Free Opening Brief in Support - District Court of Delaware - Delaware

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE COLLINS & AIKMAN CORPORATIONS and COLLINS & AIKMAN PRODUCTS CO., as Debtors in Possession, Plaintiffs, v. DAVID A. STOCKMAN, J. MICHAEL STEPP, BRYCE M. KOTH, DAVID R. COSGROVE, PAUL C. BARNABA, ROBERT A. KRAUSE, JOHN A. GALANTE, CHARLES E. BECKER, ELKIN B. MCCALLUM, THOMAS E. EVANS, CYNTHIA HESS, DANIEL P. TREDWELL, W. GERALD MCCONNELL, SAMUEL VALENTI, III, HEARTLAND INDUSTRIAL PARTNERS, L.P., HEARTLAND INDUSTRIAL ASSOCIATES, L.L.C., HEARTLAND INDUSTRIAL GROUP, L.L.C., PRICEWATERHOUSECOOPERS LLP and KPMG LLP, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 07-265-SLR-LPS JURY TRIAL DEMANDED

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANT CHARLES E. BECKER'S MOTION TO DISMISS THE AMENDED COMPLAINT OF COUNSEL: JENNER & BLOCK LLP Anton Valukas 330 N. Wabash Avenue Chicago, IL 60611-7603 [email protected] Stephen L. Ascher 919 Third Avenue - 37th Floor New York, New York 10022 [email protected] DATED: April 28, 2008 PRICKETT, JONES & ELLIOTT, P.A. James L. Holzman (Bar ID #663) J. Clayton Athey (Bar ID #4378) 1310 King Street, Box 1328 Wilmington, Delaware 19899 (302) 888-6500 [email protected] [email protected] Counsel for Defendant Charles E. Becker

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TABLE OF CONTENTS Preliminary Statement ............................................................................................................. 1 A. The Parties .................................................................................................................... 5 B. The Scheme Alleged in the Complaint ......................................................................... 6 1. The Company's Acquisition of the Becker Group ................................................. 7 a. The Non-Compete Agreement .......................................................................... 7 b. The Acquisition Price and Due Diligence ......................................................... 8 c. The $300,000 Consulting Fee ............................................................................ 8 2. The Joan Fabrics Roundtrip Transactions ............................................................ 9 3. The Rebate Scheme ................................................................................................. 9 4. The Company's August 2004 Sale of Notes.......................................................... 10 5. The GECC Loan.................................................................................................... 11 6. The Other Misrepresentations.............................................................................. 11 7. Alleged Malpractice by the Company's Auditors ................................................ 12 C. The Company's Bankruptcy....................................................................................... 12 D. The Amended Complaint............................................................................................ 13 Argument ................................................................................................................................ 14 I. The Amended Complaint Does Not Adequately Allege That Mr. Becker Participated in Any Securities or Accounting Fraud................................................................................ 14 A. The 10b-5 Claim Should Be Dismissed....................................................................... 14 1. Plaintiffs Fail to Allege Fraud with Particularity As to Mr. Becker ................... 14 2. The Amended Complaint Does Not Allege a Primary Violation by Mr. Becker .................................................................................................................... 16 3. Plaintiffs Fail to Allege Facts Giving Rise to a "Strong Inference" That Mr. Becker Acted with Scienter............................................................................ 17 4. The Company Does Not Have Standing to Bring the 10(b) Claim ...................... 20 ii
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5. The Amended Complaint Does Not Adequately Allege Loss Causation ............. 21 B. The Section 14(a) Claim Should Be Dismissed........................................................... 24 1. The Amended Complaint Does Not Allege Facts Giving Rise to a Strong Inference That Mr. Becker Was Negligent........................................................... 24 2. The Claim Does Not Adequately Allege Causation.............................................. 26 3. The Allegations Do Not Satisfy the "Essential Link" Test................................... 26 C. The Breach of Fiduciary Duty Claim Should Be Dismissed...................................... 28 1. The Amended Complaint Does Not State a Claim............................................... 28 2. The Amended Complaint Does Not Adequately Allege a Failure to Supervise................................................................................................................ 30 3. The Claim Does Not Adequately Allege Facts Sufficient to Pierce the Protections of the Exculpatory Clause or 8 Del. C. § 141(e)................................ 31 4. "Deepening Insolvency" Damages Are Not Cognizable....................................... 33 D. The Common Law Fraud Claim Should Be Dismissed ............................................. 34 1. The Claim Fails to Allege Fraud with Particularity ............................................ 34 2. The Claim Does Not Plead Scienter Adequately .................................................. 35 3. The Claim Does Not Allege Proximate Cause ...................................................... 35 4. "Deepening Insolvency" Damages Are Not Cognizable....................................... 36 II. The Unjust Enrichment Claim Concerning the Company's Acquisition of the Becker Group Should Be Dismissed ............................................................................................. 36 A. The Statute of Limitations Bars The Claim .............................................................. 37 B. The Unjust Enrichment Claim is Barred by the Business Judgement Rule ............. 38 C. Plaintiffs Have Not Adequately Alleged Unjust Enrichment .................................... 38 III. The Amended Complaint Should Be Dismissed With Prejudice .................................... 39 Conclusion .............................................................................................................................. 40

