In re Rent-Way Securities Litigation

209 F.Supp.2d 493

In re RENT-WAY SECURITIES LITIGATION.

Civil Action 00-323 Erie.

United States District Court, W.D. Pennsylvania, Erie Division.

July 11, 2002.

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Bruce W. Bernard, Bernard, Stuczynski & Bonanti, Erie, PA, Solomon B. Cera, Gold, Bennett, Cera & Sidener, LLP, San Francisco, CA, for Plaintiffs.

Kevin M. Kearney, Hodgson Russ, Buffalo, NY, Paul M. Pohl, Bryan D. Kocher, Jones, Day, Reavis & Pogue, Pittsburgh, PA, Frederick W. Thieman, Thieman & Kaufman, Pittsburgh, PA, Timothy M. Sennett, Knox, McLaughlin, Gornall & Sennett, Erie, PA, John L. Oberdorfer, Lanny Davis, Patton Boggs, Washington, DC, Robert N. Rapp, Calfee, Halter & Griswold, Cleveland, OH, T. Warren Jones, MacDonald, Illig, Jones & Britton, Erie, PA, Robert J. Kopecky, Kirkland & Ellis, Chicago, IL, for Defendants.

MEMORANDUM OPINION

McLAUGHLIN, District Judge.

This case is a securities fraud class action in which shareholders of Rent-Way, Inc. ("Rent-Way") seek relief from the company, certain of its current and former officers and directors, and its accounting firm, PricewaterhouseCoopers, LLP ("PwC"). All of the Defendants have filed motions to dismiss the Amended Consolidated Class Action Complaint ("Am. Cmplt.") that are presently pending in this Court. For the reasons set forth below, we will deny the motions filed by PwC, William E. Morgenstern, Jeffrey A. Conway, Matthew J. Marini and Rent-Way [Doc. Nos. 56, 58, 60, 63, and 69]. We will grant in part and deny in part the motion filed by William A. McDonnell [Doc. No. 62].

I. BACKGROUND

Rent-Way, a company in the business of renting home furnishings, appliances and other merchandise under full-service rental-purchase agreements, began in 1981 when it opened one store in Erie, Pennsylvania. By 1993, the year of its initial public offering, it had expanded to 19 stores in three states. Thereafter, the company dramatically accelerated the pace of its expansion. In December of 1998, Rent-Way doubled its size and became the second largest company of its kind in the United States when it acquired Home Choice Holdings, Inc. Am. Cmplt. ¶ 33. By the year 2000, Rent-Way owned and operated more than 1100 stores nationwide, compared to a mere 125 stores less than two years earlier. Am. Cmplt. ¶ 48. The class members in this action purchased Rent-Way stock during the height of the rapid expansion, specifically between December 10, 1998 and October 27, 2000, inclusive. Am. Cmplt. ¶ 1. During the class period, the common stock (symbolized on the New York Stock Exchange by "RWY"), traded for as much as $32 per share. Am. Cmplt. ¶ 4.

On Monday, October 30, 2000, Rent-Way issued a press release announcing that it was "investigating certain accounting matters, including possible accounting irregularities, which if confirmed would result in the need to revise earlier reported unaudited financial results for fiscal year 2000." Rent-Way also indicated in this release that it expected the same matters to impact its fourth quarter 2000 results. In part, the release provided that:

[b]ased on its preliminary investigation to date, however, Rent-Way expects these matters to have a negative, non-cash impact of between $25 million and $35 million pre-tax on fiscal year 2000 earnings. Based on its preliminary investigation to date, Rent-Way expects that no fiscal periods prior to fiscal year 2000 will be affected. Rent-Way had previously announced that it expected to meet consensus analyst estimates for fully diluted earnings per share of $1.83 in fiscal year 2000. Based on its preliminary investigation to date and taking into account the expected impact of these accounting matters, Rent-Way believes it will report fully diluted earnings per share of between $0.88 and $1.14 per share for fiscal year 2000.

Am. Cmplt. ¶ 58. Immediately after this release issued, Rent-Way stock declined more than 80% in the course of one day, plummeting from $23-7/16 per share to close at $5.00 per share. Rent-Way eventually disclosed that the accounting irregularities had a far more substantial impact on its fiscal year 2000 earnings than it originally predicted and that the irregularities also impacted its reported results for fiscal years 1998 and 1999. Am. Cmplt. ¶¶ 70-72. In its annual Form 10-K report for fiscal year 2000, Rent-Way reported that the total amount of adjustments affecting pre-tax operating income relating to the accounting improprieties was almost $98 million for all three years. Of this amount, $74.3 million applied to fiscal year 2000, $21.0 million applied to fiscal year 1999 and $2.3 million applied to fiscal year 1998. Additional adjustments totaling $24.5 million were made for fiscal year 2000 for other reasons.

