Dietrich ("Dietrich") as to Cohn, pursuant to Federal Rule of
Civil Procedure 56. Dietrich has opposed the motion and has moved
to strike certain evidence presented by Cohn in support of his
motion for summary judgment. For the reasons set forth below, the
motion for summary judgment is denied, as is the motion to
The parties in this action are set forth in this Court's prior
opinion of March 4, 1999, familiarity with which is assumed. See
Dietrich v. Bauer, 76 F. Supp.2d 312 (S.D.N.Y. 1999) ("Dietrich
This action was commenced by the filing of a complaint on
August 28, 1995 by Dietrich and has proceeded in the wake of a
related action In re Scorpion Technologies, Inc. Sec. Litig.,
No. C-93-20333, 1994 WL 774029 (N.D.Cal.).
In the second amended complaint, filed April 20, 1999, Dietrich
alleges, inter alia, that the defendants engaged in a scheme to
sell unregistered shares of Scorpion Technologies, Inc.
("Scorpion") in the United States, which shares had purportedly
been issued pursuant to Regulation S,*fn1 promulgated under the
Securities Act of 1933, and to manipulate the trading price of
the Scorpion shares. Dietrich alleges that defendant Green-Cohn
Group, Inc. ("Green-Cohn"), a registered broker-dealer, acted as
the conduit through which nearly 11 million shares of
unregistered Scorpion stock were sold by foreign entities to
investors in the United States, and that Green-Cohn reaped
substantial profits from these sales by being allowed to charge
grossly excessive commission rates on the trades. Dietrich
further alleges that Cohn is liable for these illegal activities
as a "control person" of Green-Cohn, pursuant to Section 20(a) of
the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78t(a),
and that Cohn is also liable for common law fraud and for
securities fraud pursuant to the California Corporations Code,
see Cal. Corp.Code §§ 25400, 25500 (West 2000).
The surviving claims in this action include primary liability
claims under Section 10(b) of the 1934 Act, SEC Rule 10b-5,
17 C.F.R. § 240.10b-5, promulgated thereunder, and common law fraud,
against defendant Green-Cohn Group, Inc., and a controlling
person liability claim under Section 20(a) of the 1934 Act,
15 U.S.C. § 78t(a), and pendent state law claims, against Cohn. See
Dietrich I, 76 F. Supp.2d 312 (dismissing as to first amended
complaint certain federal law claims against certain defendants
and dismissing but granting leave to replead state law claims).
The parties have engaged in discovery, exchanging documents and
deposing witnesses. Cohn's motion for summary judgment was filed
on June 2, 2000, Dietrich's motion to strike was filed on August
1, 2000, and oral argument was heard on September 27, 2000, at
which time these matters was deemed fully submitted.
The facts set forth below are gleaned from the parties' Rule
56.1 statements, affidavits and exhibits, with any factual
inferences drawn in the non-movant's favor. They do not
constitute findings of fact by the Court.
In January 1990, Cohn, a Texas resident, entered into a
relationship with Greenfield in which Greenfield would manage an
investment by Cohn of $2.6 million. Before forming Green-Cohn as
a New York corporation doing business as a broker, Greenfield had
discussions with Cohn concerning the formation of Green-Cohn as a
Cohn was the sole owner of Green-Cohn, owning 100% of its stock
and contributing 100% of the equity in the firm.
According to Greenfield, Cohn was also an incorporating director
of Green-Cohn and continued as a director. Cohn maintains that he
has no recollection of being a director, and no documents have
been submitted to establish his service as such. The
broker-dealer registration form for Green-Cohn identifies Cohn as
a control person. Greenfield was the president of Green-Cohn.
Cohn designated Greenfield to run Green-Cohn as its registered
Green-Cohn had offices in New York which Cohn visited during
the period in which the alleged fraud involving the Scorpion
stock was occurring. Cohn and Greenfield talked monthly and met
once or twice a year during the relevant time period. On
occasion, Green-Cohn used the address of Cohn's office in Houston
as the address for Green-Cohn. Cohn paid Greenfield $30,000 a
month for Green-Cohn operating expenses and overhead.
A photocopy of a letter from Greenfield to Cohn dated January
4, 1991 (the "January 4 Letter") states that Greenfield would
"unilaterally make all management, employment and trading
decisions of [Green-Cohn]" and would "have total control over the
entity and its management," and that Cohn had no authority to
fire Greenfield from his post as president of the company. No
original of the letter has been furnished. Dietrich has submitted
an affidavit from an expert challenging the letter's authenticity
based on forensic evidence. Greenfield testified that he did not
know if he ever sent the letter to Cohn and that he only provided
the photocopy to Cohn within the couple of months preceding
Greenfield's deposition on February 9, 2000. Although the letter
states that Cohn is 100% owner of Green-Cohn, Cohn testified at
his deposition that he did not know he was the owner of the firm
or even that there was a firm called Green-Cohn, as well as that
he had no recollection of the letter.
