Source: https://casetext.com/case/in-re-crazy-eddie-securities-litigation-11
Timestamp: 2020-03-29 19:25:47
Document Index: 506935970

Matched Legal Cases: ['§ 77', '§ 78', '§ 1961', '§ 77', '§ 1962', '§ 1961']

In re Crazy Eddie Securities Litigation, 792 F. Supp. 197 | Casetext Search + Citator
Numerous memoranda and orders of this court have recounted the facts of this litigation. The court assumes…
U.S. ex Rel. Sanders v. Allison Engine Co., Inc.
It applies only to analysis or evaluation, not the facts on which evaluation is based. See In re:Crazy Eddie…
Full title:In re CRAZY EDDIE SECURITIES LITIGATION. Vivian G. BERNSTEIN, as custodian…
792 F. Supp. 197 (E.D.N.Y. 1992)
protecting from discovery an internal review audit in a securities law action based on a self-critical analysis privilege
Sirota Sirota (Howard B. Sirota, of counsel), New York City, for plaintiffs.
Milberg, Weiss, Bershad, Specthrie Lerach (David J. Bershad, Michael C. Spencer, of counsel), Abbey Ellis (Arthur Abbey, of counsel), New York City, for plaintiff John Papastamatakis.
Pomerantz, Levy, Haudek, Block Grossman (Mark I. Gross, of counsel), New York City, for plaintiff Jeffrey Abrams.
Stull, Stull Brody (Jules Brody, of counsel), New York City, for plaintiff Vivian G. Bernstein.
Lowey, Dannenberg, Bemporad, Brachtl Selinger, P.C. (Richard Bemporad, of counsel), New York City, for plaintiff James T. Cain.
Kaufman, Malchman, Kaufman Kirby (Irving Malchman, of counsel), New York City, for plaintiff Stanley Heineman.
Milbank Tweed Hadley McCloy (C. Stephen Howard, Los Angeles, Cal., Susanne Toes, New York City, of counsel), for plaintiff Oppenheimer-Palmieri Fund Ltd.
Tuttle Taylor, Los Angeles, Cal., for plaintiffs Elias Zinn, Victor Palmieri, and Entertainment Marketing, Inc.
Folkenflik McGerity (Max Folkenflik, of counsel), New York City, for plaintiffs Entertainment Marketing Inc. and Elias Zinn.
Shearman Sterling (Joseph McLaughlin, of counsel), New York City, for defendants Peat Marwick Main Co. and KMG Main Hurdman.
Kaye, Scholer, Fierman, Hays Handler (Steven Glassman, of counsel), New York City, for defendant Oppenheimer Co., Inc.
Davis, Markel Edwards (Thomas J. Sweeney, III, of counsel), New York City, for defendant Peat Marwick Main Co.
Weil, Gotshal Manges (Dennis J. Block, of counsel), New York City, for defendants Salomon Bros., Inc., Bear Stearns Co., and Wertheim Schroder Co., Inc.
Wilson Elser Moskowitz Edelman Dicker (Richard Oelsner, of counsel), New York City, for defendants Penn and Horowitz, J. Liebman Co., Gary Perlmutter and Mark Halperin.
Hoffman Pollok, New York City, for defendant Jacob Tambor, Sasson Cohen and Zazy International Corp.
Kronish, Lieb, Weiner Hellman (William O'Brien, Justin N. Feldman, William J. Schwartz, Ivan Kline, of counsel), New York City, for defendant Eddie Antar.
Beldock Levine Hoffman (Brian E. Mass, of counsel), New York City, for defendant Isaac Kairey.
Leader Berkon (Frederick D. Berkon, of counsel), New York City, for defendants Solomon E. Antar, Eddy Antar, Steve Pasquariello, Edmond Levy and Carl G. Zimel.
Friedman Kaplan, New York City, for defendant Eddie Gindi.
Morgan, Lewis Bockius (Kevin T. Rover, of counsel), New York City, for defendant David V. Panoff.
Kelley, Drye Warren (John P. Marshall, of counsel), New York City, for defendant James H. Scott, Jr.
Hellring Lindeman Goldstein Siegal (Stephen L. Dreyfuss, Matthew E. Moloshok, of counsel), Newark, N.J., for defendants Danielle Antar, Deborah Rosen Antar, Gabrielle Antar, Simone Antar, Nicole Antar and Noelle Antar.
