In Re Westinghouse Securities Litigation

Opinions of the United
1996 Decisions States Court of Appeals
for the Third Circuit

7-18-1996

In Re: Westinghouse
Precedential or Non-Precedential:

Docket 95-3156

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________

No. 95-3156
____________

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

____________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
(D.C. Civil No. 91-00354)
____________________

Argued: November 2, 1995
Before: NYGAARD, ALITO, and SAROKIN, Circuit Judges

(Opinion Filed: July 18, l996)

____________________

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 & 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 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 for Appellee, Price Waterhouse LLP

ALITO, Circuit Judge:
 This is an appeal from three orders dismissing all of
the plaintiffs' claims in a consolidated class action securities
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 proceedings.

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 companies (the "individual defendants"). (We will refer to
the above defendants collectively as the "Westinghouse
defendants.") The other defendants are Price Waterhouse (the
independent accountant for the Westinghouse companies), and a
proposed defendant class of underwriters (the "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, however, 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 developed a major
restructuring plan, which it announced on February 27, 1991.
Under that plan, Westinghouse decided to "downsize" WCC by
selling or restructuring 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
underperforming 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 applied to loan loss reserves and to cover estimated
losses. The press release and other documents 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 reserves 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 writeoff 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." App. 1134.
Plaintiffs assert that Westinghouse further compounded
the harm to investors by raising $500 million through a May 1991
stock offering. Westinghouse offered 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 and Exchange
Commission ("SEC") in May 1991, as well as other documents
(including the Annual Report) that were incorporated by reference
therein, contained material misrepresentations and omissions.
In October 1991, Westinghouse determined and announced
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 contrary 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 announcement
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
magistrate judge granted plaintiffs limited discovery to prepare
a consolidated complaint. In March 1992, the magistrate judge
ordered that Westinghouse make available to plaintiffs documents
related to over 500 active investment 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); section 12(2) of the Securities Act, 15 U.S.C.
77l(2), against all defendants except Price Waterhouse (count
III); separate violations of sections 11 and 15 against all
defendants except for the underwriter defendants (count IV);
separate 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 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 were dismissed without prejudice to repleading, while
counts II-V and most of count VI were dismissed with prejudice.
Plaintiffs filed the Second Consolidated Amended Class
Action Complaint ("the second amended complaint") in September
1993. Plaintiffs repled all of their claims, including those
that had been dismissed with prejudice (stating that such claims
were being repled verbatim 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.
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
appeal followed.
On appeal, plaintiffs argue that 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 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
pleading 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 "[e]ach 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 dismiss
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, 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, plaintiffs are granted 30
days from this date within which to replead in conformity with
the requirements of Rule 8." Westinghouse II, Op. at 21, App.
330; Order at 35, App. 344. The district court added that
"[f]ailure 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 against seeking
immediate appellate review. They
respectfully 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
dismissed plaintiffs' Second Amended Class
Action Complaint. As that Opinion and Order
explained, with respect to those aspects of
Count One of plaintiffs' Second Amended
Complaint that survived the January 20, 1995
Opinion and Order, plaintiffs 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 replead within 30 days would
result in the dismissal 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 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 reversed 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 argue that the district court in
effect required that they violate Rule 8 (if they violated Rule 8
at all) in order to comply with Rule 9(b). See Plfs' Br. at 44-
46. We disagree.
It is well settled that "the particularity demands of
pleading fraud under Rule 9(b) in no way negate the commands of
Rule 8." Vicom, Inc. v. Harbridge Merchant Services, Inc., 20
F.3d 771, 776 (7th Cir. 1994) (citations omitted); see generally5 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
8.13, at 8-58 (2d ed. 1995) (the requirements of Rule 8 apply
