The opinion of the court was delivered by: MOTLEY
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Plaintiff, Standard Metals Corp. ("Standard"), has moved for an order granting a preliminary injunction against defendants in this action. Plaintiff alleges that defendants have violated Section 13(d) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(d), and Section 10(b), 15 U.S.C. § 78j(b), as well as Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5.
Plaintiff seeks an order preliminarily enjoining defendants: 1) from further violations of Sections 10(b) and 13(d), and Rule 10b-5; 2) from voting their shares and soliciting proxies at the forthcoming 1980 shareholders' meeting; 3) from purchasing and seeking to purchase additional shares of plaintiff's common stock; 4) from acquiring any further control over plaintiff; and 5) from selling and otherwise disposing of the 23,100 shares of restricted stock acquired from plaintiff by defendant Tomlin.
The jurisdiction of this court is premised upon Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. After a hearing on this motion for a preliminary injunction, the court makes the following findings of fact and conclusions of law.
Defendant Oklahoma Publishing Co. ("Oklahoma Publishing") is a privately held Delaware corporation with its principal place of business in Oklahoma City, Oklahoma. (Complaint P 10). Oklahoma Publishing's president and principal shareholder is defendant Edward Gaylord. (G. at 8; G. Exh. 32).
Oklahoma Publishing's principal sources of income are its radio and television broadcasting stations and its newspaper publications. (G. at 8-9). Oklahoma Publishing also has substantial deposits with Oklahoma Bank and has outstanding loans of $ 16,400,000. (G. 316-17; Pl. Exh. 11 n.6).
Plaintiff is a publicly held Delaware corporation with its principal place of business in New York City. (Gr. Aff. P P 4, 7). Plaintiff has approximately 2,391,150 shares outstanding, as of December 31, 1979, which are held by approximately 6,000 shareholders. (Pl. Exh. 5 at 1, 8). Since 1964, Boris Gresov has been plaintiff's chief executive officer. (Gr. Aff. P 1; Tr. 29). Plaintiff's primary line of business has been, and continues to be, mining ventures involving various metal ores. (Pl. Exh. 5 at 2). Plaintiff's most important mining property in recent years has been the Sunnyside Mine in Silverton, Colorado, (Gr. Aff. P 4), which produces marketable ore of gold, lead, silver, zinc, and copper. (Tr. 61).
Defendant Homer E. Noble is a Colorado resident and a promoter and operator of mining ventures. Noble has been acquainted with defendant Gaylord for a number of years, and both of them have been involved in various business ventures together, including co-ownership of defendant Gayno, Inc. (G. at 49-60; G. Exh. 32 Item 5; N. 3-7, 9-10, 21-28, 37, 59, 61-67).
Defendant Gayno, Inc. ("Gayno"), is a Colorado corporation engaged in natural resources development. Gayno was formed by Gaylord and Noble to take over the operation of their previously existing business ventures. (N. 21, 25; G. 74-76). Gayno is principally financed through loans from the First National Bank & Trust Co. ("Oklahoma Bank"), a subsidiary of Oklahoma Bancorporation Inc. (N. Exh. C30 at 8). Noble is Gayno's chief operating officer and owns thirty percent of Gayno. Gaylord owns the remaining seventy percent of Gayno. (N. at 25; G. at 10-11).
Defendant Noble Mining Co. ("Noble Mining") is a family holding company owned by Noble and his family. (G. Exh. 32 Item 5; N. Exh. C at 44).
Defendant S. Stokes Tomlin is a sixty-six-year-old former consulting engineer of plaintiff. Tomlin had been previously employed at plaintiff in various capacities since 1964.
The gravamen of plaintiff's claim under Section 13(d) against defendants Oklahoma Publishing, Gaylord, Noble, Noble Mining, and Gayno (hereinafter referred to as the "Gaylord defendants," for purposes of convenience), is that prior to the filing of a Schedule 13D on May 8, 1980, the Gaylord defendants had secretly formed a group whose purpose was to take over and acquire control of plaintiff through stock purchases and other aggressive conduct. In particular, plaintiff asserts that the Gaylord defendants conspired as a group to use plaintiff as a conduit to convert their own privately held mining properties, specifically Cimarron Coal and various other oil and gas properties, into plaintiff's stock. Plaintiff also alleges that the Gaylord defendants systematically gathered confidential information concerning plaintiff by "subverting" insiders. In addition, plaintiff alleges that this "secret conspiracy" entails plans to elect candidates to plaintiff's board of directors, proxy solicitation, and a tender offer. (Complaint P P 31(c), 32(a)-(e)). With respect to the May 8, 1980, Schedule 13D, plaintiff claims that the Gaylord defendants failed to disclose their plan to seize control of plaintiff, the source of funds used to purchase their stock, and the proper identities of the purchasers.
