In re WESTINGHOUSE SECURITIES LITIGATION.
Margaret Alessi, Gloria Bertinato, Michael C. Christner, Anna Marie Eroshevich, Toby Feuer, Kanwal K. Gupta, M.D., Matthew Harlib, Stanley Hershfang, Arnold M. Jacob, Louise Jacob, David Jaroslawicz, David Kirschner, Nathan Kleinhandler, Gerry Krim, Peter Lagorio, Nelson Lovins, Donald McLennan, Jacob Joseph Miller, Dr. Alexander Miller, Thomas Mitchell, Edward Murabito, Michael E. Nogay, Joseph Raschak, Richard Schwartzchild, Dr. Michael Slavin, Dr. Michael Solomon, Selma Solomon, Spring Creek Cardiomedical Center, Ruth Stepak, Jim Thompson, Patricia J. Vanartsdalen, Albert Zucker, Appellants.
No. 95-3156
United States Court of Appeals, Third Circuit
Argued Nov. 2, 1995. Decided July 18, 1996.
Robert E. Zimet (argued), Joseph Guglielmelli, Maura B. Grinalds, Skadden, Arps,
Dennis J. Block (argued), Stephen A. Radin, Robert F. Carangelo, Jr., Mary Lou Peters, Weil, Gotshal & Manges, New York City, Joseph A. Katarincic, Katarincic & Salmon, Pittsburgh, PA (William F. Stoll, Jr., Henry W. Ewalt, Robert L. Kaufman, Vanessa J. Brown, Westinghouse Electric Corporation Law Department, Pittsburgh, PA, of counsel), for Appellees, Robert E. Faust, Warren H. Hollinshead, Paul E. Lego, William A. Powe, Robert F. Pugliese, Theodore Stern, Westinghouse Electric Corporation, Westinghouse Financial Services, Inc. and Westinghouse Credit Corporation.
Eldon Olson, General Counsel, Rodman W. Benedict, Associate General Counsel, Price Waterhouse LLP, New York City, Frank Cicero, Jr., Robert J. Kopecky (argued), Jeffrey L. Willian, Kirkland & Ellis, Chicago, IL (Arthur J. Schwab, James D. Morton, Buchanan Ingersoll, Pittsburgh, PA, of counsel), for Appellee, Price Waterhouse LLP.
Before NYGAARD, ALITO, and SAROKIN, Circuit Judges.
OPINION OF THE COURT
ALITO, Circuit Judge:
This is an appeal from three orders dismissing all of the plaintiffs’ claims in a consolidated class action securities fraud complaint. The orders were based on
I.
A. Plaintiffs in this case are all purchasers of publicly traded Westinghouse Electric Corporation (“Westinghouse“) securities. Plaintiffs purchased Westinghouse common stock between March 28, 1989, and October 22, 1991 (“the class period“).
Defendants include Westinghouse, Westinghouse Financial Services, Inc. (“WFSI“) (a wholly owned subsidiary of Westinghouse), Westinghouse Credit Corporation (“WCC“) (which is owned by WFSI), and certain directors and senior officers of these companies (the “individual defendants“). (We will refer to the above defendants collectively as the “Westinghouse defendants.“) The other defendants are Price Waterhouse (the independent accountant for the Westinghouse companies), and a proposed defendant class of underwriters (the “underwriter defendants“) involved in a May 1991 public offering of Westinghouse common stock.
B. The relevant allegations of plaintiffs’ complaint, which were set forth in detail by the district court, see In re Westinghouse Securities Litigation, 832 F.Supp. 948 (W.D.Pa.1993), may be summarized as follows. During the 1980‘s, WCC grew rapidly by committing substantial funds to the financing of real estate developments and highly leveraged transactions. In the late 1980‘s, however, WCC experienced an increase in defaults in its real estate loans and in delinquencies in other transactions. As a result, WCC suffered billions of dollars of losses, and the Westinghouse defendants feared a drop in WCC‘s commercial paper ratings. To protect those ratings, they concealed the losses, which allegedly totalled between $2.6 and $5.3 billion, through improper accounting and reporting techniques.
Prior to February 1991, Westinghouse management decided that WCC needed a cash infusion if it was to maintain its commercial paper ratings. Westinghouse developed a major restructuring plan, which it announced on February 27, 1991. Under that plan, Westinghouse decided to “downsize” WCC by selling or restructuring nearly one-third of its assets that had previously been held on a long-term basis. Westinghouse knew that selling and restructuring so many non-performing or under performing assets in the market that existed at the time would result in significant losses. Westinghouse thus took a $975 million pre-tax charge against fourth quarter 1990 earnings to be
Plaintiffs assert that Westinghouse further compounded the harm to investors by raising $500 million through a May 1991 stock offering. Westinghouse offered 19 million shares of its common stock for sale to the investing public at $26.50 per share on May 9, 1991. Plaintiffs allege that the Prospectus and Registration Statement filed with the Securities and Exchange Commission (“SEC“) in May 1991, as well as other documents (including the Annual Report) that were incorporated by reference therein, contained material misrepresentations and omissions.
