Suna v. Bailey, 1st Cir. (1997)

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    USCA1 Opinion

    UNITED STATES COURT OF APPEALS

    FOR THE FIRST CIRCUIT

    ____________________

    No. 96-1138

    VICKI MATCH SUNA AND LORI ROSEN,

    Plaintiffs - Appellants,

    v.

    BAILEY CORPORATION, ET AL.,

    Defendants - Appellees.

    ____________________

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    APPEAL FROM THE UNITED STATES DISTRICT COURT

    FOR THE DISTRICT OF NEW HAMPSHIRE

    [Hon. Steven J. McAuliffe, U.S. District Judge] ___________________

    ____________________

    Before

    Torruella, Chief Judge, ___________

    Boudin, Circuit Judge, _____________

    and Lisi,* District Judge. ______________

    _____________________

    Jules Brody, with whom Stull, Stull & Brody, Backus, Me ___________ _____________________ _________

    Solomon & Rood and Weiss & Yourman were on brief for appellan ______________ _______________

    Sydelle Pittas, with whom Law Offices of Sydelle Pittas

    ______________ _____________________________

    on brief for appellee Bailey Corporation.

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    ____________________

    February 26, 1997

    ____________________

    ____________________

    * Of the District of Rhode Island, sitting by designation.

    TORRUELLA, Chief Judge. On May 26, 1994, Plainti TORRUELLA, Chief Judge. ____________

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    ____________________

    Appellants Vicki Match Suna ("Suna") and Lori Rosen ("Ros

    1 The officers included William A. Taylor, who served a

    (collectively "plaintiffs" or "appellants") brought this c

    consultant and as a Bailey director at all relevant times;

    R. Phillips, who served as Chairman of the Board, Presi

    action suit against Bailey Corporation ("Bailey") and indivi Chief Executive Officer and Secretary of Bailey during the c

    period; Leonard Heilman, who served as Senior Vice Presiden

    officers1 of the corporation (collectively "defendants"

    Finance and Administration, Chief Financial Officer, Treasu

    and Assistant Secretary of Bailey during the class perio

    "appellees") on behalf of all persons who purchased Bail Gordon Young, who served as a director of Bailey and as Execu

    Vice President at all relevant times; and John G. Owens,

    common stock during the class period. The suit allegesserved in various management capacities and as a directo

    Bailey during the class period.

    appellees violated Section 12 of the Securities Act2 of 1933

    2 Any person who --

    Sections 10(b)3 and 20(a)4 of the Securities Exchange Act

    (1) 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 a material fact

    necessary in order to make the statements, in

    the light of the circumstances under which

    they were made, not misleading . . . , and

    who shall not sustain the burden of proof

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    that he did not know, and in the exercise of

    reasonable care could not have known, of such

    untruth or omission,

    shall be liable to the person purchasing such security fro

    . . . .

    15 U.S.C. 771 (1976).

    3 Section 10(b) provides:

    It shall be unlawful for any person, directly

    indirectly, by the use of any means or instrumenta

    of interstate commerce or of the mails, or of

    facility of any national securities exchange --

    * * *

    (b) To use or employ, in connection with

    the purchase or sale of any security

    registered on a national securities exchange

    or any security not so registered, any

    manipulative or deceptive device or

    contrivance in contravention of such rules

    and regulations as the Commission may

    prescribe as necessary or appropriate in the

    public interest or for the protection of

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    -2-

    1934, as well as Rule 10b-55 promulgated by the Securities

    Exchange Commission ("SEC"). Appellants allege that appel

    made, or caused to be made, materially false and mislea

    statements either through Bailey's corporate documents or thr

    analysts' reports disseminated to the public. On November

    1994, the District Court of New Hampshire granted appell

    ____________________

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    investors.

    15 U.S.C. 78j(b) (1981).

    4 Section 20(a) provides, in part:

    Every person who, directly or indirectly,

    controls any person liable under any

    provision of this chapter or of any rule or

    regulation thereunder shall also be liable

    jointly and severally with and to the same

    extent as such controlled person to any

    person to whom such controlled person is

    liable . . . .

    15 U.S.C. 78t (1981).

    5 Rule 10b-5 provides:

    It shall be unlawful for any person, directly

    or indirectly, by the use of any means or

    instrumentality of interstate commerce, or of

    the mails or of any facility of any national

    securities exchange,

    (a) To employ any device, scheme, or

    artifice to defraud,

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    (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

    court of business which operates or would

    operate as a fraud or deceit upon any person,

    in connection with the purchase or sale of

    any security.

    17 C.F.R. 240.10b-5 (1996).

    -3-

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    motion to dismiss this complaint for failure to comply wit

    pleading requirements of Federal Rule of Civil Procedure 9

    The district court then allowed appellants to amend t

    complaint, but rejected the first amended complaint appell

    submitted. The district court "reluctantly grant[ed] plaint

    leave to file a second amended complaint," Order of November

    1994, at 2, but cautioned that if "the second complaint fail

    to satisfy the pleading requirements, the action [would] the

    dismissed with prejudice." Id. On September 1, 1995, appell ___

    filed a Second Amended Complaint, which the district court r

    did not meet Rule 9(b)'s pleading requirements. Order of

    29, 1995. The district court then dismissed the action

    prejudice. Appellants now appeal the dismissal of the Se

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    Amended Complaint.

    BACKGROUND BACKGROUND

    We accept as true all facts alleged in appella

    Second Amended Complaint. Shields v. Citytrust Bancorp, Inc._______ ______________________

    F.3d 1124, 1125 (1st Cir. 1994). Bailey manufactures mo

    plastic exterior components and supplies them to North Amer

    original equipment manufacturers of cars, light trucks, s

    utility vehicles and minivans. Bailey's primary customer is

    Motor Company, which accounted for approximately ninety-t

    percent of Bailey's sales in the nine months ending April

    1993. Of the remaining sales, three percent were to Gen

    Motors Corporation and four percent to other customers.

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    -4-

    During the class period, the individual defen

    signed various SEC filings. Each received or had access to

    public reports and documents depicting Bailey's finan

    condition and business prospects. Each participated in Ba

    board meetings at which information about the company

    discussed. A secondary public offering was held on August

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    1993, during which Bailey and the individual defendants

    shares at $11 each.

    On April 5, 1994, both Suna and Rosen purchased Ba

    stock. During the class period, the stock reached a high of

    than $18 per share.

    The public documents issued by Bailey and allege

    appellants to contain materially false and misleading state

    include Bailey's April 18, 1993, Prospectus and Registra

    Statement, its 1993 Annual Report, and 10-K, quarterly report

    shareholders, and press releases. In addition, appell

    contend that reports published by analysts regarding Bail

    earnings prospects and its ability to continue to incr

    earnings per share are imputable to Bailey. Appellants con

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    that all of these documents artificially inflated the ma

    price of Bailey common stock.

    Large sections of appellants' brief and Second Ame

    Complaint are devoted to quoting at length from these docume

    We will not reproduce all of these quotes, but will highl

    relevant portions as becomes necessary throughout the opin

    Appellants contend that the statements at issue were false

    -5-

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    misleading because Bailey's anticipated growth did not cont

    and its revenue declined. The decline in revenue led

    decrease in the value of Bailey's common stock to $6 1/8

    share. Appellants a

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