USCA1 Opinion

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT
____________________

No. 97-1345

MIGUEL MALDONADO, ET AL.,

Plaintiffs - Appellants,

v.

RAMON DOMINGUEZ, ET AL.,

Defendants - Appellees.

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

[Hon. Jos

Antonio Fust , U.S. District Judge]

___________________

____________________

Before

Torruella, Chief Judge,

___________

Cyr, Senior Circuit Judge,

____________________

and DiClerico, Jr.,* District Judge.

______________

_____________________

Hilda Surillo-Pe a, with whom Jaime Sifre-Rodr guez, Luis A.

__________________
_____________________ _______
Mel ndez-Albizu
_______________

and S nchez-Betances & Sifre were on

_________________________

brief for

appellants.

Jorge P rez-D az, with whom Pietrantoni M ndez & Alvarez was
________________
____________________________
on brief for Dean Witter Reynolds, Inc.
Amanda Acevedo-Rhodes, with
_____________________

whom Luz Ivette Rivera

_________________

and Luz
___

Ivette Rivera & Asociados

____________________________

were on

brief

for

appellee Ram n

Dom nguez.

____________________

February 27, 1998

____________________
____________________

Of the District of New Hampshire, sitting by designation.

TORRUELLA,
TORRUELLA,

Chief Judge.
Chief Judge.

Plaintiffs

invested

in and

___________

became

directors

of

corporation

called

the

Puerto

Rico

International Bank ("PRIBANK"), which was designed to create huge

profits for its

investor-directors by leveraging its

with low

interest loans

in order

mortgage

obligations.

When

to

collateral

purchase higher

PRIBANK

failed,

the

interest

plaintiffs

brought this suit, claiming that the investment bankers marketing

the

PRIBANK

stock defrauded

them

by

failing to

mention

possibility

that PRIBANK's securities

would be "called"

event of an

interest rate adjustment.

The

suit

under sections

1933, 15 U.S.C.

12(2) and

77l,

17(a) of

77q, as

Securities Act of 1934, 15 U.S.C.

Securities

and

Exchange

the

in the

investors filed this

the Securities

well as section

Act of

10(b) of

the

78j, and Rule 10(b)(5) of the

Commission

("SEC")

promulgated

thereunder.

The district court

a motion to dismiss.

dismissed all of these claims on

We affirm.

BACKGROUND
BACKGROUND
__________

In addressing

well-pleaded facts as

a 12(b)(6)

true and accord the

of all reasonable inferences.

6 F.3d

836, 841 (1st

motion, we

must accept

all

plaintiff the benefit

See LeBlanc v. Great Am. Ins. Co.,

___ _______
__________________

Cir. 1993).

The following

recitation of

this case's background reflects this standard.

Plaintiffs

clients

Witter")

exclusive

of

Miguel

Dean Witter

--

Maldonado,

Reynolds,

received mailed

San Juan

club where

et

al.

Inc. of

invitations

they would

--

Puerto

to

important

Rico ("Dean

meeting at

be presented

an

with a

-2-

select investment opportunity.

Ram n

At the August

30, 1993 meeting,

Dom nguez, Senior Vice-President and Sales Manager of Dean

Witter, made a presentation regarding the formation of PRIBANK, a

new corporation.

and stated

limited

to

that

ten

million coming

He explained PRIBANK's investment

individual investors'

blocks of

from

$350,000,

himself and

philosophy,

participation

with

Antonio

would

an additional

Luis Rosado

--

be

$1.5

Vice

President

of

PRIBANK.

Santander

Each

corporation.

National Bank,

investor

would

According to

risk-free investment

and

become

Dom nguez, PRIBANK

which was projected

president-to-be of

director

was a

of

the

virtually

to return 176%

of the

investors' principal in only two years.

PRIBANK's

would use

strategy

$5 million

was

relatively simple.

of collateral to

open margin

almost $300 million with various brokerage houses.

be

permitted to leverage

itself through these

PRIBANK

accounts of

PRIBANK would

brokerage houses

for 60 times its capital because it had the credit of Dean Witter

to back it up and because funds provided to PRIBANK on its margin

accounts were not allowed to

risk

assets.

In

be used for the purchase of

other words,

PRIBANK

would be

seen

credit

by the

brokerage

houses as a safe

entity because its investments would

be low risk and its credit with Dean Witter was trusted.

The money in PRIBANK's margin accounts would be used to

purchase Real Estate Mortgage

Investment Conduits ("REMICs") and

Collateralized Mortgage Obligations

("CMOs"), effectively making

PRIBANK the lender for numerous home mortgages.

-3-

These REMICs and

CMOs would

pay interest to PRIBANK at a higher rate than PRIBANK

was required to

pay to the brokerage houses for the money in its

margin accounts.

The difference between

the low interest

PRIBANK would

paying and

interest rate

be

the higher

rate

PRIBANK

would be collecting -- the "spread" -- would be PRIBANK's profit.

Since PRIBANK was able to borrow approximately 60 times more than

its collateral, a spread of only 1 percent would have resulted in

huge profits for PRIBANK's investors.

A further

made it unique.

"floaters,"

property of

PRIBANK's investment

PRIBANK would only

structure

purchase investments called

which would be re-priced and adjusted for prevailing

interest rates

every thirty

days.

