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BONIME v. DOYLE

June 30, 1976

Gertrude BONIME and Lillian Olden, Plaintiffs,
v.
John C. DOYLE et al., Defendants



The opinion of the court was delivered by: LASKER

LASKER, District Judge.

 This is an application pursuant to Rule 23(e) of the Federal Rules of Civil Procedure for approval of a proposed settlement of a class action. The merits of the plan are vigorously pressed by counsel for the plaintiff class and defendants and are challenged with equal strength by various objectors, some of whom have an interest in two similar suits currently pending in the Illinois state and federal courts. Upon detailed review of the arguments and the testimony at hearing and the documents submitted by each side, it is our conclusion that the settlement is fair and reasonable and should be approved.

 I.

 The Nature of the Action, the Parties and the Proceedings to Date

 This action was commenced in December, 1973 against Canadian Javelin Limited (Javelin or the company), a Canadian corporation primarily engaged in the business of exploring and developing natural resources whose stock is traded on the American Stock Exchange, and two individuals who figure prominently in its management. The complaint, filed on behalf of all purchasers of Javelin stock from a point in early 1969 to late 1973, alleges violations of Sections 5 and 17 of the Securities Act, 15 U.S.C. §§ 77e and 77q, Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5 by means of a course of conduct designed artificially to inflate the price of the company's stock which was never registered pursuant to Section 5 of the Securities Act.

 The plaintiffs, Gertrude J. Bonime and Lillian Olden, purchased shares in Javelin during the period of the alleged wrongdoing. The individual defendants are John C. Doyle, director, controlling shareholder and Chairman of the Executive Committee of Javelin, and William Wismer, director and President of the company.

 The amended complaint particularly charges the defendants with a series of material misrepresentations and omissions in annual reports, press releases and filings with the Securities Exchange Commission and the American Stock Exchange designed to deceive the investing public with regard to Javelin's financial condition and business prospects. (Para. 7) The allegations focus on two projects with which the company was involved during the period in question: a plan to develop a major facility in Newfoundland for the production of linerboard (the linerboard project) and a plan to exploit mineral deposits in the Cerro Colorado area of the Republic of Panama (the Cerro Colorado project). In connection with the linerboard project, the amended complaint alleges that during the planning and construction stage the company issued a continuous series of materially misleading statements as to the true size and anticipated profitability of the project, the true cost and extent of necessary financing involved and "serious obstacles" encountered in bringing the project to fruition, particularly disputes with the government of New-foundland. (Para. 9) Secondly, it is alleged that at a later time the company misrepresented the status of $4,300,000. asserted to be due from the Newfoundland government in payment for the subsequent sale of the entire linerboard project to the government by showing the amount as a current asset, when in reality the obligation was disputed and the company had failed properly to pursue the matter. The defendants are also charged with engaging, during the same period, in a scheme to deceive investors as to the Cerro Colorado project, which centered on a large copper discovery in Panama, by issuing false and misleading statements as to the company's exploitation rights, the related feasibility studies and the financial arrangements to produce and market the initial output of the project. (Para. 12) The plaintiffs allege that the company's right to develop the ore deposits was highly speculative, that no feasibility studies or arrangements to finance the project existed and that marketing plans were still in the negotiation stage. (Para. 14) It is asserted that the above misstatements or omissions resulted in artificially inflated prices for Javelin stock throughout the period and that the plaintiffs and all other purchasers of the stock would not have been required to pay as much as they did for their stock if the true facts had been known. (Para. 16)

 The defendants deny all the material allegations.

 In April, 1974 plaintiffs moved for and obtained an order directing that a class action determination be made by July 14. By stipulation and order the parties obtained three extensions of this time limit, however, because they required further discovery to reach a judgment as to the appropriate boundaries of the class. When the motion for class action determination was filed in January, 1975, the defendants offered no objection on the condition that the determination would be preliminary and they reserved their right to petition the court to alter, amend or revoke the determination pursuant to Rule 23(c)(1), Federal Rules of Civil Procedure. On the basis of the discovery to that point the plaintiffs proposed a class to include all purchasers of Javelin stock between the dates of April 30, 1969, when the 1968 annual report containing the first allegedly misleading statements was issued, and October 25, 1973, the day on which the American Stock Exchange suspended trading in the company's stock for failure to make full disclosure concerning the copper project in Panama. The latter date was selected because while the suspension was in effect the Securities Exchange Commission filed an injunctive action against the defendants which resulted in a consent judgment providing, inter alia, for full disclosure of the company's affairs. Pursuant to this judgment and prior to the resumption of trading on January 25, 1975, the company issued a letter to its stockholders to comply with the SEC order. On the strength of the presentation of the parties in the moving papers *fn1" the motion to determine the class was granted on February 7, 1975. Notice to the class was stayed pending further discovery which might affect the parameters of the class or indicate the desirability of creating sub-groups within the class. See, Wolfson v. Solomon, 54 F.R.D. 584, 593 (S.D.N.Y.1971); Fischer v. Kletz, 41 F.R.D. 377, 386 (S.D.N.Y.1966).

