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            Title Westinghouse Securities Litigation

 

            Date 1996

            By Alito

            Subject Misc

                

 Contents

 

 

Page 1

LEXSEE 90 F.3D 696

In Re: WESTINGHOUSE SECURITIES LITIGATION; MARGARET ALESSI, GLORIA BERTINATO, MICHAEL C. CHRISTNER, ANNA MARIE EROSHEVICH, TOBY FEUER, KANWAL K. GUPTA, M.D., MATTHEW HARLIB, STANLEY HERSHFANG, ARNOLD M. JACOB, LOUISE JACOB, DAVID JAROSLAWICZ, DAVID KIRSCHNER, NATHAN KLEINHANDLER, GERRY KRIM, PETER

LAGORIO, NELSON LOVINS, DONALD McLENNAN, JACOB JOSEPH MILLER, DR. ALEXANDER MILLER, THOMAS MITCHELL, EDWARD MURABITO, MICHAEL E. NOGAY, JOSEPH RASCHAK, RICHARD SCHWARTZCHILD, DR. MICHAEL

SLAVIN, DR. MICHAEL SOLOMON, SELMA SOLOMON, SPRING CREEK CARDIOMEDICAL CENTER, RUTH STEPAK, JIM THOMPSON, PATRICIA J. VANARTSDALEN, ALBERT ZUCKER, Appellants

No. 95-3156

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

90 F.3d 696; 1996 U.S. App. LEXIS 17608; Fed. Sec. L. Rep. (CCH) P99,271; 35 Fed. R. Serv. 3d (Callaghan) 1449

November 2, 1995, Argued

July 18, 1996, Filed

PRIOR   HISTORY:             **1        ON   APPEAL   FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN  DISTRICT  OF  PENNSYLVANIA.  (D.C. Civil No. 91-00354).

DISPOSITION: Affirmed in part, reversed in part, and remanded.

LexisNexis(R) Headnotes

COUNSEL: ARTHUR N. ABBEY (Argued), JOSHUA N.  RUBIN,  ABBEY  &  ELLIS,  212  East  39th  Street, New  York,   NY  10016,   JULES  BRODY,  MELISSA R.   EMERT,   STULL,   STULL   &   BRODY,   6   East

45th    Street,         New    York,           NY    10017,            HOWARD A.   SPECTER,   DAVID   J.   MANOGUE,   SPECTER LAW   OFFICES,   P.C.,   The   Koppers   Building,   26th Floor,  Pittsburgh,  PA  15219,  JEFFREY  W.  GOLAN, GERALD J. RODOS, BARRACK, RODOS & BACINE,

2001   Market   Street,   3300   Two   Commerce   Square, Philadelphia,   PA   19103,   RICHARD   A.   FINBERG, BERGER,  KAPETAN,  MEYERS,  ROSEN,  LOUIK  & RAIZMAN, 200 Frick Building,  Pittsburgh,  PA 15219, DONALD P. ALEXANDER, GREENFIELD & RIFKIN,

344 West Lancaster Avenue, P. O. Box 259, Haverford, PA 19041, Attorneys for Appellants.

ROBERT                E.             ZIMET    (Argued),                                JOSEPH GUGLIELMELLI,                   MAURA                B.             GRINALDS,

SKADDEN, ARPS, SLATE, MEAGHER & FLOM, 919

Third Avenue, New York, NY 10022, J. TOMLINSON FORT,  REED  SMITH  SHAW  &  McCLAY,  James  H. Reed  Bldg.  435  Sixth  Avenue,  Pittsburgh,  PA  15319, Attorneys for Appellees Shearson Lehman Brothers Inc. Goldman,  Sachs  &  Co.  Lazard  Freres  &                 **2        Co. Lehman  Brothers  International,  Ltd.,  Goldman  Sachs International, Ltd. and Lazard Brothers & Co. Ltd..

DENNIS  J.  BLOCK  (Argued),  STEPHEN  A.  RADIN, ROBERT F. CARANGELO, JR. MARY LOU PETERS, WEIL,  GOTSHAL  &  MANGES,  767  Fifth  Avenue, New  York,   NY  10153,   JOSEPH  A.  KATARINCIC, KATARINCIC  &  SALMON,  2600  CNG  Tower,  625

Liberty  Avenue,   Pittsburgh,   PA  15222,   Of  Counsel: WILLIAM   F.   STOLL,   JR.,    HENRY   W.   EWALT, ROBERT   L.   KAUFMAN,   VANESSA   J.   BROWN, Westinghouse  Electric,  Corporation  Law  Department, Six  Gateway  Center,  Pittsburgh,  PA  15222,  Attorneys for Appellees Robert E. Faust,  Warren H. Hollinshead, Paul  E.  Lego,  William  A.  Powe,  Robert  F.  Pugliese, Theodore   Stern,   Westinghouse   Electric   Corporation, Westinghouse Financial Services, Inc. and Westinghouse Credit Corporation.

ELDON   OLSON,  General   Counsel, RODMAN W.   BENEDICT,   Associate   General   Counsel,   Price Waterhouse  LLP,  1285  Avenue  of  the  Americas,  New York, New York 10019, FRANK CICERO, JR. ROBERT

90 F.3d 696, *; 1996 U.S. App. LEXIS 17608, **2;

Fed. Sec. L. Rep. (CCH) P99,271; 35 Fed. R. Serv. 3d (Callaghan) 1449

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J.   KOPECKY   (Argued),    JEFFREY   L.   WILLIAN, KIRKLAND   &   ELLIS,   200   East   Randolph   Drive, Chicago, IL 60601, Of Counsel: ARTHUR J. SCHWAB, JAMES D. MORTON, BUCHANAN INGERSOLL, 600

Grant   Street,   Pittsburgh,   PA   15219,   (Of   Counsel), Attorneys **3   for Appellee Price Waterhouse LLP.

JUDGES:               Before:    NYGAARD,           ALITO,   and

SAROKIN, Circuit Judges.

OPINIONBY: ALITO

OPINION:   *700   ALITO, Circuit Judge:

This is an appeal from three orders dismissing all of the plaintiffs' claims in a consolidated class action secu- rities fraud complaint. The orders were based on Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). We affirm in part, reverse in part, and remand for further proceed- ings.

I.

A.   Plaintiffs   in   this   case   are   all   purchasers   of publicly   traded   Westinghouse   Electric   Corporation

("Westinghouse")               securities.               Plaintiffs purchased Westinghouse common stock between March 28, 1989, and October 22, 1991 ("the class period").

Defendants   include   Westinghouse,   Westinghouse Financial  Services,   Inc.  ("WFSI")  (a  wholly  owned subsidiary   of   Westinghouse),    Westinghouse   Credit Corporation ("WCC") (which is owned by WFSI), and certain  directors  and  senior  officers  of  these  compa- nies (the "individual defendants"). (We will refer to the above defendants collectively as the "Westinghouse de- fendants.")  The  other  defendants  are  Price  Waterhouse

(the independent accountant for the Westinghouse com- panies), and a proposed defendant class of underwriters

(the **4   "underwriter defendants") involved in a May

1991 public offering of Westinghouse common stock.

B.  The  relevant  allegations  of  plaintiffs'  complaint, which were set forth in detail by the district court, see In re Westinghouse Securities Litigation, 832 F. Supp. 948

(W.D. Pa. 1993), may be summarized as follows. During the 1980's, WCC grew rapidly by committing substantial funds  to  the  financing  of  real  estate  developments  and highly  leveraged  transactions.  In  the  late  1980's,  how- ever, WCC experienced an increase in defaults in its real estate  loans  and  in  delinquencies  in  other  transactions. As a result, WCC suffered billions of dollars of losses, and the Westinghouse defendants feared a drop in WCC's commercial paper ratings. To protect those ratings, they concealed  the  losses,  which  allegedly  totalled  between

$2.6 and $5.3 billion, through improper accounting and

reporting techniques.

Prior to February 1991,  Westinghouse management decided  that  WCC  needed  a  cash  infusion  if  it  was  to maintain its commercial paper ratings. Westinghouse de- veloped a major restructuring plan, which it announced on  February  27,  1991.  Under  that  plan,  Westinghouse decided to "downsize" WCC by **5   selling or restruc- turing nearly one-third of its assets that had previously been held on a long-term basis. Westinghouse knew that selling and restructuring so many non-performing or un- derperforming assets in the market that existed at the time would result in significant losses. Westinghouse thus took a $975 million pre-tax charge against fourth quarter 1990 earnings to be *701  applied to loan loss reserves n1 and to cover estimated losses. The press release and other doc- uments issued by Westinghouse in connection with these actions stated that they decisively addressed WFSI's and WCC's problems. Plaintiffs allege that these statements were materially false when made in that defendants knew

(or  recklessly  disregarded  facts  demonstrating)  that  re- serves remained inadequate as of that time. Plaintiffs point to a statement by James Focareta, WCC's president from early 1990 to early 1991, in which he acknowledged that the $975 million write-off was known to be insufficient. Focareta said: "The number that was used ($ 975 million) was a number developed for something else . . . . Every Westinghouse credit manager knew that was not sufficient

. . . . The Keystone Kops were involved, clearly."   **6  App. 1134.

n1  A  loan  loss  reserve,  also  known  as  an  al- lowance for loan losses, is " a  statement of con- dition,   or  balance  sheet,   account  set  up  by  a bank  based  on  its  expectations  about  future  loan losses.  As  losses  occur,  they  are  charged  against this reserve. That is,  the loan account is credited and  the  reserve  account  is  debited.  The  reserve is  established  by  a  debit  to  an  expense  account called the loan loss provision, with a corresponding credit to the loan loss reserve." American Bankers Association,  Banking  Terminology  215  (3d  ed.

1989);  see  also  Shapiro  v.  UJB  Financial  Corp.,

964 F.2d 272, 281 (3d Cir.), cert. denied, 506 U.S.

934, 121 L. Ed. 2d 278, 113 S. Ct. 365 (1992). Plaintiffs   assert   that   Westinghouse   further   com- pounded  the  harm  to  investors  by  raising  $500  million through  a  May  1991  stock  offering.  Westinghouse  of- fered  19  million  shares  of  its  common  stock  for  sale to  the  investing  public  at  $26.50  per  share  on  May  9,

1991. Plaintiffs allege that the Prospectus and Registration Statement filed with the Securities **7   and Exchange Commission ("SEC") in May 1991, as well as other doc-

90 F.3d 696, *701; 1996 U.S. App. LEXIS 17608, **7;

Fed. Sec. L. Rep. (CCH) P99,271; 35 Fed. R. Serv. 3d (Callaghan) 1449

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uments (including the Annual Report) that were incorpo- rated by reference therein, contained material misrepre- sentations and omissions.

In October 1991, Westinghouse determined and an- nounced that the restructuring plan had to be accelerated. Additional assets of $3.1 billion were designated as being held for sale or restructuring. Westinghouse took a $1.68 billion pre-tax charge in anticipation of further losses it expected to suffer. Plaintiffs allege that defendants knew as early as October 1990 that a charge of this magnitude was inevitable and that defendants' statements to the con- trary over the course of that year and contemporaneous with  the  October  1991  announcement  were  materially false.  Plaintiffs  claim  that  they  paid  artificially  inflated prices  of  from  $21.75  to  $39.375  per  share  in  contrast to Westinghouse's closing price of $15.875 after the an- nouncement of the October 1991 charge.

