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February 5, 2002


The opinion of the court was delivered by: Elaine E. Bucklo, United States District Judge.


Charles Grimes brings this Rule 10b-5 securities fraud class action against Navigant Consulting ("Navigant"), a consulting company in which he owns 1.8 million shares, about half a million of which were purchased in the class period.*fn1 The gravamen of his complaint is that, in 1999, Navigant defrauded investors by tailing to disclose that it had used an improper accounting method that inflated the value of its stock. Grimes sued in the District of Delaware on behalf of himself and the class of all persons who purchased Navigant stock between May 6, 1999, and January 24, 2000.*fn2 Navigant moved to transfer venue to this court, and Grimes concurred. Navigant moves to dismiss, and I grant the motion.


According to Grimes' complaint, which I accept as true for the purposes of this motion, Navigant acquired four companies in the first quarter of 1999, which transaction it accounted for by using a "pooling of interests" method of accounting (the "pooling method"). This method is intended for use in a situation where shareholders in two separate corporations that merge or otherwise combine become shareholders in the surviving firm. Certain conditions must be satisfied for the use of the pooling method to be proper, including that there be no "planned" transactions when one company acquires another, such as the subsequent reacquisition of the stock issued to effect the transaction. The SEC, in its Staff Accounting Bulletin No. 96 of March 19, 1996, established a presumption that stock issued within six months of the original transaction is part of the plan of acquisition. Several executives of Navigant were involved in such transactions in July and August 1999, including vice president of corporate development Stephen J. Denari, general counsel and secretary Charles Demirjian, and chairman and CEO Robert Maher. For example, on July 2, 1999, Denari used a note to purchase almost $10 million of Navigant stock from a shareholder of one of the entities Navigant had acquired; in August, that note was repaid with a $10 million loan that Maher took out from Navigant, representing this falsely as a loan to acquire real estate. Maher himself paid back the loan by surrendering about a half million Navigant shares to the company.

Meanwhile, Navigant had been touting its "record results" for the first quarter of 1999 in press releases and 10Q filings with the SEC, and was rated highly by analysts, Grimes says, in part because of its use of the pooling method. In August 1999, after the transactions that made the pooling method inappropriate, Navigant made similar statements about its second quarter performance to the press and the SEC. Its stock quintupled in value from about $11 a share at the time of the IPO to a high of $54 a share.

But in October, the Center for Financial Research and Analysis and Barrons (October 25, 1999) published articles raising questions about Navigant's accounting methods. Navigant stock dropped from about $40 a share on October 20 to about $24 a share on October 26. On November 3, 1999, Navigant announced "record" results for the third quarter, and made similar statements in its 10Q filing of November 16. On November 22, 1999, Navigant reported that Maher had "resigned under pressure," and that Denari and Demirjian had been fired after the Directors found that they had engaged in inappropriate transactions. Although Navigant continued to deny that there was any problem with its use of the pooling method, it announced that outside auditors were reviewing its propriety. In its motion to dismiss, Navigant asks me to consider the fact that the press release of November 22, 1999, stated that:*fn3

[i]f any of the business combinations were to be recharacterized as purchases rather than poolings of interests, such change would not have any material impact on the company's cash flows or "cash earnings' during or after fiscal 1999. The effect on the company's reported net income in prior quarters would depend upon the significance of the affected transactions.

On November 23, Navigant stock dropped by half, to $13.50 a share on the NYSE.

Mr. Grimes began purchasing Navigant shares on November 26, 1999. He states that he relied upon Navigant's statements that (1) the pooling method had been properly used as well as that (2) any change in accounting methods would not affect cash earnings in fiscal 1999 or after. In a press release of January 24, 2000, the Directors announced that they had instructed management to restate financial statements to account for the acquisitions as purchases rather than poolings.

On Monday, January 24, Navigant's stock closed, at 11.3125, up from its close on Friday, January 20, 2000, at 9.9375, trading at three times the volume as well. It continued to trade at over 11.3 through at least January 26, 2000. In addition, in his own certification statement, Grimes says that on January 24, 2000, he bought 113,500 shares of Navigant at 10.39, up from the 9.211 per share he paid on December 14, 1999, and indeed up from anything he had paid for Navigant stock over the previous 45 days.*fn4


On a motion to dismiss for failure to state a claim upon which relief can be granted under Fed.R.Civ.P. 12(b)(6), I accept all well-pleaded factual allegations in the complaint as true and draw all inferences in favor of the plaintiff. Henderson v. Sheahan, 196 F.3d 839, 845 (7th Cir. 1999). Dismissal is only appropriate where it appears beyond doubt that the plaintiff can prove no set of facts to support his claim. Id. at 846. To show a violation of Rule 10b-5 of the Securities Exchange Act, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5, the plaintiff must demonstrate that: "(1) the defendant made a false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase or sale of securities (5) upon which the plaintiff justifiably relied (6) and that the false statement proximately caused the plaintiff's damages." Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997).


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