The opinion of the court was delivered by: MACMAHON
MacMAHON, District Judge.
Plaintiff moves for certification of this suit as a class action. Rule 23(c), Fed.R.Civ.P. Defendants cross-move (1) to dismiss the complaint against Ralph I. Dorfman, George Rosenkranz and Richard Rogers for insufficiency of process, Rule 12(b)(4), Fed.R.Civ.P., and against all defendants for insufficiency of the complaint, Rule 12(b)(6), Fed.R.Civ.P., or, alternatively, (2) to consolidate this action with another pending before us, Rule 42(a), Fed.R.Civ.P.
Plaintiff commenced this action on December 2, 1977 for damages for alleged violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5
by defendant, Syntex Corporation, and one of its subsidiaries (collectively "Syntex"), certain of the officers and directors of Syntex, and Industrial Bio-Test Laboratories, Inc. ("IBT"). Plaintiff also seeks to represent a class consisting of all persons who bought options to buy common stock of Syntex during the period February 4, 1976 through and including August 6, 1976 ("class period") and who, relying upon the integrity of the market in which Syntex securities were traded and upon the truth and accuracy of statements made and disseminated by the defendants with regard to the business affairs of Syntex, "sustained damages as a result of said purchase."
We will first consider defendants' cross-motion to dismiss the complaint.
Dismissal under Rule 12(b)(6)
is improper "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."
Moreover, we must accept as true the complaint's allegations
and construe them favorably to plaintiff.
We therefore accept as true the following facts for purposes of this aspect of the cross-motion:
Plaintiff purchased in February, March, April and July 1976, options to buy shares of Syntex common stock. The purchases were made in reliance on the integrity of the market and on information released by Syntex concerning Naprosyn, a new drug produced and marketed by Syntex for use in the treatment of arthritic diseases. The information, which was released in Syntex's annual report for the year ended July 31, 1975 and in subsequent public statements and press announcements, painted a rosy picture of the imminent approval of Naprosyn by the Food and Drug Administration ("FDA") for use in the United States and of a positive impact of the drug on the financial condition of Syntex.
The public reports, however, did not reveal that test results submitted to the FDA by Syntex and IBT to obtain FDA approval for Naprosyn concealed irregularities in the testing of the drug, the deaths of some test animals and the presence of tumors in others. Instead, the public reports created the impression that Syntex and IBT had complied with established testing procedures, that Naprosyn was safe and effective and that the drug would contribute to Syntex's future sales and earnings. These reports were disseminated to the public despite defendants' knowledge that the tests were improperly conducted and reported. Defendants thus engaged in a course of conduct designed to inflate artificially the market price of Syntex securities and used the mails or other instrumentalities of interstate commerce to further the scheme.
The market price for Syntex securities dropped on or about July 19, 1976, when disclosures were made that the FDA was questioning its earlier approval of Naprosyn and would re-evaluate test data submitted by Syntex and IBT. Trading in Syntex common stock was subsequently halted after Syntex, on August 5, 1976, announced that the FDA had given notice that it might withdraw its marketing approval for Naprosyn. Plaintiff was damaged by both the July 19 price drop and the subsequent halt in trading.
The essential elements of a Section 10(b) or Rule 10b-5 claim for damages are: (1) damage to plaintiff, (2) caused by reliance on defendant's misrepresentations or omissions of material facts,
or on a scheme by defendant to defraud, (3) made with an intent to deceive, manipulate or defraud, (4) in connection with the purchase or sale of securities
and (5) furthered by defendant's use of the mails or any facility of a national securities exchange.
Defendants do not dispute that the allegations of the complaint are sufficient to allow proof of elements (1), (2), (3 and (5) above, but contend that the complaint is insufficient because it does not allege any fraud in connection with the purchase or sale of a security.
The first facet of this two-pronged argument is that the options purchased by plaintiff were not "securities" within the meaning of Section 10(b). The definition of "security" applicable to Section 10(b), however, includes "any stock . . . . transferable share . . . . or warrant or right to subscribe to or purchase any of the foregoing."
Plaintiff's options, known in the trade as "calls," gave him a contractual right to purchase Syntex common stock at a specified price. The Supreme Court has said in another context that "puts, calls, options, and other contractual rights or duties to purchase or sell securities have been recognized as . . . . securities for purposes of Rule 10b-5 . . . . because the definitional provisions of the 1934 Act themselves grant them such a status."
A leading commentator concurs: "a call is a 'right to . . . . purchase' a security within the literal language of the definition [of the 1934 Act]." Indeed, calls have been explicitly
recognized as securities under Section 10(b) and Rule 10b-5.
We, therefore, conclude that plaintiff's options to purchase Syntex stock were "securities" within the meaning of ...