The opinion of the court was delivered by: SAND
LEONARD B. SAND, U.S.D.J.
This case involves 1) a purported class action brought on behalf of those persons who purchased common stock and call options of Coleco Industries, Inc. ("Coleco") from May 27, 1983 to September 29, 1983 and who continued to hold these investments on September 30, 1983, and 2) a derivative suit brought on behalf of Coleco. The alleged class has yet to be certified. Defendants in the class action include Coleco and certain of its officers. These officers are also defendants in the derivative suit; one Bruce Stein, and investor in Coleco, is plaintiff in the derivative suit.
The allegations in this case center around Coleco's introduction of its "Adam" home computer system in 1983. The Adam was intended to be a substantial advance in low cost home computer technology. Designed to retail at $600., the system would be fully integrated, offering mass memory storage, complete software, a typewriter keyboard, word processing, and letter-quality printing capability all in one package. Assembling a similar system from components on the market in 1983 would have cost substantially more than $600. Coleco projected sales of 500,000 Adam units in 1983 and record earnings for the year. In fact, Coleco achieved only a small fraction of these expected sales and reported a 7.4 million dollar loss in 1983.
In Count I of the Consolidated and Amended Complaint ("complaint"), the class plaintiffs allege inter alia that defendants' statements concerning Adam during the class period were knowingly or recklessly false, and constitute fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). Count II alleges fraud in violation of state and common law. Count III charges "negligent misrepresentation" in violation of state law. The derivative claim is asserted in Count IV.
Defendants now move (1) to dismiss Counts I and II for failure to plead fraud with the requisite particularity, see F.R.Civ.P. 9(b), (2) to dismiss Count III for failure to state a claim upon which relief can be granted, see F.R.Civ.P. 12(b). The individual defendants move to dismiss the derivative count for failure to state a claim or, alternatively, to join "indispensable parties" on their derivative claim under F.R.Civ.P. 19.
Rule 9(b) of the Federal Rules of Civil Procedure provides:
In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred gradually.
This rule aims largely to provide the defendant fair notice of the basis of plaintiff's claim and to protect defendant's reputation from groundless accusations of fraud incited by the possibility of an "in terrorem increment" in the settlement value of a lawsuit. See generally Ross v. A.H. Robins Co., Inc., 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946, 64 L. Ed. 2d 802, 100 S. Ct. 2175 (1980).
Defendants argue that the complaint fails to satisfy Rule 9(b) principally because it does not allege sufficient facts giving rise to a reasonable inference of scienter. Moreover, counsel for defendants represented at oral argument that, even when plaintiffs' submissions outside the pleadings are considered, no facts support an inference that defendants knowingly or recklessly deceived the investing public during the relevant time period.
We believe defendants' contentions are without merit and that the complaint as drafted satisifies Rule 9(b).
Rule 9(b), of course, imposes no requirement of prolixity, see Somerville v. Major Exploration, Inc., 576 F. Supp. 902, 911 (S.D.N.Y. 1983). A concise summary of plaintiffs' contentions as to scienter is set forth in paragraph 17 of the complaint:
Defendants' intent and conduct, as set forth below, were calculated to promise delivery of a finished retail product for Christmas sales in 1983, which product was neither developed, perfected nor capable of massive retail delivery by that date and which defendants either knew they could not ...