 The parties submitted the proposed settlement for the court's consideration in July, 1975. By this time, more than one and a half years since the complaint was filed, considerable discovery had taken place. Plaintiffs' attorneys had examined numerous documents relating to the events which form the subject of the complaint, received answers to one set of interrogatories and deposed four persons who played key roles in the linerboard project, the Cerro Colorado project, or both, including the defendant John Doyle. (Paras. 14, 18 and 21, Wolf Affidavit, October 8, 1975) On the basis of the facts revealed by this discovery, which indicated that there would be some problems of proof with regard to both liability and damages, plaintiffs' attorneys explored the possibility of settlement. Counsel for the defendants, for their part, though steadfastly denying the merits of the allegations, were also desirous of compromising the action to avoid the expense of continued litigation.

 Being satisfied that the proposed settlement was worthy of consideration, the court ordered that notice be given of the class determination and of a hearing to be held on the fairness of the settlement. The order provided for notice by mail and publication. Prior to the hearing the proponents of the compromise filed affidavits and memoranda in support thereof and a total of eleven class members who opposed it submitted their objections in writing.

 At the hearing on the merits of the settlement the proponents offered the expert testimony of Dr. Roger F. Murray, S. Sloan Colt Professor of Banking and Finance at the Graduate School of Business and Finance at Columbia University, on the question of provable damages should the plaintiffs prevail on the issue of liability at trial. Several objectors appeared and spoke against the settlement. Those objectors who have an interest in the concurrent Illinois litigation appeared by counsel and strenuously argued that the proposal be disallowed. Their counsel cross-examined Dr. Murray and presented a computer study to demonstrate that the potential recovery of the class was far in excess of that estimated by Dr. Murray and the proponents, and that the sum offered in settlement was therefore grossly inadequate. Both the proponents and the objectors have, with court permission, submitted further affidavits, briefs and data in support of their respective positions.

 II.

 The Proponents' View

 The affidavit of Benedict Wolf, lead counsel for the plaintiff class, sets forth in detail the facts upon which he contends that the settlement is fair. It is his view that, as discussed in detail below, it will be difficult to establish liability with regard to the first portion of the class period and that the possibility of success is more promising, but by no means assured, as to the later part. Even assuming that liability is shown, however, he appears generally to accept the analysis of the defendants' expert, Dr. Murray, who calculates that the maximum recoverable damages to this class is $2.5 million. In a separate affidavit, Dr. Murray sets forth the basis for this statement. A summary of their presentations follows:

 Discovery revealed that the allegations of the complaint relate to two distinct segments of time. During the first portion of the class period the defendants' activities centered on the development of the linerboard project; during the later part, the focus of activities was the Cerro Colorado project, and also the alleged misrepresentation as to the payment for the linerboard sale took place. With regard to the first period, the defendants are charged with misleading the public as to the prospects and progress of the linerboard project, undertaken with the consent and close involvement of the government of Newfoundland. The plaintiffs learned, however, that during this period the project in fact proceeded substantially on schedule and within the original budget estimates; that such obstacles as existed were arguably insignificant; and, although not disclosed by the company until issuance of a letter to its shareholders of May 31, 1972, the difficulties were the subject of a great deal of publicity in both Canadian and American media. Finally, it is asserted that Javelin's silence on the problems, which grew out of a dispute with the government that had developed into a political controversy in the Province between the two leading political parties, could very plausibly be defended as an exercise in sound business judgment as the project was dependent for its ultimate success on the good will of the government. Discovery also revealed that no liability could be established as to the Section 5 claim since there had been no public offerings of the unregistered securities within the applicable limitations period. (Paras. 51-63; 82-84, Wolf Affidavit, October 8, 1975)