C. The first of the class action complaints consolidated herein was filed in February 1991, just after Westinghouse announced the restructuring plan. In May 1991, the mag- istrate judge granted plaintiffs limited discovery **8   to prepare  a  consolidated  complaint.  In  March  1992,  the magistrate judge ordered that Westinghouse make avail- able to plaintiffs documents related to over 500 active in- vestment files. Plaintiffs filed the Consolidated Amended Class Action Complaint ("the first amended complaint") in June 1992.

The  first  amended  complaint  alleged  violations  of the  following  provisions:   sections  10(b)  and  20  of  the Securities Exchange Act of 1934 ("Exchange Act"), 15

U.S.C.  §§  78j(b),  78t,  and  Rule  10b-5,  17  C.F.R.  §

240.10b-5, against all defendants (count I); sections 11

and 15 of the Securities Act of 1933 ("Securities Act"), 15

U.S.C. §§ 77k, 77o, against all defendants (count II); sec- tion 12(2) of the Securities Act, 15 U.S.C. § 77l(2), against all defendants except Price Waterhouse (count III); sepa- rate violations of sections 11 and 15 against all defendants except for the underwriter defendants (count IV); sepa- rate violations of section 12(2) against the Westinghouse defendants  (count  V);  and  negligent  misrepresentation against all defendants (count VI).

In  August  1992,  defendants  moved  to  dismiss  all counts  of  the  first  amended  complaint  under  Federal Rules  of  Civil  Procedure  9(b)  and   **9    12(b)(6).  In an opinion and order entered on July 29, 1993, the district court granted defendants' motion. See In re Westinghouse Securities Litigation, 832 F. Supp. 948 (W.D. Pa. 1993)

(Westinghouse I). Count I and a small piece of count VI

*702   were dismissed without prejudice to repleading, while counts II-V and most of count VI were dismissed with prejudice. n2

n2 The dismissal of count VI is not challenged on appeal.

Plaintiffs  filed  the  Second  Consolidated  Amended Class  Action  Complaint  ("the  second  amended  com- plaint") in September 1993. Plaintiffs repled all of their claims, including those that had been dismissed with prej- udice (stating that such claims were being repled verba- tim solely to preserve their appellate rights). In December

1993, defendants moved to dismiss the second amended complaint under Federal Rules of Civil Procedure 8, 9(b), and 12(b)(6). In March 1994, plaintiffs cross-moved to supplement the second amended complaint. n3

n3 In July 1994, plaintiffs filed a motion to re- consider  the  July  1993  opinion  and  order  and  to reinstate  certain  claims.  The  court  denied  plain- tiffs' motion for reconsideration in an order entered September 28, 1994. App. 309.

**10

In January 1995, the district court granted defendants' motion  to  dismiss  the  second  amended  complaint.  See In  re  Westinghouse  Securities  Litigation,  Civ.  No.  91-

354, Opinion and Order entered January 23, 1995, App.

310-46 (Westinghouse II). Counts II-VI were dismissed without discussion, since they had already been dismissed with prejudice in Westinghouse I. Many of the claims in count I were dismissed with prejudice, and the remainder of the claims in count I were dismissed without prejudice to repleading in accordance with Rule 8. The district court also denied as moot plaintiffs' motion to supplement the second amended complaint.

Plaintiffs  filed  a  "Notice  of  Intention  to  Stand  on Second Consolidated Amended Class Action Complaint," in which they informed the district court that they would not be amending the complaint;  rather,  plaintiffs stated that they were going to "stand" on the complaint and seek immediate appellate review. App. 347. The district court then  dismissed  plaintiffs'  remaining  claims  from  count I with prejudice and closed the case. See App. 350-51

(Memorandum Order entered March 1, 1995). This ap- peal followed.

On  appeal,  plaintiffs  argue  that   **11    the  district court improperly dismissed various of their section 10(b) claims under Rule 8; misapplied the "bespeaks caution" doctrine; improperly found that plaintiffs failed to plead fraud with particularity; mistakenly found that plaintiffs failed to plead materiality; and erroneously dismissed the section 12(2) claims. Plaintiffs also argue that the district court should have granted their motion to supplement the second amended complaint. Finally, plaintiffs argue that

90 F.3d 696, *702; 1996 U.S. App. LEXIS 17608, **11;

Fed. Sec. L. Rep. (CCH) P99,271; 35 Fed. R. Serv. 3d (Callaghan) 1449

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this case should be assigned to a new district judge. II.

A. We turn first to plaintiffs' challenge to the district court's Rule 8 dismissal. Rule 8(a) provides that any plead- ing that includes a claim for relief shall contain "a short and plain statement of the claim showing that the pleader is  entitled  to  relief."  Fed.  R.  Civ.  P.  8(a)(2).  Rule  8(e) further provides that "each averment of a pleading shall be simple,  concise,  and direct." Fed. R. Civ. P. 8(e)(1).

"Taken together,  Rules  8(a)  and  8(e)(1)  underscore  the emphasis  placed  on  clarity  and  brevity  by  the  federal pleading rules." 5 Wright & Miller, Federal Practice and Procedure § 1217 at 169 (2d ed. 1990).

We review the district court's decision to **12   dis- miss claims under Rule 8 for an abuse of discretion. E.g., Kuehl v. F.D.I.C., 8 F.3d 905, 908 (1st Cir. 1993), cert. denied,  128  L.  Ed.  2d  196,  114  S.  Ct.  1545  (1994);  5

Wright & Miller,  § 1217 at 175. "It is well settled that the  question  on  review  'is  not  whether  we  would  have imposed a more lenient  penalty had we been sitting in the trial judge's place, but whether the trial judge abused his discretion in imposing the penalty he did.'" Kuehl v. F.D.I.C., 8 F.3d at 908-09 (citation omitted).

The district court's January 1995 opinion and order provided  that  "with  respect  to  those  aspects  of  Count One  that  survive  the  instant  Opinion  and  Order,  plain- tiffs are granted 30 days from this date within which to replead in conformity with the requirements of Rule 8." Westinghouse II, Op. at 21, *703  App. 330; Order at 35, App. 344. The district court added that "failure to comply with this Order will result in the dismissal of plaintiffs' claims with prejudice." Id.

On  February  21,  1995,  plaintiffs  filed  a  "Notice  of Intention  to  Stand  on  Second  Consolidated  Amended Class Action Complaint." Plaintiffs stated as follows:

Plaintiffs   have   carefully   weighed   the merits of repleading **13   against seeking immediate  appellate  review.  They  respect- fully give notice of their intention to stand on the Complaint. See, Shapiro v. UJB Financial Corp., 964 F.2d 272 (3d Cir. 1992).

App. 348. The district court then dismissed with prejudice all of plaintiffs' remaining claims, stating as follows:

On  January  20,  1995,  this  Court  dis- missed  plaintiffs'  Second  Amended  Class Action   Complaint.   As   that   Opinion   and Order  explained,  with  respect  to  those  as-

pects  of  Count  One  of  plaintiffs'  Second Amended   Complaint   that   survived   the January 20, 1995 Opinion and Order, plain- tiffs  were  granted  30  days  from  that  date within which to replead in conformity with the  requirements  of  Rule  8  of  the  Federal Rules of Civil Procedure. The Opinion and Order  specifically  stated  that  failure  to  re- plead within 30 days would result in the dis- missal of plaintiffs' claims with prejudice. Instead of filing an amended complaint, plaintiffs filed a Notice of Intention to Stand on  Second  Consolidated  Amended  Class Action Complaint,  indicating that they had

"carefully weighed the merits of repleading against seeking immediate appellate review." Accordingly,  .  .  .  it  is   **14             hereby ORDERED  that  all  remaining  claims  in plaintiffs'  Second  Amended  Class  Action Complaint are dismissed with prejudice.

App. 350-51 (Memorandum Order entered 3/1/95).

B.  Plaintiffs  argue  first  that  the  Rule  8  dismissal without  prejudice  in  Westinghouse  II  should  be  re- versed  because  the  district  court  imposed  inconsistent pleading  standards  on  them.  Plaintiffs  contend  that  the Westinghouse I opinion required them to draft the second amended complaint with tremendous specificity. They ar- gue that the district court in effect required that they vi- olate Rule 8 (if they violated Rule 8 at all) in order to comply with Rule 9(b). See Plfs' Br. at 44-46. We dis- agree.

It  is  well  settled  that  "the  particularity  demands  of pleading fraud under Rule 9(b) in no way negate the com- mands  of  Rule  8."  Vicom,  Inc.  v.  Harbridge  Merchant Services,  Inc.,  20  F.3d  771,  776  (7th  Cir.  1994)  (cita- tions omitted); see generally 5 Wright & Miller, § 1281 at

520-21 (pleading fraud with particularity under Rule 9(b) should be done consistently with the general philosophy of Rule 8); 2A Moore's Federal Practice P 8.13, at 8-58

(2d ed. 1995) (the requirements  of Rule 8 apply "even

**15   where the Rules command particularity, as in the pleading of fraud under Rule 9(b)") (footnote omitted).

Having  reviewed  plaintiffs'  second  amended  com- plaint,  we  cannot  say  that  the  district  court  abused  its discretion  in  dismissing  the  viable  portion  of  count  I, without prejudice to repleading, pursuant to Rule 8. The second amended complaint is unnecessarily complicated and verbose. The text of the complaint rambles for more than 600 paragraphs and 240 pages, including a 50-plus page  "overview"  of  the  alleged  wrongful  conduct.  The

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district court, through the two rounds of difficult motions, had narrowed plaintiffs' claims. The court then ordered plaintiffs to submit a third amended complaint contain- ing only those allegations relevant to what were, in the court's view, the remaining viable claims. This does not seem to us to constitute an abuse of discretion;  indeed, it makes a tremendous amount of sense. See generally In re Glenfed, Inc. Securities Litigation, 42 F.3d 1541, 1544

(9th Cir. 1994) (en banc) ("We see nothing to prevent the district court, on remand, from requiring, as a matter of prudent case management, that plaintiffs streamline and reorganize  the  complaint  before   **16    allowing  it  to serve as the document controlling discovery, or, indeed, before requiring defendants to file an answer.").

C. We further hold that the district court did not abuse its discretion when it *704  dismissed with prejudice the otherwise viable claims from count I following plaintiffs' decision not to replead those claims in accordance with Rule 8. The district court expressly warned plaintiffs that failure to replead the remaining claims in compliance with Rule 8 would result in the dismissal of those claims. The dismissal with prejudice that followed plaintiffs' decision not to amend was not an abuse of discretion. See, e.g., 5

Wright & Miller, § 1217 at 178 (dismissal with prejudice appropriate where party refuses to file an amended and simplified  pleading).  As  we  recently  stated  in  a  differ- ent but analogous context, "it is difficult to conceive of what other course the court could have followed." Spain v. Gallegos, 26 F.3d 439, 455 (3d Cir. 1994) (affirming dismissal with prejudice where plaintiff refused to go for- ward with remaining claims).

D. Defendants attempt to go further. They argue that all of plaintiffs' claims --  including those that had been dismissed with **17    prejudice under Rules 9(b) and

12(b)(6) in Westinghouse I and Westinghouse II -- were also dismissed with prejudice on Rule 8 grounds and that this dismissal was proper. Thus, according to defendants,

even if this Court were to reverse any por- tion of the District Court's ruling dismissing portions of the second amended complaint  with  prejudice  on  grounds  other  than  Rule

8, plaintiffs still would be bound by their ir- revocable election to stand on their Second Amended Complaint, which still will consti- tute "a flagrant violation of the requirements of Rule 8."

West. Br. at 20 (quoting Westinghouse II, Op. at 20, App.

