Appeal from an Order of the United States District Court for the Southern District of New York (Gerard L. Goettel, Judge) which (1) dismissed plaintiff's amended complaint alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder for failure to state a claim under Fed.R.Civ.P.12(b)(6) and for failure to plead fraud with the particularity required by Fed.R.Civ.P.9(b); and (2) sanctioned plaintiff under Fed.R.Civ.P.11 for filing a repetitious amended complaint.
Kearse, Altimari and Mahoney, Circuit Judges.
Jonathan Stern brought this action on behalf of himself and a class of investors who purchased common stock of the GATX Corporation ("GATX") between January 9, 1986 and March 26, 1986, inclusive. Stern complained that defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) ("Section 10(b)"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1987) ("Rule 10b-5"), by leading the investing public to believe that defendant Leucadia National Corporation ("Leucadia National") would merge with GATX, when in fact defendants sought only to inflate artificially the market price of GATX common stock, and thereafter to sell off their shares at a substantial profit.
Defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P.9(b) and 12(b)(6). The United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, granted the motion, according plaintiff leave to replead within twenty days. Stern v. Leucadia Nat'l Corp., 644 F. Supp. 1108 (S.D.N.Y. 1986). Upon the filing of the amended complaint, defendants moved to dismiss on the same grounds as before; in addition, defendants requested that sanctions be awarded under Fed.R.Civ.P.11. By endorsement, the district court granted defendants' second motion to dismiss and awarded Rule 11 sanctions with respect to that motion.
Stern appeals. We affirm as to the dismissal, and reverse as to the sanctions.
Except for the allegations pertaining to Jonathan Stern and his counsel, plaintiff's amended complaint is pleaded entirely upon information and belief. In view of our disposition of this appeal, we assume the truth of his allegations. See DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1244, 1247 (2d Cir. 1987), and cases there cited.*fn1
Stern alleges that defendants Ian N. Cumming and Joseph S. Steinberg control an interlocking network consisting of the corporate defendants, as follows. Cumming, Steinberg, Marks Investing Corp. ("MIC") and S & S Securities, Inc. ("S & S") are the owners of Cumberg, Inc. ("Cumberg"). Cumberg, Cumming and Steinberg own TLC Associates ("TLC"), a New York general partnership. In turn, TLC owns all of the outstanding shares of defendant Uintah National Corporation ("Uintah"), which owns 48% of the outstanding shares of Leucadia National, which owns all of the outstanding shares of Leucadia Inc. ("Leucadia"), which owns all of the outstanding shares of LNC Investments, Inc. ("LNC") and 94% of the outstanding shares of defendant American Investment Company ("AIC"), which owns all of the outstanding shares of defendant Charter National Life Insurance Company ("Charter"). Cumming, Steinberg and Leucadia own more than half of MIC's outstanding shares; Cumming and Steinberg own an unspecified percentage of S & S' shares; and defendant Carl Marks & Co., Inc. ("Carl Marks") owns an unspecified portion of MIC.
Stern alleges that defendants conspired with, and aided and abetted, one another in violating Section 10(b) and Rule 10b-5, and that Leucadia National, Cumming and Steinberg were each a controlling person of each of the other defendants (except possibly Carl Marks) within the meaning of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (1982).
B. The Allegations of the Amended Complaint.
In light of our view of the noncompliance of plaintiff's amended complaint with Fed.R.Civ.P.9(b), it is appropriate to outline the allegations of that complaint in some detail. That outline follows.
On January 9, 1986, Leucadia National, LNC, AIC, Charter, LI, Uintah and TLC (collectively the "Leucadia group") filed a Schedule 13D statement*fn2 with the Securities and Exchange Commission reporting that they had purchased, or had acquired options to purchase, 5.26% of GATX's outstanding shares. The statement indicated that the Leucadia group deemed GATX's common stock undervalued, and might seek control of GATX. Preliminary to any such determination, the group stated it might explore the feasibility of various strategies for gaining control, including: (1) merger; (2) acquisition of additional GATX common or preferred stock (subject to its availability at favorable prices and the availability of any requisite financing) in open market or privately negotiated purchases, by tender offer, or otherwise; (3) solicitation of proxies to elect its nominees as directors of GATX; or (4) joining forces with interested third parties to obtain control of GATX. The group noted that, depending upon the course it chose, it might dispose of shares of GATX common stock in the open market, in privately negotiated transactions, or otherwise. The statement cautioned, however, "that the possible activities of [the Leucadia group] are subject to change at any time and there is no assurance that [it] will actually purchase any additional shares of the Common Stock or any shares of preferred stock or seek to influence or obtain control of [GATX]." The same day, the Dow Jones News Service ("DJNS") reported the Leucadia group's stake in GATX and its plans with respect thereto as described above. On January 10, GATX common closed at $38 1/2 on the New York Stock Exchange ("NYSE"), up $3 5/8 from its closing price the day before.
On January 30, 1986, the Leucadia group filed the first of seven amendments to the Schedule 13D statement, noting that, through the purchase of stock and options, it had increased its stake in GATX to 6.3% of the latter's outstanding shares, and stating that it was "exploring the possibility of acquiring certain of [GATX's] assets. . . ." The amendment further reported that in connection with this exploration, the Leucadia group had entered into a confidentiality/standstill agreement with GATX on January 28 pursuant to which GATX provided certain confidential information to Leucadia; in return, the group was to freeze its stake in GATX and refrain from acquiring any additional GATX stock or acting in concert with any third party to acquire voting securities or control of GATX from the date of the agreement until twenty-four hours following destruction or return of the information furnished to the Leucadia group pursuant to the agreement.
The second amendment to the Schedule 13D statement was filed on February 3,*fn3 reporting that the Leucadia group's stake in GATX had not changed, but it had destroyed or returned all information furnished under the confidentiality/standstill agreement on ...