Friedberg v. Discreet Logic Inc.
| Decision Date | 07 March 1997 |
| Docket Number | Civil Action No. 96-11232-EFH. |
| Citation | 959 F.Supp. 42 |
| Parties | Bruce FRIEDBERG, on behalf of himself and all others similarly situated, Plaintiff, v. DISCREET LOGIC INC., Richard J. Szalwinski, David N. Macrae, Gary G. Tregaskis, Douglas R. Johnson and Thomas Cantwell, Defendants. |
| Court | U.S. District Court — District of Massachusetts |
Glen DeValerio, Berman, DeValerio & Pease, Boston, MA, Max W. Berger, Douglas M. McKeige, Bernstein, Litowitz, Berger & Grossman, New York City, for Bruce Freidberg.
Peter E. Gelhaar, Donnelly, Conroy & Gelhaar, Boston, MA, David S. Steuer, Denise M. Amantea, Joanne R. Scully, Lloyd Winawer, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, Brian E. Pastuszenski, William L. Prickett, Testa, Hurwitz & Thibeault, Boston, MA, for Discreet Logic Inc., Richard J. Szalwinski, David N. Macrae, Gary G. Tregaskis, Douglas R. Johnson, Thomas Cantwell.
The question before the Court is whether the Plaintiff's Complaint states a claim for fraud under the federal securities laws, 15 U.S.C. § 78j(b), and whether the Plaintiff's Complaint satisfies the heightened pleading standard codified at 15 U.S.C. § 78u-4.
The question is raised by a Motion to Dismiss filed pursuant to Fed.R.Civ.P. 12(b)(6) by the defendants. In reviewing this Motion, the Court "must take the allegations in the complaint as true and must make all reasonable inferences in favor of the plaintiffs." Watterson v. Page, 987 F.2d 1, 3 (1st Cir.1993) (citing Monahan v. Dorchester Counseling Ctr., Inc., 961 F.2d 987, 988 (1st Cir.1992)). The Court may grant dismissal only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Roeder v. Alpha Industries, Inc. 814 F.2d 22, 25 (1st Cir.1987) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)).
The Plaintiff, Bruce Friedberg, has filed a securities fraud claim against Discreet Logic, Inc., and several of its officers. His complaint, in substance, alleges that (1) in November of 1995 Discreet Logic, Inc. ("Discreet") issued a Secondary Public Offering ("SPO") of its stock to the purchasing public; (2) at the time of this issuance Discreet had knowledge that new technology, soon to be introduced to the market, would render its current product line obsolete; and (3) that Discreet failed to disclose this information to the prospective purchasers of its stock. His complaint more specifically alleges:
1. Discreet sells computer systems which create special visual effects for feature films and other applications. ¶ 4.1 It conducted its Initial Public Offering ("IPO") in June, 1995. ¶ 32. In September, 1995, Discreet announced record results for its 1995 fiscal year, ending July 31, 1995, with net income of $ .63 per share, compared with $ .04 per share for fiscal year 1994. Net sales in fiscal year 1995 were $64.5 million, compared with net sales of $15.4 million for fiscal year 1994. ¶ 37.
2. Buoyed by the success of its IPO and its record results for fiscal year 1995, on or about October 5, 1995, Discreet announced that it would commence a SPO. In conjunction with the SPO, Discreet filed a Registration Statement (the "Registration Statement") and Prospectus (the "Prospectus") with the SEC on or about October 5, 1995, signed by defendants Szalwinski, Macrae, Johnson, Cantwell and Tregaskis. ¶ 39.
3. Prior to the November 14, 1995 SPO, certain of Discreet's senior officers, including defendants Szalwinski and Johnson, participated in a "Roadshow" held in major cities to build investor interest in the SPO. At the "Roadshow" meetings these officers made presentations to potential purchasers of Discreet stock. At these presentations defendants Szalwinski and Johnson told potential investors that there were no significant problems with Discreet's business or management and that its future had never been brighter. They confirmed that Discreet would achieve strong sequential quarterly revenue and earnings growth throughout fiscal year 1996, with fiscal 1996 revenues to be over $125 million and fiscal 1996 earnings to be approximately $ .50 per share. These officers assured potential investors that there would be further revenue and earnings per share gains in fiscal year 1997. ¶ 42
4. On November 14, 1995, the Registration Statement and Prospectus for the SPO became effective. Defendants sold 3.2 million Discreet shares to the public at $30.25 per share. Of the 3.2 million shares sold, 1.8 million shares were sold by the Individual Defendants. ¶¶ 40, 41.
