Roeder v. Alpha Industries, Inc., No. 86-1684

• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)
• Writing for the Court: Before BOWNES; BOWNES
• Citation: 814 F.2d 22
• Parties: , Fed. Sec. L. Rep. P 93,187, RICO Bus.Disp.Guide 6600 Gilbert ROEDER, etc., Plaintiff, Appellant, v. ALPHA INDUSTRIES, INC., et al., Defendants, Appellees.
• Docket Number: No. 86-1684
• Decision Date: 23 March 1987

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814 F.2d 22 55 USLW 2552, Fed. Sec. L. Rep. P 93,187,
RICO Bus.Disp.Guide 6600 Gilbert ROEDER, etc., Plaintiff, Appellant,
v.
ALPHA INDUSTRIES, INC., et al., Defendants, Appellees. No. 86-1684. United States Court of Appeals,
First Circuit. Argued Jan. 5, 1987.
Decided March 23, 1987.

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Edward F. Haber, P.C. with whom John J. Barter, Charles W. Rankin and Rankin & Sultan, Boston, Mass., were on brief for plaintiff, appellant.

John D. Donovan, Jr. with whom Paul B. Galvani and William L. Patton, Boston, Mass., were on brief for defendants, appellees.

Before BOWNES, Circuit Judge, ROSENN, ^* Senior Circuit Judge, and SELYA, Circuit Judge.

BOWNES, Circuit Judge.

Plaintiff-appellant Gilbert Roeder brought a class action suit on his own behalf and on behalf of others similarly situated against defendants-appellants Alpha Industries, Inc., a company in which he owned stock, and its officers and directors, for damages and declaratory relief under the securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968 (1982 & Supp. III 1985). Roeder alleged defendants were liable for not publicly disclosing until indictment was imminent that Alpha had paid a bribe to obtain subcontracts. He appeals from an order by the district court granting defendants' motion to dismiss for failure to state a claim. We affirm the district court's decision, but on somewhat different grounds.

I. BACKGROUND

Alpha is a Massachusetts-based corporation engaged principally in high technology defense contract work. In May 1983 Alpha was bidding on subcontracts being let by Raytheon Company, a prime defense contractor for an electronic warfare countermeasures program, ALQ 119/184. Roeder alleges that Alpha, through its president, Andrew S. Kariotis, and its vice-president, Anthony J. DeCarolis, paid $57,000 to Chester Adamsky, a Raytheon employee, so that he would use his influence to obtain subcontracts for Alpha for the sale of electronic devices to be used in the ALQ 119/184 program. The bribe was allegedly falsely represented as compensation for an extensive marketing study purportedly performed for Alpha by A & H Associates, an entity owned and controlled by Adamsky,

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and paid in three installments in 1983: $27,000 on July 1, $25,000 on August 5, and $5,000 on October 21.

On October 3, 1984, Alpha publicly announced that one of its vice-presidents probably would be indicted as a result of a grand jury investigation. On October 23, 1984, Alpha and DeCarolis were indicted for interstate transportation of funds obtained by fraud, mail and wire fraud, and payment of kickbacks to a prime government contractor. Alpha and DeCarolis eventually pleaded guilty to one count of violating the Anti-Kickback Act, 41 U.S.C. Sec. 51 (1982).

Roeder bought 400 shares of Alpha's common stock at slightly more than $21 per share on December 30, 1983, which was after the alleged bribe was paid but before disclosure. He sold his shares on January 29, 1985, for a little more than $11 per share. He seeks to recover the loss in stock value attributable to what he alleges was an overdue announcement of Alpha's involvement with Adamsky. He brought this suit on behalf of himself and others who bought Alpha's stock between May 23, 1983, and October 3, 1984. The first count of his two-count complaint alleges that Alpha, Kariotis, and DeCarolis violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), and Securities and Exchange Commission (SEC) Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1986), by not disclosing between May 24, 1983, and October 3, 1984, that they were engaging in illegal and fraudulent conduct. This was the interval between the alleged initiation of the bribe and the announcement of the impending indictment. The second count alleges that the bribe constituted a pattern of racketeering activity making defendants liable for treble damages under RICO, 18 U.S.C. Sec. 1964(c) (1982). The district court dismissed both counts for failure to state a claim upon which relief could be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).

