robert s. green (state bar no. 136183) green welling llp...

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Opp 2nd MTD_FINAL.wpdPLNTF'S OPP TO DEFS' MTD THE SECOND AMENDED CLASS ACTION COMPLAINTCase No. C03-2522 MHP

Robert S. Green (State Bar No. 136183)GREEN WELLING LLP 235 Pine Street, 15th FloorSan Francisco, CA 94104Telephone: (415) 477-6700 Facsimile: (415) 477-6710Email: [email protected]

Liaison Counsel for Plaintiff andthe Class

Katharine M. Ryan (Admitted Pro Hac Vice) ([email protected])Karen Reilly (Admitted Pro Hac Vice) ([email protected])SCHIFFRIN & BARROWAY, LLP280 King of Prussia RoadRadnor, PA 19087Telephone: (610) 667-7706Facsimile: (610) 667-7056

Lead Counsel for Lead Plaintiff andthe Class

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

IN RE CORNERSTONE PROPANEPARTNERS LP SECURITIES LITIGATION

_____________________________________

This Document Relates to:

ALL ACTIONS

)))))))))))))))))))))))))

Case No. C03-2522 MHP

Consolidated with:C03-2566 (MHP)C03-2637 (MHP)C03-2685 (MHP)C03-2759 (MHP)C03-3076 (MHP)C03-3163 (MJJ)C03-3265 (MHP)

PLAINTIFF’S OPPOSITION TODEFENDANTS WILLIAM L. WOODSAND CHARLES J. KITTRELL’SMOTION TO DISMISS THE SECONDAMENDED CLASS ACTIONCOMPLAINT

CLASS ACTION

Hearing Date: June 6, 2005Time: 2:00 p.m.Courtroom: Hon. Marilyn Hall PatelTrial Date: Not yet set

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Opp 2nd MTD_FINAL.wpdPLNTF'S OPP TO DEFS' MTD THE SECOND AMENDED CLASS ACTION COMPLAINTCase No. C03-2522 MHP i

TABLE OF CONTENTS

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

I. PRELIMINARY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. STATEMENT OF FACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

III. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

A. Standard On A Motion To Dismiss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

B. Defendants’ Motion to Dismiss DisregardsThe Court’s Instruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

C. Defendants Woods And Kittrell Are Liable For The Materially False And Misleading StatementsMade By Answering Defendants And Cornerstone . . . . . . . . . . . . . . . . . . . . . . 11

1. The Materially False And Misleading StatementsAlleged Are Attributable To Defendants WoodsAnd Kittrell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2. Defendants Kittrell And Woods PossessedThe Requisite Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

a. Defendant Kittrell’s Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

b. Defendant Woods’ Scienter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

c. Misrepresentations And/Or OmissionsAbout Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

D. Plaintiff Sufficiently Plead Defendants WoodsAnd Kittrell’s Liability As Control Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Opp 2nd MTD_FINAL.wpdPLNTF'S OPP TO DEFS' MTD THE SECOND AMENDED CLASS ACTION COMPLAINTCase No. C03-2522 MHP ii

TABLE OF AUTHORITIES

Arthur Children's Trust v. Keim,994 F.2d 1390 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Central Bank, N.A. v. First Interstate Bank, N.A.,511 U.S. 164 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

In re Commtouch Software Ltd.,2002 U.S. Dist. LEXIS 13742 (N.D. Cal. July 24, 2002) . . . . . . . . . . . . . . . . . . . . . . . 12

In re CornerStone Propane Partners, L.P. Sec. Litig.,355 F. Supp. 2d 1069 (N.D. Cal. 2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,11,19

In re Cylink Secs. Litig.,178 F. Supp. 2d 1077 (N.D. Cal. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,20

In re GlenFed, Inc., Sec. Litig.,60 F.3d 591 (9th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Hollinger v. Titan Capital Corp.,914 F.2d 1564 (9th Cir. 1990), cert. denied, 499 U.S. 976 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

In re Homestore.com, Inc. Sec. Litig.,252 F. Supp. 2d 1018 (C.D. Cal. 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Howard v. Everex System,228 F.3d 1057 (9th Cir. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,20,21

In re Intermune, Inc. Sec. Litig.,2004 U.S. Dist. LEXIS 15382 (N.D. Cal. Jul. 30, 2004) . . . . . . . . . . . . . . . . . . . . . . . 21

Kaplan v. Rose,49 F.3d 1363 (9th Cir. 1994),cert. denied, 516 U.S. 810 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Lipton v. PathoGenesis Corp.,284 F.3d 1027 (9th Cir. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re McKesson HBOC, Inc. Secs. Litig.,126 F. Supp. 2d 1248 (N.D. Cal. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

No. 84 Employer-Teamster Joint Council Pension TrustFund v. America West Holding Corp.,

320 F.3d 920 (9th Cir. 2003), cert. denied, 540 U.S. 960 (2003) . . . . . . . . . . . . . . . . . 14

Paracor Finance, Inc. v. GE Capital Corp.,96 F.3d 1151 (9th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 21

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Opp 2nd MTD_FINAL.wpdPLNTF'S OPP TO DEFS' MTD THE SECOND AMENDED CLASS ACTION COMPLAINTCase No. C03-2522 MHP iii

In re Peoplesoft, Inc. Sec. Litig.,No C99-00472 WHA, 2000 U.S. Dist.LEXIS 10953 (N.D. Cal. May 25, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

In re Secure Computing Corp. Sec. Litig.,120 F. Supp. 2d 810 (N.D. Cal. 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

In re Silicon Graphics,183 F.3d 970 (9th Cir. 1999), reh’g, en banc denied,195 F.3d 521 (9th Cir. 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

In re Silicon Graphics, Inc. Sec. Litig.,970 F. Supp. 746 (N.D. Cal. 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Stanley v. Safeskin Corp.,2000 U.S. Dist. LEXIS 14100 (S.D. Cal. Sept. 15, 2000) . . . . . . . . . . . . . . . . . . . . . . 12

In re Wells Fargo Sec. Litig.,12 F.3d 922 (9th Cir. 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Wool v. Tandem Computers, Inc.,818 F.2d 1433 (9th Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

FEDERAL STATUTES

15 U.S.C. § 78u-4(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 Defendants are Keith G. Baxter (“Baxter”), Ronald J. Goedde (“Goedde”), William L.Woods (“Woods”), Charles J. Kittrell (“Kittrell”), Richard G. Nye (“Nye”), Merle D. Lewis(“Lewis”), Richard R. Hylland (“Hylland”), and Daniel K. Newell (“Newell”), in their capacityas officers and directors of CornerStone (collectively the “Defendants” or “IndividualDefendants”).

