Appendix — Viacom International, Inc. v. Icahn

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IN THE DEC 23 199%

Supreme Court of the nit OE ncn

OctToBeR TERM, 1991

VIACOM INTERNATIONAL, INC.,

Petitioner,

VS.

CARL C. ICAHN, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

APPENDIX

MICHAEL E. TIGAR*

727 East 26th Street

Austin, Texas 78705

(512) 471-6319

STEPHEN LOWEY

Neit L. SELINGER

Lowery DANNENBERG BEMPORAD

& SELINGER, P.C.

747 Third Avenue

New York, New York 10017

(212) 759-1504

EDWARD LABATON

New York, New York

JOHN MacE

New York, New York

* Counsel of Record

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TABLE OF CONTENTS

Opinion of the United States Court of Appeals for

The Second Circuit, dated October 6, 1991....

Transcript of Hearing before Judge Ward, dated

I IEEE ON a et han pee ey eee sn

Order Denying Defendants’ Motion to Dismiss

Amended Complaint, dated September 29,

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Racketeer Influenced and Corrupt Organizations

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UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

=e 4

No. 1534—August Term, 1991

(Argued May 21, 1991 Decided October 9, 1991)

Docket No. 91-7174

2

VIACOM INTERNATIONAL INC.,

Plaintiff-Appellant,

—Vv.—

CARL C. ICAHN; ICAHN HOLDING; ICAHN CAPITAL

CORP.; HERON INVESTORS PLAN INC.; ACF CORPO-

RATION, INC.; UNICORN ASSOCIATES CORPORATION;

GNU CoRP.; EXCALIBER PARTNERS; HEALTH

INVESTORS LIMITED PARTNERSHIP; LONGVIEW

INVESTORS LIMITED PARTNERSHIP; HARMONIOUS

ASSOCIATES LIMITED PARTNERSHIP; STORK ASSO-

CIATES LIMITED PARTNERSHIP,

Defendants -Third-Party-

Plaintiffs-Appellees,

RALPH M. BARUCH; TERRENCE A. ELKES; KENNETH F.

GORMAN; JOHN W. GODDARD; LEO CHERNE; JOSEPH

F. CONDON; THEODORE C. JACKSON; ALAN R. JOHN-

SON; PAUL A. NORTON; HARRY M. PLOTKIN; NANCE

C. REYNOLDS; JOHN F. WHITE,

Third-Party-

Defendants-Appellees.

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Before:

KEARSE, MAHONEY, and SNEED,*

Circuit Judges.

oe

Appellant, Viacom International, Inc., filed a RICO suit

against Carl Icahn and his associates alleging violations

of the Hobbs Act and the securities laws. The United

States District Court for the Southern District of New

York, Robert P. Patterson, Jr., J., granted appellees’

motion for summary judgment and dismissed appellant’s

case. The Court of Appeals, Joseph T. Sneed, J., affirmed

the grant of summary judgment and concluded that

Viacom was not injured by Icahn’s activities.

—e

MICHAEL E. TIGAR, Austin, Texas, (Stephen

Lowey, Neil J. Selinger, John Mage, New

York, New York, Lowey Dannenberg

Bemporad & Selinger, P.C., Goodkind,

Labaton & Rudoff, Wolf Popper Ross

Wolf & Jones, New York, New York, of

counsel), for Plaintiff-Appellant.

DENNIS J. BLOCK, New York, New York,

(Stephen A. Radin, Beth J. Jacobwitz,

New York, New York, Weil, Gotshal &

Manges, New York, New York, of coun-

sel), for Defendants-Appellees.

—

* Honorable Joseph T. Sneed, Senior Curcuit Judge, United States Court

of Appeals for the Ninth Circuit, sitting by designation.

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SNEED, Circuit Judge:

Plaintiff, Viacom International Inc. (Viacom), appeals

from the district court’s grant of summary judgment dis-

missing the plaintiff’s case against defendants Carl Icahn

(Icahn) and various corporations and entities controlled

by Icahn. Viacom claims that Icahn committed extortion,

in violation of the Hobbs Act, 18 U.S.C. § 1951 (1988),

when Viacom was forced to repurchase Icahn’s Viacom

stock at a price that was significantly higher than current

per share price on the open exchange. The district court

concluded that the repurchase of the stock, commonly

known as “greenmail,”’ did not violate the Hobbs Act. We

affirm.

I.

FACTS AND PROCEEDINGS BELOW

As of May 1, 1986, Cari Icahn heid slightly less than

five percent of Viacom’s stock. During this time, Icahn

met with Joseph R. Perella, Viacom’s investment banker

at First Boston Corporation. Icahn indicated that he

wanted Viacom to repurchase his shares. Perella com-

municated this information to Viacom.

On May 5, 1986, Icahn bought one million shares of

Viacom stock from Ivan Boesky for $63 a share. Because

Icahn now owned more than five percent of the com-

pany’s stock, he had until May 15, 1986, to file form 13D

with the Securities Exchange Commission (SEC), reveal-

ing his share ownership and detailing his intentions.

Before the form had to be filed, Icahn further increased

his holdings when he bought 1.5 million shares of Viacom

stock for $70 a share from JMB Realty Corp. of Chicago.

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On May 15, 1986, Icahn filed his form 13D with the

SEC. In it, he stated that he owned almost seventeen per-

cent of Viacom’s stock. He said he was prepared to buy

all of Viacom’s stock for $75 per share. If no deal could

be reached, Icahn indicated that he would continue to

explore strategies for obtaining control of Viacom. He

also suggested that he might dispose of his shares for

“cash or otherwise.”

During this time, Icahn also went public with his share

holdings. There is evidence that the widespread percep-

tion of an imminent takeover adversely affected Viacom’s

business operations. Apparently, companies and indi-

viduals were reluctant to engage in certain contractual

relations with Viacom because of the possibility that the

company would soon be sold or broken up.

On May 21, 1986, Viacom repurchased all of Icahn’s

shares. Icahn received cash (equivalent to $62 per share),

warlrants to purchase 2.5 million shares of common stock,

and ten million dollars worth of free advertising.!' When

the whole deal is added together, Icahn received approx-

imately $79.50 for each share of Viacom stock. The actual

share price on the open exchange on May 22 was $62.

Icahn received a premium over that market price which

totalled over sixty million dollars. As part of this deal,

Icahn agreed not to purchase Viacom stock or seek control

of the company for eleven years. Ten months later, Via-

com was acquired by National Amusement, Inc., for $111

a share.

1 The practice of forcing a company to repurchase a stockholder's stock

al a premium above the current market price is commonly known as

“greenmail."’ This is a practice commonly used by corporate raiders.

They purchase a large chunk of stock and threaten to engage in a hostile

takeover unless the company repurchases its shares for a premium.

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On May 28, 1986, Viacom filed this suit alleging that

Icahn and his affiliates had violated the Racketeer Influ-

enced and Corrupt Organizations Act (RICO), 18 U.S.C.

§ 1962. The amended complaint filed on October 11,

1988, alleges that Icahn committed the requisite predicate

acts required under RICO by engaging in extortion in vio-

lation of the Hobbs Act, 18 U.S.C. § 1951, and by com-

Mitting securities fraud in violation of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b) and rule

10b-5.

Specifically, Viacom alleges that Icahn’s greenmail deal

with Viacom constituted extortion. Viacom further alleges

that Icahn has engaged in a pattern of extortion. Viacom

points to other greenmail deals between Icahn and com-

panies like B.F. Goodrich, Owens Illinois, and American

Can Company. Viacom also alleges that Icahn violated the

securities laws when he purchased stock in Saxon Indus-

tries (Saxon) and Hammermill Paper Company (Ham-

mermill) and resold the stock back to the companies.

On September 14, 1990, in a published decision, Judge

Robert P. Patterson granted defendants’ motion for sum-

mary judgment. The court held that Icahn “did not obtain

property from plaintiff to which they had no lawful claim

and therefore did not commit extortion.”’ Viacom Int'l,

Inc. v. Icahn, 747 F. Supp. 205, 213-14 (S.D.N.Y. 1990).

The court also dismissed plaintiff’s securities claims

because Viacom did not have standing to raise them. /d. at

210. Having dismissed the alleged predicate acts under

RICO, the court dismissed the entire case. /d. at 214.

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II.

JURISDICTION AND STANDARD OF REVIEW

This court has jurisdiction under 28 U.S.C. § 1291

(1988). The court reviews a district court’s grant of sum-

mary judgment de novo. See Bryant v. Maffucci, 923 F.2d

979, 982 (2d Cir. 1991). The reviewing court applies the

same standard of review as that applied by the district

court. See Burtnieks v. City of New York, 716 F.2d 982,

985 (2d Cir. 1983). Under rule 56(c), summary judgment

should be granted if there is no genuine issue of material

fact and the moving party is entitled to judgment as a mat-

ter of law. See Bryant, 923 F.2d at 982. We view the

record and the evidence in the light most favorable to the

nonmoving party. See id.

III.

DISCUSSION

Without addressing whether Icahn may have violated

the Hobbs Act or the securities laws, we affirm the district

court’s holding dismissing this case because we conclude

that Viacom was not damaged by the transaction. While

the district court’s holding was based on other grounds,

both parties argued the damages question in the court

below and discussed it in the briefs filed with this court.

We can clearly affirm on this ground. See Colautti v.

Franklin, 439 U.S. 379, 397 n.16 (1979) (noting that

“{aj]ppellees, as the prevailing parties, may of course

assert any ground in support of that judgment ‘whether or

not that ground was relied upon or even considered by the

trial court’ ’’ (quoting Dandridge v. Williams, 397 U.S.

471, 475 n.6 (1970))); see also AVC Nederland B.V. v.

Atrium Investment Partnership, 740 F.2d 148, 152 (2d Cir.

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1984) (same). By affirming the judgment of the district

court on this ground, we are selecting what to us is the

most direct route to that end.

Viacom effectively paid Icahn $79.50 for each of his

three and half million shares. At the time of the deal, the

stock was trading for $62 a share on the open exchange.

To determine whether Viacom was injured, we must

decide whether the $79.50 Viacom paid to Icahn exceeded

the fair value of the stock.

Viacom points to the open market value and argues that

$62 represented the fair value of the stock. Relying on the

efficient capital market hypothesis, Viacom bases its dam-

ages on the seventeen dollar premium it was forced to pay

for each share of stock. The efficient capital market the-

ory holds that “because of the large number of skilled

profit-motivated investors continuously analyzing all pub-

licly availabie information concerning liquid publicly

traded securities, the prices of those securities in the mar-

ket fairly reflects the value of the securities.’’ Joint

Appendix at A495-96. Market price is considered “the

most reliable indicator of the value of [Viacom’s] shares”’

under this theory. /d. at A496.

We do not believe that market price is the only factor to

be considered when determining the value of stock ina

Situation such as that before us. The efficient capital mar-

ket theory clearly is not the sole means of determining

value. See Paramount Communications Inc. v. Time Inc.,

[1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) § 94,514,

at 93,277 (Del. Ch. Ct. July 14, 1989) (noting that the the-

ory of a single, efficient capital market has not been given

“the dignity of a sacred text’”’ and concluding that direc-

tors, when valuating a stock buy-out, may operate on the

theory that the stock market valuation is wrong). Deter-

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mination of a stock’s fair value is dependent on several

factors. Market price is one of those factors but it is not

the determining one. See Multitex Corp. of Am. v. Dick-

inson, 683 F.2d 1325, 1330 n.4 (11th Cir. 1982) (con-

cluding that market price is not the sole criterion for

determining the “fair value”’ of the stock). The court must

also consider a host of other factors including net asset

value and investment value. See id. at 1328-29; see also

Hunter v. Mitek Indus., 721 F. Supp. 1102, 1106 (E.D.

Mo. 1989) (holding that the court must consider all rele-

vant factors, including asset value, earnings, and every

relevant fact and circumstance when determining the fair

value of the stock).

In Litton Indus. v. Lehman Bros. Kuhn Loeb Inc., 709 F.

Supp. 438 (S.D.N.Y. 1989), the court said:

“(CJourts must take into consideration all factors and

elements which reasonably might enter into the fix-

ing of value. Thus, market value, asset value, divi-

dends, earning prospects, the nature of the enterprise

and any other facts which were known or could be

ascertained. . . and which throw any light on future

prospects. . .mustbeconsidered....” |

Id. at 447 (quoting Tri-Continental Corp. v. Battye, 74

A.2d 71, 72 (Del. Sup. 1950)). Moreover, directors may

violate their fiduciary duty if they accept merger pro-

posals based solely on market price without considering

other factors that affect the company’s inherent value. See

Smith v. Van Gorkom, 488 A.2d 858, 875-76 (Del. 1985).

Finally, each case turns on its own particular facts. No

specific rules can be culled from the caselaw. See Multi-

tex, 683 F.2d at 1329.

However, it can be said that the intensity of the pur-

chaser’s desire to acquire a large block of stock reason-

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ably may exceed its price per share in the open market.

See Amsellem v. Shopwell, Inc., No. 5683, 1979 WL 2704

(Del. Ch. Sept. 6, 1979) (noting that a large block of stock

may carry a higher price than the sum of its individual

shares because of the control factor the block contains).

A holder of such a block of stock is entitled to test the

intensity of that desire by declining to sell at the price per

share in the open market. So long as the parties search for

that price at which the purchaser’s value in use of the

stock just exceeds that of the seller, the price so deter-

mined by that process does not exceed the relevant mar-

ket price of that block. Unique goods sometimes fetch

unique prices fairly and legitimately.

