In re Fine Host Corp. Securities Litigation
| Decision Date | 22 October 1998 |
| Docket Number | No. 3:97-CV-2619 (JCH).,No. 1241.,1241.,3:97-CV-2619 (JCH). |
| Citation | 25 F.Supp.2d 61 |
| Court | Connecticut Supreme Court |
| Parties | In re FINE HOST CORPORATION SECURITIES LITIGATION. |
J. Daniel Sagarin, Elias A. Alexiades, Hurwitz & Sagarin, Milford, CT, Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Bernard Indart, Mark Zinn, James Cosentino, Rodman Ins Agency, Edward Pirro, Robert R. Glisson, Peter P. Debiase, Cosmo Debiase, Taam Assoc., Inc.
Peter A. Lennon, Joseph P. Guglielmo, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, for Doreen Stellke Levine.
Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, David Randell Scott, Colchester, CT, for Paul Zwynenburg, Richard Orenstein, Robert Askew.
Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Wreiss, Bershad, Hynes & Lerach, New York City, Jeffrey S. Nobel, Schatz & Nobel, Hartford, CT, for Donna Goode, Roland Burke.
Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Wreiss, Bershad, Hynes & Lerach, New York City, David Randell Scott, Colchester, CT, for Paul Zwynenburg, Richard Orenstein, Robert Askew.
Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Wreiss, Bershad, Hynes & Lerach, New York City, Andrew M. Schatz, Schatz & Nobel, Hartford, CT, for Terry Wright.
Phyllis M. Parker, Berger & Montague, Philadelphia, PA, Peter A. Lennon, Joseph P. Guglielmo, Milberg, Wreiss, Bershad, Hynes & Lerach, New York City, James E. Tolan, Nancy Prahofer, Joel H. Levitin, Steven D. Isser, Dechert Price & Rhoads, New York City, for Mainstay Funds, Mainstay VP Series Fund, Inc., New York Life Ins. Co.
William H. Narwold, Cummings & Lockwood, Hartford, CT, Timothy G. Ronan, Cummings & Lockwood, Stamford, CT, Shaun S. Sullivan, David B. Fein, Wiggin & Dana, New Haven, CT, Suzanne Ellen Wachsstock, Wiggin & Dana, Stamford, CT, for Fine Host Corp.
Richard F. Lawler, Whitman, Breed, Abbott & Morgan, Greenwich, CT, Philip M. Smith, David S. Patterson, Whitman, Breed, Abbott & Morgan, New York City, for Richard E. Kerley.
Timothy G. Ronan, Cummings & Lockwood, Stamford, CT, for Catherine B. James.
Carl H. Loewenson, Jr., Heather M. Benedict, Morrison & Foerster, New York City, Steven David Ecker, Thomas J. Murphy, Cowdery & Ecker, Hartford, CT, for Cynthia J. Robbins.
Eugene J. Riccio, Gulash & Riccio, Bridgeport, CT, Jack A. Gordon, John M. DeMitt, Kent, Beatty & Gordon, New York City, for Nelson A. Barber.
Margaret M. Donohoe, J. Jay Lobell, Howard, Smith & Levin, New York City, for Mary B. Griffin.
RULING ON DEFENDANTS' MOTIONS TO DISMISS
Eight motions by five different defendants to dismiss various parts of the Consolidated Amended Class Action Complaint (the "Class Complaint") and the Second Amended Complaint (the "MainStay Complaint") are now pending before this court. [Dkt.# s 41, 43, 45, 47, 59, 81, 82, 83]. For the following reasons, the motions of Kerley, Barber, and Fine Host to dismiss Count I of the Class Complaint [Dkt.# s 41, 43, 47] are DENIED; the motions of Griffin and Robbins to dismiss the entire Class Complaint as to them [Dkt.# s 45, 59] are GRANTED; and the motions by Kerley, Barber, and Fine Host to dismiss various portions of the MainStay Complaint [Dkt.# s 81, 82, 83] are GRANTED insofar as they seek to dismiss Count V, but are in all other respects DENIED.
This multi-district litigation currently involves two separate actions, the Consolidated Class Action and the MainStay Action. A brief description of the complaint in each action follows.
The Class Complaint instituted a securities class action on behalf of a putative class consisting of all purchasers of common stock of Fine Host, Inc. ("Fine Host") from June 19, 1996 through December 12, 1997, and on behalf of a putative subclass consisting of all persons who acquired Fine Host stock pursuant or traceable to the Registration Statement and Prospectus issued in connection with Fine Host's initial public offering. Class Complaint at ¶ 1. The Class Complaint names as defendants Fine Host, Richard E. Kerley, Nelson A. Barber, Cynthia J. Robbins, and Mary Bender Griffin. Id. at ¶¶ 18-22.
