UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
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DWIGHT E. WININGER, On Behalf of Himself and Plaintiff, v. SI MANAGEMENT L.P., a Limited Partnership;
Defendants. |
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Case No.: C-97-1622 CW Date: August 21, 1998 PLAINTIFF'S OPPOSITION TO
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I. INTRODUCTION
II. DEFENDANTS MUST MEET A VERY HEAVY BURDEN TO PREVAIL ON A MOTION TO DISMISS AS MOOT
B. Defendants Must Show That Plaintiffs' Allegations are "Wholly Insubstantial and Frivolous"
C. Examination of the Legal or Factual Merits is Not Appropriate
III. PLAINTIFFS SUFFERED DAMAGES AS A RESULT OF DEFENDANTS' SECURITIES VIOLATIONS
IV. PLAINTIFFS HAVE VIABLE CLAIMS FOR INJUNCTIVE RELIEF
1. Defendants Have Repeatedly Violated the Securities Laws
2. Defendants Are in a Position That Makes Future Violations Likely
VI. CONCLUSION
Armster v. United States District Court, 806 F.2d 1347 (9th Cir. 1986)
Armstrong v. Candon, 451 F. Supp. 1148 (D. Vt. 1978)
Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615 (9th Cir. 1981)
Barry v. Edmunds, 116 U.S. 550 (1886)
Bell v. Hood, 327 U.S. 678 (1946)
Bertoglio v. Texas International Co., 488 F. Supp. 630 (D. Del. 1980)
Calhoun v. United States, 475 F. Supp. 1 (S.D. Cal. 1977)
Campesinos Unidos v. United States Dep't of Labor, 803 F.2d 1063 (9th Cir. 1986)
CNW Corp. v. Japonica Partners, L.P., 776 F. Supp. 864 (D. Del. 1990)
Conley v. Gibson, 355 U.S. 41 (1957)
Corenco Corp. v. Schiavone & Sons, Inc., 362 F. Supp. 939 (S.D.N.Y. 1973)
County of Los Angeles v. Davis, 440 U.S. 625 (1979)
DCD Programs, Ltd. v. Leighton, 90 F.3d 1442 (9th Cir. 1996)
Doremus v. United States, 793 F. Supp. 942 (D. Idaho 1992)
FMC Corp. v. Boesky, 727 F. Supp. 1182 (N.D. Ill. 1989)
Garvin v. Greenbank, 856 F.2d 1392 (9th Cir. 1988)
Haas v. Wieboldt Stores, Inc., 725 F.2d 71 (7th Cir. 1984)
Hagans v. Lavine, 415 U.S. 528 (1974)
Halet v. Wend Inv. Co., 672 F.2d 1305 (9th Cir. 1982)
In re Crazy Eddie Securities Litigation, 948 F. Supp. 1154 (E.D.N.Y. 1996)
In re Haas, 36 B.R. 683, 690 (Bkrcty. N.D. Ill. 1984)
Iron Arrow Honor Society v. Heckler, 464 U.S. 67 (1983)
Issacs Brothers Co. v. Hibernia Bank, 481 F.2d 1168 (9th Cir. 1973)
Jackson v. Denver Producing & Refining, 96 F.2d 457 (10th Cir. 1938)
Katz v. Pels, 774 F. Supp. 121 (S.D.N.Y. 1991)
Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174 (S.D.N.Y. 1989)
Kulick v. Pocono Downs Racing Ass'n, 816 F.2d 895 (3d Cir. 1987)
Lehbar-Friedman, Inc. v. Movielab, Inc., 1987 WL 28541 (S.D.N.Y. Dec. 1, 1987)
Lunderstadt v. Colafella, 885 F.2d 66 (3d Cir. 1989)
Madison County Jail Inmates v. Thompson, 773 F.2d 834 (7th Cir. 1985)
Maldonado v. Flynn, 477 F. Supp. 1007 (S.D.N.Y. 1979)
Miller v. Central Chinchilla Group, Inc., 494 F.2d 414 (8th Cir. 1974)
Montgomery Ward & Co. v. Langer, 168 F.2d 182 (8th Cir. 1948)
Multnomah Legal Services Workers Union v. Legal Services Corp., 936 F.2d 1547 (9th Cir. 1991)
New York City Emp. Ret. Sys. v. Dole Food Co., 969 F.2d 1430 (2d Cir. 1992)
North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578 (9th Cir. 1983)
Riggs National Bank of Washington D.C. v. Allbritton, 516 F. Supp. 164 (D.D.C. 1981)
Rondeau v. Mosinee Paper Corp., 422 U.S. 49 (1975)
S.E.C. v. Cross Financial Services, Inc., 908 F. Supp. 718 (C.D. Cal. 1995)
S.E.C. v. Fehn, 97 F.3d 1276 (9th Cir. 1996)
S.E.C. v. First Pacific Bancorp, 142 F.3d 1186 (9th Cir. Apr. 28, 1998)
S.E.C. v. Goldfield Deep Mines Co. of Nevada, 1983 WL 1371 (C.D. Cal. Sept. 23, 1983)
S.E.C. v. Interlink Data Network of Los Angeles, Inc., 1993 WL 603274 (C.D. Cal. Nov. 15, 1993)
S.E.C. v. Koracorp Industries, Inc., 575 F.2d 692 (9th Cir. 1978)
S.E.C. v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980)
S.E.C. v. Rana Research, Inc., 1990 WL 267365 (C.D. Cal. Oct. 2, 1990)
Seibert v. Sperry Rand Corp., 586 F.2d 949 (2d Cir. 1978)
Siefman v. Wolverine Technologies, Inc., 1988 WL 212474 at *2 (E.D. Mich. Sept. 27, 1988)
Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d 63 (8th Cir. 1980)
Sierra Club v. Penfold, 857 F.2d 1307 (9th Cir. 1988)
Torres v. New York State Dep't of Labor, 318 F. Supp. 1313 (S.D.N.Y. 1970)
Treves v. Servel, Inc., 244 F. Supp. 773, 777 (S.D.N.Y. 1965)
United States v. W.T. Grant Co., 345 U.S. 629 (1953)
Veatch v. Wagner, 109 F. Supp. 537 (D. Alaska 1953)
Volk v. D.A. Davidson & Co., 816 F.2d 1406 (9th Cir. 1987)
Western Systems, Inc. v. Ulloa, 958 F.2d 864, 872 (9th Cir. 1992)
Wisconsin Real Estate Inv. Trust v. Weinstein, 530 F. Supp. 1249 (E.D. Wis. 1982)
Yamamoto v. Omiya, 564 F.2d 1319 (9th Cir. 1977)
15 U.S.C. § 78n(a)
Fed. R. Civ. P. 12(b)(1)
Defendants' own arguments demonstrate that their "Motion to Dismiss as Moot" is without merit. Defendants do not truly attempt to show that there is no live controversy between the parties. Instead, defendants argue that plaintiffs1 are not entitled, under the facts of this case, to damages or injunctive relief. While plaintiffs are confident that they will ultimately prevail on the merits, consideration of the merits on a motion to dismiss is improper. It is plaintiffs' allegations, not defendants' characterizations of the facts, that must be accepted as true for purposes of this motion.
