Court Opinion

ID: 5637
Source: CourtListenerOpinion
Date Created: 2010-04-25 05:07:59+00
Date Added: 2024-06-11T13:30:20.814578
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UNITED STATES COURT OF APPEALS
                           FOR THE FIFTH CIRCUIT

                          _____________________

                               No. 92-2519
                          _____________________

                FELIX SHUSHANY, and SHEPARD BARTNOFF,

                                                     Plaintiffs-Appellants,

                                    VERSUS

                ALLWASTE, INC., and RAYMOND L. NELSON,

                                                      Defendants-Appellees.

      ____________________________________________________

             Appeal from the United States District Court
                  for the Southern District of Texas

      _____________________________________________________
                          (May 21, 1993)

Before WIENER, BARKSDALE, and DeMOSS, Circuit Judges.

BARKSDALE, Circuit Judge:

     In issue is the degree of particularity required by Fed. R.

Civ. P. 9(b) to plead fraud, especially securities fraud.               Felix

Shushany and Shepard Bartnoff appeal the dismissal with prejudice,

for failure to comply with the rule, of their consolidated action

against Allwaste, Inc., and Raymond L. Nelson.             We AFFIRM.

                                      I.

     Allwaste is a diversified environmental services company. One

of its subsidiaries, Allwaste Asbestos Abatement, Inc. (AAA),

provides asbestos abatement services.               Nelson was chairman of

Allwaste's    board.          (Allwaste    and    Nelson   are   referred    to

collectively as "Allwaste".)         The complaint alleges that from its

incorporation    in    1986    through    1990,    Allwaste   engaged   in   an
ambitious acquisition program, almost totally through stock for

stock transactions, and reported phenomenal growth and success,

including in its asbestos abatement division; that in December

1990, however, an Allwaste press release announced its decision "to

restructure its Asbestos Abatement Division to reduce costs and

return    the    division        to     profitability        pending      its   ultimate

disposition"; and that, following this adverse disclosure, Allwaste

common stock lost approximately 70 percent of its value.

     In   May    1991,   seeking           to    represent    a   class    of   Allwaste

shareholders, Shushany sued Allwaste under, inter alia, federal

securities      laws.       He        basically     alleged       that    Allwaste   had

fraudulently     maintained           in   its    public     financial     reports   and

releases the appearance of continued financial growth, when in

fact, its asbestos abatement division had been suffering since

early 1989. In its answer, Allwaste asserted, inter alia, that the

complaint failed to state fraud with particularity as required by

Rule 9(b).

     Additionally, Allwaste propounded contention interrogatories,

seeking the factual bases of Shushany's claims.                           In response,

Shushany essentially referred Allwaste to the complaint, without

providing any further detail.               Allwaste then moved to compel more

complete answers, again asserting that the complaint did not

satisfy Rule 9(b).       After two extensions of time to respond to the

motion, Shushany submitted amended responses to the interroga-

tories, which still lacked the specificity sought by Allwaste.

                                           - 2 -
      Because Shushany had not purchased Allwaste stock during the

purported class period, he moved to amend the complaint to extend

the period.     Prior to a ruling on that motion, however, Shushany's

counsel filed another action for a different plaintiff, Bartnoff,

stating the desired class period, and moved to consolidate the two

cases.        (The       plaintiffs        are     referred     to     collectively     as

"Shushany".)        Allwaste opposed both motions.

      At a hearing on the motions in December 1991, the asserted

Rule 9(b) deficiencies were discussed; and the court informed

Shushany's counsel: "in a case like this the defendant company is

entitled to know which of their documents you feel give you a claim

and what you feel are wrong with them, right up front".                       Shushany's

counsel responded: "we believe that we can do that, we believe that

we    can     get    out     the      specific           documents     that    we    think

misrepresentations          were     made,       [sic]    and   we   think    from   those

documents we can set out our complaint within the requisites of

9(b)".      With Allwaste's agreement, the court granted the motion to

consolidate, ordering the plaintiffs to "file their Consolidated

Amended Complaint in accordance with Federal Rule 9(b)".

