primary actor. Thus, the court holds that for the purposes of this motion to dismiss, plaintiffs have stated a claim of primary liability under section 10(b) against the accountants.
Second, defendants attack the section 10(b) claim against the accountants, arguing that it does not state fraud with particularity as required by Federal Rule of Civil Procedure 9(b). A successful section 10(b) claim requires a showing of scienter -- "that defendants acted with . . . 'a mental state embracing intent to deceive, manipulate, or defraud." In re Worlds of Wonder Securities Litigation, 35 F.3d 1407 (9th Cir. 1994). Defendants argue that the 10(b) claim must be dismissed because it does not plead facts giving rise to an inference of scienter.
Under Rule 9(b), the plaintiff must plead with particularity the time, place and nature of the fraud. See Wool v. Tandem Computers Inc., 818 F.2d 1433, 1439 (9th Cir. 1987). The purpose of the rule is to identify "the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations." Id..
Not all elements of fraud have to meet the heightened pleading requirements of Rule 9(b). Scienter does not need to be pled with particularity; Rule 9(b) does not "require any particularity in connection with an averment of intent, knowledge or condition of the mind." Walling v. Beverly Enterprises, 476 F.2d 393, 396 (9th Cir. 1973). However, in a case on which the Ninth Circuit has granted en banc review, the court stated, "Although Rule 9(b) allows scienter to be pleaded generally, courts have required that the facts pled provide a basis for a strong inference of fraudulent intent [citing out of circuit cases]" In re Glenfed Securities Litigation, 11 F.3d 843, 848 (9th Cir. 1993) rehearing en banc granted (Feb. 28, 1994) (emphasis added). This requirement is inconsistent with prior Ninth Circuit law which has required only particularity as to time, place and manner. See Walling, supra. Given the conflicting case law and present review of this issue by the Ninth Circuit en banc, the court will follow more established Ninth Circuit precedent and will not require that scienter be pled with particularity. Rather, arguments regarding the necessary showing of scienter can be raised at the summary judgment stage of the litigation.
Defendants further contend that the complaint does not sufficiently plead facts that could establish reliance. However, the complaint does sufficiently allege several theories of reliance which suffice for the purposes of section 10 (b).
Thus, the section 10(b) claim, (the 3rd claim), against the accountants will not be dismissed.
2. Accountant liability under section 11.
Section 11 of the Securities Act of 1933 creates liability for providing materially false and misleading information in a registration statement. An accountant cannot be held liable under section 11 unless the materially misleading information "purports to have been prepared or certified by him." 15 U.S.C. § 77k(a)(4). The financial statements prepared and certified by the accountants for the years 1981-1983 are included in the prospectus and registration statement. Plaintiffs allege that these contain material misrepresentations. If proven, this would state a violation of section 11.
Defendants argue that the complaint fails to plead the necessary materiality of the misstatements and thus must be dismissed. A misrepresentation is material if a reasonable investor would consider it important in making a decision. Basic Inc. v. Levinson, 485 U.S. 224, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) (stating materiality standards under Section 10(b)). A recent Ninth Circuit case held that the determination of materiality at issue in that case was better made on the kind of record which summary judgment affords. In re Wells Fargo Securities Litigation, 12 F.3d 922, 930 (9th Cir. 1993). The court finds such an approach appropriate in this case as well.
The facts alleged in the complaint could state a material misrepresentation. The use of the written order basis of revenue recognition described in the complaint and the other non-standard accounting practices changed on the eve of the offering might be shown to have made a material difference to a reasonable investor. Plaintiffs should be permitted to try to produce sufficient evidence showing that the misrepresentations were material. The court needs more of a foundation than the bare offering materials to determine if a certain accounting practice could be a material misrepresentation. Thus, the 5th claim for relief will not be dismissed.
IV. Motion to Strike
Several of the accountant defendants move to strike certain allegations from the complaint. Their main arguments are (1) that some of the facts alleged fail to state a cause of action after the holding in Central Bank, 128 L. Ed. 2d 119, 114 S. Ct. 1439 (1994), and (2) that contribution should not be allowed unless the identical theories of liability were alleged against a joint tortfeasor.
The court denies the motion. A motion to strike brought under Federal Rule of Civil Procedure 12(f) is not the proper vehicle for accomplishing what defendants are asking the court to do. Defendants are making subtle legal arguments in their motion to strike that are out of place in such a motion. Such arguments are more appropriate for a motion to dismiss for failure to state a claim such as the court analyzed above.
Rule 12(f) allows the court to strike anything "redundant immaterial, impertinent or scandalous."
However, to be impertinent or immaterial, the allegations must have no possible bearing on the controversy. All of the matters that defendants are asking to have stricken are relevant to the course of conduct set out as constituting violations of the securities laws.
The request to take judicial notice is granted. The motion to strike is denied.
The motion to dismiss is denied in part and granted in part. The court grants the motion to dismiss as to claims 2, 4, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17. The court denies the motion to dismiss as to claims 1, 3, 5 and 18.
IT IS SO ORDERED.
DATED: November 22, 1994
NAPOLEON A. JONES, JR.
United States District Judge
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