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UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SUSAN POLK, et al. No. C 96-2712 MHP [filed Mar. 5, 1998] Plaintiffs, MEMORANDUM AND vs. ORDER LYNN FRITZ, et al. Defendants. ____________________________________/ In re FRITZ COMPANIES SECURITIES LITIGATION ____________________________________/ Plaintiffs bring this shareholder class action against Fritz Companies, Inc. and various individual officers and directors (collectively "Fritz"). The complaint contains claims of securities fraud under section 10(b) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), and accompanying Rule 10b-5, and controlling persons allegations under section 20 of that Act, 15 U.S.C. § 78t(a). The class period runs from August 28, 1995 to July 23, 1996. The court has jurisdiction over this action pursuant to § 27 of the Exchange Act, 15 U.S.C. § 78aa and 28 U.S.C. § 1331. Now before the court are plaintiffs' motion to strike and
defendant's motion to dismiss the complaint pursuant to Federal Rules of Civil Procedure 12(b) and 9(b), and the Private Securities Litigation Reform Act of 1995 ("SRA"), Pub. L. No. 104-67, which amends the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. Having considered the parties' arguments and submissions and for the reasons stated below, the court now issues the following memorandum and order. BACKGROUND Fritz is a San Francisco-based international logistics provider. Its President, Chairman and CEO is defendant Lynn Fritz, who is also the son of Fritz's founder. Lynn Fritz owns approximately 39% of the outstanding stock of Fritz. Compl. ¶ 22(a). In May 1995, Fritz merged with Intertrans, a Texas-based company. The merger was made pursuant to the Fritz Companies, Inc. and Intertrans Corporation Joint Merger Proxy and Prospectus (the "Proxy"). The merged company changed to a May 31 fiscal year end from a calendar year. As a result, Fritz issued a form 10-K for the January-May 1995 transitional period. Filed on August 28, 1995, the Form 10-K marks the beginning of the class period and included a charge for merger-related expenses of close to $30 million. The Proxy, however, indicated that expenses could surpass $30 million and could not be calculated conclusively "until the operational and transition plans are completed." Proxy at 22 (Herrara Decl. Ex. B). On July 24, 1996, Fritz restated its merger-related expenses, 2
and announced it would be taking additional charges totaling $11 million. According to Fritz, the additional expense was necessary because "we underestimated final costs related to the full integration of our two companies" and that "[w]e also erred in adopting the Intertrans accounting system, as it has proved inadequate, especially given our rapid growth." Herrera Decl. Ex. D. Plaintiffs' lawsuits in both federal and state court followed shortly afterwards.1 Plaintiffs have twice amended the complaint which is the subject of this motion. In the complaint, plaintiffs identify numerous allegations by Fritz that they contend were false or misleading when made. According to plaintiffs, the statements can generally be divided into three main categories. The first group includes allegedly false financial statements that overstated Fritz's earnings and revenues in violation of Generally Accepted Accounting Principles ("GAAP"). Compl. ¶¶ 44, 51, 54-55, 63-63, 68-69, 95-114. The second group consists of purported misstatements concerning the success of the Intertrans merger. Compl. ¶¶ 44, 51, 44, 76. Finally, there are alleged mistatements regarding Fritz's acquisitions apart from Intertrans. Compl. ¶¶ 46-49, 57-60, 66, 71. LEGAL STANDARD I. Rule 12(b)(6) A motion to dismiss will be denied unless it appears that the plaintiff can prove no set of facts which would entitle him or her to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Fidelity 3
Financial Corp. v. Federal Home Loan Bank of San Francisco, 792 F.2d 1432, 1435 (9th Cir. 1986), cert. denied, 479 U.S. 1064 (1987). All material allegations in the complaint will be taken as true and construed in the light most favorable to the plaintiff. NL Industries, Inc. v. Kaplan, 792 F.2d 896, 898 (9th Cir. 1986). Although the court is generally confined to consideration of the allegations in the pleadings, when the complaint is accompanied by attached documents, such documents are deemed part of the complaint and may be considered in evaluating the merits of a Rule 12(b)(6) motion. Durning v. First Boston Corp., 815 F.2d 1265, 1267 (9th Cir.), cert. denied sub. nom. Wyoming Community Dev. Auth. v. Durning, 484 U.S. 944 (1987). The court may also consider documents incorporated by reference, Kramer v. Time Warner, Inc., 937 F.2d 767, 773 (2d Cir. 1991); see also Townsend v. Columbia Operations, 667 F.2d 844, 848 (9th Cir. 1982), and documents "whose contents are alleged in the complaint and whose authenticity no party questions", Branch v. Tunnell, 14 F.3d 449, 453-54 (9th Cir.), cert. denied, 114 S.Ct. 2704 (1994); see also In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996). II. Rule 9(b) Federal Rule of Civil Procedure 9(b) provides in pertinent part that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Rule 9(b) applies to actions brought under federal securities laws. See e.g., In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541, 1545 (9th Cir. 1994) (citations omitted). 4
