In re Union Carbide Corp. Cons. Prod. Bus. Sec. Lit.

• Decision Date: 04 September 1987
• Docket Number: No. MDL 692 (CLB).,MDL 692 (CLB).
• Citation: 676 F. Supp. 458
• Parties: In re UNION CARBIDE CORPORATION CONSUMER PRODUCTS BUSINESS SECURITIES LITIGATION. This Document Relates to: All Actions.
• Court: U.S. District Court — Southern District of New York

676 F. Supp. 458

In re UNION CARBIDE CORPORATION CONSUMER PRODUCTS BUSINESS SECURITIES LITIGATION This Document Relates to: All Actions.

No. MDL 692 (CLB).

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

September 4, 1987.

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Jerome M. Congress, Milberg Weiss Bershad Specthrie & Lerach, New York City for Sy Richard Lippman and Ralph R. Scott.

Daniel W. Krasner, Wolf Haldenstein Adler Freeman & Herz, New York City, Richard D. Greenfield, Greenfield & Chimicles, Haverford, Pa., Larry A. Sucharow, Goodkind, Wechsler, Labaton & Rudoff, Harvey Greenfield, New York City, for Harry Abrevaya, Evelyn H. Summers and Charles S. Tanenbaum.

Dianne M. Nast, Kohn, Savett, Klein & Graf, P.C., Philadelphia, Pa., Elwood S. Kendrick, Elwood S. Kendrick, Inc., Los Angeles, Cal., for Selden Ring.

John S. Martin, Jr., Schulte Roth & Zabel, New York City, for Alfred E. Dudley and Alan C. Egler.

Kenneth H. Hanson, Chicago, Ill., for Richard James Stevens.

Raymond L. Falls, Denis McInerney, David R. Hyde, Kevin J. Burke, Ronald I. Keller, Cahill Gordon & Reindel, New York City, for Union Carbide Corp., Warren M. Anderson, John J. Creedon, Roberto DeJesus Toro, Harry J. Gray, James M. Hester, Jack B. Jackson, Horace C. Jones, Robert D. Kennedy, Ronald L. Kuehn, Jr., C. Peter McColough, William S. Sneath, J. Clayton Stephenson, Heinn F. Tomfohrde, III, Russell E. Train, Kathryn D. Wriston and Alec Flamm.

Bartlett H. McGuire, Jo Backer Laird, Jacqueline O. Stern, Douglas I. Brandon, Davis, Polk & Wardwell, New York City, for Morgan Stanley & Co.

Stuart L. Shapiro, Henry P. Wasserstein, Anne W. Crawford, David E. Bamberger, Skadden, Arps, Slate, Meagher & Flom, New York City, for First Boston Corp., First Boston, Inc. and First Boston Acquisition Holdings, Inc.

John S. Martin, Jr., Janet Neustaetter, Schulte Roth & Zabel, New York City, for Alfred E. Dudley and Alan C. Egler.

BRIEANT, Chief Judge.

By Memorandum and Order dated July 31, 1987, 666 F.Supp. 547, this Court set forth a detailed statement of the underlying facts alleged by plaintiffs in this case and taken as true for the purpose of resolution of the within motions. That decision discussed briefly the claims asserted against all of the defendants, and granted the motion of defendants Alfred E. Dudley and Alan C. Egler for summary judgment dismissing the complaint as to them. Familiarity of the reader therewith is assumed.

Defendant Union Carbide ("Carbide"), on behalf of the Corporation and the individually named directors and officers, has moved to dismiss pursuant to Rule 12(b)(6), F.R.Civ.P., for failure to state a claim, or in the alternative, for summary judgment pursuant to Rule 56, F.R.Civ.P. The First Boston defendants, First Boston Corp., First Boston, Inc., and First Brands Corp. ("First Boston"), moved separately to dismiss pursuant to Rule 12(b)(6), for failure to state a claim, and Rule 9(b), F.R.Civ.P., for failure to plead fraud with particularity; or, in the alternative, for summary judgment, pursuant to Rule 56, on the grounds set forth in the Union Carbide papers. Defendant Morgan Stanley moves to dismiss for failure to state a claim, Rule 12(b)(6), F.R.Civ.P.; or, in the alternative, for summary judgment, Rule 56, supplementing the submissions of defendant Union Carbide. These motions were fully submitted to this Court on September 1, 1987, with the filing of the most recent letter to the Court from defendant Union Carbide's counsel, which presented additional contentions and enclosed further deposition evidence.

For the reasons below, the motions of the First Boston defendants are granted and the motions of Morgan Stanley and Union Carbide are denied.

