Sarlie v. EL Bruce Co., 63 Civ. 1599.

• Decision Date: 01 March 1967
• Docket Number: No. 63 Civ. 1599.,63 Civ. 1599.
• Citation: 265 F. Supp. 371
• Parties: Jacques SARLIE, Plaintiff, v. E. L. BRUCE CO. (Incorporated), and Edward M. Gilbert, Defendants.
• Court: U.S. District Court — Southern District of New York

265 F. Supp. 371

Jacques SARLIE, Plaintiff, v. E. L. BRUCE CO. (Incorporated), and Edward M. Gilbert, Defendants.

No. 63 Civ. 1599.

United States District Court S. D. New York.

March 1, 1967.

Poletti, Freidin, Prashker, Feldman & Gartner, by Robert M. Haft, New York City, for Jacques Sarlie.

Arnold Bauman, New York City, for defendant Gilbert.

Webster, Sheffield, Fleischmann, Hitchcock & Chrystie, by Thomas Field and John I. Boswell, New York City, for E. L. Bruce Co.

CANNELLA, District Judge.

Damages awarded after inquest as follows: Bruce is awarded damages with respect to the First Counterclaim in the amount of $327,476.97, together with 6% interest per annum from July 11, 1962, and, with respect to the Amended Second and Third Counterclaims, the sum of $500,000, together with interest at 6% from June 7, 1962.

On May 31, 1963, Jacques Sarlie instituted suit against the E. L. Bruce Company hereinafter referred to as "Bruce" and Edward M. Gilbert, the former president of Bruce,¹ charging violations of the federal securities laws and seeking thereby to recover $2,000,000, with interest, in damages.

Sarlie's complaint alleged five causes of action. Firstly, it charged Bruce and Gilbert, jointly and severally, with violations of Section 10(b)² of the Securities Exchange Act of 1934 hereinafter referred to as the "Exchange Act" and Rule 10(b) (5)³ of the Securities and Exchange Commission, in that the defendants made certain false statements and omitted to state other material facts in connection with the sale of Bruce stock by Gilbert to Sarlie to the latter's damage.

The second cause of action, brought solely against Gilbert, alleged violations of Sections 12(2)⁴ and 17(a)⁵ of the Securities Act by reason of Gilbert's false statements and omissions of material facts as well as his failure to file an effective registration statement for the Bruce stock which had been sold.

Thirdly, Sarlie alleged a conspiracy between Bruce, Gilbert and others by whom false statements were made and material facts omitted in connection with the sale of Bruce stock by Gilbert to Sarlie.

The fourth cause of action, based upon the deceptive practices alleged in the other causes of action, alleged a common law fraud against Bruce and Gilbert.

The fifth cause of action was brought against Bruce and sought indemnification for Sarlie in an action by McDonnell and Company, a registered stock brokerdealer, against Sarlie for monies alleged to be due to McDonnell by reason of Sarlie's purchases of Bruce stock from McDonnell.

Gilbert, in an answer filed on July 9, 1963, entered a general denial to Sarlie's complaint.

Bruce, in turn, filed an answer on July 19, 1963, generally denying the allegations of the complaint and raising as an affirmative defense the fact that Sarlie had engaged in a series of transactions for the purpose of pegging, fixing or stabilizing the price of Bruce stock in contravention of Sections 9(a)⁶ and 10(b)⁷ of the Exchange Act, along with the Rules of the S.E.C. promulgated thereunder, and Sections 5⁸ and 17(a)⁹ of the Securities Act of 1933.

In addition, Bruce alleged three counterclaims.

The first charged Sarlie with the unlawful manipulation in the stock of the Celotex Company hereinafter referred to as "Celotex", in violation of Sections 9(a) and 10(b) of the Exchange Act.

The second counterclaim alleged that Gilbert, acting for himself and not in his capacity as Bruce's president, entered into unlawful transactions and agreements with Sarlie by which Gilbert, without authority, misappropriated Bruce funds and passed a substantial portion thereof to Sarlie. The third counterclaim alleged that Sarlie knew, or should have known, that the sums withdrawn by Gilbert from Bruce were monies to which Gilbert was not entitled.

Each counterclaim was held legally sufficient by Judge Murphy on May 10, 1966.¹⁰

In July of 1963 the deposition of Sarlie was noticed to be taken. It is clear that the deposition of Sarlie is essential for the proper presentation of Bruce's case. The commencement of the examination was adjourned several times and did not actually commence until December 6, 1963. After that date it was adjourned repeatedly, generally at the request of Sarlie, and, ultimately, was not completed.

On the fifteenth day of December, 1965, the examination of Sarlie by Bruce had been noticed to be continued. Upon service of this notice Sarlie moved pursuant to Fed.R.Civ.P. 30(b)¹¹ for a protective order directing that the remainder of his examination be taken by written interrogatories or, if taken orally, that this be done at Paris, France, his then alleged place of residence. As a third alternative it was suggested that the examination be postponed until shortly before the trial.

