The opinion of the court was delivered by: ROBERT W. SWEET
This is an action brought by former investors in limited partnerships against the general partner, the subsequent company created through an exchange agreement which consolidated the Plaintiffs' limited partnerships with other limited partnerships, various individual officers and directors of the general partner and the new company, and the investment banking firm which prepared a fairness opinion regarding the transaction. The Plaintiffs allege claims pursuant to Sections 12(2) and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77a et seq.; Sections 10(b) (and Rule 10b-5) and 20 of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78a et seq.; Section 14 (and Rules 14a-6, 14a-9) of the 1934 Act; and pendant state claims of breach of fiduciary duty, negligent misrepresentation, and common law fraud.
The various defendants have moved to dismiss this action pursuant to Rules 12(b)(6) and 9(b), Fed. R. Civ. P., for failure to plead claims for relief, failure to plead fraud with sufficient particularity, and failure to plead sufficient state law claims. For the reasons set forth below, the Defendants' motions are granted in part and denied in part.
The Plaintiffs ("Damson Limited Partners") bring this action as individuals and as representatives of a purported class of investors
who formerly held limited partnership interests in one or more of five limited partnerships organized by the Damson Oil Corporation ("DOC") and in which DOC served as general partner. These partnerships (collectively, the "Damson Limited Partnerships") were Damson Energy Company, L.P. ("Damson Energy"), Damson Institutional Energy Limited Partnership ("Damson Institutional"), Damson Income Energy Limited Partnership ("Damson Income"), Damson 1983-84 Oil & Gas Income Fund-Series 1985-1 ("Damson 1985-1"), and Damson 1984-85 Institutional Oil & Gas Income Fund-Series 1985E-1 ("Damson 1985E-1").
Defendants Barrie M. Damson, William T. Ouzts, Robert F. Carr, III, J. William Pierce, Robert S. Rose, Jerol M. Sonosky, and Garth M. Ramsay were officers and directors of DOC ("DOC Defendants").
Parker & Parsley Petroleum Company ("PPPC") is the company formed by the consolidation of the Damson Limited Partnerships with certain partnerships and auxiliaries known as Parker & Parsley Development Partners L.P. ("Parsley & Parker Partnerships"), and it is the transaction culminating in the creation of PPPC that gave rise to the claims in this action. Officers and directors of PPPC named as individual defendants are Scott D. Sheffield, Herbert C. Williamson, III, Timothy M. Dunn, James D. Moring, Robert J. Castor, and A. Frank Kubica ("Individual Parker Defendants," and collectively with PPPC, "PPPC Defendants").
Defendant Smith Barney, Harris Upham & Co., Inc. ("Smith Barney"), a corporation incorporated under the laws of the State of Delaware, with its principal place of business in New York City, is an investment banking firm.
The Plaintiffs filed their original Class Action Complaint on February 18, 1992 ("Original Complaint") and their First Amended Class Action Complaint ("Amended Complaint") on February 22, 1992. The action is brought by individual investors for themselves and on behalf of similarly situated members of a putative class, who were limited partners in the Damson Limited Partnerships organized by Defendant Barrie M. Damson, DOC's chairman, with DOC as the managing partner of each Partnership.
The present motions were filed by the PPPC Defendants on April 28, 1992, by the DOC Defendants on May 18, 1992, and by Smith Barney on June 2, 1992. Oral arguments were heard on July 1, 1992, and the motions were considered fully submitted as of that date.
Each of the Damson Limited Partnerships owned interests in oil and gas properties and gas processing plants. Approximately $ 1.4 billion was invested in the Damson Limited Partnerships by members of the asserted class between 1978 and 1985. The underlying basis of the Plaintiffs' action is a transaction ("Transaction") which was consummated on February 19, 1991 according to the terms and conditions of an exchange agreement ("Agreement") between DOC and Parker & Parsley Development Partners L.P. ("Parsley & Parker Partnerships").
