Opinion
96 Civ. 5567 (RPP), 96 Civ. 7527 (RPP), 96 Civ. 7936 (RPP)
February 27, 2001
OPINION AND ORDER
Class Plaintiffs move pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 56 for summary judgment on liability and damages against Defendants Jack Banks and Larry Weltman. On January 27, 2000, a default judgment was entered against GalaxiWorld.com Limited ("GalaxiWorld"), formerly Gaming Lottery Corporation ("Gaming Lottery"), after GalaxiWorld failed to appear as ordered for a hearing on January 25, 2000. For the following reasons, the motion of Class Plaintiffs for summary judgment is granted as to the liability of Defendants Banks and Weltman for the period of May 3, 1995, through May 24, 1996.
BACKGROUND
This class action was filed pursuant to Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and 78t(a), and Rule 10b-5 of the Rules of the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5, on behalf of purchasers of securities in Gaming Lottery, a Canadian corporation, during the period February 1, 1995 to May 24, 1996. (See Consolidated Amended Class Action Complaint, dated Jan. 13, 1997, ("Compl.") ¶ 35-36.) Defendants are alleged to have issued misleading public statements and financial reports between February 1, 1995, and May 24, 1996, causing the stock of Gaming Lottery to be overvalued. (Id.)
Gaming Lottery's name was Laser Friendly Corporation until July 28, 1995. Gaming Lottery is now called GalaxiWorld.com Limited ("GalaxiWorld").
The facts set forth below are taken from the parties' statements of fact pursuant to S.D.N.Y. Civ. R. 56.1 and the supporting affidavits and exhibits thereto. Pursuant to Rule 56.1, Class Plaintiffs' statements are considered admitted unless disputed by Defendants with citations to supporting evidence.
On January 31, 1995, Gaming Lottery (formerly Laser Friendly) entered into a purchase agreement (the "Purchase Agreement") with Ace Novelty Co., Inc. ("Ace") and ANCI, Inc. ("ANCI"), both State of Washington corporations, for Specialty Manufacturing, a division of Ace. (Plaintiffs' 56.1 Statement ("Pl.s' 56.1 Stint.") ¶ 1, 4.) Gaming Lottery established a wholly-owned subsidiary, Specialty Manufacturing, Inc. ("SMI"), a State of Washington corporation, to acquire Specialty Manufacturing. (Id. ¶ 3.) The Purchase Agreement provided, inter alia, that closing was conditional on SMI's obtaining regulatory approval from eight of nine states, including Washington and Nebraska, with the ninth state being either New York or Pennsylvania. (Id. ¶ 4.) The Purchase Agreement provided that in the event the Final Closing did not occur on or before March 31, 1995, the purchase price of $4,650,000 (subject to adjustments) would be paid to the vendor's attorney to be held in escrow. (Id.)
A. Events Prior to and Execution of the Final Closing
On December 28, 1994, Eleesha Swartz, general counsel for Gaming Lottery, wrote to the Washington State Gambling Commission ("WSGC") advising it that Gaming Lottery had "signed a letter of intent to acquire Specialty Manufacturing" and that the "transaction is scheduled to close on January 31, 1995." (Id. ¶ 2.) On January 19, 1995, the WSGC advised Defendant Jack Banks, Gaming Lottery's president and chief executive officer, in writing that: (1) "[t]he license issued . . . to Ace . . . to manufacture and sell pull tabs . . . is not transferrable and will become null and void upon conclusion of the purchase [of the Specialty Manufacturing division of Ace] by Laser Friendly, Inc. [Gaming Lottery]"; (2) that it had not yet received Gaming Lottery's application for licensure for Specialty Manufacturing; and (3) "[p]rior to [SMI]'s receiving authorization to manufacture and sell pull tabs in Washington, an application must be filed and an extensive pre-license investigation is conducted. Pre-license investigations can take from five to ten months to complete." (Id. ¶ 3.)
On February 1, 1995, Gaming Lottery issued a press release announcing that it had "completed the acquisition of Specialty Manufacturing, a division of Ace Novelty Co., Inc. subject to receipt of regulatory approval for the requisite gaming licenses." (Id. ¶ 5.) Defendant Banks was quoted in the press release as stating, "[w]e are pleased to have consummated this acquisition." (Id.) Defendant Weltman was identified as the contact person on the press release. (Id.)
On February 13, 1995, Defendants issued a press release announcing that Gaming Lottery had reached an agreement to raise between $10 million and $20 million to fund future acquisitions. (Id. ¶ 6.) Defendant Banks was quoted in the press release as stating, "[w]e have demonstrated our ability to grow through acquisition." (Id.) Defendant Weltman was identified as the contact person on that press release. (Id.)
On February 14, 1995, Eleesha Swartz, who was also general counsel of SMI, filed SMI's application for a license to manufacture pull tabs in the State of Washington, stating that SMI "acquired Specialty Manufacturing, a division of Ace Novelty Co., Inc. on February 1, 1995. The completion of the transaction is conditional upon obtaining the requisite gaming license for the State of Washington." (Id. ¶ 7; Defendants' Response to Plaintiffs Statement Pursuant to Local Civil Rule 56.1 ("Def.s' 56.1 Stmt.") ¶ 7.) The letter also stated that "[t]he Applicant [for the license] purchased the ongoing business of Ace Novelty," and that the "Specialty Manufacturing division will not be transferred until the State of Washington has granted a license to the applicant." (Pl.s' 56.1 Stmt. ¶ 7; Def.s' 56.1 Stmt. ¶ 7.)
On March 14, 1995, by letter to Robert Wilkinson, President of SMI, the WSGC requested, among other things, additional information from SMI and from Laser Friendly (USA) Inc., a newly formed State of Washington corporation holding all of SMI's shares. (Pl.s' 56.1 Stmt. ¶ 8.) The WSGC asked that SMI provide copies of the Purchase Agreement and any "business purchase" or "closing documents," among other documents, "to complete your application for your gambling license." (Id.) The WSGC also requested that SMI provide copies of "meeting minutes covering the formation of the corporation, election of current officers and issuance of stock." (Id.) The WSGC also requested that Laser Friendly (U.S.A.) Inc. provide "[a]greements of any and all subsidiaries to include exclusive, partnership, management, franchise, consulting, lease or any other agreements." (Id.)
On March 31, 1995, SMI placed $4,258,997 in escrow pursuant to the Purchase Agreement. (Pl.s' 56.1 Stmt. ¶ 9.)
By letter dated April 19, 1995, Eleesha Swartz, acting as general counsel for SMI, responded to the WSGC's requests of March 14, 1995. (Id. ¶ 10.) In her letter, Swartz advised the WSGC that "[t]he only documents executed in respect to the purchase of Specialty . . . is [sic] the purchase and sale agreement, a copy of which is enclosed." (Id.)
On April 28, 1995, Cathy L. Mercer, an attorney with Cassels Brock Blackwell, Canadian counsel to Gaming Lottery, wrote to the Toronto Stock Exchange, with copy to Swartz, that "the Corporation has executed and delivered a purchase agreement with Ace Novelty Co. Inc., of Washington State, as disclosed in our letter to you dated January 8, 1995; however, closing is conditional upon receipt by the Corporation of a number of required licenses, including gaming licenses. The Corporation expects to be in receipt of such licenses by July 1, 1995, and we will advise accordingly." (Pl.s' 56.1 Stmt. ¶ 11.)
On May 3, 1995, Laser, SMI, Ace and ANCI, Inc. executed a final closing agreement effective as of April 30, 1995 ("Final Closing Agreement"), with a reduction of $130,000 in the purchase price. (See Pl.s' Ex. 12.) The Final Closing Agreement included the following
The Purchase Agreement provided that the assets of Ace's Specialty Manufacturing division would be transferred to ANCI, and Laser Friendly and SMI would purchase all the shares of ANCI at the final closing date. (See Pl.s' Ex. 12.)
provisions: (1) the "Vendor and Purchaser hereby acknowledge that all the conditions to Final Closing . . . have been fully satisfied or waived by Vendor and Purchaser, except as otherwise expressly provided herein"; (2) the deletion of Paragraphs 16(e)(i), 16(i), 160), 17(b) and 17(c) in the Purchase Agreement, which included the requirement that Laser or SMI obtain licenses from regulatory authorities prior to closing; (3) Ace "shall operate the business of the Division for ANCI for the period of time specified in the Operating Agreement," attached as Exhibit A to the Final Closing Agreement; and (4) Laser and SMI shall indemnify Ace from liabilities of any nature arising from the business as defined in the Operating Agreement and guarantee ANCI's performance under the Operating Agreement. (Id.).
