Kaplan v. Rose

Decision Date09 February 1995
Docket Number92-56055,Nos. 92-55879,s. 92-55879
Citation49 F.3d 1363
PartiesFed. Sec. L. Rep. P 98,422 William KAPLAN, Administrator of the Estate of Lois Kaplan, on behalf of himself and all others similarly situated; Thomas Devere, Plaintiffs-Appellants, v. Freeman ROSE; Errol Payne; Richard Penfil; David Radlinski; Weeden & Co., L.P.; Medstone International, Inc., Defendants-Appellees. Georgiane KRAMER, on behalf of herself and all others similarly situated, Plaintiffs-Appellants, v. Freeman ROSE; Medstone International, Inc.; Errol Payne; Richard Penfil; David Radlinski; Weeden & Co., L.P., Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Leonard B. Simon, Milberg Weiss Bershad Specthrie & Lerach, Edward M. Gergosian, Barrack, Rudos & Racine, San Diego, CA, for plaintiffs-appellants.

Paul L. Gale and Darryl S. Gibson, Stradling, Yocca, Carlson & Rauth, Newport Beach, CA, for defendant-appellee Freeman Rose.

Robert E. Currie, Latham & Watkins, Costa Mesa, CA, for other defendants-appellees.

Appeals from the United States District Court for the Central District of California.

Before: BROWNING, BOOCHEVER, and KLEINFELD, Circuit Judges.

BOOCHEVER, Circuit Judge:

William Kaplan appeals the district court's grant of summary judgment to the defendants in his class action alleging securities violations against Medstone International, Inc., various Medstone officers and directors, and an underwriter (hereinafter collectively referred to as "Medstone," or "the defendants," unless individual identification is required). Georgiane Kramer appeals the dismissal as res judicata of her similar class action against the same defendants.

Kaplan alleged that the defendants made numerous material false and misleading statements and omitted material information in the company's prospectus, in violation of Sec. 11 of the Securities Act of 1933. He also alleged that the defendants made false and misleading statements, and omitted material information, from statements made after the prospectus on which the plaintiffs relied in purchasing shares of Medstone stock, in violation of Sec. 10(b) of the Securities and Exchange Act of 1934. Medstone and Kaplan both moved for summary judgment. The district court granted Medstone's motions, finding that the prospectus statements were not false, that Kaplan had not shown reliance on the statements made after the prospectus, and that the defendants had not acted with scienter in making the post-prospectus statements.

On this appeal, the parties dispute which statements and omissions were properly before the district court on summary judgment. Kaplan also argues that there were material issues of fact whether the statements and omissions were false or misleading, whether the plaintiffs relied on the post-prospectus statements under the "fraud on the market" theory, and whether the defendants made the post-prospectus statements with scienter. The parties also dispute the secondary liability of Medstone's chief executive officer as a "controlling person." We reverse in part and affirm in part.

FACTS AND PROCEDURAL BACKGROUND

In 1984, Medstone International, Inc. began engineering, manufacturing, and marketing a shockwave lithotripsy system ("system") for the treatment of kidney stones. Lithotripsy treats kidney stones with soundwaves, disintegrating the stones without invasive surgery. In January 1988, the Food and Drug Administration ("FDA") granted Medstone permission to begin clinical studies to test its system for the treatment of gallstones. Medstone began clinical evaluations. In April 1988, the FDA granted Medstone approval to sell its system to treat kidney stones.

In June 1988, Medstone issued its initial public offering. Medstone's prospectus stated that the Medstone system compared favorably with other lithotripters offered by competitors, that the system had been used successfully to treat kidney stone patients since 1986 and gallstone patients since January 1988, and that Medstone's marketing plan was based on its belief that 2,000 lithotripters would be installed in the United States in the next five to ten years to treat kidney stone and gallstone patients. Following the public offering, Medstone sold 1.15 million shares of its common stock at $13 per share.

In the year following the offering, Medstone issued a number of statements regarding the prospects of its gallstone lithotripsy system. For example, Medstone represented that its gallstone investigations were proceeding as expected; that the demand for lithotripsy to treat kidney stones and gallstones was on the rise and would result in increased demand for Medstone's system; and that Medstone's future was bright.

