Attorneys for Defendants Patriot American Hospitalitj Inc

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Attorneys for Defendants Patriot American Hospitalitj Inc Powered By Docstoc
 & FELD, L.L.P.                                                                                      F
Steven M. PesRer, P.C.
Stephen M. Zaldini, Esq.
Nawy Chung, Esq.
Sean E. O’Donnell, Esq.
590 ‘ .son Avenue
New York, N.Y. 10022
(2 12) 872- 1070
Law-ence A. Weiss, Esq. (Cal. Bar No. 164638)
333 Bush Street
San Francisco, CA 94104
(415 ) 772-6000

Attorneysfor- Defendants Patriot American
Hospitalitj? Inc., Wyndham International, Inc.,
PAH GP, Inc., PAH LP, Inc., Patriot American
Hospitality Partnership, L.P.and Wyndham
International Operating Partnership,LP

                                           IN THE UNITED STATES DISTRICT COURT
                                         FOR THE NORTHERN DISTRICTOF CALIFORNIA
                                                  SAN FRANCISCO DIVISON

In re PATRIOT AMERICAN HOSPITALITY                              ) MDL No. 1300 U   W
INC., SECURITIES LITIGATION.                                    1
                                                                )   NOTICE OF MOTION AND MOTION
                                                                )   TO DISMISS (“MERGER ACTION”);
                                                                )   MEMORANDUM OF POINTS AND
                                                                )   AUTHORITIES IN SUPPORT THEREOF
This Document Relates the “Merger Action”:

Johnsonv. Patriot American Hospitality. Inc,                    NO.C 99-2153 VRW

Ansell v. Patriot American HospitalitF Inc, C                          99-2239 VRW

Gunderson v. Patriot American Hospitality. Inc.                 No.-C 99-3040 VRW
Sola Patriot American Hospitality. Inc.
   v.                                                           NO. C 99-3966 VRW

1NO.C 00-0947


 3                PLEASE TAKE NOTICE THAT at 2:OO p.m. on December 14, 2000, or as soon thereafter as

4    :ounsel may be heard, in the courtroom of the Honorable Vaughn R.                                Walker, United States District

5    2ourt Judge, located at 450 GoldenGateAvenue,SanFrancisco,California,Defendants                                              Patriot

6    9merican           Inc.,
             Hospitality, Wyndham                                                            GP, PAH
                                                                     International, Inc., PAH Inc., LP,                   Inc., Patriot

7           Hospitality
     4merican         Partnership,                                        Wyndham
                                                                   L.P. and                                      Partnership,
                                                                                           International Operating                    LP

8    collectively the “Patriot Defendants”) will and hereby do move this Court to dismiss Plaintiffs’ First

9    \mendedConsolidatedComplaint(the“Merger                                  Complaint”) in theabove-captionedconsolidated

10   lction, underRules9(b)and12(b)(6)                               of theFederalRules        of CivilProcedure,andthe           Private

11   Securities Litigation Reform Act of 1995, 15 U.S.C.                          4 78.
12                This motion is brought on the grounds that the Merger Complaint fails to state a claim, fails to

13   latisfy therequirements                          of thePSLRAandRule9(b),             and is barred bytheapplicablestatuteof

14   imitations. This motion is based on this Notice of Motion and Motion to Dismiss; the Memorandum

15                                      thereof; the accompanying Affidavit of Sean E. O’Donnell sworn
     )f Points and Authorities in support

16   o on October 12, 2000, and the exhibits                           annexed thereto; the complete       files and records in     these

17   :onsolidated actions; oral argument of counsel; and such other and further matters as this Court may

18   :onsider.            The PatriotDefendantsalso                   hereby join theMotion       to Dismiss filed byco-defendant

19   PaineWebber Group, Inc.


     bfOTlOK TO DISLIISS ( I I E R G E R ACTION).   MDL NO. 1300
 1                                                                  TABLE OF CONTENTS

 2                                                                                                                                                                 Page

 3   TABLE OF AUTHORITIES .........................................................................................................                        iv

 4   INTRODUCTION ..........................................................................................................................                   1

 5   PRELIMINARY STATEMENT....................................................................................................                                 2


 7   ARGUMENT ..................................................................................................................................               8

 8   1.                                                             ................8
 9                            A.          The Alleged Omissions ...............................................................................                9
10                            B.The           Joint Proxy Disclosed In Detail Patriot’s “Aggressive Strategy”
11                                        To Acquire Property And IncurSubstantial Debt .....................................                              11
12                            C. The          Joint Proxy Disclosed In Detail PaineWebber’s Relationship
13                                        With Patriot And The Proposed PaineWebber Land Sale........................                                      15
14                            D.          Defendants Were Not Required To Editorialize On The Disclosed
15                                        PaineWebber Facts ....................................................................................           17
16                            E.          The Omitted Forecasts Regarding Forward Equity FinancingAre
17                                        Too Speculative And Immaterial To State A Claim.................................                                 17
18                            F.          TheNew Credit Facility’s “Costs, Fees, Points and Prepayments
19                                        Penalties” Were Immaterial As A Matter Of Law ....................................                               19
i-               NOTIFIED OF THE ALLEGED OMMISSIONS ..............................................................                                                 19
23                            A.           Plaintiffs Must Have Commenced This Action No Later Than April
24                                         6, 1999.....................................................................................................   20
25                            B.           Plaintiffs’ Hindsight Allegations Regarding How Patriot’s Stock
26                                         Performed Is Irrelevant .............................................................................           20
27                            C.           At The Very Least, Plaintiffs Were Put On “Inquiry Notice” As
28                                         Early As June 2, 1997 AndCertainly No Later ThanApril 6 , 1998 ........21
30                                                                  ...................22
32               REQUIREMENTS OF RULE9(B) AND THE PSLRA..................................................                                                  23
34                                                                       .......

                       (                       M D L NO. 1300                           ..
                         A.         Plaintiffs’ Bald Allegations That Defendants “MustHaveKnown”
                                    Are Insufficient As A Matter ofLaw ......................................................                  ;. 25
                         B.         Plaintiffs’ Allegation That DefendantsSought To PromoteThe
                                    Value Of Patriot Stock To Facilitate A Merger Is Insufficient As A
                                    Matter OfLaw ...........................................................................................     26
    CONCL.USION............................................................................................................................. 27



 1                                                              TABLE OF AUTHORITIES
 3                CASES                                                                                               PAGE(S)
 6                Berry v. Valence Technologies. Inc., 175 F.3d 699 (9th Cir.), cert. denied, 120 S.
 7                   Ct. 528 (1999) .............................................................................................................. 20
 9                                                      F.2d 1295 (4th Cir. 1993) ............................
                  Caviness v. DeRand Resources~Corp,, 983                                                                                                22
11                In re Cendant Corp. Sec. Litie., F. Supp. 2d 539 (D.N.J. 1999) ..................................
                                                 76                                                                                                      26
13                Ceres Partners v. GELAssocs,, 918 F.2d 349 (2d Cir. 1990) ..........................................                                   20
15                Desaigoudar v. Meyercord, 223 F.3d 1020 (9th Cir. 2000) ........................                                   8, 17, 18, 19, 25
17                In re Gap Sec. Litig, No. C-87-4895 (JPV), 1988 WL 168341
18                    (N.D. Cal. Sept. 28, 1988) ..........................................................................................              14
20                Genna v. Digital Link Corp., 25 F. Supp. 2d 1032 (N.D. Cal. 1997) ...............................                                      25
22                In re Glenfed. Inc. Sec. Litig., 42 F.3d 1541 (9th Cir. 1994) ...........................................                              24
24                Great Rivers COOD. Farmland Indus,, 120 F.3d 893 (8th Cir. 1997) ............................
                                   v.                                                                                                                    22
26                Kas v. Financial General Bankshares. Inc,, 796 F.2d 508 (D.C. Cir. 1986) .....................                                         17
28        ,   %   -                                                937 F.2d 767(2d Cir. 1991) .............................................              17
30                Lamof. Pleva. Liokind. Prupis & Petigrow v, Gilbertson, 501 U.S. 350 (1991).........19,20
32                    Malin v. IVAX Corn., 17 F. Supp. 2d 1345 (S.D. Fla. 1998) ...........................................                              26
34                    McCormick v. Fund Am. Cos., 26 F.3d 869(9th Cir. 1994) ......................................                                    ,
                                                                                                                                                     1 1 19
36                    Mendell v. Greenberg, 927 F.2d 667(2d Cir. 1990) ........................................................                          17
38                                                 Litig., 1996 WL 664639 (N.D. Cal. Sept. 25, 1996)...........25
                      I n re Silicon Graphics, Secs.
40                    In re Silicon Graphics, 183 F.M 970 (9th Cir. 1999) .......................................                          4, 24, 25, 26
42                    In re Stac Elecs. Sec. Litig., 82 F.3d 1480 (9thCir.1996), cert. denied, 520
43                        U.S. 1103 (1997)  ..........................................................................................................   18
45                    Sterlin v. Bioimune Sys. InG, 154 F.3d 1191 (10th Cir. 1998) ........................................                              22

                                         MDL NO. 1300
    1       Thacker v. Madaphis Corp., 1998 WL 684595 3 (S.D.N.Y. Sept.30, 1998) .................... 26
    3       Tregenza v. Great A m . Communs. Corp., 12 F.3d 717 (7th Cir. 1993) ............................ 22
    5       TSC Indus.. Inc. v. Northway. Inc., 426 U.S. 438 (1976) ................................................ 18
    7       Valley Nat’l Bank v. Trustee for Westgate - California Corn., 609 F.2d 1274
    8           (9th Cir 1979) .............................................................................................................. 16
   10       Vaughn v. Teledyne. Inc., 628 F.2d 1214 (9th Cir. 1980)                                         ................................................ 18
   12       In re VeriFone Sec. Litig., 784 F. Supp. 1471 (N.D. Cal. 1992), afrd, 11 F.3d 865
  13            (9th Cir. 1993) ............................................................................................................. 18
  15        In re VeriFone Sec. Litig., 11 F.3d 865 (9th Cir. 1993) ............................................... 8, 18
   17       Virginia Bankshares. Inc. v. Sandberq, 501 U.S. 1083 (1991) ......................................... 18
  19        Wenger v. Lumisys. Inc., 2 F. Supp. 2d 1231 (N.D. Cal. 1998) .......................................                                             22
  21        Westinghouse Elec. Corp. v. Franklin, 993 F.2d 349 (3d Cir. 1993) ............................... 20
  23        In re Worlds of Wonder Sec. Litig, 35 F.3d 1407 (9th Cir. 1994) .................................. 22
  25        Yourish v. California Amplifier, 191F.3d 983 (9th Cir. 1999)........................................ 23
  27        Zatkin v. Primuth, 551 F. Supp. 39 (S.D. Cal. 1982) ....................................................... 24
  32        15 U.S.C. 977m ............................................................................................................19,                   21
  34        15 U.S.C. 0 7 8 ~ - 4 ( b ) ( l..................................................................................................... 23
  36        15 U.S.C. 6 78~-4(b)(2)        ....................................................................................................... 4
  38        15 U.S.C. 0 7 8 ~ - 5 ( ~ ) (...............................................................................................21,
                                            1)                                                                                                               24
  40        Priv. Sec. Litig. Reform Act 0$1995 tj 9(b) ..................................................................... 23
  42        Securities Act of 1933 0 11...............................                  ...................................................... 8, 19, 21
  43                                                                                     b

  44        Securities Act of 1933 tj 12...................................................................................... 8, 19, 21
  46        Securities Act of 1933 9 13.......................................................................................... 19, 21

                IOTION TO DlShilSS (XIERCER ACTION): M D L NO.   1300
             Securities Act of 1934 5 1O(b) ....................................................................... 3, 8, 19, 20, 21

             Securities Act of 1934 5 14(A) ..................................................................   1, 3, 8, 19, 21, 22

{OTION TO DIShllSS ( M E R G E R   ACTION):M D L No. 1300
 1                                        MEMORANDUM OF POINTS AND AUTHORITIES

 2                                                                 INTRODUCTION

 3               This case presents an all too familiar scenario. A company’s price per share declines. The

4    slaintiffs’ class actionbar then sues claiming that the company’s officersand directors “must have

 5   tnown” all along that something would or would not happen, and misled the shareholders for some

6    lndefined reason.

 7              However:

 8              (1)          Disappointmentdoes                not stateaclaim; and

 9              (2)          A change in circumstances based upon international events or Congressional action-

10                           the August 1998 Asian, Russian and international debt crisis, the August through

11                                                                                   or
                             October 1998 stockmarket collapse, the consequent refusal inability of lenders to

12                           finance real estate companies and Congress’ alteration of the tax laws respecting

13                           “paired REITs”-does not state a claim.

14                                                                former shareholders of California Jockey Club
                Plaintiffs’ putative class basically consists of the

15                                                                               to
     “Cal Jockey”) and Bay Meadows Operating Company (“BMOC”)(collectively referred by

16   Plaintiffs and herein as “BayMeadows”). Plaintiffs allege that the putative alleged classwas damaged

17                                      11
     sy Patriot’ having violated Sections and 12 of the Securities Act of 1933, and Sections 10(b) and

18   14(a) of the Securities ExchangeAct of 1934, by omitting certain information in the May 30, 1997

19                                    approval of the merger between
     roint Proxy and Prospectus seeking                            Patriot and Bay Meadows (the

20   ‘Joint Proxy”).                                           J

21               These alleged omissions concernPatriot’s utilization of outside financing to fund its self-

22   jescribed “aggressive acquisition activities” and an alleged conflict of interest with Patriot’s financial

      The term “Patriot” refersto defendants Patriot American Hospitality Inc., Wyndham International, Inc., PAH GP, Inc.,
     ?AH LP, Inc., Patriot American Hospitality Partnership,L.P. and Wyndham International Operating Partnership, L.P.,
     :ollectively and individually.
1    Idvisor PaineWebber. (The Joint Proxy contains an opinion from PaineWebber to Patriot

2    Shareholders, not Bay Meadows shareholders like Plaintiffs, that the consideration for the exchange of

3    Patriot shares was fair.) According to Plaintiffs, they would not have approved the merger had they

4                     “omitted” information. However, if Plaintiffs had read the Joint Proxy, they would
     3een aware of this

5                                                                       the
     lave noticed that everything that Plaintiffs claim was omitted from Joint Proxy was,in fact,

6    disclosed therein.

7                 Moreover, as the Merger Complaint concedes, the proposed merger effectively gave the

8    putative class the option ofeither: (i) selling their Bay Meadows shares for $33.00 per paired share or

9                        paired shares for Patriot shares on a one-for-one basis. Prior to commencing
     (ii) exchanging their

10   merger negotiations, the average salesprice for Bay Meadowspaired stock was only $14.36. Thus, by

11                           class member would have
     taking the cash option, a                                                              paired
                                                   received more than double the value of her

12   shares in cash onthe day the merger was consumated. Additionally, the Joint Proxy advised Plaintiffs

13                                               financial advisor ( i e . , Plaintiffs’ financial advisor),
     that the fairness opinion of Bay Meadow’s own

14   Montgomery Securities, “indicated a potential implied value range per [paired share] of between

15   $15.00 and $18.50.”

16                                                            PRELIMINARY STATEMENT

17                This Motion to Dismiss should be granted because Plaintiffs’ claims are fatally flawed for

18   several reasons.

19                First, Plaintiffs’        obvious failure to read and study the detailed disclosures in the Joint Proxy

20   does not create a federal securities la#violation.                The Joint Proxy disclosed in detail all of the

21   information that Plaintiffs claim was omitted, along wiih all other material information necessary to

22   inform Plaintiffs of the inherent risks involved in the merger. In light of these detailed disclosures,

23   Plaintiffs are reduced to complaining that Patriot did not stare into a crystal ball and predict the exact

     LlOrlON TO   Dls\llss (\TERCER ACTION): MDL N O . 1300             2

 1                                                      almost one year after the merger, as well as
     type and magnitude of financing Patriot would utilize                                        what

 2   the future would be. But the SEC disfavors such forecasts in proxy material because they are

 3   speculative and unreliable. Omitting such predictions, accordingly, is not actionable. Nor do Plaintiffs

4    state a claim by assertingthat Defendants did not characterize PaineWebber’s purported conflict. The

5                                        material fact upon which Plaintiffs’ base this alleged conflict
     Joint Proxy repeatedly disclosed each                                                             and

6    a company is not required to editorialize upon the objective facts it discloses.