 The case appears stronger with regard to the period following the May 31 disclosure, during which the bulk of the alleged wrongdoing occurred. In Wolf's view, however, even here the allegations that the company misrepresented the existence and content of encouraging feasibility studies by outside experts regarding the prospects for the Cerro Colorado project proved to be without foundation in fact. (Paras. 36-39; 79, Wolf Affidavit, supra) He professes greater confidence in proving misrepresentations and omissions as to the other aspects of this project, the status of the exploitation rights and of the preliminary marketing arrangements and an episode regarding the premature announcement of another concession in Panama, as well as the treatment of the $4.3 million owing from the government of Newfoundland for the purchase of the linerboard project. His discussion of the facts, however, conveys the distinct impression that any assessment of success must take serious consideration of the defendants' assertion of the truth of all the statements made, or the existence of a reasonable basis for them which seriously undercuts a claim of willfulness or recklessness.

 For example, the allegation of misrepresentation with regard to the marketing arrangements for the Cerro Colorado project was undercut by the fact that very serious discussions were indeed underway with a major British concern at the time of the allegedly misleading releases which, though arguably unduly optimistic -- or rather, not fully enough qualified -- made no untrue statements, were by no means manifestly misleading, and in fact did not, as alleged, convey the false impression that marketing arrangements had been solidified. (Paras. 41-47; 81, Wolf Affidavit, supra) At trial the plaintiffs will thus have to convince a jury that the statements violated the law in a somewhat subtle degree, obviously a far more risky proposition than proving a patent lie. Similar problems existed particularly with regard to a claim that the company had prematurely announced the acquisition of another mineral concession in Panama. (Paras. 48-50; 80, Wolf Affidavit, supra)

 Even assuming that the plaintiffs do succeed in establishing securities law violations, they must, of course, prove damages. According to Wolf, the weakest aspect of the case on damages is, again, the early part of the class period, where proof of any damage at all is made difficult by the fact that most if not all of the allegedly withheld information was publicly available through the media due to the highly publicized political dispute in Newfoundland centering on the relations between the company and the government. Thus it could plausibly be argued that the price of the stock throughout this period reflected the adverse information. The problem of proof of damages is further complicated by the fact that on the first day of trading following full disclosure by the company on May 31, 1972 -- trading was suspended from early March, 1972 to August 11, 1972 as a result of the sale of the project to the government of Newfoundland -- the price was actually higher than the price when suspension began. (Para. 87, Wolf Affidavit, supra)

 With regard to recoverable damages for the later period, Wolf largely defers to the opinion of Dr. Murray. (Paras. 89, 92, Wolf Affidavit, supra)

 As stated above, Dr. Murray submitted an affidavit setting forth his views and also testified at the hearing. His credentials as an authority on the workings of the stock market are impeccable. His analysis is based on the proposition that distinction must be made between losses attributable to general market forces and trends and losses attributable to "unique characteristics of a particular company," and he assumes that "if announcements and reports issued by the company had an effect on [Javelin's] price, that effect can be measured by the differential price behavior of the shares relative to . . . indexes of market price." (Paras. 4 and 5, Murray Affidavit, October 7, 1975) In short, he attempts to factor out the amount of money lost by purchasers which is not attributable to general market trends.

 To this end he plotted the rises and falls of Javelin's selling price during the class period and compared them to the averages of the same data of two comparable groups of stock, the S & P Low Priced Common Stock and the Value Line Industrial Stocks. He concluded that in gross "the price experience of [the company] differed in no material respects from the price behavior of representative stocks in its risk class." (Para. 12, Murray Affidavit, October 7, 1975) However, he allowed the possibility that a certain number of investors may have been induced to buy at premium prices by relatively high prices or spurts in market activity with no opportunity to sell before a drop ensued. He described three periods of such "activity premiums," periods in which activity in this security greatly exceeded the norm, and calculated that a total of roughly 2,500,000 shares were traded for an aggregate premium, i.e., price in excess of normal -- of $6,013,750. From this sum, he deducted the amount which, by his estimate based on his study of the records of the transfer agent, represented money paid by short-term traders who were in and out of the stock before the price dropped, a group he believes to comprise more than 50% of the excess activity in these periods. (Para. 16, Murray ...


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