The opinion of the court was delivered by: MICHAEL A. TELESCA
FNBR is a bank holding company with three subsidiaries, the largest of which is the First National Bank of Rochester, a full-service commercial bank. FNBR's primary service and marketing area is the City of Rochester, New York and surrounding towns.
As a result of an increase in FNBR's loan portfolio, which more than tripled in size between 1984 and 1990, FNBR's net income rose substantially, increasing from $ 907,000 in 1984 to $ 2,640,000 in 1989. In 1990, however, FNBR's net income fell to $ 1,522,000.
FNBR suffered a net loss of ($ 1,938,000) in 1991, primarily due to a large increase in its provision for loan losses, a major income statement expense, which increased from $ 2,687,000 in 1990 to $ 5,130,000 in 1991.
On June 28, 1991, defendant Yapi agreed to acquire all of FNBR's outstanding common stock for $ 14.50 per share and other consideration. However, before the merger was consummated, Yapi informed FNBR on March 30, 1992 of its intention to terminate the merger agreement due to a material adverse change in the financial condition of FNBR. On April 24, 1992, FNBR announced this development, as well as the retirement of defendant Beh and the resignations of defendants Calabrese, Elliott, Relin and Stern.
On June 8, 1992, FNBR announced that it had entered into a consent order with the Federal Reserve Bank of New York and into a separate consent order with the OCC as a result of investigations into FNBR's lending practices and the condition of its loan portfolio. These orders required certain actions be taken as a result of FNBR's deteriorated financial condition.
Paul Lerner ("plaintiff") purchased FNBR common stock and 10% subordinated notes on various occasions during the relevant period, October 10, 1989, to November 12, 1992. He initiated this action on behalf of himself and all others similarly situated who purchased FNBR publically-traded securities and who were allegedly damaged as a result. However, a class has yet to be certified.
Specifically, plaintiff's claims are grouped into four separate Counts. Count I alleges that FNBR misrepresented and failed to disclose material information in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Securities and Exchange Commission Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Count I also alleges that the individual defendants are liable as "controlling persons" under § 20(a) of the Exchange Act, 15 U.S.C. § 78t, for FNBR's alleged § 10(b) violations. Plaintiff has also charged Yapi with a violation of § 10(b) and Regulation 10b-5 for its failure to disclose what it learned prior to the termination of its merger agreement with FNBR, and with secondary liability for FNBR's fraud.
Count II avers that the Registration statement (and amendments thereto), pursuant to which the 10% Subordinated Notes were issued, were false and misleading because of misrepresentations and omissions of material facts concerning FNBR's true financial condition, in violation of Sections 11 and 12 of the Securities Act of 1933, 15 U.S.C. Sections 77k(a), 77l. In addition, he alleges that the director defendants, who were all senior officers and/or directors of FNBR, are liable as controlling persons of FNBR under § 15 of the 1933 Act, 15 U.S.C. § 77o. Finally, plaintiff alleges that defendants negligently (Count III) and fraudulently (Count IV) misrepresented and omitted material information in violation of their common law duty of care.
I. Dismissal Under Fed.R.Civ.P. 12(b)(6)-The ...