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IN RE BOESKY SECS. LITIG.

July 1, 1993

In Re IVAN F. BOESKY SECURITIES LITIGATION; FMC CORPORATION, Plaintiff
v.
IVAN F. BOESKY, et al., Defendants.



The opinion of the court was delivered by: MILTON POLLACK

 POLLACK, Senior District Judge:

 BRIEFLY

 The defendant, Goldman Sachs, has moved for summary judgment pursuant to Rule 56, Fed. R. Civ. P. and a hearing thereon was held of plaintiff FMC's evidence in response and in attempted support of its claims.

 Defendant, an investment banker, was retained by plaintiff, FMC, in 1986 on a contingent fee arrangement to study and handle a plan to restructure the interests of its three groups of shareholders, viz., the public shareholders, the management shareholders, and the employee Thrift Plan shareholder. The plan was to distribute new shares to them in exchange for their old shares in stipulated amounts and additionally to make an extraordinary cash distribution to the public stockholders as well as some cash to the Employees' Thrift Plan to make up for the number of the new voting shares allocated to the management and the Thrift Plan in excess of the number of old shares they previously held. The total values distributed under the restructure to the shareholders respectively were based on an estimate of the fair value of the distribution to be received by each group. The cash payments were to be financed by borrowing against the corporate equity which would serve to increase the debt to equity ratio leveraging the balance sheet of the company.

 The plan, after an adjustment of the cash distributable to bring the values allocable to the public shareholders in line with the current market price of the stock allocable to the management shareholders, and thereby to equalize the relative allocations, was approved by vote of the stockholders and defendant's contingent fees were paid on May 28, 1986.

 On December 18, 1986, following a regulatory lawsuit instituted by the SEC against Ivan Boesky, plaintiff filed this suit against Goldman Sachs for recovery of the fees paid to the defendant and for supposed damages from a premature disclosure by an employee of the bankers of their work in progress on some corporate financing plan pertaining to FMC. The plaintiff claims that before any public announcement of the restructure plan, defendant was in breach of the confidentiality obligation it had assumed in the employment, because defendant's employee, Brown, made a disclosure (without defendant's knowledge or authority) to an outsider that he had "deduced" that the corporate finance department was engaged on some project involving a Chicago company which he surmised to be FMC. The deduction was ultimately conveyed to Ivan Boesky, a professional arbitrageur, who thereupon bought some FMC stock. On February 21, 1986, FMC publicly disclosed that it was pursuing a recapitalization plan. Starting that day Boesky started selling off FMC stock. On February 23, 1986, FMC publicly disclosed the terms of its plan. A little over a week after this second public disclosure, Boesky recommenced purchasing FMC stock. He built up a very substantial holding, and the price of the stock rose substantially over the next month. The substantial increase of the price of the stock created a disproportion of the benefits distributable under the restructure plan in favor of the management shareholders in comparison with the benefits allocable to the public shareholders, including the cash distribution payable to them.

 In consequence thereof, Goldman Sachs notified FMC that it would be compelled to withdraw the requisite fairness opinion it had furnished to FMC in February, unless the cash distributable to the public shareholders was increased from the original $ 70 to $ 80 per share, since this was necessary to equalize the relative benefits of the plan among the management, the employee shareholders, and the public shareholders. In light of the prevailing price of FMC stock, FMC's Board of Directors agreed to suggested adjustments increasing the cash distributions and the defendant then issued a revised fairness opinion.

 No corporate acquisition or cost payable to any outsider was involved in the restructure of the interests of the shareholders inter sese, and no corporate interest of the shareholders was in fact compromised by the unfortunate premature disclosure of the non-public activity of the corporate finance department of the defendant involving the restructure of the equity interests of the shareholders of FMC. To the contrary, the interests of the public shareholders were unintentionally advantaged.

 Plaintiff's response on the motion for summary judgment fell short of indicating any admissible evidence of specific facts to legally create a genuine issue of material fact with respect to damages to FMC's shareholders from the breach of confidentiality, nor is there any cognizable basis for a forfeiture of fees earned by and paid to defendant for accomplishing the success of the venture.

 Accordingly, the motion for summary judgment for defendant will be granted and the complaint against defendant will be dismissed.

 THE RECORD IN MORE DETAIL

 The following facts are substantively undisputed. In early 1985, FMC's management decided to explore the possibility of a leveraged restructuring of the company and contacted Goldman Sachs for its expertise. After initially considering a management leveraged buy-out, after studies and presentations by Goldman Sachs, FMC decided in January 1986 to pursue a stock ownership restructure in which FMC would make an extraordinary cash distribution to its public shareholders together with a new share of common capital stock in exchange for each old share held; a distribution of a lesser amount of cash to the Employees' Thrift Plan together with a number of shares of new common capital stock in exchange for each old share held; and a distribution of a number of new shares for each share of old stock held by the management stockholders (the insiders). The desired result would be a corporation, which, while still publicly owned, had a larger percentage of its equity in the hands of insiders, greater debt, and a stock price closer to the corporation's breakup value -- factors that would make the company a less attractive take-over target.

 No outside acquisition of property or interests was in any way involved in the plan. Only reduction of the corporate equity and a realignment of the shareholders interests therein was involved. The cost of the plan would ideally fall on every stockholder in proportion to his interest in the equity. The extraordinary cash payment to the public shareholders was to be financed by funds borrowed against equity, thereby leveraging the company and self-evidently tending to abort or deter any unfriendly or unsolicited attempt at a takeover of the company by making it unattractive therefor, and, especially, preempting the use of leveraging the company to finance such an attempt.

