Case 2:02-cv-04561-GEB-MCA Document 28 Filed 04/23/2004 Page 1 of 36

NOT FOR PUBLICATION

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

Civ. No. 02-4561 (WGB) IN RE FLEETBOSTON FINANCIAL CORPORATION SECURITIES LITIGATION O P I N I O N

APPEARANCES:

Gary S. Graifman, Esq. Benjamin Benson, Esq. KANTROWITZ, GOLDHAMER & GRAIFMAN 210 Summit Avenue Montvale, New Jersey 07645

Liaison Counsel for Plaintiffs

Samuel H. Rudman, Esq. CAULEY GELLER BOWMAN & COATES, LLP 200 Broadhollow Road, Suite 406 Melville, NY 11747

Co-Lead Counsel for Plaintiffs

Joseph H. Weiss, Esq. WEISS & YOURMAN 551 Fifth Avenue, Suite 1600 New York, New York 10176

Co-Lead Counsel for Plaintiffs

Jules Brody, Esq. Howard T. Longman, Esq. STULL, STULL & BRODY 6 East 45 th Street New York, New York 10017

Co-Lead Counsel for Plaintiffs

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David M. Meisels, Esq. HERRICK, FEINSTEIN LLP 2 Penn Plaza Newark, NJ 07105-2245

Mitchell Lowenthal, Esq. Jeffrey Rosenthal, Esq. CLEARY, GOTTLIEB, STEEN & HAMILTON One Liberty Plaza New York, NY 10006

Attorneys for Defendants

BASSLER, DISTRICT JUDGE:

This is a putative securities class action brought on behalf of all persons or entities except Defendants, who exchanged shares of Summit Bancorp (“Summit”) common stock for shares of

FleetBoston Financial Corporation (“FBF”) common stock in connection with the merger between FBF and Summit. Defendants

FBF and the individual Defendants 1 (collectively “Defendants”) move to dismiss Plaintiffs’ Consolidated Amended Complaint (“the

Amended Complaint”) pursuant to Federal Rule of Civil Procedure

Rule 12(b)(6). Plaintiffs cross move to strike exhibits submitted in support of Defendants’ motion to dismiss, and all references thereto.

1 The individual Defendants are: Terrence Murray, Charles K. Gifford, Robert J. Higgins, Henrique C. Meirelles, Eugene M. McQuade, Ernest L. Puschaver, William C. Mutterperl, Joel B. Alvord, William Barnet III, Daniel Burnham Jr., John T. Collins, William F. Connell, Gary L. Countryman, Alice F. Emerson, James F. Hardymon, Marian L. Heard, Robert M. Kavner, Thomas J. May, Donald F. McHenry, Michael B. Picotte, Thomas R. Piper, Thomas C. Quick, Francene S. Rodgers, Thomas M. Ryan, and Paul R. Tregurtha (collectively the “Individual Defendants”).

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Defendants’ motion to dismiss is denied in part and granted in part. Defendants’ motion is granted only with respect to the claims against Robertson Stephens (and any claims against the

Individual Defendants relating thereto) set forth in the Amended

Complaint. Plaintiffs’ cross motion is dismissed as moot.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. The FBF-Summit Merger

On October 1, 1999, FBF merged with BankBoston Corporation

(“BankBoston”). (Amended Compl., at ¶ 32.) Through that merger,

FBF acquired its principal Argentine assets; according to FBF’s

Summary Annual Report for 1999, following that merger, FBF had

139 branches in Argentina and was the top fund manager in

Argentina. (Id. at ¶ 32-33.)

One year later, in October 2000, FBF and Summit Bancorp

(“Summit”) announced a stock-for-stock merger in which Summit shareholders would receive 1.02 shares of FBF stock for each of their Summit shares. (Id. at ¶ 34.) In connection with that merger, FBF and Summit jointly filed a Merger Proxy/Prospectus with the Securities and Exchange Commission (“SEC”) and FBF filed a Merger Registration Statement and Prospectus (“Merger

Registration Statement”) on January 25, 2001, which was later amended and supplemented on March 1, 2001, the actual closing date of the merger. (Id. at ¶¶ 2, 35.)

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FBF’s Merger Registration Statement incorporated by reference a number of FBF’s SEC filings prior to the date of the merger, such as its 1999 Form 10-K and its Form 10-Q reports for the first, second, and third quarters of 2000. (Id. at ¶¶ 51,

66, 75, 83.)

B. FBF’s Argentine Portfolio and History

In 1992, the Argentine government unveiled a new currency, the Peso, to trade on a one-for-one ratio with the U.S. dollar.

(Id. at ¶ 39.) Under the new system, every Peso in circulation in Argentina was backed by one U.S. dollar in Argentina’s central bank. (Id.) For most of the 1990s, convertibility2 was a success for the Argentine economy and the country experienced low levels of inflation. (Id.)

Problems with convertibility began to surface in 1998, as the East Asian and Russian financial crises spread to Brazil,

Argentina’s largest trading partner. (Id. at ¶ 40.) As a result, by the third quarter of 1998, Argentina’s economy slipped into a recession. (Id.) As the recession worsened, downward pressure on the value of the Peso increased and the relationship between the Peso and the U.S. dollar became increasingly unnatural and artificial. (Id.)

2 By linking the Peso to the U.S. dollar, Argentina’s government hoped to prevent inflation by limiting the ability of the government to print additional pesos. The Peso and the U.S. dollar were used interchangeably. (Amended Compl., at ¶ 39.)

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News reports at that time reflected the continued steep decline in Argentine economy. For example, on March 12, 1999,

The Financial Times London reported that “recession in Brazil and

Argentina [was] expected to lead to a contraction in the continents’ gross domestic product for the first time since 1990.

