The opinion of the court was delivered by: MCAVOY
Plaintiffs bring this securities fraud action pursuant to Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Plaintiffs also bring various common law causes of action. Defendants now move, pursuant to Fed.R.Civ.P. 12 and 9, to dismiss the Complaint. Plaintiffs cross-move for leave to amend.
The following are the facts as alleged in the First Amended Complaint ("Complaint" or "Compl."). Since this motion is brought pursuant to Fed.R.Civ.P. 12(b)(6), the Court accept these allegations as true for the purposes of this motion. Mills v. Polar Molecular Corporation, 12 F.3d 1170, 1174 (2d Cir. 1993).
Plaintiffs Karol Pilarczyk ("Karol"), Roma Z. Pilarczyk ("Roma"), Andrzej P. Pilarczyk ("Andrzej"), Ian C. Pilarczyk ("Ian"), Jean Paul Poulin ("Poulin") and Anne M. Lagan ("Lagan") are residents of the Albany region in New York State. At all relevant times prior to December of 1992, Karol and Poulin were principals in TMS, Inc. ("TMS"), a New York corporation engaged from its inception in 1987 in the business of rebuilding turbochargers. Karol was the founder and president of TMS and as of December 30, 1992, owned approximately 36.9% of the issued and outstanding shares of TMS in his sole name. Poulin, the executive vice-president of TMS, owned 6.1% of the outstanding and issued shares jointly with his wife Lagan as of December 30, 1992. The remaining plaintiffs owned the following percentages of TMS' outstanding and issued stock as of December 30, 1992: Roma, jointly with her husband Karol, 5.7%, and 3.8% in her own name; Ian, 3.5%; Andrzej, 3.5%.
Defendant Morrison Knudsen Corporation ("MK") is a major international engineering and construction company headquartered in Boise, Idaho. MK is a publicly traded Delaware corporation traded on the New York Stock Exchange. Defendant MK Rail Corporation ("MK Rail") is a Delaware Corporation incorporated by MK in 1994, into which MK "spun off" certain assets. MK Rail is headquartered in Boise, Idaho, and is in the business of manufacturing, designing and distributing locomotives and locomotive parts, as well as providing fleet maintenance services to the rail industry. Following a public offering in 1994, MK continued to hold approximately 65% of the issued and outstanding shares of MK Rail.
Defendant William J. Agee was at all relevant times the Chairman of the Board, President and CEO of MK. Defendant Stephen G. Hanks was at all relevant times the Executive Vice-President for Finance and Administration and the Secretary of MK's Board of Directors. Defendant James F. Cleary was at all relevant times the Vice President of Corporate Finance and Planning of MK. Defendant Thomas J. Smith was at all relevant times the President and Chief Executive Officer of MK's Rail Systems Group. Defendant John P. Herbots was at all relevant times the Senior Vice President and General Manager of MK's Rail Systems Group, Locomotive Division. Defendant James P. O'Donnell was at all relevant times the Director-Strategic Planning of MK.
During the second half of 1992, representatives of MK approached Karol and Poulin regarding the potential acquisition of TMS by MK. Extended negotiations ensued, during which plaintiffs were never told of any problems being encountered by MK in its rail business. In fact, plaintiffs were given only glowing reports regarding the condition of MK and its future prospects. For example, in his letter to shareholders in the 1991 Annual Report, Agee noted that MK was "extraordinarily well-placed to lead America through a rail renaissance," and emphasized a number of MK's successes, including: (1) winning a $ 380 million Illinois contract to manufacture 313 cars, the largest transit award in MK history; and (2) a $ 155 million contract to build 88 cars for the California Department of Transportation (the "Caltrans" contract). The 1991 report went on to state that
MK is well-positioned to meet the growing needs of the vast transportation market. The company is unsurpassed in its ability to design, construct, manage construction, operate and finance complex infrastructure projects. MK also has gained a reputation for quality and excellence in both the manufacture of new rail cars and the remanufacture of rail cars and locomotives. MK is the only U.S.-owned and operated manufacturer of new transit cars necessary to meet the country's growing urban transit needs.
