September 14, 1977
Myra Gross, Plaintiff
Diversified Mortgage Investors Ray C. Wilson, Julius Jensen, III, M.J. Wallace, N.W. Wallace, Gordon E. Emerson, Jr., Goerge M. Lovejoy, Jr., James V. Rice, Blancke Noyes, Bayard Henry, William Royce Moore, William E. Palmer, Bernard O. Snoddy, R.M. Norris, Diversified Advisers, Inc., Continental Investment Corp. and Price Waterhouse & Co., Defendants; Harry Lewis, Plaintiff v. Gordon E. Emerson, Jr., Bayard Henry, Bernie O. Snoddy, Julius Jensen, III, Goerge M. Lovejoy, Jr., William Royce Moore, Blancke Noyes, James V. Rice, M.J. Wallace, N.W. Wallace, Diversified Advisers, Inc., Price Waterhouse & Co., Continental Investment Corporation and W Corporation, Defendants; Abraham Wechsler, on behalf of himself and all others similarly situated, Plaintiff v. Diversified Mortgage Investors, Continental Investment Corp. and Diversified Advisers, Inc., Defendants; Michael C. Duban, Individually and as Trustee for Saul and Gertrude Duban U/TÅ March 6, 1972, and Roberta Duban as Custodian for Lauren Duban and Melissa Duban, Minors, on behalf of themselves and as a class, Plaintiffs v. Diversified Mortgage Investors, Ray C. Wilson, Julius Jensen, III, M.J. Wallace, N.W. Wallace, Gordon E. Emerson, Jr., George M. Lovejoy, Jr., James V. Rice, Blancke Noyes, Bayard Henry, William Royce Moore, William E. Palmer, Bernie O. Snoddy, R.M. Norris, Diversified Advisers, Inc., Continental Investment Corp., Hornblower & Weeks-Hemphill, Noyes Incorporated, Price Waterhouse & Co., Sherman Simanowitz and Morton Meadow, Defendants; Anne Meyer, on behalf of herself and as a Class, Plaintiff v. Diversified Mortgage Investors, Ray C. Wilson, Julius Jensen, III, M.J. Wallace, N.W. Wallace, Gordon E. Emerson, Jr., George M. Lovejoy, Jr., James V. Rice, Blancke Noyes, Bayard Henry, William Royce Moore, William E. Palmer, Bernie O. Snoddy, R.M. Norris, Diversified Advisers, Inc. Continental Investment Corp., Hornblower & Weeks-Hemphill, Noyes Incorporated, and Price Waterhouse & Co., Defendants
Gagliardi, District Judge.
The opinion of the court was delivered by: GAGLIARDI
GAGLIARDI, District Judge:
The complaints in all five of these actions, brought under the Securities Exchange Act of 1934 ("Exchange Act") and pendent state claims on behalf of certain purchasers of the stock of Diversified Mortgage Investors ("DMI"), were ordered dismissed with leave to replead in accordance with the court's memorandum decision of February 25, 1977, Gross, et al. v. DMI, et al., 431 F. Supp. 1080. Defendants again move to dismiss all or parts of four of the five complaints filed in this action. The fifth complaint, in the Lewis v. Emerson, 75 Civ. 1001, action, has been answered by the defendants.
Generally, the defendants move, among other grounds, pursuant to Rule 12(b)(6) Fed. R. Civ. P. to dismiss the four complaints for failure to set forth with particularity the facts and circumstances constituting fraud as required by Rule 9(b) Fed. R. Civ. P. All of the defendants, except Price Waterhouse & Co. ("Price Waterhouse") who moves separately to dismiss, discussed infra, join in this motion. Because the amended complaints in the four actions are very similar in their method of pleading, their language and the reports and documents they rely upon as being false and misleading, the court's general discussion and decision applies to all four actions.
