Phillips v. Kidder, Peabody & Co., 87 Civ. 4936 (DLC) (JCF).

• Decision Date: 02 July 1996
• Docket Number: No. 87 Civ. 4936 (DLC) (JCF).,87 Civ. 4936 (DLC) (JCF).
• Citation: 933 F. Supp. 303
• Parties: Robert D. PHILLIPS, individually and on behalf of other shareholders of Computer Depot, Inc., similarly situated, Plaintiffs, v. KIDDER, PEABODY & CO., Defendant.
• Court: U.S. District Court — Southern District of New York

933 F. Supp. 303

Robert D. PHILLIPS, individually and on behalf of other shareholders of Computer Depot, Inc., similarly situated, Plaintiffs, v. KIDDER, PEABODY & CO., Defendant.

No. 87 Civ. 4936 (DLC) (JCF).

United States District Court, S.D. New York.

July 2, 1996.

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Samuel P. Sporn, Joel P. Laitman, Schoengold & Sporn, P.C., New York City, for plaintiffs.

Philip K. Howard, Jack P. Levin, Linda Goldstein, C. William Phillips, Howard, Darby & Levin, New York City, for defendant.

MEMORANDUM AND ORDER

FRANCIS, United States Magistrate Judge.

The plaintiff in this class action, Robert D. Phillips, alleges that Kidder, Peabody & Co. ("Kidder") violated federal securities laws and committed common law fraud in connection with a public offering of stock in Computer Depot, Inc. ("CDI" or "the company"). The parties consented to my jurisdiction for all purposes pursuant to 28 U.S.C. § 636(c). The plaintiff alleges violations of Sections 11 and 12(a)(2) of the 1933 Securities Act, 15 U.S.C. §§ 77k and 77l(a)(2), Section 10(b) of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Kidder now moves for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. For the reasons that follow, the defendant's motion is granted.

Background¹

CDI is a now-defunct corporation that operated a chain of retail personal computer outlets. CDI began its operations in March 1981 with one leased computer center located in a Dayton's department store in Minneapolis, Minnesota. CDI marketed its computer products through leased space in major department stores, taking advantage of the department stores' customer traffic, advertising, and consumer credit arrangements. The stores benefitted from CDI's computer expertise, its relationship with suppliers, and its ability to secure volume discounts. By 1984, CDI was operating forty-one computer centers in fifteen states and the District of Columbia.

CDI made a public stock offering in 1984 in order to finance future expansion. Kidder, a lead underwriter for this public offering, issued a Prospectus in connection with the offering on July 12, 1984. When the value of the stock subsequently plummeted, litigation ensued. On June 25, 1986, Ronald Kassover, another CDI shareholder filed an action in the federal district court for the District of Minnesota. His motion for class certification, however, was denied on April 27, 1987, as was a motion by Mr. Phillips to intervene in the Minnesota action. Kassover v. Computer Depot, Inc., 691 F.Supp. 1205, 1214 (D.Minn.1987), aff'd, 902 F.2d 1571 (8th Cir.1990) (table).

Mr. Phillips then initiated the instant action. The plaintiff states in his complaint that he relied on this Prospectus when he decided to purchase three hundred shares of CDI stock on the date of the initial public offering, and an additional one hundred shares on June 10, 1985. The plaintiff alleges that the Prospectus presented a "falsely optimistic picture of CDI's future growth, expansion, business products, and profitability." Complaint, ¶ 17.

In his amended class action complaint, the plaintiff alleges that the Prospectus contained the following false or misleading representations: (1) "CDI believes that a new computer center can generally achieve profitability ... within a relatively short period after it opens;" (2) "CDI 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;" (3) "subject to obtaining financing and to the other conditions relating to opening new stores, CDI presently plans to open approximately 90 new computer centers in calendar 1985;" and (4) CDI would approximately break even during the second quarter ended July 28, 1984. Am.Complaint, ¶ 58. Specifically, the plaintiff alleges that the defendant failed to disclose the following material facts: adverse change in the personal computer industry ("industry shake-out") which led to decreases in prices and intensified competition; substantial losses incurred in the thirteen weeks preceding the public offering; and significant inventory shrinkage² and inadequacy of CDI's internal inventory controls. Am.Complaint, ¶ 59.