To prevail on their motion, defendants must meet the heavy burden of establishing that plaintiffs' claims for damages and injunctive relief are "wholly insubstantial and frivolous." See Bell v. Hood, 327 U.S. 678, 682-83 (1946). Defendants must further establish that "there is no reasonable expectation that the alleged violation[s] will recur" and that "interim relief or events have completely and irrevocably eradicated the effects of the alleged violation[s]." See County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979). Defendants cannot come close to meeting these difficult burdens, because plaintiffs have a number of claims for damages and injunctive relief that are clearly not moot.2
Plaintiffs seek three types of damages against the defendants. First, plaintiffs seek damages for the expenses charged to the Partnership, in connection with defendants' attempts to implement the ill-fated "Plan of Withdrawal and Dissolution" ("the GP Plan"), that were incurred as a result of the defendants' use of false and misleading statements to induce the Limited Partners to approve the GP Plan. Second, plaintiffs seek damages for the expenses/debts incurred by the Partnership on "curative disclosures" and a resolicitation of proxies designed to correct a misrepresentation made in defendants' proxies. Third, plaintiff Wininger individually requests damages for the expenses incurred in connection with the preparation and dissemination of communications to the Limited Partners designed to counter defendants' misrepresentations and nondisclosures. All of these types of damages are recoverable under the relevant law. Defendants cannot seriously contend that plaintiffs' damages claims are "moot."
The Court should also deny defendants' motion because plaintiffs have claims for permanent and preliminary injunctive relief that are not moot. Plaintiffs request a permanent injunction prohibiting the defendants from violating the securities laws in the future. It is proper for a court to issue such a permanent injunction where, as here, the defendants have repeatedly violated the proxy rules and circumstances indicate that there is a reasonable likelihood that the defendants will commit future violations.
Such relief is especially appropriate in this case because defendants are in a position that makes it likely that they will soon once again be sending proxy solicitations to the Limited Partners. Limited Partner Sutherland has proposed a liquidation plan for the Partnership under which the General Partner would be removed, the Partnership would be dissolved, and an independent liquidating trustee would be appointed to liquidate the Partnership in the manner that produces the highest return for the Limited Partners ("the Sutherland Plan"). Ms. Sutherland filed with the SEC a publicly available proxy statement describing the Sutherland Plan, responded to the SEC's comments by filing a revised proxy statement, and expects to soon begin soliciting proxies for the Sutherland Plan.
Defendants will almost certainly oppose the Sutherland Plan. The Sutherland Plan involves removal of the defendant General Partner. Among other things, such removal could significantly decrease the amount of Partnership distributions to which the General Partner would be entitled. Implementation of the Sutherland Plan could also cause the individual defendants to lose their executive positions with the Company.
Many of the matters about which the defendants made misrepresentations and nondisclosures in their proxy solicitations for the now-abandoned GP Plan are also relevant to the Sutherland Plan. There is a strong likelihood that the defendants will repeat their previous misrepresentations and omissions or make similar misrepresentations and omissions in proxy solicitations against the Sutherland Plan. Accordingly, in addition to a permanent injunction, plaintiffs seek a preliminary injunction barring the defendants from soliciting proxies in opposition to the Sutherland Plan unless they refrain from repeating their prior misrepresentations and nondisclosures and making new ones.
Thus, this case is far from "moot." Without question, plaintiffs' claims for monetary damages survive a "motion to dismiss as moot." The same is true of plaintiffs' claims for injunctive relief. For these reasons, plaintiffs respectfully request that defendants' motion be denied.
To prevail on their motion to dismiss as moot, defendants must meet several stringent standards. Defendants' motion is made under Fed. R. Civ. P. 12(b)(1) (see Motion at 1), which provides that a court may dismiss a case where there is no subject matter jurisdiction. In other words, defendants' argument is that there is no subject matter jurisdiction because there is no live controversy.
The legal hurdles applicable in the review of motions made under Rule 12(b)(6) are also applicable to motions made under Rule 12(b)(1). See Calhoun v. United States, 475 F. Supp. 1, 3 (S.D. Cal. 1977), aff'd, 604 F.2d 647 (9th Cir. 1979), cert. denied, 444 U.S. 1078 (1980). The motion may be granted only if "'it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. at 2-3 (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)); see also Halet v. Wend Inv. Co., 672 F.2d 1305, 1309 (9th Cir. 1982). The court must accept all material allegations of fact as true and must construe those allegations in the light most favorable to the non-movant. North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 581 (9th Cir. 1983).
While the foregoing Rule 12(b)(6) principles apply to Rule 12(b)(1) motions, "[t]he threshold to withstand a motion to dismiss under Fed.R.Civ.P. 12(b)(1) is . . . lower than that required to withstand a Rule 12(b)(6) motion." Lunderstadt v. Colafella, 885 F.2d 66, 70 (3d Cir. 1989). "[A] federal court may dismiss for lack of jurisdiction only if the claims are 'insubstantial on their face.'" Id. at 69-70 (quoting Hagans v. Lavine, 415 U.S. 528, 542 n.10 (1974)). The standard is whether the allegations of the complaint are "'wholly insubstantial and frivolous.'" Id. at 70 (quoting Bell v. Hood, 327 U.S. 678, 682-83 (1946)); see also Armstrong v. Candon, 451 F. Supp. 1148, 1151 (D. Vt. 1978). "A suit cannot properly be dismissed as not involving a controversy within the jurisdiction of the court unless the facts of record create a legal certainty of that conclusion." Montgomery Ward & Co. v. Langer, 168 F.2d 182, 185 (8th Cir. 1948) (citing Barry v. Edmunds, 116 U.S. 550, 559 (1886)).
An examination of either the factual or the legal merits of a plaintiff's allegations is not proper in the review of a Rule 12(b)(1) motion.
A detailed review is not appropriate until the merits are reached. The possibility that the plaintiffs will not prevail is not controlling. Nor is the possibility that the pleadings fail to state a cause of action ground for dismissal for lack of subject matter jurisdiction.
