Westinghouse Securities Litigation, In re

• Citation: 90 F.3d 696
• Decision Date: 18 July 1996
• Docket Number: No. 95-3156,95-3156
• Parties: Fed. Sec. L. Rep. P 99,271, 35 Fed.R.Serv.3d 1449 In re WESTINGHOUSE SECURITIES LITIGATION. Margaret Alessi, Gloria Bertinato, Michael C. Christner, Anna Marie Eroshevich, Toby Feuer, Kanwal K. Gupta, M.D., Matthew Harlib, Stanley Hershfang, Arnold M. Jacob, Louise Jacob, David Jaroslawicz, David Kirschner, Nathan Kleinhandler, Gerry Krim, Peter Lagorio, Nelson Lovins, Donald McLennan, Jacob Joseph Miller, Dr. Alexander Miller, Thomas Mitchell, Edward Murabito, Michael E. Nogay, Joseph Raschak, Richard Schwartzchild, Dr. Michael Slavin, Dr. Michael Solomon, Selma Solomon, Spring Creek Cardiomedical Center, Ruth Stepak, Jim Thompson, Patricia J. Vanartsdalen, Albert Zucker, Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 696

90 F.3d 696

Fed. Sec. L. Rep. P 99,271, 35 Fed.R.Serv.3d 1449

In re WESTINGHOUSE SECURITIES LITIGATION Margaret Alessi, Gloria Bertinato, Michael C. Christner Anna Marie Eroshevich, Toby Feuer, Kanwal K. Gupta, M.D Matthew Harlib, Stanley Hershfang, Arnold M. Jacob, Louise Jacob, David Jaroslawicz, David Kirschner, Nathan Kleinhandler, Gerry Krim, Peter Lagorio, Nelson Lovins Donald McLennan, Jacob Joseph Miller, Dr. Alexander Miller, Thomas Mitchell, Edward Murabito, Michael E. Nogay, Joseph Raschak, Richard Schwartzchild, Dr. Michael Slavin, Dr. Michael Solomon, Selma Solomon, Spring Creek Cardiomedical Center, Ruth Stepak, Jim Thompson, Patricia J. Vanartsdalen, Albert Zucker, Appellants.

No. 95-3156.

United States Court of Appeals, Third Circuit.

Argued Nov. 2, 1995.

Decided July 18, 1996.

Arthur N. Abbey (argued), Joshua N. Rubin, Abbey & Ellis, New York City, Jules Brody, Melissa R. Emert, Stull, Stull & Brody, New York City, Howard A. Specter, David J. Manogue, Specter Law Offices, P.C. Pittsburgh, PA, Jeffrey W. Golan, Gerald J. Rodos, Barrack, Rodos & Bacine, Philadelphia, PA, Richard A. Finberg, Malakoff, Doyle & Finberg, P.C., Pittsburgh, PA, Donald P. Alexander, Greenfield & Rifkin, Haverford, PA, for Appellants.

Robert E. Zimet (argued), Joseph Guglielmelli, Maura B. Grinalds, Skadden, Arps, Dennis J. Block (argued), Stephen A. Radin, Robert F. Carangelo, Jr., Mary Lou Peters, Weil, Gotshal & Manges, New York City, Joseph A. Katarincic, Katarincic & Salmon, Pittsburgh, PA (William F. Stoll, Jr., Henry W. Ewalt, Robert L. Kaufman, Vanessa J. Brown, Westinghouse Electric Corporation Law Department, Pittsburgh, PA, of counsel), for Appellees, Robert E. Faust, Warren H. Hollinshead, Paul E. Lego, William A. Powe, Robert F. Pugliese, Theodore Stern, Westinghouse Electric Corporation, Westinghouse Financial Services, Inc. and Westinghouse Credit Corporation.

Slate, Meagher & Flom, New York City, J. Tomlinson Fort, Reed Smith Shaw & McClay, Pittsburgh, PA, for Appellees, Shearson Lehman Brothers Inc., Goldman, Sachs & Co., Lazard Freres & Co., Lehman Brothers International, Ltd., Goldman Sachs International, Ltd. and Lazard Brothers & Co., Ltd.

Eldon Olson, General Counsel, Rodman W. Benedict, Associate General Counsel, Price Waterhouse LLP, New York City, Frank Cicero, Jr., Robert J. Kopecky (argued), Jeffrey L. Willian, Kirkland & Ellis, Chicago, IL (Arthur J. Schwab, James D. Morton, Buchanan Ingersoll, Pittsburgh, PA, of counsel), for Appellee, Price Waterhouse LLP.

Before NYGAARD, ALITO, and SAROKIN, Circuit Judges.

OPINION OF THE COURT

ALITO, Circuit Judge:

This is an appeal from three orders dismissing all of the plaintiffs' claims in a consolidated class action securities fraud complaint. The orders were based on Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). We affirm in part, reverse in part, and remand for further proceedings.

I.

A. Plaintiffs in this case are all purchasers of publicly traded Westinghouse Electric Corporation ("Westinghouse") securities. Plaintiffs purchased Westinghouse common stock between March 28, 1989, and October 22, 1991 ("the class period").

