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February 21, 2002


The opinion of the court was delivered by: Peter Leisure, United States District Judge.


This class action under section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, arises out of the purchase of common stock of defendant Sloan's Supermarkets, Inc. ("Sloan's") by a class of investors who bought the stock at allegedly artificially inflated prices during the period of January 7, 1993 through June 2, 1994.*fn1 Plaintiffs rely on a "fraud on the market" theory, alleging that the company's chief executive officer, defendant John A. Catsimatidis, made materially false and misleading representations and failed to disclose certain material facts regarding a Federal Trade Commission ("FTC") antitrust investigation of Sloan's. Plaintiffs also allege that defendants' conduct violates Article 23-A of the General Business Law of New York, and constitutes both fraud and a breach of fiduciary duties owed to the plaintiffs under state common law.

Pursuant to Rule 56 of the Federal Rules of Civil Procedure, defendants now move for summary judgment as to each of the causes of action. For the reasons stated below, the motion is granted in part and denied in part.


A. Factual Background

RMED International, Inc. ("RMED"), is a publicly traded corporation engaged in the business of marketing and selling diapers. See Defendant's Rule 56.1 Statement ("Def. 56.1 S.") at ¶ 1; Plaintiffs Rule 56.1 Statement ("Pl. 56.1 S.") at ¶ 1. For investment purposes, RMED has used corporate funds to purchase various securities, including shares of Sloan's stock. Defendant Sloan's is a publicly traded corporation which operates supermarkets in the New York metropolitan area. Until late March 1993, Sloan's was known as Designcraft Industries, Inc. See Def. 56.1 S. at ¶ 2; Pl. 56.1 S. at ¶ 2. Defendant Catsimatidis is and has been the chairman of the board, chief executive officer, treasurer and 37% shareholder of Designcraft, and later Sloan's, since July 28, 1988. See Def. 56.1 S. at ¶ 3; Pl. 56.1 S. at ¶ 3; Complaint at ¶ 3. In addition, at all times relevant to this action, Catsimatidis is and has been the sole shareholder, president, and chief executive officer of Red Apple Companies, Inc. ("Red Apple"). See Def. 56.1 S. at ¶ 4; Pl. 56.1 S. at ¶ 4.

Red Apple operates twenty-one supermarkets in the New York City area under the names "Red Apple," "Sloan's," and "Gristede's." Prior to April 1991, all supermarkets in the New York City metropolitan area that operated under the name Sloan's were owned by a corporation then known as Sloan's Supermarkets ("Old Sloan's"), a company that is unrelated to the defendant Sloan's in this action. In April 1991, Red Apple, through an affiliate wholly-owned by Catsimatidis called Supermarket Acquisition Corp. ("SAC"), agreed to buy twenty-one of Old Sloan's supermarkets.*fn2 See Def. 56.1 S. at ¶ 5; Complaint at ¶ 3; Sloan's Supermarkets, Inc. Proxy Statement, October 1, 1997, at 1, 4, attached as Ex. C to the Affidavit of Jonathan Honig, Esq., June 16, 2000 ("Honig Aff."); Affidavit of Arthur R. Lehman, Esq., July 27, 2000 ("Lehman Aff."), at ¶ 5. Although the agreement was consummated in April of 1991, the closing agreement called for Red Apple to purchase the stores on a staggered basis over an extended time period. See Lehman Aff. at ¶ 5. Also in April of 1991, Old Sloan's changed its name to CKMR Corporation ("CKMR"). On December 24, 1992, defendant Sloan's, under its prior name Designcraft, entered into an agreement with CKMR to acquire eleven Sloan's supermarkets in New York City. Shortly after the transaction became effective on January 7, 1993, Designcraft changed its name to Sloan's. See Def. 56.1 S. at ¶ 6; Pl. 56.1 S. at ¶ 6. Thus, from April 1991 to the present, Red Apple, a company wholly-owned by Catsimatidis, has operated twenty-one Sloan's supermarkets, and from March 1993 to the present, defendant Sloan's, a company for which Catsimatidis is the CEO and the largest shareholder, has operated eleven Sloan's supermarkets in New York City.