. .” and that Argentina’ economy was expected to decline by 1.1% in 1999. (Id. at ¶ 41.) On May 10, 1999, The Wall Street

Journal announced a slump in demand for Argentine trade for

February 1999, including a 25% decline in imports and a 26% decline in exports. (Id.) The article also reported that

Deutsche Bank forecasted a 2% contraction in Argentina’s economy for 1999 and warned of the prospect of deflation. (Id.)

In February 2000, the International Monetary Fund (the

“IMF”) completed a report on the economic policies of the

Argentine government noting that “open unemployment remained high

[during 1999]” and in general, that the economy was in a deepening recession. (Id. at ¶ 42.) Similarly, on September 26,

2000, Moody’s Investor Services (“Moody’s”) released their annual report on Argentina’s banking system, which noted the weakened condition of Argentine banks stating, in part, as follows:

Moody’s stable to negative outlooks for the bank financial strength ratings (which include external supports) of the Argentine banks reflect their generally poor earnings and asset quality, as well as the relatively volatile environment in which they operate. Loan growth is weak, asset quality is deteriorating and system profitability

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continues to be eroded by the high credit, financial and operating costs of doing business in Argentina.

(Id. at ¶ 43.) On October 6, 2000, Moody’s downgraded the assets of FBF’s branches from “B1 to B2.” 3 According to Moody’s rating methodology, issues that are rated “B” offer poor financial security and “[a]ssurance of payment of obligation over any long period of time is small.” (Id. at ¶ 44.) On November 21, 2000,

Moody’s reduced its outlook for long-term foreign currency ratings of Argentine banks to “negative” from “stable” as well as changing the ratings outlook for the Republic of Argentina’s B1 foreign currency country ceiling for bonds and notes, and for the

B2 foreign currency country ceiling for bank deposits. (Id. at ¶

46.) The outlook on domestic currency denominated securities issued by Argentina was also changed to “negative.” (Id.)

On December 7, 2000, the IMF announced that it was providing an Argentine bailout of up to $25 billion and subsequently, on

December 18, 2000, it was announced that Argentina had reached an agreement with the IMF for $39.7 billion in aid. (Id. at ¶ 47.)

On December 20, 2001, President Fernandado de la Rua resigned. Next, the Argentine government passed a constitutional amendment de-linking its Peso from the U.S. dollar, and convertibility was broken in early January 2002. During this

3 Defendants contend that there was no such downgrade as the October 6 th report was published on October 6 of 1999. (See Reply Declaration of David M. Meisels, Ex. A.)

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time period, Argentina set limits on the amount of money that could be withdrawn from banks or sent abroad, declared a 30-day state of emergency, elected five different presidents in less than two weeks, and defaulted on part of its $141 billion in public sector debt. In addition, the head of Argentina’s Central

Bank resigned on January 17, 2002, and two weeks later, the

Supreme Court of Argentina declared the emergency financial controls unconstitutional. (See Declaration of Jeffrey A.

Rosenthal (“Rosenthal Decl.”), Ex. S at 21-32.) 4

C. The Amended Complaint

The first of the presently consolidated actions was filed on

September 19, 2002. After two other similar complaints were filed and the three actions were consolidated, Plaintiffs’

Consolidated Amended Complaint was filed on April 22, 2003.

Therein, Plaintiffs allege that by the time of the issuance of the Merger Registration Statement, the deepening Argentine recession made it “foreseeable” that convertibility would have to

4 The content of news articles may be judicially noticed for their truth when that content is well known or not reasonably disputable. See Weinstein’s Federal Evidence, §201.11[2] (“Facts reported in a newspaper are often accepted as generally known”); see also id. at § 201.12[5] (“Courts may take judicial notice of historical facts revealed in authoritative writings when there is no dispute about the authenticity of the materials and judicial notice is limited to factual matters that are incontrovertible” such as political and historical events); see, e.g., In re Cendant Corp. Derivative Action Litig., 96 F. Supp.2d 394, 401 (D.N.J. 2000) (taking judicial notice of fact that defendants had resigned from board positions on a certain date on the basis of New York Times article).

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be broken, thereby resulting in immediate and substantial losses on investments in Argentina. (Amended Compl., at ¶ 48.) Indeed,

Plaintiffs contend that according to a former risk management executive at FBF in Argentina (who was originally employed at

Bank Boston), at the time of the merger between FBF and

BankBoston, the break in convertibility was foreseeable and it was discussed that when convertibility was broken, there would be immediate and “severe” losses to FBF’s Argentine investments.

(Id.) According to this former employee, during meetings, which occurred during the due diligence before the FBF/BankBoston merger, presentations materials were also distributed which described that convertibility would break and lead to severe losses. (Id.)

As a result of this claimed foreseeable decoupling of the

Peso from the dollar, and FBF’s alleged knowledge of that foreseeable event as early as due diligence meetings leading up to FBF’s merger with Bank Boston in 1999, Plaintiffs assert that the Merger Registration Statement was materially false and misleading for several reasons: (1) FBF failed to allocate the proper amount of loan loss reserves for Argentina and, as a result, FBF reported artificially inflated earnings and overstated its financial condition 5 by “failing to timely record

5 Plaintiffs contend that, in total, FBF understated its substandard assets in the Merger Registration Statement by more than $6.7 billion and corresponding loan loss reserves by more

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impairment to its loans and other investments in Argentina,” (id. at ¶ 4); (2) FBF failed to adhere to Generally Accepted

Accounting Principles (“GAAP”), which required greater levels of reserve for its loss exposure on FBF’s Argentine loans, (id. at ¶

5); (3) FBF’s internal risk assessment processes were inadequate under applicable banking regulations, particularly those of the

Office of the Comptroller of the Currency (“OCC”), because FBF failed to properly classify certain loans and properly reserve for its loss exposure in Argentina, (id. at ¶¶ 6, 64-65); (4) the

Merger Registration Statement failed to disclose the numerous alleged improper business practices at FBF’s wholly-owned investment banking subsidiary, Robertson Stephens, Inc.

