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,

iPlaintiffs, ) CIVIL ACTION NO. 18451-NC a

2’V. i & Ir;

es -z -%q.c -

RITE AID CORPORATION, MARTIN L. ;SWpl2? Ia s--

GRASS, TIMOTHY J. NOONAN,F 5. :m

FRANKLIN C. BROWN, NANCY A. ,’3.Z-n -0 ‘C-J

LIEBERMAN, LEONARD STERN,;

%!ii, -f:wzi

PRESTON R. TISCH, WILLIAM .I. PIfm --3 N

BRATTON, and KPMG LLP,;

Defendants. >

BRIEF IN SUPPORT OF DEFENDANT KPMG LLP’SMOTION TO DISMISS THE CLAIMS DIRECTED AGAINST IT

OR IN THE ALTEBNATIVE. TO STAY THE PRESENT ACTION

Montgomery, McCracken, Walker & Rhoads, LLPJohn H. Newcomer, Jr.13 1 Continental Drive, Suite 304Newark, DE 19713(302) 894-7070Attorneys for Defendant KPMG LLP

OF COUNSEL:John W. Frazier, IVJohn E. CarusoMontgomery, McCracken, Walker & Rhoads, LLP123 South Broad StreetPhiladelphia, PA 19109(215) 772-1500

Dated: January 16,200l

TABLE OF CONTENTS

Page

I. INTRODUCTION . . . . . . . . . . ..I..“................ I..............................................,...............,............. 1

II. NATURE AND STAGE OF PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

III.

B. Procedural History/Background.. ........................................................................... 3

STATEMENT OF FACTS ................................................................................................ 6

IV. QUESTIONS PRESENTED . . . . . . . . . . . . . ..L.............................................................................. 8

V. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..‘................................................................. 9

A. This Court Should Dismiss Plaintiffs Claims Because They Are NotProperly Assertable in a Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.

2.

Plaintiffs Equitable Fraud and Common Law Fraud Claims AreNot Properly Assertable in a Class Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Plaintiffs Fiduciary Duty Claims Are Not Properly Assertable in aClass Action ,........... . . . . ,..,....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . . . . . . 10

B. This Court Should Dismiss All of the Claims Because They AreDerivative Causes of Action Which Cannot Be Brought as a Direct Claim . . . . . . . 12

C.

D.

This Court Should Dismiss AI1 of the Claims Because Plaintiff Seeks LostProfit Opportunity Damages Which Are Not Legally Cognizable . . . . . . . . . . . . . . . . . . . . . . 14

This Court Should Refuse to Recognize Plaintiffs Fraud and Breach ofFiduciary Duty Claims as Valid Under the Securities Litigation UniformStandards Act .,...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

E. This Court Should Dismiss PXaintiff’s Cause of Action Against &PMG forAiding and Abetting the individual Defendants’ Breaches of FiduciaryDuty for Failure to State a Claim Upon Which Relief Can Be Granted . . . . . . . . . . . . . . 22

F. The Instant Action Should be Dismissed or Stayed Based on Prior-Pending, Substantially Similar Litigation in the United States DistrictCourt for the Eastern District of Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

1. The Consolidated Actions in the Eastern District of PennsylvaniaConstitute l?rior Actions for Purposes of the McWane First-FiledRule . . . . . . . . . . . . . . . . . . . ..~.................................................................................... 26

TABLE OF CONTENTS(continued)

Page

2. The United States District Court for the Eastern District ofPennsylvania is Capable of Doing Prompt and Complete Justice . . . . . . . . . . . 27

3.

4.

