Litton Industries v. Lehman Bros. Kuhn Loeb Inc.

• Decision Date: 18 April 1990
• Docket Number: No. 86 Civ. 6447 (JMC).,86 Civ. 6447 (JMC).
• Citation: 734 F. Supp. 1071
• Parties: LITTON INDUSTRIES, INC., Plaintiff, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED, Dennis Levine, Ira B. Sokolow, Robert M. Wilkis, Bank Leu International, Ltd., Bank Leu A.G., Bernhard Meier, John R. Lademann, Bruno Pletscher, Jean-Pierre Fraysse, and Christian Schlatter, Defendants.
• Court: U.S. District Court — Southern District of New York

734 F. Supp. 1071

LITTON INDUSTRIES, INC., Plaintiff, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED, Dennis Levine, Ira B. Sokolow, Robert M. Wilkis, Bank Leu International, Ltd., Bank Leu A.G., Bernhard Meier, John R. Lademann, Bruno Pletscher, Jean-Pierre Fraysse, and Christian Schlatter, Defendants.

No. 86 Civ. 6447 (JMC).

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

April 18, 1990.

COPYRIGHT MATERIAL OMITTED

Dilworth, Paxson, Kalish & Kauffman, Washington, D.C. by Michael I. Smith, Lawrence D. Berger, Scott R. Shepherd and M. Miller Baker, for plaintiff Litton Industries, Inc.

Fried, Frank, Harris, Shriver & Jacobsen, Washington, D.C. by Henry A. Hubschman, David M. Miles and David B. Hardison, for defendants Bank Leu Intern., Ltd., Bank Leu A.G., John R. Lademann, Bruno Pletscher and Christian Schlatter.

Weisberg & Berns, New York City by David E. Weisberg, for defendant JeanPierre Fraysse.

Paul, Weiss, Rifkind, Wharton & Garrison, New York City by Martin Flumenbaum and Brad S. Karp, for defendant Dennis Levine.

Willkie, Farr & Gallagher, New York City by Anthony F. Phillips, Jeanne M. Luboja, Jonathan P. Wolfert and Laura A. Proske, for defendant Lehman Brothers Kuhn Loeb Inc.

MEMORANDUM AND ORDER

CANNELLA, District Judge:

Defendants' motion for partial summary judgment is granted in part and denied in part. Fed.R.Civ.P. 56. Plaintiff's motion for leave to file a third amended complaint is granted. Fed.R.Civ.P. 15(a). Plaintiff's motion for reversal or modification of Magistrate Gershon's denial of its motion to compel the deposition testimony of Levine is denied. 28 U.S.C. § 636(b)(1)(A) (1982). Plaintiff's motion to set aside Magistrate Gershon's ruling granting defendants' motion to strike plaintiff's reservation of right to supplement its Rule 26(b)(4) statement is denied. 28 U.S.C. § 636(b)(1)(A) (1982).

BACKGROUND

This action has been before the Court on prior motions and, therefore, complete familiarity with the underlying facts is assumed. Only those facts relevant to the instant motions will be set forth below.

In November 1982, plaintiff, Litton Industries, Inc. "Litton", retained defendant Lehman Brothers Kuhn Loeb, Inc. (now known as Shearson Lehman Brothers) "Lehman Brothers" to provide services in connection with Litton's tender offer acquisition for all the outstanding securities of Itek Corporation "Itek". Defendant Dennis Levine, an employee in Lehman Brothers' mergers and acquisitions department, allegedly learned of Litton's proposed tender offer from defendant Ira B. Sokolow, another employee of Lehman Brothers. In its second amended complaint the "Complaint", Litton alleges that Levine purchased 50,000 shares of Itek in advance of the public disclosure of Litton's tender offer through defendant Bank Leu International Limited (now known as Leu Trust and Banking (Bahamas) Limited) "BLI". The Complaint further alleges that another 10,000 shares were purchased in open market transactions by defendants Jean-Pierre Fraysse (BLI's managing director), Bernhard Meier and Christian Schlatter (BLI employees), and BLI itself. Other defendants who allegedly assisted Levine in his massive trading based on nonpublic information include Bank Leu, A.G. "BLZ", John R. Lademann (BLI board member), Bruno Pletscher (BLI general manager), and Robert Wilkis (investment banker with Lazard Freres & Company). The gravamen of Litton's Complaint is that these illegal insider purchasers artificially inflated the market price of Itek stock, causing Litton to pay more than it otherwise would have had to pay in both its open market purchases of Itek stock and in its tender offer for the outstanding Itek securities.

