The opinion of the court was delivered by: Sand, District Judge.
This securities fraud case*fn1 arises out of the
acquisition of Columbia Pictures Entertainment, Inc.
("Columbia") by Sony USA, Inc. ("Sony USA"), a wholly owned
subsidiary of the Sony Corporation ("Sony Japan"). Plaintiffs
are former stockholders of Columbia who seek to maintain a
class action on behalf of all persons who sold shares of
Columbia common stock or call options between March 27, 1989
and September 25, 1989. Amended Complaint ¶ 9. Defendants are
Sony USA, Sony Japan and Michael Schulhof, Chairman and
President of Sony USA and a director of both Sony USA and Sony
Japan. Amended Complaint ¶¶ 6-8.
Plaintiffs' amended complaint*fn2 attempts to state a cause
of action under Securities and Exchange Commission Rule
10b-5,*fn3 which was promulgated pursuant to § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1988).
Presently before this Court is defendants' motion to dismiss
the amended complaint for failure to state a cause of action,
Fed.R.Civ.P. 12(b)(6), and failure to plead fraud with
sufficient particularity, Fed.R.Civ.P. 9(b). For the reasons
stated below, defendants' motion is denied.
The facts alleged in this case are relatively
straightforward. Plaintiffs claim that during the spring and
summer of 1989, defendants made statements to the press in
which they falsely denied that merger negotiations between
themselves and Columbia were underway. As a result of these
false denials, plaintiffs and the class they seek to represent
allegedly lost money when they sold their Columbia stock at
artificially depressed prices.
According to plaintiffs' amended complaint, Sony Japan has
had a longstanding interest in diversifying its business by
expanding into other areas of the entertainment industry. In
November, 1988, Sony Japan began to focus its attention on
Columbia as a possible target for acquisition. Amended
Complaint ¶ 19. Defendant Schulhof, who was acting on behalf of
both Sony Japan and Sony USA, convened various meetings with
executives of Columbia
and the Coca-Cola Company, which owned a substantial
percentage of Columbia stock. Amended Complaint ¶¶ 8, 16,
21-23. Meetings and discussions between Schulhof and Columbia
representatives continued during the spring and early summer of
1989. Amended Complaint ¶¶ 26-29. In July, 1989, the pace of
negotiation quickened, and the acquisition plan was finalized
during August, 1989. Amended Complaint ¶¶ 21, 29-33, 34-37. A
formal merger proposal was made to Columbia's Board of
Directors by Sony USA on September 25, 1989, and a successful
tender offer followed at a price of $27 per share. Amended
Complaint ¶¶ 39-44.
Plaintiffs allege that during early 1989, defendants adopted
a policy of refusing to comment on the existence of
negotiations between themselves and Columbia regarding the
possible takeover. Amended Complaint ¶¶ 45-49. Subsequently,
however, defendants abandoned this policy and began to deny
falsely that discussions were underway. Amended Complaint ¶ 50.
Specifically, plaintiffs point to three allegedly misleading
press reports. The first is an article appearing in the April
3, 1989 edition of Forbes magazine (published on March 27th)
which reported that "Sony" denied the existence of any merger
discussions with Columbia. Plaintiffs allege that the denial
referred to in the article was made by defendant Schulhof.
Amended Complaint ¶ 50. The second press report is a June 21,
1989 Reuters dispatch which quoted defendant Schulhof and
Masaaki Morita, an officer of both Sony Japan and Sony USA, as
saying that defendants were not currently engaged in any effort
to acquire Columbia. Amended Complaint ¶ 51(a). The third and
final press report relied upon by plaintiffs is a story
appearing in the June 22, 1989 edition of The New York Times,
which apparently did no more than paraphrase the remarks
attributed to Mr. Schulhof and Mr. Morita in the Reuters
dispatch. Amended Complaint ¶ 52.
