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October 5, 1993

ROBERT E. FURMAN, Plaintiff,


The opinion of the court was delivered by: WILLIAM C. CONNER



 Sea Containers is a Bermuda corporation engaged in three major lines of business. It manufactures, sells and leases marine cargo containers; it operates sea ports and passenger, automobile, and freight ferries; and it owns a number of hotels. Compl. PP 6,20. In 1989 the Company became the subject of a hostile takeover attempt in reaction to which, in April 1990, Sea Containers sold substantial portions of both its dry cargo container and tank container fleets, and its conventional ferry and port business. Compl. P 21(a). Sea Containers and a number of its subsidiaries also completed a tender offer for 7 million shares of the Company's common stock which resulted in Sea Containers' wholly-owned subsidiaries owning more than 50% of their parent. Compl. P 21(a). Since, under a Bermuda Supreme Court ruling, Sea Containers' subsidiaries are permitted to vote the shares they hold in their parent, this ownership situation effectively insulated the Company from new hostile takeover bids. Compl. P 21(b).

 Nonetheless defendants Sherwood, the President and a Director of the Company, and Stracey, Sea Containers' Executive Vice President for finance, became concerned that in the future, if there were a change in Bermuda law or if the Company raised capital by selling common stock, Sea Containers might again find itself vulnerable to a hostile acquisition attempt. Compl. PP 7(a)&(b),20(c). To address this concern, on March 24, 1992, the Company distributed notice of a special shareholders' meeting and enclosed a proxy statement seeking adoption of a resolution which would change the capitalization structure of the Company. Under the resolution, two classes of Sea Containers common stock would be created -- Class B shares would continue to carry one vote per share but Class A shares, which would receive at least 10% higher dividend payments than Class B stock, would only carry one tenth of a vote per share. Compl. PP 22,23(c). At the special shareholders' meeting, held on April 23, 1992, the capitalization and exchange plan (the "Exchange Offer") was approved by a majority of Sea Containers' shareholders. However, excluding those shares owned and voted by the Company's wholly-owned subsidiaries, only a minority of the public shareholders approved the plan. Compl. P 22(b). The Exchange Offer provided that, effective June 23, 1992, Sea Containers' existing common stock would be reclassified as Class B stock, but that Class B shares could, at any time, be converted into Class A shares. Compl. P 23(c). In addition, the Company offered to pay a special bonus of $ 0.15 for each Class B share tendered for conversion into Class A stock before June 23, 1992. Compl. P 26.


 On a motion to dismiss we accept all allegations in the complaint as true, and dismiss only if, after drawing all inferences in plaintiffs' favor, it is clear that they are not entitled to relief. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); see Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). The complaint sets out two somewhat distinct allegations of fraud. First plaintiffs point to a number of corporate statements made during the class period which they claim perpetrated a fraud on the market and artificially raised Sea Containers' common stock price. Second plaintiffs allege that a sub-class of people were fraudulently induced to convert their Class B share to Class A shares by false and misleading statements made pursuant to the Exchange Offer. We address each allegation in turn.

 As a threshold matter, we must determine which documents are properly before the Court pursuant to this motion to dismiss. As a general rule, a motion to dismiss addresses only the validity of plaintiffs' allegations as they appear on the face of the complaint. Anderson v. Coughlin, 700 F.2d 37, 40 (2d Cir. 1983). Historically, a complaint was deemed only to include those documents either attached as exhibits or incorporated by reference therein. Goldman v. Belden, 754 F.2d 1059, 1065-66 (2d Cir. 1985). More recently, however, the Second Circuit has expanded the breadth of matters to be considered in deciding motions at the pleading stage of litigation to include documents publicly filed with the SEC and those documents upon which plaintiffs relied in framing their complaint. Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir. 1991); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991), cert. denied, 112 S. Ct. 1561 (1992); I. Meyer Pincus & Assoc. v. Oppenheimer & Co., 936 F.2d 759, 762 (2d Cir. 1991). Our consideration of a number of defendants' exhibits is appropriate because each document is at the least cited and discussed in the complaint.

 I. The Alleged Fraudulently Inflated Stock Price

 The complaint sets out a litany of statements which are alleged to have been false and misleading and to have fraudulently inflated the price of Sea Containers' common stock during the class period. Plaintiffs claim that the Company created a deceptively bullish image of itself by making statements as to its container business, its ferry operations, and its plans for raising equity capital. Plaintiffs contend that this false perception of Sea Containers' positive prospects was shattered on October 5, 1992, when the Company announced that, contrary to earlier predictions, Sea Containers' ferry earnings had suffered in the third quarter of 1992 and that earnings for that quarter would show no improvement over earnings during the same period in the prior year. Compl. P 38. The allegations are addressed in turn.

 A. Alleged False Statements Pertaining To The Company's Container Leasing Business

 On April 30, 1992, the Company released its 1991 annual report from which the complaint cites the following statements regarding the prospects for Sea Containers' refrigerated container business:

In the sector of refrigerated containers nearly all our fleet is now either out on lease or is committed for lease, but we have taken a step beyond just traditional leasing. Our strategy team spent five months analyzing the current and future demand for refrigerated containers, utilization patterns by age of equipment and region of use, rate structures and repair and maintenance requirements. We also considered our future in the manufacturing of refrigeration systems for containers and the building of insulated containers for such systems, which we currently undertake in two factories in Singapore. We looked carefully at the evolution of chlorine-free refrigerants. As a result of this study we have decided to implement a new approach to the refrigerated container leasing and sales business which we think will substantially increase profitability in the years ahead.

