Litton Industries v. Lehman Bros. Kuhn Loeb Inc.

• Decision Date: 27 March 1989
• Docket Number: No. 86 Civ. 6447 (JMC).,86 Civ. 6447 (JMC).
• Citation: 709 F. Supp. 438
• Parties: LITTON INDUSTRIES, INC., Plaintiff, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED, Dennis Levine, Ira B. Sokolow, Robert M. Wilkis, Bank Leu International, Ltd., Bank Leu A.G., Bernhard Meier, John R. Lademann, Bruno Pletscher, Jean-Pierre Fraysse, Christian Schlatter, John Doe, Jane Doe and John Doe, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

709 F. Supp. 438

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

No. 86 Civ. 6447 (JMC).

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

March 27, 1989.

COPYRIGHT MATERIAL OMITTED

Myerson Kuhn & Sterrett, Washington, D.C. by Harvey A. Levin and Michael I. Smith, for plaintiff.

Fried, Frank, Harris, Shriver & Jacobson, Washington, D.C. by Henry A. Hubschman, David M. Miles and David B. Hardison, for defendants, Bank Leu A.G., Leu Trust and Banking (Bahamas) Ltd., John R. Lademann, Bruno Pletscher and Christian Schlatter.

Willkie Farr & Gallagher, New York City by Anthony F. Phillips, Jeanne M. Luboja, Jonathan P. Wolfert and Ziporah Janowski, for defendant, Lehman Bros. Kuhn Loeb Inc.

Ashinoff, Ross & Goldman, New York City by Michael H. Barr, for defendant, Robert Wilkis.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City by Brad S. Karp, for defendant, Dennis Levine.

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

Curtis, Mallet-Prevost, Colt & Mosle, New York City by Eliot Lauer, for defendant, Ira B. Sokolow.

MEMORANDUM AND ORDER

CANNELLA, District Judge.

Defendants' motion for partial summary judgment is granted. Fed.R.Civ.P. 56(d).

BACKGROUND

Plaintiff Litton Industries, Inc. "Litton" is a Delaware corporation engaged in the business of defense electronics. Prior to 1983, Itek was a Delaware corporation engaged in the business of electronic warfare, a sub-specialty of the defense electronics industry. At all times prior to 1983, shares of Itek common stock were publicly traded in the securities markets.

Prior to September 1982, Litton began searching for a company engaged in the manufacture and sale of electronic weapons systems as a potential candidate for acquisition by Litton. In September 1982, Litton retained Lehman Brothers Kuhn Loeb, Inc. (now known as Shearson Lehman Brothers) "Lehman", at that time a prominent investment banker known for its expertise in the defense industry, to advise it in connection with Litton's possible acquisition of one or more companies engaged in the defense electronics industry. Lehman's recommendation, delivered shortly after being hired, was that Litton should purchase, on the open market, 4.9% of a target company's common stock and then attempt a friendly takeover. Itek was one of several companies highlighted in Lehman's presentation as a potential candidate for acquisition. Thereafter, Litton decided to invest in Itek and between October 15 and November 2, 1982, Litton purchased 131,600 shares of Itek common stock in open market transactions. In November 1982, Litton decided to attempt to acquire Itek and retained Lehman to serve as its investment banker for the transaction.

Litton was determined that any takeover of Itek was to be a friendly one and negotiations between the two companies began in late November 1982. Negotiations were conducted by Fred O'Green, Chairman of Litton and Robert Henderson, Chairman of Itek. In early January 1983, the Executive Committee of Litton's Board of Directors authorized O'Green to provide Henderson with a letter offering $42.50 per share. O'Green, however, did not convey this offer to Henderson as he believed that Henderson had already indicated that such an offer would be unacceptable to the Itek Board of Directors the "Itek Board" or the "Board". On January 10, 1983, Litton presented its first formal offer, of $46 per share, to the Itek Board.

The Itek Board convened on January 12, 1983 to consider Litton's offer. While the Itek Board did not vote to recommend shareholder rejection of the offer, it did, however, determine that $46 per share was an inadequate price. Henderson, therefore, was directed to attempt to persuade Litton to raise the price per share. Thereafter, Litton communicated an offer of $48 per share to the Itek Board. The Itek Board convened on January 13, 1983, to consider this new offer. At that board meeting, The First Boston Corporation "First Boston", Itek's investment banker, issued an oral and documentary report which stated that the $48 per share offer was fair. At this time, the Itek Board voted unanimously to recommend the $48 per share offer to its shareholders. Litton publicly announced the upcoming tender offer and the Itek Board sent a letter to all holders of Itek common stock and convertible debentures recommending that they tender their shares.

