Commercial Union Assur. Co., plc v. Milken

• Decision Date: 04 March 1994
• Docket Number: No. 406,D,406
• Citation: 17 F.3d 608
• Parties: Fed. Sec. L. Rep. P 98,108, RICO Bus.Disp.Guide 8502 COMMERCIAL UNION ASSURANCE CO. plc, Commercial Union Pensions Management, Ltd., Gemini Overseas Corporation, Mercia Zurich, A.G., Overbrook Nominees, Ltd., Strand Nominees, Ltd., Plaintiffs-Appellants, v. Michael R. MILKEN, Lowell J. Milken, Defendants-Appellees. ocket 93-7537.
• Court: U.S. Court of Appeals — Second Circuit

Page 608

17 F.3d 608

Fed. Sec. L. Rep. P 98,108, RICO Bus.Disp.Guide 8502

COMMERCIAL UNION ASSURANCE CO. plc, Commercial Union

Pensions Management, Ltd., Gemini Overseas Corporation,

Mercia Zurich, A.G., Overbrook Nominees, Ltd., Strand

Nominees, Ltd., Plaintiffs-Appellants, v. Michael R. MILKEN, Lowell J. Milken, Defendants-Appellees.

No. 406, Docket 93-7537.

United States Court of Appeals, Second Circuit.

Argued Aug. 30, 1993.

Decided March 4, 1994.

George D. Reycraft, New York, New York (Debra Brown Steinberg, Cadwalader, Wickersham & Taft, New York, New York, of counsel), for Plaintiffs-Appellants.

Mark Belnick, New York, New York (David L. Kornblau, Steven C. Herzog, Talitha Thurau, Steven Pacht, Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York; Michael O. Finkelstein, Lord, Day & Lord, Barrett Smith, New York, New York, of counsel), for Defendants-Appellees.

Before: FEINBERG, CARDAMONE, and ALTIMARI, Circuit Judges.

CARDAMONE, Circuit Judge:

This appeal is from a grant of summary judgment to defendants in an action in which plaintiffs asserted that defendants had violated the securities laws and civil RICO. We recognize there are legal actions that serve to punish or deter defendants or to determine property rights. But the signature of the causes of action before us is harm to plaintiffs: actual damages or consideration paid in the securities laws actions, and injury to plaintiffs' business or property in the RICO cause of action. Here plaintiffs, who are investors, may have feared they would suffer harm, but they actually suffered no out-of-pocket loss since their investments were fully repaid, plus interest. Thus, while we have no difficulty in finding that plaintiffs' causes of action might well subject defendants to liability, plaintiffs can prove no damages.

Plaintiffs-appellants are Commercial Union Assurance Co. plc, Commercial Union Pensions

Management, Ltd., Overbrook Nominees, Ltd., Strand Nominees, Ltd., Gemini Overseas Corporation, and Mercia Zurich, A.G. (collectively appellants). They appeal from an order entered on May 5, 1993 and final judgment entered on May 6, 1993, by the United States District Court for the Southern District of New York (Pollack, J.), granting defendants Michael Milken and Lowell Milken's motion for summary judgment on appellants' claims under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1988), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1993); Sec. 12(2) of the Securities Act of 1933 as amended, 15 U.S.C. Sec. 77l(2) (1988); and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961, 1962 and 1964 (1988 & Supp. II 1990). Although we affirm the district court's grant of summary judgment to defendants, our rationale for doing so is different.

BACKGROUND

We review the background briefly. In March 1986 Ivan F. Boesky, the now notorious takeover-stock speculator, reorganized the form of his risk-arbitrage business from a corporation to a limited partnership. The new partnership, known as Ivan F. Boesky & Co., L.P. (the name has subsequently been changed to CX Partners, L.P.), was financed by a large debt offering and the private placement of $250 million in limited partnership interests. Because of the highly volatile nature of the risk-arbitrage business, the prospectus for limited partners cautioned prospective purchasers that the investment entailed a high degree of risk. Potential investors were required to submit investor suitability questionnaires prior to purchasing their interests. The questionnaire inquired as to whether the investor understood the nature and risks associated with the investment, explained that there was no guarantee of any financial return and that a limited partnership was not a liquid asset and should not be relied upon for current needs or personal contingencies.

Working closely with Boesky on the reorganization was Drexel Burnham Lambert Incorporated (Drexel), and appellee Michael Milken. The now-defunct Drexel was at the time the preeminent underwriter of high-yield--so-called "junk"--bonds. Milken was the Senior Vice President and Manager of Drexel's High Yield and Convertible Bond Department that handled the Boesky reorganization. Appellee Lowell Milken, Michael Milken's brother, also a Drexel employee in the same department, assisted his brother generally and on the Boesky deal in particular. For the underwriting services associated with placing the debt portion of the reorganization, Drexel charged Boesky $26.6 million. This fee was paid partly in cash and partly by Drexel taking an equity interest in the partnership. Drexel was also a major purchaser of partnership interests.

