in 1989, or 0.001%, and two such clients out of 585,000 in 1988, or 0.0003%. Compared to the annual percentage of gallbladder removals in the general population of the United States, 0.16%, none of Plaintiffs' empirical evidence is meaningful.
Because neither the medical studies cited by Dr. Marks nor the empirical evidence cited by Plaintiffs could possibly lead one to conclude that the Nutri/System diet plan was unsafe, the Court finds that Plaintiffs have failed to produce evidence of an affirmative misrepresentation in the prospectus. Accordingly, Defendants' motion for summary judgment on Plaintiffs' misrepresentation claims must be GRANTED.
Thus, the inquiry turns to whether Plaintiffs have produced evidence of material information, available prior to the IPO, which was omitted from the prospectus.
C. The Alleged Material Omissions
1. Plaintiffs' Evidence
Even if the available information indicated that the Nutri/System plan was healthy, Plaintiffs argue that Defendants omitted material information by failing to mention in the prospectus that there were serious allegations that the Nutri/System plan was unhealthy. According to Plaintiffs, Defendants should have warned investors that there was a potential for future personal injury litigation and negative publicity. Plaintiffs offer the following evidence of information available prior to the IPO:
(1) the depositions and declarations of several former clients of Keegan-owned Nutri/Systems centers, who state that, prior to the IPO, they suffered gallbladder problems during their participation in the weight loss program;
(2) Keegan's refund and royalty records indicating that, prior to the IPO, many clients were given refunds for various unidentified "medical reasons."
(3) the records of Nutri/System franchisees nationwide, which indicated that, prior to the IPO, many clients informed the plan administrators of their gallbladder problems;
(4) the declaration of Jay Marks, M.D., who states that, at the time of the IPO, there was a host of information, including medical and scientific studies, demonstrating that persons undergoing weight loss, particularly rapid weight loss, were at risk for developing gallstones and requiring gallbladder removal (Marks Decl., PP 3-10.);
(5) the deposition of Jack Overton, whose testimony suggests that Defendant Kenneth Keegan saw an attorney's advertisement in a legal magazine seeking information to support a correlation between the Nutri/System plan and gallbladder disease;
(6) the declaration of Daniel Harris, who states that he has available for the Court's inspection videotaped copies of a three-part television program aired in Florida, which suggested a link between diet programs and gallbladder disease;
(7) the docket sheet of a case filed in a Maine state court in 1987, in which the Nutri/Systems diet plan was alleged to have caused the plaintiff's gallbladder disease and subsequent surgical removal; and
(8) the deposition of Nutri/System's national medical director, Stuart Shapiro, M.D., who testified that he began collecting articles relating to weight loss and gallbladder disease nearly a year prior to the IPO.
2. The Legal Standard
A material fact is "a fact which if it had been correctly stated or disclosed would have deterred or tended to deter the average prudent investor from purchasing the securities in question." Escott v. BarChris Construction Corp., 283 F. Supp. 643, 681 (S.D.N.Y. 1968) (quoting In Re Charles A. Howard, 1 S.E.C. 6, 8 (1934)). The question, therefore, is whether disclosure of the above facts, or inferences drawn from them, would have deterred or tended to deter the average prudent investor from purchasing Keegan's stock. Because the issue of materiality is a mixed question of law and fact, Defendants' motion for summary judgment cannot be granted if reasonable jurors could differ on the answer to this question. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 48 L. Ed. 2d 757 , 96 S. Ct. 2126 (1976).
In determining whether Plaintiffs' alleged omissions were "material," the Court must do more than determine the materiality of each specific fact listed above. The Court must also determine the materiality of inferences which may properly be drawn from the facts as a whole. For example, the Court cannot simply consider the fact of the Maine lawsuit in isolation By itself, the existence of one personal injury lawsuit in the entire United States is clearly not a fact that would influence the average prudent investor. The Court must also consider whether the existence of a lawsuit in Maine, when considered with the other facts, leads to an inference which should have been disclosed in the prospectus.
3. The Analysis of "Materiality"
As discussed above, Plaintiffs' empirical evidence does not lead to an inference that the Nutri/System diet plan causes or contributes to gallbladder disease. At most, this information required Defendants to include a statement that Nutri/System participants occasionally withdraw from the program for medical reasons. In fact, the prospectus contained this very statement. Prospectus, page 16.
Nor does Plaintiffs' empirical evidence lead to an inference that Nutri/System clients were likely to file personal injury lawsuits against Keegan. As noted above, the annual rate of gallbladder problems in the general population is greater than the annual rate demonstrated by Plaintiffs' evidence. Thus, there was no reason for Defendants to expect that those clients who suffered gallbladder problems would blame the Nutri/System diet plan. In fact, none of these clients ever filed personal injury claims against Keegan prior to the IPO.
Also noted above, the declaration of Plaintiffs' expert, Dr. Marks, contains no evidence of information available prior to the IPO suggesting a link between the Nutri/System diet plan and gallbladder disease. The medical studies cited by Dr. Marks involved either liquid diets of 500 calories per day or a peculiar class of obese dieters. These are the same studies collected by Dr. Shapiro, Nutri/System's national medical director. None of these studies has any relevance to the Nutri/System solid-food diet plan of 1,000 to 1,200 calories per day. Furthermore, no-one could predict, based on medical studies of 500-calorie liquid diets, that participants in 1,200-calorie solid-food diets would suffer gallbladder problems and file personal injury lawsuits against their weight-loss counselors. Therefore, since the medical studies cited by Dr. Marks and collected by Dr. Shapiro have no relevance to the Nutri/System plan, this information was immaterial and properly excluded from the prospectus.
