Opposition Brief — UJB Financial Corp. v. Shapiro

Eras Cour, US.

RILED

No. 92-267 a

1 SEP 3 1 4992

{

sting | weet OF THE ies

Supreme Court of the United States

October Term, 1992

.

UJB FINANCIAL CORP,, et al.,

Petitioners,

V.

IRWIN SHAPIRO, ROBERT BASSMAN,

JEROME KATZ, NORMAN SALTSITZ, JEAN LEE, and

CHAPPAQUA FAMILY TRUST,

Respondents.

+

Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

S

RESPONDENTS’ BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

s

KENNETH A. JACOBSEN*

Lisa J. RopriGuEz

IRA Neit RicHARDS

GREENFIELD & CHIMICLES

One Haverford Centre

361 West Lancaster Avenue

Haverford, PA 19041-0100

(215) 642-8500

Attorneys for Respondents

Bassman, Katz, Saltsitz,

Lee, and Chappaqua

Family Trust

*Counsel of Record

September 11, 1992

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

Se a ey Oe ee sf

ho

QUESTIONS PRESENTED FOR FEVIEW

Do the factual allegations of the complaint allege

fraud with sufficient particularity as required by Rule

9(b) of the Federal Rules of Civil Procedure?

Do officers and directors of a corporation have a duty

under the federal securities laws to speak truthfully

when making material representations concerning the

corporation’s internal affairs?

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED FOR REVIEW ........... i

TABLE OF AUTHORITIES... is45.snesten eee iii

STATEMENT OF THE CASE. «55550553 s yee eeeeaees 2

REASONS WHY THE PETITION SHOULD BE

DENIED oo i.i. code b.0-00ats eee 5

1. THE THIRD CIRCUIT’S HOLDING CONCERN-

ING RULE 9(b) DOES NOT CREATE A CON-

FLICT AMONG THE CIRCUITS, WITHIN THE

THIRD CIRCUIT, OR CONFUSION AMONG

THE DISTRICT CORREO. 1 ic05esk ent eee 6

a. The Third Circuit Did Not Deviate From Exis-

ting Interpretations of Rule 9(b)............ 7

b. There is No Intra-Circuit Conflict That

Requires Resoution. ...6601.25.200e0ereeens a: oe

c. The Circuits Are Uniform in Considering

Whether Facts Are in the Exclusive Posses-

sion of an Adverse Party in Applying Rule

) rrr oh en 11

d. Rule 9(b) Decisions Involve Assessments of

individual Complaints . .22..4. 35 2Gu 19

e. Whether the Complaint’s Allegations Satisfy

Rule 9(b)’s Particularity Requirement Does

Not Warrant This Court’s Attention ........ 21

f. The Third Circuit’s Decision Furthers Rule

Wb)'s Poticie’ ..5 ci hae ee eee 22

2. THE THIRD CIRCUIT’S STATEMENT ON MATE-

RIALITY IS CONSISTENT WITH THIS COURT’S

DEC TS ALIING 6 6 os ac.0 5 00 0 cdlaeaeser ag eee ee 23

COSNCLAIS AS aed ees 1 46k SO ee a 26

ee

ill

TABLE OF AUTHORITIES

Page

CASES

Banowitz v. State Exchange Bank, 600 F. Supp. 1466

eS owen oh eds ca auibaseacac 19

Basic Inc. v. Levinson, 485 U.S. 224 (1988)..... <3, 423, 20

~ on behalf of McDonnell Douglas v. Danforth, 742

F. Supp. 1043 (E.D. Mo. 1990) ................00.. 18

Chambers Development Co. v. Browning-Ferris Indus.,

590 F. Supp. 1528 (W.D. Pa. 1984) Peet eure e re mea ey 8

Christidis v. First Pennsylvania Mortgage Trust, 717

Pam 96 (30 Cir. 1983).................... 5, 9, 20, 23

Davis v. United States, 417 U.S. 333 (1974)........... 11

Decker v. Landmark Savings Assoc., No. 91-3776, slip

Op. (5d Cir. May 20, 1992).................. 9, 10, 11

Denny v. Barber, 576 F.2d 465

rr 12, 14, 15, 20

Denny v. Carey, 72 F.R.D. 574 (E.D. Pa. 1976)......... 8

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

denied, 111 S. Ct. 347 (5) 11, 15, 16, 17, 20

DiVittorio v. Equidyne Extractive Indus., Inc., 822

a Ob) 12

Duane v. Altenburg, 297 F.2d 515 (7th Cir. 1962) ...4, 17

Eaby v. Richmond, 561 F. Supp. 131 (E.D. Pa. 1983) ..... 8 >

F.D.I.C. v. Kerr, 637 F. Supp. 828 (W.D.N.C. 1986) .... 19

Fairmont Homes, Inc. v. Shred Pax Corp., 754 F.

mum. Geo (4.0). Ind. 1990) ...............0.00055. 19

TABLE OF AUTHORITIES - Continued

Page

Fox v. Equimark Corp., 782 F. Supp. 295 (W.D. Pa.

| ee Eee orn eae cad ea ee ee eae ee 20

Greenfield v. Professional Care, Inc., 677 F. Supp. 110

Een a: See rere een Cer eee re 16

In re Craftmatic Sec. Litig., 890 F.2d 628 (3d Cir.

oo | Seen ere ene ae bre en ae gee etree 4, 8, 9, 11, 20

In re Frank B. Hall & Co., Inc., 693 F. Supp. 1460

ew Ms es a ee ches ke Pan ee ae Cet 16

In re VMS Sec. Litig., 752 F. Supp. 1373 (N.D. Ul.

| , See RARE ee PIAS G RS. My te ya tig eS 19

Koch v. Koch Industries, No. 85-1636-C, U.S. Dist.

LEXIS 10952 (DO. Kan. june 30, 1992). ........5..5. 19

Kowal v. MCI Communications Corp., No. 90-2862

JGP, U.S. Dist. LEXIS 7437 (D.D.C. May 19,

eG eee Aa ee ee 18

Layne & Bowler Corp. v. Western Well Works, Inc.,

BOR a Oe CRTEES oh a hac ea Vi aS aes 21

Michaels Building Co. v. AmeriTrust Co., N.A., 848

Pe Gre Ge Ge. TO kek cco tis veer sek eanaen 18, 23

New England Data Services, Inc. v. Becher, 829 F.2d

Be THe Go ee ice vs oh a re eee eens 13

Nicholas v. Poughkeepsie Savings Bank/FSB,

[1990-1991 Transfer Binder] Fed. Sec. L. Rep.

