Atlantis Group, Inc. v. Rospatch Corp.

Citation: 760 F. Supp. 1239Docket: Nos. 1:90-CV-805 to 1:90-CV-807 and 1:91-CV-085

Court: District Court, W.D. Michigan; April 10, 1991; Federal District Court

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Plaintiffs in these consolidated actions allege violations of federal securities and state laws against various defendants, claiming fraudulent actions that led to financial damages. The court is considering motions to dismiss, which have been fully briefed and argued. The cases include: 

1. No. 1:90-ev-805, brought by Atlantis Group, Inc., a Delaware corporation based in Florida, which purchased 476,100 shares of Rospatch common stock at an average price of $20.87 per share from October 8, 1987, to November 18, 1988, and currently owns approximately 20% of Rospatch’s stock with two representatives on its board.
  
2. No. 1:90-cv-806, filed by Plato Products, Inc., which purchased Rospatch common stock in March 1987 and aims to represent a class of investors who bought stock from March 1987 to March 1990.

3. No. 1:90-cv-807, initiated by shareholders Jerry and Rosalyn Atcovitz, who held Rospatch stock during the same period and filed a derivative action.

Defendant Rospatch, a Michigan corporation engaged in manufacturing wood products and previously in defense electronics, is represented by multiple executives and board members, including CEO Joseph V. Parini and CFO William E. Malpass. Other defendants include a former legal counsel and independent auditor.

The court emphasizes that when evaluating motions to dismiss, the factual allegations in the complaints must be accepted as true. Plaintiffs assert reliance on public information, including SEC filings from 1987 to 1988, and claim that Rospatch’s financial statements indicated a steady net worth increase from approximately $41 million in 1986 to about $47 million in 1988. In March 1989, Rospatch attempted to sell its Technical Products Group, leading to a significant write-down of its asset values. Following this, Atlantis, having acquired about 19% of Rospatch’s stock, entered into a Letter of Intent to acquire Rospatch on June 20, 1989, and conducted due diligence from June to September 1989. The court’s ruling on the motions to dismiss is granted in part and denied in part.

Atlantis conducted a due diligence investigation and claimed that a deal to sell TPG to a defense company was a "sweetheart deal," primarily benefiting CEO Parini. Atlantis suggested to Rospatch that a higher sale price could be obtained from other bidders, leading to Rospatch ultimately selling TPG to multiple buyers at a price exceeding the initial deal. Subsequent investigations revealed questionable financial statements from Rospatch, prompting a write-down of TPG assets by $3,250,000 in November 1989 and a total of $16,875,000 by the end of the year. This write-off represented 59% of TPG's net asset value and 36% of Rospatch's net worth. Allegations of financial concealment emerged, leading to inquiries by the Audit Committee into the company's financial troubles. Controller Harris was fired for maintaining dual sets of financial records and falsifying documents to hide losses. A special counsel to the Audit Committee found that management, including Parini and CFO Malpass, had manipulated financial statements to secure bonuses and misrepresent Rospatch's financial health, recommending their dismissal. However, the board allowed Parini and Malpass to resign with termination benefits instead. The complaints argue that the financial write-offs in 1989 should have been recognized during the stock purchase period, rendering public documents materially false and misleading. Atlantis attributes the fraudulent activity to senior management and the board, including legal and auditing firms, accusing them of complicity through silence and signing false statements. Arthur Andersen, as the auditor, is alleged to have approved these statements while being aware of their inaccuracies.

A consolidated motion to dismiss was submitted for all defendants, with many filing individual briefs that largely echoed the consolidated motion. The court plans to evaluate the dismissal motions on a case-by-case and count-by-count basis. In the case of Atlantis Group, Inc. v. Rospatch Corp. et al., Atlantis brings claims under the Securities Exchange Act, asserting federal question jurisdiction and, alternatively, diversity jurisdiction. 

Count I alleges a primary violation of Section 10(b) of the Exchange Act and SEC Rule 10b-5 against several defendants. Count II claims aider and abettor liability against the primary defendants (excluding Rospatch) and two former directors. Count III raises control person liability against specific defendants. Counts IV through X include various state common law claims, such as breach of fiduciary duty, common law fraud, negligent misrepresentation, constructive fraud, fraudulent concealment, a Florida Blue Sky claim, and a Florida RICO count against select defendants.