Plaintiff also contends that the Gaylord defendants and defendant Tomlin violated Section 10(b) and Rule 10b-5. Specifically, plaintiff contends that the Gaylord defendants' secret conspiracy to seize control of plaintiff amounts to fraud and deception on the public, the issuer, and plaintiff's stockholders. With respect to defendant Tomlin, plaintiff alleges that Tomlin conveyed his lettered stock to Gaylord and Gayno in a deceptive transaction which should also be considered part of the overall scheme to seize control of plaintiff. Plaintiff claims that Tomlin misrepresented to plaintiff his intent to hold the shares for investment, when in fact he had already entered into a secret agreement to resell the shares he was to acquire by exercising his option. Finally, plaintiff alleges that the Gaylord defendants committed fraud on the open market by failing to disclose the formation of a group to acquire control of plaintiff, as well as by failing to disclose their trading of plaintiff's stock on the basis of inside information.
Defendants deny each and every one of plaintiff's allegations. The Gaylord defendants contend that all of their filings under Section 13(d) were accurate and complete in all respects. The Gaylord defendants deny that any group was formed prior to the time disclosed in the May 8, 1980, Schedule 13D. Moreover, they deny that they at any time, either individually or as a group, intended to seize control of plaintiff or to foist property on plaintiff. The Gaylord defendants contend that all sources of funds used to purchase their stock were fully disclosed in the Schedule 13D. Defendant Tomlin contends that his exercise of his option and the resale of his shares was entirely proper.
Investment Activities of the Gaylord Defendants
The record reveals that defendants Gaylord and Noble have had many business dealings with each other since the 1950's, primarily dealings concerning ore and mining ventures. Noble, as an individual investor, became interested in Standard as an attractive investment opportunity in the late 1970's. Standard, for the most part, presented an attractive investment prospect for investors in equity securities in the mining and natural resources field. Standard, at the present time, has only recently overcome some financial difficulties. In the late 1960's, Standard experienced severe cash flow problems, and in 1971 Standard sought relief in a Chapter XI proceeding. (Tr. at 59-60). By the fall of 1973, this proceeding was successfully concluded. Standard's financial position was also improved by the success of its Sunnyside Mine operation, which produced gold, lead, and zinc ores in marketable quantities. This rosy financial picture was tarnished, however, by the flooding of this mine in the late 1970's.
In the mid-1960's, Noble had one contact with plaintiff through its chief operating officer, Gresov. This contact concerned a possible exchange of Noble's mining properties for plaintiff's stock. These negotiations came to naught, for Gresov consulted geologists who recommended against the acquisition of Noble's properties as worthless "moose pasture." (Tr. at 54-55, 59, 173-74). Noble had no other contact with Gresov until he resumed his investment in plaintiff in the late 1970's.
In view of the success of the Sunnyside mining operation, Noble began to purchase plaintiff's shares in late December, 1977, and early January, 1978, acquiring approximately 20,000 shares at an average price of $ 7 per share. (Pl. Exh. 7; N. at 126; N. Exh. A at 62-63). Subsequently, Noble sold 5,300 of these shares in September, 1978, at a price of $ 12 per share, thus realizing a profit on his investment. (N. Exh. A at 62). Noble's purchase pattern thus suggests an attempt to maximize profits, selling shares when the price rose and buying when the price fell. Id.
In November or December, 1979, Noble obtained a geological report prepared by a third-party for the First Mississippi Corp., a company unrelated to any of the parties in this action. (N. at 182). The report contained detailed information about plaintiff's ore-producing property. (Tr. at 103-04). While the report had not been widely disseminated to the public, the sole testimony suggesting that the information was confidential was by Gresov. In any event, the report confirmed the belief of Gaylord and Noble that there were ores of gold in the Silverton/Sunnyside Mines and that the royalties were high. (N. at 185-86).
Apparently as part of his on-going investments, Noble also consulted between 1976 and 1978 with Richard Dwelley, a vice-president for mining operations of plaintiff. (Tr. at 5, 369). Dwelley suggested that Gresov's shares might be for sale. During the course of a conversation, Noble asked Dwelley if Gresov planned to stay on as president should Gresov sell his shares. (N. at 272). It is reasonable to infer that Noble was concerned that plaintiff would retain experienced management should Noble acquire Gresov's stock.
In 1977, Noble did meet again with Gresov, this time to discuss a possible exchange of Noble's Cimarron coal property for plaintiff's stock. Cimarron had been formed in early 1977 by an agreement among Noble Mining, Gaylord, Waldeck, and AU Mines. (N. Exh. 26). The total cash investment in the Cimarron partnership was $ 10,000. (G. at 314; N. Exh. C26 at 4). The Oklahoma Bank had loaned Cimarron approximately $ 7,100,000 (N. Exh. C33 n.4), which was used to purchase coal properties in New Mexico.
On August 20, 1979, Gresov expressed an interest in having plaintiff acquire the Cimarron properties, but Gresov also informed Noble that his own shares were not for sale. (N. at 281; Tr. at 65, 71; Gr. Aff. P 21). Noble, however, did not follow through on Gresov's expression of interest, and nothing came of the deal. (Tr. at 65, 67). Several months elapsed after this meeting, and Gresov still had heard nothing from Noble concerning Gresov's proposal to acquire Cimarron. This aborted venture alone would seem to belie plaintiff's allegation that the Gaylord defendants are intent on foisting the Cimarron properties onto plaintiff.
