Suna v . Bailey CV-94-273-M 12/29/95 UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Vicki Match Suna; and Lori Rosen, Plaintiffs, v. Civil N o . 94-273-M Bailey Corporation; William A . Taylor; Roger R. Phillips; Leonard Heilman; Louis T . Enos; E . Gordon Young; and John G. Owens, Defendants.

O R D E R

Plaintiffs bring this securities fraud action on behalf of

themselves and all persons who purchased stock of defendant

Bailey Corporation (the "Company") between August 1 8 , 1993, and

May 2 0 , 1994. In Count I of their second amended complaint

plaintiffs allege that defendants violated section 10(b) of the

Securities and Exchange Act of 1934, 15 U.S.C. §78j(b), and

Security and Exchange Commission Rule 10-b,

.10b-5.

Plaintiffs also claim that defendants violated section 12(2) of

the Securities Act of 1933, 15 U.S.C. §77l(2) (Count I I ) , and

that defendants made negligent misrepresentations upon which

plaintiffs relied when they decided to purchase the Company's

stock (Count I I I ) . Defendants move to dismiss plaintiffs' second

amended complaint and this action in its entirety. Procedural History

By order dated November 1 0 , 1994, the court granted

defendants' motion to dismiss plaintiffs' original complaint,

holding that plaintiffs failed to meet the pleading requirements

of Rule 9 ( b ) , Fed.R.Civ.P. Subsequently, plaintiffs sought leave to file their first amended complaint. Again, however, the court

found that plaintiffs failed to meet federal pleading

requirements, concluding that:

Upon review, the proposed amended complaint suffers from the same deficiencies detailed in the court's order dismissing the original complaint. The plaintiffs' proposed amended complaint follows the same pattern as the original complaint -- long quotations from various public documents and press reports, followed by general allegations of misrepresentation by defendant.

Order, at 2 . (July 3 1 , 1995). Nevertheless, the court

"reluctantly grant[ed] plaintiffs leave to file a second amended

complaint," but cautioned plaintiffs that "should the second

amended complaint fail to satisfy pleading requirements, the

action will then be dismissed with prejudice." Order, at 2 (July

3 1 , 1995).

Plaintiffs have filed their second amended complaint, and

defendants claim that i t , like its predecessors, is fatally

2 deficient and must be dismissed. Defendants also move the court to dismiss plaintiffs' action in its entirety, arguing that after having failed on three occasions to properly set forth their claims and the factual allegations necessary to support them, plaintiffs should not be given any further opportunity to amend.

Discussion

The factual background and applicable standard of review are

discussed at length in the court's November, 1994, order and need

not be repeated.

With each successive attempt to adequately plead their case, plaintiffs have submitted increasingly lengthy factual

recitations and quotations from public documents relating to the Company, which do little to advance or clarify their claims. These claims can, however, be divided into two categories: ( i ) assertions that defendants made material misstatements in documents released to the public and the Securities and Exchange Commission ("SEC");1 and (ii) assertions that Hancock

1 Specifically, plaintiffs claim that defendants made material misrepresentations concerning the Company's financial status (both present and projected) in the following five documents: the prospectus which was issued in connection with the August, 1993, stock offering; the October 2 8 , 1993, annual report

3 Institutional Equity Services published a report (which

defendants claim was the product of representations and

"guidance" from the Company) that contained material

misstatements of fact which the Company "endorsed" and "adopted"

as its own, despite an alleged duty to correct such statements.

A. Alleged False Statements in Analyst's Report.

This issue is fully and adequately discussed in the court's

prior orders. Plaintiffs' second amended complaint continues to

be deficient in this area for the reasons previously articulated.

Plaintiffs have attempted to cure those deficiencies by adding

allegations that it was the Company's practice to have defendant

Heilman:

communicate regularly with securities analysts, . . . to discuss, among other things, the Company's earnings prospects, its products, the efficiency of the Company's manufacturing plants, anticipated financial performance, and to provide detailed "guidance" to these analysts with respect to the Company's business, including projected revenues, earnings, and of particular importance to analysts, earnings per share.

Second amended complaint, ¶34. Importantly, however, plaintiffs

have failed to identify or describe the statements allegedly made

by Heilman to analysts that were materially false or misleading.

to shareholders; the November 1 , 1993, annual report (form 1 0 - K ) ; the December 6, 1993, form 10-Q; and the March 1 5 , 1994, form 10-Q. 4 Allegations that Heilman generally talked to analysts and

analysts' reports were incorrect, even if proven, would not be

sufficient to establish that Heilman (or someone else acting on

the Company's behalf) made false statements in an effort to

induce false reporting. See, e.g., Raab v . General Physics

Corp.,

(4th Cir. 1993) (plaintiff must allege

facts which show that defendant exercised control over the

analysts or sufficiently entangled itself with the analysts'

forecasts to render those predictions attributable to i t . ) .

Accordingly, to the extent that plaintiffs have attempted to

state causes of action against defendants for alleged false

statements in reports generated by securities analysts, those

claims are dismissed with prejudice.