Defendants argue that Atlantis’ complaint fails to state valid federal securities law claims under Fed. R.Civ. P. 12(b)(6). The court's decision will rely on the principle that all factual allegations in the complaint must be accepted as true, and doubts resolved in favor of the plaintiff. A motion to dismiss under Rule 12(b)(6) assesses the sufficiency of pleadings rather than the merits of the case. Count I specifically charges violations of Section 10(b) and Rule 10b-5 regarding manipulative or deceptive practices in securities transactions.

Key provisions under Section 10(b) and Rule 10b-5 address fraudulent practices in securities transactions, including employing deceitful devices, making false statements, or engaging in practices that mislead investors. The Supreme Court has characterized Section 10(b) as a broad measure aimed at preventing fraud. To establish a claim for primary liability under these rules, a complaint must demonstrate: (1) use of jurisdictional means, (2) a deceptive practice with requisite scienter, (3) connection to the purchase or sale of a security, (4) resulting damages. The Sixth Circuit employs a "direct contact" test, requiring proof of direct involvement in the deceit for primary violators. Individuals with an obligation to disclose material information can be held liable, while those providing misleading information may also be primary participants unless their involvement is too remote.

Count II of the complaint alleges secondary liability for certain defendants, which can arise from aiding and abetting another's securities violation. To qualify as an aider and abettor, it must be shown that (1) another party violated securities laws, (2) the accused was aware of their improper role, and (3) they knowingly and substantially assisted the violation. In cases of non-disclosure, the accused's silence must have been intended to facilitate the violation, requiring proof of a culpable state of mind.

The third count involves control person liability under Section 20(a), which holds individuals accountable for the actions of those they control unless they can demonstrate good faith and lack of direct or indirect inducement of the violation.

To establish control person liability, a plaintiff must demonstrate the defendant's ability to influence the corporation and their involvement in the alleged fraud. This requires showing indirect means of discipline or influence over the corporation, even without direct control. Defendants argue that the complaint primarily asserts claims of corporate mismanagement and breaches of fiduciary duty, which do not constitute securities fraud under section 10(b) as determined in Santa Fe Industries, Inc. v. Green. The Supreme Court ruled that claims of mismanagement must be accompanied by allegations of deception or misrepresentation to establish a federal cause of action. However, the allegations in Atlantis’ complaint extend beyond mere mismanagement; they include failures to disclose significant facts about Rospatch's financial condition, which could have influenced stock pricing. The court notes that allegations of material misrepresentations or omissions satisfy the fraudulent element of a section 10(b) claim. It emphasizes that the violation of federal law arises from the likelihood that undisclosed information would alter an investor's decision-making, rather than from determining whether there was a breach of fiduciary duty. The court supports its position by referencing cases where claims of fraudulent schemes that affected stock valuation were recognized as valid under federal securities laws. Despite defendants’ claims of "fraud-by-hindsight," the court concludes that Atlantis has adequately alleged misrepresentation and deception, distinguishing its claims from mere breaches of fiduciary duty. Furthermore, investors must provide concrete evidence suggesting that discrepancies between reported financial conditions and reality are linked to fraud, rather than relying on vague assertions.

Atlantis alleges that the defendants failed to disclose material facts in public documents from 1987 and 1988, prior to Atlantis' stock purchases. The complaint asserts that between 1986 and 1989, TPG experienced low cash flow and diminishing capital, with its net asset value decreasing by 59% prior to its sale in 1989, which also impacted Rospatch's net asset value negatively by 36%. These claims, if taken as true, suggest that the defendants deliberately overstated TPG's value to obscure facts that could negatively affect the stock market. Defendants counter that Atlantis bought its stock after the alleged fraud took place and argue that the Blue Chip Stamps doctrine applies, which requires that plaintiffs show they purchased shares in connection with the alleged misrepresentations. However, Atlantis maintains that it relied on the incomplete public documents when purchasing stock in 1988 and 1989, arguing that the Blue Chip Stamps doctrine does not apply.

