Plaintiffs' six-count third amended complaint asserts claims for: (1) violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (by GE Delaware and the PM Directors); (2) violations of various state securities laws, including section 1-503 of the Pennsylvania Securities Act (by GE Delaware and the PM Directors); (3) common law fraud (by all plaintiffs); (4) negligent misrepresentation (by all plaintiffs); (5) professional malpractice (by Giant Eagle and GE Delaware); and (6) breach of contract (by Giant Eagle and GE Delaware).
Summary judgment is appropriate when there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). In considering a motion for summary judgment, we must examine the evidence in the light most favorable to the non-moving party and draw all reasonable inferences in favor of that party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).
The parties agree that Pennsylvania law controls the instant action. Pennsylvania has adopted the "most significant relationship test" set forth in section 145 of the Restatement (Second) of Conflict of Laws (1971). See, e.g., Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (Pa. 1964). Under this test, a court should apply the law of the state with the most significant contacts to the action and the strongest interest in the application of its law. In the case at bar, Pennsylvania has the most significant contacts, including (1) all of the plaintiffs, with the exception of GE Delaware and Norman Weizenbaum are residents of Pennsylvania; (2) Giant Eagle and Phar-Mor are incorporated under the laws of Pennsylvania and Giant Eagle has its principal place of business here; (3) the stock purchased by plaintiffs was issued and sold in Pennsylvania; (4) the Coopers auditors who worked on the Phar-Mor and Giant Eagle audits are licensed by the Commonwealth of Pennsylvania and these auditors worked out of Coopers' Pittsburgh office; (5) the relationship between the parties was centered in Pennsylvania; and (6) the audit reports were prepared at and disseminated from Cooper's Pittsburgh office. No other state has such significant contacts to the instant action and we will apply Pennsylvania law to plaintiffs' state law claims.
Coopers' initially argues that the claims of Giant Eagle and GE Delaware are defective because the fraud perpetrated at Phar-Mor is attributable to both corporations under the general rule that "the fraud of an officer of a corporation is imputed to the corporation when the officer's fraudulent conduct was (1) in the course of his employment, and (2) for the benefit of the corporation." Rochez Bros., Inc. v. Rhoades, 527 F.2d 880, 884 (3d Cir. 1975, cert. denied, 425 U.S. 993, 48 L. Ed. 2d 817, 96 S. Ct. 2205 (1976). Under the imputation defense, a "participant in the fraud cannot also be a victim entitled to recover damages." Cenco Inc. v. Seidman & Seidman, 686 F.2d 449, 454 (7th Cir. 1992), cert. denied, 459 U.S. 880, 74 L. Ed. 2d 145, 103 S. Ct. 177 (1982).
Coopers contends that Monus was a servant of Giant Eagle, subject to its direction and control and, therefore, his fraudulent actions must be imputed to the Giant Eagle corporations. Coopers points to the fact that Monus had a written employment agreement with Giant Eagle pursuant to which he served as Phar-Mor's President through the end of 1991. The agreement stated that Monus would "report to and be subject to the direction of the Chief Executive Officer of [Giant Eagle]." Further, the agreement provided that Giant Eagle would pay Monus' annual salary and bonus. Coopers submits that these factors establish as a matter of law that Giant Eagle remained in a master-servant relationship with Monus and did not relinquish its rights to control him.
Regardless of whether Coopers' argument respecting Monus' employment status is meritorious, we reject Coopers' imputation defense for the same reason that we rejected, on summary judgment, the defense with respect to the claims asserted against Coopers by Phar-Mor, namely, the existence of genuine issues of material fact as to whether Monus, Finn and others were acting adversely to corporate interests. See, e.g., F.D.I.C. v. O'Melveny & Myers, 969 F.2d 744 (9th Cir. 1992) rev'd. on other grounds, 129 L. Ed. 2d 67, U.S. , 114 S. Ct. 2048 (1994). The factors establishing the existence of a jury question on the "adverse interest" exception are set forth in our opinion denying Coopers' summary judgment motion in Phar-Mor, Inc. v. Coopers, Civil Action No. 92-2108 (Opinion, June 1, 1995), and will not be restated here. We note, however, that the imputation defense is even less conducive to a summary dismissal with respect to the Giant Eagle plaintiffs because Monus, unlike Finn and the other alleged perpetrators, invoked his fifth amendment privilege and has not testified whether he intended, by his fraudulent acts, to benefit either Phar-Mor or the Giant Eagle corporations.
Coopers next argues that the claims of GE Delaware and the PM Directors under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 must be dismissed because (1) plaintiffs can offer no facts from which a jury could reasonably conclude that Coopers acted with scienter, and (2) it is partially untimely.
One of the requisite elements of a claim under section 10(b) of the 1934 Act and Rule 10b-5 is proof that the defendant acted with scienter. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). In Ernst, the Supreme Court noted that:
the term "scienter" refers to a mental state, embracing intent to deceive, manipulate, or defraud. In certain areas of the law recklessness is considered to be a form of intentional conduct for purposes of imposing liability for some act. We need not address here the question whether, in some circumstances, reckless behavior is sufficient for civil liability under § 10(b) and Rule 10b-5.