Serabian v. Amoskeag Bank Shares, Inc.

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 93-2070

NISHAN SERABIAN, ET AL.,

Plaintiffs, Appellants,

v.

AMOSKEAG BANK SHARES, INC., ET AL.,

Defendants, Appellees.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Shane Devine, Senior U.S. District Judge]

Before

Torruella, Circuit Judge,

Coffin, Senior Circuit Judge,

and Boudin, Circuit Judge.

James R. Malone, Jr., with whom C. Oliver Burt, III, Michael D.

Gottsch, Pamela Bond and Peter A. Pease were on brief appellants.

Robert Upton, II, with whom Charles W. Grau was on brief for

Amoskeag Bank Shares, Inc.
Ovide M. Lamontagne with whom E. Donald Dufresne was on brief for

Allen, Machinist, Bushnell, Yakovakis, Woolson, Allman and Keegan.

May 27, 1994

COFFIN, Senior Circuit Judge. The question on this appeal

is whether appellants' Third Amended Complaint states a claim for

fraud under federal securities law, see 15 U.S.C. 78j(b) (

10(b) of the Securities Exchange Act of 1934); SEC Rule 10b-5 (17

C.F.R. 240.10b-5), a claim that must be plead "with

particularity." Fed. R. Civ. P. 9(b). The district court held

that it did not, and dismissed the complaint with prejudice.

After carefully studying the 86-page, 107-paragraph complaint, we

have concluded that portions of it are entitled to survive. We

therefore vacate the dismissal in part, and remand for further

proceedings limited to the actionable allegations.

I. Background

During the period relevant to this litigation, defendant

Amoskeag Bank Shares ("Bank Shares" or "the bank" or "the

company") was a New Hampshire bank holding corporation with four

wholly owned subsidiaries: Amoskeag Bank, New Hampshire's largest

bank; Nashua Trust Company; Bank Meridian, N.A.; and Souhegan

National Bank of Milford.1 The seven individual defendants are

certain of Bank Shares' former officers and/or directors.

Plaintiffs are the purchasers of Bank Shares' common stock.

In this lawsuit, filed as a class action but still uncertified,

they claim that the defendants issued various documents, reports,

and statements that misrepresented and failed to disclose

material facts concerning Bank Shares' true financial condition,

1 Bank Shares was taken over by the FDIC in October 1991.

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thereby artificially inflating the market price of the company's

stock at the time they purchased it.2

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. See, e.g., In Re Wells Fargo Securities Litigation, 12

F.3d 922 (9th Cir. 1993); In Re Glenfed, Inc. Securities

Litigation, 11 F.3d 843 (9th Cir. 1993), reh'ng en banc, granted,

11 F.3d 843 (9th Cir. Feb. 25, 1994); Shapiro v. UJB Financial

Corp., 964 F.2d 272 (3d Cir. 1992); DiLeo v. Ernst & Young, 901

F.2d 624 (7th Cir. 1990). The primary thrust of the allegations

is that defendants knew that their loan portfolio contained many

high-risk loans, that the reserves for such loans were

inadequate,3 and that poor internal controls exacerbated the

difficulties, but that they nevertheless continued to paint a

rosy picture of the bank's financial circumstances.

The district court, having given plaintiffs the opportunity

to amend a previous version of the complaint, concluded that,

"[a]t most, the [Third Amended] [C]omplaint demonstrates dubious

business judgment or mismanagement." The court felt that the

pleading, reduced to its essence, alleged that the defendants

throughout the relevant period knowingly reserved too little in

2 Rule 10b-5, promulgated by the SEC under the authority
provided by 10(b) of the Securities Exchange Act, makes it
unlawful to misrepresent or omit material information in
connection with the purchase or sale of securities.

3 The amount put aside as a protection against loan defaults
is known as the ALL -- the "allowance for loan losses."

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anticipation of loan losses. In the court's view, however, the

complaint lacked a basis for inferring the defendants' knowledge

of the deficiency and, moreover, failed to identify any specific

loans whose reserves were inadequate. These deficiencies,

despite ample opportunity for discovery and "considerable

ingenuity in pleading," prompted the court to dismiss the

complaint with prejudice.

