Opinion ID: 529364
Heading Depth: 2
Heading Rank: 2

Heading: Denial of Leave to File Third Amended Complaint

Text: 20 The third amended complaint which the investors sought to file in May 1984 realleged claims under section 12(2) against the accountant and lawyer defendants, and for the first time added a claim under section 12(2) against the stockbroker defendants. This proposed complaint also added claims under section 10(b) and rule 10b-5 and RICO against all defendants. Leave to file this complaint was denied in June 1984. The investors again sought leave to file an almost identical third amended complaint by motion filed July 13, 1987. Leave to file this proposed third amended complaint was denied by the district court by its order filed July 30, 1987. 21 Denial of leave to amend after a responsive pleading has been filed is reviewed for abuse of discretion, ... but such denial is 'strictly' reviewed in light of the strong policy permitting amendment. ThomasLazear v. Federal Bureau of Investigation, 851 F.2d 1202, 1206 (9th Cir.1988) (citations omitted). Federal Rule of Civil Procedure 15(a) provides that a trial court should grant leave to amend freely when justice so requires. 22 In deciding whether justice requires granting leave to amend, factors to be considered include the presence or absence of undue delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue prejudice to the opposing party and futility of the proposed amendment. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); DCD Programs, Ltd. v. Leighton, 833 F.2d 183, 186 (9th Cir.1987). Leave to amend need not be given if a complaint, as amended, is subject to dismissal. Pan-Islamic Trade Corp. v. Exxon Corp., 632 F.2d 539, 546 (5th Cir.1980), cert. denied, 454 U.S. 927, 102 S.Ct. 427, 70 L.Ed.2d 236 (1981).
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24 We have concluded that under the Pinter standard, the investors' section 12(2) claim against the accountant and lawyer defendants in the second amended complaint failed to state a claim. The section 12(2) claim against the accountant and lawyer defendants in the proposed third amended complaint was virtually identical to the previously dismissed section 12(2) claim. The investors had failed to cure the deficiency in the previously dismissed claim, and the district court did not err in denying leave to file the third amended complaint against the accountant and lawyer defendants by its order filed June 27, 1984, and by its order filed July 30, 1987. 25
26 As previously stated, the stockbrokers were not named as defendants in the investors' section 12(2) claim in the second amended complaint. It was in the proposed third amended complaint that the investors first attempted to state a section 12(2) claim against the stockbrokers. The investors alleged that the stockbroker defendants were associated with [Celani, Celani & Associates, Inc. (CCA) ], distributed sales promotion data which contained misrepresentations and omissions of fact as herein alleged, for CCA, sold units in the limited partnerships of [sic] some of the plaintiffs, recommended the CCA limited partnerships and were a substantial and motivating force in the sales to plaintiffs. 27 The stockbroker defendants argue that these allegations are insufficient to state a claim under section 12(2) because the investors do not allege that the stockbrokers solicited any sales. They rely on In re Activision Securities Litigation, 621 F.Supp. 415 (D.C.Cal.1985), in which the court granted a motion to dismiss section 12(2) claims against Morgan Stanley, one of the co-lead underwriters in a public offering. This reliance is misplaced. The district court in Activision Securities dismissed the section 12(2) claim against Morgan Stanley because the plaintiffs had not alleged that any of them had purchased securities from that firm and plaintiffs fail to allege that Morgan Stanley was a 'substantial factor' in the sale. Id. at 426. Significantly, the district court in Activision Securities refused to dismiss the plaintiffs' section 12(2) claims against any of the other underwriters, and held that a recovery could be made against underwriters who had sold securities to the plaintiffs, provided the other elements of the section 12(2) claims were established. Id. at 426. 28 In the present case, the charging paragraph of the investors' section 12(2) claim against the stockbrokers alleges that the stockbrokers sold units in the limited partnerships [to] some of the plaintiffs.... This allegation charges a violation of section 12(2) in the language of the statute as to some of the investors. See 15 U.S.C. Sec. 77l (2) (Any person who ... sells a security ... which includes an untrue statement of a material fact or omits a material fact ... shall be liable to the person purchasing such security from him....). With regard to the investors in general, it is alleged that the stockbrokers distributed sales promotion data, recommended the ... limited partnership[ ] interests and were a substantial and motivating force in the sales to them. While this is not a model form of pleading a section 12(2) claim, it satisfies the short and plain statement rule of Rule 8(a)(2) which provides that a pleading which sets forth a claim for relief shall contain a short and plain statement of the claim showing that the pleader is entitled to relief.... Cf. Harelson v. Miller Financial Corp., 854 F.2d 1141, 1142 (9th Cir.), cert. denied, --- U.S. ----, 109 S.Ct. 274, 102 L.Ed.2d 263 (1988) (salesman did not personally seek out customers but used a company brochure and presented the basic facts necessary to effectuate a sale; solicitation under section 12(2) found to exist). 29 We conclude that viewing the allegations against the stockbrokers in their totality, the investors stated a section 12(2) claim against them in the proposed third amended complaint. But this does not end our inquiry of whether the district court erred in denying leave to file the third amended complaint. 30 In its order denying leave to file the third amended complaint, the district court noted that undue delay, bad faith or dilatory motive were also factors to consider. But the district court did not base its ruling on any of these grounds. The stockbrokers argue that notwithstanding this omission, undue delay is demonstrated by the fact that the initial complaint was filed in September 1983, and the motion to file the third amended complaint was not filed until May 1984, a lapse of eight months. The stockbrokers urge that we affirm the district court because of this undue delay. 