S.E.C. v. Treadway

• Decision Date: 04 January 2005
• Docket Number: No. 04 Civ. 3464(VM).,04 Civ. 3464(VM).
• Citation: 354 F.Supp.2d 311
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Stephen J. TREADWAY and Kenneth W. Corba, Defendants.
• Court: U.S. District Court — Southern District of New York

354 F.Supp.2d 311

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Stephen J. TREADWAY and Kenneth W. Corba, Defendants.

No. 04 Civ. 3464(VM).

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

January 4, 2005.

Dorothy Heyll, New York City, Nicolas Morgan, Los Angeles, CA, Rachel Lois Izower, New York City, for Plaintiff.

Alan Levine, Kronish Lieb Weiner & Hellman, L.L.P., Richard Mark Strassberg, Goodwin Procter LLP, New York City, for Defendants.

DECISION AND ORDER

MARRERO, District Judge.

The Court now has before it two motions filed by defendants Stephen J. Treadway ("Treadway") and Kenneth W. Corba ("Corba"). Treadway has filed a motion for reconsideration of the Court's Decision and Order dated October 22, 2004, and reported as SEC v. Pimco Advisors Fund Management LLC, 341 F.Supp.2d 454 (S.D.N.Y.2004) (hereinafter, "Pimco I") which denied in its entirety Treadway's motion to dismiss the Securities and Exchange Commission's ("SEC's") Complaint alleging that he violated various federal securities laws and regulations promulgated thereunder. Corba has filed a motion to dismiss portions of the First Amended Complaint filed by the SEC on November 10, 2004 ("Amended Complaint"), which attempts to correct deficiencies in certain of the claims the SEC made against him that were identified by the Court in Pimco I.

For reasons discussed below, both Treadway's and Corba's motions are denied in their entirety.

I. TREADWAY'S MOTION FOR RECONSIDERATION

Reconsideration of a court's previous order is an "extraordinary remedy to be employed sparingly in the interests of finality and conservation of scarce judicial resources." Schaffer ex rel. Lasersight, Inc. v. CC Investments, LDC, 99 Civ. 2821, 2003 WL 22480052 at *1 (S.D.N.Y. Oct. 31, 2003) (quoting In re Health Management Sys. Inc. Secs. Litig., 113 F.Supp.2d 613, 614 (S.D.N.Y.2000)). Under Local Civil Rule 6.3, in order to prevail on a motion for reconsideration, a moving party must demonstrate that the court overlooked controlling law or a factual matter that might reasonably be expected to have altered the court's decision. See id.; Shamis v. Ambassador Factors Corp., 187 F.R.D. 148, 151 (S.D.N.Y.1999). "The decision to grant or deny a motion for reargument is within the sound discretion of the district court." Shamis, 187 F.R.D. at 151.

Treadway's motion for reconsideration argues that Pimco I overlooked the original Complaint's lack of any specific factual allegations that Treadway was aware of the investment of "sticky assets," i.e., long-term investments of capital, by Canary Capital Partners LLC ("Canary"), at the time he allegedly authorized Canary to engage in market timing activities in certain funds within the PIMCO Funds: Multimanager Series collection of mutual funds ("PIMCO Funds"). According to the motion, the Court's purported failure to consider that Treadway was not alleged to have been aware of Canary's placement of sticky assets in the PIMCO Funds rendered suspect the Court's decision that the Complaint adequately alleged Treadway's violation of Section 36(a) of the Investment Company Act, which subjects those who engage in acts or practices "constituting a breach of fiduciary duty involving personal misconduct," 15 U.S.C. § 80a-35(a), to severe sanctions. (See Defendant Stephen J. Treadway's Brief in Support of his Motion for Reconsideration, dated Nov. 10, 2004 ("Treadway Br.") at 1-2.) Those sanctions may include a permanent injunction barring a violator of Section 36(a) from working in many facets of the national securities industry.

The Court finds Treadway's motion wholly without merit. As the SEC points out in opposition to Treadway's motion, the Court specifically considered and rejected Treadway's argument that the Complaint does not adequately allege Treadway's "full knowledge of the Canary relationship," including Treadway's knowledge that Canary had agreed to place sticky assets in certain of the PIMCO Funds in exchange for market timing capacity. See Pimco I, 341 F.Supp.2d at 465-66; id. at 471 (rejecting Treadway's argument that the Complaint fails to allege his full knowledge of the nature of the Canary relationship in sustaining the Section 36(a) claim against him). The Court found in Pimco I that Treadway's knowledge of Canary's placement of sticky assets in certain PIMCO Funds could be inferred from the Complaint's references to Treadway's alleged conversations with Corba about the Canary relationship. Furthermore Treadway's knowledge of specific benefits arising out of the Canary-PIMCO relationship provides a motive for Treadway's alleged authorization for Canary to continue to engage in undisclosed market timing activities even after he was aware of their detrimental effects. Whether these allegations may be proven by admissible evidence is a matter appropriately addressed at a later stage of the proceedings.

