IN THE UNITED STATES DISTRICT COURT FOR THE

r

WESTERN DISTRICT OF OKLAHOMA MAR 0 4 1999

CITY OF PHILADELPHIA, et al . ,

Plaintiffs,

vs .

FLEMING COMPANIES, INC ., et al . ,

Defendants .

Case No . CIV-96-853-MConsolidated Action

ORDER

ROBERT D . E IS, CLER KU .S . DIST . COURT, RN DIST . OF OKLABY DEPUTY

Before the Court is the "Fleming Defendants' Motion to Dismiss," filed June 9, 1997 [docke t

no . 95] . The "Fleming Defendants" include Fleming Companies, Inc ., Robert E . Stauth, R. Randolp h

Devening, Donald N. Eyler, and Kevin J . Twomey. The Fleming Defendants, pursuant to Federa l

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 ' Consolidated Amended Class Action Complaint, which was filed April 30, 1997 [docket

no. 87] . Plaintiffs filed their b rief in opposition to the motion to dismiss July 22, 1997 [docket no .

102] .

I. BACKGROUND

A . Introduction

This Consolidated Action is composed of nine separate complaints filed in this district in earl y

1996. The Tenth Circuit succinctly summarized the background as follows :

During the early 1990s, David's Supermarkets, Inc . suedFleming Companies, Inc . in Texas state court for violation of certainpurchase agreements . In 1996, the jury in that suit returned a $204 .5million verdict against Fleming . Shortly after the publicannouncement of the verdict, nine plaintiffs . . . filed separatecomplaints against Fleming, each alleging, in one form or another, thatFleming had violated federal securities laws by failing to publiclyreport the pendency of the Texas suit .

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Pindus v. Fleming Companies, Inc . , 146 F .3d 1224, 1225 (10th Cir . 1998) .

B . The Fleming Cases

1 . The Consolidated Action (Nine Consolidated Cases )

On March 26, 1997, the Court entered an order (the "Consolidation Order") consolidating

nine then-pending related cases for all purposes, under case number CIV-96-853-M, and directed tha t

these nine consolidated cases "shall be known as the `Consolidated Action ."' Order at 4 (Mar . 26 ,

1997) . The nine cases that were conso lidated for all purposes are :

a. CIV-96-480-M Kenneth Steiner and Charles Miller v . The FlemingCompanies, Inc . and Robert E. Stauth

b . CIV-96-484-M Lawrence B. Hollin v. The Fleming Companies, Inc .and Robert E . Staut h

c. CIV-96-510-M Ronald T. Goldstein v . The Fleming Companies, Inc .,et al .

d. CIV-96-593-M General Telecom Money Purchase Pension Plan andTrust, et al . v . The Fleming Companies , Inc., et al .

e . CIV-96-830-M Bright Trading, Inc . v. The Fleming Companies, Inc . ,et al .

f CIV-96-853-M City of Philadelphia, Acting Through Its Board o fPensions and Retirement v . The Fleming Companies ,Inc., et al .

g . CIV-96-869-M Gerald Pindus, et al . v. The Fleming Companies, Inc .and Robert E. Stauth

h . CIV-96-942-M Charles Hinton v . The Fleming Companies, Inc ., et al .

i . CIV-96-993-M Lawrence M. Wells v . The Fleming Companies, Inc . ,et al .

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2 . The Mark case is consolidated "for pretrial purposes only"

A tenth Complaint that was also filed in early 1996 is Robert Mark v. The Fleming

Companies , Inc., et al . , Case No. CIV-96-506-M (the "Mark case") . The Court declined to

consolidate the Mark case with the other nine cases "for all purposes," but did consolidate it with th e

other nine cases "for pretrial purposes ." Order (Mar. 26 , 1997) [CIV-96-506-M; docket no . 102] .

3 . Subsequently filed shareholder derivative actions are not consolidate d

After the March 26, 1997 Consolidation Order was entered two shareholder derivative action s

were commenced :

a. CIV-96-1679-M Caulevb. CIV-96-1808-M Rosenberg

These two cases are not consolidated with the Consolidated Action, nor are they consolidate d

with each other .

