Court Opinion

ID: 2864739
Source: CourtListenerOpinion
Date Created: 2015-09-06 00:44:48.030246+00
Date Added: 2024-06-11T12:36:25.035216
License: Public Domain

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

                                          NO. 03-02-00184-CV

                             Basic Capital Management, Inc., Appellant

                                                      v.

              Dow Jones & Company, Inc., d/b/a The Wall Street Journal, Appellee

         FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT
            NO. GN003093, HONORABLE LORA J. LIVINGSTON, JUDGE PRESIDING

                 In this defamation suit filed by appellant Basic Capital Management, Inc. (ABCM@) against

Dow Jones & Company, Inc., doing business as The Wall Street Journal, we address whether statements

in articles published by Dow Jones characterizing a federal indictment are substantially true and therefore not

actionable. The district court granted summary judgment in favor of Dow Jones, dismissing BCM=s claims

of libel and business disparagement. On appeal, BCM challenges the granting of summary judgment,

contending that Dow Jones failed to establish that (i) the complained-of statements were true or substantially

true, (ii) BCM was a public figure, and (iii) Dow Jones was not negligent. Because we conclude that the

statements characterizing the indictment were substantially true as a matter of law, we affirm the judgment of

the district court.
                        FACTUAL AND PROCEDURAL BACKGROUND

The Indictment

                 On June 14, 2000, the United States Attorney=s Office for the Southern District of New

York unsealed indictments alleging that members of the five largest crime families in New York, along with

other individuals in various parts of the country, engaged in a massive conspiracy to manipulate stock prices.

 The 107-page indictment at issue here alleged that twenty-three defendants associated to form a

racketeering enterprise that engaged in Asecurities fraud, wire fraud, pension fund fraud, illegal kickbacks to

union officials, extortion, money laundering, bribery, witness tampering, and murder solicitation.@ Count

One of the indictment described the Ameans and methods@ of the enterprise, alleging that the defendants

sought to enrich the enterprise through securities fraud and wire fraud, and to conceal and promote the

enterprise=s unlawful activities by laundering proceeds of the scheme.

                 Although BCM, a Dallas real estate investment firm, was not a named defendant, it was

identified as an actor in a pension fund fraud and kickbacks scheme set forth in Count One of the

indictment. Specifically, the indictment identified a stock offering by American Realty Trust, a real estate

investment trust controlled by BCM, as a Afraudulent investment[] that appeared to be [an] investment[]

suitable for pension funds and that w[as] designed to appear legitimate.@ The indictment further alleged that

BCM Aagreed with the enterprise to cause American Realty Trust to issue a series of preferred stock@ and

Afurther agreed with the enterprise@ that for every $10 million in stock sales, BCM Awould cause

approximately $2 million of the proceeds to be paid secretly to the enterprise.@

                                                      2
                Included in the list of the twenty-three defendants were Gene Phillips and A. Cal Rossi, who

the indictment identified as associated with BCM. The indictment alleged that Gene Phillips Asecretly

controlled@ BCM and agreed with members and associates of the enterprise Ato defraud union pension

funds in connection with the sale of American Realty preferred stock.@ The indictment further alleged that

Cal Rossi, as managing director of capital markets for BCM, Astructured the fraudulent . . . [s]tock offering@

and Aagreed that a portion of the offering proceeds would be used to pay secret bribes to union officials.@

Phillips and Rossi were named as defendants in several counts of the indictment, including Count One.

The Wall Street Journal Articles

                On June 15, the day after the indictments were unsealed and arrests were made, the

Journal ran the first of three articles that named BCM and discussed the allegations contained in the

indictment. On June 20 and June 27, following press releases issued by BCM, the Journal ran follow-up

articles.1

     June 15

                In its AHeard on the Street@ column, the Journal published an article entitled AStock-Fraud

Case Alleges Organized-Crime Tie@ and AProsecutors Say Stocks Of 19 Firms Were Manipulated.@

Reporting on the charges against 120 defendants, the article described Athe largest one-day securities-fraud

         1
           BCM challenges statements contained in the June 20 and June 27 articles, but none in the initial
article on June 15.

                                                      3
indictment ever,@ alleging various stock manipulation schemes involving microcap stocks and Adot.coms.@

Recounting a scheme in the indictment to issue fraudulent stock and pay kickbacks to corrupt union officials,

reporters for the Journal wrote:

        The mob=s alleged racketeering enterprise also sought to defraud union pension funds by
        structuring investments that allowed for secret kickbacks to corrupt union officials, the
        charges said. One of them, officials said, was a preferred stock offering of American
        Realty Trust, a real-estate investment trust listed on the New York Stock Exchange,
        allegedly arranged through Gene Phillips, who controlled Basic Capital Management, the
        Dallas investment adviser to the REIT.