In Glenfed, the Ninth Circuit held that "Rule 9(b) requires particularized allegations of the circumstances constituting fraud." Id. at 1547. Conclusory facts and neutral allegations are insufficient. Id. at 1548 (quoting Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985)). Rather, a plaintiff must plead precisely the time, place and nature of the alleged fraudulent activities. Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987)). "In other words, the plaintiff must set forth an explanation as to why the statement or omission complained of was false or misleading." Glenfed, 42 F.3d at 1548. Furthermore, plaintiffs cannot plead "fraud by hindsight," in which later events are used to support the falsity of earlier statements. Id. Instead, a plaintiff must set forth not only why a given statement was false or misleading, but why it was false or misleading when made. Id. at 1549. This is done most directly by citing inconsistent contemporaneous statements or internal information available to defendants. Id. DISCUSSION I. Pleading of the Statements A. False and Misleading Analysis Framework To survive defendant's motion to dismiss, plaintiffs' complaint must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. 5
§ 78u-4(1). This standard applies to both forward-looking and non forward-looking statements. Even before passage of the SRA, the Ninth Circuit had already established strict pleading requirements for securities actions pursuant to Federal Rule of Civil Procedure 9(b). Plaintiffs were required to explain why the statement or omission complained of was false or misleading when made. Glenfed, 42 F.3d at 1549. In addition, the time, place and nature of the allegedly fraudulent activities must have been pleaded with specificity. Kaplan v. Rose, 49 F.3d 1363, 1370 (9th Cir. 1994), cert. denied, 116 S.Ct. 58 (1995) (citing Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987)). This court stated in an earlier order that, because the Ninth Circuit already applied a heightened pleading standard in securities case, the SRA did not change the standard for pleading false and misleading statements in this Circuit. Because of this, the court concluded that it could apply pre-SRA Ninth Circuit caselaw in order to determine whether plaintiffs have properly pled that the statements at issue were false and misleading. Based on further review of the SRA and the applicable legislative history, the court now concludes that the SRA has somewhat altered the standard for pleading false and misleading statements. Specifically, the SRA mandates that "if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1) (emphasis added). In cases of information and belief pleading, pre-SRA Ninth 6
Circuit caselaw did require "a statement of the facts upon which the belief is formed." Wool v. Tandem Computers, Inc., 818 F.2d 1433, 1439 (9th Cir. 1987). However, the Ninth Circuit did not specifically require a plaintiff, as the SRA does, to state all facts upon which a belief is based.2 In addition, the legislative history confirms that the SRA makes more stringent the applicable pleading standards. Specifically, after finding that the Second Circuit employed the most stringent pleading standard of the Courts of Appeal, the Conference Committee stated that "[b]ecause [it] intends to strengthen existing pleading requirements, it does not intend to codify the Second Circuit's case law." H.R. Conf.... Rep. No. 104- 369, 104th Cong., 1st Sess. 41 (1995), 1995 U.S.C.C.A.N. 679,740. Although parties do not address it, the court has reviewed the complaint and concludes that it is pleaded on information and belief. The court's conclusion is buttressed by ¶ 125 of the complaint, which states that it is based in part on "information obtained from former employees and discussions with consultants" and also states that plaintiffs "believe that after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶1, 5-6, 8-9, 22-35, 40, 42-43, 45, 50, 56, 61, 64, 67, 70, 75, 82-83, 86-88, 91, 93, 96, 98-99, 101-120, 122-124." See In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746, 763 (1997) (concluding, on the basis of a paragraph substantially similar to ¶ 125, that "[b]ecause the sources set forth . . . do not provide plaintiffs with personal knowledge, the complaint must be based on information and belief.") 7
