United States District Court, Southern District of New York
February 25, 2002
SOUTHRIDGE CAPITAL MANAGEMENT, LLC, COOTES DRIVE, LLC AND YORK, LLC, PLAINTIFFS,
ROBERT W. LOWRY, SAMUEL JACOB BERKOVITS AND D.G. JEWELRY, INC., DEFENDANTS.
The opinion of the court was delivered by: Owen, District Judge.
OPINION AND ORDER
Before me are motions to dismiss this multi-faceted action for damages
for defamation, breach of contract, tortious interference with contract,
and trade libel, and on jurisdictional grounds, and a motion for
sanctions against the plaintiffs.
Plaintiff Southridge Capital Management is an investment adviser to
funds that put financing into publicly traded corporations, obtaining
their securities and other rights in return. It is the adviser to
plaintiffs Cootes Drive, LLC and York, LLC, two such funds. Defendant
Robert Lowry earns his living as an expert witness and consultant on
securities industry matters. Defendant D.G. Jewelry, Inc. is a publicly
traded Ontario corporation that manufactures and sells jewelry, and was
being funded by Haymarket, LLC, another Southridge client. Defendant
Samuel Berkovits is D.G.'s president, CEO and chairman.
The roots of this dispute date back to the case of Haymarket LLC v.
D.G. Jewelry of Canada Ltd., tried in the New York State Supreme Court,
New York County in November 2000. In that case, Haymarket, had put money
into D.G., got D.G. stock, and thereafter, there being a drop in the
market price of the stock, sued D.G. — now also a defendant here
— for breach of contract for D.G.'s failure to issue additional
shares of its stock to Haymarket as required by their common stock
purchase agreement, which stated that D.G. was to issue additional stock
to Haymarket if Haymarket did not experience a certain return on its
investment. There was no dispute that, under the language of the
agreement, D.G. was required to issue these additional shares and that it
had refused to do so; its defense being the claim that Haymarket,
directed by Southridge*fn1, had manipulated D.G.'s stock price downward
during the operative periods, thereby increasing the number of shares
Haymarket was to receive. On November 16, 2000, the jury found that
Haymarket had intentionally participated in such a scheme. The court, as
it had been foreshadowing all the way through the trial, immediately set
the jury verdict aside as unsupported by the evidence and entered
judgment for Haymarket, directing the clerk to enter judgment in favor of
Haymarket on the issue of liability.
Illustrative of the extensive foreshadowing are the following
colloquies from the trial record:
THE COURT: What are you claiming [Haymarket] did wrong
MR. REIMER [D.G.'s attorney]: The trades are not
carried out by some broker.
THE COURT: What are you claiming they did here, counsel?
MR. REIMER: Your Honor, we are claiming that there were
massive sales. Their own principal said —
THE COURT: And they were precluded from doing that
by the agreement.
MR. REIMER: There were ten to fifteen percent of the
sales when their volume were 10 to 15 percent of the
daily sales, it would drive the stock, the company
THE COURT: They had a right to do that, absolute
right to do that. Counselor, this case may never get
to the jury.
MS. RICHARD [Haymarket's attorney]: That —
that is my next point, Your Honor.
THE COURT: If I conclude there is no basis for the
defense, it is not going to the jury.
Haymarket Tr. at 23-24.
THE COURT: Counselor, let's finish this case. If I
conclude that there is no evidence that the market
makers actions was in any way influenced by anything
that [Haymarket] did, I will not give this case to the
jury and I will direct the entry of a judgment
certainly with respect to the non-liquidated damages
and then we can deal with the liquidated damages
So this case may not get to the jury. If that is
your evidence, counsel, you will not get to the jury.
Id. at 245-46.
THE COURT: You're claiming a scheme, presumably
participated in by [Haymarket]. And that is your
problem in this case, it seems to me, and I think it's
an insurmountable problem, but I will let the jury
render a verdict. Maybe they will make it unnecessary
for me to take any action.
Id. at 386.
THE COURT: So you are not waiving that. You want me
to state to the jury — no, hear me out here,
there is no question the contract was breached. We all
agree to that. The only defense they have are
equitable. They are not properly tried to the jury.
