Alpern v. UtiliCorp United, Inc.
| Decision Date | 17 May 1996 |
| Docket Number | Nos. 95-1456,95-2356,s. 95-1456 |
| Citation | 84 F.3d 1525 |
| Parties | Fed. Sec. L. Rep. P 99,223 William ALPERN and Russell D. Miller, on behalf of themselves and all others similarly situated, Appellants, v. UTILICORP UNITED, INC., Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Fred T. Isquith, Neil L. Zola, Wolf & Haldenstein, New York City, Edward Grossmann, Rochelle Feder Hansen, Bernstein & Litowitz, New York City, Bruce Keplinger, Norris & Keplinger, Overland Park, KS, for William Alpern and Russell D. Miller.
William H. Sanders, Sr., Michael J. Thompson, Shirley Ward Keeler, J. Randall Coffey, Jeffrey John Simon, Mark A. Boyd, Blackwell & Sanders, Kansas City, MO, for Utilicorp United, Inc.
Shirley Ward Keeler, Blackwell & Sanders, Kansas City, MO, for John Does, 1 through 10, Richard D. Stegall, and Vincent F. Marquez, Jr.
Before MAGILL, GOODWIN *, and MURPHY, Circuit Judges.
William D. Alpern and Russell D. Miller filed this securities fraud suit against UtiliCorp United Inc. (UtiliCorp) on behalf of themselves and similarly situated stock purchasers. Employees of a second-tier subsidiary of UtiliCorp reportedly misappropriated some twenty-one million dollars beginning in September 1990. The misappropriations were not publicly revealed by UtiliCorp until June 1992, along with a $11.6 million charge against its second-quarter earnings and an anticipated $5.2 million loss. Alpern and Miller claim that UtiliCorp knew or should have known of the material misappropriations by at least November 1991, when it commenced its internal investigation, and that certain financial statements made prior to its June 1992 disclosure were misleading. In a series of orders, the district court declined to certify a class, dismissed all claims, and denied two motions for reconsideration. Alpern and Miller now appeal from the judgment entered in the district court and from the order denying their motions for reconsideration. We affirm in part, reverse in part, and remand.
UtiliCorp is a public utility company which wholly owns a subsidiary called Aquila Energy Corporation (Aquila Omaha), located in Omaha, Nebraska. Aquila Omaha in turn owns a subsidiary named Aquila Energy Resources Corporation (Aquila), formed in 1989 to acquire oil and gas reserves and gathering and processing systems. Aquila is headquartered in Omaha and has an office in Houston, Texas.
Appellants Alpern and Miller sued as holders of UtiliCorp common stock. Russell Miller purchased 200 shares on the open market on November 13, 1991. William Alpern made open market purchases for approximately two years before joining UtiliCorp's Dividend Reinvestment and Stock Purchase Plan (the DRIP plan). This plan allows participants to reinvest cash dividend payments from their common stock at a price discounted from the market price. Alpern reinvested his dividends in return for more shares seven times between September 12, 1990 and March 12, 1992. 1 He asserts he made these investment decisions based on a September 4, 1990 prospectus about the DRIP plan, incorporated by UtiliCorp's August 14, 1990 registration statement, and on subsequent financial updates from the company on September 12, 1990, December 12, 1990, March 12, 1991, June 12, 1991, September 12, 1991, December 12, 1991, and March 12, 1992.
Appellants contend that two Aquila officers, Vincent F. Marquez, Jr. and Richard D. Stegall, embezzled company funds from September 1, 1990 until they were fired in early 1992. During this time, Marquez served as vice president of Aquila in Houston and as a member of Aquila's board of directors. Richard D. Stegall was Aquila's vice president in charge of acquisitions and a member of its board of directors.
UtiliCorp acquired Aquila Omaha in 1986, and the latter's rapid growth led to internal control problems and reported employee misconduct. In June 1988, an Aquila Omaha employee named Lyn Maddox wrote a memorandum to Marc Petersen, president of both Aquila Omaha and Aquila, stating that investments lacked complete documentation and required better management. Maddox was fired a month later. In an exit interview on July 28, 1988, with UtiliCorp's chairman and chief executive officer, Richard Green, Maddox and Green discussed these internal control problems and an alleged kick-back scheme on an Aquila Omaha project. Petersen had fired the four employees allegedly involved, but Maddox told Green that Petersen had instructed him to keep quiet about the incident.
