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LILLEY v. CHARREN

February 23, 1996

MICHAEL LILLEY and ARTHUR FREDERICK, on Behalf of Themselves and All Others Similarly Situated, Plaintiffs,
v.
STANLEY CHARREN, MAURICE E. MILLER, JOEL M. CANINO, GERALD R. ALDERSON, CHARLES CHRISTENSON, ANGUS M. DUTHIE, STEVEN N. HUTCHINSON, HOWARD W. PIFER, III, MERVIN E. WERTH, KENETECH CORPORATION, J.P. MORGAN SECURITIES, INC., and MERRILL LYNCH & CO., SMITH BARNEY, INC., and MORGAN STANLEY & CO., Individually and on Behalf of A Defendant Underwriter Class, Defendants.



The opinion of the court was delivered by: ILLSTON

 On February 9, 1996, the Court heard arguments on Kenetech defendants' *fn1" motion to dismiss and motion to strike, and the Underwriter defendants' *fn2" motion to dismiss. Having considered the arguments of counsel and the papers submitted, the Court hereby GRANTS Kenetech defendants' and the Underwriter defendants' motion to dismiss in part and DENIES defendants' motion to strike.

 BACKGROUND

 Kenetech Corporation is a leading developer of wind energy technology. In order to fund the continued development, marketing, and commercial development of its 33M-VS Wind Turbine, Kenetech raised capital through a September 21, 1993, initial public offering (IPO) of 6,000,000 shares of its common stock. According to the IPO Prospectus, the 33M-VS Turbine was designed to generate electric power at a cost of $ .05 per kilowatt hour (Kwh) or less, compared to a cost of $ .07 to $ .10 per Kwh from the previous generation of wind turbines. Additionally the IPO Prospectus represented that Kenetech had executed contracts to meet the future demand for the 33M-VS Turbines. In order to finance the continued development, manufacture and sale of the 33M-VS Turbines and the design, development and construction of windplants, on April 28, 1994, Kenetech undertook a public offering of 4,500,000 shares of convertible preferred stock.

 On August 8, 1995, Kenetech announced that it would report a loss of $ 0.02 per share. Kenetech attributed most of its poor performance to its continuing difficulties in implementing its backlog of wind projects efficiently and cost effectively.

 Plaintiffs filed this securities class action against Kenetech and certain present and former officers and directors and the underwriters of the public offerings. Plaintiffs allege that starting with the IPO of common stock and in the public offering of preferred stock and continuing throughout the class period, *fn3" defendants misrepresented, inter alia, Kenetech's progress on the development of the 33M-VS and the company's future prospects. Plaintiffs claim that these alleged false and misleading statements artificially inflated the price of Kenetech's securities for nearly two years. As a result, plaintiffs contend, when defendants finally revealed the true facts regarding Kenetech on August 8, 1995, the common stock completed its price decline from a class period high of $ 29 1/2 per share to below $ 4 per share by November 1995. Similarly, the preferred stock declined from a class period high of $ 20 7/8 to below $ 6 per share by November 1995. Plaintiffs assert violations of sections 11 and 15 of the Securities Act of 1933. Additionally, plaintiffs allege claims arising under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.

 The Kenetech defendants now move to dismiss pursuant to Rules 9(b) and 12(b)(6), F.R.Civ.P. The Underwriter defendants also move to dismiss the claims against them pursuant to Rules 9(b) and 12(b)(6). Finally, the Kenetech defendants seek to strike certain allegations from the complaint pursuant to Rule 12(f).

 LEGAL STANDARD

 I. Motion to Dismiss

 Under Rule 12(b)(6), a district court must dismiss a complaint if it fails to state a claim upon which relief can be granted. The question presented by a motion to dismiss is not whether a plaintiff will prevail in the action, but whether he is entitled to offer evidence in support of his claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).

 In answering this question, the Court must assume that plaintiff's allegations are true and must draw all reasonable inferences in plaintiff's favor. Usher v. City of Los Angeles, 828 F.2d 556, 561 (9th Cir. 1987). Even if the face of the pleadings suggests that the chance of recovery is remote, the Court must allow plaintiff to develop his case at this stage of the proceedings. United States v. City of Redwood City, 640 F.2d 963, 966 (9th Cir. 1981).

