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EGGHEAD.COM, INC. v. BROOKHAVEN CAPITAL MANAGEMENT
March 29, 2002
EGGHEAD.COM, INC., PLAINTIFF,
BROOKHAVEN CAPITAL MANAGEMENT, CO., LTD., FOCUSED CAPITAL PARTNERS, L.P., WATERSHED PARTNERS, L.P., CADENCE FUND, L.P., BROOKHAVEN CAPITAL MANAGEMENT, LLC, PITON PARTNERS, L.P., SKYE INVESTMENT ADVISORS, LLC, SKYE INVESTMENTS, INC., VINCENT CARRINO, DANIEL COLEMAN, PAUL MCENTIRE, AND ROBERT LISHMAN, DEFENDANTS.
The opinion of the court was delivered by: Haight, Senior District Judge.
MEMORANDUM OPINION AND ORDER
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.
I. The Court's Decision that Plaintiffs Claims Are Not
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 plaintiffs 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 plaintiffs 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
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.2d 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%. . . ." Plaintiffs 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.2d 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 plaintiffs 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 Charles A. Wright, Arthur R. Miller & Edward H.
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., Ltd., 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
1738586 (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
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 registration ...