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January 30, 1985


The opinion of the court was delivered by: Getzendanner, District Judge:

    On Motion for Attorney Fees

June 13, 1985.


This action under the federal securities laws is before the court on the motions for summary judgment and dismissal for want of prosecution of defendants Robert Wilson and Robert Wilson Associates (the "Wilson defendants"). In plaintiffs'*fn1 Amended Complaint of February 12, 1981, the Wilson defendants are charged in one count with violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), as well as rules promulgated thereunder. For the reasons stated below, both motions are granted.

Plaintiffs allege that sometime before December 31, 1976, the Wilson defendants and "other co-conspirators" began to sell "short" shares of the common stock of Olympia Brewing Company ("Olympia"). According to plaintiffs:

  Defendant short sellers and other co-conspirators
  devised and engaged in a secret scheme or conspiracy
  to manipulate the price of the shares of Olympia.
  They willfully and consciously acted individually and
  in concert with each other to effect a pattern of
  short sales of shares of Olympia with the intent,
  purpose and effect of depressing the price of such
  securities and for the purpose of inducing the sale
  of Olympia stock by others.

(Amended Complaint ¶ 12.) As part of the manipulation, the Wilson defendants and their alleged co-conspirators, on or after August 15, 1976, agreed to select Olympia stock as a target for short-selling "manipulation;" engaged in short selling such that on March 4, 1977, about 150,000 shares had been shorted; effected short sales at the end of trading days to depress "artificially" the price of the shares; "intentionally utilized short selling in order to discourage institutional investors from purchasing Olympia shares;" used short sales to force margin calls, thereby inducing more sales; and effected "naked" short selling. (Amended Complaint ¶ 16(a-f).) As a result of the short selling, the price of Olympia allegedly:

  declined precipitously from 60 1/4 on March 4, 1977,
  to 31 3/4 on March 11, 1977. The price of such shares
  fell eleven points on March 7, 1977, and 16 3/4
  points on March 11, 1977. Trading in Olympia shares
  was suspended by the Securities and Exchange
  Commission between the period beginning on or about
  March 15 and ending on or about March 25, 1977.

(Amended Complaint ¶ 17.) This scheme to depress the market price of Olympia was concealed from plaintiffs, who relied on the integrity of the market when they purchased Olympia shares. (Id. at ¶ 18.) Hilda Mangel, for example, is the sole beneficiary of a trust that purchased 900 shares of Olympia on September 16, 1976 and 1,875 shares of Lone Star Brewing Company on December 31, 1976. On March 7, 1977, the Trustee sold 100 of these shares. Wendell W. Mew was an owner of 5,000 shares of Lone Star Brewing Company, purchased at some undisclosed time and sold at a loss sometime after March 7, 1977. According to plaintiffs, the scheme to depress artificially the price of Olympia constituted a "device, scheme or artifice to defraud and an act, practice or course of business which operated as a fraud or deceit in connection with the short sales of the securities of Olympia." (Id. at ¶ 19.)


The Wilson defendants have moved for summary judgment, arguing that the facts demonstrate that no unlawful scheme to depress the price of Olympia shares took place. Plaintiffs submit evidence tending to show the existence of substantial short positions in Olympia and the correlation between an article unfavorable to Olympia and trading by the Wilson defendants. Unfortunately, neither party discusses the law applicable to a market manipulation claim. Before examining the evidence, therefore, the court must set forth what it understands to be plaintiffs' legal theory in this case.

A. Market Manipulation

Section 10(b) proscribes the use of "any manipulative or deceptive device or contrivance in contravention of the rules and regulations [of the SEC]" employed in the purchase or sale of designated securities. Rule 10b-5, promulgated under this provision, details certain prohibited deceptive practices.

Section 17(a) of the 1933 Act makes it unlawful, in the offer or sale of designated securities:

  (1) to employ any device, scheme, or artifice to
  defraud, or
  (2) to obtain money . . . by means of any untrue
  statement of a material fact or any omission to state
  a material fact necessary in order to make the
  statements made, in the light of circumstances under
  which they were made, not misleading, or
  (3) to engage in any transaction, practice, or course
  of business which operates or would operate as a
  fraud or deceit upon the purchaser.

