The opinion of the court was delivered by: Pollack, Senior District Judge.
A motion for summary judgment is before the Court in a suit predicated
on § 16(b) of the Securities Exchange Act of 1934. Under traditional
procedure an Opinion from the Court would call for an initial explanation
of the issues presented. In this unusual case however, the controversy
between the parties is best initially presented by a historical review of
the circumstances which gave rise to the controversy to illumine the
transactions and proceedings involved and aid in their understanding and
in the merits of the motion. Accordingly, with a preliminary introduction
of the parties and the cause we will proceed with the matter as it
The plaintiff known as Transcontinental Realty Investors, Inc.
(hereafter "TCI") is organized and existing under the laws of Nevada with
its principal place of business in Dallas, Texas. TCI owns and operates
commercial real estate. TCI is a public company whose common stock is
registered with the SEC. Its shares are listed and publicly traded on the
New York Stock Exchange.
The defendants, "Gotham Entities" are comprised of three principals,
namely Gotham Partners, L.L.P., Gotham Partners III LLP, both are limited
partnerships, and Gotham Partners International ("International") and all
are engaged in buying and selling securities. Also as defendants are the
investment advisors and managers of those Gotham companies namely Gotham
International Advisors, LLC., William A. Ackman and David Berkowitz.
TCI is affiliated with American Realty Investors, Inc. ("ARI") which
owned approximately 50% of TCI's common stock, and Basic Capital
Management ("BCM") which owned approximately 14.5% of TCI's common
stock. TCI in turn owned approximately 24% of Income Opportunity
Investors, Inc. ("IORI")
Gene E. Phillips is the "trustor" or grantor of the Gene E. Phillips
Children's Trust which is the owner of BCM, which advises and manages TCI
and its affiliate American Realty Trust, Inc. ("ART") ARI and IORI.
Although not an employee, officer or director of any of these
companies, Mr. Phillips according to his son Bradford Phillips, generally
"runs" BCM and is "highly involved" with all of its business decisions
made concerning ART, ARI, and IORI.
When news of Mr. Phillips' indictment was publicly announced on June
15, 2000, TCI's stock price plummeted from $10 3/4 per share to as low as
$2 7/8 per share on June 16, 2000. Trading on the New York Stock Exchange
was then halted from June 20, 2000 through June 26, 2000.
Because of the sudden decline in TCI's stock prices, a number of
brokerage houses with whom TCI's affiliates had margin agreements sold
blocks of the TCI stock collateral securing their margin accounts. As a
result the Gotham Entities were able to purchase 525,000 shares of TCI
stock through Cantor Fitzgerald & Co. on June 19, 2000, at a price of
$4.4048 per share and 3700 shares on June 27, 2000, at $7.50 per share.
On June 27, 2000 shortly after 10:00 A.M. when the market had reopened
a representative of Morgan Stanley telephoned David Berkowitz and offered
him the opportunity to buy 1,253,200 shares of TCI stock at a negotiated
price of $6 1/8 per share. Berkowitz agreed to accept the offer on behalf
of the principals of the Gotham Entities. Within 2 to 3 hours thereafter
on June 27, 2000 Goldman Sachs & Co. who was designated to clear the
purchase was furnished the allocation among the three principals of the
Entities of the shares purchased for each one, namely 939,800 shares for
Gotham Partners, LLP, 23,400 shares for Gotham Partners III, LLP, and
290,000 shares for International*fn1. Gotham's controller, Nicholas
Botta, had only to calculate the exact number of shares to be placed in
each Entity's account, which he did on that same day, in accordance with
the Gotham Entities' standard practice and in accordance with his
allocation of TCI shares on June 19, 2000. A June 19, 2000 e-mail
confirmed that Mr., Botta was to allocate the TCI shares proportionately
among the Gotham Entities. The trades cleared exactly as intended.