Attached to the Operating Agreement were "Operational Notes for Ace Novelty — Laser Friendly Transition April 25, 1995." (See Pl.s' Ex. 12.) On pages 7 and 8, that document states the following:
15. What to tell Inside/Outside contacts, etc. such as Customers, Regulators, Employees, Vendors:
a. Basically the plan is to say nothing. If asked, we say there is no change, this is just in further anticipation of the transition to Laser USA and it is just getting our ducks in a row and things in position to make those changes.
b. In regards to discussions with Regulators, Kenn [Ace] continues to be the point person and place that all inquiries from Regulators etc. goes as it relates to Ace's business and operating under Ace's licenses and that continues to happen until Specialty physically takes over and operates under its own name . . . .
19. In the event of a disagreement on the operation of the business between Ace and Robert Wilkinson on behalf of ANCI under Section 2.3 of the Operating Agreement, all strategic decisions, i.e. marketing and production, Robert Wilkinson shall make the final determination.
(Pl.s' Ex. 12 at ACE 109968.)
On May 3, 1995, Michael Morgan, Ace's corporate counsel, wrote to "[a]ll [i]nterested [p]arties," including Defendant Weltman, advising that "we accomplished the Final Closing today and disbursed the proceeds from the transaction as instructed." (Pl.s' 56.1 Stmt. ¶ 13.) Morgan caused the escrow funds to be transferred to Ace's bank. (Id.) The $130,000 reduction in the purchase price was returned to Gaming Lottery. (Id.)
No press release was issued disclosing the Final Closing. (Id. ¶ 19.)
B. Events Following the Final Closing
On May 2, 1995, Gaming Lottery issued a press release announcing that it had "entered into a 5 year contract with YIN 88 Gaming Corporation . . . to supply YIN 88 Gaming with pulltab (break open) gaming tickets" and that the "contract commences on June 1, 1995 with an estimated value of $56,000,000 in revenues." (Id. ¶ 20.) Defendant Banks was quoted in the press release as stating that "[w]e are excited that Laser Friendly, through its subsidiary Specialty Manufacturing, Inc. will be a major supplier in these new markets. This adds tremendous value to this recent acquisition." (Id.)
The January 31, 1995, Purchase Agreement had provided that "[a]ll profits generated and losses incurred by the Division [Specialty Manufacturing] during the Interim Period [until the closing] are for the account of the Purchaser," and that the "Vendor [Ace] shall provide the Purchaser [Gaming Lottery Corp.] with an unaudited statement of profit and loss for the Division prepared in accordance with generally accepted accounting principles . . . . to be delivered to the Purchaser, within 20 days following completion of the Interim Period." (Pl.s' 56.1 Stmt. ¶ 21.) On May 23, 1995, Ace provided Defendant Weltman in writing with "the interim financial statements for the period February 1 to April 30, 1995 prepared in accordance with the contract." (Id. ¶ 22.) Throughout late May, June and most of July, the parties continued to exchange documentation concerning the financial statements for the interim period. (Id.) On July 20, 1995, Ms. Swartz wrote Ace advising that "[w]e are still in the process of a detailed review of the financial statement and have requested numerous details thereon. It is our opinion that the financial statement is not accurate as there were several errors in it." (Id.) Defendant Weltman was shown as a recipient of a copy of Ms. Swartz' July 20, 1995, letter. (Id.) On June 8, 1995, Gaming Lottery issued a press release reporting consolidated financial results for its first quarter ended April 30, 1995, including the operations of Specialty Manufacturing, consisting of revenues of approximately $12 million and net income of approximately $2.3 million. (Id. ¶ 23.) On June 12, 1995, Defendant Banks issued a President's Report to shareholders repeating Gaming Lottery's consolidated first quarter operating results and stating that:
On February 1, 1995 the Company acquired the business division of Specialty Manufacturing from Ace Novelty Co., Inc
With the completion of this second strategic acquisition, [Gaming Lottery] is on the move to rapidly becoming a leader in the North American gaming industry.
(Pl.s' 56.1 Stmt. ¶ 24.)
On June 20, 1995, Gaming Lottery in an announcement asking its shareholders to rename the company Gaming Lottery Corp also stated that "[i]n the past year, [Gaming Lottery] has acquired . . . Specialty Manufacturing, a manufacturer and supplier of break-open pulltab gaming tickets for the charitable, gaming and bingo markets." (Pl.s' 56.1 Stmt. ¶ 26.) The press release further stated that Gaming Lottery "now operates five plants across the U.S. and one in Canada." (Id.) Defendant Weltman was identified as the contact person on the press release (Id.)
On June 27, 1995, Gaming Lottery issued a press release announcing that its wholly-owned subsidiary, Printing Associates, Inc., would begin to supply lottery tickets and receipts for New York State's "Quick Draw" game. (Def.s' 56.1 Stmt. ¶ 27.) On July 7, 1995, Gaming Lottery issued a press release announcing that it had "signed a letter of intent to acquire a major U.S. gaming corporation." (Pl.s' 56.1 Stmt. ¶ 28.) The press release added that the "newest acquisition is the second of four planned during the current fiscal year. In February, [Gaming Lottery] acquired Specialty Manufacturing, a manufacturer and supplier of break-open pulltab gaming tickets for the charitable gaming and bingo markets." (Id.) Defendant Weltman was quoted and identified as the contact person in the July 7, 1995, press release. (Id.)
On July 11, 1995, Gaming Lottery issued a further press release announcing that it had "completed an intentional offering of U.S. $22 million to fund the acquisition of a major U.S. gaming corporation." (Id. ¶ 29.) Defendant Banks was quoted and Defendant Weltman was identified as the contact person on the press release. (Id.)
On or about July 14, 1995, Gaming Lottery began mailing to its shareholders an Annual Report for fiscal year ended January 31, 1995. (Id. ¶ 30.) The Annual Report stated that:
The Company and its subsidiaries, Laserdata Technology, Inc., Printing Associates, Incorporated, and Specialty Manufacturing Inc., operate from five plants in the United States and one plant in Canada.
(Id.) The Annual Report further stated that the Company's "[b]reak open pull-tab tickets for bingo and charitable gaming events were manufactured in Washington by Specialty Manufacturing, Inc." (Id.)
In the Annual Report, Note 16(a) to the Consolidated Financial Statements for the fiscal year ended January 31, 1995, entitled "Subsequent events," read, "[o]n February 1, 1995, the corporation acquired the Specialty Manufacturing division of Ace Novelty Co., Inc. for an estimated purchase price of $4,260,000 U.S. cash. This acquisition was made subject to the corporation obtaining all requisite gaming licenses to carry on the business of the Specialty Manufacturing Division." (Def.s' 56.1 Stmt. ¶ 30; Pl.s' Ex. 27 at 22.)
On July 25, 1995, The Financial Post quoted Defendant Weltman as stating:
Quotations from financial publications are included in the statement of facts merely for their relevance to the market price for shares of Gaming Lottery Corporation.
We're buying companies that will allow us to expand into new gaming markets. . . . When we bought Specialty Manufacturing, we went into the bingo and charitable market through pulltab tickets.
(Pl.s' 56.1 Stmt. ¶ 31, Pl.s' Ex. 28.)
On July 27, 1995, Gaming Lottery issued a press release announcing that it had "completed the acquisition of Trade Products, Inc., a leading U.S. gaming supply manufacturer, subject to regulatory approval." (Pl.s' 56.1 Stmt. ¶ 32.) Defendant Weltman was quoted in the press release as stating that "[w]ith this acquisition, made possible by our rapid growth and aggressive acquisition strategy, Laser Friendly moves to the forefront of the bingo and charitable gaming supply markets and strengthens its hand in the lottery markets as well." (Id.) Defendant Weltman was also identified as the contact person on the press release. (Id.)
