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SEC v. NORTON

September 29, 1998

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, against JEFFREY S. NORTON, DONALD C. REYNOLDS, JOHN A. TARTAGLIA, and EDWARD T. MENSTER, Defendants.


The opinion of the court was delivered by: STEIN

SIDNEY H. STEIN, U.S. District Judge.

 The Securities and Exchange Commission ("SEC") commenced this action for alleged violations of the anti-fraud provisions of the federal securities laws. *fn1" One year ago, this Court granted in part defendant John A. Tartaglia's motion to dismiss the complaint against him pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted. See SEC v. Norton, 1997 U.S. Dist. LEXIS 15167, 1997 WL 611556 (S.D.N.Y. Oct. 3, 1997). Tartaglia now moves pursuant to Fed. R. Civ. P. 56 for summary judgment dismissing the remaining claims of the complaint against him. *fn2" The SEC opposes Tartaglia's motion for summary judgment, and in a sur-reply letter brief to this Court dated September 10, 1998, requests leave to amend the complaint. For the reasons set forth below, defendant's motion for summary judgment is granted in part and denied in part, and plaintiff's request to amend the complaint is denied.

 Motion to Amend the Complaint

 In its October 3, 1997 ruling, familiarity with which is assumed, this Court characterized the SEC's claims as alleging two fraudulent transactions: "first, Tartaglia allegedly fraudulently induced Thurman to transfer $ 1 million into an escrow account in order to facilitate the alleged purchase of [prime bank instruments] by Norton. Second, defendants replaced Thurman's funds in the escrow account with 1000 shares of Sabre stock, whose worth was misrepresented via a forged Deloitte & Touche letter." SEC v. Norton, 1997 U.S. Dist. LEXIS 15167, 1997 WL 611556, at *4 (S.D.N.Y. Oct. 3, 1997). With respect to the first transaction, this Court found that it did not fall within the purview of the securities anti-fraud statutes since the fraudulent scheme alleged was not made "in connection with the purchase or sale of a security." Id. However, this Court did find that the SEC had stated a claim pursuant to the anti-fraud statutes regarding the second transaction. That Opinion held that an action against Tartaglia pursuant to the anti-fraud securities laws remained only insofar as the complaint alleged that Tartaglia participated in a fraudulent scheme to replace Thurman's funds in an escrow account with 1000 shares of Sabre stock based on a forged auditor's letter. See id. at *7.

 Of particular relevance to the SEC's request to amend the complaint is this Court's finding that the SEC had not alleged that Thurman's funds in the escrow account were to be used to purchase prime bank instruments ("PBI's"), but rather had alleged that Thurman's funds were to be used to "facilitate" the purchase by "showing the seller of the instruments that $ 1 million was held in an escrow account." See id. at *4 (quoting Complaint, P 12). Thus, this Court wrote that this case differed from "those cases in which individuals are fraudulently misled to attempt to purchase PBI's based upon representations of expected profit." Id. Now, in an attempt to place this case within the group of distinguishable cases, the SEC seeks to amend the complaint to assert that Tartaglia made misrepresentations to Thurman to induce Thurman to invest $ 1 million in a PBI. *fn3"

 The SEC's request to amend at this very late stage in the litigation must be denied. It would be highly prejudicial to Tartaglia to grant the SEC's request to amend the complaint given that discovery in this case has been proceeding for three years, the last year of which has been conducted pursuant to this Court's October 3, 1997 Opinion & Order, which substantially narrowed the scope of the complaint to the allegations concerning the second transaction. See Turkenitz v. Metromotion, Inc., 1997 U.S. Dist. LEXIS 19762, *24, 1997 WL 773713, at *9 (S.D.N.Y. Dec. 12, 1997) (noting that prejudice to a party is the most important reason for denying motion to amend).

