Newitt v. First Union Nat. Bank

Decision Date19 November 2004
Docket NumberNo. A04A1156.,A04A1156.
Citation607 S.E.2d 188,270 Ga. App. 538
CourtGeorgia Court of Appeals


Steven Hardy, William Friend, Friend, Hudalk & Harris, LLP, Atlanta, for Appellant.

Gerald Davidson, Jr., Davidson & Tucker, LLP, Duluth, Stephen Riddell, Troutman, Sanders, Lockerman & Ashmore, Lynette Smith, Troutman Sanders LLP, Atlanta, for Appellee.

SMITH, Chief Judge.

Ronald Newitt and Ross Robertson, two self-described "unsophisticated investors,"1 filed suit against First Union National Bank and other defendants. Their multi-count complaint included claims for purported violations of federal and state securities laws, breach of fiduciary duty, negligent misrepresentation, and negligence. The essence of their lawsuit was that First Union provided inappropriate investment advice and failed to advise them of the consequences of taking that advice. The trial court awarded summary judgment against Newitt and Robertson on all claims. We likewise find that the claims fail as a matter of law and therefore affirm.

In February 1998, Newitt and Robertson sold their company, Alta Telecom, Inc. to Ciena Corporation (Ciena). The transaction was structured so that, in lieu of cash, Newitt received 550,000 shares and Robertson received 450,000 shares in Ciena, the acquiring company. At that time, the aggregate one million shares had a market value of $54,000,000. Their shares of Ciena stock were restricted, however. The shares could not be hedged2 until May 19, 1998, and could not be sold or transferred until February 19, 1999.

From February through August 1998, Newitt and Robertson met with representatives of First Union Brokerage to discuss ways to manage their assets. Karen Beardslee, a First Union vice president, assembled a team of specialists who initially met Newitt and Robertson on February 27, 1998. At the February 27 meeting and at several subsequent meetings, Bank representatives discussed arranging an "equity collar" that could be used to protect Newitt's and Robertson's Ciena holdings from a decline in Ciena's stock price. As their brief explains,

[a] collar is the financial equivalent of a combination of a put option and a call option. A put option on a share of stock gives the stockholder the right to require a counter party to purchase that stock at a certain price on a specified future date. A call option on a share of stock gives the counter party the right to require the stockholder to sell the stock at a certain price on a specified future date. The price at which the stock is purchased or sold is called the "strike price" and the option is said to "expire" on the settlement date.

In May 1998, First Union discussed collars, put options, or selling the restricted stock to a third party at a deep discount. It was First Union's recommendation to Newitt and Robertson that they collar their Ciena stock to protect themselves from a possible decline in Ciena's price. Robertson conceded that on or about May 14, 1998, First Union had recommended that he purchase "a zero cost equity collar on a large portion of [my] position of the Ciena stock."

In a letter dated May 19, 1998, allegedly sent by facsimile, First Union offered Newitt and Robertson an equity collar for their Ciena stock.3 William G. Griesser, a First Union vice president, proposed setting a floor (maximum depreciation) of $48.60 per share and a cap (maximum appreciation) of $64.80 that would protect their interests in their Ciena holdings for nine months from depreciating below 90% of its current price of $54 per share. Griesser wrote, "In the event the ending stock price fell within the collar (between $48.60 and $64.80 per share) no payment would be required by First Union or you."

After the mid-May meeting, Newitt and Robertson did not accept First Union's recommendation to execute the equity collars on their Ciena stock. Nor did they choose to enter any of the hedging alternatives proposed by First Union. On or about June 1, 1998, to position themselves for entering into a hedging transaction, including collaring Ciena, Newitt and Robertson each signed an International Swap Dealer's Association (ISDA) Master Agreement, the Schedule thereto, and a Pledge Agreement. These agreements, read together with any trade confirmations that the parties were to sign in the future for transactions, constituted the parties' entire agreement on any collar transactions.

On June 3, 1998, Ciena announced that it was to be acquired by Tellabs in a merger. After the announced merger, First Union was no longer willing to enter into the equity collar transactions on Ciena stock. Bank officials believed that an equity collar could potentially expose First Union to excessive risks if the proposed merger collapsed and resulted in the stock price of Ciena suffering a significant decline.

