that the determinations reached by this Court in its Order
denying defendants' motion to dismiss involved only the
"application of accepted and settled law to the particular
fact pattern set forth in the Complaint." Plaintiff's
Opposition at 5.
Defendants reply that the issue of the sufficiency of
plaintiff's pleading satisfies all three requirements for
certification. Without deciding on the merits of defendants'
motion, this court finds that there is no basis for
plaintiff's assertion that motions to dismiss should be
regarded as per se immune to certification. If this Court's
determinations were purely factual, that would indeed bar
certification under 28 U.S.C. § 1292(b). However, such a
conclusion can only be reached by considering in detail the
legal issues raised by defendants and decided by this Court.
In their motion for reconsideration, defendants identify
four separate issues which, in their view, satisfy the
criteria for certification: whether plaintiff has (1) stated
a federal securities claim under Rule 12(b)(6); (2) plead
fraud with sufficient particularity to satisfy Rule 9(b); (3)
satisfied the relevant statute of limitations; and (4) stated
a cause of action under the New Jersey law of negligent
misrepresentation. This Court will consider each of these
issues in turn to determine which, if any, of them merit
certification for appeal.
The 12(b)(6) Claim
In the September Opinion, this Court held that "allegations
of misstatements made by defendants in overstating reported
net income and assets by consciously under-reserving for
problem loans, and misrepresenting material facts concerning
the institution's loan quality, underwriting standards, and
loan monitoring procedures" stated a claim under 12(b)(6).
Order at 10. Defendants contend that this holding embodies a
controlling question of law over which there is substantial
ground for difference of opinion. In support of this
contention, they cite two district court cases in the Third
Circuit, Fox v. Equimark Corp., Civ. No. 90-1504, ___ F. Supp.
___ (W.D.Pa. May 22, 1991) and In re UJB Financial Corp.
Shareholder Litigation, No. 90-1569 (D.N.J. Jan. 22, 1991),
notice of appeal filed (Feb. 25, 1991), which, defendants
contend, hold that under-reserving for loan losses represents
only mismanagement, not fraud actionable under 12(b)(6).
Plaintiff maintains that the distinction between fraud and
mismanagement is a factual determination, and that this Court
merely came to a different factual conclusion than did the
other district courts in their respective cases.
This Court finds plaintiff's characterization of the issue
unsatisfactory. There are two possible interpretations of the
loan-loss reserve issue which represent distinct legal
theories. On the view adopted by this Court in its September
Order, a defendant who represents that loss provisions are
adequate, and is subsequently proved wrong, may be guilty of
either mere mismanagement or actionable fraud. A fraud action
will lie where, while representing that loss reserves are
adequate, a defendant knows that they are not or lacks any
valid basis for her representation. Although there may be many
methods for calculating reasonable loss reserves and a wide
margin for error based on good faith management decisions, a
manager who states that reserves are adequate with the
knowledge that they are not should not, in the view of this
Court, be immune from an action brought by those she defrauds.
On the other hand, one could maintain as a matter of law
that decisions about loss reserves are always business
decisions, and hence always insulated from 12(b)(6) liability,
even if the corporation and its managers are certain, at the
time the reserve amount is determined and disclosed to
investors, that the reserves will be inadequate. That
interpretation may gain some support from the undoubted fact
that providing for future losses involves substantial
uncertainty. This Court, however, has rejected the temptation
to turn the absence of certainty into a license for unbridled
misrepresentation. Although a manager may never "know" with
absolute certainty that a reserve against anticipated losses
is inadequate, there will be circumstances where she "knows,"
based on any plausible
and acceptable means of calculation, projection, or forecast,
that reserves must be increased and yet represents that they
need not be.*fn3 The September Order is premised on the view
that the latter type of knowledge is sufficient to ground a
claim of fraud under 12(b)(6).
Whether the September Order involves a controlling issue of
law and whether there is substantial ground for difference of
opinion as to its correctness turn on whether the authorities
cited by defendants adopt this Court's interpretation of the
scope of 12(b)(6) and merely come to different conclusions
about its application to particular facts, or embrace the
opposing view that misrepresentation of the adequacy of
reserves can never rise to the level of actionable fraud.
It is the view of this Court that both the authorities
within this Circuit cited by defendants and the weight of
legal authority generally adopt the same interpretation of the
Securities Acts and employ the same legal principles expressed
in the September Order.
It is well accepted in the Third Circuit and other circuits
that projections or estimates can ground a fraud claim under
the securities laws. See In re Craftmatic Securities
Litigation, 890 F.2d 628, 645-46 (3d Cir. 1989) ("[a]
projection that is issued without a reasonable basis is an
untrue statement and actionable under § 10(b) and Rule 10b-5 if
made knowingly or recklessly"); Eisenberg v. Gagnon,
766 F.2d 770, 776 (3d Cir. 1985), cert. denied, 474 U.S. 946, 106 S.Ct.
342, 343, 88 L.Ed.2d 290 (1985) ("[a]n opinion or projection,
like any other representation, will be untrue if it has no
valid basis") (citation omitted); Cameron v. Outdoor Resorts of
Am., Inc., 608 F.2d 187, 194 (5th Cir. 1979),
modified, 611 F.2d 105 (5th Cir. 1980) (projections may be
actionable); SEC v. Okin, 137 F.2d 862, 864 (2d Cir. 1943);
Marx v. Computer Sciences Corp., 507 F.2d 485, 489 (9th Cir.