In October 1991, Westinghouse determined and announced that the restructuring plan had to be accelerated. Additional assets of $3.1 billion were designated as being held for sale or restructuring. Westinghouse took a $1.68 billion pre-tax charge in anticipation of further losses it expected to suffer. Plaintiffs allege that defendants knew as early as October 1990 that a charge of this magnitude was inevitable and that defendants’ statements to the contrary over the course of that year and contemporaneous with the October 1991 announcement were materially false. Plaintiffs claim that they paid artificially inflated prices of from $21.75 to $39.375 per share in contrast to Westinghouse‘s closing price of $15.875 after the announcement of the October 1991 charge.
C. The first of the class action complaints consolidated herein was filed in February 1991, just after Westinghouse announced the restructuring plan. In May 1991, the magistrate judge granted plaintiffs limited discovery to prepare a consolidated complaint. In March 1992, the magistrate judge ordered that Westinghouse make available to plaintiffs documents related to over 500 active investment files. Plaintiffs filed the Consolidated Amended Class Action Complaint (“the first amended complaint“) in June 1992.
The first amended complaint alleged violations of the following provisions: sections 10(b) and 20 of the
In August 1992, defendants moved to dismiss all counts of the first amended complaint under
Plaintiffs filed the Second Consolidated Amended Class Action Complaint (“the second amended complaint“) in September 1993. Plaintiffs repled all of their claims, including those that had been dismissed with prejudice (stating that such claims were being repled verbatim solely to preserve their appellate rights). In December 1993, defendants moved to dismiss the second amended complaint under
In January 1995, the district court granted defendants’ motion to dismiss the second amended complaint. See In re Westinghouse Securities Litigation, Civ. No. 91-354, Opinion and Order entered January 23, 1995, App. 310-46 (Westinghouse II). Counts II-VI were dismissed without discussion, since they had already been dismissed with prejudice in Westinghouse I. Many of the claims in count I were dismissed with prejudice, and the remainder of the claims in count I were dismissed without prejudice to repleading in accordance with
Plaintiffs filed a “Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint,” in which they informed the district court that they would not be amending the complaint; rather, plaintiffs stated that they were going to “stand” on the complaint and seek immediate appellate review. App. 347. The district court then dismissed plaintiffs’ remaining claims from count I with prejudice and closed the case. See App. 350-51 (Memorandum Order entered March 1, 1995). This appeal followed.
On appeal, plaintiffs argue that the district court improperly dismissed various of their
II.
A. We turn first to plaintiffs’ challenge to the district court‘s
We review the district court‘s decision to dismiss claims under
The district court‘s January 1995 opinion and order provided that “with respect to those aspects of Count One that survive the instant Opinion and Order, plaintiffs are granted 30 days from this date within which to replead in conformity with the requirements of
On February 21, 1995, plaintiffs filed a “Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint.” Plaintiffs stated as follows:
Plaintiffs have carefully weighed the merits of repleading against seeking immediate appellate review. They respectfully give notice of their intention to stand on the Complaint. See, Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir.1992).
App. 348. The district court then dismissed with prejudice all of plaintiffs’ remaining claims, stating as follows:
On January 20, 1995, this Court dismissed plaintiffs’ Second Amended Class Action Complaint. As that Opinion and Order explained, with respect to those aspects of Count One of plaintiffs’ Second Amended Complaint that survived the January 20, 1995 Opinion and Order, plaintiffs were granted 30 days from that date within which to replead in conformity with the requirements of
Rule 8 of the Federal Rules of Civil Procedure . The Opinion and Order specifically stated that failure to replead within 30 days would result in the dismissal of plaintiffs’ claims with prejudice.Instead of filing an amended complaint, plaintiffs filed a Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint, indicating that they had “carefully weighed the merits of repleading against seeking immediate appellate review.”
Accordingly, ... it is hereby ORDERED that all remaining claims in plaintiffs’ Second Amended Class Action Complaint are dismissed with prejudice.
App. 350-51 (Memorandum Order entered 3/1/95).
B. Plaintiffs argue first that the
It is well settled that “the particularity demands of pleading fraud under
Having reviewed plaintiffs’ second amended complaint, we cannot say that the district court abused its discretion in dismissing the viable portion of count I, without prejudice to repleading, pursuant to
C. We further hold that the district court did not abuse its discretion when it
D. Defendants attempt to go further. They argue that all of plaintiffs’ claims—including those that had been dismissed with prejudice under
[e]ven if this Court were to reverse any portion of the District Court‘s ruling dismissing portions of [the second amended complaint] with prejudice on grounds other than Rule 8, plaintiffs still would be bound by their irrevocable election to stand on their Second Amended Complaint, which still will constitute “a flagrant violation of the requirements of Rule 8.”