329). There is slim support for defendants' argument in Westinghouse II, where the court stated that "plaintiffs' Second Amended Complaint shall be dismissed in its en- tirety for failure to plead in conformity with the require-

ments of Rule 8." Op. at 21,  App. 330. On the whole, however,  we  do  not  agree  with  defendants'  characteri- zation of what the district court did. As we understand the  record,  the  district  court,  having  already  dismissed certain claims with prejudice on non-Rule 8 grounds in Westinghouse I and Westinghouse II, **18   did not later dismiss those claims again for failure to comply with Rule

8.

First,  we note that the district court specifically or- dered  plaintiffs  not  to  include  in  the  third  amended complaint  any  claims  except  for  those  that  survived Westinghouse II. Westinghouse II, Op. at 21, App. 330; Order at 35, App. 344. Thus, even if plaintiffs had repled and filed a third amended complaint, the claims that had been dismissed on grounds other than Rule 8 could not have been included. Because plaintiffs were permitted to replead only those claims that survived Westinghouse II, it seems implausible to suggest that their decision not to replead could have had any effect on any claims other than those that the district court sustained in Westinghouse II. Second,  the  district  court's  Memorandum  Order  of March 1, 1995, is the only order in the record that dis- misses  any  claim  or  claims  with  prejudice  under  Rule

8,  and  that  order  quite  clearly  applies  to  only  those claims that had survived dismissal with prejudice on other grounds in Westinghouse I and Westinghouse II. That or- der explicitly states that "it is hereby ORDERED that all remaining claims in plaintiffs' Second **19   Amended Class  Action  Complaint  are  dismissed  with  prejudice." App. 350-51 (emphasis added). Thus,  we reject defen- dants' argument that either Westinghouse II or the court's March 1, 1995 Memorandum Order dismissed any claims with prejudice under Rule 8 that had already been dis- missed on their merits.

E. Defendants next argue that if we do not hold that all of the plaintiffs' claims were properly dismissed under Rule 8, we should nevertheless decline to review the dis- missal of claims in Westinghouse I and Westinghouse II on non-Rule 8 grounds. Defendants contend that "inter- locutory orders --  such as the District Court's July 1993 and January 1995 Orders, which contain all of the District Court's non-Rule 8 rulings appealed by plaintiffs --  do not merge into and are not encompassed by final orders where plaintiffs engage in a strategy intended to create an  avenue  for  this  Court  to  reach  issues  not  subject  to interlocutory appeals." n4   *705    West. Br. at 21 (em- phasis in original). Defendants rely on Marshall v. Sielaff,

492 F.2d 917 (3d Cir. 1974) (affirming dismissal for lack of prosecution and choosing not to reach underlying sub- stantive issue decided in prior interlocutory **20   order) and Sullivan v. Pacific Indem. Co., 566 F.2d 444 (3d Cir.

1977) (dismissing for lack of an appealable order where

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appellant did not challenge dismissal for failure to pros- ecute  but  attempted  to  appeal  prior  interlocutory  order denying motion for class certification). Plaintiffs counter that they followed the procedure expressly approved by this court in Shapiro v. UJB Financial Corp.,  964 F.2d at 278-79 ("a plaintiff can convert a dismissal with leave to amend into a final order by electing to stand upon the original  complaint")  (citing  Borelli  v.  City  of  Reading,

532 F.2d 950, 951-52 (3d Cir. 1976)). See Plfs' Rep. Br. at 8. We find the defendants' argument unpersuasive.

n4 Defendants advance an additional jurisdic- tional argument. They maintain that if we do not affirm the dismissal of plaintiffs' entire complaint on Rule 8 grounds, then "as in any other case where some but not all claims are dismissed . . ., plain- tiffs would have claims not dismissed in the District Court and thus no right to an interlocutory appeal." West. Br. at 21. By its own terms,  this argument would apply only if we held that at least one claim had  not  been  properly  dismissed  on  any  ground, and consequently our conclusion in part IID of this opinion (that the claims dismissed on non-Rule 8 grounds  in  Westinghouse  I  and  Westinghouse  II were not also dismissed on Rule 8 grounds) would not  be  enough  to  make  this  argument  applicable here. But in any event, defendants' argument -- for which no supporting authority is cited -- is plainly incorrect.  We  have  jurisdiction  under  28  U.S.C.

§  1291  to  review  "final"  decisions  of  the  district courts; a district court order dismissing with preju- dice the last of a plaintiff's claims is unquestionably final; and our subsequent determination during the consideration of an appeal from that order that the dismissal of one claim was not proper does not ren- der the district court's order any less final than it was when the district court entered it.

**21

First, we reject the suggestion (see Westinghouse Br. at 20) that we lack jurisdiction to review the district court's rulings in Westinghouse I and Westinghouse II. "The prin- ciple is well-settled in this circuit that an order dismissing a complaint without prejudice is not a final and appeal- able order, unless the plaintiff no longer can amend the complaint because, for example, the statute of limitations has run, or the plaintiff has elected to stand on the com- plaint." Newark Branch, N.A.A.C.P. v. Harrison, 907 F.2d

1408,  1416-17  (3d  Cir.  1990)  (citations  and  footnotes omitted) (emphasis added); see also Bethel v. McAllister Brothers, Inc., 81 F.3d 376, 381 (3d Cir. 1996); Deutsch v. United States, 67 F.3d 1080, 1083 (3d Cir. 1995); Welch v. Folsom,  925 F.2d 666,  668 (3d Cir. 1991); Trevino-

Barton v. Pittsburgh National Bank, 919 F.2d 874, 877-

78 (3d Cir. 1990). In UJB, the plaintiffs stood on their complaint with respect to claims that had been dismissed without prejudice under Rule 9(b). They argued that their allegations satisfied Rule 9(b) and that they were not re- quired to make any further amendments. This court con- cluded  that  it  had  jurisdiction   **22    to  consider  the merits of the Rule 9(b) dismissal and explained:

We have held that a plaintiff can convert a dis- missal with leave to amend into a final order by electing to stand upon the original com- plaint. See, e.g., Borelli v. City of Reading,

532 F.2d 950, 951-52 (3d Cir. 1976) ("Only if the plaintiff . . . declares his intention to stand on his complaint . . . the order becomes final and appealable"). Plaintiffs here stood on their complaint,  but defendants contend that this was not enough. They maintain that we lack jurisdiction because plaintiffs failed to obtain an explicit dismissal with prejudice. We do not agree.

964  F.2d  at  278  (alterations  in  UJB).  The  court  thus considered whether plaintiffs' allegations that had been dismissed without prejudice actually satisfied Rule 9(b). Here,  when  plaintiffs  elected  to  stand  on  the  sec- ond amended complaint rather than replead the remaining claims in compliance with Rule 8, the remaining claims were dismissed with prejudice, and the case was closed in the district court. Under the authorities discussed above, there is no doubt that the district court's dismissal of the case with prejudice was a reviewable,   **23    final or- der. We therefore reject the defendants' contentions to the extent that they challenge our appellate jurisdiction. n5

n5 The decision in Sullivan v. Pacific Indem. Co. is not to the contrary. It is true that the court in Sullivan dismissed the appeal "for lack of an ap- pealable order." 566 F.2d at 445-46. But the appel- lants in that case did not challenge the underlying final  order  of  dismissal,  but  only  the  prior  inter- locutory decision.  Id. at 445; see generally Bethel v. McAllister Brothers, Inc., 81 F.3d at 380; Huey v. Teledyne, Inc., 608 F.2d 1234, 1239-40 n.5 (9th Cir. 1979).

*706    Furthermore, we see no prudential grounds for declining to review the merits of the district court's dis- missal of claims on non-Rule 8 grounds in Westinghouse I and Westinghouse II. Under the "merger rule," prior in- terlocutory orders merge with the final judgment in a case,

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and the interlocutory orders (to the extent that they affect the final judgment) may be reviewed on appeal from the final order.   **24   See, e.g., Silver v. Mendel, 894 F.2d

598,  601  (3d  Cir.),  cert.  denied,  496  U.S.  926,  110  L. Ed. 2d 641, 110 S. Ct. 2620 (1990); Elfman Motors, Inc. v.  Chrysler  Corp.,  567  F.2d  1252,  1253  (3d  Cir.  1977)

("the appeal from a final judgment draws in question all prior  non-final  orders  and  rulings  which  produced  the judgment")  (citation  omitted).  Under  this  rule,  the  dis- trict court's orders in Westinghouse I and Westinghouse II merged with the final order dismissing the remaining claims with prejudice and closing the case and thus would ordinarily be subject to review on appeal from the final order.

Defendants,  however,  invoke  an  exception  to  the merger rule pursuant to which courts decline to reach prior interlocutory rulings where to do so would undermine the policy against piecemeal appeals. See generally, e.g., Sere v. Board of Trustees of Univ. of Illinois, 852 F.2d 285, 288

(7th Cir. 1988) ("Although the general rule is that rulings on interlocutory orders are encompassed within a subse- quent final judgment and may be reviewed as part of that judgment, the rule is inapplicable where adherence would reward a party for dilatory and bad faith tactics.") (cita- tions omitted). The **25    line of cases relied upon by defendants stands for the proposition that a dismissal with prejudice for failure to prosecute frequently bars review of previously entered interlocutory orders. n6 Without ad- dressing the potential scope of this exception to the merger rule, see Fassett v. Delta Kappa Epsilon (New York), 807

F.2d 1150, 1155 n.6 (3d Cir. 1986) (dictum declining to extend  Sullivan  holding  beyond  class  certification  con- text),  cert. denied,  481 U.S. 1070 (1987), we conclude that the exception has no application here. The failure- to-prosecute cases upon which defendants rely are dis- tinguishable from plaintiffs' decision in this case to stand on the second amended complaint --  a decision that we regard as squarely governed by our holding in UJB. We are confident that our review of the merits of the orders in Westinghouse I and Westinghouse II will not "invite the inundation of appellate dockets with requests for review of interlocutory orders or  undermine the ability of trial judges to achieve the orderly and expeditious disposition of cases." Cf.  Marshall v. Sielaff, 492 F.2d at 919.

n6 In addition to our decisions in Sullivan and

Marshall, defendants cite DuBose v. State of Minn.,

893 F.2d 169, 171 (8th Cir. 1990); Sere v. Board of

Trustees of Univ. of Ill., 852 F.2d 285, 288 (7th Cir.

1988); Ash v. Cvetkov, 739 F.2d 493, 497 (9th Cir.

1984), cert. denied,  470 U.S. 1007,  84 L. Ed. 2d

387, 105 S. Ct. 1368 (1985); and Huey v. Teledyne, Inc., 608 F.2d 1234, 1239 (9th Cir. 1979).

**26

To  summarize  our  holdings  thus  far,  we  have  con- cluded  that  the  district  court  did  not  err  in  dismissing with prejudice under Rule 8 those claims that were not dis- missed with prejudice on other grounds in Westinghouse I and Westinghouse II; that the claims that were dismissed with prejudice in Westinghouse I and Westinghouse II on non-Rule 8 grounds were not later dismissed with prej- udice under Rule 8 as well; and that it is jurisdictionally proper  and  appropriate  for  us  to  consider  whether  the district  court  erred  in  dismissing  these  claims  pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) in Westinghouse I and Westinghouse II.

We exercise plenary review over these dismissals. See, e.g., UJB, 964 F.2d at 279. Moreover, we must accept as true plaintiffs' factual allegations, and we may affirm the district court's dismissals only if it appears certain that plaintiffs can prove no set of facts entitling them to relief. Id. at 279-80 (citation omitted).

