after a hearing in open court, and for the reasons outlined below, the motion is denied as to most claims. The pending motion for continuance is also denied, and the parties are directed to proceed in this case as ordered below.
the plaintiffs in this case -- not certified as a class
-- initiated this action against the following: Newbridge Networks Corporation ("Newbridge"), a Canadian corporation that designs, manufactures, and markets integrated digital networking products, and its subsidiary Newbridge Networks, Inc.; Terrence H. Matthews ("Matthews"), Chairman of the Board and President of Newbridge, as well as its largest stockholder; Peter D. Charbonneau ("Charbonneau"), Vice President of Finance and Chief Financial Officer of Newbridge; and Peter Madsen ("Madsen"), President of Newbridge Networks, Inc. and a member of Newbridge's Board of Directors. The plaintiffs bring this matter as a class action on behalf of all persons who purchased the common stock of Newbridge from the date of Newbridge's initial public offering, July 28, 1989, through June 6, 1990.
Plaintiffs charge that defendants violated §§ 11, 12(2) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l(2), 77o, as well as §§ 10(b) and 20(a) of the Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5, by the filing of a false and misleading Prospectus, Registration Statement and quarterly reports with the SEC.
In viewing a motion to dismiss, "a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). At this stage, the Court must accept as true the factual allegations of the complaint, Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984), and draw from them all reasonable inferences in favor of plaintiffs. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). Because this motion is addressed to the face of the complaint, matters not alleged or included therein are beyond the scope of the Court's consideration at this juncture.
A. Section 11
To state a claim under § 11, the complaint must allege that the defendant signed a securities registration statement that contained material misrepresentations or omissions that were unknown to the plaintiff purchasers of the securities. To establish a prima facie case, plaintiffs need only show a material misstatement or omission. Herman & MacLean v. Huddleston, 459 U.S. 375, 382, 103 S. Ct. 683, 687, 74 L. Ed. 2d 548 (1983). Defendants argue as a preliminary matter that plaintiffs lack standing to bring their claim because they did not allege that they were purchasers at the initial distribution of shares. Defendants further contend that plaintiffs have failed to state a claim because the pertinent statements identified in the complaint are either (1) not material, or (2) are not misrepresentations or omissions because they are forward-looking or they are taken out of context of the Prospectus as a whole.
Initially, it must be observed that the Prospectus as a whole is not part of the complaint and therefore is not before the Court at this time, except for those passages from it that plaintiffs quote.
Accordingly, the Court will look only to the Complaint's factual allegations in determining this issue. See Cosmas v. Hassett, 886 F.2d 8, 13 (2d Cir. 1989).
Based on the complaint, it is concluded that plaintiffs have alleged sufficient facts to establish standing because they have stated that the shares purchased are traceable to the offering covered by the registration statement. Plaintiff Marble is alleged to have purchased shares of common stock on the day of the offering. Complaint paras. 7, 90. It cannot be said, therefore, that plaintiffs could prove no set of facts that would support standing under § 11.
The same conclusion is reached with regard to whether plaintiffs have alleged material misrepresentations or omissions. Whether a statement is material in this context is a mixed question of law and fact. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S. Ct. 2126, 2133, 48 L. Ed. 2d 757 (1976). Accordingly, "only when the disclosures or omissions are so clearly unimportant that reasonable minds could not differ should the ultimate issue of materiality be decided as a matter of law." Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628, 641 (3d Cir. 1989) (citing TSC Industries, 426 U.S. at 450, 96 S. Ct. at 2133; Berg v. First American Bankshares, Inc., 254 U.S. App. D.C. 198, 796 F.2d 489, 495 (D.C. Cir. 1986)).
Materiality means that "there is a substantial likelihood that, under all the circumstances," the misrepresentation or omission "would have assumed actual significance in the deliberations of the reasonable shareholder." TSC Industries, 426 U.S. at 449, 96 S. Ct. at 2132. Thus, "the violation of federal law stems from the substantial likelihood that disclosure 'would have been viewed by the reasonable investor as having significantly altered the "total mix" of information' available." Craftmatic, 890 F.2d at 639 (quoting TSC Industries, 426 U.S. at 449, 96 S. Ct. at 2132).
Plaintiffs allege the following misrepresentations and omissions in the prospectus: (1) problems with product quality and market acceptance were not revealed, Complaint paras. 58-63, 72-73; (2) problems with Newbridge's accounts receivable were explained as a result of product shipments being concentrated near the end of each quarter, when in fact they stemmed from quality problems, id. paras. 27, 29, 53, 57, 74, 83(b), 83(d), 83(f), 83(g); (3) the negative effect on future profits of the high-risk nature of the company's research and development activities was not disclosed, id. paras. 32, 59-60, 83(e); and (4) the negative effect on future profits of the increasing expenses of the company's infrastructure were not mentioned, id. paras. 77, 83(c). It is impossible to say that these alleged deficiencies in the Prospectus are so palpably unimportant that they are immaterial as a matter of law; whether, in the end, they are material is a question of fact not properly resolved on a motion to dismiss.
Furthermore, the fact that certain of plaintiffs' allegations center on forward-looking statements by defendants does not doom their claim at this time. "Projections and general expressions of optimism may be actionable under the federal securities laws." In re Apple Computer Securities Litigation, 886 F.2d 1109, 1113 (9th Cir. 1989), cert. denied, 496 U.S. 943, 110 L. Ed. 2d 676, 110 S. Ct. 3229 (1990). The Ninth Circuit explained:
A projection or statement of belief contains at least three implicit factual assertions: (1) that the statement is genuinely believed, (2) that there is a reasonable basis for that belief, and (3) that the speaker is not aware of any undisclosed facts tending to seriously undermine the accuracy of the statement. A projection or statement of belief may be actionable to the extent that one of these implied factual assertions is inaccurate.