Regarding the motion to dismiss filed by Gaston and Warner Norcross, they do not contest that attorneys can be liable under section 10(b) but claim they had no obligation to disclose wrongdoing by their client, Rospatch. Citing a Seventh Circuit case, they argue that mere knowledge of a material omission does not constitute a violation. Nonetheless, Atlantis alleges that these attorneys conspired to conceal Rospatch’s financial issues, misleading investors into purchasing stock at inflated prices. This allegation goes beyond a mere failure to disclose, as they are accused of being key players in the fraudulent activity. Precedents indicate that attorneys can be held liable for securities violations if they knowingly assist in disseminating false information. Courts have previously allowed claims against law firms for involvement in misleading securities offerings, suggesting that such conduct can impose liability under section 10(b).

A law firm representing underwriters for securities offerings allegedly prepared fraudulent and misleading prospectuses, potentially holding them liable under section 10(b). The court denies the motion to dismiss federal securities claims against Gaston and Warner Norcross, noting that whether they should be held accountable for securities fraud at Rospatch is a factual issue inappropriate for resolution at this stage. Gaston, as managing partner, cannot solely distance himself from the firm's actions, as courts have previously held that a senior partner's involvement in misrepresentations can be attributed to the firm. Atlantis has sufficiently alleged that Gaston and Warner Norcross had significant influence over Rospatch and thus can be held liable as control persons.

Regarding Arthur Andersen, allegations suggest it was aware of or recklessly ignored fraud at Rospatch. Andersen's claims that accounting errors were either immaterial or compliant with accepted principles are factual issues that cannot be resolved at the motion to dismiss stage. Atlantis accuses Andersen of violating section 10(b) and aiding such violations, asserting that mere knowledge of a material omission does not constitute a violation without a duty to disclose, which must arise from outside securities law. The Seventh Circuit has generally been hesitant to impose a duty on accountants to disclose their client's financial troubles, emphasizing that such a requirement could undermine the trust inherent in the accountant-client relationship.

Auditing costs may significantly increase due to expanded potential liabilities and publication expenses. Courts have established that accountants have a duty to correct known misstatements in financial statements relied upon by the public. When an auditor certifies financial statements, they assume a special trust relationship with the public, creating a continuous duty to disclose any subsequent facts that might render their previous certification unwarranted. The Eleventh and Ninth Circuits have ruled that accounting firms can be liable under section 10(b) if they knowingly allow their statements to facilitate client fraud. If plaintiffs can prove that accounting firms had actual knowledge of fraud, a duty to disclose arises, as failing to act would mislead the public. Accounting firms, such as Arthur Andersen and Deloitte, have a vested interest in maintaining their reputations, as even allegations of involvement in fraud can damage their credibility. The standard for liability in federal securities cases is high, requiring more than mere negligence. The court supports the notion that those aware of serious wrongdoing must disclose it and affirms the requirement for accountants to do so when they have knowledge or show reckless disregard for ongoing fraud. As a result, the court allows the claim against Andersen for federal securities violations to proceed and denies Andersen's motion to dismiss. Additionally, defendants argue that Atlantis has not met the specificity requirement for federal securities claims under Fed. R. Civ. P. 9(b).

Rule 9(b) mandates that claims of fraud or mistake must be detailed with particularity, including the parties involved, misleading statements, and the specifics of the fraudulent scheme, while allowing for general averments of malice or intent. The Sixth Circuit has indicated a flexible interpretation of this rule, particularly in complex securities fraud cases, emphasizing that plaintiffs must provide enough detail to give defendants fair notice of the claims without requiring complete omniscience. Scienter, or the intent to deceive, is essential in claims under section 10(b), and can be established through allegations of knowledge or recklessness. The courts favor a liberal construction of scienter allegations in favor of the plaintiff, with the understanding that such determinations are often fact-specific and not typically resolved at the pleading stage. In the case involving Gaston and Warner Norcross, sufficient motive for fraud is indicated by their connections to Rospatch, a significant client for Warner Norcross, and Gaston's position on Rospatch's board.

Warner Norcross is accused of managing the TPG acquisitions that led to significant financial write-offs in 1989, with implications that the firm was aware these acquisitions were overvalued. The firm allegedly also prepared SEC documents that misrepresented Rospatch's financial standing. Additionally, Gaston is accused of creating connections between Rospatch and other clients of Warner Norcross for self-serving purposes. These allegations suggest sufficient motive for establishing scienter against both Warner Norcross and Gaston.