*707    In  ruling  on  the  two  rounds  of  motions,  the district court considered various undisputedly authentic documents attached to plaintiffs' complaint or defendants' motions to dismiss.   **27   Because plaintiffs' claims are based  upon  these  documents,  they  were  properly  con- sidered as part of defendants' motions to dismiss. E.g., In  re  Donald  J.  Trump  Casino  Securities  Litigation,  7

F.3d 357, 368 n.9 (3d Cir. 1993), cert. denied, 114 S. Ct.

1219 (1994) (citing Pension Benefit Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993), cert. denied, 510 U.S. 1042, 126 L. Ed. 2d 655, 114 S. Ct.

687 (1994)). III.

Plaintiffs' claims under section 10(b) of the Exchange Act  and  under  sections  11  and  12(2)  of  the  Securities Act  all  require,  among  other  things,  that  plaintiffs  al- lege  a  material  misstatement  or  omission.  See  Trump,

7  F.3d  at  368  n.10.  Defendants  argued  in  the  district court that any misstatements they may have made with respect to the adequacy of WCC's loan loss reserves were not material. Defendants contended, under the "bespeaks caution" doctrine, that their cautionary language regard- ing the adequacy of WCC's loan loss reserves rendered immaterial  any  alleged  misrepresentations.  The  district court  largely  accepted  this  argument.  In  Westinghouse I, the court dismissed most of the allegations regarding loan loss reserves contained in the first amended **28  complaint, see 832 F. Supp. at 973-77, 985-86, n7 and in Westinghouse II, the court clarified that no cautionary language  immunized  defendants'  alleged  misstatements occurring  prior  to  February  27,  1991.  Thus,  under  the

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two opinions and orders, the allegations regarding alleged misstatements about loan loss reserves that were made on or  after  February  27,  1991,  were  dismissed  under  the

"bespeaks  caution"  doctrine.  We  now  turn  to  plaintiffs'

challenge to this dismissal.

n7 Specifically, the court dismissed counts II- V, which alleged violations of sections 11 and 12(2) premised upon the May 1991 prospectus, as well as plaintiffs' section 10(b) claims based upon alleged misstatements regarding loan loss reserves.

As we explained in Trump, "'bespeaks caution' is es- sentially shorthand for the well-established principle that a statement or omission must be considered in context, so that accompanying statements may render it immaterial as a matter of law." 7 F.3d at 364. n8 We described the doctrine as follows:   **29

The application of bespeaks caution de- pends  on  the  specific  text  of  the  offering document or other communication at issue, i.e.,  courts  must  assess  the  communication on  a  case-by--case  basis.  Nevertheless,  we can state as a general matter that,  when an offering  document's  forecasts,  opinions  or projections are accompanied by meaningful cautionary statements,  the forward-looking statements will not form the basis for a se- curities fraud claim if those statements did not affect the "total mix" of information the document provided investors. In other words, cautionary language, if sufficient, renders the alleged omissions or misrepresentations im- material as a matter of law.

. . . Of course, a vague or blanket (boil- erplate) disclaimer which merely warns the reader that the investment has risks will or- dinarily  be  inadequate  to  prevent  misinfor- mation. To suffice, the cautionary statements must be substantive and tailored to the spe- cific future projections, estimates or opinions in the prospectus which the plaintiffs chal- lenge.

. . . The prospectus here truly bespeaks caution because, not only does the prospectus generally convey the riskiness of the invest- ment, but its warnings and **30    caution- ary language directly address the substance of the statement the plaintiffs challenge.

*708  7 F.3d at 371-72 (citation omitted); see also Kline

v. First Western Government Securities, Inc., 24 F.3d 480,

489 (3d Cir.) ("Trump requires that the language bespeak- ing caution relate directly to that by which plaintiffs claim to have been misled.") (citation omitted), cert. denied, 115

S. Ct. 613 (1994). In Trump, we concluded that given the

"extensive yet specific cautionary language, a reasonable factfinder could not conclude" that the alleged misrepre- sentation "would influence a reasonable investor's invest- ment decision." Trump, 7 F.3d at 369; see also 7 F.3d at

373 ("no reasonable jury could conclude that the subject projection materially influenced a reasonable investor").

N8 "Although materiality is a mixed question of  law  and  fact  which  the  trier  of  fact ordinarily decides, 'if the alleged misrepresentations or omis- sions are so obviously unimportant to an investor that  reasonable  minds  cannot  differ  on  the  ques- tion of materiality it is  appropriate for the district court to rule that the allegations are inactionable as a matter of law.'" Id. at 369 n.13 (citations omitted)

(brackets in Trump).

**31

Plaintiffs'  loan  loss  reserves  claims  under  sections

11 and 12(2) are based solely on alleged misstatements in Westinghouse's May 1991 Registration Statement and Prospectus and documents incorporated therein. The re- serves claims under section 10(b) are based upon those documents as well as other alleged misstatements address- ing the adequacy of the loan loss reserves. The essence of plaintiffs' allegations is that defendants knowingly or recklessly misrepresented (i) the adequacy of WCC's loan loss reserves and (ii) compliance with Generally Accepted Accounting Principles ("GAAP") in establishing the re- serves.

With regard to plaintiffs' section 10(b) claims, the dis- trict court concluded that the warnings, "far from being Pollyanish, pointed to still darker clouds on the horizon if the economy generally, and real estate markets specifi- cally, did not improve. . . . Accordingly, despite sufficient allegations of scienter and materiality, defendants' alleged misrepresentations about the adequacy of Westinghouse and WCC loan loss reserves were so strongly qualified by clear warnings about the future that plaintiffs' causes of action . . . must be dismissed under the 'bespeaks caution'

**32   doctrine." 832 F. Supp. at 976. The court reached a similar conclusion with regard to plaintiffs' claims un- der sections 11 and 12(2). See id. at 985-86 (finding that Westinghouse's prospectus "'virtually bristles with warn- ings'" and that its statements regarding the adequacy of its reserves were "remarkably equivocal") (citation omitted). Defendants contend that all of the above claims were

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properly  dismissed  because  any  alleged  misstatements are immaterial when considered in the context of caution- ary language contained in various filings with the SEC. See Westinghouse I, 832 F. Supp. at 974-76 (summariz- ing non-prospectus warnings and quoting from numerous Westinghouse  filings).  In  defense  of  the  district  court's decision,  Westinghouse's  brief  highlights  the  following excerpts from the May 1991 Registration Statement and Prospectus, which typify the warnings on which the de- fendants rely:

As  part  of  the  reclassification  of  the  $3.4 billion  of  assets,  the  Company  reclassified for sale approximately $654 million of mar- ketable securities. . . . This portfolio will be liquidated as soon as practicable;  however, future deterioration in market value could re- sult in additional   **33    losses prior to sale

. . . .

The $3.4 billion in higher-risk and underper- forming  assets  reclassified  as  held  for  sale or restructuring included $2.4 billion in re- ceivables. As such, these receivables had and continue to have a high probability of becom- ing non-earning assets during the expected period of liquidation . . . .

Of the $2.4 billion of receivables held for sale or restructuring, at March 31, 1991, approx- imately $700 million were non-earning, up from $481 million at December 31, 1990. . . . Real estate owned in assets held for sale or re- structuring was approximately $335 million at March 31, 1991, up from $285 million at December 31, 1990.

Of the remaining $8.0 billion in receivables in WFSI's ongoing portfolio, non-earning re- ceivables totaled approximately $180 million at March 31, 1991, up from $71 million at December 31, 1990. Reduced earning receiv- ables totaled approximately $725 million at March  31,  1991,  up  from  $605  million  at December 31, 1990. Real estate owned was approximately  $175  million  at  March  31,

1991, up from $85 million at December 31,

1990.

At  March  31,  1991,  WFSI's  valuation  al- lowances  related  to  assets  held  for   **34  sale  or     *709     restructuring,  and  the  al- lowances for credit losses related to the as-

sets  in  the  ongoing  portfolio,  amounted  to

$1.013  million  and  $306  million,  respec- tively. Management believes that under cur- rent  economic  conditions  such  allowances should be adequate to cover future losses that may occur. However, a further or more pro- longed  downturn  in  the  economy  or  in  the real estate, securities or certain other markets could  have  a  negative  effect  on  the  ability of WFSI's borrowers to repay and on asset values  generally  and  could  result  in  addi- tional  increases  in  non-earnings  assets,  re- structured loans and, ultimately, increases in allowances for losses in both assets held for sale  or  restructuring  and  receivables  in  the balance of WFSI's portfolio.

Westinghouse Br. at 29-30 (quoting App. 748-49) (em- phasis and ellipses in Westinghouse brief).

Plaintiffs argue that this and other similar cautionary language was insufficient because it implied, consistently with the alleged misstatements by Westinghouse officials, that defendants believed, as of February 1991 and there- after, that the loan loss reserves were and would remain adequate "under current economic conditions." Plaintiffs

**35      contend  that  defendants'  statements  regarding the  adequacy  of  the  loan  loss  reserves  were  materially false  when  made  because  defendants  knew  that  the  re- serves were and would remain inadequate, even without any  future  or  prolonged  economic  downturn.  Plaintiffs allege that Westinghouse management and other defen- dants knew that the February 1991 charge was inadequate to cover current and expected future losses. Plaintiffs as- sert that defendants knew that WCC's loan portfolio was overstated by between $2.6 billion and $5.3 billion im- mediately prior to the first writedown of $975 million in February 1991. Pointing to internal documents suggesting that Westinghouse believed that the $975 million charge was "credible" and "affordable," plaintiffs argue that de- fendants should have been concerned with whether the charge complied with GAAP. n9 Plaintiffs also point to the statement by former WCC President James Focareta, in which he allegedly acknowledged that Westinghouse officials  knew  in  February  1991  that  the  $975  million charge was insufficient. See App. 1134.

n9 Plaintiffs allege that GAAP required defen- dants to set their loss reserves based on the value of the collateral supporting each loan in the portfo- lio under current economic and market conditions. E.g.,  App.  1193-96.  Plaintiffs  further  claim  that Westinghouse's failure to comply with GAAP re- sulted in a gross overvaluing of assets and grossly

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inadequate loss reserves. Defendants contend that plaintiffs  cite  no  generally  accepted  accounting principles that would have required Westinghouse to value assets that had probably become impaired at actual value under current economic and market conditions. West. Br. at 26-27. Defendants cite to the Emerging Issues Task Force, Issue No. 88-25, at 6, App. 531-46, and urge that this source disposi- tively provides that defendants were not required to consider present collateral values unless and until they had decided to sell the relevant asset. On the contrary, however, plaintiffs cite a number of pro- visions suggesting that defendants should have fo- cused on current collateral values. See App. 1194-

95. Indeed, the district court cited one of these stan- dards  and  appropriately  instructed  defendants  to raise  their  GAAP  arguments,  if  at  all,  on  a  mo- tion for summary judgment.  Westinghouse I, 832

F.  Supp.  at  971  &  n.11.  Defendants'  reliance  on the Emerging Issues Task Force publication --  as a ground for affirmance of the district court's be- speaks caution decision -- is misplaced. Resolution of a battle of expert sources --  as defendants ex- pect to occur here --  is inappropriate on a motion to dismiss.

