Newburger, Loeb & Co., Inc. v. Gross
| Decision Date | 24 August 1977 |
| Docket Number | D,Nos. 897-904,s. 897-904 |
| Citation | 563 F.2d 1057 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | Fed. Sec. L. Rep. P 96,148, 1977-2 Trade Cases 61,604 NEWBURGER, LOEB & CO., INC. as Assignee of Claims of David Buckley and Mary Buckley, Plaintiff-Appellant-Cross-Appellee, v. Charles GROSS, Mabel Bleich, Gross & Co., and Jeanne Donoghue, Defendants-Appellees-Cross-Appellants, Newburger, Loeb & Co., a New York Limited Partnership, Andrew M. Newburger, Robert L. Newburger, Richard D. Stern, Walter D. Stern, and Robert L. Stern as Executors of the Estate of Leo Stern, Robert L. Stern, Richard D. Stern, John F. Settel, Harold J. Richards, Sanford Roggenburg, Harry B. Frank and Jerome Tarnoff as Executors of the Estate of Ned D. Frank, Fred Kayne, Robert Muh, Paul Risher, Charles Sloane, Robert S. Persky, Finley, Kumble, Wagner, Heine, Underberg & Grutman, a Partnership (formerly known as Finley, Kumble, Underberg, Persky & Roth and Finley, Kumble, Heine, Underberg & Grutman) and Lawrence J. Berkowitz, Additional Defendants on Counterclaims-Appellants-Cross-Appellees. ockets 76-7476, 76-7486, 76-7488, 76-7489, 76-7494, 76-7495, 76-7499 and 76-7500. |
Donald H. Shaw, New York City (Kantor, Shaw & Davidoff, P.C., New York City, on the brief), for plaintiff-appellant-cross-appellee, Newburger, Loeb & Co., Inc.
Philip Mandel, New York City (Golden, Wienshienk & Mandel, Ralph Wienshienk, Bernard Rothman, Marc Owen Mandel and Arthur Tarlow, New York City, on the brief), for defendants-appellees-cross-appellants.
Simon H. Rifkind, New York City (Paul, Weiss, Rifkind, Wharton & Garrison, Finley, Kumble, Wagner, Heine & Underberg, Mark H. Alcott, John M. Delehanty, Beryl A. Schatz and Alan M. Gelb, New York City, on the brief), for additional defendant on counterclaims-appellant-cross-appellee Finley, Kumble, Wagner, Heine, Underberg & Grutman.
Paul D. Risher, pro se.
Leon B. Borstein, New York City (Shaw & Stedina, New York City, on the brief), for additional defendant on counterclaims-appellant-cross-appellee Robert Muh.
Martin E. Silfen, Gold, Farrell & Marks, Thomas R. Farrell and Leonard M. Marks, New York City, on the brief, for additional defendant on counterclaims-appellant-cross-appellee Fred Kayne.
Osmond K. Fraenkel, New York City, for additional defendants on counterclaims-appellants-cross-appellees Newburger, Loeb & Co., Andrew M. Newburger, Robert L. Newburger, Robert L. Stern, Richard D. Stern, Walter D. Stern and Robert L. Stern, as executors under the last will and testament of Leo Stern, deceased; and Sanford Roggenburg.
Lawrence J. Berkowitz, pro se.
Elaine Platt and Leon B. Borstein, New York City, on the brief, for additional defendant on counterclaims-appellant-cross-appellee Charles Sloane.
Robert S. Persky, New York City, on the brief, for additional defendant on counterclaims-appellant-cross-appellee pro se.
Before LUMBARD and MESKILL, Circuit Judges, and JAMESON, District Judge. *
These appeals and cross appeals from a judgment of the Southern District, Owen, Judge, are the latest chapter in the financial misfortunes of New York brokerage firm of Newburger, Loeb & Co. (hereinafter the "Partnership") and its successor, Newburger, Loeb & Co., Inc. (hereinafter the "Corporation") during the years 1969-71, which resulted in the departure of the managing partner, Charles Gross, and the arrangements made by the survivors and others to reorganize and rescue the business.
We affirm so much of the judgment of the district court which:
(1) Dismissed, as lacking in merit, the Corporation's churning claim, under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), against defendants Charles Gross, Mabel Bleich, Jeanne Donoghue, and Gross & Co.
(2) Awarded judgment to the defendants on their first, second and fourth counterclaims against the Corporation, and against the Partnership, individual members of the Partnership, 1 the promoters of the Corporation, 2 and Robert S. Persky and his law firm, Finley, Kumble, Underberg, Persky & Roth (which at the time of judgment was known as Finley, Kumble, Wagner, Heine, Underberg & Grutman), who were brought in as additional defendants on the counterclaims, for conspiracy to injure the defendants with respect to their interests in the Partnership.
