Kassover v. Computer Depot, Inc.

• Decision Date: 27 April 1987
• Docket Number: No. 3-86 CIV 586.,3-86 CIV 586.
• Citation: 691 F. Supp. 1205
• Parties: Ronald KASSOVER, individually and on behalf of other shareholders of Computer Depot, Inc., similarly situated, Plaintiff, v. COMPUTER DEPOT, INC., Stephen B. Parker, Frederick S. Larson, Paul J. Larson, George R.A. Johnson, Erik T. Rossing, Thomas M. Claflin, II, David M. Ehlen, Bruce L. Burnham, Richard W. McEwen, Kidder, Peabody & Co., and Dain Bosworth, Inc., Defendants.
• Court: U.S. District Court — District of Minnesota

691 F. Supp. 1205

Ronald KASSOVER, individually and on behalf of other shareholders of Computer Depot, Inc., similarly situated, Plaintiff, v. COMPUTER DEPOT, INC., Stephen B. Parker, Frederick S. Larson, Paul J. Larson, George R.A. Johnson, Erik T. Rossing, Thomas M. Claflin, II, David M. Ehlen, Bruce L. Burnham, Richard W. McEwen, Kidder, Peabody & Co., and Dain Bosworth, Inc., Defendants.

No. 3-86 CIV 586.

United States District Court, D. Minnesota, Third Division.

April 27, 1987.

COPYRIGHT MATERIAL OMITTED

Schoengold and Sporn, P.C. by Samuel P. Sporn, New York City, and Zimmerman and Reed by Charles S. Zimmerman, Minneapolis, Minn., for plaintiff.

Kirkland and Ellis by Robert E. Shapiro, Chicago, Ill., and Dorsey and Whitney by Jeffrey L. Sikkema, Minneapolis, Minn., for defendants Kidder, Peabody & Co. and Dain Bosworth, Inc.

Lindquist and Vennum by Richard B. Solum and Ann M. Parrent, Minneapolis, Minn., for the individual defendants.

Mackall, Crounse and Moore by Thomas J. Lallier, Minneapolis, Minn., for defendant Computer Depot, Inc.

ORDER

ALSOP, Chief Judge.

This matter came before the undersigned on February 27, 1987, upon a number of motions. Defendants Stephen B. Parker, Frederick S. Larson, George R.A. Johnson, Thomas M. Claflin, II, David M. Ehlen, Bruce L. Burnham, and Richard W. McEwen (the "individual defendants") and defendants Kidder, Peabody & Co. and Dain Bosworth, Inc. (the "underwriter defendants") move for summary judgment or for an undertaking pursuant to § 11(e) of the Securities Act of 1933, 15 U.S.C. § 77k(e). Defendant Computer Depot, Inc. ("CDI") moves the court to dismiss the plaintiff's claims as against CDI on the ground that the action was commenced against CDI in violation of the automatic stay imposed by 11 U.S.C. § 362 and therefore is void. Plaintiff moves the court to certify both a plaintiff class and a defendant class in this action. Finally, plaintiff moves the court for an order permitting Robert D. Phillips to intervene as a plaintiff in this action, continuing pending motions, and permitting filing of an Amended Class Action Complaint.

At the hearing held February 27, 1987, the court granted CDI's motion to dismiss and ordered plaintiff's attorneys, and not plaintiff personally, to pay CDI's attorney's fees incurred in connection with bringing CDI's motion to dismiss. See 28 U.S.C. § 1927; Fed.R.Civ.P. 11, 37. The court invited counsel for CDI to file an affidavit detailing the time expended in responding to plaintiff's complaint. The court took all other motions under advisement.

FACTS

CDI is a Minnesota corporation which sells personal computer systems, software, and related products and services through leased computer centers located in major department stores. Personal computers are those microcomputer systems that are capable of various business and personal applications such as spreadsheet analysis, graphics, and word processing. They are distinct from home computers which are used predominately for entertainment and games. Price also distinguishes personal computers from home computers; in 1984, personal computers sold for $1,000.00 to $6,000.00 while home computers typically sold for less than $1,000.00.

CDI began operations in March 1981 with one leased computer center located in a Dayton's department store. CDI experienced rapid growth as the demand for personal computers underwent a dramatic and well-publicized expansion. As of July 12, 1984, CDI was operating forty-one computer centers in fifteen states and the District of Columbia. To finance further expansion, CDI commenced an initial public offering of 875,000 of common stock at a price of $10.00 per share. CDI retained the underwriter defendants as representatives of a group of fifty-seven underwriters who were to assist in the offering. This offering, made pursuant to a registration statement and prospectus effective July 21, 1984, was withdrawn on June 27, 1984, due to a reduction in price of IBM products which resulted in a reduction of CDI's gross margins on sales of existing inventories of such products. The original registration statement and prospectus were amended by a July 12, 1984, registration statement and prospectus to reflect the impact of reduction on income, and a resultant price per share reduction from $10.00 to $9.00. The amended registration statement and prospectus also increased the number of shares offered to 1,000,000. It is this amended registration statement and prospectus that is the subject of plaintiff's allegations.

