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January 30, 1989

MOSES JAROSLAWICZ, Individually and on Behalf of All Others Similarly Situated, Plaintiff,

The opinion of the court was delivered by: FISHER


 Defendants were or are closely involved with Engelhard Corporation ("Engelhard"), *fn1" a concern engaged in a multitude of manufacturing activities which include the refining of gold, silver and platinum from both raw ore and metal scrap. On April 5, 1984, Engelhard publicly recognized a loss of roughly thirty-five million dollars at its metal refining facilities in Newark, New Jersey, and at Sheffield in the United Kingdom. Thereafter the value of Engelhard stock dropped appreciably and diminished the value of shares owned by plaintiff, Moses Jaroslawicz. Shortly thereafter, plaintiffs instituted this class action suit, alleging that Engelhard violated federal securities laws. Now, after over four years of discovery and preliminary motions, Engelhard has moved the court for summary judgment. *fn2"

 Before turning to the merits of Engelhard's motion, the court must first address certain procedural matters which bear upon the scope of its opinion. The parties agree that Jaroslawicz's twenty-one-page complaint alleges that Engelhard concealed a prior decision to write down the Newark and Sheffield facilities in order to avoid a devaluation of its stock. Defendants, however, object to Jaroslawicz's assertion that the document also sets forth a claim for failure to disclose material information regarding the operation and profitability of the two plants. *fn3" Engelhard cites the court's opinion of February 25, 1985, for the proposition that plaintiff's second theory is a new cause of action. *fn4" Defendants contend that "it is too late in the game" for plaintiffs to be allowed to amend their complaint. Defendants' Reply Memorandum, p. 4.

 The court's February 1985 opinion addressed a previous motion for summary judgment and therefore discussed only those theories which were the subject of the motion. Indeed, the court has consistently referred to plaintiff's second theory in its prior opinions. One year after its February opinion, the court described plaintiff's claim thus:

Plaintiff's complaint alleges that defendants artificially inflated the market value of their stock by misrepresenting certain facts and failing to disclose certain facts pertaining to financial worth, earnings and prospects. Plaintiff also alleges fraud and misrepresentation.

 Opinion of June 19, 1986 at p. 2. The court's interpretation is consistent with the complaint. At paragraph twenty-five of the complaint, plaintiff alleges:

Defendants employed devices, schemes and artifices to defraud and engaged in acts, practices and a course of conduct . . . which included the making of untrue statements of material facts, omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .

 Plaintiff's Complaint, Paragraph 35. See also paragraphs 47-48, 52(d)-(f), 52(h). In sum, plaintiff's claim for "material omission" is properly before the court. Therefore, the court turns to the merits of Engelhard's motion, bearing in mind that any "inferences to be drawn from the underlying facts . . . must be viewed in the light most favorable to" Jaroslawicz. United States v. Diebold, Inc., 369 U.S. 654, 655, 8 L. Ed. 2d 176, 82 S. Ct. 993 (1962).

 Section 10(b) of the Securities Exchange Act of 1934, and its enabling counterpart, Rule 10b-5 *fn5" impose liability for failure to disclose material facts which pertain to the value of corporate securities. *fn6" A "material fact" is one which would, if disclosed under the circumstances of the relevant transaction, have had a substantial likelihood of affecting a reasonable shareholder's deliberations concerning the transaction. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976). There need not be positive proof of reliance; all that is required is a showing that material facts were not disclosed. Id. at 447 n.9.

 It should be noted that summary judgment on the issue of materiality is generally considered inappropriate. No less an authority than the Supreme Court has said that:

The issue of materiality may be characterized as a mixed question of law and fact . . . . The determination requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact. *fn7"

  Id., 426 U.S. at 450 (citations omitted); and see Rogen v. Ilikon Corp., 361 F.2d 260, 265-66 (1st Cir. 1966); Harkavy v. Apparel Indus., Inc., 571 F.2d 737, 741 (2d Cir. 1978); Fisher v. Plessey Co. Ltd., 559 F. Supp. 442, 448 (S.D.N.Y. 1983); In re Washington Public Power Supply System, 650 F. Supp. 1346, 1351 (W.D. Wash. 1986). Summary judgment on the issue of materiality is appropriate only if Engelhard demonstrates that reasonable minds could not consider the undisclosed information significant to the deliberations of a reasonable investor. Northway, 426 U.S. at 450.