The specitic facts of this case persuade us that the price

Icahn was paid for his tock was arrived at in this manner

and that it was worth $79.50 a share at the time Icahn sold

his stock to the company. Several days before this deal

was reached, Icahn had offered to buy all the company’s

stock at $75 a share. Viacom’s directors met and reviewed

two reports, which had been specially prepared by two

investment firms, that evaluated Icahn’s offer. The report

prepared by First Boston valued Viacom’s stock at $90 to

$100 a share. The second report from Donaldson, Lufkin

& Jenrette, Inc. valued the stock at $88 to $100 per share.

Joint Appendix at A854-55. The board of directors

rejected Icahn’s offer as “inadequate and inappropriate.”’

Id. at A874. Various directors testified that they believed

the fair value of Viacom’s stock ranged anywhere from

$80 to $100. See id. at A578-79, A60001, A620. One

director acknowledged that market price was “among the

least reliable indicators”’ of the value of Viacom’s stock.

Id. at 562.

Proof that these estimates were not wholly wrong con-

sists Of the fact that four months after Icahn sold his

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shares to Viacom, a management led group offered to pur-

chase the company for $81 per share. After a series of

bids and counteroffers, National Amusements purchased

the company for $111 per share seven months later.

These facts convince us that Viacom was not injured by

the transaction it entered with Icahn. The directors them-

selves determined that the stock was worth more than $75

per share and refused to accept an offer at that price.

Pointing to their legal obligation to examine all the rele-

vant factors, they concluded that the stock was worth at

least $80 per share. Some of those same directors later

offered to buy the stock for $81 per share. The company

cannot now complain that it was somehow injured when

it paid less for the stock than it thought it was worth.

They can only show an injury by insisting that the stock

can only be valued at its price per share in the open mar-

ket. We have rejected this measure in this case. We are

convinced that the fair value of Viacom’s stock exceeded

$79.50 a share and that the company was not injured

when it repurchased its stock from Icahn at that price.

While we recognize that the questions are different, it

is worth noting that the district court implicitly recog-

nized that Viacom was not injured when it concluded that

Icahn obtained his deal through “hard bargaining”’ and did

not receive a benefit to which he was not otherwise enti-

tled by law. See Viacom Int'l, 747 F. Supp. at 213.

For the foregoing reasons, the judgment of the district

court is AFFIRMED.

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MAHONEY, Circuit Judge, concurring in the judgment:

I agree with the majority that the judgment of the dis-

trict court should be affirmed. I would not premise that

affirmance, however, upon the proposition that there is no

genuine issue of material fact posed by my colleagues’

conclusion that “Viacom was not damaged by the trans-

action” with Icahn on May 21, 1986. .

It is undisputed that the market price at which Viacom's

common stock traded publicly on that date, when Viacom

paid $79.50 per share for Icahn’s holdings, was $62.00

per share. It may well be, as the majority concludes, that

the real value of the stock on that date nonetheless

exceeded $79.50 per share, and that the evidence mar-

shalled by the majority in support of that conclusion

should be regarded as persuasive. In my view, however, it

falls short of establishing that proposition as a matter of

law, which Fed. R. Civ. P. 56(c) requires for an award of

summary judgment, particularly since “fairness of con-

sideration is generally a question of fact.” Klein v.

Tabatchnick, 610 F.2d 1043, 1047 (2d Cir. 1979) (col-

lecting cases).

I nonetheless agree that the summary judgment granted

by the district court to defendants-appellees should be

affirmed, because in my view plaintiffs-appellants have

established no basis for RICO liability. Plaintiffs-appel-

lants pled two predicate acts of securities fraud in viola-

tion of section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78) (1988), and rule 10b-5 thereunder,

17 C.F.R. § 240.10b-5 (1991); and a series of alleged vio-

lations of the Hobbs Act, 18 U.S.C. § 1951 (1988). Rely-

ing, inter alia, upon rulings in the Fourth and Eighth

Circuits, see /nternational Data Bank, Ltd. v. Zepkin, 812

F.2d 149, 151-54 (4th Cir. 1987); Brannan v. Eisenstein,

804 F.2d 1041, 1045-46 (8th Cir. 1986), the district court

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ruled that Viacom had no standing to assert the securities

fraud claims under RICO because it was not a purchaser

or seller of the securities in question. See Viacom Int'l

Inc. v. Icahn, 747 F. Supp. 205, 210 (S.D.N.Y. 1990). The

Third, Ninth, and Eleventh Circuits take the view, on the

contrary, that a RICO plaintiff has standing if “injured in

his business or property by reason of” a securities fraud

within the meaning of 18 U.S.C. § 1964(c) (1988),

whether or not a purchaser or seller. See Ford Motor Co.

v. Summit Motor Prods., Inc., 930 F.2d 277, 285-86 (3d

Cir. 1991); Pelletier v. Zweifel, 921 F.2d 1465, 1510 n.80

(1ith Cir. 1991); Securities Investor Protection Corp. v.

Vigman, 908 F.2d 1461, 1465-67 (9th Cir. 1990), cert.

granted on this question, 111 S. Ct. 1618 (1991).

In any event, the securities frafft\predicates in the

amended complaint herein are alleged to have been per-

petrated by icahn against two entirely unrelated compa-

nies in 1979 and 1980. Viacom was neither a purchaser or

seller in those transactions, and suffered no injury to its

business or property as a result of them. Further, to the

extent that Viacom asserts new theories of securities fraud

on appeal, I would not entertain securities fraud claims

that were not properly presented below. See, e.g., In re

Cooper/T. Smith (Abshire v. Gnots-Reserve, Inc.), 929

F.2d 1073, 1078 (Sth Cir. 1991), petition for cert. filed, 60

U.S.L.W. 3109 (U.S. July 29, 1991) (No. 91-188);

Schwimmer v. Sony Corp. of Am., 637 F.2d 41, 49 (2d Cir.

1980); McPhail v. Municipality of Culebra, 598 F.2d 603,

607 (1st Cir. 1979); Capps v. Humble Oil & Ref. Co., 536

F.2d 80, 82 (Sth Cir. 1976). Finally, I am in essential

agreement with the district court’s analysis that Viacom’s

allegations of Hobbs Act violations are inadequate to state

a claim. See 747 F. Supp. at 210-14. I accordingly join in

the judgment of affirmance.

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Hobbs Act, 18 U.S.C.

§ 1951. Interference with commerce by threats or violence

(a) Whoever in any way or degree obstructs, delays, or affects

commerce or the movement of any article or commodity in com-

merce, by robbery or extortion or attempts or conspires so to

do, at commits or threatens physical violence to any person or

property in furtherance of a plan or purpose to do anything in

violation of this section shall be fined not more than $10,000

or imprisoned not more than twenty years, or both.

(b) As used in this section —

(1) The term “robbery” means the unlawful taking

or obtaining of personal property from the person or

in the presence of another, against his will, by means

of actual or threatened force, or violence, or fear of

injury, immediate or future, to his person or proper-

ty, or property in his custody or possession, or.the per-

son or property of a relative or member of his family

or of anyone in his company at the time of the taking

or obtaining.

(2) The term “extortion” means the obtaining of

property from another, with his consent, induced by

wrongful use of actual or threatened force, violence,

or fear, or under color of official right.

(3) The term “commerce” means commerce within

the District of Columbia, or any Territory or Posses-

sion of the United States; all commerce between any

point in a State, Territory, Possession, or the District

of Columbia and any point outside thereof; all com-

merce between points within the same State through

any place outside such State; and all other commerce

over which the United States has jurisdiction.

(c) This section shall not be consti ued to repeal, modify or

affect section 17 of Title 15, sections 52, 101-115, 151-166 of Title

29 or sections 151-188 of Title 45.

(June 25, 1948, c. 645, 62 Stat. 793.)

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Racketeer Influenced and Corrupt Organizations Act

§ 1961. Definitions

As used in this chapter —

(1) “racketeering activity” means (A) any act or

threat involving murder, kidnaping, gambling, arson,

robbery, bribery, extortion, or dealing in narcotic or

other dangerous drugs, which is chargeable under

State law and punishable by imprisonment for more

than one year; (B) any act which is indictable under

any of the following provisions of title 18, United

States Code: Section 20] (relating to bribery), section

224 (relating to sports bribery), sections 471, 472, and

473 (relating to counterfeiting), section 659 (relating

to theft from interstate shipment) if the act indictable

under section 659 is felonious, section 664 (relating

to embezzlement from pension and welfare funds),

sections 891-894 (relating to extortionate credit tran-

sactions), section 1084 (relating to the transmission of

gambling information), section 1341 (relating to mail

fraud), section 1343 (relating to wire fraud), section

1503 (relating to obstruction of justice), section 1510

(relating to obstruction of criminal investigations), sec-

tion 1511] (relating to the obstruction of State or local

law enforcement), section 1951 (relating to in-

terference with commerce, robbery, or extortion), sec-

tion 1952 (relating to racketeering), section 1953

(relating to interstate transportation of wagering

paraphernalia), section 1954 (relating to unlawful

welfare fund payments), section 1955 (relating to the

prohibition of illegal gambling businesses), section

2314 and 2315 (relating to interstate transportation

of stolen property), sections 2341-2346 (relating to traf-

ficking in contraband cigarettes), sections 2421-24

(relating to white slave traffic), (C) any act which is

indictable under title 29, United States Code, section

186 (dealing with restrictions on payment and loans

to labor organizations) or section 501(c) (relating to

embezzlement from union funds), or (D) any offense

A-15

involving fraud connected with a case under title II,

fraud in the sale of securities, or the felonious

manufacture, importation, receiving, concealment,

buying, selling, or otherwise dealing in narcotic or

other dangerous drugs, punishable under any law of

the United States;

(2) “State” means any State of the United States, the

District of Columbia, the Commonwealth of Puerto

Rico, any territory or possession of the United States,

any political subdivision, or any department, agen-

cy, or instrumentality thereof;

(3) “person” includes any individual or entity

capable of holding a legal or beneficial interest in

property;

(4) “enterprise” includes any individual, partnership,

corporation, association, or other legal entity, and any

union or group of individuals associated in fact

although not a legal entity;

(5) “pattern of racketeering activity” requires at least

two acts of racketeering activity, one of which

occurred after the effective date of this chapter and

the last of which occurred within ten years (excluding

any period of imprisonment) after the commission of

a prior act of racketeering activity;

(6) “unlawful debt” means a debt (A) incurred or

contracted in gambling activity which was in viola-

tion of the law of the United States, a State or political

subdivision thereof, or which is unenforceable under

State or Federal law in whole or in part as to prin-

cipal or interest because of the laws relating to usury,

and (B) which was incurred in connection with the

business of gambling in violation of the law of the

United States, a State or political subdivision thereof,

or the business of lending money or a thing of value

A-16

at a rate usurious under State or Federal law, where

the usurious rate is at least twice the enforceable rate:

(7) “racketeering investigator” means any attorney

or investigator so designated by the Attorney General

and charged with the duty of enforcing or carrying

into effect this chapter;

(8) “racketeering investigation” means any inquiry

conducted by any racketeering investigator for the

purpose of ascertaining whether any person has been

involved in any violation of this chapter or of any final

order, judgment, or decree of any court of the United

States, duly entered in any case or proceeding aris-

ing under this chapter;

(9) “documentary material” includes any book,

paper, document, record, recording, or other material;

and

(10) “Attorney General” includes the Attorney

General of the United States, the Deputy Attorney

General of the United States, any Assistant Attorney

General of the United States, or any employee of the

Department of Justice or any employee of any depart-

ment or agency of the United States so designated by

the Attorney General to carry out the powers

conferred on the Attorney General by this chapter.

Any Department or agency so designated may use in

investigations authorized by this chapter either the in-

vestigative provisions of this chapter or the in-

vestigative power of such department or agency other-

wise conferred by law.

(Added Pub.L. 91-452, Title IX, § 901(a), Oct. 15, 1970, 84 Stat.

941, and amended Pub.L. 95-575, § 3(c), Nov. 2, 1978, 92 Stat.

2465; Pub.L. 95-598, Title III, § 314(g), Nov. 6, 1978, Stat.

2677).

A-17

§ 1962. Prohibited activities

(a) It shall be unlawful for any person who has received any

income derived, directly or indirectly, from a pattern of racket-

eering activity or through collection of an unlawful debt in which

such person has participated as a principal within the meaning

of section 2, title 18, United States Code, to use or invest, directly

or indirectly, any part of such income, or the proceeds of such

income, in acquisition of any interest in, or the establishment

or operation of, any enterprise which is engaged in, or the ac-

tivities of which affect, interstate or foreign commerce. A pur-

chase of securities on the open market for purposes of invest-

ment, and without the intention of controlling or participating

in the control of the issuer, or of assisting another to do so, shall

not be unlawful under this subsection if the securities of the issuer

held by the purchaser, the members of his immediate family,

and his or their accomplices in any pattern or racketeering ac-

tivity or the collection of an unlawful debt after such purchase

do not amount in the aggregate to one percent of the outstand-

ing securities of any one class, and do not confer, either in law

or in fact, the power to elect one or more directors of the issuer.

(b) It shall be unlawful for any person through a pattern of

racketeering activity or through collection of an unlawful debt

to acquire or maintain, directly or indirectly, any interest in or

control of any enterprise which is engaged in, or the activities

of. which affect, interstate or foreign commerce.

(c) It shall be unlawful for any person employed by or

associated with any enterprise engaged in, or the activities of

which affect, interstate or foreign commerce, to conduct or par-

ticipate, directly or indirectly, in the conduct of such enterprise's

affairs through a pattern of racketeering activity or collection

of unlawful debt.

