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June 7, 1994



The opinion of the court was delivered by: BRIAN BARNETT DUFF

This case comes before this court on defendants' Motion to Dismiss plaintiffs' Consolidated Second Amended Complaint pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6). For the reasons stated below, this court denies the motion.


 This is a securities fraud class action in which the plaintiff alleges violations of the federal securities laws and common law fraud. The securities law violations are premised on the theory of "fraud on the market" based upon statements by Centel relating to a decision to put the corporation up for sale. The plaintiffs bought Centel common stock between January 23, 1992 and May 27, 1992 (the "Class Period").

 Plaintiffs allege that certain statements made by Centel in late 1991 and early 1992 misled them into believing that Centel's stock was seriously undervalued. For example, Centel's Chairman and Chief Executive Officer said in December 1991 that Centel's stock was "well below . . . its private market valuation" and that it was worth $ 65 per share, more than twice the then prevailing market price. The plaintiffs claim that they relied on the misrepresentations and purchased the stock at $ 41 per share or more, prices that they now claim were overinflated. On May 27, 1992, Centel announced a merger with Sprint and the next day the stock traded at $ 32 per share. On March 8, 1993, the Centel-Sprint merger officially closed and the stock traded at $ 42.30/share.


 The Securities Exchange Act of 1934 Section 10(b) provides that it is unlawful for any person "to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b). The Securities and Exchange Commission's Rule 10b-5, which was promulgated pursuant to § 10b, states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, . . . in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.

 To state a viable claim under § 10b and Rule 10b-5, a complaint must allege that while buying or selling securities the defendant, acting with scienter, made a false material representation or omitted to disclose material information and that plaintiff's reliance on the defendant's actions caused plaintiff's injury. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976), reh'g. denied, 425 U.S. 986, 48 L. Ed. 2d 811, 96 S. Ct. 2194 (1976).

 A. Fraud on the Market

 In the Second Amended Complaint, plaintiffs allege that the defendants participated in a course of conduct that operated as a "fraud on the market" in violation of Section 10(b) of the Securities Exchange Act ("the Act") and Rule 10b-5. (Second Amended Complaint P 95). The defendants claim in the Motion to Dismiss that the plaintiffs failed to plead fraud on the market.

 The United States Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224, 241-42, 99 L. Ed. 2d 194, 108 S. Ct. 978 (1988) explained that fraud on the market theory is premised upon the idea that in an open and developed securities market, the availability of information both accurate and inaccurate influences the price of stock traded on the market. As this court held in Schwartz v. System Software Associates, Inc., fraud on the market theory allows a plaintiff who relied on the integrity of the market but never heard the allegedly fraudulent statements to sue. 138 F.R.D. 105, 108-09 (N.D.Ill. 1991); 813 F. Supp. 1364 (N.D.Ill. 1993). The Seventh Circuit determined in Flamm v. Eberstadt, that if a plaintiff establishes that a misleading statement or omission affected the price of stock, the plaintiff may recover damages without establishing knowledge or reliance on the delict. 814 F.2d 1169, 1179-80 (7th Cir. 1987), cert. denied, 484 U.S. 853 (1987). See also Affiliated Ute Citizens v. United States, 406 U.S. 128, 152-54, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972), reh'g. denied, 407 U.S. 916, 32 L. Ed. 2d 692, 92 S. Ct. 2430 (1972), and reh'g. denied, 408 U.S. 931, 33 L. Ed. 2d 345, 92 S. Ct. 2478 (1972). This court finds that the plaintiffs in the instant case have pled fraud on the market. The plaintiffs alleged the date and price at which each named plaintiff purchased the Centel stock (Second Amended Complaint PP14-23). Plaintiffs pled the purported misleading statements by the defendants (Id. PP 47, 54-60, 65-68, 70, ...

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