FILE D IN THE UNITED STATES DISTRICT COURT FOR THE FEB WESTERN DISTRICT OF OKLAHOMA

Transcription

1 FILE D IN THE UNITED STATES DISTRICT COURT FOR THE FEB WESTERN DISTRICT OF OKLAHOMA ROBERT O. CLERK CITY OF PHILADELPHIA., et al. ) l1.5. DIST. CO RT N DIST. OF OKLA. BY tepll1 Y Plaintiffs, vs. FLEMING COMPANIES, INC., et al., Defendants Case No. CIV M Consolidated Actio n VuLogtir 40 ORDER Before the Court is the "Fleming Defendants' Motion to Dismiss," filed May 24, 1999 [docke t no. 125]. The "Fleming Defendants" include Fleming Companies, Inc., Robert E. Stauth, R. Randolph Devening, Donald N. Eyler, and Kevin J. Twomey. The Fleming Defendants, pursuant to Federal Rule of Civil Procedure 12(b)(6), 15 U.S.C. 78u-4(b)(3), and Local Civil Rule 7.1, seek dismissal of plaintiffs' Second Consolidated Amended Class Action Complaint, which was filed Apri l 1, On July 27, 1999, plaintiffs filed their "Opposition to Defendants' Motion to Dismiss th e Second Consolidated Amended Complaint" [docket no. 140]. 1. BACKGROUND' This Consolidated Action is composed of nine separate complaints filed in this district in earl y At the heart of this case is plaintiffs' claim that defendants concealed the existence of a lawsui t filed in Texas state court in 1993 against defendant Fleming Companies, Inc. ("Fleming") by one o f its customers, David's Supermarkets, Inc., which alleged that Fleming had engaged in variou s deceptive trade practices ("David's Litigation") and that defendants violated federal securities law s by failing to publicly report the pendency of the David's Litigation. 'The March 4, 1999 Order contains a more detailed and complete factual background.

2 Following the public announcement of the $204.5 million jury verdict2 in the David' s Litigation, nine plaintiffs filed separate lawsuits against defendants. On March 26, 1997, the Court entered an order consolidating the nine then-pending related cases for all purposes. Afte r consolidation was ordered, plaintiffs filed their initial Consolidated Amended Class Action Complain t on April 30, The Fleming Defendants filed a motion to dismiss. On March 4, 1999, the Court granted the motion to dismiss, finding plaintiffs' allegations failed to satisfy the requirements of 1 5 U.S.C. 78u-4(b)(2), and granted plaintiffs leave to replead. On April 1, 1999, plaintiffs filed thei r Second Consolidated Amended Class Action Complaint.' Defendants have again filed a motion t o dismiss. II. DISCUSSION A. Rule 12(b)(6 ) Defendants seek dismissal of plaintiffs' Second Consolidated Amended Class Actio n Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. A complaint will b e dismissed under Rule 12(b)(6) "only when it appears that the plaintiff can prove no set of facts i n support of the claims that would entitle the plaintiff to relief" Roman v. Cessna Aircraft Co., 55 F.3d 542, 543 (100' Cir. 1995)(quotations omitted). In considering a Rule 12 (b)(6) motion, the Court "must accept all the well-pleaded allegations of the complaint as true and must construe them in th e 2This verdict was ultimately vacated, and the David's Litigation was settled on behalf of Fleming for $19.9 million and on behalf of the individual defendants for an undisclosed amount paid by Fleming's directors and officers liability insurance carrier. 'In accordance with the Court's order, plaintiffs designated additional allegations by shading them and designated deleted allegations by striking through them. 2

