Full opinion text
TABLE OF CONTENTS I. BACKGROUND AND NATURE OF THE CASE...........................1468 II. SUMMARY JUDGMENT STANDARDS ..................................1470 A. Affidavits...........................................................1471 B. Plaintiffs’ Procedural Objections.......................................1472 III. STATEMENT OF GENERAL FACTS....................................1472 IV. LEGAL THEORIES....................................................1486 A. Federal Securities Fraud.............................................1486 B. Common-law Fraud..................................................1489 C. Breach of Fiduciary Duty.............................................1490 D. Breach of Warranty .................................................1491 E. Materiality.........................................................1492 V. PINE BEND REFINERY...............................................1493 A. Statement of Uncontroverted Facts....................................1493 B. Scope of Claims.....................................................1503 C. Claim: Capacity as of the SPA........................................1504 1) Arguments.....................................................1504 2) Analysis........................................................1506 D. Claim: Future Expansion Plans to 155,000 bpd..........................1507 1) Arguments.....................................................1507 2) Analysis........................................................1509 E. Claim: Future Expansion Plans to 175,000 bpd..........................1510 1) Arguments.....................................................1510 2) Analysis........................................................1511 F. Detrimental Reliance ................................................1511 1) Arguments..........'...........................................1511 2) Analysis........................................................1512 G. Claim: False Statements at the March 1983 Meetings and Material.. 1512 Omissions Prior to the SPA 1) Arguments.....................................................1513 2) Analysis................'........................................1513 VI. CANADIAN AND UNITED STATES OIL AND GAS PROPERTIES.........1514 A. Statement of Facts ..................................................1514 B. Claim: Cold Lake Reserves...........................................1527 1) Undisclosed Development Activities................................1528 a. Factual Overview............................................1528 b. Arguments..................................................1528 e. Analysis....................................................1530 2) Reserve Changes................................................1531 a. Factual Overview.............'...............................1531 b. Arguments..................................................1531 c. Analysis....................................................1532 C. Claim: Giltedge Producing Properties..................................1535 D. Claim: Capa Madison Property.......................................1538 1) Fireflood project................................................1538 a. Factual overview.................•............................1538 b. Arguments..................................................1538 c. Analysis....................................................1539 2) Expected Value of the Capa Madison Unit..........................1539 a. Factual Overview............................................1539 b. Arguments..................................................1540 c. Analysis....................................................1541 VII. ABKO.................................................................1542 A. Statement of Facts ..................................................1542 B. Claims.............................................................1551 C. Arguments..........................................................1552 D. Analysis............................................................1553 1) Reliance on $45 million valuation..................................1554 2) Fair Market Value of Dealership Properties ........................1555 3) Defendants’ Knowledge of Fair Market Value.......................1557 4) Plaintiffs’ reliance on Report’s Valuation............................1557 VIII. ACCOUNTING.........................................................1558 A. Failure To Disclose Non-Recurring Expenses...........................1570 1) Scope of Alleged Claim...........................................1571 2) Arguments.....................................................1572 3) Analysis........................................................1573 B. Capitalization Versus Expensing of Certain Refinery Expenditures........1574 1) Claim..........................................................1574 2) Arguments.....................................................1574 3) Analysis............................'............................1575 C. Capitalization Versus Expensing of Interest on Construction Projects......1577 1) Claim..........................................................1577 2) Arguments.....................................................1577 3) Analysis........................................................1577 D. Accounting for the Loss on Blue Hill...................................1579 1) Claim..........................................................1579 2) Arguments.....................................................1579 3) Analysis........................................................1580 E. Accounting for Refinery Turnaround Expenses..........................1580 1) Claim..........................................................1580 2) Arguments.....................................................1581 3) Analysis........................................................1581 IX. STATUTE OF LIMITATIONS ON CLAIMS AGAINST THE DEFENDANTS CAREY, CORDES AND DAVID KOCH.........................1583 MEMORANDUM AND ORDER CROW, Senior District Judge. For some time, the court has had pending before it the defendants’ motion for summary judgment (Dk.580). By any standards, the briefs and exhibits filed in conjunction with this summary judgment proceeding are extraordinary. The defendants’ memorandum in support of its motion (Dk.581) consists of 138 pages, the plaintiffs’ memorandum in opposition (Dk.597) is 150 pages, the defendants’ reply memorandum (Dk.602) is 75 pages. The plaintiffs’ “Objections to Impermissible Evidentiary Arguments and Response to New Matters in Defendants’ Reply Brief’ (Dk.605), which is in effect a surreply brief, is 20 pages. The defendants’response (Dk.608) to the surreply is another 12 pages. The defendants’ motion and reply and the plaintiffs’ opposing memorandum are supported by statements of fact that total more than 400 pages. Behind each statement of facts are exhibits that total close to 10,000 pages. All together, the memoranda and exhibits take up more than twelve feet of shelf space in the court’s library. Accordingly, it seems an understatement to say only that the parties inundated the court with material. Reasons for the delay go beyond the sheer volume of material filed. The issues and arguments advanced and the factual detail presented in support of them were unusually complex. More often than revealed in this order, both parties expected the court to evaluate arguments