Steiner v. Southmark Corp.

• Decision Date: 05 April 1990
• Docket Number: Civ. A. No. CA3-89-1387-D,CA3-89-1402-D and CA3-89-1492-D.
• Citation: 734 F. Supp. 269
• Parties: William STEINER, on his own behalf, on behalf of him a class of plaintiffs similarly situated, Plaintiff, v. SOUTHMARK CORPORATION, et al., Defendants. Berenice ABRAMS, et al., Plaintiffs, v. SOUTHMARK CORPORATION, et al., Defendants. Norman SALSITZ, on his own behalf, on behalf of a class of plaintiffs similarly situated, Plaintiff, v. SOUTHMARK CORPORATION, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

734 F. Supp. 269

William STEINER, on his own behalf, on behalf of him a class of plaintiffs similarly situated, Plaintiff, v. SOUTHMARK CORPORATION, et al., Defendants.

Berenice ABRAMS, et al., Plaintiffs, v. SOUTHMARK CORPORATION, et al., Defendants.

Norman SALSITZ, on his own behalf, on behalf of a class of plaintiffs similarly situated, Plaintiff, v. SOUTHMARK CORPORATION, et al., Defendants.

Civ. A. Nos. CA3-89-1387-D, CA3-89-1402-D and CA3-89-1492-D.

United States District Court, N.D. Texas, Dallas Division.

April 5, 1990.

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Terrell W. Oxford of Susman Godfrey, Dallas, Tex., Daniel W. Krasner, Francis M. Gregorek and David P. Brower of Wolf Haldenstein Adler Freeman & Kerz, New York City, Steven J. Toll and Daniel S. Sommers of Cohen, Milstein & Hausfeld, Washington, D.C., and Gary E. Cantor and Larry Deutsch of Berger & Montague, Philadelphia, Pa., for plaintiffs.

Wm. Bruce Hoff, Jr., Robert J. Kriss, Gary A. Isaac and Susan J. Irion of Meyer, Brown & Platt, Chicago, Ill., and Robert W. Coleman and John W. Hicks, Jr. of Baker, Mills & Glast, Dallas, Tex., for defendant Grant Thornton.

FITZWATER, District Judge:

The instant motions to dismiss in these three related securities fraud actions require the court to address recurring questions of Fed.R.Civ.P. 9(b) pleading sufficiency inevitably presented in such actions. The court is also called upon to decide whether plaintiffs have stated claims for relief pursuant to § 11 of the Securities Act of 1933, 15 U.S.C. § 77k, and Texas common law theories.

I

Plaintiffs are purchasers of Southmark Corporation ("Southmark") securities publicly issued from January 1, 1986 through May 17, 1989.¹ They purport to act on behalf of all persons who purchased or otherwise acquired publicly issued Southmark securities during this time period. The alleged class includes a sub-class of persons who purchased Southmark debt securities in the open market between October 24, 1986 and May 17, 1989.

Plaintiffs bring these actions against certain officers and directors of Southmark as well as against defendant Grant Thornton ("Thornton"), Southmark's former auditor. Plaintiffs allege defendants are liable for violations of §§ 11 and 15 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77k and 77o, and violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) and 78t(a), and the 1934 Act's attendant Rule 10b-5.² They also assert pendent claims for common law fraud and negligent misrepresentation. Plaintiffs' claims, as set forth in their amended complaints ("complaints"), essentially are grounded upon a series of alleged misrepresentations contained in Southmark financial statements and related documents during the relevant period. Plaintiffs contend the statements and documents represented Southmark to be a financially sound, well-managed corporation. Thornton is not charged with making these misrepresentations, but instead with certifying financial statements it knew to be false or misleading and/or recklessly disregarding the content of the financial data certified.

According to plaintiffs, Southmark was not the financial gem in the rough its investors had hoped. On May 17, 1989 Southmark announced a writedown of Southmark's assets in excess of $1 billion. Southmark asserted the writedown was necessary to bring Southmark into compliance with accepted accounting principles due to a prior inadequacy of loss reserves. The instant lawsuits predictably followed. Plaintiffs originally included Southmark as a defendant, but dropped the corporation after Southmark filed its petition for bankruptcy in July 1989. Thornton now moves to dismiss the allegations asserted against it, contending: first, the claims brought under § 10(b) and Rule 10b-5 run afoul of Fed.R.Civ.P. 9(b); second, the claims brought under § 11 of the 1933 Act are improperly pleaded; and third, the common law claims asserted state no cause of action against Thornton.

II

The court considers first whether plaintiffs' complaints are adequate to satisfy the heightened pleading standard of Rule 9(b). Rule 9(b) jurisprudence is by now familiar, but the frequent use of the Rule to procure punctilious pleading detail indicates that the case law bears repeating.