Plaintiffs claim that the press statements described above
were false and materially misleading because defendants were
actively engaged in merger discussions with Columbia at the
time the statements were made.*fn4 Amended Complaint ¶¶ 57-60.
Plaintiffs further allege that as a result of the defendants'
misrepresentations, the price of Columbia stock was
artificially depressed from the time of the Forbes article
until the time the merger agreement became public. Because they
sold their Columbia stock during this period, plaintiffs
suffered economic loss directly traceable to defendants'
misrepresentations. Amended Complaint ¶¶ 61-63. Seeking
redress, plaintiffs filed the present action.
This case comes before the Court on defendants' motion to
dismiss the amended complaint. In deciding the motion, this
Court is required to accept plaintiffs' allegations as true
and construe those allegations in the light most favorable to
plaintiffs. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct.
1683, 1686, 40 L.Ed.2d 90 (1974); Dacey v. New York County
Lawyers' Ass'n, 423 F.2d 188, 191 (2d Cir. 1969), cert. denied,
398 U.S. 929, 90 S.Ct. 1819, 26 L.Ed.2d 92 (1970). The
complaint will be dismissed only if plaintiffs can prove no set
of facts that would entitle them to relief. See Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80
(1957); Goldman v. Belden, 754 F.2d 1059, 1065 (2d Cir. 1985).
In order to state a cause of action under Rule 10b-5, a
plaintiff must demonstrate the existence of six elements.
These are: (1) a misstatement or omission by the defendant;
(2) as to a material fact; (3) plaintiff relied on the
misstatement or omission; (4) defendant acted with scienter;
(5) the misstatement or omission was made in connection with
the purchase or sale of securities; and (6) plaintiff suffered
damage as a result of the misstatement or omission. See Genden
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 114 F.R.D. 48,
51 n. 2 (S.D.N.Y. 1987); Fisher v. Plessey Co., Ltd., 103
F.R.D. 150, 155 (S.D.N.Y. 1984). In their amended complaint,
plaintiffs have made allegations directed towards establishing
each of these elements. Plaintiffs allege that the press
statements made by the defendants were false (¶¶ 23-29, 50-51)
and material (¶ 50-51, 56); that the misstatements affected the
market price of Columbia stock, upon which plaintiffs relied in
deciding to sell (¶ 61); that defendants acted intentionally or
recklessly (¶ 55); that plaintiffs sold Columbia common stock
or options during the relevant period (¶ 5); and that
plaintiffs suffered monetary loss (¶¶ 62-63).
In their motion to dismiss the amended complaint, defendants
focus their attack primarily on the first three elements of
plaintiffs' 10b-5 cause of action. Defendants advance five
arguments in support of dismissal, each of which is addressed
in turn below.
1. Insufficient Allegation that Press Statements were
False and Misleading
Defendants' first challenge to the sufficiency of the
amended complaint is the contention that plaintiffs have not
alleged adequately that the press statements were false and
misleading. Relying upon Fed.R.Civ.P. 9(b), defendants argue
that plaintiffs have failed to allege facts from which it can
be inferred that merger discussions between defendants and
Columbia were underway at the time the press statements were
Rule 9(b) provides that "[i]n all averments of fraud or
mistake, the circumstances constituting fraud or mistake
should be stated with particularity." Fed.R.Civ.P. 9(b). The
purposes which Rule 9(b) seeks to accomplish are threefold:
(1) to provide defendants with fair notice of the plaintiff's
claim; (2) to protect defendants from unwarranted harm to
their reputations; and (3) to reduce the number of strike
suits. DiVittorio v. Equidyne Extractive Industries, Inc.,
822 F.2d 1242, 1247 (2d Cir. 1987). To these ends, Rule 9(b)
requires that plaintiffs plead fraud claims with somewhat more
specificity than is required for other types of claims. See 5
Wright & Miller, Federal Practice and Procedure: Civil § 1297
at 405 (Rule 9(b) "is a special pleading requirement and
contrary to the general ...