Read Manzo, et al. v. Rite Aid Corporation, et al. 18451-NC-Brief In Support Of Defendant KPMG LLP'S Motion To Dismiss The Claims Directed Against It Or In The Alternative, To Stay The Present Action text version

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY STACEY FEINGLASS MANZO on behalf of herself and all others similarly situated, Plaintiffs,

V.

) i ) CIVIL ACTION NO. 18451-NC a 2'

i & es SW Ir; -z

RITE AID CORPORATION, MARTIN L. GRASS, TIMOTHY J. NOONAN, FRANKLIN C. BROWN, NANCY A. LIEBERMAN, LEONARD STERN, PRESTON R. TISCH, WILLIAM .I. BRATTON, and KPMG LLP, Defendants.

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BRIEF IN SUPPORT OF DEFENDANT KPMG LLP'S MOTION TO DISMISS THE CLAIMS DIRECTED AGAINST IT OR IN THE ALTEBNATIVE. TO STAY THE PRESENT ACTION

Montgomery, McCracken, Walker & Rhoads, LLP John H. Newcomer, Jr. 13 1 Continental Drive, Suite 304 Newark, DE 19713 (302) 894-7070 Attorneys for Defendant KPMG LLP OF COUNSEL: John W. Frazier, IV John E. Caruso Montgomery, McCracken, Walker & Rhoads, LLP 123 South Broad Street Philadelphia, PA 19109 (215) 772-1500 Dated: January 16,200l

TABLE OF CONTENTS Page I.

INTRODUCTION . . . . . . . . . . ..I.."................ I..............................................,...............,............. 1 NATURE AND STAGE OF PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. B. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II.

Procedural History/Background.. ........................................................................... 3 6

III. IV. V.

STATEMENT OF FACTS ................................................................................................

QUESTIONS PRESENTED . . . . . . . . . . . . . ..L.............................................................................. 8 ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..`................................................................. 9 A. This Court Should Dismiss Plaintiffs Claims Because They Are Not Properly Assertable in a Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. 2. B. C. D. 9

Plaintiffs Equitable Fraud and Common Law Fraud Claims Are Not Properly Assertable in a Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Plaintiffs Fiduciary Duty Claims Are Not Properly Assertable in a Class Action ,........... . . . . ,..,....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . 10

This Court Should Dismiss All of the Claims Because They Are Derivative Causes of Action Which Cannot Be Brought as a Direct Claim . . . . . . . 12 This Court Should Dismiss AI1 of the Claims Because Plaintiff Seeks Lost Profit Opportunity Damages Which Are Not Legally Cognizable . . . . . . . . . . . . . . . . . . . . . . 14 This Court Should Refuse to Recognize Plaintiffs Fraud and Breach of Fiduciary Duty Claims as Valid Under the Securities Litigation Uniform Standards Act .,...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 This Court Should Dismiss PXaintiff's Cause of Action Against &PMG for Aiding and Abetting the individual Defendants' Breaches of Fiduciary Duty for Failure to State a Claim Upon Which Relief Can Be Granted . . . . . . . . . . . . . . 22 The Instant Action Should be Dismissed or Stayed Based on PriorPending, Substantially Similar Litigation in the United States District Court for the Eastern District of Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 1. The Consolidated Actions in the Eastern District of Pennsylvania Constitute l?rior Actions for Purposes of the McWane First-Filed Rule . . . . . . . . . . . . . . . . . . ...~.................................................................................... 26

E.

F.

TABLE OF CONTENTS (continued) Page

2. 3. 4.

The United States District Court for the Eastern District of Pennsylvania is Capable of Doing Prompt and Complete Justice . . . . . . . . . . . 27 The Issues and the Parties to the Actions are Identical for Purposes of the 2 McWane First-Filed Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Considerations of Comity and the Necessities of an Orderly and Efficient Administration of Justice Strongly Favor the Grant of Dismissal or a Stay of the Present Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 35

VI.

CONCLUSION ,,..,...........................................................................................................

TABLE OF AUTHORITIES Page

Arent v. Distribution Scis.. Inc., 8th Cir., 975 F.2d 1370 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Bimbaum v. Newnort Steel Corn., 2d Cir., 193 F.2d 461 (1952) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-21 Blue Chin Stamps v. Manor Drug Stores --> 421 U.S. 723 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Brown v. Perrette, Del. Ch., 1999 WL 342340, Chandler, C. (May 14, 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Bush v. Gore, 121 s. ct. 525 (2000) .,................ "..) .,...........,.............................................................,.................. 20 Caravetta v. McKesson HBOC. Inc., Del. Super., 2000 WL 1611101, Herlihy, J. (Sept. 7, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 33 In re Chambers Dev. Co., Inc. S'hAlders Litie., Del. Ch., 1993 WL 179335, Chandl.er, V.C. (May20, 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Chanoff v. United States SuruicalC~, D. Conn, 857 F. Supp. 1011, a&d, 2d Cir., 31 F.3d 66 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Corwin v. Silverman, Del. Ch., 1999 WL 499456, Chandler, C. (June 30, 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-28 Cracker v. Federal Denosit Ins. C&, 5th Cir., 826 F.2d 347 (1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Derdiger v. Tallman, Del. Ch., 2000 WL 1041216, Chandler, C. (July 20, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-27 Davis Ins. Groun. Inc. v. Insurance Assoc., Inc., Del. Ch., 1998 WL 892623, Steele, V.C. (Dec. 3, 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Gaffin v. Teledvne. Inc., Del. Supr., 611 A.2d 467 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 10, 13

General Foods Corn. v. Crvo-Maid. Inc., Del. Supr., 198 A.2d 681 (1964), overruled on other mounds, Pepsico. Inc. v. Pensi-Cola Bottlinn Co., Del. Supr., 261 A.2d 520 (1969) . . . . . . . . . . . . . . . . ..I.............. 32

-lll-

...

TABLE OF .AUTHORITIES (continued) Page

Gibson v. PS Grouu Holdings. Inc,, S.D. Cal., 2000 WL 777818 (June 14, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19-20 Gordon v. Buntrock, N.D. Ill., 2000 WL 556763 (April 28, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..18 Grimes v. Donald, Del. Supr., 673 A.2d 1207 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12, Jackson Nat'1 Life Ins. Co. v. Ken&&y, Del. Ch., 741 A.2d 377, Steele, V.C. (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 14 24

Kane v. Puego Motors, Del. Supr., 1995 WL 945817, Quillen, J. (Dec. 19, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Kramer v. Western Pac. Indus.. I~G, Del. Supr., 546 A.2d 348 (1988) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Lalondriz v. USA Networks. Inc., S.D.N.Y., 68 F. Supp. 2d 285 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Levine v. Seilon. Inc., 2d Cir., 439 F.2d 328 (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-16

Linman v. Batterson, Ill. App. Ct., 2000 WL 1459807 (Sept. 29, 2000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Loudon v. Archer-Daniels-Midland Co -LY Del. Supr., 700 A.2d 135 (1997) . . . . . . . . . . . . . . . . . .."............................................................................... 22 Macklowe v. Planet Hollvwood. &, Del. Ch., 1994 WL 586835, Steele, V.C. (Oct. 4, 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Malone,

Del. Supr., 722 A.2d 5 (1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9-14, 18, 23 12-13 28-33

Mazzetti v. Shenherd, Del. Ch., 1986 WL 9199, Allen, C. (Aug. 26, 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . McWane Cast Iron PiDe Corn. v._McDowell-Wellman Ene'g Co., Del. Supr., 263 A.2d 281 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,

Miller v. Phillitx Petroleum Co. Norway, Del. Supr., 537 A.2d 190 (1988) ,.,...............,,.............,,......,.............,............................................ 32 -iv-

TA.BLE OF AUTHORITIES (continued) Page

Nebenzahl v. Miller, Del. Ch., 1996 WL 494913, at *7, Steele, V.C. (Aug. 29, 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..,. . . . ..24 Oliver v. Boston Univ., Del. Ch., 2000 WL 1091480, Steele, V.C. (July 2.5, 2000) .,..,....,..,.....................,.................... 9-10 O'Reillv v. Transworld Healthcare Inc LA? Del. Ch., 745 A.2d 902, Steele, V.C. (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Reeves v. Transn. Data Communications. Inc,, Del. Ch., 318 A.2d 147, Brown, V.C. (1974) ..,...,..............................,,........................................ 12 Schnell v. Porta Svs. Corn., Del. Ch., 1994 WL 148276, Hartnett, V.C. (Apr. 12, 1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27-31 Stroud v. Grace, Del. Supr., 606 A.2d 75 (1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Transamerica Corn. v. Reliance 1~;. Co. of Illinois Del. Super., 1995 WL 1312656, Coach, J. (A.ug.6, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 Weinberger v. Lorenzo, Del. Ch., 1990 WL 156529, Chand.ler, V.C. (Oct. 12, 1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Zimmerman v. Home Shounine lstwork. Inc,, Del. Ch., 1989 WL 102488, Jacobs, V.C. (Sept. 11, 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Zirn v. VLI Corn., Del. Supr., 681 A.2d 1050 (1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

STATUTES

15 U.S.C.A. $ 77p (Supp. 2000) ............................................................................................. 1.5 U.S.C.A. § 78bb (Supp. 2000) ...........................................................................................

