Searls v. Glasser

• Decision Date: 29 November 1995
• Docket Number: No. 94-3572,94-3572
• Citation: 64 F.3d 1061
• Parties: Fed. Sec. L. Rep. P 98,867 Darrell B. SEARLS, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. James J. GLASSER, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1061

64 F.3d 1061

Fed. Sec. L. Rep. P 98,867

Darrell B. SEARLS, on behalf of himself and all others

similarly situated, Plaintiff-Appellant, v. James J. GLASSER, et al., Defendants-Appellees.

No. 94-3572.

United States Court of Appeals, Seventh Circuit.

Argued May 15, 1995.

Decided Aug. 30, 1995.

Rehearing and Suggestion for Rehearing En Banc Denied Nov. 29, 1995.

Kristi L. Browne, Lawrence Walner, Walner & Associates, Chicago, IL, Jerome Congress (argued), Michael C. Spencer, Keith M. Fleischman, Milberg, Weiss, Bershad, Hynes & Lerach, New York City, Lisa I. Vessey, Chicago, IL, for plaintiff-appellant.

Caryn L. Jacobs, Asst. U.S. Atty., Michele Odorizzi (argued), Robert J. Kriss, Scott J. Davis, Herbert L. Zarov, Alan N. Salpeter, Leland H. Chait, Rosaria V. Owen, Mayer, Brown & Platt, Chicago, IL, for defendants-appellees.

Before CUMMINGS, BAUER, and ROVNER, Circuit Judges.

BAUER, Circuit Judge.

Darrell Searls filed this class action against officers of GATX Corporation, alleging claims arising under the Securities Exchange Act of 1934 ("Act"), 15 U.S.C. Secs. 78j(b), 78t(a), as well as under state common law. The district court granted the defendants' motion for summary judgment. Searls appeals; we affirm.

GATX is a Chicago-based holding company consisting of five subsidiaries which engage in a variety of diverse operations. GATX's second largest subsidiary, GATX Capital ("Capital"), buys and then leases aircraft and railcars. At the end of a given lease, Capital will often sell the equipment at a price in excess of the equipment's book value. The profit realized from such a sale is referred to as a "disposition gain." Along with lease payments, disposition gains play significant roles in Capital's and, in turn, GATX's success.

From 1987 to 1990, GATX's financial performance was stellar. It posted earnings consistently surpassing those of the previous year. The trend culminated in January 1991, when GATX announced that its 1990 net income was a record $82.9 million. Despite a slumping global and U.S. economy, James Glasser, GATX's Chief Executive Officer, maintained that GATX would be able to sustain "modest growth" through 1991. Glasser said:

We talk about ourselves being recession-resistant.... As of December 31, 1990, we will have future noncancellable rentals in excess of two billion dollars, and that really provides us with a cushion.

Disposition gains represent an important and ongoing portion of our income stream. In 1990, we had another record year of disposition gains. Our investment in high-quality assets will continue to support a high level of disposition gains as we continue to purchase new assets and sell off mature assets.

Glasser reiterated this sentiment in a letter to shareholders which accompanied the 1990 annual report. He wrote:

We are optimistic about our company's ability to continue its momentum during 1991. As a result of the changes made to our capital structure and the long-term nature of our lease contracts, we are well positioned defensively in the current recessionary economy.... We see long-term benefits in the form of increased revenues, cash flow, and profits from all five segments as we proceed through the 1990s.

Around the time the letter and report were sent to shareholders, GATX was in the process of ratifying its five-year budget for the years 1991-1995. The budget predicted only a small increase in net income for 1991, but concluded that the rate of growth would rise sharply from 1992 to 1995. ¹ Also acknowledged in the budget was that, because Capital had fewer assets coming off leases, disposition gains would drop from $40 million in 1991 to $14.4 million in 1992.

By the end of the third quarter of 1991, GATX's net income had exceeded that earned after three quarters one year earlier. Glasser again lauded GATX's ability to withstand recessionary pressures stating, "GATX's first half earnings reflect the recession-resistant characteristics of GATX's operating companies supported by long-term assets on long-term leases." At around the same time, three of GATX's senior managers exercised their stock appreciation rights ("SARs"). SARs are issued to senior GATX officers as part of their compensation. They are not unlike stock options in that they entitle the holder to a cash or stock payment in an amount representing the difference between the market price and the strike price specified on the face of the SAR. For purposes of this opinion, the significance of the SAR is that its value rises and falls with the stock price. These transactions became an issue in the consequent litigation.

