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IN RE THE BAAN COMPANY

June 21, 2000

SALERNO, ET AL.
V.
BAAN COMPANY, N. Y.



The opinion of the court was delivered by: Joyce Hens Green, Judge

    MEMORANDUM OPINION AND ORDER

Plaintiffs' amended consolidated complaint, filed April 22, 1999, alleges securities fraud against Baan Company, N.V. (Baan) and several of its officers and directors. Baan is a Netherlands corporation with offices in the Netherlands and Reston, Virginia. The uncertified class consists of individuals who bought Baan securities (including common stock, ADRs, warrants, and options) between January 28, 1997, and October 12, 1998. These purchases were made on the NASDAQ National Market, the Amsterdam stock exchange, and the Frankfurt stock exchange, as well as other stock exchanges in Germany.

Plaintiffs bring allegations against Baan, Jan Baan, J.G. Paul Baan, Tom C. Tinsley, N.M. Wagenaar, William O. Grabe, David C. Hodgson, Amal M. Johnson, and Vanenburg Ventures, B.V.,*fn1 under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Plaintiffs also bring claims against all of the defendants, with the exception of Amal M. Johnson, under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).*fn2

Defendants Paul Baan and Vanenburg brought motions to dismiss under Fed. R. Civ. P. 12(b)(2) for lack of personal jurisdiction, and under Magistrate Judge Facciola's January 14 and May 17, 2000, Orders and this Court's March 29, 2000, Order, the parties are presently undertaking discovery on the issue of personal jurisdiction. This Opinion addresses a separate motion to dismiss brought by defendant Vanenburg under Fed. R. Civ. P. 12(b)(6) and 9(b), as well as a motion to dismiss by Jan Baan, and a motion to dismiss brought by Baan, Grabe, Hodgson, Johnson, Tinsley and Wagenaar together. In these motions the defendants challenge subject matter jurisdiction, and argue that plaintiffs have failed to state a claim because they have not adequately alleged a material misstatement or omission, scienter, or control person status. Defendants' motions to dismiss for lack of subject matter jurisdiction are granted as to those plaintiffs who neither reside in the United States nor purchased their stock in the United States. Defendants' motions to dismiss the claims brought under Section 10(b) are granted as to Paul Baan, Vanenburg, Grabe, and Hodgson, and denied as to Baan, Wagenaar, Tinsley, Johnson, and Jan Baan. Jan Baan, Paul Baan, and Vanenburg's motions to dismiss the Section 20(a) control person claims are denied.*fn3

I. FACTUAL BACKGROUND

In considering a motion to dismiss, the Court must accept the factual allegations contained in the complaint as true, and draw all reasonable inferences in favor of the plaintiffs. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Scheuer v. Rhodes, 416 U.S. 232, 236 (1974). Accordingly, the facts in this section are drawn from the complaint, and from the documents plaintiffs reference in their complaint and which are included as exhibits in defendants' motion to dismiss.

Plaintiffs allege that Baan's reported revenue and earnings were fraudulently inflated, that the defendants made statements that were materially misleading and omitted material facts, and that some of the defendants took advantage of the inflated stock price by selling some of their own stock. The improper inflation of reported revenue and earnings was achieved through the cooperative efforts of Baan, Vanenburg, and their affiliates and subsidiaries.

Vanenburg is a privately held Dutch company controlled by two brothers, Jan and Paul Baan. See Baan's Annual Report to the Securities and Exchange Commission (SEC) for the fiscal year ending December 31, 1997 ("1997 Form 20-F") at p.53, and Baan's May 7, 1998, press release. Through Vanenburg, Paul and Jan Baan have voting control over a large block of Baan's stock. In 1996, that block constituted approximately 43% of Baan's outstanding common shares, see Baan's Annual Report to the SEC for the fiscal year ending December 31, 1996 ("1996 Form 20-F") at p.45, and in 1997 it was approximately 39%, see 1997 Form 20-F at p.52. In approximately November 1998, Vanenburg's share was reduced to 30%. BBS Holding B.V. (BBS) is a majority-owned subsidiary of Vanenburg which owns approximately 15 of Baan's "channel partners."*fn4 During 1997 Baan and Vanenburg formed Baan Midmarket Solutions (BMS), with an 85% ownership by Vanenburg and 15% ownership by Baan. See 1997 Form 20-F at p.54.