**36

Having  carefully  reviewed  the  cautionary  language on  which  the  defendants  and  the  district  court  relied, we find that these statements do not sufficiently counter the  alleged  misrepresentations,  i.e.,  that  the  defendants knowingly or recklessly misrepresented the adequacy of the loan loss reserves and compliance with GAAP. If, as plaintiffs  say,  defendants  knowingly  or  recklessly  mis- represented the adequacy of the loss reserves to protect against known losses and known risks in light of the then- current economic conditions, it follows that defendants' cautionary statements about the future did not render those misrepresentations immaterial. In our view, a reasonable investor would be very interested in knowing, not merely that future economic developments might cause further losses, but that (as plaintiffs allege) current reserves were known  to  be  insufficient  under  current  economic  con- ditions. A reasonable investor might well be willing to

*710   take some chances with regard to the future of the economy, but might be quite unwilling to invest in a com- pany that knew that its reserves were insufficient under current conditions and knew it would be taking another major write-down in the **37   near future (as plaintiffs allege).  Thus,  notwithstanding  the  cautionary  language stressed by defendants, we think that there is a substantial likelihood that defendants' alleged misrepresentations -- i.e., that the loan loss reserves were established in com-

pliance  with  GAAP  and  were  believed  to  be  adequate to  cover  expected  future  losses  given  the  then-existing economic conditions --  would have assumed actual sig- nificance to a reasonable investor contemplating the pur- chase of securities. n10 We therefore cannot say that the cautionary language rendered the alleged misrepresenta- tions immaterial as a matter of law. See Kline, 24 F.3d at 489 (rejecting bespeaks caution argument where pur- ported  cautionary  language  did  not  sufficiently  counter alleged misstatements and omissions); see also Fecht v. The Price Company, 70 F.3d 1078, 1082 (9th Cir. 1995)

("Inclusion of some cautionary language is not enough to support a determination as a matter of law that defendants' statements were not misleading.") (emphasis in original)

(citation omitted), cert. denied, 134 L. Ed. 2d 547, 116 S. Ct. 1422 (1996); Rubinstein v. Collins, 20 F.3d 160, 171

(5th Cir. 1994) (reiterating view that "'to warn **38   that the untoward may occur when the event is contingent is prudent; to caution that it is only possible for the unfavor- able events to happen when they have already occurred is deceit'") (footnote omitted). In short, we cannot con- clude that the alleged misrepresentations would have been

"so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality." UJB,

964 F.2d at 281 n.11 (citation omitted). Dismissal of the loan loss reserves claims for the period after February 27,

1991 was thus improper, and we reverse this aspect of the orders entered in Westinghouse I and Westinghouse II. n11

n10  This  materiality  standard  is  essentially adapted from the Supreme Court's decision in TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). See Trump, 7

F.3d at 369 ("The Supreme Court in TSC Indus., Inc.  v.  Northway,  Inc.,  426  U.S.  438,  48  L.  Ed.

2d 757,  96 S. Ct. 2126 (1976), defined material- ity within the proxy-solicitation context of § 14(a) of the 1934 Act. Subsequently the Court expressly made the TSC standard applicable to actions under

§ 10 and Rule 10b-5, and we have made it applica- ble as well to claims under §§ 11 and 12(2) of the

1933 Act.") (citations omitted).

**39

n11 We note that defendants' reliance on UJB's discussion  of  loan  loss  reserves  is  misplaced. Although it is true that "the economic judgments made in setting loan loss reserves can be validated only at some future date," UJB, 964 F.2d at 281, we made clear in UJB that "if a defendant character- izes loan loss reserves as 'adequate' or 'solid' even though it knows they are inadequate or unstable,

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it exposes itself to possible liability for securities fraud." Id. at 282.

IV.

Plaintiffs next challenge the district court's dismissal of various other portions of their section 10(b) claims. To state a securities fraud claim under section 10(b) and rule

10b-5,  a private plaintiff must plead the following ele- ments:  (1) that the defendant made a misrepresentation or omission of (2) a material (3) fact; (4) that the defen- dant acted with knowledge or recklessness and (5) that the  plaintiff  reasonably  relied  on  the  misrepresentation or omission and (6) consequently suffered damage. E.g., UJB, 964 F.2d at 280. Also, because section 10(b) claims sound in fraud, the circumstances constituting **40   the fraud  must  be  stated  with  particularity.  See  id.  at  284; In re Craftmatic Securities Litigation, 890 F.2d 628, 645

(3d Cir. 1989); Fed. R. Civ. P. 9(b). "Rule 9(b) requires a plaintiff to plead (1) a specific false representation of material fact; (2) knowledge by the person who made it of  its  falsity;  (3)  ignorance  of  its  falsity  by  the  person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage." UJB, 964 F.2d at 284 (citing Christidis v. First Pennsylvania Mortgage Trust,  717 F.2d 96,  99 (3d Cir.

1983)).

Plaintiffs  argue  first  that  the  district  court  improp- erly  dismissed  the  section  10(b)  claims  against  the Westinghouse defendants relating to Westinghouse's al- leged  concealment  of   *711    nonearning  receivables and  inadequate  internal  controls.  Plaintiffs  further  con- tend  that  the  district  court  erred  in  dismissing  the  sec- tion 10(b) claim against Price Waterhouse. Plaintiffs also challenge the district court's dismissal of their claim that one of the underwriter defendants intentionally misled the public in the May 1991 offering. We will consider each of plaintiffs' arguments.

A. Nonearning receivables,   **41    also known as nonaccrual  loans  or  nonearning  loans,  are  defined  as

"loans on which accrual of interest has been suspended because  collectibility  is  doubtful."  American  Institute of  Certified  Public  Accountants  ("AICPA"),  Audits  of Finance  Companies  108  (1994);   see  also  American Bankers Association, Banking Terminology 244 (3d ed.

1989) (defining nonearning asset as "an asset that does not  produce  income,  such  as  .  .  .  required  reserves,  or a nonaccrual loan"). Plaintiffs allege that Westinghouse manipulated its nonearning receivables accounts to over- state the quality of its receivables portfolio.

The  district  court  essentially  found  that  plaintiffs had  not  pled  facts  explaining  with  particularity  how

Westinghouse's statements concerning nonearning receiv- ables were false and misleading or violated GAAP. The district court thus dismissed these allegations under Rules

12(b)(6) and 9(b) as "conclusory rather than factual." 832

F. Supp. at 967-68; see also Westinghouse II, Op. at 4-6, App. 313-15. The court found that plaintiffs, with the ben- efit of hindsight, were merely challenging Westinghouse's judgment as to when collectibility on the loans became doubtful. Id. **42   We disagree.

Plaintiffs allege that the Westinghouse defendants ar- bitrarily moved loans from nonearning to earning status just before mandated public reporting when, in fact, noth- ing had changed regarding the likelihood of collection. Plaintiffs contend that they have pled specific facts per- mitting the inference that defendants were intentionally concealing loan losses. We agree. Plaintiffs are not merely challenging  defendants'  judgment  regarding  when  col- lectibility became doubtful; instead, plaintiffs allege that defendants changed the classification of the loans when nothing  regarding  collectibility  had  occurred.  Plaintiffs allege that specific loans had at least three of the eight AICPA earmarks for nonearning status both before and after  they  were  removed  from  nonearning  status.  On  a motion for summary judgment, defendants may be able to show why the status of these loans consistently changed just prior to the time of reporting, and they may be able to establish that no reasonable factfinder could find for plain- tiffs. At this stage, however, we cannot say that plaintiffs have failed to state a claim or have failed to plead fraud with sufficient particularity. We therefore reverse **43  this aspect of the district court's orders.

B.  Plaintiffs  also  allege  that  Westinghouse  fraudu- lently overstated the quality of its internal controls, in vi- olation of section 10(b). Westinghouse indisputably made representations throughout the class period regarding the adequacy  of  its  internal  controls.  Plaintiffs  essentially contend that those statements were made without a rea- sonable basis and with knowledge of or in reckless disre- gard of facts suggesting their falsity.

Plaintiffs' claim is based primarily on an internal re- port prepared following an anonymous tip alleging inad- equate  internal  accounting  controls.  After  rejecting  the assertions of the anonymous tip, the November 1990 re- port discussed recommendations for improving internal controls  and  addressing  some overall concerns  that the auditors had identified. See App. 939-53.

The district court found that "the fact that the inter- nal auditors also recommended improvements in valua- tion methods and tighter standards for internal valuations does not support plaintiffs' claim that in its Form 10K's Westinghouse  fraudulently  or  even  inaccurately  repre- sented  its  internal  controls  as  adequate."  832  F.  Supp.

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at 979; see also   **44    Westinghouse II, at 8-9 ("plain- tiffs'  assertions  amount  to  nothing  more  than  'fraud  by hindsight' allegations, based on the premise that the in- ternal controls turned out to be inadequate."). We agree that plaintiffs have failed to plead any facts supporting their  conclusory  allegation  that  Westinghouse  fraudu- lently  misrepresented  the  adequacy  of  its  internal  con- trols. We therefore   *712   affirm dismissal of this aspect of the section 10(b) claim.

C. Plaintiffs argue that the district court, by "compart- mentalizing the evidence and wiping the slate clean after considering each component," failed to give weight to the

"totality of the pleadings." Plfs' Br. at 25. We have in- structed that the district courts should engage in precisely the sort of analysis undertaken by the district court in this case, see, e.g., UJB, 964 F.2d at 284; Craftmatic, 890 F.2d at 640, and we therefore find no merit in this argument.

In addition, plaintiffs' discussion of Rule 9(b) suggests that the district court improperly required them to plead defendants' state of mind with particularity. See Plfs' Br. at

18-20 (relying on In re Glenfed, Inc. Securities Litigation,

42 F.3d 1541 (9th Cir.   **45   1994) (en banc)). We do not see any evidence of such a requirement in the district court's  opinions,  and  we  therefore  find  plaintiffs'  legal argument irrelevant.

D.  Plaintiffs  also  appeal  from  dismissal  of  cer- tain  aspects  of  their  section  10(b)  claim  against  Price Waterhouse arising out of Price Waterhouse's 1988 and

1989 audits. The district court granted Price Waterhouse's motion to dismiss in Westinghouse II based on plaintiffs' failure to plead any facts suggesting fraud on the part of Price Waterhouse with respect to the 1988 and 1989 au- dits. Westinghouse II, at 21-30, App. 330-39. The district court concluded that plaintiffs failed to state a fraud claim both with respect  to whether Price  Waterhouse  fraudu- lently violated Generally Accepted Accounting Standards

("GAAS") in its 1988 and 1989 audits and with respect to whether Price Waterhouse knew that Westinghouse's

1988 and 1989 financial statements failed to comply with GAAP  and  fraudulently  stated  otherwise.  The  district court  found  that  the  only  factual  allegations  contained in the second amended complaint relevant to plaintiffs' section 10(b) claims against Price Waterhouse related to the 1990 audit.

Although plaintiffs **46   cite various GAAS stan- dards, they nowhere explain how Price Waterhouse know- ingly or recklessly violated those standards in perform- ing  its  1988  and  1989  audits.  For  example,  plaintiffs' complaint fails to allege any facts supporting their con- clusory allegation that Price Waterhouse failed to follow GAAS in determining whether Westinghouse's 2.5% loss reserves were reasonable in 1988 and 1989. Moreover, as

Price Waterhouse properly argues, plaintiffs do not allege that Price Waterhouse failed to consider the adequacy of Westinghouse's internal controls in planning the scope of or in executing the 1988 and 1989 audits; nor do plaintiffs allege that Price Waterhouse opined on the adequacy of Westinghouse's internal controls in those audits.

