The opinion of the court was delivered by: DEBEVOISE
DEBEVOISE, Senior District Judge.
Plaintiff in this action, Michael Gannon (sometimes referred to as "Gannon"), is a former employee of Continental Insurance Company ("Continental Insurance") and a former stockholder of Continental Corporation ("Continental Corp."), Continental Insurance's parent company. Gannon's complaint alleges two sets of wrongs arising out of two separate sets of facts. In the first five counts of the complaint Gannon seeks money damages and equitable relief for himself as a former employee of Continental Insurance as remedies for his allegedly wrongful termination on May 20, 1994. In the last thirteen counts of the complaint Gannon sues on behalf of himself and on behalf of a class of stockholders who purchased publicly traded securities of Continental Corp. during a period prior to 1993 and who held such securities at the time of the merger agreement between Continental Corp. and CNA Financial Corporation ("CNA"). As class representative, plaintiff seeks monetary and equitable relief for alleged state common law wrongs, corporate mismanagement and securities fraud perpetrated by the Continental Corp., its officers and board of directors during the year and a half preceding Continental Corp.'s merger with CNA on May 9, 1995.
Named as defendants with respect to Count 1 through 5 are Continental Insurance; Continental Corp.; Kenneth B. Zeigler, Senior Vice President, Human Resources for Continental Corp.; John P. Mascotte, Chairman and Chief Executive Officer of Continental Corp.; Steven J. Smith, Executive Vice President of Continental Corp.; Adrian Tocklin, Executive Vice President of Continental Corp.; Marie E. Curalto, Plan Administrator Erisa Plan; Ann M. Pauker, Plan Administrator The Reduction in Force Plan of the Continental Corp.; John and Jane Doe Corporations (1-100) and John and Jane Does (1-100).
Named as defendants with respect to Counts 6 through 18 are Continental Insurance; Continental Corp.; CNA; Chicago Acquisition Corp.
; John and Jane Doe Corporations (1-100); John and Jane Does (1-100); the fourteen individuals constituting the board of directors of Continental Corp.; the sixteen individuals characterized as executive officers of Continental Corp. (two of whom were also director-defendants); and KPMG Peat Marwick ("Peat Marwick"), certified public accountants who were the auditors of Continental Corp. and its subsidiaries during the years pertinent to this litigation.
The Continental defendants (all defendants other than Peat Marwick, Chicago Acquisition Corp., the John and Jane Doe Corporations and the John and Jane Does) moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6). After the hearing on the motion and after submission of additional papers by the Continental defendants and plaintiff, Peat Marwick moved for the same relief. For the reasons that follow, the motions to dismiss will be granted with respect to the Plaintiff's federal law claims. Plaintiff's state law claims will be remanded to the state court.
On May 2, 1995 Gannon filed a complaint in the Superior Court of New Jersey. His five count complaint alleged that Gannon had been wrongfully terminated from his position as Vice President of Continental Insurance. On May 9, 1995 Gannon filed a First Amended Complaint which amended the original complaint to assert class action claims against Continental Insurance, Continental Corp. and its executive officers and members of its Board of Directors. The additional counts alleged various forms of corporate mismanagement and violations of federal law.
On May 19, 1995 the action was removed to Federal Court. On August 23, 1995 Gannon filed another complaint, incorrectly captioned as a Third Amended Complaint (since there was no Second Amended Complaint). That complaint added numerous factual allegations, added further allegations of violations of federal law and added other defendants.
On September 29, 1995 the Continental defendants filed their motion to dismiss. At the hearing on the motion I declined the invitation to treat it as one for summary judgement and stated that I would consider only the allegations of the complaint together with documents referred to in the complaint which a court may consider on a Rule 12(b)(6) motion. Because the dates which plaintiff acquired his stock in Continental Corp. were material and were not alleged in the Third Amended Complaint, I asked plaintiff's counsel to file a Fourth Amended Complaint setting forth that information. That has been done, and the factual statement which follows is derived from the Fourth Amended Complaint (hereinafter referred to as the "Complaint") and the documents which may be considered on this motion.
The following is an overview of the facts as presented in the Complaint, and is not intended to be comprehensive. Additional facts pertinent to specific claims will be set forth in the appropriate portions of the Discussion below. In addition, although the two sets of charges in the complaint involve facts occurring during roughly the same time period, they involve the plaintiff in different capacities (as employee and as stockholder) and therefore will be recounted separately.
