86 F.R.D. 357 (E.D.Pa. 1980), C. A. 77-4244, Peil v. National Semiconductor Corp.

Docket NºCiv. A. 77-4244.
Citation86 F.R.D. 357
Opinion JudgeHANNUM, District Judge.
Party NameR. K. PEIL, on behalf of himself and all others similarly situated v. NATIONAL SEMICONDUCTOR CORPORATION, Charles E. Sporck and Peter J. Sprague.
AttorneyRichard D. Greenfield, Sterling H. Schoen, Jr., Greenfield & Schoen, P.C., Bala Cynwyd, Pa., for plaintiff. Seymour Kurland, Ian A. L. Strogatz, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for defendants.
Case DateMarch 21, 1980
CourtUnited States District Courts, 3th Circuit, Eastern District of Pennsylvania

Page 357

86 F.R.D. 357 (E.D.Pa. 1980)

R. K. PEIL, on behalf of himself and all others similarly situated



Civ. A. No. 77-4244.

United States District Court, E.D. Pennsylvania.

March 21, 1980

Page 358

[Copyrighted Material Omitted]

Page 359

Plaintiff, who sued corporation and its president and chairman of the board of directors, alleging conspiracy to maintain inflated value of common shares of stock of corporation, moved for class certification. The District Court, Hannum, J., held that: (1) fact that plaintiff did not have first-hand knowledge of facts giving rise to cause of action did not preclude him from representing class; (2) for class certification purposes, common questions of law and fact existed; and (3) a class action was not precluded on theory that damages would vary among class members according to times and prices of purchase and sale and that such issue would dominate recovery in each case.

Plaintiff's motion granted and class certified.

Page 360

Richard D. Greenfield, Sterling H. Schoen, Jr., Greenfield & Schoen, P.C., Bala Cynwyd, Pa., for plaintiff.

Seymour Kurland, Ian A. L. Strogatz, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for defendants.


HANNUM, District Judge.

I. Introduction

Before the Court is the motion of the plaintiff pursuant to F.R.Civ.P. 23(c) (1) for an order determining that the Complaint involved in this litigation and commenced on behalf of similarly situated persons should proceed as a class action. The class that the plaintiff proposes to represent would be defined as consisting of all persons or entities who purchased the common stock of the defendant National Semiconductor Corporation (hereinafter " NSC" ) during the period between approximately July 1, 1976 to March 1, 1977 and who sustained damages thereby, whether by selling such securities at reduced prices, continuing to hold them at reduced market values, or otherwise.

The essence of the plaintiff's Complaint alleges that the defendants Charles E. Sporck (hereinafter " Sporck" ) and Peter J. Sprague (hereinafter " Sprague" ), President and Chairman of the Board of NSC, respectively, engaged in a conspiratorial course of conduct to artificially inflate the value of NSC stock in order to permit Sporck and Sprague to dispose of their privately owned

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shares at the inflated value. The plaintiff contends that the defendants Sporck and Sprague actively misrepresented and failed to disclose facts that hindered potential and actual investors from gaining an accurate portrayal of the financial condition of NSC and that as a result many investors sustained losses when the market finally reflected the actual value of the stock. The plaintiff seeks to represent the class in rectifying this alleged securities violation because on October 1, 1976, he purchased 500 shares of NSC common stock at $35.75 per share and subsequently sold these same shares on February 3, 1977, at the price of $19.50 per share, a loss of $16.25 per share.

The Complaint instituting this litigation was filed on December 13, 1977, several months after the plaintiff had sold his shares of NSC common stock. Apparently, the plaintiff had considered various forms of legal recourse at an earlier date but was without sufficient legal or factual knowledge to pursue them independently. He, therefore, retained Richard D. Greenfield, Esquire, for the express purpose of unearthing the facts that occasioned his financial loss and ascertaining whether a legal remedy was available. Ultimately, a Complaint was prepared and ratified by the plaintiff which commenced this litigation.

II. Factual Summary.

NSC is engaged in a high-technology industry that requires the continuing expenditure of considerable amounts of funds for research, design development and product improvement. Prior to 1977, NSC enjoyed a reputation as one of the most thriving growth companies in the Nation and had quintupled its sales from the proceeding four years. Its commercial and consumer product lines included computer memory components and systems for various models, microprocessors, certain circuits and modules for calculators, digital watch and clock manufacturers, optoelectric products, transducers and supermarket point-of-sale equipment. These products were manufactured in several world-wide locations, among them Bangkok, Thailand; Hong Kong; Malaysia; Scotland; and Santa Clara, California.

