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 approach of simplified pleading adopted
by the federal rules"); see also Ross v. A.H. Robins Co., Inc.,
607 F.2d 545, 557 (2d Cir. 1979), cert. denied,
446 U.S. 946, 100 S.Ct. 2175, 64 L.Ed.2d 802 (1980).
On the other hand, Rule 9(b) must be read in conjunction
with Rule 8(a), which requires that complaints set out only a
"short and plain statement of the claims for relief."
Fed.R.Civ.P. 8(a); see also DiVittorio, 822 F.2d at 1247; Ross,
607 F.2d at 557 n. 20. Rule 9(b) "imposes no requirement of
prolixity," In re Coleco Sec. Litigation, 591 F. Supp. 1488,
1490 (S.D.N.Y. 1984); rather, it simply seeks to insure that
the defendant has a fair opportunity to respond to the
plaintiff's charges and is not required to answer naked or
unsubstantiated allegations of fraud.
In this case, plaintiffs' claim that the press statements
were false has been pleaded with sufficient particularity to
satisfy Rule 9(b). Contrary to defendants' contentions, the
amended complaint does allege facts which support the
inference that when the press statements denying the existence
of merger discussions were made, discussions were in fact
With regard to the time period in which the Forbes article
appeared (late March, 1989), plaintiffs point to the Offer to
Purchase promulgated by Sony USA in connection with its tender
offer for Columbia's stock, and to an article appearing in the
February, 1990 edition of Vanity Fair magazine. Amended
Complaint ¶¶ 20, 24. The Offer to Purchase states that meetings
between defendant Schulhof and representatives of Columbia took
place in "early 1989," and that thereafter representatives of
the two companies "continued investigating
the possibility" of an acquisition. See Amended Complaint ¶ 26.
The Vanity Fair article, which plaintiffs allege to have been
based at least in part on an interview with Mr. Schulhof,
states that in February, 1989, Schulhof began to "zero in" on
consummating the acquisition of Columbia. See Amended Complaint
¶ 24. It may be that neither the Offer to Purchase nor the
article comes close to conclusively establishing that merger
discussions were occurring in late March, 1989; yet the two
documents do support an inference to that effect.
With regard to the time period in which the Reuters and The
New York Times reports appeared (late June, 1989), plaintiffs
likewise have alleged facts supporting an inference of
misrepresentation. The amended complaint quotes a memorandum
allegedly prepared by defendants which indicates that as of
late August, 1989, plans to finalize the acquisition of
Columbia had been underway for two months. See Amended
Complaint ¶ 39. This allegation supports the inference that
negotiations were occurring in late June, 1989.
This Court finds that plaintiffs have pleaded adequately
that the press statements were misleading. The amended
complaint identifies the time, place, speaker and content of
the allegedly misleading statements. See Luce v. Edelstein,
802 F.2d 49, 54 (2d Cir. 1986) (Rule 9(b) requires pleading of
time, place, speaker and content). It also alleges facts which
support the inference that the press statements were false and
misleading when made. Rule 9(b) requires no more. See In re
Coleco, 591 F. Supp. at 1490 (10b-5 plaintiff need not expose
"smoking gun" in pleadings in order to satisfy Rule 9(b)).
The complaint in the instant case falls well within the
parameters of complaints that other courts have upheld against
Rule 9(b) challenges. See Credit & Finance Corp. Ltd. v. Warner
& Swasey Co., 638 F.2d 563, 566 (2d Cir. 1981) (complaint
sufficient under Rule 9(b) where it alleged a number of
particulars from which it could be inferred that corporate
press release was materially false and misleading); DiVittorio,
822 F.2d 1242, 1248 (2d Cir. 1987) (complaint's 10b-5
allegations upheld against certain defendants, even though
pleaded on information and belief, where plaintiff alleged
specific facts supporting inference of fraud). Contrast Stern
v. Leucadia Nat'l Corp., 844 F.2d 997, 1004 (2d Cir.)
(plaintiff's allegation that defendant's statement was false
insufficient under Rule 9(b) where plaintiff alleged no
specific facts to support inference of falsity), cert. denied,
488 U.S. 852, 109 S.Ct. 137, 102 L.Ed.2d 109 (1988). For this
reason, and for the reasons stated above, defendants' first
challenge to the sufficiency of the complaint fails.
