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SEC v. GULF & WESTERN INDUS.

November 24, 1980

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
GULF & WESTERN INDUSTRIES, INC., Charles G. Bluhdorn, Don F. Gaston, Defendants



The opinion of the court was delivered by: PARKER

MEMORANDUM OPINION

In this proceeding, the Securities and Exchange Commission (SEC or Commission) seeks permanent injunctive relief enjoining Gulf & Western, Inc. (Gulf & Western), its chief executive officer, Charles Bluhdorn, and Don F. Gaston, an executive vice-president from engaging in allegedly fraudulent practices in violation of the federal securities laws. The Commission charges the defendants with violations of the anti-fraud, anti-manipulation and reporting requirements of the securities laws. *fn1" The Commission's 60-page complaint alleges a wide range of violations and charges the defendants with improper financial reporting, false and misleading disclosures and failure to disclose material information concerning the corporation's business operations, financial condition and management activities in filings with the Commission and in documents disseminated to shareholders.

 In response to the complaint, the defendants assert six affirmative defenses which in summary charge the Commission with certain improprieties during the Gulf & Western investigation, a number of equitable defenses and prior acquiescence in the company's accounting methods which are challenged in the complaint. In the first defense, the defendants assert the complaint should be dismissed because of the Commission's alleged improprieties which include: (1) violation of the attorney-client privilege; (2) leaks by the SEC staff to the press during the investigation; (3) misuse of market regulation powers; and (4) interference with defendants' access to witnesses. In three of the defenses, the defendants reallege the facts underlying these claimed abuses and apply various legal principles including: balance of equities, deterrence of future abuses by the SEC, and unclean hands. The fifth defense asserts that the Commission is estopped from challenging accounting principles it previously had approved and the sixth defense charges the Commission with laches and equitable estoppel. The Commission responds that these various defenses are insufficient as a matter of law and have filed a motion to strike. Fed.R.Civ.P. 12(f). Oral arguments on the defendants' motion were considered by the Court on November 10, 1980.

 Motions to strike are not generally favored. 2A Moore Federal Practice P 12.22(1) (2d ed. 1979). If an affirmative defense is sufficient as a matter of law or if it presents substantial questions of fact or law, the motion should be denied. United States v. 416.81 Acres of Land, 514 F.2d 627, 630 (7th Cir. 1975). The prevailing rule was noted in Systems Corp. v. American Telephone & Telegraph Co., 60 F.R.D. 692, 694 (S.D.N.Y.1973):

 
Motions to strike defenses are not favored and will be denied "if the defense is sufficient as a matter of law or if it fairly presents a question of law or fact which the court ought to hear." Before this type of motion can be granted "the Court must be convinced that there are no questions of fact, that any questions of law are clear and not in dispute, and that under no set of circumstances could the defenses succeed." (citations omitted).

 However, in Augustus v. Board of Public Instruction, 306 F.2d 862, 868 (5th Cir. 1962), the court refused to strike a portion of the pleading and made the following analysis:

 
A disputed question of fact cannot be decided on motion to strike. It is true, also, that when there is no showing of prejudicial harm to the moving party, the courts generally are not willing to determine disputed and substantial questions of law upon a motion to strike. Under such circumstances, the court may properly, and we think should, defer action on the motion and leave the sufficiency of the allegations for determination on the merits. (citations omitted)

 The motion should be granted where it is clear that the affirmative defense is irrelevant and frivolous and its removal from the case would avoid wasting unnecessary time and money litigating the invalid defense. SEC v. Weil, (Current)Fed.Sec.L.Rep. (CCH) P 97,541 (M.D.Fla. Feb. 7, 1980); Narragansett Tribe of Indians v. Southern Rhode Island Land Development Corp., 418 F. Supp. 798, 801 (D.R.I.1976). Additionally, defenses which would tend to significantly complicate the litigation are particularly vulnerable to a motion to strike. Louisiana Sulphur Carriers Inc. v. Gulf Resources & Chemical Corp., 53 F.R.D. 458, 460 (D.Del.1971).

 With these standards in mind, the Court has considered the legal memoranda of counsel and their oral argument and concludes that the Commission's motion should be denied as to the allegations of the first defense based on the breach of the attorney-client privilege and matters which defendants claim are directly related thereto. Pending further discovery, that defense may be asserted. The Commission's motion to strike the remaining defenses is granted.

 A.

 First Affirmative Defense

 As noted, the defendants' first affirmative defense is a four prong reference to certain alleged improprieties committed by the Commission during its investigation of the possible securities law infractions by Gulf & Western. Because the investigation was based on the fruits of these alleged violations, the defendants assert that the Commission's complaint should be dismissed. The defendants' oral argument focused on the claimed breach of the attorney-client privilege and the Court is primarily concerned with that claim.

 In Wellman v. Dickinson, 79 F.R.D. 341 (S.D.N.Y.1978), the trial court was faced with a similar situation when the defendants alleged the Commission had committed abuses of a general nature during the investigation. Judge Carter summarized his concerns at page 351 in the following ...


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