without the benefit of a full background explanation of the relevant operating concepts and principles involved in refinery operations, oil and gas exploration, real estate ventures, and accounting matters. Other circumstances also contribute to the complexity of this motion. The plaintiffs’ claims span a period of years. Each area of claims has its own group of witnesses, most of whom are unable to recall the pertinent events and details that occurred more than a decade ago. Consequently, both sides focus the dispute in many instances over the possible interpretations of notes, reports, summaries and forms and over the possible inferences to be drawn from them. For this same reason, expert witnesses take on more importance as does the court’s role in assessing the reasonableness of the inferences underlying the expert opinions being offered. This also makes it critical for the court to understand the purpose and use of the different documents. The court’s work in this regard was frustrated by both sides’ less than exemplary work in citing all of the necessary evidence and testimony. Finally, the court has spent an undue amount of time discerning the scope of the plaintiffs’ pleaded claims. As discussed later, the plaintiffs unabashedly shift the focus on several of their claims from what they initially alleged in their amended complaints and explained in their motions to amend. The defendants on several occasions express surprise at what the plaintiffs now clarify as their claims. The plaintiffs explain some changes to be the result of learning additional facts during discovery. Other changes, however, seem more like questionable efforts to revive a dying claim. To the reader, it may seem no issue goes without comment in this order. The court, however, deliberated on several more issues than are discussed in this tome. Had every issue been addressed here, this order would be longer by several hundred pages. The court confined itself to what are the central matters behind its ruling. Thus, the parties may infer that all issues and arguments have been considered and impliedly decided consistent with the court’s ultimate ruling on the relevant claim. I. BACKGROUND AND NATURE OF THE CASE William and Frederick Koch and the other plaintiffs sold back to Koch Industries, Inc. (“KII”) all of their common stock which was approximately 47.8% of the total common stock outstanding. By the terms of the Stock Purchase Agreement (“SPA”) executed on June 4, 1983, and closed on June 10, 1983, each plaintiff received a cash payment of $200 per share of common stock, an amount equal to par value for the preferred stock owned, dividends on the common and preferred prorated to the date of the Stock Purchase Agreement, and interest from such date to the date of closing. The total cash consideration paid by KII to or for the benefit of the plaintiffs was $1,106 billion. In addition, the plaintiffs received a distribution of then pro-rata share of some offshore oil exploration property. As a result of this transaction, William and Frederick Koch severed their financial ties to the corporation started by their father and left its management in the hands of their brothers, Charles and David Koch. Less than six months after the deal was consummated, William began an investigation to determine whether he had been defrauded. From his investigation, William believed KII had retained an undisclosed interest in an oil and gas concession in Qatar. After an inquiry from William’s counsel and assurances from KII’s counsel, the plaintiffs commenced this action in June of 1985 alleging fraud in connection with Qatar and two other assets (Capa Madison Unit and the Bates & Reimann wells) and alleging a general conspiracy to defraud the selling shareholders. On the defendants’ motion, the court granted summary judgment in November of 1986 on the plaintiffs’ claims concerning Koch Qatar and the Bates and Reimann wells, but denied summary judgment on the Capa Madison Unit. (Dk. 103). After unsuccessfully asking the court to reconsider its ruling or, alternatively, to allow the plaintiffs to amend their complaint, the plaintiffs filed with the Tenth Circuit a writ of mandamus, which was denied. The plaintiffs then filed a new action against KII and other defendants in federal court in Kansas City, Kansas. Judge Saffels dismissed the Kansas City suit, as an improper attempt to split causes of actions arising from a single wrong which should be prosecuted in a single action. The Tenth Circuit subsequently affirmed this dismissal.- The plaintiffs’ efforts to find relief through other tribunals ended with William Koch’s attempted counterclaim in an action brought by Charles and David against William for breach of an agreement to divide family real estate and a coin collection. Judge Kelly dismissed the William’s counterclaim for the same reasons earlier stated in Judge Saffels’ order. The plaintiffs filed another motion for leave to file a second amended complaint. This time the court permitted the plaintiffs to add some allegations. (Dk. 172). The plaintiffs’ second amended complaint added allegations and later amended them concerning Pine Bend Refinery, the value of certain Canadian oil and gas properties, accounting policies and practices underlying KII’s financial statements. The court subsequently limited the scope of these new allegations, as the plaintiffs had filed a second amended complaint that exceeded the scope of the court’s leave. (Dk. 386). The plaintiffs again sought leave to amend their second amended complaint with respect to their accounting allegations. (Dk. 419). The court granted the plaintiffs’ leave to add some of these accounting allegations subject to certain conditions. (Dk. 505). Thereafter, the parties timely completed their remaining discovery and completed their briefing of the pending matters. To the plaintiffs, this case is “a straightforward attempt to remedy” fraud and breaches of warranties and fiduciary duties. (Dk. 597 at 148). Involving more than a “billion dollars,” this case is not a “family vendetta.” (Dk. 597 at 3). Indeed, the “huge sum” of money at stake more than explains the plaintiffs “dogged persistence” in prosecuting their allegations. (Dk. 597 at 3^4). The plaintiffs deny that their case is about “family relationships” but admit that the case is “made more painful because of those relationship.” (Dk. 597 at 4). The defendants paint a much different picture of the same subject. From the lengthy procedural history and the uncontroverted facts, the defendants see a “lawsuit ... fueled by the one-sided vendetta of William Koch against his brothers, Charles and David, and the company they now substantially own.” (Dk. 581, p. 135). They realize that the $435 million from the SPA has immunized William from the ordinary monetary restraints inherent in litigation. According to the defendants, William has “set out on a course of action to sponsor litigation which, as of this date, has occupied the time and attention of at least 25 federal and state judges in nine different proceedings.” (Dk. 581, p. 137). In this case, William has proven himself financially able and willing to add and drop law firms and experts to his litigation team. Indeed, the plaintiffs’ current testimonial experts have charged over $1.5 million for their opinions. After poring over KII records in search of claims, William’s litigation team has pleaded