Steiner v. Unitrode Corp.
| Decision Date | 13 April 1993 |
| Docket Number | Civ. A. No. 90-11443. |
| Citation | 834 F. Supp. 40 |
| Parties | William STEINER, et al., Plaintiffs, v. UNITRODE CORP., et al., Defendants. |
| Court | U.S. District Court — District of Massachusetts |
This case is a proposed securities fraud class action. Plaintiff seeks to represent all persons who purchased the stock of defendant Unitrode Corporation. ("Unitrode") from March 2, 1988 until March 16, 1990. The defendants are Unitrode and individual defendants Howard F. Wasserman ("Wasserman"), George M. Berman ("Berman"), and Walter B. Gates ("Gates"), who during this period acted as Chief Executive Officer, Chairman of the Board of Directors, and Senior Vice President and Chief Financial Officer of Unitrode, respectively.
Plaintiffs allege that the defendants violated § 10(b) and 20(a) of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b) 78t(a), and Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. 240.10b-5. Complaint, ¶ 64-77. Plaintiffs also allege a pendent state law claim of negligent misrepresentation. Id. ¶ 78-83. Plaintiffs contend that over a period of about two years defendants made several false and misleading statements regarding the condition of Unitrode and its earnings prospects in a scheme to manipulate the market price of the company's stock. Because plaintiffs purchased Unitrode stock during that period, they claim that they paid an artificially inflated price, thereby incurring substantial losses. Id. ¶¶ 5,76-77. Plaintiffs filed their original complaint in June 1990 and filed an amended complaint ("Complaint") on May 9, 1991.
Defendant has moved to dismiss the complaint for failure to state a claim upon which relief can be granted, under Fed.R.Civ.P. 12(b)(6) and for failure to plead fraud with particularity, under Fed.R.Civ.P. 9(b). As described below, the court concludes that plaintiffs have adequately stated a claim upon which relief can be granted for violations of the federal securities laws, and that the plaintiffs have stated their claims with sufficient particularity to withstand a motion to dismiss under Fed.R.Civ.P. 9(b). Accordingly, defendants' motion to dismiss the plaintiffs' amended complaint must be denied. Plaintiffs have failed, however, to state a claim upon which relief can be granted under Massachusetts law. The court, therefore, will grant defendants' motion to dismiss the pendent claims of negligent misrepresentation.
For purposes of deciding this motion to dismiss, all the factual allegations of the amended complaint have been accepted by the court as true. See Williams v. City of Boston, 784 F.2d 430, 433 (1st Cir.1986). Defendant Unitrode is incorporated in Maryland and its principal manufacturing facilities are located in Massachusetts and New Hampshire. Complaint, ¶ 8, 26. Unitrode manufactures electronic components which are sold around the world for a variety of military, data processing, telecommunications, industrial and commercial operations. Complaint ¶ 25. Shares of Unitrode common stock are listed and actively traded on the New York Stock Exchange. Id.
Beginning in 1987, Unitrode began to experience serious financial difficulties due to a sharp decline in the profitability of Unitrode's largest business segment, the Semiconductor Products Division. Id. ¶¶ 27-28. This decline was attributable in large part to the fact that the Defense Electronics Supply Center ("DESC") of the United States Department of Defense, an important customer of Unitrode, had placed a five month shipping hold on certain Unitrode products which then represented approximately 15 percent of Unitrode's sales. Id. DESC had placed this shipping hold on Unitrode after a DESC audit had revealed deficiencies in Unitrode's quality control procedures. Id. The shipping hold led to a 20 percent reduction in Unitrode's Semiconductor Products Division's workforce and a net loss of $19.9 million for the fiscal year ending January 1, 1988. Id. ¶¶ 27, 30.
Following this difficult year, Unitrode's management announced that it had taken steps to correct its quality control deficiencies, and began to predict promising earnings prospects for the company. Id. ¶¶ 35-50. The DESC ban had been lifted by the second quarter of fiscal year 1988, and the company's management, notably defendants Wasserman and Berman, publicly announced that the Company planned to achieve a 20 percent average annual growth in sales over the next five years. Id. ¶ 36. During the next year the company did report growth and profits reflecting an increase in sales at an average annual rate of about 20 percent, leading the Company to report in its fiscal year 1989 Annual Report that the revamped Semiconductor Products Division had "firmly re-established profitability."
