Opinion
Civil Action No. 02-4216.
August 10, 2004
Joseph Maddaloni, Jr., Esq., Peter Lambrianakos, Jr., Esq., PORZIO, BROMBERG NEWLAN, P.C., Morristown, New Jersey, Attorney for Defendants-Third Party Plaintiffs Irshad Ahmed, Scott D. Dunlop and Douglas W. Dunlop.
Marvin Brauth, Esq., Christine Petruzzell, Esq., David C. Kistler, Jr., Esq., WILENTZ, GOLDMAN SPITZER, Woodbridge, New Jersey, Attorney for Plaintiff.
OPINION
Plaintiff Pacific Alliance Group Limited ("PAG") brought suit alleging fraud against Pure Energy Corporation ("PEC") and three individual defendants: PEC's CEO and President Irshad Ahmed ("Mr. Ahmed"), and Scott and Douglas Dunlop ("the Dunlop brothers"), who were founders, employees, and shareholders of PEC, and members of the company's Board of Directors.
The individual defendants moved to dismiss some of the claims in PAG's Complaint under, respectively, Federal Rules of Civil Procedure 12(c) and 9(b), and the Private Securities Litigation Reform Act, 15 U.S.C. § 78u-4(b)(1) (2). The court will grant the individual defendants' motion in part, and deny it in part, as described fully in the conclusion of this Opinion.
BACKGROUND
The facts are recited as alleged by PAG, and supplemented by quotations from the Private Placement Memorandum, which PAG described in its Complaint, and which the individual defendants attached to their motion. In In re Burlington Coat Factory Securities Litigation, the Court of Appeals explained
As a general matter, a district court ruling on a motion to dismiss may not consider matters extraneous to the pleadings. However, an exception to the general rule is that a "document integral to or explicitly relied upon in the complaint" may be considered" without converting the motion [to dismiss] into one for summary judgment."
The rationale underlying this exception is that the primary problem raised by looking to documents outside the complaint — lack of notice to the plaintiff — is dissipated "[w]here plaintiff has actual notice . . . and has relied upon these documents in framing the complaint." Watterson v. Page, 987 F.2d 1, 3-4 (1st Cir. 1993) (quoting Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 48 (2nd Cir. 1991)). What the rule seeks to prevent is the situation in which a plaintiff is able to maintain a claim of fraud by extracting an isolated statement from a document and placing it in the complaint, even though if the statement were examined in the full context of the document, it would be clear that the statement was not fraudulent.114 F.3d 1410, 1426 (3d Cir. 1997) (some citations omitted).
PAG's Complaint does not explicitly cite the Private Placement Memorandum. It is nevertheless appropriate for the court to look to it because, as the Court of Appeals has held, in deciding whether to consult extrinsic documents in resolving a motion to dismiss, "what is critical is whether the claims in the complaint are `based' on an extrinsic document and not merely whether the extrinsic document was explicitly cited." Id.
In addition to the Private Placement Memorandum, the individual defendants attached two Promissory Notes to their motion. In resolving the motion to dismiss, the court did not look at these Notes because PAG, though it did not dispute their authenticity, claimed at oral argument that they were incomplete. See section II(B) of the Discussion of this Opinion.
Until it filed for bankruptcy last year, PEC was purportedly engaged in the business of developing and marketing cleaner burning motor fuels and production technologies to produce biochemicals. Beginning in early 2000, PEC undertook efforts to secure capital for the operation of its business through the sale of PEC stock and other financing arrangements. PEC engaged US Bancorp Piper Jaffray, Inc. ("Piper Jaffray") to assist it in this endeavor. Piper Jaffray prepared a Private Placement Memorandum ("PPM") for PEC dated March 2000.
PEC filed for bankruptcy under Chapter 11 on February 20, 2003.
A. Statements Predictions
The PPM, inter alia, described the products that PEC was developing and its plan to distribute and sell them, and presented financial information about the company. In conveying this information, the PPM included numerous statements of present and historical fact and predictions about the future ("statements and predictions"). PAG describes the statements and predictions in the PPM that are relevant in this case (but does not cite to specific PPM passages) in ¶ 12 of its Complaint. According to that paragraph, the PPM stated that
(a) PEC had completed successful trials of its oxygenated diesel fuel with large fleet owners, including Waste Management and The Chicago Transit Authority.
