Pinnacle Consultants, Ltd. v. Leucadia Nat. Corp., 163

• Decision Date: 10 December 1996
• Docket Number: No. 163,D,163
• Parties: RICO Bus.Disp.Guide 9184 PINNACLE CONSULTANTS, LTD., in its own behalf and on behalf of shareholders of Leucadia National Corporation, Plaintiff-Appellant, v. LEUCADIA NATIONAL CORPORATION; Ian M. Cumming; Joseph S. Steinberg; Paul M. Dougan; Lawrence D. Glaubinger; Melvin L. Hirsch; James E. Jordan, Jr.; John W. Jordan, II and Jesse Clyde Nichols, III, individually and as Officers and Directors of Leucadia National Corporation, Defendants-Appellees. ocket 96-7089.
• Court: U.S. Court of Appeals — Second Circuit

Page 900

101 F.3d 900

RICO Bus.Disp.Guide 9184

PINNACLE CONSULTANTS, LTD., in its own behalf and on behalf of shareholders of Leucadia National Corporation Plaintiff-Appellant, v. LEUCADIA NATIONAL CORPORATION; Ian M. Cumming; Joseph S Steinberg; Paul M. Dougan; Lawrence D. Glaubinger; Melvin L. Hirsch; James E. Jordan, Jr.; John W. Jordan, II and Jesse Clyde Nichols, III, individually and as Officers and Directors of Leucadia National Corporation, Defendants-Appellees.

No. 163, Docket 96-7089.

United States Court of Appeals Second Circuit.

Argued Sept. 9, 1996.

Decided Dec. 10, 1996.

Lester J. Tanner, New York City (Sharman T. Propp, Tanner, Propp & Farber, New York City, of counsel), for Plaintiff-Appellant.

Dennis J. Block, New York City (Miranda S. Schiller, Jason M. Halper, Weil, Gotshal & Manges LLP, New York City, Richard Cashman, Pavelic & Levites, New York City, of counsel), for Defendants-Appellees.

Before: FEINBERG, MINER, and PARKER, Circuit Judges.

MINER, Circuit Judge:

Plaintiff-appellant Pinnacle Consultants, Ltd. ("Pinnacle") appeals from a judgment entered in the United States District Court for the Southern District of New York (Sotomayor, J.) dismissing its complaint for failure to state a claim and for lack of subject matter jurisdiction. In its complaint, Pinnacle alleged violations of § 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78n(a), and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(b)-(d), and also asserted state common law claims for corporate waste, conversion, breach of fiduciary duty, and fraud. In an Opinion and Order entered November 16, 1995, the district court granted defendants-appellees' motion to dismiss the complaint with respect to Pinnacle's federal law claims and certain state law claims.

The district court found that Pinnacle's § 14(a) claim was barred by the statute of limitations, that Pinnacle had failed to plead the predicate acts necessary to support its RICO claim, and that there was no basis for the state law claims of fraud and conversion. The district court reserved judgment on defendants-appellees' motion to dismiss Pinnacle's remaining state law claims until further discovery had taken place concerning Pinnacle's principal place of business. Following the additional discovery, the district court found that Pinnacle's principal place of business was New York and therefore that there was no diversity jurisdiction over the remaining claims. On December 18, 1995, judgment was entered dismissing Pinnacle's complaint in its entirety.

For the reasons that follow, we affirm the judgment of the district court.

BACKGROUND

Pinnacle is incorporated in Delaware and is wholly owned by Anne-Renee Testa. Pinnacle's sole asset is a minority share of the stock of defendant-appellee Leucadia National Corporation ("Leucadia"), a financial services corporation based in New York. The eight individual defendants were the directors of Leucadia (the "Directors") during all times relevant to this action.

In May of 1994, Pinnacle commenced a shareholder derivative action against the Directors, claiming that they had defrauded Leucadia over a seven-year period by engaging in illegal stock transactions. The allegations in the complaint generally relate to four separate transactions: the issuance of warrants to Leucadia directors Ian M. Cumming and Joseph S. Steinberg in 1985, 1991, and 1992, and the merger of Marks Investing Corporation ("MIC") into Leucadia in 1990.

Cumming has served as a director and as chairman of the board at Leucadia since June of 1978. Steinberg has served as a director of Leucadia since December of 1978, and as president of Leucadia since January of 1979. During Cumming and Steinberg's tenure, Leucadia's financial health improved significantly. In December of 1978, Leucadia's common stock had a book value of negative $.22. On December 31, 1993, the book value of Leucadia's common stock was $32.54, and Leucadia had reported the highest pre-tax income in its history.

Cumming and Steinberg had entered into employment contracts with Leucadia providing that, in addition to base compensation, they were entitled to "[s]uch additional compensation as may from time to time be authorized by the Board of Directors" and that they had the right to participate in "profit sharing, stock option, cash or stock bonus or other plan or arrangement ... in the sole discretion of the ... Board of Directors of the Corporation." Leucadia's board of directors had an Employee Benefits Committee (the "Committee"), which reviewed and recommended the compensation of the chairman of the board and the president. The Committee consisted of three outside directors, defendants Jesse Clyde Nichols III, Paul M. Dougan, and James E. Jordan, Jr.

