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IN RE US OFFICE PRODUCTS SECURITIES LITIGATION

July 16, 2004.

In Re: US OFFICE PRODUCTS SECURITIES LITIGATION. TODD SEMON, et al., Plaintiffs,
v.
JONATHAN LEDECKY and U.S. OFFICE PRODUCTS CO., Defendants.



The opinion of the court was delivered by: RICARDO URBINA, District Judge

MEMORANDUM OPINION

GRANTING THE DEFENDANTS' MOTIONS TO DISMISS

I. INTRODUCTION

  This matter comes before the court on the defendants' motions to dismiss pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6), and the Private Securities Litigation Reform Act of 1995 ("PSLRA"). The plaintiffs bring suit against defendants United States Office Products ("USOP") and its former Chief Executive Officer Jonathan Ledecky ("Ledecky") for damages arising out of a strategic restructuring carried out by USOP. Because the plaintiffs do not state with particularity facts giving rise to a strong inference that the defendants acted with an intent to deceive, do not state with particularity the circumstances constituting fraud or mistake and do not have standing for one of the counts, the plaintiffs fail to state a claim upon which relief can be granted. Accordingly, the court grants the defendants' motions to dismiss the plaintiffs' consolidated and amended class action complaint.

  BACKGROUND

  A. Factual History

  The plaintiffs bring this action on behalf of themselves and other USOP stockholders who purchased or otherwise acquired USOP common stock and/or employee stock options through business transactions with USOP between June 5, 1997 and September 2, 1998 (the "Class Period") and who suffered a loss as a result of the alleged conduct of the defendants. Am. Compl. ("Compl.") ¶ 1. In 1997, USOP was one of the world's largest suppliers of office products and business services. Def. USOP's Mot. to Dismiss ("USOP Mot.") at 4. From its initial public offering in February 1995 through 1997, USOP grew by utilizing a "roll-up" strategy, that is, growth through the acquisition or merger with smaller companies. Id. Frequently, USOP would fund these acquisitions by using its own stock, which had the added benefit of allowing USOP to utilize the "pooling" method of accounting for the acquisitions. Compl. ¶ 19. The pooling method of accounting allows a purchasing company to avoid recording goodwill paid for acquisitions and instead allows the historical costs of the separate companies' assets and liabilities to be combined and become the recorded amounts of the combined company's assets and liabilities. Id. ¶ 27. During the class period, USOP completed 22 transactions under the pooling method. Id. ¶ 7.

  In September 1997, the investment firm of Clayton, Dubilier & Rice ("CD&R") approached USOP with an investment proposal involving a sale and repurchase of stock, and a spin-off of parts of USOP. Id. ¶ 88. USOP's Board of Directors ("the Board"), however, decided at a October 1, 1997 meeting not to pursue the CD&R proposal. Id. In a November 5, 1997 press release, USOP announced the promotion of Thomas Morgan to President and Chief Executive Officer, replacing Ledecky. Id. ¶ 23. Despite record reported earnings in its fiscal year 1997 fourth quarter, and its fiscal year 1998 first quarter, USOP's stock price fell substantially between October of 1997 and December of 1997. USOP Mot. at 5. In the Board's opinion, the decline in stock price was mainly due to investor difficulty in valuing USOP stock because of the company's enormous diversification. Id. To combat this, on December 17, 1997, the Board authorized USOP to re-enter discussions with CD&R regarding another investment proposal. Am. Compl. ¶ 88. The Board explained that they re-entered negotiations with CD&R because Ledecky had informed them that he intended to step down from the position and because CD&R was willing to invest the same amount it proposed in September, despite the drop in USOP's stock price. Id. ¶ 48; USOP Mot. at 6.

  On January 12, 1998, the Board decided to enter into a strategic restructuring plan with CD&R. Compl. ¶ 63; USOP Mot. at 6. The central features of the restructuring plan entailed spinning off 4 divisions of USOP and CD&R investing $270 million in exchange for 24.9% of the shares of the restructured USOP. Id. In order to obtain a large enough block of shares for CD&R, the Board proposed that USOP engage in a $1 billion stock buyback of 37 million shares at $27 per share. Compl. ¶ 62; USOP Mot. at 6. In the event that USOP shareholders collectively tendered more than 37 million shares, each shareholder's tender would be prorated. USOP Mot. at 7.