 In pursuit of the FMC project, Goldman Sachs formed a team within the firm code named "Project Chicago." In furtherance of the project, FMC provided Goldman Sachs with confidential information, principally consisting of five year projections on corporate performance and earnings, which FMC alleges it made clear to Goldman Sachs was only to be disclosed on a "need to know" basis.

 David S. Brown was employed by Goldman Sachs from June 1983 until July 1986 in the firm's Corporate Finance and Mortgage Securities Departments, but was not a member of Project Chicago. Unknown to FMC or Goldman Sachs, in mid-January 1986, Brown "deduced" through his own initiatives and inferences that Goldman Sachs was working on a major leveraged transaction for a Chicago-based client and he surmised that the client was probably FMC. Brown did not know FMC's business information or projections or the terms or timing of the potential FMC transaction, and FMC concedes that there is no evidence anyone at Goldman Sachs orally expressed FMC's name to Brown prior to the first public announcement about FMC's proposed recapitalization. Some time in late January or early February 1986, Brown told Sokolow, at the time a vice-president at Shearson, that he "thought FMC was working on something major and it might have been an LBO or some sort of leveraged recapitalization." Sokolow passed the tip to Dennis Levine, then employed at Drexel, who in turn passed the tip to Ivan Boesky, an arbitrageur. FMC concedes that Brown knew his mention of Goldman Sachs project to Sokolow violated the company's policies on client confidentiality, and that it was not within the scope of Brown's employment by Goldman Sachs to disclose his hunch or deduction to Sokolow. There is no evidence Goldman Sachs had any knowledge that Brown had passed such information to Sokolow.

 On February 22, 1986, FMC's Board approved the proposed restructure of the interests of its shareholders and on Sunday, February 23, 1986, FMC publicly announced the terms of the recapitalization.

 On February 28th, 1986, FMC finally committed itself to Goldman Sachs by a written engagement letter formally setting forth the terms of Goldman Sachs' engagement in the recapitalization transaction. The letter stated that Goldman Sachs would keep in confidence any non-public information provided to it by FMC, in furtherance of or otherwise in connection with the proposed recapitalization. The letter agreement defined the understanding:

 
8. . . . . "Confidential Information" means all data, reports, interpretations, forecasts and records containing or otherwise reflecting information concerning FMC and its affiliates and subsidiaries which is not generally available to the public, together with analyses, compilations, studies or other documents, whether prepared by FMC, Goldman, Sachs & Co. or others, which contain or reflect such information.
 
Notwithstanding the foregoing, the following will not constitute "Confidential Information" for purposes of the paragraph eight:
 
(a) . . . information which became generally available to the public [after Goldman Sachs' engagement by FMC] without any breach by us of the provisions of this paragraph eight.

 The letter also provided that the employment was on a contingent fee basis and that if and only if the plan was accepted by the shareholders and consummated, FMC would pay a fee of $ 17.5 million to Goldman Sachs. FMC claims that the confidentiality commitment was orally applicable from the time that Goldman Sachs was first approached by FMC.

 In a letter to FMC for its directors, dated February 21, 1986, Goldman Sachs described the terms of the proposed recapitalization and gave its opinion that the proposed transaction would be fair to shareholders. Under the proposed transaction, management shareholders would receive 5.667 shares of new common stock for each share of old common stock held; FMC's Thrift Plan would receive 4 shares of new common stock and $ 25 in cash for each old share; and public shareholders would receive one share of new common stock and $ 70 cash for each old share. Underlying Goldman Sachs' fairness opinion was its estimate that old FMC stock was worth $ 85 per share on its projection that the market would value new FMC stock (the "stub equity") at $ 15 per share when issued. Thus, the public, management, and thrift shareholders would each receive $ 85 of value for each share of old FMC stock surrendered: public shareholders would receive $ 70 cash plus $ 15 projected value of stub equity = $ 85 per share of old FMC stock; management shareholders would receive 5.667 new shares valued at $ 15 per share for a total package of $ 85 per share of old FMC stock; and FMC's Thrift Plan would receive $ 25 cash plus four new shares of $ 15 projected value, a total package of $ 85 per share of its old FMC stock. The $ 85 estimated value of FMC's old stock was corroborated by the stock's market value of roughly $ 85 on February 21, 1986.

 Unknown to FMC or Goldman Sachs, on February 24, 1986, the day after the public announcement of the terms of the restructure proposed, Boesky's head of research, Lance H. Lessman, recommended to Boesky that he buy FMC stock, citing in a memorandum dated February 24 reasons including:

 (1) Lessman's calculation that the stub equity would be worth more than the $ 15 projected by FMC and Goldman Sachs;

 (3) Lessman's belief that the recapitalization proposal was unfair to the public shareholders and unfairly benefitted the corporate insiders and that there thus was the possibility of a revision of the proposal or the emergence of a competing bid. *fn1"

 Boesky, however, took no immediate action on Lessman's recommendation until March 3 to April 4, 1986, during which he bought about 1,922,000 shares, accounting for more than 50% of the total trading volume in FMC stock during the period. On April 7, 1986, Boesky and affiliated entities filed a Schedule 13-D with the SEC, disclosing the dates and amounts of Boesky's FMC purchases. During this period the market price of FMC stock rose from $ 87.25 on March 12, 1986, to $ 93.75 on April 4, 1986.

 Frank P. Brosens, an officer in Goldman Sachs' Arbitrage Department, spoke with Lessman, among others, after the disclosure by FMC of the restructure plan and its terms. Brosens worked on the transaction and had a "need to know" of its details. Brosens was told to "go out into . . . the arbitrage community," "to explain to them those areas of the transaction that they didn't understand," and "to keep an ear open to hear if he heard any rumors in the marketplace about any third party activity, in effect, a risk that somebody might come in and top our ...


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