Diceon Electronics, Inc. v. Calvary Partners, LP

• Decision Date: 22 August 1991
• Docket Number: Civ. A. No. 90-753-JLL.
• Citation: 772 F. Supp. 859
• Parties: DICEON ELECTRONICS, INC., Plaintiff, v. CALVARY PARTNERS, L.P., Calvary Holdings, Inc., Calvary Partners, Inc., James R. Arabia, and Bernice H. Feicht, Defendants.
• Court: U.S. District Court — District of Delaware

772 F. Supp. 859

DICEON ELECTRONICS, INC., Plaintiff, v. CALVARY PARTNERS, L.P., Calvary Holdings, Inc., Calvary Partners, Inc., James R. Arabia, and Bernice H. Feicht, Defendants.

Civ. A. No. 90-753-JLL.

United States District Court, D. Delaware.

August 22, 1991.

Kenneth J. Nachbar of Morris, Nichols, Arsht & Tunnell, Wilmington, Del., for plaintiff.

Jesse A. Finkelstein and Mark A. Morton of Richards, Layton & Finger, Wilmington, Del., and Wilson, Sonsini, Goodrich & Rosati of Palo Alto, Cal., of counsel, for defendants Calvary Partners, L.P., Calvary Holdings, Inc., Calvary Partners, Inc., and James R. Arabia.

Bruce M. Stargatt of Young, Conaway, Stargatt & Taylor, Wilmington, Del., for defendant Bernice H. Feicht.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

This action was brought by the plaintiff Diceon Electronics, Inc. against the defendants Calvary Partners, L.P.; Calvary Holdings, Inc.; Calvary Partners, Inc.; James R. Arabia; and Bernice H. Feicht (collectively "Calvary"). The plaintiff seeks damages and injunctive relief against the defendants based upon their alleged violations of §§ 13(d), 14(a), 14(d) and 14(e) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C.A. §§ 78m(d), 78n(a), 78n(d) and 78n(e) (1981 & Supp.1991), and the Rules promulgated thereunder. (Second Amended and Supplemental Complaint, Docket Item "D.I." 25). The plaintiff also seeks damages based on pendent state law claims which allegedly arise from the defendants' efforts to gain control of Diceon by means of a fraudulent tender offer and proxy contest. (D.I. 25).

This action is presently before the Court on the defendants' motion to dismiss the plaintiff's action pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), and for mootness. The defendants aver that: (1) due to corrective filings they are no longer in violation of the securities laws, and (2) the plaintiff has not clearly stated any claim for relief that can be granted under §§ 13(d), 14(a), 14(d) or 14(e) of the 1934 Act, or under common law fraud. (D.I. 27, 34 & 63). After having heard oral argument on August 15, 1991 and considered the briefs of the parties, the Court will deny the defendants' motion to dismiss.

I. JURISDICTION

The plaintiff has sufficiently alleged jurisdiction in this Court pursuant to 28 U.S.C. §§ 1331, 1337 and § 20 of the 1934 Act. (D.I. 25 at ¶ 7). If one of the plaintiff's federal securities law claims survives this motion to dismiss, the Court may take pendent jurisdiction of the plaintiff's state law fraud claim. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Markowitz v. Northeast Land Co., 906 F.2d 100, 106 (3d Cir. 1990).

II. THE COURT'S LIMITED FACTUAL INQUIRY UNDER Fed.R.Civ.P. 12(b)(6)

A. Fed.R.Civ.P. 12(b)(6) Generally

Since no answers have yet been filed in this action, the defendants' motion is properly a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6). For purposes of this motion, all facts alleged in the plaintiff's complaint must be taken as true. On a motion to dismiss the Court is free to take judicial notice of certain facts that are of public record if they are provided to the Court by the party seeking to have them considered. MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir.1986); Phillips v. Bureau of Prisons, 591 F.2d 966, 969 (D.C.Cir.1979); 2A J. Moore, Moore's Federal Practice ¶ 12.072.-5, at 12-68 (2ed.1991); see also Huntt v. Gov't of the Virgin Islands, 339 F.2d 309, 310 (3d Cir.1964). Securities and Exchange Commission ("SEC") filings fall within this category of public records that can be judicially noticed. Kramer v. Time Warner, Inc., 937 F.2d 767 (2d Cir.1991) (On a 12(b)(6) motion court may consider SEC filings because judicial notice of such filings is appropriate under Fed.R.Evid. 201(b)(2) and they are not admitted for their truth.); cf. Massachusetts v. Westcott, 431 U.S. 322, 323 n. 2, 97 S.Ct. 1755, 1756 n. 2, 52 L.Ed.2d 349 (1977) ("Records of the Merchant Vessel Documentation Division of the Coast Guard ... may be judicially noticed."); see generally Fed.R.Evid. 201(b)(2) ("A judicially noticed fact must be one not subject to reasonable dispute in that it is ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.").