Every thirty days,

would collect interest on these investments.

carefully structure

its investments so

PRIBANK

PRIBANK planned to

that each month,

on the

same day that interest payments were due to the brokerage houses,

PRIBANK

would

also

collect

interest

on

its

investments.

Dom nguez labelled this as "matching."

This

financial

without
_______

would

give

PRIBANK

an

institutions which purchased

this perfect

matching.

Normal

advantage

over

normal

floating REMICS and CMOs

financial institutions

have mismatched inventories, and have to keep reserves on hand to

account

due.

for withdrawals and

The higher interest

to pay

obligations when

they come

rates these institutions make on their

loans barely make up for the potential interest lost on the money

sitting in their reserves at any given time.

perfect

matching, PRIBANK

would

not be

However, due to its

required

to keep

any

-4-

significant reserves on

hand, and could invest all

every month, enabling it to take

interest rates.

of its money

full advantage of the spread in

Therein lay the key to PRIBANK's philosophy, and

eventually to its downfall.

Dom nguez explained

money

based

upon the

that

interest

PRIBANK's goal

rate spread,

itself from any changes in interest rates.

and

was to

make

yet insulate

Whether rates went up

or down, the

spread would always remain.

What Dom nguez failed

to explain to the investors was that PRIBANK was not a risk-free,

or even a low-risk investment.

Instead, PRIBANK would be engaged

in highly leveraged margin trading, and, like any

PRIBANK's

investments could be subject

margin trader,

to "margin calls."

is, if interest rates went up, the value of REMICs and

That

CMOs (and

other loan obligations) would go down, and brokerage houses could

require investors

loss.

to put up

the paper

Margin calls do not necessarily occur on the same day that

investments are

PRIBANK's case --

adjusted and repriced

but can occur at

the investments falls.

having

more collateral to cover

PRIBANK,

-- at the 30-day

any time after the

mark in

value of

which was designed to profit by

no reserves, would not be able to cover any margin calls.

Therefore,

any significant hike in interest rates could bankrupt

PRIBANK, and its investors would lose their investments.

This significant risk was not disclosed to investors at

the August 30,

fluctuating

1993 meeting.

interest rates

profitability.

Instead, investors

would pose

no

were told that

threat to

PRIBANK's

The investors believed that Dom nguez and Rosado

-5-

had struck upon a scheme whereby they could make huge profits for

little or no risk.

5.5% share of

Rosado

They invested $350,000 each in exchange for a

PRIBANK and a

made commissions

seat on the

on this

$3.5

board.

Dom nguez

million of

and

investments.

PRIBANK began operations in January 1994.

On

February 4,

interest rates

by 1/4

1994,

point.

the Federal

Reserve

This increase

was the first

several increases which were to occur in future weeks.

houses soon

calls,

began to

PRIBANK was

make margin

required to

calls.

sell

increased

To

of

Brokerage

meet the

investments before

margin

their

agreed-upon settlement dates, resulting in significant penalties.

As one

margin call

called,

incurring

was being

and PRIBANK would

more

paid off, another

scramble to sell

penalties, and

draining

loan would

be

another investment,

PRIBANK's original

$5

million collateral.

In

the midst of

PRIBANK held a

this collapse, on

meeting of the board.

February 23, 1994,

At the meeting, Dom nguez

presented a picture of a smoothly-running operation, pointing out

promising investments that

PRIBANK was looking into

to mention the fact that PRIBANK was already

calls and sustaining

losses.

Soon

and failing

experiencing margin

after this meeting,

PRIBANK

lost its remaining assets and its stock became worthless.

The

present suit was brought before the District Court

of Puerto Rico under

(the "1933 Act"

1934,

15

U.S.C.

the Securities Act of 1933, 15

or "Securities Act"), and the

78

(the "1934

-6-

Act"

or

U.S.C.

77

Securities Act of

"Exchange

Act").

Plaintiffs allege that fraudulent

made

by Dom nguez

liability

on

dismissed all

and

the part

claims

Rosado,

of

and

Dean

on Rule

statements and omissions

further

Witter.

12(b)(6)

allege

The

motions.

were

vicarious

district

court

This

appeal

of claims.

First,

followed.

On appeal, plaintiffs make a number

they argue that, to the

extent that the district court converted

any

of

the

Rule

12(b)(6) motions

into

motions

for

summary

judgment under Rule 56(c),

plaintiffs received inadequate notice

and opportunity

evidence.

such

to submit

a conversion

actually occurred

At

issue is

and

both whether

whether a

conversion

would have been appropriate at that stage of the case.

Plaintiffs

finding that

section 17(a)

next claim that the district court erred in

there is no

of the

implied private cause of

1933 Act.

action under

Plaintiffs urge this

court to

recognize such a cause of action.

Plaintiffs further

erred in

concluding that

The character of

when,

contend

PRIBANK stock

the

district

was privately

PRIBANK's offering became material

shortly after this complaint was

decided Gustafson
_________

that

v. Alloyd Co., 513

___________

court

offered.

to the case

filed, the Supreme Court

U.S. 561, 577-78

(1995),

holding

that section

12(2)

of the

1933 Act

did not

apply to

private offerings.

Next, plaintiffs

10(b)

of the 1934

Exchange

Commission

argue that their claim

Act -- and

Rule 10b-5 of

promulgated

thereunder

under section

the Securities and

--

was pled

with

-7-

sufficient

particularity.

