The opinion of the court was delivered by: BARTELS
Plaintiff Geraldine Rubin brought this class action charging Long Island Lighting Company ("LILCO") with violations of § 11(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77k(a),
and § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5,
in connection with its offering and sale of three million shares of Series T preferred stock in September, 1980. The remaining ninety-five defendants compose an underwriting group of which defendant Bache Halsey Stuart Shields Inc. acted as managing underwriter for the preferred stock offering. The alleged violations consist of omissions of material facts required to make statements in the prospectus not misleading. Defendants move to dismiss the complaint for various reasons including the defense under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted.
Plaintiff alleges that she purchased 200 shares of the Series T preferred stock from the initial offering in September, 1980, "in reliance upon the Prospectus and subsequently sold said shares at a loss." (Amended Complaint P38.) Nowhere does plaintiff disclose the date of sale or the amount of loss; the court can only note that she commenced this action on March 4, 1983. On page nine of the prospectus filed by LILCO with the Securities and Exchange Commission ("SEC") as part of its registration statement, under the heading "Tax Status," there appeared the following paragraph which is the focal point of the alleged misrepresentation:
A preliminary estimate by [LILCO] indicates that a substantial portion of the Preferred Stock dividends to be paid in 1980 may represent return of capital for tax purposes and therefore will not be subject to federal income tax as ordinary income, but will be considered a return of capital, thereby reducing the tax basis of the applicable shares by such amount. In 1979, 63 percent of the dividends paid by [LILCO] on Preferred Stock were considered to be a return of capital. This was the first year in which [any portion of the] dividends paid on Preferred Stock was not taxed as ordinary income.
The statements regarding tax treatment of 1979 preferred stock dividends were correct. LILCO's prediction as to tax treatment of preferred dividends paid in 1980 proved to be accurate and, indeed, conservative. In January, 1981, LILCO advised its preferred stockholders that 100% of preferred dividends paid in 1980 would be considered as a return of capital for tax purposes. (Affidavit of Steven J. Lanzola of record-keeping agent for LILCO's transfer agent, Exh. A.) The amended complaint makes no mention of this fact.
Preferred dividends paid in the following two years, however, received less advantageous tax treatment. All preferred dividends paid in 1981 received ordinary income treatment for tax purposes. (Amended Complaint P21). In early 1983 LILCO advised its preferred stockholders that 81% of the preferred dividends paid in 1982 would be treated as return of capital. (Affidavit of Spencer E. Hughes, Jr. of LILCO's Investor Relations Department P2.) Once again, plaintiff's amended complaint omits this latter fact. Plaintiff does not claim that such dividends could not or did not constitute a return of capital. Rather, plaintiff, as best as can be ascertained from the lengthy, ambiguous, and inartfully-drawn complaint, alleges that the prospectus was deceptive in two respects.
The first of plaintiff's two claims (alleged more explicitly in the original complaint)
is that the "Tax Status" paragraph quoted above misled the investing public into believing that preferred dividends to be paid in years after 1980 would be treated as return of capital for tax purposes. (Amended Complaint PP17, 19-21, 26-28, 30, 31, 32(f) and (g), 35(f) and (g)). Plaintiff alleges, again and again, that defendants accomplished this deception by omitting from the prospectus what in summary are: (1) earnings and profits of LILCO accumulated between 1913 and 1979 for dividend purposes under § 316 of the Internal Revenue Code,
(2) earnings and profits of LILCO in the years 1979 and 1980 for dividend purposes under § 316 of the Internal Revenue Code, (3) an explanation of the effects of the above on tax treatment of preferred dividends paid in 1979 and 1980, and (4) whether the circumstances were non-recurring which led to tax treatment of preferred dividends paid in 1979 and 1980 as return of capital. (Amended Complaint PP20, 22-32, 35.)
From the tedious details elaborated in the complaint relating to the above items, one can only gather that the plaintiff is claiming that she was injured because the Series T preferred stock dividends paid by LILCO in 1981 received tax treatment as ordinary income while she expected return of capital treatment.
Plaintiff's second claim for recovery is also based on defendants' omission of the above four categories of information relating to the tax treatment of 1979 and 1980 dividends as return of capital. Plaintiff adds, however, that the omissions were material and necessary to make the statements in the prospectus not misleading because had this information been disclosed, LILCO would have been forced to either offer a greater yield or lower the stock's offering price. (Amended Complaint PP18-20, 33, 37, 39.) The omission of this information, plaintiff alleges, affected her decision as an investor in purchasing the Series T preferred stock at a given price. Under either theory the essence of plaintiff's claims is that the defendants failed to disclose material information which would have enabled plaintiff to better assess the likelihood that preferred dividends to be paid in the future would be treated as return of capital for tax purposes or to assess the value of the stock.
Defendants assert several grounds in support of their motion to dismiss the amended complaint. First, they attack plaintiff's § 10(b) claim for failing to allege fraud and scienter with particularity, Fed.R.Civ.P. 9(b), and failing to allege how the claimed omissions proximately caused plaintiff's undisclosed loss. Second, defendants seek summary judgment on plaintiff's § 11 claim on the ground that it is time-barred pursuant to the one-year limitations period provided for in § 13 of the Securities Act, 15 U.S.C. § 77m. Finally, defendants seek dismissal of the entire amended complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted under either § 11(a) or § 10(b). In essence, defendants argue that as a matter of law the challenged "Tax Status" paragraph in the prospectus contained no misleading statements or omitted material facts necessary to render the statements made not misleading. Because we agree that dismissal is warranted under Rule 12(b)(6), we need not reach defendants' other contentions.
When considering claims of material omissions under § 11(a) of the Securities Act and § 10(b) of the Exchange Act, there is no question that they stand or fall together for the simple reason that both provisions impose liability for material omissions in virtually identical language. See Parsons v. Hornblower & Weeks-Hemphill, Noyes, 447 F. Supp. 482, 489 & n.13 (M.D.N.C. 1977), aff'd, 571 F.2d 203 (4th Cir. 1978).
Both § 11(a) and § 10(b) require the plaintiff to allege and prove that the registration statement or prospectus contained a material misstatement or, as is alleged here, omitted to state a material fact necessary to make the statements made not misleading. "In short, an omission is not actionalbe unless it is a material fact that is omitted and unless that material fact adversely affects the reliability of other statements." Parsons, 447 F. Supp. at 489. "A fact is material if there is a substantial likelihood that, under all the circumstances, a reasonable investor would consider it important in reaching an investment decision." Greenapple v. Detroit Edison Co., 468 F. Supp. 702, 708 (S.D.N.Y. ...