The opinion of the court was delivered by: RONALD M. WHYTE
The motion of defendants Cypress Semiconductor Corporation ("Cypress"), Mark K. Allen, Ken Goldman, T.J. Rodgers, Marcel Gani, Thomas North and Lowell Turriff (collectively, "defendants") to dismiss plaintiffs' second amended complaint ("complaint") and to strike certain paragraphs, as well as plaintiffs' motion for correction and partial reconsideration, came on regularly for hearing on May 28, 1993. The court has received and considered all moving and responding papers and has heard the oral argument of counsel. Good cause appearing therefor, the court hereby orders as follows.
This action arises as a result of plaintiffs' allegations that defendant Cypress Semiconductor Corporation ("Cypress"), along with six (6)
of its officers/directors, committed securities fraud by publicly reporting positive news about Cypress' business, while intentionally or recklessly concealing material information regarding internal problems surrounding Cypress' business that defendants knew would negatively impact Cypress and the value of its stock.
On September 24, 1992, the court granted in part and denied in part defendants' motion to dismiss plaintiffs' complaint. Plaintiffs then filed an amended complaint, in which they add two (2) new defendants and provide more detailed allegations regarding scienter and other factors which the court found lacking in the first complaint. Plaintiffs' complaint also realleges the same class period, from August 19, 1991 through April 14, 1992, even though the court previously found that plaintiffs could not state claims for damages after January 20, 1992. Accordingly, plaintiffs have moved for reconsideration of that portion of the court's prior order. Defendants have again moved to dismiss the entire complaint, pursuant to Federal Rules of Civil Procedure, Rule 12(b)(6). They also oppose reconsideration of the court's prior order and seek to strike those paragraphs alleging claims for damages after January 20, 1992.
A. Plaintiff's Motion for Reconsideration and Defendant's Motion to Strike
The court first addresses plaintiffs' motion for reconsideration, since certain allegations contained in the complaint will be stricken if the motion for reconsideration is denied. The Ninth Circuit has set forth three grounds upon which a motion for reconsideration may be based: (1) an intervening change in controlling law, (2) the availability of new evidence, or (3) the need to correct clear error or prevent manifest injustice Painting Industry of Hawaii Market Recovery Fund v. United States Department of the Air Force, 756 F. Supp. 452, 453 (D. Hawaii 1990).
In this instance, plaintiffs contend that the court's prior ruling "contains fundamental errors with regard to stock valuation by an efficient market, and fails to recognize that in an efficient market the full import of a disclosure is immediately absorbed and the stock price immediately adjusted." Essentially, plaintiffs take the position that a duty to mitigate cannot be imposed after a partial disclosure in an efficient market because such market is, by definition, self-mitigating.
In its previous order, the court found that plaintiffs lacked standing to assert claims based upon alleged fraud causing losses after January 20, 1992 since their complaint alleges that it was on that date that Cypress began to disclose its fraud to the market. Plaintiffs specifically contend that the "market reacted dramatically to Cypress' January 20, 1992 report and the price of Cypress' common stock dropped $ 3.75 per share to $ 14 per share, or 21% of its previous day's value, on trading volume of more than 3.2 million shares."
Plaintiffs contend that the fact that some fraud was disclosed on January 20, 1992 does not mean that plaintiffs had an obligation to mitigate their damages by selling their stock. The market had already adjusted the value of their stock as a result of the disclosure. Rather, plaintiffs contend that "learning some of the truth about the Company, even if it reveals certain 'but not all' negative aspects of that company, is not the equivalent of being informed that, in fact, the Company has been defrauding the market on issues more numerous than only those revealed on an earlier date."
The court basically agrees with plaintiffs' position. Since the market adjusted the value of plaintiffs' stock based upon the January 20, 1992 disclosure, plaintiffs could not mitigate their losses by selling.
Defendants argue that plaintiffs should not be able to recover damages after January 20, 1992 because they decided to continue to hold the stock of a company which they believed had defrauded them. In essence, defendants' argument is that since defendants had defrauded plaintiffs once, plaintiffs should have realized the risk of further fraud and loss of stock value. The court does not find this argument persuasive as it assumes plaintiffs have some knowledge of a continuing risk. The court does not believe that, as a matter of law, plaintiffs can ...