On October 29, 1991, long after Maddox had been fired, he again informed UtiliCorp management about reported kickbacks and bidrigging, this time occurring at Aquila's offices in Houston. Maddox said his information came from a UtiliCorp shareholder named Jim Walzel. UtiliCorp also learned that a former Aquila employee named Sheila McDonald could have further related information and that Vince Marquez could have been a silent partner in a Houston company that had done business with Aquila.
UtiliCorp immediately hired a private investigative firm named Risk Prevention Group, Inc. (RPG). RPG talked with Walzel on November 1, 1991, and with his source, Jim Sheeler, on November 6. Sheeler, an off-shore services company owner who had previously submitted an unsuccessful bid for an Aquila project, had been told that someone had overheard Marquez telling another bidder that "If I get my condo, you get the bid" (the bidder reportedly agreed). In addition, Sheeler had noted that Marquez had recently paid for an extravagant wedding and reception in Hawaii.
Upon receiving this information, UtiliCorp CEO Richard Green met on November 11 with Gail Hudek, a partner at Blackwell Sanders Matheny Weary & Lombardi L.C. (Blackwell), UtiliCorp's long-time outside law firm and counsel for it in the case before the court. Green told Hudek to talk with Aquila president Marc Petersen, and she interviewed him on November 22. Petersen did not believe that Marquez was involved in inappropriate activity and speculated that Sheila McDonald was the possible source of the information. Efforts to contact McDonald continued throughout December; she was finally located in Houston and interviewed by Hudek on January 8, 1992.
According to McDonald, "Marquez was engaged in self-dealing on a large scale, including the receipts of kickbacks on operations contracts and property acquisitions." She described in detail how Marquez obtained authority from Aquila to purchase a property based on an inflated report of the oil and gas reserves it held, used a middleman to negotiate a lower price with the seller, and then split the difference with the middleman between the purchase price and the approved price. McDonald estimated that the losses ranged between thirty and ninety million dollars and had grossly inflated the real value of Aquila's assets.
After Hudek informed Green and other UtiliCorp management on January 13, 1992 of McDonald's disclosures, UtiliCorp greatly expanded the scope and size of its investigation. Benjamin Mann, a Blackwell partner, headed the investigative team comprised of several Blackwell attorneys, Arthur Andersen accountants, and UtiliCorp officers. They interviewed current and former Aquila employees and reviewed thousands of documents. UtiliCorp's investigators discovered further evidence of wrongdoing during the next few weeks. Sometime before January 20, 1992, Lynn Marquez, a former wife of Vince Marquez, produced several cancelled checks totalling approximately $90,000, made out to Vincent Marquez and signed by a principal in several companies that had done business with Aquila Houston. Mann concluded that these checks constituted evidence of a kickback to Vincent Marquez. Arthur Andersen also informed UtiliCorp on January 27, 1992, that the vice president in charge of Houston operations, or someone immediately below him, had transferred large amounts of money without clear authorization.
Blackwell submitted a written report of its findings to UtiliCorp on January 22, 1992. It concluded that "significant evidence of wrongdoing and irregularities" by Marquez clearly provided UtiliCorp management with a sufficient legal basis to terminate him. Moreover, it advised that the evidence was "so strongly indicative of not merely irregular but illegal conduct that [UtiliCorp] management is nearly compelled or obligated, based on its fiduciary responsibility to the Company and its shareholders, to terminate Marquez." Blackwell similarly concluded that discharge of Aquila president Marc Petersen would be legally justified based on his significant management deficiencies, especially given his prior management problems. UtiliCorp fired Marquez two days later and reprimanded Petersen. 2
Blackwell updated its findings in a January 29, 1992 report. It again stated that there was "substantial circumstantial evidence" indicating that Marquez was receiving kickbacks, including numerous irregularities regarding middlemen and lack of documentation. Blackwell estimated that the amount of kickbacks could range up to four to five million dollars, but noted that company accountants and outside auditors did not believe this amount needed to be reported.
In the meantime, during the fall and winter, UtiliCorp conducted four public offerings and issued numerous financial statements of record earnings and growth. Five million shares of UtiliCorp common stock were sold at $26 per share on October 29, 1991. Two days later, UtiliCorp announced that third quarter financial results exceeded those from the previous year and that continued growth was expected. Approximately $150 million of unsecured senior notes were sold at a coupon rate of nine percent on November 19, 1991.
December and early January public statements similarly emphasized UtiliCorp's strong financial status. UtiliCorp's press release on December 19, 1991 predicted "record financial results for both...
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