United States District Court, Central District of Illinois
March 30, 1992
DOROTHY KAS, PLAINTIFF,
CATERPILLAR, INC., G.A. SCHAEFER, D.V. FITES, L.A. KUCHAN, J.W. KENNING, AND C.E. RAGER, DEFENDANTS. ERIC MARGOLIS, PLAINTIFF, V. CATERPILLAR, INC., GEORGE A. SCHAEFER, DONALD V. FITES, LEN A. KUCHAN, JOHN W. KENNING, CHARLES E. RAGER, DEFENDANTS.
The opinion of the court was delivered by: Mihm, Chief Judge.
Before the court is Defendant's Motion to Dismiss for Failure
to Adequately Allege Scienter pursuant to Federal Rule of Civil
Procedure 9(b) and Defendant's Motion to Dismiss the Second
Amended Complaint pursuant to Federal Rules of Civil Procedure
9(b) and 12(b)(6). For the reasons set forth below, the court
denies Defendant's Scienter Motion to Dismiss and grants in
part and denies in part Defendant's 9(b) and 12(b)(6) Motion to
Plaintiffs have brought this action pursuant to § 10(b) of
the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), Rule
10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5), § 20 of
the Securities Exchange Act (15 U.S.C. § 78t) and state law.
This court has jurisdiction of this action pursuant to § 27 of
the Securities Exchange Act (15 U.S.C. § 78aa) and pendent
jurisdiction over the state law claims.
This is a security holders' class action on behalf of all
persons, other than Defendants, who purchased or otherwise
acquired the common stock of Caterpillar, purchased call
options for Caterpillar common stock, or who sold or otherwise
disposed of the put options for Caterpillar common stock
between January 19, 1990 and June 26, 1990 (the "Class
Period"). On June 25 and 26, 1990, Caterpillar stock dropped a
total of $11 (20% of its market value) for an aggregate market
loss of over $1 billion upon the disclosure of news that
Caterpillar's second quarter net income would be lower than
first quarter net income and would only constitute
approximately 56% of Caterpillar's net income for the same
period a year ago.
Plaintiffs allege in their Second Amended Complaint that the
dramatic price drop resulted from the revelation of material
facts which Defendants had previously concealed and which
rendered their prior statements, via press releases,
interviews, filings with the Securities and Exchange
Commission, and annual and quarterly reports to shareholders,
false and misleading. These alleged omissions and/or
misrepresented facts included statements in connection with a
plant renovation program called "Plant With a Future" (PWAF),
a reorganization plan announced in January of 1990 referred to
as the "January Reorganization," and the status of
Caterpillar's Brazilian operations in the face of tremendous
economic disruption in that country due to the effects of
hyper-inflation and economic policies which the new Brazilian
administration implemented on March 16, 1990 in an effort to
stabilize the Brazilian economy.
I. Defendant's Dispositive Motion to Dismiss for Failure to
Adequately Allege Scienter Pursuant to Federal Rule of
Civil Procedure 9(b).
In their Second Amended Complaint ("complaint"), Plaintiffs
allege that Caterpillar violated § 10(b) and Rule 10b-5 by
making fraudulent misrepresentations and omissions regarding
Caterpillar's financial condition during the relevant class
period. The issue before the court is whether Plaintiffs
adequately pleaded the essential element of scienter in their §
10(b) action in order to meet the requirements of Federal Rule
of Civil Procedure 9(b).
A district court may not grant a motion to dismiss for
failure to state a claim "unless it appears beyond doubt that
the plaintiff can prove no set of facts in support of his claim
which would entitled him to relief." Scola v. Comdisco, Inc.,
1991 WL 93268 at *1 (N.D.Ill., May 22, 1991), citing R.E. Davis
Chemical Corp. v. Diasonics, Inc., 826 F.2d 678, 684-85 (7th
Cir. 1987). "In making this determination, the court must
accept as true all well-pleaded facts in the complaint and all
inferences which may reasonably be drawn from them." Scola,
1991 WL 93268 at *1, citing Gray v. County of Dane,
854 F.2d 179, 182 (7th Cir. 1988).
Plaintiff alleges that Caterpillar violated § 10(b), which
prohibits any person from using or employing "any manipulative
or deceptive device or contrivance" in connection with the
purchase or sale of a security, 15 U.S.C. § 78j(b), and Rule
10b-5, which makes it unlawful for any person, in connection
with the purchase or sale of a security:
(a) To employ any device, scheme, or artifice to
defraud, (b) to make any untrue statement of a
material fact or to omit to state a material fact
necessary in order to make the statements made, in
the light of the circumstances under which they
were made, not misleading, or (c) to engage in any
act, practice or course of business which operates
or would operate as a fraud or deceit upon any
person in connection with the purchase or sale of
In Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375,
47 L.Ed.2d 668 (1976), the United States Supreme Court ruled
that the "intent to deceive, manipulate, or defraud," e.g.,
scienter, was required to establish a violation under § 10(b)
and Rule 10b-5. 425 U.S. at 194, n. 12, 96 S.Ct. at 1381, n.
12. In Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033
(7th Cir. 1977), the Seventh Circuit expanded the element of
scienter to include a "reckless omission of material facts upon
which the plaintiff put justifiable reliance in connection with
the sale or purchase of securities . . ." 553 F.2d at 1044. In
Sundstrand, the Seventh Circuit applied an objective standard
for recklessness articulated by the court in Franke v.
Midwestern Oklahoma Development Authority, 428 F. Supp. 719
[r]eckless conduct may be defined as a highly
unreasonably omission, involving not merely
simple, or even inexcusable negligence, but an
extreme departure from the standards of ordinary
care, and which presents a danger of misleading
buyers or sellers that is either known to the
defendant or is so obvious that the actor must
have been aware of it.
Per the Franke definition, the Sundstrand court stated that:
[t]he danger of misleading buyers must be actually
known or so obvious that any reasonable man would
be legally bound as knowing, and the omission must
derive from something more egregious than even
"white heart/empty head" good faith.
553 F.2d at 1045. In Sanders v. John Nuveen & Co., 554 F.2d 790
(7th Cir. 1977), the Seventh Circuit further defined what
[t]he definition of "reckless behavior" should not
be a liberal one lest any discernible distinction
between "scienter" and "negligence" be obliterated
for these purposes. We believe "reckless" in these
circumstances comes closer to being a lesser form
of intent than merely a greater degree of ordinary
negligence. We perceive it to be not just a
difference in degree, but also in kind.
554 F.2d at 793.
The scienter element in a § 10(b) cause of action is subject
to Federal Rule of Civil Procedure 9(b) which states in part
that "in all averments of fraud or mistake, the circumstances
constituting fraud or mistake shall be stated with
particularity." The Second Circuit has described the purpose of
this rule to be the following:
(1) To provide a defendant with fair notice of the
plaintiff's claim, (2) to protect a defendant from
harm to his or her reputation or good will, and
(3) to reduce the number of strike suits.