Specifically,

they

contest

the

district court's

ruling that they

had failed to

plead specific

facts which create a triable question on the issue of defendants'

"scienter."

-8-

Finally,

plaintiffs

abused its discretion in denying

an amended complaint

claim

that

the

district

court

their request for leave to file

after the district court

entered judgment.

The argument stems from the district court's issuance of a margin

order which indicated that this seemingly tardy request for leave

would be granted.

We address these arguments in turn.

ANALYSIS
ANALYSIS
________

I.
I.

Conversion of 12(b)(6) Motions

Conversion of 12(b)(6) Motions

Plaintiffs allege

converted the

for

summary

series of 12(b)(6)

judgment

Plaintiffs argue that

where

that the

pursuant

district court

motions at issue

to

Fed.

such a conversion is

R.

Civ.

improperly

into motions

P.

56(c).

necessarily improper

defendants have offered no materials outside the pleadings

and where the court has not given express notice of its intent to

convert the motions.

However,

that

the

As a matter of law, plaintiffs are correct.

a close reading

court

dismissed

of the district

these claims

court opinion reveals

based

solely

on

the

insufficiency of the pleadings, and we affirm on those grounds.

In Moody v. Town of Weymouth, 805 F.2d 30, 31 (1st Cir.

_____
________________

1986), we held that

when a district court fails

to give express

notice

to the

parties of

its intention

to convert

a 12(b)(6)

motion into a motion for summary judgment, there is no reversible

error if the party opposing the motion (1) has received materials

outside the pleadings,

them, and

(3) has

"exception" to the

(2) has had an opportunity

not controverted their

accuracy.

rule that the district court

-9-

to respond to

The Moody
_____

must notify the

parties of

an intent to

convert motions is limited,

and unless

the three factors listed above are present the exception does not

apply.

See Cooperativa de Ahorro y Cr dito Aguada

___ ________________________________________

Peabody & Co., 993 F.2d 269, 273 (1st

______________

12(b)(6) motion,

a district

extraneous

materials

opportunity

to respond to

motion).

In the present

pleading

with several

that this fact

motion

or

could

judgment.

Cir. 1993) (in deciding a

court normally

give

the

the conversion to

therefore fails.

notice

converted

into

56(c)

ignore

and

an

a summary judgment

case, the plaintiffs filed

documentary exhibits.

This argument

must either

parties

alone put plaintiffs on notice

be

v. Kidder,
_______

a detailed

Defendants

argue

that any 12(b)(6)

motion for

fundamentally misinterprets

summary

Moody and
_____

Plaintiffs

were therefore

surprised to find

district

court

converted

motions.

opinion,

the district

had

the

court used

language

that the

Throughout

consistent with

its

an

award of summary judgment, ruling that "Plaintiffs have failed to

adduce sufficient

evidence to create a material

However, an opinion's

plain

one

plain language does not

issue of fact."

always mirror its

logic, and while a quick perusal of the opinion might lead

to believe

standard

that the

district court

of decision, looking

had applied

past the terminology

the wrong

employed by

the court reveals an opinion illustrating the legal insufficiency

of the pleadings for

each claim in this suit.

See Garita Hotel

___ ____________

Ltd. Partnership v. Ponce Fed. Bank, F.S.B., 958 F.2d 15, 18 (1st
________________
_______________________

Cir. 1992)

(the determination

of whether

a district

court has

-10-

converted

mechanical").

12(b)(6)

motion

On that basis,

the district court's

rather

than

court, and we now examine each

rulings regarding the

the pleadings in this case.

II.

"functional

we affirm the standard of decision

actually employed by the district

of

is

Section 17(a) of the 1933 Act

insufficiency of

II.

Section 17(a) of the 1933 Act

The district

court dismissed

claims after concluding

one

that there was no

of the

plaintiffs'

implied private cause

of action under section 17(a) of the 1933 Act.

We agree.

Section 17 of the 1933 Act provides that:

It

shall be unlawful

for any person

in the

offer or sale of any securities by the use of

any means or instruments of transportation or
communication

in interstate

commerce or

by

theuse of the mails, directly or indirectly -

(1) to employ any device, scheme, or artifice

to defraud, or
(2) to obtain
any untrue
any

statement of

omission

necessary

money or property by

to

in order

state
to

means of

a material
a

fact or

material

make the

fact

statements

made, in the light of the circumstances under

which they were made, not misleading, or
(3) to engage in any transaction, practice or
course

of business

which operates

or would

operate

as

fraud

or

deceit

upon

the

purchaser.

15 U.S.C.

77(q).

Courts

and law enforcement agencies have the

authority to enforce section 17(a) of the 1933 Act via injunction

and criminal prosecution.

struggled with the question

of

action to

However, for years circuit courts have

of whether an implied

enforce section

17(a) also

Court has never answered the question.

-11-

exists.

private right

The Supreme

See Bateman Eichler, Hill

___ _____________________

Richards, Inc.
______________

v. Berner, 472 U.S.

______

today, neither had

this court.

299, 304 n.9

See Cleary
___ ______

(1985).

Until

v. Perfectune, Inc.,
________________

700 F.2d774, 779 (1stCir. 1983)(declining to reachthis question).

This issue has caused confusion

because, while neither

the language nor the history of section 17(a) clearly indicates a

congressional intent to

create a

private right

of action,

see
___

Newcome v. Esrey, 862 F.2d 1099, 1103-07 (4th Cir. 1988), section
_______
_____

10(b) of the

has always

action.