(b) PEC's oxygenated diesel product was commercially viable and could be sold at a commercially reasonable and profitable price.
(c) PEC's oxygenated diesel could be priced competitively with No. 2 diesel, with the price premium expected to be only approximately $0.06 per gallon.
(d) PEC's oxygenated diesel could and was about to be commercialized, would be introduced into the commercial market in 2000 and would generate significant revenues and income for PEC into 2000 and the following years.
(e) The underlying assumptions on which PEC's financial projections were based were reasonable and capable of being achieved.
(f) PEC was then working with several fuel distributors and marketers and planned a nationwide rollout of its oxygenated diesel during 2000.
(g) PEC had begun to convert the fleets of two major entities to oxygenated diesel.
(h) PEC had negotiated distribution agreements for the commercialization of oxygenated diesel with fuel distributors including, but not limited to, Getty Petroleum Marketing.
(i) PEC had positive working relationships with a large number of technical and commercial partners.
(j) PEC's P-Series fuel had the potential to compete effectively with other alternative fuels.
(k) PEC was then planning to launch its first bio-refinery that could produce a variety of biomass derived chemicals and fuel components.
(l) PEC would receive $15 million in matching funds.
(m) Government approvals were not a significant hurdle before PEC's oxygenated diesel could be commercialized.
The PPM also contained cautionary language that may have qualified some of these statements and predictions. For example, the PPM included the following passages:
Risk of Production — Fuel Formulations
The Company has not yet proven commercially that it can manufacture or supply its fuels or fuel additive packages at a cost that is competitive or commercially reasonable. The Company has no experience that it can distribute or arrange for the distribution of the additive packages in sufficient quantities or with adequate profit margins to support a large scale and commercially viable sales and distribution program. The Company will be required to hire, train and manage a number of qualified product and operational managers in order to commercialize successfully the Company's fuels and fuel additive packages. There can be no assurance that the Company can hire, train, manage and retain qualified managers for these tasks.Lack of Commercialization Expertise
Pure Energy intends to sell its products, in the United States and abroad, primarily in collaboration with selected marketing partners, as well as through licensees and pursuant to other strategic relationships. The Company has limited experience in marketing, sales, licensing and distribution. There can be no assurance that the Company will be successful in its efforts to negotiate acceptable arrangements with potential manufacturing, marketing or distribution partners or licensees, and the lack of such arrangements could have a material adverse effect on the Company.
PPM at 73-74.
During the same time period that the PPM was being prepared, "the PEC Defendants" approached PAG to provide bridge financing for and/or make an investment in PEC. They gave PAG a copy of the PPM. During phone conversations, in written correspondence, and at meetings with PAG representatives (including, but not limited to a meeting on March 6, 2000), "the PEC defendants" also reiterated the statements and predictions that appeared in the PPM.
Throughout its Complaint, PAG identifies the parties who engaged in the conduct of which it complains merely as "the PEC Defendants." It does not specify, for example, which individual defendant approached it, who specifically made the statements and predictions in meetings with PAG representatives and written correspondence, etc.
PAG alleges that these statements and predictions "were materially false, inaccurate and misleading, and presented a false, inaccurate and misleading picture of PEC, its business, its products, the marketability of those products, and its business prospects." Complaint ¶ 13. They also alleged that "the PEC Defendants knew or, through the exercise of reasonable diligence, should have known" this. Complaint ¶ 14. Finally, it alleged that "the PEC Defendants" intentionally iterated and reiterated the statements and predictions — even though they knew they were false — in order to lure companies such as PAG into investing in and lending capital to PEC.
If this was the PEC Defendants' motive, they succeeded, because on or about June 19, 2000, based on the statements and predictions, PAG loaned PEC $700,000. In addition to this loan, at some point in time not specified in the Complaint, PAG acquired 3,333 shares of stock in PEC at a cost of approximately $1.2 million.