Counselor, I don't think they have a defense, I
already told you that. I have not heard all the
witnesses, and we are going to have two depositions
and maybe some more expert testimony if the Nasdaq
document comes in.
But my sense of this case is that I'm going to give
it to the jury only for the purpose, since they are
here and have been listening, let them decide on it.
If they make the right decision, I don't have to
struggle with it. If they make the wrong decision, I
can deal with that. And if I am wrong, at least that
aspect of the case doesn't have to be tried again; my
view is we will have to deal with damages at some
Id. at 392-93.
The court charged the jury as follows on this point:
You have to determine whether or not, based on all
of the evidence in the case, and you have heard
evidence both from the broker, that testimony was read
to you, and from the expert witness called by the
defendant, there was an improper manipulation.
There is no dispute, obviously, that the market
price of the stock went down, but that was a risk that
the defendant took under the terms of this agreement.
There was nothing in this
agreement that in any way prevented Haymarket from
selling the stock as it decided to sell the stock, and,
if the manner in which Haymarket sold the stock, based
on economic factors, had a negative impact on the price
of the stock, that is not anything that Haymarket can
be held liable for; that is not improper market
manipulation. That was something that was within the
terms of the contract.
Id. at 527-28.
The jury, thereafter, spoke:
THE COURT: . . . . Has the jury agreed upon a verdict?
A JUROR: Yes.
THE COURT: With respect to the question: Has the
defendant proved that the plaintiff, Haymarket,
intentionally participated in [an] improper scheme to
manipulate the market, depress [the] price of D.G.
Jewelry stock during the two, 30-day reset period.
What was the answer?
A JUROR: Yes
THE COURT: Was that unanimous?
A JUROR: No, it was not.
Id. at 535.
And the jury being promptly excused, the following colloquy immediately
THE COURT: I take it, I'm now talking to the
attorney for [Haymarket], you want me to set aside the
MS. RICHARD: I renew my application.
THE COURT: That motion is granted. And I'm directing
the clerk to enter a judgment on the issue of
liability in favor of the plaintiff
Id. at 536.
Directly following the verdict and its immediate vacatur and reversal,
D.G. issued a press release, which reads in part:
D.G. Jewelry Wins Jury Verdict Against Haymarket
Judge Directs Verdict for Plaintiff
TORONTO — (BUSINESS WIRE) — Nov. 22, 2000
— D.G. Jewelry Inc. (Nasdaq: DGJL —
news), which designs, manufacturers, merchandises and
distributes stone-set jewelry, today reported that a
jury rendered a verdict 8-1 in favor of D.G. Jewelry,
in an action brought by Haymarket and that Haymarket
was guilty of involvement in a scheme to manipulate
the price of D.G. Jewelry shares.
Justice Gammerman of the Commercial Division of the
Supreme Court of the State of New York, directed a
verdict in favor of the plaintiff, a decision which
will be the subject of appeal.
As a result of the decision, its reversal and pending
appeal, Justice Gammerman indicated that he would stay
any obligations to act on the part of D.G. Jewelry.
Jack Berkovits, CEO of D.G. Jewelry stated: "The
jury's verdict confirms our contention at the trial
that external forces brought by Haymarket, acting
through Southridge Capital and Thomson Kernaghan
participated in a scheme to depress the share price of
DGJL in the period July 19, 1999 to October 11, 1999.
"We are hopeful and confident that the appellate court
will find in our favor as well."*fn2
Berkovits further stated: "The Company intends to
pursue the matter to its ultimate conclusion,
including an action for damages against Haymarket and
these advisors and affiliates through which we
contended at trial. Haymarket conducted its
manipulation, including Southridge Capital and Thomson
Kernaghan and others."
In D.G.'s release above, I note that D.G. nowhere identifies Haymarket
as the plaintiff or D.G. as the defendant. Thus to a lay, or even a
legally trained reader, the heading "D.G. Jewelry Wins Jury Verdict
Against Haymarket" and the subheading "Judge Directs Verdict for
Plaintiff' could be read as both the jury and the judge finding for D.G.
