Wool v. Tandem Computers, Inc., 85-2674

• Citation: 818 F.2d 1433
• Decision Date: 03 June 1987
• Docket Number: No. 85-2674,85-2674
• Parties: , Fed. Sec. L. Rep. P 93,272, 8 Fed.R.Serv.3d 91 Howard WOOL, Plaintiff-Appellant, v. TANDEM COMPUTERS INCORPORATED, Robert C. Marshall, Henry V. Morgan, and James G. Treybig, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1433

818 F.2d 1433

56 USLW 2012, Fed. Sec. L. Rep. P 93,272,

8 Fed.R.Serv.3d 91

Howard WOOL, Plaintiff-Appellant, v. TANDEM COMPUTERS INCORPORATED, Robert C. Marshall, Henry V Morgan, and James G. Treybig, Defendants-Appellees.

No. 85-2674.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 9, 1986.

Decided June 3, 1987.

Jack Corinblit and Marc M. Seltzer, Los Angeles, Cal., Judah I. Labovitz, Susanna E. Lachs, and Michael P. Coughlin, Philadelphia, Pa., and Bruce G. Stumpf, New York City, for plaintiff-appellant.

William I. Edlund, Robert M. Westberg, and John F. McLean, San Francisco, Cal., for defendants-appellees.

Appeal from the United District Court for the Northern District of California.

Before CHOY, Senior Circuit Judge, GOODWIN and PREGERSON, Circuit Judges.

CHOY, Senior Circuit Judge:

This action was brought by appellant Howard Wool ("Wool"), on behalf of himself and a class of persons similarly situated, to recover damages for alleged fraud and The defendants are: Tandem Computers Incorporated ("Tandem") and three individuals who served as Tandem officers during the relevant period--James G. Treybig ("Treybig"), Robert C. Marshall ("Marshall"), and Henry V. Morgan ("Morgan"). (Treybig, Marshall, and Morgan collectively: the "individual defendants.")

breach of fiduciary duties in violation of, inter alia, federal securities laws and California common law.

In district court, Wool alleged that Tandem and the individual defendants had utilized improper accounting practices and issued public reports which overstated the profits of Tandem and which, in turn, artificially inflated the market price of Tandem securities. Wool and the class members purchased Tandem stock during the alleged inflation.

On April 30, 1985, the district court dismissed without prejudice Wool's claim against the individual defendants. On July 24, 1985, the remaining defendant, Tandem, filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56. On September 11, 1985, the district court refused Wool's request for a continuance of the summary judgment hearing pursuant to Fed.R.Civ.P. 56(f), and granted summary judgment for Tandem. The district court also entered judgment dismissing the action. Wool timely appeals. We reverse and remand.

FACTS

Tandem is engaged in developing, manufacturing, marketing, and servicing multiple processor computer systems. Tandem's sales process begins when Tandem enters into a signed sale contract with a customer, and ends when the contracted item is shipped and installed. Under Generally Accepted Accounting Principles, sale revenue may be recognized only when: 1) the earning process is complete or virtually complete, and 2) an exchange has taken place. Under Tandem's own auditing committee standard, sale revenue may be recognized in any given quarter if: 1) the equipment has been shipped to the customer, 2) the shipment is accompanied by a signed customer purchase order or contract, and 3) the installation of the equipment at the customer site is planned to begin within 60 days of the quarter's end. ¹

From the second through fourth fiscal quarter of 1982, Tandem improperly recognized significant amounts of revenue. Tandem's management, toward the end of each quarter, authorized shipments of equipment to carrier warehouses even though material conditions of sale remained unsatisfied. Tandem's employees prepared shipping documents which, on their face, indicated direct shipment to customers. In reality, the supposedly "sold" equipment was merely transferred to a warehouse and remained under Tandem's control. These and other practices permitted Tandem to book revenue from incomplete sales.

Tandem's revenue and net income for the second through fourth quarters of 1982 were materially lower than as reported and stated in the following press releases and Forms 10-Q: 1) press release of April 28, 1982, and Form 10-Q of May 6, 1982, announcing and reporting Tandem's revenue for the quarter ending March 31, 1982; 2) press release of July 29, 1982, and Form 10-Q of August 9, 1982, announcing and reporting Tandem's revenue for the quarter ending June 30, 1982; and 3) press release of November 2, 1982, announcing Tandem's revenue for the quarter ending September 30, 1982.

On December 8, 1982, Tandem publicly announced a restatement of its fiscal year 1982 revenue from $335,899,000 to $312,143,000 and a restatement of 1982 earnings from $37,283,000 to $28,856,000. Following the announcement, the price of Tandem stock fell $5.75 from the previous day.