Green-Cohn submitted its procedural manual as required to the
National Association of Securities Dealers ("NASD"). According to
expert testimony, Green-Cohn violated its own procedural manual,
the NASD and SEC rules and industry practice with respect to
opening new accounts, documentation, customers orders,
short-selling, the opening of foreign accounts and its trading in
Greenfield provided monthly accounting statements to Cohn, and
Cohn received these statements, which were kept at Cohn's office.
Greenfield also had discussions with Cohn's accountant, who
worked out of Cohn's office, regarding Cohn's investment.
Greenfield has submitted an affidavit in which he states that his
oral and written reports to Cohn did not describe particular
investments and did not discuss Scorpion technologies. Cohn
"think[s]" that the statements he received reflected the specific
investments made by Greenfield, "assume[s]" that the statements
included such information because Greenfield acted as a money
manager for him and "money managers basically will tell you where
they've invested [your money]," and "vaguely" recalls seeing such
statements. In November 1999, Dietrich served a document request
on Cohn seeking, inter alia, documents concerning transactions
in Scorpion stock, Cohn's investment in Green-Cohn, Cohn's
relationship with Greenfield, and the financial condition of
Green-Cohn. Cohn objected to this request and has failed to
produce any accounting statements.
During the period when the alleged fraud involving Scorpion
shares was in progress, Cohn's annualized return on his initial
investment of approximately $2.5 million was $1,134,000 in 1991,
$885,000 in 1992, and $3,200,000 in 1993, which amounts to a
return of some 181% on Cohn's initial investment during the
period in which the fraud is alleged to have taken place.
I. The Standard for Summary Judgment
Rule 56(c) of the Federal Rules of Civil Procedure provides
that a motion for summary
judgment may be granted when "there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment
as a matter of law." The Second Circuit has repeatedly noted that
"as a general rule, all ambiguities and inferences to be drawn
from the underlying facts should be resolved in favor of the
party opposing the motion, and all doubts as to the existence of
a genuine issue for trial should be resolved against the moving
party." Brady v. Town of Colchester, 863 F.2d 205, 210 (2d Cir.
1988) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 330 n. 2,
106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (Brennan, J., dissenting));
see Tomka v. Seiler Corp., 66 F.3d 1295, 1304 (2d Cir. 1995);
Burrell v. City Univ., 894 F. Supp. 750, 757 (S.D.N.Y. 1995).
If, when viewing the evidence produced in the light most
favorable to the nonmovant, there is no genuine issue of material
fact, then the entry of summary judgment is appropriate. See
Burrell, 894 F. Supp. at 758 (citing Binder v. Long Island
Lighting Co., 933 F.2d 187, 191 (2d Cir. 1991)).
Materiality is defined by the governing substantive law. "Only
disputes over facts that might affect the outcome of the suit
under the governing law will properly preclude the entry of
summary judgment. Factual disputes that are irrelevant or
unnecessary will not be counted." Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
"[T]he mere existence of factual issues — where those issues are
not material to the claims before the court — will not suffice to
defeat a motion for summary judgment." Quarles v. General Motors
Corp., 758 F.2d 839, 840 (2d Cir. 1985).
For a dispute to be genuine, there must be more than
"metaphysical doubt." Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538
(1986). "If the evidence is merely colorable, or is not
significantly probative, summary judgment may be granted."
Anderson, 477 U.S. at 249-50, 106 S.Ct. 2505 (citations
II. The Motion To Strike Will Be Denied
Dietrich moves to strike the January 4 Letter — which purports
to be a photocopy of a letter from Greenfield to Cohn — pursuant
to Federal Rule of Evidence 1003. Rule 1003 provides:
A duplicate is admissible to the same extent as an
original unless (1) a genuine question is raised as
to the authenticity of the original or (2) in the
circumstances it would be unfair to admit the
duplicate in lieu of the original.
"Authentication [of a photocopy] requires proving two facts:
the original from which the duplicate was copied is itself
authentic and, again, the duplicate is an accurate reproduction
of that original. . . . [I]f the evidence concerning these facts
is sufficient to support a finding of their existence, the item
may be admitted and questions concerning the authenticity of the
original and the accuracy of the reproduction become matters for
the jury to resolve." Charles Alan Wright and Victor Gold, 31
Federal Practice and Procedure Federal Rules of Evidence §
Dietrich has retained a forensic expert who concluded that the
January 4 Letter was not in fact created on January 4, 1991.*fn2
In response, Cohn argues, first, that the date of creation is not
an aspect of this exhibit's authenticity, and, second, that based
on Cohn's own expert evidence, Dietrich is entitled to have no
weight attached to his expert's conclusion.
Contrary to Cohn's contention, the date of the creation of the
January 4 Letter is an aspect of its authenticity. See United
States v. Wolfson, 413 F.2d 804, 806 (2d
Cir. 1969) (discussing expert witness testimony as to
authenticity of document exhibit and that it had been prepared on
a date other than the one it bore). In addition, the fact that
Cohn has an expert whose conclusions contradict those of Dietrich
merely demonstrates that there is a dispute of fact as to the
authenticity of the document. In addition, Dietrich points out
that there are certain inconsistencies between the testimony of
Cohn and Greenfield and the January 4 Letter. However, there is
sufficient evidence from which a jury could conclude that the
document is indeed authentic, and, therefore, it will not be
stricken from the record. Rather, the issue of its authenticity
will be reserved for trial.
