In re Cinar Corp. Securities Litigation

Page 279

186 F.Supp.2d 279

In re CINAR CORPORATION SECURITIES LITIGATION

Phillip G. Kelley, Kathy H. Kelley, Michael G. Mayberry, and Sharon H. Mayberry, Plaintiffs, v. Cinar Corporation, Micheline Charest, and Ronald A. Weinberg, Defendants.

Steven T. CARSON, Patricia L. Carson, and Janet B. Dellosa, Plaintiffs, v. Cinar Corporation, Cinar Holdings, Inc., Micheline Charest, Ronald A. Weinberg, and Hasanain Panju, Defendants.

Karen Hilderbrand, individually and on behalf of a certain Electing Small Business Trust and a certain Irrevocable Trust, and Kim Thompson, individually and on behalf of certain Electing Small Business Trusts and a certain Irrevocable Trust, Plaintiffs, v. Cinar Corporation, Cinar Education Inc., Micheline Charest, Ronald A. Weinberg, and Hasanain Panju, Defendants.

No. MDL 00-1362(RJD).

United States District Court, E.D. New York.

February 25, 2002.

As Corrected March 5, 2002.

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Neil L. Selinger, Esq., David Harrison, Esq., Jeanne F. D'Esposito, Esq., Lowey, Dannenberg, Bemporad & Selinger, P.C., White Plains, NY, for Class Action Plaintiffs.

Jeffrey J. Davis, Esq., M. James Grode, Esq., Moore & Van Allen, P.L.L.C., Charlotte, N.C., for Kelley Plaintiffs.

James T. Williams, Jr., Esq., Jennifer T. Harrod, Esq., Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., Greensboro, N.C., for Carson Plaintiffs.

Michael S. Elkin, Esq., Sharon P. Carlstedt, Esq., Veronica E. Rendon, Esq., Thelen, Reid & Priest, L.L.P., New York City, for Hilderbrand Plaintiffs.

Bruce H. Schneider, Esq., Claude V. Szyfer, Esq., Melissa B. Papke, Esq., Susannah Sweeney, Esq., Stroock & Stroock & Lavan, L.L.P., New York City, for Defendants Cinar Corp., Cinar Holdings, Inc. and Cinar Education, Inc.

Andrew J. Levander, Esq., Louis M. Solomon, Esq., Neil A. Steiner, Esq., Swidler, Berlin, Shereff, Friedman, L.L.P., New York City, for Defendants Ronald A. Weinberg and Micheline Charest.

Lance Croffoot-Suede, Esq., Sharon M. Sash, Esq., Squadron, Ellenoff, Plesent & Sheinfeld, L.L.P., New York City, for Defendant Marie-Josée Corbeil.

Paul J. Bschorr, Esq., Dewey Ballantine, L.L.P., New York City, for Defendant Hasanain Panju.

Jerome G. Snider, Esq., Matthew S. Stewart, Esq., Daniel F. Kolb, Esq., William C. Komaroff, Esq., Davis, Polk and Wardwell, New York City, for Defendant Ernst & Young, L.L.P.

MEMORANDUM & ORDER

DEARIE, District Judge.

This case involves four separate actions arising out of allegedly fraudulent disclosures made by defendant CINAR Corporation ("CINAR" or "the Company") and its officers in various public financial statements issued during the period from April 8, 1998 through March 10, 2000. The first suit, In re CINAR Corporation Securities Litigation, No. 00-CV-1086 (E.D.N.Y. 2000), is a class action brought by plaintiffs who purchased shares of CINAR on the NASDAQ, the price of which they claim was artificially inflated by the allegedly fraudulent filings. The remaining three suits, Kelley v. CINAR Corporation, No. 1:00-CV-91-T (W.D.N.C.2000), Carson v. CINAR Corporation, No. 1:00-CV-626 (M.D.N.C.2000) and Hilderbrand v. CINAR Corporation, No. 01-CV-1985 (E.D.N.Y.2001) involve business owners in North Carolina and Ohio who sold their companies to CINAR in exchange for CINAR stock relying on the Company's financial statements as an accurate indicator of its fiscal health. Plaintiffs in these four actions assert claims arising under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the "Securities Act") and Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, as well as various state law causes of action. In addition to these suits, a group of Canadian plaintiffs who bought CINAR stock on Canadian exchanges have brought suit in Canada, alleging similar causes of action. The Judicial Panel on Multidistrict Litigation consolidated the four actions brought by American plaintiffs and transferred them to this Court for pre-trial proceedings pursuant to 28 U.S.C. § 1407.

