In re Delmarva Securities Litigation, Civ. A. No. 91-130MMS

• Decision Date: 15 May 1992
• Docket Number: Civ. A. No. 91-130MMS,91-283MMS.
• Citation: 794 F. Supp. 1293
• Parties: In re DELMARVA SECURITIES LITIGATION.
• Court: U.S. District Court — District of Delaware

794 F. Supp. 1293

In re DELMARVA SECURITIES LITIGATION.

Civ. A. Nos. 91-130MMS, 91-283MMS.

United States District Court, D. Delaware.

May 15, 1992.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Pamela S. Tikellis, James C. Strum (argued), and Edward Seglias, Greenfield & Chimicles, Wilmington, Del., and Richard D. Greenfield (argued), and Mark C. Rifkin, Greenfield & Chimicles, Haverford, Pa.; Of counsel: Gross & Metzger, Philadelphia, Pa., for plaintiffs.

Rodman Ward, Jr., (argued), Robert A. Glen, Cathy J. Pesta, Curtis S. Alva, Cathy L. Reese, and Jeff A. Shumway, Skadden, Arps, Slate, Meagher & Flom, Wilmington, Del., for defendants.

OPINION

MURRAY M. SCHWARTZ, Senior District Judge.

On March 15, 1991, plaintiff Anthony J. Cutrona ("Cutrona") commenced this litigation by filing a class and derivative action against defendants Nevius M. Curtis, Howard E. Cosgrove and H. Ray Landon and naming Delmarva Power & Light Company ("Delmarva" or "Company") as nominal defendants. On May 15, 1991, plaintiffs Leon and Cecelia Moskowitz ("Moskowitz") filed a class action naming as defendants Curtis, Landon, Cosgrove and Delmarva, and asserting claims very similar to the original Complaint filed by Cutrona. On June 10, 1991, this Court granted Cutrona's motion to dismiss Count V of the original Complaint. Also on June 10, 1991 plaintiffs filed a Consolidated and Amended Complaint (the "Amended Complaint") which, among other matters, deleted Count V (the derivative claim), named Delmarva as a defendant and added Roger D. Campbell as a defendant. The Amended Complaint alleges defendants violated Sections 10(b), 14(a) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §§ 78j(b), 78n(a) and 78t(a)); Rules 10b-5 and 141-9 promulgated thereunder; Sections 11, 12 and 15 of the Securities Act of 1933 ("Securities Act") (15 U.S.C. §§ 77k, 77l and 77o); and principles of common law. On June 12, 1991, this Court granted plaintiffs' motion to consolidate formally the Cutrona and Moskowitz actions.

Before the Court now is defendants' motion to dismiss the Consolidated and Amended Complaint based on Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure. For the reasons set forth below, the Court will grant defendants' motion to dismiss.

I. Facts

In 1987, defendant Delmarva¹ began to diversify into non-regulated businesses. In its 1987 Annual Report, Delmarva announced that the diversification effort would be undertaken to realize higher rates of return by going into non-regulated businesses. A subsidiary of Delmarva, Delmarva Capital Technology Company ("DCT"), entered into three joint ventures. The joint ventures were two wood-waste co-generation plants in Redding and Burney, California, and a resource recovery facility ("trash to steam" plant) in Glendon, Pennsylvania. The total investment in these three ventures exceeded $54 million.

Early in 1990, Delmarva disclosed the three joint ventures were having problems. The first problem was announced in Delmarva's 1989 Annual Report and a Form 10-K filed with the SEC on March 23, 1990. These reports announced certain legal problems with the joint venture in Glendon. Then, in a Form 10-Q filed with the SEC on May 15, 1990, subsequent to the election of the defendant directors, Delmarva first indicated actual operating losses occurred at Redding and Burney due to unfavorable lumber market conditions. Delmarva also disclosed at this time that a construction loan agreement for the Redding project had not been converted to a term loan as originally anticipated, that the City of Easton and the Borough of Glendon, Pennsylvania, had refused to issue a necessary waiver and permit for the Glendon resource recovery facility and that, although these refusals were being challenged by Delmarva, management could not predict the outcome of the appeals process.

In August 1990, Delmarva disclosed further problems at the joint ventures in California and Pennsylvania. At that time, Delmarva also reported that "the corporation holding DCT's co-generation plant in Redding, California was contemplating a bankruptcy filing because it was unable to meet its debt payment obligations." (Amended Complaint ("Am.Compl.") ¶ 41). Then, on October 30, 1990, Delmarva disclosed in its Quarterly Report to Stockholders that its "ultimate recovery of the investments" was uncertain and that "if it becomes necessary to write-off the entire investment in these projects, the adverse effect on earnings could approach $0.90 per share." (Am.Compl. ¶ 41). On January 29, 1991, Delmarva disclosed that it was indeed writing down assets related to the three joint ventures at a cost of $0.89 per share, or a total of about $54 million. The write-off reduced the common stockholder's equity by approximately seven percent.