Meanwhile, on March 21, 1986 appellants purchased a total of approximately $10.5 million of the partnership interests directly from Boesky's employees, without Drexel's assistance. Specifically, Commercial Union Assurance Co. plc, Commercial Union Pensions Management, Ltd., Overbrook Nominees, Ltd., Strand Nominees, Ltd. (collectively Commercial Union) purchased $7,503,175, Gemini $1,001,927, and Mercia Zurich $2,006,572. Appellants' purchases represented 4.2 percent of the total capital raised by the partnership.

Several months later, in November 1986, the government disclosed that Boesky had entered into a plea and cooperation agreement related to his insider trading activities. Professor David R. Herwitz of the Harvard Law School was appointed liquidation trustee of the partnership. As one might expect, in March 1987 appellants along with nearly two score originally named-plaintiffs, none of whom are appealing, filed their initial complaint against Boesky, Drexel and others, seeking to recover the capital they had invested. About two years later, in June 1989, after further public revelations of the insider trading scandal, the present complaint was amended by the addition of defendants-appellees Michael and Lowell Milken.

Appellants' claims were grounded on alleged violations of Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, Sec. 17 C.F.R. Sec. 240.10b-5; Sec. 12(2) of the Securities Six months after the Milkens were joined in the complaint, appellants began receiving cash payments resulting from their ownership of partnership interests. On January 7, 1990 Professor Herwitz distributed nearly the full amount of their invested capital. More precisely, Commercial Union received $7,482,189, about $21,000 less than its investment of $7,503,175. Gemini and Mercia Zurich received the exact amounts of their investments. A subsequent distribution on December 2, 1991 returned an additional $1,092,116, a yield of 10.2 percent on appellants' invested capital. A third-party settlement of $463,934 made on October 7, 1991 yielded 4.4 percent to appellants on their capital investment. A de minimis distribution was made on April 9, 1992. Thus, appellants have received $12,047,076, or 114.6 percent of their initial capital investment and they still own their partnership interests. Our calculations reflect only payments made to those appellants presently before us, therefore they differ slightly from those of the district court.

Act of 1933 as amended, 15 U.S.C. Sec. 77l(2); and on the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Secs. 1961, 1962 and 1964. The crux of appellants' theory seeking recovery against the defendants is that had they known about the criminal activity of Boesky and the Milkens--which we need not recount--they would not have purchased their partnership interests.

Throughout this period Michael Milken was attempting to resolve the criminal charges the government had brought against him. On April 24, 1990 he pled guilty to six felony charges, including conspiracy to violate the federal securities laws, securities fraud, mail fraud, and assisting in the filing of a false tax return. In conjunction with this plea, Milken agreed to pay $400 million to a restitution fund created in settlement of the Securities and Exchange Commission's (SEC) civil enforcement action, and a $200 million criminal fine.

In an attempt to resolve the pending civil litigation, in March 1992 Milken and his brother entered into a complex settlement arrangement (Global Settlement) with plaintiffs, substantially funded by $500 million contributed by Milken. Appellants, as was their privilege, opted out of this settlement and elected to pursue their then pending litigation against defendants. Accordingly, the district court instructed them to file an amended complaint that would identify the parties and claims severed from the original complaint, and to file a statement in support of their RICO claim against defendants.

At the time when this appeal was heard defendants had not answered the amended complaint. Milken has filed a general denial and admitted the facts both as stated in his criminal allocution and in a letter from his attorney to the sentencing judge. Milken also raised four affirmative defenses. Lowell Milken has also filed a general denial, asserted his Fifth Amendment privilege and raised 12 affirmative defenses. It is on this amended complaint (a 314-page opus) that defendants moved for summary judgment. On April 30, 1993 while this motion was pending, and following instructions from the district court, appellants filed a new amended complaint. Neither the Milken defendants nor Boesky have been deposed in the instant action due to a discovery stay issued by the district court.

In a reported decision, Commercial Union Assurance Co. v. Ivan F. Boesky & Co., 824 F.Supp. 348 (S.D.N.Y.1993), Judge Pollack granted summary judgment to defendants and dismissed appellants' complaint. He also invited defendants to seek Rule 11 sanctions against appellants, but stayed his decision on the sanctions pending the outcome of this appeal. From the grant of summary judgment this appeal...