II. SECURITIES FRAUD

Roeder claims Alpha, Kariotis, and DeCarolis violated Rule 10b-5 when they failed to disclose between May 24, 1983, and October 3, 1984, that Adamsky had been bribed. Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

17 C.F.R. Sec. 240.10b-5. A private cause of action exists for those injured by violations of this rule. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917, 1922, 44 L.Ed.2d 539 (1975). The district court held that the alleged bribery was not "material" information until an indictment became likely; illegal conduct that has not been discovered need not be disclosed. The court said "it appears that Alpha disclosed the probability of indictment at the time it became probable." Therefore, the court concluded, there was no failure to disclose material information.

Roeder claims the following were material facts: the bribery, the violation of criminal statutes, the breach of Alpha's contracts with Raytheon, and the exposure of the corporation to fines, legal fees, and the possible cancellation of government contracts. By not disclosing these facts before the announcement of the impending indictment, Roeder argues, defendants engaged in fraudulent and manipulative acts proscribed by Rule 10b-5.

A. Materiality

We note initially that the court's assessment of the timing of Alpha's disclosure--

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--that Alpha disclosed the impending indictment as soon as it became probable--appears to resolve a factual issue in defendants' favor. In ruling on a motion to dismiss, however, a court should not decide questions of fact. A complaint is to be construed in the light most favorable to the plaintiff; dismissal is appropriate only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). Read in this light, Roeder's complaint does not concede that Alpha revealed it faced criminal charges as soon as they became probable.

Even if the district court were correct in concluding "that Alpha disclosed the probability of indictment at the time it became probable," we do not think it is necessarily true that information about bribery is not material until it becomes the subject of an indictment. Information is material if "a reasonable investor might have considered [it] important in the making of [the investment] decision." Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-54, 92 S.Ct. 1456, 1472-73, 31 L.Ed.2d 741 (1972); Cook v. Avien, Inc., 573 F.2d 685, 693 (1st Cir.1978). This determination "requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 2133, 48 L.Ed.2d 757 (1976). On the basis of the facts alleged in Roeder's complaint, we conclude that reasonable investors might have considered defendants' alleged illegal conduct to be important information they would want to have before they made their investment decisions.

Information about bribery is relevant to important questions about the competency of management. Management's willingness to engage in practices that probably or obviously are illegal, and its decision to put the corporation at risk by so doing, may be critically important factors to investors. See Ferrara, Starr & Steinberg, Disclosure of Information Bearing on Management Integrity and Competency, 76 Nw.U.L.Rev. 555, 555-56, 581-87 (1981). Investors may prefer to steer away from an enterprise that circumvents fair competitive bidding and opens itself to accusations of misconduct. Furthermore, regardless of financial motives, investors may not want to associate themselves with such an enterprise.

Defendants assert that they should not be required to accuse themselves "of antisocial or illegal policies." (quoting Amalgamated Clothing and Textile Workers Union v. J.P. Stevens & Co., 475 F.Supp. 328, 331 (S.D.N.Y.1979), vacated as moot, 638 F.2d 7 (2d Cir.1980)). In a sense, they are right: information does not become material simply because some may regard it as antisocial or illegal. But otherwise material information does not become any less material because someone may be indicted if it is discovered by the authorities. The securities laws do not operate under the assumption that material information need not be disclosed if management has reason to suppress it. Investors may want to know about illegal activity for the same reason management will be reluctant to reveal it: it threatens to damage the corporation severely. Excepting from the disclosure rules information management has reason to hide would eviscerate the protection for investors embodied in the securities laws. ¹

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Defendants rely on United States v. Matthews, 787 F.2d 38 (2d Cir.1986), for their proposition that uncharged criminal conduct need not be disclosed as a matter of law. In Matthews, the court held that the securities laws were not...