SEC v. Weintraub: Businessman Liable for Multi-Billion Dollar Tender Offers

In SEC v. Weintraub, No. 11-21549-CIV-HUCK/BANDSTRA (S.D. Fla. Dec. 30, 2011), the court granted the U.S. Securities and Exchange Commission’s (“SEC”) motion for summary judgment against defendants Allen E. Weintraub and AWMS Acquisition, Inc., for violating Securities and Exchange Act sections 10(b) and 14(e) and SEC rules 10b-5 and 14e-8.

According to the SEC, Weintraub is the sole owner and director of AWMS Acquisition, Inc., d/b/a Sterling Global Holdings (“Sterling Global”).  On March 19, 2011, Weintraub sent a letter to Eastman Kodak Company (“Kodak”) that offered to purchase all of the company’s outstanding stock at a 46 percent premium for $1.3 billion.  Ten days later, Weintraub sent a similar letter to American Airlines’ parent company AMR Corporation (“AMR”), offering to purchase all of the company’s outstanding stock at a 48 percent premium for $3.25 billion.  Neither Kodak nor AMR responded to Weintraub’s letters.  Weintraub also contacted several reporters and media outlets, falsely informing them that Sterling Global was in “discussions” with Kodak and that “several large institutions” were backing him in the deal with AMR.

The SEC alleged that, despite Weintraub’s representation that he had received financing from banks to engage in these transactions, he in fact had received no financial backing from any of the three banks he approached.  Weintraub failed to disclose to Kodak, AMR, these companies’ shareholders, and the press that he pled guilty to money laundering and organized fraud in 2008, he was currently on probation, the United States District Court for the Southern District of Florida “permanently enjoined him from acting as an officer or director of any public company as a result of a previous violation of federal securities law” in 2002, he currently owed a judgment of $1,050,000 to the court, he filed for bankruptcy in 2007, and that Sterling Global was dissolved in 2010.

Section 10(b) and rule 10b-5 require that plaintiffs prove a material misrepresentation or omission, a connection between the misrepresentation or omission and purchase or sale of a security, and scienter.  Whereas ordinary plaintiffs must also prove reliance, causation, and economic loss, the SEC has a lower standard and is only required to show the first three elements.

The court held that the first element of the section 10(b) and rule 10b-5 claim was met, because Weintraub repeatedly made misrepresentations and omissions concerning “(1) his and Sterling Global’s ability and intention to consummate the deals with Kodak and AMR, (2) his personal background, (3) his ownership of stock in AMR, and (4) his representations to media outlets.”  Not only did Weintraub and Sterling Global lack the financial ability to purchase these companies’ outstanding stock, Weintraub consciously withheld material information regarding the prior dissolution of his company and his inability to act as an officer or director for the company, among several other items.

A false statement or omission is material when “there is a substantial likelihood that a reasonable investor would have believed the false or misleading statement or omission was important in deciding whether to purchase, sell, or hold securities.”  Weintraub’s statements to the two companies, their shareholders, and the press about his purported tender offers “gave the impression that [they] were serious and could be relied upon by investors”; thus, the court determined they were material.

The court held that the second and third elements of section 10(b) and rule 10b-5 were met because an offer to purchase a company’s outstanding stock is “in connection with” the purchase or sale of a security, and because Weintraub clearly intended to deceive the public when he sent offer letters after failing to acquire financing. 

The SEC also successfully proved Weintraub’s violations of section 14(e) and rule 14e-8.  Section 14(e) states that “[i]t shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact…in connection with any tender offer….”  The court held that Weintraub unmistakably made material misrepresentations and omissions regarding his purported tender offers and personal background. 

The primary materials for this case may be found at the DU Corporate Governance website.