The opinion of the court was delivered by: Cohill, Chief Judge.
Plaintiffs, purchasers of Equimark Corporation stock, brought
this class action against Equimark and a number of corporate
officers, charging them with securities fraud. Presently before
the Court are Motions to Dismiss filed by all defendants.
Because plaintiffs have failed to comply with the requirements
for pleading fraud, we will dismiss their amended complaint,
with leave to file a second amended complaint.
Plaintiffs claim status as purchasers of Equimark stock
during the proposed class period, September 12, 1987 to
September 12, 1990. They seek to represent all purchasers of
Equimark stock during that period.
Defendants are Equimark, a Delaware corporation with
corporate offices in Pittsburgh, and the following persons,
whom the plaintiffs claim held these positions as corporate
officers during the class period: Alan S. Fellheimer, Chairman
of the Board and Chief Executive Officer of Equimark; Judith E.
Fellheimer (wife of Alan Fellheimer), President and Executive
Vice President of Equimark and Chairman of the Board of
Equimanagement, Inc., an Equimark subsidiary; Claire W.
Gargalli, Chief Operating Officer of Equimark, a director of
Equimark, and an officer of various Equimark subsidiaries;
Michael E. Jehle, Chief Financial Officer, Secretary, and an
Executive Vice President of Equimark; Robert C. Payment, Senior
Vice President and Controller of Equimark. Complaint ¶¶ 5-10.
In Count I, plaintiffs charge defendants with securities
fraud in violation of Sections 10(b) and 20(a) of the
Securities Exchange Act, 15 U.S.C. § 78j(b) and 78t(a), and
Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5.
Complaint ¶ 60. Count II is a state-law claim for negligent
Plaintiffs charge that throughout the class period,
defendants made false and misleading statements by portraying
Equimark as a thriving corporation that was well prepared for
a downturn in the economy, when in fact loan loss reserves were
not adequate to withstand the loan losses that began in 1990.
The following excerpts from the consolidated amended class
action complaint are representative of plaintiffs' allegations:
18. . . . During [the expansion period beginning
in 1987], Equimark disregarded the need for and,
therefore, lacked adequate management policies,
procedures and controls to assure that its
acquisitions would be profitable and that its
consequential loan portfolio would be comprised of
economically sound, well-secured credits. In
connection therewith, and unbeknownst to the
investing public, Equimark's subsidiaries, both
old and newly-acquired, made increasingly
imprudent loans and investments which were not
economically justifiable and which greatly
increased Equimark's profitability for incurring
losses thereon as a result of default.
19. Throughout the Class Period, in public
pronouncements at Equimark's annual meeting of
shareholders, in filings with the SEC, in Annual
and Quarterly Reports, and statements and releases
disseminated to the investment community,
defendants portrayed the Company in glowing terms,
with great prospects for future growth and
earnings. . . .
34. On July 26, 1988, in a press release,
Defendants Alan and Judith Fellheimer announced
that they "have access to a capital pool of a
half-billion dollars — and if the deal's right,
more." This announcement was intended to convey to
the market that Equimark management and its
subsidiary EquiManagement, Inc. had unique skills
and great success in turning around troubled
35. In a press release issued on October 17, 1988,
Defendant Equimark announced its consolidated net
income for the third quarter of 1988. Equimark
announced that its earnings were "a record high
for a quarterly period and an increase of . . .
38.1 percent over consolidated net income . . . in
the third quarter of 1987." In announcing these
record earnings, defendants induced the market and
the public into believing that Equimark's
provisions for possible loan losses remained under
control and a small percentage of the total loans
38. In its Annual Report for 1988, . . .
[Equimark] stated that the reserve at December 31,
1988 was considered adequate to absorb future
credit losses of Equimark. The 1988 Annual Report
created the false impression that the financial
quality of Equimark was extremely strong, and that
any problems in the portfolio were adequately
reserved. The annual report was materially
misleading for the reasons set forth above, and by
reason of the failure to disclose that increases
in charge-offs, loan loss provision and
nonperforming assets were virtually certain.
46. The 1989 Third Quarter Report which was filed
with the SEC and disseminated to the investing
public on or about November 6, 1989, stated that
reserves for loan losses at September 30, 1989 was
$40.908 million, or 1.47% of loans outstanding.
This compared with reserves at December 31, 1988
of $36.617 million, or 1.50% of loans. Defendants
[a]s the result of effective ongoing loan
reviews, Equimark has been able to recognize the
signs of a weakening economy and has detected
the early symptoms of credit and collection
48. Equimark continued to portray the financial
condition and future prospects of Equimark and its
subsidiaries in a falsely optimistic manner in its
Form 10-K filed with ...