CCA Re SD See CON. FF nw ke cece cae eee ns 14, 15

Ouaknine v. MacFarlane, 897 F.2d 75 (2d Cir. 1990) .... 13

Rice v. Sioux City Memorial Park Cemetery, Inc., 349

tee 0h. . | er rrr re cee, are ae hs 21

TABLE OF AUTHORITIES — Continued

Page

Robbins v. Moore Medical Corp., 788 F. Supp. 179

PAGES. SPOR o5.5 Seen er tele 15, 21

Romani v. Shearson Lehman Hutton, 929 F.2d 875

te ere ee eee eee key $1,: 22,-43

Scheidt v. Klein, 956 F.2d 963 (10th Cir. 1992)........ 17

Seattle-First National Bank v. Carlstedt, 800 F.2d

imme (ROR Coe. B9GG). occ evens wis beeactesscuaun 19

Segal v. Gordon, 467 F.2d 60? (2d Cir. 1972).......... 14

Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir.

UWS s ecars DR isa ave KASSEN a EEO Re ee ee 3

Steiner v. Southmark Corp., 734 F. Supp. 269 (N.D.

FOR ROOD 55 65 5p on ds oak ee ee 19

Sweeney Co. of Maryland v. Engineers-Constructors,

inc., 109 F.R.D. 358 (E.D. Va. 1986). .....<..<..005. 19

Texaco, Inc. v. Roberts, No. 90-359, U.S. Dist. LEXIS

3180 (E.D. La. May 3, 1990) .............0ce0c000% 19

U.S. ex rel. Stinson, Lyons et al. v. Blue Cross Blue

Shield of Georgia, Inc., 755 F. Supp. 1040 (S.D. Ga.

RD «5 in'e x Snip Saas ew ew Rr eae age eee 18

Urbach v. Sayles, 779 F. Supp. 351 (D.N.J. 1991)...20, 21

Virginia Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749

LEP ED Se ckavc scat yee eRe ee a> 5,42

Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11

CEM: Se. SOG ass ca eee 12

Wexner v. First Manhattan Co., 902 F.2d 169 (2d Cir.

bg |) nee ene Mat mnmep er GML Oe 13

Wool v. Tandem Computers Inc., 818 F.2d 1433 (9th

Ch. TF)... SS eee ie

Vi

TABLE OF AUTHORITIES - Continued

Page

PUBLICATIONS

Jay B. Kasner, Rita W. Gordon, Shareholder Suits:

Ruling a Victory for Banks, American Banker,

Ree SD, Trees: OF 4s hee Cie eee 7

2A fames W. Moore & Jo Desha Lucas, Moore's

Federal Practice ¥ 9.03 [1], at 9-27-9-28 (2d ed.

O88 Souk vex eensunnveans cceet ee 12

5 Charles Alan Wright & Arthur R. Miller, Federal

Practice and Procedure § 1298 at 407 (1969) ......... 8

STATUTES AND RULES

rec. &. Civ. F Rule SO)... feces te atvaeeve ee passim

erarg Cir. int. Op. Pro. 3.9.2°ON0 SoG i ixackan 10

No. 92-267

.

In The

Supreme Court of the United States

October Term, 1992 -

e —

UJB FINANCIAL CORP,, et al.,

Petitioners,

‘;

IRWIN SHAPIRO, ROBERT BASSMAN,

JEROME KATZ, NORMAN SALTSITZ, JEAN LEE, and

CHAPPAQUA FAMILY TRUST,

Respondents.

*

Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

“@

RESPONDENTS’ BRIEF IN OPPOSITION TO

PETITION FOR A WRIT OF CERTIORARI

¢

Respondents Robert Bassman, Jerome Katz, Norman

Saltsitz, Jean Lee, and Chappaqua Family Trust (collec-

tively, “Respondents”) submit this brief in opposition to

the petition for a writ of certiorari! filed on behalf of UJB

Financial Corp. (“UJB”) and certain of its officers and

directors (collectively, “Petitioners”). Petitioners ask this

Court to review an individual complaint to determine

' Respondent Irwin Shapiro is filing a separate brief in

Opposition to the petition for a writ of certiorari.

ho

whether that complaint satisfies the pleading require-

ments of Rule 9(b) of the Federal Rules of Civil Pro-

cedure. Contrary to Petitioners’ claims, there is no new

standard, conflict, or confusion that warrants this Court’s

intervention in this litigation. The petition for a writ of

certiorari should, therefore, be denied.

STATEMENT OF THE CASE

The petition for a writ of certiorari concerns Respon-

dents’ consolidated complaint on behalf of a class of

purchasers of UJB common stock. Respondents allege

that in violation of §§ 11, 12, and 15 of the Securities Act

of 1933, and §§ 10(b), 14(a), and 20 of the Securities

Exchange Act of 1934 Petitioners misrepresented and

omitted to disclose material information in their public

statements concerning UJB. In particular, Respondents

allege, on information and belief, that Petitioners know-

ingly or recklessly misrepresented the adequacy of UJB’s

provisions for loan losses, and the quality and effective-

ness of UJB’s procedures for monitoring loans and for

ensuring that there were adequate reserves for potential

problem !oans.*

2 The complaint that Petitioners attack is Respondents’ first

consolidated complaint, and not Respondents’ fourth com-

plaint, as Petitioners misleadingly claim. See Pet. at 4.

* The opinion below, which is reproduced in the Appendix

accompanying the petition for writ of certiorart at A-1 through

A-35, contains a more detailed description of Respondents’ alle-

gations, including direct quotations of important portions of

Petitioners attacked Respondents’ complaint in the

District Court on several fronts. Petitioners sought dis-

missal pursuant to Rule 12(b)(6) of the Federal Rules of

Civil Procedure for failure to state a claim upon which

relief can be granted, and claimed that the complaint does

not allege fraud with particularity sufficient to satisfy

Rule 9(b) of the Federal Rules of Civil Procedure. The

District Court, in response to Petitioners’ motion, dis-

missed Respondents’ complaint. According to the District

Court, certain of the complaint’s allegations failed to

plead violations of federal law, while others failed to

allege with particularity fraudulent conduct. (See

A-38-50.)

