In re Motel 6 Securities Litigation

• Citation: 161 F.Supp.2d 227
• Decision Date: 05 April 2001
• Docket Number: No. 93 Civ. 2866(JFK).,No. 94 Civ. 2183(JFK).,94 Civ. 2183(JFK).,93 Civ. 2866(JFK).
• Parties: In re MOTEL 6 SECURITIES LITIGATION. Redtail Leasing, Inc., individually and on behalf of all others similarly situated, Plaintiffs, v. Hugh Thrasher, et. al., Defendants. Robert J. Rosener, individually and on behalf of all others similarly situated, Plaintiffs, v. Hugh Thrasher, et. al., Defendants.
• Court: U.S. District Court — Southern District of New York

161 F.Supp.2d 227

In re MOTEL 6 SECURITIES LITIGATION.

Redtail Leasing, Inc., individually and on behalf of all others similarly situated, Plaintiffs, v. Hugh Thrasher, et. al., Defendants.

Robert J. Rosener, individually and on behalf of all others similarly situated, Plaintiffs, v. Hugh Thrasher, et. al., Defendants.

No. 94 Civ. 2183(JFK).

No. 93 Civ. 2866(JFK).

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

April 5, 2001.

COPYRIGHT MATERIAL OMITTED

Sachnoff & Weaver, Ltd., Chicago, IL, J. Samuel Tenebaum, John W. Moynihan, Scott R. Drury, of counsel, for Plaintiffs.

Defendant Ezra Chammah, New York City, Pro se.

Nagler and Associates, Los Angeles, CA, Lawrence H. Nagler, Robert M. Zabb, of counsel for Defendant Jonathan Hirsh.

KEENAN, District Judge.

Before the Court are Defendant Ezra Chammah's pro se Motion for Summary Judgment and for Judgment on the Pleadings, and Defendant Jonathon Hirsh's Motion for Summary Judgment, or in the alternative, Partial Summary Judgment, in which Defendant Chammah joins (without papers). For the reasons outlined below, both Motions are granted in part and denied in part.

BACKGROUND

The Court assumes familiarity with the facts discussed in its earlier opinions in this case and in the related cases, SEC v. Hugh Thrasher, et al., No. 92-6987 (S.D.N.Y.) (JFK), and Redtail v. Bellezza, 95 Civ. 5191(JFK), and provides below only a rudimentary recitation of the facts as needed for this decision.

Plaintiffs allege a nationwide insider trading scheme by persons who possessed material, nonpublic information concerning the proposed acquisition of Motel 6, L.P., a Dallas-based national chain of owner-operated economy motels, by Accor, S.A. ("Accor"), a French-based company. Plaintiffs were the holders of call options on Motel 6 securities, and they assert that Defendants were part of a conspiracy to trade on highly sensitive inside information about tender offer negotiations occurring in New York between Motel 6's largest shareholder, Kohlberg Kravis Roberts & Company ("KKR"), and Accor. Defendant Hugh Thrasher ("Thrasher") was executive vice-president of Motel 6 in charge of communication at the time of the tender offer negotiations. After learning about the proposed takeover on May 21, 1990, Thrasher allegedly tipped Carl V. Harris ("Harris"), now deceased, about the tender offer negotiations. Pls.' 56.1(b) Stmt. in Opp. to Hirsh's Mot. ¶ 2.¹ Harris then allegedly told several others, including Defendants Jeffrey Sanker ("Sanker"), Harris' roommate, and William Gomez ("Gomez"), Harris' friend. Gomez and Harris later told Defendant Gregg Shawzin ("G.Shawzin"), a stockbroker, about the proposed tender offer. See id. ¶¶ 7-8, 10. The deal between Accor and Motel 6 was finalized and made public on July 12, 1990. See id. ¶ 38.

One of Sanker's tippees was Defendant Jonathan Hirsh ("Hirsh"). Plaintiffs allege that, after learning from Sanker that an inside source on the Board of Motel 6 had revealed that the hotel chain was involved in ongoing tender offer negotiations, Hirsh concocted a scheme whereby he could trade on that information with impunity. Hirsh allegedly planned to make it appear that he had received his information about Motel 6 from his broker, Roger K. Odwak ("Odwak"). See id. ¶¶ 30-31. Hirsh then allegedly entered into a partnership with Defendant Lee Rosenblatt ("Rosenblatt") to trade Motel 6 securities through Rosenblatt's securities account and split the illegal profits. Together with Rosenblatt and on his own, Hirsh then purchased Motel 6 call options, and allegedly the two realized illegal profits of almost $400,000. See id., ¶ 38. Hirsh paid Sanker $14,500 in two installments, payments Plaintiffs allege were a kickback of profits from the insider trading scheme. Plaintiffs further allege that when Sanker was later subpoenaed by the SEC, Hirsh encouraged him to say that the payments were for design work performed at Hirsh's home. See id. ¶¶ 40-42, 44-45.

One of G. Shawzin's alleged tippees was his brother, Defendant Mark Shawzin ("M.Shawzin"); M. Shawzin in turn allegedly recruited Defendant Ezra Chammah ("Chammah") into the insider trading ring. Defendant Chammah is alleged to have traded in Motel 6 securities using the inside information and to have realized at least $229,700 in profits from that trading. He is also alleged to have agreed to pay the Shawzin brothers a portion of his illegal profits as a commission or "kickback" that furthered the purposes of the conspiracy. See Pls.' 56.1(b) Stmt. in Opp. to Chammah's Mot. ¶¶ 16-17, 19, 24-25.

