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MORALES v. NEW VALLEY CORP.

June 27, 1997

RICHARD MORALES, Plaintiff against NEW VALLEY CORPORATION, HARRY I. FREUND AND JAY S. GOLDSMITH, Defendants.


The opinion of the court was delivered by: HAIGHT

 HAIGHT, Senior District Judge:

 This matter is currently before the Court for consideration of plaintiff's motion to amend his complaint to add a new party defendant, Kenneth S. Grossman, and a new claim for relief under section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78p(b), applicable to both Grossman and the existing defendants. Defendants Goldsmith and Freund oppose the motion, arguing that plaintiff's proposed amendment fails to state a claim under § 16(b), or in the alternative, is time-barred. For the reasons set forth below, plaintiff's motion is denied.

 I.

 Federal Rule of Civil Procedure 15(a) directs that leave to amend "shall be freely given when justice so requires." "This mandate is to be heeded." Foman v. Davis, 371 U.S. 178, 182, 9 L. Ed. 2d 222, 83 S. Ct. 227 (1962). Accordingly, leave to amend should normally be granted under Rule 15(a) absent:

 
"undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of the amendment, etc."

 Id.; see also Health-Chem Corp. v. Baker, 915 F.2d 805, 809 (2d Cir. 1990) (holding that leave to amend should be denied where proposed amendment has no merit); State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981) ("Reasons for proper denial of leave to amend include . . . futility of the amendment . . . ."). Defendants essentially object to the proposed amendment on the ground that it would be futile.

 Since defendants' objection is the functional equivalent of a motion to dismiss the claim under Rule 12(b)(6), Fed. R. Civ. P., plaintiff's proposed amendment should be evaluated under the same standards. Ricciuti v. New York City Transit Authority, 941 F.2d 119, 123 (2d Cir. 1991). Accordingly, this court's function "is merely to assess the legal feasibility of the complaint, not to assay the weight of the evidence which might be offered in support thereof." Geisler v. Petrocelli, 616 F.2d 636, 639 (2d Cir. 1980). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974).

 Plaintiff's motion to amend should be denied on the grounds of futility "only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Hishon v. King & Spalding, 467 U.S. 69, 73, 81 L. Ed. 2d 59, 104 S. Ct. 2229 (1984) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)). To that end, the Court must accept plaintiff's well-pleaded factual allegations as true, Papasan v. Allain, 478 U.S. 265, 283, 92 L. Ed. 2d 209, 106 S. Ct. 2932 (1986), and construe them in a light most favorable to the plaintiff. LaBounty v. Adler, 933 F.2d 121, 123 (2d Cir. 1991). In deciding this motion, the Court may consider the pleadings and any exhibits attached thereto, documents incorporated by reference in the pleadings, matters subject to judicial notice, Brass v. American Film Technologies, Inc., 987 F.2d 142, 150 (2d Cir. 1993), and documents filed with the SEC which plaintiff relied upon in composing his complaint. Kramer v. Time Warner, Inc., 937 F.2d 767, 774 (2d Cir. 1991).

 II.

 Plaintiff brings this action pursuant to § 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78p(b), which requires that an officer, director, or "beneficial owner of more than 10 per centum of any class of any equity security" disgorge and return to the corporation profits realized by that individual through the purchase and sale, or sale and purchase, of the equity security within a period of less than six months. 15 U.S.C. § 78p(a); see also Morales v. New Valley Corporation, 936 F. Supp. 119, 122 (S.D.N.Y. 1996). Plaintiff's current complaint alleges that Freund and Goldsmith were members of a "group," as that term is defined in Section 13(d), 15 U.S.C. § 78m(d), *fn1" the members of which, in the aggregate, were beneficial owners of more than 10% of the outstanding Class B cumulative convertible preferred stock of New Valley (hereinafter referred to as "preferred stock"). *fn2" The gravamen of plaintiff's current complaint is that the defendants, while members of this group, earned a short-swing profit from the purchase and sale of New Valley preferred stock that must be returned to New Valley pursuant to § 16(b).

 In his current motion, plaintiff proposes to add a new cause of action under § 16(b) against Freund, Goldsmith, and another member of the "group", one Kenneth S. Grossman, based on the assignment of certain rights to Freund, Goldsmith and Grossman, (hereinafter referred to collectively as "the defendants"), by their wholly owned company, Veritovtrade.

 On March 14, 1994, Veritovtrade executed an Equity Appreciation and Advisory Agreement with Spear, Leeds & Kellogg, J&S Investments & Company and Edward S. Gutman (hereinafter referred to as "the Holders"). Under this agreement, Veritovtrade agreed to provide financial advisory services in connection with New Valley's preferred stock, in exchange for the right to receive certain performance-related fees equal to a percentage of the appreciation of the New Valley preferred stock owned by the Holders. Several months later, on May 4, 1994, Veritovtrade executed an Assignment Agreement, pursuant to which it assigned its rights and obligations under the Equity Appreciation and Advisory Agreement to the defendants. Plaintiff alleges that within six months of the defendants' acquisition of this right to receive a performance-related fee, the Holders sold their stock at a profit, thereby generating performance-related fees for the defendants.

 Plaintiff asserts a § 16(b) claim based on the foregoing factual scenario. His theory is that, by virtue of the Assignment Agreement, the defendants "purchased" beneficial ownership of New Valley preferred stock, or a derivative security based on New Valley preferred stock, since pursuant to that Agreement the defendants acquired the right to receive fees tied to the performance of New Valley preferred stock. Similarly, plaintiff alleges that the defendants "sold" their beneficial ownership of New Valley preferred stock, or a derivative security based on New Valley preferred stock, when the Holders sold their New Valley preferred stock at a profit, thereby generating fees for the defendants. Since the execution of the Assignment Agreement and the defendants' receipt of performance-related fees both occurred within a six month period, and while the defendants were members of the "group," plaintiff claims that defendants' performance-related fees are short-swing profits that must be disgorged to New Valley pursuant to § 16(b).

 The defendants disagree; they argue, inter alia, that plaintiff's new claim fails to allege a "purchase and sale" within a six month period. Thus, the main issue presented by plaintiff's motion to amend is whether the acquisition of a right to receive a fee measured by the performance of an underlying equity security, and the subsequent receipt of that fee due to the sale of the underlying security, constitutes a "purchase ...


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