Brogren v. Pohlad, Civil File No. 3-93-714

• Decision Date: 28 September 1995
• Docket Number: Civil File No. 3-93-714,3-94-20.
• Citation: 933 F. Supp. 793
• Parties: Karl E. BROGREN and Paul R. Havig, on behalf of themselves and others similarly situated, Plaintiffs, v. Carl R. POHLAD, et al., Defendants. Andrew SALPERTO, on behalf of himself and all others similarly situated, Plaintiffs, v. Carl R. POHLAD, Donald E. Benson, James O. Pohlad, and James Cesario, Defendants.
• Court: U.S. District Court — District of Minnesota

933 F. Supp. 793

Karl E. BROGREN and Paul R. Havig, on behalf of themselves and others similarly situated, Plaintiffs, v. Carl R. POHLAD, et al., Defendants.

Andrew SALPERTO, on behalf of himself and all others similarly situated, Plaintiffs, v. Carl R. POHLAD, Donald E. Benson, James O. Pohlad, and James Cesario, Defendants.

Civil File Nos. 3-93-714, 3-94-20.

United States District Court, D. Minnesota, Third Division.

September 28, 1995.

COPYRIGHT MATERIAL OMITTED

Robert A. Minish, Frank A. Taylor, Daniel D. Hill, Popham, Haik, Schnobrich & Kaufman, Minneapolis, MN; Joseph W. Anthony, Lenny K. Wallen-Friedman, Fruth & Anthony, Minneapolis, MN; Paul B. Jones, Malkerson, Gilliland, Martin, Minneapolis, MN, for Plaintiff.

David P. Pearson, Thomas H. Boyd, Winthrop & Weinstine, St. Paul, MN; Gregory P. Joseph, Honey L. Kober, Fried, Frank, Harris, Shriver & Jacobson, New York City, for Defendants Carl R. Pohlad, Donald E. Benson, James O. Pohlad, Curtis L. Carlson, Paul R. Christen, I.H. Handmaker, and James A. Cesario.

Brian E. Palmer, Roger J. Magnuson, Peter W. Carter, Dorsey & Whitney, Minneapolis, MN, for Defendants Philip N. Hughes, Irwin L. Jacobs, IRM Fund, IRM Management Partners, IRM General.

Michael F. McGrath, Ravich, Meyer, Kirkman & McGrath, Minneapolis, MN, for Intervenor James A. Potter.

MEMORANDUM OPINION AND ORDER

DAVIS, District Judge.

This matter came before the Honorable Michael J. Davis on November 9, 1994. Defendants, MEI, Jacobs, and IMR have moved the Court to dismiss plaintiffs' claims that defendants violated sections 10(b) and 20 of the Securities and Exchange Act, 15 U.S.C. section 78j(b) and Rule 10b-5. Defendants have also moved the Court to dismiss plaintiffs' claims of negligent misrepresentation for lack of subject matter jurisdiction under 28 U.S.C. section 1367.

After a thorough review of all of the relevant documents, the Court finds that plaintiffs' complaints have failed to state a cause of action under rule 12(b)(6) for securities fraud against any of the defendants in this case. Therefore, defendants' motions to dismiss are granted in their entirety.

FACTUAL BACKGROUND

These two suits arise from the bankruptcy of MEI Diversified, Inc. (MEI) in February 1993. The plaintiff classes¹ allege that MEI's directors and officers violated Sections 10(b) and 20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10(b)-5, and Regulation S-K, which were promulgated by the Securities Exchange Commission (SEC) pursuant to that statute. They further allege common law negligent misrepresentation.

The Brogren plaintiffs consist of individuals and institutions that purchased MEI common stock, notes, and debentures between October 20, 1990 and February 23, 1993. The Salperto plaintiffs consist of individuals and institutions that purchased MEI stock between August 11, 1992 and February 22, 1993. MEI directors and officers Carl Pohlad, Donald Benson, James Pohlad, Curt Carlson, Paul Christen, I.H. Handmaker, James Cesario, and Philip Hughes (the MEI defendants) are named in both suits. Irwin Jacobs, as an MEI director, and three business entities allegedly owned and controlled by him, the IMR entities², are additional defendants in the Brogren Complaint.

Prior to its bankruptcy, MEI's shares were traded publicly on the New York Stock Exchange. Until mid-1990, MEI's primary business was distributing and selling nuts, candy and snack food. In August 1990, through an 80-percent-owned subsidiary named MEI-Regis Salon Corp., MEI acquired the stock of Regis Corporation, The Glemby Company, Inc., and Essanelle Corporation, which operated hair styling salons in shopping malls and department stores. At that time, MEI also purchased New Dimensions in Medicine, a medical products developer and manufacturer. By May 1992, MEI had sold all of its assets of the snack food business and sought to expand its beauty salon business. MEI contracted with Regis Corporation to manage the salons and to perform due diligence on Glemby Company, Inc.

