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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[X] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
GOTHAM PARTNERS, L.P., et al., ) CIVIL ACTION NO. 1:98 CV 0272
)
Plaintiffs, ) JUDGE DONALD C. NUGENT
)
vs. )
) DEFENDANT FIRST UNION'S
FIRST UNION REAL ESTATE EQUITY ) SUPPLEMENTAL MEMORANDUM
AND MORTGAGE INVESTMENTS, ) IN SUPPORT OF ITS MOTION FOR
) PRELIMINARY INJUNCTION(1)
Defendant. )
Even without the benefit of the most basic discovery, the evidence
currently available to First Union Real Estate and Mortgage Investments ("First
Union") strongly supports a serious, albeit as yet circumstantial, case that an
illegal, undisclosed group of investors was formed in late 1996 or early 1997 by
Gotham Partners, L.P. and Gotham Partners II, L.P. (collectively, "Gotham") to
obtain control of First Union, and that Gotham and other group members continued
to purchase shares of First Union on the open market from unsuspecting
shareholders who were unaware that they could, and should, demand a premium for
selling control of their company. This group has never disclosed their scheme,
even to this day, to First Union, its long-time shareholders, and the investing
public in required filings with the Securities and
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(1) First Union files this Supplemental Memorandum in Support of its Motion for
Preliminary Injunction pursuant to this Court's request.
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Exchange Commission ("SEC"). These omissions are clear violations of Sections
13(d) and 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and
the rules and regulations thereunder, whose specific purpose is to ensure that
such acquisitions do not occur without full explanation to the public market
(Section 13(d)), and that shareholders do not vote away control without full and
fair information (Section 14(a)). Absent such disclosure, investors are forced
to make purchase and sale decisions on a daily basis without understanding the
reality of the situation or the likely future of their chosen investment
vehicle, and the Gothams of the world are free to manipulate the market through
selective and misleading disclosures and statements as to their purpose and
intent. That is exactly what has transpired here.
First Union's claims -- and its urgent plea for additional discovery
and for a hearing on its motion for preliminary injunction -- are based on:
(1) a pattern of previous activity by combinations of the same group
members whereby they have secretly worked together without
appropriate disclosure to obtain control of other companies,
including other "paired-share" REITs like First Union;
(2) suspicious communications and parallel patterns of investment in
First Union by the group members, including unusual timing of
conversions of preferred shares into voting shares of beneficial
interest;
(3) group members' failure to disclose (at least until very recently)
any purpose other than mere passive "investment," notwithstanding
their concurrent complaints about First Union and its management;
and
(4) repeated communications between suspected group members and First
Union pressing for seats on First Union's Board of Trustees, not
only for themselves, but for other group members as well.
Based on this information, it is clearly appropriate under the Federal Rules of
Civil Procedure for First Union to proceed with its document subpoenae from
these group members and to depose their representatives to prepare for a hearing
on First Union's claims.
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As with their previous corporate victims, Gotham's group has sought to
disparage First Union's management and wrest control from unsuspecting
shareholders without even buying their shares, let alone paying a premium, take
short-term profits, and disregard the organizational stability of the company
including, in the case of First Union, its special tax status as a REIT. If this
Court does not take action prior to the May 19, 1998 Special Meeting of First
Union shareholders, at which time Gotham's board-packing proposal will otherwise
be considered without the benefit of accurate and complete disclosures, Gotham
and its group maintain they are likely to gain control of First Union. If that
occurs, the fox will rule the roost, leaving no one to challenge Gotham's
securities violations. The time to protect the shareholders, who are currently
being asked to submit proxies for their votes based on complete misinformation,
is now.
I. FIRST UNION IS A REIT AND CANNOT BE TAKEN OVER WITHOUT CONCERTED EFFORT
First Union is a Real Estate Investment Trust ("REIT"). It is organized
under Ohio law as an unincorporated business trust pursuant to a declaration of
trust. First Union's Declaration of Trust and its By-Laws prohibit any
shareholder from owning more than 9.8% of the outstanding shares of beneficial
interest in First Union, a provision which is aimed at protecting First Union's
preferred tax status as a REIT. This ownership limitation, and the resulting
need for cooperation among investors interested in effecting a takeover, cannot
be overemphasized.(2)
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(2) The illicit nature of secretive stock ownership underlying Section 13(d)
violations is illustrated by SEC V. DREXEL BURNHAM LAMBERT, ET AL., 837 F.Supp
587 (S.D.N.Y. 1993). DREXEL concerns the stock "parking" activity of Victor
Posner, who was contractually obligated to limit his ownership of the
outstanding voting securities of Fischbach Corporation to no more than 24.9%, a
restriction not unlike the First Union 9.8% ownership restriction in character.