1974) (forecasts); Myzel v. Fields, 386 F.2d 718, 734 n. 8 (8th
Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19
L.Ed.2d 1143 (1968); SEC v. Haffenden-Rimar Int'l, Inc.,
362 F. Supp. 323, 327 (E.D.Va. 1973), aff'd, 496 F.2d 1192 (4th Cir.
It is also well recognized that loan loss provisions reflect
a projection about the risk of a loan portfolio; see, e.g.,
Blackie v. Barrack, 524 F.2d 891, 90(9th Cir. 1975), cert.
denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976). As has
been acknowledged by almost every court directly confronted
with the question, fraudulent projections about loan loss and
risk — like fraudulent projections about other business
matters of relevance to an investor — may be a basis for legal
liability under the securities laws.*fn4 See, e.g., In re
Midlantic Corp. Shareholder Litigation, 758 F. Supp. 226 (D.N.J.
1990); First American Bank and Trust v. Frogel, 726 F. Supp. 1292,
1294 (S.D.Fla. 1989); see also cases collected in Steiner
v. Shawmut Nat. Corp., 766 F. Supp. 1236, 1243-46 & n. 19
(D.Conn. 1991); cf. Christidis v. First Pennsylvania Mortgage
Trust, 717 F.2d 96, 99 (3d Cir. 1983) (loss reserves may be
fraudulent where "property appraisals relied on where either
knowingly false, or so facially unreasonable
as to be beyond the realm of reasonable reliance for
Many well-reasoned opinions that have granted motions to
dismiss in such cases have recognized that intentional or
reckless understatement of loan loss reserves may ground a
fraud claim, but found that the facts alleged by plaintiff in
the particular case amounted to no more than mismanagement.
See, e.g., Steiner, 766 F. Supp. at 1243, 1246-47. Although a
few cases, not in this circuit, have granted motions to dismiss
in such general terms as to give rise to the suggestion that no
cause of action for fraud can ever be maintained based on
misrepresentations regarding loan loss reserves, see, e.g.,
Shields v. Amoskeag Bank Shares, Inc., 766 F. Supp. 32 (D.N.H.
1991), this court is satisfied that among courts squarely
presented with the question, there is little doubt that
misrepresentations concerning the adequacy of loss provisions
are in principle actionable under 12(b)(6).
Finally, if there was any doubt about the actionability of
fraudulent projections, including loan loss projections, that
doubt has been removed by the Supreme Court's recent decision
in Virginia Bankshares, Inc. v. Sandberg, ___ U.S. ___, 111
S.Ct. 2749, 115 L.Ed.2d 929 (1991). In Virginia Bankshares, the
court held that knowingly false statements of opinion or
belief, such as representations that the value that
shareholders were to receive for their bank stock was "high" or
a deal was "fair," could ground a securities fraud claim. Id.
111 S.Ct. at 2755.
[Such representations are] reasonably
understood to rest on a factual basis that
justifies them as accurate, the absence of which
renders them misleading. . . . provable facts
either furnish good reasons to make a conclusory
commercial judgment, or they count against it,
and expressions of such judgments can be uttered
with knowledge of truth or falsity just like
more definite statements, and defended or
attacked through the orthodox evidentiary
process. . . .
Id. at 2758.
Because valuation of a business necessarily takes into
account projections of its likely future performance,
Virginia Bankshares supports the proposition that
representations of belief about future performance may be
actionable. But the Court's reasoning also supports the
narrower principle that misrepresentation of the adequacy of
loan loss reserves can be a basis for liability. The Court
found that the statement that a bank's stock price reflected a
high valuation was actionable because it "depended on whether
provable facts about the Bank's assets, and about actual and
potential levels of operation" substantiated such a value "when
assessed in accordance with recognized methods of
valuation."*fn5 Id. at 2759 (emphasis added). Implicit in this
finding is a recognition that representations about the
adequacy of loan loss reserves can similarly ground a fraud
claim, since the valuation of a bank's assets necessarily
includes a valuation of the adequacy of its loan loss reserves.
Further, the Court found that a representation about a
bank's book value could be fraudulent because it did not take
into account the impact of the changed value of the bank's
real estate holdings. Id. at 2759, 2761. The same rationale
supports a fraud action, such as is at issue in this case,
brought on the theory that representations about the adequacy
of loan loss reserves did not take into account the impact of
the changed value of the real estate collateralizing those
Defendant relies on two cases in the Third Circuit to make
its case for certification: Fox v. Equimark Corp., 782 F. Supp. 295
(W.D.Pa. 1991) and In re UJB Financial Corp. Shareholder
Litigation, No. 90-1569 (D.N.J. Jan. 22, 1991). In Fox, the
court's holding turns not on 12(b)(6) but on
Rule 9(b). ___ F. Supp. at ___ The Fox court explicitly
entertains the possibility that a fraud claim may be stated for
knowing misrepresentation of the adequacy of loss reserves, at
___; plaintiff's action is dismissed on the different ground
that, by failing to show how defendant should have known that
the reserves were inadequate, plaintiff failed to plead his
fraud claim with sufficient particularity to satisfy the
requirements of 9(b). At ___; see discussion infra.
Similarly, UJB draws a different line than the one defendants
would urge upon the court. Following the Supreme Court's
decision in Santa Fe Industries, Inc. v. Green,