Opinion ID: 692992
Heading Depth: 2
Heading Rank: 2

Heading: Anacomp's Tender Offer for Xidex and the Illicit Trading

Text: 10 By June of 1988, Anacomp and Xidex had enjoyed extensive dealings since the 1970's. Xidex manufactures microfilm and related products. Anacomp bought millions of dollars worth of microfilm and other products from Xidex annually. For years the two companies had talked of combining because their operations were complementary. 11 These discussions became more serious in 1988, however, because Xidex's financial condition was deteriorating. During this period Xidex retained Goldman Sachs for financial advice. After conducting an investigation, Goldman Sachs indicated that some joint marketing, merger or other arrangement with Anacomp appeared feasible and desirable. Thus, in February of 1988, Xidex invited Anacomp to acquire Xidex. Ferrero was initially taken aback by this proposal because Xidex was a much larger corporation than Anacomp. But by March 1988 he expressed interest and told Xidex that they needed to start a due diligence investigation. Still, no serious discussions about the acquisition took place at that time. 12 As Xidex's financial condition worsened, however, it took steps to secure a firm commitment from Anacomp. On June 2, 1988 Xidex's board authorized its president, Bert Zaccaria (Zaccaria), to ask Ferrero whether he was interested in acquiring Xidex and, if so, to check with his financiers to determine Anacomp's offering price for Xidex stock. By the next day, Ferrero and Zaccaria had arranged to meet in Las Vegas on June 6-7, 1988. Before that meeting, Ferrero called the lawyers and investment bankers whom he had used in prior Anacomp acquisitions. 13 When Ferrero met with Zaccaria to discuss Anacomp's acquisition of Xidex on June 6, 1988, Zaccaria, Ferrero, and Maio were all staying in the same Las Vegas hotel. This was no coincidence because Maio and Ferrero had planned to meet in Las Vegas for gambling and socializing on June 6, even before Ferrero scheduled his meeting with Zaccaria. Ferrero and Maio saw each other several times over the course of this weekend. 14 It was after these meetings that the trading at issue began. More specifically, Maio called Ladavac before he left his hotel in Las Vegas, and later Maio called his broker from the Las Vegas airport. Shortly after this call Maio's broker bought 5,000 shares of Xidex for Maio's account. Thirty minutes after Maio's order, Ladavac, who had never purchased stock in Xidex before, also bought 5,000 shares of Xidex and placed an order to sell 300 shares of Anacomp. 3 The next day, on June 8, Maio bought an additional 10,000 shares of Xidex and Ladavac sold 1,700 more shares of Anacomp. Later on June 23, 1988, Ladavac purchased 5,000 shares of Xidex and sold 4,000 shares of Anacomp. 15 Immediately after this June 6-7, 1988 meeting, both Anacomp and Xidex took steps to pursue the acquisition. On June 8, the day after Ferrero returned from his meeting with Zaccaria in Las Vegas, he assembled Anacomp's financial, legal, and investment banking people to coordinate Anacomp's due diligence investigation of Xidex. On that very day, Anacomp submitted a preliminary due diligence request. On June 10, Xidex's board met and discussed prices which would make the sale of Xidex acceptable. By June 14, 1988, Xidex and Anacomp had agreed on a price for the tender offer subject to confirmation upon completion of Anacomp's due diligence investigation. On that day, the companies signed a confidentiality agreement and met with their investment bankers in secret to begin exchanging highly sensitive information. The parties planned to sign an acquisition agreement on Friday, July 8, or Monday, July 11, 1988. 16 On July 6, 1988 Ferrero was preparing to fly to California to meet with Xidex in connection with the acquisition agreement. On that same day, Maio placed a 17-minute phone call to Ferrero. One minute after this call ended, Maio purchased 10,000 more shares of Xidex stock. Earlier that day, Ladavac had purchased 5,000 shares of Xidex and sold 2,000 shares of Anacomp. 