MEMORANDUM AND ORDER ON DEFENDANTS MOTION TO DISMISS THE AMENDED COMPLAINT
This is аn action for violations of section 18(a) of the Securities and Exchange Act of 1934, 15 U.S.C. 78r(a), gross negligence under Missouri and New York state law, and violations of the Missouri Uniform Securities Act brought by plaintiffs to recover damages suffered allegedly as a result of their purchase of securities in reliance on defendant’s false and misleading statements. Defendant moves to dismiss the amended complaint pursuant to Fed.R.Civ.P. 9(b), failure to plead fraud with particularity, and pursuant to Rule 12(b) for lack of jurisdiction over the subject matter, for failure to state a claim upon which relief can be granted and for being time-barred under the аpplicable statute of limitations.
*52 Background
Plaintiffs Lindner Dividend Fund, Inc. and Whitehill Capital, Inc. commenced this action to recover damages allegedly suffered as a result of their purchase of preferred stock and debentures of the Bank of New England Corporation (“BNEC”) during the period from August 1989 through January 1990. The initial complaint was filed on October 2, 1992 and alleged five causes of action: violations of sections 10(b) and 18(a) of the Securities and Exchange Act of 1934 (“1934 Act”), pendent state law claims for common law fraud and gross negligence, and a claim for violations of the Missouri Uniform Securities Act.
Defendant filed a motion tо dismiss the initial complaint on July 23, 1993. At a conference held on July 28, 1993, plaintiffs’ counsel indicated to this court that plaintiffs would file an amended complaint rather than respond to defendant’s motion. Plaintiffs filed their amended complaint on October 25, 1993.
Count I of the amended complaint alleges violations of section 18(a) of the 1934 Act. Count II alleges “gross negligence and/or reckless conduct under common law.” Count III alleges violations of section 409.101 of the Missouri Uniform Securities Act. The amended complaint does not contain the section 10(b) and common law fraud claims. At the July 28, 1993 conference, this court, informed plaintiffs that any claims in the initial complaint not repleaded in the amended complaint would be dismissed. Accordingly, the section 10(b) and common law fraud claims of the original complaint are dismissed.
Like the initial complaint, the crux of the amended complaint is the allegation that defendant certified BNEC’s misleading 1988 10-K Annual Report and the “integrated Annual Report to Stockholders of 1988” which were both filed with the SEC on March 20, 1989. Plaintiffs allege that the information in the filed reports regarding the amount of non-performing loans at BNEC’s subsidiary banks and the adequacy of loan loss reserves presented a misleading picture of BNEC’s overall financial stability. As with the initial complaint, the amended complaint consists primarily of numerous excerpts from BNEC’s public filings, which at first reported BNEC’s relatively healthy financial performance, and later announced serious troubles.
The amended complaint avers that the “false and misleading” nature of loan loss reserves and other financial information became evident when BNEC announced a net loss of $1.05 billion and an additional loan loss provision of $1.5 billion for year-end 1989. Plaintiffs posit that BNEC’s earlier statements that its loan loss reserves were adequate were due to fraud and other misconduct by defendаnt.
The amended complaint alleges that defendant audited BNEC’s 1988 year-end financial statements, that the statements failed to disclose “the number and amount of non-performing loans” of BNEC’s subsidiary banks and “adequacy of the loan loss reserves,” that defendant’s audit “did not comply with proper accounting standards,” and that a “proper” audit “would have properly disclosed the number and amount of non-performing and partially performing loans” of the subsidiary banks which could have then been used to determine the “proper amount of loan loss reserves.”
Plaintiffs further allege on information and belief that defendant
knew, because of the decline in the New England Real Estate Market during 1988 ... and the actual loan loss experience during 1988 ... the amount of loan loss reserve and the overall quality of the outstanding loans of the subsidiary banks required a substantial increase in the loan loss reserve and adequate footnoting of [defendant’s] certification.
The amended complaint also states that defendant’s “deferr[al] to management’s estimation of the amount to be allowed for possible credit losses ... in and of itself, constitutes a failure of proper auditing practice.”
Section 18(a) Claims
Section 18(a) of the 1934 Act permits persons who, in rеliance on materially misleading statements in reports or other documents filed with the Securities and Exchange Commission pursuant to the 1934 Act, purchased or sold a security whose price was affected *53 by such statements, to bring suit against persons who “make” or “cause” such statements “to be made.”
Defendant moves to dismiss the federal claim on three grounds: a statute of limitations bar, failure to state a claim upon which relief may be granted, and failure to plead fraud with particularity. Defendant also moves to dismiss the state law claims under the Gibbs doctrine, or alternatively, on the grounds of a limitations bar and failure to state a claim upon which relief may be granted.
