Wellman v. Dickinson

• Decision Date: 24 June 1982
• Docket Number: D,40,Nos. 39,s. 39
• Citation: 682 F.2d 355
• Parties: Fed. Sec. L. Rep. P 98,731 Arnold S. WELLMAN, et al., Plaintiffs-Appellees, v. Fairleigh S. DICKINSON, Jr., Defendant-Appellant. ockets 80-6213, 80-6357.
• Court: U.S. Court of Appeals — Second Circuit

Page 355

682 F.2d 355

Fed. Sec. L. Rep. P 98,731

Arnold S. WELLMAN, et al., Plaintiffs-Appellees, v. Fairleigh S. DICKINSON, Jr., Defendant-Appellant.

Nos. 39, 40, Dockets 80-6213, 80-6357.

United States Court of Appeals Second Circuit.

Argued Dec. 9, 1981.

Decided June 24, 1982.

S. Lee Terry, Jr., Washington, D. C. (Jacob H. Stillman, Associate Gen. Counsel, Elisse B. Walter, Asst. Gen. Counsel, Ruth S. Epstein, Paul Gonson, Sol., Washington, D. C., of counsel), for appellee S. E. C.

Paul M. Bernstein and Kreindler & Kreindler, New York City, Lead Counsel for Stockholder Class and Liaison Counsel (Kaufman, Taylor & Kimmel, New York City, Co-Lead Counsel for Stockholder Class, Harvey Greenfield, New York City, Co-Counsel for Class Plaintiff Wellman, Pomerantz, Levy, Haudek & Block, New York City, Lead Counsel for debenture holder Class, Philips & Mushkin, P. C., New York City, Counsel for class plaintiff Polne, Rabin & Silverman, New York City, Counsel for class plaintiff Pupko, of counsel on the brief), for class plaintiffs and cross-appellants.

Sheldon Elsen, New York City (Orans, Elsen, Polstein & Naftalis, Leslie A. Luppert, Paul E. Summit, New York City, of counsel), for defendant-appellant.

Before LUMBARD, MOORE and VAN GRAAFEILAND, Circuit Judges.

LEONARD P. MOORE, Circuit Judge:

This appeal arises from seven separate actions brought against defendant-appellant, Fairleigh S. Dickinson, Jr., and eleven other defendants, for alleged violations of the federal securities laws, New Jersey state law, and the rules of the New York Stock Exchange. These seven actions include an enforcement action brought by the Securities and Exchange Commission ("SEC"), a private action filed by Becton, Dickinson & Company ("Becton") and certain of its officers, and five class actions brought on behalf of certain Becton shareholders. All seven actions stem from the acquisition by Sun Company, Inc. of approximately 34% of the outstanding stock of Becton, a New Jersey corporation engaged in the manufacture of health care products and medical testing and research equipment. The actions were consolidated for a bench trial before the Honorable Robert L. Carter, District Judge of the Southern District of New York. By agreement of the parties, the consolidated trial was bifurcated on the issues of liability and damages.

On the issue of liability, Judge Carter held, inter alia, that Dickinson, in an effort to induce a third-party takeover or partial takeover of Becton, had violated Section On July 31, 1980, Judge Carter issued a final opinion addressing, inter alia, the class plaintiffs' claims for damages or disgorgement of profits against Dickinson and other members of the group found to have violated Section 13(d). Wellman v. Dickinson, 497 F.Supp. 824, 834-36 (S.D.N.Y.1980). Judge Carter held that these plaintiffs had no right to monetary relief against Dickinson for a number of reasons, including their failure to demonstrate that the Section 13(d) violations directly caused any injury to the class. Thus, the district court entered a final judgment on September 29, 1980, denying the class plaintiffs' claims for disgorgement and other monetary relief against Dickinson for his violation of Section 13(d).

                13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d) (1976), 1 when he joined a group to sell more than 5% of the company's common stock without making the requisite filings with the SEC, Becton, and the exchange on which the securities were traded.  2  Wellman v. Dickinson, 475 F.Supp. 783, 837 (S.D.N.Y.1979).  Before the trial on damages commenced, the SEC withdrew its request for relief from Dickinson other than a judicial declaration that Dickinson had violated Section 13(d).  Accordingly, by order entered on February 19, 1980, Judge Carter adhered to the court's findings concerning Dickinson's liability and, with the SEC's consent, terminated with prejudice its enforcement action against Dickinson.  3
                

Dickinson appeals from this final judgment and all prior orders in this case finding that he violated Section 13(d) of the Securities Exchange Act of 1934. Dickinson contends that plaintiffs have failed to prove either that the purported members of the Section 13(d) group had beneficial ownership of sufficient Becton stock to form a group with him, or that he had entered an agreement with anyone to dispose of Becton stock either directly or indirectly through agents. The class plaintiffs cross-appeal from those portions of the September 29, 1980 judgment denying their claims for disgorgement and other monetary relief against Dickinson and from the dismissal of their claims for breach of fiduciary duty against Dickinson. On appeal, the class plaintiffs renew their argument that Dickinson breached his fiduciary duty to the shareholders of Becton, and that he must disgorge a portion of the profits he obtained as a result of his actions in violation of Section 13(d) and in breach of his fiduciary duty.