B. The Factual Allegations in the Complaint and Assertions Made by the Defendants

In its complaint the plaintiff alleges that the defendants have violated §§ 13(d), 14(a), 14(d) and 14(e) of the 1934 Act and the SEC Rules promulgated thereunder and that they continue to violate all but § 14(a). (D.I. 25).

Section 14(a) of the 1934 Act deals with the solicitation of proxies. Diceon has alleged that beginning on or about December 26, 1990 the defendants attempted to solicit proxies by means of false and misleading statements in violation of § 14(a) (D.I. 25 at ¶¶ 11, 15 & 16), and that Diceon, as a result, was forced to spend money to oppose these solicitations. Diceon's efforts were successful. At the annual meeting held on January 23, 1991 Diceon's management received proxies for more than 80% of the outstanding shares of Diceon. (Id. at ¶ 18). The proxy contest is now over.

The section 13(d), 14(d) and 14(e) claims pertain to the defendants' allegedly fraudulent tender offer. According to the complaint, the defendants made several material misstatements and omissions in connection with this tender offer. (D.I. 25). Though some of the omissions were remedied as of January 4, 1991 (Id. at ¶¶ 44, 45, 55, 56, 62, 65 & 75), several others have not yet been corrected. (Id. at ¶ 44 & 55). Since the tender offer is still outstanding (Id. at ¶ 14), these alleged violations are continuing.

The defendants however, assert in their briefs that they are now in full compliance with the securities laws. This bald assertion of fact is made without documentary evidence, such as copies of the defendants' amended SEC filings.¹ Though the Court could have considered such filings on a motion to dismiss, if provided by the parties, the absence of such evidence will not affect the Court's determination of the present motion. While it is true that updated SEC filings would have shown the Court that certain information had been disclosed by the defendants, the Court would nonetheless be unable to determine from the filings whether additional information was improperly kept secret. Under these circumstances the Court cannot conclude, as a matter of law, that there is no set of facts by which the plaintiff can sustain the claims in its complaint. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); accord Neitzke v. Williams, 490 U.S. 319, 326-27, 109 S.Ct. 1827, 1832, 104 L.Ed.2d 338 (1989). Accordingly, for purposes of this motion, the Court must assume: (1) that the defendants are in continuing violation of §§ 13(d), 14(d) and 14(e) of the 1934 Act and the SEC rules promulgated thereunder, and (2) that the defendants, at some point in the past, violated § 14(a) of the 1934 Act, and the rules promulgated thereunder. The Court, however, cannot end its inquiry here.

III. THE PLAINTIFF'S COMMON LAW FRAUD CLAIM

The plaintiff has also pled a common law action for fraud against the defendants. (D.I. 58 at ¶¶ 7, 20, 22 & 23). For purposes of this motion, the Court concludes that the plaintiff's fraud claim satisfies the pleading requirements of Fed. R.Civ.P. 8(a) and 9(b).

The complaint indicates that the defendants made a tender offer for Diceon that was conditioned on the defendants obtaining financing, and hinged on their receiving sufficient proxies to install a new board of directors and amend the by-laws. According to the complaint, the defendants had no intention of consummating this tender offer and knew that it could not be financed. Instead, the defendants expected that the tender offer would induce shareholders to tender proxies in favor of the defendants, and that they would thus be able to gain control of Diceon without having to purchase any of the tendered shares, ostensibly due to a lack of financing. In its complaint, the plaintiff provides more specific facts and thus sufficiently alleges fraud. (Id. at ¶ 16). The Court will therefore not dismiss the plaintiff's common law fraud claim unless all of the plaintiff's federal causes of action are dismissed and it appears that the Court can no longer retain pendent jurisdiction over the state law claim.

The Court notes that under Delaware law damages are an available remedy for fraud. Hegarty v. American Commonwealths Power Corp., 19 Del.Ch. 86, 163 A. 616, 619 (1932). If, therefore, the Court has jurisdiction over one of the plaintiff's federal securities law claims, the plaintiff may be able to recover damages under a pendent state law fraud claim.

IV. IMPLIED CAUSES OF ACTION UNDER SECTIONS 13(d), 14(a), 14(d) AND 14(e) OF THE SECURITIES AND EXCHANGE ACT OF 1934

A. The General Standard for Determining the Existence of an Implied Right of Action under the Securities Laws

Diceon seeks both damages and equitable relief, but the provisions of the 1934 Act upon which Diceon's federal claims rest do not explicitly permit private enforcement. The Court will therefore have to determine whether under §§ 13(d), 14(a), 14(d) or 14(e): (1) there is an implied private right of action, and (2) a target issuer such as Diceon has standing to raise such claims.² The Supreme Court has established guidelines the lower courts are expected to use when they address these questions.

In Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 2088, 45 L.Ed.2d 26 (1975) the Supreme Court set out the following with respect to implied rights of action:

In determining whether a private remedy is implicit in a statute not expressly providing one, several factors are relevant. First, is the plaintiff one of the class for whose especial benefit

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