Ron Rudy, a principal of Trade Products, testified that he was informed by Defendant Weltman that "there was a contract signed" to acquire Specialty Manufacturing and that "the moneys were escrowed pending the licensing approval." (Pl.s' 56.1 Stmt. ¶ 35.) Rudy further testified that "we did not know that the money had changed hands. We were of the understanding the money was in an escrow account and would be exchanged when the financial licensing occurred." (II)
On August 14, 1995, Swartz wrote to regulators in Illinois advising them that "Laser Friendly (U.S.A.), Inc. is in the process of purchasing the Specialty Manufacturing division of Ace. The transaction has not closed and will not close until such time as Specialty Manufacturing, Inc. is in receipt of all U.S. gaming licenses and we will advise you with respect thereto in due course." (Id. ¶ 36.)
On August 22, 1995, Swartz faxed to the WSGC a memorandum dated August 17, 1995, prepared by Steven Troster, a Toronto lawyer who represented Gaming Lottery in connection with the May 3, 1995, closing with Ace. The memorandum stated that "funds in the amount of $4,258,997 representing the purchase price as adjusted, were wire transferred by Laser . . . to the solicitors for the vendors of Specialty. . . . I further confirm that the documentation executed by the parties provides that such funds are to be held by the solicitors for the vendors until the earlier of September 30, 1995, or until such time as agreed to by the parties." (Pl.s' 56.1 Stmt. ¶ 14, 38.) The August 22, 1995, fax cover sheet from Swartz stated "[f]urther to your phone message is a copy of our attorney's letter confirming wire transfer of funds." (Id. ¶ 38.)
In fact, the escrow funds had been wire transferred to Ace's bank on or about May 3, 1995, with $130,000 returned to Gaming Lottery and $100,000 held in escrow pending resolution of the accounting for the interim period. (Id. ¶ 39.)
On August 21, 1995, Gaming Lottery issued a press release announcing that its Wholly-owned subsidiary, Printing Associates, Inc., "had received notice that it will be supplying the Illinois State Lottery Corporation with on-line terminal rolls." (Id. ¶ 40.) The press release added that Gaming Lottery "has been pursuing an aggressive acquisition strategy in the gaining industry, having completed three major acquisitions in the past ten months." (Id.)
On August 28, 1995, the Dow Jones Investor Network quoted Defendant Weltman as stating in an interview: "[O]ur first quarter was the first one that really reflected our last two acquisitions. . . . But as far as the second quarter, you know, it obviously will reflect the acquisitions of [Printing] Associates and acquisitions of Specialty Manufacturing, but we haven't really given any information out about those as yet." (Id. ¶ 41.) In the same interview, the Dow Jones Investors Network also reported that Defendant Weltman stated that Gaming Lottery had acquired Trade Products and that "our existing businesses are very regulated and we have a high degree of respect for those regulations." (Id. ¶ 42.)
Defendants were required to obtain a separate license from the State of Nebraska in order to be able to sell Specialty Manufacturing products in that state. (Id. ¶ 43.) Nebraska was one of the nine states for which the January 31, 1995, Purchase Agreement made licensing approval a condition for closing, although the provision also expressly permitted Gaming Lottery to waive any of the conditions listed in the Purchase Agreement. (Id.; Def.s' 56.1 Stmt. ¶ 43.)
The State of Nebraska interviewed Defendants Weltman and Banks on June 22, 1995, in connection with Gaming Lottery's license application. (Pl.s' 56.1 Stmt. ¶ 44.) Those interviews were audio-taped and transcribed by Nebraska. (Id.)
In his interview on June 22, 1995, with the Nebraska Department of Revenue in connection with the licensing of SMI in that state, Weltman stated that Gaming Lottery was in the process of acquiring the Specialty Manufacturing division of Ace and that the closing of the deal was pending the acquisition of the requisite licenses. (Pl.s' Ex. 34 at 9, 21, 38-40.) Furthermore, contemporaneous notes maintained by Deborah Weber of the Nebraska Department of Revenue of conversations with Swartz on August 24, 1995, indicate that Swartz's response to the question, "Has the final sales agreement been signed?" was "No, we are still waiting on Nebraska and Washington licensure." (Pl.s' 56.1 Stmt. ¶ 36.) On September 18, 1995, in a subsequent conversation with Ms. Weber, Ms. Swartz reiterated that no different sale or purchase agreement had been drafted since the original one back in the beginning. (Id.)
Banks' interview was continued on October 20, 1995. (Id. ¶ 37.) Subsequent to that interview, Nebraska wrote Eleesha Swartz a letter dated November 17, 1995, following up on various requests for information about prior financial dealings that had been made at the October 20, 1995, Banks interview. (Id. ¶ 49.) That letter was never responded to and although never publicly disclosed, in early December 1995 Banks and Weltman determined not to pursue further licensing in the State of Nebraska. (Id.)
Trade Products had retained Mary Magnuson, an attorney with expertise in licensing matters, to assist it in maintaining Trade Products' licenses during the transition to Gaming Lottery's ownership. (Id. ¶ 34; Def.s' 56.1 Stmt. ¶ 34.) Mary Magnuson was advised directly by the WSGC in July 1995 that Gaming Lottery would be required to make "complete disclosure of all sources of financing for the TPI acquisition" and that "[t]he Commission will eventually request this information from Laser Friendly, but it would expedite matters considerably if the information were provided to the Commission immediately." (Pl.s' 56.1 Stmt. ¶ 50; Def.s' 56.1 Stmt. ¶ 50.) Subsequently, by telephone on September 14, 1995, and then by letter dated September 29, 1995, the WSGC requested Gaming Lottery to provide, among other things, "[a] listing of the names, addresses, and the investment amount for every individual who bought stock in conjunction with the . . . . private stock placements to fund the purchase of Specialty Manufacturing and Trade Products, Inc." (Pl.s' 56.1 Stmt. ¶ 51.) The WSGC's request was based on Washington Administrative Code, Title 230, Chapter 230-04-110 (WAC 230.04.110), which requires that an applicant for a gambling license make available for review "all records related to the ownership or operation of the business." (See Wash. Admin. Code 230-04-110 (West 2000).)
On September 20, 1995, Gaming Lottery issued a press release announcing consolidated operating results for the six months ended July 31, 1995. (Pl.s' 56.1 Stmt. ¶ 37.) The consolidated operating results incorporated the operating results of Specialty Manufacturing. (Id.) Gaming Lottery reported an increase in sales of 463% over the prior year, revenues of $25.4 million, net income of $4.75 million, and earnings per share of $0.26. (Pl.s' Ex. 42.) The press release added that "[t]he gains reflected growth in the Company's core business as well as an aggressive acquisition program that has expanded the Company's products, markets and capabilities." (Pl.s' 56.1 Stmt. ¶ 37.) No mention was made of Specialty Manufacturing's lack of a license from the WSGC. (Pl.s' Ex. 42.)
On September 21, 1995, The Financial Post reported that Defendant Weltman stated with respect to Gaming Lottery's reported financial results for the second quarter ended July 31, 1995, that "more than 80% of the sales increase could be attributed to the two acquisitions: . . . Printing Associates, purchased a year ago, and Specialty Manufacturing, acquired this past February." (Pl.s' 56.1 Stmt. ¶ 52.)
On September 28, 1995, in response to the WSGC's September 14, 1995, telephone inquiry, Defendant Banks wrote to the WSGC, advising it that the private placements were purchased by three overseas investment funds consisting of 31, 23, and 26 individuals, respectively, and that Gaming Lottery was "not privy to the identities of the fund members." (Id. ¶ 53.)
In a letter dated October 20, 1995, the WSGC advised Defendant Banks that:
The application of Gaming Lottery Corporation will be held until November 6, 1995, without further action. If, by that date, we have not received the information requested in Paragraph (5) of the September 29, 1995 letter (copy attached), or a letter withdrawing the application, the staff will commence the process which may result in the denial of the license.
(Def.s' 56.1 Stmt. ¶ 54.)
