Elkind v. Liggett & Myers, Inc.

• Decision Date: 17 November 1978
• Docket Number: No. 73 Civ. 2837.,73 Civ. 2837.
• Citation: 472 F. Supp. 123
• Parties: Arnold B. ELKIND, Plaintiff, v. LIGGETT & MYERS, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

472 F. Supp. 123

Arnold B. ELKIND, Plaintiff, v. LIGGETT & MYERS, INC., Defendant.

No. 73 Civ. 2837.

United States District Court, S. D. New York.

November 17, 1978.

Kaplan, Kilsheimer & Foley by Robert N. Kaplan, Dale A. Schreiber, James B. Kilsheimer, III, Richard J. Kilsheimer, New York City, for plaintiff.

Webster & Sheffield by Donald J. Cohn, Paul A. Gangsei, Alan Gabbay, New York City, for defendant Liggett & Myers, Inc.

Findings of Fact and Conclusions of Law

MOTLEY, District Judge.

Plaintiff Arnold Elkind purchased 100 shares of Liggett & Myers, Inc. (Liggett) common stock on July 12, 1972 at $63 3/8 per share on the New York Stock Exchange. He sold these shares on December 27, 1972 at $38 1/8 . He brought this class action against Liggett alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (Act) (15 U.S.C. § 78j) and Rule 10b-5 (17 C.F.R. § 10b-5). Elkind is a citizen of New Jersey and Liggett is a Delaware corporation with its principal place of business in North Carolina. Liggett is one of the largest manufacturers of cigarettes. However, its business is now diversified and includes pet foods (such as Alpo), liquor, cereal, rugs and other products. This court issued an opinion on December 14, 1977 certifying as a class all those who bought Liggett stock from June 19 to July 18, 1972. As stated in that opinion, plaintiff voluntarily dismissed his complaint against the individual defendants at trial.

During the relevant time, Ralph P. Moore was Vice President and Chief Financial Officer and Daniel Provost was Director of Corporate Communications and Assistant Director of Corporate Marketing. In conjunction with its expanded business interests, Liggett employed a public relations firm, Edward Gottlieb & Associates, to help Liggett communicate with securities analysts.

In 1971 Liggett's diversified interests produced a record year. However, in 1972 Liggett's earnings dropped dramatically. In July 1972 Liggett issued a press release stating that its preliminary earnings figures for the second quarter showed a decline from the year before. The dispute in this case centers around events in June and July 1972 leading up to the issuance of the press release. The court makes the following findings of fact and conclusions of law.

Plaintiff alleges that Liggett violated Rule 10b-5 by failing to disclose the lowered earnings in June and by tipping this information. Plaintiff also contends that Liggett breached its duty not to make misleading statements by 1) failing to correct the earnings projections of financial analysts which it knew to be far too high; 2) making statements which, in light of the analysts' projections, Liggett knew would be misinterpreted; and 3) failing to issue a press release in June when it had the preliminary earning figures for April and May rather than waiting until it had preliminary figures for all of the second quarter in July. Plaintiff contends that Liggett officials acted with scienter and that these acts caused him harm for which Liggett is liable. The court finds that plaintiff has failed to carry his burden of proving these claims by a fair preponderance of the credible evidence.

Plaintiff's second cause of action is for tipping. The court finds that plaintiff has carried his burden in this respect. He has proved that Liggett officials tipped material inside information to financial analysts. Plaintiff therefore is entitled to recover under this cause of action.

Facts

In 1971 Liggett had earnings per share of $4.22. This was a record high with net earnings up to 18% over restated 1970 earnings.

In January 1972 Liggett's Board of Directors established a budget for that year which projected earnings of $4.30 a share. During the first half of 1972 financial analysts issued very favorable reports on Liggett's prospects for 1972. Many analysts projected a 10% increase in earnings. Liggett's own internal budget projections showed only a 2% increase in earnings. Many analysts submitted their reports to Liggett for review. At meeting with financial analysts, Liggett generally represented that it would have what it termed a "good year".

In March Liggett issued a press release stating that the first two months of 1972 had been good months for the company. In April Liggett offered a $50 million debenture issue.

On May 3, 1972, Liggett announced its figures for the first quarter of 1971, that is January through March. For this quarter, net earnings, before extraordinary credits and charges, had increased by 17% over the first quarter of 1971. Net earnings per share, after the credits, were $1.00 as compared to $.81 for the first quarter of 1971.