On appeal, the Court of Appeals for the Third Circuit

affirmed the District Court’s judgment in part, reversed it

in part, and remanded the case to the District Court. See

Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992)

(A-1-35). The Court of Appeals agreed with the District

Court’s determination that portions of Respondents’ com-

plaint failed to state claims under the federal securities

laws. However, the Court of Appeals also determined

that when the complaint is examined against controlling

precedent, particularly this Court’s decision in Virginia

Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749 (1991), aspects

of Respondents’ complaint did state claims under federal

law. In this regard, the Third Circuit, adhering to this

Court’s decision in Virginia Bankshares, noted that where

Respondents’ consolidated complaint. Respondents respect-

fully refer the Court to the opinion of the court below for further

detail concerning Respondents’ allegations. (See A-3 to A-10.)

corporate officers comment on the internal affairs of a

corporation, these comments are likely to be material to

investors, given corporate insiders’ superior access to

information and the importance that investors place on

corporate insiders’ statements. The Third Circuit, again

consistent with this Court’s holdings, repeated what is a

fundamental truth in the realm of federal securities laws:

when corporate insiders speak on material matters, they

must speak truthfully. (See A-17-22.)

With respect to Petitioners’ attacks below on the

specificity of Respondents’ complaint, the Court of

Appeals concluded that the complaint lacked allegations

sufficient to satisfy Rule 9(b)’s pleading requirements. In

assessing the particularity of Respondents’ complaint, the

Court of Appeals noted, unremarkably, that oftentimes in

the context of a securities fraud action, the operative facts

are exclusively in the defendants’ possession, a circum-

stance that inhibits a plaintiff from alleging the underly-

ing facts on personal knowledge and to an exacting

degree of particularity. (See A-22-25.) Courts in and out of

the Third Circuit, recognizing this circumstance, have for

decades allowed plaintiffs to plead fraud on information

and belief where the underlying facts are within the

defendants’ exclusive knowledge or control, provided

that the plaintiffs provide a statement of facts upon

which their information and belief is founded. See, e.g., In

re Craftmatic Sec. Litig., 890 F.2d 628, 646 (3d Cir. 1989);

Duane v. Altenburg, 297 F.2d 515, 518 (7th Cir. 1962). The

Third Circuit, in its opinion below, emphasized that a

plaintiff must still allege in detail all efforts that he made

to uncover specific facts to support any information and

belief that fraud has occurred. The Court of Appeals

concluded that Respondents’ complaint failed to include

this necessary detail. (See A-23-25.)

The court below specifically ordered Respondents to

redraft their complaint. In the Court of Appeals’s view,

Respondents’ complaint intermingled actionable and

inactionable claims. Respondents, therefore, are required

to reorganize their complaint, without adding new infor-

mation, to allow for an assessment of the allegations that

the Third Circuit found to be actionable. (See A-22.) Fur-

ther, because the complaint did not contain allegations

required to satisfy Rule 9(b), Respondents must add spec-

ific allegations concerning their efforts to uncover facts in

support of the alleged fraud. (See A-24-25.) Thus, Peti-

tioners ask this Court to review prematurely a complaint

that the Court of Appeals has ordered plaintiffs to

rewrite.

¢

REASONS WHY THE PETITION SHOULD BE DENIED

Petitioners have failed to demonstrate that there is

any need for this Court to review the Third Circuit's

decision. The decision below represents neither a depar-

ture from prior case law, nor a conflict with case law

applicable in every Circuit in the United States. Further,

the court below did not determine that any of Respon-

dents’ allegations were sufficiently particular. In fact, the

court below ordered Respondents to rewrite their com-

plaint.

1. THE THIRD CIRCUIT’S HOLDING CON-

CERNING RULE 9(b) DOES NOT CREATE A

CONFLICT AMONG THE CIRCUITS, WITHIN

THE THIRD CIRCUIT, OR CONFUSION

AMONG THE DISTRICT COURTS

Petitioners expend considerable energy in an effort to

conjure up a conflict to justify their seeking a writ of cer-

tiorart. The proffered conflicts, however, are all illusions.

Petitioners premise their claims that this Court’s inter-

vention is necessary on a distorted interpretation of the

opinion below, which they claim substantially lowers a

pleader’s burden under Rule 9(b). However, the opinion

below is quite unremarkable in its limited conclusion that a

pleader must allege all investigative efforts in detail before a

court can, in applying Rule 9(b), consider whether facts are

peculiarly within an adverse party’s control.

Petitioners, having obscured the plain meaning of the

opinion below, take their distorted interpretation and

compare it to decisions of the First, Second, and Seventh

Circuits and to an order of a separate Third Circuit panel

to create the illusion of conflicts. Also, Petitioners juxta-

pose a range of district court decisions on the application

of Rule 9(b) to individual complaints and use the crafted

array of results to create an illusion of what they claim is

“confusion” However, when the smoke, mirrors, and

manipulation are cleared away, it is apparent that there

are no conflicts, whether inter- or intra-Circuit, and that

Petitioners have demonstrated nothing more than a dif-

ference in results attributable to variations in the factual

patterns in which cases arose.

NI

a. The Third Circuit Did Not Deviate From

Existing Interpretations of Rule 9(b)

In assessing Petitioners’ request that this Court

review the Third Circuit’s decision, it is important to

focus upon what the court below actually held, as distin-

guished from Petitioners’ embellished contortion of the

Third Circuit’s conclusion. The Third Circuit did not con-

clude, as Petitioners claim, that a plaintiff can satisfy Rule

9(b)’s particularity requirement simply by alleging that

the facts underlying the asserted fraud are peculiarly

within the adverse party’s control, and that the plaintiff

has undertaken as complete an investigation as possible.