"even where the Rules command particularity, as in the pleading
of fraud under Rule 9(b)") (footnote omitted).
Having reviewed plaintiffs' second amended complaint,
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
district court, through the two rounds of difficult motions, had
narrowed plaintiffs' claims. The court then ordered plaintiffs
to submit a third amended complaint containing 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 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 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 different 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 forward
with remaining claims).
D. Defendants attempt to go further. They argue that
all of plaintiffs' claims -- including those that had been
dismissed with 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,
[e]ven if this Court were to reverse any
portion 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 irrevocable election to stand on
their Second Amended Complaint, which still
will constitute "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 entirety for failure to plead
in conformity with the requirements of Rule 8." Op. at 21, App.
330. On the whole, however, we do not agree with defendants'
characterization 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, did not later dismiss those
claims again for failure to comply with Rule 8.
First, we note that the district court specifically
ordered 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 dismisses 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 order explicitly states that "it is hereby
ORDERED that all remaining claims in plaintiffs' Second Amended
Class Action Complaint are dismissed with prejudice." App. 350-
51 (emphasis added). Thus, we reject defendants' 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 dismissed 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 dismissal of
claims in Westinghouse I and Westinghouse II on non-Rule 8
grounds. Defendants contend that "interlocutory 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." West. Br. at 21 (emphasis 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 substantive issue decided in prior
interlocutory order) and Sullivan v. Pacific Indem. Co., 566 F.2d
444 (3d Cir. 1977) (dismissing for lack of an appealable order
where appellant did not challenge dismissal for failure to
prosecute 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)). SeePlfs' Rep.
Br. at 8. We find the defendants' argument
unpersuasive.
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 principle is
well-settled in this circuit that an order dismissing a complaint
without prejudice is not a final and appealable 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 complaint." 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 required to make any further amendments. This
court concluded that it had jurisdiction to consider the merits
of the Rule 9(b) dismissal and explained:
[W]e have held that a plaintiff can convert a
dismissal with leave to amend into a final
order by electing to stand upon the original
complaint. 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 second
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, final order. We therefore reject the defendants'
contentions to the extent that they challenge our appellate
jurisdiction.
Furthermore, we see no prudential grounds for declining
to review the merits of the district court's dismissal of claims
on non-Rule 8 grounds in Westinghouse I and Westinghouse II.
Under the "merger rule," prior interlocutory orders merge with
the final judgment in a case, and the interlocutory orders (to
the extent that they affect the final judgment) may be reviewed
on appeal from the final order. See, e.g., Silver v. Mendel, 894
F.2d 598, 601 (3d Cir.), cert. denied, 496 U.S. 926 (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 district
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 subsequent 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.") (citations omitted). The 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. Without addressing 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 context), 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
distinguishable 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.
To summarize our holdings thus far, we have concluded
that the district court did not err in dismissing with prejudice
under Rule 8 those claims that were not dismissed 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 prejudice 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).
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. Because plaintiffs' claims are based upon these
documents, they were properly considered 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, 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 allege a materialmisstatement
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
regarding 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 complaint, see 832 F. Supp. at
973-77, 985-86, and in Westinghouse II, the court clarified that
no cautionary language immunized defendants' alleged
misstatements occurring prior to February 27, 1991. Thus, under
the 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.
As we explained in Trump, "`bespeaks caution' is
essentially 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. We described the doctrine as follows:
The application of bespeaks caution
depends 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
securities 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 immaterial as a matter of
law.