In a letter dated November 7, 1995, after a meeting among Frank Miller, Commissioner of the WSGC, Defendant Jack Banks, Defendant Larry Weltman and the principals of Trade Products, the WSGC advised Defendant Banks that disclosure of the identities of each of the investors in the private placements was necessary to Gaming Lottery's application for a license for Specialty Manufacturing. (Pl.s' Ex. 46.)
On November 22, 1995, SMI filed a petition in Washington State Superior Court to compel the WSGC to issue a license to SMI without the disclosure of the investors' identities. (Pl.s' 56.1 Stmt. ¶ 55.)
Despite the November 7, 1995, letter from the WSGC, on December 6, 1995, Defendant Weltman was quoted by the Dow Jones News Service as stating that "[w]e believe (these approvals) [to operate Trade Products] are just a formality," and that Gaming Lottery can include Trade Products' earnings retroactively once the approvals are in place. (Id. ¶ 56.)
On December 13, 1995, Gaming Lottery issued a press release announcing that it was "negotiating the acquisition of a major gaming company." (Id. ¶ 57.) Defendant Weltman was identified as the contact person on the press release. (Id.) The press release described Gaming Lottery as "a diversified gaming company that is pursuing an aggressive strategy to acquire other specialized gaming companies to expand its existing markets and branch into other gaining markets." (Id.)
On December 18, 1995, Defendant Weltman submitted a Declaration that had been prepared by Ronald Meltzer, Esq., an outside attorney for SMI, in support of SMI's motion for summary judgment to compel the WSGC to issue a license to SMI. (Id. ¶ 58.) Weltman stated in his Declaration that:
At all times, Gaming Lottery Corporation and its subsidiaries have provided the Washington State Gambling Commission with every document within their power to provide. . . . [The Commission's] failure to act and grant the license has caused great harm not only to our company but to the prospective sellers, Ace Novelty and Trade Products, Inc.
(Id.)
On December 21, 1995, Gaming Lottery issued a press release announcing that it had "completed an international offering of U.S. $12 million to fund the recently announced planned acquisition of a major gaming supply company." (Id. ¶ 59.) Defendant Weltman was identified as the contact person and was quoted in the press release as stating that "the size and success of this private placement demonstrates the confidence the market has in our strategy of expanding our product offerings through the purchase of other gaming enterprises." (Id.)
On December 29, 1995, Gaming Lottery issued a press release reporting consolidated financial statements for the third quarter ended October 31, 1995, including the operations of Specialty Manufacturing. (Id. ¶ 60.) Gaming Lottery reported third quarter revenues of S35.2 million, net income of $7.6 million, and earnings per share of $0.38. (Id.) The press release disclosed that the reported results "did not reflect revenues from the Company's newest acquisition, Trade Products" and that that acquisition had been "completed on July 27, 1995 and is still in the process of securing all the necessary regulatory approvals." (Id.) No mention was made of Specialty Manufacturing's lack of a WSGC license. (See Pl.s' Ex. 52.) The press release also stated that the "Company's performance reflects the continued growth of the gaming industry as well as the prudence of the Company's acquisitions." (Pl.s' 56.1 Stmt. ¶ 60.)
Defendants Banks and Weltman also signed and Gaming Lottery distributed a President's Report to investors dated December 29, 1995, repeating Gaming Lottery's third quarter operating results and adding that "[w]e anticipate the final approvals [for Trade Products] will be in place early in calendar year 1996." (Id. ¶ 61.)
On January 23, 1996, Weltman stated in an interview over the Dow Jones Investor Network that he was "comfortable that" GLC would receive regulatory approval to acquire Trade Products. (Id. ¶ 62.)
In an Order dated February 12, 1996, incorporating a transcript of an oral ruling on January 16, 1996, the Superior Court of the State of Washington denied Gaming Lottery's motion for summary judgment and dismissed with prejudice Gaming Lottery's petition, holding that:
There is not stated in the rules any limit upon the Gambling Commission's power to gather this information. . . . The record before me is not sufficient to establish that the information sought by the Commission is impossible to supply or that it is not material to any of their enforcement aims, and so I am going to dismiss the case.
(Id. ¶ 63.) Defendants did not issue a press release disclosing the dismissal of their petition. (Id. ¶ 64.)
On April 15, 1996, the WSGC filed a complaint against SMI seeking to restrain it from transferring the assets of Specialty Manufacturing. (Id. ¶ 65.) Paragraph 14 of that complaint alleges that:
[The State of Washington has] developed information through investigation which indicates that [SMI, Gaming Lottery, and Ace] have conspired to permit the manufacture and sale of gambling devices (pull tabs) by persons and entities who are not licensed to manufacture gambling devices in the State of Washington, in violation of RCW 9.46.310; and has knowingly owned, manufactured, possessed, bought, sold, financed, held a security interest in and transported gambling devices, in violation of RCW 9.46.2 15, and will, unless enjoined, continue to do so.
(Id.)
An affidavit of Julie Maas, a Special Agent of the WSGC, sworn to on April 15, 1996, submitted in support of the Commission's request for an injunction, states that the Commission first obtained copies of the Final Closing Agreement, the Operating Agreement, and the Operational Notes pursuant to an investigation into the ownership of Specialty Manufacturing in March and April 1996. (Id. ¶ 66; Pl.s' Ex. 57.) Maas concluded that the contents of the documents, and the fact that they had not been provided to the Commission, "proves their intent to defraud the Gambling Commission and other entities." (Pl.s' 56.1 Stmt. ¶ 66.) Maas also stated in her affidavit that "[d]uring 1995, we had been repeatedly told that the money was still in the trust account, as the sale had not yet been completed. This proved to be a lie." (Id.)
On April 15, 1996, SMI and Gaming Lottery consented to the restraint sought by Washington State on the distribution or sale of gambling products, although Defendant Weltman testified that Gaming Lottery's attorney Meltzer consented to the restraint without Gaming Lottery's authorization. (Pl.s' 56.1 Stmt. ¶ 67; Def.s' 56.1 Stmt. ¶ 67.)
On May 8, 1996, the WSGC amended its notice of administrative charges to include grounds for denial that Gaming Lottery knowingly operated Specialty Manufacturing in violation of state law from May 1, 1995 until April 1, 1996. (Pl.s' 56.1 Stmt. ¶ 68; Pl.s' Ex. 59.)
On May 14, 1996, Gaming Lottery announced that it was moving to Bermuda. (Pl.s' Ex. 61 (Report of Professor Michael J. Barclay), Ex. D.) On May 23, 1996, Gaming Lottery reported reduced first quarter results and that it had begun the process of divesting itself of its subsidiaries involved in the manufacture of lottery tickets and other gaming paraphernalia. (Pl.s' Ex. 61 ¶ 29.)
On January 2, 1997, Gaming Lottery entered into a Stipulation and Agreed Order, settling the action brought by the WSGC alleging that Gaming Lottery had illegally operated Specialty Manufacturing without State approval, pursuant to which Gaming Lottery agreed not to conduct business that requires licensure by the WSGC for ten years and to sell Specialty Manufacturing and pay the WSGC one third of the sales price, up to $750,000, or $500,000, whichever was greater. (Pl.s' 56.1 Stmt. ¶ 69; Pl.'s Ex. 58, 4c, 4e.) The Stipulation and Agreed Order provided that "[t]his payment to the Commission is in lieu of any civil or criminal action by the State of Washington for forfeiture of such assets or otherwise." (Pl.s' 56.1 Stmt. ¶ 67; Pl.'s Ex. 58, ¶ 4c.)
II. Procedural Background
On July 24, 1996, a complaint was filed in this action. On December 13, 1996, three securities fraud class actions entitled Pecarsky v. Banks, 96 Civ. 5567, Cohen v. Banks, 96 Civ. 7936, and Giamboi v. Banks, 96 Civ. 7527, which were pending in the Southern District of New York, were consolidated pursuant to Fed.R.Civ.P. 42(a). On March 4, 1997, by order of this Court, the caption of the consolidated case was changed to In re Gaming Lottery Securities Litigation. On February 25, 1999, Plaintiffs' motion for an order certifying the class pursuant to Fed.R.Civ.P. 23(a) and 23(b)(3) was granted.