Posner conspired to evade that restriction by arranging for others (namely Ivan
Boesky, with the assistance of Michael Milken) to purchase shares on his behalf
pursuant to secret, handshake understandings. The substance of these agreements,
which created a "group" within the meaning of Section 13(d) and its underlying
regulations, were never disclosed by Posner or Boesky in their Schedule 13D
filings. These violations resulted in an order requiring Posner to place stock
under his control into a voting trust and compelling the disgorgement of over
$3.6 million to the U.S. Treasury. SEE ALSO SEC V. DREXEL BURNHAM LAMBERT, 956
F.Supp 503 (S.D.N.Y. 1997).
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The Gotham entities are considered by the investment community to be
"hedge funds," primarily interested in short-term investments.(3) It is well
understood in the investment community that a hedge fund's business purpose is
to effect a quick profit by any means, fair or foul, without regard for the
long-term interests of other shareholders or corporate integrity. In an ordinary
takeover situation, a raider like Gotham could simply purchase enough of the
outstanding voting shares of its target to gain control. However, because
Gotham's target in this case is a REIT subject to the 9.8% ownership restriction
described above, Gotham must have the agreement of several other shareholders in
order to gain control. Surreptitiously, this is exactly how Gotham has
proceeded.
II. OVERVIEW OF GOTHAM'S SECURITIES VIOLATIONS
The primary focus of First Union's planned discovery is its claims
under Section 13(d) of the Exchange Act, in particular its claim that Gotham
failed to disclose the existence of its group of investors acting in concert as
early as 1996 to take control of First Union. Section 13(d) requires persons who
acquire more than 5% of the outstanding shares of a class of securities in a
publicly traded company to file a disclosure statement (i.e., "Schedule 13D")
with the SEC, which includes, inter alia, a statement of the person's purpose,
its formal or informal combinations or agreements with other shareholders, and
the source of funds with which its investment was made. A "person" includes "two
or more persons act[ing] as a partnership, limited partnership, syndicate, or
other group for the purpose of acquiring, holding, or disposing of securities of
an issuer." 15 U.S.C. Section 78m(d)(3); see also 17 C.F.R.
section 240.13d-5(b)(1) ("Where
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(3) In his deposition in this case, REIT analyst Kevin Comer of the firm BT Alex
Brown testified that Gotham is known to be a hedge fund, focused on short-term
profits. See Transcript of Comer deposition at 34 (Exhibit A). A definition of
hedge fund is provided by the DICTIONARY OF FINANCE AND INVESTMENT TERMS
(Barron's Educational Series, Inc. ed., 4th ed. 1995) at 238-39 (Exhibit B).
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two or more persons agree to act together for the purpose of acquiring,
holding, voting, or disposing of equity securities of an issuer, the group
formed thereby shall be deemed to have acquired beneficial ownership . . . of
all equity securities of that issuer beneficially owned by any such persons.")
Whether a group exists depends on whether or not members have "combined
in furtherance of a common objective." WELLMAN V. DICKINSON, 682 F.2d 355, 363
(2d. Cir. 1982), CERT. DENIED, 460 U.S. 1069 (1983). "[T]he concerted action of
the group's members need not be expressly memorialized in writing." Id.
Circumstantial evidence is routinely relied upon to determine whether a group
exists. ID. For example, the court in SEC V. SAVOY INDUSTRIES, INC., 587 F.2d
1149, 1164 (D.C. Cir. 1978), CERT. DENIED, 440 U.S. 913 (1979), upheld a lower
court ruling, based largely on circumstantial evidence, that the defendant had
formed a common purpose with other individuals to gain control of Savoy and,
thus, was liable for issuing a misleading Schedule 13D. The court relied, in
part, on defendant's discussions with the other investors regarding possible
management changes they might be able to effect, expansion of Savoy's business
into new areas, and defendant's influence over another alleged group member. The
court concluded that the defendant had effectively joined forces with the other
group members -- and should have disclosed this fact in its Schedule 13D. As
discussed below, Gotham has engaged in similar concerted activity with an eye
toward seizing control of First Union, all without the required public
disclosure.