        In a statement, Basic Capital, which manages $2.5 billion and advised four publicly traded
        real-estate companies, said Mr. Phillips and another key executive were Aout of the
        country,@ one on vacation and the other on business. AWe are shocked and surprised@ by
        the news, the company said.

     June 20

                Stock in publicly traded companies affiliated with BCM fell sharply after the indictment was

released. As a result, BCM received margin calls, then on June 19 issued a press release that it might

default on $37 million in obligations. An assistant reporter with the Journal=s Dallas bureau received

the June 19 press release about the margin calls. She called BCM for an interview, but its director of

investor relations said that no one would be made available for comment. The reporter began to draft an

article based on the press release, then read other news stories for background information. Another

                                                     4
newspaper characterized the indictment as alleging that Atwo Dallas men were to launder bribe money and

kickbacks that went to pay corrupt union officials and mobsters.@2

                The Journal ran the article on June 20. Appearing on page A10, the article, entitled ABasic

Capital Reports It Is Likely To Default On Its Margin Calls,@ contained the following statement: AFederal

authorities allege that the enterprise laundered most of its bribe money through Basic Capital Management.@

     June 27

                The reporter wrote another article after receiving a June 26 press release from BCM. In its

press release, BCM stated that it was making progress in margin debt restructuring. Appearing on page

C8, the article was entitled AAmerican Realty, Basic Capital Reach Agreements On Debt.@ It summarized

the press release and contained a statement that Atwo men associated with Basic Capital were charged with

participating in a moneylaundering scheme with alleged mob ties.@

    July 12

                Complaining about the June 20 article, BCM=s general counsel sent a letter on June 29 to

the managing editor of the Journal asking for a correction. He wrote: Athere has been absolutely no

allegation made by Federal authorities . . . that Basic Capital or any of its officers, directors or employees

ever laundered money for anyone.@ The Journal issued a correction on July 12, stating that A[t]wo of Basic

        2
        At oral argument, counsel for BCM advised that BCM did not file a lawsuit against the other
newspaper.

                                                      5
Capital Management=s former advisers who resigned last month were charged with wire fraud and

conspiring to pay illegal kickbacks through Basic Capital Management, but were not charged with money

laundering.@

The Lawsuit

                BCM filed suit against Dow Jones for defamation and business disparagement, alleging that

the two statements in the June 20 and June 27 articles falsely stated that BCM was involved in money

laundering. BCM did not challenge the June 15 article. Dow Jones filed a traditional motion for summary

judgment on the grounds that the articles were not libelous because they were true or substantially true,

BCM was a public figure for the purposes of the suit, and BCM could not prove actual malice or negligence

as a matter of law. The district court granted the motion for summary judgment without specifying the

ground and rendered judgment in favor of Dow Jones.

                                             ANALYSIS

                                                   6
                The standard for reviewing a motion for summary judgment is well established: (i)

The movant for summary judgment has the burden of showing that no genuine issue of material

fact exists and that the movant is entitled to judgment as a matter of law; (ii) in deciding whether

there is a disputed material fact issue precluding summary judgment, evidence favorable to the

non-movant will be taken as true; and (iii) every reasonable inference must be indulged in favor of

the non-movant and any doubts resolved in its favor. Nixon v. Mr. Prop. Mgmt. Co., 690 S.W.2d
546, 548-49 (Tex. 1985). When a defendant seeks to obtain summary judgment based on a

plaintiff=s inability to prove its case, the defendant must conclusively disprove at least one

element of each of the plaintiff=s causes of action. Tex. R. Civ. P. 166a(c); Huckabee v. Time

Warner Entm=t Co., 19 S.W.3d 413, 420 (Tex. 2000). Once the movant establishes that it is entitled to

summary judgment, the burden shifts to the non-movant to show why summary judgment should not be

granted. See Casso v. Brand, 776 S.W.2d 551, 556 (Tex. 1989). Because the trial court=s order

does not specify the ground or grounds relied on for its ruling, we will affirm the summary

judgment if any of the theories that Dow Jones advanced are meritorious. See Carr v. Brasher,

776 S.W.2d 567, 569 (Tex. 1989).

                BCM alleges in its first issue that Dow Jones did not establish as a matter of law that the

statements in the June 20 and June 27 articles were true or substantially true. BCM further contends that

the June 20 statement, that AFederal authorities allege that the enterprise laundered most of its bribe

money through Basic Capital Management,@ and the June 27 statement, that Atwo men associated with

Basic Capital were charged with participating in a moneylaundering scheme with alleged mob ties,@ were

                                                    7
neither true nor substantially true, because BCM was not named as a defendant and was not mentioned as a

participant in a money-laundering scheme. BCM contends that the false reporting harmed its reputation.

