Felton v. Walston & Co., Inc.

• Decision Date: 23 December 1974
• Docket Number: No. 210,D,210
• Citation: 27 A.L.R.Fed. 399,508 F.2d 577
• Parties: , Fed. Sec. L. Rep. P 94,928 Robert R. FELTON and Edward J. Egan, Plaintiffs-Appellants, v. WALSTON AND CO., INC., et al., Defendants-Appellees. ocket 74-1581.
• Court: U.S. Court of Appeals — Second Circuit

Page 577

508 F.2d 577

27 A.L.R.Fed. 399, Fed. Sec. L. Rep. P 94,928

Robert R. FELTON and Edward J. Egan, Plaintiffs-Appellants, v. WALSTON AND CO., INC., et al., Defendants-Appellees.

No. 210, Docket 74-1581.

United States Court of Appeals, Second Circuit.

Argued Oct. 30, 1974.

Decided Dec. 23, 1974.

Robert R. Felton, Mineola, N.Y., for plaintiffs-appellants.

Richard G. Lyon, New York City (William E. Willis, and Sullivan & Cromwell, New York City, on the brief), for defendants-appellees Marine Midland Bank-- New York and Brownstein.

Geoffry R. Handler, New York City (Bruce A. Hecker, and Shea, Gould, Climenko & Kramer, New York City, on the brief), for defendants-appellees Stitching Excerpta Medica (Excerpta Medica Foundation), Medische Referantan (Excerpta Medica) N.V., Infonet (Excerpta Medica-Rescona) N.V., and Eltrac (Infonet) N.V.

Jerold Oshinsky, New York City (Anderson, Russell, Kill & Olick, P.C., New York City, on the brief), for defendants-appellees Riesenbach, Elias, and Sher.

Allan M. Pepper, New York City (Milton Kunen, and Kaye, Scholer, Fierman, Hays & Handler, New York City, on the brief), for defendant-appellee Main, Lafrentz & Co.

Before LUMBARD, WATERMAN and MANSFIELD, Circuit Judges.

LUMBARD, Circuit Judge:

On May 17, 1973, plaintiff Robert R. Felton filed a class-action ¹ complaint against defendants Walston & Co., Inc. (Walston), James Nissan (Nissan), Marine Midland Bank-- New York (Marine Midland), Joel Doe ² (Brownstein) and 3 I Co./Information Interscience, Inc. (3 I Co.). In his complaint Felton alleged that Walston, Nissan and Brownstein 'employed manipulative and deceptive devices' for the purpose of inducing plaintiff to purchase 3 I Co. stock. There were further allegations, but they too were of a very general nature. Judge Bonsal granted a motion to dismiss this first complaint for failure to comply with rule 9(b) on August 2, 1973, with leave to file an amended complaint.

Plaintiff filed his first amended complaint on August 14, 1973, naming fifteen new defendants in addition to the original five. ³ This complaint went on for thirty-seven pages and contained much evidentiary material. It was answered by each of the original defendants and by new defendants Stitching Excerpta Medica (Stitching) and Main, Lafrentz & Co. (Main, Lafrentz). Following the filing of this complaint Felton, Nissan, and Brownstein were deposed. On November 5, 1973, Felton filed a motion seeking leave to amend his complaint in order to add several new allegations and the parent and the brother-sister companies of Marine Midland. ⁴ On November 9, 1973, Felton filed a motion seeking leave to add Edward J. Egan as a coplaintiff. After hearing argument on these motions, the district judge sua sponte dismissed the first amended complaint and the proposed second and third amended complaints for failure to comply with rules 9(b) and 8 of the Federal Rules of Civil Procedure. ⁵ Plaintiffs then filed their fourth amended complaint on November 29, 1973. Thereafter Main, Lafrentz moved to dismiss the complaint under rule 9(b) and alternatively for summary judgment under rule 56. Elias, Riesenbach, and Sher; Marine Midland and Brownstein; Stitching; and 3 I Co. also moved for dismissal of the complaint for failure to comply with rule 9(b). In an order dated March 29, 1974, the district court dismissed the complaint, without leave to amend, for failure to satisfy the requirements of rule 9(b). The district court, in reaching its decision, focused on plaintiffs' over-use of such words as 'fraud', 'conspiracy', and 'worthless'. It also noted that plaintiffs' complaint was based on information and belief, that no specific dates and amounts of stock purchases were alleged, and that no reliance was alleged.