In mid-June, First Union officials met with Newitt and Robertson. Griesser testified that at the meeting, they offered two options to Newitt and Robertson, putting a collar on Tellabs and "buying listed put options." Griesser testified that they discussed the risks of Ciena's price falling and Tellabs' price rising if the merger deal did not go through.

By a letter dated June 16, 1998, and also allegedly sent by facsimile, Griesser proposed that First Union create an equity collar on Tellabs stock.4 Griesser explained that "as a result of the recent merger talks between Cienna [sic] and Tellabs (TLAB), we cannot offer a hedge on [Ciena] CIEN. If you believe that the merger will occur and you are concerned about price risk of the potential new shares of TLAB, you can enter into a hedge on TLAB (please read page 2 for additional risks)." (Emphasis supplied.) Griesser wrote that "[w]e believe that the equity collar presented below may potentially mitigate the price risk involved with your current Cienna [sic] Corporation (CIEN) stock position." Griesser suggested that Newitt and Robertson consider an equity hedge on the TLAB stock price until February 1999 with the collar on TLAB stock set between $51 and $80.96 per share. Griesser pointed out:

the TLAB collar will only protect you against declines in TLAB stock, which may or may not mirror the performance of CIEN. Further, if the price of CIEN and TLAB deviate from each other, you may not have protection against declines in CIEN and you may ... owe First Union if the ending stock price of TLAB is above the cap price.

Both men fully expected the merger to occur and did not rely upon First Union in forming that opinion. They also anticipated that their Ciena stock would be converted into Tellabs. On June 23, 1998, Robertson executed a collar on 250,000 shares of Tellabs stock with an expiration date of February 23, 1999. On June 23, 24, and 25, 1998, Newitt executed collars on a total of 250,000 shares of Tellabs stock with expiration dates of February 23, 24, and 25, 1999.5

On August 21, 1998, the proposed Tellabs/Ciena merger came into "serious question." First Union informed Newitt and Robertson that with the merger called off, "there was no downside protection on Ciena." First Union asked to meet with them to discuss their current investment situation, in part, because Newitt and Robertson held collars on a stock that they did not own and the "stock they did own was plummeting." First Union offered to "unwind" their collars on Tellabs, "so that they would not potentially owe the bank." As one First Union official testified, "they had just on paper lost 42 million dollars." Instead of waiting until February 1999 when their Tellabs collars would expire, Newitt and Robertson accepted First Union's offer to unwind the collars immediately.

On August 25, 1998, First Union unwound the Tellabs collars and paid $889,566 to Newitt and $619,508 to Robertson on those collars. Because Newitt and Robertson had executed the collars on Tellabs at zero cost, they obviously profited from their Tellabs collars, as they both admit. After the demise of the merger between Tellabs and Ciena, First Union was again willing to consider executing collars on Ciena. On August 28, 1998, Newitt and Robertson and First Union discussed potential collars and put alternatives relating to their Ciena stock. After those discussions in August, Newitt and Robertson did not opt to enter into any hedging transactions of any kind with First Union, including authorizing entry of any collars on Ciena. Instead, they apparently transferred their investment business elsewhere.6

On March 13, 2000, more than eighteen months after deciding to unwind their Tellabs collars, Newitt and Robertson filed a ten-count complaint against First Union and other defendants. Their suit alleged violations of federal securities laws and the Georgia Securities Act and claims for breach of fiduciary duty, negligent misrepresentation, negligence, and punitive damages.

The thrust of their complaint was that by recommending the collars on Tellabs instead of on Ciena, the Defendants "failed to protect Plaintiffs from this decline and ... the value of Plaintiffs' positions in the Ciena stock has been dramatically diminished." They further alleged that the defendants "failed to provide Plaintiffs with an adequate explanation of the risks involved in collaring the Tellabs stock instead of the Ciena stock, or that such action would leave the Ciena stock unprotected. Defendants failed to provide Plaintiffs with any other suitable hedging alternatives." They asserted that "[b]ased on the recommendations and information provided by Defendants, Plaintiffs believed their equity positions in Ciena to be protected, or `hedged,' as explained to them by Defendants." They sought damages of not less than $15,024,850, damages for the loss of use of money and other damages, in particular, the profits that they could have obtained had Ciena rather than Tellabs been collared.

Newitt and Robertson appeal the summary adjudication...

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