In re Olympia Brewing Co. Securities Litigation

• Decision Date: 30 January 1985
• Docket Number: No. 77 C 1206.,77 C 1206.
• Parties: In re OLYMPIA BREWING COMPANY SECURITIES LITIGATION.
• Court: U.S. District Court — Northern District of Illinois

613 F. Supp. 1286

In re OLYMPIA BREWING COMPANY SECURITIES LITIGATION.

No. 77 C 1206.

United States District Court, N.D. Illinois, E.D.

January 30, 1985.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

On Motion for Attorney Fees June 13, 1985.

Richard J. Phelan, John M. Christian, Michael A. Pope, Phelan, Pope & John, Joseph A. Ginsburg, Levin, Ginsburg & Novoselsky, Chicago, Ill., for plaintiff.

William E. Snyder, Thomas W. Johnston, Chadwell & Kayser, Ltd., Chicago, Ill., Andrew C. Freedman, Reavis & McGrath, New York City, for defendant.

MEMORANDUM OPINION AND ORDER

GETZENDANNER, District Judge:

This action under the federal securities laws is before the court on the motions for summary judgment and dismissal for want of prosecution of defendants Robert Wilson and Robert Wilson Associates (the "Wilson defendants"). In plaintiffs'¹ Amended Complaint of February 12, 1981, the Wilson defendants are charged in one count with violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), as well as rules promulgated thereunder. For the reasons stated below, both motions are granted.

Plaintiffs allege that sometime before December 31, 1976, the Wilson defendants and "other co-conspirators" began to sell "short" shares of the common stock of Olympia Brewing Company ("Olympia"). According to plaintiffs:

Defendant short sellers and other co-conspirators devised and engaged in a secret scheme or conspiracy to manipulate the price of the shares of Olympia. They willfully and consciously acted individually and in concert with each other to effect a pattern of short sales of shares of Olympia with the intent, purpose and effect of depressing the price of such securities and for the purpose of inducing the sale of Olympia stock by others.

(Amended Complaint ¶ 12.) As part of the manipulation, the Wilson defendants and their alleged co-conspirators, on or after August 15, 1976, agreed to select Olympia stock as a target for short-selling "manipulation;" engaged in short selling such that on March 4, 1977, about 150,000 shares had been shorted; effected short sales at the end of trading days to depress "artificially" the price of the shares; "intentionally utilized short selling in order to discourage institutional investors from purchasing Olympia shares;" used short sales to force margin calls, thereby inducing more sales; and effected "naked" short selling. (Amended Complaint ¶ 16(a-f).) As a result of the short selling, the price of Olympia allegedly:

declined precipitously from 60¼ on March 4, 1977, to 31¾ on March 11, 1977. The price of such shares fell eleven points on March 7, 1977, and 16¾ points on March 11, 1977. Trading in Olympia shares was suspended by the Securities and Exchange Commission between the period beginning on or about March 15 and ending on or about March 25, 1977.

(Amended Complaint ¶ 17.) This scheme to depress the market price of Olympia was concealed from plaintiffs, who relied on the integrity of the market when they purchased Olympia shares. (Id. at ¶ 18.) Hilda Mangel, for example, is the sole beneficiary of a trust that purchased 900 shares of Olympia on September 16, 1976 and 1,875 shares of Lone Star Brewing Company on December 31, 1976. On March 7, 1977, the Trustee sold 100 of these shares. Wendell W. Mew was an owner of 5,000 shares of Lone Star Brewing Company, purchased at some undisclosed time and sold at a loss sometime after March 7, 1977. According to plaintiffs, the scheme to depress artificially the price of Olympia constituted a "device, scheme or artifice to defraud and an act, practice or course of business which operated as a fraud or deceit in connection with the short sales of the securities of Olympia." (Id. at ¶ 19.)

SUMMARY JUDGMENT

The Wilson defendants have moved for summary judgment, arguing that the facts demonstrate that no unlawful scheme to depress the price of Olympia shares took place. Plaintiffs submit evidence tending to show the existence of substantial short positions in Olympia and the correlation between an article unfavorable to Olympia and trading by the Wilson defendants. Unfortunately, neither party discusses the law applicable to a market manipulation claim. Before examining the evidence, therefore, the court must set forth what it understands to be plaintiffs' legal theory in this case.