18-19 18-19 17 17 .30

1.5 U.S.C.A. 0 772-l (1997) .......................................................................................................... 15 U.S.C.A. $j 78u-4 (1997) .......................................................................................................... 15 U.S.C.A. $78i (1997) .............................................................................................................

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TABLE OF AUTHORITIES (continued) Page OTHER

144 Cong. Rec. H11019-01, H11021 (daily. ed. Oct. 15. 1998) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 H.R. Rep. No. 104-369 (1995), rerxinted. in. 1995. U.S.C.C.A.N. . . . . . . . . . . . . . . . . . . . . . . . 17 730 . . . . . . . . . . . . . . . . .

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I.

INTRODUCTION

The complaint in the present case attempts to assert various claims against Rite Aid Corporation ("Rite Aid"), certain present and former directors of Rite Aid and KPMG, the former independent auditor of the financial statements of Rite Aid.' Specifically, plaintiffs complaint alleges claims for equitable fraud and common law fraud against all of the defendants, a claim for breach of fiduciary duty against the current and former directors of Rite Aid and a claim for aiding and abetting breach of fiduciary duty against KPMG. KPMG submits that all of plaintiffs claims should be dismissed as a matter of law for the following reasons: First, in substance, plaintiff attempts 1:o allege a fraud on the market inducing Rite Aid shareholders to hold their shares through the alleged class period. The Delaware Supreme Court, however, has held unequivocally that Delaware law does not recognize the fraud on the market presumption. Thus, plaintiff cannot bring her fraud claims in a class action as individual questions of law or fact as to the issue of reliance will necessarily predominate over common questions of law or fact. Indeed, with respect to all of plaintiffs claims, including the breach of fiduciary duty claims, individual questions of law or fact will inevitably predominate. Second, notwithstanding plaintiffs efforts to veil the substance of her claims, all of them are derivative in nature and thus are owned solely by the corporation. Such claims cannot be brought unless the plaintiff satisfies the threshold prerequisites of Chancery Court Rule 23.1. Plaintiff has not even attempted. to satisfy these threshold requirements to commence a derivative action.

1

A copy of the complaint is included in the Compendium as Exhibit "A." The Compendium also

contains copies of all of the unreported cases cited herein.

Third, plaintiff is not entitled to recover, as a matter of law, the damages she seeks. Plaintiffs claim boils down to the proposition that she is entitled to recover damages resulting from the lost opportunity to sell Rite Aid stock at an allegedly artificially inflated price - a form of damages which courts consistently have refused to consider as a compensable loss. Fourth, if this claim brought on behalf of a class of holders of shares of a Delaware corporation may be maintained then such a state court class action could be maintained parallel to any private securities lawsuits based on alleged misrepresentations. To permit such an expansion of Delaware common law would invite abusive litigation and frustrate the objectives of federal securities reform legislation. Fifth, plaintiffs claim for breach of fiduciary duty against the individual defendants fails properly to allege the essential elements of causation and damages, and with respect to the claim for aiding and abetting the breach of fiduciary duty, fails properly to allege specific facts from which the Court could infer that IU?MG had knowledge of any breach of fiduciary duty. Finally, significant considerations of comity and the efficient and orderly administration of justice require that the present action be dismissed or at the very least stayed pending the resolution of prior-pending federal securities and derivative litigation, all of which has been consolidated in the United States District Court for the Eastern District of Pennsylvania.

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11.

NATURE AND STAGE OF PROCEEDINGS A. The Parties

The named plaintiff in the present action is an individual who held shares of common stock in Rite Aid from prior to March 1, 1997 through and including October 18, 1999 ("Holder Class Period"). She brings this lawsuit as a class action on behalf of herself and all other persons who held the common stock of Rite Aid during the Holder Class Period. Defendant Rite Aid is a Delaware corporation having its principal place of business in Camp Hill, Pennsylvania. The company primarily operates chains of retail drugstores in the United States. The complaint also names seven individual defendants. Three of the individual defendants are current members of Rite Aid's Board of Directors while the remaining four are former members of the board.* KPMG is a Delaware limited liability partnership. KPMG, an independent public accounting firm, audited the financial statements of Rite Aid for the years at issue in the complaint.

B. Procedural Historv/Backm&

Plaintiff filed the complaint in the present action on October 25,200O. Plaintiffs complaint attempts to allege causes of action for: (1) breach of fiduciary duty (Compl. 77 192196); (2) aiding and abetting breach of fiduciary duty (id. f[lj 197-204); (3) equitable fraud (id. 11 205-209); and (4) common law fraud (id. W210-214). The breach of fiduciary duty claim is alleged only against the individual defendants and the aiding and abetting breach of fiduciary

2

The three defendants who are current members of the board are: (1) William J. Bratton, President, Brattton Group LLC.; (2) Nancy A. .Lieberrnan, Partner, Skadden, Arps, Slate, Meagher & Flom, LLP; and (3) Leonard N. Stem, Chairman of the Board and Chief Executive Officer of the Hartz Group, Inc. The four defendants who are former board members are: (1) Martin L. Grass, the former Chairman of the Board and Chief Executive Officer of Rite Aid; (2) Timothy J. Noonan, the former

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claim is brought only against KPMG. Both fraud claims are brought against all of the defendants. On and after March 15, 1999, but prior to the commencement of the present action, various Rite Aid shareholders filed numerous class and individual actions against Rite Aid and

certain Rite Aid officers and directors in the United States District Court for the Eastern District of Pennsylvania.3 These actions vvere subsequently consolidated under the caption In re Rite Aid Cornoration Securities Litigation, Civil Action No. 99-1349. The class action plaintiffs amended their complaint on March 10, 2000 to include claims against KPMG. On May 14, 1999, also prior to the filing of the present action, the Laborers Local 1298 Annuity Fund, a shareholder of Rite Aid, filed a derivative action in the United States District Court for the Eastern District of E'ennsylvania. The plaintiff amended its derivative complaint to include claims against KPMGs4 This case was subsequently consolidated with another derivative action under the caption Laborers Local 1298 Ann&v Fund v. Alex Grass. et al., Civil Action No. 99-2493. On May 17, 1999, the class and individual actions and the Rite Aid shareholders' derivative suits pending in the Eastern District of Pennsylvania were consolidated for purposes of discovery and trial. These act.ions are currently captioned In Re Rite Aid Corooration Securities Litigation, Civil Action No. 99-1349.5

President and Chief Operating Officer of Rite Aid; (3) Franklin C. Brown, the former Vice-Chairman of Rite Aid's Board of Directors; and (4) Preston R.. Tisch, a former director. 3 A copy of the Third Consolidated Amended Class Action Complaint is included in the Compendium as Exhibit "B." 4 "C." 5 There is also a case currently pending in Delaware captioned In re Rite Aid Cornoration Derivative Litigation, Civil Action No. 17440~NC. The plaintiffs in the Delaware action filed their -4A copy of the Third Amended Derivative Complaint is included in the Compendium as Exhibit

On June 6,2000, Defendant Rite Aid tiled a motion with the Judicial Panel on Multidistrict Litigation requesting transfer of a. case from the Northern District of Florida to the Eastern District of Pennsylvania for purposes of pretrial proceedings. The Panel granted the motion6 On November 8,2000, the Florida case was consolidated with the other cases pending in the Eastern District of Pennsylvania.'

complaint on January 2 1,200O. By agreement of the parties, the defendants have an indefinite extension of time in which to respond to this complaint.

6

A copy of the order granting the transfer is included in the Compendium as Exhibit "D."

7 To date, a total of twenty-one individual and class actions and two derivative actions have been filed in federal court. All of these cases have been consolidated under the caption In re Rite Aid Cornoration Securities Litigation, Civil Action No. 99-1349. -5

III.