In September of 1991, GATX began investigating the possibility of purchasing additional assets the financing of which would require GATX to issue additional equity. In an effort to gauge the wisdom of such a move, Glasser met with the head of each of the five subsidiaries and asked them to provide him with a forecast of each subsidiary's 1992 performance.

On September 23, 1991, Ronald Zech, Capital's President, informed Glasser that Capital's net income would be $12.1 million lower than that estimated in the budget. Three other subsidiaries reported projections which, when combined, fell $13 million below the net income predicted in the budget. When losses at the holding company level were thrown into the mix, GATX was looking at a net income of $67.7 million instead of the $96 million forecast in the budget.

Because analysts were projecting big things for GATX in 1992, Glasser went public with the new figures:

GATX's long-term leases to quality customers stabilize our cash flow and earnings even as the industries we serve are affected by the current economic slowdown. Although GATX is reporting record nine month earnings as a result of these recession-resistant characteristics, we anticipate that 1992 earnings will fall below this year's. We do not view this as having any effect on GATX's excellent long-term growth prospects. Next year, GATX has fewer assets coming off lease which in turn will generate lower disposition gains. Additionally, we are experiencing pressure on new and renewal aircraft lease rates. Lastly, rate increases currently obtainable on rail equipment likely will not offset increased maintenance and repair costs.

Glasser's announcement caused GATX's stock to fall from $37.63 per share to $29.38 per share. Eight days later, the plaintiffs filed this suit. The plaintiff class consists of all persons who purchased GATX stock between January 23, 1991 and October 17, 1991, the date of Glasser's announcement. Their lawsuit contends that the defendants had knowledge of the 1992 downturn well in advance of when they eventually published this information. The plaintiffs charge the defendants with deliberately misleading investors into believing that GATX's future was more promising than they knew it would be.

In a thorough and well-reasoned opinion, the district court granted the defendants' motion for summary judgment finding that the plaintiffs' allegations, even if fully supported, fail to point to actionable misrepresentations on the part of the defendants. Plaintiffs appeal this decision and contest the district court's discovery rulings.

Summary judgment shall be granted if the pleadings along with the supporting documents "show that there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The court's task is to determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986). We review a district court's grant of summary judgment using the same standard after viewing the evidence and drawing all inferences in a light most favorable to the nonmoving party. CSX Transp., Inc. v. Chicago & North Western Transp. Co., Inc., 62 F.3d 185, 188 (7th Cir.1995).

To establish liability under Sec. 10(b) of the Act, 15 U.S.C. Sec. 77j(b), or Securities and Exchange Commission Rule 10(b)(5), 17 C.F.R. Sec. 240.10b-5, one must prove that in connection with a securities transaction, the defendant either made a false statement of material fact or failed to make a statement of material fact thereby rendering the statements which were in fact made misleading. The plaintiff must then show that the misleading statement caused an injury. Whether a statement is material depends on how it affects an investor's perception of the security. If the court determines that there is a substantial likelihood that disclosure of the information would have been viewed by the reasonable investor to have significantly altered the total mix of information, the statement is material. Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988). Not surprisingly, this determination is a highly fact-dependent analysis. The plaintiff must also demonstrate that the deceit was committed with the intent to mislead or at least with recklessness so severe that it is the functional equivalent of intent. Ambrosino v. Rodman & Renshaw, Inc., 972 F.2d 776, 789 (7th Cir.1992); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875, 98 S.Ct. 224, 225, 54 L.Ed.2d 155 (1977).

One consequence of this construction is that predictions and forecasts which are not of the type subject to objective verification are rarely actionable under Sec. 10(b) and Rule 10b-5. Eckstein v. Balcor Film Investors, 8 F.3d 1121, 1132 (7th Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 883, 127 L.Ed.2d 78 (1994). "[A]n inability to foresee the future does not constitute fraud, because '[t]he securities laws approach matters from an ex ante perspective'." Id. (citations omitted). Therefore, as long as those statements had a reasonable basis when made, they do not...