UNITED STATES DISTRICT COURT
Plaintiff, the United States Securities and Exchange Commission (the "Commission"), alleges the following:
1. During September 1999, defendant Elton L. Jehn purchased the common stock and options of Worthington Foods, Inc. ("Worthington") while in possession of, and/or using, material, nonpublic information regarding the Kellogg Company's ("Kellogg") proposed acquisition or Worthington. Jehn received profits of approximately $192,000.
2. Defendant David W. Maxwell, who at all relevant times was a senior executive of Worthington, disclosed material non-public information regarding Kellogg's proposed acquisition of Worthington to at least Jehn prior to Jehn's September 1999 purchases of Worthington securities.
3. Defendants, directly and indirectly, have engaged and, unless enjoined, will continue to engage in acts, practices, and courses of business which constitute or will constitute violations of Sections 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. §§78j(b)), and Rule 10b-5 (17 C.F.R. §240.10b-5) promulgated thereunder.
4. The Commission brings this action, in part, to enjoin such acts, practices and courses of business pursuant to Sections 21(d) and 21(e) of the Exchange Act (15 U.S.C. §§78u(d) and 78u(e)).
JURISDICTION AND VENUE
5. The Court has jurisdiction of this action pursuant to Sections 21 and 27 of the Exchange Act (15 U.S.C. §§78u and 78aa).
6. Defendants, directly and indirectly, have made use of the: (1) means and instruments of transportation and communication in interstate commerce; (2) means and instrumentalities of interstate commerce; (3) mails; or (4) the facilities of a national securities exchange in connection with the transactions, acts, practices, and courses of business alleged herein within the jurisdiction of this Court and elsewhere.
7. Defendant David W. Maxwell ("Maxwell") is a resident of Westerville, Ohio. From 1970 to 2001, he was employed at various positions for Worthington and its successor Kellogg Company. In September 1999, defendant Maxwell was the director of supply chain management for Worthington.
8. Defendant Elton L. Jehn ("Jehn") is a resident of Westerville, Ohio. He owns and operates Lion's Den Barber and Beauty Salon in Worthington, Ohio. He also owns a billiard club in Worthington, Ohio. Defendant Jehn has been Defendant Maxwell's barber and friend for many years.
A. Worthington Foods, Inc.
9. Worthington is a wholly owned subsidiary of Kellogg with production facilities in Worthington and Zanesville, Ohio. It produces meat alternative food products made from soy and wheat proteins. Worthington was publicly traded corporation headquartered in Worthington, Ohio until November 29, 1999 when it merged with Kellogg. Worthington's securities were registered under Section 12(g) of the Securities Exchange Act of 1934. Its common stock was traded on the Nasdaq National Market and its options were traded on the Philadelphia Stock Exchange. From August 1 to September 30, 1999, Worthington's stock traded in the $11 15/16 to $14 3/8 range.
10. In September 1999, Worthington had a policy that prohibited employees and directors from trading in Worthington securities while in possession of material, non-public information. Worthington's policy also prohibited employees and directors from using material non-public information for personal benefit. In addition, Worthington required all executives and directors to seek approval prior to engaging in transactions in Worthington securities. As a senior executive of Worthington, defendant Maxwell was bound by, and was aware of, this policy.
B. The Kellogg Company
11. Kellogg, a Delaware corporation headquartered in Michigan, and its subsidiaries manufacture and market ready-to-eat cereal and convenience food products. The company's products are generally marketed under the Kellogg name and are sold to the grocery trade for resale to consumers.
12. On July 8, 1999, Kellogg's representatives approached Worthington's Chairman, President and Chief Executive Officer, Dale Twomley, to discuss the possibility of a business combination. On July 16, 1999, top Kellogg officials met with Twomley and other Worthington officials to execute a confidentiality agreement. On July 20, 1999, during a regularly scheduled board meeting, Twomley informed the Worthington board of directors (the "Board") of the ongoing discussions with Kellogg. At that meeting, the Board authorized management to engage an investment banker.
13. On August 10, 1999, Twomley and Worthington officials discussed pricing the deal at .76 Kellogg share per Worthington share ($26.08 per Worthington share). On August 11, 1999, during a special telephonic meeting, the Board authorized the negotiation of a definitive merger agreement. Soon thereafter, Worthington formally engaged U.S. Bancorp Piper Jaffray as its investment banker. On August 24, 1999, Worthington began its due diligence process.
14. On August 26, 1999, during a special telephonic meeting, the Board authorized management to pursue an all cash transaction. That same day, Twomley informed Defendant Maxwell about the proposed merger and explicitly instructed him not to tell anyone about it and not to use the information for personal benefit. At this time, Defendant Maxwell became involved in the due diligence process of the merger preparation.