(“Robertson Stephens”), (id. at ¶ 7.)

Alleging that Summit shareholders received overvalued FBF shares, Plaintiffs have brought claims under § 11 (Count I), §

12(a)(2) (Count III) of the Securities Act of 1933, as amended

(the “Securities Act”), against FBF, and under § 11 (Count II) and § 15 (Count IV) of the Securities Act against the Individual

Defendants. Defendants seek to dismiss all of these counts. In support of their motion to dismiss, Defendants rely on various exhibits; Plaintiffs cross move to strike those exhibits and all references thereto. than $1 billion, thereby overstating its earnings at the time of the issuance of the Merger Registration Statement by at least 50%. (Amended Compl., at ¶ 4.)

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II. DISCUSSION 6

A. Standard for Motion to Dismiss

Federal Rule of Civil Procedure 12(b)(6) allows a party to move for a dismissal based upon the pleader's "failure to state a claim upon which relief can be granted." Since the long- established federal policy of civil litigation is to decide cases on the proofs, district courts generally disfavor Rule 12(b)(6) motions. Melo-Sonics Corp. v. Cropp, 342 F.2d 856 (3d Cir.

1965); Panek v. Bogucz, 718 F. Supp. 1228, 1229 (D.N.J. 1989).

In deciding a motion to dismiss for failure to state a claim, all allegations in the pleadings must be accepted as true and the plaintiff must be given the benefit of every favorable inference that can be drawn from those allegations. See Conley v. Gibson, 355 U.S. 41, 48 (1957); Wisniewski v. Johns-Manville

Corp., 812 F.2d 81, 83 n.1 (3d Cir. 1987); Markowitz, 906 F.2d at

103. "All the rules require is a short and plain statement of the claim that gives the defendant fair notice of the plaintiff's claim and the grounds upon which it rests." Conley, 355 U.S. at

47.

Rule 12(b)(6) does not countenance "dismissals based on a judge's disbelief of a complaint's factual allegations." Neitzke

6 Both parties are reminded that in the future, briefs must comply with all applicable court rules, including Local Rule 7.2(d), which requires, in part, that footnotes be printed in the same size of type utilized in the text.

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v. Williams, 490 U.S. 319, 326-27 (1989). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims."

Scheur v. Rhodes, 416 U.S. 232, 236 (1974).

Accepting the facts in the pleadings as true and giving them all reasonable inferences, a court must dismiss under Rule

12 (b) (6) "[ i] f as a matter of law ` it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations.'" Neitzke, 490 U.S. at 326-27.

B. Motion to Dismiss

Defendants move to dismiss on several grounds. First,

Defendants contend that Plaintiffs fail to state a claim against

FBF under §§ 11 and 12 of the Securities Act for inadequate loan loss reserves or a violation of GAAP because none of the events pertaining to the economic collapse in Argentina had occurred when the Merger Registration Statement was drafted, or when the merger vote took place, and in any event, that those claims are barred by the bespeaks caution doctrine. Second, Defendants assert that Plaintiffs have failed to plead with particularity as required by Fed. R. Civ. P. Rule 9(b). Third, Defendants argue that Plaintiffs’ claims against Robertson Stephens must be dismissed because they are not only time barred, but also insufficiently pled under Fed. R. Civ. P. 8. Finally, Defendants seek to dismiss the §§ 11 and 15 claims against the Individual

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Defendants to the extent that there is no liability under either

§§ 11 or 12. Each of these contentions will be addressed in turn.

1. Section 11 and 12 Claims Against FBF

"At a minimum, each of the securities fraud provisions" allegedly violated by the Defendants "requires proof that the defendants made untrue or misleading statements or omissions of material fact." In re Donald J. Trump Casino Securities

Litigation, 7 F.3d 357, 368 (3d Cir. 1993), cert. denied, 114 S.

Ct. 1219 (1994). Section 11 provides a cause of action to purchasers of securities where:

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 . . . necessary to make the statements therein not misleading. . .

15 U.S.C. § 77k(a). Section 12(a)(2) of the Securities Act provides that any person who offers or sells a security by means of a prospectus or oral communication that misrepresents or omits material facts may be held liable to the purchaser of such security. 15 U.S.C. § 77l(a)(2) 7 ; see In re Westinghouse Sec.

7 Section 12(a)(2) states in pertinent part:

[a]ny person who - . . . (2) offers or sells a security . . ., by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state material fact necessary in order to make the statements, in the light of the

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Litig., 90 F.3d 696, 715 (3d Cir. 1996). Neither § 11 nor § 12 requires a showing of fraud, reliance, or scienter. See In re

Trump, 7 F.3d at 369, n.10; see also In re MobileMedia Sec.

Litig., 28 F. Supp.2d 901, 924 (D.N.J. 1998). Thus, actions brought under these sections allow recovery upon proof of negligence. See Herman & MacLean, 459 U.S. 375, 383-84 (1983);

Ernst & Ernst v. Hochfelder, 425 U.S. 986, 208-10 & n. 27 (1976);

In re MobileMedia, 28 F. Supp.2d at 924, n.16.

To avoid committing misrepresentation, a defendant is not required to disclose all known information, but only information that is "necessary to make other statements not misleading." In re Craftmatic Sec. Litig., 890 F.2d 628, 640 (3d Cir.1990). In other words, to state a cause of action, a plaintiff must identify "an affirmative statement that is made misleading by the material omission." In re Union Carbide Class Action Securities

Litigation, 648 F. Supp. 1322, 1326 (S.D.N.Y. 1986). Moreover,

"the allegations of the complaint are not read in isolation; they cannot be separated from the language of the prospectus, including whatever cautionary language appears in that text." In

circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission, shall be liable . . .