Armstrong, 451 F. Supp. at 1151 (emphasis added) (citing Bell, 327 U.S. at 682). "'[D]ismissal for lack of jurisdiction is not appropriate merely because the legal theory alleged is probably false.'" Lunderstadt, 885 F.2d at 70 (quoting Kulick v. Pocono Downs Racing Ass'n, 816 F.2d 895, 899 (3d Cir. 1987)). See also Miller v. Central Chinchilla Group, Inc., 494 F.2d 414, 417 (8th Cir. 1974) ("all doubts on jurisdictional points must be resolved in favor of a plenary trial rather than dismissal at the pretrial stage"). Thus, defendants' arguments that plaintiffs are not entitled to prevail on the merits of their claims are (in addition to being wrong) irrelevant.
On top of the strict standards generally applicable to Rule 12(b)(1) motions, defendants must also meet a difficult substantive standard for showing mootness. "The burden of demonstrating mootness 'is a heavy one.'" County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979) (quoting United States v. W.T. Grant Co., 345 U.S. 629, 632-33 (1953)); see also Armster v. United States District Court, 806 F.2d 1347, 1353 (9th Cir. 1986). The defendants must satisfy two conditions to prevail on their mootness motion. First, they must show "that there is no reasonable expectation that the alleged violation[s] will recur." Doremus v. United States, 793 F. Supp. 942, 947 (D. Idaho 1992) (citing Davis, 440 U.S. at 631); see also Torres v. New York State Dep't of Labor, 318 F. Supp. 1313, 1316 (S.D.N.Y. 1970). Second, defendants must establish that "interim relief or events have completely and irrevocably eradicated the effects of the alleged violation[s]." Id. at 947 (emphasis in original) (citing Davis, 440 U.S. at 631).
Defendants cannot show that the effects of their violations have been "completely and irrevocably eradicated" because (among other things) their violations inflicted monetary damages upon plaintiffs, the other Limited Partners, and the Partnership. Plaintiffs seek three categories of damages: (1) damages for the expenses/debts incurred by the Partnership in connection with the GP Plan after the defendants' misrepresentations and nondisclosures caused a majority of Limited Partners to vote for the GP Plan; (2) damages for the expenses/debts incurred by the Partnership in connection with corrective disclosures and a resolicitation of proxies caused by a misrepresentation in some of defendants' proxies; and (3) damages to plaintiff Wininger for the costs of preparing and sending communications to the Limited Partners to counter defendants' misrepresentations and nondisclosures.
Plaintiffs allege that defendants made numerous false statements and nondisclosures in their proxy solicitations for the GP Plan, and that this caused a majority in interest of the Limited Partners to vote for the GP Plan. [Proposed] Second Amended and Supplemental Complaint ("SASC") ¶¶ 67, 82, 121, 131. These allegations must be treated as true for purposes of this motion to dismiss. The vote on the GP Plan took place on November 7, 1997. SASC ¶ 67; see also Ex. A.3 After that date, the Partnership continued to be charged with the expenses of defendants' attempts to implement the GP Plan, including the substantial legal fees and costs of proceedings relating to the GP Plan in this and the Delaware actions, and the costs of written communications to the Limited Partners by the General Partner relating to the status of the GP Plan. SASC ¶ 69; see also Ex. B; Ex. C.4
The defendants eventually withdrew the GP Plan, on May 14, 1998. SASC ¶ 68; see also Ex. C (May 14, 1998 letter). Thus, if defendants had not used misrepresentations and nondisclosures to induce the Limited Partners to approve the GP Plan, none of the expenses/debts incurred by the Partnership between November 7, 1997 and May 14, 1998 would have been spent. Accordingly, plaintiffs seek, on behalf of themselves, the other Limited Partners, and the Partnership, damages for those expenses. SASC ¶¶ 82, 88, 121, 131, 168; see also First Amended and Supplemental Complaint ("FAC") ¶ 148.
Under the law, these damages are recoverable for violations of the proxy rules. An investor is entitled to bring a derivative suit on behalf of a corporation or a partnership for damages suffered by the corporation or partnership as a result of a misleading proxy solicitation. See Yamamoto v. Omiya, 564 F.2d 1319, 1325-26 (9th Cir. 1977); Katz v. Pels, 774 F. Supp. 121, 127 (S.D.N.Y. 1991).5 Moreover, it is well-established that consequential damages may generally be recovered for securities violations. See DCD Programs, Ltd. v. Leighton, 90 F.3d 1442, 1447 (9th Cir. 1996); Garvin v. Greenbank, 856 F.2d 1392, 1401 (9th Cir. 1988); Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1413 (9th Cir. 1987); Arrington v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 651 F.2d 615, 620 (9th Cir. 1981).
Defendants appear to argue that plaintiffs cannot sue for damages in this action for expenses charged to the Partnership in connection with the GP Plan because plaintiffs may be able to receive damages for those expenses in the Delaware action. See Motion at 17 n.11. However, in the Delaware action, plaintiffs seek to recover damages for GP Plan expenses based on the state law claim that defendants breached their fiduciary duties by pursuing the GP Plan. In this action, plaintiffs seek to recover damages based on the federal claim -- which has not and cannot be brought in Delaware -- that the GP Plan expenses identified above were caused by violations of the securities laws.6 It is fundamental that the same damages can be sought under more than one claim. And plaintiffs' fiduciary duty claim involves legal standards and factual issues different from plaintiffs' federal securities claim -- meaning that it is possible that plaintiffs could prevail on only one of the two claims. Thus, plaintiffs' fiduciary duty claim in the Delaware action does not bar plaintiffs' securities claims here.
The second category of damages sought by plaintiffs is damages for the expenses/debts incurred by the Partnership for "curative disclosures" and a resolicitation of proxies caused by one of defendants' misrepresentations. In the proxies they originally sent out on September 19, 1997, defendants falsely stated that Limited Partners had to vote for the GP Plan in order to participate in the public offering component ("the Underwritten Sale") of the GP Plan. SASC ¶¶ 60, 76; see also Ex. E at 2; FAC ¶¶ 50, 59.7 Defendants then effectively conceded the falsity of this statement by, on September 26, 1997, sending the Limited Partners a letter and revised proxies which stated that Limited Partners did not have to vote for the GP Plan to participate in the Underwritten Sale. SASC ¶¶ 60, 77; see also Ex. F at 26, 29; FAC ¶ 51. However, on October 10, 1997, defendants once again sent out proxies which falsely stated that Limited Partners did have to vote for the GP Plan to take part in the Underwritten Sale. SASC ¶¶ 61, 75-76; see also Ex. G, third unnumbered page; FAC ¶¶ 52, 59.
