The opinion of the court was delivered by: PETER K. LEISURE
This action arises from the sale of common stock by In-Store Advertising Co. ("In-Store"). Plaintiffs purport to represent a class of persons who purchased In-Store common stock. There are three groups of original defendants (the "defendants"), and KPMG Peat Marwick ("Peat Marwick") was brought into the instant action, as an additional defendant, in July 1993. Peat Marwick now moves this Court for an order dismissing or severing defendants' cross-claims and dismissing plaintiffs' state law fraud claim for failure to comply with Rules 8 and 9(b) of the Federal Rules of Civil Procedure. Alternatively, Peat Marwick moves for severance of claims against it from the main action. In addition, plaintiffs and defendants both move for the production of certain documents that Peat Marwick has failed to provide. For the reasons stated below, Peat Marwick's motion is granted in part and denied in part, and plaintiffs' and defendants' motions are denied in their entirety.
This action arises from the sale of common stock, pursuant to an initial public offering ("IPO") by In-Store on July 19, 1990. See Memorandum of KPMG Peat Marwick in Support of its Motion (1) to Dismiss or Sever the Cross-Claims and (2) to Dismiss Plaintiffs' State Law Fraud Claim ("Peat mem.") at 5. In-Store sold advertising time on its electronic signs located in participating supermarkets to consumer product companies. Id. In-Store commenced operations in 1987 and filed for protection under Chapter 11 of the Bankruptcy Code in July 1993. Id.
Plaintiffs purport to represent a class of purchasers of In-Store common stock. Defendants include: "venture capital defendants," each of which placed one of their officers or principals on In-Store's board of directors; "individual defendants," a group comprised of management defendants and outside director defendants; "underwriter defendants," a group encompassing the involved underwriters; and Peat Marwick, which conducted an audit of In-Store's financial statements for the year ended December 31, 1989. Peat mem. at 6.
Plaintiffs' first complaint was filed on August 29, 1990. On August 27, 1991, plaintiffs filed a consolidated class action complaint, and this complaint charged all defendants, except Peat Marwick, with violations of federal securities laws, common law fraud, and negligent misrepresentation. After answers were filed to this complaint, the parties entered into settlement negotiations which resulted in the execution of a memorandum of understanding in February 1992. See Cross-Claimants' Answering Memorandum of Law in Opposition to KPMG Peat Marwick's Motion to Dismiss or Sever Cross-Claims ("Defendant mem.") at 3. The settlement dissolved, however, and on July 16, 1993, plaintiffs filed another amended complaint adding Peat Marwick as a defendant. In addition, defendants filed separate cross-claims against Peat Marwick.
On December 30, 1993, Judge Conboy dismissed all federal securities claims against Peat Marwick as time barred. This left common law fraud as plaintiffs' only remaining claim against Peat Marwick. Peat Marwick now moves to dismiss or sever both the common law fraud claim and the cross-claims of its co-defendants.
Rule 9(b) of the Federal Rules of Civil Procedure ("Rule 9(b)") provides, "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally." "The purpose of Rule 9(b) is threefold -- it is designed to provide a defendant with fair notice of a plaintiff's claim, to safeguard a defendant's reputation from 'improvident charges of wrongdoing,' and to protect a defendant against the institution of a strike suit." Acito v. IMCERA Group, Inc., 47 F.3d 47, 1995 WL 46734 at *4 (2d Cir. 1995) (quoting O'Brien v. National Property Analysts Partners, 936 F.2d 674, 676 (2d Cir. 1991) (Leisure, J.)). Peat Marwick observes that Rule 9(b) is especially designed to protect the reputation of accountants and other professionals. See Peat mem. at 15.
