Litton Industries, Inc. v. Lehman Bros. Kuhn Loeb Inc.

• Decision Date: 23 September 1992
• Docket Number: Nos. 464,589,D,s. 464
• Citation: 967 F.2d 742
• Parties: Fed. Sec. L. Rep. P 96,814, RICO Bus.Disp.Guide 8034 LITTON INDUSTRIES, INC., Plaintiff-Appellant-Cross-Appellee, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED, Defendant-Appellee-Cross-Appellant, Dennis Levine; Ira B. Sokolow; Robert M. Wilkis; Bank Leu International, Ltd.; Bank Leu A.G.; John R. Lademann; Bruno Pletscher; Jean-Pierre Fraysse; Christian Schlatter, Defendants-Appellees, Bernhard Meier, Defendant. ockets 91-7643, 91-7697.
• Court: U.S. Court of Appeals — Second Circuit

Page 742

967 F.2d 742

Fed. Sec. L. Rep. P 96,814, RICO Bus.Disp.Guide 8034

LITTON INDUSTRIES, INC., Plaintiff-Appellant-Cross-Appellee, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED Defendant-Appellee-Cross-Appellant Dennis Levine; Ira B. Sokolow; Robert M. Wilkis; Bank Leu International, Ltd.; Bank Leu A.G.; John R Lademann; Bruno Pletscher; Jean-Pierre Fraysse; Christian Schlatter Defendants-Appellees, Bernhard Meier, Defendant.

Nos. 464, 589, Dockets 91-7643, 91-7697.

United States Court of Appeals, Second Circuit.

Argued Nov. 21, 1991.

Decided June 17, 1992.

As Amended Sept. 23, 1992.

David H. Pittinsky, Philadelphia, Pa. (Lawrence D. Berger, Scott R. Shepherd, Thomas E. Groshens, Ballard, Spahr, Andrews & Ingersoll, Bruce W. Kauffman, Mark J. Levin, Dilworth, Paxson, Kalish & Kauffman, Philadelphia, Pa., Richard J. Mathieu, Burns, Kennedy, Schilling & O'Shea, New York City, of counsel), for plaintiff-appellant-cross-appellee.

Henry A. Hubschman, ^* Washington, D.C. (David M. Miles, Joseph C. Port, Jr., Nina Morais, Robert M. Fisher, Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C.), for defendants-appellees Bank Leu A.G., Bank Leu Intern., Ltd., John R. Lademann, Bruno Pletscher, Christian Schlatter.

Arthur L. Liman, Martin Flumenbaum, Brad S. Karp, Talitha Curtis, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, for defendant-appellee Dennis B. Levine.

Elliot Lauer, Benard V. Preziosi, Jr., Curtis, Mallet-Prevost, Colt & Mosle, New York City, for defendant-appellee Ira B. Sokolow.

Robert M. Wilkis, pro se.

David E. Weisberg, Weisberg & Berns, New York City, for defendant-appellee Jean-Pierre Fraysse.

Jeanne M. Luboja, New York City (Jonathan D. Bassett, Mitchel H. Ochs, Willkie Farr & Gallagher, of counsel), for defendant-appellee-cross-appellant Lehman Bros. Kuhn Loeb Inc.

Before: OAKES, Chief Judge, MESKILL and KEARSE, Circuit Judges.

OAKES, Chief Judge:

This litigation presents the question whether an acquiring corporation may hold its investment banker, employees of the banker, and their tippees liable--pursuant to rule 10b-5, civil RICO, or common law fraud--for insider trading in the stock of the target company based on information misappropriated from the acquiring corporation. The particular issue spotlighted on this appeal concerns causation.

Litton Industries, Inc. ("Litton") alleges that the price it paid for the acquisition of Itek Corporation was artificially inflated as a result of insider trading in Itek's common stock. In 1982, Litton decided to acquire Itek and retained Lehman Brothers Kuhn Loeb Inc. ("Lehman") (now Shearson Lehman Brothers) to serve as its investment banker. Information concerning Litton's plans was passed by an employee of Lehman to another employee of Lehman--Dennis Levine--who, unbeknownst to Litton, began purchasing massive amounts of Itek stock. Litton alleges that Levine's spree, as well as the purchases by traders either tipped by Levine or piggybacking on his trades, inflated the market price of Itek stock, forcing Litton to raise its tender offer for the outstanding Itek stock. Litton seeks damages based on overpayment for its tender offer purchases of Itek stock.

