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ROSENBERG v. DIGILOG

August 2, 1985

IRVING ROSENBERG, M.D., EMPLOYEES PROFIT SHARING TRUST, IRVING ROSENBERG, M.D., EMPLOYEES PENSION TRUST AND IRVING ROSENBERG, M.D., DEFINED BENEFIT PENSION TRUST
v.
DIGILOG INC., RONALD G. MOYER, JOHN VENSEL, COOPERS & LYBRAND, THOMAS M. EMORY, JR., PETER P. TARABORELLI, L. JOHN ANKNEY, HILLIARD W. PAIGE, WILLIAM G. ROBINSON, ROBERT F. ONRAET



The opinion of the court was delivered by: MCGLYNN

 MCGLYNN, J.

 On June 10, 1985, plaintiff filed this action charging defendants with, inter alia, violations of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78r(a), and Rule 10b-5. Plaintiff brought the action individually and on behalf of the purchasers of the common stock of Digilog, Inc. *fn1"

 Presently before the court is plaintiff's motion for reconsideration of an order dismissing the amended complaint. Briefly stated, the facts in this case are as follows.

 Plaintiff and the class he seeks to represent are the purchasers of Digilog, Inc. stock. Digilog, Inc. is a corporation engaged in the development, manufacture and marketing of high technology electronic telecommunications and data processing equipment. Defendant Coopers & Lybrand ("C&L") is a partnership of certified public accountants who at all relevant times acted as Digilog's independent auditor. C&L also prepared Digilog's annual reports and financial statements for 1981, 1982, and 1983, the years at issue in plaintiff's case. The remaining defendants are the officers and directors of Digilog, Inc.

 In 1981, Digilog, Inc. formed a second corporation, DBS International, Inc., to market its products both in the United States and abroad. By 1983, Digilog had acquired over 90% ownership of DBS. Neither Digilog nor DBS, however, disclosed this information in their annual reports or financial statements. Plaintiff maintains that because C&L did not consolidate the corporations' reports, Digilog's financial statements did not accurately reflect the effect of DBS' losses on Digilog's financial condition. Plaintiff contends that had C&L properly consolidated financial information from both corporations in the financial statements and annual reports it had prepared for Digilog, Digilog would have shown substantial pre-tax losses in 1981 rather than pre-tax earnings and that the company would have shown substantially lower pre-tax earnings in 1982 and 1983 than actually reported. Plaintiff further asserts that the alleged misrepresentations and omissions in Digilog's financial reports artificially inflated the market price at which plaintiff and other purported class members purchased Digilog stock. C&L subsequently filed a motion to dismiss on the grounds that the Complaint failed to allege actual reliance on the alleged misstatements.

 On February 8, 1985, I granted defendants' motion and entered an order dismissing plaintiff's complaint but allowing plaintiff ten (10) days to amend his complaint to allege actual reliance upon the alleged misstatements. That order was filed by the Clerk on February 11, 1985. On February 21, plaintiff filed this motion for reconsideration. C&L opposes that motion on several grounds.

 First, C&L contends that plaintiff's motion for reconsideration violates Rule 20(g) of the Local Rules of Civil Procedure because it was filed late. *fn2" This argument is without merit.

 Rule 20(g) of the Local Rules of Civil Procedure for the Eastern District of Pennsylvania provides:

 
Motions for reconsideration or reargument shall be served within (10) days after the entry of the judgment, order, or decree concerned.

 The order dismissing plaintiff's complaint was, as previously noted, filed on February 11, 1985. Since plaintiff's motion for reconsideration was filed on February 21, it clearly falls within the ten (10) day limitation period set forth in Rule 20.

 Defendant's second argument asserts, basically, that the law in this Circuit clearly established a requirement of actual reliance on defendant's alleged misstatements. C&L contends that since plaintiff failed to allege actual reliance on the alleged misstatements in Digilog's financial statements, its complaint was properly dismissed and plaintiff's motion for reconsideration should be denied.

 Traditionally, the measure of causation in private actions for misrepresentation has been proof of plaintiff's reliance on defendant's alleged misstatements or omissions. List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir. 1965). Similarly, the function of requiring a plaintiff to show reliance in actions under the securities laws is to permit only those who are injured by defendant's wrongful conduct to sue. In certain situations, however, the Supreme Court has recognized the need to offer some relief from the heavy burden often imposed by the reliance requirement.

 In Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972), for example, the Supreme Court held that in cases involving omissions of material information rather than misrepresentations of fact, the trier of fact may presume reliance where plaintiff could justifiably expect disclosure of all material information by defendant. All that is necessary is that the facts withheld by defendant be material in the sense ...


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