Stern v. Leucadia Nat. Corp.
| Decision Date | 20 April 1988 |
| Docket Number | D,No. 1214,1214 |
| Citation | 844 F.2d 997 |
| Parties | , Fed. Sec. L. Rep. P 93,717, 11 Fed.R.Serv.3d 61 Jonathan STERN, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. LEUCADIA NATIONAL CORPORATION, LNC Investments, Inc., Charter National Life Insurance Company, American Investment Company, Leucadia Inc., Uintah National Corp., TLC Associates, Carl Marks & Co., Inc., Ian N. Cumming, Joseph S. Steinberg, Cumberg, Inc., Marks Investing Corp. and S & S Securities, Inc., Defendants-Appellees. ocket 87-7211. |
| Court | U.S. Court of Appeals — Second Circuit |
Roger W. Kirby, New York City (Kaufman Malchman Kaufmann & Kirby, New York City, of counsel), for plaintiff-appellant.
Dennis J. Block, New York City (Jonathan M. Hoff, Donald E. McKnight, Jr., Weil, Gotshal & Manges, New York City, of counsel), for defendants-appellees Leucadia Nat. Corp., LNC Investments, Inc., Charter Nat. Life Ins. Co., American Inv. Co., Leucadia, Inc., Uintah Nat. Corp., TLC Associates, Carl Marks & Co., Inc., Ian N. Cumming, Joseph S. Steinberg, Cumberg, Inc., Marks Investing Corp., and S & S Securities, Inc.
Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant-appellee Carl Marks & Co., Inc.
Before KEARSE, ALTIMARI and MAHONEY, Circuit Judges.
Jonathan Stern brought this action on behalf of himself and a class of investors who purchased common stock of the GATX Corporation ("GATX") between January 9, 1986 and March 26, 1986, inclusive. Stern complained that defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982) ("Section 10(b)"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1987) ("Rule 10b-5"), by leading the investing public to believe that defendant Leucadia National Corporation ("Leucadia National") would merge with GATX, when in fact defendants sought only to inflate artificially the market price of GATX common stock, and thereafter to sell off their shares at a substantial profit.
Defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6). The United States District Court for the Southern District of New York, Gerard L. Goettel, Judge, granted the motion, according plaintiff leave to replead within twenty days. Stern v. Leucadia Nat'l Corp., 644 F.Supp. 1108 (S.D.N.Y.1986). Upon the filing of the amended complaint, defendants moved to dismiss on the same grounds as before; in addition, defendants requested that sanctions be awarded under Fed.R.Civ.P. 11. By endorsement, the district court granted defendants' second motion to dismiss and awarded Rule 11 sanctions with respect to that motion.
Stern appeals. We affirm as to the dismissal, and reverse as to the sanctions.
Except for the allegations pertaining to Jonathan Stern and his counsel, plaintiff's amended complaint is pleaded entirely upon information and belief. In view of our disposition of this appeal, we assume the truth of his allegations. See DiVittorio v. Equidyne Extractive Indus. Inc., 822 F.2d 1242, 1244, 1247 (2d Cir.1987), and cases there cited. 1
Stern alleges that defendants Ian N. Cumming and Joseph S. Steinberg control an interlocking network consisting of the corporate defendants, as follows. Cumming, Steinberg, Marks Investing Corp. ("MIC") and S & S Securities, Inc. ("S & S") are the owners of Cumberg, Inc. ("Cumberg"). Cumberg, Cumming and Steinberg own TLC Associates ("TLC"), a New York general partnership. In turn, TLC owns all of the outstanding shares of defendant Uintah National Corporation ("Uintah"), which owns 48% of the outstanding shares of Leucadia National, which owns all of the outstanding shares of Leucadia Inc. ("Leucadia"), which owns all of the outstanding shares of LNC Investments, Inc. ("LNC") and 94% of the outstanding shares of defendant American Investment Company ("AIC"), which owns all of the outstanding shares of defendant Charter National Life Insurance Company ("Charter"). Cumming, Steinberg and Leucadia own more than half of MIC's outstanding shares; Cumming and Steinberg own an unspecified percentage of S & S' shares; and defendant Carl Marks & Co., Inc. ("Carl Marks") owns an unspecified portion of MIC.
Stern alleges that defendants conspired with, and aided and abetted, one another in violating Section 10(b) and Rule 10b-5, and that Leucadia National, Cumming and Steinberg were each a controlling person of each of the other defendants (except possibly Carl Marks) within the meaning of Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78t(a) (1982).
