Wayne Inv., Inc. v. Gulf Oil Corp.

• Decision Date: 18 July 1984
• Docket Number: No. 84-1099,84-1099
• Citation: 739 F.2d 11
• Parties: , Fed. Sec. L. Rep. P 91,577 WAYNE INVESTMENT, INC., Plaintiff, Appellant, v. GULF OIL CORPORATION, et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 11

739 F.2d 11

39 Fed.R.Serv.2d 795, Fed. Sec. L. Rep. P 91,577

WAYNE INVESTMENT, INC., Plaintiff, Appellant, v. GULF OIL CORPORATION, et al., Defendants, Appellees.

No. 84-1099.

United States Court of Appeals First Circuit.

Argued May 11, 1984.

Decided July 18, 1984.

Susan F. Brand, Boston, Mass., with whom Alfred J. O'Donovan, III, Boston, Mass., was on brief, for appellant.

John W. Castles 3d, New York City, with whom William P. Casella, Banks Brown, Ellen M. Saideman, New York City, John E. Bailey, Kenneth C. Keener, Houston, Tex., Eleanor D. Acheson, Ropes & Gray, Boston, Mass., and Lord, Day & Lord, New York City, were on brief, for appellees.

Before COFFIN and BOWNES, Circuit Judges, and PETTINE, ^* Senior District Judge.

COFFIN, Circuit Judge.

Appellant Wayne Investment brought an action against Gulf Oil Corporation (Gulf) alleging that Gulf had violated Sec. 17(a) of the Securities Act of 1933, ¹ Secs. 10(b) and 14(e) of the Securities Exchange Act of 1934, Mass.Gen.Laws Ann. ch. 93A, and the common law of fraud by making false and misleading statements in connection with a tender offer. The district court dismissed the complaint on the ground that appellant had not met the requirement of Fed.R.Civ.P. 9(b), which provides, "In all averments of fraud ..., the circumstances constituting the fraud ... shall be stated with particularity." Appellant argues that its complaint and an affidavit it filed in opposition to Gulf's motion to dismiss did set out the fraud claim with sufficient particularity. In addition, appellant argues that its claim under Mass.Gen.Laws Ann. ch. 93A was not subject to the requirements of Fed.R.Civ.P. 9(b), and that it should have been allowed to amend its complaint to allege diversity jurisdiction for this claim. We find that the district court ruled correctly on both of these issues, and we affirm.

On June 17, 1982, Gulf and Cities Service Company (Cities Service) entered into a merger agreement under which Gulf agreed to make an offer of $63.00 per share for approximately 54 percent of the Cities Service common stock. If the offer was successful, Gulf planned to merge Cities Service with a wholly-owned subsidiary of Gulf. Gulf's Offer to Purchase (the Offer) expressly warned, "There can be no assurance that a challenge to the Offer on antitrust grounds will not be made, or if such a challenge is made, what the result will be." The Offer stated that each party would "use its best efforts to cause the Merger to occur." The Offer also provided, however, that Gulf reserved the right to terminate the offer if certain conditions (including an adverse action by a governmental authority) arose, "regardless of the circumstances giving rise to such condition (including any action or inaction by ... Gulf)."

Gulf began to purchase shares of Cities Service on June 22, 1982. During June and July appellant sold a number of put and call options with a September expiration date. On July 29, 1982, the Federal Trade Commission (FTC) obtained a temporary restraining order enjoining the transaction on antitrust grounds. Gulf issued a press release on July 30, 1982, announcing that it intended "to contest the FTC action vigorously but at the same time [to] seek to discuss whether there is a reasonable basis for prompt settlement of the action." Appellant closed some of its call options, purchased shares to cover other call options that had been exercised, and left open its position in some of its put options. On August 6, 1982, Gulf announced that it was exercising its right to terminate the merger agreement and tender offer. The price of Cities Service stock fell sharply, and appellant suffered a considerable loss when the September put options were exercised.

Appellant filed a complaint on July 26, 1983, alleging on information and belief that after the Offer to Purchase had been made, various legal and financial developments had made the acquisition of Cities Service a less attractive proposition for Gulf. In consequence, the complaint alleged, Gulf

"pursued a course of fraudulent and unlawful conduct designed to precipitate events which Gulf could argue constituted sufficient conditions to permit Gulf to terminate its obligations under the Merger Agreement and Offer to Purchase. Toward that end, Gulf refused to negotiate or cooperate in good faith with the Federal Trade Commission ("FTC"), as it was required to do under the terms of the Merger Agreement, in order to provoke a lawsuit by the FTC to enjoin the proposed merger and to cause the entry of a court order preventing Gulf from consummating its acquisition of Cities Service stock."

The complaint alleged that the FTC informed Gulf that it had only limited objections to the proposed merger, but that Gulf continued to refuse "to engage in meaningful negotiations with the FTC." The complaint alleged:

"On or about July 30, 1982, while continuing to preserve a means of escaping its obligations under the Merger Agreement and Offer to Purchase and having decided not to perform its obligations under the Merger Agreement and Offer to Purchase, Gulf announced, in a false and misleading press release ("the Press Release"), that it intended to proceed with the merger and that it 'intend[ed] to contest the FTC action vigorously, but at the same time seek to discuss whether there is a reasonable basis for a prompt settlement of the action.' Following the Press Release, Gulf continued to fail and refuse to engage in any meaningful good faith settlement discussions with the FTC."

The allegations of the complaint were supplemented in some respects by appellant's affidavit filed in opposition to Gulf's motion to dismiss. For example, the affidavit specified the number and striking prices of the options appellant had purchased between June and July 1982. The affidavit also stated that the president of Wayne Investment had "read of Gulf's press release on July 30, 1982."

It is well settled that Rule 9 "requires specification of the time, place, and content of an alleged false representation, but not the circumstances or evidence from which fraudulent intent could be inferred." McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226, 228 (1st Cir.1980) (collecting cases). This special pleading requirement provides the defendant with notice of the grounds on which plaintiff's fraud claim rests. Id. at 228-29. In addition, in the context of securities litigation, Rule 9

"operates to diminish the possibility that 'a plaintiff with a largely groundless claim [will be able] to simply take up the time of a number of other people [by extensive discovery], with the right to do so representing an in terrorem increment of the settlement value, rather than a reasonably founded hope that the process will reveal relevant evidence ....' " Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir.1979) (quoting Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 741, 95 S.Ct. 1917, 1928, 44 L.Ed.2d 539 (1975)).

A number of courts have held that allegations based on "information and belief" do not satisfy the particularity requirement unless the complaint sets forth the facts on which the belief is founded. See, e.g., Segal v. Gordon, 467 F.2d 602, 608 (2d Cir.1972); Duane v. Altenburg, 297 F.2d 515, 518-19 (7th Cir.1962). The requirement that supporting facts be pleaded applies even when the fraud relates to matters peculiarly within the knowledge of the opposing party. See Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 379 (2d Cir.1974); 2A J. Moore, Moore's Federal Practice, p 9.03 at 9-26 (2d ed. 1983).

Appellant concedes that its action was filed nearly a year after the withdrawal of Gulf's tender offer, and that its complaint "mirrors allegations in three other...