The court's memorandum decision of February 25, 1977 found that the amended complaint in the Duban action, 74 Civ. 3035, alleged fraud with the particularity required by Rule 9(b) beginning December 6, 1973. Examining the new complaints filed as a result of that memorandum decision, the court finds that the other complaints also adequately allege fraud beginning with that date.
Such a decision is reached with serious reservations about the method of pleading adopted in these complaints. Plaintiffs have each set out a collection of diverse and lengthy quotations and assertions based on defendants' reports and documents spanning a period of years. These lengthy quotations do not satisfy the particularity requirement of Rule 9(b) and are contrary to Rule 8(a)'s, Fed. R. Civ. P., requirement that the complaint contain a short and plain statement of the claim. At the end of all of these quotations and assertions, plaintiffs set out a list of defects which allegedly apply to all of these diverse materials. Plaintiffs do not attempt to correlate these alleged defects with the specific reports or financial statements which allegedly conveyed this information or failed adequately to disclose it. As a result, plaintiffs have not succeeded in meeting the requirements of this court's memorandum decision to set forth the manner in which each financial statement and report is alleged to have been fraudulent and to identify in what respects each particular statement and report was false or misleading or what omissions were made and why the statements made are believed to be misleading. Memorandum Decision at 8, 17, citing Felton v. Walston & Co., Inc., 508 F.2d 577 (2d Cir. 1974); Rich v. Touche Ross & Co., 68 F.R.D. 243, 246-47 (S.D.N.Y. 1975); Spiegler v. Wills, 60 F.R.D. 681, 682 (S.D.N.Y. 1973); Goldberg v. Shapiro, CCH Fed. Sec. L. Rep. P 94,813 at 96,717 (S.D.N.Y. 1974). Nonetheless, as to the period beginning with the defendants' news release of December 6, 1973, while the allegations are not as specific as might be desired, the court can see a sufficient nexus between the documents alleged to be false or misleading and the manner they are allegedly false or misleading to defeat a motion to dismiss. These averments, while not exemplary, go beyond the conclusory allegations of the prior complaints forbidden by Rule 9(b). Further specification is a task deferred to the discovery stage of the litigation.
Plaintiffs have much more difficulty defeating the motion to dismiss with respect to pre-December 6, 1973 reports or statements relied upon in their complaints. Plaintiffs concede that the most aggravated period of defendants' alleged fraud occurred around the December, 1973 period when the oil crisis and its effect on real estate ownership became apparent to the business community and when DMI issued releases indicating they were better able to deal with the resultant market fluctuations than other real estate investment trusts (REIT). Prior to December, 1973, the alleged fraud is more attenuated and fewer, if any, of the concluding list of alleged defects apply to the earlier reports. So, for example, the effect of the oil crisis could not be anticipated at the time of the 1970 or 1971 DMI Annual Reports.
After a careful examination of the complaints in these actions and the quotations from the Annual Reports, the court reaches the following conclusions. As to the 1972 Annual Report, with among other allegedly fraudulent statements its emphasis on the attractiveness of intermediate term and mini-perm loans without disclosure of their alleged risks, plaintiffs have sufficiently alleged particular fraud and connected the report to the fraud to defeat a motion to dismiss. As to the 1972 Form 10-K filed with the Securities and Exchange Commission ("SEC") pursuant to Section 13 of the Exchange Act, 15 U.S.C. § 78m, and all reports and financial statements prior to the 1972 Annual Report referred to in the amended complaints, defendants' motions to dismiss will be granted. The manner of the fraud alleged in these early reports is unclear from the complaints. The only identifiable omission alleged generally as to all reports and statements is that they failed to record loan losses in amounts adequate to provide for foreseeable losses. These allegations of wrongdoing are not supported and in the absence of circumstances fairly supporting an inference of impropriety they remain only bare assertions without the specificity required by Rule 9(b). See Lewis v. Black, CCH Fed. Sec. L. Rep. P 95,638 at 90,167 (E.D.N.Y. 1976); Segal v. Coburn Corp. of America, CCH FED. SEC. L. REP. P 94,002 at 94,020-21 (E.D.N.Y. 1973). Plaintiffs have failed to identify in what manner and in what particular respects this omission or any other statement or omission in these particular early documents was fraudulent. A general allegation spanning several years cannot be expansively applied to the early years where there is no indication of such fraud.
