Wilensky v. Digital Equip. Corp.

• Decision Date: 08 August 1995
• Docket Number: 94-10759-JLT,Civ. A. No. 94-10752-JLT,94-10940-JLT.
• Citation: 903 F. Supp. 173
• Parties: Leonard WILENSKY, et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants. Merry Lou SHAW, et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants. Charles E. LONERGAN, Jr., et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

903 F. Supp. 173

Leonard WILENSKY, et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants.

Merry Lou SHAW, et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants.

Charles E. LONERGAN, Jr., et al., Plaintiffs, v. DIGITAL EQUIPMENT CORPORATION, et al., Defendants.

Civ. A. Nos. 94-10752-JLT, 94-10759-JLT, 94-10940-JLT.

United States District Court, D. Massachusetts.

August 8, 1995.

COPYRIGHT MATERIAL OMITTED

Philip M. Giordano, Giordano & Champa, P.A., Boston, MA, Ray Siderius, Siderious & Lonergan, Seattle, WA, for plaintiffs in No. 94-CV-10940.

Edmund C. Case, Jordan D. Hershman, Testa, Hurwitz & Thibeault, Randall W. Bodner, John D. Donovan, Jr., William L. Patton, Daniel J. Klau, Ropes & Gray, Boston, MA, for defendants in No. 94CV10940, 94CV10759.

Glen DeValerio, Berman, DeValerio & Pease, Boston, MA, David Bershad, Steven Schulman, Jeffrey S. Abraham, Milberg, Weiss, Bershad Specthrie & Lerarch, New York City, Richard Schiffrin, Schiffrin & Craig, Bala Cynwyd, PA, for plaintiff in No. 94CV10759.

Edward F. Haber, Shapiro, Grace & Haber, Glen DeValerio, Berman, DeValerio & Pease, Boston, MA, for plaintiffs in No. 94CV10752.

Gerald F. Rath, Robert A. Buhlman, Bingham, Dana & Gould, Boston, MA, for defendants in No. 94CV10752.

MEMORANDUM

TAURO, Chief Judge.

On March 21, 1994, the Digital Equipment Corporation ("Digital") began a public offering of 16 million shares of Series A, Eight and 7/8 % Cumulative Preferred Stock. This offering allowed Digital to raise $400 million of much-needed capital.

Three weeks later, Digital issued quarterly data that revealed huge losses. Digital's stock suffered considerably, and dozens of lawsuits followed. These were eventually consolidated into the three cases currently before this court: Shaw v. Digital, C.A. 94-10759-JLT ("Shaw"); Wilensky v. Digital, C.A. 94-10752-JLT, ("Wilensky"); and Lonergan v. Digital, C.A. 94-10940-JLT ("Lonergan").

Although couched in different terms,¹ the three complaints sound similar stories. Each contains allegations that Digital failed to disclose poor performance data in the period leading up to the offering, and that this failure rendered other statements attributable to Digital incomplete, false, and otherwise misleading. Presently at issue are defendants' motions to dismiss each of these consolidated cases.

I. BACKGROUND

When viewed in the light most favorable to the pleader, Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974), the complaints reveal the following sequence of events.²

In July of 1992, following a series of "operational and financial reverses," Digital's Board of Directors moved to replace its founder and president, Kenneth Olsen. Olsen was replaced by defendant Robert Palmer, who was named President and Chief Executive Officer effective October, 1992. Earlier in the summer, defendant William Steul had been named Chief Financial Officer by Olsen.

Both moves roughly coincided with Digital's release of a new product, the Alpha computer chip. Plans were made to reorganize Digital's sales and marketing strategies in order to enhance the "market penetration" of the Alpha chip.

Although the company continued to report losses, results in the first two quarters of fiscal 1994 surpassed those of a year earlier. Digital officers reacted favorably to the company's improving position, expressing cautious optimism in statements to shareholders, analysts, and the press. Against this backdrop, Digital prepared for the March 21, 1994 public stock offering.

The offering succeeded in raising upwards of $400 million. Soon thereafter, on April 15, 1994, Digital announced its results for the third quarter of fiscal 1994, showing significant losses, both in absolute terms and in comparison with the company's third-quarter performance a year earlier. The markets reacted quickly, and in two days of trading Digital's stock lost more than twenty-five percent of its value. These lawsuits followed.

II. ANALYSIS

A. WILENSKY

Wilensky, unlike Shaw and Lonergan, does not contain a claim for relief under section 10(b) and Rule 10b-5. Wilensky, rather, was intentionally drafted to omit claims of fraud, and is limited to claims brought under sections 11 and 12(2).³

In opposing the defendants' motions to dismiss, the Wilensky plaintiffs specifically cite two passages of the March 21 prospectus supplement. The plaintiffs claim that these statements are actionable not for what they say, but for what they omit.

