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September 26, 1990


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 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 made.

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 ยง 1297 at 405 (Rule 9(b) "is a special pleading requirement and contrary to the general ...

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