At the time of his termination in 1993, Gannon was employed by Continental Insurance in its Cranbury, New Jersey facility as Vice President, NBC/Residual Market Center. (Complaint at P1) Continental Insurance is in the business of writing property and casualty insurance. (Id. at P2.) Gannon had been employed by Continental Insurance since February of 1969 (Id. at P6.) and is more than forty years old. (Id. at P22.)
Before taking over Glen Falls RMC Gannon had been warned by Robert Reinke ("Reinke"), Senior Vice President and Horvath's supervisor, to "watch his back" as there was a "special relationship" between Horvath and Frederic Marziano ("Marziano"), President of Continental Insurance. (Id. at P14.) After taking over the Glen Falls RMC Gannon continued to hear rumors about the relationship between Horvath and Marziano. (Id.) He heard some cafeteria gossip about Horvath having her hand on Marziano's leg and was told by Glen Tippy ("Tippy"), another Vice President that there were rumors all over Glen Falls that Horvath and Marziano were sleeping together. (Id. at P15.) Gannon also noticed that physically they were closer than most people usually were. (Id. at P14.) Finally, Tippy told Gannon that he had inadvertently glanced in Horvath's date book and discovered that she was having dinner with Marziano. (Id. at P15.)
Gannon believed that Horvath was "going over his head" and dealing directly with Marziano who was not her direct supervisor. (Id at P14.) Further Gannon believed that the relationship between Marziano and Horvath violated state and federal laws concerning sexual harassment, and that Gannon was being discriminated against based on his gender because he was unable to render favors (based on gender) to Marziano. (Id. at P11.) Gannon also believed that Horvath and Marziano's relationship was negatively affecting the financial results of the corporation. (Id.) Finally Gannon believed that Marziano, because of the pressure which Gannon had placed on Horvath, was retaliating against him personally by demoting him and blocking the possibility of his receiving another Vice President position. (Id.)
Gannon believed that he was required, by corporate regulation, to report his concerns relating to Horvath and Marziano's relationship. (Id. at P20.) On May 2, 1994 Gannon wrote a personal and confidential letter to John P. Mascotte, Chairman of the Board and Chief Executive Officer of the corporation asking him to investigate the relationship between Marziano and Horvath. (Id. at P10.) Subsequently Gannon met with Mascotte and Steven J. Smith to discuss this issue. (Id. at P18.)
On May 6, 1994, Gannon met with Kenneth B. Zeigler, head of Human Resources, and Mel Katzman, an attorney for the Corporation to further discuss his concerns. (Id. at P19.) On May 16, 1994, Gannon was told by Zeigler and Smith that after an investigation, they were unable to substantiate his concerns. Gannon was also informed that by raising those concerns and causing an investigation, he had committed a terminable offense. (Id. at P20.) Gannon was asked to sign an agreement which offered him three months pay and placement assistance in return for his promise not to sue Continental Insurance. (Id.) Gannon was given until May 20th to sign the agreement and was denied an extension to review it with his attorney. (Id. at P21.) Not having signed the agreement Gannon was terminated without any severance pay. (Id.)
Gannon, believing that he was in fact entitled to severance benefits, appealed the denial of these benefits. (Id. at P26.) That appeal was subsequently denied by Plan Administrator, Ann M. Pauker, and the Fiduciary of the Plan. (Id.)
B. Corporate Violations and Mismanagement Issues
Between 1969 and 1994, Gannon purchased stock of the Continental Corp., through the Continental Corp. Incentive Savings Plan whereby money would be deducted from Gannon's salary and used to purchase the corporation's stock on the open market. (Id. at P51.) During the same period Gannon was issued dividends on the stock which he used to purchase additional shares. (Id. at P5(a).) Plaintiff last acquired shares of Continental Corp stock sometime between April 1, 1994 and June 30, 1994. (Id. at P51(e)).
Because of its failure to reserve in 1993, Continental Corp. sustained a loss of $ 602,900,000 in 1994. (Id. at PP 85.) Of that amount 56 million dollars is attributed to Environmental IBNR losses for which Continental Corp. should have reserved in 1993, instead of awarding bonuses. (Id. at P84.) Another factor contributing to Continental Corp.'s loss was the 480 million dollars placed in reserve in 1994, a good portion of which should have been reserved in 1993. (Id. at P85.)
Continental Corp. misled its shareholders regarding this scheme through a series of misstatements in its annual reports and subsequently issued proxy statements.
Gannon alleges that these misrepresentations were made by Continental Corp. in an attempt to conceal from the stockholders the true nature of the profit shown in 1993 and the impropriety of the bonuses subsequently taken by management. (Id. at P86.)