1934 Act -- with substantially

been interpreted

to provide for

See Herman & MacLean v.

___ __________________

(1983) (expressly interpreting

similar language --

a private

Huddleston,
__________

459 U.S.

right of

385-87

section 10(b)'s private right

of

action

as

consistent

purposes").

While

some

congressional intent

section 17(a), see

___

574-76

consider

with

to infer

when addressing

a private

intent

whether

"broad

remedial

not find

the

requisite

right

of action

is

the

private

primary

from

right

factor

of

found no meaningful distinction

and section 10(b).

1223, 1244-46 (7th

right of action

did

laws'

Touche Ross & Co. v. Redington, 442 U.S. 560,

_________________
_________

exists), other circuits

561 F.2d

courts

(1979) (legislative

section 17(a)

securities

Compare Daniel
_______ ______

to

action

between

v. Teamsters,
_________

Cir. 1977) (holding that

a private

exists), and SEC v. Texas Gulf Sulphur Co., 401

___ ___
_______________________

F.2d 833, 867 (2d Cir.

1968) (Friendly, J., concurring)

(same),

with Landry v. All Am. Assur. Co., 688 F.2d 381, 384-91 (5th Cir.
____ ______
__________________

1982)

(holding

that no

private

right of

action

Stephenson v. Calpine Conifers II, Ltd., 652 F.2d

__________
__________________________

exists), and
___

808, 815 (9th

Cir. 1981) (same).

-12-

However, in Aaron v. SEC,

_____
___

446 U.S. 680, 695-97 (1980),

the Supreme Court held that, unlike section 10(b) of the Exchange

Act, section 17(a)

of the Securities Act does

not require proof

of scienter.

Thus, while the implied cause of action under 10(b)

would expose only

the deceitful to private causes

implied cause of action

under 17(a) would impose

on merely negligent wrongdoers.

four years

such

as

earlier that

the one

under

extended to actions premised on

such liability

Furthermore, the Court had ruled

a judicially

implied

of action, an

created cause

section

of action,

10(b), could

negligent wrongdoing.

not

be

See Ernst
___ _____

& Ernst v. Hochfelder, 425 U.S. 185, 210 (1976).

_______
__________

Aaron
_____

and Ernst highlighted

_____

distinction between implying

two

sections.

While

the

for courts

a significant

private causes of action

10(b) implied

continued to enjoy unanimous recognition and

cause

under the

of action

has

the imprimatur of a

unanimous

has

Supreme Court in Huddleston, the 17(a) cause of action

__________

been held up

circuit to

private

circuits

to renewed scrutiny.

have addressed the

right

of

had

Stratton Corp., 962 F.2d 169,

______________

section

17(a),

held otherwise.

recognize a

including four

See
___

Finkel v.
______

174-75 (2d Cir. 1992) (noting that

Kirshner v. United States, 603 F.2d 234 (2d Cir.

________
_____________

overruled); Newcome
_______

years, every

issue has refused to

action under

which originally

In recent

v. Esrey, 862
_____

1988) (overruling Newman v. Prior,

______
_____

1978), had been

F.2d 1099, 1101-07

(4th Cir.

518 F.2d 97 (4th Cir. 1975));

Stephenson v. Paine Webber Jackson & Curtis, Inc., 839 F.2d 1095,
__________
___________________________________

1100 (5th Cir.); Schlifke v. Seafirst Corp., 866 F.2d 935, 942-43
________
______________

-13-

(7th Cir.

1989)(overruling Daniel
______

(7th Cir.

1977), rev'd on other grounds, 439 U.S.

_______________________

Deviries
________

v. Teamsters,
_________

v. Prudential-Bache Sec., Inc.,

___________________________

Cir. 1986); Puchall

_______

561 F.2d

551 (1979));

805 F.2d 326, 328 (8th

v. Houghton, Cluck, Coughlin & Riley (In re

__________________________________ _____

Washington Pub. Power Supply Sys. Sec. Litig.), 823

_______________________________________________

1350 (9th

1223

Cir. 1987) (overruling

Mosher v. Kane, 784

F.2d 1349,

F.2d 1385

______

(9th Cir.

F.2d

1986); Stephenson
__________

808, 815

(9th Cir.

Fenner & Smith, Inc.,

____________________

____

v. Calpine Conifers II, Ltd.,

__________________________

1981)); Zink
____

652

v. Merrill Lynch Pierce

_____________________

13 F.3d 330, 334 (10th

Cir. 1993); Currie

______

v. Cayman Resources Corp., 835 F.2d 780, 784-85 (11th Cir. 1988).
______________________

We now come to the same conclusion.

In determining

whether

action exists in a statute,

Touche Ross, 442

___________

an implied

1993).

In

right

of

we look to congressional intent, see

___

U.S. at 574-76, keeping in mind that there is a

strong presumption against such inferences.

Racecourse
__________

private

See Sterling Suffolk

___ ________________

v. Burrellville Racing, 989 F.2d 1266, 1268 (1st Cir.

___________________

this case,

we

do not

find sufficient

evidence of

congressional

intent

to

overcome

the

presumption.

