Plaintiffs, purchasers of Gaming Lottery Corporation ("GLC") stock between February 1, 1995 and May 24, 1996 (the "class period"), allege, on behalf of a putative class, that GLC,¹ and two of its officers, Jack Banks ("Banks") and Larry Weltman ("Weltman"), violated Sections 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, by making materially false and misleading statements and omissions concerning GLC's acquisition of Specialty Manufacturing Inc. ("SM"), which artificially inflated the price of GLC common stock. Banks and Weltman are also accused of violating Section 20(a) of the Exchange Act as controlling persons of GLC.

Defendants GLC, Banks and Weltman move to dismiss the Consolidated Amended Class Action Complaint (the "Complaint") for failure to state a claim upon which relief can be granted, pursuant to Federal Rule of Civil Procedure ("Fed. R. Civ. P.") 12(b)(6), and for failure to plead fraud with particularity, pursuant to 15 U.S.C. § 78u-4(b) and Fed. R. Civ. P. 9(b). In the alternative Defendants move to strike Paragraph 59 of the Complaint as immaterial, impertinent, and scandalous, pursuant to Fed. R. Civ. P. 12(f). For the following reasons defendants' 12(b)(6) motion is denied and defendants' 12(f) motion is granted.

The following are allegations of fact contained in the Complaint. In 1995 and 1996, GLC was an Ontario corporation that manufactured products for lottery and gaming markets, operating through subsidiaries in Ontario and the United States. During the class period GLC purported to be a diversified gaming company that manufactured and supplied products to the lottery, parimutuel, bingo, and charitable gaming markets (Compl. ¶ 35). The market for GLC stock was an efficient market (id. ¶¶ 32-33), and its stock traded on the Toronto Stock Exchange and on the NASDAQ National Market (id. ¶¶ 23, 32). Defendant Banks was the President, Chief Executive Officer ("CEO"), Chairman of the Board of Directors, and a controlling shareholder of GLC (id. ¶ 24). Defendant Weltman was the Executive Vice President, Chief Financial Officer ("CFO"), and a Director of GLC (id. ¶ 25).

The Complaint alleges that GLC: (1) acquired SM without obtaining the required regulatory approval from the Washington State Gambling Commission (the "Commission") (id. ¶ 36); (2) falsely represented to the investing public that this acquisition was completed when it was not (id.); (3) consolidated SM's financial results with those of GLC beginning with its fiscal 1996 first quarter results ended on April 30, 1995 (id. ¶¶ 36-37); and (4) because GLC deceived the Commission by misrepresenting that it had not acquired and was not operating SM, misled the investing public by making announcements of proposed acquisitions and material new gaming contracts in other states which were almost certain to fail once those state regulators learned that GLC had deceived the Commission (id. ¶ 40).

In June 1994 GLC, then called Laser Friendly, engaged primarily in the business of developing and marketing desk-top publishing software, adopted a strategic plan to expand into gambling-related businesses through a program of acquisitions (id. ¶¶ 35, 44). On September 23, 1994, GLC announced the purchase of Printing Associates Inc., a New York-based supplier of lottery selection tickets and terminal rolls (id.). Thereafter, on November 2, 1994, GLC announced that it had entered into a letter of intent to acquire SM, a division of Ace Novelty Co., Inc. ("Ace"), a supplier of charitable and bingo game tickets or "pull tabs" (id. ¶ 45), and on November 28, 1994 GLC announced that it had entered into a letter of intent to acquire Infinity Group "Infinity"), a supplier of slot machines, video lottery terminals, and bingo products id. ¶ 46). At the time, defendant Banks commented that with the acquisition of Infinity and SM, shareholders' equity would be approximately $45 million as compared to $3 million three years earlier (id.). On December 6, 1994, GLC and Banks announced that sales and earnings per share, for the nine months ending October 31, 1994, had increased by 43% over the same period in 1993 (id. ¶ 47).

On December 13, 1994, GLC announced that it had completed the sale of one million units (each consisting of a share of common stock and a warrant), as part of a previously announced international private placement involving a total of 1,875,000 units, and had received proceeds in excess of $3.78 million to be used to fund GLC's ongoing acquisition program (id. ¶ 48).