The Court also concludes that Treadway may be found liable for violation of Section 36(a) even if he lacked specific knowledge of the sticky asset agreement at the time he allegedly authorized Canary to engage in undisclosed, detrimental market timing activities. In his motion, Treadway acknowledges that the Complaint alleges Treadway's interest in "forming a relationship with a wealthy and reputable family" (Treadway Br. at 4), i.e. the Stern family, which owned Canary, at the time he allegedly approved Canary's undisclosed market timing activities. A factfinder could reasonably conclude that Treadway's desire to form a relationship with Canary, a wealthy and powerful investor, led him to violate his fiduciary duty towards other PIMCO Funds investors by placing Canary's interests over the interests of those who were unaware of the existence of the Canary relationship, and its potential detrimental effects on the PIMCO Funds, at the time they purchased or sold affected fund shares. Treadway's own brief acknowledges that putting some investors' interests ahead of others constitutes an accepted breach of fiduciary duty (see Treadway Br. at 7 ("By putting some investors' interests ahead of others', late-trading also exemplifies a breach of an accepted fiduciary duty.")); he fails to recognize, however, that the SEC's Complaint accuses him of engaging in analogous activities.

It may well be, as Treadway alleges in his motion, that Treadway's market timing-related activities were less egregious than those of other mutual fund executives who entered into undisclosed relationships with Canary or other market timing firms, authorized or engaged in late trading activities, and/or shared or personally benefited from disclosure of nonpublic information concerning the composition of mutual fund portfolios. If Treadway nonetheless personally committed securities fraud, regardless of how "minimal" the fraud may have been when compared to other wrongdoers in the industry, a factfinder may reasonably conclude that the fraud constituted a breach of fiduciary duty involving personal misconduct within the meaning of Section 36(a). The extent to which Treadway breached his fiduciary duties towards investors would go to the issue of Treadway's appropriate punishment for violating Section 36(a), rather than his exposure to liability under that section. See 15 U.S.C. § 80a-35(a) (authorizing the Court, if a person is found to have violated Section 36(a), to "award such injunctive or other relief against such person as may be reasonable and appropriate in the circumstances").

II. CORBA'S MOTION TO DISMISS

In his motion, Corba argues that the portions of the Amended Complaint charging him with primary violations of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, or Section 34(b) of the Investment Company Act of 1940, 14 U.S.C. § 80a-33(b), and Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), must be dismissed. According to Corba, the Amended Complaint fails to address flaws in the original Complaint that led the Court to dismiss the SEC's claims against him for primary violations of Section 10(b) and Rule 10b-5 thereunder, as well as Section 34(b). Further, Corba argues, the Amended Complaint no longer contains the factual allegations that led the Court to conclude that violations of Section 17(a) were adequately pled. These arguments are not without force, but cannot prevail under the legal standards established by the Second Circuit and articulated by the Court's Decision and Order.

Corba correctly notes that the original Complaint failed to allege facts sufficient to subject him to primary liability under Section 10(b) and Rule 10b-5 thereunder, or Section 34(b). (See Memorandum of Kenneth W. Corba in Support of His Motion to Dismiss the First Amended Complaint, dated Nov. 24, 2004 ("Corba Mem. of Law") at 1-2.) Pimco I found that the original Complaint failed to charge Corba with the personal involvement in drafting or communicating the allegedly fraudulent statements, which were contained within the PIMCO Funds' prospectuses, necessary for him to be exposed to primary liability under these sections. See Pimco I, 341 F.Supp.2d at 466-67.

Pimco I relied on two Second Circuit decisions to explain why the original Complaint failed to charge Corba with primary liability for material misrepresentations or omissions under Sections 10(a), Rule 10b-5, and Section 34(b).¹ As discussed in Pimco I, a defendant ordinarily "must actually make a false or misleading statement in order to be held [primarily] liable under Section 10(b). Anything short of such conduct is merely aiding and abetting, and no matter how substantial that aid may be, it is not enough to trigger primary liability under Section 10(b)." Id. at 466 (quoting Wright v. Ernst & Young LLP, 152 F.3d 169, 175 (2d Cir.1998)).² But in a subsequent case, the Second Circuit concluded that an executive with Scholastic Corp. who was not specifically identified as communicating allegedly fraudulent...