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August 15, 2002


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 unfolded chronologically.

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.

The Amended Complaints

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 principals.

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:

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