United States District Court, Southern District of New York
January 23, 1990
CLEMENTE GLOBAL GROWTH FUND, INC., PLAINTIFF,
T. BOONE PICKENS, III, OLIVER R. GRACE, JR., JOHN S. GRACE, GRACE-PICKENS ACQUISITION CORP., SUMTER PARTNERS, L.P., GRACE-MERRILL, L.P., DRAKE ASSOCIATES L.P., ANGLO AMERICAN SECURITY FUND, L.P., STERLING GRACE CAPITAL MANAGEMENT, L.P., AND CHURCHILL ASSOCIATES, L.P., DEFENDANTS.
The opinion of the court was delivered by: Keenan, District Judge.
OPINION AND ORDER
The central facts of this case are set forth in Clemente
Global Growth Fund, Inc. v. Pickens, 705 F. Supp. 958 (S.D.N Y
1989), familiarity with which is assumed. There, this Court
ruled that plaintiff, a closed-end management investment
company (the "Fund"), had standing to sue to enforce § 12(d)(1)
of the Investment Company Act of 1940 (the "1940 Act") and that
plaintiff was entitled to a preliminary injunction enjoining
defendants from closing a tender offer for up to 100% of
Although the Court will avoid repetition of its prior
decision where possible, a significant change in the
circumstances surrounding the proposed tender offer
necessitates frequent comparison of the factual background
existing in January, 1989 with that today in January, 1990.
Most notably T. Boone Pickens, III and Sumter Partners, L.P.
("Sumter") have announced that they have abandoned the tender
offer and intend to sell all or substantially all of the Fund
stock which they presently hold. This Court held in its
previous decision that Sumter satisfied the definition of an
investment company and had over 100 beneficial owners under
the counting mechanisms of the 1940 Act. See Clemente, 705
F. Supp. at 964-68; 15 U.S.C. § 80a-3(c)(1)(A). Accordingly,
Grace Pickens Global Acquisition Partners ("GPGAP"), the tender
offer vehicle consisting of Sumter and five other limited
partnerships, could not lawfully acquire more than 3% of the
Fund's stock under § 12(d)(1)(A) of the 1940 Act,
15 U.S.C. § 80a-12(d)(1)(A).
The case is now before this Court on the application of T.
Boone Pickens, III and his partnership, Sumter, for summary
judgment or, alternatively, vacatur of the preliminary
injunction. The other defendants have likewise moved for
vacatur of the preliminary injunction and dismissal of the
second amended complaint or, alternatively, for summary
judgment. Plaintiff has
cross-moved against all of the defendants for an order
directing them to sell their Fund shares in excess of 3% of
the Fund's outstanding voting stock. For the reasons detailed
below, the Court denies all of the parties' motions.
On April 19, 1989 the GPGAP partnership agreement was
amended to effect Sumter's withdrawal from the partnership.
The amendment also provided that the remaining partners would
be associated under the name Grace Global Acquisition Partners
("Grace Global"). The defendants emphasize that the cleavage
between Sumter and the other members of Grace Global was
absolute and irrevocable. On April 21 Grace Global notified
the Securities and Exchange Commission of these changes in an
amendment to the group's Schedule 13D and 14D-1 filings. The
amendment represents that "[i]n the event Grace Global and its
partners obtain control of the Fund, Sumter will not
participate financially or otherwise." Grace Def't's Exh. A.
In addition, Sumter filed a separate Schedule 13D confirming
the split. Sumter avows in this filing that there are no
"contracts, arrangements, understandings or relationships
(legal or otherwise) among" Sumter and its former partners.
Sumter also states that it will not acquire any more Fund
shares and that it intends "to dispose of all or substantially
all" of the Fund shares it holds. Grace Def't's Exh. B.
Apart from Sumter's withdrawal, the composition of the
tender offer vehicle is unchanged. Grace Global is a general
partnership with five general partners, each of which is a
limited partnership: Anglo American Security Fund, L.P.
("Anglo American"); Sterling Grace Capital Management, L.P.