2 Citations to the Complaint are in the form ¶ __.

Opp 2nd MTD_FINAL.wpdPLNTF'S OPP TO DEFS' MTD THE SECOND AMENDED CLASS ACTION COMPLAINTCase No. C03-2522 MHP 1

I. PRELIMINARY STATEMENT

This is a class action brought by Plaintiff against the officers and directors1 of

CornerStone Propane Partners, L.P. (“CornerStone,” the “Partnership” or the “Company”) for

violations of the federal securities laws. Only Defendants William L. Woods (“Woods”) the

Vice President of Acquisitions of CornerStone, and Charles J. Kittrell (“Kittrell”) the Executive

Vice President, Secretary of the Managing General Partner and Chief Operating Officer

(“COO”) of CornerStone, now move to dismiss Plaintiff’s Second Amended Consolidated Class

Action Complaint (the “Second Amended Complaint” or “Complaint”).2 Defendants Baxter,

Goedde, Nye, Lewis, Hylland and Newell, all filed answers to the Second Amended Complaint

on May 10, 2005 (the “Answering Defendants”).

As set forth below, the motion should be denied in its entirety. Defendants Woods and

Kittrell’s arguments in support of their motion to dismiss (1) ignore the Court’s directive

provided during the telephone status conference conducted with all parties on April 14, 2005

following Plaintiff’s filing of the Second Amended Complaint, wherein the Court found the

Complaint as filed sufficient and strongly cautioned Defendants against filing any motions that

the Court may find frivolous; (2) misstate Plaintiff’s allegations in the Second Amended

Complaint and instead rely on the allegations in Plaintiff’s First Amended Complaint; and (3)

misinterpret the federal securities laws.

As detailed in the Complaint, this action arose out of a massive fraud, involving the

Company’s fundamental business strategy of growth by acquisition, and the accompanying

extensive manipulation of the Company’s accounting practices to mask CornerStone’s true

financial condition. Prior to and throughout the class period, which begins on July 29, 1998, and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


extends through February 11, 2003 (the “Class Period”), CornerStone, created in 1996, engaged

in a frenzied pace of business acquisitions, financed and directed by its Managing General

Partner and creator– NorthWestern Corporation (“NorthWestern”), acting through its wholly

owned subsidiary NorthWestern Growth. Funding CornerStone’s acquisition activity was

immensely profitable to NorthWestern, which received dividend paying preferred shares in

return for the funding, which investment income was reported in Northwestern’s financials, with

the shares listed as assets of NorthWestern. CornerStone’s acquisition activity generated

significant revenue for NorthWestern, so much so that at the time CornerStone was sold by

NorthWestern, it was contributing revenues of nearly $2.5 billion, and had catapulted

NorthWestern into the Fortune 500.

CornerStone’s common units were leveraged in the purchase price of the acquired

companies, for which CornerStone systemically overpaid throughout the Class Period– thereby

inflating its own debt load to the benefit of its creditor, NorthWestern. To assure the acquisitions

continued apace, and to inflate the value of CornerStone’s common units, acting in its capacity

as Managing General Partner, NorthWestern initiated incentive programs for a select

management group largely made up of the Answering Defendants, and Defendants Woods and

Kittrell. CornerStone paid out bonuses under the Acquisition Incentive Plan based on a

percentage of the dollar value of the acquired company in excess of $7 million between 1997 and

2001– with Woods and Kittrell collectively receiving over $3 million dollars— for acquisitions

the Company has admitted it overpaid.

To conceal from investors the mounting debt burden generated by the frenzied

acquisition of deliberately overvalued companies, and to maximize CornerStone and thereby

NorthWestern’s financial benefit— Defendants engaged in various accounting manipulations

devised to inflate the price of CornerStone’s common units. These manipulations were also

keyed to incentive bonuses, whose recipients were members of a small control group including

Defendants Woods and Kittrell. Defendants repeatedly made materially false and misleading

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3 In the Court’s Civil Pretrial Minutes issued on April 14, 2005, the Court provided an“Order After Hearing” which provided: “Amended complaint filed; Defendant expresses intentto file another motion to dismiss; Court finds that complaint as filed is sufficient to proceed infurther hearing and advises defense counsel that filing any motions that the court may findfrivolous may result in sanctions, including but not limited to attorneys’ fees.” References to the“Order After Hearing” will be made as “Hr. Order.”


statements and/or failed to disclose: (i) that CornerStone had been systemically overpaying for

propane company acquisitions made as early as 1997 and inflating its goodwill; (ii) that tank

inventories of acquired companies were deliberately inflated, and that the Company did not, at

any time through the Class Period, have an accurate record of its tank inventories; (iii) that

through the manipulation of CornerStone’s accounting practices, which included the shifting of

current operating expenses and costs to acquisition related transactions to be capitalized over

time and reclassifying expenses to asset items, Defendants were materially overstating its

EBITDA, net income and earnings per unit; and (iv) that CornerStone lacked adequate internal

controls and was therefore unable to even ascertain the true financial condition of the

Partnership, confirmed by no less than three different accounting firms’ inability to complete

audits of the Company because critical documents and records were missing.

Defendants’ deception caused CornerStone's common units, which had traded as high as

$22 during the Class Period, to decline to $0.35 per share by the end of the Class Period, erasing

over $360 million in market capitalization. The common units are now virtually worthless.

On February 7, 2005, the Court issued an Order ( the “Order”) granting the Individual

Defendants’ motion to dismiss the Plaintiff’s Corrected Consolidated Amended Class Action

Complaint (the “First Amended Complaint”) with leave to amend. On April 1, 2005, Plaintiff

filed the Second Amended Complaint. Thereafter, on April 14, 2005, the Court held a telephone

status conference, wherein the Court indicated that the Second Amended Complaint “as filed is

sufficient to proceed,”3 and that it was a “far different complaint, both in terms of format” and

“manner in which the allegations are set forth, and far closer to what the Court directed than

perhaps Defendant thinks, and also that it’s a far different complaint tha[n] we had before us the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4 References to the transcript of the April 14, 2005 telephone status conference will bemade as “Tr. at __.”

5 NorthWestern Growth, through its subsidiary, CornerStone Propane GP, Inc., acted asthe “Managing General Partner” of the Partnership, and controlled the management of thePartnership throughout the Class Period. ¶ 28.

6 CornerStone was organized as a master limited Partnership (“MLP”). CornerStone andits subsidiary, CornerStone Propane, L.P. (the “Operating Partnership”), were organized inOctober 1996 and November 1996, respectively. CornerStone Propane GP, Inc. and SYN werethe general partners (“General Partners”) of CornerStone and the Operating Partnership. TheGeneral Partners owned an aggregate 2% interest as general partners, and the unitholders(including the General Partners as holders of Subordinate Units) owned a 98% interest as limitedpartners, in CornerStone and the Operating Partnership on a combined basis. ¶ 3.


last time around.”4 Tr. at 5. Defendants Baxter, Goedde, Nye, Lewis, Hylland and Newell all

filed answers on or about May 10, 2005. Defendant Woods, the Vice President of Acquisitions

of CornerStone during the Class Period, and the recipient of $1.1 million in acquisition related

bonuses, and Defendant Kittrell, who during the Class Period was the Executive Vice President,

Secretary of the Managing General Partner and COO of CornerStone, and received $1.95 million

in acquisition related bonuses have moved to dismiss the Second Amended Complaint.