      As Shushany concedes, the consolidated complaint, however, was

virtually      identical        to   the    prior    complaints.          Consequently,

Allwaste moved to dismiss for failure to comply with Rule 9(b).                         At

the   hearing       in    May    1992,       Shushany       referred     to   additional

information regarding the fraud, which he had supposedly provided

                                            - 3 -
in a second set of amended responses to interrogatories.1   Shushany

did not, however, request leave to amend the complaint to include

those details.     After extensive argument, the district court

stated: "I do not believe that the Plaintiffs have cured the

problem from their original complaint...."     And in its written

opinion, it stated that the consolidated complaint was "virtually

the same" as the prior complaint which "[the court] had previously

found to be insufficient".2   Accordingly, it dismissed the action

with prejudice.3

                                II.

     Shushany contends that the consolidated complaint complied

with the rule.4    A dismissal for failure to state fraud with

1
     To the contrary, our review of those amended responses reveals
that many of the details Shushany referred to at the hearing were
not contained in the responses.
2
     In light of the district court's prior discussions on the
asserted Rule 9(b) deficiencies, we are at a loss to understand
Shushany's characterization of the district court's holding as "a
judicial broadside". As discussed, the motion to consolidate was
agreed to by Allwaste and granted by the district court only upon
the understanding that Shushany would make good on his promise to
"set out [the] complaint within the requisites of 9(b)".
3
     As to the dismissal being with prejudice, see infra note 11.
4
     Shushany alternatively contends, as he did in district court,
that Allwaste waived any Rule 9(b) objection by filing an answer to
the original complaint and engaging in discovery. We agree with
the district court that this contention "borders on being
frivolous". From the time of its answer, which, as noted, included
a Rule 9(b) objection, Allwaste repeatedly and consistently
contended that the complaint failed to comply with the rule.
Contrary to Shushany's contention, it is not the law in this
circuit that "[t]he entire concept behind [Rule 9(b)]" is solely to
enable the defendant to prepare a responsive pleading. Further-
more, we see no reason to penalize a defendant who, rather than
initiating time-consuming and costly motions to dismiss a deficient
complaint, chooses to pursue the needed information through

                               - 4 -
particularity as required by Rule 9(b) is a dismissal on the

pleadings for failure to state a claim.           See Guidry v. Bank of

LaPlace ("Guidry II"), 954 F.2d 278, 281 (5th Cir. 1992); Fed. R.

Civ. P. 12(b)(6).     Accordingly, we review the dismissal de novo,

and in so doing, "accept the complaint's well-pleaded factual

allegations as true."        Id.

     The consolidated complaint had four claims: (1) against both

defendants for violations of § 10(b) of the Securities and Exchange

Act of 1934, 15 U.S.C. § 78(j)(b), and Rule 10b-5 promulgated

thereunder,   17    C.F.R.     240.10b-5;   (2)   against   Nelson,   as   a

"controlling person" of Allwaste, for violations of § 20(a) of the

discovery. It was only after this avenue of pursuit failed that
Allwaste moved to dismiss.

     Moreover, at the first hearing (December 1991) on the Rule
9(b) deficiencies, Shushany's counsel took a quite opposite
position to the present assertion of waiver. When the court asked,
"[h]ave you any serious complaint about the interrogatories
[defendants] propounded that go to that [Rule 9(b)] area?", counsel
stated:

               No, your Honor, our only objection is that we
          thought the complaint in itself was good enough to
          begin with, however, we can respond to the
          interrogatories as best we can, and if things don't
          work out they can file their ... 9(b) motion, which
          we have never seen before. It's always been this
          threat that's been hanging out there in the wings
          against us, but we've never seen it, we don't
          particularly know what they're talking about.

(Emphasis added.)