15 U.S.C. § 77l(a) (2) .

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re Trump Casino Sec. Lit., 793 F. Supp. 543, 553 (D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993), cert. denied, 114 S. Ct. 1219

(1994) .

A court evaluates whether the statement or omission was misleading at the time it was made. In re Trump, 793 F. Supp. at

553. "'[F]raud by hindsight,' the attempt to impose liability on management for unrealized economic predictions, is not actionable." Id. at 551 (quoting Sinay v. Lamson & Sessions Co.,

948 F.2d 1037, 1040 (6th Cir. 1991)).

a. Failure to State a Claim Regarding Adequacy of Loan Loss Reserves and GAAP Violation

Plaintiffs’ Amended Complaint is founded on the premise that as a result of the deepening recession in Argentina and the weakening of the Argentine Peso, Defendants were required to increase the amount of its loan loss reserves for its Argentine loans and investment, yet failed to do so in conformity with applicable GAAP. Given the alleged inadequacy of FBF’s loan loss reserves, Plaintiffs contend that statements in the Merger

Registration Statement were rendered materially false and misleading.

Loan loss reserves are defined as a “statement of condition, or balance sheet, account set up by a bank based on its expectations about future loan losses. As losses occur, they are charged against this reserve. That is, the loan account is credited and the reserve account is debited. The reserve is

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established by a debit to an expense account called the loan loss provision, with a corresponding credit to the loan loss reserve.”

Shapiro v. UJB Fin. Corp., 964 F.2d 272, 281 (3d Cir.), cert. denied, 506 U.S. 934 (1992) (citation omitted) (emphasis added).

Although a loan loss reserve is, by definition, “based on the expectation about future loan losses,” to be an actionable misstatement, a plaintiff must allege that the loan loss reserves were known to be insufficient in light of the then-current economic conditions. In re Westinghouse, 90 F.3d at 709.

I. Section 11 and 12 Claims to be Based on Facts

In support of their motion to dismiss, Defendants contend that Plaintiffs have failed to state a claim under § 11 or § 12 of the Securities Act for inadequate loan loss reserves or a violation of GAAP because §§ 11 and 12 require untrue or misleading statements or omissions of fact. According to

Defendants, Plaintiffs’ claims are a clear-cut case of “fraud by hindsight” 8 because the “inadequacy” of the loan loss is premised on “facts”, i.e. the economic collapse and political instability in Argentina, that did not occur until a year after the Merger

Registration Statement was issued. Thus, Defendants posit that they cannot be held liable for securities fraud resulting from a lack of clairvoyance; moreover, in addition to not knowing when

8 Plaintiffs point out that this case does not even concern fraud.

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and if such events would take place, they argue that there were indications that the Argentine economy was in fact resilient.

However, even if the Court were to consider the materials that are extraneous to the Amended Complaint and were submitted by Defendants in support of their motion to dismiss, the Court must accept the allegations of the Amended Complaint as true and resolve all disputed issues of fact in favor of Plaintiffs for purposes of this motion. Therefore, any facts disputed by

Defendants are irrelevant for the present purposes. Taking

Plaintiffs’ allegations as true and according them all reasonable inferences, Plaintiffs’ claims cannot be dismissed as a matter of law for failing to be based on facts. As Plaintiffs explain, their claim alleges that the adverse events, i.e. the downgrades by Moody’s and information about unfavorable market conditions, occurred and were present prior to the Registration Statement, but that Defendants ignored and concealed such “critical” events.

Thus, Plaintiffs are not accusing Defendants of failing to see the future, but of refusing to recognize the impact of the adverse market information that was then available, as they were required to do, by disclosing those negative market trends in the

Merger Registration Statement and reflecting them in FBF’s loan loss reserves.

ii. Inactionable Mismanagement

Next, Defendants also contend that, at most, FBF’s failure

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to predict the future is nothing more than inactionable mismanagement. Indeed, “mere failure to provide adequate reserves (or to perform competently other management tasks) does not implicate the concerns of the federal securities laws and is not normally actionable.” Shapiro, 964 F.2d at 281. Similarly, it is not a violation of the securities law “if a defendant has not commented on the nature and quality of the management practices that it has used to reach a particular statement of loan loss reserves, earnings, assets, or net worth” and thus failed to characterize “these practices as inadequate, meaningless, out of control, or ineffective.” Id.

In contrast, a defendant exposes itself to possible liability for securities fraud “if a defendant characterizes loan loss reserves as ‘adequate’ or ‘solid’ even though it knows they are inadequate or unstable.” Id. at 282. The Third Circuit

Court of Appeals has explained that “[b]y addressing the quality of a particular management practice, a defendant declares the subject of its representation to be material to the reasonable shareholder, and thus is bound to speak truthfully.” Id. In the

Third Circuit’s view, “a reasonable investor would be influenced significantly by knowledge that a bank has knowingly or recklessly hidden its true financial status by deliberately misstating its level of non-performing loans, failing to provide adequate reserves, and indulging its problem loan customers.”

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Id. at 281.

Thus, the Court must determine if here, Plaintiffs are alleging that Defendants knowingly made material statements that

FBF’s loan loss reserves were adequate when in fact they were not, or whether Plaintiffs are merely claiming that the reserves were inadequate. See id. at 283-84. In this case, FBF represented in the Merger Registration Statement, among other things, that “. . . the reserve for credit losses [was] maintained at levels considered adequate by management to provide for credit losses inherent in these portfolios.” Amended Compl., at ¶ 64. Plaintiffs claim that this statement is an example of a materially false and misleading statement because FBF was not properly reserved for its loss exposure in Argentina given that the Argentine economy was in steep decline.' See id. at ¶ 65.

