The opinion of the court was delivered by: GAGLIARDI
GAGLIARDI, District Judge.
These four actions have been brought under various provisions of the securities laws on behalf of certain purchasers of the stock of Diversified Mortgage Investors ("DMI"). Defendant DMI is a real estate investment trust within the meaning of Sections 856 through 858 of the Internal Revenue Code of 1954, as amended, organized under the laws of the State of Massachusetts. At all times material to these actions, DMI's shares have been listed and traded on the New York Stock Exchange. Other defendants in some of these actions include: Diversified Advisers, Inc., the investment adviser and manager of DMI; Continental Investment Corp., the parent of Diversified Advisers, Inc. and the sponsor and a parent of DMI; various individual directors, trustees and officers of these corporate defendants; and Price, Waterhouse & Co. a certified public accounting firm which acted as the independent auditors of DMI during the relevant period of these actions.
Plaintiffs claim generally that the various defendants' misrepresentations and omissions caused the overvaluation of DMI's securities and concealed its true condition from the public, causing these plaintiffs and others to buy such securities at inflated prices and, because of the decline of the market price of DMI's shares, to suffer losses. They allege that the acts and practices constituting violations which are the basis of their complaints occurred in part in the Southern District of New York. Each of the plaintiff's complaints in the four actions assert that the individual plaintiff is acting on behalf of a class. The plaintiffs in the Duban and Lewis actions move pursuant to Rule 23(b) Fed.R.Civ.P. for class action certification claiming to represent all persons similarly situated who purchased the stock of DMI during the period of alleged wrongful conduct and who were damaged by the wrongful conduct.
Certain of the defendants in each of the actions move, pursuant to Rule 42(a) Fed.R.Civ.P., to consolidate these actions for pretrial purposes. They claim that the four actions are related in that each attacks certain reports and financial statements of DMI, each involves substantially the same defendants, and each purports to be a class action and alleges classes involving the same or overlapping time periods. Plaintiffs Gross, Wechsler, and Duban, in the event the consolidation motion is granted, move for appointment of co-lead counsel the law firms of Snow & Becker and Kass, Goodkind, Wechsler & Gerstein. Plaintiff Lewis cross-moves for the appointment of Stull, Stull & Brody as general counsel.
Because of the court's decision to dismiss the complaint or parts of the complaint in each of these actions, the court reserves decision on the class action motions and extends the time if the defendants reply to those motions until twenty days after the filing of the amended complaints. Similarly, the court will defer consideration of the consolidation and appointment of lead counsel motions until after the filing of the amended complaints. In this way the court may determine these motions and the adequacy of the complaints with respect to all the defendants at the same time.
In this action alleging violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. 240.10b-5, most of the defendants move, pursuant to Rule 12(b)(6) Fed.R.Civ.P., to dismiss the complaint for failure to state a claim upon which relief may be granted and for failure to state a claim with the particularity required by Rule 9(b) Fed.R.Civ.P. This court has jurisdiction of this action pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa.
The complaint contains two claims. The first claim seeks relief from all defendants except Price, Waterhouse & Co. ("Price Waterhouse"). The second claim is brought against Price Waterhouse only.
Focusing on the first claim and the motion to dismiss for failure to set forth a claim with the particularity required by Rule 9(b) Fed.R.Civ.P., Rule 9(b) provides in part:
[In] all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.
It is established in this Circuit that under Rule 9(b) "mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of Rule 10b-5 are insufficient." Shemtob v. Shearson, Hammill & Co., Inc., 448 F.2d 442, 444 (2d Cir. 1971); also quoted in Felton v. Walston & Co., Inc., 508 F.2d 577, 580 (2d Cir. 1974); Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972); Goldberg v. Shapiro, CCH Fed.Sec.L.Rep. P 94,813 at 96,717 (S.D.N.Y.1974).
There are at least three well-recognized purposes for Rule 9(b)'s specificity requirement. The first is to inhibit the filing of a complaint as a pretext for discovery of unknown wrongs. Segal v. Gordon, supra at 607-08; Lewis v. Varnes, 368 F. Supp. 45, 47 (S.D.N.Y.), aff'd, 505 F.2d 785 (2d Cir. 1974). A complaint alleging fraud "should serve to redress a wrong, not to find one." Segal v. Gordon, supra at 608. The second aim is to protect potential defendants from the harm that comes to their reputations when they are charged with the commission of acts involving moral turpitude. Segal v. Gordon, supra at 607; Rich v. Touche Ross & Co., 68 F.R.D. 243, 245 (S.D.N.Y.1975). Finally, Rule 9(b) serves to ensure that allegations of fraud are concrete and particularized enough to give notice to the defendants of what conduct is complained of to enable the defendants to prepare a defense to such a claim of misconduct. Rich v. Touche Ross & Co., supra at 245; Lewis v. Varnes, supra at 47; see Felton v. Walston & Co., supra.