On February 10, 1994 the Continental Corp. released and disseminated its Annual Report for 1993 (hereinafter 1993 Annual Report). (Id. at P67.) Discussing Continental Corp.'s reserve policy with respect to Environmental IBNR losses the 1993 Annual Report stated:
Continental does not establish reserves for unreported asbestos-related, other toxic tort and environmental pollution claims because of significant uncertainties, which do not allow liabilities to be reasonably estimated. Such uncertainties include difficulties in determining the frequency and severity of such potential claims and in predicting the outcome of judicial decisions, as case law evolves regarding liability exposure, insurance coverage and interpretation of policy language. At this time, the future financial impact of unreported asbestos-related, other toxic tort and environmental pollution claims cannot be reasonably estimated, and no assessment can be made with respect to the ultimate impact thereof on Continental's results of operations or financial condition in the future. (1993 Annual Report at p. 17)
In fact these statements are false and Continental Corp. could and should have reserved for such losses. (Complaint at P67) Contrary to this statement the defendants knew that such losses would be experienced in 1993 and that it was both possible and required for them to set aside the appropriate reserves to cover such losses. (Id.)
In addition the 1993 Annual Report concludes with a number of paragraphs lauding the efforts taken by Continental Corp. to ensure the fiscal integrity of the company. (Id. at P95.) The relevant parts provide:
Continental maintains an effective system of internal accounting controls through established policies and procedures including a code of conduct. Such controls are designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and that the processes of accumulating and developing financial records are reliable for use in preparing financial statements and maintaining accountability of assets. . . . The system is continuously reviewed through an extensive program undertaken by a team of internal auditors. (1993 Annual Report at p. 21)
On May 13, 1994 the Continental Corp. filed a Form S-3 Registration Statement ("Registration Statement") under the 1993 Securities Act which incorporated by reference the 1993 Annual Report and a Quarterly Report for the quarter ending March 31, 1994. (Id. at P104.) In addition to adopting the misstatements contained in those documents the registration statement omitted to state material information, with respect to the scheme perpetrated above. (Id. at P161.)
On December 6, 1994, Continental Corp., CNA and Chicago Acquisition Corporation ("Chicago"), a direct wholly owned subsidiary of CNA formed to facilitate CNA's acquisition of Continental Corp., entered into a merger agreement which provided that CNA through Chicago would acquire Continental Corp. stock at $ 20 per share. (Id. at P87.) This price was substantially below the market price at the time and in fact was 32.8% below the $ 29.80 value of the stock in 1993, when Continental Corp. showed a profit. (Id. at P88.)
On March 29, 1995 Continental Corp. issued a Proxy Statement and Annual Report (hereinafter "1994 Annual Report) which among other things asked the stockholders to vote on the proposed merger between CNA and Continental Corp. (Id. at P94.) In addition the 1994 Annual Report discussed Environmental IBNR losses providing:
Prior to the third quarter of 1994, Continental did not establish reserves for incurred but not reported asbestos-related, toxic tort and environmental pollution claims (the "Environmental IBNR Claims")because the existence of significant uncertainties (including difficulties in determining the frequency and severity of potential claims and in predicting the outcome of judicial decisions, as case law evolves regarding liability exposure, insurance coverage and interpretation of policy language) and the absence of standard techniques to measure exposure did not allow ultimate liabilities to be reasonably estimated in accordance with accepted actuarial standards.
While Continental continues to believe that it is not possible to reasonably estimate ultimate liability for Environmental IBNR Claims, it has concluded that different measurement techniques based on industry averages, for estimating a reserve for Environmental IBNR Claims have been sufficiently developed, and accepted in the industry, to permit Continental to determine a reasonable gross estimate for Environmental IBNR Claims. (1994 Annual Report at p. F-9.)
On May 8, 1995, one day prior to the voting on the merger agreement, Gannon notified the Continental Corp. of his intent to file suit for fraudulently and purposely keeping reserves low in 1993 in order to show a profit and pay senior executives a bonus and preserve their jobs. (Id. at P91.) On May 9, 1995, the merger between the Continental Corp., CNA and Chicago was approved and has subsequently been completed. (Id. at P80.)
A. Motion to Dismiss Pursuant to Rule 12(b)(6)
Pursuant to Rule 12(b)(6), a plaintiff's complaint must be dismissed for failure to state a claim if a defendant demonstrates "beyond a doubt that 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 (1957); Johnsrud v. Carter, 620 F.2d 29, 33 (3d Cir. 1980). All allegations set forth in the complaint must be accepted as true, see Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972), and all reasonable inferences must be drawn in plaintiff's favor. Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir 1991).