Under the Agreement, the Damson Limited Partnerships would be merged with the Parker & Parsley Partnerships to create PPPC, and the managers of the Parker & Parsley Partnerships were to become officers and directors of PPPC and would control the merged entity, while members of DOC management were to resign and would be paid "severance" payments.
A Supplemental Prospectus ("First Supplement"), dated February 8, 1991, was filed with the Securities and Exchange Commission ("SEC") on February 11, 1991. Three days later, after a Damson investor filed suit in the Supreme Court of New York, alleging that the Agreement's severance payments to be made to DOC management constituted waste and breach of fiduciary duty, the Defendants and DOC filed a second Supplemental Prospectus ("Second Supplement") with the SEC on February 14, 1991.
The Special Meeting of February 19 was held and Parker & Parsley voted the proxies obtained from the Damson Limited Partners, on the basis of the Original Prospectus and Smith Barney's fairness opinion, thereby consummating the Transaction according to the terms and conditions of the Agreement.
The assets of the Damson Limited Partnerships were consolidated with those of the Parsley & Parker Partnerships to form PPPC, and the stock of PPPC was distributed according to the exchange formula set forth in the Agreement. The end result of the ratification of the Agreement is asserted to be a direct financial loss to the Damson Limited Partners of more than $ 70 million.
The gravamen of the Plaintiffs' action is that, as a result of the fact that they received the First and Second Supplements either immediately before or after the Special Meeting,
PPPC, DOC, and their directors secured ratification of the Agreement by voting proxies which they had obtained pursuant to the disclosures of the Original Prospectus, and that the Defendants knew those disclosures to be inadequate, incomplete, and misleading.
On a Rule 12(b)(6) motion to dismiss, the factual allegations of the complaint are presumed to be true and all factual inferences must be drawn in their favor and against the defendants. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); Dwyer v. Regan, 777 F.2d 825, 828-29 (2d Cir. 1985). Accordingly, the factual allegations considered here and set forth below are taken from the Plaintiffs' Amended Complaint and constitute findings of fact by the Court. They are presumed to be true only for the purpose of deciding the present motions.
Rule 12(b)(6) also imposes a substantial burden of proof upon the moving party. A court may not dismiss a complaint unless the movant demonstrates "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitled him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). Accord Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984) (quoted in H.J., Inc. v. Northwestern Bell Tel. Co., 492 U.S. 229, 106 L. Ed. 2d 195, 109 S. Ct. 2893, 2906 (1989)).
In the event that a plaintiff alleges a claim based on a prospectus, as is the case here, the court may consider the prospectus in ruling on a Rule 12(b)(6) motion even if the prospectus was not attached to the complaint and made a part thereof under Rule 10(c), Fed. R. Civ. P. See Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991), cert. denied, U.S. , 118 L. Ed. 2d 208, 112 S. Ct. 1561 (1992); I. Meyer Pincus & Assocs. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991).
Additionally, if the allegations of a complaint are contradicted by documents made a part thereof, the document controls and the court need not accept as true the allegations of the complaint. See Feick v. Fleener, 653 F.2d 69, 75 & n.4 (2d Cir. 1981); United States ex rel. Sommer v. Dixon, 524 F. Supp. 83, 85 (N.D.N.Y. 1981), aff'd, 709 F.2d 173 (2d Cir.) (per curiam), cert. denied, 464 U.S. 857, 78 L. Ed. 2d 158, 104 S. Ct. 177 (1983). Following the logic of Cortec and I. Meyer Pincus, this rule also applies to a prospectus supplied by a defendant in support of its Rule 12(b)(6) motion to dismiss.
Rule 9(b), Fed. R. Civ. P., requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." See Shemtob v. Shearson, Hammill & Co., 448 F.2d 442, 444-45 (2d Cir. 1971) (Rule 9(b) applies to fraud claims under § 10b of the 1934 Act). The pleading must be sufficiently particular to serve the three goals of Rule 9(b):
(1) to provide a defendant with fair notice of the claims against him; (2) to protect a defendant from harm to his reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the number of strike suits,
Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962, 976 (E.D.N.Y. 1988), vacated in part, In Re Crazy Eddie Sec. Litig., 714 F. Supp. 1285 (E.D.N.Y. 1989) (citing Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987)).
