It alleges that these defendants who were members of the underwriting group that directly marketed the bonds at issue to the public, conspired with 52 "co-conspirators" (listed in Exhibit 3 to the Amended Complaint), who were also members of the underwriting group but are not defendants in this suit, to violate Section 10(b) and Rule 10b-5 of the Securities Act. The gravamen of the claim is that these conspirators practiced fraud on plaintiffs by knowingly or recklessly making misrepresentations of material facts and omissions to state material facts about the bonds and the status of the Plant 4 and 5 projects in connection with the sale of the bonds. Specifically, conspirators misrepresented or omitted to state the fact that the bonds for Plants 4 and 5 were not backed by the state or federal government, as were the bonds for Plants 1, 2 and 3; and that the Plant 4 and 5 projects were misplanned, mismanaged, and plagued by cost overruns and delays. The purpose and effect of this scheme was to artificially inflate the market for the bonds and induce plaintiffs to invest in the bonds, which resulted in their injury.
Count II, also brought by all plaintiffs against the conspirator defendants, alleges that the underwriters' (conspirator defendants and co-conspirator) marketing and sales of the bonds through misrepresentations and omissions constituted an "enterprise" and their acts constituted a "pattern of racketeering," as defined by RICO. The income derived from these activities alleged were used in the establishment, maintenance of control, and conduct of the affairs of enterprise, in violation of 18 U.S.C. § 1962(a)-(d).
Counts III, IV, V, VI are brought only by plaintiffs who purchased bonds from one of the 16 named defendants (referred to in Amended Complaint as "purchasing plaintiffs"). Count III alleges that defendants individually violated Section 10(b) and Rule 10b-5 by knowingly or recklessly making the misrepresentations and omissions described in Count 1 in connection with the sale of bonds to purchasing plaintiffs. That conduct is also the basis for the claims of negligent misrepresentations (Count IV), fraud (Count V) and breach of fiduciary duty (Count VI).
When assessing a Rule 12(b) motion to dismiss, the Court must accept as true all factual allegations in the complaint and view them in a light most favorable to plaintiff. DP Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984); Eberts v. Westinghouse Electric Corp., 581 F.2d 357, 359 (3d Cir. 1978). A complaint "should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1969).
The parties have also submitted some documents outside the complaint for the Court's consideration. For example, plaintiffs have submitted the affidavit of Michael Hausfeld, plaintiffs' counsel, attesting to the reasonableness of the inquiry made before the complaint was filed; defendants' submission of newspaper and magazine pieces detailing the travails of WPPS project (see exhibits to J.B. Hanauer & Co. and Gibraltar Securities Co.'s Memorandum in Support of Motion to Dismiss); plaintiff's submission of confirmation of stock purchases by two plaintiffs (see Exhibits D and E to Plaintiff's Memorandum in Opposition to Motion to Dismiss to J.B. Hanauer & Co. and Gibraltar Securities Co.).
When the Court considers these documents in determining whether the complaint fails to state a claim, it must treat the motion to dismiss as one for summary judgment. Fed.R.Civ.P. 12(b). Summary judgment will only be granted if "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The party moving for summary judgment must demonstrate the absence of all genuine issues of material fact. Adickes v. S.H. Kress Co., 398 U.S. 144, 153, 26 L. Ed. 2d 142, 90 S. Ct. 1598 (1970). The court must construe all of the allegations and evidence in a light most favorable to the party opposing the motion and must resolve any doubts about the existence of genuine issues of fact against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962); Sunshine Books, Ltd. v. Temple University, 697 F.2d 90, 95 (3d Cir. 1982).
Defendants initially contend that the fraud claims in the complaint do not meet the requirements of Rule 9(b) and thus should be dismissed.
Rule 9(b) reads in part "In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This requirement of particularity has been applied to fraud allegations under the federal acts as well as state law. Goldman v. Belden, 754 F.2d 1059, 1069 (2d Cir. 1985); Haroco, Inc. v. American Nat. Bank and Trust Co. of Chicago, 747 F.2d 384, 403 (7th Cir. 1984), aff'd 473 U.S. 606, 53 U.S.L.W. 5067, 87 L. Ed. 2d 437, 105 S. Ct. 3291 (1985); Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir. 1983); McKee v. Pope Ballard Shepard & Fowle, Ltd., 604 F. Supp. 927, 928-31 (N.D.Ill. 1985); Seiler v. E.F. Hutton & Co., 102 F.R.D. 880, 886 (D.N.J. 1984).
The allegations of fraudulent misrepresentations and omissions in the amended complaint are structured in a novel fashion. Exhibit 1 to the amended complaint lists the names of broker/dealers or banks (including defendants here) which sold WPPSS bonds relating to Plant Nos. 4 and 5 ("bonds"), the plaintiffs to which they sold the bonds, the home state of these plaintiffs, the date of purchase of the bonds, and the face amount of the bonds. Amended Complaint, para. 4.
Exhibit 4 to the amended complaint allegedly contains some of the specific misrepresentations and omissions made by 13 of the defendants to some of the plaintiffs. It has five columns (headed 'A', 'B', 'C', 'D', 'E') and with respect to each of the plaintiffs, one or more of the columns are checked. It contains the following legend, entitled "Defendants' Misrepresentations to Plaintiffs:"
A. I was told that these bonds were backed by the Federal Government.