In addition to his interest in Vanenburg, Jan Baan founded Baan in 1978, served as Baan's Chief Executive Officer (CEO) until July 1998, was a managing director of Baan throughout the class period, and was a managing director of Vanenburg until January 1998. Paul Baan served as chairman of Baan's board of supervisory directors from April 1996 to December 1997, and has been president and managing director of Vanenburg since 1994. Wagenaar was the Chief Financial Officer (CFO) and Senior Vice President of Administration for Baan beginning in August 1997, became Baan's Chief Operating Officer (COO) in April 1998, and had previously served as Vanenburg's COO. Tinsley was President and COO of Baan beginning in November 1995, and has been chairman of the board of directors since April 1998 and CEO since July 1998. as well as a member of the audit committee throughout the class period. Grabe and Hodgson have been supervisory directors and members of Baan's audit committee throughout the class period. Johnson was Executive Vice President of Americas Operations for Baan beginning in January 1996, acting managing director and Executive Vice President of Affiliates and Marketing since January 1997, and has had responsibility for Baan's Supply Chain Division since January 1998.

The primary activity which enabled defendants to allegedly inflate Baan's reported revenue and earnings was the shipment of merchandise to Baan's affiliates on what the plaintiffs call a "consignment" basis. In essence, plaintiffs allege that Baan made these shipments with the knowledge that the sales to the affiliates were not final, and that if the affiliates were unable to re-sell Baan's products, Baan would have to buy the products back. Plaintiffs allege that in violation of Generally Accepted Accounting Procedures (GAAP) and SEC regulations, Baan recognized these consignment sales as revenue. The bulk of the statements and omissions plaintiffs allege to be materially misleading are misleading because they incorporate or rely on the inflated revenue figures, and fail to disclose that consignment sales to related parties were being counted as revenue.

The misleading statements upon which plaintiffs rely were communicated to the public through three basic formats. First, through Baan's filings with the SEC, including its annual 20-F and quarterly 6-K forms; second, press releases and statements on Baan's website; and, finally, news articles, some of which include quotes from Baan's officers. Only some of these were published in the United States, and many of them included warnings and disclosures. A chronological overview of these statements, as described in the complaint, will provide a framework in which the plaintiffs' allegations may be best understood.*fn5

1996 Year End Figures

As noted earlier, the class period begins on January 28, 1997. On that date, Baan issued a press release reporting "record net revenues" for 1996, and on the following day Baan's website reported "dramatic growth" while noting that 30% of the revenue for the year was derived from "indirect channel sales". In April 1997 Baan filed its 1996 20-F, reporting net revenue from licenses of $224.24 million,*fn6 total net revenue of $387.96 million, and disclosing that $14.5 million in revenue was from channel sales to its affiliate BBS. Like all of Baan's subsequent filings with the SEC, the 20-F indicated that Baan's accounting practices were in accordance with GAAP. See 1996 20-F at p.53.

First Quarter 1997

In April 1997 Baan issued a press release celebrating its continued dramatic growth and anticipating the earnings for the quarter, with a quote from Tinsley regarding matters such as the high demand for Baan products. In May, Baan filed its 6-K for the first quarter of 1997. The document revealed that Baan had total revenues of $123.87 million and license revenues of $77.37 million, a substantial increase over the 1996 first quarter revenues of $77.93 and $40.07 million, respectively.

Second Quarter 1997

In July 1997 Baan issued a press release regarding the second quarter, again including quotations from Tinsley, and again followed the next month by Baan's 6-K. The 6-K revealed Baan's continuing increasing license revenue of $92.3 million for the quarter.

Third Quarter 1997

On January 21, 1998, Baan filed a 6-K for the third quarter, reporting license revenue of $108.7 million. The previous fall the company had issued a press release and an interview with Jan Baan announcing "record revenue and earnings" for that quarter and "a fast growth track for the foreseeable future."

Fourth Quarter 1997

Although Baan issued a press release regarding the fourth quarter, and news reports remarked on Baan's continuing growth, plaintiffs indicate that Baan neither filed a 6-K for the fourth quarter nor included separate numbers for fourth quarter revenue in its annual 20-F. In its January 29, 1998 press release, Baan announced "record revenues" for the fourth quarter, including license revenue growth of 72% over the previous year. Several news reports around that time contained Jan Baan's positive projections about the company, including expectations that Baan would "continue to outpace the growth of the market."

Plaintiffs allege facts which suggest that by this point in time, at least some of the defendants may have been aware of signs of trouble. Plaintiffs claim that Baan's channel partners informed Baan they were having difficulty selling Baan's software to end-users, resulting in a backlog of unsold goods and their inability to accept more Baan products for resale.*fn7 In February 1998, Grabe and Hodgson each sold 40,000 shares of Baan stock, General Atlantic Partners, of which Grabe and Hodgson were managing partners, sold 491,427 shares, and GAP Coinvestment Partners, of which Grabe and Hodgson are general partners, sold 68,532 shares. At that point in time, Baan stock was worth roughly $45 per share.