As

the

district court observed, Congress explicitly provided for private

__________

causes of action

the

fact that

create

did not

in sections 11 and 12

other provisions

express remedies does

complex

not in itself

While

statutory scheme

prove that Congress

imply a private remedy in another section, see Cannon v.

___ ______

University of Chicago,
_____________________

explicit remedies

conduct

of a

of the 1933 Act.

441 U.S. 677, 690 n.13

in the same

and benefit

the

(1979), where the

statute address much of

same parties

-14-

as

a potential

the same

implied

private

cause of action, the circumstances militate against that

inference.

Furthermore, the legislative history of section 17(a)

does not, on the whole, favor an implied private right of action.

See
___

Newcome,
_______

examination

of

Therefore,

the

862

the

F.2d

at

1103-07

legislative

district court

(conducting

history

did

of

not err

an

this

in

in-depth

provision).

dismissing the

plaintiffs' claim under section 17(a) of the 1933 Act.

III.
III.

Section 12(2) of the 1933 Act

Section 12(2) of the 1933 Act

Plaintiffs

also brought

suit under

section

12(2) of

the

Securities Act.

This provision establishes civil

any

uses

person

who

fraudulent

means

to

liability for

sell a

security.1

____________________

According to 15 U.S.C.

Any

person

security .

77l(a)(2):

who
. .

. .

offers

by the use

instruments

of

or

of any

means or

transportation

communication

in interstate

the mails, by

means of a prospectus

communication,
statement

of a

which

make

the

an

fact

the

of

or oral
untrue

or omits

fact necessary in

statements, in

or

commerce or

includes

material

state a material

sells a

to

order to

light

of the

circumstances under which they were made, not

misleading (the purchaser not knowing of such
untruth

or

omission),

sustain the burden

know, and in the
could

not

and

who

shall

of proof that he

not

did not

exercise of reasonable care

have known,

of

such untruth

or

omission, shall be liable . . . to the person

purchasing

such security

from him,

sue either

at law or in equity

who may

in any court

of

competent

consideration
interest

jurisdiction, to
paid

thereon,

for such
upon the

recover
security

tender

the
with

of such

security, or for damages if he no longer owns

the security.

-15-

However, after the complaint was

filed in this case, the Supreme

Court conclusively decided that section 12(2) applies exclusively

to "initial public offerings."

U.S. 561,

577-78 (1995).

pleadings

established

See Gustafson v. Alloyd Co., 513

___ _________
__________

The district

that

PRIBANK

stock

had

privately, dismissed
_________

the 12(2)

ruling, arguing that

their pleadings did not admit

stock was

placed privately.

claim.

court, ruling

that the

been

Plaintiffs appeal

Since Gustafson was

_________

received

permission

to

amend

their

this

that PRIBANK

decided after

their complaint was filed, the plaintiffs argue that they

have

placed

complaint,

should

which

currently fails to explicitly address whether PRIBANK's stock was

placed

privately or publicly.

court to decide is whether

Therefore, the question for this

the pleadings, in their current form,

establish that PRIBANK's stock was placed privately.

A placement of

stock is private if it

is offered only

to

a few sophisticated

with the issuer,

that

purchasers who each

enabling them to command

would otherwise be

contained in a

have a relationship

access to information

registration statement.

See Cook v. Avien, Inc., 573 F.2d 685, 691 (1st Cir. 1978).
___ ____
___________

determination

relegated to

of whether

an offer

a simple numerical test."

Enters, Inc., 873

_____________

Ralston Purina Co.,

__________________

F.2d

1094

public has

See Van Dyke

___ ________

(8th Cir.

1989)

346 U.S. 119, 125 (1953)).

are required to weigh the facts

whether the

is not

offerees need

"The

not been

v. Coburn
______

(citing SEC
___

v.

Instead, courts

of each case carefully to assess

to be protected

See Ralston Purina, 346 U.S. at 127.

___ ______________

-16-

under the

1933 Act.

In

this case,

Witter clients.

past

for each

passively

twelve invitations

of them.

to invest

interest in

directors.

sent to

Dean

Dom nguez had personally managed accounts in the

in an

starting a new corporation.

5.5%

were

The plaintiffs

existing entity,

merely asked

but to

partner in

Each shareholder of PRIBANK bought a

the corporation

The board

were not

and

was to meet each

a seat

on the

board of

month, and according

to

PRIBANK's by-laws

the board

of directors

had full

control and

direction of the corporation's affairs and business.

Section

who would

securities.

12(2) of the 1933 Act protects those investors

otherwise be

powerless against

the corporation's

and have access to all documents

formation

cannot bring suit under section 12(2)

for the reasons

and investments,

others

claimed in this suit.

within

new

they

when the corporation fails

Let us be clear.

not mean to suggest that a director has no remedy when

by

of

When a select group of investors are asked to become

directors of a new corporation,

relevant to

fraudulent offers

corporation,

but

only

We do

defrauded

that,

under

Gustafson, section 12(2) of the 1933 Act is not available to this

_________

class of claimants.

Under these circumstances, there was no need

to

amend

allow

leave to

the

pleadings

on

this issue.

