In re PHLCORP Securities Tender Offer Litigation

• Decision Date: 02 December 1988
• Docket Number: No. 88 Civ. 0306(PNL).,88 Civ. 0306(PNL).
• Citation: 700 F. Supp. 1265
• Parties: In re PHLCORP SECURITIES TENDER OFFER LITIGATION.
• Court: U.S. District Court — Southern District of New York

700 F. Supp. 1265

In re PHLCORP SECURITIES TENDER OFFER LITIGATION.

No. 88 Civ. 0306(PNL).

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

December 2, 1988.

Milberg Weiss Bershad Specthrie & Lerach, New York City (David Bershad, of counsel), Greenfield & Chimicles, New York City (C. Oliver Burt, III, of counsel, Haverford, Pa.), Abbey & Ellis, Goodkind Wechsler Labaton & Rudoff, Harvey Greenfield, Schoengold & Sporn, New York City, for plaintiff.

Weil, Gotshal & Manges, New York City (Dennis J. Block, H. Adam Prussin, Dushica B. Protic, Timothy J. Lawliss, of counsel), for defendants Leucadia Nat. Corp., Ian Cumming and Joseph Steinberg.

Pavelic & Levites, New York City (Raymond A. Levites, of counsel), for defendants PHLCORP, James Kimball and Michael Lynch.

LEVAL, District Judge.

Defendants move, pursuant to Fed.R.Civ. P. 12(b)(6) and 9(b), to dismiss the consolidated amended complaint (hereafter the "complaint") for failure to state a claim upon which relief can be granted and failure to plead fraud with particularity.

BACKGROUND

The complaint alleges fraud in violation of § 14(e) of the Securities Exchange Act, 15 U.S.C. § 78n(e), and state law claims for breach of fiduciary duty to corporate stockholders. The defendants are Leucadia National Corporation ("Leucadia"); PHLCORP, Inc. ("PHLCORP"); Ian M. Cumming and Joseph S. Steinberg, officers and directors of Leucadia and PHLCORP; and James N. Kimball and Michael T. Lynch, who are non-employee directors of PHLCORP. The plaintiffs are present or former shareholders of PHLCORP.¹ They bring this action on behalf of a putative class of all shareholders of PHLCORP during the period January 14, 1988 through February 24, 1988.

The defendant PHLCORP was formerly known as Baldwin-United Corp. On November 13, 1986, the Company emerged from reorganization proceedings under Chapter 11 of the Bankruptcy Code. As a result of claims which Leucadia held against Baldwin-United which Leucadia converted into common stock in the reorganization proceedings, Leucadia was the largest and controlling shareholder of PHLCORP when it emerged from bankruptcy, owning 39% of PHLCORP shares. Fourteen months later, on January 21, 1988, Leucadia made a tender offer for PHLCORP's stock, which is the subject of this suit.

The complaint alleges that during the period preceding its tender offer, Leucadia manipulated the stock price of PHLCORP downward. The lowering of the price of PHLCORP stock was accomplished by causing PHLCORP to (1) take a non-recurring charge against income of $8.6 million in connection with the restructuring of its trading stamp business; (2) take a realized investment loss of $3.6 million after taxes to restructure its investment portfolio; and (3) incur a charge of more than $7.6 million, arising from the discontinuance of its accident and health insurance business. It is alleged that PHLCORP also delayed certain favorable transactions so that the resulting gains would not affect PHLCORP's statements until after the tender. Finally, plaintiffs allege that defendants caused PHLCORP to omit from its books the increase in value of surplus notes that PHLCORP held in Empire Mutual Insurance Group, a highly profitable insurance mutual that was subsequently converted into a stock company under the name Empire Insurance Company. They contend that the value reported for the surplus notes was artificially low as a result of regulations of the New York Superintendent of Insurance. After the close of the last quarter for which a report was published prior to the tender offer, PHLCORP exchanged the notes for common shares of Empire at a substantial profit. Prior to the tender, defendants obtained copies of an appraisal performed by the actuarial firm of Tillinghast, Nelson & Warren, Inc. for the Superintendent of Insurance, which valued Empire at between $61.9 million and $64.8 million as of September 30, 1985. This implied a value attributable to Empire of $3.52 to $3.69 per share of PHLCORP.

The complaint alleges that by this manipulation, Leucadia was able to purchase stock in PHLCORP in the tender offer at a "grossly unfair" price of $5 a share. The offer, seeking 5.2 million shares of PHLCORP at $5, began on January 21, 1988 and was successfully concluded on February 24, 1988. By this purchase Leucadia increased its ownership of PHLCORP stock from 39% to 63%.