17 Ferrero flew to California on July 7, 1988, for his confidential meeting with Xidex the next day. Maio placed a 14-minute phone call to Ferrero at his hotel on the morning of July 8, and shortly after this call Maio placed two orders to buy a total of 30,000 shares of Xidex. Later that same day Maio purchased 2,500 more shares of Xidex and sold some 22,800 shares of Anacomp. Ladavac bought 5,000 shares of Xidex minutes after Maio got off the phone with Ferrero and, shortly thereafter, sold 3,000 shares of Anacomp. Later this same day Maio called Ladavac from his car and she bought 5,000 more shares of Xidex and sold 5,000 more shares of Anacomp. 18 On July 10, Ferrero flew back to Indianapolis so that the next day he could preside over the Anacomp board meeting scheduled for the consideration and approval of the tender offer. Maio called Ferrero at his Indianapolis hotel just before 7 a.m. on Monday, July 11, and, starting an hour and a half later, Maio bought 35,000 shares of Xidex and sold 37,200 shares of Anacomp in a series of seven transactions. 19 On Tuesday, July 12, 1988, Anacomp and Xidex for the first time publicly announced Anacomp's planned tender offer. When the markets opened Xidex stock jumped over 26% and Anacomp stock dropped over 13%. Immediately after the announcement Maio and Ladavac sold all of the Xidex stock they had purchased since Maio's meeting with Ferrero in Las Vegas on June 6, 1988. Maio had purchased 80,000 shares of Xidex for $527,000 and made a profit of $211,000. He also sold $60,000 shares of Anacomp prior to the announcement thereby avoiding losses of $66,250. Ladavac had purchased 25,000 shares of Xidex for some $155,000 and made a profit of $78,750. She had also sold 16,000 shares of Anacomp before the announcement thereby avoiding losses of $15,750. 20 The trading of Maio, Ladavac, and others attracted the SEC's attention, and it began an investigation. During that investigation, Ferrero, Maio, and Ladavac were questioned by the SEC, and ultimately the SEC brought this civil enforcement action against each of them, and others. The day after the SEC filed suit, Ferrero consented to the entry of judgment against him without admitting or denying the allegations in the SEC's complaint. Pursuant to that judgment he agreed to pay a penalty of over $275,000. Maio and Ladavac denied any wrongdoing, and the case went to trial. 21 At trial, Maio and Ladavac denied giving or receiving tips and claimed that their trading was based on information available to investors at large. Maio testified that he ordered Xidex stock when leaving Las Vegas because his broker had called him there to recommend the purchase. But Maio's broker testified that he had never recommended the stock. Maio also claimed that he was in Florida during July and denied having made any calls to Ferrero, Ladavac, and his stockbrokers during that time. But the district court found that Maio had made these calls. 4 For her part, Ladavac denied receiving any tip from Maio and testified that she bought Xidex because a price movements chart prepared by a co-worker indicated Xidex stock was desirable. But that co-worker testified that his chart did not give a buy signal for Xidex at the time of Ladavac's trades. 22 After an extensive bench trial the district court entered judgment against Maio and Ladavac. In pertinent part, the district court found that information about the June 6-7 meeting between Ferrero and Zaccaria concerning the contemplated tender offer was material non-public information, and further, that the June 6-7 meeting was a substantial step by Anacomp towards commencing its tender offer for Xidex. The court also found that Ferrero misappropriated and gifted confidential information about this meeting to Maio, who then tipped Ladavac. The district court found that Maio and Ladavac had a derivative duty to disclose the material non-public information in their possession, because they knew that Ferrero's disclosure was improper, and that they breached this duty when they sold and bought shares in Anacomp and Xidex on the basis of that information. As a result, the district court found that their sales of stock in Anacomp violated Secs. 10(b) 5 and 14(e) 6 of the Exchange Act, section 17(a) 7 of the Securities Act, and Rules 10b-5 8 and 14e-3 9 promulgated thereunder; it also found that their purchases of Xidex stock violated Secs. 10(b), and 14(e) of the Exchange Act, and Rules 10b-5 and 14e-3. The district court entered judgment against the defendants and assessed fines and penalties. Maio and Ladavac appealed.