The opinion of the court was delivered by: GETTLEMAN
Plaintiff, Lionheart Partners, Inc., as General Partner of Lionheart USA Micro Cap Value, L.P., brings this putative class action on behalf of itself and all others similarly situated for damages resulting from alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. sect. 78j and 78t, and the rules and regulations promulgated thereunder, including Securities and Exchange Commission ("SEC") Rule 10b-5. The complaint alleges that defendants M-Wave, Inc. ("M-Wave") and Joseph Turek ("Turek"), M-Wave's President, Chief Executive Officer and Chairman of the Board of Directors, issued public statements that were materially false and contained material omissions upon which plaintiffs relied to their detriment. Defendants have now moved to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), asserting that plaintiff has failed to allege three elements of a prima facie case of securities fraud. For the reasons set forth in this opinion, the motion is denied.
Defendant M-Wave is a leading manufacturer of printed circuit boards used in wireless communications such as cellular phones and direct broadcast satellite television antennas. M-Wave's major customers are leaders in the telecommunications industry, such as Motorola, AT&T and Nokia. Defendant's sales, net income and earnings per share have steadily increased from 1992 through 1994, and at year end 1994 M-Wave common stock traded at approximately $ 15 per share.
On May 9, 1995, M-Wave announced higher sales and earnings for the company's first quarter, which ended March 31, 1995. On June 8, 1995, M-Wave issued a press release in which defendant Turek reported that M-Wave expected to see more favorable margins during 1995 and had diversified its customer base. After this release, M-Wave's stock traded as high as $ 18 per share during June and early July 1995.
On July 11, 1995, M-Wave issued another press release, announcing that net income for the second quarter ending June 30, 1995, was expected to be $ .22-.25 per share, falling below net income reported for the prior year's second quarter. The stated reason for this reduction was that shipments to Motorola were lower than expected. After this announcement, the market price of M-Wave stock fell approximately $ 3, to approximately $ 15 per share.
On August 8, 1995, M-Wave announced its actual second quarter and six months financial results. Net sales were up from the second quarter of 1994, but operating income and earnings per share were lower in comparison to 1994. The report stated that the decrease was due to the July 11 announcement of lower than anticipated shipments to Motorola. In this August 8 press release, Turek was quoted as follows:
We previously announced that the lower order level from Motorola would have an impact on quarterly earnings . . . Temporary situations like this aren't uncommon, and shipments to Motorola are already back on schedule during the third quarter of 1995."
Following the August 8 statements, M-Wave stock continued to trade at approximately $ 13 to $ 15 per share during August, September, and part of October.
On or about August 16, 1995, Turek sold 25,000 shares of his M-Wave stock at $ 14.40 per share. On October 13, 1995, plaintiff purchased 2000 M-Wave shares at a price of $ 11.31 per share.
On October 18, 1995, M-Wave announced that third quarter revenues would be 30% below the prior year's third quarter and earnings per share would be zero. M-Wave's management cited reduced orders from key customers and price competition as the reasons for the reduced revenues and earnings. Turek also announced staff reductions at M-Wave's subsidiaries, which were later confirmed in a press release to equal a 20% reduction. In a conference call following the October 18 press release, Turek, in response to questions concerning the August 8 statements, stated:
In hindsight, that might have been a poor way to describe that statement. We have . . . actually when we talked about resuming contracts with Motorola, there was a point there during the quarter where they had actually gone to a zero situation.
Following the October 18 press release, the market price of M-Wave stock fell to approximately $ 7 per share.