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TABLE OF AUTHORITIES
CASES

7547 Corp. v. Parker & Parsley Dev. Partners, L.P., 38 F.3d 211(5th Cir. 1994) ..................... 27 Akerman v. Collins & Aikman Corp., No. 1:05-CV-05098 (S.D.N.Y.) ...................................... 12 Ash v. McCall, 2000 WL 1370341 (Del. Ch. Sept. 15, 2000) .................................................... 33 Banjo Buddies, Inc. v. Renosky, 399 F.3d 168 (3d Cir. 2005) .................................................... 28 Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007)........................................................ 3, 29 Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195 (3d Cir. 2006)............................................ 21 Bio-Medical Sciences, Inc. v. Weinstein, 407 F. Supp. 970 (S.D.N.Y. 1976) ..................20, 21, 22 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) ................................................. 20 Bond Opportunity Fund v. Unilab Corp., 2003 WL 21058251 (S.D.N.Y. May 9, 2003)............ 25 Bruno v. Collins & Aikman Corp., No. 2:05-CV-71325 (S.D.N.Y.) .......................................... 12 Buckley v. O'Hanlon, 2007 WL 956947 (D. Del. Mar. 8, 2007).......................................... 28, 31 California Pub. Employees' Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004).................. 24 Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645 (7th Cir. 1997)................................ 21 Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994) .... 16 Cinalli v. Kane, 191 F. Supp. 2d 601 (E.D. Pa. 2002) ............................................................... 34 Conley v. Gibson, 355 U.S. 41 (1957)....................................................................................... 29 Copland v. Grumet, 88 F. Supp. 2d 326 (D.N.J. 1999) .............................................................. 17 Crescent/Mach I Partners, L.P., 846 A.2d 963 (Del. Ch. 2000) .......................................... 30, 33 Desimone v. Barrows, 924 A.2d 908 (Del. Ch. 2007)................................................................ 29 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ................................................................... 21 Egleston v. Collins & Aikman Corp., No. 2:05-CV-04950 (S.D.N.Y.) ...................................... 12 Emerald Partners v. Berlin, 2003 WL 21003437 (Del. Ch. Apr. 28, 2003) ............................... 32 Fleer Corp. v. Topps Chewing Gum, Inc., 539 A.2d 1060 (Del. 1988) ...................................... 38 Gantler v. Stephens, 2008 WL 401124 (Del. Ch. Feb. 14, 2008) ............................................... 38 Gariddi v. Mosingo, No. 2:05-CV-05251 (S.D.N.Y.)................................................................ 12 Gen. Elec. Co. v. Cathcart, 980 F.2d 927 (3d Cir. 1992)................................................26, 27, 36 Giordano v. Czerwinski, 216 A.2d 874 (Del. 1966)................................................................... 36 Globis Capital Partners, L.P. v. Stonepath Group, Inc., 241 Fed. Appx. 832 (3d Cir. 2007) ..... 19 Gould v. Am.-Haw. S. S. Co., 535 F.2d 761 (3d Cir. 1976)........................................................ 24 iv
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Guttman v. Huang, 823 A.2d 492 (Del. Ch. 2003) .................................................................... 31 Halpern v. Barran, 313 A.2d 139 (Del. Ch. 1973) .................................................................... 37 Hoover v. Allen, 241 F. Supp. 213 (S.D.N.Y. 1965).................................................................. 22 Hudson v. Wesley College, Inc., 1998 WL 939712 (Del. Ch. Dec. 23, 1998)............................. 36 In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999) ...................................15, 17, 18, 19 In re Aetna Inc. Sec. Litig., 34 F. Supp. 2d 935 (E.D. Pa. 1999) ................................................ 29 In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997)................................... 15 In re Campbell Soup Co. Sec. Litig., 145 F. Supp. 2d 574 (D.N.J. 2001)................................... 37 In re Caremark Intern. Inc. Derivatives Lit., 698 A.2d 959 (Del. Ch. 1996)........................ 30, 31 In re Champion Enters., Inc., Sec. Litig., 145 F. Supp. 2d 871 (E.D. Mich. 2001) ..................... 39 In re CitX Corp., Inc., 448 F.3d 672 (3d Cir. 2006)............................................................. 24, 33 In re DVI, Inc. Sec. Litig., 2005 WL 1307959 (E.D. Pa. May 31, 2005) .................................... 16 In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549 (S.D. Tex. 2002) ....... 17 In re GlenFed, Inc., Sec. Litig., 60 F.3d 591 (9th Cir. 1995)...................................................... 29 In re Lukens Inc. S'holders Litig., 757 A.2d 720 (Del. Ch. 1999).............................................. 32 In re McKesson HBOC, Inc. Sec. Litig., 126 F. Supp. 2d 1248 (N.D. Cal. 2000)................. 25, 33 In re NAHC, Inc. Sec. Litig., 2001 WL 1241007 (E.D. Pa. Oct. 17, 2001)................................. 39 In re NAHC, Inc. Sec. Litig., 306 F.3d 1314 (3d Cir. 2002)................................................... 6, 37 In re Nat'l Auto Credit Inc. S'holder Litig., 2003 WL 139768 (Del. Ch. Jan. 10, 2003) ............ 30 In re Reliance Sec. Litig., 135 F. Supp. 2d 480, 511 (D. Del. 2001) .......................................... 24 In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198 (3d Cir. 2002) ............................... 15 In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256 (3d Cir. 2006).................................... 19 In re Teleglobe Commc'n Corp., 493 F.3d 345 (3d Cir. 2007) .................................................. 33 In re The Student Loan Corp. Derivatives Litig., 2002 WL 75479 (Del. Ch. Jan. 8, 2002)......... 30 In re U.S. West, Inc. Sec. Litig., 201 F. Supp. 2d 302 (D. Del. 2002)......................................... 25 In re Walt Disney Co. Derivative Litig., 907 A.2d 693 (Del. Ch. 2005)..................................... 31 Initio, Inc. v. Hesse, 474 F. Supp. 312 (D. Del. 1979) ............................................................... 21 Isanaka v. Spectrum Techs. USA, Inc., 131 F. Supp. 2d 353 (N.D.N.Y. 2001)........................... 28 J.I. Case Co. v. Borak, 377 U.S. 426 (1964) ............................................................................. 24 Kahn v. Seaboard Corp., 625 A.2d 269 (Del. Ch. 1993) ........................................................... 37 Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp. 2d 417 (D.N.J. 1999) ....................... 19 v
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Key Equity Investors, Inc. v. Sel-Leb Mktg. Inc., 2007 WL 2510385 (3d Cir. Sept. 6, 2007)...... 19 Kleinpeter-Fleck v. Collins & Aikman Corp., No. 2:06-CV-01355 (S.D.N.Y.).......................... 12 Kline v. First Western Gov't Sec., Inc., 24 F.3d 480 (3d Cir. 1994)........................................... 14 Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991) ......................... 37 Mainstay High Yield Corp. Bond Fund v. Heartland Indus. Partners, L.P., 2:07-CV-10542 (E.D.MI.).............................................................................................................................. 12 Malpiede v. Townson 780 A.2d 1075 (Del. 2001) ..................................................................... 32 McDermott Inc. v. Lewis, 531 A.2d 206 (Del. 1987) ................................................................. 28 Merck & Co., Inc. v. SmithKline Beecham Pharm. Co., 1999 WL 669354 (Del. Ch. Aug. 5, 1999) .................................................................................................................................... 37 MetCap Sec. LLC v. Pearl Senior Care, Inc., 2007 WL 1498989 (Del. Ch. May 16, 2007) ....... 39 Metro Commc'n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121 (Del. Ch. 2004) ............................................................................................................................................. 35 Mills v. Elec. Auto-Lite Co., 396 U.S. 375 (1970) ..................................................................... 26 N. Amer. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007).... 34 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266 (3d Cir. 1998) ............... 17 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154 (3d Cir. 2001) ............... 21 Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340 (3d Cir. 2001) ............................................................................................................................................. 24 Prod. Res. Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) ..................... 31, 38 Scattergood v. Perelman, 945 F.2d 618 (3d Cir. 1991).............................................................. 27 SEC v. Collins & Aikman Corp., No. 1:07-CV-02419 (S.D.N.Y.) ............................................. 13 SEC v. Lucent Techs., Inc., 363 F. Supp. 2d 708 (D.N.J. 2005) ........................................... 16, 17 Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000) ....................................................... 23 Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004).................... 19 Sowell v. Butcher & Singer, Inc., 926 F.2d 289 (3d Cir. 1991).................................................. 23 Stephenson v. Capano Dev., Inc., 462 A.2d 1069 (Del. 1983) ............................................. 34, 35 Tellabs v. Makor Issues & Rights, Ltd, 127 S. Ct. 2499 (2007) ........................................2, 18, 25 Total Care Physicians, P.A. v. O'Hara, 798 A.2d 1043 (Del. Super. 2001)............................... 38 Tracinda Corp. v. DaimlerChrysler AG, 197 F. Supp. 2d 42 (D. Del. 2002) ............................. 26 Trenwick America Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch. 2006) ..... 32, 33 vi
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Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478 (3rd Cir. 1998)...... 20 Tse v. Ventana Medical Systems, Inc., 297 F.3d 210 (3d Cir. 2002) .......................................... 23 United Canso Oil & Gas Ltd. v. Catawba Corp., 566 F. Supp. 232 (D. Conn. 1983)................. 27 United States v. David A. Stockman, No. 1:07-CR-0020 (S.D.N.Y.) ......................................... 13 Virginia Bankshares, Inc. v. Sandberg, 501 U.S 1083 (1991).................................................... 27 Westinghouse Elec. Corp. v. Franklin, 993 F.2d 349 (3d Cir. 1993).......................................... 37 Wilmington Country Club v. Cowee, 747 A.2d 1087 (Del. 2000) .............................................. 36 Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir. 2007)................................................... 1, 16 Wool v. Tandem Computers, Inc., 818 F.2d 1433 (9th Cir. 1987).............................................. 16 Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998)...................................................... 17 Zerby v. Allied Signal Inc., 2001 WL 112052 (Del. Super. Ct. Feb. 2, 2001)............................. 36
STATUTES

