CFO Answers Complaint, Takes Fifth

What's that, answer a PSLRA complaint? No motion to dismiss? Yes, it's true, and you can read all about it in one of two separate opinions issued by Judge William S. Duffey, Jr. (N.D. Ga.) in the securities class action and the consolidated derivative action in the Friedman's litigation. There's a lot to go over in the securities opinion, with the court evaluating "eleven motions to dismiss" the 1933 and 1934 claims filed by executives, outside directors, underwriters, control entities, and Ernst & Young. "Essentially, Plaintiffs contend Defendants engaged in significant accounting fraud, resulting in the overstatement of the Company's reported earnings." And yep, the former CFO (Victor M. Suglia) "did not file a motion to dismiss," opting instead to answer by "asserting his Fifth Amendment rights in response to many of Plaintiffs' allegations." As for everyone else, the Court largely denied their motions to dismiss, finding that Plaintiffs "assert a systemic practice by which the Company inflated revenue by booking sales for which they knew payment was improbable," and "have identified and pleaded with sufficient particularity five categories of alleged misconduct that resulted in the Company's issuance of allegedly false and misleading financial statements during the class period."

As for the derivative action, which Judge Duffey noted consists of "similar allegations," it didn't fare so well. "The Court concludes that Plaintiffs have failed to allege particularized facts, either in isolation or in their totality, creating reasonable doubt as to a majority of the directors' independence or disinterestedness to excuse the requirement that Plaintiffs make demand on the Board." Case dismissed.

You can read In re Friedman's Securities Litigation at 2005 U.S. Dist. LEXIS 19503, and In re Friedman's Derivative Litigation, at 2005 U.S. Dist. LEXIS 20094. Both were issued on September 7, 2005.

Nugget: "In light of the complexity of the allegations and Plaintiffs' obligation to plead its claims with particularity -- a separate ground on which Defendant urges Plaintiffs' Complaint be dismissed -- the Court finds Plaintiffs' Complaint is not a "shotgun pleading" which should be dismissed."