The opinion of the court was delivered by: LASKER
In this securities fraud case, Moore Medical Corporation ("Moore Medical") and its numerous individual codefendants move to dismiss the complaint
pursuant to Rules 12(b)(6) and 9(b), Fed. R. Civ. P.
Plaintiffs are shareholders who bought stock in Moore Medical, a pharmaceuticals company, during the asserted class period of May 10, 1988 through March 16, 1991. Their claim arises from losses Moore Medical suffered from its acquisition, operation and resale of a subsidiary generic drug manufacturing company, West-ward Incorporated ("West-ward").
Plaintiffs allege two types of mutually reinforcing deceit by defendants during the purported class period: first, that Moore Medical fraudulently made public announcements and filed documents with the Securities and Exchange Commission (SEC) identifying factors, unrelated to West-Ward, as the significant impediments to Moore Medical's profitability when in fact West-ward seriously diminished its current and future profitability, or else downplaying the severity of problems at West-ward, thereby creating the false perception among investors that correction of the disclosed factors would lead to improved performance by Moore Medical overall. Second, plaintiffs allege that statements of optimism concerning West-ward's and Moore Medical's future results, which were contained in various Moore Medical announcements and SEC documents and typically accompanied any limited acknowledgements of West-ward's shortcomings which were made, were inconsistent with the company's knowledge that West-ward's poor results would continue and would significantly lessen Moore Medical's earnings. Among West-ward's alleged undisclosed problems were ongoing inventory problems, underutilization of production capacity, and regulatory difficulties with the Food and Drug Administration (FDA). It is alleged that the goal and result of this scheme was an inflated market price for Moore Medical stock.
The alleged fraudulent statements and omissions include: (1) quarterly and annual reports for 1988 and the first two quarters of 1989, which, it is claimed, failed to disclose serious long-term difficulties at West-ward and which misleadingly identified unrelated past problems which had been corrected as the significant barriers to profitability that Moore Medical faced; (2) statements for the third quarter of 1989 which represented that although earnings were "depressed" by losses at West-ward and that West-ward had yet to generate a profit, a new marketing program made Moore Medical "confident that West-ward will achieve acceptable levels of profitability," and which failed to reveal continuing problems at West-ward; (3) statements for the fourth quarter of 1989 and the 1989 annual report which, although blaming company-wide losses partly on "continuing losses" at West-ward, falsely expressed confidence in the subsidiary's future profitability, particularly in light of its growing sales, and failed to reveal ongoing impediments to improved results at the subsidiary; (4) first quarter 1990 statements which omitted mention of increased losses at West-ward and improperly stated, "We are encouraged by the improved business of our West-ward manufacturing operation where sales for the quarter were 75 percent above a year ago"; (5) second quarter 1990 statements that noted disappointment with West-ward's continued "operation at a loss" despite increased sales, but failed to reveal regulatory difficulties the subsidiary was experiencing with the FDA; (6) third quarter 1990 statements dated November 8, 1990 revealing a pre-tax loss of $ 453,000 at West-ward, which depressed Moore Medical's earnings by ten cents per share, and announcing that Moore Medical would consider options including the sale of West-ward, but saying nothing of the severity of West-ward's problems or the magnitude of loss likely to result from such a sale.
Plaintiffs allege that these statements and omissions violated § 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (by both Moore Medical and the individual defendants), and § 20 of the same Act, 15 U.S.C. § 78t (by the individual defendants).
Moore Medical moves pursuant to Rule 12(b)(6) to dismiss the complaint on the grounds that: 1) Moore Medical had no duty to disclose its subsidiary's results separately from its own when the subsidiary's results were not material to the overall condition of the company; 2) Moore Medical made full disclosures of West-ward's performance whenever it was material to Moore Medical's overall results; 3) the optimistic statements made by the company and its officials as to West-ward's and Moore Medical's future performance are not actionable because they were neither factual assertions nor bad-faith expressions of opinion, and therefore cannot be deemed fraudulent within the meaning of § 10(b); 4) Robbins has not alleged a specific date on which he purchased Moore Medical stock, and accordingly has failed adequately to allege that his purchase was in reliance on any statements or omissions made by defendants; and 5) plaintiffs have failed to allege a "control person" claim under § 20.
Defendants also move to dismiss the complaint under Rule 9(b) for the following reasons: 1) the complaint provides mere conclusory allegations of fraud without alleging sufficient facts to show fraud or to support allegations of defendants' scienter; 2) the complaint is pleaded on information or belief without sufficient reference to the facts or sources underlying the complaint; 3) the complaint merely alleges "fraud by hindsight" which as a matter of law is inadequate under Rule 9(b).
Part II of this opinion considers defendants' objections pursuant to Rule 12(b)(6) and part III considers those arising under Rule 9(b).
A. Sufficiency of Disclosures Concerning West-ward and Applicability of § 10(b) to Optimistic Statements
In its Rule 12(b) motion to dismiss, Moore Medical divides plaintiffs' allegations into two categories: the first consisting of alleged nondisclosure of material information as to West-ward's problems; the second including optimistic statements as to West-ward's future performance.
While there is case law which addresses each type of deception separately, our reading of the complaint suggests a claim that the omissions and optimistic statements operated in tandem to deceive investors into believing that West-ward suffered no serious long-term problems and soon would contribute to greater profits for Moore Medical, when in fact the subsidiary was beset with numerous severe difficulties, had no realistic chance of becoming profitable and in fact likely would hinder Moore Medical's overall results. Accordingly, in this opinion the sufficiency of the allegations is considered jointly.
