In re Software Toolworks, Inc. Securities Lit.

• Decision Date: 30 March 1992
• Docket Number: No. C-90-2906 FMS.,C-90-2906 FMS.
• Citation: 789 F. Supp. 1489
• Court: U.S. District Court — Northern District of California
• Parties: In re SOFTWARE TOOLWORKS, INC. SECURITIES LITIGATION. This document relates to All Actions.

789 F. Supp. 1489

In re SOFTWARE TOOLWORKS, INC. SECURITIES LITIGATION This document relates to All Actions.

No. C-90-2906 FMS.

United States District Court, N.D. California.

March 30, 1992.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Alan Schulman, William S. Lerach, Milberg Weiss Bershad Specthrie & Lerach, San Diego, Cal., Sherrie R. Savett, Berger & Montague, P.C., San Francisco, Cal., Catherine A. Sullivan, for plaintiff Richard B. Dannenberg.

Alan Schulman, Milberg Weiss Bershad Specthrie & Lerach, San Diego, Cal., Sherrie R. Savett, Berger & Montague, P.C., San Francisco, Cal., Max W. Berger, Bernstein Litowitz Berger & Grossmann, New York City, for plaintiffs Mindy Blitz, Eugene Costiglio, Kenneth H. Ross, Homer Fleisher, Steven G. Cooperman, Nathaniel Orme, Ervin H. Fishman, Frederick Wertheimer, Barbara Wertheimer, William J. Bing, Arlene Bing, Anthony D. Shapiro, William Dulude, H.N. Brown, Jr., David E. Lockrow, Karl E. and Lucille C. Bauman and Jack Schnitzer.

Michael L. Zigler, Morrison & Foerster, San Francisco, Cal., for defendants Software Toolworks Inc., Leslie Crane, Elizabeth M. Barker, Joseph Abrams, Norman Worthington, Walter Bilofsky, Michael E. Duffy, Roger M. Buoy and Michael L. Noel.

Perry A. Irvine, Irvine & Cooper, Palo Alto, Cal., for Judson Mitchell.

Bruce G. Vanyo, Wilson Sonsini Goodrich & Rosati, Palo Alto, Cal., for defendants PaineWebber, Inc. and Montgomery Securities.

Philip R. Rotner, Karen Kennard, McCutchen Doyle Brown & Enersen, Michael L. Zigler, Morrison & Foerster, San Francisco, Cal., for defendant Deloitte & Touche.

ORDER REGARDING SUMMARY JUDGMENT CROSS-MOTIONS

FERN M. SMITH, District Judge.

In this securities class action, class plaintiffs ("Plaintiffs"), defendant underwriters Montgomery Securities and PaineWebber, Inc. ("Underwriters") and defendant auditor Deloitte & Touche ("Deloitte"), move the Court for summary judgment or partial summary judgment as follows:

(1) Plaintiffs move for partial summary judgment against the Underwriters as to liability on Plaintiffs' Section 11 and 12(2) claims;

(2) Underwriters move for summary judgment on all claims against them;

(3) Plaintiffs move for partial summary judgment against Deloitte as to Section 11 and 10(b), and Rule 10b-5, liability on three issues;

(4) Deloitte moves for summary judgment on all claims against it, or alternatively, for partial summary judgment as to any of the Section 11 and 10(b), and Rule 10b-5, claims against it.

On December 31, 1991 the Court issued a tentative Order on the various cross-motions and scheduled a hearing. A hearing was held on February 14, 1992. The Court now issues its final Order, discussing the cross-motions in corresponding pairs; that is, (1) Plaintiffs vs. Underwriters and (2) Plaintiffs vs. Deloitte.¹ Relevant factual and evidentiary information will be incorporated and discussed as pertinent to each motion.

PLAINTIFFS VS. UNDERWRITERS

Plaintiffs seek partial summary judgment against the Underwriters as to liability on Plaintiffs' Section 11 and 12(2) claims. The Underwriters seek summary judgment on all claims against them — i.e., Plaintiffs' Section 11, 12(2) and 10(b) claims against them.² Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c).³ A dispute about a material fact is "genuine," "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986).

In order for Plaintiffs to attain summary judgment they must establish that summary judgment is appropriate as to every element of their securities claims. If the Underwriters can raise a genuine factual dispute as to any element — falsity, materiality, etc. — then the Plaintiffs' motion must be denied. Id. By contrast, the Underwriters can obtain summary judgment by defeating any one of those elements. Since defeating any one element will not only afford summary judgment to the Underwriters, but will also necessarily decide Plaintiffs' motion, the Court will first address the Underwriters' motion.