Plaintiffs argue on appeal that the complaint more than

adequately set forth the bases for their allegations of fraud by

detailing numerous specific instances in which the defendants had

knowledge of the "true facts," yet made substantially different

representations to the investing public. They claim that the

district court impermissibly drew inferences in favor of the

defendants, contrary to its obligation to indulge every

reasonable inference helpful to their case. See, e.g., Garita

Hotel Ltd. Partnership v. Ponce Federal Bank, 958 F.2d 15, 17

(1st Cir. 1992).

We review the district court's determination de novo,

applying the same criteria employed by the district court. Id.

If the allegations would permit recovery under any viable theory,

the dismissal must be reversed. Id.

II. Applicable Standards

We preface our discussion with a brief survey of the general

principles that must guide our review of plaintiffs' complaint.

First, the securities laws "do not guarantee sound business

practices and do not protect investors against reverses," DiLeo,

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901 F.2d at 627. In stating an actionable claim for

misrepresentation, therefore, plaintiffs must plead more than

that defendants acted irresponsibly and unwisely, but that they

were aware that "mismanagement had occurred and made a material

public statement about the state of corporate affairs

inconsistent with the existence of the mismanagement," Hayes v.

Gross, 982 F.2d 104, 106 (3d Cir. 1992). See also Shapiro, 964

F.2d at 283 ("[I]t is not a violation of the securities laws to

simply fail to provide adequate loan loss reserves; properly

collaterize or secure a loan portfolio; or provide sufficient

internal controls or loan management practices.").

Second, defendants may not be held liable under the

securities laws for accurate reports of past successes, even if

present circumstances are less rosy, see Capri Optics Profit

Sharing v. Digital Equipment, 950 F.2d 5, 7-8 (1st Cir. 1991),4

and optimistic predictions about the future that prove to be off

the mark likewise are immunized unless plaintiffs meet their

4 In Capri Optics, we described our earlier decision,

Backman v. Polaroid, 910 F.2d 10 (1st Cir. 1990) (en banc), as

holding that

there was no duty to disclose to market buyers
information simply because it was material, or to
amplify what was said, unless the omitted matter caused
what was said to be misleading . . . . As an
illustration, if defendant reported, correctly, without
more, "This is our eighth consecutive quarter in which
our gross has increased," there was no duty to add, for
the benefit of market buyers, "We are concerned about
the next one."

We recognized, of course, that "if defendant's apprehension was
of a disaster the rule might be different . . . ."

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burden of demonstrating intentional deception, see Greenstone v.

Cambex Corp., 975 F.2d 22, 25-26 (1st Cir. 1992) (there is no

"`fraud by hindsight'"); DiLeo, 901 F.2d at 627 (same). See also

Shapiro, 964 F.2d at 283-84 n.12 (quarterly report stating that

the company "looks to the future with great optimism . . . is

clearly inactionable puffing").

Third, and finally, general averments of the defendants'

knowledge of material falsity will not suffice. Greenstone, 975

F.2d at 25. Consistent with Fed. R. Civ. P. 9(b), the complaint

must set forth "specific facts that make it reasonable to believe

that defendant[s] knew that a statement was materially false or

misleading." Id. The rule requires that the particular "`times,

dates, places or other details of [the] alleged fraudulent

involvement'" of the actors be alleged. In re Glenfed, 11 F.3d

at 847-48 (citation omitted). See also Romani v. Shearson Lehman

Hutton, 929 F.2d 875, 878 (1st Cir. 1991); New England Data

Services v. Becher, 829 F.2d 286, 288 (1st Cir. 1987) ("[I]n the

securities context, and in general, this circuit has strictly

applied Rule 9(b).").

With this framework in mind, we begin our scrutiny of

plaintiffs' allegations.

III.

The Third Amended Complaint contains 63 paragraphs ( 23-

86) describing the misstatements and omissions allegedly made by

defendants during the class period from June 17, 1987 through

October 23, 1989. We have read the paragraphs line-by-line, and

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agree with the district court that much of complaint fails to

establish an actionable 10b-5 claim. Many of the challenged

statements either were undisputedly true representations of the

company's circumstances, or are unaccompanied in the complaint by

specifics tending to show knowing falsity. Other portions of the

complaint are inadequate because they allege improper conduct in

wholly conclusory terms.

The complaint is more successful in stating a claim

concerning statements made during late 1988 and 1989, when

plaintiffs contend that the bank was experiencing accelerated

loan deterioration. Public announcements during that time

suggested that the bank's loan business was under control while

plaintiffs allege that the bank recognized that its problems were

severe, particularly that its ALL was inadequate and its internal

procedures for identifying problem loans deficient.

