United States District Court, Southern District of New York
December 18, 1991
ALVIN J. IVERS, TRUSTEE OF THE ALVIN J. IVERS, P.C. PENSION TRUST, ERIK BALLAN, WILLIAM STEINER, LEE BLOOM AND VIOLET KLEIN, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
KEENE CORPORATION AND GLENN W. BAILEY, DEFENDANTS.
The opinion of the court was delivered by: William C. Conner, District Judge.
OPINION AND ORDER
This class action is brought by plaintiffs on behalf of all
those who purchased common stock of the Bairnco Corporation
("Bairnco") between March 13, 1989 and April 2, 1990. The
Amended Class Action Complaint (hereinafter "Complaint")
alleges violations of Section 10(b) of the Securities Exchange
Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated
This action is currently before the Court on defendants'
motion to dismiss the Complaint pursuant to Rules 9(b) and
12(b)(6) of the Fed.R.Civ.P.
In the Complaint, plaintiffs allege that defendant Keene
Corporation ("Keene"), a wholly owned subsidiary of Bairnco at
all times relevant to this action, and defendant Glenn W.
Bailey, the chief executive officer of Keene and Bairnco,
caused Bairnco to disseminate in its publicly issued statements
materially false and misleading information concerning Keene's
financial condition which operated artificially to inflate the
market price of Bairnco common stock. In particular, plaintiffs
allege that defendants represented, without a reasonable
basis, that then present and reasonably foreseeable claims for
asbestos-related damages and the cost of defense against such
claims would not have a materially adverse effect on the
financial condition of Keene and of Bairnco.
Central to plaintiffs' claim is the following excerpt from
Bairnco's 1988 Annual Report:
Keene's management and its counsel believe that
the disposition of the existing and possible
unasserted asbestos claims and other cases will
not have a material adverse effect on Keene.
Accordingly, management of the corporation
[Bairnco] believes that the disposition of such
claims, along with various other lawsuits, will
not have a material adverse effect on the
consolidated financial position of the
Complaint ¶ 42(a). The Annual Report went on to explain that
this conclusion was premised on five factors:
(1) Keene's insurance coverage; (2) Keene's
experience to date with asbestos cases and their
settlement, including Keene's review of the trends
with respect to new case filings; (3) the benefit
derived from the cooperation of co-defendants . .
. (4) the potential reduction of Keene's share of
indemnity as Manville and possibly other
responsible parties, such as the U.S. Government,
pay a share of liability contribution to asbestos
case costs and (5) the book accrual established by
Keene. . . .
Complaint ¶ 42(b)).
These statements, which plaintiffs allege to be false and
misleading, were consistently repeated in Bairnco's annual and
quarterly reports to the public during the class period,
On January 23, 1990, defendants announced a restructuring of
Bairnco in which Keene would be "spun off" and shares of its
stock distributed to Bairnco, shareholders in proportion to
their Bairnco holdings.
In a press release issued on March 28, 1990, Bairnco reversed
its prior assurances regarding the asbestos claim risks. The
release stated that the management of Keene could not determine
whether or not Keene's ultimate liability on asbestos claims
would have a "material adverse effect upon Keene's financial
position." Complaint ¶ 54. In the five business days following
the press release, the per-share price of Bairnco common stock
fell more than 50% in value, from $13.625 to $6.25.
In its 1989 10-K report, filed on or about April 2, 1990,
Bairnco disclosed that "substantially all of Keene's remaining
insurance coverage" was subject to litigation or dispute and
would not be available until after such insurance litigation or
disputes and other issues were resolved.
I. Applicable Legal Standard
In considering a motion to dismiss for failure to state a
claim, the court "is merely to assess the legal feasibility of
the complaint, not to assay the weight of the evidence which
might be offered in support thereof." Geisler v. Petrocelli,
616 F.2d 636
, 639 (2d Cir. 1980). "The issue is not whether a
plaintiff will ultimately prevail but whether the claimant is
entitled to offer evidence to support the claims." Scheuer v.
Rhodes, 416 U.S. 232
, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90
(1974). In order to prevail on a motion to dismiss, the moving
party must demonstrate "beyond doubt that the [non-moving
party] can prove no set of facts in support of his claim which
would entitle him to relief." Conley v. Gibson, 355 U.S. 41
45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957); Dahlberg v.
Becker, 748 F.2d 85
, 88 (2d Cir. 1984), cert. denied,
470 U.S. 1084
, 105 S.Ct. 1845
, 85 L.Ed.2d 144 (1985). A court must
accept as true the factual allegations accompanying the
complaint and draw all reasonable inferences in favor of the
non-moving party. See Cosmas v. Hassett, 886 F.2d 8
, 12 (2d
In the instant case plaintiffs offer three separate theories
of Keene's liability under Section 10(b) and Rule 10b-5.
Plaintiffs claim: (1) that Keene is "primarily liable" for the
misstatements issued by Bairnco concerning Keene; (2) that
Keene is liable
for failing to correct Bairnco's Material Misrepresentations;
and (3) that Keene is liable as an aider and abettor. The Court
considers these theories individually below.
