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STROMFELD v. A&P

July 18, 1980

Edgar STROMFELD and Sol Zisook, Plaintiffs,
v.
The GREAT ATLANTIC & PACIFIC TEA COMPANY, INC., et al., Defendants



The opinion of the court was delivered by: WERKER

The original complaint in this securities action was dismissed on February 21, 1980 for failure to state a claim upon which relief could be granted and for failure to plead fraud with sufficient particularity. Stromfeld v. Great Atlantic & Pacific Tea Co., 484 F. Supp. 1264 (S.D.N.Y. 1980). The dismissal was without prejudice, and the plaintiffs were granted leave to file an amended complaint. The plaintiffs did so on March 24, 1980, and thereafter the defendants filed the instant motion to dismiss the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted and for failure to plead fraud with sufficient particularity.

The facts are summarized in the Court's prior opinion, and familiarity with that opinion will be assumed. The amended complaint adds the following: (1) a list of 24 documents filed with the SEC from January 16, 1979 through February 22, 1980 upon which the plaintiffs base their allegations concerning the "public acts and transactions of the defendants," amended complaint, at 2; (2) the various defendants are designated with respect to each claim as either "primary defendants" or "aiders and abettors," id. at 4-5; (3) an allegation that the failure of defendants to disclose the formation of the selling group caused plaintiffs and other stockholders to trade in A&P stock when they otherwise would not have and at prices that would have been different had there been such disclosure, id. at P 59; (4) allegations that defendants Scott, Morrow, and Feder and one Edward J. Tonner caused the A&P to permit the Tengelmann defendants to gain access to inside information, which included "confidential business data," id. at P 63; (5) allegations that defendant TN Delaware acquired over 1,000,000 additional shares of A&P common stock in numerous open market transactions, id. at P 52; (6) allegations of irreparable harm and inadequacy of legal remedies, id. at PP 89, 90; (7) the date on and price at which Stromfeld purchased his A&P stock, id. at P 5; (8) the date on and price at which Zisook purchased and sold his A&P stock, id. at P 6; (9) statements setting forth the bases for plaintiffs' information and belief as to certain allegations, id. at 3; and (10) allegations in support of the claim that the defendants engaged in a tender offer, id. at PP 73-74.

The amended complaint sets forth three federal causes of action. The first charges defendants with forming and concealing or failing to disclose a secret selling group in violation of sections 13, 18 and 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m, 78r and 78j(b), and the rules and regulations promulgated thereunder. The second cause of action alleges the illegal use of undisclosed inside information in violation of section 10(b) and the rules and regulations promulgated thereunder. The third claim accuses defendants of engaging in an illegal tender offer in violation of section 14 of the 1934 Act, 15 U.S.C. § 78n, and the rules and regulations promulgated thereunder. Additionally, the amended complaint sets forth claims for common law fraud, interference with business, and breach of fiduciary duty.

 DISCUSSION

 A. The First Cause of Action

 The first claim accuses the defendants of formulating a selling group of shareholders without public disclosure and without the public filings required by section 13(d) and 17 C.F.R. § 240.13d-1 et seq. The complaint alleges in essence that had the plaintiff Zisook *fn1" and other shareholders been aware of the assembling of a selling group and the imminent shift in control of A&P, they would not have sold their stock when they did nor would they have sold their stock at the prices they did.

 I held in my prior opinion that plaintiffs had failed to state a cause of action for alleged violations of section 13(d) whether such a claim was asserted under section 13(d) directly or under sections 18(a) or 10(b). 484 F. Supp. at 1268-71. Plaintiffs have not alleged anything in the amended complaint that would cause me to alter that conclusion. In light of the failure of section 13 to expressly confer a private cause of action for damages, and in view of the remedies available explicitly under section 18(a) and implicitly under section 10(b), the plaintiffs herein have no independent cause of action under section 13 for violations thereof. See, e.g., Myers v. American Leisure Time Enterprises, Inc., 402 F. Supp. 213 (S.D.N.Y. 1975), aff'd without opinion, 538 F.2d 312 (2d Cir. 1976) (section 13(d)); In re Penn Central Securities Litigation, 494 F.2d 528, 539-41 (3d Cir. 1974) (section 13(a)); Rosengarten v. International Telephone & Telegraph Corp., 466 F. Supp. 817, 827 (S.D.N.Y. 1979) (section 13(a)); Nemo v. Allen, 466 F. Supp. 192, 195-96 (S.D.N.Y. 1979) (section 13(a)). See also Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S. Ct. 2479, 61 L. Ed. 2d 82 (1979) (no implied cause of action for violations of reporting requirements of section 17(a) of 1934 Act). *fn2" In addition, section 18(a) by its terms applies to situations where a plaintiff relies on false or misleading statements contained in SEC filings. 15 U.S.C. § 78r(a). Where, as here, a plaintiff seeks relief for a defendant's failure to file, section 18(a) is not properly invoked. Even assuming a cause of action exists under section 18(a) for the failure to file section 13(d) statements, it is clear the amended complaint does not allege facts that would support a cause of action under section 18(a). Similarly, the amended complaint fails to state a claim under section 10(b).