B. Material Omissions
After PAG made its initial loan, the PEC Defendants continued to reiterate the statements and predictions in an attempt to induce PAG to provide further financing. It also failed to disclose to PAG (1) dissension within the management of PEC, (2) issues with respect to the performance of Mr. Ahmed and his ability to work constructively with others, (3) new information demonstrating that the statements and predictions previously made orally and in the PPM were false, and (4) that Series C shares in PEC had been the subject of a stock split and did not have the value attributed to those shares by PEC. Complaint ¶ 19.
Because it did not know any of this troubling information, in or about December 2000, PAG loaned PEC an additional $300,000.
C. New Promises and Representations in the Notes
PEC gave PAG a Promissory Note for both the June loan and the December loan. In each of these Notes, PEC reiterated the statements and predictions that had appeared in the PPM, and further promised and represented that (1) the financial statements PEC provided to PAG were accurate in all material respects and presented fairly in all material respects the financial position of PEC, (2) the funds PAG loaned PEC would be used primarily to generate income and cash flow as soon as possible through the commercialization efforts of the oxygenated diesel fuel program, which would be vigorously pursued, and (3) the funds being loaned by the plaintiff would be used in accordance with the business plan set forth in the PPM. Complaint ¶ 21. In the end, however, PEC did not use the proceeds of the Notes for the purposes represented.
See section II(B) of the Discussion section of this Opinion.
D. PAG's Losses Lawsuit
On June 19, 2002, PAG's two loans to PEC became due and payable in full, but PEC failed to pay the principal and accrued interest. PEC had by that date become "a shell entity without material assets and [PAG's] stock investment . . . [had become] virtually worthless." Complaint ¶ 24.
On August 28, 2002, PAG brought suit against PEC, Mr. Ahmed, and the Dunlop brothers. PAG claimed that the statements and predictions, the material omissions of fact, and the promises and representations were intentionally false and fraudulent, and that PAG relied on them to its detriment.
PAG's Complaint included four fraud claims against PEC and the individual defendants: a claim under § 12 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77l; a claim under § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5; a common law fraud claim; and a common law negligent misrepresentation claim. It also included a claim against PEC on the Promissory Notes the company had signed.
II. Procedural History
In January 2003, PAG moved for summary judgment as to its claim against PEC only. Several weeks later, however, PEC filed a Chapter 11 petition, and the action was automatically stayed pursuant to 11 U.S.C. § 362. In a February 21, 2003 Order, the court stayed PAG's motion for summary judgment against PEC until the automatic stay under the bankruptcy code is lifted, but stated that the action as against the individual defendants (Mr. Ahmed and the Dunlop brothers) should proceed until further order of the court.
In March 2003, PEC moved to stay the action against the individual defendants as well, but the court denied this motion.See Pacific Alliance Group v. Pure Energy Corporation, Civ. No. 02-4216, slip op. (D.N.J. June 10, 2004).
In October 2003, Douglas Dunlop moved to dismiss the complaint against him pursuant to Rule 4(m). The court denied this motion later the same month.
In January 2004 PEC and the individual defendants moved to disqualify Wilentz, Goldman Spitzer, P.A., from representing PAG in this lawsuit. The court denied that motion the next month.See Pacific Alliance Group v. Pure Energy Corporation, Civ. No. 02-4216, slip op. (D.N.J. Feb. 27, 2004).
In April 2004, the individual defendants moved for partial judgment on the pleadings pursuant to FED. R. CIV. P. 12(c), and to dismiss under Rule 9(b) and 15 U.S.C. § 78u-4(b)(3)(A) for failure to plead with sufficient particularity. It is to the merits of this latest motion that the court will now turn.
It is appropriate for a party to move for judgment on the pleadings any time after the pleadings close. Fed.R.Civ.P. 12(c). "[T]he pleadings close after the last of the following pleadings in the case has been filed: answer, reply to a counterclaim, answer to a cross-claim, and third-party answer." 2-12 MOORE'S FEDERAL PRACTICE § 12.38 (Matthew Bender 3d ed.).
