October 13, 1993. Plaintiffs allege that this press release falsely stated that B&L was taking certain measures to streamline its manufacturing operations, such as reducing its workforce and consolidating some plants, in order to better utilize its facilities and lower its costs, whereas in fact these measures were a response to a severe decline in demand for B&L's products. The complaint also alleges that the press release reported that B&L's third-quarter revenues had increased eight percent over the same period for the prior year, to $ 498.8 million, although the complaint does not expressly allege that this statement was false.
Plaintiffs do not claim that they were unaware of the existence of this press release at the time the original complaint was filed. As with the Class I claims against the additional individual defendants, plaintiffs contend that the claims on behalf of purchasers of B&L stock between October 13 and December 13, 1993 relate back to the filing of the original complaint.
I find that these claims do not relate back under Rule 15, and that they are time-barred. For one thing, these claims do not meet the prerequisites of Rule 15(c)(3) concerning the addition of new plaintiffs. Nothing in the prior pleadings put defendants on notice that they would be subject to claims by persons who had bought B&L stock before December 14, 1993. There is also no mistake here concerning the identity of the proper parties that would justify the failure to assert these claims sooner.
In addition, these claims do not meet Rule 15(c)(2)'s requirement that "the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading ..." The October 13 press release was not mentioned in the prior pleadings and constitutes a separate alleged act of fraud. See Hunt v. American Bank & Trust Co. of Baton Rouge, 783 F.2d 1011, 1014 (11th Cir. 1986) (claims based on two allegedly fraudulent transactions did not relate back to original complaint, which alleged a separate transaction); In re Crazy Eddie Securities Litigation, 747 F. Supp. 850, 855 (E.D.N.Y. 1990) (claims in amended complaint relating to stock sales in December 1985 and March 1986 did not relate back to original complaint, which alleged material misstatements in connection with sale in March 1985); In re Commonwealth Oil/Tesoro Petroleum Corp. Securities Litigation, 467 F. Supp. 227, 260 (W.D.Tex. 1979) (amended complaint did not relate back to original complaint, since it "alleged new events not even mentioned in the original complaint"); cf. Wells v. HBO & Co., 813 F. Supp. 1561, 1565-66 (N.D.Ga. 1992) (amended complaint related back to original, since amended complaint attacked the same statements in the same SEC filings as the original complaint, but simply stated another reason that those statements falsely inflated the value of defendant's stock; noting that "whether the amended complaint would arise out of fraudulent acts occurring at the same time as the fraudulent acts in the original complaint is at least one factor to consider"); Issen v. GSC Enterprises, Inc., 538 F. Supp. 745, 749 n. 5 (N.D.Ill. 1982) (claims on behalf of persons who purchased stock in 1969 related back to original complaint, which identified class as composed of persons who bought stock after January 1, 1970, since "the claims of 1969 purchasers arose out of precisely the same transactions and occurrences alleged in [the] original complaint").
In determining whether a claim in an amended pleading arose out of the same conduct, transaction or occurrence alleged in an earlier pleading, courts have focused on whether the prior pleading put the other party on notice of the acts giving rise to the claim. See, e.g., Strong & Fisher Ltd. v. Maxima Leather, Inc., 1995 U.S. Dist. LEXIS 6404, No. 91 CIV 1779, 1995 WL 293607 *4 (S.D.N.Y., May 11, 1995); Contemporary Mission, Inc. v. New York Times Co., 665 F. Supp. 248, 255 (S.D.N.Y. 1987), aff'd, 842 F.2d 612 (2d Cir.), cert. denied, 488 U.S. 856 (1988). Although the prior pleadings did put defendants on notice that plaintiffs' claims against them arose out of the same general scheme to defraud as that alleged in the current complaint, those pleadings gave no indication that plaintiffs were alleging any fraudulent conduct by defendants prior to December 14, 1993.
It should also be noted that the third amended complaint alleges that the October 13 press release
announced, inter alia, that B&L was instituting a series of actions directed at streamlining its manufacturing operations supporting its sunglass and ophthalmic pharmaceutical business to improve the operating performance of both product areas. Specifically, the Company announced in that release that it was reducing its worldwide work force by more than 500 employees, and consolidating some of its manufacturing plants.
Third Amended Complaint P 55. The complaint also alleges that Gill was quoted in the press release as stating that these measures would "improve Bausch & Lomb's earnings potential in 1994 and beyond ...," that he expected B&L to "report very solid progress ...," etc. Third Amended Complaint P 56.
The prior complaints made virtually identical allegations about B&L's December 14, 1993 press release. See First Amended Complaint PP 39, 40; Second Amended Complaint PP 45, 46. The third amended complaint does not make these allegations about the December 14 press release. Thus, it appears that the statements formerly alleged to have been made on December 14, 1993 are now alleged to have been made on October 13, 1993.
Arguably, then, the previous allegations concerning the December 14 press release could be said to have put defendants on notice that the same statements that were contained in the October 13 press release might be a basis for plaintiffs' claims, except for one problem: the statements were not contained in the October 13 press release. An examination of the press releases shows that the statements about streamlining manufacturing operations, and the previously quoted statements by Gill, were contained only in the December 14 press release. See Lurie Affidavit Exs. 3, 4. Clearly, then, there was no reason for defendants to anticipate that they would be alleged to have made these statements on October 13, 1993.
IV. Control-Person Liability
The individual defendants contend that the claims against them based upon § 20(a) of the Act, 15 U.S.C. § 78t(a), must be dismissed because plaintiffs have not pleaded facts from which it can be inferred that the individual defendants both had the power to control or influence B&L or its management, and that they were culpable participants in the primary violation and had knowledge of the violation. Plaintiffs assert that they have pleaded sufficient facts to establish control person liability, and they further maintain that it is not necessary to allege culpable conduct by the individual defendants at this stage.
