Cresswell v. Sullivan & Cromwell
| Decision Date | 11 January 1989 |
| Docket Number | 88 Civ. 2221 (RWS).,No. 87 Civ. 2685 (RWS),87 Civ. 2685 (RWS) |
| Citation | 704 F. Supp. 392 |
| Parties | Edward CRESSWELL, et al., Plaintiffs, v. SULLIVAN & CROMWELL and Prudential-Bache Securities, Inc., Defendants. Percy Herbert MEADOWS, Jorgen Hellzen, Chalais Holdings Limited, Elizabeth E. Noble, Ghasson Nagib Pharaon, Gerhardt Schulte-Heuthaus, and Roderick R. Von Etzdorf, Plaintiffs, v. SULLIVAN & CROMWELL and Prudential-Bache Securities, Inc., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Cooper, Brown & Behrle, P.C., New York City, for Cresswell plaintiffs; Richard B. Cooper, James M. Latimer, of counsel.
Wachtell, Lipton, Rosen & Katz, New York City, for Sullivan & Cromwell; Bernard W. Nussbaum, Kenneth B. Forrest, Rodrigo J. Howard, of counsel.
Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for Prudential-Bache Securities, Inc.; Sanford M. Litvack, Charles Chasin, of counsel.
Brown & Seymour, New York City, for the Meadows plaintiffs; Whitney North Seymour, Jr., Peter Megargee Brown, of counsel.
Defendant Prudential-Bache Securities Inc. ("Bache") has moved in limine to preclude the deposition and trial testimony of Edward J. Swan, Esq. ("Swan") who represented certain of the plaintiffs in Cresswell v. Prudential-Bache Securities, Inc., 83 Civ. 2099 (RWS) ("Cresswell I") on the grounds that the contingency fee arrangement between Swan and counsel for the plaintiffs here, Richard Cooper, Esq. ("Cooper") is improper. Sullivan and Cromwell has moved pursuant to Fed.R.Civ.P. 56 for summary judgment to dismiss the complaint in this action of Plaintiffs Edward Cresswell et al ("Cresswell II"). Plaintiffs have moved to further amend the Second Amended Complaint by adding a Fifth Claim for Relief against Sullivan and Cromwell. In a related case, Meadows v. Sullivan and Cromwell and Prudential-Bache Securities, Inc., 88 Civ. 2221 (RWS) ("Meadows"), the Meadows plaintiffs have moved pursuant to Fed.R.Civ.P. 42(a) to consolidate their action with this one, "Cresswell II". Upon the reasons, facts and conclusions set forth below, Bache's motion to preclude the testimony of Swan, Plaintiffs' motion to amend the Second Amended Complaint, and the Meadows plaintiffs' motion to consolidate are denied, and Sullivan and Cromwell's motion for summary judgment is granted.
Briefly stated, the amended complaint alleges that Bache and Sullivan and Cromwell deliberately withheld information subject to discovery during the course of an earlier action between the Cresswell I plaintiffs and Bache, and that this withholding constitutes grounds for rescinding the settlement of the earlier action and for an increased award of damages which would have resulted, had the withheld information been revealed. That information related to the initiation of a proceeding by the New York Stock Exchange (the "NYSE") into Bache's activities in connection with the sale of securities which were the subject of Cresswell I. The propriety of the conduct of attorneys in litigation is the underlying issue in the disposition of these motions. The skill of counsel for both sides has greatly assisted in the determination of these issues which are vexing, sensitive, and by their nature particularly appropriate for resolution at this stage of the litigation.
The present action was commenced in April, 1987, alleging that the exchange between Bache and the NYSE in December, 1983 had been deliberately withheld. The Complaint alleged that the nonproduction of the documents caused plaintiffs to settle Cresswell I for less than they otherwise would have.
Certain of the prior proceedings of this case are set forth in this court's opinion of July 31, 1987, familiarity with which is assumed, which denied Sullivan and Cromwell's motion pursuant to Rule 12(b)(6) Fed. R.Civ.P. to dismiss the amended complaint. Cresswell v. Sullivan and Cromwell, 668 F.Supp. 166 (S.D.N.Y.1987). Discovery has proceeded in this action and has largely been completed.
On March 31, 1988, certain of the former plaintiffs in Cresswell I filed a separate action (Meadows), seeking the same relief requested by the Plaintiffs in Cresswell II. Although there has been little, if any, discovery in Meadows, aside from any discovery relating to the particular plaintiffs, this court determined in June, 1988 that plaintiffs in Meadows could have access to the discovery material gathered by Cresswell II discovery.
The Bache motion to disqualify Swan was heard on July 21, 1988, and its disposition was deferred until the disposition of the remaining motions which were heard on October 21, 1988.