Further, the release's language that D.G. was "hopeful and confident that
the appellate court will find in our favor as well" (underscoring
supplied) (omitting to state that it was D.G. that would be appealing)
could doubtless reinforce in a reasonable reader's mind that both the
judge and the jury had found in D.G.'s favor.
Two further press releases, one from each party, followed over the next
month. While a scrutinizing student of all three releases might be able
from the charges and counter-charges to determine what had basically
happened, it is for a jury to determine what, if anything, various
readers read, studied and parsed out.
But more was to come that a jury here could find revealing of
Berkovits' state of mind.*fn3 On or about January 11, 2001, Berkovits of
D.G., following the above, sent an e-mail to a number of companies that
Southridge's fund clients were financing under contracts. Following the
names and addresses of the companies, the e-mail reads:
It is my understanding that your company completed a
private placement financing sometime in 2000 with an
entity affiliated with Stephen Hicks and/or Mark
Valentine. My company was involved in such a financing
My company, as have many others who dealt with these
people, subsequently sustained a serious downturn in
its stock price, which still continues.
You might find it interesting that in November, 2000,
a New York State Supreme Court jury found that D.G.
Jewelry Inc. was a victim of stock manipulation
conducted through Southridge
Capital and Thomson, Kernaghan. I am attaching copies
of press releases resulting from that decision,
including the response from Southridge Capital.*fn4
I believe that we all have an interest in protecting
the integrity of the markets from manipulation and
corruption of their free operation. of necessity, our
company has had to learn about the ways in which the
markets can be affected in this manner and we have
developed information and contacts that assisted us to
become enlightened about these kinds of practices. It
may be that you too might have similar concerns and
might benefit from our experience.
Should you wish to discuss my case, I would be happy
to do so, within the bounds of confidentiality
requirements and legal restrictions.
Yours very truly,
Samuel Jacob Berkovits, President, CEO
D.G. Jewelry, Inc. Tel: (416) 665-8844, ext. 222*fn5
Thereafter, following a tense exchange between lawyers for both sides,
on or about February 23, 2001, Berkovits sent to the recipients of the
above e-mail, the following:
I write to clarify some of the comments contained in
my letter to you of January 11, 2001. Although the
press releases attached to my letter make clear the
following, I wanted to make sure that my letter was
not misinterpreted. The trial that I mentioned was a
case brought by Haymarket against D.G. Jewelry for
breach of contract. The jury returned a verdict
against Haymarket LLC, not Southridge Capital, Thomson
Kernaghan, Steve Hicks or Mark Valentine. Although
D.G. Jewelry argued at the trial that the stock
manipulation scheme we contended Haymarket had
participated in also involved Southridge Capital and
Thomson Kernaghan, the jury was only asked to make a
determination regarding Haymarket.
The court immediately overturned the jury's verdict
against Haymarket and instead entered judgment for
Haymarket, ordering D.G. Jewelry to issue 316, 933
shares of its common stock to Haymarket. D.G. Jewelry
is in the process of appealing that decision. After
D.G. Jewelry posted a bond, Justice Gammerman stayed
any obligation to act on the part of D.G. Jewelry
pending the appeal.
I want to stress that I am not suggesting that your
company should in any way attempt to avoid any valid
contractual obligations that it may have with any
entities affiliated with Southridge Capital, Thomson
Kernaghan, or Messrs. Hicks or Valentine, and I want
to be sure that you have not drawn any such suggestion
or implication from my earlier communication with
Yours very truly,
Samuel Jacob Berkovits, President, CEO —
D.G. Jewelry, Inc. Tel: (416) 665-8844, ext. 222
Southridge in its complaint presently before me now alleges that
because of D.G. "s conduct above it is now a defendant in two other
actions, and two of its funding clients, Cootes and York, have had their
funding contracts with Internet Law Library and Mobile P.E.T. Systems,
respectively broken to everyone's damage. Thus, whatever a jury
might draw from any other evidence in this case, the foregoing requires
that the plaintiffs' allegations against Berkovits and D.G., of
defamation and sequelae (see p.1, supra) including punitive damages, go
to the jury. Accordingly, the motion by D.G. and Berkovits to dismiss is
without merit and is denied. See Weinstein v. Albright, 261 F.3d 127
(2d Cir. 2001); Armstrong v. Simon & Schuster, Inc., 625 N.Y.S.2d 477,
481 (N.Y. 1995); Davis v. Ross, 754 F.2d 80
, 82 (2d Cir. 1985); Celle v.