In the following sections, we explain our conclusions by

considering in detail various portions of the complaint. We do

not examine separately each allegation contained in this

voluminous pleading, but believe our discussion is sufficiently

complete and illustrative to enable the district court to

distinguish the actionable from the inactionable in the remaining

paragraphs. Sales of stock and mortgage-backed securities,

23-25. These paragraphs describe Bank Shares' substantial

losses in June and July 1987 when it sold certain mortgage backed

securities, as well as stock that it unlawfully held in eight

banking companies. Plaintiffs allege that, with the approval or

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acquiescence of "Bank Shares['] purportedly independent

auditors," the company knowingly allocated these losses to the

improper fiscal quarters of 1987. As a result, plaintiffs

allege, Amoskeag's announced earnings for the quarter ended June

30, 1987 were artificially inflated. The complaint also

criticizes the defendants' failure to recognize loss on the

company's equity securities portfolio until the end of the year.

We fail to find a basis for actionable securities fraud in

these paragraphs. Plaintiffs allege no representations

inconsistent with the bank's state of affairs.5 The fact that

the company was in violation of federal law by its ownership of

the financial institution stock may reflect poorly on its

management, but in no way demonstrates a 10b-5 violation.

Nothing in the complaint suggests that the decision of Bank

Shares to delay its equity security loss until the end of the

year was fraudulent, even if, as the complaint alleges, it was a

violation of Generally Accepted Accounting Principles (GAAP).

Indeed, the complaint acknowledges that Ernst & Whinney, Bank

Shares' accounting firm, approved the method by which the company

recognized its losses, arguably casting doubt on the existence of

any impropriety.6

5 A general allegation that the practices at issue resulted
in a false report of company earnings is not a sufficiently
particular claim of misrepresentation.

6 As a result of our conclusion that these paragraphs, as
well as 26-42, were dismissed properly for lack of actionable
allegations, we need not address defendants' contention that they
should be stricken as time-barred.

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Reversal of $275,000 in 1987 loan loss provision, 26-30.

These paragraphs allege that, at the end of the second

quarter of 1987, defendants reversed an allocation of $275,000

that had been made earlier in the year to its loan loss provision

"for no reason other than arbitrary manipulation" designed "to

offset the impact of other losses." Plaintiffs claim that

defendants falsely represented in their Form 10-Q for the quarter

that the decrease was attributable to the credit quality of the

bank's loan portfolio.

This conclusory allegation of falsity is unsupported by any

specific facts. Plaintiffs offer no basis for inferring that the

defendants knew that the bank's loan portfolio was, at that time,

improperly characterized as "excellent." They provide no

information about the general health of the company's loan

portfolio, and fail to cite any specific loans that were in

trouble. Defendants' 10-Q states that the decision to reduce the

loan loss provision was attributable to, inter alia, the sale of

$48 million in loans and the low level of non-performing loans.

The figures and statistics contained in the document are not

alleged to be inaccurate. We consequently find no actionable,

particularized allegation of fraud in this portion of the

complaint.

Economic outlook and internal review, 1987 Annual Report,

33-43.7

7 Paragraph 32 quotes at length from the company's 1987
annual report and suggests that its "decidedly upbeat" tone was
fraudulent. Plaintiffs acknowledge, however, that the bank

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This portion of the complaint describes a growing awareness

by the Company of the slowdown in the real estate market, and

recognition of the need to quantify possible losses inherent in

its loan portfolio. The complaint alleges:

[C]ontrary to public representations, by February 1988,
the defendants had determined that the existing loan
review function was unable to keep up with timely
reviews of the Company's loan portfolios (which were
known by defendants to be deteriorating in
creditworthiness due to changes in the economy) and the
Company lacked sufficient loan credit file
documentation to properly analyze the ALL. Thus, the
Company hired a retired career banker, J. Howard "Mac"
McGloon, on a consulting basis to review lending
practices and ostensibly to assist the Loan Review
department in its function.

34.

Nothing in the following paragraphs, which describe various

"public representations" contained in the company's 1987 annual

report, supports the assertion that officials knowingly

misrepresented the bank's ability to manage its loan portfolio.

That a consultant was hired to assist with loan review is not

inconsistent with the company's statement, cited in 37, that

"[m]anagement closely monitors the quality of the loan and lease

financing portfolio." Getting the help needed to stay on top of

the situation, or to improve it, is one aspect of close

monitoring.8

disclosed the substantial drop in net income from the prior year
and the substantial loss in equity securities. No facts suggest
knowing falsity in any of the company's optimistic statements
about its future prospects.