A

Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." The particularity requirement of Rule 9(b) applies to securities fraud claims, Smith v. Ayres, 845 F.2d 1360, 1365 (5th Cir.1988), and operates to ensure that a securities action is not based solely on conclusory allegations. See id.; Unimobil 84, Inc. v. Spurney, 797 F.2d 214, 217 (5th Cir.1986). Thus, a general allegation of fraud or fraudulent conduct is insufficient to support a claim without supporting particulars. Summer v. Land & Leisure, Inc., 664 F.2d 965, 970-71 (5th Cir. Unit B 1981), cert. denied, 458 U.S. 1106, 102 S.Ct. 3485, 73 L.Ed.2d 1367 (1982).

Rule 9(b) neither serves as a throwback to the hypertechnical pleading requirements of the Field Code nor requires needlessly repetitive pleading. See In re Commonwealth Oil/Tesoro Petroleum Corp. Sec. Litigation, 467 F.Supp. 227, 251 (W.D. Tex.1979) (Higginbotham, J.). Instead, "Rule 9(b) is read in conjunction with Fed. R.Civ.P. 8 which requires only a `short and plain statement of the claim showing that the pleader is entitled to relief.'" Landry v. Air Line Pilots Ass'n Int'l AFL-CIO, 892 F.2d 1238, 1264 (5th Cir.1990), rehearing pending. See also Corwin v. Marney, Orton Inv., 788 F.2d 1063, 1068 n. 4 (5th Cir.1986); Mitchell Energy Corp. v. Martin, 616 F.Supp. 924, 927 (S.D.Tex.1985). To satisfy Rule 9(b), a complaint need only apprise the defendant of the time, place, and nature of fraudulent behavior and defendant's relationship thereto. E.g., Mitchell Energy, 616 F.Supp. at 927; Keys v. Wolfe, 540 F.Supp. 1054, 1065 (N.D.Tex. 1982) (Higginbotham, J.), rev'd on other grounds, 709 F.2d 413 (5th Cir.1983); In re Commonwealth Oil/Tesoro Petroleum Sec. Litigation, 484 F.Supp. 253, 269 (W.D. Tex.1979) (class certification decision) (Higginbotham, J.).

B

Thornton contends Rule 9(b) is not satisfied in these three cases because the complaints: (1) are pleaded on information and belief; (2) fail to allege how plaintiffs have been damaged; (3) improperly lump all defendants together; (4) do not identify each of the documents upon which plaintiffs predicate their claims against Thornton; (5) do not allege with particularity the nature of Thornton's alleged misrepresentations; and (6) fail properly to allege reliance. The court considers each contention in turn.

The general rule is that allegations of fraud cannot be based upon information and belief. E.g., Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.1989); Madonna v. United States, 878 F.2d 62, 66 (2d Cir.1989); Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986). The rule may be relaxed, however, as to matters within the opposing party's knowledge. Moore, 885 F.2d at 540. In such cases, allegations satisfy Rule 9(b) if accompanied by a statement of the facts upon which the belief is based. Id.; Madonna, 878 F.2d at 66; Luce, 802 F.2d at 54 n. 1.

The court discerns no infirmity in plaintiffs' information and belief pleading. Plaintiffs can hardly be expected to have personal knowledge of the facts constituting the wrongdoing where, as here, the precise nature of the allegations is that corporate officers and the corporation's auditor took steps to ensure that the true facts remained undisclosed. See Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439-40 (9th Cir.1987). The portions of plaintiffs' complaints alleging misrepresentations and specific acts of fraud are substantially precise. Plaintiffs have identified the nature of each alleged misstatement, the document or release in which it appeared, and the manner in which the misstatement was misleading. In addition, plaintiffs have specifically set out the actions of Thornton they contend amount to securities violations. That these allegations are based upon information and belief provides no basis for dismissal. See id.

Plaintiffs' failure to allege specifically how they have been damaged is equally untroubling at this early stage of the litigation. The premise of each complaint is that the alleged misstatements artificially inflated the value of Southmark securities and thereby injured those who purchased the securities on the open market. Plaintiffs have identified the relevant dates of purchase and types of securities involved. Plaintiffs' allegations as to damages are set forth with adequate clarity to put Thornton on notice of the charges against it.³

Thornton's assertion that the complaints are deficient because they do not apprise Thornton of the allegations against it is equally unpersuasive. While this court's decision in Pearlstein v. Justice Mortgage Inv., 1979 Fed.Sec.L.Rep. (CCH) ¶ 96,760, 1978 WL 1143 (N.D.Tex.1978) (Hill, J.), could be selectively read to require a different result, a full and fair reading of that decision indicates it is not inconsistent with the result the court reaches today. In Pearlstein Judge Hill recognized the general proposition that Rule 9(b) requires only that a plaintiff identify the persons involved in and the circumstances surrounding the alleged fraud, such as the time, place, and contents of the purported scheme. Id. at 94,977. He held that Rule 9(b) was not satisfied due to a lack of correlation in plaintiff's complaint, noting that the plaintiff must "designate the specific defendants who are responsible for each individual document ..." in order to satisfy Rule 9(b). Id. Thornton relies upon this holding to support the proposition that plaintiffs' complaints do not apprise Thornton of the allegations against it. The court declines to adopt this reading of the...