 Section 13(d) requires any person or group of persons who directly or indirectly acquires beneficial ownership of enough stock in a corporation to have more than a five per cent interest to file certain reports with the SEC and the issue of the security within 10 days after the "acquisition." Section 13(d) and the word "acquisition" as used therein have been construed to require a filing within 10 days after the "formation" of a group of stockholders together holding more than a five per cent interest. See GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir. 1971), cert. denied, 406 U.S. 910, 92 S. Ct. 1610, 31 L. Ed. 2d 821 (1972).

 According to the amended complaint itself, Zisook purchased his 200 shares of A&P common stock at $ 5.625 per share on December 15, 1978 and sold 100 of these shares of February 13, 1979 for.$ 7.00 per share and the remaining 100 shares for $ 6.625 on March 21, 1979. The complaint does not allege the date on which the alleged selling group was formed, but states merely that "(a)t a date and place presently unknown to plaintiffs but prior to January 16, 1979," amended complaint, at P 46, a meeting was arranged between the Tengelmann defendants and the defendant Hartford Foundation. The complaint further alleges that on January 16, 1979, the defendants entered into seven agreements whereby TN Delaware acquired the shares and options to purchase additional shares of A&P stock, and that the defendants filed a number of Schedule 13D's on January 18 and 19, 1979.

 The amended complaint fails to state a claim upon which relief can be granted for several reasons. First, it alleges that the defendants filed Schedule 13D's on January 18 and 19, 1979; but since it does not plead the date on which the group was purportedly formed, it does not allege that these statements were not filed until more than 10 days after the alleged formation of the selling group. Second, although the complaint alleges that the defendants' failure to disclose the formation of the group "caused the plaintiffs and other shareholders of (A&P) to engage in purchases and sales of the stock of (A&P) which they would not otherwise have made and resulted in these transactions being made at prices which would not have been in effect had disclosure of this information been made," amended complaint, at P 59, the facts alleged do not support this assertion at all. Zisook purchased his 200 shares in December 1978 when the stock of A&P was allegedly "artificially depressed" because of the alleged concealment of the formation of the selling group. Since Zisook brought the stock at an artificially depressed price, he paid less for the stock than it was actually worth and he was not in any way damaged by the purchase. Moreover, he did not sell the stock until February 13 and March 21, 1979, after a number of Schedule 13D's had been filed and thus after public notice had been given of the formation of the group of stockholders. Since the filings were made prior to the two sales of his stock, the price of his stock was no longer "artificially depressed " when it was sold and he had at least constructive notice of the formation of the group at that time. Hence, his sales of his stock could not have been caused by a failure on the part of the defendants to file Schedule 13D's, nor did he sustain any damages as a result thereof.

 The first cause of action of the amended complaint can be construed to allege a claim that the plaintiff Zisook could have sold his stock at a higher price prior to the date disclosure was actually made if disclosure had been made earlier. The essence of this claim is that Zisook lost an opportunity to sell his stock at a higher price. Under these circumstances, however, Zisook would not be a "purchaser or seller" of stock, and he would thus have no cause of action. In Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), the Supreme Court held that a plaintiff must be either a purchaser or seller of a security to have standing to sue under section 10(b) and Rule 10b-5. Zisook's claim that he could or would have sold his stock at a price that could or would have been higher than that at which he eventually sold had the information concerning the formation of the group been disclosed earlier is precisely the type of speculative but difficult to defend against claim that the Birnbaum rule *fn3" was intended to bar. See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. at 737-47, 95 S. Ct. at 1926-31. Moreover, even if it is assumed that a cause of action exists under section 18(a) for the failure to file Schedule 13D's, Zisook would have no claim for relief since he would not have "purchased or sold a security at a price which was affected by (a) statement" that should have been but was not filed. See 15 U.S.C. § 78r(a). If Zisook had actually sold his stock prior to the filing of the required documents, a very different situation would be posed. Under the facts as alleged, however, Zisook is not entitled to relief.

 B. The Second Cause of Action

 The second claim of the amended complaint charges the defendants with using undisclosed material inside information to their own benefit. Other than the information concerning the formation of a selling group discussed above, however, the amended complaint fails to identify with any specificity the material inside information that purportedly should have been but was not disclosed. Paragraph 63 of the amended complaint refers to "inside information contained in the files of (A&P)" including "confidential business data designed to enable the Tengelmann defendants to determine whether, when, and how their European marketing and distribution practices could be applied to the (A&P)." The failure of the amended complaint to provide any specific description of the alleged inside information or when it was obtained is grounds in itself for dismissing this cause of action under Fed.R.Civ.P. 9(b). See Ross v. A. H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979), cert. denied, 446 U.S. 946, 100 S. Ct. 2175, 64 L. Ed. 2d 802 (1980). This cause of action, however, is deficient for even more compelling reasons.

 The Supreme Court recently held that section 10(b) is not violated by a failure to disclose unless a defendant has a duty to disclose. In Chiarella v. United States, 445 U.S. 222, 234, 100 S. Ct. 1108, ...


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