West. Br. at 20 (quoting Westinghouse II, Op. at 20, App. 329). There is slim support for defendants’ argument in Westinghouse II, where the court stated that “plaintiffs’ Second Amended Complaint shall be dismissed in its entirety for failure to plead in conformity with the requirements of Rule 8.” Op. at 21, App. 330. On the whole, however, we do not agree with defendants’ characterization of what the district court did. As we understand the record, the district court, having already dismissed certain claims with prejudice on non-Rule 8 grounds in Westinghouse I and Westinghouse II, did not later dismiss those claims again for failure to comply with
First, we note that the district court specifically ordered plaintiffs not to include in the third amended complaint any claims except for those that survived Westinghouse II. Westinghouse II, Op. at 21, App. 330; Order at 35, App. 344. Thus, even if plaintiffs had repled and filed a third amended complaint, the claims that had been dismissed on grounds other than
Second, the district court‘s Memorandum Order of March 1, 1995, is the only order in the record that dismisses any claim or claims with prejudice under
E. Defendants next argue that if we do not hold that all of the plaintiffs’ claims were properly dismissed under
Notes
First, we reject the suggestion (see West. Br. at 20) that we lack jurisdiction to review the district court‘s rulings in Westinghouse I and Westinghouse II. “The principle is well-settled in this circuit that an order dismissing a complaint without prejudice is not a final and appealable order, unless the plaintiff no longer can amend the complaint because, for example, the statute of limitations has run, or the plaintiff has elected to stand on the complaint.” Newark Branch, N.A.A.C.P. v. Harrison, 907 F.2d 1408, 1416-17 (3d Cir.1990) (citations and footnotes omitted) (emphasis added); see also Bethel v. McAllister Brothers, Inc., 81 F.3d 376, 381 (3d Cir.1996); Deutsch v. United States, 67 F.3d 1080, 1083 (3d Cir.1995); Welch v. Folsom, 925 F.2d 666, 668 (3d Cir. 1991); Trevino-Barton v. Pittsburgh National Bank, 919 F.2d 874, 877-78 (3d Cir.1990). In UJB, the plaintiffs stood on their complaint with respect to claims that had been dismissed without prejudice under
[W]e have held that a plaintiff can convert a dismissal with leave to amend into a final order by electing to stand upon the original complaint. See, e.g., Borelli v. City of Reading, 532 F.2d 950, 951-52 (3d Cir.1976) (“Only if the plaintiff ... declares his intention to stand on his complaint ... the order becomes final and appealable“).
UJB, 964 F.2d at 278 (alterations in UJB). The court thus considered whether plaintiffs’ allegations that had been dismissed without prejudice actually satisfied
Here, when plaintiffs elected to stand on the second amended complaint rather than replead the remaining claims in compliance with
affirm the dismissal of plaintiffs’ entire complaint on Rule 8 grounds, then “as in any other case where some but not all claims are dismissed ..., plaintiffs would have claims not dismissed in the District Court and thus no right to an interlocutory appeal.” West. Br. at 21. By its own terms, this argument would apply only if we held that at least one claim had not been properly dismissed on any ground, and consequently our conclusion in part IID of this opinion (that the claims dismissed on non-Rule 8 grounds in Westinghouse I and Westinghouse II were not also dismissed on Rule 8 grounds) would not be enough to make this argument applicable here. But in any event, defendants’ argument—for which no supporting authority is cited—is plainly incorrect. We have jurisdiction under
Defendants, however, invoke an exception to the merger rule pursuant to which courts decline to reach prior interlocutory rulings where to do so would undermine the policy against piecemeal appeals. See generally, e.g., Sere v. Board of Trustees of Univ. of Illinois, 852 F.2d 285, 288 (7th Cir.1988) (“Although the general rule is that rulings on interlocutory orders are encompassed within a subsequent final judgment and may be reviewed as part of that judgment, the rule is inapplicable where adherence would reward a party for dilatory and bad faith tactics.“) (citations omitted). The line of cases relied upon by defendants stands for the proposition that a dismissal with prejudice for failure to prosecute frequently bars review of previously entered interlocutory orders.6 Without addressing the potential scope of this exception to the merger rule, see Fassett v. Delta Kappa Epsilon (New York), 807 F.2d 1150, 1155 n. 6 (3d Cir.1986) (dictum declining to extend Sullivan holding beyond class certification context), cert. denied, 481 U.S. 1070, 107 S.Ct. 2463, 95 L.Ed.2d 872 (1987), we conclude that the exception has no application here. The failure-to-prosecute cases upon which defendants rely are distinguishable from plaintiffs’ decision in this case to stand on the second amended complaint—a decision that we regard as squarely governed by our holding in UJB. We are confident that our review of the merits of the orders in Westinghouse I and Westinghouse II will not “invite the inundation of appellate dockets with requests for review of interlocutory orders [or] undermine the ability of trial judges to achieve the orderly and expeditious disposition of cases.” Cf. Marshall v. Sielaff, 492 F.2d at 919.
To summarize our holdings thus far, we have concluded that the district court did not err in dismissing with prejudice under
We exercise plenary review over these dismissals. See, e.g., UJB, 964 F.2d at 279. Moreover, we must accept as true plaintiffs’ factual allegations, and we may affirm the district court‘s dismissals only if it appears certain that plaintiffs can prove no set of facts entitling them to relief. Id. at 279-80 (citation omitted).
appealable order.” 566 F.2d at 445-46. But the appellants in that case did not challenge the underlying final order of dismissal, but only the prior interlocutory decision. Id. at 445; see generally Bethel v. McAllister Brothers, Inc., 81 F.3d at 380; Huey v. Teledyne, Inc., 608 F.2d 1234, 1239-40 n. 5 (9th Cir.1979).
III.