II. STATEMENT OF FACTS

CornerStone is a nationwide propane retail and wholesale distributor, created in 1996 by

NorthWestern Growth,5 a wholly owned subsidiary of NorthWestern. ¶ 2. CornerStone was

created to hold and operate the business and assets of NorthWestern Growth’s propane

operations, which included SYN, Inc. (“SYN”), Empire Energy Corporation (“Empire”) and CGI

Holdings, Inc. (“Coast”).6 Id. The former executive team of Coast, Answering Defendants

Baxter, Goedde and Defendant Kittrell, became the senior executives of the Managing General

Partner and managed the Partnership’s business throughout the Class Period, with the exception

of Goedde who resigned effective June 30, 2001. ¶ 28. The Partnership is one of the nation’s

largest retail propane marketers, serving approximately 440,000 customers in more than 30

states. ¶ 2. Through NorthWestern Growth, NorthWestern owned approximately 30% of

CornerStone and through NorthWestern Growth, was the Managing General Partner. ¶ 3.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7 NorthWestern was a huge client the accounting firm could not afford to loose. Andersen was paid $44.4 million in fees in 2001 alone. ¶ 6. This fee surpassed the $27 millionEnron paid Andersen in 2000 for purported “consulting” services, and more than seven timesthe $5.8 million fee paid by NorthWestern to Andersen in 2000. Id. Of the $44.4 million feepaid, only $2.6 million was for auditing services, with the remaining $41.8 million paid foralleged “consulting.” Id.


As explained in detail in Plaintiff’s Second Amended Complaint, CornerStone’s financial

performance was closely tied to the financial success of its Managing General Partner,

NorthWestern. ¶ 4. Indeed, CornerStone’s furious acquisition activity throughout the Class

Period fundamentally contributed to NorthWestern’s bottom line. Funding for CornerStone’s

acquisitions were funneled by NorthWestern through NorthWestern Growth, which received

dividend paying preferred stock in return. ¶ 3. NorthWestern reported this investment income

on it’s financial statements. Id. The value of CornerStone preferred stock was listed as an asset

on NorthWestern’s financial statements, with losses “allocated” to minority interests, and

thereby kept off of NorthWestern’s financials. Id. Acquisition activity by CornerStone thus

boosted NorthWestern’s bottom line by virtue of how the acquisitions were financed, and loaded

subsidiaries, including CornerStone, down with debt. Moreover, NorthWestern was interested in

keeping the price of CornerStone’s common units high, as they were used to leverage the

purchase price of the acquired companies. Id.

As a major contributor to NorthWestern’s bottom line, CornerStone was closely managed

and controlled by NorthWestern and NorthWestern Growth. ¶ 5. The entities shared

independent auditors, Arthur Andersen, LLPs (“Andersen”), which NorthWestern coopted and

persuaded to overlook and “bless” CornerStone’s fraudulent accounting practices– the very same

practices engaged in by NorthWestern, to artificially inflate CornerStone’s earnings, and thereby

NorthWestern’s.7 ¶ 6. NorthWestern itself was sued in a class action securities lawsuit in the

United States District Court for the District of South Dakota for its involvement in a massive

accounting fraud. ¶ 7. Answering Defendants Hylland, Newell and Lewis were also Defendants

in that case. Id. Among other things, NorthWestern had taken an $880 million write-off -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8 CornerStone was set up to distribute its “Available Cash” to its partners each quarter. According to the 1999 10-K, “[a]vailable Cash generally means all cash on hand at the end ofeach quarter less the amount of cash reserves established by the Managing General Partner in itsreasonable discretion for future cash requirements.” ¶ 29. The cash added to reserves was “toprovide for the proper conduct of the Partnership's business, the payment of debt principal andinterest and to provide funds for distribution during the next four quarters.” Id. CornerStonewas obligated to distribute 100% of its Available Cash with 2% going to the General Partner,until it met the MQD of $0.54 for the quarter in question. Id.


almost $600 million of which was for overstated goodwill related to its subsidiaries including

CornerStone – and restated its last three quarters of financial results. ¶ 7. Answering

Defendants Lewis and Hylland were forced out as a result of their role in the NorthWestern

fraud. Id.

By the start of the Class Period, in July 1998, facing mounting debt from acquisition

activity and adverse business conditions, as well as increasing pressure from NorthWestern to

boost it’s bottom line, Defendants needed to portray increasingly positive results to prop up the

value of the Company’s common units, used by CornerStone to leverage purchase prices for

acquired companies, and to convince investors (including the owners of to be acquired propane

businesses), that CornerStone would continue to pay its minimum quarterly distribution

(“MQD”) on the units.8 ¶ 8. This distribution, coupled with the tax benefits the Partnership

form provided, made the common unit yield for CornerStone an attractive investment.

Motivated by a need to prop up its net income and operating cash flows to avoid defaulting on its

debt covenants, Defendants Woods and Kittrell, along with the Answering Defendants, devised

several schemes to avoid the appearance that CornerStone would be forced to cut its distribution

while simultaneously enabling Defendants to line their own pockets.

The Annual Operating Performance Incentive Plan

Answering Defendants, along with Defendants Woods and Kittrell, engaged in

accounting manipulations to improperly and artificially increase earnings before income taxes,

depreciation and amortization (“EBITDA”), a key financial indicator for CornerStone, as

according to CornerStone, “it provides additional information for evaluating the Partnership's

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


ability to distribute the Minimum Quarterly Distribution and to service and incur indebtedness.”

¶ 30. EBITDA was an important indicator of cash flows by excising various non-cash charges

from Net Income. Id. Thus, by manipulating expenses, the Partnership could give the

impression that EBITDA was stronger and that cash flows were more healthy. In turn, investors

could be falsely led to believe that MQDs were safe when, in reality, cash flow indicators were

far less healthy than reported.

CornerStone adopted an Annual Operating Performance Incentive Plan, paying annual

incentive bonuses determined by the members of the Managing General Partner’s Board, which

included Answering Defendants Hylland, Newell, and Lewis. ¶ 31. The bonus, which was equal

to a percentage of a participant’s annual salary (plus in the case of the Executives, his

Management Fee) based on the Partnership's performance compared to budgeted levels of net

income and EBITDA. Id. Bonuses were marked to budget. Eligible executives – Defendants

Woods and Kittrell, received no bonus if performance was 10% or greater below budget and

50% of annual salary if performance was at budget. Id. Further, CornerStone established a

bonus pool marked to EBITDA. Id. If EBITDA exceeded budget, CornerStone would establish

a “bonus pool equal to 10% of the excess of EBITDA over budget, which will be divided among

Messrs. Baxter, Kittrell, Goedde and Woods and any other participants that the Board of

Directors of the Managing General Partner may determine.” Id. As detailed in the well pled

allegations of the Complaint, Defendants including Woods and Kittrell, engaged in widespread

accounting manipulations to improperly and artificially increase EBITDA and net income.

Under the Annual Operating Performance Incentive Plan, Answering Defendants Baxter,

Goedde and Defendants Kittrell and Woods all personally profited as a result of these fraudulent

acts and received handsome bonuses, indicating that CornerStone came close to or met EBITDA

budget for the fiscal years 1997 through 2001.