As to the alleged omissions, Moore Medical emphasizes the proposition that neither the law nor accounting norms impose a duty to reveal results of relatively small subsidiaries like West-ward and asserts that in any event it fully disclosed all information about West-ward that was material to investors in Moore Medical.
In the absence of a duty to disclose, Moore Medical argues, it cannot be held liable for the omissions alleged. See, e.g., Levine v. NL Industries, Inc., 717 F. Supp. 252, 254 (S.D.N.Y. 1989), aff'd, 926 F.2d 199 (2d Cir. 1991) ("In order for the omission to be actionable, the omitted information must have been material, and there must have been a duty to disclose it"). As to the allegedly fraudulent statements of optimism, Moore Medical argues that they were non-actionable expressions of opinion rather than falsehoods or bad faith assertions.
The disclosure requirements of the securities laws do not impose a general duty on a corporation to disclose all material information, but require that whatever statements the corporation does issue be truthful and complete, and not materially misrepresent the facts existing at the time of the announcement. Schlanger v. Four-Phase Systems, Inc., 582 F. Supp. 128, 133 (S.D.N.Y. 1984); Roeder v. Alpha Industries, Inc., 814 F.2d 22, 26 (1st Cir. 1987). Accordingly, regardless whether Moore Medical had a specific duty to reveal the type of information whose omission is alleged, failure to disclose the information would be actionable if its disclosure were necessary to make statements made by the corporation truthful and complete and not misleading.
Statements of opinion or expectation as to future events, which are not strictly factual and therefore cannot be evaluated for truth or falsehood, are deemed fraudulent under § 10(b) only where "the defendant disseminated the forecasts knowing they were false or that the method of preparation was so egregious as to render their dissemination reckless," Estate of Detwiler v. Offenbecher, 728 F. Supp. 103, 137 (S.D.N.Y. 1989), and are not actionable merely because events unfold differently from the stated expectation. See, e.g., Friedman v. Mohasco Corp., 929 F.2d 77, 79 (2d Cir. 1991). Moreover, where optimistic statements are coupled with revelations of adverse developments for a business, those statements "bespeak caution" on the part of investors and make the required showing of fraud all the more unlikely. See Schwartz v. Novo Industri A/S, 658 F. Supp. 795, 798 (S.D.N.Y. 1987) (Weinfeld, J.) (fraud claim undercut by defendant's statement that major customer had developed alternate source for product despite simultaneous claim that business would not be materially affected).
A misrepresentation or misleading omission is material if a reasonable investor would consider it significant in the total mix of information influencing his or her decision to purchase or sell a security. Basic, Inc. v. Levinson, 485 U.S. 224, 234, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). The Supreme Court has described the issue of materiality as a mixed question of law and fact which is only appropriate for resolution by summary judgment (or, by logical extension, motion to dismiss) where "the established omissions are 'so obviously important to an investor, that reasonable minds cannot differ on the question of materiality.'" TSC Industries, 426 U.S. at 450.
Neither the complaint nor plaintiffs' argument in opposition to the present motion disputes that Moore Medical's announcements of financial results, its annual reports and its SEC filings all accurately presented its aggregate financial results for the relevant periods. Plaintiffs claim that Moore Medical's assertion or implication that its disappointing performance was caused by identified factors which had been corrected, in conjunction with the company's failure to reveal West-ward's severe problems, fraudulently created a false belief among investors that all significant problems Moore Medical faced had been resolved and that the company's performance would dramatically improve.
Securities fraud claims have been dismissed on the grounds of immateriality under the stringent standard set forth above, although that course is unusual. For example, allegations that a large chemical company did not specifically reveal the risk and likely cost of an accident at one of its facilities was ruled "immaterial as a matter of law" and dismissed where the nature of the defendant's business naturally entailed the kind of risk whose omission was alleged. See In re Union Carbide Class Action Securities Litigation, 648 F. Supp. 1322 (S.D.N.Y. 1986). And in I. Meyer Pincus & Assoc., P.C. v. Oppenheimer & Co., 936 F.2d 759 (2d Cir. 1991), petition for cert. filed (Feb. 6, 1992), the Court of Appeals held that dismissal was appropriate where the alleged misleading statement or omission was a prospectus statement that "The shares of closed-end investment companies frequently trade at a discount from or premium to their net asset value" and where in fact, plaintiffs alleged, it was highly unusual for closed-end funds to trade at a premium. 936 F.2d at 761. The court's review of the prospectus, including the statement identified in the complaint, led it to conclude that the prospectus in no way predicted that shares of the fund would trade at a premium, and indeed "bespoke caution." 936 F.2d at 763.
The allegations here, however, unlike those in the cases defendants cite dismissing securities fraud complaints on materiality grounds, claim that defendants repeatedly omitted material information that would inform investors of significant problems likely to present an ongoing burden to Moore Medical, while presenting a picture of a company essentially healthy but for a few problems whose imminent correction would result in greater profitability. It is alleged that even when difficulties at West-ward were acknowledged, the disclosures were made in general terms, did not refer to specific problems that were known to the company, and often were accompanied by optimistic statements made recklessly or ...