Rediker v. Geon Industries, Inc., 75 Civ. 2438 (VLB).

• Citation: 464 F. Supp. 73
• Decision Date: 22 November 1978
• Docket Number: No. 75 Civ. 2438 (VLB).,75 Civ. 2438 (VLB).
• Parties: Susan W. REDIKER et al., Plaintiffs, v. GEON INDUSTRIES, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

464 F. Supp. 73

Susan W. REDIKER et al., Plaintiffs, v. GEON INDUSTRIES, INC., et al., Defendants.

No. 75 Civ. 2438 (VLB).

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

November 22, 1978.

COPYRIGHT MATERIAL OMITTED

Finley, Kumble, Wagner, Heine & Underberg, New York City, for plaintiffs.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendants Geon Industries, Inc., George O. Neuwirth and Frank Bloom.

Borden & Ball, New York City, for defendants Roy Alpert and Irving Alpert.

MEMORANDUM ORDER

VINCENT L. BRODERICK, District Judge.

I. Introduction

This action was commenced by plaintiff in the United States District Court for the Northern District of Alabama, Southern Division. Pursuant to 28 U.S.C. § 1404(a), the case was transferred to the Southern District of New York.

After transfer plaintiff filed a motion seeking authorization for the action to be maintained as a class action. That motion was opposed, and cross-motions were filed to dismiss the complaint on the ground that it failed to state a claim upon which relief could be granted. Plaintiff then moved for leave to file an amended and supplemental complaint, and defendants, asserting that the new proposed complaint also failed to state a claim upon which relief could be granted, opposed plaintiff's motion.

On September 28, 1976, this Court per MacMahon, J. filed a Memorandum Opinion granting leave to amend the complaint. That order rendered moot defendants' motion to dismiss and plaintiff's motion for class action determination since both motions had been addressed to the earlier pleading.

Plaintiff has now served and filed her Amended and Supplemental Complaint (hereinafter the "complaint"), and she has moved for class action certification pursuant to Rule 23(c), Fed.R.Civ.P. Plaintiff has defined the relevant class as "all persons other than defendants named herein who were beneficial owners of Geon stock at that time on February 22, 1974 when trading on the American Stock Exchange was suspended and who were record owners of Geon stock as of the close of business on June 14, 1974." Complaint ¶ 15. Various of the defendants have filed cross-motions to dismiss the complaint for failure to state a claim upon which relief can be granted.¹

II. Conclusion

For the reasons set forth below, defendants' motions to dismiss the complaint are granted as to so much of the complaint as alleges individual claims by plaintiff and, except as to the Section 16(b) claim against defendant James McMahon, see pp. 82-83 infra, as to so much of the complaint as alleges derivative claims on behalf of defendant Geon Industries, Inc. As to so much of the complaint as alleges claims on behalf of the class proposed by plaintiff, defendants' motions to dismiss are denied without prejudice. Action on plaintiff's motion for class action certification is suspended pending submission by the parties of further memoranda on that motion. Such memoranda are to be prepared in light of the dispositions announced in this order.²

III. Discussion

For purposes of the motion to dismiss, the facts alleged in the complaint will be taken as undisputed. The facts are set forth, in substance, below. They relate to the proposed acquisition of the assets of Geon Industries, Inc. ("Geon") by Burmah Oil Co., Ltd. ("Burmah").

Plaintiff Susan W. Rediker presently owns 100 shares of Geon common stock, having purchased 200 shares on July 23, 1973 and having sold 100 of those shares on February 20, 1975. Plaintiff brings this action in the purported dual capacity of class representative seeking damages from Geon and the other defendants, and derivative plaintiff seeking relief on behalf of Geon. She purports to represent a class consisting of all persons, other than the defendants, who owned Geon stock on February 22, 1974 when trading on the AMEX was suspended and who were owners of Geon stock on June 14, 1974.

Defendant Geon is a New York corporation whose stock is registered on the American Stock Exchange ("AMEX") pursuant to § 12(b) of the Securities Exchange Act of 1934 ("Exchange Act").³

Defendant George O. Neuwirth, the founder of Geon, is its chief executive officer and chairman of its board of directors. He owns or is voting trustee with respect to approximately 581,000 shares of Geon common stock, which constitutes some 29 per cent of the total common stock outstanding. Defendant Frank Bloom is the secretary-treasurer and financial vice-president of Geon. Defendant McMahon was during times pertinent to this litigation the comptroller of Geon Intercontinental, Inc. ("Intercontinental"), a wholly owned subsidiary of Geon. McMahon had overall responsibility for the accounting department of Intercontinental and helped Bloom in the preparation of Geon's financial statements and reports. Defendant Roy Alpert is a close friend of defendant Neuwirth. Defendant Irving Alpert is a brother of Roy Alpert and is a partner of his brother in a real estate business. Defendant Edwards & Hanly is a broker-dealer in securities and a member of AMEX. Defendant Marvin Rauch was during times pertinent to this litigation a registered representative employed by Edwards & Hanly. Defendant Arthur Andersen & Company is a national accounting firm which provided all outside accounting services for Geon.

