
USCA1 Opinion

	




                            UNITED STATES COURT OF APPEALS                                FOR THE FIRST CIRCUIT                                 ____________________          No. 97-1345                              MIGUEL MALDONADO, ET AL.,                               Plaintiffs - Appellants,                                          v.                               RAMON DOMINGUEZ, ET AL.,                               Defendants - Appellees.                                 ____________________                     APPEAL FROM THE UNITED STATES DISTRICT COURT                           FOR THE DISTRICT OF PUERTO RICO                    [Hon. Jos  Antonio Fust , U.S. District Judge]                                              ___________________                                 ____________________                                        Before                               Torruella, Chief Judge,                                          ___________                              Cyr, Senior Circuit Judge,                                   ____________________                         and DiClerico, Jr.,* District Judge.                                              ______________                                _____________________               Hilda Surillo-Pe a, with whom Jaime Sifre-Rodr guez, Luis A.               __________________            _____________________  _______          Mel ndez-Albizu  and S nchez-Betances &  Sifre were on  brief for          _______________      _________________________          appellants.               Jorge P rez-D az, with whom Pietrantoni M ndez & Alvarez was               ________________            ____________________________          on brief for Dean Witter Reynolds, Inc.               Amanda Acevedo-Rhodes, with  whom Luz Ivette Rivera  and Luz               _____________________             _________________      ___          Ivette  Rivera  &  Asociados  were on  brief  for  appellee Ram n          ____________________________          Dom nguez.                                 ____________________                                  February 27, 1998                                 ____________________                                        ____________________          *  Of the District of New Hampshire, sitting by designation.                    TORRUELLA,  Chief Judge.   Plaintiffs  invested  in and                    TORRUELLA,  Chief Judge.                                ___________          became   directors  of  a  corporation  called  the  Puerto  Rico          International Bank ("PRIBANK"), which was designed to create huge          profits for its  investor-directors by leveraging its  collateral          with low  interest loans  in order  to  purchase higher  interest          mortgage  obligations.    When  PRIBANK  failed,  the  plaintiffs          brought this suit, claiming that the investment bankers marketing          the  PRIBANK  stock defrauded  them  by  failing to  mention  the          possibility  that PRIBANK's securities  would be "called"  in the          event of an  interest rate adjustment.  The  investors filed this          suit  under sections  12(2) and  17(a) of  the Securities  Act of          1933, 15 U.S.C.     77l,  77q, as  well as section  10(b) of  the          Securities Act of 1934, 15 U.S.C.   78j, and Rule 10(b)(5) of the          Securities   and   Exchange    Commission   ("SEC")   promulgated          thereunder.  The district court  dismissed all of these claims on          a motion to dismiss.  We affirm.                                      BACKGROUND                                      BACKGROUND                                      __________                    In addressing  a 12(b)(6)  motion, we  must accept  all          well-pleaded facts as  true and accord the  plaintiff the benefit          of all reasonable inferences.  See LeBlanc v. Great Am. Ins. Co.,                                         ___ _______    __________________          6 F.3d  836, 841 (1st  Cir. 1993).   The following  recitation of          this case's background reflects this standard.                      Plaintiffs  Miguel  Maldonado,  et  al.  --   important          clients  of  Dean Witter  Reynolds,  Inc. of  Puerto  Rico ("Dean          Witter")  --  received mailed  invitations  to  a  meeting at  an          exclusive  San Juan  club where  they would  be presented  with a                                         -2-          select investment opportunity.   At the August  30, 1993 meeting,          Ram n  Dom nguez, Senior Vice-President and Sales Manager of Dean          Witter, made a presentation regarding the formation of PRIBANK, a          new corporation.   He explained PRIBANK's investment  philosophy,          and stated  that  individual investors'  participation  would  be          limited  to  ten  blocks of  $350,000,  with  an additional  $1.5          million coming  from  himself and  Antonio  Luis Rosado  --  Vice          President  of  Santander  National Bank,  and  president-to-be of          PRIBANK.     Each  investor  would  become  a   director  of  the          corporation.   According to  Dom nguez, PRIBANK  was a  virtually          risk-free investment  which was projected  to return 176%  of the          investors' principal in only two years.                      PRIBANK's  strategy  was  relatively simple.    PRIBANK          would use  $5 million  of collateral to  open margin  accounts of          almost $300 million with various brokerage houses.  PRIBANK would          be  permitted to leverage  itself through these  brokerage houses          for 60 times its capital because it had the credit of Dean Witter          to back it up and because funds provided to PRIBANK on its margin          accounts were not allowed to  be used for the purchase of  credit          risk  assets.   In  other words,  PRIBANK  would be  seen  by the          brokerage  houses as a safe  entity because its investments would          be low risk and its credit with Dean Witter was trusted.                    The money in PRIBANK's margin accounts would be used to          purchase Real Estate Mortgage  Investment Conduits ("REMICs") and          Collateralized Mortgage Obligations  ("CMOs"), effectively making          PRIBANK the lender for numerous home mortgages.  These REMICs and                                         -3-          CMOs would  pay interest to PRIBANK at a higher rate than PRIBANK          was required to  pay to the brokerage houses for the money in its          margin accounts.   The difference between  the low interest  rate          PRIBANK would  be  paying and  the higher  interest rate  PRIBANK          would be collecting -- the "spread" -- would be PRIBANK's profit.          Since PRIBANK was able to borrow approximately 60 times more than          its collateral, a spread of only 1 percent would have resulted in          huge profits for PRIBANK's investors.                    A further  property of  PRIBANK's investment  structure          made it unique.   PRIBANK would only  purchase investments called          "floaters,"  which would be re-priced and adjusted for prevailing          interest rates  every thirty  days.   