Finally, on October 17, 1998, defendants sent out a letter and revised blue proxies which stated the truth -- that Limited Partners did not have to vote for the GP Plan to participate in the Underwritten Sale. SASC ¶¶ 62, 77; see also Ex. H at 2, 27; FAC ¶ 53. At the same time, defendants invalidated all proxies they had previously received, postponed the special meeting at which the GP Plan was to be voted on, and began a complete resolicitation of proxies. SASC ¶¶ 62, 77; see also Ex. H at 2-3; FAC ¶ 53.
Thus, by making false statements in their September 19 and October 10 proxies, defendants caused the Partnership to incur expenses/debts for the "curative" September 26 proxies, for the "curative" October 17 proxies, and for the October 17 resolicitation of proxies. Plaintiffs seek to recover damages for these costs, on behalf of the Partnership, the Limited Partners, and themselves. SASC ¶¶ 77, 169; see also FAC ¶ 148. Under Maldonado v. Flynn, 477 F. Supp. 1007, 1010 (S.D.N.Y. 1979), the expenses of a new proxy solicitation attributable to the mailing of false proxy materials can be recovered as damages for proxy violations.
The third category of damages sought by plaintiffs is damages to plaintiff Wininger for the costs of preparing and disseminating communications to the Limited Partners designed to counter defendants' violations of the proxy regulations. Prior to mailing out a proxy statement, defendants advocated for the GP Plan in a March 21, 1997 letter to the Limited Partners and in a June 9, 1997 press release. SASC ¶¶ 48-51, 53, 145-46; see also Ex. I; Ex. J; FAC ¶¶ 38-42, 124-25. The Court has already found that defendants probably violated the securities laws through this advocacy. Ex. K at 9-12. In order to prevent the March 21 letter and the June 9 press release from predisposing the Limited Partners into being in favor of the GP Plan, plaintiff Wininger filed two responsive proxy statements with the SEC. SASC ¶¶ 52, 54; see also Ex. L, M.
The proxy statement defendants did finally send out had numerous misrepresentations and nondisclosures. SASC ¶¶ 56, 91-119; see also FAC ¶¶ 75-102. In an attempt to convey the true facts to the Limited Partners, plaintiff's counsel, as part of its representation of plaintiff, sent out a letter to the Limited Partners. SASC ¶ 66; see also Ex. N. Plaintiff Wininger seeks damages for the costs of the preparation, filing, and dissemination of these communications in response to defendants' securities violations. SASC ¶¶ 83, 122, 132, 170; see also FAC ¶ 148.
Courts familiar with proxy battles have ruled that such damages are recoverable under the securities laws. For example, in In re Crazy Eddie Securities Litigation, 948 F. Supp. 1154, 1166, 1173 (E.D.N.Y. 1996), the court awarded the plaintiffs damages for the expenses they incurred in waging a proxy fight as a result of fraudulent misrepresentations made by the defendants. In CNW Corp. v. Japonica Partners, L.P., 776 F. Supp. 864, 869 (D. Del. 1990), the court held that a corporation pled a claim sufficient to survive a motion to dismiss where it sought damages under § 14(a) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78n(a)) for expenses it incurred "by responding to an illegal proxy solicitation." Similarly, in In re Haas, 36 B.R. 683, 690 (Bkrcty. N.D. Ill. 1984), the court held that the plaintiff stated a valid claim where it sought damages for the expenses of a proxy solicitation issued in response to an allegedly unlawful proxy solicitation by the defendants. See also Haas v. Wieboldt Stores, Inc., 725 F.2d 71, 74 (7th Cir. 1984) ("expenses of preparing proxy materials that must be discarded" as a result of securities violations "are logical damages to assess for the violation").
Defendants contend that plaintiff Wininger is not entitled to recover for the costs associated with communications to the Limited Partners because those costs were advanced by plaintiffs' counsel. Motion at 16-17. However, under plaintiff Wininger's contingency fee agreement with plaintiffs' counsel, plaintiff Wininger must repay all such advanced costs out of the proceeds of the liquidation of the Partnership upon plaintiffs' counsel obtaining a successful outcome in its representation of plaintiff Wininger.8 Thus, plaintiff Wininger, not plaintiffs' counsel, is ultimately responsible for the costs of the preparation, filing, and dissemination of the communications to the Limited Partners.
In any event, it is improper to consider now whether plaintiff Wininger will actually be entitled to prevail on the legal and factual merits of this damages claim. As pointed out earlier, defendants' motion is a Rule 12(b)(1) motion to dismiss on the grounds that no subject matter jurisdiction exists because the case is moot. In such a procedural context, the court in Haas v. Wieboldt stated, "It does not matter whether the plaintiff's claim is meritorious. If that were the test every dismissal would be jurisdictional." 725 F.2d at 73. The court added, "a court is not deprived of subject-matter jurisdiction of a case that arises under federal law merely because it may lack the power to provide a particular remedy." Id. (citing Bell v. Hood, 327 U.S. 678, 685 (1946)). Similarly, in Veatch v. Wagner, 109 F. Supp. 537, 540 (D. Alaska 1953), the court ruled in the context of a motion to dismiss that the defendant's argument that the plaintiff did not actually sustain damages "is of no avail on this motion." Accordingly, it is improper with respect to this motion to review whether plaintiff Wininger actually sustained damages, so long as he has stated a claim for damages which is not "wholly insubstantial and frivolous" (see Bell, 327 U.S. at 682-83).
Plaintiffs' damages claims are not "moot" -- it is undisputed that the defendants have not paid plaintiffs, the Limited Partners, or the Partnership any damages.9 The arguments that defendants make with respect to plaintiffs' damages claims go to the merits of the claims and are thus improper at this stage. And the three cases cited by defendants in the section of their motion relating to plaintiffs' damages claims (see Motion at 18) -- Madison County Jail Inmates v. Thompson, 773 F.2d 834 (7th Cir. 1985); Shapiro v. Midwest Rubber Reclaiming Co., 626 F.2d 63 (8th Cir. 1980), cert. denied, 449 U.S. 1079 (1981); and FMC Corp. v. Boesky, 727 F. Supp. 1182 (N.D. Ill. 1989), aff'd, 36 F.3d 255 (2d Cir. 1994) -- are inapposite. These cases simply stand for the self-evident proposition that damages (other than nominal damages) cannot be awarded to a plaintiff who has not suffered actual economic harm. See Madison, 773 F.2d at 844, 846-47; Shapiro, 626 F.2d at 70; FMC, 727 F. Supp. at 1189.