In order to satisfy the requirements of Rule 9(b), plaintiffs must indicate which statements they believe to be false or deceptively incomplete and why they judge them to be false or incomplete, detail the time and place at which statements were made, and identify those charged with having made those statements. See Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989); Quantum Overseas, N.V. v. Touche Ross & Co., 663 F. Supp. 658, 666 (S.D.N.Y. 1987). In other words, "pursuant to Rule 9(b), an allegation of fraud 'should state the contents of the communications, who was involved, where and when they took place, and [explain] why they were fraudulent.'" See Bay State Milling Company v. Terranova Bakers Supplies Corporation, 871 F. Supp. 703, 1995 WL 4321 at *3 (S.D.N.Y. 1995) (Leisure, J.) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175-76 (2d Cir. 1993)).
although Rule 9(b) provides that intent and other conditions of mind may be averred generally, plaintiffs must nonetheless provide some factual basis for conclusory allegations of intent. . . . These factual allegations must give rise to a "strong inference" that the defendants possessed the requisite fraudulent intent. . . . A common method for establishing a strong inference of scienter is to allege facts showing a motive for committing fraud and a clear opportunity for doing so. . . . Where motive is not apparent, it is still possible to plead scienter by identifying circumstances indicating conscious behavior by the defendant. . . . though the strength of the circumstantial allegations must be correspondingly greater.
Beck v. Manufacturers Hanover Trust Co. 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988), overruled on other grounds by United States v. Indelicato, 865 F.2d 1370 (2d Cir.), cert. denied, 491 U.S. 907, 109 S. Ct. 3192, 105 L. Ed. 2d 700 (1989) (citations omitted). In sum, the scienter requirement of Rule 9(b) may be satisfied in two ways. "The first approach is to allege facts establishing a motive to commit fraud and an opportunity to do so. The second approach is to allege facts constituting circumstantial evidence of either reckless or conscious behavior." In Re Time Warner Inc. Sec. Lit., 9 F.3d 259, 268-69 (2d Cir. 1993), cert. denied, 114 S. Ct. 1397, 128 L. Ed. 2d 70 (1994)
In the instant action, there is little dispute that, except for the requisite scienter allegations, plaintiffs have met all of the requirements of Rule 9(b). Plaintiffs, however, do not allege that Peat Marwick knew of, participated in, or had a motive to participate in the alleged fraud. Absent either a factually supported allegation that Peat Marwick had a motivation to defraud plaintiffs or an allegation of "conscious behavior" by Peat Marwick, plaintiffs must rely on allegations of facts constituting circumstantial evidence of reckless behavior. Accordingly, plaintiffs must allege facts sufficient to support a "strong inference" that Peat Marwick acted with the requisite intent, recklessness, to defraud plaintiffs. See In Re Time Warner 9 F.3d at 268; Connecticut Nat'l Bank v. Fluor Corp., 808 F.2d 957, 962 (2d Cir. 1987). Plaintiffs must plead facts and not just provide conclusory allegations which state the legal standard.
Peat Marwick asserts that plaintiffs have not made the requisite showing. Peat Marwick notes that "merely alleging that a professional has performed services for other defendants is an insufficient basis for inferring scienter." Morin v. Trupin, 711 F. Supp. 97, 110 (S.D.N.Y. 1989). Peat Marwick maintains that the allegations made in the complaint, that it failed to comply with generally accepted auditing standards ("GAAS") and generally accepted accounting principles ("GAAP"), do not sufficiently allege the required scienter. It further contends that a mere failure to comply with auditing standards does not give rise to an action for fraud, and that plaintiffs' allegations, at most, sound in negligence.
Plaintiffs, on the other hand, maintain that they have fully satisfied Rule 9(b). They argue that they have adequately identified in the complaint the time, place, speaker and content of the alleged misrepresentations by Peat Marwick, such that Peat Marwick has been sufficiently apprised of the claims against it. Plaintiffs further contend that they have adequately alleged scienter. Plaintiffs note that, under New York law, recklessness constitutes sufficient scienter to support an inference of fraud. See, e.g., Joel v. Weber, 1990 N.Y. Misc. LEXIS 691, at *6 (N.Y. Sup. Ct. 1990); Fidelity & Deposit Co. v. Arthur Andersen & Co., 131 A.D.2d 308, 515 N.Y.S.2d 791, 793 (1st ...