7               Second, Plaintiffs’ claims aretime-barred. Each of the claims assertedin the Merger

8                                                                                       notified of
     Complaint must havebeen brought within oneyear from the date on which Plaintiffs were

9    the alleged omissions. The absolute latest date Plaintiffs were notified of the alleged omissionsis

10   April 6, 1998. By that date, Defendants had made countless disclosures regarding Patriot’s highly

11                                                           Patriot’s forward equity contracts.
     leveraged acquisitions, its dealings with PaineWebber and

12   Plaintiffs, therefore, were required commence this action by no later than April5, 1999 (oneyear

13   later). However, the earliestof the complaints now consolidated herein was not filed until May 14,

14                               notice.
     1999, well over one year after

15                                                        the
                Third, Plaintiffs’ claims also are barred by PSLRA’s Safe Harbor provisions and the

16   common law “bespeaks caution” doctrine. Each of the alleged omissions relatesto information that

17                                                                   planned aggressive acquisition
     the Joint Proxy identified as forward-looking, including Patriot’s

18                                                        and
     strategy, involving substantial debt, future financing possible conflicts of interest. Moreover, the

19                                  and
     Joint Proxy repeatedly disclosed warned Plaintiffs of the risks associated with these factors.

20                                                                                          entitled
     Having accompanied this informationiith meaningful cautionary statements, Defendants are

21                                                           “bespeaks caution’’ doctrine.
     to the full protections of the PSLRA’s safe harbor and tbe

22              Fourth, Plaintiffs’ first and fourth claims (based on $0 10(b) and 14(a) of the 1934 Act)should

23   be dismissed for the additional reasonthat Plaintiffs have not complied with thePSLRA’s requirement

     MOTlOU TO DIShllSS (hlERGER          MDL NO. 1300
 1   that they “state with particularityfacts giving rise to a strong inferencethat defendant[s] acted with the

2    required state of mind” as to each alleged misrepresentation. 15 U.S.C.              5 78~-4(b)(2).Plaintiffs have
 3   failed entirely to set forth “all the facts” “in great detail” which form the basis of their allegationsabout

4                                                              details,” the “sources of [their]
     Defendants’ mental state, including “adequate corroborating

 5   information,” “how [they]learned of the reports,” and “such facts as may indicate their reliability.”In
6    re Silicon Graphics, 183 F.3d 970, 983, 985 (9th Cir. 1999).2


10              Bay Meadows and CalJockeyformerlyoperatedasa                    “paired-share’’ REIT.     Plaintiffs’

11                                          (hereinafter cited as‘T’)f 1. As a paired-share REIT,
     Merger Complaint dated September 14,2000

12   2al Jockey ownedreal estate, which it leased to BMOC, and BMOC operated a horse trackon the

13   xoperty.       16. This paired-share REIT structure conferred certain tax benefits.         f 4. Although

14   2ongress barred these structuresin 1984, Bay Meadowsenjoyed a “grandfather” exceptionto this

15   xohibition because it operated as such prior to 1983.1 53.

16                                                 the
                Patriot was formed in April 1995 for purpose of, among other things, acquiring, developing

17   md repositioning hotel properties under a corporate REIT structure.               165. According   to Plaintiffs,

18                                                to
     ’atriot sought to acquire Bay Meadows in order compete withPatriot’s competitor, Stanvood

     Lodging Trust, which was operating already a paired-share REIT. 1
42                                            as                      68.

21   Bay Meadows, Concerned AboutFuture Revenues, Sought a More Aggressive Portfolio
22                                               of                                        about
                In or about April 1996, the Boards Directors of Bay Meadows became concerned

23   future revenues and began exploring merger opportunities. & Joint Proxy (hereinafter citedas

24   “Pxy”) 99, 102. This concern was due,at least in part, to “a steady decline in daily on-track attendance

     ’ Defendants also incorporate by reference the arguments set forth in PaineWebber’s Motion to Dismiss including without
     limitation the assertion that Plaintiffs lack standing to bring this action.
                                             MDL NO. 1300
 1   311   a nationwide basis and an increase in competition from other gaming and leisure activities.” Pxy

2    99. Bay Meadows perceived the merger with Patriot as a means of assembling a more aggressive

3    portfolio by expanding into the hotel industry. Pxy 99, 102. As stated by Cal Jockey’s Board when it

4                                                                                          to
     recommended the merger to its shareholders, mergingwith Patriot “would allow Cal Jockey enjoy

5    significant growth opportunities, including expansioninto the lodging industry . . . .” Pxy 99. (&G

6                                                                                             to
            BMOC’s recommendation of the merger, “a combination with Patriot would allow [BMOC]

7    mjoy significant growth and diversification opportunities. . . . ” Pxy 102.)

9    The Merger Offered Plaintiffs More ThanDouble The Value Of Their Paired Shares Cash

10                                                   of
                The decision of the Bay Meadows Boards Directors to merge with Patriot also was

11                                                                                                     of
     predicated on the fact that their shareholders, including Plaintiffs, were being offered the option

12   receiving in cash at consummation of the merger more than double the premerger announcement value

13   of their paired shares. Upon approving the merger, the Bay Meadows shareholders were given the

14   option to (i) sell their sharesfor $33.00 per paired shares or (ii) exchange their paired shares for

15   shares on a one-for-one basis.                       7 79.   As Bay Meadows’ Boards of Directors explained, $33.00 per

16                                                                                           of
     paired share represented an approximate premium of 130% over Bay Meadows’ average sale price

17                                                                   7
     $14.36 per paired share before merger negotiations commenced. Pxy 99. (Graphs representing daily

18                                          from 1995 to the present are annexed the accompanying
     stock prices for Bay Meadows and Patriot                                  to

19   Affidavit of Sean E. O’Donnell dated October 12,2000 (“O’D Aff.”) as Exhibit A.)3



     .’ This Court may take judicial noticeof stock trades. Heliotroue General. Inc. v. Ford Motor Co,, 189 F.3d 97 1, 98 1 n. 18
     (9th Cir. 1999).


                                Bay MeadowdCalifornia Jockey Stock Chart 1994-1998
               0”   50

                                                        Date                              I
                                                                 OnOctober 31 1996. Callfornla Jockey Club a z Bay
                                                                                                ne d
                                                                 Meadows O p w a ~ n g o m p w e t e 1r30a blnjlng
                                                                 xqulslllonAgreemenl wlthPartot AmerimHssp~tality I-c

1            In other words, upon consummation of the merger, Plaintiffs would either (i) realize an

2    mmediate profit of more than 130%or (ii) receive Patriot shares and see what the future may bring.

3    ‘The JointProxy disclosed that Bay Meadows’ financial advisor, Montgomery Securities, estimated

4    he value range of the paired shares to be only $15.00 to $18.50 per paired share.                 7 99.) The       Bay

5    Meadows’ shareholders followed the recommendations of theirBoards and approved the merger on

6    luly 1. 1997. T[ 104.

8    The Market Falters And Plaintiffs Sue

9            As set forth repeatedly in the Joint Proxy, because Patriot operated as a REIT, it relied heavily

10   lpon outside financing to fund its ”aggressive acquisition activities.” Pxy 1-7, 11, 14, 15,42,44-45.

11   49. 53. 58. 63, 64,66,67, 91-93, 95. (In order to maintain its REIT status, Patriot was required to

12   distribute to its shareholders 95% of its ordinary taxableincome. Pxy 53.) Prior to its merger with Bay
13   Meadows, Patriot had already incurred over $470 million of debt in just two years. It also was

14   disclosed repeatedly that while the Joint Proxy was being circulated, Patriot was negotiating to

15   increase its available financing from $475 millionto $1.2 billion! Pxy 53.

                          ACTION) MDL NO 1300
 1             In December 1997. approximately seven monthsafter the Joint Proxy was issued and the

2    merger was approved. Patriot entered into the first of three forward equity contracts. In accordance

3    with Patriot’s previously disclosed intention to rely heavily on outside financing, these forward equity

4    contracts allowed Patriot to obtain financing using its own stock as collateral. See 77 1 19-122.

5    Unfortunately for Plaintiffs and Defendants, leveraged real estate transactions became unpopular a

6    year or so after the merger. The international financial crisis of August 1998 to October 1998 slammed

7    the United States stock markets and REITSwere hit particularly hard.4 Following the market “crash”,

8    lenders became wary of REITs and grewless willing or unable to finance these leveraged structures.’

9                                                           tax
     Making matters worse, in July 1998, Congress amended the laws and removed the “grandfather

10   2xception” for the preexisting paired-share WITS. Patriot and the other paired-share REITS suffered:


                                                          RElT Stock Charts
                                                              1994-1 999

12             By November 1998, Patriot had defaulted on at least one of its loans and it had reported a net
13   loss of $60 million for the 1998 third quarter. 7124. By May 1999, Patriot’s stock had fallen to $5 per

14   share.

     ’ This Court also may take judicial notice of market trends. Heliotrope,189 F.3d at 98 1 n. 18.
       See O’D Aff., Ex. B. containing news articles discussing the International financial crisis and impact on the credit
     narket, particularly for REITS.
           TO                   MDL NO 1300
 1                                                                                                               that
                      These strike suits followed. Citing the decline in value of Patriot stock, Plaintiffs assert

2    Defendants must have misled them somehow when the Joint Proxy was circulated over a year earlier.

3                                                                                                   of
     Remarkably, Plaintiffs make no claim against the individual members of the Boards of Directors Cal

4    lockey or BMOC or theirfinancial advisor, Montgomery Securities. Yet it was Montgomery

5                                    of
     Securities and Board of Directors Cal Jockey and BMOC that recommended the mergerto

6    ?laintiffs; not Patriot and not PaineWebber. In fact, neither Patriot nor PaineWebber gave opinion

7    1s to the fairness of themerger to Bay Meadows shareholders.

9                                                                     ARGUMENT

10   1.               THERE ARE NOMATERIALOMISSIONS                               OR MISREPRESENTATIONS

11                                                                       Plaintiffs’ utter failure to identify any
                      The most significant flaw in the Merger Complaint is

12                                                                           of
     xtionable misrepresentation or material omission in the Joint Proxy. Each the federal securities

13   .aws invoked by Plaintiffsrequires a substantive allegation that Defendants were responsiblefor a

14                                 fact                                or
     nisrepresentation of a material by either making an untrue statement by omittingto state a

15   xaterial fact necessary in order to make the statement made,in the light of the circumstances in which

16   :hey were made, not misleading. Desaigoudar v. Meyercord, 223 F.3d 1020, 1026 (9th Cir. 2000)

17   [stating that claims under                     0 14(a) of the 1934Act require a material misrepresentation);
18   VeriFone Sec. Litig., 11 F.3d 865, 868 (9th Cir. 1993) (affirming this Court’s holdingthat claims

19   under        8 10(b) of the 1934 Act and $5                 11 and 12 of the 1933Act require a material misrepresentation).

20   Plaintiffs fail to allege any such m a t d a l misrepresentation.


                      D I S ~ ~ (,MERCER ACTION): MDL NO. 1300
     M O T I O N TO

 1   4.            The Alleged Omissions

2                                                              to
                   Plaintiffs’ entire case apparently boils down four alleged omissionsconcerning Patriot’s

3    Feliance on debt to finance its self-described “aggressive acquisitionactivities” and PaineWebber’s

4    mrported conflict of interest. As set forth below, each of these alleged omissionswas either fully

5    jisclosed in the Joint Proxy or is immaterial:


 8   First Alleged Omission                                                Reality
10   ,‘[D]efendants’ true intentions and                                   The Joint Proxy disclosed sufficient  information to inform
11   msiness strategy to incur                                             a reasonable investorof Patriot’s “aggressive acquisition
12   substantial debt, through massive                                     activities” and the inherent risks involved. Pxy 5 , 15,44-
13   short-term debt instruments and                                       45,50, 53, 64.
14   forward equity financing contracts,                               *   The Joint Proxy disclosedthat Patriot was increasing its
15   largely underwritten by defendant                                     available financing from $475 million to $1.2 billion.Pxy
16   PaineWebber.” T[ 90.                                                  2, 53, 58.
17                                                                                                     that
                                                                           The Joint Proxy disclosed Patriot would seek
18                                                                         additional financing, including possible equity financing.
19                                                                         Pxy 2,58.
21   Second Alleped Omission                                           Reality
23   ,‘[T]hat substantially all of the$1.2                                                                    that
                                                                           The Joint Proxy plainly disclosed at least $971
24   facility was already                                                                                    be
                                                                           million of the $1.2 billion would committed when the
25   Zommitted and would dramatically                                      Wyndham Transaction closed. Pxy 7, 144.
26   increase Patriot’s debt, and that                                     The Joint Proxy disclosed  that Patriot was increasing its
27   Patriot intended to increase such                                     available financing from $475 million to $1.2 billion.
28   debt, at an exorbitant rate, in the                                   Pxy 42,53, 58.
29   succeeding months. Additionally,                                      The Joint Proxy disclosed  that Patriot would seek
30   there are no disclosures about any                                    additional financing, includingpossible equity financing.
31   costs, fees, points, prepayments                                      Pxy 2,58,93.
32   penalties which is all material                                       Information regarding “costs,fees, points, prepayments
33   information.’’ 79 1.                                                  penalties” is immaterial as a matter oflaw.

                             ~             R          M D L NO. 1300
 2   I’hird Alleged Omission                                           Reality
 4   ,‘Patriot planned to enter into                                   *   The Joint Proxy disclosed that Patriot may rely upon
 5   forward equity contracts with the                                     equity financing. Pxy 42, 53, 58.
 6   assistance of defendant                                           *   Patriot did not enter into forward equity financing until
 7   PaineWebber. . . .” 7 92.                                                                                              and
                                                                           seven months after the Joint Proxy was issued, there
 8                                                                         is no allegation that Patriot even knewthat it would do so
 9                                                                         when Joint Proxy was filed. 7 119.
10                                                                     -   Patriot was under no obligation to predict the type of
11                                                                         financing it would use seven months after the  merger.
13   Fourth Alleged Omission                                           Reality
15   ?aineWebber’s purported “conflict                                 *   The Joint Proxy disclosed that PaineWebber was
16   If interest” basedupon (i)                                            Patriot’s (i) investment advisor; (ii)lender; and (iii)
17   ?aineWebber’s status as Patriot’s                                     underwriter. Pxy 11,98, Annex F-2.
18   nvestment advisor, lessor, lender                                 *   The Joint Proxy disclosed and discussed in detail the
19   md underwriter 77 95-97; and (ii)                                     Proposed PaineWebber Land Sale. Pxy 5,42,44, 5 5 , 60,
20   ’ainewebber’s principal                                                64-65, 60, 98, 132.
21   mderstanding with Patriot to                                      -   PaineWebber’s fairness opinion within the Joint Proxy,
22   Iurchase and leaseback Cal Jockey                                     which was rendered to Patriot’sshareholders, and        to
23   Iroperty after the Merger.                                            Plaintiffs also disclosed PaineWebber’s   relationship with
24   Defined in the Joint Proxy                                            Patriot and the Proposed PaineWebber Land Sale.
25   lnd herein as the “Proposed
26   ’ainewebber Land Sale”] 77 98
27   lnd 100.


     ~ ~ O T I O N Dlsrclss ( M E R C E R ACTIO^)
               TO                                   MDL No. 1300
1    B.         The Joint Proxy Disclosed In Detail Patriot’s “Aggressive Strategy” To Acquire Property
2               And Incur Substantial Debt

3                                                      Patriot’s self-described “aggressive strategy”to
                The Joint Proxy’s extensive disclosure of

4                                                                                             not
     acquire property and incur substantialdebt bars any claim that a reasonable investor would have

5                                                      inherent risks involved. See. e . g , McCormick v.
     understood the “true nature” of this strategy or the

6    Fund Am. Cos., 26 F.3d 869, 880 (9th Cir. 1994). As discussed below, theJoint Proxy plainly

7    disclosed that Patriot was acquiring hotelproperties at a blistering rate. It disclosed Patriot’s reliance

8    upon outside financing to fund these acquisitions and it disclosed that Patriot showed no signsof

9    slowing down.