In short, even if plaintiffs' claims for injunctive relief were moot (which they are not), plaintiffs' damages claims are sufficient by themselves to allow plaintiffs to withstand defendants' mootness motion. Cf. Jackson v. Denver Producing & Refining, 96 F.2d 457, 461 (10th Cir. 1938) ("A case will not be dismissed where only part of a controversy has become moot and other questions remain for decision"). Therefore, since no motion for an injunction is pending, the Court need not even address defendants' arguments relating to the propriety of injunctive relief, which are discussed in the following section.
Plaintiffs' Second Amended and Supplemental Complaint seeks a permanent injunction against the defendants to prohibit them from violating the securities laws in the future. SASC ¶¶ 166, 173. A court may issue such a permanent injunction where there is "a reasonable likelihood of future violations of the securities laws." See S.E.C. v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). "The existence of past violations may give rise to an inference that there will be future violations; and the fact that the defendant is currently complying with the securities laws does not preclude an injunction." Id. The Ninth Circuit and its district courts have upheld or issued permanent injunctions against future securities violations on many occasions. See S.E.C. v. First Pacific Bancorp, 142 F.3d 1186, 1194 (9th Cir. 1998); S.E.C. v. Fehn, 97 F.3d 1276, 1295 (9th Cir. 1996), cert. denied, 118 S. Ct. 59 (1997); Murphy, 626 F.2d at 654-57; S.E.C. v. Cross Financial Services, Inc., 908 F. Supp. 718, 734-36 (C.D. Cal. 1995); S.E.C. v. Interlink Data Network of Los Angeles, Inc., 1993 WL 603274 at *12 (C.D. Cal. Nov. 15, 1993); S.E.C. v. Rana Research, Inc., 1990 WL 267365 at *24 (C.D. Cal. Oct. 2, 1990), aff'd, 8 F.3d 1358 (9th Cir. 1993); S.E.C. v. Goldfield Deep Mines Co. of Nevada, 1983 WL 1371 at *10 (C.D. Cal. Sept. 23, 1983), aff'd, 758 F.2d 459 (9th Cir. 1985); see also S.E.C. v. Koracorp Industries, Inc., 575 F.2d 692, 702 (9th Cir. 1978) (vacating district court's decision not to issue permanent injunction), cert. denied, 439 U.S. 953 (1978).
The factors relevant to whether it is proper to grant a permanent injunction against future violations of the securities laws include (1) "the isolated or recurrent nature of the infraction," (2) "the likelihood, because of defendant's professional occupation, that future violations might occur," (3) "the defendant's recognition of the wrongful nature of his conduct," and (4) "the sincerity of his assurances against future violations." See Murphy, 626 F.2d at 655. All of these factors weigh in favor of the issuance of a permanent injunction here.
In this case, there are at least four separate instances with respect to which either the Court indicated that defendants probably violated the securities laws or the defendants essentially conceded the violation by sending out a "curative disclosure." The Court found that defendants probably violated SEC Rules 14a-3 and 14a-6 (17 C.F.R. §§ 240.14a-3, .14a-6) by advocating in favor of the GP Plan in their March 21, 1997 letter without filing the letter as a proxy solicitation with the SEC and disseminating a proxy statement. See Ex. K at 9-10. The Court made the same finding with respect to the defendants' June 9, 1997 press release. See Ex. K at 10. At a hearing, the Court stated that it "tend[s] to agree" with plaintiffs' contention that defendants falsely represented to the Limited Partners that two thirds in interest of the Limited Partners had to approve an opinion of counsel in order to require the GP Plan to be approved by a two-thirds vote, when in fact only 10 percent in interest of the Limited Partners had to approve the opinion of counsel. See Ex. P. And defendants effectively conceded by mailing out "corrective disclosures" on September 26 and October 17, 1997 that they falsely represented in their September 19 and October 10 proxies that Limited Partners had to vote for the GP Plan to take part in the Underwritten Sale. Compare Ex. E at 2 and Ex. G at third unnumbered page to Ex. F at 26, 29 and Ex. H at 2, 27.
Given the defendants' occupations as the General Partner and the individuals and entities who control it, defendants are certainly in a position to commit future violations. Such violations are especially likely because of the looming proxy battle over the liquidation plan proposed by limited partner Sutherland ("the Sutherland Plan"). Under the Sutherland Plan, the General Partner will be removed, the Partnership will be dissolved, and an independent liquidating trustee ("the Trustee") will be appointed to oversee the liquidation of the Partnership. Ex. Q at 3. The Trustee will then use his best efforts to obtain a control premium for the Partnership's stock in the Company by selling the Company stock as a block or otherwise transferring it to a single buyer. Ex. Q at 3. If the Trustee cannot cause such a "change of control transaction" to be implemented, the Trustee either will distribute the Partnership's Company stock directly to the Limited Partners or will sell the stock in a registered offering and distribute the proceeds to the Limited Partners. Ex. Q at 7. Thus, under the Sutherland Plan, an independent Trustee considering solely the interests of the Limited Partners will explore all liquidation options in order to ensure that the Limited Partners receive the highest possible return.
The defendants will almost certainly actively oppose the Sutherland Plan. General partners do not normally stand idly by when limited partners seek to remove them. And here, under the Partnership Agreement, the General Partner's distributions of liquidation proceeds could be reduced by up to 75 percent if the General Partner is removed. See Ex. R, § 7(g)(ii) (as amended), pp. 24-26. Moreover, implementation of a change of control transaction by the Trustee could cause the individual defendants to lose their lucrative executive positions as officers of the Company, since an acquirer of the Company could choose to install new management. For these reasons, it is likely that defendants will soon again be sending proxy solicitations to the Limited Partners. Given defendants' history of violations, it is unlikely that such proxy solicitations will comply with the securities laws.10
There is no indication in the record of any recognition by the defendants that their conduct violated the securities laws or was wrongful. And the "sincerity of [the defendants'] assurances against future violations" cannot be evaluated since the defendants have not made any such assurances. This case is similar to Murphy, where the court stated that the defendant's "continued insistence that he has done nothing wrong indicates that he may commit similar errors in the future." See 626 F.2d at 656. Thus, all four of the relevant factors identified above weigh in favor of the entry of a permanent injunction.
Defendants point out that there is a difference between the standards applicable where the SEC is seeking injunctive relief and the standards applicable to private litigants. Motion at 14. The SEC is not required to present "proof of irreparable injury or the inadequacy of other remedies," regardless of whether it is seeking a preliminary injunction or a permanent injunction. S.E.C. v. Management Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). Private litigants, on the other hand, are not "relieved of showing irreparable harm and other usual prerequisites for injunctive relief." Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 63 (1975).