“For purposes of a motion to dismiss, I assume the well-pleaded facts as they appear in the complaint to be admitted, indulging every reasonable inference in favor of the non-moving party,”
Slavin v. Morgan Stanley & Co., Inc.,
I. Statute of Limitations
Section 18 provides that a plaintiff must bring an action under that section “within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued.” 15 U.S.C. § 78r(c). A cause of action accrues within the meaning of section 18(e) when the purchase of securities for which damages are sought has taken place.
Jacobson v. Peat, Marwick, Mitchell & Co.,
Plaintiffs’ purchases of securities during December 1989 and January 1990 are within the three-year limitations period. In regard to these purchases, the amended complaint alleges that thе suit was commenced within one year “of the date when the wrongs involved were discovered or could have been discovered with reasonable diligence” because plaintiffs did not “discover” the claim until they received a “Notice of Pendency of Class Action” in September 1992. This assertion is untenable in light of the allegations in the amended complaint that results for fiscal year 1989 showed losses and loss provisions in the billions of dollars. Even though plaintiffs allege that these losses were “inadequate to disclose the true financial picture of BNEC,” a great deal of the picture was by then clear. By some time in 1990, whеn this information of losses in 1989 was made public, plaintiffs were sufficiently aware of the facts constituting this cause of action to start the running of the limitations period.
See Slavin,
A. Class Action Tolling
In opposing defendant’s Motion to Dismiss, plaintiffs do not rely on their claim that they did not “discover” their cause of action until September 1992 but rather invoke the class action tolling doctrine and a tolling agreement between defendant and the putative class in the Bank of New England shareholder and derivative litigation to protect them from the limitations bar.
The class action tolling doctrine was enunciated in
American Pipe & Construction Co. v. Utah,
First, although defendant was initially named in some of the various class action suits filed in this court, the plaintiffs in those actions chose not to assert claims against the defendant in the consolidated and amended class action complaint, under the same caption, which superseded the earlier complaints.
See, e.g., International Controls Corp. v. Vesco,
Plaintiffs argue that they are nevertheless entitled to such tolling because they were not informed that the prior class action was not proceeding against the defendant. Plaintiffs cite no authority for this proposition. Generally, decisions by class counsel to drop certain defendants from individual suits, made to refine issues and not as a result of settlement, are within counsel’s discretion and do not necessarily require notice to the putative class.
See Manual For Complex Litigation Second
§ 30.212 (1986);
see also Longden v. Sunderman,
Additionally, the Supreme Court has noted that the class action tolling rule is not inconsistent with the purposes served by statutes of limitations of putting defendants on notice of adverse claims and of preventing plaintiffs from sleeping on their rights.
Crown, Cork & Seal Co. Inc. v. Parker,
Second, class action tolling applies only to complaints that assert the same causes of action as the original claim.
Burns v. Ersek,
Here, plaintiffs assert a section 18 claim while plaintiffs in the earlier class action against defendant asserted violations of section 10(b). The facts required to be pleaded
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and proved under section 10(b) are significantly different from the facts that give rise to section 18 claims. To state a claim under section 10(b), a plaintiff must allege acts indicating an intent to deceive, manipulate, or defraud.
Ernst & Ernst v. Hochfelder,
B. Tolling Agreement
More availing to plaintiffs is their argument that the section 18(a) claims are timely because of a tolling agreement between defendant and the putative class in Bank of New England Corp. Class Action Litigation. Subject to its terms, the tolling agreement and a subsequent extension extended the applicable statutes of limitations through October 22, 1993.
The agreement was entered into by the named plaintiffs in the class action litigation “in behalf of the members of the class that said parties sought to represent, including persons who purchased Bank of New England Corporation securities ... between April 22, 1987 and January 19, 1990” and defendant. The agreement was to- “run[ ] in favor of all putative class members in the consolidated amended complaint” and “class members who do not opt out are to be regarded as parties to this agreement protected by this agreement.” Plaintiffs fall under the agreement’s penumbra of protection.
The agreement, by subsequent extension, expressly conditioned the tolling of the statute of limitations on the plaintiffs in the class and derivative litigants filing claims against defendant by October 22, 1993. The original agreement provided that if the
plaintiffs do not file any such claims [against Ernst & Young] by ... April 22, 1993 ... this [agreement] shall cease to have any effect and E & Y may therefore assert any statute of limitations defense it may have or would have had without regard for the agreement reflected in this paragraph, including without limitation any statute that may have run during the pen-dency of agreement.
