Rosen v. Brookhaven Capital Management, Co., Ltd.

• Decision Date: 07 March 2002
• Docket Number: No. 99 Civ. 9397(CSH).,99 Civ. 9397(CSH).
• Parties: Felice ROSEN, Derivatively on Behalf of Egghead.Com, Inc., and Egghead.Com, Inc., Plaintiffs, v. BROOKHAVEN CAPITAL MANAGEMENT, CO., LTD., Focused Capital Partners, L.P., Watershed Partners, L.P., Cadence Fund, L.P., Brookhaven Capital Management, LLC, Piton Partners, L.P., Skye Investment Advisors, LLC, Skye Investments, Inc., Vincent Carrino, Daniel Coleman, Paul McEntire, and Robert Lishman, Defendants.
• Court: U.S. District Court — Southern District of New York

194 F.Supp.2d 224

Felice ROSEN, Derivatively on Behalf of Egghead.Com, Inc., and Egghead.Com, Inc., Plaintiffs, v. BROOKHAVEN CAPITAL MANAGEMENT, CO., LTD., Focused Capital Partners, L.P., Watershed Partners, L.P., Cadence Fund, L.P., Brookhaven Capital Management, LLC, Piton Partners, L.P., Skye Investment Advisors, LLC, Skye Investments, Inc., Vincent Carrino, Daniel Coleman, Paul McEntire, and Robert Lishman, Defendants.

No. 99 Civ. 9397(CSH).

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

March 7, 2002.

COPYRIGHT MATERIAL OMITTED

Glenn F. Ostrager, Ostrager Chong & Flaherty, New York City, for plaintiff.

Sheldon Eisenberger, New York City, for defendant.

MEMORANDUM OPINION AND ORDER

HAIGHT, Senior District Judge.

In an Opinion dated January 9, 2002, familiarity with which is assumed, the Court denied defendants' in limine motion to preclude certain of plaintiff's claims. This Opinion resolves the remaining in limine motions.

I. DEFENDANTS' OTHER MOTIONS

A. Evidence on the Applicability of the Investment Adviser Exemption

Plaintiff's claim under Section 16 of the Securities and Exchange Act of 1934 is that defendants as a group (the "Brookhaven Group") were the beneficial owners of more than 10 percent of the common stock of Egghead.com ("Egghead") and that defendants realized profits from the purchase and sale of their shares in Egghead within a period of less than six months. See 15 U.S.C. § 78p(b). Defendants invoke the exemptions from the definition of beneficial ownership listed in S.E.C. Rule 16a-1 (17 C.F.R. § 240.16a-1). Included in that list are registered investment advisers and groups of registered investment advisers. The securities held by such persons "for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of business" are exempt as long as there is no "purpose or effect of changing or influencing control of the issuer or engaging in any arrangement subject to Rule 13d-3(b)...."

Defendants seek to preclude plaintiff from challenging defendants' entitlement to the investment adviser exemption on any grounds other than the grounds attacked by plaintiff in the complaint. Defendants raise this argument in two separate motions in limine, which are substantially identical in content.¹ Defendants assert that plaintiff's complaint acknowledged defendants' entitlement to the investment adviser exemption in general and only challenged the applicability of the exemption on two grounds: that defendants intended to change or influence control over Egghead and that certain members of the Brookhaven Group are not independently exempt. This latter ground was rejected by the Court as a matter of law in its Opinion denying defendants' motion to dismiss. Interstate Commerce Com'n v. Kroblin, 113 F.Supp. 599, 621-29 (N.D.Iowa 1953). Defendants therefore contend that plaintiff should be precluded from challenging defendants' entitlement to the investment adviser exemption on any grounds other than that defendants intended to change or influence control over Egghead.

Defendants make reference in their motion to only one other ground upon which plaintiff might challenge the investment adviser exemption. This ground for challenge is that defendants were registered as investment advisers under state but not federal law in violation of 15 U.S.C. § 80b-3 and § 80b-3a. Defendants point out that plaintiff should have known from a letter written to plaintiff by Egghead's counsel on March 3, 1999, that defendants Brookhaven Capital Management Co., Ltd. and Brookhaven Capital Management Co., LLC were registered under state but not federal law. Defendants argue that plaintiff's failure to include this ground in the complaint constitutes an admission that defendants' entitlement to the investment adviser exemption is unassailable on this ground.

Defendants misunderstand both the burden on the plaintiff in pleading facts in her complaint and the nature of judicial admissions. A plaintiff's complaint should contain allegations that support her claim, but a plaintiff has no obligation to anticipate and refute potential affirmative defenses. Harris v. City of New York, 186 F.3d 243, 251 (2d Cir.1999) (holding that complaint need not anticipate statute of limitations, which is an affirmative defense), citing 5 Charles Alan Wright & Arthur R. Miller, Federal Practice & Procedure § 1276 (2d ed.2001). Anticipation of defenses in a complaint was not even recognized at common law and now is merely tolerated. Alcoa S.S. Co. v. Ryan, 211 F.2d 576, 578 (2d Cir.1954). Rule 8(c) of the Federal Rules of Civil Procedure imposes on the defendant the burden of pleading in its answer any matter "constituting an avoidance or affirmative defense." See Gomez v. Toledo, 446 U.S. 635, 640, 100 S.Ct. 1920, 64 L.Ed.2d 572 (1980) (holding that defendant in civil rights case has burden of pleading defense of qualified immunity and plaintiff has no obligation to anticipate such defense), citing 5 Wright & Miller § 1276. Plaintiff may always, however, rebut defendant's proof of affirmative defenses.