("Sterling Grace"); Drake Associates, L.P. ("Drake");
Grace-Merrill, L.P. ("Grace-Merrill"); and Churchill
Associates, L.P. ("Churchill"). The general partners in Grace
Global maintain that each partner actively participates in
management and that no partner has an expectation of profits
derived solely from the efforts of others.
Sumter's 46% stake in the former GPGAP is now gathered in
the two Grace Global partners with the greatest economic
resources: Anglo American and Sterling Grace. If all Fund
shares are now tendered, Grace Global will be funded as
Anglo American 38.6%
Sterling Grace 44.6%
Plaintiff does not dispute that each of the five limited
partnerships that comprise Grace Global has fewer than 100
beneficial securities owners. Plaintiff challenges, however,
Grace Global's assertion that this conclusion attaches when
the five are regarded as a group or as Grace Global.
See Mattingly Aff. ¶¶ 31, 39-45. Plaintiff also contends that a
factual question exists with respect to the completeness of the
split between Sumter and the other limited partnerships.
Sumter contends that it has decided the game is not worth
the candle and thus has abandoned the tender offer. To
demonstrate its good faith, Sumter points out that it has
severed all ties to the other limited partnerships and avows
that no agreements or understandings exist between those
limited partnerships and Sumter. Sumter has also announced
that it intends to sell all or substantially all of its Fund
stock. On this basis Sumter argues that the Fund's claims
against it are moot and therefore the injunction entered
against it should be vacated and summary judgment entered in
A defendant seeking to dismiss a case as moot bears a heavy
burden. See United States v. W.T. Grant Co., 345 U.S. 629, 633,
73 S.Ct. 894, 897-98, 97 L.Ed. 1303 (1953). This burden is not
satisfied until it is "`absolutely clear that the alleged
wrongful behavior could not reasonably be expected to recur.'"
Gwaltney of Smithfield v. Chesapeake Bay Found., Inc.,
484 U.S. 49, 66, 108 S.Ct. 376, 386, 98
L.Ed.2d 306 (1987) (quoting United States v. Phosphate Export
Ass'n, Inc., 393 U.S. 199, 203, 89 S.Ct. 361, 364, 21 L.Ed.2d
344 (1968)) (emphasis in Gwaltney). Accord R.C. Bigelow, Inc.
v. Unilever N.V., 867 F.2d 102, 106-07 (2d Cir. 1989).
Sumter relies heavily on Trane Co. v. O'Connor Securities,
718 F.2d 26 (2d Cir. 1983) to bolster its contention that
plaintiff's claims against it are moot. In Trane, plaintiff
company was denied a preliminary injunction against two limited
partnerships that had acquired over eight percent of
plaintiff's stock, despite the presence of misleading
statements in defendants' Schedule 13D because plaintiff had
not established irreparable harm. During the pendency of
plaintiff's appeal from the denial, defendants sold their
entire holdings of plaintiff's stock and moved to dismiss the
appeal as moot. See id. at 27.
The Second Circuit Court of Appeals granted defendants'
application, holding that "[s]ince the defendants in fact
liquidated their entire position, there are no remaining `live'
issues on this appeal." Id. (emphasis added). The Court
recognized the possibility that defendants could acquire
additional stock, but concluded that this did not animate
plaintiff's request to enjoin future purchases of its stock by
defendants. See id.
Sumter's reliance on Trane is misplaced. As the Supreme Court
has stated, "voluntary cessation of allegedly illegal conduct .
. . does not make [a] case moot." W.T. Grant, 345 U.S. at 632,
73 S.Ct. at 897. In Trane, the defendants actual sale of their
holdings rendered it "abstractly . . . conceivable" that they
again would acquire a sufficient amount of plaintiff's stock to
require a Schedule 13D filing. Trane, 718 F.2d at 27. Here,
Sumter continues to hold its Fund stock in violation of §
12(d)(1)(A) of the 1940 Act. While the Court does not question
Sumter's principals' candor, it cannot rule as a matter of law
that it is absolutely clear that the alleged wrongful
accumulation of Fund stock could not reasonably be expected to
recur. Indeed, until the alleged § 12(d)(1)(A) violation
ceases, it is impossible to state that it is unlikely to be
revived. Cf. Fuchs v. Swanton Corp., 482 F. Supp. 83, 90
(S.D.N.Y. 1979) (declining to dismiss action as moot despite
defendant's statement that it "presently considers its previous
attempt [of merging] . . . abandoned").
