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Cosmas v. Hassett

decided: September 12, 1989.

NICHOLAS COSMAS, PLAINTIFF-APPELLANT,
v.
JAMES P. HASSETT, GERARD V. CAREY, JAMES M. COOKE, BENJAMIN S. DEYOUNG, LAWRENCE R. MILES, C. BRUCE NEWBERRY, THOMAS W. RUSSELL, JR. AND NORMAN S. SHERWOOD, DEFENDANTS-APPELLEES



Appeal from an order of the United States District Court for the Southern District of New York (Walker, Judge), which dismissed the amended complaint for failure to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b). Vacated and remanded.

Kearse, Cardamone and Pierce, Circuit Judges.

Author: Pierce

PIERCE, Circuit Judge

Nicholas Cosmas appeals from an order of the United States District Court for the Southern District of New York, Judge John Walker, Jr., which dismissed Cosmas' amended complaint for failure to satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b). We believe that the amended complaint did satisfy the requirements of Rule 9(b). Therefore, we vacate the order of the district court and remand to the district court for further proceedings consistent with this opinion.

BACKGROUND

In a complaint dated March 5, 1987, Cosmas, the plaintiff, alleged that he purchased securities of Inflight Services, Inc. ("Inflight"). He further alleged that the eight named defendants were directors of Inflight, and that these defendants defrauded him and other purchasers of Inflight securities in violation of both statutory and common law. In an order dated November 17, 1987, the district judge dismissed Cosmas' complaint for failure to plead fraud with particularity as required by Rule 9(b), but granted Cosmas leave to amend the complaint.

Cosmas filed an amended complaint dated December 7, 1987. Count One of the amended complaint charges the defendants with violating Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated under that Act, 17 C.F.R. § 240.10b-5. Count One sets forth the following allegations:

In 1985, Inflight was principally engaged in the business of providing projection and video equipment and services in three markets: the airline industry, the marine market and the "institutional" market. (para. 14). Through March 31, 1985, Inflight, as part of its institutional market, had customers in the People's Republic of China ("the PRC"). (para. 15). Between April 1, 1985 and June 30, 1985, the PRC imposed significant import restrictions which restricted Inflight's sales to customers in the PRC. (para. 26).

In Inflight's 10K form for the fiscal year which ended June 30, 1985 ("the 1985 10K"), which Inflight filed with the Securities and Exchange Commission on or about October 1, 1985, (para. 16), Inflight stated that the revenue increase at Inflight from fiscal 1984 to fiscal 1985 was "primarily the contribution of increased sales in the institutional market," (para. 17). The 1985 10K reported that as of September 1, 1985, purchase orders for the future delivery of institutional projection equipment had an estimated value of $6 million and that this backlog of orders was expected to generate at least $5 million in revenue in the 1986 fiscal year. (para. 20).

On or about August 26, 1985, an article appeared in Forbes magazine which reported on an interview with one of the defendants, Lawrence R. Miles, who was then the chief executive officer of Inflight. The article stated that "[sales] to the People's Republic of China . . . are also an important new source of revenue" for Inflight. (para. 18). According to the amended complaint, Inflight had approached Forbes to write the article, and provided Forbes with the information which the article contained. (para. 35).

Inflight's 1985 Annual Report to Shareholders ("1985 Annual Report"), which was issued on or after October 15, 1985, asserted that the "profitability from Inflight's revenues continues to improve as revenues from institutional sales increase." (para. 21). Defendant Miles signed the 1985 Annual Report and the 1985 10K, and, according to the amended complaint, the other defendants read these documents before they were issued. (para. 36).

In the 1985 fiscal year, Inflight earned $2.76 million, or $.95 per share, the highest earnings the company had ever attained. (para. 22). In a press release issued on or about October 15, 1985, Inflight announced that it expected its per share earnings for the fiscal year ending June 30, 1986 to be between $.90 and $1.15. (para. 23). In a press release issued on or about November 8, 1985, Inflight repeated its earlier prediction for the per share earnings for fiscal 1986. (para. 24). Inflight repeated this prediction yet again at its annual shareholder meeting which was held on or about February 11, 1986. (para. 25).

Thereafter, on or about May 9, 1986, Inflight announced a "write down" of $2.5 million worth of inventory. (para. 27). In its 1986 10K form ("1986 10K"), Inflight stated that the cause of the write down of inventory was the cancellation of anticipated sales to customers in the PRC due to the PRC's import restrictions. (para. 28). The 1986 10K stated that of the backlog of $6 million worth of purchase orders for institutional projection equipment which existed in September 1985, "$5 million of that was for export sales to the [People's] Republic of China. Those sales were not made due to import restrictions imposed by that country." (para. 28).

In October 1986, Inflight announced a net loss for fiscal 1986. (para. 32). In November 1986, Inflight announced that it was entering bankruptcy ...


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