In the Ninth Circuit, however, a plaintiff needs to show irreparable injury only for a preliminary injunction. Where a permanent injunction is sought, "when actual success on the merits is shown, the inquiry is over and a party is entitled to relief as a matter of law irrespective of the amount of irreparable injury which may be shown." Western Systems, Inc. v. Ulloa, 958 F.2d 864, 872 (9th Cir. 1992), cert. denied, 506 U.S. 1050 (1993); see also Multnomah Legal Services Workers Union v. Legal Services Corp., 936 F.2d 1547, 1553 (9th Cir. 1991); Sierra Club v. Penfold, 857 F.2d 1307, 1318-19 n.16 (9th Cir. 1988).11
And with respect to establishing success on the merits where a permanent injunction against future securities violations has been requested, the same considerations apply in suits by private litigants as in suits by the SEC. The court in Bertoglio v. Texas International Co., 488 F. Supp. 630, 662 (D. Del. 1980), used the same factors as those set forth by the Ninth Circuit in S.E.C. v. Murphy, 626 F.2d at 655 (see supra § IV(A)) to evaluate a claim made by a private party for a permanent injunction against future violations of the securities laws. The court stated that the party had established a strong case for a permanent injunction, but declined to issue the injunction because the party had itself committed violations. Id.
Other courts have also upheld the viability of claims made by private parties for permanent injunctive relief against securities violations. In Corenco Corp. v. Schiavone & Sons, Inc., 362 F. Supp. 939, 951-52 (S.D.N.Y.), aff'd, 488 F.2d 207 (2d Cir. 1973), the court issued a permanent injunction in a securities case involving private parties. And in Lehbar-Friedman, Inc. v. Movielab, Inc., 1987 WL 28541 at *2 (S.D.N.Y. Dec. 1, 1987), the court permitted the plaintiff to conduct discovery for the purpose of obtaining a permanent injunction with respect to proxy statement disclosure. See also Treves v. Servel, Inc., 244 F. Supp. 773, 777 (S.D.N.Y. 1965) (holding that the plaintiff's claim for permanent injunctive relief against interlocking directorates stated a claim sufficient to survive a motion to dismiss).
In sum, at least in the Ninth Circuit, while the SEC unlike a private litigant is not required to establish irreparable harm when seeking a preliminary injunction, there appears to be no material difference between the requirements for permanent injunctive relief applicable to the SEC and the requirements applicable to private litigants. This makes sense, as "[t]he primary purpose of injunctive relief against violators of the federal securities laws is to deter future violations, not to punish the violators." See Koracorp, 575 F.2d at 697.
In addition to seeking a permanent injunction generally prohibiting the defendants from violating the securities laws, plaintiffs' Second Amended and Supplemental Complaint also seeks a narrower, preliminary injunction prohibiting the defendants from making proxy solicitations opposing the Sutherland Plan unless they refrain from repeating the misrepresentations and nondisclosures they made in the past (and from making new misrepresentations in any such solicitations). SASC ¶¶ 123, 172. There are at least three specific misrepresentations/nondisclosures that defendants made in connection with the GP Plan which relate to matters that a reasonable Limited Partner would consider important in deciding how to vote on the Sutherland Plan:
1. Defendants misleadingly represented that, after a priority return ("the Priority Return") defined in the Partnership Agreement is reached, the General Partner will be entitled to 100 percent of the profits of the Partnership until the ratio of the aggregate capital accounts of the General Partner and the Limited Partners becomes 30:70. SASC ¶ 102; see also Ex. D at 29; FAC ¶ 85. In an affidavit filed in the Delaware action, defendant Leonard Chill claimed that this amount would be approximately $65 million if the Partnership were liquidated now. SASC ¶ 102; see also Ex. S at 5-7. In fact, this amount will be zero, because the aggregate capital accounts of the General Partner and the Limited Partners will become equal to zero at the precise moment that the Priority Return is reached. SASC ¶ 102; see also Ex. R, §§ 6(d)-(e), pp. 136-38. Consequently, the General Partner will only be entitled to 30 percent of the distributions of the Partnership after the Priority Return is reached (except that the General Partner will be entitled to just 7.5 percent if it is removed). SASC ¶ 102; see also Ex. R, §§ 5(e), 6(e)-(f), pp. 133-34, 138-39; Ex. R, § 7(g)(ii) (as amended), pp. 24-26; FAC ¶ 85. Defendants admitted this in the original offering memorandum used to sell Partnership Units. SASC ¶ 102; see also Ex. T at 220 and generally.
2. Defendants consistently failed to disclose in their proxy solicitations that the individual defendants are subject to a conflict of interest because of their dual roles as executive officers in the Company and persons who control the General Partner. SASC ¶¶ 96, 126, 148, 150, 152; see also FAC ¶¶ 79, 109, 127, 129, 131.
3. Defendants repeatedly failed to disclose that the Partnership can obtain a control premium though a sale or other block transfer of its controlling Company stock to a single buyer. SASC ¶¶ 108-112, 149; see also FAC ¶¶ 91-95, 129.
Plaintiffs will be easily able to meet the requirement of demonstrating irreparable harm necessary to obtain a preliminary injunction (and would also be able to meet that requirement with respect to a permanent injunction if the requirement was applicable). If defendants are allowed to continue making misrepresentations and nondisclosures in proxy solicitations to the Limited Partners, the Limited Partners will be deprived of their rights to cast a fully informed vote on the Sutherland Plan (or on any other liquidation plan that may be proposed). This Court has already ruled that such harm constitutes irreparable harm of the sort that can justify injunctive relief. Ex. K at 11 (citing Kaufman v. Cooper Companies, Inc., 719 F. Supp. 174, 178 (S.D.N.Y. 1989); Riggs National Bank of Washington D.C. v. Allbritton, 516 F. Supp. 164, 181 (D.D.C. 1981)). Moreover, if defendants use misrepresentations in proxy solicitations to induce the Limited Partners to vote down the Sutherland Plan, calculating damages for the economic harm that the Limited Partners would consequently suffer could be exceedingly difficult or impossible.
Plaintiffs have established that they have a strong case for both a permanent injunction and a preliminary injunction. But they are required to do far less to survive defendants' Rule 12(b)(1) mootness motion. As stated earlier, the standard under Rule 12(b)(1) is whether plaintiffs' claims are "'insubstantial on their face.'" See Hagans v. Lavine, 415 U.S. 528, 542 n.10 (1974). Yet defendants argue that plaintiffs' claims for injunctive relief should be dismissed because "actual success on the merits has not been established." See Motion at 14 n.6. The making of such premature and irrelevant arguments going to the ultimate merits of the issues in the case suggests that defendants realize that they have no hope of meeting the strict standards applicable to their mootness motion.