The defendants assert that several factors, beyond Delmarva's control, caused the failure of the investment in the joint ventures. The defendants urge that environmental and regulatory activities in the California ventures' operating area, combined with the demand for wood fuel by other similar projects in the area, resulted in high log and fuel costs. This high cost of logs, the major raw material for the California ventures' wood-burning power plants and adjoining sawmills, adversely affected the ability of the plants to operate profitably.

Plaintiffs² contend that from the outset, the defendants knew or should have known that the three joint ventures were ill-conceived, imprudent investments for Delmarva and were subject to an unacceptably high risk of loss. Moreover, plaintiffs contend that the operating and financial conditions of the joint ventures were concealed throughout 1989 and most of 1990. Plaintiffs allege that despite the growing problems during that time, Delmarva, through its public statements and publicly filed or disseminated documents, misled the market to believe that Delmarva's business, and in particular the diversification of its business, was successful and positioned to achieve consistent earnings growth for the Company. The plaintiffs claim that as a result, Delmarva's net income and assets were overstated materially and the market price of Delmarva common stock was artificially inflated throughout the Class Period, all for the purpose of assuring individual defendants were reelected as directors and officers. In other words, plaintiffs allege defendant directors "entrenched" themselves in their positions as directors by dissemination of false and misleading proxy statements for the 1988-90 annual meetings of Delmarva stockholders.

II. Standard

Under Rule 12(b)(6), a count of a complaint may be dismissed for failure to state a claim only if, when accepting all factual allegations as true and drawing all reasonable inferences from these facts, no relief would be granted under any set of facts that could be proved. Melo v. Hafer, 912 F.2d 628, 634 (3d Cir.1990), aff'd, ___ U.S. ___, 112 S.Ct. 358, 116 L.Ed.2d 301 (1991); Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir.1988) (citing D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir.1984)).

III. Judicial Notice of SEC Filings

As a preliminary matter, plaintiffs contend defendants should not be permitted to utilize public documents referenced in, but not attached to, the Amended Complaint. Plaintiffs urge that all "outside facts" should be stricken. However, all of the "outside facts" are taken from public documents filed with the Securities and Exchange Commission ("SEC"). This 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. SEC filings fall within this category of public records that can be judicially noticed. Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir.1991). See also Southmark Prime Plus, L.P. v. Falzone, 776 F.Supp. 888, 892-93 (D.Del.1991) ("Judicial notice of public i.e., SEC filings is ... appropriate under Rule 201(b)(2)); 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.").³

IV. Count I: Section 10(b) and Rule 10b-5 Claims

A. Economic Loss

Defendants have moved to dismiss Count I, plaintiffs' federal fraud claim based upon Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 140.10b-5 (1990), for failure to state a claim under Fed.R.Civ.P. 12(b)(6).

To state a claim under Rule 10b-5, the plaintiff must allege that the defendant

(1) with scienter — an intent to deceive, manipulate, or defraud, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 194-214, 96 S.Ct. 1375, 1381-91, 47 L.Ed.2d 668 (1976),

(2) made misleading statements or omissions, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 476-77, 97 S.Ct. 1292, 1302-03, 51 L.Ed.2d 480 (1977); Schreiber v. Burlington Norther, Inc., 472 U.S. 1, 7-8, 105 S.Ct. 2458, 2462, 86 L.Ed.2d 1 (1985),

(3) of material fact, TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976),

(4) upon which the plaintiff — a purchaser or seller of the security, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-55, 95 S.Ct. 1917, 1923-35, 44 L.Ed.2d 539 (1975),

(5) relies in entering the transaction, Basic, Inc. v. Levinson, 485 U.S. 224, 243, 108 S.Ct. 978, 989, 99 L.Ed.2d 194 (1988), and

(6) which caused economic loss to the plaintiff. In re Phillips Petroleum Securities Litigation, 881 F.2d 1236, 1244 (3d Cir.1989); Bastian v. Petren Resources Corp., 892 F.2d 680, 683-86 (7th Cir.1990).

Scattergood v. Perelman, 945 F.2d 618, 622 (3d Cir.1991). Attention is turned to the sixth factor, economic loss.

The Amended Complaint variously states throughout the putative Class Period, March 15, 1988, to January 29, 1991, that because of de...