Jacobson v. Peat, Marwick, Mitchell & Co.
| Decision Date | 18 August 1977 |
| Docket Number | No. 77 Civ. 108 (HFW).,77 Civ. 108 (HFW). |
| Citation | 445 F. Supp. 518 |
| Parties | Hans JACOBSON, on behalf of himself, Individually, and representatively on behalf of all other shareholders of the Walter Reade Organization, Inc., similarly situated, Plaintiffs, v. PEAT, MARWICK, MITCHELL & CO., a partnership, Sheldon Gunsberg, E. L. Schuman, C. W. Preuster, Albert Floersheimer, T. D. Carroll, C. F. Simonelli, A. D. Emil, W. C. MacMillen, F. A. Augsbury, Jr., Samuel Hoffman, Milton Koffman, Dolly M. Reade and the Walter Reade Organization, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Tenzer, Greenblatt, Fallon & Kaplan, New York City, for plaintiffs; Stacy L. Wallach, New York City, of counsel.
Cahill, Gordon & Reindel, New York City, for Peat, Marwick, Mitchell & Co.; H. Richard Schumacher, Joseph W. Muccia, New York City, of counsel.
Burke, Burke, Daniels, Leighton & Reid, New York City, for Augsbury.
In this securities class action arising out of the failure of the Walter Reade Organization, Inc. ("Reade"),1 defendant Peat, Marwick, Mitchell & Co. ("PMM"), a partnership of certified public accountants which served as the independent auditor for Reade, moves to dismiss the complaint brought against it by Hans Jacobson (the "plaintiff") for failure to allege fraud with the degree of particularity required by Rule 9(b), Fed.R.Civ.P., and for failure to state a claim upon which relief can be granted, Rule 12(b)(6), Fed.R.Civ.P.2 PMM's motion is granted herein but plaintiff is given leave to serve within twenty days an amended complaint in accordance with the decision of this court.
The complaint was filed on January 11, 1977. It alleges jurisdiction under section 27 of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78a, et seq. (1970), and contains two counts: the first is brought under section 18(a) of the Act, 15 U.S.C. § 78r(a) (1970); the second, under section 10(b) of the Act, 15 U.S.C. § 78j(b) (1970), and the SEC rules and regulations thereunder, including presumably rule 10b-5, 17 C.F.R. 240.10b-5. Plaintiff seeks damages substantially in excess of $1,000,000 on his own behalf and for a class "consisting of all purchasers and sellers of the common stock of Reade from 1970 to date but excluding the named defendants (¶ 14).3
As plaintiff readily concedes, the complaint was drafted "primarily" from information set forth in note 3 to the Consolidated Financial Statements accompanying the Form 10-K which Reade submitted to the SEC for calendar year 1975. That note reads as follows:
Count One of the complaint alleges that for each of the calendar years from 1970 through 1975, Reade filed with the SEC a Form 10-K and other documents required by the Act (¶ 20); that each of these Form 10-Ks "contained a certification of Reade's financial statement by PMM," including a representation that the financial statement fairly presented the financial position of Reade, as well as the results of its operations and changes in its financial position as of the end of that year (¶ 21); and that each of the Form 10-Ks was false and materially misleading in that it substantially overstated Reade's accounts receivable and therefore its earnings and net worth for the period in question (¶ 22). Count One further alleges upon information and belief that Reade's Form 10-K for calendar year 1971 overstated Reade's accounts receivable by at least $600,000 and that Reade's Form 10-K for calendar year 1974 overstated Reade's accounts receivable by at least $907,000 (¶ 23). Count One goes on to recite that "defendants either knew that the Form 10-K's filed by Reade . . were materially false and misleading . . or acted in wanton and reckless disregard of the true facts" (¶ 24); that plaintiff and each member of the class who bought and sold the common stock of Reade during the relevant period "did so in reliance upon the false financial statements, certifications, documents and reports filed with the S.E.C. at the behest of the defendants" (¶ 26); and that Reade's false statements, documents and reports materially affected the prices at which plaintiff and members of the class purchased and sold Reade's common stock. (¶ 29).
Count Two of the complaint alleges, in essence, that the facts giving rise to Count One also led to a violation of section 10(b) of the Act and rule 10b-5 thereunder. With respect to Reade's records of its accounts receivable, it is further alleged upon information and belief that the defendants, in order to conceal the true facts from the SEC, other government agencies and the investing public, either failed to keep or destroyed business records of Reade and concealed their absence during the period from 1970 through the date the complaint was filed. (¶ 36). It is also alleged upon information and belief that PMM's "certifications" of Reade's Form 10-Ks failed to disclose the absence of these business records or the existence of the defendants' scheme (¶ 36). Finally, in Count Two reliance by the plaintiff and members of the putative class is pleaded in the following terms:
Plaintiff and the members of the class effected their purchase sic and sales of the common stock of Reade during the period 1970 to date in the belief and understanding that such purchases and sales were made at valid and legitimate market prices derived from the free play of legitimate market sources and untainted by false or fraudulent statements and filings of the defendants.
(¶ 38).
Although Rule 8(a) of the Federal Rules of Civil Procedure requires but a "short and plain statement of the claim showing that the pleader is entitled to relief," in certain categories of cases — such as those involving allegations of fraud — greater particularity is required to sustain a complaint. Rule 9(b), Fed.R.Civ.P.4 Thus the complaint in an action for securities fraud must identify, inter alia, the misrepresentations which were allegedly made,5 and the manner in which they are considered to be false,6 and it must set forth facts from which an inference of fraud by a given defendant may be drawn.7 Moreover an allegation may only be made upon information and belief when it is shown that it concerns matters peculiarly within the knowledge of the adverse party;8 even then the pleader must set forth a statement of the facts upon which his belief is founded.9
When the complaint in the instant action is viewed with these criteria in mind, it is apparent that plaintiff has not set forth enough facts to state a cause of action for damages under the securities laws.
Count One of the complaint specifically identifies the documents and statements that plaintiff contends were false and indicates, in general, how he and other investors were allegedly misled, but it nevertheless fails to meet the requirements of Rule 9(b) in several significant respects. First, although it is alleged that Reade's 10-K forms overstated Reade's accounts receivable for each of the calendar years from 1970 through 1975, defendants are also entitled to be apprised of the approximate amount of overstatement involved. See Gross v. Diversified Mortgage Investors, 431 F.Supp. at 1088 n. 1; Levy v. First National City Bank, No. 75-1335, slip. op. at 2 (S.D.N.Y. Aug. 26, 1975). This information has not been provided for calendar years 1970, 1972, 1973 or 1975. An amount is given for calendar years 1971 and 1974, but this, too, is insufficient since it is done upon information and belief without reciting the facts upon which the belief is founded.10
More importantly, plaintiff has not shown why overstatements made by Reade should lead to an inference that PMM, as its auditor, acted with scienter11 to defraud parties purchasing or selling Reade common stock. Yet as plaintiff himself concedes,12 without some showing of impropriety, violations of the securities laws may not be inferred from the publication of inaccurate accounting figures alone. E. g., Schmeidler v. Lazard Freres & Co., No. 74-2206, slip. op. at 8-9 (S.D.N.Y. Jan. 6, 1977); Goldberg v. Shapiro, 1974-1975 Transfer Binder Fed.Sec.L.Rep. (CCH) ¶ 94,813 (S.D.N.Y. 1974).
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