Gersten, Savage, Kaplowitz Curtin, New York City, for defendants Michelle Antar, Rose Antar, Rose M. Antar, Rori Antar, Sam A. Antar, Sam M. Antar, Adam Kuszer, Benjamin Kuszer, Ellen Kuszer, Simon Kuszer and Lillian Rosen.
The court assumes familiarity with its previous published memoranda and orders dated December 30, 1988, Bernstein v. Crazy Eddie, Inc., 702 F. Supp. 962 (E.D.N.Y. 1988) (the 1988 Order); June 16, 1989, In re Crazy Eddie Sec. Litig., 714 F. Supp. 1285 (E.D.N.Y. 1989) (the 1989 Order); June 19, 1990, In re Crazy Eddie Sec. Litig., 740 F. Supp. 149 (E.D.N.Y. 1990) (the June 1990 Order); September 19, 1990, In re Crazy Eddie Sec. Litig., 747 F. Supp. 850 (E.D.N.Y. 1990) (the September 1990 Order); and March 6, 1991, In re Crazy Eddie Sec. Litig., 135 F.R.D. 39 (E.D.N.Y. 1991) (the 1991 Order).
The first complaint with which the court dealt was styled "consolidated and amended complaint," Bernstein v. Crazy Eddie, Inc., 87-CV-33, and will be called the First Complaint. It alleged claims by plaintiffs, as purchasers of the common stock of defendant Crazy Eddie, Inc. (Crazy Eddie), against Crazy Eddie and various of its former officers, directors, accountants, and underwriters. That pleading invoked the Securities Act of 1933 (the Securities Act), 15 U.S.C. § 77a et seq. (1982 Supp. IV 1986), the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78a et seq. (1982 Supp. IV 1986), the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. § 1961 et seq. (1982 Supp. IV 1986), and state law.
In substance the allegations were that Crazy Eddie, a New York corporation founded by Eddie Antar and controlled by his family, first sold shares to the public in September 1984. Between that time and November 1987, although not in all cases throughout that period, the individual defendants were its directors or officers. During that period defendant Peat Marwick Main Co. (Peat Marwick) and its predecessor certified the financial statements that Crazy Eddie filed with the Securities and Exchange Commission (SEC) and disseminated to the public.
Crazy Eddie made three public offerings of securities underwritten by defendants Oppenheimer Co. (Oppenheimer), Wertheim Schroder Co. (Wertheim), Bear, Stearns Co. (Bear Stearns) and Salomon Brothers, Inc. (Salomon). Crazy Eddie offered shares of common stock in March of 1985 and 1986, and convertible subordinated debentures in June of 1986.
In 1988 and 1989 three new complaints were filed by purchasers of Crazy Eddie common stock. Krim v. Crazy Eddie, 88-CV-1592; Stepak v. Crazy Eddie, 88-CV-1593; Abrams v. Crazy Eddie, 89-CV-1640. Those complaints alleged claims similar to those stated in the First Complaint.
The next complaint in In re Crazy Eddie Securities Litigation, filed in October 1989, was called "second amended consolidated and supplemental complaint," and will be referred to as the Second Complaint. It was in substantial part identical to the First Complaint, but also dropped Crazy Eddie, then in bankruptcy, as a defendant, added and amended certain claims, and added new defendants, including Penn Horowitz, an accounting firm that performed auditing and other services in the early 1980's, and its successor J. Liebman Co. The Second Complaint also added Schwebel, Krim, Stepak and Abrams as plaintiffs and repleaded the Securities Act, Exchange Act and state law claims based on the debenture offering. In the 1988 Order the court had dismissed these claims because none of the then plaintiffs was a debenture holder. See 702 F. Supp. at 972.
In the September 1990 Order, 747 F. Supp. 850, the court, among other things, dismissed as time-barred the Securities Act claims against the underwriter Oppenheimer based on the Oppenheimer Sales and the claims against Eddy Antar, Zimel, Wertheim, Bear Stearns, Salomon, and Peat Marwick based on the 1986 debenture offering, and dismissed with leave to replead the Exchange Act claims against Penn Horowitz and the RICO claim against Solomon E. Antar.
The most recent case, Crazy Eddie, Inc. v. Peat Marwick Main Co., 92-CV-75, was transferred to this court from the United States Bankruptcy Court for the Southern District of New York, where the Crazy Eddie bankruptcy proceeding is pending. In that action Crazy Eddie as debtor and debtor in possession seeks to recover from its accountant Peat Marwick for fraudulent conveyance, breach of contract and negligence.