Section 10(b) targets "manipulative or deceptive" conduct, and thus all of the activities of Rule 10b-5, to be unlawful, must be accompanied by scienter. See Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 473-74, 97 S.Ct. 1292, 1300-01, 51 L.Ed.2d 480 (1977). However, if an implied claim exists under § 17(a), it is possible that scienter is not required under § 17(a)(2) & (3). L. Loss, Fundamentals of Securities Regulation 1150 (1983 & Supp. 1984). Otherwise, the elements of § 17(a) and Rule 10b-5 are substantially the same as applied to sellers. Because of the court's ruling, it need not determine whether an implied claim exists under § 17(a).

It is clear from the Amended Complaint and the plaintiffs' August 8, 1984 memorandum, that plaintiffs are seeking to establish market manipulation. Plaintiffs' injuries stem from their purchase at a price that subsequently declined as a result of manipulative activities such as end-of-the-day trading and "naked" sales by the Wilson defendants. It is thus important to determine the types of acts that would constitute actionable manipulation.*fn2

The Supreme Court has indicated that manipulation normally refers to "practices, such as wash sales, matched orders, or rigged prices, that are intended to mislead investors by artificially affecting market activity." Santa Fe, 430 U.S. at 476, 97 S.Ct. at 1302. One district court indicated that manipulation claims should be limited to the type of activity that "creates the false impression that certain market activity is occurring when in fact such activity is unrelated to the actual supply and demand." Hundahl v. United Benefit Life Insurance Co., 465 F. Supp. 1349, 1360 (N.D.Tex. 1979). This conclusion, derived from the language quoted above in Santa Fe, persuaded the Hundahl court that misrepresentations about the value of the issuing corporation could not constitute market manipulation. The court also relied on common law market manipulation cases which involved market transactions tending to prevent the market price from "accurately reflecting the market's unimpeded judgment of the stock's value." 465 F. Supp. at 1360.

Several market manipulation cases involve such trading activities, unrelated to supply and demand, that tend to inflate or depress the market price. For example, in Securities & Exchange Commission v. Commonwealth Chemical Securities, Inc., 410 F. Supp. 1002 (S.D.N.Y. 1976), aff'd in part, modified in part, and remanded, 574 F.2d 90 (2d Cir. 1978), trading between accounts and "swap" trading were held to introduce a "foreign element . . . to those which normally establish the price of a particular stock, namely, supply and demand in a public auction market, free from artificial manipulation, and the performance of the issuing company in a system of free competitive enterprise." 410 F. Supp. at 1310. See Koenig v. Smith, 88 F.R.D. 604, 605-06 (E.D.N.Y. 1980) (greatly increased trading activity allegedly artificially inflated price; financial performance of issuing corporation did not justify price increase).

Manipulation through deceptive trading activities is an element of plaintiffs' claims against Loeb Rhoades & Co., Inc. in this consolidated action. The activities alleged in the claims against Loeb Rhoades & Co., Inc. are detailed in this court's opinion in McNichols v. Loeb Rhoades & Co., Inc., 97 F.R.D. 331, 333 (N.D.Ill. 1982) (adds element of misrepresentations as to imminent acquisition of issuing corporation). The deceptive trading activities in the case against the Wilson defendants include "naked" short selling, the taking of substantial short positions, and end-of-the-day trading designed to depress artificially Olympia's price.