Cosmas v. Hassett, 886 F.2d 8
, 11 (2nd Cir. 1989), citing Stern
v. Leucadia National Corp., 844 F.2d 997
, 1003 (2nd Cir.),
denied, 488 U.S. 852
, 109 S.Ct. 137
, 102 L.Ed.2d 109 (1988).
The leading Seventh Circuit case regarding the requirement
for pleading scienter is DiLeo v. Ernst and Young, 901 F.2d 624
(7th Cir. 1990). In DiLeo, the court refers to the
"particularity" requirement of Rule 9(b) by stating:
[a]lthough states of mind may be pleaded
generally, the "circumstances" must be pleaded in
detail. This means the who, what, when, where, and
how: the first paragraph of any newspaper story.
901 F.2d at 627. The DiLeo court was particularly concerned
with the disclosure of circumstances that would separate fraud
from the benefit of hindsight. Id. at 628. In that case, the
plaintiff claimed that Continental Bank's auditors had violated
Rule 10b-5 by certifying fraudulent financial statements and
aiding and abetting the primary violator, the Bank. DiLeo, 901
F.2d at 626. The Seventh Circuit affirmed the district court's
dismissal of the complaint after plaintiff failed to plead any
facts by which the court could infer fraud and distinguish that
inference from what appeared to be an accounting firm's failure
to recognize that the Bank's loan reserves needed to be
increased. Plaintiff failed to allege why this need should have
been apparent sooner and why failure to increase the reserves
amounted to fraud. Under the aider and abettor theory,
plaintiff failed to establish how the accounting firm had a
duty to disclose this information or how it had the requisite
scienter, given that the complaint contained no direct or
circumstantial evidence of scienter. Given the facts of that
case, the court found that defendants had nothing to gain from
the deceit and therefore no credible motive. 901 F.2d at 629.
Scienter must be pleaded in one of three ways. First, a
plaintiff may plead direct evidence of scienter. Renovitch v.
Kaufman, 905 F.2d 1040, 1046 (7th Cir. 1990). If the plaintiff
fails to produce direct evidence, the court should examine
whether there is indirect evidence of scienter by considering
whether the fraud was in the interest of the defendants or
whether the defendants had a motive to defraud. See Renovitch,
905 F.2d at 1046; DiLeo, 901 F.2d at 629; Barker v. Henderson,
Franklin, Starnes & Holt, 797 F.2d 490, 497 (7th Cir. 1986); In
re First Chicago Corp. Secur. Litigation, 769 F. Supp. 1444,
1455 (N.D.Ill. 1991). Third, if plaintiff fails to demonstrate
the possibility of motive or self-interest, he must demonstrate
scienter by alleging circumstances which provide a factual
foundation for otherwise conclusory allegations of scienter.
Kas v. Chase Manhattan Bank, N.A., CCH Fed.Sec.L.Rep. ¶ 95,381
at 96,864, 1990 WL 113185 (S.D.N.Y. 1990). These factual
allegations "must give rise to a `strong inference' that the
defendants possessed the requisite fraudulent intent." Id.,
citing Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50
(2nd Cir. 1987), cert. denied, 484 U.S. 1005, 108 S.Ct. 698, 98
L.Ed.2d 650 (1988). If the fraud alleged does not appear to
contain a motive or if the motive appears to be irrational,
plaintiffs must make a very strong showing of other
circumstances of scienter. DiLeo, 901 F.2d at 629.
In their motion to dismiss, Defendants argue that Plaintiffs'
allegations of scienter are "boilerplate," conclusory, and
insufficient to satisfy the standards set by the Seventh
Circuit and Rule 9(b). Defendants allege that in the absence of
direct evidence, Plaintiffs have failed to provide evidence of
motive to defraud or other circumstantial evidence which raises
a strong inference of fraud.
Defendants allege that the Seventh Circuit has affirmed that
boilerplate and conclusory allegations of scienter will not
suffice. Robin v. Arthur Young & Company, 915 F.2d 1120, 1127
(7th Cir. 1990), cert. denied, ___ U.S. ___, 111 S.Ct. 1317,
113 L.Ed.2d 250 (1991) (court held that assertions that the
defendant had knowledge of the misstatements "are nothing more
than rote conclusions"); DiLeo v. Ernst and Young, 901 F.2d at
629 (court held that "rote conclusions" and "boilerplate" do
not suffice); First Chicago, 769 F. Supp. at 1454 (court held
that conclusory allegations "will not satisfy Rule 9(b)").
In response, Plaintiffs argue that Rule 9(b) itself
explicitly states that the "condition of mind of a person may
be averred generally." See Carter v. Signode Industries, Inc.,
694 F. Supp. 493, 500 (N.D.Ill. 1988) (plaintiffs need only describe
the outline of the fraudulent scheme and need not set forth
facts which, because discovery has not been completed, are in
the exclusive possession of defendants); Reshal Assoc. Inc. v.
Long Grove Trading Co., 754 F. Supp. 1226 (N.D.Ill. 1990) (The
court ruled that the circumstances constituting fraud must be
pleaded in detail, not the circumstances constituting the state
of mind). Plaintiffs also cite Coe v. Circle Express, Inc.,
1991 WL 34626 (N.D.Ill., Mar. 12, 1991), where plaintiffs
alleged that defendants were insiders and officers of the
company, knew the representations and omissions in the relevant
document and recklessly disregarded their inaccuracy. The Coe
court held that plaintiffs had alleged sufficient facts to
"afford a basis for believing that plaintiffs could prove
scienter" as plaintiffs could not be expected at that point in
the litigation to have the in-depth knowledge of the internal
affairs of defendant corporation that would be required to
state their claim with great particularity.
In the instant case, Plaintiffs distinguish DiLeo v. Ernst
and Young, 901 F.2d 624 (7th Cir. 1990) by stressing that the
plaintiffs in that case failed to plead any allegations from
which one could infer that defendants knew or should have known
that the bank's loan loss provisions were unreasonable.
Plaintiffs also distinguish Robin v. Arthur Young and Co.,
915 F.2d 1120 (7th Cir. 1990) on its facts. In that secondary
liability case, the court ruled that plaintiff's claim that
Arthur Young should have known that the prospectus was false
and misleading was a conclusory allegation which failed to
plead fraud with sufficient particularity. Noting that Arthur
Young would not have discovered this evidence even through
routine audit, the court held that plaintiffs failed to allege
how Arthur Young was supposed to discover the misleading
evidence. 915 F.2d at 1127.