Federal jurisdiction is predicated solely on the claim under § 14(e) of the Exchange Act. The complaint alleges that various documents issued by Leucadia in connection with its purchase offer (a press release announcing the offer, the Offer to Purchase, and the Schedules 14D-1 and 14D-9) contain untrue statements of material facts and omit to state material facts necessary in order to make the statements made not misleading. It alleges four misstatements: (1) the tender offer documents falsely state that the offering price is "fair" and fail to disclose that it is "unfair"; (2) the press release falsely asserts that PHLCORP's board of directors includes "independent directors"; (3) the tender offer documents do not state that the offer violates insider trading prohibitions; and (4) the tender offer documents fail to disclose the completed Empire appraisal and misleadingly imply that the appraisal of Empire had not been completed by stating:

During 1986, the Superintendent selected an independent actuarial consulting firm to appraise the fair market value of Empire. The Superintendent has not completed his appraisal process. (Offer to Purchase)

Defendants move to dismiss, arguing that none of the alleged misstatements or omissions is material or actionable under § 14(e), and that the plaintiffs lack standing. They contend that after dismissal of the federal claims, the state law claims should be dismissed for lack of jurisdiction.

DISCUSSION

A motion to dismiss under Fed.R. Civ.P. 12(b)(6) is directed to the sufficiency of the pleading. Documents attached to the complaint as exhibits or incorporated by reference may be considered, Field v. Trump, 850 F.2d 938, 949 (2d Cir.1988), but other documents may not. Goldman v. Belden, 754 F.2d 1059, 1066 (2d Cir.1985). The court must accept the allegations of the complaint as true and construe all reasonable inferences in plaintiff's favor. Dahlberg v. Becker, 748 F.2d 85, 88 (2d Cir.1984), cert. denied, 470 U.S. 1084, 105 S.Ct. 1845, 85 L.Ed.2d 144 (1985). A complaint may be dismissed only when "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Philips Business Systems, Inc. v. Executive Communications Systems, Inc., 744 F.2d 287, 290 (2d Cir.1984) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957)). "The court's function on a Rule 12(b)(6) motion is not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.1985).

A. Misleading Statements and Omissions

A complaint seeking damages under § 14(e) must allege that (1) defendants misrepresented or omitted to state material facts in connection with the purchase or sale of a security; (2) the shareholders relied to their detriment upon the misrepresentations or omissions; and (3) the misrepresentations or omissions were made with scienter. Chris Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 362-63 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 232, 38 L.Ed.2d 148 (1973); Diamond v. Arend, 649 F.Supp. 408, 412 (S.D.N.Y. 1986); Caleb & Co. v. E.I. DuPont de Nemours & Co., 599 F.Supp. 1468, 1474 (S.D.N.Y.1984). A misstatement or omission is "material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding" whether to accept the tender offer. Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140 (2d Cir.1979); cf. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976).

The allegation that defendants falsely characterized the tender offer price as fair and failed to disclose that it was unfair does not state a claim under § 14(e). In Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), the Supreme Court held that no cause of action under the federal securities laws was stated by the claim that shareholders were treated unfairly in a merger. It is a necessary corollary to that rule that where the defendant has otherwise made full disclosure its false characterization of a transaction as fair does not make out a claim under § 14(e). Pross v. Katz, 784 F.2d 455, 458 (2d Cir.1986). Thus the courts in this circuit have uniformly struck down allegations that an offering document fails to discuss the fairness of an offered price as not stating a claim for securities fraud. See Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1, 4 (2d Cir.1983) ("the fairness or unfairness to shareholders of a transaction engaged in by a control group is irrelevant under Section 14(e)"), cert. denied, 465 U.S. 1052, 104 S.Ct. 1326, 79 L.Ed.2d 722 (1984); Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1084 (2d Cir. 1977); Klausner v. Ferro, 604 F.Supp. 1188, 1195 (E.D.N.Y.1985), aff'd mem., 788 F.2d 3 (2d Cir.1988); Billard v. Rockwell International Corp., 526 F.Supp. 218, 221 (S.D.N.Y.1981) ("failure to `disclose' that an offered price is unfair is not a violation"), aff'd, 683 F.2d 51 (2d Cir.1982); Kreindler v. Sambo's Restaurants, Inc., 1981-82 Transfer Binder Fed.Sec.L.Rep. ¶ 98,312, at 91,959 (S.D.N.Y.1981) 1981 WL 1684 ("failure to characterize as a `pyramid scheme' or as `fraudulent' the conduct it fully described in such releases and reports; and the failure to predict the ultimate collapse of the corporation ... not actionable under the securities laws").

The allegation based on PHLCORP's statement that it has...