The Acquisition Incentive Plan

CornerStone also adopted an Acquisition Incentive Plan, initiated by NorthWestern (to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

289 The transactions covered by the plan included those occurring on or after December 17,

1997 through the fifth anniversary thereof. ¶ 34.


boost its own revenue through CornerStone debt) providing bonuses to covered persons “for

adding new businesses to the Partnership's propane operations.” ¶ 34. According to the 1999

10-K, the Board of Directors of the Managing General Partner, which included Answering

Defendants – determined who would receive such bonuses. Id. Defendants Woods and Kittrell

were part of the inner management circle determined by the Answering Defendants to receive

the bonus– which was substantial, paid in cash, and paid quickly– within only 90 days following

the close of the acquisition deal. Id. Bonuses were to equal “4% of the gross acquisition

purchase price, allocated among the participants in the plan based on defined percentages.” 9 Id.

As detailed in the Complaint, the acquisition incentive was part of an overarching scheme

devised by Defendants to fraudulently boost the revenues of CornerStone’s Managing General

Partner. To achieve this goal, Defendants deliberately and systemically overpaid for the

Company’s acquisitions, thereby increasing CornerStone’s debt to NorthWestern (and

investment income revenues to NorthWestern), and inflating Defendants’ bonuses tied to the

gross purchase price of the companies acquired.

Throughout the Class Period, Defendants announced increased earnings, based on retail

gallon sales made possible through the acquisitions. To do so, Defendants engaged in, and yet

failed to disclose, their systemic manipulation of CornerStone’s accounting practices. In order to

inflate the value of the acquired companies, and thereby, potential retail gallons, according to

former employees including CornerStone’s former Vice President and Controller (“VPC”) as

well as former employees of NorthWestern, CornerStone falsified its financial statements by

shifting ordinary operating expenses to the costs of acquisitions, and directing its financial

statement to capitalize those expenses over time rather than recognize them in the current period.

¶¶ 54-55. In addition, Defendants purposefully under reported costs and overstated the value of

the inventory of acquired companies totaling the number of propane tanks acquired. E.g., ¶¶ 56-

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


60. These tank inventories were never verified, despite CornerStone’s own internal audit reports

revealing “failing” audit grades in 80% of all inventory reports prepared in the tank inventory

category. ¶ 75. These audit reports were widely circulated within CornerStone, and specifically

provided to Defendant Kittrell as COO of CornerStone.

Defendants, including Defendant Kittrell, further failed to disclose related party

transactions, which included the Company’s renting storage tanks back from the Answering

Defendants Baxter and Goedde, and Kittrell, at a huge premium. ¶ 83(a). The storage tanks

were held back from the Company after it acquired Coast Energy for the benefit of the Individual

Defendants. Id. The rental agreement was signed by Answering Defendant Goedde, as an

officer of CornerStone, and by Answering Defendant Baxter, as an officer of LQA1. Id. The

tanks were later purchased by the Company from Defendants Baxter, Goedde and Kittrell. Id.

Moreover, throughout the Class Period, Defendants misrepresented that the Company

had in place centralized management systems, which would have provided for tight control of

virtually all aspects of the business. ¶ 133. In reality the Company had no internal controls.

The material impact of the total absence of internal controls and manipulation of financial

reports and records began to emerge in the period following the termination of CornerStone’s

independent auditor Arthur Andersen LLP on May 16, 2002, hiring as its replacement Deloitte &

Touche (“Deloitte”). ¶ 90. Incredibly, Deloitte was unable to audit the Partnership’s financial

statements for fiscal year ended June 30, 2002, due to material weaknesses in internal controls.¶

98. Unable to even file the required financial statements with the Securities and Exchange

Commission (“SEC”), CornerStone was delisted in August 2002. ¶ 170. On August 28, 2003,

CornerStone filed a Form 8-K with the SEC disclosing the receipt of the “Wells notice” and the

prospect of SEC administrative proceedings for the failure to file SEC-required filings and to

restate CornerStone’s financial statements for prior periods. ¶¶ 104, 173. Deloitte was

terminated in October 2003, and a smaller accounting firm, Marcum & Kliegman LLP, was

retained. ¶ 110. However, the required SEC filings still remain outstanding.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

10 Interestingly, Defendants do not include the Court’s April 14, 2005 telephoneconference in the “Procedural History” provided in the motion to dismiss (Def. Br. at 3), nor dothey indicate that the non-moving Defendants have filed answers to the Second AmendedComplaint.


Finally, on February 11, 2003, the last day of the Class Period, CornerStone filed a Form

8-K stating that Deloitte could not re-audit CornerStone's previous financial filings, citing

irreconcilable known errors and missing supporting documents. ¶¶ 97, 98. CornerStone’s

common units, which traded as high as $22 during the Class Period, declined to $0.35 per unit

share by the close of the Class Period, erasing over $360 million in capitalization. ¶ 9.

III. ARGUMENT

A. STANDARD ON A MOTION TO DISMISS

The Court has previously set forth the standard for a motion to dismiss pursuant to Rule

12(b)(6) in the Memorandum & Order. In re CornerStone Propane Partners, L.P. Sec. Litig.,

355 F. Supp. 2d 1069, 1075 (N.D. Cal. 2005). As recognized by this Court, “unless it appears

beyond doubt that Plaintiff can prove no set of facts in support of her claim which would entitle

her to relief,” a motion to dismiss must be denied. Id.

B. DEFENDANTS’ MOTION TO DISMISS DISREGARDS THE COURT’S INSTRUCTION

This is Defendants Woods and Kittrell’s second motion to dismiss Plaintiff’s claims.

During the telephone status conference conducted by the Court with all parties on April 14,

2005, the Court indicated that the Second Amended Complaint had met the pleading

requirements outlined in the Order.10 Tr. at 5. However, despite the Court’s cautioning

Defendants to make their motion to dismiss “at your own peril,” and further warning that

“[B]ecause if I determine that, in fact, you could have deciphered from all of this and should

have deciphered from all of this what it is you are complaining about that you think is

inadequate, and then I will order that you pay attorneys’ fees” (Tr. at 22), Defendants have

disregarded and largely mischaracterized the allegations the Court found sufficient in the Second

Amended Complaint.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

11 For example, Defendants completely disregard the additional information provided by witness VPC– which the Court has now found sufficient. Defendants assert “Plaintiffs generallyallege that Kittrell, along with other Defendants, ‘orchestrated the manipulation ofCornerStone’s books.’ SAC ¶ 55. This Court has already rejected this conclusory allegation,noting that it ‘includes no particulars,’ and Plaintiffs have added no new allegations in this mostrecent complaint. CornerStone, 355 F. Supp. 2d at 1090.” Def. Br. at 11. A similar claim ismade by Defendants as to additional information plead as to witness HPD concerningDefendants’ failure to disclose related party transactions– which the Court has now foundsufficient. Defendants assert that this witness has only been renamed “head of the propertydepartment” and that “These allegations are based upon almost the exact same allegations that[were] rejected by this Court: ‘Without pleading PDE’s basis of knowledge, the complaint hasnot yet substantiated the allegations regarding the LQA1 entity [as to all Defendants].’ ConerStone, 355 F. Supp. 2d at 1086.” Def. Br. at 12.