5. Defendant Richard J. Szalwinski ("Szalwinski") was Chairman of the Board of Directors of Discreet. In the SPO, he sold 645,944 shares of Discreet, or approximately 11 percent of his holdings, at $28.74 per share (which cost him $ .0005 per share), and realized profits of $18.5 million. ¶ 17; Prospectus, pp. 48 and 51.
6. Defendant David N. Macrae ("Macrae") was President and Chief Executive Officer of Discreet. In the SPO, he sold 400,000 shares, or 33 percent of his holdings, at $28.74 per share (which cost him $1.63 per share), and realized profits of $11.4 million. ¶ 18; Prospectus, pp. 48 and 51.
7. Defendant Thomas Cantwell ("Cantwell") was a Director of the Company. In the SPO, he sold 383,333 Discreet shares, or approximately 11 percent of his holdings, at $28.74 per share, and realized profits of $11 million. ¶ 19; Prospectus, pp. 48 and 51.
8. Defendant Gary G. Tregaskis ("Tregaskis") was a Director of the Company. In the SPO, Tregaskis sold 400,000 Discreet shares, or approximately 11 percent of his holdings, at $28.74 per share (which cost him $ .03 per share), and realized profits of $11.4 million. ¶ 20; Prospectus, pp. 48 and 51.
9. Defendant Douglas R. Johnson ("Johnson") was a Vice President and Chief Financial Officer of the Company. In the SPO, he sold 20,000 Discreet shares, or approximately 50 percent of his holdings, at $28.74 per share, and realized profits of $574,800. ¶ 21; Prospectus, pp. 48 and 51.
10. On or about December 14, 1995, the underwriters of the SPO purchased an additional 383,333 common shares in overallotment shares, which were sold to the investing public at a price of $30.25 per share. Of the 383,333 shares sold, defendant Szalwinski sold 129,080 shares, and defendant Cantwell sold 83,333 shares. Aggregate profits for these Individual Defendants totalled in excess of $6.5 million. The Company itself sold an additional 180,020 shares and reaped profits in excess of $5.1 million. ¶ 54.
11. In May of 1994 Discreet had entered into a Master Value-Added Reseller Agreement (the "VAR Agreement") with Silicon Graphics, Inc. ("SGI") which provided Discreet advance access to SGI technology. ¶ 8. In the Prospectus to the SPO, the Company emphasized that the key to its ability to continue to produce its "innovative" technology was because of its close strategic relationship with SGI and because it designed systems that "took advantage" of SGI's computer workstations which enabled Discreet to continue to provide "state-of-the-art digital solutions" and "maintain [its] leading edge technology." The Prospectus noted that all of Discreet's systems "currently include workstations manufactured by SGI." ¶¶ 45, 46.
12. The Company touted in the Prospectus the impressive growth in revenue from sales of its FLAME systems which ran on the SGI Onyx Reality Engine2 workstation and that any factors affecting that workstation would have a material impact on such sales:
sales of FLAME systems will continue to constitute a significant portion of its revenues for the foreseeable future. Accordingly, any factor adversely affecting sales of FLAME systems could have a material adverse effect on the Company's business and results of operations. [Emphasis added].
13. The Prospectus further emphasized that, as a result of the Company's close relationship with SGI, it actually "obtains advance access" to SGI technology:
The company believes that its future success will be based in part on its ability to enhance its existing systems and to introduce new products and features which meet the evolving requirements of creative professionals. In addition, as a master VAR ["Value Added Reseller"] of SGI workstations, the Company obtains advance access to SGI technology in order to develop compatible systems and to modify and improve existing products. [Emphasis added].
14. The Prospectus also stated that there was a possibility that "from time to time, the Company or others may" announce products that had the potential to shorten the lifecycle or replace the Company's existing products and that could have a material adverse impact on the Company's results:
from time to time the Company or others may announce products, features or technologies which have the potential to shorten the life cycle of or replace the company's then existing products. Such announcements could cause customers to defer the decision to buy or determine not to buy the Company's products or cause the Company's distributors to seek to return products to the Company, any of which would have a material adverse effect on the Company's business and results of operations. In addition, there can be no assurance that products or technologies developed by others will not render the Company's products or technologies non-competitive or obsolete. [Emphasis added].
15. On January 22, 1996, SGI announced the introduction of a visualization computer called Onyx Infinite Reality. According to commentators, it was a "breakthrough system [that] simultaneously processes graphics, imaging and video data in real time" and was "up to 100 times faster than the Onyx Reality Engine2 graphics (which Discreet was then using), previously the world's fastest graphics, system." ¶ 55.
16. In connection...
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