3 light most favorable to the plaintiff." IV B. Section 10(b)/Rule IOb-5 Claim Introduction Section 10(b) provides : 15 U.S.C. 78j(b). 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 -- (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 investors. Rule lob-5 provides, in pertinent part : 17 C.F.R b-5. It shall be unlawful for any person... (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading,... in connection with the purchase or sale of any security. 2. Plaintiffs' Section 10(b)/Rule lob-5 allegation s Plaintiffs' Section 10(b)/Rule IOb-5 allegations are basically the same as those asserted in 'In considering a Rule 12(b)(6) motion to dismiss, a cou rt may consider public disclosure documents filed with the SEC as well as documents upon which plaintiff has relied in bringing suit. Considering these documents does not require conve rting the motion to one for summa ry judgment. Cortec Indus., Inc. v. Sun Holding L.P., 949 F.2d 42, 47-8 (2d Cir. 1991), cert. denied, 503 U S. 960 (1992). 3

4 plaintiffs' Consolidated Amended Class Action Complaint. An overview of plaintiffs' Sectio n 10(b)/Rule lob-5 allegations is contained in the second numbered paragraph of the Secon d Consolidated Amended Class Action Complaint : Although Fleming and the individual defendants herein were legally responsible for ensuring the accuracy and completeness of Fleming's public filings, during the Class Period Fleming and the individual defendants flagrantly flaunted these obligations, and instead engaged in a fraudulent scheme and course of conduct in violation of the federal securities laws by, inter alia, knowingly and/or recklessly : (1) failing to disclose the pendency of the David's Litigation against the Company and the Company's exposure therein until the day that the jury rendered its adverse verdict; (2) failing to disclose that a material portion of the Company's revenues and profits resulted solely from the wrongful, unlawful and deceptive business practices engaged in by the Company which gave rise to the David's Litigation; (3) failing to disclose that because of the charges against the Company in the David's Litigation, Fleming was forced to change the way in which it conducted its business and would not be able to continue to earn the high profits it was previously earning ; and (4) failing to disclose that the Company's much heralded restructuring and re-engineering program (which was announced while the undisclosed David's Litigation was pending) was largely designed to eliminate the illegal and wrongful - but highly profitable - practices complained of in the David's Litigation. Moreover, as a result of its overcharging David's and other customers, Fleming recorded substantial revenues, profits and assets to which it was not entitled under its contracts with those customers. As defendants knew or recklessly disregarded, these improperl y 4

5 recorded revenues, profits and assets rendered Fleming's publicly disseminated financial statements materially false and misleading. Defendants' fraudulent scheme and course of conduct caused the price of Fleming's common stock to be artificially inflated during the Class Period, thereby causing plaintiffs and other purchasers of Fleming stock during the Class Period to suffer substantial damages. Second Consolidated Amended Class Action Complaint at Plaintiffs' specific allegations regarding violations of Section 10(b)/Rule IOb-5 are the sam e specific allegations made in their Consolidated Amended Class Action Complaint. See Consolidate d Amended Class Action Complaint at and Second Consolidated Amended Class Actio n Complaint at Pleading standard for Section 10(b) claims "In the securities context, Rule 12(b)(6) dismissals are difficult to obtain because the caus e of action deals primarily with `fact-specific inquir [ies]' such as materiality." Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10' Cir. 1997)(quoting Basic, Inc. v. Levinson, 485 U.S. 224, 24 0 (1988)). However, even before the enactment of the Private Securities Litigation Reform Act of 1995, 15 U.S.C. 78u-4 ("PSLRA"), courts were not hesitant to dismiss secu rities claims for failure to state a claim. As noted by the Tenth Circuit in a pre-pslra decision :' "[C]ourts do not hesitat e to dismiss securities claims pursuant to Rule 12(b)(6) where the alleged misstatements or omission s are plainly immaterial, or where the plaintiff has failed to allege with particularity circumstances tha t could justify an inference of fraud under Rule 9(b)." Grossman, 120 F.3d at 1118 (citations omitted). 'All references to the Second Consolidated Amended Class Action Complaint are to the copy which contains the editing notations. 'The PSLRA applies to cases filed after December 22, 1995, the date the PSLRA became effective. It was not applicable in Grossman. It does apply in this case because plaintiffs filed their complaints after December 22,

