Koniag, Inc. v. Frank Pagano, Charlotte Pagano and Raymond Kurt Swensen Superior Court for the State of Alaska (1999) False and misleading non-board proxy solicitation under state proxy regulations.

Attorney for plaintiff: Not revealed.

Attorney for defendant: Not revealed.

Before: Judge Brian Shortell.

Order Granting Plaintiff’s Motion for Summary Judgment As to Count I of its First Amended Complaint

          Plaintiff Koniag, Inc. (“Koniag”) moves for consolidated summary judgment, arguing that statements in certain documents distributed by Frank Pagano, Charlotte Pagano, and Raymond Swensen (“Defendants”) both prior to, and during, their November 1997 proxy solicitation campaign are false and misleading statements of material fact as a matter of law. Based on the analysis below, I agree with Koniag and grant summary judgment.

I. Background

          The documents which are the subject of this motion were sent by Defendants to Koniag shareholders. The documents urged Koniag shareholders, by a proxy vote, to reject a Board proposal to create a permanent trust fund for proceeds from sales of Koniag lands; and to reject the three directors nominated by the Koniag Board. At Koniag’s 1997 Annual Meeting, the permanent trust fund proposal failed, and two of the three nominees of Koniag’s Board were elected. None of the Defendants were elected to the Koniag Board.

          There are three documents which are central to this motion. First, an April 1997 letter from Koniag’s former President, Frank Pagano, to Koniag shareholders. Second, Defendants’ November 1997 proxy solicitation, which sought votes for the December 1997 Koniag annual meeting. Third, a document contained in the proxy solicitation materials entitled, “What Every Shareholder Should Know,” which was distributed by Defendants at a Koniag shareholder informational meeting in Anchorage.

          Koniag argues that the April 1997 letter was a proxy solicitation statement and that certain statements contained in the April letter are materially false and misleading as a matter of law. It also claims that certain statements in the November proxy solicitation are materially false and misleading as a matter of law. It additionally argues that certain statements in Defendants’ solicitation document, “What Every Shareholder Should Know” are materially false and misleading as a matter of law. Koniag finally argues that Defendants’ proxy solicitation, as a matter of law, fails to comply with Alaska securities law regarding non-board proxy solicitations.

II. Summary Judgment Standard

          In order for summary judgment to be granted, the movant must show that there is no genuine issue of material fact and that it is entitled to judgment as a matter of law. Once the movant meets its burden of establishing the absence of any material facts at issue, the non-movant must produce evidence demonstrating that a material issue of fact exists. (citations omitted).

III. Standard of Law

          Koniag is a regional native corporation created under the Alaska Native Claims Settlement Act (“ANCSA”). As such, it is expressly exempted from the Federal Securities Act of 1933 and the Securities Exchange Act of 1934.[1] Therefore, Alaska securities law governs this issue.

IV. Defendants’ April Letter to Koniag Shareholders Was a Proxy Statement

          3 AAC 08.365(14) of the Alaska Administrative Code sets forth the definition of a proxy statement:

“proxy statement” means a letter, publication, press release, advertisement, radio/television script or tape, or other communication of any type which is made available to shareholders under circumstances reasonably calculated to result in the procurement, withholding, or revocation of a proxy.

          This definition essentially codifies earlier federal court decisions. See SEC v. Okin, 132 F.2d 784, 786 (2nd Cir. 1943) (SEC authority over proxy solicitations extends to “any other writings which are part of a continuous plan ending in solicitation and which prepare the way for its success.”); Long Island Lighting Company v. Barbash, 779 F.2d 793, 796 (2nd Cir. 1985) (communication is a proxy solicitation if, seen in the totality of the circumstances, it is reasonably calculated to influence the shareholders’ votes.)

          Koniag argues that the April 1997 letter was a proxy statement because it was a communication made during the execution of Defendants’ continuous plan, which ended in a proxy vote solicitation.

          Defendants argue that the April letter is not a proxy statement. They claim that their letter was sent to only 430 of the 3500 Koniag shareholders, six months prior to the actual solicitation campaign. They also claim that their letter they sent to a portion of the shareholders was a different, later version of the April letter the Koniag Board sent to all 3500 shareholders with its June response.