Other cases have allowed misrepresentations concerning the issuing company's financial performance to support claims of market manipulation. For example, Judge Patrick E. Higgenbotham, in In re LTV Securities Litigation, 88 F.R.D. 134 (N.D.Tex. 1980) (author of Hundahl), discussed the theory of market manipulation as applicable to the overvaluation of the issuing corporation's inventories in a statement of earnings. Another court has explicitly held that manipulation is not limited to the types of activities listed in Sante Fe. Jordan v. Global Natural Resources, 564 F. Supp. 59, 66 (S.D.Ohio 1983). There, the court noted the Supreme Court's definition of manipulative as connoting "intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199, 96 S.Ct. 1375, 1383, 47 L.Ed.2d 668 (1976). Artificial effects are produced by activities not reflecting the "basic forces" or "natural forces" of supply and demand. 564 F. Supp. at 66. Thus, the Jordan court found that public misrepresentations concerning the value of the issuing corporation and its proposed transactions could state a claim for manipulation. Id. See also Wolgin v. Magic Marker Corp., 82 F.R.D. 168, 170 (E.D.Pa. 1979) (manipulation alleged through both deceptive market transactions and false market reports); Panzirer v. Wolf, 663 F.2d 365, 368 (2d Cir. 1981), vacated as moot, 459 U.S. 1027, 103 S.Ct. 434, 74 L.Ed.2d 594 (1982) (inaccurate financial report of issuing corporation); McNichols v. Loeb Rhoades & Co., Inc., supra, (false acquisition rumors); Mottoros v. Abrams, 524 F. Supp. 254, 256-57 (N.D.Ill. 1981) (misrepresentations in press releases as to issuer's sales). In this case, the only representation concerning the value of Olympia Brewing Company mentioned in plaintiff's memorandum is the March 7, 1977 publication in Barron's of facts reflecting negatively on Olympia.

Regardless of whether market manipulation is achieved through deceptive trading activities or deceptive statements as to the issuing corporation's value, it is clear that the essential element of the claim is that inaccurate information is being injected into the marketplace. Panzirer, 663 F.2d at 368. See also Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976); T.J. Raney & Sons v. Fort Cobb, Oklahoma Irrigation Fuel Authority, 717 F.2d 1330, 1332 (10th Cir. 1983), cert. denied, ___ U.S. ___, 104 S.Ct. 1285, 79 L.Ed.2d 687 (1984) ("[m]aterial misrepresentation will theoretically cause the artificial inflation or deflation of the stock price"). The market price therefore reflects false information, and deceives the purchaser or seller relying on the market price as a true indicator of the issuer's worth. Hence, in Billard v. Rockwell International Corp., 683 F.2d 51, 56 (2d Cir. 1982), the Court found no deception in the announcement of a genuine tender offer, explaining that, "[n]o potential trader is led to believe there is a ready market for shares when none in fact exists and the activity of the offeror is not designed to achieve anything other than the success of the [tender] offer." Under this logic, therefore, injection of accurate information into the market price, while perhaps unlawful under other securities laws such as those pertaining to insider trading, cannot state a claim for market manipulation.

Before addressing the facts set forth by Wilson in support of their motion, the court notes that neither party explains to the court the propriety of the various market practices pursued by Wilson. The court makes the following assumptions: Short selling is an entirely proper procedure when backed by a sufficient number of borrowed shares. In addition, fluctuations in the market price of stock resulting from legitimate trading activities is a natural and lawful result of such activities. For example, if traders determine that a stock is overpriced and substantial selling occurs, the resulting decline in price is not unlawful. Substantial trading, either long or short, is not by itself unlawful. Finally, borrowing shares from and selling short to the same entity is not unlawful.

The Wilson defendants argue that their activities in purchasing shares of Olympia were not manipulative and hence cannot support a claim for securities fraud. Robert Wilson is an unlicensed professional investor and the sole general partner of Robert Wilson Associates, an investment partnership. (Wilson Dep., 1/27/83, p. 3.) Wilson made trades on behalf of Robert Wilson Associates in Olympia on several occasions. (Id. at 6.) Indeed, accepting plaintiffs' Exhibit C as an accurate reflection of Wilson's trades in Olympia, Wilson made substantial short sales in Olympia from August 25, 1976 through March 11, 1977. These sales of Olympia were in amounts of as low as 100 shares and as high as 10,000 shares. On March 11, 1977, Wilson had sold 44,433 shares of Olympia short, 4,533 of those shares having been converted from 17,000 shares of Lone Star Brewing Company purchased on January 3 and 4, 1977.

According to Wilson, in 1976, he made a decision to increase his short positions in Olympia stock. (Wilson Dep. at 28.) Wilson candidly states that once he made that decision, he made all possible efforts to borrow as much Olympia shares as was within his means in order to pursue his strategy of short selling. For example, Wilson explains that, "I just want to underscore that I had constant discussions with [my broker Neuberger and Berman] trying to find more stock to borrow. . . . I should add, it is fair to say that I wanted to short all that I thought [my brokers] were likely to be able to borrow." (Wilson Dep. at 36-37.) Wilson notes, however, that he probably would not have sold short more than 100,000 shares. (Id. at 37.)

