Full opinion text
OPINION AND ORDER D. BROOKS SMITH, District Judge. I. INTRODUCTION Westinghouse Credit Corporation (WCC) is a subsidiary of Westinghouse Financial Services, Inc. (WFSI), itself a wholly-owned subsidiary of Westinghouse Electric Corporation (Westinghouse). WCC was formed in 1954 to finance consumer sales of Westinghouse products; however, it eventually expanded into new credit markets, including industrial and commercial finance and sophisticated corporate lending. In the early 1980s, WCC hit its stride when it tapped into the booming commercial and residential real estate markets. Such success, however, was short-lived. WCC’s fortunes collapsed along with the real estate market in the late-1980s, and the price of Westinghouse stock tumbled during the class period from a high of $39.375/share to a low of $15.875/share. Consolidated Amended Class Action Complaint (Docket No. 84) ¶¶ 185, 186. Now, like so many lending institutions battered by the late-1980s real estate bust, see Michael Quint, Investors Challenging Banks on Bad Loans, N.Y. Times, January 28, 1991, at D1, Westinghouse, along with its outside accountant and investment bankers, is defending against shareholders who allege that the company made false and misleading statements regarding the health of its financial services units, thereby artificially inflating the price of Westinghouse stock and damaging plaintiffs who purchased that stock at what they claim to have been an artificially high price. The Purchaser Class Action plaintiffs filed their action on February 28, 1991. Over the course of the next year, the parties skirmished over several discovery motions, until March 18,1992, when Magistrate Judge Lancaster ordered Westinghouse to make available to plaintiffs, on a continuous basis from April 1, 1992 to April 29, 1992, at WCC’s offices, documents relating to 536 accounts designated as “Assets Held for Sale or Restructuring” for inspection and copying. On June 15, 1992, after having reviewed some 3.5 million pages of active investment file documents, plaintiffs filed a Consolidated Amended Class Action Complaint (Complaint) and an Amended and Supplemental Complaint relating to the derivative action against Westinghouse, Civil Action No. 91-624 (Derivative Complaint) (Docket No. 85). This action is currently before the Court on defendants’ motions to dismiss (Docket No. 90, 91, 101, 106). II. BACKGROUND As noted above, WCC sharply increased its lending activity in the 1980s, expanding into highly leveraged corporate transactions, high-yield securities, and especially, commercial real estate markets. WCC’s primary source of funds for these investments was short-term commercial paper debt. When the real estate market softened during the late-1980s and into the early-1990s, many of WCC’s real estate receivables began under-performing, and the underlying investment properties lost value. Therefore, on May 8, 1990, in order to protect WCC’s standing with the commercial paper ratings agencies, Westinghouse entered into a support agreement with WCC, pursuant to which Westinghouse agreed to maintain for three years, by regular capital infusions if necessary, WCC’s total debt-to-equity ratio at a maximum of 6.5 to 1. ¶ 97; Exhibit O to Defendant Westinghouse’s Memorandum in Support of Motion to Dismiss Consolidated Amended Class Action Complaint (Westinghouse Memo) at 8. By September 21, 1990, the Corporate Finance Section of Westinghouse’s Treasury Department had prepared a report entitled “Strategic Considerations — WFSI, Discussion Points,” Exhibit Y to Westinghouse Memo, which assessed the diminished value of WFSI assets and offered direction for WFSI’s future plans. ¶ 111. The report, the contents of which were not released to the public, ¶ 112, discussed the various strategies available to WFSI as it faced increasing problems in its real estate portfolio. The alternatives under consideration were stated as follows: A — maintain size and likely growth, modest change in mix — acquire Enterprise and United, but stop there B — maintain size, improve growth outlook by aggressive change in mix — fund aggressive growth in thrifts and mortgage banking by liquidating WCC’s current business C — contract size, maintain mix — accept write down, apply proceeds for sale of written down assets to debt repayment, pursue thrifts and mortgage banking on modest scale D — pay dividend, contract size and growth — aggressively liquidate assets, distribute cash to parent — abandon thrifts and mortgage banking Exhibit Y at 15. The report speculated that alternatives B and D were unlikely, and raised the possibility of a fifth alternative, the “missing alternative — focus on selling leasehold residuals and other ‘hidden’ assets to produce gains for write offs, reduce cost structure (internally generated gains used to write off non-earning assets).” Id. at 17. The report suggested that Westinghouse continue to “modify and complete the Strategic Plan” and “complete the Lazard study— evaluate exit vs. hold alternatives.” Id. at 18. The report concluded, inter alia, that it was “unlikely” that WFSI would continue to operate as a long-term, core business, and that it would eventually exit the real estate markets. The report recommended that WFSI hold its portfolios for exit when the markets recovered, and stated that there was “no need for [a] self-inflicted writedown— unless assets can be liberated.” Finally, the report recommended “engaging] Lazard to [evaluate the costs and benefits of a] near-term exit vs. hold for later exit,” and “to assist in internal restructuring effort, and validate Corporate views — also, to assist in communications message.” Id. at 20. Westinghouse did retain Lazard Freres & Co. (Lazard), an investment banking firm, on September 28,1990. ¶ 115. After interviewing key WCC personnel about WCC’s real estate portfolios, Lazard allegedly began preparing Westinghouse’s CEO and Chairman of the Board of Directors, Paul Lego, for a meeting with securities analysts scheduled for October 24,1990. ¶ 125. At the October 24, 1990 meeting, Lego allegedly told the analysts: “We believe our reserves are adequate. We see no major problems there,” and, “We do not believe we will have to take any kind of major hit in financial services. We believe our reserves are adequate.” ¶ 131. Lazard subsequently informed Westinghouse that: Markets do not currently expect any major write-off. They rely on a statement by Westinghouse’s management, at the October 24, meeting, that there are no prospects of such write-offs. Several reports quote the statement as the source of their belief____ Because it would come as a relative surprise and in contradiction to previous announcements, a large write-off might put the credibility of Westinghouse’s management at risk. ¶ 132. On February 27, 1991, Westinghouse and WCC announced that they were taking a $975 million pre-tax charge against fourth-quarter 1990 earnings as part of a restructuring plan adopted by Westinghouse for its WFSI and WCC subsidiaries. ¶ 150. Westinghouse also made a cash contribution of $525 million to WFSI during the first quarter of 1991 and extended its 1991 support agreement with WCC to June 1994. Exhibit O to Westinghouse Memo at 8. Also on February 27, 1991, Lego stated in a letter to shareholders: “We believe the loss provision and related actions decisively address the problems at WFSI.” Lego concluded that, “By taking this special charge, we have strengthened the financial position of the corporation. The short-term problems we are experiencing in no way detract from the long-term opportunities we see in-our markets. We remain fully confident of our ability to create outstanding returns to our shareholders over the long term.” ¶ 153; Exhibit K to Westinghouse Memo at 6, 8. Concurrent with the February 27, 1991 press release, Westinghouse and WCC filed with the SEC Forms 8-K, pursuant to Sections 13 or 15(d) of the Securities Exchange Act, which require the periodic filing of reports necessary to keep reasonably current the information and documents contained in a registration statement. 