Surprisingly, Defendants refer and rely on the allegations contained in the First Amended

Complaint and the Court’s prior Order as support for their instant motion to dismiss the Second

Amended Complaint, which the Court has called a “far different complaint.” Tr. at. 5. For

example, Defendants’ “Statement of Facts As Alleged in the SAC” (Def. Br. at 4), largely relates

to the First Amended Complaint. In fact, NorthWestern– the protagonist in the massive fraud

Defendants participated in, is not even mentioned in the current motion to dismiss, or in the facts

as stated in Defendants’ prior pleading, which Defendants have chosen to incorporate by

reference in support of their instant motion (“pp. 2-8 lays out, in great detail, the alleged facts of

this action.”). Def. Br. at 4 n. 3. Defendants’ reliance on the prior pleading and Order as

grounds for dismissal of the Second Amended Complaint violates the Court’s direction, and the

motion to dismiss should be denied.11

C. DEFENDANTS WOODS AND KITTRELL ARE LIABLE FOR THEMATERIALLY FALSE AND MISLEADING STATEMENTS MADE BYANSWERING DEFENDANTS AND CORNERSTONE

This Court has determined that the materially false and misleading statements as alleged

in the Second Amended Complaint are sufficiently plead to proceed. Hr. Order. The only issues

raised by Defendants Woods and Kittrell concerning these statements specifically are: (1)

whether Woods and Kittrell may be held liable for the statements made; and, (2) whether the

facts as alleged give rise to a strong inference that Woods and Kittrell possessed the requisite

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

12 Defendants’ reference to the holding in In re Silicon Graphics, Inc. Sec. Litig., 970 F.Supp. 746, 759 (N.D. Cal. 1997) (Def. Br. at 10) for the proposition that only “speakers may beheld liable” misconstrues the court’s holding. Instead, the district court relied on the grouppleading doctrine and explained that “on summary judgment, a defendant may rebut the grouppleading presumption by producing evidence that he had no involvement in creating thechallenged document.” Silicon Graphics, 970 F. Supp. at 759. No Ninth Circuit decision, to


state of mind. See Def. Br. at 1.

1. The Materially False and Misleading Statements Alleged Are Attributable toDefendants Woods and Kittrell

Defendants Woods and Kittrell move to dismiss Plaintiff’s Second Amended Complaint

on the grounds that they did not personally sign or verbally make any of the materially false and

misleading statements as alleged in the Second Amended Complaint. Defendants’ argument is

without merit. “In cases of corporate fraud where the false and misleading information is

conveyed in prospectuses, registration statements, annual reports, press releases, or other “group-

published information,” it is reasonable to presume that these are the collective actions of the

officers.” In re GlenFed, Inc., Sec. Litig., 60 F.3d 591, 593 (9th Cir. 1995)(doctrine applied to

defendants who either “participated in the day-to-day corporate activities, or had a special

relationship with the corporation, such as participation in preparing or communicating group

information at particular times.”); see also In re Commtouch Software Ltd., 2002 U.S. Dist.

LEXIS 13742 *43 (N.D. Cal. July 24, 2002)(given the particular allegations connecting each of

the defendants with the fraud at issue, as well as the positions held by defendants, a pleading

stage presumption would arise that they were aware of the type of misconduct alleged, and may

be held accountable for corporate statements under the group-pleading doctrine which has

survived the PSLRA); In re Secure Computing Corp. Sec. Litig., 120 F. Supp. 2d 810, 821 (N.D.

Cal. 2000)(applying “group published information” doctrine and rejecting defendants’ argument

that PSLRA abolished this presumption); Stanley v. Safeskin Corp., 2000 U.S. Dist. LEXIS

14100 *14 (S.D. Cal. Sept. 15, 2000)(allegations of defendants’ participation in daily activities

of company, preparation of reports, and attendance at meetings where financial condition of

company discussed justified application of group pleading presumption.)12

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

date, has rejected the group pleading presumption after passage of the PSLRA.

13 Defendants’ reliance on Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S.164 (1994), for the proposition that section 10(b) does not recognize an aiding and abetting causeof action (Def. Br. at 9), and therefore they are shielded from liability, is misplaced. In CentralBank, the Court eliminated the implied right of action against outside business entities thatparticipated in or assisted with the primary violation of the securities laws. In reaching itsholding, the Court reasoned, “The problem, of course, is that aiding and abetting liability extendsbeyond persons who engage, even indirectly, in a proscribed activity; aiding and abettingliability reaches persons who do not engage in the proscribed activities at all, but who give adegree of aid to those who do.” Id. at 176. Here, the Plaintiff has alleged more than sufficientfacts demonstrating that the Defendants were CornerStone insiders, who actively engaged,participated in and personally benefitted from a broad, pervasive fraudulent scheme– hardly the“aider and abettor” status contemplated by the Supreme Court. Likewise, Defendants’ relianceon the holding in In re Cylink Secs. Litig., 178 F. Supp. 2d. 1077 (N.D. Cal. 2001) (Def. Br. at9), is readily distinguishable. Unlike Cylink where the court found Plaintiffs had not adequatelypled section 10(b) liability against the defendant Vice President of Sales as he was not alleged tobe involved in the fraudulent revenue recognition at issue, here, both Defendants Woods andKittrell are alleged to have participated in and benefitted from the fraudulent conductcomplained of. Notably, the court in Cylink did not dismiss Plaintiff’s section 20(a) controlperson claim against the Vice President of Sales. Id. at 1089.


Therefore, at this pleading stage, Defendants cannot escape liability for their participation

in the massive fraud engaged in by the Defendants simply by asserting they did not personally

make the materially false and misleading statements alleged.13 See In re Homestore.com, Inc.

Sec. Litig., 252 F. Supp. 2d 1018, 1038 (C.D. Cal. 2003)(one may be held liable for securities

fraud for participation in a “scheme to defraud” even after Central Bank.) As the well plead

allegations in the Second Amended Complaint clearly demonstrate, Defendants were engaged in

a pervasive fraudulent scheme designed to artificially inflate the value of the Company’s

common units, and each Defendant’s participation and personal financial benefit gained by such

participation, Plaintiff has demonstrated that he is entitled to the “group published information”

presumption as to Defendants Woods and Kittrell.

2. Defendants Kittrell and Woods Possessed the Requisite Scienter

A complaint alleging violations of Section 10(b) must state “facts giving rise to a strong

inference that the defendant acted with the required state of mind” or scienter. 15 U.S.C. § 78u-

4(b)(2). Scienter may be pled through allegations demonstrating a defendant’s (1) actual

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


knowledge that a statement or omission at issue is false, or (2) deliberate recklessness as to the

truth of the statement at the time it is made. In re McKesson HBOC, Inc. Secs. Litig., 126 F.

Supp. 2d 1248, 1269 (N.D. Cal. 2000). Each allegation supporting a strong inference of scienter

should not be considered individually. Rather, the Court must “answer the larger question of

whether [plaintiffs’] complaint, considered in its entirety, states facts which give rise to a strong

inference of deliberate recklessness.” In re Silicon Graphics, 183 F.3d 970, 985 (9th Cir. 1999),

reh’g, en banc denied, 195 F.3d 521 (9th Cir. 1999). In this case, the Court has already

concluded that the Second Amended Complaint sufficiently alleges such facts. Hr. Order.

