IN RE TELEDYNE DEFENSE CONTRACTING DERIVATIVE LIT., CV 92-6481 Kn.

• Decision Date: 27 September 1993
• Docket Number: No. CV 92-6481 Kn.,CV 92-6481 Kn.
• Citation: 849 F. Supp. 1369
• Court: U.S. District Court — Central District of California
• Parties: In re TELEDYNE DEFENSE CONTRACTING DERIVATIVE LITIGATION.

849 F. Supp. 1369

In re TELEDYNE DEFENSE CONTRACTING DERIVATIVE LITIGATION.

No. CV 92-6481 Kn.

United States District Court, C.D. Calif.

August 16, 1993.

Order Dismissing Federal Claims with Prejudice September 27, 1993.

William S. Lerach, Milberg Weiss Bershad Specthrie & Lerach, San Diego, CA, Kevin P. Roddy, Los Angeles, CA, Richard Schiffrin, Schiffrin & Craig, Ltd., Bala Cynwyd, PA, Co-Lead Counsel, Eugene Mikolajczyk, J. Paul Gignac, Chimicles, Burt & Jacobsen, Los Angeles, CA, Richard D. Greenfield, Greenfield & Rifkin, Haverford, PA, Howard B. Sirota, Saul Roffe, Sirota & Sirota, New York City, for plaintiffs.

Thomas E. Holliday, Barbara G. Zelkind, Gibson, Dunn & Crutcher, David I. Gindler, Irell & Manella, Miles N. Ruthberg, Heller, Ehrman, White & McAuliffe, Los Angeles, CA, Brian C. Cuff, Carlsmith Ball Wichman Murray Case Mukai & Ichiki, Long Beach, CA, William J. Meeske, Latham & Watkins, Los Angeles, CA, for defendants.

MEMORANDUM OPINION ON DEFENDANTS' MOTIONS TO DISMISS

KENYON, District Judge.

I. INTRODUCTION

This is a shareholders derivative action brought pursuant to Fed.R.Civ.P. 23.1 by shareholders of Nominal Defendant Teledyne, Inc. (the "Corporation"). This action is brought in the name of and for the benefit of the Corporation against its Board of Directors, as well as certain of its present and/or former officers. The Second Amended Complaint ("SAC") alleges a continuous course of illegal conduct in which all Defendants have participated directly, as part of a conspiracy and/or by aiding and abetting one another.

Specifically, the SAC describes a pattern of criminal and otherwise fraudulent conduct by several of the Corporation's subsidiaries and units, including: (1) the sale of between 9 and 12 million suspect or defective electromagnetic switches (known as relays) by Teledyne Relays to the United States government over a period of years, resulting in various civil and criminal investigations, charges, and complaints, including a False Claims Act lawsuit pending before this Court and a guilty plea (including a $17.5 million fine) by the Corporation to federal criminal charges of 35 counts of making false statements to the government; (2) charges against Teledyne Systems alleging the submission of inflated prices when bidding for government contracts, which has resulted in a False Claims Act lawsuit for some $90 million in damages (and in which, as with the Teledyne Relays suit, the government has intervened) and a related criminal investigation; (3) a False Claims Act lawsuit and related criminal investigation against Teledyne Controls, alleging inadequate testing on cockpit instrument systems used in military aircraft, averring damages of some $300 million, and for which the Corporation has already paid $2.15 million in partial settlement; (4) whistle-blower actions involving the Teledyne Electronics Unit, alleging bribery to obtain foreign contracts, and the Teledyne Solid-State Unit, the subject matter of which is unknown; (5) admission of Teledyne Electronics, Teledyne Firth Sterling, Teledyne Electro-Mechanisms, and Teledyne Thermatics into the Department of Defense Voluntary Disclosure Program, resulting in disclosure of military transponder production discrepancies and failures to conform to requirements of various government testing programs and military specifications; and, (6) the execution of federal search warrants on, and the receipt of federal grand jury subpoenas by, several of the Corporation's other divisions.

Plaintiffs bring four separate claims, two federal, two state: (1) claimed violations of RICO, 18 U.S.C. § 1962(a)-(d), are brought against all Defendants; (2) claimed violations of § 14(a) of the Securities Exchange Act and SEC Rule 14a-9 are brought against the Officer and Director Defendants only; common law claims for (3) intentional breach of fiduciary duties and aiding and abetting the same; and, (4) negligent breach of fiduciary duties, are brought against all Defendants. Plaintiffs seek (a) to recover (on the Corporation's behalf) the damages alleged to have been caused by the corporation's illegal activities and the Defendants' participation or acquiescence therein; (b) return to the Corporation of salaries and other compensation paid and given to the Defendants during the time when the Defendants were in breach of the fiduciary duties they owed to the Corporation; (c) a declaration that the elections of the Directors from 1987 to 1992 are null and void; and, (d) costs and expenses, including attorneys', accountants', and experts' fees.

