Loan v. Federal Deposit Ins. Corp.

• Decision Date: 08 August 1989
• Docket Number: Civ. A. No. 89-0251-T.
• Citation: 717 F. Supp. 964
• Parties: Thomas LOAN, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Donald J. Anderson, Thomas F. Bagley, Walter E. Bennett, Robert B. Bowen, Ernest N. Daulton, Jr., Robert E. Fitzgerald, Robert F. Fredo, Jr., Thomas J. Judy, Robert C. Keogh, Ralph Lolli, Jr., Gerard R. Martel, J. Parker Rice, Lester H. Rome, Eugene L. Sorbo, C. William Wester and Anthony F.S. Whitton, Defendants.
• Court: U.S. District Court — District of Massachusetts

717 F. Supp. 964

Thomas LOAN, Plaintiff, v. FEDERAL DEPOSIT INSURANCE CORPORATION, Donald J. Anderson, Thomas F. Bagley, Walter E. Bennett, Robert B. Bowen, Ernest N. Daulton, Jr., Robert E. Fitzgerald, Robert F. Fredo, Jr., Thomas J. Judy, Robert C. Keogh, Ralph Lolli, Jr., Gerard R. Martel, J. Parker Rice, Lester H. Rome, Eugene L. Sorbo, C. William Wester and Anthony F.S. Whitton, Defendants.

Civ. A. No. 89-0251-T.

United States District Court, D. Massachusetts.

August 8, 1989.

Robert S. Potters, Potters & Sands, P.C., Boston, Mass., for Thomas Loan.

Brandon F. White and Michael Gaffney, Foley, Hoag & Eliot, Boston, Mass., for First Service Bank for Sav.

William J. Patton, Robert J. Stillman and David Martland, Ropes & Gray, Boston, Mass., for FDIC.

TAURO, District Judge.

This is the third in a series of lawsuits filed in federal and state court by shareholders of the First Service Bank for Savings following the disclosure of financial irregularities by federal and state banking examiners.¹ Plaintiff is the representative of a putative class of the bank's shareholders who purchased shares in the bank's initial offering. Their purchases took place between July 9, 1986 and August 1, 1986, and were made pursuant to the terms of a Subscription Offering Circular. Named as defendants are: 1) the Federal Deposit Insurance Corporation;² 2) C. William Wester, the bank's former President, Chief Executive Officer and Chairman of the bank's board of directors; 3) Robert F. Fredo, Jr., the bank's former Senior Vice President and Senior Lending Officer; and 4) the bank's board of directors.

The complaint alleges that the defendants made material misrepresentations and omissions in the Subscription Offering Circular as well as in subsequently filed annual reports for 1986 and 1987. Each of the defendants are charged in a four count complaint with: 1) violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l; 2) violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5; 3) common law fraud; and 4) negligent misrepresentation. All the defendants have moved to dismiss the complaint.

I.

An essential element of both of plaintiff's securities claims is a misrepresentation or omission of a material fact. See 15 U.S.C. § 77l, 17 C.F.R. § 240.10b-5. No liability exists for either claim in the absence of an allegation that a particular statement was untrue, or that the statement failed to disclose a material fact.

Plaintiff relies on numerous representations which were made in the bank's Subscription Offering Circular.³See Complaint ¶ 35. These representations can be placed into four broad categories: 1) statements concerning the bank's lending practices, including the type of loans made, the risks associated with those loans and how the bank attempts to minimize those risks;⁴ 2) financial data about the bank's activities during 1985 and early 1986;⁵ 3) information about how banks are regulated by federal and state agencies;⁶ and 4) information about how the bank will be affected by conversion from mutual ownership to stock ownership.⁷

Although the complaint quotes at length from the Subscription Offering Circular, it does little more than allege that each quoted section was a misrepresentation or omission of a material fact. The complaint does not even try to explain how any of the challenged statements were untrue. See e.g., Complaint ¶ 35(k) (one of the alleged material misrepresentations is the following statement, that is most obviously true: "Banks are extensively regulated under both federal and state law."). Merely claiming that a statement is untrue does not make it so. A plaintiff has an obligation to explain what is untrue about each of the challenged statements and cannot merely quote a statement and assert that it is untrue.

Plaintiff attempts to avoid his obligation to identify specific misrepresentations and omissions by alleging that "the statements made in the Circular ... were intended ... to mislead ... purchasers into believing that ... the bank was a conservatively run banking institution tightly regulated ... and was in compliance with federal and state statues and all applicable regulations." See Complaint ¶ 36. The complaint then goes on to explain that this impression was false because the bank was involved in numerous transactions that "violated state and federal banking law and good banking practices." Id. The complaint does not specify what these banking practices were, or when they occurred. Rather, the complaint simply focuses on how these practices were later allegedly misrepresented on the bank's annual reports for 1986 and 1987.

