Opinion ID: 557198
Heading Depth: 2
Heading Rank: 1

Heading: Acquisition of LH Investors Stock

Text: The proxy statement recited that 38 Neither Mr. Greenberg nor any other present director or officer of the Company owns beneficially or will acquire an equity or debt interest in AEA, LHI, Holdings or [LH] Investors. 39 LH Investors was an AEA subsidiary which in effect became the sole owner of Loehmann's. Four months after the merger Greenberg was offered the opportunity to purchase stock in LH Investors on favorable terms, which he did. Mendell alleges that this purchase was contemplated and negotiated prior to the merger contrary to the above quoted passage of the proxy statement. The district court dismissed this contention in Mendell II for insufficient supporting evidence. It relied on the testimony of the president of AEA that it was the regular policy of the company to offer stock incentives to its management. It reasoned that the sale of stock to Greenberg was as consistent with this unilateral policy as with the allegation of a pre-merger arrangement. 715 F.Supp. at 88. 40 We think the district court failed to consider circumstantial evidence beyond the acquisition of LH Investors stock itself. Mendell submitted a memorandum dated October 16, 1980 prepared by Ronald Kominski, then a manager for Continental Illinois National Bank and Trust Company of Chicago, recommending that the bank approve a loan to AEA for the acquisition of Loehmann's. Kominski stated in this memo that [m]anagement, presently in place, will be retained and offered a 14% equity participation in the new corporation. (emphasis deleted). Kominski testified in his deposition that this statement regarding equity participation most probably came from someone at AEA. 41 Another confidential memorandum dated November 1980 was prepared by AEA and entitled Memorandum Relative to the Purchase of Loehmann's, Inc. It contained a table styled Return on Investment Analysis, which has columns of financial information relating to Loehmann's. At the top of the table it says 15% Growth[,] Value in Year Five $ 10x Net Operating Income. During discovery AEA produced for Mendell a second table called  'S' 15% Growth Return on Investment Analysis. Its heading stated Value in Year Five $ 10x Assuming Interest of 15 1/2% and $31/Share Price. This second table also had columns of financial information under almost identical headings and containing almost identical figures as the first table. But in the second table for S company, there is a line that reads S's Mgmt $ 5% under a column indicating percentages of stock. Mendell claims that S company was in reality Loehmann's and that the S table shows that it was planned that Loehmann's management would receive common stock equal to 5 percent of the capitalization of LH Investors. 42 When questioned about the table for S company at his deposition, Carl Hess, AEA's president testified that he did not know which company it referred to, but that it did not refer to Loehmann's. Hess was unable to explain why the two tables were nearly identical. Nor could he explain why AEA had produced the document in response to Mendell's discovery request if it did not refer to Loehmann's. A reasonable juror could disbelieve Hess' testimony, find that the S table referred to Loehmann's and that it indicated that AEA had planned prior to the merger to give Loehmann's management, including Greenberg, shares of stock in LH Investors. 43 If Mendell is able to persuade a jury that AEA had in fact planned prior to issuance of the proxy statements to give Greenberg stock, and that Greenberg had negotiated the arrangement, then the statement that neither Greenberg nor any other officer will acquire an equity ... interest in ... [LH] Investors, [Inc.] was false and misleading under Rule 14a-9. Since a jury could reasonably infer that such an agreement took place in light of the table for S company and the testimony of Kominski, summary judgment dismissing the claimed failure to disclose the acquisition of LH Investors stock was improper. See Saxe v. E.F. Hutton & Co., 789 F.2d 105, 111 (2d Cir.1986); Hahn v. Breed, 606 F.Supp. 1557, 1559-61 (S.D.N.Y.1985).