The opinion of the court was delivered by: Decker, District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiff, David Colan ("Colan"), a security holder of
Prudential-Bache Securities Inc. ("Prudential-Bache"), has
brought this action on behalf of Prudential-Bache for recovery of
shortswing profits realized by defendant First City Financial
Corporation Ltd. ("First City") allegedly in violation of section
16(b) of the Securities Exchange Act of 1934 ("the Act"), 15
§ 78p(b).*fn1 Colan asserts that First City earned approximately
$8,000,000.00 in profits from its trading in the stock of the
Bache Group Inc. ("Bache"). Currently pending is First City's
motion for summary judgment.
The circumstances giving rise to this action are as
follows.*fn2 On March 21, 1979, the Bel Companies*fn3 began
purchasing the common stock of Bache, reporting in a Schedule 13D
statement filed with the SEC on that same date that "[s]ince the
Corporations intend to consider seeking to acquire control of the
Issuer their position cannot be considered solely that of a
passive investor." By late June, 1979, the Bel Companies had
become the beneficial owners of 7.8% of Bache's outstanding
On September 13, 1979, Samuel Belzberg ("Belzberg") met with
Harry A. Jacobs ("Jacobs"), Chairman of Bache, and H. Virgil
Sherrill ("Sherrill"), the President and director of Bache.
According to Amendment No. 4 to the Bel Companies' Schedule 13D,
dated October 4, 1979, Belzberg indicated that he was interested
in increasing his investment in Bache to between 20% and 25% of
the latter's outstanding common stock. In a letter from Bache's
Board of Directors to Belzberg, dated September 24, 1979, and
attached as an exhibit to Amendment No. 4, Jacobs stated:
"The Board of Directors agree that an increase in
ownership by you of Bache shares would be contrary to
the interests of Bache and its shareholders."
Despite this letter, the Bel Companies continued purchasing Bache
stock and by late June, 1980, they owned 8.2% of the outstanding
On July 14, 1980, the Bel Companies sold all their common
stock, amounting to 778,700 shares, to First City "in order to
realign the investment within the corporate group on more
satisfactory business terms." See Schedule 13D, filed with the
SEC on July 23, 1980, at 7-8.
On July 15 and 16, 1980, First City purchased 115,600 shares of
Bache common stock, which boosted its holdings to over 10%, of
Bache's outstanding common stock. Additional purchases soon led
to holdings of approximately 16.8%.
According to a Request by Bache for an Investigation and Public
Hearings and an Order Prohibiting Purchases Pending Hearings
("the Request"), filed with the Attorney General of the State of
New York, Belzberg, at a December 16, 1980,
meeting with Jacobs, indicated a desire to be elected to the
Bache Board and to be allowed to designate another member of the
Board. Bache understood this to be an attempt by Belzberg to
"take over Bache," Request, at 1, and to "influenc[e] the
control" of Bache. Id. at 17. In response to this perceived
attempt, Bache sought an order from the New York Attorney General
prohibiting First City and the Belzberg family from purchasing
any additional shares of Bache. Bache asserted in the Request, in
part, that the Belzberg family had "embark[ed] on an aggressive
market purchase program without disclosing detailed information
about themselves, their plans or even the terms of the bid, . . .
compell[ing] Bache shareholders to speculate about these factors
while forcing them to make an important investment decision[,]"
Id. at 13-14. The Request also stated that the charged parties
had "actively solicit[ed] shares of Bache through a variety of
methods in furtherance of their takeover bid and, accordingly,
are in violation of the New York Act [the New York Security
Takeover Disclosure Act, N.Y.BUS.CORP.LAW § 1601 (Consol. 1982)]
for making such a bid without making the required disclosure."
Id. at 16.
By February 18, 1981, First City had increased its holdings to
approximately 22.6% of Bache's outstanding common stock.
Amendment No. 2 to Bache's Schedule 14D-9, filed with the SEC on
April 2, 1981, indicates that it was soon after these additional
purchases that Bache contacted The First Boston Corporation
("First Boston") in an effort to locate a purchaser of the entire
company. On March 3, 1981, First Boston approached The Prudential
Insurance Company of America ("Prudential") concerning the
latter's possible acquisition of Bache. Bache and Prudential
engaged in discussions concerning the possible acquisition, while
at the same time Bache also met with First Boston to examine
other potential acquirers. Belzberg asserts in an affidavit filed
in support of First City's motion that neither First City nor its
representatives participated in or were informed of Bache's
negotiations with Prudential.
On March 18, 1981, Prudential offered to acquire all of Bache's
outstanding common stock for $32 per share through a cash tender
offer to be followed by a second step cash merger. On that same
day, the Bache Board approved acceptance of Prudential's offer,
and the agreement was announced publicly on March 19. In
recommending acceptance of the first step cash tender offer,
Bache stated in its Schedule 14D-9, at 4, dated March 20, that
"the Company [Bache] was mindful of the continuing
market purchases by First City . . . which posed a
threat that it would gain control of the Company,
leaving minority stockholders who would not have the
opportunity to receive a price for their shares as
high as that offered by [Prudential]."
This same statement was repeated in the proxy materials
distributed to Bache shareholders and recommending approval of
the second step cash merger.
On March 23, 1981, Pru Holdings Inc. ("Pruho"), a wholly-owned
subsidiary of Prudential, commenced a tender offer for all of the
outstanding Bache common stock at a price of $32 per share.
Pursuant to this tender offer, Pruho acquired approximately 70%
of Bache's outstanding common stock. At a special meeting of
Bache shareholders held on June 11, 1981, the merger of Pruho and
Bache was approved despite the fact that First City voted all of
its shares against the merger. On June 12, pursuant to the terms
of the merger, the 2,440,975 shares of Bache stock owned by First
City were converted into the right to receive $32 per share in
II. Legal Contentions of the Parties.