The opinion of the court was delivered by: LEONARD B. SAND
Plaintiff Food and Allied Service Trades Department, AFL-CIO ("FAST"), brought this securities class action on behalf of itself and a class of similarly situated shareholders of defendant Millfeld Trading Co., Inc. ("Millfeld"). Millfeld is a Delaware corporation in the primary business of importing and marketing shoes; it went public in January 1990. In early 1992, the price of Millfeld stock collapsed after Millfeld disclosed that it was being investigated by federal prosecutors for systematic underpayment of its Customs duties over the preceding five years (the "Announcement").
This collapse of Millfeld stock, not surprisingly, produced more than one lawsuit against the company and its directors. Two such cases against Millfeld and its officers are before this Court -- the instant suit brought by FAST in July 1992, and another one filed a month earlier by plaintiffs Pentland USA, Inc. and Pentland Group PLC (collectively, "Pentland"). Both suits arise out of the same underlying transactions by Millfeld, and both allege securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5, and state common law.
In both cases, defendants moved to dismiss plaintiffs' complaint on the grounds that it failed to allege fraud with the particularity required by Federal Rule of Civil Procedure 9(b). In a hearing on December 10, 1992, this Court granted defendants' motions in both cases and gave plaintiffs leave to file amended complaints in both actions.
Plaintiffs in both actions filed their amended complaints on February 1, 1993, both of them adding allegations intended to support what had been lacking in the original complaints -- the inference that Millfeld's underpayment of its Customs duties was made with scienter, that is, with defendants' knowledge or with reckless disregard for the truth. Defendants in both actions moved to dismiss the amended complaints, alleging that, as before, they failed to plead fraud with the particularity required by Rule 9(b). By Opinion dated December 15, 1993 (the "Pentland Opinion"), we denied the motions to dismiss in the Pentland action.
For the reasons set forth below, we now deny defendants' motions to dismiss this action, with the exception of the motion to dismiss made by defendant Terren Peizer, which is granted. Familiarity with the Pentland Opinion is assumed.
This action resembles the Pentland action in most material respects. In particular, both actions arise from the same set of underlying transactions, and the complaints in both actions allege essentially the same set of material facts. The fundamental differences between the two actions are twofold:
1) FAST brings this action as representative of a class. The named class comprises all shareholders who purchased shares of Millfeld common stock between January 19, 1990, the date on which Millfeld went public, and April 27, 1992, the date on which it claims the market fully assimilated Millfeld's February 1992 disclosure of its Customs underpayments; and
2) While Pentland named as defendants only Millfeld and Barry Feldstein, Millfeld's former CEO, president and chairman, FAST names four additional individual defendants who were officers and/or directors of Millfeld during the relevant time period.
The first distinction -- the class nature of this action -- has no bearing on the motions to dismiss. As to the second distinction, we will treat the motions to dismiss in two groups -- those brought by defendants who were also defendants in the Pentland action (the "Pentland defendants"), and those brought by defendants not named in Pentland (the "non-Pentland defendants").
I. The Pentland Defendants
Millfeld and Barry Feldstein are the defendants named in both Pentland and this action. As noted above, by Opinion dated December 15, 1993 we denied these two defendants' motions to dismiss in the Pentland action. Finding no material differences between the two matters with respect to these common defendants, we now adopt the reasoning of the Pentland Opinion with regard to these two defendants, and we deny the motions to dismiss made by Millfeld and Barry Feldstein in this action.
II. The Non-Pentland Defendants
Having concluded that FAST has adequately alleged a "primary" violation of Section 10(b) with regard to Millfeld and Barry Feldstein, we now address issues of "secondary" liability with regard to the remaining defendants. FAST offers two theories of secondary liability under the Exchange Act for the remaining defendants: first, that they incurred liability as "controlling persons" under Section 20(a) of the Exchange Act; second, that they "aided and abetted" the primary violators.
The remaining defendants are described as follows in the Amended Complaint:
2) Dale Whitney became Vice President of Operations and Treasurer of Millfeld in 1981, and became a director in August 1989. He was terminated as Vice president and Treasurer and resigned from the Board in February 1992. The Amended Complaint alleges that he was also ...