that its 1985 losses were expected to be smaller than their 1984 losses. (Par. 12)
In fact, however, during December, 1985, the three individual defendants knew or had reason to believe that Western Union would realize substantially larger losses in 1985 than it had realized in 1984, and that Western Union's optimistic predictions were unlikely to come true. The defendants possessed this information by virtue of their access to Western Union's oral and written internal reports of earnings and income. (Par. 14)
On December 9, 18, and 19, 1985, Curtiss-Wright sold its Western Union stock on the open market at approximately $13 per share. (Par. 16-17)
Curtiss-Wright did not disclose to the investing public the information concerning the true extent of Western Union's financial deterioration. (Par. 18).
Plaintiff Ervin G. Froid purchased Western Union stock on December 18, 1985. (Par. 2; Plaintiff's Brief in Opposition, at 14) If plaintiff would have known of the withholding of information by the defendants, plaintiff would not have purchased Western Union stock at all, or would have purchased at a lower price. (Par. 20) The price paid by plaintiff was inflated because it did not reflect Western Union's true financial position. (Par. 21)
In February 1986, Western Union announced that it expected to report a net loss of about $370 million for fiscal year 1985, compared to a $58.4 million net loss in fiscal 1984. (Par. 13)
In May 1986, Western Union stock was trading at $5.88 per share. (Par. 19).
On May 28, 1986, plaintiff filed a complaint alleging that defendants Berner, Ehinger, Sprigle, and Curtiss-Wright Corp. violated Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, 17 C.F.R. 240-10b-5, and committed common law fraud. The complaint is filed as a class action on behalf of "all persons who purchased the common stock of Western Union in the open market from November 10, 1985, until at least February 10, 1986 inclusive, and who have suffered damages as a result of the acts and transactions complained of herein." (Par. 9(b)).
Generally speaking, a Rule 10b-5 plaintiff must establish the following elements: a false representation or omission of a material fact; defendants' intent or recklessness ("scienter"); the plaintiff's reasonable reliance thereon; and his resultant loss. See Peil v. Speiser, 806 F.2d 1154, slip op. at 13 (3d Cir. 1986). Defendants do not contend that the complaint fails to allege an omission of fact; they argue that the complaint is defective with regard to each of the other elements.
Defendants contend that plaintiff has failed to allege that the information that was withheld was material. Under the federal securities statutes, materiality is defined as "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder." TSC Industries v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976) (interpreting Rule 14a-9 concerning proxy voting); see Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 647 (3d Cir. 1980) (applying this definition under Rule 10b-5).
Paragraph 14 alleges that the information withheld was "oral and written projections of earnings and income" concerning (a) the fact that Western Union would have substantially larger losses than the year before, contrary to previous reports, and (b) that Western Union's prior optimistic predictions would not be realized. Paragraph 15 alleges that defendants knew that these projections were material.
The Third Circuit has set forth more specific guidelines for determining the materiality of "soft information" such as income projections.
Courts should ascertain the duty to disclose asset valuations and other soft information on a case by case basis, by weighing the potential aid such information will give a shareholder against the potential harm, such as undue reliance, if the information is released with a proper cautionary note.