When Defendants moved under Rule 12(c), the pleadings were not yet closed in this case because the third-party defendant — Piper Jaffray — had not yet answered the complaint Defendants filed against it. The court will thus treat this motion as a motion to dismiss under Rule 12(b)(6). This will make no practical difference as the same standard applies to motions made under both Rule 12(c) and Rule 12(b)(6). Id.
In analyzing a motion to dismiss, the court must accept the allegations in the Complaint as true, and draw all reasonable inferences in favor of the plaintiff. U.S. Express Lines Ltd. v. Higgins, 281 F.3d 383, 388 (3d Cir. 2002).
DISCUSSION
The individual defendants ask the court to (1) dismiss PAG's claim under § 12 of the 1933 Act, (2) dismiss PAG's claim under § 10(b) of the 1934 Act and common law claims to the extent they are based on certain paragraphs of the Complaint, and (3) dismiss PAG's § 10(b) and common law fraud claims for failure to plead with sufficient particularity. The court will deny the individual defendants' second request, and grant their first and third requests.
I. Claim under § 12 of the 1933 Act
PAG's Complaint alleges that when Defendants made the statements and predictions, the material omissions of fact, and the promises and representations described above, they violated § 12 of the 1933 Act. Defendants argue — and the court agrees — however, that § 12 of the 1933 Act does not apply to private transactions such as the one involved here. Rather, as the Supreme Court clarified in Gustafson v. Alloyd Company, Inc., 513 U.S. 561 (1995), § 12 applies only to public offerings by issuers or controlling shareholders. See also, e.g., Lewis v. Fresne, 252 F.3d 352, 357-58 (5th Cir. 2001);Vannest v. Sage, Rutty Co., 960 F. Supp. 651, 654-55 (W.D.N.Y. 1997). This court is bound to apply the interpretation of § 12 at which the Court arrived in Gustafson, notwithstanding PAG's request that it read the section more broadly in light of recent corporate scandals and "sweeping changes to corporate regulation."
That section states, in pertinent part,
Any person who . . . offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable . . . to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.15 U.S.C. § 77l(a).
II. Claim under § 10(b) of the 1934 Act, and common law claims
PAG also alleges that the statements and predictions, the material omissions of fact, and the promises and representations described above were violations of § 10(b) of the 1934 Act, and constituted common law fraud and negligent misrepresentation.
Section 10(b) of the 1934 Act broadly prohibits the use of "manipulative or deceptive devices" in connection with the purchase or sale of a security. SEC Rule 10b-5, promulgated thereunder, prohibits persons from, inter alia, making "any untrue statement of a material fact or omit[ting] to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading. . . ." Ieradi v. Mylan Laboratories, Inc., 230 F.3d 594, 598 (3d Cir. 2000).
To state a claim for securities fraud under § 10(b) and Rule 10b-5, a private plaintiff must plead the following elements: (1) that the defendant made a misrepresentation or omission of (2) a material (3) fact; (4) that the defendant acted with knowledge or recklessness and (5) that the plaintiff reasonably relied on the misrepresentation or omission and (6) consequently suffered damage. Id. "A misrepresentation or omitted fact `is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to act.'"EP Medsystems, Inc. v. Echocath, Inc., 235 F.3d 865, 872 (3d Cir. 2000) (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
To state a claim for common law fraud under New Jersey law, a plaintiff must allege that the defendant (1) made a material representation of a presently existing or past fact, (2) with knowledge of its falsity (scienter) and (3) with the intention that plaintiff rely thereon, and (4) that plaintiff did so rely to his detriment." Jewish Center v. Whale, 432 A.2d 521, 524 (N.J. 1981).
To state a claim for negligent misrepresentation under New Jersey law, a plaintiff must allege that (1) an incorrect statement was negligently made and (2) justifiably relied upon, and that (3) injury was sustained as a consequence of that reliance. Kuhnel v. CNA Ins. Companies, 731 A.2d 564, 581 (App. Div. 1999).
The individual defendants request that the court dismiss PAG's § 10(b) and common law claims on a variety of grounds. The court addresses these grounds seriatim below.