10 Del. C. § 8106...................................................................................................................... 37 15 U.S.C. § 78j(b) ................................................................................................................... 14 15 U.S.C. § 78n ........................................................................................................................ 24 15 U.S.C. § 78u-4..........................................................................................................15, 17, 39 17 C.F.R. § 240.10b-5 .............................................................................................................. 14 17 C.F.R. § 240.14a-9............................................................................................................... 24 8 Del. C. § 102 ......................................................................................................................... 32 8 Del. C. § 141 ..............................................................................................................28, 31, 32 8 Del. C. § 174 ......................................................................................................................... 32
RULES

Fed. R. Civ. P. 8(a)................................................................................................................... 29 Fed. R. Civ. P. 9(b)........................................................................................................14, 28, 34
TREATISES

Thomas Lee Hazen, 3 Treatise on the Law of Securities (5th ed. 2005)..................................... 23

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Defendant Charles E. Becker respectfully submits this memorandum of law in support of his motion to dismiss the First Amended Complaint ("amended complaint") filed by plaintiffs Collins & Aikman Corporation and Collins & Aikman Production Company, as debtors in possession ("plaintiffs," "Collins & Aikman," or "the Company"). PRELIMINARY STATEMENT Charles Becker should not be a defendant in this case. He is not even mentioned in the complaint's allegations concerning the accounting and securities fraud that allegedly occurred at Collins & Aikman, and he was not unjustly enriched by the Company's acquisition of a company he owned in an arms-length transaction that occurred before he joined the Company's Board. Mr. Becker plainly cannot be held liable for the alleged accounting and securities fraud. The amended complaint does not allege that Mr. Becker made a single misrepresentation, committed a single wrongful act, or disregarded a single "red flag." Mr. Becker was not even associated with the Company when it sold securities pursuant to the allegedly false financial statements ­ the only securities transaction specified in the complaint. Faced with these same facts, the Department of Justice, the Securities and Exchange Commission, and Collins & Aikman's investors have all decided not to name Mr. Becker as a defendant in the criminal, regulatory, or civil actions that have arisen from the Company's bankruptcy. The amended complaint does not suggest any reason for plaintiffs' decision to the contrary. Plaintiffs fail to allege even a single fact to demonstrate that Mr. Becker knew of or participated in the alleged securities or accounting fraud. Thus, plaintiffs seek to hold Mr. Becker responsible for this fraud simply because he was in the wrong place at the wrong time: He was an outside director of a company whose officers were allegedly falsifying its accounts. These allegations apparently rest on the now defunct "group pleading" doctrine. In Winer Family Trust v. Queen, 503 F.3d 319, 337 (3d Cir. 2007), the Court of Appeals for the 1
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Third Circuit held that "group pleading" is no longer viable in private securities actions because the strict particularity provision in the Private Securities Litigation Reform Act (the "Reform Act") requires plaintiffs to allege fraud by Mr. Becker personally. The complaint contains no such allegations, and with good reason: Mr. Becker resigned from the Company's board three months before the relevant sale of securities. As a result, the court cannot credit plaintiffs' generalized allegation that "all the officers and directors" participated in a securities fraud. Thus, the claim under Section 10(b) and Rule 10b-5 of the Exchange Act must be dismissed for failure to plead fraud with particularity, and for failure to allege that Mr. Becker was a "primary violator" of the securities laws. The Reform Act also requires plaintiffs to allege facts supporting a "strong inference" that Mr. Becker had the requisite state of mind for the securities fraud claims. As the Supreme Court recently held in Tellabs v. Makor Issues & Rights, Ltd, 127 S. Ct. 2499 (2007), plaintiffs must plead facts from which the court can find "cogent and compelling" evidence of Mr. Becker's state of mind. But the amended complaint does not allege a single fact to show that Mr. Becker personally had any intent, let alone the requisite intent, for these claims. Plaintiffs' state-law claims concerning the accounting fraud should be dismissed for similar reasons. Plaintiffs allege that "the Director and Officer Defendants" breached their fiduciary duty by "orchestrating, encouraging or utilizing various accounting schemes . . . which materially misstated the financial condition of the Company." Compl. ¶ 194. Since this claim "sounds in fraud," it is subject to Rule 9(b)'s particularity requirement. And while Rule 9(b) can sometimes be satisfied by group pleading, group pleading cannot be used against an outside director, like Mr. Becker, who is not alleged to have participated in the Company's day-to-day business or in its statements.