Plaintiffs’ claims under
As we explained in Trump, “‘bespeaks caution’ is essentially shorthand for the well-established principle that a statement or omission must be considered in context, so that accompanying statements may render it immaterial as a matter of law.” 7 F.3d at 364.8 We described the doctrine as follows:
The application of bespeaks caution depends on the specific text of the offering document or other communication at issue, i.e., courts must assess the communication on a case-by-case basis. Nevertheless, we can state as a general matter that, when an offering document‘s forecasts, opinions or projections are accompanied by meaningful cautionary statements, the forward-looking statements will not form the basis for a securities fraud claim if those statements did not affect the “total mix” of information the document provided investors. In other words, cautionary language, if sufficient, renders the alleged omissions or misrepresentations immaterial as a matter of law.
... Of course, a vague or blanket (boilerplate) disclaimer which merely warns the reader that the investment has risks will ordinarily be inadequate to prevent misinformation. To suffice, the cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge.
... [T]he prospectus here truly bespeaks caution because, not only does the prospectus generally convey the riskiness of the investment, but its warnings and cautionary language directly address the substance of the statement the plaintiffs challenge.
Plaintiffs’ loan loss reserves claims under
With regard to plaintiffs’
Defendants contend that all of the above claims were properly dismissed because any alleged misstatements are immaterial when considered in the context of cautionary language contained in various filings with the SEC. See Westinghouse I, 832 F.Supp. at 974-76 (summarizing non-prospectus warnings and quoting from numerous Westinghouse filings). In defense of the district court‘s decision, Westinghouse‘s brief highlights the following excerpts from the May 1991 Registration Statement and Prospectus, which typify the warnings on which the defendants rely:
As part of the reclassification of the $3.4 billion of assets, the Company reclassified for sale approximately $654 million of marketable securities.... This portfolio will be liquidated as soon as practicable; however, future deterioration in market value could result in additional losses prior to sale ....
The $3.4 billion in higher-risk and underperforming assets reclassified as held for sale or restructuring included $2.4 billion in receivables. As such, these receivables had and continue to have a high probability of becoming non-earning assets during the expected period of liquidation ....
Of the $2.4 billion of receivables held for sale or restructuring, at March 31, 1991, approximately $700 million were non-earning, up from $481 million at December 31, 1990.... Real estate owned in assets held for sale or restructuring was approximately $335 million at March 31, 1991, up from $285 million at December 31, 1990.
Of the remaining $8.0 billion in receivables in WFSI‘s ongoing portfolio, non-earning receivables totaled approximately $180 million at March 31, 1991, up from $71 million at December 31, 1990. Reduced earning receivables totaled approximately $725 million at March 31, 1991, up from $605 million at December 31, 1990. Real estate owned was approximately $175 million at March 31, 1991, up from $85 million at December 31, 1990.
At March 31, 1991, WFSI‘s valuation allowances related to assets held for sale or
restructuring, and the allowances for credit losses related to the assets in the ongoing portfolio, amounted to $1.013 million and $306 million, respectively. Management believes that under current economic conditions such allowances should be adequate to cover future losses that may occur. However, a further or more prolonged downturn in the economy or in the real estate, securities or certain other markets could have a negative effect on the ability of WFSI‘s borrowers to repay and on asset values generally and could result in additional increases in non-earnings assets, restructured loans and, ultimately, increases in allowances for losses in both assets held for sale or restructuring and receivables in the balance of WFSI‘s portfolio.
Westinghouse Br. at 29-30 (quoting App. 748-49) (emphasis and ellipses in Westinghouse brief).
Plaintiffs argue that this and other similar cautionary language was insufficient because it implied, consistently with the alleged misstatements by Westinghouse officials, that defendants believed, as of February 1991 and thereafter, that the loan loss reserves were and would remain adequate “under current economic conditions.” Plaintiffs contend that defendants’ statements regarding adequacy of the loan loss reserves were materially false when made because defendants knew that the reserves were and would remain inadequate, even without any future or prolonged economic downturn. Plaintiffs allege that Westinghouse management and other defendants knew that the February 1991 charge was inadequate to cover current and expected future losses. Plaintiffs assert that defendants knew that WCC‘s loan portfolio was overstated by between $2.6 billion and $5.3 billion immediately prior to the first writedown of $975 million in February 1991. Pointing to internal documents suggesting that Westinghouse believed that the $975 million charge was “credible” and “affordable,” plaintiffs argue that defendants should have been concerned with whether the charge complied with GAAP.9 Plaintiffs also point to the statement by former WCC President James Focareta, in which he allegedly acknowledged that Westinghouse officials knew in February 1991 that the $975 million charge was insufficient. See App. 1134.
Having carefully reviewed the cautionary language on which the defendants and the district court relied, we find that these statements do not sufficiently counter the alleged misrepresentations, i.e., that the defendants knowingly or recklessly misrepresented the adequacy of the loan loss reserves and compliance with GAAP. If, as plaintiffs say, defendants knowingly or recklessly misrepresented the adequacy of the loss reserves to protect against known losses and known risks in light of the then-current economic conditions, it follows that defendants’ cautionary statements about the future did not render those misrepresentations immaterial. In our view, a reasonable investor would be very interested in knowing, not merely that future economic developments might cause further losses, but that (as plaintiffs allege) current reserves were known to be insufficient under current economic conditions. A reasonable investor might well be willing to
IV.
