The opinion of the court was delivered by: TYLER
The underlying action in this case has been brought by plaintiffs to recover for defendants' alleged violations of the antifraud provisions of the federal securities laws. More specifically, plaintiffs claim that they have been induced to purchase securities from JNT Investors, Inc. ("JNT") by reason of defendants' deceptive or negligent practices.
Plaintiffs are Stanley L. Handelman, Allan Handelman and Mary Handelman, customers of JNT. Defendant Loeb, Rhoades & Company ("Loeb, Rhoades"), is a co-partnership engaged in the general brokerage and commission business, and a broker-dealer in securities. Defendant Martin D. Weiss, was an employee of Loeb, Rhoades, and served as a registered representative to the accounts of plaintiffs at Loeb, Rhoades. Defendant Jay N. Tabatchnick was a principal shareholder, director and president of JNT. (Tabatchnick has not yet been served.) Defendant Harlan J. Sauer, the Senior Vice President and Secretary of JNT, was also a shareholder and director of JNT.
Sauer has moved pursuant to 28 U.S.C. § 1406(a) to have this action dismissed or transferred due to lack of proper venue. Alternatively, Sauer seeks to be severed from this action. Weiss has joined with Sauer in seeking to have this case transferred to the District of New Jersey for the convenience of the parties, 28 U.S.C. § 1404(a). Weiss and Sauer have also petitioned to have the law firm of Rosen, Wise, Felzen & Salomon, Esqs., disqualified from representing plaintiffs in this action and from having any connection with this litigation. For the reasons hereinafter discussed, the motions for dismissal, severance and transfer are denied, while the motion for disqualification is granted.
Defendants' motions concerning venue and severance are easily disposed of. Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa) and § 22 of the Securities Act of 1933 (15 U.S.C. § 77v), provide, in effect, that suit may be brought in any United States District Court wherein any of the acts complained of took place or where the defendant is found, is an inhabitant, or transacts business. Defendants have not disputed the fact that many of the key events took place in the Southern District of New York. It is clear, therefore, that this court has the power to hear this case. See e.g. Reich v. Butcher, 338 F. Supp. 438 (E.D. Pa. 1972). Since venue is not improper, this court has no authority under 28 U.S.C. § 1406(a) to transfer the case.
Defendants seek to have this case transferred to New Jersey on the basis that most of the parties to the action reside there and that since the parties will be witnesses, New Jersey will therefore be a more convenient forum. In order to disturb plaintiffs' choice of forum, however, the defendants must show that the District of New Jersey is substantially more convenient. Gulf Oil Corporation v. Gilbert, 330 U.S. 501, 508, 67 S. Ct. 839, 91 L. Ed. 1055 (1947); City of New York v. General Motors Corporation, 357 F. Supp. 327 (S.D.N.Y. 1973). There are no compelling reasons to transfer this case. Defendants Weiss and Sauer live within easy commuting range of New York City, and most of the acts in question occurred in this district. Moreover, because the related JNT liquidation proceeding is before it, this court has some familiarity with the background of this suit. Many, if not all, important records of JNT are also located in this district.
Defendants' motions brought under 28 U.S.C. §§ 1406(a) and 1404(a) to dismiss, sever, or transfer are therefore denied.
In order to fairly consider defendants' motion to disqualify plaintiffs' law firm, it is necessary to understand a bit of the background to this proceeding. On February 15, 1972, the Securities and Exchange Commission ("SEC") commenced an action against JNT for violations of the bookkeeping and net capital provisions of the Securities Exchange Act of 1934 and the rules promulgated thereunder. 15 U.S.C. § 78 o (c) (3) and Rule 17 CFR 240.15c3-1. Pursuant to § 5(a) (2) of the Securities Investors Protection Act of 1970 ("SIPA"), 15 U.S.C. § 78eee(a) (2), the Securities Investor Protection Corporation ("SIPC") joined this action and, in accordance with § 5(b) (1) of the Act (15 U.S.C. § 78eee(b) (1)), applied for a decree adjudicating that the customers of JNT were in need of protection. As required by statute, 15 U.S.C. § 78eee(b) (3), SIPC also requested an order appointing Jerry B. Klein of Herz, Herson & Company, trustee, and Harvey R. Miller of Weil, Gotschal & Manges attorney for the trustee. The application was granted and JNT is currently being liquidated under the supervision of this court in accordance with the procedures of SIPA (15 U.S.C. § 78eee(b) (3)).