A. Market Manipulation

Section 10(b) proscribes the use of "any manipulative or deceptive device or contrivance in contravention of the rules and regulations of the SEC" employed in the purchase or sale of designated securities. Rule 10b-5, promulgated under this provision, details certain prohibited deceptive practices.

Section 17(a) of the 1933 Act makes it unlawful, in the offer or sale of designated securities:

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money ... by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of circumstances under which they were made, not misleading, or

(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Section 10(b) targets "manipulative or deceptive" conduct, and thus all of the activities of Rule 10b-5, to be unlawful, must be accompanied by scienter. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 473-74, 97 S.Ct. 1292, 1300-01, 51 L.Ed.2d 480 (1977). However, if an implied claim exists under § 17(a), it is possible that scienter is not required under § 17(a)(2) & (3). L. Loss, Fundamentals of Securities Regulation 1150 (1983 & Supp.1984). Otherwise, the elements of § 17(a) and Rule 10b-5 are substantially the same as applied to sellers. Because of the court's ruling, it need not determine whether an implied claim exists under § 17(a).

It is clear from the Amended Complaint and the plaintiffs' August 8, 1984 memorandum, that plaintiffs are seeking to establish market manipulation. Plaintiffs' injuries stem from their purchase at a price that subsequently declined as a result of manipulative activities such as end-of-the-day trading and "naked" sales by the Wilson defendants. It is thus important to determine the types of acts that would constitute actionable manipulation.²

The Supreme Court has indicated that manipulation normally refers to "practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity." Santa Fe, 430 U.S. at 476, 97 S.Ct. at 1302. One district court indicated that manipulation claims should be limited to the type of activity that "creates the false impression that certain market activity is occurring when in fact such activity is unrelated to the actual supply and demand." Hundahl v. United Benefit Life Insurance Co., 465 F.Supp. 1349, 1360 (N.D.Tex.1979). This conclusion, derived from the language quoted above in Santa Fe, persuaded the Hundahl court that misrepresentations about the value of the issuing corporation could not constitute market manipulation. The court also relied on common law market manipulation cases which involved market transactions tending to prevent the market price from "accurately reflecting the market's unimpeded judgment of the stock's value." 465 F.Supp. at 1360.

Several market manipulation cases involve such trading activities, unrelated to supply and demand, that tend to inflate or depress the market price. For example, in Securities & Exchange Commission v. Commonwealth Chemical Securities, Inc., 410 F.Supp. 1002 (S.D.N.Y.1976), aff'd in part, modified in part, and remanded, 574 F.2d 90 (2d Cir.1978), trading between accounts and "swap" trading were held to introduce a "foreign element ... to those which normally establish the price of a particular stock, namely, supply and demand in a public auction market, free from artificial manipulation, and the performance of the issuing company in a system of free competitive enterprise." 410 F.Supp. at 1310. See Koenig v. Smith, 88 F.R.D. 604, 605-06 (E.D.N.Y.1980) (greatly increased trading activity allegedly artificially inflated price; financial performance of issuing corporation did not justify price increase).

Manipulation through deceptive trading activities is an element of plaintiffs' claims against Loeb Rhoades & Co., Inc. in this consolidated action. The activities alleged in the claims against Loeb Rhoades & Co., Inc. are detailed in this court's opinion in McNichols v. Loeb Rhoades & Co., Inc., 97 F.R.D. 331, 333 (N.D.Ill.1982) (adds element of misrepresentations as to imminent acquisition of issuing corporation). The deceptive trading activities in the case against the Wilson defendants include "naked" short selling, the taking of substantial short positions, and end-of-the-day trading designed to depress artificially Olympia's price.

Other cases have allowed misrepresentations concerning the issuing company's financial performance to support claims of market manipulation. For example, Judge Patrick E. Higgenbotham, in In re LTV Securities Litigation, 88 F.R.D. 134 (N.D. Tex.1980) (author of Hundahl), discussed the theory of market manipulation as applicable to the overvaluation of the issuing corporation's inventories in a statement of earnings. Another court has explicitly held that manipulation is not limited to the types of activities listed in Sante Fe. Jordan v. Global Natural Resources, 564 F.Supp. 59, 66 (S.D.Ohio 1983). There, the court noted the Supreme Court's definition of manipulative as connoting "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). Artificial effects are produced by activities not reflecting the "basic...