Opinion ID: 532765
Heading Depth: 1
Heading Rank: 5

Heading: Failure to Satisfy Fed.R.Civ.P. 9(b)

Text: 66 The district court dismissed Counts II and III, to the extent they incorporated Subparagraphs 49(q)-(t), 24 for failure to comply with the particularity requirement of Fed.R.Civ.P. 9(b). 25 In these subparagraphs, plaintiffs allege the failure to disclose that certain projections were made without a reasonable basis. 67 We need not decide the sufficiency of (q)-(t) with respect to Count III, the Sec. 12(2) claim. In Count III, plaintiffs allege that defendants sold securities by means of a registration statement and prospectus containing material misstatements and omissions. 26 According to plaintiffs, these documents were dated and effective March 5, 1986. The projections described in subparagraphs (q)-(t), however, were made in reports and press releases issued after March 5, 1986. 27 Thus, defendants could not have disclosed in the registration statement and the prospectus that the projections were made without a reasonable basis. Moreover, plaintiffs do not allege that the registration statement and prospectus were updated, or that defendants had a duty to amend the documents, nor are such allegations implicit in the Complaint. Therefore, we find that subparagraphs 49(q)-(t) cannot form the basis for plaintiffs' Sec. 12(2) claim. 28 68 In Count II, plaintiffs allege that defendants' misstatements and omissions violated Sec. 10(b) and Rule 10b-5. Fed.R.Civ.P. 9(b) requires plaintiffs to plead the circumstances of the alleged fraud with particularity to ensure that defendants are placed on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of fraud. Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). The first sentence of Rule 9(b) requires the identification of the elements of the fraud claim. Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir.1983) (citing C. Clark, Code Pleading Sec. 48, at 312 (2d ed. 1947)). Nonetheless, focusing exclusively on the particularity requirement is  'too narrow an approach and fails to take account of the general simplicity and flexibility contemplated by the rules.'  Id. at 100 (quoting C. Wright & A. Miller, 5 Federal Practice and Procedure Sec. 1298, at 407 (1969)); see also Seville, 742 F.2d at 791 (allegations of date, time, or place fulfill functions of Rule 9(b)). 69 Courts must be sensitive to the fact that application of Rule 9(b) prior to discovery may permit sophisticated defrauders to successfully conceal the details of their fraud. Christidis, 717 F.2d at 99-100. Particularly in cases of corporate fraud, plaintiffs cannot be expected to have personal knowledge of the details of corporate internal affairs. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987); C. Wright & A. Miller, Sec. 1298 at 416. Thus, courts have relaxed the rule when factual information is peculiarly within the defendant's knowledge or control. Moore v. Kayport Package Express, Inc., 885 F.2d 531, 540 (9th Cir.1989); Michaels Building Co. v. Ameritrust Co., 848 F.2d 674, 680 (6th Cir.1988); DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1248 (2d Cir.1987); see Saporito v. Combustion Engineering Inc., 843 F.2d 666, 675 (3d Cir.1988) (pleadings do not satisfy Rule 9(b); no reason to believe that additional information is in the exclusive control of defendant), vacated on other grounds, --- U.S. ----, 109 S.Ct. 1306, 103 L.Ed.2d 576 (1989). We agree that rigid enforcement in such circumstances could permit sophisticated defrauders to avoid liability. Nonetheless, even under a non-restrictive application of the rule, pleaders must allege that the necessary information lies within defendants' control, and their allegations must be accompanied by a statement of the facts upon which the allegations are based. See Moore, 885 F.2d at 540; MaDonna v. United States, 878 F.2d 62, 66 (2d Cir.1989); Stern v. Leucadia National Corp., 844 F.2d 997, 1003 (2d Cir.), cert. denied, --- U.S. ----, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988); DiVittorio, 822 F.2d at 1248; Wool, 818 F.2d at 1439; Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir.1986). 70 Subparagraphs 49(q)-(t) allege the failure to disclose that certain projections for Craftmatic's performance were made without reasonable basis. A projection that is issued without a reasonable basis is an untrue statement and actionable under Sec. 10(b) and Rule 10b-5 if made knowingly or recklessly. Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, 474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985). Plaintiffs allege that defendants knowingly or recklessly misrepresented and omitted material facts. In subparagraphs 49(q)-(t), plaintiffs provide defendants with notice of the dates, the speaker, and the actual projections at issue. Moreover, plaintiffs allege that there was no reasonable basis for the projections. Defendants contend that these allegations are insufficient because they fail to explain why there was no reasonable basis. 71 Under a flexible application of Rule 9(b), plaintiffs need not necessarily allege the specific information at defendants' disposal at the time the projections were made. However, plaintiffs must accompany their allegations with facts indicating why the charges against defendants are not baseless and why additional information lies exclusively within defendants' control. We recognize that the district court provided plaintiffs with an opportunity to amend the Complaint to provide greater specificity, Fed.R.Civ.P. 15, and that plaintiffs decided to stand on their pleadings. However, because this pleading requirement has not previously been set forth in detail in this circuit, we will reverse the dismissal of Count II to the extent it relies on subparagraphs 49(q)-(t), and remand so that plaintiffs may have another opportunity to amend their Complaint. Given our treatment of these subparagraphs, we need not decide whether they adequately state a claim under Sec. 10(b) and Rule 10b-5. 29