Cumming and Steinberg also were general partners of a New York general partnership, TLC Associates ("TLC"). In 1979, TLC acquired 100 percent of the outstanding stock of Uintah National Corp., which, in turn, owned approximately 51.9 percent of Leucadia's outstanding voting stock. As of May of 1985, four Leucadia directors, Cumming, Steinberg, Lawrence D. Glaubinger, and John W. Jordan II, through investment in TLC, beneficially owned in the aggregate approximately 55 percent of Leucadia's outstanding common stock.

On May 8, 1985, Leucadia's board of directors authorized the issuance of warrants to Cumming and Steinberg, entitling each of them to purchase 200,000 shares of Leucadia common stock at $25 per share (approximately 17 percent above the then market price) (the "1985 Warrants"). Thereafter, a majority of Leucadia's shareholders approved the issuance of the 1985 Warrants. Leucadia's 1985 Proxy Statement disclosed that the 1985 Warrants were issued to Cumming and Steinberg "[i]n recognition of their efforts in establishing record achievements during the past six years." The 1985 Proxy Statement also disclosed that Leucadia's officers and directors as a group beneficially owned 56.5 percent of the outstanding shares of Leucadia common stock.

In January of 1987, as a result of a two-for-one stock split, the 1985 Warrants were exercisable at $12.50 per share for 400,000 shares each by Cumming and Steinberg. In November of 1989, Leucadia bought back from Cumming and Steinberg warrants for an aggregate of 786,000 Leucadia shares at a purchase price equal to the difference between the warrant exercise price ($12.50 per share) and $21.56 (the price that was paid by Leucadia to other shareholders in a self-tender offer executed shortly thereafter, plus an interest factor).

In 1990, Leucadia merged with MIC, a Delaware corporation. Prior to the merger, in May of 1990, MIC's shares were owned by Leucadia (56.08 percent), Cumming (4.39 percent), Steinberg (4.39 percent), Jordan II (15.20 percent), and Carl Marks & Co. and its subsidiary. MIC owned a 54 percent interest in TLC, which, in turn, beneficially owned approximately 58.7 percent of the outstanding common shares of Leucadia. The result of this circular ownership structure was that Leucadia, through its direct interest in MIC and MIC's direct interest in TLC, indirectly owned shares of its own stock.

In order to simplify this circular ownership structure, Leucadia requested that its shareholders approve a merger of MIC into Leucadia at Leucadia's 1990 annual shareholder meeting. An affirmative vote of two-thirds of Leucadia's common shares entitled to vote was required to approve the merger. The 1990 Proxy Statement disclosed that TLC beneficially owned 58.7 percent of the outstanding Leucadia shares, that TLC "intends to cause all of such Leucadia Shares to be voted in favor of the Merger," and that approval of the merger was "assured" if an "additional approximately 8%" of outstanding Leucadia stock voted in favor of the merger. ¹ On May 11, 1990, the merger was approved by the shareholders.

In June of 1990, Leucadia's board of directors voted to issue warrants to Cumming and Steinberg, entitling each of them to purchase 400,000 shares of common stock at a price of $22 per share (the "1991 Warrants"). At that time, Leucadia's common stock was selling for $21.88 per share. The 1991 Proxy Statement disclosed that the officers and directors of Leucadia as a group beneficially owned 54.1 percent of the outstanding Leucadia common shares. In May of 1991, a majority of outstanding shares was voted to approve issuance of the 1991 Warrants. In January of 1992, Leucadia bought back the 1991 Warrants from Cumming and Steinberg at a price of $18.375 per share, the difference between the $22 per share exercise price and $40.375, the closing price of common shares on January 9, 1992.

In January of 1992, Leucadia's board of directors once again authorized the issuance of warrants to Cumming and Steinberg, entitling each of them to purchase 400,000 shares of Leucadia common shares at $40.375 per share (the "1992 Warrants"). These warrants were not exercisable or transferable until April 1, 1993. The 1992 Proxy Statement disclosed that Leucadia's directors as a group beneficially owned in the aggregate over 50 percent of Leucadia's outstanding shares.

On May 11, 1994, Pinnacle commenced the action giving rise to this appeal. In its complaint, Pinnacle asserted claims for violations of § 14(a) of the Exchange Act and RICO, as well as state common law claims for corporate waste, conversion, breach of fiduciary duty, and fraud. The alleged predicate acts under the RICO claim were four acts of mail and wire fraud. The first three predicate acts involved Leucadia's 1985, 1991 and 1992 Proxy Statements, which allegedly failed to disclose that the warrants would be issued to Cumming and Steinberg in violation of New York Business Corporation Law ("BCL") § 505. Pinnacle claimed that, because Leucadia's 1985, 1991, and 1992 Proxy Statements did not disclose that the issuance of these warrants would violate section 505, the...