The opinion of the court was delivered by: Kram, District Judge.
MEMORANDUM OPINION AND ORDER
This purported class action arises out of the issuance of
stock and the subsequent Chapter 11 bankruptcy petition by
Computer Depot, Inc. ("CDI"). Robert D. Phillips, the named
plaintiff, claims that the activities of defendant Kidder,
Peabody & Co. ("Kidder") and a defendant class of underwriters
for CDI stock, relating to the initial offering and subsequent
sales of that stock, violated sections 11 and 12 of the
Securities Act of 1933, section 10(b) of the Securities
Exchange Act of 1934 and Securities Exchange Commission Rule
10b-5. Phillips further alleges common law fraud by Kidder and
the defendant class in connection with the issuance and sale
of CDI stock. Jurisdiction is founded on 28 U.S.C. § 1331,
15 U.S.C. § 77v, 15 U.S.C. § 78aa and principles of
pendent jurisdiction. This case is now before the Court on
Kidder's motion for dismissal pursuant to Fed.R. Civ.P. 12(c)
or in the alternative, Fed.R. Civ.P. 56. Kidder claims that
Phillips' suit is barred by res judicata, and that his
Complaint, as to the common law fraud and Rule 10b-5 counts, is
insufficiently specific to meet the pleading requirements of
Fed. R.Civ.P. 9(b).
CDI is a now-defunct corporation which operated a chain of
retail personal computer outlets. In 1984 CDI made a public
offering of stock, for which defendant acted as underwriter.
Plaintiff claims that the registration statement and
prospectus prepared in connection with the 1984 stock offering
contained material misrepresentations of fact as to the retail
market in personal computers. Plaintiff alleges that the
prospectus painted an overly optimistic picture of CDI's
future, when in fact defendant knew or should have known of a
"softening in the personal computer market" at the time the
prospectus was prepared. Complaint ¶¶ 17, 18, 27. Plaintiff
alleges that he purchased CDI stock in reliance on the
prospectus, and suffered remediable injury when CDI went
bankrupt as the result of the undisclosed "softening" of the
personal computer market. Complaint ¶¶ 40, 41.
On June 20, 1986, another CDI shareholder, Ronald Kassover,
filed a purported class action suit ("the Kassover
litigation") in the United States District Court for the
District of Minnesota against Kidder, the defendant here, CDI,
its corporate officers, and Dain Bosworth, Inc. The theories
of recovery against all defendants in the Kassover litigation
were similar to those asserted against Kidder by plaintiff
here. Kassover alleged violations of sections 11 and 12(2) of
the Securities Act of 1933 (15 U.S.C. § 77k, 77l(2)) by all
defendants. Kassover further alleged violation of section 10(b)
of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and
common law fraud by CDI and the corporate officer defendants.
Kassover v. Computer Depot, Inc., 691 F. Supp. 1205, 1209
(D.Minn. 1987), aff'd, 902 F.2d 1571 (8th Cir. 1990).
Phillips learned of the pendency of the Kassover litigation
when he received information concerning CDI's chapter 11
reorganization plan. He then contacted Kassover, and
subsequently retained Samuel Sporn, Esq. ("Sporn"), also then
serving as counsel in the Kassover litigation. C. William
Phillips affidavit, exhibit B, at 2. Phillips then sought to
intervene as a plaintiff in the Kassover litigation pursuant
to Fed. R.Civ.P. 24(b). At approximately the same time, Kidder
moved for summary judgment on the allegations made against it
by Kassover. Kassover moved for an order permitting Phillips'
intervention in that action and continuing all pending motions
for 45 days.
Chief Judge Alsop of the Minnesota District Court denied
Kassover's motion for Phillips' intervention and a 45-day
continuance as a "transparent attempt" to prevent the imminent
success of Kidder's summary judgment motion, and to "shore up
a crumbling lawsuit." Kassover, supra, 691 F. Supp. at 1210.