For the above reasons, and because plaintiffs have made no real effort to argue that their pleading is not one based on information and belief, the court will apply the provision of the SRA dealing with complaints pleaded on information and belief. In addition, the court finds that the SRA imposes more stringent pleading standards for false and misleading statements than did pre-SRA Ninth Circuit caselaw. 1. False Financial Statements The gravamen of plaintiffs' allegations regarding Fritz's financial statements is that the statements overstated Fritz's revenues and earnings in violation of GAAP. Under GAAP, "revenue must be earned before it can be recognized." Provenz v. Miller, 102 F.3d 1478, 1484 (9th Cir. 1996) (emphasis in original). According to plaintiffs, there are five reasons why the financial statements were false and misleading: 1) "Fritz failed to record at least $10 million of acquisitions costs and inflated earnings by at least $6.6 million, or approximately $.40 per share, for the five months ended May 31, 1995 and each subsequent quarter. ¶¶99, 101"; 2) "Fritz's May 31, 1995 financial statements disguised at least $1.3 million of Intertrans ordinary bad debt as a merger-related cost ¶103"; 3) "Fritz fraudulently recorded $26 million of potential merger candidate's pre-acquisition revenues as its own, before the mergers took place, and recorded $7 million in revenues from sales defendants admit did not exist. ¶¶ 106, 107"; 4) "Fritz improperly recapitalized $2.1 million in software developments costs during the third quarter ended February 29, 1996, which were 8
previously written off as merger costs. ¶108 "; 5) "Fritz failed to account for uncollectible accounts receivable, including $4.7 million of Intertrans' accounts receivable over one year old, and another $5 million of other receivables. ¶¶110-11." Plaintiffs' Opposition at 8-9. The court finds that plaintiffs have failed to adequately and specifically state reasons why the financial statements were false or misleading when made. To begin with, plaintiffs appear to rely on as-yet-unconducted discovery to support their allegations. Compl. ¶ 125 (stating that "after reasonable opportunity for discovery, substantial evidentiary support will likely exist for the allegations set forth at ¶¶ 1, 5-6, 8-9, 22-35, 40, 42-43, 45, 50, 61, 64, 67, 70, 75, 82-83, 86-88, 91, 93, 96, 98-99, 101-120, 122-124.") As this court has previously made clear, the SRA, as is evidenced by its strict prohibitions of discovery during the pendency of a motion to dismiss, was enacted in part to require plaintiffs to make a showing, prior to discovery, that the statements at issue were false or misleading. 15 U.S.C. §§ 77u- 4(b)(1) & (3). Plaintiffs, of course, argue that they have satisfied the stringent pleading standard of the SRA and this Circuit. To begin with, plaintiffs have compiled a chart that they maintain sets out the alleged misstatements and how they were false or misleading when made. Hodges Decl. Ex. A. This chart, however, does not address the paragraphs in the complaint dealing with the financial statements. Thus, the Hodges chart does nothing to demonstrate that portions of the financial statements were false when made. 9
Second, plaintiffs maintain that Fritz's subsequent restatement that increased its earlier estimates of merger expenses and bad debts demonstrates that its earlier statements were false when made. Compl. ¶ 100. While recognizing that such a restatement is not an admission of securities fraud, plaintiffs argue that the restatement does tend to show that the original statements contained material errors. Securities fraud claims such as these must be analyzed, as plaintiffs recognize, under the standards announced in Glenfed. 42 F.3d at 1549-50. The Ninth Circuit explained that: [t]he fact that an allegedly fraudulent statement and a later statement are different does not necessarily amount to an explanation as to why the earlier statement was false. For example, both the valuation of assets and the setting of loan loss reserves are based on flexible accounting concepts, which, when applied, do not always (or perhaps ever) yield a single correct figure. In order to allege the circumstances constituting fraud, plaintiff must set forth facts explaining why the difference between the earlier and the later statements is not merely the difference between two permissible judgments, but rather the result of a falsehood. . . . [P]laintiffs may need to draw on contemporaneous statements or conditions to make that demonstration. Glenfed, 42 F.3d at l549 (emphasis in original). The fact that defendant may have, through its restatement, corrected its prior assessment, does not establish that the earlier accounting judgment was false when made. Id. at 1540-41. Thus, to properly state a claim for accounting fraud, plaintiffs must "plead facts sufficient to support a conclusion that [d]efendant[] prepared the fraudulent financial statements and that the alleged financial fraud was material." In re Oak Technology Securities Litig., 1997 WL 448168 *8. In addition, 10
