The opinion of the court was delivered by: SONIA SOTOMAYOR
Plaintiff Azurite Corp. Ltd. ("Azurite") brings this action to recover damages from corporate defendant Lafer, Amster & Co., now Amster & Co. (hereinafter "LACO"), and its officers Arnold Marvin Amster ("Amster"), Barry Stuart Lafer ("Lafer") and Joel Richard Packer ("Packer") (together "defendants") for violation of § 13(d)(C)(1) of the Securities Exchange Act (the "Act") of 1934, 15 U.S.C. § 78j(b) and the rules and regulations promulgated thereunder. Defendants move for summary judgment under Fed. R. Civ. P. 56 and for sanctions under Fed. R. Civ. P. 11 and 28 U.S.C. § 1927 against Azurite and its counsel. Plaintiff opposes defendants' motion and seeks leave to amend its complaint to include a claim of insider trading in violation of § 10(b) of the Act, 15 U.S.C. § 78m(d). For the reasons stated below, defendants' motion for summary judgment is GRANTED but defendants' motion for sanctions under Rule 11 or, alternatively, under 28 U.S.C. § 1927 is DENIED. Plaintiff's motion for leave to amend its complaint is also Denied.
In 1988, the Securities and Exchange Commission ("SEC") commenced an action against LACO arising from the same transactions at issue in this case. On May 14, 1991, Judge Charles H. Haight in in Sec. & Exch. Comm'n v. Amster & Co., 762 F. Supp. 604, 615 (S.D.N.Y. 1991), granted defendant's motion for summary judgment. For a detailed history and thorough description of the facts of this case, the avid reader is referred to Judge Haight's decision. I describe only an abbreviated summary of the facts pertinent to the motion before me.
In the course of its operations, LACO, a registered broker-dealer in the business of risk arbitrage, became interested in Graphic Scanning Corporation ("Graphic") as a potential investment target. Graphic was in the process of liquidating assets that LACO believed to be undervalued. As a risk arbitrageur, LACO began buying Graphic stock at the then prevalent low market value with the expectation of either selling the stock before liquidation or obtaining the higher value per share it anticipated stockholders would receive once Graphic liquidated its assets.
LACO's purchases eventually surpassed 5% of all outstanding Graphic stock, triggering the disclosure requirements of the Securities Exchange Act of 1934. Accordingly, on August 19, 1985, LACO filed a Schedule 13D disclosure statement setting forth the investment purpose of its holdings in Graphic. The Schedule further represented that:
Each of LACO and the other filing persons supports the Company's [Graphic] public announcements . . . regarding its intention to develop a plan of asset distribution to its stockholders . . . . If the Company [Graphic] abandons its intention referred to above . . . LACO intends to review its position and take any such action as it deems appropriate at the time.
On January 28, 1989, Graphic filed a Form S-1 statement stating that it would sell only those assets for which it obtained appropriate offers. Graphic also disclosed the existence of ongoing negotiations to sell its profitable cellular radio properties to Barry Yampol ("Yampol"), the founder and chairperson of Graphic and sole shareholder of plaintiff Azurite, a major institutional investor in Graphic stock.
During the four weeks that followed this conversation, LACO officers met with various attorneys, financial planners and other institutional investors in Graphic stock to study the alternatives available to LACO as a disgruntled investor. For example, on February 3, 1986, Amster, Lafer and Stephen Greenberg, LACO's lawyer and general partner, met with Elaine Ruege ("Ruege"), a representative of the Olayan Group, a major institutional investor in Graphic stock, to discuss the available options. In a memorandum to the file dated February 6, 1986, Ruege stated that in the meeting LACO had proposed that Graphic shareholders group together and force the company's liquidation. See Amster & Co., 762 F. Supp. 604, 615 (S.D.N.Y. 1991) On February 4, 1986, Amster and Lafer also met with the General Electric Pension Fund, another institutional investor, to discuss a proxy contest as one of the alternatives available to prevent Graphic's selective sale of assets, including that of the cellular division to Yampol.