Plaintiffs next challenge the district court‘s dismissal of various other portions of their
Plaintiffs argue first that the district court improperly dismissed the section 10(b) claims against the Westinghouse defendants relating to Westinghouse‘s alleged concealment of
A. Nonearning receivables, also known as nonaccrual loans or nonearning loans, are defined as “[l]oans on which accrual of interest has been suspended because collectibility is doubtful.” American Institute of Certified Public Accountants (“AICPA“), Audits of Finance Companies 108 (1994); see also American Bankers Association, Banking Terminology 244 (3d ed. 1989) (defining nonearning asset as “[a]n asset that does not produce income, such as ... required reserves, or a nonaccrual loan“). Plaintiffs allege that Westinghouse manipulated its nonearning receivables accounts to overstate the quality of its receivables portfolio.
The district court essentially found that plaintiffs had not pled facts explaining with particularity how Westinghouse‘s statements concerning nonearning receivables were false and misleading or violated GAAP. The district court thus dismissed these allegations under
Plaintiffs allege that the Westinghouse defendants arbitrarily moved loans from nonearning to earning status just before mandated public reporting when, in fact, nothing had changed regarding the likelihood of collection. Plaintiffs contend that they have pled specific facts permitting the inference that defendants were intentionally concealing loan losses. We agree. Plaintiffs are not merely challenging defendants’ judgment regarding when collectibility became doubtful; instead, plaintiffs allege that defendants changed the classification of the loans when nothing regarding collectibility had occurred. Plaintiffs allege that specific loans had at least three of the eight AICPA earmarks for nonearning status both before and after they were removed from nonearning status. On a motion for summary judgment, defendants may be able to show why the status of these loans consistently changed just prior to the time of reporting, and they may be able to establish that no reasonable factfinder could find for plaintiffs. At this stage, however, we cannot say that plaintiffs have failed to state a claim or have failed to plead fraud with sufficient particularity. We therefore reverse this aspect of the district court‘s orders.
B. Plaintiffs also allege that Westinghouse fraudulently overstated the quality of its internal controls, in violation of
Plaintiffs’ claim is based primarily on an internal report prepared following an anonymous tip alleging inadequate internal accounting controls. After rejecting the assertions of the anonymous tip, the November 1990 report discussed recommendations for improving internal controls and addressing some overall concerns that the auditors had identified. See App. 939-53.
The district court found that “[t]he fact that the internal auditors also recommended improvements in valuation methods and tighter standards for internal valuations does not support plaintiffs’ claim that in its Form 10K‘s Westinghouse fraudulently or even inaccurately represented its internal controls as adequate.” 832 F.Supp. at 979; see also Westinghouse II, at 8-9 (“plaintiffs’ assertions amount to nothing more than ‘fraud by hindsight’ allegations, based on the premise that the internal controls turned out to be inadequate.“). We agree that plaintiffs have failed to plead any facts supporting their conclusory allegation that Westinghouse fraudulently misrepresented the adequacy of its internal controls. We therefore
C. Plaintiffs argue that the district court, by “compartmentalizing the evidence and wiping the slate clean after considering each component,” failed to give weight to the “totality of the pleadings.” Plfs’ Br. at 25. We have instructed that the district courts should engage in precisely the sort of analysis undertaken by the district court in this case, see, e.g., UJB, 964 F.2d at 284; Craftmatic, 890 F.2d at 640, and we therefore find no merit in this argument.
In addition, plaintiffs’ discussion of
D. Plaintiffs also appeal from dismissal of certain aspects of their
Although plaintiffs cite various GAAS standards, they nowhere explain how Price Waterhouse knowingly or recklessly violated those standards in performing its 1988 and 1989 audits. For example, plaintiffs’ complaint fails to allege any facts supporting their conclusory allegation that Price Waterhouse failed to follow GAAS in determining whether Westinghouse‘s 2.5% loss reserves were reasonable in 1988 and 1989. Moreover, as Price Waterhouse properly argues, plaintiffs do not allege that Price Waterhouse failed to consider the adequacy of Westinghouse‘s internal controls in planning the scope of or in executing the 1988 and 1989 audits; nor do plaintiffs allege that Price Waterhouse opined on the adequacy of Westinghouse‘s internal controls in those audits.
Plaintiffs’ GAAP arguments are similarly unavailing. Under Christidis, plaintiffs must allege facts that give rise to an inference that Price Waterhouse knew or was reckless in not knowing that Westinghouse‘s financial statements failed to comply with GAAP. 717 F.2d at 100; see also Eisenberg v. Gagnon, 766 F.2d 770, 776-78 (3d Cir.), cert. denied, 474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985). There are no facts cited in plaintiffs’ second amended complaint supporting an inference that Price Waterhouse knew or was reckless in not knowing that Westinghouse was using speculative, inflated values in valuing receivables. Moreover, although Price Waterhouse concedes that it knew that Westinghouse set its loss reserves at 2.5% of total assets in audit years 1988 and 1989, this fact provides no support for plaintiffs’ allegation that Price Waterhouse knew that Westinghouse was violating GAAP in those years. Assuming that Westinghouse violated GAAP during 1988 and 1989, plaintiffs nonetheless fail to allege facts suggesting that Price Waterhouse intentionally or recklessly misrepresented Westinghouse‘s compliance with GAAP.
