Ross v. AH Robins Co., Inc., 77 Civ. 1409.
| Decision Date | 08 January 1979 |
| Docket Number | No. 77 Civ. 1409.,77 Civ. 1409. |
| Citation | 465 F. Supp. 904 |
| Parties | Kalman ROSS and Anita Ross, Plaintiffs, v. A. H. ROBINS COMPANY, INC., et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
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Eric L. Keisman, Marian R. Probst, Thomas A. Bernstein, Wolf, Popper, Ross, Wolf & Jones, New York City, for plaintiffs.
William E. Hegarty, Miles M. Tepper, Charles A. Gilman, Cahill, Gordon & Reindel, New York City, Robert H. Patterson, Jr., R. Gordon Smith, Ann Marie Whittemore, McGuire, Woods & Battle, Richmond, Va., for defendants.
This is a proposed class action brought by two shareholders of the defendant A. H. Robins Company, Inc. ("Robins") against that corporation and several of its directors for violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, as well as for common law fraud and breaches of the fiduciary duties of the individual defendants. The defendants have moved to dismiss the complaint in its entirety on the grounds that: (1) this Court lacks subject matter jurisdiction over the plaintiffs' claims, Fed.R.Civ.P. 12(b)(1); (2) the complaint, as amended, fails to comply with the pleading requirements of Fed.R.Civ.P. 9(b); and (3) there is no implied cause of action under Section 10(b) of the Securities Exchange Act of 1934 since Section 18 of that Act provides the exclusive private remedy for the acts or failures to act complained of, Fed.R.Civ.P. 12(b)(6). The defendants also move for the dismissal of the state common law claims should the federal claims be dismissed.
For the purposes of this motion, the following allegations contained in the amended complaint are taken as true. Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 23 L.Ed.2d 404 (1969). In 1970, Robins, a manufacturer of pharmaceutical and consumer products, began to produce and market a contraceptive device known as the Dalkon Shield. On July 23, 1973, the plaintiffs purchased 100 shares of Robins common stock. During the period between the introduction of the Shield into the market and plaintiffs' purchase of Robins common stock, Robins published favorable statements concerning the safety, efficiency and marketability of the device. The Shield, however, did not perform as anticipated, and Robins was named as defendant in several products liability actions. Also, in 1972 a report was completed which indicated that the Shield was not as safe or effective as Robins had originally advertised. This report was not published, and Robins did not attempt to modify or correct the earlier statements that had been made concerning the Shield until July, 1974.
The plaintiffs originally instituted this action on March 23, 1977. The defendants moved to dismiss that complaint on grounds similar to those asserted in this motion. That complaint was dismissed by order of this Court dated April 5, 1978 for failure to comply with the particularity requirements of Rule 9(b), among other reasons.
The essence of plaintiffs' claim is that Robins and the individual defendants knew of or recklessly disregarded unfavorable information concerning the Shield. They allegedly failed to correct or modify the original statements made by Robins concerning the Shield in breach of the duty imposed upon them by Section 10(b) and Rule 10b-5. Further, defendants allegedly made, or caused to be made, statements concerning the Shield or Robins' financial condition without also stating that problems involving the Shield had arisen or that an unpublished report indicated that the Shield may not perform as well as originally stated. These omissions, plaintiffs contend, rendered these later statements misleading in violation of Section 10(b) and Rule 10b-5. The period during which these alleged violations occurred is from April, 1972 through July, 1974. Plaintiffs seek to represent all persons who purchased Robins securities during this period.
The defendants have asserted several arguments in support of their motion to dismiss the amended complaint. In the discussion that follows, each of the defendants' arguments will be separately reviewed.
The defendants contend that the amended complaint essentially states a claim for mismanagement and for injuries suffered by Robins because of the errors in judgment by the individual defendants, claims not cognizable under Section 10(b) or Rule 10b-5. Therefore, the defendants argue, the amended complaint should be dismissed pursuant to Fed.R.Civ.P. 12(b)(1) because this Court lacks subject matter jurisdiction.