STATEMENT OF FACTS

In her complaint, plaintiff maintains that Rite Aid and the individual defendants made material misrepresentations concem:ing the company's operations and financial performance, including misstatements in Rite Aid's annual financial statements for the fiscal years ended March 1, 1997, February 28, 1998 and February 27, 1999. Plaintiff further alleges that Rite Aid and the individual defendants failed to disclose that they inflated the reported earnings of Rite Aid during the Holder Class Period by engaging in a variety of improper and illegal business and employment practices. KPMG was the independent auditor which examined Rite Aid's financial statements. KPMG's audit reports stated that KPMG's audits were conducted in accordance with Generally Accepted Auditing Standards ("GAAS"), and that, in KPMG's opinion, Rite Aid's financial statements were fairly presented in accordance with Generally Accepted Accounting Principles ("[email protected]"). Plaintiff charges KPMG with disregarding facts and deliberately turning "a blind eye to numerous red flags" which indicated that the financial statements were materially misstated. Compl. fi 173. As a remedy for these alleged wrongs, the complaint seeks damages "that plaintiff and class members suffered individually in their capacities as shareholders of Rite Aid." Compl. 12. Plaintiff asserts that she and the putative class members were harmed because "they lost the value of what was represented to them versus the actual value of their Rite Aid stock once the truth was known." a Although the complaint appears to be intentionally vague about what those damages might be, the only allegations from which one could attempt to quantify damages concern a diminution in Rite Aid's stock price. See. e.e., Compl. f 39 ("a Holder Class Period high of $50.94 per share"), 77 41,43,45 (measuring percentage declines Tom the Holder Class

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Period high), and fi 47 ("Rite Aid's stock price has been trading in the $2 - $3 per share range recently.").

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IV.

OUESTIONS [email protected]

A. B.

Should the Court dismiss plaintiffs complaint because the claims asserted therein are not properly assertable in a class action? Should the Court dismiss plaintiffs complaint because the claims asserted therein are derivative causes of action which cannot be brought as direct claims? Should the Court dismiss plaintiffs complaint because the damages which plaintiff seeks to recover are not legally cognizable? Should the Court dismiss plaintiffs complaint because the claims asserted therein are invalid under the Securities Litigation Uniform Standards Act? Should the Court dismiss plaintiffs cause of action against KPMG for aiding and abetting the individual defendants' breaches of fiduciary duty for failing to plead the requisite causation? Should the Court dismiss or stay the present action in favor of the prior pending consolidated actions in the Eastern District of Pennsylvania?

C. D. E.

F.

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V.

ARGUMENT A. This Court ShouldJismiss Plaintiff's Claims Because Thev Are Not ProDerlv Assertable in a Clas Action 1. Plaintiffs Equitable Fraud and Common Law Fraud Claims Are Not Properly Assertable in a Class Action

It is well settled under Delaware law that a class action may not be maintained where a plaintiff alleges causes of action for equitable fraud or common law fraud.' Malone v. Brincat,

Del. Supr., 722 A.Zd 5, 13 & n.47 (1998); & v. VLI Corp., Del. Supr., 681 A.2d 1050, 1061 (1996); Gaffin v. Teledvne, Inc., Del. Supr., 6 11 A.2d 467,474 (1992). The Supreme Court has

reasoned that such claims are inappropriate in class actions because individual questions of law or fact, particularly as to the element of justifiable reliance, will inevitably predominate over common questions of law or fact.' Malone, 722 A.2d at 14 n.47; a, 681 A.2d at 1061; Gaffin,

611 A.2d at 474. Indeed, while sorne jurisdictions permit claims of fraud to be brought in a class

action under the theory that the plaintiffs can prove the element of reliance on a classwide basis

by showing that the defendant committed a fraud on the market, Delaware has explicitly rejected the fraud on the market presumption. Malone, 722 A.2d at 13; Gaftin, 611 A.2d at 474-75. Del. Ch., 2000 Univ In the recent case of Oliver v. BostonL,W I . 1 0 9 1 4 8 0 , a t * 1 O - l 1 , Steele, V.C. (July 25, ZOOO), the Court of Chancery granted a motion to dismiss equitable and common law fraud claims as part of an alleged class action. The court found that it was entirely

The elements of common law fraud are as follows: (1) a false representation, usually one of fact, made by the defendant; (2) the defendant's knowledge or belief that the representation was false, or was made with reckless indifference to the truth, (3) an intent to induce the plaintiff to act or to refrain from acting; (4) the plaintiffs action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of such reliance. &i, 68 1 A.2d at 1060-61. Unlike common law fraud, equitable t?aud does not require proof that the defendant knew or believed the statement to be false or that the statement was made in reckless disregard of the truth. I& at 106 1. 9 Pursuant to Chancery Court Rule 23, in order for the plaintiff to maintain a class action in the instant case, the Court would have to find that "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members."

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proper to dismiss the claims at this early stage of the litigation. Writing for the court, then Vice Chancellor Steele explained: This purported class action is not the appropriate vehicle to advance such individually unique claims. Allowing these claims to proceed would frustrate the inherent practical benefits of a class action. . . . Accordingly, I dismiss plaintiffs negligent misrepresentation and equitable fraud claims. Of course, any individual plaintiff is free to refile any of these claims in the appropriate forum, and in so doing plead specific facts detailing individual justifiable reliance . . . . Oliver -2 2000 WL 1091480, at *I 1. In this case, plaintiff raises causes of action for equitable and common law fkaud in Counts III and IV of her complaint. Compl. l/`\ 205214. Despite Delaware's unambiguous prohibition against raising such claims in the context of a class action, plaintiff states outright that she seeks to bring the case "as a class action on behalf of herself and all other persons who held common stock in Rite Aid Corporation" during the Holder Class Period. Compl. 7 1. Because claims for equitable and common law fraud cannot be maintained in a class action, plaintiff fails to state claims upon which relief can be granted. Accordingly, this Court should dismiss all of plaintiffs fraud claims.

2. Plaintiffs Fiduciary Duty Claims Are Not Properly Assertable in a Class Action

Plaintiffs breach of fiduciary duty claim should also be dismissed on the ground that a class action is not the appropriate vehicle to assert this claim. Indeed, as the Delaware Supreme Court recently made clear, when bringing a class action, a plaintiff must assert a cause of action and articulate a remedy that is "con.sistent with Court of Chancery Rule 23, and our decision in T h u s , Malone,d722iA.2d at 14. e s t i o n s o f l a w o r f a c t w i l l i n e v i t a b l y Gaftin." i f i n i v d u a l q u predominate over common questio:ns of law or fact, the claim should be dismissed. See id.; Gaffn Oliver -9 611 A.2d at 474. Y-,2000 WL 1091480, at *I 1.

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Here, plaintiff attempts to bring a breach of fiduciary duty claim as a class action on behalf of all persons who held the common stock of Rite Aid from prior to March 1, 1997 through and including October 18, 1999. Compl. fi 1. She seeks damages for "investment opportunity losses" and "benefit of the bargain damages" which "at a minimum" include "the value of what was represented to them versus the actual value of their Rite Aid stock once the truth was known." Compl. 7 2. Plamtiff, in effect, seeks to recover a specific amount of damages even though her theory of relief is premised on the assertion that each Rite Aid shareholder would have sold his or her stock on some indefinite date, at some artificially inflated and unspecified price, and thereby would have realized a profit (or at least reduced a loss), if the true financial condition of Rite Aid had been known. Not only would the timing of each shareholder's hypothetical sale of stock be an essential element of the claim, but the reasons that each stockholder did not in fact sell on any given date would also be critical. It goes without saying that each shareholder's claim would hinge upon that particular shareholder's individual circumstances, m, tolerance for risk. Given that a determination of each shareholder's claim would require an in depth analysis of the particular circumstances sunounding his investment, individual questions of fact would inevitably predominate over comm.on ones. This Court should therefore not permit plaintiffs classwide breach of fiduciary claim to proceed. Without a claim for breach of fiduciary duty, there can be no related claim for aiding and abetting such a breach. Malone, 722 A.2d at 14. Accordingly, the Court should al.so dismiss plaintiffs claim against KPMG for aiding and abetting the alleged breach of fiduciary duty.

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B.

