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MOTTOROS v. ABRAMS

October 15, 1981

THERESA M. MOTTOROS, PLAINTIFF,
v.
MARTIN ABRAMS, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Grady, District Judge.

  MEMORANDUM OPINION

This cause comes before the court on motion of the plaintiff for class certification. Fed.R.Civ.P. 23. The class sought to be certified is defined as

  All persons, exclusive of the defendants, who
  purchased the common stock of AES Technology
  Systems, Inc., on the Over-the-Counter Market
  between March 13, 1979, and September 5, 1980.

The complaint alleges violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (§ 10(b)).

FACTS

Plaintiff is an investor who purchased shares of stock in AES Technology Systems, Inc. Defendants are AES Technology, its subsidiary, Game Plan, Inc., which is engaged in the manufacture of slot and pinball machines, and the officers and directors of those corporations. Plaintiff alleges that on March 13, 1979, defendants issued a press release in which they claimed to have received their first orders for coin operated slot machines from two hotel/casinos in Las Vegas; one order was claimed to be for 72 machines to the Sands Hotel, another was for 50 machines to the Dunes Hotel. The release also stated that the Sands had agreed to buy a substantial number of additional machines from AES. This press release failed to state that this order for 72 machines was not an "order" but was rather an agreement for the purchase of three machines with 69 machines to follow if the first three proved satisfactory. (Defendants later failed to disclose that the Sands never exercised this option to purchase the additional machines.) This release also failed to state that the commitment from the Dunes was not a "firm" order, and that on March 5, 1979, AES had granted an option to a Dunes' subsidiary, M & R Investment Corporation, to purchase shares of AES stock. Defendants again failed to disclose the existence of this stock option in their press release of March 29, 1979, in which AES stated that the Dunes had placed an order for more than 200 machines for its Atlantic City casino. Obviously, disclosure of the stock option might have undercut the significance of the large order from the Dunes as an indication of the desirability of the machines produced by AES. Prior to these press releases, AES stock had been lightly traded at approximately $7 3/4 per share. On March 30, 1979, plaintiff Mottoros, having seen these two press releases, purchased 200 shares of AES stock at a price of $13 3/4 per share.

On June 21, 1979, AES issued a press release stating it had been field testing new machines at three locations in Las Vegas and had received orders from more than a dozen casinos in Nevada. Plaintiff again alleges a failure to disclose that certain of these orders were not firm but were contingent or conditional upon testing of a small number of machines, and that again the Dunes' option was not disclosed.

On July 29, 1979, a column written by Dan Dorfman was published in the Chicago Tribune and other newspapers. Although we have not seen a copy, it appears that the column disclosed and commented negatively upon the Dunes' options and the business of AES. On July 30, 1979, AES issued a press release in reply. Among other things, the defendants stated in this press release that AES' pinball machine sales had gone from $- 0- to $5 million during its first year and that it had "commitments" for more than 1,000 slot machines. Plaintiff alleges that AES' books at the time showed sales of only $4,371,000.00. On December 4, 1979, AES filed its form 10-K with the Securities and Exchange Commission. The financial statement attached to the form revealed that certain sales previously recorded as having been made had not been made; therefore, the amounts of these sales were deducted and first year sales (for the fiscal year ending June 30, 1979) ultimately totalled only $3,763,000.00. The allegedly misleading press release of July 30, 1979, was also attached as part of the 10-K filing.

On April 2, 1980, AES issued a press release stating that it had sustained substantial losses due to the fact that some of its orders had been contingent, that it had been unable to collect receivables, and that it was seeking debt or equity financing.

On September 5, 1980, the SEC issued an order (Release No. 17126) finding probable cause to believe that AES had conducted its business in violation of the securities laws, and accepting an Offer of Settlement from AES. This SEC release detailed all the activities complained of by the plaintiffs in this case. After the release, AES shares declined to approximately $4 per share.

Plaintiff has filed this suit on behalf of the class pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, to enforce liabilities created by Section 10(b) of the Act (15 U.S.C. § 78j) and Rule 10b-5 of the SEC (17 C.F.R. § 240.10b-5).

Defendants raise two points in opposition to this motion for class certification.*fn1 First, they argue that there is no "common question of law or fact" predominating among the class members, since the plaintiffs are required to prove reliance as to each and every class member individually. Second, defendants argue that the closing date for the class should not be as late as September 5, 1980, when the SEC published Release No. 17126 and found that there was reason to believe that AES was substantially in violation of the securities laws. Rather, defendants argue that the closing date for the class should be, at the latest, April 2, 1980, when defendants issued the "corrective" press release that allegedly "cured" all previous misstatements and omissions. Neither argument has merit, and we therefore grant the motion and certify the class as defined above.

DISCUSSI ...


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