II MOTIONS FOR SUMMARY JUDGMENT
Peat Marwick, Wertheim, Bear Stearns, Salomon and Oppenheimer move for partial summary judgment dismissing the claims against them under (1) Sections 11 and 12(2) of the Securities Act, (2) Section 10(b) of the Exchange Act and Rule 10(b)-5 of the rules promulgated thereunder, and (3) principles of common law fraud and negligent misrepresentation.
Section 11 provides in pertinent part that if any part of a registration statement "contain[s] an untrue statement of a material fact or omit[s] to state a material fact required . . . to make the statements therein not misleading," any person acquiring such security may sue every person who was an accountant named as having certified any part of the statement as to which suit is brought, or who was an underwriter with respect to the security. 15 U.S.C. § 77k.
The parties have completed discovery on this issue and the motion is one for summary judgment. To meet their burden, plaintiffs must produce evidence to show that their shares are traceable to the allegedly defective offerings and not to Crazy Eddie's initial public offering or registration-exempt sales made by members of the company's former management pursuant to Rule 144. In other words plaintiffs must show something from which a jury could conclude that they own "new" stock and not "old" stock. See In re LILCO Sec. Litig., 111 F.R.D. 663, 671 (E.D.N.Y. 1986).
"[n]o action shall be maintained to enforce any liability created under [Section 11 or Section 12(2)] unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . ."
In the September 1990 Order the court dismissed with leave to replead Schwebel's Section 11 claim in the Second Complaint because it failed to set forth facts showing why he could not have discovered the false statements as to the debenture offering in November 1987, when the new management of Crazy Eddie announced an estimated inventory shortfall of approximately $45 million. 747 F. Supp. at 856. When defendants filed their motion for summary judgment in July 1990 plaintiffs had not yet repleaded to comply with the court's requirement.
The statute of limitations begins to run when a plaintiff should have discovered the general fraudulent scheme, not when a plaintiff should have known all the details of the alleged fraud. Berry Petroleum Co. v. Adams Peck, 518 F.2d 402, 410 (2d Cir. 1975). Schwebel had such notice as of November 1987. His claims under Sections 11 and 12(2) are time barred, unless as to certain defendants the statute of limitations was tolled by so-called standstill agreements.
Plaintiffs argue that various "standstill agreements" with Oppenheimer, Bear Stearns, Wertheim and Salomon signed by the named plaintiffs in the First Complaint, but not by Schwebel, toll the statute of limitations for his claims. In substance these agreements dismissed certain defendants from the action without prejudice, and recited that in the event those plaintiffs later joined them in the action based on the First Complaint or an amendment to it authorized by the Federal Rules of Civil Procedure, the statute of limitations would be tolled as to those plaintiffs'"claims against [them] set forth in the Consolidated and Amended Complaint [the First Complaint]."
III THE THIRD COMPLAINT AND THE NEW COMPLAINT
Plaintiffs were not entitled to amend the Second Complaint as of right under Federal Rule of Civil Procedure 15, because they already so amended once by filing the Second Complaint which repleaded certain claims with leave of the court but also added new defendants and expanded the class period. See Glaros v. Perse, 628 F.2d 679, 686 (1st Cir. 1980); Rodgers v. Lincoln Towing Service, Inc., 771 F.2d 194, 203-204 (7th Cir. 1985).
Nor did plaintiffs have leave to amend the Second Complaint. The court therefore treats the Third Complaint as without legal effect. See Gaumont v. Warner Bros. Pictures, Inc., 2 F.R.D. 45, 46 (S.D.N.Y. 1941) (amendment to complaint stricken where plaintiff failed to comply with Rule 15(a)); Hoover v. Blue Cross and Blue Shield of Alabama, 855 F.2d 1538, 1544 (11th Cir. 1988).
The court denies plaintiffs' motion to amend to allege the entire Third Complaint nunc pro tunc. Evaluating plaintiffs' proposed amendments under Rule 15(a), the court finds no good reason to allow plaintiffs to add numerous new defendants, some of whom have had to appear pro se, and none of whom appears to have played a significant part in the transactions at issue. Undue delay and undue prejudice to the opposing parties are justifiable reasons to deny leave to amend. U.S. v. Continental Illinois Nat. Bank and Trust Co., 889 F.2d 1248, 1254 (2d Cir. 1989) ( quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)).
Nor will the court allow plaintiffs to consolidate the new action with In re Crazy Eddie Securities Litigation, thereby evading the requirements of Rule 15. See Walton v. Eaton Corp., 563 F.2d 66, 71 (3d Cir. 1977) ( en banc).