It has long been established that statutory exceptions constitute defenses which must be pleaded and proved by the defense. As the Supreme Court stated nearly eighty years ago:

By repeated decisions it has come to be a settled rule ... that an indictment or other pleading founded on a general provision defining the elements of an offense, or of a right conferred, need not negative the matter of an exception made by a proviso or other distinct clause, whether in the same section or elsewhere, and that it is incumbent on one who relies on such an exception to set it up and establish it.

McKelvey v. United States, 260 U.S. 353, 356-57, 43 S.Ct. 132, 67 L.Ed. 301 (1922); accord Bowles v. Wheeler, 152 F.2d 34, 41 (9th Cir.1945); United States v. King & Howe, 78 F.2d 693, 696 (2d Cir.1935); United States v. Acnotabs, 207 F.Supp. 758, 768 (D.N.J.1962). Courts have also specifically held in the securities context that defendants have the burden to plead and prove statutory exemptions. Securities and Exchange Commission v. Ralston Purina Co., 346 U.S. 119, 126, 73 S.Ct. 981, 97 L.Ed. 1494 (1953) ("Keeping in mind the broadly remedial purposes of federal securities legislation, imposition of the burden of proof on an issuer who would plead the exemption seems to us fair and reasonable."); see also Byrnes v. Faulkner, Dawkins & Sullivan, 550 F.2d 1303, 1311 (2d Cir.1977); Securities and Exchange Commission v. Culpepper, 270 F.2d 241, 246 (2d Cir.1959); Securities and Exchange Commission v. Parnes, No. 01 Civ. 0763, 2001 WL 1658275, at *6 (S.D.N.Y. Dec. 26, 2001) ("[A] plaintiff need not plead the inapplicability of an exemption, as the party claiming exemption from registration requirements bears the burden of proving that the exemption applies."); Steed Finance LDC v. Nomura Securities International, Inc., No. 00 Civ. 8058, 2001 WL 1111508, at *5 (S.D.N.Y. Sept. 20, 2001).

In this case, the claim which plaintiff raised in her complaint and which plaintiff has the burden to prove at trial is that defendants as a group were the beneficial owners of more than 10 percent of the common stock of Egghead and that defendants realized profits from the purchase and sale of their shares in Egghead within a period of less than six months. Compl. ¶¶ 16, 22-27; see 15 U.S.C. § 78p(b). Defendants raised the affirmative defense in their answer that they are exempt under the securities laws, Answer ¶ 29, and it is defendants' burden to prove at trial their entitlement to an exemption. In turn, plaintiff may rebut defendants' proof of their affirmative defense. The fact that plaintiff anticipated and challenged defendants' affirmative defense in the complaint, Compl. ¶¶ 17-20, does not alter the allocation of burdens.

Defendants inaccurately refer to plaintiff's anticipatory challenges as "claims" and argue that they have a right to notice of these "claims" in the complaint. Defendants contend that they failed to prepare alternative defenses because they did not have notice of all the ways plaintiff might challenge defendants' entitlement to the investment adviser exemption. Defendants have no right to notice, in the complaint or otherwise, of the manner in which plaintiff may rebut defendants' proof of an affirmative defense. Defendants' reliance on LNC Investments, Inc., which involved a plaintiff's failure to give notice of claims which the plaintiff bore the burden of pleading and proving at trial, is misplaced. LNC Investments, Inc. v. First Fidelity Bank, No. 92 Civ. 7584, 2000 WL 1093012 (S.D.N.Y. Aug.4, 2000) (plaintiff failed in initial pleadings to claim that defendant trustees were liable for their failure to assert § 507(a) administrative expense priority in bankruptcy court). Defendants have not cited any case holding that a plaintiff must give notice in the complaint, or at any stage for that matter, of the manner in which the plaintiff will rebut likely defenses.

In addition to their argument that plaintiff is obligated to give notice of how it will challenge defendants' entitlement to the investment adviser exemption, defendants also make the argument that plaintiff admitted in the complaint that the investment adviser exemption is valid in this case "as a general matter" and can only be challenged on the two grounds raised in the complaint. Defendants contend that plaintiff should be bound by these "admissions."

It is true that "stipulations and admissions in the pleadings are generally binding on the parties and the Court." PPX Enterprises, Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d Cir.1984). Plaintiff has not, however, made any binding admissions. Plaintiff did not admit in the complaint that the investment adviser exemption is generally valid in this case. The complaint does identify several defendants as "investment advisers," but such factual descriptions are not admissions that the statutory...