
USCA1 Opinion

	




                            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.                                         -2-          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."                                         -3-          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,                                                                     _____                                         -4-          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 . . . ."                                         -5-          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                                         -6-          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                                         -7-          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.                                         -8-               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                                         -9-               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                                         -10-               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."                                         -11-          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.                                         -12-               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               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               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                                         -13-                    in loan review.  They oversee a comprehensive                    in loan review.  They oversee a comprehensive                    reporting and monitoring system                    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                    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                    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                    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          ____                                         -14-          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."                                         -15-          `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                                       ____                                         -16-          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                                         -17-               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.                                         -18-          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.                                         -19-          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                                         -20-          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.                                         -21-          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.                                         -22-          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:                                         -23-               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                                         -24-                                          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.                                         -25-
