to the applicability of the doctrine to shareholders.
In Strassman, et. al. v. Fresh Choice Inc., 1995 U.S. Dist. LEXIS 19343, *38-39 (N.D. Cal. 1995) the court held that the group publication doctrine can be applied to a venture capital firm shareholder where plaintiff can show that "the firm's agent participated in the preparation and dissemination of company documents containing misrepresentations." In Klein v. King, 1990 U.S. Dist. LEXIS 5392, *34 (N.D. Cal. 1990) the court held that group publication applies to outside directors or majority shareholders "upon a showing that there is a special relationship between the individual(s) and the corporation in question warranting such treatment. A good starting point in this analysis is whether or not these outside directors or majority shareholders would be considered 'control persons' of the corporation . . . ." In In re Gupta Corp. Securities Litigation, 900 F. Supp. 1217, 1241 (1994) the court appeared to propose a single standard for directors, officers and shareholders: "Only defendants who are active in the day-to-day management and control of a company may be held liable under the group pleading presumption." Finally, in the Southern District of California, the court determined that "[defendant corporation] since it was not a director or officer but only a shareholder could not fall under the group publishing doctrine which courts have applied only to directors and officers." Robbins v. Hometown Buffet, Inc., 1995 U.S. Dist. LEXIS 17870, *15 (S.D. Cal. 1995). Of these cases, only Kline found shareholders liable under a group publication doctrine.
In keeping with the argument made above that group published information is designed only to be a pleading device and not to be a hook on which to hang liability, the Gupta standard, that defendants are liable only if they are involved in day-to-day affairs, seems the most convincing. The Gupta standard is more faithful to the rationale of the group published information doctrine than either the decisions in Robbins and Strassman which put too great a burden on plaintiffs and the Klein decision which conflates control person liability and the group published information doctrine. Furthermore, the Gupta standard has the benefits of uniformity; if a defendant is involved in running the day-to-day affairs of a corporation, the group pleading presumption should apply equally to that person whether her title is officer, director, or shareholder.
Turning to the facts of this case, the plaintiffs have failed to plead circumstances sufficient to support a finding that the TCI defendants were involved in the day-to-day running of IN. While they have detailed in their complaint the financial arrangements between TCI and IN, and have stated that these arrangements led to TCI receiving a seat on IN's board, they have failed to show that TCI took an active role in IN's daily affairs. Plaintiffs may have alleged that the corporate TCI defendants had the capacity to participate in the day-to-day operations of IN, but they have failed to allege that they actually did so.
By way of comparison, in the Gupta decision, whose standard this Court is applying, the court determined that although the defendant Novell Corporation was a major shareholder with a representative on Gupta's board who signed allegedly fraudulent filings, was given advance copies of Gupta's financial statements and had the ability to correct allegedly false statements prior to their issuance, Novell was not held liable under the group published information doctrine. 900 F. Supp. at 1241-42. Those facts actually allege greater involvement by the defendant's agent than is alleged here, and yet the court decided to dismiss for failure to state a claim. We do the same.
Therefore, with regard to the corporate TCI defendants, Count 1 of the TAC is DISMISSED. Plaintiffs are given leave to amend their complaint to plead circumstances which would permit this Court to infer that the TCI defendants actually participated in the day-to-day affairs of IN.
3. Oral Statements
A number of the allegedly false statements complained of in the TAC were made orally by individual IN defendants. The TCI defendants in their motion to dismiss state that the group publication doctrine cannot apply to oral statements. This is clearly true. See, e.g., Gupta, 900 F. Supp. at 1239-40; In re Sunrise Technologies Securities Litigation, 1992 U.S. Dist. LEXIS 18213, *9 (N.D. Cal. 1992). The purpose of the doctrine is to relieve plaintiffs the burden of proving the authorship of a writing. This problem of authorship does not arise with oral statements.
Even striking the oral statements from plaintiffs' TAC, however, there remain sufficient written statements to make out a case of securities fraud against the authors of those statements.
See, e.g., TAC at 12: 23-25 (discussing IN's Annual Report); at 14: 22-25 (discussing 10-Q filed with the SEC). Thus, although plaintiffs are correct in their assertion that oral statements cannot be the basis for the invocation of the group published information doctrine, this alone is insufficient to merit a dismissal of the TAC.
For the reasons stated above, the TCI defendants' motion to dismiss Count I of the TAC is GRANTED as to both defendant Howard and the Corporate TCI defendants. The plaintiffs are granted leave to amend their complaint to allege circumstances sufficient to permit an inference that the TCI defendants were involved in the day-to-day affairs of IN. The amended complaint shall be filed no later than December 13, 1996. A status conference will be held December 18, 1996 at 8:30 am.
IT IS SO ORDERED.
Dated: November 18, 1996
D. Lowell Jensen
United States District Judge