Plaintiffs also distinguish First Chicago by explaining that,
in that case, plaintiffs simply quoted documents and alleged
that the statements made therein were untrue without actually
explaining how or why they were false representations. 769
F. Supp. at 1453-54. In the instant case, Plaintiffs argue that
they have provided numerous factual allegations which allege
what, why, and how statements and omissions were fraudulent.
Lacking direct evidence, Plaintiffs' complaint concentrates
on establishing motive and circumstantial evidence which may
infer scienter. Defendants argue that Plaintiffs' attempt to
allege motive fails. They deny that status as officers gives
rise to an inference of motive to commit fraud. Defendants
state that DiLeo and its progeny make clear that Plaintiffs
cannot sidestep Rule 9(b) by making conclusory allegations that
could be leveled against any officer of any company. Instead,
Plaintiffs must plead specific facts that separate ordinary
business reverses from fraud in this case. 901 F.2d at 627.
Defendants also argue that Plaintiffs' alleged motive is
irrational because the individual Defendants had too much to
lose both monetarily and in terms of prestige and reputation to
engage in fraud. Defendant contends that this is particularly
so in light of the fact that they voluntarily disclosed the
alleged withheld information on June 25, 1990. Defendants cite
DiLeo, where the court ruled that because defendant accounting
firm's greatest asset was its reputation for honesty, it would
have been irrational for the firm to have joined cause with the
primary violators. 901 F.2d at 629.
Plaintiffs argue that their allegation of motive contained in
¶ 14 of the complaint provides a non-exhaustive list of reasons
why senior insiders such as Defendants have a motive to cover
up financial problems plaguing the company during their
stewardship. See Morse v. Abbott Laboratories, 756 F. Supp. 1108,
1111 (N.D.Ill. 1991), where the court held:
[u]nlike DiLeo, the individual defendants, all
directors and/or senior officers, have incentive to
withhold disclosure of material information which
would have had an adverse effect on [the company].
In that case, defendants were in possession of adverse
information regarding Food and Drug Administration sanctions
against the company due to regulatory violations on the part of
Abbott Laboratories and failed to disclose this material
information during the class period.
In the instant case, Plaintiffs contend that Defendants'
voluntary disclosure at the end of the class period does not
negate an incentive to delay as long as possible disclosure of
the adverse news. Plaintiffs distinguish Defendants' reference
to Goldberg v. Freedom Federal Savings Bank, 1989 WL 8503 at *3
(N.D.Ill., Jan. 31, 1989), aff'd sub. nom. Goldberg v.
Household Bank FSB, 890 F.2d 965 (7th Cir. 1989) (the court
held that "management candor officiates any inference of
willful intent.") In the Goldberg case, the court found that
defendants promptly disclosed the material information upon
reasonable discovery, unlike the instant case, where
Plaintiffs' allegations infer that Defendants had the material
information for some months prior to its disclosure.
The court finds that Plaintiffs have sufficiently pleaded
allegations of motive from which scienter may be inferred.
Plaintiffs have alleged that defendants were corporate officers
responsible for the management and financial decisions in the
company with reputations, job stability, and personal
investments on the line. Given the nature of their particular
positions and responsibilities, one may infer that they were
privy to the adverse information alleged in plaintiffs
complaint and capable of recognizing the potential impact of
that information on the financial health of the company. This
court finds Plaintiffs analogy to Morse persuasive when
considering Plaintiffs' allegations of known adverse
information during the class period which was not disclosed,
including the general condition of the Brazilian economy before
March 16, 1990 and the details of that government's reforms
after March 16, 1990. Plaintiffs' allegations create a strong
inference that Defendants, like the officers in Morse who were
in a position to assess the negative impact of the FDA
sanctions, knew about adverse information affecting the company
and had reason to downplay its effects given their direct
accountability for the company's performance.
The court is not persuaded that the facts of this case are
comparable to those in First Chicago, where the court's
rejection of motive appears to rely upon its assessment of the
defendants as being primarily lenders and only secondarily as
officers, ruling that their jobs would be jeopardized more by
the failure to follow lending procedures than by disclosure of
depressed earnings earlier rather than later due to bad loans.
769 F. Supp. at 1455. Although that court also considered as a
factor the fact that defendants did not sell their personal
stock during the class period (also the case here), this fact
was not dispositive when assessing what was in defendants'
interest which might provide the requisite motive for scienter
The court rejects Defendants' argument that the motive
alleged in Plaintiffs' complaint is "irrational" and therefore
requires "strong" circumstantial evidence. This is not a case
like DiLeo, where defendants were accountants hired by the
company, and where the motivation to maintain one contract with
a client at the price of committing fraud was determined to be
illogical by the court when that price risked perhaps the most
valuable asset to an accounting firm, its reputation.
In the instant case, defendants were controlling persons,
insiders, and officers who had everything to gain or lose
depending on how the shareholders, and the market in general,
perceived their performance. The fact that defendants
voluntarily disclosed the adverse information in June before
they were obligated to make their next financial disclosure
does not necessarily vitiate motive. The fact that the
individual defendants ultimately disclosed adverse information
despite a combined personal loss of millions of dollars can be
argued both ways. Their large personal investments might have
provided a motive for the delay in that disclosure until the
disclosure became inevitable. Defendant's reliance on
Goldberg for this proposition is accorded little weight, given
the distinguishable facts in that case which indicated that the
firm had made an honest miscalculation in stating it's
semi-annual earnings. Upon discovery of that mistake, the firm
corrected it to it's detriment, as the firm was then on the
The court is required to accept Plaintiffs' factual
allegations as true pursuant to the standard of review for a
motion to dismiss. Therefore, it appears from the face of the
complaint that Plaintiffs have alleged sufficient motive on the
part of the Defendants to materially misrepresent the financial
condition of the company. Plaintiffs have met their burden of
pleading the element of scienter necessary for a 10(b)/10b-5
cause of action with the requisite particularity required by
Rule 9(b). Whether plaintiffs have met their burden under the
full screen of particularly required under 9(b) with regard to
the who, what, how, why and where under DiLeo is an issue left
for Defendants' second dispositive motion under Rules 12(b)(6)
and 9(b) discussed below. Because the court finds that
Plaintiffs' Second Amended Complaint alleges motive sufficient
to meet Rule 9(b) requirements, it does not reach the issue of
whether there is sufficient circumstantial evidence pleaded
pursuant to the third alternative method of establishing
scienter in accordance with Rule 9(b).
II. Defendants' Motion to Dismiss the Second Amended Complaint
Pursuant to Federal Rule of Civil Procedure 9(b) and
A. Legal Standards Under Rule 9(b).
When a complaint includes allegations of fraud, Federal Rule
of Civil Procedure 9(b) requires that the "circumstances
constituting fraud or mistake shall be stated with
particularity." Three well-established purposes for this rule
are the following:
(1) The filing of "strike suits" or complaints as
pretexts for the discovery of unknown wrongs is
inhibited; (2) defendants are protected from the
harm that results from charges of serious
wrongdoing; and (3) defendants are ensured notice
of the conduct complained of, enabling them to
prepare a defense. (Citations omitted).