First Boston

The only federal securities claim asserted against defendant First Boston is contained in Count One, Complaint para. 50, which alleges a violation of Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), in that:

"First Boston and the officer defendants knew or recklessly disregarded that deceptive statements were issued by Union Carbide in connection with the proposed sale of the Consumer Products businesses. Their participation in the sales of those properties notwithstanding such knowledge constitutes conspiracy in, and/or aiding and abetting of, the deceptive acts alleged in this cause of action ... First Boston gave substantial aid and assistance to Union Carbide and Home and Automotive management in the perpetration of the aforementioned scheme through acts which included a pretense of participating in a competitive bidding process while secretly circumventing that process. By concealing the fact that the competitive bidding process had been tainted, First Boston and the individual First Boston defendants intended to and did encourage the other defendants to issue the false and misleading statements described above subsequent to January 4, 1986, and to refrain from issuing corrective public statements."

The only activities for which plaintiffs seek to impose liability against First Boston are: its participation in a bidding process for the Home and Automotive ("H & A") division of Union Carbide, and eventual acquisition of these assets, with knowledge that the bidding process had been tainted by virtue of certain meetings, discussed in our prior decision, between representatives of First Boston and Dudley and Egler, as to whom the Complaint has been dismissed by this Court; and their concealment in some unexplained way of the alleged fact that the bidding process was thus "tainted." No questions of material fact exist in connection with this claim against First Boston, and the Court assumes as it must that the allegations of the plaintiffs are true in this regard.

Apparently, First Boston is not charged with a primary violation of Section 10(b) of the 1934 Act (First Boston Mem. at 3-4; Plaintiff Mem. at 90).

Here the claim against First Boston is even more attenuated than the similar Rule 10b-5 claim previously dismissed by this Court against Dudley and Egler.

First Boston did not initiate contact with Union Carbide, but became involved when Daniel Raymond, District Production Manager of the H & A division, telephoned an old friend, Robert Henderson, to refer him to an investment banker "who he felt would be the best for us to work with in an acquisition effort" (Raymond Tr. 40); Henderson referred Raymond to Denis Newman, a good friend and then a managing director at First Boston (Newman Tr. 6); several meetings between these and other representatives of First Boston and H & A management thereafter eventuated (Plaintiff Mem. at 50-51). This defendant is further removed from a Section 10(b) violation in that none of its representatives or agents was an officer or director of defendant Union Carbide, and no evidence of First Boston's participation in the preparation and issuance of the relevant documents has been presented in the voluminous submissions to this Court.

To charge First Boston with liability for aiding and abetting a Rule 10b-5 violation, plaintiffs must demonstrate the three elements set forth in our prior decision (see Memorandum and Order dated July 31, 1987 at 561-65). Assuming, as the Court did therein, that the plaintiffs have supported adequately their claim of a primary federal securities law violation by Union Carbide, this Court concludes, for substantially the same reasons discussed with respect to Dudley and Egler, that plaintiffs have failed to demonstrate either the "knowledge" or "substantial assistance" elements as to First Boston.

In support thereof, plaintiffs state only in the most conclusory fashion that: "the `knowledge' element of aiding and abetting liability has plainly been satisfied" (Plaintiff Mem. at 93). Their ensuing contentions focus for the most part only on defendant Morgan Stanley in this regard (Plaintiff Mem. at 91-96). No knowledge evidence is presented as to First Boston, other than that derived from its allegedly "secret" meetings with Dudley and Egler which are said to have "tainted" the bidding process, and the financial benefits to be gained as a result of these meetings, and the nondisclosures allegedly contained in the documentation prepared and issued by Union Carbide. As this Court held earlier (Memorandum and Order at 33), the potential for financial gain does not, standing alone, indicate high conscious intent to aid and abet a securities law violation.

Liability cannot be imposed absent a showing at least that the defendant had actual knowledge of tortious conduct by the primary wrongdoer, particularly where the alleged aider and abetter owes no fiduciary duty to, and has no confidential relationship with, the injured party. The lower threshold of knowledge embodied in the recklessness standard is limited to those securities cases in which the alleged aider and abettor owes a fiduciary duty to the plaintiff. See Armstrong v. McAlpin, 699 F.2d 79, 91 (2d Cir.1983); Rolf v. Blyth, Eastman Dillon & Co. Inc., 570 F.2d 38, 44 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978); Terrydale Liquidating Trust v. Barness, 611 F.Supp. 1006 (S.D.N.Y.1984). Where there is no duty of disclosure, an alleged aider-abettor to a securities fraud can be found liable only if scienter of the high "conscious intent" variety, "something closer to an actual intent to aid in the fraud", can be proved. IIT v. Cornfeld, 619 F.2d 909, 925 (2d Cir.1980).

There are no facts from which this Court could infer that this defendant had actual knowledge, or even the equivalent reckless disregard, of the allegedly misleading nature of the documents issued by Union Carbide, much less the high conscious intent required to be demonstrated in a situation such as this where, as with Dudley and Egler, there is no duty on the part of First Boston to act, and no participation of this bidder in the preparation or issuance of documents or the Rights by Union...