Regarding Arthur Andersen, the firm contends that the plaintiffs have not sufficiently demonstrated scienter. However, the plaintiffs argue that Andersen's failure to act upon a significant 36% markdown in Rospatch's net worth indicates recklessness. As an independent auditor, Andersen was responsible for verifying the company's valuations, and the allegations of such a markdown imply a need for affirmative action on their part, thus adequately alleging Andersen’s scienter.

Defendants further assert that the complaint lacks specificity in detailing each defendant's role in the misleading documentation. Citing the case of Arnold v. The Arnold Corp., the defendants reference a precedent where broad allegations were deemed insufficient under Federal Rule of Civil Procedure 9(b). However, the Sixth Circuit found that the plaintiff's claims were sufficiently detailed to survive a dismissal motion, emphasizing the importance of allowing plaintiffs to substantiate claims of fraud when they provide enough specificity to inform the defendants of the nature of the allegations.

Atlantis has sufficiently pleaded its claims against defendants Parini, Malpass, Harris, Warner Norcross, Gaston, and Arthur Andersen, providing detailed allegations that put each on notice of the specific nature of the claims. The complaint asserts that Parini, Malpass, and Harris had actual knowledge of materially overstated financial disclosures related to Rospatch, with Parini and Malpass being corporate officers and Harris serving as the controller, who was dismissed for maintaining two sets of books. Atlantis has identified the relevant documents and described the defendants' roles in the fraudulent activities, demonstrating reliance on the alleged fraud and the harm from purchasing Rospatch stock at inflated prices. 

In contrast, the claims against the Outside Directors lack the necessary specificity required under Rule 9(b). Atlantis failed to delineate the actions or omissions of these directors, leading to the dismissal of the federal securities law violations against them. The court cited precedent emphasizing that each defendant must be individually informed of the specific allegations against them, particularly in cases involving multiple defendants. The complaint does not clarify why only certain Outside Directors are named as primary violators, and it does not provide sufficient details regarding their alleged involvement in the fraudulent conduct. The court noted that mere designation as a director does not automatically impose liability as a controlling person without evidence of actual participation or influence in the corporation's operations.

The court found the complaint against the Outside Directors insufficiently specific and internally inconsistent. It noted that certain directors were alleged to have committed fraud despite not being on the board during the relevant time. Atlantis argued that the Outside Directors could be liable under the collective group product doctrine, which holds all members of a group liable for collective fraud. However, the Outside Directors contended that Atlantis must show their involvement or knowledge of the fraud to establish a cause of action. 

Referencing *In re Consumers Power Co. Sec. Litig.*, the court indicated that while collective allegations may suffice, specific actions by individual defendants must be delineated. In this case, Atlantis failed to show that any Outside Directors were aware of ongoing fraud at Rospatch, and their allegations were deemed too general. The court noted that motive is not required but is often used to prove intent; here, the Outside Directors lacked motive since most did not control daily operations and owned stock, which they would have likely sold had they known of the fraud. 

With no allegations of insider dealings or knowledge of ongoing fraud, the court dismissed the Outside Directors from the federal securities claims without leave to amend, marking the third complaint Atlantis filed in nearly a year. Despite the lengthy nature of the complaint, Atlantis did not suggest further factual allegations could strengthen their claims. The court also highlighted that Atlantis had access to insider information through its own directors on Rospatch’s board and had conducted a due diligence investigation prior to considering the acquisition. Dismissal without leave to amend was deemed a harsh but appropriate sanction in this instance.

The court dismissed federal securities fraud claims against the Outside Directors without leave to amend, finding that Atlantis had sufficient opportunity to amend its complaint but failed to adequately allege wrongdoing. Consequently, the dismissal of these directors eliminated federal question jurisdiction, necessitating the dismissal of state law claims against them and Smith due to lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). The court referenced precedent indicating that once federal claims are dismissed, related state claims must also be dismissed. Additionally, it noted that diversity jurisdiction was not applicable because Arthur Andersen had partners in the same state as certain plaintiffs, which negated federal jurisdiction. 

Atlantis attempted to invoke the rule from United Mine Workers v. Gibbs regarding pendent party jurisdiction; however, the court clarified that the Supreme Court's decision in Owen Equipment rejected this approach when no federal claim exists against a defendant. Regarding Smith, who signed Rospatch’s 1988 Form 10-K, the court found insufficient allegations of wrongdoing beyond his signature and noted that there was no evidence linking his actions to the plaintiffs' stock purchases. Consequently, Smith was also dismissed from the federal claims without leave to amend. The court reiterated that it lacked jurisdiction over the state law claims against Smith for the same reasons applicable to the Outside Directors, thus granting Smith's motion to dismiss those claims.

