Tregenza v. Great American Communications Co.

• Decision Date: 30 April 1993
• Docket Number: No. 92 C 6384.,92 C 6384.
• Parties: W. Kenneth TREGENZA, James E. Haas and Ernest B. Seegers, on behalf of themselves and a class of persons similarly situated, Plaintiffs, v. GREAT AMERICAN COMMUNICATIONS COMPANY, a Florida corporation, and Shearson Lehman Brothers, Inc., a Delaware corporation, Defendants.
• Court: U.S. District Court — Northern District of Illinois

823 F. Supp. 1409

W. Kenneth TREGENZA, James E. Haas and Ernest B. Seegers, on behalf of themselves and a class of persons similarly situated, Plaintiffs, v. GREAT AMERICAN COMMUNICATIONS COMPANY, a Florida corporation, and Shearson Lehman Brothers, Inc., a Delaware corporation, Defendants.

No. 92 C 6384.

United States District Court, N.D. Illinois, E.D.

April 30, 1993.

Terry Rose Saunders and Arthur T. Susman, Susman, Saunders & Buehler, Chicago, IL, for plaintiffs.

Timothy J. Murphy, Steven J. Rotunno, Sedgwick, Detert, Moran & Arnold; Jerry M. Santangelo, H. Nicholas Berberian, Neal, Gerber & Eisenberg, Chicago, IL; and James E. Burke and James R. Matthews, Keating, Muething & Klekamp, Cincinnati, OH, for defendants.

MEMORANDUM OPINION AND ORDER

HART, District Judge.

Plaintiff, W. Kenneth Tregenza, is a resident of the state of Michigan who purchased shares of defendant, Great American Communications Company ("GACC") from defendant Shearson Lehman, Inc. ("Lehman") on October 11, 1989. Plaintiff, James E. Haas, is also a Michigan resident who purchased GACC shares through Lehman between November 15, 1989 and November 2, 1991. Plaintiff, Ernest B. Seegers, is a resident of Illinois who purchased shares of GACC through Lehman between November 10, 1989 and June 10, 1991. Defendant, GACC, is a Florida corporation which owns and operates television and radio stations and produces animated television programs and feature films. GACC's principal operations are conducted through Great American Broadcasting Company in Cincinnati, Ohio. Defendant, Lehman, is a Delaware corporation with its principal place of business in New York. Lehman Brothers is a division of Lehman that maintains retail brokerage sales offices in Chicago, Illinois.

Plaintiffs bring their amended class action complaint pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5, and Section 12(2) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77l (2). This court has subject matter jurisdiction under § 27 of the Exchange Act, 15 U.S.C. § 78aa, 28 U.S.C. § 1331, and 28 U.S.C. § 1367. Plaintiffs' supplemental state claims allege violation of the Illinois Securities Law of 1953, Ill.Rev.Stat., ch. 121½, ¶¶ 137.1 et seq., and negligent misrepresentation.

Lehman has filed a motion to dismiss plaintiffs' amended complaint in its entirety for failure to state a claim and because the federal claims were filed beyond the statute of limitations. Fed.R.Civ.P. 12(b)(6). GACC has also filed a motion to dismiss for failure to state a claim, for failure to plead fraud with particularity, Fed.R.Civ.P. 9(b), and on statute of limitations grounds. Because defendants rely on documents outside their pleadings, the court notified the parties at the time the motions were presented that it would treat defendants' motions to dismiss on statute of limitations grounds as motions for summary judgment. See Fed.R.Civ.P. 12(b) (last sentence).

On a motion to dismiss, all well-pleaded factual allegations are accepted as true and are construed in favor of claimants. Roots Partnership v. Lands' End, Inc., 965 F.2d 1411, 1416 (7th Cir.1992). "Dismissal of the complaint is proper only if it appears beyond doubt that the plaintiffs can prove no set of facts in support of their claims which would entitle them to relief." Id. The standard for summary judgment is similar but allows examination of materials outside the complaint. On a motion for summary judgment, the entire record is considered with all reasonable inferences drawn in favor of the nonmovant and all factual disputes resolved in favor of the nonmovant. LaScola v. U.S. Sprint Communications, 946 F.2d 559, 563 (7th Cir.1991). Summary judgment is appropriate only where there is "no genuine issue as to any material fact." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Whether or not a fact is material is governed by substantive law. Id. The burden of establishing a lack of any genuine issue of material fact rests on the movant. Jakubiec v. Cities Service Co., 844 F.2d 470, 473 (7th Cir.1988). Summary judgment is not proper when there is a dispute over facts which might affect the outcome of the suit. Liberty Lobby, 477 U.S. at 248, 106 S.Ct. at 2510. The dispute must be genuine, that is, the party opposing the motion for summary judgment may not "rest on the mere allegations of his pleading, but must set forth specific facts showing there is a genuine issue for trial." Id. The nonmovant must also make a showing sufficient to establish any essential element for which it will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).