On a 12(b)(6) motion, the district court is limited to the facts alleged in the complaint, not those raised for the first time by counsel in its legal memorandum. Hauptmann v. Wilentz, 570 F. Supp. 351, 364 (D.N.J. 1983), aff'd without opinion, 770 F.2d 1070 (3d Cir. 1985), cert. denied, 474 U.S. 1103, 88 L. Ed. 2d 922, 106 S. Ct. 887 (1986); Seevers v. Arkenberg, 726 F. Supp. 1159. 1165 (S.D. Ind. 1989) ("This court is not at liberty, however, to consider allegations which do not appear in the complaint but which are averred only in legal briefs."). The Court of Appeals for the Third Circuit, however, has held that a "court may consider an undisputedly authentic document that a defendant attaches as an exhibit to a motion to dismiss," without converting the motion into a motion for summary judgement, "if the plaintiff's claims are based on the document." Pension Deb. Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir 1993), cert. denied, 126 L. Ed. 2d 655, 114 S. Ct. 687 (1994). This opinion will make reference to documents on which Plaintiff relies relating both to termination issues and the securities issues which were submitted by defendants in support of their motion.
B. ERISA-based Termination claim
The only federal claim which Gannon raises with regard to his wrongful termination is that Continental Insurance violated the Employee Retirement Security Act of 1979 29 U.S.C. 1001 et seq. ("ERISA") by refusing to provide severance pay.
In Paragraph 26 of the Complaint Gannon alleges:
Continental Insurance, itself, maintains a plan which gives employees benefits if there is a reduction in force or severance. The Plan Administrator at all times relevant herein, was Ann M. Pauker (hereinafter ("Pauker"). Gannon appealed, through appropriate procedures, his denial of ERISA reduction in force/severance benefits. That appeal was denied by Continental, the Plan Administrator and the Fiduciary of the Plan. It should be noted that the Plan is not a separate trust plan, but a plan maintained by the Continental Corp., of which Continental Insurance is a division.
Gannon's claim to severance pay is based on a portion of the Employee Handbook which provides:
Severance pay is provided as financial support to assist during the period of unemployment following termination as a result of a reduction in force. Severance is based on salary grade and length of service.
Based on the facts as alleged in the complaint it is clear that defendant was not terminated as a result of a reduction in force. As such he is clearly is not covered by this plan.
Plaintiff argues that though he is not covered explicitly by the severance plan described in the manual he is owed severance pay because it had been the custom of the company to provide severance pay even to employees who were terminated for reasons other then a reduction in force. While Plaintiff might have a contract action against defendant based on this allegation he does not have a claim pursuant to ERISA. 29 U.S.C. § 1102(a)(1) provides: "every employee benefit plan shall be established and maintained pursuant to a written instrument." In Hozier v. Midwest Fasteners, Inc., 908 F.2d 1155, 1164 (3rd Cir. 1990) the court, relying on this provision, concluded that a written ERISA plan could not be amended by informal communication between the employer and the employee . Rather, all amendments must be in writing to be enforceable under ERISA.
Since the plan as written does not cover Gannon, his ERISA claim asserted in Count 5 must be dismissed.
C. Securities Act of 1933
(a) In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring such security...may either at law or in equity, in any court of competent jurisdiction sue. . .
(2) offers or sells a security ...by the use of any means of or instruments of transportation or communication in interstate commerce or of the mails by means of a prospectus or oral communication, which includes an untrue statement of material fact or omits to state a material fact necessary in order to make the statement in light of the circumstances under which they were made, not misleading...
shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction to recover the consideration paid for such security with interest thereon less the amount of any income received thereon upon the tender of such security or for damages if he no longer owns the security.
In Ballay v. Legg Mason Wood Walker Inc. 925 F.2d 682, (3d Cir. 1991) the court held that § 11 and § 12(2) of the 1933 Securities Act apply only to stocks bought in an initial public offering and not to stocks purchased through secondary market transactions. Further, the Supreme Court in Gustafson v. Alloyed CO. Inc. 513 U.S. , 131 L. Ed. 1 (1995) referring to the Ballay case asserted that the word "prospectus" in § 12(2) precludes liability under this section for anything other then a stock purchase on an initial offering.
Among the amendments to the final version of the complaint were allegations setting forth the manner in which and the date when plaintiff acquired his shares. During the period between 1969 and 1994 he purchased stock of Continental Corp. through the corporation's Incentive Savings Plan. Money was deducted from his pay check and used to purchase shares ...