(d) It shall be unlawful for any person to conspire to violate

any of the provisions of subsections’ (a), (b), or (c) of this section.

(Added Pub.L. 91-452, Title IX, § 90l(a), Oct. 15, 1970, 84

Stat. 942.)

' So in original. Probably should be “subsection”.

A-18

§ 1964. Civil remedies

(a) The district courts of the United States shall have jurisdic-

tion to prevent and restrain violations of section 1962 of this

chapter by issuing appropriate orders, including, but not limited

to: ordering any person to divest himself of any interest, direct

or indirect, in any enterprise; imposing reasonable restrictions

on the future activities or investments 6f any person, including,

but not limited to, prohibiting any person from engaging in the

same type of endeavor as the enterprise engaged in, the activities

of which affect interstate or foreign commerce; or ordering

dissolution or reorganization of any enterprise, making due pro-

vision for the rights of innocent persons.

(b) The Attorney General may institute proceedings under this

section. In any action brought by the United States under this

section, the court shall proceed as soon as practicable to the hear-

ing and determination thereof. Pending final determination

thereof, the court may at any time enter such restraining orders

or prohibitions, or take such other actions, including the ac-

ceptance of satisfactory performance bonds, as it shall deem

proper.

(c) Any person injured in his business or property by reason

of a violation of section 1962 of this chapter may sue therefor

in any appropriate United States district court and shall recover

threefold the damages he sustains and the cost of the suit,

including a reasonable attorney’s fee.

(d) A final judgment or decree rendered in favor of the United

States in any criminal proceeding brought by the United States

under this chapter shall estop the defendant from denying the

essential allegations of the criminal offense in any subsequent

civil proceeding brought by the United States.

(Added Pub.L. 91-452, Title IX, § 901(a), Oct. 15, 1970, 84 Stat.

943.)

A-19

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

EDWARD L. ANDERSON, et al.,

Plaintiffs,

V. 85 Civ. 4215 (RJW)

CARL C. ICAHN, et al.,

Defendants.

February 4, 1987

4:15 p.m.

Before:

HON. ROBERT J. WARD,

APPEARANCES

LOWEY, DANNENBERG & KNAPP

Attorneys for plaintiff

STEPHEN LOWEY

NEIL L. SELINGER,

Of Counsel

WOLF POPPER ROSS WOLF & JONES

Attorneys for plaintiffs Lage and Jaffe

JOHN MAGE,

Of Counsel

District Judge

A-20

GOODKIND, WECHSLER, LABATON & RUDOFF

Attorneys for plaintiff Bronstein

EDWARD LABATON,

Of Counsel

WEIL, GOTSHAL & MANGES

Attorneys for defendants

DENNIS J. BLOCK

STEPHEN A. RADIN,

Of Counsel

HUGHES, HUBBARD & REED

Attorneys for Viacom International

PETER M. KREINDLER,

Of Counsel

(Case called; all parties ready)

THE COURT: I’ve had the opportunity to review the sub-

missions and I think the first order of business is the propriety

of the derivative action in terms of the demand on the board.

As some of you are at least aware, I have written on this sub-

ject, although subsequent learning from the Court of Appeals

in another matter indicated that there was some exception taken

to some of the views that I expressed.

Let me, however, tell you how I see it. We start with Rule

23.1 of the Federal Rules of Civil Procedure. In relevant part

that rule requires that the complaint allege with particularity

the efforts, if any, made by the plaintiff to obtain the action

he desires from the directors, and, if necessary, from the

shareholders, and then he is to allege the reasons for his failure

either to obtain the action or for not making the effort.

The defendant, in moving to dismiss the failure to make this

demand which they contend is required, starts by citing some

general policy arguments. I don’t really put too much stock in

those arguments but would turn next to the assertion that the

plaintiffs have not pled with specificity the reasons such a

A-21

demand would be futile since the plaintiff has sued no board

members, since Icahn has contracted to leave the board members

alone for ten years and since a majority of the board is indepen-

dent. As I understand the plaintiff's response, it is argued that

the defendant or defendants, if you want to call them that,

primarily Mr. Icahn, lack standing to raise the objection.

In the case to which I referred a few moments ago, I held

that the general rule is that strangers cannot complain of a plain-

tiffs failure to make a demand. The defendants respond by rely-

ing on Third Circuit precedent. Needless to say, when one has

spent the time that I spent in drafting a opinion — and you

will recognize that one was not off the top of my head — I prefer

to rely on my own precedent absent contrary precedent in this

circuit or from the Supreme Court.

The plaintiffs point out to us that before filing suit Anderson

sent a hand delivered letter to the board demanding that the

board not enter into any buyback arrangements. That’s set forth

in the complaint, paragraph 75. Plaintiffs go on to argue that

any further demand would have been futile since the board

members were interested in and biased the transaction to

preserve their perks.

In addition, plaintiff argues that the Viacom board implied-

ly acquiesced by filing an answer that did not raise it. I start

by suggesting that this whole question of futility in the context

of this lawsuit is a Federal question. Although what must be

pled and with what particularity is not necessarily totally clear.

As I read the cases cited in Wright and Miller, the question

is could any facts indicating futility be shown? Needless to say,

this is an issue, as with so many others, where a determination

of the sufficiency of allegations of futility depend upon the cir-

cumstances of the individual case. There is authority for that.

The authority is in Kastor v. Modification Systems, a case

which can be found at 731] F.2d 1014, Second Circuit 1984 page

1018. The Court of Appeals noted that if the directors are

A-22

adversely interested the demand is presumtively futile, citing

authority, and where allegations in the complaint permit the

court to infer that the directors lack their requisite

disinterestedness, a demand is not required. Even were we to

dismiss, clearly the proper course, as in the Kastor case, which

I mentioned a moment ago, would be to allow an amendment.

That gets us to a case which we will be talking about a bit

this afternoon, Feinberg v. Carter, Judge Walker’s case. We have

some of the same cast of characters. I don’t use that word pe-

joratively, involving the 1984 repurchase of Goodrich stock, that

Mr. Icahn had required.

There Judge Walker denied the defendant’s motion to dismiss

for failure to make a demand, looking specifically for whether

there is any business justification consistent with the challenged

transaction. If the directors don’t have any good reason,

presumption of disinterestedness is reduced.

Judge Walker had found no such good reason to pay the

premium and found as well that the directors had good reason

to do it, to hold on to their various perks, their compensation,

pension benefits and so on. That case has a distinction that |

don’t think we have here. In that case the board initially covered

up the buyback. As you all know, Judge Walker certified the

question under 1292 B.

I think at this stage, with that background, I should ask a

couple of questions. Why don’t I ask defendants to tell me why,

in their view, Judge Walker’s opinion is not persuasive?

MR. BLOCK: Anything Judge Walker says is persuasive, your

Honor. I am Dennis Block and represented the defendants. The

Goodrich case, your Honor, as you quite correctly point out,

number one, is distinguishable on the basis that there was a viola-

tion of proxy rules 14(a) by all of the directors. As Judge Kearse

in the second decision in Galiff v. Alexander pointed out under

very proper circumstances not cited by Judge Walker that in

and of itself would have been sufficient to excuse demand. More

A-23

importantly, I think where Judge Walker went off in Goodrich

is where he found the directors had a pension. And the pension

was determined based on years of services and that these direc-

tors needed to remain in office in order to maximize their pen-

sion. That interest is the financial interests that the courts look

to in determining whether or not directors are biased are so con-

flicted so as to take away the business judgment rule of defense

from their determination.

It was the financial interest, and whether Judge Walker was

clear in the way he described it or not, he certainly set forth

those facts about that board of directors. Every single director

serving on that board had a unique pension plan and it was in

his personal financial interest to remain on the board. So keep-

ing Mr. Icahn out of taking control of Goodrich in that case

was a very significant factor.

Additionally, the 14(a) violation in and of itself should have

excused demand. In this case eight of the 12 directors have no

financial interest pled by the plaintiff. Four more officers —

eight are outside directors and I think that distinguishes the case,

your Honor.

THE COURT: What is your response to the standing ques-

tion: In view of the fact that Viacom did not raise this particular

defense, do you have standing to raise it on your own?

I must tell you I don’t think you do.

MR. BLOCK: Your Honor, let me first reverse the issue.

THE COURT: No, just answer the question.

MR. BLOCK: I will answer it. Yes, I do have standing. As

your Honor points out, not even looking toward the Schlensky

decision but looking at Markowitz here in your Honor’s court

is that the key had to be somebody with a fiduciary relation-

ship as opposed to a stranger in the transaction. My client had

and has 2.5 million warrants to purchase the common stock of

Viacom which is the equivalent of owning Viacom stock. We

are the equivalent if not better than the plaintiff who has a less

A-24

share of Viacom and we stand in the same sphere in the hierar-

chy of the corporation. We are truly a fiduciary and I suggest

a closer fiduciary than the investment advisor in the Markowitz

case that you found did have standing.

I would question whether any of the decisions thus far in this

issue has pinpointed the real problem. Standing is an issue that

in the first instance the plaintiff must get by. He must have stand-

ing to be in court. In order to be here pleading a corporation's

claim he has to have standing and he gets standing by either

having the court accede to his request to be here or by

demonstrating futility. It is his burden which he must overcome.

THE COURT: He has chosen the futility route.

MR. BLOCK: And has failed miserably in pleading it.

THE COURT: Perhaps under Chitty’s Rules he might not

make it but we don’t use them any more. At least I don't.

He did hand deliver a letter, and as I indicated has pleaded

that. It seems to me that that is something we ought to look at.

What is the effect of that letter?

MR. BLOCK: I cite your Honor to a case I handled in

Delaware which is right on point, Seibert v. Harper and Row.

THE COURT: In Federal court?

MR. BLOCK: Noin Chancery Court. I might point out that

the Delaware Chancery rules parrot 2.1 in all respects.

THE COURT: But the chancellors do not necessarily reflect

in all respects the views that we reflect or are required to en-

force the Federal securities laws. You know the differences that

have come through the years. And Delaware, being that quaint

state that it is, has always taken a rather strict position which

I always considered was somewhat favoring the corporation.

A-25

Here we attempt, I think, to go down the middle. He did write

a letter. It does seem to me under the circumstances he acted

sufficiently. Frankly, I don’t see that Mr. Icahn, who sold out

at a premium, who owns no stock at the present time and who

is alleged to have been a wrongdoer should be able, when the

corporation has chosen not to do it, to impose the demand re-

quirement to avoid a suit claiming misdeeds on his part.

It does seem to me that you are on the short end of this one

based on the facts — and I could get into some comments where

you attempted to distinguish Judge Walker’s case. There was

no finding in the Feinberg case that a particular number of direc-

tors had or didn’t have already vested pensions. And frankly,

I never ran into a major corporation yet where the directors did

not receive some type of remuneration — perhaps not as substan-

tial as Goodrich — but they are usually compensated handsome-

ly for attending at directors meetings.

It strikes me that all of this is quibbling and I think should

not detain us long since we have many more important things

to do.

I think you have done your best, as you always do, to answer

the impossible questions that I put to you. Why don’t you sit

down a moment and let me hit the plaintiff's counsel.

Why didn’t you make the demand?

MR. BLOCK: If I might before I sit down.

THE COURT: Of course.

MR. BLOCK: I would like to bring two cases to your Honor'’s

attention. One is Allison v. G.M. and another case I had a

pleasure of being involved in the Third Circuit which stands

for the same proposition that the Seibert case stands for which

is that a pre-suit letter is not demand. I would like to point out

to the court that the demand here wasn’t a demand on the cor-

porations to sue my client. It was a demand on the corporation

A-26

not to do the transaction and to sue themselves, in essence, to

sue the directors for breaching the fiduciary duty. Never men-

tioned Mr. Icahn as a potential defendant or a wrongdoer.

Secondly, I would like to mention the E.F. Hutton case in this

circuit affirmed by the Second Circuit which says in language

clear as can be that the kind of interest necessary to excuse the

man is financial interest.

I go to Judge Walker’s opinion again and point out that the

uniqueness of the pension plan set forth in that case is a very

distinguishing factor.

I take it back, Hutton has not been affirmed. I think it is Judge

Owen and right on point with this issue.

Finally, with respect to the question of demand, demand has

been made, apparently, by some of these very same plaintiffs

in connection with a companion parallel state court proceeding

which strangely enough isn’t here but is across the street and

the company rejected it. The company seemed to have no pro-

blem there in rejecting the demand.

THE COURT. It interested me that the company which might

have been expected to raise this, didn’t and this stranger to the

proceedings did. We are not saying here, and I want you to

understand this, Mr. Block, that the letter was demand. But that

it bears on the futility of doing anything, and indeed, in my

judgment, if anyone could be reasonable, this was futile. The

directors were not about to do anything. They had decided to

pay off.

In any event, why, and I asked this once before in another

case where I went through this whole exercise — to plaintiff's

counsel, why didn’t they make a demand?

MR. LOWEY: Good afternoon, your Honor. Stephen Lowey.

I hesitate to add very much to your Honor’s exposition already

because I learned long ago not to try to improve upon a situa-

tion where —

A-27

THE COURT: Where you are ahead.

MR. LOWEY: — and the judge has grasped the arguments

in our briefs as completely or even better than we made them

ourselves. But I will of course try to answer a question which

I don’t regard at unanswerable and that is: Why didn’t we make

the demand. Your Honor has already alluded to main point.

The first being that under the circumstances where we had tried

to avoid the situation, this was not hindsight on our part but

rather foresight. It was clear having sent the letter that any fur-

ther communication would be futile.

Your Honor has already mentioned that. Clearly another letter

would have been a futility.

A second reason, and that is spelled out in the complaint, is

that the nature of the claim is that there was coercion exerted,

there was extortion exerted. The nature of the greenmail act here,

and I am sure I will have an occasion to develop that more ful-

ly in the Hobbs Act argument. But the nature of the greenmail

act is an act which is done, or the payment is done against the

will of the payee. It is an extortion type of claim, and we will

get to the point of where the Hobbs Act applies. But the point

is it was not voluntary. We alleged —

THE COURT: It was voluntary —

MR. LOWEY: It was voluntary but it was coerced. It was

voluntary. My point is this. That we allege that the payment

evidenced a fear by the directors that unless the payment were

made there would be economic loss suffered by Viacom and the

Viacom officers, the loss of perks and all of that. That that was

very real and the reason for the payment. Under those cir-

cumstances there's a definite futility in making a subsequent

demand.

We tried to avoid it in the first place. The reason they did

it is they knew perfectly well that they were violating duties,

they were paying corporate waste. They did it anyhow and they

A-28

did it anyhow because of the coercive nature of the extortion

claim.

That is a circumstance that makes it doubly futile.

THE COURT: In my view at least it would have been very

good use of a 22 cent stamp and might have spared a number

of trees.

Do you know, if I may ask this fact question, what the board

members receive as compensation? They get per meeting, per

year, some pension benefits after they’ve served as directors? It

should be somewhere in a 10-K I would imagine.

MR. LOWEY: We have in the complaint only the compensa-

tion of the inside board members, in paragraph 7. We do not

have the compensation of the outside board members.

THE COURT: That’s what I would be interested in.

MR. LOWEY: We can supply that. It is not in the complaint

but certainly it is publicly available, yes.

THE COURT: Let me ask you this question: If you were given

this choice, which option would you accept: To wait, in view

of Judge Walker’s certification, and see what the Second Cir-

cuit does with this particular matter? Or to proceed with the

lawsuit and take your chances that by following Judge Walker

you might very well wind up in a situation where we would

have wasted some time and effort?

MR. LOWEY: I would certainly rather proceed. First of all,

I have every confidence by my reading of not only that case but

other cases that bear upon the issue that there is every reason

why Judge Walker should be affirmed, if the Second Circuit takes

it — and that has not yet been decided yet. We can advise the

court of that when it happens. We are monitoring it but it hasn’t

happened yet. So to answer your Honor’s question today, we

certainly have many reasons to wish to proceed and not to await

A-29

a determination by the Second Circuit, if indeed the Second Cir-

cuit will take it.

THE COURT: Very well. I don’t think there’s anyone else to

speak on this particular issue and I am prepared to make a rul-

ing on this question right now.

The court holds that in the context of this case a demand

would be futile.

I take into account the plaintiff's prior letter, although I do

not perceive it to be a proper demand. I do consider it in mak-

ing my determination that a proper demand would have been

futile.

As a second ground for my determination I hold that the

defendants lack standing to assert this defense inasmuch as the

defendants are no longer stockholders, nor do they in any way

presently represent the corporation. And I would add that in

their wisdom, counsel for the corporation have determined not

to assert this defense.

We will move on now to the question of shareholders demand.

There we would look to Wright and Miller. We have here another

case where far too many trees died in vain. The requirement

in Rule 23.1 that the plaintiff make demand on the shareholders

“if necessary” incorporates substantive state law. If state law

would require such a demand, so too would the Federal courts.

The plaintiff relies upon Federal law, or when the claim other-

wise involves Federal questions, however, the courts waive this

requirement and I cite 7 C Wright and Miller paragraph 1832

at pages 122-23.

RICO, which we will be dealing with shortly, is a Federal

statute. In this court’s view the shareholder demand is not

required, and, in fact, even on the New York State extortion

count the predicate acts in state law only lay the foundation

for substantive Federal liability. So if RICO survives this

A-30

motion, it being a Federal statute, I think the demand is not

required.

I'd ask Mr. Block, who rarely concedes anything, whether in

light of what I have just said the defendants are not prepared

to concede that a shareholder demand was not necessary.

MR. BLOCK: Not only are we not ready to concede, we point

to you Allison v. G.M. as being right on point where the Third

Circuit stated that you look to state law not to Federal law. And

that was a RICO claim.

THE COURT: Can't you come up with anything other than

the Third Circuit? I told you before that I am particularly con-

cerned with this circuit and the Supreme Court. There are

numerous cases excusing shareholder demands. For example,

when shareholders are numerous. In this case you have a publicly

traded company which is listed on the New York Stock Exchange.

I have no present recollection of the number of shareholders,

but those factors alone that I have just mentioned would in-

dicate that shareholders are numerous. Anybody have any fact

on that? I don’t want to guess.

MR. LOWEY: We do have it in the complaint I believe. In

paragraph 5 C of the complaint it is alleged that as of March

3, 1986, Viacom had issued and outstanding 20,636,777 shares

of common stock held by more than 18,000 shareholders of

record.

THE COURT: My law clerk has just given me the same in-

formation which is then supplemented by what | said about

listed and traded. That's a lot of shareholders. It seems to me

if we were talking numerosity, you have got a number of

shareholders.

Does the defendant, Mr. Block, contend that Ohio law is

binding?

MR. BLOCK: Yes, your Honor.

A-31

THE COURT: I thought you would.

MR. BLOCK: Your Honor, I might cite to you two cases by

brother judges in this district, Duffy and Owen, to the effect

that the number of shareholders is not the test and that both

of those judges did enforce in the context of public companies

the requirement that demand be made on shareholders and that

the cases aren’t cited in our brief but you should have them.

One is Judge Owen’s decision in Magid v. Mortgage Growth In-

vestors, paragraph 95, 673 of C C H, 1976 Southern District

case. And the second one is Clairdale Enterprises v. C.1. Realty

Investors at 423 Fed. Supp. 257, Judge Duffy.

THE COURT: I respect both of my colleagues. In my view

at least the requisite demand on shareholders should be excused

where the shareholders are as numerous as they are here.

Needless to say, if the RICO claim survives scrutiny I think Ohio

law becomes irrelevant. But if you don’t want to concede that.

we can leave it for another time.

MR. BLOCK: Your Honor, so I don’t misunderstand, it is only

relevant with respect to the issue of standing to enter the court

and that’s with respect to the demand on shareholder issue and

the demand on the board issue, not on the substance of the claim.

THE COURT: Let me say this. It is the height of something,

— some people might say chutzpah, but I won't — it’s the height

of something for a stranger, not such as Mr. Icahn, to wrap

himself in the mantle with which he has cloaked himself and

make these arguments concerning demands, particularly

shareholder demand. May I inquire if in Judge Owen's case and

Judge Duffy's case the person was a stranger as is Mr. Icahn?

MR. BLOCK: My client in the Magid case was the advisor

to the fund so I guess his honor found that wasn’t a stranger.

But I might point out Mr. Icahn is the second largest shareholder

in Viacom. He has warrants to purchase over 2 million shares.

to exercise right now. By tendering a check we are the second

largest shareholder in the corporation. To characterize us as a

A-32

stranger when the Plaintiffs in the aggregate don’t have a ma-

jority of the stock I believe is unfair.

THE COURT: I don’t regard his warrants as I do the hopefully

dividend producing certificates that are held by the shareholders.

I assume as the holder of a warrant, which is usually a right _

to purchase, he doesn’t obtain dividends or anything like that

from the company in connection with his warrants, does he?

He just has a right to purchase. He could, in my judgment, go

out and by calls and be in the same posture. But that’s your view.

MR. BLOCK: I would like to cite a slew of cases that agree

with my view.

THE COURT: I am sure you would but it would deter us far

too long. We have been deterred already, Mr. Block. I’ve made

my ruling. Let us move on to the question of RICO standing.

That's the most interesting question that we have here.

I don’t know whether you are raising that question, Mr. Block,

of RICO standing.

MR. BLOCK: Your Honor, the issue we are arguing is that

there are no predicate acts.

THE COURT: Not standing?

MR. BLOCK: Not standing.

THE COURT: All right, thank you. That's the first time we

have been able to move forward without some discussion.

Although I pondered this since my participation in a recent

program which was participated in by one of your colleagues

who is not here today, has given me much to chew about on

the subject, but I think we can pass on that and move immediate-

ly to the matter that you just raised, the matter of the predicate

acts.

A-33

There I think I will put the heat a little bit on the plaintiff's

counsel. Let’s turn first to 10b and Rule 10b-5.

Counsel, which material misstatements do you intend to rely

upon?

MR. LOWEY: Your Honor, we allege two predicate acts of

securities law violations, each in connection with a transaction

which was also a greenmail transaction. Both involving the false

statements in 13(d) filings made by Mr. Icahn in connection with

those transactions. The first of which was the Saxxon Industries,

the second of which was Hammermill Paper Company.

We do allege that those filings were false, they weve viola-

tions of 13(d) and they were knowingly false. The facts related

to those filings are set forth in the complaint. That is to say,

the nature of the entire transaction and the fact that these fil-

ings were made. I might say that we are not the first to have

raised the question of the falsity of those filings. In each case

there has been prior allegations of falsity, none of which have

been resolved in a dispositive way.

In the Saxxon Industries case the allegation was made that

a false 13(d) was filed and that gave rise to a 10b-5 violation.

Judge Pierce, sitting as a district judge, denied defendant’s mo-

tion to dismiss that. So that case was Schnell v. Schnall. I can

hardly pronounce it, but in any event, the import of Judge

Pierce’s decision is that the issue as to whether or not 10b-5 was

violated is an issue of fact. That case went to trial, I understand,

and was settled during trial. So the jury never got to decide

whether or not Mr. Icahn committed violations of Rule 10b-5

in connection with the Saxxon matter because a settlement was

entered into in the course of the trial.

THE COURT: Judge Brieant, of course, knocked down similar

arguments in the Chock Full ’o Nuts case arguing that any

shareholder would know that a buyback is possible. What do

you have to say about that?

A-34

MR. LOWEY: I will answer that, but what I have to say about

that, that goes I think more to the question of extortion and

less to the question of securities violation predicate acts, but I

will answer that.

First of all, that was not a Hobbs Act case. Judge Brieant was

not being directed to and asked to read and apply the Hobbs

act as we are asking your Honor to do. It came up in an entire-

ly different coritext.

Secondly, this was a fignt between a raider, if you will, and

a management, a litigation in which clearly the vigor of the

defense negated any greenmail payment. There was no extor-

tion involved or possible extortion clairn because nothing

was paid. There was no payoff and no payoff intended or

contemplated.

The litigation proceeded really with the defendants raising

the argument that this is what he intends, he intends extortion.

THE COURT: What difference does that make? The ruling

there was on 13(d), was it not, not Hobbs Act?

MR. LOWEY: It was on 13(d). But the point of it is that the

extortion — what your Honor directed my attention to and what

is the point of the case that’s made by the defendants is that

Judge Brieant’s order said there is really nothing much wrong

wit: what is happening here based upon what was argued to

him and the situation as he saw it. He said there’s a cow that

somes dy wants to milk and the other guy wants to milk it and

that’s sort of natural. That’s the way of corporate life. We all

know that.

THE COURT: That's the way it is up in the northern part

of our district, you see, we work with analogies such as cows.

MR. LOWEY: If that’s the analogy I haven't seen any cows

near my home. I think clearly Judge Brieant was clearly speak-

ing dictum as far as that argument goes. It was a very colorful

A-35

way of expressing it. But really, judge, you compare that to Judge

Walker and see the contrast. Judge Walker, who had a green-

mail case in front of him, a real live greenmail case, not a

hypothetical greenmail, because that’s what was being argued

in Chock Full ’o Nuts, they claimed there was an intention to

extort or reference was made to the extortionary nature of it,

but that was all pure hypothetical.

Judge Walker, on the other hand, had a pleading in which

there was a consummated greenmail, and addressing that

pleading he saw something very much wrong with the situa-

tion. He said the directors had no basis for exercising business

judgment under those circumstances. Clearly wrong. You com-

pare Judge Brieant to Judge Walker and they are totally opposite.

Judge Brieant I forgive because he was not faced with facts

that would lead him to the conclusion that Judge Walker came

to, and it was really pure dictum and was throwaway, as far

as I see it, really did not meat any of the issues that we are faced

with today.

THE COURT: I would ask you whether or not you believe

that Judge Walker properly disposed of these contentions?

MR. LOWEY: Are you speaking of the fiduciary duty

contentions?

THE COURT: Essentially.

MR. LOWEY: Yes, I do. I believe he is absolutely correct on

that.

THE COURT: Would you want to argue that Icahn’s plans

as they developed constitute manipulative devices? Was he

manipulating the stock in that sense?

MR. LOWEY: We have not alleged that and we have no basis

for alleging it at the moment and we would not intend to pur-

sue that approach.

A-36

THE COURT: Of course, he did not cause the entire value

of price of the shares across the board to change, really, he just

got his own payment and didn’t seem, from my perspective, to

be manipulative either. So I can’t fault you for your position

there.

Just continuing along the same lines, are your predicate acts

Hobbs or on the securities laws, which you just have argued?

Or do you say that you have one from column A and one from

column BP

MR. LOWEY: We have six from column A, which is consum-

mated extortion; we have two column B which is securities law

violations, and we have an additional nine, I believe, from

column C which are conspiracies to commit extortion. So those

are the predicate acts as they are delineated in the complaint.

THE COURT: You would make a good United States Attorney,

you could come in with a multi-count indictment.

I would ask you, however, you were commenting about Judge

Walker a few moments ago, if under 10b-5 didn’t Judge Walker

throw out those contentions. I thought he had.