With respect to the other Gaylord defendants, the record fails to reveal an orchestrated or synchronized effort to accumulate plaintiff's stock in 1977 and 1978, despite the close business and personal relationship between Noble and Gaylord. At the time of Noble's initial purchases of plaintiff's stock in 1977 and 1978, Gaylord sold all but 500 of his shares. Commencing in 1963, Gaylord had made several occasional investments, and on September 27, 1977, Gaylord had acquired 10,000 shares of plaintiff and received a stock dividend of 500 shares. (G. at 46-47, 63). In December, 1977, Gaylord sold all but 500 of his shares for tax reasons, suffering a substantial loss in profits. (G. at 64). As a shareholder, Gaylord did not take any active part in plaintiff; in fact, he neither voted his shares nor attended the annual meeting in 1979. (N. at 289).
With respect to Noble Mining's holding, Noble Mining bought 15,000 shares of plaintiff in December, 1979. (N. Exh. A at 53). Thus, the combined Noble and Noble Mining holdings of plaintiff's stock are approximately 37,000 shares. (G. Exh. 32).
Oklahoma Publishing's investment in plaintiff's stock commenced in 1978. Oklahoma Publishing gradually accumulated 469,300 shares of plaintiff over the next twenty-seven months. (G. Exh. 6). These shares represented approximately nineteen percent of all of plaintiff's outstanding stock. Oklahoma Publishing has filed the required Schedule 13D's since the time its holdings exceeded five percent of the total issued common stock of plaintiff. (G. Exhs. 8, 9, 17, 18, 19, 20, 21, 32).
The record discloses that Oklahoma Publishing's purchases were made from its working capital, not from any surreptitious borrowing or extraordinary sales of assets as suggested by plaintiff. Oklahoma Publishing's financial statements clearly indicate that the company was not suffering any shortage of working capital and had sufficient funds to make substantial purchases of stock. For example, during the period of purchases of plaintiff's stock, Oklahoma Publishing had an increase in working capital of more than $ 16 million. (Pl. Exh. 11). Moreover, Glenn Stinchcomb, treasurer and assistant secretary of Oklahoma Publishing, directly testified that no borrowed funds were used to purchase shares of plaintiff. (Stinchcomb at 64). The company's financial statements demonstrate that, contrary to plaintiff's argument, Oklahoma Publishing had a pre-existing bank debt which was not a debt incurred to purchase plaintiff's shares. (Pl. Exhs. 10, 11). No evidence, aside from plaintiff's speculation, exists to support a finding that Gaylord, in his capacity as an official of the Oklahoma Bank, facilitated loans to Oklahoma Publishing for the purchase of plaintiff's stock.
As disclosed in several Schedule 13D's, Gayno also made purchases from its working capital. Defendants Gaylord and Noble made their purchases from personal funds and a loan from Gayno, as disclosed in the Schedule 13D. (N. at 28-31, 143-45; N. Exh. A at 72-104; G. Exh. 32 Item 3; N. at 223-24; G. at 137-39). It should be noted that Gayno was indebted to Oklahoma Bank for more than $ 6,275,000, of which $ 2,390,000 was unsecured. While it may have been imprudent banking practice to have loaned this money to Gayno, no credible evidence has been adduced that Gaylord used his influence to facilitate Noble's purchase of stock. (N. Exh. C32 at 9).
On May 8, 1980, Oklahoma Publishing filed a Schedule 13D which disclosed, among other items, that Noble, Gaylord, and Oklahoma Publishing had formed an investment "group." In particular, the Schedule 13D discloses that:
1) the persons filing the Schedule 13D had no purpose or intent of influencing control over plaintiff at the time of previous purchases;
2) on April 30, 1980, the Gaylord defendants agreed to act together as a group to exert influence on the policies and management of plaintiff; "although no plan presently exists to acquire control of (plaintiff), the group's collective intention to influence the issuer's policies and management may be deemed to constitute an intention to exercise "control";
3) members of the group intend to cast their votes in a single block and also will communicate with other shareholders regarding equity interests;
4) the group has not reached a decision as to whether to seek representation on the Board of Directors, or to engage in any proxy solicitation;
5) the group will discuss possible sources of action for the group, involving stock purchases or tender offers, but the group has no present plans to liquidate, sell the assets of, or merge with plaintiff, or to make any material change in the nature of the business or corporate structure of plaintiff.
Defendant Tomlin's investment in plaintiff has been considerably more limited than that of the Gaylord defendants. At no time, for example, has Tomlin become subject to the disclosure requirement of Section 13(d) since he has never accumulated more than five percent of the stock of plaintiff. Tomlin's holdings prior to March, 1980, consisted entirely ...