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IN RE GAMING LOTTERY SECURITIES LITIGATION

February 23, 1999

IN RE GAMING LOTTERY SECURITIES LITIGATION.


The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

  OPINION AND ORDER

Plaintiffs, who are purchasers of Gaming Lottery Corporation ("GLC")*fn1 stock allege, on behalf of a putative class, that GLC and two of its officers, Jack Banks ("Banks") and Larry Weltman ("Weltman"), violated Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making materially false and misleading statements and omissions concerning GLC's acquisition of Specialty Manufacturing Inc. ("SM"), which artificially inflated the price of GLC common stock. Banks and Weltman are also accused of violating Section 20(a) of the Exchange Act as controlling persons of GLC.

Plaintiffs move, pursuant to Rule 23 of the Federal Rules of Civil Procedure, to certify a class composed of all American and Canadian persons who purchased the common stock of GLC in the American or Canadian securities markets during the period from February 1, 1995 through May 24, 1996. Defendants oppose certification of the class and move to dismiss the Canadian plaintiffs' claims for lack of subject matter jurisdiction. For the reasons that follow, plaintiffs' motion for class certification is granted and defendants' motion to dismiss the claims of the Canadian plaintiffs is denied.

BACKGROUND

As discovery has not yet been completed, the factual allegations contained in the Consolidated Amended Class Action Complaint must be drawn on to sketch the background of this case. The following allegations contained in the Consolidated Amended Class Action Complaint were summarized by the Court in its opinion signed on May 27, 1998:

    In 1995 and 1996, GLC was an Ontario corporation
  that manufactured products for lottery and gaming
  markets, operating through subsidiaries in Ontario
  and the United States. During the class period GLC
  purported to be a diversified gaming company that
  manufactured and supplied products to the lottery,
  parimutuel, bingo, and charitable gaming markets
  (Compl. ¶ 35). The market for GLC stock was an
  efficient market (id. ¶¶ 32-33), and its stock
  traded

  on the Toronto Stock Exchange and on the NASDAQ
  National Market (id. ¶¶ 23, 32). Defendant Banks
  was the President, Chief Executive Officer ("CEO"),
  Chairman of the Board of Directors, and a controlling
  shareholder of GLC (id. ¶ 24). Defendant Weltman
  was the Executive Vice President, Chief Financial
  Officer ("CFO"), and a Director of GLC (id. ¶ 25).
    The Complaint alleges that GLC: (1) acquired SM
  without obtaining the required regulatory approval
  from the Washington State Gambling Commission (the
  "Commission") (id. ¶ 36); (2) falsely represented
  to the investing public that this acquisition was
  completed when it was not (id.); (3) consolidated
  SM's financial results with those of GLC beginning
  with its fiscal 1996 first quarter results ended on
  April 30, 1995 (id. ¶¶ 36-37); and (4) because GLC
  deceived the Commission by misrepresenting that it
  had not acquired and was not operating SM, misled the
  investing public by making announcements of proposed
  acquisitions and material new gaming contracts in
  other states which were almost certain to fail once
  those state regulators learned that GLC had deceived
  the Commission (id. ¶ 40).
    In June 1994 GLC, then called Laser Friendly,
  engaged primarily in the business of developing and
  marketing desktop publishing software, adopted a
  strategic plan to expand into gambling-related
  businesses through a program of acquisitions (id.
  ¶¶ 35, 44). On September 23, 1994, GLC announced the
  purchase of Printing Associates Inc., a New
  York-based supplier of lottery selection tickets and
  terminal rolls (id). Thereafter, on November 2,
  1994, GLC announced that it had entered into a letter
  of intent to acquire SM, a division of Ace Novelty
  Co., Inc. ("Ace"), a supplier of charitable and bingo
  game tickets or "pull tabs" (id. ¶ 45), and on
  November 28, 1994 GLC announced that it had entered
  into a letter of intent to acquire Infinity Group
  ("Infinity"), a supplier of slot machines, video
  lottery terminals, and bingo products (id. ¶ 46).
  At the time, defendant Banks commented that with the
  acquisition of Infinity and SM, shareholders' equity
  would be approximately $45 million as compared to $3
  million three years earlier (id). On December 6,
  1994, GLC and Banks announced that sales and earnings
  per share, for the nine months ending October 31,
  1994, had increased by 43% over the same period in
  1993 (id. ¶ 47).
    On December 13, 1994, GLC announced that it had
  completed the sale of one million units (each
  consisting of a share of common stock and a warrant),
  as part of a previously announced international
  private placement involving a total of 1,875,000
  units, and had received proceeds in excess of $3.78
  million to be used to fund GLC's ongoing acquisition
  program (id. ¶ 48).
    At the beginning of the class period, on February
  1, 1995, GLC announced that it had completed the
  acquisition of SM subject to receipt of regulatory
  approval for the requisite gaming license (id. ¶
  62).*fn2 Banks commented, "we are projecting
  revenues of $15,000,000 for Specialty Manufacturing
  for the fiscal year ending January 31, 1996, adding a
  significant contribution to [the company's] projected
  revenues of $100,000,000 [for that year]. We are
  pleased to have consummated this acquisition by
  January 31, 1995." (Id.)
    In February, 1995, GLC applied for a license to
  manufacture gambling devices in the State of
  Washington (id. ¶ 54). The Commission delayed
  issuing a license because GLC would not reveal who
  owned the Swiss bank accounts