MR. LOWEY: Judge Walker I think it was 14(a). yes he, he

he did dismiss a 14(a) violation.

THE COURT: Let’s move on to Hobbs because I think as you

said at the outset that’s really the center of it.

Let me again, if I could without dwelling too long on it, set

the stage and then my first inquiry will be to the defendant's

counsel.

I think we focus here, since we don’t have a real contest on

RICO standing, on what I would characterize as the predicate

acts. What I am looking at, frankly, is at this point Judge

Walker’s opinion which I found to be exceedingly helpful, in

A-37

general. He discussed the 10b claims and then he moved on to

the others.

I am going to pass to the others because I think it’s just as

well under the circumstances, the hour is late. You start out with

the statute itself, the language of which essentially is well known

to both of you and which obviously he focuses on extortion which

is defined as the obtaining of property from another with his

consent induced by the wrongful use of fear. That fear could

be physical, could be economic.

As I understand the plaintiffs theory of the case, it is that

when Mr. Icahn purchased Viacom stock he put the Viacom

board in fear of their jobs, he put them in fear of business disrup-

tion, and the fear came from the fact that the directors knew

of his reputation from prior similar acts.

The arguments raised by the defense here I think could be

really dealt with summarily. There is a contention first that

Icahn’s acts, which is characterized as the purchase of stock in

waging a contest for corporate control, are not unlawful, and,

as well, that threats to engage in unlawful conduct cannot con-

stitute the basis for an extortion claim. And they urge dismissal.

I have a lot of difficulty with that argument.

Blackmail is often a threat to do legal or permitted acts. And

I must say I have those cases here when I try a Hobbs Act case.

The plaintiffs have cited a number of cases involving labor

picketing, which is lawful in itself, but obviously becomes il-

legal when labor leaders take side payments, and a lot of cases

to that effect. Certainly a corporation has no absolute right to

be free of contests for corporate control just as an employer has

no guarantee of labor peace. It is nevertheless extortion for an

investor to threaten to fight or strike to coerce a transfer of cor-

porate assets that is a payment for his own personal benefit.

I must say that in the context of the activities here, although

perhaps there has not been too much judicial acceptance of this

A-38

up to now, the analogy in my view is, if not persuasive,

appealing.

The defendants argue that the Hobbs Act does not apply. I

must say over Judge Pratt’s dissent, the Court of Appeals for

this circuit applied the Hobbs Act in a way that I think ap-

plicable here.

So I turn to Capo — not the mob figure but the name of the

defendant — a case that has been cited a number of times. It

is relatively recent case having come down just last year. The

victim’s fear may clearly be fear of a loss that is purely economic.

Judge Walker has accepted this in his case and it seems to be

a common-sense argument that both officers and directors, par-

ticularly the insiders, fear the loss of their positions. For the in-

siders it’s often their livelihood. And notice that the economic

fear here certainly need not be of self-interest but might be in-

formation that the corporate economy, that is the corporation’s

own economic well-being, might be disrupted. C!early the loss

can be future oriented and the defendant need not have instilled

the fear. His reputation would often be enough.

There were two fellows in this state about 50 years ago whose

names were Lepky and Gura. They just had to show up. In fact,

as I recall it, people would show up on their behalf and say that

they were there on their behalf and extortion payments would

be promptly forthcoming, because the persons who were pay-

ing the money were aware of the reputation of the individuals.

So you have the Capo court recognizing, as I say, these essen-

tial factors, and recognizing that the bottom line was the ex-

ploitation of a fear of economic loss in order to obtain property

to which the exploiter is not properly entitled.

We have a factual question here and that would be the fear

of the board. So it may well be that some day down the road

that is going to be something to be presented to a court and/or

a jury. ‘

A-39

The real issue that we have seen at least is whether Mr. Icahn

is entitled to the premium he has obtained. That is, is it a

legitimate gain which comes about by hard bargaining, or if

the payment is improper. That characterization seems to im-

plicate other bodies of substantive law. And it seems to me we

could look at it from the point of view of the directors.

What I am getting at, obviously, is there are factual ques-

tions here which probably preclude the dismissal which is

sought. Perhaps once they are fleshed out with discovery, there

may be a disposition short of a trial. I don’t see the disposition

coming about at this juncture.

You get to this question: Can the directors legitimately pay

premium? Certainly what they pay, how they pay it is essen-

tially a matter of some common knowledge. Then we get into

all sorts of problems: Corporate articles, state corporation law

and the good old business judgment rule. And we have to look

at it from the adequacy of the consideration. As I understand

it, the claim is that Icahn gave his promise to go away for a

number of years in exchange for a payment received for his stock

which was in excess of the value of the stock on that day on the

market.

I note the defendant’s hypotheticals and would comment that

none of them are persuasive. Their first example omits entirely

the element that the corporation pays somebody property to

which they are not entitled, that is, a premium. When you add

it, it becomes our case. The second example, likewise, omits any

side payment of a premium outside of the collective bargain-

ing agreement. The Hobbs Act could and perhaps should apply

to strike suits except for a settled line of cases allowing resort

to the courts.

It seems to me that under the circumstances we have got all

sorts of ramifications which I won’t burden you with, including

anti-trust violation. There just doesn’t seem any defensible

distinction or reason to accept the invitation extended by the

defendants.

A-40

I think the only one of the examples which I thought was an

interesting one was the sports example. Is assuming the player

is under contract, this might be actionable under Capo. It is,

however, a whole lot easier to see such a threat as hard bargain-

ing, since the player obviously desires a signed contract; whereas

I am not too sure that most people who were in are in the posi-

tion of Mr. Icahn earnestly wish to assume control of a corpora-

tion. Needless to say, he did assume control of TWA. Whether

that means that’s enough for any one man or not I am not

prepared to say.

That distinction is a plausible one and may be sufficient to

hang an argument on. It seems to me what we are going to be

talking about is the exploitation of fear, the cause of which need

not be unlawful, and the intent of the exploiter. Clearly the use

of fear must be wrongful to survive the test.

The plaintiffs recognize that if Mr. Icahn’s intent at the outset

is crucial. If he didn’t intend to complete a takeover but only

to force the payment, then I imagine the act would be indictable.

It seems to me that puts the plaintiffs at the bottom of an

uphill fight. But it seems to me at this stage proper pleading

will survive this, as well as a Rule 56 motion just as long as the

court can be satisfied that Icahn’s intent remains an issue.

I think that what I have done is pretty much spell out my

thinking. There are two other matters that should be dealt with

briefly. I don’t think either of them are binding. The reliance

of the defendants on the Chock Full ’o Nuts case that was re-

ferred to a few minutes ago, and the Dan River case down in

the Fourth Circuit.

I don’t think, frankly, that that’s going to turn too many people

around. Turning to Mr. Block, make your argument as you

perceive it and then I will ask you a couple of questions.

MR. BLOCK: After all that you are going to let me make

my argument? Thank you, your Honor.

A-41

Your Honor, you are dealing with commerce, and if you are

correct in what you say, you have put one major road block in

legitimate commerce on the street, because in any negotiation

concerning anything leverage and economic fear is the

motivating factor that ultimately results in the determination

by both sides as to where to agree, how cases are settled.

You look at what you are trying to accomplish and what you

may lose. Fear, which you have identified as an issue here, can’t

just be fear. Even Judge Kearse in Capo says it must be

reasonable fear.

THE COURT: I figured that my cushy position as an officer

and director of a profitable corporation is going to be terminated

and that I perhaps do not have the proverbial golden parachute

and I have reached a point in my career that it is unlikely that

I can do as well, wouldn’t it be reasonable for me to have that

economic fear?

MR. BLOCK: You are suggesting a director has breached his

fiduciary duty in what you describe. Let me just cite to you what

a director says. He says this case can’t be looked at in a vacuum.

Director Allan Johnson asked the exact question. There is a

similar case in the state court.

THE COURT: When is that case going to be tried?

MR. BLOCK: “Q. Is it fair to describe the board as being

scared that Mr. Icahn may get control of this company?

“A. I don’t think being scared had anything to do with it.”

That’s not part of this motion but let me put the case in con-

text. Mr. Icahn brought bought 17 percent of Viacom and an-

nounced he wanted to pay a $10 premium over the market, $75

for a $65 stock. The company first adopted a poison pill which

says you can’t buy the company. Then they add adopted a poison

put which means if you buy the company all the debt holders

get all the stock back. They answered that they were going to

do a discriminatory tender offer. They were going to make a

A-42

tender offer to all the shareholders of the company. But Mr.

Icahn I guess I ought to be suing for extortion, civil extortion

which doesn’t exist against the board of directors of the com-

pany who literally forced my client to sell his stock.

The Fourth Circuit in describing this kind of circumstances

in the case you have looked at, the Dan River case, said, in

essence, this is just a question of whenever somebody seeks to

purchase a company, a board, in its fiduciary responsibility and

relationship, has to make certain determinations. It may be

defensive actions. One of the defensive actions it may take is

it might enter into negotiation and find the strike price at which

a willing seller is willing to sell and the company is willing to

buy.

This case shouldn’t be looked at in a vacuum. The price of

this stock according to today’s newspaper on a post-split slit basis

is $100 a share. Maybe recision is an appropriate ready. We could

give back to the corporation a $75 stock that we sold a few

months ago and get back $100. The very board of directors wants

to do a management L B O, but they only want to do it at $98

because an outside group wants to pay a hundred. To look at

the case of Viacom and say that because the plaintiff says we

received more than the market price is to be myopic.

Stocks have values. The market place need not always find

the right value. Here we have evidence, that the court can take

judicial notice of, that the company is worth, let alone in the

eyes of the greedy management $100 dollars a share, 33 1/3 per-

cent more than my client more than a few months ago received

for his shares. I think that demonstrates the question of bargain-

ing gaining. There was a buyer that thought the stock was worth

bump and a seller that thought it was worth bump. That we

receive something more than the market I don’t think is any par-

ticular issue. That when Joe Morris tells Mr. Parcells that he

is not going to play in the superbow] unless he received a 100,000

is not extortion.

THE COURT: Joe Morris is an unique individual?

A-43

MR. BLOCK: 17 percent of a company is a unique amount

of shares.

THE COURT: Is it really? Other than it is a lot of shares,

it’s not unique. Each share as a par value. Each share entitles

the shareholder to a certain per share dividend. The market

values, the shares, it seems to me that market value is used for

many purposes, among other things, the tax purpose. But here

Icahn got $55 million more than the market. Why? That’s the

question. Why?

MR. BLOCK: Because his choice, as put to him by board of

directors of this company, was if you don’t sell us your shares

we will do all the things I just said including a discriminatory

tender offer. These are all publicly filed documents that this

court can take judicial notices. He had a choice. Either he was

going to be hit very very hard or accept what was being offered

to him for his shares. The board of directors as it turns out was

correct in valuing the company because a couple of months later

they told their own shareholders that they were willing to pay

them $98 a share, and indeed National Amusements announced

today in the newspapers they were willing to pay 100.

They made a business judgment. The judgment was that

Icahn in offering $75 dollars a share was making a bid that they

viewed as inadequate. In their business judgment they thought

the company was worth more. In this case they proved to be

correct by subsequent events. Somebody was willing to pay a

hundred dollars a share.

THE COURT: You know what you have just done, and it’s

understandable, you have just sealed my mind that though you

may prevail on the merits, it would not be appropriate to decide

the issue that you have presented on a Rule 10b-6 motion. That’s

where we are. Remember, we are not at a point where we have

just finished trying the case and your argument is that the plain-

tiff has not made out a case by a preponderance of the evidence.

A-44

The real question in my mind is do we have something to try,

and the answer in my judgment, based on what you just said

in response to my question, is yes, we do. You may be right, but

it seems to me that whether or not you are right has to go beyond

the face of any set of pleadings.

MR. BLOCK: Your Honor, if I can respectfully disagree.

THE COURT: You certainly can.

MR. BLOCK: This is not an issue of fact. This an issue of

law. The lawful activity, the lawful act to do something lawful

can’t be a violation a criminal statute, which is what your Honor

is saying you are ready to say can go beyond the motion to

dismiss. You cannot have legitimate commerce be extortion, and

that’s what you saying.

THE COURT: No, but you see what you have got. I get this

a lot and you may recall I get this usually at the conclusion of

the government's case in a criminal prosecution when the defense

gets up and argues for a dismissal. At that juncture I have to

invariably tell people — and you do it also in civil cases — that

at least at this stage of the litigation those reasonable inferences

which are to be drawn have to be drawn in favor of the plain-

tiff. You may come in with tremendous arguments that will per-

suade a jury: Mr. Icahn is a benefactor, or that his judgment

was terrible, he only took a $55 million profit when he could

have taken a hundred and maybe we should take up a collec-

tion for him. But isn’t that to be left for another day? That's

the real problem.

MR. BLOCK: Your Honor, you are expending the law and

in doing so you are opening the courts to anybody who has ever

engaged in two or more negotiations to be sued by an unhappy

adversary at the bargaining table for extortion or coercion in

the negotiating process.

Moreover, if in fact we are going to say on a motion to dismiss

in the RICO context that based on this thin reed we are going

A-45

to say discovery, in what they characterized as six from column

A and two from column B is appropriate, we are going to place

upon the defendants an enormous burden of cost and effort to

defend a case which, your Honor, I believe as a matter of law

should not survive this motion.

THE COURT: Let me put a question to Mr. Lowey. Based

on what Mr. Block has been saying concerning the present value

of the shares, would you kindly tell me what your client’s

damages are?

MR. LOWEY: Your Honor, the damages are calculated as of

the time of the greenmail. That’s point one.