Plaintiffs' GAAP arguments are similarly unavailing. Under Christidis, plaintiffs must allege facts that give rise to an inference that Price Waterhouse knew or was reck- less in not knowing that Westinghouse's financial state- ments  failed  to  comply  with  GAAP.  717  F.2d  at  100; see  also  Eisenberg  v.  Gagnon,  766  F.2d  770,  776-78

(3d Cir.),  cert. denied,  474 U.S. 946 (1985). There are no  facts  cited  in  plaintiffs'  second  amended  complaint supporting   **47    an  inference  that  Price  Waterhouse knew or was reckless in not knowing that Westinghouse was using speculative, inflated values in valuing receiv- ables.  Moreover,  although  Price  Waterhouse  concedes that  it  knew  that  Westinghouse  set  its  loss  reserves  at

2.5% of total assets in audit years 1988 and 1989,  this fact  provides  no  support  for  plaintiffs'  allegation  that Price Waterhouse knew that Westinghouse was violating GAAP in those years. Assuming that Westinghouse vio- lated GAAP during 1988 and 1989, plaintiffs nonetheless fail to allege facts suggesting that Price Waterhouse in- tentionally or recklessly misrepresented Westinghouse's compliance with GAAP.

In  short,  plaintiffs  fail  to  allege  any  facts  support- ing an inference that Price Waterhouse made fraudulent misrepresentations in its 1988 and 1989 audit opinions. Plaintiffs'  allegations  do  not  support  an  inference  that Price Waterhouse could not reasonably and in good faith have opined that the financial statements as a whole fairly presented the financial condition of Westinghouse in ac- cordance  with  GAAP.  We  therefore  affirm  the  district court's order dismissing the section   *713   10(b) claims against  Price  Waterhouse  arising  out  of  Price   **48  Waterhouse's 1988 and 1989 audits.

E.  Plaintiffs  also  challenge  the  district  court's  dis- missal of their section 10(b) claims against Lazard Freres

("Lazard"), one of the underwriter defendants. In addition to dismissing these claims under the "bespeaks caution" doctrine, the district court dismissed them on the ground that plaintiffs failed to plead any facts supporting section

10(b) liability against Lazard. See Westinghouse I, 832 F. Supp. at 979-81; Westinghouse II, at 33-34, App. 342-

43. In Westinghouse I, the district court found that the documents upon which plaintiffs relied could not bear the construction placed on them by plaintiffs.  832 F. Supp. at 979-81; see also Westinghouse II, at 33, App. 342. We agree.

Plaintiffs                 place       primary   reliance   on            Lazard's

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December 2, 1990, Progress Report and on a document entitled "Westinghouse Electric-- Board Meeting Q & A," developed for use at the February 27, 1991, Board meet- ing.  See  App.  1428-41  (Progress  Report);  App.  1134-

36 (Q & A). Plaintiffs also rely on a report prepared by

Westinghouse in September 1990. See App. 918-36.

In the Progress Report, Lazard recommended "serious consideration  of  a comprehensive **49    restructuring program which could include a one-time charge to earn- ings." App. 1435. Lazard also explained that "the possible restructuring outlined earlier implies the ultimate dispo- sition of roughly $3.2 billion or 55% of non-real estate assets  and  at  least  $1.5  billion  of  real  estate  (problem real estate totalled $1.5 billion or 37% of the portfolio at September 30, 1990)." App. 1440 (emphasis in origi- nal). In the proposed question and answer script, Lazard suggested the following response to the question,  "Are the  reserves  adequate?":   "Given  the  results  of  each  of these review processes, the charge taken today is clearly reasonable but was at the low end of the range identified by management in conjunction with the strategic review performed by Lazard." App. 1135.

Based  on  the  above  sources,  plaintiffs  argue  that Lazard  knew  that  the  February  1991  charge  was  inad- equate  to  protect  against  known  and  likely  losses.  We agree  with  the  district  court,  however,  that  the  docu- ments on which plaintiffs rely simply do not support their conclusory  allegations  and  that  plaintiffs  fail  to  allege facts supporting their section 10(b) claims against Lazard. n12  These  claims  were  properly   **50    dismissed  in Westinghouse I and Westinghouse II.

n12 For example, plaintiffs' reply brief asserts that "Lazard had alerted the Westinghouse Board to the fact that reserves were inadequate, even after the special provision of $975 million under exist- ing  asset  disposition  strategies."  Plfs'  Rep.  Br.  at

18 (citing 2nd Am. Comp. P 152, App. 1135). But the proposed questions and answers to which plain- tiffs cite simply do not suggest that Lazard believed the charge to be inadequate as of or after February

1991.

V.

Defendants argued in the district court that plaintiffs' allegations regarding loan loss reserves and non-earning loans in count I were subject to dismissal as being quanti- tatively immaterial as a matter of law (separate and apart from the "bespeaks caution" doctrine). In Westinghouse I, the district court rejected defendants' argument,  find- ing  that  the  allegations  of  wrongfully  understated  re- serves  were  sufficiently  substantial  when  compared  to

Westinghouse's net income for the relevant time **51  periods.  832 F. Supp. at 971-73. In Westinghouse II, de- fendants argued that plaintiffs failed to allege a material misrepresentation or omission during the time period of March 28, 1989, through March 28, 1990 (i.e., the first year of the class period) with respect to their allegations regarding  the  loan  loss  reserves  and  nonearning  loans. Westinghouse II, Op. at 13-18, App. 322-27. The district court agreed and dismissed these claims for the first year of the class period. Id.

Plaintiffs  challenge  this  aspect  of  Westinghouse  II, Plfs' Br. at 34-38, and defendants counter that all of the allegations regarding nonearning assets and loan loss re- serves  (not  merely  those  for  the  first  year  of  the  class period) could and should have been dismissed on quanti- tative materiality grounds. West. Br. at 39-45. Assuming without deciding that defendants' latter argument (which was   *714   not raised on defendants' motion to dismiss the second amended complaint) is properly before us, we find it to be without merit. n13 We thus turn to the dis- missal of plaintiffs' claims for the first year of the class period.

n13  Defendants  rely  on  Instruction  2  to  Item

103 of S.E.C. Regulation S-K, 17 C.F.R. § 229.103, in support of their argument that materiality should in all circumstances be quantified at 10% of current assets. Instruction 2 states in relevant part that "no information need be given with respect to any le- gal  proceeding that involves primarily a claim for damages if the amount involved,  exclusive of in- terest and costs, does not exceed 10 percent of the current assets of the registrant and its subsidiaries on a consolidated basis." Id. This regulation has no application here, and not surprisingly, defendants do not point to any cases extending this instruction beyond its intended scope.

**52

As  referred  to  earlier  in  our  discussion  of  the  "be- speaks caution" doctrine, "an omitted fact is material if there  is  a  'substantial  likelihood that,  under  all  the  cir- cumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable share- holder.'" UJB, 964 F.2d at 281 n.11 (quoting T.S.C. Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d

757, 96 S. Ct. 2126 (1976)). "In other words, the issue is whether there is a substantial likelihood that the disclo- sure would have been viewed by the reasonable investor as having 'significantly altered the "total mix" of informa- tion' available to that investor." Id. Moreover, "materiality is a mixed question of law and fact, and the delicate assess- ments of the inferences a reasonable shareholder would

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draw from a given set of facts are peculiarly for the trier of fact." Id. (citing T.S.C., 426 U.S. at 450). Therefore,

"only if the alleged misrepresentations or omissions are so obviously unimportant to an investor that reasonable minds cannot differ on the question of materiality is it ap- propriate for the district court to rule that the allegations are inactionable as a matter of law." Id.

The district **53  court recognized that the adequacy of loan loss reserves is generally the type of information that would significantly influence a reasonable investor. Westinghouse  I,  832  F.  Supp.  at  972  (citing  UJB,  964

F.2d  at  281).  However,  the  court  also  tested  plaintiffs' complaint to determine whether the allegations regarding loan loss reserves were quantitatively material in this par- ticular case. The district court stated that "the failure to disclose that a loan portfolio is likely to be impaired by some de minimis amount may be 'relevant' in that it is the type of information that investors care about, but of such 'dubious significance' as to be 'trivial,' and 'hardly conducive  to  informed  decisionmaking,'  so  that  to  rea- sonable shareholders, such omission must be immaterial as a matter of law." 832 F. Supp. at 972 (quoting TSC Industries, 426 U.S. at 448-49). We agree. See generally Loss & Seligman, Fundamentals of Securities Regulation

137-41, 479-80 (1995) (quantitative materiality analysis is generally appropriate, though not when "such matters as a conflict of interest or criminal violations are at is- sue");  see also Ferber v. Travelers Corp.,  802 F. Supp.

698,   **54    708 (D. Conn. 1992) (omission of extent of  second  mortgages not  material  in  relation  to  overall real estate, investment, and asset portfolios);  In re First Chicago Corp. Securities Litigation, 769 F. Supp. 1444,

1454 (N.D. Ill. 1991) (total value of alleged bad loan im- material in relation to size of defendant's real estate loan portfolio). n14

n14  We  thus  reject  plaintiffs'  argument  that all   misstatements   regarding   loan   loss   reserves and  nonearning  receivables  are  inherently  mate- rial. But we also reject defendants' similarly cat- egorical  assertion  that  materiality  must  be  quan- tified  at  a  specified  percentage  of  income  or  as- sets.  Although  "a  'rule  of  thumb'  of  5-10  per- cent  of  net  income  is  widely  used  as  a  general materiality  criterion"  in  the  accounting  profes- sion," see Financial Accounting Standards Board, Accounting  Standards:   Statements  of  Financial Accounting  Concepts  No.  2,  App.  C,  P  167,  at

81 (1989) (citing James W. Pattillo, The Concept of Materiality in Financial Reporting (1976)), the question  of  materiality  must  be  considered  on  a case-by--case basis under the standards set forth in T.S.C. Industries and our cases. See also Pattillo,

supra,  at 12 (advocating consideration of various factors in determining materiality in the accounting profession and concluding that "the single rule-of-- thumb materiality criterion of 5%-10% of net in- come  or  loss  should  be  used --  if  at  all,  and  by itself -- with extreme caution").

**55

Plaintiffs do not dispute that their only allegation chal- lenging  the  adequacy  of  loan  loss  reserves  prior  to  the fourth quarter   *715   of 1989 has to do with one asset that allegedly was improperly not written down by $1.278 million  during  the  third  quarter  of  that  year.  See  App.

1234.  The  charge  that  would  have  followed  the  write- down of this asset would have amounted to merely 0.54% of  Westinghouse's  net  income  of  $234  million  for  that quarter. n15 We agree with the district court that this al- legation is not sufficiently material to be actionable, i.e., there is not a substantial likelihood that this information would  have  assumed  actual  significance  in  the  deliber- ations of a reasonable investor. Plaintiffs thus allege no actionable reserves claims for the period prior to the fourth quarter of 1989. The first actionable disclosures alleged in the second amended complaint relating to loan loss re- serves for the fourth quarter of 1989 occurred on March

29, 1990. The district court thus properly dismissed the reserves allegations that concern the period prior to the March 29, 1990, disclosures.

n15 As the district court stated, "what is affected most immediately by the development of a loss re- serve for accounting purposes is income not assets. In order to determine the materiality of allegedly inadequate loan loss reserves, the focus then must be the amount of loan loss reserves alleged to have been wrongfully not posted as a percentage of in- come during the relevant period,  rather than as a percentage of current assets." Westinghouse I, 832

F. Supp. at 973 (citation omitted).

**56

The district court also dismissed the nonearning loans allegations relating to the first year of the class period. The  court  found  that  the  assets  identified  in  plaintiffs' complaint that allegedly should have been classified as nonearning through the fourth quarter of 1989 were barely

1% of Westinghouse's current assets for any quarter dur- ing that period and were thus immaterial. n16 The second amended complaint alleges that prior to the fourth quar- ter of 1989,  eight assets were improperly not classified as nonearning assets. See App. 1169-76. These accounts amount  to  just  0.51%  of  Westinghouse's  current  assets for the first and second quarters of 1989 and only 1.2%

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of Westinghouse's current assets for the third quarter of

1989.  We  again  agree  with  the  district  court  that  these allegations are not sufficiently substantial to be material, and plaintiffs therefore allege no actionable nonearning loans claims for the period prior to the fourth quarter of

1989. n17 As with the reserves claims, the first actionable disclosures alleged in the second amended complaint re- lating to nonearning loans for the fourth quarter of 1989 occurred on March 29, 1990. The district court thus prop- erly **57    dismissed the nonearning loans allegations that  relate  to  the  period  prior  to  the  March  29,  1990, disclosures.

n16 As the district court noted, plaintiffs "them- selves  allege  that  the  effect  of  'artificially  reduc- ing the reported level of non-earning receivables' is to 'overstate the quality (and, hence, the value) of  the  receivables  portfolio'  as  a  whole.  As  a  re- sult, the materiality of plaintiffs' allegations regard- ing Westinghouse's non-earning assets is properly measured by comparison with Westinghouse's to- tal current assets." Westinghouse II, Op. at 15 n.8, App. 324 n.8 (quoting 2nd Am. Comp.)  (brackets omitted).

n17 Plaintiffs argue that they should not be re- quired  to  support  their  claims  through  loan-by-- loan allegations. At least in the circumstances of this case, where plaintiffs have had the benefit of reviewing the relevant loan files prior to filing their amended complaint, we think it is entirely appro- priate to require such a level of specificity. See also Westinghouse I, 832 F. Supp. at 973.