On June 4, 1997, Gotham filed a Schedule 13D with the SEC with respect
to its acquisition of more than 5% of the outstanding shares of beneficial
interest in First Union. Gotham has filed several amendments to that Schedule
13D. The original Schedule 13D failed to satisfy the requirements of Section
13(d) of the Exchange Act, and this inadequate disclosure has
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not been fully corrected by the subsequent amendments. Among other things, First
Union believes Gotham has:
(1) failed to identify and disclose the "group" formed by Gotham whose
purpose and intent has been and is to take control of First Union,
sell off its assets, and/or effect significant changes in the
organization, structure and management of First Union;
(2) failed to identify the members of this undisclosed group;
(3) failed to disclose the true source of funds for the shares
acquired by the group;
(4) failed to disclose the group's true plans and intentions for First
Union; and
(5) failed to disclose any and all contracts, arrangements,
understandings and/or relationships between it and other
individuals and entities with respect to First Union.
These incomplete and misleading Schedule 13D filings have materially defrauded
the market and have allowed Gotham and those acting in active concert with them
to acquire and hold at least 30% of First Union's shares without disclosing to
First Union's shareholders from the very beginning the information required by
the federal securities laws, including the fact of their combination and their
intent to force a change in control of First Union.
Seven months after filing their original Schedule 13D, Gotham began a
proxy contest to replace the three trustees on First Union's nine-member Board
of Trustees whose terms were expiring, to expand the Board of Trustees by an
additional six seats, and to have its own six-member slate fill those seats
("the Proposal"). The Proposal was disclosed in a Schedule 13D filed on January
8, 1998. However, the fact that the Proposal was the product of a pre-existing
plan and agreement of a group, who together hold nearly thirty percent of First
Union's stock, was not disclosed in either Gotham's original Schedule 13D, its
amendments, or in Gotham's proxy solicitation materials.
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With respect to its proxy solicitation claims, First Union also seeks
relief under Section 14(a) because: (1) Gotham improperly solicited support for
its takeover plans among members of the group long before proxy materials were
ever filed with or cleared by the SEC; (2) Gotham's filed January 1998 proxy
materials continued to omit discussion about the group and were evasive about
Gotham's takeover purpose; (3) only recently, and after mailing its first set of
proxy solicitation materials, did Gotham reveal a proposed strategy for First
Union in response to threatened legislative changes to First Union's tax status,
but still without disclosing its unlawful group or plans to turn the Trust into
a speculative "opportunity fund;" and (4) any subsequently proposed revisions to
Gotham's proxy materials will come too close to the scheduled May 19 Special
Meeting to afford shareholders a real opportunity to make an informed choice.
During the entire period that these false and misleading public filings have
been propounded to the market, Gotham has continued to purchase shares of First
Union, and innocent investors have continued to make purchase and sale decisions
in reliance upon Gotham's avowed, albeit false, filings. Both the Section 13(d)
and 14(a) claims form a basis for First Union's motion for preliminary
injunction.
III. THE GROUP'S KNOWN CONCERTED ACTIVITY
A. THE PATTERN OF UNDISCLOSED GROUP CONDUCT
Although it is likely not to be an exhaustive list, First Union has
identified three major actors in the Gotham group. First, of course, is Gotham,
which began acquiring shares of beneficial interest in First Union in
mid-November 1996, when it purchased more than 500,000 shares. It purchased an
additional 200,000 shares before the end of January 1997, and by June 1997 was
compelled to file a Schedule 13D with the SEC reporting ownership of more than
1.9 million shares -- over 6.7% of First Union's outstanding voting shares of
beneficial interest.
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This percentage increased to 8% by September 1997 and approached the 9.8% limit
in October 1997.
Another participant has been Apollo Real Estate Advisors, L.P.
("Apollo"), which first reported its stake in First Union in a November 21, 1996
Schedule 13D. At that time, Apollo held preferred shares that were convertible
into approximately 725,000 shares of beneficial interest, having purchased its
entire interest in the preceding two weeks. By late December, Apollo had
acquired an additional block of over 200,000 common shares of First Union. By
continuing to buy both preferred and common shares, Apollo acquired the
equivalent (assuming conversion of preferred shares) of approximately 2,136,000
voting shares by June 1997.