The tender offer was commenced on January 17, 1983, and successfully concluded by March 4, 1983. Itek was then merged into a wholly owned subsidiary of Litton. Any outstanding shares of Itek common stock were converted into a right to receive $48 per share.

It is undisputed that during the time of the negotiations and subsequent tender offer for Itek, Dennis Levine was employed by Lehman. It is also undisputed that Levine conducted massive amounts of trading based on material nonpublic information "insider trading" during this period. Levine's insider trading was apparently conducted with the knowledge, assistance and participation of defendants Bank Leu, A.G. "BLZ", a Swiss corporation; Bank Leu International Ltd. (now known as Leu Trust and Banking (Bahamas) Limited) "BLI", a Bahamian corporation and wholly owned subsidiary of BLZ; Jean-Pierre Fraysse, BLI's managing director and board member; John R. Lademann, BLI board member and member of the Management Board of BLZ; Bruno Pletscher, general manager of BLI; Christian Schlatter and Bernhard Meier, employees of BLI; and Ira Sokolow, an employee of Lehman.

It is also undisputed that defendants purchased an aggregate 60,000 shares of Itek common stock, in open market transactions, between November 12 and December 29, 1982. Although Litton is very satisfied with its takeover of Itek, it initiated the instant action claiming that, absent defendants' insider trading, Litton could have acquired Itek at a cheaper price. In fact, Litton alleges that absent defendants' insider trading it would have made the Board an offer of not more than $40 per share. Litton does not seek to undo the transaction, but rather, seeks damages based on the alleged artificially inflated price it paid for the shares of Itek common stock.

The complaint alleges causes of action under (1) section 10(b) of the Security Exchange Act of 1934, 15 U.S.C. § 78j(b) and rule 10b-5 promulgated thereunder, 17 C.F. R. § 240.10b-5 (count one); (2) section 14(e) of the Williams Act, 15 U.S.C. § 78n(e) and rule 14e-3 promulgated thereunder, 17 C.F. R. § 240.14e-3 (count two); (3) The Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et. seq., specifically, 18 U.S.C. §§ 1962(a), (b), (c) and (d) and 18 U.S.C. § 1964(c) (counts three, four, five and six); (4) fraud (count seven); (5) negligence (count eight); (6) intentional interference with a business and contractual relationship (count nine); (7) breach of contract (count ten); (8) breach of fiduciary duty (count eleven); and (9) section 352-c of New York General Business Law (count twelve); (10) section 1609(b) of New York Business Corporation law (count thirteen).

Defendants seek summary judgment contending that plaintiff lacks standing to bring counts two, twelve and thirteen. In addition, defendants seek partial summary judgment on those portions of counts one, three, four, five, six, seven and nine which allege losses occurring from the purchases made during the tender offer on January 17, 1983, and through the purchases made during the Litton/Itek merger on March 4, 1983. Defendants contend that there is no material question of fact that their conduct did not cause Litton injury.¹

DISCUSSION

1. STANDARDS FOR THE APPLICATION OF SUMMARY JUDGMENT

Rule 56(c) of the Federal Rules of Civil Procedure provides that a district court shall grant a motion for summary judgment if it determines that "there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." The court is not to resolve disputed issues of fact, but must "assess whether there are any factual issues to be tried, while resolving ambiguities and drawing reasonable inferences against the moving party." Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.1986) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 249 (2d Cir.1985)), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d 762 (1987).

The mere existence of disputed factual issues, however, is not enough to defeat a motion for summary judgment. Knight, 804 F.2d at 11-12; Quarles v. General Motors Corp., 758 F.2d 839, 840 (2d Cir. 1985) (per curiam). For the issues of fact to be "genuine," they must have a real basis in the record before the court, see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986), and most significantly, must be "material to the outcome of the litigation." Knight, 804 F.2d at 11. It stands to reason that, in order to be material, the disputed issues must implicate cognizable legal principles upon which recovery may be had, or liability denied, thus entitling the moving party to judgment "as a matter of law." Fed.R.Civ.P. 56(c); see Anderson, 477 U.S. at 248-52, 106 S.Ct. at 2510-12; Kronfeld v. Trans World Airlines, Inc., 832 F.2d 726 (2d Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 1470, 99 L.Ed.2d 700 (1988); see also S.A. Childress, A New Era For Summary Judgments: Recent Shifts At The Supreme Court, 116 F.R.D. 183, 189-90 (1987) (discussing Anderson).

In the procedural sense, the moving party bears the initial burden of demonstrating the absence of any genuine issue of material fact....