Diamond Multimedia Systems, Inc. v. Superior Court

• Decision Date: 04 January 1999
• Docket Number: No. S058723,S058723
• Citation: 19 Cal.4th 1036,80 Cal.Rptr.2d 828,968 P.2d 539
• Court: California Supreme Court
• Parties: , 968 P.2d 539, 99 Cal. Daily Op. Serv. 84 DIAMOND MULTIMEDIA SYSTEMS, INC. et al., Petitioners, v. SUPERIOR COURT of Santa Clara County, Respondent; Joanne Pass et al., Real Parties in Interest

Page 828

80 Cal.Rptr.2d 828

19 Cal.4th 1036, 968 P.2d 539, 99 Cal. Daily Op. Serv. 84

DIAMOND MULTIMEDIA SYSTEMS, INC. et al., Petitioners, v. SUPERIOR COURT of Santa Clara County, Respondent;

Joanne Pass et al., Real Parties in Interest.

No. S058723.

Supreme Court of California

Jan. 4, 1999.

Wilson Sonsini Goodrich & Rosati, Steven M. Schatz, Terry T. Johnson, Marta Cervantes, Thomas J. Martin and Rebecca A. Mitchells, Palo Alto, for Petitioners.

Daniel J. Popeo, David M. Young, Woodland; and Lawrence W. Schonbrun, Berkeley, for Washington Legal Foundation and Allied Educational Foundation as Amicus Curiae on behalf of Petitioners.

Brobeck, Phleger & Harrison, Thomas M. Peterson, Tower C. Snow, Jr., Robert P. Varian, John B. Missing, Sara B. Brody, Patrick Thomas Murphy and Rachael E. Meny, San Francisco, for the Securities Industry Association, the National Venture Capital Association and the American Electronics Association as Amicus Curiae on behalf of Petitioners.

Shearman & Sterling, Jeffrey S. Facter, David L. Anderson and Michele F. Kyrouz, San Francisco, for Adobe Systems Incorporated as Amicus Curiae on behalf of Petitioners.

No appearance for Respondent.

Milberg Weiss Bershad Hynes & Lerach, Alan Schulman, San Diego, Mark Solomon, William S. Dato; Abbey, Gardy & Squitieri, Arthur N. Abbey, Jill S. Abrams, James J. Seirmarco; Bernstein Litowitz Berger & Grossmann, Daniel L. Berger, Jeffrey N. Leibell; Faruqi & Faruqi, Nadeem Faruqi; Stull, Stull & Brody and Jules Brody, New York City, for Real Parties in Interest Joanne Pass et al.

Barack, Rodos & Bacine, Edward M. Gergosian, Kristi A. Shelton, San Diego; Burt & Pucillo, Michael J. Pucillo and Wendy H. Zoberman, Palm Beach, for Real Party in Interest the Lauren Group.

James McMahon; Harold E. Dunbar, Harrisburg; Berman, DeValerio, Pease & Tabacco and Joseph J. Tabacco, Jr., San Francisco, for the Pennsylvania State Employees' Retirement System and the Missouri State Employees' Retirement System as Amicus Curiae on behalf of Real Parties in Interest Joanne Pass et al. Mooney, Green, Baker, Gibson and Saindon and Robert H. Stropp, Jr., Washington, DC, for National Council of Senior Citizens as Amicus Curiae on behalf of Real Parties in Interest Joanne Pass et al.

Earl V. Brown, Jr., Costa Mesa; and Judy Scott, San Francisco, for the International Brotherhood of Teamsters and the Service Employees International Union as Amicus Curiae on behalf of Real Parties in Interest Joanne Pass et al.

Rossbacher & Associates and Henry H. Rossbacher, Los Angeles, for National Council of Senior Citizens, the International Brotherhood of Teamsters and the Service Employees International Union as Amicus Curiae on behalf of Real Parties in Interest Joanne Pass et al.

BAXTER, J.

Corporations Code section 25400, a part of the Corporate Securities Law of 1968 (§ 25000 et seq.), ¹ provides that it is unlawful in this state to make false statements or engage in specified fraudulent transactions which affect the market for a security when done for the purpose of inducing purchase or sale of the security or raising or depressing the price of the security. In short, it prohibits market manipulation. ² Section 25500 creates a civil remedy for buyers or sellers of stock ³ the price of which has been affected by the forms of market manipulation proscribed by section 25400.

The principal question in this mandamus action is whether that civil remedy is available to out-of-state purchasers who bought or sold a stock whose price was affected by market manipulation if the purchase or sale took place outside the State of California. The matter reached this court after the Court of Appeal summarily denied a petition for writ of mandate by which petitioners, defendants in the underlying lawsuit, sought to compel the Santa Clara County Superior Court to sustain their demurrer and dismiss a class action seeking damages under section 25500 for an alleged violation of section 25400. This court granted review and issued an order to show cause. We conclude that this action is properly brought under sections 25400 and 25500 and affirm the judgment of the Court of Appeal.