The Third Circuit determined only that, where a pleader

seeks to have a court take into consideration that the facts

concerning an alleged fraud are within the exclusive con-

trol of the adverse party in determining whether the

pleader has alleged fraud in compliance with Rule 9(b),

the pleader must specifically allege any efforts to obtain

the facts. (See A-24.) In concluding that Respondents’

complaint as drafted does not satisfy Rule 9(b), the court

below emphasized that even where facts are peculiarly

within the possession and control of an adverse party, a

plaintiff must still provide a specific factual basis to sup-

port his allegation. (/d.) See Jay B. Kasner, Rita W. Gordon,

Shareholder Suits: Ruling a Victory for Banks, American

Banker, August 5, 1992, at 4 (“Significantly, . . . the

appeals court reaffirmed that plaintiffs must specifically

provide a factual basis for their allegations of fraudulent

conduct... .”).

This interpretation of Rule 9(b) is not new. Courts in

the Third Circuit have recognized for years that Rule 9(b)

must be applied flexibly where an adverse party is in

control of all the facts. See, e.g., Denny v. Carey, 72 F.R.D.

574, 580 (E.D. Pa. 1976); cf. Chambers Development Co. v.

Browning-Ferris Indus., 590 F. Supp. 1528, 1539 (W.D. Pa.

1984) (granting plaintiff an opportunity to take discovery

for 60 days to amend RICO allegations where information

concerning mail or wire fraud was in adverse party’s

control); Eaby v. Richmond, 561 F. Supp. 131, 137 (E.D. Pa.

1983) (same). In Christidis v. First Pennsylvania Mortgage

Trust, 717 F.2d 96 (3d Cir. 1983), from which Petitioners

claim the decision below deviates, the Third Circuit speci-

fically noted that:

In applying the first sentence of Rule 9(b) courts

must be sensitive to the fact that its application,

prior to discovery, may permit sophisticated

defrauders to successfully conceal the details of

their fraud. Moreover, in applying the rule,

focusing exclusively on its “particularity” lan-

guage “is too narrow an approach and fails to

take account of the general simplicity and flex-

ibility contemplated by the rules.”

Id. at 99-100 (quoting 5 Charles Alan Wright & Arthur R.

Miller, Federal Practice and Procedure, § 1298 at 407 (1969)).

Following Christidis, the Third Circuit, in its decision

in In re Craftmatic Sec. Litig., 890 F.2d 628 (3d Cir. 1989),

reaffirmed that Rule 9(b) must be applied flexibly, but

that even under a flexible approach, a pleader must

adduce facts sufficient to support a claim of fraud. As the

court explained:

Under a flexible application of Rule 9(b), plain-

tiffs need not necessarily allege the specific

information at defendants’ disposal at the time

the [alleged misrepresentations] were made.

However, plaintiffs must accompany their alle-

gations with facts indicating why the charges

against defendants are not baseless and why

additional information lies exclusively within

defendants’ control.

Id. at 646.

The opinion below is indistinguishable from the

Third Circuit’s conclusions in Christidis and Craftmatic. In

all three cases, the Third Circuit recognized that a

pleader’s inability to access facts is to be considered in

evaluating whether fraud has been pleaded with suffi-

cient specificity. The opinion below only emphasizes that

a pleader must disclose his investigative efforts before a

court can evaluate whether, under the circumstances,

there is sufficient particularity to comply with Rule 9(b)’s

dictates. (See A-23-24.)

b. There is No Intra-Circuit Conflict That

Requires Resolution

Petitioners contend that this Court's review is necessary

to resolve a conflict between the opinion below and a sum-

mary affirmance by a separate Third Circuit panel of a

District Court’s order, which, in turn, was a summary affir-

mance of a Magistrate’s Report and Recommendations. Even

the most cursory comparison of the supposedly “conflicting”

decisions belies Petitioners’ contention.

On May 20, 1992, the day on which the Third Circuit

issued its opinion in this case, a separate panel of that court

affirmed, with a judgment order, the District Court’s

dismissal of the complaint in Decker v. Landmark Savings

10

Assoc., No. 91-3776, slip op. (3d Cir. May 20, 1992) (judgment

order) (A II-6). In Landmark, the District Court, in a mem-

orandum order, affirmed a Magistrate’s Report and Recom-

mendations. (See A II-7.) Thus, according to Petitioners, a one

paragraph judgment order summarily affirming, without any

analysis or explanation, a five paragraph memorandum

order, which likewise lacked any real explanation, affirming

a Magistrate’s recommendations creates a conflict with a

separate panel of the Third Circuit, which issued a multi-

page decision detailing its reasoning. Apart from the fact that

under the Third Circuit’s Internal Operating Procedures, a

judgment order is never published and, therefore, lacks any

value as a precedent, see Third Cir. Int. Op. Pro. 5.5.2 and 5.6,

to characterize Petitioners’ claim as overreaching is to be

charitable.4

4 There are two curious aspects to Petitioners’ argument in

this regard. First, in quoting the Third Circuit’s judgment order

in their petition, Petitioners exclude a critical word: “essen-

tially.” Contrary to Petitioners’ claim, the judgment order does

not affirm the dismissal of the Landmark complaint for the “same

reasons” as those recommended by the-Magistrate, but for

“essentially the same reasons.” (A II-6 (emphasis added).)By

qualifying its judgment order with the word “essentially,” the

Third Circuit panel left substantial doubt as to the precise rea-

sons for its affirmance. From the judgment order, it is impossi-

ble to tell what parts of the Magistrate’s reasoning the panel did

and did not endorse. Moreover, the rationale underlying the

Magistrate’s two Reports and Recommendations are themselves

somewhat difficult to discern, to the extent that issues concern-

ing Rule 9(b) are intermingled with issues concerning arguable

failures to state claims upon which relief can be granted.

Second, Petitioners, although they claim that the Landmark

complaint and the complaint in this litigation are similar, have

failed to submit a copy of either complaint as part of the Appen-

dix. Petitioners’ failure to submit either Respondents’ complaint

or the Landmark complaint causes one to ask what Petitioners

1]

That there is no conflict between the two panel deci-

sions is underscored by the fact that the Third Circuit

rejected Petitioners’ petition for rehearing en banc, in

which Petitioners posited the same illusory “conflict” that

they present here. (See A-51-52.) If the judges of the Third

Circuit believed there is a conflict between this case and

Landmark, they would have sought to resolve it.5 They did

not, and denied Petitioners’ petition for rehearing.

c. The Circuits Are Uniform in Considering

Whether Facts Are in the Exclusive Posses-

sion of an Adverse Party in Applying Rule

9(b)

Petitioners rely principally upon three decisions to

create their claimed inter-Circuit conflict: Romani v. Shear-

son Lehman Hutton, 929 F.2d 875 (1st Cir. 1991), DiLeo v.

