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April 30, 1993

W. KENNETH TREGENZA, JAMES E. HAAS and ERNEST B. SEEGERS, on behalf of themselves and a class of persons similarly situated, Plaintiffs,
GREAT AMERICAN COMMUNICATIONS COMPANY, a Florida corporation, and SHEARSON LEHMAN BROTHERS, INC., a Delaware corporation, Defendants.

The opinion of the court was delivered by: WILLIAM T. HART

 Plaintiff, W. Kenneth Tregenza, is a resident of the state of Michigan who purchased shares of defendant, Great American Communications Company ("GACC") from defendant Shearson Lehman, Inc. ("Lehman") on October 11, 1989. Plaintiff, James E. Haas, is also a Michigan resident who purchased GACC shares through Lehman between November 15, 1989 and November 2, 1991. Plaintiff, Ernest B. Seegers, is a resident of Illinois who purchased shares of GACC through Lehman between November 10, 1989 and June 10, 1991. Defendant, GACC, is a Florida corporation which owns and operates television and radio stations and produces animated television programs and feature films. GACC's principal operations are conducted through Great American Broadcasting Company in Cincinnati, Ohio. Defendant, Lehman, is a Delaware corporation with its principal place of business in New York. Lehman Brothers is a division of Lehman that maintains retail brokerage sales offices in Chicago, Illinois.

 Plaintiffs bring their amended class action complaint pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j (b), the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5, and Section 12(2) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 771(2). This court has subject matter jurisdiction under § 27 of the Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331, and 28 U.S.C. § 1367. Plaintiffs' supplemental state claims allege violation of the Illinois Securities Law of 1953, Ill. Rev. Stat., ch. 121-1/2, §§ 137.1 et seq., and negligent misrepresentation.

 Lehman has filed a motion to dismiss plaintiffs' amended complaint in its entirety for failure to state a claim and because the federal claims were filed beyond the statute of limitations. Fed. R. Civ. P. 12(b)(6). GACC has also filed a motion to dismiss for failure to state a claim, for failure to plead fraud with particularity, Fed. R. Civ. P 9(b), and on statute of limitations grounds. Because defendants rely on documents outside their pleadings, the court notified the parties at the time the motions were presented that it would treat defendants' motions to dismiss on statute of limitations grounds as motions for summary judgment. See Fed. R. Civ. P. 12(b) (last sentence).

 On a motion to dismiss, all well-pleaded factual allegations are accepted as true and are construed in favor of claimants. Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1416 (7th Cir. 1992). "Dismissal of the complaint is proper only if it appears beyond doubt that the plaintiff[s] can prove no set of facts in support of [their] claim[s] which would entitle [them] to relief." Id. The standard for summary judgment is similar but allows examination of materials outside the complaint. On a motion for summary judgment, the entire record is considered with all reasonable inferences drawn in favor of the nonmovant and all factual disputes resolved in favor of the nonmovant. Visser v. Packer Engineering Assoc., Inc., 909 F.2d 959, 960 (7th Cir. 1990). Summary judgment is appropriate only where there is "no genuine issue as to any material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Whether or not a fact is material is governed by substantive law. Id. The burden of establishing a lack of any genuine issue of material fact rests on the movant. Jakubiec v. Cities Service Co., 844 F.2d 470, 473 (7th Cir. 1988). Summary judgment is not proper when there is a dispute over facts which might affect the outcome of the suit. Liberty Lobby, 477 U.S. at 248. The dispute must be genuine, that is, the party opposing the motion for summary judgment may not "rest on the mere allegations of his pleading, but must set forth specific facts showing there is a genuine issue for trial. " Id. The nonmovant must also make a showing sufficient to establish any essential element for which it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

 Plaintiffs may maintain this action on behalf of the represented class only if they satisfy the requirements of Fed. R. Civ. P. 23(a) and 23(b). Plaintiffs have the burden of establishing that the requirements of Rule 23 have been met and that the case is appropriate for class-wide adjudication. Trotter v. Klincar, 748 F.2d 1177, 1184 (7th Cir. 1984); Susman v. Lincoln Am. Corp., 561 F.2d 86, 90 (7th Cir. 1977). Plaintiffs have not moved for certification of the class and defendants have not made any motion directed to the class allegations. This court is nevertheless obligated to rule on class certification. See Bieneman v. City of Chicago, 838 F.2d 962, 963 (7th Cir. 1988). There has been no showing that any of the named plaintiffs would be adequate class representatives. On this record, class certification must be denied. To the extent either party desires a reconsideration on class certification on a more complete record, a motion must be filed within 10 days, under Fed. R. Civ. P. 59(e). Cf. Koch v. Stanard, 962 F.2d 605, 607 (7th Cir. 1992).

 According to the amended complaint, in October 1987, GACC acquired Taft Broadcasting Company ("Taft") for approximately $ 1.5 billion and changed its name to Great American Broadcasting Company. To finance the acquisition, GACC issued $ 285 million of 14-3/8% Senior Subordinated Bonds due 1999 and GACC's holding company borrowed $ 670 million in bank loans and issued 137.5 million of 13-1/4% notes due 1996. In addition, GACC issued 2.7 million shares of its own common stock to Taft shareholders.

