ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 91-00354)
Before: NYGAARD, ALITO, and SAROKIN, Circuit Judges
(Opinion Filed: July 18, l996)
This is an appeal from three orders dismissing all of the plaintiffs' claims in a consolidated class action securities fraud complaint. The orders were based on Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). We affirm in part, reverse in part, and remand for further proceedings.
Plaintiffs in this case are all purchasers of publicly traded Westinghouse Electric Corporation ("Westinghouse") securities. Plaintiffs purchased Westinghouse common stock between March 28, 1989, and October 22, 1991 ("the class period").
Defendants include Westinghouse, Westinghouse Financial Services, Inc. ("WFSI") (a wholly owned subsidiary of Westinghouse), Westinghouse Credit Corporation ("WCC") (which is owned by WFSI), and certain directors and senior officers of these companies (the "individual defendants"). (We will refer to the above defendants collectively as the "Westinghouse defendants.") The other defendants are Price Waterhouse (the independent accountant for the Westinghouse companies), and a proposed defendant class of underwriters (the "underwriter defendants") involved in a May 1991 public offering of Westinghouse common stock.
The relevant allegations of plaintiffs' complaint, which were set forth in detail by the district court, see In re Westinghouse Securities Litigation, 832 F. Supp. 948 (W.D. Pa. 1993), may be summarized as follows. During the 1980's, WCC grew rapidly by committing substantial funds to the financing of real estate developments and highly leveraged transactions. In the late 1980's, however, WCC experienced an increase in defaults in its real estate loans and in delinquencies in other transactions. As a result, WCC suffered billions of dollars of losses, and the Westinghouse defendants feared a drop in WCC's commercial paper ratings. To protect those ratings, they concealed the losses, which allegedly totaled between $2.6 and $5.3 billion, through improper accounting and reporting techniques.
Prior to February 1991, Westinghouse management decided that WCC needed a cash infusion if it was to maintain its commercial paper ratings. Westinghouse developed a major restructuring plan, which it announced on February 27, 1991. Under that plan, Westinghouse decided to "downsize" WCC by selling or restructuring nearly one-third of its assets that had previously been held on a long-term basis. Westinghouse knew that selling and restructuring so many non-performing or underperforming assets in the market that existed at the time would result in significant losses. Westinghouse thus took a $975 million pre-tax charge against fourth quarter 1990 earnings to be applied to loan loss reserves *fn1 and to cover estimated losses. The press release and other documents issued by Westinghouse in connection with these actions stated that they decisively addressed WFSI's and WCC's problems. Plaintiffs allege that these statements were materially false when made in that defendants knew (or recklessly disregarded facts demonstrating) that reserves remained inadequate as of that time. Plaintiffs point to a statement by James Focareta, WCC's president from early 1990 to early 1991, in which he acknowledged that the $975 million writeoff was known to be insufficient. Focareta said: "The number that was used ($975 million) was a number developed for something else . . . . Every Westinghouse credit manager knew that was not sufficient . . . . The Keystone Kops were involved, clearly." App. 1134.
Plaintiffs assert that Westinghouse further compounded the harm to investors by raising $500 million through a May 1991 stock offering. Westinghouse offered 19 million shares of its common stock for sale to the investing public at $26.50 per share on May 9, 1991. Plaintiffs allege that the Prospectus and Registration Statement filed with the Securities and Exchange Commission ("SEC") in May 1991, as well as other documents (including the Annual Report) that were incorporated by reference therein, contained material misrepresentations and omissions.
In October 1991, Westinghouse determined and announced that the restructuring plan had to be accelerated. Additional assets of $3.1 billion were designated as being held for sale or restructuring. Westinghouse took a $1.68 billion pre-tax charge in anticipation of further losses it expected to suffer. Plaintiffs allege that defendants knew as early as October 1990 that a charge of this magnitude was inevitable and that defendants' statements to the contrary over the course of that year and contemporaneous with the October 1991 announcement were materially false. Plaintiffs claim that they paid artificially inflated prices of from $21.75 to $39.375 per share in contrast to Westinghouse's closing price of $15.875 after the announcement of the October 1991 charge.
