The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiffs Eileen Kennedy and Frank Murphy filed this action as
a claimed class action on behalf of the stockholders of Xcor
International, Inc. ("Xcor") and as a claimed derivative action
on behalf of Xcor. Defendants include Xcor, The Seeburg
Corporation ("Seeburg"), Consolidated Entertainment, Inc.
("Consolidated"), Xcor's officers, directors, attorneys and
accountants and a principal lender, and another alleged
controlling person of Xcor, Gulf & Western Industries, Inc. ("G
This Court's December 16, 1980 memorandum opinion and order
(the "Opinion") dismissed plaintiffs' First Amended Complaint
with leave to replead along the guidelines established in the
Opinion, 503 F. Supp. 1116. Plaintiffs have now submitted their
Second Amended Complaint (the "Complaint") stating six separate
claims, and all defendants have moved to dismiss the Complaint.
For the reasons stated in this memorandum opinion and order
defendants' motions are granted except for the Complaint's sixth
In their first claim plaintiffs assert a class action by Xcor's
shareholders for violations of Section 17 of the 1933 Act,
15 U.S.C. § 77q, and Rule 10b-5 arising from plaintiffs' purchase of
their Xcor stock.*fn1 Plaintiffs' first two attempts to plead
that claim were deficient in failing to allege any reliance by
the plaintiffs on the documents containing the alleged
misrepresentations and omissions. Plaintiffs now concede that
they did not rely on or even read any of the documents generated
by defendants containing the alleged misrepresentations and
omissions. Rather they assert for the first time an entirely new
basis for that claim: a "fraud on the market" theory.
Three Courts of Appeal have accepted such a theory of
securities fraud: Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981)
(en banc); Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975); Ross
v. A.H. Robins Co., 607 F.2d 545, 553 (2d Cir. 1979). Under that
theory (In re LTV Securities Litigation, 88 F.R.D. 134, 142
A plaintiff asserting fraud on the market need not
allege individual reliance but only that the
plaintiff relied upon the integrity of the market
price of the security which was distorted by the
impact of the particular misstatements (citations
omitted). Reliance is presumed once it is shown that
a misrepresentation is material, or, what is
substantially identical given the concept of
materiality — once it is established that the
material misrepresentation affected the price of the
stock traded on the open market.
Although our own Court of Appeals has yet to adopt or reject
the fraud on the market theory, this Court need not resolve that
question to decide this motion. Plaintiffs have failed to plead
the necessary ingredients of that cause of action in any event.
In Shores v. Sklar the Fifth Circuit, with ten judges
dissenting in an en banc opinion, most recently accepted only a
limited version of the fraud on the market theory. It upheld such
a Rule 10b-5 action only if the securities were proved entirely
unmarketable — if the bonds involved could not even have been
offered for sale on the market but for the fraudulent
misrepresentation of defendants. As the Court went on to state:
If he proves no more than that the bonds would have
been offered at a lower price or a higher rate,
rather than that they would never have been issued or
marketed, he cannot recover.
Here Complaint ¶ 95 alleges that the material omissions and
misstatements by defendants artificially inflated the price of
Xcor's stock. There is no allegation that such securities would
not have been marketable but for defendants' allegedly unlawful
acts.*fn2 Thus under the limited version of the fraud on the
market theory adopted by the Fifth Circuit in Shores plaintiffs
would not have a cause of action.
While it may be possible in certain limited circumstances for a
plaintiff to suffer a loss even where the price of the stock has
continued to rise (see In re LTV Securities Litigation, 88 F.R.D.
at 148-49), it is axiomatic that there must be some injury to
plaintiff in order to state a cause of action under Rule 10b-5.
Because plaintiffs have alleged unlawful actions ...