plaintiffs "must identify the particular transactions underlying [the] alleged accounting deficiencies." Id., citing In re Wells Fargo Sec. Litig., 12 F.3d 922, 926-27 (9th Cir. 1993), cert. denied, 513 U.S. 917 (1994)). Here, plaintiffs' complaint fails to demonstrate how the financial statements were false when made and not just through benefit of hindsight. Merely arguing, for example, that "Fritz fraudulently recorded $26 million of potential merger candidate's pre-acquisition revenues as its own" does nothing to demonstrate that any statements in Fritz's financial statements were false when made and does not meet the high particularity standards established by the SRA and Ninth Circuit caselaw. This district has concluded that, in order to adequately plead securities fraud based on improper revenue recognition, "[p]laintiffs must allege, at a minimum, some particular transactions where revenues were improperly recorded, including the names of the customers, the terms of specific transactions, when the transactions occurred, and the approximate amount of the fraudulent transactions." In re Oak Technology, at *8. Here, one scours plaintiffs' complaint and papers in vain for any allegations that even come close to meeting this standard. Nor have plaintiffs adequately pled their allegations that the financial statements contained statements which were misleading because of material omissions by Fritz. For example, plaintiffs maintain that "Fritz failed to record at least $10 million of acquisitions costs. . . . ¶¶99, 101." Nowhere, however, do plaintiffs point to any information, such as facts known to Fritz 11
at the time of the financial statements that it failed to disclose, tending to show the nature of any costs that Fritz purportedly neglected to record. This is insufficient under Rule 9(b) and the SRA. At oral argument, plaintiffs argued that under the recent case Cooper v. Pickett, 122 F.3d 1186 (9th Cir. 1997), as amended 1998 WL 32678 (1998), the complaint adequately pleads a securities fraud cause of action based on false financial statements. In Cooper, the Ninth Circuit reversed the district court's dismissal with prejudice of the plaintiffs' complaint, holding that plaintiffs had met their pleading burdens under Glenfed. Cooper, 1998 WL 32678 *11-13. Plaintiffs here maintain that their complaint is comparable to that at issue in Cooper and thus sufficient to withstand defendant's motion to dismiss. The court disagrees. Cooper, although recently decided, did not deal with the pleading requirements under the SRA as the complaint at issue was filed on August 15, 1994. 1998 WL 32678, *2. Thus, it did not consider the heightened pleading standards incorporated into the SRA, such as the requirement that a complaint pleaded on information and belief disclose all facts underlying the beliefs. In addition, the court respectfully notes that Cooper, while not purporting to overrule existing law, appears to conflict with earlier Ninth Circuit securities cases that required greater particularity in the pleading of fraud claims. See, e.g. Glenfed, 42 F.3d at 1549; In re Stac, 89 F.3d at 1405; Wool, 818 F.2d at 1439. The court will not parse these conflicts, however, since they arise in pre-SRA cases. 12
In addition, plaintiffs' claims must fail under the truth-on- the-market doctrine. It appears to the court that plaintiffs premise the reliance element of their fraud claims on the fraud-on- the-market doctrine. This doctrine allows plaintiffs who may not have read the alleged misrepresentations to rely upon market conditions reflecting the fraud. The theory is that an established market assimilates all of the available information regarding a particular stock and sets the stock price accordingly. Investors make their decisions in reliance upon the integrity of an informed market. Where material misrepresentations have been placed into the mix of information or omissions render the market information misleading the stock price is skewed and investors may be defrauded. See Basic v. Levinson, 108 S.Ct. 978, 989, 485 U.S. 224, 241-42 (1988). The "fraud-on-the-market" theory has another significant benefit. It enables plaintiffs to proceed by way of a class action because of general reliance on the market whereas individual claims of reliance would be atypical and could defeat a class action. Id. at 242 (concluding that "'[t]he causal connection between the defendants fraud and the plaintiffs' purchase of stock in [a fraud-on-the-market] case is no less significant than in a case of direct reliance on misrepresentations.'" (citation omitted)). Since the hypothesis is that the market reflects all available information, there is a corollary doctrine called the "truth-on- the-market" defense. Thus, if at the relevant time the market contained countervailing information, it is less likely or not likely that the market was defrauded. This Circuit has adopted the 13