Moreover, Plaintiffs have set forth on the face of the Amended

Complaint facts to support their contention that Defendants knowingly made such alleged misstatements regarding FBF’s loan loss reserves. See id. at ¶ 48.

Accordingly, the Court cannot find, on a motion to dismiss,

' Defendants insist that FBF’s loan loss reserves were adequate because the reserves were correctly based on “probable” and “estimable” losses at the time the reserves were taken. However, the merits of whether or not FBF’s loan loss reserves were in fact adequate is not appropriate for this Court to determine on a motion to dismiss given the factual dispute over that issue. Rather, the Court must accept Plaintiffs’ allegations as true for purposes of this motion.

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that Plaintiffs have only alleged mere inactionable mismanagement. Defendants have not met their burden of proving that Plaintiffs are unable to prove any set of facts, consistent with the allegations in the Amended Complaint, that would entitle them to relief. If, as Plaintiffs allege, Defendants knowingly made material statements that FBF’s loan loss reserves were adequate when in fact they were not, and the adverse market conditions were such that FBF should have disclosed those negative trends and increased its loan loss reserves based on the then-current economic conditions, a reasonable jury could find for Plaintiffs under § 11 or § 12 of the Securities Act for inadequate loan loss reserves or a violation of GAAP.

b. Bespeaks Caution Doctrine

To the extent an offering document adequately discloses risks and therefore "bespeaks caution," liability cannot be imposed as a matter of law. In re Trump, 7 F.3d at 364. The

"bespeaks caution" doctrine "is essentially shorthand for the well-established principle that a statement or omission must be considered in context, so that accompanying statements may render it immaterial as a matter of law." Id. at 364; see also In re

Westinghouse, 90 F.3d at 707; Romani v. Sherarson Lehman Hutton,

929 F.2d 875, 879 (1 st Cir. 1991); Luce v. Edelstein, 802 F.2d

49, 56 (2d Cir. 1986); Raab v. General Physics Corp., 4 F.3d 286,

290 (4th Cir. 1993). The "bespeaks caution" doctrine is equally

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applicable to allegations of both affirmative misrepresentations and omissions concerning “soft information.” 10 In re Trump, 7

F.3d at 371-72.

Cautionary statements suffice to render challenged misrepresentations or omissions immaterial as a matter of law if they are "substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge." Id. at 371-72; Jackson National Life Ins.

Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 703 (2d Cir.

1994)(disclosures "bespeak caution" when they warn about the very contingencies that come to pass); In re Worlds of Wonder

Securities Litigation, 35 F.3d 1407, 1414 (9th Cir. 1994)("the bespeaks caution doctrine applies only to precise cautionary language which directly addresses itself to future projections, estimates or forecasts in a prospectus."), cert. denied sub nom.

Miller v. Pezzani, 116 S. Ct. 185 (1995). This focused application of the bespeaks caution doctrine avoids the temptation of management to "conceal deliberate misrepresentations beneath the mantle of broad cautionary language." Id. at 1414.

10 “The term soft information refers to statements of subjective analysis or extrapolation, such as opinions, motives, and intentions, or forward looking statements, such as projections, estimates, and forecasts.” In re Craftmatic, 890 F.2d at 642.

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Here, Defendants contend that the bespeaks caution doctrine bars Plaintiffs’ claims because FBF bespoke caution about the possibility of an economic downturn in Argentina by issuing clear warnings that Argentina’s general economic prospects could not be assured and that FBF’s Argentine loans were subject to numerous risks, including credit risk, political and economic conditions and restrictions on foreign exchange. See Rosenthal Decl., Ex. A at 23-24, Ex. B at 12, Ex. C at 13-14, Ex. D at 14 (“In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations”). Moreover, Defendants insist that FBF could not have been more specific in its most current financial statement incorporated in the Merger

Registration Statement, informing investors that “it is not possible to predict what effect if any, the economic and political events in Argentina will ultimately have on that country’s economic growth or on the Corporation’s operations in

Argentina . . . .” Id. at Ex. D at 14.

Further, Defendants point out that although the Amended

Complaint asserts that FBF’s Form 10-Qs for the first and second quarters of 2000 ignored the Argentine recession, see Amended

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Compl., at 70, 78, FBF’s Form 10-Q for the first quarter of 2000 in fact disclosed that the “Corporation’s international loan portfolio was relatively flat compared to December 31, 1999, reflecting economic slowdowns in Brazil and Argentina.” Id. at

Ex. B at 11. Similarly, in earlier reports such as FBF’s 1999

Form 10-K (also incorporated in the Registration Statement), FBF briefly noted the “economic volatility in 1999, which resulted in a devaluation of the Brazilian currency and a significant recession in Argentina.” Id. at Ex. A at 18.

Additionally, each quarterly financial statement warned investors that “actual results may differ materially” from future projections due to a variety of uncertainties, including

“currency fluctuations” and changes in “political and economic conditions, either domestically or internationally.” Id. at Ex.

A at 2, Ex. B at 18, Ex. C at 21, Ex. D at 20. Defendants claim that these cautionary statements were "substantive and tailored to the specific future projections, estimates or opinions in the prospectus which the plaintiffs challenge." In re Trump, 7 F.3d at 371-72.

In response, Plaintiffs argue that Defendants cannot prevail pursuant to the bespeaks caution doctrine because the actionable statements and omissions at issue do not involve forward looking projections, but rather, are statements of currently existing fact and events. That is, Plaintiffs contend that setting a

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proper loan loss reserve involves a sound accounting procedure based on current, existing facts and in accordance with applicable GAAP and other regulations, such as those factors required by the OCC Handbook.

