The opinion of the court was delivered by: CONTI
SAMUEL CONTI, UNITED STATES DISTRICT JUDGE.
Plaintiffs bring this action on behalf of all purchasers of Worlds of Wonder, Inc. ("WOW") securities during the period from and including February 5, 1987 and November 9, 1987. Plaintiffs allege seven substantive claims: (1) violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder ("10b-5"); (2) violation of section 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78t ("Section 20"); (3) fraud and deceit; (4) negligent misrepresentation; (5) violation of section 11 of the Securities Act of 1933, 15 U.S.C. § 77k ("Section 11"); (6) violation of section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) ("Section 12(2)"); (7) violation of section 15 of the Securities Act of 1933, 15 U.S.C. § 77o ("Section 15"). This matter is currently before the court on defendants' separate motions to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b).
This action arises out of the demise of Worlds of Wonder, Inc. ("WOW"), a toy manufacturer based in Fremont, California. WOW was founded in 1985 and specialized in the design, manufacturing and marketing of technologically sophisticated toys. In 1986, WOW had an immensely successful year, spurred on by sales of its two most popular products, "Teddy Ruxpin", a talking teddy bear, and "Laser Tag", an electronic toy gun. This success was short-lived, however, and in December of 1987 WOW filed for protection under Chapter 11 of the bankruptcy laws.
The Complaint names the following officers of WOW as defendants: Angelo M. Pezzani ("Pezzani"), former President and Chief Operating Officer; Donald D. Kingsborough ("Kingsborough"), former Chairman of the Board and Chief Executive; and Richard B. Stein ("Stein"), former Executive Vice President and Chief Financial Officer (hereinafter referred to collectively as the "Officers"). The Complaint also names two directors of WOW as defendants, John B. Howenstine ("Howenstine") and Barry H. Margolis ("Margolis"). The Complaint further names the public accounting firm of Deloitte Haskins & Sells ("DH&S") and the underwriting and securities brokerage firm of Smith Barney, Harris Upham & Co. ("Smith Barney") as defendants.
Since this matter is currently before the court on motions to dismiss, the court assumes as true the facts alleged by the plaintiffs. See Halet v. Wend Inv. Co., 672 F.2d 1305, 1309 (9th Cir. 1982).
The Complaint alleges that the defendants engaged in a conspiracy with the purpose and effect of "artificially inflating the market prices of WOW's common stock and debentures and enabling the debentures to be foisted upon the public securities market." Complaint para. 29. In furtherance of this conspiracy defendants "recklessly made or caused to be made various false and misleading statements of material facts respecting WOW." Id. Each of the defendants aided and abetted one another's wrongful conduct. Para. 31. The defendants also engaged in insider trading. Paras. 31, 32.
The "individual defendants" made "highly optimistic and bullish statements respecting WOW" which were "materially false and misleading", including: that 1987 would be a big year for WOW [para. 33(a)]; that the estimate for sales in 1987 was $ 300 million, and $ 500 million for the next year [para. 33(b)]; that WOW was withdrawing an intended public offering because of market conditions [para. 33(c)]; that while earnings dropped by 86% for the fourth quarter ending in March 1987, analysts were "well-informed" in projecting WOW's 1988 earnings to be about $ 34 million [para. 33(d)]; and that WOW's stock was undervalued [para. 33(e)].
In June of 1987 WOW issued a prospectus and registration statement which was "materially false and misleading" and had the "purpose and effect of inflating the price of WOW's stock." Para. 33(f). This prospectus discussed WOW's business condition in "positive terms and disclosed no insoluble problems or difficulties." para. 36(a). The prospectus also failed to disclose that the debentures offered were speculative and involved a high degree of risk. para. 36(b). Smith Barney was the underwriter of the June 1987 offering [para. 18(b)], and sold to the investing public, including plaintiffs, all debentures of WOW which were sold during this public offering [para. 92].
In June of 1987 the President of WOW sent a letter to shareholders which "boasted" of WOW's progress while WOW was "suffering its worst fiscal quarter since WOW's inception." para. 33(g). Defendants further minimized WOW's problems by making "optimistic" statements which "continued to falsely inflate the prices of WOW's securities." paras. 33(h) and (i), 34. Also, the defendants failed to release results of WOW's second quarter ending in September of 1987 although they had represented that they would. para. 43.
WOW's accountants, DH & S, knew that WOW was suffering business difficulties but concealed this from WOW stockholders and gave WOW a "clean and unqualified opinion or report with respect to the financial statements of WOW." paras. 48-51. DH& S "falsely represented " that its financial examination of WOW was in accordance with generally accepted accounting principles. paras. 51-53. DH &S's acted "knowingly or in such a reckless manner as to constitute a deceit and fraud upon plaintiffs and the members of the class." para. 54.
Defendants Margolis, Howenstine, Officers, DH & S, and Smith Barney have all separately moved this court for dismissal of the complaint pursuant to Fed. R. Civ. P. 12(b)(6) and 9(b). While each of the defendants have fashioned their own arguments in response to the allegations, all the defendants argue that the Complaint fails to state proper claims under federal securities law and fails to plead fraud with particularity. Plaintiffs oppose all the defendants' motions. The court will summarize each of defendants' motions separately.
A. Defendant Officers' Motion to Dismiss
Defendant Officers argue that plaintiffs have failed to state a Section 11 claim against them because: (1) contrary to plaintiffs' assertions, the prospectus warned potential purchasers of the risks involved in WOW debentures; (2) there was no duty to disclose the allegedly omitted facts. The Officers argue that plaintiffs have failed to state a Section 12(2) claim against them because there are no allegations sufficient to establish that the Officers were "sellers" of the securities at issue. The Officers further argue that plaintiffs' 10b-5 claim must be dismissed because it fails to plead fraud with particularity and fails to plead scienter. The Officers also argue that plaintiffs' negligent misrepresentation claims should be dismissed because they are based on alleged omissions rather than affirmative misstatements.
B. Howenstine's Motion to Dismiss
Howenstine argues that plaintiffs' 10b-5 claim against him must be dismissed because it fails to plead scienter. Howenstine argues that the Section 20(b) claim against him should be dismissed because plaintiffs have failed to adequately plead that he was a "controlling person" within the meaning of federal securities laws. Howenstine argues that plaintiffs have not alleged any facts to indicate that his reliance on information provided by WOW was unreasonable, and therefore the state law claims should be dismissed. Howenstine also argues that the pleadings do not demonstrate that he was a seller of securities and that plaintiffs' Section 12(2) claim should therefore be dismissed. Howenstine further argues that the complaint should be dismissed for failure to plead fraud with particularity.
C. Margolis' Motion to Dismiss
Margolis argues that the complaint should be dismissed because it fails to adequately distinguish between the responsibilities of the various defendants. Margolis argues that many of the statements alleged to have been misleading are not actionable, and that plaintiffs have failed to allege the specific place, time, nature or specific content of the alleged fraud. Margolis argues plaintiffs' 10b-5 claim against him is ...