some claims that it has forced to abandon and has shifted the focus of other claims to fit the most recent expert opinions. The defendants say this extraordinary effort simply reveals that the plaintiffs have no valid claims. There is little about this case that is ordinary, plain, or straightforward. With over one billion dollars at stake and both sides being well-heeled for litigation, even what should be simple or ordinary has become complex and extraordinary. Even so, the court believes both sides have had a fair opportunity for discovery and for presenting their positions in this summary judgment proceeding. Moreover, the court believes it has taken the time and made the effort to consider carefully the arguments and issues presented for its ruling. Sometime ago in an order, the court said: It is no secret that the courts have become the stage for the unraveling of a family. There are indications that harbored ill feelings have created and fueled expensive and time-consuming litigation in the courts, as well as, much publicized proceedings within other branches of government. (Dk. 172 at 16). The court summarized its observations in a later order noting that the “case is obviously driven by family spite and is undeterred by general financial considerations.” (Dk. 386 at 16). While it has recognized what it believes to be the obvious, the court has done so only when the plaintiffs’ motives for pursuing the action or for filing a motion were a relevant consideration. For purposes of this motion, the court does not consider the plaintiffs’ motives for bringing this suit to be a factor of much relevance. II. SUMMARY JUDGMENT STANDARDS A court grants a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure if a genuine issue of material fact does not exist and if the movant is entitled to judgment as a matter of law. The court is to determine “whether there is the need for a trial — whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). “Only disputes over facts that might affect the outcome of the suit under the governing law will ... preclude summary judgment.” Id. There are no genuine issues for trial if the record taken as a whole would not persuade a rational trier of fact to find for the nonmoving party. Matsushita Elec. Indust. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). “[TJhere are cases where the evidence is so weak that the case does not raise a genuine issue of fact.” Burnette v. Dow Chemical Co., 849 F.2d 1269, 1273 (10th Cir.1988). The initial burden is with the movant to “point to those portions of the record that demonstrate an absence of a genuine issue of material fact given the relevant substantive law.” Thomas v. Wichita Coca-Cola Bottling Co., 968 F.2d 1022, 1024 (10th Cir.), cert. denied, 506 U.S. 1013, 113 S.Ct. 635, 121 L.Ed.2d 566 (1992). If this burden is met, the nonmovant must “come forward with specific facts showing that there is a genuine issue for trial as to elements essential to” the nonmovant’s claim or position. Martin v. Nannie and Newborns, Inc., 3 F.3d 1410, 1414 (10th Cir.1993) (citations omitted). The nonmovant’s burden is more than a simple showing of “some metaphysical doubt as to the material facts,” Matsushita, 475 U.S. at 586, 106 S.Ct. at 1356; it requires “ ‘present[ing] sufficient evidence in specific, factual form for a jury to return a verdict in that party’s favor.’” Thomas v. International Business Machines, 48 F.3d 478, 484 (10th Cir.1995) (quoting Bacchus Industries, Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991)). The court views the evidence of record and draws all reasonable inferences in the light most favorable to the nonmovant. Id. A party relying on only conclusory allegations cannot defeat a properly supported motion for summary judgment. White v. York Intern. Corp., 45 F.3d 357, 363 (10th Cir.1995). More than a “disfavored procedural shortcut,” summary judgment is an important procedure “designed ‘to secure the just, speedy and inexpensive determination of every action.’ Fed.R.Civ.P. 1.” Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1986). At the same time, a summary judgment motion does not empower a court to act as the jury and determine witness credibility, weigh the evidence, or choose between competing inferences. Windon Third Oil and Gas v. Federal Deposit Ins., 805 F.2d 342, 346 (10th Cir.1986), cert. denied, 480 U.S. 947, 107 S.Ct. 1605, 94 L.Ed.2d 791 (1987). A. Affidavits Both sides challenge one or more affidavits submitted by the other side. To satisfy Rule 56(e) standards, affidavits must “be based on personal knowledge, contain facts which would be admissible at trial, and show that the affiant is competent to testify on the matters stated therein.” Conaway v. Smith, 853 F.2d 789, 792 (10th Cir.1988). A statement merely indicating that a purported affidavit is based upon “information and belief’ is insufficient. Price v. Rochford, 947 F.2d 829, 832-33 (7th Cir.1991). “ ‘[Generalized, unsubstantiated, non-personal affidavits are insufficient____’” Thomas v. International Business Machines, 48 F.3d at 485 (quoting Stevens v. Barnard, 512 F.2d 876, 879 (10th Cir.1975)). The object of Rule 56(e) “is not to replace conclusory allegations of the complaint or answer with conclusory allegations of an affidavit.” Lujan v. National Wildlife Federation, 497 U.S. 871, 888, 110 S.Ct. 3177, 3188, 111 L.Ed.2d 695 (1990). Affidavits offering only ‘“conclusory allegations without specific supporting facts have no probative value.’” Nichols v. Hurley, 921 F.2d 1101, 1113 (10th Cir.1990) (quoting Evers v. General Motors Corp., 770 F.2d 984, 986 (11th Cir.1985)). Conclusory statements going to ultimate issues are not adequate to avoid summary judgment. Nichols v. Hurley, 921 F.2d at 1114. “Rule 56 demands something more specific than the bald assertion of the general truth of a particular matter, rather it requires affidavits that cite specific concrete facts establishing the existence of the truth of the matter asserted.” Hadley v. County of Du Page, 715 F.2d 1238, 1243 (7th Cir.1983), cert. denied, 465 U.S. 1006, 104 S.Ct. 1000, 79 L.Ed.2d 232 (1984). “ ‘Generally, a witness’ affidavit may not be disregarded simply because it conflicts with a prior deposition.” Independent Drug Wholesalers Group, Inc. v. Denton, 833 F.Supp. 1507, 1520 (D.Kan.1993) (citation omitted). Some discrepancies simply go to the weight of the evidence and to the credibility of the witness. Durtsche v. American Colloid Co., 958 F.2d 1007, 1010 n. 2 (10th Cir.1992). Courts should approach these discrepancies in a pragmatic fashion: “A definite distinction must be made between discrepancies which create transparent shams and discrepancies which create an issue of credibility or go to the weight of the evidence. The purpose of summary judgment is to separate real, genuine issues from those which are formal or pretended. To allow every failure of memory or variation in a witness’s testimony to be disregarded as a sham would require far too much from lay witnesses and would deprive the trier of fact of the traditional opportunity to determine which point in time and with which words the witness ... was stating the truth.” Bank of Illinois v. Allied Signal Safety Restraint Systems, 75 F.3d 1162, 1169-70 (7th Cir.1996) (quoting Tippens v. Celotex Corp., 805 F.2d 949, 953 (11th Cir.1986)). On the other hand, a court must remain on guard against tolerating a practice which could undermine “ ‘the very purpose of the summary judgment motion — to weed out unfounded claims, specious denials, and sham defenses.’ ” Bank of Illinois v. Allied Signal Safety Restraint, 75 F.3d at 1169 (“[T]he rule applies only to cases in which the statements are inherently inconsistent and in which the contradiction is not the result of an honest discrepancy or newly discovered evidence.”) (quoting Babrocky v. Jewel Food Co. & Retail Meatcutters Union, 773 F.2d 857, 861 (7th Cir.1985)). “‘[C]ourts will disregard a contrary affidavit when they conclude that it constitutes an attempt to create a sham fact issue.’” Rios v. Bigler, 67 F.3d 1543, 1551 (10th Cir.1995) (quoting Franks v. Nimmo, 796 F.2d 1230, 1237 (10th Cir.1986)). In determining if a sham fact issue exists, the court weighs the following factors: “whether the affiant was cross-examined during his earlier testimony, whether the affiant had access to the pertinent evidence at the time of his earlier testimony or whether the affidavit was based on newly discovered evidence, and whether the earlier testimony reflects confusion which the affidavit attempts to explain.” Franks, 796 F.2d at 1237; see Rios, 67 F.3d at 1551. B. Plaintiffs’ Procedural Objections The plaintiffs object that the defendants’ five sets of uneontroverted facts: (1) include sentences unsupported by a citation to the record; (2) are packaged in an argumentative fashion; (3) cite inadmissible evidence; (4) cite information relative to matters outside the discoverable period of 1981-1985; and (5) cite their own self-serving statements to support summary judgment. The court was mindful of these objections in finding the uncontroverted facts material here. Other than to say that the court’s findings necessarily reflect its rulings on these different objections, the court shall not address them specifically. III. STATEMENT OF GENERAL FACTS 1. Koch Industries, Inc. (“KII”) is a diversified energy company based in Wichita, Kansas. During the period here in controversy, it employed about 7,000 persons and owned and operated a variety of assets including, but not limited to, refineries in Pine Bend, Minnesota and Corpus Christi, Texas; refined products terminals and service stations throughout the United States; a gas fractionation plant in Medford, Oklahoma; several thousands of miles of crude, refined product and natural gas liquids pipelines in the United States and Canada; a fleet of trucks engaged in hauling crude oil; natural gas liquids and refined products; petroleum coke trading facilities; coal mines; oil and gas exploration properties; gas processing plants; manufacturing facilities in the United States, Canada and Italy; ranches in Texas and Montana; and several hundred Chrysler automobile dealership facilities located throughout the United States. 2. As of December 31, 1982, KII had a book net worth of $1.54 billion and had just completed a record year, earning an after tax amount of $309 million. Its outstanding capital stock consisted of preferred stock, having an aggregate par value of $26.6 million, and 11.4 million shares of common stock, having a book value of approximately $133 per share. 3. As of June 4,1983, the plaintiffs owned preferred stock having an aggregate par value of $10.6 million and 5.46 million shares of common stock, approximately 47.8 percent of the total common stock outstanding. Under the terms of the Stock Purchase Agreement (“SPA”), each plaintiff received a cash payment of $200 per share of common stock, an amount equal to par value for the preferred stock owned, dividends on the common and preferred prorated to the date of the Stock Purchase Agreement, and interest from such date to the date of closing. The total cash consideration paid by KII to or for the benefit of the plaintiffs was $1,106 billion. In addition, the plaintiffs received a distribution of their pro-rata share of Hueso. 4. This action was commenced on June 7, 1985. 5. In addition to KII, the defendants consist of Charles G. Koch (Charles), David H. Koch (David), Sterling V. Varner (Varner), Tom M. Carey (Carey) and Donald L. Cordes (Cordes). During the times relevant hereto, Charles was a director of KII and was its chief executive officer, Varner was a director of KII and was its president, David was a director of KII and was an executive vice president, Carey was vice president of finance of KII, and Cordes was vice president of legal affairs of KII. 6. The plaintiffs herein consist of basically three groups of former stockholders of KII: William I. Koch Related parties: Oxbow Energy, Inc. Spring Creek Art Foundation, Inc. Northern Trust Company Frederick R. Koch Related parties: The Fiduciary Trust Company International as Trustee Simmons Family Related parties: L.B. Simmons Energy, Inc. d/b/a Rocket Oil Company Marjorie Simmons Gray Gay A. Roane — daughter of Marjorie Gray Ann Alspaugh — daughter of Marjorie Gray; wife of James P. Linn Louis Howard Andres Cox Paul Anthony Andres Cox Holly Antoinette Andres Cox Farabee Ronald W. Borders, Trustee 7. Fred C. Koch founded KII and actively participated in its affairs until shortly before his death in 1967. He and his wife, Mary, had four children of their marriage. The eldest is Frederick R., followed by Charles and then the fraternal twins, David and William. In 1966 and 1967, Fred C. Koch gave all of his common shares of stock in KII to newly created trusts for each of his four sons. Such gifts were in equal amounts except that Frederick was not included in the gifts of stock made in 1967 with the result that Frederick’s stock interest in KII was always less than that of the other three brothers. 8. During all times relevant to the issues in this case, until the closing of the Stock Purchase Agreement in June 1983, Charles, David and William each owned a little over 20 percent of the issued and outstanding common stock, voting and nonvoting, and Frederick owned a little over 14 percent. The balance of the common stock (about 25 percent) was owned by the Simmons family (13 percent), the family of J. Howard Marshall II who was a member of the Board of Directors (about eight percent), and by employees and others (about four percent). 9. Charles began working for KII in 1961. He was made an officer in 1962 and was elected as president in 1966. In 1967, after the death of Fred C. Koch, Charles became chairman of the Board, a position he has held continuously since that date. David began working for KII in 1970 and has remained its employ to this date. He presently serves as executive vice president of the chemical technology group of KII and is in charge of the equipment manufacturing businesses. 10. William became a full time employee of KII in 1974. Prior to that he had attended the Massachusetts Institute of Technology from which he received bachelor, masters and doctorate degrees in chemical engineering in 1962,1963, and 1971. While attending graduate school he worked one summer at the Pine Bend refinery in its engineering department. Between 1967 and 1974, William operated a venture capital company owned by himself, Charles and David, the purpose of which was to find high technology businesses for personal investment for the three brothers and for KII. In 1976, he became head of the Koch Carbon group, and in 1979, he was elected to the position of vice president of corporate development for KII. William continued in both positions until his employment was terminated in December 1980. 