Prior to the commencement of this action, certain defendants disgorged all or part of their profits from trading in Itek securities to the Securities and Exchange Commission the "SEC". Pursuant to paragraph eight of an agreement between defendant BLI and the SEC executed on March 19, 1986, BLI agreed to disgorge on behalf of itself and its employees (other than Meier) all profits realized from the purchase and sale of Itek securities. BLI disgorged a total of $53,747.07 to the SEC as profit realized by BLI and two of its employees (Schlatter and Fraysse) from transactions in Itek securities through accounts maintained at BLI. This disgorgement represents BLI's profit of $14,879.15, Schlatter's profit of $24,038.77, and Fraysse's profit of $14,829.15. See Declaration of Henry A. Hubschman in Support of Motion for Partial Summary Judgment, at ¶¶ 3-5, 86 Civ. 6447 (JMC) (S.D.N.Y. Oct. 26, 1989) "Hubschman Declaration". The other remaining moving defendants — BLZ, Lademann, and Pletscher — did not trade in Itek securities and, therefore, did not disgorge any profits to the SEC.¹

Levine realized a profit of $12,651,753.99 from the purchase and sale of securities, including a profit of $805,035.00 from the purchase and sale of 50,000 shares of Itek securities transacted through an account maintained on his behalf at BLI. See Hubschman Declaration, at ¶¶ 6, 8. In connection with a prior insider trading action filed against Levine by the SEC, Levine executed a Consent and Undertaking on June 4, 1986, whereby he agreed to the entry of a "Final Judgment of Permanent Injunction and Other Equitable Relief." See SEC v. Levine, 881 F.2d 1165, 1169 (2d Cir.1989). Pursuant to the Consent and Undertaking, Levine disgorged assets valued at $11.5 million to a receiver for satisfaction of any claims against Levine "`arising out of the purchase and sale of securities by Levine and his companies as alleged in the Complaint'" filed by the SEC. Id. (quoting Consent and Undertaking, at ¶ 8 (July 4, 1986)). The SEC complaint included transactions in securities of Itek.

Among the various types of relief sought in the instant action, Litton seeks disgorgement of all profit, fees, and commissions earned from the sale and purchase of Itek securities by defendants Levine, Sokolow, Wilkis, Fraysse, Schlatter, Meier, BLI, and any third party acting on information supplied by any of the defendants. See Complaint, Relief ¶ 2.

There are four motions presently before the Court. First, defendants BLZ, BLI, Lademann, Pletscher, Schlatter, Fraysse, and Levine collectively the "Bank Leu defendants" seek partial summary judgment on Litton's claim for disgorgement of all profit, fees, and commissions earned on the purchase and sale of Itek securities. Second, Litton moves for leave to file a third amended complaint. Third, Litton moves for reversal or modification of Magistrate Gershon's denial of its motion to compel the deposition testimony of Levine. Lastly, Litton moves to set aside Magistrate Gershon's ruling granting defendants' motion to strike plaintiff's reservation of right to supplement its Rule 26(b)(4) statement.

DISCUSSION

I. Summary Judgment

A. Disgorgement of Profits

The Bank Leu defendants seek partial summary judgment on Litton's claim for disgorgement of all profits earned from the sale and purchase of Itek securities on the ground that such profits previously have been disgorged to the SEC.² Litton contends that disgorgement is an appropriate measure of damages in a private action under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) the "1934 Act" and Rule 10b-5 promulgated thereunder despite any prior disgorgement to the SEC. Alternatively, Litton argues that the Bank Leu defendants did not disgorge the full extent of their profits to the SEC, thereby preserving the availability of disgorgement as a measure of damages in this action.

The traditional measure of damages for a violation of Section 10(b) and Rule 10b-5 is the out-of-pocket rule as developed in the tort action of deceit. See, e.g., Huddleston v. Herman & MacLean, 640 F.2d 534, 555 (5th Cir.1981), aff'd in part, rev'd in part on other grounds, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983); Blackie v. Barrack, 524 F.2d 891, 909 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976); Levine v. Seilson, Inc., 439 F. 2d 328, 334 (2d Cir. 1971). With respect to defrauded sellers under Rule 10b-5, the Supreme Court has recognized that the proper measure of out-of-pocket loss is the difference between the value of what the seller received and the value of what the seller would have received had there been no fraudulent conduct. Affiliated Ute Citizens v. United States, 406 U.S. 128, 155, 92 S.Ct. 1456, 1473, 31 L.Ed.2d 741 (1972); see also Alley v. Miramon, 614 F.2d 1372, 1387 (5th Cir. 1980) ("As a general rule, the correct measure of a seller's damages in a 10b-5 action is the difference between the price received and the value of the securities at the time of the fraudulent transaction."). However, the Supreme Court recognized one major exception to this customary measure of damages. Where the defrauding purchaser receives more than the seller's actual loss, the proper measure of damages shall be the amount of the purchaser's profits. Affiliated Ute Citizens, 406 U.S. at 155, 92 S.Ct. at 1473.

The origin of the disgorgement measure of damages for defrauded sellers of securities endorsed by the Supreme Court in Affiliated Ute Citizens is Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965). In Janigan, the First Circuit recognized that the profit made by a purchaser who acquired property by fraud should be deemed the proximate consequence of the fraud since the profit would not have accrued absent the fraudulently induced sale. 344 F.2d at 786. Although the Janigan disgorgement measure of damages has been applied primarily in the context of a defrauded seller, the Second Circuit has expressly rejected any such limitation. See Zeller v. Bogue Elec. Mfg. Corp., 476 F.2d 795, 802 (2d Cir.1973). Other circuits have similarly recognized that disgorgement principles apply equally to an innocent party induced to purchase securities. See,...