Filipino Reporter Enters, Inc., 209 F.3d 163
, 177-78 (2d Cir. 2000);
Immuno A.G. v. Moor-Jankowski, 537 N.Y.S.2d 129, 135 (1st Dept. 1989);
Huggins v. Moore, 704 N.Y.S.2d 904
, 908 (N.Y. 1999).
Given the foregoing, D.G.'s and Berkovits' motion for Rule 11 sanctions
has no support and is also denied.
Turning to defendant Lowry's motions, Lowry had testified at the said
Haymarket trial as an expert witness for D.G. In connection with this
engagement, he signed an employment agreement with D.G.'s counsel,
Kirkland & Ellis, which included the following:
You agree that documents and information of any kind
that you . . . acquire will be maintained in strict
confidence and not disclosed to any other person or
party without our prior written consent. All
documentary material provided to you . . . together
with all copies thereof must be returned immediately
upon request. In addition, any activities that you
perform under this agreement and any conclusions or
judgments that you reach or have reached must be
maintained as confidential in the same way. You should
understand that these restrictions will continue even
after the termination of your consulting work for us
and after the termination of the matter.
Southridge contends that this paragraph was included in the agreement for
its protection as part of a prior agreement with Kirkland & Ellis to
maintain the confidentiality of certain confidential and proprietary
business information that had been revealed as part of the Haymarket
After the Haymarket case concluded, Lowry was retained by an attorney
for a San Diego, California corporation, Mobile P.E.T. Systems, Inc.,
which was in a dispute with plaintiff York, a plaintiff in this case, and
another Southridge client. In that connection, Lowry faxed from his home
in Virginia to Mobile P.E.T. in California a chart that he had helped to
prepare as part of the Haymarket litigation showing the relationships
between Southridge and other companies (York is not mentioned in the
chart). Southridge contends that this chart was based on confidential
information, documents and testimony that it had provided to Kirkland &
Ellis during the Haymarket litigation and was within the confidentiality
protection of the agreement signed by Lowry. Plaintiffs here also allege
that Lowry made statements to Mobile P.E.T. concerning Southridge in
violation of the agreement and for the purpose of causing Mobile P.E.T.
to breach its contract with York, and that as a result of these, Mobile
P.E.T. did breach its contract with York, refusing to deliver to York
certain Mobile P.E.T. common stock and refusing to convert certain Mobile
P.E.T. common stock to preferred stock as demanded by York. York sues for
damages for the foregoing, and Southridge sues for breach of the
confidentiality agreement, which is part of Mobile P.E.T.'s separate suit
Defendant Lowry moves to dismiss for lack of personal jurisdiction
Fed. R. Civ. P. 12(b)(2) claiming: (1) that personal jurisdiction does
not exist because, under New York's long arm statute (CPLR §
302(a)(1)), the claims do not arise out of a New York transaction; and (2)
that plaintiff Southridge is not a third party beneficiary of the
agreement between Lowry and Kirkland & Ellis. I address the second
"The plaintiff bears the burden of establishing that the court has
jurisdiction over the defendant when served with a Rule 12(b)(2) motion
to dismiss. . . . A plaintiff may carry this burden by pleading in good
faith . . . legally sufficient allegations of jurisdiction, i.e., by
making a prima facie showing of jurisdiction. . . . [A]ll allegations are
construed in the light most favorable to the plaintiff and doubts are
resolved in the plaintiffs favor." Whitaker v. American Telecasting,
Inc., 261 F.3d 196, 208 (2d Cir. 2001) (internal citations omitted).