"truth-on-the-market" defense, holding that in a fraud-on-the- market case, a defendant's misrepresentation of or failure to disclose material information "may be excused where that information has been made credibly available to the market by other sources." Apple Computer, 886 F.2d at 1115; Kaplan, 49 F.3d at 1376. Here, it is undisputed that Fritz's publicly-filed documents contained information that the estimate of merger expenses was subject to change. The Proxy statement, for example, declared that "it will not be feasible to determine the actual amount of the [merger] charge until the operational and transitional plans are completed." Proxy at 22. It addition, following its audit of Fritz's financial statements for the transition period, PMG issued a management letter which stated that merger costs and bad debt allowances were "accounting estimates." Thus, it is clear that information regarding the possible adjustment of the merger expenses was "made credibly available to the market." Apple Computer, 886 F.2d at 1115; Kaplan, 49 F.3d at 1376. 2. Misstatements Concerning the Success of the Intertrans Merger Plaintiffs point to four statements regarding the success of the Intertrans merger which they allege were false or misleading when made. Compl. ¶¶ 44, 51, 55, 76. These alleged mistatements were included in, respectively, a Form 10-K filed around August 28, 1995, a press release of October 2, 1995 reporting Fritz's results from the first fiscal quarter, a Report to Shareholders issued 14
around October 16, 1995 and a press release of around May 24, 1996. According to plaintiffs, the complaint properly demonstrates how each of the statements was false or misleading when made. Each allegation will be considered in turn. a. Form 10-K of August 1995 The statement at issue in the Form 10-K reports: "[i]n connection with [the Intertrans] merger, the Company recorded one- time charges in May 1995 for transaction costs of $3.3 million and $26.7 million of other costs relating to combining the operations." Compl. ¶ 44.3 Unfortunately for plaintiffs, there is absolutely no showing that these statements were false or misleading when made. In fact, plaintiffs do not discuss this paragraph in their opposition, except to state that they have included "a descriptive paragraph" in the complaint describing how these representations were false and misleading. Compl. ¶ 45. Basically, ¶ 45 alleges that Fritz discovered, while conducting due diligence prior to its decision to merge with Intertrans, that the merger costs would be higher than those reported in the Form 10-K. However, plaintiffs have cited to no information, such as contemporaneous statements or documents, which tend to show that Fritz' estimation of merger costs, which was also contained in financial statements subject to a KPMG audit, was false or misleading when made. Another court in this district has recently concluded that unparticularized and unsupported allegations of adverse information allegedly uncovered during a routine due diligence investigation do not satisfy the requirements 15
of Rule 9(b). In re Valence Technology Sec. Litig., 1995 WL 274343 at *12 (N.D. Cal. 1995). This court agrees. Plaintiffs' conclusory statements regarding the alleged falsity of the merger charges do not come close to the required "particularized allegations of the circumstances constituting fraud. Glenfed, 42 F.3d at 1547. b. Press Release of October 1995 The statement at issue in the October 2, 1995 press release reports "[t]he company attributes its continued rapid growth to . . . a margin expansion resulting from its merger with Intertrans Corporation ("Intertrans") which was completed on May 30, 1995." Compl. ¶ 51.4 According to plaintiffs, this statement was materially false or misleading because the Intertrans accounting system, which Fritz had planned to adopt for its air and ocean freight forwarding systems, had not yet been fully integrated with the already-existing Fritz operating system. Compl. ¶ 56(b), (d). It is undisputed that the Intertrans accounting system proved to be inadequate for the merged companies. In fact, Fritz issued a press release on July 24, 1995 stating that "[w]e . . . erred in adopting the Intertrans accounting system, as it has proved inadequate, especially given our rapid growth." Herrera Decl. Ex. D. Plaintiffs argue that it was false or misleading for Fritz to represent that it had merged with Intertrans when, in fact, the accounting system for freight forwarding systems was not yet fully integrated. However, the court does not agree with plaintiffs that it was 16