Moreover, on a motion for summary judgment, the court may
not resolve disputed factual issues; it may only assess
whether factual issues sufficient to require a trial are at
hand. See Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.
1986), cert. denied, 480 U.S. 1932, 107 S.Ct. 1570, 94 L.Ed.2d
762 (1987). In doing so, "all ambiguities and inferences to be
drawn from the underlying facts should be resolved in favor of
the party opposing the motion, and all doubts as to the
existence of a genuine issue for trial should be resolved
against the moving party." Brady v. Town of Colchester,
863 F.2d 205, 210 (2d Cir. 1988); see also Curry Road Ltd. v. K
Mart Corp., 893 F.2d 509, 511 (2d Cir. 1990). With these
principles in mind, the Court concludes that there is a genuine
factual issue concerning whether Sumter is truly independent of
Grace Global and whether an agreement or understanding is in
place between the two regarding disposition of Sumter's Fund
Despite its avowed intention to wash its hands of this
matter, Sumter on two separate occasions declined to sell all
or substantially all of its holdings to "`friends' of
Clemente's management" at market prices of $.85 per share or
more above its purchase price of the shares. Pickens Aff.
¶ 8. Sumter responds that its refusal to sell on these
occasions was an effort to avoid participation in a "greenmail"
transaction. See 26 U.S.C. § 5881. The sine qua non of a
greenmail transaction is an "`offer [by the target company] to
repurchase the investor's shares at a premium above the market
price.'" Amalgamated Clothing & Textile Workers v. Murdock,
861. F.2d 1406, 1408 n. 2 (9th Cir. 1988) (quoting Note,
Greenmail: Targeted Stock Repurchases and the
Management-Entrenchment Hypothesis, 98 Harv.L.Rev. 1045, 1045
(1985)); see also
26 U.S.C. § 5881(b)(3). Plaintiff's counsel avers that the two rejected
offers were made at market price. See Mattingly Aff. ¶ 13. This
is plainly sufficient to preclude entry of summary judgment on
the ground that the offers to purchase Sumter's stock have no
probative value here because they would have constituted
The Fund has not yet conducted discovery on the issue of
Sumter's independence. The Fund asserts that Sumter has
withdrawn from the tender offer group to allow its former
partners to proceed legally, intending to substitute its
capital contribution with its stock by tendering the stock to
Grace Global. If this is accurate, then Sumter's actions might
give rise to a violation of section 48(a) of the 1940 Act,
which bars an entry from making an acquisition indirectly that
it could not make directly. See 15 U.S.C. § 80a-47(a).
Moreover, Sumter's failure to disclose such an agreement or
understanding would violate the disclosure provisions of the
securities laws. The absence of discovery calculated to explore
the sufficiency of plaintiff's "clandestine agreement"
allegation renders summary judgment in favor of Sumter
inappropriate. See Federal Ins. Co. v. Mallardi, 696 F. Supp. 875,
884 (S.D.N.Y. 1988) (Knapp, J.).
The Grace Global defendants also move for summary judgment
and vacatur of the preliminary injunction. As in Sumter's
case, the granting of these applications is premature. First,
as discussed supra, a factual issue concerning the completeness
of Sumter's retreat from the tender offer exists. If Sumter
remains involved in the contemplated tender offer, whether
directly or indirectly on the facts presently before the Court,
the offer will run afoul of § 12(d)(1)(A) of the 1940 Act. See
Clemente Global Growth Fund, Inc. v. Pickens, 705 F. Supp. 958,
967-69 (S.D.N.Y. 1989); Amicus Curiae Brief of The SEC at 5, 13
Furthermore, it remains unclear whether Grace Global is an
investment company within the understanding of § 3(a)(1) of the
1940 Act. To be an investment company, an entity must issue
securities. See 15 U.S.C. § 80a-3(a). Additionally, that entity
must be primarily engaged in investing, reinvesting or trading
in securities. See § 80a-3(a)(1). In its amicus curiae brief
before the Second Circuit, the SEC stated that "[a] conclusion
cannot be reached, on the basis of the facts found by the
district court, as to whether GPGAP is an investment company."