The price of Medstone's stock increased steadily following the June 1988 public offering to a high closing bid of almost $40 a share in August 1988. In the fall of 1988, Errol Payne resigned as Medstone's Chief By early October 1989, the Medstone stock price had decreased to $15 per share, and it continued to fall to $12 per share by October 18, 1989.

Executive Officer ("CEO"), and shortly thereafter he and his family sold two-thirds of their stock, for $6.5 million. At about the same time, Richard Penfil, Medstone's President, and his family sold one-fourth of their Medstone stock for approximately $2.4-2.5 million. After Penfil's resignation in August of 1989, Penfil and his family sold the vast majority of their remaining stock for an additional $4.5 million.

On October 20, 1989, the FDA announced that it would not approve Medstone's application for its system to treat gallstones, because it lacked "reasonable assurance that the device is effective." The FDA also denied the application for gallstone lithotripsy of Medstone's main competitor, the German company Dornier Medizintechnic GmbH ("Dornier"). A week following the October 20, 1989 announcement, the price of Medstone stock fell to as low as $6 per share.

On October 25, 1989, William Kaplan, as administrator of the estate of a Medstone shareholder, filed a shareholder class action against Medstone alleging violations of federal securities law. In addition to Medstone, Kaplan named the following defendants: Payne (Medstone's former CEO); Penfil (Medstone's former president); Freeman Rose (Medstone's Executive Vice President of Engineering at the time of the offering, and Medstone's CEO from July 1988 to July 1990); David Radlinski (Medstone's Vice President of Finance and Chief Financial Officer ("CFO")); and Weeden & Co., L.P. ("Weeden") (the underwriter of Medstone's initial public offering). Kaplan alleged that the defendants made false and misleading statements in the initial public offering on June 2, 1988, and that up until October 20, 1989, the date of the FDA's rejection of Medstone's application for approval of its gallstone lithotripsy system, they issued further misleading statements inflating the prospects for the success of Medstone's system in treating gallstones.

Shortly after Kaplan filed a second amended complaint on August 2, 1990, the district court granted Kaplan's motion for class certification. The deadline to amend the pleadings or join other parties was set at May 13, 1991.

On June 11, 1991, Georgiane Kramer, a member of the class of Medstone shareholders, filed a separate class action securities fraud complaint against the same defendants named in the Kaplan action. On October 7, 1991, the district court dismissed the Kramer complaint as barred by the statute of limitations, but later reinstated Kramer's claims regarding statements made after the prospectus. On March 17, 1992, Kramer filed a first amended complaint, and shortly thereafter filed a motion for consolidation with Kaplan.

Meanwhile, Kaplan filed a motion for summary judgment on his claims regarding statements in the prospectus and a motion for summary adjudication of facts on the claims regarding Medstone's statements after the prospectus. Medstone filed motions for summary judgment on all Kaplan's claims. The district court granted in full Medstone's motions for summary judgment and denied Kaplan's motions. Without ruling on Kramer's motion for consolidation, the district court dismissed Kramer as res judicata.

DISCUSSION
I. Statements by Medstone properly before the district court on the motions for summary judgment
A. The nine statements before the court on summary judgment

We must first determine which of Medstone's statements are properly before us on appeal. Kaplan alleges that the district court improperly granted summary judgment for Medstone on thirteen statements that Kaplan claims were false and misleading. Medstone responds that only three of the alleged misstatements identified by Kaplan on appeal were before the district court on summary judgment, and that the remainder were specifically rejected as late attempts to amend the pleadings. Medstone is wrong. Nine of the thirteen statements Of course, locating these statements somewhere in the pleadings does not answer whether they were properly before the district court on summary judgment, so that we may consider them on this appeal. To preserve his claims regarding these statements for appeal, Kaplan's opposition to Medstone's motions for summary judgment must have informed the district court of the legal or factual reasons why summary judgment was inappropriate. Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 466-67 (9th Cir.1990). See also In re Worlds of Wonder Sec. Litig., 814 F.Supp. 850, 861 n. 8 (N.D.Cal.1993) ("Worlds of Wonder I" ) (where parties "have thrown in the proverbial kitchen sink" with numerous allegations of misleading statements or omissions in complaint, district court addresses only those contentions raised by parties in opposition papers), aff'd in part, 35 F.3d 1407 (9th Cir.1994). All the alleged misstatements that Kaplan cites on appeal appear in the...

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