 In 1989 GACC wished to reduce the outstanding debt from the Taft transaction by issuing new GACC stock in exchange for outstanding bonds and notes. GACC entered an agreement with Lehman whereby Lehman would purchase and retire $ 49.4 million of the Taft debt from the Taft debtholders in exchange for Lehman receiving 3.65 million newly issued shares of GACC common stock.

 In order to allow Lehman to profit from the transaction, the new shares of GACC had to fetch approximately $ 12 per share. At the time of the Lehman transaction, GACC was in poor financial condition and GACC could not have sold newly issued stock for $ 12 per share if it had to file a registration statement and prospectus disclosing the full extent of its financial condition. Thus the need to make the initial stock transaction with Lehman. To ensure Lehman's value in the shares, Lehman would pre-sell the stock before any announcement of the Taft debt repurchase. To encourage Lehman's brokers to recommend the shares to their clients, Lehman's brokers were given a $ 1 per share commission. Furthermore, Lehman and GACC directed the brokers to use a persuasive script containing false and misleading statements to sell the stock. The brokers were successful and sold all 3.65 million shares to plaintiff Tregenza and others on October 11, 1989.

 Using the script to sell the shares, brokers stated that GACC stock was worth twice as much as the current selling price and that within two years the stock should be well into the "$ 20's," that downside risk at the current price level was less than 10%, and that such prominent names in the investment community as Mario Gabelli and Michael Steinhardt each had holdings in GACC of between 500,000 and 1 million shares implying that these individuals had purchased GACC stock. In fact, plaintiffs allege, the price of GACC stock was grossly inflated at $ 12 per share, GACC was so laden with debt that GACC stock at any price was extremely risky and highly speculative, and Gabelli and Steinhardt had not purchased their GACC shares, but rather had received them for their Taft stock in the Taft transaction in 1987. The Lehman brokers also failed to mention that the stock was newly issued, that Lehman was pre-selling the stock to the public at a price that would guarantee Lehman a profit, that GACC's poor cash flow and burdensome long term debt made the stock significantly less valuable than the $ 12 sales price, that GACC could not have retired the debt through a direct public offering or that Lehman was receiving $ 1 per share commission, which was higher than the usual and customary commission. Additionally, defendants never disclosed the fact that the shares being pre-sold on October 11, 1989 were obtained on October 12, 1989 by Lehman in exchange for the debt retirement.

 Plaintiffs also allege that after the October 11, 1989 sale, Lehman continued to sell GACC stock at inflated prices through December 17, 1991 and that GACC knew and consented to Lehman's sales technique. Lehman brokers allegedly obtained inflated GACC prices during the period by again using a script containing false and misleading statements. Lehman brokers stated that GACC was worth far more than the market price of the stock when, in fact, GACC stock was grossly inflated. In June 1990, Lehman represented that the assets of GACC were worth $ 14 to $ 20 per share, at a time when the stock was trading at $ 5-1/2 to $ 7-1/2 per share. Lehman brokers stated that Carl Lindner, GACC's largest shareholder, was standing behind GACC and would not allow the price to decline further, when in fact, Lindner could not or would not stop the continuing stock slide. Brokers stated that GACC was selling some assets, including three substantial interests in other corporations, to retire debt and improve profitability when, in fact, the sale of these assets was insufficient to recover profitability. Finally, the brokers represented that GACC's stock prices would rise to a price comparable *fn2" to stock prices of other networks such as ABC and CBS when, in fact, GACC's debt made the comparison impossible. Plaintiffs, Haas and Seegers, purchased stock during the period after October 11, 1989.

 Defendants argue that plaintiffs' federal securities claims were filed beyond the one-year statute of limitations applicable to plaintiffs' claims. 15 U.S.C. § 77m (Section 12(2)); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773, 2782 (1991) (Section 10(b) and Rule 10b-5); Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385, 1392 (1990), cert. denied, 115 L. Ed. 2d 1052, 111 S. Ct. 2887 (1991) (Section 10(b) and Rule 10b-5). Defendants argue that the one-year statute of limitations applicable to both the § 10(b) and § 12(2) claims begins to run when plaintiffs discover, or in the exercise of reasonable diligence, should have discovered the alleged violation. Plaintiffs argue that an "inquiry notice" standard is not applicable to the one-year statute of limitations for § 10(b) and Rule 10b-5 claims.

 Prior to the Lampf decision, the Seventh Circuit applied a one-and-three year statute of limitations borrowed from § 13 of the Securities Act. Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385, 1390 (7th Cir. 1990). In Lampf, the Supreme Court ruled that a one-and-three statute of limitations should be applied to such cases, but that the source of that limitation was § 9(e) of the Exchange Act. 111 S. Ct. at 2781. Section 9(e) of the Exchange Act provides that any action must be brought "within one year after the discovery of the facts constituting the violation and within three years after such violation" but includes no express "inquiry notice" language. 15 U.S.C. § 78i(e). By contrast, § 13 of the Securities Act expressly provides that the one-year period begins after "discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m (emphasis added). *fn3 ...

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