II. Keene's Liability Under Section 10(b)
A. Primary Liability
Plaintiffs argue that Keene, as a subsidiary of Bairnco,
cannot escape primary liability for the alleged misstatements
issued by Bairnco about Keene. Relying upon SEC v. Texas Gulf
Sulphur, 401 F.2d 833, 862 (2d Cir. 1968), cert. denied,
394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969), plaintiffs
advance the unchallengable proposition that once a person or
entity voluntarily chooses to make a statement which is
"reasonably calculated to influence the investing public," the
speaker has a duty to disclose sufficient information so that
the statement made is not "false and misleading or . . . so
incomplete as to mislead." Plaintiffs argue that during the
class period, when Keene was a subsidiary of Bairnco, Keene was
responsible for providing Bairnco with details of its
performance so as to enable Bairnco accurately to assess and
publicly report on Bairnco's financial condition. Complaint ¶¶
8, 66, 67; Op. Mem. at 24. Plaintiffs thus conclude that
because Keene was aware of its true financial condition and
knew that its allegedly false and misleading statements would
be publicly disseminated by Bairnco and Bailey, Keene should be
held liable under Texas Gulf Sulphur for knowingly
disseminating false and misleading information that was
reasonably calculated to influence the investing public.
By contrast, defendants maintain that plaintiffs' novel
theory fails to state a claim. Specifically, defendants assert
that Keene, as a wholly owned subsidiary of Bairnco, owed no
duty to the shareholders of Bairnco to disclose any
information. It was Bairnco, not Keene that made the statements
in issue here and only Bairnco owed a duty to its shareholders.
Defendants remark further that a duty to speak does not find
its source in the securities laws but instead must come from a
fiduciary relationship between the parties. See Robin v. Arthur
Young & Co., 915 F.2d 1120, 1125 (7th Cir. 1990), cert. denied,
___ U.S. ___, 111 S.Ct. 1317, 113 L.Ed.2d 250 (1991). And
plaintiffs, who were purchasers of Bairnco's stock, allege no
"fiduciary relation" with Keene.
Thus defendants conclude that since a 10b-5 complaint must
include an allegation of the basis of the defendant's duty
toward the plaintiff, see Chiarella v. United States,
445 U.S. 222, 228-29, 100 S.Ct. 1108, 1114-15, 63 L.Ed.2d 348 (1980)
(citing Frigitemp Corp. v. Financial Dynamics Fund,
524 F.2d 275, 282 (2d Cir. 1975)), and since no such allegation can be
found here, the Complaint must be dismissed insofar as it
alleges defendants' primary liability under Section 10(b). The
Court agrees. Plaintiffs' apparent attempt to derive this duty
from Texas Gulf Sulphur is misplaced. In that case, the
statements in issue were made to the public by the corporation
whose securities were traded. Here Keene made no relevant
statements to the investing public and had no publicly traded
shares during the class period. Plaintiffs' attempt to derive
such a duty from In re Par Pharmaceutical, Inc. Sec. Litig.,
733 F. Supp. 668 (S.D.N.Y. 1990), is similarly unavailing. Par
Pharmaceutical, as cited by plaintiffs, held only that the
complaint in question was sufficient to withstand the
heightened scienter requirements that apply to an aiding and
abetting claim under the securities laws in the absence of a
duty to disclose. See id. at 681. Par Pharmaceutical by no
means stands for the proposition that a subsidiary company owes
a duty to the shareholders of its parent for statements issued
by the parent. Thus, plaintiffs' primary liability theory
B. Failure to Correct Material Misrepresentations
Closely related to plaintiffs' primary liability theory is
plaintiffs second theory: that Keene can be held liable not
only for alleged false statements but also for its alleged
failure to correct the false statements made by Bairnco about
Keene. Because this theory would also require a duty towards
Bairnco's shareholders on the part
of Keene and because plaintiffs, for reasons noted in the
previous section, have failed to prove the existence of any
such duty on the part of Keene, plaintiffs cannot proceed under
a theory of Keene's failure to correct Bairnco's alleged
C. Aider and Abettor Liability
In addition to primary liability and liability for failure to
correct material misrepresentations, plaintiffs have also
alleged defendants' liability under Section 10(b) as an aider
and abettor. In order to establish liability on this theory,
plaintiffs must prove three elements: (1) the existence of a
primary violation by someone other than the alleged aider and
abettor; (2) knowledge of and specific intent to promote this
violation; and (3) "substantial assistance" in the achievement
of the primary violation.*fn1
Bloor v. Carro, Spanbock,
Londin, Rodman & Fass, 754 F.2d 57
, 62 (2d Cir. 1985);
Armstrong v. McAlpin, 699 F.2d 79
, 91 (2d Cir. 1983); ITT, an
Int'l Inv. Trust v. Cornfeld, 619 F.2d 909
, 922 (2d Cir. 1980).