Every thirty days,  PRIBANK          would collect interest on these investments.   PRIBANK planned to          carefully structure  its investments so  that each month,  on the          same day that interest payments were due to the brokerage houses,          PRIBANK  would   also  collect   interest  on   its  investments.          Dom nguez labelled this as "matching."                    This  would  give  PRIBANK  an  advantage  over  normal          financial  institutions which purchased  floating REMICS and CMOs          without  this perfect  matching.   Normal  financial institutions          _______          have mismatched inventories, and have to keep reserves on hand to          account  for withdrawals and  to pay  obligations when  they come          due.  The higher interest  rates these institutions make on their          loans barely make up for the potential interest lost on the money          sitting in their reserves at any given time.  However, due to its          perfect  matching, PRIBANK  would  not be  required  to keep  any                                         -4-          significant reserves on  hand, and could invest all  of its money          every month, enabling it to take  full advantage of the spread in          interest rates.  Therein lay the key to PRIBANK's philosophy, and          eventually to its downfall.                    Dom nguez explained  that  PRIBANK's goal  was to  make          money  based  upon the  interest  rate spread,  and  yet insulate          itself from any changes in interest rates.  Whether rates went up          or down, the  spread would always remain.   What Dom nguez failed          to explain to the investors was that PRIBANK was not a risk-free,          or even a low-risk investment.  Instead, PRIBANK would be engaged          in highly leveraged margin trading, and, like any  margin trader,          PRIBANK's  investments could be subject  to "margin calls."  That          is, if interest rates went up, the value of REMICs and  CMOs (and          other loan obligations) would go down, and brokerage houses could          require investors  to put up  more collateral to cover  the paper          loss.  Margin calls do not necessarily occur on the same day that          investments are  adjusted and repriced  -- at the 30-day  mark in          PRIBANK's case --  but can occur at  any time after the  value of          the investments falls.  PRIBANK,  which was designed to profit by          having  no reserves, would not be able to cover any margin calls.          Therefore,  any significant hike in interest rates could bankrupt          PRIBANK, and its investors would lose their investments.                    This significant risk was not disclosed to investors at          the August 30,  1993 meeting.  Instead, investors  were told that          fluctuating  interest rates  would pose  no  threat to  PRIBANK's          profitability.   The investors believed that Dom nguez and Rosado                                         -5-          had struck upon a scheme whereby they could make huge profits for          little or no risk.  They invested $350,000 each in exchange for a          5.5% share of  PRIBANK and a  seat on the  board.  Dom nguez  and          Rosado  made commissions  on this  $3.5  million of  investments.          PRIBANK began operations in January 1994.                    On  February 4,  1994,  the Federal  Reserve  increased          interest rates  by 1/4  point.   This increase  was the first  of          several increases which were to occur in future weeks.  Brokerage          houses soon  began to  make margin  calls.   To  meet the  margin          calls,  PRIBANK was  required to  sell  investments before  their          agreed-upon settlement dates, resulting in significant penalties.          As one  margin call  was being  paid off, another  loan would  be          called,  and PRIBANK would  scramble to sell  another investment,          incurring  more  penalties, and  draining  PRIBANK's original  $5          million collateral.                    In  the midst of  this collapse, on  February 23, 1994,          PRIBANK held a  meeting of the board.   At the meeting, Dom nguez          presented a picture of a smoothly-running operation, pointing out          promising investments that  PRIBANK was looking into  and failing          to mention the fact that PRIBANK was already  experiencing margin          calls and sustaining  losses.  Soon  after this meeting,  PRIBANK          lost its remaining assets and its stock became worthless.                    The  present suit was brought before the District Court          of Puerto Rico under  the Securities Act of 1933, 15  U.S.C.   77          (the "1933 Act"  or "Securities Act"), and the  Securities Act of          1934,  15  U.S.C.     78  (the "1934  Act"  or  "Exchange  Act").                                         -6-          Plaintiffs allege that fraudulent  statements and omissions  were          made  by Dom nguez  and  Rosado,  and  further  allege  vicarious          liability  on  the part  of  Dean  Witter.   The  district  court          dismissed all  claims  on Rule  12(b)(6)  motions.   This  appeal          followed.                    On appeal, plaintiffs make a number  of claims.  First,          they argue that, to the  extent that the district court converted          any  of  the  Rule  12(b)(6) motions  into  motions  for  summary          judgment under Rule 56(c),  plaintiffs received inadequate notice          and opportunity  to submit  evidence.  At  issue is  both whether          such  a conversion  actually occurred  and  whether a  conversion          would have been appropriate at that stage of the case.                    Plaintiffs  next claim that the district court erred in          finding that  there is no  implied private cause of  action under          section 17(a)  of the  1933 Act.   Plaintiffs urge this  court to          recognize such a cause of action.                    Plaintiffs further  contend  that  the  district  court          erred in  concluding that  PRIBANK stock  was privately  offered.          The character of  PRIBANK's offering became material  to the case          when,  shortly after this complaint was  filed, the Supreme Court          decided Gustafson  v. Alloyd  Co., 513  U.S. 561, 577-78  (1995),                  _________     ___________          holding  that section  12(2)  of the  1933 Act  did not  apply to          private offerings.                    Next, plaintiffs  argue that their claim  under section          10(b)  of the 1934  Act -- and  Rule 10b-5 of  the Securities and          Exchange  Commission  promulgated  thereunder  --  was pled  with                                         -7-          sufficient  particularity.     Specifically,  they   contest  the          district court's  ruling that they  had failed to  plead specific          facts which create a triable question on the issue of defendants'          "scienter."                                         -8-                    Finally,  plaintiffs  claim  that  the  district  court          abused its discretion in denying  their request for leave to file          an amended complaint  after the district court  entered judgment.          The argument stems from the district court's issuance of a margin          order which indicated that this seemingly tardy request for leave          would be granted.  We address these arguments in turn.                                       ANALYSIS                                       ANALYSIS                                       ________          I.  Conversion of 12(b)(6) Motions          I.  Conversion of 12(b)(6) Motions                    Plaintiffs allege  that the  district court  improperly          converted the  series of 12(b)(6)  motions at issue  into motions          for  summary  judgment  pursuant  to  Fed.  R.  Civ.   P.  56(c).          Plaintiffs argue that  such a conversion is  necessarily improper          where  defendants have offered no materials outside the pleadings          and where the court has not given express notice of its intent to          convert the motions.  As a matter of law, plaintiffs are correct.          However,  a close reading  of the district  court opinion reveals          that  the  court  dismissed  these claims  based  solely  on  the          insufficiency of the pleadings, and we affirm on those grounds.                    In Moody v. Town of Weymouth, 805 F.2d 30, 31 (1st Cir.                       _____    ________________          1986), we held that  when a district court fails  to give express          notice  to the  parties of  its intention  to convert  a 12(b)(6)          motion into a motion for summary judgment, there is no reversible          error if the party opposing the motion (1) has received materials          outside the pleadings,  (2) has had an opportunity  to respond to          them, and  (3) has  not controverted their  accuracy.   The Moody                                                                      _____          "exception" to the  rule that the district court  must notify the                                         -9-          parties of  an intent to  convert motions is limited,  and unless          the three factors listed above are present the exception does not          apply.   See Cooperativa  de Ahorro y  Cr dito Aguada  v. Kidder,                   ___ ________________________________________     _______          Peabody &  Co., 993 F.2d 269, 273 (1st  Cir. 1993) (in deciding a          ______________          12(b)(6) motion,  a district  court normally  must either  ignore          extraneous   materials  or  give   the  parties  notice   and  an          opportunity  to respond to  the conversion to  a summary judgment          motion).   In the present  case, the plaintiffs filed  a detailed          pleading  with several  documentary exhibits.   Defendants  argue          that this fact  alone put plaintiffs on notice  that any 12(b)(6)          motion  could  be  converted  into  a  56(c)  motion for  summary          judgment.   This argument  fundamentally misinterprets  Moody and                                                                  _____          therefore fails.                    Plaintiffs  were therefore  surprised to find  that the          district  court  had  converted  the  motions.    Throughout  its          opinion,  the district  court used  language  consistent with  an          award of summary judgment, ruling that "Plaintiffs have failed to          adduce sufficient  evidence to create a material  issue of fact."          However, an opinion's  plain language does not  always mirror its          plain  logic, and while a quick perusal of the opinion might lead          one  to believe  that the  district court  had applied  the wrong          standard  of decision, looking  past the terminology  employed by          the court reveals an opinion illustrating the legal insufficiency          of the pleadings for  each claim in this suit.   See Garita Hotel                                                           ___ ____________          Ltd. Partnership v. Ponce Fed. Bank, F.S.B., 958 F.2d 15, 18 (1st          ________________    _______________________          Cir. 1992)  (the determination  of whether  a district  court has                                         -10-          converted   a  12(b)(6)   motion  is   "functional   rather  than          mechanical").  On that basis,  we affirm the standard of decision          actually employed by the district  court, and we now examine each          of  the district court's  rulings regarding the  insufficiency of          the pleadings in this case.          II.  Section 17(a) of the 1933 Act          II.  Section 17(a) of the 1933 Act                    The district  court dismissed  one  of the  plaintiffs'          claims after concluding  that there was no  implied private cause          of action under section 17(a) of the 1933 Act.  We agree.                    Section 17 of the 1933 Act provides that:                    It  shall be unlawful  for any person  in the                    offer or sale of any securities by the use of                    any means or instruments of transportation or                    communication  in interstate  commerce or  by                    theuse of the mails, directly or indirectly -                                         (1) to employ any device, scheme, or artifice                    to defraud, or                     (2) to obtain  money or property by  means of                    any untrue  statement of  a material  fact or                    any  omission  to   state  a  material   fact                    necessary  in order  to  make the  statements                    made, in the light of the circumstances under                    which they were made, not misleading, or                     (3) to engage in any transaction, practice or                    course  of business  which operates  or would                    operate  as  a  fraud   or  deceit  upon  the                    purchaser.          15 U.S.C.   77(q).  Courts  and law enforcement agencies have the          authority to enforce section 17(a) of the 1933 Act via injunction          and criminal prosecution.  However, for years circuit courts have          struggled with the question  of whether an implied  private right          of  action to  enforce section  17(a) also  exists.   The Supreme          Court has never answered the question.  See Bateman Eichler, Hill                                                  ___ _____________________                                         -11-          Richards, Inc.  v. Berner, 472 U.S.  299, 304 n.9  (1985).  Until          ______________     ______          today, neither had  this court.  See Cleary  v. Perfectune, Inc.,                                           ___ ______     ________________          700 F.2d774, 779 (1stCir. 1983)(declining to reachthis question).                    