Trane Co. v. O'Connor Securities

• Decision Date: 31 March 1983
• Docket Number: No. 82 Civ. 4668 (RLC).,82 Civ. 4668 (RLC).
• Citation: 561 F. Supp. 301
• Parties: The TRANE COMPANY, Plaintiff, v. O'CONNOR SECURITIES, et al. O'CONNOR SECURITIES, et al., Counterclaimants, v. The TRANE COMPANY, et al., Counterclaim Defendants.
• Court: U.S. District Court — Southern District of New York

561 F. Supp. 301

The TRANE COMPANY, Plaintiff, v. O'CONNOR SECURITIES, et al.

O'CONNOR SECURITIES, et al., Counterclaimants, v. The TRANE COMPANY, et al., Counterclaim Defendants.

No. 82 Civ. 4668 (RLC).

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

March 31, 1983.

Cleary, Gottlieb, Steen & Hamilton, New York City, for plaintiff The Trane Co.; Edmund H. Kerr, Judith A. Ripps, Neil P. Forrest, Nancy E. Schwarzkopf, New York City, of counsel.

Kramer, Levin, Nessen, Kamin & Soll, New York City, for defendants O'Connor Securities and O'Connor Associates; Daniel P. Levitt, Greg A. Danilow, Scott D. Heller, Andrea M. Likwornik, New York City, of counsel.

OPINION

ROBERT L. CARTER, District Judge.

The Trane Company ("Trane"), principally engaged in the manufacture and sale of air conditioning equipment, is a Wisconsin corporation with its principal place of business in La Crosse, Wisconsin. Trane's common stock is traded on the New York and Midwest stock exchanges, and as of April 20, 1982, Trane had approximately 10,201,788 shares of common stock outstanding held by 4,400 shareholders of record.

Defendants, O'Connor Securities ("Securities") and O'Connor & Associates ("Associates") (collectively "O'Connor") are Illinois limited partnerships. Securities is authorized to engage in the business of trading in securities, and Associates is authorized to engage in the business of options and contracts relating to securities. Together defendants engage in the business of "risk arbitrage" which is the purchase and sale of the securities of companies involved in extraordinary transactions, such as reorganizations, liquidations, mergers and tender offers.

In or about January, 1982, Lawrence Lambert and Ann Carmel, O'Connor general partners chiefly responsible for oversight and operation of defendants' risk arbitrage business, regarded Trane as a likely candidate for a possible take over effort. Accordingly, in their view the purchase of Trane's shares presented a premium investment potential for O'Connor. In reliance on Lambert's and Carmel's evaluation, defendants lost no time embarking on a program of acquiring a sizable position in Trane common stock. Defendants hoped to realize a profit on their purchases either through a merger, a tender offer by a third party or by selling back to Trane the shares the partnerships had bought. As of the time of this proceeding, Securities was beneficial owner of 514,000 (5.04%) shares and Associates was the beneficial owner of 1,051,300 (10.3%) shares of Trane's outstanding stock.

On June 28, 1982, defendants filed their original Schedule 13d with the Securities and Exchange Commission pursuant to § 13(d) of the Exchange Act, 15 U.S.C. § 78m(d)(1). Subsequently, six amendments were certified (on July 7, July 13, July 19, August 20, September 1 and September 17 — all in 1982 — respectively) to the Schedule 13d pursuant to Rule 13d-2, 17 C.F.R. § 240(d)-2 (1982) and filed.

Item 3 of Schedule 13d reads as follows:

Source and Amount of Funds or Other Consideration.

As of the close of business on June 25, 1982, Securities owned 499,000 shares of Common Stock which it purchased for an aggregate consideration of $14,552,762.50 (excluding brokerage commissions). As of the close of business on June 25, 1981, Associates owned 323,900 shares of Common Stock which it purchased for an aggregate consideration of $10,017,337.50 (excluding brokerage commissions). The funds used by each Reporting Person for its purchase of such shares were obtained from such Reporting Person's working capital and from the proceeds of demand loans made by one or more banks in the ordinary course of business. Such loans bear interest at the brokers' "call rate", from time to time in effect. Although no shares of Common Stock are now pledged, from time to time in the past Common Stock and other securities had been pledged and Common Stock and other securities may be pledged from time to time in the future to secure borrowings.

Item 4 reads as follows:

Purpose of the Transaction.

The Reporting Persons have acquired their shares of Common Stock for investment. The Reporting Persons' objective is to sell such shares, together with any additional shares they may acquire, at profit.

The Reporting Persons may acquire additional shares if to do so would present an opportunity for profit. The Reporting Persons may sell their shares to any person, including the Issuer.