Defendants sum up the next events as follows:
Unhappy with the sale of such a large portion of its
affiliates' TCI holdings, TCI, ART, and its wholly
owned subsidiary ART Holdings brought suit in the
Dallas State Court against the defendants, the Section
H Partners, and against its general partners Karenina
Corp. and DPB Corp.,*fn2 alleging a conspiracy
between Morgan Stanley and the Gotham Entities to
conduct a "bargain basement" liquidation of the margin
accounts of TCI's affiliates. That complaint, filed on
September 6,2000 sought to state claims against the
Gotham Entities for conspiracy to breach Morgan
Stanley's margin agreement with ART, conspiracy to
breach Morgan Stanley's fiduciary duties to ART,
conspiracy to convert property, and conspiracy to
defraud. Morgan Stanley was not named as a defendant
in the suit. Plaintiffs demand as to the Gotham
Entities was for exemplary damages, imposition of a
constructive trust over all TCI stock purchased, and a
restraining order prohibiting the Gotham Entities from
transferring any of their TCI stock. Particularly in
light of plaintiffs failure to name alleged
co-conspirator Morgan Stanley
as a defendant in that suit, it is clear that
plaintiffs' goal was to regain ownership of TCI stock
for its affiliate and for its control of TCI. Within
six months, on October 3, 2000 the Option Agreement in
suit was executed and TCI's lowest share price at the
time was $15.00. Karl L. Blaha, president of American
Realty Investors, Inc. and IORI, who was also
president of TCI, signed the Option Agreement.
On July 31, 2001, the plaintiff filed a First Amended Complaint
alleging that through the purchases on June 11 and June 27, 2000 Gotham
acquired over 10% of TCI's common stock and thereafter had purchased
additional shares of such stock and that subsequently the Gotham
principals on October 3, 2000 had entered into a Stock Option agreement
with TCI's affiliates to sell 1,858,900 shares of TCI common stock held
by Gotham Entities. The First Amended Complaint asserted that the option
was exercised and the balance due thereon was paid for on April 5, 2001.
Plaintiff in this suit then sought recovery of the profit only on the
shares purchased after June 27, 2000 including 3700 shares from Cantor
Fitzgerald in acknowledgment of the fact that the earlier purchases
previously sued on did not constitute a "purchase" subject to §
16a-2(c). 17 C.F.R. § 240.16A-2.
However, a year later plaintiff filed a Second Amended Complaint this
time claiming that the June 27, 2000 purchases by the Gotham principals
had been sold on June 27th to Berkowitz, one of their advisors, on his
own behalf and that he had made a resale thereof some hours later to the
Gotham principals who thus became holders of stock that was subject to
§ 16(b). liability for any sale thereof within less than six months.
Plaintiff alleged that the shares so acquired by the Gotham principals
from their advisor Berkowitz, having been sold in the stock option
agreement dated October 3, 2001 were subject to § 16(b)
accountability for the profits thereon. Morgan Stanley had never made the
suggestion at any time that the briefly delayed allocation of the shares
among the Gotham principals was of any business significance to the
transaction or in any way affected the purchases intended for the three
Suffice to say, there is no evidence in the record submitted on the
motion that Morgan Stanley sold the 1,253,200 shares to Berkowitz
individually and that he resold them to his principals on the same day.
The plaintiff relies on the 2 or 3 hour delay on June 27 in furnishing
the allocation among the principals and rules pertaining to an agent's
failure to give an allocation when he accepted the transaction.
The unassailable facts presented on the motion for summary judgment do
not support the amended theory of the plaintiff of a purchase by
Berkowitz for his own account and a resale of the purchased shares on the
same day to his principals. Plainly, this was added to offset the
plaintiffs initial mistake in overlooking the law that the June 27
acquisition was not a purchase within § 16(b) because that purchase
for the first time made the purchasers of 10 percent or more holders of
the TCI stock.
The plaintiff fashions its contention substantially on the following
dismemberment of the scenario of events: