Miller v. Schweickart

• Decision Date: 26 April 1976
• Docket Number: No. 74 Civ. 5089.,74 Civ. 5089.
• Citation: 413 F. Supp. 1062
• Parties: Howard M. MILLER et al., Plaintiffs, v. Winfield H. SCHWEICKART et al., Defendants.
• Court: U.S. District Court — Southern District of New York

413 F. Supp. 1062

Howard M. MILLER et al., Plaintiffs, v. Winfield H. SCHWEICKART et al., Defendants.

No. 74 Civ. 5089.

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

April 26, 1976.

Freeman, Meade, Wasserman & Sharfman, New York City, Laurance V. Goodrich, Brooklyn Heights, N. Y., for plaintiffs; J. Owen Zurhellen, III, Charles I. Poret, New York City, of counsel.

Hays, Landsman & Head, New York City, for defendant Skelly Oil Co.; C. Lansing Hays, Jr., David Ross, New York City, of counsel.

Langberg & Ringel, New York City, for defendant Arthur Rafkind; Nathan Ringel, New York City, of counsel.

OPINION

EDWARD WEINFELD, District Judge.

Plaintiffs, limited partners of Schweickart & Co. ("Schweickart"), a securities broker-dealer and former member of the New York Stock Exchange, bring this action derivatively on behalf of Schweickart, which suffered a financial collapse in July 1974 and is now defunct. They assert claims against Skelly Oil Company ("Skelly") and others for violations of section 17 of the Securities Act of 1933,¹ section 10(b) of the Securities Exchange Act of 1934,² Rule 10b-5 promulgated thereunder,³ and the New York State common law. The claims center about purchases of millions of dollars of securities by Skelly and others from Schweickart and the latter's commitments to repurchase. In general, the charge is that the transactions were engaged in by Schweickart general partners as part of a conspiracy to defraud Schweickart, and that Skelly and other purchasers of the securities aided and abetted them in concealing the commitment to repurchase. The matter is now before the court on a motion for summary judgment by Skelly, and accordingly we are here concerned only with its role in the alleged conspiracy.

Skelly from time to time accumulates large sums of cash which ultimately are intended for capital purposes, including the acquisition and development of oil and gas properties, improvement and expansion of its refineries and other aspects of its business. Until required for its capital purposes, Skelly's policy is to invest the accumulated funds on a short-term basis by the purchase of federal, state and municipal bonds or notes, certificates of deposit and the like. In August 1971 Skelly's investment officer was solicited by a Schweickart representative (not one of its general partners) with respect to purchases of securities. According to defendant's representatives, undisputed by any Schweickart representative, the oral arrangement which followed the solicitation of the Skelly account was that if Skelly bought bonds from Schweickart, Schweickart would, on a day agreed on, or if no day was agreed on, on whatever day Schweickart or Skelly at their option elected, buy back the bonds at the price at which Skelly purchased them and Skelly would sell the bonds at that price. The plaintiffs refer to these transactions as "parking" of securities, with implied overtones of fraudulent conduct, whereas Skelly refers to them as "repo" or repurchase transactions, which it states are common or normal methods of purchase from banks and sellers of commercial paper. Under the arrangement the purchases of the bonds by Skelly were at a specified price plus interest accrued to the date of purchase; on resale to Schweickart Skelly would receive the price plus interest accrued to the date of resale. Thus Skelly realized the interest which accrued during the period it owned the bond. Pursuant to their arrangement, from September 1, 1971 through February 7, 1972, Skelly bought municipal bonds from Schweickart and from October 1, 1971 through March 27, 1972 Schweickart repurchased the same bonds. Each trade between Skelly and Schweickart was followed by a written confirmation. Whatever nomenclature is applied to these transactions, Schweickart carried the risk of a market decline in the securities, but had the advantage of any market gain.⁴

Plaintiffs' claim is that Schweickart's general partners failed to disclose in Schweickart's records or otherwise the obligation to repurchase from Skelly, thereby enabling them to avoid the capital restrictions of the New York Stock Exchange⁵ and exposing Schweickart to extraordinary risks and costs, with consequent financial collapse.