We reject the claims raised by both parties, and hold that Judge Carter did not err in finding that Dickinson violated Section 13(d) of the Securities Exchange Act of 1934 and in denying the claims of the class plaintiffs for damages or disgorgement from Dickinson. For the reasons set forth

below, we affirm the district court's judgment and orders in all respects.

FACTS

Since the facts underlying this appeal are described in detail in the two opinions of the district court, Wellman v. Dickinson, 497 F.Supp. 824 (S.D.N.Y.1980); Wellman v. Dickinson, 475 F.Supp. 783 (S.D.N.Y.1979), we shall only summarize them briefly.

As Judge Carter observed: "The background and governing facts in this complex drama embrace personality conflicts, animosity, distrust, and corporate politics, as well as a display of ingenuity and sophistication by brokers, investment bankers and corporate counsel". Wellman v. Dickinson, supra, 475 F.Supp. at 797-98.

One of the principal personalities was Fairleigh S. Dickinson, Jr., the son of a founder of Becton and a major stockholder of the company. He individually held 802,138 shares of Becton stock (4.2% of the outstanding shares). In addition, Dickinson held 140,794 shares (.64%) as a co-trustee and at least 198,922 shares (1%) as a member of the Dickinson family.

Dickinson personally managed Becton for over twenty-five years. In 1974, Dickinson relinquished his management responsibilities and became Chairman of the Board. In late 1976, however, differences between the new management and Dickinson emerged. On April 20, 1977, after a bitter internal power struggle over the course of several months, the new management team prevailed, and the board of directors voted to remove Dickinson as its chairman. ⁴

The day following his removal as chairman, Dickinson met with representatives of Salomon Brothers ("Salomon"), ⁵ a New York limited partnership engaged in the investment banking and brokerage business, to obtain advice on how to regain control of Becton. In attendance were Jerome Lipper, who was Dickinson's attorney, Kenneth Lipper, brother of Jerome Lipper and a partner of Salomon, Richard Rosenthal and John Gutfreund of Salomon, Martin Lipton, who was Salomon's attorney, and two directors of Becton who were sympathetic to Dickinson. These men discussed several possible strategies. Dickinson ultimately agreed to a plan to vote with outside directors as a means of bringing pressure on Becton's management and selling a block of the company's shares, including his own, to a corporation interested in taking over Becton. Dickinson hired Salomon to assist him in locating a corporation that would be interested in purchasing his substantial holdings in Becton and those of his friends as the springboard for a complete or partial takeover of the company. Dickinson's friends included Dr. J. H. Fitzgerald Dunning, a director of Becton, who personally owned 3,200 shares and served as one of two co-trustees for one of three family trusts which held 344,849 shares (1.8%). Each of his two brothers served as a co-trustee for one of the other two trusts, and Dunning's personal lawyer served as the other trustee for all three trusts.

Shortly thereafter, Salomon was also contacted by Dan W. Lufkin who was concerned about his investment in Becton stock in light of Dickinson's removal from the company's chairmanship. Lufkin was a member of a partnership together with Edward L. Scarff which owned 93,000 shares of Becton stock. The partnership and three other individuals, Richard Drake, Charles Willock, and Robert Smith, were the principals of a kidney dialysis company acquired by Becton in 1977. As a result of that transaction, the partnership received 93,000 shares of Becton stock, Willock received 46,248 shares, and the two other men each received 140,148 shares (total 2.2%). After the acquisition of the dialysis company, Drake, Willock, and Smith continued to rely heavily on Lufkin's partnership for investment advice.

Dickinson subsequently contacted Robert Zeller, chief executive officer of F. Eberstadt & Company, Inc. ("Eberstadt"), a Delaware corporation engaged in investment banking, institutional stock brokerage, and the management of pension funds and advisory accounts. Eberstadt had acted for many years as Becton's investment banker. Zeller had also advised Dickinson on the handling of some of his personal affairs. Moreover, an Eberstadt subsidiary, F. Eberstadt & Company Managers & Distributors Inc. ("Eberstadt M & D"), ⁶ served as investment advisor to two mutual funds (the "Funds"), the Chemical Fund and the Surveyor Fund, which along with a number of Eberstadt-managed discretionary brokerage accounts held 496,075 shares of Becton stock (2.6%). Dickinson informed Zeller that he was asking Salomon to involve Eberstadt in the effort to encourage a corporation to undertake a complete or partial takeover of Becton. Initially, Dickinson and Salomon and Zeller entered into merely an oral...