Plaintiffs' 75-page, 161-paragraph Amended Complaint contains numerous allegations that we will more fully set forth in our respective discussions of each Defendant's motion to dismiss. Briefly, however, Plaintiffs' claims may be summarized as follows. In Count I, Plaintiffs allege that each Defendant violated Section 10(b) of the Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by disseminating materially false and misleading statements concerning Rent-Way's earnings, profitability and financial condition during the class period. The Rent-Way statements they allege to have been false and misleading include the originally reported year-end reports for fiscal years 1998 and 1999 and the fiscal quarter-end results for all of the quarters of 1999 and the first three quarters of 2000. Am. Cmplt. ¶¶ 108-135. In its annual report for fiscal year 2000 and on its Form 10-K filed with the SEC, Rent-Way admitted that all of these statements were in fact false. Separate statements made by some of the individual defendants during the class period are also identified. Plaintiffs further assert that PwC falsely represented in its 1998 and 1999 audit opinions that Rent-Way's financial statements had been prepared in accordance with GAAP and that its audits had been performed in accordance with GAAS, and that it reviewed and approved of Rent-Way's false quarterly reports. Am. Cmplt. ¶¶ 74, 92. Plaintiffs assert that Rent-Way's internal accounting structure was severely deficient and that the Rent-Way Defendants knew of and used this fact to manipulate the appearance of the company's financial condition so that it could continue its acquisition practices. In this regard, Plaintiffs claim that Marini, Rent-Way's controller, manually altered numerous entries on the company's ledger prior to the year-end and quarter cut-off dates. They also allege that PwC knew of Rent-Way's fraudulent practices and of the severe deficiencies in the accounting system but failed to properly fulfill its obligations as auditor because it was not independent from its client. In Count II, Plaintiffs allege that the individual Defendants (Morgenstern, Marini, Conway and McDonnell) are liable under Section 20(a) of the Exchange Act because they were "controlling persons" within the meaning of this provision at all relevant times.

II. STANDARDS OF REVIEW

A. Motion to Dismiss

In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the district court must accept as true all well-pleaded allegations, and must view the facts and inferences to be drawn from the pleadings in the light most favorable to the non-moving party. Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 406 (3d Cir.1993) (citation omitted). The proper inquiry is "whether relief could be granted ... `under any set of facts that could be proved consistent with the allegations.'" Gasoline Sales, Inc. v. Aero Oil Co., 39 F.3d 70, 71 (3d Cir.1994) (quoting National Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 256, 114 S.Ct. 798, 127 L.Ed.2d 99 (1994)). Judgment will only be granted if it is clearly established that no material issue of fact remains to be resolved and that the movant is entitled to judgment as a matter of law. Regalbuto v. City of Philadelphia, 937 F.Supp. 374, 377 (E.D.Pa.1995) (citing Inst. for Scientific Info., Inc. v. Gordon and Breach, Science Publishers, Inc., 931 F.2d 1002, 1005 (3d Cir.1991), cert. denied, 502 U.S. 909, 112 S.Ct. 302, 116 L.Ed.2d 245 (1991). In deciding motions to dismiss, courts generally consider only the allegations in the complaint, exhibits attached thereto and matters of public record. Pension Benefit Guar. v. White Consolidated Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.1993), cert. denied, 510 U.S. 1042, 114 S.Ct. 687, 126 L.Ed.2d 655 (1994)). A district court may, however, consider the factual allegations within other documents, including those described or identified in the complaint and matters of public record, if the plaintiff's claims are based upon those documents. Id.; In re Westinghouse Sec. Litig., 90 F.3d 696, 707 (3d Cir.1996). In these instances, the court is not required to construe the motions to dismiss as motions for summary judgment. In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1426 (3d Cir.1997).

B. Section 10(b) and Rule 10b-5

Section 10(b) makes it "unlawful for any person, directly or indirectly ... [t]o use or employ, in connection with the purchase of any security ... any manipulative or deceptive device or contrivance in contravention of [SEC] rules and regulations." 15 U.S.C. § 78j(b). Rule 10b-5 in turn prohibits the "employ[ment of] any device, scheme, or artifice to defraud" and the "mak[ing of] any untrue statement of a material fact or [the omission of] a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5. To state a securities fraud claim under Section 10(b) and Rule 10b-5, a private plaintiff must plead: (1) that the defendant made a misrepresentation or omission of (2) a material (3) fact; (4) that the defendant...