are not specifically identified, plaintiffs do specifically allege that the identity of the contracts Newbridge was unable to ship is "particularly within defendants' knowledge." Id. P 69. Moreover, it appears from the Amended Complaint that plaintiffs base their allegation with respect to shipment delays on a statement by Kenneth Wigglesworth, Newbridge's Vice-President of Finance, after the August 1, 1994 announcement of decreased earnings, that Newbridge "was unable to fill some shipments because inventories of certain parts were not available." Id. Although it is a close question, plaintiffs satisfy the Kowal standard with respect to allegations about undisclosed delays in shipping contracts because of inadequate inventory.
However, plaintiffs do not offer any "statement of the facts upon which the allegations are based" with respect to allegations about the inability of "several large and important customers . . . to secure financing" for purchases. Id. P 5. Plaintiffs allege that "Newbridge was unable to obtain financing guarantees from third-party banks that were necessary to ship the Company's product to those companies." Id. P 69. Those companies and banks are not identified, and plaintiffs do not satisfy the Kowal standard for pleadings on information and belief. This strict pleading standard under Rule 9(b) is intended to "'prevent the filing of a complaint as a pretext for the discover, of unknown wrongs.'" Kowal, 16 F.3d at 1279 n.3 (quoting Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir. 1993) (citation omitted)). Thus, plaintiffs' argument that their inability to be more specific in their allegations should be excused at this pre-discovery stage of the litigation does not take into account the Court of Appeals' justification for a strict pleading standard under Rule 9(b), that is, to avoid "the discovery of unknown wrongs." Plaintiffs must in order to satisfy Rule 9(b), either allege additional facts or allege that such facts are within defendants' control and provide a statement of facts on which the allegations are based.
Many other allegations raise similar problems under Rule 9(b). For example, plaintiffs allege that sales in Newbridge's T-1 multiplexer product line were flat or declining, in contrast with prior reporting periods, but fail to allege any additional information about the degree to which such sales were flat or declining, or the relevant time period. Similarly, plaintiffs allege that defendants did not disclose various sharply increased expenses. See Amended Compl. P 69. Plaintiffs provide no additional information with respect to the degree to which expenses increased or when they increased, or the information on which these allegations are based. Moreover, plaintiffs' allegation that the July 12, 1994 newspaper article should have disclosed "adverse business conditions" is clearly insufficient under Rule 9(b). Our Court of Appeals rejected a similarly vague allegation in Kowal, holding that the complaint "lacked any factual specificity to support the proposition that customers were switching . . .' and plaintiffs' pleadings on information and belief did not aver facts regarding customer switching were particularly within the defendants' knowledge, or identify the facts upon which their belief of customer switching was founded." Kowal, 16 F.3d at 1279. Thus, defendants' motion to dismiss must be granted with respect to allegations about defendants' failure to disclose difficulties with financing flat or declining sales, increased expenses and other "adverse business conditions."
Plaintiffs' allegations, if stated with particularity, would state a claim of securities fraud, despite defendants' argument to the contrary. Thus, this Court will grant leave to amend, as requested by plaintiffs. Where information necessary to support an allegation is particularly within defendants' knowledge, plaintiffs must so state and identify, the facts upon which the allegation is founded, as required by Kowal.
Finally, defendants argue that plaintiffs' allegations with respect to individual defendants' insider trading and, relatedly, defendants' scienter are inadequate under Rule 9(b). Plaintiffs make much of the allegation that several of the individual defendants sold significant percentages of their stock holdings during the relevant period, thereby taking advantage of the allegedly inflated share price. According to plaintiffs, a duty to disclose arises when corporate executives sell their stock while in possession of non-public information. See Pls.' Opp'n at 20 (citing Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26 (1st Cir. 1987)). As this Court has already determined that plaintiffs' allegations, if adequately pleaded, state a claim for securities fraud, it is unnecessary to resolve the parties' dispute over whether insider trading creates an additional duty to disclose material information. However, plaintiffs also argue that evidence of insider trading supports an inference of scienter. See Pls.' Opp'n at 20 n. 5 (citing In re Apple Computer Sec. Litig., 886 F.2d 1109 (9th Cir. 1989), cert. denied, 496 U.S. 943 (1990)). Defendants concede that intent and knowledge may be averred generally under Rule 9(b), but argue that "a securities fraud plaintiff must also allege the circumstances of that knowledge to satisfy the scienter requirements of federal law. . . . 'This means the who, what, where, and how . . . .'" Defs.' Reply at 23-24 n. 12 (citation omitted). Insofar as some of plaintiffs' allegations are inadequate under Rule 9(b), scienter has been inadequately alleged. However, "insider trading in suspicious amounts or at suspicious times is, of course, presumptively probative of bad faith and scienter." Rubinstein v. Collins, 20 F.3d 160, 169 (5th Cir. 1994). Despite defendants' argument to the contrary, plaintiffs have adequately pleaded insider trading so as to support an inference of scienter. See Amended Compl. PP 51, 60.