This issue has caused confusion  because, while neither          the language nor the history of section 17(a) clearly indicates a          congressional intent to  create a  private right  of action,  see                                                                        ___          Newcome v. Esrey, 862 F.2d 1099, 1103-07 (4th Cir. 1988), section          _______    _____          10(b) of the  1934 Act -- with substantially  similar language --          has always  been interpreted  to provide for  a private  right of          action.  See Herman  &  MacLean v.  Huddleston,  459 U.S.  385-87                   ___ __________________     __________          (1983) (expressly interpreting  section 10(b)'s private right  of          action  as  consistent  with  securities  laws'  "broad  remedial          purposes").    While  some  courts  did  not find  the  requisite          congressional intent  to infer  a private  right  of action  from          section 17(a), see  Touche Ross & Co. v. Redington, 442 U.S. 560,                         ___  _________________    _________          574-76  (1979) (legislative  intent  is  the  primary  factor  to          consider  when addressing  whether  a  private  right  of  action          exists), other circuits  found no meaningful distinction  between          section 17(a)  and section 10(b).   Compare Daniel  v. Teamsters,                                              _______ ______     _________          561 F.2d  1223, 1244-46 (7th  Cir. 1977) (holding that  a private          right of action  exists), and SEC v. Texas Gulf  Sulphur Co., 401                                    ___ ___    _______________________          F.2d 833, 867 (2d Cir.  1968) (Friendly, J., concurring)  (same),          with Landry v. All Am. Assur. Co., 688 F.2d 381, 384-91 (5th Cir.          ____ ______    __________________          1982)  (holding  that no  private  right of  action  exists), and                                                                        ___          Stephenson v. Calpine  Conifers II, Ltd., 652 F.2d  808, 815 (9th          __________    __________________________          Cir. 1981) (same).                                         -12-                    However, in Aaron v. SEC,  446 U.S. 680, 695-97 (1980),                                _____    ___          the Supreme Court held that, unlike section 10(b) of the Exchange          Act, section 17(a)  of the Securities Act does  not require proof          of scienter.  Thus, while the implied cause of action under 10(b)          would expose only  the deceitful to private causes  of action, an          implied cause of action  under 17(a) would impose  such liability          on merely negligent wrongdoers.  Furthermore, the Court had ruled          four years  earlier that  a judicially  created cause  of action,          such  as  the one  implied  under  section  10(b), could  not  be          extended to actions premised on  negligent wrongdoing.  See Ernst                                                                  ___ _____          & Ernst v. Hochfelder, 425 U.S. 185, 210 (1976).          _______    __________                    Aaron  and Ernst highlighted  for courts  a significant                    _____      _____          distinction between implying  private causes of action  under the          two  sections.   While  the  10(b) implied  cause  of action  has          continued to enjoy unanimous recognition and  the imprimatur of a          unanimous  Supreme Court in Huddleston, the 17(a) cause of action                                      __________          has  been held up  to renewed scrutiny.   In recent  years, every          circuit to  have addressed the  issue has refused to  recognize a          private  right  of  action under  section  17(a),  including four          circuits  which originally  had  held otherwise.   See  Finkel v.                                                             ___  ______          Stratton Corp., 962 F.2d 169,  174-75 (2d Cir. 1992) (noting that          ______________          Kirshner v. United States, 603 F.2d 234 (2d Cir.  1978), had been          ________    _____________          overruled); Newcome  v. Esrey, 862  F.2d 1099, 1101-07  (4th Cir.                      _______     _____          1988) (overruling Newman v. Prior,  518 F.2d 97 (4th Cir. 1975));                            ______    _____          Stephenson v. Paine Webber Jackson & Curtis, Inc., 839 F.2d 1095,          __________    ___________________________________          1100 (5th Cir.); Schlifke v. Seafirst Corp., 866 F.2d 935, 942-43                           ________    ______________                                         -13-          (7th Cir.  1989)(overruling Daniel  v. Teamsters,  561 F.2d  1223                                      ______     _________          (7th Cir.  1977), rev'd on  other grounds, 439 U.S.  551 (1979));                            _______________________          Deviries  v. Prudential-Bache Sec., Inc.,  805 F.2d 326, 328 (8th          ________     ___________________________          Cir. 1986); Puchall  v. Houghton, Cluck, Coughlin &  Riley (In re                      _______     __________________________________  _____          Washington Pub.  Power Supply Sys.  Sec. Litig.), 823  F.2d 1349,          _______________________________________________          1350 (9th  Cir. 1987) (overruling  Mosher v. Kane, 784  F.2d 1385                                             ______    ____          (9th Cir.  1986); Stephenson  v. Calpine Conifers  II, Ltd.,  652                            __________     __________________________          F.2d  808, 815  (9th Cir.  1981)); Zink  v. Merrill  Lynch Pierce                                             ____     _____________________          Fenner & Smith, Inc.,  13 F.3d 330, 334 (10th  Cir. 1993); Currie          ____________________                                       ______          v. Cayman Resources Corp., 835 F.2d 780, 784-85 (11th Cir. 1988).             ______________________          We now come to the same conclusion.                    In determining  whether  an implied  private  right  of          action exists in a statute,  we look to congressional intent, see                                                                        ___          Touche Ross, 442  U.S. at 574-76, keeping in mind that there is a          ___________          strong presumption against such inferences.  See Sterling Suffolk                                                       ___ ________________          Racecourse  v. Burrellville Racing, 989 F.2d 1266, 1268 (1st Cir.          __________     ___________________          1993).   In  this case,  we  do not  find sufficient  evidence of          congressional  intent  to  overcome  the  presumption.    As  the          district court observed, Congress explicitly provided for private                                            __________          causes of action  in sections 11 and 12  of the 1933 Act.   While          the  fact that  other provisions  of a  complex  statutory scheme          create  express remedies does  not in itself  prove that Congress          did not  imply a private remedy in another section, see Cannon v.                                                              ___ ______          University of Chicago,  441 U.S. 677, 690 n.13  (1979), where the          _____________________          explicit remedies  in the same  statute address much of  the same          conduct  and benefit  the  same parties  as  a potential  implied                                         -14-          private  cause of action, the circumstances militate against that          inference.  Furthermore, the legislative history of section 17(a)          does not, on the whole, favor an implied private right of action.          See   Newcome,  862  F.2d  at  1103-07  (conducting  an  in-depth          ___   _______          examination  of  the  legislative  history  of  this  provision).          Therefore,  the  district court  did  not err  in  dismissing the          plaintiffs' claim under section 17(a) of the 1933 Act.          III.  Section 12(2) of the 1933 Act          III.  Section 12(2) of the 1933 Act               Plaintiffs  also brought  suit under  section  12(2) of  the          Securities Act.   This provision establishes civil  liability for          any  person  who  uses  fraudulent  means  to  sell a  security.1                                        ____________________          1  According to 15 U.S.C.   77l(a)(2):                    Any  person  who  . .  .  offers  or  sells a                    security .  . .  by the use  of any  means or                    instruments     of     transportation      or                    communication  in interstate  commerce or  of                    the mails, by  means of a prospectus  or oral                    communication,  which   includes  an   untrue                    statement  of a  material  fact  or omits  to                    state a material  fact necessary in  order to                    make  the  statements, in  the  light  of the                    circumstances under which they were made, not                    misleading (the purchaser not knowing of such                    untruth  or  omission),  and  who  shall  not                    sustain the burden  of proof that he  did not                    know, and in the  exercise of reasonable care                    could  not  have known,  of  such untruth  or                    omission, shall be liable . . . to the person                    purchasing  such security  from him,  who may                    sue either  at law or in equity  in any court                    of  competent  jurisdiction, to  recover  the                    consideration  paid  for such  security  with                    interest  thereon,  upon the  tender  of such                    security, or for damages if he no longer owns                    the security.                                         -15-          However, after the complaint was  filed in this case, the Supreme          Court conclusively decided that section 12(2) applies exclusively          to "initial public offerings."   See Gustafson v. Alloyd Co., 513                                           ___ _________    __________          U.S. 561,  577-78 (1995).   The district  court, ruling  that the          pleadings   established  that  PRIBANK   stock  had  been  placed          privately, dismissed  the 12(2)  claim.   Plaintiffs appeal  this          _________          ruling, arguing that  their pleadings did not admit  that PRIBANK          stock was  placed privately.   Since Gustafson was  decided after                                               _________          their complaint was filed, the plaintiffs argue that they  should          have  received   permission  to  amend  their   complaint,  which          currently fails to explicitly address whether PRIBANK's stock was          placed  privately or publicly.   Therefore, the question for this          court to decide is whether  the pleadings, in their current form,          establish that PRIBANK's stock was placed privately.                    A placement of  stock is private if it  is offered only          to  a few sophisticated  purchasers who each  have a relationship          with the issuer,  enabling them to command  access to information          that  would otherwise be  contained in a  registration statement.          See Cook v. Avien, Inc., 573 F.2d 685, 691 (1st Cir. 1978).  "The          ___ ____    ___________          determination  of whether  an offer  is not  public has  not been          relegated to  a simple numerical test."   See Van Dyke  v. Coburn                                                    ___ ________     ______          Enters,  Inc., 873  F.2d  1094  (8th Cir.  1989)  (citing SEC  v.          _____________                                             ___          Ralston Purina Co.,  346 U.S. 119, 125 (1953)).   Instead, courts          __________________          are required to weigh the facts  of each case carefully to assess          whether the  offerees need  to be protected  under the  1933 Act.          See Ralston Purina, 346 U.S. at 127.          ___ ______________                                         -16-                    In  this case,  twelve invitations  were  sent to  Dean          Witter clients.  Dom nguez had personally managed accounts in the          past  for each  of them.   The plaintiffs  were not  merely asked          passively  to invest  in an  existing entity,  but to  partner in          starting a new corporation.  Each shareholder of PRIBANK bought a          5.5%  interest in  the corporation  and  a seat  on the  board of          directors.  The board  was to meet each  month, and according  to          PRIBANK's by-laws  the board  of directors  had full  control and          direction of the corporation's affairs and business.                    Section  12(2) of the 1933 Act protects those investors          who would  otherwise be  powerless against  fraudulent offers  of          securities.  When a select group of investors are asked to become          directors of a new corporation,  and have access to all documents          relevant to  the corporation's  formation  and investments,  they          cannot bring suit under section 12(2)  when the corporation fails          for the reasons  claimed in this suit.   Let us be clear.   We do          not mean to suggest that a director has no remedy when  defrauded          by  others  within  a  new  corporation,  but  only  that,  under          Gustafson, section 12(2) of the 1933 Act is not available to this          _________          class of claimants.  Under these circumstances, there was no need          to  allow  leave to  amend  the  pleadings  on  this issue.    We          therefore affirm  the district  court's dismissal  of this  claim          under Rule 12(b)(6).2                                        ____________________          2  Plaintiffs maintain that Dom nguez' statements could  form the          basis of section 12(2) claims in spite of the fact that  they did          not appear in  the prospectus, because section 12(2) applies more          broadly to initial  public offerings which are  exempted from SEC          registration -- in this case due to the "intrastate" character of                                         -17-          IV.  