IN RE ATLANTIC FINANCIAL MGT., INC. SEC. LIT.

• Decision Date: 08 December 1988
• Docket Number: M.D.L. No. 584.
• Citation: 718 F. Supp. 1003
• Parties: In re ATLANTIC FINANCIAL MANAGEMENT, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — District of Massachusetts

718 F. Supp. 1003

In re ATLANTIC FINANCIAL MANAGEMENT, INC. SECURITIES LITIGATION.

M.D.L. No. 584.

United States District Court, D. Massachusetts.

December 8, 1988.

COPYRIGHT MATERIAL OMITTED

Peter J. Schneider, Robert J. Cordy and Nancy L. Brush, Burns & Levinson, Boston, Mass., for plaintiffs.

Alvin K. Hellerstein and Alan M. Klinger, Stroock & Stroock & Lavan, New York City, and Jerome Gotkin, Gordon P. Katz and Robert L. Kirby, Jr., Widett, Slater & Goldman, P.C., Boston, Mass., for AZL in Margaret Hall II and Abelson.

James L. Ackerman, Sharon S. Tisher and Betsy G. Roberti, Day, Berry & Howard, Boston, Mass., for individual AZL defendants in Margaret Hall II and Strong in Abelson.

MEMORANDUM AND ORDER ON AZL DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

SKINNER, District Judge.

These consolidated class actions arose from an alleged scheme to inflate the price of defendant AZL Resources, Inc's ("AZL") stock, in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.; Rule 10b-5, 17 C.F.R. § 240.10b-5; Section 1962 of the Racketeer and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961 et seq.; and common law fiduciary duty. The plaintiffs are all investors who lost money on the stock. AZL and certain individual officers and directors of the company ("the AZL defendants") now move for summary judgment on the 10b-5 claims in both the Margaret Hall and Abelson actions. In the alternative, defendants move for shortening of the class period.

The individual AZL defendants who join in this motion are Maurice F. Strong, Scott M. Spangler, Mel P. Melsheimer, Leonard C. Hentsch, Herman W. Van Loo and Tom F. Marsh. These individuals have each made a separate summary judgment motion as to the counts based on RICO, insider trading and breach of fiduciary duty. The motions of the five individual AZL defendants other than Strong are dealt with in a single order. Defendant Strong's motion is in a separate order.

A. Factual and Procedural Background

The plaintiffs allege that during the period from April 1981 through the spring of 1982, AZL desired additional capital to finance exploration and development of oil and gas properties in which it had an interest. To obtain this capital, and to make AZL a more attractive partner for a merger, the AZL defendants embarked on a scheme to raise the market price of AZL stock. The scheme was carried out through misrepresentations by AZL insiders that AZL was on the brink of concluding a favorable merger agreement. Most of these statements were allegedy made by defendant Strong, AZL's Chairman of the Board, to Robert DiIanni ("DiIanni"), a principal of Atlantic Financial Management ("AFM"), an investment advisor whose purchases of AZL stock for himself and his clients helped to drive up the price. It is further alleged that other individual officers and directors of AZL furthered the market manipulation scheme and engaged in prohibited insider trading by selling their AZL stock in October-November 1981. The plaintiffs are all investors who purchased AZL stock during the period of the alleged manipulation, and lost money when the stock price collapsed in the spring and summer of 1982. The Abelson class action against the AZL defendants is brought on behalf of open market purchasers of AZL stock. The two Margaret Hall actions are brought on behalf of those individuals who were advisees of AFM, and lost money through its heavy investment in AZL stock on their behalf. In the first of these actions, the Margaret Hall class is suing AFM, DiIanni, two other directors of AFM, and certain other corporate entities who assisted in placing the investments ("the AFM defendants").¹ In the second, the class is suing the AZL defendants. A subclass of Margaret Hall has been certified, consisting of AFM advisees for whom AZL stock was purchased at the same time as the individual AZL defendants were selling their stock. The subclass alleges certain individual AZL defendants engaged in prohibited insider trading.

The misrepresentations allegedly began in April of 1981, and continued through February of 1982. As a result of these statements, and DiIanni's enthusiastic patronage of AZL, the price of the stock rose to a high of $32.00 per share on December 23, 1981. When information became public that a favorable merger was not imminent, the stock fell sharply, hitting a low of $4.62 per share on July 7, 1982.

