136 F.3d 531 (7th Cir. 1998), 97-2026, Isquith by Isquith v. Caremark Intern., Inc.

Docket Nº:97-2026.
Citation:136 F.3d 531
Party Name:Rebecca ISQUITH, by her custodian, Fred T. ISQUITH, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. CAREMARK INTERNATIONAL, INC., et al., Defendants-Appellees.
Case Date:February 10, 1998
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit

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136 F.3d 531 (7th Cir. 1998)

Rebecca ISQUITH, by her custodian, Fred T. ISQUITH,

individually and on behalf of all others similarly

situated, Plaintiff-Appellant,

v.

CAREMARK INTERNATIONAL, INC., et al., Defendants-Appellees.

No. 97-2026.

United States Court of Appeals, Seventh Circuit

February 10, 1998

Argued Dec. 4, 1997.

Page 532

Terry Rose Saunders, Chicago, IL, Arthur T. Susman, Robert E. Williams, Charles R. Watkins (argued), Susman, Buehler & Watkins, Chicago, IL, for Plaintiff-Appellant.

Dan K. Webb, Howard M. Pearl, Julie A. Bauer, Kevin D. Finger, Winston & Strawn, Chicago, IL, for Caremark International Incorporated.

Tyrone c. Fahner, Vincent J. Connelly, Bennett W. Lasko (argued), Edward H. Williams, Mayer, Brown & Platt, Chicago, IL, for Baxter International Incorporated.

Michael A. Pollard, William J. Linklater, Baker & McKenzie, Chicago, IL, for C.A. Lance Piccolo, James G. Connelly, III, Thomas W. Hodson.

Before POSNER, Chief Judge, and CUMMINGS and MANION, Circuit Judges.

POSNER, Chief Judge.

This is a class action suit under Rule 10b-5 of the SEC and other antifraud provisions of federal securities law, with supplemental claims under state corporation law. The suit, against Baxter International (the pharmaceutical manufacturer) and a spun-off former wholly owned subsidiary of Baxter called Caremark, charges that Baxter submitted a fraudulent statement to the Securities and Exchange Commission in connection with the spinoff. The district judge granted a motion to dismiss, holding that there was no purchase or sale of securities; relinquished jurisdiction over the supplemental claims, pursuant to 28 U.S.C. § 1367(c)(3); and so dismissed the entire case.

The complaint alleges that in 1991, when Caremark was still part of Baxter, the government began investigating Caremark for suspected Medicare and Medicaid fraud. While publicly denying any wrongdoing, Baxter feared the worst. Why is unclear, since a parent ordinarily is not liable for its subsidiary's torts; and if it is, a spinoff will not insulate it. We need not unravel these mysteries; all that is important is that, according to the complaint (the only source of factual allegations in the case), Baxter decided to try to insulate itself from any potential liability by spinning off Caremark, that is, by transferring the ownership of the subsidiary from Baxter to Baxter's shareholders, each to receive shares of Caremark proportional to their shares in Baxter, with the result that Caremark would no longer be a subsidiary of Baxter but an independent company. In order to be assured of not having to register the new security created to effectuate the spinoff--for the shares of Caremark, as of

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Baxter, were to be publicly traded--Baxter wanted a "no action" letter from the SEC. The Commission issued the letter upon Baxter's agreeing to file an "information statement," see 17 C.F.R. § 240.14c-2, that would among other things disclose the purpose of the spinoff. The statement said that the purpose of the spinoff was to avoid a looming competitive conflict between Caremark and other lines of Baxter's business. That, according to the complaint, was a lie; the purpose of the spinoff was to minimize the liability of Baxter's shareholders for Caremark's fraud. But the SEC issued the requested "no action" letter; the spinoff--which did not require the consent of the shareholders--went through; and Baxter shareholders found themselves holding Baxter plus Caremark shares (one of the latter for every four of the former) rather than just Baxter shares.

The immediate effect of the transaction was to reduce the market value of Baxter stock because the spinoff had diminished Baxter's assets. But the market value of Baxter and Caremark stock--the only thing investors would care about--exceeded the value of Baxter stock before the spinoff. Eventually, however, the investing public got wind of Caremark's troubles, and the market value of its shares headed south. In 1995 Caremark pleaded guilty to criminal charges of fraud based on conduct going back to 1986 and paid the government $160 million.

The plaintiff class consists of the owners of Baxter shares at the time of the spinoff. The claim is that the spinoff constituted a forced "sale" of Caremark shares to them and that the sale was effected by fraud because, had the true purpose of the spinoff been revealed, owners of Baxter shares could have gotten the courts to block it; Baxter would then have been kept intact and Baxter stock would, they claim, today be worth more than the current combined value of Baxter and Caremark stock. It is difficult to see why, since Baxter's Caremark subsidiary, as it would have remained, would still have had to pony up the $160 million to the government. But the plaintiff argues, and in the posture of the case we must, though skeptical, accept, that the spinoff destroyed valuable synergies between Baxter and its Caremark subsidiary. If, however, whether on this or some other basis, the plaintiff could have gotten the spinoff enjoined, this implies that she can still sue for damages--as she has done, in the supplemental state law claim now pending in state court. So it is very difficult to see how Baxter's coyness about the purpose of the suit hurt her or the other members of the class. She says she may have a statute of limitations problem with her state law claim. But if that problem is due to Baxter's fraud in concealing Caremark's troubles, she can set up that fraud as a defense to the statute of limitations--the defense of fraudulent concealment. See, e.g., Cada v. Baxter Healthcare Corp., 920 F.2d 446, 451 (7th Cir.1990).

The plaintiff hints that the SEC, too, would have blocked, or at least delayed, the spinoff had it learned of Caremark's illegalities. Yet she points to nothing in the laws administered by the SEC that would have authorized the Commission to impede the transaction had Baxter confessed that its motivation was to lighten its liabilities. That is not an improper motivation, and anyway the Commission's concern is with the completeness and accuracy of information provided to investors rather than with what the information reveals about the soundness or even morality of the investment. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 477-78, 97 S.Ct. 1292, 1302-04, 51 L.Ed.2d 480 (1977); 1 Louis Loss & Joel Seligman, Securities Regulation 391 (3d ed.1989). So if Baxter had come clean, the SEC would still have had no grounds for refusing to issue a no-action letter. And, at worst, Baxter would then have registered the Caremark stock.

There is a lot more that is wrong with this suit. Suppose Baxter had been candid with the SEC--and hence the public, because both the information statement and the no-action letter were public documents, and the statement, at least, was mailed to the shareholders--about Caremark's liability. Then the market value of Baxter's shares would have fallen immediately, discounting any anticipated losses resulting from that liability, and the plaintiff class would have taken its hit then--before they could do anything about it--rather than later. Although investors who bought stock in Baxter or Caremark

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after the spinoff and in reliance on the stated purpose might have been hurt by Baxter's lack of candor, they are not members of the class. They have their own suit. The class in the present suit is limited to owners of Baxter shares at the time of the spinoff. If we assume with the plaintiff that Baxter would have been liable for its subsidiary's fraud, the spinoff shifted that liability to Caremark. Without the spinoff, it would have remained with Baxter. Since the members of the class owned both companies, the spinoff merely shifted liability from one pocket of their trousers to another. As for the loss of synergy, that has nothing to do with fraud. It is not a loss resulting from a misrepresentation or a misleading omission; it is a compounding of the poor...

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