The opinion of the court was delivered by: JEROME B. SIMANDLE
SIMANDLE, District Judge:
This federal securities law class action is before the court on defendants' motion to dismiss the Consolidated Amended Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The issue presented is whether plaintiffs' allegations that the defendants made optimistic public projections for success of the corporation's expected performance in sales of frozen carbonated beverages in knowing or reckless disregard of material adverse facts, continuing before and after plaintiff-shareholders purchased corporate stock in reliance upon the projections, states a claim for securities fraud under Rule 10b-5 of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5, and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). For the reasons discussed below, the court will grant defendants' motion.
This is a securities class action suit brought on behalf of all persons who purchased the common stock of J & J Snack Foods Corp. ("J & J" or the "Company") during the period from January 10, 1992 up to and including June 18, 1992 (the "Class Period").
Defendant J & J is in the business of manufacturing and marketing nutritional snack foods to the food service, school and retail supermarket industries.
Its principal products include soft pretzels, frozen treats and desserts, churros, baked goods and frozen carbonated beverages ("FCBs"). Plaintiffs allege that defendants J & J, Gerald B. Shreiber, chief executive officer of J & J, and Arnold J. Goldstein, former chief financial officer of J & J, failed to disclose material adverse information, and made or participated in the making of fraudulent misstatements, in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a). Plaintiffs also have asserted claims for common law fraud, deceit and negligent misrepresentation.
The Consolidated Amended Complaint (or, the "Complaint") identifies several allegedly false and misleading public reports and statements made by or on behalf of J & J, and approved of or acquiesced in by defendants Shreiber and Goldstein. The Complaint alleges inter alia as follows:
1. On January 10, 1992, Shreiber stated:
Our short-term financial results, particularly our first and second quarters (October through March) will be impacted by the costs related to the expansion of our FCB business. We anticipate strong third and fourth quarter sales, our seasonal selling period for our beverage business. We continue to be pleased with the performance of our snack food business, including both our food service and supermarket sales, which grew over 18 percent in the first quarter. Despite the economic recessionary problems affecting the country, we are optimistic for 1992 and beyond.
Consolidated Amended Complaint at P 27.
2. On January 24, 1992, J & J announced its results for the first quarter ended December 28, 1991, and defendant Goldstein commented:
Although our frozen carbonated beverage division experienced lower-than-expected sales and earnings related to the recession, our food service and retail supermarket divisions produced good results for the quarter. Food service sales were up 13 percent and sales to supermarkets were up 39 percent. Our core businesses are fundamentally strong and we are optimistic about the balance of fiscal 1992 and beyond.
Consolidated Amended Complaint at P 28. J & J's Form 10-Q for the period ending December 28, 1991, which it filed with the Securities and Exchange Commission ("SEC") on February 25, 1992 and which Shreiber and Goldstein signed, reiterated the results as stated above. Consolidated Amended Complaint at P 29.
3. During a conversation on or about March 17, 1992 with Richard Davis, Jr. ("Davis"), a stock analyst for Wessels, Arnold & Henderson, Goldstein told Davis, "among other things, that there was nothing unusual to report." Consolidated Amended Complaint at P 30.
4. On April 10, 1992, Advest, Inc., a brokerage firm, "based upon information from the Company," issued a buy recommendation for the Company and indicated that J & J's FCB division had a soft winter, but was expected to report strong summer 1992 results. Consolidated Amended Complaint at P 31.
6. On April 24, 1992, J & J announced its results for the second quarter and first half ended March 28, 1992, in which sales increased 14 percent to $ 28,515,000 from $ 24,979,000 in last year's (i.e., the previous year's) second quarter. Net earnings for the second quarter climbed 98 percent to $ 972,000 compared to $ 491,000 last year. Shreiber allegedly stated:
Our snack food sales and earnings were up sharply in the second quarter and overshadowed the seasonal losses of our beverage operations . . . . The second quarter included strong sales and earnings results for products sold to supermarkets. We are optimistic about prospects for the second half of our fiscal year when sales of our frozen carbonated beverages are generally higher.
Consolidated Amended Complaint at P 33. The Company's Form 10-Q for the quarter ended March 28, 1992, filed on or about May 4, 1992 and signed by Shreiber and Goldstein, reiterated these results. Consolidated Amended Complaint at P 36.