     And, finally, the Rule 9(b) motion addressed the consolidated
complaint, as to which no answer or discovery had been filed.

                                    - 5 -
Act, 15 U.S.C. § 78t(a); and against both defendants for (3) fraud

and deceit and (4) negligent misrepresentation.5

     The    elements       of    a     securities    fraud   claim    are    "(1)   a

misstatement or an omission (2) of material fact (3) made with

scienter (4) on which the plaintiff relied (5) that proximately

caused his injury".         Cyrak v. Lemon, 919 F.2d 320, 325 (5th Cir.

1990).     A fact is considered material if "there is a substantial

likelihood    that     a    reasonable        shareholder    would    consider      it

important ...".      TSC Industries, Inc. v. Northway, Inc., 426 U.S.
438, 449 (1976); see also Krim v. BancTexas Group, Inc., No. 92-

1208, slip op. at 4137 (5th Cir. May 12, 1993).                  Scienter is the

intent to deceive, manipulate, or defraud.                     Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 193-94 (1976).                The scienter element is

satisfied     by   proof        that    the     defendant    acted    with   severe

recklessness,      which    is       "limited   to   those   highly   unreasonable

omissions or misrepresentations that involve not merely simple or

even inexcusable negligence, but an extreme departure from the

standards of ordinary care, and that present a danger of misleading

buyers or sellers which is either known to the defendant or is so

obvious that the defendant must have been aware of it". Broad v.

5
     We assume that the same Rule 9(b) concerns apply to the common
law fraud claims as to the securities fraud claims. The complaint
relies on the same allegations for them. In any event, Shushany
made no attempt to distinguish the claims in his brief. See Fed.
R. App. P. 28(a)(5); Zeno v. Great Atlantic & Pacific Tea Co., 803
F.2d 178, 180-81 (5th Cir. 1986) (issues not briefed are waived).

     Likewise, because Shushany does not contest in his appellate
brief the district court's dismissal of his negligent mis-
representation claim, we do not address it.

                                          - 6 -
Rockwell Int'l Corp., 642 F.2d 929, 961-62 (5th Cir.) (en banc),

cert. denied, 454 U.S. 965 (1981).

       Rule 9(b) provides: "In all averments of fraud or mistake, the

circumstances constituting fraud or mistake shall be stated with

particularity".         Thus, allegations of fraud must meet a higher, or

more strict, standard than the basic notice pleading required by

Rule 8.        This standard "stems from the obvious concerns that

general, unsubstantiated charges of fraud can do damage to a

defendant's       reputation".           Guidry       II, 954 F.2d     at       288.

Additionally, Rule 9(b) is designed "to preclude litigants from

filing baseless complaints and then attempting to discover unknown

wrongs".       Guidry v. Bank of LaPlace ("Guidry I"), 740 F. Supp.
1208, 1216 (E.D. La. 1990), aff'd as modified, 954 F.2d 278 (5th

Cir.   1992);     see    also     O'Brien      v.    National   Property    Analysts

Partners, 936 F.2d 674, 676 (2d Cir. 1991) (recognizing threefold

purpose of Rule 9(b) for securities fraud claims -- to provide

defendant with fair notice of claim, to safeguard defendant's

reputation, and to protect defendant against the institution of

strike suits).

       "At    a   minimum,       Rule   9(b)     requires     allegations       of   the

particulars       of     time,     place,      and     contents    of     the     false

representations, as well as the identity of the person making the

misrepresentation        and     what   he   obtained       thereby".     Tel-Phonic

Services, Inc. v. TBS Int'l, Inc., 975 F.2d 1134, 1139 (5th Cir.

1992).       "What constitutes `particularity' will necessarily differ

with the facts of each case and hence the Fifth Circuit has never

                                         - 7 -
articulated the requirements of Rule 9(b) in great detail". Guidry

II, 954 F.2d at 288.

