MEMORANDUM OPINION AND ORDER
ROYCE C. LAMBERTH, UNITED STATES DISTRICT JUDGE
Plaintiff Securities and Exchange Commission in this case seeks permanent injunctive relief against defendant Leonard Levy
for his alleged violations of section 13(d)(1) of the Securities Exchange Act of 1934 (hereinafter the "Exchange Act") and Rules 13d-1 and 13d-2 promulgated pursuant to that section, of section 13(d)(3) of the Exchange Act and Rule 13d-5(b)(1) promulgated thereunder, as well as section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In its motion for summary judgment, the plaintiff Securities and Exchange Commission (hereinafter "SEC") requests summary judgment in its favor as to all of these alleged violations of the Exchange Act. Moreover, plaintiff seeks sanctions against defendant pursuant to Rule 37 of the Federal Rules of Civil Procedure for defendant's alleged failure to make himself available for a properly noticed deposition, and for defendant's alleged failure to comply with an order of this court granting plaintiff's motion to compel defendant to produce certain documents. Defendant has opposed plaintiff's motions for summary judgment and for sanctions. Moreover, defendant has moved to extend the time period for discovery,
to compel the plaintiff to produce certain documents requested in his document request, to dismiss the plaintiff's complaint, and for sanctions pursuant to Rule 11 of the Federal Rules of Civil Procedure. A hearing was held on all outstanding motions on January 11, 1989 at which the court heard the arguments by counsel for the plaintiff as well as by defendant pro se.3 The court at the hearing took under submission the motions addressed in this memorandum opinion and order. After setting out the material facts about which there is no genuine dispute between the parties, the court shall address the discovery-related motions submitted by both parties before addressing plaintiff's motion for summary judgment.
Summary Judgment is appropriate only if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Accordingly, for the purposes of plaintiff's motion for summary judgment, the defendant "enjoys the benefit of all favorable inferences from the evidence proffered . . . and the facts offered by the [defendant] if adequately buttressed by evidentiary material, are to be taken as true." Abraham v. Graphic Arts International Union 212 U.S. App. D.C. 412, 660 F.2d 811, 814 (D.C. Cir. 1981). Moreover, pursuant to local rule 108(h), the court shall "assume that all facts identified by the [plaintiff] in its statement of material facts are admitted [by defendant], unless such a fact is controverted in the statement of genuine issues filed in opposition to the motion."
Rule 108(h), Rules of the United States District Court for the District of Columbia.
This case grows out of defendant's initially successful but ultimately tragic attempt to wrest control of Information Displays, Inc. (hereinafter "IDI"), a Delaware corporation whose principal place of business is Armonk, New York. Before its demise in May of 1984, IDI manufactured, marketed, and serviced computer-based interactive graphics systems. IDI's common stock is registered with the SEC pursuant to section 12(g) of the Exchange Act. At times relevant to the issues addressed in this memorandum opinion, its common stock was traded over-the-counter and was listed on the National Association of Securities Dealers Automated Quotation System. Defendant began to make substantial purchases of IDI stock in October of 1983, and by March of 1984 defendant had acquired a controlling interest in IDI. All of plaintiff's claims against defendant relate to defendant's purchases of IDI stock; more specifically, they relate directly to alleged inaccuracies in the schedules defendant was required to file with the SEC pursuant to section 13(d) of the Exchange Act.
Defendant's purchases of IDI stock were financed largely through a series of loans granted him by the National Bank of Carmel (hereinafter "NBC").
NBC was organized as a national banking association in 1980, and became a subsidiary of the Carmel Bancorporation (hereinafter "CBC") on August 8, 1983 when CBC acquired NBC by issuing stock previously registered with the SEC in exchange for 100% of the outstanding shares of NBC. CBC registered and sold a secondary offering of common stock in the first quarter of 1984. Defendant's relationship with NBC was primarily through two of its officers, who are also defendants in this matter: Robert Boynton and Richard Fritz. Boynton was president, chief executive officer and a director of CBC, and executive vice president, cashier, and director of NBC. Fritz was vice president and secretary of CBC, and senior vice president and loan administrator for NBC.