 Even if the undisclosed facts are material, however, Rule 10b-5 will not provide liability unless the defendant was under a "duty to speak." Chiarella v. United States, 445 U.S. 222, 235, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980); Flynn Bros. v. Bass Bros. Enterprises, Inc., 744 F.2d 978, 984 (3d Cir. 1984); Staffin v. Greenberg, 672 F.2d 1196, 1202 (3d Cir. 1982); Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir. 1985), cert. denied, 475 U.S. 1015, 89 L. Ed. 2d 310, 106 S. Ct. 1195 (1986); Cf. Zweig v. Hearst Corp., 594 F.2d 1261, 1266 (9th Cir. 1979) (holding that Rule 10b-5 requires disclosure of all material facts). Such a duty exists where the corporation has made affirmative statements regarding the complained-of matter. Flynn Bros., 744 F.2d at 984; Starkman, 772 F.2d at 238.

 Defendants cite a line of decisions beginning with S.E.C. v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied sub nom. Coates v. S.E.C., 394 U.S. 976, 22 L. Ed. 2d 756, 89 S. Ct. 1454 (1969), which address a defendant's duty to disclose "present facts which signal or influence future patterns" of corporate activity. Harkavy, 571 F.2d at 741. Defendants argue that a finding of a Rule 10b-5 duty to disclose the events leading to the April, 1984 write-down would incorrectly compel them to have divulged "the benefit of [their] superior . . . analysis by disclosing . . . educated guesses or predictions." Texas Gulf Sulphur, 401 F.2d at 848. They claim that the possibility of a write-down was so remote throughout the class period that they were under no obligation to disclose either the facts or the discussions which eventually led to it.

 This line of argument is inapposite. Texas Gulf Sulphur dealt with the imposition of a duty to speak in the context of insider silence regarding novel developments which were not addressed by prior statements. In contrast, this case presents a situation in which Engelhard's "duty to speak" arose due to the very fact that the company made statements concerning the health of its refining operations. In the Third Circuit, the making of an affirmative statement on a securities matter triggers a duty to include such information as would prevent the statements from misleading a reasonable investor. See e.g., Eisenberg v. Gagnon, 766 F.2d 770, 776-77 (3d Cir. 1985), cert. denied sub nom. Weinstein v. Eisenberg, 474 U.S. 946, 88 L. Ed. 2d 290, 106 S. Ct. 342 (1985) (upholding that part of a jury instruction that liability requires an affirmative statement coupled with material omissions); Flynn Bros., 744 F.2d at 984 (holding that a duty to speak arises when affirmative description of a tender offer is made); Staffin, 672 F.2d at 1204 (holding that affirmative statements trigger a duty to speak). Indeed, this rule may be found within Texas Gulf Sulphur itself. Texas Gulf Sulphur, 401 F.2d at 861-64. Plaintiff's "material omission" claim does not rely on some undisclosed-but-approaching event. Rather, it relies on the presence of affirmative statements rendered misleading by material omissions which, in the words of Texas Gulf Sulphur, deprived plaintiff and those similarly situated of "the disclosure of basic facts" which would have allowed them to "draw upon their own evaluative expertise in reaching their own investment decisions with knowledge equal to that of the insiders." Id. at 848-49.

 The applicable principles, therefore, demand a two-step inquiry. First, the court must determine whether the omitted facts were "material" under Northway. If the facts are material, they must be compared with any affirmative statements made by Engelhard regarding the two refineries to determine whether the statements were rendered misleading by the omission. Staffin, 672 F.2d at 1202. Summary judgment may be granted only if no reasonable fact finder could find for Jaroslawicz using these criteria.

 Plaintiff's complaint centers around two material omissions. First, Jaroslawicz contends that Engelhard planned to write down the Newark and Sheffield facilities before April 5, 1984. In support of this contention, Jaroslawicz points to the decreasing capital expenditures made on both factories, the idling of much or most of their productive apparati, and the high number of lay-offs and terminations at the plants. *fn8" These facts, however, cannot even raise an inference that Engelhard's management had made a prior decision to write down these facilities. At most they infer executive ineptitude; "'Congress by [section] 10(b) did not seek to regulate transactions which constitute no more than internal corporate mismanagement.'" Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977) (quoting Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 12, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971)).