Section 10(b) of the 1934 Act (SEC Rule 10b-5)          IV.  Section 10(b) of the 1934 Act (SEC Rule 10b-5)                    Plaintiffs  also seek relief under section 10(b) of the          Exchange Act, 15 U.S.C.    78j(b), and SEC Rule 10b-5 promulgated          thereunder, 17  C.F.R.    240.10b-5, which  prohibit any  person,          directly  or indirectly, from committing fraud in connection with          the purchase  or sale  of securities.   See id.;  Gross v.  Summa                                                  ___ ___   _____     _____          Four, Inc., 93 F.3d  987, 992 (1st Cir.  1996).3  Unlike  section          __________          17(a),  section  10(b)  requires that  plaintiffs  plead  -- with          sufficient  particularity to  withstand Fed. R.  Civ. P.  9(b) --          that defendants acted with "scienter."  Scienter has been defined          as "a  mental state embracing  intent to deceive,  manipulate, or          defraud."   See Ernst, 425 U.S.  at 193 n.12.   Plaintiffs allege                      ___ _____          that Dom nguez and Rosado understood  and concealed the risks  of          margin calls on the PRIBANK investments.                      This circuit has  been clear and consistent  in holding                                        ____________________          PRIBANK's  offering.    By concluding  that  PRIBANK's  stock was          placed privately, we need not reach this issue.          3  Under section 10(b) of the 1934 Act:                    It shall be unlawful for any person, directly                    or indirectly,  by the  use of  any means  or                    instrumentality of interstate  commerce or of                    the mails, or of any facility of any national                    securities exchange--                    (b)  To use or employ, in connection with the                    purchase or  sale of any  security registered                    on  a  national  securities  exchange or  any                    security not so  registered, any manipulative                    or   deceptive  device   or  contrivance   in                    contravention of  such rules  and regulations                    as the Commission may prescribe as  necessary                    or appropriate in the public  interest or for                    the protection of investors.          15 U.S.C.   78j.                                         -18-          that, under section  10(b), plaintiffs must plead  specific facts          giving rise  to a "strong  inference" of fraudulent intent.   See                                                                        ___          Greenstone v.  Cambex Corp.,  975 F.2d 22,  25 (1st  Cir. 1992).4          __________     ____________          "Courts  have  uniformly held  inadequate  a  complaint's general          averment  of  the  defendant's  'knowledge'  of material  falsity          unless the complaint also sets  forth specific facts that make it          reasonable  to believe that  defendant knew that  a statement was          false or misleading."  Id.  Applying this standard to plaintiffs'                                 ___          complaint, the district court dismissed the claim for failure  to          plead scienter with sufficient particularity.5                    "This court has been 'especially  rigorous' in applying          Rule 9(b)  in securities  fraud actions  'to minimize the  chance          that a  plaintiff with  a largely groundless  claim will  bring a          suit and conduct extensive discovery in the hopes of obtaining an          increased settlement, rather than  in the hopes that  the process          will reveal relevant  evidence.'"  Shaw v. Digital  Equip. Corp.,                                             ____    _____________________          82 F.3d 1194,  1223 (1st Cir. 1996) (quoting  Romani v. Shearson,                                                        ______    _________                                        ____________________          4  Even  if plaintiffs wish to prove  scienter by "recklessness,"          they  still  must  allege,  with  sufficient particularity,  that          defendants had full  knowledge of the dangers of  their course of          action and chose not to disclose those dangers to investors.  See                                                                        ___          Cook, 573 F.2d at 692.          ____          5    In  December  1995,  citing  "abuse  in  private  securities          lawsuits,"  Congress enacted  the  Private Securities  Litigation          Reform Act of 1995 (the "Reform Act").  15 U.S.C.   78u-4 (1988 &          Supp.  1995).   This  Act  implemented  a  "heightened"  pleading          standard under federal securities law which requires that factual          allegations  be  of sufficient  particularity to  give rise  to a          strong  inference that  the defendant  acted  with the  requisite          state of mind.  15 U.S.C.   78u-4(b)(1).  Although the Reform Act          does not  retroactively apply to  this case, we do  not interpret          the  new  standard to  differ  from  that  which this  court  has          historically applied.  See Greenstone, 975 F.2d at 22.                                 ___ __________                                         -19-          Lehman, Hutton,  929 F.2d 875, 878 (1st Cir. 1991)).  However, in          ______________          examining  a   complaint  for  the  requisite   particularity  in          allegations  of  fraud, we  are  required  to  apply  a  delicate          standard.  While  Fed. R. Civ. P. 9(b) proscribes the pleading of          "fraud by hindsight," we  also cannot expect plaintiffs to  plead          "fraud with complete insight" before discovery  is complete.  Id.                                                                        ___          at  1225.   We therefore look carefully  for specific allegations          of fact giving rise to a "strong inference" of fraudulent intent,          see Greenstone, 975 F.2d at 25, keeping in mind that the pleading          ___ __________          of scienter  "may not rest on  a bare inference that  a defendant          'must have  had' knowledge of  the facts."   Id.  at 26  (quoting                                                       ___          Barker v. Henderson, Franklin, Starnes  & Holt, 797 F.2d 490, 497          ______    ____________________________________          (7th Cir. 1986)).6                      The  plaintiffs' brief argues that Dom nguez and Rosado                                        ____________________          6  Plaintiffs  urge this court to  adopt a new means  for testing          whether   scienter  has  been  properly  pled  in  10(b)  claims.          According  to  plaintiffs,  the   Second  Circuit's  "motive  and          opportunity"  test properly screens  out those claims  which lack          the requisite specificity to proceed with discovery.  See,  e.g.,                                                                ___   ____          Chill v.  General Elec.  