The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY
This case involves allegations of securities fraud and pendant state law claims.
Plaintiff, Harold Falik, is the former Chief Financial Officer of Emerson Radio Corporation ("Emerson"). (P 10).
Defendants Jay Haft, Eugene I. Davis, Donald Dvorkin, Lyle E. Gramley, Geoffrey P. Jurick, and Walter F. Mondale were alleged to be, at all relevant times, officers or directors of Emerson. (PP 3-4). However, Defendants Gramley and Mondale have thus far not appeared in this action. Defendant Parker Duryee Rosoff & Haft ("Parker Duryee") is a New York law firm. (P 2). Defendant Martin Stein is a member of this firm. (P 5). Defendant Haft, in addition to his position as a director at Emerson, is also a member of Parker Duryee. (P 3).
Falik asserts that he was the victim of two distinct but connected frauds. The first of these arose out of litigation in a matter that was filed in this District in 1990, Karr v. Emerson Radio Corp., et al., 90 Civ. 1315 (TPG). (PP 10-11). Emerson and Falik were among the defendants named in the Karr case which was filed by investors in a real estate syndicate in which Emerson had been a principal. (PP 12-13). The suit charged fraud based upon Emerson's failure to provide these investors with notice of its withdrawal from the syndicate, a material fact. (P 13-14). Jay Haft, a defendant in the instant matter, failed to advise Emerson of its duty to disclose this withdrawal. (P 14). On or about February 19, 1990, after Karr was filed, Parker Duryee and Martin Stein undertook to act as legal representatives for both Emerson and Falik. (P 15).
Stein and Haft assured Falik that they and their firm would act in Falik's best interests in the Karr matter and would, in connection therewith, exercise the reasonable care, skill, and diligence exercised by attorneys in the ordinary discharge of their duties under similar circumstances. (PP 16, 18-19). Stein, Haft, and Parker Duryee made these representations with the intention that Falik act upon them, and Falik indeed acted upon them and retained Stein and Haft as his attorneys for the Karr case. (PP 21-22). However, from the time of the initiation of Karr, Haft and Stein were aware of a conflict of interest between Emerson and Falik, as well as one between Haft, Stein, and Parker Duryee on the one hand and Emerson and Falik on the other. (PP 23-25). For a period of over two and one-half years, Stein and Haft deceived Falik while pursuing their own and Emerson's interests at the expense of Falik's. (P 27). For example, during this time, Haft and Stein repeatedly advised Emerson to shift some or all of its liability to Falik. (P 28). Moreover, while they assured Falik that his legal fees in Karr were being paid by a third party pursuant to an indemnification agreement required under Emerson's by-laws, Haft and Stein failed to require such third-party payments. (PP 34-36).
It was not until October 7, 1992 that Haft and Stein revealed the conflicts to Falik by informing him by letter that following a pretrial conference they were entering into settlement negotiations on behalf of Emerson but not on behalf of Falik. (P 30). The same letter explained that while Karr was to be ready for trial by December 1, 1992, Stein, Haft, and their firm were withdrawing as Falik's counsel due to the conflict. (P 31). As a result, Falik was forced to retain the law firm of Anderson Kill Olick and Oshinsky, and he incurred legal fees of $ 262,100. (PP 37, 40). Moreover, Falik was ultimately subjected to a judgment of $ 1 million. (P 42).
The facts of the Karr litigation form the basis of Counts II, IV, and V, as well as part of Count III of Falik's amended complaint. Count II alleges the facts described above, and asserts that Parker Duryee's, Haft's and Stein's knowing and willful failure to advise Falik of the conflicts of interest inherent in Karr, as well as Defendants' actions against Falik's interests constitute legal malpractice. (PP 67-74). Count IV relies upon the same set of facts and asserts that Defendants' conduct constitutes a breach of contract. (PP 82-85). Count V also relies on these facts and asserts that Defendants have violated § 487 of the New York Judiciary Law. (PP 86-88). See N.Y. Judiciary Law § 487 (McKinney 1983) (misconduct by attorneys). Count III sounds in common law fraud, and relies in part on the facts of the Karr litigation. (PP 75-81).
The second alleged fraud involves a stock option exercised by Falik. On April 15, 1991, pursuant to a contractual arrangement with Emerson, Falik tendered a check to Emerson for $ 120,960 in payment for exercise of an option to purchase 56,000 unrestricted, SEC registered, and freely transferable shares of Emerson common stock. (P 43). At a subsequent meeting of Emerson's board of directors on June 11, 1991, upon a motion made by Defendant Haft and seconded by Defendant Gramley, the board approved the April transaction and voted either to issue the above-mentioned shares to Falik or to refund his payment in full. (P 44). This meeting was attended by all individual defendants in this case. (P 45).
Despite the board action and following Falik's repeated requests for his shares, in May 1992 Emerson transferred to Falik a certificate representing ownership of 56,000 shares of common which certificate bore restrictive legends. (P 46). The shares transferred were not SEC registered and not freely transferable as promised. (P 46). This occurred despite the Emerson directors' knowledge that Falik intended to sell the shares for a profit at the approximate market price of $ 168,000. (P 46).
In July and August 1992, Falik spoke with Defendant Dvorkin on several occasions. (P 48) Dvorkin, who agreed that Falik's demands were legitimate, promised to arrange a meeting between Falik and Defendant Davis to address Falik's demands. (P 48). At the ensuing meeting, Defendant Davis promised to discuss with Defendant Jurick the possibility of Jurick's purchasing or arranging the purchase of Falik's restricted shares. (P 49). Davis promised further that if Dvorkin could not thus resolve Falik's problem, Emerson would issue the required unrestricted shares to Falik after Emerson filed its 1992 10-K report in April 1993. (P 49) Falik was further encouraged in May 1993 when Emerson issued press releases announcing its imminent registration and issuance of common stock. (P 50). However, in late 1993, Emerson filed a petition with the United States Bankruptcy Court for the District of New Jersey seeking Chapter 11 protection. (P 52). Thus, in December 1993, following this filing, Falik sold his 56,000 restricted shares for $ 0.03 per share. (P 52).