Plaintiffs, in addition to the allegations based on the documents, allege that Price Waterhouse "agreed to maintain reserves at a capped 2.5% (later increased to a grossly inadequate 2.8%) despite known massive increases in problem loans," see P 77-90, and "participated in the scheme to defraud by recklessly disregarding the lack of internal controls, failing to obtain sufficient competent evidential matter, failing to broaden the scope of its audit where circumstances required, and failing to maintain independence," See P 371*; see generally Plaintiffs' Brief at 19.
Plaintiffs do not allege that Price Waterhouse expressed any opinions or was retained or consented to render opinions in any other public disclosures. See PP 137-62. Nor do plaintiffs allege that Price Waterhouse was party to Lazard's review of Westinghouse's options in late 1990, nor in the Westinghouse board of directors' decision to take the $ 975 million charge. Finally, plaintiffs do not allege that Price Waterhouse was involved in or commented on the $ 1.68 billion charge taken in October, 1991.
Plaintiffs' claim that Price Waterhouse's unqualified opinions on Westinghouse's financial statements in the class period directly violate Section 10(b) and Rule 10b-5 are sufficient to state a claim at this stage of the proceedings. Plaintiffs must allege, in order to state a direct claim, that Price Waterhouse knowingly or with reckless indifference made a false statement of material fact intending to induce the plaintiffs' reliance thereon. Lewis v. Chrysler Corp., 949 F.2d at 649. It is not actionable that a financial statement is incorrect or even that the party audited is committing a fraud which the auditor does not detect, because the expression of the auditor's opinion does not make the auditor an insurer of every investor who purchases in reliance on the financial statement.
Nevertheless, the Court of Appeals has approved, although in a distinguishable procedural context, liability based on allegations that an auditing firm misrepresented its adherence to GAAS. See Bradford-White Corp. v. Ernst & Whinney, supra.
Measured by the pleading standards of Rule 9, however, the complaint is inadequate to state any cause of action against Price Waterhouse for aiding and abetting. Plaintiffs' aiding and abetting allegations, for example that Price Waterhouse "agreed" that WCC's loss reserves would be 2.5%, see P 80, and "approved" an inadequate level of loss reserves so that the individual Westinghouse defendants could garner performance bonuses, P 90, are inherently improbable as a matter of fact and insufficient as a matter of law. In the absence of any allegation that would support an inference that Price Waterhouse had either the legal power or a factual incentive to agree to or approve loss reserves, plaintiffs' aiding and abetting claim is based on two allegations: (1) that Price Waterhouse received fees from Westinghouse, P 78, and that it acted as CFO of Brad Cable at the time of some of its audits, P 405.
Accounting firms do not offer their services to large corporations gratis, and there is nothing improper in Price Waterhouse receiving fees for its services. Nevertheless, a different situation might be presented if plaintiffs alleged that Price Waterhouse's compensation was well above the market rate or that it was somehow bartered for a favorable opinion. Paragraph 78 makes no such allegations, and adds nothing to plaintiffs' other allegations.
The allegation that Price Waterhouse's audit integrity was compromised because it was also acting as CFO of Brad Cable is also rejected. Regulation S-X requires an accountant's independence, but considers independence to be impaired only by a "direct financial interest" or a "material indirect financial interest." 17 C.F.R. § 210.2-01(b). Price Waterhouse's alleged indirect financial interest in Brad Cable is, on the facts alleged, immaterial as a matter of law.
VI. COUNTS TWO, THREE, FOUR and FIVE
A. Westinghouse Defendants
In order to state a claim under Sections 11 and 12(2), plaintiffs need only allege that they acquired a security which was accompanied by a registration statement, any part of which contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, regardless of scienter. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 74 L. Ed. 2d 548, 103 S. Ct. 683 (1983). Allegations of § 11 and § 12(2) violations that sound in fraud must be pled with the particularity required by Rule 9(b). Shapiro, 964 F.2d at 287.
