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.
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 § 16(b), plaintiff also requests an award of
pre-judgment interest. Defendant opposes the motion on the issue
of liability, opposes the reward of pre-judgment interest, and
cross-moves for summary judgment.
I. Section 16(b)
Section 16(b) of the Act allows an issuer of securities or a
shareholder to bring an action for disgorgement of the profits
made by a statutory insider from a purchase and sale of the
issuer's securities that occurs within a six-month period. See
15 U.S.C. § 78p. Section 16(b) does not require a showing of bad
faith, and "operates mechanically, and makes no moral
distinctions, penalizing technical violators of pure heart, and
bypassing corrupt insiders who skirt the letter of the
prohibition." Magma Power Co. v. Dow Chem. Co., 136
347 F.3d 316, 320 (2d Cir. 1998). The stated purpose of the statute
is to prevent the "unfair use of information which may have been
obtained by such beneficial owner, director, or officer by reason
of his relationship to the issuer." 15 U.S.C. § 78p(b).
In order to establish liability under § 16(b), plaintiff must
show (1) a purchase and (2) a sale of securities (3) by a
beneficial owner of more than 10% of any class of equity
security, director or officer (4) within a six-month period. See
Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d
Cir. 1998). Defendant concedes that he made purchases and sales
of Quintel stock within a six-month period. It is also undisputed
that he is not a director or officer of Quintel. The only
remaining issue is whether defendant is a beneficial owner of
more than 10% of the Quintel common stock. Summary judgment is
appropriate if there is no genuine issue of material fact
underlying the legal question of whether defendant was a
beneficial owner of more than 10% of Quintel common stock at the
time of his short-swing transactions. See Morales v. New Valley
Corp., 999 F. Supp. 470, 472 (S.D.N.Y. 1998), aff'd Morales v.
Freund, 163 F.3d 763 (2d Cir. 1999).
Section 16 requires a "two-tier" analysis of beneficial
ownership. SEC Rule 16a-1(a) requires that, in order to be a
beneficial owner under § 16(b), defendant must be a beneficial
owner as defined by § 13(d) of the Act and defendant must have a
pecuniary interest in the securities at issue. See Morales, 999
F. Supp. at 473. Pecuniary interest is defined as "the
opportunity, directly or indirectly, to profit or share in any
profit derived from a transaction in the subject securities."
17 C.F.R. § 240.16a-1(a)(2)(i). Defendant Stolz admits that he
profited from the purchase and sale of Quintel securities,
therefore he had a pecuniary interest in the Quintel securities.
Under Rule 16a-1(a)(1), for the purposes of determining whether
a person is a beneficial owner of more than ten percent of any
class of securities, a beneficial owner is "any person who is
deemed a beneficial owner under section 13(d) of the Act and
rules thereunder." Section 13(d) of the Act states in relevant
part that "if two or more persons act as a . . . group for the
purpose of acquiring, holding or disposing of securities of an
issuer, such group shall be deemed a person" that may itself be
deemed a beneficial owner. 15 U.S.C. § 78m(d)(3). If two or more
persons are determined to be a "group" for the purposes of §
13(d), their stock holdings are aggregated to determine whether
they are beneficial owners of 10% of the issuer's stock. Thus, if
defendant Stolz acted with Feder and Lindsey "as a group for the
purpose of acquiring, holding or disposing of" Quintel
securities, their stock holdings would be aggregated to more than
18% and Stolz would be a beneficial owner of more than 10% of
Quintel stock under § 16(b).
II. Section 13(d)
The purpose of § 13(d) is "to alert the marketplace to every
large, rapid aggregation or accumulation of securities,
regardless of technique employed, which might represent a
potential shift in corporate control." GAF Corp. v. Milstein,
453 F.2d 709, 717 (2d Cir. 1971). In order to form a group under
§ 13(d), the defendants must have "combined in support of the
common objective." S.E.C. v. Savoy Indus., 587 F.2d 1149, 1162
(D.C.Cir. 1978) (citations omitted). The pooling agreements that
Congress targeted in § 13(d) will not always be in writing; a §
13(d) group may be proved with circumstantial evidence. See id.