We

therefore affirm

the district

court's dismissal

of this

claim

under Rule 12(b)(6).2

____________________

Plaintiffs maintain that Dom nguez' statements could

form the

basis of section 12(2) claims in spite of the fact that

they did

not appear in

the prospectus, because section 12(2) applies more

broadly to initial

public offerings which are

exempted from SEC

registration -- in this case due to the "intrastate" character of

-17-

IV.
IV.

Section 10(b) of the 1934 Act (SEC Rule 10b-5)

Section 10(b) of the 1934 Act (SEC Rule 10b-5)

Plaintiffs

also seek relief under section 10(b) of the

Exchange Act, 15 U.S.C.

thereunder, 17

directly

C.F.R.

240.10b-5, which

or sale

Four, Inc., 93 F.3d

__________

section

sufficient

person,

of securities.

See id.;
___ ___

987, 992 (1st Cir.

1996).3

Unlike

section

plaintiffs

plead

-- with

Civ. P.

9(b) --

10(b)

requires that

particularity to

mental state embracing

defraud."

Gross v.
_____

withstand Fed. R.

that defendants acted with "scienter."

as "a

prohibit any

or indirectly, from committing fraud in connection with

the purchase

17(a),

78j(b), and SEC Rule 10b-5 promulgated

See Ernst, 425 U.S.

___ _____

Scienter has been defined

intent to deceive,

at 193 n.12.

that Dom nguez and Rosado understood

Summa
_____

manipulate, or

Plaintiffs allege

and concealed the risks

of

margin calls on the PRIBANK investments.

This circuit has

been clear and consistent

in holding

____________________

PRIBANK's

offering.

By concluding

that

PRIBANK's

placed privately, we need not reach this issue.

Under section 10(b) of the 1934 Act:

It shall be unlawful for any person, directly

or indirectly,

by the

use of

instrumentality of interstate

any means

or

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
on

sale of any

national

security not so
or

deceptive

contravention of

security registered

securities

exchange or

registered, any manipulative

device

or

such rules

contrivance

or appropriate in the public

the protection of investors.

78j.

in

and regulations

as the Commission may prescribe as

15 U.S.C.

any

necessary

interest or for

stock was

-18-

that, under section

giving rise

10(b), plaintiffs must plead

to a "strong

inference" of fraudulent intent.

Greenstone v.
__________

Cambex Corp.,
____________

975 F.2d 22,

"Courts

have

uniformly held

inadequate

averment

of

the

specific facts

defendant's

unless the complaint also sets

'knowledge'

25 (1st

See
___

Cir. 1992).4

complaint's general

of material

falsity

forth specific facts that make it

reasonable

to believe that

false or misleading."

Id.
___

defendant knew that

a statement was

Applying this standard to plaintiffs'

complaint, the district court dismissed the claim for failure

to

plead scienter with sufficient particularity.5

"This court has been 'especially

Rule 9(b)

that a

in securities

plaintiff with

fraud actions

rigorous' in applying

'to minimize the

a largely groundless

claim will

chance

bring a

suit and conduct extensive discovery in the hopes of obtaining an

increased settlement, rather than

in the hopes that

will reveal relevant

Shaw v. Digital Equip. Corp.,

____
_____________________

82 F.3d 1194,

evidence.'"

1223 (1st Cir. 1996) (quoting

the process

Romani v. Shearson,
______
_________

____________________

Even

if plaintiffs wish to prove

scienter by "recklessness,"

they

still

must

allege,

defendants had full

with

sufficient particularity,

knowledge of the dangers of

that

their course of

action and chose not to disclose those dangers to investors.

See
___

Cook, 573 F.2d at 692.

____

In

December

lawsuits,"

1995,

citing

Congress enacted

"abuse

the

in

private

securities

Private Securities

Litigation

Reform Act of 1995 (the "Reform Act").

15 U.S.C.

Supp.

1995).

This

Act

implemented

78u-4 (1988 &

"heightened"

pleading

standard under federal securities law which requires that factual

allegations
strong

be

of sufficient

inference that

state of mind.

particularity to

the defendant

15 U.S.C.

78u-4(b)(1).

does not

retroactively apply to

the

standard to

new

historically applied.

acted

differ

with the

that

requisite

not interpret

which this

See Greenstone, 975 F.2d at 22.

___ __________

-19-

to a

Although the Reform Act

this case, we do

from

give rise

court

has

Lehman, Hutton,
______________

examining

allegations

standard.

929 F.2d 875, 878 (1st Cir. 1991)).

complaint

of

While

fraud, we

for

are

the

requisite

required

to

apply

in

delicate

also cannot expect plaintiffs to

"fraud with complete insight" before discovery

1225.

particularity

Fed. R. Civ. P. 9(b) proscribes the pleading of

"fraud by hindsight," we

at

However, in

We therefore look carefully

is complete.

plead

Id.
___

for specific allegations

of fact giving rise to a "strong inference" of fraudulent intent,

see Greenstone, 975 F.2d at 25, keeping in mind that the pleading
___ __________

of scienter

"may not rest on

a bare inference that

a defendant

'must have

had' knowledge of

the facts."

Id.
___

at 26

(quoting

Barker v. Henderson, Franklin, Starnes & Holt, 797 F.2d 490, 497
______
____________________________________

(7th Cir. 1986)).6

The

plaintiffs' brief argues that Dom nguez and Rosado

____________________

Plaintiffs

whether

urge this court to

scienter

According

to

opportunity"

has

been

plaintiffs,

adopt a new means

properly

the

pled

Second

test properly screens

in

10(b)

Circuit's

General Elec. Co., 101

__________________

out those claims

F.3d 263,

claims.