6 The PSLRA raised the pleading standard for Section 10(b) claims higher. Under the PSLRA, a complaint asserting a violation of Section 10(b) : 15 U.S.C. 78u-4(b)(1). shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding a statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. Moreover, the pleading requirement for scienter, which is an essential element of a Sectio n 10(b) claim, is higher yet. Allegations of scienter require a plaintiff to : 15 U.S.C. 78u-4(b)(2). with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. A complaint that does not meet the requirements of Section 78u-4(b)(1) and (2) "shall" b e dismissed. 15 U.S.C. 78u-4(b)(3). 4. Essential elements of Section 10(b)/Rule 10b-5 clai m "To state a claim under [Section 10(b)/Rule IOb-5], a plaintiff must allege: (1) a misleading statement or omission of a material fact, (2) made in connection with the purchase or sale o f securities; (3) with intent to defraud or recklessness ; (4) reliance; and (5) damages." Grossman, 120 F.3dat1118. In the instant case, only element number two is unchallenged - the parties agree plaintiffs ' purchase of stock constitutes purchases of a security. Defendants challenge the sufficiency of th e complaint with respect to each of the remaining elements of plaintiffs' Section 10(b) claim. Becaus e the Court finds plaintiffs have failed to sufficiently plead scienter, the Court will dismiss the Sectio n 6

7 10(b) claim without addressing the sufficiency of plaintiffs' allegations as to materiality, reliance, an d causation/damages. 5. Scienter a. Plaintiffs' additional scienter allegation s In its March 4, 1999 Order, the Court found plaintiffs' scienter allegations failed to satisfy the strict scienter pleading requirement of the PSLRA. In their Second Consolidated Amended Clas s Action Complaint, plaintiffs have added a subsection entitled "Additional Scienter Allegations." Plaintiffs make the following "additional" allegations regarding defendants' scienter : 65. As alleged herein, defendant Fleming and the individual defendants acted with scienter in that each defendant were aware of and/or recklessly disregarded the material facts set forth herein concerning the David's Litigation and the Company's fraudulent business practices; knew that the public documents and statements issued or disseminated in the name of the Company complained of herein were materially false and misleading ; knew that such statements or documents would be issued or disseminated to the investing public ; and knowingly and/or recklessly participated in the issuance or dissemination of such statements or documents in violation of the federal securities laws. For example : (a) Defendant Fleming was indisputably fully aware of the David' s Litigation and of the allegations set forth therein no later than September 19, 1993, inasmuch as Fleming filed its answer to the original David's Complaint in Texas state court on that date. Similarly, as evidenced by certificates of service attached to subsequent complaints filed in the David's Litigation, Fleming also was fully aware of the contents of the First Amended, Third Amended, Fourth Amended, and Fifth Amended Complaints which were served on Fleming on February 23, 1995, September 19, 1995, January 15, 1996, and February 9, 1996, respectively. Similarly, Fleming was fully aware of various other developments in the course of the litigation, such as the course of the extended discovery that took place in that action, and the denial of Fleming's motion for partial summary judgment. (For example, the Court's January 24, 1995 order that denied Fleming's motion for partial summaryjudgment was served o n 7