     Shushany      alleged         three    types    of       fraudulent    statements

contained in various Allwaste public documents and reports:6 (1)

that employees of various AAA divisions were instructed to engage

in   improper      accounting         practices,         which     resulted     in    an

overstatement      of    earnings     and    income      in    Allwaste's     financial

reports;     (2)     that      statements        about    increasing       demand    and

opportunities for growth in the asbestos abatement industry were

false; and     (3)      that   a    statement      regarding     the    integrity    and

business ethics of Allwaste employees was false.                       We address each

category separately.

                                            A.

     For the period November 22, 1989, through December 21, 1990,

Shushany alleged that "[i]n the face of the worsening business

environment for the asbestos abatement market", Allwaste "embarked

on a plan and scheme to have Allwaste report inflated revenues and

earnings".    As examples, Shushany alleged the following:

                (a) By no later than the Winter of 1989, the
           Defendants or Defendants' agents began a course and
           scheme designed to defraud investors by instructing
           employees to make arbitrary adjustments for the
           accounting of inventory of the asbestos operations
           in Houston, Texas;

                (b) In January of 1990, the Defendants, or
           Defendants' agents, instructed employees, including
           Don   Higginbotham,   an  employee   of   Defendant
           Allwaste, to increase bad debt reserves rather

6
     Shushany cited various statements from the Allwaste 1989 Form
10-K; its first, second, and third quarter 1990 Forms 10-Q; and an
October 30, 1990, press release by Nelson.

                                           - 8 -
          than, as required, writing off certain accounts
          receivable;

                (c) In the Spring of 1990, the Defendants'
          agents instructed Mr. Higginbotham to arbitrarily
          realize an additional $650,000 on one of Allwaste's
          largest asbestos contracts for the third quarter of
          1990;

               (d) Defendants or Defendants' agents were
          instructing employees in other Allwaste divisions
          to make arbitrary increases to inflate income
          during at least the Spring of 1990; and

               (e) In the Spring of 1990, the Defendants or
          Defendants' agents, instructed their employees to
          conceal the securities fraud committed by Allwaste
          from the shareholders of Allwaste.

The complaint then cites particular statements from Allwaste's

financial reports, and alleges variously that they were "materially

false and misleading as such amounts were improperly inflated",

were "made without a reasonable basis", and were "inaccurate" due

to the fraudulent accounting procedures.

     But, the complaint did not identify who in particular was

instructing   the    employees   to   make    the   arbitrary    accounting

adjustments, what particular adjustments were made,7 how those

adjustments   were   improper    in   terms   of    reasonable   accounting

practices,8 how those adjustments were incorporated into Allwaste's

7
     Cf. Decker v. Massey-Ferguson, 681 F.2d 111, 117 (2d Cir.
1982) (allegations of two instances of a debt placement and a
financing arranged in the "fall of 1977" were insufficient
allegations of the time and place of the fraud); Recchion v.
Westinghouse Elec. Corp., 606 F. Supp. 889, 895 (W.D. Pa. 1985)
(allegations that defendant misstated value of various facilities,
which in turn affected defendant's financial statements, were
insufficient in part because complaint failed to state which
facilities were involved).
8
     In fact, surprisingly, the consolidated complaint deleted the
general references to generally accepted accounting principles

                                  - 9 -
financial    statements,    and    if    incorporated,    whether     those