A. "Bespeaks Caution" Doctrine
The individual defendants first argue that PAG's § 10(b) and common law claims should be dismissed, not in toto, but to the extent they are grounded in the alleged misrepresentations described in paragraphs12(b)-(e), 12(j) and 12(m) of the Complaint. These alleged misrepresentations deal, respectively, with the commercial viability and the pricing and profitability of PEC's oxygenated diesel, the competitiveness of PEC's P-Series fuel, and governmental approvals and regulation of PEC's oxygenated diesel. The individual defendants argue that these alleged misrepresentations are all forward-looking predictions rather than statements of present or historical fact. As such, they may be rendered immaterial by the "bespeaks caution" doctrine.
The Court of Appeals adopted the "bespeaks caution" doctrine inIn re Trump Casino Securities Litigation — Taj Mahal Litigation, 7 F.3d 357 (1993). See also, e.g., EP Medsystems, 235 F.3d at 873-75; Semerenko v. Cendant Corp., 223 F.3d 165, 181-83 (3d Cir. 2000); In re Westinghouse Securities Litigation, 90 F.3d 696, 707-11 (3d Cir. 1996). Under that doctrine, "a court may determine that the inclusion of sufficient cautionary statements in a prospectus renders [forward-looking] misrepresentations and omissions contained therein nonactionable." Trump, 7 F.3d at 364. The individual defendants claim that the cautionary statements contained in PEC's PPM do render the predictions PAG refers to in paragraphs 12(b)-12(e), 12(j) and 12(m) of its Complaint immaterial, and that consequently those statements may not serve as the basis for PAG's fraud claims.
If the statements referred to in paragraphs12(b)-12(e), 12(j) and 12(m) of the Complaint are all forward-looking predictions (and the court here need not decide that they are), and if they were the sole basis for PAG's fraud claims, those claims might fail because the cautionary statements in the PPM might render them immaterial under the "bespeaks caution" doctrine. But the court must read the statements referred to in paragraphs 12(b)-12(e), 12(j) and 12(m) of the Complaint in the context not only of the cautionary statements in the PPM but also of the affirmative misstatements of present and historical fact PAG alleges were contained in the PPM.
These latter statements, of course, cannot themselves be rendered immaterial by the "bespeaks caution" doctrine because that doctrine applies only to forward-looking statements. EP Medsystems, 235 F.3d at 874; Semerenko, 223 F.3d at 182.
For example, PEC allegedly represented in the PPM that it had "completed trials [of its oxygenated diesel fuel] with large fleet owners." PPM at 5; see also alleged misrepresentations described in paragraphs 12(f) and 12(g) of the Complaint. PAG claims these representations were simply not true. It seems likely that affirmative misstatements of historical fact would "infect" — or color the way a reasonable reader of the PPM would read — forward-looking statements and predictions about, for example, the commercial viability of PEC's oxygenated diesel. Given their presence in the PPM, the court cannot agree with the individual defendants that the cautionary statements in the PPM render the alleged misrepresentations it described in paragraphs 12(b)-(e), 12(j) and 12(m) of the Complaint immaterial as a matter of law.
B. Promises Representations in the Notes
The individual defendants next argue that PAG's § 10(b) and common law fraud claims should be dismissed to the extent they are based on the promises and representations PAG claims (in ¶ 21(a)-(c) of the Complaint) PEC made in the Notes because, the individual defendants claim, these promises and representations were not made in the Notes. The individual defendants invite the court to peruse copies of the Notes that it submitted to confirm this claim.
PAG conceded at oral argument on May 24, 2004 that the promises and representations do not appear in the Notes the individual defendants submitted. It claimed, however, that there was an additional document — a "Note Purchase Agreement" — signed on the same day the Notes were signed, which the individual defendants did not submit to the court, and which does contain the promises and representations. Neither party submitted a copy of this Note Purchase Agreement to the court after oral argument.
