The opinion of the court was delivered by: SWEET
This is a class action for damages brought by State Teachers Retirement Board ("State Teachers"), a public pension fund, against the Fluor Corporation ("Fluor"), for material nondisclosures about a major contract in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5. Plaintiff also seeks to recover damages from Manufacturers Hanover Trust Company ("Manufacturers") for allegedly purchasing Fluor stock without disclosing that it had material inside information about this contract.
Three years after the commencement of this action and after the completion of extensive discovery, plaintiff has moved to amend its complaint for a second time. Defendants vigorously oppose this motion and have moved for summary judgment pursuant to Fed.R.Civ.P. 56. For the following reasons, plaintiff's motion to amend its complaint is granted to the extent described hereunder, and defendants' motion for summary judgment is granted.
The following facts, submitted pursuant to Local Rule 9(g), are undisputed by the parties. Fluor provides world-wide engineering, construction, procurement and management services to its clients. In September, 1974, the South African Coal, Oil and Gas Corporation Limited ("SASOL"), a quasi-governmental entity of the Republic of South Africa, formally invited Fluor and two other large industrial construction companies to submit proposals on a $ 1 billion construction project in Sasolburg, South Africa (SASOL II). After engaging in discussions with all three companies, SASOL informed Fluor on February 25, 1975, that Fluor would get the SASOL II contract provided Fluor and SASOL could reach agreement on the Heads of Agreement ("the Agreement"), and provided SASOL's Board confirmed the specific wording of the Agreement. Following additional negotiations, the Agreement was signed by SASOL on February 27 and by Fluor on February 28, 1975.
Paragraph 3 of the Agreement provided:
SASOL has placed an embargo on all publicity with regard to the appointment of a SASOL II contractor and the negotiations as well as the status thereof shall be kept confidential by all persons involved therein up to 10 March 1975 unless the Company Secretary advises to the contrary. The other tenderers will be notified by SASOL that negotiations are in progress with one of the tenderers and that a contract will be awarded if the present negotiations are successful.
SASOL wanted the publicity embargo because of the need to inform the French government of the project and to involve them in its financing. March 10 was also the date of Fluor's annual meeting.
On Friday, February 28, news of the SASOL II contract was circulated to several officers of Fluor, and Walter Russler, Fluor's Director of Investor Relations, began preparation of a press release for the March 10 date. On Tuesday, March 4, Russler received a telephone call from Edward Bejan, a Fluor consultant for investor relations in New York. Bejan stated that he had received a call from a securities analyst reporting a rumor that Fluor had received a large project.
That same morning, Paul Etter, Fluor's Manager of Public Relations, received a call from David Geffner, a specialist in Fluor stock on the Pacific Coast Exchange, regarding rumors that Fluor had gotten or was working on a large contract. Etter then passed a note to J. Robert Fluor, who was Chairman of the Board and Chief Executive Officer, recounting the call and suggesting that a news release be issued "as soon as possible."
Geffner called again on March 5 and 6 to report other rumors concerning Fluor including a rumor that it had obtained a large contract in the Middle East and that there might be a tender offer for its stock. Etter also received a telephone call on March 5 from a securities analyst with Provident National Bank in Philadelphia reporting rumors emanating from Houston that Fluor had received a big contract in South Africa.
On that same afternoon Russler met with Alexander Blanton, an analyst from Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"). During that conversation, Blanton asked whether Fluor had gotten the coal gassification contract in South Africa. There is a factual dispute as to whether Russler denied that the contract had been awarded to Fluor or whether he avoided answering the question.
A Reuters reporter also spoke with Russler on March 5, and a story that went out on the Reuters financial wire at 2:02 p.m. (EST) on March 5 or 6, quoted a "spokesman" as saying that the stock rise probably reflected the anticipation of the company's first quarter earnings report and might also be attributable to the fact that the company was "being considered for some major orders."
The volume in trading in Fluor increased significantly on March 5, and the price of the common stock, which had been rising slowly throughout the week, moved upward strongly on Thursday, March 6. This stock activity caused Jonathan Veniar, an employee of the New York Stock Exchange ("the Exchange"), to call the legal department of Fluor. His call was returned late that afternoon by Richard B. Humbert, a Vice President of Fluor. Humbert told Veniar that he was uncertain of the reason for Fluor's increased volume, but indicated among other possible explanations that Fluor had been awarded the SASOL II contract that could not be announced until March 10. At that time Veniar told Humbert that the Exchange might exercise its prerogative to halt trading in the stock pending the announcement of the SASOL contract. Humbert agreed that a suspension might be beneficial.