          I believe that the April letter is a proxy statement under 3 AAC 08.365(14). Defendants’ explicit statement in their November 1997 proxy solicitation “Again . . . ask[ed] and remind[ed]” Koniag shareholders “to refer to the April 2, 1997, correspondence from Frank Pagano to the shareholders . . ..”[2] This reference to the April letter in the November proxy solicitation indicates that it was sent to Koniag shareholders as part of the execution of Defendants’ proxy solicitation campaign and was calculated to influence Koniag shareholders’ proxy votes for the November election.

V. Certain Statements in Defendants’ April Letter Are Materially False and Misleading as a Matter of Law

          The Alaska Securities Act prohibits misrepresentations of material fact in proxy solicitations. AS 45.55.160 provides that:

A person may not, in a document filed with the Administrator or in a proceeding under this chapter, make or cause to be made an untrue statement of material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading.

          Under this language, a single material statement or omission of fact is sufficient to establish a violation of the statute.

          Alaska regulations give broad effect to the prohibitions contained in the statute. 3 AAC 08.315(a) defines a misrepresentation as a statement that, at the time and under the circumstances in which it is made (1) is false or misleading with respect to a material fact; (2) omits a material fact necessary in order to make a statement made in the solicitation not false or misleading; or (3) omits a material fact necessary to correct a statement, in an earlier communication regarding the solicitation of a proxy for the same meeting or subject matter, which has become false or misleading.

          In addition, 3 AAC 08.315(a) provides some examples of what might be a misleading statement under Alaska law: “(1) predictions as to future market values; (2) material that directly or indirectly impugns character, integrity, or personal reputation, or directly or indirectly makes charges concerning improper, illegal, or immoral conduct or associations, without factual foundation. . .”

A. Portions of the April Letter Are False and Misleading

          Koniag argues that Frank Pagano’s April letter contains several misrepresentations under Alaska securities law. The alleged misrepresentations include the following:

  • The [Koniag] Board suspended me from my position as President of our corporation after the [rape] charges were filed [against Frank Pagano]. I was not given the benefit of trial when this action was taken. I was given no opportunity to expose the falsity of the allegations in any kind of unbiased forum.[3]


  • In late 1995 I became aware that I was being misled, lied to and blindsided by our management, counsel, and consultants. I immediately put the board on notice of my concerns and was preparing to closely examine that which I was suspicious of. Before I could put my plan into effect, I was removed from the position to do so and it was made clear I was not wanted back.[4]


  • [While Pagano was President] I found out that actions were taking place or being planned behind my back by [Gross, Martens, and Timme] which I perceived were not in the best interests of our corporation and its shareholders. The suspicious actions I uncovered by these individuals for all intents and purposes appeared to benefit their own personal agendas more than our Corporations’ [sic].[5]


  • With the unbridled support of our CEO, Uwe Gross, Cordez [sic] and Lexo [sic] sued Kotsiosis [sic][6] using Koniag’s money and attorney, Bill Timme. Together, they were trying to shakedown Kotsiosis for $42,000 in cash.[7]


          With regard to the statement about the circumstances surrounding Mr. Pagano’s departure from the Koniag, Defendants have admitted that the allegations that Mr. Pagano was “suspended” and “removed” by the board are false, as Pagano requested the Koniag Board to put him on administrative leave with pay from his job as President of Koniag.[8] In fact, in light of the charges against him, Mr. Pagano stated that “it would be a distraction to the staff [of Koniag], if by my presence, I bring too much attention on the corporation about my case that it jeopardizes our daily business.[9] Accordingly, the statement in the April letter alleging Mr. Pagano’s suspension is false under 3 AAC 08.315(a) because it omits the fact that Pagano requested leave due to his concerns about the effect of his rape charges on Koniag’s public image.

          With regard to the alleged conduct of Gross, Martens, and Timme, these statements are false and misleading under 3 AAC 08.315(a)(2) because they directly impugn these individuals’ character and integrity; and directly allege illegal conduct without factual foundation. The lack of factual foundation is discussed below.

