State, Mecklenburg County Provectus Biopharmaceuticals, Inc. v. RSM U.S. LLP

018 NCBC 100

STATE OF NORTH CAROLINA MECKLENBURG COUNTY PROVECTUS BIOPHARMACEUTICALS, INC., Plaintiff, v. RSM U.S. LLP f/k/a McGLADREY, LLP, Defendant.

No. 17 CVS 10396

Superior Court of North Carolina, Mecklenburg

September 28, 2018

Baker Donelson, Bearman, Caldwell & Berkowitz, PC, by Mark D Griffin, Lori H. Patterson, Matthew G. White, and R. Andrew Hutchinson, and Erwin, Bishop, Capitano & Moss, P.A., by A. Todd Capitano, for Plaintiff Provectus Biopharmaceuticals Inc.

Williams & Connolly LLP, by Thomas H. Selby, Jessica Richard, and Amy B. McKinlay, and Poyner Spruill LLP, by Karen H. Chapman, Cynthia L. Van Horne, and Lee A. Spinks, for Defendant RSM U.S. LLP f/k/a McGladrey LLP.

ORDER AND OPINION ON DEFENDANT'S MOTION TO DISMISS

Louis A. Bledsoe, III, Chief Business Court Judge

1. THIS MATTER is before the Court upon Defendant RSM U.S. LLP f/k/a McGladrey, LLP's ("RSM") Motion to Dismiss Plaintiff Provectus Biopharmaceuticals, Inc.'s ("Provectus") Amended Complaint under Rule 12(b)(6) of the North Carolina Rules of Civil Procedure (the "Motion").

2. Having considered the Motion, the briefs and supplemental briefs in support of and in opposition to the Motion, and the arguments of counsel at the hearing on the Motion, the Court hereby GRANTS in part and DENIES in part the Motion.

I. FACTUAL BACKGROUND

3. The Court does not make findings of fact when ruling on a motion to dismiss under Rule 12(b)(6). See, e.g., Concrete Serv. Corp. v. Inv'rs Grp., Inc., 79 N.C.App. 678, 681, 340 S.E.2d 755, 758 (1986). Rather, the Court recites the relevant allegations in the pleading asserting the challenged claims-here, Provectus's Amended Complaint.

4. Provectus is a publicly traded, development-stage biotechnology company with its principal place of business in Knoxville, Tennessee. (Am. Compl. ¶¶ 1, 14, ECF No. 24.) Provectus was founded in 2002 and focuses on developing drugs for certain cancers and skin conditions. (Am. Compl. ¶ 19.) At all relevant times, Provectus had four employees. (Am. Compl. ¶ 20.)

5. Defendant RSM is an Iowa limited liability partnership with its principal place of business in Illinois. (Am. Compl. ¶ 15.) RSM is the United States-based firm within RSM International, a global network of independent audit, tax, and consulting firms. (Am. Compl. ¶ 15.) RSM holds itself out as a leading provider of auditing, tax, wealth management, and consulting services. (Am. Compl. ¶ 15.) RSM is registered to conduct business in North Carolina and conducted its primary services at issue here through its North Carolina offices and personnel. (Am. Compl. ¶ 15.)

6. The present dispute between these two companies involves Provectus's contention that two of its executives received millions of dollars in wrongful reimbursement payments as the result of intentional, willful, or negligent actions RSM took in the course of providing accounting or auditing services to Provectus.

7. In 2007, RSM approached Provectus, marketing itself as a "one-stop resource for all of Provectus's accounting and financial needs." (Am. Compl. ¶ 21.) Provectus decided to hire RSM because, with only four employees, Provectus lacked the internal resources or ability to manage and monitor its own financial and accounting systems. (Am. Compl. ¶¶ 20, 22.)

8. Beginning in 2007 and continuing through early 2016, RSM maintained three separate engagements with Provectus. (Am. Compl. ¶¶ 2-3.) The different engagements can be summarized as follows:

(1) An outsourcing engagement, under which RSM provided comprehensive accounting services, human resources services, related technology services, and business consulting services;

(2) An engagement for review of [Provectus's] financial statements, under which RSM advised on Form 10-K and Form 10-Q reporting requirements, reviewed financial statements for compliance with SEC rules and regulations, advised on specific footnote disclosures, advised on various technical accounting matters, and assisted with responding to the SEC on any comment letters relating to technical accounting matters; and

(3) An engagement to provide internal audit and Sarbanes-Oxley ("SOX") compliance services, under which RSM directed [Provectus's] compliance with SOX Section 404, including the utilization of integrated risk management services to plan and conduct a Committee of Sponsoring Organizations of the Treadway Commission ("COSO") evaluation, to design and assess the effectiveness of [Provectus's] internal controls, and to assess operating effectiveness of [Provectus's] internal controls.

