The opinion of the court was delivered by: Lasker, District Judge.
In July 1983, Reginald Lewis formed TLC Pattern, Inc. for
the purpose of purchasing
The McCall Pattern Company ("McCall"). The majority
stockholder of TLC Pattern was TLC Group, Inc. All of the
stock of TLC Group was owned by Lewis or held in two trusts
for the benefit of his minor children. In January 1984, TLC
Pattern purchased McCall and Lewis became Chairman of the
Board of TLC Pattern, Inc., which continued to do business
under the name of McCall. In June 1987, Crowthers McCall
Pattern, Inc. ("Crowthers") acquired McCall, changing the name
to Crowthers McCall Pattern Company, Inc. ("Crowthers
McCall"). Lewis was paid $53 million for his interests and
remained one of four directors of McCall and an owner of 20%
of its common (voting) stock, equivalent to a 2.6% equity
In September 1987, The Travelers Insurance Company and The
Travelers Indemnity Company (collectively "Travelers") loaned
$35 million to Crowthers McCall. The loan was evidenced by
long term Senior Notes (the "Notes"). In September 1988,
Crowthers McCall defaulted on the Notes and on December 9,
1988, Crowthers McCall filed a petition for reorganization
under Chapter 11 of the United States Code in the United
States Bankruptcy Court for the Southern District of New York.
Travelers asserts that at the time of the loan, it was led
to believe that virtually all of McCall's revenues were
derived from sales to consumers and concluded, based on that
belief, that McCall's cash flow and operating profit were
reasonably stable and sustainable. According to Travelers, it
was not until December 1988, shortly before McCall's filed for
bankruptcy, that it first learned that McCall's had two
distinct forms of profit, one of which was called Trading
Profit (derived from sales to the ultimate consumers) and the
other Non-Trading Profit (arising from McCall's inventory
practices and charges to its retailers). Non-Trading Profit
comprised approximately 92% of McCall's total operating profit
in 1986. Travelers alleges that had this information been
disclosed during its due diligence inquiry, it would not have
purchased the Notes which it now claims are worth
substantially less than the $35 million it paid for them.
Lewis moves for summary judgment on the grounds that he did
not and could not have had anything to do with or any
knowledge of the alleged inaccuracies and omissions in the
financial disclosures to Travelers. Because Travelers has
failed to demonstrate the existence of a material dispute with
regard to Lewis' role in Travelers' purchase of the Notes,
summary judgment is granted in favor of Lewis.
Travelers seeks to hold Lewis liable for its loss based on
its claims that Lewis (1) controlled Crowthers McCall and its
management in connection with their allegedly misleading
statements and omissions relating to the sale of the Notes,
thereby violating § 12(2) of the Securities Act of 1933 ("1933
Act") and § 20(a) of the Securities Exchange Act of 1934 ("1934
Act"); (2) aided and abetted Crowthers McCall's alleged
violation of § 10(b) and Rule 10b-5 of the 1934 Act; and (3)
concealed certain financial information from Travelers prior to
its purchase of the Notes.
Travelers asserts that from January 1984 when he acquired
McCall until June 1987 when it was sold, Lewis dominated
McCall. He was Chairman of the Board, owned a significant
amount of stock in McCall and held positions of authority in
its parent company. He took an active role in business
planning and pricing strategies, was intimately familiar with
McCall's finances, internal accounting and operational reports
and performance. He was also senior partner of Lewis &
Clarkson, McCall's outside general counsel.
The heart of Travelers' complaint against Lewis involves
what Travelers claims was Lewis' continuing influence over
Robert L. Hermann, who prior to the June 1987 acquisition was
Executive Vice President of McCall. During Lewis' tenure as
Chairman of the Board, Hermann developed certain internal
financial reports called "Functional P & L [Profit and Loss]
Statements." The Functional P & L Statements demonstrated that
McCall's operating profit was derived mostly from "Non-Trading
Profit" resulting from charges and price increases to dealers
who held inventory on consignment and not from "Trading
Profit" based upon sales to consumers.
Travelers maintains that according to Hermann, one could not
truly understand how McCall worked without understanding the
information contained in the Functional P & L Statements.
Travelers relies heavily on the fact that when Hermann
disclosed the Functional P & L Statements to McCall's Board of
Directors, Lewis chastised him at length and ordered him never
again to disclose the Functional P & L Statements to anyone.
According to Travelers, even after June 1987 when Lewis was no
longer Chairman of the Board and ceased to exercise day-to-day
responsibility at McCall, "[t]hat order remained in place."
Plaintiffs' Memorandum of Law at 3. Indeed, when Hermann
disclosed the Functional P & L Statements to Travelers in
December 1988, Hermann indicated that he had not disclosed
them earlier because Lewis had ordered him never to disclose
them to anyone. Travelers alleges that the Functional P & L
Statements contained critical information concerning the
source and sustainability of McCall's revenues, operating
profit and cash flow which was not included in the Private
Placement Memorandum relied upon by Travelers in its purchase
of the Notes. Travelers claims that had it been aware of this
information, it would not have purchased the Notes because it
would have known that the Notes were worth significantly less
than the $35 million it paid for them. Lewis should be held
responsible for the loss, Travelers asserts, because he
reviewed the Private Placement Memorandum and was or should
have been aware of its materially misleading omissions.
B. Lewis' Grounds for Summary Judgment
A motion for summary judgment shall be granted if "there is
no genuine issue as to any material fact and . . . the moving
party is entitled to a judgment as a matter of law."
Fed.R.Civ.P. 56(c). "[T]he burden on the moving party [to show
the absence of a genuine issue concerning any material fact]
may be discharged by `showing' — that is, pointing out to the
district court — that there is an absence of evidence to
support the nonmoving party's case." Celotex Corp. v. Catrett,
477 U.S. 317, 325, 106 S.Ct. 2548, 2554, 91 L.Ed.2d 265 (1986).
"[T]h[e] standard [for granting summary judgment] mirrors
the standard for a directed verdict under Federal Rule of
Civil Procedure 50(a) . . ." Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).
Accordingly, to establish a genuine issue for trial on a motion
for summary judgment, the non-moving party must show more than
"some metaphysical doubt as to the material facts." Matsushita
Electric Industrial Co. v. Zenith Radio Co., 475 U.S. 574, 106
S.Ct. 1348, 89 L.Ed.2d 538 (1986). "Where the record taken as a
whole could not lead a rational trier of fact to find for the
non-moving party there is no `genuine issue for trial.'" Id.
Lewis asserts that there is no genuine issue of material
fact as to his complete lack of involvement in the offering
and sale of the Notes to Travelers. Lewis points out that in
negotiating for the loan, Travelers had no dealings with him.
He neither offered, negotiated, nor secured the sale of the
Notes and he received none of the proceeds. He alleges that he
was told nothing about the negotiations and had no contact
concerning the transaction with any of the persons or entities
involved and therefore he did not and could ...