2. Insufficient Allegation that Misstatements were
Defendants' second argument in support of the motion to
dismiss is that plaintiffs have failed to allege adequately
that the press statements were materially misleading.
Defendants argue that in order to be "material" under Rule
10b-5, merger discussions must have progressed to the point
where consummation of the transaction is more likely than not.
In this case, they argue, plaintiffs have not alleged that
completion of the Columbia acquisition was more likely than not
in either late March or late June. Therefore, according to
defendants, there is no adequate allegation that the press
statements were materially misleading and the complaint should
Defendants cite no support in the cases for the proposition
that merger discussions are immaterial as a matter of law
until consummation of the transaction is more likely than not,
nor has this Court found any such case. Instead, defendants
seize upon certain language in Basic, Inc. v. Levinson,
485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988), as support for
their theory. In Basic, the Supreme Court determined that an
omitted or misrepresented fact is material under Rule 10b-5 if
it "would be viewed by the reasonable investor as having
significantly altered the `total mix' of information made
available." Id. at 231-32, 108 S.Ct. at 983 (quoting TSC
Industries, Inc. v. Northway, Inc.,
426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976)).
Applying this test to the question of when merger discussions
become material, the Court stated that materiality depends
upon "a balancing of both the indicated probability that the
event will occur and the anticipated magnitude of the event in
light of the totality of company activity." Id. at 238, 108
S.Ct. at 987 (quoting SEC v. Texas Gulf Sulphur Co.,
401 F.2d 833, 849 (2d Cir. 1968), cert. denied, 394 U.S. 976, 89 S.Ct.
1454, 22 L.Ed.2d 756 (1969)). Defendants point to the Supreme
Court's use of the word "probability" in its explanation of
materiality and argue that this implies that a contemplated
merger must be more likely than not in order for discussions
about it to be material.*fn5
This Court rejects defendants' argument because it is based
on an erroneous reading of Basic. In Basic, the Supreme Court
expressly eschewed the Third Circuit's "agreement in principle"
test for materiality, under which merger negotiations were
deemed immaterial as a matter of law until an agreement in
principle was reached by the parties. Basic, 485 U.S. at 237,
108 S.Ct. at 986. While noting the advantages of a bright-line
rule, see id. at 236, 108 S.Ct. at 985, the Court ultimately
endorsed the fact-specific test for materiality discussed
above. See id. at 238, 108 S.Ct. at 986 (materiality depends on
balancing of chance that transaction will occur against
magnitude of event). In this case, the "more likely than not"
test urged by defendants is merely a reformulation of the
bright-line rule rejected by the Supreme Court in Basic.
Defendants' proposed rule ignores the Supreme Court's directive
that "[n]o particular event or factor" is conclusive in
deciding whether merger discussions are material. See id. at
239, 108 S.Ct. at 987. It also ignores the fact that a
reasonable investor might view merger negotiations as extremely
significant even before consummation of the transaction has
become more likely than not. See SEC v. Shapiro, 494 F.2d 1301,
1306-07 (2d Cir. 1974) (finding materiality at point where
transaction was not more likely than not to occur); Dungan v.
Colt Industries, Inc., 532 F. Supp. 832, 837 (N.D.Ill. 1982).
The appropriate test for the materiality of the alleged
misstatements in this case is the fact-specific inquiry set
out in Basic — whether, balancing the probability of the
merger's consummation against its importance to Columbia, there
is a substantial likelihood that a reasonable investor would
have viewed the existence of merger discussions as
significantly altering the "total mix" of information
available. See Basic, 485 U.S. at 231-32, 108 S.Ct. at 983. In
evaluating materiality in this case, it must also be borne in
[s]ince a merger in which it is bought out is the
most important event that can occur in a small
corporation's life, to wit, its death, . . .
information, as regards a merger . . . can become
material at an earlier stage than would be the
case as regards lesser transactions. . . .
Id. at 238, 108 S.Ct. at 987 (quoting SEC v. Geon Industries,