11              1.         The JointProxyPlainly Disclosed Patriot’s BlisteringGrowthRate of More
12                         Than 300% in Less Than Two Years

13                                                                                             that
                In addition to those acquisitions already consummated, the Joint Proxy disclosed Patriot

14   was in contract to acquire another$300,000,000 worth of hotel properties. Pxy 95. According to the

15   Joint Proxy, Patriot had entered into contracts or letters of intent to: (i) purchase “fourteen hotels. . .

16                                                $271.4 million” (the “Proposed Acquisitions”); and
     for a combined purchase price of approximately

17   (ii) acquire Grand Heritage Hotelsfor approximately $25.25 million (the “Grand Heritage

18                                                                         of
     Acquisition”). Pxy 4,63. As stated in the Joint Proxy, the consummation the Proposed

19                                               in
     Acquisitions alone would mean a 300% increase Patriot’s room portfolio since its initial offeringin

20   April 1995:
21          Assuming all of the Proposed Acquisitions are consummated, New Patriot REIT’s hotel
22          portfolio include
                    will           70 hetels,
                                            aggregating16,833     representing300%
                                                             rooms,           a
23          increase in the sizeof New Patriot REIT’S room portfolio since              Initial
24          Offering.
26   Pxy 4, 63 (emphasis supplied) (see alsoO’D Aff., Ex. C).

 1             Indeed, the Joint Proxy revealed that even after the Proposed Acquisitions and the Grand

 2   Heritage Acquisitions were complete, Patriot was about to double its size again. The Joint Proxy

 3   disclosed repeatedly that Patriot had entered into a merger agreement with Wyndham Hotel

4    Corporation to acquire more than$1.1 billion worth of hotel and franchise properties. Pxy 5-6, 65-6.

5    Following the proposed Wyndhammerger, Patriot’s combined assetswould be worth approximately

6    $2.6 billion, of which approximately45.8% was attributable to Wyndham. Pxy 6, 66 (see also O’D

7    Aff., Ex. C).

8              2.         TheJointProxyProminently              Disclosed Patriot’s Plan To ContinueIts
9                         Aggressive Strategy

10             In no uncertain terms, Patriot’smanagement considered the hotel industry to be a buyer’s

11   market. In fact, Patriot’s management viewed the merger with Bay Meadowsas a means ofenhancing

12   its acquisition opportunities, and theJoint Proxy plainly disclosed so:
13           Patriot believes that market conditions remain favorable for the acauisition of additional
14           hotelsandhotel     Dortfolios and it is expected that NewPatriotREITwillcontinue
15                  aggressive
             Patriot’s      acquisition                                         Patriot
                                                 activities. Additionally, New Operating
16           Company intends to explore opportunities to acquire hotel operators, owners of hotel
17           franchises or brands  and      independent hotelmanagement          Patriot’s
18           management believes that the paired share structure will enhance opportunities for New
19           Patriot REIT and New Patriot Operating Company consummate such acquisitions.
21   Pxy 5 , 64-65, 91-92 (emphasis supplied) (seealsQ O’D Aff., Ex. C).

22             3.         The JointProxyWarned Plaintiffs That Patriot’s AggressiveStrategy
23                        Involved Substantial Debt

24             The Joint Proxy disclosedthat Patriot generally was required to distribute 95% of its ordinary

25   taxable income in order to maintain its qualificationas a REIT. Pxy 53. Consequently, Patriot relied

26   heavily upon outside financing to fund acquisitions. The Joint Proxy disclosed:

27             The fact that New Patriot REIT generally must distribute 95% of its ordinary taxable
28             income in order to maintain its qualification as a REIT may limit New Patriot REIT’s
29             ability to rely upon lease income from its hotels or subsequently acquired properties to
30             finance acquisitions or new developments. As a result, if debtor equity financing were
31             not available on acceptable terms, further acquisitions or development activities might


1               be curtailed or New Patriot REIT’s cash available for distribution might be adversely
2               affected.
4    Pxy 53. In fact, the Joint Proxy explicitly disclosed and warned all Bay Meadows’ Shareholders,

 5   ’laintiffs, in great detail, of the risks associated with this reliance upon outside financing:

 6              Possible adverse consequences to the stockholders of Cal Jockey and Bay Meadows
 7              who remain stockholders of New Patriot REIT and New Patriot Operating Company as
 8              a result of(i)theincreaseinthe        amount of pro forma combineddebtpayableby
 9              [Patriot] . . . as compared to no indebtedness of Bay Meadows and Cal Jockey . . . . (ii)
10              the increase in the pro forma ratio of combined debt to total market capitalization of
11              New Patriot REIT and New Patriot Operating Company to 29.6% . . . It also should be
12              noted that (i)PaineWebberRealEstatehas          agreed to increasePatriot’savailability
13              under the Line of Credit from $475 million $625 million (as of May 28, 1997, $471.2
14              million was outstanding under the Line of Credit) and (ii) Patriot has entered into a
15              commitment letter with PaineWebber Real Estate and Chase concerning replacing the
16              Line of Credit with the New Credit Facility which will have availability of up to $1.2
17              billion. See “Risk Factors-Substantial Debt Obligations; No Limits on Indebtedness.”
18                                                          ***
19                        DEBT
                SUBSTANTIAL             NO     ON
                             OBLIGATIONS; LIMITS INDEBTEDNESS
20              Subsequent to theconsummation of the MergerandtheRelatedTransactions,the
21              amount of pro forma combined debt New Patriot    REIT and New Patriot Operating
22              Company will assume is approximately $579.9 million as compared to no indebtedness
23              of Bay Meadows and Cal Jockey. . . .
24                                                          ***
25              New Patriot REIT and New Patriot Operating Company also may borrow additional
26              amounts from the same or other       lenders inthefuture, or may issue corporatedebt
27              securities in public or private offerings. In this regard, (i) PaineWebber Real Estate has
28              agreed to increase Patriot’s availability under the Line of Credit from $475 million to
29              $625 million (as of May 28, 1997, $471.2 million was outstanding under the Line of
30              Credit) and (ii) Patriot has  entered into a commitment letter with PaineWebber Real
31              Estate and Chase concerning replacing the Line of Credit with the New Credit Facility
32                                            of
                which will have availability up to $1.2 billion.
33                                                          ***
34                                              the
                Neither the Restated Charters nor Restated Bylaws limit the amount of indebtedness
35              New Patriot REIT or New PatriotOperating: Company may incur.
36                                                          ***
37              There can be no assurance that New Patriot R                          R                    y
38              . . . will be able to meet their ckbt service obligationsand. to the extent that thev cannot,
39              New Patriot REIT and New Patriot Operatin? Companv risk the loss of some or all of
40              their assets. including their hotels. to foreclosure.
41                                                          ***‘
42              Adverseeconomicconditionscouldcausetheterms             on which borrowin_gs become
43              available to be unfavorable. In such circumstances, if New PatriotREIT or New Patriot
44              Operating Company is in need of capital to repay indebtedness in accordance with its
45              termsorotherwise,    it could be required to liquidate oneormoreinvestments         in

     V~OTION                   ACTION): M D L No. 1300
                Dls!dlss (MERGER
 1              properties at times which may not permit realization of the maximum return on such
 2              investments.
 3                                                               ***
 4              The foregoing: risks associated with debt obligations of New Patriot REIT     and New
 5              Patriot Operating Company may adversely affect the market price of the paired shares
 6              of New Patriot REIT Common Stock and New Patriot Operating Companv Common
 7              Stock following: the Merzer and may inhibit the ability of New Patriot REIT and New
 8              PatriotOperatingCompany       to raise capitalinboththepublicandprivatemarkets
 9                                           of
                following the consummation the Mergerand the Related Transactions.
11   ’xy 14, 44-45 (emphasis supplied).
13              4.          The Joint Proxy Plainly Disclosed That At Least $971 Million Of The $1.2
14                          Billion New Credit Facility Already Was Committed

15                                                Joint Proxy plainly disclosed that at least $971 million of the
                Contrary to Plaintiffs’ claims, the

16                                       virtually spent. According to the Joint Proxy, Patriot
     j 1.2 billion New Credit Facility was                                                    was

17                                                                                             Line
     legotiating with PaineWebberand Chase Manhattan Bankto transform its revolving $475 million

18   If Credit into a NewCredit Facility with available financing of up to $1.2 billion. Pxy 45. This New

19   :redit Facility consisted of a$500 million term loan and a $700 millionrevolving line of credit. Pxy

20   71. As of May 28, 1997, $471 million was outstandingon the existing Line of Credit. Pxy 58. The

21   oint Proxy further providedthat the $500 million termloan would be used to finance the Wyndham

22   rransactions. Pxy 71. This means that at least $971 million of the $1.2 billion New Credit Facility

23   dready was “spent”:
                                    Amount Outstanding Under
                                    Existing Lineof Credit:                   $471,000,000

                                     Financing     Transactions               $500,000.000

                                                            .+                $971,000,000
24                                                         that
                The Joint Proxy, accordingly, amply disclosed a large portion of the $1.2 billion already

25   ‘spent”. The mere fact that Plaintiffs neglected to do tHe math does not create a federal securities

26   :laim for non-disclosure. See. e . g , In re Gap Sec. Lit., No. C-87-4895 (JPV), 1988 WL 168341, at *6

27   :N.D. Cal. Sept. 28, 1988) (“[Wlhere needed information may be derived through calculationsof data

 1                                         material omission of fact will be dismissed.”)(attached hereto
     provided by the corporation, a claim of

2    at Tab 1).

3    C.          The Joint Proxy Disclosed In Detail PaineWebber’s Relationship With Patriot And The
4                Proposed PaineWebber Land Sale

5                                         disclosed in detail PaineWebber’s relationship with Patriot andthe
                 Similarly, the Joint Proxy

G    Proposed PaineWebber Land Sale. Plaintiffs argue first that PaineWebber was conflicted becauseit

7    jerved as Patriot’s financial advisor, 7 93, lender, 77 95 and 96, and underwriter. 7 97. But the Joint

 8   Proxy comprehensively disclosed thisinformation:
 9          In thepast,PaineWebberhas        provided financial advisoryservicesandinvestment
10          banking services and has acted as a lender, to Patriot (including actingas an underwriter
11          for Patriot) and received fees for the rendering of these services. PaineWebber may
12          provide financial advisory or investment banking services to, and act as an underwriter
13          or placement agent for or lender to, Patriot, Cal Jockeyor Bay Meadows in the future.

14   ?xy 98.

15               Next, Plaintiffs argue that PaineWebber had a conflict because, prior to the merger, Patriot

16   Igreed “to sell substantially allof [Cal Jockey’s]land holdings to PaineWebber’s real estate affiliate.

17     for approximately $78 million’’ and PaineWebber agreed to leaseback this property to Patriot.

18                                                   as
     rhis transaction was defined in the Joint Proxy the “Proposed PaineWebber Land Sale” and

19                                                                       for
     repeatedly was disclosed and discussed in detail. The Joint Proxy, example, disclosed:
20          Patriot and PaineWebber Incorporated(“PaineWebber”) have entered into an agreement
21          pursuant to which, following the closing of the Merger, an affiliatePaineWebber will
22          purchase from New Patriot REIT substantially all of the land which is currently owned
23          byCalJockey      . . . for apurchaseprice of $78.05millionincash(theProposed
24          PaineWebber Land Sale”). In connection with the Proposed PaineWebber Land Sale,
25          New Patriot REIT would assign all of its rights and benefits under existing leases,
26          contracts, permits and entitlements relating to land owned by Cal Jockey       . . . to the
27          PaineWebber affiliate . . . . Sjmultaneously with the consummation of such purchase,
28          thePaineWebberaffiliate      and NewPatriotREITwouldenterintoagroundlease
29          covering that portion of the land upon which- the Racecourse is situated for a term of
30          seven years at an annual rate of $3 million forathe first year of the lease, $3.25 million
31          for the second year, $3.5 million for the third year, $4 million for the fourth and fifth
32          years and $5 million for each remaining year during the term of the lease . . . . There
33          can be no assurance that the Proposed PaineWebber Land Sale will be consummated.

                       (                  MDL No. 1300
 1   Pxy 4, see also Pxy 64-65. In fact, originally, PaineWebber was goingto be a direct participant inthe

 2   merger transaction and the Joint Proxy disclosed this too:
 3          During the negotiations which eventually resulted in the execution of the October 3 1,
 4           1996 Agreement,   PaineWebber        engaged in discussions with Patriot regardinga
 5          potential acquisition by PaineWebber or an affiliate thereof of certain of the real estate
 6          assets of Cal Jockey following consummation of the transactions contemplated by the
 7          October 3 1, 1996 Agreement. See “-Background of the Merger.” These discussions,
 8          however, had terminated prior to the time that PaineWebber had finalized the valuation
 9          analysesdescribedabove        and delivered its fairness opinion to thePatriotBoardof
10          Directors. Thus, neither Patriot nor PaineWebber believe that PaineWebber had any
11          conflict of interest at the time that PaineWebber delivered the PaineWebber Opinion. In
12          December 1996, PaineWebber and Patriot resumed such discussions and subsequently
13          reached an agreement in principlepursuant to which an affiliate of PaineWebber would
14          purchase substantially all of the land owned by Cal Jockey    following consummation of
15          the Merger for a purchase price of    $78.05 million in cash.
17   ’XY    84-85.

19                                                        rendered to Patriot shareholders andnot Bay
                  PaineWebber’s fairness opinion, which was

20                                                    relationship with Patriot and the Proposed
     aeadows shareholders, also disclosed PaineWebber’s

21   IaineWebber Land Sale:
22         As you are aware, PaineWebber Incorporated is currently acting as financial advisor to
23         theCompanyand        will receivea fee for rendering this opinionandwillreceivean
24         additional fee upon  consummation               Proposed
                                                      of the                 the
                                                                  Transaction. past,
25         PaineWebberIncorporatedhas        provided financial advisoryservices and investment
26         banking services to the Company (including acting as an underwriter for the Company)
27         and received fees for the rendering of these services. We may provide  financial advisory
28         or investment banking services to, and act as an underwriter or placement agent for, the
29         Company, BMOC or CJ in the         future. Moreover, as you are aware, prior to the date
30         hereof, PaineWebber Incorporated engaged in discussions with the Company regarding
31         a potential acquisition by PaineWebberIncorporated or an affiliate thereofof certain of
32         the real estate assets of CJfollowing consummation of the transactions contemplated by
33         the Acquisiti-on Agreement. Such      discussionshave     not resulted in an agreement
34         between the Company, on the one hand, and PaineWebber Incorporated or an affiliate
35         thereof, on the other hand,a d are not ongoing on the datehereof, but such discussions
36         may commence again in the     future.
38   Pxy F 1 -F2. Thus, the Joint
                                Proxy comprehensively dishosed all of the relevant facts concerning

39   PaineWebber’s purported conflict of interest. S e e , u,Valley Nat’l Bank v. Trustee for Westgate-

40   California Corp., 609 F.2d 1274, 1282 (9th Cir. 1979) (dismissing claimsthat proxy inadequately

     WOTION TO DIShfISS ( X l E R G E R ACTION):   MDL NO. 1300
 1   iisclosed conflicting interests where “[tlhe of the dual roles played . . . [was] revealed in three

2    different places in the InformationStatement.”).