adjustments were material in light of Allwaste's overall financial

position.9     Although    we   need    not   identify   which   of   these

(GAAP) that had been in the prior complaints, replacing allegations
that the defendants violated GAAP with allegations that the facts
reported "were [not] in fact true" and were "inaccurately
reported". Cf. Christidis v. First Pennsylvania Mortg. Trust, 717
F.2d 96, 99 (3d Cir. 1983) (complaint insufficient in absence of
allegation of manner in which defendant's accounting method
departed from reasonable accounting practices and procedures); In
Re Frank B. Hall & Co., Inc., 693 F. Supp. 1460, 1465-66 (S.D.N.Y.
1988) (allegation that accountant arbitrarily valued company $10
million under GAAP, with citation to specific accounting rules
violated, was sufficient); Fox v. Equimark Corp., 782 F. Supp. 295,
301 (W.D. Pa. 1991) (allegations that defendant failed to increase
loan loss reserves when substantial losses were virtually certain
were insufficient, in part because complaint failed to specify
manner in which reserves were improperly established).
9
     At oral argument in both the district court and our court,
Shushany argued only that the adjustments must have been material,
or Allwaste would not have made, and attempted to conceal, them.
Obviously, any such inference does not satisfy Rule 9(b)
particularity requirements.    Cf. Decker v. Massey-Ferguson, 681
F.2d at 116 (where complaint alleged failure to record value of
certain assets but did not even approximate figures involved, it
failed to demonstrate materiality in light of the overall figures
of the company); Wool v. Tandem Computers, Inc., 818 F.2d 1433,
1440 (9th Cir. 1987) (complaint sufficient where each alleged
misstatement was identified by content, date, and document or
announcement, and complaint stated exact dollar amount of each
alleged overstatement); In Re AM International, Inc., Securities
Litigation, 597 F. Supp. 1117, 1119 & n.3 (S.D.N.Y. 1984)
(allegations that defendant placed intense pressure on accounting
management to overstate income and assets and to withhold adverse
accounting information "prior to 1980" in a "material amount not
yet calculated, but in excess of $5 million" were insufficient with
respect to the 1978 financial reports in part because no factual
basis was provided for the $5 million figure); Recchion v.
Westinghouse Elec. Corp., 606 F. Supp. 889, 895 (W.D. Pa. 1985)
(allegations that defendant misstated production costs for various
facilities,   which   in  turn    affected   defendant's   financial
statements, were insufficient in part because complaint failed to
state extent of the misstatements); In Re Wyse Technology
Securities   Litigation,   1990 WL 169149  (N.D.   Cal.   1990)
(unpublished) (allegations that improper accounting procedures with
respect to sales and income affected defendant's public financial
statements   insufficient   where    complaint   failed  to   allege

                                  - 10 -
deficiencies,       standing   alone,    might    render    the   complaint

insufficient under Rule 9(b), we hold that altogether, they do.

     Shushany contends that the facts sought lie particularly

within Allwaste's knowledge, and therefore, he is excused from

pleading    them,   citing,    inter   alia,   Michaels    Building    Co.    v.

Ameritrust Co., N.A., 848 F.2d 674, 680 (6th Cir. 1988); Craftmatic

Securities Litigation v. Kraftsow, 890 F.2d 628, 645 (3d Cir.

1989); and Christidis v. First Pennsylvania Mortgage Trust, 717
F.2d 96, 100 (3d Cir. 1983).       Shushany demonstrated at the motion

to dismiss hearing, however, that he had ample access to at least

some of the information sought, through a "whistleblower" AAA

employee,    the    earlier-referenced      Don   Higginbotham,       who    was

assertedly represented by Shushany's counsel in a separate action

against Allwaste.10

     As noted, Shushany referred at the hearing to a second set of

amended responses to interrogatories, which purportedly provided

additional facts gleaned from Higginbotham's testimony in the other

case.   These included an alleged dispute between Nelson and a Mr.

Stewart over the acquisition of American Environmental, the names

of three individuals who allegedly directed the accounting fraud,

and the date of one such incident.        Shushany also represented that

"the securities fraud was directed to be concealed by at least

Wayne Rachlin[, who] directed Don Higginbotham and Olga Guerra to

approximate amount involved to establish materiality).
10
     The attorneys made several references to the Higginbotham
action in arguments to the district court, but no evidence of it
appears in the record.