11. Charles, David and William served on the Board of Directors of KII since at least 1967, and between the years 1976 and 1980, the three of them also served on an executive committee of the Board. William resigned his position as a director on the closing of the Stock Purchase Agreement on June 10,1983. 12. Frederick has never been active in the company, never attended stockholder meetings and never asked to have a representative on the Board of Directors of KII until March of 1981, when he caused S. Hazard Gillespie, a retired partner of the prominent New York law firm, Davis, Polk & Wardwell, to be nominated and elected as a director. Mr. Gillespie served as a director until his resignation on June 10, 1983, on the closing of the Stock Purchase Agreement. 13. The Simmons family acquired their interest in KII in the decade between 1940 and 1950 and have had a representative on the Board since that date. Mrs. Marjorie Simmons Gray was a member of the Board from 1967 until March 1981, when her family caused James P. Linn to be elected to the Board of Directors as a representative of the Simmons family. Mr. Linn is an attorney with an Oklahoma City law firm and, at that time, was the son-in-law of Mrs. Gray. Mr. Linn continued to serve as a director until the closing of the Stock Purchase Agreement on June 10,1983. 14. At the Board of Directors meeting in March of 1980, William Koch proposed that the Company study stockholder liquidity. The Board discussed and informally approved the concept of studying ways to improve liquidity and cash flow for KII stockholders. The Board took no formal action during the meeting. In August of 1980, the Board of Directors discussed the matter further. Thereafter, Charles Koch developed an estate planning and liquidity program for the purpose of seeking ways to improve liquidity and cash flow to the stockholders of KII and to assist them in their estate planning needs. Pursuant to that program, Carey and Cordes arranged personal meetings with each of the principal stockholders to ascertain their needs and desires. On October 28, 1980, Carey and Cordes submitted a report to Charles Koch as to their findings and conclusions. Three days later, Charles sent to the principal stockholders of KII a copy of this report along with a questionnaire soliciting their views on the subject of going public and whether they would be willing to sell some of their stock in a public offering. 15. During the summer of 1980, William Koch had been talking to his brother, Frederick, to members of the Simmons family, and to the two sons of Howard Marshall II (E. Pierce Marshall and Howard III), about some ongoing concerns with Charles’ control and management of the company. By the fall of 1980, William believed he had a defined group of “proponents” who were in favor of some changes on the Board of Directors. After reading Charles’ letter dated October 31, 1980, and its enclosures, William was concerned that the proponents’ plans might be upset if voting stock were sold to the Employee Stock Ownership Plan. William was also concerned by an agenda item for the December 1980 Board of Directors meeting that proposed changing the non-voting common stock to voting stock. William believed this latter change would divest the two Marshall sons (who had been given voting stock by their father but had only a modest amount of non-voting stock) of their swing vote position (one voting share for 20 non-voting shares). After the letter dated October 31 was mailed, William talked to each member of his group and decided they needed to act then to change the Board of Directors. Howard Marshall III agreed with the proposal, and on November 25, 1980, William, Frederick, the Simmons family and J. Howard Marshall III, believing they controlled over 50 percent of the voting stock, issued a notice for a special meeting of stockholders of KII to be held on December 5, 1980 for the purpose of (a) removing the existing Board of Directors, (b) expanding the Board from seven members to nine members, (c) electing members to the newly expanded Board, and (d) making certain by-law changes. As of that time, the seven Board members of KII consisted of Charles, David, William, Varner, Carey, Marjorie Simmons Gray and J. Howard Marshall II. 16. William knew that the proponents did not control the necessary number of shares to elect a new Board unless they obtained a proxy from the First National Bank of Wichita as trustee under the trusts created by Fred C. Koch for William and Frederick. In November of 1980, William contacted the bank and asked for and received their proxy for the purpose of adding two new directors. He did not tell them that any directors would be removed. The trustee later revoked its proxy by letter dated December 1, 1980, stating in part that the purpose for the meeting as reflected in the Notice of Special Meeting “transcends those referred to in pri- or conversations and communications with William I. Koch; particularly, the stated purposes of voting on a motion to remove from office the entire Board of Directors.” (DX-Gen 19). 17. Charles and David knew that the four percent of Koch’s voting stock owned by Howard Marshall III represented the controlling interest which they needed as part of their group to remain majority shareholders. Charles and others arranged for Howard Marshall II to discuss with his son the situation and eventually purchase back all of his son’s shares in KII for a total purchase price of $8 million. The effective selling price was $207 per share of common stock, voting and non-voting. Charles and David personally loaned the money to Howard Marshall II for the purchase of these shares. Howard Marshall II sold the shares to Charles and David several days later for the same price that he had bought them from his son. 18. On December 2, 1980, William can-celled his call for a special meeting. 19. At a special meeting of the Board of Directors on December 5, 1980, Varner “advised ... that Mr. William I. Koch had been requested to resign from certain offices and directorships in this corporation and certain of its subsidiaries,” but that he had refused. Varner proposed a resolution adopted by a majority of the Board that terminated William as an employee and officer of KII and its subsidiaries. 20. Because of the sale and purchase of the voting stock held by J. Howard Marshall III and because of the assumption that the First National Bank of Wichita would vote the shares in trust in accordance with the desires of the remainderman of each trust, the voting percentage of William, Frederick, the Simmons family and related parties (hereinafter the “dissidents”) dropped to approximately 47 percent and the voting percentage of Charles, David and the Marshalls was at 49.7 percent, with the remaining shares owned by employees and others. 21. During a telephone conference between Jim Linn and Cordes on December 2, 1980, it was agreed to meet and discuss making a deal to resolve the dispute. Cordes and Carey flew to Oklahoma City on December 10, 1980, to meet with Jim Linn and representatives of Frederick and William for the purpose of negotiating a deal. Although Linn had advised Cordes that everyone would be there and that they would have their “trading hats on,” no one was present at the meeting except for Linn, Marjorie Simmons Gray and one of her grandchildren. William did not come to the meeting, although he was in Oklahoma City at the time. At the meeting, Cordes and Carey outlined a proposal for purchasing one-half the dissidents’ shares now at a price of $140 and then either going public or purchasing the other one-half later on a formula price. 