C . The Claim s

Plaintiffs assert the following claims :

Count I Violations of Section 10(b) of the Exchange Act and Rule I Ob-5 promulgatedthereunder, asserted against all defendants .

Count II Violation of Section 20(a) of the Exchange Act, asserted against theIndividual Defendants . '

D . Chronology

1 . On August 24, 1993, the complaint against Fleming in the David's Litigationwas filed in Texas state court .

2 . On November 15, 1993, Fleming filed its Form 10-Q for the fiscal quarterended October 2, 1993, signed by Defendant Devening .

1 The "Individual Defendants" include Robert E . Stauth, R. Randolph Devening,

Donald N. Eyler, and Kevin J. Twomey .

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3 . On March 15, 1994, Fleming filed its 1993 Annual Report, signed byDefendant Stauth.

4. On March 25, 1994, Fleming filed its Form 10-K for its fiscal year endedDecember 25, 1993, signed by Defendants Stauth, Devening , Eyler andothers .

5. On May 31, 1994 , Fleming filed its Form 10-Q for the quarter ended April 16,1994 .

6 . On August 22, 1994, Fleming filed its Form 10-Q for the quarter ended July9, 1994, signed by defendant Eyler .

7 . On November 15, 1994, Fleming filed its Form 10-Q for the quarter endedOctober 1, 1994, signed by defendant Eyler .

8 . On March 31, 1995, Fleming filed its 1994 Annual Report, signed bydefendant Stauth .

9 . On March 28, 1995, Fleming filed its Form 10-K for the year ended December31, 1994, signed by defendant Stauth .

10 . On June 5 , 1995, Fleming filed its Form 10-Q for the quarter ended April 22,1995, signed by defendant Twomey .

11 . On August 29, 1995, Fleming filed its Form 10-Q for the quarter ended July15, 1995, signed by defendant Twomey .

12. On November 20, 1995, Fleming filed its Form 10-Q for the quarter endedOctober 7, 1995, signed by defendant Twomey .

13 . On March 14, 1996, Fleming filed its 1995 Annual Report, specificallydisclosing the existence of the David's Litigation for the first time .

14. On March 14, 1996, Fleming issued a press release announcing that the juryin the David's Litigation had rendered a verdict adverse to Fleming and theother defendants .

15 . On March 14, 1996, Fleming's stock closed at $17 .50 per share, representinga loss of $2 .13 from the previous day's close .

16. On March 15, 1996, the David's Litigation jury awarded punitive damage s

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and determined that Fleming must pay a total of as much as $207 .5 million .

17. On March 18, 1996, Fleming's stock closed at $15 .13 per share .

18 . On March 28, 1996, Fleming announced that it was cutting its regularquarterly dividend from $ .30 to $ .02, in order to preserve capital in order topost an appeal bond in the David's Litigation .

19. On March 28, 1996, Fleming's stock closed at $14 per share .

20. On April 15, 1996, Fleming announced that it would record a first quartercharge of about $7 . 1 million related to the David's Litigation .

21 . In March, April, May, and June, 1996, the subject nine complaints were filed .

22 . On June 24, 1996, the David's Litigation verdict was vacated, and Flemingwas granted a new trial with a different trial judge .

23 . On March 25, 1997, the David 's Litigation was settled on behalf of Flemingfor $19 . 9 million and on behalf ofthe individual defendants for an undisclosedamount paid by Fleming's directors and officers liability insurance car rier.

