Bianco v. Texas Instruments, Inc.

• Decision Date: 11 October 1985
• Docket Number: No. 85 C 376.,85 C 376.
• Parties: Joseph BIANCO, et al., Plaintiffs, v. TEXAS INSTRUMENTS, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

627 F. Supp. 154

Joseph BIANCO, et al., Plaintiffs, v. TEXAS INSTRUMENTS, INC., et al., Defendants.

No. 85 C 376.

United States District Court, N.D. Illinois, E.D.

October 11, 1985.

Phillip L. Stern, Jerrold E. Salzman, Daniel Clune, Deborah Bornstein, Richard Davis, Lee Freeman, John F. Kinney, Freeman, Freeman & Salzman, for plaintiffs.

Jacob H. Stillman, Rosalind C. Cohen, Richard A. Levine, Washington, D.C., Edward G. Kohler, for S.E.C., amicus curiae.

Stephen P. Beddell, Gardner, Carton & Douglas, Robert F. Finke, Mayer Brown Platt, Hope G. Nightinga, Bartlett H. McGuire, Ialis Polk Wardell, New York City, James E. Dahl, James E. Dahl & Associates, Ronald P. Kane, John F. Stimson, Siegan, Barbakoff, Gomberg, Gordon & Elden, Ltd., for defendants.

MEMORANDUM OPINION

GRADY, District Judge.

This is a securities action brought pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5 of the Securities and Exchange Commission ("SEC"), 17 C.F.R. § 240.10b-5. The plaintiffs are options traders who purchased and/or sold options contracts on Texas Instruments, Inc. common stock during the period from June 6, 1983, to June 10, 1983. The defendants are Texas Instruments, Inc. ("TI") and five named individuals. All of the defendants have filed motions to dismiss the complaint, or in the alternative, to transfer the case to the Northern District of Texas.

FACTS

The seventeen plaintiffs in this case are individuals and corporations who traded in options contracts in TI stock on the Chicago Board of Options Exchange ("CBOE"). All of the plaintiffs, with the exception of Sheldon Jospey, are citizens and residents of the Northern District of Illinois, and all apparently opted out of a similar class action brought by stock and options traders against TI in the Northern District of Texas. Council on Social Work Education v. Texas Instruments, Inc., Nos. 3-83-1083, 1167, 1204 and 1373-H (N.D.Tex.).¹

The named defendants are Texas Instruments, Inc. and four present or former employees of the Consumer Products Group of TI who allegedly traded in TI options: Joseph C. Fox, David L. Ball, Patricia J. Randall and Carl J. Fleece. These four employees are also defendants in an SEC enforcement action in Texas based on the same transactions at issue in this case. SEC v. Fox, No. CA5-84-172 (N.D.Tex.).² A fifth individual, Emery Spears, is a self-employed barber, who is not a TI employee but who allegedly traded in TI options using improperly obtained inside information.³ TI is a Delaware corporation head-quartered in Dallas, Texas, and all of the individual defendants are residents of Texas.

For the purpose of deciding defendants' motions to dismiss, we must assume that the following facts alleged in plaintiffs' first amended complaint are true. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957); Ashbrook v. Hoffman, 617 F.2d 474, 475 (7th Cir.1980). During the time prior to March 1, 1983, TI made repeated public announcements projecting favorable earnings as a result of increasing sales of its 99/4A home computer products. On March 1, 1983, TI issued a press release stating that it was voluntarily correcting a potential defect in the 99/4A home computer. The cost of this correction and the anticipated loss in sales would have a negative impact on the company's first quarter earnings in 1983; however, TI's Chairman of the Board and Chief Executive Officer was quoted as saying that "1983 still holds the promise of being a significantly better year for TI than 1982." First Am.Comp., ¶ 19. In May 1983, TI issued a report of its April stockholder meeting and its first quarter results. The report stated that net sales overall had increased nine percent over the first quarter of 1982, and noted that the home computer defect had prevented sales of that product for a month. Nonetheless, it was reported that "production of home computers continued at an accelerated pace," and that despite the difficulties with the 99/4A home computer, "consumer electronics should be an important contributor to TI this year." The report concluded that "1983 holds the promise of being a significantly better year for TI than 1982." First Am.Comp., ¶ 20.