The fact that no empirical evidence or medical information suggested a link between the Nutri/System diet plan and gallbladder disease is also relevant to whether Defendants were required to disclose the remaining information cited by Plaintiffs. If there had been one shred of medical authority or empirical evidence suggesting a connection between gallbladder disease and solid-food diet plans of 1,000 to 1,200 calories, a reasonable jury could find that an average prudent investor would be influenced by the existence of a single personal injury lawsuit, a legal advertisement, and a television show. However, absent any real support for the connection between gallbladder disease and the Nutri/System program, no prudent investor would change his investment plans solely because, on three isolated occasions, unresolved questions were raised regarding a possible health risk posed by the Nutri/System program.
The average prudent investor is aware that every company faces lawsuits of one type or another. The fact that one Nutri/System client out of nearly a million filed a lawsuit claiming the diet plan caused his gallbladder problems would not concern the prudent investor, particularly since the out-of-court settlement left no indication whether the client's allegations had any basis in fact.
Similarly, the fact that one plaintiff-side attorney took out an advertisement seeking support for a claim that the Nutri/System plan caused gallbladder problems would not concern the prudent investor. The average prudent investor is aware that many attorneys across the nation seek support for lawsuits which never materialize. The fact that this attorney was forced to advertise nationally for such support would reinforce as much as diminish the prudent investor's confidence that the diet plan was not vulnerable to attack.
Finally, the opinions about Nutri/System expressed in a local television program would not influence the prudent investor in the absence of supporting medical studies or authority. It is common knowledge that the content of television programs is based more on ratings than truth. In any case, the prudent investor would not be concerned about negative publicity generated locally in Florida, since the Keegan Nutri/System centers were located on the west coast.
Based on this Court's finding, as a matter of law, that none of the information cited by Plaintiffs would deter the average prudent investor from investing in Keegan stock, the alleged omissions from the prospectus were not "material," and thus cannot support a legal claim against Defendants. Accordingly, Defendants' motion for summary judgment on Plaintiff's omissions-based claims must be GRANTED.
4. Innocent Omissions
Even if this Court were to assume that the Maine lawsuit, the Florida television show, and the legal advertisement were facts which would have influenced the average prudent investor, Plaintiffs' claims would not survive summary judgment because there is no evidence that Defendants were aware of this information or that the information was reasonably available to them. Even Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, which provides strict liability against the issuer of stock for misstatements in the prospectus, does not impose liability for the omission of material information which was unknown to, and not reasonably discoverable by, the defendants. See In Re The Ultimate Corp. Securities Litigation, Fed. Sec. L. Rep. (CCH) P 94,523 (July 20, 1989).
In this case, there is no evidence that Defendants saw the tiny five-line classified advertisement which mentioned a claim against Nutri/System for gallbladder disease and sought "similar litigation or claims." This ad appeared in the "Advocate," a publication of the American Trial Lawyers of America. Although Jack Overton testified that he forwarded a copy of this ad to Kenneth Keegan, the dated "Fax Transmittal Memo" indicates that it was not sent until March 21, 1990, well after the IPO. Without evidence that Defendants saw the ad, this Court finds that no reasonable jury would expect Defendants to have found it on their own.
Similarly, there is no evidence that Defendants were aware of the Maine lawsuit or the Florida television program. The Maine lawsuit was not reported in any official reporter or electronic database. The television program was broadcast only in Florida. No reasonable jury could find that such information was reasonably available to Defendants.
Because there is no evidence that Defendants knew of these matters, or could reasonably have discovered them, the law imposes no liability on Defendants for failing to disclose them in the prospectus.
When Plaintiffs' evidence is viewed, not with the benefit of 20-20 hindsight, but with the eyes of the average prudent investor at the time of the IPO, it is clear that Plaintiffs have greatly exaggerated the significance of a few isolated occurrences. No prudent investor, facing the vast amount of information which could possibly bear on her investment decision, would single out as noteworthy the information cited by Plaintiffs. No reasonable jury could conclude other than that the average prudent investor would have disregarded these matters, concluding that they were isolated occurrences, which implied nothing about the safety of the Nutri/System diet plan or about the potential for future litigation or negative publicity.
The Court's analysis, which Plaintiffs must have expected, raises a disturbing question: on what evidentiary basis did plaintiffs and their attorneys see fit to file their complaint in the first place? A mere drop in the value of stock is not sufficient. Did Plaintiffs' attorneys view the complaint as a ticket in the discovery lottery, where the odds of discovering real fraud are one-in-fifty, but where one almost always wins a settlement? The Court hopes not.
Fortunately, the summary judgment procedure allows parties to cut through a groundless complaint or untenable defense and thereby eliminate the heavy expense of preparing for trial. This procedure also serves to thwart the practice of prosecuting a case solely in order to obtain a "ransom settlement": one based not on the value of the case, but on the costs of defending it. To achieve these goals, however, the court must peer beyond the hyperbolic arguments of the attorney opposing summary judgment and closely examine the evidence itself. As the above analysis demonstrates, by expending this effort at summary judgment the court can avoid the much greater cost of taking a meritless case to trial.
In this case, because the information cited by Plaintiffs would not have deterred, or tended to deter, the average prudent investor from investing in Keegan stock, Defendants' failure to disclose that information in the prospectus is not actionable under any law. Accordingly, Defendants' motions for summary judgment on all of Plaintiffs' claims must be GRANTED. Because this ruling on the issue of materiality disposes of the entire case, the Court expressly declines to decide whether Defendants' alternative arguments would also entitle them to summary judgment.
IT IS SO ORDERED.
U.S. DISTRICT COURT JUDGE
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