The AZL defendants' current summary judgment motion on the 10b-5 claims has two grounds. First, they contend that on the basis of undisputed material facts, plaintiffs cannot establish essential elements of a Rule 10b-5 violation. Second, they argue that one or both of the actions should be barred for failure to comply with the Statute of Limitations. Should they prevail on their summary judgment motion, defendants ask dismissal of the state law claims for lack of pendent jurisdiction. In the alternative, should they fail to secure summary judgment, defendants seek a shortening of the class period.

The Abelson plaintiffs have also put the Statute of Limitation in issue. They argue that a different limitations period, a longer one, should govern this action.

B. Failure to Establish Essential Elements of the 10b-5 Claim

I can render judgment for defendants only if there is no genuine issue as to any material fact, defendants are entitled to judgment as a matter of law on the undisputed facts, or if the evidence most favorable to the plaintiffs will not support a finding for them as a matter of law. Defendants have asserted that based on what they claim are undisputed material facts, plaintiffs are unable to establish a violation of 10b-5 as a matter of law. They further argue that even if plaintiffs' version of the facts is correct, they cannot establish three necessary elements of a Rule 10b-5 action: falsity, materiality and justifiable reliance.

In support of their summary judgment motion, pursuant to Local Rule 18, defendants have submitted the following list of "undisputed material facts":

(a) that AZL was a speculative stock;

(b) that AZL, during the period September 1981-January 1982, was engaged in serious merger negotiations with Tesoro Petroleum Company ("Tesor") at the highest corporate level;

(c) that none of the AZL defendants stated at any time that AZL had agreed-on or completed a merger with Tesoro;

(d) that none of the AZL defendants made representations to Robert DiIanni ("DiIanni") or anyone else, that AZL had a merger in the works (or was close to completion of a merger) prior to September 21, 1981;

(e) that DiIanni, as an investor and an investment adviser, at all times knew that merger negotiations were tentative and that a merger was never final until completed;

(f) that DiIanni knew no later than January 24, 1982 that AZL would not be entering into a merger with Tesoro, then known to him as "Company X";

(g) that by no later than May 1982, DiIanni and Tuton believed that Strong had lied to them and otherwise failed to tell them the truth in their discussions of AZL's merger prospects; and

(h) that Arthur Abelson was informed in 1982, at least, by Sanford Ritter, that DiIanni and Tuton believed that Strong had lied to them regarding AZL's merger prospects.

Plaintiffs initially objected to the defendants' motion because it failed to conform to the requirements of Local Rule 18, which requires inclusion of a "concise statement of the material facts as to which the moving party contends there is no genuine issue to be tried, with page references to affidavits, depositions and other documentation." Defendants then submitted an "amended statement" including record references. Defendants have not moved to substitute this statement for their original statement, but characterize it as available purely for the plaintiffs' convenience.

Insofar as it is based on the argument that "material facts" enumerated in their Rule 18 statement are not in dispute, the motion must fail. The listed "facts" are not established by the record references which defendant belatedly supplied. Further, the plaintiffs' responses and counter-designations make it clear that defendants' assertions are in genuine dispute. Finally, many of defendants' assertions are not facts, but conclusions, representing inferences defendants hope the finders of fact will draw.

Defendants maintain that even if they concede plaintiffs their version of the facts, the section 10(b) and Rule 10b-5 claims are insufficient as a matter of law because plaintiffs cannot demonstrate that representations by the AZL defendants regarding merger prospects were either false or material, or that DiIanni's reliance on them was reasonable.

The defendants assert that any representations allegedly made by them concerning merger negotiations cannot have been false and misleading within the meaning of Rule 10b-5, because AZL was actually exploring the possibility of merger with various companies. They further argue that because the statements were predictive, they cannot possess the requisite falsity to create liability. This is also the thrust of their arguments that plaintiffs cannot demonstrate materiality or justifiable reliance. In short, defendants argue that because merger discussions are inherently uncertain of completion, statements about merger prospects are obviously unreliable to any reasonable investor, regardless of their source, the manner of presentation, or how unjustifiably rosy their content. As such, they would be legally insufficient to ground § 10(b) and Rule 10b-5 claims. In my opinion, this is not a correct statement of the law.

1. Materiality

It is clear that misrepresentations about the current status of merger negotiations can be material for purposes of investor decision. See e.g. Basic, Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). In the case, Basic, Inc. made repeated public denials that it was engaged in merger negotiations. These statements...