The first of the class action complaints consolidated herein was filed in February 1991, just after Westinghouse announced the restructuring plan. In May 1991, the magistrate judge granted plaintiffs limited discovery to prepare a consolidated complaint. In March 1992, the magistrate judge ordered that Westinghouse make available to plaintiffs documents related to over 500 active investment files. Plaintiffs filed the Consolidated Amended Class Action Complaint ("the first amended complaint") in June 1992.
The first amended complaint alleged violations of the following provisions: sections 10(b) and 20 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. Section(s) 78j(b), 78t, and Rule 10b-5, 17 C.F.R. Section(s) 240.10b-5, against all defendants (count I); sections 11 and 15 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. Section(s) 77k, 77o, against all defendants (count II); section 12(2) of the Securities Act, 15 U.S.C. Section(s) 77l(2), against all defendants except Price Waterhouse (count III); separate violations of sections 11 and 15 against all defendants except for the underwriter defendants (count IV); separate violations of section 12(2) against the Westinghouse defendants (count V); and negligent misrepresentation against all defendants (count VI).
In August 1992, defendants moved to dismiss all counts of the first amended complaint under Federal Rules of Civil Procedure 9(b) and 12(b)(6). In an opinion and order entered on July 29, 1993, the district court granted defendants' motion. See In re Westinghouse Securities Litigation, 832 F. Supp. 948 (W.D. Pa. 1993) (Westinghouse I). Count I and a small piece of count VI were dismissed without prejudice to repleading, while counts II-V and most of count VI were dismissed with prejudice. *fn2
Plaintiffs filed the Second Consolidated Amended Class Action Complaint ("the second amended complaint") in September 1993. Plaintiffs repled all of their claims, including those that had been dismissed with prejudice (stating that such claims were being repled verbatim solely to preserve their appellate rights). In December 1993, defendants moved to dismiss the second amended complaint under Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). In March 1994, plaintiffs cross-moved to supplement the second amended complaint. *fn3
In January 1995, the district court granted defendants' motion to dismiss the second amended complaint. See In re Westinghouse Securities Litigation, Civ. No. 91-354, Opinion and Order entered January 23, 1995, App. 310-46 (Westinghouse II). Counts II-VI were dismissed without discussion, since they had already been dismissed with prejudice in Westinghouse I. Many of the claims in count I were dismissed with prejudice, and the remainder of the claims in count I were dismissed without prejudice to repleading in accordance with Rule 8. The district court also denied as moot plaintiffs' motion to supplement the second amended complaint.
Plaintiffs filed a "Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint," in which they informed the district court that they would not be amending the complaint; rather, plaintiffs stated that they were going to "stand" on the complaint and seek immediate appellate review. App. 347. The district court then dismissed plaintiffs' remaining claims from count I with prejudice and closed the case. See App. 350-51 (Memorandum Order entered March 1, 1995). This appeal followed.
On appeal, plaintiffs argue that the district court improperly dismissed various of their section 10(b) claims under Rule 8; misapplied the "bespeaks caution" doctrine; improperly found that plaintiffs failed to plead fraud with particularity; mistakenly found that plaintiffs failed to plead materiality; and erroneously dismissed the section 12(2) claims. Plaintiffs also argue that the district court should have granted their motion to supplement the second amended complaint. Finally, plaintiffs argue that this case should be assigned to a new district judge.
We turn first to plaintiffs' challenge to the district court's Rule 8 dismissal. Rule 8(a) provides that any pleading that includes a claim for relief shall contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). Rule 8(e) further provides that "[e]ach averment of a pleading shall be simple, concise, and direct." Fed. R. Civ. P. 8(e)(1). "Taken together, Rules 8(a) and 8(e)(1) underscore the emphasis placed on clarity and brevity by the federal pleading rules." 5 Wright & Miller, Federal Practice and Procedure Section(s) 1217 at 169 (2d ed. 1990).
We review the district court's decision to dismiss claims under Rule 8 for an abuse of discretion. E.g., Kuehl v. F.D.I.C., 8 F.3d 905, 908 (1st Cir. 1993), cert. denied, 114 S. Ct. 1545 (1994); 5 Wright & Miller, Section(s) 1217 at 175. "It is well settled that the question on review `is not whether we would have imposed a more lenient penalty had we been sitting in the trial judge's place, but whether the trial judge abused his discretion in imposing the penalty he did.'" Kuehl v. F.D.I.C., 8 F.3d at 908-09 (citation omitted).