Defendant's business relationship with NBC began when defendant completed an application for a $ 500,000 line-of-credit from NBC in the name of Jarnel Financial Services, Ltd., an entity owned by defendant and his wife; NBC's loan committee approved this initial $ 500,000 line-of-credit on October 5, 1983. Defendant applied for this first loan in connection with his participation in the financing of a real estate development project, not expressly in connection with his purchases of IDI stock, although he had also begun purchasing IDI shares in October of 1983. In November or December of 1983, defendant first discussed with Boynton and Fritz the possibility of borrowing money from NBC for the purpose of purchasing IDI stock. In January of 1984, Boynton and/or Fritz agreed to advance defendant additional funds in connection with his purchases of IDI stock. There was never any agreement to lend defendant a specific amount of money in total, and the loans were made piecemeal through the issuance of a series of short-term notes; total disbursements to defendant ultimately exceeded $ 8 million. Defendant used most of this $ 8 million,
traditional margin loans taken out with the stock brokerage firms through which he was purchasing IDI stock, as well as a proportionately small amount (about $ 100,000) of personal funds to finance his purchases of IDI stock. Aware that he would have to file a schedule pursuant to section 13(d) of the Exchange Act once he had acquired 5% of the outstanding shares of IDI, defendant hired Sam Frabizzio, a Delaware attorney, to assist him in preparing the required Schedule 13D. Defendant accordingly filed his first Schedule 13D on January 31, 1984. In this first schedule, in relevant part he reported that the source of his funds used for purchasing IDI stock was "personal funds," and he did not report that he had any contracts, arrangements, or understandings with any other person within the meaning of section 13(d)(1)(E) of the Exchange Act, or that he was a member of a "group" sharing a common objective with respect to the purchase of IDI stock within the meaning of sections 13(d)(3) of the Exchange Act. Subsequent to the filing of his first schedule 13(d), defendant retained the firm of Holtzmann Wise & Shepard (hereinafter "HWS") to represent him in his purchases of IDI stock. The parties dispute whether defendant's principal attorneys at HWS -- Arthur Malman and Jay Diamond -- informed defendant that he was required to report his substantial borrowings from NBC as one source of the funds used to purchase IDI stock. Making all reasonable inferences in defendant's favor, we assume for the purposes of deciding plaintiff's summary judgment motion that defendant's attorneys misinformed defendant about his obligation to disclose NBC borrowings. On February 21, 1984, defendant filed his first amendment to his Schedule 13D. In that amendment, defendant reported his "source of funds" as a combination of personal funds and margin borrowing. Defendant also did not state that he had any contracts, arrangements, or understandings with any other person or that he was a member of a "group" within the meaning of sections 13(d)(3) of the Exchange Act. Between February 21 and April 20, 1984, defendant filed ten further amendments to his Schedule 13D to reflect additional purchases of IDI stock, and in none of these additional amendments did defendant reveal that he had purchased IDI stock using borrowed money supplied by NBC. Defendant, furthermore, did not state that he had any contracts, arrangements, or understandings or that he was a member of a "group". On May 25, 1984, defendant filed a twelfth amendment to his Schedule 13D in which he reported in relevant part that "the personal funds of Leonard Levy . . . referred to [in the previous schedule 13D and amendments thereto] as having been employed to purchase the Issuer's shares, was to a very substantial degree raised by means of a number of advances extended by the National Bank of Carmel . . . in the aggregate amount, according to the bank, of approximately $ 8.5 million (a portion of this amount was used for other purposes)." Defendant did not state in this twelfth amendment that he had any contracts, arrangements, or understandings or that he was a member of a "group."
As early as November of 1983 Boynton and Fritz stated that they were interested in purchasing shares of IDI on behalf of the bank. Defendant accordingly introduced them to two account executives at Bateman Eichler and L.F. Rothschild through which defendant had been purchasing shares of IDI. Defendant had also discussed with Boynton and Fritz, prior to their purchasing shares on behalf of CBC, his plans with respect to IDI, including the possibilities of a tender offer or proxy fight. Between January 13 and 20, Boynton purchased 72,500 shares of IDI in CBC's name.
In early January of 1984, defendant contacted William Weksel, the president of IDI to request a meeting; the two men agreed to meet on January 27, 1984. Boynton, who had by then purchased IDI stock in CBC's name, joined defendant when he flew to New York to meet with Weksel. After arriving in New York, defendant and Boynton met with Mike Levy, a consultant previously employed by Oppenheimer & Co. Mr. Levy placed a call to a friend of his, a Mr. LeBow. Levy, Boynton, and Lebow subsequently carried on a conference call in which they discussed IDI's prospects. Levy and Boynton met the next morning with Weksel. Levy introduced Boynton as "one of the investors in IDI that Levy was bringing along." During that meeting, Levy informed Weksel that other investors were participating with him in his efforts with regard to IDI and that he and his associates held about 400,000 shares in aggregate, including 72,500 shares defendant claimed were held by Boynton. Such other investors, according to defendant, included Boynton, defendant's spouse, and other "friends." After a tour of IDI, Defendant, Boynton, and Weksel were joined by Albert Bromberg, IDI's executive vice president. During a meeting that lasted over one hour, defendant criticized IDI's marketing strategy and management, discussed the possibility of Weksel's resignation, and requested representation on IDI's Board of Directors. Defendant threatened a proxy contest if Weksel did not satisfy his requests within one week. Defendant and Boynton discussed IDI still further after their meeting with Weksel and Bromberg, and then met with Paul Zofnass and George Elling of Oppenheimer & Co. and discussed IDI further. Zofness suggested that he mediate between defendant and Weksel. Weksel did not ever comply with defendant's demands.