8 Similarly, plaintiffs fail to demonstrate any basis for
inferring knowing falsity in the defendants' statement, also
quoted in 37 of the complaint, that "the Company's basic

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Although 40-42 allege that, during early 1988, defendants

failed to follow internal policy for recognizing earnings on

commercial real estate loans and to allocate the appropriate ALL

amount for such loans, the complaint does not demonstrate how

these flaws in procedure add up to a securities violation. As

noted earlier, "mere failure to provide adequate reserves (or to

perform competently other management tasks) does not implicate

the concerns of the federal securities laws and is not normally

actionable," Shapiro, 964 F.2d at 281.

Plaintiffs additionally complain about the tone of a press

release issued by the company on July 14, and the company's

quarterly report filed with the SEC on August 12. These reports

were misleadingly positive, plaintiffs allege, because they

stated that earnings were down in part because of an increase in

loan reserves designed as a "safeguard against an extended

slowdown in real estate and condominium markets." See 43.

There is nothing actionable in these statements, which simply

report the company's reduced earnings and one of the reasons for

it.

Chaston finds "serious deficiencies"; internal concerns;

"conservative" approach, 46-69.

This portion of the complaint primarily describes events and

information relating to the bank's handling of its ALL in late

1988 and early 1989, as well as corresponding public statements

banking business is strong as indicated by the excellent quality
of the loan and lease financing portfolio."

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made by the defendants about those matters. In our view, it is

the only section of the complaint that contains allegations

sufficiently particular and pertinent to survive defendants'

motion to dismiss.

The scenario depicted by these allegations can be summarized

as follows: at least by August 1988, the company had become aware

that the quality of its commercial loans had deteriorated

significantly, and that the loan review department was having

difficulty staying on top of problem loans, particularly in

commercial real estate. See 47.9 This prompted the hiring of

a consulting firm, Chaston Associates, that began work in mid-

October. Chaston reported within two weeks that there were

"serious deficiencies" in the ALL at Amoskeag, and this finding

was partly responsible for a $6 million increase in loan loss

reserves at the end of the third quarter, September 30, 1988.

See 46. Meanwhile, internal reviews also had revealed

deficiencies in the ALL at both Nashua Trust Company (NTC) and

Amoskeag, and the auditor concluded that "additional injections

to the reserve [at Amoskeag] are required as soon as financially

feasible." 50 (a), (b).

9 This paragraph alleges that, on August 10, 1988, Bank
Shares' vice president and loan review officer Worden informed an
Ernst & Whinney auditor that

the quality of commercial loans had deteriorated since
E&W's last audit review as of December 31, 1987, and
that Worden did not believe that his department was
devoting an adequate amount of time to the monitoring
of the appropriateness of credit quality ratings
assigned by Amoskeag's loan officers, particularly in
the area of CRE [commercial real estate] loans.

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Plaintiffs juxtapose these allegations showing internal

awareness of review problems and inadequate loan loss reserves

with the company's public statements characterizing its loan

review capabilities as "strong" and its ALL approach as

"conservative." In 52 of the complaint, for example,

plaintiffs cite a press release issued on October 24, 1988,

announcing third quarter earnings that were substantially reduced

from the same period a year earlier. The paragraph continues:

Defendants Machinist and Allen made the following false
and misleading statements in the press release with
respect to the increase in loan loss provision:

. . .

[W]e have experienced a build-up of non-performing
loans to $47 million, or 2.7 percent of total loans,
from $35 million at June 20, 1988, the majority of
which relates to commercial real estate. Our loan
Our loan
review capabilities are strong and we have directed
specific resources to each of those loans.
specific resources to each of those loans

The decision to make a substantial addition to the
loan reserve is consistent with past practice of the
consistent with past practice of the
company to address issues in a timely and conservative
manner. We strongly believe this action will ensure
manner
the integrity of our financial statements and solidify
the foundation for future earnings gains.

52 (some emphasis added, other omitted).