Kidder now moves for summary judgment, arguing that: (1) the claims regarding CDI's inventory shrinkage and all class claims are barred by the statute of limitations; (2) the accuracy of each statement in the Prospectus is established by undisputed facts; (3) contrary to the plaintiff's allegation, the Prospectus did disclose allegedly "omitted" facts with regard to falling computer prices and the competitiveness of the computer industry; and (4) Kidder affirmed the statements in the Prospectus based on extensive due diligence and had a reasonable basis for adopting any forward-looking statements concerning CDI's future.

The defendant brought a prior motion for summary judgment on February 1, 1991. The Honorable Shirley Wohl Kram, United States District Judge, denied the motion without prejudice to renewal on the ground that further discovery was necessary. Phillips v. Kidder, Peabody & Co., 782 F.Supp. 854, 866 (S.D.N.Y.1991).

Discussion

A. Summary Judgment

A motion for summary judgment shall be granted only when it is clear that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). The moving party has the initial burden of demonstrating the absence of a genuine issue of material fact. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). The non-moving party has the burden of coming forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). There must be enough evidence in favor of the non-moving party's case such that a jury could return a verdict in its favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 2509-10, 91 L.Ed.2d 202 (1986). "The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgement; the requirement is that there be no genuine issue of material fact." Id. at 248, 106 S.Ct. at 2510.

The plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, 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. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the non-moving 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).

"For purposes of summary judgment in a securities fraud claim, our inquiry is confined to whether a genuine issue of material fact exists as to: (1) whether the alleged misrepresentations or omissions are material; (2) whether the plaintiffs were justified in relying on the misrepresentations and omissions; and (3) whether the misrepresentations or omissions were the actual and proximate cause of the plaintiffs' losses." Medline Industries, Inc. Employee Profit Sharing & Retirement Trust v. Blunt, Ellis & Loewi, Inc., No. 89 Civ. 4851, 1993 WL 13436, at *4 (N.D.Ill. Jan. 21, 1993) (footnote omitted). A plaintiff bears the burden of persuasion in alleging facts which suggest that the statements were "made or reaffirmed without a reasonable basis or were disclosed other than in good faith." Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1418 (7th Cir.1992) (quoting Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513 (7th Cir.1989)). Where the facts of a case lead to conflicting inferences and conclusions, summary judgment is precluded. In re Chaus Securities Litigation, No. 88 Civ. 8641(SWK), 1990 WL 188921, at *4 (S.D.N.Y. Nov. 20, 1990) (citing Robertson v. Seidman & Seidman, 609 F.2d 583, 591 (2d Cir.1979)).

B. Statute of Limitations

Prior to addressing the substantive arguments contained in the defendant's motion, I turn to the issue of the statute of limitations. The defendant's argument in this regard is two-fold: it argues that all class claims are time barred, and that the amended claims with respect to the break even forecast are barred even if they relate back to the original complaint.

1. Class Claims

The plaintiff argues that this Court has already ruled that the statute of limitations was tolled during the pendency of the Kassover litigation with regard to both individual and class claims. In support of this argument the plaintiff cites six decisions by three different judges that purportedly reject, explicitly or implicitly, the defendant's argument that the class claims are barred.³ Indeed, the defendant has raised this argument previously on several occasions: in its first motion for summary judgment, on reargument of that motion, and in its objection to my report and recommendation. Thus, it would appear anomalous to approach this subject so late in the case. However, upon closer examination of these decisions, it is clear that although several opinions ruled on the timeliness of individual claims, no judge has passed on the viability of the class claims.

There is no dispute that the plaintiff's individual claims were tolled by the Kassover litigation. In my May 30, 1991 Report and Recommendation I found that "the statute of limitations for Mr. Phillips was tolled for the approximately ten months that the Kassover class action motion was pending, and it is therefore `deemed' to have been filed for limitations purposes on September 7, 1986." Report and Recommendation dated May 30, 1991 at 7 (emphasis...