The court is addressing the statute of limitations applicable to federal securities claims in consolidated actions transferred to it under 28 U.S.C. § 1404(a). Following the Van Dusen and Ferens precedents, the court will apply the statute of limitations that the originating Florida district court would have used. Specifically, it will utilize Florida's two-year/five-year statute of limitations from the Blue Sky laws, as established in prior case law, including Sargent v. Genesco and King v. Gandolfo. Under these laws, claims must be filed within two years of discovering the cause of action, but no longer than five years from the violation's occurrence. The court finds that the plaintiffs’ claims are timely, as the discovery date of alleged fraud was around September 1989. 

Defendants suggest adopting a shorter, uniform federal statute of limitations, which has been implemented in other circuits (one year from discovery and three years maximum), citing cases like Ceres Partners and In re Data Access Systems. However, the Eleventh Circuit has explicitly rejected this shorter limitation, maintaining its stance in Smith v. Duff and Phelps. The court has also previously declined to adopt this uniform federal approach in section 10(b) cases, deeming the current circumstances unsuitable for such a shift.

The Eleventh Circuit recently chose not to follow other circuits and will instead rely on the analogous state law limitations period for federal securities claims, as clarified in a recent case. The U.S. Supreme Court is set to resolve a circuit split regarding this issue, having granted certiorari in a related Ninth Circuit case. Andersen contends that Florida law should not apply since it was only added as a defendant after the case was transferred to Michigan. However, the court notes that applying Michigan law would not advantage Andersen more than Florida law.

In the Sixth Circuit, similar to the Eleventh Circuit, courts refer to state law for the limitations period applicable to 10b-5 actions, specifically utilizing Michigan's six-year statute of limitations for common law fraud, which governs federal securities law claims. Andersen acknowledges that if this statute applies, the plaintiffs’ claims are not time-barred but argues against following Sixth Circuit precedent. The court emphasizes that any potential change to this precedent should be left to the Court of Appeals.

Andersen also proposes using Michigan’s borrowing statute to apply Pennsylvania's statute of limitations based on where the named plaintiffs purchased their stock, but the court maintains that only the analogous state statute of limitations is relevant, while federal law governs other aspects.

The court denies Andersen's motion to dismiss the federal securities claims based on the statute of limitations. In Count I of Atlantis’ complaint, multiple defendants’ motions to dismiss the primary violation of 10(b) and Rule 10b-5 are denied, as Atlantis has presented sufficient facts for trial. Conversely, the Outside Directors’ motion to dismiss is granted due to insufficient particularity in stating a primary violation. In Count II, alleging secondary violations by aiders and abettors, motions to dismiss from various defendants are also denied.

Motions to dismiss by the Outside Directors, excluding Van-der Hyde, and Smith are granted without leave to amend. The motions to dismiss the control person liability allegation (Count III) by Parini, Malpass, Gaston, and Warner Norcross are denied, while Pharr’s motion to dismiss Count III without leave to amend is granted. Prior to addressing Atlantis’ state law claims, the court establishes that it must apply the state law that the transferor court would have applied, following the precedent set in Van Dusen v. Barrack. Consequently, Florida's conflict of laws rules will be analyzed to determine the applicable law for the tort claims. 

According to the Florida Supreme Court's "significant relationships test," which aligns with the Restatement (Second) of Conflict of Laws, the law governing the substantive rights and liabilities in tort will be based on the state with the most significant relationship to the events and parties involved. Key factors include the location of the injury, the conduct causing the injury, the parties' residences and businesses, and the nature of their relationship. Applying this test, Michigan is determined to have the most significant relationship to the case due to the public sale of stock from a Michigan corporation and the occurrence of the alleged fraud in Michigan.

The court notes that while Atlantis does business in Florida and purchased stock there, the more substantial connections to Michigan justify the application of Michigan law. Additionally, state law claims sounding in fraud must comply with the particularity requirements of Fed. R. Civ. P. 9(b). The court’s determination regarding the sufficiency of pleading federal securities law violations also extends to the state law fraud claims. Count IV of Atlantis’ complaint alleges breach of fiduciary duty against all defendants except Rospatch.

