S.E.C. v. Mize, 78-1049

• Decision Date: 23 April 1980
• Docket Number: No. 78-1049,78-1049
• Citation: 615 F.2d 1046
• Parties: Fed. Sec. L. Rep. P 97,362 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. D. Doyle MIZE et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1046

615 F.2d 1046

Fed. Sec. L. Rep. P 97,362

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellant, v. D. Doyle MIZE et al., Defendants-Appellees.

No. 78-1049.

United States Court of Appeals, Fifth Circuit.

April 23, 1980.

Harvey Pitt, Gen. Counsel, Paul Gonson, Asst. Gen. Counsel, John M. Mahoney, Sp. Counsel, Frederic Townsend, Atty., Richard E. Brodsky, Sp. Counsel, Michael K. Wolensky, Securities & Exchange Comm., Washington, D.C., for plaintiff-appellant.

Woodard, Henry & Primm, Robert A. Hall, Roger R. Wright, Jr., Houston, Tex., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Texas.

Before MORGAN, REAVLEY and HATCHETT, Circuit Judges.

LEWIS R. MORGAN, Circuit Judge:

The Securities and Exchange Commission brought this action to permanently enjoin D. Doyle Mize, Farnham Corporation, and others ¹ from engaging in future violations of the antifraud and tender offer provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a); Sections 10(b), 14(d), and 14(e) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and 78n(d), and 78n(e), and Rules 10b-5 and 14d-1 thereunder, 17 C.F.R. 240.10b-5 and 240.14d-1. After a hearing, the District Court for the Southern District of Texas entered a judgment for defendants denying injunctive relief. On appeal, the SEC contends that the court misinterpreted the evidence and applied an erroneous legal standard in assessing the materiality of certain facts in this case.

I.

D. Doyle Mize (Mize), the principal figure in this action, was chairman of the board of directors and chief executive officer of Southdown, Inc. (Southdown) and later of Valhi, Inc. (Valhi), a wholly-owned subsidiary of Southdown. The gravamen of the SEC's complaint is that Mize and certain of his business associates made repeated secret attempts to gain personal voting control of Valhi at prices below book value. To effectuate their scheme, defendants allegedly filed with the SEC and disseminated to the

public various documents which contained both affirmative misstatements and material omissions of fact. The defendants respond that Mize made every effort to comply with the federal securities laws and engaged in no act or practice which in any way violated those laws.

BACKGROUND

Southdown is a publicly-held Louisiana corporation headquartered in Houston, Texas, whose stock is registered with the SEC and traded on the New York Stock Exchange. During the early 1970s, Southdown was engaged, through its subsidiaries, in the production and marketing of cement, sugar, malt beverages, soft drink beverages, table wines and other consumer products. The company was also engaged in oil and gas operations and had large scale agricultural land development and farming interests. The company's agricultural operations were conducted through its Valhi subsidiary.

In 1971 the Southdown board of directors determined that the company's agricultural subsidiary was financially incompatible with Southdown's other business endeavors and was actually depressing the value of Southdown's stock. The directors reasoned that investors interested in the stable, current yield associated with Southdown's manufacturing operations were attributing little, if any, significance to the high risk high profit features and long-term growth requirements of the company's farming business. For this reason, the board proposed to divide Southdown into separate agricultural and manufacturing entities having generally different operating characteristics and capital requirements. To assess the wisdom of this plan, Southdown consulted two investment advisers, each of whom endorsed the proposed separation.

In 1973 and 1974 the board of directors authorized two attempts to divide Southdown into separate entities. These efforts were abandoned, however, when, on one occasion, a number of shareholders instituted lawsuits seeking to enjoin the separation and, on another occasion, the company encountered certain mechanical difficulties in accomplishing the separation. The search for ways to divide the company continued, and, on March 27, 1975, the board of directors unanimously approved the spin-off of Valhi from the parent corporation and announced in a press release its filing of a registration statement and accompanying prospectus with the SEC. On May 13, 1975, the spin-off was consummated when Southdown distributed the stock of Valhi as a dividend to Southdown's common shareholders.

The alleged secret attempts by Mize to gain control of Valhi occurred during the period immediately prior to and following the May 1975 spin-off. These events can conveniently be discussed as the (1) the Lambert tender offer proposal, (2) the Peterson deal, and (3) the Farnham counter-tender offer.

The Lambert Tender Offer Proposal.

