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April 16, 1985

ROY L. ASH, et al., Defendants MADISON FUND, INC., Plaintiff, vs. NEW COURT SECURITIES CORPORATION, et al., Defendants PRICE WATERHOUSE, Third-Party Plaintiff, vs. RICHARD B. BLACK, Third-Party Defendant RICHARD B. BLACK, Plaintiff, vs. ROY L. ASH, et al., Defendants

The opinion of the court was delivered by: SPRIZZO



 This case involves a series of actions brought by purchasers of stock in AM International, Inc. ("AMI"), which actions were consolidated for discovery in this district pursuant to 28 U.S.C. § 1407. Defendants named in five complaints filed motions to dismiss for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6), and for failure to plead fraud with the requisite particularity pursuant to Fed. R. Civ. P. 9(b).

 The Court heard oral argument on the motions on July 18 and 19, 1983. At that time the Court orally granted defendant Richard B. Black's motion to dismiss Price Waterhouse's third-party complaint against Black in Madison Fund, Inc. v. New Court Securities Corp., 81 Civ. 7024, for failure to comply with Rule 9(b), without prejudice to the filing of an amended complaint. See Transcript of Argument ("Tr.") at 222 (July 18, 1983). Decision on all other motions was stayed at the request of the parties pending possible settlement. In July of 1984 the parties informed the Court that they no longer wished the Court to defer a decision on the motions.

 On October 9, 1984 the Court ruled on the motions in open court. The Court granted defendants' motions to dismiss the complaint in Roncarati v. Ash, 82 Civ. 2494, see Opinion and Order, MDL No. 494 (JES) (Nov. 13, 1984). The Court also granted defendants' motions to dismiss the first amended complaint in Black v. Ash, 82 Civ. 1023, for failure to plead fraud with particularity, with leave to file a second amended complaint. The Court denied in part and granted in part the motions addressed to the second amended consolidated complaint in Dubowski v. Ash, 82 Civ. 1732 ("Dubowski complaint"), and the second amended complaint in the Madison Fund action ("Madison Fund complaint"). This Opinion and Order will address the motions in those latter two actions.

 I. Background

 The moving defendants in both actions are (1) officers and directors of AMI, some of whom were members of AMI's Audit Committee, (2) Price Waterhouse, AMI's independent auditor, and (3) various foreign Price Waterhouse firms ("the foreign Price Waterhouse defendants.") *fn1"

 The Dubowski action covers a proposed class of plaintiffs *fn2" who purchased AMI stock from September 17, 1979, when AMI disclosed to the public its fiscal 1979 year-end financials, until September 23, 1981, when AMI disclosed its expected losses for fiscal 1981. Plaintiffs sue pursuant to sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78(t), and Rule 10b-5, 17 C.F.R. § 240.10b-5, alleging misrepresentations and omissions in AMI's fiscal 1979 and 1980 Annual Reports and Form 10-Ks, as to which Price Waterhouse gave its opinion, and in interim financial statements and Form 10-Qs for the first quarter of fiscal 1979 through the third quarter of fiscal 1981. See Dubowski Complaint P48.

 The Madison Fund action is brought by Madison Fund, Inc., a Delaware closed-end mutual fund. See Madison Fund Complaint P1. Madison Fund purchased 1,475,000 AMI shares directly from AMI by a purchase agreement dated February 20, 1981, and consummated March 5, 1981, id. at PP 25-27, and purchased 161,000 shares on the open market between March 9, 1981 and April 6, 1981. Id. at P28. Madison Fund alleges material misrepresentations and omissions in AMI's fiscal 1980 year-end financial statements, and in interim financial statements for the first and second quarters of fiscal 1981. Id. at P35. Madison Fund sues pursuant to sections 12(2), 15, and 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 771(2), 77o, and 77q(a); sections 10(b), 18, and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78r, and 78t, Rule 10b-5, 17 C.F.R. § 240.10b-5, and pursuant to state and common law.