Conclusory allegations of wrongdoing do not satisfy the requirements imposed by Rule 9(b). Rule 9(b) is satisfied in a fraud case only when the complaint sets forth
1) precisely what statements were made in what documents or oral representations or what omissions were made, . . . 2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) the same, 3) the content of such statements and the manner in which they misled, and 4) what the defendants "obtained as a consequence of the fraud."
Todd v. Oppenheimer & Co., 78 F.R.D. 415, 420-21 (S.D.N.Y. 1978). See also Savino v. E.F. Hutton & Co., 507 F. Supp. 1225, 1232 (S.D.N.Y. 1981); Troyer v. Karcagi, 476 F. Supp. 1142, 1149 (S.D.N.Y. 1979); Gross v. Diversified Mortg. Inv., 431 F. Supp. 1080, 1087 (S.D.N.Y. 1977). In addition, the allegations of the complaint must at least give rise to an inference of fraud.
See Ross v. A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980).
The plaintiff's complaint must give notice to each defendant of its alleged misconduct.
[A] complaint, therefore, may not rely upon blanket references to acts or omissions by all of the "defendants," for each defendant named in the complaint is entitled to be appraised of the circumstances surrounding the fraudulent conduct with which he individually stands charged.
Jacobson v. Peat, Marwick, Mitchell & Co., 445 F. Supp. 518, 522 n.7 (S.D.N.Y. 1977). This requirement facilitates the preparation of an adequate defense while protecting a defendant's reputation from groundless accusations. See De Atucha v. Hunt, 128 F.R.D. 187, 189 (S.D.N.Y. 1989); Posner v. Coopers & Lybrand, 92 F.R.D. 765, 768 (S.D.N.Y. 1981), aff'd without op., 697 F.2d 296 (2d Cir. 1982). It also serves to prevent the abuse of process and the disruption of the gratuitous defendant's normal business activity. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 740-41, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975).
However, when the plaintiff is alleging corporate fraud perpetrated on investors through the use of "group-published information," such as prospectuses, registration statements, annual reports, and press releases, as the plaintiffs are alleging here, "it is reasonable to presume that these are collective actions of the officers." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1440 (9th Cir. 1987). Thus,
under such circumstances, a plaintiff fulfills the particularity requirement of Rule 9(b) by pleading the misrepresentations with particularity and when possible the roles of the individual defendants in the misrepresentations.
The Rule 9(b) standard also is relaxed when the defendant is an "insider" or an "affiliate." See Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986); Stevens v. Equidyne Extractive Indus. 1980, Petro/Coal Program 1, 694 F. Supp. 1057, 1061 (S.D.N.Y 1988). But, as this Court has previously noted, this relaxed standard is to be distinguished from the stricter standards applicable to claims brought against professionals involved in the transaction. See Ahmed v. Trupin, 781 F. Supp. 1017, 1027 (S.D.N.Y. 1992) (accountants and attorneys not treated as insiders); Bruce v. Martin, 691 F. Supp. 716, 724 (S.D.N.Y. 1988) (aider and abettor defendants were alleged to be affiliates and insiders or controlled parties); Stevens, 694 F. Supp. at 1062 (accountants and attorney not insiders, "therefore the relaxed standards of pleading with respect to who said what do not apply"); see also Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F. Supp. 521, 531 (S.D.N.Y 1990) ("where counsel drafted the offering memorandum and were acting on behalf of the general partner, they are not, without more, corporate insiders or affiliates to whom the relaxed pleadings standards are applicable"), aff'd, 927 F.2d 594 (2d Cir. 1991).
