There are ample facts pled to support an inference that material facts
known to at least some of the defendants were withheld in order to
maintain the price of Honeywell's stock.
Fifth, defendants contend that certain of the statements that
plaintiffs' claim were false and misleading are forward-looking statements
that are not actionable either under the Reform Act's safe harbor
provision, 15 U.S.C. § 78u-5, or the "bespeaks caution" doctrine.
Under the latter, a plaintiff can claim that a forward-looking statement
violates Rule 10b-5 only by alleging either that the speaker did not
actually believe the forward-looking statement when made or that the
speaker has no reasonable basis for the belief. That issue will be dealt
with in the section dealing with scienter.
Certain of the alleged misrepresentations were forward looking —
the revenue and EPS forecasts and projections of merger synergies. Most
were oral, not written. Under the Reform Act's safe harbor each
particular oral statement must be identified as forward looking.
15 U.S.C. § 78u-5 (c)(2)(A)(i)-(ii) (emphasis added). None were so
identified here. Further, for each written or oral forward-looking
statement defendants were required to state that the actual results might
differ materially from those projected and identify important factors
"that could cause actual results to differ materially from those in the
forward-looking statement." 15 U.S.C. § 78u-5 (c)(1)(A)(i). At this
stage in the proceedings it cannot be said that any of the cautionary
language in the written or oral statements met this standard.
Sixth, defendants assert that the allegedly false statements concerning
Honeywell's condition past and present are not actionable because
plaintiffs have not alleged that they were false. I have read the
complaint and find that it does in fact allege that defendants'
statements regarding Honeywell's current condition and past performance
C. Scienter: To state the conclusion, the complaint alleges scienter
adequately as to Bonsignore, Ferrari and Wallman and, through them, as to
Honeywell. The allegations are inadequate to sustain a charge of scienter
as to the other Individual Officers.
The Reform Act's provisions affected in particular the pleading of
scienter. The Court of Appeals for the Third Circuit has held that a
plaintiff may properly plead scienter in two ways, i.e., (i) establishing
a motive and opportunity to commit fraud along with particularized facts
giving rise to a strong inference of scienter or (ii) by setting forth
facts that constitute circumstantial evidence of either reckless or
conscious behavior. Advanta, 180 F.3d 525 at 534-35. Both ways have been
employed in the instant complaint.
Turning first to Bonsignore, plaintiffs rely heavily upon the existence
of motive and opportunity. He had the ongoing motive to make the merger
appear to be a success; his compensation depended upon his achieving
specified financial targets; he held a substantial amount of stock and
stock options which he sought to sell at optimum prices. He in fact did
sell 80.077 shares of Honeywell stock during the class period for
$4,444,375. A significant portion of the sales was in the period shortly
before disclosure of the serious problems that Honeywell had
accomplished. These are factors that may be considered in determining if
scienter has been adequately pled, particularly when considered in
combination. However, as defendants point out, alone they are
Incentive compensation is a common practice, and a desire to maintain
their corporate positions is universal among corporate executives.
Neither motivation can be the basis of a fraud charge. Chill v. General
Elec. Co., 101 F.3d 263, 268 (2nd Cir. 1996). Similarly the desire to
show the success of a recent transaction such as the merger is
insufficient. Phillips v. LCI International, Inc., 190 F.3d 609, 623 (4th
The mere fact of trading during an alleged class period is not enough.
In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1424 (3d Cir.
1997). It has been held that a plaintiff can rely on insider trading to
establish scienter where the timing and quantities of executives' trading
is "suspicious enough to support the necessary strong inference of
sciente." Id. at 1410. Insider trading is suspicious only when it is
"dramatically out of line with prior trading practices." In re Silicon
Graphics Inc. Sec. Litig., 183 F.3d 970, 987 (9th Cir. 1999). The
complaint does not allege what the Individual Officers past stock sale
practices were, and, in fact defendants have presented evidence to the
effect that the volume of the Individual Officers stock sales was fairly
consistent with past practices. The timing of the sales in 2000 alleged
in the complaint is factor to consider in determining if scienter has
been adequately pled, but alone it is not enough.
