Cosby v. KPMG, LLP

LEWIS COSBY, ERIC MONTAGUE, and MARTIN ZIESMAN,as Co-Trustee for the Carolyn K. Ziesman Revocable Trust, on behalf of themselvesand all others similarly situated, Plaintiffs, v. KPMG, LLP, Defendant.

No.: 3:16-CV-121-TAV-DCP

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF TENNESSEE

May 7, 2021

MEMORANDUM OPINION AND ORDER

This action is before the Court on KPMG LLP's Partial Motion to Dismiss the Third Amended Complaint [Doc. 180]. Defendant argues that Count Two of the Third Amended Complaint must be dismissed, in accordance with a prior order dismissing the claim. Additionally, defendant argues Count Three of the Third Amended Complaint must be dismissed pursuant to Rule 12(b)(6) because it is barred by the statute of repose and the named plaintiff does not have standing. For the reasons that follow, defendant's motion is GRANTED in part and DENIED in part.

I. Background

In August 2018, this Court ruled on defendant's motion to dismiss the Second Amended Complaint and dismissed Count Two [Doc. 76]. On March 1, 2019, plaintiffs filed a motion to substitute the class representatives [Doc. 101]. Defendant did not have an objection to the substitution if plaintiffs filed an amended complaint reflecting the change and two other conditions were met [Sealed Doc. 115]. Plaintiffs replied, addressing the other matters, but taking no position on defendant's condition that they file an amended complaint [Doc. 147]. United States Magistrate Judge Debra C. Poplin granted the motion, ordering plaintiffs to file an amended complaint as their operative pleading [Doc. 167]. Plaintiffs filed the Third Amended Complaint [Doc. 174]. Defendant then filed the present motion to dismiss [Doc. 180] and a motion to stay the case pending decision on the motion to dismiss [Doc. 187]. This Court denied the motion to stay since the case was already stayed pending its ruling on class certification and ordered the parties to complete briefing the motion [Doc. 201]. Plaintiffs responded [Doc. 202] and defendant replied [Doc. 204]. The matter is now ripe for the Court's review.

II. Standard of Review

Defendant brings its motion pursuant to Federal Rule of Civil Procedure 12(b)(6). As a preliminary matter, Rule 8(a)(2) sets out a liberal pleading standard. Smith v. City of Salem, 378 F.3d 566, 576 n.1 (6th Cir. 2004). Thus, pleadings in federal court need only contain "'a short and plain statement of the claim showing that the pleader is entitled to relief,' in order to 'give the [opposing party] fair notice of what the . . . claim is and the grounds upon which it rests.'" Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Detailed factual allegations are not required, but a party's "obligation to provide the 'grounds' of his 'entitle[ment] to relief'requires more than labels and conclusions." Id. (alterations in original). "[A] formulaic recitation of the elements of a cause of action will not do," nor will "an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555, 557).

In deciding a Rule 12(b)(6) motion, the court must determine whether the complaint contains "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570; accord Directv, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). This assumption of factual veracity, however, does not extend to bare assertions of legal conclusions, Iqbal, 556 U.S. at 679, nor is the Court "bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678. Determining whether a complaint states a plausible claim for relief is ultimately "a context-specific task that requires [the Court] to draw on its judicial experience and common sense." Id. at 679. In conducting this inquiry, the Court "must construe the complaint in a light most favorable to plaintiff[ ], accept all well-pled factual allegations as true, and determine whether plaintiff[ ] undoubtedly can prove no set of facts in support of those allegations that would entitle [her] to relief." Bishop v. Lucent Techs., Inc., 520 F.3d 516, 519 (6th Cir. 2008) (citing Harbin-Bey v. Rutter, 420 F.3d 571, 575 (6th Cir. 2005)).

III. Analysis

Defendant moves to dismiss Counts Two and Three as having been previously decided by this Court and failing to state a claim, respectively. First, defendant moves to dismiss Count Two, the "scheme liability" claim under Section 10(b) and subparts (a) and (c) of Rule 10b-5. This Court already dismissed this count for failure to state a claim upon which relief may be granted when ruling on the motion to dismiss the Second Amended Complaint [Doc. 76 p. 20-25]. Plaintiffs then reasserted the claim in the Third Amended Complaint [Doc. 273 ¶¶ 273-280]. However, plaintiffs did not need to replead the claim to preserve the right to appeal its previous dismissal. Hayward v. Cleveland Clinic Found, 759 F.3d 601, 617 (6th Cir. 2014). Plaintiffs' response [Doc. 202] did not object or address defendant's arguments regarding this claim. Accordingly, defendant's motion is GRANTED in part, and Count Two is DISMISSED.