A threshold question, then, concerns the pleading requirements for a § 20(a) claim. As another district court within this circuit recently noted, whether a plaintiff must allege the defendant's scienter or culpable conduct for a 20(a) claim continues to be "a subject of controversy in this Circuit." Duncan v. Pencer, 1996 U.S. Dist. LEXIS 401, No. 94 Civ. 0321, 1996 WL 19043 *15 (S.D.N.Y. Jan. 18, 1996). Some district courts have held that a plaintiff bringing a § 20(a) claim must allege both control and either scienter or culpable conduct, while others have held that § 20(a) requires the plaintiff to allege only control, not scienter or culpable conduct, with the burden then shifting to the defendant to show good faith as an affirmative defense. See id. at *17 and cases cited therein.
After considering the matter, I find the reasoning of the latter cases more persuasive. The Second Circuit held in Marbury Mgmt., Inc. v. Kohn, 629 F.2d 705, 716 (2d Cir.), cert. denied, 449 U.S. 1011 (1980), that once a plaintiff establishes a defendant's control status, the defendant must shoulder the burden of proving his good faith. Both this holding and the wording of the statute itself suggest that good faith is an affirmative defense. As such, the good-faith defense should not be determined on a motion to dismiss, but rather after full discovery and, if necessary, a hearing. See Duncan, 1996 U.S. Dist. LEXIS 401, 1996 WL 19043 *17-18; Borden, Inc. v. Spoor Behrins Campbell & Young, Inc., 735 F. Supp. 587, 590 (S.D.N.Y. 1990); Zimmerman v. Prime Medical Services, Inc., 729 F. Supp. 23, 25 (S.D.N.Y. 1990); Mauriber v. Shearson/American Express, Inc., 567 F. Supp. 1231, 1238 (S.D.N.Y. 1983).
Plaintiffs, therefore, make out a prima facie case of control person liability if they sufficiently allege the individual defendants' control status. By doing so, plaintiffs raise a presumption of actual control, rebuttable either by a showing of good faith, or the absence of actual control. See Savino v. E.F. Hutton & Co., 507 F. Supp. 1225, 1243 (S.D.N.Y. 1981).
The burden of showing control status is not particularly onerous. The SEC defines "control" as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 240.12(b)-2.
In determining control status, "courts have given heavy consideration to the power or potential power to influence and control the activities of a person, as opposed to the actual exercise thereof." Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880, 890 (3d Cir. 1975), cert. denied, 425 U.S. 993, 48 L. Ed. 2d 817, 96 S. Ct. 2205 (1976). In other words, control requires "'only some indirect means of discipline or influence short of actual direction.'" Drobbin v. Nicolet Instrument Corp., 631 F. Supp. 860, 864 (S.D.N.Y. 1986) (quoting Myzel v. Fields, 386 F.2d 718, 738 (8th Cir. 1967), cert. denied, 390 U.S. 951, 19 L. Ed. 2d 1143, 88 S. Ct. 1043 (1968)); see also Savino, 507 F. Supp. at 1243.
In order to survive a motion to dismiss at the pleading stage, then, a plaintiff must plead facts which "support a reasonable inference that they had the potential power to influence and direct the activities of the primary violator." Food and Allied Service Trades Dep't, AFL-CIO v. Millfeld Trading Co., 841 F. Supp. 1386, 1391 (S.D.N.Y. 1994); Borden, 735 F. Supp. at 591. I find that plaintiffs have met this standard. For one thing, the complaint alleges that all the individual defendants but Stephenson and McCluski owned significant amounts of B&L stock during the relevant time period. Stephenson and McCluski, however, are alleged to have had particular responsibility with respect to B&L's finances. In that regard, all of the individual defendants are alleged to have been high-ranking officers within B&L, with responsibility either for B&L's overall performance, or for its finances: Gill, Chairman, Chief Executive Officer, and Chief Spokesperson; Zarella, President and Chief Operating Officer; Stephenson, Senior Vice President-Finance; Resnick, Vice-President and Treasurer; and McCluski, Controller.
It is true that mere status or position in a company does not conclusively show control status. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1441 (9th Cir. 1987). Nevertheless, in all cases, "'the issue of "control" is a complex fact question, which requires close examination of the relationships of the various alleged "controlling persons" to the person or entity which [is] alleged to have violated the Act.'" Edwards & Hanly v. Wells Fargo Securities Clearance Corp., 458 F. Supp. 1110, 1126 (S.D.N.Y. 1978) (quoting First Nat'l Bank of Orlando v. Miller, 77 F.R.D. 430, 439 (S.D.N.Y. 1978)), rev'd on other grounds, 602 F.2d 478 (2d Cir. 1979), cert. denied, 444 U.S. 1045 (1980). The nature of the individual defendants to B&L and to the alleged fraud here suggests that they had control status. Furthermore, the complex factual issues relating to this issue cannot be resolved on a motion to dismiss.
Defendant Bausch & Lomb, Inc.'s motion to dismiss the complaint (Item 41), and the individual defendants' motion to dismiss the complaint (Item 39), are granted in part. Plaintiffs may not assert claims against any defendants arising out of purchases of Bausch and Lomb stock prior to December 14, 1993, and plaintiffs may not assert claims against Ronald L. Zarella, Peter Stephenson, Alan H. Resnick, or Stephen L. McCluski arising out of purchases of Bausch and Lomb stock between December 14, 1993 and June 3, 1994. In all other respects, defendants' motions to dismiss are denied.
IT IS SO ORDERED.
DAVID G. LARIMER
UNITED STATES DISTRICT COURT
Dated: Rochester, New York
October 24, 1996.