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
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
CDI's performance fell well short of the representations made
in the Prospectus. According to the complaint, during the
fiscal year ended February 2, 1985, CDI opened only 47 new
computer centers, and during the entire fiscal year ended
February 2, 1986, CDI opened only 11 new computer centers. In
addition, by February 2, 1986, CDI had closed approximately 20
computer centers. Complaint at ¶ 20. Further, CDI reported
reduced prices and
gross profits in each SEC Form 10-Q for the quarters ending May
4, 1985, August 3, 1985, and November 2, 1985. Complaint at
¶¶ 21-23. CDI also disclosed for the first time in its Form
10-Q for the quarter ended May 4, 1985, that "in the current
fiscal year, there has been a softening in the market for
personal computers." Complaint at ¶ 21. By June 10, 1985, the
price of CDI stock had fallen from the public offering price of
$9.00 per share to $4 7/8. The price per share continued to
fall until it reached $1.50 per share on December 17, 1985. On
December 18, 1985, CDI filed a Form 8-K with the Securities &
Exchange Commission which stated that CDI had filed a petition
for reorganization under Chapter 11 of the Bankruptcy Code.
Following this announcement, the price of the stock dropped to
$0.75 per share.
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
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
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.
I. Standard for Summary ...