The opinion of the court was delivered by: CANNELLA
JOHN M. CANNELLA, United States District Judge:
After a nonjury trial on the merits, the Court finds for defendants.
Plaintiffs instituted this action charging defendants with violations of Section 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, promulgated thereunder by the Securities and Exchange Commission.
Plaintiffs also allege defendants' violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), New York's antifraud statute, N.Y. Gen. Bus. Law § 352-c, and common law fraud. Because the language of the state statute and the common law prohibitions against fraud are substantially similar to the scope of Rule 10b-5, plaintiffs main thrust throughout the trial was directed at the violation of federal laws.
This action arises out of defendants' sale of the entire stock of ITT Service Industries Corporation ["ITTSI"] and Allied Building Services of Ontario, Limited ["ABSO"] to plaintiffs on November 1, 1978. On that date, plaintiffs paid a total price of $8,000,000, representing net tangible assets plus $500,000. Pursuant to the Purchase Agreement ["Agreement"], the value of the net tangible assets was ultimately to be decided after the closing by the parties' accountants. They reached agreement on a figure of $7,678,678 -- a final purchase price of $8,178,678.
Plaintiffs claim a fraud based upon misleading representations and omissions by defendants that induced their purchase of ITTSI stock. Plaintiffs seek damages in the sum of $2,875,000, which allegedly represents the difference between the price paid plus transaction-related costs and the fair market value of ITTSI stock on November 1, 1978. Defendants seek judgment of $178,678 plus interest from August 2, 1979 on their counterclaim for the balance of the purchase price.
After a thirteen-day trial on issues of liability and damages, and the numerous documents, briefs and arguments ably and cogently submitted by counsel, the Court makes the following findings of fact and conclusions of law:
Plaintiff Pritchard Services Group of America ["PSGA"], a Nevada corporation and plaintiff Nation-Wide Building Services, Ltd., a wholly-owned subsidiary of Pritchard Services Group of Canada, Ltd., a Canadian corporation, are both controlled by a publicly-held Great Britain corporation, Pritchard Services Group, PLC ["PSG"]. PSG's principal business is building maintenance. Plaintiffs are referred to collectively as "Pritchard".
Defendant International Telephone and Telegraph Corporation ["ITT"], a Delaware corporation with its principal place of business in New York and defendant ITT Canada Limited ["ITT Canada"], a Canadian corporation wholly-owned subsidiaries of ITT and ITT Canada before their sale to Pritchard. ITTSI's name was changed to Pritchard Services, Inc.
Peter Pritchard is chairman of the board of PSG and PSGA. He was Pritchard's chief negotiator in the acquisition of ITTSI. Curtis Roberts is an executive at PSG and has been responsible for operating PSG companies in foreign countries.
Stanley Luke, the principal negotiator for ITT, was an ITT executive vice-president and headed its acquisition and divestitute program. David Davidson was ITTSI's president at the time of its sale. James Kelley, a certified public accountant with ITT, was responsible for providing financial information about ITTSI to Pritchard. Walter Domeracki was manager of financial controls of ITT's building services division and was responsible for the accounting systems and controls utilized by ITTSI. Gabor Mezei was the comptroller for ITTSI's Building Services Division. William Bramwell was an ITT staff attorney who handled legal aspects of the ITTSI transaction.
In 1976, PSG instructed Roberts to investigate building service companies in North America for potential acquisition. PSG wanted to build a cleaning services business by purchasing several companies in various geographical areas. Roberts and Peter Pritchard were sophisticated in the operation and acquisition of building services businesses. They had reviewed the financial records of hundreds of potential targets, had operated subsidiaries around the world, and had recently purchased businesses in Australia and the Far East. In November 1977, PSG acquired a building maintenance company in Puerto Rico.
Roberts initially contacted ITT in April 1978 about the possible purchase of ITTSI. Pritchard and ITT conducted several negotiations during the summer of 1978. The principal meetings were in London, England on July 17, 1978 and in New York City on August 29, 1978. The parties also conducted negotiations by mail, telex and telephone. Pritchard made extensive investigations into ITTSI and received detailed financial and other information from ITT.
ITTSI, comprised of approximately thirteen separate companies acquired by ITT, was primarily involved in the building services business. Its other unrelated operations were transferred to ITT before the sale to Pritchard. The Agreement for the ITTSI stock became effective on November 1, 1978. ITT's representations and warranties in the Agreement concerning financial statements, PX 9, P B.6;
the absence of any adverse change in the condition of ITTSI's business, PX 9, PB.16; and the accuracy and completeness of all representations, warranties and information provided by ITT, PX 9, PB.17, explicitly did not survive the closing. PX 9, PJ.1.
The Parameters of the Lawsuit
Plaintiffs assert that they were wrongfully induced to purchase ITTSI because they were defrauded by defendants' false and misleading representations and omissions of material fact. These allegations can be categorized generally under one main claim concerning the break-even operating rate and three tangential claims regarding financial information, goodwill, and internal accounting and assessments. The Court will analyze separately the factual basis of the allegations in each category with regard to whether the misrepresentations and omissions were material, plaintiffs detrimentally relied on material (dis)information, and if necessary, the proof of scienter.
The Court notes that the issues of reliance and materiality are intertwined for each separate allegation, see Herzfeld v. Laventhol, Krekstein, Horwath & Horwath, 540 F.2d 27, 33-35 (2d Cir. 1976) and also recognizes that its conclusions of law on materiality are properly decided after compiling all the evidence to determine whether a reasonable investor would view the omissions/misstatements "as having significantly altered the 'total mix' of information made available." TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976). The Court finds, however, that plaintiffs have failed to prove a violation of securities laws under the separate categories or in the case as a whole.
"Although a judicial review of alleged material misstatements or omissions should not become an exercise in 'nitpicking'," Pantry Pride v. Rooney, 598 F. Supp. 891, 901 (S.D.N.Y. 1984) (quoting Kennecott Copper Corp. v. Curtiss-Wright Corp., 584 F.2d 1195, 1200 (2d Cir. 1978)), the Court will examine in some detail plaintiffs' relevant specific allegations. The Court's findings of fact and conclusions of law track those proposed by defendants for the simple reason that the Court found their witnesses credible. Plaintiffs' principal witnesses, Roberts and Pritchard, were not straightforward on several occasions.
The Court specifically noted at trial that Pritchard had "a pathological block to answer[ing]" [Tr. 620] certain questions and that at various times he "sound[ed] to me like Alice in Wonderland." [Tr. 1170]. The Court finds both Roberts and Pritchard to be incredible on many issues, and, like a bad egg in an omelet, it spoils their entire testimony, even when taken with a grain of salt.
BREAK-EVEN OPERATING RATE