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GERSHON v. WAL-MART STORES

September 29, 1995

PETER GERSHON, et al., Plaintiffs, against WAL-MART STORES, INC. et al., Defendants.


The opinion of the court was delivered by: SOTOMAYOR

 SONIA SOTOMAYOR, U.S.D.J.

 Defendant Wal-Mart Stores, Inc. ("Wal-Mart") moves for an order pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b) dismissing, as against it, plaintiffs' Consolidated and Amended Class Action Complaint (the "Amended Complaint"). *fn1" For the reasons discussed below, the motion is GRANTED.

 BACKGROUND

 This litigation arose out of the March, 1994 bankruptcy of The Gitano Group, Inc. ("Gitano"), a New York-based apparel manufacturer and wholesaler. Plaintiffs in this action are a class of Gitano shareholders, comprising all persons who owned Gitano common stock between April 5, 1993 and January 24, 1994 (the "Class Period").

 Defendant Wal-Mart Stores, Inc. is an Arkansas-based retailer that was Gitano's largest customer, accounting for approximately one-third of Gitano's net sales during 1992, up from 18% in 1989. Am. Compl. at P 66. *fn2"

 For a year prior to filing for bankruptcy protection, Gitano experienced operating difficulties, reporting a $ 140 million loss in its annual report for 1992. The same annual report disclosed that Gitano was under investigation for criminal violations of U.S. Customs laws. At the time the 1992 annual report was published on May 19, 1993, Gitano also knew, but did not disclose, that Wal-Mart had a policy of discontinuing all purchases from any vendor found guilty of such customs violations. Am. Compl. P 78(iii). *fn3"

 On December 16, 1993 federal prosecutors announced that Gitano and three of its former top executives had pled guilty to felony charges arising from a scheme to evade customs laws. The triggering event to the Gitano bankruptcy was the announcement by Gitano on January 24, 1994 that, due to Wal-Mart's policy regarding customs violators, Wal-Mart would no longer purchase Gitano merchandise.

 Plaintiffs' claim against Wal-Mart advances the novel argument that Wal-Mart is liable for securities fraud because of its failure to warn Gitano stockholders that Gitano would likely suffer serious adverse consequences as a result of Wal-Mart's "no business with felons" policy (hereinafter, the "Customs Policy").

 The Amended Complaint makes a single claim against Wal-Mart: it violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated by the Securities and Exchange Commission thereunder. *fn4" Am. Compl. P 123-131. Importantly, the Amended Complaint makes no claim under Section 20(a) of the Exchange Act, which enlarges the boundary of liability to "every person who, directly or indirectly, controls" the issuer. *fn5"

 The claim is supported by an allegation that Wal-Mart owed a duty of disclosure to Gitano shareholders, because of its "close and longstanding business relationship with Gitano," Gitano's dependency on Wal-Mart for a third of its business, and Wal-Mart's resulting profit from that business. Am. Compl. P 25-28. The plaintiffs also claim that Wal-Mart deliberately concealed the Customs Policy in order to protect the continuity of supply of Gitano products through the Christmas shopping season, which it alleges explains Wal-Mart's six-week delay between the time Gitano pleaded guilty and the date on which Wal-Mart invoked its Customs Policy by cutting off purchases. Am. Compl. P 27, 79.

 The offensive conduct Wal-Mart is charged with in this action is that of having remained silent in the face of misleading information made public by Gitano management. Am. Compl. P 79. There is no claim that Wal-Mart was trading in Gitano securities during the Class Period, or that it made any statements itself. *fn6"

 DISCUSSION

 A district court's function on a motion to dismiss under Fed. R. Civ. P. Rule 12(b)(6) is to assess the legal feasibility of the complaint. Kopec v. Coughlin, 922 F.2d 152, 155 (2d Cir. 1991). The issue "is not whether a plaintiff will evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). Allegations contained in the complaint must be construed favorably to the plaintiff. Walker v. New York, 974 F.2d 293, 298 (2d Cir. 1992), cert. denied, 507 U.S. 961, 122 L. Ed. 2d 762, 113 S. Ct. 1387 (1993). Dismissal is warranted only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to ...


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