At the beginning of the class period, on February 1, 1995, GLC announced that it had completed the acquisition of SM subject to receipt of regulatory approval for the requisite gaming license (id. ¶ 62).² Banks commented, "we are projecting revenues of $15,000,000 for Specialty Manufacturing for the fiscal year ending January 31, 1996, adding a significant contribution to [the company's] projected revenues of $100,000,000 [for that year]. We are pleased to have consummated this acquisition by January 31, 1995." (Id.)

In February, 1995, GLC applied for a license to manufacture gambling devices in the State of Washington (id. ¶ 54). The Commission delayed issuing a license because GLC would not reveal who owned the Swiss bank accounts used to supply cash as part of the international offering for the proposed purchase of SM (id.). In mid-1995 the Commission learned that GLC had acquired SM, despite the lack of regulatory approval, and was using Ace as a "front" to operate SM, using Ace's previously obtained state license (id. ¶¶ 56, 63). The Commission was repeatedly told by GLC that its acquisition of SM was not completed, but the Commission determined that this was a lie (id. ¶ 58). In or about April, 1996, the Commission, having concluded that GLC was operating SM without a license, filed a complaint for injunctive relief against GLC (id. ¶¶ 41, 49, 60).³ Ms. Mass, a Special Agent of the Commission, in an affidavit sworn to on April 15, 1996, stated that the parties to the sale had lied to the Commission in denying that the acquisition had been completed, and that an internal document obtained by the Commission, "Operational Notes for Ace Novelty - Laser Friendly Transition," instructed that, if regulators asked, they should be told that there was no change in the status of the companies, which proved their intent to defraud the Commission (id. ¶¶ 36, 53, 58, 63, 102; Pl. Mem. Ex. A). The Commission's action was settled on December 24, 1996 after GLC agreed to pay the Commission up to $750,000, and not to conduct business requiring licensure by the Commission for ten years (id. ¶ 61).

During 1995 defendants made a number of other optimistic projections regarding pending and future acquisitions, and revenue growth. During this period the price of GLC stock increased significantly. On February 13, 1995, GLC announced a plan to raise $10-20 million, through the sale of special warrants to buy a share of common stock and one half of a non-transferable purchase warrant to buy a common share, to raise $10 to $20 million to further fund its acquisition program (id. ¶ 64). The annual report for the fiscal year ending January 31, 1995, reported consolidated financials with SM and other acquisitions showing revenue had increased by 92%, profits by 118%, assets by 342%, and shareholder's equity by 667% (id. ¶ 65). On May 2, 1995 GLC also announced that it had entered into a number of supply contracts, including a contract to supply, through its subsidiary SM, gaming materials to a major Canadian gaming services corporation, YIN 88 (id. ¶ 66). On June 8, 1995 GLC, Banks and Weltman issued a press release reporting a revenue increase of almost 400%, for the first fiscal quarter of 1996, ending April 30, 1995, and an increase in net earnings of approximately 300%, as compared to the comparable period a year earlier (id. ¶ 69). This financial report consolidated the financial statements of SM with those of GLC, despite the fact that the acquisition was subject to regulatory approval and the Commission still had not granted GLC a license to operate SM (id. ¶ 69).

On June 27, 1995 GLC announced that it would be supplying lottery tickets and receipts for the New York State Lottery (id. ¶ 71). On July 7, 1995 GLC announced plans to acquire another major gaming company projected to close in August 1995 and expected to "significantly increase" earnings per share and boost shareholder equity by $35-65 million (id. ¶ 74). On July 11, 1995, announced that it had raised $22 million from an international private placement of 3.7 million shares (id. ¶ 75). On July 27, 1995, GLC announced that it had completed the acquisition of Trade Products, Inc. ("TPI") a gaming supply company located in Washington State (id. ¶ 80). GLC announced that this acquisition would double its revenue base in the next fiscal year (id.). On August 14, 1995, GLC reported plans to acquire two more gaming businesses (id. ¶ 83). On September 20, 1995, GLC, again including the financial results of SM, reported a 463% increase in revenues and a 263% increase in net income, for the six months ended July 31, 1995, compared with the corresponding period a year earlier (id. ¶ 87). Weltman stated that 80% of this increase was attributable to the acquisitions of SM and Printing Associates (id. ¶ 88). On December 21, 1995, GLC announced the completion of another private placement which raised $12 million for the acquisition of Stuart Entertainment Inc. (id. ¶ 91). On December 29, 1995, GLC again issued a consolidated financial statement for the nine months ended October 31, 1995, showing 310% growth in revenue and earnings compared to the same period in the prior year (id. ¶ 92). In a letter dated the same day, signed by Banks and Weltman, GLC informed shareholders that TPI revenues had not been included in the financial report because GLC was still in the process of securing necessary regulatory approvals, a process anticipated to be complete by early 1996 (id. ¶ 94).