In the summer of 1973, Geon commenced discussions with Burmah concerning the possible merger of the two companies. During September, October and November of 1973, defendant Neuwirth tipped defendants Rauch and Roy Alpert, and apparently tipped others, as to the ongoing Geon-Burmah discussions. Shortly thereafter all of the individual defendants were engaged in widespread tipping of friends and relatives. With the exception of Neuwirth and Bloom, all of the individual defendants, along with the tippees' friends and relatives, purchased Geon stock on the basis of their knowing of the brewing Geon-Burmah deal, which constituted knowledge of non-public inside information.

Public disclosure concerning the preliminary discussions between Geon and Burmah was not made until December, 1973. On December 21, 1973, Geon announced that it had reached a written agreement in principle with Burmah whereby Geon was to be acquired by Burmah for $36,000,000, or approximately $16.80 per share. Even after the fact of the prospective acquisition of Geon by Burmah had been made public, non-public inside information concerning the details of the prospective merger continued to be passed on, through February 22, 1974, to the same group of defendants' friends and relatives.

On February 15, 1974 a Geon board of directors' meeting was scheduled for February 21, 1974. The proposed purpose of the meeting was formally to approve the agreement in principle that had been announced December 21, 1973. By February 21, Neuwirth, Bloom, McMahon and the other individual defendants knew or should have known that Geon's pre-tax earnings would be reduced by at least $314,000 for an item improperly reflected in 1973 income. They had also learned that preliminary figures indicated that for the year 1973 Geon income would be some 29% less than had been expected and substantially less than had been previously announced to the public.

On February 21 Geon's board of directors decided to postpone the signing of the agreement with Burmah. Another Geon board meeting was scheduled for February 24. Late on February 21 or early on February 22 McMahon called Rauch, who entered sell orders for all of McMahon's Geon stock, to be processed when the AMEX opened on the morning of February 22, 1974. Rauch also entered sell orders on behalf of himself, his relatives, his friends and various other clients. These orders were executed by Edwards & Hanly on the AMEX. Neuwirth had informed the Alperts of the situation, and the Alperts had sell orders representing approximately one-half of their holdings awaiting execution when the AMEX opened on the morning of February 22, 1974.

All of these sell orders (approximately 46,000) created a severe imbalance with respect to Geon stock when the AMEX opened on February 22. The AMEX delayed opening the market in Geon stock, and an AMEX official called defendant Bloom to inquire whether Geon had any explanation for the large number of sell orders. Bloom responded that Geon had no material non-public information on recent developments to account for the influx of sell orders. As the result of this misrepresentation, the market in Geon stock was opened on February 22 at 10:33 a. m. Various insiders and their "tippees" promptly sold their Geon stock, and the price declined on heavy volume from approximately $14.38 to approximately $11.80 per share. Pursuant to a request from counsel for Geon, the AMEX halted trading at 11:19 a. m.

On March 15, 1974 Geon announced that it had reached a revised agreement in principle with Burmah, by which Burmah would purchase Geon for $13.00 per share, a price down from the originally agreed price of $16.80 per share.

On June 3, 1974 the Wall Street Journal reported that Geon said it expected the agreement for its sale to Burmah would be carried out on June 4 for slightly under $24,000,000, or $10.75 per Geon share. On July 2, 1974 the Geon-Burmah deal was approved by Geon stockholders at their annual meeting.

A proxy statement circulated to secure approval of the Geon-Burmah deal contained material misstatements of fact and material omissions. Burmah, confronted with the illegal activities of Geon's insiders and the pendency of a Securities and Exchange Commission complaint against Geon, Neuwirth, Bloom, McMahon, Edwards & Hanly, Rauch and the Alperts based upon their activities in connection with the anticipated Geon-Burmah deal, notified Geon on July 12, 1974 that Burmah did not intend to consummate the planned purchase of Geon.

Geon stock remained subject to the February 22nd AMEX stop-trade order through July 24, 1974, with the exception that trading was reopened from June 10 th...