22. In early 1981, KII entered into preliminary negotiations with Kerr McGee, an Oklahoma based oil and gas company that was publicly held. A representative of Kerr McGee approached KII about a possible merger that offered benefits to both companies, including a public market for the dissidents’ shares. The Descriptive Memorandum of KII, which was later furnished to the investment bankers in 1981 and 1982, was initially prepared for the Kerr McGee negotiations. KII endeavored to follow the full disclosure rules of the Securities and Exchange Commission in preparing the Descriptive Memorandum. The negotiations eventually stalled as Kerr McGee’s offers had valued KII’s shares in the range of $130 per share while KII’s offers had valued KII’s shares in the range of $160 per share. 23. In early 1981, William employed the New York law firm of Davis, Polk and Ward-well (“Davis Polk”) to represent him in his dealings with KII. Representatives of that firm met with Cordes in early 1981 and urged him to employ a New York investment banking firm to evaluate KII and propose a solution. In April 1981, KII agreed to Davis Polk’s approach and looked for an. investment banking firm. While preferring Lehman Brothers Kuhn Loeb (“Lehman”), KII employed Morgan Stanley & Company (“Morgan Stanley”) as Frederick and William preferred them. The purpose of Morgan Stanley’s study was to arrive at its opinion of the probable price which KII stock would bring if publicly traded and to resolve other matters and concerns with taking KII public. Lehman simultaneously conducted a similar study apparently at no charge to KII. 24. Morgan Stanley and Lehman concluded their studies by the middle of May 1981. Morgan Stanley presented their results in a meeting with representatives of KII and the dissidents on May 18,1991. Morgan Stanley opined that KII stock would sell for between $150 to $170 per share in a secondary offering. Lehman’s numbers, $140 to $160 per share, were presented to the Board at its meeting in May, along with a summary comparison of the two studies. Both firms had conducted asset valuations. Morgan Stanley had concluded that Koch’s assets were worth $197 to $299 per share, and Lehman’s range was $185 to $216 per share. Charles told the Board in May that Morgan Stanley’s values were too high as they had not accounted for working capital. Charles also reported to the Board that Morgan Stanley believed KII’s value was contingent upon the continuity of current management and its clear control of KII, that Morgan Stanley had said the Company was a “great private company and should stay that way,” and that Lehman had said the Company should not go public “unless it really needs to.” (PX 8, ¶ 16). 25. Immediately following the Board meeting in May of 1981, Cordes outlined a proposal to William Koch, James Linn and S. Hazard Gillespie, the effect of which would be the dissidents would exchange their voting shares for nonvoting shares from Charles, David, and J. Howard Marshall II. A registration statement would then be filed covering the nonvoting shares held by the dissidents plus an additional 100,000 shares offered by David and Charles. Cordes submitted this written proposal to Davis Polk on May 28, 1981. On July 30, 1981, Davis Polk responded that William agreed in principle with the proposal, subject to working out the details, but only if KII purchased up to 1,000,000 shares from the plaintiffs “at a price whieh would represent a premium over the public offering price.” Davis Polk further suggested that William’s sale of stock could be in exchange for the stock of Koch Carbon and for the specialty division of Koch Chemical. Cordes met with Davis Polk lawyers on August 26, 1981, and outlined KII’s proposed valuation of Koch Carbon and the amount of working capital it would contribute to Koch Carbon and the Boston division of Koch Chemical. Cordes also proposed an exchange of these two business assets for about 555,000 shares of stock. After this meeting, there were no further negotiations with Davis Polk attorneys. 26. In October 1981, William and representatives of the other plaintiffs began having meetings with Goldman Sachs & Co., a Wall Street investment banking firm, for the purpose of employing that firm to advise the plaintiffs. In October 1981, William considered litigation against KII as one of his possible options. At th'e recommendation of Goldman Sachs, William was put in touch with Arthur Liman of the New York City law firm of Paul, Weiss, Rifkind, who had a reputation as a skilled business litigator. William employed Liman on a contingency fee arrangement similar to one that is described below between William and Goldman Sachs. 27. In December 1981, the dissidents/plaintiffs entered into a voting trust agreement which, among other things, provided that no beneficial owner of the stock subject to the voting trust could sell any KII stock, voting or non-voting, unless approved by all of the trustees of the voting trust, except that only a majority of the trustees need approve if all of the participants in the voting trust were given an equal chance to sell on the same terms. 28. Eleven months earlier in January of 1981, Charles, David, J. Howard Marshall II, and Varner entered into a voting trust agreement in which they agreed that a majority of them would determine how all shares held in trust would be voted for nominees to the Board and for other matters that would frustrate the purpose of the trust. 29. On February 4,1982, William and the other dissidents formally employed the New York City investment banking firm of Goldman Sachs & Co. (“Goldman Sachs”) to represent them. The engagement letter recites that Goldman Sachs was to represent the dissidents: ... in negotiations looking to (i) the possible sale of all or a portion of the capital stock of Company held by [them] ... by way of redemption, exchange of stock for assets, public offering or otherwise, (ii) the possible acquisition by the [dissidents] or the Company of all or a portion of the capital stock of the Company not owned by the [dissidents] by way of redemption, exchange of stock for assets or otherwise and/or (iii) the possible sale of the Company, by way of merger, a sale of all or a portion of the assets or stock of the Company or otherwise. (DX-Gen 39, PW 00185). The engagement letter also provided that the fee to Goldman Sachs would be .50% of the first $150 per share of the aggregate consideration received by plaintiffs in any transaction plus 1.5% of the aggregate consideration in excess of such amount. Based on that formula, Goldman Sachs would have been entitled to a fee of over $8 million based on the $200 per share price obtained in the SPA. 30. In the early part of 1982, Cordes spoke with Linn to ascertain what had happened to the negotiations with Davis Polk. Linn advised that William had retained Arthur Liman of Paul, Weiss, Rifkind law firm in New York City. Linn further advised that they still wanted to find a resolution to the stockholder dispute. Linn and Cordes agreed to meet immediately after the next KII Board meeting scheduled for March 6, 1982. A meeting was held in New York City on March 10, 1982 at the offices of Paul, Weiss, Rifkind. Each of the parties was represented at such meeting by counsel. In addition, representatives of Goldman Sachs, as the investment banker for the plaintiffs, and Lehman Brothers, as the investment banker for KII, were at the meeting. It was agreed that all negotiations between the parties should be conducted by the investment bankers, that the existence of such negotiations should be kept confidential to protect the interests of the Company, and that the factual investigation required by the investment bankers would take about six weeks. 