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December 19, 1986

ERVIN G. FROID, Plaintiff,

The opinion of the court was delivered by: SAROKIN

 In this insider trading action, defendants move to dismiss the complaint or, in the alternative, for summary judgment.

 The summary judgment motion requires the court to determine whether plaintiff is entitled to discovery. Absent discovery he cannot refute the factual assertions of defendants which, in essence, deny plaintiff's allegations of insider trading. On the one hand, to deny discovery deprives plaintiff of the opportunity of challenging the facts tendered by defendants in support of their motion. It must be conceded that by their very nature most facts which would support plaintiff's claims of insider trading are primarily within the possession of the defendants.

 On the other hand, the court must recognize that discovery in a case of this nature has a life of its own totally apart from the ultimate facts which it may disclose. The mere prospect of discovery of high ranking corporate executives or board members confers substantial leverage upon the plaintiff. Therefore, the court should be hesitant to allow such free-wheeling discovery absent a sufficient threshold showing by plaintiff that he is entitled to it.

 It is not sufficient for plaintiff to merely contend that defendants' affidavits may be untruthful -- if that were the sole basis to defeat a motion for summary judgment, then none would ever be granted. In order for plaintiff to be entitled to proceed with discovery, he must present sufficient information to cast doubt upon defendants' factual assertions. Mere suspicion and conjecture are not enough. The court must make certain that the tools of discovery are utilized to dig for the truth rather than be used to bury the defendants.

 The court thus proceeds to determine which of those purposes will be served in this matter.

 I. Defendants' Motion to Dismiss under Rule 12(b)(6)

 A. Background

 For the purposes of defendants' motion to dismiss, the court accepts as true the following allegations contained in plaintiff's complaint.

 Until November 1985, defendant Curtiss-Wright Corp. was the largest stockholder of Western Union, owning 18.4% of the outstanding common stock. (Par. 8) Defendants T. Roland Berner, Charles E. Ehinger, and Richard P. Sprigle, were, at all times relevant, officers of Curtiss-Wright. These individuals also were directors of Western Union, functioning as Curtiss-Wright's designees to Western Union's Board of Directors. (Pars. 3-6).

 Western Union had experienced large losses in recent years. (Par. 10) On May 17, 1985, however, Western Union's chairman announced that the company would be operating at a profit by the end of 1985. (Par. 11; Plaintiff's Memorandum of Law in Opposition to Defendants' Motion to Dismiss or for Summary Judgment, at 2.) In September, 1985, Western Union reported 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) *fn1" 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)).

 B. Discussion

 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. *fn2"

 1. Materiality

 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 ...

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