complaints. By doing so, Jacobson & Triggs and Beigel and Sandler -- like Hirschhorn -- contravened the Code in a manner which has caused prejudice to the defendants in this action. Accordingly, neither firm may continue representing plaintiffs here.
The need to disqualify Jacobson & Triggs is clear. Triggs was the one who met with Hirschhorn and spoke with him numerous times over the telephone. (Tr. at 79). On each of those occasions, Triggs knew or should have known that he was talking to an attorney who had previously represented the key defendants in this action. Rather than minimize his contact with Hirschhorn, however, Triggs pursued Hirschhorn's information zealously, in order to take advantage of Hirschhorn's inside and obviously secret information.
More importantly, Hirschhorn was not just a source of secret and possibly confidential information. He was, for all practical purposes, acting as Triggs co-counsel. Not only do Hirschhorn's own bills reveal that he spent over 120 hours assisting plaintiffs in the prosecution of the two actions, but Triggs' notes confirm such a role. Under these circumstances, Triggs should have known that Hirschhorn was violating ethical obligations both to NPA and to United Growth and that he was assisting in Hirschhorn's improper conduct.
Given the scope of Hirschhorn's involvement with Jacobson & Triggs, the Court finds that Jacobson & Triggs' continued representation of the Ackerman plaintiffs creates a substantial likelihood that NPA and United Growth's confidential and secret information would inevitably be used to prosecute this action and unfairly prejudice defendants. Therefore, Jacobson & Triggs is disqualified from representing any of the remaining plaintiffs in this action.
The grounds for disqualifying Beigel & Sandler are equally compelling. Like Triggs, Jaskiel told the Court that "plaintiffs . . . learned of the fraud from an insider who provided information which could not have been obtained from any other source." (Jaskiel Ltr. at 2, emphasis added). In addition, in its opposition papers, Beigel & Sandler do not provide an independent basis for the factual allegations detailed in the Remington complaint, but rather emphasize its reliance on Hirschhorn: "[defendants] make much about plaintiffs' statement that Hirschhorn provided the information which revealed the fraud. Plaintiffs do not back away from this statement. Hirschhorn provided the details of the fraud which allowed the complaint to pass 9(b) muster with flying colors."
In sum, Beigel & Sandler's conduct is indistinguishable from Jacobson & Triggs because in drafting its initial and amended complaints, it relied almost exclusively on Hirschhorn's improper disclosures. Even if no member personally met with Hirschhorn, Beigel & Sandler has improperly benefitted from Hirschhorn's disclosures. Because Beigel & Sandler has taken no steps to insulate itself from Triggs and/or Hirschhorn, it must not be permitted to take unfair advantage of its "tainted" knowledge. Therefore, Beigel and Sandler is also disqualified from representing any of the remaining plaintiffs in this action. See Fund of Funds v. Arthur Andersen & Company, 567 F.2d 225, 236 (2d Cir. 1977) (plaintiffs' law firm disqualified because it was in a position to receive privileged information from defendant's former law firm); see also Cheng v. GAF Corp., 631 F.2d 1052, 1057-58 (2d Cir. 1980) (screening held to be ineffective method of ensuring that confidential information is not utilized), vacated on other grounds, 450 U.S. 903 (1981).
The Court must next consider whether the complaints should be dismissed because of counsels' conduct. Canon 4 of the Code requires that a Court do what is appropriate to ensure that any confidential and secret information disclosed by a party's formal counsel not subsequently be used against that same party in another litigation. In some cases, courts have dismissed actions which are based upon improperly disclosed information. See Doe, 330 F. Supp. at 1355 (S.D.N.Y. 1972); Eckhaus v. Alfa-Laval, Inc., 764 F. Supp. 34 (S.D.N.Y. 1991).