Ernst & Young, 901 F.2d 624 (7th Cir.), cert. denied, 111 S.

are trying to hide. The answer is simple: that decisions concern-

ing the application of Rule 9(b) turn on the allegations peculiar

to any complaint. The Magistrate’s Report and Recommenda-

tions in the Landmark case makes clear that the recommendation

to dismiss pursuant to Rule 9(b) is grounded entirely on the

allegations in that case. The standard that the Magistrate

applied to reach her conclusion is no different than the standard

applied in the Third Circuit before and after the opinion below.

(See A II-18-23 (applying standards set out in In re Craftmatic Sec.

Litig.).)

> In any event, even if it is assumed that there is a conflict, it

is a conflict that the Third Circuit in the first instance should

resolve. Cf. Davis v. United States, 417 U.S. 333, 340 (1974) (not-

ing previous denial of certiorari despite acknowledged conflict

between two decisions of a single circuit).

Ct. 347 (1990), and Denny v. Barber, 576 F.2d 465 (2d Cir.

1978). According to Petitioners, these three decisions

establish that the First, Second, and Seventh Circuits

apply Rule 9(b) differently than does the Third Circuit in

the decision below. These three decisions, however, do

nothing of the sort.

With respect to the First and Second Circuits, Petitioners

themselves concede that “these courts have relaxed some-

what the rigorous pleading standard under Rule 9(b) where

the plaintiff has alleged that the facts lie solely within defen-

dants’ control. See, e.g., DiVittorio v. Equidyne Extractive Indus.,

Inc., 822 F.2d 1242, 1217 [sic] (2d Cir. 1987); Wayne Investments

[sic] v. Gulf Oil Corp., 739 F.2d 11, 13-14 (1st Cir. 1984).” (Pet.

at 14.) This concession is fatal to Petitioners’ claim that there

is any conflict between the First and Second Circuits and the

decision below.®

The First Circuit’s Romani decision is, in any event,

squarely consistent with the decision below. The First

Circuit, in Romani, stated that “[w]here allegations of

fraud are explicitly or, as in this case, implicitly, based

6 Petitioners also cite 2A James W. Moore & Jo Desha Lucas,

Moore's Federal Practice J 9.03 [1], at 9-27-9-28 (2d ed. 1991)

(“where the facts are in the exclusive possession of the adver-

sary, courts should permit the pleader to allege the facts on

information and belief, provided a statement of the facts upon

which the belief is founded is proffered”) in support of their

contention that the application of Rule 9(b) in other Circuits is

somehow different from the Third Circuit’s approach. However,

the Third Circuit, in its decision below, cited with approval this

same passage from Moore's. (See A-24.) It is hard to conceive of a

reason why the Third Circuit would rely on this passage from

Moore's if it was expressing a thought inconsistent with Moore's.

13

only on information and belief, the complaint must set

forth the source of the information and the reasons for

the belief.” Romani, 929 F.2d at 878. This statement is

indistinguishable from the statements in the opinion

below that Petitioners attack in their petition.? Cf. New

England Data Services, Inc. v. Becher, 829 F.2d 286, 290-91

(1st Cir. 1987) (where specific information as to use of

interstate mail or telecommunications for RICO claims “is

likely in the exclusive control of the defendant,” court

should determine whether the plaintiff should have the

opportunity to take discovery and then amend an other-

wise defective complaint).

The Second Circuit cases too are indistinguishable

from the decision below in terms of their analysis of Rule

9(b) where facts are within the exclusive control of an

adverse party. See, e.g., Wexner v. First Manhattan Co., 902

F.2d 169, 172 (2d Cir. 1990) (fraud allegations “may be

based on information and belief when facts are peculiarly

within the opposing party’s knowledge,” and complaint

pleaded on information and belief must adduce specific

supporting facts); Ouaknine v. MacFarlane, 897 F.2d 75, 81

(2d Cir. 1990) (concluding that allegations of scienter

were sufficient where “ailegations lie peculiarly within

7 In upholding the dismissal of a complaint for failing to

plead fraud with the requisite specificity, the court in Romani

conducted an inquiry concerning the specific allegations at

hand. It upheld the dismissal because “[t]he complaint contains

no factual allegations that would support a reasonable inference

that adverse circumstances existed at the time of the offering,

and were known and deliberately or recklessly disregarded by

defendants.” 929 F.2d at 878. Once again, the decision turned on

the allegations of the particular complaint under consideration.

14

the opposing party’s knowledge and are accompanied by

information that raises a strong inference of fraud.”);

Nicholas v. Poughkeepsie Savings Bank/FSB, [1990-1991

Transfer Binder] Fed. Sec. L. Rep. (CCH) { 95,606 at

97,839-97,841 (S.D.N.Y. 1990) (“[T]he Second Circuit has

repeatedly recognized that the requirements of Rule 9(b)

are to be relaxed where the facts are ‘peculiarly within

the adverse party’s knowledge.’ ”) (quoting Segal v. Gor-

don, 467 F.2d 602, 608 (2d Cir. 1972)).

The Second Circuit’s decision in Denny v. Barber does

not create a conflict between the Second and Third Cir-

cuits. In that case, the specific complaint at issue con-

tained no allegedly misleading statements before the

plaintiff’s stock purchases. 576 F.2d at 468-69. In addition,

the plaintiff alleged that the defendants failed to disclose

the risks involved in certain investments that collapsed

several years later. In upholding the dismissal of the

complaint, the Second Circuit, in an opinion written by

Judge Friendly, determined that the plaintiff had failed to

allege how, other than through “greater clairvoyance,”

the defendants could possibly have known or forecast

that future events would cause the investments to fail. Id.

at 470. Nowhere do Petitioners explain how Denny, which

does not address the application of Rule 9(b) where facts

are in the exclusive possession of an adverse party, is

more apposite than later Second Circuit decisions that

explicitly discuss that situation.®

8 Petitioners, at several points, invoke Denny's “fraud by

hindsight” language as part of their general hyperbolic reaction

to the opinion below. Denny's “fraud by hindsight” language

cannot be understood to preclude a plaintiff from relying on

—

15

The Seventh Circuit’s decision in DiLeo also does not

pose a conflict with the decision below. In DiLeo, the

Court of Appeals upheld the dismissal of a Section 10(b)

claim against an accounting firm that audited the finan-

cial statements of a financial institution, Continental IIli-

nois. The plaintiffs in DiLeo alleged, inter alia, that

Continental Illinois’s loan loss reserves were inadequate

and that Continental Illinois did not timely write off

loans. The Court of Appeals held that the complaint in

that case did not allege any facts that would establish that

prior “rosy” statements were attributable to “fraud” sim-

ply because Continental Illinois later experienced losses

and that the complaint alleged only “ ‘fraud by hindsight’ .”