Defendants' argument that this case is moot is mainly based on the fact that they have, for the moment, stopped making proxy solicitations due to the withdrawal of the GP Plan. However, "'voluntary cessation of allegedly illegal conduct does not deprive the tribunal of the power to hear and determine the case, i.e., does not make the case moot.'" County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979) (quoting United States v. W.T. Grant Co., 345 U.S. 629, 632 (1952)). Where an injunction is sought, the case does not become moot "merely because the [defendant's] conduct immediately complained of has terminated, if there is a possibility of a recurrence which would be within the terms of a proper decree." Armster v. United States District Court, 806 F.2d 1347, 1357 (9th Cir. 1986). "[I]f prospective relief can still be afforded, the controversy is not moot." Campesinos Unidos v. United States Dep't of Labor, 803 F.2d 1063, 1068 (9th Cir. 1986).
"A change of activity under the threat of judicial scrutiny is insufficient to negate the existence of an otherwise ripe case or controversy." Armster, 806 F.2d at 1357. "Where there is a reasonable possibility that the unlawful conduct will recur, the mere cessation of that conduct will not render the challenged conduct immune from judicial scrutiny." Id. at 1358-59. Thus, as explained above, "'[d]efendants face a heavy burden to establish mootness . . . because otherwise they would simply be free to return to (their) old ways after the threat of a lawsuit had passed.'" Id. at 1359 (quoting Iron Arrow Honor Society v. Heckler, 464 U.S. 67 (1983)).
Here, plaintiffs have established a reasonable possibility that defendants will once again begin committing securities violations as a result of their need to oppose the Sutherland Plan. Moreover, defendants have temporarily stopped making illegal proxy solicitations not due to a recognition that their conduct was unlawful, but because they withdrew the GP Plan after it became virtually certain that the Delaware Court of Chancery would issue a permanent injunction against it. "It has long been recognized that the likelihood of recurrence of challenged activity is more substantial when the cessation is not based upon a recognition of the initial illegality of that conduct." Armster, 806 F.2d at 1359.
In addition, in the securities context, it has been held that "where injunctive relief is sought to prevent a recurrence of future violations . . . a claim arising out of a past election . . . is not moot if there is a real threat of recurrence." Wisconsin Real Estate Inv. Trust v. Weinstein, 530 F. Supp. 1249, 1251 (E.D. Wis. 1982) (citing Seibert v. Sperry Rand Corp., 586 F.2d 949, 951 (2d Cir. 1978)). "Similarly, if the proxy materials used in connection with the past election contributed to the outcome of the most recent election, the claim for injunctive relief is not moot." Id. (citing Maldonado v. Flynn, 597 F.2d 789, 797 n.10 (2d Cir. 1979)).
In this case, defendants' past misrepresentations and nondisclosures may, if relief is not issued, improperly affect how the Limited Partners vote on the Sutherland Plan. The true barometer is not the words in the defendants' briefs, but the actions of the defendants themselves. Based on defendants' past conduct, a substantial threat exists that defendants will repeat their prior misleading statements and/or make new misrepresentations in proxy solicitations opposing the Sutherland Plan. Thus, plaintiffs' claims for injunctive relief, which seek to prevent the Limited Partners from being misinformed in the future, are not moot.
The cases cited by defendants in support of their argument that plaintiffs' claims for injunctive relief are moot (see Motion at 4-6, 12) are wholly inapposite. In each of defendants' cases (except for one case in which the court granted injunctive relief12), there was, as a factual matter, no reasonable likelihood that the challenged conduct would be repeated. See S.E.C. v. Medical Committee for Human Rights, 404 U.S. 403, 406 (1972) (no reasonable likelihood of repetition of defendant's initial refusal to include stockholder proposal in proxy statement where proposal was eventually included and was soundly defeated); New York City Emp. Ret. Sys. v. Dole Food Co., 969 F.2d 1430, 1433 (2d Cir. 1992) (same factual scenario as in Medical Committee); Issacs Brothers Co. v. Hibernia Bank, 481 F.2d 1168, 1170 (9th Cir. 1973) (same factual scenario as in Medical Committee); CNW Corp. v. Japonica Partners, L.P., 776 F. Supp. 864, 866, 868 (D. Del. 1990) (no evidence that defendants would again attempt to take over plaintiff corporation, since defendants' takeover attempt was defeated in proxy battle and defendants subsequently disposed of most of their stock in plaintiff corporation); In re Haas, 36 B.R. 683, 690 (Bkrtcy. N.D. Ill. 1984) (challenged conduct not likely to recur where merger proposal had been withdrawn two years earlier and there was no evidence that entity that proposed merger had any interest in acquiring target company at any time after withdrawal of proposal); Siefman v. Wolverine Technologies, Inc., 1988 WL 212474 at *2 (E.D. Mich. Sept. 27, 1988) (no possibility that withdrawn tender offer would be repeated because target corporation had been subsequently acquired by another purchaser). By contrast, the defendants in the case at bar are likely to soon reenter the proxy solicitation arena due to the forthcoming solicitation of proxies by Limited Partner Sutherland for the Sutherland Plan, and would eventually do so anyway because of the general intense pressure they are facing from the Limited Partners to liquidate the Partnership.
In Treves v. Servel, Inc., 244 F. Supp. 773 (S.D.N.Y. 1965), under circumstances with stark parallels to those at bar, the court rejected the defendants' mootness argument. The plaintiff in Treves sought damages and injunctive relief arising out of a proposed merger and out of an interlocking directorate. Id. at 775. Similarly to the defendants here, the Treves defendants argued that the case was moot because "the merger has been abandoned, and the forbidden relationship has been ended." Id. at 776. The court responded, "Defendants' entire legal position as to mootness rests on a failure to attach proper significance to plaintiff's allegations that defendants are guilty of violations of the Securities Acts and the Clayton Act." Id. at 776. The court explained, "Once a violation is assumed, as must be done in this procedural context, [the applicable law] precludes a successful argument that abandonment of the merger and cessation of the challenged relationship automatically mooted the applicable portions of plaintiff's causes of action." Id.
The court went on to quote from United States v. W. T. Grant Co., 345 U.S. 629, 632 (1953):
Voluntary cessation of allegedly illegal conduct does not deprive the tribunal of power to hear and determine the case, i.e., does not make the case moot. A controversy may remain to be settled in such circumstances . . . . The defendant is free to return to his old ways . . . . This, together with a public interest in having the legality of the practices settled, militates against a mootness conclusion. . . . For to say that the case has become moot means that the defendant is entitled to a dismissal as a matter of right. The courts have rightly refused to grant defendants such a powerful weapon against public law enforcement . . .
