Jakobe v. Rawlings Sporting Goods Co.

• Decision Date: 23 September 1996
• Docket Number: No. 4:95CV2288-DJS.,4:95CV2288-DJS.
• Citation: 943 F.Supp. 1143
• Parties: Henry G. JAKOBE, Jr., Plaintiff, v. RAWLINGS SPORTING GOODS COMPANY, et al., Defendants.
• Court: U.S. District Court — Eastern District of Missouri

943 F.Supp. 1143

Henry G. JAKOBE, Jr., Plaintiff, v. RAWLINGS SPORTING GOODS COMPANY, et al., Defendants.

No. 4:95CV2288-DJS.

United States District Court, E.D. Missouri, Eastern Division.

September 23, 1996.

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Roy A. Walther, III, Walther and Glenn, St. Louis, MO, Don R. Lolli, Partner, Beckett and Lolli, Kansas City, MO, Dennis J. Johnson, South Burlington, VT, Lee S. Shalov, Ralph M. Stone, Milberg & Weiss, New York City, for Henry G. Jakobe, Jr.

Glenn E. Davis, Frank N. Gundlach, Edwin L. Noel, Armstrong and Teasdale, St. Louis, MO, for Rawlings Sporting Goods Company, Inc.

Glenn E. Davis, Frank N. Gundlach, Edwin L. Noel, Susan Cohen Levy, David C. Bohan, Jenner and Block, Chicago, IL, for Carl J. Shields and Harold B. Keene.

ORDER

STOHR, District Judge.

On November 22, 1995, plaintiff Henry G. Jakobe, Jr. filed a class action complaint against Rawlings Sporting Goods Company, Inc. ("Rawlings"), Carl J. Shields and Howard B. Keene¹ alleging violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Plaintiff's complaint stems from defendants' alleged misstatements and omissions regarding the adverse effects of the 1994 baseball strike on the sale of Rawlings' baseball-related products and the price of Rawlings common stock. Defendants' joint motion to dismiss is pending before the Court.

A. Factual Background

From 1967 until July 8, 1994, Rawlings was a wholly owned subsidiary of Figgie International, Inc. ("Figgie"). On July 8, 1994, Figgie sold 100% of its ownership interest in Rawlings pursuant to an initial public offering. In the initial public offering, 7,650,000 shares of Rawlings common stock were sold to the investing public at a price of $12.00 per share. The common stock of Rawlings is actively traded on the NASDAQ National Market Systems.

Plaintiff acquired 1000 shares of Rawlings common stock in a three month period between December, 1994 and March, 1995: 200 shares on December 19, 1994 at a share price of $13.75; 300 shares on February 6, 1995 at a share price of $14.25; and 500 shares on March 17, 1995 at a share price of $10.75.

On March 24, 1995, Rawlings entered into an amendment of its credit agreement with the First National Bank of Chicago. Pursuant to this agreement, Rawlings' pre-existing credit agreement was amended to increase Rawlings' line of credit from $2 to $3 million.

Rawlings is a major supplier of team sports equipment in North America and Japan, with net revenues of $144.1 million in fiscal year 1995. Rawlings manufactures and sells a broad array of baseball, basketball, football and hockey equipment. Since 1977, Rawlings has been the exclusive supplier of baseballs to the National and American Leagues. Since 1994, Rawlings has been the exclusive supplier of baseballs to each of the 18 minor leagues. Rawlings is also the leading supplier of baseball gloves to major and minor league players.

In the United States, Rawlings sells its products directly to approximately 2,500 customers including local sporting good stores, institutional dealers, regional sporting goods chains, national sporting goods chains, sporting goods mega stores and mass merchandisers.

Rawlings' sale of baseball-related products is seasonal. Typically, Rawlings' customers place orders for baseball-related products beginning in July for shipment beginning in October (pre-season orders). These pre-season orders represent approximately 75-80% of Rawlings' sales of baseball-related products during a particular year and largely determine Rawlings' revenues and profitability between October 1 and March 31. Rawlings thereafter receives additional "fill-in" orders depending upon each customer's actual product sales ("sell-through"). Fill-in orders typically account for the remaining 20-25% of Rawlings' sales of baseball-related products during a particular year.

Defendant Shields has been the Chairman of the Board of Directors, Chief Executive Officer and President of Rawlings since July, 1994. As of December 2, 1994, Shields was the beneficial owner of 4,381 shares of Rawlings common stock. In connection with the initial public offering, Shields was granted 108,332 options to purchase shares of Rawlings common stock.