I. Underwriters' Motion for Summary Judgment

The Underwriters seek summary judgment on Plaintiffs' Section 11, 12(2) and 10(b) claims against them. According to the Underwriters, the evidence in the record indisputably demonstrates that their investigation in relation with the Registration Statement and Prospectus ("Prospectus") for Toolworks' July 1990 public offering ("Offering") satisfied the due diligence standard, and therefore exempts them from Section 11 or 12(2) liability. The Underwriters further claim that they are entitled to summary judgment on the Section 10(b) claims because Plaintiffs cannot prove the necessary scienter to establish primary or secondary liability under Section 10(b). Plaintiffs respond that the Underwriters cannot justify summary judgment since the evidence on the record: (1) establishes that the Prospectus was materially false and misleading and that the Underwriters failed to make a reasonable investigation of the accuracy of the Prospectus,⁴ and (2) raises triable issues of fact with respect to Plaintiffs' Section 10(b) claims.

For the reasons set forth below, and after a full hearing and an exhaustive review of the facts and evidence presented by the parties, the Underwriters' motion for summary judgment is GRANTED and Plaintiffs' motion for partial summary judgment is DENIED.

A. Prospectus Claims

Section 11 affixes liability to underwriters of stock by means of a prospectus which is materially misleading, unless they prove they exercised due diligence to discover and eliminate such false and misleading statements. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S.Ct. 683, 687, 74 L.Ed.2d 548 (1983); 15 U.S.C. § 77k. Similarly, an underwriter who offers or sells a security by means of a prospectus which contains a material misstatement or omits a material fact is liable under Section 12(2), unless he establishes an affirmative due diligence defense. 15 U.S.C. § 77l(2).⁵ The standards under Sections 11 and 12(2) are therefore virtually the same. See Sanders v. John Nuveen & Co., 619 F.2d 1222, 1228 (7th Cir.1980), cert. denied, 450 U.S. 1005, 101 S.Ct. 1719, 68 L.Ed.2d 210 (1981).⁶

Without conceding any elements of Plaintiffs' prima facie case on the Prospectus claims, the Underwriters seek summary judgment solely on the issue of due diligence. They claim that the investigation they performed in connection with the Offering entitles them to the "due diligence" defense. See, e.g., Feit v. Leasco Data Processing Equipment Corp., 332 F.Supp. 544 (E.D.N.Y.1971) (absolving underwriters on ground of due diligence). Plaintiffs contend that the Underwriters cannot establish a due diligence defense because there is substantial evidence that the Underwriters failed to perform a reasonable investigation into (1) Toolworks' Nintendo business, (2) the results of the June 1990 quarter, and (c) recognition of revenues on Toolworks' Original Equipment Manufacture ("OEM") software licensing business. Plaintiffs further claim that it is not proper to decide the adequacy of due diligence on summary judgment, because what constitutes a reasonable investigation is a mixed question of law and fact for the jury to decide.

1. Deciding the Adequacy of Due Diligence on Summary Judgment

What is a factual and what is a legal question for purposes of summary judgment is not easily determined. See Pullman-Standard, Division of Pullman, Inc. v. Swint, 456 U.S. 273, 288, 102 S.Ct. 1781, 1789-90, 72 L.Ed.2d 66 (1982). At one extreme, the resolution of disputes over historical facts (a thing done, an action performed, or an event or occurrence) is a factual question for the jury. At the other extreme, when the facts material to the application of a pure rule of law are undisputed, the application is a matter of law for the court, requiring no trial. In between these extremes, there is a large continuum occupied by mixed questions of law and fact.

Mixed questions of law and fact generally require the resolution of disputes over historical facts, a matter for the jury. When the dispute is not over historical facts, however, but over their legal significance, the issue may be appropriate for summary judgment. See Horton v. Taylor, 767 F.2d 471, 478 (8th Cir.1985); Schwarzer, Summary Judgment Under the Federal Rules: Defining Genuine Issues of Material Fact, 99 F.R.D. 465, 472-73 (1984). After a careful review of the record, the Court finds that there are no genuine issues of material historical fact with regard to the Underwriter's due diligence defense. The disagreement between Plaintiffs and the Underwriters revolves around whether the due diligence performed was enough to entitle the Underwriters to a statutory defense under Section 11 and 12(2).

The "application of standards set by statutes, regulations and precedent to undisputed facts will normally give rise to a `question of law' for the court. That principle ensures that the law is applied in a uniform and predictable fashion." U.S. v. Rule Industries, Inc., 878 F.2d 535, 542 (1st Cir.1989); see also McDermott Int'l, Inc. v. Wilander, ___ U.S. ___, ___, 111 S.Ct. 807, 818, 112 L.Ed.2d 866 (1991); Stissi v. Interstate and Ocean Transport Co., 765 F.2d 370, 374 (2d Cir.1985). The Court, however, must decide whether the context in which the question arises makes it more appropriate for decision by judge or by jury. See, e.g., Rule Industries, Inc., 878 F.2d at 542 (Buy American Act presents rare instance where determination of statutory standard better suited for jury).

A decision likely to have significant precedential impact on the resolution of...