On behalf of the sub-class, Count I of the Class Complaint alleges that the prospectus that Fine Host filed with the SEC in connection with its initial public offering contained false and materially misleading financial information in violation of section 11 of the Securities Act of 1933. Id. at ¶¶ 26, 149. In particular, the complaint alleges that as a result of improper accounting practices, the audited financial statements contained in the prospectus materially overstated Fine Host's net income for fiscal 1993, 1994, and 1995. Id. at ¶ 46. Count I is brought against defendants Fine Host, Kerley, and Barber only. Id. at ¶ 141.
Counts II and III of the complaint are brought on behalf of the entire class. In Count II, plaintiffs allege that all of the defendants violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 by knowingly and/or recklessly engaging in fraudulent accounting practices. Plaintiffs allege that through these practices, defendants artificially inflated Fine Host's stock price based on a showing of profits which in actuality were losers. Id. at ¶ 152. In Count III, brought against defendants Kerley and Barber only, plaintiffs allege that Kerley and Barber were control persons within the meaning of section 20(a) of the Securities Exchange Act of 1934, and are therefore liable for the underlying violations of the securities laws. Id. at ¶¶ 163-164.
In the MainStay Complaint, plaintiffs The MainStay Funds, on behalf of its Convertible Fund, MainStay VP Series Fund, Inc., on behalf of its Convertible Portfolio, and New York Like Insurance Company, on behalf of its Pooled Separate Account No. 7, the Convertible Account, allege five separate causes of action against various combinations of defendants Fine Host, Kerley, and Barber. The claims arise out of plaintiffs' purchase, pursuant to a private offering, of Fine Host subordinated notes (the "Notes") which were convertible into Fine Host common stock. MainStay Complaint at ¶ 1. Plaintiffs allege that in connection with their purchase of the Notes, they relied on materially false and misleading representations made by Fine Host as to the company's financial results for fiscal 1994, 1995, 1996, and the first three quarters of fiscal 1997. Id. at ¶ 3.
In Count I, plaintiffs allege that all of the defendants violated section 10(b) of the Securities Exchange Act and Rule 10b-5 by "carr[ying] out a plan, scheme and course of conduct with the illicit goal of raising capital by offering debt at a lower interest rate than the market would demand." Id. at ¶ 72. In Count II, brought against Fine Host only, plaintiffs allege that they reasonably relied on the misrepresentations and omissions contained in Fine Host's financial reports and that they are therefore entitled to recover under section 18(a) of the Securities Exchange Act. Id. at ¶¶ 80-84. In Count III, plaintiffs seek to hold defendants Kerley and Barber liable as "control persons" under section 20(a) of the Securities Exchange Act. Id. at ¶¶ 85-89. In Count IV, plaintiffs allege that all defendants are liable for common law fraud. Id. at ¶¶ 90-95. Plaintiff's final cause of action, Count V, seeks to recover damages from Fine Host and Kerley for making negligent misrepresentations. Id. at ¶¶ 96-101. In addition to compensatory damages, costs, and attorneys' fees, plaintiffs request an award of punitive damages in the amount of $500,000. Id. at p. 28.
Defendants in the Consolidated Amended Class Action have filed motions to dismiss various portions of the Class Complaint. Defendants Fine Host, Barber, and Kerley have each filed a motion to dismiss Count I of the complaint on the ground that the named plaintiffs of the subclass did not purchase their shares in the initial public offering and therefore have no standing to assert a claim under section 11. [Dkts.# s 41, 43, 47]. Defendants Robbins and Griffin have each filed a motion to dismiss the entire complaint as to them. [Dkt.#s 45, 59].
Defendants in the MainStay action have moved to dismiss virtually all of the MainStay Complaint. [Dkt.#s 81, 82, 83] All three defendants have moved to dismiss Counts I and IV for failure to plead scienter adequately. Defendants Kerley and Barber have also moved to dismiss Counts I and IV on the alternate ground that the complaint fails to plead adequately that plaintiffs relied on the alleged misrepresentations. Defendants Fine Host and Kerley have moved to dismiss Count V for plaintiffs' failure to allege the existence of a "special relationship" between themselves and defendants. Defendants Kerley and Barber have moved to dismiss Count III for failure to state a claim for control person liability. In addition, Fine Host has moved to dismiss plaintiffs' claim for punitive damages.
Defendants Kerley, Barber, and Fine Host present a single argument in support for their motions to dismiss Count I of the Class Complaint. They argue that plaintiffs lack standing to assert a claim under section 11 because the named plaintiffs who purport to represent the sub-class, Robert Askew and Thomas A. Guarnera, did not purchase their shares in the initial...
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