The third participant is Franklin Mutual Advisors, Inc. ("Franklin"),
which reported in a November 22, 1996 Schedule 13G(4) ownership of 569,000
preferred shares of First Union, convertible into almost 1.9 million common
shares. A little over a year later, Franklin reported the acquisition of an
additional block of one million common shares, for a total beneficial interest
equivalent to 2.9 million voting shares in First Union.
These major participants deserve attention for more than their
holdings in First Union. They have each previously worked together, in various
combinations, to take control of a series of public companies without disclosing
their plans to the public market. For example, in 1996-1997, Apollo and Gotham
actively worked together in an ultimately unsuccessful attempt to obtain control
of Santa Anita Realty Enterprises and its affiliate, Santa Anita Operating
Company, which together formed another paired-share REIT. Gotham's William
Ackman testified briefly in state court proceedings that Gotham had purchased
its 8% stake in Santa Anita while "absolutely"
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(4) A Schedule 13G is intended for use only by institutional, passive investors,
who do not intend to participate in, control or influence management of an
entity. 17 C.F.R. section 240.13d-1(b)(1) Its vociferous criticism of First
Union management and its efforts to ensure a change in control clearly
disqualifies Franklin as a "passive investor."
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working with Apollo to acquire control of Santa Anita. Notwithstanding this now
admitted purpose, Gotham's November 26, 1996 Schedule 13D for Santa Anita
reported only that Gotham had purchased its stake in Santa Anita "for investment
purposes."
Apollo also failed to disclose its working relationship with Gotham in
connection with Santa Anita, despite the fact that Gotham and Apollo
contemporaneously filed separate Schedule 13D amendments on January 28, March
17, and April 8, 1997 as their concerted acquisition program progressed.
Similarly, Franklin, which itself held a 6% stake in Santa Anita, did not
disclose until April 1997 that it had previously been in negotiations with
Apollo's team to seek a takeover of the company.
Other examples of concerted effort by these players include the
takeover of Bay Meadows Operating Company/California Jockey Club, another
paired-share REIT. In November 1996, the month it began acquiring First Union
shares, Gotham disclosed a 6.23% stake in Bay Meadows. By December 1996, Bay
Meadows had been taken over by Patriot American Hospitality, a Dallas-based REIT
whose major investors included William Mack -- the president of Apollo. Gotham
and Franklin were also reported by the press as working together during 1997 to
pressure Dow Jones to sell its Markets Division. Both held large stakes in Dow
Jones and leveraged each other's stakes to force the sale of the unit by the
parent. SEE WHAT'S GONE WRONG AT DOW JONES MARKETS?, The Media Intelligence
Bulletin, Dec. 5, 1997 (Exhibit C).
These transactions reveal a pattern that make Gotham's, Apollo's, and
Franklin's simultaneous ownership of any company, especially a REIT, highly
suspicious. However, the investing public and First Union's individual
shareholders would be unlikely to have the benefit of this perspective or the
resources with which to detect concerted group takeover activity. Of course,
under the federal securities laws investors are not expected to undertake
investigative
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research; a group's existence and takeover purpose should be plainly disclosed
to all. The Gotham group routinely neglects this step, at least until they are
nearing completion of each takeover project.
B. KNOWN CONCERTED ACTION BY THE GROUP WITH RESPECT TO FIRST UNION
The Gotham group's pattern of concerted takeover activity extends to
their investments in First Union. Within weeks of their simultaneous investment
in First Union in November 1996, there is evidence that Gotham and Apollo were
working together to obtain control. Ackman has testified that he was aware of
Apollo's substantial holdings and knew two people at Apollo: W. Edward Scheetz
and William Scully. Documents produced by Gotham show that as early as December
26, 1996, Gotham and Apollo were exchanging information about First Union and
the opinion that it was "undervalued." For example, on that date, Apollo faxed
to Gotham a December 24, 1996 article published by America Online entitled "How
Far Can FUR Fly?" (Exhibit D.)