                                   - 11 -
revise    schedules     to   direct   the   auditors'    attention   from   the

arbitrary increases to income ... [and] required Mr. Higginbotham

and Ms. Guerra to practice false responses to potential questions

concerning the increases to income".             Shushany further represented

to the district court that Higginbotham "will testify that ... he

believes that the same activities were going on not just in Houston

but also at the Argon Asbestos Abatement Division and also in

Birmingham ...".        Shushany's counsel then stopped, stating, "I'm

not going to bore the Court by going through all [the] responses".

     Although, as also noted, much of this information was not

contained in the amended responses, Shushany demonstrated a greater

knowledge of the factual basis for the fraud claims than appears in

the complaint, yet no effort was made to amend it to include these

details, in spite of the district court's prior admonition and

Allwaste's repeated Rule 9(b) objections.11             Allwaste responded in

part to Shushany's argument by stating, "it's fine to say Mr.

Higginbotham told us this and told us that.            In that case, then why

don't    they   share   that   with    us   in   an   amended   complaint   that

specifies what it is".         Indeed, as Allwaste states in its brief,

11
     This notwithstanding, Shushany complains several times in his
appellate briefs -- but does not raise as an issue -- that the
district court dismissed without granting leave to amend.
Additionally, in his reply brief, he states, "[t]o the extent that
Plaintiffs have not so requested Plaintiffs request leave to amend
to address any 9(b) complaint". This untimely request is totally
lacking in merit.

     Furthermore, Shushany does not contend that the dismissal
should have been without prejudice. Thus, he has waived any error
in that regard.

                                      - 12 -
"[i]f there was a claim to be made, few 10b-5 plaintiffs have had

more information with which to make it".12

     We    find   the   deficiencies    in    the     complaint   particularly

troubling because the alleged fraudulent acts occurred at AAA, an

Allwaste     subsidiary.13         Although     it    is   foreseeable      that

misstatements in AAA's ledgers could materially skew the accuracy

of Allwaste's financial reports, such an inference standing alone

is obviously insufficient to support a securities fraud claim

against    Allwaste     and   Nelson.     The       complaint   provides    only

conclusory    allegations     to   support    any    connection   between   the

alleged fraudulent accounting practices at AAA and Allwaste's

financial reports, which do not satisfy the requirements of Rule

9(b).

     In sum, Shushany failed to state his allegations regarding

accounting fraud with sufficient particularity to comply with Rule

9(b).     As stated, and because this court has recognized that the

degree of particularity required differs with the facts of each

12
     Shushany may have been under the impression that because the
same counsel supposedly defended Allwaste in the Higginbotham
action, Allwaste was presumed to have knowledge of Higginbotham's
testimony. Our review, however, as well as the district court's,
is limited to the record established in this case. Therefore, even
if this case turned on Allwaste's actual knowledge, we could not
take note of information not contained in the record.
13
     Although Allwaste contends that Higginbotham's employer, AAA
of Houston, was actually a subsidiary of AAA, which would further
attenuate any link between the alleged accounting fraud and
Allwaste's financial reports, we do not find that fact in the
record, and Allwaste provides no record cite to it. See Fed. R.
App. P. 28(a)(4) (the statement of the facts shall contain
"appropriate references to the record").

                                    - 13 -
case, see Guidry II, 954 F.2d at 288, we base our holding on the

entirety of the complaint rather than on any single defect.

                                    B.

     Shushany's allegations about Allwaste's misrepresentations

concerning the demand and opportunity for growth in the asbestos

abatement    industry   likewise    lack    sufficient    particularity.

Specifically, Shushany quoted the following statements from the

various Allwaste financial reports listed supra, note 6:

                 1.   "Management of the Company believes that
            there is a substantial opportunity for growth in
            the asbestos abatement business due to the rapidly
            increasing demand for these services". (1989 Form
            10-K).

                 2.   "Revenues increased at all of the
            Company's asbestos abatement operating locations".
            (First quarter 1990 Form 10-Q).