Given PAG's claim, the court must dismiss the individual defendants' argument; assessing that argument here clearly would require looking outside the pleadings in a manner that would be inappropriate in the context of a motion to dismiss. 2-12 MOORE'S FEDERAL PRACTICE § 12.34[2] ("In deciding whether to dismiss, the court may consider only the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings, and matters of which the judge may take judicial notice"). C. Particularity of Pleading
The individual defendants also ask the court to dismiss the Complaint to the extent it is grounded in the statement described in ¶ 12(l). In that paragraph, PAG alleged that PEC had claimed in the PPM that it "would receive $15 million in matching funds." The individual defendants claim that it is nowhere claimed in the PPM that PEC would receive $15 million in matching funds.
The court will not address this argument at this time because, for reasons explained in the next section of this Opinion, it is going to grant PAG leave to amend its Complaint. PAG is advised to consider the individual defendants' argument regarding ¶ 12(l) and, if it finds truth in that argument, to omit the information alleged in that paragraph when it drafts its Amended Complaint. If after consideration it believes the individual defendants' argument regarding ¶ 12(l) has no merit, it may include the information that paragraph contains in its Amended Complaint. The individual defendants may then raise their argument again, and the court will address it in due course.
Defendants argue finally that PAG's § 10(b) and common law fraud claims should be dismissed in their entirety because PAG has failed to plead them with sufficient particularity. Common law fraud claims are subject to the heightened pleading requirements of Rule 9(b). See, e.g., In re Cendant Corp. Securities Litigation, 190 F.R.D. 331, 334-36 (D.N.J. 1999). Section 10(b) claims are subject to heightened pleading requirements of both Rule 9(b) and the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4, et seq. ("Reform Act").In re Alpharma Securities Litigation Maverick Capital, Ltd., 372 F.3d 137, 148 (3d Cir. 2004).
Rule 9(b) states that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." However, plaintiffs may generally allege "[m]alice, intent, knowledge, and other condition of mind of a person." As applied to § 10(b) claims,
Rule 9(b) requires a plaintiff to plead (1) a specific false representation [or omission] of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage. Further, Rule 9(b) requires plaintiffs to identify the source of the allegedly fraudulent misrepresentation or omission. In sum, Rule 9(b) requires, at a minimum, that plaintiffs support their allegations of securities fraud with all of the essential factual background that would accompany the first paragraph of any newspaper story — that is, the "who, what, when, where and how" of the events at issue.Id. (quotations and citations omitted).
The Reform Act places additional burdens on plaintiffs attempting to plead fraud in securities cases. The Act requires a plaintiff alleging a Rule 10b-5 violation to,
specify each statement alleged to have been misleading [that" the defendant" made], the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
§ 78u-4(b)(1). In addition, the Reform Act requires that plaintiffs "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." § 78u-4(b)(2). If a plaintiff fails to meet the pleading requirements of the Reform Act, a court must dismiss her Complaint. § 78u-4(b)(3)(A).
"Importantly, to the extent that Rule 9(b)'s allowance of general pleading with respect to mental state conflicts with the [Reform Act's] requirement that plaintiffs `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,' 15 U.S.C. § 78u-4(b)(2), the [Reform Act] supersedes Rule 9(b) as it relates to Rule 10b-5 actions." In re Alpharma, 372 F.3d at 148.
The court is sensitive to the fact that the pleading particularity requirements of Rule 9(b) and the Reform Act may sometimes create a difficult situation for plaintiffs because the kind of information they require a complaint to include is not often easy to come by without discovery. This consideration appears to be less relevant here than in most cases, however, because of information that emerged in PEC's previous motion in this lawsuit (the motion for disqualification of the Wilentz firm) last winter: the President of PAG was the chair of PEC's Board of Directors for approximately a year (2000-2001), and was specifically aware of some of the things PAG now accuses PEC of concealing (e.g., that Mr. Ahmed had "engaged in a pattern of mismanagement"). The court notes this fact, but, because it does not appear in the Complaint, does not rely on it in arriving at its resolution of the current motion.