Gotham and Apollo also shared a brokerage firm in late 1996 and early
1997 that was drawing the conclusion that First Union was a potential takeover
target. Furman Selz, L.L.C. worked with both Gotham and Apollo and a Furman Selz
analyst has testified in deposition that clients of that firm were given advance
access to analysts' reports concerning First Union. Indeed, Gotham has produced
a draft Furman Selz reported dated December 2, 1996, which identified First
Union as a likely takeover candidate. The draft, which bore the legend "For
Internal Use Only!," was hand-addressed to Bill Ackman. Therefore, at least
Ackman had the opportunity and ability to influence the final Furman Selz
analyst report, which was publicly distributed a couple of days later. Furman
Selz's policy of allowing clients advance access to
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reports concerning First Union suggests that Apollo may very well have had a
similar opportunity.
Two months later, and four months before filing its Schedule 13D,
Ackman reported to Gotham's partners in Gotham's February 11, 1997 Annual Letter
that he believed it "highly likely that [First Union] will soon be controlled by
managers or investors who have the ability to take advantage of their special
tax and structural characteristics and who can create value well in excess of
the company's current market prices." (Emphasis added). Ackman's confidence
apparently reflects knowledge of other shareholders' support, since Gotham at
this point held less than 5% of First Union's shares and could not otherwise be
at all confident of a change in control without such information. Ackman's
confidence that a takeover would occur was demonstrated by Gotham's purchase of
an additional 750,000 shares in this "poorly managed" REIT during the following
four months. These shares, of course, were purchased from sellers unaware that
First Union had been put into play by a group of conspiring investors.
Notwithstanding the group members' increasing stake in First Union,
Gotham's Ackman and David Berkowitz and Apollo's Scully, along with other
suspected group members, including Ronald Kravit of Blackacre Capital
Group/Cerberus Partners, L.P., appeared uninvited at an invitation-only "road
show" luncheon presentation organized by First Union for potential investors on
May 27, 1997. As First Union's management attempted to interest invited
potential investors in First Union's new equity offering, the gate-crashers
interfered with the presentation, using the occasion to air their disagreements
with management. Scully in particular directly challenged the integrity and
strategy of management. This disruption unnerved many invited investors and
drove several away, thereby reducing the price ultimately obtained for the newly
offered shares. In this endeavor, the Gotham group did not act in a manner
consistent with being
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investment-only shareholders, but rather vultures looking to create an
opportunity for themselves. Ironically, a week later Gotham filed its original
Schedule 13D complaining about, inter alia, First Union's equity offerings and
their "dilutive effect" on shareholders. Gotham and its allies, of course, had
helped to create the object of their own complaint.
Gotham went public with its complaints in its June 4, 1997 Schedule
13D filing and a July amendment that disclosed a related diatribe sent to First
Union's management and Board of Trustees on July 14. Notwithstanding complaints
about management's background and experience, First Union's strategy, and the
dilutive effect of its decision to raise equity capital, however, Gotham
continued to buy more First Union shares! In August, it purchased 165,200
shares; in October, another 435,000.
Meanwhile, the other players began to make their presence felt.
Apollo's Scully approached First Union's Chairman, James Mastandrea, on
September 9, 1997 and suggested First Union add HIM AND GOTHAM'S BILL ACKMAN to
First Union's Board of Trustees. Scully also intimated that First Union was
targeted for a takeover and that 14 of First Union's shareholders owned 65% of
its stake -- statistics that strongly suggest concerted action and shared
information.
Several months later on November 7, 1997, Scully again spoke to Mr.
Mastandrea, urging a meeting with several major Apollo investors. The telephonic
parade through Mr. Mastandrea's office continued later that day as both Gotham's
Ackman and Ed Scheetz, formerly of Apollo but by this time with NorthStar
Capital Partners ("NorthStar") and also a Gotham partner, called separately to
suggest "strategic alternatives." Scheetz also told Mr. Mastandrea that
NorthStar had acquired 600,000 common shares of First Union. A week later,
Ackman called again and told Mr. Mastandrea that he had spoken with Scheetz and
urged him to make the earlier call.
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Ackman now admits that by December 12, 1997 he had already in place a
slate of nine proposed new trustees to take over First Union -- at the same time
he was scheduling a "peace-making" meeting with Mr. Mastandrea and nearly a
month before Gotham publicized its board-packing plan. Among Gotham's nine
nominees was and is James Williams, a Gotham partner with ties to Franklin, who
serves as chairman of Michigan National Bank, a position he achieved after
Franklin principal Michael Price had forced Michigan National's sale. See Mark
Calvey, BAY AREA BANKERS PICK UP SOME POISON FOR FIGHT AGAINST PREDATORS, San
Francisco Business Times, Nov. 15, 1996 (Exhibit E).