This Court ShouldDismiss All of the Claims Because Thev Are Derivative Causes of Action Which Cannot Be Brought as a Direct Claim

Courts have long acknowledged a sharp distinction between derivative and direct actions in corporate litigation. See, e.g., &imes v. Do&d, Del. Supr., 673 A.2d 1207, 1213 (1996). A derivative action is deemed to belong to the corporation and may only be maintained on behalf of the corporation. Mazzetti v. Shenl&, Del. Ch., 1986 WL 9199, at *2, Allen, C. (Aug. 26, 1986); Reeves v. Transu. Data Communications, Inc., Del. Ch., 318 A.2d 147, 149, Brown, V.C. (1974). A plaintiff who wishes to maintain such an action must follow the procedural requirements set forth in Chancery Court Rule 23.1. Grimes, 673 A.2d at 12 16. A direct action is owned by the shareholder himself. Mazzetti, 1986 WL 9199, at *2; A shareholder atcan bring a direct action without being bound by the Reeves, 3 18 A.2d 149. procedural prerequisites of a derivative action, and thus, can assert his claims more freely. Weinberger v. Lorenzo, Del. Ch., 1990 WL 156529, at *2, Chandler, V.C. (Oct. 12, 1990). In Malone, the Supreme Court held that the trial court properly dismissed an action brought by a group of shareholders on the ground that their claim was derivative and, therefore, had to be brought on behalf of the corporation. 722 A.2d at 14. In Malone, as here, the shareholders tiled an action against the directors of the corporation, alleging that the directors breached their fiduciary duties by disseminating information which contained overstatements of the company's financial performance and that KPMG aided and abetted these breaches of fiduciary duty. The plaintiffs further alleged that the defendants' actions resulted in the corporation losing virtually all of its value. The director defendants and KPMG filed motions to dismiss, which the Court of Chancery granted. On appeal, the Supreme Court affirmed the dismissal of the complaint. The Court explained: -12-

The allegation in paragraph 3 that the false disclosures resulted in the corporation losing virtually all its equity seems obliquely to claim an injury to the corporation. The plaintiffs, however, never expressly assert a derivative claim on behalf of the corporation or allege compliance with Court of Chancery Rule 23.1, which requires pre-suit demand or cognizable and particularized allegations that demand is excused. . . . The Court of Chancery properly dismissed the complaint before it against the individual director defendants . . . . Malone, 722 A.2d at 14. The Supreme Court did not foreclose the possibility of a direct cause of action, but emphasized that any alleged class action remedy must be "properly assertable" and "consistent with Court of Chancery Rule 23 and our decision in Gaffin."" & at 14. With respect to Kl?MG, the {Court held that "[wlithout a well-pleaded allegation in the complaint for a breach of fiduciary duty, there can be no claim for aiding and abetting such a breach, Accordingly, the plaintiff's aiding and abetting claim against KPMG was also properly dismissed." Id. at 14-15. In the instant action, plaintiff has attempted to avoid the holding of Malone by labeling her claims as individual claims for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, equitable fraud and common law fraud." The predicate for each of these claims is the allegation that "defendants issued and caused to be disseminated to the plaintiff and class members, all of whom were shareholders in Rite Aid, false and misleading annual reports, loK's, other shareholder communications, financial statements and audit opinions on financial statements and related auditor's letters certifying the accuracy of these financial statements all of

IO

As noted above, the Court in Gaffin held that "[a] class action may not be maintained in a purely

common law or equitable tiaud case since individual questions of law or fact, particularly as to the

element of justifiable reliance, will inevitably predominate over common questions of law or fact." 611 A.2d at 474. II It is well settled that in distinguishing between individual and derivative claims the intention of the plaintiff does not control. timer v. Western Pac. Indus.. Inc., Del. Supr., 546 A.2d 348,352 (1988); Mazzetti, 1986 WL 9199, at *2. Instead, the Court determines the nature of the action from the body of the complaint. Kramer 546 A.2d at 352; Mazzetti, 1986 WL 9199, at *2. -> -13-

which falsely portrayed Rite Aid's revenues, earnings and resultant financial condition." Compl. ll 1. Nowhere in the complaint does plaintiff allege either of the two types of "special injuries" giving rise to direct causes of action recognized under Delaware law, namely: (1) an injury suffered by the plaintiff that was not suffered by all of the stockholders generally; or (2) a wrong involving a contractual right of a stockholder which exists independent of any right of the corporation. Grimes, 673 A.2d at 1213. To the contrary, plaintiff avers that she and the other stockholders suffered an injury "because they lost the value of what was represented to them versus the actual value of Rite Aid stock once the truth was known." Compl. f 2. This alleged loss is indistinguishable from an aheged diminution in the value of Rite Aid. Such an injury would and did fall upon all of Rite Aid's stockholders who held their shares from March 1, 1997 through October 18, 1999 in an amount equal to their pro rata share of the corporation. Moreover, this alleged injury does not implicate any of the shareholders' contractual rights. As such, the complaint is devoid of any properly assertable allegations of an injury that would entitle plaintiff to pursue her claims in a shareholder class action. See Malone, 722 A.2d at 14; see also Linman v. Batterson, Ill. App. Ct., 2000 WL 1459807, at * 4 (Sept. 29,200O) (applying Delaware law and holding that plaintiffs claims were derivative where "plaintiffs' alleged injury rests on allegations that some form of corporate mismanagement lowered the value of plaintiffs' stock"). Accordingly, this Court should dismiss all of the claims raised in the complaint. C.

This Court Shotid Dismiss All of the Claims Because Plaintiff Seeks Lost Profit Ooeortungtv Damages Which Are Not LePallv Cotmizable

Boiled down to its essence, plaintiff's complaint seeks damages resulting from the lost opportunity to sell Rite Aid stock. while its price was allegedly artificially inflated during the Holder Class Period. Thus, plaintiff seeks damages for the lost opportunity to obtain insider -14-

trading profits, to which no one would be 1awMly entitled. Accordingly, this Court should dismiss plaintiffs complaint in its entirety for failing to state a claim upon which relief can be granted. See Court of Chancery Rule 12(b)(6). Plaintiffs complaint defines the damages being sought as, at a minimum, the loss in value of what was represented to the plaintiff and the putative plaintiff class versus the actual value of their Rite Aid stock once the truth was known. I2 Compl. T[ 2. Thus, the damages which plaintiffs complaint seeks to recover necessarily consist of the difference between the allegedly artificially inflated prices of Rite Aid stock during the Holder Class Period (a, Compl. 7 39, "a Holder Class Period high of $50.94 per share) and the price of Rite Aid's stock once all of Rite Aid's alleged misrepresentations had become known by the end of the Holder Class Period (g, Compl. f 147, "Rite Aid's stock price has been trading in the $2-$3 per share range recently"). An almost identical theory of recovery was soundly rejected by the United States Court of Appeals for the Second Circuit in Levine v. Seilon, Inc., 2d Cir., 439 F.2d 328 (1971). In Levine, the plaintiff initiated a stockholder action alleging that his reliance on certain misrepresentations made by the defendant corporation caused him to retain his stock until after the fraud became known to the public, which deprived him of the opportunity to sell his stock at a higher price during the alleged class period.13 In affirming the dismissal of the action, the Plaintiffs complaint is devoid of any allegation that she or any of the putative plaintiff class members she seeks to represent purchased their shares of Rite Aid stock at an artificially inflated price. Nor does plaintiffs complaint inc1ud.e an allegation that the price of Rite Aid stock was either artificially inflated or depressed at the close of the class period on October 18, 1999. Thus, plaintiff does not contest the fact that she and all of the members of the putative plaintiff class that she seeks to represent bought Rite Aid stock at its fair market value and, as of October 18, 1999, held Rite Aid stock whose price matched its fair market value. The absence of such an allegation is understandable, since it would, in all likelihood, result in removal of the action to federal court pursuant to section 78bb(f) of the federal Securities Litigation Uniform Standards Act of 1998, Pub.L. 105-353, 112 Stat. 3227 (1998). I3 Levine's complaint sought recovery for alleged violations of Sections IO(b) and 14(e) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule lob-5. -15I2

Second Circuit held that the plaintiff could not establish that he suffered a compensable loss as a W r t n at o result of the defendant's alleged misrepresentations. Levine,i 439 iF.2d g 333.n b e h a l f

of the Second Circuit in Levine, Judge Friendly explained that the plaintiff "could hardly be heard to claim compensation for the premium he might have extracted from some innocent victim if he had known of the fraud and the buyer did not." Id. In addition, Judge Friendly noted that the plaintiff could not establish that the defendant corporation's alleged misrepresentations caused him damages, because if the misrepresentations had not been made, then the price of his stock would not have been artificially inflated in the first place, and there would have been no gain to be realized by a sale of the stock. & at 334. The Fifth and the Eighth Circuits have likewise refused to recognize claims for damages based on alleged lost opportunities to sell stocks at artificially inflated prices created by alleged misrepresentations or non-disclosures. See Qocker v. Federal Deposit Ins. Co., 5th Cir., 826 F.2d 347, 350-52 (1987); Arent v. Distribution Scis.. Inc., 8th Cir., 975 F.2d 1370, 1372-73 (1992); see also Chanoff v. Unit& States Surgical Corp., D. Corm., 857 F. Supp. 1011, 1018, affd, 2d Cir., 31 F.3d 66 (1994). This Court should adopt the common-sense rationale underlying the decisions in Levine and its progeny that plaintiffs cannot claim the right to profit from what they themselves allege was an unlawfully inflated stoclc price, and therefore should dismiss plaintiffs complaint in its entirety for failure to state a claim upon which relief can be granted.