Because the parties agree that the challenged statements only characterize the allegations of the indictment,

and do not purport to portray the underlying events described therein, our task is necessarily limited to

determining whether the articles accurately report the charges set forth in the indictment.

                 To prevail on a defamation claim, the plaintiff must prove that the defendant published a

statement that was defamatory about the plaintiff, while acting with either actual maliceCif the plaintiff was a

public official or public figureCor negligenceCif the plaintiff was a private individualCabout the truth of the

statement. WFAA-TV, Inc. v. McLemore, 978 S.W.2d 568, 571 (Tex. 1998). A written statement is

defamatory if it exposes a person to public contempt or financial injury, or if it impeaches a person=s

reputation. See Tex. Civ. Prac. & Rem. Code Ann. ' 73.001 (West 1997). To prevail on a business

disparagement claim, the plaintiff must prove publication by the defendant of the disparaging words, falsity,

malice, lack of privilege, and special damages. Prudential Ins. Co. of Am. v. Financial Review Servs.,

Inc., 29 S.W.3d 74, 82 (Tex. 2000). A statement that is true or substantially true cannot support a

claim for either defamation or business disparagement. See Hurlbut v. Gulf Atl. Life Ins. Co., 749
S.W.2d 762, 766 (Tex. 1987). Therefore, if Dow Jones shows the substantial truth of the articles

as a matter of law, it will be entitled to summary judgment. See McIlvain v. Jacobs, 794 S.W.2d
14, 15 (Tex. 1990).

                 The substantial truth test stems from the freedom of speech and freedom of press

protections of the First Amendment. See Masson v. New Yorker Magazine, Inc., 501 U.S. 496,

                                                       8
516-17 (1991). Under the substantial truth test, the truth of the statement in the publication on which

an action for libel is based is a defense to the action. McIlvain, 794 S.W.2d at 15; see also Tex.

Civ. Prac. & Rem. Code Ann. ' 73.005. A statement is substantially true, and thus not actionable,

if its Agist@ or Asting@ is not substantially worse than the literal truth. See McIlvain, 794 S.W.2d at

16; Dolcefino v. Randolph, 19 S.W.3d 906, 921 (Tex. App.CHouston [14th Dist.] 2000, pet.

denied). This evaluation requires us to determine whether, in the mind of the average person who

read the statement, the allegedly defamatory statement was more damaging to the plaintiff=s

reputation than a truthful statement would have been. McIlvain, 794 S.W.2d at 16; Dolcefino, 19
S.W.3d at 921. When the underlying facts as to the gist of the libelous charge are undisputed, we

disregard any variance regarding items of secondary importance and determine substantial truth

as a matter of law. McIlvain, 794 S.W.2d at 16.

     The June 20 Article

                We first examine whether the June 20 article is true or substantially true in stating that the

indictment alleges that the racketeering enterprise laundered bribe money through BCM. BCM urges that

the statement is false because the indictment does not allege that BCM, Phillips, or Rossi participated in the

money-laundering scheme. BCM also argues that the gist of the accusation of money laundering is more

damaging to BCM=s reputation in the mind of the average reader of the Journal than a truthful statement

would have been. We disagree with both contentions.

                                                      9
                As the substantive racketeering count of the indictment, Count One defines the racketeering

enterprise and names twenty-three defendants, including Phillips and Rossi. In addition to describing the

money-laundering and kickback schemes engaged in by the enterprise, Count One recites the purposes of

the enterprise to include Aconcealing and promoting the enterprise=s unlawful activity by laundering the

proceeds of securities fraud and wire fraud.@ While the indictment does not name BCM as a defendant, it

also does not suggest that the company played a passive role. According to Count One of the indictment,

BCM Aagreed to cause@ the issuance of stock and Afurther agreed with the enterprise@ that for every $10

million in stock issued, it would Acause approximately $2 million of the proceeds to be paid secretly to the

enterprise.@

                The crime of racketeering includes a pattern of illegal activity that encompasses a wide

range of crimes, including, inter alia, bribery, money-laundering, extortion, embezzlement, wire and mail

fraud, gambling, and murder. See 18 U.S.C. ' 1961(1). Here, Count One sets forth a panorama of

nineteen racketeering acts that include, inter alia, securities fraud, extortion, money-laundering

conspiracies, kickback schemes, wire fraud, and witness tampering. While the article could have been

more precise in describing BCM=s alleged role, it accurately depicted the allegations of the indictment that

the enterprise engaged in money laundering and that the bribe moneys, i.e., kickbacks, were obtainedCas

it was allegedCthrough the issuance of fraudulent stock by BCM and a second fraudulent investment known

as the TradeVentureFund, which was unrelated to BCM. The article was clear that the indictment did not

name BCM as a defendant. Moreover, as described in the article, BCM=s role was as consistent with the

company being an unwitting conduit as with being a knowing participant.