On January 11, 1996, GLC announced that its negotiations with Stuart Entertainment had been put on hold pending GLC's receipt of necessary regulatory approvals from the Commission (id. ¶ 95). On January 30, 1996, GLC announced that its previously reported acquisition of TPI had been terminated, at TPI's initiative, because regulatory approvals had not been obtained in a timely manner (id. ¶ 96). At the same time it was also announced that the acquisition of Stuart Entertainment had been canceled (id.). Following these announcements the price of GLC stock fell sharply (Compl. ¶ 96). On March 25, 1996, GLC reported financial results for the fiscal year ending January 31, 1996. The report, signed by Banks and Weltman, which again consolidated the results of SM, reported an increase in revenue of 186% and an increase in net income of 134% as compared to the previous fiscal year (id. ¶ 99).

On April 2, 1996, GLC announced that it planned to divest itself of all of its gaming-related subsidiaries (id. 101). Share prices, which had reached a high of $9.00 per share in the Summer of 1995, fell to $2.50 by May, 1996 (id. ¶¶ 43, 107). On April 26, 1996, it was publicly reported that Washington State gambling regulators said that GLC had secretly and illegally owned SM and operated it through Ace (id. ¶ 102). It was further revealed that GLC knew, in February 1995 when it had announced that the acquisition of SM, that it was not permitted to operate SM without a license, and that it knew since at least May 1995 that the Commission would not issue a license due to GLC's refusal to provide the identities of its investors (id.). Plaintiffs allege that, despite this knowledge, GLC and Ace entered into a secret and illegal deal whereby Ace was used as a "front" to operate SM (id. ¶ 103). On May 13, 1996, GLC announced that it intended to relocate to Bermuda (id. ¶ 104). On May 23, 1996, GLC announced quarterly results for the period ending April 30, 1996, which showed a decline in revenue to $533,404 compared to $12,028,710 for the comparable period one year earlier, and a loss in net income of $1,218,701 (id. ¶ 106). Revenue from SM and other gaming subsidiaries were not included in that report (id.)

On June 28, 1996, GLC restated its results for the prior year's fiscal quarter ending April 30, 1995, to account for the discontinued operations. As restated, revenue from continued operations was only $49,000 rather than the $12,000,000 originally reported, and a loss of $300,000 was reported as compared to the original reports showing of $2,300,000 in income (id. ¶ 108). On June 29, 1996, Ontario regulators blocked GLC's move to Bermuda (id.).

A motion to dismiss for failure to state a claim shall not be granted unless it appears beyond doubt that a plaintiff can prove no set of facts in support of its claim that would entitle it to relief. See Conley v. Gibson, 355 U.S. 41, 45-6, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957); Branham v. Meachum, 77 F.3d 626, 628 (2d Cir. 1996). When passing on a motion to dismiss, the allegations in the complaint are accepted as true and construed in favor of the plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974); Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972).

Under the Private Securities Litigation Reform Act of 1995 (the "Reform Act") a complaint alleging securities fraud must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b). Furthermore, under the Federal Rules of Civil Procedure, "Rule 9(b) applies with equal force to all claims of fraud." Fed.R.Civ.P. 9(b); Kolbeck v. LIT America, Inc., 923 F. Supp. 557, 568 (S.D.N.Y. 1996)("Rule 9(b) mandates that the complaint inform each defendant of his alleged role in the deception"); Strougo v. Bear Stearns & Co., Inc., 1996 U.S. Dist. LEXIS 16422, 1996 WL 67730, *1 (S.D.N.Y. 1996). Allegations of fraud may be based on only information and belief as to matters that are peculiarly within the knowledge of the defendant. See Stern v. Leucadia Nat'l Corp., 844 F.2d 997, 1003 (2d Cir. 1988). In addition, such pleadings must "state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).

