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May 22, 1991


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 misrepresentation.

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. . . .
  21. Throughout the Class Period, however, as part
  of the scheme alleged herein, defendants
  misrepresented and concealed the deterioration of
  the quality of Equimark's loan portfolio,
  concealed and misrepresented the likelihood of
  huge increases

  in non-performing assets, concealed the failure to
  set appropriate loan loss reserve levels on loans
  experiencing problems, concealed the failure to
  timely charge-off assets on which substantial
  losses were virtually certain in light of the
  facts known or available to them and misstated
  expansion prospects.
  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
  banking institutions.
  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
  stated that:
    [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 ...

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