In re Afc Enterprises, Inc. Securities Litigation

Page 1363

348 F.Supp.2d 1363

In re AFC ENTERPRISES, INC. SECURITIES LITIGATION.

No. 1:03-CV-817-TWT.

United States District Court, N.D. Georgia.

December 28, 2004.

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Robert R. Adler, Joseph E. White, III, Maya Saxena, Milberg, Weiss, Bershad & Schulman, Boca Raton, FL, Albert R. Atwood, Jr., Darren J. Robbins, Shaun Khojayan, William S. Lerach, Lerach, Coughlin, Stoia & Robbins, San Diego, CA, Andrei Rado, Steven G. Schulman, Milberg, Weiss, Bershad & Schulman, New York City, Edward H. Nicholson, Jr., Meryl W. Edelstein, Lauren S. Antonio, Martin D. Chitwood, Chitwood & Harley, Atlanta, GA, Marc A. Topaz, Schiffrin & Barroway, Bala Cynwyd, PA, Evan J. Smith, Brodsky & Smith, Bala Cynwyd, PA, Emily C. Komlossy, Goodkind, Labaton, Rudoff & Sucharow, New York City, Mark C. Gardy, Abbey Gardy, New York City, Nadeem, Faruqi, Faruqi & Faruqi, Nancy Kaboolian, Abbey Gardy, New York City, Jack Landskroner, Landskroner Grieco, Cleveland, OH, James Dabney Miller, King & Spalding, Atlanta, GA, James E. Miller, Shepherd, Finkelman, Miller & Shah, LLC, Chester, CT, Marc H. Edelson, Hoffman & Edelson, Doylestown, PA, Scott R. Shepherd, Shepherd Finkelman Miller & Shah, Media, PA, Fred Taylor Isquith, Gregory M. Nespole, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, Carol V. Gilden, Michael E. Moskovitz, Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, Karen Hanson Riebel, Lockridge, Grindal, Nauen, Minneapolis, MN, Joseph R. Seidman, Jr., Mel E. Lifshitz, Bernstein, Liebhard & Lifshitz, New York City, for plaintiffs.

Charles Neal Pope, Michael Lee McGlamry, Teresa Pike Tomlinson, Pope, McGlamry, Kilpatrick & Morrison & Norwood, Atlanta, GA, John M. Roth, David G Russell, J. Marbury Rainer, Parker, Hudson, Rainer & Dobbs, Atlanta, GA, Allie Lin, Richard A. Rosen, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, John R. Bielema, Jr., William Scott Sorrels, Powell, Goldstein, Frazer & Murphy, Atlanta, GA, for defendants.

ORDER

THRASH, District Judge.

This is a securities fraud class action. It is before the Court on the Outside Directors, Freeman Spogli, and Penman Defendants' Motion to Dismiss [Doc. 99], the Underwriter Defendants' Motion to Dismiss [Doc. 100], the AFC Enterprises, Inc., Frank J. Belatti, Samuel N. Frankel, Dick R. Holbrook, and Gerald J. Wilkins Defendants' Motion to Dismiss [Doc. 102], and the Plaintiffs' Motion to Supplement the Record [Doc. 132].

I. BACKGROUND

Defendant AFC Enterprises, Inc. ("AFC") is a publicly-traded company engaged in the ownership, operation, and franchising of fast food restaurants under the trade names Popeye's Chicken & Biscuits, Church's Chicken, Cinnabon, Seattle's Best Coffee, and Torrefazione Italia Coffee. During the proposed class period and all other times relevant to this litigation, Defendant Frank J. Belatti served as chairman of the board and chief executive officer of AFC. Defendant Gerald J. Wilkins served as chief financial officer of AFC since December 1995 and as executive vice-president since December 2000. Defendant Dick R. Holbrook served as president and chief operating officer of AFC since 1995. Defendant Samuel N. Frankel served as executive vice-president, secretary, and general counsel and as a director of AFC from 1992 to February 2001. Defendant Paul Farrar served as a director of AFC through February 2001. Defendants Mark J. Doran, Matt L. Figel, Peter Starrett, and William M. Wardlaw each served as directors of AFC at all times relevant to this action.

The Lead Plaintiffs, the International Union of Operating Engineers Local 132 Pension Plan ("Local 132"), Thomas Savchick, and the Perkins Family Trust seek to represent a class of plaintiffs who purchased or otherwise acquired AFC stock between March 2, 2001, and March 24, 2003, ("the Class Period"). The Lead Plaintiffs allege that they and other similarly situated plaintiffs suffered damages stemming from the Defendants' alleged violations of federal securities laws and the resultant price inflation of AFC stock during the Class Period.

