Heliotrope Gen. v. Ford Motor Co.

• Decision Date: 04 August 1999
• Docket Number: No. 97-56757,97-56757
• Citation: 189 F.3d 971
• Parties: (9th Cir. 1999) HELIOTROPE GENERAL, INC., on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. FORD MOTOR COMPANY; FORD HOLDINGS INC.; FORD HOLDINGS CAPITAL CORPORATION, Defendants-Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 971

189 F.3d 971 (9th Cir. 1999)

HELIOTROPE GENERAL, INC., on behalf of itself and all others similarly situated, Plaintiff-Appellant, v. FORD MOTOR COMPANY; FORD HOLDINGS INC.; FORD HOLDINGS CAPITAL CORPORATION, Defendants-Appellees.

No. 97-56757

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted August 4, 1999--Pasadena, California

Decided August 30, 1999

[Copyrighted Material Omitted]

James C. Krause, Krause & Kalfayan, San Diego, California, for the plaintiff-appellant.

George M. Newcombe, Simpson Thacher & Bartlett, New York, New York, for the defendants-appellees.

Appeal from the United States District Court for the Southern District of California; Jeffrey T. Miller, District Judge, Presiding. D.C. No. CV-96-00872-JTM.

Before: Cynthia Holcomb Hall, Thomas G. Nelson, Circuit Judges, and James Ware,¹ District Judge.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Heliotrope General, Inc., ("Heliotrope") appeals from the district court's order granting the defendants' motion for summary judgment and judgment on the pleadings. We have jurisdiction under 28 U.S.C. S 1291, and we affirm.

FACTUAL BACKGROUND

In September 1989, Ford Motor Co. ("Ford") created Ford Holdings, Inc. ("FHI") for the stated purpose of acquiring, owning, and managing various insurance and financial services assets of Ford. In order to take advantage of certain tax benefits, Ford had to satisfy two conditions: (1) Ford had to own less than eighty percent of FHI, and (2) Ford and FHI could not file a consolidated tax return for five years after Ford deconsolidated its financial services operations. In order to maintain Ford's diluted ownership interest, FHI at various times issued to the public shares of Preferred Stock.² Each prospectus filed with the various stock issues stated that FHI could be merged with an affiliated entity at any time without a shareholder vote, and provided that in the event of a merger shareholders would receive twenty-five dollars per share plus accumulated and unpaid dividends. Between January 20, 1993, and July 26, 1993, Heliotrope General, Inc., ("Heliotrope") purchased on the NYSE a total of 9800 shares of Series A Preferred Stock at prices ranging from $26.375/share to $27.125/share,³ and a total of 8500 shares of Series B Preferred Stock at prices ranging from $24.875/share to $26.625/share.⁴

Eventually, the costs to Ford of separately maintaining FHI began to outweigh the benefits Ford received from its tax strategy. In April 1995, Ford's Chairman responded to analysts' questions regarding the likelihood of Ford's restructuring its financial services operations by suggesting that a restructuring was in the works. In September 1995, Ford announced that it was considering spinning off its financial operations. In October 1995, the FHI board of directors (i.e., Ford management) announced its decision to merge FHI with Ford. To that end, Ford created Ford Holdings Capital Corp. ("FHCC"), a wholly owned subsidiary of Ford, into which FHI was merged on December 31, 1995. On January 4, 1996, Heliotrope's Series A and Series B shares of FHI Preferred Stock were cashed out for $25 per share, the liquidation preference stated in each prospectus.

In May 1996, Heliotrope filed suit against Ford, FHI, and FHCC, alleging seven causes of action for losses resulting from the merger: violations of sections 11, 12(a)(2), and 15 of the Securities Exchange Act of 1933; violations of sections 10(b), including Rule 10b-5 promulgated thereunder, and 20(a) of the Securities Exchange Act of 1934; and common law claims for fraud and negligent misrepresentation. Among other allegations, Heliotrope alleged that Ford failed to disclose the tax strategy underlying the creation of FHI and failed to disclose information concerning the likelihood of a merger, omissions that artificially inflated the price of FHI Preferred Stock. Although the lawsuit was styled as a class action, the district court never certified the suit as a class action.

The defendants filed a Rule 12(b)(6) motion to dismiss all of Heliotrope's claims, which the district court ⁵ granted in part and denied in part. The district court determined that all three of Heliotrope's 1933 Act claims failed as a matter of law. In addition, the district court determined that two of the three bases for relief for the 1934 Act claims and the common law claims failed as a matter of law,⁶ leaving as the sole basis for relief Ford's alleged failure to disclose its tax strategy. The district court denied the defendants' motion with respect to the 1934 Act claims and the common law claims, deciding that Heliotrope's complaint satisfied the rigorous pleading requirements for scienter. Neither party appealed that order.

