Opinion
Civil Action No. 3:98-CV-1216-M
January 22, 2001
MEMORANDUM OPINION AND ORDER
Before the Court is Defendants' Motion to Dismiss Amended Class Action Complaint and Defendant Southwest Securities' Motion to Dismiss, both filed on August 7, 2000 in the above-entitled case, all briefs in support of those motions, and all responses and replies thereto. Having considered the applicable law and arguments of counsel at a hearing held on November 17, 2000, and for the reasons set out below, the Court is of the opinion that the motions should be GRANTED.
ViaGrafix Corporation ("ViaGrafix") develops and markets training and educational course products for consumers who use popular computer software produced by a variety of software companies. ViaGrafix also develops its own graphics software products. On March 4, 1998, ViaGrafix commenced its IPO, for which a registration statement and prospectus were prepared. Prior to the opening of trading on May 12, 1998, one industry analyst reduced his forecasted estimates for ViaGrafix. Although sales had increased, the analyst noted that the sales of ViaGrafix were below his prior estimates, which had anticipated greater increases. As one explanation for why ViaGrafix had not reached his forecast, the analyst cited soft demand in April and May, "driven in part by uncertainty surrounding the release schedule for Windows 98." The company's stock price subsequently dropped. This lawsuit followed.
The other named Defendants are: (1) Michael Webster, the former President and Chairman of the Board at ViaGrafix; (2) Robert Webster, the former Executive Vice President and Director of ViaGrafix; (3) Robert Moore, the former Treasurer and CFO of ViaGrafix; (4) Southwest Securities, the underwriter for the Initial Public Offering ("IPO"); and (5) Learn2.com, Inc., which was acquired by ViaGrafix on August 23, 1999. These Defendants may be referred to in this memorandum opinion, either separately, or together with ViaGrafix, as the "Defendants."
Plaintiff is an institutional investor, appointed by this Court on May 22, 2000 as lead plaintiff of the putative class. It sues under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act"), alleging that Defendants made false and misleading statements and omissions regarding Windows 98 that were material to a reasonable investor. Plaintiff alleges that ViaGrafix depended on Microsoft in two significant ways: (1) ViaGrafix offered training products for several Microsoft operating systems and applications and (2) the software products offered by ViaGrafix were primarily made to operate under Microsoft operating systems. Plaintiff asserts in ¶¶ 27-36 of the Complaint (and particularly in ¶¶ 33-35) that Defendants failed to include any reference in the prospectus to the prospective release of Windows 98, and that this failure was materially misleading to prospective shareholders regarding the dependence of ViaGrafix on Microsoft, and particularly Windows 98. Plaintiff asserts that the prospectus gave no warning to investors that the value of ViaGrafix common stock was inextricably tied to the release and near-term success of Windows 98 and, that at the time of the IPO, undisclosed problems with Windows 98 and its release had already impacted ViaGrafix.
The motions to dismiss focus on whether the nondisclosure of the linkage between Microsoft's Windows 98 and ViaGrafix's future success should properly have been a subject of analysis in the prospectus. The prospectus contained no projections.
There is in the prospectus a picture of a box of ViaGrafix training materials for Windows 98. Defendants claim that picture confirms a relationship between ViaGrafix and that product, while Plaintiff claims that relationship is not disclosed. The Court finds the picture inadequate as a substitute for verbal information about the relationship. In other words, if the linkage must be described, the picture does not do so.
The Plaintiff's allegations under the Securities Act are untenable for several reasons. First, the prospectus did not contain false statements of fact. As of March 1998, Windows 98 was not yet in the market. The fact that it was in development was widely known. Further, the fact that state Attorneys General had in February 1998 commenced an investigation of Microsoft was widely noted in the media, but it was unknown how and when that investigation would affect the release of Windows 98. The Defendants were not required to speculate about that.
Second, the alleged non-disclosure was not material, in light of what was known or disclosed. See In re Stack Elecs. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996), cert denied, 520 U.S. 1103 (1997). Gart v. Electroscope, Inc., 24 F. Supp.2d 969 (D. Minn. 1998), and Rhodes v. Omega Research, Inc., 38 F. Supp.2d 1353 (S.D. Fla. 1999). The prospectus noted the risk that rapid changes in technology, product delays, customer preference changes, and reliance on and resistance to Microsoft technology could all impact ViaGrafix's future success.
This Court finds that disclosure of the alleged omissions was not required, as they were not material. Although Plaintiff argued that the ViaGrafix training materials for Windows 98 had been prepared and were "ready to go," it is clear from the prospectus that if Windows 98 were unsuccessful, those training materials would be similarly unsuccessful. Defendants were not required to disclose more than they did about this subject.
Plaintiffs legal theory is untenable, and thus the Court finds that no legitimate purpose is to be served by permitting Plaintiff to amend. The Defendants' Motion to Dismiss under Rule 12(b)(6) is therefore GRANTED, and Plaintiff's claims are dismissed with prejudice, with costs taxed against Plaintiff.