Every one or two weeks during the month of February, 1984 defendant telephoned Boynton and Fritz to ask for more money to purchase IDI stock, which requests were always granted. The bank had made no formal commitment to continue to loan defendant money in support of his purchases of IDI stock, or even to loan him any fixed sum of money with regard to his IDI purchases.
Sometime after the meeting of January 27, 1984, defendant considered three options: to continue purchasing shares on the open market, undertake a proxy fight, or undertake a tender offer. In late February or early March, defendant and Boynton spoke over the telephone. During this conversation, defendant said to Boynton that "we'd have to make a decision on precisely what we were going to do" with respect to IDI.
On about March 8, 1984 defendant held a series of meetings over a period of two or three days in New York with Boynton, Fritz, his HWS attorneys and others, including members of investment banking firms, during which these strategy options were discussed and it was decided that defendant should continue to make open market purchases. Defendant soon thereafter asked Boynton and Fritz if they would serve on IDI's Board of Directors, and they agreed. Finally, on March 23, 1984, defendant entered into an agreement with Weksel and Bromberg according to which he purchased 50 percent of their IDI holdings and assumed control of the company. Immediately after defendant announced that he had assumed control of IDI, the brokerage firms that extended defendant margin credit began to call their loans.
NBC's loans to defendant, totalling more than $ 8 million, were significantly in excess of the bank's legal lending limit of about $ 700,000.
It is disputed by the parties whether the loans were made without at least the informal knowledge of the bank's board of directors and loan committee. Defendant points to two facts that suggest that the bank's board of directors may have been at least generally aware of defendant's borrowings. In deposition testimony
which defendant identifies as testimony elicited during a March 27, 1987 deposition of Richard Alan Williams, then director of NBC and CBC, Mr. Williams appears to state that a director of NBC -- Mr. Clayton B. Neill, Jr. -- was assigned to investigate the bank's loans to defendant during a meeting of the bank's board of directors in February of 1984. See [Defendant's] Opposition To Motion For Summary Judgment, January 11, 1989, Exhibit 18. Moreover, in what appears to be part of this same deposition, Mr. Williams states that the bank may have made several other loans in addition to its loans to defendant that were also above the legal lending limit. These facts cast some doubt on the plaintiff's assertion that NBC's board of directors suddenly discovered in early April of 1984 that Boynton and Fritz had been making substantial loans in violation of the bank's lending limits between January and April of 1984, and that the board would have halted the loans had they known that they were being made. Accordingly, drawing all reasonable inferences in favor of defendant, we assume for the purposes of plaintiff's motion for summary judgment that the board of directors was at least generally aware that significant additional loans were being advanced to defendant and that these loans exceeded the bank's legal lending limit.
In mid-April, NBC stopped honoring checks defendant wrote to meet his margin calls with various brokerage firms. The parties dispute whether defendant's substantial borrowings were a primary cause of IDI's ultimate financial instability and demise. Defendant cites other reasons as the primary cause of IDI's downfall, and for the purposes of deciding this motion for summary judgment we accept defendant's version of the events leading to IDI's bankruptcy.
II. DISCOVERY-RELATED MOTIONS
Plaintiff has moved for sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure, and defendant has moved to extend the time-period for discovery
and to compel the plaintiff to produce certain documents requested in his document request.
The court will grant plaintiff's motion for sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure. Plaintiff properly noticed the continuation of defendant's deposition by its Sixth Notice of Deposition, filed and served upon defendant's counsel on October 14, 1988, requiring defendant to attend the continuation of his deposition at plaintiff's offices at 10:00 a.m. on October 27, 1988. Review of the docket entries in this case reveals that defendant did not seek a protective order with regard to his deposition on October 27, 1988 or otherwise oppose that deposition.
Defendant failed to appear for his deposition scheduled for October 27, 1988.