                 3.   "Demand for these [asbestos abatement]
            services has continued to increase as the Company
            has steadily expanded its work force between the
            periods, particularly in the Pacific Northwest and
            in Houston, Texas". (Second quarter 1990 Form 10-
            Q).

                 4.   "Demand for these [asbestos abatement]
            services has continued to increase, particularly in
            Houston, Texas and along the West Coast". (Third
            quarter 1990 Form 10-Q).

                 5.   "Our abatement backlog remains high [in
            spite of a decline in fourth quarter results]".
            (October 30, 1990, press release).

Shushany    variously   alleged    that    these   representations   were

fraudulent because they were based on the alleged inaccurately

reported financial figures.14

14
     Shushany alleged that the various statements "were materially
false and misleading as they included earnings and sales for the
asbestos abatement business of Allwaste which were improperly

                                  - 14 -
     Statements that are predictive in nature are actionable only

if they were false when made.        Isquith v. Middle South Utilities,

Inc., 847 F.2d 186, 203 (5th Cir. 1988), cert. denied, 488 U.S. 926

(1988). Furthermore, "projections of future performance not worded

as guarantees are generally not actionable under the federal

securities laws".      Krim, slip op. at 4138.    To the extent that the

falsity   of   these   statements    depends   upon   Shushany's   general

allegations about the "worsening business environment for the

asbestos abatement market", no facts were pleaded to support them.

Nor does Shushany's comparison of Allwaste stock prices before and

after the alleged events support an inference of fraud.            As the

Seventh Circuit has explained:

           At one time the firm bathes itself in a favorable
           light. Later the firm discloses that things are
           less rosy.     The plaintiff contends that the
           difference must be attributable to fraud.   "Must
           be" is the critical phrase, for the complaint
           offers no information other than the differences

inflated, and were made without a reasonable basis"; "were
materially false and misleading because, Allwaste and defendant
Nelson were aware or were reckless in knowing that due to decreased
margins on sales and revenues, the asbestos abatement division was
suffering financially"; "[were] false and misleading because
Allwaste and defendant Nelson were aware that Allwaste was
fraudulently instructing its employees to increase bad debt
reserves, rather than as required writing off certain accounts
receivable, and the financial figures it was reporting were,
therefore, inaccurate"; "[were] false and materially misstated both
the revenues for the Company and the prospects for future revenues
in that Allwaste and Defendant Nelson were aware that Allwaste was
improperly inflating its earnings and was experiencing significant
objections from its employees regarding the manner in which
Allwaste was recognizing income in its asbestos abatement
division"; and "were false and misleading because Allwaste and
Defendant Nelson were fraudulently instructing its employees to
increase its bad debt reserve, rather than making required write
offs, and to make arbitrary increases to inflate the income
recognized by Allwaste".

                                    - 15 -
             between   the  two  statements   of   the  firm's
             condition.... Investors must point to some facts
             suggesting that the difference is attributable to
             fraud.

DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990), cert.

denied, 498 U.S. 941 (1990).              As noted, the only allegations

suggesting that the statements were false when made are those

concerning the accounting fraud at AAA. Because we have determined

that   the   accounting    fraud   allegations     were   not   pleaded   with

sufficient particularity, these allegations, which depend upon

them, also must fail.

                                       C.

       Finally, regarding the business ethics of Allwaste employees,

Shushany cited the following statement from the annual report

attached to Allwaste's 1989 Form 10-K:           "These men and women share

the same fundamental principles upon which your company was founded

-- integrity, hard work, business ethics and fervent commitment to

the    highest   level    of   customer     service".     Again,   Shushany's

characterization of this statement as fraudulent depends solely on

the allegations regarding the "unscrupulous and unethical business

practices by the Company", i.e., the alleged accounting fraud. For

the reasons explained above, these allegations also fail to satisfy

Rule 9(b).

                                      III.

       Accordingly, the dismissal with prejudice for failure to

comply with Rule 9(b) is

                         AFFIRMED.

                                     - 16 -