Vaughn v. Teledyne, Inc.

• Decision Date: 17 September 1980
• Docket Number: No. 78-2309,78-2309
• Parties: Fed. Sec. L. Rep. P 97,637 R. Eugene VAUGHN, G. Kenneth Vaughn, Eugene W. Vaughn, Glenn A. Vaughn and Marilyn Anne Swindall, Plaintiffs-Appellants, v. TELEDYNE, INC., a Delaware corporation, Henry E. Singleton, George A. Roberts, George Kozmetsky, Robert C. Jackson, Arthur Rock and Claude E. Shannon, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1214

628 F.2d 1214

Fed. Sec. L. Rep. P 97,637

R. Eugene VAUGHN, G. Kenneth Vaughn, Eugene W. Vaughn, Glenn A. Vaughn and Marilyn Anne Swindall, Plaintiffs-Appellants, v. TELEDYNE, INC., a Delaware corporation, Henry E. Singleton George A. Roberts, George Kozmetsky, Robert C Jackson, Arthur Rock and Claude E Shannon, Defendants-Appellees.

No. 78-2309.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Jan. 9, 1980.

Decided Sept. 17, 1980.

Walter H. Drane, Schurmer, Drane, Bullis & McCarthy, Los Angeles, Cal., for plaintiffs-appellants.

Kenneth R. Heitz, William A. Masterson, Los Angeles, Cal., for defendants-appellees.

Appeal from the United States District Court for the Central District of California.

Before CHOY and ANDERSON, Circuit Judges, and SMITH, ^* District Judge.

CHOY, Circuit Judge:

Appellants filed a complaint alleging violations of sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. §§ 78j(b), 78n(e), and Rule 10b-5 of the Securities and Exchange Commission (SEC) regulations, 17 C.F.R. § 240.10b-5; fraud; and breach of a fiduciary duty by Teledyne and several of its directors. The district court granted summary judgment in favor of appellees. We affirm.

I. Facts

In connection with Teledyne's 1969 acquisition of Financial Indemnity Corporation and Foremost Insurance Service, appellant G. Kenneth Vaughn (Kenneth) received 39,200 shares of $3.50 convertible stock of Teledyne. These shares were subject to redemption by Teledyne on or after June 30, 1971 for $100 a share or, at Kenneth's option, the shares could be converted into Teledyne common stock at a ratio of four shares of Teledyne to one share of the convertible. Appellants allege that Kenneth was advised by appellee Henry E. Singleton, Chairman of the Board of Directors and Chief Executive Officer of Teledyne, that Teledyne would not call the stock in June 1971, when first possible under the contract.

On June 28, 1971 Teledyne called the $3.50 convertible stock, giving holders of the stock until July 28, 1971 to have the stock redeemed or to convert the stock. Kenneth allegedly attempted to contact Singleton, seeking advice as to which of the two options was better. ¹ Unable to reach Singleton, he spoke with a Themistocles Michos, then Secretary of Teledyne, who is not a party to this action. Michos allegedly told Kenneth that most of the holders of the convertible stock were "redeeming" it. He also allegedly told Kenneth that, if Kenneth "redeemed" the stock and later (after talking with Singleton) decided that he wanted to convert to Teledyne common stock, the redemption could be unwound.

Kenneth sold 18,100 shares of the convertible stock to Teledyne. He had transferred 18,900 other shares to his brother, appellant R. Eugene Vaughn (Richard). Richard sold 14,000 shares to Teledyne and converted the remaining 4,900 shares into common stock. Singleton allegedly later refused to unwind the redemptions though Kenneth repeatedly asked him to do so within the next two months.

In September 1972 Teledyne made a tender offer to purchase at least one million shares of its common stock at $20 per share; 8.9 million shares were tendered and accepted.

In December 1973 Teledyne made another tender offer for a minimum of four million shares at $14 per share; 1.6 million shares were accepted. On May 31, 1974 Teledyne offered to exchange 10% subordinated debentures in the face amount of $20 for at least one million of its shares; 3.8 million shares were offered and exchanged. A similar offer was made in December 1974; 1.9 million shares were offered and exchanged for 10% subordinated debentures in the face amount of $16.

In April 1975 Teledyne made a third tender offer for a minimum of one million shares; 3.6 million shares were offered and accepted at a price of $18 per share.

In February 1976 Teledyne made a fourth tender offer. 2.5 million shares of stock were offered and accepted at a price of $40 per share.

During the period from June 1971 to November 1976, the number of outstanding shares of Teledyne common stock decreased from 38 million to 11 million. Teledyne's earnings, on the other hand, increased dramatically in 1975 and 1976. Other than appellee George A. Roberts who exercised an option to purchase 34,778 shares of Teledyne in 1975, none of the individual appellees purchased any Teledyne stock between 1971 and 1976. Nonetheless, the aggregate percentage of stock owned by these individuals increased from 3.94% in 1971 to 10.49% in 1975.