31 Based upon the record before us, we cannot make our own independent determination whether under the circumstances the delay was undue, or whether the motion to file the third amended complaint was made in bad faith or with a dilatory motive. These are matters which the district court should consider and decide in the first instance in the exercise of its discretion. It has not done so, and a remand to the district court for this purpose is appropriate. 6 32 In July 1987, the investors again sought leave to file a third amended complaint to set forth a section 12(2) claim against the stockbroker defendants. The district court denied this motion for the same reasons it had denied the earlier motion in June 1984, and because of the intervening three years of inactivity. As to the section 12(2) claim against the stockbroker defendants, however, neither the investors' attempt to reassert this claim in 1987, or the court's second rejection of it, alters our conclusion that the district court should not have rejected the section 12(2) claim on the basis that it was insufficiently pleaded. The three years of inactivity from 1984 to 1987 also has no effect on what we have concluded was the erroneous ruling by the district court in 1984.
33 The third amended complaint also introduced a section 10(b) and rule 10b-5 claim against all defendants. 7 In denying leave to file the proposed third amended complaint, the district court determined that these claims were subject to dismissal because the fraud alleged was not pleaded with the particularity required by rule 9(b). 34 Appellants assert they have met the requirements of rule 9(b) by pleading the misrepresentations, rather than the defendants' conduct, with particularity. Appellants further contend that because this case involves corporate fraud, allegations based on information and belief are satisfactory and fraudulent conduct need not be attributed to individual defendants. Finally, the appellants argue it would be substantially unfair to strictly apply the particularity requirement in this case because the matters pleaded are within the knowledge of the defendants and not known to the plaintiffs. 35 Rule 9(b), which applies to securities actions brought under section 10(b) and rule 10b-5, requires particularity in pleading the circumstances of the alleged fraud. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987) (citing Semegen v. Weidner, 780 F.2d 727, 734-35 (9th Cir.1985)). A pleading is sufficient under rule 9(b) if it identifies the circumstances constituting fraud so that a defendant can prepare an adequate answer from the allegations. Id. While statements of the time, place and nature of the alleged fraudulent activities are sufficient, mere conclusory allegations of fraud are insufficient. Id. 36 In the present case, the section 10(b) and rule 10b-5 claims in the investors' proposed third amended complaint do not allege the time, place or nature of the defendants' allegedly fraudulent conduct. The complaint bases its allegations on information and belief, and fails to attribute particular fraudulent statements or acts to the individual defendants. 37 We recently reviewed the particularity requirements in allegations of corporate fraud. Wool, 818 F.2d 1433. In Wool, plaintiffs who had purchased Tandem stock brought an action under, inter alia, section 10(b) and rule 10b-5. Their complaint alleged that defendants had fraudulently inflated the market price of Tandem securities before the plaintiffs' bought them. The defendants challenged the allegations because they were based on information and belief, and failed to specify the conduct of each individual defendant. Id. at 1439-40. 38 In Wool, we explained that allegations of fraud based on information and belief usually do not satisfy the particularity requirements under rule 9(b). Id. at 1439. However, the rule may be relaxed as to matters within the opposing party's knowledge. For example, in cases of corporate fraud, plaintiffs will not have personal knowledge of all of the underlying facts. Id. In such cases, the particularity requirement may be satisfied if the allegations are accompanied by a statement of the facts on which the belief is founded. Id. (citations omitted). Instances of corporate fraud may also make it difficult to attribute particular fraudulent conduct to each defendant as an individual. To overcome such difficulties in cases of corporate fraud, the allegations should include the misrepresentations themselves with particularity and, where possible, the roles of the individual defendants in the misrepresentations. See id. at 1440. 39 In the present case, the prospectuses are not specifically identified as to content, date or author. The complaint does not specify which plaintiff received which prospectus, or which plaintiff(s) made purchases through the stockbroker defendants, or which securities the investors allegedly purchased. The investors' allegations do not adequately state the facts on which their belief is founded, and thus fail to satisfy even the relaxed standard enunciated in Wool. See Blake v. Dierdorff, 856 F.2d 1365, 1369 (9th Cir.1988). Moreover, unlike the situation in Wool, the accountant, lawyer and stockbroker defendants in this case are not a narrowly defined group of corporate officers or directors who are alleged to have had day-to-day control over the fraudulent entities or their finances. See Wool, 818 F.2d at 1440. 40 We conclude that the district court did not err when, in June 1984, it denied leave to amend the complaint to add the section 10(b) and rule 10b-5 claims; these claims were not pleaded with sufficient specificity and were subject to dismissal. See Pan-Islamic Trade Corp., 632 F.2d at 546. We further conclude that the district court did not err when on July 30, 1987 it again denied leave to file the proposed third amended complaint, which complaint contained the same section 10(b) and rule 10b-5 claims. After three years, the investors had failed to cure the deficiencies of the earlier proposed pleading.
