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August 9, 2004.

ALLIEDSIGNAL, et al., Defendants.

The opinion of the court was delivered by: LAURA TAYLOR SWAIN, District Judge


Plaintiffs, which are four Massachusetts and two California business trusts and two Maryland corporations, assert claims in this action under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, certain sections of the California Corporate Code, and for common law fraud, in connection with their purchase of bonds from Breed Technologies, Inc. ("Breed"). Except to the extent noted below, the Court has jurisdiction of this action pursuant to 15 U.S.C. § 77v and 78aa, and 28 U.S.C. § 1331 and 1367. Defendants move, respectively, for an order dismissing the Amended Complaint ("Complaint") pursuant to Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. The Court has considered thoroughly all submissions and argument in connection with the instant motions. For the following reasons, the motions are granted in part and denied in part.


  The following allegations are taken from the Complaint, statements or documents incorporated in the Complaint by reference, public disclosure documents filed with the SEC, and/or documents that Plaintiffs either possessed or knew about and upon which they relied in bringing this action. See Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000). All of the allegations in the Complaint are taken as true for purposes of resolution of the instant motion practice.

  Breed, a non-party to this action, "develops and manufactures components and systems for vehicle occupant safety for cars and trucks." (Compl. ¶ 19.) In 1997, defendant AlliedSignal Inc. ("AlliedSignal") sold the assets of its Safety Restraints Systems Division ("SRS") to Breed for $710 million. (Id. ¶ 2.) Breed financed the SRS Acquisition through the sale of the bonds at issue (the "Bonds"). (Id. ¶ 3.) Defendants NationsBanc Montgomery Securities LLC ("NationsBanc") and Prudential Securities, Incorporated ("Prudential"), acted as the underwriters for the Bonds. (Id. ¶¶ 26-27). Plaintiffs purchased the Bonds through an investment manager, either Capital Research and Management Company ("CRMC") or Capital Guardian Trust Company ("CGTC"). See id. ¶¶ 11-18.

  At the time of the SRS Acquisition, defendant Johnnie Cordell Breed was Breed's Chief Operating Officer, and defendant Charles J. Speranzella ("Speranzella") was Breed's Executive Vice President of Worldwide Operations and General Counsel. (Id. ¶ 29.) Allen K. Breed, Breed's founder, was chair or co-chair of Breed's Board of Directors until March 1998, and subsequently was chair emeritus.*fn1 (Id. ¶ 22.) Johnnie Cordell Breed, Speranzella, and Allen Breed are referred to collectively as the "Director Defendants."

  Breed informed AlliedSignal that the acquisition would be financed through a private placement. AlliedSignal agreed to provide Breed with financial information about SRS and to give Breed the right to conduct due diligence on SRS for one month. (Id. ¶¶ 34-35.) During due diligence, AlliedSignal provided Breed's accountants, Ernst & Young, with materials that included SRS's earnings before interest, taxes and amortization and other adjustments ("EBITA") for the first half of 1997, and SRS's projected EBITA for 1997 and 1998. (Id. ¶ 39.) Plaintiffs allege that "Breed now claims, although Plaintiffs were never informed," that AlliedSignal hindered Breed's due diligence by withholding key documents and information, and by limiting access to certain operations and financial personnel. (Id. ¶ 41.) The information that Plaintiffs allege AlliedSignal did not turn over included the margins on particular SRS contracts, which AlliedSignal represented it could not calculate. (Id.) Plaintiffs also allege that Breed now claims that Ernst & Young's due diligence revealed that AlliedSignal "had engaged in questionable accounting practices or made unsupportable assumptions," information that Plaintiffs did not learn prior to purchasing the Bonds. (Id. ¶ 42.)

  The SRS Acquisition closed on October 30, 1997. (Id. ¶ 47.) Notwithstanding the difficulties Breed encountered during due diligence, the Director Defendants allowed AlliedSignal to keep the financial books and records for SRS until June 30, 1998. (Id. ¶ 48.) After AlliedSignal provided Breed with SRS's financial records in July 1998, Breed realized that it had been defrauded. Breed filed suit against AlliedSignal on August 2, 1999. (Id. ¶ 50.) Plaintiffs did not learn of the discovery difficulties or accounting problems until after Breed's complaint was filed. (Id.)

  Breed issued the Bonds pursuant to an Offering Memorandum, dated April 20, 1998, created by Breed, the Director Defendants, NationsBanc and Prudential (the "Private Placement"). (Id. ¶¶ 51-52; "Offering Memorandum," Ex. 1 to Bellacosa Decl.) The Offering Memorandum contains financial data and projections of Breed that give effect to the SRS Acquisition and other transactions, including pro forma statements of earnings for the 12 months ended June 30, 1997, and December 31, 1997, and for the six months ended December 31, 1997. (Compl. ¶¶ 54-55.)