          Regarding Mr. Pagano’s allegations that he was misled, lied to, and blindsided, his supporting evidence for this statement is that it “is a true statement. It is also my opinion.” and that he felt “that I was not being given honest information.’[10]

          Regarding Mr. Pagano’s allegations that Gross, Martens, and Timme were acting on behalf of their own interests, instead of Koniag’s, Mr. Pagano’s supporting evidence consists of a statement alleging that it “is a true statement . . . [and the] conduct did not appear to be, from what I can tell, in the best interests of Koniag . . . or [the] shareholders.”[11]

          Regarding the “shakedown” of Kotsiosis, the only support for this statement is Mr. Pagano’s statement that it is “true.” He states that he is referring to a draft demand letter authored by Timme on behalf of ICRC Energy, Inc. to Katsiotis regarding Katsiotis’ alleged breach of a shareholder agreement and his employment contract. The draft letter states that ICRC Energy would refrain from filing suit against Katsiotis if he agreed to repay $46,000, an amount equivalent to a portion of his salary. Pagano states that he is also referring to a second demand letter seeking the return of certain information in lieu of filing a lawsuit.[12]

          The above-mentioned factual support is insufficient to establish a disputed issue of material fact as to the allegations contained in the statements. Assertions that Mr. Pagano believes his statements are “true” and are his “opinion” are insufficient to establish a material issue of disputed fact under Rule 56(e). The Defendants must set forth actual facts, not conclusory statements.[13]

B. The False & Misleading Statements Are Material

          3 AAC 08.315 provides that “A misrepresentation is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote . . . Subjective proof that one or more shareholders actually granted a proxy because of a misrepresentation is not required.” The regulation’s language defining materiality is taken from the holding in Brown v. Ward, 593 P.2d 247 (Alaska 1979) (adopting the standard for materiality of facts in proxy solicitations set out in TSC Industries v. Northway, Inc., 426 U.S. 438 (1976) as the Alaska common law standard).[14]

          Koniag argues that pursuant to the Alaska Supreme Court opinion in Brown v. Ward, 593 P.2d 247 (Alaska 1979), summary judgment may be granted on issues of materiality.

          Defendants argue that given the large number of conflicting factual issues, and the large number of reasonable inferences to be drawn therefrom, the standard for materiality set out by the U.S. Supreme Court in TSC Industries v. Northway, Inc., 426 U.S. 438 (1976), prevents the granting of Koniag’s summary judgment motion and requires an ordinary trial. The TSC court stated, “Only if the established omissions are ‘so obviously important to an investor, that reasonable minds cannot differ on the question of materiality’ is the ultimate issue of materiality appropriately resolved ‘as a matter of law’ by summary judgment.” Id. at 450 (citations omitted).

          However, Defendants’ proposition ignores the result in Brown, which adopted the TSC standard for materiality. After the Brown court found that the statements at issue were materially misleading, it went on to state “[s]ince we find Ward’s proxy solicitations to be materially false as a matter of law, no further evidence need be received . . .” Brown at 251. Accordingly, as discussed below, I believe that the statements referenced in this order are so obviously important to Koniag shareholders in deciding how to vote their proxies, that reasonable minds could not differ on this conclusion. Therefore, they are material and summary judgment is appropriate in this case.

          Mr. Pagano’s statement regarding the circumstances surrounding his departure is material. Clearly it would be important to a Koniag shareholder, voting for candidates for the Koniag Board, to know whether or not the Board “suspended” and “removed” Mr. Pagano because he discovered their alleged personal agendas and got rid of him in order to cover-up any improprieties on their part.

          With regard to the statements about the conduct of Gross, Martens and Timme, it is undeniable that a reasonable shareholder would consider the following facts important when voting their proxies: the officers of the corporation lie, mislead and blindside; they place their personal interests above the interests of the corporation; and they shakedown individuals for tens of thousands of dollars.

          Moreover, Defendants themselves seem to think these allegations are material. In the proxy solicitation, Mr. Pagano stated to Koniag shareholders, “Judging from the board’s and management’s performance of our affiliates . . . I for one, do not want them managing what rightfully belongs to me.”[15]

VI. Defendants’ Proxy Solicitation Fails to Comply with Alaska Securities Law Regarding Non-board Proxy Solicitations

          3 AAC 08.355(8) requires that a non-board proxy solicitation must be preceded or accompanied by a dated, written proxy statement including . . . a statement of the total amount estimated to be spent and the total amount already expended on the solicitation of proxies.” Furthermore, 3 AAC 08.355(9) requires “a statement indicating who will bear the expense of the solicitation, and the amount each participant in the solicitation has contributed or has agreed to contribute, unless the participant is a contributor of less than $500 in the aggregate.”