The third amended complaint names as defendants Lehman, Bank Leu International ("BLI"), and Bank Leu, as well as the traders--Levine, Ira Sokolow, Robert Wilkis, and various employees of BLI and Bank Leu. The complaint alleges the following causes of action: (1) violation of section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b) (1988), and rule 10b-5, 17 C.F.R. § 240.10b-5 (1991); (2) civil RICO, 18 U.S.C. §§ 1962(a)-(d) & 1964(c) (1988); and (3) state common law claims, including fraud, negligence, interference with contractual relations, breach of contract, and breach of fiduciary duty. Lehman is not named as a defendant in the RICO and common law fraud counts, but is named in the securities fraud claim as a controlling person, pursuant to 15 U.S.C. § 78t(a) (1988), and in the negligence claim. ¹ The United States District Court for the Southern District of New York, John M. Cannella, Judge, in orders dated March 27, 1989, reported at 709 F.Supp. 438, and August 4, 1989, granted appellees' motion for partial summary judgment dismissing all of Litton's claims for tender offer overpayment ² on the grounds that the insider trading, as a matter of law, did not cause the injury alleged by Litton. Litton appeals from a judgment dated June 26, 1991, which, pursuant to a memorandum and order dated June 4, 1991, 767 F.Supp. 1220, directed the entry of final judgment under Fed.R.Civ.P. 54(b) on the dismissal of Litton's tender offer claims. We reverse the district court's dismissal, holding that there is a genuine issue of material fact concerning whether the trader appellees, trading on the basis of confidential information belonging to Litton, caused Litton's injury.

I

In 1982, Litton decided to expand its defense electronics business by acquiring a firm with an expertise in electronic warfare products. Litton retained Lehman, an investment firm known for its defense industry savvy, to aid in its search for a suitable acquisition. On September 20, 1982, Lehman gave a presentation to Litton, which assessed the merits of various defense electronics companies as potential targets and addressed the optimum strategies for acquiring such a company. Itek was among the companies highlighted by Lehman.

As a step toward possible acquisition of Itek, Litton began, in October 1982, to make open market purchases of Itek stock. In November, Litton settled on Itek as its target company. Litton informed Lehman, on November 8, 1982, that it wished to engage Lehman as the investment banker for the Itek transaction. At this time Itek stock was selling for approximately $26 per share. Acting on Lehman's advice, Litton commenced its acquisition strategy: to purchase 4.9% of Itek stock on the open market and to negotiate a friendly acquisition of Itek through a tender offer followed by a merger of Itek with a Litton subsidiary. On November 12, 1982, Lehman confirmed in writing the agreement between Litton and Lehman and the letter agreement was executed by Litton on November 23.

Ira Sokolow, who was among the Lehman employees privy to Litton's plans, passed information as to Litton's plans to Levine with the understanding that Levine would secretly purchase Itek stock and Sokolow would share in the profits derived from these purchases. On November 12, 1982, Levine instructed Bernhard Meier in the Bahamian office of BLI to purchase 50,000 shares of Itek common stock on Levine's behalf. On the basis of Levine's purchases, Meier and other employees of BLI (Jean-Pierre Fraysse and Christian Schlatter) began purchasing additional shares of Itek stock for both BLI and themselves. Levine also tipped Robert Wilkis, an investment banker at Lazard Freres & Co., concerning Litton's acquisition plans. Wilkis purchased Itek stock through an offshore bank account. By the time Litton publicly announced its tender offer, on January 14, 1983, Levine and his cronies had purchased approximately 60,000 shares of Itek stock; and the market price of Itek stock had reached approximately $33 per share.

Litton, meanwhile, had begun to negotiate with Itek. Throughout these negotiations Litton adhered to its strategy of acquiring Itek through a friendly tender offer. At a November 23, 1982 meeting Fred O'Green, chairman of Litton's Board of Directors, told Robert Henderson, chairman of Itek's Board of Directors, that Litton was exploring "the possibility of acquiring the whole of [Itek by] a tender offer for cash on a friendly basis if we could come to a set of circumstances that [was] acceptable to both [parties]."

By early January 1983, the negotiations had progressed to the stage at which Litton's Executive Committee was assessing how much to offer per share of Itek stock. Relying on the advice of Lehman, Litton believed a fair price to be equivalent to the current market price of Itek common stock plus a 50% premium. The Committee authorized O'Green to make an initial offer of $42.50 per share. After discussions with Itek, O'Green, realizing that Itek would regard the offer as too low, declined to convey it to the Itek Board. On January 10, 1983, Litton offered Itek $46 per share for Itek common stock. The Itek Board met to consider that offer on January 12, 1983. Without rejecting the offer, the Itek Board elected to explore whether Litton would offer "a little bit more."

The next day Litton raised its offer to $48 per share. The Itek Board reconvened, and--after receiving a favorable fairness report from its investment banker, First Boston Corporation--voted to recommend the offer to its shareholders. On January 14, 1983, Litton publicly announced the tender offer. Subsequent to the announcement of the tender offer, the trader defendants sold their Itek shares for a profit.

The tender offer commenced on January 17, 1983 and concluded successfully on March 4, 1983: Itek was merged into a subsidiary of Litton and the outstanding shares were converted into a right to receive $48 per share. When Levine's activities became public in 1986, Litton brought this action to recover damages. Litton avers that the trader appellees' purchases forced the price per share of Itek common stock to rise, which in turn resulted in Litton's payment of an inflated price for the Itek acquisition.

II

The district court found that Litton could prove no facts that would establish the causation element of the section 10(b)/rule 10b-5, civil RICO, and common law tort claims. Because the causation element is essential to all of these claims, the district court concluded that summary judgment was appropriate. 709 F.Supp. at 449, 452-53. On appeal from a grant of summary judgment we review the record de novo, applying the same standard employed by the district court. Bryant v. Maffucci, 923 F.2d 979,...