Wilson admittedly had dinner with Alan Abelson, a columnist at Barron's, sometime in the beginning of 1977. (Wilson Dep. at 50, 55.) Wilson has known Abelson since 1967 or 1968. (Id. at 5.) Alan Abelson remembers the dinner as occurring in February 1977. (Abelson Dep. at 19.) According to Abelson, Wilson made a passing reference to Olympia, saying it was "the biggest rig he ever saw." Abelson relates that he made no comment about that, and that that was the "sum total" of the discussion. (Id. at 1920.) Abelson does not remember Wilson commenting that he hoped Abelson would conduct an investigation regarding Olympia. (Id. at 32.) According to Abelson, he did nothing about writing an article until other persons, unrelated to Wilson, provided the inspiration to do so. (Id. at 9, 12, 21.)

Wilson confirms that he mentioned his thoughts about Olympia being "rigged" to Abelson during this dinner meeting. He further remembers stating that an investigation ought to be conducted by Barron's into the stock. (Wilson Dep. at 53.) Wilson told Abelson that his evaluation of the stock indicated it was overpriced. This, plus the difficulty he had in borrowing the stock from Loeb Rhoades, supported his position that the stock was rigged. (Id. at 53-54.) According to Wilson, Abelson did not respond to this information. (Id. at 53.) Wilson did not tell Abelson about the takeover rumors concerning Olympia, to which he gave no credence, and had no further discussions with Abelson on this subject. (Id. at 54-55.)

On March 7, 1977, Abelson published his opinion that Olympia shares were performing spectacularly in relation to the shares of other brewing companies. In his opinion, the positive events in Olympia's past year could not account for its high price. Abelson further reported that an Olympia spokesperson stated that Olympia was not for sale, despite rumors of an impending takeover. (See Wilson Memorandum, filed 7/7/83, Exhibit 1.) Wilson apparently had no conversations with Abelson concerning Olympia apart from this dinner conversation, and hence was not aware of the impending publication of the Barron's article.

Wilson's trading activity in Olympia is fairly consistent throughout the period from August 1976 through March 1977. From August 1976 through December 1, 1976, Wilson sold short 29,900 shares of Olympia, at prices ranging from 38 to 36 from August 25 to September 2, 1976, and from 45 1/2 to 45 1/8 from November 5 to December 1, 1976. These 29,900 shares were sold on fifteen different days, with one day's sale consisting of 10,000 shares and the other sales ranging from 100 to 4,500 shares. In the beginning of January 1977, on two days, Wilson sold 17,000 shares of Lone Star. From March 3 to March 7, 1977, Wilson sold 6,000 shares of Olympia at prices ranging from 601/2 to 61 1/4. Finally, on March 11, 1977, the next trading day after the Barron's article appeared, Wilson sold 3,000 shares of Olympia at prices ranging from 44 to 47 7/8.

This trading is consistent with Wilson's analysis that the shares were overpriced as early as August 1976, when they were priced in the high 30s, as even after the Barron's article, Wilson continued to sell short. Wilson's acts throughout this period confirm his testimony that he sold as much Olympia as his brokers could borrow.

According to Wilson, these facts are entirely exculpatory. He explains that the evidence demonstrates that he properly sold shares short based on his analysis that the shares were overpriced. He did not sell shares that he had not already borrowed. Moreover, he did not inject inaccurate information concerning Olympia into the marketplace. At this point, it is appropriate to note that plaintiffs never once dispute Wilson's assertion that Olympia was overpriced, or otherwise attempt to show that the price at which they purchased represented the true market value of Olympia. Plaintiffs never contest, in evidence, argument, or allegation, the accuracy of the Abelson article. The only evidence of Olympia's value before the court, therefore, comes from Wilson, who basically contends that the shares were not worth the asking price at all times during his short sales.

