Donoghue v. Casual Male Retail Group, Inc., 03 CIV. 1037(KMW).

• Decision Date: 31 March 2005
• Docket Number: No. 03 CIV. 1037(KMW).,03 CIV. 1037(KMW).
• Parties: Deborah DONOGHUE, Plaintiff, v. CASUAL MALE RETAIL GROUP, INC. and Jewelcor Management Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

375 F.Supp.2d 226

Deborah DONOGHUE, Plaintiff, v. CASUAL MALE RETAIL GROUP, INC. and Jewelcor Management Inc., Defendants.

No. 03 CIV. 1037(KMW).

United States District Court, S.D. New York.

March 31, 2005.

COPYRIGHT MATERIAL OMITTED

David Lopez, Southampton, NY, for Plaintiff.

Alan Roy Friedman, Kramer, Levin, Naftalis & Frankel, LLP, Amy Busa, Fixler & LaGuttuta, Dennis H. Tracey, III, Robert Brian Black, Hogan & Hartson LLP, New York, NY, George A. Reihner, Elliott, Reihner, Siedzikowski & Egan P.C., Scranton, PA, Richard L. Huffsmith, Jewelcor Companies, Wilkes-Barre, PA, for Defendants.

ORDER

KIMBA M. WOOD, District Judge.

Deborah Donoghue ("Plaintiff") brings this shareholder action, pursuant to Section 16(b) of the Securities Exchange Act of 1934 ("Section 16(b)"), 15 U.S.C. § 78p(b)(2005), against Defendants Casual Male Retail Group, Inc. ("Casual Male") and its beneficial owner, Jewelcor Management, Inc. ("Jewelcor"). Plaintiff seeks to recover "short-swing" profits that she alleges Jewelcor realized from the purchase and sale of Casual Male common stock within a six-month period.

Plaintiff moves for summary judgment with respect to liability and damages; Defendants oppose Plaintiff's motion and cross-move for summary judgment.¹ For the reasons set forth below, the Court grants Plaintiff's motion for summary judgment and, accordingly, denies Defendants' motion for summary judgment.

I. Background

Unless otherwise noted, the following facts are derived from the parties' Stipulation of Undisputed Facts and Statement of Material Facts Pursuant to Local Civil Rule 56.1 ("Rule 56.1 Statement").

At all times relevant to the instant action, Plaintiff was, and continues to be, a shareholder of Casual Male. Rule 56.1 Statement, ¶ 3. Casual Male retained Jewelcor to render management and consulting services as an independent contractor in October 1999. Id. at ¶ 4; see Consulting Agreement, dated Oct. 28, 1999, id. at Ex. A. Pursuant to a Non-Qualified Stock Option Agreement, which served as partial compensation for Jewelcor's consulting services, Casual Male granted Jewelcor an Option to purchase 400,000 shares of its common stock at a fixed price of $1.156 per share, on or prior to April 28, 2002 (the "Option"). Option Agreement, dated Oct. 28, 1999, id. at Ex. B. The Agreement indicated that payment for the Option could be made (i) by cash or check, (ii) "in the form of shares of Common Stock that are not then subject to any restrictions," or (iii) by notice with instructions to a broker to deliver cash or check. Id.

Between November 21, 2001 and January 2, 2002, Jewelcor made open-market purchases of 62,951 shares of Casual Male common stock at prices of between $2.24 and $3.02 per share. Id. at ¶ 16. On April 18, 2002, Jewelcor exercised the above-described Option by surrendering 79,467 Casual Male shares, at the contemporaneous fair market value of $5.82 per share. Id. at ¶ 15. On October 3, 2002, Jewelcor bought 11,500 Casual Male shares at $3.35 per share; the following day, Jewelcor bought an additional 12,000 Casual Male shares at $3.26 per share; and on October 14, 2002, Jewelcor bought 1,610 Casual Male shares at $3.12 per share. Plnt.'s Supp. Statement of Material Facts ("Plnt.'s Supp. Statement"). ¶ 2.²

Jewelcor was the beneficial owner of more than 10% of Casual Male common stock at all relevant times. Rule 56.1 Statement, ¶ 17. Jewelcor was 100% owned by Jewelcor Incorporated, which was 100% owned by SH Holdings Incorporated, which was 93% owned by Seymour Holtzman ("Holtzman") and his wife, Evelyn Holtzman. Id. at ¶ 13. When Casual Male granted Jewelcor the Option, Holtzman was the President of Jewelcor and the Chairman of its Board of Directors. Id. at ¶ 8. Subsequent to the Option grant, and at the time Jewelcor surrendered the 79,467 Casual Male shares to exercise the Option, Holtzman was an officer and director of Casual Male. Id. at ¶¶ 9, 15. Jewelcor was never an officer or director of Casual Male. Id. at ¶ 14.