On January 27, 2000, a default judgment was entered in this case against GalaxiWorld (formerly named Gaming Lottery Corporation, and named Laser Friendly Corporation until July 28, 1995), after GalaxiWorld failed to appear as ordered at a hearing on January 25, 2000. In the default judgment, the Court ordered an inquest to be held on February 9, 2000, regarding the damages to be awarded. Following the inquest on damages, on February 16, 2000, damages were adjudged against GalaxiWorld in the amount of $22,084,844 as of May 24, 1996, together with costs and interest thereon. See In re Gaming Lottery Sec. Litig., 96 Civ. 5567 (RPP), 2000 U.S. Dist. LEXIS 1558 (S.D.N.Y. Feb. 16, 2000). On March 14, 2000, Defendant GalaxiWorld filed a notice of appeal from that judgment.
On April 14, 2000, Class Plaintiffs moved for summary judgment on liability and damages against Defendants Jack Banks and Larry Weltman, as two of Gaming Lottery's controlling officers. On June 2, 2000, Defendants filed papers in opposition to the motion. On June 26, 2000, Class Plaintiffs filed a reply brief in support of their motion. On June 30, 2000, this Court heard argument on the motion.
On September 27, 2000, while this summary judgment motion was pending, Defendants Banks and Weltman each pled guilty in Supreme Court, New York County to one count of violation of New York General Business Law § 352-c(5). On September 28, 2000, Class Plaintiffs' counsel informed the Court by letter of Defendants Banks' and Weltman's pleas and that each defendant was ordered by the sentencing court to pay a fine of $100,000 as well as $400,000 in restitution to the Plaintiff Class in this case. By Order of this Court dated October 5, 2000, the Clerk of the District Court accepted the $800,000 paid by Defendants Banks and Weltman in restitution, in order to hold the funds until they are distributed to the Class. On September 29, 2000, this Court issued an order to the parties, stating that in view of the letter from Class Plaintiffs' counsel to the Court dated September 28, 2000, counsel for all parties were to advise the Court whether they agreed that the sole issue before the Court on Class Plaintiffs' pending motion for summary judgment was the amount of damages. On October 6, 2000, and October 27, 2000, Class Plaintiffs submitted papers including Defendants' plea allocutions in support of their motion for summary judgment against Defendants Banks and Weltman. On October 18, 2000, and November 1, 2000, Defendants submitted memoranda in opposition.
DISCUSSION
I. Standard for Summary Judgment
The Second Circuit has summarized the standard for granting summary judgment as follows:
First, summary judgment may not be granted unless "the pleadings, depositions. answers to interrogatones, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56 (c). Second, the burden is upon the moving party to demonstrate that no genuine issue respecting any material fact exists. In considering that, third, all ambiguities must be resolved and all inferences drawn in favor of the party against whom summary judgment is sought. Fourth, the moving party may obtain summary judgment by showing that little or no evidence may be found in support of the nonmoving party's case. When no rational [fact finder] could find in favor of the nonmoving party because the evidence to support its case is so slight, there is no genuine issue of material fact and grant of summary judgment is proper.Gallo v. Prudential Residential Svcs., 22 F.3d 1219, 1223-24 (2d Cir. 1994) (citations omitted).
II. Application of the Standard
A. Liability Under Section 10(b) and Rule 10b-5
Class Plaintiffs argue that Defendants' guilty pleas conclusively demonstrate their liability to the Class, leaving only the issue of damages to be decided by the Court. (See Affidavit of Robert C. Finkel in Further Support of Plaintiffs' Motion for Summary Judgment Addressing the Conclusive Effect of Defendants' Criminal Plea Agreement and Plea Allocution ("Finkel Aff."), dated October 26, 2000, Exhibits A (plea agreement of Defendant Larry H. Weltman), B (plea agreement of Defendant Jack Banks), and C (transcript of Defendants' plea allocutions before the Honorable Bernard J. Fried, People v. Banks, Sept. 27, 2000).) Class Plaintiffs claim that Defendants violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder in their issuance of misleading public statements and financial reports between February 1, 1995, and May 24, 1996, causing the stock of Gaming Lottery to be overvalued. (Id. Compl. ¶ 35-36.) Class Plaintiffs allege that Defendants acquired and operated a division of Ace Novelty Company called Speciality Manufacturing without obtaining the licensure from the State of Washington that was required to legally operate Speciality Manufacturing and that Defendants, while making public business announcements regarding the acquisition of other specialized gaining companies, concealed the lack of licensure of Specialty Manufacturing from the public, which resulted in the overvaluation of Gaming Lottery stock. (See id.)
"Evidence of a final judgment, entered after a trial or upon a plea of guilty . . . adjudging a person guilty of a crime punishable by death or imprisonment in excess of one year [is admissible] to prove any fact essential to sustain the judgment." FED. R. EVID. 803 (22). "Application of collateral estoppel from a criminal proceeding to a subsequent civil proceeding is not in doubt." Maietta v. Artuz, 84 F.3d 100, 102 n. 1 (2d Cir. 1996). A "plea of guilty . . . [is] an admission of all the elements of a formal criminal charge, and [is] itself a conviction as conclusive as a jury verdict." La Magna v. United States, 646 F.2d 775, 778 (2d Cir. 1981).
An analysis of Defendants' plea allocutions and their plea agreements, together with the facts established by Class Plaintiffs' and Defendants' S.D.N.Y. Civil Rule 56.1 Statements, is required to determine whether there is "no genuine issue of material fact" regarding Plaintiffs claims that Defendants violated Section 10(b) of the Exchange Act or Rule 10b-5 promulgated thereunder.
Section 10(b) of the Securities Exchange Act provides that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange — . . .
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j.
Rule 10b-5 of the regulations promulgated by the Securities and Exchange Commission pursuant to Section 10(b) provide that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5. The Second Circuit has held that
[t]o state a cause of action under Section 10(b) or Rule 10b-5 plaintiffs must prove that [the defendant] (1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury.In re Int. Bus. Mach. Corp. Sec. Litig., 163 F.3d 102, 106 (2d Cir. 1998).
On September 27, 2000, Defendants pled guilty to violation of New York General Business Law § 352-c(5) under the Martin Act, which provides that:
Any person, partnership, corporation, company, trust or association, or any agent or employee thereof who intentionally engages in any scheme constituting a systematic ongoing course of conduct with intent to defraud ten or more persons or to obtain property from ten or more persons by false or fraudulent pretenses, representations or promises, and so obtains property from one or more of such persons while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation or purchase of any securities or commodities, as defined in this article, shall be guilty of a class E felony.
N Y GEN. Bus. LAW § 352-c(5) (West 2000). A class E felony is punishable by up to four years imprisonment. See New York Sentence Charts at 7 (McKinney 2000); see also Finkel Aff., Exs. A and B, ¶ 1.
Each Defendant's plea agreement is identical in terms of its description of Defendants' culpable conduct. The plea agreements provide in paragraph six that:
[Defendant] acknowledges that in connection with the count of Violation of General Business Law section 352-c(5) he was in a control management position with GalaxiWorld, a publicly traded company named Laser Friendly, Inc. in 1995 and renamed Gaming Lottery Corporation during 1995. [Defendant] further acknowledges that GalaxiWorld (as Laser Friendly) entered into a transaction to purchase the Specialty Manufacturing division of Ace Novelty Company ("Ace Novelty"), that the business of Specialty Manufacturing was in the gaming industry and that that industry is highly regulated and requires that the companies participating in it be licensed, that he and GalaxiWorld (as Laser Friendly) were warned that upon final closing of that transaction the license issued to Ace Novelty by the State of Washington would be null and void, that GalaxiWorld (as Laser Friendly) nevertheless completed the final closing without obtaining licensure from the State of Washington, that GalaxiWorld (as Laser Friendly and Gaming Lottery Corporation) operated Specialty Manufacturing without being licensed and without informing the State of Washington of the final closing, and that GalaxiWorld (as Laser Friendly and Gaming Lottery Corporation) undertook the material risk that if its concealed conduct were discovered by the State of Washington and not approved, GalaxiWorld (as Laser Friendly and Gaming Lottery Corporation) and its financial condition would be significantly adversely affected.