Nor will the court permit plaintiffs to amend the Second Complaint at this late date to include Penn Horowitz as a defendant. In September 1990 the court dismissed with leave to replead the Section 10(b) claim against Penn Horowitz for failure to allege fraud with particularity and for failure to state a claim for aider and abettor liability under that statute. As of the date of that order, Penn Horowitz was no longer a party in this action.
The Third Complaint, filed over one year after the order, states new claims against Penn Horowitz for violations of RICO, common law fraud and negligent representation. Penn Horowitz is not named as a defendant in the Exchange Act count but it is mentioned in the allegations under that count.
Because Penn Horowitz will be prejudiced by plaintiffs' unreasonable and unjustifiable delay in repleading the Exchange Act claim, and because the Third Complaint does not fairly alert Penn Horowitz as to whether plaintiffs intended to plead an Exchange Act claim against it, plaintiffs may not amend the Second Complaint to include Penn Horowitz. Plaintiffs may use their New Complaint to raise any claims they have against this defendant.
The court will allow plaintiffs to apply for leave to file a properly pleaded RICO claim against Peat Marwick under 18 U.S.C. § 1962(c), with sufficient and specific allegations of the requisite predicate acts of mail or wire fraud. A RICO claim against Peat Marwick would be insufficient if based on predicate acts of "fraud in the sale of securities," 18 U.S.C. § 1961(1)(D), because Peat Marwick did not engage in the sale of securities. In re Par Pharmaceutical Inc., Sec. Litig., 733 F. Supp. 668, 684 (S.D.N.Y. 1990).
Plaintiffs say they recently discovered new information supporting the RICO claim against Peat Marwick. In their brief they say that depositions of defendants James Scott, Jr. and William Saltzman revealed for the first time that Peat Marwick partner Al Ferrara made what plaintiffs believe are affirmative misrepresentations to the Crazy Eddie Audit Committee of the Board of Directors relating to a purported investigation of transactions by Crazy Eddie. Plaintiffs also say in their brief dated December 13, 1991 that further investigation "within the last month" revealed that Ferrara discovered the fabrication of the product sales by category figures included in the prospectus for the March 1986 offering, but represented to defendants Bear Stearns, Wertheim, and Salomon that those figures were reliable and accurate.
Although Peat Marwick will have to investigate the new fact of knowledge, it will not be unduly prejudiced by the addition of the RICO claim. See Kuczynski v. Ragen Corp., 732 F. Supp. 378, 381-383 (S.D.N.Y. 1989) (permitting addition of RICO claim after discovery had ended); Rodonich v. House Wreckers Union Local 95 of Laborers' International Union of North America, 624 F. Supp. 678, 686 (S.D.N.Y. 1985) (permitting addition of RICO claim on the eve of trial).
Plaintiffs claim to have a good faith basis for their new allegations. They have not presented to the court the basis for their new assertion that Ferrara "actually knew" of the ongoing fraud. But the court may not require them to do more than meet the pleading requirements under the rules of procedure. See Mountain View Pharmacy v. Abbott Laboratories, 630 F.2d 1383, 1385-86 (10th Cir. 1980). Peat Marwick may move to dismiss or for summary judgment if appropriate.
IV OBJECTIONS TO DISCOVERY ORDER
A "privilege of self-critical analysis" or a "self-evaluative privilege" serves the public interest by encouraging self-improvement through uninhibited self-analysis and evaluation. Lasky v. American Broadcasting Cos., Inc., 5 Fed.R.Serv.3d 1366, 1986 WL 9223 (S.D.N.Y. 1986) (recognizing self-evaluative privilege in cases of violations of securities laws, medical malpractice, violations of civil rights and libel); New York Stock Exchange, Inc. v. Sloan, 22 Fed.R.Serv.2d 500 (S.D.N.Y. 1976).
The privilege is not absolute. It applies only to the analysis or evaluation itself, not to the facts upon which the evaluation is based, see Burka v. New York City Transit Authority, 110 F.R.D. 660, 667 (S.D.N.Y. 1986) (discussing government's deliberative privilege), and must be balanced against the party's need for discovery fully and fairly to determine the issues. Lasky, supra; Gray v. Board of Higher Education of the City of New York, 692 F.2d 901, 904-906 (2d Cir. 1982).
Peat Marwick asserts that production of the materials would chill its attempt to monitor the quality of its work. The court is somewhat skeptical of a claim of a chilling effect, King v. Conde, 121 F.R.D. 180, 192-193 (E.D.N.Y. 1988), but it is not without weight.