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ZUCKERMAN v. HARNISCHFEGER CORP.

April 27, 1984

KARL ZUCKERMAN, Plaintiff, against HARNISCHFEGER CORPORATION, HENRY HARNISCHFEGER, JAMES A. MEZERA, ROBERT D. TEECE, JOHN P. GALLAGHER, HERBERT V. KOHLER, JR., RALPH J. KRAUT, EDWARD P. LEBENS, and DONALD TAYLOR, Defendants.


The opinion of the court was delivered by: HAIGHT

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

Plaintiff Karl Zuckerman brings this action on behalf of himself and other similarly situated purchasers of the common stock of defendant Harnischfeger Corporation ("the Company") to redress alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. 240.10b-5.The plaintiff class contemplated is comprised of those persons who purchased Harnischfeger stock during the period January 14, 1981 through March 31, 1981. Also named as defendants are the individual directors and officers of the Company during the period of the violations alleged. The case is presently before the Court on defendants' motion to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b). For the reasons stated, defendants' motion is granted.

 I.

 Factual Background

 Harnischfeger Corporation is a publicly owned Delaware corporation engaged in the design, manufacture, and sale of heavy industrial machinery, including electric and hydraulic mining shovels, lifting and digging equipment, overhead traveling cranes, and automated material handling systems. Its principal place of business is Milwaukee, Wisconsin. During the period at issue in this litigation, trading activity in the Company's stock increased significantly on two occasions. On January 14, 1981, the closing price of Harnischfeger stock rose to 15-3/4 from the previous day's close at 13-7/8. The number of shares traded increased from 251,000 on January 13 to 1,178,000 shares on January 14, 1981. On the afternoon of January 14, a Harnischfeger spokesman stated publicly that the Company knew of no corporate developments that would account for the surge in trading. *fn1" The high volume of trading continued for another day and thereafter declined sharply. From January 28, 1981 through March 24, 1981, the closing price for the Company's stock fluctuated from a low of 14 up to a high of 17-7/8. (Def. Ex. A).

 The second surge in trading at issue here occurred on March 25, 1981, when 3,487,000 shares of Harnischfeger were traded, a significant increase from the previous day's total of 273,000 shares. The closing price went from 17-7/8 on March 24 to 21-1/8 on March 25, 1981. Again, in response to the surge in trading, a spokesman for the Company stated that it was unable to attribute the increase in volume and price to any corporate developments. *fn2" Trading remained heavy for several days, with the closing price peaking at 22 on March 27 and thereafter declining to 18-3/4 on March 31, 1981. (Def. Ex. A).

 On April 1, 1981, the Company announced that it had reached an agreement in principle with Kobe Steel, Ltd. of Japan ("Kobe"), whereby Harnischfeger would sell to Kobe certain of its Japanese patents and certain know-how relating to construction equipment and Kobe would purchase one million shares of Jarnischfeger common stock. This tentative agreement was subject to the approval of the companies' respective boards of directors. At the time of the announcement, trading in the Company's stock was temporarily suspended. The closing price that day, according to the complaint, was 16-1/4. (Comp. P15).

 With these facts in mind, I turn to defendants' motion to dismiss.

 II.

 Motion to Dismiss

 Defendants move to dismiss the complaint on various asserted grounds, including failure to plead fraud with particularity as required by Fed.R.Civ.Proc. 9(b) and failure to allege the various elements requisite to a § 10(b) cause of action. Section 10(b) of the Securities and Exchange Act of 1934 forbids manipulative or deceptive conduct "in connection with the purchase or sale of any security. . . ." Rule 10b-5, promulgated thereunder, makes it unlawful for any person, directly or indirectly,

 "(a) To employ any device, scheme, or artifice to defraud,

 "(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

 "(c) To engage in any act, practice, or course of business which operates or would operate was a fraud or deceit upon any person, in connection with the purchase or sale of any security."

 Plaintiff alleges in the complaint that the Company's public statements on January 14, 1981, and March 25, 1981, disavowing any corporate developments that could account for the surge in trading on those dates, were "false and misleading announcements" which "caused the price of the Company's stock to rise to or remain at higher levels that if the true facts had been stated. . . ." (Comp. P16). The misstatements alleged, which plaintiff now characterizes as "mixed misrepresentations and non-disclosures" (Pl. Br. at 15), involve defendants' failure to divulge publicly that the Company "was engaged or had determined to engage in negotations with Kobe Steel . . . to sell 1,000,000 shares of its stock to that company." (Comp. P14). Plaintiff concludes therefrom that purchasers of Harnischfeger stock during the period January 14, 1981 through March 31, 1981 have been damaged in that they "paid inflated prices for the stock." (Comp. P16).

 Certain of the allegations set forth in plaintiff's complaint do not, in my view, satisfy Rule 9(b)'s specificity requirement, while the complaint as a whole is more fundamentally defective in that it fails to assert the elements necessary to an actionable claim under the securities laws. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." This refinement of the Federal rules' otherwise simplified pleading approach is intended to protect defendants from the substantial harm that could result from vaugely pleaded or speculatively based claims of serious wrongdoing. It further ensures that a defendant accused of fraudulent conduct will be fully apprised of the grounds upon which that claim rests. Ross v. A.H. Robins Co., Inc., 607 F.2d 545, 557 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980), rehearing denied, 448 U.S. 911, 65 L. Ed. 2d 1140, 100 S. Ct. 3057 (1980); Denny v. Barber, 576 F.2d 465, 469 (2d Cir. 1978); Segal v. Gordon, 467 F.2d 602, 607 (2d Cir. 1972). As stated by the Second Circuit: "[T]o pass muster in this Circuit a complaint "must allege with some specificity the acts constituting the fraud" [citation omitted]; conclusory allegations that defendant's conduct was fraudulent or deceptive are not enough." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 114 (2d Cir. 1982). In the context of § 10(b) litigation, "plaintiff must allege acts indicating an intent to deceive, manipulate or defraud . . ., and Rule 9(b) requires that the circumstances constituting such fraud be stated with particularity." Id. at 115. See Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S. Ct. 683, 692, 74 L. Ed. 2d 548 (1983) ("[A] Section 10(b) plaintiff carries a heavier burden that a Section 11 plaintiff. Most significantly, he must prove that the defendant acted with scienter, i.e., with intent to deceive, manipulate, or defraud.")

 Plaintiff's only allegation of the requisite "scienter" or "intent to deceive" is as follows:

 "17. All of the defendants herein knew or were reckless in no knowing, or were negligent in knowing, that the statements complained of were false and misleading, and in authorizing, permitting or failing to ...


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