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In re Cardinal Health Inc. Securities Litigations

March 29, 2007

IN RE: CARDINAL HEALTH INC. SECURITIES LITIGATIONS, PLAINTIFF,


The opinion of the court was delivered by: Judge Algenon L. Marbley

THIS DOCUMENT RELATES TO Magistrate Judge King All Securities Actions

OPINION AND ORDER

I. INTRODUCTION

Plaintiffs, investors in Cardinal Health, Inc. ("Cardinal" or "the Company") bring securities fraud actions against Cardinal, Cardinal executives, Robert D. Walter, George L. Fotiades, Richard J. Miller, James F. Millar, Gary S. Jensen, and Mark Parrish (collectively, the "Individual Defendants"), and Cardinal's independent auditor, accounting firm Ernst & Young ("E&Y"). Plaintiffs allege that from 1998 through 2002, while Cardinal's pharmaceutical distribution unit underwent a reorganization, the corporation engaged in an elaborate accounting scheme designed to artificially inflate its earnings and conceal debt. Further, Plaintiffs allege that E&Y, hired as the Company's independent auditor in 2002, aided Cardinal in perpetuating its fraudulent accounting.

This matter comes before the Court on E&Y's Motion for Entry of Final Judgment on the only claim asserted against it. This Court, in an Opinion and Order dated March 27, 2006, granted E&Y's motion to dismiss Plaintiffs' securities fraud claim, asserted under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(j), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, which Plaintiffs allege against E&Y in their Consolidated and Amended Complaint. Given this dismissal, and the fact that Plaintiffs assert all remaining claims against other defendants, E&Y asks this Court to enter a final judgment on the aforementioned Section 10(b) claim pursuant to Fed. R. Civ. P. 54(b). For the reasons stated herein, Defendant's 54(b) Motion is GRANTED.

II. BACKGROUND

A. Facts

This case involves a securities class action lawsuit brought on behalf of all persons and entities who purchased Cardinal's publicly traded securities between October 24, 2000 and July 26, 2004, inclusive (the "Class Period").*fn1 The Complaint alleges that all Defendants knowingly or recklessly disregarded errors in Cardinal's methods of revenue recognition, and that, through their public misrepresentations about the Company's Operating Revenue, Defendants fraudulently induced Plaintiffs to purchase Cardinal stock at artificially inflated prices in violation of Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a), and the rules and regulations promulgated thereunder by the Securities Exchange Commission ("SEC"), including Rule 10b-5, 17 C.F.R. § 240.10b-5. The Complaint further alleges that the Individual Defendants are liable as "controlling persons" of Cardinal, under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).*fn2 The Complaint asserts causes of action against numerous defendants. The defendants have been grouped together based on their roles and the claims asserted against them. The first such group, which is collectively referred to as "the Cardinal Defendants," includes Cardinal and the six individuals who were either Cardinal directors or members of the Company's senior management during the Class Period: Robert D. Walter, George L. Fotiades, Richard J. Miller, James F. Millar, Gary S. Jensen, and Mark Parrish.

Plaintiffs, however, do not place the blame solely on Cardinal and the Individual Defendants; they also allege that E&Y, serving as Cardinal's independent auditor, assisted the Company "in orchestrating or profiting from [its alleged] fraud." On May 8, 2002, E&Y received $2.31 million from Cardinal for pre-engagement services, and took on Cardinal's multi-million dollar account after Arthur Anderson ("AA"), Cardinal's previous long-term auditor, imploded under the weight of its involvement in massive alleged accounting frauds.*fn3

A large portion of E&Y's services related to work that fell outside the scope of financial statements audits. In fact, in addition to auditing, during the Class Period, E&Y provided Cardinal with the following services: (1) due diligence services related to mergers and acquisitions, audit-related research and assistance and employee benefit plan audits; (2) tax advice and planning services; and (3) other services related to matters such as litigation assistance and internal audit services.*fn4

E&Y made no public statement relating to Cardinal until September 30, 2002 when Cardinal filed its 10-K for FY 2002, containing its audited financial statement. E&Y certified Cardinal's FY 2002 financial results, previously audited by AA. The only other public statement E&Y made during the Class Period was its audit opinion with respect to Cardinal's financial statements for FY 2003, which was published in Cardinal's 2003 10-K filed on September 29, 2003.*fn5 Over the course of the Class Period, E&Y received a total of $27.1 million in fees from Cardinal, which was one of the largest clients of E&Y's Columbus, Ohio office. E&Y's fees were particularly important to the partners in E&Y's Columbus, Ohio office whose incomes and bonuses depended on Cardinal's continued business. Plaintiffs contend that, from the time it became Cardinal's auditor, through the end of the Class Period, E&Y ignored obvious red flags and blindly certified Cardinal's financial statements knowing that, in reality, Cardinal had intentionally misstated its financials to maintain an artificially inflated stock price.*fn6

B. Procedural History

On April 22, 2005, Lead Plaintiff, PFG, filed a Consolidated Amended Complaint (the "Complaint") alleging that, during the Class Period, Defendants engaged in a scheme to defraud Plaintiffs by knowingly or recklessly disregarding errors in revenue recognition, and, through their public misrepresentations about Cardinal's Operating Revenue, fraudulently induced Plaintiffs to purchase Cardinal's stock at artificially inflated prices.

In summary, Plaintiffs' Complaint alleges the following: (1) Defendants materially misrepresented Cardinal's revenues and earnings in violation of GAAP as evidenced by the Company's press releases and SEC filings concerning revenues and earnings from FY 2000 through FY 2004, and Individual Defendants' statements that routinely highlighted "increased revenues" over consecutive periods; (2) though Cardinal represented that its financial statements were prepared in compliance with GAAP, they were not; and (3) Cardinal's financial statements artificially inflated the net income and earnings of Cardinal and caused Plaintiffs to suffer significant financial losses.

The Plaintiffs' Complaint identifies all of Cardinal Defendants' allegedly false and misleading statements occurring over the course of the Class Period in 105 pages. See Complaint ΒΆΒΆ 55-238. The Plaintiffs allege that Cardinal Defendants made these misleading statements in forward-looking statements, press releases, conference calls, and corporate documents, and they aver that analysts relied ...


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