(Am. Compl. ¶¶ 2, 22.) As a result of these engagements, Provectus alleges that RSM had "direct access to and day-to-day control over every aspect of Provectus's financial and accounting systems from 2007 until early 2016, including complete control over the management of [Provectus's] general ledger." (Am. Compl. ¶ 23.)

9. As a particular part of its duties connected to its SOX compliance services "RSM developed, drafted, reviewed, and commented on the development of Provectus's internal controls environment, including Provectus's Purchase to Pay Process [Narrative]." (Am. Compl. ¶ 29.) This Purchase to Pay Process Narrative dealt with "the processes and responsibilities for reviewing, processing, and approving [Provectus] expenditures." (Am. Compl. ¶ 30.) These expenditures included advances and reimbursements for travel and entertainment ("T&E") expenses incurred by Provectus employees. (Am. Compl. ¶¶ 30-35.)

10. Under the Purchase to Pay Process Narrative, Provectus employees could receive wire transfer advances to cover future travel costs purportedly associated with Provectus. (Am. Compl. ¶ 49.) The process for advancing and documenting these wire transfers required the approval of key Provectus personnel:

The CFO determines the need for a wire and completes the Wire Backup Form. This form is then signed by 2 of the 3 [Provectus] founders and the form is faxed to the bank for completion. The Wire Backup Form is attached to the Bank Confirmation and the CFO prepares the journal entry to record the transaction and forwards to [RSM] for posting. In addition, a copy of the transaction is given to the [Bible Harris Smith PC ("BHS")] staff member to make sure it is included properly on the reconciliation and processed in QuickBooks.^[1]

(Am. Compl. ¶ 35.) As part of this process, RSM received the advance requests and the necessary officer approval for the wire transfers. (Am. Compl. ¶ 49.)

11. The Purchase to Pay Process Narrative also allowed Provectus employees to be reimbursed for legitimate business expenses. (Am. Compl. ¶ 49.) This process worked as follows:

Each employee prepares an itemized listing of expenses, attaches the support for each item and signs. This Expense Report is then forwarded through the CFO to the BHS Staff member who reviews the document for accuracy and completeness of backup and amounts. If there are problems these are discussed and resolved with the applicable employee and once final, they are signed off by the BHS staff and process[ed] as any other invoice.

(Am. Compl. ¶ 31.) As part of the reimbursement process, RSM received an expense reimbursement request and any paperwork submitted therewith. (Am. Compl. ¶ 49.)

12. The degree to which the T&E advances and reimbursement processes were followed allegedly changed over time. Prior to 2011, RSM requested, sampled, and tested T&E expense reports and received back-up documentation to support T&E expense payments. (Am. Compl. ¶ 60.) Beginning in 2011, however, RSM stopped receiving back-up documentation to show that the funds transferred to Provectus employees were actually used for company-related travel or other legitimate business purposes. (Am. Compl. ¶ 50.)

13. As another part of RSM's SOX engagement, RSM also issued quarterly and annual reports regarding RSM's control monitoring. (Am. Compl. ¶ 38.) To perform these services, RSM sampled Provectus's expense payments, including reimbursements for T&E expenses. (Am. Compl. ¶ 39.) For the majority of the parties' engagement, RSM represented that it had identified no material weaknesses in Provectus's internal controls. (Am. Compl. ¶¶ 55, 63-75.) In February 2016, however, RSM issued a report acknowledging that certain aspects of Provectus's internal controls were materially deficient. (Am. Compl. ¶¶ 38, 54, 66-76.) Provectus now alleges that such weaknesses existed well before that time and that these weaknesses greatly harmed Provectus.

14. Between 2011 and 2016, Provectus's CEO, Dr. Craig Dees ("Dees"), received approximately $3.2 million in advances for T&E expenses. (Am. Compl. ¶ 7.) Dees did not substantiate these advances. (Am. Compl. ¶ 11.) Provectus's COO and CFO, Peter Culpepper ("Culpepper"), also received between $300, 000 and $1.4 million in T&E reimbursements without providing adequate documentation. (Am. Compl. ¶ 7.) Provectus alleges that Dees and Culpepper never actually incurred any T&E expenses associated with these payments and were instead siphoning money from Provectus for their own gain. (Am. Compl. ¶ 11.)

15. Provectus contends that RSM bears responsibility for Dees's and Culpepper's wrongful advances and reimbursements. Provectus alleges that RSM (i) failed to design and implement satisfactory internal controls to prevent the payment of advances and reimbursements for illegitimate purposes, (Am. Compl. ¶ 60), (ii) knew of the nature and frequency of these T&E advances and reimbursements but never requested further document support from Provectus to validate whether Provectus funds had been used for legitimate business purposes, (Am. Compl ¶¶ 8, 46), and (iii) continually made negligent and/or intentional misrepresentations to Provectus concerning the adequacy of...