 3   D.           DefendantsWere Not Required To Editorialize On The Disclosed PaineWebberFacts

4                                            that Defendants did not characterize these facts as a
                  Plaintiffs only can complain                                                   “conflict of

5    Interest.” It is settled law, however, that the federal securities laws do not require companies to

6    :haracterize or state conclusions about disclosed facts. These laws simply require the disclosureof

7                                                                                    of
     Ibjective material facts such that a reasonable investor can determine the fairness the underlying

8    :ransaction. Valley, 609 F.2d at 1282; Kramer v. Time Warner. Inc., 937 F.2d 767, 776 (2d Cir. 1991)

9    :“The disclosure required. . .is not a rite of confession. . . What is required is the disclosure of material

10   hjective factual matters.”); Mendell v. Greenberg, 927F.2d 667,674 (2d Cir. 1990); Kas v. Financial

11   3eneral Bankshares. Inc., 796 F.2d 508, 517 (D.C.Cir. 1986) (“Nor can the proxy statement befaulted

12                                         “potential conflict of interest.””).
     3ecause it never uses the actual phrase

14   E.           The Omitted Forecasts Regarding Forward Equity Financing Are Too Speculative And
15                Immaterial To StateA Claim

16                Plaintiffs complain essentiallythat Defendants didnot stare into their crystal ball when issuing

17   :he Joint Proxy andpredict that approximately ayear after themerger, Patriot would “incur substantial

18   lebt, through massive short-term debt instrumentsand forward equity financing contracts.”         71 90,
19   1 19-22. These alleged nondisclosures are, in substance, failuresto forecast future events. The SEC

20                                                                                                 too
     ‘has historically disfavored forecasts and value estimates inproxy statements” because they are
21   speculative to be relied upon by a reasonableinvestor. Desaigoudar, 223 F.3d at 1023-24. Not

22   ;urprisingly, Plaintiffs allege nofacts to suggest that Defendants actually knew, when the JointProxy

23   was circulated, what typeof financing Patriot would rely upon one year later. Obviously, this would

     \lOTION TO DlShllSS ( M E R G E R ACTION).   MDL NO. 1300
 1   depend upon a host of factors beyond Patriot’s control including interest rates, prospective lenders,

2    potential acquisitions, the real estate market and the economy in general.

3               The information alsowas immaterial. Materiality in the context of proxy solicitations hasbeen

4    defined by the SupremeCourt as “a substantial likelihood that the disclosure of the omitted fact would

5                                                                     altered the ‘total mix’ of
     have been viewed by the reasonable investor as having significantly

6    information made available.” TSC Indus.. Inc. v. Northway. Inc., 426 U.S. 438, 449 (1976); seealso

7    Virginia Bankshares. Inc. v. Sandberg, 501 U.S. 1083, 1090 (1991); Vaughnv. Teledyne. Inc., 628

8    F.2d 1214, 1221 (9th Cir. 1980). Due to the speculative natureof financial forecasts and the Joint

9                                                       that                                        to
     Proxy’s cautionary language, Plaintiffs cannot argue including in the Joint Proxy predictions as

10                                                later, would have altered the total mix of information
     what type of financing Patriot would use a year

11   regarding the merger. Omitting this information, therefore, simply is not actionable. DesaiEoudar, 223

12   F.3d at 1023-24; In re VeriFone, 11 F.3d at 871.
13           As this Court recognized in In re VeriFone Sec. Litis., 784 F. Supp. 1471 (N.D. Cal. 1992),

14   affd,    11 F.3d 865 (9th Cir. 1993), absent allegations that defendants withheld financial data from

15                                        such alleged omissions are not material as a matter of law. Here,
     which forecasts typically are derived,

16   Plaintiffs offer no facts whatsoever (rather they offer only 20/20 hindsight) even suggest that Patriot

17   knew it would enter into such financing when Joint Proxy was circulated. Nordo Plaintiffs even

18   plead any facts demonstratingthat Defendants withheld any data or information even suggestingthat

19   such financing was likely. Therefore, these financing forecasts need not have been disclosed, and the .

20                                             not
     failure to make these omitted forecasts did render other statements in the Joint Proxy misleading.

21                                 at                                                             1488-
     See. e.%, Desaieoudar, 223 F.3d 1023-24; see also In re Stac Elecs. Sec. Litis., 82 F.3d 1480,

22   89 (9th Cir. 1996)’ cert. denied, 520U.S. 1103 (1997) (holding nondisclosureof negotiations with

23   Microsoft and knowledge that Microsoft intended to introduce competitive productnot actionable); In

24   re VeriFone, 11 F.3d at 871.

1    F.           The New Credit Facility’s “Costs, Fees, Points and Prepayments Penalties” Were
2                 Immaterial As A Matter Of Law

3                                                                                           also were
                  The New Credit Facility’s “costs, fees, points [and] prepayments penalties”

4    immaterial. As set forth in the Joint Proxy, Patriot was in the midst of negotiating the NewCredit

5    Facility when the Joint Proxy was circulated. Pxy 71. Accordingly, the Joint Proxy disclosedthat

6    there could be no guarantee that the New Credit Facility would, in fact, be obtained or upon what

7    terms. Pxy 7, 7 1. Any disclosures, therefore, regarding the “costs, fees, points and prepayments” also

8    would have been purely speculativeand hence immaterial. See Desaigoudar, 223 F.3d at 1024 (“Since

9    we conclude that a prediction based on the facts in the complaintwould have been unreliable, we

10   cannot conclude that omitting it from the proxy statements violated the law.”), see alsQ McConnick, 26

11   F.3d at 880 (“[Plaintiff] knew that he didn’t know the name of thebuyer. Hence, while that

12                                    Defendants’ failure to disclose it was not misleading, and hence
     information may have been material,

13   not actionable.”).

15   11.                    CLAIMS ARE TIME-BARRED
                  PLAINTIFFS’                     BECAUSEPLAINTIFFS

18                                             be
                  Plaintiffs’ claims also should dismissed becausePlaintiffs commenced the first of three

19                                     year after being on actual notice of the alleged omissions.
     unconsolidated action more than one

20   Pursuant to          4   13 of the 1933 Act, Plaintiffs were required to bring their claims under              $4   11 and 12

21                       the
     within one year from date on which the alleged omissions should have been discovered through

22   reasonable diligence. 15 U.S.C.                          0 7 7 h (“No action shall be maintained to enforce any liability created
23   under section 77k or 771(a)(2) of this titleunless broug3t within one year after the discovery of the

24   untrue statement or the omission. . .”). Plaintiffs also were required to bring their claimsunder                         $8
25   1O(b) and 14(a) of the 1934Act, within one year after discovery of the alleged omissions. See Lampf,

     hlOT10S TO DISbllSS ( M E R C E R ACTIOS).   .MDL NO. 1300
 1   Pleva. Lipkind. Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991) (holding litigation under               0   lO(b)

2    and Rule lob-5 must be commencedwithin one year after discovery); Westinghouse Elec. Corp. v.

3    Franklin, 993 F.2d 349, 353 (3d Cir. 1993) (holding m f p e r i o d of limitations applicable to 0 14(a)

4    claims); see also Ceres Partnersv. GEL Assocs,, 918 F.2d 349 (2d Cir. 1990).

6    A.        Plaintiffs Must Have Commenced This Action No Later Than April 6, 1999

7              Based solely upon the transactions disclosed in the Joint Proxy and the press releases cited in

8    the Merger Complaint, it is beyond disputethat Plaintiffs werenotified of each of the alleged

9    omissions as early as June2, 1997, when the Joint Proxy was circulated, and certainly later than

10   April 6, 1998, when the last forward equity contract was announced.              (Excerpts from these releases

11   are annexed O’D Aff. as Ex. D.) By April 6, 1998, Patriothad made countless disclosures regarding

12   its many acquisitions and the debt incurred to leverage these acquisitions, including each of the

13   forward equity contracts it entered into.7 & O’D Aff. Ex. C. Patriot also expressly had disclosed that

14                                                         that
     the $1.2 billion credit facility fully was committed and the Proposed PaineWebber Land Sale was

15   consummated. See Ex. D. Plaintiffs, therefore, were required to commence this action no laterthan

16                                                                                      filed on May 7, 1999,
     April 5 , 1999 (one year later). But the earliest of the class action complaints was

17   well over one yearlater.

19   B.        Plaintiffs’HindsightAllegationsRegardingHow               Patriot’s Stock PerformedIsIrrelevant

20             The Merger Complaint make&he unsubstantiated assertion that the alleged fraud was not

21   discovered until “late 1998” when Patriot’s stock value,declined significantly. Yet Patriot’s stock

     ’  Plaintiffs were on notice of the forward equity financing as early as December 1997 when Patriot announced entering into
     the first of the three forward equity contracts. 7 119.
     ’                                       is
       In evaluating whether a shareholder on notice of her claims, “[c]ourts can impute knowledge of public information
     without inquiring into when, or whether, individual shareholders actually knew of the information question.” Berry V.
                                                                                 S . Ct.
     Valence Technolow. Inc., 175 F.3d 699, 703 n.4 (9th Cir.) cert. denied, 120 528 (1999).
 1   ?erformance is totally irrelevant as to when Plaintiffs were on notice of the alleged omissions. Thus,

 2   Plaintiffs complain that they were misled as to the “true nature” of Patriot’s aggressive strategy to

 3   2cquire properties rapidly and incur substantial debt in the process. Plaintiffs were put on notice of this

4    fact every time Patriotacquired another property orborrowed another dollar. Based solely upon the

5                                                                 and
     xess releases cited in the Merger Complaint, between June 1997 April 1998, Patriot disclosedthe

6                                                                                   $3
     xquisition of at least 125 additionalhotel properties and the incurrence of over billion of new

7    financing, including each of the threeforward equity contracts. & Ex. D. The substantial debt

8                                                            at
     ncurred, and the potential risks involved, were disclosed the time each transaction was announced,

9    u t one year later when the risks became
                                            realitior. The decline in value of Patriot’s stock price does

10                                         to
     lot mean that Plaintiffs were misled as the actual risks, it simply guaranteed that the plaintiff class

11   iction bar would sue.
13   E.           At The Very Least, Plaintiffs Were Put On “Inquiry Notice” As Early As June 2,1997
14                And Certainly No Later Than    April 6,1998

15                                                                       that
                  Given these extensive disclosures, there can be no dispute Plaintiffs had actual notice of

16                                          litigation commenced. At the very least, these countless
     heir claims more than one year before this

17   disclosures placed Plaintiffs on“inquiry notice” of the alleged omissions. If Plaintiffs truly were

18   duped into ariskier investment than expected, as they claim, these numerous disclosures surely

19   revealed enough risk to raise the brow of a reasonable investor. Plaintiffs’ second and third claims,

20                                            quoted above, 0 13 of the 1933 Act starts the clockrunning
     therefore, should be dismissed because, as

21   for 5 fj 1 1 and 12 claims when areasoffable investor, should have discovered the alleged fiaud. 15

22   U.S.C.       5 77m.         This same inquirystandard applies to Plaintiffs’ 1934 Act claims. Although the Ninth

23                                                   of
     Circuit has not yet determined the applicability the inquiry noticestandard, every circuit court to

24                                   applied an inquiry notice standard for claims under § § 10(b) and
     address the issue since Lamp, has

     XlOTlON TO DlShllSS ( M E R G E R ACTION)’   MDL NO. 1300
 1   14(a). Great Rivers Coop. v. Farmland Indus., 120 F.3d 893 (8th Cir. 1997); Caviness v. DeRand

2    Resources Corp., 983 F.2d 1295 (4th Cir. 1993); Sterlin v. Bioimune Sys. Inc., 154 F.3d 1191 (10th

3    Cir. 1998); Westinghouse, 993 F.2d at 353. As Judge Posner reasoned in Trepenza v. Great American

4                                                 believed, inquiry notice makes sense for fraud the
     Lommunications Corp., “[ilf, as Congress plainly                                          in

5    sale of stock [§$ 1 1and 12 claims], it makes sense when the fraud is challenged under [Rule lob-51

G    rather than under the statutes.” 12 F.3d 717, 722 (7th Cir. 1993).
8    [II.        THE PSLRA ACT’S SAFE HARBOR AND THE “BESPEAKS                                    CAUTION’’ DOCTRINE

10                                                                                                     law
                 Plaintiffs’ claims also are barred by the PSLRA’s Safe Harbor provisions and the common

11   ,‘bespeaks caution” doctrine. The PSLRA                       provides that no liability can attach to a forward-looking

12   statement if the statement is identified as forward-looking and accompanied by meaningful cautionary

13   language. See 15 U.S.C.                                (1998). And it specifically identifies statement[s] of “the plans

14   and objectives of management for future operations” and “future economic performance” as forward-

15   looking statements.                  15 U.S.C. § 78~-5(i)(l). Likewise, under the       caution”
                                                                                     “bespeaks      doctrine,

16   forward-looking statements are considered “immaterial when the defendant has provided the investing

17   public with sufficiently specific risk disclosures or other cautionary statements concerning the subject

18   matter of the statements at issue to nullify any potentially misleading effect.” In re Worlds of Wonder

19   Sec. Litis., 35 F.3d 1407, 1413 (9th Cir. 1994).

20                                                  to
                 Each of the alleged omissions relates information the Joint Proxy identified as fonvard-

21   looking, including Patriot’s aggressiveacquisitions, the substantial debt involved, future financingand
22   possible conflicts of interest. For example, theJoint Proxy provided:

23               This Joint Proxy . . . contains statements which constitute forward looking statements
24               within the meaning of the Private Securities Litigation Reform      Act of 1995. Those
25               statements . . .include statements regarding the intent, belief or current expectations of
26               Patriot, Cal Jockey and [BMOC] . . . with respect to . . . (iv) potential acquisitions or
27               dispositions . . . including the Proposed Acquisitions, the Grand Heritage Acquisition,

     MOTION TO   Dlshllss ( M E R C E R ACTION):MDL NO 1300
 1                the Proposed Wyndham Transactions and the Proposed PaineWebber Land Sale, (v) the
 2                policies of [Patriot] . . . regarding investments, acquisitions, dispositions, financings,
 3                conflicts of interest and other matters . . . (vii) risks associated with the hotel industry
 4                and real estate markets in general, (viii) the availability of debt and equity financing,
 5                including the New Credit Facility, (ix) interest rates, (x) general economic conditions
 6                and (xi) trends . . . . Stockholders                                such
                                                          are cautioned that any forward         looking
 7                statements are not guarantees of future performance and involve risks of uncertainties,
 8                and that actual         may
                                    results        differ materially from those in the     forward looking
 9                statements . . . .
11   Pxy 42. As shown earlier, the Joint Proxy also warned Plaintiffs repeatedly of the risks associated

12   Patriot’s aggressive acquisition strategyand the substantial debt involved. Having made these

13                                                  entitled to the full protections of thePSLRA’s safe
     neaningful cautionary statements, Defendants are

14   larbor, Wenger v. Lumisys. Inc., 2 F. Supp. 2d 1231, 1241-43 (N.D. Cal. 1998), and the bespeaks

15   :aution doctrine. In re Worlds of Wonder, 35 F.3d at 1413.


18                                            is
                  The Merger Complaint simply not pled with the specificityrequired by Rule 9(b) or the

19                                                           high degree of meticulousness. See Yourish
     PSLRA, which require Plaintiffsto plead their case with a

20   v. California Amplifier, 191 F.3d 983,993 (9th Cir. 1999). Rule 9(b) mandates that “[iln all averments

21                                                     fraud or mistake shall be stated with particularity.”
     3f fraud or mistake, the circumstances constituting

22                                                    stringent pleading standard for securities
     The PSLRA modifies Rule 9(b), providing even a more

23                                      to
     slaims fraud by requiring plaintiffs identify: (1) each statementalleged to have been misleading; (2)

24                               statement is misleading; and (3) all facts on which that belief is formed.
     the reason or reasons why the

25   See In re Silicon Graphics 183 F.3d at 996; 15 U.S.C. 4 78~-4(b)(l).
26                 Plaintiffs have failed to identify                  specific statement in the Joint Proxy that was made

27   misleading by any alleged material omission. Instead, Plaintiffs’ claims are based on the conclusory

28   assertion that the Joint Proxy “failed to disclose defendants’ trueintentions and business strategy to

29                                                                        forward equity financing
     incur substantial debt, through massive short-term debt instruments and

     LlOTION TO DlshllSS ( h l E R G E R ACTION):   MDL NO. 1300
 1   ;ontracts, largely underwritten by defendant PaineWebber.” 81 19. Again, the Merger Complaint is

2    devoid of any factual allegationsto suggest that Defendants knew, at the time the Joint Proxy was

3    distributed, that Patriot would be entering into a forward equity contract with PaineWebber seven

4    months later. Nor have Plaintiffspled any facts to indicate that Patriot’s acquisition strategy was

5    mything other than the strategy setforth in the Joint Proxy. Rather than offering contemporaneous

6                                                                                                        to
     facts or admissions to contradict the statementsregarding Patriot’s strategy, Plaintiffs merely point

7    Facts allegedly occurring in“late 1998,” indicating that Patriot suffered financial difficulties more than

8    1 year                               filed.
                  after the Joint Proxy was

9                 It is not enough to allege that, because a statement conflicts with the current state
                                                                                                   of facts, the

10   ;tatement is false. In re Glenfed. Inc. Sec. Litig., 42 F.3d 1541, 1548 (9th Cir. 1994). Rather, as the

11   :ourt noted in Glendfed, Plaintiffs mustallege specific facts showing “why the disputed statement was

12                                  using evidence such as inconsistent contemporaneous statements or
     intrue or misleading when made,”

13   nformation in existence at the time of thestatement.                U at 1549.