"motive

the requisite specificity to proceed with discovery.

Chill v.
_____

for testing

267 (2d

and

which lack
See,
___

e.g.,
____

Cir. 1996)

(determining whether defendants had the motive and opportunity to

commit fraud); Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124,

_______
________________________
1128 (2d. Cir.

1994) (same).

compatible with this

It is unclear whether this test is

circuit's "especially rigorous" application

of Rule 9(b) in the securities fraud

court

has

analyzing

had

the

opportunity

the sufficiency of

to

context.
develop

In any case, this

a

pleadings in cases

framework

for

similar to the

present one, and we respectfully decline the invitation to review

or adopt

Second Circuit case

law on this

issue.

Cf.
___

Bruce G.

Vanyo, Lloyd Winawer & David Priebe, The Pleading Standard of the
____________________________

Private Securities Litigation Reform Act of 1995, PLI Corp. Law &
________________________________________________
Practice

Course Handbook Series, Sept. 1997, 71-81, available in

Westlaw

at 1015 PLI/Corp. 71 (chronicling how Congress expressly

rejected the Second

pleading scienter in

Circuit's "motive and opportunity"

the Reform Act because

test for

it was incompatible

with the Act's heightened pleading requirements).

-20-

were "persons highly knowledgeable and with much expertise in the

field

of securities

PRIBANK."

and

investments of

REPO transaction

on behalf

of PRIBANK, and

represented

Given

According to the complaint,

both Dom nguez and Rosado were vice-presidents of large

financial institutions, "neither

those

purchased by

However, the complaint dismissed by the district court

paints a somewhat different picture.

although

the type

10(b)'s

characterizing

them had

of any bank

had no

to plaintiffs

one of

requirement

with assets

manner to

and the

of

other

engaged in

assure that

similar to

what they

investors was

pleading

of

true."

scienter,
________

the defendants as irresponsible or "in over their

heads" does not further the plaintiffs' cause.

The complaint is also replete with allegations based on

"information and

the

risk

belief" that Dom nguez and Rosado were aware of

of margin

calls.

However, "information

and belief"

alone is insufficient to meet 9(b)'s particularity requirement in

this context.

See Romani v. Shearson, Lehman, Hutton, 929 F.2d

___ ______
_________________________

875, 878 (1st Cir. 1991).

When we examine these pleadings carefully, we find that

there are no specific allegations

fraudulent

intent.

At most,

of fact which strongly imply a

complaint

contains general

inferences that Dom nguez and Rosado "must have

known" about the

risks of margin calls and

on

PRIBANK.

the devastating effect they could have

Unfortunately

precisely the types

the

for

the

plaintiffs,

of inferences which this court,

these

are

on numerous

occasions, has determined to be inadequate to withstand Rule 9(b)

-21-

scrutiny.

See Shaw, 82
___ ____

F.3d at 1123; Serabian v.

________

Amoskeag Bank
_____________

Shares, 24 F.3d 357, 367 (1st Cir. 1994); Greenstone, 975 F.2d at
______
__________

26; Romani, 929 F.2d at 878.7

______

V.
V.

Leave to Amend the Complaint

Leave to Amend the Complaint

After the district court's opinion issued in this case,

the plaintiffs filed

The

court

denied

a motion for leave to

this

motion.

However,

amend the pleadings.

before

ruling

on

defendants' motions to

perplexing margin

According to

order, any

resolved all

had issued a

briefing schedule.

motion requesting

and amended pleadings

the court

meaning

order amending this case's

the margin

amend pleadings

after

dismiss, the district court

could be

leave to

filed ten

"pending pleadings."

days

While the

of the phrase "pending pleadings" is unclear, plaintiffs

argue that the phrase referred to the pending motions to dismiss,

and

that the

denial of

their subsequent

request for

leave to

amend was therefore an abuse of discretion.8

____________________

The

complaint contains additional allegations

and Rosado knew that PRIBANK

that they presented
board

meeting.

was disintegrating at the same time

a rosy picture to investors

However,

these

occurring well after the original

therefore
action.

immaterial for

that Dom nguez

the

at the February

allegations involve

activity

sale of PRIBANK stock, and are

purposes of

this 10(b)

cause of

See Gross, 93 F.3d at 993 (citing Shaw, 82 F.3d at 1222,

___ _____

____

for the proposition

that allegations of conduct

sale or exchange at

issue in 10(b) claim are irrelevant).

if the allegations
had discovered

are true, the fact that

PRIBANK's fatal

occurring after

Even

Dom nguez and Rosado

flaw before

the February

board

meeting is not probative of any attempt to defraud the plaintiffs

months earlier.

We note

term

that a motion to dismiss

is defined in

Fed. R. Civ.

does not promise to grant

_____

is not a "pleading" as

P. 7.

the

Furthermore, the order

any motions filed after the resolution

of "pending pleadings," but instead states that such requests and

pleadings may be filed.
_____

Nonetheless, we believe that plaintiffs'

-22-

Looking

uncertainty

at the

about its

granted via margin

order

itself

interpretation.

order was five

does

The

pages long.

not

resolve

motion

It

our

that

was

was entitled

"Plaintiffs' Objections and Proposed Changes to Scheduling Order"

and

of

generally consisted of very ordinary requests for extensions

time.