In their Amended Complaint, Plaintiffs initially asserted claims for violations of Section 10(b) and 14(e) of the Securities Exchange Act of 1934 ("Exchange Act"), Rules 10b-5 and 14e-3 promulgated thereunder, Section 20A(a) of the Exchange Act, RICO violations [18 U.S.C. § 1962(b), (c) and (d)], Common Law Fraud and Unjust Enrichment.² Chammah and Hirsh now seek dismissal of all claims remaining against them. The Court will consider each Motion in turn.

DISCUSSION

I. SUMMARY JUDGMENT STANDARDS

A motion for summary judgment may be granted under Fed.R.Civ.P. 56 if the entire record demonstrates that "there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When viewing the evidence, the Court must "assess the record in the light most favorable to the nonmovant and ... draw all reasonable inferences in its favor." Delaware & Hudson Ry. Co. v. Consolidated Rail Corp., 902 F.2d 174, 177 (2d Cir.1990); see also McLee v. Chrysler Corp., 109 F.3d 130, 134 (2d Cir.1997). Although the movant initially bears the burden of showing that there are no genuine issues of material fact, once such a showing is made, the opposing party must produce sufficient evidence to permit a reasonable jury to return a verdict in its favor, identifying "specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 248, 256, 106 S.Ct. 2505. "[U]nsupported allegations do not create a material issue of fact," Weinstock v. Columbia Univ., 224 F.3d 33, 41 (2d Cir.2000), so a summary judgment motion "will not be defeated merely ... on the basis of conjecture or surmise." Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir.1991); see also Goenaga v. March Of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir.1995). If the court finds that there are factual disputes regarding material issues, however, summary judgment is not appropriate. See Anderson, 477 U.S. at 249, 106 S.Ct. 2505; see also Repp & K & R Music, Inc. v. Webber, 132 F.3d 882, 890 (2d Cir.1997) ("Clearly, the duty of a court on a motion for summary judgment is ... not to decide factual issues. In this regard, the court's task is issue identification, not issue resolution.").

II. CHAMMAH'S MOTION FOR SUMMARY JUDGMENT AND FOR JUDGMENT ON THE PLEADINGS

Chammah now moves for Summary Judgment and Judgment on the Pleadings. For the reasons outlined below, the motion is granted in part and denied in part.

As a threshold matter, Plaintiffs argue that Chammah's Motion should be denied in its entirety since he has failed to comply with Local Rule 56.1(a) requiring parties who move for summary judgment to submit a "short and concise statement of the material facts as to which the moving party contends there is no genuine issue to be tried." Local Rule 56.1. "Failure to submit such a statement may constitute grounds for denial of the motion," id., however, since "pro se litigants are to be given special latitude," Armstrong v. Tucker, 97 Civ. 7388(AKH)(KNF), 2000 U.S. Dist. LEXIS 2434 at *5 (S.D.N.Y. Feb. 29, 2000), this Court will exercise its discretion and entertain the motion on its merits.

A. Common Law Fraud Claim

Chammah maintains that Plaintiffs' common law fraud claim must be dismissed because, inter alia, the Plaintiffs cannot prove that they relied on a misrepresentation or omission Chammah is alleged to have committed. In an earlier decision in this case, this Court dismissed common law fraud claims against Hirsh for precisely this reason, noting that:

"where Plaintiffs' factual allegations focus solely on an insider trading conspiracy that perpetrated a fraud on the market, and Plaintiffs have alleged no connection to the Defendants other than the fact that Plaintiffs traded on the market contemporaneously with Defendants, Plaintiffs have not alleged facts to support a claim of actual, direct reliance on Defendants' omissions."

In re Motel 6 Litigation, 93 Civ. 2183(JFK), 1997 WL 154011 at *6 (S.D.N.Y. Apr. 2, 1997).

Unlike actions under federal securities laws where reliance is presumed if the omissions were material and the defendant had a duty to disclose, see Pollack v. Laidlaw Holdings, Inc., 90 Civ. 5788(DLC), 1995 WL 261518 at *11 (S.D.N.Y. May 3, 1995), common law fraud claims must be supported by factual allegations demonstrating a plaintiff's actual, direct reliance on the misrepresentation or omission. See Golden Budha Corp. v. Canadian Land Co., 931 F.2d 196, 202 (2d Cir.1991); Olshansky v. Sutton, 2001 WL 99857 at *9, 2001 U.S. Dist. LEXIS 945 at *9 (S.D.N.Y. Feb. 6, 2001). To survive a Motion for Summary Judgment, the Plaintiffs must produce sufficient evidence to permit a reasonable jury to return a verdict in its favor, identifying "specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, 477 U.S. at 248, 256, 106 S.Ct. 2505. Plaintiffs have not identified any facts which might suggest sufficient reliance. Accordingly, Chammah's Motion for Summary Judgment on Plaintiffs' Common Law Fraud claim is hereby granted.

B. Unjust Enrichment Claims

Chammah also seeks dismissal of Plaintiffs' unjust enrichment claims, arguing that he has fully disgorged his allegedly illegal profits and that his disgorgement renders Plaintiffs' unjust enrichment claim moot. See Chammah's...