15 U.S.C. §§ 78m, 78o (d) (1988). In its February 27, 1991 Form 8-K, WCC disclosed its identification of “$139 million in real estate properties owned, $653 million in marketable securities, $538 million in non-earning receivables and $1.3 billion in reduced earning receivables restructured to earn less than their original contractual rate.” Exhibit L to Westinghouse Memo at 2. On or about March 11,1991, Westinghouse and WCC filed annual reports, Form 10-K, for the 1990 fiscal year. Exhibits M and N to Westinghouse Memo. On or about April 18, 1991, and again on or about May 6, 1991, Westinghouse filed with the SEC a registration statement, Form S-3, and Prospectus in conjunction with a May 9, 1991 public offering of 19,000 shares of Westinghouse common stock at $26.50 per share. Exhibits O, P, and Q to Westinghouse Memo. On October 7, 1991, Westinghouse filed a Form 8-K that announced that net income was down over the first three quarters of 1991 compared to the same period in 1990, and issued another press release announcing “a major change in strategy to accelerate a broader disposition of assets in its financial services subsidiary, resulting in the recording of a $1.68 billion valuation provision during the third quarter.” ¶ 179; Exhibit V to Westinghouse Memo at 4. Addressing this second substantial charge against earnings within 9 months, Lego explained: “Because of the prolonged recession, the lack of credit in real estate markets and the nation’s oversupply of commercial properties, which have diminished the current value of real estate assets, we have determined to take these decisive actions.” ¶ 181; Exhibit V at 10. Lego also stated: “While disappointing, this performance is the result of the comprehensive plan we announced today that is intended to accelerate the recovery of our Financial Services unit and to put the corporation back on the track toward improved operating and financial performance.” Id. at 5. Finally, on or about November 14, 1991, Westinghouse and WCC filed with the SEC their quarterly reports, Form 10-Q, for the third quarter of 1991. Exhibits W and X to Westinghouse Memo.’ WCC cited “limited progress ... in liquidating or restructuring real estate and corporate financing assets,” Exhibit X at 9; Westinghouse disclosed that: Operating profit for the third quarter and first nine months was down significantly compared with the same periods of 1990. Third quarter operating profit included a $1.68 billion valuation provision established to facilitate the previously announced plans to downsize Financial Services. Excluding the $1.68 billion valuation provision, operating profit for the quarter and first nine months was sharply lower than the same periods of 1990. The decline in operating profit was due to significant increases in loan loss provisions from continuing business operations. Exhibit W at 11. Westinghouse also announced that it would enter into a new support agreement with WCC, “stipulat[ing] the same financial support with respect to [WCC’s 6.5 to 1] debt-to-equity ratio,” and providing financial support necessary to guarantee WCC’s commercial paper borrowings, and to maintain WCC’s debt ratings. Exhibit X at 10. III. DISCUSSION OF THE COMPLAINT A. Westinghouse Allegations Plaintiffs’ causes of action against Westinghouse include claims for violations of Sections 10(b) and 20 of the Securities Exchange Act of 1934, as amended (the Exchange Act), 15 U.S.C. §§ 78j(b), 78t (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1992); Sections 11, 12(2), and 15 of the Securities Act of 1933, as amended (the Securities Act), 15 U.S.C. §§ 77k(a), 111 (2), llo (1988); and for negligent misrepresentation under principles of Pennsylvania common law. Plaintiffs allege that as early as 1988, defendants were aware of the serious deterioration of WCC’s real estate and highly-leveraged transactions portfolios, but as set forth in more detail in Part V, infra, failed to: (1) fully disclose the extent of the losses in the receivables, attempting to hide those losses; (2) make appropriate valuation provisions to the loan loss reserves established to cover the nonperforming or under-performing receivables; and (3) disclose the effect of the losses upon Westinghouse’s and WCC’s commercial paper ratings and on Westinghouse in light of Westinghouse’s financial obligations to WCC under the support agreement. ¶46. B. The Secondary Defendant Allegations Plaintiffs also allege causes of action under Section 10(b), Section 11, Section 12(2), and common law negligent misrepresentation against Price Waterhouse, Westinghouse’s independent accountant, Lazard, an investment banking firm retained in September 1990 to advise Westinghouse, and several securities underwriters (including Lazard) who underwrote Westinghouse’s May 1991 public offering of common stock. The first substantive mention of the secondary defendants appears at ¶48. Price Waterhouse and Lazard are alleged generally to have “aided” Westinghouse, WCC, and the individual defendants in concealing the deteriorating condition of WCC’s real estate loans during the March 28, 1989 through October 22, 1991 period. The factual specifics concerning this aid are distributed among ¶¶ 53, 56 and 64: Price Waterhouse and Lazard are alleged to be responsible for WCC’s publication of artificially reduced levels of nonearning real estate receivables in WCC’s Forms SEC 10-Q and Forms 10-K. Price Waterhouse and Lazard also aided the Westinghouse defendants in some undescribed way in reclassifying nonearning real estate as reduced earning receivables. Price Water-house is additionally alleged to have failed to disclose WCC’s portfolio of underperforming real estate receivables after auditing WCC’s 1988 and 1989 financial statements, and to have authorized Westinghouse’s announcement of its 1990 unaudited financial results on January 17, 1991. Next, in ¶ 77 through ¶ 90, Price Water-house is alleged to have audited Westinghouse’s and WCC’s year-end statements in 1989, 1990 and 1991 and received fees from Westinghouse for doing so. Price Water-house is alleged to have assisted Westinghouse and WCC at unspecified times to conceal WCC’s losses and risky loans in three ways: (1) by agreeing that WCC’s reserve for loan losses would not exceed 2.5% of receivables; (2) by failing to disclose WCC’s reclassification of nonearning receivables as reduced earnings receivables, WCC’s growing volume of reduced earning receivables, and