In short, plaintiffs fail to allege any facts supporting an inference that Price Waterhouse made fraudulent misrepresentations in its 1988 and 1989 audit opinions. Plaintiffs’ allegations do not support an inference that Price Waterhouse could not reasonably and in good faith have opined that the financial statements as a whole fairly presented the financial condition of Westinghouse in accordance with GAAP. We therefore affirm the district court‘s order dismissing the
E. Plaintiffs also challenge the district court‘s dismissal of their
Plaintiffs place primary reliance on Lazard‘s December 2, 1990, Progress Report and on a document entitled “Westinghouse Electric—Board Meeting Q & A,” developed for use at the February 27, 1991, Board meeting. See App. 1428-41 (Progress Report); App. 1134-36 (Q & A). Plaintiffs also rely on a report prepared by Westinghouse in September 1990. See App. 918-36.
In the Progress Report, Lazard recommended “serious consideration of a comprehensive restructuring program which could include a one-time charge to earnings.” App. 1435. Lazard also explained that “[t]he possible restructuring outlined earlier implies the ultimate disposition of roughly $3.2 billion or 55% of non-real estate assets and at least $1.5 billion of real estate (problem real estate totalled $1.5 billion or 37% of the portfolio at September 30, 1990).” App. 1440 (emphasis in original). In the proposed question and answer script, Lazard suggested the following response to the question, “Are the reserves adequate?“: “Given the results of each of these review processes, the charge taken today is clearly reasonable but was at the low end of the range identified by management in conjunction with the strategic review performed by Lazard.” App. 1135.
Based on the above sources, plaintiffs argue that Lazard knew that the February 1991 charge was inadequate to protect against known and likely losses. We agree with the district court, however, that the documents on which plaintiffs rely simply do not support their conclusory allegations and that plaintiffs fail to allege facts supporting their
V.
Defendants argued in the district court that plaintiffs’ allegations regarding loan loss reserves and nonearning loans in count I were subject to dismissal as being quantitatively immaterial as a matter of law (separate and apart from the “bespeaks caution” doctrine). In Westinghouse I, the district court rejected defendants’ argument, finding that the allegations of wrongfully understated reserves were sufficiently substantial when compared to Westinghouse‘s net income for the relevant time periods. 832 F.Supp. at 971-73. In Westinghouse II, defendants argued that plaintiffs failed to allege a material misrepresentation or omission during the time period of March 28, 1989, through March 28, 1990 (i.e., the first year of the class period) with respect to their allegations regarding the loan loss reserves and nonearning loans. Westinghouse II, Op. at 13-18, App. 322-27. The district court agreed and dismissed these claims for the first year of the class period. Id.
Plaintiffs challenge this aspect of Westinghouse II, Plfs’ Br. at 34-38, and defendants counter that all of the allegations regarding nonearning assets and loan loss reserves (not merely those for the first year of the class period) could and should have been dismissed on quantitative materiality grounds. West. Br. at 39-45. Assuming without deciding that defendants’ latter argument (which was
As referred to earlier in our discussion of the “bespeaks caution” doctrine, “[a]n omitted fact is material if there is a ‘substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.‘” UJB, 964 F.2d at 281 n. 11 (quoting T.S.C. Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)). “In other words, the issue is whether there is a substantial likelihood that the disclosure would have been viewed by the reasonable investor as having ‘significantly altered the “total mix” of information” available to that investor.” Id. Moreover, “[materiality is a mixed question of law and fact, and the delicate assessments of the inferences a reasonable shareholder would draw from a given set of facts are peculiarly for the trier of fact.” Id. (citing T.S.C., 426 U.S. at 450, 96 S.Ct. at 2132-33). Therefore, “[o]nly if the alleged misrepresentations or omissions are so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality is it appropriate for the district court to rule that the allegations are inactionable as a matter of law.” Id.
The district court recognized that the adequacy of loan loss reserves is generally the type of information that would significantly influence a reasonable investor. Westinghouse I, 832 F.Supp. at 972 (citing UJB, 964 F.2d at 281). However, the court also tested plaintiffs’ complaint to determine whether the allegations regarding loan loss reserves were quantitatively material in this particular case. The district court stated that “[t]he failure to disclose that a loan portfolio is likely to be impaired by some de minimis amount may be ‘relevant’ in that it is the type of information that investors care about, but of such ‘dubious significance’ as to be ‘trivial,’ and ‘hardly conducive to informed decisionmaking,’ so that to reasonable shareholders, such omission must be immaterial as a matter of law.” Id. at 972 (quoting TSC Industries, 426 U.S. at 448-49, 96 S.Ct. at 2131-32). We agree. See generally Loss & Seligman, Fundamentals of Securities Regulation 137-41, 479-80 (1995) (quantitative materiality analysis is generally appropriate, though not when “such matters as a conflict of interest or criminal violations are at issue“); see also Ferber v. Travelers Corp., 802 F.Supp. 698, 708 (D.Conn.1992) (omission of extent of second mortgages not material in relation to overall real estate, investment, and asset portfolios); In re First Chicago Corp. Securities Litigation, 769 F.Supp. 1444, 1454 (N.D.Ill.1991) (total value of alleged bad loan immaterial in relation to size of defendant‘s real estate loan portfolio).14
Plaintiffs do not dispute that their only allegation challenging the adequacy of loan loss reserves prior to the fourth quarter
The district court also dismissed the nonearning loans allegations relating to the first year of the class period. The court found that the assets identified in plaintiffs’ complaint that allegedly should have been classified as nonearning through the fourth quarter of 1989 were barely 1% of Westinghouse‘s current assets for any quarter during that period and were thus immaterial.16 The second amended complaint alleges that prior to the fourth quarter of 1989, eight assets were improperly not classified as nonearning assets. See App. 1169-76. These accounts amount to just 0.51% of Westinghouse‘s current assets for the first and second quarters of 1989 and only 1.2% of Westinghouse‘s current assets for the third quarter of 1989. We again agree with the district court that these allegations are not sufficiently substantial to be material, and plaintiffs therefore allege no actionable nonearning loans claims for the period prior to the fourth quarter of 1989.17 As with the reserves claims, the first actionable disclosures alleged in the second amended complaint relating to nonearning loans for the fourth quarter of 1989 occurred on March 29, 1990. The district court thus properly dismissed the nonearning loans allegations that relate to the period prior to the March 29, 1990, disclosures.
