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January 13, 1984


The opinion of the court was delivered by: Prentice H. Marshall, District Judge.


Plaintiff Jerry Etshokin commenced this action by filing a four-count complaint against defendants alleging violations of various securities laws and regulations. He later amended his complaint to include a claim under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-68 (1976).*fn1 Defendants have moved to dismiss the RICO count for failure to state a claim upon which relief may be granted. Three of the defendants have moved for summary judgment on counts 1 through 4.


Plaintiff is a member of the Chicago Board Options Exchange, Inc. ("CBOE"). Complaint ¶ 3. He was a "market maker," trading options on, among other things, common stock of defendant Texasgulf, Inc. ("Texasgulf") on the CBOE. Id. ¶ 9. From February 1 through June 26, 1981, plaintiff alleges, his trading consisted primarily of sales of "call" options, "thus placing [him] in an increasingly `short' position." Id. A call option gives the holder of the option the right to require another party, here plaintiff, to redeem the option in shares of a given stock. Plaintiff's trades in Texasgulf call options were, he alleges, predicated on his belief that Texasgulf was not a likely merger or takeover subject, that absent a merger or takeover the price of Texasgulf stock would not increase, and that therefore the call options would not be exercised and plaintiff would not be required to purchase Texasgulf stock to cover the options. Id.

Texasgulf is a natural resources company which finds, develops and produces chemicals, metals, and energy products. Id. ¶ 4. At all times relevant to this action, approximately 37% of the outstanding common stock of Texasgulf was owned by a wholly-owned subsidiary of defendant Canadian Development Corporation ("CDC"), a Canadian corporation approximately 90% owned by the Canadian government. Id. ¶ 5. Defendants H. Anthony Hampson, Pierre Cote, and John P. Gallagher were all directors of both CDC and Texasgulf; Hampson was also president and chief executive officer of CDC. Id. ¶ 7. Defendant Richard Mollison was chairman of the board and chief executive officer of Texasgulf. Id. ¶ 6.

Plaintiff alleges that on or about February 1, 1981, representatives of CDC began negotiations with a French corporation, Societe Nationale Elf Aquitaine ("SNEA") for the sale of CDC's Texasgulf stock. These negotiations were not publicly disclosed until June 26, 1981. Id. ¶ 10. However, rumors began to circulate that Texasgulf might be a takeover target, and Canadian investors began accumulating Texasgulf stock. Id. ¶ 11. Plaintiff alleges that at a June 18, 1981 meeting of the New York Society of Security Analysts, Mollison denied that CDC had any interest in disposing of its Texasgulf stock and "implied" that he had received no information that would supply a basis for the rumors of an impending takeover. Id. ¶ 13. Plaintiff asserts that he relied on this statement in formulating his investment plans. Id. ¶ 15.

On June 23, 1981, CDC allegedly released to the Dow Jones Newswire a statement that it had no intention of selling its interest in Texasgulf and that it was unaware of the reason for the trading activity in Texasgulf stock. Id. ¶ 17. At that time, plaintiff alleges, CDC and SNEA had already agreed on the terms and conditions of a sale of CDC's Texasgulf stock to SNEA and a tender offer to be made for the remainder of Texasgulf's stock by a subsidiary (to be created) of SNEA. Id. ¶ 18. Plaintiff alleges that he relied on this statement in formulating his investment plans. Id. ¶ 20.

An agreement between CDC and SNEA for the sale of CDC's Texasgulf stock, and a tender offer by SNEA for the remainder of Texasgulf's stock, were publicly announced on June 26, 1981. The offer was to be at $50 per share. This was increased to $56 per share on July 6, 1981. Id. ¶ 22. Due to a rise in the market price of Texasgulf stock as a result of the tender offer announcement, many of the call options plaintiff had sold were exercised and plaintiff was forced to cover. His covering purchases for options sold between February 1 and June 26, 1981 totalled over $1.2 million.

As described in the complaint and explained in plaintiff's response to the motion for summary judgment, plaintiff's securities fraud claims are based on several theories. First, if Mollison knew of the impending takeover when he denied the rumors, he is liable for making material and misleading statements, and Texasgulf is liable vicariously. Second, since Mollison and Texasgulf made public assurances that no tender offer was pending, they had a duty of reasonable inquiry to determine whether their statements were true. Third, plaintiff argues that the knowledge of the "interlocking" directors (Hampson, Cote, and Gallagher) must be imputed to Texasgulf and that since these directors knew of the CDC-SNEA negotiations before June 26, 1981, Texasgulf is deemed to know of them as well and its public denials were therefore misleading. Finally, it appears that plaintiff asserts that the interlocking directors had a duty individually to correct Texasgulf's denials once they became aware of the CDC-SNEA negotiations.*fn2

Texasgulf, Mollison, and Gallagher have moved for summary judgment on plaintiff's securities fraud claims. They argue that the statement attributed to Mollison by plaintiff was never made and even if made was not false or misleading; that the knowledge of the interlocking directors cannot be attributed to Texasgulf; and that Texasgulf had no duty under the circumstances presented here to inquire into the "market rumors" concerning the impending takeover. The motion is based primarily on discovery taken and a decision rendered in a similar case, Weintraub v. Texasgulf, Inc., 564 F. Supp. 1466 (S.D.N.Y. 1983), though defendants have supplemented the record with affidavits. Plaintiff's response to the motion is based in part on the assertion that plaintiff needs to take discovery here not taken in the Weintraub case and that summary judgment would thus be unfair. We will nevertheless discuss the merits of defendants' motion, for even if plaintiff's position is well taken it may be possible to pare down the lawsuit considerably.

1. Mollison's alleged misstatements

Defendants first argue that Mollison never made the misstatements that plaintiff attributed to him. Defendants have submitted a transcript of the June 18 meeting of the securities analysts. The only comments contained in the transcript relating in any way to CDC or Texasgulf stock are the following:

  QUESTION. Do you know whether Canadian Development
  Corp. has been buying your stock in the last quarter,
  and what their ownership objectives in the company
  may be?
  CHAIRMAN MOLLISON. My belief and understanding of
  that is that the only purchases that CDC has made for
  nearly two years is through its participation in our
  dividend reinvestment plan. I don't think ...

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