C. The Standard of "Materiality"
When a plaintiff alleges misrepresentations or omissions in a prospectus in violation of the provisions of the 1933 and 1934 Acts, the burden is on the plaintiff to demonstrate that those misrepresentations or omissions were material in nature. Thus, the plaintiff must make
a showing of substantial likelihood that, under all the circumstances, the omitted [or misrepresented] fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted [or misrepresented] fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976).
See also Basic, Inc. v. Levinson, 485 U.S. 224, 238, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) ("It is not enough that a statement is false or incomplete, if the misrepresented fact is otherwise insignificant."). This "substantial likelihood" standard does not require the plaintiff to show that a reasonable investor would have changed his mind in the face of full disclosure. See Basic, Inc., 485 U.S. at 231-32; Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384-85, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970); Feinberg Testamentary Trust v. Carter, 652 F. Supp. 1066 (S.D.N.Y. 1987); see also Lebhar Friedman, Inc. v. Movielab, Inc., No. 86 Civ. 9965 (SWK), 1987 U.S. Dist. LEXIS 127 at *13 (S.D.N.Y. Jan. 13, 1987) (failure to disclose independent counsel's recommendations for board action, including reevaluation of CEO's compensation, held to be material).
Because materiality is a mixed question of law and fact, TSC Indus., 426 U.S. at 450, the materiality of an omitted or misrepresented fact is resolvable on a motion to dismiss only if the underlying facts are free of controversy and the fact is so obviously unimportant that no reasonable shareholder could have viewed it as significantly altering the "total mix" of information made available to the plaintiffs. See Zell v. Intercapital Income Sec., Inc., 675 F.2d 1041, 1045 (9th Cir. 1982).
II. The Factual Allegations
The allegations contained in the Amended Complaint regarding violations of §§ 12(2) and 15 of the 1933 Act and §§ 10(b), 14(a), and 20 of the 1934 Act are set forth with the requisite particularity with regard to each of the PPPC and DOC Defendants to survive the their Rule 12(b)(6) motions to dismiss. However, the allegations regarding Smith Barney's § 10(b) and Rule 10b-5 violations fail to pass muster under Rule 9(b) and are dismissed.
A. The Original Prospectus
The Damson Limited Partners make the following allegations about the Defendants' false statements and omission of material facts in the Original Prospectus:
36. In order to obtain the approval and ratification of the Damson limited partners, P&P, DOC and the individual defendants prepared a Prospectus/Proxy Statement dated December 31, 1990. The Prospectus solicited proxies from Damson limited partners for approval of the Exchange Agreement. The Prospectus was over 215 pages long, not including hundreds of pages of attached exhibits. The Prospectus was also difficult to understand because financial information concerning the reserves and other assets contributed by the respective partnerships was not succinctly and clearly summarized. Nonetheless, the financial information set forth in the Prospectus suggested that the value of the assets contributed by the Damson and Parker & Parsley partnerships were comparable.
37. In order to further induce the limited partners to execute proxies solicited by management for ratification of the Exchange Agreement, DOC obtained and appended to the P&P Prospectus a so-called "fairness opinion" issued by defendant Smith Barney.
Am. Compl. PP 36, 37. The fairness opinion stated it assumed the accuracy of all the information stated in the Original Prospectus, an assumption that proved to be incorrect.
B. Omissions of Material Facts
The Damson Limited Partners made further allegations regarding omissions of material facts:
The December 31, 1990 Prospectus, did not reflect the year-end financial information compiled by the partnerships, which indicated that certain assets of the Damson Limited Partnerships, specifically the gas treatment plants, had been undervalued by more than $ 100 million in the Original Prospectus. Additionally, by at least mid-January 1991, DOC and P&P management were aware that the Damson partnerships were contributing approximately 60% of the total asset values contributed to the newly formed merger corporation in exchange for only 40% of P&P stock to be issued after the agreement was ratified (after adjustment for the cash to be paid to the Damson limited partners under the Exchange Agreement). This meant that the Damson partners were ...