Lucas v. Florida Power & Light Co.
| Decision Date | 31 October 1983 |
| Docket Number | No. 77-4009-Civ-SMA.,77-4009-Civ-SMA. |
| Parties | Samuel LUCAS, and Belle Lucas, his wife, in their own names and on behalf of all other persons similarly situated, Plaintiffs, v. FLORIDA POWER & LIGHT COMPANY, a Florida Corporation, Defendant. |
| Court | U.S. District Court — Southern District of Florida |
COPYRIGHT MATERIAL OMITTED
Wallace, Engels, Pertnoy & Solowdky, Miami, Fla., Macey & Sikes, Atlanta, Ga., for plaintiffs.
Steel, Hector & Davis, Miami, Fla., Reid & Priest, New York City, for defendant.
THIS CAUSE was heard by the Court at a non-jury trial extending over the course of eight days. By Order dated November 10, 1982, the Court bifurcated the trial so that only liability issues were presented. Numerous witnesses testified, depositions were introduced into evidence, many exhibits were admitted, and the Court heard extensive oral argument by counsel for both parties, receiving and considering also pretrial memoranda of law and post-trial revised proposed findings of fact and conclusions of law from both sides. The Court has had ample opportunity to hear and observe the lay witnesses, the business-oriented witnesses, the parties and their representatives, as well as expert witnesses on both sides. Having fully considered all of the aforegoing, the Court record, and being otherwise fully advised in the premises, the Court hereby renders this Memorandum Opinion thereon, including herein its Findings of Facts and Conclusions of Law as follows:
(Exhibits are referred to as:
This is a class action by Samuel Lucas and Belle Lucas, his wife, Florence Anthone and Anchor National Life Insurance Company, on behalf of themselves, and all persons who beneficially owned Defendant's first mortgage bonds, 10 1/8 % series issued March 13, 1975, due March 1, 2005 immediately prior to Defendant's redemption announcement made on March 23, 1977. Plaintiffs contend that Defendant, Florida Power & Light Company (hereinafter referred to as "FPL"), in 1975, through its public invitation for bids, preliminary, bidding and final prospectuses for the bonds, violated the Securities Exchange Act of 1934, , Section 10(b) and Rule 10b-5, in that Florida Power and Light fraudulently misrepresented therein its right to redeem the bonds at special redemption prices through the replacement fund provisions of the mortgage; that, at or about the time of redemption in 1977 and in connection therewith, FPL's conduct constituted fraud in violation of Section 10(b) and Rule 10b-5.
Plaintiffs' complaint arises from alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder. This Court has jurisdiction over this action under Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and 28 U.S.C. § 1331.
1. On March 13, 1975, FPL sold $125 million (principal amount) of first mortgage bonds to a group of 21 underwriters which submitted the winning bid for the entire issue of bonds. It was intended that the bonds be acquired by the underwriters with a view to distribution to the public.
2. The interest rate on the bonds was fixed by the winning bid at 10 1/8 %. (See PX-75) This was the highest interest rate historically paid by FPL up to that time for first mortgage bonds which were issued and sold. The 10 1/8 bonds were to be offered for resale to the public at a price of 101.663% of par value and accrued interest.
3. In addition to the basic mortgage and the supplemental indenture, the 10 1/8 bonds were sold at competitive bid pursuant to certain documents. Those documents are:
4. Florence Anthone purchased ten of the 10 1/8 bonds, $1,000.00 denomination, on March 14, 1975, at a price expressed in terms of percentage of par value of 101.663, for a total of $10,166.30. Although she received prospectuses for her investment, plaintiff Anthone never read any FPL prospectus or other description of the 10 1/8 bonds before she purchased the 10 1/8 bonds on March 14, 1975. (Anthone, Tr. 66-67) She relied completely on her late husband's broker's decision.
