stock," id. at 2, 3, and so could not have been previously disclosed. Accordingly, it argues, plaintiffs allegations suggest no wrongdoing beyond mere mismanagement or negligence, neither of which is adequate to establish the scienter element required for a Section 10(b) claim.
In response, plaintiffs argue that "there was nothing 'predictive' about Millfeld's Customs obligations," Pls.' Mem. at 2-3 -- that these obligations were not unquantifiable "risks" of doing business but instead were clearly quantifiable obligations resting on straightforward calculations of the value of the merchandise that Millfeld imported. Accordingly, they argue that the facts in the Amended Complaint give rise to a strong inference that defendants knew of Millfeld's Customs obligations at the time they arose, or recklessly disregarded those obligations.
Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity"; but "malice, intent, knowledge and other condition of mind of a person may be averred generally." Thus, allegations of scienter "are not subjected to the more exacting consideration applied to the other components of fraud." Breard v. Sachnoff & Weaver, Ltd., 941 F.2d 142, 143 (2d Cir. 1991); Ouaknine v. MacFarlane, 897 F.2d 75, 81 (2d Cir. 1990); Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987).
However, "there must be 'some factual basis for conclusory allegations of intent.' Specifically, 'allegations of scienter are sufficient if supported by facts giving rise to a "strong inference" of fraudulent intent.'" Breard, 941 F.2d at 143-44 (citations omitted); O'Brien v. Nat'l Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) ("an ample factual basis must be supplied to support the charges"); Connecticut Nat'l Bank, 808 F.2d at 962 (plaintiffs must plead "circumstances that provide at least a minimal factual basis for their conclusory allegations of scienter"). For Section 10(b) purposes, scienter includes recklessness. Breard, 941 F.2d at 144; IIT, Int'l Invest. Trust v. Cornfeld, 619 F.2d 909, 923 (2d Cir. 1980).
On a motion to dismiss, we must read the complaint generously, and draw all inferences in favor of the plaintiff. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989). Allegations "may be based on information and belief when facts are peculiarly within the opposing party's knowledge." Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990).
Applying these standards, we find that the Amended Complaint satisfies the requirements of Rule 9(b). In particular, the following facts alleged in the Amended Complaint give rise to a "strong inference of fraudulent intent": (1) Customs duties are affirmative, quantifiable legal obligations on importers (Am. Compl. P 49), and importing was Millfeld's primary business (Am. Compl. P 3), so defendants should have had knowledge of Millfeld's Customs obligations; (2) defendants engaged in a continuous and prolonged pattern of misrepresentations, giving rise to an inference of recklessness (Am. Compl. PP 45-55); and (3) Feldstein was, for the entire period of Millfeld's alleged Customs underpayments, the president, CEO and chairman of Millfeld and controlled over 49 percent of its common stock, and thus had intimate knowledge of, and control over, Millfeld's business during the relevant time period, as well as a strong motive to keep Millfeld's profits appearing healthy (Am. Compl. PP 24-30).
Since we find that these facts alleged in the Amended Complaint give rise to a "strong inference of fraudulent intent," defendants' motions to dismiss the Amended Complaint are DENIED.
The Parties are to advise the Court in writing on or before January 17, 1994 when all discovery will be completed, a pretrial order submitted, and the parties will be ready for trial.
Dated: December 15, 1993
New York, New York
Leonard B. Sand