The opinion of the court was delivered by: Marilyn Hall Patel Chief Judge United States District Court Northern District of California
Plaintiffs' Motion for Leave to Amend Complaint
Plaintiffs bring this shareholder class action against Fritz Companies, Inc. and various individual officers and directors (collectively "Fritz"). The complaint contains claims of securities fraud under Section 10(b) of the Securities Exchange Act of 1934 ("SEA"), 15 U.S.C. § 78j(b), related Rule 10-5, and controlling persons allegations under Section 20 of the SEA, 15 U.S.C. § 78t(a). After allowing plaintiffs to file First and Second Amended Complaints in 1997, this court dismissed the action with prejudice for failure to state a claim. In re Fritz Co. Sec. Litig., No. C--96--2712 (N.D. Cal. March 5, 1998) (Patel, J.). In 1999, the Ninth Circuit summarily vacated the order for reconsideration in light of its decision in Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999). Now before the court is plaintiffs' motion for leave to amend the complaint pursuant to Rule 15 of the Federal Rules of Civil Procedure. Having considered the arguments of the parties, and for the reasons set forth below, the court rules as follows.
Fritz was a transportation logistics business in San Francisco that provided information services for importers and exporters worldwide. In April 1995, Fritz and Intertrans-an air and ocean freight forwarding and transportation logistics business-filed a Joint Proxy and Prospectus for merger/acquisition. In May 1995, Fritz acquired Intertrans with the approval of both companies' shareholders. As a result of the merger, Fritz issued a Form 10-K for the January--May transitional period, filed in August 1995. This filing marks the beginning of the Class Period, which runs from August 28, 1995 to July 23, 1996. The Form 10-K included a charge of "merger-related expenses" of nearly $30 million and indicated that expenses could be higher and could not be conclusively calculated "until the operational and transition plans are completed." Proxy, Herrara Dec. Exh. B, at 22.
In April 1996, Fritz released a report of financial operations for its third fiscal quarter, claiming revenue of $274.3 million, net income of $10.3 million, and earnings per share of 29 cents. In August 1996, Fritz filed an amended report on the Form 10-K for the third quarter with adjustments as follows: revenue was reduced by approximately $26 million, net revenue by approximately $8 million, and pre-tax income by approximately $0.9 million. Several million dollars of previously unaccounted for operating expenses and logistics services were also recognized in this report. Fritz claimed that much of the cost was necessary because they "underestimated final costs related to the full integration of our two companies" and "also erred in adopting the Intertrans accounting system, as it has proved inadequate, especially given [their] rapid growth." Herrera Dec. Exh. D.
Fritz reported a loss of $3.4 million, or 10 cents per share, for the fourth quarter 1996. The stock price dropped by 55% in a single day and never fully recovered. Plaintiffs allege that Fritz was aware of the impending collapse of the company and that, by engaging in improper accounting practices, Fritz drastically inflated revenue calculations for the third quarter. They claim that Fritz (1) improperly inflated revenues by recognizing revenue on sales where collection was not reasonably expected, or the services were not agreed to or performed by the customer; and (2) that Fritz failed to properly present its operating expenses, including freight costs, bad debt and software development costs, in its financial statements, which made Fritz appear more profitable and growing than was actually the case.
Plaintiffs also allege that, although auditors had informed Fritz that severe accounting and internal controls problems made Intertrans' system incapable of providing accurate financial information, it was not until fifteen months after the merger that Fritz disclosed these controls problems. During those fifteen months, Fritz had represented the company as flourishing financially, due in part to the successful integration of the Intertrans system into its company. Plaintiffs allege that these representations materially misstated the truth that Fritz was using unreliable accounting information and accounting practices in order to artificially inflate Fritz's stock for the benefit of the major shareholders and CEO.
Plaintiffs' filed suit in state and federal court soon after Fritz's collapse, filing their first complaint with this court in July 1996. They subsequently consolidated their actions and filed a First Amended Complaint in January 1997. In April 1997 plaintiffs filed a Second Amended Complaint ("SAC"), which this court dismissed with prejudice. The Ninth Circuit summarily vacated the order for reconsideration in light of its intervening decision in In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999). Plaintiffs now move to amend their complaint.
Fed. R. Civ. P. 15(a) provides a party may amend a pleading only by leave of the court after the filing of a responsive pleading, unless the opposing party consents to the amendment. Rule 15(a), however, also provides that leave to amend "shall be freely given when justice so requires." "This policy is to be applied with extreme liberality." Eminence Capital, LLC v. Aspeon, 316 F.3d 1048, 1051 (9th Cir. 2003). The Supreme Court has set forth several factors that a district court should evaluate in determining whether justice requires granting leave to amend, including "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, [and] futility of amendment." Id. at 1052 (quoting Foman v. Davis, 371 U.S. 178, 182 (1962)). The factor carrying the greatest weight is whether the proposed amendment will unduly prejudice the opposing party. Id. The party opposing the amendment bears the burden of showing prejudice. DCD Programs Ltd. v. Leighton, 833 F.2d 183, 187 (9th Cir. 1987).
A district court's discretion over an amendment is "especially broad" where the court has already given plaintiff one or more opportunities to amend the complaint. Id. at 186 n.4; see also SissetonWahpeton Sioux Tribe v. United States, 90 F.3d 351, 355 (9th Cir. 1996) (finding previous amendments and the futility of proposed amendment warranted denial of leave to amend). It also may be appropriate to deny leave to amend where the proposed amendment "merely restates the same facts using different language, or reasserts a claim previously determined." DCD Programs, 833 F.2d at 188 (quoting Wakeen v. Hoffman House, Inc., 724 F. 2d 1238, 1244 (7th Cir. 1983)).
Plaintiffs' Proposed Third Amended Complaint ("TAC") contains claims of securities fraud under Section 10(b) of the SEA, 15 U.S.C. § 78j(b), Rule 10b-5, and controlling persons allegations under Section 20 of the SEA, 15 U.S.C. § 78t(a). Plaintiffs move for leave to amend the SAC in light of the heightened pleading standard under the Private Securities Litigation Reform Act ("PSLRA") and the Ninth Circuit ruling in Silicon ...