Ferber v. Travelers Corp.

• Decision Date: 09 January 1992
• Docket Number: Civ. No. H-90-842 (AHN).
• Citation: 785 F. Supp. 1101
• Court: U.S. District Court — District of Connecticut
• Parties: Stanley FERBER, et al. v. The TRAVELERS CORPORATION, Edward H. Budd, Richard J. Shima, Thomas O. Thorsen.

785 F. Supp. 1101

Stanley FERBER, et al. v. The TRAVELERS CORPORATION, Edward H. Budd, Richard J. Shima, Thomas O. Thorsen.

Civ. No. H-90-842 (AHN).

United States District Court, D. Connecticut.

December 2, 1991.

Ruling on Motion For Reconsideration and Request for Leave to Amend January 9, 1992.

J. Daniel Sagarin, Hurwitz & Sagarin, P.C., Milford, Conn., Robert Sugarman, Milberg, Weiss, Bershad, Specthrie & Lerach, New York City, for plaintiffs.

Thomas Groark, Jr., Day, Berry & Howard, Hartford, Conn., Herbert Wachtell, Wachtell, Lipton, Rose & Katz, New York City, for defendants.

Ruling on Plaintiffs' Motion For Reconsideration and Request for Leave to Amend January 9, 1992.

RULING ON MOTION TO DISMISS

NEVAS, District Judge.

This is a five-count class action¹ in which twenty-two shareholders² ("the plaintiffs") sue the Travelers Corporation ("Travelers"), Edward H. Budd ("Budd"),³ Thomas O. Thorsen ("Thorsen"),⁴ Richard J. Shima ("Shima"),⁵ (collectively, "the defendants") for violations of federal securities and common law. The plaintiffs allege that in public statements and reports disseminated to the public between November 15, 1989 and October 5, 1990 ("the Class Period"), the defendants made material misrepresentations concerning Travelers' net income, loan loss reserves, real estate and junk bond portfolios, common stock dividends and future business prospects.

In count one of the consolidated amended complaint ("the complaint") (filing no. 21), the plaintiffs sue the defendants for securities fraud, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1990). In count two, the plaintiffs sue the individual defendants for violations of Section 20(a) of the 1934 Act. In count three, the plaintiffs sue the defendants for violations of Sections 11, 12 and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. §§ 77k, 77l, 77o. The last two counts of the complaint are pendent state law claims against the defendants. Count four is an action for common law fraud and deceit and count five is an action for negligent misrepresentation. The defendants now move to dismiss the entire complaint pursuant to Rules 9(b), 12(b)(6) and 12(b)(1), Fed. R.Civ.P. For the reasons that follow, the motion to dismiss is granted in its entirety.

I. Applicable Standards

A. Rule 12(b)(6)

When considering a motion to dismiss the court accepts as true all factual allegations in the complaint and draws inferences from these allegations in the light most favorable to the plaintiff. Schauer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Corcoran v. American Plan Corp., 886 F.2d 16, 17 (2d Cir.1989). Dismissal is not warranted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Patton v. Dole, 806 F.2d 24, 30 (2d Cir. 1986). The plaintiff, however, must set forth information sufficient to outline the elements of the claim or to permit inferences to be drawn that these elements exist. In determining whether to grant a Rule 12(b)(6) motion, the court considers primarily the allegations in the complaint, although a wide range of material may be taken into account.⁶ 5A C. Wright and A. Miller, Federal Practice and Procedure: Civil § 1364, at 475-81 (1990 & 1991 Supp.) ("Wright & Miller"). Ultimately, the question for the court to decide is "whether or not it appears to a certainty under existing law that no relief can be granted under any set of facts that might be proved in support of plaintiff's claims." De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir.1978), cert. denied, 441 U.S. 965, 99 S.Ct. 2416, 60 L.Ed.2d 1072 (1979).

B. Rule 9(b)

A plaintiff alleging fraud must do so by specifically setting forth facts that constitute this unlawful conduct. Indeed, Rule 9(b) requires that "in all averments of fraud ..., the circumstances constituting fraud ... shall be stated with particularity." There is a tension between Rule 9(b) and Rule 8(a)(2), Fed.R.Civ.P., which requires only that pleadings consist of "a short and plain statement of the claim showing that the pleader is entitled to relief." Rules 9(b) and 8(a)(2) must be harmonized in light of the policy considerations behind Rule 9(b). Three purposes underlie the particularity requirement of Rule 9(b):

First, it assures the defendant of fair notice of what the plaintiff's claim is and the grounds upon which it rests.... Secondly, the specificity requirement grows out of the desire to protect defendants from the harm that comes to their reputations or to their goodwill when they are charged with serious wrongdoing. ... In the context of securities litigation Rule 9(b) serves an additional important purpose. It operates to diminish the possibility that a plaintiff with a largely groundless claim will be able to simply take up the time of a number of other people by extensive discovery, with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the process will reveal relevant evidence.