In early January 1998, Scheetz proposed to First Union that it acquire
NorthStar's new REIT, NorthStar Investment Corporation. Scheetz also proposed
that he and David Lesser of Hudson Bay Partners be given seats on First Union's
board. NorthStar had not fallen too far from the Gotham tree, however; Scheetz
faxed Ackman a draft of his proposal letter to First Union in advance.
On January 8, 1998, Gotham made public its board-packing plan and
proposed nominees. It did so on the last possible day for such proposals prior
to the scheduled April 14, 1998 Annual Meeting of shareholders. Thereafter,
Apollo and Franklin continued to act in a manner consistent only with a
cooperative takeover effort. As of early February, both Apollo and Franklin held
large portions of their interest in First Union in preferred shares, which tend
to hold value better in a declining market (as was predicted by doomsayer
Gotham) and which generally trade at a premium over their conversion value in
common shares. However, preferred shares do not have voting rights.
Notwithstanding the economic advantage in not converting their preferred shares,
both Apollo and Franklin prematurely converted their entire portfolio of First
Union preferred into common shares on February 12, 1998, the day before the
record date for First Union's then-
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scheduled April 14 Annual Meeting. Neither had sufficient shares to control the
vote, of course. Nevertheless, the two acted not only in lockstep, but
apparently in total confidence that the Gotham proposal would prevail, a level
of confidence that strongly evidences concerted activity.
Throughout this entire period, and regardless of the numerous
connections, communications, and coincidences in the behavior of Gotham,
Franklin and Apollo, as well as NorthStar, Blackacre/Cerberus, and Hudson Bay
Partners, not a single 13D filing by any group member disclosed to the investing
public the interrelationships among the group members or their agreement to act
together to oust First Union's management and take control of its board.
C. THE NEED FOR DISCOVERY
First Union's discovery needs are obvious from the preceding
recitation of evidence. Clearly, First Union must be allowed an opportunity to
depose Gotham's principals. Gotham has moved for a protective order barring even
this most fundamental party discovery. First Union has subpoenaed James
Williams, a Gotham partner and one of its nominees for a First Union board seat,
who apparently has ties to Franklin. First Union has also, quite justifiably,
served document subpoenas on Franklin, Apollo, NorthStar, Blackacre/Cerberus,
and Hudson Bay Partners. It has also subpoenaed for deposition Scully of Apollo,
Jeffrey Altman of Franklin, and Steven Feinberg of Blackacre/Cerberus. This
discovery, at a minimum, is necessary to allow First Union to gather evidence
concerning the group members' communications, relationships, and motives, which
is essential to determine the extent of the illicit group and to prepare for a
hearing on First Union's pending motion.
First Union has also subpoenaed documents from Gotham's proxy
solicitation firm, Beacon Hill, and has subpoenaed Beacon Hill's Edward McCarthy
for deposition in order to explore the roles of the group members in Gotham's
proxy solicitation in support of its proposal.
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Beacon Hill has undertaken its engagement with Gotham on a contingency fee
basis, an unorthodox arrangement that suggests it was provided assurances of the
success of Gotham's proposal -- an issue of direct relevance to First Union's
claims.
It is critical that First Union have an opportunity to complete this
discovery, which is clearly within the scope of Federal Rule of Civil Procedure
26's broad mandate to permit discovery "reasonably calculated to lead to
admissible evidence." Indeed, First Union's currently proposed discovery is
narrowly tailored to examine the group activity and investment purpose that is
central to its federal securities claims.
IV. GOTHAM'S FAILURE TO DISCLOSE ITS GROUP ACTIVITY ENTITLES FIRST UNION TO
INJUNCTIVE RELIEF
Contrary to Gotham's suggestions, its failure to disclose fully its
group arrangement with Apollo and Franklin (and perhaps others) and the group's
intent to obtain control of First Union is not a "mere technical violation" that
can be overlooked by the Court. TWIN FAIR, INC. V. REGER, 394 F.Supp. 156, 160
(W.D.N.Y. 1975). For example, in TWIN FAIR the court considered the accumulation
of securities by an individual and his related companies and trusts without
making timely disclosures as required by Section 13(d). TWIN FAIR observed that
the purpose of Section 13(d) "is to alert the marketplace to every large, rapid
aggregation or accumulation of securities . . . which might represent a
potential shift in corporate control." ID. (QUOTING GAF CORP. V. MILSTEIN, 453
F.2d 709, 717 (2d Cir. 1971)). Notwithstanding the defendants' tardy Schedule
13D filing, TWIN FAIR concluded that the violation warranted "disenfranchisement
of the shares involved." ID. at 161. The court entered a preliminary injunction
against the entire group enjoining (1) acquisition of additional stock; (2)
solicitation of proxies; (3) making a tender offer; (4) voting shares already
acquired; (5) disposing of shares, other than via unsolicited open market sales;
and (6) other Exchange Act violations. ID.