Co., 101  F.3d 263,  267 (2d  Cir. 1996)          _____     __________________          (determining whether defendants had the motive and opportunity to          commit fraud); Shields v. Citytrust Bancorp,  Inc., 25 F.3d 1124,                         _______    ________________________          1128 (2d. Cir.  1994) (same).  It is unclear whether this test is          compatible with this  circuit's "especially rigorous" application          of Rule 9(b) in the securities fraud  context.  In any case, this          court  has  had  the  opportunity  to  develop  a  framework  for          analyzing  the sufficiency of  pleadings in cases  similar to the          present one, and we respectfully decline the invitation to review          or adopt  Second Circuit case  law on this  issue.  Cf.  Bruce G.                                                              ___          Vanyo, Lloyd Winawer & David Priebe, The Pleading Standard of the                                               ____________________________          Private Securities Litigation Reform Act of 1995, PLI Corp. Law &          ________________________________________________          Practice  Course Handbook Series, Sept. 1997, 71-81, available in          Westlaw  at 1015 PLI/Corp. 71 (chronicling how Congress expressly          rejected the Second  Circuit's "motive and opportunity"  test for          pleading scienter in  the Reform Act because  it was incompatible          with the Act's heightened pleading requirements).                                          -20-          were "persons highly knowledgeable and with much expertise in the          field  of securities  and  investments of  the type  purchased by          PRIBANK."  However, the complaint dismissed by the district court          paints a somewhat different picture.  According to the complaint,          although  both Dom nguez and Rosado were vice-presidents of large          financial institutions, "neither  one of  them had  engaged in  a          REPO transaction  on behalf  of any bank  with assets  similar to          those  of PRIBANK, and  had no  manner to  assure that  what they          represented  to plaintiffs  and the  other  investors was  true."          Given   10(b)'s   requirement   of  a   pleading   of   scienter,                                                                  ________          characterizing  the defendants as irresponsible or "in over their          heads" does not further the plaintiffs' cause.                     The complaint is also replete with allegations based on          "information and  belief" that Dom nguez and Rosado were aware of          the  risk  of margin  calls.   However, "information  and belief"          alone is insufficient to meet 9(b)'s particularity requirement in          this context.   See Romani v. Shearson, Lehman,  Hutton, 929 F.2d                          ___ ______    _________________________          875, 878 (1st Cir. 1991).                      When we examine these pleadings carefully, we find that          there are no specific allegations  of fact which strongly imply a          fraudulent  intent.    At most,  the  complaint  contains general          inferences that Dom nguez and Rosado "must have  known" about the          risks of margin calls and  the devastating effect they could have          on   PRIBANK.    Unfortunately  for  the  plaintiffs,  these  are          precisely the types  of inferences which this court,  on numerous          occasions, has determined to be inadequate to withstand Rule 9(b)                                         -21-          scrutiny.  See Shaw, 82  F.3d at 1123; Serabian v.  Amoskeag Bank                     ___ ____                    ________     _____________          Shares, 24 F.3d 357, 367 (1st Cir. 1994); Greenstone, 975 F.2d at          ______                                    __________          26; Romani, 929 F.2d at 878.7              ______          V.  Leave to Amend the Complaint          V.  Leave to Amend the Complaint                    After the district court's opinion issued in this case,          the plaintiffs filed  a motion for leave to  amend the pleadings.          The  court  denied  this  motion.    However,  before  ruling  on          defendants' motions to  dismiss, the district court  had issued a          perplexing margin  order amending this case's  briefing schedule.          According to  the margin  order, any  motion requesting  leave to          amend pleadings  and amended pleadings  could be  filed ten  days          after  the court  resolved all  "pending pleadings."    While the          meaning  of the phrase "pending pleadings" is unclear, plaintiffs          argue that the phrase referred to the pending motions to dismiss,          and  that the  denial of  their subsequent  request for  leave to          amend was therefore an abuse of discretion.8                                          ____________________          7  The  complaint contains additional allegations  that Dom nguez          and Rosado knew that PRIBANK  was disintegrating at the same time          that they presented  a rosy picture to investors  at the February          board  meeting.    However,  these  allegations involve  activity          occurring well after the original  sale of PRIBANK stock, and are          therefore  immaterial for  the  purposes of  this 10(b)  cause of          action.  See Gross, 93 F.3d at 993 (citing Shaw, 82 F.3d at 1222,                   ___ _____                         ____          for the proposition  that allegations of conduct  occurring after          sale or exchange at  issue in 10(b) claim are irrelevant).   Even          if the allegations  are true, the fact that  Dom nguez and Rosado          had discovered  PRIBANK's fatal  flaw before  the February  board          meeting is not probative of any attempt to defraud the plaintiffs          months earlier.           8  We note  that a motion to dismiss  is not a "pleading" as  the          term  is defined in  Fed. R. Civ.  P. 7.   Furthermore, the order          does not promise to grant  any motions filed after the resolution                              _____          of "pending pleadings," but instead states that such requests and          pleadings may be filed.  Nonetheless, we believe that plaintiffs'                           _____                                         -22-                    Looking  at the  order  itself  does  not  resolve  our          uncertainty  about its  interpretation.    The  motion  that  was          granted via margin  order was five  pages long.  It  was entitled          "Plaintiffs' Objections and Proposed Changes to Scheduling Order"          and  generally consisted of very ordinary requests for extensions          of  time.   Buried  on  the  third  page, however,  was  a  short          paragraph containing  the vague  and  confusing language  sampled          above,  which could  be interpreted  as  a request  for a  highly          unconventional  scheduling change.  When the district court judge          granted the  motion, he did so  by writing "granted" in  the left          margin of the first page, as is customary in district courts.  