31. Goldman Sachs was considered one of the leaders in the investment banking industry. In its 1982 Annual Report, Goldman Sachs quoted the Wall Street Journal’s appraisal of Goldman Sachs as “an adviser in more merger and acquisition transactions than any other firm on Wall Street.” (DX-Gen 43, p. 35). Under the leadership of Steve Friedman, currently the co-chairman of Goldman Sachs, Goldman Sachs put together a six person team to conduct the study of KII and advise the plaintiffs on valuation and strategy. It was the function of the Goldman Sachs team to gather information, conduct interviews of management, review documents and then analyze the data accumulated. This process began on March 11,1982 when the Goldman Sachs team compiled a preliminary information request to be delivered to KII, consisting of twenty-five items of information and data, including annual, quarterly and monthly financial statements, oil and gas reserve reports, refinery operating data, pipeline information, real estate evaluations, corporate and personnel organization charts, description of activities of each subsidiary, tax information, crude oil purchase and sales agreements, and several other areas of information. This preliminary information request was delivered to William for his comments and, after taking several of his suggestions, the final list was sent to KII on March 13, 1982. Goldman Sachs sent its information requests to KII by mail directed through Cordes, and he took the lead in responding. KII also delivered its Descriptive Memorandum, which had been prepared during the Kerr McGee negotiations, along with a supplement dated April 1982. In addition, the Goldman Sachs team received information from the following sources: (a) William provided files he had accumulated over the years including projects approved by the Board of Directors, exploration reports, maps, minutes, the Chrysler Realty (ABKO) acquisition, refinery expansion, etc., consisting of some 37 different subject matters. In addition, William briefed the Goldman Sachs team verbally on his knowledge of KII, including background on the heads of the various operating groups. (b) The Goldman Sachs team met with members of KII management on several occasions. At those meetings, the Goldman Sachs team not only heard presentations from various KII personnel, but they received additional documents from them and were afforded and exercised the opportunity to ask detailed questions of both the KII employees and of their public accountants. The KII personnel participating in those meetings included: Charles; Varner; T.M. Carey, vice president-finance; B.A. Paulson, vice president-refining; W.W. Hanna, vice president-marketing; Joe Moeller, refined products marketing; Bill Hougland, vice president-crude oil purchasing; Wes Stanford, vice president-oil field services; Bill Cummings, vice president-equipment manufacturing; R.W. Walton, vice president-exploration; Bud Ziser, Chick McCormick, and John Carraway of Koch Exploration; C.J. Nelson, president of ABKO; David Koch, vice president-chemical technology group; C.C. McCampbell, vice president-hydrocarbon group; George Ablah-ehief executive officer-ABKO; Milton H. Hall, vice president; Donald L. Cordes, vice president-legal affairs. Mr. Eckert, the senior finance man on the Goldman Sachs team, testified that there was extensive questioning, that they were given a lot of detail, and that the KII personnel were trying to present the company in a light most favorable to them. Eckert also stated that he could not recall any question or information request to which they did not receive a satisfactory answer. (c) KII also provided additional detailed information in a data room created specifically for the Goldman Sachs study. A great deal of detailed financial information was in the data room, and the Goldman Sachs team members were allowed and did take detailed notes. The data room included, in part: the quarterly review meetings for the third quarter of 1981 for the more than 30 operating divisions of KII, year end 1981 financial statements for all of such divisions, and many other documents such as lifting costs for the Canadian exploration division, operating expenses for the Pine Bend refinery, over/short reports for Koch Fuels, computer runs for each dealership of ABKO, and fourth quarter systems reports for Koch Oil Company and related pipeline operations. (d) The Goldman Sachs team also searched financial and industry literature, such as the Oil and Gas Journal, for information that would relate to the study of KII. The team consulted with persons outside its members, such as Ray Hansen concerning oil and gas properties and Mr. Ballard concerning real estate. 32. On June 10,1982, William and Arthur Liman had a meeting at which Goldman Sachs presented the first results from their study. At that meeting, Goldman Sachs presented tables and other materials. William asked a lot of questions and requested that Goldman Sachs also perform comparisons with Morgan Stanley’s valuation and others, more thorough evaluation on price/earnings rations, and discounted cash flow analyses with sensitivities for margin and volume. 33. Goldman Sachs completed the additional requested work, dated it June 18,1982, and labelled it as the “Monday package.” On Monday, June 21,1982, members of Goldman Sachs merger department met to review the package for purposes of expressing opinions on value. 34. The Monday package consisted of almost 100 pages and contained a narrative description of KII; its historical earnings and balance sheets from 1977 through and including the plan for 1982; the footnotes to its audited financial statements; the latest financial statements (April 1982); financial comparisons with 11 other publicly held oil and gas companies; comparisons with certain acquisitions transactions involving oil and gas companies; a preliminary list of potential buyers of KII and/or its businesses; an analysis of the value of KII ranging from a low of $1.3 billion to $2 billion; and a separate analysis of the major segments of KII’s business (including the oil gathering, refined products group, the hydrocarbons group, and the chemical technology group) which included a narrative description, historical financial data, comparisons with other companies, lists of potential buyers and range of values. 35. Following the Monday meeting on June 21,1982, some or all of the members of the Goldman Sachs team met with William and his counsel, Arthur Liman and Bud Taylor, on June 25, 1982. Goldman Sachs’ files include an agenda of the subjects to be covered at the meeting: 1. Review sale of the Company through a public offering. 2. Review sale of the Company to one or more purchasers. 3. Discuss redeeming the stock of the Minority for a combination of cash and liquid assets. 