the sale would not have been completed. Id. ¶ 35, 39.
Count one of the complaint alleges violations of § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and
17 C.F.R. § 240.10b-5;*fn7 count two, violations of Pennsylvania
Securities Exchange Act of 1972, 70 Pa. C.S. § 1-401; count three,
common law fraud; count four, negligent and innocent misrepresentation;
count five, civil conspiracy; and count six, promissory estoppel. The
relief requested includes "(a) the difference in value between the
Secured Convertible Debenture if UTN went public as represented and the
value of the Secured Convertible Debentures if UTN did not go public and
(b) their lost opportunity and profit had Plaintiffs sold their shares in
TDC to other interested purchasers." Am. cmplt. ¶ 51.
Defendants' objections to the complaint, in summary, are as follows:
(1) fraud was not pleaded with specificity, as required by Federal Rule
of Civil Procedure 9(b) and the Private Securities Litigation Reform Act
of 1995, 15 U.S.C. ¶ 78u-4 et seq. (the Reform Act); (2) the
securities, common law fraud, misrepresentation, and estoppel counts fail
to state an actionable claim; (3) the common law fraud and
misrepresentation claims are barred by the integration clause of the
Stock Purchase Agreement; and (4) the securities claims are time-barred.
Defendants also maintain that, because the only basis for jurisdiction is
the federal securities claim, supplemental jurisdiction should not be
II. DiscussionA. Dismissal: failure to plead with specificity
Securities fraud claims must comply with heightened pleading standards
set forth in Rule 9(b) and the Reform Act.*fn8 See EP MedSystems, Inc.
v. EchoCath, 235 F.3d 865, 880 (3d Cir. 2000). Rule 9(b) provides that
"[i]n all averments of fraud or mistake, the circumstances constituting
fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b).
Although the rule ordinarily mandates plaintiffs to plead the "who,
what, when, and where" details of the alleged fraud, the averments may
contain specifics in some alternative fashion. However, plaintiffs must
employ some means to "inject precision and some measure of
substantiation into their allegations of fraud."
Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791
(3d Cir. 1984); compare Seville, 742 F.2d at 791 (rule satisfied
where complaint listed the specific pieces of equipment that were the
subject of the alleged fraud, what equipment was involved in each of several
alleged fraudulent transactions, and gave the content of the alleged
misrepresentations), with Saporito v. Combustion Eng'g Inc.,
843 F.2d 666, 675 (3d Cir. 1988), vacated on other grounds,
489 U.S. 1049, 109 S.Ct. 1306, 103 L.Ed.2d 576 (1989) (complaint
dismissed where it alleged "the general content of the representations,"
but did not specify "who the speakers were . . . or who received the
information . . .").
Our Court of Appeals has cautioned that Rule 9(b) should be applied
flexibly and in a manner that is "sensitive to the fact that its
application, prior to discovery, may permit sophisticated defrauders to
successfully conceal the details of their fraud." Christidis v. First
Pennsylvania Mortgage Trust, 717 F.2d 96, 99-100 (3d Cir. 1983).
Therefore, the particularity rule is relaxed "when factual information is
peculiarly within the defendant's knowledge or control." Craftmatic Sec.
Lit. v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989).
Under the Reform Act, the complaint must set forth "each statement
alleged to have been misleading, the reason or reasons why the statement
is misleading, and, if an allegation regarding the statement or omission
is made on information and belief, the complaint shall state with
particularity all facts on which that belief is formed."*fn10
15 U.S.C. § 78u-4(b)(1). The Reform Act also requires the complaint
to "state with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind [i.e., scienter],"
15 U.S.C. § 78u-4 (b)(2). "This language . . . requires plaintiffs to
plead `the who, what, when, where, and how'" of each act or omission
giving rise to a fraudulent state of mind. In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 534 (3d Cir. 1999) (quoting DiLeo v. Ernst &
Young, 901 F.2d 624, 627 (7th Cir. 1990)). But it is "sufficient for
plaintiffs [to] plead scienter by alleging `facts establishing a motive
and an opportunity to commit fraud, or by setting forth facts that
constitute circumstantial evidence of either reckless or conscious
behavior.'" Advanta, 180 F.3d at 534 (quoting Weiner v. Quaker Oats Co.,
129 F.3d 310, 318 n. 8 (3d Cir. 1997)).*fn11
Here, the pertinent misleading statements as specified by the
complaint:*fn12 "during the summer of 1997, over the course of 4 or 5
conversations UTN and Dr. Colkitt, through their agents, Randy Warren and
Deanna Jones, represented to Plaintiffs that UTN would make an initial
public offering of its common stock . . . `probably within a year.'" Am.