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Similarly, in HANNA MINING CO. V. NORCEN ENERGY RESOURCES LTD., 574
F.Supp 1172 (N.D. Ohio 1982), this Court ordered the defendant to divest itself
of all shares acquired after its false Schedule 13D was filed to remedy the
irreparable harm caused not only to the target corporation, but also the
shareholders who had sold their shares without the benefit of knowing the
defendant's takeover purpose -- knowledge to which they were entitled under
Section 13(d). SEE ALSO DICEON ELECTRONICS, INC. V. CALVARY PARTNERS, L.P., 772
F.Supp 859 (D. Del. 1991); CHAMPION PARTS REBUILDERS, INC. V. CORMIER CORP., 661
F.Supp 825 (N.D. Ill. 1987); USG Corp. v. Wagner & Brown, 690 F.Supp 625 (N.D.
Ill. 1987); K-N ENERGY, INC. V. GULF INTERSTATE CO., 607 F.Supp 756
(D. Colo. 1983).
Gotham should be similarly enjoined. For months, Gotham misled
shareholders, including those from whom it purchased shares, with respect to its
intent to seek control of First Union and its group arrangement with other large
shareholders. Gotham has also obscured its strategic plans for First Union,
which may threaten its tax status and alter the nature of the investment its
shareholders have come to expect. These misrepresentations and omissions have
caused shareholders to make decisions without the full information to which they
are entitled and have resulted in a prolonged period of destabilization suffered
by the Trust. Moreover, Gotham has hardly been forthcoming about the web of
intrigue underlying its assault on First Union. As a result, if the Court were
to order new disclosures, they would be too late to provide any effective relief
prior to the May 19 Special Meeting. Therefore, as in TWIN FAIR, the appropriate
remedy would be to enjoin consideration of Gotham's pending proposal and its
board nominees, enjoin its proxy solicitation, and enjoin the voting of its
shares at the upcoming meeting. Without this relief, Gotham would be allowed to
evade the strictures of the securities laws not only without penalty, but to its
advantage. The Court should not permit this result.
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V. CONCLUSION
First Union's Motion for Preliminary Injunction raises important issues
critical to the upcoming Special Meeting of shareholders on May 19, 1998.
Consideration of that Motion should, therefore, be expedited. First Union
respectfully requests that this Court permit it to complete its proposed
discovery and that the Court set a hearing on the Motion.
Respectfully submitted,
/s/ Frances Floriano Goins
-----------------------------------
Frances Floriano Goins (0018631)
Martha S. Sullivan (0064040)
Alan M. Koschik (0065891)
SQUIRE, SANDERS & DEMPSEY L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
(216) 479-8500
James P. Murphy (0003874)
SQUIRE, SANDERS & DEMPSEY L.L.P.
1201 Pennsylvania Avenue N.W.
P.O. Box 407
Washington, D.C. 20044
(202) 626-6600
Attorneys for Defendant
First Union Real Estate Equity
and Mortgage Investments
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CERTIFICATE OF SERVICE
----------------------
A copy of the foregoing Defendant First Union's Supplemental Memorandum
in Support of Its Motion for Preliminary Injunction was served this 4th day of
May, 1998, by hand-delivery upon David C. Weiner, Esq., Hahn Loeser & Parks
L.L.P., 3300 BP America Building, 200 Public Square, Cleveland, Ohio 44114-2301;
and by U.S. Mail, postage prepaid upon Alexander R. Sussman, Esq., Fried, Frank,
Harris, Shriver & Jacobson, One New York Plaza, New York, New York, 10004,
counsel for Plaintiffs Gotham Partners, L.P., and Gotham Partners II, L.P.
/s/ Alan M. Koschik
----------------------------------
One of the Attorneys for Defendant
First Union Real Estate Equity
and Mortgage Investments