Despite these public statements, TI was actually experiencing a substantial decline in the demand for its home computer products, and the company was oversupplying its inventory of 99/4A computer products. In addition, price competition in the home computer industry had eroded TI's profit margins and TI was not keeping pace with its competitors in reducing manufacturing costs. Beginning in late April, TI's top executives began meeting with members of the Consumer Products Group to consider possible actions in light of the home computer difficulties. During May, the Consumer Products Group considered reducing its home computer production for 1983 by 41 percent. On June 2, 1983, TI's president met with certain officers at the Consumer Products Group headquarters in Lubbock, Texas, and considered these reductions along with proposed reductions in the monthly, quarterly and annual Consumer Products Group forecasts. On June 3, 1983, a special meeting of the Board of Directors was called for June 10, and on June 6 the regularly scheduled monthly Consumer Products Group forecasting meeting was moved from June 9 to June 8 in order to prepare for the Board meeting. Also on June 6, the Consumer Products Group recommended that production and forecast figures be significantly reduced.

The company's Board of Directors met on Friday, June 10, 1983. Following this meeting, TI issued a press release stating that it could lose "as much as $100 million" during the second quarter of 1983 as a result of "recent developments" in its home computer operations. First Am.Comp., ¶ 25. The release stated that "it now appears that 1983 will be a significantly poorer year for the company than 1982." Id. This press statement was not made public until after the securities markets had closed on June 10, and on Monday, June 13, when the markets opened, trading in TI stock on the New York Stock Exchange was delayed by approximately 2½ hours because of the disproportionate number of sell orders. When trading opened, the price of TI stock was $119 per share, as compared to its June 10 closing price of $157.75 per share, and closed on June 13 at $117.75 per share.

During the week from June 6 to June 10, all seventeen plaintiffs traded in options on TI stock on the CBOE, allegedly relying on TI's March and May reports concerning its financial outlook. Nine of the plaintiffs also made "long" purchases of TI common stock on the open market that same week. First Am.Comp., ¶ 4. During the same time period, the individual defendants in this case traded in TI options on the CBOE, using the inside information that TI was experiencing serious difficulties with its home computer products and was about to make a major change in forecasts and production.⁴ As a result of this insider trading, and because of TI's delay in correcting its allegedly false financial statements, plaintiffs suffered losses in excess of $5 million.

Count I of this suit to recover those losses states a Rule 10b-5 claim against TI for making false and misleading statements concerning its financial outlook and for withholding corrective statements. Count II of the complaint is directed against the named and as yet unidentified individual defendants who engaged in insider trading in TI options. Count III is a common law fraud action against all defendants, alleging that the defendants knew of TI's anticipated losses but failed to disclose this information correcting the prior misrepresentations made by the company. These fraudulent misrepresentations and omissions were made with the intent of encouraging plaintiffs to sell TI puts, purchase TI calls and buy TI stock "long."

DISCUSSION

Motion to Dismiss by TI

Standing of Options Traders to Sue

Defendant Texas Instruments has moved to dismiss the claims based on options transactions.⁵ TI claims that options traders have no standing under § 10(b) or Rule 10b-5⁶ to sue the issuer of the underlying security for allegedly misleading statements because there is no fiduciary relationship or obligation between the issuing corporation and the options trader.⁷

TI points out that options contracts are not written or sold by the corporation issuing the underlying common stock, but are instead written by the Options Clearing Corporation. The common stock issuer, in this case TI, derives no financial benefit from the options transactions, and in fact may be harmed inasmuch as the options market draws purchasers who might otherwise buy common stock and invest directly in the corporation.⁸ Because the options trader does not actually purchase shares of the underlying issuer, there is no transactional or fiduciary relationship between the options trader and the issuer, and the issuer does not owe the trader a duty to disclose material information. Therefore, the options trader cannot sue for breach of a duty that does not exist.

In support of its argument, TI cites the Supreme Court's decision in Chiarella v. United States, 445 U.S. 222, 228-30, 100 S.Ct. 1108, 1114-16, 63 L.Ed.2d 348 (1980), in which the Court held that a duty to disclose material information arises only when there exists a "relationship of trust and confidence" between the defendant and the injured party. The defendant in Chiarella was a printer who inferred the identify of a corporation that was the target of a takeover attempt from documents sent to his employer for printing. Using this inside information, the defendant purchased shares in the target corporation, and then sold the shares at a profit immediately after the takeover was made public. The Court found that the defendant did not violate the securities laws, despite the fact that he bought shares with improperly obtained inside...