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SEC v. TOOMEY

August 7, 1992

SECURITIES AND EXCHANGE COMMISSION Plaintiff, against ROBERT TOOMEY and WILLIAM MERRIGAN Defendants.

Ward


The opinion of the court was delivered by: ROBERT J. WARD

Plaintiff Securities and Exchange Commission ("the SEC") has moved, pursuant to Rule 12(f), Fed. R. Civ. P., to strike eight of the eleven affirmative defenses asserted by defendant Robert Toomey. For the reasons that follow, plaintiff's motion is granted in part and denied in part.

 BACKGROUND

 Robert Toomey is a former Vice President of The Great Atlantic and Pacific Tea Company, Inc. ("A&P"). William Merrigan is a former employee of A&P. The instant case concerns the involvement of Merrigan and others in securities transactions in the stock of Shopwell, Inc. ("Shopwell") and Waldbaum, Inc. ("Waldbaum") *fn1"

 On or about May 15, 1986, A&P and Shopwell reached a tentative agreement that A&P would acquire all of Shopwell's outstanding shares at $ 39 per share. The agreement was not publicly disclosed. Merrigan purchased 1,500 shares of Shopwell stock at prices ranging between $ 28-7/8 and $ 31-1/8 per share on May 15 and May 16, 1986. When Shopwell announced that it was engaged in merger negotiations on May 20, its stock climbed to $ 35-1/8. Complaint PP 5, 6.

 According to the SEC, on or about May 23, 1986, Toomey notified Merrigan that negotiations between A&P and Shopwell had broken down. Toomey received this information in connection with his employment at A&P. On May 23, 1986, Merrigan sold his Shopwell stock at prices ranging between $ 33-1/2 and $ 33-3/4 per share. On the next trading day, May 27, Shopwell stock closed at $ 29 per share. The SEC claims that the material, nonpublic information Merrigan received from Toomey allowed him to avoid losses of $ 6,288.34. Complaint P 6.

 Thereafter, on or about November 21, 1986, A&P and Waldbaum entered into negotiations that culminated in a November 25, 1986 tender offer by A&P for all outstanding Waldbaum stock at $ 50 per share. The SEC claims that Toomey told Merrigan that A&P was planning to make a tender offer for Waldbaum on November 25, 1986 when this information was not yet public. Complaint P 7.

 Merrigan purchased 2,500 shares of Waldbaum at prices ranging from $ 24-1/4 to 24-1/2 per share on November 26, 1986. After the tender offer was made public, on November 28, 1986, Merrigan sold his stock for $ 49 per share, realizing a profit of $ 59,388.30. Complaint PP 8, 9.

 Moreover, the SEC claims that both Toomey and Merrigan tipped others who purchased and profited from Waldbaum stock. Complaint P 10.

 The SEC asserts that Toomey passed material information to Merrigan and that he knew or had reason to know such information was nonpublic and that communication of the information would result in a violation of Rule 14e-3 [17 C.F.R. § 240.14e-3], promulgated under Section 14(e) of the Exchange Act [ 15 U.S.C. § 78n(e)]. Complaint P 11.

 Defendant Toomey has responded with eleven affirmative defenses.

 DISCUSSION

 A. Standards for Striking Affirmative Defenses Pursuant to Rule 12(f)

 First, there may be no question of fact which might allow the defense to succeed. A motion to strike defenses "will not be granted 'unless it appears to a certainty that plaintiffs would succeed despite any state of the facts which could be proved in support of the defense'" William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939 (quoting Durham Industries v. North River Insurance Co., 482 F. Supp. 910, 913 (S.D.N.Y. 1979)); Morse/Diesel v. Fidelity and Deposit Co. of Md., 763 F. Supp. 28, 34 (S.D.N.Y. 1991). To this effect, defendant's pleadings will be liberally construed. Bennett v. Spoor Behrins Campbell & Young, 124 F.R.D. 562, 564 (S.D.N.Y. 1989); Oliner v. McBride's Industries, 106 F.R.D. 14, 17 (S.D.N.Y. 1985); Oppel v. Empire Mutual Insurance Company, 92 F.R.D. 494, 496 (S.D.N.Y. 1981).

 Second, there may be no substantial question of law, a resolution of which could allow the defense to succeed. William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939; Essex Music v. ABKCO Music and Record, 743 F. Supp. 237, 240 (S.D.N.Y. 1990). It is particularly important to refrain from considering disputed questions of law when, as in this case, there has been no significant discovery. William Z. Salcer, Panfeld, Edelman v. Envicon Equities Corp., 744 F.2d at 939.

 Third, plaintiff must show that it is prejudiced by the inclusion of the defense. Bennett v. Spoor Behrins Campbell & Young, 124 F.R.D. at 564; Oliner v. McBride's Industries, 106 F.R.D. at 18; Sample v. Gotham Football Club, 59 F.R.D. 160, 169 (S.D.N.Y. 1973); see also 5A C. Wright & A. Miller, Federal Practice & Procedure § 1381, at 672 (1990).

 Increased time and expense of trial may constitute sufficient prejudice to warrant granting plaintiff's Rule 12(f) motion. Metric Hosiery Co. v. Spartans Industries, 50 F.R.D. 50, 51, 52 (S.D.N.Y. 1970); 2A J. Moore, Federal Practice, P 12.21[3], p.12-181 (1987). When "the defense is insufficient as a matter of law, the defense should be stricken to eliminate the delay and unnecessary expense from litigating the invalid claim." FDIC v. Eckert Seamans Cherin & Mellott, 754 F. Supp. 22, 23 (E.D.N.Y. 1990). The court in Eckert granted a motion to ...


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