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KALNIT v. EICHLER

December 22, 1999

RICHARD L. KALNIT, PLAINTIFF,
v.
FRANK M. EICHLER, ROBERT L. CRANDALL, CHARLES P. RUSS III, PIERSON M. GRIEVE, LOUIS A. SIMPSON, ALLAN D. GILMOUR, CHARLES M. LILLIS, GRANT A. DOVE, JOHN SLEVIN, KATHLEEN A. COTE, DANIEL W. YOHANNES, AND MEDIAONE GROUP, INC., DEFENDANTS.



The opinion of the court was delivered by: Scheindlin, District Judge.

    OPINION AND ORDER

Richard L. Kalnit, on behalf of himself and all others similarly situated, brings this uncertified securities fraud class action against MediaOne Group, Inc. ("MediaOne") and its directors, Frank M. Eichler, Robert L. Crandall, Charles P. Russ III, Pierson M. Grieve, Louis A. Simpson, Allan D. Gilmour, Charles M. Lillis, Grant A. Dove, John Slevin, Kathleen A. Cote and Daniel W. Yohannes (collectively the "Directors" or "individual defendants"). Plaintiff alleges that defendants violated Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, by fraudulently failing to disclose certain information in connection with a publicly announced, proposed merger between MediaOne and Comcast Corporation ("Comcast"). Plaintiff brings an additional claim against the individual defendants for controlling person liability pursuant to Section 20 of the Exchange Act. Plaintiff seeks damages for losses incurred as a result of defendants' alleged violations.

Defendants move to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(6), for failure to state a claim upon which relief may be granted, and pursuant to Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act of 1995 ("Reform Act"), 15 U.S.C. § 78u-4 (1999), for failure to plead fraud with particularity. For the reasons stated below, defendants' motion is granted.

I. Legal Standard

Dismissal of a complaint pursuant to Rule 12(b)(6) is proper "only where it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim that would entitle him to relief." Scotto v. Almenas, 143 F.3d 105, 109-10 (2d Cir. 1998) (internal quotations omitted). "The task of the court in ruling on a Rule 12(b)(6) motion is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998) (internal quotations omitted). Thus, in deciding such a motion, the court must accept as true all material facts alleged in the complaint and draw all reasonable inferences in the nonmovant's favor. See Thomas v. City of New York, 143 F.3d 31, 36 (2d Cir. 1998). Nevertheless, "[a] complaint which consists of conclusory allegations unsupported by factual assertions fails even the liberal standard of Rule 12(b)(6)." De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 70 (2d Cir. 1996) (internal quotations omitted). In deciding a Rule 12(b)(6) motion, the district court must limit itself to facts stated in the complaint, documents attached to the complaint as exhibits or documents incorporated in the complaint by reference. See Newman & Schwartz v. Asplundh Tree Expert Co., 102 F.3d 660, 661 (2d Cir. 1996). However, in securities fraud actions, the court "may review and consider public disclosure documents required by law to be and which actually have been filed with the SEC. . . ." Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 47 (2d Cir. 1991).

Fed.R.Civ.P. 9(b) sets forth additional pleading requirements with respect to allegations of fraud. Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." But, under Rule 9(b), "[m]alice, intent, knowledge and other condition of mind of a person may be averred generally."

Securities fraud actions are subject to the requirements of Rule 9(b). See Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124, 1127 (2d Cir. 1994). However, the Reform Act heightened Rule 9(b)'s requirement for pleading scienter. See 15 U.S.C. § 78u-4(b)(3)(A); see also Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 537-38 (2d Cir. 1999). As a result, in securities fraud actions, scienter may not be averred generally. Rather, plaintiffs must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." Press, 166 F.3d at 538 (quoting 15 U.S.C. § 78u-4(b)(3)(A)); see also Chill v. General Elec. Co., 101 F.3d 263, 268-69 (2d Cir. 1996).*fn1

II. Background

The facts set forth below are taken from the Complaint and are assumed to be true for purposes of this motion. MediaOne is a Delaware corporation with its principal offices in Englewood, Colorado. Complaint ("Compl.") ¶ 5. The company provides telecommunications services, including cellular and mobile land-line telephone services and network infrastructure and cable services. Id. MediaOne purchased Continental Cablevision ("Continental") in 1996. Id. ¶ 24. On February 27, 1996, as part of its acquisition of Continental, MediaOne entered into a publicly-disclosed shareholder's agreement with Continental's co-founder, Amos Hostetter. Id. ¶ 24. This agreement included a "standstill restriction" which limited Hostetter's ability to propose mergers involving MediaOne. Id. At all relevant times, Hostetter owned approximately 56.32 million MediaOne shares (or 9.33% of all outstanding MediaOne shares). Id. ¶ 25.

