The opinion of the court was delivered by: SIFTON
Plaintiff, John Cable, has brought this action complaining of alleged violations of sections 10 and 20 of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j and 78t; Rule 10b-5, promulgated thereunder, 17 C.F.R. § 240.10b-5; and the common law. Defendants, Hechler, Oppenheimer, and Hirsch, have moved for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure or, alternatively, pursuant to Rule 56(b). Defendant Hechler also seeks costs and attorneys' fees.
Plaintiff has responded with a cross-motion seeking leave to amend the complaint. That motion has been granted, and an amended complaint has been filed. Defendants' motions, now addressed to the amended complaint, remain to be resolved.
Considering defendant's motions as motions pursuant to Rule 12, the material facts alleged by plaintiff must be taken as true. Hospital Building Co. v. Rex Hospital Trustees, 425 U.S. 738, 740, 96 S. Ct. 1848, 1850, 48 L. Ed. 2d 338 (1976); Texas Consumer Finance Corp. v. First National City Bank, 365 F. Supp. 427, 429 (S.D.N.Y.1973). Plaintiff alleges that as of May 1977 he was the Chairman of the Board and Chief Executive Officer of Spartek, Inc., a corporation engaged in the manufacture and sale of engineered building and industrial products, primarily products made of ceramic tile. From May 1977 through March 31, 1979, he owned shares of common stock of Spartek, the shares of which were publicly traded on the American Stock Exchange ("AMEX"). In May 1977 and at all other times relevant to the issues raised here, defendant Hechler was the Director of Acquisitions for defendant Oppenheimer.
In May 1977, defendant Hechler contacted Spartek through plaintiff and proposed that a group, including Oppenheimer and Hechler, acquire Spartek's name, business, and substantially all of its assets. The transaction further contemplated that Spartek would become a closed-end diversified investment company (SPR Fund, Inc.), which, using part of the cash obtained from the sale of assets, would offer to purchase all issued and outstanding shares of Spartek stock from those who did not wish to continue their investment in the new business.
Hechler and Cable negotiated concerning the terms of this transaction from May 1977 until October 22, 1977, when plaintiff terminated all discussions because he believed negotiations had reached an impasse. Throughout this period and afterward, until December 1977, Hechler is, at the same time, said to have traded, without plaintiff's knowledge, in Spartek stock. Hechler is also said to have informed defendant Hirsch and others of the existence and status of the negotiations with Spartek; and they, on the basis of this information, in conjunction with Hechler, are said to have also traded in Spartek stock from June through December 1977.
Prior to the commencement of the negotiations, Hechler is said to have assured plaintiff Cable that the existence, status, and terms of the proposed transaction would be revealed only to the proposed purchasers and to no others and would not be exploited by Hechler, directly or indirectly, for private gain.
From November 11 through 13, 1977, there is alleged to have been an unusually high volume of trading in Spartek stock, said to be directly attributable to trading by defendants Hechler and Hirsch and others who were given inside information about Spartek by Hechler. On November 14, 1977, an AMEX listing representative asked plaintiff if he knew why there was such a high volume of trading. Plaintiff said he did not know the cause.
On December 5, 1977, Hechler informed plaintiff that Spartek's demands would be met; and on December 6 and 7, 1977, Spartek issued press releases describing the general terms of the proposed sale. Thereafter, between December 12, 1977, and February 2, 1978, Hechler and Hirsch are said to have sold all of their shares of Spartek stock. In July 1978, the parties reached a definitive agreement of sale which provided for closing, subject to shareholder approval, on August 31, 1978, or, at the latest, October 31, 1978.
Spartek then filed a preliminary draft of a proxy statement with respect to the sale with the Securities Exchange Commission. At this time the Commission is said to have been engaged in an investigation of defendants Hechler, Hirsch, and Oppenheimer for insider trading by them, occurring between 1975 and 1978, in the stock of corporations with respect to which Hechler was, at the time of the trading, negotiating sale-of-assets transactions. The Commission's investigation resulted in the filing of a federal court action against Hechler and Hirsch and an administrative proceeding against Oppenheimer. These actions in turn resulted, after the events material to this action, in a consent judgment against defendants Hechler and Hirsch containing a plan of disgorgement and a settlement with defendant Oppenheimer containing a plan for supervising defendant Hechler. In connection with this judgment, the defendants stated that they neither admitted nor denied the charges against them.
In the context of its investigation of Hechler, Hirsch, and Oppenheimer, the Commission undertook an informal investigation of the proposed sale which delayed the processing of Spartek's Proxy Statement and, thus, the shareholder meeting. That investigation culminated in Spartek's and plaintiff's consent to the entry of an Order and Findings and the issuance of a Report of Investigation. The Commission found, inter alia, that plaintiff had lied to the AMEX representative when he said he didn't know the cause of the unusually high trading. This finding was widely reported, allegedly damaging plaintiff's name and reputation.
On October 6, 1978, Oppenheimer and Hechler withdrew from participation in the sale, but new financial backing was found, and the contract of sale was amended on November 9, 1978, to provide for closing by March 31, 1979. On November 14, 1978, Cable says he learned for the first time of Hechler's insider trading and tipping. On February 22, 1979, a report was released finding the proposed sale favorable to the public shareholders. The sale was consummated on March 31, 1979. Plaintiff ceased to be a shareholder of Spartek and became a shareholder of SPR Fund, Inc.
Plaintiff alleges that, as a result of defendants' wrongdoing, he was damaged in that "(it) was an integral part of the sale that, upon closing, SPR, as a regulated investment company under the Internal Revenue Code, would distribute 90% of its net income directly to its shareholders in cash ... which I would have received if not for the wrongful acts of defendants. That money is now irretrievably lost." (Plaintiff's Affidavit, dated 8/29/80, P19(b) ) Plaintiff also states that "(t)he fact and circumstances of the seven months' delay entailed a loss of benefits and necessitated personal out-of-pocket expenditures all of which aggregated $ 260,000." (Plaintiff's Affidavit, dated 8/29/80, P18).
Plaintiff's claim essentially is that the transaction was delayed due to defendants' acts, as, therefore, was plaintiff's receipt of the economic benefits of the transaction which he was to receive. Defendants' acts are said to have constituted a fraud not only upon third persons who bought from defendants in their insider trading, but also upon the plaintiff ...