Second, defendant argues the Section 11 claim, Count Three, must be dismissed pursuant to Rule 12(b)(6) for failure to state a claim, since named plaintiff Martin Ziesman's ("Ziesman") Section 11 claim is barred by the statute of repose and he lacks standing.

Section 11 claims have a three-year statute of repose which begins to run upon the date on which the security is bona fide offered to the public. 15 U.S.C. § 77m. Ziesman purchased Series C preferred stock on June 4, 2014 [Doc. 101-2 p. 3] and seeks to bring a Section 11 claim on behalf of "[a]ll those who purchased Miller Energy preferred shares pursuant to or traceable to the Offering Documents" [Doc. 174 ¶ 33]. The parties agreethat under the SEC rules, the relevant consideration is the effective date of an offering document, whether a registration statement or prospectus supplement, for which an auditor is required to provide consent under the Securities Act [Doc. 181 p. 9; Doc. 202 p. 26]. The first relevant date is when the original registration was declared effective. To become effective, the filing must include audited financial statements and an auditor's report with consent of the auditor. 17 C.F.R. § 230.430B(f)(2). At this point, the securities are considered bona fide offered to the public. Id. However, when a prospectus supplement contains "new audited financial statements or other financial information as to which the accountant is an expert and for which a new consent is required," the effective date is then considered the date in which the prospectus is deemed part of and included in the registration statement. Id. § 230.430B(f)(5)(i). Under subsections (f)(2) and (f)(5) then, the effective date is tied to the date at which a filing includes an audit report accompanied by the auditor's consent.

Defendant argues the subsection (f)(5) exception for prospectus supplements does not apply [Doc. 181 p. 9]. Defendant states that the Series C preferred stock was issued pursuant to a registration statement dated September 6, 2012 which became effective on September 18, 2012 [Doc. 174 ¶ 188]. The prospectus supplements dated February 13, 2013, May 7, 2013, and June 27, 2013, were for offerings of Series C preferred stock, and subsequent prospectus supplements were for Series D preferred stock [Id. ¶ 285]. Plaintiffs also include a chart that identifies which of defendant's reports were incorporated into the registration statement which indicates the Series C prospectus supplements did notincorporate new audited financial statements beyond those included in the registration statement [Id. ¶ 188]. Defendant states this chart indicates the prospectus supplements "did not incorporate any new financial statements audited by KPMG" and that consequently, the "Series C preferred stock was bona fide offered as of September 18, 2012, the date the registration statement became effective" [Doc. 181 p. 10]. Since the three-year statute of repose then ran on September 18, 2015, and the initial complaint was not filed until March 14, 2016, defendant avers that the Section 11 claim based on the Series C preferred stock is time-barred.

Plaintiffs respond, arguing that the determination of which date applies "depends on the identity of the defendant and the circumstances, involving several overlapping regulations, two of which govern claims against auditors" [Doc. 202 p. 26].¹ Plaintiffs argue that one of the two regulations that could govern here is the series of regulations described above, regarding subsections (f)(2) and (f)(5) [Id.]. However, plaintiffs also contend that Rule 430B(f)(3) applies, and therefore argue that the relevant date for aregistration statement is the date of any subsequent annual Form 10-K so long as any shares remain unsold under the registration statement [Id. p. 27]. Rule 430B(f)(3) provides, in relevant part, that:

If a registration statement is . . . deemed to include, through incorporation by reference or otherwise, a report or opinion of any person . . . whose consent would be required under section 7 of the Act, . . . then for purposes of this section and for liability purposes under section 11 of the Act, the part of the registration statement for which liability against such person is asserted shall be considered as having become effective . . . as of the time the report or opinion is deemed to be a part of the registration statement.

Id. § 230.430B(f)(3).

The registration statement was filed on Form S-3 [Doc. 174 ¶ 284]. Item 12 of Form S-3 requires the incorporation by reference of all periodic and...