Count I, which is brought under § 10(b) and Rule 10b-5, alleges that the defendants, either as participants or aiders and abettors, overestimated or underestimated production costs for nuclear and fossil facilities of Westinghouse located in the United States and throughout the world. These defendants took unreported profits from completed construction accounts and allocated them to secret reserve accounts called "bags." The defendants later used the secret reserve accounts to alter financial results in order for the individual defendants to receive financial performance bonuses. (Complaint para. 44-para. 47, docket entry No. 1). These actions are alleged to have resulted in the misrepresentations of Westinghouse's financial condition to the detriment of the investing public. Plaintiff further alleges that Price Waterhouse knew or should have known that certified financial statements prepared by them were inaccurate.
Count III essentially alleges the facts contained in Count I and asserts a cause of action for common law fraud and breach of fiduciary duty.
Count IV is brought against the five individual defendants for trading Westinghouse stock, without disclosing, on the basis of material inside information. Count IV alleges a cause of action based upon § 10(b)(5), common law fraud, and breach of fiduciary duty.
To state a claim under § 10(b), plaintiff must allege more than corporate mismanagement. He must allege facts indicating an intent to deceive, manipulate, or defraud. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 479, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 7 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976). Rule 9(b) requires that such fraud be stated with particularity.
A reading of plaintiff's complaint compels the conclusion that it does not comply with the heightened pleading requirement of Rule 9(b). Plaintiff gives no factual specifics to support his claim that Westinghouse failed to report the true worth of its nuclear and fossil facilities, nor which of those facilities were underestimated or overestimated, beyond stating that they are located in the United States and throughout the world. Thus, plaintiff fails to state the place of the alleged fraud as required by Rule 9(b). See DuSesio v. United Refining Co., 540 F. Supp. 1260, 1272 (W.D. Pa. 1982). Plaintiff has a duty to identify the allegedly false and misleading statements or documents on which he relied. By merely alleging that he relied upon Westinghouse's financial statements, plaintiff has not clearly or specifically identified which documents that term encompasses. See Decker v. Massey-Ferguson, Ltd., 681 F.2d 111 (2nd Cir. 1982). Furthermore, the complaint does not set forth from which sources plaintiff derived his information and belief that Westinghouse's financial statements contained overstatements and understatements, nor the extent to which Westinghouse misstated its financial worth.
Furthermore, although the plaintiff, in Count IV, alleging that defendants traded Westinghouse stock on inside information, he does not cite one specific instance of such trading.
Since plaintiff only asserts in a conclusory and general fashion without providing the defendants with fair notice of the grounds on which they rest, plaintiff cannot use discovery as a means of uncovering his claims. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975). Accordingly, defendants' motion to dismiss Counts I, III, and IV for failure to plead fraud with particularity as required by Rule 9(b) is granted. Plaintiff is hereby given leave to amend Counts I, III, and IV of the complaint to comply with Rule 9(b) within twenty days of this Memorandum Opinion. Moore's Federal Practice para. 9.03 (2nd ed. 1984).
Plaintiff alleges that Price Waterhouse failed to accurately disclose the alleged temporary diversions and relocation of excess monies and fraudulently certified false financial reports. Again, plaintiff does not identify the financial statements and reports which he claims misled him, apart from referring to all financial statements prepared by Price Waterhouse from August, 1977 until the filing of the complaint. Simply denominating unspecified financial statements and reports as false and misleading fails to state the circumstances constituting fraud. Furthermore, the complaint does not detail the extent of the accounting firm's knowledge of the true financial situation of Westinghouse, or the efforts they expended, if any, in which they were remiss in investigating Westinghouse's financial condition.
See Christidis v. First Pennsylvania Mortgage Trust, supra, at 100.
Accordingly, Price Waterhouse's motion to dismiss Counts I and III for failure to plead fraud with particularity as required by Rule 9(b) is granted. Plaintiff is hereby given leave to amend Counts I, III, and IV of the complaint to comply with Rule 9(b) within twenty days of this Memorandum Opinion. Moore's, supra, at para. 9.03.
II. Motion to Dismiss Count V
Westinghouse has filed a motion to dismiss Count V of the complaint on the ground that it fails to comply with Rule 23.1 of the Federal Rules of Civil Procedure because: (1) plaintiff has failed to make a demand on Westinghouse's Board of Directors; (2) plaintiff was not a shareholder of Westinghouse at the time of the alleged wrongful conduct and at the time of the filing of this complaint; (3) plaintiff failed to verify the complaint; and (4) plaintiff does not fairly and adequately represent the interests of the Westinghouse shareholders and Westinghouse.