At various times between October 1971 and December 1973, Richard and appellant Marilyn Anne Swindall (Marilyn), Kenneth's daughter, ² sold Teledyne common stock in the market. Marilyn sold 608 shares at prices not exceeding $26 per share. Richard sold 20,794 shares at an average price of $11 per share.

Kenneth tendered 352 shares, and his son, appellant Eugene W. Vaughn, tendered 1,134 shares in response to the April 1975 tender offer. In November 1975 appellant Glenn A. Vaughn (also Kenneth's son) sold in the market 200 shares of Teledyne common stock at a price of approximately $21.75 per share.

In November 1976 appellants filed a complaint against appellees Teledyne, Singleton, Roberts, George Kozmetsky, Robert C. Jackson, Arthur Rock, and Claude E. Shannon. All of the individual appellees were members of the Board of Directors at Teledyne. The complaint was amended in February 1977. The complaint alleged violations of §§ 10(b) and 14(e) of the Act and Rule 10b-5; fraud; and breach of a fiduciary duty in furtherance of "a plan and conspiracy to obtain for (appellees) increased control of TELEDYNE, to exclude numerous of its public shareholders from participation in TELEDYNE's future equity growth and profitability and to utilize the assets of TELEDYNE to accomplish their illegal goals."

After substantial discovery, ³ the district court granted summary judgment in favor of Teledyne and the directors, concluding that there had been no violation of the securities laws, that there was no breach of fiduciary duty, and that the statute of limitations barred recovery either from the alleged misrepresentations or from the failure to disclose the alleged plan or financial projections.

II. Summary Judgment

Summary judgment is properly awarded where there is no genuine issue of material fact or where, viewing the evidence and the inferences drawn therefrom in the light most favorable to the party opposing the motion, the moving party clearly is entitled to prevail as a matter of law. Smith v. Gross, 604 F.2d 639, 641 (9th Cir. 1979).

A. Statute of Limitations

As the parties state, the three-year statute of limitations of Cal.Code Civ.Proc. § 338(4) is applicable to this action. See Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523 (9th Cir. 1976); United California Bank v. Salik, 481 F.2d 1012 (9th Cir.), cert. denied, 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973). Where more than three years have elapsed between the time that the wrong allegedly was perpetrated and the filing of the action, the plaintiff has the burden of proving facts that would toll the statute. Rochelle v. Marine Midland Grace Trust Co., 535 F.2d at 531-32.

1. Misrepresentations

Appellants allege that sometime in July 1971, Michos, then Secretary of Teledyne, misrepresented to Kenneth and Richard that most of the holders of the convertible stock were "redeeming" it and that such a redemption later could be unwound and changed into a conversion to Teledyne common stock. Appellants did not file suit until November 1976, more than five years after the misrepresentations allegedly were made. ⁴

The district court concluded that Kenneth and Richard ⁵ were barred from recovery for the alleged misrepresentations because, by July 30, 1971, they "had sufficient facts to know that Teledyne had breached representations allegedly made to them with respect to the redemption of the $3.50 Preferred Stock." We agree that recovery is barred. Appellants admit that by September 1971 Singleton had refused to unwind the stock redemption at least twice, and they allege no facts that toll the statute of limitations. The latest possible date that the "misrepresentation" claim for relief could have accrued was in September 1971, more than three years before this action was filed. Thus, appellants cannot recover for any damages caused by the alleged misrepresentations regarding the redemption of the preferred stock.

2. Conspiracy

Appellants' main contention is that appellees had a plan to reduce the number of outstanding shares of Teledyne common stock, thereby increasing their proportionate control of Teledyne and their earnings. As evidence of this scheme appellants point to the frequency of Teledyne's tender offers and other acquisitions of its own stock, at a substantial cost; the reduction of outstanding shares from approximately 38 million shares in 1971 to less than 11 million shares in 1976; the increase in the net income per share from $1.48 in 1971 to $10.48 in 1976; and the increase in the percentage of stock owned by appellees from 3.94% in 1971 to 10.49% in 1975.

The district court found that by October 18, 1972 (after 8.9 million shares were accepted in the first tender offer) "plaintiffs had sufficient facts to determine that the defendants had purportedly failed to disclose certain facts to them with respect to (the) alleged scheme and conspiracy," and concluded that recovery was barred by the statute of limitations. It is true that if the appellants knew sufficient facts to put them on inquiry notice before November 19, 1973, any claim for relief from stock transactions before that date would be barred by the statute of limitations. See Robuck v. Dean, Witter & Co., No. 77-1841, --- F.2d ----, ---- (9th Cir. March 7, 1980); Rochelle v. Marine Midland Grace Trust Co., 535 F.2d at 531. However, we cannot say as a matter of law that they had such facts. One...