17                Plaintiffs’ first and fourth claims should be dismissed for the additional reasonthat Plaintiffs

18                                    requirement that they state “in great detail, facts that constitute
     lave not complied with the PSLRA’s

19   strong circumstantial evidence ofdeliberately reckless or conscious misconduct.” In re Silicon

20   3raphics, 183 F.3d at 974; Desaigoidar, 223 F.3d at 1022; Zatkin v. Primuth, 551 F. Supp. 39,45 (S.D.

21   Cal. 1982). Plaintiffs must set forth Grticularized facts demonstrating “a degreeof recklessness that

22   strongly suggests actual intent,”and they have not done so. In re Silicon Graphics, 183 F.3d at 979.

23   Pleading “mere motive and opportunity” is insufficient. Id. at 988.

     \fOTIOh TO   Dlshllss ( M E R G E R   ACTION): hlDL NO. 1300
 1                As stated earlier, the PSLRA identifies statements
                                                                   regarding management plans and future

 2    performance to be forward-looking. As such, the PSLRArequires Plaintiffs to plead and prove that

 3    such statements were made with “actual knowledge” that the statement was false and misleading. 15

 4    U.S.C. tj 78~-5(c)(l)(B).Far from pleading particularized facts suggesting fraudulent intent,

 5                                                        most generic of allegations. Plaintiffs have not
      Plaintiffs’ “boilerplate” Merger Complaint offers the

 6    alleged that any of Defendants bought or sold Patriot stock during the alleged class period or otherwise

 7                                               at
      were motivated to promote their own interests the expense of shareholders.’ Plaintiffs merely allege

 8    that Defendants (i) “knewof’ adverse facts “[bly virtue their positions at Patriot, and their access
                                                            of                                           to

 9    public and nonpublic information availableto them;” (ii) “recklessly disregarded’’ these alleged facts;

10    and (iii) were motivatedto make “misleading statementsand omissions” to “artificially inflate” Patriot

11                                                           1
      stock to facilitate Patriot’s merger with Bay Meadows. 1 102 and 133. Such conclusive allegations,

12    however, routinely are dismissed. Id.; see also SiliconGraphics, 1996 WL 664639, at * 12 (N.D. Cal.

13    Sept. 25, 1996) (“[Pllaintiff must do more
                                               than speculate as to defendants’ motives or makeconclusory

I16                                                         facts.”) (attached hereto at Tab 2).
      allegations of scienter; plaintiff must allege specific

17    A.          Plaintiffs’ Bald Allegations That Defendants “Must Have Known” Are Insufficient As A
18                Matter of Law

19                                           of
                  Plaintiffs’ bald allegations what Defendants“must have known” byvirtue of their corporate

20    positions will not support a claim for securities fraud. Courts routinely reject pleadings that simply

21                                                and                                             to
      highlight the defendants’ corporate positions then, with hindsight, impute specific knowledge

22    them. See. e.%, Silicon Graphics,18&.3d at 974; Genna v, Digital Link Corp,, 25 F. Supp. 2d. 1032,

23    1041 (N.D. Cal. 1997) (“[Sltatements of fraud based ob access to internal corporate data without

       These allegations particularly are odd since Plaintiffs have not named any individuals a defendant in the Merger
      MOTION TO DlShllss ( M E R G E R ACTION)’   MDL NO 1300
 1                                                                                                      In
     ;pecific contemporaneous facts are insufficient to support a claim.”) (quotations omitted); see also

2    .e Cendant Corp. Sec. Litig., 76 F. Supp. 2d 539, 547 (D.N.J. 1999).
4    B.           Plaintiffs’ Allegation That Defendants Sought To Promote The Value Of Patriot Stock To
5                 Facilitate A Merger Is Insufficient As A Matter Of Law.

6                Similarly, Plaintiffs’ allegations that Defendants sought to commit a fraud in order to “cause

7    1nd ensure Patriot’s mergerwith Bay Meadows” areequally deficient. Efforts to “cause and ensure”

8                                      interests, and hardly give rise to a “strong inference” of fraudulent
     nergers reflect legitimate business

9    ntent. See Thacker v. Madaphis Corp., 1998 WL 684595, at *3 (S.D.N.Y. Sept. 30, 1998) (attached

10   lereto at Tab 3); Malin v. IVAX Corp., 17 F. Supp. 2d 1345, 1361 (S.D. Fla. 1998). Ensuring

11   nergers are generalized motivationsthat “‘could be imputed to any publicly-owned, for-profit

12   :ndeavor, [and are] . . . not sufficiently concrete for the purposes of inferring scienter.”’ Thacker, 1998

13   NL 684595, at *3 (quoting Chill v. General Elec. Co,, 101 F.3d 263,268 (2d Cir. 1996). Not

14   urprisingly, Plaintiffs have not and cannot identify any illegitimate business interest here. Simply

15   tated, Plaintiffs are unableto satisfy the requirementsfor pleading scienter under any standard, much

16   ess the PSLRA’s rigorous pleading standard.

     4OTlON TO DlS\llSS ( M E R G E R ACTION):   MDL NO. 1300

     1                                                         CONCLUSION

     2            Despite its repeated and unfounded attempts to implicate Defendants for some

     3                                             not                          of
         wrongdoing, the Merger Complaint simply does contain a single allegation any direct

    4                                                                                of
         misrepresentation or material omission. Nor does it adequately allege that any Defendants

     5   acted with scienter in perpetuating the alleged fraud. In any event, eachPlaintiffs’ claims is

    6                                                                          forth above, the Merger
         barred by the applicable statuteof limitations. For all the reasons set

    7    Complaint should be dismissed with prejudice.
    8    Dated: October 12,2000
    11                                                         Respectfully submitted,
    15                                                     I   ’m, M P , STRAUSS, HAUER
    16                                                          & FELD, L.L.P.
    17                                                         590 Madison Avenue
    18                                                         New York, N.Y. 10022
    19                                                         (2 12) 872- 1070
    20                                                         Steven M. Pesner, P.C.
    21                                                         Stephen M. Baldini, Esq.
    22                                                         Nancy Chung, Esq.
    23                                                         Sean E. O’Donnell, Esq.


         HOTION TO DISMISS (MERGER      MDL NO. 1300
 1                                                         CERTIFICATE OF SERVICE
3               The undersigned certifies that a true and correct copy of the (1) Notice Of Motion, MotionTo

4    Dismiss, and Memorandum Of Points And Authorities In Support Thereof; and (2) Affidavit Of Sean E.

5    O’Donnell, sworn to on October 13, 2000, was served by overnight mail on this 13“’day of October,

6    2000, on all parties on the attached service list.




10                                                                    Sean E. O’Donnell

                                                                    SERVICE LIST

   Joseph W. Cotchett, Esq.                                              Allan Steyer, Esq.
   Bruce L. Simon, Esq.                                                  Jeffrey H. Lowenthal, Esq.
   Marie Seth Weiner, Esq.                                               STEYER,    LOWENTHAL,    BOODROOKAS
   Mark C. Molumphy,Esq.                                                 & WALKER L.L.P.
   COTCHETT, PITRE & SIMON                                               One California Street, Suite 2200
   San FranciscoAirport Office Center                                    San Francisco, California 941 11
   840 Malcolm Road, Suite 200                                           (41 5) 42 1-3400
   Burlingame, California 94010                                          (415) 421-2234 (facsimile)
   (650) 697-6000
   (650) 697-0577 (facsimile)                                            Counsel for Plaintfis Gunderson et al.
                                                                         N.D. Cal., No. C-99-3040
   Counselfor Plaint@ Johnson et al.
   N.D. Cal., No. C-99-2153

   George R. Corey,Esq.                                                  James McManis, Esq.
   Jeffrey D. Manos, Esq.                                                Colleen Duffy Smith,Esq.
   Dario de Ghetaldi, Esq.                                               McMANIS, FAULKNER& MORGAN, P.C.
   COREY, LUZAICH, MANOS& PLISKA                                         160 W. Santa Clara Street, 10"' Floor
   700 El Camino Real                                                    San Jose, California 95 1 13
   P.O. Box 669                                                          (408) 279-8700
   Milibrae, California 94030-0669                                       (408) 279-3244 (facsimile)
   (650) 871-5666
   (650) 871-4144(facsimile)                                             Counsel for Plaintiffs Sola et al.
                                                                         N.D. Cal., No. C-99-2770
   Counselfor Plaint8s Ansell et al.
   N.D. Cal., No. C-99-2239

   Alfred G. Yates, Jr., Esq.                                            Andrew L. Barroway, Esq.
   LAW OFFICE OF ALFRED G. YATES                                         SCHIFFRIN & CRAIG
   Allegheny Building                                                    Three Bala Plaza East, Suite 400
   429 Forbes Avenue, Suite 195                                          Bala Cynwyd,Pennsylvania 19004
   Pittsburgh, Pennsylvania 15219                                        (610) 667-7706
   (412) 391-5164
   (412) 471-1033 (facsimile)                                            Counsel for Plainti@ Gallagher et al.
                                                                         N.D. Texas, No. 99-CV1429-L

   Counselfor Plaintiffs Levitchet al.
   N.D. Texas, No. 99-CV1416-D

~ ~ O T I O N DlSzllSS ( M E R G E R          MDL N O . 1300
Steven G. Schulman, Esq.                       William S. Lerach, Esq.
Samuel H. Rudman, Esq.                         Travis Downs, 111, Esq.
MILBERG,WEISS,BERSHAD,HYNES                  & Darren J. Robbins, Esq.
LERACH, L.L.P.                                 MILBERG, WEISS, BERSHAD, HYNES           &
One Pennsylvania,49"' Floor                    LERACH, L.L.P.
New York, New York 10119-0165                  600 West Broadway, #1800
(212) 594-5300                                 San Diego, California 92 101
(212) 868-1229 (facsimile)                     (619) 231-1058
                                                       1-7423 (facsimile)
                                               (6 19) 23
Marc R. Stanley, Esq.
Roger Leon Mandel, Esq.                          Roger L. Mandel, Esq.
STANLEY MANDEL& IOLA, L.L.P.                     Marc R. Stanley, Esq.
3 100 Monticello Avenue, Suite 750               STANLEY, MANDEL & IOLA, L.L.P.
Dallas, Texas 75205                              3 100Monticello Avenue, #750
(2 14) 443-4300                                  Dallas, Texas 75205
(214) 443-0358 (facsimile)                       (214) 443-4300
                                                 (214) 443-0358 (facsimile)
Counselfor Plaintffs Levitchet al.
N.D. Texas, No. 99-CV1416-D                      Howard D. Finkelstein, Esq.
                                                 Jeffrey R. Krinski, Esq.
Counselfor Plaintiffs Gallagheret al.            Arthur L. Shingler, Esq.
N.D. Texas, No. 99-CV1429-L                      FINKELSTEIN & KRTNSK
                                                 501 West Broadway, #1250
Counsel for Plaintiffs SzekIey          et   al. San Diego, California 92 101
N.D. Texas, No. 3-99 CV1866-D                    (619) 238-1333
                                                 (619) 238-5425 (facsimile)

                                                 Counsel for Plaintiffs Susnow et al.
                                                 N.D. Texas, No. 3-99 CV1354-T
John W. Spiegel, Esq.                        Thomas M.Melsheimer, P.C.
MUNGER, TOLLES & OLSEN, L.L.P.               State Bar No. 13922550
355 South Grand Avenue, 35“’Floor            M. Brett Johnson, Esq.
Los Angeles, California 9007 11560           State BarNo. 00790975
(213) 683-9100                               LYNNSTODGHILL   MELSHEIMER           &
(213) 687-3702 (facsimile)                   TILLOTSON, L.L.P.
                                             750 N. St. Paul Street, Suite 1400
David H. Fry, Esq.                           Dallas, Texas 75201
MUNGER, TOLLES& OLSEN, L.L.P.                (214) 981-3802

33 New Montgomery Street,19t1’  Floor        (214) 981-3839 (facsimile)
San Francisco, California 94105-9781         Joe McBride, Esq.
(4 15) 5 12-4000                             Brian Murray, Esq.
(41 5) 5 12-4077(facsimile)                   N
                                             W & PECKEL LLP
                                             275 Madison Avenue,34‘”Floor
Counsel for Paine Webber Group, Inc.         New York, New York 100     16
N.D. Cal., No. C-99-2153 (Johnson)           (212) 682-1818
N.D. Cal., No. C-99-3040 (Gunderson)         (212) 682-1 892 (facsimile)
N.D. Cal., No. C-99-2239 (Ansell)
N.D. Cal.,No. C-99-2770 (Sola)               Counsel for Plaint#s Meisenburg et al.
N.D. Texas, No. 3-99 CV1354-T (Susnow)       N.D. Texas, No. 3-99-CV1686-X

Laurence A. Weiss, Esq.
    WHITE                                &
333 Bush Street
San Francisco, California 94104-2878
(415) 772-6000
(415) 772-6268 (facsimile)
Coumel for  Defendants Patriotet al.

1988 WL 168341                                                                           Page    1
Fed. Sec. L. Rep. P 94,724
(Cite as: 1988 WL 168341 (N.D.Cal.))
< KeyCite Yellow Flag>
United States District Court, N.D. California.      The complaint also charges six   of the Gap's
                                                   officers              Strobin, Senior Vice
      In re Gap Securities Litigation.             President and Chief Operating Officer, Alan
                                                   Zintbaum, Senior Vice President and Chief-
             NO.(2-87-4895JPV.                     Financial Officer,Dexter Tight, Senior Vice
                                                   President and Secretary of Gap, John Carver,
                Sept. 28, 1988.                    Senior Vice President of Human Resources,
                                                   Donald Fisher, Founder and Chief Executive
                   Opinion                         Officer, and Millard Drexler, President) with
                                                   making and assisting in the making of alleged
VUKASIN, District Judge.                           material omissions of fact. Finally, the
                                                   complaint alleges that these six Gap officers
              I. BACKGROUND                                                     upon
                                                   traded their shares basedinside
                                                   information in violation of federal and state
 *1 This is a proposed class action "fraud-on-     law.
the-market" securities case filed on behalf of
all persons who held shares in the Gap, Inc.        Plaintiffs challenge as misleading three Gap
("Gap"), a well-known clothing retailer,           documents: (1) an April 14, 1987, lettler from
between May 3, 1987, and September 23,             Fisher and Drexler to shareholders, which
1987. Gapincludes the Gap stores and two           disseminated the fiscal year 1986 (ending
subsidiary chains, GapKids and Banana              January 31, 1987) annual report; (2) a May
Republic. Plaintiffs allege that in early and      14, 1987, press release reporting on the results
mid-1987,      defendants issued financial         of the first quarter of fiscal 1987; and (3) an
statements and press releases that contained       August 13,  1987, press release reporting on
omissions of material fact that kept the price     the results of the second quarter of fiscal 1987.
of Gapstock      artificially high.   Plaintiffs
allege that the reason Gap failed to reveal         Taken as a whole, plaintiffs allege that these
certain material facts about its operations and    three documents made threemainmaterial
kept its stockprice artificially high was so       omissions of fact:        (1) the Gap was
that its officers, who were major shareholders,    experiencing an adverse build-up of inventory;
could sell their shares before the price of the    (2) the percentage of the Gap's total increase
stock fell.                                        in sales during the first two quarters of FY
                                                   1987 that was attributable to "comparable
 On May 3, 1987, the Gap disseminated its          store sales" was not     revealed because it
annual report, which plaintiffs allege             reflected a declining trend; and (3) the
contained an extremely optimistic forecast of      declining trend in the Gap's    merchandise
the Gap's future performance. On September         margins in the first two quarters of FY 1987
23, 1987, Gap announced that its earnings for      as a result of rising costs ofgoods imported
thethirdquarter      ending October 31, 1987,      from Asia.
wouldbedeclining. by as much as 33% over
the prior
        period.        The price of Gapstock        *2 Defendants argue that there were no
plunged, falling between   August           and    omissions of material facts, and that therefore,
September 1987 $40 to $37 518 per s h s e . By         the
                                                   taking                           in
                                                                 facts alleged plaintiffs
failing to include material facts about Gap's      complaint as admitted, the complaint should
performance in earlier reports and press           be dismissed pursuant to Rule 12(bX6),
releases, plaintiffs argue, the Gapviolated §      F.R.Civ.P.
1001) of the Securities Exchange Act (15
U.S.C. § 78j(b)), Rule lob-5 thereunder (17         All defendants now  move        dismiss
                                                                                   to           the
C.F.R. § 240.10b-5), and committed common          complaint in itsentirety.
law fraud andnegligent misrepresentation.