In this case, plaintiff alleges that the written PRN/Quintel
Agreement is a pooling agreement in which defendant, Feder and
Lindsey combined in support of a common objective. Defendant does
not dispute that he signed the PRN/Quintel Agreement, but
disputes that this agreement rendered him a member of a group
under § 13(d). Thus, we must consider whether, as a matter of
law, the PRN/Quintel Agreement was an agreement between Stolz,
Feder and Lindsey to act as a group with the purpose of
acquiring, holding, or disposing of Quintel securities. We must
also consider the significance of defendant's Schedule 13(d) and
other SEC filings that indicated he was a member of a § 13(d)
A. Agreement to Acquire, Hold or Dispose of Quintel
Although the lock-up provisions in the PRN/Quintel Agreement
control when and how Stolz, Feder and Lindsey can dispose of
their Quintel securities, the provisions are not an agreement
among them to acquire, hold or dispose of their securities. In
determining whether there is a § 13(d) group, courts have
considered common objectives to control the stock price or
effectuate a shift in corporate control, the ability of the group
members to exert influence over the corporation, and the
voluntariness of the agreement to acquire, hold, or dispose of
In order to find a § 13(d) group, a common objective among its
members is required. In Morales v. Freund, a § 13(d) group was
formed when the defendants entered into an agreement to use their
best efforts to obtain voting control of the issuer's stock by
acquiring more stock. 163 F.3d at 766. Similarly, the court found
a prima facie case of a § 13(d) group in Lerner v. Millenco
because the defendants coordinated their investments for the
purpose of artificially maintaining the market price of the
stock. 23 F. Supp.2d 337, 343 (S.D.N.Y. 1998). In Global
Intellicom v. Thomson Kernaghan & Co., the common objective of
the § 13(d) group was artificially to increase trading volume and
decrease the value of the stock. 99 Civ. 342, 1999 WL 544708, at
*14 (S.D.N.Y. July 27, 1999) (denying defendants' motion to
There is no evidence that Stolz, Feder and Lindsey were trying
to effectuate a shift in corporate control through the
disposition of Quintel stock. In S.E.C. v. Levy, the defendant
was a member of a § 13(d) group that agreed to use their stock to
further the common objective of acquiring control over the
issuing corporation. 706 F. Supp. 61, 71 (D.D.C. 1989). Similarly,
in GAF Corp., the defendant was a member of a § 13(d) group
whose members agreed to pool their stock holdings to attempt a
corporate takeover. 453 F.2d at 717; see also Wellman v.
Dickinson, 682 F.2d 355, 363 (2d Cir. 1982) (affirming district
court's determination that defendants agreed to act in concert in
disposing of their shares as part of an effort to effectuate a
shift in corporate control).
In contrast to the agreements in the aforementioned cases, the
PRN/Quintel Agreement was an agreement between two corporations
to effectuate a sale of PRN's holdings in another company.
Although the sale was in exchange for Quintel stock, the purpose
of the agreement was not to acquire control of Quintel. Nor is
there any other evidence of an agreement to attempt a corporate
takeover.*fn3 The only common objective that Stolz, Feder and
Lindsey shared was to sell PRN's holdings in New Lauderdale LLC.
The lock-up provisions here do not reflect the objectives of
Stolz, Feder and Lindsey, rather they exist to protect Quintel
and Quintel shareholders. Quintel, not defendant Stolz and the
alleged group, was trying to affect — i.e., protect — the price
of Quintel stock.
Defendant Stolz did not agree with Feder and Lindsey to use
their stock to exert
influence over Quintel. In Savoy, the defendant was a member of
a § 13(d) group because he had a substantial interest in the
corporation and exerted substantial influence through the
disposition of his shares. Savoy, 587 F.2d at 1165. The
defendant was suggesting acquisitions and business transactions
to the corporation. See id. Unlike the defendant in Savoy,
Stolz owned less than 2.5% of Quintel stock. Even combining
Stolz's interest with the holdings of Feder and Lindsey, the
alleged group would own about 18% of Quintel, and would be unable
to exert substantial influence over Quintel. Further, there is no
evidence that Stolz has attempted to exert influence over or get
involved in the management of Quintel.