Defendants include Westinghouse, Westinghouse Financial Services, Inc. ("WFSI") (a wholly owned subsidiary of Westinghouse), Westinghouse Credit Corporation ("WCC") (which is owned by WFSI), and certain directors and senior officers of these companies (the "individual defendants"). (We will refer to the above defendants collectively as the "Westinghouse defendants.") The other defendants are Price Waterhouse (the independent accountant for the Westinghouse companies), and a proposed defendant class of underwriters (the "underwriter defendants") involved in a May 1991 public offering of Westinghouse common stock.

B. The relevant allegations of plaintiffs' complaint, which were set forth in detail by the district court, see In re Westinghouse Securities Litigation, 832 F.Supp. 948 (W.D.Pa.1993), may be summarized as follows. During the 1980's, WCC grew rapidly by committing substantial funds to the financing of real estate developments and highly leveraged transactions. In the late 1980's, however, WCC experienced an increase in defaults in its real estate loans and in delinquencies in other transactions. As a result, WCC suffered billions of dollars of losses, and the Westinghouse defendants feared a drop in WCC's commercial paper ratings. To protect those ratings, they concealed the losses, which allegedly totalled between $2.6 and $5.3 billion, through improper accounting and reporting techniques.

Prior to February 1991, Westinghouse management decided that WCC needed a cash infusion if it was to maintain its commercial paper ratings. Westinghouse developed a major restructuring plan, which it announced on February 27, 1991. Under that plan, Westinghouse decided to "downsize" WCC by selling or restructuring nearly one-third of its assets that had previously been held on a long-term basis. Westinghouse knew that selling and restructuring so many non-performing or under performing assets in the market that existed at the time would result in significant losses. Westinghouse thus took a $975 million pre-tax charge against fourth quarter 1990 earnings to be applied to loan loss reserves ¹ and to cover estimated losses. The press release and other documents issued by Westinghouse in connection with these actions stated that they decisively addressed WFSI's and WCC's problems. Plaintiffs allege that these statements were materially false when made in that defendants knew (or recklessly disregarded facts demonstrating) that reserves remained inadequate as of that time. Plaintiffs point to a statement by James Focareta, WCC's president from early 1990 to early 1991, in which he acknowledged that the $975 million writeoff was known to be insufficient. Focareta said: "The number that was used ($975 million) was a number developed for something else.... Every Westinghouse credit manager knew that was not sufficient.... The Keystone Kops were involved, clearly." App. 1134.

Plaintiffs assert that Westinghouse further compounded the harm to investors by raising $500 million through a May 1991 stock offering. Westinghouse offered 19 million shares of its common stock for sale to the investing public at $26.50 per share on May 9, 1991. Plaintiffs allege that the Prospectus and Registration Statement filed with the Securities and Exchange Commission ("SEC") in May 1991, as well as other documents (including the Annual Report) that were incorporated by reference therein, contained material misrepresentations and omissions.

In October 1991, Westinghouse determined and announced that the restructuring plan had to be accelerated. Additional assets of $3.1 billion were designated as being held for sale or restructuring. Westinghouse took a $1.68 billion pre-tax charge in anticipation of further losses it expected to suffer. Plaintiffs allege that defendants knew as early as October 1990 that a charge of this magnitude was inevitable and that defendants' statements to the contrary over the course of that year and contemporaneous with the October 1991 announcement were materially false. Plaintiffs claim that they paid artificially inflated prices of from $21.75 to $39.375 per share in contrast to Westinghouse's closing price of $15.875 after the announcement of the October 1991 charge.

C. The first of the class action complaints consolidated herein was filed in February 1991, just after Westinghouse announced the restructuring plan. In May 1991, the magistrate judge granted plaintiffs limited discovery to prepare a consolidated complaint. In March 1992, the magistrate judge ordered that Westinghouse make available to plaintiffs documents related to over 500 active investment files. Plaintiffs filed the Consolidated Amended Class Action Complaint ("the first amended complaint") in June 1992.

The first amended complaint alleged violations of the following provisions: sections 10(b) and 20 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b), 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5, against all defendants (count I); sections 11 and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77k, 77o, against all defendants (count II); section 12(2) of the Securities Act, 15 U.S.C. § 77l (2), against all defendants except Price Waterhouse (count III); separate violations of sections 11 and 15 against all defendants except for the underwriter defendants (count IV); separate violations of section 12(2) against the Westinghouse defendants (count V); and negligent misrepresentation against all defendants (count VI).

In August 1992, defendants moved to dismiss all counts of the first amended complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). In an opinion and order entered on July 29, 1993, the district court granted defendants' motion. See In re Westinghouse Securities Litigation, 832 F.Supp. 948 (W.D.Pa.1993) (Westinghouse I ). Count I and a small piece of count VI were dismissed without prejudice to repleading, while counts II-V and most of count VI were dismissed with prejudice. ²

Plaintiffs filed the Second Consolidated Amended Class Action Complaint ("the second amended complaint") in September 1993. Plaintiffs repled all of their claims, including those that had been dismissed with prejudice (stating that such claims were being repled verbatim solely to preserve their appellate rights). In December 1993, defendants moved to dismiss the second amended complaint under Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). In March 1994, plaintiffs cross-moved to supplement the second amended complaint. ³

In January 1995, the district court granted defendants' motion to dismiss the second amended complaint. See In re Westinghouse Securities Litigation, Civ. No. 91-354, Opinion and Order entered January 23, 1995, App. 310-46 (Westinghouse II ). Counts II-VI...