1997 Year End Figures

In May 1998 Baan filed its 1997 20-F with the SEC, showing a net revenue of $679.6 million, and license revenue of $433.43 million. Baan disclosed that $66.33 million of that license revenue was from related parties.*fn8 Baan further disclosed that approximately $11.6 million of the license revenue had been recognized, despite the fact that the inventory it represented remained unsold at the end of 1997. However, Baan indicated that all such remaining inventory had been sold during the first quarter of 1998. In May 1998, AFX News interpreted Baan's 20-F to show that receivables sold to BBS accounted for $50 million, of which $18 million was for potential future license income, and some of which was based on unsold BBS inventories. Another news report interpreted the 20-F to suggest that Baan had recognized $13 million in revenue from BMS. Baan explained the large fourth quarter revenues by its belief that Baan had "been positively impacted by year — end capital purchases by larger corporate customers." Baan's 20-F also reported that Baan had charged Vanenburg $8.6 million for management information systems and marketing costs and services.

First Quarter 1998

On April 20, 1998, analysts predicted that Baan's first quarter for 1998 would show revenues of $209 million, and a net income of about $24 or $25 million. On April 21, 1998, Baan announced its first quarter results in a press release, indicating that net revenue was $176 million, license revenue was $90 million, and net income was $2.4 million.*fn9 The press release explained the lower than expected results as a reflection of a $71 million increase in deferred revenues for the quarter, approximately $43 million of which was due to the implementation of a new SEC accounting pronouncement. Statement of Position (SOP) 97-2 had replaced SOP 91-1, and Baan indicated that uncertainty about the new SOP caused it to defer revenue from software which had been delivered under certain signed contracts, and which Baan would have recognized as revenue under the old SOP. Tinsley issued a written statement reflecting Baan's decision to defer revenue from those certain contracts. In May, Baan's auditors were replaced with a new company. The press reported that Baan would no longer be a party to financing agreements with its customers, and that Baan's "established practice of submitting all transactions with affiliates to its outside auditors" would continue, and quoted Wagenaar as saying that "these clarifications address the uncertainties surrounding the implementation" of SOP 97-2. See Complaint at ¶ 82.

In July 1998 Baan filed its 6-K for the first quarter, which specified that of its $92.9 million in license revenue, $18.18 million had been from sales to related parties. Baan also revised its net profit down from the $2.4 million it had announced in April, to a net profit of $2.4 million. Baan's 6-K disclosed that through 1997, Baan had recognized indirect channel sales at the time of shipment, "subject to certain conditions including an evaluation of the amount of inventory carried by the reseller channel." Third Quarter 6-K at pp.11-12. The 6-K indicated that in 1998 Baan changed its policy, recognizing only sales to end users. News reports indicated that Baan was "under fire for its aggressive accounting practices," and that there was confusion surrounding the relationship and transactions between Vanenburg, BBS, BMS, and Baan.

Second Quarter 1998

In July 1998, Baan issued a press release regarding its second quarter earnings, reporting net income of $17.1 million. On August 31, 1998, Baan issued a press release announcing BMS' successes in building reseller relationships, resulting in market share gains. In September Baan filed its second quarter 6-K, which reflected total revenues of $230.08 million, and license revenue of $131.25 million. The form disclosed that the license revenue figure included $32.64 million from related parties, and repeated the disclosure from Baan's first quarter 1998 6-K regarding Baan's new method for recognizing revenue from indirect channel sales. Finally, the second quarter 6-K stated that Baan had charged Vanenburg $4.6 million for management information systems and marketing costs and services.

Third Quarter 1998, and the End of the Class Period

On October 12, 1998, Baan disclosed a loss for the third quarter of 1998, and a material shortfall in revenue, and warned that the fourth quarter would be disastrous as well. On October 29 Baan issued a press release revealing that $23.1 million of its third quarter license revenue was from related parties. Baan also disclosed related party license revenue figures from the previous year: $16.2 million for the third quarter of 1997, and $26.7 million for the first three quarters of 1997 combined.

Fourth Quarter 1998, and Beyond

On January 20, 1999, Baan issued a press release regarding the expected results from the fourth quarter of 1998. Baan announced its intention to reduce revenue by the amount of indirect channel sales which had not been sold to end users by the end of the third quarter of 1998. That amount was $50 million, and it included $17 million which had been sold by the end of the fourth quarter, and $33 million which remained unsold. On March 2, 1999, Baan issued a press release stating that total revenue for the fourth quarter was $131 million, resulting in a loss of $295 million for the company. The revenues for all of 1998 were $736 million, and the net loses for 1998 were $315 million. Among the charges contributing to the overall loss was a $56 million loss during the fourth quarter, spent to clear the indirect channel ...


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