Kidder's motion for summary judgment was granted on statute of
limitations grounds. Under section 13 of the Securities Act of
1933, no suit may be maintained if the plaintiff had or through
reasonable diligence should have had notice of the alleged
fraud more than one year prior to instituting the lawsuit. The
Minnesota court noted that ordinarily, reasonable diligence is
a matter for jury determination. The court found, however, that
as a matter of law Kassover had, or through reasonable
diligence could have had, knowledge of the "softening" of the
retail personal computer market more than one year prior to the
institution of that lawsuit. Id. at 1211. The court found that
CDI was under no duty to disclose the possibility of a
bankruptcy resulting from its planned expansion because that
potential outcome was overly speculative. Kidder's failure to
include warnings to that effect in its prospectus and
registration statement therefore did not give rise to an action
under the Securities Act of 1933. Id. at 1212. Because the
court found that Kassover had constructive notice of the
"softening" in the retail computer market at least as early as
June, 1985, he was barred by the statute of limitations from
bringing a claim under the Securities Act of 1933 arising from
misrepresentations to that effect. Since Kassover had no
action under the Securities Act of 1933, the Minnesota court
found that he was no longer an appropriate class
representative with respect to his claims under the Securities
Act of 1933. Thus, the court declined to certify the plaintiff
class with respect to the claims against Kidder. Id.
Kassover appealed Judge Alsop's April 27, 1987 order to the
Eighth Circuit. During the pendency of that appeal, the
instant litigation was instituted by Phillips against Kidder.
Judge Edelstein denied Kidder's motion for transfer to the
District of Minnesota, and for an undertaking pursuant to
section 11(a) of the Securities Act of 1933. After the Eighth
Circuit affirmed the April 27, 1987 order, Kassover moved for
dismissal without prejudice of his claims against CDI and its
On April 3, 1990, Chief Judge Alsop ordered dismissal of
Kassover's claims against Kidder with prejudice, and dismissal
of his claims against the other defendants in that action
Defendant now moves for dismissal of this action, arguing
that the order of dismissal with prejudice as to Kidder
entered in the Kassover litigation should operate as a bar to
the instant litigation. In the alternative, defendant argues
that plaintiff has failed to plead fraud with the
particularity required by Fed.R.Civ.P. 9(b).
Claim preclusion bars subsequent litigation on a cause of
action where a valid and final judgment as to that cause of
action has been rendered in prior litigation between the same
parties or their privies. Montana v. United States,
440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979); Tucker v.
Arthur Andersen & Co., 646 F.2d 721, 726-27 (2d Cir. 1981).
Where the elements of claim preclusion are established,
subsequent litigation on any theory of recovery or defense
arising from the cause of action which was the subject of the
prior action is barred, whether or not it was actually
litigated in that action. Tucker, supra, 646 F.2d at 721; Index
Fund, Inc. v. Hagopian, 677 F. Supp. 710, 715 (S.D.N.Y. 1987).
The doctrine of claim preclusion conserves judicial resources
and protects defendants from burdensome and vexatious
litigation. Montana, supra, 440 U.S. at 153, 99 S.Ct. at 973.
In general, there must be both an identity of parties and an
identity of claims between the prior and subsequent litigation
before the operation of claim preclusion is triggered.
Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1233 (2d Cir.),
cert. denied, 434 U.S. 903, 98 S.Ct. 300, 54 L.Ed.2d 190 (1977)
(citations omitted). However, the first element, "identity of
parties," is construed somewhat less than literally. Several
Circuits have followed the lead of the Fifth Circuit in
recognizing a doctrine of "virtual representation." Under this
principle, if the interests of a nonparty are virtually
represented in litigation, the non-party may be precluded from
subsequent litigation. Aerojet-General Corp. v. Askew,
511 F.2d 710, 719 (5th Cir.) (citing Chicago, R.I. & P. Ry. Co. v.
Schendel, 270 U.S. 611, 618, 46 S.Ct. 420, 70 L.Ed. 757 (1926)
(other citations omitted)), cert. denied, 423 U.S. 908, 96
S.Ct. 210, 46 L.Ed.2d 137 (1975); 18 Wright, Miller & Cooper,
Federal Practice and Procedure: Jurisdiction § 4457 (1981 &
Supp. 1990). The Due Process clause limits this ...