Zatkin v. Primuth

• Decision Date: 03 September 1982
• Docket Number: Civ. No. 82-602-E.
• Citation: 551 F. Supp. 39
• Parties: Gary ZATKIN, on behalf of himself and all others similarly situated, Plaintiff, v. David PRIMUTH, et al., Defendants.
• Court: U.S. District Court — Southern District of California

551 F. Supp. 39

Gary ZATKIN, on behalf of himself and all others similarly situated, Plaintiff, v. David PRIMUTH, et al., Defendants.

Civ. No. 82-602-E.

United States District Court, S.D. California.

September 3, 1982.

COPYRIGHT MATERIAL OMITTED

David B. Gold, Paul F. Bennett, David B. Gold, A.P.C., San Francisco, Cal., for Gary Zatkin, plaintiff.

Robert W. Hallock, Karl F. Nygren, Thomas P. Coffey, David Garten, Kirkland & Ellis, Chicago, Ill., David R. Clark, Aylward, Kintz, Stiska, Wassenaar & Shannahan, San Diego, Cal., for David J. Primuth, Emil L. McNeely, James R. Wilson, John V. Drum, Clark A. Johnson, Thomas W. Cline, Richard W. Fruechtenicht, Thomas C. Harvey, defendants.

Jeanne E. Irving, Cox, Castle & Nicholson, Los Angeles, Cal., for Ray A. Watt, defendant.

Gordon G. Busdicker, Faegre & Benson, Wendy J. Wildung, Minneapolis, Minn., Leonard S. Janofsky, William B. Campbell, Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., for Walter H. Davies, Jr., Wayne E. Matschullat, Ellsworth L. Johnson, Wenda Weekes Moore, defendants.

John A. Donovan, Gerald T. Ford, Hughes, Hubbard & Reed, Los Angeles, Cal., for Coopers & Lybrand, defendant.

Joseph E. Coughlin, Michael R. Hassan, Lord, Bissell & Brook, Chicago, Ill., Charles A. Adamek, Lord, Bissell & Brook, Los Angeles, Cal., for Duff and Phelps, Inc., defendant.

Grover R. Heyler, Thomas M. Mustin, Latham & Watkins, Los Angeles, Cal., for F.N. Shumway, defendant.

MEMORANDUM DECISION

ENRIGHT, District Judge.

Plaintiff Gary Zatkin filed the present action on behalf of himself and all persons who acquired securities of Wickes Companies, Inc. (Wickes) from August 12, 1980, through March 15, 1982, inclusive. The case is one in a series of lawsuits by holders of Wickes securities alleging violation of federal securities law.

Zatkin allegedly purchased 100 shares of common stock in The Wickes Corporation (TWC) in September 1978. TWC and Gamble-Skogmo, Inc. (Gamble) issued a Joint Proxy Statement and Registration Statement and Prospectus in July 1980. On August 12, 1980, the two companies combined to form Wickes Companies, Inc. On that date plaintiff exchanged his TWC stock for 100 shares of Wickes common stock.

Plaintiff alleges that defendants employed a deceptive and manipulative scheme to conceal adverse information about the company's business condition in an effort to maintain an artificially high price for Wickes securities. The complaint alleges violation of §§ 17(a)(2) and (3), 11, 12, and 15 of the Securities Act of 1933, and §§ 10(b) and Rule 10b-5, 20, 14, and Rule 14a-9 of the Securities Exchange Act of 1934. Zatkin also alleges that defendants are liable under common law theories of negligent misrepresentation and fraud and deceit.

In addition to selected directors and officers of Wickes, defendants include Duff & Phelps, Inc., a financial advisor to TWC, and Coopers & Lybrand, an independent auditor. The individual defendants have filed motions to dismiss under Rule 9(b), Fed.R.Civ.P. Defendants Coopers & Lybrand and Duff & Phelps, Inc. have moved for dismissal under Rule 12(b)(6) and Rule 9(b).

Upon due consideration of the parties' memoranda and exhibits, the arguments advanced at the hearing on August 30, 1982, and for the reasons set forth herein, the court denies all motions to dismiss under Rule 9(b), Fed.R.Civ.P. The court also denies the motions of Coopers & Lybrand, and Duff & Phelps, Inc., under Rule 12(b), with the exception of claims under § 17 of the 1933 Act and § 14 of the 1934 Act, which are dismissed.

DISCUSSION

RULE 9(b) MOTIONS

Defendants in the present action have filed motions to dismiss based upon Rule 9(b) of the Federal Rules of Civil Procedure. Defendants make the general argument that plaintiff has failed to plead facts with sufficient detail and particularity to allege fraud.

The legal standards bearing on federal complaints are found in Rules 8 and 9. Rule 8 calls merely for a short and plain statement of the facts and claim, and has consistently been accorded very liberal construction. Rule 9(b), however, provides that certain "special matters," such as fraud, must be pleaded with particularity. Rule 9(b) has been held to apply to 10b-5 securities cases. Gottreich v. San Francisco Investment Corporation, 552 F.2d 866 (9th Cir.1977).