THE COURT: Am not sure I agree with that, but let’s hear

your arguments.

MR. LOWEY: The damages at that time, let’s focus on that

time —

THE COURT: Did your client sell his stock?

MR. LOWEY: I’m sorry. I have misspoken and we are not

on the same wavelength.

THE COURT: I thought at the time of greenmail he sold his

stock.

MR. LOWEY: I answered the question as if my client was

part of the corporation. I want to make that clear. Our client

here is Viacom. This is a derivative action. Mr. Anderson is suing

on behalf of the corporation and so in answering your question,

my answer is —

THE COURT: Wait a minute. You have those security law

predicates that you were talking about before. You've got to be

A-46

a buyer or a seller, don’t you? The corporation can't own those

claims, am I not correct?

MR. LOWEY: A different issue but I will answer it surely,

your Honor. We are claiming — I want to fit the predicate, your

Honor’s question, into the whole scheme of things.

The predicate acts that we have alleged are specific prior

violations of the securities laws knowingly by Mr. Icahn which

are, by definition, predicate acts under 1961, that is, the RICO

statute. We start off with 1961. The RICO statute takes you in

different phases at the time. Your Honor’s question: What about

damages? and that comes under 1964.

So first we start off with 1961, what are the elements of a

RICO claim. And we take them element by element. One the

elements is you have to allege a —

THE COURT: There are seven constituent elements.

MR. LOWEY: Pattern of racketeering activity.

THE COURT: That the defendant through the commission

of two or more acts constituting a pattern of racketeering ac-

tivity directly or indirectly invests in or maintains an interest

in or participates in an erNerprise, the activities of which affect

interstate commerce’ That’s not me, that’s Moss v. Morgan

Stanley. The plaintiff also have to show that they were injured

by reason of the defendant's prohibited conduct, also coming

out of Moss v. Morgan Stanley, and specifically referring to

1964 C.

Now we start with that. Do you agree with my explication

so far

MR. LOWEY: Not quite. The reason I don’t agree is because

the injury that is being claimed is not an injury that comes by

A-47

the injured party from the predicate acts. That is not a sequence

of the statute, and it is quite clear that’s not the sequence of

the statute. It’s not the predicate acts that cause the injury. It’s

the predicate acts that give rise to the substantive violation.

One turns to Section 1964 which is entitled Civil Remedy to

Determine Who Can Claim Injury. The words of the statute

of 64 C, “Any person injured in his business or property by reason

of a violation of Section 1962” so one has to turn to Section 1962.

1962 has four component parts. Only three of them are involved

in this pleading.

The first violation of 1962 subsection A which is alleged in

this pleading is the use of the proceeds — I will be colloquial

rather than statutory, but the use of the proceeds of the prior

greenmail in the current greenmail. It’s the proceeds of the pat-

tern of racketeering activity that are being used here.

The subsection B of 1962 deals with the acquisition of an in-

terest in Viacom as part of a pattern of racketeering activity.

We claim, we allege that his acquisition of shares of Viacom

was part of a pattern of racketeering activity just as it was with

the other prior extortion racketeering pattern that we have

alleged in these other situations.

And subsection D is conspiracy. In order to be entitled to the

civil remedy provided by Section 1964 C, we have to show that

we have been injured, we meaning Viacom the corporation, in

this derivative action that Viacom was injured in its business

or property by reason of Icahn’s violation of Section 1962.

If we establish that, that because he had been engaging in

a pattern of racketeering activity and throughout that he made

an investment in Viacom and he then goes ahead with the

substantive violation in the Viacom situation, not part of the

prior pattern but here alleging a specific action of extortion

against Viacom, and they are damaged as a result of that, we

have satisfied the pleading requirements of the RICO statute.

a ee, ee ee

A-48

Your Honor is quite right to say that proof is another matter,

but we do not have to show, and specifically — my colleague

is pointing out to me quite correctly in response to answer your

Honor’s question about where’s damage, we do point out that

the F.A.S.B. accounting rules required Viacom, and Viacom did

take a $28 million charge against it’s current earnings for the

quarter ending June 30, 1986. That was required to be done.

THE COURT: I don’t think that answers my question.

MR. LOWEY: That goes to the point of what are the damages.

THE COURT: No, it doesn’t. That’s an accounting matter.

He may have gotten money from a company which had a

substantial intrinsic value which was cash poor and could have

and would have preferred to use its cash for other purposes and

was required to take this charge. But let me assume another set

of the facts.

It would be legitimate, as I see it, to pay Icahn what they

paid him if the directors were to say, we paid him more than

market but we knew that the corporation was worth more than

he was offering.

In that circumstance it seems to me the directors are respect-

ing rather than abrogating their duty to the shareholder when

they tell this fellow to go away and they pay him off to do so,

because in the context of that, thev have preserved the

shareholder to another day when the stock goes up.

I had a case years ago where I recall] that just because the

stock went up in value during the pendency of the litigation,

my claim went down the tubes.

I am troubled by this question of damage. Yes, they paid more

than market, and | think if your man had sold out and then

the price of the shares had gone one way or the other, he might

have had an argument. But he held on.

A-49

He is there really suing derivatively on behalf of the corpora-

tion. But what is the corporation? The corporation is the sum

of the shareholders. And it seems it me if the sum of the

shareholders have actually benefited by the stock going up

beyond what Icahn got, beyond what Icahn offered, there may

be a serious question of liability but no damages.

MR. LOWEY: May I respond to that. I think I can supply

the necessary ingredient between the premises of your argument

and the conclusion for your argument. That ingredient is

something that your Honor deals with in every tort case that

your Honor handles. That is the ingredient of proximate cause.

You are missing something here. Let me give you the opposite

hypothetical. at the end of May, management of Viacom, direc-

tors of Viacom pay a premium over market, substantial premium

over market, to Icahn and at that particular point in time there's

no question that the market.could ever give him that and he

has come out with a premium. Within the next few days

something terrible happens at Viacom. The FCC establishes a

new rule that you can only have one television station or cable

station, or worse yet, Bill Cosby gets arrested for a morals viola-

tion or something like that and the entire value, the Bill Cosby

series has to be taken off the air. The point is: intervening events.

I am suggesting to your Honor that what happened subse-

quently, like the investment of Mr. Redstone who is the person

who is now making this bid that we are reading about in the

paper, is an intervening event. It is something that happened

subsequent to the events we are dealing with here and it is not

an event that is related to, for purposes of calculating damages,

Mr. Icahn’s situation.

THE COURT: I am not persuaded, let’s put it that way. Let

me get back and maybe I will help you if I get back on to Mr.

Block. Mr. Block, can you favor me with any square holdings

that what has been characterized here as greenmai! is per se

lawful?

A-50

MR. BLOCK: Yes. I think, your Honor, that the Fourth Cir-

cuit and I'll read to you a paragraph from the decision in Dan

River: “Plaintiff likens ultimatum to an extortionate threat but

we fail to appreciate the supposed similarity. Icahn does put

a corporation’s management to a difficult choice: Accede to a

takeover or employ defensive moves but so does any party who

altogether lawfully contempt plates a takeover attempt.”

That case is on all fours with this case on the question of

greenmail.

If I could go back to Capo, it is a case that Judge Kearse wrote

the opinion on.

THE COURT: Let’s stay with Dan River for just a moment.

The case as I read it really only holds that the plaintiff's com-

plaint did not justify injunctive relief under the securities laws

and what you have read really does not solve the problem. The

RICO claim foundered on the predicate offenses of an invest-

ment company Icahn controlled and previous greenmail offenses.

The court concluded, and I would quote, “There are just too

many flaws and too much speculation” and that’s at Page 290

of Dan River. So I do not feel that Dan River, much as you would

like it to, stands for the proposition that greenmail is per se

lawful. Now you're back to Capo. I just thought should leave

you with that with that comforting thought.

MR. BLOCK: I would like to disagree. The court in Dan River

did deny a preliminary injunction but it denied it because there

was no likelihood of success on the merits. The language I read

to your Honor at least with respect to the allegation of green-

mail —

THE COURT: It would have been helpful if they sua sponte

dismissed. What happened after the denial of injunction, if you

know?

aaa

A-51

MR. BLOCK: In all of those cases that’s the end of it. The

company’s employees did an employee ESOP and that was the

end of it. There are a slew of cases in New York, Delaware and

elsewhere that hold in essence that the purchasing of stock by

a corporation, a target of a repurchase, not the word greenmail,

is perfectly lawful and totally within the discretion of the board

of directors of the public company. I cite Lewis v. Daum in

Delaware and there is a slew of cases in New York. I would be

happy to supply your Honor with the names.

My colleague says Pollack v. Delaware. There are a whole

bunch of cases which hold that a corporation in dealing with

its own stock including lat has been called greenmail is perfectly

legal. The issue sometimes comes up —

THE COURT: I wouldn’t argue that general proposition deal-

ing in its own stock. There are numerous companies which

presently are repurchasing stock. I may disagree with their

economic theory, and it has been discussed in economic jour-

nais, but that’s perfectly legal. I don’t think that’s getting me

where I want to go.

MR. BLOCK: That's all you are dealing with in this particular

case.

THE COURT: No, it isn’t. Purchasing in the market is one

thing; purchasing from an individual with the reputation of your

client, for a premium, is something else.

MR. BLOCK: Let me deal with both of those issues. First,

your Honor, when I said targeted repurchases that means ex-

actly greenmail, purchasing from a specific individual at a price

significantly above the market price. There are no less than ten

cases that say that that’s perfectly within the discretion of the

board of directors of a public corporation and there are none,

with the possible, possible exception of the Goodrich case, on

the legal issue whether the demand was appropriate that might

be said to go the other way. And I am not sure it goes the other

way.

A-52

Secondly, it is unfair to talk about the reputation of my client.

What has been alleged in the complaint here was that because

it was Mr. Icahn there was fear. Fear of what? What has Mr.

Icahn done? He has acquired two very large public corpora-

tions TWA and ACF. Both public, both in excess of a billion

dollars in capitalization. Mr. Icahn has at least on six other oc-

casions purchased stock. His reputation is he sold the stock back.

There was a contest. Management that said we don’t want to

sell this company, we want to stay independent.

What’s the fear created by Mr. Icahn’s reputation? What is

the connection? What is this reputation? Supposedly, according

to this complaint because we are only dealing with the com-

pleted transaction in the complaint, that they say is Mr. Icahn’s

reputation? Takeovers are a perfectly legitimate activity. If in

fact Mr. Icahn succeeded with the complaint and was successful

and if in fact some of those people lost some of their jobs, which

is possible, and in some cases it doesn’t happen, is that il-

legitimate economic activity? Of course it is not. His reputa-

tion for what? To me the pleading on its face is insufficient when

it says fears are created by Mr. Icahn’s reputation. Reputation

to be bought out? Why would that concern him. This would

make them happy if he goes away.

Reputation to do what? What they are really saying is the

reputation to acquire companies and get rid of certain manage-

ment people. Your Honor, that’s capitalism. That is what has

happened in America in the last ten years. Companies have been

acquired by different managers and certain economic changes

in those companies have taken place.

THE COURT: The actual acquisition? The actual takeover

creates no problems.

The fear of a takeover, the crying of wolf, if that’s what it

is, creates the problem. You gave me a whole hatful of cases a

few moments ago and I was curious when you said there were

so many out there, if those cases concern premiums for control.

A-53

MR. BLOCK: Yes, in every one of them that’s the issue. I

would be happy to submit that and I will do it tomorrow

morning.

THE COURT: I have thought so. I would like to get those

from you because certainly they are significant. I that’s what

you said but I wasn’t sure. I want to go back. If you just would

send your adversary a copy. I should like to see those and study

them.

I think I interrupted you before when you were talking about

Capo.

MR. BLOCK: I will be brief and I know it is late. The Capo

case deals with an individual charge by a corporation, Kodak,

with responsibility. His responsibility was to hire people. What

Mr. Capo did, he was an entrepreneur. He decided he wouldn't

hire anyone who didn’t pay him some special amount of money.

He took, in essence, a bribe. He received something he was not

entitled to and he illegitimately — this is sort of like the insider

trading cases, the misappropriation theory. He violated his

responsibility of trust to the Kodak Corporation. Kodak didn’t

hire Capo and say go hire some people and, by the way, if you

can make a couple of bucks on the side, please do that. They

said your job in personnel was to hire. He did something im-

proper. That is the distinguishing fact in Capo.

If you look at the Supreme Court’s decision on U.S. v. Ed-

monds it is right on point. Some crazy union person, similar

to what happened in the tragedy in Puerto Rico, took a gun

and shot and blew up corporate property. He did it in order,

like Joe Morris wanted a better deal, wanted more salary. The

Supreme Court of the United States said that he may have

violated a whole bunch of other laws but that was not extor-

tion because it was perfectly lawful for him to want to desire

to get the most money he could get for his services. Just as Mr.

Icahn would have an absolute right to get the most money he

could get for his share of securities.

A-54

Your Honor, I suggest to you that the firing of the gun, the

exploding of a plant, the possible killing or maiming of in-

dividuals is a very, very serious unlawful act. The Supreme Court

of the United States in I guess 1984 held that those facts do not

constitute extortion. I prevail upon this court, you cannot say

that negotiation between two parties where one may be per-

ceived to have more leverage than the other will constitute ex-

tortion. You will open up the court to almost a floodgate of litiga-

tions dealing with people who negotiate amongst themselves.

I think the distinguishing fact in Capo and all the other cases

that do find extortion is that something improper is being done.