III. Cohn Is Not Entitled To Summary Judgment
Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") imposes joint and several liability on any person
who "directly or indirectly, controls any person liable under any
provision of this title or of any rule or regulation thereunder."
15 U.S.C. § 78t(a) (1995).
"In order to establish a prima facie case of liability under §
20(a), a plaintiff must show: (1) a primary violation by a
controlled person; (2) control of the primary violator by the
defendant; and (3) that the controlling person was in some
meaningful sense a culpable participant in the primary
violation." Boguslavsky v. Kaplan, 159 F.3d 715, 720 (2d Cir.
1998) (internal quotation marks omitted) (citing SEC v. First
Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996)).*fn3
Once a prima facie case has been made out, the defendant may
still escape liability if he shows that he acted in good faith.
First Jersey, 101 F.3d at 1473 (citations omitted).
Cohn contends that the undisputed evidence demonstrates as a
matter of law that Dietrich cannot establish the second and third
elements required to make out a prima facie case, and, in
addition, that he is entitled to summary judgment based on a good
faith defense. In addition, Cohn contends that, once the federal
law claims are dismissed, this Court should decline to exercise
jurisdiction over the pendent state law claims.
A. There Is Sufficient Evidence From Which The Jury Could
Conclude That Cohn Is A Control Person
"Control over a primary violator may be established by showing
that the defendant possessed `the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract or
otherwise.'" First Jersey, 101 F.3d at 1472-73 (quoting
17 C.F.R. § 240.12b-2). In this Circuit, the "control person"
provisions are broadly construed as they "were meant to expand
the scope of liability under the securities laws." Terra Res. I
v. Burgin, 664 F. Supp. 82, 88 (S.D.N.Y. 1987) (citations
For purposes of Section 20(a) liability, "actual control
requires only the ability to direct the actions of the controlled
person, and not the active exercise thereof." Sanders v.
Gardner, 7 F. Supp.2d 151, 163 (E.D.N.Y. 1998) (citations
omitted); see In re Bausch & Lomb, Inc. Sec. Litig.,
941 F. Supp. 1352, 1368 (W.D.N.Y. 1996) (in determining
control status "courts have given heavy consideration to the
power or potential power of influence and control the activities
of a person, as opposed to the actual exercise thereof")
(internal quotation marks and citation omitted); Epstein v. Haas
Sec. Corp., 731 F. Supp. 1166, 1175 n. 5 (S.D.N.Y. 1990)
(plaintiff need not show that defendants actually exercised
practical ability to control violative conduct) (citations
omitted). Thus, "control" has been construed as "requiring only
some indirect means of discipline or influence short of actual
direction" by the controlling person. Drobbin v. Nicolet
Instrument Corp., 631 F. Supp. 860, 884 (S.D.N.Y. 1986) (internal
quotation marks and citation omitted).
A sole shareholder of the company that is the primary wrongdoer
has been held to be a control person within the meaning of
Section 20(a), as ownership strongly suggests that the defendant
has the potential power to influence and direct the activities of
the wrongdoer. See Borden, Inc. v. Spoor Behrins Campbell &
Young, Inc., 735 F. Supp. 587, 590-91 (S.D.N.Y. 1990); Healey v.
Chelsea Res. Ltd., 736 F. Supp. 488, 494-95 (S.D.N.Y. 1990); see
also Sloane Overseas Fund, Ltd., 941 F. Supp. 1369, 1378
(S.D.N.Y. 1996) (control can be inferred from substantial stock
Cohn was the sole owner of Green-Cohn, owning 100% of its stock
and contributing 100% of the equity in the firm. Moreover, Cohn
was named as a control person of Green-Cohn on its broker-dealer
registration form, Cohn was apparently an incorporating director
at the time of his initial equity contribution of approximately
$2.6 million, and he never resigned, and Cohn paid Greenfield
approximately $30,000 per month to cover Green-Cohn's operating
and overhead expenses. Thus, there is ample evidence from which a
jury could conclude that Cohn was a control person of Green-Cohn.
Cohn points to the January 4 Letter as evidence that he
abdicated control over Greenfield-Cohn, since the letter states
that Greenfield was to have "total control" over the firm and its
management. However, as discussed above, there is an issue of
fact presented with respect to the authenticity of this letter.
Therefore, Cohn is not entitled to summary judgment on this
B. There Is Sufficient Evidence From Which A Jury Could
Conclude That Cohn Was A Culpable Participant
The third element of a prima facie case for control person
liability is that the control person have been "in some
meaningful sense [a] culpable participant in the fraud
perpetrated by [the] controlled person." First Jersey, 101
F.3d at 1472. The meaning of this element has not yet been
addressed at any length by the Second Circuit, other than to
state that "a determination of § 20(a) liability requires an
individualized determination of a . . . defendant's particular
culpability." Boguslavsky, 159 F.3d at 720.