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June 2, 1992


The opinion of the court was delivered by: JOHN F. GERRY

 GERRY, Chief Judge

 The parties are presently before the court upon motion of defendants Donald J. Trump, Robert S. Trump, Harvey S. Freeman, The Trump Organization Inc., Taj Mahal Funding Inc., Trump Taj Mahal Inc., and Trump Taj Mahal Associates Limited (collectively "the Trump defendants") and defendant Merrill, Lynch, Pierce, Fenner and Smith ("Merrill Lynch") for dismissal with prejudice, pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons expressed herein, defendants' motion is granted.


 The Taj Mahal ("the Taj") is a hotel/casino located on the boardwalk in Atlantic City, New Jersey. The project was initiated by Resorts International, Inc. ("Resorts") but was later sold to the Trump defendants. In 1988, as the primary source of funding for the Taj, the Trump defendants offered and Merrill Lynch underwrote $ 674 million in 14% first mortgage investment bonds ("the bonds"). The bonds were issued pursuant to a prospectus dated November 9, 1988 ("the prospectus").

 After learning that the Taj intended to file Chapter 11 bankruptcy and establish a reorganization plan, various bondholders filed separate complaints in the Southern District of New York, the Eastern District of New York, and the District of New Jersey, alleging essentially similar claims that the prospectus included misrepresentations and omissions which violated federal securities fraud laws. The complaints were consolidated in multi-district litigation in this court. Plaintiffs await class certification.

 In May, 1991, the parties reached a tentative settlement agreement, memorialized in a "Memorandum of Understanding" ("MOU"). The MOU provided for plaintiffs to conduct "confirmatory discovery" to determine whether they believed the settlement to be a fair disposition of the case. In October 1991, the plaintiffs returned from confirmatory discovery seeking to cancel the settlement deal. Defendants moved before this court for an order allowing them to solicit approval by the plaintiff class of the proposed settlement, over the objections of all plaintiffs' counsel. We denied that motion in a memorandum opinion and order dated November 15, 1991. This motion to dismiss, filed jointly by the Trump defendants and Merrill Lynch, followed.


 Count one of plaintiffs' complaint alleges that the prospectus "contained untrue statements of material facts and omitted to state material facts required to be stated therein which were necessary to make the statements therein not misleading," in violation of sections 11, 12(a) and 15 of the Securities Act of 1933. Count two alleges fraud in the prospectus in violation of sections 10(b) and 20(b) of the Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. Count two also alleges, as part of the securities fraud claim, that the prospectus contained false and misleading information.

 Count three, a breach of fiduciary duty claim, is lodged only against defendant Donald Trump. Count four is a common law false advertising claim. Counts three and four present solely state law claims, which depend for their survival on this court retaining jurisdiction over the federal securities claims.


 The prospectus is a lengthy, detailed document. On the first page this notice appears in bold print: "See 'Special Considerations' for a discussion of certain factors to be considered by potential investors." There follows a section entitled "PROSPECTUS SUMMARY" which notes inter alia that "upon completion, the Taj Mahal will be the largest casino/hotel facility in Atlantic City." Prospectus, at 3. *fn2" Included in the prospectus summary is a synopsis of the Special Considerations section:

 Special Considerations

There are special considerations associated with an investment in the Bonds. These special considerations include, among others, the ability of the Partnership to service its debt; the validity of the security of the Bonds; the possible effect of applicable fraudulent conveyance statutes; the risks regarding completing and opening the Taj Mahal; the terms of the Trump Completion Guaranty; potential conflicts of interest; competition; imitation of liability; management of the Taj Mahal; certain regulatory matters, including matters affecting ownership of the Bonds; absence of a public market for the Bonds; the maintenance of insurance; and the appraisals of the Taj Mahal.
Before making a decision to purchase any of the Bonds, prospective purchasers should consider carefully the following factors, among others set forth in this Prospectus, which could materially adversely affect (i) the operations of the Partnership and its ability to make necessary payments to the Company to meet the debt service requirements of the Bonds and (ii) the security for the Bonds.