To maintain a securities fraud claim under § 10(b) plaintiffs must allege that, in connection with the sale of securities, the defendants, acting with scienter, made a false material representation or omitted to disclose material information, and that plaintiffs relied on defendants' actions to their detriment. San Leandro Emerg. Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 805 (2d Cir. 1996.) Under the Reform Act a plaintiff must "plead specific facts that create a strong inference of knowing misrepresentation on the part of the defendants." Norwood Venture Corp. v. Converse Inc., 959 F. Supp. 205, 1997 WL 165691 (S.D.N.Y. 1997).

Here plaintiffs allege that, throughout the class period, defendants made materially false and misleading statements concerning GLC's acquisition of SM. Specifically, plaintiffs allege that GLC and the other defendants consolidated SM's financial results with those of GLC, and falsely represented to the investing public that the acquisition of SM was complete when it was not. (Compl. ¶ 36). Plaintiffs also allege that GLC's reported financial results were materially false and misleading throughout the class period, and in violation of Generally Accepted Accounting Principles ("GAAP"), including Financial Accounting Standards Board Statement of Financial Accounting Standards ("FAS") No. 94 (id. ¶ 37). FAS No. 94 states that, while in general financial results of majority owned subsidiaries should be consolidated, that consolidation should not occur if ownership is likely to be temporary, or if the subsidiary operates under governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary (id. ¶ 38).

Plaintiffs also allege that: (1) defendants announcements of acquisitions, and contracts which it claimed to have secured, were materially misleading because it was almost certain that GLC would be unable to proceed with those acquisitions, or to fulfill the contracts, once Washington State regulators learned it was operating SM without a license, and so long as it refused to provide the identities of its investors (id. ¶¶ 40, 63, 67, 81, 105); (2) defendants made reckless or knowing material misrepresentations and omissions to the investing public and financial analysts who published optimistic forecasts about GLC's future performance on that basis (id. ¶ 73, 79, 86), (3) these knowing or reckless misrepresentations and omissions were part of a scheme designed to protect and enhance the executive positions of the individual defendants, to enlarge the proceeds from GLC's private offerings, and to enhance the value of individual shares owned by the individual defendants (id. ¶ 110); and (4) defendants' misrepresentations and omissions caused the price of GLC stock to be artificially inflated, and that, had plaintiffs known the truth about the company's situation they would not have purchased this stock at these inflated prices (id. ¶ 118).

Defendants claim that: (1) the Complaint's allegations do not demonstrate that, in fact, GLC did acquire SM illegally; (2) a deviation from GAAP principles, by itself, does not denote securities fraud, even if it does result in a misstatement of earnings, Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 362 & n. 5 (1st Cir. 1994); and (3) just because the Commission took the position in April 1996 that GLC had improperly and "secretly" completed the SM acquisition without Commission approval does not mean that GLC's public reports of income received were false or misleading when made (Def. Mem. at 13-15). They also assert that the Complaint does not allege any facts from which it could be concluded that GLC would not obtain a license from the Commission, and that accordingly scienter is not adequately pled (id. at 17-19).

Defendants are correct insofar as plaintiffs have failed to plead facts from which it can be inferred that defendants knew, in February 1995, that the Commission would not grant GLC a license to operate SM due to the nondisclosure of the ownership of the Swiss bank accounts involved in the December 1994 private offering of one million units, used to fund the acquisition of SM (id. ¶ 54). Washington regulations in effect at the time of the December 1994 private placement only required disclosure of the identity of individuals owning 10% or more of the company's outstanding shares, which totaled over 18 million shares. W.A.C. § 230-02-300 (1995) (Def. Mem. Ex. 1).⁴ None of the investors participating in the December 1994 private placement bought 10% or more of the outstanding shares, a point that plaintiffs do not dispute. Defendants claim to have been taken by surprise when the Commission asked them to supply information about investors in accordance with the revised regulations (Tr. of Argument on June 3, 1997, at 40). In addition, while in her affidavit, Special Agent Mass of the Commission, states that the application was not approved because ownership could not be established, no dates are provided as to when ownership information was requested (Pl. Mem. Ex. A). The Complaint contains no allegations that the individual defendants disposed of their stock during this period. The failure to obtain the license, and of the overall acquisition program, did not directly benefit the defendants and, accordingly, the allegations pertaining to early 1995 are not sufficient to raise a strong inference of knowing misrepresentations by defendants.