Defendants assert that Atlantis' breach of fiduciary duty claims are flawed under Michigan law, which stipulates that fiduciary duties are owed solely to the corporation, not individual shareholders, necessitating that such claims be brought derivatively rather than directly. However, corporate officers and directors owe fiduciary duties of care and loyalty to both the corporation and its shareholders, allowing Atlantis, a shareholder of Rospatch, to pursue these claims directly against Rospatch and its officers and directors. 

Gaston, a board member and attorney for Rospatch, has a common law fiduciary duty to shareholders, leading to the denial of his motion to dismiss the breach of fiduciary duty claim. Conversely, Warner Norcross, representing Rospatch, argues it owes no fiduciary duty to the shareholders, a position the court agrees with, as Michigan attorneys owe a duty only to their clients, not to adversarial parties. Therefore, Warner Norcross' motion to dismiss is granted.

Andersen is also named in the fiduciary duty claim; however, no facts are presented to establish its fiduciary duty to Atlantis. The court clarifies that while auditors must disclose certain information under federal law, this does not equate to a fiduciary duty under state law, leading to Andersen's motion to dismiss being granted.

In addition, Atlantis accuses all defendants of common law fraud, following the Michigan Supreme Court's six criteria for actionable fraud: a material false representation made knowingly with the intent for the plaintiff to rely on it, resulting in reliance and injury. Atlantis has sufficiently pleaded a cause of action for common law fraud based on the company's overvaluation in public documents.

Atlantis alleges that a false representation was made by the defendants, who included Rospatch, Parini, Malpass, Harris, Gaston, Warner Norcross, and Arthur Andersen, with knowledge of its falsity and with the intention for Atlantis to rely on it. Atlantis claims to have suffered injury when the actual value of Rospatch was disclosed. Consequently, the defendants' motions to dismiss Count V for common law fraud are denied.

In Count VI, Atlantis accuses all defendants of negligent misrepresentation. The defendants argue that Michigan law does not recognize such a claim in securities offerings and seek dismissal of this count. The Michigan Supreme Court established in Williams v. Polgar that a title abstractor has a duty to perform diligently and skillfully, extending this duty to any parties that could reasonably foreseeably rely on the abstract's accuracy. Although privity is not required for negligent misrepresentation claims, recovery is limited to those whose relationships to the actions taken under the contract are foreseeable. Lower Michigan courts have upheld claims based on foreseeability, allowing plaintiffs to pursue actions when injured by negligent contract performance, even without privity.

The Sixth Circuit, in Molecular Technology, acknowledged that an attorney could be liable for negligent misrepresentation in securities cases if it was reasonable to foresee that investors would rely on the information provided. However, this case differs significantly because it involves a large, publicly traded corporation, unlike the closely-held corporation in Molecular Technology. A previous ruling in In re Consumers Power Co. Securities Litigation suggested that recognizing a negligent misrepresentation claim in such large company cases could lead to excessive liability for defendants. This reasoning is supported in the current context.

Liability for negligent misrepresentation in securities issues involving publicly traded corporations could lead to a significant number of lawsuits, yet the Michigan Supreme Court's decision in Williams did not indicate a need for protecting every investor from such claims. A federal district court must have clear authority to diverge from established state law, and Michigan's case law on negligent misrepresentation has seen little development since Williams. Consequently, the court declines to expand Michigan common law to include alleged negligence in large corporate stock offerings, resulting in the dismissal of Atlantis’ Count VI.

Atlantis’ Count VII alleges constructive fraud against all defendants except Rospatch. Michigan law defines constructive fraud as a breach of duty that can deceive others, irrespective of moral intent, and involves retaining unearned benefits. It poses similar challenges to securities law as negligent misrepresentation, with no requirement for proving negligence—innocent misrepresentation suffices. However, Michigan courts have not recognized a cause of action for constructive fraud in this context, leading to the dismissal of Count VII against all defendants.

Count VIII alleges fraudulent concealment by all defendants, highlighting that fraud can occur through the suppression of facts. For suppression to qualify as "silent fraud," there must be a legal or equitable duty to disclose, which plaintiffs cannot locate in federal securities law but may find in the fiduciary duties of certain defendants. Arthur Andersen has a duty to disclose material information due to its awareness of federal securities fraud, while Warner Norcross lacks such a duty, resulting in the dismissal of its motion concerning this count.