In November 1974 a New York representative of Lambert Freres et Cie., Inc. (Lambert), a French construction company, telephoned Mize in Houston, Texas. The representative informed Mize that Lambert had observed Southdown's previous unsuccessful attempts to spin off its Valhi subsidiary and suggested that Lambert might be able to assist Southdown in achieving that goal. After further discussion, Mize learned that Lambert was considering making a tender offer for Southdown stock. Lambert stated that it was primarily interested in Southdown's cement operations and had little or no interest in the company's farming operations or in the other businesses in which Southdown was engaged. Lambert then made clear that if the acquisition were accomplished it would be interested in selling Valhi in order to help finance the tender offer for Southdown. Aware that Mize had long been interested in working exclusively with Southdown's agricultural subsidiary, Lambert suggested that Mize form an investment group with Leland McCarthy and Richard McCarthy for the purpose of purchasing Valhi. ² Mize expressed interest in this proposal.

On January 23, 1975, Lambert forwarded to the Southdown board of directors a letter ³ proposing a tender offer for a majority of Southdown's common stock at a minimum price of $12 per share and its preferred stock at a minimum price of $25 per share. The letter stated that because Lambert had no interest in Valhi's agricultural operations it would, after gaining control of Southdown, distribute the Valhi stock on a pro rata basis to Southdown shareholders. The letter further stated that the tender offer proposal was "based on the understanding that Messrs. Mize, L. McCarthy and R. McCarthy would agree to purchase all shares of Valhi common stock to be owned by Lambert" at $10 per share.

On January 24, 1975, Southdown issued a press release notifying shareholders of the possibility of a cash tender offer for Southdown stock and stating that it intended to cooperate with the proposed offeror's efforts to conduct a financial review of the company. The press release emphasized the contingent nature of the tender offer, noting that the board of directors could give no assurances that the offeror would ultimately decide to proceed with its proposal or that the directors would be able to recommend the tender offer to shareholders. Unlike Lambert's January 23, 1975 letter, however, the press release made no mention of the proposed distribution of Valhi shares to Southdown shareholders or of the possible sale to Mize and the McCarthys of the Valhi shares Lambert would receive in the distribution.

The Peterson Deal.

During the early fall of 1974 and prior to the negotiations with Lambert, Charles Peterson, a former president of National Alfalfa Dehydrating & Milling Company (National Alfalfa), ⁴ expressed an interest in having Southdown or one of its subsidiaries purchase his 51 percent block of National Alfalfa stock. At that time Peterson's stock was pledged to secure a 4.5 million dollar loan which he had obtained from Crown Cork Financial. Peterson indicated that he wanted to sell his stock for an amount sufficient to repay his loan obligation and that he wanted an equity interest in the entity that ended up owning the National Alfalfa stock. Interested in this proposal, Southdown drafted a preliminary purchase agreement for Peterson's stock. In October 1974, however, negotiations were terminated because Southdown, in an unrelated transaction, was planning to file a registration statement with the SEC and lacked sufficient information about National Alfalfa to include in its registration materials. On several occasions during the winter of 1974-75 Mize reaffirmed Southdown's interest in National Alfalfa and indicated that future negotiations with Peterson might be possible.

On March 27, 1975, the day Southdown announced the spin-off of its agricultural subsidiary, Mize resigned as an officer and director of Southdown and became chairman of the board of directors and chief executive officer of Valhi. In early 1975 Mize prepared a memorandum entitled "Valhi/NA/CP" which outlined a proposal whereby Valhi would acquire 100 percent of the stock of National Alfalfa. ⁵ The memorandum provided that:

1. Valhi would issue preferred stock to Peterson in exchange for his National Alfalfa stock 2. Peterson would contribute the Valhi preferred stock to Farnham Corporation (a newly-formed company) in exchange for (a) $7,000,000 which he would use to pay off his loan secured by the National Alfalfa stock and (b) a 24.5 percent ownership interest in Farnham Corporation;

3. Mize and the McCarthys would transfer to Farnham Corporation approximately $2,250,000 in assets in exchange for which Mize would receive 26.5 percent ownership interest in Farnham and each of the McCarthys would receive 24.5 percent;

4. Farnham Corporation would borrow the $7,000,000 to be paid by Peterson by pledging as collateral the Valhi preferred stock which it would obtain from Peterson.

On April 15, 1975, Mize delivered the Valhi/NA/CP...