  used to supply cash as part of the international
  offering for the proposed purchase of SM (id). In
  mid-1995 the Commission learned that GLC had acquired
  SM, despite the lack of regulatory approval, and was
  using Ace as a "front" to operate SM, using Ace's
  previously obtained state license (id. ¶¶ 56, 63).
  The Commission was repeatedly told by GLC that its
  acquisition of SM was not completed, but the
  Commission determined that this was a lie (id. ¶
  58). In or about April, 1996, the Commission, having
  concluded that GLC was operating SM without a
  license, filed a complaint for injunctive relief
  against GLC (id. ¶¶ 41, 49, 60).*fn3 Ms. Mass, a
  Special Agent of the Commission, in an affidavit
  sworn to on April 15, 1996, stated that the parties
  to the sale had lied to the Commission in denying
  that the acquisition had been completed, and that an
  internal document obtained by the Commission,
  "Operational Notes for Ace Novelty — Laser Friendly
  Transition," instructed that, if regulators asked,
  they should be told that there was no change in the
  status of the companies, which proved their intent to
  defraud the Commission (id. ¶¶ 36, 53, 58, 63, 102;
  Pl. Mem. Ex. A). The Commission's action was settled
  on December 24, 1996 after GLC agreed to pay the
  Commission up to $750,000, and not to conduct
  business requiring licensure by the Commission for
  ten years (id. ¶ 61).
    During 1995 defendants made a number of other
  optimistic projections regarding pending and future
  acquisitions, and revenue growth. During this period
  the price of GLC stock increased significantly. On
  February 13, 1995, GLC announced a plan to raise
  $10-20 million, through the sale of special warrants
  to buy a share of common stock and one half of a
  non-transferable purchase warrant to buy a common
  share, to raise $10 to $20 million to further fund
  its acquisition program (id. ¶ 64). The annual
  report for the fiscal year ending January 31, 1995,
  reported consolidated financials with SM and other
  acquisitions showing revenue had increased by 92%,
  profits by 118%, assets by 342%, and shareholder's
  equity by 667% (id. ¶ 65). On May 2, 1995 GLC also
  announced that it had entered into a number of supply
  contracts, including a contract to supply, through
  its subsidiary SM, gaming materials to a major
  Canadian gaming services corporation, YIN 88 (id. ¶
  66). On June 8, 1995 GLC, Banks and Weltman issued a
  press release reporting a revenue increase of almost
  400%, for the first fiscal quarter of 1996, ending
  April 30, 1995, and an increase in net earnings of
  approximately 300%, as compared to the comparable
  period a year earlier (id. ¶ 69). This financial
  report consolidated the financial statements of SM
  with those of GLC, despite the fact that the
  acquisition was subject to regulatory approval and
  the Commission still had not granted GLC a license to
  operate SM (id. ¶ 69).
    On June 27, 1995 GLC announced that it would be
  supplying lottery tickets and receipts for the New
  York State Lottery (id. ¶ 71). On July 7, 1995 GLC
  announced plans to acquire another major gaming
  company projected to close in August 1995 and
  expected to "significantly increase" earnings per
  share and boost shareholder equity by $35-65 million
  (id. ¶ 74). On July 11, 1995, announced that it had
  raised $22 million from an international private
  placement of 3.7 million shares (id. ¶ 75). On July
  27, 1995, GLC announced that it had completed the
  acquisition of Trade Products, Inc. ("TPI") a gaming
  supply company located in Washington State (id. ¶
  80). GLC announced that this acquisition would double
  its revenue base in the next fiscal year (id). On
  August 14,

