The opinion of the court was delivered by: SWEET
Defendant Manufacturers Hanover Trust Company ("MHT") has moved under Rule 15(a), Fed.R.Civ.P., to amend its answer to assert a cross-claim for contribution against defendant Fluor Corporation ("Fluor"). MHT has also moved for an order limiting proof regarding MHT's trading in Fluor stock to the period ending March 6, 1975, and for orders excluding certain evidence from trial. Plaintiffs, State Teachers Retirement Board, individually and on behalf of others similarly situated ("State Teachers"), have moved for an order severing Fluor from this action and providing for a post-trial hearing to approve a settlement between State Teachers and Fluor. For the reasons given below, MHT's motion to amend is granted, its motion regarding trading after March 6 is denied and its other motions are denied except as set forth herein. State Teachers' motion is denied.
Motion to Amend to Add a Cross-Claim
The extensive history of this matter is given in this court's and the Court of Appeals' decisions and need not be repeated here. On May 2, 1984, eight years after this action was commenced and shortly before the trial was to start, Fluor and State Teachers executed a settlement agreement ("Settlement") under which Fluor would pay State Teachers $100,000 in return for dismissal of all claims against it. The Settlement provides that if MHT obtains leave to assert a cross-claim against Fluor, the Settlement becomes void.
Under Rule 15, leave to amend a pleading "shall be freely given when justice requires." The Supreme Court has noted that "[i]f the underlying facts or circumstances relied upon by a plaintiff may be a proper subject of relief, he ought to be afforded an opportunity to test his claim on the merits." Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). It should also be noted that Rule 13(g), Fed.R.Civ.P., under which MHT seeks to assert the cross-claim, is construed liberally so as "to avoid multiple suits and to encourage the determination of the entire controversy among the parties before the court with a minimum of procedural steps." 6 c. Wright & A. Miller, Federal Practice & Procedure § 1432 at 1616 (1971).
Leave to amend should not be granted, however, if it is sought for such reasons as "bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of the allowance of the amendment, futility of the amendment, etc." Foman, 371 U.S. at 182.In its brief opposing MHT's motion, Fluor has cited cases in which courts denied, on grounds of prejudice, eleventh-hour motions by remaining defendants to assert cross-claims for contribution and indemnity against settling defendants. See In re Ampicillin Antitrust Litigation, 82 F.R.D. 647 (D.D.C. 1979); In re Cessna Distributorship Antitrust Litigation, 532 F.2d 64, 68 (8th Cir. 1976); In re Arthur Andersen & Co., 621 F.2d 37, 41 (1st Cir. 1980).
Those cases are not persuasive, however, because special circumstances were present in each of them which are not present in the instant case. In those cases, the courts, in denying the motions, emphasized the time and money that had been expended in attempting to settle the claim, the complexity and difficulty of reaching the settlement, and the likelihood that the assertion of a cross-claim would add issues to the case and further delay the trial.In one of the cases, Ampicillin Antitrust Litigation, the court noted that contribution had generally been held to be not available under the antitrust law, and thus the proposed cross-claim was unlikely to succeed on the merits.
The settlement here is not particularly complex, nor is there indication that its achievement required extensive time and effort. The parties opposing the motion have n ot contended that the proposed cross-claim fails to state a claim or is otherwise deficient on the merits. The assertion of the cross-claim will not require postponement of the trial, since Fluor, after extensive discovery and pretrial motions, is fully prepared to litigate this action, and the cross-claim will not introduce new, unanticipated issues. Assertion of the cross-claim will not unduly prejudice Fluor or the plaintiffs. The cross-claim will require no additional discovery and will involve the same facts, events, evidence and witnesses as the main claim. Its assertion here will m ake it unnecessary for MHT to assert duplicative claims in a separate action. See Lyons v. Marrud, Inc., 46 F.R.D. 451 (S.D.N.Y. 1968). In such a separate action, Fluor might defend with witnesses that might have been unavailable to MHT in the first trial, increasing the possibility of inconsistent verdicts. For these reasons, MHT's motion to amend is granted.
