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COLAN v. PRUDENTIAL-BACHE SECURITIES INC.

June 20, 1983

DAVID COLAN, PLAINTIFF,
v.
PRUDENTIAL-BACHE SECURITIES INC., ET AL., DEFENDANTS.



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 U.S.C. § 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.

I. Factual Background.

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 common stock.

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 common stock.

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%.

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 cash.

II. Legal Contentions of the Parties.

The legal contentions of the parties can be briefly summarized. Plaintiff Colan alleges that the conversion by First City of its Bache shares into the right to receive $32 per share in cash on June 12, 1981 was a "sale" of an equity security within the meaning of section 16(b) of the Act. Because First City was the beneficial owner of more than 10% of Bache's outstanding common stock at all times within six months of June 12, 1981, Colan concludes that the profits earned by First City from the conversion ...


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