The opinion of the court was delivered by: POLLACK
POLLACK, Senior District Court Judge,
Plaintiffs, purchasers of the securities of Canandaigua Wine Company, Inc. ("Canandaigua"), have brought suit against Canandaigua and two of its officers, Richard Sands and Lynn Fetterman, (collectively "Defendants") asserting securities fraud claims based on §§ 10(b) and 20(a) of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 88(a), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder by the Securities and Exchange Commission ("S.E.C."). Plaintiffs contend that misleading statements or omissions by Canandaigua and its officers artificially inflated the company's stock price until November 10, 1995, when the stock substantially dropped upon the report that fourth quarter 1995 earnings had decreased a mere $ .01 per share from the fourth quarter 1994 earnings.
Defendants moved to dismiss the Consolidated Amended Class Action Complaint ("Complaint") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Pursuant to Rule 12(c), due to the factual matters outside of the complaint presented to and not excluded by the court, the motion was treated as one for summary judgment and disposed of as provided in Rule 56. The parties were given a reasonable opportunity to present all material made pertinent to a motion by Rule 56.
For the reasons appearing below, summary judgment will be granted in favor of defendants and the complaint will be dismissed.
Canandaigua is one of the country's leading producers and marketers of branded alcoholic beverages; it produces and markets over 125 national and regional brands of alcohol, including such popular table wine brands as Almaden, Inglenook and Paul Masson. Canandaigua is the second largest supplier of wines, the fourth largest importer of beers and the eighth largest supplier of distilled spirits in the United States. Within the past several years, Canandaigua has aggressively expanded in the wine industry through takeovers of producers of popular name-brand varietal wines.
During this expansion period, Canandaigua's Class A common stock market price on the Nasdaq National Market rose from $ 15 per share in August 1991 to approximately $ 40 per share at the beginning of 1995.
On or about January 1, 1995, Canandaigua decided to embark on a new competitive price strategy "to increase its market share in the varietal wine market by introducing numerous new brands of varietal wines at substantial discounts to existing market prices." Complaint P 33. To attract customers from competitors' brands the company priced its new brands approximately $ 1 to $ 2 below competitors' prices, a discount of at least 15% below competitors' prices, if not more. Joint Statement of Agreed and Disputed Facts, Pursuant to Local Civil Rule 3(g) PP 26, 32 ("3(g) Stat"). "The strategy was to attract price sensitive customers away from competitors' brands." Id. They believed that "by effectively starting a price war, they could trade the Company's short term profits and earnings to gain longer term benefits," Complaint P 34, "and be well positioned in the industry two or three years in the future." Id. At the time, Canandaigua was experiencing strong growth of its market share based on its recent acquisitions of Vintners International Company, Inc. (producers of Paul Masson and Taylor California Cellars) and the Almaden/Inglenook brands from Heublein, Inc.
In their 1994 10K filing with the S.E.C., defendants noted that they were undertaking a "reduction in prices" for their Taylor California Cellars brands as well as "new promotional programs" and "repackaging of selected products," but did not otherwise discuss below-market pricing of new products. 3(g) Statement P 11. On January 12, 1995, in their 10Q filing with the S.E.C., the Company reported strong First Quarter 1995 results and attributed growth of its market share in branded beverage alcohol product net sales and unit volume to "our strategy of capitalizing on strong wholesaler relationships and expanding distribution and penetration of our growing portfolio of products." 3(g) Statement P 14.
At some point in March or April of 1995, Canandaigua actually introduced its new packaging and several new product lines at prices that undercut the competition. At the time, Canandaigua was experiencing a strong level of growth in its overall business. On April 4, 1995, Canandaigua issued a press release announcing record earnings and net sales for its 1995 second quarter, which ended February 28, 1995. Within the release, Richard Sands, the President and Chief Executive Officer of Canandaigua, was quoted as saying that "overall strategy, which includes growth through acquisitions, has also resulted in internal growth in both net sales and unit volume of our branded products." 3(g) Statement P 17. In its second quarter 10Q report to the S.E.C., Canandaigua ascribed a drop in overall gross profit as a percentage of net sales to "reduced gross profit percentages on the Company's table wine brands due to lower selling prices and higher costs of goods sold associated with some of these brands." 3(g) Statement P 16.
On July 10, 1995, Canandaigua released its third quarter results; the company had continued to experience record levels of overall earnings and profits. Within a press release, Sands remarked that Canandaigua's "brand development strategy [was] continuing to generate excellent results" and that the company was "aggressively positioning both new and existing varietal table wine products to capitalize on our strong brand equity." 3(g) Statement P 20. Meanwhile, the third quarter 10Q report to the S.E.C. revealed "increases in many of the Company's varietal table wine brands due to, among other things, line extensions and new product introductions." 3(g) Statement P 18. In addition, Canandaigua repeated that an overall decline in gross profits percentage for the year was partially attributable to "lower selling prices and higher cost of goods sold associated with some of these [table wine] brands." 3(g) Statement P 19.
On November 9, 1995, Canandaigua announced the results for its 1995 fourth quarter, ending August 31, 1995. Earnings and profits continued to achieve positive levels comparable to those of previous periods and above those of previous years. Net earnings in the fourth quarter of Fiscal 1995 were $ 10.4 million, or, $ .52 per share on a fully diluted basis, as compared to $ 8.6 million, or $ 0.53 per share on a fully diluted basis, in Fiscal 1994. 3(g) Statement P 22. These results did not, however, meet the projections of stock analysts, who had predicted record earnings and profits despite no such indication from Canandaigua. The next day, on November 10, the market price of Canandaigua's stock on the Nasdaq market dropped from $ 49.88 per share to $ 31.06 per share on trading volume of 4.8 million shares, well above the range of former daily trading. 3(g) Statement P 27.
In a press release, Canandaigua attributed its earnings results to "higher than expected promotional costs and lower than expected gross profits in our California table wine business as we successfully increased our market share in the fast-growing and highly competitive varietal wine category." Compl. P 65 (emphasis added). In a conference call with analysts Sands explained:
So, while we have defined pricing targets in each market for each SKU, the mix of sales by SKU and market by market is very difficult to predict, and we did not predict that we would sell as much as we sold in our lower price markets against lower priced SKUs as actually incurred.
Calandra Aff., Ex. O, at 5.
One analyst gave his opinion that "because the distribution system is both fractionated and long-tailed, the magnitudes of the sales incentives are not known until well after product is shipped to the customer," while another opined that "unexpected mix changes in the fourth quarter arising from the company's new pricing strategy and higher-than-expected grape costs" as the source of Canandaigua's diminished results. Silverman Aff., Ex. 14, 15.
The conference call allegedly represented the first time that Canandaigua had discussed the discount pricing plan for its new products, which Sands described as a "major attack" on competitors. Calandra Aff., Ex. O, at 23. Sands pointed out that the new varietal wine lines were introduced in the beginning of the third quarter and that consumer response (and therefore effects on sales, earnings and profits thereon) could not be gauged until they began replenishing inventory of the new lines in the fourth quarter. He did not, however, suggest (and plaintiffs do not allege) that Canandaigua lowered prices on its pre-existing products or did anything other than to introduce a new line of products at below market prices. Sands cogently explained Canandaigua's market pricing decision: "if you are going to create a ...