(Finkel Aff., Exs. A and B, ¶ 6.) During Defendants' plea allocutions on September 27, 2000, the following allocution took place:
THE COURT: I am about to turn to the facts of this case, which I believe, essentially, are set forth in paragraph 6 of this letter.
It is charged, Mr. Banks, that you, together with Mr. Weltman, and you, Mr. Weltman, together with Mr. Banks, committed the crime of a Violation of General Business Law section 352-c(5), a class E felony, committed as follows:
That the two of you, in New York County and elsewhere, during the period from in or about October 1994, to on or about December 31, 1999, intentionally engaged in a scheme constituting a systematic ongoing course of conduct, with intent to defraud ten or more persons, and to obtain property from ten or more persons by false and fraudulent pretenses, representations, and promises, and so obtained property from one or more of such persons while engaged in inducing and promoting the issuance, distribution, exchange, sale, negotiation, and purchase of a security; to wit: Specifically, shares of a company with different names during the scheme, including Laser Friendly, Inc., Gaming Lottery Corporation, and other names. Is that true, Mr. Weltman, what I just said?
(Finkel Aff., Ex. C at 52-53.) Thus Justice Fried of the New York Supreme Court, Criminal Term, made clear to the Defendants that they were charged with violation of Gen. Bus. Law § 352-c(5) by engaging in a scheme with intent to defraud purchasers of shares of Gaming Lottery Corporation. Accordingly, by their pleas of guilty, Defendants Banks and Weltman admitted they intentionally engaged in the scheme to defraud while engaged in inducing or promoting the sale of Gaming Lottery shares. 1. Concealment of Material Facts in Connection With the Purchase of Securities
There is no genuine issue of material fact that the Defendants acted "in connection with the purchase or sale of any security." 15 U.S.C. § 78j; 17 C.F.R. § 240 10b-5 see also In re Int. Bus. Mach. Corp. Sec. Litig., 163 F.3d at 106. Defendants argue that their pleas demonstrate only that they acted only in connection with a license application to Washington State. (See Defendants Bank's [sic] and Weltman's Reply Memorandum of Law In Further Opposition to Plaintiffs Motion for Summary Judgment, dated Nov. 1, 2000, at 5.) However, N.Y. Gen. Bus. Law § 352-c(5) to which Defendants pled guilty requires that a defendant engage in a scheme with intent to defraud and obtain property "while engaged in inducing or promoting the issuance, distribution, exchange, sale, negotiation or purchase of any securities or commodities." (Finkel Aff., Ex. A.) Justice Fried made clear that Defendants' pleas to violation of Gen. Bus. Law § 352-c(5) were for obtaining property while engaged in inducing or promoting shares of Gaming Lottery Corporation. (See Finkel Aff., Ex. C at 52-53.) Defendants in their allocutions agreed that they violated N.Y. Gen. Bus. Law specifically with regard to shares of Gaming Lottery Corporation. (See Id.) Accordingly, no genuine issue of material fact exists regarding whether Defendants' pled guilty to intentionally engaging in a scheme to defraud "in connection with the purchase or sale of [Gaming Lottery] securities."
There is no genuine issue of material fact that Gaming Lottery failed to disclose material facts to the purchasers of its shares and that Defendants Banks and Weltman caused Gaming Lottery to conceal those material facts. The plea agreements state that Defendant Jack Banks was Gaming Lottery's president and chief executive officer and Defendant Larry Weltman was an executive officer of Gaming Lottery. (See Finkel Aff., Exs. A and B, ¶ 2.) Each has acknowledged in his plea of guilty that he was in a control management position at Gaming Lottery. (See Finkel Aff., Ex. C at 54, 56.) In their plea agreements, Defendants also admitted that they knew that: (1) Gaming Lottery could not operate Specialty Manufacturing without a license from the WSGC; (2) Ace Novelty's license from the WSGC to operate Specialty Manufacturing would become null and void when Gaming Lottery closed the purchase of Specialty Manufacturing; (3) Gaming Lottery nonetheless completed the final closing without obtaining licensure from the WSGC; and (4) Gaming Lottery operated Specialty Manufacturing without being licensed and without informing the State of Washington of the final closing. (See Finkel Aff., Exs. A and B, ¶ 6.)
Class Plaintiffs do not contend that the plea agreements and allocutions are evidence of Defendants' culpability prior to the date that the final closing took place, which was on or about May 3, 1995, effective April 30, 1995. See Pl.'s Supp. Mem. dated Oct. 26, 2000, at 5 n. 3; see also Pl.'s Ex. 12 (Final Closing Agreement).)
Defendants Banks and Weltman do not contest Class Plaintiffs' statements that in its financial reports or press releases, Gaming Lottery did not disclose that it was operating Specialty Manufacturing without the required license from the State of Washington. (See Pl.s' 56.1 Stmt. ¶ 23, 24, 37, 60, 61.) Defendants Banks and Weltman admitted in their plea agreements that by operating Specialty Manufacturing without a license and without informing the State of Washington of the final closing, Gaming Lottery undertook a material risk that if its concealed conduct was discovered by the State of Washington and not approved, Gaming Lottery and its financial condition would be significantly adversely affected." See Finkel Aff. Exs. A and B, ¶ 6.) Accordingly, there is no genuine issue that Gaming Lottery, and Banks and Weltman, intentionally concealed material facts relating to Gaming Lottery's operations and financial condition.
Moreover, while not reporting that it was operating Specialty Manufacturing without the required license, Gaming Lottery included the operating profits of Specialty Manufacturing in reporting its quarterly earnings in press releases dated June 8, 1995, September 20, 1995, and December 29, 1995, and in President's Reports to investors dated June 12, 1995, and December 29, 1995. (See Pl.s' 56.1 Stmt. ¶ 23, 24, 37, 60, 61.) In its September 20, 1995, press release Gaming Lottery reported a sales increase of 463% over the prior year, revenues of $25.4 million, net income of $4.75 million, and earnings per share of $0.26. (See Pl.s' Ex. 42.) In those reports, Defendants did not reveal that they were operating that business and reporting those earnings though they had not received the required licensure from Washington State. (See Finkel Aff, Ex. C at 55, 57.) For Defendants to include the operating revenues of Specialty Manufacturing together with those of Gaming Lottery in its quarterly financial reports without disclosing the material risk to Gaming Lottery of operating Specialty Manufacturing without a license constitutes concealment of a material fact. The materiality of the risk was exacerbated by its being taken while Gaming Lottery was publicly engaged in "an aggressive strategy to acquire other specialized gaming companies." (See Pl.s' Ex. 49.) Consequently, no genuine issue of material fact exists regarding whether Defendants made omissions of material fact in violation of Section 10(b) and Rule 10b-5.
