State Teachers Retirement Bd. v. Fluor Corp.

Decision Date22 June 1981
Docket NumberNo. 328,D,328
Citation654 F.2d 843
PartiesFed. Sec. L. Rep. P 98,005 STATE TEACHERS RETIREMENT BOARD, Plaintiffs-Appellants, v. FLUOR CORPORATION and Manufacturers Hanover Trust Company, Defendants- Appellees. ocket 80-7592.
CourtU.S. Court of Appeals — Second Circuit

Russell A. Kelm, Columbus, Ohio (Schwartz, Shapiro, Kelm & Warren, Columbus, Ohio, Nelson E. Genshaft, William J. Brown, Ohio Atty. Gen., James B. Farmer, Asst. Atty. Gen., Columbus, Ohio, of counsel), for plaintiffs-appellants.

Raymond L. Falls, Jr., New York City (Cahill, Gordon & Reindel, New York City, John A. Shutkin, New York City, of counsel), for defendant-appellee Fluor Corporation.

Richard J. Concannon, New York City (Kelley, Drye & Warren, New York City, Robert E. Crotty, New York City, of counsel), for defendant-appellee Manufacturers Hanover Trust Company.

Before LUMBARD, MANSFIELD and MESKILL, Circuit Judges.

LUMBARD, Circuit Judge:

State Teachers Retirement Board ("State Teachers"), a public pension retirement fund established by the State of Ohio, appeals from a judgment of dismissal by the District Court for the Southern District, Robert W. Sweet, J., of its class action on behalf of all those who sold stock of the Fluor Corporation ("Fluor") during the period March 3 to March 13, 1975, without the knowledge of certain information regarding a construction contract award to Fluor. It seeks damages from the defendant Fluor for alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, caused by Fluor's failure to disclose this inside information. State Teachers further alleges that Fluor revealed this information to the defendant Manufacturers Hanover Trust Company ("Manufacturers"), who later purchased a large block of Fluor stock from State Teachers. It is also alleged that Fluor failed to halt trading in its stock despite increased market activity in the stock due to rumors about the contract.

Three years after instituting this class action, State Teachers sought leave to amend its complaint to include a claim against Fluor for tipping additional material inside information unrelated to the construction contract and additional claims based on statements made by Fluor's officers which misrepresented or omitted material facts and on violations of the New York Stock Exchange Listing Agreement and Company Manual. State Teachers also sought leave to add J. Robert Fluor (chairman of the board and chief executive officer of Fluor Corporation) as a defendant. Defendants Fluor and Manufacturers opposed these amendments and moved for summary judgment.

The district court permitted State Teachers to amend its complaint only to include the claim for violation of the Exchange's rules and for the misrepresentations and omissions. Leave to amend the complaint to include the other claims and to add J. Robert Fluor as a defendant was denied. Judge Sweet then granted summary judgment for the defendants on the entire complaint. See 500 F.Supp. 278 (S.D.N.Y.1980).

Finding no evidence of scienter on the part of either defendant, we affirm the district court's grant of summary judgment for defendants on the section 10(b) claims which are based upon Fluor's failure to disclose inside information and to halt trading. For this same reason, we affirm the dismissal of the misrepresentation claim and the claim for violation of the Exchange's rules. We reverse, however, the dismissal of State Teachers' tipping claim against both defendants because there are material issues of fact. We also reverse the district court's refusal to permit the plaintiffs to amend their complaint to include an allegation that Fluor tipped to Manufacturers inside information unrelated to the construction contract. This refusal was an abuse of discretion under the standard announced in Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). Finally, we affirm the district court's denial of leave to add Mr. Fluor as a party defendant.

I.

Fluor, a California corporation with its headquarters in Los Angeles, is a world-wide engineering and construction company. In September, 1974, Fluor was invited, along with two other large construction companies, to submit proposals on a $1 billion project to build a coal gasification plant in South Africa for the South African Coal, Oil and Gas Corporation Limited ("SASOL"). On February 25, 1975, SASOL informed Fluor that, subject to negotiating the terms of an agreement, Fluor would be awarded the project known as SASOL II. Three days later, Fluor signed an agreement with SASOL.

The agreement provided for an "embargo" on all publicity regarding the appointment of Fluor as contractor until March 10, 1975. 1 The ostensible purpose of this pledge of confidentiality was SASOL's need to complete delicate negotiations with the French government for financing prior to the contract's announcement. March 10 was also the date of Fluor's annual shareholders meeting.

