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CREDIT & FIN. CORP. v. WARNER & SWASEY CO.

February 25, 1980

CREDIT & FINANCE CORP. LTD.; CRESCENT DIVERSIFIED LTD.; MIKE FELKAY; GLENHAVEN LTD.; ABRAHAM ISRAELOFF; PHYLLIS IRAELOFF; CLARA E. KELLNER; GEORGE A. KELLNER; CARL B. MENGES; NAT MILLER ASSOCIATES; ELIZABETH B. MOTT; PIMLICO ASSOCIATES; POLYTECHNIC ORGANIZATION LTD.; FRED R. NEDERLANDER; ELMER G. ST. JOHN, M.D.; MARGARET W. ST. JOHN; SOGO SHOSHA LIMITED; SAMUEL M. STAYMAN and ALFRED RAND, as Agents for STAR INVESTORS; WENDY JESSER STOWE; ROBERT WINTHROP; JERRY ROLAND; and DONALDSON, LUFKIN & JENRETTE, INC., Plaintiffs, against WARNER & SWASEY COMPANY; RANCO INCORPORATED; and VORWERK & CO. (KG), Defendants.


The opinion of the court was delivered by: KNAPP

MEMORANDUM AND ORDER

This is an action for violations of the Securities and Exchange Act of 1934 ("1934 Act"). Plaintiffs are twenty corporations, associations and individuals who purchased on the New York Stock Exchange between July 12 and July 18, 1979 an aggregate of 52,100 shares of the common stock of Ranco, Inc. Defendants are Warner & Swasey Company, an Ohio corporation; Ranco, an Ohio corporation; and Vorwerk & Co. (KG), a German trading and holding company. With regard to defendant Ranco, plaintiffs allege violations of section 10(b) of the 1934 Act, as amended, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Before us is Ranco's motion to dismiss the complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim upon which relief can be granted and failure to allege fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. For reasons set forth in this opinion, the motion is granted, with leave to replead.

The Facts

 According to plaintiffs' amended complaint, the facts underlying this action are as follows: On September 1, 1978, Warner & Swasey purchased 518,100 shares of Ranco common stock, constituting approximately 14% of Ranco's outstanding common stock. On September 5, Ranco filed a complaint in Ohio State court alleging that Warner & Swasey's acquisition of the Ranco stock violated Ohio's take-over statute. On September 16, Ranco and Warner & Swasey entered into an agreement ("September 16 Agreement") pursuant to which the Ohio action was dismissed and Warner & Swasey agreed not to buy or sell Ranco stock for a period of one year, but which agreement could be terminated by either party on thirty days written notice. On July 12, 1979 Warner & Swasey's president sent a letter ("July 12 letter") to the chairman of Ranco's Board of Directors in which Warner & Swasey (a) offered to purchase all of Ranco's outstanding common stock, and (b) gave the required thirty days notice of its intent to terminate the September 16 Agreement on August 11, 1979. *fn1" Simultaneous with its sending of the July 12 letter to Ranco, Warner & Swasey filed it with the Securities and Exchange Commission as an amendment to the Form 13-D which it had filed in September 1978 pursuant to section 13(d)(1) of the 1934 Act, 15 U.S.C. § 78m(d)(1), and Rules 13d-1 and 13d-2 promulgated thereunder, 17 C.F.R. §§ 240.13d-1, 13d-2. The contents of the July 12 letter were released to the public, causing the price of Ranco common stock to rise from $ 151/4 to $ 221/4. On July 12, Ranco issued a press release in which it acknowledged receipt of the July 12 letter, reported that the proposal would be considered by its Board of Directors at a meeting to be held on July 16, and expressed the opinion (vindicated by subsequent events) that there would be no hostile tender offer on the part of Warner & Swasey. *fn2" On July 16, Ranco issued another press release in which it reported that its Board of Directors had rejected Warner & Swasey's proposed offer as "inadequate and not in the best interests of the Company and its shareholders." *fn3" Between July 12 and July 18, plaintiffs, who are arbitrageurs, that is, speculators in securities of companies which are the possible targets of tender offers, *fn4" purchased a total of 52,100 shares of Ranco common stock. On August 1, Warner & Swasey entered into an agreement with Vorwerk to sell its entire Ranco holdings to Vorwerk, whereupon the price of Ranco common stock fell from $ 22 to $ 161/2.