1. Primary Violation
Defendants argue that plaintiffs cannot prove any of these
elements. The bulk of their argument, however, focuses on
countering plaintiffs' allegations of a primary violation on
the part of Bairnco. Specifically, defendants argue that the
Complaint does little more than plead "fraud by hindsight."
In Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978), Judge
Friendly set forth a useful articulation of the rule:
[T]he complaint is an example of alleging fraud by
hindsight. For the most part, plaintiff has simply
seized upon disclosures made in later annual
reports and alleged that they should have been
made in earlier ones. . . . Nowhere does the
complaint alleged with the required particularity
transactions about which defendants in fact had
such perceptions or were reckless in not having
them when the 1973 and early 1974 reports were
issued. . . .
Defendants argue strenuously that plaintiffs have alleged no
more in their Complaint than the Complaint in Denny. Plaintiffs
disagree, noting that in Denny, the district court found that
the Complaint "`merely recited neutral facts which are
irrelevant to the claims they embellish, and which do not
permit an inference of wrongdoing.'" 576 F.2d at 468 (quoting
the district court's findings of fact).
Distinguishing Denny, plaintiffs in the instant case urge
that their Complaint alleges specific facts which were known to
Keene and which Keene concealed until the close of the class
period. In particular, plaintiffs argue that they have alleged
defendants' failure to disclose its true financial condition
and asbestos-related liability during the class period with
respect, inter alia, to defendants' inadequate insurance
coverage. The Court agrees. In the Complaint, plaintiffs allege
that while Bairnco represented in its 1988 10-K report that
approximately $234 million of insurance coverage was remaining
and available for asbestos cases as of December 31, 1988,
defendants failed to disclose that some $143 million of this
amount was in dispute or the subject of litigation. Complaint ¶
30(b); Op.Mem. at 7. In addition, the Complaint charges that
while Bairnco noted that an additional $30 million in coverage
was uncertain because it was owed to Keene by insolvent
insurance companies, defendants failed to disclose that these
imperiled an additional $23 million in coverage. Complaint
¶ 47; Op.Mem. at 7-8. Taking these allegations of the Complaint
to be true,*fn2 as the Court must on the instant motion, the
Complaint, at the very least, states the existence of a primary
violation by Bairnco.
2. Specific Intent
Keene's knowledge of and specific intent to further this
primary violation is clearly alleged in paragraph 66(b) of the
Complaint. Rule 9(b) itself provides that "malice, intent,
knowledge and other conditions of mind of a person may be
averred generally." The facts alleged in the Complaint suffice
to meet the standard of Rule 9(b) since they give rise to a
strong inference that Keene had knowledge that the statements
made by Bairnco respecting the financial condition and
asbestos-related liability of Keene were false or misleadingly
incomplete. Although it is not clear how the subsidiary, Keene,
would benefit from an increase in the market price of its
parent's stock, there is no requirement that the Complaint
identify any motive for the aider/abettor to assist in the
fraud, see Cosmas v. Hassett, 886 F.2d 8
, 13 (2d Cir. 1989).
3. Substantial Assistance
There is also little doubt that the Complaint does set forth
the substantial assistance provided by Keene in furtherance of
the primary violation. According to the Complaint, Keene
provided this substantial assistance both by supplying the
materially false and misleading materials and information to
Bairnco for public dissemination, and in covering up the fraud
by failing to correct the false and misleading statements.
Complaint ¶¶ 67-69.
Defendants argue, however, that plaintiffs' allegations of
fraud are insufficient to meet the requirements of Rule 9(b).
Specifically, defendants note that in this Circuit fraud
allegations ought to specify the time, place, speaker, and
content of the alleged misrepresentations, see Di Vittorio v.
Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir.
1987), and since plaintiffs do not achieve this standard of
specificity with respect to Keene's alleged statements, rule
9(b) has not been satisfied.
The Court does not agree. Allegations of fraud may be based
on information and belief "when facts are peculiarly within the
opposing party's knowledge" and the Complaint sets forth
specific facts supporting a strong inference of fraud.
Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.
1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d
467 (1975); Somerville v. Major Exploration, Inc., 576 F. Supp. 902,
909 (S.D.N.Y. 1983). Here the Complaint sets forth
sufficiently specific details to apprise defendants of the
nature of the claim against them and to permit them to prepare
their defense. Although the Complaint does not specify exactly
where and how the alleged misrepresentations were made, this
information is obtainable through interrogatories or
depositions. Under the circumstances of this case, where the
information needed relates essentially to the internal workings
of Keene and Bairnco, a rigid application of Rule 9(b) would be
particularly inappropriate. See Schlick, 507 F.2d at 379.
Moreover, where, as here, the assistance consists in part in
failing to correct misstatements — that is, in a continuing
silence — there were no communications which could be
identified as to time, place, speaker or content.
For the above stated reasons, defendants' motion to dismiss
is granted insofar as concerns the claims of primary liability
and failure to correct material misstatements and denied
insofar as concerns the claim of aider and abettor liability.