In this case, it is beyond dispute that Hirschhorn had a significant relationship with the ad hoc committee and plaintiffs' counsel both before and after the original and amended complaints were filed. Under these circumstances, the Court finds that the only appropriate and fair remedy is to reevaluate defendants' prior motions to dismiss. As detailed more fully below, there is no question that plaintiffs' counsel relied exclusively and extensively on attorney Hirschhorn to support their allegations of wrongdoing. Therefore, the motions to dismiss are granted and the complaints are hereby dismissed without prejudice. See Doe, 330 F. Supp. at 1355 (dismissing complaint and disqualifying counsel where all allegations in complaint were acquired during attorney's representation of defendant as in-house counsel). See also Link v. Wabash Railroad Co., 370 U.S. 626, 82 S. Ct. 1386, 1390, 8 L. Ed. 2d 734 (1962) (dismissal of claim due to chosen counsel's unexcused behavior does not impose unjust penalty on client).
The NPA Defendants
The remaining claims against the NPA defendants are brought by plaintiffs residing in New York, New Jersey, Indiana and South Carolina for common law fraud. In initially denying the NPA Defendants' motion to dismiss these fraud claims, the Court relied upon the allegations concerning the license fee, the HUB management system, the financial projections, and the undisclosed indemnity agreements between Travelers and NPA. It is not even seriously disputed by the parties that these allegations, which are contained in both complaints, are premised on information Hirschhorn disclosed to Triggs. (Triggs Ltr. at 2-3; Tr. at 26, 77-78, 104). Because the Court will not permit plaintiffs to reap the benefit of NPA's confidential and secret information, the Court grants the NPA defendants' motion to dismiss the two complaints without prejudice.
The United Growth Defendants
The allegations which the Court relied upon in denying the United Growth Defendants' motion to dismiss the common law fraud claims against them concerned the circumstances surrounding the 1989 roll-up of ten of the twelve NCCs. Specifically, plaintiffs allege that as the controlling person of United Growth, Talansky, breached his fiduciary obligations by making material misrepresentations and omissions in the United Growth PPM. Plaintiffs also allege that in at least two of the NCCs, Talansky improperly voted his limited partnership interests in order to obtain the votes necessary to approve the roll-up. Finally, plaintiffs allege that with respect to two NCCs, the United Growth Defendants failed to notify the investors of their right to rescind the roll-up due to the failure of the lenders holding the mortgages to consent to the transaction.
One of the topics Triggs admitted discussing with Hirschhorn was the United Growth Defendants' "communications with investors concerning their votes in the roll-up." (Triggs Ltr at 3). In addition, Hirschhorn testified that he was still employed by the United Growth Defendants and participated directly in putting together the roll-up. Finally, the notes Triggs supplied to the Court in camera support plaintiffs' allegations concerning the improper motivation behind the roll-up and the lack of the required lender consent. In sum, the record before the Court supports the conclusion that without the information obtained from Hirschhorn, plaintiffs would not be able to sustain their remaining claims against the UGP defendants. Therefore, those claims are dismissed without prejudice.
The allegations upon which the Court relied upon in denying Spengler Carlson's motion to dismiss the aiding and abetting claim in the Ackerman complaint concern Spengler Carlson's involvement in the 1989 roll-up. Specifically, plaintiffs allege that Spengler Carlson had knowledge of and provided assistance to Talansky in breaching his fiduciary duty.
If not for Hirschhorn's improper disclosures, as evidenced from Triggs' notes, the aiding and abetting claim against Spengler Carlson would not have been made. Accordingly, Spengler Carlson's motion to dismiss that claim is granted and the complaint against Spengler Carlson is dismissed without prejudice.
The only claims remaining against Weiner Zuckerbrot are the claims alleging common law fraud by plaintiffs who invested after December 19, 1985. According to the Ackerman complaint, Weiner Zuckerbrot, through its partner Kenneth Zuckerbrot, created the HUB license fee arrangement for the NCCs' service mark and knew that the license fee was "fraudulently described" to the investors in the PPMs. Additionally, plaintiffs allege that Weiner Zuckerbrot knew the license fee was conceived as a source for additional revenue for NPA.
In the October 20, 1992 letter to the Court, Triggs stated that "the creation of the HUB license concept" was one of the topics he discussed with Hirschhorn at their November 15 meeting. In addition, while Hirschhorn testified that he did discuss Kenneth Zuckerbrot with Triggs, he did not tell Triggs that Zuckerbrot created the license fee concept for NPA (Tr. at 79). This testimony, however, is not consistent with Triggs' notes. Therefore, because the more credible evidence before the Court demonstrates, that but for Hirschhorn's improper disclosures to Triggs, the Ackerman plaintiffs would fail to sustain a claim against Weiner Zuckerbrot, the remaining fraud claims against that defendant are dismissed without prejudice.