SEC Brief at 14.*fn1
The Grace Global defendants have embraced the question
raised by the SEC and elevated it to a legal conclusion. They
contend that Grace Global, like GPGAP before it (and the
organized investment group before GPGAP), does not issue
securities and therefore cannot, as a matter of law, be an
investment company. As the SEC observed in its brief, general
partnership interests "usually are not securities, but may be
under certain factual circumstances." SEC Brief at 14 (emphasis
in original). A general partnership interest may be deemed a
security when "the partnership interest . . . satisf[ies] the
Howey test." Hirsch v. duPont, 396 F. Supp. 1214, 1220 (S.D.N Y
1975), aff'd, 553 F.2d 750 (2d Cir. 1977). In SEC v.
W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244
(1946), the Supreme Court, in defining "investment contracts"
for purposes of the Securities Exchange Act of 1934, stated:
"[t]he test is whether the scheme involves an investment of
money in a common enterprise with profits to come solely from
the efforts of others." Id. at 301, 66 S.Ct. at 1104. In a
later exposition of the subject, the Supreme Court observed:
"[t]he touchstone [of Howey] is the presence of an investment
in a common venture premised on a reasonable expectation of
profits to be derived from the entrepreneurial or managerial
efforts of others." United Housing
Found., Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060,
44 L.Ed.2d 621 (1975). If a triable issue exists regarding
whether any putative general partnership interest in Grace
Global derives its profits through the endeavors of others,
summary judgment may not be employed.
The Grace Global defendants devote a considerable portion of
their papers to arguing that each of the five partners has a
voice in the affairs of Grace Global and that "management" is
"vested in the Partners." General P'ship Agreement at ¶ 3.1.
They maintain that no passive investor is afoot.
While this may ultimately prove to be so in this case, a
motion for summary judgment, where all inferences are to be
indulged in favor of the non-moving party, is not the
appropriate vehicle for establishing the point. As plaintiff
notes, under the partnership agreement Churchill, which is
controlled by John and James Pinto, cannot overrule any
decisions of the Grace interests because the Grace interests
control most Grace Global votes. See General P'ship Agreement
at ¶ 3.1. Moreover, Churchill (like the other partners) cannot
withdraw from the partnership absent the consent of all
partners. Each partner save Churchill is controlled by Grace
interests. An inference certainly can be drawn that Churchill's
options in management affairs are tantamount to a Hobson's
choice. Greater discovery must be conducted before all doubt
can be removed over whether Churchill's partnership interest is
in economic reality a limited partnership interest.*fn2
Thus, because factual issues material to a determination of
the legality of Grace Global's investment remain, summary
judgment and vacatur are inappropriate.
The Fund has cross-moved for an order directing all
defendants to sell the Fund shares they have acquired in
excess of 3% of the outstanding voting stock of that company.
The Court believes that the remedy of divestiture, if
appropriate, is premature. As the Third Circuit Court of
Appeals noted in a case where § 12(d)(1)(A) was alleged to have
been violated: "[i]t may be that, at final hearing, [defendant]
will be forced to divest itself of all [plaintiff] shares in
excess of 3%." Bancroft Convertible Fund, Inc. v. Zico
Investment Holdings Inc., 825 F.2d 731, 739 (3d Cir. 1987)
(emphasis added). Upon the completion of discovery, and after
full hearing, plaintiff's application may be renewed.
For the reasons stated above, the Court denies the
applications of all parties. Discovery is to proceed. The
parties are instructed to appear for a status conference on
March 9, 1990 at 12:15 p.m. in Courtroom 444.