VI.
A. As discussed above, the district court dismissed the
In In re Craftmatic Securities Litigation, 890 F.2d 628 (3d Cir.1989), we held that the Supreme Court‘s definition of the term “seller” under
In Craftmatic, we cautioned that “the language of § 12, which makes a participant liable to the ‘person purchasing such a security from him ...,’ precludes actions against remote sellers, and focuses the inquiry on the relationship between the purchaser and the participant, rather than on the latter‘s degree of involvement in the transaction.” Craftmatic, 890 F.2d at 636 (citation omitted). We added with regard to solicitation liability that “although an issuer is no longer immunized from § 12 liability, neither is an issuer liable solely on the basis of its involvement in preparing the prospectus. The purchaser must demonstrate direct and active participation in the solicitation of the immediate sale to hold the issuer liable as a § 12(2) seller.” Id. (citations omitted).
B. Plaintiffs do not claim that any of the Westinghouse defendants were direct sellers. Rather, plaintiffs allege that the underwriter defendants purchased the shares from Westinghouse and resold them to the public, including plaintiffs. E.g., App. 362-63, 366-67. The Westinghouse defendants therefore cannot be liable under
593. The section 12 Defendants were sellers of Westinghouse securities within the meaning of Section 12(2) of the Securities Act and either sold or promoted the sale of said securities directly to plaintiffs and other Class members or solicited plaintiffs and other Class members to buy such securities. In so acting, the Section 12 Defendants were motivated by a desire to serve their own financial interests.
App. 506 (count III); see also App. 511-12 (count V). Plaintiffs allege no facts suggesting how any Westinghouse defendants directly and actively participated in the solicitation of plaintiffs’ immediate purchases of Westinghouse stock.
The district court dismissed the section 12(2) claims, explaining as follows:
[P]laintiffs have not alleged that the Westinghouse defendants in fact sold or solicited the purchase of Westinghouse securities, but attempt nonetheless to analogize their allegations to the allegations and holding in Craftmatic by pointing to the similarity of language employed.... The conclusory allegation that defendants sold or solicited the purchase of securities will withstand a motion to dismiss only if accompanied by allegations of fact that defendants did sell or solicit the purchase of securities.
Westinghouse I, 832 F.Supp. at 984 (citation and footnote omitted) (emphasis in original).18 Plaintiffs argue that because the facts alleged in their complaint are so similar to
It is certainly true that plaintiffs’ section 12(2) allegations are not clearly drafted. Plaintiffs do not, for example, make clear which defendants are alleged to be direct sellers as opposed to solicitor sellers. See UJB, 964 F.2d at 287 n. 17. Nor do plaintiffs allege how the Westinghouse defendants, assuming they are alleged to be solicitor sellers, directly and actively participated in the solicitation of the immediate sales.19 Further, plaintiffs’ allegation that defendants “promoted the sale of” securities would not, standing alone, give rise to any section 12(2) liability. The district court could certainly require that plaintiffs clear up these ambiguities on remand.
Taken in the light most favorable to plaintiffs, however, the complaint does allege that the Westinghouse defendants “solicited plaintiffs” to purchase Westinghouse securities and that in so doing they were motivated by a desire to serve their own financial interests. Contrary to the district court‘s statement, these are factual allegations—allegations plaintiffs will have to prove—and not bare legal conclusions. Under Craftmatic, plaintiffs’ allegations are sufficient to survive a motion to dismiss under
We note that although fraud is not a necessary element of a claim under
C. As to the underwriter defendants, the first amended complaint alleges that “[e]ach member of the Underwriter Class sold Westinghouse stock to members of the Prospectus Subclass during the Class Period.” App.
The district court dismissed the
In Count Three, plaintiffs must allege, to state a viable Section 12(2) cause of action, that the underwriter defendants were “sellers” within the meaning of Section 12(2). That is, there must be an allegation that a particular proposed defendant sold or solicited the sale of Westinghouse securities to the individual plaintiffs. Pinter v. Dahl, 486 U.S. at 643-47, 108 S.Ct. at 2076-77. This element is lacking.