The plaintiffs in In re Westinghouse raised a similar argument. In that case, the plaintiffs had challenged the adequacy of loan loss reserves; the defendants, however, argued that the bespeaks caution doctrine rendered any alleged misstatements immaterial. In response, the plaintiffs argued that any cautionary language was insufficient because the loan loss reserves were based on “current economic conditions.” In re

Westinghouse, 90 F.3d at 709. Upon careful review of the cautionary language issued by the defendants, the Third Circuit held that such cautionary statements did not sufficiently counter the alleged misrepresentations regarding the adequacy of the loan loss reserves and compliance with GAAP. Id. In so deciding, the

Court of Appeals explained:

If, as plaintiffs say, defendants knowingly or recklessly misrepresented the adequacy of the loss reserves to protect against known losses and known risks in light of the then- current economic conditions, it follows that defendants’ cautionary statements about the future did not render those misrepresentations immaterial. In our view, a reasonable investor would be very interested in knowing, not merely that future economic developments might cause further losses, but that (as plaintiffs allege) current reserves were known to be insufficient under current economic

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conditions. A reasonable investor might well be willing to take some chances with regard to the future of the economy, but might be quite unwilling to invest in a company that knew that its reserves were insufficient under current conditions and knew it would be taking another major write-down in the near future (as plaintiffs allege). Thus, notwithstanding the cautionary language stressed by defendants, we think that there is a substantial likelihood that defendants’ alleged misrepresentations –- i.e., that the loan loss reserves were established in compliance with GAAP and were believed to be adequate to cover expected future losses given the then-existing economic conditions–- would have assumed actual significance to a reasonable investor contemplating the purchase of securities. We therefore cannot say that the cautionary language rendered the alleged misrepresentations immaterial as a matter of law.

Id. at 709-710 (footnotes omitted).

Thus, in this action, upon careful review of Defendants’ cautionary language, the Court holds that, for the same reasons noted in In re Westinghouse, such cautionary language does not render the alleged misrepresentations immaterial as a matter of

law. 11

Lastly, even aside from the cautionary language in FBF’s SEC filings, Defendants maintain that the total mix of information available to Plaintiffs rendered the alleged misrepresentations immaterial because Plaintiffs knew the level of FBF’s reserves

11 In light of this ruling, the Court need not reach Plaintiffs’ additional argument that Defendants’ cautionary statements are not sufficiently tailored or related to the alleged misrepresentations to render them immaterial.

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relative to FBF’s Argentine exposure. In so arguing, Defendants point out that FBF disclosed in its financials the size of its

Argentine portfolio, Amended Compl., at ¶¶ 53, 67-68, 75-76, 85-

86, and the size of its reserves. Id. at ¶¶ 51, 69, 77, 87.

Moreover, the Moody’s 1999 downgrade and the press reports that

Plaintiffs claim put FBF on notice of Argentina’s future economic collapse were all matters of public record before the Summit merger, and therefore, arguably put Plaintiffs on notice as well.

Defendants conclude that Plaintiffs, thus aware of the purported inadequacy of FBF’s reserves at the time they approved the merger and acquired shares of FBF in connection therewith, cannot claim that FBF deceived them in light of the “total mix” of information available.

A statement or omission is material if there is

“‘substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.’” Shapiro, 964 F.2d at 281 n.11 (quoting T.S.C. Indus., Inc. v. Northway, Inc., 426

U.S. 438, 449 (1976)). Materiality is a mixed question of law and fact, which the trier of fact ordinarily decides. Id. A fact is material if its disclosure would have "significantly altered the 'total mix' of information available" to an investor.

In re Craftmatic, 890 F.2d at 641. Therefore, only “if the alleged misrepresentations or omissions are so obviously

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unimportant to an investor that reasonable minds cannot differ on the question of materiality is it appropriate for the district court to rule that the allegations are inactionable as a matter of law." Shapiro, 964 F.2d at 281 n.11.

Here, whether the total mix of information available to an investor made immaterial the information that the loan loss reserves were adequate is a fact intensive inquiry on which reasonable minds could differ. Accordingly, the Court cannot decide that issue in Defendants’ favor on a motion to dismiss.

c. Rule 9(b)

Rule 9(b) requires that “[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.” Fed. R. Civ. P. 9(b). Although

Plaintiffs avoid any mention of the word “fraud,” Defendants argue that Plaintiffs’ loan loss reserve claims sound in fraud because ¶ 48 of the Amended Complaint, which describes the due diligence meeting where it was discussed that “convertibility would break and it would lead to severe losses”, 12 alleges willful disregard of knowledge. Therefore, Defendants contend that Plaintiffs’ allegations must meet the pleading requirements of Rule 9(b), but fail to do so.

Plaintiffs, however, insist that Rule 9(b) does not apply because their Securities Act claims are based on negligence

12 See section IC supra.

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rather than fraud. While Plaintiffs acknowledge that ¶ 48 of the

Amended Complaint could be used in a fraud action, they insist that it is not so used here; Plaintiffs explain that in the context of this action, the alleged belief that “convertibility would break” demonstrates that defendants were on notice of this fact, and were therefore obligated to reflect that fact in their calculation of loan loss reserves and in other public statements.

Upon reviewing the Amended Complaint, and construing it in the light most favorable to Plaintiffs, the Court finds that while Plaintiffs’ claims, as Plaintiffs admit, could sound in fraud, here, they sound in negligence. Plaintiffs do not allege in the Amended Complaint that Defendants acted intentionally, knowingly, or recklessly. Compare Shapiro, 964 F.2d at 287-88

(finding complaint devoid of allegations that defendants acted negligently, and instead, filled with references to defendants’ intentional and reckless misrepresentation of material facts).