8 all parties). Nonetheless, defendant Fleming did not disclose the existence of the David's Litigation at any time during the Class Period - not when the David's complaint was filed in August 1993, not when Fleming filed its Answer in September 1993, not when Fleming's motion for partial summaryjudgment was denied in January 1995, not when defendant Eyler was deposed in February 1995, not when defendant Stauth submitted an affidavit in the litigation in May of 1995, and not even when the trial began in early (b) By virtue of his position as the Company's President and Chief Executive Officer at all relevant times and his concomitant management responsibilities, defendant Stauth also had actual knowledge of, or was recklessly indifferent to, the existence of the David's Litigation no later than September 19, 1993 when Fleming filed its answer to the original David's Complaint. Indeed, as Fleming's President, CEO and Chairman of the Board, and as a signatory of Fleming's various Class Period SEC filings as alleged herein, Stauth had an affirmative duty to keep informed of - and to publicly disclose in the Company's Class Period SEC filings - the status of all potentially material litigation against the Company, and to ensure that the Company's disclosures of other pending litigation were not materially false or misleading. Accordingly, Stauth's failure to disclose the existence ofthe David's Litigation and related information concerning the Company's fraudulent business practices in the Company's Class Period SEC filings - including Fleming's Form 10-Q dated November 15, 1993, Registration Statement dated December 8, 1994 (which Stauth signed), 1993 Annual Report dated March 15, 1994 and Form 10-K for FY 1993 dated March 25, 1994 (both of which Stauth signed), Form 10-Q's for the first, second and third quarters of FY 1994 filed May 31, August 22 and November 15, 1994, and 1994 Annual Report dated March 13, 1995 and Form 10-K for FY 1994 dated March 28, 1995 (both of which Stauth also signed) - was, at a minimum, reckless. Moreover, in an affidavit dated May 4, 1995 in the David's Litigation, defendant Stauth stated that he was "aware of the... lawsuit filed by David's Supermarkets, Inc. against Fleming," was "familiar with Plaintiffs First Amended Original Petition [i.e. complaint]," and had received reports "regarding the status of this litigation." Accordingly, Stauth's failures to disclose the existence of the David's Litigation after May 4, 1995, were not merely reckless, but knowing and willful. (c) By virtue of his position as an Executive Officer, Senior Vice President, Controller and Chief Accounting Officer of the Company 8

9 and his concomitant management responsibilities, defendant Stauth [sic] also had actual knowledge of, or was recklessly indifferent to, the existence of the David's Litigation no later than September 19, 1993 when Fleming filed its answer to the original David's complaint. Indeed, as an Executive Officer of Fleming and as a signatory of Fleming's various Class Period SEC filings as alleged herein, defendant Eyler had an affirmative duty to keep informed of - and to publicly disclose in the Company's Class Period SEC filings - the status of all potentially material litigation against the Company, and to ensure that the Company's disclosures ofother pending litigation were not materially false or misleading. Accordingly, Eyler's failure to disclose the existence ofthe David's Litigation and related information concerning the Company's fraudulent business practices in the Company's Class Period SEC filings - including Fleming's Form 10-Q dated November 15, 1993, 1993 Annual Report dated March 15, 1994, Form 10-K for FY 1993 dated March 25, 1994 (which Eyler signed), and Form 10-Q's (all of which Eyler also signed) for the first, second and third quarters of FY 1994 which were filed May 31, August 22 and November 15, 1994, respectively, and Registration Statement dated December 8, 1994 (which Eyler also signed) - was knowing, and at a minimum reckless. Indeed, inasmuch as defendant Eyler was deposed on February 22, 1995 in the David's Litigation, it is all but certain that Eyler had actual, formal notice of the David's Litigation well before that date, and it is indisputable that he had actual notice of the litigation prior to his departure from the Company on March 1, (d) Similarly, by virtue of their senior positions and management responsibilities with the Company during the relevant times, defendant Devening also had actual knowledge of, or was recklessly indifferent to, the existence of the David's Litigation and related information concerning the Company's fraudulent business practices no later than September 19, 1993, and that defendant Twomey also had actual knowledge of, or was recklessly indifferent to, the existence of the David's Litigation and related information concerning the Company's fraudulent business practices no later than shortly after he joined Fleming as an Executive Officer, Controller and Chief Accounting Officer in March of Indeed, as signatories of Fleming's various Class Period SEC filings as alleged herein, these defendants had an affirmative duty to keep informed of - and to publicly disclose in the Company's Class Period SEC filings - the status of all potentially material litigation against the Company, and to ensure that the Company's disclosures of other pending litigation were not materiall y 9

