Opinion ID: 511708
Heading Depth: 2
Heading Rank: 1

Heading: The Director Defendants' Liability

Text: 21 With respect to actions alleged against a group that is in control of publishing information, 22 [i]n cases of corporate fraud where the false or misleading information is conveyed in prospectuses, registration statements, annual reports, press releases, or other group published information, it is reasonable to presume that these are the collective actions of the officers. Under such circumstances, a plaintiff fulfills the particularity requirement of Rule 9(b) by pleading the misrepresentations with particularity and where possible the roles of the individual defendants in the misrepresentations. 23 Wool v. Tandem Computers Inc., 818 F.2d 1433, 1440 (9th Cir.1987) (citations omitted). Although in Wool only officers were named as defendants, Wool 's presumption of collective action when there is misleading group published information is equally applicable to members of a board of directors in a corporate fraud action. 24 Blake's allegations of fraud describe issuance of false and misleading corporate reports, press releases, and offering circulars. The complaint provides, in nineteen separate paragraphs, the date of each of these publications, specific descriptions of the representations made, the reasons for their falsity, and, where possible, the role of the individual defendants in preparation and dissemination. This is sufficient to meet Rule 9(b) requirements. 25 The director defendants also argue that the complaint fails to allege the predicate acts of mail fraud with the requisite specificity because Blake has not alleged that any defendant devised the scheme to defraud or had specific intent to defraud. 26 In Sun Savings, we required each element of mail fraud to be pled with particularity: 27 To allege a violation of the mail fraud statute, plaintiff must show that (1) defendant devised a scheme or artifice to defraud, (2) defendant used the mails in furtherance of the scheme; and (3) defendant did so with the specific intent to deceive or defraud. 28 825 F.2d at 195. Paragraph seven of the complaint alleges: 29 The ... director defendants, because of their positions of control and authority as principal executive operating officers and directors of Sun, were able to and did, directly or indirectly control the contents of various annual and quarterly financial reports, public statements and press releases of Sun. These defendants had a duty to promptly disseminate accurate and truthful information with respect to Sun's business, operations, financial condition and management practices to Sun's shareholders including the plaintiffs, so they would have truthful and accurate information. The defendants participated in the alleged wrongdoing, in part, in order to continue and prolong the illusion of Sun's continued growth, to inflate the publicly reported assets and earnings of Sun and conceal the true extent and nature of its loan losses, dangerous financial practices and lack of controls, and to conceal the adverse facts concerning Sun's operations and loans so that they could (i) protect their executive and/or directorship positions and the substantial compensation and/or prestige they obtained thereby; (ii) obtain extra and or bonus compensation; and (iii) conceal and cover up their own prior misconduct and mismanagement of Sun and avoid being held responsible therefore. 30 Under Wool it is reasonable to presume that the corporate scheme to defraud was collectively devised by the director defendants. See Wool, 818 F.2d at 1440. Allegations of specific intent need not be made expressly. Sun Savings, 825 F.2d at 195. Intent is shown by examining the scheme itself. Id. at 196 (citations omitted). Blake has alleged the director defendants disseminated information to potential and existing Sun Savings stockholders that falsely portrayed Sun Savings' financial condition. Thus, the complaint adequately alleges that these defendants devised a scheme and intended to defraud. 31 Greenfield Liability. One of the members of Sun Savings' board of directors, Van Greenfield, asserts that the complaint fails to allege actions on his part sufficient to constitute a pattern of racketeering. According to the allegations of the complaint, Greenfield served as a Sun Savings director beginning in October 1984. Sometime after his appointment to the board, but before October 20, 1984, Greenfield told Blake's investment advisor, Robert Blake, that Sun Savings was an excellent investment opportunity and that the price of its stock would increase. When Greenfield made these statements, a partnership in which he was a partner, Greenfield Partners, had agreed in principle to invest $12 million in Sun Savings. After October 20, 1984, Sun Savings' true financial condition became publicly known. As a result, Greenfield's partnership did not invest in Sun Savings. All the allegedly false statements made by Sun Savings or its board of directors were made before Greenfield joined the board. 32 Because Greenfield did not join the board until October 1984, the Wool presumption that corporate statements result from collective action is inapplicable to him. See Wool, 818 F.2d at 1440. The complaint must allege individual actions by Greenfield sufficient to constitute a pattern of racketeering activity. 33 Two or more predicate acts are required to satisfy RICO's pattern requirement. Sun Savings, 825 F.2d at 193. The complaint alleges only one possible predicate act by Greenfield: his misstatement to Robert Blake that Sun Savings was a good investment. Thus, the complaint fails to state a RICO claim against Greenfield.