B. Alleged False Statements in Public Documents.

Essentially, plaintiffs assert that the Company made the

following fraudulent representations (or omissions) in documents

released to the public:

1. The Company falsely stated that it would achieve increased profits by moving production from its plant in Seabrook, New Hampshire, to newly acquired factories in Michigan. Complaint, ¶ 2 .

5 2. The Company knowingly issued false predictions regarding future earnings prospects during pre- offering road shows. Complaint, ¶ 5 . 3. When the Company made the public offering it knew but failed to disclose that its profitability would decline sharply because of a much less profitable mix of parts to be supplied to Ford. Complaint, ¶ 8 . 4. The Company failed to disclose to the public "severe" problems it began experiencing at its Contour facility beginning in February, 1994 (i.e., 6 months after the first day of the public offering and after issuance of all but one of the public documents of which plaintiffs complain). Complaint, ¶13.

However, as discussed more fully below, the only substantive

factual allegations which arguably meet the specificity

requirements Rule 9(b) relate to plaintiffs' claim that because

its largest customer, Ford Motor Company, provided the Company

with "26-week forecasts of production requirements," the Company necessarily knew of future reductions in sales of its products

well in advance. Stretching that allegation, one might infer

that when public statements regarding anticipated future earnings

were made, defendants actually knew that the Company's profits

would decrease, if the operable 26-week forecast from Ford

actually established that the Company would experience a

significant decrease in gross sales revenue. Plaintiffs seem to

claim it did and that despite such knowledge, defendants

6 nevertheless published statements which misrepresented the

Company's likely future earnings, probable productivity, and

ability to successfully address a shift in its product mix.

Finding that these allegations meet the specificity requirements

of Rule 9 ( b ) , however, would require the court to read far more

into plaintiffs' complaint than is actually there.

As an example of defendants' alleged fraud, plaintiffs claim

that the "Prospectus stated that [the Company] would become even

more profitable as a result of lower operating costs at

manufacturing facilities the Company had acquired." Complaint,

para. 57 (emphasis added). In support of that fraud claim,

plaintiffs then quote the allegedly offending provisions

contained in the Prospectus. However, contrary to plaintiffs'

exaggerated assertion, the cited provisions do not purport to

guarantee that the Company's move to other manufacturing

facilities would result in lower costs or higher profits.

Instead, the statements made in the Prospectus are far more

measured and reserved:

The Company intends to transfer certain labor intensive operations from Seabrook to Hillsdale and Madison to take advantage of lower average labor costs and more fully utilize existing capacity.

7 Second amended complaint, para. 57 (quoting the Prospectus). As

in earlier versions of their complaint, plaintiffs seek to hold

the Company liable for failing to anticipate a drop in profits,

without providing the requisite factual allegations to support a

claim that the Company knew that its profits would fall yet,

despite such knowledge, misled the public. Defendants make the

point cogently and succinctly:

Notably, all of the discussion in paragraph 6 2 , which purports to say why the prospectus excerpts were false when made, is of events that occurred after -- long after -- publication of the prospectus. The short of it is that plaintiffs fault Bailey because Bailey did not accurately predict that "the transfer of production would result in a reduction o f , not an increase i n , the Company's profits." Comp. 62(c). Need it be said that if the Company could have predicted such a result, the transfer of production -- which had not occurred at the time of the prospectus -- would not have been attempted?

Defendants' memorandum, at 5 .

Plaintiffs allege no facts which, if proven, would establish

that the Company knew that the transfer of production would

result in a substantial decrease in profits but, nevertheless,

fraudulently asserted that it expected a favorable effect on its

profit margin.

8 In response to the court's earlier concerns that they had

failed to articulate why statements made by defendants were

fraudulent when they were made (i.e., without the benefit of

hindsight), plaintiffs claim that they have amended their

previous complaints to state "the factual basis why the

statements contained [earlier in the Complaint and attributed to

defendants] were materially false and misleading." Plaintiffs'

Memorandum at 1 2 . S o , for example, in paragraph 62(a) of the

second amended complaint, plaintiffs allege that:

Bailey's earnings would not continue to grow, they would decline materially due to a massive shift of Bailey's production to a much less profitable product mix. Defendants knew o f , or recklessly ignored this shift, because o f , among other things, information contained in Ford's 26-week Forecasts, the "predictable" lives of the products the Company manufactured, and communications with representatives of Ford. (emphasis added)

As before, however, plaintiffs have failed to allege facts to

support these allegations of fraud. Plaintiffs fail, for

example, to plead why defendants knew or should have known that

the anticipated shift in product mix would cause profits to

diminish. It simply does not follow that a shift in product mix

necessarily apprised defendants that profitability would

necessarily or even likely decline.

9 In paragraph 61 of the Complaint, plaintiffs quote the

Company's Prospectus at length, which provides:

Ford is redesigning the Taurus/Sable and Tempo/Topaz and the Company does not expect to supply components for the Taurus/Sable after the 1995 model year or for the Tempo/Topaz after the 1994 model year. . . . Although vehicle build rates are inherently unpredictable, based on the components it has been selected to manufacture and its current estimates for build rates for these models, the Company believes that these components in the aggregate, will provide the Company with opportunities comparable to those that have been provided by the Taurus/Sable and Tempo/Topaz models.