On October 2, 1984, the Securities and Exchange Commission (the "SEC") filed a complaint for a permanent injunction against Tandem and the individual defendants. The SEC complaint alleged that beginning in the second quarter and continuing through the fourth quarter of fiscal year 1982, Tandem had engaged in improper On the basis of the SEC's allegations, Wool brought this action on October 23, 1984, as a class action on behalf of all persons who purchased Tandem stock from April 28, 1982, through December 8, 1982, inclusive. Wool personally purchased 2,000 shares of Tandem stock on July 9, 1982, at $17.75 per share, and sold them on August 19, 1982, at $16.63 per share.

accounting practices which caused material changes in Tandem's reported profits.

ISSUES

Wool claims on appeal that:

1) The district court erred in granting summary judgment against Wool for failure to establish the requisite injury to entitle him to relief under section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, promulgated thereunder.

2) The district court erred in granting summary judgment against Wool in regard to his claims of common law fraud and negligent misrepresentation.

3) The district court erred in dismissing Wool's claims against the individual defendants for failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b).

4) The district court erred in dismissing Wool's claims against the individual defendants as "controlling persons" of Tandem under section 20(a) of the 1934 Act, 15 U.S.C. Sec. 78t(a).

DISCUSSION

I. Section 10(b) and Rule 10b-5 Claims

Wool argued below that Tandem and the individual defendants violated section 10(b) of the 1934 Act and Rule 10b-5. The district court dismissed Wool's claim against the individual defendants. The remaining defendant, Tandem, contended, and the district court concluded, that there was no genuine issue of material fact because Wool as a matter of law did not suffer any injury.

We review de novo the district court's grant of summary judgment in favor of Tandem regarding Wool's section 10(b) and Rule 10b-5 claims. See Plaine v. McCabe, 797 F.2d 713, 716-17 (9th Cir.1986). Summary judgment is appropriate when the moving party demonstrates that there is no genuine issue of material fact. Anderson v. Liberty Lobby, Inc., --- U.S. ----, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Id. As to genuineness, the threshold inquiry is "whether there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. at 2511; see also Grigsby v. CMI Corp., 765 F.2d 1369, 1373 (9th Cir.1985).

We disagree with the district court's conclusion that Wool presented no genuine issue of material fact. First, the out-of-pocket measure of damages clearly establishes that Wool in theory may have suffered recoverable damages from the defendants' alleged fraudulent acts. Second, Wool submitted specific facts from which a reasonable jury, viewing the evidence in a light most favorable to Wool, could conclude that Wool actually suffered such recoverable damages.

A. Out-of-Pocket Measure of Damages

In an action brought under Rule 10b-5 for a material omission or misstatement, the plaintiff must prove that the misrepresentation or omission caused the harm. Hatrock v. Edward D. Jones & Co., 750 F.2d 767, 773 (9th Cir.1984). Both parties agree that the causation requirement is satisfied if Wool suffered recoverable damages as determined by the out-of-pocket rule set forth in Blackie v. Barrack, 524 F.2d 891, 908-09 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976), and Green v. Occidental Petroleum The out-of-pocket rule measures the damages recoverable by an individual who because of fraud or misrepresentation has been injured by market transactions in an actively traded stock. The out-of-pocket rule fixes recoverable damages as "the difference between the purchase price and the value of the stock at the date of purchase." Green, 541 F.2d at 1344; see Blackie, 524 F.2d at 908; Note, The Measure of Damages in Rule 10b-5 Cases Involving Actively Traded Securities, 26 Stan.L.Rev. 371, 383 (1974). ²

Corp., 541 F.2d 1335, 1341-46 (9th Cir.1976) (Sneed, J., concurring).

The following facts are undisputed: Wool bought his Tandem stock on July 9, 1982, and sold it on August 19, 1982. Tandem began publishing its allegedly overstated quarterly revenue figures before the date of Wool's purchase. Tandem subsequently confirmed these figures in the July 28, 1986, press release and the August 11, 1986, Form 10-Q. No other operating revenue or earnings figures were released by Tandem into the market during the time that Wool held his Tandem stock. Wool, therefore, is an "in-and-out" trader: one who purchased stock during the period of misrepresentation but sold it before any disclosure which either partially or completely corrected the misrepresentation.

Tandem contends that because Wool bought and sold his stock without any change in Tandem's publicly announced revenue figures, any alleged price inflation Wool...