II. DISCUSSION

A . Rule 12(b)(6)

Defendants seek dismissal of the complaint pursuant to Rule 12(b)(6) of the Federal Rules of

Civil Procedure . A complaint will be dismissed under Rule 12 (b)(6) "only when it appears that the

plaintiff can prove no set of facts in support of the claims that would entitled the plaintiff to relief. "

Romanv. Cessna Aircraft Co . , 55 F.3d 542, 543 (10" Cir . 1995)(quotations omitted) . In considering

a Rule 12(b)(6) motion, the Court "must accept all the well-pleaded allegations of the complaint a s

true and must construe them in the light most favorable to the plaintiff." Id . 2

2 In considering a Rule 12 (b)(6) motion to dismiss, a cou rt may consider publicdisclosure documents filed with the SEC as well as documents upon which plaintiff has relied inb ringing suit . Considering these documents does not require converting the motion to one forsummary judgment . Cortec Indus ., Inc. v . Sun Holding L.P. , 949 F .2d 42, 47-8 (2°d Cir . 1991),cert . denied , 503 U. S. 960 (1992) .

B. Section 10(b)/Rule lOb-5 Claim

1 . Introductio n

Section 10(b) provides :

It shall be unlawful for any person, directly or indirectly, by the use ofany 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 saleof any security registered on a national securities exchange or anysecurity not so registered, any manipulative or deceptive device orcontrivance in contravention of such rules and regulations as theCommission may prescribe as necessary or appropriate in the publicinterest or for the protection of investors .

15 U.S .C. § 78j(b) .

Rule IOb-5 provides, in pertinent part :

It shall be unlawful for any person . . .

(b) To make any untrue statement of a material fact or to omit to statea material fact necessary in order to make the statements made, inlight of the circumstances under which they were made, notmisleading, . . .

in connection with the purchase or sale of any security .

17 C .F .R. § 240 . 10b-5 .

2 . Plaintiffs' Section 10(b)/Rule lOb-5 Allegation s

Plaintiffs provide an overview of their Section 10(b)/Rule 1Ob-5 allegations in the firs t

numbered paragraph of their Consolidated Amended Class Action Complaint :

During the Class Period, defendants engaged in a fraudulent schemeand course of conduct, in violation of the federal securities laws,involving the misrepresentation and/or withholding and concealmentfrom the investing public of material facts, including : (1) the pendencyof the David's Litigation against the Company and the Company' s

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exposure therein ; (2) that a material portion of the Company'srevenues and profits resulted solely from the wrongful, unlawful anddeceptive business practices engaged in by the Company which gaverise to the David's Litigation ; (3) that because of the charges againstthe Company in the David's Litigation, it was forced to change theway in which it conducted its business and would not be able tocontinue to earn the high profits it was previously earning; and (4) thatthe Company's much heralded restructuring and re-engineeringprogram was intended in part to eliminate the wrongful -- but highlyprofitable -- and unlawful practices complained of in the David'sLitigation . Moreover, as a result of its overcharging David's andother customers, Fleming recorded substantial revenues, profits andassets to which it was not entitled under its contracts with thosecustomers. These improperly recorded revenues, profits and assetsrendered its publicly disseminated financial statements materially falseand misleading. Defendants' fraudulent scheme and course of conductcaused the price of Fleming's common stock to be artificially inflatedduring the Class Period thereby causing injury to plaintiffs and otherpurchasers of Fleming stock during the Class Period .

Complaint at 2-4

In relation to violations of Section 10(b)/Rule 1Ob-5, plaintiffs specifically allege :

56 . Defendants violated their disclosure duties underRegulation S-K and under Rule lOb-5 promulgated by the SEC underSection 10(b) of the Exchange Act by failing to disclose the factsconcerning the pendency of the David's Litigation, its likely effect onFleming's revenues, income, and financial condition; the change inFleming's pricing policies in connection with Fleming's restructuringand re-engineering plan ; and Fleming's inability to continue earningexcessive -- although wrongful and unlawful -- profits by breaching itsagreements with its customers . Specifically, the foregoing publicstatements issued by Fleming and the Individual Defendants during theClass Period were materially false and misleading in the followingrespects :

(a) The statements in Fleming's 1993 Annual Report, set forthin paragraphs 36(b)(i) and (b)(ii) above; Fleming's 1993 10-K, setforth in paragraphs 36(c)(ii) and (c)(iii) above ; Fleming's form 10-Qsfor the quarters ended October 2, 1993, April 16, 1994, July 9, 1994,and October 1, 1994, set forth in paragraphs 36(a), (d)(i), (d)(ii),(e)(i), (e)(ii), (f)(i), and (f)(ii), respectively, above ; Fleming's 1994Annual Report, set forth in paragraphs 36(g)(iii) and (g)(iv) above ;