WCC’s in-substance foreclosures; and (3) by misrepresenting that Price Water-house’s audits were consistent with Generally Accepted Accounting Standards (GAAS) and that Westinghouse and WCC’s financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP). In 1990, Price Waterhouse is alleged to have informed WCC management of its reluctance to remain at a 2.5% level of reserves, and approved an increase to a 2.8% level of reserves. Plaintiff alleges that Price Waterhouse misrepresented this level of reserves as adequate, despite knowing at year-end 1990, facts demonstrating that the level of reserves was deficient by $1 billion or more. Plaintiffs’ allegations then turn, in ¶ 103 et seq., to Lazard. Lazard is alleged to have been retained by Westinghouse as a financial adviser in August or September 1990; to have conducted a study of WFSI and WCC; and to have produced a document entitled Westinghouse Credit Corporation — Discussion Outline. Exhibit B to Underwriter Defendants’ Compendium of Exhibits (Compendium). Lazard partners Felix Rohatyn and Ken-rick Wilson allegedly prepared Lego and Warren H. Hollinshead, Westinghouse’s Treasurer and CFO, for an October 24, 1990 meeting with securities analysts. Lazard executive Steve Niemczyk is alleged to have written a script containing proposed answers to questions expected from the securities analysts, which script included two statements actually made by Lego at the October 24, 1990 analysts’ meeting: We believe our reserves are adequate. We see no major problems there.... We do not believe we will have to take any kind of major hit in financial services. We believe our reserves are adequate. Compendium, Exhibit A at 7. Plaintiffs allege that these statements were false and that the Lazard personnel responsible knew or recklessly disregarded facts which demonstrated that the statements were false. ¶ 131. Lazard allegedly continued to analyze WCC’s status in December 1990 and January 1991, and learned of WCC’s deteriorated asset values, high levels of nonearning receivables, and the inadequacy of WCC’s reserves. Construing an ambiguity in the complaint most favorably to the plaintiffs, plaintiffs also allege that at the time of the January 16, 1991 earnings report Westinghouse had already planned the charges it later took against 1990 income, ¶ 138, and that Lazard learned of this plan by January 9, 1991. ¶ 136. On January 9, 1991 Lazard allegedly recommended that Westinghouse release fourth-quarter and year-end 1990 earnings results on January 16, 1991 without disclosing any of these facts. Lazard also allegedly recommended a board meeting to discuss a restructuring of WFSI and WCC, a meeting which took place on January 30, 1991. Plaintiffs allege that Westinghouse personnel met with personnel from Lazard and Shearson Lehman Brothers on February 7, 1991 to discuss the effect on the ratings of Westinghouse commercial paper of an “expected charge to earnings.” ¶ 143. In response to Westinghouse’s request, Lazard completed a document on February 11, 1991 entitled Model Restructuring and Financial Plan which proposed, inter alia, a $1.0 — $1.2 billion charge to increase loan loss reserves. ¶ 145. Westinghouse and Lazard allegedly determined to seek the rating agencies’ reaction to the proposed charge, ¶ 147, and on February 20, 1991, Lego and other Westinghouse personnel met with Moody’s and Standard and Poor’s. The plan submitted by Westinghouse differed in several respects from the Model Plan prepared by Lazard. ¶ 148. On February 27, 1991, Westinghouse announced its $975 million charge against 1990 earnings. Allegedly Lazard and Price Waterhouse knew this “did not provide for adequate reserves,” and “chose to conceal the losses” with a “crash effort to sell off the losing real estate loans and properties.” ¶ 155. Lazard allegedly also prepared a document for use at the February 27, 1991 board meeting entitled Westinghouse Electric — Board Meeting Q & A, and which read as follows: Q: Are the reserves adequate? A: Given the results of each of these review processes, the charge taken today is clearly reasonable but was at the low end of the range identified by management in conjunction with the strategic review performed by Lazard. The charge taken is clearly based on economic conditions today. Given the unstable environment in which we are currently operating, further economic deterioration could lead to future charges and further capital calls on the parent. Furthermore, the level of charge taken today is also highly contingent on the implementation of disposition strategies, which continue to be developed, and on market conditions. It is based on an understanding of how management will deal with underperforming assets: An orderly but aggressive liquidation plan. In this regard, a timely and active monitoring of the ongoing restructuring/disposition plan is crucial. Not a monthly process, but weekly. Q: When do we need to see “real” results? A: By the end of the second quarter following the charge, meaningful results should be evident. A timely reduction in commercial paper through application of cash proceeds raised via asset dispositions; A progressive reduction in the level of underperforming assets; and Stable to increasing core earnings and ROE. Q: What happens in the event there is further deterioration? A: More draconian steps would be required to preserve credit ratings at a cost to current earnings. But to the extent that WCC’s asset disposition strategy, or its ability to term out additional debt, can reduce commercial paper in the near term, there will be less of a risk due to further economic deterioration an/or [sic] a drop in credit ratings. The key is clearly what can be done in the near-term prior to any further deterioration. ¶ 157. In April and May of 1991, Westinghouse proceeded with another facet of its restructuring plan, a public offering of 19 million shares of common stock. Westinghouse filed a prospectus and registration statement with the SEC in connection with the offering which took place on May 9, 1991. The prospectus stated that the financial statements incorporated by reference in the prospectus were incorporated “in reliance on the report of Price Waterhouse.” ¶ 168; Exhibit Q to Westinghouse Memo at 18. The public offering was apparently completed before the fall of 1991. On September 6,1991, Moody’s and Standard & Poor’s downgraded Westinghouse’s commercial paper. ¶ 178. In response, Westinghouse took an additional $1.68 billion charge to add to its reserve for loan losses. ¶ 179. Plaintiffs allege that as early as October, 1990, Lazard and Price Waterhouse knew that the conditions which Westinghouse gave in October 1991 as reasons for its additional charge existed. ¶ 182. Plaintiffs allege that Lazard and Price Waterhouse also knew facts in February 1991 that should have caused them to conclude that the first charge was grossly inadequate. Id. Lazard and Price Waterhouse nonetheless allegedly aided Westinghouse in taking the $975 million charge by representing that it was adequate to cover losses inherent in WCC’s portfolio, which resulted in the share prices of the May, 1991 offering not reflecting the true financial weakness of the company. ¶ 183, ¶ 185. Plaintiffs also allege that in connection with public