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Even if the breach of fiduciary duty claim is evaluated under the lesser "notice" pleading standard of Rule 8(a), it still fails. As the Supreme Court recently explained, Rule 8(a) requires the plaintiff to allege more than "labels," "conclusions," and a "formulaic recitation of a cause of action's elements." Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007). Plaintiffs' allegations concerning the "Director and Officer Defendants" are precisely that; without alleging any specific facts concerning Mr. Becker, the allegations do not give him any notice whatsoever of what he personally is alleged to have done wrong. Under these circumstances, plaintiffs have failed to state a claim that Mr. Becker failed to detect an accounting fraud committed by others. He is not alleged to have disregarded any red flags or to have participated in a systematic failure of oversight, as required by Delaware's strict standard for pleading a failure to supervise claim. Moreover, as a director, Mr. Becker is protected from such claims by his statutory right under Delaware law to rely on the company's auditors, and by the "exculpatory clause" in the Company charter that precludes claims that he breached his duty of care. Plaintiffs have pled no facts to pierce these fundamental protections. The only portion of the complaint that actually names Mr. Becker is the unjust enrichment claim, which challenges Collins & Aikman's acquisition of a company Mr. Becker owned, the Becker Group, in July 2001. Plaintiffs complain about three aspects of that acquisition: (a) a non-compete agreement that Mr. Becker concluded with Collins & Aikman in March 2001, before he joined the Company; (b) the allegedly "excessive" price the Company paid for the Becker Group after conducting allegedly inadequate due diligence; and (c) a $300,000 retainer that Mr. Becker received to compensate him for helping to integrate the Becker Group into the Company. Compl. ¶¶ 47-50.

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This claim is time-barred. The material facts of the Company's acquisition of the Becker Group, including the non-compete agreement, were accurately disclosed in Collins & Aikman's Form 8-K filings in March and July 2001. Thus, plaintiffs were on inquiry notice of this claim more than three years before the Company's bankruptcy filing, and the claim has expired under the applicable Delaware statute of limitation. The unjust enrichment claim also lacks substance. Plaintiffs do not identify anything unjust or unlawful about the arms-length non-compete agreement. Moreover, since Mr. Becker was not a director of the Company at the time of the acquisition, but was affiliated only with the Becker Group, he cannot be responsible for the Company's alleged lack of diligence or its alleged overpayment. And plaintiffs do not identify any reason why Mr. Becker should not keep the $300,000 retainer, which was paid for services rendered; if the Company failed to disclose that payment, the non-disclosure would not give the Company a claim against Mr. Becker. Plaintiffs should be denied leave to replead yet again. In the three years since the Company's bankruptcy, plaintiffs have had access to the findings of special counsel, as well as to information that has been developed in the concurrent criminal, regulatory, and investor actions. Plaintiffs' amended complaint apparently incorporates the additional facts that they have learned. Yet plaintiffs still allege no specific facts to support any claim that Mr. Becker should be liable for either the alleged accounting fraud or for the Company's acquisition of the Becker Group. For these reasons, and additional reasons that are applicable to all the individual defendants (and are therefore discussed more briefly below), the complaint against Mr. Becker should be dismissed in its entirety, with prejudice.

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STATEMENT OF FACTS1 A. THE PARTIES Plaintiffs Collins & Aikman Corporation and Collins & Aikman Production Company are Delaware corporations. Compl. ¶ 6. Collins & Aikman, through its subsidiaries, was engaged in the design, manufacture, and supply of automotive interior components. Id. ¶ 6. On May 17, 2005, Collins & Aikman and its subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code. Id. ¶¶ 70-91. The plaintiff corporations bring this complaint as debtors-in-possession. Id. ¶ 6. According to the complaint, a litigation trust has been created to pursue these claims on behalf of the companies' creditors. Id. ¶ 7. Defendant Heartland Industrial Partners, L.P. is a Delaware limited partnership whose managing general partner is defendant Heartland Industrial Associates, L.L.C. Id. ¶ 27. Defendant Heartland Industrial Group, L.L.C. is a related entity. Id. ¶ 28. Together, these entities are referred to as "Heartland." Id. ¶ 30. In February 2001, Heartland LP acquired a controlling interest in Collins & Aikman, and Heartland's representatives, including David A. Stockman, assumed positions on Collins & Aikman's Board of Directors. Id. ¶ 45. Many of the individual defendants were Heartland executives who also participated in the management of Collins & Aikman. Id. ¶¶ 7, 8, 13, 17-20, 30. For example, Stockman, a Managing Member of one Heartland entity and a founding partner and Senior Managing Director of another, was at various times either Collins & Aikman's Chairman of the Board, CEO, or both. Id. ¶¶ 7, 30. Similarly, defendants Michael Stepp, John A. Galante, Cynthia Hess, Daniel Tredwell, W. Gerald McConnell, and Samuel Valenti were all members or managing directors of a Heartland entity and either officers or directors of Collins & Aikman. Id. ¶¶ 8, 13, 17-20.
1

The documents cited in this Statement of Facts are attached to the accompanying Affirmation of Stephen L. Ascher, dated April 28, 2008 ("Ascher Aff.").

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Most of the remaining individual defendants were officers of Collins & Aikman who had an active role in the Company's day-to-day business or accounting. Id. ¶¶ 9, 10, 11, 12, 16. For example, Bryce Koth held various positions at Collins & Aikman relating to tax and finance, culminating as its CFO from October 13, 2004. Id. ¶ 9. David R. Cosgrove held various positions relating to finance and financial planning, culminating as its Corporate Controller from October 2004 until May 2005. Id. ¶ 10. Paul Barnaba, Robert Krause, and Thomas E. Evans were also each high-ranking officers of the Company. Id. ¶¶ 11-12, 16. Mr. Becker was an outside director of Collins & Aikman. He became an outside director after he sold Becker Group LLC to Collins & Aikman in July 2001. Id. ¶ 14. Mr. Becker was not on the board's audit committee and is not alleged to have had any other responsibilities related to the Company's accounting. See Collins & Aikman 14-A filings, attached to Ascher Aff. as Ex. 2.2 Mr. Becker resigned from the Board on May 6, 2004, and had no role in the company for the year leading to its bankruptcy. Compl. ¶ 14. After Stockman resigned from his position as CEO in May 2005, Mr. Becker was appointed interim CEO. Id. Plaintiffs have not asserted any claims against Mr. Becker arising out of his actions as interim CEO. During the time period covered by the complaint, Mr. Becker was not a Heartland executive; he was only a limited partner (i.e., a passive investor). Id. B. THE SCHEME ALLEGED IN THE COMPLAINT The gist of the amended complaint is that Heartland looted Collins & Aikman by extracting tens of millions of dollars in management fees after its acquisition in 2001, all the while "cooking its books" to hide a liquidity crisis at the Company. Id. ¶¶ 53-91. The complaint

2

The Court can take notice of this fact from the Company's SEC filing. See In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1331 (3d Cir. 2002).