In re First Chicago Corporation Secur. Litigation, 769 F. Supp. 1444,
1452 (N.D.Ill. 1991). The Seventh Circuit has expanded
upon this requirement in two leading cases, DiLeo v. Ernst &
Young, 901 F.2d 624 (7th Cir. 1990), cert. denied,
498 U.S. 941, 111 S.Ct. 347, 112 L.Ed.2d 312 (1990) and Sears v. Likens,
912 F.2d 889 (7th Cir. 1990). In DiLeo, plaintiffs were
shareholders suing the accounting firm of a financially
distressed bank. Plaintiffs alleged that (1) the firm violated
the securities laws directly by certifying fraudulent financial
statements that were incorporated into documents, and (2) the
firm aided and abetted the bank's primary violations of the
securities laws. 901 F.2d at 626. The basis for plaintiffs
complaint was that the bank failed to increase its reserves
fast enough to cover failing loans. Judge Easterbrook affirmed
the lower court's decision by ruling that the complaint
inadequately alleged the firm's violations of securities laws
or its liability as aider and abetter. The court ruled that:
[a]lthough states of mind may be pleaded
generally, the "circumstances" must be pleaded in
detail. This means the who, what, when, where and
how: the first paragraph of any newspaper story.
None of this appears in the complaint. . . .
901 F.2d at 627. The court held that investors seeking relief
under Rule 10b-5 must provide some facts suggesting fraud which
distinguished their situation from legitimate business reverses
and the benefit of hindsight. 901 F.2d at 627, 628.
In Sears v. Likens, supra, minority shareholders brought an
action against various defendants alleging they were deprived
of full value of their stock when the corporation went into
dissolution. The Seventh Circuit affirmed the lower court by
ruling that the shareholders had failed to allege fraud with
sufficient particularity as to state securities fraud claims.
The court re-emphasized the threshold requirements for pleading
under Rule 9(b):
a complaint must specify the identity of the
person making the misrepresentation, the time,
place, and content of the misrepresentation, and
the method by which the misrepresentation was
communicated to the plaintiff. A complaint that
attributes misrepresentations to all defendants,
lumped together for pleading purposes, generally
912 F.2d at 893. In that case, plaintiffs made conclusory
allegations which did not detail the participants regarding
"who" "how" or "when."
Plaintiffs must provide more than conclusory allegations to
satisfy the Rule 9(b) requirement that the circumstances of
fraud be pleaded with particularity. Robin v. Arthur & Co.,
915 F.2d 1120 (7th Cir. 1990). In Robin, investors sued the
accounting firm which certified the financial statement
contained in the allegedly misleading prospectus of the company
charged with primary liability under the security laws. In
affirming the lower court's dismissal, the Seventh Circuit
[w]hile reckless conduct may satisfy the scienter
requirement, bare allegations that Arthur Young
should have known or that its knowledge was due to
a reckless disregard of the truth are not
sufficient to turn a possible negligence or
malpractice action into an action for securities
915 F.2d at 1127.
Although courts have subsequently recognized the
particularity requirements of DiLeo and Sears as controlling in
this Circuit, the court in Reshal Assoc., Inc. v. Long Grove
Trading Co., 754 F. Supp. 1226 (N.D.Ill. 1990) warned against a
mechanical application of these requirements. It stated that
"Rule 9(b) must not be applied blindly, but rather must be
applied in view of its purposes." 754 F. Supp. at 1230. In that
case, Judge Rovner denied the portion of defendant's motion to
dismiss which claimed that plaintiffs failed to distinguish
among defendants sufficiently enough to inform them of the
nature of the claimed wrong, thereby denying them the
opportunity to formulate an effective defense. 754 F. Supp. at
1231. In First Chicago, supra, the court stated that technical
compliance with Rule 9(b) by providing specific information as
to time, place, content, and speaker, was not enough. 769
F. Supp. at 1453. When a complaint is based on information and
belief, the court stated that Rule 9(b) requires that the
complaint set forth the facts on which the belief is founded.
Defendants argue that the court must examine the complaint on
a statement-by-statement basis "to determine if any particular
utterance can be considered false or misleading." In re Sun
Microsystems, Inc. Secur. Litigation, CCH Fed.Sec.L.Rep. ¶
95,504, 97,635, 1990 WL 169140 (N.D.Cal. 1990), citing In re
Apple Computers Secur. Litigation, 886 F.2d 1109, 1116 (9th
Cir. 1989). Defendants contend that Plaintiffs' complaint falls
short of meeting the requirements under Rule 9(b) in one of two
ways: (1) particular allegations contained in the complaint are
conclusory and lack the factual foundation necessary to support
a claim of fraud under Rule 9(b); and (2) certain allegations
fail to satisfy the requirements set out in DiLeo, particularly
the "who" requirement. See McKee v. Pope Ballard Shepard and
Fowle, Ltd., 604 F. Supp. 927, 931 (N.D.Ill. 1985) (the court
ruled that the identity of those charged with making the
misrepresentations is crucial); Tannebaum v. Clark, 1988 WL
130621 (N.D.Ill., Nov. 29, 1988) (securities fraud claims
dismissed under Rule 9(b) where plaintiff alleged that two
defendants made a series of misrepresentations and "did not
adequately plead the contents of the representations and the
identity of the party making them").
In light of the three basic purposes of Rule 9(b) articulated
in First Chicago, Plaintiffs argue that they have pleaded with
sufficient particularity to put Defendants on notice of the
nature of the claim against them. See Reshal Assoc., Inc. v.
Long Grove Trading Company, where the court stated that "[t]he
strictness with which this rule is applied . . . varies
according to the nature of the allegations. . . ." 754 F. Supp.
at 1231. That court recognized that at the pleading stage,
plaintiffs may not have access to relevant evidence in
exclusive possession of defendants. The focus of the court's
concern was whether the allegations were pleaded in sufficient
detail to put defendants on notice of the nature of the
fraudulent acts alleged that they might adequately defend
against them. Id.; see also Banowitz v. State Exchange Bank,
600 F. Supp. 1466, 1469 (N.D.Ill. 1985).
The court will assess the sufficiency of Plaintiffs'
allegations under Rule 9(b) in conjunction with the 12(b)(6)
B. Legal Standards Under Federal Rule of Civil Procedure
By moving under Rule 12(b)(6), the defending party alleges
that, accepting the
Plaintiffs' allegations as true, the complaint fails to state
a claim upon which relief can be granted. Gomez v. Illinois
State Board of Education, 811 F.2d 1030
, 1039 (7th Cir. 1987).