. . . Of course, a vague or blanket
(boilerplate) disclaimer which merely warns
the reader that the investment has risks will
ordinarily be inadequate to prevent
misinformation. To suffice, the cautionary
statements must be substantive and tailored
to the specific future projections, estimates
or opinions in the prospectus which the
plaintiffs challenge.

. . . [T]he prospectus here truly
bespeaks caution because, not only does the
prospectus generally convey the riskiness of
the investment, but its warnings and
cautionary language directly address the
substance of the statement the plaintiffs
challenge.
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 bespeaking 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 misrepresentation "would influence a reasonable
investor's investment decision." Trump, 7 F.3d at 369; see alsoid. at 373
("no reasonable jury could conclude that the subject
projection materially influenced a reasonable investor").
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 reserves claims under
section 10(b) are based upon those documents as well as other
alleged misstatements addressing 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 reserves.
With regard to plaintiffs' section 10(b) claims, the
district 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 specifically, 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' doctrine." 832 F. Supp. at 976. The
court reached a similar conclusion with regard to plaintiffs'
claims under sections 11 and 12(2). See id. at 985-86 (finding
that Westinghouse's prospectus "`virtually bristles with
warnings'" and that its statements regarding the adequacy of its
reserves were "remarkably equivocal") (citation omitted).
Defendants contend that all of the above claims were
properly dismissed because any alleged misstatements are
immaterial when considered in the context of cautionary language
contained in various filings with the SEC. See Westinghouse I,
832 F. Supp. at 974-76 (summarizing 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 defendants
rely:
As part of the reclassification of the $3.4
billion of assets, the Company reclassified
for sale approximately $654 million of
marketable securities. . . . This portfolio
will be liquidated as soon as practicable;
however, future deterioration in market value
could result in additional losses prior to
sale . . . .

The $3.4 billion in higher-risk and
underperforming assets reclassified as held
for sale or restructuring included $2.4
billion in receivables. As such, these
receivables had and continue to have a high
 probability of becoming non-earning assetsduring the expected
period of liquidation . .
. .

Of the $2.4 billion of receivables held for
sale or restructuring, at March 31, 1991,
approximately $700 million were non-earning,
up from $481 million at December 31, 1990. .
. . Real estate owned in assets held for
sale or restructuring 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
receivables totaled approximately $180
million at March 31, 1991, up from $71
million at December 31, 1990. Reduced
earning receivables 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
allowances related to assets held for sale or
restructuring, and the allowances for credit
losses related to the assets in the ongoing
portfolio, amounted to $1.013 million and
$306 million, respectively. Management
believes that under current economic
conditions such allowances should be adequate
to cover future losses that may occur.
However, a further or more prolonged 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 additional
increases in non-earnings assets,
restructured 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) (emphasis 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 thereafter, that the
loan loss reserves were and would remain adequate "under current
economic conditions." Plaintiffs contend that defendants'
statements regarding the adequacy of the loan loss reserves were
materially false when made because defendants knew that the
reserves were and would remain inadequate, even without any
future or prolonged economic downturn. Plaintiffs allege that
Westinghouse management and other defendants knew that the
February 1991 charge was inadequate to cover current and expected
future losses. Plaintiffs assert that defendants knew that WCC's
loan portfolio was overstated by between $2.6 billion and $5.3
billion immediately 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 defendants should have
been concerned with whether the charge complied with GAAP.
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.
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 misrepresented 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 conditions. A reasonable
investor might well be willing to take some chances with regard
to the future of the economy, but might be quite unwilling to
invest in a company that knew that its reserves were insufficient
under current conditions and knew it would be taking another
major write-down in the 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 compliance with GAAP and were
believed to be adequate to cover expected future losses given the
then-existing economic conditions -- would have assumed actual
significance to a reasonable investor contemplating the purchase
of securities. We therefore cannot say that the cautionary
language rendered the alleged misrepresentations immaterial as a
matter of law. See Kline, 24 F.3d at 489 (rejecting bespeaks
caution argument where purported cautionary language did not
sufficiently counter alleged misstatements and omissions); seealso 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, 116 S. Ct. 1422 (1996);
Rubinstein v. Collins, 20 F.3d 160, 171 (5th Cir. 1994)
(reiterating view that "`[t]o warn that the untoward may occur
when the event is contingent is prudent; to caution that it is
only possible for the unfavorable events to happen when they have
already occurred is deceit'") (footnote omitted). In short, we
cannot conclude 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.

