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March 28, 2002


The opinion of the court was delivered by: Charles S. Haight, Jr., Senior United Stated District Judge:


This suit is brought pursuant to § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), which "provides that beneficial owners of more than ten percent of any class of an equity security must turn over, to the issuer of that security, any profits earned from a purchase and sale of the securities of that issuer if the purchase and sale are separated by less than six months." Morales v. Freund, 163 F.3d 763, 764 (2d Cir. 1999). The purpose of this statutory provision is "to deter `insiders,' who are presumed to possess material information about the issuer, from using such information as a basis for purchasing or selling the issuer's equity securities at an advantage over persons with whom they trade." Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998) (footnote omitted); accord Morales v. Quintel Entm't, Inc., 249 F.3d 115, 121 (2d Cir. 2001).

The case was scheduled for trial on January 29, 2002. The Court resolved five in limine motions made by defendants and one in limine motion made by plaintiff in Opinions dated January 9 and January 10, 2002. At a conference on January 15, the parties raised additional issues that would benefit from pre-trial resolution, and the Court adjourned the date of trial until April 8, 2002 to permit full briefing of those issues.

The parties have now submitted cross-motions for summary judgment. Defendants request summary judgment on the basis that, as investment advisers, they are exempt from liability Defendants have also submitted a letter brief requesting reconsideration of the Court's Opinion of January 9, 2002, which held that certain of plaintiff's claims are not time-barred. Plaintiff's motion for summary judgment asks the Court to reconsider Judge Marrero's decision of September 29, 2000 and decide that defendants as a group are not eligible for the investment adviser exemption; in the alternative, plaintiff moves for partial summary judgment on the basis that defendants were not entitled to the exemption prior to February 17, 1998. This Opinion resolves both parties' requests for reconsideration and motions for summary judgment.

I. The Court's Decision that Plaintiff's Claims Are Not Time-Barred

Defendants request reconsideration of the Court's decision in its Opinion dated January 9, 2002, which resolved defendants' first in limine motion. In that in limine motion, defendants sought to preclude plaintiff from presenting any claims relating to any time period other than May 27, 1998 — September 30, 1998 and September 10, 1997 — November 21, 1997. Defendants asserted that claims that arose prior to those dates are barred by the statute of limitations, viewed in conjunction with Rule 9(f) of the Federal Rules of Civil Procedure. In its January 9 Opinion, the Court decided that Fed. R. Civ. P. 9(f) does not limit plaintiff's claims to the dates stated in the complaint and that the statute of limitations also does not limit plaintiff's claims, because equitable tolling applies.*fn1 Defendants now request reconsideration on the ground that plaintiff's complaint provided no notice of claims arising from transactions prior to September 10, 1997.

In its complaint, plaintiff alleged that defendants 1) sold shares of Egghead.Com, Inc. ("Egghead") between July 6, 1998 and September 30, 1998 which matched purchases between May 27, 1998 and July 2, 1998, and 2) sold Egghead shares between September 10, 1997 and November 21, 1997. Compl. ¶¶ 22-23, 25. Plaintiff did not identify in its complaint the purchase dates for this latter group of shares but provided an explanation for not doing so: "[Defendants] failed, in violation of Section 13(d) of the Exchange Act, to report the purchases that they made while they maintained a greater than 10% beneficial ownership. . . ." Compl. ¶ 25. Furthermore, plaintiff asserted in its complaint that defendants may be liable for "additional purchases and sales . . . of which plaintiff is now unaware." Compl. ¶ 26.

It was because of defendants' failure to make required disclosures that I held, in the Opinion dated January 9, 2002, that equitable tolling applies to plaintiff's claims. For comparable reasons, I decide that plaintiff was not required to include in its complaint information about stock purchases which defendants wrongfully failed to disclose. Plaintiff provided ample notice of its claim, based on the information available to it; and plaintiff specifically gave notice that it was seeking to impose liability based on unknown purchases that matched sales between September 10, 1997 and November 21, 1997. It should come as no surprise to defendants that those unknown purchases occurred prior to September 10, 1997.

II. Defendants' Entitlement to the Investment Adviser Exemption

A. Judge Marrero's Decision that Defendants as a Group Are Eligible for the Investment Adviser Exemption

In his September 29, 2000 Opinion, reported at 113 F. Supp. 615, Judge Marrero concluded after a comprehensive analysis of Rule 16a-1 that "the investment adviser exemption provided for under subsection (v) is not vitiated by subsection (x) because the adviser may be part of a group for Section 13(d) purposes." Id. at 629. Plaintiff is discontented with the practical result of Judge Marrero's conclusion because "the exclusion of [Brookhaven's] shares held on behalf of its managed accounts (other than shares held directly by group members [Watershed Partners, Focused Capital Partners, and Cadence Fund,] which are included in the group's aggregate beneficial ownership) would reduce the group's aggregate beneficial ownership below 10%. . . ." Plaintiff's Brief at 17.

