Guenther v. Cooper Life Sciences, Inc.

• Decision Date: 12 December 1990
• Docket Number: No. C-89-1823 MHP.,C-89-1823 MHP.
• Citation: 759 F. Supp. 1437
• Court: U.S. District Court — Northern District of California
• Parties: George R. GUENTHER, James L. Krum, Darwin J. Monson, Kenneth J. Perrington, Edward W. Reed, Fred H. Roberts, Richard Volkmann, George Fox, Douglas A. Florine, and John H. Richter, on behalf of themselves and all others similarly situated and derivatively on behalf of Cooper Life Sciences, Inc., Plaintiffs, v. COOPER LIFE SCIENCES, INC.; The Cooper Companies, Inc.; Cooper Development Company; Parker G. Montgomery; A. Kenneth Nilsson; Charles Crocker; Robert W. Jamplis; Barbara Hunter Foster, as Executrix of the Estate of Hugh K. Foster; Michael Mitzmacher; Joseph A. Dornig; Martin M. Koffel; Richard W. Turner; John M. Vuko; Randolph B. Stockwell; Hambrecht & Quist, Inc.; Peat, Marwick Main & Co.; Gryphon Associates, L.P.; and The Gryphon Management Group, Ltd., Defendants.

759 F. Supp. 1437

George R. GUENTHER, James L. Krum, Darwin J. Monson, Kenneth J. Perrington, Edward W. Reed, Fred H. Roberts, Richard Volkmann, George Fox, Douglas A. Florine, and John H. Richter, on behalf of themselves and all others similarly situated and derivatively on behalf of Cooper Life Sciences, Inc., Plaintiffs, v. COOPER LIFE SCIENCES, INC.; The Cooper Companies, Inc.; Cooper Development Company; Parker G. Montgomery; A. Kenneth Nilsson; Charles Crocker; Robert W. Jamplis; Barbara Hunter Foster, as Executrix of the Estate of Hugh K. Foster; Michael Mitzmacher; Joseph A. Dornig; Martin M. Koffel; Richard W. Turner; John M. Vuko; Randolph B. Stockwell; Hambrecht & Quist, Inc.; Peat, Marwick Main & Co.; Gryphon Associates, L.P.; and The Gryphon Management Group, Ltd., Defendants.

No. C-89-1823 MHP.

United States District Court, N.D. California.

December 12, 1990.

Vance K. Opperman, Richard A. Lockridge, W. Joseph Bruckner, Opperman & Paquin, Vernon J. Vander Weide, Head, Hempel, Seifert & Vander Weide, Minneapolis, Minn., Jack Corinblit, Marc M. Seltzer, Corinblit, Shapero & Seltzer, Los Angeles, Cal., for plaintiffs.

Denise M. Amantea, Jared L. Kopel, Valerie D. Lewis, Elizabeth Roth, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, Cal., for Cooper Development Co., Gryphon Associates, L.P., Gryphon Management Group, Ltd., Cooper Life Sciences, Inc., Parker G. Montgomery, A. Kenneth Nilsson, Charles Crocker, Robert W. Jamplis, Barbara Hunter Foster, Michael Mitzmacher, Joseph A. Dornig, Martin M. Koffel, Richard W. Turner, John M. Vuko, Randolph B. Stockwell.

Melvin R. Goldman, Darryl P. Rains, Jordan Eth, Morrison & Foerster, San Francisco, Cal., for Hambrecht & Quist, Inc.

Boake Christensen, Richard North Patterson, Charlene S. Shimada, Charmaine F. Mesina, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for Peat Marwick Main & Co.

Walter C. Robinson, III, Emmett C. Stanton, Ellyn Freed, Pillsbury, Madison & Sutro, San Francisco, Cal., for Cooper Companies, Inc.

Marvin D. Morgenstein, Lee Ann Huntington, Morgenstein & Jubelirer, San Francisco, Cal., for Martin M. Koffel, Richard W. Turner, John M. Vuko.

OPINION

PATEL, District Judge.

Plaintiff investors brought this putative class action alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, including a claim under section 11 of the Securities Exchange Act of 1933, 15 U.S.C. § 77k, and pendent state claims, including a negligence claim against defendant KPMG Peat Marwick ("Peat Marwick"). The parties are now before the court on defendant Peat Marwick's motion for partial summary judgment against plaintiffs' section 11 and negligence claims. Having considered the papers and arguments of the parties, and for the following reasons, the court GRANTS defendant's motion for summary judgment as to plaintiffs' section 11 claims, GRANTS defendant's motion as to the negligence claim of plaintiffs Kenneth J. Perrington and George Fox, and DENIES defendant's motion as to all other plaintiffs' negligence claim.

