964 F.2d 272 (3rd Cir. 1992), 91-5153, Shapiro v. UJB Financial Corp.

Docket Nº:91-5153.
Citation:964 F.2d 272
Party Name:23 Fed.R.Serv.3d 24 Irwin SHAPIRO, on behalf of himself and all others similarly situated v. UJB FINANCIAL CORP.; T. Joseph Semrod; and John R. Haggerty, Irwin Shapiro, Robert Bassman, Jerome Katz, Norman Salsitz, Jean Lee, Executrix of the Estate of Calvin Lee, and Chappaqua Family Trust, Appellants.
Case Date:May 20, 1992
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

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964 F.2d 272 (3rd Cir. 1992)

23 Fed.R.Serv.3d 24

Irwin SHAPIRO, on behalf of himself and all others similarly situated


UJB FINANCIAL CORP.; T. Joseph Semrod; and John R.

Haggerty, Irwin Shapiro, Robert Bassman, Jerome Katz, Norman

Salsitz, Jean Lee, Executrix of the Estate of Calvin Lee,

and Chappaqua Family Trust, Appellants.

No. 91-5153.

United States Court of Appeals, Third Circuit

May 20, 1992

Argued Sept. 17, 1991.

As Amended May 28, 1992.

Rehearing and Rehearing En Banc Denied July 7, 1992.

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[Copyrighted Material Omitted]

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Leonard Barrack (argued), Gerald J. Rodos, Barrack, Rodos & Bacine, Philadelphia, Pa., Kenneth A. Jacobsen (argued), Greenfield & Chimicles, Haverford, Pa., Robert M. Roseman, Rudolph, Seidner, Goldstein, Salmon, P.C., Eugene A. Spector, Eugene A. Spector & Associates, Philadelphia, Pa., Susan S. Thomas, Zlotnick & Thomas, Bala Cynwyd, Pa., Robert A. Skirnick, Wechler, Skirnick, Harwood, Halebian & Feffer, New York City, for appellants.

Frederic K. Becker, Wilentz, Goldman & Spitzer, Woodbridge, N.J., Irwin H. Warren, Dennis J. Block (argued), Weil, Gotshal & Manges, New York City, for appellees.

Before: BECKER and SCIRICA, Circuit Judges and VanARTSDALEN [*], District Judge.


SCIRICA, Circuit Judge.

This case is one of a number of federal securities actions against financially troubled banking institutions. After a sharp downturn in the financial condition of defendant UJB Financial Corporation, its shareholders filed a complaint alleging violations of §§ 11, 12(2), and 15 of the Securities Act of 1933 and §§ 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934, and various pendant state law claims. These claims are predicated on allegedly

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false and misleading statements made by UJB and other defendants regarding the company's loan loss reserves, earnings and income, lending practices, and internal management and credit controls.

The district court dismissed most of plaintiffs' federal claims for failure to state a claim upon which relief could be granted and for failure to plead with particularity. Fed.R.Civ.P. 12(b)(6), 9(b). The court also found that plaintiffs failed to state a common law claim for negligent misrepresentation. We will affirm in part and reverse in part.


Defendant UJB Financial Corporation, a New Jersey-based bank holding company that offers a wide range of financial services, consists of 12 member banks and 11 non-bank subsidiaries. 1 Its common and Series B preferred stock are traded on the New York Stock Exchange. When plaintiffs' complaint was filed, UJB had more than $11 billion in assets, $7 billion in outstanding loans, and $8 billion in total consolidated deposits. The remaining defendants are individuals who were UJB officers 2 and directors 3 during the relevant time period, February 1, 1988 to July 18, 1990.

From 1987 to 1989, UJB saw substantial growth in assets, earnings, net income, and net worth. Total loans increased from $6.5 billion to $8.3 billion, total assets from $10.1 billion to $12.1 billion, and net income from $102 million to $118 million. The company's periodic announcements, made in quarterly and annual reports, press releases, and governmental filings, often contained more than just routine recitations of financial figures. The announcements repeatedly referred to UJB's "prudent," "cautious," and "conservative" lending policy, its "strict" credit administration practices, its "minimal" foreign loan exposure, and its "basic" approach to loan management. There were also frequent references to UJB's adherence to "sound" and "time-tested" banking practices, the "high" quality of its loan portfolio, and its "high safety margin." UJB also represented that its loan loss reserves were "strong" or "very strong," and had been and would continue to be "maintained at a level determined adequate." The bank further attributed its overall success to its "strategy" of limiting its business dealings to the New Jersey region and avoiding concentration on a few large projects.