AFC Enterprises, Inc. was founded in 1992 in Atlanta as America's Favorite Chicken Company. In 1996, AFC received substantial investments from Defendants Freeman Spogli & Co. ("Freeman Spogli"), a merchant banking firm based in Los Angeles, and Penman Private Equity and Mezzanine Fund, L.P. ("Penman"), a private investment entity based in Chicago. In 1997, AFC reported $8.8 million in net income, the first profit posted by the company since its founding. AFC then reported steadily growing profits through the remainder of the Class Period. In 1998, AFC acquired Seattle Coffee Company and Cinnabon International, Inc. These acquisitions significantly increased its fast food restaurant portfolio. AFC continued to expand from 1998 to 2001. It went public on March 2, 2001. The initial public offering consisted of 9,375,000 shares of AFC common stock that began trading on NASDAQ under the symbol "AFCE." Later in 2001, AFC made a secondary public offering of 7,000,000 shares of common stock.

From its founding through April 2002, Arthur Andersen ("Andersen") served as AFC's outside accountant and auditor. In April 2002, AFC hired KPMG LLP ("KPMG") to replace Andersen. Early in 2003, AFC, in consultation with KPMG, conducted a detailed review of its accounting and reporting policies. As a result of this review, on March 24, 2003, AFC announced its decision to restate its previously issued financial statements for all of fiscal year 2001 and for each of the first three quarters of 2002. AFC later announced that it would also restate financial statements for fiscal year 2000. Wilkins, the chief financial officer, resigned about a month after the first announcement.

AFC's restatement of its reported financials for 2000 through the third quarter of 2002 revealed that AFC's net income for this period was substantially lower than what had been reported in its financial reports.¹ The margins by which income for these reporting periods were overstated ranged from 21% to 92% with substantial variation. In response to AFC's announcement that it was restating its previous financials and its acknowledgment that it would miss the deadline for filing its 2002 Annual Report, AFC's stock price plummeted.

On March 25, 2003, the day after the announcement, AFC's stock price dropped $3.70 (21% of its total value) on unusually high trading volume. It closed at a 52-week low of $13.40 per share. On that same day, Plaintiff James Nugent filed a securities fraud action against AFC and Belatti and Wilkins. Nugent alleged generally that the Defendants knowingly or recklessly employed accounting methods that ignored Generally Accepted Accounting Principles ("GAAP") and misrepresented the condition of AFC's business to inflate the price of AFC stock. Other class action suits were also filed.

On August 18, 2003, this Court appointed Local 132, Thomas Savchick, and the Perkins Family Trust as Lead Plaintiffs. On January 26, 2004, the Lead Plaintiffs filed a Consolidated Amended Class Action Complaint. In this complaint, the Lead Plaintiffs named as Defendants in addition to the company: AFC officers Frank J. Belatti, Gerald J. Wilkins, Dick R. Holbrook, and Samuel N. Frankel (collectively "Officer Defendants"); AFC directors Mark J. Doran, Paul Farrar, Matt L. Figel, Kelvin Pennington, John M. Roth, Ronald P. Spogli, Peter Starrett, and William M. Wardlaw (collectively "Director Defendants"); investment firms Freeman Spogli and Penman; and underwriters Goldman, Sachs & Co., Credit Suisse First Boston Corporation, and Deutsche Banc Alex. Brown (collectively "Underwriter Defendants").

The Plaintiffs assert five claims against the Defendants for violations of the federal securities laws. In Count I, the Plaintiffs seek to recover against AFC, the Underwriter Defendants, the Officer Defendants, and the Director Defendants pursuant to section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, for alleged misstatements in the registration statement and prospectus issued in connection with the initial public offering. In Count II, the Plaintiffs seek to recover against the Officer Defendants, the Director Defendants, and Freeman Spogli as controlling persons of AFC under section 15 of the Securities Act, 15 U.S.C. § 77o. In Count III, the Plaintiffs assert a claim against Defendants AFC, Belatti, Wilkins, Holbrook, and Pennington for violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) ("the Exchange Act"), and Rule 10b-5 promulgated thereunder. In Count IV, the Plaintiffs assert a claim against Defendants Belatti, Wilkins, Holbrook, Pennington, Roth, Spogli, Freeman Spogli, and Penman as alleged controlling persons of AFC pursuant to section 20(a) of the Exchange Act. In Count V, the Plaintiffs allege that Defendants Belatti, Frankel, Freeman Spogli, and Penman engaged in insider trading in violation of section 20A of the Exchange Act. The Defendants move to dismiss all of these claims on various grounds.

II. MOTION TO DISMISS STANDARD

A complaint should be dismissed under Rule 12(b)(6) only where it appears beyond doubt that no set of facts could support the plaintiff's claims for relief. Fed.R.Civ.P. 12(b)(6); see Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Linder v. Portocarrero, 963 F.2d 332 (11th Cir.1992). In ruling on a motion to dismiss, the court must accept the facts pleaded in the complaint as true and construe them in the light most favorable to the plaintiff. See Quality Foods de Centro America, S.A. v. Latin American Agribusiness Development Corp., S.A., 711 F.2d 989, 994-95 (11th Cir.1983). The court may consider evidence which is undisputedly authentic and on which the plaintiff specifically relies, and may take judicial notice of any relevant documents legally required by and publicly filed with the Securities and Exchange...