(9th Cir. 1988); see also W. Prosser, Law of Torts § 46, at 292 (5th ed. 1984) (to establish a civil conspiracy, plaintiff must allege both an agreement and that an unlawful overt act was committed by one of the parties in pursuance of the agreement). In Roberts, the court held that because plaintiffs stated a claim under § 10(b), plaintiffs clearly alleged an injury caused by an unlawful act. Id. at 1484. By contrast, because plaintiff Alfus has not stated a claim under § 10(b), she has not successfully alleged an injury caused by an unlawful act.
In civil conspiracy actions, courts insist upon a higher level of specificity than is usually demanded of other pleadings. This insistence upon a higher level of specificity may result from the frequent presence of fraud as part of plaintiff's claim, which brings the complaint under Fed.R.Civ.P. 9(b) that the circumstances constituting fraud be stated with particularity. Wright & Miller, supra, at 182. In this case, plaintiff's allegations that defendants conspired to commit fraud are insufficient both for failure to plead conspiracy with the requisite particularity and for failure to plead an agreement to participate in an unlawful act. Roberts, 670 F. Supp. at 1483-84; Semegen v. Weidner, 780 F.2d 727, 731 (9th Cir. 1985); see also Fed.R.Civ.P. 9(b) (in all averments of fraud, "the circumstances of fraud shall be stated with particularity").
To survive a motion to dismiss, plaintiff must allege with sufficient factual particularity that defendants reached some explicit or tacit understanding or agreement. Roberts, 670 F. Supp. at 1484 (proof of a conspiracy does not require a showing of an explicit agreement; a demonstration of a tacit agreement is enough); see also Halberstam v. Welch, 227 U.S. App. D.C. 167, 705 F.2d 472, 479 (D.C.Cir. 1983). It is not enough to show that defendants might have had a common goal unless there is a factually specific allegation that they directed themselves towards this wrongful goal by virtue of a mutual understanding or agreement. Roberts, 670 F. Supp. at 1484.
Plaintiff charges that it alleged conspiracy to commit fraud with the requisite specificity by stating the roles of each defendant in the company and the participation of each in the issuance of the five alleged fraudulent statements. Plaintiff's Opposition Brief at 27. Plaintiff alleges certain acts -- that defendant Robertson signed two of the contested documents, that defendant Lussier participated in the issuance of several of the alleged misleading statements and that certain of the defendants sold stock within a four month period, but plaintiff fails to allege any agreement by the defendants. Plaintiff merely alleges that "a conspiracy, common enterprise and common course of conduct commenced at least as early as October 31, 1988 and involved all defendants," and that "defendants accomplished their conspiracy, common enterprise and common course of conduct by issuing false and misleading statements to the investing public." Complaint para. 40.
Plaintiff has not alleged an injury causing damages or an agreement, and the conclusory statements that she makes are not sufficient to state a claim for conspiracy against the individual defendants. Defendants' motion to dismiss the conspiracy claims (including defendant Rollnick's motion) is hereby granted with leave to plead the existence of an agreement and specific facts concerning the agreement.
III. COUNT II: INSIDER TRADING CLAIMS
A. Factual Background
Plaintiff alleges that during the class period, which extends over approximately four and one-half months, defendants Dolinar, Shellooe, Rollnick and Tolchin ("Defendant Sellers") engaged in massive insider selling of approximately 273,820 shares of Pyramid common stock. Complaint para. 9. Plaintiff brings her private claim for relief under Section 10(b) and Rule 10b-5 of the Securities Exchange Act. Defendants deny that such a claim exists in the Ninth Circuit under § 10(b), and suggest that plaintiff may have intended to bring the claim under § 20A of the Exchange Act, 15 U.S.C. § 78t-1. To state a claim under § 20A, the trading must have occurred "contemporaneously." § 78t-1 (a). Even if this Court were to find that there is a private right of action under § 10(b) and Rule 10b-5, defendants assert that this Court should follow the Second Circuit's lead and imply the same "contemporaneousness" requirement as is contained in the new statute. Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94-95 (2d Cir. 1981); Shapiro v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 495 F.2d 228, 237 (2d Cir. 1974).
B. Legal Analysis
The Ninth Circuit has never considered whether there is an implied private right of action to recover damages for improper insider trading under § 10(b) or Rule 10b-5, although other courts, most notably the Second Circuit, have implied such a right.
See Wilson v. Comtech Telecommunications Corp., 648 F.2d at 94-95. Congress recently enacted § 20A of the Securities Exchange Act of 1934, which expressly provides for private suits against inside traders who trade "contemporaneously" with private party plaintiffs. § 78t-1(a). The statute is applicable to actions which arose on or after November 19, 1988. Plaintiff specifically disclaims any intent to proceed under § 20A, Plaintiff's Opposition Brief at 28 n. 15;
§ 20A does not preempt preexisting remedies. § 78t-1(d).
This Court need not reach the issue of whether a private right of action is implied under § 10(b) or Rule 10b-5, for even if the Court recognized a private right of action, plaintiff has not alleged that any defendant traded contemporaneously with her. See Wilson v. Comtech, 648 F.2d at 94-95 (only those persons who purchased stock contemporaneously with the alleged insider stock sales have standing to bring the insider trading claim).
The duration of a "contemporaneous" class varies, although the courts have interpreted the "contemporaneous trading" requirement quite strictly. First, a plaintiff's trade must have occurred after the wrongful insider transaction. See, e.g., In re Equity Funding Corporation, 416 F. Supp. at 183-85; In re Olympia Brewing Co. Securities Litigation, 613 F. Supp. 1286, 1298-99 (N.D.Ill. 1985); O'Connor & Associates v. Dean Witter Reynolds, Inc., 559 F. Supp. 800, 803 (S.D.N.Y. 1983); see also Wang, The "Contemporaneous" Traders Who Can Sue An Inside Trader, 38 Hastings L.J. 1175, 1178 (1987) and cases cited therein.
