Serabian v. Amoskeag Bank Shares, Inc., 93-2070

• Decision Date: 09 March 1994
• Docket Number: No. 93-2070,93-2070
• Parties: Fed. Sec. L. Rep. P 98,228 Nishan SERABIAN, et al., Plaintiffs, Appellants, v. AMOSKEAG BANK SHARES, INC., et al., Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 357

24 F.3d 357

Fed. Sec. L. Rep. P 98,228

Nishan SERABIAN, et al., Plaintiffs, Appellants, v. AMOSKEAG BANK SHARES, INC., et al., Defendants, Appellees.

No. 93-2070.

United States Court of Appeals, First Circuit.

Heard March 9, 1994.

Decided May 27, 1994.

James R. Malone, Jr., with whom C. Oliver Burt, III, Michael D. Gottsch, Pamela Bond, Haverford, PA, and Peter A. Pease, Boston, MA, were on brief, for appellants.

Robert Upton, II, with whom Charles W. Grau, Concord, NH, was on brief, for Amoskeag Bank Shares, Inc.

Ovide M. Lamontagne, with whom E. Donald Dufresne, Manchester, NH, was on brief, for Allen, Machinist, Bushnell, Yakovakis, Woolson, Allman and Keegan.

Before TORRUELLA, Circuit Judge, COFFIN, Senior Circuit Judge, and BOUDIN, Circuit Judge.

COFFIN, Senior Circuit Judge.

The question on this appeal is whether appellants' Third Amended Complaint states a claim for fraud under federal securities law, see 15 U.S.C. Sec. 78j(b) (Sec. 10(b) of the Securities Exchange Act of 1934); SEC Rule 10b-5 (17 C.F.R. Sec. 240.10b-5), a claim that must be plead "with particularity." Fed.R.Civ.P. 9(b). The district court held that it did not, and dismissed the complaint with prejudice. After carefully studying the 86-page, 107-paragraph complaint, we have concluded that portions of it are entitled to survive. We therefore vacate the dismissal in part, and remand for further proceedings limited to the actionable allegations.

I. Background

During the period relevant to this litigation, defendant Amoskeag Bank Shares ("Bank Shares" or "the bank" or "the company") was a New Hampshire bank holding corporation with four wholly owned subsidiaries: Amoskeag Bank, New Hampshire's largest bank; Nashua Trust Company; Bank Meridian, N.A.; and Souhegan National Bank of Milford. ¹ The seven individual defendants are certain of Bank Shares' former officers and/or directors.

Plaintiffs are the purchasers of Bank Shares' common stock. In this lawsuit, filed as a class action but still uncertified, they claim that the defendants issued various documents, reports, and statements that misrepresented and failed to disclose material facts concerning Bank Shares' true financial condition, thereby artificially inflating the market price of the company's stock at the time they purchased it. ²

The complaint depicts an increasingly familiar saga of a bank that boomed with the real estate market of the early 1980s, but suffered in the recession and deteriorating market that followed. See, e.g., In Re Wells Fargo Securities Litigation, 12 F.3d 922 (9th Cir.1993); In Re Glenfed, Inc. Securities Litigation, 11 F.3d 843 (9th Cir.1993), reh'ng en banc, granted, 11 F.3d 843 (9th Cir. Feb. 25, 1994); Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir.1992); DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.1990). The primary thrust of the allegations is that defendants knew that their loan portfolio contained many high-risk loans, that the reserves for such loans were inadequate, ³ and that poor internal controls exacerbated the difficulties, but that they nevertheless continued to paint a rosy picture of the bank's financial circumstances.

The district court, having given plaintiffs the opportunity to amend a previous version of the complaint, concluded that, "[a]t most, the [Third Amended] [C]omplaint demonstrates dubious business judgment or mismanagement." The court felt that the pleading, reduced to its essence, alleged that the defendants throughout the relevant period knowingly reserved too little in anticipation of loan losses. In the court's view, however, the complaint lacked a basis for inferring the defendants' knowledge of the deficiency and, moreover, failed to identify any specific loans whose reserves were inadequate. These deficiencies, despite ample opportunity for discovery and "considerable ingenuity in pleading," prompted the court to dismiss the complaint with prejudice.

Plaintiffs argue on appeal that the complaint more than adequately set forth the bases for their allegations of fraud by detailing numerous specific instances in which the defendants had knowledge of the "true facts," yet made substantially different representations to the investing public. They claim that the district court impermissibly drew inferences in favor of the defendants, contrary to its obligation to indulge every reasonable inference helpful to their case. See, e.g., Garita Hotel Ltd. Partnership v. Ponce Federal Bank, 958 F.2d 15, 17 (1st Cir.1992).