The only claim remaining against Price Waterhouse is the Ackerman plaintiffs' claim of common law fraud.
The Ackerman plaintiffs allege that in or about mid-June 1985, Sue Smith ("Smith") a Price Waterhouse employee, had a telephone conversation with a representative at NPA and communicated her concern about the HUB license fee which was to have been paid to NPA in NCC II. Price Waterhouse received no response from NPA regarding Smith's request and allegedly failed to take further proper steps to investigate how the funds generated from the license fee were being spent.
As stated above, one of the eight topics of conversation Hirschhorn discussed with Triggs at their November 15, 1991 meeting was whether Price Waterhouse, or any of the other third-party professionals, had inquired about how the money generated by the HUB license was being spent.
At the evidentiary hearing, Hirschhorn testified that he spoke with Smith over the telephone quite regularly while he was working for NPA and that Smith was interested in "what things NPA was doing in connection with their responsibilities under the license fee arrangement, as detailed in the private placement offering." (Tr. at 86-87). Moreover, when Hirschhorn was asked what if anything he told Triggs about Price Waterhouse's obligation to further investigate Smith's concerns, Hirschhorn responded evasively that he couldn't recall but then he said "I remember telling him that I was going to try to find out the answer, and I think I told him that nothing ever happened beyond that. There was nothing beyond that conversation with Sue. There was no follow up conversation." (Tr. at 90). Finally, the notes Triggs supplied to the Court support the contention that if it were not for Hirschhorn's disclosures, the Ackerman plaintiffs would not be able to sustain a claim against Price Waterhouse. Accordingly, because the remaining fraud claims against Price Waterhouse derive solely from information improperly revealed by Hirschhorn, they are dismissed without prejudice.
The only remaining claims against Travelers are for common law fraud claim based upon Travelers' alleged failure to disclose "secret" indemnities issued to it by NPA as well as Travelers' alleged assistance with the false financial projections contained in the PPMs.
Hirschhorn testified that he disclosed to Triggs NPA's relationship with Travelers and Travelers' role in the NCC transactions including any special arrangements between NPA and Travelers. (Tr. at 24-25, 74-75. 77). Moreover, in his October 20, 1992 letter to the Court, Triggs acknowledged that one of the eight topics he discussed with Hirschhorn included the "negotiations and relationship of Travelers to the deals and whether or not Travelers had any special arrangements in connection with these deals."
Hirschhorn only knew about Travelers relationship with NPA because Hirschhorn was NPA's lawyer and discussed those matters with his client NPA. Therefore, because the allegations in the complaint relating to Travelers' fraud would not have been accessible to Triggs but for Hirschhorn's breach of his ethical obligations to his former client, that information must be purged from the Ackerman complaint. Without that information, the Ackerman complaint fails to state a proper claim of common law fraud against Travelers and must be dismissed without prejudice.
In its September Opinion, the Court, exercising its discretion, elected to retain supplemental jurisdiction over plaintiffs' remaining state law claims. See Carnegie-Mellon University v. Cohill, 484 U.S. 343, 108 S. Ct. 614, 619, 98 L. Ed. 2d 720 (1988) ("a federal court should consider and weigh in each case, and at every stage of the litigation, the values of judicial economy, convenience, fairness, and comity in order to decide whether to exercise jurisdiction over a case . . . involving pendent state-law claims.").
Given the above stated findings, however, should either the Ackerman or Remington plaintiffs seek to amend its complaint in a manner consistent with this decision, the Court would decline to continue exercising its supplemental jurisdiction over this case. 28 U.S.C. § 1367(c)(3) and (4).
For the foregoing reasons, defendants' motion to disqualify plaintiffs' counsel is granted. Defendants' motion to dismiss the complaints is also granted without prejudice.
Dated: New York, New York
July 1, 1993.
LOUIS J. FREEH, U.S.D.J.