**58  VI.

A. As discussed above, the district court dismissed the section 12(2) claims under the "bespeaks caution" doc- trine. The district court also dismissed the section 12(2) claims on the ground that plaintiffs failed to allege that defendants "offered or sold" Westinghouse securities to plaintiffs within the meaning of section 12(2). We turn now to plaintiffs' challenge to this determination.

Section 12(2) provides that a person who "offers or sells" newly issued securities by means of a prospectus or oral communication that misrepresents or omits material facts is liable to the person "purchasing such security from him." 15 U.S.C. § 77l(2). In Pinter v. Dahl, 486 U.S. 622,

100 L. Ed. 2d 658, 108 S. Ct. 2063 (1988), the Supreme

Court stated that although the language of section 12(1)

"contemplates a buyer-seller relationship not unlike tradi- tional contract privity," id. at 642, its scope is not limited only to those who pass title.  Id. at   *716   642-47. The

Court held that the term "seller" in the context of section

12(1) includes (1) "the owner who passed title, or other interest in the security, to the buyer for value" and (2) "the person who successfully solicits the purchase, motivated at least in part **59    by a desire to serve his own fi- nancial interests or those of the securities owner." Id. at

642, 647. Under Pinter, both direct sellers and those who engage in the active solicitation of an offer to buy can be

"sellers" for purposes of section 12(1). See id. at 646-47. In In re Craftmatic Securities Litigation, 890 F.2d 628

(3d Cir. 1989), we held that the Supreme Court's defini- tion  of  the  term  "seller"  under  section  12(1)  applies  in actions brought under section 12(2).   Id. at 634-36; see also UJB, 964 F.2d at 286-87. Thus, under Pinter and our cases, a section 12(2) seller may be one who passes title to the buyer for value (a direct seller) or one "who suc- cessfully solicits the purchase, motivated at least in part by a desire to serve his own financial interests or those of the securities owner" (a solicitor seller).  Pinter, 486 U.S. at 643.

In Craftmatic, we cautioned that "the language of §

12, which makes a participant liable to the 'person pur- chasing such a security from him . . .,' precludes actions against remote sellers, and focuses the inquiry on the rela- tionship between the purchaser and the participant, rather than on the latter's degree **60   of involvement in the transaction." Craftmatic, 890 F.2d at 636 (citation omit- ted).  We  added  with  regard  to  solicitation  liability  that

"although an issuer is no longer immunized from § 12 li- ability, neither is an issuer liable solely on the basis of its involvement in preparing the prospectus. The purchaser must  demonstrate  direct  and  active  participation  in  the solicitation of the immediate sale to hold the issuer liable as a § 12(2) seller." Id. (citations omitted).

B. Plaintiffs do not claim that any of the Westinghouse defendants  were  direct  sellers.  Rather,  plaintiffs  allege that the underwriter defendants purchased the shares from Westinghouse  and  resold  them  to  the  public,  including plaintiffs. E.g., App. 362-63, 366-67. The Westinghouse defendants therefore cannot be liable under section 12(2) as  direct  sellers.  Cf.   UJB,  964  F.2d  at  287  (plaintiffs not required to allege direct and active solicitation where newly offered shares were purchased directly through de- fendant UJB). Plaintiffs further allege as follows:

593. The section 12 Defendants were sellers of Westinghouse securities within the mean- ing  of  Section  12(2)  of  the  Securities  Act and either **61   sold or promoted the sale of  said  securities  directly  to  plaintiffs  and other  Class  members  or  solicited  plaintiffs and other Class members to buy such securi-

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ties. In so acting, the Section 12 Defendants were motivated by a desire to serve their own financial interests.

App.  506  (count  III);  see  also  App.  511-12  (count V).   Plaintiffs   allege   no   facts   suggesting   how   any Westinghouse  defendants  directly  and  actively  partici- pated in the solicitation of plaintiffs' immediate purchases of Westinghouse stock.

The district court dismissed the section 12(2) claims, explaining as follows:

Plaintiffs                 have        not           alleged    that          the Westinghouse defendants in fact sold or so- licited  the  purchase  of  Westinghouse  secu- rities,  but  attempt  nonetheless  to  analogize their allegations to the allegations and hold- ing in Craftmatic by pointing to the similarity of language employed. . . . The conclusory allegation  that  defendants  sold  or  solicited the  purchase  of  securities  will  withstand  a motion  to  dismiss  only  if  accompanied  by allegations of fact that defendants did sell or solicit the purchase of securities.

Westinghouse I, 832 F. Supp. at 984 (citation and footnote

**62   omitted) (emphasis in original). n18 Plaintiffs ar- gue that because the facts alleged in their complaint are so similar to   *717   the factual allegations of the complaint sustained in Craftmatic, they stated a section 12(2) claim. See Plfs' Br. at 40-41. We are constrained to agree.

n18  Westinghouse  concedes  here,  as  it  did in  the  district  court,  that  it  directly  sold  securi- ties pursuant to the DRP prospectus, and that the two  named  plaintiffs  who  purchased  pursuant  to that prospectus stated section 12(2) claims against Westinghouse itself in count V. See Westinghouse I, 832 F. Supp. at 984 n.23 & 987 n.24; see also West. Br. at 47.

It is certainly true that plaintiffs' section 12(2) allega- tions are not clearly drafted. Plaintiffs do not, for example, make clear which defendants are alleged to be direct sell- ers as opposed to solicitor sellers. See UJB, 964 F.2d at

287 n.17. Nor do plaintiffs allege how the Westinghouse defendants, assuming they are alleged to be solicitor sell- ers, directly and actively **63    participated in the so- licitation of the immediate sales. n19 Further, plaintiffs' allegation that defendants "promoted the sale of" securi- ties would not,  standing alone,  give rise to any section

12(2) liability. The district court could certainly require

that plaintiffs clear up these ambiguities on remand.

n19 An allegation of direct and active partici- pation in the solicitation of the immediate sale is necessary for solicitation liability,  i.e.,  where the section 12(2) defendant is not a direct seller. See UJB, 964 F.2d at 287. Such an allegation is crucial so  as  to  ensure  a  direct  relationship  between  the purchaser and the defendant, without which a de- fendant is simply not a statutory seller. See Pinter,

486 U.S. at 651 ("The 'purchase from' requirement of § 12 focuses on the defendant's relationship with the plaintiff-purchaser.").

Taken in the light most favorable to plaintiffs, how- ever, the complaint does allege that the Westinghouse de- fendants "solicited plaintiffs" to purchase Westinghouse securities **64  and that in so doing they were motivated by a desire to serve their own financial interests. Contrary to the district court's statement, these are factual allega- tions -- allegations plaintiffs will have to prove -- and not bare legal conclusions. Under Craftmatic, plaintiffs' alle- gations are sufficient to survive a motion to dismiss under Rule  12(b)(6):   "It  cannot  be  said  at  this  juncture  that plaintiffs can prove no set of facts that would entitle them to relief." Craftmatic, 890 F.2d at 637 (citations omitted). For these reasons, we reverse the district court's order dis- missing the section 12(2) claims against the Westinghouse defendants.

We note that although fraud is not a necessary element of a claim under section 12(2), section 12(2) claims that do sound in fraud must be pled with particularity. UJB,

964 F.2d at 288-89. The district court did not decide, nor do defendants argue, that plaintiffs' section 12(2) claims sound in fraud. n20 To the extent, if any, that the section

12(2) claims in fact sound in fraud, plaintiffs could justi- fiably be required to plead the circumstances constituting fraud  with  the  particularity  required  by  Rule  9(b).  n21

This is not,  however,   **65    the theory on which the district court rested its decision; nor has it been advanced by the parties in this court.

n20 It seems to us that the district court effec- tively imposed a heightened pleading requirement on plaintiffs and that the court implicitly required plaintiffs to plead their section 12(2) claims with the particularity required by Rule 9(b). Absent a deter- mination  that  plaintiffs'  claims  sounded  in  fraud, or some analysis explaining why Rule 9(b) should apply when a section 12(2) claim does not sound in fraud, see UJB, 964 F.2d at 288 ("By its plain wording,  Rule 9(b) would not appear to apply to claims that a defendant negligently violated §§ 11

90 F.3d 696, *717; 1996 U.S. App. LEXIS 17608, **65;

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Page 17

and 12(2);  we need not and do no decide this is- sue."); see also In re Phar-Mor, Inc. Litigation, 848

F. Supp. 46, 50 (W.D. Pa. 1993); In re Chambers

Development  Securities  Litigation,  848  F.  Supp.

602, 624 (W.D. Pa. 1994), this constitutes legal er- ror. As mentioned, defendants have not attempted to defend the district court's order on these alterna- tive grounds, and we do not reach these issues.

n21 Unlike the complaint in UJB -- where the section  12(2)  count  sounded  in  fraud  essentially because  it  incorporated  all  prior  factual  allega- tions,  including those alleging intentional,  know- ing, and reckless conduct, UJB, 964 F.2d at 287-

88 --  count III of the first amended complaint in this case incorporates only paragraphs 1-28 (juris- diction/venue, parties, and class action allegations) and  paragraphs  423-38  (section  11  allegations). App.  505.  The  section  12(2)  count  itself  alleges that the Westinghouse defendants "knew or, in the exercise  of  reasonable  care,  should  have  known of  the  misstatements  and  omissions  contained  in the Registration Statement/Prospectus and the doc- uments  incorporated  therein  by  reference."  App.

507;  see  also  PW  Br.  at  37  ("In  opposing  Price Waterhouse's  motion  to  dismiss  their  Section  11 claims, plaintiffs expressly disavowed any reliance on  the  allegations  supporting  the  fraud  claims  in an effort to avoid having Rule 9(b) apply to these claims.") (emphasis in PW brief).

**66

C. As to the underwriter defendants, the first amended complaint alleges that "each member of the Underwriter Class   sold   Westinghouse   stock   to   members   of   the Prospectus  Subclass  during  the  Class  Period."  App.

*718      367.  Plaintiffs  further  allege  that  the  under- writer defendants sold Westinghouse securities "directly to plaintiffs and other Class members." App. 506.