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
elements: (1) that the defendant made a misrepresentation or
omission of (2) a material (3) fact; (4) that the defendant 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 the fraud must be stated with particularity. Seeid. 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
improperly dismissed the section 10(b) claims against the
Westinghouse defendants relating to Westinghouse's alleged
concealment of nonearning receivables and inadequate internal
controls. Plaintiffs further contend that the district court
erred in dismissing the section 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, also known as nonaccrual
loans or nonearning loans, are defined as "[l]oans 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 alsoAmerican
Bankers Association, Banking Terminology 244 (3d ed.
1989) (defining nonearning asset as "[a]n asset that does not
produce income, such as . . . required reserves, or a nonaccrual
loan"). Plaintiffs allege that Westinghouse manipulated its
nonearning receivables accounts to overstate 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 receivables 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; seealso
Westinghouse II, Op. at 4-6, App. 313-15. The court found
that plaintiffs, with the benefit of hindsight, were merely
challenging Westinghouse's judgment as to when collectibility on
the loans became doubtful. Id. We disagree.
Plaintiffs allege that the Westinghouse defendants
arbitrarily moved loans from nonearning to earning status just
before mandated public reporting when, in fact, nothing had
changed regarding the likelihood of collection. Plaintiffs
contend that they have pled specific facts permitting the
inference that defendants were intentionally concealing loan
losses. We agree. Plaintiffs are not merely challenging
defendants' judgment regarding when collectibility 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 plaintiffs. 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 this aspect of the district
court's orders.
B. Plaintiffs also allege that Westinghouse
fraudulently overstated the quality of its internal controls, in
violation 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 reasonable
basis and with knowledge of or in reckless disregard of facts
suggesting their falsity.
Plaintiffs' claim is based primarily on an internal
report prepared following an anonymous tip alleging inadequate
internal accounting controls. After rejecting the assertions of
the anonymous tip, the November 1990 report 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 "[t]he fact that the
internal auditors also recommended improvements in valuation
methods and tighter standards for internal valuations does not
support plaintiffs' claim that in its Form 10K's Westinghouse
fraudulently or even inaccurately represented its internal
controls as adequate." 832 F. Supp. at 979; see alsoWestinghouse II, at
8-9 ("plaintiffs' assertions amount to
nothing more than `fraud by hindsight' allegations, based on the
premise that the internal controls turned out to be
inadequate."). We agree that plaintiffs have failed to plead any
facts supporting their conclusory allegation that Westinghouse
fraudulently misrepresented the adequacy of its internal
controls. We therefore affirm dismissal of this aspect of the
section 10(b) claim.
C. Plaintiffs argue that the district court, by
"compartmentalizing 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
instructed 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. 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 certain
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 audits. 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
fraudulently 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 cite various GAAS standards, they
nowhere explain how Price Waterhouse knowingly or recklessly
violated those standards in performing its 1988 and 1989 audits.
For example, plaintiffs' complaint fails to allege any facts
supporting their conclusory 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 reckless in not
knowing that Westinghouse's financial statements 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 an inference that Price Waterhouse knew or was
reckless in not knowing that Westinghouse was using speculative,
inflated values in valuing receivables. 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 violated GAAP during
1988 and 1989, plaintiffs nonetheless fail to allege facts
suggesting that Price Waterhouse intentionally or recklessly
misrepresented Westinghouse's compliance with GAAP.
In short, plaintiffs fail to allege any facts
supporting 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 accordance with GAAP. We
therefore affirm the district court's order dismissing the
section 10(b) claims against Price Waterhouse arising out of
Price Waterhouse's 1988 and 1989 audits.
E. Plaintiffs also challenge the district court's
dismissal 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 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 meeting. 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 restructuring program which
could include a one-time charge to earnings." App. 1435. Lazard
also explained that "[t]he possible restructuring outlined
earlier implies the ultimate disposition 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
original). 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 inadequate to
protect against known and likely losses. We agree with the
district court, however, that the documents 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. These claims were properly dismissed in
Westinghouse I and Westinghouse II.

