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April 26, 1983

GILBERTE N. CRYSTAL, on behalf of herself and all others similarly situated, Plaintiff,

The opinion of the court was delivered by: WEINFELD


 Plaintiff, an attorney with securities law experience, purchased 150 shares of Bethlehem Steel Corporation ("Bethlehem") on July 28, 1977, one day after it announced a reduction in its quarterly dividend from fifty cents to twenty-five cents. On August 18, 1977, following a disastrous flood at its Johnstown, Pennsylvania plant and other adverse factors, Bethlehem announced a plan to improve its profitability, a principal element of which was a 2.6 million ton reduction of its steelmaking capacity at its Johnstown and Lackawanna, New York plants.

 In January 1980, almost two and a half years after her purchase, plaintiff commenced this action individually and on behalf of all persons who purchased Bethlehem shares between January 27, 1977, the day after Bethlehem issued its preliminary earnings report for 1976, through August 18, 1977 ("class period"), the day on which Bethlehem made its announcement with respect to the Johnstown and Lackawanna plants. *fn1" Her principal charges centered about matters with respect to these plants, although other charges were included. The complaint alleged that during the class period the defendants, Bethlehem and its chief and seven other executive officers and directors, conspiratorially engaged in fraudulent and manipulative conduct in violation of section 10(b) of the Securities Exchange Act of 1934 ("Act") *fn2" and Rule 10b-5 promulgated thereunder ("Rule") *fn3" and of principles of state and common law; that said conduct caused members of the class to purchase Bethlehem common stock "for grossly excessive consideration," and had the effect of artificially supporting or maintaining the market price of Bethlehem's common stock.

 Plaintiff's original complaint was dismissed by Judge Pierce, *fn4" who found it "deficient," inter alia, insofar as it failed "to set forth with sufficient particularity the source of the facts upon which plaintiff's information and belief is based." In granting leave to serve an amended complaint, Judge Pierce cautioned that "the sources of the information and belief should be sufficiently identified so as to allow each defendant and the Court to review the sources and determine, at the pleading stage, whether an inference of fraud may be fairly drawn from the information contained therein." *fn5" Following service of her amended complaint, the defendants again moved to dismiss, whereupon plaintiff cross-moved for leave to serve a second amended complaint, which motion was granted. Upon the service of plaintiff's second amended complaint, the defendants now move to dismiss with prejudice pursuant to Rule 9(b) of the Federal Rules of Civil Procedure on the ground that it fails to allege fraud with particularity, and pursuant to Rule 12(b) (6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted.

 Preliminarily, it is desirable to refer to the underlying reasons for the particularity requirement of Rule 9(b). These have been recognized in numerous rulings by our Court of Appeals: to prevent irreparable damage to defendants' reputation and good will that results from unwarranted charges of fraud; to minimize potential strike suits which by the abuse of time-consuming and expensive pretrial discovery with its disruption of normal business activities serve as an in terrorem force to augment the settlement value of such actions; to prevent the engagement of the facilities and services of the Court with respect to such groundless claims; and to assure that a defendant accused of fraudulent conduct is given particularized information to enable him to respond adequately. *fn6" Also, in the consideration of the instant motion it is desirable to bear in mind that the Act and the Rule were designed to protect the investing public "only if the conduct alleged can be fairly viewed as 'manipulative or deceptive.'" *fn7"

 Our Court of Appeals, in a recent decision, has reiterated its "insist[ence] that a complaint alleging fraudulent violations of Section 10(b) and Rule 10b-5 satisfy the particularity requirement of Fed. R. Civ. P. 9(b). *fn8" To pass muster in this Circuit a complaint 'must allege with some specificity the acts constituting the fraud'; *fn9" conclusory allegations that defendant's conduct was fraudulent or deceptive are not enough." *fn10" The Court further admonished: "To state a claim under section 10(b), plaintiff must allege facts indicating an intent to deceive, manipulate, or defraud, *fn11" and Rule 9(b) requires that the circumstances constituting such fraud be stated with particularity." *fn12" Thus, to satisfy the rule, plaintiff's complaint must allege (1) specific facts; (2) sources that support the alleged specific facts; and (3) a basis from which an inference of fraud may fairly be drawn.

 Against that background of applicable law we turn to the amended pleading. Stripped to its essentials, the discursive and somewhat free-wheeling complaint charges that plaintiff and members of her class were fraudulently induced during the class period to purchase shares of Bethlehem stock at excessive prices by the defendants' conspiratorial and fraudulent concealment and failure to disclose that:

 (1) it was certain that Bethlehem would have to close down its unprofitable Johnstown steelmaking plant in 1978 and likely that the Lackawanna facilities would be closed in the near future and that as a consequence several hundreds of millions of dollars of plant closing costs would be incurred;

 (2) Bethlehem had overstated its earnings and assets because it had failed to write down the value of these facilities to their net realizable value and to provide a reserve for several hundreds of millions of dollars that would be incurred for such plant closings;

 (3) for many years Bethlehem failed adequately to fund its various pension plans and failed to disclose the extent of under-funded and unfunded liabilities and the invalidity of various actuarial assumptions that were utilized;

 (4) Bethlehem's reliance upon debt to finance its operations and the inadequacy of its cash flow for "badly needed" modernization plans, particularly with respect to the obsolete steelmaking facilities at the Johnstown and Lackawanna plants; and

 (5) Bethlehem understated costs and overstated assets by using straight-line depreciation schedules which did not take into consideration the capital intensive nature of Bethlehem's business and the effects of inflation or replacement cost of the underlying assets.

 The complaint further alleges that all the foregoing facts were known to or recklessly disregarded by the defendants, and that each defendant was personally aware of all the material facts with respect to Bethlehem's financial and operating condition prior to and throughout the class period. Plaintiff asserts that the misrepresentations were made or omitted from various Bethlehem annual and quarterly corporate reports and SEC filings. *fn13" In addition to listing Bethlehem's annual and other reports and its press releases as the sources of information with respect to misrepresentations or omitted statements, plaintiff cited a potpourri of almost 100 newspaper and magazine articles about Bethlehem, other steel companies, the steel industry and its problems as a cyclical industry. As to these latter publications, with but one exception referred to hereafter, the complaint makes no specific reference to any portion of the publication. Simply listing a mass of documents does not satisfy Rule 9(b). Plaintiff must "indicate how . . . these sources . . . provide the requisite factual support for the complaint's accusations . . . [and must] link . . . the sources to subsequent allegations in the pleading." *fn14"

 A fair reading of plaintiff's second amended complaint compels the conclusion that it, too, is deficient and that not only does it not comply with the particularity requirement of Rule 9(b), but even assuming that the sources of her allegations are somewhere to be found in the massive documents listed by her, they provide no basis from which a fair and reasonable inference may be drawn of manipulative and fraudulent conduct attributable to each defendant. Instead of putting herself "on record as to what the alleged fraud consists of specifically," *fn15" plaintiff has relied upon generalities. Considering all the allegations of her complaint, other than those conclusory ones that the defendants' conduct was fraudulent and each has "manifested a conscious and continuous effort to distort the truth and otherwise mislead the investing public in order artificially to support the market price of Bethlehem stock . . .", they do ...

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