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August 26, 1993

GLEN VOSGERICHIAN, on behalf of himself and all others similarly situated

The opinion of the court was delivered by: BY THE COURT; J. WILLIAM DITTER, JR.

 This is a securities fraud suit against Commodore International Limited, three of its senior officers (with Commodore, "the Commodore defendants,") and Commodore's independent auditor, Arthur Andersen & Co. In two amended complaints, plaintiff charges all defendants with violating the Securities Exchange Act of 1934, sections 10(b) and 20(a), as amended by 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5, promulgated by the Securities and Exchange Commission, 17 C.F.R. § 249.10b-5. Plaintiff also charges the Commodore defendants with negligent misrepresentation under Pennsylvania law.

 Defendants move separately to dismiss plaintiff's complaints for failure to state a claim and failure to plead fraud with particularity. The Commodore defendants have attached a large appendix to their motion comprising all press releases, financial statements, and reports to which plaintiff had referred in his complaints. Since plaintiff has also had a reasonable opportunity to present pertinent material, I must treat defendants' motions as motions for summary judgment. See Federal Rule of Civil Procedure 12(b). *fn1"

 I will grant Andersen's motion for summary judgment. I will also grant the Commodore defendants' motion, except as it concerns their failure to disclose a warrant re-purchase agreement they allegedly entered into with Prudential Insurance in 1987. On that issue, I will deny summary judgment and permit the parties 60 days for discovery.

 I. Facts

 The undisputed facts are as follows. Commodore is an American manufacturer of personal computers and other high technology products. It does most of its business in Europe. Through the 1980's Commodore prospered, but in 1989 the company's sales began to fall off and net income decreased sharply, particularly in Europe. This was partly due to the fact that between December, 1989, and June, 1990, the growth rate of the European computer market dropped five percent.

 In April, 1991, Commodore launched CDTV, a new interactive compact disc television system for the home. CDTV sold slowly. Thereafter, Commodore's fortunes continued to decline.

 Plaintiff charges that the Commodore defendants, with the help of their auditor, Andersen, intentionally misled shareholders about the company's financial health. As a result, plaintiff and the other shareholders who purchased Commodore stock between July 1, 1990, and August 19, 1992, were allegedly damaged as a result of having relied on defendants' misrepresentations. Plaintiff charges that these misrepresentations composed a "continuing course" of fraudulent conduct which was designed to inflate the price of Commodore stock artificially and attract a willing buyer.

 A. The GAAP Violations

 1. The Litigation Settlement

 The first element of defendants' alleged course of fraud involved Commodore's financial reporting practices. It is undisputed that in 1991, Commodore settled a lawsuit with its former president for $ 9.2 million. In its FY91 third-quarter financial statement, Commodore termed this settlement an "extraordinary item." Because generally accepted accounting principles ("GAAP") reserve the term "extraordinary item" for expenses more unusual than litigation, plaintiff charges that the Commodore defendants, with Andersen's acquiescence, knowingly violated GAAP. Moreover, Andersen, by issuing a "clean" or unqualified opinion for Commodore's statement, allegedly violated generally accepted auditing standards ("GAAS") as well. *fn2"

 2. The Undisclosed Obligation to Prudential

 Second, with regard to Commodore's financial statements, Commodore does not dispute that it never disclosed an obligation, allegedly incurred in 1987, to buy back warrants for stock which it had conveyed to Prudential Insurance Company in 1987 in connection with a $ 60 million loan. Commodore maintains it never had such an obligation.

 Moreover, Commodore concedes that in 1989 and 1991, when it did buy back portions of these warrants, it reported these re-purchases in its financial statements as equity transactions. Arthur Andersen does not dispute that it "advised or concurred" with Commodore's decision to do so.


 Plaintiff's second charge in the Commodore defendants' "course" of fraudulent conduct is that these defendants misrepresented their expectations for the interactive video product, CDTV. Plaintiff charges these defendants with promising that the product would do far more than it did. What Commodore actually "promised" about CDTV is fully contained in the defendants' exhibits, however, and because plaintiff has not challenged these submissions as either inaccurate or incomplete, I consider these statements not in dispute.

 In Commodore's first CDTV press release on April 3, 1991, it introduced its "revolutionary consumer electronics component." Commodore stated that, "During the introductory phase, 50 CDTV multimedia titles will be available, with more than a hundred planned." (Appendix, CDTV Press Release). Also in that release, Nolan Bushnell, general manager of Commodore's Interactive Consumer Products Division, stated:

We believe the CDTV player and interactive multimedia will be to the 1990s what VCRs and videos were to the 1980s. The CDTV system will make our education entertaining and our entertainment educational. If we can change the world through information, then this is the product to do it.

 Later that month, Commodore's chairman, Irving Gould, stated: "Commodore's range of products is now being enhanced with the launch of CDTV, an innovative multi-media product which represents a major potential opportunity in the consumer market." (Appendix, FY91 3Q PR and Report.)

 At the end of that year, the company's 1991 annual report announced:

[CDTV] was received with great enthusiasm by industry analysts and retailers. The Electronic Industries Association named it one of the most innovative consumer electronics products of 1991. Popular Science named CDTV ...

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