ABCO, Inc., was formed in 1922. By 1978 it was a large diversified corporation with over three billion dollars in assets. It had authorized twenty million shares of common stock. Eleven million, five-hundred thousand (11,500,000) of these shares had been issued. ABCO currently held five-hundred thousand (500,000) in its own name which it had repurchased in the market to use for various employee stock option plans. Another one million (1,000,000) shares were owned by ABSCB, a wholly owned subsidiary of ABCO. The remaining ten million shares were widely held by over ten thousand (10,000) shareholders. Its stock was listed on both the New York and American Stock Exchanges.
On January 15, 1979, ABCO announced a decrease in earnings from $25 to $23 per share. This was attributed primarily to losses sustained by its Electronics Division. Its Electronics Division in the past had accounted for approximately ten percent (10%) of ABCO’s total sales. After the announcement the price of ABCO stock declined from $53 to $48. John Director, a member of ABCO’s Board of Directors, felt that ABCO would recover so he purchased, on January 30, 1979, one-hundred thousand (100,000) shares of stock at $48 per share.
On February 15, 1979, one of the research scientists of the Electronics Division discovered what appeared to be a major breakthrough in microcircuitry. He reported his discovery to Joe Officer, the President of ABCO, and explained that it would take at least two months to verify. If feasible, the breakthrough would turn the Electronics Division around and enable ABCo to capture a large segment of the available market.
On February 20, Officer bough 50,000 shares of ABCo at $48 per share.
Doug Investor, a securities analyst, based on his studies of ABCO’s financial statements, decided it was a good investment. On March 1 he purchased 400,000 shares at $48. On March 9 he purchased 500,000 shares at $49. On March 16 he purchased 200,000 shares at $49. On March 30 he purchased 200,000 shares at $48.
Fred Seller owned 20,000 shares of ABCO. On March 28 he visited Joe Officer to discuss the future of ABCO. Mr. Officer did not tell Mr. Seller of the possible Electronics Division breakthrough, but offered to buy his shares at $50 per share. Seller agreed.
On April 3, 1979, the breakthrough was confirmed. ABCO’s Public Relations Department immediately prepared a release which was carried by all major newspapers and the nationwide wire services. It was picked up and broadcast by the major television and radio news networks as well.
ABCO’s stock rose to $60 per share by April 5, 1979.
John Director, needing cash, sold 50,000 of his shares on June 15 at $60 per share. He sold the remaining 40,000 on August 3 at $60 per share. Joe Officer sold all 70,000 of his shares on October 3 at $65 per share.
Doug Investor sold 125,000 shares on September 2 at $43, 75,000 on September 19, 500,000 on September 26, and the remaining 600,000 on October 4. These last three sales were at $60 per share.
1. Fred Seller comes to you today. Advise him of his possible cause(s) of action and any recovery.
2. Jeff Right, another director of ABCO, comes to you today. He wants to know if ABCO has any actions against Officer, Director or Investor, and if so, the possible recovery. Advise him.