false or misleading for Fritz to state that it had merged with Intertrans when the accounting system had not yet been fully integrated. The press release does not state that Fritz had already successfully adopted Intertrans' accounting system, merely that it had merged with Intertrans. Plaintiffs have failed to demonstrate how the non-integration of the accounting system tends to show that it was false or misleading for Fritz to state that it had merged with Intertrans. Presumably, two companies can officially merge and yet still have matters to resolve regarding issues such as automation or staffing. This would not suggest, however, as plaintiffs seem to believe, that a merger did not in fact occur or that it was misleading for the company to represent that it had merged with another company. Thus, the statements in the press release are not actionable. c. Report to Shareholders The October 1995 Report to Shareholders announces that Fritz "successfully merged Intertrans Corporation into our global operations." The Report goes on to state that the acquisition of Intertrans had resulted in growth for the company and that there had been a "successful integration of Intertrans into the Fritz family." Compl. ¶ 55. As before, plaintiffs maintain that these statements were false and misleading when made because Fritz had not yet fully adopted the Intertrans accounting system and, in fact, ultimately concluded that the Intertrans accounting system was inadequate for the needs of the merged companies. And, as before, plaintiffs fail 17
to explain why incomplete adoption of the accounting system renders Fritz's statements regarding the merger inaccurate. The press release makes no representation regarding the Intertrans accounting system. Without more, plaintiffs cannot meet the pleading burdens imposed by the SRA and Rule 9(b). d. Press Release of May 1996 This press release concerned the resignation of Carsten Andersen, one of the named defendants in this action, from Fritz's Board of Directors. Andersen stated "[f]ollowing the very successful integration of Intertrans Corporation into the Fritz global network over the last year, my mission is complete." Once again, plaintiffs maintain that the undisputed incomplete adoption of the accounting system rendered the statement regarding "successful integration" of the two companies false and misleading. The court concludes, once again, that plaintiffs have utterly failed to demonstrate how or why this statement was false or misleading when it was made. Andersen did not aver that Fritz had successfully adopted Intertrans' accounting system, or indeed, mention anything about the accounting system. Plaintiffs do not explain how, in either their papers or their complaint (and the court doubts that they could even if they tried), problems with the adoption of accounting system render a merger unsuccessful or incomplete. Thus, all of plaintiffs' claims based on alleged misstatements concerning the success of the Intertrans merger must be dismissed. 18
3. Misstatements Concerning Fritz's Other Acquisitions The final group of statements that plaintiffs allege were false and misleading when made involve Fritz's acquisitions apart from Intertrans.5 According to plaintiffs, these statements are actionable because they omit information that would have made them not misleading. Compl. ¶¶ 46-49, 57-60, 66, 71. In their opposition, plaintiffs devote only nine lines to the alleged misstatements regarding the non-Intertrans acquisitions. They maintain that nothing more is required to demonstrate that these statements were misleading than their allegation that: defendants misrepresented acquisition profits and the costs of the acquisition program; that Fritz used acquisition charges to hide Fritz's payable accounts, bad debt, software costs, freight charges and other ordinary operating expenses enabling Fritz to disguise its deteriorating financial condition and failure to properly accrue for ordinary business expenses. Opposition at 12; Compl. ¶¶ 50, 61. Obviously, this is incorrect. The court agrees with defendant that plaintiffs' belief that this is sufficient to meet the pleading standards of Rule 9(b) and the SRA reveals that plaintiffs have no idea what the SRA and Rule 9(b) actually require. As the court has emphasized, plaintiffs must plead facts supporting an inference that the statements at issue were false or misleading when made. Glenfed, 42 F.3d at 1448-49; 15 U.S.C. § 78u-4(b)(1). Conclusory statements such as those made by plaintiffs do not satisfy the SRA's requirement of providing "the reason or reasons why each statement is misleading.6 15 U.S.C. § 78u-4(b)(1)(B). To begin, plaintiffs do not even pinpoint, in either their complaint or their papers, exactly which acquisitions 19
