The opinion of the court was delivered by: McCURN, Chief Judge.
MEMORANDUM-DECISION AND ORDER
This is a putative class action in which the plaintiffs,
shareholders in Continental Information Systems, Inc. ("CIS"),
allege that certain of the corporation's officers, directors,
and an accounting firm, made material misrepresentations and
omissions in information provided to the investing public, in
violation of Sections 10(b) and 20(a) of the Securities and
Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t; and Rule
10b-5, 17 C.F.R. § 240.10b-5.
The court issued a prior decision granting in part and
denying in part motions by all the defendants to dismiss the
first consolidated amended complaint. Klein v. Goetzmann,
745 F. Supp. 107 (N.D.N.Y. 1990). The plaintiffs then filed and
served their second consolidated amended complaint (hereinafter
referred to as "the complaint") in January 1991.
Defendants Smith, Panasci, Witting and Hayman have moved to
dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(1) and
(6) for failure to state a claim upon which relief can be
granted, failure to plead fraud with particularity, and for
lack of pendent jurisdiction. Specifically, these defendants,
who refer to themselves as the "outside directors,"*fn1
contend that the plaintiffs have failed to adequately allege
fraud, scienter and culpable participation by these
Defendant Deloitte and Touche, the accounting firm for CIS,
was added as a party defendant in the complaint. Deloitte and
Touche has moved to dismiss the complaint on the ground that
the claims against it are barred by the statute of limitations
for section 10(b) and Rule 10b-5 actions.
The outside directors contend that the complaint is
deficient since it fails to allege that any of them made any
specific misstatements in financial statements, nor that any
of them "culpably participated" in the making of any specific
misstatements by others. The plaintiffs argue that (1) the
motion to dismiss should be precluded by the law of the case
and collateral estoppel doctrines; and (2) that the complaint
adequately describes the allegedly fraudulent acts and
provides the outside directors with sufficient information to
answer the allegations.
With respect to the plaintiffs' first contention, the law of
the case and collateral estoppel doctrines do not apply here.
As the outside directors correctly assert in their reply
memorandum, the issue presented here, whether outside
directors are subject to "culpable participation" or
"controlling person" liability has not been reached by the
court prior to the instant motion. In fact, the court
specifically stated in its prior decision that it would not
address the issue whether any of the defendants might be
subject to "controlling person" liability, since that issue
was not raised by the parties. Klein, 745 F. Supp. at 110-11, n.
3. In addition, with respect to collateral estoppel, there has
been no final judgment to which collateral estoppel could be
The court turns then to considering whether plaintiffs have
adequately pleaded their fraud claims against the outside
directors. As noted by the court previously in Klein,
complaints alleging fraudulent violations of section 10(b) and
Rule 10b-5 must satisfy the requirement in Fed. R.Civ.P. 9(b)
that fraud must be stated with particularity. Klein, 745
F. Supp. at 111 (citing Decker v. Massey-Ferguson, Ltd.,
681 F.2d 111, 114 (2d Cir. 1982)).
An outside director has no duty to insure that all material
adverse information about a corporation is conveyed to
prospective purchasers of the corporation's stock.
Decker, 681 F.2d at 119. An outside director's liability must
be that of an "'aider and abettor, a conspirator, or a
substantial participant in fraud perpetrated by others.'" Id.
(quoting Lanza v. Drexel & Co., 479 F.2d 1277, 1289 (2d Cir.
1973)). However, conclusional allegations that the defendants
aided and abetted or conspired are not sufficient. Decker, 681
F.2d at 119. "The complaint must charge a violation of section
10(b) by the Company, knowledge of such violation by the
director, and his substantial assistance in the accomplishment
of the violation [citation omitted], or else the existence of
an agreement between the director and one or more others to
accomplish the wrongful purpose of violating section 10(b)."
Id. In sum, as stated by the Second Circuit in Lanza:
We recognize that participation by a director in
the dissemination of false information reasonably
calculated to influence the investing public may
subject such a director to liability under [Rule
10b-5]. But it is quite a different matter to hold
a director liable in damages for failing to insure
that all material, adverse information is conveyed
to prospective purchasers of the company's stock
absent substantial participation in the concealment
or knowledge of it. Absent knowledge ...