Amended Class Action Complaint (the "Complaint") was filed, alleging primary claims against all defendants for violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and secondary claims against defendants Beach and Pepsico as "control persons" under 15 U.S.C. § 78t(a).
As set forth in the Complaint, defendant Buenos Aires Embotelladora S.A. ("Baesa") is an Argentinean bottling corporation, organized in 1989, with principal offices in Buenos Aires, Argentina, and Boca Raton, Florida. Its securities are traded on the New York Stock Exchange in the form of "American Depository Shares." At all relevant times, defendant Charles H. Beach was its President and "Principal Executive Officer." In November, 1993, Baesa entered into an agreement with defendant Pepsico, Inc., by which, among other things, Pepsico acquired nearly 24% of Baesa's common stock in exchange for $ 35 million, various Pepsi bottling and distribution rights in Argentina and certain other parts of South America, and the right to approve certain Baesa management decisions. Ultimately, in August, 1996, following Beach's resignation, Pepsico took total control of Baesa and, shortly thereafter, announced that Baesa had suffered substantial losses largely attributable to "accounting irregularities." The price of Baesa shares fell precipitously, and these lawsuits by Baesa shareholders followed.
The gist of plaintiffs' 70-page Complaint is that between November, 1995 and August, 1996, Baesa, in concert with Beach and Pepsico, issued numerous false and misleading public statements that materially overstated the company's assets and earnings and effectively concealed the company's deteriorating financial position. Careful inspection of the Complaint reveals, however, that the legally cognizable allegations of fraudulent conduct largely center on financial and other irregularities at Baesa's Brazilian subsidiary, a separate company known as "PCE," that is not a party to this case but the financial statements of which were included in Baesa's public reports. Furthermore, the Complaint is noticeably skimpy in setting forth particular facts from which one might strongly infer that Baesa, Beach (who worked at the Boca Raton office), or Pepsico had knowledge during the class period that the reported Brazilian results were fraudulent.
Accordingly, on March 26, 1997, defendants promptly moved to dismiss the Complaint, contending, inter alia, that plaintiffs' had failed to meet the requisite standards for pleading scienter in a securities fraud case.
Properly to determine what those standards are, one must first distinguish between the mental state required for securities fraud liability ("scienter") and the level of pleadings required to adequately allege that mental state at the outset of a lawsuit. The Reform Act speaks only to the latter. Specifically, subsection 21D(b)(2) of section 101(b) of the Reform Act, entitled "Required State of Mind," reads in its entirety as follows:
In any private action arising under [Title I of the Exchange Act] in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this title, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.