According to the plaintiff's allegations and a number of exhibits presented by both parties in their memoranda, NSC was unexpectedly besieged with several intra-company problems in mid-1976 to early-1977 that, perhaps, may be labelled as " growth pains." The Court is not immediately concerned with the exact nature of these production and financial difficulties 1 but rather narrows its attention to statements made by the defendants Sporck and Sprague during the time period involved. In an effort to avoid alienating itself from what would appear to be the gist of the plaintiff's Complaint nondisclosures the Court will maintain awareness of the time gaps between events as well as the events themselves.

On May 26, 1976, a news release emanated from NSC providing information that the Bangkok, Thailand plant which manufactured watch modules and various types of integrated circuits was undergoing labor problems and had been temporarily closed. The release further stated that the products manufactured in Bangkok were also manufactured at other plants that were increasing production activity. Although these plants could attempt to compensate for the effect of the shutdown, NSC predicted a diminishment in sales for the fourth fiscal quarter of 1976, ending May 31, 1976.

As predicted, the Bangkok shutdown did effect fourth quarter sales and thus directly the fiscal-year profits of NSC. In a New York Magazine article dated July 12, 1976, the defendant Sprague told an interviewer

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to expect a $1.45 price-earnings multiple for the fiscal year, down 20¢ from original Wall Street projections. Perhaps in an effort to buttress the company's image, however, the defendant Sprague continued:

" Whether National slips 20 percent or gains 20 percent, it's still traveling on a very fast bus."

He attributed the earnings shortfall to mounting expenses, namely the addition of some 4,000 employees in the last four months. Since National Semiconductor is planning to add another 7,000 workers over the next ten to twelve months, it struck me that more earnings disappointments could be on the way. Not so, Sprague insists: " we're paying the bill now for a higher level of sales and earnings that has yet to be achieved. But these expenses won't be relevant six months out, since the semiconductor business (75 percent of company sales) is going into a boom mode. Semiconductors are now in a shortage situation and it's getting worse. And with prices stabilizing, our profit margins are bound to improve."

According to Sprague, earnings of about $2.75 a share are a " reasonable expectation" for fiscal 1977. Further, he expects fiscal-1977 volume to top $500 million, versus an estimated $320 million in fiscal 1976. The strength of the semiconductor business is such, Sprague said, that it should offset any problems that may arise from competition in such consumer electronics as digital watches and pocket calculators (about 20 percent of sales). (Emphasis added).

Dorfman, New York Magazine, July 12, 1976, at 12, col. 3. The interview comprising the substance of this article was held on July 9, 1976.

NSC issued another News Release and its Annual Report in late July, 1976, in both of which it announced manufacturing problems with its semiconductor digital watch components. The predicted effect of this was that there would be a reduction in output which would effect sales and earnings throughout the first quarter of fiscal-year 1977. An improvement was expected during the second quarter but Sporck was quoted as saying: " (T)he first quarter dollar loss in chip, module and finished watch production for this product line will be difficult to make up during the Company's fiscal year which ends May 31, 1977." (Emphasis added). A literal reading of this statement would appear to lend itself to a limited interpretation that only profits attributable to this particular product line would be effected rather than total company profits from the combined yields of all product lines. This interpretation would appear to be consistent with the closing paragraph of the defendants Sporck's and Sprague's letter to the stockholders contained in the Annual Report:

In summary, fiscal 1976 was a year of resolution and growth for National despite the industry's downturn during the first half. We enlarged our manufacturing capacity; we increased our production processing capabilities; we expanded our product line and customer base; we entered new markets; we increased our sales and earnings. All of these form a solid foundation for our entry into fiscal 1977 and it should be an exciting year.

On July 30, 1976, the problems detailed in the aforementioned News Release and Annual Report were announced by the Company at a widely attended analyst meeting. Again it predicted a depressed level for the first quarter but that there would be a significant rebound in the second quarter. Stock market analysts generally remained optimistic and predicted that NSC would perform well over its fiscal year, preferring to rely upon NSC's corporate history and outstanding reputation as a growth company rather than the several recent negative occurrences. Kidder, Peabody & Co., in an August 30, 1976 research memorandum, stated that regardless of...

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