901 F.2d at 627-28 (quoting Denny v. Barber, 576 F.2d at

470)).9 In so doing-the Seventh Circuit specifically noted

later facts to establish that a defendant’s previous representa-

tions are false or misleading. There is no inherent evil in a

plaintiff basing allegations of fraud on subsequent disclosures

concerning a business’s internal affairs. As one court has writ-

ten:

[Where] the information directly involved the Bank’s

financial condition and business practices ... it may

be an appropriate inference that the nature and extent

of the Bank’s subsequent disclosures are evidence

that the matters disclosed did not suddently come to

light.

Nicholas v. Poughkeepsie Savings Bank/FSB, [1990-1991 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 4 95,606 at 97,841; see also

Robbins v. Moore Medical Corp., 788 F. Supp. 179, 192 (S.D.N-Y.

1992) (“[T]he Denny court recognized that fraud by hindsight

decisions ‘may or may not be consistent and... necessarily rest|

|] on [their] particular facts.’ ”) (quoting Denny, 576 F.2d at 470).

® Petitioners seize on the Seventh Circuit’s statement in

DiLeo that “[b]Jecause only a fraction of financial deteriorations

reflects fraud, plaintiffs may not proffer the different financial

16

that there had been a “flood” of public information,

including several lawsuits and at least one full trial, from

which the plaintiffs could have obtained relevant infor-

mation to provide exacting detail for their complaint.

DiLeo does not present a conflict with the decision

below because it is factually and legally inapposite. First,

DiLeo involved an outside accounting firm, while the

decision below involved corporate insiders. Courts have

generally construed Rule 9(b) more stringently with

respect to such third parties, see, e.g., In re Frank B. Hall &

Co., Inc., 693 F. Supp. 1460, 1462 (S.D.N.Y. 1988) (“de facto

enhanced pleading requirement... has developed under

Rule 9(b) . . . for outside professionals”); Greenfield v.

Professional Care, Inc., 677 F. Supp. 110, 114 (E.D.N.Y.

1987) (“when inside directors are involved inferences of

fraud may be drawn that might otherwise not be permiss-

ible.”). Second, as noted above, there-had been a “flood of

[public] information,” including evidence presented pub-

licly during a five month jury trial, regarding Continental

Illinois and its financial condition before the DiLeo com-

plaint was filed; in contrast, in this litigation, there was

virtually no public information about UJB’s internal

statements and rest. Investors must point to some facts suggest-

ing that the difference is attributable to fraud.” DiLeo, 801 F.2d

at 627 (cited in Pet. at 9). According to Petitioners, this quotation

serves to crystalize the conflict between the Seventh and Third

Circuits. As an initial matter, there is no conflict between the

DiLeo court’s conclusion that a pleader must “point to” facts

suggesting that fraud has occurred and the Third Circuit's

application of Rule 9(b). Moreover, the Seventh Circuit’s prem-

ise, L.e., that only a fraction of financial deteriorations reflects

fraud,-is an unsupported factual conclusion at which the Sev-

enth Circuit arrived without citation.

17

financial condition that Respondents could access. In

short, DiLeo and the decision below address two mark-

edly different factual situations: fraud claims against cor-

porate insiders where the underlying facts are exclusively

within the adverse parties’ possession (the decision

below) as compared with fraud claims against outsiders

where there is a substantial amount of publicly available

information (DiLeo).

By contrast, 30 years ago, when the Seventh Circuit

did address the same issue as addressed in the court

below, it reached an identical conclusion:

[P]leading on “information and belief” is per-

missible as to matters peculiarly within the

adverse party’s knowledge . . . [and] allegations

of fraud such as are here involved when made

on “information, and belief” must be accom-

panied by a statement of the facts upon which

the belief is founded.

Duane v. Altenburg, 297 F.2d 515, 518 (7th Cir. 1962)

(upholding dismissal of complaint that lacked statement

of facts upon which information and belief was founded).

Indeed, it appears that the law on the specific issue

addressed in the decision below is uniform throughout

the land: where facts are peculiarly within an adverse

party’s knowledge, that circumstance is taken into con-

sideration, 1.e., fraud may be pleaded on “information

and belief,” but pleaders “must accompany such an alle-

gation with a statement of facts upon which their allega-

tion is based.” (A-24.) See Scheidt v. Klein, 956 F.2d 963,

967 (10th Cir. 1992) (“Allegations of fraud may be based

on information and belief when the facts in question are

peculiarly within the opposing party’s knowledge and

ee

18

the complaint sets forth the factual basis for the plaintiff’s

belief.”); Michaels Building Co. v. AmeriTrust Co., N.A., 848

F.2d 674, 680 (6th Cir. 1988) (noting that “[c]ourts have

held that the rule may be relaxed where information is

only within the opposing party’s knowledge.”); Wool v.

Tandem Computers Inc., 818 F.2d 1433, 1439 (9th Cir. 1987)

(allegations of fraud may be upon information and belief

where the plaintiff cannot have personal knowledge of

the underlying wrongdoing; “[i]n such cases, the partic-

ularity requirement may be satisfied if the allegations are

accompanied by a statement of the facts upon which the

belief is founded.”); Kowal v. MCI Communications Corp.,

No. 90-2862 JGP, U.S. Dist. LEXIS 7437, at *21 (D.D.C.