7. On or about April 28, 1992, the brokerage firm of Piper Jaffray, Inc. ("Piper Jaffray") maintained its buy recommendation and, "on information from the Company," reported that Circle K, a major new FCB customer which J & J had recently obtained, would bring J & J's incremental FCB dispensers up over 15% by year end, making incremental growth highly likely for FCB over the next two years. Consolidated Amended Complaint at P 35.
8. On or about June 10, 1992, J & J representatives spoke to analysts at a Piper Jaffray conference concerning J & J's outlook and gave a positive report on J & J, neglecting to mention any alleged problems in the Company's FCB division. Consolidated Amended Complaint at P 37.
9. On or about June 10, 1992, Shreiber spoke with Davis and allegedly told him that:
the growth in the FCB business will be 20% in the second half, and 13-14% for the year. Specifically, with regard to the third quarter, defendant Shreiber told Davis that J & J had everything in place to achieve 17-18% growth for its FCB business.
Consolidated Amended Complaint at P 38.
10. After the close of trading on Wednesday, June 17, 1992, Shreiber "suddenly" announced that:
Although we expect to close out the quarter with overall healthy sales increases, disappointing results with our Frozen Carbonated Beverage business and other increased operating expenses are expected to impact earnings for the quarter. . . .
Start-up and expansion expenses in connection with the Company's Frozen Carbonated Beverage business, coupled with the interruption of sales due to a remodeling program by a major FCB customer, is expected to continue through the fourth quarter. For our fiscal year we do not expect to match last year's earnings per share of 67 cents, based on this year's weighted average number of shares of 10,859,000.
Consolidated Amended Complaint at P 40.
The start-up and expansion expenses alluded to in P 40 of the Complaint refer to J & J's acquisition and expansion plan which it announced in its January 10, 1992 communique, see defendants' Exhibit A, as well as J & J's contract with Circle K, see Consolidated Amended Complaint at P 41. K-Mart was the FCB customer undergoing the remodeling program. Consolidated Amended Complaint at P 41. By the time trading commenced on Thursday, June 18, 1992, J & J's common stock lost 28% of its value, falling from Wednesday, June 17, 1992's closing price of $ 12.50 per share to $ 9.00 per share.
In asserting their claims, plaintiffs "rely, in part, upon the presumption of reliance established by the omission of material facts" of which they complain. Consolidated Amended Complaint at P 23. They also rely in part upon the presumption of reliance established by the fraud-on-the-market doctrine. See id. at P 22. More specifically, plaintiffs allege that:
(a) defendants made public misrepresentations or failed to disclose material facts during the Class Period;
(b) the omissions and misrepresentations were material;
(c) the securities of the Company traded in an efficient market;
(d) the omissions and misrepresentations alleged would tend to induce a reasonable investor to misjudge the value of the Company's securities; and
(e) plaintiffs and the members of the Class purchased their J & J securities between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.
Defendants assert that plaintiffs' allegations are insufficient as a matter of law. They move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6).
A. Standard for Rule 12(b)(6) Motions
When considering a motion under Rule 12(b)(6), Fed.P.Civ.P., to dismiss for failure to state a claim upon which relief can be granted, the district court must accept as true the allegations and facts pleaded in the complaint and any and all reasonable inferences derived from those facts. See Unger v. National Residents Matching Program, 928 F.2d 1392, 1400 (3d Cir. 1991); Markowitz v. Northeast Land Co., 906 F.2d 100, 103 (3d Cir. 1990) . See also Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974) (stating that allegations of a complaint should be favorably construed for the pleader). A court may not dismiss the complaint "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
Normally, courts may not review matters outside of the pleadings on motions to dismiss. When a court reviews such outside materials, the motion is transformed into one for summary judgment under Fed.R.Civ.P. 56, see Fed.R.Civ.P. 12(b), and the court must apply a different standard of decision. If a court decides to treat a motion to dismiss as one for summary judgment, all parties must be given a reasonable opportunity to present all other materials made pertinent by Rule 56. Here, defendants ask us to review certain exhibits annexed to their Memorandum of Law in Support of Motion of Defendants to Dismiss Consolidated Amended Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(6) (hereinafter, "Defendants' Brief"), without converting their motion into one for summary judgment. Plaintiffs, however, argue that defendants' exhibits "are irrelevant and must be ignored." Plaintiffs' Memorandum in Opposition to Defendants' Motion to Dismiss the Consolidated Amended Complaint (hereinafter, "Plaintiffs' Brief") at 10.
