Phillips Petroleum Securities Litigation, In re

• Decision Date: 01 July 1976
• Docket Number: No. 85-14,85-14
• Citation: 881 F.2d 1236
• Parties: Fed. Sec. L. Rep. P 94,538, RICO Bus.Disp.Guide 7278 In re PHILLIPS PETROLEUM SECURITIES LITIGATION. C.A. 85-14 HUDSON, et al. v. PHILLIPS PETROLEUM COMPANY, et al. C.A. 85-45 HUDSON, et al. v. PHILLIPS PETROLEUM COMPANY, et al. C.A. 85-281 IRWIN, et al. v. DOUCE, et al. C.A. 85-401 KELLY, et al. v. PICKENS, et al. C.A. 85-447 LAWRENCE, et al. v. PICKENS, et al. C.A. 85-537 COHEN v. MESA PETROLEUM CO., et al. Appeal of Florence HUDSON (Civil ActionMMS), Harry W. Voege; S. Paul Posner & Co., a partnership; Ominsky, Joseph & Welsh, P.C., Defined Benefit Plan U/A dated DDT
• Court: U.S. Court of Appeals — Third Circuit

Page 1236

881 F.2d 1236

Fed. Sec. L. Rep. P 94,538, RICO Bus.Disp.Guide 7278

In re PHILLIPS PETROLEUM SECURITIES LITIGATION.

C.A. 85-14 HUDSON, et al. v. PHILLIPS PETROLEUM COMPANY, et al.

C.A. 85-45 HUDSON, et al. v. PHILLIPS PETROLEUM COMPANY, et al.

C.A. 85-281 IRWIN, et al. v. DOUCE, et al.

C.A. 85-401 KELLY, et al. v. PICKENS, et al.

C.A. 85-447 LAWRENCE, et al. v. PICKENS, et al.

C.A. 85-537 COHEN v. MESA PETROLEUM CO., et al.

Appeal of Florence HUDSON (Civil Action No. 85-14 MMS),

Harry W. Voege; S. Paul Posner & Co., a partnership;

Ominsky, Joseph & Welsh, P.C., Defined Benefit Plan U/A

dated DDT July 1, 1976, Albert Ominsky, Trustee; Barnett

Stepak; Initio, Inc.; Alfred D. Whitman; Connecticut

Medical Laboratory, Inc.; Murray Bell; Pierre Haber and

Leonard Brawer (Civil Action No. 85-45 MMS), Christopher P.

Kelly and Brynn Kelly, Trustees for the Kelly Family Trust

Under Trust Agreement dated as of October 1, 1977, on behalf

of themselves and all others similarly situated (Civil

Action No. 85-401 LON), John S. Lawrence, on behalf of

himself and all others similarly situated (Civil Action No.

85-447), Jerry C. Cohen (Civil Action No. 85-537 MMS).

Appeal of John S. LAWRENCE.

Nos. 88-3719, 88-3755.

United States Court of Appeals Third Circuit.

Argued March 13, 1989.

Decided Aug. 9, 1989.

Rehearing and Rehearing In Banc Denied Sept. 6, 1989.

Dianne M. Nast, Stuart H. Savett, Kohn, Savett, Klein & Graf, P.C., Philadelphia, for appellant Ominsky, Joseph & Welsh, P.C. Defined Benefit Plan U/A dated DDT 7/1/76, Albert Ominsky, trustee.

William Prickett (argued), Prickett, Jones, Elliott, Kristol and Schnee, Wilmington, Del., for appellants.

Stephen D. Oestreich, Wolf, Popper, Ross, Wolf & Jones, New York City, for all

appellants as lead counsel; individual counsel for appellant Harry Voege.

David J. Bershad, Milberg, Weiss, Bershad, Spechthrie & Lerach, New York City, for appellant Initio, Inc.

Irving Bizar, Bizar, D'Alessandro, Shustak and Martin, New York City, for appellant Florence Hudson.

David F. Dobbins (argued), Patterson, Belknap, Webb and Tyler, New York City, for appellant John S. Lawrence.

Charles F. Richards, Jr. (argued), Thomas A. Beck, William J. Wade, Richards, Layton & Finger, Wilmington, Del., for appellees Mesa Partners, Mesa Petroleum Co., Mesa Asset Co., T. Boone Pickens, Cyril Wagner, Jr., Jack E. Brown, I.T. Corley, Jack K. Larsen, J.R. Walsh, Jr., Robert L. Stilwell, Harley N. Hotchkiss, Wales H. Madden, Jr., David H. Batchelder, Jesse P. Johnson, Cy-7, Inc. and Jack-7, Inc.

Before MANSMANN, GREENBERG and SCIRICA, Circuit Judges.

OPINION OF THE COURT

SCIRICA, Circuit Judge.

This is an appeal from a grant of summary judgment against a consolidated plaintiffs class, comprised of individuals who purchased stock in the Phillips Petroleum Company ("Phillips") from December 5, 1984 through December 21, 1984. The named defendants in the class action include Phillips and the Phillips Board of Directors (the "Phillips defendants"), the Mesa Partnership ("the Partnership") which attempted to acquire control of Phillips by a hostile takeover in December 1984, and individual members of the Partnership, including Mesa Petroleum Company ("Mesa") and Mesa's Chief Executive Officer, T. Boone Pickens, Jr. ¹ After a complex procedural history, the plaintiffs had outstanding claims alleging violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1988); a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-68 (1982 & Supp. III 1985); and claims arising under Delaware state law. After a settlement that removed the Phillips defendants from the litigation, plaintiffs moved for summary judgment on liability and the Mesa defendants cross-moved for summary judgment. The district court granted the Mesa defendants' motion, dismissing with prejudice all outstanding claims against them. In re Phillips Petroleum Securities Litigation, 697 F.Supp. 1344 (D.Del.1988).