 Prospectus at 8 (emphasis added). Each special consideration listed in the "Special Considerations" synopsis constitutes a subject matter heading under the "Special Considerations" section, and is explained in considerable detail there.

 Following the "Special Considerations" section is the meat and potatoes of the prospectus, "Management's Discussion and Analysis of Financial Conditions and Results of Operations of the Partnership and the Company" ("Management's Discussion"). The entire prospectus is replete with cross-references directing potential investors to related portions of the prospectus.


 I. Standards on Motion to Dismiss

 A Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief may be granted must be denied "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." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). We must accordingly consider the factual allegations of the complaint as true, construe them liberally, and draw all reasonable inferences in plaintiffs' favor. See Unger v. National Residents Matching Program, 928 F.2d 1392 (3d Cir. 1991); Glenside West Corp. v. Exxon Co., U.S.A., Div. of Exxon Corp., 761 F. Supp. 1100 (D.N.J. 1991); Gutman v. Howard Sav. Bank, 748 F. Supp. 254 (D.N.J. 1990); Leaty v. U.S., 748 F. Supp. 268 (D.N.J. 1990). If, applying these standards, plaintiffs cannot state an actionable claim, the complaint must be dismissed.

 We take this occasion to comment on the extent to which this court may consider matters outside the pleadings on a 12(b)(6) motion to dismiss. In opposing defendants' motion, plaintiffs have submitted considerable materials, including affidavits, deposition transcript excerpts, and an appraisal report, accompanied by an identifying affidavit. Plaintiffs urge that we may consider these materials, which are clearly matters outside the pleadings, without converting the 12(b) motion into a Rule 56 motion for summary judgment. We disagree.

 Plaintiffs rely on Swin Resource Systems v. Lycoming County, 883 F.2d 245, 247 (3d Cir. 1989), cert. denied, 493 U.S. 1077, 110 S. Ct. 1127, 107 L. Ed. 2d 1033 (1990), for the proposition that extraneous materials that "fall within the ambit of the complaint" may be considered on a motion to dismiss. In fact, in Swinn the extraneous material considered -- a deposition -- was attached to the complaint at the time of filing. Plaintiffs here attached no materials, not even the prospectus, to their complaint. The depositions and other materials they now urge us to consider as falling within the ambit of the complaint were never submitted to this court until plaintiffs opposed the current motion. We do not think that these materials fall within the ambit of the complaint, as courts in this circuit have used that phrase. *fn3" The materials which plaintiffs urge us to consider are the stuff of summary judgment motions, not motions to dismiss under 12(b)(6).

 II. Choice of Law

 A threshold question is which circuit's law should be applied to judge the actionability of the prospectus. Although the case has been consolidated in this district, within the Third Circuit, the underlying cases come not only from this district but also from the Southern District of New York and the Eastern District of New York, both within the Second Circuit. *fn4" The question to be decided is whether the law of the Third or Second Circuit controls our decision.

 In a case consolidated under 28 U.S.C. § 1407, the law of the transferor forum must be given "close consideration," but the law of the transferee forum ultimately controls. In re Korean Air Lines Disaster of Sept. 1, 1983, 829 F.2d 1171, 1176 (D.C. Cir. 1987).

The federal courts spread across the country owe respect to each other's efforts and should strive to avoid conflicts, but each has an obligation to engage independently in reasoned analysis. Binding precedent for all is set only by the Supreme Court, and for the district courts within a circuit, only by the court of appeals for that circuit.

 Id. Accordingly, the law of the Second Circuit must be given close consideration here, but does not have stare decisis effect. As defendants point out, we are faced with a relatively blank slate on certain crucial issues in the Third Circuit, while we are well-instructed on those issues by the Second Circuit and other circuits as well.

 III. The Federal Securities Fraud Claims

 The complaint essentially sets forth claims under section 11 of the Securities Act of 1933, as amended, 15 U.S.C. § 77k(a); and section 10 the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j(b), and rule 10b-5 promulgated thereunder. *fn5" The crux of our analysis is whether the complaint adequately alleges that the prospectus contained material false and misleading statements or omissions.