D. This Court Should Refuse to Recognize Plaintiff's Fraud and Breach of Fiduciarv Dutv Claims as Valid Under the Securities Litigation Uniform Standards Act

Congress enacted the federal Private Securities Litigation Reform Act of 1995, (the "Reform Act"), Pub.L. 104-67, 109 Stat. 737 (1995), in an attempt to curb the deleterious effects of abusive and meritless private securities lawsuits on the integrity of American capital markets. -16-

See H.R. REP. No. 104-369 (1995) reprinted irk 1995 U.S.C.C.A.N. 730 (joint explanatory statement of the Committee of Conference) ("Congress has been prompted by significant evidence of abuse in private securities lawsuits to enact reforms to protect investors and maintain confidence in our capital markets.`"). To that end, the Reform Act established, inter alia, heightened pleading requirements for private securities lawsuits brought in federal court, a stay of discovery pending motions to dismiss and a safe harbor provision for certain forward-looking statements. See 15 U.S.C.A. $0 7'72-1,7&r-4 (1997). By 1998, it had become evident to Congress that the objectives of the Reform Act were being frustrated by a shift in securities class action lawsuits from federal to state courts. By simply framing their claims under state law and filing their securities class action lawsuits in state, rather than federal court, plaintiffs were avoiding the requirements of the Reform Act. See 144 CONG. REC. H11019-01, H11021 (daily. ed. Oct. 15. 1998) (joint explanatory statement of the Committee of Conference) ("[Slince passage of the Reform Act, plaintiffs lawyers have sought to circumvent the Act's provisions by exploiting differences between Federal and State laws by filing frivolous and speculative lawsuits in State court, where essentially none of the Reform Act's procedural or substantive protections are available."). In an attempt to prevent the state court forum-shopping which `was robbing the Reform Act of its effectiveness, Congress enacted the Securities Litigation Uniform Standards Act of 1998, (the "Uniform Standards Act"), Pub.L. No, 105-353, 112 Stat. 3227 (1998). In order to accomplish its stated goal, the Uniform Standards Act required securities class actions involving the purchase or sale of nationally traded securities, based upon false or misleading statements, to be brought exclusively in federal court under federal law. The Uniform Standards Act further provided for the removal to federal court

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of such class actions brought in state courts and. under state law. & 15 U.S.C.A. $6 77p, 78bb (Supp. 2000). In Malone, the Supreme Court reaffirmed that fraud on the market claims are regulated by federal law. Malone, 722 A.2d at 12. However, the Court also noted the complementary roles played by state and federal law in regulating corporate disclosures, &. at 13, and the two important exceptions, known as the Delaware carve-outs, which preserve the traditional role of state corporate law, u Because the Uniform Securities Act was not yet effective on the date the Malone complaint was filed, the Supreme Court was not called upon to decide the effect of the Act on a holders' class action complaint: "We need not decide at this time, however, whether this new Act will have any effect on this litigation if plaintiffs elect to replead . . . ." 722 A.2d at 13 n. 42. By bringing her action as a holder, rather than a purchaser or seller of securities, plaintiff has avoided application of the removal provisions of the Uniform Standards Act. See Gordon v. Buntrock, N.D. Ill., 2000 WL 556763 (April 28,200O); Lalondriz v. USA Networks, Inc., S.D.N.Y., 68 F. Supp. 2d 285 (1999). However, that does not answer the question, expressly reserved by the Supreme Court in Malone, whether the Uniform Securities Act (which does apply to this case) should bar "holder" class action claims. Because plaintiffs claims inherently create substantial potential for abuse, this Court should not permit them to proceed. First, "holder" claims such as those alleged here could be brought parallel to every class action involving the purchase or sale of securities based upon allegedly false or misleading statements. Indeed, the Court may take notice that many of the averments in the Manzo complaint have been lifted, practically verbatim, from the previously filed federal complaint. Comnare, s.. Manzo Compl. 11148 - 154, 155 - 191 (included in Compendium as Exhibit "A")

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with In Re Rite Aid Cornoration Se&urities Liti& Third Am. Compl. 77 44 - 150, 152 - 188 (included in Compendium as Exhibit. "B"). Thus, permitting plaintiff to go forward on a classwide basis with her state common law fraud and breach of fiduciary claims will ultimately result in frustration of the objectives of both th.e Uniform Standards Act and the Reform Act.14 Second, it should be noted that the Manzo complaint falls outside the scope of the Delaware carve-outs from the Uniform Securities Act codifying the two exceptions to the rule that securities class actions invo1vin.g the purchase or sale of nationally traded securities based upon false or misleading statements be brought under federal law. The first carve-out permits class actions to be brought in state court which are exclusively derivative brought by one or more shareholders on behalf of the corporation. &e 15 U.S.C.A. $0 77p-(f)(2)(B), 78bb-(f)(5)(C) (Supp. 2000). The second carve-out preserves the availability of state court class actions, where the state law claim arises out of a request for shareholder action. See 15 U.S.C.A. @ 77p(d)( l)(B)(ii)(II), 78bb-(f)(3)(A)(ii)(II)(bb) (Supp. 2000). Manzo has not been brought as an "exclusively derivative action"; hence, the first carveout does not apply. See 15 U.S.C.A. 40 77p-(f)(2)(B), 78bb-(f)(5)(C). Manzo also does not allege any connection to decisions of Rite Aid shareholders "with respect to voting their securities, acting in response to a ,tender or exchange offer, or exercising dissenters' or appraisal rights." See 15 U.S.C.A. 09 77p-(d)(l)(B)(ii)(II), 78bb-(f)(3)(A)(ii)(II)(bb). Thus, the second

It bears noting that at least one federal district court has held that "the language of the Delaware carve-out [is] unambiguous as to its lack of a venue restriction." See Gibson v. PS Groue Holdinas. Inc., S.D. Cal., 2000 WL 777818, *6 (June 14,200O). Assuming that the Gibson Court's interpretation of the Delaware carve-outs is correct, then. a Manzo-like class action purportedly based on the common law of the State of Delaware could be brought in any of the 50 states parallel to a covered federal securities class action involving a Delaware corporation. -19-

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carve-out does not apply." This Court should avoid a construction of state law which would produce a result contrary to a controlling federal statute. Comnare Bush v. Gore, 121 S. Ct. 525, 533 (2000) (plurality opinion). Third, even placing the Uniform Securities Act aside, the policy considerations underlying the federal rule against holders' class actions are sound and should be applied to this case. In Blue Chin Stamns v. Mara Drug Stem, 42 1 U.S. 723 (1975), the United States Supreme Court formally adopted the "Birnbau~ rule,"i6 limiting standing to bring an implied private action for violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities Exchange Commission Rule lob-5 to actual purchasers or sellers of securities. In so ruling, the Blue ChiD Court found that policy considerations, in conjunction with long-standing precedential support for the Bimbaum rule and the consistency of the rule with what could be gleaned of the intent of Congress, tipped the scales against permitting non-purchasers or nonsellers of securities to bring implied private actions under Section 10(b) and Rule lob-5. Id- at 749. Specifically, the Blue Chip Court noted that without the Bimbaum Rule there would be an increased potential for nuisance or "strike" suits, because private actions alleging violations of Section 1 O(b) and Rule 1 Ob-5 would "turn largely on which version of a series of occurrences the jury may decide to credit."17 & at 742. The Blue Chin Court explained that absent the This factor distinguishes the present case from Gibson, cited in footnote 14, above. Gibson involved a proxy solicitation in response to an acquisition offer; in that case, a shareholder vote was requested, and defendants did not dispute that the requirements for the second carve-out were met. Gibson -92000 WL 777818, at *l & *4,. Here, in contrast, the second carve-out does not apply. 1.5 Bimbaum v. Newnort Steell&, 2d Cir., 193 F.2d 461 (1952).

17 In this regard, the Blue ChiE Court noted that there is an inhemnt potential for nuisance or "strike" suits in the field of federal securities laws governing the disclosure of information, because "even a complaint which by objective standards may have very little chance of success at trial has a settlement value to the plaintiff out of any proportion to its prospect of success at trial so long as he may prevent the suit from being resolved against him by dismissal or summary judgment." a at 740. -2oIS

Bimbaum rule: Plaintiffs entire testimony would be dependent upon uncorroborated oral evidence of many of the crucial elements of his claim, and still be sufficient to go to the jury. The jury would not even have the benefit of weighing the plaintiff's version against the defendant's version, since the elements to which the plaintiff would testify would be in many cases totally unknown and ,unknowable to the defendant. The very real risk in permitting those in respondent's position to sue under Rule lob-5 is that the door will be open to recovery of substantial damages on the part of one who offers only his own testimony to prove that he ever consulted a prospectus of the issuer, that he paid any attention to it, or that the representations contained in it damaged him. Id. at 745-46. In the instant action, plaintiff alleges that the fraud of the defendants and the breaches of fiduciary duty of the individual defendants caused her not to purchase or sell her stock, but simply to retain it. Thus, the success or failure of plaintiffs fraud and breach of fiduciary duty claims will depend in large part on her own uncorroborated testimony as to: (1) whether she actually read and/or relied on the financial statements distributed by the Rite Aid defendants; and (2) when she supposedly would have decided to sell her Rite Aid stock had she known the true financial condition of the company. Therefore, her claims implicate the same policy considerations which influenced the United States Supreme Court to formally adopt the Bimbaum rule and limit standing to bring implied private actions for violations of Section 10(b) of the Securities Exchange Act of I934 and SEC Rule 1 Ob-5 to purchasers and sellers of securities. Permitting plaintiff to go forward with her fraud and breach of fiduciary duty claims will both frustrate the objectives of the Uniform Standards Act and the Reform Act, and open the door to the same proof problems and increased potential for nuisance and "strike" suits which prompted the United States Supreme Court to formally adopt the Bimbaum rule. For these

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reasons as well, this Court should dismiss plaintiffs complaint for failing to state a valid claim for relief under Delaware common law.