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describes a host of allegedly fraudulent activity that furthered this scheme, including at least two separate accounting frauds, a sale of $415 million in Collins & Aikman securities, and several purportedly misleading press releases and other statements. Id. ¶¶ 53-94. The amended complaint mentions Mr. Becker by name in only four of its 246 paragraphs, see id. ¶¶ 14, 48-49, 140, and alleges his personal involvement in only one allegedly improper transaction ­ the Company's arms-length acquisition of the Becker Group, LLC, which occurred before Mr. Becker joined the Board of Collins & Aikman ­ as follows: 1. The Company's Acquisition of the Becker Group

In July 2001, the Company acquired Becker Group LLC, a manufacturer of plastic parts for automobiles owned by Mr. Becker. Id. ¶ 47. The amended complaint appears to challenge three aspects of the acquisition. a. The Non-Compete Agreement

First, the Company agreed to pay Mr. Becker $18 million for a non-compete agreement, which was to be paid out over five years. Id. ¶ 49. In March 2003, after making two years of such payments, the Company bought out the non-compete agreement for $11.3 million. Id. The terms of the non-compete were fully and accurately disclosed before and after the sale. On March 21, 2001, Collins & Aikman disclosed in an 8-K its intent to acquire Becker Group LLC, including the facts concerning the agreement and concerning Mr. Becker's intention to join the Company's Board of Directors. Ascher Aff., Ex. 3. On July 3, 2001, the Company issued another 8-K in which it reiterated that as part of the acquisition Mr. Becker was to receive $18 million over five years pursuant to a non-compete agreement. Ascher Aff., Ex. 4. The $11.3 million buy-out was similarly disclosed in the Company's 10-K filing in March, 2003. Ascher Aff., Ex. 5. These filings contradict the amended complaint's allegation that Collins &

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Aikman's financial statements failed to disclose "transactions with defendants Becker, McCallum and entities that they controlled." Compl. ¶¶ 138-40. Despite these accurate disclosures, the amended complaint alleges that "[u]nder applicable law, Becker was obligated to not compete with the Company and, therefore, there was no reason to enter into a non-compete with him, and he was not entitled to receive any monies from the Company for his agreement not to compete." Id. The amended complaint does not specify the "applicable law" that purportedly obliged Mr. Becker not to compete with the Company, nor does it otherwise explain how this routine agreement was wrongful. Id. b. The Acquisition Price and Due Diligence

Plaintiffs' amended complaint also alleges that "[t]he acquisition of the Becker Group was ill-conceived and executed," that "Defendants did not perform adequate due diligence in connection with the acquisition, and the valuation . . . placed on the Becker Group was excessive and not warranted." Id. ¶ 50. Once again, however, the terms of Collins & Aikman's acquisition of the Becker Group were fully disclosed in Collins & Aikman's 8-K filings on March 21, 2001 and again on July 3, 2001. Ascher Aff., Exhs. 3-4. Moreover, Mr. Becker represented the Becker Group, not the Company, in this transaction. Mr. Becker was not appointed as a director of the Company until after it acquired the Becker Group. As the seller, Mr. Becker obviously was not responsible for the Company's due diligence into that transaction or its decision concerning how much to pay for the Becker Group. Id. ¶ 14. c. The $300,000 Consulting Fee

Finally, plaintiffs allege that Mr. Becker received a retainer for his assistance in facilitating "the integration of Becker Group into Collins & Aikman," and that this retainer was not disclosed in the Company's SEC filings. Id. ¶ 48. The complaint does not allege that the 8
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payment to Mr. Becker was substantively improper, that he did not perform services entitling him to this consultancy fee, or that the Company was injured by its non-disclosure. Id. Nor does the complaint suggest that Mr. Becker, as an outside director, was in any way responsible for the non-disclosure. 2. The Joan Fabrics Roundtrip Transactions

In September 2001, Collins & Aikman made another acquisition, this time of Joan Automotive Fabrics ("Joan Fabrics"). Id. ¶ 53. The amended complaint alleges that soon after this acquisition, the defendants embarked on a fraudulent accounting scheme that continued without interruption until the Company's bankruptcy. Id. ¶¶ 53-69. Specifically, beginning in late 2001, the Company began to engage in a series of fraudulent "round-trip" transactions designed "to improperly increase its reported income and artificially inflate its reported financial results." Id. ¶ 53. These disguised loans allowed the Company to book $15 million in fake profits from December 2001 until the first quarter of 2003. Id. ¶¶ 55-57. The amended complaint alleges that this fraud was carried out by Stockman, McCallum and Stepp, as well as unnamed "others acting at their direction." Id. ¶¶ 50-57. The detailed allegations about this scheme do not allege that Mr. Becker had any role in it, was aware of it, or was aware of any facts that should have put him on notice of it. 3. The Rebate Scheme

Beginning in early 2002, "Defendants" allegedly engaged in a "Rebate Scheme" whereby the Company "improperly recogniz[ed] rebates from the Company's suppliers before the rebates had actually been earned by the Company." Id. ¶ 58. The amended complaint describes three different ways that the Company improperly recognized rebates, and the amounts of the rebates listed by supplier and fiscal quarter. Id. ¶¶ 58-69.

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The amended complaint again does not allege that Mr. Becker played any part in this scheme or knew or should have known of its existence. Id. If anything, plaintiffs' allegations negate any inference of wrongdoing. The amended complaint alleges that some of the defendants used fraudulent "side letters" to hide the transactions from the Company's directors. Id. ¶¶ 153-56. Although the "side letters" are alleged to be "red flags" that the Company's auditors should have investigated, id., plaintiffs concede that such letters are typically hidden from the Board of Directors, id. ¶ 153. 4. The Company's August 2004 Sale of Notes

In May 2004, Mr. Becker resigned from the Board of Directors. Compl. ¶ 14. He was not affiliated with the Company again until May 2005, when he became its interim CEO. In August 2004, three months after Mr. Becker's resignation, the Company sold approximately $415 million in notes. Id. ¶ 71. The amended complaint alleges that "[t]he offering materials used to sell the notes presented materially false and misleading financial results for the Company as they included financial results that were artificially inflated due to the accounting improprieties detailed herein." Id. Mr. Becker is not alleged to have personally played any role in this sale. Instead, the amended complaint makes conclusory allegations that all of the officers and directors of the Company participated in the false statements, including: (1) "During all times relevant hereto, each of the Director and Officer Defendants occupied a position with Collins & Aikman or was associated with the Company in such a capacity as to make him or her privy to confidential and proprietary information concerning Collins & Aikman and its operations, finances and financial condition." Compl. ¶ 25;