Westinghouse I, 832 F.Supp. at 987.22
We agree with the district court that plaintiffs must allege that the underwriter defendants were section 12(2) sellers, but we do not find support in Pinter for the district court‘s statement that, in order to achieve this, plaintiffs are required to allege which underwriter sold securities to each plaintiff. Under Pinter, a plaintiff will not succeed on a section 12(2) claim unless the plaintiff shows, among other things, that the plaintiff bought from or was solicited by a specified statutory seller. But Pinter does not address what allegations are necessary to plead that a defendant is a seller within the meaning of the statute.23 Absent a particularity requirement,24 plaintiffs must provide a short and plain statement showing that the underwriter defendants are statutory sellers and that plaintiffs purchased securities from them.
We find that plaintiffs satisfied this requirement and stated a
VII.
After defendants filed the motions to dismiss that led to Westinghouse II, plaintiffs cross-moved to supplement the second amended complaint. See App. 1582-83. Plaintiffs sought to add an additional alleged misrepresentation—Lego‘s alleged October 1990 statement that Westinghouse had only an immaterial amount of restructured receivables.
Plaintiffs’ motion is not discussed at any length in Westinghouse II. It is addressed in one sentence of the opinion and one sentence of the order. See Westinghouse II, Op. at 21, App. 330 (dismissing second amended complaint under rule 8; granting plaintiffs 30 days within which to replead surviving claims in compliance with rule 8; and denying as moot the cross-motion
We find no abuse of discretion in this ruling. The plaintiffs could have included (and were expected to include) the allegation at issue in the third amended complaint. They chose not to submit that complaint. The allegation at issue is relevant to claims that survived the district court‘s orders in Westinghouse I and Westinghouse II, claims that were dismissed with prejudice under Rule 8 only after plaintiffs’ decision to stand on the second amended complaint. Plaintiffs therefore abandoned this allegation when they chose not to submit a third amended complaint.
VIII.
Plaintiffs argue that on remand this case should be reassigned to a new district judge. Plaintiffs rely primarily upon the following statement from Westinghouse I:
In the early 1980‘s, WCC hit its stride when it tapped into the booming commercial and residential real estate markets.
Such success, however, was short-lived. WCC‘s fortunes collapsed along with the real estate market in the late-1980‘s, and the price of Westinghouse stock tumbled during the class period from a high of $39.75/share to a low of $15.875/share.
Now, like so many lending institutions battered by the late-1980‘s real estate bust, Westinghouse, along with its outside accountant and investment bankers, is defending against shareholders who allege
that the company made false and misleading statements regarding the health of its financial services units, thereby artificially inflating the price of Westinghouse stock and damaging plaintiffs who purchased that stock at what they claim to have been an artificially high price.
Westinghouse I, 832 F.Supp. at 958 (citations omitted).
According to plaintiffs, “[t]his statement suggests that plaintiffs’ claims have no merit and that their damages were caused not by defendants’ fraud, but by an economic environment visited on defendants.” Plfs’ Br. at 48. Plaintiffs argue that although it was proper for the judge to take judicial notice of the downturn in the real estate market, “it was improper for [the judge] to attribute plaintiffs’ extensive damages to this trend rather than to defendants’ fraudulent scheme as alleged in the Complaints.” Plfs’ Rep. Br. at 24. Plaintiffs seem to us to read too much into the judge‘s statement, and we note that the district judge‘s comment was not unlike others found in other reported decisions. See, e.g., UJB, 964 F.2d at 274 (“This case is one of a number of federal securities actions against financially troubled banking institutions. After a sharp downturn in the financial condition of defendant UJB Financial Corporation, its shareholders filed a complaint[.]“); see also Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 360 (1st Cir. 1994) (“The complaint depicts an increasingly familiar saga of a bank that boomed with the real estate market of the early 1980s, but suffered in the recession and deteriorating market that followed.“) (citations omitted).
As in United States v. Bertoli, 40 F.3d 1384, 1412 (3d Cir.1994), plaintiffs here make “no allegation that [the district judge] derived his bias from an extrajudicial source.” Rather, all the incidents cited involve rulings and statements made in deciding motions. “Thus, these incidents will not support recusal unless, looked at objectively, ‘they display a deep-seated favoritism or antagonism that would make fair judgment impossible.‘” Id. (quoting Liteky v. United States, 510 U.S. 540, 555, 114 S.Ct. 1147, 1157, 127 L.Ed.2d 474 (1994)). Plaintiffs have not identified anything suggesting such a favoritism or antagonism, and our review of the record reveals none. Finally, we note that, as a practical matter, the judge sustained a number of the
IX.
For the foregoing reasons, we affirm in part and reverse in part the district court‘s orders entered on July 29, 1993 (Westinghouse I), January 23, 1995 (Westinghouse II), and March 1, 1995 (Memorandum Order dated 2/28/95), and we remand for further proceedings consistent with this opinion.
Margaret GARES v. WILLINGBORO TOWNSHIP; Willingboro Township Council; Willingboro Township Police Dept.; Gary Owens, Willingboro Township, Appellant.
No. 95-5269
United States Court of Appeals, Third Circuit
Argued Dec. 8, 1995. Decided July 23, 1996.