It is argued that the gravamen of the amended complaint is that there was improper marketing of a product manufactured and sold by Robins. The defendants assert that the plaintiffs' claim lacks the requisite nexus between such marketing and the purchase or sale of securities. Furthermore, defendants argue, the amended complaint alleges an injury which was suffered by the corporate defendants, not the plaintiffs and, consequently, the plaintiffs lack standing to bring suit.
The theory under which the plaintiffs seek recovery is not, however, so limited. They claim that the defendants failed to correct statements made in documents issued by Robins which were true when made but which became misleading by subsequent events. Specifically, plaintiffs claim that Robins made certain statements in its 1970 and 1971 Annual Reports and in a March, 1972 prospectus. All of these documents were issued during the period 1970 through 1972 and indicated that the Shield was a safe and effective means of contraception and that the device was becoming popular in use. However, in 1972, an unpublished research report indicated that the Shield was neither as effective nor as safe as earlier publicized studies indicated.
Plaintiffs claim that defendants knew of or recklessly disregarded these facts, and that they concealed and failed to make proper disclosure of these facts. The defendants also allegedly failed, until 1974, to disclose that Robins had been named as defendant in several products liability suits during the proposed class period. The effect of these nondisclosures coupled with the earlier Robins statements concerning the Shield, plaintiffs contend, presented a false and inflated picture of the operating and financial condition of Robins when they purchased Robins securities. Had the disclosure been made prior to plaintiffs' purchase, they say, the price of Robins securities would have been lower than that which they paid.
While the plaintiffs cannot, as shareholders, be heard to complain of injuries to the corporation merely because the value of plaintiffs' investment had been indirectly harmed by the acts of the defendant, Gordon v. Fundamental Investors, Inc., 362 F.Supp. 41 (S.D.N.Y.1973), the amended complaint asserts direct injury to the plaintiffs as a result of the acts of the defendants or of their failure to act. Plaintiffs seek to recover for more than mere alleged acts of mismanagement by the defendants. Their claim is arguably within the purview of Section 10(b) unless Section 18 of the Securities Exchange Act of 1934 provides plaintiffs an exclusive remedy.
Defendants further contend: (1) that they had no duty to revise prior statements made before the proposed class period, in particular statements made in Robins' 1970 and 1971 Annual Reports and in a prospectus issued in 1972; (2) that plaintiffs' claims are too vague; and (3) that plaintiffs rely on post-purchase facts to support their claim.
It is now clear that there is a duty to correct or revise a prior statement which was accurate when made but which has become misleading due to subsequent events. This duty exists so long as the prior statements remain "alive". A. Jacobs, The Impact of Rule 10b-5 § 88.04b at 4-14, (rev.1978) and cases cited therein. Consequently, the defendants owed a duty to plaintiffs to revise any such statements made in Robins' 1970 and 1971 annual reports and in its March, 1972 prospectus if those statements were "alive" at the time the plaintiffs purchased Robins securities. Defendants contend that these reports were ineffective once Robins issued its 1972 Annual Report. The 1972 report was allegedly issued some months prior to plaintiffs' purchase.
Both section 10(b) and Rule 10b-5 are silent as to the effect of time on the duty to correct, but logic compels the conclusion that time may render statements immaterial and end any duty to correct or revise them. In measuring the effect of time in a particular instance, the type of later information and the importance of earlier information contained in a prior statement must be considered. Thus, general financial information in a two-year old annual report may be stale and immaterial. Shahmoon v. General Dynamics Corp., 1973-1974 Fed. Sec.L.Rep. (CCH) ¶ 94,308 at 95,038 (S.D.N. Y.1973). However, no general rule of time can be applied to all circumstances. Rather, a "particular duty to correct a specific prior statement exists as long as traders in the market could reasonably rely on the statement." 2 A. Bromberg, Securities Law, Fraud, § 6.11(543) (1977).
The prior statements at issue would appear to be of a nature that traders in the market might reasonably rely on them until publicly corrected. The 1970 Annual Report allegedly stated that clinical data indicated that the Shield (Amended Complaint, ¶ 15). The 1971 Annual Report allegedly states that the Shield was ...
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