Ross v. A.H. Robins, Co., 607 F.2d 545, 557 (2d Cir.1979), cert. denied, 446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980) (citations and quotations omitted). Accordingly, Rule 9(b) "is a special pleading requirement and contrary to the general approach of simplified pleading adopted by the federal rules." Ross, 607 F.2d at 557 (quoting 5 Wright & Miller § 1297 at 615).⁷ Thus, Rule 9(b) requires pleading that gives fair notice in light of the special nature of fraud cases.

II. Background

Travelers is one of the largest multi-line insurance companies in the United States. It underwrites life, group life, prepaid and group accident and health, individual and group annuities, workers compensation, auto, liability, casualty and fire insurance. (Compl. ¶ 24). Travelers' insurance and related investment operations accounted for 89% of its consolidated assets and 88% of its net income for fiscal year 1989. (Compl. ¶ 24).

Prior to the mid-1980s, Travelers invested proceeds from its insurance business in relatively stable, low risk, guaranteed investments in order to earn a safe and consistent investment return. (Compl. ¶ 25). During the mid-1980s, in order to obtain higher yields on investments made with proceeds from its insurance business, Travelers made risky investments in mortgage loans, highly leveraged real estate transactions and junk bonds. (Compl. ¶ 26).

In August 1988, Travelers added $415,000,000 to its loss reserves for real estate operations. Primarily as a result of the addition to loss reserves, Travelers' net income for 1988 fell to $55,000,000 from $321,000,000 for 1987. (Compl. ¶ 32-32). During 1989, Travelers made no material changes in its loss reserves for real estate operations or in connection with its junk bond holdings, and reported a net income of $445,000,000 for the year. (Compl. ¶ 35).

The plaintiffs allege that throughout the Class Period, Travelers publicly stated that it was actively monitoring its real estate and junk bond portfolios and had established its real estate loan loss reserves in a timely and proper manner. (Compl. ¶ 38). Furthermore, the plaintiffs allege that Travelers portrayed its financial condition in an unrealistically positive light. (Compl. ¶ 39). Indeed, the plaintiffs allege that Travelers made statements, in the Third Quarter 1989 Form 10-Q, about losses, the need for loan loss reserves and reported earnings that were knowingly or recklessly materially false and misleading. These statements materially understated losses, failed to disclose that Travelers was under-reserved for potential real estate losses from non-performing loans, and thus overstated its earnings. (Compl. ¶¶ 40-1).

In addition, the plaintiffs allege that the defendants made false and misleading statements in a variety of other contexts. In the 1989 Annual Report to Shareholders ("1989 Annual Report"), the defendants allegedly made false and misleading statements concerning real estate-related problems and the status of Travelers' junk bond portfolio. (Compl. ¶¶ 42-5). At the April 3, 1990 annual shareholders meeting, Budd allegedly made false and misleading statements concerning reserves for the real estate investments and Travelers' book value. (Compl. ¶¶ 46-7). The plaintiffs allege that Travelers made false statements concerning reserves for real estate loan losses in the Forms 10-Q for the quarters ending March 31, June 30 and August 10, 1990. (Compl. ¶¶ 50-4).

Travelers' allegedly false representations concerning the extent of the non-performing loans in the real estate portfolio and overstatements concerning reported assets and earnings culminated on October 5, 1990, when Travelers publicly announced that it expected to report a $500 million third quarter loss in earnings. This loss was largely attributable to a $650 million addition to reserves for possible losses on real estate-related investments. Accordingly, Travelers cut its quarterly dividend substantially. The same day, the price of Travelers common stock dropped from $20.75 to $16.375—almost 24% of its value. On October 8, 1990, the next trading day, the price of Travelers' common stock fell an additional $2.00 per share.

The core of the plaintiffs' allegations is set forth in paragraphs eleven through seventeen of the complaint. The plaintiffs allege that the defendants engaged in a "plan, scheme and course of conduct" which:

(i) deceived the investing public, including the plaintiffs ... regarding Travelers' financial condition and future business prospects; (ii) artificially inflated and maintained the market price of Travelers common stock; and (iii) caused the plaintiffs ... to purchase Travelers common stock at inflated prices.

(Compl. ¶ 11)....