statement of Adobe Chairman Dr. Warnock on May 2, 1990 is not actionable because plaintiffs allege no facts that would render any portion of it false or misleading. Defendants take each sentence uttered by Dr. Warnock in turn and point to plaintiffs' failure to allege that it is false and misleading. However, defendants' analysis of the Complaint misconstrues the test for Rule 10b-5 liability.
Rule 10b-5 makes actionable material omissions. The test for whether an omission is material is whether failure to disclose the omitted information would influence the decision of a reasonable investor. See Marx v. Computer Sciences Corporation, supra, 507 F.2d at 492. Specifically, "when an earnings forecast is made, such facts should be disclosed as are necessary to allay any misleading impression thereby created." Id. (emphasis added). In addition, an omission found to be "material" might be actionable even if the earnings forecast turned out to be substantially correct, if such omission created an erroneous impression of the health of the company and concealed certain pitfalls. Id. at 492 fn. 12. Whether the failure to disclose certain facts or any partial combination of them is an omission "to state a material fact necessary in order to make the statements made . . . not misleading" is a factual determination properly left to the jury. Id. Only if a disclosure is so obvious that reasonable minds cannot differ is the issue appropriately resolved as a matter of law. See, e.g., Durning v. First Boston Corp., 815 F.2d 1265, 1268 (9th Cir. 1987) citing TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976).
In the present action, on the evidentiary facts now before the court, the disclosure or lack thereof is not so obvious as to be grounds for a motion to dismiss. The court finds that under certain sets of facts, Warnock's statement could be found by a trier of fact to create a misleading impression due to a material omission. The Complaint alleges that Warnock's May 2 statement created a misleading impression by being falsely optimistic about Adobe's second quarter earnings. It claims defendants knew or should have known that, due to the alleged delay in new product lines, and related dropoff in royalty payments by OEMs, second quarter earnings would be flatter than Warnock made them out to be. Had reasonable investors known of these facts about Adobe's delays and lower royalties alleged by plaintiffs, their decision to invest in Adobe stock might have been affected.
Furthermore, Rule 10b-5 does not require a plaintiff, as a matter of pleading, to "link" every omission with an allegedly misleading statement. "Linking" is necessarily a factual determination, to be made after discovery. See Fine v. Rubin, 623 F. Supp. 171, 172-73 (N.D. Cal. 1985). Defendants' arguments that the alleged omissions were actually disclosed is an argument going to the sufficiency of the disclosure, and is therefore an argument concerning the materiality of the alleged statements, an inherently fact-specific inquiry. Basic, Inc. v. Levinson, 485 U.S. 224, 99 L. Ed. 2d 194, 211, 108 S. Ct. 978 (1988). The court finds the Complaint withstands defendants' motion to dismiss on these grounds.
B. Fraud and Negligent Misrepresentation Allegations
Defendants argue that plaintiffs' state law claims should be dismissed for lack of pendent jurisdiction. Since the court has found that plaintiffs' federal law claims are sufficiently pled, it finds that pendent jurisdiction still obtains as to the state law claims, which arise from the same facts and circumstances as the federal law claims. See Ohashi v. Verit Industries, 536 F.2d 849, 854 n. 2 (9th Cir.), cert. denied, 429 U.S. 1004, 50 L. Ed. 2d 616, 97 S. Ct. 538 (1976).
Defendants argue that the negligent misrepresentation claim should be dismissed in any event for failure to state a claim. As this court has noted before, in California the standard of Goodman v. Kennedy, 18 Cal. 3d 335, 134 Cal. Rptr. 375, 556 P.2d 737 (1976) applies to determine the liability of director and officer defendants. In re Worlds of Wonder Securities Litigation, 694 F. Supp. 1427 (N.D. Cal. 1988). Under Goodman, liability for negligent misrepresentation can only attach if defendants owed a duty to plaintiffs to avoid the wrongdoing. The determination of duty under Goodman is a question of law which requires balancing the following factors: 1) the extent to which the transaction was intended to affect the plaintiffs; 2) foreseeability of harm to plaintiffs; 3) degree of certainty that plaintiffs suffered injury; 4) the closeness of the connection between the defendant's conduct and the injury suffered; 5) the moral blame attached to the defendants' conduct; and 6) the policy preventing future harm.
In this case, on balance, the court finds the plaintiffs have alleged these factors sufficiently to withstand a motion to dismiss. Plaintiffs allege that defendants acted improperly during the Class Period to keep the price of Adobe stock artificially high. They allege defendants knew or should have known that their activity would cause plaintiffs tangible harm, indicating foreseeability and a close connection to the harm. The artificially high stock price alleged would ensure certain injury to the plaintiffs, and plaintiffs allege morally blameworthy insider trading. As to policy, the court is aware that frivolous suits may inhibit corporate directors and officers from speaking out at all, with the adverse effect of limiting the amount of public information about a company's well-being. However, as discussed above, it also recognizes the need to hold directors and officers to the highest standards of accountability to shareholders in performing their duties. Accordingly, the negligent misrepresentation claim here also survives the motion to dismiss.
Finally, defendants claim plaintiffs fail to state a claim for common law fraud because fraud on the market allegations are insufficient for pleading reliance. However, in California, "an inference of reliance arises if a material false representation was made to persons whose acts thereafter were consistent with reliance on the representation." Occidental Land, Inc. v. Superior Court, 18 Cal. 3d 355, 134 Cal. Rptr. 388, 556 P.2d 750 (1976). Plaintiffs' allegations meet this standard, so their common law fraud claim may stand.
In accordance with the foregoing, IT IS HEREBY ORDERED that defendants' motion to dismiss is DENIED.
IT IS SO ORDERED.