proposal was rejected by the Finance Committee in favor of Merrill Lynch.
Accompanying the offering of preferred shares was a registration statement and a prospectus. The statement was signed by all Western Union directors, including Berner, Sprigle, and Ehinger. For purposes of this motion, the prospectus shall be considered to have constituted a deception of the potential investor, in that it presented a "generally rosy picture of Western Union as a company poised to take a leadership role in the telecommunications industry [while] the truth is that it was on the verge of collapse." (Plaintiff's brief, p.1). The new marketing strategies for 1984 were "high risk" and could succeed only with "large amounts of external financing." The signatures of Berner, Sprigle, and Ehinger appeared on the prospectus with the other 13 directors of Western Union. Nevertheless, the affidavit testimony of Berner, Sprigle, and Ehinger shows that they believed the prospectus to be truthful.
Merrill Lynch proceeded to underwrite the offering of preferred shares and sell them to the public. In June of 1984, two months after the offering, Berner purchased 1,000 shares of Western Union common stock for his own account. In the months before and after the offering, Western Union management continued to issue routine and reassuring press releases to the investment community, and as regular policy the board of directors was never asked to clear such releases.
On August 28, 1984, the Western Union board unanimously voted to discharge Chairman Robert M. Flanagan. Plaintiffs aver that Berner had sought Flanagan's removal, based upon Flanagan's deposition testimony that he had heard from another board member (Harper Sibley) that "Mr. Berner was trying to force me out of the company . . ." (Flanagan deposition p.246-47, Komins Aff., Exhibit P). However, Flanagan also stated that his belief in this was "one of a thousand beliefs I had." (Tyler Aff. Exhibit B p.253) and two non-Curtiss-Wright members of the Western Union board present at the meeting stated that Berner, Sprigle, and Ehinger did not take the lead in ousting Flanagan. (Sibley Aff. para. 8, Kheel Aff. para. 10).
As a replacement for Flanagan, the board offered the chairmanship to several directors, all of whom rejected it. The board finally turned to Berner who took the position on an interim basis, which was to last approximately three months.
In November of 1984, during Berner's brief tenure as chairman, the company's banks cancelled a $ 100 million line of credit that had been approved in September. The resulting cash shortage caused Western Union to cancel payment of dividends. The price of the company's stock began a swift decline. After Berner was replaced as chairman by Robert Leventhal (not Berner's candidate; his was John Pope, who was rejected) in December of 1984, Berner, Sprigle, and Ehinger found themselves increasingly "frozen out" of the management process. Secret "informal" meetings of the board were held without them, and several Western Union officers were directed not to talk to them.
In early December 1985, Curtiss-Wright sold a small portion of its Western Union shares for tax reasons, thus reducing its proportionate share in Western Union to 16 %. The Western Union board immediately demanded the resignation of two out of the three Curtiss-Wright directors, over their objections, because under the terms of the standstill agreement Curtiss-Wright was limited to representation on the board in proportion to its share in the outstanding voting stock. The next month, Curtiss-Wright wrote a sorrowful finis to its Western Union venture by selling all of its remaining shares and incurring a loss of $ 57.3 million. It only remains to be stated that Western Union's subsequent writedowns of its assets in 1986 were done without the advance knowledge of Berner, Sprigle, and Ehinger during their terms as directors of Western Union.
Defendants have moved for summary judgment on the issue of their liability to plaintiff class of Western Union shareholders based on the allegedly fraudulent prospectus and accounting procedures of Western Union, urging (1) that Curtiss-Wright and Berner, Sprigle, and Ehinger were not "controlling persons" under section 15 of the Securities Act of 1933 (15 U.S.C. § 77 o or section 20 of the Securities Exchange Act of 1934 (15 U.S.C. § 78 t); (2) that Curtiss-Wright and Berner, Sprigle, and Ehinger did not culpably participate in any violation of section 15 of the 1933 Act; section 20 of the 1934 Act; or aid and abet a securities violation under section 11 of the 1933 Act (15 U.S.C. § 77 k) or section 10(b) of the 1934 Act (15 U.S.C. § 78j(b)) and its concomitant rule 10b-5 (17 C.F.R. § 240-10b-5); (3) that Berner, Sprigle, and Ehinger did comply with their duty of due diligence during their term as directors of Western Union so as to avoid any primary liability under section 11 of the 1933 Act; (4) that Curtiss-Wright did not violate section 12(2) of the 1933 Act (15 U.S.C. § 77l(2)) as an aider and abettor of Merrill Lynch.
I. STANDARD FOR SUMMARY JUDGMENT
Federal Rule of Civil Procedure 56(c) provides that summary judgment may be granted only when the record shows that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Hersh v. Allen Products Co., 789 F.2d 230, 232 (3d Cir. 1986). The moving party has the initial burden of identifying evidence that, if uncontroverted, would entitle them to a directed verdict at trial. Tigg Corp. v. Dow Corning Corp., 822 F.2d 358, 362 (3d Cir. 1987); Equimark Commercial Financial Co. v. C.I.T. Financial Services Corp., 812 F.2d 141, 144 (3d Cir. 1987). The burden then shifts to the adverse party to point to the evidence showing a genuine issue for trial; i.e., the evidence that would allow a reasonable jury to find for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986), Matsushita Electric Industrial Co v. Zenith Radio, 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). However, the adverse party must show more than a "metaphysical doubt as to the material facts". Matsushita 475 U.S. at 586. In this case, disagreement between defendant and plaintiff turns more on questions of law than of fact. Plaintiff does not challenge defendants on most facts, and discrepancies can be reconciled with reference to the record.
II. CONTROL LIABILITY
Section 15 of the Securities Act of 1933 (15 U.S.C. 77 o) provides that:
Every person who, by or through stock ownership, agency or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency or otherwise, controls any person liable under section 11 [ 15 USCS § 77k] or 12 [ 15 USCS § 771], shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist.
Section 20 of the Securities Exchange Act (15 U.S.C. § 78 t(a)) provides:
Every person who, directly or indirectly, controls any person liable under any provision of this title or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.