Defendants argue that plaintiffs' complaint fails to plead facts demonstrating causation because plaintiffs have not specifically linked any decline in the price of Clearly Canadian shares with a particular misstatement. In an omissions case, however, this is hardly surprising. As discussed in Part IIIB, supra, it is not unreasonable to assume at this stage in the litigation that plaintiffs may be able to demonstrate that but for defendants' alleged material omissions, the price of Clearly Canadian shares would have decreased faster than it did. Of course, plaintiffs will have to come forward with evidence on this point, but that is an issue more properly addressed in a motion for summary judgment. Defendants' motion to dismiss plaintiffs' claim for failure adequately to plead loss causation is DENIED.
To make out a claim of controlling person liability under § 20(a) of the Securities and Exchange Act of 1934, plaintiffs must allege that (1) individual defendants had the power to control or influence Clearly Canadian and (2) individual defendants were culpable participants in the company's alleged fraudulent acts. Wool, 818 F.2d at 1441-42. "Where, as here, the corporate officers are a narrowly defined group charged with day-to-day operations of a public corporation, it is reasonable to presume that these officers had the power to control or influence the particular transactions giving rise to the securities violation." Id.
Review of plaintiffs' second amended complaint reveals adequate allegations to support the first element of plaintiffs' § 20(a) claim. As discussed above, plaintiffs' complaint also sufficiently alleges that defendants Mason, Foreman and Horton all made culpable misstatements to support the second element of § 20(a) liability. Furthermore, plaintiffs' complaint contains sufficient allegations of a conspiracy and acts in furtherance to support claims against the remaining individual defendants. Defendants' motion to dismiss plaintiffs' § 20(a) claim is therefore DENIED.
Denial of defendants' motion to dismiss does not mean this litigation must proceed with plaintiffs' complaint as it stands. FRCP 8(a)(2) requires a "short and plain statement of the claim showing the pleader is entitled to relief." Plaintiffs' seventy-four page complaint is neither short nor plain. Rather, it is replete with irrelevant and immaterial recitals that have no part in this litigation. Inclusion of such material places an unnecessary burden on defendants and the court to sift through the irrelevant matter to identify the basis of plaintiffs' claims. Ultimately, such pleading is self-defeating for plaintiffs, as it merely slows down the litigation from reaching the merits of plaintiffs' claims.
Included in plaintiffs' second amended complaint, for example, are PP 41-64 and 98-107, which, respectively, describe in fifteen pages statements allegedly made by defendants before and after the purported class period. Similarly, P 108, which describes alleged insider trading by individual defendants, lists on five pages trading activity that occurred overwhelmingly outside the purported class period. As the class period defines the time during which defendants' fraud was allegedly alive in the market, statements made or insider trading allegedly occurring before or after the purported class period are irrelevant to plaintiffs' fraud claims. Pursuant to Rule 12(f), the court therefore ORDERS STRICKEN from plaintiffs' complaint PP 41-64 and 98-107 and any transactions listed in P 108 that occurred before August 3, 1992, or after July 19, 1993, plaintiffs' purported class period. The court also ORDERS
STRICKEN PP 3, 4, 5 and 6, which discuss only statements allegedly made before the purported class period.
In addition, the court ORDERS STRICKEN P 109, which purports to list in thirty-nine subparagraphs information known to or recklessly disregarded by defendants when making their allegedly misleading statements. For the reasons discussed in Part III, supra, certain of PP 65-97 describe plaintiffs' claims with adequate specificity and detail to satisfy plaintiffs' pleading requirements under Rules 8 and 9(b), rendering the additional piling on of vague so-called "facts" in P 109 unnecessary. Moreover, P 109 fails to show how any of the allegedly adverse facts it recites rendered false or materially misleading any statements made by defendants. Nor does P 109 identify facts which imposed on defendants a duty to disclose the information it contains.
Finally, the court ORDERS STRICKEN as redundant and immaterial PP 66-71, 73, 77, 80-88 and 90-95. Paragraph 66 states only that an analyst lowered his forecast for Clearly Canadian's earnings. There is no allegation, however, that the analyst's statement was false or misleading, or that defendants "sufficiently entangled [themselves] with the analysts' forecasts to render those projections attributable to [them]." Elkind v Liggett & Myers, Inc, 635 F.2d 156, 163 (2d Cir 1980). Accordingly, P 66, even if true, is not actionable. The same can be said for PP 83-85 (describing analysts' comments about Clearly Canadian). Paragraph 77, which contains no factual allegations, is immaterial.