Defendant Westinghouse filed this motion to which the individual defendants named in Count V have filed a motion to join. (Docket entry No. 25). Since defendants other than the corporation on whose behalf the derivative claim is asserted have standing to raise the defense of failure to comply with the requirements of Fed. R. Civ. P. 23.1, defendants' motion to join in Westinghouse's motion is granted. Shlensky v. Dorsey, 574 F.2d 131, 142 (3d Cir. 1978).
Because the Court concludes that plaintiff has failed to satisfy the demand requirement of Rule 23.1, the Court grants defendants' motion to dismiss Count V of the complaint. It is unnecessary to consider the remaining bases posited by the defendants in support of its motion.
Rule 23.1 states in pertinent part that a shareholder's derivative complaint shall "allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority . . . and the reasons for his failure to obtain the action or for not making the effort."
Plaintiff avers in his complaint that demand would be futile since the directors acquiesced in the complained of conduct and the directors themselves are named defendants.
(Complaint para. 91, docket entry No. 1). These allegations without more are insufficient to excuse plaintiff from compliance with Fed. R. Civ. P. 23.1.
The demand requirement of Rule 23.1 assures that those who are most familiar and responsible for corporate management determine whether and how to pursue a corporate claim. Cramer v. General Tel. and Electronics Corp., 582 F.2d 259, 275 (3d Cir. 1978), cert. denied, 439 U.S. 1129, 59 L. Ed. 2d 90, 99 S. Ct. 1048 (1979).
In determining whether the allegations of plaintiff's complaint are sufficient to excuse demand, the Third Circuit has stated that the inquiry is "intensely factual" and focused upon the disinterestedness of the directors, rather than the nature of their wrongdoing. Lewis v. Curtis, 671 F.2d 779, 786 (3d Cir.), cert. denied, 459 U.S. 880, 74 L. Ed. 2d 144, 103 S. Ct. 176 (1982). In Lewis, plaintiff brought a derivative action against the corporation and its board of directors asserting that the directors had participated in an allegedly self-interested transaction and engaged in corporate waste. In that situation, the Third Circuit held that where plaintiff's complaint set forth in detail facts that would establish bias, demand would be futile and, therefore, should be excused. Id. at 786-787.
Plaintiff's complaint avers that the directors "by their failure to detect the concealment of the true state of affairs at Westinghouse and to make public disclosure . . . aided and abetted [the officers] in their illegal acts." (Complaint para. 89, docket entry No. 1). In particular, the complaint alleges that these officers
manipulated the gross profits of Westinghouse and presented a false picture of Westinghouse's earnings in order to realize greater profits and monies for themselves. (See Count I of plaintiff's complaint). Furthermore, plaintiff's complaint alleges that these officers traded Westinghouse stock on inside confidential information in violation of Rule 10b-5 and in breach of their fiduciary duty. (See Count IV of plaintiff's complaint).
Notably, the complaint does not allege that the directors themselves realized any monies from these alleged fraudulent activities or were engaged in any kind of self-dealing. Merely alleging that the directors acquiesced in the challenged transactions does not excuse plaintiff from compliance with Rule 23.1. Weiss v. Temporary Inv. Fund, Inc., 516 F. Supp. 665, 672 (D.C. Del. 1981), aff'd., 692 F.2d 928 (3d Cir. 1982), vacated on other grounds, 465 U.S. 1001, 104 S. Ct. 989, 79 L. Ed. 2d 224 (1984), on remand, 730 F.2d 939 (3d Cir. 1984). Accordingly, defendants' motion to dismiss Count V is granted.
III. Petition for Order Requiring Plaintiff to Post Security for Costs
Defendants named in Counts I through IV petition the Court pursuant to Rule 9(a) of the Local Rules of the United States District Court for the Western District of Pennsylvania for an order requiring plaintiff to post security for costs. Since the Court has dismissed all Counts of the complaint, defendants' motion is moot.
IV. Petition to Require Plaintiff to Post Security for Reasonable Expenses and Attorneys' Fees
Defendant Westinghouse moves, pursuant to 15 P.S. § 1516 (1967),
for an order requiring plaintiff to post security for expenses, including attorneys' fees, which may be incurred by the corporation as a condition precedent to maintaining or recovering in a derivative suit. Since the Court has dismissed Count V, plaintiff's derivative claim, defendant's motion is moot. See supra, Part I.
An appropriate Order will be issued.