Buried

paragraph containing

above,

which could

unconventional

granted the

on

the

third

the vague

and

be interpreted

scheduling change.

motion, he did so

page, however,

was

confusing language

as

a request

for a

short

sampled

highly

When the district court judge

by writing "granted" in

the left

margin of the first page, as is customary in district courts.

is entirely

possible that the

and arguably

improper request

judge was unaware of

that he

It

the unusual

was supposedly

granting

along

with

the

standard extensions

contained

in

the motion.

However, while the motion filed by the plaintiffs was unclear, it

could not be fairly characterized

to reconsider this

as deceptive.

margin order was filed,

Since no motion

and no clarification

or amendment to the order issued from the court, we must give the

order its reasonable construction.

This

propriety, and

court

is

asked

effect of the

interpretation of

to

determine

margin order.

the motion,

two bedrock

procedure may conflict in this case.

the

Depending

meaning,

upon the

principles of

civil

On the one hand, a district

court cannot allow an amended pleading where a final judgment has

____________________

interpretation
complaint

of the

after the

implausible.

order as
case

has been

blank check
dismissed

to rewrite
is not

the

entirely

-23-

been rendered unless that judgment

pursuant to Fed.

is first set aside or vacated

R. Civ. P. 59 or 60.

Hern ndez, 22 F.3d 384, 389 (1st Cir.

_________

the

district

court's

scheduling

See Acevedo-Villalobos v.
___ __________________

1994).

order

On the other hand,

purportedly

allowed

plaintiffs just such a luxury, and, if it did, they were entitled

to rely on that

order.

See Berkovitz v. Home

Box Office, Inc.,

___ _________

89

F.3d 24,

29-30 (1st

procedural route, lawyers

it.").

Cir. 1996)

______________________

("[W]hen a

court

and litigants are entitled

charts a

to rely on

-24-

Under these

circumstances, we are keenly interested in

the district court's interpretation of its own order.

we cannot

hope to understand

briefing schedule

case.

There

conferences

plaintiffs

which

have

clarified

never raised this

to

dismissal

of its

promised

completely as

may well

for leave

margin

as

amend was

order or

a leave

the nuances of a

the judge

amend.

before the district court

who managed

made in

the

Unfortunately,

order.

issue below.

it

its motion

This failure

the

scheduling

the

Plaintiffs' request

to reconsider

contained no

plaintiffs' understanding

to

district court's

been comments

part of

claims, and

On review,

the

mention of

the

they had

been

that

to raise

is fatal to the claim on

the issue

appeal.

See
___

Villafa e-Neriz
_______________

We must

v. F.D.I.C., 75
________

be especially vigilant

F.3d 727, 734

(1st Cir. 1996).

in applying this rule

dispute involves an understanding reached by

where the

the parties and the

district court during the pre-trial stages of a case.

In any case, we need not remand this case to allow

a revision of the complaint because

the plaintiffs would be futile.

(1962)

would be

(leave to

amend

amendments

proposed by

See Foman v. Davis, 371 U.S. 178

___ _____
_____

shall not

be granted

where amendments

futile); Resolution Trust Corp. v. Gold, 30

_______________________
____

253 (1st Cir. 1994) (same).

and

the

again before

allegations

complaint, producing

they

F.3d 251,

In their request for leave to amend,

this court,

which

for

would

plaintiffs allude to

incorporate

into

detailed documentary evidence

the factual

an

amended

for support.

Nonetheless, a careful review of this material reveals that these

-25-

amended claims would be destined for dismissal.

There exists no

17(a) of the

apply

to

the

1933 Act,

private right of action

and section

issuance of

presented by this case.

12(2) of the

securities

under

under section

Act does

not

the circumstances

See supra Sections II & III.

___ _____

No further

factual

the

allegations can save

10(b) action

these claims.

could survive

dismissal

Furthermore, while

if plaintiffs

could

provide more specific allegations of

fact which strongly imply a

fraudulent

Dom nguez and

intent on

the

part

of

Rosado,

proposed amendments to the complaint would not do so.

provide an expert's

affidavit concluding

have

likelihood

known

subject

of the

to margin calls,

would have on PRIBANK.

that their

and the

Yet,

Plaintiffs

that defendants

securities

devastating effect

the

would

would be

that this

as we have stated, the pleading

of

scienter "may not rest on a bare inference that a defendant 'must

have had' knowledge

of the facts."

(quoting Barker, 797 F.2d at 497).9

______

Greenstone, 975 F.2d at

__________

26

We conclude that the amended

10(b) claim would not have passed 9(b) scrutiny.10

____________________

Furthermore,

this affidavit,

documentary evidence

in support

amend, indicates that

and a half million

along

with plaintiffs'

of their request

other

for leave

to

Dom nguez and Rosado invested and lost one

dollars of their own money in

__________________

PRIBANK, which

undermines any inference of scienter.

10

Plaintiffs also argue

amend their complaint

dismiss.

that they filed requests for

prior to the resolution of

_____

leave to

the motions to

We find that these "motions" were never actually filed.

Instead, the plaintiffs, in other filings, merely mentioned that,

at some point,

they would seek leave

not sought until after the case was

issue is mooted by our

to amend.
dismissed.

That

leave was

In any case, the

finding that amending the complaint would

be futile.

-26-

CONCLUSION
CONCLUSION
__________

For

the reasons stated in this

judgment of the district court.

opinion, we affirm the

affirm
______

-27-