4. Discuss purchase of control by the Minority. 5. Review dividing the Company into groups of operating companies and liquid assets and distributing them among the shareholder groups. 6. Review tax aspects of various alternatives. 7. Discuss negotiating strategy. 8. Review presentation to Minority shareholders. 36. Goldman Sachs also prepared and distributed two additional sets of reports at the meeting on June 25, 1982. The first set of reports totalled seventeen pages and provided a valuation range of the major segments of KII and a total asset valuation range of $1,653 billion to $2,253 billion (which converts after subtraction of long term debt and preferred stock to a per share value of $135 to $187 per share, with a mean of $161); compared the valuation ranges previously offered by Lehman and Morgan Stanley; and listed and ranked the different alternatives shown on the agenda. For each alternative, it placed a valuation per share of stock ranging from a mean of $110 per share which could be realized from a public stock offering; to $140 per share if 100% of the KII stock were sold to a third party for cash; $171 per share if all of the KII assets were sold to a third party; $70 per share if the plaintiffs’ stock were sold for cash to a third party; $92 per share if the plaintiffs’ stock were sold to KII for cash; and $171 per share if the plaintiffs’ stock were purchased by KII by the spin off of operating businesses plus cash. Of the potential businesses for spin off or distribution, the report listed the refined products group, the crude oil gathering group, and the United States exploration and production assets. The second set of reports provided by Goldman Sachs contained over 100 pages and resembled the Monday package except for including graphs showing discounted cash flow (“DCF”) analyses of various business segments and a spread sheet valuing the ABKO subsidiary under various assumptions. 37. According to Eckert, William was a demanding client who asked a lot of good questions and wanted to make “sure no stone was left unturned.” William asked numerous questions during the meeting on June 25, 1982. He questioned whether Goldman Sachs had appropriately valued the company and whether they had done the DCF analyses correctly. After the meeting, William met for two hours with Mac Heller and made detailed requests for additional studies including a leverage study of the refined products group, additional data pertaining to returns and cash flows, comments concerning the “prospects of the business,” and more DCF analyses including “testing the Refined Products DCF for its sensitivity to percent of capacity....” (DX-Gen 65, G00042). 38. William believed that Goldman Sachs’ values were too low. William also expressed his concern that Goldman Sachs was trying to lower his expectations to a level where a deal might occur. As early as June 21,1982, William sought the advice of Nathanial Rothschild, a former investment banker. Rothschild suggested that William get a second opinion and he recommended Bain & Co. William did in fact employ Bain & Co. at his first meeting with that firm on July 19, 1982. Earlier, William also sought advice from Henry Burkhardt, III, an independent investor and venture capitalist. 39. During the summer of 1982, William continued to review Goldman Sachs’ work and asked them to do additional tasks. William worked most closely with Goldman Sachs because, among the dissident group, he had the most familiarity with KII. It was decided in July that the dissidents would not meet until September in order that Goldman Sachs could make its presentation to each of the dissidents before the meeting. 40. In the meantime, the preliminary report of Lehman Brothers was done by early June and was finalized on July 2,1982. Lehman’s opinion was that KII’s common stock had a per share value of $161 to $188, with a mean of $175 per share. As a result, KII and Lehman were ready to commence negotiations. 41. In April 1982, a writer for Fortune magazine contacted KII and advised that they wanted to do a story on KII. Representatives from KII and Goldman Sachs agreed that the interviews should proceed but that the stockholder dispute, the investment banking visits and the valuations should not be discussed. William had telephone conversations with the Fortune writer which William had secretly taped. William had told his lawyer, Arthur Liman, that he had simply refused to talk with the reporter per Liman’s advice. Liman was not aware of the taped conversations until they were produced during the 1982 litigation. 42. The article on KII was published by Fortune on July 26, 1982. It fully disclosed the existence of the stockholders’ disputes, repeated many of the dissident group’s allegations about the management style of KII and of Charles Koch. It also suggested that the battle for control was not over and that Charles might not ultimately be successful. KII and its management were distressed over the article and concerned about its potentially unsettling effect on customers and employees. KII management believed the dissident group or their representatives provided the information to the Fortune reporter. 43. In August, a special meeting of the Board of Directors was called, in part, to create an executive committee with “all the powers and authority of this Board of Directors in the management of the business and affairs of this Corporation____” (PX 14, K707601). The dissident board members and their representatives refused to attend this meeting objecting to its legality. The resolution creating an executive committee passed. Among the stated purposes for the creation of the executive committee were that the dissidents were hostile to management and would not hesitate to use sensitive information in a manner adverse to corporate interests and that frank discussions about sensitive matters would be difficult in Board meetings attended by dissidents. 44. William met with Bain & Co. on the 23rd and 25th of July at which time Bain suggested that they would have to do a “blitz” on the valuation since Goldman Sachs had already done their valuation and was ready to negotiate. Bain described the information they needed to determine the value of KII, and William delivered the same to them. 45. The first meeting between Goldman Sachs and representatives of Frederick was held August 3, 1982. Later in August, Fred Eckert of Goldman Sachs and William met with Marjorie Simmons Gray in Colorado Springs. Besides going over values, Eckert discussed the different ways to split up KII and possible negotiating strategies for the dissidents. William discussed possible lawsuits, and Marjorie agreed with the litigation alternative and was not offended by it. 46. William had received advice from his friend and financial advisor, Mr. Rothschild, that William should not argue with Goldman Sachs over its valuation of KII and that he should just tell Goldman Sachs the value he wanted based on the other valuations. 47. After notice of the special August Board meeting was sent, Liman called Cordes and advised him that if the executive committee proposal was adopted, there would be no negotiations. After having Lehman cheek with Goldman Sachs about impending negotiations, the defendants were left with the impression that there was in fact no real prospect for negotiations. Consequently, the Board proceeded