In Gomez, the Seventh Circuit stressed that a decision to
dismiss a suit under 12(b)(6) should not be made lightly as it
could "preclude another suit based on any theory that the
plaintiff might have advanced on the basis of the facts giving
rise to the first action." 811 F.2d at 1039, citing American
Nurses' Asso. v. Illinois, 783 F.2d 716
, 726-27 (7th Cir.
1986). Therefore, a district court must accept the well-pleaded
allegations of the complaint as true and must view those
allegations in the light most favorable to the plaintiff. Id.
While the complaint cannot be amended by the briefs filed by
the plaintiff in opposition to a motion to dismiss, defendant
cannot attempt to refute the complaint or to present a
different set of allegations. 811 F.2d at 1039. In Gomez, the
[t]he attack is on the sufficiency of the
complaint, and the defendant cannot set or alter
the terms of the dispute, but must demonstrate
that the plaintiff's claim, as set forth by the
complaint, is without legal consequence . . . [I]t
is undisputed that the defendant must overcome a
high barrier to prevail under Rule 12(b)(6).
811 F.2d at 1039, 1040. Defendants can only prevail on their
motion if it is clear that no relief could be granted under any
set of facts consistent with the allegations of the complaint.
Hishon v. King & Spalding, 467 U.S. 69
, 73, 104 S.Ct. 2229,
2232, 81 L.Ed.2d 59 (1984). See also Robin v. Doctors
Officenters Corp., 686 F. Supp. 199, 206 (N.D.Ill. 1988)
(however, the court is not bound by the legal characterizations
that plaintiff attributes to the facts).
C. Pleading the Elements of a 10(b)/10b-5 Action in Order to
Survive a 12(b)(6) Motion.
Under Rule 12(b)(6), Plaintiffs must plead factual
allegations that establish each necessary element of a claim
under § 10(b) and Rule 10b-5. See, e.g., Latigo Ventures v.
Laventhol & Horwath, 876 F.2d 1322
, 1325 (7th Cir. 1989)
(dismissal of securities fraud action with prejudice under Rule
12(b)(6) affirmed where plaintiffs failed to plead reliance
element of Rule 10b-5); Greenberg v. Boettcher & Co.,
755 F. Supp. 776, 780-81 (N.D.Ill. 1991) (securities fraud complaint
dismissed under Rule 12(b)(6) where plaintiffs failed to plead
adequately reliance and causation elements).
To establish a violation of § 10(b) and Rule 10b-5, a
plaintiff must demonstrate that the defendants:
(1) in connection with a securities transaction,
(2) made an untrue statement of material fact or
omitted a material fact that rendered the
statements made misleading, (3) with the intent to
mislead (scienter), and (4) which caused
plaintiff's loss (reliance and causation).
Greenberg, 755 F. Supp. at 780, citing Schlifke v. Seafirst
Corp., 866 F.2d 935
, 943 (7th Cir. 1989).
In addition to the elements of materiality, scienter,
reliance, and causation, Defendants must have had a duty to
disclose. In Basic, Inc. v. Levinson, 485 U.S. 224, 239, n. 17,
108 S.Ct. 978, 987, n. 17, 99 L.Ed.2d 194 (1988), the Court
stated that "[to] be actionable, of course, a statement must
also be misleading. Silence, absent a duty to disclose, is not
misleading under Rule 10b-5." In determining a duty to
disclose, the court may have to analyze materiality, certainty,
whether the information is protected, or whether the
information is misleading. See, in general, Basic, Inc. v.
Levinson, 485 U.S. 224, 239, n. 17, 108 S.Ct. 978, 987, n. 17,
99 L.Ed.2d 194 (1988); Schlifke v. Seafirst Corp., 866 F.2d 935
(7th Cir. 1989); In re First Chicago Corporation Secur.
Litigation, 769 F. Supp. 1444 (N.D.Ill. 1991).
In the instant case, Defendants argue that the court must
examine a complaint under 12(b)(6) on a statement-by-statement
basis "to determine if any particular utterance can be
considered false or misleading." In re Sun Microsystems, Inc.
Secur. Litigation, CCH Fed.Sec.L.Rep. ¶ 95,504 at 97,635
(N.D.Cal. 1990), citing, In re Apple Computer Secur.
Litigation, 886 F.2d 1109, 1116 (9th Cir. 1989) (plaintiffs may
defeat summary judgment only by showing a genuine issue of
fact with regard to a particular statement by defendant
Defendants review the legislative history of § 11 of the 1933
Securities Act which is relevant to 17 C.F.R. 240.10b-5
(prohibits omissions of "a material fact necessary in order to
make the statements made, in light of the circumstances under
which they were made, not misleading") because the language of
Rule 10b-5 is modeled after § 11. Courts have held that both
provisions impose the same liability for omissions. Rubin v.
Long Island Lighting Co., 576 F. Supp. 608, 612 (E.D.N.Y. 1984).
Section 11 requires disclosure only if information is "required
to be stated" under specified disclosure rules or "necessary to
make the statements therein not misleading." The Conference
Report on the final bill which contains § 11 adopted by both
Houses commented that the language regarding omissions:
[h]as been clarified . . . to make the omission
relate to the statements made in order that these
statements shall not be misleading, rather than
making mere omission a ground for liability where
no circumstances exist to make the omission in
H.R.Rep. No. 152, 73rd Cong., 1st Sess. 26 (1939). Thus,
Defendants conclude that "an omission is relevant under 10b-5
only if the fact of that omission caused some other identified
statement to itself be misleading at the time it was made."
(Emphasis added). Defendants suggest that the court classify
each statement according to whether it is: (1) a statement of
historical fact or (2) a forward looking protection or opinion.
Each of the two types of statements should then be further
classified according to whether it is alleged to be: (a)
affirmatively false, (b) rendered misleading as the result of
an alleged omission. Defendants argue that a statement of
historical fact is actionable under § 10(b) if it is
sufficiently alleged that the statement is either (1) false or
(2) misleading because of omitted information.
Defendants contend that Plaintiffs must identify with
specificity a "causal link," or nexus between the alleged
misleading statements and the related omissions which clarifies
how a particular omission rendered the statement misleading at
the time of its issuance. In re Fleet/Norstar Secur.