PAG has failed to plead its allegations against the individual defendants with sufficient particularity to satisfy either the standards of Rule 9(b) or the more stringent standards of the Reform Act. For example, though Rule 9(b) requires plaintiffs to "identify the source" of the misrepresentation, In re Alpharma, 372 F.3d at 148, and the Reform Act requires that the misleading statement be set forth as to "the defendant," PAG's Complaint does not attribute any of the allegedly fraudulent statements and omissions on which this case is based to the individual defendants. Instead, it refers to the source of those statements and omissions vaguely as "the PEC Defendants." See 2-9 MOORE'S FEDERAL PRACTICE § 9.03[1][f] (Matthew Bender 3d ed.) ("If a claim involves multiple defending parties, a claimant usually may not group all claimed wrongdoers together in a single set of allegations. Rather, the claimant must make specific and separate allegations against each defendant.").
See also 2-9 MOORE'S FEDERAL PRACTICE § 9.03[1][b] (Matthew Bender 3d ed.) ("the reference [in Rule 9(b)] to "`circumstances constituting fraud'" usually requires the claimant to allege at a minimum the identity of the person who made the fraudulent statement").
The Complaint does not even identify which individual defendants attended the meetings at which — or participated in the phone calls in which — the fraudulent statements and omissions were made, much less specify which of the individual defendants made those statements or omissions. As far as the oral misleading statements are concerned, then, PAG has failed to plead fraud with sufficient particularity to satisfy Rule 9(b) and the Reform Act. See, e.g., Klein v. General Nutrition Cos., Inc., 186 F.3d 338, 345 (3d Cir. 1999) (dismissing securities fraud claims against, inter alia, managers of a company because offending statement was unattributed: "The complaint fails to attribute the statement to any specific member of GNC management. FED. R. CIV. P. 9(b) requires, at a minimum, that the plaintiff identify the speaker of allegedly fraudulent statements").
In fact, the individual defendants are hardly even mentioned in the Complaint. Both Mr. Ahmed and the Dunlop brothers are "introduced" in the "Parties" section, and Mr. Ahmed's performance and alleged inability to get along with others is referenced as one of the things "the PEC Defendants" failed to disclose to PAG, but otherwise the individual defendants are never mentioned by name.
PAG also does not allege that the individual defendants were the source of the allegedly misleading statements that appear in the PPM and the Notes. As far as those statements are concerned, PAG could have argued (but, notably, did not argue) that it need not plead the individual defendants' personal responsibility because of the "group pleading doctrine." Under that doctrine,
identification of the individual sources of statements is unnecessary when the fraud allegations arise from the misstatements or omissions in group-published documents, such as annual reports, prospecuses, registration statements, press releases or other `group-published information' that presumably constitute the collective actions of those individuals involved in the day-to-day affairs of the corporation . . . In the typical scenario, the group pleading doctrine is used . . . to attribute group published information to senior executives of a corporate defendant.In re Aetna Securities Litigation, 34 F. Supp. 2d 935, 948 (E.D. Pa. 1999).
The Court of Appeals for the Ninth Circuit is commonly credited with innovating this doctrine in Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987).
It is unclear, however, whether the group pleading doctrine remains viable after the enactment of the Reform Act in 1995. That Act, as noted, specifically requires that the untrue statements or omissions be set forth with particularity as to "the defendant," and that scienter be pled with regard to "each act or omission" sufficient to "give rise to a strong inference that the defendant acted with the required state of mind." § 78u-4(b). There is strength to the argument that under this standard, it should not be possible for corporate officers to be held responsible for unattributed corporate statements solely on the basis of their titles.