On August 6, 1991, after Red Apple had begun to acquire three of the twenty-one supermarkets from Old Sloan's, the FTC sent a private letter to Red Apple's general counsel informing Red Apple of the FTC's concern that the acquisitions by Red Apple violated federal antitrust laws. Specifically, the letter informed Red Apple that the FTC was concerned that the acquisitions did not comply with the Hart-Scott-Rodino Act,*fn3 and might violate Section 1 of the Clayton Act*fn4 and Section 5 of the Federal Trade Commission Act.*fn5 See Lehman Aff. at ¶ 6; FTC Letter to Red Apple, August 6, 1991 ("FTC Letter"), attached as Exhibit B to Lehman Aff.*fn6 Further, the letter requested that Red Apple "delay consummation of these transactions pending completion of any investigation we may initiate into the potential anticompetitive [sic] effects of the acquisitions." FTC Letter. Finally, the FTC requested that Red Apple cease all document destruction and preserve all documents pending the completion of any investigation. See id.

In September of 1991, the FTC commenced an investigation of the Red Apple acquisition, considering whether Red Apple's acquisitions violated antitrust laws, and whether Red Apple and Catsimatidis should be required to divest themselves of certain Sloan's supermarkets. See Def. 56.1 S at ¶ 7. On September 12, 1991, the FTC served a subpoena duces tecum on Red Apple. See Subpoena from the FTC, September 12, 1991, attached as Ex. I to Lehman Aff. Around this same time period, the Attorney General's Office of the State of New York also began to investigate the Red Apple acquisition, serving Red Apple with a subpoena duces tecum on September 6, 1991. See Subpoena from the State of New York Department of Law, September 6, 1991, attached as Ex. H to Lehman Aff. This investigation continued through the January 1993 acquisition by defendant Sloan's of eleven supermarkets from Old Sloan's,*fn7 and culminated in a complaint filed by the FTC on May 27, 1994 against defendant Sloan's, Red Apple, SAC and defendant Catsimatidis alleging antitrust violations and seeking divestiture often supermarkets in New York City.*fn8 See FTC Complaint against Red Apple Sloans Supermarkets et. al. ("FTC Complaint"), attached as Ex. J to Honig Aff., at 7; Pl. 56.1 S. at ¶ 12. Catstimatidis, defendant Sloan's, SAC, Red Apple and the FTC ultimately entered into a consent decree. The decree required divestment of six supermarkets, and prohibited Catsimatidis, defendant Sloan's, SAC, and Red Apple from acquiring any interest in supermarkets south of 116th Street in Manhattan, except for acquisitions between or among themselves, for a period often years. See Pl. 56.1 S. at ¶ 14; FTC Consent Decree, February 28, 1995, attached as Ex. K to Honig Aff., at 1-10.

The FTC complaint was not publicly announced until June 2, 1994. See Pl. 56.1 5. at 12. However, several New York area newspapers, including the New York Post, the Daily News, and the New York Observer, reported in late August 1991 that Mark Green, City Consumer Affairs Commissioner, had written the FTC asking it to conduct an investigation of the proposed acquisition of Sloan's supermarkets by Red Apple. See Honig Aff., Ex. E-5, 6, 7, and 8. None of these articles indicate that the FTC was conducting an investigation of the defendant Sloan's. A publication called FTC: WATCH, a Washington Regulatory Reporting Associates publication, however, reported on October 21, 1991 that the FTC'S Competition Bureau was investigating supermarket acquisitions by Red Apple.*fn9 See FTC:WATCH, October 21, 1991, attached as Ex. E-9 to Honig Aff. Articles published by FTC:WATCH on February 28, 1994, March 14, 1994, March 28, 1994, May 9, 1994, and May 23, 1994 also mentioned that the FTC was considering bringing a formal complaint against Red Apple regarding the Sloan's supermarkets acquisition. See Honig Aff., Ex. E-13, 14, 15, 16, and 17. The articles appearing in FTC:WATCH, however, do not make any mention of the FTC investigation of the eleven supermarket acquisition by defendant Sloan's. See id.