The Issues and the Parties to the Actions are Identical for Purposesof the 2 8McWane First-Filed Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

VI. CONCLUSION ,,..,........................................................................................................... 35

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, 14

Jackson Nat’1 Life Ins. Co. v. Ken&&y,Del. Ch., 741 A.2d 377, Steele, V.C. (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 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-LYDel. 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

Mazzetti v. Shenherd,Del. Ch., 1986 WL 9199, Allen, C. (Aug. 26, 1986) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12-13

McWane Cast Iron PiDe Corn. v._McDowell-Wellman Ene’g Co.,Del. Supr., 263 A.2d 281 (1970) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26, 28-33

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 IncLA?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 IllinoisDel. Super., 1995 WL 1312656, Coach, J. (A.ug.6, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1Weinberger 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) ............................................................................................. 18-19

1.5 U.S.C.A. § 78bb (Supp. 2000) ........................................................................................... 18-19

1.5 U.S.C.A. 0 772-l (1997) .......................................................................................................... 17

15 U.S.C.A. $j 78u-4 (1997) .......................................................................................................... 17

15 U.S.C.A. $78i (1997) ............................................................................................................. .30

-v-

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 in730 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171995 U.S.C.C.A.N.

-vi-

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 alsocontains 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.

-2-

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. 77 192-

196); (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 formerChairman of the Board and Chief Executive Officer of Rite Aid; (2) Timothy J. Noonan, the former

-3-

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 ofRite 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 theCompendium as Exhibit “B.”

4 A copy of the Third Amended Derivative Complaint is included in the Compendium as Exhibit“C.”

5 There is also a case currently pending in Delaware captioned In re Rite Aid CornorationDerivative Litigation, Civil Action No. 17440~NC. The plaintiffs in the Delaware action filed their

-4-

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 extensionof 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 beenfiled in federal court. All of these cases have been consolidated under the caption In re Rite AidCornoration 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

(“GA@“). 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

-6-

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

recently.“).

-7-

IV. OUESTIONS PRESENT@

A.

B.

C.

D.

E.

F.

Should the Court dismiss plaintiffs complaint because the claims assertedtherein are not properly assertable in a class action?

Should the Court dismiss plaintiffs complaint because the claims assertedtherein are derivative causes of action which cannot be brought as directclaims?

Should the Court dismiss plaintiffs complaint because the damages whichplaintiff seeks to recover are not legally cognizable?

Should the Court dismiss plaintiffs complaint because the claims assertedtherein are invalid under the Securities Litigation Uniform Standards Act?

Should the Court dismiss plaintiffs cause of action against KPMG for aidingand abetting the individual defendants’ breaches of fiduciary duty for failingto plead the requisite causation?

Should the Court dismiss or stay the present action in favor of the prior pendingconsolidated actions in the Eastern District of Pennsylvania?

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V. ARGUMENT

A. This Court ShouldJismiss Plaintiff’s Claims Because Thev Are Not ProDerlvAssertable in a Clas Action

1. Plaintiffs Equitable Fraud and Common Law Fraud Claims Are NotProperly 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.

In the recent case of Oliver v.D e l . C h . , 2 0 0 0 W I . 1 0 9 1 4 8 0 , a t * 1 O - l 1 ,Boston UnivL,

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

8 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 wasmade with reckless indifference to the truth, (3) an intent to induce the plaintiff to act or to refrain fromacting; (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 lawfraud, equitable t?aud does not require proof that the defendant knew or believed the statement to be falseor 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 theinstant case, the Court would have to find that “the questions of law or fact common to the members ofthe class predominate over any questions affecting only individual members.”

-9-

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 suchindividually unique claims. Allowing these claims to proceed would frustrate theinherent practical benefits of a class action. . . . Accordingly, I dismiss plaintiffsnegligent misrepresentation and equitable fraud claims. Of course, any individualplaintiff is free to refile any of these claims in the appropriate forum, and in sodoing plead specific facts detailing individual justifiable reliance . . . .

Oliver 2000 WL 1091480, at *I 1.-2

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 aClass 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 , i f i n d i v i d u a l q u 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 yGaftin.” Malone, 722 A.2d at 14.

predominate over common questio:ns of law or fact, the claim should be dismissed. See id.;

Gaffn 611 A.2d at 474. Oliver 2000 WL 1091480, at *I 1.-9 Y-,

-lO-

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.