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Fleming's 1994 10-K, set forth in paragraphs 36(h)(i) and (h)(ii)above; and Fleming's form 10-Qs for the quarters ended April 22,1995, July 15, 1995, and October 7, 1995, set forth in paragraphs36(j)(i), (k)(i), (k)(ii), (1)(i) and (l)(ii), respectively, above, concerninglitigation pending or threatened against Fleming, were materially falseand misleading because defendants knowingly or recklessly failed todisclose (1) the pendency of the David's Litigation; (2) that Fleminghad engaged in a systematic wrongful, deceptive and unlawful courseof conduct which gave rise to the David's Litigation and wouldsubject the Company to potential exposure from other customers hadbeen treated similarly to David's ; and (3) that an adverse verdict in theDavid's Litigation was likely, which would result in the loss ofmillions of dollars of Fleming's assets, income and equity .Furthermore, the David's Litigation did not arise in the ordinarycourse of Fleming's business, and thus was not encompassed withinthe general description of other litigation the Company faced fromtime to time, and the omission of a specific disclosure of the David'sLitigation rendered the description of Fleming's pending litigationmaterially false and misleading .

(b) Fleming's financial statements contained in the 1993Annual Report as set forth in paragraph 36(b) above ; 10-Qs for thequarters ended October 2, 1993, April 16, 1994, July 9, 1994 andOctober 1, 1994, as set forth in paragraphs 36(a), (d), (e) and (f)respectively, above ; 1994 Annual Report as set forth in paragraph36(g) above; and 10-Qs for the quarters ended April 22, 1995, July15, 1995, and October 7, 1995, as set forth in paragraphs 36(j), (k)and (1), respectively, above, were materially overstated in that Flemingmade no provision therein for the probable adverse verdict that waslikely to be entered against it in the David's Litigation,notwithstanding the probability that it would be found liable for claimsthat David's asserted therein, as required under generally acceptedaccounting principles ("GAAP"), in particular Statement of FinancialAccounting No. 5 (Accounting for Contingencies) . In addition, thosefinancial statements were materially false and misleading andpresented in violation of GAAP in that millions of dollars of Fleming'sreported income and assets and equity had been created as a result ofits wrongful, deceptive and unlawful business practices, wereunearned, and were therefore recorded in violation of GAAP,including, inter alia , FASB Statement of Concepts No. 5, Paragraph83b, . . . In this connection, the jury in the David's Litigation awardedDavid's $53 million in compensatory damages for lost profits as aresult of Fleming's excessive charges .

(c) The statements in Fleming's 1993 10-K, set forth in

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paragraph 36(c)(i) above ; Fleming's form 10-Qs for the quartersended April 16, 1994, July 9, 1994, October 1, 1994, set forth inparagraphs 3 6(d)(ii), (e)(iii) and (f)(iii), respectively, above; Fleming's1994 Annual Report, set forth in paragraphs 36(g)(i) and (g)(ii) ;Fleming's 1994 10-K, set forth in paragraphs 36(h)(iii) and (h)(iv)above; and 10-Qs for the quarters ended April 22, 19995, July 15,1994, October 7, 1995, set forth in paragraphs 36(j)(ii), (k)(iii) and(1)(iii), respectively, above, concerning Fleming's restructuring and re-engineering plan, were materially false and misleading because theymisrepresented or failed to disclose, inter alia, the following :

(i) While defendants represented that the FFMP's cost pluspricing represented a new policy, many Fleming customers had beenoperating under cost plus contracts for many years . Moreover,contrary to defendants' representations, Fleming had, in connectionwith these cost plus contracts, agreed to base its pricing on the actualdiscounted prices it paid ;