 The complaint alleges misrepresentations with respect to three general aspects of the prospectus: the defendants' ability to service the debt on the bonds; the competition which the Taj Mahal would face; and the appraisals relied upon by defendants in valuing the Taj. All these aspects deal with future projections or forecasts. The complaint further alleges misrepresentations about the state of Donald Trump's "financial empire," contained both in the prospectus and in various media sources.

 In support of dismissal, defendants argue that the prospectus so "bespeaks caution" that the statements and omissions specified in the complaint are not actionable. Plaintiffs respond that no amount of cautionary language can render a false or misleading omission or a fraudulent misrepresentation not actionable; that the complaint adequately alleges such omissions and misrepresentations; and that the complaint therefore states claims of securities fraud sufficient to withstand a motion to dismiss. *fn6"

 IV. The "Bespeaks Caution" Approach to Federal Securities Fraud Claims

 We examine first the "bespeaks caution" doctrine relied upon by defendants. The essence of the doctrine is that where an offering statement, such as a prospectus, accompanies statements of its future forecasts, projections and expectations with adequate cautionary language, those statements are not actionable as securities fraud. Within the past thirteen months, five circuit courts have adopted this approach to evaluating the actionability of a federal securities fraud claim based on future projections contained in a prospectus or other offering statement. See Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 (1st Cir. 1991); I. Meyer Pincus & Associates v. Oppenheimer & Co., Inc., 936 F.2d 759, 763 (2d Cir. 1991); Sinay v. Lamson & Sessions Co., 948 F.2d 1037, 1040 (6th Cir. 1991); Moorhead v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 949 F.2d 243, 245-46 (8th Cir. 1991); In re Convergent Technologies Securities Litigation, 948 F.2d 507, 516 (9th Cir. 1991). Because the trend in the law heavily favors this approach, a comprehensive examination of it is warranted.

 A. Origins of the "Bespeaks Caution" Approach

 The "bespeaks caution" formula was first devised in Polin v. Conductron Corp., 552 F.2d 797 (8th Cir. 1977), a shareholder suit alleging securities fraud based on allegedly false and misleading statements in proxy statements, annual reports, and other documents. In affirming a judgment on the merits for defendants after trial, the Polin court held that the terminology employed in an annual report, specifically that results were "'expected' to show improvement" and that there was "a 'possibility' of a break-even soon," were terms which "bespeak caution in outlook and fall far short of the assurances required for a finding of falsity and fraud." Id., 552 F.2d at 806, n. 28.

 Subsequently, the Second Circuit decided Luce v. Edelstein, 802 F.2d 49 (2d Cir. 1986), a case generally regarded as seminal. The court in Luce found that while some of plaintiffs' allegations were sufficient to state a claim for relief under section 10(b), including allegations that defendants made promises which they knew at the time to be false, other allegations of intentional misrepresentation as to the potential success of the defendant partnership could not survive a motion to dismiss. The challenged statements at issue were specifically addressed by cautionary language:

the Offering Memorandum made it quite clear that its projections of potential cash and tax benefits were "necessarily speculative in nature" and that "no assurance could be given that these projections would be realized." Indeed, the Offering Memorandum warned prospective investors that "actual results may vary from the predictions and these variations may be material." We are not inclined to impose liability on the basis of statements that "bespeak caution. "

 Id. at 56 (emphasis added). The Luce court relied on Polin for this proposition.