By December 1989 (during the fourth quarter of fiscal year 1990), however, Unitrode began to announce publicly that it once again faced quality control problems in its Semiconductor Products Division. On December 11, 1989, the DESC issued another stop shipment order covering certain of the company's semiconductors, determining, as in 1987, that there were procedure and documentation deficiencies in the manufacturing process. Id. ¶ 53. On March 16, 1990 the company revealed the full extent of the bad news: Unitrode posted a fiscal year 1990 fourth quarter loss of $21.3 million, including a write-down of over $14 million for unusual charges and restructuring. The charge included reserves for anticipated product returns and damage claims arising from actions taken to correct deficiencies in quality control procedures. Also included were write-downs in the carrying values of inventories and losses attributable to the shipping holds placed by the DESC on Unitrode's Semiconductor Products Division. Id. ¶ 58. As a result of these difficulties, Unitrode's stock fell to $4.25 per share on March 16, 1990; at its zenith, during the proposed class period, the stock traded at $9.38 per share Id. ¶ 61.
Plaintiffs allege that during the class period defendants made various statements to the public via the press, annual and quarterly reports, and Securities and Exchange Commission filings, which fraudulently misled investors about Unitrode's financial prospects, and specifically about the company's success in overcoming its quality control problems. Plaintiffs charge that by knowingly or recklessly making false and misleading statements, and by failing to disclose ongoing quality control problems, defendants violated § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and engaged in negligent misrepresentation under state law. Plaintiffs further charge that the individual defendants are liable as controlling persons under § 20(a) of the Act and for aiding and abetting Unitrode in violation of § 10(b) and Rule 10b-5.
In deciding this motion to dismiss under Fed.R.Civ.P. 12(b)(6) and 9(b), the court must draw all reasonable inferences in favor of the plaintiffs. Dartmouth Review v. Dartmouth College, 889 F.2d 13, 16 (1st Cir.1989). Furthermore, the complaint should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957).
To state a cause of action under the federal securities laws, a plaintiff must allege: 1) that he purchased or sold securities; 2) that defendants misrepresented or omitted material facts in connection with that purchase or sale; 3) that the misrepresentations or omissions were made knowingly or recklessly; and 4) that plaintiff relied on such misrepresentations or omissions to his detriment. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731, 95 S.Ct. 1917, 1923, 44 L.Ed.2d 539 (1975); Kennedy v. Josephthal & Co., 814 F.2d 798, 804 (1st Cir.1987).
William Steiner ("Steiner"), the named plaintiff, alleges that he purchased Unitrode stock, on March 9, 1988 and on October 19, 1988. Complaint ¶ 7. The complaint then details chronologically multiple statements made by defendants throughout the proposed class period, alleging that they were knowingly or recklessly misleading to the investing public. As a preliminary matter, Defendants argue that the complaint should be dismissed because Steiner lacks standing to base his action on statements made after the date of his last stock purchase.
Defendants correctly argue that to survive the motion to dismiss the plaintiff must show that the statements or omissions which he claims are actionable under § 10(b) were made "in connection with" his purchase of stock. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. at 731-49, 95 S.Ct. at 1923-32. Though this action comprises a proposed class action, the court must assess standing to sue based on the actionable claims of the named plaintiff, and not upon the standing of unidentified class members. See Adair v. Sorenson, 134 F.R.D. 13, 16 (D.Mass.1991); Konstantinakos v. Federal Deposit Ins. Corp., 719 F.Supp. 35, 37-38 (D.Mass.1989).
The named plaintiff, however, does plead that material misrepresentations were made by defendants prior to October 19, 1988. Plaintiff's complaint alleges that defendants knowingly made material misrepresentations on May 5, 1988, within Unitrode's annual report, and on May 25, 1988, when defendants Berman and Wasserman addressed a group of securities analysts. Complaint ¶¶ 35-36. Furthermore, plaintiff alleges that defendants omitted material information, by not disclosing ongoing quality control problems, in several quarterly reports disseminated prior to October 1988. Plaintiff, therefore, maintains the requisite standing to sue under § 10(b) and Rule 10b-5.
Plaintiff alleges that these misrepresentations and omissions were made knowingly, in an...
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