Securities And Exchange Commission v. First City Financial Corporation, Ltd.

890 F.2d 1215 (D.C. Cir. 1989)

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Nature of the Case

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Facts

On March 4, 1986, Marc Belzberg (D) telephoned Alan Greenberg, the Chief Executive Officer of Bear Stearns, a large Wall Street brokerage firm, and asked Greenberg to buy substantial shares of Ashland for D's account. Ds claim that Greenberg 'misunderstood' Belzberg (D): the latter intended only to recommend that Bear Stearns buy Ashland for its own account. Marc and Samuel Belzberg purchased 61,000 shares of Ashland stock for D using Goldman Sachs, another large Wall Street investment banking house. Throughout the month, D also steadily acquired large blocks of Ashland stock through Katz-Goldring. By February 26, D had accumulated more than 1.3 million shares, approximately 4.8 percent of Ashland's total outstanding stock. Around the same time, Marc Belzberg began acquiring shares through Greenberg at Bear Stearns. D employed several commonly accepted measures to maintain the secrecy of its purchases since public knowledge that D was acquiring a large stake in Ashland would likely drive up the price of the stock. D bought the Ashland stock through nominee accounts established at Katz-Goldring specifically for the Ashland purchases. P received a favorable report from Pace Consultants, a Texas consulting firm hired to assess Ashland's petroleum-related businesses. Two days later on March 4, Marc Belzberg telephoned Greenberg and engaged him in a short conversation. Greenberg interpreted Marc Belzberg's call as an order to purchase Ashland stock on behalf of P. Immediately after the phone call, Greenberg purchased 20,500 Ashland shares. If purchased for D, those shares would have pushed D's Ashland holdings above 5 percent and triggered the beginning of the 10 day filing period of section 13(d). Between March 4 and 14, Greenberg purchased an additional 330,700 shares of Ashland stock for D costing more than $14 million. On March 17, Marc Belzberg called Greenberg and arranged a written put and call agreement for the 330,700 shares Bear Stearns had accumulated. Several days later, Marc Belzberg received the written agreement with a 'strike price,' or the price Bear Stearns was charging D, of $ 43.96 per share. This price was well below the then market price of $ 45.37; thus, the total March 17 put, and call price was almost $500,000 below market. Marc Belzberg testified that he believed that Bear Stearns was acting as a 'Santa Claus' and that Greenberg was giving him 'a bit of a break' to gain more business from D in the future. The strike price reflected only the cost to Bear Stearns of acquiring the stock over the two week period before the written agreement (plus interest and commission). This created an inference that D was the beneficial owner of the securities before March 17. Eventually, D approached Ashland with a friendly buyout which was rejected. D then issued a press release disclosing that D held between 8 and 9 percent of Ashland's stock. Almost immediately, the price of Ashland stock rose 10 percent to $52.25. On March 26, P filed the Schedule 13D disclosure statement required by section 13(d). The statement indicated that First City had accumulated 9 percent of Ashland stock and intended to launch a tender offer for the remaining shares at $60 per share. The market price of Ashland stock then rose to $55, peaking at $55.75 per share the next day. D eventually abandoned the attempted tender offer because it could not get financing. On March 31, Ashland agreed to buy back D's shares for $51 per share, resulting in a $15.4 million profit for D. P began an informal inquiry and then filed a civil complaint against Ds alleging that they crossed the 5 percent threshold on March 4 but filed the required disclosure statement on March 26, twelve days past the section 13(d) deadline. The court found for P and ordered Ds to disgorge approximately $2.7 million in that Ds were able to purchase these shares at an artificially low price due to their failure to make the section 13(d) disclosure on March 14. Ds appealed.