In the Spring of 1995 defendants may have been overly optimistic in their belief that they would obtain a license, that their acquisition program would proceed, and that they would be able to fulfill their contractual obligations, but "misguided optimism is not a cause of action, and does not support an inference of fraud." Acito at 53; Shields at 1129. Unreasonable growth projections are only actionable if they can be inferred to be known to be false or made recklessly. In addition, corporate defendants cannot be held liable for overly optimistic statements in analysts' articles that are not attributed to specific corporate agents. In re Time Warner Inc. Sec. Litig., 9 F.3d 259, 264-65 (2d Cir. 1993).⁵

While the pleadings do not raise an inference that defendants knew, in early 1995, that they would not be granted a license, sufficient facts have been pled to raise a strong inference of later fraud by the defendants.

Washington law provides that "no person shall manufacture ... sell, distribute, furnish or supply ... any gambling device, including ... pull tabs ... without first obtaining a license to do so from the commission ..." Wash. Rev. Code § 9.46.310 (1998). GLC applied for a license to manufacture gambling devices, including pull tabs, through SM, in February 1995 (Compl. ¶ 54). As a company aware of the need for a gaming license GLC should have been aware of the normal length of time for issuance of a license and the reasons for non-issuance. The Commission's announcement in April 26, 1996, revealed that GLC knew, since at least May 1995, that the Commission would not issue a license due to GLC's refusal to provide the identities of its investors (Compl. ¶ 102). Nevertheless, for over a year after the announcement on February 1, 1995, of the acquisition of SM, subject to receipt of regulatory approval for the requisite gaming license, the defendants proceeded to operate SM to supply gaming devices using Ace Novelty as a front, claiming to the Commission that the sale of SM to GLC had not been completed (Compl. ¶ 58). During this period they also made announcements of increases in revenues and profits, and in stockholder equity, which incorporated SM's financials, and made announcements of other acquisitions of gaming companies and contracts with gaming commissions. The announcements of increases in earnings and stockholder equity are alleged to have been in violation of FAS No. 94 (Compl. ¶¶ 38, 70, 89, 93).⁶ But, in any event, those announcements would be materially misleading to investors since they did not contain notice that the SM acquisition was still subject to the receipt of regulatory approval for a gaming license by the State of Washington.⁷

From these facts a strong inference is raised that GLC, Banks as CEO and controlling stockholder, and Weltman as CFO, had an interest in not disclosing the lack of regulatory approval for the operation of SM, so that the financial results of GLC, consolidated with SM, as reported to the investing public: (1) would serve to increase the price of GLC common stock, (2) provide a basis for raising additional funds for additional acquisitions of gaming companies through an overseas private placement by GLC⁸, and (3) allow for public announcements which would further raise the value of the GLC stock held by them.

Nevertheless, defendants continued to report consolidated earnings with SM at a time when it should have been apparent that the granting of regulatory approval for a gaming license was increasingly in doubt, and while it was engaging in conduct (operating SM using Ace as a front) that would increase that doubt. The factual allegations raise the inference that the defendants knew that there was more than a substantial likelihood that the Commission would not issue the license, even while investors were led to believe that the SM acquisition had been a complete success (id. ¶ 36). Weltman as CFO, and Banks as the CEO and a controlling shareholder of GLC, both had responsibility for overseeing the preparation and dissemination of financial reports and access to information about the status of the acquisition and the status of the regulatory approval required for GLC to operate SM. As operators of a company involved in the gaming industry they must have also been aware that the Commission would insist on knowing the identity of the investors providing the funds to GLC for the acquisition of SM and the other gaming companies.⁹ These facts provide strong circumstantial evidence that defendants knowingly and recklessly made many material misrepresentations and/or omissions about the financial results and operations of GLC in the second half of 1995 and in 1996, as alleged in the Complaint.¹⁰ Thus, the pleading requirements of the Reform Act have been met and the motion to dismiss is denied as to Count 1.