Following the district court's Rule 12(b)(6) order, the case was transferred to Judge Jeffrey T. Miller, at which time Heliotrope filed an amendment to its First Amended Complaint. The defendants then filed a motion for (I) summary judgment with respect to Heliotrope's claims that Ford failed to disclose its tax strategy, and failed to disclose the five-year deconsolidation requirement in 26 U.S.C. S 1504, and (II) judgment on the pleadings with respect to Heliotrope's claim that Ford failed to disclose by 1993 information concerning the likelihood that Ford would merge FHI back into Ford in 1995. After allowing limited discovery on the issue of loss causation, an element of Heliotrope's remaining claims, the district court granted the defendants' motion for summary judgment. The district court decided that Heliotrope could not prove loss causation because all of the allegedly omitted information regarding Ford's tax strategy had entered the market by the time Heliotrope purchased shares of FHI Preferred Stock. In addition, the district court granted the defendants' motion for judgment on the pleadings, finding (1) that Ford had no duty to disclose the five-year deconsolidation requirement of 26 U.S.C. S 1504 because it was already part of the total mix of market information, (2) that Heliotrope failed to plead with particularity the circumstances that would have given rise to a duty on Ford's part to disclose preliminary merger discussions, (3) that when the duty arose Ford complied with its duty to disclose the merger negotiations, and (4) that Heliotrope could not allege any facts that showed Ford had a duty to disclose in 1993 that it was considering merging FHI into Ford in 1995. Heliotrope timely appealed from the district court's order.

DISCUSSION

I. Summary Judgment

Heliotrope contends the district court erred by granting the defendants' motion for summary judgment on the basis that there was no genuine issue of material fact on whether Ford's failure to disclose its tax strategy caused Heliotrope's loss. We review de novo the district court's order granting the defendants' motion for summary judgment. See Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir.1998). We must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. See id. After a careful review of the record, we find no error.

A. Section 10(b) & Rule 10b-5

Heliotrope's complaint is based upon a fraud-on-themarket theory, alleging that the market for FHI's Preferred Stock was highly efficient, incorporating all publicly available information into its market price. In a fraud-on-the-market case, an omission is actionable under section 10(b) and Rule 10b-5 "only if the [allegedly undisclosed] information has not already entered the market." See Morris v. Newman (In re Convergent Techs. Sec. Litig.), 948 F.2d 507, 513 (9th Cir. 1991). "If the market has become aware of the allegedly concealed information, `the facts allegedly omitted by the defendant would already be reflected in the stock's prices' and `the market will not be misled.' " Id. (quoting Schneider v. Vennard (In re Apple Computer Sec. Litig.), 886 F.2d 1109, 1114 (9th Cir. 1989)). "In such a case, the element of reliance will not be satisfied, and plaintiff's claims based on a fraud on the market theory will fail." Kaplan v. Rose, 49 F.3d 1363, 1376 (9th Cir. 1994).

In its complaint, Heliotrope claimed that Ford was required to disclose the following information: (1) FHI "had been established as a separate entity for tax-reporting purposes favorable to Ford"; (2) the tax purposes required that FHI remain as a separate existence from Ford for at least five years; (3) the tax purposes required FHI to issue preferred shares so that Ford's ownership interest in FHI would not exceed eighty percent; and (4) Ford was required to pay taxes on dividends it received from FHI.⁷ We address each of these four alleged omissions below.

1. Tax Purpose of Offering

It is undisputed that Ford's tax strategy was part of the total mix of market information prior to Heliotrope's purchases of Series A and Series B Preferred Stock. Ford introduced numerous financial analyst reports and news articles showing that FHI was formed at least in part for tax purposes. See e.g., Fitch Investors Service, Inc., Ford Motor Credit Co. -- Company Report, May 3, 1990; Beth McGoldrick, Ford Finds an Answer to the Consolidation Rule, Institutional Investor, May 1990, at 162; Miriam Benson, Minimizing the Tax Bill by Reorganizing the Company, Inv. Dealer's Dig., Jan. 15, 1990, at 16; Bear, Stearns & Co., Ford Motor Co. -Company Report, Dec. 28, 1989; Eric N. Berg, Ford Plans to Establish a New Unit, N.Y. Times, Oct. 13, 1989, at D4; Ford Organizes Financial Units, Detroit News, Oct. 13, 1989, at E1; Matthew Winkler, Ford Revamps Firm to Realize Big Tax Savings, Wall St. J., Oct. 12, 1989, at A3. Because Ford's tax strategy was part of the total mix of information reflected in the price of FHI Preferred Stock at the time Heliotrope purchased its shares, Heliotrope cannot prove that...