Litigation, CCH Fed.Sec.L.Rep. ¶ 96,146 at 90,816, 1991 WL
185171 (D.C.R.I., June 5, 1991) (the court dismissed
plaintiff's complaint because "plaintiffs failed to demonstrate
how the challenged statements are misleading"). Defendants
argue that "the statement made must itself be incomplete to be
actionable, and if it is incomplete, then the omitted material
must be so related to the statement made that the statement
made is misleading without the omitted material." See Backman
v. Polaroid Corp., 910 F.2d 10, 17 (1st Cir. 1990); In re Sun
Microsystems, Inc. Secur. Litigation, CCH Fed.Sec.L.Rep. ¶
95,504 at 97,638; Scola v. Comdisco, 1991 WL 93268 at *4
(N.D.Ill., May 22, 1991); Capri Optics Profit Sharing v.
Digital Equipment Corporation, 760 F. Supp. 227, 233 (D.Mass.
Plaintiffs disagree with Defendant's statement-by-statement
approach and argue that statements are actionable where they
mislead because of a failure to speak the full truth. See Rowe
v. Maremont Corp., 650 F. Supp. 1091, 1105 (N.D.Ill. 1986);
Panter v. Marshall Field & Co., 646 F.2d 271, 292 (7th Cir.
1981) ("[O]nce a company undertakes partial disclosure of . . .
information there is a duty to make the full disclosure of
known facts necessary to avoid making such statements
misleading"); Issen v. GSC Enterprises, Inc., 538 F. Supp. 745,
751 (N.D.Ill. 1982) ("when a party undertakes to disclose
anything, it has the duty to speak the full truth").
The cases on which Plaintiffs rely speak in terms of
"information," "facts," and "statements" disclosed or omitted,
rather than isolated statements and/or isolated omissions to
which they are linked (emphasis added). See Acme Propane, Inc.
v. Tenexco, Inc., 844 F.2d 1317 (7th Cir. 1988) where the
Seventh Circuit reversed and remanded the district court's
order granting seller's motion to dismiss a securities fraud
action brought by buyers of a working interest in an oil and
gas well. Investors in that case alleged that defendants made
affirmative misrepresentations and omitted material information
regarding the production history and future
prospects for certain oil wells. 844 F.2d at 1321. The court
analyzed oral and written representations made by defendants,
analyzed the statements in relation to each other and in the
context in which they were presented in making its
determination as to whether they were false or misleading. 844
F.2d at 1324, 1325.
Plaintiffs argue that determining the "circumstances under
which the statements were made" requires the statements to be
viewed in the context of each other as part of an integrated
whole. Taken in context, Plaintiffs allege that Defendant
corporation was publicly portrayed as a company where
"everything [was] going right, which [was] unthreatened by
external events in Brazil, and which [was] pregnant with the
potential for short-term profits." See Plaintiffs' brief at p.
8; Isquith v. Middle South Utilities, Inc., 847 F.2d 186 (5th
Cir.), cert. denied, 488 U.S. 926, 109 S.Ct. 310, 102 L.Ed.2d
329 (1988) (Fifth Circuit ruled that "courts interpreting the
securities laws have long recognized that reviewing the context
in which disclosure appears is an essential part of determining
the disclosure's adequacy"), Id. at 201, 202, citing Greenapple
v. Detroit Edison Co., 618 F.2d 198 (2nd Cir. 1980) (the court
found a violation "notwithstanding the broad discretion which
users have in assembling and organizing their data, where the
method of presentation obscures or distorts the significance of
material facts. . . . [E]mphasis and gloss can in the right
circumstances, create liability under . . . Rule 10b-5. . .
."); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 605 (5th
Cir.), cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113
(1974) ("[an] adequacy of disclosure is a function of position,
emphasis, and the reasonable anticipation that certain future
events will occur." See also McMahan & Co. v. Wherehouse
Entertainment, Inc., 900 F.2d 576 (2nd Cir. 1990), where the
Second Circuit reversed the lower court's dismissal of an
action because the information provided by defendants was
"literally true" and therefore not misleading. 900 F.2d at 579.
That court held:
[w]hen read as a whole, the defendant's
representations connotated a richer message than
conveyed by a literal reading of the statements.
The central issue on all three claims is not
whether the particular statements, taken
separately, were literally true, but whether
defendants' representations, taken together and in
context, would have misled a reasonable investor
about the nature of the debentures. . . . [T]he
disclosure required by securities laws is measured
not by literal truth, but by the ability of the
material to accurately inform rather than mislead
Id. at 579. See also SEC v. C.R. Richmond & Co., 565 F.2d 1101,
1106-07 (9th Cir. 1977).
Unlike an allegation involving a historical statement, where
plaintiff must allege that the statement is either false or
misleading because of the omitted information, an allegation
involving a forward-looking statement must include specific
facts which demonstrate (1) the absence of a good faith belief
in the statement at the time it was made, or (2) that the
statement had no reasonable basis at the time it was made.
Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513 (7th Cir.
1989) ("forward looking statements need not be correct; it is
enough that they have a reasonable basis."); Decker v.
Massey-Ferguson, Ltd., 681 F.2d 111, 117 (2nd Cir. 1982)
("economic prognostication, though faulty, does not, without
more, amount to fraud"), citing, Polin v. Conductron
Corporation, 552 F.2d 797, 805 (8th Cir. 1977).
Defendants argue that conclusory allegations will not
suffice, and facts are required to support any allegation of
lack of good faith belief or the lack of a reasonable basis.
Alfus v. Pyramid Technology Corp., 745 F. Supp. 1511, 1518
(N.D.Cal. 1990). (allegations of false projects are defective
where "plaintiff has failed to sufficiently allege that
defendants' statements were made other than in good faith"); In
re Chaus Secur. Litigation, CCH Fed.Sec.L.Rep. ¶ 95,646,
98,002, 1990 WL 188921 (S.D.N.Y. 1990) (court does not find
forward-looking statements contained in an annual report
misleading when "the complaint states no factual basis to
suggest that the defendants knew or should have known that
these prophecies were false when made in 1986 and 1987."
(Citing Schwartz v. Novo Industri, A/S, 658 F. Supp. 795, 799
Like historical statements, Defendants argue that Plaintiffs
must establish the same nexus between the projection actually
made and the alleged omission. Capri Optics, 760 F. Supp. 227
(D.Mass. 1991); In re Sun Microsystems, CCH Fed.Sec.L.Rep. at ¶
Plaintiffs agree that forward-looking statements can be
actionable if they are false, misleading, or lack a good faith
basis. Fisher v. Samuels, 691 F. Supp. 63, 69 (N.D.Ill. 1988);
Abrams v. Oppenheimer Government Secur. Inc., 589 F. Supp. 4, 9
(N.D.Ill. 1983), aff'd, 737 F.2d 582 (7th Cir. 1984).
Plaintiffs note the importance of liability for forward-looking
statements as reflected by the Seventh Circuit in Wielgos v.