Plaintiff asks this Court to disapprove Judge Marrero's ruling and accept its theory, namely, that "a group constituted or deemed so for the purposes of Sections 16 and 13(d)(3) and which includes an institution or person otherwise exempt under Rule 16a-1(a)(1)(i) through (ix), would lose the exemption in the event any member of the group is not `independently exempt' under any of these subsections." 113 F. Supp. at 620. Defendants ask that I adhere to Judge Marrero's ruling, relying principally upon the law of the case doctrine. I conclude that the law of the case doctrine applies, decline to disturb Judge Marrero's ruling, and deny plaintiff's application to be relieved of its consequences.

"The law of the case doctrine posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case." DiLaura v. Power Auth. of the State of New York, 982 F.2d 73, 76 (2d Cir. 1992) (citations and internal quotation marks omitted). "Application of the law of the case doctrine is discretionary and does not limit a court's power to reconsider its own decisions prior to final judgment," Sagendorf-Teal v. County of Rensselaer, 100 F.3d 270, 277 (2d Cir. 1996) (citation and internal quotation marks omitted); however, the Second Circuit has cautioned that "while a court may sometimes review an earlier ruling, nevertheless, because there is a strong policy favoring finality the court exercises its underlying power to review earlier rulings sparingly." North River Ins. Co. v. Philadelphia Reins. Corp., 63 F.3d 160, 165 (2d Cir. 1995) (citations, internal quotation marks, and ellipses omitted). That policy reflects the salutary principle that "where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again." Zdanok v. Glidden Co., 327 F.2d 944, 953 (2d Cir. 1964). "The major grounds justifying reconsideration are `an intervening change of controlling law, the availability of new evidence, or the need to correct a clear error or prevent manifest injustice.'" Virgin Atlantic Airways, Ltd. v. National Mediation Board, 956 F.2d 1245, 1255 (2d Cir. 1992) (citing and quoting 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4478 at 790).

None of these grounds for reconsidering Judge Marrero's is present. The question is purely one of law; the possibility of "new evidence" does not arise. Plaintiff professes to find in the Second Circuit's subsequent decisions in Morales v. Quintel Entm't, Inc., 249 F.3d 115 (2d Cir. 2001) and Levy v. Southbrook Int'l Invs., Inc., 263 F.3d 10 (2d Cir. 2001) legal grounds for vacating Judge Marrero's interpretation of Rule 16a-1. There is no substance to this argument. Judge Marrero's ruling addressed the question of exemptions within a group under Rule 16a-1(a)(1)(i)-(ix). Neither Quintel nor Levy presented that question, and accordingly the Court of Appeals said nothing about it. I accept that Judge McKenna disagrees with Judge Marrero's interpretation, see Strauss v. Kopp Inv. Advisors, No. 98 Civ. 7493, 1999 WL 787818 (S.D.N.Y. Sept. 30, 1999), and Morales v. Adept Technology, Inc., No. 00 Civ. 0957, 2000 WL 1738585 (S.D.N.Y. Nov. 22, 2000), and Judge Wood has reached the same conclusion as Judge McKenna, albeit without analysis or discussion, see Morales v. Auspex Systems, Inc., No. 00 Civ. 1173, 2001 WL 258502 (S.D.N.Y. Mar. 15, 2001). While I yield to no one in my admiration for these two able colleagues, their opinions do not constitute "an intervening change of controlling law," and I find much to praise in Judge Marrero's painstaking analysis. The parties battled vigorously on behalf of their different interpretations of the rule, Judge Marrero resolved the issue in a lengthy and thoughtful opinion, and, applying the law of the case doctrine, I will not disturb his ruling.

B. The Effect of Brookhaven's State Registration as an Investment Adviser

Brookhaven*fn2 was registered as an investment adviser in California but not federally during 1997 and 1998, the relevant time period. The current version of Rule 16a-1 allows an exemption for "[a]ny person registered as an investment adviser under Section 203 of the Investment Advisers Act of 1940 (15 U.S.C. § 80b-3) or under the laws of any state." 17 C.F.R. § 240.16a-1. The language "or under the laws of any state" was added by an amendment published on January 16, 1998, and effective on February 17, 1998. SEC Release No. 34-39538, 63 Fed. Reg. 2854, 2854, 2858, 2868 (Jan. 16, 1998). Defendants argue that the amendment should be given retroactive effect so that Brookhaven can claim the benefit of the investment adviser exemption for periods before February 17, 1998, as well as periods after that date. Plaintiff argues that the amendment should not be given retroactive effect. Furthermore, plaintiff argues that Brookhaven was obligated to register federally after February 17, 1998, and therefore may not claim the exemption after that date based on its state registration.

The amendment to Rule 16a-1 was passed to harmonize that rule with changes to the Investment Advisers Act of 1940 which took effect in 1997. National Securities Markets Improvement Act of 1996, Pub. L. No. 104-290, 110 Stat. 3416, amending 15 U.S.C. § 203A, and amended by Pub. L. No. 105-8, 111 Stat. 15 (1997). The SEC Release adopting the amendment to Rule 16a-1 explained:

[T]he National Securities Markets Improvement Act of 1996. . . . amended the Investment Advisers Act of 1940 . . . by adding Section 203A, which prohibits certain investment advisers from registering with the Commission. For the most part, only advisers that have "assets under management" of $25 million or more, that advise registered investment companies, or that meet one of several exemptions from the prohibition on ...

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