Further, Defendants’ argument that Defendants Woods and Kittrell’s motive to earn

bonuses specifically targeted to the commission of the fraudulent activity alleged in the

Complaint is not relevant to this Court’s inquiry is without merit. In this Circuit, allegations of

motive to earn executive bonuses, when combined with other allegations, supports a strong

inference of scienter. No. 84 Employer-Teamster Joint Council Pension Trust Fund v. Am. West

Holding Corp., 320 F.3d 920, 938, 944 (9th Cir. 2003), cert. denied, 540 U.S. 960 (2003)

(allegations of stock option eligibility and executive bonuses earned during the class period

support strong inference of scienter); In re Wells Fargo Sec. Litig., 12 F.3d 922, 931 (9th Cir.

1993) (allegations of motive and opportunity including the incentive to increase bonus

compensation establish fraudulent intent). Particularly where the defendants are control persons,

as they clearly are here, “[s]pecific, particularized allegations” of motive may indicate that the

Individual Defendants had knowledge of their misstatements and omissions. See America West,

320 F.3d at 944 (because defendants controlled the compensation committee and incentive

compensation was linked to performance, “Plaintiffs have provided specific, particularized

allegations” of scienter); see also In re McKesson, 126 F. Supp. 2d at 1269 (while “a motive for

fraud, such as personal gain, is not a required element of scienter or of fraud in general,”

allegations of motive contribute to the totality of allegations supporting a strong inference of

scienter); Howard v. Everex Sys., 228 F.3d 1057, 1064 (9th Cir. 2000) (same). Ignoring these

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

14 See In re PeopleSoft, Inc. Sec. Litig., No. C 99-00472 WHA, 2000 U.S. Dist. LEXIS10953, at *9 (N.D. Cal. May 25, 2000) (“Scienter may be proven and pled by reference tocircumstantial evidence, for it is rare that perpetrators of a fraud would confess outright. SiliconGraphics itself recognizes this”).

15 Kittrell had previously worked with Answering Defendants Baxter and Goedde as amember of the executive team at Coast, one of the companies held by NorthWestern andcombined with Synergy and Empire to form CornerStone in 1996. ¶¶ 27, 28.


Ninth Circuit decisions which are directly on point, Defendants instead rely on district court

cases and on Circuit Court decisions involving allegations of motive, which, “without more,” do

not meet the PSLRA pleading standard. Def. Br. at 14. See, e.g., Lipton v. PathoGenesis Corp.,

284 F.3d 1027, 1038 (9th Cir. 2002). Moreover, the Complaint, examined in the aggregate,

alleges ample circumstantial evidence giving rise to a strong inference of scienter individually as

to Defendants Kittrell and Woods.14

a. Defendant Kittrell’s Scienter

As detailed in the well plead allegations of the Second Amended Complaint, Defendant

Kittrell was an officer of CornerStone, and along with Answering Defendants Baxter and

Goedde, was a senior executive of the Managing General Partner from the time of CornerStone’s

formation.15 ¶ 28. Defendant Kittrell was the Executive Vice President, Secretary of the

Managing General Partner and COO of CornerStone. ¶ 18. Together with Answering

Defendants Baxter and Goedde, Kittrell managed the Partnership’s business throughout the Class

Period, with the exception of Goedde, who resigned effective June 30, 2001. ¶ 28.

According to Plaintiff’s witness VPC, Defendant Kittrell was involved in and directed

CornerStone’s accounting manipulations which involved the shifting of expenses where they did

not belong to receive a beneficial, but fraudulent accounting treatment. ¶ 55. VPC reported that

certain normal business costs were “buried” as acquisition costs to capitalize them instead of

having to expense them. Id. Specifically, VPC identified the Continental acquisition as an

example of such manipulations, where management “rolled” the expense of the use of an

airplane “that was not part of the acquisition at all” into the acquisition so that the expense would

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28


not be taken in that quarter, “but could instead be spread out.” Id. VPC reported that there were

many instances of this kind of “burying” of expenses which directly resulted in the

overstatement of goodwill– where the expenses were shifted to be fraudulently amortized over

the life of the goodwill or asset. Id. As to Defendant Kittrell, VPC specifically identified

Kittrell as one of the executives, along with Answering Defendants Goedde and Baxter, who

orchestrated this manipulation of CornerStone’s books, in concert with Answering Defendants

Hylland, Newell and Lewis. Id.

Further, in addition to the accounting manipulations taking place related to acquisitions,

VPC provided information which indicated that management, including Kittrell, was aware that

CornerStone was overpaying for virtually every acquisition– made possible by leveraging the

Company’s common units in the purchase price of the acquired company. According to VPC,

this practice was common knowledge, and a discussed strategy– discussed in financial meetings,

weekly report meetings, in meetings when they purchased companies, in the break room, and in

the restroom. ¶ 60. VPC also reported that management acquired overvalued companies in

order to receive the acquisition incentives which rewarded management only on the gross

numbers relating to the acquisitions, so management inflated their purchase prices. ¶ 62, see

also ¶ 59. As a recipient of $1.95 million in acquisition related bonuses for “adding new

businesses to the Partnership’s propane operations” (¶ 34), which bonuses were 4% of the gross

value of each individual acquisition and payable 90 days from the close of that particular

acquisition transaction (Id.), Defendant Kittrell directly participated in facilitating CornerStone’s

acquisition of overvalued propane companies. The Company has since admitted that since as

early as 1997, the purchase price for acquired companies had been misallocated, and inflated. ¶¶

101, 102.

Moreover, in addition to Defendant Kittrell’s direct participation in the acquisition of

overvalued companies evidenced by his substantial bonus payments (which exceeded the $1.73

million in acquisition bonuses received by Answering Defendant Goedde (¶ 36)), HPD also

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

16 According to HPD, the internal audit reports came back reporting significant missingtanks “right from the beginning of the CornerStone creation.” ¶ 76. The audit reports continueduntil PHD left CornerStone in 2003. Id. Therefore, as a recipient of the audit reports, DefendantKittrell knew, throughout the Class Period, that the Company’s propane tank holdings wereinflated.


described Defendants’ outright overstatement of the asset value attached to the already inflated

number of propane tanks and other inventory booked as assets during an acquisition. ¶ 81.

According to HPD, internal auditors had a field “check list” that they used when visiting service

centers, and that one of the criterion examined was a tank control criterion. ¶ 75. HPD stated

that “80% of the audit reports that came back, that I saw, had a failing grade, or a C or D grade,

meaning that the tanks that are supposed to be sitting there on the lots are not to be found.”16 ¶

75. HPD would get a copy of each report produced from an audit site, and distribute the reports

to management including Defendant Kittrell– according to VPC, HPD’s supervisor during his

tenure at CornerStone, “everybody got them [the reports].” ¶ 77. In addition, CornerStone’s

auditor, Deloitte, found the Partnership had failed “to record the actual physical inventory of

customer propane tanks.” ¶ 111. During the Class Period, Defendant Kittrell received $1.95

million in acquisition incentive bonus payments. ¶ 36. Deloitte found the Company had failed

“to record the differences between subsequent actual bonus payments and the initial bonus

accrual” – indicating the bonuses paid – also inflated by the overvalued gross price of the

acquired companies– had never been adjusted in line with the actual value of the acquisition.