          An examination of the proxy solicitation[16] reveals that Defendants failed to provide any information regarding the costs and expenses of their proxy solicitation. Moreover, Defendants, and their expert, Lawrence Carroll, admit that Defendants did not comply with these disclosure requirements.[17]

          Consequently, Defendants’ proxy solicitation is in violation of Alaska securities law.

VII. Koniag Has Established That Defendants’ Proxy Statements Contained False and Misleading Statements of Material Fact. Therefore, Summary Judgment Is Appropriate as to Count I of Koniag’s Complaint.

          Count I of Koniag’s first amended complaint alleges that “[the defendants’] false and misleading statements in proxy solicitations and in the distribution of non-board solicitations and [sic] are in violation of Alaska statutory and regulatory law.[18] Koniag has established 1) false and misleading statements of material fact,[19] 2) failure to comply with Alaska securities law regarding non-board proxy solicitations. Summary judgment is granted, therefore, on Count I of Koniag’s first amended complaint.

          DONE this 5th day of February, 1999, at Anchorage, Alaska.

          Brian Shortell, Superior Court Judge


Footnote 1 – See 43 U.S.C. sec. 1625 (West 1998)

Footnote 2 – See Koniag Memorandum in Support, Ex. 10, pg. 2, _ 1.

Footnote 3 – See Koniag Memorandum In Support, pg. 1, _ 6.

Footnote 4 – Id. at 6 _ 3.

Footnote 5 – Id. at 2, _ 5.

Footnote 6 – Nick Katsiotis, Mark Cordes, and Jim Lexos were 40% shareholders in ICRC Energy, Inc. Koniag is a 60% shareholder in ICRC Energy, Inc.

Footnote 7 – Id. at 3, _ 2.

Footnote 8 – See Koniag Memorandum in Support, Ex. 7, 8, 9, _ 1 (Admissions by each defendant that Frank Pagano requested the Board to put him on administrative leave with pay).

Footnote 9 – See Koniag Memorandum in Support, Ex. 22, pg. 1.

Footnote 10 – See Defendants’ Opposition, Affidavit of Frank Pagano, pg. 55, _58.

Footnote 11 – Id. at 37, _ 18.

Footnote 12 – Id. at 41-43, _ 28.

Footnote 13 – See West v. City of St. Paul, 936 P.2d 136, 140 (Alaska 1997)(“Conclusory statements in opposing affidavits are not sufficient to defeat a summary judgment motion.”).

Footnote 14 – In Brown v. Ward, a dissident candidate for the board of Cook Inlet Region, Inc. (CIRI), another ANCSA corporation, impliedly promised if elected to distribute to each shareholder $300,000 from the mining and sale of coal reserves, a “big chunk of land,” and “thousands of dollars in cash” from the liquidation or real estate investments. The trial court made a factual finding that CIRI did not in fact have the large amounts of land or assets that candidate Ward had represented it did, and that Ward had not considered that ANCSA provisions required CIRI to distribute 70% of the revenues from the production of coal to other regional ANCSA corporations before any distribution to CIRI shareholders could occur. However, the trial court found that Ward’s solicitation was not materially misleading, but expressed “solely a philosophical difference between plaintiff and defendant.” The Alaska Supreme Court reversed. It adopted the U.S. Supreme Court’s standard for materiality as set forth in TSC Industries: “[A] misrepresentation is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” Brown, 593 P.2d at 251,quoting TSC, 426 U.S. at 449. Based upon this standard, the Alaska Supreme Court held that Ward’s proxy statement was so egregiously misleading that it was misleading as a matter of law. Id.

Footnote 15 – See Koniag’s Memorandum in Support, Ex. 10, pg. 3.

Footnote 16 – See Koniag’s Memorandum in Support, Ex. 10.

Footnote 17 – See Defendants’ Opportunity., Affidavit of F. Pagano, pg. 20, _ 101;Affidavit of L. Carroll, Attachment B, pg. 11 – 12.

Footnote 18 – First Amended Complaint at 15.

Footnote 19 – Koniag alleges 101 false and misleading statements of material fact, and sets out its contentions at length in its memoranda. I have not ruled specifically on each contention, because if I were to do so I might not be able to finish this decision until after the millennium. It should suffice that I have discussed the violations specified here. By omitting discussion of other specific violations, I am not ruling against Koniag’s arguments, however. Koniag has shown multiple violations of law in the proxy solicitations.