To establish controlling person liability under Section 20(a) of the Exchange Act, a complaint must allege facts from which it can be inferred that the defendant had actual power or influence over the controlled person, and that the defendant induced or participated in the alleged illegal activity. Thomas L. Hazen, The Law of Securities Regulation § 13.15 (1995). Control is defined as the "possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person whether through the ownership of voting securities, by contract, or otherwise." 17 C.F.R. 230.405. Knowledge of the illegal activity must be imputable to the defendant.¹¹

Banks, was CEO and Chairman of the Board of Directors of GLC, and, with his wife, the controlling shareholder of GLC during the class period (Compl. ¶ 24). He is thus a controlling person of GLC. Weltman was CFO, Executive Vice President and a Director of GLC (id. ¶ 25). According to the Complaint he controlled the content of financial reports, signed these reports, and made numerous public statements about the SM and other acquisitions. The Complaint has therefore alleged sufficient facts to allow an inference that Weltman was also a controlling person of GLC. Since the allegations in the Complaint are sufficient to raise a strong inference of fraud by Banks and Weltman, the motion to dismiss is also denied as to Count 2.

Fed. R. Civ. P. 12(f) allows the court, upon timely motion, to strike from a pleading any "immaterial, impertinent, or scandalous matter." Generally motions to strike "are not favored and will not be granted unless it is clear that the allegations in question can have no possible bearing on the subject matter." von Bulow by Auersperg v. von Bulow, 657 F. Supp. 1134, 1146 (S.D.N.Y. 1987). However, courts may, at their discretion, grant such motions when the allegations at issue are immaterial and "serve no purpose except to inflame the reader." Morse v. Weingarten, 777 F. Supp. 312, 319 (S.D.N.Y. 1991).

Defendants ask this court to strike Paragraph 59 of the Complaint which alleges that:

The Gambling Commission thereafter sought records, including inventory lists to determine if Gaming Lottery was indeed shipping product out of Specialty Manufacturing's warehouse. However, by the time the Gambling Commission received a search warrant, a three-alarm fire destroyed the business records. Fire officials reportedly suspected arson.

Defendants complain that this paragraph implies that GLC or Ace feloniously caused relevant business records to be destroyed, an implication which defendants assert is unfounded (Def. Mem. at 23). Defendants argue that there is no indication that any relevant files were destroyed or that defendants had anything to do with the fire (Def. Mem. at 24). They cite a newspaper article in which Jonathan McCoy, Assistant Washington State Attorney General, is quoted as saying that, as far as he knew, the state had the records it needed, adding, "we don't know of any records relating to the transaction that were in the Seattle facility" (Pl. Mem. Ex. 8).

Plaintiffs claim support for their allegations in the Mass Affidavit (Pl. Mem. Ex. A) and in an Associated Press ("AP") report about the fire (id. Ex. C). However, while the Mass Affidavit states that the Commission was denied access to a warehouse, there is no indication that it is referring to the warehouse involved in the fire.¹² The AP report states that the building "once housed Ace Co..." and reports that investigators "would not say... whether Ace records were in the storage area," although Ace President Mayers believed that there were some old records in the building (id.). AP also reported that fire department records indicated that a fire in the same building in 1974, after which Ace moved to a new location, was believed to have been set by a rival manufacturer (id.). Thus, the explicit allegations contained in ¶ 59 have not been shown to be relevant to the claims contained in the Complaint, and the implicit allegation, that defendants were somehow responsible for setting the fire, is not supported by the documents plaintiffs cite.

Given the fact that there is no evidence to support the allegations contained in ¶ 59, and evidence to the contrary exists, the Court finds that ¶ 59 is scandalous and orders it stricken from the Complaint.

For the foregoing reasons defendants motion to dismiss is denied in its entirety. Defendants motion to strike paragraph 59 of the Complaint is granted.

Counsel are to attend a conference on June 8, 1998 at 9:00 a.m. in Courtroom 24A to set a trial schedule.

IT IS SO ORDERED.

¹ Gaming Lottery was known as Laser Friendly until July 1995. All references, herein, will be to Gaming Lottery regardless of the time period involved.

² Washington State law provides that a license must be obtained from the Washington State Gambling Commission ("Commission") before manufacturing, selling, or supplying gambling equipment in the state. WASH. REV. CODE § 9.46.310 (1998); WASH. ADMIN. CODE § 230-04-110 (1997).