On the morning of February 28, one of Fluor's representatives in South Africa telephoned David Tappan, vice-chairman of Fluor, in Los Angeles and notified him that the SASOL II contract was either signed or about to be signed. That morning, Walter Russler, Fluor's Director of Investor Relations, began preparation of a news statement to be released on March 10. On the morning of March 4, Russler and Paul Etter, Fluor's Public Relations Manager, received numerous inquiries from security analysts regarding rumors that Fluor had won a contract for a large project. Neither Russler nor Etter commented on these rumors. Etter then informed J. Robert Fluor of these rumors and suggested to him that a news release be issued "as soon as possible." Meanwhile, during the week starting March 3, the volume of trading in Fluor's stock increased over that of previous weeks and the price moved up slightly.

On March 5, the draft of the news release prepared by Russler was approved by J. Robert Fluor. The release was then cabled to Fluor's representatives in South Africa for approval by SASOL. That same day and again on the following day, David Geffner, a specialist in Fluor stock on the Pacific Coast Exchange, called to report rumors that Fluor had obtained a large contract in the Middle East and that there might be a tender offer for its stock. In addition, on March 5, an analyst at Merrill Lynch asked Russler whether Fluor had received the coal gasification contract in South Africa. A factual dispute exists over whether Russler denied that the contract had been awarded to Fluor or whether he avoided answering the question.

Russler also spoke with a reporter for Reuters on March 5. At 2:02 p. m. (EST) on March 5 or 6, a story was sent out on the Reuters financial wire that quoted a Fluor "spokesman" as saying that the increased market activity probably reflected the anticipation of the company's final quarter earnings report and might also be attributable to the fact that the company was "being considered for some major orders."

On March 6, the volume of Fluor stock surged three-fold and the price increased from 22- 1/4 to 25. 2 This stock activity caused Jonathan Veniar, a market analyst at the New York Stock Exchange, to call Richard Humbert at Fluor's legal department. Humbert told Veniar that he was uncertain of the reason for the increased volume, but he did indicate three possible explanations: (1) Fluor had been advised that an unknown group was interested in purchasing one million shares of the company's common stock; (2) Fluor had been awarded the as yet unannounced SASOL II contract, and (3) there were potential new jobs for Fluor in Iran and Saudi Arabia. Veniar told Humbert that the Exchange might exercise its prerogative to halt trading pending the announcement of the SASOL II contract. Humbert agreed that a suspension might be beneficial.

On March 7, the Stock Exchange halted trading on the stock pending an announcement to be made the following Monday, March 10. At 9:00 a. m. (EST) on March 10, Fluor issued a press release announcing the signing of the SASOL II contract. At 11:16 a. m. (EST) trading in Fluor stock was resumed.

Between March 3 and March 6, State Teachers, one of the largest public pension funds in the United States with assets of over $3 billion, sold 288,257 shares of Fluor stock held in its portfolio for about $6.4 billion. 3 This amounted to approximately 40 percent of the shares traded that week. State Teachers' decision to sell Fluor stock had been made in January 1975 and was based, at least in part, on the belief that the future market price for Fluor stock would not fully reflect the earnings from projects in foreign countries. During this same four day period, Manufacturers decided to purchase approximately 200,000 Fluor shares. Manufacturers already held more than 275,000 shares of Fluor stock in various accounts which it managed; also, Fluor was on Manufacturers' list of recommended stocks. From March 3 to March 13 the period which defines the class Manufacturers purchased a total of 292,000 shares of Fluor stock.

On February 24, 1975, Lester Winterfeldt, a security analyst with Manufacturers, traveled to Los Angeles to meet with representatives of several companies, including Fluor. He met with Etter and spoke briefly with J. Robert Fluor and David Tappan. Winterfeldt did not return to New York until March 3 and the day following his return, he discussed with Joel Tirchswell, as senior vice-president at Manufacturers, what he had learned on his trip. On March 4 and 5, Winterfeldt presented a report about his trip, including his contact with Fluor, to two regularly scheduled meetings of Manufacturers' investment officers. Afterwards, two groups of investment officers at Manufacturers decided to acquire a larger position in Fluor stock: about 200,000 more shares.

On March 5 or 6, Daniel...

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