documents and SEC filings Price Waterhouse made knowing or reckless misrepresentations by falsely stating that Westinghouse and WCC’s internal controls were adequate, ¶ 351, ¶371*, when in fact Price Waterhouse knew, ¶ 355, that they were not. Allegedly, WCC lacked standards for reporting, inter alia, in-substance foreclosures, ¶ 356, cash-flow projections, ¶ 357, internal valuations, ¶ 358-60, and lending policies. ¶¶ 369-73. Plaintiffs contend that Price Waterhouse also falsely stated that the financial statements accompanying the Annual Reports accurately represented WCC’s financial position, ¶ 192, ¶ 347*, and that Price Water-house’s audits of those statements were conducted in accordance with GAAS. ¶ 192, ¶ 351*, ¶ 365*. According to plaintiffs, Price Waterhouse on January 23, 1991 also was aware that WFSI had identified $2.6 billion in underperforming assets, but nonetheless stated that it believed WFSI’s loss reserves for 1990 were adequate. ¶ 360*, ¶ 361*. Additionally, Price Waterhouse was retained by Westinghouse in August, 1990 to act as CFO for Brad Cable. WCC provided $10 million to effect a leveraged buyout of Brad Cable in September, 1990. Allegedly, Price Waterhouse’s inventory of Brad Cable revealed shortfalls which were covered by WCC. ¶¶ 297-99. Acting as CFO of Brad Cable at the same time Price Waterhouse was auditing Westinghouse’s financial statements allegedly rendered Price Waterhouse unable to conduct an independent audit of Westinghouse, ¶405, thereby resulting in Price Waterhouse accepting incorrect information from WCC. ¶¶ 374-403. The allegations summarized above are the basis for the following causes of action against the secondary defendants: Count One — In ¶ 409, Price Waterhouse and Lazard are alleged to have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by making “statements, described above [which] were false and misleading when made.” The general reference to statements is understood to refer to the specific statements alleged in the body of the complaint, which are again summarized in ¶ 413. Count Two — In ¶ 429 and ¶ 430, Price Waterhouse, Lazard and the underwriter defendants are alleged to have violated Section 11 of the Securities Act in connection with the May, 1991 public offering, by participating in the making of false statements in the registration statement, prospectus, and documents incorporated therein. The references to false statements made or true statements not made are understood to refer to the specifics alleged in the body of the complaint, and are summarized in ¶¶ 431-433, and in ¶ 434 as to Price Waterhouse only. Count Three — Lazard and the underwriter defendants are alleged, in ¶ 442, to have sold Westinghouse common stock in the May 1991 offering through the use of a false or misleading registration statement and prospectus in violation of Section 12(2) of the Securities Act. Count Four — Price Waterhouse is alleged to have violated Section 11 of the Securities Act in the same manner alleged in Count Two, towards the persons who purchased Westinghouse common stock directly through Westinghouse’s dividend reinvestment plan. ¶ 452. Finally, in Count Six, Price Waterhouse, Lazard and the underwriter defendants are alleged to have committed the tort of negligent misrepresentation by failing to disclose Westinghouse’s lack of adequate reserves and by affirmatively representing that Westinghouse’s loss reserves were adequate and that Westinghouse’s book value accurately reflected its financial condition. ¶469. IV. PLEADING STANDARDS A. Rule 12(b)(6) When deciding a motion to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6), the Court must accept as true all facts alleged in the complaint, and view them in the light most favorable to the plaintiff. Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir.1990); D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir.1984). In order to prevail on a Rule 12(b)(6) motion, the movant must establish that no relief could be granted under any set of facts that the plaintiff could prove. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir.1988). Where the allegations of the complaint rest on the construction placed on a document, it is proper to refer to that document at the pleadings stage to determine whether the document can bear the construction placed on it. See Fudge v. Penthouse Int’l, Ltd., 840 F.2d 1012, 1015 (1st Cm.), cert. denied, 488 U.S. 821, 109 S.Ct. 65, 102 L.Ed.2d 42 (1988); Teagardener v. Republic-Franklin Inc. Pension Plan, 909 F.2d 947, 949 (6th Cir.1990), cert. denied, 498 U.S. 1027, 111 S.Ct. 678, 112 L.Ed.2d 670 (1991); Cortee Industries, Inc. v. Sum, Holding, L.P., 949 F.2d 42, 47 (2d Cir.1991), cert. denied, — U.S. -, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992). B. Rule 9(b) Fed.R.Civ.P. 9(b) provides: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.” Under Rule 9(b), a plaintiff must plead (1) a specific false representation of material fact; (2) knowledge by the person who made it of its falsity; (3) ignorance of its falsity by the person to whom it was made; (4) the intention that it should be acted upon; and (5) that the plaintiff acted upon it to his damage. Shapiro v. UJB Financial Corp., 964 F.2d 272, 284 (3d Cir.), cert. denied, — U.S.-, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992) (citing Christidis v. First Pennsylvania Mortgage Trust, 717 F.2d 96, 99 (3d Cir.1983)). Under Rule 9(b), plaintiffs may not simply point to a bad result and allege fraud. Rather, plaintiffs must plead with particularity the circumstances of the alleged fraud in such a way as to inject “precision and some measure of substantiation into their allegations of fraud.” Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied, 469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985). By way of example, allegations of “who, what, when, where, and how: the first paragraph of any newspaper story,” would satisfy the particularity requirement of Rule 9(b). See Dileo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.), cert. denied, 498 U.S. 941, 111 S.Ct. 347, 112 L.Ed.2d 312 (1990); cf. Seville Industrial Machinery, 742 F.2d at 791 (allegations of “date, place or time” fulfill the requirements of Rule 9(b)). This stringent particularity requirement, which applies to allegations of securities fraud, Recchion v. Westinghouse Electric Corp., 606 F.Supp. 889, 894 (W.D.Pa.1985), serves three purposes: “(1) to place the defendants on notice and enable them to prepare meaningful responses; (2) to preclude the use of a groundless fraud claim as a pretext to discovering a wrong or as a ‘strike suit’; and (3) to safeguard defendants from frivolous charges which might damage their reputations.” Fox v. Equimark Corp., 782 F.Supp. 295, 298 (W.D.Pa.1991) (citations omitted). The United States Court of Appeals for the Third Circuit has cautioned against permitting “sophisticated defrauders to successfully conceal the details of their fraud.” Christidis, 717 F.2d at 99-100. Therefore, courts sometimes relax the rule when “factual information is peculiarly within the defendant’s knowledge or control,” Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628, 645 (3d Cir.1989); but a plaintiff who makes such allegations must still provide a “statement of the facts upon which the allegations are based.” Id. Finally, Rule 9(b) permits “knowledge and other condition of mind of a person [to be] averred generally.” Therefore, plaintiffs need not plead intent to defraud with stringent particularity to permit the inference that the defendants are accused of possessing the requisite scienter to state a cause of action for fraud. Cramer v. General Telephone & Electronics Corp., 582 F.2d 259, 272-73 (3d Cir.1978), cert. denied, 439 U.S. 1129, 99 S.Ct. 1048, 59 L.Ed.2d 90 (1979). C. Section 10(b) Section 10(b) of the Exchange Act provides: “It shall be unlawful for any person ... [t]o use or employ, in connection with the purchase or sale of any security ..., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b) (1981). SEC Rule 10b-5, promulgated under authority of Section 10(b), makes it unlawful to “make any untrue statement of a material fact or to omit to state a material fact” such that prospective purchasers or sellers of securities are misled. 