Once the cross-claim has been permitted, the Settlement becomes void. Thus, the reasons for State Teachers' motion regarding severance and the settlement hearing are no longer present, and that motion is denied.
Motion Regarding Trading After March 6, 1975
State Teachers represents a class of persons who sold Fluor stock during the period March 3 through March 6, 1975 purportedly without knowledge of certain material, nonpublic information communicated to MHT. During this period, plaintiffs sold 688,000 shares of Fluor stock at approximately $22 per share. Plaintiffs contend that expert testimony they will adduce at trial will show that the fair value fo Fluor stock during this period, assuming simultaneous disclosure of all inside information, would have been approximately $34 per share. Accordingly, plaintiffs calculate their per share loss at $12, and contend that their damages are $8,256,000 ($12 x 688,000).
MHT purchased 208,600 Fluor shares during March 4 through 6, 1975. (MHT did not purchase Fluor shares on March 3, 1975.) Plaintiffs, assuming an average per share purchase price of $22 and a fair value of $35, contend that MHT's profits from this trading were $2,503,200 ($12 X 208,600) (the "March 3-6 Profits"). MHT purchased 231,350 shares during March 10 through April 11. Assuming an average per share purchase price of $25.69 for these shares, plaintiffs contend that MHT's profits for this trading were $1,922,519 ($8.31 X 231,350). MHT purchased no more Fluor shares after this period until June 9, but the purchases after that date were at per share prices exceeding $34, and plaintiffs concede that MHT earned no insider's profits on these purchases. Accordingly, plaintiffs contend that MHT's gains for the entire period of insider trading werre $4,425,719 ($1,922,519 $2,503,200) (the "March 3-April 11 Profits").
MHT contends that plaintiffs can be awarded damages of no more than the March 3-March 6 Profits because of the decisions of the Court of Appeals for this Circuit in Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 172-73 (2d Cir. 1980) and Wilson v. Comtech Telecommunications Corp., 648 F.2d 88, 94-95 (2d Cir. 1981). Plaintiffs contend that Elkind would limit their damages only to the March 3-April 11 Profits.
In Elkind, the Court of Appeals established a new limit on recoveries in 10b-5 actions, the "disgorgement measure," which equals "the amount gained by the tippee as a result of his selling at the earlier date rather than delaying his sale until the parties could trade on an equal informational basis." Elkind, 635 F.2d at 172.This court has already held that the disgorgement measure applies to this action.State Teachers Retirement Board v. Fluor, 566 F. Supp. 945, 953-54 (S.D.N.Y. June 30, 1983). The parties agree that the disgorgement measure would limit plaintiffs' damage award to, at the most, the March 3-April 11 Profits, since these profits represent the total gain MHT may have realized from trading on its alleged inside information.
MHT, however, seeks to take Elkind one step further, by reading it in conjunction with Wilson. In Wilson, the Court of Appeals limited the class of 10b-5 plaintiffs to those who trade "contemporaneously with the insider." 648 F.2d at 94. MHT would have this court create a disgorgement cap for this class of plaintiffs equal to the profits MHT gained from those of its purchases that were contemporaneous with the plaintiffs' sales -- i.e., the March 3-6 Profits.
This holding would not comport with the rationale of Elkind. MHT's position mixes Wilson's holding concerning the appropriate class of plaintiffs with Elkind's limitation on the damages that may be assessed against a defendant. Elkind's stated rationales for the relevant portion of its holding were that (1) "To the extent that it makes the topper and tippees liable up to the amount gained by their misconduct, it should deter tipping of inside information and tippee-trading" and (2) "On the other hand, by limiting the total recovery to the tippee's gain, the measure bars windfall recoveries of exorbitant amounts bearing no relation to the seriousness of the misconduct." 635 F.2d at 172. Both of these rationales would be served by using and March 3-April 11 Profits as the disgorgement measure. Fluor and MHT, the alleged tipper and tippee, would be liable for the amount gained by their misconduct, and thus similar tipping will be deterred. On the ...