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IN RE KEEGAN MGMT. CO.

May 29, 1992

In re Keegan Management Co., Securities Litigation MICHAEL MOORE, JOHN VISLOCKY, and EMMANUEL CRESPO, on behalf of themselves and those similarly situated, Plaintiffs,
v.
KEEGAN MANAGEMENT COMPANY, KEEGAN MANAGEMENT CO., WORTH CORPORATION, KENNETH KEEGAN, JEAN PERRETTE, ROBERT SHARPE, BARRY MATTHEWS, GARY VANDEWEGHE, HARRISON AUGER, G. TYLER RUNNELS, ISAAC SOUEDE, ROBERT WALLACE, AND H.J. MEYERS & CO., INC., Defendants.


Williams


The opinion of the court was delivered by: SPENCER WILLIAMS

Last September, when Defendants moved to dismiss this action, they urged this Court to spare them the expense and burden of discovery, arguing that Plaintiffs had no evidence to support their allegations. Defendants insisted that Plaintiffs were prosecuting this case solely on the basis of a hope that, during discovery, they would uncover some evidence that Defendants had advance warning of the events which ultimately caused Plaintiffs' injury.

 Accordingly, because Plaintiffs have produced no evidence that Defendants' prospectus contained a misrepresentation or omitted a material fact, Defendants' motions for summary judgment are GRANTED. Plaintiffs' motions for summary judgment on their Section 11 claims and for class certification of their state law claims are DENIED.

 BACKGROUND

 In December 1989, Defendant Keegan Management Company ("Keegan") was the largest franchisee of Nutri/System Weight Loss Centers ("Nutri/System") in the United States, operating some 64 of those centers in the San Francisco Bay Area and other locations. On December 20, 1989, Keegan made an initial public offering ("IPO") of stock, selling 1.25 million shares to its broker-dealer H.J. Meyers & Co. ("Meyers") for $ 7 per share. Meyers, in turn, resold the shares to the public, pursuant to a prospectus filed on Form S-1 with the Securities and Exchange Commission.

 Within months of the IPO, events took a sharp turn for the worse for Keegan. In early 1990, allegations began to emerge that various weight-loss programs, including the Nutri/System program, caused or contributed to gallbladder problems. These allegations were first raised in several personal injury lawsuits filed against Nutri/System in Florida. They subsequently gained nationwide exposure when Congress began a series of hearings relating to the safety of diet plans in March 1990.

 Not unexpectedly, Keegan experienced a downturn in client signups. This downturn led to a decline in profits and Keegan's decision in May 1990 to sell 31 of its Nutri/System centers. By August 1990, Keegan was itself a defendant in Nutri/System personal injury lawsuits, and its stock had plunged an average of ten dollars per share.

 After suffering substantial losses, Keegan shareholders Michael Moore and John Vislocky filed the first of these two, now consolidated, class action lawsuits in February 1991. Conceding that Defendants disclosed the existence and impact of this negative publicity in April 1990, Plaintiffs charged that Defendants knew, or were reckless in not knowing, about these matters much earlier. Specifically, Plaintiffs alleged that, prior to the IPO, Defendants were aware of information calling into question the safety of the Nutri/System program, but they failed to warn investors in their issuing prospectus of these potential health risks or the potential for personal injury litigation against Keegan.

 DISCUSSION

 I. LEGAL STANDARD ON SUMMARY JUDGMENT

 A. Burdens

 The moving party bears "the initial responsibility of informing the district court of the basis for its motion . . . ." Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265 , 106 S. Ct. 2548 (1986). The moving party must demonstrate that no genuine issue of material fact exists for trial. Id. at 322. However, the moving party is not required to negate those portions of the nonmoving party's claim on which the nonmoving party bears the burden of proof. Id.

 Once the moving party demonstrates that there is no genuine issue of material fact, the nonmoving party must designate "specific facts showing that there is a genuine issue for trial." Id. at 324. The nonmoving party must "make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial" Id. at 322.

 B. Evaluating the Evidence

 The adjudication of a summary judgment motion is not a "trial on affidavits." Anderson v. Liberty Lobby, 477 U.S. 242, 255, 91 L. Ed. 2d 202 , 106 S. Ct. 2505 (1986). Credibility determinations and weighing of the evidence are solely jury functions. Id. at 255. Inferences drawn from underlying facts must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538 , 106 S. Ct. 1348 (1986) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176 , 82 S. Ct. 993 (1962)).

 However, there may be no genuine issue of material fact if "the evidence is of insufficient caliber or quantity to allow a rational finder of fact" to find for the nonmoving party. Anderson, 477 U.S. at 254. And in some circumstances the factual context may render the nonmoving party's claim implausible, and the nonmoving party must come forward with "more persuasive evidence" to support the claim "than would otherwise be necessary." Matsushita, 475 U.S. at 587.

 II. ANALYSIS

 A. Introduction

 Plaintiffs' entire lawsuit depends upon their allegation that, prior to December 20, 1989, there was (1) information suggesting a link between the Nutri/System diet plan and gallbladder disease, or (2) information indicating that such a link would be alleged in the future, specifically in personal injury lawsuits brought against Keegan-owned Nutri/System centers. If there was no such information, or if the available information would not influence the average prudent investor, then the omission of this information from the prospectus is not actionable under any state or federal law. No law requires the prospectus to contain immaterial information or information that did not exist prior to its effective date.

 In reviewing the evidence presented, the Court has taken care not to lose sight of the relevant time frame. The prospectus became effective on December 20, 1989, the date of the IPO. Because all of Plaintiffs' claims are based on the contents of the prospectus, evidence of information available after December 20, 1989 is irrelevant to the determination of what should have been stated in the prospectus.

 The relevant dates are particularly important in this case because the evidence is undisputed that, by the spring of 1990, there was an abundance of information foretelling a spate of personal injury lawsuits against Keegan as well as a decline in business. Because this information appeared so soon after the IPO, it is tempting to assume, as Plaintiffs do, that Defendants must have had an inkling of it before the IPO. ...


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