difference between events and trends affecting "operations," such as the closure of a plant or the increase in costs of raw materials, and competitive marketing strategies and plans. The former are information concerning the extrinsic operational situation that management faces, and needs to be disclosed, while the latter are competitive business judgments that management makes to improve the business, and need not be disclosed.
More importantly, courts have been sensitive about forcing a company to damage its own interests as well as those of its shareholders by revealing competitive information. See Philip Morris, 75 F.3d at 809 (expressing concern about "interpreting the securities laws to force companies to give their competitors advance notice of sensitive pricing information")
; In re Verifone S.E.C.. Litig., 784 F. Supp. 1471, 1483 (N.D. Cal. 1992) (expressing wariness of requiring provision of "information to competitors . . . which would be to the detriment of the corporation. To impose a disclosure obligation for such information simply cannot be in the best interests of investors and shareholders."), aff'd, 11 F.3d 865 (9th Cir. 1993). It is inherently absurd to impose on companies in highly competitive, consumer-based industries an affirmative duty to disclose to competitors sensitive pricing and marketing decisions. It would defy reason (and long-established business practices) to interpret a regulation concerned with analyzing "operations" and "financial condition" and furnishing a "narrative form of the financial data" as requiring such disclosure. S-K 303's mandate to disclose material "trends and uncertainties" does not contemplate furnishing competitors with an analytical blueprint of a company's business strategies.
b. Canandaigua's marketing strategy
The propriety of this interpretation of S-K 303 is bolstered when one considers the particularly routine nature of the business strategy pursued by Canandaigua. In March or April of 1995, Canandaigua introduced new products and new packaging in order to mount an "aggressive" "major attack" on the competition to gain market share for those products. Calandra Aff., Ex. O, at 22-23. In addition, they priced these new products at a discount to "attract price-sensitive consumers away from competitors' brands." Compl. P 33. The undisputed facts show that this strategy had little initial impact on Canandaigua's financial condition or results; Canandaigua had record profits in the third quarter.
In fact, Canandaigua did not experience a significant drop off beyond the range of reasonably possible results in net sales, earnings or revenues over the second, third and fourth quarters of 1995.
More importantly, Canandaigua's strategy to increase market share seems to have been at least an initial success; the company experienced a 43% increase in varietal wine volume and posted a 2% increase in market share, while their main competitor, Gallo, showed a varietal wine volume decrease. Silverman Aff., Ex. 14.
Plaintiffs argue that disclosure was required regardless of the fact that Canandaigua's policy succeeded in both expanding market share and maintaining profitability.
Plaintiffs assert that the disclosure of the strategy would have presaged not the actual shortfall of profits as compared to previous periods or years, but rather the discrepancy between actual profits and analysts' projections of profits. There is no duty under 10b-5 or S-K 303 to disclose an expectation that analysts' projections will be wrong. See Shaw v. Digital Equipment Corp., 82 F.3d at 1210 ("There is always some risk that the quarter in progress at the time of an investment will turn out for the issuer to be worse than anticipated."). Moreover, analysts based their projections on their own (not management's) assumption that Canandaigua would affirmatively raise prices to offset rising costs despite the fact that no such plan was indicated by any previous statement or action by Canandaigua. Silverman Aff., Ex. 20, 21. Instead, in pursuit of market share, Canandaigua lowered its prices without consulting the investment analysts who follow the Company or disclosing its strategy to defendants' competitors. Defendants committed no wrong. In fact, they acted normally in the best interests of their permanent shareholders; they owe no duty to analysts who wantonly predict that they will choose another strategy.
Nonetheless, plaintiffs contend, without factual support, that the marketing strategy should have been disclosed pursuant to S-K 303 because "a material effect on the registrant's financial condition or results of operations" was "reasonably likely to occur." S.E.C. Release, *8. As proof of this materiality, plaintiffs point to the risks posed by the pricing plan: the profit margin for each discounted bottle of wine would be affected (Compl. P 35), competition would exist between new and existing products (Compl. P 37) and an adverse "skew" of "the mix of wines the Company sold in its new product lines" could arise (Compl. P 38). All of these risks were posed by the pricing plan simply by virtue of the fact that it was a marketing strategy for a consumer-based marketing company; practically every decision involving either prices or products poses the same risks. Plaintiffs also present the circular argument that the pricing plan could result in materially reduced earnings and profits "if the Company did not obtain the necessary volume levels and product sales mix." Compl. P 51. Of course, this is true of every business decision. Plaintiffs theory of the scope of material events under S-K 303 would require disclosure of every single significant product and price decision. Besides being absurd in a competitive market, broadening disclosure requirements in this manner would effectively "bury . . . shareholders in an avalanche of trivial information." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976).