At the conclusion of the negotiations, Karol and Poulin agreed, subject to the TMS shareholders' approval, that MK could acquire TMS for a purchase price of $ 14,000,000. At the time of the initial agreement as to price, the structure of the transaction was not discussed; MK later informed Karol and Poulin, however, that the transaction had to be structured as a tax-free reorganization, in which the shareholders of TMS would exchange their shares for MK stock, so that MK could account for the acquisition by the pooling of interests.
Karol and Poulin also were told that as a condition of the transaction, MK required each to execute Employment Agreements and Non-Competition agreements, under which each would be paid a total of $ 2,000,000, in equal payments over a ten-year period. As the documents were being prepared for the acquisition, MK informed Karol and Poulin that compensation for the Non-Competition agreements would also entail stock, rather than cash: $ 1,500,000 of MK stock was to be placed in escrow for each of them, with 10% of the stock to be released from escrow each year for ten years. The remaining $ 500,000 of compensation, MK informed them, would be covered by the payment of dividends on the MK stock over the life of the Non-Competition Agreements.
Between December 27, 1992 and December 30, 1992, MK and the plaintiff shareholders of TMS executed an Exchange and Purchase Agreement (the "Purchase Agreement"). Section 1.2 of the Purchase Agreement set forth the "Purchase Price" for the TMS shares as follows:
Purchase Shares shall mean such issued shares of MK Common Stock, par value $ 1.66 2/3 per share ("MK Common") having an aggregate value of Fourteen Million Dollars ($ 14,000,000).
(Compl. Ex A) (emphasis added). The Purchase Agreement further provided a formula for computing the value of the MK shares, making them equal to "the unweighted average of the daily market closing price on the New York Stock Exchange composite tape for MK Common for the ten business days ending five days prior to the date of closing, as reported in the Wall Street Journal." (Compl. Ex. A, § 1.2). With a closing date of December 30, 1992, this formula resulted in a MK stock value (for the purposes of the Purchase Agreement) of $ 21.2125.
Section 8.4 of the Purchase Agreement provided as follows:
8.4 Accuracy of Representations
No representation or warranty made by Buyer or MK contained in this Agreement or in any other writing furnished pursuant thereto, including the SEC documents, contains an untrue statement of a material fact or omits to state a material fact necessary to make the statements and facts contained herein or therein, in light of the circumstances in which they were or are made, not false or misleading.
(Compl. Ex. A, § 8.4). The "SEC Documents" are listed in Section 4.1 of the Purchase Agreement and include MK's 1991 Annual Report, Form 10-K and Proxy Statement, and MK's Quarterly Reports to Shareholders and Form 10-Q's for quarters ending March 31, 1992, June 30, 1992 and September 30, 1992.
The deal was closed on December 30, 1992, at which time TMS shareholders received a total of 659,988 shares of MK stock, with Karol and Roma collectively receiving 306,928 shares, and Poulin and Lagan jointly receiving 40,115 shares. Andrzej and Ian each received 23,413 shares.
At the time the agreements were entered into, plaintiffs allege that MK knew of certain problems in its rail systems business. For example, plaintiffs allege that the entry of the company into transit car production was "badly flawed," and that MK had performed inadequate research into the design of transit cars. Moreover, the design and engineering of the Chicago Transit Authority cars mentioned in MK's 1991 letter to shareholders allegedly was done by a firm other than MK. Plaintiffs further assert that certain misstatements in the 1991 Annual Report were intentionally and successfully made to inflate the price of the MK stock. Finally, plaintiffs contend that the 1992 and 1993 Annual Reports contained similar misstatements of MK's financial success, prompting analysts such as First Boston, Merrill Lynch and Kidder, Peabody to issue favorable reports on MK into 1994.
Based upon MK's apparently solid financial position, MK created MK Rail in early 1994 and completed a publicly traded spin off to enable MK Rail to build, re-build and lease locomotives.
From the time TMS was acquired by MK through early 1994, Karol and Poulin continued to attend management meetings and planning sessions in connection with their employment at MK. They were never informed of any problems encountered in MK's Rail Systems Group.
Subsequent to these announcements, the analysts down-graded their reports on MK, and the ...