 In their amended complaint, plaintiffs allege in essence: (a) they had made their purchases of Ranco stock in reliance upon the July 12 letter as filed with the Securities and Exchange Commission; (b) the July 12 letter "created the impression that if Ranco's board did not approve of the Offer," Warner & Swasey would make a hostile tender offer; (c) Ranco's July 12 press release was "materially false and misleading" in that it "failed to disclose" that Ranco had already "determined to oppose efforts by defendant (Warner & Swasey) to increase its ownership in Ranco" and instead stated that Ranco's Board of Directors would "consider and evaluate" the proposal; (d) the July 16 press release also was "materially false and misleading" in that it "augmented the impression, created by the July 12 (letter), which Ranco knew to be false, that defendant (Warner & Swasey) would make a hostile tender offer"; (e) "Defendant Ranco issued the false press releases in furtherance of its aim to frustrate defendant (Warner & Swasey's) efforts to acquire Ranco and to facilitate defendant (Warner & Swasey's) sale of its Ranco holdings"; (f) the news of Warner & Swasey's decision not to make a hostile tender offer for Ranco stock but instead sell its Ranco holdings to Vorwerk "took investors by surprise, and caused the price of Ranco stock to plummet . . ."; (g) Ranco and Vorwerk were somehow in collusion with each other in the alleged violations of the 1934 Act.

 The Procedural Setting

 Plaintiffs initiated the instant action on August 27, 1979 by filing their original complaint. Defendants Ranco and Vorwerk responded by moving pursuant to Rule 12(b) of the Federal Rules of Civil Procedure to dismiss the complaint for failure to state a claim upon which relief can be granted and failure to allege fraud with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. *fn5" On December 4, 1979, plaintiffs filed an amended complaint dated November 7, 1979. Thereafter, defendant Ranco did not make a new motion specifically addressed to the amended complaint. *fn6" However, its counsel, Whitney North Seymour, Jr., Esq., did submit an affidavit in support of an application by Ranco to have both the original and amended complaints dismissed as "sham and false" in accordance with Rule 11 of the Federal Rules of Civil Procedure. In addition, defendant Ranco submitted a "Reply Memorandum in Support of its Motion to Dismiss and Strike the Original and Amended Complaints" in which it asserted:

 
"Ranco presses its motion to dismiss both the original and amended complaints for failure to state a cause of action as to it. Ranco has also expanded its motion to include an application to strike both the original and amended complaints under Rule 11 as sham because of the misstatement of the essential facts on which they purport to be based."

 Consequently, at a hearing before us, we deemed Ranco's original Rule 12(b) motion to have been renewed, and it was argued as such by counsel for both Ranco and plaintiffs.

 Discussion

 It is well established that "the securities laws do not distinguish between sophisticated and unsophisticated investors . . . ." In re Scientific Control Corp. Securities Litigation (S.D.N.Y.1976) 71 F.R.D. 491, 512. Specifically, "sophisticated investors, like all others, are entitled to the truth." Stier v. Smith (5th Cir. 1973) 473 F.2d 1205, 1207. See also Wheat v. Hall (5th Cir. 1976) 535 F.2d 874, 876; Welch Foods, Inc. v. Goldman, Sachs & Co. (S.D.N.Y.1974) 398 F. Supp. 1393, 1398-99; Barthe v. Rizzo (S.D.N.Y.1974) 384 F. Supp. 1063, 1067; Altschuler v. Cohen (S.D.Tex.1979) 471 F. Supp. 1372, 1383; Newman v. Shearson, Hammill & Co., Incorporated (W.D.Tex.1974) 383 F. Supp. 265, 268.

 However, it would seem self-evident that sophisticated arbitrageurs such as plaintiffs are not entitled to either a greater level or a different type of protection under the securities laws than that afforded to the average, far less sophisticated, investor. One cannot create a cause of action out of one's own cunning. The essence of plaintiffs' claim appears to be that because they were such sophisticated arbitrageurs, they assumed that defendant Ranco's perfectly truthful statements contained in its July 12 and July 16 press releases *fn7" were designed to convey a meaning diametrically opposite to their apparent meaning. The law does not sanction such convoluted reasoning.

 A reasonable person reading Ranco's July 12 press release could not but conclude that if the Warner & Swasey proposal were to be rejected, no hostile tender offer would be forthcoming. Nothing in the July 16 press release could reasonably be interpreted as indicating otherwise. Furthermore, the July 12 press release is absolutely non-committal as to whether the Ranco Board of Directors would accept or reject Warner & Swasey's proposal at its forthcoming July 16 meeting.

 One would have to apply a peculiar "Alice in Wonderland" type of logic *fn8" to interpret the July 12 press release as somehow suggesting that the Warner & Swasey proposal would definitely or even possibly be accepted; or to conclude from either press release that Ranco at any relevant time anticipated a hostile tender offer by Warner & Swasey in the event that the proposal made in the July 12 letter *fn9" were to be rejected. Plaintiffs cannot now ...


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