Commonwealth Edison Co., 892 F.2d 509, 514 (7th Cir. 1989),
where the court stated, "[i]nvestors value securities because
of beliefs about how firms will do tomorrow, not because of how
they did yesterday." In Good v. Zenith Electronics Corp.,
751 F. Supp. 1320, 1322 (N.D.Ill. 1990), the court ruled that
providing an earnings projection may violate § 10(b) where
defendant "ignor[ed] facts seriously undermining the accuracy
of the forecast." Marx v. Computer Sciences Corp.,
507 F.2d 485, 490 (9th Cir. 1974). 751 F. Supp. at 1322.
Plaintiffs contend that Defendants have a duty to correct
misleading statements even if the original communication was
made in good faith. Good v. Zenith Electronics Corp., 751
F. Supp. at 1322 (if a corporation voluntarily makes a public
statement that is correct when issued, it has a duty to update
that statement if it becomes materially misleading in light of
subsequent events); Greenfield v. Heublein, Inc., 742 F.2d 751,
758 (3rd Cir. 1984), cert. denied, 469 U.S. 1215, 105 S.Ct.
1189, 84 L.Ed.2d 336 (1985).
This court finds that alleged material omissions must be
linked to identified affirmative statements. However, the court
does not find that in order to plead a Rule 10b-5 action
sufficient to survive a 12(b)(6) motion to dismiss, each
statement, isolated and by itself, must be rendered incomplete
or misleading by virtue of a particular omission. To grant
dismissal of a statement at this stage of analysis would
preclude the court from reaching the next essential step in
analyzing the sufficiency of Plaintiffs' allegations under
12(b)(6), the analysis of the statement in context with all
other material information disclosed, or "in light of the
circumstances under which they were made." 17 C.F.R. 240.10b-5.
Although this court agrees that a statement-by-statement
analysis is helpful in determining whether Plaintiffs have
alleged their securities fraud claims sufficiently under the
requirements of 9(b) and 12(b)(6), the court recognizes that:
[s]ome statements, although literally accurate,
can become, through their context and manner of
presentation, devices which mislead investors. For
that reason, the disclosure required by the
security law is measured not by literal truth, but
by the ability of the material to accurately
inform rather than mislead prospective buyers.
In re Convergent Technologies Secur. Litigation, 948 F.2d 507
(9th Cir. 1991); Morris v. Newman, 948 F.2d 507, 512 (9th Cir.
1991), citing, McMahan & Co. v. Wherehouse Entertainment, Inc.,
900 F.2d 576, 579 (2nd Cir. 1990).
The contrary authority cited by Defendant, In re Sun
Microsystems, Inc. Secur. Litigation, CCH Fed.Sec.L.Rep. ¶
95,504 at 97,635 (N.D.Cal. 1990) and In re Apple Computer
Secur. Litigation, 886 F.2d 1109, 1116 (9th Cir. 1989), is not
persuasive in light of this court's interpretation of the
legislative history discussed above, the precedent set by the
Seventh, Fifth, and Second Circuits, and the basic purpose for
which § 10(b) and Rule 10b-5 exist, that is to ensure that all
relevant material information regarding publicly traded
securities is disseminated into the market completely and
accurately so that investors and analysts may rely upon the
integrity of that market in making their investment decisions.
In assessing the sufficiency with which Plaintiffs make their
allegations in light of Defendants' 12(b)(6) motion to dismiss,
the court will analyze the identified affirmative statements
individually and collectively in the context in which they are
made. This court is mindful of its duty regarding a Rule
12(b)(6) motion to "not . . .
weigh the evidence that might be presented at a trial but
merely to determine whether the complaint itself is legally
sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2nd Cir.
1985). Therefore, this court will not render any decision as to
whether a particular statement is rendered misleading by a
particular omission. It will merely determine whether
Plaintiffs have sufficiently alleged circumstances under which
Plaintiffs could conceivably prove their claim of fraudulent
misrepresentation under any set of facts at trial. If the court
finds that an alleged material omission clearly would not
render any identified affirmative statement or statements made
by Defendants misleading under any set of facts, then
Plaintiffs will have failed to meet their burden under Rule
12(b)(6) to plead their § 10(b) claim sufficiently with regard
to the statement or statements.
D. Analysis of Defendants' Statements Under the Requirements
of Rule 9(b) and Rule 12(b)(6).
1. Disclosure that Caterpillar's Brazilian Operations
Generated Only Five Percent of Caterpillar's Sales. See
Plaintiffs' Second Amended Complaint ¶¶ 33(a), 26.
The allegations in ¶¶ 26 and 33(a) were allegedly disclosed
to analysts by Defendants before ultimate release through three
different analysts' reports. The central 9(b) issue is whether
Plaintiffs have alleged with particularity the "who"
requirement. In other words, can Defendants be liable for
secondary information disseminated through analysts' reports.
The court finds that Plaintiffs' complaint sufficiently alleges
facts which reasonably infer that Defendants were responsible
for the information released by the analysts regarding the
disclosure that Caterpillar's Brazilian operations generated
only five percent of Caterpillar's sales. See, Alfus v. Pyramid
Technology Corp., 764 F. Supp. 598 (N.D.Cal. 1991). Defendants'
authority to the contrary is factually distinguishable. See,
Pershing v. Sirmer, 1989 WL 165155 (N.D.Ill., Dec. 27, 1989);
McKee v. Pope, Ballard, Shepard and Fowle, Ltd., 604 F. Supp. 927
(N.D.Ill. 1985); and Tannebaum v. Clark, 1988 WL 130621
(N.D.Ill., Nov. 29, 1989). The court holds that Plaintiffs have
met their burden under Rule 9(b) with regard to the five
percent sales disclosure.
The court also finds that Plaintiffs have met their burden
pursuant to Rule 12(b)(6). The allegations in ¶ 26 of
Plaintiffs' complaint could support a finding on the merits
that the five percent sales statement was misleading, given the
omission of the fact that approximately 20% of Caterpillar's
profits were generated in Brazil. This is firm-specific
information which is arguably material and sufficiently
connected to the alleged misstatement. Defendants have a duty
to disclose material, firm-specific information even if they
have not done so historically, if that information effectively
renders an affirmative statement misleading. Plaintiffs have
sufficiently alleged facts which indicate that Defendants could
have been in possession of material adverse knowledge regarding
the Brazilian economy as early as January or February of 1990,
even though the Brazilian government did not make formal
reforms until March 16, 1990.
For the reasons stated above, the court denies Defendants'
motion to dismiss regarding the allegations pertinent to
Caterpillar's Brazilian operations generating only five percent
of Caterpillar's sales.
2. Statements Made In Caterpillar's January 18, 1990 Press
a. "Sales in Brazil, however, could be hurt by
post-election policies which will likely aim at
b. "Consequently, we expect 1990 profit to be
under considerable pressure most of the year."
c. "On the positive side, company sales for the
year should benefit from somewhat higher price
realization, availability of new products, and
continued strong demand for large machines."