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
quantitatively immaterial as a matter of law (separate and apart
from the "bespeaks caution" doctrine). In Westinghouse I, the
district court rejected defendants' argument, finding that the
allegations of wrongfully understated reserves were sufficiently
substantial when compared to Westinghouse's net income for the
relevant time periods. 832 F. Supp. at 971-73. In Westinghouse
II, defendants 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 reserves
(not merely those for the first year of the class period) could
and should have been dismissed on quantitative materiality
grounds. West. Br. at 39-45. Assuming without deciding that
defendants' latter argument (which was not raised on defendants'
motion to dismiss the second amended complaint) is properly
before us, we find it to be without merit. We thus turn to the
dismissal of plaintiffs' claims for the first year of the class
period.
As referred to earlier in our discussion of the
"bespeaks caution" doctrine, "[a]n omitted fact is material if
there is a `substantial likelihood that, under all the
circumstances, the omitted fact would have assumed actual
significance in the deliberations of the reasonable
shareholder.'" UJB, 964 F.2d at 281 n.11 (quoting T.S.C. Indus.,
Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). "In other
words, the issue is whether there is a substantial likelihood
that the disclosure would have been viewed by the reasonable
investor as having `significantly altered the "total mix" of
information' available to that investor." Id. Moreover,
"[m]ateriality is a mixed question of law and fact, and the
delicate assessments of the inferences a reasonable shareholder
would 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,
"[o]nly 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 appropriate for the
district court to rule that the allegations are inactionable as a
matter of law." Id.
The district 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 particular case. The district court stated that
"[t]he 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 reasonable shareholders,
such omission must be immaterial as a matter of law." Id. at 972
(quoting TSC Industries, 426 U.S. at 448-49). We agree. Seegenerally
Loss & Seligman, Fundamentals of Securities Regulation137-41, 479-80
(1995) (quantitative materiality analysis is
generally appropriate, though not when "such matters as a
conflict of interest or criminal violations are at issue"); seealso Ferber
v. Travelers Corp., 802 F. Supp. 698, 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 immaterial in relation to size of defendant's real estate
loan portfolio).
Plaintiffs do not dispute that their only allegation
challenging the adequacy of loan loss reserves prior to the
fourth quarter 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. We agree with the district court
that this allegation 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
deliberations 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 reserves 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.
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 during that period and were thus
immaterial. The second amended complaint alleges that prior to
the fourth quarter 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% 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. As with the
reserves claims, the first actionable disclosures alleged in the
second amended complaint relating to nonearning loans for the
fourth quarter of 1989 occurred on March 29, 1990. The district
court thus properly dismissed the nonearning loans allegations
that relate to the period prior to the March 29, 1990,
disclosures.