May 19, 1992) (allegations of fraud may be upon informa-

tion and belief “as to matters peculiarly within the

knowledge of the opposing party. ... Even with respect

to matters within the knowledge of the other party, the

allegations must be accompanied by a statement of the

facts upon which the belief is founded.”); U.S. ex rel.

Stinson, Lyons, et. al. v. Blue Cross Blue Shield of Georgia,

Inc., 755 F. Supp. 1040, 1052 (S.D. Ga. 1990) (“Where . . .-

factual information is peculiarly within the defendant's

knowledge or control, rule 9 (b)’s requirement is relaxed

somewhat. In such a case, pleading on information and

belief is acceptable . . . but on one condition: the com-

plaint must adduce specific facts supporting a strong

inference of fraud or it will not satisfy even a relaxed

pleading standard.”) (citation omitted); Burt on behalf of

McDonnell Douglas v. Danforth, 742 F. Supp. 1043, 1050

(E.D. Mo. 1990) (“[C]omplaining stockholders need not

specify facts that are peculiarly within the opposing

party’s knowledge and more general allegations will suffice

19

as long as an attempt is made to comply with Rule 9(b)

and the allegations are accompanied by a statement of the

grounds on which the stockholder’s belief rests.”) (cita-

tions omitted); Steiner v. Southmark Corp., 734 F. Supp.

269, 273 (N.D. Tex. 1990) (Rule 9(b) “may be relax-

ed... as to matter within the opposing party’s knowl-

edge. ... !n such cases, allegations satisfy Rule 9(b) if

accompanied by a statement of the facts upon which the

belief is based. ...”) (citations omitted); Sweeney Co. of

Maryland v. Engineers-Constructors, Inc., 109 F.R.D. 358,

360 (E.D. Va. 1986) (“If plaintiffs do not have access to

information, some relaxation of Rule 9(b) is necessary

when plaintiffs are not likely to have more specific infor-

mation until after discovery.”) (citations omitted).!° In

short, Petitioners’ asserted conflict does not exist as

between the Third Circuit and any other court.

d. Rule 9(b) Decisions Involve Assessments of

Individual Complaints

Petitioners’ assertion that there is confusion at the

district court level disregards the fact that, in the first

10 See also Koch v. Koch Industries, No. 85-1636-C, U.S. Dist.

LEXIS 10952 (D. Kan. June 30, 1992); In re VMS Sec. Litig., 752 F.

Supp. 1373, 1391-92 (N.D. Ill. 1990); Fairmont Homes, Inc. v. Shred

Pax Corp., 754 F. Supp. 665, 667 (N.D. Ind. 1990); F.D.I.C. v. Kerr,

637 F. Supp. 828, 834 (W.D.N.C. 1986); Texaco, Inc. v. Roberts, No.

90-359, U.S. Dist. LEXIS 5180 (E.D. La. May 3, 1990); Banowitz v.

State Exchange Bank, 600 F. Supp. 1466, 1469 (N.D. Ill. 1985); cf.

Seattle-First National Bank v. Carlstedt, 800 F.2d 1008, 1011 (10th

Cir. 1986).

20

instance, any determination of whether Rule 9(b)’s partic-

ularity requirement has been satisfied requires an assess-

ment of the complaint at hand. The various cases that

Petitioners attempt to contrast with each other (see Pet. at

10-11, 18-19) only underscore the point that Rule 9(b)

requires a complaint specific determination of whether

fraud has been pleaded with sufficient particularity.

The decision in Urbach v. Sayles, 779 F. Supp. 351

(D.N.J. 1991), illustrates the fact that the various decisions

applying Rule 9(b), which Petitioners cite as evidence of

“confusion,” each turn almost entirely on the specific

allegations of the particular complaint at hand, and not

on any supposed variation in the standards for applying

Rule 9(b). In that opinion, the District Court rejected

arguments substantially similar to Petitioners’ arguments

here in ruling on a motion to certify an interlocutory

appeal. In analyzing an alleged conflict between opinions

applying Rule 9(b) at the district court level (a conflict

that supposedly resulted from the decision in Fox v. Equt-

mark Corp., 782 F. Supp. 295 (W.D. Pa. 1991) and the

District Court’s opinion in this litigation (See A-38 to

A51)), the District Court surveyed the authority on the

application of Rule 9(b), including the Third Circuit’s

decisions in Christidis, 717 F.2d 96 (3d Cir. 1983), and

Craftmatic, 800 F.2d 628 (3d Cir. 1989), the District Court’s

opinion in Fox, the Seventh Circuit’s decision in DiLeo,

901 F.2d 624 (7th Cir.), cert. denied, 111 S. Ct. 347 (1990),

the Second Circuit’s decision in Denny, 576 F.2d 465 (2d

Cir. 1978), and the District Court’s opinion in this litiga-

tion. The Urbach court concluded that all the opinions

21

applied similar standards in reaching their conclusions

concerning Rule 9(b). See 779 F. Supp. at 358-64

(“Although the authorities cited by defendant rejected

plaintiffs’ fraud claims for failure to satisfy Rule 9(b), the

showing of particularity there required is no different

from the standard enunciated by this Court and satisfied

by the plaintiff.”). As the District Court’s analysis in the

Urbach case demonstrates, the purported “confusion” at

the district court level is not confusion at all but, rather, is

simply different results reached by different judges

analyzing different complaints under the same Rule 9(b)

standards. See Robbins v. Moore Medical Corp., 788 F. Supp.

at 191-92.

e. Whether the Complaint’s Allegations Sat-

isfy Rule 9(b)’s Particularity Requirement

Does Not Warrant This Court’s Attention

The issue of whether a complaint alleges fraud with

sufficient particularity, as demonstrated above, turns

upon the complaint’s allegations and points up an addi-

tional reason for declining to issue a writ: Petitioners are

asking the Court to review a single complaint, which the

Court of Appeals already directed Respondents to re-

write, to determine whether that complaint satisfies Rule

9(b). This inquiry, which is manifestly premature and can

be of interest only to the parties to this litigation, does not

justify a writ of certiorari. See Rice v. Sioux City Memorial

Park Cemetery, Inc., 349 U.S. 70, 79 (1955) (writs should

not be granted to settle principles of interest only to the

parties as opposed to principles of interest to the public);

Layne & Bowler Corp. v. Western Well Works, Inc., 261 U.S.

