The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.
Defendants' motions to dismiss, pursuant to Rule 9(b),
12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure,
The complaint further alleges that the individual defendants
had actual knowledge of the true financial condition of Prime,
or recklessly disregarded facts available to them. (Complaint
Para 22-32, 41, 42). In addition, the complaint alleges that
Peat Marwick, as Prime's auditor, "aided and abetted the other
defendants' unlawful scheme" with actual knowledge. (Complaint
Para 15, 22, 43).
The plaintiffs were purchasers of Prime stock during said
period, and are alleged to have relied on the alleged
misstatements. The foregoing allegations constitute a cause of
action under Rule 10(b)(5) promulgated under Section 10(b) of
the Securities Exchange Act of 1934. See Heit v. Weitzen,
402 F.2d 909, 914 (2d Cir. 1968) (denying motion to dismiss Rule
10(b)(5) complaint which alleged actual knowledge of
misstatements in 10K Report), cert. denied, 395 U.S. 903, 89
S.Ct. 1740, 23 L.Ed.2d 217 (1969).*fn1
Peat Marwick argues that it can be liable for misstatements
in the Annual Reports which it certified, but not for
misstatements in the Quarterly Reports which it claims to have
only "reviewed." That contention is without merit. The
complaint alleges that Peat Marwick negligently reviewed the
interim reports "recklessly" and with "actual knowledge."
See In re Am International, Inc. Securities Litigation,
606 F. Supp. 600, 606 (S.D.N.Y. 1985) (citing Armstrong v. McAlpin,
699 F.2d 79, 91 (2d Cir. 1983) and IIT, An International
Investment Trust v. Cornfeld, 619 F.2d 909, 927 (2d Cir. 1980).
Moreover, the allegations about the interim reports are not
isolated, but serve as a foundation for the alleged violation
of Rule 10(b) in certifying the corporation's Annual Reports.
The complaint also adequately complies with Rule 9(b) of the
Federal Rule of Civil Procedure. The complaint alleges the
time, place and manner in which the material statements claimed
to be false and materially misleading were made. Each of the
individual defendants signed one or more of the SEC filings
containing the statements or held company positions in which
they were responsible for the preparation of such statements.
Defendant Peat Marwick prepared some of the financial schedules
filed with the Securities and Exchange Commission. There can be
no doubt that the complaint gives each defendant notice of
precisely the fraudulent acts he is charged with committing
intentionally. No more is required by Rule 9(b). Goldman v.
Belden, 754 F.2d 1059, 1069-70 (2d Cir. 1985); see also Beck v.
Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987)
(Rule 9(b) satisfied "by identifying circumstances indicating
conscious behavior by the defendant").
The second claim for relief under Section 20(a) of the
Securities Exchange Act of 1934 realleges the same allegations
and seeks to hold the individual defendants who were either
officers or directors liable as controlling persons. Certain of
the directors may have a "reliance in good faith" defense. The
validity of this defense should be determined not on a motion
to dismiss, but after discovery has been completed, as in
Marbury Management Inc. v. Kohn, 629 F.2d 705, 716 (2nd Cir.),
cert. denied, 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469
(1980). The alleged fact scenario strongly implies that the
officers and directors were "directly or indirectly,
controlling persons" over the allegedly misleading statements
in their reports. Accordingly, this count also states a claim
for which relief can be granted.
Finally, defendants assert several slightly different
arguments in favor of dismissing the pendent state law claims,
which are based on the same allegations and analogous legal
theories. Defendant Landis's argument that actual reliance must
be alleged under common law is not a grounds for dismissal
because paragraph 45 alleges the actual reliance of class
Peat Marwick and Landis contend that a lack of privity or any
alleged "`relationship . . . sufficiently approaching
privity,'" Lumbard v. Maglia, Inc., 621 F. Supp. 1542, 1545
(S.D.N.Y. 1985) (quoting Credit Alliance Corp. v. Arthur
Andersen & Co., 65 N.Y.2d 536, 493 N.Y.S.2d 435, 483 N.E.2d 110
(1985)), between the investing community and defendants Peat
Marwick and Landis would be grounds for dismissing the
negligent misrepresentation claim. See In re Coleco Securities
Litigation, 591 F. Supp. 1488, 1493 (S.D.N.Y. 1984). That
argument may well be valid, if New York common law governs the
case. Id. However, the class has not yet been certified and
choice of law issues have yet to be fully briefed. The Court
chooses to wait for plaintiff's motion for Rule 23
certification before confronting this issue. See In re Energy
Systems Equipment Leasing Securities Litigation, 642 F. Supp. 718,
744 (E.D.N.Y. 1986).
Landis also moves for dismissal of plaintiff's claim that
"the individual defendants have breached the fiduciary duties
they owe to plaintiffs and members of the Class, and are liable
therefor." (Complaint Para 58). Plaintiffs and Landis agree
that Delaware law governs this claim because Prime Medical is
incorporated in that state. See also Cowin v. Bresler,
741 F.2d 410, 414 n. 4 (D.C. Cir. 1984). Under Delaware law, a common
law claim for breach of fiduciary duty by a corporate director
or officer can only be asserted (a) by the corporation or on
the corporation's behalf in a derivative action or (b) by
individual shareholders when a "special injury" has occurred.
See id. at 414-16 (explaining Delaware law). The first
condition does not apply because this action is brought against
Prime Medical, Inc. by a class of individual shareholders who
purchased stock between October 4, 1985 and November 16, 1988.
As regards the second condition, a "special injury" is a
wrong which either involves "a particular right" or is
"distinct from that suffered by other shareholders." Lipton v.
News International, Plc, 514 A.2d 1075, 1078 (Del. 1986).
Plaintiff has not alleged that defendant's infringed any
"particular rights," such as preemptive rights, contractual
rights, or rights involving control of the corporation. Lipton,
514 A.2d at 1078. However, an injury distinct from that
suffered by all shareholders is present. The alleged inflated
price of Prime common stock, due to the alleged misstatements,
would constitute a special injury to those who purchased stock
from October 4, 1985 to November 20, 1989. This case is
distinguishable from the holding in Cowin that "deceptive and
incomplete reports issued by the company" are not a "special
injury" and constitute a "harm primarily to the corporation
shared by each stockholder." 741 F.2d at 416. The common law
claims for breaches of fiduciary duties in Cowin and the cases
upon which it relies, Empire Life Insurance Co. v. Valdak
Corp., 468 F.2d 330, 338-39 (5th Cir. 1972), and Bokat v. Getty
Oil Co., 262 A.2d 246, 249 (Del. 1970), rested upon allegations
that mismanagement had resulted in depreciation of the stock.
When stock is unlawfully depreciated all of the stockholders
are wronged. However, alleged mismanagement ...