(ii) Fleming had a practice of violating the terms of these costplus contracts, which had, in the past, enabled the Company to inflateits profits by a substantial amount (for example, the David's juryfound Fleming liable for $53 million in compensatory damages overa two year period), and that once such unlawful activities wouldcease, Fleming would not be able to maintain such profits ;

(iii) While defendants portrayed the FFMP as a strategydesigned to increase cost savings and profits, it was made necessarybecause of increasingly heated disputes over Fleming's right toappropriate all the benefits of its discount buying, culminating in theDavid's Litigation, and Fleming's inability to continue to realizeexcess, unlawful profits from its violation of the terms of cost pluscontracts . Defendants knew that Fleming's profits would decline asa result of Fleming's instituting the FFMP and ceasing its improperand unlawful pricing activities .

Complaint at 69-73 .

3 . Pleading Standard for Section 10(b) Claims

"In the securities context, Rule 12(b)(6) dismissals are difficult to obtain because the cause

of action deals primari ly 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, 240

(1988)) . However, even before the enactment of the P rivate Securities Litigation Reform Act o f

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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 hesitate

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 that

could justify an inference of fraud under Rule 9(b) ." Grossman, 120 F.3d at 1118 (citations omitted) .

The PSLRA raised the pleading standard for Section 10(b) claims higher . Under the PSLRA,

a complaint asserting a violation of Section 10(b) :

shall specify each statement alleged to have been misleading, thereason or reasons why the statement is misleading, and, if anallegation regarding a statement or omission is made on informationand belief, the complaint shall state with particularity all facts onwhich that belief is formed .

15 U.S .C . § 78u-4(b)(1) .

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 :

with respect to each act or omission alleged to violate this chapter,state with particularity facts giving rise to a strong inference that thedefendant acted with the required state of mind . .

15 U.S.C. § 78u-4(b)(2) .

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 IOb-5 Claim

"To state a claim under [Section 10(b)/Rule IOb-5], a plaintiff must allege : (1) a misleading

The PSLRA applies to cases filed after December 22, 1995, the date the PSLRAbecame effective . It was not applicable in Grossman . It does apply in this case because plaintiffsfiled their complaints after December 22, 1995.

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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.3d at 1118 .

In the instant case, only element number two is unchallenged -- the parties agree plaintiffs '

purchases of stock constitute purchases of a security . Defendants challenge the sufficiency of th e

complaint with respect to each of the remaining essential elements of plaintiff s Section 10(b) claim :

materiality, scienter , reliance , and causation/damages . Because the Court finds plaintiffs have failed

to sufficiently plead scienter, the Court will dismiss the Section 10(b) claim without addressing th e

sufficiency of plaintiffs' allegations as to materiality, reliance, and causation/damages .

5 . Scienter

One of defendants' primary arguments in their Motion to Dismiss is that plaintiffs have failed

to plead facts giving rise to a strong inference of fraud, or, in other words, plaintiffs have failed t o

satisfy the PSLRA' s pleading requirement for scienter .

In their Consolidated Amended Class Action Complaint, plaintiffs make the following

allegations regarding defendants' scienter :

57. Each defendant acted with actual knowledge or recklessdisregard of the true facts alleged herein to have been misrepresentedor omitted by them in Fleming's public statements and filings . Byvirtue of their positions as senior officers of the Company, theIndividual Defendants received periodic reports of such importantmatters as litigation against the Company and the Company's internalinvestigation regarding the facts alleged therein . As senior officers,they were consulted and advised about such fundamental corporatematters as the Company's pricing policies . In addition, they reviewedand were familiar with the contents of the Company's publicdisclosures and in fact signed many of them as described above . TheIndividual Defendants therefore knew, or recklessly disregarded thatthe David's Litigation was not disclosed in the Company's publi c

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filings, although other litigation was disclosed . They knew furtherthat the descriptions of the Company's re-engineering plan wasincomplete and misleading .

58 . The Individual Defendant had the opportunity to commitand participate in the fraud . They were among the top officers ofFleming and they controlled its press releases, corporate reports,public filings and communications with analysts . Thus, theycontrolled the public dissemination of and could falsify, informationabout the David's Litigation, the underlying unlawful pricingactivities, and other matters alleged herein, that reached the public andaffected the price of Fleming's stock .