 In addition, the SEC has failed to explain why it did not move to amend the complaint sooner. Its allegations of "newly" discovered evidence stem from a deposition of Thurman that transpired in February 1996. The SEC relies on the fact that because this evidence was discovered from a third party witness, it is justified in seeking an amendment at this late stage. Yet, the SEC has made no showing that it only recently received this third-party discovery. In light of this Court's ruling in October 1997, it appears that the SEC seeks to amend the complaint in its sur-reply letter solely to avoid an adverse ruling on this summary judgment motion. Given these facts, this Court denies the SEC's request to amend the complaint. See Berman v. Parco, 986 F. Supp. 195, 217 (S.D.N.Y. 1997) ("'Leave to amend a complaint will generally be denied when the motion to amend is filed solely in an attempt to prevent the Court from granting a motion to dismiss or for summary judgment, particularly when the new claim could have been raised earlier.'") (quoting 1 M. Silverberg, Civil Practice in the Southern District of New York ยง 6.26).

 Summary Judgment Motion

 Summary judgment will be granted "only when the moving party demonstrates that 'there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'" Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (quoting Fed. R. Civ. P. 56(c)). In deciding whether a genuine dispute remains as to a material fact, the Court must resolve all ambiguities, and draw all reasonable inferences, against the moving party. Matsushita Electrical Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587-88, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986).

 Tartaglia makes four arguments in support of his motion for summary judgment. First, he contends that the SEC's claims pursuant to Section 10(b) of the Exchange Act and Rule 10(b)-5 promulgated thereunder, and Section 17(a) of the Securities Act should be dismissed because Tartaglia made no "misrepresentations in connection with" the substitution of the Sabre stock. Second, he asserts that the SEC's claims for aiding and abetting and for conspiracy to violate the securities laws should be dismissed. Third, he urges that the SEC's claims pursuant to Section 17(a)(2) of the Securities Act must be dismissed because he did not obtain any money or property from the alleged fraud. Finally, he maintains that the remedy of disgorgement may not be maintained against him because he never obtained any "ill-gotten gains." Each of Tartaglia's contentions will be addressed below.

 A. The "In Connection With" Requirement

 Tartaglia contends that the undisputed facts establish that he did not make any misrepresentations to anyone "in connection with" the sale of a security. "Misrepresentations or omissions involved in a securities transaction but not pertaining to the securities themselves cannot form the basis of a violation of Section 10(b) or Rule 10b-5." Manufacturers Hanover Trust Co. v. Smith Barney, Harris Upham & Co., Inc., 770 F. Supp. 176, 181 (S.D.N.Y. 1991) (citing Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984)). The alleged misrepresentation must pertain to the "fundamental nature" of the security, "'namely, characteristics and attributes that would induce an investor to buy or sell the particular [securities].'" Production Resource Grp., L.L.C. v. Stonebridge Partners Equity Fund, L.P., 6 F. Supp. 2d 236, 239 (S.D.N.Y. 1998) (quoting Manufacturers Hanover Trust Co., 770 F. Supp. at 181)).

 Relying on this case law, Tartaglia contends that the SEC has failed to demonstrate that he made any misrepresentation regarding the Sabre stock transaction. Although the SEC has elicited very little evidence demonstrating that Tartaglia made misrepresentations regarding the Sabre stock, it has presented testimony from the escrow holder that creates a genuine issue of material fact. The SEC relies on a statement from the escrow holder that "[Tartaglia] indicated to me that what I was already holding was of sufficient value to support an additional transfer of funds in excess of $ 500,000, yes." Affidavit of William D. Kitay in Opposition to defendant John A. Tartaglia's Motion for Summary Judgment dated July 1, 1998 ("Kitay Aff."), Exh. 5 at 550 (deposition transcript of Rory J. Cutaia, Esq. on March 4, 1996). Defendant maintains that this testimony should not be credited because in an earlier deposition, the escrow holder specifically stated that Tartaglia did not make any statements regarding the value of the Sabre Credit Corp. stock. In particular, the escrow holder was asked and answered the following question:

 
Q. Did Tartaglia say anything to you on or about September 21st concerning the value of the ...

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