The first passage relates to Digital's Alpha "market-penetration strategy." The prospectus supplement, at page S-7, reads as follows:

The Corporation continues to take actions to respond to changes in industry demand, economic conditions and other facts affecting the Corporation's business. In October 1993, the Corporation announced new open client-server products and related software and service products. The Corporation continues to seek alliances with other companies and to focus its resources in order to offer products which meet customer needs for open systems. Just after the close of the second quarter, the Corporation announced that it had hired a new general manager to lead its European operations. The Corporation also is focusing on increasing market penetration by improving its direct sales efforts targeting the growing small and medium enterprise information technology market and expanding its use of resellers and other indirect channels of distribution.

March 21, 1994, Prospectus Supplement, at S-7 (emphasis added).

The plaintiffs argue that this statement is misleading in two ways. First, the plaintiffs claim that the statement is actionable in that it omits certain details of the new sales strategy.⁴ Second, the plaintiffs allege that the "market-penetration statement is incomplete in that it fails to disclose "declining sales and massive losses despite these actions and in omitting to disclose ... serious operational and functional problems. Wilensky Complaint at ¶ 72, Shaw Complaint at ¶ 113(a), (e), (i), (h). The plaintiffs, in other words, challenge Digital's non-disclosure of both the details and the results of the new sales strategy.

The second allegedly actionable statement refers to the adequacy of Digital's restructuring reserves. This passage reads:

While spending for R & E and SG & A is declining, the Corporation believes its cost and expense levels are still too high for the level and mix of total operating revenues.

The Corporation is reducing expenses by streamlining its product offerings and selling and administrative practices, resulting in reductions in an employee population, closing and consolidation of facilities and reductions in discretionary spending. The Corporation believes that the remaining restructuring reserve of $443 million is adequate to cover presently planned restructuring actions. The Corporation will continue to take actions necessary to achieve a level of costs appropriate for its revenues and competitive for its business.

March 21, 1994, Prospectus Supplement at S-8 (emphasis added).

The plaintiffs claim that the statement is misleading because Digital knew or should have known that it would soon be forced to take "an enormous new restructuring charge." Wilensky Complaint, ¶¶ 73, 74(a)(e), 76.

Upon careful review, the court finds that both statements, viewed in the context of the March 11 prospectus and its March 21 supplement, cannot be considered "so incomplete as to mislead." Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir.1990) (en banc). In fact, the prospectus supplement contains an abundance of cautionary language. The prospectus and its supplement, in other words, "bespeak caution," both in general and with specific reference to the alleged misrepresentations cited by the plaintiffs. See generally, In re Worlds of Wonder Securities Litigation, 35 F.3d 1407, 1413-15 (9th Cir.1994) (describing origin and scope of the `bespeaks caution' doctrine).⁵

With respect to Digital's sales strategy, the prospectus supplement contains an extensive "Discussion and Analysis of Results of Operations and Financial Condition." Prospectus Supp. at S-7. In this discussion, Digital candidly refers to "a significant decrease in European revenues, as well as a decline in U.S. revenues ..." On the following page, the supplement notes decreasing gross profits, and attributes the decline to a "decrease in product sales," coupled with lower profit margins on Alpha based systems and "competitive pricing pressures." Id. at S-8.

These statements do not disclose particular sales strategies, but they do reflect shrinking revenue in a difficult market.⁶ To the extent that the allegedly actionable statements indicate otherwise, they fall short of the specificity required of an actionable statement. See, e.g., Rand v. Cullinet Software, Inc., 847 F.Supp. 200, 208 (D.Mass. 1994), Colby v. Hologic, Inc., 817 F.Supp. 204, 211 (D.Mass.1993).

Likewise, in commenting on the perceived adequacy of the current restructuring reserve, the prospectus supplement warns that "the Corporation will continue to take actions necessary to achieve a level of costs appropriate for its revenues and competitive for its business." Prospectus Supp. at S-8. This language follows immediately on the heels of a statement about "presently planned" restructuring reserves.

Again, Digital's statement must be viewed in the context of the company's overall appraisal of its condition. The restructuring statement, in the context of the previously announced decline in revenue and the pledge to continue to take adequate "action," clearly conveys the possibility of additional restructuring charges.

B. SHAW

In addition to the passages cited above, the Shaw plaintiffs point to a long series of statements and omissions that evince an intent to defraud the market in violation of section 10(b).⁷ In a summary of actionable omissions and misrepresentations, the Shaw plaintiff...