Treves, 244 F. Supp. at 776 (ellipses in original) (citations omitted).
The Treves court determined that, as here, the plaintiff had viable claims for both damages and injunctive relief. Id. at 777. The plaintiff in Treves, similarly to the plaintiffs at bar, sought "damages for the cost to the corporation of the merger which was thereafter abandoned, e.g., expenses relating to the preparation and distribution of the proxy statement." Id. In addition to ruling that this damages claim was not "moot," the court decided that "plaintiff's request for permanent injunctive relief will not be dismissed at this juncture." Id.
The court explained that "the climate for repetition of the challenged conduct exists as it did before commencement of plaintiff's lawsuit." Id. Such a climate also exists in the case at bar, as solicitation of proxies for the Sutherland Plan will soon begin, and the General Partner is virtually certain to oppose it. The Treves court further stated,
P>There is, additionally, a genuine factual dispute about the existence of a causal relationship between commencement of suit by plaintiff and cessation by defendants of the allegedly improper activities. The possibility, therefore, exists that dismissal of the lawsuit might result in resumption of the challenged activities, and plaintiff ought to be given an opportunity to prove that this is a real threat, calling for permanent injunctive relief.
Id. (emphasis added). Likewise, dismissal of this suit might be treated by the defendants as a sign that they may violate the securities laws with impunity in opposition to the Sutherland Plan. Thus, the plaintiffs ought to at least be given an opportunity to prove that permanent injunctive relief is justified by a real threat of recurrent violations.
Defendants have failed to meet the "heavy burden" which a proponent of a mootness argument must surmount. As stated above, defendants were required to show (1) that "there is no reasonable expectation that the alleged violation[s] will recur" and (2) that "interim relief or events have completely and irrevocably eradicated the effects of the alleged violation[s]." See County of Los Angeles v. Davis, 440 U.S. 625, 631 (1979). Defendants have not come close to making such a showing -- plaintiffs have strong claims for damages and for prospective injunctive relief. For the foregoing reasons, plaintiffs respectfully request that defendants' motion to dismiss be denied.
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Dated: July __, 1998 |
THE MILLS LAW FIRM By:_____________________________ |
D:\Winword\DOCS\SYN2\MotAmndCom.doc/clh
1 The term "plaintiffs," as used in this opposition, refers to Lead Plaintiff Dwight E. Wininger, M.D. and Limited Partner Charlene E. Sutherland. Contemporaneously with the filing of this opposition, Lead Plaintiff Wininger has moved to file a Second Amended and Supplemental Complaint ("SASC") under which, among other things, Limited Partner Sutherland would be added as a named plaintiff.
2 Plaintiffs believe that all the monetary and injunctive relief discussed in this Opposition may be properly granted pursuant to the pending First Amended and Supplemental Complaint ("FAC"), as all the causes of action justifying that relief are in the FAC. With respect to relief, the FAC requests "damages as according to proof," injunctive relief, and all other relief "that is otherwise just and reasonable." FAC ¶¶ 144, 148. Plaintiffs' proposed Second Amended and Supplemental Complaint does not add any new causes of action. The main changes made by the SASC are that the SASC describes in detail how the Limited Partners, the Partnership, and the plaintiffs have suffered damages, and that the SASC updates plaintiffs' requests for injunctive relief to reflect the changes in circumstances that have occurred since the filing of the FAC. See Plaintiff's Motion to Amend and Supplement His Complaint, filed July 17, 1998.
3 All exhibits cited herein are attached to the Declaration of Alex J. Luchenitser filed herewith.
4 According to defendants' proxy statement for the GP Plan, the expenses of the GP Plan were to be advanced by the Company, but the Partnership was to owe a debt to the Company for all the expenses (with the exception, under certain circumstances, of expenses in excess of $1.8 million). Ex. D at 30. As such, the Partnership apparently has incurred a substantial debt to the Company for the GP Plan expenses.
5 An investor may sue both on his own behalf and derivatively on behalf of the corporation or partnership for damages incurred by the corporation or partnership as a result of proxy violations. See Yamamoto, 564 F.2d at 1326 ("a shareholder who alleges a deceptive or misleading proxy solicitation is entitled to bring both direct and derivative suits"); Katz, 774 F. Supp. at 127 ("Even a proxy claim, seeking a damage remedy on behalf of the corporation, cannot be classified solely as derivative").
6 Plaintiffs' federal securities claim cannot be brought in the Delaware action because federal courts have exclusive jurisdiction over claims of violations of the federal securities laws. See 15 U.S.C. § 78aa; Silberkleit v. Kantrowitz, 713 F.2d 433, 434-35 (9th Cir. 1983).
7 Limited Partners who did not participate in the Underwritten Sale would have had to wait 360 to 720 days or longer after the initiation of implementation of the GP Plan to receive full liquidity for their investment through one to three distributions of Company stock. SASC ¶¶ 57-59; see also Ex. D at 7; FAC ¶¶ 47-49.
8 The fee and cost provisions of plaintiff Wininger's fee agreement are identical to the fee and cost provisions of the standard contingency fee agreement used by plaintiffs' counsel with respect to the Partnership. Ex. O. Plaintiff Wininger reserves the attorney-client privilege with respect to all other provisions of his retainer agreement.
9 Cf. Lewis v. McGraw, 495 F. Supp. 27, 30 (S.D.N.Y. 1979) ("It would be inconsistent with the purposes of Section 14(e) to preclude an action for damages relating to pre-tender offer violations in cases where no tender offer was in fact made"), aff'd, 619 F.2d 192 (2d Cir.), cert. denied, 449 U.S. 951 (1980).
10 Defendants' contention that "Sutherland has filed a shell of a proxy statement which is obviously incomplete" is belied by the thick and comprehensive proxy statement for the Sutherland Plan. See Ex. Q. Limited Partner Sutherland has received comments from the SEC and responded to them, and she expects to file the final version of the proxy statement and begin soliciting proxies soon.
11 In any event, plaintiffs can easily demonstrate irreparable harm. See infra § IV(C).
12 In Dillon v. Berg, 326 F. Supp. 1214, 1228, 1235 (D. Del. 1971), aff'd, 453 F.2d 876 (3d Cir. 1971), the court invalidated the result of a shareholders meeting and ordered corrected proxy materials complying with the proxy rules to be sent out, but noted that a misstatement concerning one specific proposal was moot because that proposal had been withdrawn. The injunction issued in Dillon, because it required the defendant to disseminate corrected proxy materials, would have prevented the defendants from making misrepresentations about the withdrawn proposal had they chosen to resubmit it. See id. at 1235.