Hostetter expressed his disapproval of the proposed merger with Comcast in a March 25, 1999 letter to the MediaOne Directors. Compl. ¶ 27. In the letter, Hostetter asked to be released from the 1996 standstill restriction so that he could pursue and develop a merger proposal superior to the Comcast merger proposal. Id.

Defendant Eichler, MediaOne's President, Legal Counsel and Secretary, responded to Hostetter's request on behalf of the Directors in a letter dated March 31, 1999. Id. ¶¶ 6, 28. In the March 31 letter, the Directors agreed to release Hostetter from the standstill restriction. Id. ¶ 28. The Directors acknowledged and accepted Hostetter's agreement "not to make any public announcement of [his] efforts to develop a superior proposal without the Directors' written consent, and to respond with `no comment' if a press inquiry is made." Id. ¶ 29 (quoting March 31 letter). Hostetter immediately entered into discussions with third parties regarding the acquisition of MediaOne. Id. ¶ 32.

On April 16, 1999, plaintiff Kalnit sold 1,820 shares of MediaOne stock at $65 7/16 per share. Id. ¶ 31. On April 22, AT & T Corporation ("AT & T") publicly proposed an acquisition of MediaOne for approximately $58 billion. Id. ¶ 33. The same day, Hostetter filed a Schedule 13D with the Securities and Exchange Commission disclosing the March 25 and March 31 letters. Id. ¶ 34. On May 6, 1999, the date Kalnit filed his class action Complaint, MediaOne's stock price had increased to $79 per share. Id. ¶ 35.

In his Complaint, plaintiff purports to represent a plaintiff class consisting of all persons who sold MediaOne shares between March 31 and April 22, 1999. The gravamen of the Complaint is that defendants' failure to disclose certain allegedly material information — namely, that Hostetter was authorized to seek superior merger proposals for MediaOne during the forty-five day waiting period prior to the scheduled closing of the proposed MediaOne/Comcast merger — artificially depressed the market for MediaOne shares causing plaintiff and other class members to sell their MediaOne shares at a deflated price.*fn2

Discussion

III. Claim One: Section 10(b) and Rule 10b-5

Section 10(b) of the Exchange Act prohibits the use of "manipulative or deceptive" practices in connection with the purchase or sale of securities. See 15 U.S.C. § 78j(b). Rule 10b-5 sets forth specific practices that are considered "manipulative or deceptive." 17 C.F.R. § 240.10b-5(b). Among other things, Rule 10b-5 provides that "[i]t shall be unlawful . . . [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b).

To state a claim under section 10(b) and Rule 10b-5, plaintiff must allege that in connection with the purchase or sale of securities: (1) defendants made a false material representation or omitted to disclose material information; (2) defendants acted with scienter; and (3) plaintiff detrimentally relied upon defendants' fraudulent acts. See Press, 166 F.3d at 534 (2d Cir. 1999). In addition, as discussed supra Part I, plaintiff must allege elements one and two — fraudulent acts and scienter — with particularity in order to meet the heightened pleading requirements set forth in Rule 9(b) and the Reform Act.

In their motion to dismiss, defendants contend that the Complaint must be dismissed pursuant to Rule 12(b)(6) because plaintiff fails to adequately allege material misrepresentation or omission by defendant and/or detrimental reliance by plaintiff and other purported class members. Defendants also argue that the Complaint must be dismissed pursuant to Rule 9(b) and the Reform Act because plaintiff fails to set forth his claims of fraudulent acts and scienter with sufficient particularity.

A. Misleading Statements and ...


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