Greenstone v. Cambex Corporation

United States District Court for the District of Massachusetts · 1991 · Corporations

777 F. Supp. 88 (1991)

Updated August 22, 2026

CorporationsSecurities fraudRule 10b-5Disclosure dutiesduty to disclosematerialityomissionsFed. R. Civ. P. 9(b)

Facts

Plaintiff alleged that Cambex's press releases, SEC filings, and annual and quarterly reports during the class period were misleading because they did not disclose allegedly unlawful business practices involving IBM Credit's computer components. According to the complaint, those practices generated some of Cambex's reported revenues and earnings, thereby materially inflating revenue and understating liabilities. Plaintiff did not contend that the reported revenue figures were numerically inaccurate or false per se, only that the source of some revenue was unlawful and undisclosed. The alleged wrongful practices later became the subject of an IBM and IBM Credit lawsuit, after which Cambex's stock price declined and Cambex settled by agreeing to comply with sublease terms and pay IBM for memory previously sold or leased by Cambex.

Issue

Does a corporation state a Rule 10b-5 claim when its reported revenues are not alleged to be numerically false, but the complaint asserts that the revenues were misleading because the company failed to disclose allegedly illegal business practices that contributed to those revenues? Also, did the complaint plead with sufficient particularity how the challenged statements were false or misleading?

Rule

Under Rule 10b-5, there is no liability for nondisclosure unless the defendant had a duty to disclose the information. A duty to disclose does not arise from mere possession of nonpublic material information; it arises when a statute or regulation requires disclosure, when a corporate insider trades on confidential information, or when the corporation makes incomplete or misleading disclosures. In addition, Rule 9(b) requires a securities fraud plaintiff to specify the time, place, and content of the alleged false representation and to explain what is untrue or misleading about each challenged statement.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Devices, a public company based in Cleveland, reported accurate quarterly revenue and earnings in its SEC filings. A shareholder later sued in federal court alleging that some of those revenues came from an undisclosed practice of violating customers’ service agreements, and that investors would have viewed the practice as important had it been disclosed.

Under the majority rule applied here, which is the strongest basis for dismissing the Rule 10b-5 claim?

Explanation. Rule 10b-5 omission liability requires a duty to disclose. The majority held that even if undisclosed misconduct would be material to investors, materiality alone does not create an affirmative duty to disclose. Where the complaint concedes the reported revenues were actually received and does not identify a disclosure duty, the omission theory fails.