¶ 111.

b. Defendant Woods’ Scienter

As detailed in the Second Amended Complaint, Defendant Woods was also an officer of

CornerStone, and at all relevant times was CornerStone’s Vice President of Acquisitions. ¶ 17.

As discussed above, the frenzied acquisition strategy employed by CornerStone– was premised

on the acquisition of overpriced propane companies to increase CornerStone’s debt to

NorthWestern, and thereby boost its Managing General Partner’s revenues. The fact that

CornerStone was overpaying for the companies acquired and leveraging the Company’s common

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

17 The Company, in its 2/10/03 8-K, further admitted that $26 million in initial purchaseprice allocations were misallocated and would be reclassified to goodwill, resulting in a netincrease of goodwill by approximately $23 million as of June 30, 2001, for acquisitions datingback to 1997. ¶¶ 101, 102. It was not until February 11, 2003 that Defendants finally admitted,it would be writing down CornerStone’s goodwill by approximately $150 million, and after theClass Period in October 2003, admitting that in fact $174 million in goodwill would need to bewritten off. ¶¶ 103, 108.


units to do so, was a well known business strategy. VPC reported this practice was common

knowledge, and a discussed strategy– discussed in financial meetings, weekly report meetings, in

meetings when they purchased companies, in the break room, and in the restroom. ¶ 60.

Further, it was also well known that management was purposefully inflating the purchase prices

of acquired companies to inflate their own acquisition related bonuses– a bonus program

deliberately devised by NorthWestern to insure CornerStone would incur the highest level of

debt possible on each transaction NorthWestern funded. VPC reported that management

acquired overvalued companies in order to receive the acquisition incentives which rewarded

management only on the gross numbers relating to the acquisitions, so management inflated their

purchase prices. ¶ 62, see also ¶ 59. As alleged in the Complaint, the Company has admitted

that it overpaid for virtually every acquisition. ¶ 101. Therefore, as a recipient of $1.1 million

for “adding new businesses to the Partnership’s propane operations” (¶ 34) that the Company has

admitted were overvalued, Woods– by virtue of his own transactions for which he was rewarded,

and as the Vice President in charge of acquisitions– was aware that CornerStone was overpaying

for acquired companies.17 As discussed above, Deloitte’s findings confirmed the inflated

bonuses paid were never adjusted in line with the actual value of the acquisitions. ¶ 111. In

light of the management meetings where the overvaluing of the acquired companies was

discussed, as reported by VPC,– in financial meetings, weekly report meetings, meetings when

they purchased companies, in the break room, and in the restroom (¶ 60)– Plaintiff has

sufficiently plead Defendant Woods’ knowledge and/or reckless disregard of the falsity of

statements made by Defendants during the Class Period concerning the success of the acquisition

business strategy as well as the financial health of CornerStone.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

18 Defendants also attempt to reargue issues concerning the undisclosed related partytransactions on which the Court has already made findings. For example, Defendants arguePlaintiff has not demonstrated the “transactions should have been disclosed”– a materialityargument already rejected by this Court. In re CornerStone, at 1086. Defendants also rearguethat Plaintiff failed to demonstrate any facts that Defendant Kittrell “failed to disclose thetransaction to the Company’s auditors.” As the Court has already determined, “This issue isaddressed by allegations regarding Deloitte’s management letter, which demonstrates thatdisclosure of such transactions to auditors was inadequate to satisfy disclosure standards.” Id. The Court granted Plaintiff leave to amend concerning the Defendants’ failure to disclose therelated party transaction claim to plead PDE’s basis of knowledge concerning the LQA1 entity,which Plaintiff has done to the Court’s satisfaction. See Hr. Order.


c. Misrepresentations and/or omissions about related party transactions

When Coast Energy was merged into CornerStone, former owners and managers of

Coast, including Answering Defendants Baxter and Goedde, and Defendant Kittrell, held back

ownership of 20 storage tanks and instead owned them individually in an entity known as LQA1.

¶ 83(a). They executed an agreement, signed by Answering Defendants Goedde and Baxter,

where CornerStone leased these tanks at a premium. Id. The leasing of these tanks continued

until the second half of 2002 when CornerStone purchased the tanks from LQA1 at a premium.

Id. These transactions were not disclosed to the public.

Defendants’ argument that the related party transaction allegations “are based upon

almost the exact same allegations that were rejected by this Court,” is simply wrong.18 See Def.

Br. at 12. Citing to the Court’s opinion dismissing the First Amended Complaint without

prejudice, Defendants assert, “Without pleading PDE’s basis of knowledge, the complaint has

not yet substantiated the allegation regarding the LQA1 entity [as to all Defendants].” Def. Br.

at 12, citing CornerStone, 355 F. Supp. 2d at 1086. Contrary to Defendants’ misrepresentation

of the allegations plead in the Second Amended Complaint, Plaintiff has not simply “renamed”

PDE as “head of the property department,” in the Second Amended Complaint. Def. Br. at 12 n.

6. Instead, Plaintiff has further plead this witness’ basis of knowledge, to the Court’s satisfaction

as demonstrated in the Court’s finding the Second Amended Complaint sufficient. See Hr.

Order. Therefore, Defendants’ argument is without merit, and disregards the Court’s instruction

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

19 Plaintiff properly plead Defendants Woods and Kittrell’s violation of section 10(b). Moreover, this Court has already found the Second Amended Complaint sufficiently plead securities law violations as to some, if not all of the Individual Defendants, includingCornerStone, which is not now named as a defendant due to the Company’s filing for bankruptcyprotection.


to Defendants that they should carefully review the current pleading should they choose to file a

motion to dismiss.

D. PLAINTIFF SUFFICIENTLY PLEAD DEFENDANTS WOODS AND KITTRELL’S LIABILITY AS CONTROL PERSONS

Contrary to Defendants’ argument, Plaintiff properly plead control person liability under

section 20(a) of the 1934 Act as to Defendants Woods and Kittrell. Plaintiff is not required to

prove Defendants’ “actual” control over CornerStone to plead control person liability. Rather,

“[t]o establish ‘controlling person’ liability, the Plaintiff must show that a primary violation was

committed and that the defendant ‘directly or indirectly’ controlled the violator.” Paracor Fin.,

Inc. v. GE Capital Corp., 96 F.3d 1151, 1161 (9th Cir. 1996) (citing Hollinger v. Titan Capital

Corp., 914 F.2d 1564, 1575 (9th Cir. 1990) cert. denied, 499 U.S. 976 (1991)). Moreover, “[t]he

Plaintiff need not show the controlling person’s scienter or that they ‘culpably participated’ in

the alleged wrongdoing.” Paracor, 96 F.3d at 1161 (citation omitted) (emphasis added); see

also Howard, 228 F.3d at 1065.

