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MORALES v. QUINTEL ENTERTAINMENT

October 27, 1999

RICHARD MORALES, PLAINTIFF,
v.
QUINTEL ENTERTAINMENT, INC. AND PETER STOLZ, DEFENDANTS.



The opinion of the court was delivered by: William C. Conner, Senior District Judge.

OPINION AND ORDER

Plaintiff Richard Morales brings this shareholder suit pursuant to Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (the "Act"), to recover profits realized by defendant Peter Stolz through his short-swing trading in common shares of Quintel Entertainment, Inc. ("Quintel"). Quintel is a named defendant solely to bring all the necessary parties before the court. Before this Court are plaintiff's motion and defendant Stolz's cross-motion for summary judgment. For the reasons stated below, plaintiff's motion is denied and defendant Stolz's cross-motion is granted.

BACKGROUND

Pursuant to a January 17, 1996 agreement*fn1 (the "PRN/Quintel Agreement"), Psychic Reader's Network ("PRN") sold its one-half interest in New Lauderdale LLC to Quintel. As an 11% shareholder of PRN, defendant Stolz received 352,000 shares of Quintel common stock as a result of this transaction. These shares represented less than 2.5% of the outstanding common stock of Quintel. The other two shareholders of PRN were Steve Feder, who owned 44.5% of PRN shares, and Thomas Lindsey, who owned 44.5% of PRN shares. Both Feder and Lindsey received 1,429,000 shares as a result of the PRN/Quintel Agreement.

The PRN/Quintel Agreement, negotiated by Feder and PRN's counsel with Quintel's Chief Executive Officer and Quintel's counsel, included several provisions restricting PRN shareholders from selling the Quintel stock that they received pursuant to the agreement. These provisions, commonly called "lock-up" provisions, are often included in merger and acquisition agreements.

The first lock-up provision, contained in Section 3.3 of the PRN/Quintel Agreement, prevented the PRN shareholders from selling shares of Quintel stock for two years unless a Quintel Principal sold shares. If a Quintel Principal sold shares, then each of the PRN shareholders had the right to sell a specific number of shares as determined by a formula. Each PRN shareholder could also sell a specific number of shares to pay taxes. The second lock-up provision, contained in Section 3.2.1 of the PRN/Quintel Agreement, restricted the PRN shareholders from selling more than a specific number of shares of Quintel stock in any quarter.

In December 1996, Stolz executed a Schedule 13D. The Schedule 13D indicated, by a check in the appropriate box, that Stolz was a member of a group. It also stated that a group "may be formed" which "may be deemed to be the beneficial owner" of the 3,388,000 shares of Quintel stock collectively owned by Feder, Lindsey and Stolz. Stolz filed four amendments to the Schedule 13D with the Securities and Exchange Commission ("SEC") that included the same information with respect to the existence of a group.

Defendant Stolz also filed one Form 5 and six Forms 4 with the SEC between February 1997 and September 1998. Each of these forms stated that the "Relationship of Reporting Person to Issuer" was a "Member of 13(d) group owning more than 10%." The cover letter accompanying each of these Forms also stated that Stolz was a member of a § 13(d) group owning more than 10% of Quintel stock.

Defendant Stolz claims that the Schedule 13D and the Forms 4 and 5 were prepared by his attorney and he signed them without regard to the statements that he was a member of a group.

Between November 1996 and August 1998, defendant Stolz made forty (40) purchases and fifty-one (51) sales of Quintel stock. Plaintiff seeks disgorgement of the profits Stolz made from these transactions based upon the allegation that the transactions were short-swing trading*fn2 by an insider.

DISCUSSION

Under Federal Rule of Civil Procedure 56(c), the moving party is entitled to summary judgment if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show 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." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Where there are cross-motions for summary judgment, "the standard is the same as that for individual motions for summary judgment and the court must consider each motion independent of the other. . . . Simply because the parties have cross-moved, and therefore have implicitly agreed that no material issues of fact exist, does not mean that the court must join in that agreement and grant judgment as a matter of law for one side or the other." Aviall, Inc. v. Ryder System, Inc., 913 F. Supp. 826, 828 (S.D.N Y 1996), aff'd, 110 F.3d 892 (2d Cir. 1997). When evaluating each motion, the court must consider the facts in the light most favorable to the non-moving party. See id.

In addition to moving for summary judgment on the issue of liability under ยง 16(b), plaintiff also requests an award of pre-judgment interest. Defendant opposes the motion on the issue of liability, opposes the reward of ...


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