-ll-

B. This Court ShouldDismiss All of the Claims Because Thev Are DerivativeCauses 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 can bring a direct action without being bound by theReeves, 3 18 A.2d at 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 corporationlosing 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 thecorporation or allege compliance with Court of Chancery Rule 23.1, whichrequires pre-suit demand or cognizable and particularized allegations that demandis excused. . . . The Court of Chancery properly dismissed the complaint before itagainst 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, lo-

K’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 purelycommon law or equitable tiaud case since individual questions of law or fact, particularly as to theelement of justifiable reliance, will inevitably predominate over common questions of law or fact.” 611A.2d at 474.

II It is well settled that in distinguishing between individual and derivative claims the intention ofthe 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 ofthe 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 LostProfit 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

I2 Plaintiffs complaint is devoid of any allegation that she or any of the putative plaintiff classmembers 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 artificiallyinflated or depressed at the close of the class period on October 18, 1999. Thus, plaintiff does not contestthe fact that she and all of the members of the putative plaintiff class that she seeks to represent boughtRite Aid stock at its fair market value and, as of October 18, 1999, held Rite Aid stock whose pricematched its fair market value. The absence of such an allegation is understandable, since it would, in alllikelihood, result in removal of the action to federal court pursuant to section 78bb(f) of the federalSecurities 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 theSecurities Exchange Act of 1934 and Securities Exchange Commission Rule lob-5.

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Second Circuit held that the plaintiff could not establish that he suffered a compensable loss as a

result of the defendant’s alleged misrepresentations. Levine, 439 F.2d at 333.W r i t i n g o 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 ofFiduciarv Dutv Claims as Valid Under the Securities Litigation UniformStandards 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

-17-

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”)

-18-

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 carve-

out 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

14 It bears noting that at least one federal district court has held that “the language of the Delawarecarve-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 theDelaware carve-outs is correct, then. a Manzo-like class action purportedly based on the common law ofthe State of Delaware could be brought in any of the 50 states parallel to a covered federal securities classaction involving a Delaware corporation.

-19-

--

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 non-

sellers 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

IS This factor distinguishes the present case from Gibson, cited in footnote 14, above. Gibsoninvolved a proxy solicitation in response to an acquisition offer; in that case, a shareholder vote wasrequested, and defendants did not dispute that the requirements for the second carve-out were met.Gibson 2000 WL 777818, at *l & *4,. Here, in contrast, the second carve-out does not apply.-91.5 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 “evena complaint which by objective standards may have very little chance of success at trial has a settlementvalue to the plaintiff out of any proportion to its prospect of success at trial so long as he may prevent thesuit from being resolved against him by dismissal or summary judgment.” a at 740.

-2o-

Bimbaum rule:

Plaintiffs entire testimony would be dependent upon uncorroborated oralevidence of many of the crucial elements of his claim, and still besufficient to go to the jury. The jury would not even have the benefit ofweighing the plaintiff’s version against the defendant’s version, since theelements to which the plaintiff would testify would be in many casestotally unknown and ,unknowable to the defendant. The very real risk inpermitting those in respondent’s position to sue under Rule lob-5 is thatthe door will be open to recovery of substantial damages on the part of onewho offers only his own testimony to prove that he ever consulted aprospectus of the issuer, that he paid any attention to it, or that therepresentations 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 forAidiw and Abettiw the Individual Defendants’ Breaches of Fiduciarv Dutyfor 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

-22-

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

18 Plaintiffs breach of tiduci.ary claim against the individual defendants should also be dismissed asit 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 legalconclusions implicating itself in a breach of fiduciary duty from surrounding facts and circumstancesprior to a formal adjudication ofthe matter.” In the present action, plaintiffs breach of fiduciary dutyclaim hinges on the proposition that the individual defendants should have disclosed their own allegedfraud to plaintiff and the putative plaintiff class in Rite Aid’s financial statements and reports for thefiscal 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 individualdefendants and is fatally flawed for this reason as well.

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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 theEastern 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.