Here, Plaintiff sufficiently alleged a primary violation of section 10(b) of the Exchange

Act.19 Plaintiff also alleged that the Individual Defendants participated in the day-to-day affairs

of the corporation, indeed that Answering Defendants Goedde, Baxter, and Defendant Kittrell

orchestrated the manipulation of CornerStone’s books in concert with Answering Defendants

Hylland, Newell and Lewis (¶ 87). From CornerStone’s inception, Defendant Kittrell was one of

the senior executives of the Managing General Partner (¶ 28), with Defendant Woods serving as

the Vice President of Acquisitions. ¶ 17. Both had the power to control and influence corporate

actions as senior managers of CornerStone. See Cylink, 178 F. Supp. 2d at 1084-85 (section

20(a) claim sustained against Vice President of Sales and Marketing even though defendant not

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

20 Defendants’ reliance on the holding in In re Intermune, Inc. Sec. Litig., 2004 U.S.Dist. LEXIS 15382 (N.D. Cal. Jul. 30, 2004), is misplaced. In In re Intermune, the court foundPlaintiff’s underlying allegations of illegal or improper marketing failed to meet the PSLRA’sstandards, and had failed to present “much beyond the theory that the individual defendantsviolated federal securities laws because they had the power and authority to control informationreleased to the public by virtue of their position.” In re Intermune, at *21. The facts as plead inthe instant action are to the contrary. Here, Plaintiff has plead Defendants Woods and Kittrellwere involved in and benefitted from the very fraudulent actions which form the gravamen ofthis action.


alleged to have participated in fraudulent revenue recognition. Section 20(a) inquiry is to the

“management and policies” of the corporation and not discrete transactions.).20 Further, Plaintiff

detailed in the Second Amended Complaint that Defendants personally benefitted from, and

participated in an enormous fraudulent scheme encompassing the Company’s primary business

strategy– acquisitions– in which virtually every acquired company was overvalued, with the

transactions used to “bury” expenses to inflate EBITDA and prop up the value of CornerStone’s

common units. Moreover, each Defendant was a member of a small, select control group

designated to receive incentive payments tied directly to the fraudulent activity alleged– the

overvalued acquisitions, and the increased EBITDA. ¶¶ 31, 32, 34, 36. See Howard, 228 F.3d at

1065-66; Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1441 (9th Cir. 1987) (holding that a

defendant’s day-to-day oversight of company operations and involvement in the financial

statements at issue are “sufficient to presume control over the transactions giving rise to the

alleged securities violation”).

Moreover, Defendants’ argument is premature. “Whether [the defendant] is a controlling

person is an “intensely factual question”, involving scrutiny of the defendant’s participation in

the day-to-day affairs of the corporation and the defendant’s power to control corporate actions.”

Kaplan v. Rose, 49 F.3d 1363, 1382 (9th Cir. 1994), cert. denied,516 U.S. 810 (1995); Paracor,

96 F.3d at 1161 (quoting Arthur Children’s Trust v. Keim, 994 F.2d 1390, 1396 (9th Cir. 1993)).

For the purposes of this pleading motion, Plaintiff sufficiently alleged that the Defendants

Woods and Kittrell exercised direct and/or indirect power to control CornerStone.

Responses and Replies

U.S. District Court Northern District of California

Notice of Electronic Filing or Other Case Activity

NOTE: Please read this entire notice before calling the Help Desk. If you have questions, please email the Help Desk by replying to this message; include your question or comment along with the original text.

Please note that these Notices are sent for all cases in the system when any case activity occurs, regardless of whether the case is designated for e-filing or not, or whether the activity is the filing of an electronic document or not.

If there are two hyperlinks below, the first will lead to the docket and the second will lead to an e-filed document. If there is no second hyperlink, there is no electronic document available . See the FAQ posting "I have a Notice of Electronic Filing that was e-mailed to me but there's no hyperlink..." on the ECF home page at

The following transaction was received from Green, Robert S. on 5/24/2005 at 3:20 PM

Docket Text: Memorandum in Opposition re [167] MOTION to Dismiss Second Amended Class Action Complaint and Memorandum of Points and Authorities in Support Thereof filed by Charles J. Kittrell and PLAINTIFF'S OPPOSITION TO DEFENDANTS WILLIAM L. WOODS AND CHARLES J. KITTRELL'S MOTION TO DISMISS THE SECOND AMENDED CLASS ACTION COMPLAINT filed byGilbert H. Lamphere. (Green, Robert) (Filed on 5/24/2005)

The following document(s) are associated with this transaction:

3:03-cv-2522 Notice will be electronically mailed to: Stuart L. Berman [email protected]

3:03-cv-02522-MHP Erikson et al v. Cornerstone Propane Partners LP et al

Case Name: Erikson et al v. Cornerstone Propane Partners LP et alCase Number: 3:03-cv-2522Filer: Gilbert H. LamphereDocument Number:169

Document description:Main Document Original filename:F:\CPP\Pleading\Opp 2nd MTD_FINAL.pdf Electronic document Stamp: [STAMP CANDStamp_ID=977336130 [Date=5/24/2005] [FileNumber=1899597-0] [a6ac110ebf0db83ecc6b0262eab9ba34b02c4f94906740c315cce26f05923bb1238b07162ae6edbfd6e2b18ad4b917a8f1d260a389a902c2470ea932cf88300a]]

1 of 3CAND-ECF

Tuesday, May 24, 2005https://ecf.cand.uscourts.gov/cgi-bin/Dispatch.pl?321043162342891

Grace A. Carter [email protected], [email protected] Darren J. Check , Esq [email protected] John C. Dwyer [email protected], [email protected] Kimberly C. Epstein [email protected], [email protected];[email protected] Grant P. Fondo [email protected], [email protected] Robert S. Green [email protected] Robert A. Jigarjian [email protected] Cory E. Manning [email protected], James Pooley [email protected], [email protected];[email protected];[email protected];[email protected];kolivares@ Karen Reilly [email protected], [email protected] Katharine M. Ryan [email protected], [email protected] Anupam Sharma [email protected], [email protected],[email protected],[email protected] Alfred Glenn Yates , Jr [email protected] 3:03-cv-2522 Notice will NOT be electronically mailed to: Willie Briscoe Provost & Umphrey Law Firm, LLP 3232 McKinney Avenue Suite 700 Dallas, TX 75204 Jacob Goldberg Schiffrin & Barroway Three Bala Plaza East, Suite 400 Bala Cynwyd, PA 19004 Joe Kendall Provost & Umphrey Law Firm, LLP 3232 McKinney Avenue Suite 700 Dallas, TX 75204 Gerald L. Rutledge Law Offices of Alfred G. Yates, Jr. 519 Allegheny Building 429 Forbes Avenue

2 of 3CAND-ECF


Pittsburgh, PA 15219 Marc A. Topaz Schiffrin & Barroway. LLP 280 King of Prussia Road Radnor, PA 19087

3 of 3CAND-ECF


robert s. green (state bar no. 136183) green welling llp...

Documents