59. Each of the Defendants had a number of motives forconcealing the David's Litigation and the other matters alleged to beconcealed or misrepresented herein, which included the following :

(a) If Fleming's wrongful, unlawful and deceptive businesspractices became widely known, Fleming's relationships with othercustomers with cost-plus contracts would be seriously damaged, ascustomers would certainly subject the prices and services they werereceiving from Fleming to much closer scrutiny, and Fleming wouldtherefore lose a major source of profits . The evidence adduced in theDavid's Litigation demonstrates that Fleming's practices ofintentionally overstating its costs were not confined to David's, butwere uniform policies that applied to many customers ;

(b) Disclosure ofthe David's Litigation would expose Flemingto a proliferation of similar suits from customers with cost-pluscontracts similar to David's . This is, in fact, precisely what happenedafter the David's Litigation was revealed. Fleming has been sued byat least two other customers, who have accused Fleming of virtuallythe identical wrongful practices as was the subject of the David's suit ;and

(c) Disclosure of the David's Litigation would jeopardize theCompany's efforts to implement the FFMP, which was crucial to thegrowth ofthe Company, as customers would be reluctant to switch toa cost plus pricing system if they doubted Fleming's integrity andcould not rely on Fleming's assurances that it would pass all costs onto its customers .

Complaint at 73-76 .

Scienter is defined as a "mental state embracing intent to deceive, manipulate, or defraud . "

Ernst & Ernest v . Hochfelder, 425 U . S . 185, 193 n .12 (F976) . P rior to the passage of the PSLRA,

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the Second Circuit had the strictest standard for pleading scienter . The Second Circuit standard coul d

be met by either (1) pleading facts showing that the defendants had both motive and opportunity t o

commit fraud; or (2) pleading facts constituting strong circumst antial evidence of reckless or

conscious behavior . Shields v . Citvtrust Bancorp , Inc ., 25 F.3d 1124 (2°d Cir . 1994) .

Under the PSLRA, as noted above, the standard for pleading scienter in the context of a

section 10(b) claim was heightened : plaintiffs must "plead with particularity facts giving rise to a

strong inference that the defendant [s] acted with the required state of mind ." 15 U.S .C . § 78u-

4(b)(2) . However, the PSLRA does not suggest what type or quantum of facts is sufficient to plead

the required "strong inference ." Some guidance can be obtained from the legislative history of the

PSLRA, but even that histo ry is sufficiently ambiguous and contradicto ry to permit opposing, but

equally reasonable, conclusions .

The courts that have looked at this issue are split as to what a plaintiff must plead to meet the

"strong inference" standard .' Some courts have held that in enacting the scienter pleading

requirement, Congress intended to raise the scienter pleading standard beyond the Second Circuit' s

already stringent standard . Under these decisions, plaintiffs no longer satisfy the pleading requirement

by pleading motive and opportunity . See In re Silicon Graphics, Inc., Securities Litigation, 970 F .

Supp . 746 (N.D. Cal . 1997) ; Novak v . Kasaks , 997 F . Supp . 425 (S .D.N.Y. 1998) ; In re Glena~re

Technologies , Inc., Secu rities Liti ag tion, 982 F . Supp. 294 (S.D.N.Y. 1997); Powers v. Eichen, 977

F. Supp . 1031 (S .D. Cal. 1997) ; Voit v . Wonderware Corp., 977 F . Supp . 363 (E.D . Pa. 1997) ;

4 The Court is not aware of any decisions by the Tenth Circuit addressing this issue .The United States District Court for the District of Colorado has addressed this issue in QueenUno Ltd. Partnership v . Coeur D'Alene Mines Corp , 2 F. Supp. 2d 1345 (D . Colo. 1998) andSchaffer v. Evolving Systems, Inc ., _ F. Supp . 2d _, 1998 WL 902411 (D . Colo. 1998) .

