Fraudulent Tender Offers Lead to Summary Judgment Victory for the SEC
Susan M. Greenwood | Bloomberg Law
- The announcement of a tender offer is material to investors.
- The “in connection with” element does not require defendant’s actual participation in a securities transaction.
- All communications concerning a tender offer are subject to Exchange Act Section 14(e).
The U.S. District Court for the Southern District of Florida granted summary judgment to the Securities and Exchange Commission (SEC) on its claims that Allen Weintraub and AWMS Acquisition, Inc. d/b/a/ Sterling Global Holdings (Sterling Global) made false and misleading statements in connection with proposed purchases of Eastman Kodak Company (Kodak) and AMR Corp. (AMR), the parent company of American Airlines.
Offers to Purchase Companies Lack Financing and Facts
As the Court explained, in March 2011, Weintraub sent letters to board members, officers, and other representatives of Kodak and AMR, offering to purchase all of the outstanding stock of their respective companies. Although Weintraub’s attractive offer prices represented a 46 percent premium over Kodak’s stock price and a 48 percent premium over AMR’s stock price, neither company responded to the offer letters. On the same days that he sent the offer letters to Kodak and AMR, Weintraub also sent copies of the letters to various news organizations, and in the case of the Kodak letter, to institutional shareholders of Kodak including Legg Mason Capital, Blackrock, Inc., and The Vanguard Group.
Weintraub purportedly made his offers even though he had no ability to finance the transactions. Indeed, three different banks rejected Weintraub’s solicitation of loans ranging from $1.3 billion to $3.5 billion. Further, Weintraub never retained an investment banking firm or legal counsel to assist with the proposed transactions. Weintraub’s offers further omitted several negative developments in his personal life, including (1) his 2008 guilty plea for felony organized fraud and felony money laundering, (2) a 2002 injunction that banned him from serving as an officer or director of a public company, (3) an outstanding $1.05 million judgment for violations of the federal securities laws, (4) his 2007 bankruptcy filing, (5) the 2008 foreclosure on his primary residence, and (6) the 2010 dissolution of Sterling Global by the Division of Corporations of the Florida Department of State for the company’s failure to file an annual report.
Based on Weintraub’s alleged misstatements and omissions concerning his background and his ability to secure financing to acquire Kodak and AMR, the SEC charged him with violations of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 14e-8 thereunder.
Pleading Securities Fraud
To establish a violation of Exchange Act Section 10(b), the Court said, the SEC must prove that Weintraub made a materially false or misleading statement or omission with scienter in connection with the purchase or sale of a security. The SEC, however, does not need to prove reliance, causation, or damages to state a claim.
— False and Misleading Statements or Omissions
The Court easily found false and misleading statements or omissions. It explained that the offer letters “created the misleading impression that Sterling Global was poised to purchase these companies, and had the means and ability to finance the proposed multi-billion acquisitions.” In reality, however, neither Weintraub nor Sterling Global had the assets or resources to complete the proposed transactions. Weintraub also made a second set of misstatements and omissions, the Court held, by failing to disclose his abundant legal problems. Lastly, Weintraub made false and misleading statements to the banks from which he sought financing and to the media outlets he informed of his planned purchases of Kodak and AMR. As to the banks, the Court explained that Weintraub falsely stated that he already owned a significant stake in AMR. With respect to media outlets, Weintraub indicated that he was holding discussions with Kodak and that he had financing for the AMR transaction, neither of which was true.
Next, the Court held that Weintraub’s misstatements and omissions were material. “News of a tender offer is generally considered material in that a successful tender offer could lead to a significant corporate event.” Even the “mere announcement of a proposed tender offer is material because it indicates to investors that they may have the opportunity to sell their shares at a premium.” Further, courts have found that the failure to disclose existing or prior court orders and bankruptcies is material in securities fraud enforcement actions. Accordingly, the Court held that Weintraub’s misstatements and omissions concerning his background and his ability to obtain financing “bolstered the impression that Sterling Global’s offers for Kodak and AMR were serious, and could be relied upon by investors.” As Weintraub did not offer any competing evidence, the Court concluded that he made material misstatements and omissions.
— In Connection With
Given the traditionally broad interpretation of the “in connection with” requirement, the Court explained that the “SEC does not have to prove that a defendant actually participated in a securities transaction himself.” Instead, the SEC can meet the requirement “‘simply by showing that the misrepresentations in question were disseminated to the public in a medium upon which a reasonable investor would rely, and that they were material when disseminated.’” Weintraub sent offer letters to Kodak and AMR and sent copies to institutional investors and news media. He also spoke with reporters to further publicize the offers. These actions, the Court concluded, meet the “in connection with” requirement.
“[A] defendant engages in knowing misconduct when he fails to disclose the true facts of a transaction.” The SEC, the Court said, demonstrated that Weintraub made offers to purchase two major corporations without securing financing. “No reasonable person,” the Court continued, “could have believed that their purported offers to acquire Kodak and AMR for billions of dollars at above-market prices without any funds, financing, or professional services, were made in good faith.” Moreover, Weintraub personally knew the truth about his background and legal troubles. As the Court concluded: “His intentional failure to disclose this information further confirms that he acted with scienter.”
Fraud in Tender Offers
Finally, the Court held that the SEC also was entitled to summary judgment on its Exchange Act Section 14(e) claim. As the Court explained, Section 14(e) is modeled on Section 10(b) and provides “broad antifraud prohibition for tender offers.” Any communication concerning a transaction that involves tender offer rules is subject to Section 14(e). Thus, even though Weintraub never submitted a formal tender offer, the tender offer letters and his “related communications were pre-commencement communications that fall under rule 14e-8.” Given Weintraub’s false and misleading statements and omissions concerning financing for the transactions and his background, the Court concluded that he “could not have had the intention to, or the reasonable belief that he or Sterling Global could, complete tender offers for two corporations for more than $4.5 billion.”
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