Moreover, in its order of October 5, 1988, this court ordered defendant to produce all documents responsive to plaintiff's first request for production of documents that were in his possession, custody, and control, including those documents located at his present and former attorney's offices, at the offices of the Securities and Exchange in Washington, D.C. on or before October 12, 1988. At the hearing held on January 11, 1989, defendant argued that he did not produce certain documents because he believed that they were protected by an attorney-client privilege, but did not produce the documents even after the court in its order of October 24, 1988 addressed the scope of defendant's attorney-client privilege. Moreover, defendant has not moved for a protective order with regard to any such documents and did not assert any such privilege in his opposition to plaintiff's motion to compel the production of documents requested in its first request for production of documents, which motion the court granted in its order of October 5, 1988. For all of these reasons, the court shall grant plaintiff's motion for sanctions pursuant to Rule 37 of the Federal Rules of Civil Procedure and shall order defendant to produce the documents he was ordered to produce pursuant to this court's order of October 5, 1988 as well as its order of October 24, 1988 within twenty days of this memorandum opinion and order, and it shall further order defendant to attend a continued deposition if plaintiff chooses, within eleven days of this memorandum opinion and order, to notice such a deposition. Plaintiff may if it chooses renew its motion for summary judgment as to any remaining claims after conducting the additional discovery ordered in this memorandum opinion and order. Furthermore, as a sanction for defendant's noncompliance with plaintiff's discovery requests, and this court's discovery orders, this court shall deny defendant's motion to compel the plaintiff to produce certain documents. Also as a sanction pursuant to Rule 37 of the Federal Rules of Civil Procedure, and because this court believes that the parties have had ample opportunity to conduct discovery, defendant's motion to extend the time-period permitted for discovery shall be denied.
III. SUMMARY JUDGMENT
Federal Rule of Civil Procedure 56(e) provides, inter alia, that "when a motion for summary judgment is made and supported as provided in this rule, an adverse party . . . must set forth specific facts showing there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him." Fed. R. Civ. P. 56(e). The Advisory Committee notes that the "very mission of the summary judgment procedures is to pierce the pleadings and to assess the proof to see whether there is a genuine need for trial." Fed. R. Civ. P. 56(e), Advisory Committee Note. Three Supreme Court cases decided in 1986 confirm this view, and highlight the usefulness of Rule 56(e) in disposing of cases, or parts of cases, that need not go to a jury. See generally, Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986) ("one of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses, and we think it should be interpreted in a way that allows it to accomplish this purpose."); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986) (court should not send case to jury "unless evidence is of such a character that it would warrant a jury in finding a verdict in favor of that party"); Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-89, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986)("where record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial."). Finally, the Federal Rules envision partial summary judgment in those cases, as here, where some, but not all, of the issues may properly be disposed of before trial. Fed. R. Civ. P. 56(a), (d). In addition, summary judgment is particularly appropriate in a non-jury case such as this.
See United States v. Matheson, 532 F.2d 809, 813 (2nd Cir. 1976), cert. denied, 429 U.S. 823, 50 L. Ed. 2d 85, 97 S. Ct. 75 (1976).
We are mindful that the party moving for summary judgment in this case has the burden of proving its claims by a preponderance of the evidence at trial. The United States Supreme Court has held that "the inquiry involved in a ruling on a motion for summary judgment . . . necessarily implicates the substantive evidentiary standard of proof that would apply at the trial on the merits." Anderson v. Liberty Lobby, Inc, 477 U.S. 242, 252, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). Accordingly, the court in deciding plaintiff's motion for summary judgment must ask whether the fact-finder "could find by a preponderance of the evidence that the plaintiff is entitled to a verdict . . . ." 477 U.S. at 252.
A. Section 13(d)
Section 13(d)(1) of the Securities Exchange Act provides in relevant part that:
Any person who, after acquiring directly or indirectly the beneficial ownership of any equity security of a class which is registered pursuant to section 781 of this title . . . is directly or indirectly the beneficial owner of more than 5 per centum of such class shall, within ten days after such acquisition, [file] . . . a statement containing such of the following information, and such additional information, as the Commission may by rules and regulations, prescribe as necessary or appropriate in the public interest or for the protection of investors. . . .
15 U.S.C. § 78m(d)(1) (Supp. 1988). The statute then lists certain information that the 13(d) statement must contain. Among other things, it must contain:
(B) the source and amount of the funds or other consideration used or to be used in making the purchases, and if any part of the purchase price is represented or is to be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, or trading such security, a description of the transaction and the names of the parties thereto. . . .