The opinion of the court was delivered by: CARTER
Plaintiff John P. Decker brought this action against Massey-Ferguson, Ltd. ("Massey"); fourteen present or former directors of Massey (the "individual defendants");
and Clarkson, Gordon & Co. ("Clarkson"), auditors for Massey. Decker alleges that the defendants acted or failed to act in ways that violated §§ 10(b), 18(a) and 20(a) of the Securities Exchange Act ("Act"), 15 U.S.C. §§ 78j(b), 78r(a) and 78t(a), Rule 10b-5 promulgated thereunder, and the common law. In essence, plaintiff charges that a series of misstatements and non-disclosures by the defendants in publicly disseminated documents led the investing public to pay inflated prices for Massey common stock from February 1, 1976, through February 24, 1978 (the "class period"). Plaintiff claims that, by reason of the defendants' actions, he and the class he represents were damaged when Massey common declined precipitously in market price.
In an order and opinion dated December 21, 1979, the court dismissed the original complaint, finding that plaintiff failed in at least three respects to plead fraud with sufficient particularity as required by Rule 9(b), F.R.Civ.P. First, the complaint was premised on information and belief only, without any additional statement of facts which would enable defendants or the court to understand the basis of the fraud allegations. Second, it inadequately expounded the specific circumstances alleged to constitute fraud and failed to identify the documents and statements alleged to offend the Act. Third, it failed to "differentiate among the defendants in its accusations of wrongdoing, or to state with any particularity what specific wrongful acts were done." (Opinion at p.5). Plaintiff was given leave to file an amended complaint conforming to Rule 9(b) within thirty days.
Decker has now filed an amended complaint totalling sixty-nine pages in length which, for the first time, alleges violations of § 18(a) of the Act and common law claims, in addition to the claim under §§ 10(b) and 20. All of the defendants have moved to dismiss this new pleading.
Massey, the individual defendants, and Clarkson contend that the amended complaint either does not provide the additional specificity Rule 9(b) requires or fails to state a claim for relief, that the claim of violations of § 18(a) is similarly deficient under Rule 9(b) and in any event is time barred, and that the common law counts cannot be heard under the court's pendant jurisdiction. In the alternative, Massey and the individual defendants have moved for partial summary judgment dismissing certain allegations of the complaint as barred by applicable statutes of limitations. Eleven of the individual defendants, who reside in Canada or England (the "foreign individual defendants"),
have moved, pursuant to Rule 12(b)(2), F.R.Civ.P., to dismiss for lack of personal jurisdiction. The parties have filed cross motions pertaining to discovery.
Rule 9(b) "is a special pleading requirement and contrary to the general approach of simplified pleading adopted by the federal rules." 5 Wright & Miller, Federal Practice and Procedure: Civil, § 1297 at 405; Ross v. A. H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1978), cert. denied, 446 U.S. 946, 100 S. Ct. 2175, 64 L. Ed. 2d 802 (1980). Two general purposes have been attributed to the rule: first the "desire to protect defendants from the harm that comes to their reputations or to their good will when they are charged with serious wrongdoing," Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972), Ross v. A. H. Robbins, supra at 557; and, second, to assure defendants of "fair notice of what the plaintiff's claim is and the grounds upon which it rests," Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444 (2d Cir. 1971), Denny v. Barber, 576 F.2d 465, 469 (2d Cir. 1978). Moreover, in the context of securities litigation, the specificity requirement of Rule 9(b) serves also the purpose of discouraging "strike suits" that might be brought by plaintiffs with largely groundless claims, relying on their in terrorem effect to argument the suit's settlement value. Ross, supra at 557; Denny v. Barber, supra at 470.
Taken together, the decisions of this circuit establish
that a plaintiff alleging fraud in a securities transaction must specifically allege the acts or omissions upon which his claim rests... A defendant is entitled to a reasonable opportunity to answer the complaint and must be given adequate information to frame a response.
Ross, supra at 557-78. See also Gross v. Diversified Mortgage Investors, 431 F. Supp. 1080, 1087 (S.D.N.Y.1977) (Gagliardi, J.):
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 are believed to be misleading.
Plaintiff was put on notice by the dismissal of the original complaint that the amended pleading must "identify both the documents alleged to contain violations and the specific statements within them that are false or misleading" (Opinion at p.4), and that there must be a definitive identification of the respects in which those statements were false, misleading or inaccurate, or what omissions were made, and why the statements were believed to be misleading. Id.
A. The original complaint was impermissibly premised on information and belief only, and the amended pleading is no more acceptable than the original. Plaintiff has failed to provide a factual basis for what are essentially unsupported and conclusory allegations of fraud. As a matter of superficial appearances, perhaps, the new version purports to be alleged by plaintiff on direct knowledge.
However, except for lengthy reference to, quotation from and discussion of various documents disseminated by Massey, the allegations of the amended pleading are the same as the original, but without the acknowledgement that they are premised on information and belief. As Judge Weinfeld stated in Gilman Bros., Inc. v. Peat, Marwick, Mitchell & Co., (1978) CCH Fed.Sec.L.Rep. P 96,512 at 93,995 (S.D.N.Y.1978):
plaintiff offers no explanation for how certain matters which were alleged upon information and belief in the original complaint are now alleged upon direct knowledge. When fraud is alleged upon information and belief, the rule requires a plaintiff to furnish a statement of facts upon which the belief is founded, e.g. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir. 1974), not simply to omit the allegation.
In the instant pleading, plaintiff has simply dropped the allegation. Paragraph 1 of the amended complaint