costs or profits to which they are referring. In addition, plaintiffs do not point to the payable accounts, bad debt, software costs, freight charges and other operating expenses that they allege Fritz was hiding behind its acquisition charges. Without more, the court must conclude that plaintiffs have not met their pleading burden. They have utterly failed to elucidate any reasons why Fritz's statements regarding its acquisitions apart from Intertrans were false and misleading when made. Thus, the court must dismiss plaintiffs' claims relating to alleged misstatements regarding Fritz's's non-Intertrans acquisitions. II. Scienter Because the court has concluded that plaintiffs have failed to meet their threshold burden of properly pleading facts supporting an inference that the statements discussed above were false and misleading when made, defendant's motion to dismiss must be granted. Thus, the court need not address whether plaintiffs have properly plead scienter. III. Plaintiff's Motion to Strike In conjunction with defendant's motion to dismiss, plaintiffs' bring a cross-motion to strike a number of documents submitted by defendant. Specifically, plaintiffs move to strike Exhibit J to the Herrera Declaration, which consists of copies of documents created by KPMG Peat Marwick. According to plaintiffs, these documents may not be considered by the court because they are neither referenced nor quoted in the complaint. 20
Plaintiffs are incorrect. Although these documents were not specifically referred to in the complaint, they were implicitly referenced. For example, plaintiffs maintain that "in connection with Peat's 1996 audit and in April 1997, Fritz was required to record millions of dollars of internal bad debt." Compl. ¶ 93. This court has previously allowed, in conjunction with a motion to dismiss in a securities fraud case, submission of documents available to plaintiffs and implicitly referenced in their complaint. Padnes v. Scios Nova, 1996 WL 539711 *9 (N.D. Cal. 1996). As the court stated in Padnes, plaintiffs cannot make a broad assertion of the absence of information which is contrary to known facts in order to resist a motion to dismiss and plunge the parties into lengthy and costly discovery." Thus, plaintiffs' motion to strike must be denied.7 /// /// /// /// /// /// /// /// /// /// /// /// /// 21
CONCLUSION For the foregoing reasons, defendant's motion to dismiss is GRANTED. The court does not grant plaintiffs leave to amend. This is the third complaint in this action filed by attorneys who specialize in securities class actions and promote themselves as the preeminent plaintiffs' securities firm. They should be able to plead a complaint that passes muster in one try. Three is certainly enough. In addition, plaintiffs' cross-motion to strike is DENIED. This order fully adjudicates or renders moot the motions reflected at Docket ## 35-1 and 41-1 in case no. C-96-2712 and the Clerk of the Court shall remove them from the pending motions list. The Clerk of the Court shall also close the file. IT IS SO ORDERED. Date: March 5, 1998 /s/ _______________________________ MARILYN HALL PATEL Chief Judge United States District Court Northern District of California 22
ENDNOTES 1. Plaintiffs' counsel filed three state securities fraud complaints against the Fritz defendants in San Francisco Superior Court. All three actions were dismissed with prejudice pursuant to defendants' demurrers. 2. Because pre-SRA Ninth Circuit caselaw did require particularity and an explanation why the statement or omission complained of was false or misleading when made, Glenfed, 42 F.3d at 1549, such caselaw is instructive to the court's analysis. For example, plaintiffs must still plead the time, place and nature of the allegedly fraudulent activities with specificity. Kaplan, 49 F.3d at 1370. 3. This paragraph of the complaint contains other statements released in the Form 10-K. Plaintiffs themselves, however, have identified the misstatements at issue as those dealing with the success of the merger with Intertrans. As these are the only statements dealing even marginally with the merger in this portion of the complaint, the court assumes that they are the statements to which plaintiffs refer. 4. This press release also included information about Fritz's increases in revenues, income and earnings per share. Plaintiffs' papers, however, do not challenge the veracity of this information. 5. Fritz acquired a number of small logistics providers. 6. For example, plaintiffs maintain that a press release of September 11, 1995, wherein "defendants announced the acquisition of the operations of Rex Air Freight C.A. based in Caracas, Venezuala," was misleading. Compl. ¶ 47. However, this press release, at least as described by plaintiffs in their complaint, mentions nothing about the costs or profits of the acquisition. 7. The court also notes, as plaintiffs themselves have admitted, that defendants are submitting the KPMG Peat Marwick papers primarily to show that they did not act with the requisite scienter. As the court has already concluded, it need not reach the issue of scienter because plaintiffs failed to show that the statements at issue were false or misleading when made. 23
Source: Scanned paper copy of court-stamped document