In response to Sarlie's motion, Bruce moved, by motion filed January 31, 1966, pursuant to Fed.R.Civ.P. 37(d)¹² to dismiss the complaint because of Sarlie's alleged wilful failure to complete his deposition. Alternatively, it was suggested that Sarlie be ordered to appear at the Southern District Courthouse for the continuation and completion of his examination.

By a written memorandum filed March 16, 1966, Judge McGohey disposed of both motions.

Regarding Sarlie's motion, it was, in all respects, denied.

With respect to Bruce's motion to dismiss the complaint, it was denied but without prejudice to renewal if, in the opinion of Bruce's counsel, Sarlie's future conduct made such a course advisable. Further, Sarlie was directed to "appear within twenty days from the date of the memorandum or on such other date as counsel may agree upon, for the continuation of his deposition at the Southern District Courthouse, and the deposition was to continue there from day to day until completed."

The twenty day period provided for in the aforesaid order expired on April 5, 1966. At that time Sarlie had failed to appear for the continuation of the examination. It was clear that the failure of Sarlie to appear within the designated time was the result of a clear and studied determination by Sarlie after all efforts to continue to postpone the deposition of Sarlie had failed.

Thereafter, on April 12, 1966, Bruce filed a renewed motion for an order pursuant to Fed.R.Civ.P. 37(d) based on Sarlie's wilful failure to comply with the March 16, 1966 order of Judge McGohey. By his motion, Bruce again sought a dismissal of Sarlie's action against Bruce, the entry of a default judgment against Sarlie and in favor of Bruce on the latter's counterclaims and an award of cost and disbursements together with interest from June 12, 1962.

By memorandum filed May 10, 1966, Judge Murphy granted Bruce's renewed motion in all respects.¹³ Thereafter, on May 26, 1966, Judge Murphy entered an order directing that, inter alia, the amount of Bruce's damages were to be determined by the court upon a hearing and that a judgment was to be entered in favor of Bruce in the amount as determined at the aforesaid hearing.

Pursuant to Judge Murphy's order, on October 10, 11, and 13, 1966, a hearing in the nature of an inquest for damages was held by this court. During this hearing both Bruce and Sarlie appeared through counsel, questioned witnesses, made oral argument and submitted trial memoranda. At the conclusion of the hearing each side was directed to submit proposed findings of fact and conclusions of law to the court.¹⁴

Before passing upon the respective arguments of opposing counsel, in the interest of clarity the factual background upon which the counterclaims rest, follows.

The First Counterclaim

With an eye toward ultimately gaining control of the Celotex Corporation, in the period extending from March 6, 1962 until June 4, 1962, Bruce purchased through the New York Stock Exchange a total of 60,900¹⁵ shares of Celotex securities.

The purchase price of 60,800 shares ranged from a high of 41 and ½ on March 6, 1962, to a low on June 4, 1962, of 24 and ½. See Exhibit C. Of these 60,800 shares, all but 1300 shares were purchased at prices exceeding $30 per share. See Exhibit C. The aggregate purchase price for this block of stock was $2,172,050.97. Additionally, on April 19, 1962, Bruce purchased 100 shares from one Seymour Kalb for $3,132. See Exhibit MM.

On July 11, 1962, Bruce sold the entire block of 60,900 shares of Celotex for $1,827,000, based on a sales price of $30 per share. See Exhibit D.

Concededly, by his default, Sarlie has admitted that he participated in a manipulation of the stock market with respect to Celotex shares, that his acts violated Sections 9(a) and 10(b) of the Exchange Act, that Bruce purchased Celotex shares in the period from March 6, 1962 through June 4, 1962, and that the prices at which Bruce purchased the Celotex shares were affected by the plaintiff's manipulations thereof.

Notwithstanding this, argues Sarlie, by means of its pleaded formula Bruce must nevertheless prove the exact amount of damages incurred by Bruce as a result of the manipulation. That is, Bruce must prove the difference between the prices at which it purchased the stock and the prices at which it would have purchased the stock in an unmanipulated market, for this, reasons Sarlie, is the theory advanced by Bruce in his counterclaim and, pursuant to Fed.R. Civ.P. 54(c),¹⁶ must be the theory which the court applies in awarding damages upon this default.

In support of its position Sarlie also cites several cases for the proposition that the theory for the computation of damages cannot be changed after a default.¹⁷

For its part, counsel for Bruce concedes that the formula suggested in its counterclaim normally would be the appropriate measure for the computation of damages. But its application in this proceeding, argues Bruce, would be impossible for Sarlie, by reason of his default in pretrial discovery, has effectively prevented Bruce from ascertaining the true extent of the manipulation which the Celotex securities underwent. Under such...