Court Opinion

ID: 6929266
Source: CourtListenerOpinion
Date Created: 2022-07-23 23:48:43.207628+00
Date Added: 2024-06-11T16:07:04.671035
License: Public Domain

TROTT, Circuit Judge,
dissenting.
I respectfully dissent, and I do so essentially because I believe our colleague on the district court had it right when he dismissed this complaint for failure to state a claim. I can do no better than repeat the essence of his analysis:
In order to survive a motion to dismiss, plaintiffs who allege securities fraud must plead facts which, if true, constitute fraud. Fed.R.Civ.Proc. 9(b). Plaintiffs are not required to assert facts pertaining to fraud that are “peculiarly within the opposing party’s knowledge,” but the requirements of Rule 9(b) are satisfied only if the allegations of fraud are accompanied by a statement of the facts upon which the fraud is founded. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir.1987) (citations omitted).
*932Furthermore, plaintiffs’ facts, and the inferences which reasonably can be drawn from them, must support a claim of fraud in the purchase or sale of securities. The federal securities laws do not proscribe all fraud which occurs in the business world. The fraud, alleged must “touch” upon securities transactions. S.E.C. v. Clark, 915 F.2d 439, 449 (9th Cir.1990).
Nothing in plaintiffs’ voluminous complaint states facts which support a coherent theory of securities fraud. Plaintiffs (sic) theory begins with heightened federal regulatory guidelines, issued in January, March and May of 1991, which suggested (but did not require) changes in the methods banks use to value nonaccrual loans and highly leveraged transactions. Plaintiffs then describe what they allege to be a three month long “scheme” by the defendants to misrepresent the Bank’s financial health through understated loan loss provisions for the first quarter of 1991. Despite a complaint of 59 pages, containing 134 paragraphs of allegations, plaintiffs’ counsel was unable to point to one paragraph or set of paragraphs which provide the facts necessary to infer fraud in the purchase of (sic) sale of securities.
Indeed, the facts in the complaint, which may suggest mismanagement on the part of the Bank, and might even suggest a violation of banking regulations, cannot be fairly read to raise an inference that the alleged misconduct' by the defendants touched upon a securities transaction. The fact that defendants increased loan loss reserves in the second quarter, and at all times relevant accurately reported the amount of actual reserves set aside by the bank, does not by itself allege securities fraud, notwithstanding conclusory statements of fraud in the complaint.
Judge Friendly, in adjudicating a securities fraud claim from an earlier period of financial reversals in the banking industry, characterized a complaint similar to the one filed in this matter as “an example of alleging fraud by hindsight.” Denny v. Barber, 576 F.2d 465, 470 (2d Cir.1978). Judge Friendly recognized the difficulties encountered by a small shareholder in framing a securities fraud complaint against a large corporation, and the consequent need to relax pleading requirements, but dismissed the complaint in Denny because “there still must be more than vague allegations that, as shown by subsequent developments, the corporation’s true financial picture was not so bright in some respects as its annual reports had painted and that the defendants knew, or were reckless in failing to know, this.” Id.
In the argot of today, a complaint should be dismissed if, read as a whole, it creates a strong impression that, on a report of bad news from the defendant, “plaintiffs’ counsel simply stepped to the nearest computer console, conducted a global Nexis search, pressed the ‘Print’ button, and filed the product as their complaint.” Hershfang v. Citicorp, 767 F.Supp. 1251 (S.D.N.Y.1991). Here, plaintiffs cite annual reports, quarterly reports, banking regulations and newspaper articles. They list customers of the Bank who are known today to be burdened with debt. But nowhere does the complaint link the facts stated to a coherent theory of securities fraud.
Fraud on the market is a problematic theory. Unless carefully managed by us, it threatens to wrack our economy. Anytime a stock price drops' significantly, will all prior rosy statements by management concerning the company’s financial condition and future business prospects become the basis for actionable fraud?
I note with great interest that the supposedly defrauded stockholders in this case state in their complaint that “the trading price of Wells Fargo’s common stock, upon disclosure [of the “fraud”] ... collapse[d] ... from over $97 per share to $74 per share.” I note with equally great interest that the trading price of this stock on the day of oral argument, May 10, 1993,. was $104.75. This is an interesting' kind of fraud where the value of the disputed stock before the case goes to trial exceeds its value before the alleged wrongdoing that caused it to “collapse.” I would suspect that on remand the district court will be confronted with an interesting motion for summary judgment.
*933When businesses complain about the costs heaped on them by a court system with no adequate controls, I believe they will be able to point to this litigation as an example.