Defendants move to dismiss on numerous grounds. Defendant CINAR moves to dismiss the Consolidated and Amended Class Action Complaint ("Class Action Complaint" or "CAC") and the Kelley Complaint on grounds of comity and forum non conveniens. Defendants Ronald A. Weinberg and Micheline Charest move to dismiss the Class Action Complaint and Kelley Complaint on grounds of comity and forum non conveniens and move to dismiss the Kelley Complaint on additional grounds of insufficient service of process and failure to state a claim of fraud.¹ Defendant Marie-Josée Corbeil moves to dismiss the Class Action Complaint on grounds of comity, forum non conveniens and lack of personal jurisdiction. Defendant Ernst & Young moves to dismiss the Class Action Complaint on grounds of comity, forum non conveniens and failure to comply with Rule 9(b). CINAR moves to dismiss the Carson Complaint on grounds of comity, forum non conveniens and failure to state a claim under the North Carolina Unfair Trade Practices Act. Weinberg and Charest move to dismiss the Carson Complaint on grounds of comity, forum non conveniens and failure to state a claim of fraud. Defendant Panju moves to dismiss the Carson Complaint on grounds of comity, forum non conveniens, lack of personal jurisdiction, failure to comply with Rule 9(b), failure to state a claim of control person liability under Section 20(b) of the Exchange Act and failure to state a claim of fraud. Finally, CINAR moves to dismiss the Hilderbrand Complaint on grounds of comity and forum non conveniens.

BACKGROUND

The Defendants

Defendant CINAR is a Canadian corporation that develops, produces and distributes non-violent programming and educational materials for children both in Canada and abroad. Founded in 1976, it is incorporated under the laws of Quebec and maintains its principal place of business in Montreal, Quebec, Canada. CINAR Holdings, Inc. and CINAR Education, Inc., both incorporated in Delaware, are wholly owned subsidiaries of CINAR.

Defendants Ronald A. Weinberg and Micheline Charest, a married couple, cofounded CINAR. From 1994 until 2000 Weinberg served as CINAR's President and Co-Chief Executive Officer, and Charest served as its Chairman of the Board and Co-Chief Executive Officer. Both became Directors of CINAR in 1984 and were members of the Management Committee.

Defendant Hasanain Panju became CINAR's Corporate Comptroller in 1994 and was then made Vice-President of Finance in 1995. In 1996, Panju was named CINAR's Chief Financial Officer. Panju became a Director of CINAR in 1995 and was a member of the Management Committee.

Defendant Marie-Josée Corbeil was a Vice-President of CINAR and served as its General Counsel. Corbeil was also a Director of CINAR and a member of the Management Committee.

Defendant Ernst & Young ("E & Y") served as CINAR's outside auditors since 1992 and audited its financial statements for the fiscal years ending November 30, 1997 and November 30, 1998. E & Y's unqualified audit opinions on CINAR's 1997 and 1998 financial statements appeared in the 1999 Registration Statement, which gives rise to several of the class action claims.

In re CINAR²

CINAR became a publically-traded company in September 1993. CINAR initially sold its shares only on the Montreal and Toronto exchanges, but it began trading in the United States on the NASDAQ in July 1994. Since 1994, CINAR has issued stock in four subsequent offerings: in April 1995, in July 1996, in September 1997 and in March 1999. See id. ¶ 44. In connection with these stock issuances, Weinberg and Charest made several trips to New York and North Carolina, among other places, to attend meetings with investors and to participate in "road shows" designed to promote CINAR stock in the United States. See Aff. of Peter Lerner ¶¶ 4, 5A. The last two of these offerings, which fell within the period from April 1997 to March 2000 that is the subject of this class action, were largely directed to buyers in the United States. Under the terms of the Underwriting Agreement for the September 1997 stock offering, the U.S./International Underwriters were to sell 2.7 million of the 3.1 million shares issued and were prohibited from selling in Canada or to Canadian citizens. Under a similar agreement for the March 1999 stock offering, the same underwriters were to sell more than 5.4 million of the 7 million shares issued and were again forbidden to sell in Canada or to Canadian citizens. See CAC ¶¶ 18, 44.

Over the course of that same time period, CINAR issued several press releases, published financial reports and submitted SEC filings, all of which form the basis for the Class Plaintiffs' causes of action. The gravamen of the Class Action Complaint is that these statements and releases contained inflated estimates of CINAR's financial position because they took into account improperly claimed tax credits and did not record unauthorized related party transactions and off-shore investments. CAC ¶¶ 3, 108-09. This information began to surface on October 15, 1999, when press reports circulated that Canadian authorities were conducting an investigation into alleged tax fraud on the part of CINAR. The investigation focused on whether CINAR had availed itself illegally of an incentive plan that granted tax credits to Canadian television productions that programmed Canadian-authored content. According to the reports, CINAR had falsely attributed several scripts written by American authors to Canadians in order to receive the tax benefit. CINAR's Class B stock price dropped from $28.00 per share to $22.125 per share by the close of the day's trading.³ In response to this decline, CINAR announced that any tax liability would be minimal and that its Audit Committee would conduct an inquiry into the matter. CINAR's stock price gradually rose again to $27.3875 per...