E. This Court ShouldBismiss Plaintiff's Cause of Action Against KPMG for Aidiw and Abettiw the Individual Defendants' Breaches of Fiduciarv Duty for Failure to State21 Claim Unon Which Relief Can Be Granted

Plaintiff has failed to plead the requisite causation to sustain her breach of fiduciary claim against the individual defendants. As a result, plaintiff also fails to state a claim upon which relief may be granted against KPMG for aiding and abetting the breaches of fiduciary duty. In addition, plaintiffs claim against KPMG for aiding and abetting the individual defendants' breaches of fiduciary duty rests ahnost entirely on conclusory allegations, and therefore fails to meet the pleading requirements of Court of Chancery Rule 12(b)(6). Accordingly, plaintiffs claim against KPMG for aiding and abetting the individual defendants' breaches of fiduciary duty should be dismissed. For purposes of a motion to dismiss under Chancery Court Rule 12(b)(6), the Court must assume the truth of all well-pleaded, non-conclusory allegations found in the plaintiffs complaint and must extend the benefit of all reasonable inferences that may be drawn therefrom in favor of the plaintiff in determining whether the complaint states a claim upon which relief may be granted. Loudon v. Arch%Daniels-Midland Co., Del. Supr., 700 A.2d 135, 140 (1997). However, mere conclusory allegations devoid of factual details to support an allegation are not to be accepted as true, and necessarily fail to meet the pleading requirement needed to survive a Rule 12(b)(6) motion to dismiss. Jackson Nat'1 Life Ins. Co. v. Kennedv, Del. Ch., 741 A.2d 377, 386,392, Steele, V.C. (1999) (citations omitted). In her complaint, plaintiff alleges that the individual defendants breached their fiduciary duties by failing to "accurately and truthfully report the financial condition of Rite Aid." Compl. 1 194. Those same misrepresentations form the basis of plaintiffs dual fraud counts against the

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individual defendants. Importantly, nowhere in her complaint does plaintiff allege that she and/or the putative plaintiff class suffered compensable injuries as a result of the individual defendants' alleged breaches of their fiduciary duties, as distinct from injuries resulting from the individual defendants' alleged fraud. Plaintiff's breach of fiduciary duty claim against the individual defendants therefore fails for lack of causation, because "a well-pleaded request for more than nominal damages for the breach of the duty of disclosure arising from the nondisclosure of wrongdoing that underlies an accompanying claim . . . will require a plaintiff to plead that the disclosure violation created a h.arm discrete from the harm caused by the underlying wrongdoing . . in order for the disclosure claim to survive a motion to dismiss." O'Reillv v. Transworld Healthcas. Inc., Del. Ch., 745 A.2d 902,919, Steele, V.C. (1999) (citing Brown v. Perrette, Del. Ch., 1999 WL 342340, Chandler, C. (May 14, 1999)).18 Absent a viable claim for breach of fiduciary duty against the individual defendants, plaintiff cannot state a claim upon which relief can be granted against KPMG for aiding and abetting the individual defendants' breaches of fiduciary duty. See Malone, 722 A.2d at 14-15 Accordingly, plaintiffs aiding and abetting count against KPMG should be dismissed pursuant to Court of Chancery Rule 12(b)(6). This Court should also dismiss plaintiffs aiding and abetting claim against KPMG because plaintiff fails to allege specific facts to support the allegation that KPMG knowingly Plaintiffs breach of tiduci.ary claim against the individual defendants should also be dismissed as it is violative of the rule against "self-flagellation." As the Supreme Court held in Stroud v. Grace, Del. Supr., 606 A.2d 75,84 (1992), "a board is not required to engage in `self flagellation' and draw legal conclusions implicating itself in a breach of fiduciary duty from surrounding facts and circumstances prior to a formal adjudication ofthe matter." In the present action, plaintiffs breach of fiduciary duty claim hinges on the proposition that the individual defendants should have disclosed their own alleged fraud to plaintiff and the putative plaintiff class in Rite Aid's financial statements and reports for the fiscal years of 1997, 1998, and 1999. However, the alleged fraud has yet to be adjudicated. Thus, plaintiffs breach of fiduciary claim improperly calls for "self-flagellation" on the part of the individual defendants and is fatally flawed for this reason as well. -2318

participated in the individual defendants' alleged breaches of fiduciary duty. In order to state an actionable claim for aiding and abetting a breach of fiduciary duty under Delaware law, a plaintiff must plead: (1) the existence of a fiduciary relationship; (2) a breach of that relationship; (3) knowing participation in the fiduciary breach by the defendant; and (4) damages to the plaintiff which resulted from the concerted action of the fiduciary and the non-fiduciary. Jackson, 741 A.2d at 386. Furthermore, "`[a] court can infer a non-fiduciary's knowing participation only if a fiduciary breaches its duty in an inherently wrongful manner, and the plaintiff alleges specific facts from which that court could reasonably infer knowledge of the breach."' rd. at 392 (quoting &&nzahl v. Miller, Del. Ch., 1996 WL 494913, at *7, Steele, V.C. (Aug. 29,1996)). In her complaint, plaintiff alleges that KPMG knew or recklessly disregarded the fact that the individual defendants were engaging in a fraud upon the plaintiff and the putative plaintiff class, and knowingly or recklessly aided and abetted the individual defendants' breaches of fiduciary duty by failing to disclose the fraud. Compl. ljl200-202. In support of the foregoing conclusory allegations, plaintiff alleges the following facts: (1) that KPMG was "intimately involved in continuous audits and analyses of Rite Aid's financial statements;" (2) that KPMG "had numerous meetings with financial and accounting personnel at Rite Aid;" and (3) that KPMG "reviewed confidential internal financial documents and other documents and records of Rite Aid." Compl. 7 202. Even accepting all of these vague and conclusory factual allegations as true, plaintiff still fails to state a cause of action against KPMG for aiding and abetting the individual defendants' breaches of fiduciary duty. In every audit, the independent auditor assesses the presentation of the company's financial statements, meets with financial and accounting personnel and reads internal financial documents, records, and analyses, some of

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which may be confidential. Thus, plaintiffs conclusory allegations amount to no more than that KPMG conducted audits of Rite Aid"s financial statements. The mere fact that KPMG audited Rite Aid's financial statements, met with some financial personnel at Rite Aid, and reviewed some of Rite Aid's financial documents and records does not and can not give rise to an inference that KPMG actually knew that the individual defendants were breaching their fiduciary duties to the shareholders. There simply are no facts establishing KPMG's participation in the alleged fraud. Nor can a reasonable inference

be drawn from such allegations that JSPMG knowingly participated in the individual defendants' wrongdoing. I9 Accordingly, the Court should dismiss the aiding and abetting claim pursuant to Court of Chancery Rule 12(b)(6). F. The Instant Action Should be Dismissed or Staved Based on Prior-Pendiw, Substantiallv Similar Litigation in the United States District Court for the Eastern District of Pennsvlvania

As previously set forth, numerous individual and putative class actions were commenced against Rite Aid, several of Rite Aid's senior officials, and KMPG prior to the filing of the instant action. These prior-pending actions have been filed in or transferred by way of the

Judicial Panel on Multidistict Litigation to the United States District Court for the Eastern District of Pennsylvania and consolidated. In addition, two derivative actions brought on behalf of Rite Aid have been consolidated and are pending in the Eastern District of Pennsylvania.

