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RECCHION v. KIRBY

March 25, 1986

ALFRED R. RECCHION, an individual and derivately on behalf of Westinghouse Electric Corporation, Plaintiff,
v.
ROBERT E. KIRBY, et al., Defendants



The opinion of the court was delivered by: BLOCH

 BLOCH, District, J.

 On February 10, 1986, the Court held a hearing on the question of the plaintiff's adequacy as a representative in the above captioned matter. At the conclusion of the hearing, the Court ordered the parties to file proposed findings of fact and conclusions of law on the issues of plaintiff's adequacy as a representative and the adequacy of the demand on the Board of Directors. Having considered the testimony and reviewed the exhibits admitted into evidence, the Court now enters its findings of fact and conclusions of law.

 Findings of Fact

 1. This is a shareholder's derivative suit brought on behalf of Westinghouse Electric Corporation (Westinghouse) against past and present officers or directors of Westinghouse or its subsidiaries.

 2. Plaintiff Alfred R. Recchion is an individual residing in New Jersey.

 3. The complaint, inter alia, alleges that from on or about August, 1977 and continuing through May 13, 1980, defendants Kristy, Hurlburt, Hayward, Kirchner, and Facchini, officers of Westinghouse subsidiaries, presented a false financial picture of Westinghouse in order to meet their financial performance goals and thereby realize greater executive compensation. To effectuate their goal, these defendants engaged in the following practices:

 
a. Overestimated or underestimated production costs for nuclear and fossil facilities of Westinghouse;
 
b. Arbitrarily adjusted a percentage of completion ratio or a ratio of price to costs on various nuclear plants;
 
c. Took profits from completed construction accounts and allocated them to secret reserve accounts called "bags";
 
d. Used the secret reserve accounts to alter financial results in order to receive bonuses; and
 
e. Covered up excessive executive expenses by offsetting them in OMC Reserve Account 21215 instead of reporting them in the proper reserve account.
 
4. As a result of the aforementioned practices, plaintiff alleges that these defendants engaged in corporate waste and exploitation of corporate information for their personal benefit.
 
5. The complaint further alleges that the remaining defendants breached their fiduciary duty by failing to detect and prevent the aforementioned activities.

 A. The Plaintiff

 6. Recchion was employed by Westinghouse from June of 1965 until his involuntary resignation in April of 1980.

 7. During the relevant time period, plaintiff was employed in the following positions:

 
a. May, 1975 to September, 1977 -- Site Financial Manager, Westinghouse International Power Systems Company, Zagreb, Yugoslavia;
 
b. September, 1977 to December, 1978 -- Manager Financial Planning and Analysis, Westinghouse, Pittsburgh, Pennsylvania;
 
c. February, 1979 to 1980 -- Manager Project Accounting and Proposal Analysis, Westinghouse, Pittsburgh, Pennsylvania;
 
d. 1980 -- Manager Financial Control, Westinghouse International Company, Pittsburgh, Pennsylvania.

 8. In April of 1980, Recchion was asked to resign from Westinghouse because he had violated corporate policy by improperly approving excessive expenditure of company funds.

 9. Plaintiff testified that he felt that he had tremendous growth potential at Westinghouse, whereby he could realize a salary of $150,000 with attendant benefits. Following his involuntary resignation from Westinghouse, plaintiff was forced to make a career path change. Presently, plaintiff has achieved his maximum possible salary of $62,300.

 10. Recchion feels vindictive towards Westinghouse.

 B. Other Litigation

 11. Following Recchion's involuntary resignation, other litigation has been initiated by Mr. Recchion against Westinghouse.

 12. On May 8, 1980, a hearing was held regarding Recchion's claim for unemployment compensation.

 13. On September 1, 1982, Recchion and his wife filed suit against Westinghouse in the Court of Common Pleas of Allegheny County, Pennsylvania, stating several causes of action arising out of his wrongful discharge and seeking substantial compensatory and punitive damages.

 14. On April 12, 1983, plaintiff filed suit in the United States District Court for the Western District of Pennsylvania at 606 F. Supp. 889, individually and derivatively on behalf of Westinghouse against the same individual defendants in the instant suit, alleging violations of the federal securities laws, common law fraud and breach of the defendants' fiduciary duty. By memorandum opinion dated January 25, 1985, the Court, inter alia, dismissed plaintiff's derivative claims for failure to comply with the "demand on directors" requirement of Fed. R. Civ. P. 23.1. By order dated February 27, 1985, plaintiff was denied leave to amend the complaint to include a derivative claim. On April 3, 1985, counsel entered into a stipulation whereby the individual defendants named in the derivative claim did not have to file a responsive pleading in view of the Court's dismissal of that claim. Subsequently, Recchion's individual claims were settled for $2,000.

 15. On May 6, 1985, the instant suit was filed in the Court of Common Pleas of Allegheny County, Pennsylvania, and subsequently removed to the United States District Court for the Western District of Pennsylvania.

 C. Stock Ownership

 16. Recchion sold 252 shares of Westinghouse stock on August 25, 1977.

 17. Plaintiff purchased one share of Westinghouse stock on April 14, 1983, for the sole purpose of bringing a derivative action.

 18. Between the time of the sale and purchase of Westinghouse stock, plaintiff owned no Westinghouse stock.

 D. Recchion's participation and knowledge of the alleged wrongdoing

 20. Recchion became aware of the use of Account 21215 to cover up excessive executive expenditures in late 1979 or early 1980.

 21. Without making any determination on the merits of plaintiff's allegations, and assuming arguendo that the wrongdoings alleged in plaintiff's complaint are true, Recchion participated in the alleged improper accounting practices at the direction of his supervisor, although he knew that they were in violation of generally accepted accounting principles. Specifically, Recchion was involved in manipulating the profits and losses on the balance sheets and adjusting the ratio of percentage cost completion on nuclear plants to meet financial goals.

 22. In 1980, Recchion lied to Westinghouse auditors regarding the complained of accounting practices in Account 21215 at the direction of his superior.

 23. Recchion knew about all of the facts alleged in the complaint at the time he purchased one share of stock in April of 1983.

 E. Verification

 24. The amended complaint which was filed on November 15, 1985, was verified only by Recchion's attorney.

 25. On December 3, 1985, a second affidavit was filed which Recchion admitted was not signed before a notary, although it purports to have been so signed. Instead, the notary's signature was added after Recchion mailed the affidavit to his attorney in Pennsylvania. Recchion did so at the direction of his attorney, although he knew it was improper.

 F. Demand

 26. On or about March 8, 1985, Recchion sent a letter to 17 individuals stating as follows:

 
Dear Director:
 
On behalf of Mr. Recchion I am formerly making a demand upon you to take action, Including legal action for the claims made on behalf of Westinghouse Corporation in ...

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