Under § 6(a) of SIPA (15 U.S.C. § 78fff(a)), a SIPC trustee has a duty to return to the customers of the debtor (JNT) "specifically identifiable property",
to distribute the "single and separate fund,"
and pay to customers monies advanced by SIPC. The trustee is also required to complete open contractual commitments of the debtor, to enforce rights of subrogation,
and to liquidate the business of the debtor. While the duties of the attorney for the trustee are not specifically spelled out in SIPA, it seems clear that it is his obligation to assist the trustee in the performance of his tasks.
Chester B. Salomon, who was then an associate of Weil, Gotschal & Manges, acted as one of Harvey R. Miller's assistants in the matter of the JNT liquidation. Salomon continued to work on the JNT liquidation until February 13, 1973, when he left Weil, Gotschal & Manges to form his own law firm. It is this newly formed law firm which commenced the present action on June 20, 1973.
As assistant to Miller, Salomon has stated that he aided the trustee in collecting assets, reducing them to money and distributing the customer accounts. He also prepared applications to this court for orders authorizing the trustee to distribute cash and securities to the customers of JNT who were entitled thereto. At the May 26, 1972 hearing of one of these applications, questions were raised by the SEC concerning some of the customers. On June 9, 1972, the court ordered that certain of these customers be stricken from the distribution schedules pending an investigation of their claims. Securities and Exchange Commission v. JNT Investors, Inc., Civil No. 72-681 (S.D.N.Y. June 9, 1972). In order to resolve the claims of these customers and certain other problem claims, the trustee was authorized by the court, pursuant to 11 U.S.C. § 567(2), to examine the directors and officers of JNT and other specified individuals concerning "the acts, conduct, property, liabilities and financial condition of the Debtor [JNT], the operation of the business of the Debtor and any other matter relevant to this proceeding." Securities and Exchange Commission v. JNT Investors, Inc., Civil No. 72-681 (S.D.N.Y. Nov. 29, 1972). Included among the people whom the trustee was authorized to examine were defendants Harlan J. Sauer, Jay N. Tabatchnick, Martin D. Weiss, as well as the plaintiffs and other customers of Weiss. Pursuant to the court order, Salomon personally examined Sauer, the plaintiffs and certain other customers of Weiss. Salomon admits that most of the information in his complaint was obtained in his interview with plaintiffs and also that he told plaintiffs that he was planning to establish his own law office in April, 1973. Sauer claims that Salomon, while deposing him, asked him numerous questions concerning his relationship with Weiss and concerning customers introduced to JNT by Weiss. This is not denied by Salomon.
In arguing that this court should disqualify plaintiffs' law firm, defendants Weiss and Sauer have addressed their arguments to the Code of Professional Responsibility;
specifically to Canon 9 ("A Lawyer Should Avoid Even the Appearance of Professional Impropriety."), Canon 5 ("A Lawyer Should Exercise Independent Professional Judgment on Behalf of a Client"), and, by implication, to Canon 4 ("A Lawyer Should Preserve the Confidences and Secrets of a Client"). Canons 4 and 5 are not directly applicable to the facts of this case since none of the defendants was ever a client of Salomon. Salomon was appointed by SIPC to assist Harvey Miller, the attorney for the trustee, and his client therefore was either the trustee, Jerry Klein, or SIPC itself. Under 15 U.S.C. § 78eee(b) (3), the person selected as trustee for the liquidation of the debtor must be disinterested, which means that he cannot be an attorney for the debtor or have any interest materially adverse to that of the creditors or stockholders of the debtor (11 U.S.C. § 558). There can thus be no justifiable claim that Salomon had an attorney-client relationship with any defendant. Furthermore, Salomon has stated that he notified both Miller and Klein of his intention to bring this suit and that they had no objections (Salomon affidavit para. 12). Even if it were accepted that Salomon owed a certain loyalty to JNT, this loyalty does not necessarily extend to its officers and directors. See Ethical Consideration 5-18, ABA Code of Professional Responsibility, N.Y. Judiciary Law App. at 100-101.
The activities of Salomon also do not literally come within the prohibitions traditionally associated with Canon 9 and the pertinent Ethical Consideration and Disciplinary Rule.
Ethical Consideration 9-3 provides that:
"After a lawyer leaves judicial office or other public employment, he should not accept employment in connection with any matter in which he had substantial responsibility prior to his leaving, since to accept employment would ...