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
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.
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
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 S.at ¶ 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.
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.
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
Section 10(b) of the Securities Exchange Act of 1934 provides in
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 ...