Defendant argues that no claims were filed against defendant by named plaintiffs prior to October 22,1993, and therefore by its own terms the agreement is without effect and cannot be relied upon by plaintiffs. However, the terms of the agreement do not condition tolling on the filing of suit by a named plaintiff, but rather merely on the filing of suit by “plaintiffs.” In the agreement’s opening paragraph, the “named plaintiffs” are distinguished from the “members of the classes they seek to represent,” and the operative paragraph of the agreement does not state that “named plaintiffs” must file suit by a certain date. The express condition of the agreement was met when any plaintiff filed suit against defendant prior to the deadline.
Plaintiffs, as members of the plaintiff class in Bank of New England Corp. Class Action Litigation, were entitled to the protections of the tolling agreement, and properly availed *56 themselves of those protections by filing suit against defendant prior to October 22, 1993.
II. Failure to State a Claim
“Section 18 requires that a plaintiff establish knowledge of and reliance upon the alleged misstatements contained in any document filed with the SEC.”
Ross v. A.H. Robins Co.,
The amended complaint alleges that plaintiffs “specifically relied upon various statements contained in said reports.” These “various statements” are quoted throughout the amended complaint. “Indulging every reasonable inference in favor of the non-moving party,” I find that plaintiffs have sufficiently met their burden at this stage of the litigation of alleging that they saw and relied upon the alleged misstatements contained in the documents.
To plead a section 18 claim properly, plaintiffs must allege not only specific reliance but also that they sustained damages by relying upon false or misleading statements filed with the SEC and that the purchase or sale price of his shares was affected by such statements.
Jacobson,
I agree that plaintiffs’ alleged continued reliance on the loan loss reserve figures in December and January when the рrice of the shares had dropped nearly 50 percent since August is highly suspect. Plaintiffs are not unsophisticated investors. Plaintiffs are corporate investment groups that should have been aware of the declining New England real estate market and should have been alerted to potential problems by dramatic decreases in the prices of securities. In light of plaintiffs’ status, I also find it unusual that in December 1989 and January 1990 plaintiffs were still relying on a 1988 10-K that had been filed in March of that year, especially since by that time there were “various published articles and statements” revealing that BNEC would “post substantial losses in the fourth quarter.”
Slavin v. Morgan Stanley & Co.,
Nevertheless, I find that plaintiffs’ allegations that their loss was caused by reliance on various statements contained in forms filed with the SEC, while perhaps subject to challenge, are not “unsupportable conclusions” that should be disregarded on a motion to dismiss.
Ochoa Realty Corp. v. Faria,
III. Failure to Plead Fraud with Particularity
Complaints sounding in fraud or mistake are held to a higher standard of pleading specificity than that of Fed.R.Civ.P. 8. Rule 9(b) provides that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” The puteóse of Rule 9 is to provide notice to the defendant of the grounds on which the plaintiff’s fraud claim rests,
Hayduk v. Lanna,
Plaintiffs argue that Rule 9(b) is inapplicable to section 18 claims, suggesting that because the standards of liability under section 18 are broader than under section 10(b), actions under section 18 should not be subject to the more stringent plеading requirements of Rule 9(b). I found no authority for this proposition or for the more general claim that Rule 9(b) is inapplicable to section 18 actions. To the contrary, several courts have held that Rule 9(b) is applicable to section 18 claims.
See, e.g., Denny v. Barber,
Plaintiffs further contend that fraud is not an element of a section 18 claim, but rather that all section 18 requires is negligent misrepresentation. Without deciding whether fraud is an element of such a claim or not, I note that this district has “clearly held that Rule 9(b) applies to claims of negligent misrepresentations” because the “same rule against pleadings on ‘information and belief and the same policy against allowing ‘strike suits’ apply to negligent misrepresentation claims as apply to outright claims of fraud.”
In re Stratus Computer, Inc. Sec. Litig.,
This circuit has interpreted Rule 9(b) to require “specification of the time, place, and content of an alleged false representation ...”
McGinty v. Beranger Volkswagen, Inc.,
In addition to specifications of time, place and the content of alleged misrepresentations, plaintiffs are required to plead a factual basis that would make it reasonable to determine that a statement was materially false or misleading.
Greenstone v. Cambex Corp.,
While I assume factual allegations to be true when passing on a motion to dismiss, this tolerance does not extend to legal conclusions or bald assertions.
Resolution Trust Corp. v. Driscoll,
It is only when such conclusions are logically compelled, or at least supported, by the stated facts, that is, when the suggested inference rises to what experience indicates is an acceptable level of probability, that “conclusions” become “facts” for pleading purposes.
