4th Circ. Revives BearingPoint Shareholder Action

By Christine Caulfield

Law360, New York (August 04, 2009, 4:19 PM ET)

A securities class action against bankrupt technology consulting firm BearingPoint Inc. has been given a second life by a federal appeals court, more than a year and a half after the case was tossed for failing to reach the pleading bar established by the U.S. Supreme Court’s Tellabs ruling.

The U.S. Court of Appeals for the Fourth Circuit on Friday agreed that the shareholders’ case had inadequately pled scienter under the heightened standard, but ruled that the U.S. District Court for the Eastern District of Virginia had erred in November 2007 when it refused the plaintiffs’ motion to correct the deficiencies in a second amended complaint.

An attorney for the institutional investors, Solomon B. Cera of Gold Bennett Cera & Sidener LLP, said Tuesday that the ruling was a major victory for the plaintiffs, which had won limited relief from the automatic stay protecting BearingPoint in Chapter 11 to hear the appeals court decision.

“The case has been pending such a long time that unfortunately BearingPoint went bankrupt in the interim, but we have filed papers in that case to protect the interests of the class and will continue to pursue our rights there,” Cera said, adding that the securities fraud claims against nondebtor former company executives would proceed without delay.

BearingPoint, formerly known as KPMG Consulting LLC, filed for bankruptcy March 6, after oral arguments were heard in the shareholders’ appeal. The U.S. Bankruptcy Court for the Southern District of New York modified the automatic stay on May 7 to allow the Fourth Circuit to issue its ruling.

The case was originally filed against BearingPoint and its top executives by Matrix Capital Management Fund LP more than four years ago, alleging that the “defendants defrauded the market by knowingly or recklessly publishing false financial information despite awareness of BearingPoint’s ‘lax internal controls’ and dysfunctional accounting systems.”

The complaint came in the wake of an April 2005 announcement that BearingPoint would take an impairment charge of between $250 million and $400 million due to accounting errors and that its financial statements for 2003 and 2004 would be affected by the errors.

Matrix filed an amended complaint as lead plaintiff in June 2005, and the district court tossed it without leave to amend in November 2005.

In its 49-page decision Friday, the Fourth Circuit said the admissions by BearingPoint that the company lacked the internal controls to prevent the accounting errors was not evidence of an intent to defraud.

“BearingPoint’s admissions fail to suggest that defendants intentionally created an environment conducive to accounting fraud; the company simply admits that such an environment existed,” the appeals court said. “Such an admission fails to suggest that defendants acted with scienter when they issued BearingPoint’s 2003 and 2004 financial statements.”

But the appeals court further said that its agreement with the district court’s analysis of the allegations in the complaint did “not dispose of this case,” finding that the lower court should have allowed the plaintiffs to submit their proposed amended suit.

“In denying plaintiffs leave to amend, the district court merely repeated the reasons it had previously offered for dismissing the operative complaint. The district court made no determinations about prejudice, bad faith, or futility with respect to the proposed second amended complaint. That alone may constitute an abuse of discretion,” the appeals court said.

The appeals court noted that the Supreme Court’s decision in Tellabs was handed down in late June 2007, after the plaintiffs had filed the operative complaint.

Notably, the appeals court also found that the additional allegations in the proposed amended complaint weighed in favor of an inference of scienter against the BearingPoint executives.

A concurring opinion issued by Judge Robert King went further in support of the plaintiffs, finding that they had sufficiently alleged scienter in their dismissed first amended complaint.

BearingPoint is represented by Skadden Arps Slate Meagher & Flom LLP.

Plaintiffs are represented by Gold Bennett Cera & Sidener LLP.

The case is In re: BearingPoint Inc. Securities Litigation, case number 1:05-cv-454, in the U.S. District Court for the Eastern District of Virginia.