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SEC v. LORIN

November 21, 1994

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
HENRY W. LORIN, EUGENE K. LAFF, STANLEY ASLANIAN, JR., CAPITAL SHARES, INC., LAWRENCE CAITO, TONI VALLEN, ROSARIO RUSSELL RUGGIERO, ENN KUNNAPAS, PAUL L. MIANO, AND EDWARD J. BARTER, Defendants.



The opinion of the court was delivered by: HAROLD BAER, JR.

 HAROLD BAER, JR., District Judge,

 On November 20, 1990, the Securities and Exchange Commission ("SEC") brought this civil injunctive action pursuant to section 20(b) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77t(b) (1988), and section 21(d) of the Securities and Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78u(d) (Supp. 1993). The complaint alleges, in relevant part, that defendants Capital Shares, Inc. ("Capital Shares"), Lawrence Caito ("Caito"), the owner, president and head trader of Capital Shares, and Eugene K. Laff ("Laff") had engaged in manipulative schemes in violation of various securities laws. This case had initially been assigned to the Honorable Pierre N. Leval, but was later transferred to me.

 The SEC has made two motions. The first seeks to dismiss with prejudice all remaining claims against Laff pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure, while the second requests that the affirmative defense of defendants Caito and Capital Shares that asserts a limitation period be struck pursuant to Rule 12(f) of the Rules.

 I. SEC's Motion to Dismiss Remaining Claims Against Laff

 In a March 15, 1993 order, Judge Leval granted partial summary judgment in favor of the SEC and against defendant Eugene K. Laff ("Laff") on the basis of Laff's prior criminal conviction on allegations that constitute, in part, the allegations in the instant case. SEC v. Lorin, 1993 U.S. Dist. LEXIS 3164, No. 90 Civ 7461, 1993 WL 77372 (S.D.N.Y. Mar. 15, 1993). In so doing, Judge Leval granted the SEC virtually all of the injunctive relief it sought against Laff. The only relief the SEC can further obtain against Laff is an injunction almost identical to the one previously issued and approximately $ 192,000 in disgorgement. The SEC believes, however, that even if it obtains a favorable judgement, Laff will be unable to pay the disgorgement. SEC Memorandum at 3. Laff has been incarcerated for the last three years and will not be released for at least another year as a result of his conviction. In addition, Laff has reportedly depleted most of his assets in financing his criminal defense, while the remainder of his assets have apparently been attached due to the numerous civil judgements obtained against him as a result of his participation in the activity that supported his conviction. Id. at 3-4. The SEC feels that proving the remaining claims against Laff would involve a substantial commitment of time and resources by both the parties and the court that would not be worth the small amount of additional relief the SEC might thereby acquire. Id. at 4. Consequently, the SEC moved pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure to dismiss with prejudice all remaining claims against Laff, namely those that did not constitute the activity for which he was convicted. Specifically, the SEC seeks dismissal of the Third and Sixth causes of action against Laff, Complaint PP 147-49, 160-70, in their entirety, and the First, Second, Fourth and Seventh causes of action against Laff as far as these claims relate to all transactions in Big O Tires, Inc., Cliff Engle Ltd., Digital Metcom, Inc., Fountain Powerboat Industries, Inc. and Tunex International, Inc., to transactions in Flores de New Mexico, Inc. prior to August 27, 1986, and to transactions in TS Industries, Inc. prior to July 1, 1987, Complaint PP 27-146, 150-55, 171-80.

  Rule 41(a)(2) provides that, except where parties agree to a stipulation of dismissal, *fn1" "an action shall not be dismissed at the plaintiff's instance save upon order of the court and upon such terms and conditions as the court deems proper." Fed. R. Civ. Pro. 41(a)(2). The second sentence of Rule 41(a)(2) provides that "if a counterclaim has been pleaded by a defendant [,] . . . the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court." Id. Although Laff did file counterclaims against the SEC, these counterclaims were dismissed in an order of Judge Leval's dated July 30, 1991. SEC v. Lorin, 1991 U.S. Dist. LEXIS 10887, No. 90 Civ. 7461, 1991 WL 155767 (S.D.N.Y. July 30, 1991). With no counterclaims pending before the court and with no objection lodged by Laff, Rule 41(a)(2) can be used to dismiss the remaining actions against Laff. See Banque de Depots v. National Bank of Detroit, 491 F.2d 753, 757 (6th Cir. 1974).