Defendants' claim in their May 31, 2000, Memorandum in Opposition that in the consolidation of the revenues and expenses of Specialty Manufacturing with those of Gaming Lottery from February 1, 1995, they relied on the opinion of Canadian accountant John Wiseman, is irrelevant in view of Defendants' pleas of guilty. Nevertheless, it should be pointed out that both Wiseman's memorandum dated January 11, 1995, and his letter dated September 11, 1995, advising Gaming Lottery that the purchaser should account for the transaction from February 1, 1995, notwithstanding that the final closing had not taken place, are based on materially false facts provided to him by Gaming Lottery. Specifically, Wiseman, who was not provided with the Purchase Agreement which contained performance conditions for Gaming Lottery, relied on Defendant Weltman's representations to him that "Laser Friendly will be acquiring the assets of the Seattle corporation with an effective date of February 1, 1995. Laser Friendly will be putting in its own President to run and control the company from the date of acquisition." (Def.s' Ex. A, (Wiseman Memorandum dated Jan. 11, 1995); see also Def.s' Ex. B (Wiseman Letter dated Sept. 11, 1995); Supplemental Affidavit of Robert C. Finkel, dated July 10, 2000, Ex. A ("Wiseman Dep.") at 17, 27, 19, 55.) In fact, Gaming Lottery did not acquire the assets of the corporation or place its own president in control of Specialty Manufacturing until the execution of the Final Closing Agreement on or about May 3, 1995. (See Pl.s' Ex. 12.) Wiseman also relied on Weltman's representation that the process of obtaining the necessary licenses required for closing will take approximately 90 days." (Def.s' Ex. A; see also Wiseman Dep., at 24-26.) On January 19, 1995, eight days after the date of the Wiseman memorandum, Weltman was informed by the WSGC that "pre-license investigations can take five to ten months to complete." (Pl.s' 56.1 Stmt. ¶ 3.) Although informed that the process of obtaining a license would take significantly longer than 90 days, Defendant Weltman did not request a new opinion letter from Wiseman based on the information he received on January 19, 1995, from the WSGC. Defendants cannot rely on an opinion letter based on materially false facts which they provided, or based on such minimal disclosure as to be misleading. Defendants also rely on an affidavit from Mair Azoulay, the in-house accountant at Gaming Lottery during 1995, in which Azoulay asserts that the consolidation of revenues from Specialty with those of Gaming Lottery was based on the advice of Wiseman. (See Declaration of Mair Azoulay, May 30, 2000, ¶ 5.) Regardless of the propriety of consolidation of the financials, Mr. Wiseman's opinion does not justify Defendants' concealment from May 3, 1995, to May 24, 1996, that Gaming Lottery had not obtained a license to operate Specialty Manufacturing. Defendants' reliance on Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir. 1999), is also misplaced. In Stevelman, the Second Circuit noted that allegations of a violation of generally accepted accounting principles are not sufficient without corresponding fraudulent intent to state a securities fraud claim. See id. (citing Chill v. Gen. Elec. Co., 101 F.3d 263, 267 (2d Cir. 1996)). Here, Gen. Bus. Law § 352-c(5) requires intent to defraud, and Justice Fried made clear that Defendants' pleas to violation of that statute were for intentionally defrauding the purchasers of shares of Gaming Lottery Corporation. (See Finkel Aff., Ex. C at 52-55.) Thus Class Plaintiffs' claims are based on Defendants' "intent to defraud."
2. Scienter
There is no genuine issue of material fact regarding whether Defendants acted with scienter. Scienter is "a degree of knowledge that makes a person legally responsible for the consequences of his or her act or omission . . . a mental state consisting in an intent to deceive, manipulate, or defraud." BLACK'S LAW DICTIONARY 1347 (7th ed. 1999); see Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). The Second Circuit has held that the requisite intent exists "when it is clear that a scheme, viewed broadly, is necessarily going to injure." AUSA Life Ins. Co. v. Ernst Young, 206 F.3d 202, 220-21 (2d Cir. 2000) (quoting United States v. Chacko, 169 F.3d 140, 148 (2d Cir. 1999)). "Such a presumption is appropriate in circumstances such as . . . where a large entity, firm, institution, or corporation is acting in a manner that easily can be foreseen to result in harm." AUSA Life Ins. Co. v. Ernst Young, 206 F.3d at 221 (citing generally United States v. Regent Office Supply Co., 421 F.2d 1174, 1181 (2d Cir. 1970)).
Defendants assert in their memorandum of May 31, 2000, that Class Plaintiffs cannot establish scienter. (See Def.s' Mem. in Opp. at 17-23.) Defendants further contend in their memoranda of October 18, 2000, and November 1, 2000, that their pleas under N.Y. Gen. Bus. Law § 352-c(5) do not establish scienter because "neither scienter nor an intent to defraud need be proven in order to establish liability under the Martin Act." (See Def.s' Mem. of Law, dated Oct. 18, 2000, at 7-8; Def.s' Reply Mem., dated Nov. 1, 2000, at 5 (relying on People v. Sala, 695 N.Y.S.2d 169 (3d Dep't 1999) (upholding defendants' convictions under N.Y. Gen. Bus. Law § 352-c(6)), and State v. Rachmani Corp., 71 N.Y.2d 718, 725 (1988) (noting that to establish liability for fraudulent practices under N.Y. Gen. Bus. Law § 352-c(1)(a), the Attorney General need not allege or prove either scienter or intentional fraud).) It is true that the broad fraud provisions in the Martin Act include all deceitful practices contrary to the plain rules of common honesty and all acts tending to deceive or manipulate the public. The language of N.Y. Gen. Bus. Law § 352-c(5), the subsection to which Defendants pled guilty of violating, however, specifically prohibits "intentionally engag[ing] in any scheme constituting a systematic ongoing course of conduct with intent to defraud." N.Y. GEN. Bus. LAW § 352-c(5); Finkel Aff., Ex. C at 53-58. Thus the violation to which Defendants Banks and Weltman pled guilty requires the intent to defraud," i.e. scienter. See Ernst Ernst v. Hochfelder, 425 U.S. at 193. Most importantly, Defendants acknowledged in their allocutions that they knowingly and intentionally concealed obtaining and operating Specialty Manufacturing without the required license. (Finkel Aff. Ex. C at 53-58.) Defendants also acknowledged in their allocutions that "Gaming Lottery undertook the material risk that if its concealed conduct were discovered by the State of Washington and not approved, [Gaming Lottery] and its financial condition would be significantly adversely affected." (Finkel Aff., Ex. C, 53-58.) Accordingly, Defendants have admitted that their material omissions of fact constituted a course of conduct from which harm to purchasers of shares of Gaming Lottery was foreseeable. Thus there is no genuine issue of material fact regarding whether Defendants possessed the requisite scienter for a violation of Section 10(b) and Rule 10b-5.
Defendants argue in their May 31, 2000, Memorandum that Class Plaintiffs cannot prove that the final closing was unlawful or that Defendants knew or recklessly disregarded that the final closing was unlawful. (Def.s' Mem. in Opp. at 18-23.) However, Defendants admitted in their plea allocutions that they knew that Gaming Lottery could not operate Specialty Manufacturing without a license and nevertheless completed the final closing without obtaining a license from the WSGC and then operated Specialty Manufacturing while concealing the lack of a license. (See Finkel Aff. Ex. C at 53-57.) Thus Defendants' arguments are inconsistent with their plea allocutions.
Defendants' claim in their Memorandum in Opposition of May 31, 2000, that in the final closing of the transaction to purchase Specialty Manufacturing from Ace Novelty they relied on the advice of Ronald Meltzer, who was then Ace's attorney, cannot be squared with their plea allocutions on September 27, 2000, of intentional misconduct in closing that transaction without obtaining the requisite licenses.
3. Class Plaintiffs' Reliance on Defendants' Press Releases and Quarterly Reports
There also is no genuine issue of material fact regarding the fourth element of a Section or Rule 10b-5 violation which requires that Class Plaintiffs have relied upon Defendants' misstatements or omissions of material fact. "Reliance provides the requisite causal connection between a defendant's misrepresentation and a plaintiffs injury." Basic v. Levinson, 485 U.S. 224, 243 (1988). Reliance is presumed where plaintiffs are purchasers of a security and have demonstrated a "fraud on the market." See id.
The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company's stock is determined by the available material information regarding the company and its business. . . . Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements. . . . The causal connection between the defendants' fraud and the plaintiffs' purchase of stock in such a case is no less significant than in a case of direct reliance on misrepresentations.Basic v. Levinson, 485 U.S. at 241-42 (quoting Peil v. Speiser, 806 F.2d 1154, 1160-61 (3d Cir. 1986)). "An efficient market, one which rapidly reflects new information in price, is both open and developed."Cammer v. Bloom, 711 F. Supp. 1264, 1286 n. 35 (D.N.J. 1989) (citing Bromberg Lowenfels, 4 Securities Fraud and Commodities Fraud, § 8.6 (Aug. 1988)).