Money is being taken in bribery. It’s the union leader who says,

I have a right to picket, but if you pay me a couple of bucks

under the table I will remove the picketing. Those are the ex-

tortion cases. Your Honor, this is a perfectly litigate economic

activity. The sale of stock, whether it is purchased by the com-

pany or anybody else, is a choice, as the Fourth Circuit said,

that the directors made in their business judgment. What is it

worth to them.

THE COURT: Extortion usually, you are saying, is a side pay-

ment, usually cash under the table.

MR. BLOCK: Inconsistent with your obligation — it’s like

the misappropriation cases. If you look at Judge Pollack’s re-

cent decision. You have an assignment from your employer and

you are doing X but you do X plus Y. You go beyond what your

right and your role is and you take something special for yourself.

You in essence have violated that trust to the employer on whose

behalf you are operating. That’s are what those cases say. That’s

the theory.

THE COURT: Let me ask this. I would like to come back

for a moment to Judge Walker’s decision. We deal with them

here, the aiding and abetting cases. Is there a fair agrument to

be made based on Judge Walker’s decision that there could be

a charge leveled against your client that he aided and abetted

the directors in violating their fiduciary duty to the stockholders?

A-55

MR. BLOCK: First you would you have to have an allega-

tion that the board of directors of this company breached its

fiduciary duty and then I think it is perfectly consistent with

Judge Walker’s decision to say that my client, or to allege that

my client aided and abetted that breach of fiduciary duty. Your

Honor, 196] doesn’t list aiding and abetting, breaches of

fiduciary duty as a predicate crime for RICO. It has to be an

indictable offense. I suggest to your Honor that there has never

been an indictment in this country for greenmail. Never, ever,

ever, ever.

THE COURT: Let’s ask Mr. Lowey the question as to whether

he makes that argument in this case, that there was a breach

of fiduciary duty by the directors of Viacom which Mr. Icahn

aided and abetted.

MR. LOWEY: We do not make it in this case. That is precisely

the claim that is being made in the Supreme Court action but

not in this case.

THE COURT: That gets me to this. What are we doing? Are

there two parallel cases? And, if so, why?

MR. LOWEY: Surely. The answer is there are two cases but

they are not parallel. The Supreme Court action is an action

that deals with the leveraged buyout transaction, which is

another situation, in addition to the Icahn greenmail transac-

tion. It encompasses both transactions. And in encompassing

both transactions it does make allegations of breach of fiduciary

duties in connection with both transactions and it does make

allegations that Icahn aided and abetted in the earlier one. That

is, in the greenmail one.

THE COURT: Why shouldn't this case, then, which covers

less ground, be stayed pending the outcome of the state court

action which covers more ground?

MR. LOWEY: They are totally independent claims. Let me

try to put in focus the elements here. This action was started

a ae

A-56

in May of this year. The state court action was started in

September. This action does not raise fiduciary duty claims at

all. It is strictly a Federal action. We did not append state law

claims here.

THE COURT: You have no pendent claims, I recognize that.

MR. LOWEY: By reason of subsequent events which occurred

after the events with which this lawsuit deals, a state law ac-

tion was commenced. The state law action raises violations of

state law which are independent and not related to the RICO

claims here. We don’t claim to answer your Honor’s question.

We don’t claim that those are predicate acts. Mr. Block has

argued, and he is right, I completely agree with Mr. Block, there

is no basis for alleging that a breach of fiduciary duty which

is a violation of an equitable obligation gives rise to an indict-

able offense under 1961. He is right about that and we don't

claim it. So breach of fiduciary duty is really not an element

of the RICO claims here at all.

But what is happening in the Supreme Court is there have

been claims made for state law violations. Different laws are

involved. The RICO claims are not at all dispositive of the claims

in the state court or vice versa. Either case could win or lose

by either party totally independent. The one does not depend

upon the outcome of the other, so they are really separate and

independent claims.

If I may, your Honor, address a couple of points. Have I

satisfied your Honor’s question on that? I would be glad to pur-

sue it further.

THE COURT: The hour is late and I don’t think it would

serve much purpose to speak further.

MR. LOWEY: The state court claim involves other issues,

other factors. The Icahn greenmail is part of it, but only

fiduciary claims are made there and they are independent. May

I also add that I’m sure that Mr. Block will defend those

A-57

vigorously there as he is defending here. He may stand before

your Honor and say, well, sure they can go across the street, why

do we need to be here? When he gets across the treat he will

be making quite a different argument. He will be not so ready

to concede that his client would be willing to admit to breaching

fiduciary duty.

I would like to come back to the Hobbs Act which is before

your Honor today. Let me talk about what Mr. Block insists is

the distinction between our claims and these other cases.

He is willing to admit that labor racketeers are guilty of ex-

tortion, that is, thugs and mobsters, but not model corporate

citizens, people that have never been put in jai! for committing

crimes. Those people can’t commit extortion. If you are a pur-

chaser of large amounts of stock, if you are a corporate raider,

that’s not criminal.

Well, the statute doesn’t make that distinction. Specifically,

the Culvert case, United States Supreme Court in interpreting

the Hobbs Act says you don’t have to be a racketeer to be guilty

of the Hobbs Act. The United States Supreme Court has made

that specific distinction.

Mr. Block would like that distinction to be made, and if not

made on the law at least the suggestion that this is really what

we are talking about when we are talking about Hobbs Act, talk-

ing about thugs and hoods. Not so, Mr. Block. The Supreme

Court says that.

The question is, what is the effect of people like Mr. Icahn

in the financial community? What do his peers think of the

activities?

THE COURT: That is irrelevant. This is not a popularity con-

test. Let me just put this to you. This so called greenmail has

been well known now for four or five years. The U.S. Attorney

in this district, and I am sure in many others, is aware of both

RICO and the Hobbs Act.

A-58

Can you note any prosecutions of people who have acquired

the reputation of Mr. Icahn, and, if I may say so, three or four

other individuals who at least bear a similar reputation, in-

cluding Mr. Pickens, I suppose and Mr. Goldsmith — he’s not a

mister, I guess he’s a sir— and a few others?

MR. LOWEY: Your Honor, I was waiting for that question.

Because my answer to the question is of course there has been

no prosecution yet. The followup question is why not, and let

me answer that.

Specifically in this circuit, Sedima has made clear two vital

interpretations of RICO. Number one, you don’t have to have

a racketeering injury, and, number two, the predicate acts need

not have resulted in criminal convictions.

Prior to Sedima the United States Attorney in this district,

under this circuit’s interpretation of RICO, could not have in-

dicted and convicted Mr. Icahn, had he been so motivated, under

existing law. Now, since Sedima, which is 1985, less than two

years old, it is now clear from the Supreme Court that Mr. Icahn,

who has not been convicted of a crime, but if he has commit-

ted an indictable offense he is subject to such indictment. It

hasn’t happened yet. It has not happened to any of the raiders

yet. There has been no prosecution since 1985 of any greenmail.

As your Honor points out, greenmail is a relatively new

phenomenon in terms of the magnitude of the problem in the

financial community. Let me say it has not gone unnoticed by

commentators in courts either. If I may —

THE COURT: No, don’t, the hour is too late, you are off the

track. I think I have your point. I think I have one or two more

questions for Mr. Block and then maybe we will suspend.

Mr. Block, the aiding and abetting would go to characteriz-

ing the premium as one to which Icahn is entitled. If he is not

so entitled, the payment results from extortion which would be

the predicate offense and therefore indictable and a RICO claim,

would it not?

A-59

MR. BLOCK: We have substantial disagreement on that. The

violation would be a breach of fiduciary duty, a waste of the

corporate assets by the corporate nondefendants, the board of

directors, and if in fact they violated their fiduciary duty there

is case law that says we could be charged, if the facts demonstrate

it, with aiding and abetting and breach of fiduciary duty. That’s

the current state case as it that exists.

I have a complaint, I would like to hand it up, it is going to

parallel at this time and we are being asked in essence to de-

fend exactly the same case in two different courts in two dif-

ferent places. The answer is it is not extortion, but it is breach

of fiduciary duty by the board of directors and waste of the cor-

poration’s assets and possible allegations of aiding and abetting.

THE COURT: Not a state crime either?

MR. BLOCK: No. I hear Sedima is two years old. What did

Sedima say? It said RICO should be read broadly. It didn’t say

that the predicate crime such as the Hobbs Act or the New York

Penal Code shouid be read broadly. Indeed we construe our

criminal statutes rather narrowly. Sedima does nothing to say

that. That’s not to say that your Honor should be the first to

extend the Hobbs Act or the New York Penal act to say a breach

of fiduciary duty by a board of directors and the possibly aiding

and abetting and breach of fiduciary duty should be extortion.

THE COURT: I have two more questions for you and then ~

each of you can have a minute to sum up. I gather it hasn’t been

touched upon but I gather there is no real argument concern-

ing the adequacy of the plaintiff, assuming he complies with

all the technicalities to represent the shareholders?

MR. BLOCK: Your Honor, we moved on that basis prior to

the action being instituted in state court. We said in our mo-

tion to dismiss that these very plaintiffs are prejudicing the rights

of their own class by not suing the people who would be primari-

ly responsible, the board of directors. They have now, subsequent

to the filing of our motion, gone to state court with the same

——————————————

A-60

claim. So we are not now saying that what they are doing is

not in the best interests of shareholders. What we are saying

now is they are doing it in a duplicative fashion.

THE COURT: Not adequate, overly zealous.

MR. BLOCK: Whether they are overly zealous or perfectly

adequate we are not disputing. What we are saying is unfair

to us is to have to defend the same allegations. Even though they

have a different tag on those allegations, they call it aiding and

abetting, fiduciary duties in the state court and RICO here in

the Federal court, it is the same claim and we are being forced

to defend it in two separate places.

THE COURT: Do you have a grievance by virtue of the fact

that they chose not to name the board of directors here in Federal

court?

MR. BLOCK: I think they played fast and loose with your

Honor.

THE COURT: It is troublesome, I will say that. I will ask

for a response when you are finished.

MR. BLOCK: They said to themselves, they read the law, they

understand that in order to get by the demand requirement,

your Honor, your decision today notwithstanding, if they sued

the directors that would be a problem. By not suing the direc-

tors they assume that maybe the directors— and maybe they

talked about it beforehand, maybe the directors did not move

to dismiss this action based on the business judgment rule. After

we moved on that very ground, then they went into state court

and sued the directors as well. I believe they are playing very

fast and loose with this court.

THE COURT: Let me ask Mr. Lowey why he didn’t sue them

and now that he has sued them why he hasn’t sought to join

them here.

A-61

MR. LOWEY: Your Honor, we targeted a case based upon

the Hobbs Act which we believe the time as has come based upon

Sedima and development of the Hobbs Act, including Capo, we

wanted to present a clean issue to your Honor—not to your

Honor because we didn’t know who the wheel would get. But

we filed a complaint and your Honor lucked out and your Honor

now has the issue to determine which is, we recognize, an issue

of first impression. It is not novel. Iis time has come for a

decision.

1 will not burden anyone in this court with some recitation

of learned scholarly views on the matter. But the point is I would

love to claim creativity in this area. I would like to claim that

I woke up one morning wi-h this brilliant idea. But not so. This

is a case that was ready to be brought. And rather than en-

cumbering it with state law pendent claims, breach of fiduciary

duty claims, all of which by the way are not easy to win, I have

been in such cases before. There is, after all, the Goodrich case

in this court.

Judge Walker has sustained a complaint indeed, but there has

been no judgment yet at trial. So alleging a breach of fiduciary

duty claim and an aiding and abetting claim one is met with

the business judgment rule. I needn’t tell your Honor. Your Honor

has alluded to it. In Delaware, actions of this kind are regular-

ly met with the business judgment rule and very little is left with

them absent extreme circumstances.

So it is not a clear shot for a plaintiff to come into court in

a greenmail situation and allege breach of fiduciary duty aiding

and abetting. Mr. Block can pull the cases right out of his brief

case in which those claims have been dismissed on busin__» judg-

ment grounds.

What we chose to do here, not to say that we wouldn't await

a Judge Walker-type decision and we do believe that the tenden-

cy of the law ought to be in that direction, recognizing that

business judgment does not apply in these extreme situations,

these fights for survival. These are not normal decisions of

A-62

management, but we didn’t want to have all that in this court

in this complaint. We wanted to present the Hobbs Act issue.

We believe we are right. We believe the fact that nobody has

said it yet only shows that greenmail is relatively new. RICO

only goes back to 1970. It was not tested very much in the early

years.

The Hobbs Act goes back to 1940 but everybody thought of

it in terms of labor racketeering cases so the law has been

developed quite clearly to a point where if the shoe fits, let’s

try it on. And it does fit here and we submit that certainly — I

will go beyond the complaint stage just for a moment because

Mr. Block took some liberties with some deposition transcripts.

I do want you to know it fits within the facts as we see them.

We aren’t just being technical. We do believe there is strong

evidence to show what Mr. Icahn’s intent really was here and

we do fully intend to pursue this case to trial.

Again, we believe that Mr. Block will have an opportunity

at some point on full record to test out whether or not the Hobbs

Act applies to an outstanding eorporate citizen as well as to a

labor racketeer. But let’s see what the facts are before we test

that one upstairs.

Here on this complaint we believe that we are presenting the

court with a clean legal issue. We did not wish to give a kitchen

sink-type of complaint for the court to deal with here. And that

is why we thought better when circumstances arose later — and

it wasn’t because of Mr. Block. I would not give him credit for

forcing us to go to the state court with this complaint. The oc-

casion arose in another context and that is the leveraged buyout

context which is also the subject of the state court action for

us to do that.

So I would suggest there is only one more matter I want to

bring to the court’s attention.