10 false or misleading. Accordingly, these defendants' failure to disclose the existence of the David's Litigation in the Company's Class Period SEC filings that were issued while they were senior officers of the Company was knowing, and at a minimum reckless. (e) The knowing and/or reckless nature of the defendants' failures to disclose the David's Litigation is also shown by the fact that defendants, beginning in Fleming's 1993 Annual Report, repeatedly disclosed the existence of two federal lawsuits that had been filed against the Company in Florida and certain other legal matters Defendants' selective disclosure of these other litigations demonstrates the defendants' awareness of the importance of informing investors of significant pending litigation against the Company, even at early stages. Nonetheless, Fleming and the Individual Defendants repeatedly refused to disclose the existence of the David's Litigation, which involved claims of similar or greater magnitude, and which was substantially further advanced than the other litigations by no later than January 1995 (by which time, inter alia, extensive discovery had been conducted and Flemings' motion for partial summary judgment had been denied in the David's Litigation). 66. In addition, each of the defendants were aware of, or at least recklessly indifferent to, to Fleming's wrongful, deceptive, fraudulent and illegal business practices in connection with Fleming's cost-plus contracts. (a) As set forth in detail above at 31-33, Fleming's wrongful, deceptive and illegal business practice of artificially inflating Fleming's costs was an official policy and widely spread practice of the Company that was known to a wide array of Company officials, and was not confined to the acts of a few "renegades" in the field. Accordingly, defendant Fleming, as a matter of law, had actual knowledge of these practices, the extent to which they artificially inflated Fleming's reported earnings, and the extent to which they exposed Fleming to substantial and significant liability to David's as well as Fleming's other cost-plus customers. (b) Similarly, by virtue of their positions as Executive Officers and senior managers of the Company, each of the Individual Defendants knew of, or was at least recklessly indifferent to, Fleming's deceptive, fraudulent and illegal business practices in connection with Fleming's cost-plus contracts. For example : 10

11 (i) As alleged in paragraphs 31(c) and 31(d)(i) above, internal Fleming corporate documents from 1991 produced in the David's Litigation show that Fleming - in addition to defrauding David's - had also engaged in deceptive, fraudulent and illegal business practices in connection with Fleming's cost-plus contracts with customers who were serviced by, inter alia, Fleming's Phoenix, Arizona and Sacramento, California divisions. Tellingly, defendant Robert Stauth was the Vice President who headed Fleming' s Phoenix division from 1987 until January 1991, and thereafter continued to be responsible for the operations of both the Phoenix and Sacramento divisions as Senior Vice President of Fleming's Western Region (until July 1992 ) and as Executive Vice President for Division Operations (until 1993) prior to becoming Fleming's President and CEO. Moreover, as reported in an April 11, 1996 Bloomberg Business News report, Stauth's June 1995 deposition testimony "hurt the company's stand" in the David's Litigation. (ii) As alleged in paragraphs 31(a) and 33, internal Fleming corporate documents from 1991 produced in the David's Litigation also show that defendant Donald Eyler was copied on, inter alia, an October 3, 1990 memorandum which expressly refers to Fleming's practice of artificially inflating Fleming's purported "cost" with an "inside margin." Accordingly, defendant Donald Eyler clearly had actual knowledge of Fleming's deceptive, fraudulent and illegal business practices in connection with Fleming's cost-plus contracts no later than October 3, Defendant Fleming engaged in the fraudulent scheme alleged herein in order to, inter alia, facilitate the Company's December 8, 1994 offering of $300 million of Fixed Notes and $200 million in Floating Notes. Moreover, at all relevant times, defendant Fleming was motivated to conceal the truth concerning its wrongful and deceptive business practices (as alleged in the David's Litigation) in order to prevent and/or limit any disruption to the Company's business and/or its ability to retain customers. Had Fleming candidly disclosed the true nature and scope of the Company's wrongful and deceptive business practices or the existence ofthe David's Litigation, Fleming's customers would have been reluctant to engage in further business with the company and/or would have curtailed their business with it, and the success of Fleming's FFMP marketing plan would have been seriously jeopardized. For example, as noted at above, a key element necessary for the FFMP to succeed as a marketing device was customer belief in Fleming's representation s 11