Aware of the FTC investigation since its initial stages, from 1991 to 1994, Catsimatidis and his attorneys engaged in discussions with the FTC concerning the possible divestiture of certain Sloan's supermarkets by defendant Sloan's and Red Apple. See Pl. 56.1 S. at ¶¶ 8, 10, and 11; Def. 56.1 S. at ¶ 8. In addition, from September 1993 through May of 1994, Catsimatidis and defendant Sloan's engaged in negotiations with the FTC, in which the FTC clearly stated that defendant Sloan's was the target of its inquiry, and demanding divestiture of certain Sloan's supermarkets. See Pl. 56.1 ¶ 11.

Nevertheless, between February 28, 1993 and January 14, 1994, defendant Sloan's communicated with its shareholders and made a number of SEC filings without ever disclosing the existence of the ongoing FTC investigation. See Complaint at ¶¶ 16-21 (noting that defendant Sloan's failed to disclose the FTC investigation in SEC filings on February 28, 1993, April 9, 1993, August 18, 1993, October 11, 1993, and January 14, 1994). In particular, defendant Sloan's (under its former name Designcraft), in its annual report to shareholders as of February 28, 1993, not only failed to disclose the investigation, but stated that Sloan's would "continue to actively seek additional businesses, preferably within the food industry." Sloan's February 28, 1993 Annual Report, attached as Ex. D-3 to Honig Aff.

Defendant Sloan's, whose stock trades on the American Stock Exchange ("AMEX"), has 2, 397, 605 issued and outstanding shares that are owned by over 320 stockholders apart from Catsimatidis. During the period from November 18, 1993 through December 21, 1993, RMED acquired, in public trade, 226, 000 shares of defendant Sloan's stock, or roughly 10% of the outstanding shares, at prices ranging from $7.75 to $11.25 per share. See Complaint at ¶ 23. RMED sold almost all of these shares between December 29, 1993 and July 29, 1994. See Complaint at ¶ 24. On May 26, 1994, the day before the issuance of the FTC complaint, Sloan's stock was trading at $6.13 per share. On June 1, 1994, the day before the public announcement of the FTC complaint, the price of the stock had fallen to $5.75 share, and, on July 18, 1994, the price had fallen to $4.00 share. See Complaint at ¶ 28.

B. Procedural Background

Plaintiffs allege that defendants' violated Section 10(b) of the Securities Exchange Act of 1934, and Rule 10(b) promulgated thereunder by (1) failing to disclose the existence of the FTC investigation until June 2, 1994; (2) falsely stating that defendant Sloan's would seek to acquire additional business in the food industry; and (3) failing to disclose the possibility that defendant Sloan's would be divested of some of its supermarkets or would be restricted from acquiring supermarkets.

Defendants previously moved to dismiss the complaint, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that the federal causes of action should be dismissed for failure to plead fraud with particularity, as required by Rule 9(b) of the Federal Rules of Civil Procedure, and that the supplemental state claims should consequently be dismissed for lack of subject matter jurisdiction. In a Memorandum Order filed March 3, 1995, this Court denied defendants' motion in its entirety. See RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 878 F. Supp. 16, 17 (S.D.N.Y. 1995). On March 25, 1996, this Court ruled that the action could proceed as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure, certifying the class of persons who purchased shares of defendant Sloan's stock during the period from January 7, 1993 to June 2, 1994, inclusive. See RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., No. 94 Civ. 5587, 1996 WL 134757 (S.D.N Y March 25, 1996).

On April 18, 2000, this Court affirmed Magistrate Judge Ronald L. Ellis's decision rejecting the defendants' motion to exclude the testimony of plaintiffs' damages expert, Candace L. Preston. See RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., No. 94 Civ. 5587, 2000 WL 420548 (S.D.N.Y. April 18, 2000) (Leisure, J.); RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., No. 94 Civ. 5587, 2000 WL 310352 (S.D.N Y March 24, 2000) (Ellis, Mag. J.). The defendants now move for summary judgment.


Section 10(b) of the Securities Exchange Act of 1934 provides in relevant part:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of ...

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