Plaintiffs quote similar remarks by defendant Allen at a

combined meeting of New York and New England stock analysts on

October 28, 1988, and by defendants Machinist and Allen in a

press release issued on January 30, 1989:

We at Amoskeag are risk-averse bankers. If
risk-averse
the banking business involves the fundamental
choice between eating well and sleeping well,
we'll cut back a little on the calories for
more peace of mind. We have excellent people
We have excellent people

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in loan review. They oversee a comprehensive
reporting and monitoring system

***

When we allocated $6 million to the loan loss
reserve in the third quarter, we worked from
we worked from
very conservative assumptions. We considered
very conservative assumptions
all the factors and assumed less-than-
favorable economic conditions. Higher short-
term rates. Low overall economic growth.
Further potential softening in real estate
markets.

We made this decision without prompting from
regulators or accountants.
regulators or accountants

56 (emphasis added).

While non-accrual loans rose in the
fourth quarter, from $26.6 million to $35.8
million, the rate of increase in problem
loans has moderated. We are managing those
We are managing those
loans intensively and with success.
loans intensively and with success

The real estate market is turning around
slowly and further reductions of excess
inventory have been realized. Our policy of
Our policy of
reserving conservatively in advance of need
is being validated. We remain well secured
is being validated We remain well secured
and confident of the values underlying our
loans.
loans

62 (some emphasis added, other omitted).

Plaintiffs also allege that, despite company awareness that

"additional injections to the reserve" were required, see

50(b), 59, 60, a management statement contained in Bank Shares'

1988 Annual Report, filed with the SEC in late March 1989,

observed that "[i]t is management's judgment that the allowance

for loan and lease losses at year-end 1988 is sufficient to

absorb losses inherent in the existing portfolio," 68. See

also 64 (defendants stated in annual report that amount of

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increase in the ALL from year-end 1987 to year-end 1988 is "a

prudent and proper course for today"); 69(d).10

In this series of allegations, plaintiffs do more than

simply identify management problems or point to statements that

put a positive spin on the company's circumstances, without

indicating how or why defendants should have known the

descriptions were inaccurate. Rather, these paragraphs present a

contrast between what company officials were hearing internally

about their loan review effectiveness and the adequacy of their

ALL, and what the company was telling the public at the same

time. Cf. Romani, 929 F.2d at 878-80 (complaint contains no

factual allegations supporting a reasonable inference that

adverse circumstances were known and deliberately or recklessly

disregarded by defendants); Hayes, 982 F.2d at 106 ("[P]laintiff

alleges more than mismanagement. He alleges that defendants made

affirmative representations inconsistent with the state of

corporate affairs they knew to exist."). When defendants

"affirmatively characterize[] management practices as `adequate,'

10 In 69(d), plaintiffs allege that on about February 21,
1989, the company's audit committee was told by its accounting
firm, Ernst & Whinney, that a Chaston report

"presented management and E&W with a problem" since
Chaston had concluded the allowances for loan loss at
both Amoskeag and NTC were inadequate by a combined
total of $9.4 million. E&W further told the Audit
Committee it had been required to expend "significant
effort in reviewing [a] large number of individual
loans to support adequacy of a reserve less than
Chaston felt was needed."

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`conservative,' `cautious,' and the like, the subject is `in

play.'" Shapiro, 964 F.2d at 282.

For example, if a defendant represents that its lending
practices are "conservative" and that its
collateralization is "adequate," the securities laws
are clearly implicated if it nevertheless intentionally
or recklessly omits certain facts contradicting these
representations. Likewise, if a defendant
characterizes loan loss reserves as "adequate" or
"solid" even though it knows they are inadequate or
unstable, it exposes itself to possible liability for
securities fraud. By addressing the quality of a
particular management practice, a defendant declares
the subject of its representation to be material to the
reasonable shareholder, and thus is bound to speak
truthfully.

Id. See also In Re Wells Fargo, 12 F.3d at 930; Hayes, 982 F.2d

at 106-07.

These allegations also are sufficiently particular to meet

the requirements of Rule 9(b). In the paragraphs at issue,

plaintiffs specifically identify the internal reports and the

public statements underlying their claims, providing names and

dates. Although this section of the complaint would be

strengthened if it contained specific examples of problem loans

requiring a higher ALL, see In Re Wells Fargo, 12 F.3d at 926-28,

the summaries of the auditors' and consultants' reviews serve the

same purpose. Both permit an inference that the bank knew, or

should have known, that its public statements were inconsistent

with the actual conditions then being reported to them. The

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complaint does not simply rely on poor performance in the

aftermath of positive reports.11

Despite our conclusion that certain allegations survive

threshold consideration, we note that plaintiffs remain a great

distance from actually proving securities fraud. Their ability

to demonstrate that defendants acted with fraudulent intent in

making the various representations about Bank Shares'

conservative ALL approach may depend, inter alia, on whether

company officials in good faith believed their allocations were

adequate, and considered the increases recommended by the

consultants to be "ultra" conservative, and thus excessive. See

In Re Wells Fargo, 12 F.3d at 927 ("[T]he setting of loan loss

reserves is, by all accounts, an `art and not a science' . . . .