BACKGROUND

Plaintiffs purport to represent a class of investors who purchased stock in Cooper LaserSonics, Inc. ("CLS"), between June 17, 1985 and January 28, 1988, Revised Second Amended and Supplemental Complaint ("Complaint") at ¶ 24, during which period there were two public offerings of CLS stock. Plaintiffs allege that misleading reports audited by defendant Peat Marwick were included in a February 19, 1986 amendment to a June 14, 1985 registration statement filed in connection with the first public offering, and in a February 27, 1987 registration statement filed in connection with the second public offering.

Plaintiffs purchased their stock in Minnesota and brought this class action in the district of Minnesota. Defendants moved for a transfer of venue pursuant to 28 U.S.C. § 1404(a), which the Minnesota district court granted. Peat Marwick has moved for partial summary judgment against plaintiffs on their section 11 and negligence claims.

LEGAL STANDARD

Under Federal Rule of Civil Procedure 56, summary judgment shall be granted "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial ... since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). See also T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987) (the nonmoving party may not rely on the pleadings but must present specific facts creating a genuine issue of material fact); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (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.").

The court's function, however, is not to make credibility determinations. Anderson, 477 U.S. at 249, 106 S.Ct. at 2510. The inferences to be drawn from the facts must be viewed in a light most favorable to the party opposing the motion. T.W. Elec. Serv., 809 F.2d at 631.

DISCUSSION

Defendant Peat Marwick has moved for partial summary judgment on both plaintiffs' section 11 claim and their negligence claim. Regarding plaintiffs' section 11 claim, defendant argues that plaintiffs lack section 11 standing. On plaintiffs' negligence claim, defendant contends that it owed plaintiffs no duty. Alternatively, defendant argues for summary judgment on the negligence claim of plaintiffs Perrington and Fox because they cannot show actual reliance.

I. Section 11 Standing

A cause of action under section 11 is available only to purchasers of "stock actually issued in the offering for which the plaintiff claims there was a false or otherwise misleading registration statement." Abbey v. Computer Memories, Inc., 634 F.Supp. 870, 872 (N.D.Cal.1986). Thus, to have standing under section 11, plaintiffs must establish that they purchased shares either (1) directly in the public offering for which the misleading registration statement was filed or (2) traceable to that public offering.¹ See Kirkwood v. Taylor, 590 F.Supp. 1375, 1378 (D.Minn. 1984), aff'd, 760 F.2d 272 (8th Cir.1985); Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967). The burden of tracing shares to a particular public offering rests with plaintiffs. Abbey, 634 F.Supp. at 876 n. 5.

Plaintiffs purport to represent a class of investors who purchased CLS shares on the open market at any time from June 17, 1985 through January 28, 1988. Complaint at ¶ 24. CLS filed its first registration statement on June 14, 1985; it amended that statement on February 19, 1986. The amended statement contained the first published allegedly misleading report audited by Peat marwick. Defendants filed another registration statement in connection with a second public offering on February 27, 1987. Plaintiffs allege that this report is also misleading.

Some plaintiffs purchased stock between the filing of the initial registration statement and the allegedly misleading February 1986 amendment. Because the stock purchased by these plaintiffs was not issued pursuant to a defective registration statement, argue defendants, these plaintiffs lack standing. Furthermore, the remaining plaintiffs have not traced their stocks to the February amendment or the second offering, and thus may own shares originally issued in connection with the first registration statement. Because these plaintiffs have not traced their securities to a defective registration statement, defendants argue that they also lack standing under section 11.

The question of how to treat an allegedly misleading post-effective amendment in the context of tracing appears to be one of first impression. It is, however, a question addressed squarely by the same regulation requiring the filing of post-effective amendments:

for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

17 C.F.R. § 229.512(a)(2) (1990).

Under section 13 of the Securities Act of 1933, 15 U.S.C. § 77m, actions under section 11 and section 12(1) must in all instances be brought within three years after the security was first offered. Without section 229.512(a)(2), it is possible that the statute of limitations could run on a section 11 claim in a continuous offering before investors who purchase in a delayed offering even purchase their securities. Section 229.512(a)(2) avoids this anomalous result and "insures that liability protection under the Securities Act remains in force throughout the life of the shelf registration statement," Delayed or Continuous Offering and Sale of Securities, 46 Fed.Reg. 42001, 42003 (1981), by treating post-effective amendments offering securities as the "initial bona fide offering thereof." For securities offered in a post-effective amendment, then, the three-year statute of limitations clock begins running on the date of the amendment rather than the date of the initial offering and registration statement.

In their papers, plaintiffs argue that because no new securities were offered in the February 1986 amendment, the "securities offered therein" must be the securities offered in the initial June 1985 offering.² Thus, according to plaintiffs, the otherwise non-defective 1985 registration statement is rendered retroactively blemished by the defective 1986 amendment. This reading of the provision would enable investors, such as some of the plaintiffs here, to bring a section 11 action even though at the time they purchased their shares they could...