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