I The Superior Court Action

Plaintiff Joanne Pass filed the underlying action as a class action on behalf of all purchasers of the common stock of Diamond Multimedia Systems, Inc. (Diamond Multimedia) between October 26, 1995, and June 20, 1996, except the named defendants and their families. The named defendants are Diamond Multimedia, Hyung Hwe Huh, its senior vice-president and chief technical officer; William J. Schroeder, board member, president, and chief executive officer; Gary B. Filler, senior vice-president and chief financial officer; and Chong-Moon Lee, founder and chairman of the board. Lee, Filler, and Schroeder controlled Diamond Multimedia through their board positions and stock ownership.

A. General allegations.

The complaint alleges ⁴ that all of the individual defendants were aware of adverse nonpublic information about Diamond Multimedia's business, finances, product, markets and present and future business prospects. Each was aware of and approved false statements issued by or on behalf of Diamond Multimedia during the class period. ⁵ The November 1995 stock offering which followed raised over $94 million for Diamond Multimedia while the individual defendants each received more than $2 million for the shares they sold, based on their insider information, at the artificially inflated price.

Diamond Multimedia is a manufacturer and supplier of graphics accelerator and modem products, having its executive offices and principal place of business in San Jose, California. Its shares are traded on the NASDAQ National Market system. ⁶ During the class period the shares rose from just under $20 per share on April 13, 1995, to over $40 per share in December 1995. At the time of a November 1995 offering, Diamond Multimedia sold 3.15 million shares, the individual defendants sold 315,041 shares at prices in the $30 per share range. In January through March 1996, the individual defendants sold 226,672 shares and in April and May 1996, they sold $136,250 worth of shares. The price of the shares had declined to the $20 per share range at that time. The price fell to as low as 9 1/8 per share following a June 20, 1996, revelation by Diamond Multimedia that it would suffer a loss and subsequent admission that it would write down its inventory.

The plaintiff class includes California residents and others throughout the United States. Pass alleged that she had purchased 800 shares of Diamond Multimedia stock on May 17, 1996, at 18 3/4 per share. The place of purchase is not stated.

B. The section 25400 cause of action.

The complaint purports to state a cause of action under subdivision (d) of section 25400 which provides: "It is unlawful for any person, directly or indirectly, in this state: [p] ... [p] (d) If such person is a broker-dealer or other person selling or offering for sale or purchasing or offering to purchase the security, to make, for the purpose of inducing the purchase or sale of such security by others, any statement which was, at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or which omitted to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, and which he knew or had reasonable ground to believe was so false or misleading."

In support of section 25400 cause of action, the complaint alleges that defendants individually and pursuant to a conspiracy, or as aiders and abetters of one another, made untrue statements of material facts, omitted to state material facts necessary to make the statements not misleading, and engaged in acts, practices, and a course of conduct which operated as a fraud and deceit upon class members in order to sell their own Diamond Multimedia shares or induce the purchase of Diamond Multimedia stock by plaintiff and members of the class. Defendants sold or offered for sale Diamond Multimedia shares during the class period or willfully participated in such sales or offerings for sale. Defendants offered to sell or sold Diamond Multimedia shares by means of written or oral communications which included untrue statements of a material fact or omitted to state material facts necessary to make the statements not misleading. Members of the plaintiff class suffered damages because they relied on the integrity of the market when they purchased Diamond Multimedia shares at artificially inflated prices. Plaintiffs would not have purchased the shares at the price paid or at all had they been aware that the market price had been artificially and falsely inflated by defendants' misleading statements and concealments. At the time of their purchases the fair market value of the shares was substantially less than the price paid by class members.

Compensatory and punitive damages, pre- and post-judgment interest, attorneys and experts fees, and equitable or injunctive relief were sought.

Diamond Multimedia and all of the individual defendants except Lee (collectively Diamond Multimedia or defendants) demurred generally (Code Civ. Proc., § 430.10, subd. (e)) on the ground that the complaint did not state facts sufficient to constitute a cause of action as to either cause of action. ⁷

The first of several bases for relief offered by Diamond Multimedia in support of its demurrer to the Corporate Securities Law cause of action was an argument that the complaint failed to plead the jurisdictional prerequisite for actions under sections 25400 and 25500 because there was no allegation that any stock purchases were made "in this state." ⁸ Legislative history materials accompanied the memorandum of points and authorities. At the hearing on the demurrer, Diamond Multimedia argued that the...