We hold that the district court properly exercised its ancillary jurisdiction over these counterclaims.
(3) Dismissed, as lacking in merit, defendants' ninth counterclaim under the federal antitrust laws for destruction of Gross' employment opportunity with Rafkind & Co., a New York brokerage firm.
(4) Dismissed defendants' fifth, sixth, seventh and eighth counterclaims for lack of subject matter jurisdiction.
(5) Dismissed the six counterclaims of the Corporation and the additional defendants against Gross.
We reverse those parts of the judgment which:
(1) Awarded judgment to Gross on defendants' third counterclaim for conversion of Gross' interest in warrants to buy stock of Geon Industries, Inc., and Computer Softwear Systems, Inc.
We hold that Judge Owen erroneously exercised jurisdiction over this claim after Judge Ward correctly held that it was not within the ancillary jurisdiction of the court.
(2) Awarded $50,000 punitive damages to Gross.
Finally, although we affirm the finding of liability on defendants' first, second and fourth counterclaims, we remand these counterclaims for recomputation of damages in light of our reversal of defendants' third counterclaim and certain difficulties with the court's computation of damages.
To further discussion of the issues, we summarize the underlying facts. The partnership was an established Wall Street brokerage firm. From about May 1959 through December 31, 1968 it acted as a clearing house for the partnership of Gross & Co., which consisted in part of Charles Gross, his sister, Jeanne Donoghue, his secretary, Mabel Bleich, and Charles Jordon; thus, the Partnership executed orders for Gross & Co. and sent confirmations and statements to its customers. Among these customers were David and Mary Buckley, who had an active account with Gross & Co. in 1962-66.
In 1969 Gross & Co. liquidated and on January 1, 1969, Gross became a general partner in the Partnership with an initial investment of about $400,000. Bleich and Donoghue became limited partners, investing about $75,000 each. Gross soon thereafter became managing partner of the Partnership and invested another $400,000 in the firm. The Partnership began to experience the record-keeping problems common on Wall Street in late 1969 and early 1970 caused by the greatly increased volume of transactions in the 1960's, which have come to be known as the "back office crunch," see, e. g., Hirsch v. du Pont, 553 F.2d 750 (2d Cir. 1977). By the summer of 1970 the firm was experiencing serious capital problems. A number of the partners expressed dissatisfaction with Gross' management, and he stepped down as managing partner. As he was not satisfied with the proposed new management, Gross gave notice of his withdrawal from the firm on August 31, 1970, which under the terms of the partnership agreement became effective as of September 30, 1970. Gross also demanded the return of his "additional capital" (claimed to be $400,000) and fifteen per cent of his "committed capital," pursuant to the partnership agreement. The agreement provided that at least eighty-five per cent of the "partnership interest" of a withdrawn general partner remained in the firm, at the risk of the business, for twelve months from the effective date of withdrawal. On December 31, 1970, Bleich and Donoghue submitted notices of withdrawal from the firm.
Fred Kayne became managing partner after Gross stepped down. Before joining the Partnership Kayne and Charles Sloane had been employed as registered representatives of the firm at its California office. According to Kayne and Sloane, they were induced by Gross to join the firm and became general partners in late February, 1970, each investing $50,000. In the summer of 1970, after becoming managing partner, Kayne brought in Robert Muh and Paul Risher as consultants. At about this time, the law firm of Finley, Kumble, Underberg, Persky & Roth began to handle legal matters for the Partnership, with Robert S. Persky as the partner in charge.
Defendants allege that shortly after Kayne became managing partner he began to plot with Muh, Risher, Sloane, Lawrence J. Berkowitz (house counsel to the Partnership), and Persky to transform the Partnership into a corporation and to gain control of its assets for a small investment. According to the testimony of Gross, early in September, 1970, he met with Persky and Kayne who attempted to persuade him not to withdraw from the Partnership and who told him that he would "be sorry" if he did not cooperate.
The fortunes of the Partnership continued to dwindle, however, and in November, 1970, both Kayne and Sloane withdrew. On November 17, 1970, the New York Stock Exchange notified the firm that if it was not in compliance with the "required excess capital" provision of the Exchange constitution by November 20, steps would be taken to suspend the firm. The Partnership was also directed to prepare for possible liquidation.
Under continuing pressure from the Exchange, a reorganization was proposed by Risher and Muh as an alternative to the Partnership's liquidation. The assets of the Partnership were to be transferred to a corporation; in return, the general and limited partners and the subordinated lenders were to receive a variety of securities in accordance with their capital positions. The corporation's promoters were Berkowitz, Kayne, Muh, Risher and Sloane. See note 2, supra. In return for investments of $10,000 each, Kayne, Risher, and Muh would each receive sixteen per cent of the common stock. Kayne and Sloane were to participate in management along with Risher and Muh. ...
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