41 The investors' proposed third amended complaint alleges violations of 18 U.S.C. Sec. 1962(c) through a pattern of racketeering activity within the definition of 18 U.S.C. Secs. 1961(1)(A) and (D), and Sec. 1961(5). These allegations are directed at all defendants. Liability under 18 U.S.C. Sec. 1962(c) requires the conduct of an enterprise through a pattern of racketeering activity. Sun Savings and Loan Ass'n v. Dierdorff, 825 F.2d 187, 191 (9th Cir.1987) (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985)). Racketeering activity is any act indictable under several provisions of Title 18 of the United States Code, see 18 U.S.C. Sec. 1961. 42 The district court dismissed the investors' RICO claim in June 1984, solely on the ground that there was no allegation of a racketeering enterprise injury. The district court's reason for dismissal, failure to allege a racketeering enterprise injury, is no longer valid. In Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985), the Supreme Court expressly considered whether an allegation of a racketeering enterprise injury is necessary to sustain a RICO claim, and concluded [t]here is no room in the statutory language for an additional, amorphous 'racketeering injury' requirement. 473 U.S. at 495, 105 S.Ct. at 3284. The district court's dismissal of the RICO claim on the racketeering injury ground, however, does not dispose of the issue on appeal. We will affirm a district court's correct legal result, even if reached for an invalid reason. Bruce v. United States, 759 F.2d 755, 758 (9th Cir.1985); Alcaraz v. Block, 746 F.2d 593, 602 (9th Cir.1984). 43 We have applied the particularity requirements of rule 9(b) to RICO claims. Alan Neuman Prods., Inc. v. Albright, 862 F.2d 1388, 1392-93 (quoting Schreiber Distrib. v. Serv-Well Furniture Co., 806 F.2d 1393, 1400 (9th Cir.1986)). Rule 9(b) requires that the pleader state the time, place, and specific content of the false representations as well as the identities of the parties to the misrepresentation. Id. 862 F.2d at 1401. 44 The RICO claim in the investors' proposed third amended complaint does not attribute specific conduct to individual defendants. The claim also does not specify either the time or the place of the alleged wrongful conduct other than to say: Commencing on or about October, 1982, and through and including March, 1983, within the Central District of California, and elsewhere, the defendants, and each of them, devised, intended to devise and carried out, a scheme to defraud, .... This is not sufficient. Allegations of fraud under section 1962(c) must identify the time, place, and manner of each fraud plus the role of each defendant in each scheme. Schreiber Distrib., 806 F.2d at 1401 (quoting Lewis v. Sporck, 612 F.Supp. 1316, 1325 (N.D. Cal.1985)). 45 Our discussion of the deficiencies in the general allegations of the investors' section 10(b) and rule 10b-5 claim applies to the investors' RICO claim as well. Nearly all of the complaint's general RICO allegations refer to the conduct of Celani, Binder, and entities CCA and Kayport. These defendants are not parties in this appeal. The few general allegations of conduct which are apportioned to a particular defendant are aimed at the stockbroker defendants. These particular charges, however, fail to specify the time, place, and content of the alleged mail and securities fraud, the predicate acts on which the RICO claim is based. Furthermore, none of the RICO allegations identifies the role of the individual defendants in the alleged fraudulent scheme. 46 These deficiencies in the RICO allegations were the same in 1987 as they were in 1984, the two times the investors sought to add RICO claims to their complaint. The complaint which was proffered in 1984 was deficient as to the RICO claims and so was the complaint proffered in 1987. 47 We conclude that the district court did not err when, in June 1984, it denied leave to file the third amended complaint to set forth the RICO claims; these claims were defective, and would have been subject to dismissal. See Pan-Islamic Trade Corp., 632 F.2d at 546. We also conclude that the district court did not err when on July 30, 1987 it again denied leave to file the third amended complaint containing the RICO claims. Three years had passed, and the defects in the RICO claims had not been cured.