Paragraphs 67-71, 73, 80-82, 86-88 and 90-95 all fail to comply with FRCP 9(b). To satisfy Rule 9(b)'s requirements for pleading securities fraud, "plaintiff[s] must set forth what is false or misleading about a statement, and why it is false." Glenfed, 94 CDOS at 9374 (emphases added). While all of these paragraphs from plaintiffs' second amended complaint discuss statements by defendants, none says anything about why those statements were false when made. For example, P 71 states:
On October 29, 1992, Clearly Canadian announced that it had entered into agreements to distribute Clearly Canadian products in Mexico and the Caribbean. In the announcement, defendant Foreman, Chief Operating Officer stated: "These agreements are part of Clearly Canadian's goal of quality on its worldwide leadership position within the rapidly growing New Age beverage industry. Under the terms of the agreement, the distributors have committed to 1,000,000 cases and 600,000 cases in the first year of the agreements." In fact, distributors appear to have taken significantly less product during the first year period identified.
SAC P 71. This paragraph alleges that defendant Foreman made a statement that later turned out not to be true. There is no indication, however, about what was false or misleading about the statement when made. Glenfed, 94 CDOS at 9375 ("[A] plaintiff must set forth, as part of the circumstances constituting fraud, an explanation as to why the disputed statement was untrue or misleading when made."). The statement describes an agreement; to satisfy Rule 9(b), plaintiffs must allege that the description of the agreement was itself false or misleading, not simply that facts did not unfold as hoped. Paragraph 86 provides a similar example. The paragraph merely states that defendants "asserted that Clearly Canadian was about to be delisted from the Vancouver Stock Exchange and listed on the New York Stock Exchange * * *. Clearly Canadian was never listed on the New York Stock Exchange." Again, there is no indication that defendants' assertion was false when made. Moreover, P 86 fails to identify the time and place of this alleged statement, failing the other requirements of Rule 9(b). Glenfed, 94 CDOS at 9374.
Plaintiffs cannot, as they have attempted to do, simply list a number of defendants' statements and then elsewhere (in this case P 109) describe in vague terms why these statements were false. Allegations must be focused on specific falsehoods. Otherwise, by filing an easily drafted complaint, plaintiffs could impose significant discovery costs on defendants and burden the courts with needless litigation.
The court recognizes, as discussed in Part II, supra, that often information related to the falsity of a defendant's statements will not be known at the time of pleading. In this situation, however, the proper pleading practice is exemplified by PP 75-76 of plaintiffs' second amended complaint, which allege that defendant Foreman made a particular prediction (fourth quarter revenues would be $ 30-$ 35 million), but that when he made that prediction he possessed internal sales reports showing his prediction was unreasonable. Such specificity lays the foundation for focused discovery about what defendant Forman knew when he made his prediction and allows the parties to determine efficiently whether the prediction had a reasonable basis and, therefore, whether defendants can be liable for securities fraud.
Plaintiffs seek certification that this fraud-on-the-market securities litigation may be maintained as a class action under FRCP 23. In In re Seagate Technology II Securities Litigation, 843 F Supp 1341, 1366 (ND Cal 1994), the court required plaintiffs seeking class certification in a fraud-on-the-market securities action to provide evidence on the extent of seller-purchaser and equity conflicts. The court believes that such information is necessary to determine the adequacy of representation in fraud-on-the-market cases, as the court must do under Rule 23. Id at 1359-64.
Plaintiff lawyers in the case at bar, instead of presenting evidence to address the court's concerns, take issue with the court's Seagate II order. For the reason's detailed in Seagate II, the court believes seller-purchaser conflicts and conflicts between equity-holding and non-equity-holding class members raise serious questions about the adequacy of representation of all would-be class members. As plaintiffs have submitted no evidence to the court on these issues, the court is not in a position to determine whether class certification is proper. Accordingly, plaintiffs' motion for class certification is DENIED WITHOUT PREJUDICE.
Counsel shall appear for a status and scheduling conference on March 17, 1995, at 2:00 p.m.
IT IS SO ORDERED.
VAUGHN R. WALKER
United States District Judge