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(2) "Because of these positions and such access, each of the Director and Officer Defendants knew that the true facts specified herein regarding Collins & Aikman's business and finances had not been disclosed to and were being concealed . . . ." Id.; and (3) "Each of the officer and director defendants participated in the issuance and/or review of false and/or misleading statements, including the preparation of false and/or misleading press releases, SEC filings and reports to Collins & Aikman shareholders and/or creditors." Id. Since Mr. Becker was not associated with the Company at the time of this sale, these conclusory and generalized allegations plainly do not apply to him. 5. The GECC Loan

In December 2004, seven months after Mr. Becker resigned from the Board, the Company entered into a borrowing agreement with General Electric Capital Corporation ("GECC"). Id. ¶ 74-79. Plaintiffs allege that Stockman and others issued misleading statements regarding the Company's ability to borrow pursuant to its GECC agreement. Id. ¶ 80. This transaction occurred when Mr. Becker was not on the Board or otherwise associated with the Company, and he is not mentioned in the relevant allegations. 6. The Other Misrepresentations

The amended complaint also alleges that after Mr. Becker resigned in May 2004, but before he rejoined the Company in May 2005, various defendants made misrepresentations concerning the Company's liquidity and financial results, including a March 2005 press release concerning the Company's delay in issuing its 2004 financial results while it reviewed its rebate accounting; a conference call with investors at about the same time; a presentation to some of the company's lenders in March 2005; and a presentation to one of those lenders (and an associated press release) in April 2005. Id. ¶¶ 80-89. Mr. Becker was not associated with the Company at the time of these alleged misrepresentations and is not alleged to have participated in them. 11
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7.

Alleged Malpractice by the Company's Auditors

In 79 numbered paragraphs that make up the bulk of the complaint, plaintiffs allege that the Company's auditors committed malpractice by failing to uncover the misconduct described above. Id. ¶¶ 102-80. None of these allegations mentions Charles Becker. C. THE COMPANY'S BANKRUPTCY On May 12, 2005, Collins & Aikman issued a press release announcing that the Board of Directors had forced Stockman to resign his positions at the Company. Id. ¶ 90. In that same announcement, the Board appointed Mr. Becker to serve as interim CEO while it searched for Stockman's permanent replacement. Id. ¶ 14. On May 17, 2005, Collins & Aikman and its subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code. Id. ¶ 91. Collins & Aikman's bankruptcy has led to significant collateral litigation. First, several shareholder class action lawsuits were filed, consolidated and transferred to the Eastern District of Michigan. Akerman v. Collins & Aikman Corp., No. 1:05-CV-05098 (S.D.N.Y.); Egleston v. Collins & Aikman Corp., No. 2:05-CV-04950 (S.D.N.Y.); Gariddi v. Mosingo, No. 2:05-CV05251 (S.D.N.Y.); Bruno v. Collins & Aikman Corp., No. 2:05-CV-71325 (S.D.N.Y.); Kleinpeter-Fleck v. Collins & Aikman Corp., No. 2:06-CV-01355 (S.D.N.Y.). These lawsuits seek damages from the Company's former officers and directors, including defendants Stockman, Stepp, Koth, and Heartland, based on allegations that they violated federal securities laws by participating in a scheme to misrepresent the Company's financial position. Id. Second, the Company's note-holders brought a class action against several former officers and directors of the Company based on the Company's allegedly fraudulent issuance of the August 2004 Notes. Mainstay High Yield Corp. Bond Fund v. Heartland Indus. Partners, L.P., No. 2:07-CV-10542 (E.D. MI.); see also Compl. ¶ 71.

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Third, on March 21, 2007 a grand jury indicted Stockman, Stepp, Cosgrove and Barnaba on charges of conspiracy to commit securities fraud, securities fraud, bank fraud, mail fraud and obstruction of justice. United States v. David A. Stockman, No. 1:07-CR-0020 (S.D.N.Y.). Finally, on March 26, 2007, the SEC filed civil charges against Stockman and eight other former officers of Collins & Aikman, including defendants Stepp, Galante, Cosgrove, Barnaba and McCallum. SEC v. Collins & Aikman Corp., No. 1:07-CV-02419 (S.D.N.Y.). None of these actions named Mr. Becker as a defendant or alleged any impropriety by him regarding the acquisition of the Becker Group. D. THE AMENDED COMPLAINT Plaintiffs assert five claims against "Director and Officer Defendants" without any attempt to match specific allegations or individual defendants to any of those claims. Plaintiffs assert: (1) a Section 10(b) claim based on alleged misstatements related to the sale of securities (presumably the August 2004 notes), Compl. ¶¶ 181-85; (2) a Section 14(a) claim based on alleged misrepresentations in proxy statements leading to the election of directors, id. ¶¶ 186-91; (3) a breach of fiduciary claim based solely on the allegedly inappropriate accounting schemes, id. ¶¶ 192-95; (4) an unjust enrichment claim based on the alleged payment of inflated prices for goods, services and corporate acquisitions, the alleged violation of securities laws and alleged misrepresentations, id. ¶¶ 195-98; and (5) a fraud claim based on alleged misrepresentations made to Collins & Aikman's Board of Directors and Audit Committee, id. ¶¶ 199-204. From Mr. Becker's perspective, the best that can be discerned is that he is grouped with the other officer and director defendants for purposes of the securities fraud, common-law fraud and breach of fiduciary duty claims concerning the alleged accounting fraud. The allegations regarding the Company's acquisition of the Becker Group appear to be alleged as part of the unjust enrichment claim against Mr. Becker, but not as part of the other claims. 13
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ARGUMENT Mr. Becker cannot be held liable for either the accounting and securities fraud that allegedly occurred at the Company, or for any claims arising out of Collins & Aikman's acquisition of Becker Ventures in July 2001. I. THE AMENDED COMPLAINT DOES NOT ADEQUATELY ALLEGE THAT MR. BECKER PARTICIPATED IN ANY SECURITIES OR ACCOUNTING FRAUD Since Mr. Becker was not associated with Collins & Aikman at the time of any relevant securities transaction, and the amended complaint does not allege that he personally participated in the alleged accounting fraud or even was on notice of it, all the claims should be dismissed to the extent that they try to hold him liable for the securities or accounting fraud. These claims should also be dismissed because they seek "deepening insolvency" damages, which are not cognizable under federal securities law or Delaware state law. A. THE 10B-5 CLAIM SHOULD BE DISMISSED The plaintiffs' first claim is that the director and officer defendants violated the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Compl. ¶ 182. To allege a claim under Section 10(b) and Rule 10b-5, plaintiffs must allege that (1) the defendant made a misstatement or an omission (2) of a material fact (3) with scienter (4) in connection with the purchase or sale of a security (5) upon which plaintiff reasonably relied (6) which proximately caused injury. Kline v. First Western Gov't Sec., Inc., 24 F.3d 480, 487 (3d Cir. 1994). The amended complaint does not adequately allege several of these elements, as follows. 1. Plaintiffs Fail to Allege Fraud with Particularity As to Mr. Becker