VI.
A. As discussed above, the district court dismissed
the section 12(2) claims under the "bespeaks caution" doctrine.
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 (1988), the
Supreme Court stated that although the language of section 12(1)
"contemplates a buyer-seller relationship not unlike traditional
contract privity," id. at 642, its scope is not limited only to
those who pass title. Id. at 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 by a desire to serve his
own financial 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 definition 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 successfully 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 purchasing such a
security from him . . .,' precludes actions against remote
sellers, and focuses the inquiry on the relationship between the
purchaser and the participant, rather than on the latter's degree
of involvement in the transaction." Craftmatic, 890 F.2d at 636
(citation omitted). We added with regard to solicitation
liability that "although an issuer is no longer immunized from
12 liability, 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,
962 F.2d at 287 (plaintiffs not required to allege direct and
active solicitation where newly offered shares were purchased
directly through defendant UJB). Plaintiffs further allege as
follows:
593. The section 12 Defendants were
sellers of Westinghouse securities within the
meaning of Section 12(2) of the Securities
Act and either 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
securities. 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 participated in the solicitation of
plaintiffs' immediate purchases of Westinghouse stock.
The district court dismissed the section 12(2) claims,
explaining as follows:
[P]laintiffs have not alleged that the
Westinghouse defendants in fact sold or
solicited the purchase of Westinghouse
securities, but attempt nonetheless to
analogize their allegations to the
allegations and holding 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
omitted) (emphasis in original). Plaintiffs argue that because
the facts alleged in their complaint are so similar to 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.
It is certainly true that plaintiffs' section 12(2)
allegations are not clearly drafted. Plaintiffs do not, for
example, make clear which defendants are alleged to be direct
sellers 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 sellers,
directly and actively participated in the solicitation of the
immediate sales. Further, plaintiffs' allegation that
defendants "promoted the sale of" securities 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.
Taken in the light most favorable to plaintiffs,
however, the complaint does allege that the Westinghouse
defendants "solicited plaintiffs" to purchase Westinghouse
securities 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 allegations -- allegations
plaintiffs will have to prove -- and not bare legal conclusions.
Under Craftmatic, plaintiffs' allegations 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 dismissing 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.
To the extent, if any, that the section 12(2) claims in fact
sound in fraud, plaintiffs could justifiably be required to plead
the circumstances constituting fraud with the particularity
required by Rule 9(b). This is not, however, the theory on
which the district court rested its decision; nor has it been
advanced by the parties in this court.
C. As to the underwriter defendants, the first amended
complaint alleges that "[e]ach member of the Underwriter Class
sold Westinghouse stock to members of the Prospectus Subclass
during the Class Period." App. 367. Plaintiffs further allege
that the underwriter 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 plaintiffs
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
"sellers" within the meaning of Section
12(2). That is, there must be an allegation
that a particular proposed defendant sold or
solicited the sale of Westinghouse securities
to the individual plaintiffs. Pinter v.
Dahl, 486 U.S. at 643-47. This element is
lacking.
Westinghouse I, 832 F. Supp. at 987.
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. Absent a particularity
requirement, plaintiffs must provide a short and plain
statement showing that the underwriter defendants are statutory
sellers and that plaintiffs purchased securities from them.
We find that plaintiffs satisfied this requirement and
stated a section 12(2) claim against the underwriter defendants.
Taken in the light most favorable to plaintiffs, the first
amended complaint alleges that each of the underwriter defendants
sold Westinghouse securities directly to plaintiffs and that each
plaintiff purchased Westinghouse securities directly from an
underwriter defendant. Cf. Jackson v. First Federal Savings of
Arkansas, 709 F. Supp. 863, 884 (E.D. Ark. 1988) (dismissing
section 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). Compare Craftmatic, 890
F.2d at 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 provides 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 Litigation, 848 F. Supp. 602, 625 (W.D.
Pa. 1994) (sustaining 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 appropriate
standard of scrutiny for a Rule 12(b)(6) motion, a set of facts
establishing the underwriter defendants as `sellers' 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.

VII.
After defendants filed the motions to dismiss that led
to Westinghouse II, plaintiffs cross-moved to supplement the
second amended complaint. See App. 1582-83. Plaintiffs sought
to add an additional alleged misrepresentation -- Lego's alleged
October 1990 statement that Westinghouse had only an immaterial
amount of restructured 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 complaint 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 "[t]he 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 dismissed the motion
as moot -- because plaintiffs were presumably going to be
submitting a third amended complaint and would include the newly-
discovered allegation in that complaint.
We find no abuse of discretion in this ruling. The
plaintiffs 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 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
reassigned to a new district court judge. Plaintiffs rely
primarily 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 during
the class period from a high of $39.75/share
to a low of $15.875/share. Now, like so many
lending institutions battered by the late-
 1980's real estate bust, Westinghouse, along
with its outside accountant and investment
bankers, is defending against shareholders
who allege that the company made false and
misleading statements regarding the health of
its financial services units, thereby
artificially inflating the price of
Westinghouse stock and damaging 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, "[t]his statement suggests
that plaintiffs' claims have no merit and that their damages were
caused not by defendants' fraud, but by an economic 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 market, "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 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 complaint[.]"); see alsoSerabian v.
Amoskeag Bank Shares, Inc., 24 F.3d 357, 360 (1st
Cir. 1994) ("The complaint depicts 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 extrajudicial source."
Rather, all the incidents cited involve rulings 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 States, 114
S. Ct. 1147, 1157 (1994)). Plaintiffs have not identified
anything suggesting such a favoritism or antagonism, and our
review of the record reveals none. Finally, we note that, as a
practical matter, the judge sustained a number of the section
10(b) claims asserted 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
reverse 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 consistent with this opinion.