FMC Corp. v. Boesky
| Decision Date | 21 July 1988 |
| Docket Number | No. 87-1678,87-1678 |
| Citation | 852 F.2d 981 |
| Parties | , Fed. Sec. L. Rep. P 93,946, RICO Bus.Disp.Guide 6985 FMC CORPORATION, Plaintiff-Appellant, v. Ivan F. BOESKY, et al., Defendants-Appellees. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Thomas P. Sullivan, Jenner & Block, Chicago, Ill., for plaintiff-appellant.
William E. Willis, Sullivan & Cromwell, New York City, Charles E. Davidow, Wilmer, Cutler & Pickering, Washington, D.C., for defendants-appellees.
Before BAUER, Chief Judge, and RIPPLE and MANION, Circuit Judges.
On November 14, 1986, Ivan F. Boesky passed quickly from fame to infamy. That afternoon, after the markets closed, federal officials announced that the Securities and Exchange Commission ("SEC") had charged Boesky with violating the securities laws by trading in the stock of at least seven corporations with the benefit of material nonpublic information. The officials also announced that Boesky had entered into a responsive "Consent and Undertakings," in which he agreed to abide by the terms of a permanent injunction, plead guilty to one criminal count, and pay a $50 million fine and an additional $50 million representing disgorgement of some of the profits from illegal trades in the seven corporations' stock. 1
FMC Corporation ("FMC") is one of those corporations, and this civil action for damages, filed on December 18, 1986, is one of the first to follow the SEC's charges. FMC's complaint alleges that Boesky, with the help of other defendants, wrongfully misappropriated confidential business information concerning FMC's May, 1986 recapitalization, and then used that information to manipulate the price of FMC's stock. In sixteen counts, FMC alleges that some or all of the defendants violated several federal securities laws, all four civil provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), and various state common laws. FMC claims that, because of Boesky's illegal conduct, it altered the terms of its initial recapitalization proposal and, as a result, paid approximately $235 million more to recapitalize than it otherwise would have. FMC also alleges that Boesky lined his pockets with more than $20 million by trading illegally in FMC's stock.
The district court dismissed FMC's action, holding first that the complaint alleges no legally cognizable injury and, therefore, that FMC lacks constitutional standing to assert its federal-law claims. The court then declined to exercise pendent jurisdiction over FMC's state-law claims. FMC appeals from the district court's dismissal of its complaint.
Plaintiff-appellant FMC, a Delaware corporation with its principal place of business in Chicago, produces machinery and chemicals for industry, government, and agriculture. A large corporation--in 1985, its sales exceeded $3.26 billion--its common stock is traded on the New York Stock Exchange ("NYSE") and on other major exchanges. Before its May, 1986 recapitalization, eighty percent of FMC's twenty-two million common shares were publicly owned.
In addition to Boesky, a former securities arbitrager, the defendants-appellees include the various entities through which Boesky conducted his investment activities ("the Boesky Affiliated Entities" or "the Boesky Group") 2; David S. Brown, an officer of the investment banking firm of defendant Goldman, Sachs & Co. ("Goldman"); Ira B. Sokolow, an officer of the investment banking firm of defendant Shearson Lehman Brothers, Inc. ("Shearson"); and Dennis B. Levine, an officer of the investment banking firm of defendant Drexel Burnham Lambert, Inc. ("Drexel").
The complaint tells the following tale. 3
Sometime before early 1985, Boesky, Levine, Sokolow, and Brown agreed to share confidential business information about impending corporate transactions for their individual and collective financial benefit. For example, Boesky agreed to pay Levine five percent of any profits Boesky made trading with the benefit of material nonpublic information provided by Levine. As high-ranking officers of influential Wall Street investment banking firms, each had access to such confidential business information and, as we shall see, Boesky had the ability to turn that information into profits.