19 Plaintiff does incorporate by reference all of the prior allegations contained in her complaint intoher aiding and abetting count against KPMG. However, the complaint’s prior factual allegationsconcerning KPMG do not pertain to most of the alleged Holder Class Period, and are almost universallyconclusory in nature. Indeed, the only specifics alleged in support of her claims pertain to certain “redflags” that KPMG allegedly should have been aware of during its audit of Rite Aid’s financial statementsfor the fiscal year ending on February 27, 1999. Compl. T[ 173. At most, plaintiffs allegations mightsupport a negligence claim; they are insufficient on their face to show “knowing participation” in breachof fiduciary duty. Moreover, logic and common sense dictate that such “red flags,” allegedly wavingduring KPMG’s 1999 audit could not support a claim that KPMG aided and abetted the individualdefendants’ breaches of fiduciary duty occurring in 1997,1998 or 1999 prior to that audit.

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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 PennsylvaniaConstitute 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 ofPennsylvania does not render KPMG’s request for dismissal or a stay premature, because the DistrictCourt 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 classaction 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 ofPennsylvania 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 leadplaintiffs and counsel for the action) (citing &diaer v. Tallman, Del. Ch., 2000 WL 1041216, Chandler,C. (July 20,200O)).

22 The third amended consolidated derivative complaint in the Eastern District of Pennsylvaniaraises claims for waste of corporate resources, breaches of fiduciary duty, breaches of contract, andviolations 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 ofthe 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 prior-

pending 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

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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 Districtof Pennsylvania and the derivative action pending in the Court of Chancery are derived from the samenucleus of operative facts.

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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. TheThird Amended Consolidated Class Action Complaint names former Rite Aid Chief Financial OfficerFrank M. Bergonzi as an individual defendant. The Third Amended Derivative Complaint names directorLeonard I. Green as an individual defendant, while Ms. Manzo names director William J. Bratton andformer director Preston R. Tisch as individual defendants.

25 There are proposed partial settlement agreements among plaintiffs, Rite Aid and present andformer 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 partialsettlements, if ultimately approved, would result in the Rite Aid settling defendants being dismissed asdefendants on the claims currently alleged by the plaintiffs in the Eastern District of Pennsylvania. Thedismissal would have no effect on the identity of the defendants for McWane purposes, because, at aminimum, an allocation of fault still has to be made regarding Rite Aid and all of the settling defendantsin 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 andEfficient Administration of Justice Strongly Favor the Grant ofDismissal 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

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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 test@ 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, thisprong is necessarily subsumed into the analysis.

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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 previously-

commenced 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 304Newark, DE 19713(302) 733-0600Attorneys for Defendant KPMG LLP

OF COUNSEL:John W. Frazier, IVJohn E. CarusoMontgomery, McCracken, Walker & Rhoads, LLP123 South Broad StreetPhiladelphia, 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., EsquirePRICKETT, JONES & ELLIOTT13 10 King StreetP.O. Box 1328Wilmington, Delaware, 19899

Herbert J. Stem, EsquireSTERN B GREENBERG75 Kivingston AvenueRoseland, NJ 07068(973) 535-1900

William A. Slaughter, EsquireBALLARD SPAHR ANDREWS

& INGERSOLL, LLP1735 Market Street 51” floorPhiladelphia, PA 19103-7599(215) 665-8500

Steven J. Rothschild, EsquireKaren L. Valihura, EsquirePaul J. Lockwood, EsquireEdward B. Micheletti, EsquireSKADDEN, ARPS, SLATE, MEAGHER

& FLOM, LLPOne Rodney SquareP.O. Box 636Wilmington, DE 19899-0636(302) 65 K-3000

Andrew B. Weissman, EsquireWILMER, CUTLER & PICKERING2445 M Street N WWashington, DC ‘20’037(202) 663-6000

Dated: January 16,200l

David M. Howard, EsquireDECHERT4000 Bell. Atlantic Tower1717 Arch StreetPhiladelphia, PA 19103(215) 994-4000

Bernard W. Nussbaum, EsquireAllan A. Martin, EsquireGeorge T. Conway, III, EsquireWACHTELL, LIPTON, ROSEN & KATZ51 West 52”d StreetNew York, New York 10019-6150

Alan J. Stone, EsquireMORRIS, NICHOLS, ARSHT & TUNNELL1201 North Market StreetP.O. Box 1347Wilmington, Delaware 19899- 1347(302) 65%9200

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