On May 15, the Liggett board of directors received preliminary figures for April which showed a sharp drop in earnings per share. April 1972 earnings were $.03 per share compared to April 1971 earnings which were $.30. Liggett issued no statement at this time. Its stock was selling at 68¾.

On June 19, the board of directors received the preliminary figures for May which showed earnings per share of $.23, a significant revival from April's figure of $.03 a share, but a decline from the earnings per share in May 1971 which were $.27 a share. Earnings to that date were $1.26, below the earnings for the same period in 1971 of $1.38, but ahead of the budgeted earnings for 1972. At this time Liggett's stock sold for $64½.

By July 14, Liggett stock was selling at $60. During the time between June 21 and July 18, the New York Stock Exchange commenced a stock watch investigation of Liggett stock. On July 17, the board of directors received the preliminary figures for June, the final month of the second quarter. Earnings for June were $.20 a share. Earnings for the first six months of 1972 stood at $1.46, down from $1.82 for the same period in 1971. On that day, the board of directors decided to issue a press release stating the preliminary earning figures even though Liggett had never done so before. The final figures would not be available for another two weeks.

On July 18, at 2:15 p. m., Liggett issued its press release stating that earnings per share would be down from 1971. The press release explained this decline in terms of a decline in earnings of Liggett's international cigarette operations, a decline in J. & B. scotch sales during the second quarter as a result of heavy trade sales in the first quarter in anticipation of an April price increase, a decline in pet food earnings because of higher raw material prices, manufacturing start-up costs, higher costs and lower volume and losses in another subsidiary due to high recall and compliance expenses to meet F.T.C. flammability standards.

After the July 18 press release the price of Liggett stock continued to fall from approximately $52 a share until it bottomed out at approximately $40 a share on August 7. In August the price rose briefly and then declined again. Earnings for 1973 and 1974 remained depressed.

I. Failure to Correct Analyst's Projections

In the first half of 1972 financial analysts were projecting that Liggett's earnings would increase by ten per cent in 1972. At this time Liggett's internal budget projections showed that Liggett expected only a two per cent increase in earnings in 1972. It was the practice of many of these analysts to submit their reports to Liggett for review before publishing them. Liggett corrected any factual errors in the reports but refused to comment in any way on the earnings projections. Liggett stated that its policy was not to comment on incorrect opinions or projections based on correct factual data.

Plaintiff's expert witness testified that it was the custom and practice in the industry to correct analysts' earnings projections that were incorrect by a significant margin. There can be no doubt that the analysts' projections for Liggett were widely off target. Plaintiff contends that Liggett was under a legal duty to correct these projections which came to its attention. However, the Second Circuit has ruled otherwise.

In Electronic Specialty Co. v. Int'l Controls Corp., 409 F.2d 937 (2d Cir. 1969), the Second Circuit rejected the plaintiff's claim that the defendant corporation had a duty to correct erroneous factual statements appearing in a Wall Street Journal article about the defendant. It was clear that the defendant had knowledge of the article. Defendant was involved in a tender offer battle with the plaintiff which was being covered by the Wall Street Journal. The article overstated both the extent of the defendant's holdings in the plaintiff's company and the price which defendant was likely to offer for shares in plaintiff's company.

The Second Circuit stated, at 949,

"While a company may choose to correct a misstatement in the press not attributable to it, cf, SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 857-64, 866-69 (concurring opinion) (2 Cir. 1968), we find nothing in the securities legislation requiring it to do so."

In Electronic Security, supra, the Second Circuit was ruling on a claim under § 14 of the Act. The court finds the Second Circuit's reasoning in that case equally applicable to a claim under § 10(b). Hutto v. Texas Income Properties Corp., 416 F.Supp. 478, 482 (S.D.Tex.1976); Milberg v. Western Pacific Railroad Co., 51 F.R.D. 280, 282 (S.D.N.Y.1970) (no likelihood of success on similar 10b-5 claim); Zucker v. Sable, 426 F.Supp. 658, 662 (S.D.N.Y.1976) (" . . . defendants had no obligation under the securities law to correct the press error.") (dictum). This is not a case in which Liggett failed to correct false statements made by its underwriter, Cf. Greenhop v. Jonhop, Inc., 358 F.Supp. 413, 420 (D.Ore.1973), or someone else closely allied with the corporation, cf. Brennan v. United States Life Insurance Co., 417 F.2d 147 (7th Cir. 1969).

The Second Circuit's ruling in Electronic Specialty, supra, has been criticized by commentators who would place a greater duty on...