5. Samuel and Belle Lucas purchased ten of the 10 1/8 bonds, $1,000.00 denomination, on February 14, 1977, at a price expressed in terms of percentage of par value of 111.75, for a total of $11,175.00. Samuel Lucas did not possess or read any FPL prospectus describing the 10 1/8 bonds before he purchased the 10 1/8 bonds on February 14, 1977 in the after market. Instead, he relied on the assurance of a stockbroker that the bonds could not be called, and upon a Bond Guide prepared by Standard & Poor's, which his broker indicated confirmed this. (Lucas, Tr. 57) He wanted bonds with no possible recall at all. (Lucas, Tr. 58)
6. Anchor National Life Insurance Company, (hereinafter referred to as "ANLIC"), purchased the 10 1/8 bonds on the dates and at the prices and amounts shown below:
Date Face Amount Price Cost
05/20/76 $1,000,000 106.250 $1,062,500.00
07/13/76 750,000 107.000 802,500.00
08/10/76 2,000,000 107.667 2,153,340.00
09/02/76 2,000,000 109.625 2,192,500.00
09/10/76 500,000 110.500 552,500.00
01/06/77 30,000 111.427 33,428.10
__________ _____________
Totals $6,280,000 $6,796,768.10
Plaintiff ANLIC's purchases of bonds were made for it by its affiliated investment adviser, Anchor Corporation. The officer of Anchor Corporation supervising bond purchases was also an officer of ANLIC, and was at the time of suit a Senior Vice President of ANLIC. In selecting the 10 1/8 bonds in the after market of May 1976, ANLIC relied first on conversations with Smith Barney, then on a Moody's publication, then on a Paine, Webber booklet on the redemption features of high coupon bonds, and on Standard & Poor's Bond Guide. ANLIC did not read or rely on prospectuses when buying bonds in the after market (Harbeck, Tr. 1219, 1238).
7. FPL's basic mortgage and original series of bonds were authorized by the Securities and Exchange Commission (SEC) in its Findings and Opinion, and Order, In re Florida Power & Light, 15 S.E.C. 85, 96 (SEC Release 35-4791, December 28, 1943). (DX-21) 8. At the time the mortgage was created, FPL, like many other utilities, was subject to the Public Utility Holding Company Act of 1935 (the "1935 Act"). (Dicke, Tr. 1639) The 1935 Act gave the SEC regulatory jurisdiction concerning the organization and financing activities of public utility holding companies and their operating subsidiaries.
9. The 1935 Act was enacted in the aftermath of a large number of bankruptcies and defaults by utilities during the Depression. Pursuant to the 1935 Act, the SEC began a process of reorganizing the holding company systems and providing a more rational basis for their financing. (Dicke, Tr. 1639)
10. During the period from 1937 through 1945, a large number of public utility mortgages were executed under the authorization of the SEC. These mortgages are substantially similar to one another. (Dicke, Tr. 1640)
11. As a Florida mortgage, FPL's mortgage, and all the supplemental indentures thereto, are recorded in the official public records of the 37 counties in which FPL owns property.
12. The mortgage here authorized an initial series of bonds and secured them by placing a lien on all property (with certain specified exceptions) which FPL owned at that time and which it thereafter would acquire or construct. (FPL Mortgage, DX-20)
13. The mortgage provided that the company could thereafter issue new series of first mortgage bonds. Each time the company issues a new series, the mortgage requires it to designate, or "certify", a quantity of property in connection with that series. The principal amount of the bonds may not exceed 60% of the cost or value of the certified property. FPL's ability to finance by selling first mortgage bonds is limited by the amount of fundable property available.
14. Each time FPL sells first mortgage bonds, it executes a supplemental indenture, which establishes terms and conditions under which the specific issue of bonds is offered. The supplemental indenture also serves to certify the property on which the new bonds are issued. The supplemental indenture relating to the 10 1/8 bonds was the 30th Supplemental Indenture. (DX-5)
15. In its order authorizing the FPL mortgage, the SEC required FPL to include in that mortgage a covenant which imposed an annual requirement hereafter referred to as a "replacement fund" requirement. The covenant in the order reads as follows:
The Company further covenants, in substance, that during the year 1944 and in each succeeding year thereafter it will expend an amount equivalent to 15% of adjusted gross operating revenues, as defined in the Indenture, for such year for maintenance and replacement of the mortgaged property, for the construction of property which may not thereafter be made the basis for the authentication of bonds, or for the redemption or purchase and cancellation of bonds (but not including bonds retired pursuant to the sinking fund provisions), any deficiency in such expenditure to be made up by the deposit of cash with the Corporate Trustee as a...
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