15. On August 30, 1999, Kellogg delivered to Worthington an initial draft of the merger agreement. On September 8, 1999, the Board met with legal counsel to review the merger agreement. On September 23, 1999, Twomley and Kellogg officials agreed to a price of $24 per share for Worthington stock. The next day, on September 24, 1999, the Board held a special meeting during which the directors authorized management to complete the definitive agreement. Copies of the merger agreement were sent to the Worthington directors on September 27, 1999. On September 29, 1999, the Board met and approved the merger agreement. The parties executed the merger agreement by the end of the day on September 30, 1999. On the morning of October 1, 1999, the parties issued a press release announcing the merger agreement in which Kellogg would pay $24 for each share of Worthington stock. Worthington's stock price closed on October 1, 1999, at $23 1/16, up $8.75 or 61.4% from the prior day's closing.
THE IMPROPER CONDUCT OF THE DEFENDANTS
16. Defendant Maxwell was well aware of Worthington's well-established policy and prohibitions against insider trading. He understood that he was prohibited from trading Worthington stock while in possession of material, non-public information and that he was prohibited from tipping others about that information.
17. On September 22, 1999, defendant Maxwell visited defendant Jehn for a barbershop appointment. During this appointment, defendant Maxwell informed defendant Jehn of Kellogg's anticipated acquisition of Worthington. Defendant Jehn relied on that information in making his September 1999 purchases of Worthington common stock and options. Furthermore, defendant Jehn knew that the information was non-public.
18. Defendant Maxwell breached his duty of trust and confidence to Worthington and its shareholders by disclosing material non-public information to defendant Jehn. Moreover, defendant Maxwell improperly benefited by disclosing that information.
19. Additionally, defendant Jehn improperly benefited by trading on that information. In fact, defendant Jehn made approximately $192,000 by trading on that information.
20. On September 22, 1999, the very same day that defendant Maxwell tipped defendant Jehn, defendant Jehn purchased 1000 shares of Worthington common stock. The following day, September 23, 1999, he purchased an additional 500 shares.
21. Shortly thereafter, defendant Jehn learned that by trading options, he could earn a greater return with less cash outlay. He promptly bought as many Worthington options as he thought his margin account would permit. An option is a security that gives the option buyer the right, but not the obligation, to buy or sell the underlying security at a specified price for a certain, fixed period of time.
22. Defendant Jehn purchased 115 October Worthington call options with a strike price of $12.50 on September 27. A call option is an option that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Defendant Jehn had never traded options prior to placing orders to buy Worthington calls in September 1999. Moreover, he used a $5,000 credit card cash advance to fund those purchases.
23. Furthermore, defendant Jehn asked his broker whether he could purchase even more options on margin. When his broker informed him that he still had margin available, on September 29 he used the last of it to buy an additional 90 October Worthington call options with a strike price of $15.
24. On October 1, defendant Jehn liquidated his position in Worthington securities, selling (to close) 90 Oct 15 calls for a profit of $64,774.50, 65 Oct 12.50 calls for a profit of $67,944.22 50 Oct 12.50 calls for a profit of $52,242, and 1,500 shares of Worthington stock for a profit of $15,915.60. Defendant Jehn's total realized profits were $191,954.57. The following chart shows defendant Jehn's purchases and sales of Worthington Foods securities and his profits:
Violations of Section 10(b) of the Exchange Act
(15 U.S.C. § 78j(b)) and Rule 10b-5
(17 C.F.R. § 240.10b-5) Promulgated Thereunder
25. Paragraphs 1 to 24 are realleged and incorporated by reference herein.
26. By the conduct alleged above, defendant Maxwell and defendant Jehn, in connection with the purchase of securities by the use of the means and instrumentalities of interstate commerce, by the use of the mails, or by the use of the facilities of a national securities exchange, directly and indirectly: employed devices, schemes, and artifices to defraud; made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and engaged in acts, practices and courses of business which would and did operate as a fraud and deceit upon the purchasers and sellers of securities.
27. The defendants acted with scienter when they engaged in the conduct alleged in paragraphs 1 to 24, above.
28. By reason of the activities alleged above, the defendants violated Section 10(b) of the Exchange Act, 15 U.S.C. § 78k(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder.
PRAYER FOR RELIEF
THEREFORE, the Commission respectfully requests that this Court:
Find that the defendants committed the violations alleged above.
Grant a Final Judgment Order of Permanent Injunction, Civil Penalties, and Other Equitable Relief ("Final Judgment"), in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, enjoining the defendants, their agents, servants, employees, assigns, attorneys, and those persons in active concert or participation with them who receive actual notice of the Final Judgment by personal service or otherwise, and each of them, from, directly or indirectly, engaging in acts, practices, and courses of business, in violation of Section 10(b) of the Exchange Act (15 U.S.C. §§78j(b)), and Rule 10b-5 (17 C.F.R. §240.10b-5) promulgated thereunder.
Grant an Order requiring defendants to pay to the registry of this Court disgorgement of their ill-gotten gains plus prejudgment interest from October 1, 1999 to the date of final judgment in this matter.
Grant an Order requiring defendants to pay civil penalties pursuant to Section 21A of the Exchange Act (15 U.S.C. §78u-1).
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant an Order for such further relief as the Court may deem appropriate.
Dated: January 21, 2003 Respectfully Submitted,
ATTORNEYS FOR PLAINTIFF