"). The precise timing of certain statements in relation to the

bank's ALL activity also is crucial.12

11 The complaint does not entirely lack reference to
specific loans. For example, in paragraphs 48 and 49, plaintiffs
aver that, in meetings held on August 16, 1988, an Ernst &
Whinney representative was told by the head of Amoskeag's
commercial real estate (CRE) division that certain CRE loans
"were now `maturing' and some were beginning to evidence signs of
deterioration not previously evident." 48. The Amoskeag
officer, Stephen Bradbury, noted in particular residential
condominiums, for which the bank had 18 or 19 outstanding loans.
Additionally, plaintiffs allege that E&W learned from the head of
Amoskeag's private banking division of a number of large,
unsecured problem loans, three of which are specifically
identified. 49. The complaint does not allege a connection,
however, between these specific loans and the asserted problems
with internal monitoring and inadequate ALL.

12 While a generous reading of the allegations in this
section would permit the inference that Bank Shares was
representing its ALL as adequate and "conservative" at the same
time that it was receiving multiple reports that it was not, it
also is possible that some of the disputed statements occurred

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Similarly, the contested statements regarding the quality of

Bank Shares' loan management capabilities may turn out to be

neither material nor misleading if, for example, hiring

consultants is a typical strategy of aggressive bank managers to

prevent more serious problems. In other words, defendants may

show that, in the banking context, "effective" loan monitoring

often includes adding hired experts to the company's own internal

procedures.

We note, as an additional caveat to the court and the

parties, that not every paragraph in this section of the

complaint contains actionable allegations,13 and even those

paragraphs that cannot be dismissed in their entirety as a matter

of law may contain allegations and wholly conclusory statements

only in the aftermath of corrective action -- in particular, the
$6 million allocation as of September 30, 1988 -- and that bank
officials thus reasonably believed that their reports were
accurate. For example, the review of Amoskeag's ALL performed by
the company's Internal Audit Department "[a]s of September 30,
1988" indicated the need for "additional injections" to the ALL,
but it is not clear whether this assessment was based on the
amount of reserves before or after the $6 million was allocated
retroactively to the third quarter. See 50(b). Indeed, it is

necessary to determine whether Bank Shares in October 1988 viewed
the $6 million as a complete solution to the identified problems,
or knew that it was only a partial response to Chaston's initial
findings, in order to evaluate its public statements. See, e.g.,

46, 54, 55, 57, 62.

13 For example, 61 states that defendants Allen, Yakovakis
and Machinist were "not surprise[d]" by Chaston's conclusion that
the Amoskeag and NTC ALLS were inadequate by a total of $12.1
million. The paragraph fails to identify with the required
particularity the conversations on which it is based, giving no
information about when and where these conversations supposedly
took place. Similarly, nothing in 58, which addresses "below
market rate" loans given to condominium purchasers, gives rise to
an inference of fraud, as distinguished from simple
mismanagement.

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that warrant no further attention.14 Although we leave to the

district court's discretion how it chooses to proceed upon

remand, we suspect that it may wish to direct plaintiffs to

submit a revised, limited complaint consistent with this decision

before conducting further proceedings. Cf. Shapiro, 964 F.2d at

284 (directing plaintiffs to reorganize complaint on remand to

facilitate evaluation).15

Continuing loan deterioration, declining earnings,

increasing ALL, 70-86.

These allegations detail developments beginning in mid-1989

with Bank Shares' acknowledging a substantial problem with non-

performing loans, prompting dramatic increases in its ALL

(including a $31.5 million addition to the previously announced

$6.1 million allocation for the first quarter), and ultimately

resulting in a reported net loss of $50.7 million for fiscal year

1989. Presumably, plaintiffs seek to establish in this section

of the complaint that the precipitous drop in Bank Shares'

14 In 53, for example, plaintiffs allege that "defendants
knew that the provision for loan losses in prior periods had been
arbitrarily understated without regard to the requirement of the
ALL, for the purposes of manipulating and artificially increasing
the Company's reported earnings." This language re-introduces
the allegations surrounding the 1987 decrease in the ALL, but it
is no more supportable at this point than it was earlier. See

supra at 8-9.