THE COURT: Bring it swiftly because the hour is late. You

have one minute to bring it to my attention. Mr. Block, you will

have two minutes to respond.

A-63

MR. LOWEY: One case which we have not put into our brief,

and that is the argument that Mr. Block mentions that RICO

does not permit us to seek injuctive or injuctive relief. We didn’t

answer that argument in our brief. I want to give the court a

case of Judge Pratt’s when he was sitting as a district judge in

the Eastern District granted an injunction in a RICO civil case

and said that he did not read Section 1964 to exclude injuctive

relief where appropriate in other circumstances.

THE COURT: How is it appropriate here?

MR. LOWEY: Only because Mr. Block has moved to strike

as part of his motions certain allegations.

THE COURT: Why do you want to maintain, as I under-

stand it if you do want to maintain, any claim for anything other

than money damages?

MR. LOWEY: I don’t, except for the fact —

THE COURT: Then I think we ought to clean up the act.

MR. LOWEY: I will be glad —I regard it as a nonissue at the

moment, absolutely. But if it is stricken I would not want this

to be regarded as with prejudice in some other situation that

may arise.

THE COURT: Injuctive relief shouldn’t be sought after the

fact, and frankly, if new facts and circumstances arise in the

future which dictate injuctive relief you would not be, in my

judgment, bound by some doctrine and be barred from assert-

ing the claim in the future. I must say I did not think that that

particularly belonged here and I still don’t. ;

I think you fellows may wish to clean up some loose ends in

this case, otherwise we are going to have problems as the

discovery proceeds.

A-64

I think you have covered your points. I will say to you so that

Mr. Block will have-a chance to speak, that as I sit here now,

although I did not necessarily subscribe to the proposition you

have a winning case, I think that your case is sufficient not on-

ly to withstand a 12b-6 motion for total dismissal but also prob-

ably at least at this juncture to withstand a summary judgment

motion, and therefore I would be disposed to suggest that it

would be appropriate to proceed to some reasonable discovery

here, perhaps on an expedited basis, and to resolve this ques-

tion on its merits. One of the questions really, at least in my

mind as I sit here now, relates to Mr. Icahn’s intent.

It seems to me that if he intended a takeover and decided for

good and sufficient business reasons to take a premium for his

stock, in my judgment he should not be held liable in this

lawsuit. On the other hand, if it was his intent to obtain money

from this corporation by means which I would characterize as

extortionate, then I suggest that there may well be merit to the

RICO claim as far as liability is concerned.

I have lots of questions concerning damages. All right, Mr.

Block.

MR. KREINDLER: Could I have 30 seconds?

MR. LOWEY: I promised Mr. Kreindler that I would in-

troduce him and I neglected to. Peter Kreindler is a member

of the firm Hughes Hubbard & Reed. He is in their Washington

office. He is a member of the bar of the District of Columbia,

also a member of the bar of the Second Circuit. He informed

me just before the proceedings began this afternoon that he has

never been admitted in this court and I promised to move his

admission and do so now at this time.

THE COURT: That motion is granted.

MR. KREINDLER: Thank you. If I may impose for just 30

seconds. I represent the company, Viacom International, the

nominal defendant in this case. I also represent the outside

a i

| :

creditors of the company. Lest there be no misunderstanding,

and I think it is clear from our answer, it is the position of the

company represented in this case by the board of directors that

the acts of the board were completely lawful and were taken

in the best interests of the company and were designed at every

step of the way, going back to the rights plan that Mr. Block

has referred to and the payment for the purchase of Mr. Icahn’s

shares which is the subject of this action that all of those ac-

tions were taken by the directors to maximize the value for the

shareholders.

I think as Mr. Block points out, the fact that there are cur-

rently offers being made for the company at approximately $95

and $96 a share bears out the fact that the directors’ actions

were taken in the best interests of the shareholders.

THE COURT: Let me stay with you for one moment. Assume

a worse case scenario of liability. What if any damages would

have been proximately caused by the alleged wrongdoing?

MR. KREINDLER: Your Honor, I can say this. The decision

by the board of directors to purchase Mr. Icahn’s shares was

based upon advice of independent investment bankers that the

company’s intrinsic value at that time was between $80 and $100

a share.

THE COURT: Is that advice in written form?

MR. KREINDLER: Yes, it is and it is incorporated into the

minutes of the board of directors and it’s part of the discovery

that has been made available to plaintiffs in this action. Your

Honor, I can’t testify here, I can only say what has happened

to date. What’s happened to date is that the company has now

received two offers, one of which has been valued at approx-

imately $94 a share, the other one has not been valued yet but

there have been public reports that its value is higher. Those

offers have been received by the special committee of the board

of directors and I just wanted to make sure that there was no

misunderstanding on the record that the verified answer that

A-66

the company has put in here which states that the actions were

taken by the board here and what they perceived to be the best

interests of the shareholders, that there is no mistake about that.

THE COURT: Incidentally, since you have risen to speak, I

guess you may wish to comment about the fact that you did

not join in the motion or assert the lack of a demand on the

corporation.

MR. KREINDLER: Your Honor, I think that in part relates

to the status of the state court litigation. Your Honor should

understand that, contrary to the statement that the directors

were not sued until after this case was brought, at the same time

that this case was brought there were state court actions brought

alleging a breach of fiduciary duty and charging Mr. Icahn with

aiding and abetting that breach of fiduciary duty. Those state

court actions have not been prosecuted to date.

Subsequent to the announcement of the management buyout

there was a new state court action brought in which allegation

relating to the management buyout and allegations relating to

the greenmail payment were made. But it is incorrect to state

that the directors were not sued prior to the most recent suit

brought in state court relating to the buyout. The directors were

sued originally at the same time that this case was brought in

this court.

Your Honor, the directors were advised by counsel of the op-

tions available to them in defending the state court actions and

the options available to the company in responding to this ac-

tion, and the decision of the board of directors is duly noted

in our verified answer and that is that counsel for the company

were directed to file the answer, as your Honor has it before you.

I will note one further thing, your Honor, the question about

why the directors were not joined as defendants in this case.

There is no basis under Federal law for the alleged victim of

an extortion to be charged as a co-conspirator with the person

who engages in the extortion.

A-67

THE COURT: Yes, I think that’s a very valid point. In the

extortion situation as opposed to the bribe situation, you are

the victim.

MR. KREINDLER: Yes. So I am not here, your Honor, to

take the position on whether or not the complaint states a claim.

The directors of the company directed us to file the answer that

we filed and I leave that to Mr. Lowey on behalf of the com-

pany as it were, but nevertheless a lawyer for one of shareholders,

and Mr. Block to argue. I do not think the directors could pro-

perly be made a party to this action and obviously will vigorously

defend the state court action.

MR. BLOCK: If I might. I would like to make what I believe

would be helpful suggestions. I believe if your Honor decides

the case you would decide it as a case of first impression and

I would like you certify one, that the demand issue was on both

the directors and the shareholders and, two, the extortion issue

on RICO. I think this is something the Second Circuit should

hear before you put my client to the expense and aggravation

of what is a frivolous action. Mr. Kreindler points out that the

stock is worth in the high 80s. My client’s calculation were sup-

plied in that case as well and we always thought the stock was

valued or worth something in the 80s when we bid 75 and sold

it out for something less than 75.

We are being put to two litigations on the same issues

simultaneously. We are going to bring in the directors in this

case proceeding beyond appeal from your Honor’s decision. The

case is going to be complicated. Of course, the case is going to

take time.

THE COURT: How are you going to claim anything over

against the directors? What did they do?

MR. BLOCK: If we are liable, they are liable. They are the

ones that forced us to sell.

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THE COURT: If the charge is extortion?

MR. BLOCK: Your Honor, if in fact we sold—

THE COURT: Do you really think that you are going to

benefit by bringirig them in and having each side point fingers

at the other in front ever a jury?

MR. BLOCK: The facts are what the facts are, your Honor,

and the jury will decide what’s right and what is wrong. This

case won't be here to see a jury.

THE COURT: The Court of Appeals is not particularly recep-

tive to a 1292 B certification.

MR. BLOCK: Judge Walker did certify the same issue at least

as to one point. It seems to me the case shouldn’t proceed in

this court if it didn’t proceed there. I think we have a stronger

case.

THE COURT: I suggested before to your adversary that

maybe we should consider staying this case pending a determina-

tion by the Court of Appeals whether or not they were going

to accept certification, which they obviously have to do before

the case can go up. That might allay some of your feelings. Or,

alternatively, to stay this litigation pending the outcome of the

state court proceedings, which seemed to me at the time to be

broader. He has rejected that suggestion. You seem to take a con-

trary position.

MR. BLOCK: Yes. It seems fair to me to be put to the effort

of two separate trials on the same issue when I can tell your

Honor, and I have no doubt about this, that this matter won't

be here for trial. We will spend a lot of time on discovery but

we are now seeing in the newspaper the fact that there will be

no shareholders at some point in time because of either the

leveraged buyout of the third party purchase will deprive Mr.

Lowey’s client of the very standing he says he has to be here.

The law in this circuit is once you are no longer a shareholder

you can’t assert derivative claim.

A-69

I don’t want to cry about this but my client is being put to

a great deal of dollar expense and effort for a case that it seems

apparent to me is not going to be one you are going to try. I

think I am entitled to certification if the Goodrich defendants

are entitled to it. I have a much better case.

The issue of RICO extortion, I think what your Honor is do-

ing has such ramifications for this court and other courts na-

tionwide that before the floodgates open let’s have circuit court

review of it. Let the Second Circuit say —

THE COURT: You are an exponent of piecemeal litigation.

I am not. That’s exactly what it is.

MR. BLOCK: This is a case that cries out for it.

THE COURT: I don’t think it cries out for it. If we were talk-

ing of a poor widow lady who was putting her last pennies into

the defense of an unjust lawsuit, it might start to cry. At this

point, I suggest that you wrap it up. We will take a brief recess

and then I will tell what’s going to be.

MR. BLOCK: I would make the motion now to stay this case

pending the outcome in the state court and not to be put to try-

ing two cases on the same issues.

THE COURT: I think we wil! take a brief recess.

(Recess)

THE COURT: Let me conclude by indicating where I stand

at the present time. Turning first to the question of shareholder

demand, I think that the case here, in light of the letter, is a

stronger case than the Feinberg case which was decided by Judge

Walker. My present disposition would be to decide that there

was no reason for a demand to have to be made, for a number

of reasons which we've covered during the course of this argu-

ment. One, of course, being that there had been no request for

it by the corporate defendant; the other being the letter.

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However, if prior to my rendering a decision the Court of Ap-

peals decides to accept certification from Judge Walker’s case,

I should like to be apprised of that, and that may change my

views, not with reference to the merits of the matter, but with

reference to timing.

The other aspect of the case I think presents a closer ques-

tion. I would be disposed at this point, if I were to conclude

as I’m leaning, that the Hobbs Act claim states a claim to cer-

tify that question. I hesitate to certify for two reasons. Number

one, I am opposed in general to piecemeal litigation; number

two, so is the Court of Appeals. However, I recognize that there

could very well be a substantial expenditure of time on all sides

with reference to the discovery.

Finally, is there ongoing discovery at the present time, or have

you been waiting for the decision on this motion?

MR. LOWEY: Your Honor, the discovery that has been pro-

ceeding has essentially been related to the state claims. That

is to say, there has been no discrete separation of issues in the

questioning, but I think the formality of it has been more related

to the state claims than to this case.

THE COURT: Would you have any problem about deferr-

ing any intensive discovery pending a decision on the motion?

MR. LOWEY: There would be no problem with respect to

the Hobbs Act claim. If I may just respond in this case. Mr. block

naturally —

MR. BLOCK: We have a written stipulation stating discovery

in this case is stayed pending your Honor’s decision. We have

a written stipulation.

MR. LOWEY: So I was correct that discovery has proceeded

only in the other case.

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THE COURT: I appreciate that. As far as I am concerned,

we will leave that in place. I will reserve decision.

As I say, my leaning is strong on the demand question for a

variety of reasons and probably would not change no matter

what the Court of Appeals did on that particular application

for interlocutory review. Obviously if they denied it the matter

would be relatively academic in view of my belief that the case

here is a stronger one.

But I can see the point on the He bs Act, so since you have

an agreement to stay discovery, I will reserve on the motion and

when a decision is forthcoming, and it probably will not be

tomorrow, you then, having the advantage of the decision, can

make a determination of what you wish to do as far as possibility

of an interlocutory appeal.

There is anything further?

MR. BLOCK: No. Do you wish us to still supply you with

the cases?

THE COURT: I would appreciate if you would supply the

court with the cases that you indicated during argument that

you would. They would undoubtedly be helpful. I know the ones

you suggested you had and were going to furnish would appear

to be the ones with which I may not be familiar and I would

be benefitted substantially by anything that you believe ap-

propriate. That would go a little beyond even that. If there is

something that occurs to you tomorrow that you think would

be helpful in light of the interchanges that we had here, the ex-

changes that we had, if you would send the court a copy, copy-

ing your adversary it would be accepted as a post-argument sub-

mission. Decision is reserved.

(Concluded)

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

EDWARD L. ANDERSON , et al .,

Plaintiffs,

against

CARL C. ICAHN, et al.,

Defendants.

NOTICE OF MOTION

WEIL, GOTSHAL & MANGES

Attorneys for Defendants

767 FIFTH AVENUE

BOROUGH OF MANHATTAN, NEW YORK, N.Y. 10153

(212) 310-8000

September 27, 1988

The within motion is denied. It

is so ordered.

/s/ Robert Ward

U.S.D.].