607 F.2d at 557-58; Harris v. Emerson, CCH Fed.Sec.L.Rep. ¶
97,196 (S.D.N.Y. 1979).
To the extent that suit is based on material misstatements,
plaintiffs must show reliance — that is, must satisfy the
statutory requirement that the alleged statements have been made
"in connection with the purchase or sale of any security" by
plaintiffs. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,
95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Wright v. Heizer Corp.,
560 F.2d 236, 249 (7th Cir. 1977), cert. denied, 434 U.S. 1066, 98
S.Ct. 1243, 55 L.Ed.2d 767 (1978). This in turn narrows the
proper focus of the complaint to plaintiffs' own purchases of
Xcor stock, and the claimed misstatements extant at the time of
those purchases. As for claimed material omissions, Affiliated
Ute Citizens v. United States, 406 U.S. 128, 153, 92 S.Ct. 1456,
1472, 31 L.Ed.2d 741 (1972), teaches that "positive proof of
reliance is not a prerequisite to recovery." Nonetheless, because
Affiliated Ute still requires "that the facts withheld be
material in the sense that a reasonable investor might have
considered them important in the making of this decision," once
again plaintiffs are limited to material omissions existing at
the time of their respective purchases of Xcor stock.
Plaintiffs' principal reliance in this action, and their
extended pejorative characterization of defendants, is based on
alleged fraud, self-dealing and mismanagement by various of the
defendants. For example, Paragraphs 28 through 34 of the Amended
Complaint do not deal at all with a securities claim by
plaintiffs in the Rule 10b-5 sense defined by Santa Fe
Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51
L.Ed.2d 480 (1977), or by such subsequent cases as Gluck v.
Agemian, 495 F. Supp. 1209 (S.D.N.Y. 1980).*fn10 Plaintiffs must
recognize, and must limit their complaint in accordance with the
recognition, that a federal securities claim under 1934 Act §
10(b) and Rule 10b-5 and 1933 Act § 17 must deal with fraud (in
the securities sense) in the sale of securities to plaintiffs. On
that score, Paragraph 47 of the Amended Complaint, to take
another example, also reflects the kind of muddied misperception
that has pervaded plaintiffs' pleadings to this point.
Gulf & Western Industries, Inc.
Plaintiffs' allegations (or more accurately lack of
allegations) against Gulf & Western require that the action be
dismissed as to that defendant. Paragraph 15 of the Amended
Complaint alleges that Gulf & Western "has been a controlling
person of the defendant Xcor throughout the relevant period." No
other allegations refer in terms to Gulf & Western, although (1)
a large number of references are made to "defendants" throughout
the Amended Complaint without specifying just which defendant
committed what act and (2) judging from plaintiffs' headings in
the Amended Complaint, several of its claims are apparently
asserted against many defendants, including Gulf & Western.
However, "controlling person" liability cannot be predicated,
as defendants have sought to do here, solely on ownership of Xcor
stock. Sanders v. John Nuveen & Co., 524 F.2d 1064, 1072 (7th
Cir. 1975), vacated on other grounds, 425 U.S. 929, 96 S.Ct.
1659, 48 L.Ed.2d 172 (1976); Christoffel v. E.F. Hutton & Co.,
588 F.2d 665, 668-69 (9th Cir. 1978) and cases therein cited.
Absent any allegation of "culpable participation" in the alleged
wrongdoing, the Amended Complaint cannot stand against Gulf &
Western. McFarland v. Memorex Corp., 493 F. Supp. 631, 649
Because plaintiffs will be required to replead, it is
appropriate to comment on an aspect of plaintiffs' pleading to
date that is epitomized by the Gulf & Western situation but must
be cured as to all defendants in the Second Amended Complaint:
the practice of alleging indiscriminately that "defendants"
performed or omitted to perform some act. There may indeed be
some specific matters as to which it is appropriate to refer to
some defendants in a collective sense ("defendant directors" is
an obvious example). There may even be individual items as to
which each of the defendants was involved in claimed wrongdoing.
But plaintiffs owe defendants the obligation to make a good faith
differentiation throughout the complaint that will enable each
defendant to know with what he or it is charged and to what he or
it must make answer.
Plaintiffs' First Amended Complaint is dismissed, and
plaintiffs are given leave to file a Second Amended Complaint
complying with the provisions of this memorandum opinion and
order on or before January 5, 1981. Given the enormous workload
that plaintiffs have already imposed on opposing counsel and the
Court, plaintiffs must recognize that a failure to generate a
sound complaint limited to matters properly cognizable by this
Court may be met with further motions by defendants for
sanctions, to which this Court would be inclined to be more
receptive than heretofore.