179 F.R.D. 126 (S.D.N.Y. 1998), 97 CIV. 5874(RWS), Adair v. Bristol Technology Systems, Inc.

Docket Nº:97 CIV. 5874(RWS).
Citation:179 F.R.D. 126
Opinion Judge:SWEET, Senior District Judge.
Party Name:Lincoln ADAIR, Antique Prints, Ltd., and Martha Seamans, on behalf of themselves and all others similarly situated, Plaintiffs, v. BRISTOL TECHNOLOGY SYSTEMS, INC., Duke & Company, Inc., First Cambridge Securities Corp., Richard H. Walker, Maurice R. Johnson, Paul Spindler and Lawrence Cohen, Defendants.
Attorney:Rabin & Peckel, New York City (Brian Murray, I. Stephen Rabin, Joseph V. McBride, of Counsel), for Plaintiffs. O'Sullivan Graev & Karabell, New York City (Joshua H. Epstein, James L. Burns, of Counsel), for Bristol Technology, Richard M. Walker, Maurice R. Johnson, Paul Spindler and Lawrence Cohe...
Case Date:May 14, 1998
Court:United States District Courts, 2nd Circuit, Southern District of New York
 
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Page 126

179 F.R.D. 126 (S.D.N.Y. 1998)

Lincoln ADAIR, Antique Prints, Ltd., and Martha Seamans, on behalf of themselves and all others similarly situated, Plaintiffs,

v.

BRISTOL TECHNOLOGY SYSTEMS, INC., Duke & Company, Inc., First Cambridge Securities Corp., Richard H. Walker, Maurice R. Johnson, Paul Spindler and Lawrence Cohen, Defendants.

No. 97 CIV. 5874(RWS).

United States District Court, S.D. New York.

May 14, 1998

Page 127

On motion to dismiss in securities fraud class action, the District Court, Sweet, Senior District Judge, held that: (1) investors who bought their shares in the secondary market, rather than from issuer in the initial public offering (IPO), had standing to assert claim for issuing a false and misleading prospectus under section of the Securities Act, where they could " trace" their securities to the challenged registration; (2) investors who brought claim for issuing a false and misleading prospectus pleaded an actionable omission; (3) allegation that issuer of securities omitted from prospectus interim financial statements required pursuant to regulation stated an actionable omission under securities fraud statute and Rule 10(b)-5; and (4) investors adequately plead scienter for purpose of securities fraud claim.

Motion denied.

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Rabin & Peckel, New York City (Brian Murray, I. Stephen Rabin, Joseph V. McBride, of Counsel), for Plaintiffs.

O'Sullivan Graev & Karabell, New York City (Joshua H. Epstein, James L. Burns, of Counsel), for Bristol Technology, Richard M. Walker, Maurice R. Johnson, Paul Spindler and Lawrence Cohen.

Daniel E. Katz, New York City, for First Cambridge Securities Corp.

Gersten, Savage, Kaplowitz & Fredericks, New York City (Leslie K. Case, of Counsel), for Duke & Company, Inc.

OPINION

SWEET, Senior District Judge.

Defendants Bristol Technology Systems, Inc. (" Bristol" ), Richard H. Walker, Maurice R. Johnson, Paul Spindler, Lawrence Cohen (the " Individual Defendants" and together with Bristol, the " Bristol Defendants" ), First Cambridge Securities Corporation (" First Cambridge" ), and Duke & Company, Inc. (" Duke" and together with First Cambridge and the Bristol Defendants, the " Defendants" ) have moved to dismiss the complaint in this securities fraud class action case (the " Complaint" ) for failure to plead fraud with particularity pursuant to Federal Rule of Civil Procedure 9(b) and for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the Defendants' motion is denied.

The Parties

Plaintiffs Lincoln Adair (" Adair" ), Antique Prints Ltd. (" Antique Prints" ), and Martha Seamans (" Seamans" and collectively, the " Plaintiffs" ), filed this action on behalf of themselves and all others similarly situated who bought Bristol common stock (" Stock" ) and Redeemable Class A Common Stock Purchase Warrants (" Warrants" ) during the period of November 13, 1996 through May 2, 1997.

Bristol is a Delaware corporation with its principal place of business in Irvine, California. The Individual Defendants are each officers and directors of Bristol. Walker has served as President and Chief Executive Officer, Spindler has served as Chairman of the Board, Executive Vice President and Secretary, and Cohen has served as Vice President of the Board, Executive Vice President, and Treasurer. Johnson has served as Vice President of Bristol since July 1996, and was previously President and a director of Cash Registers, Inc. (" CRI" ), a subsidiary of Bristol.

First Cambridge and Duke were underwriters for Bristol's initial public offering (the " IPO" ).