Rule 9(b) provides that 'in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.' We have recently interpreted this rule in Shemtob v. Shearson, Hammill & Co., 448 F.2d 442 (2 Cir. 1971), and Segal v. Gordon, 467 F.2d 602 (2 Cir. 1972). In Shemtob we held that 'mere conclusory allegations to the effect that defendant's conduct was fraudulent or in violation of Rule 10b-5 are insufficient.' Shemtob v. Shearson, Hammill & Co., supra, 448 F.2d at 444. In Segal we again stressed that conclusory statements are not enough.

The complaint at issue here first details the relationships between 3 I Co., a publicly held corporation whose stock is traded in the over-the-counter market, and the other defendants. Specifically it alleged that Walston is a stock brokerage firm that made a market for 3 I Co. stock, that Nissan was a vice-president of Walston and a 3 I Co. stockholder and creditor and a co-guarantor of several 3 I Co. bank loans, that Marine Midland and associated companies were 3 I Co. creditors and traded in 3 I Co. stock, and that Brownstein was employed as a securities analyst by Marine Midland and that in the course of his employment wrote reports on the prospects of 3 I Co.

Elias, Riesenbach and Sher were alleged to be officers, directors, and shareholders of Information Company of America and related companies when 3 I Co. purchased these companies on June 30, 1971. After the purchases the complaint alleges that these defendants became officers of 3 I Co.

With respect to Stitching the complaint alleges that it sold a data bank license to 3 I Co. for 3 I Co. stock. Main, Lafrentz is simply said to be engaged in the practice of accounting. The alleged misdeeds of these defendants were specified as follows:

I. ELIAS, RIESENBACH & SHER

Elias, Riesenbach and Sher are alleged to have sold 'worthless' companies to 3 I Co., and to have 'falsely and deceptively declare(d) to the investing public that (3 I Co.'s purchase of these companies) was a major viable acquisition.' Such statements clearly fail to allege 'the circumstances constituting fraud . . . with particularity' as is required by rule 9(b). One of the main purposes of the rule is to apprise a 'defendant of the claim against him and of the acts relied upon as constituting the fraud charged.' 5 C. Wright & A. Miller, Federal Practice & Procedure 1297, at 404 (1969). These allegations are merely conclusory and clearly do not apprise the defendants of the claims made against them. Simply denominating unspecified statements as 'deceptive' and corporations as 'worthless' is not enough. Some further explanation of the allegations is necessary to indicate how they constitute fraud. The district court correctly concluded that these allegations failed to satisfy rule 9(b). Segal v. Gordon, supra, 467 F.2d at 608.

II. STITCHING EXCERPTA MEDICA

Stitching is alleged to have sold a 'worthless' data bank license to 3 I Co. In addition, Stitching is alleged somehow to have conspired with 3 I Co. to inflate the value of the data bank license. Why the license was worthless and what was fraudulent about selling assets (even worthless assets) to another corporation are never explained. Allegations such as these scarcely inform a defendant what the plaintiff is talking about, let alone satisfy the standards required by rule 9(b). Hence as to Stitching, we affirm the ruling of the district court.

III. MAIN, LAFRENTZ AND 3 I CO.

The complaint alleges that Main, Lafrentz failed to follow generally accepted accounting principles when it audited the books of 3 I Co. Specifically it alleged that Main, Lafrentz reviewed three specific agreements between 3 I Co. and other individuals or corporations and that it failed accurately to reflect the effect of those agreements on 3 I Co.'s financial statements with the result that 3 I Co.'s assets were substantially inflated. For example, the complaint claims that the value of the stock used to purchase a data bank license was inflated so as to increase the assets of 3 I Co. and that Main, Lafrentz failed to disclose this fact. Since 3 I Co. initially established the values assigned to the assets in question, it is alleged to be a party to the misrepresentation of its assets.

While the allegations here are not as specific as might be desired, they do specify the agreements and amounts involved in the alleged misrepresentation. They cannot be characterized as merely conclusory since they clearly are much more than a bald assertion that Main, Lafrentz engaged in fraudulent acts. It may well be that plaintiffs have no claim against Main, Lafrentz but the proper manner in which to determine whether a claim exists is to require an answer, and, if necessary, a trial of those issues. This result is especially appropriate since in applying rule 9(b) we must not lose sight of the fact that it must be reconciled with rule 8 which requires a short and concise statement of claims. See 5 C. Wright & A. Miller, Federal...