Schwartz v. Celestial Seasonings, Inc.

• Citation: 124 F.3d 1246
• Decision Date: 05 September 1997
• Docket Number: No. 95-1524,95-1524
• Parties: Fed. Sec. L. Rep. P 99,538, 38 Fed.R.Serv.3d 802 Arthur M. SCHWARTZ, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. CELESTIAL SEASONINGS, INC., PaineWebber, Incorporated, Shearson Lehman Brothers, Inc., Mo Siegel, Ronald V. Davis, Philip B. Livingston, Vestar/Celestial Investment Limited Partnership, John D. Howard, James P. Kelley, Arthur J. Nagle, Daniel S. O'Connell, Robert L. Rosner, Barnet M. Feinblum, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1246

124 F.3d 1246

Fed. Sec. L. Rep. P 99,538, 38 Fed.R.Serv.3d 802

Arthur M. SCHWARTZ, on behalf of himself and all others

similarly situated, Plaintiff-Appellant, v. CELESTIAL SEASONINGS, INC., PaineWebber, Incorporated,

Shearson Lehman Brothers, Inc., Mo Siegel, Ronald V. Davis,

Philip B. Livingston, Vestar/Celestial Investment Limited

Partnership, John D. Howard, James P. Kelley, Arthur J.

Nagle, Daniel S. O'Connell, Robert L. Rosner, Barnet M.

Feinblum, Defendants-Appellees.

No. 95-1524.

United States Court of Appeals, Tenth Circuit.

Sept. 5, 1997.

Dennis J. Johnson of Law Offices of Dennis J. Johnson, South Burlington, VT (Gerald L. Bader, Jr. and Randolph S. Dement of Bader & Villanueva, P.C., Denver, CO, on the briefs), for Plaintiff-Appellant.

George B. Curtis of Gibson, Dunn & Crutcher, Denver, CO (Thomas M. Piccone and Jessica Lee of Gibson, Dunn & Crutcher, Denver, CO, on the briefs), for Defendants-Appellees PaineWebber, Incorporated and Lehman Brothers, Inc.

Jeffrey B. Rudman of Hale and Dorr, Boston, MA (Peter J. Macdonald and S. Tara Miller of Hale and Dorr, Boston, MA and Fred H. Bartlit, Jr., P.C., Thomas R. Stephens

and John S. Phillips of Bartlit, Beck, Herman, Palenchar & Scott, on the brief), for Defendants-Appellees Celestial Seasonings, Inc., Mo Siegel, Ronald V. Davis, Philip B. Livingston, Vestar/Celestial Investment Limited Partnership, John D. Howard, James P. Kelley, Arthur J. Nagle, Daniel S. O'Connell, Robert L. Rosner and Barnet M. Feinblum.

Before HENRY ^*, RONEY ^** and MURPHY, Circuit Judges.

MURPHY, Circuit Judge.

Arthur M. Schwartz sued Celestial Seasonings, Inc., and others in the United States District Court for the District of Colorado for violations of securities laws. The district court dismissed the suit for failure to satisfy the particularized pleading requirements of Fed.R.Civ.P. 9(b). Exercising jurisdiction pursuant to 28 U.S.C. § 1291, this court reverses and remands.

I. FACTUAL BACKGROUND

In July 1993 Celestial Seasonings, Inc., the largest manufacturer and marketer of herb teas in the United States, issued approximately two million shares of stock in an initial public offering (hereinafter "IPO"). The IPO Prospectus revealed that Celestial was introducing new ready-to-drink ("RTD") iced tea products in an effort to expand beyond its established hot tea business. The IPO Prospectus also revealed that Celestial had entered into a marketing agreement with Perrier (hereinafter "Perrier Agreement" or "Agreement"), under which Perrier gained exclusive rights to make and sell the new Celestial iced tea beverages in the United States and Canada. Celestial made a secondary public offering of stock (hereinafter "SPO") in January 1994. The SPO Prospectus again discussed the new iced tea products and the Perrier Agreement. In May 1994, however, Celestial announced it had entered into discussions with Perrier to amend or terminate the Agreement. Thereafter, Celestial stock prices declined.

II. PROCEDURAL HISTORY

Appellant-plaintiff, Arthur Schwartz filed suit in the district court on behalf of himself and other similarly situated purchasers of Celestial stock claiming fraud. He asserted that Celestial, despite knowingly or recklessly disregarding the fact that the Perrier Agreement was an illusion, made statements which misled investors to conclude that the Agreement would enable Celestial to utilize Perrier's resources to sell its new iced tea products. Specifically, the Complaint alleges that the appellees-defendants, which include Celestial, certain Celestial insiders, and the underwriters for the IPO and SPO, PaineWebber, Inc., and Lehman Brothers, Inc., issued statements which led investors to conclude as follows: that Celestial would be able to utilize Perrier's manufacturing, marketing, and distributing capabilities to sell its RTD teas in the United States and Canada; that the Perrier Agreement would enhance Celestial's position as a specialty beverage company, increase the availability of its products at convenience stores, wholesale clubs, restaurants and food service operations, and allow it to further capitalize on its high brand awareness and on the growth in the RTD market; that Perrier, having promoted Celestial's RTD teas in test markets, would be selling Celestial's RTD products in fourteen major metropolitan markets in the Summer of 1993; and that a joint venture between Perrier's parent, Nestle, and Coca-Cola would not adversely impact the Perrier Agreement.