Prior Proceedings

Plaintiffs filed the Complaint in this action on August 8, 1997, alleging that the Defendants are liable for (1) issuing a false and misleading registration statement and prospectus in violation of § 11 of the Securities Act of 1933 (the " Securities Act" ), 15 U.S.C. § 77k; and (2) fraud in violation of section 10(b) of the Securities and Exchange Act of 1934 (the " Exchange Act" ), 15 U.S.C. § 78j(b), and Securities and Exchange Commission (" SEC" ) Rule 10b-5, 17 C.F.R. § 240.10b-5. Specifically, Plaintiffs allege that the registration statement and prospectus is misleading because it failed to disclose: (i) the material trend of increasing losses for Bristol; (ii) that CRI's nine month results 1 for the period ended September 30, 1996 were less than half of what they were for the same period in 1995; and (iii) that the combined Bristol and CRI entity lost money for the nine months ended September 30, 1996. The Complaint further alleges " control person" liability under section 15 of the Securities Act and section 20(a) of the Exchange Act against the Individual Defendants. Plaintiffs seek damages, interest, and fees.

On November 19, 1997, the Court granted Plaintiffs' motion to be appointed lead plaintiffs and for their counsel to be appointed lead plaintiffs' counsel.

The Bristol Defendants and Duke filed motions to dismiss on December 23, 1997.

Page 129

First Cambridge filed their motion to dismiss on January 15, 1998. The motions were deemed fully submitted on February 25, 1998 without oral argument.

The Facts

On a motion to dismiss under Rule 12(b)(6), Fed.R.Civ.P., the facts of the complaint are presumed to be true, and all factual inferences are drawn in the plaintiff's favor. Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir.1989). Therefore, the factual allegations set forth below do not constitute findings of fact by the Court. Unless otherwise indicated, the facts are drawn from the allegations made by the Plaintiffs in the Complaint.

Bristol was formed on April 3, 1996, to establish a national network of full service dealers of retail automation equipment, such as point-of-sale systems, electronic cash registers, and related hardware and software. On June 28, 1996, Bristol acquired CRI, a point-of-sale systems dealership founded in 1974 doing business in Kentucky and Ohio.

The Bristol registration became effective on November 12, 1996, and the securities were first sold to the public beginning November 13, 1996. In total, Bristol issued 1,250,000 shares of Stock for $6.00 per share and 625,000 Warrants at $0.125 per warrant in the IPO. The Stock and Warrants are publicly traded on the Nasdaq Small Cap Market.

Plaintiffs contend Bristol's registration statement and prospectus did not disclose losses Bristol incurred for the two quarters ending June 30, 1996, and September 30, 1996. Plaintiffs allege that the true financial condition of Bristol was not revealed to the investing public until May 2, 1997, when Bristol announced it had suffered a loss of $433,000 in the first quarter of 1997. On that day Bristol stock, which sold for $6.00 per share at the initial public offering, closed at $3 1/16 per share.

The only information in the prospectus concerning net income before taxes for any part of 1996 was the net income before taxes for CRI for the fiscal year ended June 30, 1996. No quarterly information was provided for CRI, and there were no financial statements for Bristol or for Bristol and CRI on a consolidated basis.

Plaintiffs contend that these financial statements failed to disclose Bristol's losses, which were approximately $31,000 as of June 30, 1996, and $83,000 as of September 30, 1996. Combined, Bristol and CRI had lost $23,632 by the end of the third quarter, ending September 30, 1996. Nor was there any indication that the fourth quarter, which was half-completed at the time of the IPO, would result in an additional $116,152 in losses.

The Defendants contend that the prospectus did contain information related to Bristol's limited operating history and business plan, the operational and financial history of CRI, and the risks associated with the securities that Bristol was offering. Information was provided that revealed Bristol's sole expenses through June 30, 1996, prior to acquiring CRI, was $31,250 in salaries.

With respect to CRI, the Defendants contend that the prospectus offered detailed financial information for fiscal years ending June 30, 1994, 1995, and 1996, which revealed that CRI's performance decreased significantly between 1995 and 1996.2 Defendants contend that because of Bristol and CRI's brief joint operating experience, the prospectus did not include a combined income statement but instead contained pro forma consolidated information, as if CRI had been acquired by Bristol on July 1, 1995. This pro forma statement revealed that Bristol would have suffered a first quarter loss before taxes for the period of $20,479. Furthermore, while the third quarter information was not disclosed in the November prospectus, it was disclosed in December when Bristol filed it's third quarter 1996 10-Q with the Securities Exchange Commission (the " SEC" ).3

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Bristol further contends that on March 14, 1997, it filed with the SEC it's 1996 annual 10-K which covered the period from Bristol's inception through the end of the fiscal year, disclosing further significant losses. At the end of the 1997 first quarter losses amounted to $433,936, which was disclosed May 2, 1997, in Bristol's 10-Q SEC filing.

Discussion

I. Standard For Motion To Dismiss

In deciding the merits of a motion to...

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