While this appeal presents several issues, the principal matter confronting us is whether a genuine issue of material fact exists with regard to the securities fraud claims. If so, we must determine whether the record contains any evidence from which a jury could reasonably find scienter on the part of the Partnership, a necessary element of the plaintiffs' claims under the federal securities laws and RICO--and, thus, whether the district court erred as a matter of law in granting summary judgment on those claims. Because we believe there is sufficient evidence for a jury to so conclude, we will vacate the district court's judgment dismissing the claims under Sec. 10(b) and Rule 10b-5, and remand for further proceedings on those claims. Additionally, as violations of the federal securities laws can constitute predicate acts under the RICO statute, we will vacate the district court's judgment and remand for further proceedings on the RICO claim.

We will, however, affirm the district court's dismissal of all claims brought under Delaware state law.

I.

While this lawsuit concerns the Partnership's efforts to acquire control of Phillips, the germane facts begin with an earlier attempt by Mesa Petroleum to acquire Great American Oil Company of Texas ("GAO"). In December 1982, Mesa launched a hostile tender offer for GAO. In order to thwart Mesa's takeover, GAO negotiated a friendly "white knight" merger with Phillips. A key to consummation of the deal, however, was a settlement with Mesa in early January 1983. That settlement included Mesa selling its block of stock back to GAO, being compensated for its expenses and, most importantly, signing a Standstill Agreement whereby Mesa and its affiliates agreed in essence not to attempt to acquire any of the voting securities of GAO for a period of five years. The Standstill Agreement made no reference to any attempt by Mesa or its affiliates to acquire voting shares in Phillips.

The Partnership began to purchase Phillips common stock on October 22, 1984. On December 4, 1984, the Partnership issued a press release stating it had acquired approximately 5.7% of Phillips's outstanding shares and that it was commencing a tender offer for 15 million shares of Phillips common stock at $60 per share. The press release stated explicitly that the Partnership would "not sell any Phillips shares owned by it back to Phillips except on an equal basis with all other shareholders."

The Partnership filed its Schedule 13-D on December 5, 1984, as required under Section 13(d) of the Williams Act, 15 U.S.C. Sec. 78m(d)(1). ² The Schedule 13-D stated that the proposed tender offer was designed ultimately to obtain control of Phillips. Furthermore, the Schedule 13-D reiterated the statement from the previous day's press release that the Partnership did not intend to sell its shares to Phillips except on an equal basis with all shareholders.

The next day, December 6, 1984, T. Boone Pickens appeared on the nationally televised MacNeil/Lehrer News Hour representing the Partnership. In response to questioning by Mr. MacNeil, Pickens stated unequivocally that "[t]he only way we would consider selling back [to Phillips] is if they make the same offer to all shareholders."

Phillips responded to the Partnership's actions by attempting to block the takeover attempt in court. From the initial announcement of the takeover, both the Partnership and Phillips filed a succession of suits in an attempt to block or pre-empt the other's actions. In order of filing, these included the following: (1) an action by the Partnership in the United States District Court for the District of Delaware on December 4, 1984, to enjoin enforcement of the Delaware Tender Offer Act (8 Del.C. Sec. 203) and to determine, under pendent jurisdiction, the applicability of the GAO Standstill Agreement to the Partnership's takeover of Phillips; (2) a declaratory action in Delaware Chancery Court to declare the GAO Standstill Agreement inapplicable to the Phillips takeover attempt; (3) the ex parte procurement of a temporary restraining order by Phillips in Oklahoma state court preventing the Partnership from moving against Phillips based upon the GAO Standstill Agreement; (4) further action by the Partnership in Delaware Chancery Court to restrain Phillips from pursuing its Oklahoma action; (5) further action by the Partnership in the Delaware Federal District Court to prevent Phillips from initiating action in any other federal court; and (6) an action by Phillips in Louisiana state court to prevent the Partnership from acquiring interest in certain Phillips assets in At the same time the parties were jousting in court, however, Phillips was pursuing private negotiations with the Partnership. Settlement efforts were conducted by a neutral intermediary, Joseph Flom, Esq. On December 7, 1984, Phillips made its first offer, through Flom, to buy out the Partnership's interest in Phillips. Pickens, representing the Partnership, declined the offer--allegedly because it did not treat all shareholders equally. Phillips made repeated offers over the course of the next two weeks, all of which were refused, according to the defendants, because they did not treat all shareholders equally.

Louisiana, through control of Phillips itself, without the prior approval of that state's regulatory agencies. The Louisiana action does not appear to have had any impact on the takeover contest and, indeed, no party to this lawsuit mentions it as having been a factor. The other actions all turned on the applicability of the GAO Standstill Agreement to the Partnership's attempt to take over Phillips. Both the United States District Court and the Oklahoma state court ultimately deferred to the Delaware Chancery Court for determination of the applicability issue.

The turning point in the takeover fight came on December 20, 1984. On that day, the...