Two of the exhibits in question (Exhibits A and C) are the full text of documents from which plaintiffs quoted selected excerpts in their Consolidated Amended Complaint. See Complaint at P 27 (quoting language contained in Exhibit A) and P 33 (quoting language contained in Exhibit C). Two of the exhibits (B and D) are copies of, respectively, J & J's first and second quarter reports which were distributed to, among others, J & J's "Shareholders and friends." Though plaintiffs do not quote directly from these documents, they do quote from and/or cite other J & J public documents which announced the same exact quarterly results as those announced in Exhibits B and D. See Consolidated Amended Complaint at PP 28, 29, 33 and 36.
Defendants' Exhibit E is a copy of J & J's third quarter report, which announces the Company's actual third quarter performance, about which defendants made the projections that are now the basis for this suit.
If the plaintiffs had attached the full text of these documents to their Complaint, the documents would have been considered part of the Complaint and unquestionably reviewable on this Rule 12(b)(6) motion to dismiss. See Fed.R.Civ.P. 10(c). See also 5 C. Wright & A. Miller, Federal Practice and Procedure: Civil 2d, § 1327 at 761 (1990). It is also proper for us to consider the text of these documents in this Rule 12(b)(6) motion without converting the motion into one for summary judgment under Rule 56. These documents are clearly pertinent to the plaintiffs' allegations because the contents of these documents have been excerpted or summarized in plaintiffs' Complaint. Moreover, reference to the full texts is necessary to place the defendants' statements and the Company's financial statistics cited by the plaintiffs in their Consolidated Amended Complaint into the proper context. Plaintiffs cannot fairly ask us to consider this information in a vacuum divorced from the other directly related, contemporaneous statements and disclosures made by the defendants. See Romani v. Shearson Lehman Hutton, 929 F.2d 875, 879 n.3. (1st Cir. 1991); Field v. Trump, 850 F.2d 938, 949 (2d Cir. 1988) (stating that in considering Rule 12(b)(6) motion to dismiss, court may review documents submitted by defendants which "are integral to plaintiff's claims"); In re Donald J. Trump Casino Securities Litigation, 793 F. Supp. 543, 546 n.1, 547 (D.N.J. 1992) (hereinafter, "Trump "). See also 5 Wright & Miller, Federal Practice and Procedure, § 1327 at 762-63 ("When plaintiff fails to introduce a pertinent document as part of his pleading, defendant may introduce the exhibit as part of his motion attacking the pleading"). Therefore, we hold that the consideration of defendants' Exhibits A-E--each of which has been excerpted, summarized or alluded to in plaintiffs' Consolidated Amended Complaint--is appropriate in this Rule 12(b)(6) motion and such consideration does not raise matters outside the pleadings to trigger summary judgment consideration.
B. Plaintiffs' Standing to Assert Post-Purchase Statements
Before reviewing the alleged misleading statements in light of the applicable law, we must first determine which statements the court can rightly review. Defendants argue that certain of the alleged statements upon which plaintiffs base their suit are not actionable, and that plaintiffs do not have standing to assert claims based upon any of these statements. See Defendants' Reply Brief in Further Support of [Their] Motion to Dismiss the Consolidated Amended Complaint (hereinafter, "Defendants' Reply Brief"), at 2-10. Indeed, defendants assert that "the motion to dismiss can easily be disposed of on this basis alone." Id. at 10. The courts seem to be split on this issue, and the case law arguably can be interpreted to support fully both parties' positions.
According to the Complaint, plaintiff Irons purchased five hundred shares of J & J common stock on January 14, 1992, Consolidated Amended Complaint at P 7, and plaintiff Renz purchased five hundred shares of J & J common stock on March 2, 1992, id. at P 6. Irons and Renz are the two named plaintiffs in this purported class action. The statements (and omissions) upon which the Complaint is founded were allegedly made over the five month period between January 10, 1992, and June 17, 1992. Defendants argue that this court may not consider any of the alleged misrepresentations or omissions which occurred after March 2, 1992, nor may any of those alleged post-March 2, 1992 misrepresentations or omissions serve as a basis for plaintiffs' suit. Defendants cite various cases in support of their position.
In Trump, the plaintiffs noted that they, like the plaintiffs here, represented a putative class, and stated that potential members of the class may have purchased bonds subsequent to, and in reliance on, the statements at issue. Id., 793 F. Supp. at 566 . Chief Judge Gerry did not find this reasoning persuasive. He concluded:
The named plaintiffs could not represent a class which included bondholders who purchased after these statements were printed, as all of the named plaintiffs purchased prior to circulation of those statements. . . . "The fact that a case is brought as a class action does not change the calculus; ...