Fed. R. Civ. P. 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This particularity 14
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requirement has been rigorously applied in securities fraud cases. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1417 (3d Cir. 1997). Thus, plaintiffs asserting securities fraud claims must specify "the who, what, when, where, and how: the first paragraph of any newspaper story." In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534 (3d Cir. 1999). In addition, Rule 10b-5 claims must comply with the heightened pleading requirements of the Reform Act (15 U.S.C. §§ 78u-4(b)(1), (b)(2)), which "imposes another layer of factual particularity to allegations of securities fraud." In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002). Under the Reform Act, a securities fraud claim brought under the Exchange Act must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1)(B). If a complaint fails to comply with these pleading requirements, it must be dismissed. Id. § 78u-4(b)(3)(A). The amended complaint in this case fails to allege the "who." While Stockman and several other defendants are named repeatedly in the amended complaint, plaintiffs do not allege any misleading statements or omissions by Mr. Becker. Mr. Becker is not alleged to have signed any corporate filings, issued any press releases, or otherwise spoken (or had a duty to speak). Without any such allegations, the amended complaint is in essence trying to hold Mr. Becker responsible for various Company statements under the group pleading doctrine. Under this doctrine, the plaintiff need not identify individual sources of statements when the fraud allegations arise from misstatements or omissions in "group published information" such as annual reports, prospectuses, registration statements, press releases, or other documents that

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presumably constitute the collective actions of the individuals who run the day-to-day affairs of the corporation. Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987). But, as the Third Circuit held just four months ago, the "group pleading" doctrine did not survive the enactment of the Reform Act because it cannot satisfy the statute's stringent pleading requirements regarding particularity and scienter. See Winer Family Trust v. Queen, 503 F.3d 319, 335 (3d Cir. 2007) ("[T]he group pleading doctrine is no longer viable in private securities actions after the enactment of the PSLRA."). Thus, in Winer, plaintiffs attempted to hold defendant officer/directors liable under Rule 10(b) for alleged misrepresentation and omissions in the company's SEC filings. See Winer, 503 F.3d at 334-35. Plaintiffs alleged that the officers and directors had "access to, control over, and ability to edit and withhold dissemination of the [company's] press releases and SEC filings." Id. The Third Circuit dismissed plaintiffs' claims and emphasized that "[t]he PSLRA requires plaintiffs to specify the role of each defendant demonstrating each defendant's involvement in misstatements and omissions." See Winer, 503 F.3d at 335-36. Since plaintiffs cannot rely on the group pleading doctrine, the claims against Mr. Becker should be dismissed for lack of particularity. 2. The Amended Complaint Does Not Allege a Primary Violation by Mr. Becker

In Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 190-91 (1994), the Supreme Court held that a private plaintiff cannot bring an aiding and abetting claim under section 10(b), and that private civil liability under section 10(b) is limited to "primary violator[s]." Id. Although the Third Circuit has not had occasion to decide the criteria for primary liability, SEC v. Lucent Techs., Inc., 363 F. Supp. 2d 708, 722 (D.N.J. 2005), district courts in the circuit have adopted the "bright line" approach, see id. at 724; In re DVI, Inc. Sec. Litig., 2005 WL 1307959, at *8 (E.D. Pa. May 31, 2005) (noting that "most courts" have adopted 16
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the "bright line" test); Copland v. Grumet, 88 F. Supp. 2d 326, 330-34 (D.N.J. 1999). Under the "bright line" test, a primary violator "must actually make the material misstatement or omission and `the misrepresentation must be attributed to the specific actor at the time of public dissemination' . . . ." Lucent Techs., Inc., 363 F. Supp. 2d at 720 (D.N.J. 2005) (quoting Wright v. Ernst & Young LLP, 152 F.3d 169, 174-75 (2d Cir. 1998)). Mr. Becker obviously was not a primary violator. The amended complaint does not allege that he signed any documents in connection with the note offering, or that any misrepresentation or omission could be attributed to him at the time of its dissemination. In fact, such attribution would be impossible since he was no longer with the Company when any alleged misrepresentations were publicly made.3 For this reason as well, the 10(b) claim against Mr. Becker should be dismissed. 3. Plaintiffs Fail to Allege Facts Giving Rise to a "Strong Inference" That Mr. Becker Acted with Scienter

The Reform Act requires 10b-5 plaintiffs to "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u4(b)(2); In re Advanta Corp. Sec. Litig., 180 F.3d at 538. In a securities fraud case under Rule 10b-5, the required state of mind is scienter, or fraudulent intent, which requires a showing of intentional wrongdoing or recklessness. See Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 272-73 (3d Cir. 1998). Recklessness is defined as an "extreme departure

3

Some circuits have instead applied a "substantial participation" test, which "provides for primary liability where there is `"substantial participation or intricate involvement' of the secondary party in the preparation of fraudulent statements `even though that participation might not lead to the actor's actual making of the statements.'" Lucent Techs., Inc., 363 F. Supp. 2d at 722 (quoting In re Enron Corp. Sec., Derivative & ERISA Litig., 235 F. Supp. 2d 549, 585 (S.D. Tex. 2002)) (internal quotation marks omitted). Even under this test, Mr. Becker is not a primary violator. Plaintiffs have not alleged that Mr. Becker participated at all, let alone substantially, in the preparation of misstatements in connection with a sale of securities that occurred months after his resignation.

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from the standards of ordinary care which presents a danger of misleading that is either known to the defendant or is so obvious that the actor must have been aware of it." In re Advanta Corp. Sec. Litig., 180 F.3d at 535. This "strong inference" requirement supersedes the provisions of Rule 9(b) that otherwise permit state of mind to be averred generally. Id. at 531 n.5. In Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2510 (2007), the Supreme Court held that for the plaintiff to satisfy the "strong inference" requirement, "the inference of scienter must be more than merely `reasonable' or `permissible' ­ it must be cogent and compelling, thus strong in light of other explanations." To determine whether the inference is "cogent and compelling," the court "must engage in a comparative evaluation; it must consider, not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged." Id. at 2504. The relevant inquiry is "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard. . . . " Under this standard, a complaint will survive dismissal only if "a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id. at 2510 (emphasis supplied) . Under the Tellabs standard, the amended complaint plainly does not allege that Mr. Becker had an intent to defraud. It does not include any facts to suggest that he engaged in any intentional wrongdoing or reckless misconduct in connection with the Company's accounting or sale of securities, but instead alleges only that he must have known about the alleged accounting fraud due to his position as a director of the company. Even before Tellabs, courts in the Third Circuit repeatedly dismissed conclusory allegations of knowledge based on the defendant's position, particularly as an outside director.

