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IN RE CRAFTMATIC SECS. LITIG.

January 13, 1989

IN RE: CRAFTMATIC SECURITIES LITIGATION; THIS DOCUMENT RELATES TO: ALL ACTIONS


The opinion of the court was delivered by: MCGLYNN

 HONORABLE JOSEPH L. MCGLYNN, JR., UNITED STATES DISTRICT JUDGE

 In this federal securities class action, Defendants Craftmatic/Contours Industries, Inc., Stanley Kraftsow and Carolyn Kraftsow ("Craftmatic Defendants") move to dismiss Counts I, II and III of Plaintiff's Consolidated Amended Complaint ("Complaint") for failure to state a claim upon which relief can be granted, Fed. R. Civ. P. 12(b)(6), and for failure to comply with the pleading requirements of Rule 9(b); to dismiss Plaintiff's pendant state law claim -- Count IV -- for lack of subject matter jurisdiction, Fed. R. Civ. P. 12(b)(1); or, in the alternative, to strike Plaintiff's legally insufficient averments pursuant to Fed. R. Civ. P. 12(f). Defendant Advest moves to dismiss Count I to the extent that the factual allegations set forth in paragraph 49(d)-(g), (i)-(l) purport to state a claim against Advest upon which relief can be granted; or in the alternative, to strike paragraph 49(d)-(g) and (i)-(l) immaterial pursuant to Fed. R. Civ. P. 12(f). Advest further moves pursuant to Rule 12(e) for a more definite statement as to Count III of the Complaint. For the reasons stated below, I conclude that:

 
I) Count I should be dismissed with respect to all defendants for failure to state a claim upon which relief can be granted;
 
II) Count III should be dismissed with respect to the Craftmatic Defendants for failure to state a claim upon which relief an be granted;
 
III) Count II should be dismissed with respect to the Craftmatic Defendants for failure to state a claim upon which relief can be granted to the extent it incorporates paragraph 49(a)-(m), (o)-(p) of the Complaint;
 
IV) Count III should be dismissed with respect to Defendant Advest for failure to state a claim upon which relief can be granted to the extent it incorporates paragraph 49(a)-(m), (o)-(p) of the Complaint; and
 
V) Counts II and III should be dismissed (with leave to amend) for failure to comply with the "particularity" requirement of Fed. R. Civ. P. 9(b) to the extent they incorporate paragraph 49(q)-(t) of the Complaint.

 I. FACTS

 In deciding a motion to dismiss for failure to state a claim,

 
factual allegations of the Complaint are to be accepted as true and the complaint should be dismissed only if it appears to a certainty that no relief could be afforded under any set of facts which could be proved. Reasonable factual inferences will be drawn to aid the pleader.

 D.P. Enterprises, Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984).

 Defendant Craftmatic manufactures, markets and distributes the Craftmatic Adjustable Bed, "specifically designed for residential use which purports to have certain features found in hospital beds," and the Contour Chair Lounge, "which purports to be a custom-fitted reclining chair." Cplt. paragraph 7(a). Craftmatic's stock has been traded publicly since March 5, 1986 ("Initial Public Offering"). Cplt. paragraph 7(c). Defendant Stanley Kraftsow served as Chairman of the Board of Directors, President, and Chief Operating Officer of Craftmatic during the class period. Cplt. par. 8. His wife, Defendant Carolyn Kraftsow, is a Director and Secretary of Craftmatic. Cplt. par. 9. Defendant Advest, Inc. is the securities brokerage and investment firm that served as the Company's investment banker, advisor, and the principal underwriter in Craftmatic's initial public offering.

 The Plaintiff class is comprised of all persons who purchased Craftmatic common stock during the period March 5, 1986 through June 11, 1987 ("the class period"). In their Complaint, Plaintiffs purport to state three federal causes of action *fn1" and one state pendant claim, *fn2" in essence, alleging that Defendants made certain injurious misrepresentations and omissions of material fact in connection with the initial public offering and subsequent trading of Craftmatic stock.

 II. PREDICTIVE FAILURES

 
The Craftmatic Defendants contend that plaintiffs have attempted improperly to create a duty to predict future business activities and to convert garden variety claims of corporate mismanagement, which are more properly the subject of litigation under Delaware corporation law, into federal securities claims. Plaintiffs have alleged, in essence, that defendants failed to speculate or accurately predict their future difficulties, and to disclose their own alleged mismanagement. These claims, which transcend the boundaries of disclosure mandated by the federal securities laws, seek to impose liability based upon defendants' failure to peer into the future and predict the events which plaintiffs, with the benefits of perfect hindsight, now claim should have been disclosed.

 Motion to Dismiss at 4.

 The Craftmatic Defendants subdivide Plaintiffs claims for alleged predictive failures into two categories: those that involve failures to predict future developments, Cplt. paragraph 49(a), (d)-(e), (g), (m), (p), and those that involve the reasonableness of projections actually made, Cplt. paragraph 49(q)-(t).

 A. Failure to Predict Future Developments

 The Consolidated Amended Complaint, in essence, alleges that certain documents failed to disclose that:

 
-- Craftmatic's advertising and marketing program was based on deceptive and illegal sales practices which would and did result in charges and fines being levied against the company, paragraph 49(a);
 
-- the company's expansion program entailed an unusual and extremely high risk of failure and that the company was gambling with its profitability, paragraph 49(d);
 
-- the company's application of the advertising and marketing strategies of its core business to new product lines would hurt the ...

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