Instead, the Amended Complaint tracks the statutory language of §

12(a)(2), namely that Defendants “knew or, in the exercise of reasonable care, should have known” of the misstatements. 13 See

In re Phar-Mor, Inc. Sec. Litig., 1993 WL 623308, at *4 (W.D. Pa.

Dec. 6, 1993). Therefore, because Plaintiffs’ Securities Act claims sound in negligence, Rule 9(b) is inapplicable. See In re

Westinghouse, 90 F.3d at 717, n.20 (noting that it would be legal

13 See n.7, supra.

27 Case 2:02-cv-04561-GEB-MCA Document 28 Filed 04/23/2004 Page 28 of 36

error to impose heightened pleading requirement of Rule 9(b)

“[a]bsent a determination that plaintiffs’ claims sounded in fraud, or some analysis explaining why Rule 9(b) should apply when a section 12(2) claim does not sound in fraud”); Shapiro,

964 F.2d at 288 (“By its plain wording, Rule 9(b) would not appear to apply to claims that a defendant negligently violated

§§ 11 and 12 (2) ”) .

2. Section 11 and 12 Claims Against Robertson Stephens

The initial Complaint did not contain any allegations regarding Robertson Stephens and was devoted exclusively to claims pertaining to FBF’s purported failure to maintain adequate loan loss reserves based on the Argentine economy; the Amended

Complaint adds that the Merger Registration Statement was materially false and misleading because Robertson Stephens “was manipulating and distorting the market for its IPOs.” Amended

Compl., at ¶ 129.

Defendants contend that Plaintiffs’ claims against Robertson

Stephens are time barred and do not relate back to the filing of the original complaint. Each of the §§ 11, 12(a)(2), and 15 claims against Robertson Stephens must have been “brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . .” 15 U.S.C. § 77m; see In re NAHC, Inc., Sec. Litig., 306 F.3d 1314, 1326 (3d Cir. 2002)

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(recognizing that plaintiffs have “a duty to exercise reasonable diligence to uncover the basis for their claims, and are held to have constructive notice of all facts that could have been learned through diligent investigation during the period.”

(internal quotations omitted)). According to Defendants, numerous events, including FBF’s 2001 annual report published on

March 1, 2002, 14 put Plaintiffs on inquiry, if not direct notice

14 The March 1, 2002 annual report disclosed, in pertinent part, the following:

During 2001, Robertson Stephens, the Corporation’s investment banking subsidiary, and many other underwriters, as well as various issuers and their officers and directors, were named as defendants in approximately 200 class action lawsuits alleging violations of federal securities laws in connection with the underwriting of initial public offerings (IPOs). The plaintiffs contend that the defendants violated the securities laws by failing to make certain required disclosures in prospectuses, by manipulating the prices of IPO securities in the aftermarkets through, among other things, alleged agreements with companies receiving allocations to purchase additional shares in the aftermarket and by false and misleading analyst reports. Robertson Stephens and other leading underwriters have also been named as defendants in class action lawsuits under the antitrust laws alleging that the underwriters conspired to manipulate the aftermarkets for the IPO securities and to extract anticompetitive fees in connection with the IPOs. Robertson Stephens believes that it acted lawfully in respect to the foregoing allegations and is contesting these suits. Robertson Stephens is also involved in various governmental reviews and

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of the alleged misstatements prior to the April 22, 2003 filing of the Amended Complaint. Defendants further contend that the new allegations against Robertson Stephens do not relate back to the original complaint because such claims relate to an entirely separate subsidiary in an entirely different business, and concern entirely different conduct.

While Plaintiffs do not dispute that this Court may consider the annual report for purposes of this motion, and that the annual report put them on notice of the alleged violations by

Robertson Stephens, see Matthews v. Kidder, Peabody & Co., 260

F.3d 239, 252 (3d Cir. 2001) (noting that investors are “presumed to have read prospectuses, quarterly reports, and other information relating to their investments”), Plaintiffs do contend that their claims are not time barred because they relate back to the initial complaint that was filed on September 19,

2002.

Rule 15 provides that “[a]n amendment of a pleading relates back to the date of the original pleading when . . . the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading . . ..” Fed. R. Civ. P.

15(c)(2). The rationale behind Rule 15©) is to ensure that for

investigations concerning the foregoing.

Rosenthal Decl., Ex. E at 5.

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statute of limitations purposes, the defendant has been given adequate notice of the plaintiff’s claim and the grounds upon which it rests. Baldwin County Welcome Ctr. V. Brown, 466 U.S.

147, 149 n.3 (1984); see Nelson v. County of Allegheny, 60 F.3d

1010, 1014 (3d Cir. 1995) (“the relation-back rule requires plaintiffs to show that the already commenced action sufficiently embraces the amended claims so that defendants are not unfairly prejudiced”). “Thus, although a plaintiff need not set forth in detail the basis of his claim for relief, she [sic] must ‘give the defendant fair notice of what the plaintiff’s claim is and the grounds upon which it rests.’” Wells v. HBO & Co., 813 F.

Supp. 1561, 1565 (N.D. Ga. 1992) (citing Baldwin County Welcome

Ctr., 466 U.S. at 149 n.3).

The relation back of amendments is generally permitted to correct a factual or a procedural deficiency, to cure a defective statement of jurisdiction or venue, or to change the legal theory on which the action was brought. See Grace v. Rosenstock, 169

F.R.D. 473, 480 (E.D.N.Y. 1996); 3 J. Moore, Moore’s Federal

Practice, ¶ 15.19[2] at 15-81 to 83 (3d ed. 2004). In contrast, courts do not permit the use of Rule 15©) to add allegations concerning an entirely different transaction or set of facts not included in the original pleading. Grace, 169 F.R.D. at 480-81;

Wright, Miller & Kane, 6A Federal Practice & Procedure: Civil 2d

§ 1497 at 70 (2d 1990) (“When plaintiff attempts to allege an

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entirely different transaction by amendment, Rule 15©) will not authorize relation back”) (footnote omitted).