                       Copr. West 2000 No Claim to Orig. U.S. G d Works
                             @                                 o.

1988 WL 168341                                                                           Page    2
(Cite as: 1988 W L 168341, *2 W.D.Cal.))

                I. DISCUSSION
                 I                                   Defendants      with
                                                               respond            two arguments.
A. Plaintiffs' "Fraud-on-the-Market"Claims          First, they argue that the actual inventory
                                                    levels were disclosedin itsForm 10-Q (a filing
  There are three essential elements to a Rule      required by the SEC), and that therefore there
 lob-5 claim: (1) a misrepresentation or          nowas                        Second,
                                                                material omission.
omission of a material fact, Santa Fe               defendants argue that the five additional
Industries, Inc. v. Green, 430 US.462 (1977);       alleged omissions do not state a claim.
(2) scienter-an intent to deceive or defraud,
Ernst & Ernst v. Hochfelder,    425 US. 185         a. Build-up was Disclosed
(1976); and (3)  some       casual connection
between the alleged violation and the injury        Defendants first argue that they satisfied
to plaintiff. Fishman v. Estrin, 501 FSupp.        their duty to disclose material facts under
208,(D.D.C.1980).             In
                              this     motion,     Rule 10b-5 becausethe actual inventory levels
defendants address only the   first element--         disclosed
                                                   were             in the Gap's Form 10-Q.
whether defendants made anyomission of a           Defendants argue that, where a corporation
material fact. Defendants argue that each of       discloses the underlying data, it is not
the three alleged material omissions fails to      required under Rule lob-5 to characterize
state a claim upon which reliefcan be granted.     those facts with pejorative nouns        and
Accordingly, defendants argue that the             adjectives. Klamberg v. Roth, 473 FSupp.
complaint should be dismissed with prejudice       544, 551-52 (S.D.N.Y.1979).
pursuant to Rule 12(bX6), F.R.Civ.P.
                                                    *3 Plaintiffs respond that they are not
1.The Inventory Build-Up                           alleging a Rule lob-5 violation basedupon
                                                   defendants' failure either to disclose its
 Plaintiffs first contend that defendants          inventory levels or to ascribe    pejorative
violated federal securities laws by failing to     adjectives to these data.Rather,       plaintiffs
reveal in its August 13, 1987, press release,      assert that a violation occurred     because
discussing the results of the second quarter of    defendants failed to disclose a deviation in the
FY 1987, that the Gap had experienced an           Gap's standard policy  of marking down its
"adverse build-up in inventory." Plaintiffs        excess inventory. Plaintiffs refer to the Gap's
contend that the inventory at Gap stores rose      Form 10K,issued with its annual report in
   $152,454,000        on May 2, 1987, to          April, 1987, which states that the Gap marks
$203,141,000 on August 1, 1987.       While        down its inventory if it exceeds     customer
plaintiffs admit thatthis rise in inventory        demand "for reasons of a) style, b) seasonal
levels wasdisclosed,        they argue that        adaption, c) adverse weather conditions,     d)
defendants failed to reveal the causes and         changes in customer  preference."      Plaintiffs
trends ascribed to this build-up in inventory.     argue that defendants had a duty to discose
Plaintiffs contend in 1 48 of the complaint        their deviation from the Gap's     previously
that defendants should have disclosed that: (i)             policy,
                                                   announced because                the deviation
the inventory increase was caused by a flat or     caused second quarter income to be artificially
declining sales trend;             material
                             (ii) the              inflated (i.e., the losses caused       by the
increase was continuing; (iii) in order to         markdown wouldnotbe         reflected in second
reduce inventory, Gapwould have to either          quarter earnings). Basic, Inc. v. Levinson, 108
write off large portions of the inventory, thus    S.Ct. 978, 983 (1988).       Further, plaintiffs
reducing profits and shareholders' e&ty, or        argue, because the Gap's          13,
                                                                               August 1987,
sell inventory at deep discounts, which would      press release contained an optimistic appriasal
affect earnings; (iv) the buildupwasdue to         of the future, defendants were required to
defendants' failure to markdown inventory to       dibclose all material facts that could   affect
meet customer   demand,      as was company        future earnings. First Virginia Bankshares v.
policy; and (v) newproductproblemswould            Benson,559 F.2d 1307,1314 (5th Cir.1977),
negatively affect third quarter profits.           cert. denied, 435 US.952 (1978).

                       Copr. West 2000 No Claim to Orig. U.S.
                             @                               Govt. Works

1988 WL 168341                                                                             Page    3
(Cite as: 1988 WL 168341, *3 CN.D.Cal.))

 Defendants reply that plaintiffs fail even to       +4 Plaintiffs attempt to justify this statement
plead a deviation from their announced policy.      by arguing that the Gap later admitted that
While plaintiffs do plead in the complaint that     its sales slowed in August,  1987.           This
defendants failed to mark down inventory,           argument makes no sense.                Plaintiffs
they do not plead that this failure was in spite    complain that defendants failed to adequately
of inventory build-up due to the causes listed      explain the inventory build-up as of the end of
in the Gap’s Form l O Q (i.e., style, seasonal      the second quarter of   FY      1987. Plaintiffs’
demand, Defendants    note            that Rule     argument addresses events that occurred in
9031, F.R.Civ.P., requires fraud to be pled with    thethirdquarter     of FY 1987.  Accordingly,
particularity, and that plaintiffs have failed to   plaintiffs’ claim that defendants violated Rule
meet Rule 903)’srequirements.                       10b-5 by not ascribing the Gap’s      inventory
                                                    build-up to a flat or declining sales trend is
 The Court finds defendants’ reply argument         dismissed with prejudice.
persuasive.          However, dismissal with
prejudice is not required at this stage. Thus,                               Increase
                                                    ii. The Material Inventory                    Was
plaintiffs’ claim that defendants violated Rule     Continuing
10b-5 by failing to disclose a change in
markdown policy is dismissed      without            Next, plaintiffs allege that defendants
prejudice:      Plaintiffs are granted 30 days      violated Rule lob-5 by failing to note in its
leave to reallege this claim with more              August 13, 1987, press release that the
particularity pursuant to the requirements of       inventory build-up was continuing. Plaintiffs
Rule 903).                                          concede that defendants disclosed inventory
                                                    levels for every quarter including the second
b. Whether Five AllegedOmissions State a            quarter ofFY 1987, and thus plaintiffs were
Claim                                               aware that there was a past trend of rising
                                                    inventory levels. Thus, defendants cannot be
 Defendants next argue that the five alleged        held liable for failing to announce this past
omissions in 7 48 of the complaint fail to state    trend. Plaintiffs appear to argue, however,
a claim and thus should be dismissedwith            that defendants are liable because they failed
prejudice.                                          to state that the Gap’s inventory levels would
                                                    continue to rise in the future.
i. Inventory Increase due to Flat or Declining
Sales Trend                                          Defendants argue this assertion fails to state
                                                    a claim, because a corporation has no duty to
 Plaintiffs assert that defendants violated Rule    make projections about its upcoming
lob-5 by not reporting in its August 13, 1987,      performance. Vaughn v. Teledyne, kc., 628
press release that the inventory increase was       F.2d 1214, 1221 (9th Cir.1980); Panter v.
due to a flat or declining sales trend.             Marshall Field & Co.,646F.2d271,292-93
Defendants point out that     this    statement     (7th Cir.), cert. denied, 454 US. 1092(1981).
contradicts other facts pled in the complaint:      Plaintiffs counter that defendants are required
namely, that sales for the second quarter of        to reveal all material adverse information as
FY 1987 grew 32% over the second quarter of         to future prospects. However, plaintiffs’ cited
FY 1986     and that sales in existing stores       authorities don’t support      this proposition.
(those that were also open during the,second        Plaintiffs further argue that Item 303(aX3) of
quarter ofFY 1986) grew 13.5%. Defendants           SEC Regulation S-K requires disclosure of
quote this Court’s opinionin FalstatT Brewing       “any known trends that have had or that the
Co. v. Stroh Brewing Co., 628 FSupp. 822,           registrant reasonably        will
                                                                           expects            have a
826(N.D.Cal.1986): “unsupported conclusions         material ... unfavorable impact on net sales or
and unwarranted inferences not need          be     revenues or income    from            continuing
acceptedpurposes            of a Rule 1203x6)       operations.
                                                    There are several problems with plaintiffs’

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1988 WL 168341                                                                             Page 4
(Cite as: 1988 WL 168341, *4 (N.D.Cal.))

argument. First, the cases clearly state Rule       investors of this assumption.
lob-5 does not require corporations to disclose
financial projections.          Item 303(aX3)        Plaintiffs' argument is very   weak.       First,
of SEC Regulations S-K appliesonly to annual        defendants made no sales projections for the
reports. The alleged omission did not occur in      third quarter of 1987. Thus, no duty arose to
the Gap's annual report, but ratherin its           tellits investors that the higher inventory
August 13, 1987,  press release. The Court                did
                                                    level not        mean thatthe Gap     expected
agrees that this particular allegation fails to     higher sales in the third quarter. Second, at
state a claim. Thus, the Court dismisses with       m s ,plaintiffs are repeating their claim that
prejudice plaintiffs' claim that defendants         defendants violatedRule lob-5 by failing to
violated Rule lob-5 by failing to state in its      tell its investors that it was deviating from its
August 13, 1987, press release that there the         of
                                                    policy         marking down   slow-moving
material inventory increase was continuing.         inventory. Accordingly, the Court     dismisses
                                                    with prejudice plaintiffs' claim that
iii. That the Gap Would Haveto Either Write         defendants violatedRule10b-5 by failing to
Off Sigruficant Portions of Inventory or Sell It    inform its investors that, in order to reduce
at Deep Discounts                                   inventory, the Gap    would have to sell the
                                                    inventory at deep            which
                                                                         discounts, would
 Next, plaintiffs allege that defendants            adversely affectearnings.
violated Rule lob-5 by failing to disclose that,
in order to reduce inventory, it would have to       iv. The Inventory
                                                                     Increase    Was
                                                                                  Due      to
either write off significant portions of its        Defendants' Failure to MarkdownInventory
inventory,      thus      reducing      reported    to Meet Customer Demand
shareholders' equity, revenue and earnings, or
sell the inventory at a deepdiscount,which           Once again, plaintiffs assert that defendants
would adversely affect revenues and earnings.              Rule
                                                    violated 10b-5          by not informing     its
Defendants argue that the Gapdid in fact            investors that the inventory increase was due
meetthis requirement. Inits 10-K        for FY      to the Gap's failure to markdown inventory to
1986(published      in April, 19871, the Gap        meet customer demand, as its published Form
reported that, "[ilf inventory exceeds customer     10-K stated was  company       As
                                                                             policy.         stated
demand, ... markdowns are employed to clear         above, while plaintiffs may have a claim for
the merchandise. markedowns                 may     defendants'alleged deviation fromcompany
have an adverse effect on earnings    ...'IThus,    policy, this claim is notpled with sufficient
defendants argue, they warned investors that        particularity to meet the requirements of Rule
markdownswould be used if inventoryrose             909, F.R.Civ.P.
too high, and that     earnings          be
adverselyaffected.Basedon        this statement      Defendants vigorously argue that most of the
and the published higher inventory statistics       inventory as of August 1, 1987, was new fall
released in August,1987, defendants argue           merchandise, and thus plaintiffs assertion that
that, "[ilndustry analysts ... could make their     the Gap failed to mark down its        stale
own predictions." Further, the Gap points out,      merchandise is without foundation. However,
while          inventory was marked down            plaintiffs correctly    out
                                                                        point      thatthis is a
during thethirdquarter,       no inventory was      motion to dismiss, and thus the allegations in
ever written off.                                   the complaint must be taken as admitted.
 *5 Plaintiffs counter that investors were left      Accordmgly, this claim is dismissed without
in dark,
     the            because investors could         prejudice, and with leave to refile it in an
reasonably assume that the higher inventory         arhended complaintwithin 30 days.
levels reflected higher sales projections, as any
slow-moving inventory would have already             v. New Product Problems Would Negatively
been marked down and sold. Thus, plaintiffs         Impact Third Quarter Earnings
argue, defendants had a duty to disavow

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                              @                              Govt. Works

1988 WL 168341                                                                           Page     5
(Cite as: 1988 WL 168341, *5 (N.D.Cal.))

 Fifth, plaintiffs allege that defendants           Defendants argue that this allegation fails to
violatedRule lob-5 failing to   disclose that      state a claim for three reasons: (a) Gap had no
  product    would
new problems negatively                            duty todisclose this statistic; (b) the alleged
impact third quarter earnings. Defendants          omitted fact is not material, because the data
argue this claim  should     be dismissedfor       from which the omitted fact could have been
failure to plead fraud with particularity as       derived was disclosed; and (c) the sales trend
required by Rule 9 ) F.R.Civ.P. Defendants
                    @,                             that plaintiffs say should have been disclosed
argue that plaintiffs do not allege what these     did not exist.
'hew products" are, now what the "problems"
were,        how they affected earnings.            a. No Duty
Further, defendants argue that the Gaphad
no duty to make projections as to third quarter     Defendants frt argue that they had no duty
earnings. (Vaughn v. Teledyne,    Inc., supra,     to disclose the percentage of total sales growth
628 F.2d at 1221.                                  due to comparable store sales. Defendants
                                                   argue that a duty to disclose an omitted fact
 Plaintiffs attempt to remedy this deficiency in   arises only if it is necessary to prevent another
their opposition brief by explaining what they             from
                                                   disclosure          being misleading.       Here,
meant to say in  the     complaint.     This is    defendants argue, the disclosure of the total
insufficient to meet the requirements of Rule      sales growth and the comparable sales growth
96) Accordingly, the Court    dismisses this       was sufficient to inform the investor.   The
claim without prejudice and with 30 days           additional disclosure of comparable sales
leave to amend.                                    growth as a percentage of total sales growth
                                                   was unnecessary.
2. Comparable Store Sales Figures
                                                    Plaintiffs fail to refute this argument. While
 *6 Plaintiffs' second major contention is that    plaintiffs insist that defendants had a duty to
defendants violated 0 lo@) of the Securities       disclose sales trends, they fails to explain why
Exchange Act and Rule lob-5 by omitting the        the date given was not sufficientto inform the
Gap's "flat or declining trend" in the             investor.Thus,       the Court finds defendants'
percentage increase in total sales attributable    frt argument persuasive.
to "comparable store sales." To understand
this claim, some background is needed. Sales        b. Materiality
growth is measured in two ways. First, a
retail fmn will measure total sales growth,         Next, defendants argue thatthis omission
which includes both sales in stores ther were      was not material because plaintiffs could have
in existence in the same quarter of the prior      derived this statistic from the data providing
year and sales ofnew stores. Second, a retail      in the August 13, 1987, press release.
fum measures growth in terms of "comparable        Defendants present a formula fromwhich a
store sales," which consists of growth only by     rough approximation of the percentage of total
those stores in existence the same quarter of      sales growth due to comparable sales growth
the prior year. By segregating comparable          can be derived. Plaintiffs argue that this Post
store sales, analysts can determine whether a      hoc formula is insufficient to satisfy Rule lob-
f m ' s established business is growing.           5; defendants should have either calculated
                                                   the statistic themselves, or at least provided
 Each of the Gap's quarterly Form lOQ%eports       the formula in the press release. Plaintiffs
disclosed both total sales growth and              further argues that the needed data was
comparable store sales growth.      Plaintiffs     "buried" in the press release.
argue, however, that in addition to disclosing       L

these statistics, defendants should have            Plaintiffs' argumentmust fail. First, the
disclosed the percentage of the total sales        press release was only two pageslong;     it
increase that was attributable to comparable       could hardly bury data. Second, the courts
store sales growth.                                have held that, where  needed   information

                        Copr. West 2000 No Claim to Orig. US.Govt. Works

1988 WL 168341                                                                           Page 6
(Cite as: 1988 WL 168341, *6 (N.D.Cal.))

maybe derived through calculations of data          disclose its gross profit margins for  every
provided by the corporation, a claim of             quarter, including the second quarter ofFY
material omission of fact will be dimissed.         1987. Second, defendants argue that it had
Acme Propane v. Tenexco, Inc., 844 F.2d 1317,       no duty to additionally and separately list its
1322-23 (7th (3.1988) (affmning dismissal of                                          Rule
                                                    merchandising margins, because 10b-5
0 lo@) claim because "long division [based on       does not impose a duty to disclose all material
data disclosed1
              would      have produced the          facts.    Third, defendants argue that the
ratio").                                            market already knew of the     trend toward
                                                    higher productcosts in the Far East, citing
c. Alleged Trend Did Not Exist                      passagesfrom    several investor newsletters
                                                    that came out in the summer of 1987.
 *7 Third, defendants argue that the alleged
"flat or declining" trend of comparable store        Plaintiffs correctly argue that defendants'
sales as a percentage of total sales growth did     third point raises matters outside the
not exist. Defendants note that 41.9% of the        pleadings and is thus not appropriate in a
total sales growth in thesecond quarter of FY       Rule 12bX6) motion. Further, plaintiffs argue
1987 was     attributable to comparable store       that SEC Regulation S-K requires a securities
sales, while only 30% of the total sales growth     registrant to disclose "events that will cause a
in        second quarter FY  of      1986was        material change in the relationship between
attributable to comparable store sales.             costs and revenues." Finally, plaintiffs argue
Defendants argue that this statistic shows just     that the fact that defendants stated in theFY
the opposite of what plaintiffs contend; that       1986 annual report that, "we can control our
at least through the second quarter of     FY       own destiny," misleads investors into
1987,comparable       store sales growth as a       believing that the Gap could control its own
percentage of total sales growth wasrising.         wholesale costs.