Dartmouth Review v. Dartmouth College,
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The amended complaint contains eoneluso-ry assertions that defendant’s audit “did not comply with proper accounting standards,” and that if proper accounting standards had been employed, they “would have properly disclosed the number and amount of nonperforming and partially performing loans” of BNEC’s subsidiary banks, which would then have been used “to determine the proper amount of loan loss reserves.” The amended complaint does not “give examples of problem loans that [defendant] should have caught, or explain how it did or should have recognized that the provisions for reserves established by [BNEC’s] loan officers were inaccurate.”
DiLeo v. Ernst & Young,
In
DiLeo v. Ernst & Young,
plaintiffs alleged, as they do here, that a substantial increase in loan loss reserves is evidence of wrongdoing with respect to earlier stаtements that the reserves were adequate.
The story in this complaint is familiar in securities litigation. At one time the firm bathes itself in a favorable light. Later the firm discloses that things are less than rosy. The plaintiff contends that the difference must be attributed to fraud. ‘Must be’ is the critical phrase, for the complaint offers no information other than the differences between the two statements of the firm’s condition. Because only a fraction of financial deteriorations reflects fraud, plaintiffs may not proffer the different financial statements and rest. Investors must point to some facts suggesting that the difference is attributable to fraud- Rule 9(b) required the district court to dismiss the complaint, which discloses none of the circumstances that might separate fraud from the benefit of hindsight.
Similarly, courts in this district, in the wake of the collapse of the New.England real estate market, have been flooded with section 10(b) complaints alleging that substantial increases in loan loss reserves provide factual support for a claim that earlier statements of adequate reserves were fraudulent. Such complaints have not survived scrutiny under Rule 9(b).
See, e.g., Driscoll v. Landmark Bank for Sav.,
In
Akerman,
I dismissed similar claims of inadequate loan loss reserves, overstated asset quality, and understated non-performing loans pursuant to Rule 9(b). I found allegations based on information and belief, like those here, to be inadequate where such allegations consisted of eighteen paragraphs of excerpts that “simply quote verbatim from the Bank’s annual and quarterly reports,”
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immediately followed by “conelusory statements that pertain more to mismanagement than to misrepresentation.”
Although the foregoing eases discuss the pleading requirements for claims brought pursuant to section 10(b), the mere allegation of later substantial increases in loan loss reserves does not provide adequаte factual support for a claim that earlier statements of adequate reserves must be attributable to fraud or misrepresentation for purposes of section 18. There is no “fraud by hindsight.”
Denny v. Barber,
Finally, even if plaintiffs had pled adequate factual support for the inaccuracy of the statements, “without some showing of impropriety, violations of the securities laws may not be inferred from the publication of inaccurate accounting figures alone.”
Jacobson v. Peat, Marwick, Mitchell & Co.,
Pendent State-law Claims
Plaintiffs’ reliance on diversity jurisdiction for their state law claims is insupportable. Diversity jurisdiction requires complete diversity. No plaintiff can have the same citizenship as any defendant at the time the lawsuit is commenced.
Strawbridge v. Curtiss,
7 U.S. (
For diversity purposes, unincorporated associаtions are deemed to be citizens of each and every state in which their members are citizens.
United Steelworkers of America v. R.H. Bouligny, Inc.,
Since the federal claim has been dismissed with рrejudice at such an early stage in the lawsuit, this is not an appropriate case to exercise pendent jurisdiction over the state-law claims. “[I]f the federal claims are dismissed before trial ... the state claims should be dismissed as well.”
United Mine Workers v. Gibbs,
a federal court should consider and weigh in each case, and at every stage of the litigation, the values of judicial economy, convenience, fairness, and comity in order to decide whether to exercise jurisdiction *60 over a ease brought in that court involving pendent state-law claims. When the balance of these factors indicates that a case properly belongs in state court, as when the federal-law claims have dropped out of the lawsuit in its early stages and only state-law claims remain, the federal court should decline the exercise of jurisdiction by dismissing the case without prejudice ... in the usual case in which all federal-law claims are eliminated before trial, the balance of factors to be considered ... will point toward declining to exercise jurisdiction over the remaining state-law claims.
Carnegie-Mellon Univ. v. Cohill,
Conclusion
Plaintiffs are not entitled to a third chance to plead their federal claims. Plaintiffs were put on notice of pleading deficiencies when defendant moved to dismiss the original complaint. Where plaintiffs have had “ample opportunity to allege any facts of which they are aware,” and their “First Amended Complaint itself was a response to an earlier charge that, the original complaint failed to comply with Rule 9(b), the amended complaint should be dismissed without leave to replead.
Tapogna v. Egan,
Judgment of dismissal shall forthwith enter accordingly.