 District courts in the Second Circuit have followed the Luce "bespeaks caution" approach consistently. See e.g., Haggerty v. Comstock Gold Co., L.P., 765 F. Supp. 111, 114 (S.D.N.Y. 1991); CL-Alexanders Laing & Cruickshank v. Goldfeld, 739 F. Supp. 158, 162 (S.D.N.Y. 1990) (with respect to future projections, no liability under section 10b for statements that "bespeak caution"); Brown v. E.F. Hutton Group, 735 F. Supp. 1196, 1201-02 (S.D.N.Y. 1990); Friedman v. Arizona World Nurseries Limited Partnership, 730 F. Supp. 521, 541 (S.D.N.Y. 1990) (warnings and disclaimers limit degree to which investors may reasonably rely on offering document as forecast of future performance), aff'd without opinion, 927 F.2d 594 (2d Cir. 1991); O'Brien v. National Property Analysts Partners, 719 F. Supp. 222, 227 (S.D.N.Y. 1989); Stevens v. Equidyne Extractive Industries 1980, Petrol/Coal Program 1, 694 F. Supp. 1057, 1063 (S.D.N.Y. 1988) (no liability attaches to offering memorandum purporting to be speculative); Feinman v. Schulman Berlin & Davis, 677 F. Supp. 168, 171 (S.D.N.Y. 1988) (no reasonable reliance where offering document informed that estimates were speculative).

 Luce v. Edelstein also has been cited with approval by this court. In In re National Smelting of New Jersey, Inc. Bondholders' Litigation, 722 F. Supp. 152, 171 (D.N.J. 1989) (Gerry, C.J.), this court relied on Luce in granting summary judgment in favor of a third-party defendant accounting firm in a false and misleading prospectus case:

In a similar situation, the Second Circuit Court of Appeals in Luce v. Edelstein refused to find 10(b) liability to the authors of an offering memorandum, which had "warned prospective investors that 'actual results may vary from the predictions and these variations may be material.'" The court, speaking through Judge Winter, stated: "We are not inclined to impose liability on the basis of statements that clearly bespeak caution."

 Id. at 171 (citations omitted). The language at issue in that portion of National Smelting contained the following warning: "It is usually the case that one or more of the assumptions in a forecast do not materialize because events and circumstances do not occur as expected. Therefore, the actual results during the forecast period will differ from the forecasted results; the differences may be material." Id.7

 B. Recent Developments in the "Bespeaks Caution" Approach

 Most recently, the First, Second, Sixth, Eighth and Ninth Circuit Courts of Appeals have explicitly adopted the "bespeaks caution" approach to securities fraud claims. *fn8" In Romani v. Shearson, Lehman and Hutton, the plaintiffs had alleged that defendants fraudulently induced them into investing in a horse-breeding farm "through misrepresentations and omissions in the offering materials that falsely inflated the partnership's financial potential." Romani, 929 F.2d at 876. Plaintiffs claimed that several material adverse facts were deliberately withheld by defendants from the prospectus. The First Circuit, however, placed dispositive weight on this statement in the prospectus: "there can be no assurance that the investment objectives of the Partnership will be obtained." Id. at 879. This directly led the court to hold that "although the offering materials were optimistic about the prospects for [the business enterprise], the documents unquestionably warned potential investors in a meaningful way that economic conditions in the horse-breeding industry were uncertain. Documents such as this, which 'clearly 'bespeak caution," are not the stuff of which securities fraud claims are made. . . ." Id.

 Similarly, in I. Meyer Pincus & Associates v. Oppenheimer & Co., the Second Circuit "declined to impose liability" on the basis of "statements contained within the prospectus which clearly 'bespeak caution,' rather than encouraging optimism." The court accordingly ruled that the language of the prospectus, "when read in context, is not materially misleading." I. Meyer Pincus, 936 F.2d at 763. The court also considered important the fact that "the first sentence of the Prospectus Summary, which states that the summary 'is qualified in its entirety by reference to the more detailed information included elsewhere in the prospectus,' unambiguously communicates the importance of reading all relevant material contained within the prospectus." Id. (Emphasis added.)

 In Sinay v. Lamson & Sessions Co., the Sixth Circuit affirmed the dismissal of an action alleging securities fraud under a fraud-on-the-market theory. Citing Polin, the Sinay court held specifically that "economic projections are not actionable if they bespeak caution." Sinay, 948 F.2d at 1040. The court continued,

in determining whether the statements are actionable, the court must scrutinize the nature of the statement to determine whether the statement was false when made. While analyzing the nature of the statement, the court must emphasize whether the "prediction suggested reliability, bespoke caution, was made in good faith, or had a sound factual or historical basis."