  1995, GLC reported plans to acquire two more gaming
  businesses (id. ¶ 83). On September 20, 1995, GLC,
  again including the financial results of SM, reported
  a 463% increase in revenues and a 263% increase in
  net income, for the six months ended July 31, 1995,
  compared with the corresponding period a year earlier
  (id. ¶ 87). Weltman stated that 80% of this
  increase was attributable to the acquisitions of SM
  and Printing Associates (id. ¶ 88). On December 21,
  1995, GLC announced the completion of another private
  placement which raised $12 million for the
  acquisition of Stuart Entertainment Inc. (id. ¶
  91). On December 29, 1995, GLC again issued a
  consolidated financial statement for the nine months
  ended October 31, 1995, showing 310% growth in
  revenue and earnings compared to the same period in
  the prior year (id. ¶ 92). In a letter dated the
  same day, signed by Banks and Weltman, GLC informed
  shareholders that TPI revenues had not been included
  in the financial report because GLC was still in the
  process of securing necessary regulatory approvals, a
  process anticipated to be complete by early 1996
  (id. ¶ 94).
    On January 11, 1996, GLC announced that its
  negotiations with Stuart Entertainment had been put
  on hold pending GLC's receipt of necessary regulatory
  approvals from the Commission (id. ¶ 95). On
  January 30, 1996, GLC announced that its previously
  reported acquisition of TPI had been terminated, at
  TPI's initiative, because regulatory approvals had
  not been obtained in a timely manner (id. ¶ 96). At
  the same time it was also announced that the
  acquisition of Stuart Entertainment had been canceled
  (id). Following these announcements the price of
  GLC stock fell sharply (Compl. ¶ 96). On March 25,
  1996, GLC reported financial results for the fiscal
  year ending January 31, 1996. The report, signed by
  Banks and Weltman, which again consolidated the
  results of SM, reported an increase in revenue of
  186% and an increase in net income of 134% as
  compared to the previous fiscal year (id. ¶ 99).
    On April 2, 1996, GLC announced that it planned to
  divest itself of all of its gaming-related
  subsidiaries (id. ¶ 101). Share prices, which had
  reached a high of $9.00 per share in the Summer of
  1995, fell to $2.50 by May, 1996 (id. ¶¶ 43, 107).
  On April 26, 1996, it was publicly reported that
  Washington State gambling regulators said that GLC
  had secretly and illegally owned SM and operated it
  through Ace (id. ¶ 102). It was further revealed
  that GLC knew, in February 1995 when it had announced
  that the acquisition of SM, that it was not permitted
  to operate SM without a license, and that it knew
  since at least May 1995 that the Commission would not
  issue a license due to GLC's refusal to provide the
  identities of its investors (id). Plaintiffs allege
  that, despite this knowledge, GLC and Ace entered
  into a secret and illegal deal whereby Ace was used
  as a "front" to operate SM (id. ¶ 103). On May 13,
  1996, GLC announced that it intended to relocate to
  Bermuda (id. ¶ 104). On May 23, 1996, GLC announced
  quarterly results for the period ending April 30,
  1996, which showed a decline in revenue to $533,404
  compared to $12,028,710 for the comparable period one
  year earlier, and a loss in net income of $1,218,701
  (id. ¶ 106). Revenue from SM and other gaming
  subsidiaries were not included in that report (id.)
    On June 28, 1996, GLC restated its results for the
  prior year's fiscal quarter ending April 30, 1995, to
  account for the discontinued operations. As restated,
  revenue from continued operations was only $49,000
  rather than the $12,000,000 originally reported, and
  a loss of $300,000 was reported as compared to the
  original reports showing of $2,300,000 in income
  (id. ¶ 108). On June 29, 1996, Ontario regulators
  blocked GLC's move to Bermuda (id).
  In re Gaming Lottery Securities Litig., Nos. 96 Civ. 5567(RPP), 96 Civ. 7527(RPP), 96 Civ. 7936(RPP), 1998 WL 276177, at *1-*4 (S.D.N.Y. May 29, 1998).

This action was commenced by a Complaint dated July 24, 1996 in the action Pecarsky v. Banks. By agreement of the parties, pursuant to a stipulated order dated November 12, 1996, this case was consolidated with two other actions. A Consolidated Amended Class Action Complaint was filed January 16, 1997. By its opinion signed May 27, 1998, the Court denied defendants' motion to dismiss on the pleadings and granted defendants' motion to strike one paragraph of the Amended Complaint.

DISCUSSION

Plaintiffs have proffered six class representatives: Captain Charles Young, David Pecarsky (individually and on behalf of plaintiff Overall Supply, Inc.) and Michael Giamboi, each of whom is an American citizen, and Joel Bowen, Kevin Malakouti and Jason Shannon, each of whom is a Canadian citizen. Plaintiffs seek to certify a class consisting of all American and Canadian persons who purchased GLC stock between February 1, 1995, the date when GLC announced that it had completed the acquisition of SM, and May 24, 1996, the day after GLC restated its financial statements for the first quarter of 1996 to exclude the operations of SM.

Defendants argue that the class should not be certified because Young and Pecarsky possess interests atypical to those of the class, such that they cannot serve as adequate representatives, and because the claims of the Canadian plaintiffs do not lie within the Court's subject matter jurisdiction. Plaintiffs further claim that each of the proposed class representatives has failed to comply with discovery requests and to monitor the progress of the litigation, thereby demonstrating an inability to serve as an adequate class representative. Finally, defendants argue that even if a class is certified, the class period should be shortened to run from ...


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