387, 393 (1923). Whether the complaint in this litigation —

22

after it is rewritten and refiled as directed by the Third

Circuit — ultimately pleads fraud with sufficient partic-

ularity will not resolve a dispute of sufficiently general

application to warrant this Court’s review. Other litigants

and other courts will still have to answer for themselves

whether, under the circumstances peculiar to the cases

confronting them, Rule 9(b) has been satisfied.

Further, whether Respondents have satisfied Rule

9(b)’s particularly requirements is entirely speculative

and hypothetical, given the Court of Appeals’s direction

that Respondents rewrite their complaint to excise inac-

tionable allegations, to clarify their claims, and to add

allegations injecting specificity as to their investigation of

the fraudulent conduct at issue. Under these circum-

stances, this Court’s limited resources should not be

expended in an effort to determine whether an earlier

version of Respondents’ complaint satisfied Rule 9(b).

f. The Third Circuit’s Decision Furthers Rule

9(b)’s Policies

Petitioners contend that this Court must intervene in

this litigation because the decision below undercuts Rule

9(b)’s policies. However, the opinion below is entirely

consistent with, and indeed furthers, those policies. The

Third Circuit’s requirement that a plaintiff specifically

aver his efforts to uncover information allegedly in the

exclusive control of an adverse party is not, as Petitioners

characterize it, an endorsement of a “shoot first and ask

questions later” approach to litigation. By requiring

detailed allegations concerning a plaintiff’s investigation

of facts that the plaintiff claims cannot be reached, the

23

Third Circuit is ensuring that fraud claims are scru-

pulously examined before the commencement of litiga-

tion. (See A-24.) Further, even a party’s scrupulous

investigation cannot save a defective complaint if that

scrupulous investigation does not yield the information

and belief necessary to particularize allegations of fraud.

See Christidis, 717 F. 2d at 100; see also Michaels Building

Co. v. AmeriTrust Co., N.A., 848 F.2d at 679-681.

2. THE THIRD CIRCUIT’S STATEMENT ON

MATERIALITY IS CONSISTENT WITH THIS

COURT’S DECISIONS

Petitioners, in addition to their attack on the Third

Circuit’s unremarkable discussion of Rule 9(b), claim that

the discussion in the decision below of whether state-

ments are actionable under the federal securities laws is

somehow inconsistent with decisions of this Court. In

particular, Petitioners assert that the Court below erred

when it stated that “by addressing the quality of a partic-

ular management practice, a defendant declares the sub-

ject of its representation to be material to the reasonable

shareholder, and’ thus is bound to speak truthfully”

(A-18), because it purportedly “ignores” this Court’s

decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988). It is

Petitioners, however, and not the Third Circuit, who have

ignored controlling precedent from this Court.

Petitioners’ argument once again distorts the ruling

of the court below. The statement that Petitioners attack

flows from the Court of Appeals’s analysis of whether

certain alleged misstatements are actionable under the

federal securities laws. In concluding that some are and

24

others are not, the court below did not hold that the fact

that a corporate officer or director utters a statement

automatically makes that statement material. The Court

of Appeals simply recognized the significance that stock

purchasers can place on corporate insiders’ statements

concerning internal corporate affairs about which

insiders can be expected to have superior knowledge.

he court below’s statement in this regard is nothing

more than the logical application of this Court’s conclu-

sion in Virginia Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749

(1991). In Virginia Bankshares, this Court stated:

[T]here is no room to deny that a statement of

belief by corporate directors about a recom-

mended course of action, or an explanation of

their reasons for recommending it, can take

on... importance [to a reasonable shareholder

in deciding how to vote]. Shareholders know

that directors usually have knowledge and

expertness far exceeding the normal investor’s

resources, and the directors’ perceived superi-

ority is magnified even further by the common

knowledge that state law customarily obliges

them to exercise their judgment in the share-

holders’ interest.

Id. at 2757.

As the court below explained, after quoting the

above language:

If a director’s statement of belief +s material

because of the speaker’s superior knowledge,

then a manager’s statement of belief must also

be material. A manager’s knowledge and exper-

tise regarding the day-to-day operation of his

company generally exceeds that of a director,

25

and the reasonable investor is aware of this fact.

Even if management sometimes acts in its own

interest, a reasonable investor need not take a

manager’s statement of belief at anything less

than face value.

(A-19.)

Petitioners no doubt are fully aware of this Court’s

Virginia Bankshares decision, particularly since it was cited

and quoted in the opinion below. However, Petitioners

totally ignore the Virginia Bankshares case (they do not

even cite it in their petition) and instead look to this

Court’s holding in Basic Inc. v. Levinson in a feeble effort

to manufacture another (non-existent) conflict.

Basic, though, is of no aid to Petitioners. This Court

in Basic did not address the question of whether state-

ments by a corporation’s officers and directors about

internal corporate affairs are actionable. Rather, Basic

addresses only the question of when in the course of

merger discussions the existence of such discussions

becdmes material and must be disclosed publicly. See 485

U.S. at 236-241. Virginia Bankshares, on the other hand,

directly addresses the question of when affirmative state-

ments by corporate directors become significant to rea-

sonable investors. Virginia Bankshares, thus, provides the

appropriate guidepost for assessing the Third Circuit's

discussion of the potential importance of corporate

insiders’ comments. The Court of Appeals’s statement is

entirely consistent with Virginia Bankshares.

Further, Petitioners cannot question seriously the

Third Circuit’s statement that material statements by cor-

porate officérs and directors must be truthful. It is a

26

fundamental principle of securities law, of which Peti-

tioners should have been aware from reading Basic, that

material representations must not be false or misleading.

See Basic, 485 U.S. at 238. There is, then, no conflict

between the opinion below and this Court’s prior hold-

ings.

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Dated: September 11, 1992

Respectfully submitted,

KENNETH A. JACOBSEN*

Lisa J. RopRIGUEZ

IRA Nett RICHARDS

GREENFIELD & CHIMICLES

One Haverford Centre

361 West Lancaster Avenue

Haverford, PA 19041-0100

(215) 642-8500

Attorneys for Respondeits

Bassman, Katz, Saltsitz,

Lee, and Chappaqua Family

Trust

*Counsel of Record

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