 If the Court chooses to dismiss the complaint, it must then decide whether to grant leave to amend. In general, leave to amend is only denied if it is clear that amendment would be futile and "that the deficiencies of the complaint could not be cured by amendment." Noll v. Carlson, 809 F.2d 1446, 1448 (9th Cir. 1987) (quoting Broughton v. Cutter Laboratories, 622 F.2d 458, 460 (9th Cir. 1980) (per curiam)).

 II. Motion to Strike

 Rule 12(f) provides that "the court may order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." However, motions to strike should not be granted unless it is clear that the matter to be stricken could have no possible bearing on the subject matter of the litigation. Colaprico v. Sun Microsystems, Inc., 758 F. Supp. 1335, 1339 (N.D. Cal. 1991). Motions to strike are regarded with disfavor as they are often used as delaying tactics, and because of the limited importance of pleadings in federal practice. Id.

 DISCUSSION

 I. Kenetech Defendants' Motion to Dismiss

 Kenetech defendants have moved to dismiss pursuant to Rules 9(b) and 12(b)(6) on six grounds: (1) that the "bespeaks caution" doctrine requires dismissal with prejudice of all claims in the complaint; *fn4" (2) that the statute of limitations bars plaintiffs' claims; (3) that the complaint fails to satisfy the particularity requirements of FRCP 9(b); (4) that plaintiff's section 11 claim fails to allege facts to show the required purchase of shares from the initial public offering; (5) that plaintiffs fail to allege claims under section 10(b) against individual Kenetech defendants; and (6) that plaintiffs fail to adequately allege that individual defendants had "control person status" which is required for claims under sections 15 and 20(a).

 A. Bespeaks Caution Doctrine

 Under the bespeaks caution doctrine, a court can rule as a matter of law that a defendant's forward-looking representations contained enough cautionary language or risk disclosures to protect the defendant against claims of securities fraud. Fecht v. Price Co., 70 F.3d 1078, 1081 (9th Cir. 1995); In re Worlds of Wonder Sec. Litig., 35 F.3d 1407 (9th Cir. 1994), cert. denied, U.S. , 116 S. Ct. 185 (1995) ("WOW "). A motion to dismiss for failure to state a claim will succeed under the bespeaks caution doctrine only where the documents containing defendants' challenged statements include enough cautionary language or risk disclosure that "reasonable minds" could not disagree that the challenged statements were not misleading. Fecht, 70 F.3d at 1082. Inclusion of some cautionary language is not enough to support a determination that, as a matter of law, defendants' statements were not misleading. Id. at 1082. Thus, the issue is whether there is enough cautionary language.

 Kenetech fails to satisfy the requirements of the bespeaks caution doctrine. First, many of the alleged misleading statements are not forward-looking statements *fn5" and thus are not protected by the doctrine. For example, many of the challenged statements pertain to the fact that the 33M-VS turbine "can generate pollution-free electricity at a price competitive with newly constructed fossil fuel plants." (Compl. P 110). This is not a forward-looking statement but a statement of a current fact which the bespeaks caution doctrine does not protect.

 Second, the bespeaks caution doctrine applies only where the documents containing defendants' challenged statements include enough cautionary language or risk disclosure that "reasonable minds" could not disagree that the challenged statements were not misleading. Fecht, 70 F.3d at 1082. Many of the alleged misleading statements were made to the press without any cautionary language or risk disclosures. *fn6" Thus, the bespeaks caution doctrine cannot protect these statements.

 Finally, as to Kenetech's forward-looking representations there must be enough cautionary language so that "reasonable minds" could not disagree that the challenged statements were not misleading. Id. While Kenetech's IPO Prospectus, Preferred Stock Prospectus, and 1993 10-K all contain some cautionary language, there is not enough cautionary language for this Court to decide as a matter of law that reasonable minds could not disagree that the challenged statements were not ...


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