Plaintiffs bring this action as a shareholder class action. Fed.R.Civ.P. 23(a), (b). In general, the court should make a determination whether the complaint is appropriate for class certification "as soon as practicable after the commencement of such an action." Fed.R.Civ.P. 23(c). Whether the case should proceed as a representative action must be determined promptly and "without regard to the virtues of the plaintiffs' legal theory." Koch v. Stanard, 962 F.2d 605, 607 (7th Cir.1992).¹ This determination should generally be made prior to consideration of motions to dismiss and for summary judgment.

Plaintiffs may maintain this action on behalf of the represented class only if they satisfy the requirements of Fed.R.Civ.P. 23(a) and 23(b). Plaintiffs have the burden of establishing that the requirements of Rule 23 have been met and that the case is appropriate for class-wide adjudication. Trotter v. Klincar, 748 F.2d 1177, 1184 (7th Cir.1984); Susman v. Lincoln Am. Corp., 561 F.2d 86, 90 (7th Cir.1977). Plaintiffs have not moved for certification of the class and defendants have not made any motion directed to the class allegations. This court is nevertheless obligated to rule on class certification. See Bieneman v. City of Chicago, 838 F.2d 962, 963 (7th Cir.1988). There has been no showing that any of the named plaintiffs would be adequate class representatives. On this record, class certification must be denied. To the extent either party desires a reconsideration on class certification on a more complete record, a motion must be filed within 10 days, under Fed.R.Civ.P. 59(e). Cf. Koch v. Stanard, 962 F.2d 605, 607 (7th Cir.1992).

According to the amended complaint, in October 1987, GACC acquired Taft Broadcasting Company ("Taft") for approximately $1.5 billion and changed its name to Great American Broadcasting Company. To finance the acquisition, GACC issued $285 million of 14 3/8 % Senior Subordinated Bonds due 1999 and GACC's holding company borrowed $670 million in bank loans and issued 137.5 million of 13¼% notes due 1996. In addition, GACC issued 2.7 million shares of its own common stock to Taft shareholders.

In 1989 GACC wished to reduce the outstanding debt from the Taft transaction by issuing new GACC stock in exchange for outstanding bonds and notes. GACC entered an agreement with Lehman whereby Lehman would purchase and retire $49.4 million of the Taft debt from the Taft debtholders in exchange for Lehman receiving 3.65 million newly issued shares of GACC common stock.

In order to allow Lehman to profit from the transaction, the new shares of GACC had to fetch approximately $12 per share. At the time of the Lehman transaction, GACC was in poor financial condition and GACC could not have sold newly issued stock for $12 per share if it had to file a registration statement and prospectus disclosing the full extent of its financial condition. Thus the need to make the initial stock transaction with Lehman. To ensure Lehman's value in the shares, Lehman would pre-sell the stock before any announcement of the Taft debt repurchase. To encourage Lehman's brokers to recommend the shares to their clients, Lehman's brokers were given a $1 per share commission. Furthermore, Lehman and GACC directed the brokers to use a persuasive script containing false and misleading statements to sell the stock. The brokers were successful and sold all 3.65 million shares to plaintiff Tregenza and others on October 11, 1989.

Using the script to sell the shares, brokers stated that GACC stock was worth twice as much as the current selling price and that within two years the stock should be well into the "$20's," that downside risk at the current price level was less than 10%, and that such prominent names in the investment community as Mario Gabelli and Michael Steinhardt each had holdings in GACC of between 500,000 and 1 million shares, implying that these individuals had purchased GACC stock. In fact, plaintiffs allege, the price of GACC stock was grossly inflated at $12 per share, GACC was so laden with debt that GACC stock at any price was extremely risky and highly speculative, and Gabelli and Steinhardt had not purchased their GACC shares, but rather had received them for their Taft stock in the Taft transaction in 1987. The Lehman brokers also failed to mention that the stock was newly issued, that Lehman was pre-selling the stock to the public at a price that would guarantee Lehman a profit, that GACC's poor cash flow and burdensome long term debt made the stock significantly less valuable than the $12 sales price, that GACC could not have retired the debt through a direct public offering, nor that Lehman was receiving $1 per share commission, which was higher than the usual and customary commission. Additionally, defendants never disclosed the fact that the shares being presold on October 11, 1989 were obtained on October 12, 1989 by Lehman in exchange for the debt retirement.

Plaintiffs also allege that after the October 11, 1989 sale, Lehman continued to sell GACC stock at inflated prices through December 17, 1991 and that GACC knew and...