In light of our view of the noncompliance of plaintiff's amended complaint with Fed.R.Civ.P. 9(b), it is appropriate to outline the allegations of that complaint in some detail. That outline follows.
On January 9, 1986, Leucadia National, LNC, AIC, Charter, LI, Uintah and TLC (collectively the "Leucadia group") filed a Schedule 13D statement 2 with the Securities and Exchange Commission reporting that they had purchased, or had acquired options to purchase, 5.26% of GATX's outstanding shares. The statement indicated that the Leucadia group deemed GATX's common stock undervalued, and might seek control of GATX. Preliminary to any such determination, the group stated it might explore the feasibility of various strategies for gaining control, including: (1) merger; (2) acquisition of additional GATX common or preferred stock (subject to its availability at favorable prices and the availability of any requisite financing) in open market or privately negotiated purchases, by tender offer, or otherwise; (3) solicitation of proxies to elect its nominees as directors of GATX; or (4) joining forces with interested third parties to obtain control of GATX. The group noted that, depending upon the course it chose, it might dispose of shares of GATX common stock in the open market, in privately negotiated transactions, or otherwise. The statement cautioned, however, "that the possible activities of [the Leucadia group] are subject to change at any time and there is no assurance that [it] will actually purchase any additional shares of the Common Stock or any shares of preferred stock or seek to influence or obtain control of [GATX]." The same day, the Dow Jones News Service ("DJNS") reported the Leucadia group's stake in GATX and its plans with respect thereto as described above. On January 10, GATX common closed at $38 1/2 on the New York Stock Exchange ("NYSE"), up $3 5/8 from its closing price the day before.
On January 30, 1986, the Leucadia group filed the first of seven amendments to the Schedule 13D statement, noting that, through the purchase of stock and options, it had increased its stake in GATX to 6.3% of the latter's outstanding shares, and stating that it was "exploring the possibility of acquiring certain of [GATX's] assets...." The amendment further reported that in connection with this exploration, the Leucadia group had entered into a confidentiality/standstill agreement with GATX on January 28 pursuant to which GATX provided certain confidential information to Leucadia; in return, the group was to freeze its stake in GATX and refrain from acquiring any additional GATX stock or acting in concert with any third party to acquire voting securities or control of GATX from the date of the agreement until twenty-four hours following destruction or return of the information furnished to the Leucadia group pursuant to the agreement.
The second amendment to the Schedule 13D statement was filed on February 3, 3 reporting that the Leucadia group's stake in GATX had not changed, but it had destroyed or returned all information furnished under the confidentiality/standstill agreement on February 6, thus terminating its obligations thereunder as of February 7.
Amendment number three, filed February 12, announced that the Leucadia group had on February 11 proposed a cash merger with GATX pursuant to which the latter's common stockholders would receive at least $38 per share. The group also announced that, in the alternative, it was prepared to discuss a transaction whereby GATX would distribute its capital equipment leasing business to its shareholders and the cash merger price would be reduced by an agreed amount. The amendment stated that consummation of the transaction "would be subject to negotiation, preparation and execution of a definitive merger agreement, the requisite regulatory approvals, satisfactory completion by Leucadia of diligence (which it would be prepared to commence promptly) and Leucadia [National's] arrangement of requisite financing." GATX responded on February 13, that it would consider any "specific bona fide proposal" made by the Leucadia group, and would provide the group with non-public information concerning GATX subject to a confidentiality agreement.
The Leucadia group filed the fourth amendment to its Schedule 13D statement on February 25, announcing that it owned 8.86% of GATX's outstanding shares. Three days later, DJNS reported that Leucadia National had raised its bid for GATX to $40 per share and that Merrill Lynch Capital Markets ("Merrill Lynch"), retained by Leucadia National as its financial advisor to assist in obtaining the necessary financing for the $40 per share bid, was "highly confident" that it could obtain the requisite financing. DJNS also reported that GATX had announced another $40 per share offer from a third party, and a "conditional" offer of $42 per share in cash and notes from still another third party.
Amendment number five to the Schedule 13D statement, filed on March 4, 1986, indicated no change in Leucadia's ownership of GATX's outstanding shares. It reported, however, the increase in the proposed merger price to $40. Again, the Leucadia group stated that consummation of its cash merger proposal was...
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