The SEC has ruled that Goldman Sachs' partners and employees,
who had to sign a shareholders' agreement as a condition of
receiving stock, were not subject to aggregation of their stock
for the purposes of determining whether they were 10% beneficial
owners under § 16(b), even though the agreement included lock-up
provisions and voting agreements. See Goldman Sachs Group, Inc.,
S.E.C. No-Action Letter [1999 Transfer Binder] Fed.Sec.L.Rep.
(CCH) ¶ 77,553 (April 30, 1999). The SEC Staff based its ruling
in part on the shareholders' lack of ability to control Goldman
Sachs because of the large number of shareholders and their small
individual holdings. Similarly, each individual shareholder here
owns a small percentage of Quintel stock. Although there are only
three shareholders in the alleged group, there is no indication
that Stolz, Feder and Lindsey had the ability, or common
objective, to exert influence over Quintel.
Also relevant is whether the PRN/Quintel Agreement was
voluntary. In the Goldman Sachs No-Action Letter, the SEC also
based its ruling on the involuntariness of the shareholder
agreement. See id. The partners and employees at Goldman Sachs
had to agree to the lock-up and voting provisions, or they could
not receive their shares of Goldman Sachs stock. Similarly, the
sale of PRN's holding in New Lauderdale LLC would not have
occurred unless Stolz, Feder and Lindsey agreed to the lock-up
Considering the involuntary nature of the lock-up provisions,
the lack of evidence that Stolz was attempting to exert influence
over Quintel by acting with Feder and Lindsey, and the fact that
the lock-up provisions reflect Quintel's objectives, defendant
Stolz was not a member of a § 13(d) group as a matter of law.
B. Defendant's Schedule 13(d) and Forms 4 and 5
Plaintiff also argues that defendant Stolz admitted that he was
a member of a § 13(d) group by so indicating on the Schedule
13(d) and Forms 4 and 5 that Stolz filed with the SEC. Although
these documents may be evidence of Stolz's belief that he was a
member of a § 13(d) group, § 16(b) liability will not be imposed
unless Stolz meets the statutory definition of a beneficial
owner. Other courts in this District have held that a defendant's
filings cannot "dispose of the question of statutory
interpretation presented." Levner v. Saud, 903 F. Supp. 452, 461
n. 14 (S.D.N.Y. 1994) (quoting Chemical Fund v. Xerox Corp.
377 F.2d 107, 112 (2d Cir. 1967)), aff'd Levner v. Prince Alwaleed,
61 F.3d 8 (2d Cir. 1995); see also Levy v. Seaton, 358 F. Supp. 1,
4 (S.D.N.Y. 1973) (filing "would not be dispositive if it was
an unnecessary act based on a mistake of law"). Therefore,
defendant's indications in his SEC filings that he was a member
of a § 13(d) group are not dispositive of his legal status as a
member of a § 13(d) group. Plaintiff also must show that as a
matter of interpretation of § 13(d), defendant is a member of a
group that agreed to acquire, hold or dispose of Quintel stock.
Because we have found, upon application of § 13(d) to the
undisputed facts, that defendant Stolz is not a member of a §
13(d) group, his SEC filings will not impose § 16(b) liability.
Because defendant Stolz is not a member of a group under §
13(d), we cannot aggregate his holdings of Quintel stock with
those of Feder and Lindsey. As a less than 2.5% beneficial owner
of Quintel stock, Stolz is not subject to § 16(b) liability.
II. Plaintiff's Claim for Pre-Judgment Interest
We need not reach plaintiff's claim for pre-judgment interest
because we have determined as a matter of law that defendant
Stolz is not liable under § 16(b) for his short-swing trading in
For the foregoing reasons, plaintiff's motion for summary
judgment is denied and defendant's cross-motion for summary
judgment is granted. Plaintiff's complaint is hereby dismissed
with prejudice as to all defendants and the Clerk of the Court
shall enter judgment for defendant Stolz.