Complaint at para. 61 (quoting the Prospectus) (emphasis added).

It is entirely possible that the disclosed shift in product mix

could have lead to increased productivity and profitability, or

about the same, or perhaps less if the "current estimates" were

in error or if the "inherently unpredictable" build rates proved

to be just that -- inherently unpredictable. Simply stated,

plaintiffs have failed to allege facts which, if proven, would

support their claim that the Company knew profitability would

fall but, nevertheless, misled the public into believing that it

would remain constant. Merely quoting these passages from the

Prospectus and pointing to a subsequent decline in profitability

is insufficient to state a claim for fraud. See, e.g., Lucia v .

Prospect Street High Income Portfolio,

7 0 , 174 (1st Cir.

10 1994) ("the complaint must set forth specific facts that make it

reasonable to believe that defendants knew that a statement was

materially false or misleading."); Serabian v . Amoskeag Bank

Shares,

5 7 , 361 (1st Cir. 1994) ("defendants may not be

held liable under the securities laws for accurate reports of

past successes, even if present circumstances are less rosy, and

optimistic predictions about the future that prove to be off the

mark likewise are immunized unless plaintiffs meet their burden

of demonstrating intentional deception."); Greenstone v . Cambex

Corp.,

2 , 25 (1st Cir. 1992) ("The courts have

uniformly held inadequate a complaint's general averment of the

defendant's `knowledge' of material falsity, unless the complaint

also sets forth specific facts that make it reasonable to believe

that defendant knew that a statement was materially false.");

Romani v . Shearson Lehman Hutton,

7 5 , 878 (1st Cir.

1991) ("The requirement that supporting facts be pleaded applies

even when the fraud relates to matters peculiarly within the

knowledge of the opposing party. . . . Where allegations of fraud

are explicitly o r , as in this case, implicitly, based only on

information and belief, the complaint must set forth the source

of the information and the reasons for the belief.").

11 In support of their claim that the second amended complaint

meets the pleading requirements of Rule 9 ( b ) , plaintiffs' rely on

a recent opinion by the Court of Appeals for the Ninth Circuit in

Fecht v . The Price Company, ___ F.3d ___,

(9th

Cir. Nov. 2 0 , 1995). This reliance i s , however, misplaced. In

that case, unlike this one, the court found that the plaintiffs

had alleged facts which, if proved at trail, would support a

finding that the defendant made material and false statements to

the public. Specifically, the court noted that:

The Complaint alleges that the positive statements about the expansion program were false when made because, in truth, the new stores were losing money and the program overall was doing so poorly that it would have to be curtailed or abandoned. Thus plaintiffs allege facts that reveal that the statements failed to reflect the Company's true condition at the time the statements were made. . . . More particularly, plaintiffs cite specific problems with the expansion program . . . In addition, the Complaint pleads facts that show that the decision to terminate the expansion program was made very shortly after the optimistic statements were made. . . . This shortness of time is circumstantial evidence that the optimistic statements were false when made.

Id. at *4-5 (emphasis added). Here, plaintiffs have failed to

allege facts which, even if assumed to be true and capable of

12 being proved at trial, would support a claim that defendants knew

their public statements were false when they were made.

As required by law, the Company plainly and unambiguously

disclosed to the public the shift in product demand from Ford. It also clearly stated that "vehicle build rates are inherently

unpredictable." Second amended complaint, at ¶61 (quoting the

Prospectus). Nevertheless, plaintiffs seem to take issue with

the Company's statement that, despite "unpredictable" vehicle

build rates and a shift in product mix, it "believes that these

components in the aggregate, will provide the Company with

opportunities comparable to those that have been provided by the

Taurus/Sable and Tempo/Topaz models." Again however, plaintiffs

have pled no facts which, if proven, would support a claim that

the Company's expressed belief that Ford's revised product demand

presented comparable opportunities was knowingly false when the

Company made that statement. The same is true with regard to

plaintiffs' claims concerning the Company's statements about its

relocation of production facilities.

Conclusion

13 Plaintiffs' allegations of securities fraud are serious

ones. The law requires such allegations to be pled with

specificity. Because counsel for plaintiffs appear to be

experienced and knowledgeable securities litigators, the court is

constrained to infer that counsel have pled all the facts they

can, with all the specificity possible, in light of the

information available to them. Having afforded plaintiffs three

opportunities to state legally sufficient claims, and plaintiffs

having failed to do s o , the court hereby dismisses their second

amended complaint and this action in its entirety, with

prejudice. Defendants' motion to dismiss (document n o . 23) is

granted.

SO ORDERED.

Steven J. McAuliffe United States District Judge

December 2 9 , 1995

cc: Edward L . Hahn, Esq. Patrick K. Slyne, Esq. Sydelle Pittas, Esq. Michael C . Harvell, Esq.

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