Plaintiff identifies three statements contained in the prospectus that he asserts were materially false and misleading. The prospectus stated "the Company believes that a new computer center generally can achieve profitability ... within a relatively short period of time after it opens." The prospectus also stated "the Company believes that it is able to remain price competitive due to its large volume of purchases which permits it to take advantage of high levels of price discounts." Finally, the prospectus stated "subject to obtaining financing and to the other considerations relating to opening new stores, the Company presently plans to open approximately ninety new computer centers in calendar 1985."

In fact, CDI was unable either to expand at the rate projected in the prospectus or to remain price competitive over the next eighteen months. Instead, the retail market for personal computers grew increasingly competitive, leading to what numerous newspaper and magazine articles published between November 1983 and October 1984 described as a "shake-out" in the personal computer market. As a result of this intensifying competition, CDI was not able to open ninety new stores in calendar 1985, although the corporation did expand from forty-one stores at the time of the offering to eighty stores at the end of its fiscal year, which was February 2, 1985. During the first quarter of fiscal 1985, CDI experienced the effect of a softening and recession in the market for personal computers. Prices of products, and accordingly gross margins, declined. As a result, CDI experienced a net loss for this quarter, and was able to open only two new stores. These facts and an express reference to the "softening" of CDI's market were disclosed in CDI's Form 10-Q for the quarter ended May 4, 1985, and this Form 10-Q was filed with the Securities and Exchange Commission June 18, 1985.

Despite increased sales in the second and third quarters of 1985, CDI continued to lose money as demand, revenue per store, and prices declined while expenditures remained fixed at a high level due to earlier expansion. The personal computer market, and CDI's place in it, continued to deteriorate in the last quarter of 1985 and in mid-December 1985 CDI's principal banks notified CDI that they were imposing severe restrictions on CDI's borrowing under its discretionary lines of credit. On December 19, 1985, CDI filed a petition under Chapter 11 of the United States Bankruptcy Code.

Plaintiff Ronald Kassover, a frequent securities class action plaintiff, acquired 200 shares of CDI stock in the July 1984 offering at a price of $9.00 per share. After learning from various newspaper articles of a "softening in demand" for personal computers and of a "shake-out" in the retail market for personal computers, Kassover lost confidence in CDI and on March 21, 1985, decided to sell his shares at $7.50 per share. Thus Kassover sustained a total loss of $300.00. On June 25, 1986, plaintiff brought this action in four counts. Count I alleges that CDI, the individual defendants, who are directors of CDI, and the underwriter defendants violated § 11 of the Securities Act of 1933, 15 U.S.C. § 77k. Count II alleges that CDI, the individual defendants, and the underwriter defendants violated § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2). Count III alleges that CDI and the individual defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5. Finally, Count IV alleges a claim based upon common law fraud against CDI and the individual defendants.

The individual and underwriter defendants took Kassover's deposition on December 9, 1986. Kassover acknowledged then that he had learned of a shake-out in the personal computer market by the late fall of 1984. In fact, Kassover began reading articles on the "softening" in the market and its industry-wide effects, and continued to do so even after he sold his stock in March 1985. Kassover also repeatedly acknowledged that he had "no facts" or "no proof" or no evidence to support many of his claims. Indeed, when pressed for the basis of his belief that any defendant had or should have had foreknowledge of the operational effects of the industry shake-out, he repeated that he had none, but "wouldn't mind going into their records to find out how much amount sic the units per store, etc., etc., what was selling, what wasn't."

DISCUSSION

I. Plaintiff's Motion to Permit Intervention, to Permit Service of an Amended Complaint, and to Continue Pending Motions.

Plaintiff moves the court for an order pursuant to Fed.R.Civ.P. 24(b) permitting Robert D. Phillips to intervene as an additional party plaintiff in this action, for an order permitting service of an amended complaint, and to continue all pending motions for forty-five days.

In determining whether permissive intervention should be allowed, the threshold question is whether a timely application has been filed. Fed.R.Civ.P. 24(b). The decision as to timeliness is committed to the district court's discretion. NAAPC v. New York, 413 U.S. 345, 365-66, 93 S.Ct. 2591, 2602-03, 37 L.Ed.2d 648 (1973); Arkansas Electric Energy Consumers v. Middle South Energy, Inc., 772 F.2d 401, 403 (8th Cir.1985). Although the issue is determined from all the circumstances, 413 U.S. at 366, 93 S.Ct. at 2603, three factors receive...