Count IX of Atlantis’ complaint alleges violations of the Florida Securities and Investor Protection Act by the defendants. The relevant statutes provide that civil remedies available under U.S. laws also apply to Florida securities transactions. The Florida Supreme Court has determined that state securities laws are intended to align with federal laws, granting Florida investors full access to civil remedies. Since the court previously identified federal securities law violations against certain defendants, similar violations under Florida law are also established. The defendants' argument regarding the necessity of buyer/seller privity, based on E.F. Hutton v. Rousseff, is rejected as it pertains to a different statute. Consequently, the motion to dismiss Count IX is denied.

Count X asserts that defendants Rospatch, Parini, Gaston, and Warner Norcross committed a civil violation of the Florida RICO statute. The statute allows civil remedies for injuries caused by a pattern of criminal activity, including violations related to securities transactions. The court emphasizes that the focus is on the nature of the activities rather than the status of the violators, and prior rulings indicate that a connection to organized crime is not required for civil RICO claims. The alleged misconduct involves filing SEC reports with material misstatements from 1987 to 1988. As this conduct falls within the scope of the Florida RICO statute, the court finds that Atlantis has sufficiently stated a violation, and the motions to dismiss Count X are also denied.

Additionally, the court summarizes the outcomes of motions related to state law claims: the motions to dismiss Count IV for breach of fiduciary duty by Parini, Malpass, Harris, and Gaston are denied, while those by Warner Norcross and Arthur Andersen are granted. The motions to dismiss by the Outside Directors and Smith for lack of jurisdiction are granted.

Count V of Atlantis’ complaint asserts common law fraud, with motions to dismiss from Rospatch, Parini, Malpass, Harris, Gaston, Warner Norcross, and Arthur Andersen being denied. Conversely, the motions to dismiss filed by the Outside Directors and Smith for lack of jurisdiction are granted. Count VI, alleging negligent misrepresentation, results in all defendants' motions to dismiss being granted. Count VII, concerning constructive fraud, also sees all defendants’ motions to dismiss granted. In Count VIII, which alleges fraudulent concealment, motions to dismiss from Rospatch, Parini, Malpass, Harris, Gaston, and Arthur Andersen are denied, while Warner Norcross’ motion is granted, and the Outside Directors’ and Smith’s motions for lack of jurisdiction are granted. Count IX, claiming violations of the Florida Securities and Investor Protection Act, results in denied motions to dismiss from Rospatch, Parini, Malpass, Harris, Gaston, Warner Norcross, and Arthur Andersen, with the Outside Directors’ and Smith’s motions for lack of jurisdiction granted. Count X alleges a civil violation of the Florida RICO statute, with motions to dismiss from Rospatch, Parini, Gaston, and Warner Norcross denied.

In the case of Plato Paper Products, Inc. v. Rospatch, Plato asserts the same three federal securities claims as Atlantis and similar claims for common law fraud, negligent misrepresentation, and fraudulent concealment. The court adopts the analysis from Atlantis regarding federal securities claims. A notable distinction in Plato's complaints is the assertion that each Outside Director is a “controlling person” under Section 20 of the 1934 Exchange Act, while Atlantis claims only Director Pharr holds this status. Under Sixth Circuit precedent, liability as a controlling person requires evidence of actual participation or influence in corporate operations. Plaintiffs argue the Outside Directors were positioned to influence Rospatch through committee service and claim a presumption of control, yet they fail to address relevant case law distinguishing their situation. Unlike in prior cases involving smaller corporations, Rospatch's status as a large, publicly-held corporation negates a presumption of control for its directors, who are not alleged to actively engage in operations.

Plaintiffs must present sufficient facts to support their claims against the directors, which Plaintiff Plato failed to do in its complaint. Consequently, the Outside Directors are dismissed from Plato’s control persons claim (Count III) without leave to amend. Count V, alleging negligent misrepresentation, is dismissed for all defendants, following precedent set in the Atlantis case. Counts IV and VI assert common law fraud and fraudulent concealment claims against all defendants, respectively. The defendants did not contest these claims in their motion to dismiss, leading to the denial of their motions regarding these counts.