Here, the Robertson Stephens claims involve an entirely different transaction or set of facts from the loan loss reserve claims that center around the Argentine economy. Nonetheless,

Plaintiffs contend that the Robertson Stephens allegations relate back to the initial complaint because these new claims provide separate reasons to support their initial claim that FBF’s public filings were misleading.

The Court disagrees with Plaintiffs. In In re National

Media Sec. Litig., 1994 WL 649261 (E.D. Pa. Nov. 18, 1994), a case that Plaintiffs argue is analogous, the initial complaint challenged the truthfulness of corporate disclosures, highlighting a particular sentence in an annual report about the defendant company’s main business product. In the initial complaint, the plaintiffs alleged that the misleading statement failed to disclose risks to the company arising from a dispute between the company and its co-producer, PRMI. In the amended complaint, the plaintiffs sought to further challenge the alleged misleading statements for failing to disclose a dispute between the company and its supplier, Ronic. Although the disputes involving PRMI and Ronic were distinct, both the initial complaint and the amended complaint claimed that the defendants

“violated the securities laws and negligently misrepresented the

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same product line in the same public statements” contained in the annual report. Id. at *2 (emphasis added). Thus, the court held that the same misleading sentences were the same occurrence for purposes of Rule 15(c)(2), and that therefore, the amendments related back to the initial complaint and were not time barred.

Id.

In Wells, 813 F. Supp. 1561, the plaintiff’s original complaint alleged that the defendant company’s public filings were false and misleading because the company unlawfully inflated its earnings by the accounting and disclosure methods it used with respect to a practice called “discounting.” The amended complaint simply stated another reason the same statements in the same public filings falsely inflated the value of the company’s stock. In deciding whether the amendment related back to the initial complaint, the court recognized that the “plaintiff’s original complaint gave no hint that it challenged [the company’s] reporting procedures or earnings estimates on any basis other than discounting.” Id. at 1565. The court also noted that “[s]imply because [the company] had notice that plaintiff objected to one particular problem with its statements does not mean [the company] had notice of other problems.” Id. at 1565-66. Despite these observations, the court found that on balance, the proposed amended complaint arose from the same transaction as the original complaint in part because the amended

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complaint attacked precisely the same allegedly misleading filings, and the same particular statements within those filings, as those challenged in the original complaint. Id. at 1566. As the court further explained, the original complaint “could to some extent have alerted [the company] to the possibility that, at least following discovery, the specific statements in the filings might appear to have inflated [the company’s] stock value for other reasons. . ..” Id. at 1566.

Because the amendments in In re National Media and Wells that were deemed to relate back to the original complaint challenged the same particular sentences contained in the same public filings as those challenged in the initial complaints, those cases are distinguishable and therefore, not instructive here. In this case, the Amended Complaint does not challenge the same particular statements challenged in the original Complaint.

Plaintiffs’ initial Complaint centered around the alleged inadequacy of FBF’s loan loss reserves in view of the Argentine economy and the violations of applicable accounting and banking regulations resulting therefrom. That is an entirely different set of acts from the subsequently alleged improper business practices of Stephenson Roberts. Thus, while both the old and new allegations share the same broad challenge that the Merger

Registration Statement was false and misleading, Defendants have had inadequate notice of the amendments for purposes of Rule

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15(c)(2). Accordingly, Plaintiffs’ amended claims pertaining to

Stephenson Roberts do not relate back and are therefore time barred.

In view of the Court’s decision, the Court need not address the remaining arguments raised by Defendants in support of their motion to dismiss the Robertson Stephens claims.

3. Section 11 and 15 Claims Against Individual Defendants

Defendants argue that to the extent that Plaintiffs fail to allege sufficiently any claim under § 11 or § 12, their claims under § 15 against the Individual Defendants for controlling person liability must be dismissed as well because “liability under Section 15 of the Securities Act hinges on liability under either Section 11 or Section 12.” Castlerock Mgmt. Ltd. v.

Ultralife Batteries, Inc., 114 F. Supp.2d 316, 325 (D.N.J. 2000).

Therefore, to the extent that any of the claims against the

Individual Defendants are with respect to the Stephenson Roberts allegations, those claims are dismissed.

C. Cross Motion to Strike Exhibits Submitted in Support of Defendants’ Motion to Dismiss and All References Thereto

Plaintiffs seek to strike Exhibits G, H, I, J, K, N, O, P,

Q, R, S, and U, which are attached to the Rosenthal Declaration and are comprised of various newspaper articles, reports and presentations.

However, because Plaintiffs have prevailed on Defendants’

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motion to dismiss, 15 the Court need not determine Plaintiffs’ cross motion to strike the defense exhibits. Plaintiffs’ cross motion is dismissed as moot.

III. CONCLUSION

For all the foregoing reasons, Defendants’ motion to dismiss is denied in part and granted in part. Defendants’ motion to dismiss is granted only with respect to the claims against

Robertson Stephens (and any claims against the Individual

Defendants relating thereto) set forth in the Amended Complaint; those claims are dismissed as time barred. Plaintiffs’ cross motion to strike is dismissed as moot.

/s/ WILLIAM G. BASSLER U.S.D.J.

DATED: April 23, 2004

15 Although Defendants’ motion to dismiss is granted with respect to the Robertson Stephens claim, the Court reached its decision without resort to any of the exhibits that are the subject of Plaintiffs’ cross motion to strike.

36