Stern v. Leucadia Nat. Corp.

• Decision Date: 07 October 1986
• Docket Number: No. 86 Civ. 3127 (GLG).,86 Civ. 3127 (GLG).
• Citation: 644 F. Supp. 1108
• Parties: Jonathan STERN, on behalf of himself and all others similarly situated, Plaintiff, v. LEUCADIA NATIONAL CORPORATION, LNC Investments, Inc., Charter National Life Insurance Company, American Investment Company, Leucadia Inc., Uintah National Corporation, TLC Associates, Carl Marks & Co., Inc., Ian N. Cumming, Joseph S. Steinberg, Cumberg, Inc., Marks Investing Corp., and S & S Securities, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

644 F. Supp. 1108

Jonathan STERN, on behalf of himself and all others similarly situated, Plaintiff, v. LEUCADIA NATIONAL CORPORATION, LNC Investments, Inc., Charter National Life Insurance Company, American Investment Company, Leucadia Inc., Uintah National Corporation, TLC Associates, Carl Marks & Co., Inc., Ian N. Cumming, Joseph S. Steinberg, Cumberg, Inc., Marks Investing Corp., and S & S Securities, Inc., Defendants.

No. 86 Civ. 3127 (GLG).

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

October 7, 1986.

Kaufman Malchman Kaufmann & Kirby, New York City (Irving Malchman, Roger W. Kirby, Lorna N. Graham, of counsel), for plaintiff.

Weil, Gotshal & Manges, New York City (Dennis J. Block, Jonathan M. Hoff, Patricia A. Olah, of counsel), for defendants except Carl Marks & Co., Inc.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City (Sidney S. Rosdeitcher, Shira Perlmutter, of counsel), for defendant Carl Marks & Co., Inc.

GOETTEL, District Judge:

Plaintiff Jonathan Stern brings this putative class action alleging that the defendants violated section 10(b) of the Securities and Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b) (1982), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1986), by filing Schedule 13D statements that contained material omissions or misrepresentations. The defendants are seven corporate entities that co-signed the 13D schedules at issue, several other corporations, and two individuals.

The allegations of the complaint are pleaded on information and belief and include the following facts, which we accept as true for purposes of deciding defendants' motions to dismiss: On January 9, 1986, Leucadia National Corp. ("Leucadia") and six other corporate defendants (LNC Investments, Inc.; American Investment Co.; Charter National Life Insurance Co.; Leucadia Inc.; Uintah National Corp.; and TLC Associates), collectively referred to as the "signing defendants," filed a Schedule 13D with the SEC stating that they had purchased or acquired options to purchase 5.26% of GATX Corporation's ("GATX") outstanding shares. The 13D stated that they might seek to take over control of GATX by one of several means, including a merger proposal or tender offer. It also stated that they might dispose of their shares of GATX stock in the open market or privately.

On January 30, 1986, the signing defendants filed an amended 13D in which they declared an increase in their onwership of GATX stock and revealed that they were exploring the possibility of acquiring certain of GATX's assets, in connection with which they had entered into several agreements with GATX: (1) a confidentiality agreement whereby GATX would furnish them with certain information, and (2) a standstill agreement whereby they would not acquire additional stock while the agreement was in force. On February 3, 1986, the defendants filed another amended 13D declaring that the confidential information had been returned to GATX and, thus, both of the above agreements were terminated. On February 12, 1986, defendants filed a third amendment to their 13D disclosing Leucadia's proposed cash merger with GATX for $38/share, subject to various approvals, a due diligence review, and Leucadia's ability to arrange the necessary financing. That offer was rejected. On February 25, 1986, defendants filed a fourth amendment to their 13D noting they now owned 8.86% of GATX stock.

On March 4, 1986, defendants again amended their 13D and stated that GATX had rejected the $38 offer on February 13, but that on February 28, Leucadia had increased its offer to $40/share and entered into a confidentiality agreement with GATX for the latter to furnish Leucadia with additional confidential information for a due diligence review. On March 12, 1986, after completing a diligence review, the defendants once more amended their 13D to indicate that Leucadia continued to be willing to offer $40 per share, contingent, as before, on its obtaining financing. These developments were reported by the Dow Jones News Service the same day, along with the fact that two other companies had made bids for GATX, one for $40 and one for $42/share. On March 22, GATX accepted Leucadia's offer. However, on March 25, Leucadia requested a one-week extension before entering into a definitive merger agreement, claiming that, since certain GATX debts would come due immediately in the event of a merger, it needed time to arrange for additional financing. GATX refused to grant this request and the deal fell through.

The plaintiff claims that the signing defendants never intended to go through with the merger and were merely manipulating the market price of the stock. The complaint alleges that the defendants "intentionally omitted from the ... Schedule 13Ds the material fact that it was their basic and primary purpose ..., after inflating the market price, either to sell GATX's stock back to GATX for a substantial premium above market price or to sell such stock to another bidder for GATX at a substantial premium above market price." Complaint ¶ 29. It is not alleged that the defendants sold their stock to GATX, or anyone else, for a substantial premium. Indeed, it was conceded that the stock was held for a period of time, then sold in the market at a loss.

The plaintiff asserts that prior to the alleged scheme GATX stock was selling for approximately $34 per share. The plaintiff purchased GATX stock on March 3, 1986, for $41.50 per share. Plaintiff sold his stock on April 8, 1986, at $35.25 per share. He claims the defendants' allegedly fraudulent merger proposals caused the price of GATX stock to rise during January, February, and March 1986, and then fall substantially once their deal fell through. The plaintiff purports to represent a class of all those who purchased stock in GATX between January 9, and March 26, 1986.

In addition to the signing defendants, the other named defendants are several corporations and two individuals, Ian N. Cumming and Joseph S. Steinberg. The complaint alleges that Cumming and Steinberg, along with Leucadia, are "controlling persons" of the corporate defendants, except perhaps Carl Marks & Co., Inc. ("Carl Marks"). The complaint sets forth a rather confusing description of interlocking ownership of the various corporations. The ownership of Leucadia and the other signing defendants is traced back to Cumming, Steinberg, and a corporation called Cumberg, Inc. The latter is allegedly owned by the two individuals and the last two corporate defendants, S & S Securities and Marks Investing Corp. ("MIC"). MIC is alleged to be partly owned by the same two individuals, partly owned by Leucadia, and partly owned by defendant Carl Marks. The complaint does not allege what proportionate share each owns, or if they represent all or only some of the owners of MIC.

All defendants now move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), for failure to state a claim upon which relief can be granted and for failure to plead fraud with particularity. Carl Marks moves separately as well, arguing that, even if upheld as to the other defendants, the complaint fails to state a claim against it.

A cause of action under section 10(b) of the Act and Rule 10b-5 promulgated thereunder must allege "that, 1 in connection with the purchase or sale of securities, 2 the defendant, acting with scienter, 3 made a false material representation or omitted to disclose material information and 4 that plaintiff's reliance on defendant's actions caused him injury." Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir.1985). Furthermore, a claim of securities fraud must satisfy the pleading requirements of Rule 9(b) of the Federal Rules of Civil Procedure. Thus, a plaintiff must "allege the existence of facts and circumstances sufficient to warrant the pleaded conclusion that fraud occurred." Decker v. Massey-Ferguson, Ltd., 681 F.2d 111, 119 (2d Cir.1982). See Luce v. Edelstein, 802 F.2d 49, 54 n. 1 (2d Cir.1986). "Distorted inferences and speculations" will not suffice. Segal v. Gordon, 467 F.2d 602, 606 (2d Cir.1972). See Shamrock...