12 that is would pass on to its customers all rebates, discounts and other beneficial deals - which required customers to have confidence in Fleming's integrity and honesty. 68. Fleming was also motivated to conceal the David's Litigation and its wrongful and deceptive business practices in order to minimize the likelihood that other customers, who had also been victims of Fleming's fraudulent pricing policies, would initiate further litigation against the Company based on Fleming's wrongful and deceptive business practices. Indeed, as noted at 51-57, after the existence of the David's Litigation was finally disclosed, at least three other supermarket chain operators brought claims against Fleming for wrongful, unlawful and deceptive billing practices similar to those brought by David's. 69. The Individual Defendants engaged in the fraudulent scheme alleged herein in order to, inter alia (i) facilitate the Company's December 8, 1994 offering of $300 million of Fixed Notes and $200 million in Floating Notes at artificially inflated prices ; (ii) avoid jeopardizing the success of the FFMP ; (iii) minimize the likelihood of additional claims and lawsuits similar to those brought against the Company in the David's Litigation ; (iv) protect and enhance their executive positions and the substantial compensation and prestige they obtained thereby ; and (v) enhance the value of their personal holdings of Fleming securities. Second Consolidated Amended Class Action Complaint at (emphasis in original). The substance of many of these "additional" scienter allegations were alleged previously i n plaintiffs ' Consolidated Amended Class Action Complaint. The following are the only trul y "additional" scienter allegations : (1) in a May 4, 1995 affidavit, defendant Stauth stated that he wa s "aware of the... lawsuit filed by David's Supermarkets, Inc. against Fleming," was "familiar wit h Plaintiffs First Amended Original Petition [i.e. complaint]," and had received reports "regarding the status of this litigation," and, thus, Stauth's failures to disclose the existence of the David's Litigatio n after May 4, 1995, were not merely reckless, but knowing and willful ; (2) defendant Eyler wa s deposed on February 22, 1995 in the David's Litigation, and it is indisputable that he had actua l 12

13 notice of the litigation prior to his departure from Fleming on March 1, 1995 ; (3) defendant Staut h through his position as the Vice President who headed Fleming's Phoenix division from 1987 unti l January 1991, as Senior Vice President of Fleming ' s Western Region until July 1992, and a s Executive Vice President for Division Operations until 1993, was aware Fleming had been engage d in deceptive, fraudulent and illegal business practices in connection with Fleming's cost-plus contract s with customers who were serviced by Fleming's Phoenix, Arizona and Sacramento, Californi a divisions; (4) defendant Eyler was copied on an October 3, 1990 memo which expressly referred t o Fleming's practice of artificially inflating Fleming's purported "cost" with an "inside margin," and i t is clear he had actual knowledge of Fleming's deceptive, fraudulent and illegal business practices i n connection with Fleming's cost-plus contracts ; and (5) defendants were motivated to engage in th e fraudulent scheme in order to facilitate Fleming 's December 8, 1994 offering of $3 00 million of Fixed Notes and $200 million in Floating Notes at artificially inflated prices. b. Scienter pleading standard The PSLRA requires a plaintiff to "state with particularity facts giving rise to a stron g inference that the defendant acted with the required state of mind [scienter]." 15 U.S.C. 78u- 4(b)(2). Scienter is defined as a "mental state embracing intent to deceive, manipulate, or defraud " Ernst & Ernst v. Hochfelder, 425 U. S. 185, 193 n.12 (1976). Recklessness satisfies the sciente r requirement for a violation of Section 10 (b). Anixter v. Home-Stake Production Co., 77 F.3d 1215, 1232 (10"' Cir. 1996). Recklessness is defined as "conduct that is an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is eithe r known to the defendant or is so obvious that the actor must have been aware of it." Anixter, 77 F.3 d at 1232 (internal quotations and citations omitted). Simple negligence, however, does not satisfy the 13