Plaintiff's complaint, as are the complaints in the other three actions, is based upon "information and belief." The allegations in these complaints violate the general rule that "Rule 9(b) pleadings cannot be based on information and belief." Segal v. Gordon, supra at 608, citing 2A J. Moore's, Federal Practice P 9.03. "While the rule is relaxed as to matters peculiarly within the adverse parties' knowledge, the allegations must then be accompanied by a statement of facts upon which the belief is founded." Id.; accord, Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), cert. denied, 421 U.S. 976, 95 S. Ct. 1976, 44 L. Ed. 2d 467 (1975); Rich v. Touche Ross & Co., supra at 245.
Under Rule 9(b), the court must examine the complaint to determine whether it sets forth with particularity "a statement of facts upon which the belief is founded." The complaint in this case in the first cause of action does not satisfy this particularity requirement of Rule 9(b). The complaint in paragraph 15 generally alleges that DMI issued "false and misleading annual and quarterly reports, financial statements and other materials, and filed false and misleading reports with the New York Stock Exchange, the Securities and Exchange Commission and [others]" dating back to 1969. While some reports are later referred to in somewhat greater detail, it is just this kind of generalized statement in para. 15 that must be stricken under Rule 9(b). Instead, there must be a specific identification of what statements were made in what reports and in what respects they were false, misleading or inaccurate or what omissions were made and why the statements made are believed to be misleading. Rich v. Touche Ross & Co., supra at 246; see Felton v. Walston & Co., Inc., supra; Spiegler v. Wills, 60 F.R.D. 681, 682 (S.D.N.Y.1973). Plaintiff must state the time, place and content of each financial statement and report which she claims misled her, the manner in which they were alleged to be fraudulent, and what was obtained as a consequence of the fraud.
Rich v. Touche Ross & Co., supra at 246-47; Spiegler v. Wills, supra at 682; Goldberg v. Shapiro, supra at 96,717. Additionally, the plaintiff has failed to plead the nature and amount of securities purchased and the specific dates of the transactions as required by Rule 9(b). See Felton v. Walston & Co., Inc., supra at 580; Segal v. Gordon, supra at 608.
Defendants also attack the first cause of action for failure to state a claim upon which relief can be granted and move to dismiss the complaint under Rule 12(b)(6) Fed.R.Civ.P. Defendants claim that the plaintiff has failed to allege the required scienter to make out a cause of action under § 10(b) and Rule 10b-5. It is settled law "that 'facts amounting to scienter, intent to defraud, reckless disregard for the truth, or knowing use of a device, scheme or artifice to defraud' are essential to the imposition of liability." Lanza v. Drexel & Co., 479 F.2d 1277, 1301 (2d Cir. 1973) (en banc), quoting Shemtob v. Shearson, Hammill & Co., supra at 445. Mere negligence is not actionable under Section 10(b) and Rule 10b-5. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976); see Cohen v. Franchard Corp., 478 F.2d 115, 123 (2d Cir.), cert. denied, 414 U.S. 857, 94 S. Ct. 161, 38 L. Ed. 2d 106 (1973); Shemtob v. Shearson Hammill & Co., supra at 445.
Defendants contend that plaintiff's allegation in para. 18 of the complaint that "defendants knew, or should have known" of the alleged misdeeds only alleges negligence and fails to allege scienter. Ernst & Ernst v. Hochfelder, supra, 96 S. Ct. at 1390-91, only requires an allegation of intentional or willful conduct beyond mere negligence for a § 10(b) and Rule 10b-5 claim. As a result, plaintiff's allegation that defendants "knew" of the falsity of their representations is a sufficient allegation of scienter under Section 10(b) and Rule 10b-5. Heit v. Weitzen, 402 F.2d 909, 914 (2d Cir. 1968), cert. denied, 395 U.S. 903, 89 S. Ct. 1740, 23 L. Ed. 2d 217 (1969); Lewis v. Marine Midland Grace Trust Co., 63 F.R.D. 39, 44 (S.D.N.Y.1973); Raskas v. Supreme Equipment & Systems Corp., 71 F.R.D. 672 at 674 (E.D.N.Y.1976); Oleck v. Fischer, 401 F. Supp. 651 (S.D.N.Y.1975); but see contra Rich v. Touche Ross & Co., 415 F. Supp. 95 (S.D.N.Y.1976); Vogel v. Brown, CCH Fed.Sec.L.Rep. P 94,831 (S.D.N.Y.1974). Plaintiff's general allegation of knowledge complies with Rule 9(b) Fed.R.Civ.P. While that Rule requires that circumstances constituting fraud be stated with particularity, the same Rule expressly authorizes "knowledge, and other conditions of mind may be averred generally." The fact that plaintiff's complaint may be read as alternatively pleading actual knowledge and constructive knowledge (i.e., "knew, or should have known") does not render her pleading insufficient, as Rule 8(e)(2) Fed.R.Civ.P. specifically allows for such pleading in the alternative. Raskas v. Supreme Equipment, supra at 674.
The motions of defendant Price Waterhouse attack the second claim of the complaint on the same ground that the other defendants attack the first claim. Under a Rule 9(b) attack the court recognizes that the protection of Rule 9(b) is particularly important where the defendants are accountants and other professionals whose reputations in their field of expertise are most sensitive to slander. Rich v. Touche Ross & Co., supra at 245; see Felton v. Walston & Co., supra at 581-82. The ...