OPINION AND ORDER
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").
For the reasons discussed below, the motion is GRANTED.
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.
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).
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.
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.
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.
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 relief." Ricciuti v. NYC Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957) (footnote omitted)).
In considering a Rule 12(b)(6) motion, a court must look to: (1) the facts stated on the face of the complaint; (2) documents appended to the complaint; (3) documents incorporated in the complaint by reference; and (4) matters of which judicial notice may be taken. Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993), cert. denied, 127 L. Ed. 2d 375, 114 S. Ct. 1054, 114 S. Ct. 1055 (1994) (citing Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991)). See also Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993) (same).
The threshold legal issue before me on this motion to dismiss is whether the Amended Complaint alleges any set of facts from which it can be concluded that Wal-Mart owed any duty of disclosure at all to Gitano shareholders or that its actions had any connection to the purchase and sale of securities under Rule 10b-5. I hold it does not.
As the briefs have provided me with no cases on point, I have searched for cases, and consulted the leading treatises, seeking precedent or informed commentary asserting that shareholders of an issuer may hold a company whose only relationship to the issuer is through an arms-length supply contract culpable for the issuer's securities fraud. In the very ample list of categories of business entities having been found liable, either primarily or secondarily, for an issuer's fraud (see. e.g., 5C Arnold S. Jacobs, Litigation and Practice Under Rule 10b-5 § 66.02[a][ii] (rev. 1995) (listing 35 such categories)), I have found none analogous to Wal-Mart's role in this case. Those few reported cases involving defendants contracting with the issuer are confined to contracts for the purchase by the defendant of the issuer's securities, drawing the nexus of the alleged fraud and the issuer's stockholders much more tightly than is the case here. See, e.g., Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787 (2d Cir. 1969), cert. denied, 400 U.S. 822, 27 L. Ed. 2d 50, 91 S. Ct. 41 (1970); Gibson v. Cannon, 325 F. Supp. 706 (E.D. Pa. 1971).
I inspect this claim then to determine whether generally applicable principles of disclosure duty recognized within the Rule 10b-5 context could confer upon plaintiffs a cognizable claim. The leading Supreme Court cases which speak to the issue answer in the negative. The dispositive case is Chiarella v. United States, 445 U.S. 222, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980) which states: "We hold that a duty to disclose under § 10(b) does not arise from mere possession of nonpublic market information". Id. at 235. Chiarella established the parameters of the disclosure duty by asserting:
First, not every instance of financial unfairness constitutes fraudulent activity under § 10(b). Second, the element required to make silence fraudulent -- a duty to disclose -- is absent in this case. No duty could arise from petitioner's relationship with seller of the target company's securities, for petitioner had no prior dealings with them. He was not their agent, he was not a fiduciary, he was not a person in whom the sellers had placed their trust and confidence. He was, in fact, a complete stranger who dealt with the seller only through impersonal market transactions.