17 C.F.R. Section 240.10b-5 (1992). To state a claim under Section 10(b) and Rule 10b-5, a private plaintiff must plead (1) a false representation of (2) a material (3) fact; (4) the defendant’s knowledge of its falsity and his intention that the plaintiff rely on it; (5) the plaintiffs reasonable reliance on defendant’s false representation; and (6) the plaintiffs resultant economic loss. Lewis v. Chrysler Corp., 949 F.2d 644, 649 (3d Cir.1991). Individual defendants may be held liable under Section 10, pursuant to Section 20 of the Exchange Act, if the plaintiff can establish the individual defendants’ “controlling person” relationship to the defendant corporation. D. Section 11 To bring a claim under Section 11 of the Securities Act, a plaintiff must allege that he “acquired” a security which was accompanied by a registration statement, “any part” of which “contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k(a) (1988). Plaintiffs need not allege reliance, scienter or damages, see Louis Loss, Fundamentals of Securities Litigation 896-97, 902 (2d ed. 1988), though they must allege that the shares they purchased are traceable to a false or misleading registration statement. Shapiro, 964 F.2d at 286. E. Section 12(2) Section 12(2) of the Securities Act provides that a person who “offers or sells” newly issued securities “by means of a prospectus or oral communication” that misrepresents or omits a material fact “is liable to the person purchasing such security from him” in an initial offering. 15 U.S.C. 77l (1988). As with Section 11, plaintiffs need not allege scienter on the part of the defendant, nor must they allege their own reliance on the misstatement or omission. However, in order to state a claim under Section 12(2), plaintiffs must allege that they did not know of the defendants’ untruth or omission, and that the defendants knew, or in the exercise of reasonable care, could have known of the misrepresentation or omission. See Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 687-688 (3d Cir.), cert. denied, — U.S. —, 112 S.Ct. 79, 116 L.Ed.2d 52 (1991). F. Aiding and Abetting Plaintiffs allege that Price Waterhouse and the underwriter defendants are liable both for their independent violations of the securities laws and as aiders and abettors of Westinghouse’s violations. Complaint ¶422. The two theories asserted must be considered separately and distinctly, because aider and abettor liability should properly focus on the connection between the alleged conduct of Westinghouse and the alleged conduct of the secondary defendants, not on the relationship between the plaintiff class and the secondary defendants. Only if Price Waterhouse, Lazard, and the other underwriters are alleged to have knowingly or recklessly participated in Westinghouse’s allegedly fraudulent actions in a substantial way can they be properly held as aiders and abettors. Monsen v. Consolidated Dressed Beef Co., 579 F.2d 793, 799-800 (3d Cir.), cert. denied, 439 U.S. 930, 99 S.Ct. 318, 58 L.Ed.2d 323 (1978); Landy v. FDIC, 486 F.2d 139, 162-63 (3d Cir.1973), cert. denied, 416 U.S. 960, 94 S.Ct. 1979, 40 L.Ed.2d 312 (1974). The direct liability claims against the accountant and underwriters, by contrast, require examination of the communication or nondisclosure of information by the accountant and underwriters to the plaintiffs. Here, whatever is alleged to have been done or not done by Westinghouse must not be conflated with the allegations against the secondary defendants. V. COUNT ONE A. Westinghouse’s Alleged Financial Misrepresentations 1. “Westinghouse and WCC Wrong fully Deflated Their Reported Nonearning Assets and Concealed Reduced Earning Receivables” Plaintiffs allege that Westinghouse and WCC manipulated their aggregate nonearning receivables accounts in order to report artificially low levels of nonearning receivables in WCC’s SEC quarterly and annual reports. ¶¶ 49-56. The effect of this alleged manipulation would be to overstate the quality of the receivables portfolio, thereby deceiving the investing public into believing that those portfolios were more valuable (i.e., had a higher expected future cash flow) than they actually did. ¶¶ 194-198. Specifically, plaintiffs allege that Westinghouse and WCC systematically deleted certain assets from the nonearning receivables category during the last month of each quarter. Nonearning loans were allegedly restructured, ¶204, and transferred to the unreported “less-than-carry,” or, more conventionally, “reduced-earning” receivables category. ¶ 205. Plaintiffs allege that this concealment scheme enabled Westinghouse and WCC to create the appearance that they “were justified in recognizing income on those receivables when such recognition was wholly unwarranted.” ¶ 205. Plaintiffs similarly allege that WCC routinely “restructured and modified” the loans of defaulting borrowers “to earn less than their original contract interest rates” in order “to avoid the disclosure and required recognition of substantial losses on these loans.” ¶¶ 57-60. In this manner, plaintiffs aver, WCC increased its internally recorded reduced earning receivables account by approximately $1 billion. ¶ 62. The effect of these loan restructurings was to mislead “the marketplace into the belief that WCC’s problem loans were limited to the reported but artificially deflated nonearning receivables, which amounted to only 5-7% of WCC’s net real estate receivables portfolio,” when in reality, by plaintiffs’ calculations, WCC’s “problem real estate loans” constituted “as much as 60% of its real estate loan portfolio.” ¶ 63. Defendants argue that restructuring loans for defaulting borrowers is “a perfectly reasonable business practice,” not inconsistent with GAAP, and that plaintiffs’ concealment theory is “entirely conclusory, with no allegations regarding specific loans or deviations, much less material deviations, from generally accepted accounting principles.” Westinghouse Memo at 21. Defendants also contend that those specific accounts that plaintiffs have identified and alleged to be part of the concealment scheme, ¶¶ 207-245, constitute such a small portion of the 536 accounts for which plaintiffs have had discovery (an even smaller portion of all Westinghouse assets) as to be immaterial. Westinghouse Memo at 32; see also Appendix 1. Plaintiffs’ allegations with respect to defendants’ manipulation of non-earning and reduced earning receivables do not satisfy the pleading standards under Section 10(b) of the Securities Act and Rule 9(b). Plaintiffs repeatedly claim that defendants’ lacked a “basis” or “reasonable justification” for restructuring nonearning loans and reclassifying them as reduced earning loans. ¶¶ 207-245. But these allegations amount to no more than a dispute over the accuracy of defendants’ accounting practices, or a challenge to Westinghouse’s opinion and belief as to when collectibility on the loans became doubtful, neither of which constitutes an actionable claim. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 479, 97 S.Ct. 1292, 1304, 51 L.Ed.2d 480 (1977) (internal corporate mismanagement not actionable under § 10(b)); In re Scott Paper Securities Litigation, 138 P.R.D. 56 (E.D.Pa.1991) (allegation that a projection was issued without a reasonable basis and therefore actionable “must contain facts that if proved would substantiate the charge of lack of a reasonable basis”) (citing Craftmatic, 890 F.2d at 645). Plaintiffs obviously attempt to allege more than simple internal corporate mismanagement, and paint a picture of asset manipulation in the service of nondisclosure. Plaintiffs claim that Westinghouse and WCC attempted to conceal nonearning receivables by restructuring and improperly reclassifying them as reduced earning receivables, and that defendants knew or should have known this was inconsistent with reasonable accounting practices. This is an allegation that, if properly made, would significantly influence the reasonable investor, Shapiro, 964 F.2d at 281. However, without an explanation of how defendants’ actions violated Generally Accepted Accounting Principles, plaintiffs’ allegation is conclusory rather than factual, and therefore insufficient under the particularity requirements of Rule 9(b). See Shapiro, 964 F.2d at 284-85; Christidis, 717 F.2d at 100. To the extent plaintiffs’ claim rests on defendants’ alleged restructuring and reclassifying certain accounts, without more, defendants’ motion to dismiss plaintiffs’ claim under Section 10(b) and Rule 10b-5 is meritorious. Whether or not defendants’ restructurings and reclassifications were justified or made with sufficient basis, defendants still had a duty to disclose the fact and effects of the restructurings and reclassifications. Plaintiffs’ allegation that defendants failed to so disclose, see e.g., ¶¶ 198, 211, 213, 216, 219, 223, 229, 238, 240, 242, directly concern the “philosophy of full disclosure,” Santa Fe, 430 U.S. at 477, 97 S.Ct. at 1303, embodied in the federal securities laws, and withstands defendants’ motion to dismiss. Specifically, plaintiffs allege that Westinghouse and WCC failed in several Form 10-Ks and 10-Qs to (1) report their aggregate troubled debt restructurings, and (2) disclose the amount of interest that would have been earned if its restructured loans had been performing in accordance with their original terms, and the amount of commitments defendants made “to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings.” ¶¶ 197-98. Under Financial Accounting Standards Board (FASB) Statement No. 15, this information should have been disclosed, and defendants do not dispute that it was not disclosed. Plaintiffs’ allegation is pled with sufficient particularity, as it states when and where the omissions were made, and'how defendants failed to comply with GAAP. This claim withstands defendants’ motion to dismiss. 2. “Westinghouse and WCC Concealed Real Estate Foreclosures and Losses Through Special Arrangements with the Tontis” Plaintiffs’ allegations regarding WCC’s “joint venture” with Edmond and Robert Tonti, ¶¶ 65-76, 330-42, are similar to their allegations that defendants concealed non-earning receivables by reclassifying them as reduced earning receivables. WCC allegedly restructured nonperforming commercial real estate loans in such a way that, in economic substance, WCC, and not the Tontis, was the owner of the underlying property in a kind of “joint venture” arrangement. In form, however, this alleged “joint venture” was characterized as an ordinary receivable investment, permitting WCC to understate its joint venture portfolios. ¶¶ 330-340. In this manner, plaintiffs aver, Westinghouse and WCC also avoided reporting losses and taking write-downs on collateral which was in-substance foreclosed, and the “effect ... was to materially inflate the earnings, assets and net worth of Westinghouse and WCC during the Class Period....” ¶342. Plaintiffs’ allegations of fraud are derived from the Tontis’ own allegations in an action brought against Westinghouse in another district to prevent Westinghouse from enforcing loan obligations, ¶ 65. As such, it is more akin to hearsay than the type of facts that must accompany plaintiffs’ allegations “indicating why the charges against defendants are not baseless.” Craftmatic, 890 F.2d at 646. A more serious flaw in this claim is that it primarily alleges mismanagement. A fraud allegation based upon failure to disclose a devalued asset base, or failure to timely foreclose in substance upon devalued property is inadequate unless it explains the wrongfulness of defendants’ course of action. Plaintiffs do not allege why under GAAP the Tonti properties should have been foreclosed rather than recognized as possible income. Similarly, plaintiffs baldly state but do not allege how, under GAAP, the economic substance of the restructured loans compels the conclusion that WCC actually entered into a joint venture with the Tontis. Making additional commercial real estate loans at below market rates to a struggling debtor who “rarely invested any capital in the [underlying] properties,” ¶ 70, is risky, may be wrongheaded, may even be gross mismanagement, but it is not fraudulent. Shapiro, 964 F.2d at 283 (improper loan collateralization and insufficient loan management practice not actionable under securities laws). Tacking the phrase “in order to conceal losses” onto the end of such an allegation does not convert it from an allegation of mismanagement into a fraud claim any more than does “inserting the words ‘defendants failed to disclose that ... ’ before the claimed mismanagement.” Fox v. Equimark Corp., 782 F.Supp. at 301. 