Skelly moves for summary judgment, claiming that any fraud by failure to disclose Schweickart's repurchase obligation was solely that of the Schweickart general partners, and that Skelly's trades with Schweickart, as far as Skelly knew, were ordinary repurchase or "repo" transactions, made without any knowledge by Skelly of their nondisclosure by Schweickart partners or their use to facilitate net capital violations. In the alternative, Skelly urges that even if summary judgment is inappropriate on the issue of scienter, the alleged "parking" took place between the fall of 1971 and the spring of 1972 and as a matter of law could not have been a proximate cause of Schweickart's collapse more than two years later in July 1974.

The basic material facts are not in dispute. Solely for the purpose of this motion, Skelly does not dispute that certain Schweickart general partners employed the "repo" transactions with Skelly to overextend Schweickart's capital without detection, and that ultimately Schweickart's fall was due to impairment of its capital facilitated by nondisclosure of oral "repo" commitments with firms other than Skelly. Plaintiffs do not dispute any of the purchase or repurchase transactions. What is in dispute are the inferences to be drawn from the facts. Plaintiffs contend that a permissible inference of Skelly's guilty knowledge arises from the attendant circumstances of these transactions which requires the denial of Skelly's motion and a trial of the issues.

Skelly personnel who participated in the transactions have submitted affidavits categorically denying any knowledge of any wrongdoing or that they were aware of any wrongdoing of any Schweickart partners with respect to the transactions. All orders to purchase or to resell bonds were placed orally by telephone by Skelly personnel who aver that the trades were part of the "daily grist of the mill" of Skelly's investment program for short-term, surplus capital; further, it is stated that the transactions with Schweickart were no different from similar transactions executed with other brokers in connection with Skelly's short-term investment program. No Schweickart representative who handled any of the trades has testified or submitted any affidavit attributing knowledge to Skelly's representative that Schweickart's general partners had failed to disclose or record repurchase obligations and were evading capital restrictions. It is recognized, of course, that Skelly's categorical denials of wrongdoing are by no means conclusive, and by themselves do not require the granting of defendant's motion for summary judgment.⁶ The court also recognizes that the absence of direct evidence is not fatal to plaintiffs' claim—indeed it is fully aware that conspiracies are rarely established by direct evidence; that usually they are spelled out by independent circumstantial evidence and the reasonable inferences to be drawn therefrom.⁷ However, there must be a fact basis upon which the sought-for inferences of conspiracy and knowing participation therein must rest. Plaintiffs rely upon the fact that the agreements to repurchase were oral; they contend that such agreements are atypical and that this permits an inference by a trier of the fact that Skelly had actual knowledge⁸ of the fraudulent use to which the undisclosed transactions were utilized by the Schweickart general partners—in short, plaintiffs argue it warrants a fact-finder to infer that the transactions "had no purpose other than to permit the general partners to exceed capital requirements and to conceal their wrongdoing."⁹

A fact-finder may draw reasonable inferences from known or proven facts, but the inference must be based on common experience and be logical or reasonable.¹⁰ Here virtually the single fact relied on to establish that Skelly had guilty knowledge of the illicit purpose of Schweickart's general partners is what plaintiffs term the "suspiciously unusual" nature of the "repo" agreements—that is, the absence of formal written documents evidencing all of the terms.

To support their claim, plaintiffs rely upon the deposition testimony of witnesses. However, upon close analysis the proffered testimony does not support the basic claim. Winfield Schweickart, a defendant and former general partner, testified that his understanding of the term "repo" included transactions where the repurchase agreement was in writing and that he believed oral commitments would not be binding. Jean Golashesky, another general partner, testified she would expect a "repo" transaction to be in writing and her understanding of the term was that it included only written agreements. However, upon cross-examination, she indicated that by "written" she meant only that the various trades would be followed by confirmations.¹¹ John Stevenson, a bond trader, testified that the usual repurchase agreement was in writing. Finally, another bond trader, Bobby Tanner, stated that the only distinction between a "repo" and a "parking" transaction is that in the latter the commitment to repurchase is "a gentleman's understanding" and in the former there is a written agreement to repurchase at a particular time.

A fair reading of the witnesses' testimony suggests that none of them questioned the legitimacy of oral repurchase agreements. Accepting the fact that repurchase agreements are usually written, this does not stamp oral agreements as unusual or illicit. Whether written or oral, the subject matter of the parties' agreement and their respective obligations are the same; that the parties did not commit their understanding to written form did not convert an otherwise legal agreement to an illegal one. Plaintiffs have offered no evidence to...