S.E.C. v. Happ

• Decision Date: 25 November 2003
• Docket Number: No. CIV.A. 00-12051-REK.,CIV.A. 00-12051-REK.
• Citation: 295 F.Supp.2d 189
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff v. Robert D. HAPP, Defendant
• Court: U.S. District Court — District of Massachusetts

295 F.Supp.2d 189

SECURITIES AND EXCHANGE COMMISSION, Plaintiff v. Robert D. HAPP, Defendant

No. CIV.A. 00-12051-REK.

United States District Court, D. Massachusetts.

November 25, 2003.

COPYRIGHT MATERIAL OMITTED

Gregory S. Gilman, John T. Dugan, Kimberly M. Zimmer, Madeleine McGrath Blake, Martin F. Healey, Sandra J. Bailey, Securities and Exchange Commission, Boston, MA, for Securities and Exchange Commission.

Gary C. Crossen, Rubin & Rudman LLP, Peter M. Casey, Stephen C. Wameck, Foley Hoag LLP, Boston, MA, for Robert D. Happ.

Opinion

KEETON, Senior District Judge.

I. Introduction

This is a civil enforcement proceeding brought by the Securities and Exchange Commission (SEC) against Robert D. Happ. After extensive pretrial proceedings, the case proceeded to jury trial and a special verdict in the form of answers to questions under Rule 49(a) of the Federal Rules of Civil Procedure. After post-verdict motions, filed submissions, and oral argument on October 29, 2003, the case is now before the court for determination of appropriate relief.

For reasons explained in Part II of this Opinion, I allow a defense motion for sanctions because of unwarranted refusal of SEC counsel to accept a proposed stipulation on authenticity of telephone billing records and inappropriate argument by SEC counsel to the jury. I conclude sanctions against SEC in the amount of $87,036.63 to be appropriate.

The part of this sanction that is monetary is included in the Final Judgment as an award in favor of Happ against the SEC. I conclude also, as explained in Parts III-VII of this Opinion, that the appropriate relief for SEC against Happ is a declaratory judgment of violation of SEC insider trading rules and a monetary award (including civil penalty) against the defendant of $85,242.63, plus prejudgment interest.

Rather than a provision for offset in the ordinary sense, I conclude that a form of stay of execution of the judgment in part is appropriate.

II. Defense Motions for Sanctions

A. Unwarranted Refusal to Stipulate to Authenticity of Telephone Records

One of the key allegations in SEC's Amended Complaint in this case is the following:

On Thursday, June 25, 1998, just five days prior to the close of the Third Quarter, [Hanley] telephoned Happ at his [Happ's] Weston, Massachusetts residence and left a voice message for him [Happ]. [Hanley] informed Happ, in that voice message, that he needed to meet with him [Happ] the following Monday or Tuesday to discuss Galileo's Third Quarter difficulties. The CEO [Hanley] attempted to convey in his message to Happ that the difficulties were serious.

Amended Complaint, Docket No. 19 (filed April 6, 2001), ¶ 18.

On August 1, 2002, counsel for Happ took a deposition of Hanley. Hanley testified that he placed the telephone call alleged in paragraph 18 of the Amended Complaint from Hanley's Galileo office telephone in Sturbridge, Massachusetts. Deposition transcript, pages 133-134, attached as Ex. A to Affidavit of Stephen C. Warneck, Docket No. 130.

Itemized telephone bills for a period including June 25 (Thursday), 1999, through June 30 (Tuesday), 1999, were produced by a custodian under subpoena, and became accessible to counsel for SEC as well as counsel for Happ on or before opening statements at trial.

Included in Happ's First Set of Requests for Admissions was Request No. 8 (attached as Ex. B to Warneck affidavit, Docket No. 130): "Hanley did not make a telephone call from Galileo's offices in Sturbridge, Massachusetts to Happ's residence in Weston, Massachusetts, telephone number 781-899-8081, on June 25, 1998." Responding to this request on November 7, 2002, the SEC denied, thus still asserting that Hanley did call Happ's residence from Hanley's Galileo office telephone in Sturbridge on Thursday, June 25, 1998. On September 11, 2003, SEC stipulated to the "authenticity and accuracy" of the telephone records, but not to facts that would support a conclusion of the records' completeness. See Docket No. 130 at ¶ 5. Not until halfway through the trial, when defendants' experts were waiting in the courtroom to testify as to the completeness of the phone records, did SEC stipulate to the fact that "[t]he call did not take place from Mr. Hanley's office on the 25th of June or on the 22nd, 23rd or 24th." Trial Transcript Day 6 (Docket No. 116) at 104.

I conclude that this continuing assertion that Hanley called Happ's residence on Hanley's office telephone on Thursday, June 25, 1998 was unjustified, making it appropriate under Fed.R.Civ.P. 37(c)(2) to award reasonable costs to Happ. Fed. R.Civ.P. 37(c) provides:

If a party fails to admit the genuineness of any document or the truth of any matter as requested under Rule 36, and if the party requesting the admissions thereafter proves the genuineness of the document or the truth of the matter, the requesting party may apply to the court for an order requiring the other party to pay the reasonable expenses incurred in making that proof, including reasonable attorney's fees. The court shall make the order unless it finds that (A) the request was held objectionable..., or (B) the admission sought was of no substantial importance, or (C) the party failing to admit had reasonable ground to believe that the party might prevail on the matter, or (D) there was other good reason for the failure to admit. Here, SEC argues that exceptions (C) and (B) apply, i.e., that it had reasonable grounds to believe that it might prevail, and that in any event, the material was of no substantial importance.

I conclude, first, that SEC had no reasonable ground to believe that it might prevail on this matter. The only basis SEC counsel ever advanced for making this assertion was Hanley's deposition and trial testimony. At trial, Hanley testified:

Q. Now, where were you when you made your call to Mr. Happ?

A. My best memory is that I was in my office.

Q. How certain are you about that memory?

A. My best memory is that I was in my office.

Transcript, Trial Day 2 (Docket No. 112) ("Tr.2") at 65 (emphasis added). Similarly, during his deposition, Hanley testified:

Q. How did you go about initiating that meeting with Mr. Happ?

A. I placed a call to him I believe from my office to ask him if he could come in and meet with myself and Greg Riedel on Monday or Tuesday of the following week.

Q. And you say that was a phone call from your office?

A. I believe so, yes.

Deposition of William T. Hanley (Docket No. 132, ex. B) at 133 (emphasis added). As the emphasis shows, Hanley was equivocal about his testimony regarding the location from which he called Happ. On the other hand, the phone records, introduced in evidence as Trial Exhibit 10, show that no such call was made.

SEC's contrary argument, that deposition testimony showed that the phone records may have been incomplete, is unpersuasive. No deponent testified that the phone records were incomplete. The only deposition testimony was to the effect that the deponent could not be certain the records were complete. Other than Hanley's testimony, SEC advanced no direct or circumstantial evidence upon which a factfinder could permissibly base a finding that the phone records were incomplete, without engaging in speculation. I rule that it was unreasonable for SEC to believe that a jury would credit Hanley's equivocal testimony over the objective phone records produced by Happ.

SEC's refusal to stipulate to the completeness of the phone records at issue is particularly unwarranted in view of the stipulation that SEC did make. On September 11, 2003, SEC stipulated to the "authenticity and accuracy" of the telephone records. SEC refused, however, to stipulate to the fact that Galileo received telephone service from two vendors, AT & T and Bell Atlantic, and refused to stipulate to other features of the telephone system employed at Galileo. Affidavit of Stephen C. Warneck (Docket No. 133, ex. A). This refusal was despite the deposition testimony of an individual with personal knowledge of these facts, and despite the lack of any evidence to the contrary. Id.; see also Deposition of Brian Towns (Docket No. 129, ex. C) at 15 ("I know our long distance carrier was AT & T and that our local carrier, Bell Atlantic, would carry all the local calls").

SEC counsel's actions imposed on Happ and his counsel the necessity, if they wished to assert their rights, of developing for use at trial adequate evidence of completeness. This position of SEC and its counsel was unwarranted and was both a cause in fact and a legal cause of Happ's incurring the fees and expenses he incurred after SEC counsel's refusal to stipulate to authenticity had become unwarranted beyond genuine doubt. This is so because the SEC and its counsel never acknowledged the completeness of the telephone records until a point in trial after the records had been offered and the ruling that would be made by the court had become both certain and apparent.

Also without merit is SEC's argument that the fact was of no substantial importance. The proposition that Hanley called Happ on June 25, 1998, was central to SEC's version of events, as set forth in its court-filed papers through the eve of trial. Happ's demonstration that the call was not made from Galileo's office cast grave doubt on whether the call was made at all, and also could have affected the jury's view of Hanley's credibility. Although the fact was ultimately not dispositive (in view of SEC's eventual stipulation on day six of the trial, and the jury's findings in favor of SEC), the requested stipulation was nonetheless of substantial importance to the preparation of Happ's case. In these circumstances, I rule that SEC must bear the costs Happ incurred in preparing to prove this fact at trial.

I find that the statement of the fees and expenses incurred is correctly recited in the Affidavit of Stephen C. Warneck and other attachments to defendant's Supplemental Submission in Support of...