however, that a great deal turns on context. As one noted author has written regarding insider trading, "One who trades on hearing a total stranger say 'TGS is a good buy' should not be a violator. But one who trades on being told the same thing by a director of the company, in a tone of a mysterious and emphatic confidentiality, on emerging from a board meeting, may well be a violator." 3 BROMBERG § 7.5(1141), at 7:300.11. And the analogy to this case is reasonably plain.
Materiality is a mixed question of law and fact. TSC Industries, Inc., 426 U.S. at 450. Dismissal on materiality grounds of a complaint alleging misrepresentation or non-disclosure of a fact is appropriate only if the plaintiff could prove no facts under the allegations of the pleading that would permit the trier to find the fact material.
Mitsubishi and the Rockefellers had funded deficits which, by the date in question, aggregated almost $ 400 million. Nevertheless, the complaint alleges that Mitsubishi and RCP historically had maintained close relations. Thus, while the refusal to meet itself was ambiguous, the trier of fact reasonably might infer that it was something out of the ordinary. Against the background of the alleged relationship among Mitsubishi, RCP and the Rockefeller family, the Court is not prepared to say that it would be unreasonable as a matter of law for a trier of fact to conclude that Mitsubishi's refusal shed enough light on its probable future actions to alter significantly the "total mix" of available information. Accordingly, insofar as the motion seeks dismissal of this aspect of the complaint on the ground that there was no duty to disclose the refusal, or that the refusal was not material, it must be denied.
RCP has another arrow in its quiver, however. FED. R. CIV. P. 9(b) requires that allegations of fraud be made with particularity. The Rule 10b-5 and state law claims manifestly allege fraud. And while scienter is not an essential element of the claim under Section 12(2) of the Securities Act of 1933, this complaint pleads scienter as part of that claim (cpt P 32), thus bringing that count within Rule 9(b) as well. E.g., Neubauer v. Eva-Health USA, Inc., 158 F.R.D. 281, 284 n.1 (S.D.N.Y. 1994) (citing cases).
It now is established in the Second Circuit that a securities fraud plaintiff must "allege facts that give rise to a strong inference of fraudulent intent" in order to state a legally sufficient claim for relief. Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). This may be accomplished "either (a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id. Accord, e.g., San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 813 (2d Cir. 1996); Acito v. Imcera Group, Inc., 47 F.3d 47, 51 (2d Cir. 1995); In re Time Warner Inc. Securities Litigation, 9 F.3d at 268-69. Plaintiff's brief contends that the complaint satisfies Rule 9(b) on either standard. (Pl. Mem. 11-12)
The complaint manifestly is insufficient under the conscious misbehavior prong of the test. To be sure, it contains conclusory assertions that RCP "willfully and/or recklessly" failed to disclose the facts described above and that it "knew, or was reckless in not knowing, of the material misrepresentations and omissions ..." (Cpt PP 25, 32, 38, 44) But all of those allegations are made on information and belief (cpt at 1) and none is supported by even a scrap of evidentiary detail. See Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1003 (2d Cir.), cert. denied, 488 U.S. 852, 102 L. Ed. 2d 109, 109 S. Ct. 137 (1988). The materiality of the one alleged nondisclosure that is sufficient to survive a motion to dismiss is highly debatable, which indicates that the nondisclosure in itself is not a sufficient basis from which to infer conscious misbehavior. In consequence, the conclusory allegations rest on nothing.
Plaintiff does not "enjoy a 'license to base claims of fraud on speculation and conclusory allegations.'" San Leandro, 75 F.3d at 813 (quoting Wexner v. First Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990)). To sustain this complaint on the conscious misbehavior standard would be to confer precisely such a license. That leaves the question whether plaintiff had a motive and an opportunity to commit fraud by withholding the information concerning Mitsubishi's refusal to meet.
The complaint alleges that RCP in early 1993 began seeking additional capital to replace expiring bank guarantees. (Cpt P 27) Plaintiff's brief argues that the disclosure of Mitsubishi's refusal to meet -- which it too aggressively characterizes as its "apparent decision to cease funding" -- would have made the terms on which RCP could have raised additional capital less favorable (Pl. Mem. 11), thus giving RCP a motive to conceal. But this assertion is defeated by the Second Circuit's most recent pronouncement on this subject.
In San Leandro Emergency Medical Group Profit Sharing Plan, 75 F.3d 801, the plaintiffs complained of Philip Morris' alleged failure to disclose that sales of Marlboro cigarettes, an important product, were declining at an alarming rate and that the company was considering a new discounted pricing strategy to increase market share at the expense of short-term profits. In an effort to establish the motive essential to the second prong of the Rule 9(b) test, they contended that the nondisclosure temporarily sustained the stock price and an illusion of continued profitability, which in turn "maintained the company's bond and credit ratings at the highest possible level so as to maximize the marketability of the $ 700 million of debt securities issued" during the relevant period. Id. at 813. But the Second Circuit dismissed the argument in a single sentence: "We do not agree that a company's desire to maintain a high bond or credit rating qualifies as a sufficient motive for fraud in these circumstances, because 'if scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions.'" Id. at 814 (quoting Acito, 47 F.3d at 54). See also Shields v. Citytrust Bancorp, Inc., 25 F.3d at 1130 ("It is hard to see what benefits accrue from a short respite from an inevitable day of reckoning.").
San Leandro and Shields both were stronger cases for the plaintiffs on this point than this one. In both cases, the issuers had made forward-looking statements with varying degrees of optimism that allegedly were at odds with subsequent events. In both, therefore, the plaintiffs at least could argue with straight faces that the alleged nondisclosures kept the market from learning of developments inconsistent with the issuers' stated expectations. Here, in contrast, the market well knew, because the Registration Statement disclosed, that the Borrowers were hanging on by their fingernails and that Mitsubishi and the Rockefellers had no obligation to continue funding the deficits. RCP said absolutely nothing to suggest that they would continue to fund. If the concealment of information at variance with management's stated expectations is insufficient to give rise to an inference of fraud, a fortiori the failure to disclose Mitsubishi's refusal to meet in the circumstances of this case is insufficient. Accordingly, the complaint fails to allege fraud with the particularity required by FED. R. CIV. P. 9(b).
For the foregoing reasons, defendant's motion to dismiss the complaint is granted in all respects.
Dated: April 16, 1996
Lewis A. Kaplan
United States District Judge