The opinion of the court was delivered by: BRIEANT
By a paper docketed August 6, 1982 in this lawsuit founded on the well familiar provisions of Rule 10b-5, plaintiff has renewed its motion for class action determination dated April 1, 1982, which was, by reason of this Court's Order dated June 23, 1982, held in abeyance pending the filing of an amended complaint.
At the same time, by motion docketed August 31, 1982, defendants moved for an order dismissing the amended complaint pursuant to Rule 12(b) (6), F.R.Civ.P. for failure to state a claim, or alternatively, pursuant to Rule 12(f), F.R.Civ.P., striking out the allegations of fraud on the market reliance. The motions were heard together on October 13, 1982 and fully submitted as of October 25, 1982.
The amended class action complaint herein was filed July 16, 1982. According to the amended complaint, as amplified at the hearing on these motions, defendant Four-Phase is the issuer of common stock which was at the relevant point in time, listed and traded on the New York Stock Exchange. The individual defendants are former officers and/or directors of the issuer.
Plaintiff seeks to sue as representative of a class which includes all persons other than defendants who owned Four-Phase stock immediately prior to the December 2, 1981 public announcement by the company quoted below and alleged in para. 12 of the amended complaint, and who sold the stock at any time prior to the subsequent announcement on December 10, 1981 of a proposed merger by the issuer with Motorola, Inc. Familiarity with this Court's prior Memorandum Endorsement docketed June 24, 1982 is assumed.
The amended complaint shows that on November 27, November 30 and December 1, 1981, the three trading days before December 2, 1981, Four-Phase stock closed on the New York Stock Exchange at prices of $28., 27 5/8ths and 28 3/4ths on share volume of 27,500, 18,000 and 39,800 shares, respectively. On December 2, 1982 there was, it is said, a "steep and sudden rise in the market price of and the trading volume in the Company's common stock." The price rose to 34 1/2 on a volume of 302,000 shares.
On December 2, 1981, defendants issued an announcement (the "Hodder Statement"), disseminated to the public over the Dow-Jones ticker reading as follows:
"R. Frederick Hodder, Treasurer of Four-Phase Systems said the Company is not aware of any corporate developments which would affect the market for its stock."
Plaintiff claims the statement was false and also that it contained a material omission. Plaintiff would have the Court assume for the motion, and intends to prove at trial, that word of the pending merger had leaked, causing a reaction in volume of shares sold, and market price. Of course, the Hodder Statement, like many statements, may be characterized alternatively as false and misleading, or as incomplete, having a misleading omission. The Statement is arguably false, but it is also misleading in that it fails to "state a material fact necessary . . . to make the statement made, in light of the circumstances under which [it was] made, not misleading" within the familiar rubric of Rule 10b-5, e.g., "however Mr. Hodder also said that he and other representatives of the issuer were engaged in active negotiations looking toward a merger with a large publicly held corporation and were drafting papers to effect such a transaction, although final agreement had not been reached."
Plaintiff pleads that the market reacted both as to price and volume, adversely to the stock, as a result of the Hodder Statement. On December 8th the New York Stock Exchange halted trading, prior to which the stock closed at 32 7/8ths on a volume of 103,200 shares. On December 10, 1982, while trading was halted, the company announced that it had entered into a merger agreement with Motorola, Inc. whereby Motorola would acquire all Four-Phase stock for Motorola stock, valued at $45. per share. On December 11, 1981, when trading resumed, the closing price was 39 1/2 on a volume of 527,900 shares.
Plaintiff alleges, and it certainly may be inferred, that the "steep and sudden rise in the market price of and trading volume in Four-Phase stock on December 2 . . . was a result of a leakage into the marketplace of information relating to the merger negotiations between Four-Phase and Motorola." (Amended Complaint, para. 16). Accordingly, plaintiff pleads that the December 2nd Statement by the company was materially false and misleading, that the issuer knew of the merger under discussion with Motorola, and knew that the possibility of the merger was a corporate development which could and in fact did affect the market in the stock once news of that prospect leaked, as it apparently did.
Plaintiff alleges that the false and misleading Hodder Statement artificially depressed the market price, and thereby affected the "intergrity" (sic) of the market (Amended Complaint, para. 19). Plaintiff also alleges that in reliance on the December 2nd Statement and in reliance on the integrity of the market, and in particular reliance on his assumption or belief that the market price of Four-Phase stock reflected accurate public information disseminated by Four-Phase, he sold his stock during the class period, suffering a lost benefit which he would have enjoyed had he awaited the merger. Plaintiff also alleges that in reliance on the December 2nd Statement, and/or the integrity of the market, members of the proposed class must have done the same thing.
While defendants' motion to dismiss or to strike seeks affirmative relief, essentially the purpose of this motion is to defeat the companion motion of plaintiff for class certification. Accordingly, consideration of ...