On Appeal from the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Action No. 88-4530.
Stapleton, Scirica and Weis, Circuit Judges.
This is an appeal from dismissal of a consolidated class action complaint brought under various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The district court dismissed the securities law claims under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, and for failure to comply with the requirement of pleading fraud with particularity under Fed.R.Civ.P. 9(b). The district court also dismissed a claim of common law fraud and deceit for lack of pendent jurisdiction. 703 F. Supp. 1175, 1184 (E.D.Pa. 1989).
The complaint made several allegations of omissions and misrepresentations, all of which the district court examined with care and we will affirm much of its judgment. However, because we believe that certain allegations should not be dismissed and that Collins v. Signetics Corp., 605 F.2d 110 (3d Cir. 1979), relied upon by the district court, has now been implicitly overruled by the Supreme Court, we will reverse part of the district court's judgment.
Defendant Craftmatic/Contours Industries, Inc. is a company engaged in the business of marketing and selling a number of products, including the Craftmatic Adjustable Bed and the Contour Chair Lounge, through a network of independent distributors and the company's own direct sale operations. Defendant Stanley Kraftsow was the company's Chairman of the Board of Directors, President, and Chief Operating Officer, while his wife, Carolyn Kraftsow, was Secretary and a director.*fn1 Defendant Advest is a securities brokerage and investment firm. In the mid-1980s, Craftmatic grew significantly, expanding from total assets of four million dollars in 1984 to nineteen million dollars in 1986. Plaintiffs attribute Craftmatic's growth to the acquisition in September 1983 of Contour Chair Lounge, Inc., a previously unaffiliated concern, and to a vastly expanded marketing effort resulting in increased sales.
On March 5, 1986, an Initial Public Offering of 1,650,000 shares of Craftmatic Common Stock was made at $8.50 per share representing nearly 40% of the company's outstanding common shares. The Offering consisted of 1,000,000 shares issued and sold by Craftmatic, and an additional 650,000 shares sold by Stanley Kraftsow as the selling stockholder. Defendant Advest served as Craftmatic's investment banker, adviser, and principal underwriter for the Initial Public Offering. Plaintiffs allege that Craftmatic received in excess of seven and one half million dollars from the stock sale, and that Stanley Kraftsow received in excess of five million dollars.
The prospectus for the offering provided not only raw financial data, but also the following representations: 1) the company had embarked on an expansion program that could include acquisitions in the water purification and window shutter markets; 2) Craftmatic had signed a consent order with the Federal Trade Commission, as well as assurances of voluntary compliance with the State of Florida and the Commonwealth of Pennsylvania; and 3) Craftmatic believed it was "presently in compliance with consumer protection requirements."*fn2
In 1987, Craftmatic sustained a loss of more than three million dollars, a decrease of 14.7% in wholesale sales and advertising commissions, and heavy losses in the two new product lines. In addition, the company entered into consent agreements with the states of Washington, Oregon, and Pennsylvania regarding its consumer sales practices in those states.
The thrust of plaintiffs' action is set forth in their brief: "As detailed in the Complaint, the serious operational problems known to defendants caused their statements concerning Craftmatic's marketing, expansion, and upgrading programs to be false and misleading. . . ." According to plaintiffs, "the unexpected revelation of these adverse facts concerning Craftmatic's business, expansion, and profitability caused the price of its stock to plummet from the Initial Public Offering price of $8.50 per share to as low as $1 per share."
The Plaintiff class is comprised of all persons who purchased Craftmatic Common Stock during the period from March 5, 1986 through June 11, 1987. The First Consolidated Amended Complaint ("the Complaint") alleges four causes of action against the Craftmatic defendants. Count I alleges a violation of § 11(a) of the Securities Act of 1933, 15 U.S.C. § 77k(a)(1988).*fn3 Count II alleges a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1988).*fn4 Count III alleges a violation of § 12(2) of the Securities Act, 15 U.S.C. § 771 (2) (1988). Count IV alleges common law fraud and deceit. Additionally, plaintiffs allege "controlling person" liability against Stanley and Carolyn Kraftsow under § 15 of the Securities Act, 15 U.S.C. § 77o (1988), with regard to the Securities Act claims (Counts I and III), and under § 20(a) of the Exchange Act, 15 U.S.C. § 78t (1988), with regard to the § 10(b) claim. Counts I and III are also alleged against Advest.