  Breed issued press releases and Form 10-Q's in February and March of 1998 that reported earnings and included information on the SRS division, but did not disclose that the financial books and records of SRS were still being kept by AlliedSignal. (Id. ¶¶ 59-60.) Breed marketed the Bond placement by leading a nationwide road show (the "Road Show") with Nationsbanc. (Id. ¶ 61.) On the Road Show, Speranzella met with CRMC and CGTC in Los Angeles on April 7, 1998. (Id. ¶ 62.) Speranzella did not disclose to CRMC/CGTC that AlliedSignal still maintained SRS's financial records, or "the existence of loss contracts." (Id. ¶¶ 63-64.) NationsBanc did not contradict Speranzella's statements. (Id. ¶ 66.)

  After the Road Show, the NationsBanc analyst covering Breed provided CRMC/CGTC with a financial model of Breed prepared with financial data culled from SRS financial statements that AlliedSignal had given to Breed. (Id. ¶¶ 68-71.) NationsBanc did not disclose to CRMC/CGTC the due diligence difficulties experienced by Breed, or that the financial data underlying NationsBanc's Breed model derived from AlliedSignal. (Id. ¶ 69.)

  Relying on the Road Show, the conversations with NationsBanc, and the Offering Memorandum, CRMC/CGTC purchased the Bonds for Plaintiffs. (Id. ¶ 72.)

  Pursuant to a Registration Rights Agreement between Breed and NationsBanc and Prudential that is described in the Offering Memorandum, Breed agreed to file a registration statement (the "Registration Statement") with the SEC with respect to an offer to exchange the Bonds for registered notes (the "Exchange Offering"). (Id. ¶ 73.) On March 9, 1999, Breed filed the Registration Statement with the SEC, incorporating by reference previously filed financial statements that were prepared from AlliedSignal-provided data. (Id. ¶¶ 75, 77; "Registration Statement," Ex. 3 to Bellacosa Decl., at 7-8.) The Registration Statement does not incorporate the Offering Memorandum. See Registration Statement at 7-8. Johnnie Cordell Breed and Speranzella signed the Registration Statement. (Compl. ¶ 75.) In its 10-K for the fiscal year ending June 30, 1998, filed September 28, 1998, Breed reported that, "[d]uring the quarter ended June 30, 1998, [Breed] recorded a $21.7 million special charge . . . relating to expected losses under 28 contracts . . . acquired in connection with the SRS Acquisition." (Ex. 2 to Bellacosa Reply Decl. at 19; Compl. ¶ 106.) In a press release accompanying Breed's 10-Q for the quarter ending March 31, 1999, both issued May 17, 1999, Breed reported a special charge of $135.2 million "relating to [Breed's] European seat belt operations . . . resulting in a $234.7 million or $6.37 per share net loss for the nine months ended March 31, 1999." ("Press Release," Ex. 8 to Bellacosa Decl.) The May 1999, 10-Q explained that Breed had acquired the European seat belt businesses as part of the SRS Acquisition, and that the charge was necessary because those businesses "are performing materially worse than expected and have contracts to provide products at losses or marginal profits." ("May 1999, 10-Q," Ex. 9 to Bellacosa Decl., at 11.)

  Breed filed suit against AlliedSignal for fraud in August 1999. Plaintiffs commenced the instant action in the United States District Court for the District of Delaware on July 31, 2000.


  In evaluating a motion to dismiss, the Court is obliged to take as true the facts alleged in the complaint and draw all reasonable inferences in favor of the plaintiff. Grandon v. Merrill Lynch & Co., 147 F.3d 184, 188 (2d Cir. 1998). The complaint must not be dismissed unless "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Cohen v. Koenig, 25 F.3d 1168, 1172 (2d Cir. 1994) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)); Ganino v. Citizens Utilities Company, 228 F.3d 154, 161 (2d Cir. 2000). The Court may consider statements or documents incorporated in the complaint by reference, public disclosure documents filed with the SEC, and documents "that the plaintiffs either possessed or knew about and upon which they relied in bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88-89 (2d Cir. 2000) (internal citations omitted).

  Plaintiffs' Claims Against Defendants NationsBanc and Prudential

  Plaintiffs assert claims against NationsBanc and Prudential under Sections 11 and 12(a)(2) of the Securities Act arising from allegedly misleading historical financial statements in the Offering Memorandum, Registration Statement and Prospectus, allegedly misleading oral statements regarding the historical financial statements of SRS, and omissions in the foregoing regarding Breed's due diligence difficulties with AlliedSignal of which NationsBanc and Prudential were or should have been aware, that called the SRS financial statements into doubt.

  Section 11 Claims

Section 11 of the Securities Act provides, in part, that
In case any part of the registration statement . . . contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security . . . may, either at law or in equity, in any court of competent jurisdiction, sue . . . every ...

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