If the Reporting Persons have not sold their shares in the near term, they may attempt to interest the Issuer or other parties in a transaction that could result in disposition of the Reporting Persons' shares at a profit. Although no decision has been made to do so, the Reporting Persons may utilize a tender offer or other means to seek control of the Issuer in order to achieve their investment objective. If the Reporting persons were to seek and acquire control of the Issuer, they would undertake to sell their shares, sell or merge the Issuer or otherwise pursue their investment objective. They would not attempt to influence or change the Issuer's on-going business.

Except as set forth in this Item 4, neither the Reporting Persons nor the General Partners have any plans or proposals nor are they aware of any, which would result in any of the events enumerated in clauses (a)-(j) of Item 4 of Schedule 13D. In the future, however, the Reporting Persons may formulate such plans or proposals.

The language in Schedule 13d was authored and on June 25, 1982, executed and certified as true and complete by Lawrence Lambert. Despite the equivocal "may acquire additional shares" statement in Item 4, on June 28, 1982, and June 30, 1982, a total of 47,600 shares of Trane stock were bought by O'Connor. On July 8, immediately subsequent to certifying the first amendment to the Schedule 13d, which made no modification of the language recited in Item 4, O'Connor purchased 46,700 shares of Trane stock. On July 9, 1982, O'Connor offered to buy 1,850,000 shares of Trane stock which were acquired by General Electric Corp. On July 13, the second amendment to Schedule 13d was certified again without modification of the above cited language in Item 4. Nonetheless, on July 14, O'Connor sought unsuccessfully to purchase several thousand shares of Trane stock but did succeed on July 16 in purchasing 547,000 Trane shares.

THE ISSUES

Plaintiff contends (1) that O'Connor, in the acquisition of Trane securities between January, 1982, and September, 1982, engaged in activities constituting market manipulation in violation of Sections 9(a)(2) and 10(b) of the Exchange Act, 15 U.S.C. § 78i(a)(2)¹ and 78j(b);² (2) that O'Connor's original Schedule 13d and the various amendments violated Section 13(d) of the Exchange Act, 15 U.S.C. § 78m(d)(1)³ in that these statements failed to make fair and accurate disclosures; and (3) that the aforesaid violations also constituted violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968; and (4) that as a result, Trane, its employees, shareholders and franchisees have suffered and will continue to suffer irreparable injury. Plaintiff's Post Trial Memorandum at 2 et seq.

Plaintiff seeks an order from this court prohibiting any further purchases of Trane stock by O'Connor, prohibiting O'Connor from voting their stock and barring the sale by O'Connor of the partnerships' Trane portfolio except pursuant to a court approved plan of divestiture. Id. at 44 et seq.

DETERMINATION

Market Manipulation

Plaintiff's contention that defendants have violated Section 9(a)(2) of the Exchange Act is not supported on this record. It is, of course, true that O'Connor engaged in active trading in Trane stock between January and September, 1982. During that nine month period defendants moved from a position of zero holdings in Trane stock to a total acquisition of approximately 1.5 million Trane securities. Defendants' holdings now contain roughly 15% of all Trane's outstanding stock. This level of trading activity undoubtedly affected the price of the stock and induced purchases by others. Indeed, Robert Nye, an expert for plaintiff, testified that the activity in the stock caused him to enter the market.

It is also clear that O'Connor was convinced that Trane was a ready target for unusual corporate activity in the form of a merger, take over or tender offer. Lawrence Lambert and Ann Carmel, O'Connor general partners, had primary responsibility for finding risk arbitrage situations ripe for profitable investment. The impulse to concentrate on the acquisition of a large holding in Trane was initiated by Lambert and Carmel. The O'Connor-Trane acquisitions that Lambert and Carmel orchestrated were designed to help bring more quickly to fruition the interest which would trigger the corporate activity their research told them was bound to occur. The record can be fairly read as establishing that O'Connor gambled on investing $50 million in the purchase of 1.5 million Trane securities in the hope and belief that they would be able to sell those shares to third parties or to Trane at a sizeable profit.

I am not convinced, however, that any federal securities laws have been violated in the market activity defendants engaged in in acquiring the Trane securities. The central purpose of section 9(a) is not to prohibit market transactions which may raise or lower the price of securities, but to keep an open and free market where the natural forces of supply and demand determine a security's price. Chris-Craft v. Piper Aircraft, 480 F.2d 341, 383 (2d Cir.), cert. denied, 414 U.S. 910, 94 S.Ct. 231, 38 L.Ed.2d 148 (1973). O'Connor purchased and sold stock through open market channels. There is no evidence that defendants were responsible for any simulated pink sheet activity, nor has there been any evidence of the collapse of the market after O'Connor's active trading subsided. Cf. SEC v. Resch-Cassin & Co., 362 F.Supp. 964,...