 Id. (Citations omitted.) Applying this standard, the court held that the "questioned statements herein were phrased with sufficient cautionary language." Id. Indeed, each challenged statement was accompanied or addressed by "cautionary language." Additionally, the Sinay court cited to the proposition that "fraud by hindsight," the attempt to impose liability on management for unrealized economic predictions, is not actionable. Id., citing Schwartz v. Novo Industri, A/S, 658 F. Supp. 795, 799 (S.D.N.Y. 1987).

 The Eighth Circuit reinforced its position on the "bespeaks caution" doctrine when it affirmed summary judgment for defendants in Moorhead v. Merrill Lynch. Plaintiffs in Moorhead had brought a securities fraud claim for alleged misrepresentations in a bond offering statement. They argued that defendant had "made misrepresentations, omitted material facts and made economic predictions with reckless disregard for their validity," urging the appeals court to reverse the finding that any misrepresentations or omissions were disclosed by specific cautionary language in the challenged document. Moorhead, 949 F.2d at 245. However, in affirming the district court's holding, the appeals court agreed that "plaintiffs could not base a federal securities fraud claim on any misrepresentations or omission in the feasibility study which was addressed by the repeated, specific warnings of significant risk factors and the disclosures of underlying factual assumptions also contained therein." Id. at 245-46. The cautionary language considered by the Moorhead court included the following:

We believe that the underlying assumptions provide a reasonable basis for management's forecast. However, some assumptions inevitably will not materialize and unanticipated events and circumstances may occur; therefore, the actual results achieved during the forecast periods will vary from the forecast and the variations may be material. The accompanying financial forecast indicates that sufficient funds will be generated to meet expenses, including the debt service requirements. . . . However, the achievement of any financial forecast is dependent upon future events, the occurrence of which cannot be assured.

 Id., 949 F.2d at 246 n. 2 (emphasis added). The document also contained several other examples of"no representations or assurances can be made" language. Id.

 Finally, the Ninth Circuit joined in adopting the "bespeaks caution" approach. The court in In re Convergent Technologies highlighted the importance of viewing the challenged statements in context, noting that "to prevail, the plaintiffs must demonstrate that a particular statement, when read in light of all the information then available to the market, or a failure to disclose particular information, conveyed a false or misleading impression." Convergent Technologies, 948 F.2d at 512 (emphasis added). Plaintiffs in Convergent Technologies had argued that it was a violation of securities fraud laws for defendants to omit internal corporate projections from the offering statement. However, in affirming summary judgment, the court relied on Vaughn v. Teledyne, Inc., 628 F.2d 1214, 1221 (9th Cir. 1980), which held that "it is just good general business practice to make such projections for internal corporate use. There is no evidence, however, that the estimates were made with such reasonable certainty even to allow them to be disclosed to the public." Convergent Technologies at 516 (emphasis in original). Additionally, regarding cautionary language, the court found that the challenged prospectuses "provided more than generalized statements of risk." Id. These included statements that future success was dependent on several enumerated factors of uncertain result, warnings of "unanticipated problems" down the line, and notice that plaintiffs were investing in a new, untried venture. Id.

 C. Considerations in Adopting the "Bespeaks Caution" Approach

 Plaintiffs respond to this body of securities fraud law by arguing that the only question properly before this court on a motion to dismiss is whether the complaint alleges false and misleading statements or omissions, or misrepresentations. They argue that they have adequately pled such claims, and that the cautionary language in the prospectus cannot insulate defendants from liability or preclude plaintiffs from stating a cognizable claim.

 Plaintiffs are correct in stating that 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." In re Craftmatic Securities Litigation, 890 F.2d 628, 645-46 (3d Cir. 1989); Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, 474 U.S. 946 (1985); Urbach v. Sayles, 779 F. Supp. 351, 355 (D.N.J. 1991) ("projections or estimates can ground a fraud claim under the securities laws"). The same is true for section 11 claims. The Supreme Court has recently confirmed that "statements of reasons, opinion or belief" regarding ...

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