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IN RE PHILIP MORRIS SECS. LITIG.

January 6, 1995

IN RE PHILIP MORRIS SECURITIES LITIGATION


The opinion of the court was delivered by: RICHARD OWEN

 OWEN, District Judge

 This class action had its genesis on Friday, April 2, 1993. That morning Philip Morris announced that it would reduce the average price on its flagship Marlboro cigarette brand by forty cents per pack. Philip Morris expected that, as a result of this, operating earnings for 1993 from its United States tobacco business would be down as much as forty percent.

 Less than five hours later, at 1:25 p.m., the first of these class action lawsuits was filed on behalf of a plaintiff that had bought 60 shares during the alleged class period. Four more lawsuits were filed that same day, and on the very next business day -- Monday, April 5 -- five additional lawsuits were commenced. In each of these complaints, pleaded almost entirely on information and belief, plaintiffs accused defendants of having made fraudulent statements so as to artificially raise the price of Philip Morris' common stock. Supporting plaintiffs' conclusory allegations were a few public statements made earlier in the year with a comparison to the April 2 announcement, and the allegation that because of differences in the announcements the defendants must have committed fraud. I note that in the few hours counsel devoted to getting the initial complaints to the courthouse, overlooked was the fact that two of them contained identical allegations, apparently lodged in counsel's computer memory of "fraud" form complaints, that the defendants here engaged in conduct "to create and prolong the illusion of [Philip Morris'] success in the toy industry. " (Emphasis supplied).

 Under the circumstances, an observation by the court in Ferber v. Travelers Corp., 785 F. Supp. 1101 (D.Conn. 1991) at 1106, n. 8 seems remarkably apt:

 
. . . The court finds it peculiar that four of the lawsuits consolidated in this action were filed around 10:00 a.m. on the first business day following Travelers' announcement of the loss reserve increase. Most of the complaints are virtually identical (including typographical errors). At the hearing the court inquired about the swiftness of the plaintiffs' response to the announcement by Travelers. Counsel for the plaintiffs represented that "people in [his] firm worked throughout the weekend" to obtain the documentation necessary to file the complaints. . . . The court also asked:
 
How did you get to be so smart and to acquire all this knowledge about fraud from Friday to Tuesday? . . . On Friday afternoon did your client suddenly appear at your doorstep and say "My God, I just read in the Wall Street Journal about Travelers. They defrauded me," and you agreed with them and you interviewed them and you determined that there was fraud and therefore you had a good lawsuit, so you filed it Tuesday morning, is that what happened?

 Now before me is a motion to dismiss the "Consolidated Amended Class Action Complaint" of plaintiffs and thirty-four law firms. The action, basically pleaded on information and belief, *fn1" alleges violations of § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, 15 U.S. § 78j(b), claiming misstatements and omissions relating to defendant Philip Morris' domestic tobacco operations and, specifically, their flagship Marlboro cigarette brand. Plaintiffs' class is defined as those who invested in Philip Morris stock between January 7 and April 2, 1993. Defendant Philip Morris is incorporated in Virginia, headquartered in New York, and is well known in the tobacco, food and beer industries. Half of its operating profits are generated from domestic tobacco operations, and full-priced brands such as Marlboro constitute nearly 90% of the profits from tobacco operations. Largely because Marlboro is the most popular cigarette sold in America, Philip Morris has been the domestic tobacco industry leader for the past nine years.

 Plaintiff's claim of fraud *fn2" is predicated on various statements made by Philip Morris officials between January 7 and mid-March 1993 that allegedly inflated the price of Philip Morris stock and induced plaintiffs to purchase shares. On April 2, Philip Morris announced the said new marketing strategy that included a price reduction of $ 0.40 per pack of Marlboro cigarettes, which, it was estimated, would decrease projected earnings of domestic tobacco products for 1993 by nearly 40% in comparison with the previous year. This announcement caused Philip Morris common stock to lose nearly 25% of its value, falling from $ 64.125/share at the close of the market on April 1 to $ 49.375/share by the close of April 2.

 Defendants now move to dismiss the consolidated amended complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6). Such a motion must be denied unless "it appears beyond doubt that plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957), and in viewing any claim, I must draw all reasonable inferences in favor of the plaintiff. Defendants contend that the complaint neither pleads an actionable claim under § 10(b) or Rule 10b-5 of the Securities Exchange Act nor satisfies Federal Rule of Civil Procedure 9(b)'s requirement that fraud be pleaded with particularity. There must be some allegations of acts or conduct indicating that the Philip Morris declarants knew or should have known the statements to be false at the time they were made. Schwartz v. Novo Industri, A/S, 658 F. Supp. 795, 799 (S.D.N.Y. 1987). For a § 10(b) and Rule 10b-5 fraud claim, plaintiffs must establish (1) material misstatements or omissions, (2) indicating an intent to deceive or defraud, (3) in connection with the purchase or sale of a security. Luce v. Edelstein, 802 F.2d 49, 55 (2d Cir. 1986).

 The complaint does set forth arguably optimistic statements as follows:

 On January 7, 1993, Philip Morris issued a press release in which Hans G. Storr, Executive Vice President, Chief Financial Officer and a director of the Company, remarked:

 
While the environment in 1993 will be as challenging as in 1992, we are budgeting for and expecting a strong year for all of our businesses.
 
We expect to do better this year than last year. Marlboro is still very strong in the face of very low pricing . . . I think we'll be able to cut the decline rate.

 The following day The Wall Street Journal reported that Philip Morris' central concern in 1993 would be on profits rather than market share. Senior Vice President Lawrence Wexler is quoted as saying that Marlboro "is ...


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