On October 18, 2002 Plaintiff made a demand for prosecution, pursuant to Section 16(b) of the Exchange Act, on Casual Male. Complaint, ¶ 5; Casual Male's Answer, ¶ 5; Jewelcor's Answer, ¶ 5, Casual Male denied Jewelcor's liability and refused to bring suit. Id. Over sixty days after Plaintiff's demand, but within two years of the alleged transactions, Plaintiff commenced the instant action. Complaint, ¶ 7; see 15 U.S.C. § 78(p)(b) ("Suit to recover such profit may be instituted ... by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request...; but no such suit shall be brought more than two years after the date such profit was realized.").

II. Discussion

A. Standard of Review on a Motion for Summary Judgment

Summary judgment is properly granted where the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The substantive law governing a case will identify those facts that are material, and only disputes over relevant or necessary facts "that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

Courts in the Second Circuit "have recognized the propriety of a [summary judgment] disposition in Section 16(b) actions where the parties do not contest the facts." Morales v. Gould Investors Trust, 445 F.Supp. 1144 (S.D.N.Y.1977), aff'd 578 F.2d 1369 (2d Cir.1978). However, even when both parties assert the absence of any genuine issues of material fact and cross-move for summary judgment, a court need not enter judgment for either party. Morales v. Quintel Entm't, Inc., 249 F.3d 115, 120 (2d Cir.2001). "Rather, each party's motion must be examined on its own merits, and in each case all reasonable inferences must be drawn against the party whose motion is under consideration." Id.

B. Liability under Section 16(b) of the Exchange Act

Section 16(b) of the Exchange Act "imposes a general rule of strict liability on owners of more than 10% of a corporation's listed stock for any profits realized from the purchase and sale, or sale and purchase, of such stock occurring within a 6-month period." Gollust v. Mendell, 501 U.S. 115, 116-117, 111 S.Ct. 2173, 115 L.Ed.2d 109 (1991); see 15 U.S.C. § 78p(b).³ The expressly stated purpose of this Section is to "prevent[] the unfair use of information which may have been obtained by [a] beneficial owner, director, or officer by reason of his relationship to the issuer." 15 U.S.C. § 78p(b); see Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972) ("[F]ederal courts ... have recognized that the only method Congress deemed effective to curb the evils of insider trading was a flat rule taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great."); Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232, 243-55, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976) (discussing the general purpose and legislative history of Section 16(b)).

Section 16(b) renders insiders "liable to suits requiring them to disgorge their profits even if they did not trade on inside information or intend to profit on the basis of such information." Gollust, 501 U.S. at 122, 111 S.Ct. 2173; see 15 U.S.C. § 78p(b) ("any profit realized ... shall inure and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner..."); accord Rosen ex rel. Price Communications Corp. v. Price, 1997 WL 401793, *1, 1997 U.S. Dist. Lexis 10274, *11 (S.D.N.Y. July 16, 1997) (noting that the statute has been described as "harsh," "crude," and "Draconian," because "liability under § 16(b) attaches even if there is no proof that the defendant intended to profit from inside information"). For this strict liability to attach to a transaction, the plaintiff must show that there was "(1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than ten percent of any one class of the issuer's securities (4) within a six-month period." Gwozdzinsky ex rel. Revco D.S. v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir.1998).

When confronted with "unorthodox" or "borderline" transactions that are not "classic purchases and sales for cash" within the literal terms of the statute, courts look to the legislative purpose behind Section 16(b), applying a "potential for speculative abuse" test on a case-by-case basis. Steel Partners II, L.P. v. Bell Indus., Inc., 315 F.3d 120, 124 (2d Cir.2002); Lane Bryant, Inc. v. Hatleigh Corp., 517 F.Supp. 1196, 1201 (S.D.N.Y.1981); Tyco Laboratories, Inc. v. Cutler-Hammer, Inc. 490 F.Supp. 1, 4 (S.D.N.Y.1980).

In deciding whether borderline transactions are within the reach of the statute, the courts have come to inquire whether the transaction may serve as a vehicle for the evil which Congress sought to prevent — the realization of short-swing profits based upon access to inside information.... Thus, "in interpreting the terms `purchase' and `sale,' courts have properly asked whether the particular type of transaction involved is one that gives rise to speculative abuse."

Kern County Land Co. v. Occidental Petroleum Corp. 411 U.S. 582, 593-595, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973) (quoting Reliance, 404 U.S. at 424, n. 4, 92 S.Ct. 596). The two primary "indices" used for measuring the potential for speculative abuse are (1) the defendant's access to inside information (as distinguished from possession of...