In the case of Bonsignore, however, there are many additional facts
which when considered in conjunction with his motivation and stock
sales, constitute sufficient pleading of scienter. His actions must be
viewed against the backdrop of the allegations of serious
misrepresentations and omissions recounted above. He was Chief Executive
Officer of Honeywell as of December 1, 1999 and became Chairman on April
1, 2000. He had full knowledge of all of Honeywell's operations. By
virtue of his position he had to have known of the falsity of the
representations he and his fellow officers made. He led the numerous
meetings with the investment advisors, investors and others. He
continually provided misinformation to the investment houses knowing that
it would be incorporated in reports to be issued to the public. It is
alleged that in some instances he reviewed the reports before they were
issued. Plaintiffs need not plead adoption or endorsement when they
allege, as here, that certain of the Individual Officers made false
statements directly to analysts that were repeated in the analysts
reports. Cooper v. Pickett, 137 F.3d 616, 624 (9th Cir. 1997). In those
situations where a defendant actually reviews an analyst's report before
it is issued he can be said to have adopted it.
This in the case of Bonsignore scienter has been adequately alleged. In
addition to motivations and stock sales, he enjoyed a prominent position
in Honeywell which required that he have detailed knowledge of the
subject matter of the misrepresentations. It was he who led the campaign
to present the false picture to the investing public, making statements
he knew to be false.
For similar reasons scienter on the part of Ferrari and Wallman has
been alleged. Ferrari sold 57,386 shares of Honeywell stock for
$3,328,388 during the Class Period. Wallman sold none. As explained above
that is not the critical factor.
What is critical is the fact that each held a position in Honeywell
that required that he have full knowledge of its business and financial
status. Ferrari was President and Chief Operating Officer during the lass
Period. Wallman was Senior Vice President and Chief Financial Officer of
Honeywell during the Class Period.
Both Ferrari and Wallman joined Bonsignore at the meetings with
financial advisors and investors and both of them continually provided
false information to the
advisors between conferences and meetings. They too reviewed investment
house reports before they were distributed to the investing community.
This in its totality is sufficient to meet the Reform Act's heightened
The "plus factors" establishing scienter are not present in the case of
the other Individual Officers. It is alleged that during the class period
Johnson sold 40,000 shares of Honeywell stock for $2,260,000. Kreindler
sold 102,369 shares for $5,428,423. Porter sold 25,000 shares for
$1,815,710. That, without more, is inadequate to constitute a basis for
finding scienter. It is also alleged that attending the December 20, 1999
analysts' conference along with Bonsignore, Ferrari and Wallman were
Redlinger, Johnson and Porter.
None of the Individual Officers other than Bonsignore, Ferrari and
Wallman were in positions which would require that they have full overall
knowledge of Honeywell's finances, operations and problems. Each had
responsibility for an ancillary function, and without more specificity
knowledge of the matters which were misrepresented cannot be attributed
to them. Redlinger was Senior Vice President — Human Resources;
Johnson was Executive Vice, Chief Operating Officer — Aerospace
Businesses; Kreindler was Senior Vice President and General Counsel;
Porter was Senior Vice President — Information and Businesses
Further, other than the December 20, 1999 analysts' conference, there
are no allegations that these Individual Officer participated with
Bonsignore, Ferrari and Wallman in meeting with representatives of the
investment community, fed misinformation at such meetings or otherwise,
or reviewed investment house reports. In operations as huge and
geographically extended as those of Honeywell the allegations of the
Complaint are inadequate to bring into play the group pleading doctrine
with respect to company officers other than Bonsignore, Ferrari and
Wallman, cf. In re GlenFed, Inc. Sec. Litig., 60 F.3d 591, 593 (9th Cir.
D. Motion to Strike: Supporting defendants' motion to dismiss are eight
exhibits attached to an affidavit. Plaintiffs moved to strike Exhibit B
(1999 Proxy Statement issued by Honeywell), Exhibit E (a transcript of a
Honeywell conference call with analysts on December 20, 1999) and Exhibit
H (a transcript of a Honeywell conference call with analysts on April
13, 2000). It is plaintiffs' contention that apart from being
unauthenticated hearsay, these documents are not referenced, quoted or
incorporated in the Complaint and thus are inappropriate for
consideration on a motion to dismiss under Rule 12(b)(6).
Plaintiffs may well be correct, and the court has not considered these
Exhibits in deciding the motion to dismiss. The Exhibits, however, will
become part of the material that will be assembled during discovery, and
no useful purpose would be served by striking them at this point in the
proceedings. Plaintiffs' motion will be denied as moot.
Defendants' motion to dismiss the complaint will be granted as to
defendants Redlinger, Johnson, Kreindler, and Porter and denied as to
defendant Honeywell, Bonsginore, Ferrari, Wallman. Plaintiffs' motion to
strike certain Exhibits will be
denied as moot. The court will enter its own order.