On Friday, March 7, trading in Fluor common stock was suspended for the entire day pending "a news announcement on Monday." At 9:00 A.M. (EST) on Monday, March 10, the press release regarding SASOL II was issued by Fluor. The opening of trading in Fluor shares was delayed until 11:16 A.M. (EST).
Between the signing of the Agreement on February 27-28 and the announcement of the SASOL II contract on March 10, State Teachers sold most of its Fluor common stock. Its decision to sell Fluor stock was made in January 1975 and was based at least in part on the belief that the market price for Fluor stock would not fully reflect the earnings from projects in unstable foreign countries.
Even before the award of the SASOL II contract Manufacturers held more than 275,000 shares of Fluor stock and Lester Winterfeldt, Manufacturers' securities analyst who followed Fluor, had favorably recommended it. On February 24, 1975, Winterfeldt met with Etter in Los Angeles and spoke briefly with J. Robert Fluor and David Tappan, Jr., president of the wholly owned Fluor subsidiary that was awarded the SASOL II project. While in the Los Angeles area, Winterfeldt also met with other companies, as planned, and on February 27 and 28 he attended a seminar in Houston. During that week, certain portfolio managers at Manufacturers purchased Fluor stock for Manufacturers' account.
Winterfeldt returned to his office on Monday, March 3, 1975, and on March 4 he reported to Joel Tirschwell, a Senior Vice President at Manufacturers, about his recent trip, including his contact with Fluor. On March 4 and 5, Winterfeldt also gave reports to two regularly scheduled meetings of Manufacturers' investment officers about his trip, and afterwards, two groups of investment officers decided to buy Fluor stock.
On March 5 or 6, Daniel Marciano, a trader for Mitchell Hutchins, Inc., called Neil Martin, a trader for Manufacturers and solicited Manufacturers as a purchaser for a block of approximately 150,000 shares of Fluor stock that had been put up for sale by State Teachers. Although the phone calls were not instigated or solicited by Manufacturers, it agreed to buy the stock.
II. State Teachers Motion to Amend its Complaint
Defendants have no objection to the minor factual changes and revisions made in plaintiff's proposed second amended complaint. They vigorously oppose, however, plaintiff's attempt to alter the action in the following basic ways. First, plaintiff makes new claims against Fluor for its alleged failure to comply with its Listing Agreement with the New York Stock Exchange and for the alleged statement by Russler to Alexander Blanton of Merrill Lynch that rumors of the award of the SASOL II contract were untrue. Second, it now alleges that Manufacturers traded in Fluor stock after receiving from Fluor material inside information unrelated to the SASOL II project. Finally, it adds J. Robert Fluor as a party defendant and claims that he violated Rule 10b-5 and that he breached his fiduciary duty.
Additions of Claims Relating to Listing Agreement and Denial of Rumors
Leave to amend should be freely given when justice so requires. Fed.R.Civ.P. 15(a). While laches and unexcused delay may bar a proposed amendment, the mere fact that an amendment is offered late in the case is not enough to bar it if the other party is not prejudiced. 3 Moore's Federal Practice P 15.08(4) at 15-102 (2d ed. 1979). Although this motion to amend was offered more than three years after the commencement of litigation, this court sees no prejudice to defendant Fluor in permitting the addition of the claims relating to the Listing Agreement (Count II) and the statement by Russler to Blanton denying the rumors about the award of the project (Count III). Both of these claims directly relate to the SASOL II contract. Their addition would not appear to create the need for any new discovery since Russler, Blanton and his associates at Merrill Lynch have already been deposed and the claim under the Listing Agreement does not raise new factual questions other than those already presented. Therefore, the complaint will be amended to add these claims.
B. Addition of Claims Unrelated to SASOL II
The attempt to add a claim against Manufacturers and Fluor for disclosures unrelated to the SASOL II project is somewhat more complicated. In its original complaint, plaintiff alleged that defendant Manufacturers purchased approximately 150,000 shares of Fluor common stock from plaintiff on March 6, 1975, without disclosing its knowledge of inside information concerning the negotiation and execution of a contract between Fluor and SASOL. State Teachers now seeks to allege that Manufacturers violated § 10(b) by purchasing the shares with knowledge of other material inside information "concerning Fluor, its operations, backlog, financial condition and prospects on jobs in which Fluor was interested as a bidder (Count V)." It also seeks to claim that Fluor violated § 10(b) by disclosing non-public information to a Manufacturers representative on February 24, 1975 "concerning projects on which Fluor was bidding and projections on earnings and the size of its future backlog of business," and that based on such disclosures Manufacturers purchased more than 292,000 shares of Fluor stock (Count IV).
Defendants oppose these requested amendments of the complaint on the ground that they do not plead fraud with the particularity required by Fed.R.Civ.P. 9(b).