14 scienter requirement. Board of County Commissioners of San Juan County v. Liberty Group, 96 5 F.2d 879, 883 (10 `'' Cir.), cert. denied, 506 U. S. 918 (1992). After undertaking a detailed examination of the cases interpreting the standard for pleadin g scienter under the PSLRA, the Court, in its March 4, 1999 Order, adopted the following pleading standard : March 4, 1999 Order at 15.' The Court [is to] examine plaintiffs' allegations in their entirety, without regard to whether those allegations fall within any formalistic category, such as motive and opportunity, to determine if plaintiffs' allegations permit a strong inference of fraudulent intent. C. Discussion As set forth above, plaintiffs allege each defendant acted with actual knowledge or reckles s disregard of the true facts misrepresented or omitted in Fleming's public statements and filings. Plaintiffs once again base this allegation in part upon defendants' positions as senior officers o f 7As of March 4, 1999, no circuit court had ruled on the appropriate standard for pleading scienter under the PSLRA. However, since the Court issued that order, six circuits have ruled on this issue The Second and Third Circuits have held the PSLRA adopted the pre-existing Second Circuit pleading standard, which could be met by pleading either facts showing that defendants had "motive and opportunity" or facts constituting strong circumstantial evidence of reckless or conscious behavior. See Press v. Chemical Investment Services Corp., 166 F.3d 529 (2d Cir. 1999) ; In re Advanta Corp. Sec. Litig _, 180 F.3d 525 (3d Cir. 1999). The Ninth Circuit has held the PSLRA adopted a more stringent standard than the pre -existing Second Circuit pleading standard, the "motive and opportunity" test is no longer valid, and a plaintiff must plead facts constituting circumstantial evidence of deliberately reckless or conscious misconduct. See In re Silicon Graphics Inc. Sec. Litig., 183 F.3 d 970 (9`' Cir. 1999). The First, Sixth, and Eleventh Circuits have adopted a middle approach that appears to be substantively identical to the flexible standard this Court adopted in its March 4, 1999 Order. See Greebel v. FTP Software, Inc., 194 F. 3d 185 (15` Cir 1999 ) ; In re Comshare Inc. Sec Litig., 183 F.3d 542 (61' Cir. 1999) ; Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11`x' Cir 1999). The Tenth Circuit still has not ruled on this issue. Upon review of the subsequent case law, the Cou rt finds the standard it adopted in its March 4, 1999 Order is still the appropriate standard. 14

15 Fleming. As set forth in the March 4, 1999 Order, such allegations are not sufficient to meet the stric t scienter pleading standard. See March 4, 1999 Order at Plaintiffs also again allege defendant s had both opportunity and motive. In their "additional" scienter allegations, plaintiffs reassert three motives this Court previously found insufficient to satisfy the PSLRA scienter standard. protectio n of relationships with cost-plus customers, avoidance of a proliferation of lawsuits similar to th e David's Litigation, and prevention of jeopardizing Fleming's efforts to implement the FFMP See March 4, 1999 Order at For the reasons set forth in the March 4, 1999 Order, the Court agai n finds these motives insufficient. Plaintiffs' truly "additional" scienter allegations also fail to satisfy the scienter pleadin g standard of the PSLRA. Plaintiffs' first two "additional" scienter allegations, defendant Stauth and defendant Eyler's undisputed knowledge of the David's Litigation, do not give rise to a stron g inference that they acted with the required state of mind when they failed to disclose the David' s Litigation. The Court finds there are no facts indicating these defendants intentionally failed to disclose the David 's Litigation in order to deceive, manipulate, or defraud plaintiffs. Additionally, the Court finds defendants ' alleged conduct is not reckless, it is not an extreme departure from th e standards of ordinary care, which presents a danger of misleading buyers or sellers that is eithe r known to defendants or is so obvious that defendants must have been aware of it. The Court further finds the fact defendants were aware of the David's Litigation does not automatically lead to th e inference they intentionally or recklessly failed to disclose the litigation and finds plaintiffs' allegation s at most support a finding of simple negligence, which is not sufficient to satisfy the scienter pleadin g requirement of the PSLRA. Plaintiffs' third "additional" scienter allegation is simply another scienter allegation based upo n 15