Defendants argue that the amended complaint fails to state a claim of "controlling person" liability under § 20(a) against the individual defendants. Section 20(a) provides that "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 is . . . liable." 15 U.S.C. § 78t(a). "Control" is defined as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. § 240.12b-2. The amended complaint states that the individual defendants controlled Newbridge "by reason of their stock ownership or other financial interests, their business relationships and their status as members of Newbridge's management and/or Board." Amended Compl. P 21. Defendants argue that these general allegations of the individual defendants' positions are insufficient to plead actual control. See Mot. to Dismiss at 48 (citing In re Cryomedical Sciences, Inc. Sec. Litig., 884 F. Supp. 1001, 1020 (D. Md. 1995)). Defendants also argue that plaintiffs' failure to specify how much stock the individual defendants actually owned is fatal to the claim. See id. (citing Martin v. EVP Second Corp., 1991 U.S. Dist. LEXIS 9234,  Fed. Sec. L. Rep. (CCH) P 96,115 at 90,646 (S.D.N.Y. 1991); Ballan v. Wilfred Am. Educ. Corp., 720 F. Supp. 241, 254 (E.D.N.Y. 1989)).
The amended complaint alleges that on April 1, 1994, defendant Sommerer sold 70,000 shares, which was more than half of his common shares. Amended Compl. P 51. Defendant Charbonneau sold all of his 98,850 common shares during two sales in April 1994. Id. Plaintiffs therefore effectively provide information as to how much stock these two defendants owned during the Class Period. In addition, defendants Matthews, Sommerer, and Charbonneau each signed Newbridge's July 1, 1994 Form 10-K. Id. P 57. Thus, "each moving defendant signed at least one of the SEC filings in which false and misleading statements were made. . . . This is sufficient, at least at the pleading stage, to create an inference that they had at least a modicum of control over the content of these documents." In re the Leslie Fay Cos., Inc. Sec. Litig., 835 F. Supp. 167, 1993 WL 438927, *5 & n. 11 (S.D.N.Y. 1993). Furthermore, at least one press release specifically quoted defendant Sommerer, and another quoted defendant Matthews. See Amended Compl. PP 52, 54. These allegations "would seem to tie [the individual defendants] to the fraud itself." Cammer v. Bloom, 711 F. Supp. 1264, 1295 (D.N.J. 1989), appeal dismissed, 993 F.2d 875 (3d Cir. 1993). Plaintiffs adequately allege that the fraud was perpetrated through group-published statements, such as press releases which presumptively reflect the collective actions of Newbridge's directors and officers. See Blake v. Dierdorff, 856 F.2d 1365, 1369 (9th Cir. 1988). Finally, "substantial weight must be given to the authority, or rather the potential authority, inherent in [defendants'] positions, considered separately or in concert." In re Meridian Sec. Litig., 772 F. Supp. 223, 228 (E.D. Pa. 1991). It would therefore be premature to dismiss plaintiffs' claims against the individual defendants under § 20 at this early stage of the litigation, at least with respect to the few allegations that have not been dismissed under Rule 9(b).
Defendants argue that the amended complaint fails to state a claim of common-law negligent misrepresentation. Plaintiffs do not specify which state's (or states') common law is at issue. However, as one court has observed, "authorities are divided on whether plaintiffs making common law fraud claims may employ a fraud on the market theory." Wells v. HBO & Co., 813 F. Supp. 1561, 1569 (N.D. Ga. 1992) (citing cases). Many jurisdictions require a plaintiff to plead individual reliance with respect to each alleged misrepresentation. See, e.g., id. at 1569-70; Good v. Zenith Electronics Corp., 751 F. Supp. 1320, 1323 (N.D. Ill. 1990); Deutschman v. Beneficial Corp., 132 F.R.D. 359, 379 (D. Del. 1990). It would be inappropriate to resolve the reliance question as to each state whose law might be implicated in this class action, particularly where plaintiffs have not specified any particular state law that governs this case. Nor is a "fraud on the market" theory or a presumption of reliance applicable to this common-law context. Plaintiffs must present individualized, specific allegations of reliance by each plaintiff, and they have not done so in their amended complaint.
Plaintiffs argue that if actual individual reliance must be alleged the issue should be held "in abeyance for separate trials, following the determination on liability," or plaintiffs should be permitted to "submit appropriate information demonstrating their actual reliance." Pls.' Opp'n at 47. However, defendants correctly argue in their opposition to plaintiffs' motion for class certification that plaintiffs' common-law claims do not lend themselves to class action treatment because of the potential choice-of-law problems that would make a class action unwieldy. See J/H Real Estate Inc. v. Tulino, 1996 U.S. Dist. LEXIS 1546, 1996 WL 63712, *7 (E.D. Pa. Feb. 9, 1996). Accordingly, an accompanying Order will grant defendants' motion to dismiss plaintiffs' common-law negligent misrepresentation claims.
Plaintiffs ask that this action be certified on behalf of all persons who purchased the common stock of Newbridge between March 29, 1994, and August 1, 1994, and suffered damage. Defendant Newbridge argues that class certification would be inappropriate because there are insufficient facts to support certification and the proposed class is overbroad.
Rule 23(a) provides:
One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.