3. “Westinghouse and WCC Misrepresented the Adequacy of Their Loan Loss Reserves” When “[i]t is probable that as of the date of the financial statements,” one or more future events will occur confirming that the value of “an asset has been impaired or a liability incurred, based on information available before the actual issuance date of the financial statements,” and “the amount of loss can be reasonably estimated,” the loan loss reserve established for that asset should be “accrued as a charge to income as of the date of the financial statements.” See Martin A. Miller, GAAP Guide 1992 6.02-6.03 (1992). If the loss appears only “reasonably possible” or “remote,” as of the date of the financial statements, GAAP requires that the loan loss reserve be disclosed by footnote, or not disclosed at all, respectively. Id. Plaintiffs allege that “Westinghouse and WCC failed to follow Generally Accepted Accounting Principles in setting their loan loss reserves,” by failing to “make estimates of specific losses whenever possible, using optimistic assumptions in estimating certain losses, and bas[ing] their overall loss reserves not on a loan-by-loan analysis but on historical benchmark percentages of total loans outstanding, which was inappropriate.... ” ¶ 249. These failings allegedly caused Westinghouse and WCC to misrepresent the adequacy of loss reserves for WFSI in several of its SEC reports, registration statement and prospectus during the proposed class period. ¶¶ 250-263. In ¶¶ 250-257, plaintiffs allege that Westinghouse and WCC “knowingly of recklessly misrepresented in the Notes to the Financial Statements ... the adequacy of [their] loss reserves” in their Form 10-Ks and 10-Qs during the period covering the last quarter of 1988 through the second quarter of 1991. Each of the allegedly misleading statements from those SEC reporting forms represents essentially that: (1) Westinghouse or WCC maintains an allowance for possible losses on financing receivables; (2) at a level which provides adequately for future losses that may develop in the portfolio; (3) which allowance or reserve is “based on historical trends” and “past ehargeoff experience,” “current delinquencies, the characteristics of the accounts, the value of the underlying collateral and general economic conditions and trends.” See ¶¶ 252-257; Exhibit N to Westinghouse Memo at 21. Plaintiffs also aver that the defendants’ misrepresentations in their SEC reports were exacerbated by individual Westinghouse officials. In particular, plaintiffs point to the October 24, 1990 statement made by Westinghouse Chairman Paul Lego to a gathering of securities analysts allegedly miseharacterizing WFSI’s reserves as “adequate,” ¶¶ 258-59, and to a statement by another Westinghouse spokesman, in June 1991, allegedly responding to statement by George Fraise, a market analyst for Smith Barney, that a $500 million write off for Westinghouse was “very possible” by saying: “Our position on that is that we believe that we have taken an adequate reserve, and at this time we don’t believe that any further reserve is necessary.” ¶262. Since the late-1980s, federal courts in the northeast region of the United States, where the downturn in real estate markets has been especially severe, have become familiar with Section 10(b) claims alleging loan loss reserve misrepresentations, and the law in this area is well-developed. The mere fact that loan loss reserves are discovered, ex post, to be inadequate, does not provide the basis for a securities fraud claim. Shapiro, 964 F.2d at 283 (“it is not a violation of the securities laws to simply fail to provide adequate loan loss reserves; properly collateralize or secure a loan portfolio; or provide sufficient internal controls or loan management practices”). However, where the defendant has commented on the “nature and quality of the management practices that it has used to reach a particular statement of loan loss reserves,” or has otherwise “charaeterize[d] 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.” See Shapiro, 964 F.2d at 281-82. Westinghouse, through spokesmen and in its SEC reports, undeniably used such language to describe its loan loss reserves, see e.g., Exhibit M to Westinghouse Memo at 42 (“The financial statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances .... ” “We believe that the Corporation’s policies and procedures, including its system of internal accounting controls, provide reasonable assurance that the financial statements are prepared in accordance with the applicable securities laws and with a corresponding standard of business conduct”), which, under Shapiro would put its loan loss reserves “in play.” a. Scienter If a corporation’s agents’ projections or opinions with respect to data such as loan loss reserves are reasoned and justified, with a sound factual or historical basis, they are not actionable even if inaccurate. Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, 474 U.S. 946, 106 S.Ct. 342, 88 L.Ed.2d 290 (1985). However, when such opinions are “issued without a genuine belief or reasonable basis,” are made knowingly or recklessly, and are inaccurate, see Virginia Bankshares Inc. v. Sandberg, 498 U.S.-, 111 S.Ct. 2749, 115 L.Ed.2d 929, 948 (1991) (“disbelief or undisclosed motivation, standing alone, [is] insufficient to satisfy the element of fact” in a securities fraud action), they constitute “culpable conduct actionable under § 10(b) and Rule 10b-5.” Eisenberg, 766 F.2d at 776 (citations omitted). The issuer’s alleged recklessness in issuing the baseless opinions or projections is sufficient to establish the scienter element of a Section 10(b) claim. Id. at 777. Where the corporate director or officer has “greater access to information or [ ] a special relationship to investors making use of the information, there is an obligation to disclose data indicating that the opinion or forecast may be doubtful.” Id. at 776 (citations omitted). However, management does not have a duty to paint a dark picture of its mismanaged operations, so long as a “reasonably detailed account of past operations and complete financial statements” are disclosed. See Craftmatic, 890 F.2d at 640 (affirming dismissal of claims that management failed to characterize “its financial reporting and accounting controls as inadequate and ineffective”). Defendants argue that the loan loss reserves allegations cannot support a cause of action, because the allegedly necessary loss reserves were not established for many individual accounts until Westinghouse abandoned its hold for the long term strategy on February 27, 1991. Westinghouse alleges that prior to that time the adequacy of WFSI’s and WCC’s loan loss reserves was properly determined primarily by analyzing past chargeoff experience and historical trends, though defendants’ SEC reports purport that other, more individualized factors were considered as well. In addition, defendants say, Westinghouse and its subsidiaries truly believed its representations regarding the adequacy of their loan loss reserves, and unless plaintiffs can allege facts showing otherwise, plaintiffs’ claims are not actionable. Loan loss reserves are a type of “soft information,” consisting essentially of predictions about the future performance of receivables portfolios. As such, characterizations of reserves as adequate are necessarily a matter of opinion and belief. Shapiro, 964 F.2d at 281 (“No matter what method is used, the economic judgments made in setting loan loss reserves can be validated only at some future date”). Such characterizations can be both material, see Virginia Bankshares, 498 U.S. at-, 111 S.Ct. at 2757, 115 L.Ed.2d at 944; Flynn v. Bass Bros., Inc., 744 F.2d 978, 988 (3d Cir.1984), and factual, for “conclusory terms in a commercial context are reasonably understood to rest on a factual basis ... and expressions of such judgments can be uttered with knowledge of truth or falsity just like more definite statements.” Virginia Bankshares, 498 U.S. at-, 111 S.Ct. at 2758, 115 L.Ed.2d at 946. Plaintiffs have alleged the lack of reasonable basis for failure to take loss reserves in the individual cases with sufficient particularity to put