 Plaintiffs insist such a trend did exist, citing    Plaintiffs'    last two      arguments     are
lowercomparable store sales growth in the           unpersuasive.         First, as stated above,
third quarter of  FY     1987compared to the        Regulation S-K applies only to annual reports.
    quarter of FY 1986.
third                        However,        this   It doesnotapply      to press releases, such as
argument misses the mark.            As stated      defendants'  August 13, 1987, press release.
previously, the August 13, 1987, press release      Second, the courts have held that vague
dealt only with the second quarter of FY 1987.      expressions of optimism as to future
                                                    performance are mere"puffing" and are not
Thus, defendants do not appear to have made         actionable under the securities laws. See e.g.,
a n y material omission by not stating in the       In re Apple Computer Securities Litigation,
GAP'S August 1987,     press     release that                    1552,
                                                    672 F.Supp.1572  (N.D.Cal.1987).
comparable store sales growth as a percentage       Accordingly, the Court grants with prejudice
of total sales growth was flat or declining.        defendants' motion to dismiss with respect to
Accordingly, the Court dismisses this claim of      this claim.
plaintiffs with prejudice.
                                                    B. Plaintiffs' Insider Trading Claims
3. Decline in Merchandising Margins
                                                     *8 The Courtnotes that plaintiffs' primary
 Plaintiffs' third        allegation 4 s that       claims are basedupon       a "fraud- on-the-
defendants violatedRule       lob-5 by not          market" theory. that is, plaintiffs contend
disclosing thatthe      Gap's
                           merchandising            that the Gap and its officers violated 0 1 ( )
margin was falling as a result of higher            and Rule lob-5 thereunder by failing to
wholesale pricesin the Far East.                           publicly
                                                    announce                  material
                                                                        certain              facts
                                                    concerning the Gap'sperformance           and
 Defendants raise three arguments against           operations.
this claim. First, they argue that the Gap did

                        Copr. West 2000 No Claim to Orig. U.S.
                               @                              Govt. Works
1988 WL 168341                                                                              Page 7
(Cite as: 1988 W L 168341, *8 (N.D.Ca1.))

 However, the complaintalsoalleges insider             marking down inventory that exceeds
trading claims against the individual                  customerdemand        is DISMISSED without
dedendants. The question before the Court,             prejudice.     Plaintiffs are granted 30 days
therefore, is whether the insider trading              leave to file an amended complaint realleging
claims raise any distinct legal or factual             this claim with particularity as required by
issues.                                                Rule (b) of the Federal Rule of Civil
 The Court finds that, under the facts alleged
in this case, the insider trading claims are on         2. Plaintiffs’ claims that defendants violated
the same footing as the “fraud-on-the-market”          0 1001)
                                                             of      the 1934 Act and Rule lob-5
claims. In essence, the insider information on         thereunder by failing to disclose: (1)that the
which plaintiffs allege defendants traded is           inventory increase was caused primarily by a
precisely the same information plaintiffs              flat or declining sales trend; (2) that   the
assert that the Gap and its officers had a duty        material inventory increase was continuing;
to announce publicly in its FY 1987 quarterly          (3) that in order to reduce inventory, the Gap
reports and press releases.                            would have to either write off sigmfkant
                                                       portions of its inventory, thus reducing
 Thus, allegations that do not state a claim           reported shareholders’ equity, profits, and
under a “fraud-on-the-market”theory also will          earnings or sell the inventory at deep
  support an insider trading claim.
not                                         An                whichadversely
                                                       discountswould                            affect
insider is no more required to predict future          revenues and earnings, as alleged in
inventory level or sales trends to prospective         paragraphs 48(i), (ii), and (iii) of plaintiffs’
purchasers of Gap securities than     is     a                    Class
corporation and its officers to the public. As         Complaint, are DISMISSED with prejudice.
the Second Circuit held in SEC v. Texas Gulf
Sulpher, 401 F.2d833,848 (2d Cir.19681,                 *9 3. Plaintiffs’ claims that defendants
                                                       violated § 1001) of the 1934 Act and Rule 10b-5
 Nor is an insider obligated to conferupon             thereunder by failing to disclose: (1)that the
outside investors the benefit of his superior          inventory       was
                                                                increase due            to defendants’
financial or other expert analysis by disclosing       failure to mark down     inventory     to meet
his educated guess or predictions.... The only         customerdemand,       as was company  policy;
regulatory objective isthat equal access to            and (2) that new    productproblemswould
material information be enjoyed equally, but           negativelyimpact third-quarter earnings, as
this objective requires nothing more than the          alleged in paragraphs 48(iv) and (v) are
disclosure of basic facts so that outsiders may        DISMISSED without    prejuudice.      Plaintiffs
draw upon their own evaluative expertise in            are granted 30 days leave to file an amended
reaching their own investment decisions with           complaint realleging these claims with
knowledge equal t o that of the insiders.              particularity as required by Rule 90-1).

 Accordingly, the Court’s findings and                  4. Plaintiffs’ claims that defendants violated
conclusions as to plaintiffs’ “fraud-on- the-          0 lo@) of the 1934 Act and Rule lob-5
market” claims apply   equally to plaintiffs’          thereunder by failing to disclose that: (1) the
insider trading claims.                                Gap was experiencing a flat or declining trend
                                                       inthe    percentage increase    in total sales
               III. ORDER        -*                    attributable to comparable store sales; and (2)
For the foregoing reasons, IT I HEREBY
                               S                       that the Gap’s merchandising margins were
ORDERED that:                                          declining as a result of higher wholesale costs
                                                       ip the Far East are DISMISSED with
 1. Plaintiffs’ claim that defendants violated §       prejudice.
lo@) of the Securities Exchange Act of 1934
and Rule lob-5 thereunder by allegedly failing         5. Plaintiffs’ state law claims are DISMISSED
to disclose a change in the Gap’s    policyof          withoutprejudice and with 30 days leave to

                        Copr. West 2000     No Claim to Orig. US.Govt. Works

1988 WL 168341                                                          Page 8
(Cite as: 1988 WL 168341, *9 (N.D.Cal.))

reallege these claims in the amended
complaint in accordance with this order.


                      Copr. West 2000 No Claim to Orig. U.S.G d Works
                           @                                 o.

1998WL684595                                                                                 Page     1
(Cite as: 1998 W L 684595 (S.D.N.Y.))

Only   the Westlaw citation is currently               engaged in merger negotiations with Plaintiffs
available.                                             and persuaded Plaintiffs to abandon their
                                                       negotiations concerning the merger and initial
United States District Court, S.D. New York.           public offering with the other medical billing
                                                       services company. (Comp1.q23.) In December
    James F. THACKER, et al., Plaintiffs,              1995, Plaintiffs sold MMS to Medaphis in
                        V.                             exchange for 4 million shares of unregistered
MEDAPHIS CORP. and Randolph G. Brown,                         common (Id.)
                                                       Medaphis stock.   Medaphis
           Defendants.                                 agreed to register the shares "as expeditiously
                                                       as possible" and to "use its reasonable best
           No. 97 CIV. 2849(DAl3).                     efforts" in doing so. (Comp1.l 58.) The shares
                                                       were never registered. (Comp1.l 55.) Between
                Sept. 30,1998.                         December 29, 1995 (the date of the Medaphis-
                                                       MMS merger) and October 1996,       22,
Howard,Darby      & Levin, New  York,      C.          Medaphis' stock priceplummeted from $37per
William Phillips, Esq., Adam B. Siegel, Esq.,          share to $10.37 per share, based in part onthe
Of Counsel, forthe Plaintiff.                          disclosure of difficulties with a highly-touted
                                                       re-engineering project.(Compl.39, 711 52-54.)
King & Spalding, New    Lawrence
                    York,         v.
Senn, Jr., Esq., Of Counsel, for the                    Plaintiffs claim, as part of their pre-merger
Defendants.                                            tortious interference, fraud and contract
                                                       claims, that Medaphis misrepresented and
        MEMORANDUM & ORDER                                    "numerous
                                                       concealed                  material facts in
                                                       connection with the sale of M M S . " (Comp1.l
BA'I'TS, District J.                                   74.) These facts include: Medaphis' financial
                                                       health, the state of Medaphis'technological
 *1 Plaintiffs JamesF. Thacker, Alyson T.              advances, and potential transactions with
Stinson, Carol T. Shumaker, Lori T. Caudill,           other "dominant companies in the industry."
William J. DeZonia, theJamesF.        Thacker                 67.)
                                                       (Compl. Because             Plaintiffs relied on
Retained Annuity Trust, and the Pauline H.             these statements, MMS abandoned its plans
Thacker Retained Annuity Trust (collectively,          for an initial public offering of its shares and
"Plaintiffs"), assert eleven (11) claims               merged with Medaphis. (Comp1.q 27, 133.)
including securities fraudand common     law
tort and contract claims.   Defendants,                 Plaintiffs claim that after the merger,
Medaphis Corporation and its Chief Executive           Medaphis failed to use its best     efforts     to
Officer, Randolph G. Brown, move to dismiss            register the shares issued to Plaintiffs,
ten of the eleven counts, pursuant to Rule 9 b
                                            ()         (Comp1.q 3), and that Defendants, through
and Rule 12(bX6) of the Federal Rules of Civil         misleading and false statements, "induce[dl
Procedure. [FNlI                                       the MMS shareholders not to formally exercise
                                                       contract rights or to seek public redress for its
   FN1. Defendants do not seek to dismiss Count I, a   [Medaphis'] failure to register, which it feared
   claim against Medaphis forbreach of the Merger      might adversely  affect the Company."      [sic]
   Agreement and the Registration Rights Agreement.    (Comp1.q 62.)
              I. BACKGROUND                            Defendantsdeny these allegations and now
                                                       move to dismiss.
 Plaintiffs are former shareholders of M M S , a
medical billing services company. (Comp1.q 2.)                        II. DISCUSSION
In 1995, MMS was negotiating a merger with
another medical billing services company and            "On a motion to dismiss under Rule 1201x61,
preparing an initial public offering. (Comp1.q                                   true
                                                       the court must accept as the         factual
23.) Beginning in   June         Defendants
                             1995,                     allegations inthe complaint, and draw all

                         Copr. West 2000 No Claim to Orig. US. Govt. Works

1998 WL 684595                                                                              Page    2
(Cite as: 1998 WL 684595, *1 (S.D.N.Y.))

reasonable inferences in favor of the plaintiff."      "The elements of actual fraud under New
Bolt Elec., Inc. v. City of New York, 53 F.3d         York Law are a false representation, scienter,
465, (2d
   469 Cir.1995)            (citations omitted).      materiality, expectation of reliance, justxiable
"The district court should grant such a motion        reliance, and damage." Congress Fin. Corp. v.
only if, after viewing plaintiffs allegations in      John Morrell & Co.,  790 FSupp. 459,       469
this favorable light, 'it appears beyond doubt        (S.D.N.Y.1992) (citing MorseDiesel, Inc.    v.
that the Plaintiffs can prove no set of facts in      Fidelity And Deposit Co. of Md., 715 FSupp.
support of his claim which would entitle h m  i           585
                                                      578, (S.D.N.Y.1989)). Rule          9(b) of the
to relief." ' Walker v. City of New York, 974         Federal Rules of Civil Procedure provides   that
F.2d 293, 298 (2d Cir.1992)  (quoting Ricciuti v.     "liln all averments of fraud or mistake, the
NewYork City Transit Auth., 941 F.2d119               circumstances constituting fraud or mistake
(2dCir.1991) (quoting Conley v. Gibson,355            shall be stated with particularity ...         'I

U.S.41,  45-46, 78    S.Ct. 99, 2 L.Ed.2d  80         Fed.R.Civ.P. W). Additionally, "allegations
(1957))).                                             [of fraud1 must be supported by the pleadings
                                                      of specifk facts tending to show that, at the
 A. Fraud, Counts 11, III, IV, VI, VII, VIII, and     time the defendant made the asserted
IX                                                    representations and promises, it never
                                                      intended to honor its  stated       intentions."
 *2 When evaluating a claim of fraud, the             Carlucci v.Owens-Corning Fiberglas Corp.,
Court must fpst look to whether the claim has         646 F.Supp. 1486, 1491 (E.D.N.Y.1986) (citing
been pled sufficiently under Fed.R.Civ.P. 9(b).       Songbird Jet Ltd., Inc. v. Amax Inc., 581
Rule 9(b) serves several purposes--to put the         F.Supp. 912,924-25 (S.D.N.Y. 1984)).
defendant on notice of the detailsof the claims
against h i m , to protect a defendant's               AlthoughRule 9(b) reads, "[mlalice, intent,
         and       goodwill unfounded
                         from                         knowledge and other condition of mind of a
allegations and to prevent strike suits.              person may be averred generally", cases have
DiVittorio v. Equidyne Extractive Indus., Inc.,       held that if scienter is an element of the action
822 F.2d 1242, 1247 (2d Cir.1987); Maywalt    v.      it must be suffciently pled. It is recognized
Parker & Parsley Petroleum Co., 808 F.Supp.           that alleging "great specificity" is not
1037, 1046 (S.D.N.Y.1992). Rule 9(b) provides,        required, Connecticut Nat'l Bank v. Fluor
"[iln all averments of fraud or mistake, the          Corp., 808 F.2d 957, 962 (2d Cir.1987) (citing
circumstances constituting fraud or mistake           Goldman v. Belden, 754 F.2d 1059, 1070 (2d
shall be stated with particularity           ....I'   Cir.1985)), as it cannot be    expected that a
Fed.R.Civ.P. 9(b). This applies to claims             Plaintiffs can plead a defendant's state of
arising under Section lo@) of the 1934 Act.                Id.
                                                      mind.However,             Plaintiffs must plead
Ross v. A.H. Robins Co., 607 F.2d 545, 556 (2d        circumstances  which"give       rise to a strong
Cir.1979); Maywalt, 808 FSupp.     at     1046.       inference" that the defendants had knowledge
Therefore, "a complaint must adequately               of the fraudulent acts. Id.; Acito v. IMCERA
specify the statementsit claims were false and               Inc., F.3d 52 Cir.1995);
                                                      Group, 47 47, (2d
misleading, give particulars as to the respect        Cosmas, 886 F.2d at 12 (complaintmust plead
in which Plaintiff contends thestatements             facts indicating conscious   behavior     by the
were fraudulent,state when and where the              defendant);Ross,607F.2d         at 558; Keenan,
statements were   made,    and identifythose          838 F.Supp. at 86 (same); Schick v. E m t 8z
responsible for the statements." Kelly v. L.L.        Young, 141 F.R.D.26  23,(S.D.N.Y.1992)
Cool J., 145       32,
              F.R.D. 38         (S.D.N3.1992)         (same).
(quoting Cosmas v. Hassett, 886 F.2d 8, 11(2d
Cir.1989)), affd, 23 F.3d 398 (2d Cir.1994); see       "3 A strong inference of fraud is established
also DiVittorio, 822 F.2d at 1247; Keenan v.          eitther "a) by alleging facts to show that
D.H. Blair & Co., Inc.,838F.Supp.82,         86       defendants had both motive and opportunity
(S.D.N.Y.1993); Kubin v. Miller, 801 FSupp.           to commit fraud, or b)by alleging facts that
 1101,1117 (S.D.N.Y.1992).                            constitute strong circumstantial evidence of
                                                      con&ous misbehavior or recklessness." Acito,

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1998 WL 684595                                                                             Page     3
(Cite as: 1998 WL 684595, *3 (S.D.N.Y.))