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F riedberg v . Discreet Logic, 959 F . Supp. 42 (D. Mass . 1997) .

Other courts have held PSLRA' s scienter pleading requirement can be satisfied by pleadin g

motive and opportunity and have adopted the Second Circuit's pleading standard . See Marksman

Partners, L .P. v. Chantal Pharm . Corp, 927 F. Supp . 1297 (C .D . Cal . 1996) ; Rehm v. Eagle Finance

Corp., 954 F . Supp . 1246 (N.D. Ill . 1997 ) ; Fugman v. Approgenex, Inc ., 961 F . Supp . 1190 (N.D .

Ill . 1997) ; Partners v . Sensormatic Elec. , No. 96-C-4072, 1997 WL 570771 (N .D. Ill . 1997) ; In re

Oak Tech. Securities Litigation, No. 96-20552, 1997 WL 448168 (N .D . Cal . 1997) ; Shahzad v . H.J .

Meyers & Co . , No. 95-Civ-6196, 1997 WL 47817 (S .D.N.Y. 1997) . The Second Circuit, the only

circuit court of appeals to have decided this issue, has also held that its prior standard for pleadin g

scienter is sufficient under the PSLRA' s new pleading requirement .

Finally, a few courts have neither outright rejected nor wholesale adopted the motive and

opportunity prong of the Second Circuit standard. These courts have looked at the allegations as a

whole, not within any strict two-prong approach, and have then determined whether the plaintiff s

have pled facts giving rise to a strong inference of fraudulent scienter . Under this approach, motive

and opportunity allegations are not presumed sufficient by themselves to meet the pleading standard ,

but may be considered when determining whether the pleading standard has been met . See in re

Baesa Securities Litigation , 969 F . Supp. 238 (S .D.N.Y. 1997) ; In re Health Management, Inc .

Secu rities Litigation, 970 F . Supp . 192 (E .D.N.Y. 1997) .

The United States District Court for the District of Colorado, the only district court locate d

within the Tenth Circuit to have ruled on this issue, has followed the courts in the latter category .

In Queen Uno Ltd. Partnership v. Coeur D'Alene Mines Corp . , 2 F. Supp . 2d 1345, 1359 (D. Colo .

1998), the court held :

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Here, the Court finds such a case-by-case approach most appropriatein light of the plain language and legislative history of the Reform Act .Congress's unequivocal intention, as noted in both reports, to `raiseexisting pleading requirements' precludes a per se rule that allegationsof motive and opportunity necessarily raise a strong inference that thedefendants acted with the required state of mind. This does not meanthat in occasional cases the inference drawn solely from motive andopportunity allegations will not be sufficiently strong to withstand amotion to dismiss, but merely that it will not always be so . Moreover,in those cases where motive and opportunity allegations do not alonecreate a strong inference of scienter, the allegations will nonethelessbe relevant in determining whether the totality of the allegationspermits a strong inference of fraud . In short, the Reform Act requiresthat a court examine a plaintiff's allegations in their entirety, withoutregard to whether those allegations fall within a formalistic categorysuch as motive and opportunity, to determine if the allegations permita strong inference of fraudulent intent . Ifthe facts alleged permit suchan inference then a lOb-5 claim will by the Reform Act's plainlanguage survive a motion to dismiss .

Id . at 1359 (internal citations omitted) . See also Schaffer v . Evolving Systems, Inc . , _ F. Supp .

2d, 1998 WL 902411 (D . Colo. 1998) (setting forth same standard as Queen Uno) .

After having reviewed the various decisions on this issue , as well as the parties ' briefs on thi s

matter, the Court finds the standard adopted by the District Court of Colorado represents the mos t

appropriate approach to reviewing plaintiffs' allegations of scienter to determine whether th e

PSLRA' s scienter pleading requirement has been met. The Court, therefore, will examine plaintiffs '

allegations in their entirety, without regard to whether those allegations fall within any formalisti c

category, such as motive and opportunity , to determine if plaintiffs' a llegations permit a strong

inference of fraudulent intent .