During the same period, LACO continued its investment in Graphic shares. On February 3, 1986, LACO purchased 1.7 million dollars in Graphic convertible debentures with no voting rights. Additionally, on February 4, 1986, LACO purchased 17,500 shares of Graphic common stock. Its purchases continued with 87,500 shares on February 6 and 100,000 shares on February 7. On February 14, defendants Lafer and Amster individually each purchased 25,000 shares. See Amster & Co., 762 F. Supp. 604, 607.
A rapidly unfolding series of events saw LACO's investment strategy change from passive investment on February 3, 1986, to an aggressive proxy-battle for control of Graphic on February 28, 1986. On February 7, Graphic filed an 8K Form with the SEC noting that it was transferring its interest in its radio telephone services to Mr. Yampol. On February 10, however, LACO filed Amendment 5 to its Schedule 13D statement, indicating that there had been no change in its investment strategy. Nevertheless, according to uncontested deposition testimony, that same day, LACO received notice of the contents of Graphic's 8K statement.
Thereafter, LACO met with various outside counsel and consulted financial advisors Morgan Lewis Githens & Ahn about its alternatives. Finally, because other outside counsel could not advise them for reasons not relevant here, LACO's officers met with attorneys from the law firm of Willkie Farr & Gallagher on February 13 or 14, to further discuss alternatives to Graphic's decision.
On or about February 18, 1986, LACO filed Amendment 6 where it advised that LACO was beginning to consider, on a preliminary basis, a proxy battle for control of Graphic. LACO represented that its consideration was prompted by Graphic's change in liquidation strategy and its decision to sell its cellular division to Yampol. On March 3, 1986, LACO filed Amendment 7 where it revealed its decision to wage a proxy battle for Graphic effective as of February 28. Subsequently, LACO acquired control over Graphic; Graphic then elected a new board of directors and retained Drexel Burnham Lambert ("Drexel") to conduct its asset liquidation.
Following an exhaustive two-year investigation, the SEC brought charges under §§ 10(d) and 13(d) against LACO, Amster and Lafer and under § 13(d) against Packer for their failure to make timely disclosure of their decision to wage the proxy battle. On February 1, 1989 -- two months after the SEC brought its enforcement proceeding -- Azurite commenced this action but the parties shortly thereafter agreed to place Azurite's action on the suspense docket pending resolution of the SEC enforcement proceedings before Judge Haight.
During the SEC enforcement proceeding, defendants moved to dismiss the complaint under Fed. R. Civ. P. 12(b)(6) on the ground that the complaint failed to state a claim. The SEC opposed the motion arguing under Rule 56(f) that additional discovery was necessary before the Court considered defendants' motion. The parties conducted additional discovery and defendants again moved to dismiss. In light of the parties' submissions, Judge Haight treated defendants' motion as one for summary judgment, granted defendants' motion and ordered the complaint dismissed with prejudice. The SEC moved for reconsideration which motion Judge Haight denied. The SEC then filed a notice of appeal which it later withdrew for reasons that are not clear on the record but are nonetheless irrelevant to the issues before me.
Following Judge Haight's decision, defendants asked Azurite to withdraw its claims. Azurite declined. On October 2, 1992, the case was reassigned to my docket. I held a case management conference where defendants indicated their intention to file a motion to dismiss and for summary judgment. I inquired whether plaintiff required any discovery which did not duplicate that already undertaken and disclosed during the SEC action in order to respond to defendants' proposed motions. Azurite requested leave to take six additional depositions of Drexel employees. These depositions, Azurite explained, were necessary because it had reason to believe that defendants had conspired with Michael Milken ("Milken") and other Drexel employees to take over Graphic. According to Azurite, Drexel had acquired inside information about Graphic in 1984 when Graphic retained Drexel as an underwriter for a bond financing. Azurite maintained that when Yampol called off the financing, Milken decided to "get back" at Graphic by providing defendants with information that eventually enabled them to take over Graphic.
In addition to taking the six Drexel depositions, Azurite issued document subpoenas on the Drexel Liquidating Trust, Cahill Gordon & Reindel, the SEC, Willkie, Farr & Gallagher, and requested and received from defendants further document production and answers to interrogatories. After completing this discovery, Azurite moved to amend its complaint to include more detailed allegations of insider trading and of a conspiracy between Drexel, Milken and ...