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See, e.g., In re Advanta, 180 F.3d at 539. Allegations that a defendant "must have known" a statement was false or misleading are "precisely the types of inferences which [courts], on numerous occasions, have determined to be inadequate to withstand Rule 9(b) scrutiny." Id.; see also Kennilworth Partners L.P. v. Cendant Corp., 59 F. Supp. 2d 417, 428-30 (D.N.J. 1999). Allegations of this type are indistinguishable from impermissible "group pleading." See Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 364-65 (5th Cir. 2004). In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 281-82 (3d Cir. 2006), is on point. In that case, the plaintiffs alleged scienter against the company's outside directors "without any attempt to link specific individuals to specific instances of reckless conduct." The Third Circuit held that the "allegation that the Outside Directors, qua directors and members of the audit committee, had access to unspecified business records and a duty to review them does not give rise to a strong inference that the Outside Directors individually knew of or recklessly disregarded particular wrongful recognitions of revenue." Id. at 282. Similarly, in this case, plaintiffs do not "link" Mr. Becker to any "specific instances of reckless conduct"; they allege merely that he must have been aware of the fraud based upon his position as an outside director. Compl. ¶ 25. Moreover, plaintiffs allege that certain aspects of the fraud were designed to hide the scheme from the Board of Directors, which necessarily includes Mr. Becker. Id. ¶ 153. Nor are there any specific allegations of an improper motive.4

4

Under Tellabs, plaintiffs can no longer establish scienter by alleging merely that defendants had the "motive and opportunity" to commit the fraud; considering two specific factors (motive and opportunity) in isolation is inconsistent with the Supreme Court's directive to consider all the inferences "collectively" and "holistically." See Tellabs, id. at 2609-11 ( "[T]he significance that can be ascribed to an allegation of motive, or lack thereof, depends on the entirety of the complaint." ). The Third Circuit has not specifically addressed the question of whether the "motive and opportunity" test survives Tellabs. See Key Equity Investors, Inc. v. Sel-Leb Mktg. Inc., 2007 WL 2510385, at *3-4 (3d Cir. Sept. 6, 2007); Globis Capital Partners, L.P. v. Stonepath Group, Inc., 241 Fed. Appx. 832, 836 (3d Cir. 2007).

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Based on the absence of any specific allegations against Mr. Becker personally, his status as an outside director, and the exculpatory allegation that the Board itself was deceived, the more cogent inference is that Mr. Becker was not reckless, and that individuals other than Mr. Becker executed any fraud behind his back. Plaintiffs' 10(b) claim must be dismissed. 4. The Company Does Not Have Standing to Bring the 10(b) Claim

Section 10(b) prohibits fraud only if it is "in connection with the purchase or sale of any security." In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 729-31 (1975), the Supreme Court interpreted this element to require a plaintiff in a private civil case to be a buyer or seller of a security in order to have standing to sue under the statute. See Trump Hotels & Casino Resorts, Inc. v. Mirage Resorts Inc., 140 F.3d 478 (3rd Cir. 1998). Although Collins & Aikman was a seller of securities in August 2004, it is not bringing its 10b-5 claim based on any injury it suffered as a seller; the Company did not receive less money than it should have when it sold the notes. If anyone was victimized by the sale, it was the purchasers, who are not parties to this action. Rather, the amended complaint alleges only that the company was injured by the business decision to take on more debt, which deepened the Company's insolvency and reduced creditors' returns in bankruptcy. Compl. ¶ 184. The Company does not have standing to assert a claim for this "deepening insolvency" injury. Courts have consistently held that under the "buyer-seller" rule, corporate issuers do not have standing to bring 10b-5 claims against their officers or directors based upon the issuer's fraudulent sale of its own securities, because issuers cannot suffer damages from their own sales of securities. For example, in Bio-Medical Sciences, Inc. v. Weinstein, 407 F. Supp. 970, 973 (S.D.N.Y. 1976), the corporation brought a 10b-5 claim against its former CEO alleging that he made misrepresentations in a note offering. The court rejected the claim, holding that not every

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"fraud by any officer of an issuer having any relationship to any sale by the issuer is actionable by such issuer"; the issuer must show that the "loss resulted from the sale itself." Id. Similarly, in Initio, Inc. v. Hesse, 474 F. Supp. 312 (D. Del. 1979), the plaintiff brought a derivative suit on behalf of the corporation, claiming that the director defendants caused the company to issue a misleading registration statement in conjunction with its own public offering of securities. Id. at 319. The court rejected the claim, reasoning: "In this case . . . , [the plaintiff] does not claim that [the corporation] is about to become the victim of a fraudulent sale, but rather that [it] is about to perpetrate a fraud on the public and . . . may eventually be injured. . . . In light of this distinction, the Court concludes that [the corporation] would not qualify as a buyer or seller under the [buyer-seller] rule. . . ." Id. at 320 (emphasis in original). Since the Company here is trying to recover for a similarly indirect injury, the claim should be dismissed. 5. The Amended Complaint Does Not Adequately Allege Loss Causation

A 10b-5 plaintiff must allege "loss causation." Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005). Loss causation means "that the fraudulent misrepresentation actually caused the loss suffered." Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 222 (3d Cir. 2006) (quoting Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 173 (3d Cir. 2001)) (internal quotation marks omitted). Loss causation, or "proximate cause," requires a plaintiff to demonstrate "that it was the very facts about which the defendant lied which caused its injuries." Id. (quoting Caremark, Inc. v. Coram Healthcare Corp., 113 F.3d 645, 648 (7th Cir. 1997)) (internal quotation marks omitted). It is not sufficient for a plaintiff to allege that a fraudulent misrepresentation itself was related to an economic loss, or that it caused a transaction that may have led to an eventual loss; the plaintiff must allege that the misrepresentation actually caused the loss. See Dura Pharm., Inc., 544 U.S. at 343.

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A corporation cannot assert a claim against its officers or directors for engaging in a fraud that benefited the company, even if the corporation suffered some collateral or eventual harm from the transaction. For example, in Weinstein, 407 F. Supp. 970, the court rejected plaintiff's 10(b) claim because the issuer company actually benefited from the fraud. Id. at 97374 ("Weinstein, albeit by improper means and for the conceded purpose of benefiting himself, was seeking to achieve such benefit solely by enhancing the assets of the corporation and thus increasing the value of its shares. Had he succeeded, all other stockholders would have benefited as much as he did. Indeed, he did succeed in enhancing those assets, if only temporarily."). Similarly, in Hoover v. Allen, 241 F. Supp. 213, 227 (S.D.N.Y. 1965), the district court held that a corporation has "no cause of action under section 10(b) predicated solely upon its purchase of its stock at a fraudulently lowered price," because "the immediate effect of the Company's purchasing at a price below value was to benefit, rather than in