16 a defendant' s position as an officer at Fleming. As set forth above, this same type of conclusory allegation of scienter was found insufficient in the Court's March 4, 1999 Order. Accordingly, plaintiffs' third "additional" scienter allegation is also insufficient. Plaintiffs' fourth "additional" scienter allegation seeks to infer fraudulent intent based upo n defendant Eyler being copied on an October 3, 1990 memo which referred to Fleming's practice o f artificially inflating Fleming's purported "cost" with an " inside margin." The Court finds the fact defendant Eyler was copied on a memo three years prior to the class period and the initiation of th e David's Litigation does not, by itself, lead to a strong inference defendant Eyler acted with scienter. Plaintiffs' final "additional" scienter allegation is defendants' motive to engage in th e fraudulent scheme in order to facilitate Fleming's December 8, 1994 offering of $300 million of Fixed Notes and $200 million in Floating Notes at artificially inflated prices. "We do not agree that a company's desire to maintain a high bond or credit rating qualifies as a sufficient motive for fraud in these circumstances, because if scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securitie s fraud actions." San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morri s Companies, Inc., 75 F.3d 801, 814 (2d Cir. 1996)(internal quotations and citations omitted). See also Novak v. Kasaks, 997 F. Supp. 425, 430 n.5 (S.D.N.Y. 1998)(allegation of motive to raise capital insufficient as a matter of law to allege scienter) ; Coates v. Heartland Wireless Communications, Inc., 26 F. Supp. 2d 910, 919 (N.D. Tex. 1998)(motive to facilitate public exchange offering insufficien t as a matter of law to allege scienter). Accordingly, the Court finds this motive is not sufficient to give rise to a strong inference defendants had the requisite fraudulent intent. Finally, even though none of plaintiffs' scienter allegations individually meet the strict scienter 16

17 pleading requirement of the PSLRA, the Court must now examine plaintiffs' allegations together t o determine whether, taken as a whole, the allegations meet this standard. Having carefully reviewed plaintiffs' Second Consolidated Amended Class Action Complaint with respect to all allegations o f scienter, the Court is satisfied the allegations fail to set forth sufficient facts to give rise to a stron g inference of fraudulent intent by defendants. Accordingly, the Court finds plaintiffs' allegations fai l to satisfy the requirements of Section 78u-4(b)(2), and, therefore, Count I of plaintiffs' Secon d Consolidated Amended Class Action Complaint must be dismissed. C. Section 20(a) Clai m Section 20(a) provides for secondary liability for persons who "control" others found to b e primarily liable under the Exchange Act. First Interstate Bank of Denver, N.A. v. Prins, 969 F.2d 891, 897 (101h Cir. 1992), rev'd on other grounds sub nom, Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994). Since the Court is dismissing the primary liability claim, this secondary liability claim must also be dismissed. D. Dismissal With Prejudic e This is plaintiffs' second attempt to state a claim under the federal securities laws. This latest attempt comes after the Court's March 4, 1999 Order, which thoroughly set forth what is require d to plead scienter under the PSLRA. In light of the fact plaintiffs are no closer to meeting th e PSLRA' s scienter pleading requirement in their Second Consolidated Amended Class Actio n Complaint, the Court finds any further attempts would be futile. Accordingly, the Court find s plaintiffs' Second Consolidated Amended Class Action Complaint should be dismissed with prejudice. III. CONCLUSION The "Fleming Defendants' Motion to Dismiss," filed May 24, 1999 [docket no. 125] i s 17

18 GRANTED. The Second Consolidated Amended Class Action Complaint, filed April 1, 1999, i s hereby DISMISSED with prejudice. IT IS SO ORDERED this day of February, 2000 a UNITED STATES. VICKI MILES-I ENTERED ON JUdGMENT DOCKET O N 18