Wagner v. Lehman Bros. Kuhn Loeb Inc., 83 C 509.

• Decision Date: 19 June 1986
• Docket Number: No. 83 C 509.,83 C 509.
• Citation: 646 F. Supp. 643
• Court: U.S. District Court — Northern District of Illinois
• Parties: Francis H. WAGNER, Plaintiff, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED and Stuart Travis, Defendants.

646 F. Supp. 643

Francis H. WAGNER, Plaintiff, v. LEHMAN BROTHERS KUHN LOEB INCORPORATED and Stuart Travis, Defendants.

No. 83 C 509.

United States District Court, N.D. Illinois, E.D.

June 19, 1986.

Steven P. Gomberg, Ronald P. Kane, Siegan, Barbakoff, Gomberg & Gordon, Ltd., Chicago, Ill., for plaintiff.

Michael W. Coffield, David L. Carden, Coffield, Ungaretti, Harris & Slavin, Chicago, Ill., for defendant Shearson Lehman Brothers/American Exp.

Richard J. Hoskins, Schiff, Hardin & Waite, Chicago, Ill., and Alan Kahn, Ralph Hochberg, Kahn & Hochberg, New York City, for Stuart Travis.

MEMORANDUM OPINION AND ORDER

ROVNER, District Judge.

This case is a securities action filed on January 29, 1983 by plaintiff Francis H. Wagner ("Wagner") as a putative class representative against defendant Shearson Lehman Brothers, Inc. ("Lehman") and defendant Stuart Travis ("Travis") to recover losses incurred while Travis was employed by Lehman as a registered representative and while he acted as a broker for Wagner. Wagner's complaint alleges that Travis churned his customers' accounts at Lehman to generate commissions and purchased securities on their behalf without consideration for their investment objectives and financial resources. Lehman allegedly either participated in, knew, or should have known of Travis's conduct but failed to supervise him properly. Wagner asserts that this conduct by Travis and Lehman violated Sections 10(b) and 20 of the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, Commission Rule 10b-5, 17 C.F.R. § 240.10b-5, and the Racketeer Influenced Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1964. He also asserts pendent state claims of fraud and breach of fiduciary duty. Wagner's claims against Travis and Lehman are brought on his own behalf and as representative of the putative class of former Lehman customers whose accounts were handled by Travis while he was employed at Lehman from 1971 through 1982.

A flurry of motions were filed after the complaint, including a motion for class certification, two motions to disqualify plaintiff's counsel, a motion to substitute the executor of Wagner's estate as the class representative after Wagner's death, a motion to dismiss the complaint for Rule 11 violations, and a motion to impose Rule 11 sanctions against Lehman for filing one of the motions to disqualify counsel. The two motions to disqualify plaintiff's counsel are based on separate and independent facts. On May 2, 1983, Lehman filed its Motion to Dismiss and Disqualify Plaintiff's Counsel on the grounds that this action was improperly brought based upon information gained by Wagner and his counsel, Steven Gomberg ("Gomberg"), from Travis in return for a false promise of payment of money. On May 13, 1985, Lehman filed its Motion to Disqualify Plaintiff's Counsel based on: (1) the conflict of interest existing in the representation of plaintiff by his counsel, Ronald Kane ("Kane"), given Kane's substantial responsibility while employed by the Securities and Exchange Commission ("the SEC") for an investigation of defendants concerning Wagner's claims conducted by the SEC; and (2) the impropriety of Kane's conduct in contacting employees of the SEC, after he left its employ and appeared as plaintiff's counsel in this action, in an attempt to persuade the Commission to initiate an investigation of defendants. An evidentiary hearing was conducted from December 10 to December 16, 1985. Following the evidentiary hearing, the parties were instructed to prepare Proposed Findings of Fact and Conclusions of Law and to brief the motions. For the reasons stated below, this Court has decided to: grant the motions to disqualify plaintiff's counsel, Gomberg, Kane, and their law firm; deny the motion for class certification; deny the motion to substitute Lee Barbakoff, the executor of Wagner's estate, as the class representative; deny plaintiff's Rule 11 motion for sanctions; and deny the Rule 11 motion to dismiss the complaint.

FACTS¹

I. Genesis of this Lawsuit — Travis's Taped Statements.²

Approximately 18 months after he had closed his account with Lehman, on November 22, 1982, Wagner received a telephone call from Travis. Travis proposed that Wagner could recover the losses he had sustained in his account, allegedly in excess of $1.2 million, by suing Lehman for "misinformation, mismanagement and churning." (Wagner Dep. at 6-9.) Travis stated that he would give testimony to support those claims in exchange for 15 to 20 percent of any sum ultimately recovered by Wagner from Lehman. He further stated that no one was to know about their proposed financial arrangement and that if asked about it, he would lie. Travis indicated to Wagner during this conversation that he was emotionally depressed, that he was "finished" in the brokerage business, and that he was in dire financial straits. (Wagner Dep. at 10.) On November 23, 1982, the next day, Wagner contacted his attorney, Steven Gomberg of the law firm of Siegan, Barbakoff, Gomberg, Gordan & Elden, Ltd. ("the Siegan, Barbakoff firm"). Gomberg told Wagner to prepare notes of his conversations with Travis and to gather his trading records with Lehman.