Plaintiffs may not circumvent the settled doctrine that there is no affirmative duty to disclose information by stretching the language of S-K 303 beyond its legitimate scope. Canandaigua simply introduced new products at below market prices and successfully expanded its market share thereon. Although profit margins on the new products may have been "squeezed" compared to those of the existing products (the prices of which are not alleged to have been discounted), Canandaigua continued to make substantial profits in the third and fourth quarter of 1995 substantially equivalent to earlier periods. In fact, Canandaigua had record profits and earnings in the third quarter of 1995. Applying S-K 303 in this instance would drastically expand the duty to disclose and take the unprecedented step of requiring companies to release affirmatively their sensitive pricing and marketing information to their competitors. It is clear that Canandaigua's competitive pricing policy was not a "trend or uncertainty" expected to materially impact on "operations" or "financial condition" within the ambit of S-K 303 disclosure.
B. Failure to adequately plead scienter
The plaintiffs' claims also fail because the complaint does not adequately meet the obligatory scienter requirement of section 10(b) of the Securities and Exchange Act of 1934. Rule 9(b) of the Federal Rules of Civil Procedure requires that "the circumstances of fraud or mistake be pleaded with particularity," but allows conditions of mind such as scienter to be "averred generally." Fed. R. Civ. P. 9(b). In order to avoid abuse of this relaxed specificity requirement, however, plaintiffs are required to "allege facts that give rise to a strong inference of fraudulent intent." Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1128 (2d Cir. 1994). This requirement may be satisfied either "(a) by alleging facts to show that defendants had both motive and opportunity to commit fraud, or (b) by alleging facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness." Id. If plaintiffs' attempt to plead scienter by showing recklessness or conscious misbehavior, then "the strength of the circumstantial allegations must be correspondingly greater." Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d Cir. 1987), cert. denied, 484 U.S. 1005, 98 L. Ed. 2d 650, 108 S. Ct. 698 (1988), overruled on other grounds, United States v. Indelicato, 865 F.2d 1370 (2d Cir. 1989) (en banc).
Plaintiffs contend that their allegations show that (1) defendants knew of the discounting strategy, (2) defendants knew of the "various risks and potential adverse effects" of the strategy, and (3) defendants "knew or were reckless in not knowing that their statements . . . did not adequately disclose critical facts about their strategy." Pl. Mem., at 30-31. At the same time, however, plaintiffs claim that this third, critical contention is "self-evident." Pl. Mem., at 31. In other words, the purported circumstantial evidence of consciousness or recklessness in failing to disclose is the fact of non-disclosure itself; this is the type of "broad and conclusory" allegation that is considered "meaningless." Shields, 25 F.3d at 1129 (citing Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 119-20 (2d Cir. 1982); see also Acito, 47 F.3d 47, 53 ("conclusory allegations of fraud do not satisfy the pleading requirements of Rule 9(b)"); Luce v. Edelstein, 802 F.2d 49, 54 (2d Cir. 1986). In fact, as noted above, plaintiffs have failed to show particularized facts that Canandaigua made any false or misleading statement or omission.
Beyond this, plaintiffs fail to raise the essential strong inference of fraudulent intent. Scienter in 10b-5 actions is more than simple conscious nondisclosure. The requisite scienter is an "intent to deceive, manipulate, or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Although the Second Circuit has maintained that recklessness is a form of scienter in "appropriate circumstances," Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 46 (2d Cir.), cert. denied, 439 U.S. 1039, 58 L. Ed. 2d 698, 99 S. Ct. 642 (1978), "mere garden variety breach of a known duty does not constitute such recklessness." Gross v. Damon Corp., 1995 U.S. Dist. LEXIS 3904, 1995 WL 138612, at *3 (S.D.N.Y.). "Reckless conduct is, at the least, conduct which is 'highly unreasonable' and which represents 'an extreme departure from the standards of ordinary care.'" Rolf, 570 F.2d at 47; see also Healey v. Chelsea Resources, Ltd., 947 F.2d 611, 618 (plaintiff must show "such recklessness as to amount to scienter"); In re Fischbach Corp. Securities Litigation, 1992 U.S. Dist. LEXIS 373, 1992 WL 8715, at *5 (S.D.N.Y.) (finding appropriate circumstances for recklessness as a form of scienter when there is "wilful blindness").
