Opinion ID: 778801
Heading Depth: 3
Heading Rank: 1

Heading: Accounting violations.

Text: 62 As discussed above, allegations of GAAP violations, alone, are insufficient to state a claim for securities fraud. In re Navarre Corp., 299 F.3d 735, 2002 WL 1760458, slip op. at 15. The Class alleged K-tel knew or was reckless in not knowing prior to filing the March 10-Q that a subsidiary or its assets had been impaired and that K-tel was required by FAS 121 to write-off the assets in the amount of $1,498,000. The Class claimed such knowledge was evident in K-tel's stated intention to curtail subsidiary activities. It contended the write-off was not timely completed with the purpose of inflating stock prices until after the delisting issue was resolved and the individual defendants had completed millions of dollars in insider trading. Further, the Class alleged the failure to write-off the impaired assets resulted in an overstating of assets, net worth and earnings. Finally, the Class claimed the March 10-Q was materially false and misleading when it stated the subsidiary operations had been curtailed because the subsidiary had contract obligations which would result in additional losses of $1.8 million about which FAS 5 required disclosure in May 1998. 63 The Class alleged K-tel's knowing overstatement of assets in violation of GAAP evinces fraudulent intent. It claimed K-tel's asset base was deteriorating due to the losses sustained, and expected to sustain, by the subsidiary. The Class contended K-tel deferred GAAP imposed write-offs in order to artificially maintain an asset base of over $4 million, NASDAQ's minimum net asset value requirement for listing. The deferral allegedly facilitated the sale of stocks by four of the individual defendants prior to public disclosure of the possibility of delisting. The Class further alleged the individual defendants, as executives of the company, by at least May 8, 1998, knew of the facts surrounding the improper accounting conduct. Specifically, the Class concluded K-tel stated its intentions to curtail the activities of the subsidiary, thereby acknowledging the impaired nature of the assets. Finally, the Class alleged the sheer magnitude of the GAAP violations exhibit scienter. 64 The Class alleged multiple motives for the individual defendants including (a) inflating the price of K-tel's common stock, (b) avoiding or delaying NASDAQ delisting, (c) deferring adverse effects of NASDAQ delisting, (d) increasing compensation directly tied to stock price, and (e) protecting employment with K-tel. The motive allegations are insufficient to support scienter. We will address them in reverse order. 65 As stated above, general allegations of a desire to increase stock prices, increase officer compensation or maintain continued employment are too generalized and are insufficient. See Kalnit, 264 F.3d at 139. While such allegations may be sufficient if the benefit to an individual defendant is unusual, Green Tree, 270 F.3d at 661, no such allegations were pled in this case. The Class failed to allege how or to what extent the defendants' compensation or continued employment was tied to stock price or to what degree, if any, the defendants benefitted. 66 The motive allegations related to delisting are insufficiently pled to support a finding of a strong inference of fraudulent intent. Even assuming GAAP violations occurred, the Class has alleged no facts to support the inference that the individual defendants violated GAAP in the March or the June, 1998 reports to avoid delisting. The Class allegation assumes the defendants knew they would be receiving a delisting letter and would, in fact, be delisted. The record shows K-tel was not delisted, even though the June 10-K represented the company was below NASDAQ requirements for continued listing and the NASD delisting letter was sent October 19, 1998. Further, an intent to curtail certain activities based on past losses does not, by itself, raise a red flag that nearly $1.5 million in assets need be immediately written off. The Class has failed to allege facts demonstrating K-tel had the intent to defraud. 67 The Class contends massive insider trading is evidence of the defendants' motive to commit fraud through inflating stock price. [U]nusual insider trading activity during the class period may permit an inference of bad faith and scienter. Acito, 47 F.3d at 54. Here, however, the Class alleged only conclusory statements that the insider sales were unusual or suspicious. Such conclusory and speculative allegations are insufficient. See In re Comshare, Inc., Sec. Litig., 183 F.3d 542, 553 (6th Cir.1999). The Class failed to allege the prior history of sales for the defendants or even the number of shares held by each. See Greebel, 194 F.3d at 207 (holding plaintiffs' failure to provide information regarding sales made by insiders at times outside the class period permitted no possibility of comparison). Therefore, the Class failed to allege facts to show the trading activity was unusual or how it was unusual. 68 Additionally, taking each defendant individually decreases any inference of scienter. Kieves, company president in October 1998 and previously on the board of directors, sold no shares of common stock during the class period. Kieves's conduct actually undercuts the Class's argument. See Acito, 47 F.3d at 54. 69 Weiner sold 390,000 shares between May 8, 1998, and May 26, 1998, for approximately $11.7 million. Weiner's conduct should not materially impact the scienter analysis because he resigned as company president in August 1998. See Greebel, 194 F.3d at 206 (It is not unusual for individuals leaving a company, like [defendant], to sell shares.). 70 The complaint alleged the remaining defendants sold shares between May 8, 1998, and June 9, 1998, during a period when the stock price experienced a steady decline from approximately $34 to $11.25. Specifically, Kives, who owned 42% of K-tel's common stock, sold 2,202,303 shares between May 11, 1998, and June 9, 1998, for over $26 million; Fischer sold 6,000 shares on May 8, 1998, for approximately $195,000; and Koblick sold 82,178 shares on May 8, 1998, for approximately $2.6 million. As alleged in the complaint, on May 5, 1998, K-tel announced the financial results for the quarter ending March 31, 1998, which included a decline in sales and income. On May 8, 1998, K-tel filed its March 10-Q, echoing the negative information previously disclosed. Selling after delivering news that causes a company's stock price to go down is not suggestive of withholding information. Greebel, 194 F.3d at 207 (finding no sales were made before a big event was made known to the public, and sales were made after negative information was disclosed and before positive information was disclosed); see Nathenson v. Zonagen Inc., 267 F.3d 400, 418 (5th Cir.2001) (decrease in stock price after allegedly misleading disclosure precluded action under fraud-on-the-market theory). Therefore, similar to the Greebel court, we find, [a]lthough the total sum involved was large, the ... plaintiffs produced no evidence that the trading was out of the ordinary or suspicious. Greebel, 194 F.3d at 207. 71 If we were to conclude the trading provides circumstantial evidence of scienter, the claim would still fail because the trading did not coincide with false or misleading statements, which is required to survive dismissal. See In re Navarre Corp., 299 F.3d 735, 2002 WL 1760458, slip op. at 20. Accordingly, it is not possible to draw a strong inference of scienter based on (a) the alleged accounting violations or (b) the alleged improper trading. 72