G. PENDENT STATE LAW CLAIMS
Defendants contend that if the court dismisses the federal securities law claims, it should also dismiss the pendent state law claims for lack of jurisdiction. United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966); Durham v. Kelly, 810 F.2d 1500, 1505-06 (9th Cir. 1987). In light of the previous discussion, defendants' motion is DENIED.
Defendants contend that plaintiffs fail to allege fraud with particularity, setting forth facts that show falsity, materiality, intent to deceive, justifiable reliance and damages. Vasquez v. Superior Court, 4 Cal. 3d 800, 811, 94 Cal. Rptr. 796, 484 P.2d 964 (1971). In addition, plaintiffs are not entitled to a presumption of reliance for common law fraud and must allege facts showing actual and justifiable reliance on the alleged misrepresentations by each plaintiff. See Wilhelm v. Pray, Price, Williams & Russell, 186 Cal. App. 3d 1324, 1332, 231 Cal. Rptr. 355 (1986).
The court agrees. Plaintiffs have failed to allege individual reliance and may not rely on the "fraud on the market" theory for common law fraud claims. Defendants' motion as to this claim is GRANTED, and plaintiffs have THIRTY (30) DAYS LEAVE TO AMEND in order to allege actual reliance.
2. Negligent Misrepresentation
Defendants contend that they owed no duty to plaintiffs. Therefore, because plaintiffs were not the known or intended beneficiary of the supposed misrepresentation or a member of a limited group to whom the representations were made, no claim lies. In Weinberger v. Schroeder, No. C-84-20757-WAI, Slip Opn. at 9 (N.D. Cal. October 28, 1986), this court dismissed a claim for negligent misrepresentation based on alleged misrepresentations in annual and quarterly reports. The court noted that such "aftermarket statements" were not intended to induce stock purchases but rather to inform existing shareholders of corporate developments or to meet SEC reporting requirements. Accordingly, defendants assert that liability may not be imposed for alleged misstatements in aftermarket documents such as SEC filings, press releases and shareholder reports. Id.; Self-Insurers' Security Fund v. ESIS, Inc., 204 Cal. App. 3d 1148, 1163, 251 Cal. Rptr. 693 (1988).
In determining whether a duty exists to a third party not in privity, the court looks to (1) the extent to which the transaction was intended to affect the plaintiff, (2) the foreseeability of harm to him, (3) the degree of certainty that the plaintiff suffered injury, (4) the closeness of the connection between the defendant's conduct and the injury suffered, (5) the moral blame attached to the defendant's conduct, and (6) the policy of preventing future harm. Goodman v. Kennedy, 18 Cal. 3d 335 at 343, 556 P.2d 737, 134 Cal. Rptr. 375 (1976). The court finds that the allegedly misleading publications at hand were intended to affect plaintiffs. Unlike the publications in Weinberger, the publications here were not aftermarket publications. Instead, they acted to entice investment in 3Com and artificially inflate the market. In addition, taking the complaint's allegations as true, the directors would have known that by selling their stock at inflated prices, those purchasers would be injured when the alleged omissions were disclosed. Plaintiffs' injuries can be proven with reasonable certainty, and there are sufficient allegations of a nexus between defendants' conduct and plaintiffs' injury as discussed above. The court finds that the existence of these factors is sufficient to find a duty.
However, plaintiffs have failed to allege individual reliance. Therefore, for the reasons stated in the previous discussion on common law fraud, defendants' motion is GRANTED. Plaintiffs have THIRTY (30) DAYS LEAVE TO AMEND their complaint in order to allege actual and justifiable reliance.
H. INSIDER TRADING
Defendants move to dismiss this claim on the basis that plaintiffs have failed to allege contemporaneous trading. Plaintiffs do not appear to oppose the dismissal of this claim, but rather, plaintiffs contend that they are relying on the allegations of insider trading as evidence of scienter.
Defendants' motion to dismiss as to this claim is GRANTED, and count II of the complaint is DISMISSED WITH PREJUDICE.
DATED: May 4, 1990
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