47F.3d at 52. Motive requires a showing of          Cir. 1996).
"concrete benefits that couldbe realized by
one or more of the false statements ... alleged"     Plaintiffs also have not alleged conscious
and opportunity is shown by ''the means and         misbehavior or recklessness that wouldgive
likely prospect of achieving the concrete           rise to an inference that the speaker had a
benefits by the  means alleged." Shields v.         basis for knowing it was false. See Shields, 25
Citytrust Bancorp, Inc., 25 F.3d 1124, 1129 (2d     F.3d at 1129 (pleading scienter requires
Cir.1994);Pollack v. LaidlawHoldings, hc.,          plaintiff to linkstatement with facts that
No. 90 Civ. 5788, 1995 US. Dist. LEXIS 5909,        would give rise to inference that speaker had
at *2        May
     (S.D.N.Y. 2,1995).              To allege      basis forknowing       statements werefalse).
conscious misbehavior or recklessness the           Plaintiffs identify several statements madeby
complaint must link themisleading statement         Brown and Medaphis in the fall of 1995 which
with facts that give rise to an inference that      later proved to be false (Comp1.q 17, 11 18, 17
the speaker had a basis for knowing it was          23-26);however, Plaintiffs fail to link these
false. Shields, 25 F.3d at 1129; Pollack, 1995      statements with facts fromwhich the Court
US.Dist. LEXIS 5909, at *2.                         could infer that Defendants had a basis for
                                                    knowing the statementswere false.
1. Pre-Merger Fraud
                                                    2. Post-Merger Fraud
 Reading the Complaint in the light most
favorable to the Plaintiff, Plaintiffs have          *4 Plaintiffs claim that Medaphis and Brown
failed to plead scienter adequately in any of       made false statements that caused Plaintiffs
their pre-merger fraud claims. Plaintiffs' pre-     to delay demanding enforcement of their
merger fraud allegations rely on private            registration rights, and that in        so,
statements made by Brown in the fall of 1995        Defendantsbreached their obligations under
regarding the "paperless processing" re-            the Merger Agreement        and Registration
engineering project and Medaphis'proposed           Rights Agreement.
merger with McKessonCorp.,(Compl. at 11
23-26), as well as public statements inthe fall      Under New York Law, "[gleneral allegations
of 1995 touting Imonics as "a key to the            that [a1 defendant entered into a contract
Company's       're-engineering'    initiative."    while lacking theintent to perform it are
(Compl.7 17, 7 18.) Plaintiffs allege that they     insufficient to support ... [a] claim [of fraud]."
relied on these statementsin making the             NewYorkUniv.v.        Continental Ins. Co.,87
decision to merge with Medaphis. (Comp1.l           N.Y.2d308,      318, 639         283,
                                                                            N.Y.S.2d 662
30.)                                                N.E.2d 763,769 (N.Y.1995).

 However, Plaintiffs fail to allege any facts        Likewise, district courts in the Second Circuit
that wouldshow a strong inference of fraud          have repeatedly rejected attempts to convert a
either by alleging motive and opportunity or        breach of contract claim into a fraud claim by
by . showingsufficientevidence        of reckless   merely alleging that a contracting party never
behavior on the    part     of the Defendants.      intended to M    i its promises under the
plaintiffs claim Defendants'motive was "to          agreement. See, e.g., Strojmaterialintorg v.
eliminate "   s as a potentially significant        Russian Am. Commercial Corp., 815 FSupp.
competitor in  the medical billing services         103, 105 (E.D.N.Y.1993) ("a claim predicated
industry, and also to continue Mdaphis'             on a breach of a contractual arrangement
aggressive acquisition of related companies."       cannot be converted into a fraud claim simply
(Comp1.q 2.) Plaintiffs' allegations fail because   by allegations that a defendant never intended
generalized motives "which could be imputed         to adhere to its obligations under the
to any publicly-owned,         endeavor,
                       for-profit                   agreement"); Value Time,    Inc.    v. Windsor
[are] ... notsufficiently
                              for             the   Toys, Inc., 700 F.Supp. 6, 6 (S.D.N.Y.1988)
purposes of inferring scienter." Chill v.           (alleging that party intended to breach a
General Elec.  Co.,              263, (2d
                        101 F.3d 268                contract at the time it entered into the

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1998 WL 684595                                                                             Page    4
(Cite as: 1998 W L 684595, *4 (S.D.N.Y.))
contract does not state a claim for fraud);           *5 Defendants claim that Plaintiffs have not
Cranston Print Works Co. v. Brockmann Int'l          provided adequate notice for the basis of their
A.G., 521 FSupp.' 609, (S.D.N.Y.1981)
                           614                       breach of contract claim. (Defs.' Mem. Law at
(noting the rejection of efforts to convert          22). However, the Court finds that Plaintiffs
contracts actions into fraud claims based upon       have pled adequately the existence of both the
allegations that a contracting party never           MergerAgreement         and the Registration
intended to W i l l its promise).                    Rights Agreement. (Comp1.f    35, 1 37, 81.)
                                                     Plaintiffs have adequately pled their
 Reading the Complaint in the light most             performance of the Merger Agreement and the
favorable to the Plaintiffs, Plaintiffs have         Registration Rights Agreement. (Comp1.q34,
failed to meetthe burden of pleading with            7 37, 1 43.) Plaintiffs have pled Defendants'
specifcity the post-merger fraud claims. As          breach of the Merger    Agreement      andthe
with the pre-merger fraud claims, Plaintiffs         Registration Rights Agreement. (Compl.qq 40-
have failed toplead scienter with sufficient         45, 7 48, 7 50, 7 51, 1 56, 7 58, 7 59, 81.)
specificity. Plaintiffs fail to link any of          Finally, Plaintiffs have pled damages. (Compl.
Defendants'                        misleading          3, 1[ 4, 1 30-33, 1 38, 77 41- 50,   52-56, 1
statements with any facts from   which    the        82.)
Court could infer that Defendantsknew the
statements were false. In pleading scienter          C. Tortious Interference, Count X
regarding the post-merger statements,
Plaintiffs provide only the conclusory                Defendants also allege that inorder to state a
allegation that Medaphis "never intended to          claim of tortious interference, scienter must be
glow the registration of the shares", (Comp1.I       pled with particularity. (Defs.'Mem.Law at
401, and that "upon information andbelief'           15 & n.  10.) In order to state a claim for
Medaphis feared that Plaintiffs'stock sales          tortious interference, a plaintiff must plead:
would have a negative impact upon Medaphis           "1) business relations with a third party; 2)
stock prices. (Compl.7 42.)                          defendants' interference with those business
                                                     relations; 3) defendants acted with the sole
 Hence, Plaintiffs's fraud claims numbered II,       purpose of harming the plaintiff or used
III, IV, VI, VII, Vm, and IX are DISMISSED           dishonest, unfair, or improper means; and 4)
with leave to amend.                                 injury to the business relationship." Purgess v.
                                                     Sharrock, 33 F.3d   134,     141 (2dCir.1994).
B. Breach of Contract, Count V                       When the interference is with prospective
                                                     contract rights rather than inducing breach of
 In order to state a claim for breach of contract    an existing contract, Plaintiffs "must show
under New York law, a plaintiff must allege:         more culpableconduct       on thepart of the
1) existence of an agreement; 2) adequate            [Dlefendant[sl." NBT  Bancorp Inc. v. Fleet/
performance of the contract by the plaints, 3)       Norstar Fin. Group, 87 N.Y.2d 614, 621, 641
breach of the contract provisions by the             N.Y.S.2d 581,664 N.E.2d 492,496 (N.Y. 1996).
defendant; and damages.
                     4)              Tagare v..      When only prospective rights or economic
NYNEX Network Sys. Co., 921 FSupp. 1146,             benefits are involved, a plaintiff must show
   (S.D.N.Y.1996); 8(aX2)
1149              Rule                    of the     "wrongful means" employed by the defendant,
Federal Rules of Civil Procedure requires only       defined as "physical  violence,        fraud or
"a short andplainstatement          of the claim     misrepresentation, civil suits  and      criminal
showing that the pleader is entitled t relief        prosecutions, and some degrees of     economic
...'IFed.R.Civ.P. 8(aX2). Therefore, Plaintiffs      pressure; they do not,          include
are not required to set out in detail the factual    persuasion alone although it is knowingly
bases for this claim; all that is required is that   ditected at interference with the contract." Id.
the pleading "give the defendant fair notice of      (emphasis added) (citing Guard Life Corp.v. S.
what the plaintiffs claim is and the grounds         Parker Hardware Mfg., Corp., 50 N.Y.2d 183,
upon which it rests." Conley, 47.           193-94, 428 N.Y.S.2d 406
                                                                             628, N.E.2d  445,
                                                     450-51 (N.Y.1980)); see PPX Enterprises, Inc.

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                               @                               Govt. Works

1998WL684595                                                                                          Page     5
(Cite as: 1998 WL 684595, *5 (S.D.N.Y.))

v. Audiofidelity Entertainment, Inc., 818 F.2d              finds it hard to believe                 could
                                                                                     that Mr. Senn not
    269 Cir.1987)
266, (2d                   (Yf the defendant's                           "a
                                                            discover, with                                his
                                                                                             inquiry", that
interference is intended, at least in part, to              partner, William R. Spalding, executedthe        very
advance its own competing interests, the claim                        to
                                                            agreements whichPlaintiffs      refer. Fed.R.Civ.P.
will fail unless the means employedinclude                  1 I@).
criminal or fraudulent conduct"). Plaintiffs
allege that Defendants' wrongful conduct is              E. Leave to Replead
based         "fraudulent misrepresentations"
made by Medaphis and Brown. (Compl. at 11                 *6 Rule 15(a) of the Federal Rules of Civil
102-103.) However, Plaintiffs'   fraud claims,           Procedure provides that permission to amend
incorporated by reference into Plaintiffs'               a pleading "shall be freely given when justice
tortious interference claim, have not been pled          so requires." Fed.R.Civ.P. 15(a). "[Ut isthe
with rmfficient particularity. Accordingly,              usual practice upon    granting a motion to
Plaintiffs' Count X is DISMISSED with leave              dismiss to allow leave to replead." Cohen v.
to amend.                                                Citibank, No. 95 Civ. 4826,1997 WL 88378,
                                                         at (S.D.N.Y.              1997);
D. Declaratory Judgment, Count XI                        Intermetals Corp. v. M N ArcticConfidence,
                                                         No. Civ.
                                                            92 1856,  1993          WL 312903, at*1
 Plaintiffs alsoseek a declaratory judgment              (S.D.N.Y. Aug. 12, 1993). Absent a showing of
that certain non-compete agreements,                     undue delay, bad faith, or dilatory motive on
executed by Thacker, DeZonia and Medaphis                the part of the movant, undue prejudice to the
in connection with the merger, are void and              opposing party, or the futility of the
unenforceable.        105-108.)
                       (Compl.Bli                        amendment, a plaintiff should be granted
Defendants claim that Plaintiffs' "indefinite            leave to replead. See Protter v. Nathan's
reference to unidentified agreements is                         Sys.,
                                                         Famous Inc.          . 904 F.Supp.101,     111
insufficient to put Medaphis on notice as to             (E.D.N.Y.1995) (citing Foman v. Davis, 371
what agreements, andwhat terms of those                  U.S.178,182, 83 S.Ct: 227,9L.Ed.2d222
agreements, Plaintiffs seek to have declared             (1962)).
void and unenforceable." (Defs.' Mem. Law at
23) (citing Nordic Bank PLC v. Trend Group,               While the Court finds Plaintiffs Complaint
Ltd.,619 F.Supp. 542, (S.D.N.Y.1985)).
                          562                            insufficient, "the Court cannot determine that
Defendants'      claim      of   ignorance    is         the plaintiff could not,           under any
disingenuous, and Defendants' citation of                circumstances, rmfficiently allege his claims."
Nordic Bank is inapposite.     Nordic      Bank          Protter, 904 F.Supp.     at 11. Therefore, the
concerned a     breach of certain side letter            Plaintiff is hereby granted leave to file an
agreements where Plaintiffs made only "a                 Amended Complaint within twenty (20) days
bald allusion as to their breach." Nordic Bank,          of the date of this Order. Failure to file within
619 F.Supp. at 562. Here, Plaintiffs seek to             this time period will waive the      right     to
have the agreements declared void and                           With
                                                         replead.          regard to any amendment,
unenforceable in theirentirety. (Compl. 1 108;           Plaintiff is cautioned against perfunctory
Pls.' Mem.  Law      at 37.) Furthermore, this           nonsubstantive or cosmetic changes. [FN31
Court finds that Plaintiffs have provided
 adequate information as to the parties to the               FN3. The Court notes with approval Judge Leisure's
contracts, the date      of execution, and the               thoughtful comments in Spier v. Erber, No. 89 Civ.
 subject matter of the contracts, [FN21 @ompl.q              1657, 1990 W L 71502, at *IO n. 8 (S.D.N.Y.      May
 106.) Thus, Defendants    Motion     to dismiss             24, 1990):
 Claim XI is DENIED.                                      - mt has become an all      too     common practice for
                                                           ' litigants granted leave to replead to make only minor
   FN2. Plaintiffsthat
                    the     were                             changes in the original compliant based on an overly
   executed by "William R. Spalding, General
                                      then                   restrictivereading of thedismissing court's order,
   Counsel of Medaphis and currently a partner at King       prompting a second motion to dismiss. An amended
   and Spalding." (PIS.' Mem.Law at 37). The Court                     which to with
                                                             complaint fails  replead sufficient

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                                 @                                o.

1998 WT, 684595                                                                   Page   6
(Cite as: 1998 WL 684595, *6 (S.D.N.Y.))

   particularity after a finding of lack of specificity may
    well be regarded by the Court as a frivolous filing in
    violation of Fed.R.Civ.P. 11. Conversely, a renewed
    Rule 9(b) motion [to dismiss] after an adequate and
    thorough repleading can also be viewed as frivolous.
   the                 Plaintiff
              event that files               an Amended
    Complaint that is insufficiently pled or not in accord
    with the Court’s decision, the Court may, on motion,
    take appropriate action. See also Mathon v. Marine
   Midland                 875 F.Supp. 986,             1003

                III. CONCLUSION

 Defendants’ Motion to Dismiss is GRANTED
as to Counts II, III, IV, VI, VII, VJIC, IX and X.
Defendants’ Motion to Dismiss is DENIED as
to Counts V and XI.

 Plaintiffs are given leave to amend the
dismissed claims as set forth above.
Defendants shall move or answer within
twenty (20) days of service of the Amended



                             Copr. West 2000 No Claim to Orig. U.S. Govt. Works