In PP 423-466, plaintiffs allege that all defendants including the individual defendants, violated Sections 11, 12(2) and 15 of the Securities Act by making misrepresentations of fact in the registration statement and prospectus filed with the SEC on April 18, 1991 in connection with the May 1991 public offering, and by offering or selling Westinghouse securities by the use of a misleading prospectus. Specifically, plaintiffs aver that the registration statement and prospectus misrepresented Westinghouse's earnings, assets, net worth and loan loss reserves. Plaintiffs also aver that Westinghouse falsely predicted in its prospectus that the restructuring plan announced February 27, 1991 would "reduce risk and improve the financial position and results of operations of WFSI and WCC in future periods," and that "management believed that under current economic conditions [WFSI's valuation allowances] should be adequate to cover future losses that may occur." P 432. Finally, plaintiffs allege that Westinghouse's 1990 Form 10-K annual report, referred to in the prospectus, contained false statements about the adequacy of Westinghouse's loan loss reserves and internal controls, misleading characterizations about the February 27, 1991 restructuring, and falsely represented that, "Management believes that, under current economic conditions, the allowance for losses at December 31, 1990 will be adequate to cover future losses that may develop in the various portfolios." P 433.
1. Control Person Liability
Plaintiffs' claims against the individual defendants are premised upon the allegation that Messrs. Lego, Stern, Hollinshead, Faust, Powe and Pugliese were "controlling persons," pursuant to Section 15 of the Securities Act. Section 15 defines "controlling person" as every person who "controls any person liable under section 11 or 12. . . ." 15 U.S.C. 77o (1988). The Securities and Exchange Commission defines "control" in this context as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 240.12b-2. In Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 890-91 (3d Cir. 1975), the United States Court of Appeals for the Third Circuit stated that "heavy consideration" is given "to the power or potential power to influence and control the activities of a person, as opposed to the actual exercise thereof." The court held that a person who owned fifty per cent of the outstanding stock, was Chairman, CEO and President of the company, and ran the day-to-day business activities was a "controlling person." Id. at 891.
None of the individual defendants in the instant matter bear as many incidents of control as did the defendant in Rochez Bros.; they are each, however, "controlling persons." Each of the individual defendants is alleged to have possessed the power, or the potential power, to control the activities of Westinghouse and/or WFSI and WCC. PP 9, 11. At the motion to dismiss stage, such alleged influence, even "short of actual direction," is sufficient to make one a controlling person, see Gould v. American-Hawaiian S.S. Co., 535 F.2d 761, 779 (3d Cir. 1976). The ultimate question "whether a defendant is a controlling person within the meaning of federal securities law is a question of fact," and may therefore be raised again in a motion for summary judgment. See Wiley v. Hughes Capital Corp., 746 F. Supp. 1264, 1283 (D.N.J. 1990) (citing In re Worlds of Wonder Securities Litigation, 694 F. Supp. 1427, 1435 (N.D.Cal. 1988)).
2. Rule 12(2) "Offers or Sells" Requirement
The Westinghouse Defendants argue that Counts Three and Five should be dismissed as to them because plaintiffs have not pled facts demonstrating that the Westinghouse defendants offered or sold securities, an essential element of any claim under Section 12(2) of the Securities Act.
In PP 442 and 461, plaintiffs allege in wholly conclusory terms that defendants "were sellers of Westinghouse securities within the meaning of Section 12(2) of the Securities Act and either sold or promoted the sale of said securities directly to plaintiffs and other Class members or solicited plaintiffs and other Class members to buy such securities." Relying on the Third Circuit Court of Appeals' holding on this issue in Craftmatic, 890 F.2d at 637, plaintiffs argue that their legal conclusion, unsupported by any allegation of fact, establishes that the Westinghouse defendants, acting out of their own financial interests, either sold, or solicited the purchase of, Westinghouse securities as part of the May 19, 1991 public offering.
The Supreme Court in Pinter v. Dahl, 486 U.S. 622, 100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988), held that § 12(1) liability extends both to sellers and to those who solicit securities purchases, motivated by their own or the securities owners's financial interests. Id. at 642-47. The Craftmatic court, applying the rule from Pinter, to Section 12(2) claims, 890 F.2d at 635, held that an issuer who itself sold nearly two-thirds of an initial public offering of common stock, Craftmatic, 890 F.2d at 630, was not immunized from § 12 liability.
In Craftmatic, the plaintiffs alleged that:
Each of the defendants . . . either sold said securities directly to plaintiffs . . . or solicited plaintiffs . . . to buy Craftmatic common stock . . . and in so acting were motivated by a desire to serve their own financial interests or the financial interests of the owners of Craftmatic securities, and they . . . conspired with and aided and abetted one another in connection with the preparation of the false and misleading Prospectus and Registration Statement used in conjunction with the sale of Craftmatic securities.