Plaintiff does incorporate by reference all of the prior allegations contained in her complaint into her aiding and abetting count against KPMG. However, the complaint's prior factual allegations concerning KPMG do not pertain to most of the alleged Holder Class Period, and are almost universally conclusory in nature. Indeed, the only specifics alleged in support of her claims pertain to certain "red flags" that KPMG allegedly should have been aware of during its audit of Rite Aid's financial statements for the fiscal year ending on February 27, 1999. Compl. T[ 173. At most, plaintiffs allegations might support a negligence claim; they are insufficient on their face to show "knowing participation" in breach of fiduciary duty. Moreover, logic and common sense dictate that such "red flags," allegedly waving during KPMG's 1999 audit could not support a claim that KPMG aided and abetted the individual defendants' breaches of fiduciary duty occurring in 1997,1998 or 1999 prior to that audit. -25

19

These derivative actions have been consolidated with the individual and class actions for purposes of discovery and trial.20 This procedural history, along with considerations of comity and the necessities of an orderly and efficient administration of justice, require that the present action be dismissed or, at the very least, stayed until the prior-pending actions are resolved. Delaware courts have long endorsed the exercise of judicial discretion in favor of dismissing or staying a later-filed action in Delaware in favor of a prior-pending action in another jurisdiction. See McWaneAZast Iron Pine Corn. v. McDowell-Wellman Ene'e Co., Del. Supr., 263 A.2d 281 (1970); see also Davis Ins. Groun. Inc. v. Insurance Assoc.. Inc., Del. Ch., 1998 WL 892623, at *2, Steele, V.C. (Dec. 3, 1998). In McWane, the Supreme Court stated that such discretion should be exercised. freely where: (1) there is a prior action pending elsewhere; (2) in a court capable of doing prornpt and complete justice; (3) which involves the same parties and the same issues. & at 283. This concept, which has since been coined the "first-filed rule," is "impelled by considerations of comity and the necessities of an orderly and efficient administration of justice." &L

1. The Consolidated Actions in the Eastern District of Pennsylvania Constitute Prior Actions for Purposes of the McWane First-Filed Rule

The consolidated actions pending in the Eastern District of Pennsylvania were all filed and served well prior to the filing of the present action on October 25,200O. Accordingly, they constitute prior-pending actions fi)r purposes of the McWane first-filed rule.2' See McWane,

20

Another derivative action brought on behalf of Rite Aid is also pending in the Court of Chancery, at Civil Action No. 17440-NC. 21 The lack of a class certification in the consolidated class action litigation in the Eastern District of Pennsylvania does not render KPMG's request for dismissal or a stay premature, because the District Court has already selected the lead plaintiffs and lead counsel for the consolidated class action complaint.

See Caravetta v. McKesson HBOG&, Del. Super., 2000 WL, 1611101, at *3-5, Herhhy, J. (Sept. 7, 2000) (although courts ruling on a motion to dismiss and/or stay in favor of a prior-pending putative class

action must be sensitive to the adequacy of the purported class representatives and counsel prior to

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263 A.2d at 282 (filing and service of complaint constitutes "commencement of action" for purposes of the first-filed rule).

2. The United States District Court for the Eastern District of Pennsylvania is Capable of Doing Prompt and Complete Justice

There can be little question that the Uni.ted States District Court for the Eastern District of Pennsylvania is capable of doing prompt and complete justice. At present, all of the causes of action set forth in the consolidated class action. complaint in the Eastern District of Pennsylvania are based on violations of the federal securities laws, over which the federal courts have particular purview. Moreover, as is discussed more fully herein below, the issues and the parties to the consolidated actions pending in the Eastern District of Pennsylvania are substantially identical to those in the present action. Finally, to the extent that Delaware law is applicable to the consolidated derivative actions in the Easi.em District of Pennsylvania,22 or could become applicable to the consolidated class action litigation pending there, the Delaware courts have acknowledged the competency and qualifications of the federal courts to interpret and apply Delaware law, including Delaware law pertaining to fiduciary duty. See Derdiger, 2000 WL 1041216, at *6; Cot-win v. Silverman, Del. Ch., 1999 WL 499456, at *6, Chandler, C. (June 30, 1999); Schnell v. Porta Svs. COQ., Del. Ch., 1994 WL 148276, at *5, Hartnett, V.C. (Apr. 12, 1994).

certification, such concerns are not implicated where the court has already selected the most adequate lead plaintiffs and counsel for the action) (citing &diaer v. Tallman, Del. Ch., 2000 WL 1041216, Chandler, C. (July 20,200O)). The third amended consolidated derivative complaint in the Eastern District of Pennsylvania raises claims for waste of corporate resources, breaches of fiduciary duty, breaches of contract, and violations of Pennsylvania law, the Delaware Corporations Law and the Federal Securities Exchange Act.

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3.

The Issues and the Parties to the Actions are Identical for Purposes of the McWang First-Filed Rule

As noted above, the applicability of the McWane first-filed rule requires consideration of the identity between the issues and parties to the actions. However, complete identity is not required. Rather, substantial or fUnctiona identity between the issues and parties to the actions is sufficient for Mc Wane purposes. .See Corwin, 1999 WL 499456, at *4 n. 13 (citations omitted). This standard is met here, because both the issues and the parties to the prior-pending consolidated actions in the Eastern District of Pennsylvania are substantially identical to the issues and the parties to the present action. With respect to the identity between the issues, the Court of Chancery's decision in Schnell is particularly instructive. 3s 1994 WL 148276. In Schnell, the defendants moved to dismiss or stay the plaintiffs putative class action in favor of prior-pending consolidated putative class actions in the United States `District Court for the Eastern District of New York. The priorpending consolidated class action complaint alleged that the Porta Systems Corporation, its inside directors and one officer violated Sections 10(b) and 20 of the Federal Securities Act of 1934 and SEC Rule lob-5 by issuing a series of false and misleading statements and reports which failed to disclose material adverse information about the corporation's financial condition, operations, management and prospects. Relying on almost all of the same financial statements and reports, the plaintiff filed a class action complaint in the Court of Chancery naming Porta Systems and all of its directors as defendants, and alleging breaches of fiduciary duty and common-law fraud. In opposing defendants' motion to dismiss and/or for a stay, the plaintiff argued that the issues in the actions were not substantially identical because the federal securities claims contained in the consolidated class action complaint in the Eastern District of New York required -28-

different prima facie allegations than his common law claims of breach of fiduciary duty and fraud. Schnell 1994 WL 148276, at "4. The Court of Chancery disagreed, finding that the -9 causes of action all arose out of the same nucleus of operative facts, and were therefore substantially identical for purposes of the McWane first-filed rule. rd. In so finding, the Schnell Court reasoned that the claims in both actions were derived from the same basic allegations of fraud, misrepresentations and nondisclosures on the part of the defendants. Id. The present action raises claims for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, common law fraud and equnable fraud, whereas the consolidated class action complaint in the Eastern District of Pennsylvania raises claims for violations arising under Sections IO(b) and 20(a) of the Federal Securities Exchange Act of 1934 and SEC Rule lob-5. However, as in Schnell, the claims asserted in both complaints undeniably arise out of the same common nucleus of operative facts, and are derived from the same basic allegations; indeed, as demonstrated above, most of the allegations of the federal consolidated class action complaint and the Manzo complaint are practically identical.23 Thus, the issues presented in the actions are substantially identical for purposes of the McWane first-filed analysis. There is also substantial identity between the parties to the actions. The consolidated class action and derivative complaints in the Eastern District of Pennsylvania and plaintiffs class action complaint all name Rite Aid, Martin L. Grass, Timothy J. Noonan and KPMG as defendants. Alex Grass, Franklin C. Brown, Leonard N. Stem, Philip Neivert and Nancy A. Lieberman, all of whom are present or former officers and/or directors of Rite Aid named as defendants here, are named as defendants in the Eastern District of Pennsylvania derivative

23

Likewise, the claims raised in the consolidated derivative actions pending in the Eastern District of Pennsylvania and the derivative action pending in the Court of Chancery are derived from the same nucleus of operative facts. -29-

action as we11.24 The common primary defendimts establish substantial identity of the defendants for purposes of the McWane first-filed analysis, notwithstanding the fact that the actions each name one or more additional directors or officers of Rite Aid as individual defendants. See Schnell, 1994 WL 148276, at *5 (finding substantial identity of defendants in prior-pending federal action and later-filed Delaware action despite absence of certain directors as defendants in the federal action).25 As noted above, the putative plaintiff class in the consolidated class action complaint in the Eastern District of Pennsylvania consists of those individuals who purchased or acquired Rite Aid securities from May 2, 1997 to November 10, 1999, while the putative plaintiff class in the instant action consists of those individuals who held shares of Rite Aid stock from prior to March 1, 1997 through and including October 18, 1999. There is likely a considerable degree of overlap between the classes; many plaintiffs who purchased Rite Aid stock prior to, and held throughout, the Holder Class Period may have continued to purchase during the Holder Class Period, and would be members of both alleged classes. However, any differences in the potential memberships of the two putative plaintiff classes is immaterial, because, as evidenced by the

24

Some present or former Rite Aid officers and directors are absent from some of the actions. The Third Amended Consolidated Class Action Complaint names former Rite Aid Chief Financial Officer Frank M. Bergonzi as an individual defendant. The Third Amended Derivative Complaint names director Leonard I. Green as an individual defendant, while Ms. Manzo names director William J. Bratton and former director Preston R. Tisch as individual defendants. 25 There are proposed partial settlement agreements among plaintiffs, Rite Aid and present and former Rite Aid officers and directors other than Martin L. Grass, Timothy J. Noonan and Frank M. Bergonzi pending for approval in the consolidated actions pending in federal court. These partial settlements, if ultimately approved, would result in the Rite Aid settling defendants being dismissed as defendants on the claims currently alleged by the plaintiffs in the Eastern District of Pennsylvania. The dismissal would have no effect on the identity of the defendants for McWane purposes, because, at a minimum, an allocation of fault still has to be made regarding Rite Aid and all of the settling defendants in the consolidated federal actions. See 1.5 U.S.C.A. 0 78i-(e) (1997).

voluminous complaints here and in the Eastern District of Pennsylvania, the plaintiffs in these cases are seeking to try the same allegations in two different forums. In summary, any lack of identity between the parties to the actions is outweighed by relevant considerations of comity and the traditional forum non conveniens factors. See Zimmerman v. Home Shonning Network, Inc., Del. Ch., 1989 WL. 102488, at * 6-8, Jacobs, V.C. (Sept. 11, 1989) (granting a stay of a later-filed Delaware action based on a finding that relevant considerations of comity outweighed both: (1) the lack of identity between the parties and issues to the competing actions; and (2) the fact that application of the traditional forum non conveniens factors would favor the denial of a stay).