The factual allegations upon which these claims are based are contained in Paragraph 49 of the Complaint.*fn5 With the exception of the allegation contained in Subparagraph 49(n), each of the factual recitations is styled as a "failure to disclose" material information, rather than as an affirmative misrepresentation by the defendants.
The Craftmatic defendants moved to dismiss Counts I through III for failure to state a claim upon which relief can be granted (Fed.R.Civ.P. 12(b)(6)), to dismiss Count IV for lack of subject matter jurisdiction, and to dismiss all fraud claims for failure to plead with particularity (Fed.R.Civ.P. 9(b)). In the alternative, the Craftmatic defendants moved to strike the averments of the Complaint as legally insufficient (Fed.R.Civ.P. 12(f)). Simultaneously, Advest filed its own motion to dismiss for failure to state a claim upon which relief can be granted and, in the alternative, for a more definite statement of Count III (Fed. R. Civ. P. 12(e)).
In its Amended Order dated January 27, 1989, the district court dismissed the following federal claims:
1) Count I with respect to all the defendants for failure to state a claim upon which relief can be granted;
2) Count III with respect to the Craftmatic defendants for failure to state a claim upon which relief can be granted;
3) Count II with respect to the Craftmatic defendants for failure to state a claim upon which relief can be granted to the extent it incorporated Paragraph 49(a)-(n), and (p) of the Complaint;
4) Count III with respect to Advest for failure to state a claim upon which relief can be granted to the extent it incorporated Paragraph 49(a)-(n), and (p) of the Complaint; and
5) Counts II and III with leave to amend, "for failure to comply with the 'particularity' requirement of Fed.R.Civ.P. 9(b)" to the extent they incorporated Paragraph 49(q)-(t) of the Complaint.
This left Subparagraph 49(o). In the course of litigating a Motion to Reconsider, plaintiffs admitted that Subparagraph 49(o), standing alone, did not fulfill the materiality requirement of § 10(b) or Rule 10b-5, thus leaving no factual allegation to support Count II. In addition, they elected not to replead Subparagraphs 49(q) - (t), and they admitted Subparagraph 49(o) did not constitute part of the claim against Advest under § 12(2). Consequently, by Order dated February 10, 1989, the district court dismissed what was left of Counts II and III. As all of the federal question claims at that point were dismissed, the district court dismissed the common law claims in Count IV as well.
On appeal, plaintiffs essentially press four contentions. First, plaintiffs contend that the district court erred in holding that the Craftmatic defendants were not "sellers" subject to liability under § 12(2) of the Securities Act. Second, plaintiffs maintain that the district court erred in ruling that certain subparagraphs allege only a failure to disclose mismanagement. Third, plaintiffs argue that the district court erred in ruling that certain allegedly undisclosed information amounted to no more than predictions of future business developments and that these omissions could not constitute a violation of federal securities laws. Finally, plaintiffs claim that the district court erred in ruling that certain allegations failed to meet the pleading requirements of Fed.R.Civ.P. 9(b).*fn6
In reviewing a dismissal for failure to state a claim, we must accept the factual allegations as true and we may affirm the dismissal only if it appears certain that plaintiffs can prove no set of facts which would entitle them to relief. Ransom v. Marrazzo, 848 F.2d 398, 401 (3d. Cir. 1988) (citing D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984)).
II. Meaning of "Seller" Under § 12(2)
Section 12(2) of the Securities Act provides that any person who offers or sells a security by means of a prospectus or oral communication that makes misstatements or omissions of material fact "shall be liable to the person purchasing such a security from him." 15 U.S.C. § 771(2) (1988). Relying on our decision in Collins v. Signetics Corp, 605 F.2d 110 (3d Cir. 1979), the district court held that plaintiffs failed to state a claim against the Craftmatic defendants because under Collins, only the immediate seller of securities is liable to the purchaser for violations of § 12(2). Consequently, the court dismissed Count III with respect to the Craftmatic defendants.
Since our decision in Collins, the Supreme Court in Pinter v. Dahl, 486 U.S. 622, 108 S. Ct. 2063, 100 L. Ed. 2d 658 (1988), has considered the scope of the term "seller" in the context of § 12(1).*fn7 In Pinter, the Court stated that although "the language of § 12(1) contemplates a buyer-seller relationship not unlike traditional contract privity," its scope is not limited to those who pass title. Id. at 2076 (citing § 2(3), Securities Act of 1933, 15 U.S.C. § 77b(3) (1988) (definition of "sell" and "offer")). Therefore, because "solicitation is the stage at which an investor is most likely to be injured," id. at 2078, the Court held the term "seller" to ...