Hartford Fire Ins. v. Federated Dept. Stores

• Decision Date: 13 October 1989
• Docket Number: 88 Civ. 8688(RWS).,No. 88 Civ. 8460(RWS),88 Civ. 8460(RWS)
• Citation: 723 F. Supp. 976
• Parties: HARTFORD FIRE INSURANCE COMPANY, Plaintiff, v. FEDERATED DEPARTMENT STORES, INC., Campeau Corporation, Campeau Corporation (U.S.) Inc., and CRTF Corporation, Defendants. Bernard SEGAL, M.D., Trustee, Individually and on behalf of all those similarly situated, Plaintiff, v. FEDERATED DEPARTMENT STORES, INC., Philip Caldwell, Howard Goldfeder, William G. Miller, Peter G. Peterson, Marvin S. Traub, Kathryn D. Wriston, Charlotte Beers, John W. Burden, III, James L. Ferguson, Reginald H. Jones, Will M. Storey, Clifton R. Wharton, Robert A. Charpie, Howard W. Johnson, Daniel W. LeBlond, Norman S. Matthews, Donald J. Stone, Campeau Corporation, Campeau Corporation (U.S.) Inc., CRTF Corporation, Shearson Lehman Hutton Inc., and Goldman Sachs & Co., Defendants.
• Court: U.S. District Court — Southern District of New York

723 F. Supp. 976

HARTFORD FIRE INSURANCE COMPANY, Plaintiff, v. FEDERATED DEPARTMENT STORES, INC., Campeau Corporation, Campeau Corporation (U.S.) Inc., and CRTF Corporation, Defendants.

Bernard SEGAL, M.D., Trustee, Individually and on behalf of all those similarly situated, Plaintiff, v. FEDERATED DEPARTMENT STORES, INC., Philip Caldwell, Howard Goldfeder, William G. Miller, Peter G. Peterson, Marvin S. Traub, Kathryn D. Wriston, Charlotte Beers, John W. Burden, III, James L. Ferguson, Reginald H. Jones, Will M. Storey, Clifton R. Wharton, Robert A. Charpie, Howard W. Johnson, Daniel W. LeBlond, Norman S. Matthews, Donald J. Stone, Campeau Corporation, Campeau Corporation (U.S.) Inc., CRTF Corporation, Shearson Lehman Hutton Inc., and Goldman Sachs & Co., Defendants.

Nos. 88 Civ. 8460(RWS), 88 Civ. 8688(RWS).

United States District Court, S.D. New York.

October 13, 1989.

LeBoeuf, Lamb, Leiby & MacRae, New York City (Grant S. Lewis, Charles C. Platt, Stephen C. Clark, Wallace A. Showman, of counsel), for plaintiff Hartford Fire Ins.

Cravath, Swaine & Moore, New York City (Ronald S. Rolfe, Alden L. Atkins, Kent A. Yalowitz, of counsel), for defendants except Shearson Lehman Hutton, Inc. and Goldman Sachs & Co.

Goodkind, Labaton & Rudoff, New York City (Lawrence R. Sucharow, of counsel), Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa. (Stuart H. Savett, of counsel), Greenfield & Chimicles, Haverford, Pa. (Richard D. Greenfield, of counsel), for plaintiffs Bernard Segal, et al.

Simpson Thacher & Bartlett, P.C., New York City (Kenneth R. Logan, Joseph Wayland, of counsel), for defendants Shearson Lehman Hutton, Inc. and Goldman Sachs & Co. SWEET, District Judge.

Defendants Federated Department Stores, Inc. ("Federated"), et al., have moved pursuant to Rules 12(b)(6), 56, and 9(b), Fed.R.Civ.P., for an order dismissing the first amended complaint of Hartford Fire Insurance Company ("Hartford") and the complaint of Bernard Segal, M.D. ("Segal") (together with Hartford referred to as the "Plaintiffs"), trustee individually and on behalf of all those similarly situated.¹ For the reasons set forth below, the motions are granted and the complaints are dismissed in their entirety.

The Parties

Hartford is a Connecticut insurance company with its principal place of business in Hartford, Connecticut. Segal served as Trustee of the Likoff-Segal Associates Defined Benefit Pension Plan Trust.

Federated is a retailing conglomerate incorporated in Delaware with its principal place of business in Cincinnati, Ohio. As of January 30, 1988, Federated's department store chains included Bloomingdale's, Filene's, Bullock's/Bullocks Wilshire, I. Magnin, and Rich's.

Campeau Canada, an Ontario corporation with its principal place of business in Toronto, Ontario, Canada, owns shopping centers, office complexes, and suburban business parks in Canada and retail operations in the United States. Campeau U.S., a Delaware Corporation with its principal place of business in Toronto, Ontario, Canada, is a wholly-owned subsidiary of Campeau Canada. CRTF, a New York corporation with its principal place of business in Toronto, Ontario, Canada, is a wholly owned subsidiary of Campeau U.S. that was formed for the purpose of acquiring Federated.

The Individual Defendants in the Segal Action were Federated directors and/or officers during the events at issue. Shearson and Goldman Sachs are investment banks maintaining principal places of business in New York, New York.