defendants on notice of the nature of plaintiffs’ claim. Defendants’ argument that plaintiffs are merely quibbling over one of at least two proper methods of establishing reserves for commercial real estate under GAAP, Westinghouse Memo at 34, loses some force under the combined weight of standards promulgated by the American Institute of Certified Public Accountants, and the Third Circuit Court of Appeals’ opinion in Bradford-White Corp. v. Ernst & Whinney, 872 F.2d 1153 (3d Cir.), cert. denied, 493 U.S. 993, 110 S.Ct. 542, 107 L.Ed.2d 539 (1989) (upholding jury finding that auditor who claimed to comply with generally accepted auditing standards but did not was liable under Rule 10b-5), and would be a matter more properly raised on a motion for summary judgment. b. Materiality Plaintiffs discuss six particular accounts and list seven others in WCC’s commercial real estate portfolio, alleging that even though each of the accounts was underperforming no reserve was established. See Di-Leo, 901 F.2d at 626; Fox v. Equimark Corp., 782 F.Supp. at 300 (in order to state an actionable claim under the securities laws, the plaintiff must specify how the defendant knew its reserves were inadequate or why it should have increased its reserves earlier). Plaintiffs contend that defendants failed to establish reserves for these accounts without reasonable basis, and that that constitutes fraud. Still, to survive a motion to dismiss,. Rule 9(b) requires that a plaintiff plead a specific false representation of a material fact. See Christidis, 717 F.2d at 99. Applying the Supreme Court’s definition of materiality in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976), “[a]n omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding” whether to trade shares of the corporation’s stock. “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Id. The adequacy of loan loss reserves is the type of information that would significantly influence a reasonable investor, Shapiro, 964 F.2d at 281. But the legal materiality of a fact does not turn solely upon the type of information that fact represents. Materiality has both a qualitative and a quantitative dimension. If a particular fact alleged is relevant in terms of the sort of information that investors care about, i.e., information concerning the management and financial position of a corporation, but trifling as a matter of consequence, the information is not legally material. The failure to disclose that a loan portfolio is likely to be impaired by some de minimis amount may be “relevant” in that it is the type of information that investors care about, but of such “dubious significance,” TSC Industries, 426 U.S. at 448, 96 S.Ct. at 2132, as to be “trivial,” and “hardly conducive to informed decisionmaking,” id. at 448-49, 96 S.Ct. at 2132, so that to reasonable shareholders, such omission must be immaterial as a matter of law. Instantly, plaintiffs cite examples of problem loans for which WCC allegedly should have, but did not, establish reserves, from periods including the fourth quarter of 1989 through the fourth quarter of 1990. Using plaintiffs’ highest suggested numbers, the total dollar amount of reserves plaintiffs allege were wrongfully not established for each quarter represents a miniscule portion of WCC’s current assets for that quarter. For example, plaintiffs allege that, during the fourth quarter of 1989, Westinghouse should have reserved between $10 million and $25 million to cover expected losses on its loan to Focus Financial Group Inc., ¶ 277, and an unspecified substantial amount to cover expected losses on its non-recourse first mortgage on the Daniel Building, an office building in Greenville, South Carolina. ¶ 283. Westinghouse’s financial statement in its Form 10-K annual report for the fiscal year ended December 31, 1989 represented current assets of $6,779,000,000. Assuming that the reserves plaintiffs allege defendants should have established during the fourth quarter of 1989 totalled $31 million, the reserves would have represented only 0.46 percent of Westinghouse’s current assets for the same period. Similar calculations for successive quarters yield percentages of 0.21% for the first quarter of 1990, 1.06% for the second quarter of 1990, 0.24% for the third quarter of 1990, and 1.28% for the fourth quarter of 1990. In fact, by the end of the fourth quarter of 1990, all the loan loss reserves that plaintiffs allege should have been established, added together, amounted to only 3.0% of Westinghouse’s current assets at that time. Given these small numbers, it would seem doubtful that plaintiffs have alleged facts showing a material misrepresentation or omission, especially since they have had the benefit of conducting discovery on some 536 loan files before filing their amended complaint. However, the focus on loan loss reserves as a percentage of current assets is misplaced. When it appears “probable” (as opposed to “reasonably possible” or “remote”) that an asset has been impaired by an amount that can be reasonably estimated, the previously established loss reserve, or “loss contingency,” should be treated as an actual loss. At that point, the proper accounting response is to accrue the loss reserve as a charge against income as of the date of the financial statements. FASB, Statement of Financial Accounting Standards, No. 5 at ¶ 8. What is affected most immediately by the development of a loss reserve for accounting purposes is income, not assets. In order to determine the materiality of allegedly inadequate loan loss reserves, the focus then must be the amount of loan loss reserves alleged to have been wrongfully not posted as a percentage of income during the relevant period, rather than as a percentage of current assets. See Securities and Exchange Comm’n v. Shared Medical Systems Corp., 1992 WL 208029 n. 5 (ED.Pa.1992) (rejecting defendants’ argument that an absolute rule of 10 percent defines materiality in securities fraud cases, and considering effect of alleged misstatement on income). In 1989, Westinghouse had net income of $922 million, of which $270 million was earned in the fourth quarter. Exhibit L to Westinghouse Memo at 9. Westinghouse’s 1990 net income, unadjusted for the February 27,1991 $975 million pretax charge against 1990 fourth quarter earnings, was $1,001,000,000. After the charge, Westinghouse’s 1990 net income was $268 million. Westinghouse’s unadjusted 1990 fourth quarter net income was $284 million. After the charge, Westinghouse experienced a 1990 fourth quarter net loss of $449 million. Exhibits K and M to Westinghouse Memo at 7 and 22 (1990 Form 10-K.) Plaintiffs have identified $26 million and $76,442,237 in loan loss reserves wrongfully not established for the fourth quarters of 1989 and 1990. These amounts represent 9.6% of reported 1989 fourth quarter income, and 26.9% of 1990 fourth quarter income (unadjusted), respectively. For the 1990 fiscal year, plaintiffs have identified $153,442,-237 of reserves that they allege should have been posted. These amounts represent approximately 15% of Westinghouse’s 1990 net income, unadjusted for the February 27,1991 charge against 1990 fourth quarter earnings. At the motion to dismiss stage of litigation, doubts about materiality should be resolved in f