Defendants cite numerous cases from other circuits which hold, in effect, that there is a strict standard for pleading in cases of fraud, and that one may not begin his investigation by filing a complaint. This is true because of the danger of strike suits and because of the reputational injury to defendants charged with fraud. Nonetheless, "it is inappropriate to focus exclusively on the fact that Rule 9(b) requires particularity in pleading fraud. This is too narrow an approach and fails to take account of the general simplicity and flexibility contemplated by the rules." 5 Wright & Miller, Federal Practice and Procedure, § 1298. The Ninth Circuit has consistently taken the approach of reading the two rules in conjunction. Under Ninth Circuit law, a pleading is sufficient for purposes of Rule 9(b) if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer. While conclusory allegations will not suffice, statements which provide the time, place and nature of the alleged fraudulent activities will. Bosse v. Crowell, Collier and MacMillan, 565 F.2d 602, 611 (9th Cir.1977); Walling v. Beverly Enterprises, 476 F.2d 393, 397 (9th Cir.1973). The court finds the complaint in the present case meets this test.

A. Pleadings Based on Information and Belief

Allegations of fraud based on information and belief usually do not satisfy the degree of particularity required under Rule 9(b). However, an exception exists where, as in cases of corporate fraud, the plaintiffs cannot be expected to have personal knowledge of the facts constituting the wrongdoing. In such cases, a complaint based on information and belief is sufficient if it includes a statement of the facts upon which the belief is based. Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974), cert. denied, 421 U.S. 976, 95 S.Ct. 1976, 44 L.Ed.2d 467 (1975).

B. Lack of Individualization

Defendants also object to the "each and all" language of the complaint and charge it fails to properly establish the conduct of the individual defendants. This contention is without merit. Where statements can be attributed to one individual, they are so specified. The defendants are each identified in the complaint as directors and/or officers of Wickes. Where alleged actions involve the issuance of annual reports or releases, it may be presumed that these are the collective actions of the directors and officers. See, In re Equity Funding Corp. of America Securities Litigation, 416 F.Supp. 161, 181 (C.D.Cal.1976).

C. Aiding and Abetting

Coopers & Lybrand asserts that aid and abet liability has been improperly pleaded under 9(b). The rule requires that all elements of aiding and abetting a fraud must be pleaded with particularity. Kirshner v. Goldberg, 506 F.Supp. 454, 458 (S.D. N.Y.1981). Plaintiff must plead three elements:

(1) a primary violator has committed a securities law violation; (2) the defendant knew of the violation, but, (3) nonetheless knowingly and substantially assisted the primary violator.

SEC v. Seaboard Corp. ("Tabor"), 677 F.2d 1297, 1299 (9th Cir.1982). Plaintiff's complaint satisfies the requirements of Rule 9(b) in pleading aid and abet liability.

D. Fraudulent Concealment

Section 13 of the 1933 Act establishes the time period within which an action may be brought. Plaintiff's claims are time-barred unless the action is brought within one year of the discovery of the untrue statement or omission, or within one year of the time when such discovery should have occurred. 15 U.S.C. § 77m. Plaintiff Zatkin alleges that defendants' fraudulent concealment excuses his failure to bring this action within the one-year limitation period.

The requirements for pleading fraudulent concealment are set forth in Rutledge v. Boston Woven Hose & Rubber Co., 576 F.2d 248, 250 (9th Cir.1978), as follows:

To avoid the bar of limitation by invoking the concept of fraudulent concealment, the plaintiff must allege facts showing affirmative conduct upon the part of the defendant which would, under the circumstances of the case, lead a reasonable person to believe that he did not have a claim for relief. Silence or passive conduct of the defendant is not deemed fraudulent, unless the relationship of the parties imposes a duty upon the defendant to make disclosure. The affirmative act of denying wrongdoing may constitute fraudulent concealment where the circumstances make the plaintiff's reliance upon the denial reasonable....

In the present case, the allegations contained in ¶¶ 20, 41, and 42 of the complaint contain the elements necessary in pleading fraudulent concealment.

RULE 12(b)(6) MOTIONS

The issue in a Rule 12(b)(6) motion to dismiss is "whether in the light most favorable to plaintiff, and with every doubt resolved in his behalf, the complaint states a valid claim for relief." 5 Wright & Miller, Federal Practice and Procedure: Civil § 1357 at 601. It must appear beyond doubt that plaintiff can prove no set of facts which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). The court primarily considers the allegations of the complaint in ruling on a 12(b)(6) motion.

A. Causation Under § 10(b)

Coopers & Lybrand asserts that it cannot be held liable for acts which occurred after August 12, 1980, when the plaintiff Zatkin obtained his Wickes stock.

This defendant is correct in its assertion that allegedly fraudulent acts which occur after a plaintiff's purchase of stock cannot form the basis of a § 10(b) claim because the acts are not performed in connection with the purchase or sale of stock....