Though the Court of Appeals has not yet addressed the question, district courts in this Circuit have for the most part declined to apply the group pleading doctrine since the enactment of the Reform Act. See, e.g., Jones v. Intelli-Check, Inc., 274 F. Supp. 2d 615, 646 (D.N.J. 2003) ("the application of the group pleading doctrine would circumvent the [Reform Act's] heightened pleading requirements"); P. Schoenfeld Asset Management, L.L.C. v. Cendant Corp., 142 F. Supp. 2d 589, 619-621 (D.N.J. 2001) ("[t]his court agrees with . . . other district courts' refusal to recognize the group published information doctrine after the passage of the [Reform Act]"); Marra v. Tel-Save Holdings, Inc., No. 98-3145, 1999 WL 317103, at *5 (E.D. Pa. May 19, 1999) ("the presumption inherent in group pleading is inconsistent with the [Reform Act's] purpose"); In re Home Health Corp. of Am., No. CIV. A. 98-834,1999 WL 79057, at *21 (E.D. Pa. Jan. 29, 1999) ("the group published information doctrine is inconsistent with the [Reform Act's] pleading requirements . . . specific allegations as to the actions and scienter of each defendant are necessary"). Further, the only court of appeals to speak definitively on the issue since the Reform Act was passed held that the group pleading doctrine did not survive the Reform Act. Southland Securities Corporation v. Inspire Insurance Solutions, Inc., 365 F.3d 353, 363-365 (5th Cir. 2004). See also 5A CHARLES ALAN WRIGHT ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1301.1 (3d ed. 2004) ("The PSLRA seems to have ended group pleading in securities fraud cases").
But see, e.g., In re U.S. Interactive, Inc., No. 01-CV-522, 2002 WL 1971252, at *4 (E.D. Pa. 2002) ("This court follows a narrowly construed group pleading doctrine and finds that it is valid when applied to officers where it is almost certain that given the high-level position of the officer within the company and the nature of the published writing that he or she would have been involved directly with writing the document or approving its content and that the officer was privy to information concerning the accuracy of the statements within the document").
Several courts of appeals have noted that the question exists, but declined to resolve it. See, e.g., Dunn v. Borta, 369 F.3d 421, 434 (4th Cir. 2004) and In re Cabletron Systems, Inc., 311 F.3d 11, 40 (1st Cir. 2002) (recognizing the potential inconsistency between pleading specificity requirements and the group pleading doctrine, but declining to decide whether that doctrine should be recognized or whether it survives the Reform Act).
Because by neglecting to attribute any of the fraudulent statements or omissions that form the basis of this lawsuit to the individual defendants, PAG failed to plead with sufficient particularity under both Rule 9(b) and the Reform Act, the court will dismiss PAG's § 10(b) and common law fraud claims without prejudice. PAG may file an amended complaint addressing this deficiency within 30 days of the date of this Opinion.
The individual defendants argue that PAG's Complaint should be dismissed with prejudice because PAG did not cross-move for leave to amend. Reply Brief at 2. No such cross-motion requirement exists.
The individual defendants claim PAG has failed to plead with sufficient particularity not only because it did not attribute any of the allegedly misleading statements in question to them, but also because (1) it did not sufficiently plead that the statements were misleading, or explain the reason or reasons why the statements were misleading, as they were required to under § 78u-4(b)(1), and (2) it did not allege facts sufficiently particular to satisfy the scienter pleading requirement of § 78u-4(b)(2). The court will not address these alternate grounds at this time. If PAG files an amended complaint that addresses the attribution defect identified in this Opinion but not the other potential problems defendants have raised, defendants may raise these arguments again. If PAG is unable in the Amended Complaint to cure the defect identified in this Opinion, the court will dismiss with prejudice, and it will be unnecessary for the defendants to raise these arguments, or for the court to address them.
CONCLUSION
For the foregoing reasons, the court will
(1) grant the individual defendants' motion to dismiss PAG's claim under § 12 of the 1933 Act, and dismiss that claim with prejudice;
(2) deny the individual defendants' motion to dismiss PAG's claim under § 10(b) of the 1934 Act and common law claims to the extent those claims are grounded in the alleged misrepresentations described in ¶¶ 12(b)-(e), 12(j), 12(m) and ¶ 21(a)-(c) of the Complaint;
(3) deny without prejudice the individual defendants' motion to dismiss PAG's § 10(b) and common law claims to the extent they are grounded in the statement described in ¶ 12(l) of the Complaint;
(4) grant the individual defendants' motion under Rule 9(b) and § 78u-4(b)(3)(A) of the Reform Act to dismiss PAG's § 10(b) and common law fraud claims for failure to plead with sufficient particularity, and dismiss those claims without prejudice;
(5) grant PAG 30 days to amend the Complaint to cure the defect identified in section II(C) of the Discussion section of this Opinion.