The district court dismissed the section 12(2) claims against  the  underwriter  defendants,  finding  that  plain- tiffs failed to allege that the underwriter defendants were statutory  sellers  under  section  12(2).  The  district  court explained as follows:

In Count Three, plaintiffs must allege, to state a viable Section 12(2) cause of action, that  the  underwriter  defendants  were  "sell- ers"  within  the  meaning  of  Section  12(2). That is, there must be an allegation that a par- ticular proposed defendant sold or solicited the sale of Westinghouse securities to the in- dividual plaintiffs.  Pinter v. Dahl, 486 U.S.

at 643-47. This element is lacking.

Westinghouse I, 832 F. Supp. at 987. n22

n22  The  district  court  also  found  that  plain- tiffs were attempting to bring a class action against a  proposed  class  of  defendants  "without  alleging facts which would establish standing by a plaintiff against each defendant." Id. The court stressed that

"there must be a representative plaintiff who alleges sale or solicitation by each proposed defendant." Id.

(citations omitted). While these concerns might be relevant on a motion for class certification, they do not address whether, as a threshold matter, plain- tiffs  properly  stated  a  section  12(2)  claim  under Rule 12(b)(6).

**67

We agree with the district court that plaintiffs must allege that the underwriter defendants were section 12(2) sellers, but we do not find support in Pinter for the district court's statement that, in order to achieve this, plaintiffs are required to allege which underwriter sold securities to each plaintiff. Under Pinter, a plaintiff will not succeed on a section 12(2) claim unless the plaintiff shows, among other things, that the plaintiff bought from or was solicited by a specified statutory seller. But Pinter does not address what allegations are necessary to plead that a defendant is a seller within the meaning of the statute. n23 Absent a particularity requirement, n24 plaintiffs must provide a short and plain statement showing that the underwriter de- fendants are statutory sellers and that plaintiffs purchased securities from them.

n23 Pinter reached the Supreme Court follow- ing an affirmance by the Fifth Circuit of a judgment for investors entered after a bench trial in the dis- trict court.  Pinter, 486 U.S. at 628-29. The opinion concerns the burden of proving that a defendant is a statutory seller, not the burden of pleading such an allegation.

**68

n24 We note that some of the authorities relied upon by defendants dismissed section 12(2) claims under Rule 9(b). E.g., Friedman v. Arizona World Nurseries Ltd. Partnership, 730 F. Supp. 521, 542

(S.D.N.Y. 1990) (section 12(2) claim not pled with particularity required by rule 9(b)), aff'd, 927 F.2d

594 (2d Cir. 1991) (Table). We again emphasize that the district court did not find, nor do defendants ar- gue, that plaintiffs' section 12(2) claims sound in

90 F.3d 696, *718; 1996 U.S. App. LEXIS 17608, **68;

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Page 18

fraud. These authorities are thus inapposite. Also, defendants rely on cases in which there was no al- legation that plaintiffs purchased directly from de- fendants, e.g., In re Newbridge Networks Securities Litigation, 767 F. Supp. 275, 280-81 (D.D.C. 1991)

("nowhere does the complaint state that plaintiffs

'purchased from' defendants, or that defendants sold directly to plaintiffs"),  as distinguished from this case, where there is indisputably a general allega- tion to that effect.

We find that plaintiffs satisfied this requirement and stated a section 12(2) claim against the underwriter de- fendants.  Taken  in  the  light  most   **69    favorable  to plaintiffs, the first amended complaint alleges that each of the underwriter defendants sold Westinghouse securi- ties directly to plaintiffs and that each plaintiff purchased Westinghouse securities directly from an underwriter de- fendant. Cf. Jackson v. First Federal Savings of Arkansas,

709 F. Supp. 863, 884 (E.D. Ark. 1988) (dismissing sec- tion 12(2) claim where plaintiff did not allege that any defendant  sold  him  his  shares  or  solicited  him  to  buy his  shares).  The  defendants  and  the  district  court  have not pointed to any authority requiring anything further. Although plaintiffs did not submit a model pleading, we cannot say they failed to state a claim under Rule 12(b)(6). n25 Compare Craftmatic, 890 F.2d at   *719    637; see also Moore v. Kayport Package Express, Inc., 885 F.2d

531, 538-39 (9th Cir. 1989) ("While this is not a model form  of  pleading  a  section  12(2)  claim,  it  satisfies  the short and plain statement rule of Rule 8(a)(2) which pro- vides that a pleading which sets forth a claim for relief shall  contain  'a  short  and  plain  statement  of  the  claim showing that the pleader is entitled to relief.'") (citation omitted); In re Chambers Development Securities   **70  Litigation, 848 F. Supp. 602, 625 (W.D. Pa. 1994) (sus- taining section 12(2) allegations not unlike those in this case); Miller v. New America High Income Fund, 755 F. Supp. 1099, 1105 (D. Mass. 1991) ("Applying the appro- priate standard of scrutiny for a Rule 12(b)(6) motion, a set of facts establishing the underwriter defendants as 'sell- ers' is clearly plausible, although the plaintiffs must later produce facts to prove the underwriter defendants' actual participation in the activity.") (citation omitted), aff'd, 36

F.3d 170 (1st Cir. 1994). We therefore reverse the district court's order dismissing the section 12(2) claims against the underwriter defendants.

n25  We  alternatively  hold  that  the  district court's dismissal of plaintiffs' section 12(2) claims based on plaintiffs' failure to specify which under- writers sold to each plaintiff should have been with- out prejudice and with leave to amend. See gener-

ally, e.g., District Council 47, American Federation v. Bradley, 795 F.2d 310, 316 (3d Cir. 1986); Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 48

(2d Cir. 1991) (dismissal for curable pleading de- fect should generally be without prejudice and with leave to amend), cert. denied, 503 U.S. 960 (1992). At  oral  argument,  defense  counsel  indicated  that the dismissal of these claims may have been with prejudice because the claims were dismissed with prejudice  on  the  independent  "bespeaks  caution" ground. We have already reversed that determina- tion, and we now hold that even assuming that the district  court  properly  found  plaintiffs'  complaint lacking  for  failure  to  specify  which  underwriter sold to each plaintiff, it should have dismissed the claims without prejudice and with leave to amend.

**71  VII.

After  defendants  filed  the  motions  to  dismiss  that led  to  Westinghouse  II,  plaintiffs  cross-moved  to  sup- plement the second amended complaint. See App. 1582-

83. Plaintiffs sought to add an additional alleged misrep- resentation -- Lego's alleged October 1990 statement that Westinghouse had only an immaterial amount of restruc- tured receivables.

Plaintiffs'  motion  is  not  discussed  at  any  length  in Westinghouse II. It is addressed in one sentence of the opinion and one sentence of the order. See Westinghouse II, Op. at 21, App. 330 (dismissing second amended com- plaint  under  rule  8;  granting  plaintiffs  30  days  within which to replead surviving claims in compliance with rule

8; and denying as moot the cross-motion to supplement); Westinghouse II, Order at 35, App. 344 ("Plaintiffs' cross- motion to supplement the Second Amended Complaint

(Docket No. 174) is denied as moot."). In their brief on appeal,  plaintiffs  state  that  "the  only  possible  basis  for the finding of mootness was the blanket dismissal of the Second Complaint under Rule 8." Plaintiffs' Br. at 47. It seems to us that this is in fact why the district judge dis- missed the motion as moot --  because plaintiffs **72  were presumably going to be submitting a third amended complaint and would include the newly-discovered alle- gation in that complaint.

We find no abuse of discretion in this ruling. The plain- tiffs could have included (and were expected to include) the  allegation  at  issue  in  the  third  amended  complaint. They chose not to submit that complaint. The allegation at  issue  is  relevant  to  claims  that  survived  the  district court's  orders  in  Westinghouse  I  and  Westinghouse  II, claims  that  were  dismissed  with  prejudice  under  Rule

8  only  after  plaintiffs'  decision  to  stand  on  the  second

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Page 19

amended complaint. Plaintiffs therefore abandoned this allegation when they chose not to submit a third amended complaint.

VIII.

Plaintiffs argue that on remand this case should be re- assigned to a new district court judge. Plaintiffs rely pri- marily upon the following statement from Westinghouse I:

In the early 1980's, WCC hit its stride when it tapped into the booming commercial and residential real estate markets.

Such success, however, was short-lived. WCC's  fortunes  collapsed  along  with  the real estate market in the late-1980's, and the price  of  Westinghouse  stock  tumbled  dur- ing  the   **73                class  period  from  a  high of  $39.75/share  to  a  low  of  $15.875/share.

*720      Now,  like  so  many  lending  insti- tutions  battered  by  the  late-1980's  real  es- tate bust, Westinghouse, along with its out- side  accountant  and  investment  bankers,  is defending  against  shareholders  who  allege that the company made false and misleading statements regarding the health of its finan- cial services units, thereby artificially inflat- ing the price of Westinghouse stock and dam- aging plaintiffs who purchased that stock at what they claim to have been an artificially high price.

Westinghouse I, 832 F. Supp. at 958 (citations omitted). According to plaintiffs, "this statement suggests that plaintiffs'  claims  have  no  merit  and  that  their  damages were  caused  not  by  defendants'  fraud,  but  by  an  eco- nomic environment visited on defendants." Plfs' Br. at 48. Plaintiffs argue that although it was proper for the judge to take judicial notice of the downturn in the real estate mar- ket, "it was improper for the judge  to attribute plaintiffs' extensive damages to this trend rather than to defendants' fraudulent  scheme  as  alleged  in  the  Complaints."  Plfs'

Rep.  Br.  at  24.  Plaintiffs  seem  to  us  to  read  too  much into **74    the judge's statement, and we note that the district judge's comment was not unlike others found in other reported decisions. See, e.g., UJB, 964 F.2d at 274

("This case is one of a number of federal securities actions against financially troubled banking institutions. After a sharp  downturn  in  the  financial  condition  of  defendant UJB Financial Corporation, its shareholders filed a com- plaint . "); see also Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 360 (1st Cir. 1994) ("The complaint de- picts an increasingly familiar saga of a bank that boomed with the real estate market of the early 1980s, but suffered in the recession and deteriorating market that followed.")

(citations omitted).

As  in  United  States  v.  Bertoli,  40  F.3d  1384,  1412

(3d  Cir.  1994),  plaintiffs  here  make "no  allegation that

the  district  judge   derived  his  bias  from  an  extrajudi- cial source." Rather,  all the incidents cited involve rul- ings  and  statements  made  in  deciding  motions.  "Thus, these  incidents  will  not  support  recusal  unless,  looked at objectively, 'they display a deep-seated favoritism or antagonism that would make fair judgment impossible.'" Id. (quoting Liteky v. United   **75      States, 510 U.S.

540, 127 L. Ed. 2d 474, 114 S. Ct. 1147, 1157 (1994)). Plaintiffs have not identified anything suggesting such a favoritism or antagonism, and our review of the record re- veals none. Finally, we note that, as a practical matter, the judge sustained a number of the section 10(b) claims as- serted in count I in both Westinghouse I and Westinghouse II. For these reasons, we reject all of plaintiffs' contentions raised in support of their reassignment argument. We wish to emphasize that requesting reassignment is a grave step; it should not be taken lightly or for the purpose of seeking some strategic advantage.

IX.

For the foregoing reasons, we affirm in part and re- verse in part the district court's orders entered on July 29,

1993 (Westinghouse I), January 23, 1995 (Westinghouse

II),  and  March  1,   1995  (Memorandum  Order  dated

2/28/95),  and  we  remand  for  further  proceedings  con- sistent with this opinion.

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