It is true that "a plaintiff alleging fraud in connection with a securities transaction must specifically allege the acts or omissions upon which his claim rests." Ross v. A. H. Robins Co., Inc., 607 F.2d 545, 557 (2d Cir. 1979). "[It] is not an unreasonable burden to expect the plaintiffs to be able to identify the misstatements, omissions or fraud that caused them to engage in particular securities transactions." Rich v. Touche Ross & Co., 68 F.R.D. 243, 247 (S.D.N.Y.1975). In this case, State Teachers' second amended complaint completely fails to apprise the defendants of the actual statements that allegedly were disclosed to Manufacturers and not known to the public generally. Although plaintiff claims that defendants have notice of the nature of these statements because they are contained in an affidavit accompanying plaintiff's motion,
this court would still require that plaintiff incorporate the substance of the alleged disclosures before any amendment of the complaint would be permitted.
In this case, however, regardless of the particularity of the pleadings, the motion to amend the complaint with respect to these claims will not be granted because the amendments are unduly delayed and will result in undue prejudice to the defendants. In September, 1976, four months after the original complaint was filed, Manufacturers disclosed in its answers to plaintiff's interrogatories that Lester Winterfeldt, a Manufacturers securities analyst, met with Fluor representatives on February 24, 1975. In January 1977, plaintiff deposed Winterfeldt about that meeting and other matters. Ten other Manufacturers employees were deposed and in March, 1978, State Teachers amended its complaint to add Merrill Lynch, Pierce, Fenner & Smith as a defendant,
without changing its allegations against Manufacturers. It was not until more than a year later, on July 13, 1979, that plaintiff finally moved to amend its complaint to add these new claims against Fluor and Manufacturers.
Plaintiff's explanation for the delay is that it did not realize that the disclosures allegedly made were not public until it finished deposing Fluor officials in June 1979. This argument proves too much. Plaintiff is not a single unsophisticated investor, but rather a major institutional investor with its own securities analysts who were constantly keeping abreast of all available information about Fluor, one of its many investments. Moreover, although it claims that it only recently learned that this information was not public, it does not indicate how it learned this fact and why it took so long to do so. Therefore, there was undue delay that would justify denying the motion to add these claims at this time. See 3 Moore's Federal Practice P 15.08 at 15-94.
An additional basis for denying the motion to amend is the delay these new claims would cause in bringing this case to trial. Plaintiff is now raising claims of alleged disclosures that occurred during the critical time period involved here but are factually distinct from the original claim relating to inside information about the award of the SASOL II contract. The injection of these new issues into the case would create the need for additional discovery into exactly what information was publicly known about Fluor in February and March 1975 and the date of the public dissemination of the allegedly undisclosed information.
Moreover, if these amendments were allowed, they would further delay the trial date because of their effect on the conditional class action certification granted on December 2, 1976. At that time, the conditional class was defined as "all those who sold shares of common stock of Fluor Corporation between March 3 through March 13, 1975,
inclusive, without knowledge of Fluor's contract (with SASOL)." State Teachers Retirement Bd. v. Fluor Corp., 73 F.R.D. 569 (S.D.N.Y.1976). Although plaintiff would simply have this court extend the class to those who sold during those dates without knowledge of this additional non-public information, in fact the effects of such alleged disclosures to Manufacturers could have injured sellers far beyond March 13, 1975, since this information was not necessarily made public at that time and Manufacturers continued to buy Fluor stock beyond that date. Because State Teachers sold all of its Fluor stock before March 13, amendment of the complaint would necessitate that an additional class representative be located for the period extending beyond that time. The delay that this search and the additional discovery could cause after more than three years of litigation would unduly prejudice the defendants' attempts to resolve this lawsuit. Consequently, leave will not be granted to amend the complaint to add the new claims unrelated to SASOL II.
C. Addition of Claims Against J. Robert Fluor
Plaintiff's attempt to amend the complaint to add J. Robert Fluor as a party defendant in Count I (failure to disclose) and Count VI (state claims) raises additional problems. Plaintiff offers no convincing explanation as to why it did not act sooner to learn of the participation of Fluor's Chief Executive Officer in the handling of the SASOL II project. In addition, although the claims against him are essentially the same as those made against the corporation, they might create the need for some additional discovery to learn the full extent of his participation. On the other hand, there would seem to be no prejudice or surprise caused by the delay in seeking this amendment, because as President and Chief Executive Officer of the corporation, Mr. Fluor was undoubtedly fully familiar with the pendency of the case and the facts underlying the action.
Ordinarily, under the liberal federal rules, this combination of undue delay but minimal prejudice would probably militate for allowing the amendment to add J. Robert Fluor. Fluor argues, however, that the complaint should not be amended because the claims ...