The opinion of the court was delivered by: FRANKEL
The plaintiff, a lawyer and experienced investor, claims to have been misled by material omissions affecting certain stock purchases so that he lost money rather than winning, as he had hoped to do. In a now common kind of action, he sues for himself and his alleged class under §§ 10(b), 20, and 27 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, and 78aa (1970), and Rule 10b-5, 17 C.F.R. § 240.10b, issued thereunder.
The securities involved are the common shares of defendant DCL Incorporated, of which plaintiff bought 500 on February 10 (at $10 3/8), 500 on February 14 (at $10), and 1,000 on March 13, 1972 (at $9 1/2).
DCL is in the business of short-term leasing of computers, primarily the System/360 series which it purchases from IBM. The short leases which DCL must offer to remain competitive with IBM do not afford sufficient return to recoup the purchase price of the computers. Consequently, it is essential that DCL remarket its equipment by securing lease renewals or new lessees, or by selling its computers. Obsolescence of a computer "portfolio," as the inventory appears to be called, is a major industrial threat to a remarketing program. It was, therefore, a matter of potential concern for DCL that in 1970 IBM announced its intention to introduce a new, more powerful computer line, the System/370.
During the year 1971 and until February 15, 1972, defendant Price Waterhouse & Co. served as DCL's independent auditing firm. In December 1971, Price Waterhouse informed DCL that it intended as of then to qualify its opinion of DCL's 1971 financial statements by making its opinion
"subject to the ability of the Company to fully recover the cost of its computer equipment by lease renewals, by attracting new lessees and by sale of equipment."
This became a subject of dispute that was to lead soon to severance of the relationship. DCL requested, perhaps demanded, that Price Waterhouse study DCL's portfolio, remarketing program, and depreciation schedule, as well as the computer leasing industry in general, in order to recommend steps which would enable Price Waterhouse to avoid qualifying its opinion. Price Waterhouse declined to do so, however, maintaining that its position rested upon considerations pervading the computer leasing industry rather than factors peculiar to DCL. As has been noted, DCL discharged Price Waterhouse on February 15, 1972, having therefore (1) obtained the opinion of Touche Ross & Co. that there was no reason for DCL to change its policies concerning its portfolio of System/360 computers, and (2) arranged for the services of Lybrand, Ross Bros. & Montgomery as independent auditors. The latter firm ultimately certified DCL's 1971 figures without any qualification of the kind Price Waterhouse had contemplated.
The problems of new leases and remarketing as they affected companies like DCL appear not to have been secret during the period here in question and for some time before that. For example, such articles as "Computer-Leasing Firms Offer Discounts by Gambling on Long Lives for Machines" and "Computer Lessors Worried About Rental of Their Old Machines, Threat of New Ones," as well as others describing the industry structure and remarketing efforts, appeared in the Wall Street Journal on various dates in 1967, 1968, and 1970, and in the August 1968 issue of Datamation, an industry magazine. In addition, DCL's published statements, e. g., its original prospectus of August 27, 1968, its 1970 Annual Report, and a March 1, 1971, listing application to the American Stock Exchange, stressed remarketing problems. Nevertheless, plaintiff's claim focuses on:
(1) the failure to mention this problem at the key times involved here, and, seemingly more importantly,
(2) the failure to mention on February 8, 1972, Price Waterhouse's intention to qualify upon grounds of this concern its certification of the 1971 figures.
The importance of the date February 8, 1972, for this lawsuit results from the fact that DCL on that day announced unaudited figures showing earnings per share of 96 cents for 1971 as compared with 48 cents for the prior year. "No mention was made that defendant Price Waterhouse had stated to defendant DCL that such earnings should be accompanied by a warning to investors that they were subject to the ability of defendant DCL to remarket certain of its inventory items."
The cheerful 1971 figures, absent the Price Waterhouse caveat, are claimed by plaintiff to have caused the sustaining of DCL's common stock price at a level substantially higher than what it would have been had that warning cloud been exposed. Continuing his account of the alleged wrongs, plaintiff tells that DCL's annual report, issued in April 1972, finally recounted the Price Waterhouse disagreement and discharge and that, "as a direct consequence thereof, defendant DCL's common stock fell drastically in price."
Upon the fuller allegations thus summarized, plaintiff makes two sets of claims:
(1) against DCL and its directors named here as defendants for perpetrating a scheme and artifice to defraud the investing public by issuing a misleading earnings statement in order to cause DCL's common stock to trade at an artificially high price;
(2) against Price Waterhouse for failing to "take steps to inform the public that the financial information disseminated by defendant DCL was, in its opinion, incomplete and misleading."