Citadel Holding Corp. v. Roven
| Decision Date | 09 June 1994 |
| Docket Number | No. 92-55915,92-55915 |
| Citation | 26 F.3d 960 |
| Parties | , Fed. Sec. L. Rep. P 98,240 CITADEL HOLDING CORP., a Delaware corporation, Plaintiff-Appellant, v. Alfred ROVEN; American Underwriters, Inc., a Delaware corporation, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Kirsten Hicks Spira and Martin C. Washton, Gibson, Dunn & Crutcher, Los Angeles, CA, for plaintiff-appellant.
Jeffrey Q. Smith, Cadwalader, Wickersham & Taft, New York City, and Richard C. Field, Cadwalader, Wickersham & Taft, Los Angeles, CA, for defendants-appellees.
Appeal from the United States District Court for the Central District of California.
Before: TANG, D.W. NELSON, and LEAVY, Circuit Judges.
Opinion by Judge D.W. NELSON.
OVERVIEW
Citadel Holding Corporation ("Citadel") appeals the district court's grant of summary judgment in favor of Alfred Roven ("Roven") and American Underwriters, Inc. ("American") in an action filed by Citadel under Sec. 16(b) of the Securities Exchange Act of 1934 ("the Act"). 15 U.S.C. Sec. 78p(b) (1988). Citadel seeks disgorgement of profits allegedly realized by Roven through short-term transactions with private brokerage houses in options referencing Citadel stock. We have jurisdiction pursuant to 15 U.S.C. Sec. 78aa. We affirm.
Citadel is a savings and loan holding company incorporated under the laws of the There were two legal restrictions against any shareholder or prospective shareholder acquiring more than 10% of Citadel's common stock during the 1985-87 time period. First, no person could own more than 10% of a savings and loan's common stock without approval from the Federal Home Loan Bank Board ("Bank Board"). See 12 U.S.C. Secs. 1730a, 1730(q) (1988). Second, Article 8 of Citadel's Certificate of Incorporation expressly prohibited any person "significantly engaged" in an "unrelated business activity" from owning more than 10% of the Citadel stock (the "Article 8 restriction"). At all relevant times, Roven held 313,000 shares of Citadel's common stock, approximately 9.8% of all the company's outstanding shares.
State of Delaware, with its principal place of business in Glendale, California. Its common stock is listed and traded on the American Stock Exchange. Alfred Roven ("Roven") is the Chairman of the Board of Directors and the sole shareholder of American Underwriters, Inc. ("American"), a securities and real estate investment company. At the time that Roven, through American, entered into the private option contracts at issue here, he was a director of Citadel, and therefore was a statutory "insider" within the meaning of Sec. 16(b) of the Act.
On October 8, 1985, Roven negotiated with Bear Stearns & Co. ("Bear Stearns") to purchase call options on behalf of American. In exchange for an initial payment of $750,000, Roven received the right to purchase, at a pre-determined price, 150,000 shares of Citadel stock (the "Bear Stearns option"). Roven's rights under the contract were nontransferable, and his option to purchase the 150,000 shares was exercisable only in its entirety. The agreement provided for an initial exercise period of only thirty days, but Roven had the right to extend the agreement for subsequent thirty-day periods so as to maintain his option position. Although Roven could not sell his option on the open market, he was free at any time to sell the option back to Bear Stearns at a price linked to the market price of the underlying securities.
The Bear Stearns option gave Roven no voting rights with respect to the underlying Citadel stock, and there is no evidence that Roven directly or indirectly obtained added leverage over the management of Citadel as a result of the agreement. Roven had a right to receive dividends on the underlying Citadel stock, although no such payments were made during the time that he maintained the option position.
Roven renewed the Bear Stearns option over two years, maintaining his option on precisely 150,000 shares irrespective of changes in the price of the underlying stock and irrespective of whether the extensions represented a net profit or loss. The extensions were accomplished through a series of "rollovers" that occurred either immediately prior to the scheduled expiration date or when the price of the Citadel stock referenced in the agreement hit a specified "trigger" price. Each extension resulted in a new exercise price and a new purchase price.