Both groups of plaintiffs generally allege that defendants made materially misleading public statements and omissions about MEI's performance in order to artificially inflate its stock price, for their own benefits as shareholders, and to hide from capital investors the fact that the company was in dire financial straits.

Salperto Complaint

The Salperto plaintiffs allege that on or about August 11, 1992, MEI reported a $2,989,000 loss for the quarter ending June 30, 1992. In reporting this result, defendant Benson stated in a press release that the medical products segment produced a positive contribution but that the professional beauty salon segment produced an operating loss:

Our professional beauty salons' business' second quarter and year-to-date results continue to reflect failure to meet profit expectations on which the acquisition transaction and management agreement with Regis ... were based. In addition to lower than anticipated six-month salon revenues, we experienced rapidly escalating costs. We believe we have properly reacted to the cost increases and have implemented steps to contain such costs in the future. A new management team was installed to replace Regis and we are pleased with the new direction and enthusiasm Gary Hollister and his team bring to MEI salons.

* * * * * *

We continue to incur one-time legal expenses in the form of consulting fees, legal fees, employment related expenses and reorganizational expenses, much of which related to the lawsuit against Regis arising from its management of the salons. One-time expenses for the 1992 six-month period were approximately $4,100,000.

* * * * * *

Because of the need for cash with which to grow our business segments and to service out long term debt interest burden, we continue to discuss refinancing options with several investment bankers. Some of these refinancing options include seeking strategic partners to provide significant equity capital for both of the company's operating segments. It is our desire to reduce the interest burden of our long term debt in a meaningful way.

The Salperto plaintiffs allege that these statements failed to adequately disclose that if the discussions about refinancing and seeking strategic-partners were unsuccessful, it was doubtful whether the company could continue to operate. They allege that this omission violated Item 303 of SEC regulation S-K, 17 C.F.R. § 229.10, which requires disclosure of events or uncertainties which are likely to affect a corporation's liquidity. Id. § 229.303(a)(1)-(3).

The Salperto plaintiffs also allege that defendants failed to disclose this information in the management discussion and analysis section (MD & A) of MEI's second and third quarter 1992 10-Q forms. There defendants stated that short term liquidity was not a problem, and that long term liquidity needs "are anticipated to be funded by a combination of cash flows from operations, long-term financing, sale of nonoperating assets" and new long-term financing arranged with banks or other financial institutions or a private placement/strategic investor equity infusion.

On or about October 2, 1992 MEI announced that it was continuing discussions with strategic investors "to provide equity capital and augment profitability through a greater product base and greater distribution of all products." It made a similar announcement on October 23, 1992. The Salperto plaintiffs allege that defendants failed to disclose in both these statements that if discussions were unsuccessful, substantial doubt would exist about MEI's ability to survive.

On November 17, 1992 MEI reported third quarter losses of $8,680,000. The company characterized these losses as "very disappointing" but went on to state that they reflected progress in the medical segment, which would be increasing production-capacity to keep up with demand. It further stated that MEI was "continuing discussions with strategic investors" for the medical products and professional beauty salon subsidiaries "to provide significant equity capital and augment profitability." MEI also announced that it had received a proposal from the IMR Fund, L.P., to acquire 13,340,000 shares of MEI voting stock at a purchase price of $5.00 per share, and that the agreement was subject to the parties' due diligence.

In a press release issued November 20, 1992, MEI stated that the proposal was "worthy of consideration" because of the cash infusion, which would be used to expand New Dimensions in Medicine and the Salons and to continue the litigation against The Glemby Company. The Salperto plaintiffs allege that this statement was misleading because the cash was necessary for MEI to continue operating and that MEI's survival was doubtful without a cash infusion.

On December 2, 1992 MEI announced that its board of directors was in the process of evaluating the proposal and exploring other alternatives; it made the same announcement on December 23, 1992. On January 11, 1993 it announced that 100 management employees had been eliminated from the salon segment in order to position MEI more effectively for future years. On January 21, 1993 MEI then announced that it had signed a letter of intent with IMR. The Salperto plaintiffs allege that defendants did not disclose in any of these releases that MEI might not survive if the transaction was not completed.

Brogren Complaint

The Brogren plaintiffs allege the same facts that make up the Salperto complaint. In addition, they allege numerous misrepresentations and omissions between October 20, 1990 and August 11, 1992. For example, they allege that defendants misrepresented on the second quarter 1990 10-Q and 10-K forms that the company's capital was sufficient to meet long term needs. They further allege that the report misleadingly stated that "a substantial portion" of that quarter's loss was attributable to MEI's snack and candy group rather than the salons, and...