The Facts

On January 22, 1987, Federated filed a shelf registration under SEC Rule 415 to issue up to $500 million of debt securities in one or more separate series. On October 22, 1987, pursuant to its shelf registration and a January 15, 1987 Indenture Agreement (the "Indenture") between Federated and Manufacturers Hanover Trust ("Manufacturers"), Federated issued $200 million in notes bearing interest at a rate of 9.375% due November 1, 1992 (the "Notes"). Federated marketed the Notes pursuant to a prospectus dated January 22, 1987 (the "Prospectus") and a prospectus supplement dated October 22, 1987 (the "Prospectus Supplement"). Shearson and Goldman Sachs served as lead underwriters for twenty-six underwriters participating in the offering.

Standard & Poor's ("S & P") rated the Notes "AA-," and Moody's rated them "Aa2." According to the Plaintiffs, these ratings "indicated that the debtor had an extremely strong capacity to pay the interest and repay principal and that the debt securities were of high quality by all standards." Hartford Amended Complaint ¶ 18; Segal Complaint ¶ 26. When they were issued, the Notes had a spread of eighty-five basis points to United States Treasury securities of comparable maturity.

On October 22, 1987, Hartford bought $25,000,000 of the Notes at 100% of face value. Segal bought 100 Notes for $100,828.13 on October 26, 1987, and he has brought this action on behalf of all persons who bought Notes between October 22, 1987 and January 25, 1988 and owned them until January 25, 1988. The Plaintiffs allege that they considered the Notes "safe, low-risk corporate securities" when they purchased them. Hartford Amended Complaint ¶ 18; Segal Complaint ¶ 26.

Federated's offering and the Plaintiffs' purchases occurred when Federated was considered a possible takeover candidate. In support of their motions, the Defendants have submitted more than sixty articles revealing that the press and the financial community had anticipated a possible takeover of Federated for several years.² For example:

— On December 23, 1984, analysts at Oppenheimer & Co. said "in the retailing industry which has already witnessed several takeovers, Federated Department Stores ... made the list" of possible takeover targets.

— On May 1, 1985, the New York Times reported a "flood of takeover rumors involving some of the major department store chains, such as ... Federated Department Stores."

— On July 1, 1986, the Wall Street Journal's "Heard on the Street" column identified Federated as one of a "half-dozen" retail stocks that are potential takeover targets.

— On October 9, 1986, the Wall Street Journal reported that "several analysts said this retailer Federated is one of the more attractive takeover possibilities."

— Also on October 9, 1986, the Washington Post reported that "among the companies most frequently mentioned as a takeover target is Federated Department Stores."

— On October 29, 1986, the Wall Street Journal reported that Federated is "the subject of continued takeover or restructuring speculation."

— On October 30, 1986, Women's Wear Daily reported that Federated would be the "next major retailer to become a takeover target."

— On November 19, 1986, the Dow Jones News Wire reported that Federated was one of twelve companies whose stock was included in the Dow Jones "speculative index" of likely takeover or restructuring candidates.

— On January 26, April 7, and October 5, 1987, financial analysts at Cyrus J. Lawrence, Inc., a brokerage firm, listed Federated as among the five retail companies most susceptible to an acquisition.

— On August 28, 1987, Bear, Stearns & Company reported in its research highlights that "Federated is an attractive potential takeover target."

— On October 20, 1987, Drexel Burnham Lambert reported Federated as one of four retail stocks that "have been in the potential takeover arena, and given the recent price adjustments, they would appear to be quite attractive."

In addition, Federated had responded to these rumors by taking steps to discourage a takeover, and those measures were disclosed by Federated and publicly reported. In January 1986, Federated instituted a shareholders rights plan, which it described in a press release as follows:

While we have no knowledge that anyone is contemplating a hostile move against the company, the Board believes that our action is prudent in light of the current takeover environment. The plan is not designed to prevent a takeover on terms that are fair and acceptable to all shareholders but to deal with unilateral actions by hostile acquirors which could deprive the Board and our shareholders of the ability to make reasoned decisions.

Federated also submitted this press release with its Form 8-K filed with the SEC. In November 1986, Federated repurchased a large block of its shares from a single shareholder, and it subsequently expanded that repurchase plan to cover a total of 10 million shares. Federated disclosed the repurchase authorization in a press release and included the authorization in its 1986 Annual Report filed with the SEC.

The Plaintiffs also allege that "Mr. Howard Goldfeder, Federated's Chairman "Goldfeder", had been considering a leveraged buy-out of the company prior to the offering of the Notes." This allegation emerged from a January 27, 1988 Wall Street Journal article that appeared following CRTF's bid for Federated, stating: "One favored defense — a management-led buy-out that Mr. Goldfeder has been considering for months — is increasingly improbable because of financing difficulties and internal strife."

On January 25, 1988, CRTF launched a $4.2 billion hostile tender offer for Federated. Federated had not solicited the offer, and CRTF had not contacted Federated prior to making its bid. Federated's board of directors rejected CRTF's bid as inadequate, and R.H. Macy & Company submitted a competing offer. After several weeks of competitive bidding, Federated agreed to be acquired by CRTF for $6.6 billion in what the Plaintiffs characterize as a "highly leveraged transaction." Hartford Amended Complaint ¶ 22; Segal Complaint ¶ 28.

The Plaintiffs contend that the CRTF acquisition drastically altered Federated's financial position. According to the Plaintiffs, Federated's debt-to-equity ratio "has soared," and the interest expense on its new debt "not only radically exceeds historic levels, but approaches and possibly exceeds Federated's earnings." Hartford...