 II. The Fraud Claims

 Most of defendants' motions in the Dubowski and Madison Fund actions are addressed to plaintiffs' allegations of fraud. Fed. R. Civ. P. 9(b) requires that the circumstances of fraud be stated with particularity. Conclusory allegations of fraud are insufficient. See, e.g., Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982); Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972); Crystal v. Foy, 562 F. Supp. 422, 424 (S.D.N.Y. 1983). Thus, plaintiffs must plead acts from which an intent to deceive, manipulate, or defraud may reasonably be inferred with respect to each defendant. See, e.g., Decker, supra, 681 F.2d at 115; Crystal, supra, 562 F. Supp. at 424-25.

 A. Dubowski v. Ash

 1. Management defendants -- Ash, Mellor, Lander, and Combes

 It is clear that the fraud allegations regarding the 1980 financials and the 1981 interim reports are sufficient with respect to the AMI management defendants. Despite defendants; claims to the contrary, the Dubowski complaint clearly sets forth sufficient specific facts as to how and in what amount these financials were allegedly false or misleading, and the basis for those allegations, as well as facts regarding the knowledge and intent of these insider defendants which if accepted as true, permit a reasonable inference of fraud. No more is required by Rule 9(b). As the Second Circuit has recently recognized, inferences of fraud may be made as to inside directors based on their insider status, which would not be permissible absent that insider status. See Goldman v. Belden, 754 F.2d 1059, slip op. at 1931-33 (2d Cir. 1985).

 The allegations with respect to the 1979 financials are somewhat less specific, and the defendants' argument that these allegations, standing alone, do not meet the particularity requirement of Rule 9(b) is more persuasive. However, taking these factual allegations in connection with all of the other facts pleased, and affording the plaintiffs the benefit of all reasonable inferences that may be drawn from those allegations the Court cannot say as a matter of law that they are insufficient. See, e.g., Dubowski Complaint P97-98, 102-103. Therefore, while the motions to dismiss the allegations of the complaint for the 1979 fiscal year present a much closer question, these motions to dismiss are denied.

 2. Audit Committee defendants -- Gray, Birkelund, Kelly, and Paget

 The Audit Committee defendants, while not officers of AMI, allegedly had access to a substantial fund of information regarding the company and its financial condition, knew about many of the problems the company was having, and were responsible, inter alia, for reviewing the Price Waterhouse audits. E.g., Dubowski Complaint P64-69. The facts as to these directors are therefore clearly distinguishable from those in Lanza v. Drexel & Co., 479 F.2d 1277 (2d Cir. 1973), relied on by defendants, where after trial, an outside director was found not liable under section 10(b). See id. at 1289. In that case, the district court found the director "was not aware or even suspicious that plaintiffs were being deceived. . . . [He] had no knowledge or belief that any hard figures published by [the company] were false or misleading." Id. at 1288, citing, [1970-71 Transfer Binder]Fed. Sec. L. Rep. (CCH) P92,826, at 90,105 (S.D.N.Y. October 9, 1970).

 Assuming the allegations of the complaint to be true, as the Court must do on a motion to dismiss, this is clearly not the case here. On the facts pleaded, these defendants are much closer to the position occupied by an inside director, than they are to a typical outside director. Given that insider status, the Court finds the allegations of the complaint as to them to be legally sufficient for the reasons set forth above with respect to the management defendants. Cf. SEC v. Cayman Islands Reinsurance Corp., [1982 Transfer Binder]Fed. Sec. L. Rep. (CCH) P98,717, at 93,592-93 (S.D.N.Y. June 17, 1982). *fn3"

 3. Price Waterhouse

 Price Waterhouse was AMI's independent auditor, and issued its opinion as to both the 1979 and 1980 year-end reports. Plaintiffs therefore sue Price Waterhouse as a principal in connection with these reports. Since Price Waterhouse did not give any opinion with respect to the 1981 interim financials, plaintiffs sue ...

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