³ Defendants argue that, under Washington law, it was reasonable for them to believe that their operating agreement with Ace was a permissible arrangement. (Def. Reply Mem. At 6.)

⁴ Beginning in November 1995 these regulations were changed to require disclosure of owners of 5% or more of a company's stock.

⁵ Even if defendants did speak with outside analysts and/or reporters, there is no evidence regarding what was said or whether the facts as reported by these outsiders accurately reflected what they were told by Defendants. Raab v. General Physics Corp., 4 F.3d 286, 288 (4th Cir. 1993)(without control by defendants their statements to analysts "could be taken out of context, incorrectly quoted, or stripped of important qualifiers.") Defendant can only be held liable for their own misstatements and not those of third parties. Reliance on representations made by others cannot itself form the basis for liability. Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1225 (10th Cir. 1996), citing Central Bank of Denver v. First Interstate Bank, 511 U.S. 164, 128 L. Ed. 2d 119, 114 S. Ct. 1439 (1994).

⁶ Since GLC was not revealing the identities of its investors it should have realized that its operation of SM would not be approved by the Commission and that the SM consolidation was only likely to be temporary.

⁷ As plaintiff points out, the footnote in the Annual Report for the year ended January 31, 1995, issued on June 1995 report did not advise investors that regulatory approval of the requisite gaming license to operate SM had not been obtained. It stated: "This acquisition was made subject to the corporation obtaining all requisite gaming licenses..." (Def. Mem. Ex. 5 at 22 n. 16(b))(emphasis added). With respect to the acquisition of TPI, GLC was more explicit in a letter to shareholders dated December 29, 1995, which stated that GLC was "still in the process of securing all necessary regulatory approvals." (Compl. ¶ 94; Pl. Mem. at 4 n.2)(emphasis added). The letter did not make a similar statement about GLC's license application to operate SM.

⁸ The identity of the investors in the July 1995 private placement of well over 10% of its outstanding shares was evidently also not revealed to the Commission (Compl. ¶ 75).

⁹ The requirement that major ownership interests be disclosed as a condition for licensure, WASH. ADMIN. Code § 230-04-110 (1997), designed to prevent criminal infiltration of gambling-related businesses, would be defeated if the statute allowed non-licensed owners to hide behind non-owning but licensed front corporations.

¹⁰ The materiality of the alleged misrepresentations and omissions is borne out by the fact that once GLC agreed to stop operating SM, and announced plans to divest itself of SM the price of GLC stock plummeted. Reported revenues for the quarter ending April 30, 1996 were $533,404, a decrease from $12,028,710 reported for the comparable period a year earlier (Compl. ¶ 106).

¹¹ There has been some division within the Circuit as to whether plaintiffs must allege scienter under Section 20(a) of the Exchange Act, or only control. See Duncan v. Pencer, 1996 U.S. Dist. LEXIS 401, 1996 WL 19043 (S.D.N.Y., January 18, 1996) at 15-18 (reviewing Second Circuit case law and concluding that only control need be pleaded to establish a prima facie case under Section 20); Food and Allied Serv. Trades Dep't, AFL-CIO v. Millfeld Trading Co., Inc., 841 F. Supp. 1386, 1390 (S.D.N.Y. 1994)(relying on Marbury Management, Inc. v. Kohn, 629 F.2d 705 (2d Cir. 1980), to find that Section 20(a) only requires plaintiffs to allege control); Neubauer v. Eva-Health USA, Inc., 158 F.R.D. 281, 284 (S.D.N.Y. 1994). But see Robbins v. Moore Medical Corp., 788 F. Supp. 179, 188 (S.D.N.Y. 1992)(holding that scienter must be pled to establish a claim under § 20). Those courts which have held that scienter need not be pleaded also hold that the heightened pleading requirements of Rule 9(b) do not apply. Duncan v. Pencer, 1996 WL 19043 at *18; Neubauer v. Eva-Health USA, Inc., 158 F.R.D. at 284-85.

¹² The Commission wanted to inspect inventory to make sure that SM did not ship gambling supplies in its possession (Pl. Mem. Ex. A), but the evidence suggests that Ace had previously moved its operations out of the building where the fire occurred and had nothing stored there other than old records (id. Ex. C).