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March 25, 1986

JOEL PACKER and G & P INDEPENDENT MANAGEMENT CORP., on behalf of themselves and as shareholders of Graphic Scanning Corp., in part derivatively in the right of Graphic Scanning Corp., Plaintiffs,

The opinion of the court was delivered by: CONNER



Plaintiffs Joel Packer ("Packer") and G & P Independent Management Corporation ("G & P") are beneficial owners of 10,100 and 100 shares respectively of the common stock of Graphic Scanning Corporation ("Graphic"). They commenced this action against the members of Graphic's board of directors alleging violations of section 10(b) of the Securities Exchange Act of 1934 ("the '34 Act"), 15 U.S.C. § 78j(b) (1982), Securities and Exchange Commission rule 1Ob-5, 17 C.F.R. § 240.10b-5 (1985), and the laws of the state of Delaware. Subject matter jurisdiction is predicated upon section 27 of the '34 Act, 15 U.S.C. § 78aa (1982), and the doctrine of pendent jurisdiction.

 This matter is now before the Court on defendants' motion (1) to dismiss plaintiffs' complaint; (2) to disqualify plaintiffs' counsel; or (3) in the alternative, to stay this action pending decision of a shareholder derivative action pending in the Delaware Chancery court. For the reasons set forth below, defendants' motion to dismiss the complaint is granted.


 On a motion to dismiss, the Court must accept as true the facts alleged in the complaint. See Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972) (per curiam); Joyce v. Joyce Beverages, Inc., 571 F.2d 703, 706 (2d Cir.), cert. denied, 437 U.S. 905, 57 L. Ed. 2d 1135, 98 S. Ct. 3092 (1978). Accordingly, for the purposes of this motion, the relevant facts are as follows:

 Plaintiffs allege that, beginning in 1981 and continuing to date, defendant Barry Yampol ("Yampol"), chairman of Graphic's board of directors, has been systematically stripping Graphic of its assets and converting them to his own benefit. Plaintiffs allege that the other defendants, the balance of Graphic's board of directors, are under Yampol's influence and control, and have acquiesced in Yampol's looting of the corporation.

 Plaintiffs allege that since 1981, defendants have caused Graphic to issue proxy statements, registration statements, and press releases containing material misrepresentations and omissions with respect to Yampol's dealings with the corporation. Plaintiffs allege that as a result of these misleading statements and omissions, all of which they claim caused the price of Graphic stock to be artificially inflated, they purchased Graphic stock relying on the "integrity of the market and/or the statements made." Verified Complaint P 58. Plaintiff Packer purchased shares of Graphic stock sometime shortly after August 15, 1984 at $7.375 per share. Plaintiff G & P purchased Graphic stock on February 24, 1986, four days prior to the filing of this lawsuit, at an undisclosed price. Packer and G & P have not sold their stock; they continue to hold the shares to date.

 Plaintiffs' complaint asserts five claims against defendants based on their alleged misdeeds. Plaintiffs assert their first claim for relief in their individual capacities; it charges defendants with violations of section 10(b) and rule 10b-5. Plaintiffs assert the second through fifth claims derivatively on bahalf of Graphic; those claims charge defendants with common law fraud, breach of fiduciary duty, waste of corporate assets, and misappropriation of corporate opportunities. Plaintiffs have named Graphic as a nominal defendant on these derivative claims.

 Plaintiffs do not seek damages, but only injunctive and declaratory relief. They have requested, inter alia, (1) a declaration invalidating certain agreements between Graphic and defendants; (2) a permanent mandatory injunction requiring defendants to correct the allegedly false and misleading statements mentioned above; (3) a permanent injunction enjoining defendants from acquiring or voting Graphic stock or proxies until thirty days after defendants have corrected the allegedly false and misleading statements; (4) a permanent injunction enjoining defendants from selling Graphic's assets outside the ordinary course of business until directors elected at the next annual meeting of Graphic's shareholders have taken office; (5) a permanent injunction enjoining defendants from violating the federal securities laws, defrauding Graphic and its stockholders, breaching their fiduciary duties, wasting corporate assets, or misappropriating corporate opportunities; and (6) a permanent injunction enjoining Graphic from indemnifying defendants for any expenditures they may incur in the defense of this action without first obtaining the approval of a majority of Graphic's shareholders.

 As noted above, defendants have moved to dismiss the complaint against them. They advance the following grounds in support of their motion to dismiss plaintiffs' non derivative federal securities claim: (1) Graphic is an indispensable party to this claim; (2) plaintiffs lack standing to assert a 10b-5 claim; (3) the alleged misstatements are not material misrepresentations but merely pejorative characterizations of actions which were fairly described in the underlying documents; and (4) plaintiffs have not pleaded their allegations of fraud with sufficient particularity.

 Defendants note, of course, that if I dismiss plaintiffs' securities claim, United Mine Workers v. Gibbs. 383 U.S. 715, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966), requires that I also dismiss plaintiffs' four derivative state law claims. In addition, defendants advance the following independent grounds for dismissing those claims: (1) plaintiffs are inadequate derivative representatives; (2) plaintiffs seek to challenge actions that took place before they became Graphic shareholders; (3) plaintiffs failed to make a demand on Graphic's board of directors prior to commencing this action; and (4) the derivative claims are not pendent to plaintiffs' federal claim because the state law claims will substantially predominate and do not arise out of a common nucleus of operative fact.

 Defendants have also moved to disqualify plaintiffs' counsel, Willkie Farr & Gallagher, from prosecuting the derivative claims because the law firm also represents some of Graphic's competitors, and therefore has a conflict of interest. Finally, defendants have moved to stay the derivative claims because there is a prior action pending in the Delaware Chancery court challenging all of the acts and transactions complained of here.

 For the reasons set forth below, I agree with defendants that plaintiffs lack standing to assert a 10b-5 claim for the relief they seek. I need not and do not address defendants' other attacks on the securities claim. Moreover, having concluded that plaintiffs' federal claim must be dismissed, I decline to exercise pendent jurisdiction over ...

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