 Defs' Ex. 5 at 3-4 (emphasis added) (cited in compl. P 24(a)(i)). Additionally, plaintiffs cite the following statements as to the prospects for the Company's container business made in a June 10, 1992 press release:

The on-take of new container equipment is proceeding at a faster rate than planned, Mr. Sherwood told the shareholders, due to stronger than expected demand. It is likely that the budgeted on-take of $ 130 million of new containers for the year will be exceeded. . . . Between the first quarter of 1991 and the first quarter of 1992 container division overheads as a percentage of revenue have declined 4%, with another 4% decline expected in each of the successive two years. By the first quarter of 1994 the Company's overhead as a percentage of revenue should be at the level just prior to the sale of its dry cargo and tank container fleets to Tiphook in the second quarter of 1991. Mr. Sherwood said that container lease rates on average had shown no decline over the past year despite the decline in interest rates. In fact, rates for refrigerated containers are showing a meaningful increase in step with increased demand. Mr. Sherwood said the company's entire serviceable refrigerated container fleet was now out on lease or committed for lease. Demand for the company's new Series III SeaCold refrigeration system for containers which operates on chlorine free gas has been so great that the SeaCold factory in Singapore is now booked to capacity for many months ahead. The company's container fleet is now close to full employment at 88% utilization Mr. Sherwood indicated, because at any moment in time there are units under repair and some inventory is required in depots. The company has successfully re-entered the tank container leasing market with several hundred units now on lease.

 Defs' Ex. 6; compl. P 32. Finally, the complaint cites the following statement from the Company's August 13, 1992 press release:

Mr. Sherwood indicated that marine container utilization remains steady at 88% and lease rates remain firm. The company is experiencing shortages of many equipment types. He said that the on-take of new containers combined with improved results from the company's containerships should result in continued improvement of earnings from this division for the balance of the year.

 Compl. P 36 (quoting Defs' Ex. 3 at 2). Plaintiffs claim that these statements were misleading because they failed to disclose that the Company's container leasing business was increasingly focused on non-refrigerated containers which were more vulnerable to cyclical economic forces. Compl. PP 25(a),33(a),37(b). *fn1" This allegation is meritless.

 The complaint does not contest the truthfulness of any of the facts which Sea Container disclosed regarding its container business. Plaintiffs only claim that the positive forecasts of the container sector's future performance were false and misleading because of the failure to disclose the fact that the Company's container business was becoming more dry-cargo-container intensive. Statements which predict the Company's future performance may be the basis of a securities claim only if they were disseminated knowing they were false or the method of their 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); see Virginia Bankshares, Inc. v. Sandberg, 115 L. Ed. 2d 929, 111 S. Ct. 2749, 2758 (1991). Defendants argue that the complaint states no facts which might support either conclusion and therefore contend that these allegations are not set out with the particularity required by Rule 9(b). In any case, defendants take the position that this portion of the complaint fails to state a claim upon which relief can be granted and therefore should be dismissed under Rule 12(b)(6).

 At a minimum these conclusory allegations as to the Company's container business are deficient under Rule 9(b), Fed. R. Civ. P., which requires that a complaint identify: the fraudulent statements made; how they were fraudulent; and when, where and by whom they were made. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Rule 9(b) permits pleadings based on information and belief only when the facts are particularly within the opposing party's knowledge and then only if the allegations are accompanied by specific facts which support a strong inference of fraud. Id. at 11-12; DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242, 1247 (2d Cir. 1987); Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990).

 Plaintiffs supply no facts to support this conclusory allegation; indeed the complaint alleges that in 1989 the Company sold a substantial portion of its dry cargo and tank container fleets to Tiphook plc, a British container leasing company, compl. P 21(a), which tends to contradict the conclusion that the Company's business was becoming more dry-cargo-container intensive. In addition, it is not clear from the complaint how a reasonable investor could have drawn any conclusion as to the growth and performance of the Company's dry container sector from the language quoted from the 1991 annual report. The statement is expressly limited to a discussion of the refrigerated container sector and, several paragraphs later in the annual report, the Company discusses the status of the refrigerated, tank, and dry cargo container sectors and the proportion that each represents of the Company's total container fleet.

In 1991 we acquired $ 122 million of new containers and related equipment; we are forecasting a similar ontake of such units in 1992. At March 31, 1992 our container fleet numbered 140,000 twenty foot equivalent units representing an investment at original cost of $ 607 million. Demand for our containers has consistently outstripped our ability to supply for most of 1991 and we expect this situation to prevail throughout this year, although the "mix" of our customer demands may change slightly. For example, we re-entered the tank container leasing business on April 2, 1992 at the end of the two year no-compete period agreed at the time we sold our tank container fleet in 1990. We are now concluding a number of tank leases with our former customers as well as new ones. We think there may be a slight ...

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