Denny v. Barber

United States Court of Appeals for the Second Circuit · 1978 · Corporations

576 F.2d 465 (1978)

Updated August 22, 2026

CorporationsSecurities fraudPleadingRule 9(b)Rule 10b-5Section 18Section 20(a)particularity

Facts

Plaintiff bought 15 shares of Chase Manhattan Corporation on December 12, 1974 and sought to represent purchasers of the corporation's securities since January 1, 1973. His amended complaint alleged, on information and belief, that the corporation, its officers and directors, and its accountants had issued false annual and interim financial statements, proxy materials, and prospectuses concerning risky loans, foreign activities, reserves, municipal securities, CMART-related matters, and overvaluation of securities. Many of the allegations relied on later disclosures in subsequent annual reports, and plaintiff admitted in a Rule 9(g) statement that he lacked information about the underlying transactions and needed discovery because the evidence was in defendants' control. The district court concluded the allegations were vague, conclusory, or based on post-purchase events and dismissed the complaint.

Issue

Whether a securities fraud complaint by a purchaser of stock adequately states claims under Rule 10b-5, § 18, and § 20(a) when it broadly alleges that earlier reports were misleading, but fails to identify with particularity the pre-purchase statements that were false and the facts showing defendants knew or were reckless in not knowing of the falsity when those statements were issued.

Rule

In a Rule 10b-5 action, Rule 9(b) requires more than conclusory allegations that later events showed earlier corporate reports were too optimistic. The plaintiff must identify the offending pre-purchase statements and allege with sufficient particularity the facts showing why they were false or misleading when made and facts permitting an inference that defendants knew, or were reckless in failing to know, of that falsity; pleading fraud by hindsight is insufficient.

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In Seattle, Nora Kim bought shares of Rain Harbor Financial Group in March 2022. A year later, the company disclosed major losses on commercial real estate loans, and Nora sued, alleging the 2021 annual report was fraudulent because it described the loan portfolio as strong even though many loans were actually "risky" and "speculative."

Assuming Nora's complaint does not identify any particular loans, amounts, dates, or facts showing management knew of specific problems when the 2021 report was issued, how should the court rule on a motion to dismiss?

Explanation. Rule 9(b) requires the plaintiff to identify the offending pre-purchase statements and plead specific facts showing why they were false when made and why defendants knew or were reckless in not knowing that. A complaint that merely calls loans "risky" and infers fraud from later losses is impermissible fraud by hindsight.