Plaintiffs argue that they have alleged enough facts to suggest Canandaigua's knowing non-disclosure of potentially material information. Even assuming that this is true, their allegations do not provide the basis for drawing the requisite inferences of fraud. As noted above, there were legitimate competitive business reasons for defendants to keep their own counsel on the pricing of their new product line. Furthermore, plaintiffs have alleged neither any statement that is false or misleading, affirmatively or through omission, nor any facts that suggest defendants knew they had a duty to disclose the marketing strategy pursuant to statute or regulation. It is not enough for plaintiffs to allege that defendants knew that the disclosures did not reveal the pricing strategy or that the omitted information was material, for that alone does not suggest "conscious misbehavior or recklessness." Shields, 25 F.3d at 1128. Absent some allegation that defendants knew or were highly unreasonable in not knowing that they were doing something illicit, the complaint fails to adequately plead scienter. See Mayer v. Oil Field Systems Corp., 803 F.2d 749, 756 (2d Cir. 1986) (scienter requires "at least knowing misconduct"); Reiss v. Pan American World Airways, Inc., 711 F.2d 11, 14 (1983) ("conscious failure to disclose" not sufficient, "there must be proof that the non-disclosure was intended to mislead."). There is absolutely nothing to suggest that Canandaigua was "promoting a fraud." Shields, 25 F.3d at 1129.
C. Section 20(a) claim against Sands and Fetterman
Without a primary violation of the securities laws under § 10(a), there can be no secondary, or derivative, violation under § 20(a). See Shields, 25 F.3d at 1132. Thus, dismissal of the § 10(b) claim will necessarily carry dismissal of the § 20(a) claim.
IV. Denial of Discovery
Defendants' request that judgment be postponed until discovery is ordered pursuant to Rule 56(f) of the Federal Rules of Civil Procedure is also denied. To succeed, an affidavit requesting additional time to conduct discovery in order to respond to a summary judgment motion must explain "the nature of the uncompleted discovery; how the facts sought are reasonably expected to create a genuine issue of material fact; what efforts the affiant has made to obtain those facts; and why those efforts were unsuccessful." Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir. 1994); see also Genao v. Board of Education of the City of New York, 888 F. Supp. 501, 504-05 (S.D.N.Y. 1995) (citing Sage Realty v. Ins. Co. of North America, 34 F.3d 124, 128 (2d Cir. 1994).
There is no genuine issue of fact before the court material to the issues dispositive to the motion for summary judgment: the defendants' lack of a duty to disclose the allegedly withheld information and the failure of the allegations to give rise to a strong inference of fraudulent intent. To satisfy the requirements of Rule 56(f), plaintiffs' affidavit must establish a reasonable expectation that the requested discovery will raise genuine issues of fact as to these issues. None of the requested information, however, involves a heretofore unidentified prior, misleading statement and no additional discoverable facts will impact on the scope of the duty to disclose pursuant to S-K 303. Furthermore, plaintiffs have not identified any specific discoverable information that will raise the obligatory suggestion of fraud. Thus, plaintiffs have not specified "how the facts sought are reasonably expected to create a genuine issue of material fact." Paddington Partners, 34 F.3d at 1138. Plaintiffs may not premise further discovery on a meritless, groundless claim in order to seek the "in terrorem increment of the settlement value." See Denny v. Barber, 576 F.2d 465, 470 (2d Cir. 1978) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741, 44 L. Ed. 2d 539, 95 S. Ct. 1917 (1975))
Defendants are entitled to the grant of summary judgment and the complaints are dismissed, with costs to defendants.
November 6, 1996
Senior United States District Court Judge