The complaint attempts to link the 1986 and 1987 annual reports to the Subscription Offering Circular by alleging that the Circular should have disclosed the inaccuracies in the annual reports. But the annual reports were not issued until after the Circular. Effectively, what plaintiff is trying to do is base his securities claims on reports which were issued after he bought his shares. He cannot rely directly on those reports. See supra at n. 3. And he cannot do so indirectly by alleging that misrepresentations on reports issued in 1987 and 1988 should have been disclosed in the Subscription Offering Circular which was issued in 1986.

Plaintiff's complaint has failed to identify a single material fact contained in the Subscription Offering Circular that was untrue when made. Nor has plaintiff pointed to a specific material fact which the defendants failed to disclose. Accordingly, both of plaintiff's federal claims must be dismissed.

II.

An alternative reason exists to dismiss the securities claims against each of the individual defendants, with the exception of the FDIC. These defendants argue that the § 12(2) claim should be dismissed because they were not "sellers" of the securities at issue. The § 10(b) claims should be dismissed, according to the individual defendants, for failure to particularize their role in the fraud alleged.

A. § 12(2)'s Seller Requirement

Section 12(2) provides that "any person who ... offers or sells a security ... by means of a prospectus ... which includes an untrue statement of a material fact or omits to state a material fact ... shall be liable to the person purchasing such security from him." 15 U.S.C. § 77l(2). The Supreme Court has explained that § 12 only imposes liability on two classes of persons: those who actually transfer title to securities and those that "successfully solicit the purchase." Pinter v. Dahl, 486 U.S. 622, 108 S.Ct. 2063, 2079, 100 L.Ed.2d 658 (1988).⁸ Collateral participants in the sale of securities cannot be held liable under § 12(2). Id. 108 S.Ct. at 2080.

Clearly none of the individual defendants transferred title to the securities — the bank performed that function itself. Nowhere in the complaint does plaintiff allege that any of the individual defendants played any part in soliciting the sale of the bank's securities. Indeed, they are not even alleged to have signed the Subscription Offering Circular. In the absence of any allegation in the complaint connecting the individual defendants to the sale of the securities, this court cannot conclude that they are sellers within the meaning of § 12(2). Accordingly, the § 12(2) claim must be dismissed against all the defendants except the FDIC.

B. Pleading fraud with particularity

The individual defendants also contend that the § 10(b) claim against them must be dismissed for failure to allege their particular role in the fraud.⁹ Rule 9(b), which is applicable to alleged violations of § 10(b), provides that "the circumstances constituting fraud ... shall be stated with particularity." Fed.R.Civ.P. 9(b). Where multiple defendants are involved, each person's role in the alleged fraud must be particularized in order to satisfy Rule 9(b). See Margaret Hall Foundation v. Atlantic Financial Management, Inc., 572 F.Supp. 1475, 1481 (D.Mass.1983) (Tauro, J.).

The complaint does not connect the allegedly false and misleading Subscription Offering Circular to any of the individual defendants. The complaint does allege that "the defendants caused the Subscription Offering Circular to be prepared and circulated." Complaint ¶ 33. This bare allegation is not enough to inform the individual defendants of what they are actually alleged to have done. None of the individual defendants are alleged to have actually prepared, signed or even read the Circular before it was issued. Accordingly, the individual defendants are being sued based on their status as directors and former officers of the bank rather than for any actual role they may have played in producing or circulating the Subscription Offering Circular. That alone is not a sufficient basis to impose liability pursuant to § 10(b). See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 119-20 (2d Cir.1982) (directors cannot be charged with securities fraud based on their status as directors alone).

III.

The only remaining claims in this case are based on the common law of Massachusetts. Once a federal court dismisses all the federal claims contained in a complaint, the court must decide whether it is prudent to continue to exercise its pendent jurisdiction over claims based exclusively on state law. See United Mine Workers of America v. Gibbs, 383 U.S. 715, 725-26, 86 S.Ct. 1130, 1138-39, 16 L.Ed.2d 218 (1966) (pendent jurisdiction is discretionary). Where, as here, all the federal claims have been dismissed at an early stage in the litigation, respect for the parallel legal system existent in the state where the federal court sits favors dismissal of the remaining counts. Id. at 726, 86 S.Ct. at 1139. Accordingly, plaintiff's common law fraud and negligent misrepresentation claims are dismissed for lack of subject matter jurisdiction.

An order will issue.

ORDER

For the reasons set forth in the accompanying memorandum, defendan...