Under New York law, a third party may enforce a contract if it is
within the class of intended beneficiaries of the contract even if not
named or known of at the time. See Trans-Orient Marine v. Star Trading &
Marine, 925 F.2d 566, 573 (2d Cir. 1991). "In determining third party
beneficiary status it is permissible for the court to look at the
surrounding circumstances as well as the agreement. . . . [T]he
obligation to perform to the third party beneficiary need not be
expressly stated in the contract." Id. "An intended third party
beneficiary will be found when it is appropriate to recognize a right to
performance in the third party and the circumstances indicate that the
promisee intends to give the third party the benefit of the promised
Looking at the facts in a light most favorable to Southridge,
Southridge alleges a viable claim to a third party beneficiary status.
Southridge alleges a prior agreement with D.G.'s counsel — the
promisee of the agreement with Lowry — to keep confidential
information learned through the Haymarket litigation, and that the
promisee intended that one in the position of Southridge be a beneficiary
of the agreement made with Lowry.
Turning to the issue of jurisdiction, "[i]n assessing whether personal
jurisdiction is authorized, the court must look first to the long-arm
statute of the forum state. . . . If the exercise of jurisdiction is
appropriate under that statute, the court must decide whether such
exercise comports with the requisites of due process." Whitaker, 261 F.3d
at 208 (internal citations omitted). To come within New York's long-arm
statute under CPLR § 302(a)(1), Lowry must have engaged in
purposeful activities within New York, and there must be a substantial
relationship between those activities and the transaction out of which
the cause of action rose. See PDK Labs, Inc. v. Friedlander, 103 F.3d 1105,
1109 (2d Cir. 1997). Substantial relationship can be shown where an
action "is sufficiently related to the business transacted that it would
not be unfair to deem it to arise out of the transacted business." Id.
It is undisputed that Lowry transacted business in New York by signing
the contract with D.G.'s counsel, assisting here in D.G.'s suit and
testifying here on behalf of D.G. It is also undisputed that Lowry faxed
information he received during that suit to Mobile P.E.T. Since the cause
of action by Southridge is sufficiently related to the business Lowry
transacted in New York, it confers personal jurisdiction. Accordingly,
Southridge has made a prima facie showing that it is a third party
beneficiary of the confidentiality contract signed by Lowry in New York;
its claim for the breach of that contract confers personal jurisdiction.
I now turn to the issue of whether there exists personal jurisdiction
for the claim by York that Lowry by breach of the confidentiality
agreement, and statements Lowry made to Mobile P.E.T. in addition,
tortiously interfered with and caused the breach of York's contract with
Mobile P.E.T. "There is no requirement that jurisdiction be grounded upon
either the final act or the ultimate act causing the injury. . . . It is
sufficient if the cause of action is related to and grows out of the
transaction of business in New York." Legros v. Irving, 327 N.Y.S.2d 371,
373-74 (1st Dept. 1971), appeal dismissed, 331 N.Y.S.2d 673 (N.Y. 1972).
While York was not a beneficiary of the contract signed by Lowry, the
information allegedly used by Lowry to tortiously interfere with York's
contract with Mobile P.E.T. was gained from and flowed to Lowry from his
business activity in New York. Therefore, there is personal jurisdiction
for this cause of action.
As to whether the exercise of jurisdiction comports with the requisites
of due process, it only "requires that a defendant have enough minimum
contacts with the forum state so that the maintenance of the suit does
not offend traditional notions of fair play and substantial justice. . . .
We may exercise jurisdiction over [the defendant] if we find that he
has purposely and sufficiently availed himself of the privileges of
conducting business in New York so as to reasonably expect to be subject
to suit here." PDK Labs, 103 F.3d at 1110-11 (internal citations
omitted). By his employment as an expert in the New York Haymarket suit,
testifying here on behalf of D.G., and obtaining from that New York suit
material information used and allegedly abused thereafter, Lowry has
sufficiently availed himself of the privilege of conducting business in
New York and should have reasonably expected to be subject to suit here.
Therefore, the due process requirement is satisfied, and Lowry's motions
to dismiss are denied.