15 Although we have focused on the section of the complaint
labeled "Class Period Misstatements and Omissions," we note that
significant portions of paragraphs 87 to 106, describing
plaintiffs' cause of action, also could be substantially reduced
if the district court chooses to order plaintiffs to amend their
complaint before taking further action.

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financial condition was not really so precipitous, and thus

reflects the company's earlier concealment of its poor situation.

This approach, however, is simply an impermissible effort to

establish fraud through hindsight. It is well established that

plaintiffs in a securities action have not alleged actionable

fraud if their claim rests on the assumption that the defendants

must have known of the severity of their problems earlier because

conditions became so bad later on. See Kowal v. MCI

Communications Corp., 16 F.3d 1271, 1278 (D.C. Cir. 1994);

Greenstone, 975 F.2d at 25 (Rule 9(b) not satisfied by general

averment that "defendants `knew' earlier what later turned out

badly"). See also supra at 5-6. Unlike the earlier section of

the complaint, detailing the basis for the alleged inconsistency

between defendants' knowledge and their public statements, there

are no facts stated here with any particularity from which an

inference of fraud reasonably can be drawn.

The complaint instead states that bank examiners in May

reported the need for an increased ALL, see 73, that Bank

Shares at approximately that time obtained an extension for

filing its first quarter report for 1989 so that it could

readdress the adequacy of its ALL, see 75, and that it shortly

thereafter made a substantial increase, see 76. From all that

appears, Bank Shares acted properly in doing what it was advised

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to do, while reporting accurately that it was taking these steps

because of "real estate related loan problems," see 79.16

The concluding paragraphs in this section of the complaint

describe various Chaston reports on Bank Shares' loan management

procedures and its ALL, as well as the company's reports of its

losses in the third and fourth quarters of 1989. See 81-86.

None of them provides a basis for a securities fraud claim.

IV.

In addition to its claim against Bank Shares as a

corporation, plaintiffs allege liability against seven individual

former officers and directors of the company. The district court

did not address the sufficiency of these allegations in the Third

Amended Complaint, but did reject the claims as insufficiently

particular when it reviewed an earlier version. See Shields v.

Amoskeag Bank Shares, 766 F. Supp. 32, 40-41 (D.N.H. 1991).

We conclude that, with respect to five of the seven

defendants, the complaint alleges a sufficiently specific

connection to certain of the challenged statements that dismissal

16 Plaintiffs point to a statement in Bank Shares' 10-Q for
the second quarter of 1989, filed with the SEC on about August 1,
explaining that the increase in the provision for loan and lease
losses "was the result of management's assessment of the adequacy
of the allowance for loan and lease losses in light of [the]
judgment that there has been significant deterioration in the
condition of problem loans since year-end," 79. Nothing in the
complaint suggests that this was other than an accurate depiction
of what occurred. That "management's assessment" may have been
affected by the views of examiners or consultants does not make
the statement a fraudulent misrepresentation. In asserting in
80 that this statement was knowingly false and misleading,
plaintiffs provide only conclusory support lacking in
particularity.

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of plaintiffs' claims as a matter of law is inappropriate. With

the exception of Bushnell and Woolson, all of the defendants are

alleged to have signed the 1988 Annual Report in which Bank

Shares' loan loss reserves were depicted as "sufficient" and

"prudent," see supra at 14; Complaint, at 64,17 and also are

alleged to have received copies of the internal auditor's report

concluding that additions to the reserves were required as soon

as possible, Complaint, at 50-51, as well as Chaston's report

in December 1988 stating that the ALL was inadequate, id. at

59-61. The acceptance of responsibility for the contents of the

Annual Report, demonstrated by defendants' signatures, combined

with specific allegations that they knew of conflicting

conditions, establishes a sufficient link between the defendants

and the alleged fraud to satisfy Rule 9(b)'s particularity

requirement. Cf. Romani, 929 F.2d at 880 n.4; Wool v. Tandem

Computers Inc., 818 F.2d 1433, 1440 (9th Cir. 1987) ("In cases of

corporate fraud where the false or misleading information is

conveyed in . . . annual reports . . . or other `group-published

17 The complaint alleges that Bushnell was chairman and
chief executive officer of Bank Shares until his resignation in
early 1988, and he therefore was no longer with the company when
the 1988 Annual Report was written and released. Indeed, because
all of the actionable allegations concern the time period after
his departure, we affirm his dismissal from the case.
Woolson is the only defendant not alleged to have been a
director of Bank Shares, and thus not a signatory of the holding
company's Annual Report.

