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Keywords

plaintiffdefendantpleamotioncorporation

plaintiffmotionwillmotion to dismiss

Related Cases

U.S. S.E.C. v. Delphi Corp., Not Reported in F.Supp.2d, 2008 WL 4539519, Fed. Sec. L. Rep. P 94,877

Facts

The SEC initiated an investigation into Delphi Corporation in August 2004, which led to a formal complaint filed in October 2006. The complaint detailed a pattern of federal securities law violations by Delphi and its senior officers from 2000 to 2004, including fraudulent accounting schemes that resulted in the company materially misstating its financial condition. Specific allegations included the mischaracterization of a $20 million payment from Electronic Data Systems as income, despite knowing it was a refundable amount.

In approximately August of 2004, the SEC notified Delphi that it had issued a Formal Order of Investigation into matters underlying the complaint in this case.

Issue

The main legal issues included whether the SEC adequately pleaded its claims against the defendants under securities laws and whether the defendants' motions to dismiss should be granted.

The court will separately consider each motion.

Rule

The court applied the legal standards for pleading securities fraud, which require allegations of misrepresentation or omission of material facts, made with scienter, and justifiably relied upon by the plaintiff. The court also considered the requirements of Rule 9(b) for fraud claims and the standards for motions to dismiss under Rule 12(b)(6).

In facing a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6) “[t]he court must construe the complaint in the light most favorable to the plaintiff, accept all the factual allegations as true, and determine whether the plaintiff can prove a set of facts in support of its claims that would entitle it to relief.”

Analysis

The court found that the SEC's allegations against the defendants, particularly Judith Kudla, met the pleading standards required under Rule 9(b) and sufficiently established the necessary elements of securities fraud. The court noted that Kudla's role as a CPA and her involvement in the mischaracterization of the $20 million payment demonstrated the requisite scienter. The SEC's detailed allegations provided fair notice of the claims against Kudla, and the court rejected her arguments regarding the inadequacy of the SEC's claims.

As to scienter, the SEC alleges that Kudla, a CPA, was responsible for accounting in the division that was negotiating the $20 million payment and knew that the amount would be paid back to EDS or was reckless in not knowing that it would violate GAAP to report it as income.

Conclusion

The court denied the defendants' motions to dismiss, allowing the SEC's claims to proceed. The court concluded that the SEC had sufficiently alleged securities fraud against the defendants.

For the reasons that follow, the motions will be denied.

Who won?

The SEC prevailed in this case as the court denied the motions to dismiss filed by the defendants, allowing the case to move forward based on the sufficiency of the SEC's allegations.

The court will separately consider each motion.

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