From May 21, 1986 through August 14, 1987, Roven withdrew cash from his Bear Stearns account on at least nine separate occasions. These withdrawals were conditional receipts of funds that Roven was required to repay if and when the securities declined in value. From the time the Bear Stearns option was originated in October 1985, through October 1, 1987, Roven paid a total of $5,288,720 to extend the position and withdrew a total of $5,289,569 from the account. No money was withdrawn until more than seven months after the agreement was initiated, and when the stock market crashed in October, 1987, the contract expired worthless. Roven never exercised the Bear Stearns option.
In April 1986, Roven negotiated, through American, three call option contracts referencing Citadel stock with another broker, Prudential Bache Securities, Inc. ("Prudential Bache"). In exchange for $286,875, $284,700, and $277,625, respectively, Roven received the right under each of the three contracts to purchase 25,000 shares of Citadel common stock, for a total of 75,000 shares. The Bache options worked much as did the Bear Stearns option, except that the Bache options had an initial term of thirty to forty-five days. American paid a total of $1,068,335 with respect to the acquisition and Roven made no effort to disguise the transactions. Roven and American timely filed amendments to their Schedule 13D publicly disclosing the acquisition of the Bear Stearns and Bache options, and appended copies of the trade confirmations and other descriptive material. Roven also disclosed the options in filling out Citadel's annual directors' and officers' questionnaires. Despite these disclosures, Roven concluded that, because the options were not "presently exercisable," he had no obligation separately to report the transactions pursuant to Sec. 16(a). 1
extension of the first and third Bache options. American, however, neither withdrew nor was paid any money with respect to these two options, and never closed them out. Roven extended the second Bache option by a series of payments in the aggregate amount of $490,700. On October 29, 1986, Roven closed out the option and, as a result, received funds from Prudential Bache in the amount of $559,650. Roven received these funds six months and seven days after he acquired the option. Roven never exercised any of the three Bache options.
Citadel's 1986 annual proxy statement, which was filed with the SEC and distributed to shareholders, stated with respect to the Bear Stearns option (the Bache options not yet having been acquired) as follows:
American has acquired an option giving it the right to purchase from a third party 150,000 shares of Citadel common stock, which option by its terms cannot be exercised until all required filings have been made with, and all required approvals have been obtained from, the appropriate regulatory authorities.
On or about May 29, 1987, Citadel filed with the SEC, and transmitted to its shareholders, a copy of its 1987 annual proxy materials. Once again, Citadel made reference to the options, this time implicating both the Bear Stearns and Bache agreements. Citadel noted that Roven's ownership of Citadel stock "[did] not include options with respect to 200,000 shares constituting approximately 5.77% of the issued and outstanding shares ... that cannot be lawfully exercised until certain required filings have been made with, and certain required approvals have been obtained from, the Federal Home Loan Bank Board." Citadel's 1987 proxy statement also discussed the Article 8 restriction.
Citadel filed this action on October 9, 1987, in the District Court for the Central District of California, seeking disgorgement of profits allegedly realized by Roven through his purchase and sale of the options. Roven emphasizes that he was prohibited by law from purchasing additional Citadel stock without prior federal and corporation approval, and maintains that he purchased the options so as to be able to increase his ownership of Citadel were he to obtain the necessary approvals. Citadel, however, claims that Roven was able to use the options to speculate in Citadel stock in violation of Sec. 16(b). Pursuant to the terms of Sec. 16(b), 2 Citadel was required to show that Roven (1) realized a In November, 1988, Roven moved for summary judgment on the ground that the options were not equity securities of Citadel within the meaning of Sec. 16(b), and on the alternative ground that the options were not "presently exercisable" and thus exempted by SEC Rules 16a-6 and 16a-10. The motion for summary judgment was denied, and on November 3, 1990, Roven made a renewed motion for summary judgment. While the matter was under submission, the case was transferred to Judge Pfaelzer.
profit, (2) from a purchase and sale or sale and purchase within a period of less than six months, (3) of an equity security of Citadel, (4) in a transaction that was not exempt by the rules and regulations of the Securities and Exchange Commission ("SEC").
On June 16, 1992, Judge Pfaelzer filed an order granting Roven's renewed motion for summary judgment, finding that Citadel had failed to raise a genuine issue of material fact with respect to three issues. The district court held that: (1) as a matter of law and fact, there was no "purchase and sale" or "sale and purchase" within a period of less than six months; (2) Citadel failed to raise a...
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