Because of this factual record, therefore, the court grants Wilson's motion for summary judgment to the extent the plaintiffs might be claiming that Wilson or his "co-conspirators" injected inaccurate information about Olympia's market value into the marketplace. Wilson's belief and the Barron's article, on this record, were accurate and could not therefore be responsible for having the effect of artificially changing the price of Olympia. If anything, the information concerning the overpricing was a service to the market, as it injected information into the market tending to indicate that Olympia shares were overpriced when this was in fact the case. (The court will address possible unlawful insider trading, an entirely separate violation, below.)

The court finds that the Wilson defendants have adduced sufficient evidence of their lawful behavior to shift the burden under Rule 56 to plaintiffs. Herman v. National Broadcasting Co., Inc., 744 F.2d 604, 607 (7th Cir. 1984). That evidence has provided a lawful and reasonable explanation for trading activities allegedly part of a massive market manipulation scheme. Wilson's testimony credibly and candidly sets forth his analysis of Olympia stock and his decision to sell short as many shares as he could borrow. His testimony is consistent with the record of his trades in Olympia, indicating consistent selling at times when he was able to borrow the shares. Each trade was motivated by a lawful, economically-based decision that Olympia was overpriced or even rigged. He acted on his own market evaluations and not in concert with other short sellers. Any effect on the market price of his selling based on his evaluation that the price would decline is not improper.

On this showing, plaintiffs now have the burden of "set[ting] forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). Resting on allegations or the hope of impeaching defendants' evidence does not satisfy this burden. It should be noted, moreover, that this case was filed in 1977, and a considerable amount of discovery has taken place in the set of cases eventually consolidated with this one under Civil Action 77 C 1206. Moreover, plaintiffs responded to this motion shortly before the case was set for trial and well after discovery was closed. Plaintiffs apparently have provided the court with all of their evidence in support of their downward manipulation scheme, and have made no request under Rule 56(f) for further discovery.

Most of plaintiffs' evidence requires the court to draw inferences of an unlawful conspiracy. On this motion, the court must draw all inferences in favor of the nonmoving party, although only reasonable inferences are indulged. Korf v. Ball State University, 726 F.2d 1222, 1226 (7th Cir. 1984); Hermes v. Hein, 742 F.2d 350, 353 (7th Cir. 1984). Where the nonmoving party is seeking to show the existence of a conspiracy solely through circumstantial evidence, the court has even less discretion in the types of inferences that can defeat a motion for summary judgment.

In Weit v. Continental Illinois National Bank & Trust Co., 641 F.2d 457 (7th Cir. 1981), cert. denied, 455 U.S. 988, 102 S.Ct. 1610, 71 L.Ed.2d 847 (1982), plaintiffs sought to show an unlawful price-fixing conspiracy. Defendants had denied the existence of the agreement, and plaintiffs pointed to parallel activities by defendants as indicative of unlawful agreement. The Court explained:

  [Plaintiffs suggest] that while parallel pricing
  alone is not sufficient to establish a price-fixing
  conspiracy, such evidence together with an
  opportunity to conspire is sufficient to rebut
  defendants' denials and require a trial on the
  merits. [Citations and footnote omitted.] However,
  when the plaintiff or prosecution relies on
  circumstantial evidence alone, the inference of
  unlawful agreement rather than individual business
  judgment must be the compelling, if not exclusive,
  rational inference.

Id. at 463. In granting defendants' motion for summary judgment, the Weit Court noted:

  When a District Court has afforded the parties eight
  years of unlimited discovery, the parties have
  designated the evidence on which they will rely at
  trial, and the Court has had an opportunity to review
  the evidence and concludes that no reasonable jury
  could return a verdict for plaintiffs, judicial
  economy mandates that summary judgment be entered.
  [Citation omitted.] A trial on such claims would
  serve only as a forum for impeachment and argument by
  counsel; not for the presentation of evidence.

Id. at 464. See also O'Byrne v. Cheker Oil Co., 727 F.2d 159, 163 (7th Cir. 1984) (summary judgment granted defendants in antitrust case as no "significant probative evidence" supported complaint and plaintiffs' evidence "not susceptible" to their interpretation). A review of the record shows that ...

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