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information,' it is reasonable to presume that these are the

collective actions of the officers.").18

Defendants Machinist and Allen are identified as the authors

or speakers of the other statements contained in the paragraphs

that survive dismissal, and those allegations also remain live

against them. As to those statements, the other defendants are

alleged only to have authorized or acquiesced in them (the press

releases), or they are attributed no role at all in the

dissemination of the statements (remarks by Allen and Machinist

at analysts meeting). See 52, 56. This is insufficient to

meet the requirements of Rule 9(b).19

Defendants assert that the complaint fails in any respect to

state an actionable claim against the individual defendants

because there are no allegations from which scienter reasonably

may be inferred, such as that they sold their personal stock in

Bank Shares during the class period. They argue that it is

insufficient to base a claim of fraudulent intent on allegations

that defendants sought to protect their compensation and

prestige. See Complaint at 105. See also Tuchman v. DSC

Communications Corp., 14 F.3d 1061, 1068-69 (5th Cir. 1994).20

18 We see no need to distinguish at this juncture between
plaintiffs' primary and secondary liability theories.

19 Because these are the only relevant allegations relating
to Woolson, he, like Bushnell, is entitled to dismissal.

20 The Fifth Circuit in Tuchman endorsed language from the

district court's opinion in that case rejecting the pursuit of
increased compensation as a sufficient basis for inferring fraud:

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We agree that allegations that defendants committed fraud to

save their salaries or jobs ordinarily will not be enough to

support a reasonable inference of scienter if the complaint lacks

any other basis for inferring fraudulent intent. In this case,

however, plaintiffs have done more than simply aver generally

that defendants knowingly misrepresented Bank Shares'

circumstances, while relying on a job-preservation motive to

establish the element of scienter. As described above,

plaintiffs specifically cited reports and documents presented to

defendants at relevant times that were inconsistent with the

defendants' public statements. This satisfies the necessary

pleading requirements. See In Re Wells Fargo, 12 F.3d at 931

("While `allegation[s] of unusual insider trading by defendants

immediately preceding the disclosure of negative news' may be . .

. a characteristic of a `typical securities fraud class action,'

they are not required.").21

On a practical level, were the opposite true, the
executives of virtually every corporation in the United
States would be subject to fraud allegations. It does
not follow that because executives have components of
their compensation keyed to performance, one can infer
fraudulent intent.

14 F.3d at 1068-69 (quoting 818 F. Supp. 971, 976 (N.D. Tex.
1993)).

21 Nothing in Tuchman, a case emphasized by defendants at

oral argument, is to the contrary. In that case, the Ninth
Circuit observed that "[w]here a defendant's motive is not
apparent, a plaintiff may adequately plead scienter by
identifying circumstances that indicate conscious behavior on the
part of the defendant, though the strength of the circumstantial
allegations must be correspondingly greater." 14 F.3d at 1068.
After rejecting the desire to preserve incentive compensation and
similar "perquisites and emoluments of office" as a sufficient

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V.

We conclude that the plaintiffs have stated a claim against

Bank Shares and five of the individual defendants based on

certain of the allegations contained in paragraphs 46 to 69, with

such limitations and exclusions as previously described. To that

extent, the dismissal of the Third Amended Complaint is reversed.

The district court may choose to require a Fourth Amended

Complaint, consistent with this decision, before conducting

further proceedings. In all other respects, the district court's

decision is affirmed.22

Affirmed in part, reversed in part, and remanded. No costs.

basis for an inference of scienter, the court looked to whether
plaintiffs otherwise had established fraudulent intent. It found
that they had not, observing that the complaint failed to assert
"any fact that makes it reasonable to believe that the defendants
knew that any of their statements were materially false or
misleading when made." Id. at 1069. This case is

distinguishable because, as we have discussed, plaintiffs here
have alleged facts from which an inference of knowledge
reasonably may be drawn.

22 We note that the complaint indicates that only one of the
three named plaintiffs, Nishan Serabian, purchased shares during
the time period giving rise to the actionable allegations, and it
therefore appears that plaintiffs Horvei and Lo Priore no longer
are proper parties. The district court will need to address this
matter on remand.

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