Defendant Keene was Rawlings' Vice President for Foreign Activity and Procurement from November, 1992 to April, 1995. In April, 1995, Keene became Rawlings' Chief Operating Officer. As of December 2, 1994, Keene was also Secretary of Rawlings' Board of Directors. As of December 2, 1994, Keene was the beneficial owner of 3,230 shares of Rawlings common stock. In connection with the initial public offering, Keene was granted 41,250 options to purchase shares of Rawlings common stock. On January 23, 1995, Keene sold 3,230 shares of his Rawlings common stock at a price of $12.88 per share and received approximately $41,600.

On August 12, 1994, major league baseball players went on strike. The strike lasted approximately eight months — the longest work stoppage in professional sports history.

B. Plaintiff's Class Action Complaint

In Count I, plaintiff seeks damages for violations of § 10(b) of the Securities Exchange Act of 1934 ("the Act") and Rule 10b-5 promulgated thereunder. Plaintiff alleges that defendants made various untrue statements of material fact and omitted material facts in order to (1) conceal from investors and Rawlings' lenders adverse information concerning Rawlings' performance; (2) artificially inflate and maintain the market price of Rawlings common stock; and (3) permit Keene to dispose of his Rawlings stock at artificially inflated prices. Plaintiff claims that there was a "fraud on the market" during the alleged class period from November 8, 1994 through June 30, 1995. Plaintiff challenges certain public statements and omissions made by Rawlings' management during the class period as being overly optimistic in light of the baseball strike.

In Count II, plaintiff asserts "controlling person" liability against Keene and Shields under § 20(a) of the Act. Plaintiff alleges that Keene and Shields are liable as direct participants in the above-referenced unlawful conduct and that Keene and Shields exercised control and influenced Rawlings to engage in the above-referenced unlawful conduct.

C. Consideration of Documents Integral to the Complaint

Most of the allegedly actionable statements set forth in the complaint were culled from press releases, an annual report and an SEC filing.² Plaintiff has not attached the full text of any of these documents to his complaint. Defendants, however, have attached each of the documents to their motion to dismiss.³ Plaintiff has not objected to the attachments and, in fact, has referred to them in his memorandum in opposition to defendants' motion to dismiss. See Pltf. Mem. in Opp., p. 13, n. 5.

Before ruling on the motion to dismiss, the Court must address the threshold question of whether it may properly consider the full text of these documents which are partially quoted and referred to in plaintiff's complaint. Although the Eighth Circuit has not addressed the issue, other circuits have found that where a plaintiff does not attach to his complaint a public document upon which he relies, a defendant may produce such document in support of a motion to dismiss if the document is integral to the complaint. See, e.g., San Leandro Emergency Medical Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 809 (2d Cir.1996) (finding that the district court properly considered the full text of documents in ruling on a motion to dismiss in a securities fraud case); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 46-48 (2d Cir.1991), cert. denied, 503 U.S. 960, 112 S.Ct. 1561, 118 L.Ed.2d 208 (1992) (in construing a motion pursuant to Fed.R.Civ.P. 9(b) or 12(b)(6) in a securities fraud case, a court may consider documents outside of the complaint to the extent they are integral to plaintiff's complaint); Lovelace v. Software Spectrum, Inc., 78 F.3d 1015, 1018 (5th Cir. 1996) (in ruling on a motion to dismiss a securities fraud claim, a court may consider the contents of certain relevant public disclosure documents for the purpose of determining what statements the documents contain, not to prove the truth of the documents' contents). At least one district court in this circuit has agreed. See Brogren v. Pohlad, 933 F.Supp. 793, 797-99 (D.Minn.1995).

The Court finds that it is proper to consider the statements in question in their context and that the documents in question are integral to plaintiff's complaint. Accordingly, the Court will consider the full texts of the relevant public disclosure documents to determine what statements the documents contain.

D. The Standard for a Motion to Dismiss

For the purposes of defendants' motion to dismiss, the Court takes all facts alleged in plaintiff's complaint as true. Westcott v. Omaha, 901 F.2d 1486, 1488 (8th Cir.1990). The Court construes the allegations set forth in the complaint and reasonable inferences arising therefrom favorably to plaintiff. Morton v. Becker, 793 F.2d 185, 187 (8th Cir.1986). Nonetheless, the Court need not adopt inferences drawn by plaintiff if such inferences are unsupported by the facts set out in the complaint, nor must the Court accept legal conclusions cast in the form of factual allegations. Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 2944-45, 92 L.Ed.2d 209 (1986).

E. Plaintiff's Factual Allegations

Generally, plaintiff alleges that defendants' optimistic statements regarding Rawlings' current financial status and future prospects were false and misleading because defendants were aware of undisclosed facts that would undermine the accuracy of the representations. Specifically, plaintiff alleges that defendants knew but did not disclose in a timely manner that Rawlings was not receiving fill-in...