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PHILLIPS v. KIDDER

December 13, 1991

ROBERT D. PHILLIPS, INDIVIDUALLY AND ON BEHALF OF OTHER SHAREHOLDERS OF COMPUTER DEPOT, INC., SIMILARLY SITUATED, PLAINTIFF,
v.
KIDDER, PEABODY & CO., DEFENDANT.



The opinion of the court was delivered by: Kram, District Judge.

MEMORANDUM OPINION AND ORDER

In this action, plaintiff Robert D. Phillips ("Phillips" or "Mr. Phillips"), on behalf of a putative class of shareholders,*fn1 alleges that Kidder, Peabody & Co. ("Kidder") violated the federal securities laws and committed common law fraud in connection with a public offering of stock in Computer Depot, Inc. ("CDI"). Kidder has moved for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on the grounds that Phillips fails to allege an actionable misrepresentation or omission of fact, and that the federal securities claims are barred by the applicable statutes of limitations.

BACKGROUND

CDI was a retailer of personal computers, software and related supplies, focusing on IBM and Apple products. CDI began operations in March 1981 with one leased computer center located in a Dayton's department store in Minneapolis, Minnesota. CDI's marketing strategy was to lease floor space in major department stores where it was able to take advantage of the store's customer traffic, advertising and consumer credit arrangements, while the department stores benefitted from CDI's expertise, its relationships with suppliers and its ability to secure volume discounts. By 1984, CDI was operating forty-one computer centers in fifteen states and the District of Columbia. In an effort to further expand its business, CDI made a public stock offering in 1984. Kidder and Dain, Bosworth, Inc. ("Dain, Bosworth") were the co-lead underwriters for the public offering. On July 12, 1984, in connection with the public offering, Kidder issued a Prospectus which, according to the complaint, Mr. Phillips relied on in purchasing 300 shares of CDI stock on July 12, 1984, the date of the initial public offering, and an additional one hundred shares of CDI stock on June 10, 1985.

The complaint focuses on this Prospectus. According to Mr. Phillips, the Prospectus presented a "falsely optimistic" picture of CDI's prospects. Specifically, Phillips claims that the Prospectus falsely stated that:

(1) "a new [CDI] computer center generally can achieve profitability . . . within a relatively short period after it opens," Complaint at ¶ 27(i); Prospectus at 12;

(2) "the Company believes that it is able to remain price competitive due to its large volume of purchases which permits it to take advantage of high levels of price discounts," Complaint at ¶ 27(ii); Prospectus at 15; and

(3) "subject to obtaining financing and to other conditions relating to opening new stores, the Company presently plans to open approximately 90 new computer centers in calendar 1985," Complaint at ¶ 27(iii); Prospectus at 12.

Phillips further contends that the Prospectus omitted to state the following material facts:

(1) "the rapidly changing material adverse circumstances of the personal computer market, inter alia, that there was a significant price-cutting and a slackening in the growth of demand for personal computers which had occurred during the latter part of 1983 and was worsening in the first half of 1984; which caused a shake-out in the personal computer market," Complaint at ¶ 28(i);

(2) "CDI had sustained substantial losses in the 13 weeks immediately preceding the effective date of the offering," Complaint at ¶ 28(ii);

(3) "the negative effects of personal computer price decreases on CDI's business operations and profitability, which would substantially decrease the gross profit margin and make the representations of profitability of new stores false," Complaint at ¶ 28(iii);

(4) "the opening of new stores would drain the Company's assets and likely require it to seek the protection of the bankruptcy laws," Complaint at ¶ 28(iv);

(5) "competition in the retail personal computer market was so intense by mid-1984 that the likelihood of opening 49 more stores in remaining calendar 1984 and 90 stores in 1985 was remote at the time of the effective date of the Prospectus," Complaint at ¶ 28(v); and

(6) "numerous discount stores were driving down the prices of personal computers which would further negatively impact on CDI's business operations and profitability." Complaint at ¶ 28(vi).

Mr. Phillips commenced this action on July 10, 1987, and asserted four claims against Kidder. Count One alleges that Kidder, as a co-lead underwriter and an after-market "market-maker" in the stock of CDI, violated § 11 of the Securities Act of 1933 (the "1933 Act"), 15 U.S.C. § 77k, in that the July 12, 1984 Prospectus contained false and misleading material misrepresentations and omitted to state material facts. Count Two alleges that Kidder violated § 12(2) of the 1933 Act, 15 U.S.C. § 77l(2), in connection with the issuance of the Prospectus. Count Three alleges that Kidder violated § 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, in that Kidder, by its fraudulent conduct in artificially inflating and maintaining the price of CDI stock by means of materially false and misleading statements and omissions, engaged in acts, practices or courses of business which operated as a fraud upon Mr. Phillips and the other members of the class; made various untrue statements of material facts and omitted to state material facts necessary to make the statements made, in light of the circumstances under which they were made, not misleading; and employed manipulative and deceptive devices and contrivances in connection with the sale of CDI securities. Count Four alleges common law fraud in connection with the CDI offering.

Kidder moved to transfer the case to the District of Minnesota, but its motion was denied by Order of the Court dated March 25, 1988. It also moved to dismiss on the grounds of res judicata and collateral estoppel, but that motion was also denied by Order of this Court dated July 24, 1990. 750 F. Supp. 603. Kidder then moved for summary judgment. It asserted that each of the federal securities claims was barred by the applicable statute of limitations and argued that none of the alleged misrepresentations or omissions were actionable because the Prospectus fully and adequately disclosed the special risks of investing in the personal computer retail market in 1984, including the very risks of falling prices and rising competition that Mr. Phillips claims were omitted. Finally, Kidder argued that Phillips' pendent state claim should be dismissed if summary judgment was granted in its favor on the federal claims. Discovery has not been completed in this matter, but has been stayed by Magistrate Judge Francis at Kidder's request during the pendency of this motion. Report and Recommendation (the "Report"), dated May 30, 1991, at 4.

Kidder's motion for summary judgment was initially heard by Magistrate Judge Francis who issued a Report and Recommendation dated May 30, 1991. The Report recommended that Kidder's motion for summary judgment be granted in part and denied in part. Specifically, the Report concluded that (1) Mr. Phillips' § 11 and § 12(2) claims under the 1933 Act were barred by the applicable statute of limitations, and thus summary judgment was appropriate; (2) Mr. Phillips' § 10(b) claim under the 1934 Act was not barred by the statute of limitations, and thus summary judgment was inappropriate; (3) Mr. Phillips' § 10(b) claim should not be dismissed, as a matter of law, for failure to allege an actionable misrepresentation or omission;*fn2 and (4) Mr. Phillips' pendent state law claim would not be dismissed.

Pursuant to Federal Rule of Civil Procedure 72 and 28 U.S.C. § 636(b)(1)(B), both parties have filed partial objections to the Report. The Court has received and reviewed both the Report and the partial objections submitted by the parties, and has made the de novo determination required by both Rule 72 and 28 U.S.C. § 636(b)(1)(B) of those portions of the Magistrate Judge's disposition to which specific objections have been made. For the reasons set forth below, the Report is adopted in part and rejected in part, and discovery shall go forward.

DISCUSSION

I. Standard for Summary ...


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