We review the district court's determination de novo, applying the same criteria employed by the district court. Id. If the allegations would permit recovery under any viable theory, the dismissal must be reversed. Id.

II. Applicable Standards

We preface our discussion with a brief survey of the general principles that must guide our review of plaintiffs' complaint. First, the securities laws "do not guarantee sound business practices and do not protect investors against reverses," DiLeo, 901 F.2d at 627. In stating an actionable claim for misrepresentation, therefore, plaintiffs must plead more than that defendants acted irresponsibly and unwisely, but that they were aware that "mismanagement had occurred and made a material public statement about the state of corporate affairs inconsistent with the existence of the mismanagement," Hayes v. Gross, 982 F.2d 104, 106 (3d Cir.1992). See also Shapiro, 964 F.2d at 283 ("[I]t is not a violation of the securities laws to simply fail to provide adequate loan loss reserves; properly collateralize or secure a loan portfolio; or provide sufficient internal controls or loan management practices.").

Second, defendants may not be held liable under the securities laws for accurate reports of past successes, even if present circumstances are less rosy, see Capri Optics Profit Sharing v. Digital Equipment, 950 F.2d 5, 7-8 (1st Cir.1991), ⁴ and optimistic predictions about the future that prove to be off the mark likewise are immunized unless plaintiffs meet their burden of demonstrating intentional deception, see Greenstone v. Cambex Corp., 975 F.2d 22, 25-26 (1st Cir.1992) (there is no " 'fraud by hindsight' "); DiLeo, 901 F.2d at 627 (same). See also Shapiro, 964 F.2d at 283-84 n. 12 (quarterly report stating that the company "looks to the future with great optimism ... is clearly inactionable puffing").

Third, and finally, general averments of the defendants' knowledge of material falsity will not suffice. Greenstone, 975 F.2d at 25. Consistent with Fed.R.Civ.P. 9(b), the complaint must set forth "specific facts that make it reasonable to believe that defendant[s] knew that a statement was materially false or misleading." Id. The rule requires that the particular " 'times, dates, places or other details of [the] alleged fraudulent involvement' " of the actors be alleged. In re Glenfed, 11 F.3d at 847-48 (citation omitted). See also Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir.1991); New England Data Services v. Becher, 829 F.2d 286, 288 (1st Cir.1987) ("[I]n the securities context, and in general, this circuit has strictly applied Rule 9(b).").

With this framework in mind, we begin our scrutiny of plaintiffs' allegations.

III.

The Third Amended Complaint contains 63 paragraphs (pp 23-86) describing the misstatements and omissions allegedly made by defendants during the class period from June 17, 1987 through October 23, 1989. We have read the paragraphs line-by-line, and agree with the district court that much of complaint fails to establish an actionable 10b-5 claim. Many of the challenged statements either were undisputedly true representations of the company's circumstances, or are unaccompanied in the complaint by specifics tending to show knowing falsity. Other portions of the complaint are inadequate because they allege improper conduct in wholly conclusory terms.

The complaint is more successful in stating a claim concerning statements made during late 1988 and 1989, when plaintiffs contend that the bank was experiencing accelerated loan deterioration. Public announcements during that time suggested that the bank's loan business was under control while plaintiffs allege that the bank recognized that its problems were severe, particularly that its ALL was inadequate and its internal procedures for identifying problem loans deficient.

In the following sections, we explain our conclusions by considering in detail various portions of the complaint. We do not examine separately each allegation contained in this voluminous pleading, but believe our discussion is sufficiently complete and illustrative to enable the district court to distinguish the actionable from the inactionable in the remaining paragraphs.

Sales of stock and mortgage-backed securities, pp 23-25.

These paragraphs describe Bank Shares' substantial losses in June and July 1987 when it sold certain mortgage backed securities, as well as stock that it unlawfully held in eight banking companies. Plaintiffs allege that, with the approval or acquiescence of "Bank Shares['] purportedly independent auditors," the company knowingly allocated these losses to the improper fiscal quarters of 1987. As a result, plaintiffs allege, Amoskeag's announced earnings for the quarter ended June 30, 1987 were artificially inflated. The complaint also criticizes the defendants' failure to recognize loss on the company's equity securities portfolio until the end of the year.

We fail to find a basis for actionable securities fraud in these paragraphs. Plaintiffs allege no representations inconsistent with the bank's state of affairs. ⁵ The fact that the company was in violation of federal law by its ownership of the financial institution stock may reflect poorly on its management, but in no way demonstrates a 10b-5 violation. Nothing in the complaint suggests that the decision of Bank Shares to delay its equity security loss until the end of the year was fraudulent, even...