  On January 13, 1998, USOP issued a press release outlining the restructuring. Compl. ¶ 64. In the press release, USOP disclosed that as a result of the transactions contemplated by the restructuring plan, it would have to reclassify several prior acquisitions under the "purchase" method of accounting rather than the more favorable "pooling" method. Id. ¶ 67. The press release also disclosed that the effect of the accounting reclassifications would be to substantially lower earnings for the next two quarters. Id; USOP Mot. at 8. On May 28, 1998, USOP shareholders overwhelmingly approved the restructuring plan, which was completed on June 10, 1998. Compl. ¶ 92; USOP Mot. at 9. Unfortunately for USOP, the restructuring did not have the desired effect on its stock price. From June 10, 2003, the date the restructuring was complete, until two days before the amended complaint was filed, the stock price declined from $25.50 to $4.85. Compl. ¶¶ 100, 103. After the drop in stock price, the plaintiffs brought suit alleging that several prior financial disclosures and statements by Ledecky were false and misleading because USOP and Ledecky formed the intent to enter into a deal with CD&R earlier in 1997, knew that entering into the restructuring would cause USOP to have to restate earnings, and intentionally concealed their intentions in order to artificially keep the stock price high. See generally Compl.

  B. Procedural History

  On April 12, 1999, the Judicial Panel on Multi-district Litigation transferred six actions pending in the Southern District of New York to this court for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C. § 1407. On July 29, 1999, the plaintiffs filed their amended complaint, asserting violations of sections 10(b) and 14(a) of the Securities Exchange Act of 1934 ("the Exchange Act"); breach of contract; and violations of sections 12(2) and 11 of the Securities Act of 1933 ("the Securities Act"). After the defendants filed their initial motion to dismiss, the court stayed the case on several occasions due to bankruptcy filings, MDL transfers and mediation efforts. Subsequently, the defendants filed renewed motions to dismiss. The court now turns to those motions. III. ANALYSIS

  A. Legal Standard for a Rule 12(b)(6) Motion to Dismiss

  A Rule 12(b)(6) motion to dismiss tests the legal sufficiency of a complaint. Browning v. Clinton, 292 F.3d 235, 242 (D.C. Cir. 2002). The complaint need only set forth a short and plain statement of the claim, giving the defendant fair notice of the claim and the grounds upon which it rests. Kingman Park Civic Ass'n v. Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003) (citing FED R. CIV. P. 8(a)(2) and Conley v. Gibson, 355 U.S. 41, 47 (1957)). "Such simplified notice pleading is made possible by the liberal opportunity for discovery and the other pre-trial procedures established by the Rules to disclose more precisely the basis of both claim and defense to define more narrowly the disputed facts and issues." Conley, 355 U.S. at 47-48 (internal quotation marks omitted). It is not necessary for the plaintiff to plead all elements of his prima facie case in the complaint, Swierkiewicz v. Sonoma N.A., 534 U.S. 506, 511-14 (2002), or "plead law or match facts to every element of a legal theory." Krieger v. Fadely, 211 F.3d 134, 136 (D.C. Cir. 2000) (internal quotation marks and citation omitted).

  Accordingly, "the accepted rule in every type of case" is that a court should not dismiss a complaint for failure to state a claim unless the defendant can show beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Warren v. District of Columbia, 353 F.3d 36, 37 (D.C. Cir. 2004); Kingman Park, 348 F.3d at 1040. Thus, in resolving a Rule 12(b)(6) motion, the court must treat the complaint's factual allegations — including mixed questions of law and fact — as true and draw all reasonable inferences therefrom in the plaintiff's favor. Macharia v. United States, 334 F.3d 61, 64, 67 (D.C. Cir. 2003); Holy Land Found. for Relief & Development v. Ashcroft, 333 F.3d 156, 165 (D.C. Cir. 2003); Browning, 292 F.3d at 242. While many well-pleaded complaints ...


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