The district court's January 1995 opinion and order provided that "with respect to those aspects of Count One that survive the instant Opinion and Order, plaintiffs are granted 30 days from this date within which to replead in conformity with the requirements of Rule 8." Westinghouse II, Op. at 21, App. 330; Order at 35, App. 344. The district court added that "[f]ailure to comply with this Order will result in the dismissal of plaintiffs' claims with prejudice." Id.
On February 21, 1995, plaintiffs filed a "Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint." Plaintiffs stated as follows:
Plaintiffs have carefully weighed the merits of repleading against seeking immediate appellate review. They respectfully give notice of their intention to stand on the Complaint. See, Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992). App. 348.
The district court then dismissed with prejudice all of plaintiffs' remaining claims, stating as follows:
On January 20, 1995, this Court dismissed plaintiffs' Second Amended Class Action Complaint. As that Opinion and Order explained, with respect to those aspects of Count One of plaintiffs' Second Amended Complaint that survived the January 20, 1995 Opinion and Order, plaintiffs were granted 30 days from that date within which to replead in conformity with the requirements of Rule 8 of the Federal Rules of Civil Procedure. The Opinion and Order specifically stated that failure to replead within 30 days would result in the dismissal of plaintiffs' claims with prejudice.
Instead of filing an amended complaint, plaintiffs filed a Notice of Intention to Stand on Second Consolidated Amended Class Action Complaint, indicating that they had "carefully weighed the merits of repleading against seeking immediate appellate review."
Accordingly, . . . it is hereby ORDERED that all remaining claims in plaintiffs' Second Amended Class Action Complaint are dismissed with prejudice. App. 350-51 (Memorandum Order entered 3/1/95).
Plaintiffs argue first that the Rule 8 dismissal without prejudice in Westinghouse II should be reversed because the district court imposed inconsistent pleading standards on them. Plaintiffs contend that the Westinghouse I opinion required them to draft the second amended complaint with tremendous specificity. They argue that the district court in effect required that they violate Rule 8 (if they violated Rule 8 at all) in order to comply with Rule 9(b). See Plfs' Br. at 44-46. We disagree.
It is well settled that "the particularity demands of pleading fraud under Rule 9(b) in no way negate the commands of Rule 8." Vicom, Inc. v. Harbridge Merchant Services, Inc., 20 F.3d 771, 776 (7th Cir. 1994) (citations omitted); see generally 5 Wright & Miller, Section(s) 1281 at 520-21 (pleading fraud with particularity under Rule 9(b) should be done consistently with the general philosophy of Rule 8); 2A Moore's Federal Practice Para(s) 8.13, at 8-58 (2d ed. 1995) (the requirements of Rule 8 apply "even where the Rules command particularity, as in the pleading of fraud under Rule 9(b)") (footnote omitted).
Having reviewed plaintiffs' second amended complaint, we cannot say that the district court abused its discretion in dismissing the viable portion of count I, without prejudice to repleading, pursuant to Rule 8. The second amended complaint is unnecessarily complicated and verbose. The text of the complaint rambles for more than 600 paragraphs and 240 pages, including a 50-plus page "overview" of the alleged wrongful conduct. The district court, through the two rounds of difficult motions, had narrowed plaintiffs' claims. The court then ordered plaintiffs to submit a third amended complaint containing only those allegations relevant to what were, in the court's view, the remaining viable claims. This does not seem to us to constitute an abuse of discretion; indeed, it makes a tremendous amount of sense. See generally In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541, 1544 (9th Cir. 1994) (en banc) ("We see nothing to prevent the district court, on remand, from requiring, as a matter of prudent case management, that plaintiffs streamline and reorganize the complaint before allowing it to serve as the document controlling discovery, or, indeed, before requiring defendants to file an answer.").
We further hold that the district court did not abuse its discretion when it dismissed with prejudice the otherwise viable claims from count I following plaintiffs' decision not to replead those claims in accordance with Rule 8. The district court expressly warned plaintiffs that failure to replead the remaining claims in compliance with Rule 8 would result in the dismissal of those claims. The dismissal with prejudice that followed plaintiffs' decision not to amend was not an abuse of discretion. See, e.g., 5 Wright & Miller, Section(s) 1217 at 178 (dismissal with prejudice appropriate where party refuses to file an amended and simplified pleading). As we recently stated in a different but analogous context, "it is difficult to conceive of what ...