It          is entirely  possible that the  judge was unaware of  the unusual          and arguably  improper request  that he  was supposedly  granting          along  with  the  standard extensions  contained  in  the motion.          However, while the motion filed by the plaintiffs was unclear, it          could not be fairly characterized  as deceptive.  Since no motion          to reconsider this  margin order was filed,  and no clarification          or amendment to the order issued from the court, we must give the          order its reasonable construction.                     This  court   is  asked  to   determine  the   meaning,          propriety, and  effect of the  margin order.  Depending  upon the          interpretation of  the motion,  two bedrock  principles of  civil          procedure may conflict in this case.  On the one hand, a district          court cannot allow an amended pleading where a final judgment has                                        ____________________          interpretation  of the  order as  a  blank check  to rewrite  the          complaint  after the  case  has been  dismissed  is not  entirely          implausible.                                         -23-          been rendered unless that judgment  is first set aside or vacated          pursuant to Fed.  R. Civ. P. 59 or 60.  See Acevedo-Villalobos v.                                                  ___ __________________          Hern ndez, 22 F.3d 384, 389 (1st Cir.  1994).  On the other hand,          _________          the  district   court's  scheduling  order   purportedly  allowed          plaintiffs just such a luxury, and, if it did, they were entitled          to rely on that  order.  See Berkovitz v. Home  Box Office, Inc.,                                   ___ _________    ______________________          89  F.3d 24,  29-30 (1st  Cir. 1996)  ("[W]hen a  court  charts a          procedural route, lawyers  and litigants are entitled  to rely on          it.").                                         -24-                    Under these  circumstances, we are keenly interested in          the district court's interpretation of its own order.  On review,          we cannot  hope to understand  the nuances of a  district court's          briefing schedule  as  completely as  the judge  who managed  the          case.   There  may well  have  been comments  made in  scheduling          conferences  which  clarified  the  order.    Unfortunately,  the          plaintiffs  never raised this  issue below.   Plaintiffs' request          for leave  to  amend was  part of  its motion  to reconsider  the          dismissal  of its  claims, and  it  contained no  mention of  the          margin  order or  plaintiffs' understanding  that  they had  been          promised  a leave  to  amend.   This failure  to raise  the issue          before the district court  is fatal to the claim on  appeal.  See                                                                        ___          Villafa e-Neriz  v. F.D.I.C., 75  F.3d 727, 734  (1st Cir. 1996).          _______________     ________          We must  be especially vigilant  in applying this rule  where the          dispute involves an understanding reached by  the parties and the          district court during the pre-trial stages of a case.                    In any case, we need not remand this case to allow  for          a revision of the complaint because  the  amendments  proposed by          the plaintiffs would be futile.  See Foman v. Davis, 371 U.S. 178                                           ___ _____    _____          (1962)  (leave to  amend  shall not  be granted  where amendments          would be  futile); Resolution Trust  Corp. v. Gold, 30  F.3d 251,                             _______________________    ____          253 (1st Cir. 1994) (same).  In their request for leave to amend,          and  again before  this court,  plaintiffs allude to  the factual          allegations  which   they  would  incorporate  into   an  amended          complaint, producing  detailed documentary evidence  for support.          Nonetheless, a careful review of this material reveals that these                                         -25-          amended claims would be destined for dismissal.                    There exists no  private right of action  under section          17(a) of the  1933 Act,  and section  12(2) of the  Act does  not          apply  to  the  issuance of  securities  under  the circumstances          presented by this case.  See supra Sections II & III.  No further                                   ___ _____          factual  allegations can save  these claims.   Furthermore, while          the  10(b) action  could survive  dismissal  if plaintiffs  could          provide more specific allegations of  fact which strongly imply a          fraudulent  intent on  the  part  of  Dom nguez and  Rosado,  the          proposed amendments to the complaint would not do so.  Plaintiffs          provide an expert's  affidavit concluding  that defendants  would          have  known  of the  likelihood  that their  securities  would be          subject  to margin calls,  and the  devastating effect  that this          would have on PRIBANK.  Yet,  as we have stated, the pleading  of          scienter "may not rest on a bare inference that a defendant 'must          have had' knowledge  of the facts."   Greenstone, 975 F.2d at  26                                                __________          (quoting Barker, 797 F.2d at 497).9  We conclude that the amended                   ______          10(b) claim would not have passed 9(b) scrutiny.10                                        ____________________          9   Furthermore,  this affidavit,  along  with plaintiffs'  other          documentary evidence  in support  of their request  for leave  to          amend, indicates that  Dom nguez and Rosado invested and lost one          and a half million  dollars of their own money in  PRIBANK, which                                      __________________          undermines any inference of scienter.           10  Plaintiffs also argue  that they filed requests for  leave to          amend their complaint  prior to the resolution of  the motions to                                 _____          dismiss.  We find that these "motions" were never actually filed.          Instead, the plaintiffs, in other filings, merely mentioned that,          at some point,  they would seek leave  to amend.  That  leave was          not sought until after the case was  dismissed.  In any case, the          issue is mooted by our  finding that amending the complaint would          be futile.                                         -26-                                      CONCLUSION                                      CONCLUSION                                      __________                    For  the reasons stated in this  opinion, we affirm the                                                                 affirm                                                                 ______          judgment of the district court.                                         -27-