In early 1985, after Boesky and friends formed their illicit trading pact, FMC's management was considering antitakeover measures. FMC hired Goldman to help consider various options, including acquisitions, a leveraged buyout, and a recapitalization. After studying FMC's corporate structure and the growth nature of its principal businesses, FMC and Goldman determined that a recapitalization was FMC's best alternative. 4
A recapitalization would help shield FMC from a hostile takeover by enabling FMC's management to increase significantly its proportionate equity interest in the corporation and, at the same time, substitute a substantial amount of debt for equity in the company's capital structure. In short, FMC would buy each share of its common stock from public shareholders for cash plus one share of new common stock; management, on the other hand, would purchase its old common shares entirely with new stock. By accepting new equity instead of a partial cash payment for its old shares, management would increase its ownership stake in the company. Coupled with an amendment to FMC's charter requiring a supermajority to authorize certain business combinations, management would have much greater control of the corporation's destiny. In addition, by borrowing to finance the cash payment to public shareholders, the company would inject approximately $2 billion worth of debt into its capital structure. This debt infusion would make the corporation less attractive to a hostile bidder.
After deciding to recapitalize, FMC retained Goldman to help it consummate the transaction. Under the parties' written retainer agreement, Goldman agreed to keep confidential FMC's recapitalization plans and all information disclosed by FMC in connection with it. Goldman promised to disclose information about "Project Chicago," as the recapitalization was called, only to its agents, employees, and counsel who needed to know the information. In return for Goldman's services, FMC agreed to pay Goldman $17.5 million if and only if the recapitalization was consummated. With that sum as an incentive, Goldman began working on the terms of the recapitalization.
In early 1986, Goldman's Brown, although he was not a member of the Goldman "team" working with FMC, learned of "Project Chicago." More faithful to the illegal-trading foursome's agreement than to his employer, Brown passed the confidential information concerning FMC's consideration of a recapitalization to Sokolow, who passed it to Levine, who passed it to Boesky. Each knew that the disclosure of the information constituted a breach of Goldman's and Brown's contractual and fiduciary duty to FMC, and that it constituted a misappropriation and wrongful taking from FMC. Apparently, this troubled them little, especially Boesky.
With the benefit of the confidential information obtained from Brown through Sokolow and Levine, Boesky, through the Boesky Affiliated Entities, began purchasing FMC's common stock. Lots of it. Between Tuesday, February 18, 1986, and Friday, February 21, 1986, the Boesky Group bought at least 95,300 shares. During the first three days of this period, the Boesky Group's purchases accounted for roughly thirteen percent of the total volume of trading in FMC stock on the NYSE. Within this three-day span, FMC's stock price rose from $71.75 to $80.75 per share.
On the morning of February 21, 1986, FMC's stock price climbed to $83. At that point, FMC asked the NYSE to suspend trading in its stock and the company announced publicly that it was contemplating a recapitalization. Following the announcement, trading in FMC stock resumed and the price rose to $85.625 per share. That Friday, the Boesky Group began selling its 95,300 shares. The alleged profits: at least $975,000.
That same Friday, February 21, 1986, Goldman outlined the terms of the recapitalization for FMC's board and opined that the proposed transaction was fair to shareholders. Under the proposal, FMC would purchase each share of its old common stock from public shareholders for $70 cash and one share of new FMC stock. Management would receive no cash, just 5.667 shares of new FMC stock for each old share. FMC's Thrift Plan, a type of employee profit-sharing plan, would receive $25 in cash and four shares of new FMC stock for each old share.
Crucial to Goldman's opinion that the proposed recapitalization was fair to all shareholders was its estimate that each share of new FMC stock would be worth $15.00. Based on that estimate, each shareholder group would receive $85 worth of consideration for each old common share. If the $15 estimate was inaccurate, however, there would not be parity of consideration among the three shareholder categories. The $85 in consideration, of course, was roughly equal to the price at which FMC's stock was trading on Friday, February 21, 1986. Thus, on Saturday, February 22, 1986, FMC's board of directors approved the proposed recapitalization and, for the first time, announced the deal's terms to the public. 5
After FMC's board approved the recapitalization proposal, the price of old FMC stock rose substantially above $85 per share, enough so that Goldman became concerned that its initial estimate that new FMC stock would be worth $15 per share was no longer accurate and, as a result, that the proposed recapitalization was no longer fair to public shareholders. 6 Goldman thus urged FMC to increase the cash payment going to public shareholders for their old common shares under the proposed plan, and FMC began considering its options.
Unknown to FMC, Boesky learned that FMC was reviewing the cash portion of the consideration for public...
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FMC Corp. v. Boesky
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