The opinion of the court was delivered by: SWEET
Once again this class action securities action brought by plaintiff State Teachers Retirement Board ("State Teachers") against defendants the Fluor Corporation ("Fluor"), certain of its officers and Manufacturers Hanover Trust Company ("Manufacturers") has succeeded in raising a difficult and vexing issue of securities law. This time it is the effect to be given Dirks v. SEC, 463 U.S. 646, 51 U.S.L.W. 5123, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (U.S. July 1, 1983). The issue is presented in the context of motions by Fluor and Manufacturers for summary judgment dismissing the Fourth Amended Complaint pursuant to Rule 56, Fed.R.Civ.P. For the reasons and with the reluctance described below, I will deny the motions, and this action will be set down for trial before the jury demanded by State Teachers.
There have been a number of opinions in this action rendered by this court, one of which was affirmed in part and reversed in part by the Court of Appeals.Familiarity with those opinions, the facts there set forth and the vocabulary of the litigation is assumed. The regret which attaches to this decision is derived from the history of the action and a growing persuasion that the interests of the parties and the public have been ill served by the course of this litigation which has become a Cooks' Tour conducted by skilled counsel over an ever-changing landscape of securities law. The balance of justice between finality and resolution on the one hand and the careful consideration of complicated issues on the other has become increasingly precarious.
The action was filed in 1976 by State Teachers, a public pension retirement fund, its principal allegation being a failure of Fluor to affirmatively disclose to the market confidential, material inside information, namely, its $1 billion contract to construct a coal gasification plant for South African Coal, Oil and Gas Corporation, Ltd. ("SASOL"). As an alternative cause of action, claims were made for violations of the securities law arising out of a tip of material inside information, relating to an increase in Fluor's backlog, projections of increases in Fluor's earnings per share and the likelihood of Fluor's obtaining projects other than the SASOL coal gasification contract referred to below. Since then, the issues of materiality, public knowledge, the effect of the cap described in Elkind v. Liggett & Myers, 635 F.2d 156 (2d Cir. 1980), and the existence of a California cause of action for fiduciary duty have been determined, all against the tension created by the difficulty in determining the proper inferences to be drawn from facts established by the record.
Initially this court found that the SASOL contract information that may have been conveyed to Manufacturers, namely, that "SASOL" could go" was deducible from public information. However, it was determined on appeal that an issue of fact had been presented, namely, whether the knowledge of a bid by Fluor on the SASOL contract (an inference to be drawn from the "SASOL could go" comment) would have been material inside information, given Fluor's policy against announcing its bids. Additionally, the Court of Appeals held that the purchase of Fluor stock by Manufacturers after Winterfeldt's return to New York more than eight days after the alleged tip, created a factual issue of Manufacturers' scienter. The line between factual, as opposed to legal issues, and facts as opposed to inferences based upon facts has been difficult for this court to define in this action.
It is against this background that the instant motion must be resolved against the defendants despite the availability of complete discovery to the parties and what appears at this stage to be the absence of proof necessary to satisfy the requirements of Dirks.
Initially, State Teachers seeks to limit Dirks to its facts -- a special situation in which the "tip" was evidence of a corporate crime and the tipper was thus a sympathetic figure -- a "whistle blower." However, the Supreme Court specifically stated that its holding in Dirks extended beyond the facts of that case:
[o]n its facts, this case is the unusual one.... Nonetheless, the principal at issue here extends beyond these facts.
51 U.S.L.W. at 5126 n.18. Dirks had argued before the Supreme Court that the receipt of "evidence of a corporate crime" should not constitute the receipt of "material inside information." 51 U.S.L.W. at 5128 n.25. The Court had the opportunity to decide the case on this limited ground and could have carved out an exception from the definition of "material inside information" to allow an outsider to receive "evidence of criminal activity." Notwithstanding, the Court chose to decide Dirks on broader grounds. Indeed, in Dirks the Supreme Court established "a guiding principle for those whose daily activities must be limited and instructed by the SEC's inside-trading rules...." 51 USLW at 5128.
The opinion made evident the awareness of its implications and the depth of the problem of dissemination of marketplace information that it sought to address. The SEC had maintained the broad proposition "that anyone who knowingly receives nonpublic, material information from an insider has a fiduciary duty to disclose before trading." 51 U.S.L.W. at 5126. The Supreme Court rejected that view, stating:
The SEC's rule -- applicable without regard to any breach by an insider -- could have serious ramifications on reporting by analysts of investment views.
51 U.S.L.W. at 5126 n. 18.
The Court stated that a reason for its rejection of this position was the fact that such a limitation on analyst activities would harm the securities markets:
[t]he value to the entire market of [analysts'] efforts cannot be gainsaid; market efficiency in pricing is significantly enhanced by [their] initiatives to ferret out and analyze information, and thus the ...