As set forth above, plaintiffs allege each defendant acted with actual knowledge or with

reckless disregard of the true facts misrepresented or omitted in Fleming's public statements an d

filings. Plaintiffs base this allegation upon defendants' positions as senior officers of Fleming ,

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defendants' receiving periodic reports of litigation matters and investigations, and defendants' bein g

consulted and advised about Fleming's pricing policies . Plaintiffs, however, never name any specific

report defendants may have reviewed or identify specific advice defendants may have given or

received involving either the David's Litigation, Fleming's pricing policies, or the basis for

implementing the FFMP, Fleming's restructuring and re-engineering program . Plaintiffs simply make

conclusory allegations that defendants were senior officers ; therefore, they had actual knowledge or

should have had knowledge of the "true facts ." Such conclusory allegations of scienter are no t

sufficient under Rule 9(b), much less under the PSLRA .

In addition to their conclusory allegations of actual knowledge or reckless disregard, plaintiff s

allege defendants had both opportunity and motive . Plaintiffs set forth three motives : (1) protectio n

of relationships with cost-plus customers; (2) avoidance of a proliferation of lawsuits similar to th e

David's Litigation; and (3) prevention of jeopardizing Fleming's efforts to implement the FFMP .

Business motives shared by most companies or executives cannot support an inference o f

fraudulent intent . Shields v. Citytrust Bancorp, Inc . , 25 F .3 d 1124, 1130 (2°d Cir . 1994) . Allegations

that a business is motivated to commit fraud in order to protect its relationships with its customer s

is such a shared business motive . In re Crystal Brands Securities Litigation, 862 F . Supp . 745, 749

(D. Conn. 1994) . The Court finds avoidance of a proliferation of similar lawsuits is also a busines s

motive shared by most companies or executives . Accordingly, the Court finds motives #1 and #2 fai l

to rise to a level sufficient to give rise to a strong inference that defendants had the requisit e

fraudulent intent .

Motive #3 also fails to meet the scienter pleading standard . In their Consolidated Amende d

Class Action Complaint, plaintiffs allege there was an industry-wide change taking place in th e

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process by which food is distributed, making it more difficult for the wholesaler to make forwar d

buying profits . Complaint at 21-22 . Plaintiffs further allege this industry trend was at least partially

responsible for the development of Fleming's new p ricing policy, FFMP. Thus, plaintiffs ' motive #3

must be viewed in light of the changes in the industry . When viewed in this light, the Court finds that

plaintiffs' motive #3 does not give rise to a strong inference of fraudulent intent .

Finally, even though none of plaintiffs' scienter allegations individually meet the strict sciente r

pleading requirement of the PLSRA, the Court must now examine plaintiffs' allegations together to

determine whether, taken as a whole, the allegations meet this standard . Having carefully reviewe d

plaintiffs' Consolidated Amended Class Action Complaint with respect to all allegations of scienter ,

the Court is satisfied the allegations fail to set forth sufficient facts to give rise to a strong inferenc e

of fraudulent intent by defendants . Accordingly, the Court finds plaintiffs' allegations fail to satisfy

the requirements of Section 78u-4(b)(2), and, therefore, Count I of plaintiffs' Consolidated Amende d

Class Action Complaint must be dismissed .

C . Section 20(a) Claim

Section 20(a) provides for secondary liability for persons who "control" others found to be

p rimarily liable under the Exch ange Act . First Interstate Bank of Denver, N.A. v. Prins , 969 F .2d

891, 897 (10' 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 .

III . CONCLUSION

The "Fleming Defendants' Motion to Dismiss," filed June 9, 1997 [docket no . 95] is

GRANTED . The Consolidated Amended Class Action Complaint, filed April 30, 1997, i s

17

DISMISSED without prejudice, and plaintiffs are given until April 1, 1999, to file a second amende d

complaint . If plaintiffs file a second amended complaint, they shall designate additional allegation s

by underlining them and designate deleted allegations by striking through them .

IT IS SO ORDERED this day of March, 1999 .

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