                                                    10
                 BCM argues that a statement suggesting that BCM was engaged in money laundering would

be more damaging to BCM=s reputation because of the opprobrium associated with money laundering as

well as the availability of forfeiture as a penalty under the federal crime of money laundering. An ordinary

reader of the Journal, BCM asserts, could reasonably believe from the article that BCM was at risk for a

multimillion-dollar forfeiture.

                 The taint of the alleged defamatory statement is certainly no greater in the mind of the

average reader than a more exacting truthful statement would have been. An ordinary reader could well

conclude that the description of BCM as a money-laundering conduit carries less Asting@ than the portions of

the indictment that actually mention BCM=s role. In the plain words of the indictment, BCM was alleged to

be an active participant in the charged conspiracy.

                 Moreover, because of the broad availability of forfeiture in RICO3 cases, BCM was no

more exposed to forfeiture for alleged money laundering than it would be for the activities actually alleged in

the indictment. RICO provides specifically that a defendant convicted of a violation of the Act Ashall forfeit

to the United States . . . any interest the person has acquired or maintained in violation of section 1962

[and] any property constituting, or derived from, any proceeds which the person obtained, directly or

indirectly, from racketeering activity or unlawful debt collection in violation of section 1962.@ 18 U.S.C. '

1963(1), (3). Courts have held that the statute creates a mandatory obligation of forfeiture after a RICO

        3
         RICO is an acronym for the Racketeer Influenced and Corrupt Organizations Act. See, e.g.,
United States v. Cantu, 185 F.3d 298, 300 (5th Cir. 2000).

                                                      11
conviction. See, e.g., United States v. Faulkner, 17 F.3d 745, 774-75 (5th Cir. 1994). Thus, the

indictment itself raised the specter of forfeiture of any interests of convicted defendants.

                A comparison of the challenged statement and the indictment demonstrates that the article

was substantially true and not inaccurate, and that any variance was minor. See McIlvain, 794 S.W.2d at

16.

      The June 27 Article

                The June 27 article, as with the June 20 article, arose from a BCM press release. The

article reported information from the press release that BCM had avoided threatened margin calls. It also

included background information about the indictment. The allegedly defamatory statement, that Atwo men

associated with Basic Capital were charged with participating in a moneylaundering scheme with alleged

mob ties,@ is true or substantially true. That Phillips and Rossi were associated with BCM was clear from

BCM=s own press release that Phillips and Rossi Astepped aside@ from their Aday-to-day responsibilities@

with the company. Phillips was active in the management of the company, and Rossi was director of capital

markets for BCM.

                Phillips and Rossi were charged in Count One of the indictment as members of the

enterprise, which included members of organized crime families. Count One, a forty-seven page description

of the racketeering scheme, listed the Ameans and methods of the enterprise,@ including money laundering,

union pension fund fraud, and kickback schemes. Additionally, the indictment alleged that Phillips Aagreed .

. . to defraud union pension funds@ and that Rossi structured the stock offering and Aagreed that a portion of

the proceeds would be used to pay secret bribes.@ The allegations of the indictment thus fall under the

                                                     12
ambit of participating in a money laundering scheme, which includes disguising illegally obtained funds

so that the funds appear to come from legitimate sources or activities. See 18 U.S.C. ' 1956.

Money laundering occurs in connection with a wide variety of crimes, including fraud and racketeering. See

id. Because the gist or sting of the statement characterizing the indictment in the June 27 article is not worse

than the literal truth, the statement is substantially true as a matter of law. See McIlvain, 794 S.W.2d at 16.

We overrule BCM=s first issue.4

                                              CONCLUSION

                  We conclude that the statements characterizing the indictment in the June 20 and June 27

articles are substantially true as a matter of law. Because Dow Jones has negated an essential element of

BCM=s causes of action, we affirm the judgment of the district court granting summary judgment in favor of

Dow Jones.

                                                   __________________________________________

                                                   Jan P. Patterson, Justice

Before Chief Justice Aboussie, Justices Patterson and Puryear

Affirmed

Filed: October 17, 2002

        4
            In light of our disposition of BCM=s first issue, we need not address its remaining issues.

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Publish

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