As a result, defendants' motions to dismiss are granted insofar as those portions of plaintiffs' amended complaints referring to the 1972 DMI Form 10-K and to all reports and statements issued prior to the 1972 DMI Annual Report are ordered stricken. While the court is doubtful that plaintiffs will be able to replead as to these early documents with the particularity required by Rule 9(b), it will not at this stage of the litigation dismiss with prejudice. Following the law in this Circuit in Lowenschuss v. Kane, 520 F.2d 255, 263 (2d Cir. 1975) and Mooney v. Vitolo, 435 F.2d 838, 839 (2d Cir. 1970), plaintiffs, who have not had extensive access to the records of defendants and have only been given one opportunity to replead, cannot have their claims dismissed without leave to amend. See Felton v. Walston and Co., Inc., supra at 580, 582 (dismiss with prejudice fourth amended complaint after three unsuccessful attempts to replead). Plaintiffs, if they seek to replead, are given 20 days to plead with the particularity required by Rule 9(b) in accordance with this decision and the court's prior memorandum decision as to each of the individual documents dismissed. If plaintiffs upon repleading fail to meet the requirements of Rule 9(b), those portions of their complaints will be dismissed without leave to amend.
Defendant Price Waterhouse's only motions are in the Duban, Meyer and Gross actions pursuant to Rule 12(b)(6) to dismiss these amended complaints as to it for failure to allege fraud with particularity as required by Rule 9(b). The court's memorandum decision of February 25, 1977, slip op. at pp. 8-12, set out the pleading requirements of this Circuit under Rule 9(b) with respect to accountant defendants. While Rule 9(b) does not insulate accountants from claims of fraud where a complaint alleges the fraudulent acts with particularity, these complaints do not comply with this court's memorandum decision and do not satisfy the requirements of Rule 9(b).
The complaints fail to delineate the extent of the participation and responsibility of Price Waterhouse in any of the alleged errors or omissions. Plaintiffs only generally allege that the reserves for losses recorded over several years were not adequate. As already set forth, supra, such a general conclusory allegation does not satisfy Rule 9(b). See Lewis v. Black, supra; Segal v. Coburn Corp. of America, supra (complaints alleging an overstatement of earnings due to failure to provide proper reserves for anticipated losses were dismissed for lack of specificity.) This allegation is particularly insufficient as to Price Waterhouse in that it fails to allege facts and circumstances constituting fraud specifically on the part of Price Waterhouse. See Rich v. Touche Ross & Co., supra, 68 F.R.D. at 246-47; Goldberg v. Shapiro, supra, at 96,717. Dealing with all the defendants as a group without delineating what role Price Waterhouse had with respect to the various documents referred to in the amended complaint does not satisfy Rule 9(b).
Plaintiffs in all three actions concede in their briefs that they are not charging Price Waterhouse with conducting a fraudulent audit of DMI. Rather they claim that Price Waterhouse certified financial statements over several years with knowledge and in possession of facts which led or should have led to knowledge that the financial statements were false and misleading. Such a general conclusory allegation of fraud is not in compliance with Rule 9(b). To satisfy Rule 9(b) plaintiffs must specify in what respects each of the statements were false and misleading, and the factual basis for believing Price Waterhouse acted fraudulently and was responsible.
Defendant Price Waterhouse's motion to dismiss the amended complaints as to it is granted with leave to plaintiffs to replead within 20 days from the date of filing of this memorandum decision and order. Such repleading should be in accordance with this memorandum decision and order and the court's February 25, 1977 memorandum decision. Particular attention should be paid to the specificity required as to Price Waterhouse's participation and fraud with respect to the early DMI ...
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