In the Atcovitz v. Beadle case, brought derivatively on behalf of Rospatch with state law claims, Count I alleges breach of fiduciary duty against the Outside Directors, which is upheld under Michigan law. Count II claims Warner Norcross aided and abetted a breach of trust, but since Michigan law does not recognize this cause of action, the court grants the motion to dismiss this count. Count III alleges civil conspiracy among the Outside Directors, which is valid as it is tied to the breach of fiduciary duty claim. The motions to dismiss Count III are denied. Count IV seeks declaratory and injunctive relief, which remains under consideration.

Count IV does not establish an independent cause of action but seeks a remedy contingent on the plaintiffs prevailing on substantive claims. The court will evaluate the request for equitable relief only after plaintiffs prove their entitlement to such relief under applicable claims. 

Parini and Malpass filed a Rule 12(b)(6) motion to dismiss, supported by affidavits and a settlement/indemnification agreement, arguing they cannot be sued either directly or derivatively by the corporation. However, relevant case law (Sims v. Mercy Hospital and Hildebrand v. Board of Trustees of Michigan State University) dictates that a court cannot consider evidence outside the complaint when ruling on a motion to dismiss for failure to state a claim unless the motion is converted to one for summary judgment. Although the indemnification agreement is referenced in the derivative complaint, Atcovitz claims it is part of a fraudulent scheme by Parini and Malpass. 

While some defendants have valid dismissal claims under Rule 12(b)(1), Parini and Malpass do not. A factual dispute exists regarding their alleged breaches of fiduciary duty and potential civil conspiracy, leading to the denial of their motion to dismiss the derivative suit.

In the case Atlantis Group, Inc. v. Rospatch Corp., various motions to dismiss were ruled upon: Rospatch's motions for multiple counts were denied, while others were granted for specific counts and defendants. Parini and Malpass' motions to dismiss several counts were denied, whereas other motions by different defendants were granted.

Smith's motion to dismiss Counts IV, V, VI, VII, VIII, and IX for lack of jurisdiction is granted. Gaston and Warner Norcross’ motion to dismiss Counts I, II, III, V, IX, and X is denied, while Gaston’s motion to dismiss Counts IV and VIII is denied and Warner Norcross’ motion to dismiss Counts IV and VIII is granted. Both Gaston and Warner Norcross’ motions to dismiss Counts VI and VII are granted. Arthur Andersen's motions to dismiss Counts I, II, V, VIII, and IX are denied, but its motions for Counts IV, VI, and VII are granted. 

In the case of Plato Paper Products, Rospatch’s motion to dismiss Counts I, IV, and VI is denied, while Count V is granted. The Outside Directors’ motion to dismiss Counts I, II, and III without leave to amend is granted, and their motion for lack of jurisdiction on Counts IV, V, and VI is also granted. Parini and Malpass’ motions to dismiss Counts I, II, III, IV, and VI are denied, but their motion for Count V is granted. Similarly, Harris’ motions to dismiss Counts I, II, III, IV, and VI are denied, while Count V is granted. Smith’s motions to dismiss Counts I, II, and III are granted, and for lack of jurisdiction on Counts IV, V, and VI are also granted. 

Gaston and Warner Norcross’ motions to dismiss Counts I, II, III, and IV are denied, but Count V is granted; Gaston’s motion to dismiss Count VI is denied, while Warner Norcross’ motion for Count VI is granted. Arthur Andersen's motions to dismiss Counts I, II, IV, and VI are denied, but Count V is granted. 

In the Atcovitz case, the Outside Directors’ motions to dismiss Counts I and III are denied, as are Parini and Malpass’ motions. Harris’, Smith’s, and Gaston’s motions to dismiss Counts I and III are also denied. Warner Norcross’ motion to dismiss Count II is granted. 

The court acknowledges that Plato Paper Products, which acquired stock in April 1987, may not adequately represent other class members who purchased at different times; this issue is pending in the class certification motion. Additionally, Rospatch is asserting attorney-client privilege regarding communications with Gaston, complicating their dismissal motion. The claims in this class action differ from those in the Atlantis suit due to the requirement of demonstrating reliance. A critical issue in the class certification motion is whether claims necessitating proof of reliance can be pursued collectively. Professor Joel Seligman has been appointed to investigate the derivative lawsuit's viability for Rospatch.