The first sign of a downturn appeared in March, 1990, when UJB filed a 10-K Report with the Securities and Exchange Commission. The accompanying 1989 Annual Report stated that the provision for loan losses had been increased as a "prudent" measure, and asserted that the loan loss reserves, which had recently been augmented by 13.1%, were "at a level determined adequate." The same Annual Report contained an interview with UJB's President and Chief Executive Officer, Joseph Semrod, who attributed the increase in bad loans to the cyclical nature of the banking business, a slow economy, and problems in residential real estate construction and development. He noted, however, that this part of UJB's loan portfolio was "well secured," and that UJB continued to have "good loan to value ratios." He projected "continued solid growth," but conceded that UJB was "budgeting a smaller real estate portfolio."

UJB's troubles escalated in March and April of 1990 when three financial evaluation services--Moody's Investors Service, Fitch Investors Service, and Standard & Poors--downgraded their ratings of UJB debt, stock, and commercial paper, as well

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as their ratings of deposits belonging to UJB's principal bank subsidiary, United Jersey Bank. These analysts expected UJB's credit quality to deteriorate, particularly with regard to real estate, construction, and land development loans.

On April 18, 1990, UJB issued a press release announcing a dramatic decline in net income and an equally striking increase in its loan loss reserves and non-performing assets. Semrod nevertheless reassured the public that the "long term is what counts," and that UJB was both "positioned for the '90s and beyond" and "focused on maximum sustainable long-range earning growth and maximum long-term return." On July 18, 1990, UJB issued another press release announcing that the company's loan loss provision was four times what it had been the year before, and that earnings and income had dropped again. The price of UJB's common stock, which had been as high as $27 per share in the prior three years, plummeted to approximately $10 per share.

In reaction to these developments, plaintiff shareholders filed this class action. They attribute their economic losses to "a campaign [by defendants] to depict the illusion of UJB as a growing, profitable and vital lending institution with conservative lending practices, and a system of internal controls proper to ensure adequate collateralization and prompt recognition and accounting for problem loans." According to plaintiffs, defendants' public announcements in the years 1988-1990 portrayed UJB "in a falsely optimistic manner" by stating that the loan loss reserves were adequate, loan review procedures and policies were stringently and continuously applied, lending opportunities were balanced appropriately against risks, and financial results were positive.

The claims of the plaintiff class 4 are grouped into three separate Counts. Count I alleges that defendants misrepresented and failed to disclose material information in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1991). Count I also alleges that the individual defendants are liable as "controlling persons" under § 20(a) of the Exchange Act, 15 U.S.C. § 78t (1988), for UJB's alleged § 10(b) violations. Count II avers that representations made in certain UJB registration statements and prospectuses violated §§ 11 and 12(2) of the Securities Act of 1933. 15 U.S.C. §§ 77k(a), 77l (2) (1988). In addition, it alleges that the individual defendants are liable to certain members of the plaintiff class as "controlling persons" under § 15 of the Securities Act. 15 U.S.C. § 77o (1988). Finally, Count III charges that defendants negligently misrepresented and omitted material information in violation of their common law duty of care. 5 The complaint sets forth many detailed factual allegations in support of these claims, but paragraph 52 summarizes them all. 6

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Defendants filed a motion to dismiss, which the district court granted in part and denied in part. The district court dismissed with prejudice all claims in Counts I and II "to the extent that they rely on pp 52(a), (b), (c), (f), and (g) of the amended complaint, and to the extent that they rely upon allegations of mismanagement in

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pp 52(d) and (e)." It also dismissed with prejudice the § 15 claim in Count II and the negligent misrepresentation claim in Count III. The § 11 and § 12(2) claims of Count II were dismissed for failure to state a claim upon which relief could be granted, but the district court gave plaintiffs 30 days to amend their complaint to remedy defects identified in its opinion. Finally, the district court specifically upheld the § 20(a) "controlling person" claim in Count I.

The district court found that the remaining allegations in Counts I and II based on subparagraphs 52(d), (e), (h) and (i) did not satisfy Federal Rule of Civil Procedure 9(b), which requires that fraud be pleaded with particularity. However, the court did not formally dismiss these allegations. Instead, it granted plaintiffs 30 days to amend the complaint. The court also ordered class representative Jerome Katz to post $50,000 as security in connection with the § 11 and § 12(2) claims. Following this order, plaintiffs formally announced that they would neither amend their complaint nor provide security, and instead filed a timely appeal from the district court's order. Defendants moved to dismiss the appeal.



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