The Complaint further alleges that the defendants knowingly or recklessly disregarded the following facts: Perrier's distribution system was incompatible with the sale of RTD teas; the Perrier Agreement could not result in any significant sales of Celestial's products unless Perrier were willing to expend material amounts of money and time to revamp its distribution system and thus be able to market RTD teas in appropriate retail outlets; Perrier was not making, nor would it make in the future, any significant effort to market Celestial's RTD teas because it was focusing its efforts elsewhere; Nestle's arrangement with Coca-Cola was already adversely affecting Perrier's ability and willingness to market Celestial's RTD products; and Celestial, given the limited distribution it would be able to achieve under the Perrier Agreement, was not then and would not in the future be able to afford the shelf space "slotting fees" necessary for expansion.

Based on these assertions, plaintiff sought damages, claiming (1) primary liability for direct violations of § 11 of the Securities Act of 1933 and § 10(b) of the Securities and Exchange Act of 1934 (including Securities and Exchange Commission Rule 10b-5 promulgated thereunder); and (2) secondary liability of "control persons" for violations of § 15 of the 1933 Act and § 20 of the 1934 Act. See Securities Act of 1933, ch. 38, 48 Stat. 74 (codified as amended at 15 U.S.C. §§ 77a-77aa (1997)); Securities Exchange Act of 1934, ch. 404, 48 Stat. 881 (codified as amended at 15 U.S.C. §§ 78a-78mm (1997)).

The defendants filed a motion to dismiss, arguing that the Complaint failed to satisfy the particularized pleading requirement of Fed.R.Civ.P. 9(b) and that the action was barred by the statute of limitations. The district court dismissed the suit, ruling that while the action was not time barred, the §§ 11 and 10(b) primary liability claims failed under Rule 9(b) ¹; and the §§ 15 and 20 secondary liability claims failed as a consequence of the failure of the primary liability claims. ²

The district court's Rule 9(b) analysis of the Complaint was as follows:

[T]he complaint amounts to eighty paragraphs of scattered allegations--some more specific than others--which are then lumped together generally in Schwartz's federal securities claims. While Schwartz had pleaded detailed facts in the first eighty paragraphs of his complaint, he has failed to identify the circumstances constituting fraud upon which his various securities claims rely. Schwartz's complaint fails to meet the particularity requirements of Rule 9(b) because it does not adequately identify (1) the time, place and contents of the fraudulent misrepresentations or omissions; (2) the identity of the party alleged to have made the misrepresentations or omissions; and (3) the consequences of those misrepresentations or omissions.

Aplt.App. at 344. The district court also indicated that the §§ 11 and 10(b) claims were deficient because they failed to indicate which specific documents contained the alleged fraudulent statements, and because they failed to reveal the contents of the misrepresentations by "at least enumerating which paragraphs in the Complaint contain them." The court also indicated that the § 10(b) claim failed to "identify the specific misrepresentations made and which defendants are alleged to have made them."

Plaintiff argues that the § 11 claim is not premised on fraud, and thus is not subject to Rule 9(b); he further argues that the § 10(b) claim satisfies Rule 9(b). He also argues that the district court correctly ruled that the action was not barred by the statute of limitations and that this issue thus does not provide an alternative ground to affirm the dismissal. ³

III. THE COMPLAINT

The Complaint identifies each of the defendants and describes their involvement with or responsibility for, the alleged fraud. (Complaint pp 6-24, 30-32.) It identifies, describes, paraphrases, and quotes allegedly fraudulent statements and/or omissions found in the IPO and SPO Prospectuses (Complaint pp 33-40, 46, 61-62); the underwriters' IPO "marketing materials" (Complaint pp 41-44); several Celestial press releases (Complaint pp 48, 52-54, 58, 63, 65-66); Celestial's Form 10-K (Complaint p 55), Form 10-Q (Complaint p 64), and report to stockholders (Complaint pp 56-57); PaineWebber reports and internal broker "wires" (Complaint pp 50, 68); and Wall Street Journal articles (Complaint pp 51, 67). The Complaint also alleges facts which the identified statements failed to disclose or misrepresented, and it explains how the statements accomplished the fraudulent scheme. (Complaint p 45, 47, 59.)

Furthermore, the Complaint identifies the statements which first revealed that there were problems with the Perrier Agreement, but it alleges that these initial revelations were fraudulent because they failed to "fully reveal the nature or extent of Celestial's problems with Perrier." (Complaint pp 69, 70.) The Complaint alleges that the extent of these problems was not revealed until a May 18, 1994 Dow Jones News Wire article, which it quotes. (Complaint p 70.) The Complaint quotes various statements which announced or discussed the termination of the Perrier Agreement (Complaint pp 75-76), including statements taken from a Celestial press release (Complaint p 71); a PaineWebber report (Complaint p 72) and internal wire to brokers (Complaint p 73); statements by individual stock...