Further, the contemporaneous requirement has been deemed not met if plaintiff's trade occurred more than a few days apart from defendants' transactions. See, e.g., Wilson v. Comtech, 648 F.2d 88 (plaintiff's sale of stock approximately one month after defendant's purchase not contemporaneous); Backman v. Polaroid Corp., 540 F. Supp. 667, 671 (D.Mass. 1982) (plaintiff who traded two and seven days after defendants' sale did not trade contemporaneously); Kreindler v. Sambo's Restaurants, Inc., [1981-1982 Transfer Binder] Fed.Sec.L.Rep. (CCH) P 98,312 (S.D.N.Y. 1981) (purchase seven days after the insider's sale does not meet the contemporaneous requirement).
Plaintiff acknowledges that some courts "drastically limit" the class of plaintiffs who may bring suit for a breach of an insider trader's duties, but that other courts have imposed liability for the entire class of individuals who purchased shares between the time of the initial breach and the time of the remedial disclosure. Plaintiff's Opposition at 31, citing Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 353 F. Supp. 264 (S.D.N.Y. 1972) and Elkind v. Liggett and Myers, Inc., 635 F.2d 156 (2nd Cir. 1980).
In the instant case, the initial breach is alleged to have occurred on November 7, 1988, and the remedial disclosure made on March 23, 1989, approximately a four and one-half month period. In contrast to the four and one-half month period here at issue, in Shapiro the contemporaneous trading period was four days, and in Elkind it was two days. The cases that plaintiff cites are thus not authority for plaintiff's assertion that a class of purchasers who purchased stock over a four month period can all be contemporaneous traders.
Based on the above legal analysis, plaintiff has failed to allege that she traded contemporaneously with any defendants' stock sale and therefore lacks standing to bring a private insider trading claim. Because the named plaintiff lacks standing to bring the claim, she cannot pursue the claim on behalf of the class. La Mar v. H & B Novelty and Loan Co., 489 F.2d 461, 465-66 (9th Cir. 1973) (a class plaintiff may not represent the class for claims she does not share). Count II of the complaint is hereby dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim.
IV. COUNT III: NEGLIGENT MISREPRESENTATION
Plaintiff alleges that defendants induced her to buy Pyramid shares through the misrepresentations and omissions described above, and through failing to disclose material facts with respect to Pyramid's future prospects. Complaint para. 55. Plaintiff asserts that defendants should have foreseen that she and other class members would rely on their statements and therefore defendants are liable for the tort of negligent misrepresentation.
Liability for negligent misrepresentation may attach only where plaintiff establishes that defendants breached a duty owed to him. Applying the six factors set forth in Goodman v. Kennedy, 18 Cal.3d 335, 134 Cal. Rptr. 375, 556 P.2d 737 (1976),
a number of recent Northern District cases have held that negligent misrepresentation claims based solely on "aftermarket" documents (such as the present case) should be dismissed because unlike offering materials, the purpose of aftermarket financial reports is not to create a market for stock. Weinberger v. Schroeder, No. C-84-20757-WAI, slip op. at 8 (N.D.Cal. Oct. 28, 1986); In re Worlds of Wonder, 694 F. Supp. 1427, 1436 (N.D.Cal. 1988); Feldman v. Glaze, No. C-87-20723-WAI, slip op. at 6 (N.D.Cal. May 12, 1988); In re Seagate Technology II, No. C-88-20489-RPA, slip op. at 17-18 (N.D.Cal. 1989); In re Genentech, Inc. Securities Litigation, No. C-88-4038-DLJ, slip op. at 13-16 (N.D.Cal. July 7, 1989); Levy v. Eletr, 724 F. Supp. 1269, 1273 (N.D.Cal. 1989); see also In re Coleco Securities Litigation, 591 F. Supp. 1488 (S.D.N.Y. 1984).
Plaintiff argues that this Court should reject Weinberger, since it ignores the realities of the securities market, and follow International Mortgage Co. v. John P. Butler Accountancy Corp., 177 Cal. App. 3d 806, 223 Cal. Rptr. 218 (1986) (an accountant had a duty to persons "who reasonably and foreseeably rely" on his conduct or statements) and Gaillard v. Arthur Young, No. C-85-2373-RFP (N.D.Cal. July 10, 1985) (accounting firm might be liable for negligent misrepresentations in a registration statement).
Weinberger, Feldman and In re Genentech, however, found Butler distinguishable from a case involving misrepresentations made by directors and officers of a corporation on grounds that the independent accountant has a unique public function, which "does not find a close parallel in a director's or officer's obligations to prospective shareholders." Weinberger, slip op., at 7. The rationale of Weinberger and Feldman is persuasive, and plaintiff's claim for negligent misrepresentation, as it pertains to aftermarket acts or omissions, is dismissed without leave to amend. To the extent that the claim is based on documents other than aftermarket statements (such as prospectuses) plaintiffs are given leave to amend to so allege.
Defendants' motion to dismiss the complaint is granted with 30-days leave to amend as detailed in this memorandum. The stay of discovery, originally granted on August 11, 1989 and extended on September 15, 1989, will be lifted in accordance with limitations set by the Court at the status conference to be held on April 27, 1990 at 10:00 a.m., U.S. District Court, 280 So. First Street, San Jose. Prior to the April 27 status conference, the parties are ordered to meet and confer in an attempt to arrive at a mutually agreeable discovery plan. If the parties are unable to agree, each party is to submit its own written plan for discovery.
IT IS SO ORDERED.