4. Considerations of Comity and the Necessities of an Orderly and Efficient Administration of Justice Strongly Favor the Grant of Dismissal or a Stay of the Present Action

In determining whether to exercise its discretion and dismiss or stay the present action in favor of the prior-pending consolidated actions in the Eastern District of Pennsylvania, the Court should also consider the "necessities of an orderly and efficient administration of justice" and relevant "considerations of comity" cited in &Wane. See Transamerica Corn. v. Reliance Ins. Co. of Illinois, Del. Super., 1995 WL 1312656, at *3, Coach, J. (Aug. 30, 1995); see also Macklowe v. Planet Hollvwood. Inc., Del. Ch., 1994 WL 586835, at *3, Steele, V.C. (Oct. 4, 1994). As demonstrated below, these factors also militate heavily in favor of the grant of dismissal or a stay of the present action. The "necessities of an orderly and efficient administration of justice" which are considered under the McWane first-tiled anal.ysis consist of Delaware's traditional forum non conveniens factors. Schnell, 1994 WL 148276, at `3. These factors include: (1) the applicability of Delaware law; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the possibility of a view of the premises (if applicable); (5) the -31-

pendency or non-pendency of a similar action or actions in another jurisdiction26; and (6) all other practical considerations that would make the trial easy, expeditious and inexpensive. Z&e, G, Miller v. Phillies Petroleum Co. Norwav, Del. Supr., 537 A.2d 190,202 (1988); General Foods Corn. v. &o-Maid. Inc., Del. Supr., 198 A.2d 681, 684 (1964), overruled on other grounds, Peusico. Inc. v. Pensi-Cola Bottling CL, Del. Supr. 261 A.2d 520 (1969). While Delaware law is applicable to the plaintiffs common law causes of action for fraud and breach of fiduciary duty, this fact does not weigh heavily against the grant of dismissal or a stay of the present action pending the resolution of the consolidated litigation in the Eastern District of Pennsylvania. As noted above, the Delaware courts have acknowledged the competency of the federal courts to interpret and apply Delaware law, including Delaware law on fiduciary duty. In addition, some courts have given little weight to the "applicability of Delaware law" factor of the forum non conveniens analysis. See Kane v. Puerro Motors, Del. Supr., 1995 WL 945817, at *4, Quillen, J. (Dec. 19, 1995) ("Delaware Courts have routinely heard cases in which other state or federal law applies. [citation omitted] This factor is minor at best."). With respect to the relative ease of access to proof, the availability of compulsory process for witnesses and other practical considerations that would make the trial easy, expeditious and inexpensive, it must be noted that Kite Aid is located in Pennsylvania, as are most of the present and former Kite Aid officers, directors and employees and KPMG professional personnel who will likely be called to [email protected] in this case. In addition, the prior-pending consolidated actions in the Eastern District of Pennsylvania involve issues of fact and law which are necessarily duplicative of those in the present action. Therefore, allowing the present action to proceed in

26

In the context of a motion to dismiss and/or stay pursuant to the McWane first-filed rule, this prong is necessarily subsumed into the analysis. -32-

the Court of Chancery, while virtually the same litigation is prosecuted in the Eastern District of Pennsylvania, would result in an unnecessary waste of valuable judicial resources, as well as of the resources of the parties. See In re Chambers Dev. Co.. Inc. S'holders Litig., Del. Ch., 1993 WL 179335, at *8, Chandler, V.C. (May 20, 1993). Perhaps even more importantly, considerations of comity weigh heavily in favor of dismissal of the present action, or at least in favor of a stay of the action pending resolution of the consolidated litigation in the Eastern District of Pennsylvania. The specific "considerations of comity" cited in McWane include: (1) the avoidance of wasteful duplication of time, effort, and expense which inevitably results from simultaneous adjudication in dual forums; (2) the elimination of the possibility of inconsistent or conflicting rulings and judgments; and (3) the curtailment of an unseemly race by each party to trial and judgment in the forum of its choice. McWane, 263 A.2d at 283. As noted above, dismissal or a stay of the present action will result in the avoidance of wasteful duplication of time, effort, and expense which will otherwise inevitably result. On the other hand, permitting the present action to go forward in the Court of Chancery will have one certain consequence - that a Federal District Court in Pennsylvania with jurisdiction over numerous lawsuits all arising out of the same basic facts and transactions potentially could be on a collision course with the Court of Chancery's efforts to preside over and resolve a lawsuit addressing those very same facts and transactions. See Caravetta, 2000 WL 1611101, at *6. The grant of dismissal or a stay of the present action will avoid this undeniable circumstance and result in a far more efficient and orderly administration of justice for all parties. Given the substantial identity between. the issues and parties to the previouslycommenced consolidated actions pending in the Eastern District of Pennsylvania and the Court

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of Chancery and the present action and the significant considerations of comity and the efficient and orderly administration of justice described above, KF'MG requests that the Court exercise its discretion and dismiss the instant action or, at the very least, stay the action pending resolution of the prior-pending actions, at which point it can be determined whether there is any need to proceed with this matter at all.

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VI.

CONCLUSION

For the foregoing reasons, plaintiffs claims in the Complaint should be dismissed. In the alternative, the present case should be stayed during the pendency of the earlier filed federal actions.

MONTGOMERY, MCCRACKEN, WALKER & RHOADS, LLP

Suite 304 Newark, DE 19713 (302) 733-0600 Attorneys for Defendant KPMG LLP OF COUNSEL: John W. Frazier, IV John E. Caruso Montgomery, McCracken, Walker & Rhoads, LLP 123 South Broad Street Philadelphia, PA 19 109 (215) 772-1500 Dated: January 16,200l

-3%

CERTIFICATE OF SERVICE

I hereby certify that I caused two copies of the Brief in Support of Defendant KPMG LLP's Motion to Dismiss the Claims Directed Against It or, in the Alternative, to Stay the Present Action to be served, by first class mail, postage prepaid, upon: Ronald E. Brown, Jr., Esquire PRICKETT, JONES & ELLIOTT 13 10 King Street P.O. Box 1328 Wilmington, Delaware, 19899 Herbert J. Stem, Esquire STERN B GREENBERG 75 Kivingston Avenue Roseland, NJ 07068 (973) 535-1900 William A. Slaughter, Esquire BALLARD SPAHR ANDREWS & INGERSOLL, LLP 1735 Market Street 51" floor Philadelphia, PA 19103-7599 (215) 665-8500 Steven J. Rothschild, Esquire Karen L. Valihura, Esquire Paul J. Lockwood, Esquire Edward B. Micheletti, Esquire SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP One Rodney Square P.O. Box 636 Wilmington, DE 19899-0636 (302) 65 K-3000 Andrew B. Weissman, Esquire WILMER, CUTLER & PICKERING 2445 M Street N W Washington, DC `20'037 (202) 663-6000

David M. Howard, Esquire DECHERT 4000 Bell. Atlantic Tower 1717 Arch Street Philadelphia, PA 19103 (215) 994-4000 Bernard W. Nussbaum, Esquire Allan A. Martin, Esquire George T. Conway, III, Esquire WACHTELL, LIPTON, ROSEN & KATZ 51 West 52"d Street New York, New York 10019-6150 Alan J. Stone, Esquire MORRIS, NICHOLS, ARSHT & TUNNELL 1201 North Market Street P.O. Box 1347 Wilmington, Delaware 19899- 1347 (302) 65%9200

Dated: January 16,200l

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Information

Manzo, et al. v. Rite Aid Corporation, et al. 18451-NC-Brief In Support Of Defendant KPMG LLP'S Motion To Dismiss The Claims Directed Against It Or In The Alternative, To Stay The Present Action

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