The opinion of the court was delivered by: Sweet, District Judge.
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
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 ...