 This, however, does not end the court's inquiry. As explained by the Southern District of New York, "Under Rule 41(a)(2) 'the essential question is whether the dismissal of the action will be unduly prejudicial to the defendants; if so, plaintiffs' motion should be denied. If not, it should be granted . . . .' This rationale applies even when . . . the plaintiff seeks a dismissal with prejudice. . . ." Wainwright Secs. Inc. v. Wall St. Transcript Corp., 80 F.R.D. 103, 105 (S.D.N.Y. 1978) (alteration in original) (quoting Harvey Aluminum, Inc. v. American Cyanamid Co., 15 F.R.D. 14, 18 (S.D.N.Y. 1953)). "A voluntary dismissal may, at the discretion of the trial court, be granted if prejudice will not result to the other party." SEC v. American Bd. of Trade, 750 F. Supp. 100, 105 (S.D.N.Y. 1990) (citing Kern v. TXO Prod. Corp., 738 F.2d 968, 970 (8th Cir. 1984)). As in American Board of Trade, the defendant here has made no opposition to the motion, and it is difficult to understand how dismissal with prejudice will adversely affect him. I therefore grant the SEC's motion to dismiss all remaining claims against Laff with prejudice, as identified above.

 II. SEC's Motion to Strike Affirmative Defense Asserting a Limitation Period

 A. Background

 The SEC alleges that between March and October 1987, Caito, on behalf of Capital Shares, had purchased securities of five corporations in order to reduce the "floating supply" of stock in return for guaranteed profit, entered and changed bid quotations on the National Association of Securities Dealers Automated Quotation system that were not justified by legitimate supply and demand for the securities, and failed to disclose material information about the above stated actions and the fact that the prices of the stocks were manipulated by such conduct. The SEC contends that Capital Shares' and Caito's (collectively, "defendants") conduct violated section 17(a) of the Securities Act, 15 U.S.C. § 77q(a) (1988), sections 9(a)(2), 10(b), 15(c)(1)-(2), and 17(a)(1) of the Exchange Act, 15 U.S.C. §§ 78i(a)(2), 78j(b), 78o(c)(1)-(2), and 78q(a)(1) (1988), and SEC Rules 10b-5, 15c1-2, 15c2-7, 17a-3 and 17a-4 promulgated thereunder, 17 C.F.R. §§ 240.10b-5, 240.15c1-2, 240.15c2-7, 240.17a-3, and 240.17a-4 (1994).

 The SEC seeks a permanent injunction prohibiting the defendants from violating the above securities laws and an order directing the defendants to disgorge all money, property and other assets derived from the transactions at issue. The defendants assert the affirmative defense that the SEC's action is "time barred." Defendants' Supplemental Memorandum at 1. *fn2" They claim the limitation period applicable to private rights of action under the federal securities laws, commonly referred to as Rule 10b-5 actions, bars this SEC action. In February 1991, the SEC moved to strike this affirmative defense pursuant to Rule 12(f) of the Federal Rule of Civil Procedure, but Judge Leval deferred decision on this issue in his June 18, 1991 order. SEC v. Lorin, No. 90 Civ. 7461, 1991 WL 576895 (S.D.N.Y. June 18, 1991).

 Rule 12(f) allows the Court to "order stricken from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter." Fed. R. Civ. Pro. 12(f). The Federal Rules of Civil Procedure reflect the policy that pleadings should be treated liberally, and that a party should have the opportunity to support its contentions at trial. Oliner v. McBride's Indus., Inc., 106 F.R.D. 14 (S.D.N.Y. 1985). Accordingly, Rule 12(f) motions are not favored and will not be granted routinely. Telectronics Proprietary, Ltd. v. Medtronic, Inc., 687 F. Supp. 832 (S.D.N.Y. 1988). To succeed on such a motion, the movant must first show that it is prejudiced by the inclusion of the defense. Shell Oil Co. v. EEOC, 523 F. Supp. 79, 83 (E.D. Mo. 1981). Furthermore, there can be no questions of fact or law which, if resolved in favor of the adversary, would enable the defense to succeed. Resolution Trust Corp. v. Youngblood, 807 F. Supp. 765, 769 (ND. Ga. 1992); Shell Oil, 523 F. Supp. at 83; Soanes v. Baltimore & O.R.R., 89 F.R.D. 430, 431 n.1 (E.D.N.Y. 1981). If the SEC is correct in that, as a matter of law, no limitation period applies to this action, then in ...


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