cmplt. ¶ 25. The statements were misleading, the complaint states,
Although UTN, through its agents, and Dr. Colkitt himself through his
agents knew of facts material and critical to Plaintiffs making a proper
determination of the value of the Secured Convertible Debenture, UTN and
Dr. Colkitt failed to disclose the following facts:
(a) the true financial condition of UTN and Dr. Colkitt;
(b) the devastating effect Dr. Colkitt's financial
and legal troubles with Equimed would have on the
ability of UTN to go public, including without
(1) that Equimed had no procedures in place to
assure all adjustments to Equimed's accounting
records, including general journal entries, are
reviewed, approved and supported with documentation
or appropriate explanations;
(2) that no procedures were in place to assure
that routine reconciliations
reviews and analysis of its significant account
balances were performed on a timely basis;
(3) that Equimed had a dispute with the accounting
firm of Ernst & Young, LLP concerning financial
statements and the fees charged by that accounting
(4) that Equimed, Dr. Colkitt and other entities
affiliated and/or controlled by Dr. Colkitt were
being investigated and sued by the United States for
Upon information and belief, prior to closing the
Sale, both UTN and Dr. Colkitt knew of the proceedings
brought by the United States against Dr. Colkitt,
Equimed and other companies affiliated with Dr.
Colkitt as evidenced by the case being filed in the
United States District Court for the District of
Maryland on August 2, 1995.
Dr. Colkitt as controlling shareholder of Equimed,
knew or was reckless with regard to his knowledge of
the dispute with Ernst & Young regarding accounting
issues. . . .
Am. cmplt. ¶¶ 33, 40-41.
While there are some factual allegations of fraud, the complaint falls
short of the particularity requirements of Rule 9(b) and
15 U.S.C. § 78u-4(b)(1). For example, as to representations made by
Warren and Jones "during the summer of 1997," adequate allegations of
date, time and place are lacking. Am. cmplt. ¶ 25. Moreover, the
complaint does not specify whether Warren or Jones made the
representations, or to which plaintiffs the statements were made.
Saporito, 843 F.2d at 675 (complaint must "indicate who the speakers were
. . . and who received the information . . . "). Plaintiffs have not
"inject[ed] precision and some measure of substantiation into their
allegations of fraud." Seville, 742 F.2d at 791. No explanation has been
offered why the statements made by Warren and Jones could not be
recounted in detail, albeit such information is obviously within
plaintiffs' sphere of knowledge.*fn13
The complaint also violates the clear mandate of the Reform Act to
specify "each statement alleged to have been misleading."
15 U.S.C. § 78u-4(b)(1). Here, again, the allegation that "four or
five" statements were made "during the summer of 1997" is illustrative.
Am. cmplt. ¶ 25. The point is that defendants cannot be expected to
frame a responsive pleading to relatively broad allegations, nor are they
protected from a frivolous suit.
In re Burlington Coat Factory Sec. Lit., 114 F.3d 1410, 1418
(3d Cir. 1997) (the rule "gives defendants notice of the claims against
them, provides an increased measure of protection for their reputations,
and reduces the number of frivolous suits brought solely to extract
Leave to amend may be denied because of undue delay, bad faith,
dilatory motive, prejudice, and futility. Burlington, 114 F.3d at 1434.
Although plaintiffs filed a consolidated complaint and, subsequently, an
amended complaint, there is a recognized reluctance "to preclude the
prosecution of a possibly meritorious claim because of defects in the
pleadings. . . ." Id. (quoting Ross v. A.H. Robins Co., 607 F.2d 545, 547
(2d Cir. 1979)). Plaintiffs will "be afforded an additional, albeit final
opportunity, to conform the pleadings" to Rule 9(b) and the Reform Act.
B. Dismissal: failure to state a claim
Defendants also urge dismissal of the federal and state securities,
fraud, and misrepresentation claims because: (1) the representations were
no more than non-actionable promises of a future occurrence and were not
misrepresentations of past or present material fact; and (2) loss
causation has not been alleged.*fn16 Moreover,
defendants argue, the promissory estoppel claim is improperly asserted
against Colkitt and UTN, instead of UTP, and, therefore, fails to state a
According to defendants, the failure of UTN to make an initial public
offering "is merely an unfulfilled possibility," and "a promise as to a
future occurrence is not, as a matter of law, an act of fraud." Defs.
mem. at 15, 27. Defendants rely on the Restatement Second of Torts:
If the statement is honestly made and the intention
in fact exists, one who acts in justifiable reliance
upon it cannot maintain an action for deceit if the
maker for any reason changes his mind and fails or
refuses to carry his expressed intention into effect.
If the recipient wishes to have legal assurance that
the intention honestly entertained will be carried
out, he must see that it is expressed in the form of
an enforceable contract, and his action must be on the
Restatement (Second) of Torts ¶ 530(1) cmt. b. Nevertheless, a
determination of whether statements were "honestly made [with] the
intention in fact" to perform in the future entails questions of fact.
See Fox's Foods, Inc. v. Kmart Corp., 870 F. Supp. 599, 608 n. 11
(M.D.Pa. 1994). Moreover, it cannot be ruled as a matter of law that
defendants did not recognize the infeasibility of a public offering when
the statements were made. See Phoenix Technologies, Inc. v. TRW, Inc.,
834 F. Supp. 148, 152 (E.D.Pa. 1993) ("If one states an intention to take
future action that does not actually comport with one's true state of
mind at that time, it is a misrepresentation of an existing fact.")