 The record, however, is not entirely silent regarding a pre-planned write-down. One of the exhibits submitted by Jaroslawicz is a memorandum by Robert Pudlack, the Coopers & Lybrand manager in charge of an Engelhard audit. The memorandum, written on August 8, 1983, purports to record a meeting held five days earlier between Coopers & Lybrand and Engelhard personnel. The meeting was attended by Irving Isko, President, C.E.O. and Director of Engelhard, and by S.N. Roseberry, Engelhard's Vice President and Controller. Pudlack's memorandum relates that:

The meeting was held at Engelhard's request and related to the Company's proposed treatment of a write-down of certain P.P. & E. [Plant, Property & Equipment] at Delancy Street . . . .
* * * *
We were informed by Isko that the Company intends to have an appraisal of the going concern value of the refining operations performed as a basis to recover a write-down of the P.P. & E.
We agreed that a write-down was appropriate . . . .
. . . Isko expressed his concern about the adverse impact of a Delancy Street write-down on the trend of earnings. He further stated that the write-down is a recognition of inappropriate decisions made by predecessor management . . . . He requested our assistance to conceptualize a manner by which the impact of the write-down would not affect the earnings trends . . . .

 Plaintiff's Exhibit "G," pp. 1-2. The memorandum indicates that both Isko and Roseberry received copies. Id.

 This memorandum treats the write-down as an established fact, rather than a hypothetical alternative. It is evidence from which a jury could well find that responsible persons in Engelhard's management had determined a full year in advance of the April 5, 1984, announcement to write down the Newark facility. A reasonable jury could also conclude that Isko's exhortation that Engelhard "conceptualize a manner" of rendering the write-down harmless to the company's financial position was an open invitation to mislead the public as to the nature of the event.

 Defendants point out that Pudlack was informed in 1984 by Mr. Tom Fitzpatrick, another Coopers & Lybrand partner present at the August 3, 1983 meeting, that his memorandum "did not represent the sense of the meeting." Deposition of Pudlack at p. 81. Pudlack subsequently repudiated his earlier memorandum; he testified that the August 3, 1983 discussion concerned a possible option, rather than a determined course of action. Id. at 76-77. Apparently, none of the other persons listed on the memorandum's distribution section informed Pudlack of his error. Id. at 81-93. *fn9"

 Pudlack's August 8 memorandum is also contradicted by the testimony of other witnesses to the effect that a write-down was not planned in 1983. See e.g., Deposition of Isko at pp. 41, 43-44; Deposition of Holley at p. 25. But it should be noted that Fitzpatrick's request for redaction came almost one year after the August 3 meeting, in the context of an S.E.C. request to examine memoranda of that meeting. Id. at 81. Indeed, when asked what "caused" his revisionist communications with Fitzpatrick, Pudlack responded by identifying the S.E.C.'s request. Id.

 Pudlack's first memorandum, when compared with both Engelhard's affirmative statement of April 5, 1984, and the company's earlier statements about the management of the plants, could be considered to reveal a misleading omission of a material fact. The conflicting versions of what transpired at the August 3, 1983 meeting, as well as the circumstances surrounding Pudlack's alteration of his memorandum, create a genuine issue as to whether Engelhard planned a write-down long before the 1984 announcement. Because the credibility of witnesses is patently within the province of the jury, Losch v. Borough of Parkesburg, 736 F.2d 903, 909 (3d Cir. 1984); Donovan v. Metropolitan Dist. Council, 620 F. Supp. 131, 133 (E.D. Pa. 1985), the state of the evidence on this issue precludes summary judgment.

 The court now addresses Jaroslawicz's claim that Engelhard's statements about the Newark and Sheffield refineries were rendered misleading by the omission of material facts concerning those plants' operation. In doing so, the court notes that Engelhard's refining operations were, as Engelhard wrote in its 1982 annual Report, one of two "principal segments" of the company's operations. Plaintiff's Exhibit "F," p. 28. Indeed, Mr. Milton Rosenthal, a former Chairman of Engelhard's Board of Directors, testified that:

The refinery in a precious metal operation for a large precious metals company is an almost indispensable part of the conduct of such a business environment. If a large precious metals manufacturing company does not have a refinery of its own, it is at a basic commercial disadvantage in dealing with its competitors . . . .

 Deposition of Rosenthal, p. 20. Rosenthal, and Engelhard's reports, spoke of the company's refining capacity in general. However, Rosenthal also addressed the Newark and Sheffield facilities:

The conduct of the business of the refinery at Newark was important and that was because it was the primary refining facility in ...

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