In 1981-82, Bache recommended in Europe an investment program based upon the spread between the price of GNMA futures contracts and the price of Treasury Bond futures (the "Spreads"). Certain publications issued by Bache were alleged by all plaintiffs to have been misleading. In October, 1982, the spread widened beyond its historic position, and the plaintiffs were required to liquidate their positions, incurring losses.
In March, 1983, sixty plaintiffs represented by Swan filed a complaint alleging that Bache had made materially false and misleading statements in connection with the marketing of the Spreads and seeking $2.87 million in compensatory damages and $200 million in punitive damages (Cresswell I). Eventually, more than 80 plaintiffs sought $5.68 million in compensatory damages and $208 million in punitive damages.
Marvin Schwartz ("Schwartz"), a senior litigation partner at Sullivan and Cromwell, was in charge of the matter for Bache, and was assisted by Sullivan and Cromwell associates Howard Burnett ("Burnett") and John L. Hardiman ("Hardiman"). The parties in Cresswell I reached a settlement in early 1985 pursuant to which Bache paid the plaintiffs in Cresswell I and a similar case, Wallin, et al v. Prudential-Bache Securities, Inc., 84 Civ. 7192 (RWS), a total of approximately $2.7 million, or 46% of the claimed dollar losses in those actions, and forgave debit amounts due from several plaintiff-customers.
On January 6, 1983, prior to the initiation of Cresswell I, an investor, Polly Gregory ("Gregory"), later a plaintiff in Cresswell I, wrote to the NYSE complaining of losses in connection with the Spreads sold by Bache in Europe and seeking assistance in recouping her losses. Gregory's letter was referred to the NYSE Division of Member Firm Regulatory Services, where it came to the attention of a Review Specialist, Barbara Krupinski ("Krupinski"). On February 1, 1983, Krupinski forwarded Gregory's letter to Bache and requested that Bache respond to the complaint and send information to the NYSE related to the marketing of the Spreads.
On March 15, a Bache memorandum was forwarded to William Goldenblum ("Goldenblum"), a Bache lawyer in Paris, regarding "correspondence received from the New York Stock Exchange regarding ... allegations against our firm." On March 28, 1983, Goldenblum responded to Krupinski by letter. Goldenblum denied without explanation that the pamphlet marketing the Spreads was misleading. The NYSE, in turn, forwarded Goldenblum's letter to Gregory. On May 4, 1983, Goldenblum again wrote to the NYSE. On May 13, Krupinski repeated a request made by telex in late April and then asked Goldenblum by letter to send her a copy of a 1981 advertisement on the Spreads and information concerning the advertisement. On May 26, 1983, Goldenblum sent Krupinski a copy of the advertisement. By letter of June 6, 1983, Goldenblum told Hardiman of Sullivan and Cromwell that the NYSE "has raised the question of the ad," and enclosed a copy of his file relating to Polly Gregory. On June 7, Barbara D. Salmanson ("Salmanson"), a Bache attorney specializing in commodities law, told Goldenblum that Schwartz wanted to see the ad before rendering advice.
Schwartz then helped Bache prepare a response to the NYSE inquiry on the advertisement. His draft of this letter has not been preserved. Salmanson signed the letter, approved by Schwartz, which was sent to Krupinski on June 8, 1983. A copy of the letter was also sent to Hardiman. In the letter, Bache informed the NYSE that the advertisement on the Spreads had been reviewed prior to publication in the London Financial Times, and that since the Bache reviewer "assumed that the brochure referred to in the advertisement was in fact available to the public," it was felt that the advertisement would not violate NYSE standards. At some time in mid 1983, Gregory's letter of complaint and the Bache responses were referred by the Regulatory Services of the NYSE to its Department of Enforcement.
On December 5, 1983, Loren Schechter ("Schechter"), General Counsel of Bache, received a letter from Donald E. Shippy ("Shippy"), a Senior Enforcement Investigator from the Department of Enforcement indicating that the Exchange was "investigating the possibility that ... Bache ... may have violated the standards for advertising and sales literature contained in ... the Exchange Rules" with regard to the advertisement and brochure on the Spreads (the "December 5 Letter"). On December 9, 1983, Schechter responded to the Exchange with a brief letter indicating that he would "look into the matter promptly and be in touch ..." (the "December 9 Letter").
On December 13, 1983 Shippy held a phone conversation with Schechter and Salmonson. In his memorandum of that conversation, Shippy wrote:
Pru-Bache, according to Mr. Schechter, is currently the subject to 83 suits seeking $5,000,000 in damages. Because of this civil litigation, the firm cannot take a hit because of this alleged rule violation and will contest us if we bring charges against them.
In January, 1984, Gregory, who had become a Cresswell I plaintiff in December, 1983, provided Swan with some of her correspondence with the NYSE...
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