Wagner was a self-made millionaire who invested extensively in the stock market. He began investing in stock in 1967. He engaged in a wide variety of securities transactions with numerous brokerage companies, sometimes simultaneously, and he monitored all of his transactions carefully. Travis was employed by Lehman from December, 1970 to February, 1982. Travis first contacted Wagner by phone in October, 1975, and as a result of that contact, Wagner opened two accounts with Lehman, a cash and margin account and an option account. On his New Account Form, Wagner indicated that at that time he had a net worth of $5 million and a portfolio valued at $4 million.

Wagner maintained his accounts with Lehman until April, 1981. During that time he purchased the securities of more than 60 corporations and traded heavily in more than 70 options. He profited by approximately $516,944 in his stock transactions, but he lost approximately $1,132,887 in his options trading. Wagner testified at his deposition that he had no personal knowledge of any wrongdoing by Lehman other than what Travis had told him.

Two days after the November 22, 1982 conversation, Travis called Wagner again to see whether Wagner had "started proceedings." (Wagner Dep. at 27-29.) Travis told Wagner that Lehman knew he was a "pathological compulsive gambler" before he started trading for Wagner and had sent Travis to a psychiatrist. (Wagner Dep. at 29-32.) When Travis learned that no lawsuit had yet been filed, he again told Wagner to sue Lehman. In this conversation, Travis suggested that Wagner and his attorney should come to New York where Travis would go over "everything" and would "testify" on his behalf. (Wagner Dep. at 32; Wagner's notes at 5.)³ Travis told Wagner that if asked his reasons for this testimony, he would:

... answer by saying that he wants to do one last good favor for me. He will also say that he has remorse, wants to repent, and ... a born again Christian.

(Exhibit I at 6.) In this second telephone conversation, Travis for the first time asked Wagner for an immediate payment of $20,000 to "hold him over." (Wagner Dep. at 33.) Wagner's response to this immediate request for funds was "to give the impression that I would do everything in my power to help him —." (Wagner Dep. at 34.) Accordingly, Wagner told Travis that he would "try to raise the money for him." (Wagner Dep. at 35.) Travis then stated that when the suit was settled, he wanted Wagner to give the money to his wife, and Wagner and Travis discussed how this could be done "without raising suspicion." (Exhibit I at 6.)

Following his conversations with Travis, Wagner and Gomberg met with a representative of the United States Attorney's office in Chicago, to whom they conveyed the Travis story. Wagner was then referred to the United States Attorney's office in New York, where Travis resided. Wagner and Gomberg met with an Assistant United States Attorney and an FBI agent in New York on December 2, 1982, at which time the Assistant and the FBI agent proposed that Wagner wear a concealed recording device to meet with Travis. Wagner agreed to this proposal. During this meeting, Wagner requested an opinion as to whether anything he was doing was illegal. The Assistant United States Attorney assured Wagner that it was not.

Accordingly, Wagner and Gomberg met with Travis at his home on December 3, 1982. As noted above, prior to this meeting, Wagner had a recording device affixed to his body by two FBI agents. Upon his arrival at the Travis home, Gomberg absented himself from the room. (FBI Transcript at 13.)⁴ Wagner then confirmed with Travis the "payment" arrangements they had previously discussed. Although Wagner apparently had no intention of paying Travis any money, he did attempt to induce testimony favorable to his case. Thus, the following exchange took place:

Wagner: ... our understanding now is the fact that we get this thing going — I'll definitely take care of you on this one.

* * * * * *

Travis: I don't know if I can make it — I got $400 left.

Wagner: Now listen, I'm working on this 20 grand.

Travis: I don't need twenty, I need ten. I haven't paid my f_____ bills for two months, so I can hang, pal. But, if I can't have it in six months, Frank, I'll sign you a note for that. Trust me.

Wagner: I trust you. I trust you.

(Exhibit J at 14, 16.) Once this arrangement was confirmed, Travis proceeded to talk with Wagner and his attorney about his alleged mismanagement of his customers' accounts.

Partway through the December 3 meeting, Gomberg persuaded Travis to permit an open tape recording of the proceedings. Travis consented to this "open" tape only after Gomberg promised that he would not "use that tape in court" and that Gomberg would...