The various Defendants (including the "Inside Directors," the "Outside Directors," the "Officer Defendants," and Defendant Thomas L. McDowell) have moved to dismiss each and every cause of action in the SAC pursuant to Fed.R.Civ.P. 12(b)(6). Although the Defendants ask this Court to dismiss Plaintiffs' complaint on a variety of grounds, the Court limits its discussion and decision to two issues. The first appears to be a question of first impression: is a parent corporation (or its shareholders suing derivatively) a proper RICO plaintiff when the racketeering activity complained of was conducted by and through its corporate subsidiaries, directed at third parties (primarily the United States government), and intended for the overall benefit of the Corporation (and its shareholders)? The second question is one about which much has been written: assuming that the officers and directors were somehow culpably involved in the pattern of unlawful conduct alleged, do they violate Section 14(a) of the Exchange Act by failing to confess their involvement prior to the commencement of any litigation questioning that involvement? Because the Court answers these two questions in the negative, Plaintiffs fail to state a viable federal claim, and this lawsuit, including the pendent state law claims, must be dismissed. The Court need not and does not reach the alternative arguments raised.

II. ANALYSIS

For purposes of a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6), the Court assumes the truth of all of the allegations in the complaint and views the averments in the light most favorable to the Plaintiffs. Leave to amend is ordinarily granted unless the Court concludes beyond doubt that the Plaintiffs can allege no set of facts consistent with their complaint that would entitle them to relief. Schreiber Dist. v. Serv-Well Furniture Co., 806 F.2d 1393, 1401 (9th Cir.1986).

A. RICO CLAIMS

1. Background

Plaintiffs purport to state claims under all of RICO's substantive provisions (i.e., 18 U.S.C. § 1962(a)-(d)). Under § 1964, any person "injured in his business or property by reason of a violation of" any of these subsections may bring suit therefor. Drawing on prior interpretation of similar wording in the antitrust laws, the Supreme Court recently held that this "by reason of" language requires that RICO plaintiffs show proximate causation, one aspect of which is a "direct relation between the injury asserted and the injurious conduct alleged." Holmes v. Securities Investor Protection Corp., ___ U.S. ___, ___, 112 S.Ct. 1311, 1318, 117 L.Ed.2d 532 (1992). "Thus, a plaintiff who complains of harm flowing merely from the misfortunes visited upon a third person by the defendant's acts is generally said to stand at too remote a distance to recover." Id.

The Ninth Circuit recently adopted the position previously taken by this and other courts that to state a § 1962(a) claim, Plaintiffs must allege injury "by reason of" the Defendants' use or investment of racketeering income. Nugget Hydroelectric v. Pacific Gas & Elec., 981 F.2d 429, 437 (9th Cir.1992). This Court has similarly agreed with courts that have held that a § 1962(b) claim requires injury "by reason of" Defendants' "acquisition or control of an interest in a RICO enterprise." E.g., U.S. Concord, Inc. v. Harris Graphics Corp., 757 F.Supp. 1053, 1060 (N.D.Cal.1991). To state a § 1962(c) claim, one must allege an injury "flowing from the commission of the predicate acts." Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 497, 105 S.Ct. 3275, 3285, 87 L.Ed.2d 346 (1985); Reddy v. Litton Industries, Inc., 912 F.2d 291, 294 (9th Cir.1990). § 1962(d), which makes actionable conspiracy to violate any one of the three previous provisions, imports the injury-violation nexus of each. See Medallion TV Enterprises v. SelecTV of California, 627 F.Supp. 1290, 1297-1301 (C.D.Cal.1986), affirmed 833 F.2d 1360 (9th Cir.1987); Reddy, 912 F.2d at 294-295.

2. Pleading Injury and Causation

Defendants' principal argument for dismissal of Plaintiffs' RICO claims is that under Holmes, the racketeering activity complained of was not the proximate cause of the injuries to the Corporation for which Plaintiffs seek recovery. Put another way, Defendants argue that Plaintiffs lack "statutory standing." Holmes, ___ U.S. at ___, 112 S.Ct. at 1327 (Scalia, J., concurring) (noting that proximate causality is one element of RICO statutory standing).

Defendants point out that according to the SAC the Corporation was the immediate beneficiary of the alleged wrongdoing (e.g., it retained defense contracts it might not otherwise have gotten, and thereby inflated its earnings and profits); the governments of the United States (and Saudi Arabia and Egypt) were the intended targets; and, any injury the Corporation suffered (decreased profits because of payment of fines, penalties, legal fees, and investigation costs, exposure to massive potential liability, and decreased sales to the government, see SAC ¶¶ 8, 39, 116, 126) resulted not directly from the RICO violations alleged, but from revelation of the predicate acts and the government's independent decisions to investigate the complaints brought to its attention.¹

Plaintiffs do not respond to the arguments made by Defendants that the SAC does not state a claim under 1962(a) and 1962(b) because nowhere is it alleged that the injuries complained...