Under Rule 12(b)(6), these statements are forward-looking.
Therefore, Plaintiffs must have alleged facts sufficient to
suggest bad faith or no reasonable basis on the part of
Defendants at the time these statements were made. The alleged
misleading omissions must also be sufficiently linked
to the affirmative statements so as to render them inaccurate
or misleading without the disclosure of such omissions.
Plaintiffs allege that the significance of these statements
is lost because of the omission of the 20% Brazilian profit
figure. Plaintiffs claim that Defendants knew at the time the
statements were made that Caterpillar was being negatively
impacted by the economic turmoil in Brazil. Therefore,
Plaintiffs contend that statement "a." is misleading because in
January, it was no longer speculation that Brazilian sales
would suffer. Taken in context, Plaintiffs argue that statement
"b." is a misleading half-truth because Defendant knew at the
time that statement was made that the anticipated economic
reforms in Brazil would have a profound affect on Caterpillar's
ability to earn profits in Brazil, a market which constituted
approximately one-fifth of Caterpillar's profits in 1989.
Plaintiffs contend that the sales and demand figures contained
in statement "c." were illusory because they were fueled
artificially by hidden economic factors such as currency
The court finds that the allegations directed toward
statements "a.," "b.," and "c." meet the Rule 9(b) requirements
for particularity and the Rule 12(b)(6) requirement for a
factual inference that Defendants had no reasonable basis for
making these statements at the time they were made. Therefore,
the court denies Defendants' motion to dismiss regarding the
allegations pertaining to the identified statements contained
in the January 18, 1990 press release.
3. Statements Made in First Boston Report Issued on January
a. "By region, we believe Cat is forecasting a
5-10% decline domestic and a 0-5% hike overseas,
with as much as 2-4% of the domestic cut-back
coming in truck engines."
b. "Based on conversations with management, we
believe the net incremental benefit will be in
excess of $100 million."
Under Rule 9(b), the question of "who" the statements are
attributable to is satisfied. The statements in context are
ambiguous enough to raise an inference that Caterpillar was the
source of the information above.
Under Rule 12(b)(6), Plaintiffs allege that there was no
reasonable basis for the prediction in statement "a." given the
economic situation in Brazil at the time. Plaintiffs make
specific allegations regarding how the increase in sales in
1989 were largely due to activity in Brazil and therefore
misleading because this increase was not demand driven, but
created artificially by other economic factors. This court
finds that Plaintiffs have failed to plead adequately facts
which infer no reasonable basis or lack of good faith with
regard to statement "a." Plaintiffs fail to allege facts which
suggest that Brazil's potentially negative contribution to
"overseas" sales render this figure unreasonable given the
potential performance of other overseas markets and Brazil's
relatively small fraction thereof.
Similarly, Plaintiffs fail to allege sufficient facts which
suggest either bad faith or lack of reasonable basis for
statement "b." and therefore fail to meet their burden under
Rule 12(b)(6). Therefore, the court finds that although these
statements meet the requirements of Rule 9(b), they do not meet
the requirements of Rule 12(b)(6). Therefore, Defendants'
motion to dismiss regarding these statements is granted.
4. Statements Made in Caterpillar's 1989 Annual Report.
a. "Brazil, with its 140 million inhabitants,
represents great potential for Caterpillar's
future. Brazil is Caterpillar's fourth largest
b. "Overseas sales were 11% higher than in 1988
with demand especially strong in Europe, Brazil,
Australia, and the Far East."
Plaintiffs have successfully pleaded with particularity their
allegations regarding these statements pursuant to Rule 9(b).
They have also sufficiently pleaded allegations which challenge
the reasonable basis for statement "a." and the degree to which
statement "b." was misleading when taken in context and in
light of the economic factors in Brazil which allegedly
rendered demand in Brazil illusory.
Plaintiffs have pleaded sufficient detail to meet their
burden under Rule 9(b) with regard to statement "b." Plaintiffs
have also succeeded to plead factual allegations which infer
that this historical fact was misleading.
c. "Reorganization will improve our
competitiveness and help us achieve better returns
d. "Expectation that benefits will exceed costs
regarding PWAF project in 1990."
Although the allegations regarding these statements meet the
requirements of Rule 9(b), Plaintiffs have failed to allege any
facts which suggest bad faith or unreasonableness at the time
they were made. Therefore, Defendants' motion to dismiss with
regard to statements "c." and "d." is granted.
5. Statements Made in Caterpillar's First Quarterly Report,
Released May 9, 1990.
a. "In Brazil, demand increased over one year ago
despite the uncertainty of Brazilian economy."
b. "The company hasn't changed its outlook from
what was stated in its 1989 annual report."
Plaintiffs have met their burden under Rule 9(b) with regard
to statements "a." and "b." They have also successfully pleaded
allegations which infer that statement "a.", as a historical
statement, was rendered misleading by undisclosed information
regarding the Brazilian government's announced reforms as of
March 16, 1990.
They have also provided sufficient allegations regarding
Brazil which challenge the reasonableness of statement "b." as
a forward-looking statement. Therefore, Defendants' motion to
dismiss with regard to these statements is denied.
6. Kuchan's Statement Regarding "Overseas" Markets Remains
Strong. (Reported to the Press on February 26, 1990).
Plaintiffs have met their burden under both Rule 9(b) and
12(b)(6) with regard to Defendant Kuchan's statement.
Plaintiffs' allegations reasonably infer that this statement
was misleading due to the omitted information Caterpillar
allegedly possessed at the time regarding Brazilian market.
Therefore, Defendants' motion to dismiss with regard to
Defendant Kuchan's statement is denied.
7. Management's Statements Regarding the PWAF and the January
Reorganization Alleged in Plaintiffs' Complaint, ¶¶ 43(c), (d)
These statements fail to meet the particularity requirements
under Rule 9(b) and the requirements of Rule 12(b)(6). Under
Rule 9(b), the particular statements are not adequately
identified. Under Rule 12(b)(6), Plaintiffs fail to allege
facts which infer that Defendants had a duty to disclose this
information or that the omission of this information was
fraudulent and not simply mismanagement. Therefore, Defendants'
motion to dismiss with regard to ¶¶ 43(c), (d) and (e) of
Plaintiffs' complaint is granted.
For the reasons cited above, Defendants' Motion to Dismiss
for Failure to Adequately Allege Scienter Pursuant to Rule 9(b)
is DENIED; Defendants' Motion to Dismiss the Second Amended
Complaint Pursuant to Rules 9(b) and 12(b)(6) is GRANTED in
part and DENIED in part. This case is referred back to the
Magistrate for further proceedings.
© 1992-2003 VersusLaw Inc.