In the case at hand, Gaming Lottery stock was traded on two markets, NASDAQ and the Toronto Stock Exchange. Class Plaintiffs expert, Professor Michael J. Barclay, has provided a report and testified that he performed an analysis finding that the market for Gaming Lottery stock was efficient. (See Pl.s' Ex. 61 at 5-6, ¶ 11-14.) Professor Barclay also performed a statistical test called the Durbin-Watson test, which indicated that the Gaming Lottery's stock returns did not exhibit autocorrelation. See Id.) This evidence supports Professor Barclay's conclusion that the market for Gaming Lottery stock was efficient during the class period. (See id.) There is no evidence submitted to the contrary, and Defendants do not dispute that the market for Gaming Lottery stock was efficient. Since Class Plaintiffs have demonstrated that the market for Gaming Lottery stock was efficient during the class period, Class Plaintiffs are entitled to a presumption of reliance. See Basic v. Levinson, 485 U.S. at 243. Defendants have submitted no evidence to rebut the presumption. Consequently, there is no genuine issue of material fact that Class Plaintiffs relied on Defendants' omissions of material facts.
4. Proximate Cause
Finally, there is no genuine issue of material fact that "plaintiffs' reliance was the proximate cause of their injury." In re Int. Bus. Mach. Corp. Sec. Litig., 163 F.3d at 106. The Second Circuit has recently held that the loss causation requirement of Section 10(b) and Rule 10b-5 requires the plaintiff to prove that "the misrepresentation . . . was the cause of the actual loss suffered." AUSA Life Ins. Co. v. Ernst Young, 206 F.3d 202, 219 (2d Cir. 2000) (quoting Citibank, N.A. v. K-H Corp., 968 F.2d 1489, 1495 (2d Cir. 1992)) (remanding the issue to the district court for further factual determinations relevant to the foreseeability aspects of loss causation).
Although Defendants claim in their October 18, 2000, and November 1, 2000, Memoranda in Opposition that damages were not proximately caused by Defendants' culpable conduct, loss causation is an element of the Martin Act to which Defendants have pled guilty because it requires that defendant by virtue of his culpable conduct "so obtains property from one or more of such persons." N.Y. GEN. Bus. LAW § 352-c(5). Defendants Banks and Weltman by their pleas of guilty acknowledged that they engaged in a scheme with intent to defraud and did obtain property from purchasers of shares of Gaming Lottery by that scheme. See Finkel Aff., Ex. C at 52.) Thus Defendants have admitted loss causation, a material element of the Martin Act. Class Plaintiffs also assert, and Defendants deny, that Defendants have conceded loss causation by agreeing to and establishing a restitution fund of $800,000 for Class Plaintiffs whom they acknowledged were victims of their fraudulent conduct.
"[L]oss causation in effect requires that the damage complained of be one of the foreseeable consequences of the misrepresentation." AUSA Life Ins. Co. v. Ernst Young, 206 F.3d at 216 (quoting Manufacturers Hanover Trust Co. v. Drysdale Secs. Corp., 801 F.2d 13, 21 (2d Cir. 1986)). Here, Defendants acknowledged in their plea agreements and allocutions that Gaming Lottery took "the material risk that if its concealed conduct were discovered by the State of Washington and not approved, GalaxiWorld (as Laser Friendly and Gaming Lottery Corporation) and its financial condition would be significantly adversely affected." (Finkel Aff. Ex. C at 53-58.) In the event that Gaming Lottery's financial condition were "significantly adversely affected" upon disclosure of the concealed conduct, purchasers of Gaming Lottery stock would suffer a loss. Pecuniary loss to the purchasers of stock in Gaming Lottery Corporation was therefore a foreseeable consequence of Defendants' conduct. Consequently, Defendants' omissions are the proximate cause of Class Plaintiffs' pecuniary loss. No evidence has been submitted to the contrary.
In their November 1, 2000, Memorandum in Opposition, Defendants argue that the WSGC's denial of a license was a result of Gaming Lottery's refusal or inability to identify its investors, which Defendants assert was an intervening event that absolves Gaming Lottery of liability. See Def.s' Reply Mem., dated Nov. 1, 2000, at 7-8.) Defendants have submitted no evidence showing that the WSGC ever denied a license to SMI because Gaming Lottery had refused or was unable to identify its investors. Additionally, on May 8, 1996, the WSGC amended its notice of administrative charges and opportunity for an adjudicative hearing to include as grounds for denial that Gaming Lottery knowingly operated Specialty Manufacturing in violation of state law from May 1, 1995 until April 1, 1996. (Pl.s' 56.1 Stmt. ¶ 68; Pl.s' Ex. 59.) Thus Defendants' claim is inconsistent with the WSGC's amended notice of administrative charges.
Additionally, Class Plaintiffs' damages expert has opined that based upon the event study that he performed, Defendants' public statements subsequent to May 3, 1995, and during the period of concealment of its non-licensed operation of Specialty Manufacturing, concerning Gaming Lottery's earnings and planned acquisitions of gaming companies and supply contracts with state lotteries "caused [Gaming Lottery's] stock price to increase from the $3.00 to $4.00 trading range early in 1995 to approximately $8.00 per share by the Fall of 1995." (Pl.s' Ex. 61, at 6-12, ¶ 15-30.) Professor Barclay concluded that "disclosing the failure to obtain regulatory approval, termination of these acquisitions, and Gaming Lottery's consequential exit from the gaming industry caused the stock price to decline significantly from December 1995 through May 1996." (Id. at 12, ¶ 30.) No reasonable juror could find that a genuine issue of material fact exists regarding loss causation under Section 10(b) of the Securities Exchange Act or Rule 10b-5 promulgated thereunder.
Accordingly, Class Plaintiffs' motion for summary judgment on their claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder for the period of May 3, 1995, through May 24, 1996, is granted.
B. Liability Under Section 20(a)
Class Plaintiffs also move for summary judgment on their claim against Defendants Banks and Weltman under Section 20(a) of the Securities Exchange Act, which provides for liability of controlling persons and persons who aid and abet violations. See 15 U.S.C. § 78t (Lexis 2000). Section 20(a) provides that:
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.15 U.S.C. § 78t(a). The Second Circuit has interpreted Section 20(a) as follows:
[T]o establish a prima facie case of controlling-person liability, a plaintiff must show a primary violation by the controlled person and control of the primary violator by the targeted defendant and show that the controlling person was "in some meaningful sense [a] culpable participant in the fraud perpetrated by [the] controlled person." Control over a primary violator may be established by showing that the defendant possessed "the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise."S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996) (internal citations omitted). On February 17, 2000, this Court entered judgment against Gaming Lottery for violation of the 1934 Securities Exchange Act. Defendants Banks and Weltman acknowledged in their plea allocutions that they were "in control management position[s] with GalaxiWorld [Gaming Lottery]" and therefore controlling persons of Gaming Lottery. (See Finkel Aff., Ex. C at 53-58.) By virtue of their allocutions, Defendants have also admitted that they were culpable participants in the fraud committed by Gaming Lottery against Gaming Lottery's stockholders. (See id.) Since a judgment was rendered against Gaming Lottery for violation of the Exchange Act, and since Defendants were in control management positions at Gaming Lottery, Class Plaintiffs have made out a prima facie case of controlling person liability.
"Once the plaintiff makes out a prima facie case of § 20(a) liability, the burden shifts to the defendant to show that he acted in good faith." S.E.C. v. First Jersey Sec., Inc., 101 F.3d at 1472-73. Here, neither Defendant has made any showing that he acted in good faith. In fact, Defendants cannot show that they acted in good faith since they have pled guilty to N.Y. Gen. Bus. Law § 352-c(5), which by its terms requires intentionally engaging in a scheme constituting a systematic ongoing course of conduct with intent to defraud. See N.Y. GEN. Bus. LAW § 352-c(5). Consequently, Class Plaintiffs' motion for summary judgment on their claim of liability against Defendants Banks and Weltman pursuant to Section 20(a) of the Exchange Act is granted.
III. Damages
On January 14, 2000, Proskauer Rose LLP ("Proskauer") was relieved as counsel for Defendants Gaming Lottery, Jack Banks and Larry Weltman. On February 24, 2000, present counsel on this motion filed a notice of appearance on behalf of Defendants Banks and Weltman only. On February 25, 2000, in view of Proskauer's assertion of an attorneys' lien for unpaid fees of Gaming Lottery, Class Plaintiffs' counsel offered Defendants' new counsel access to their file of all depositions and document discovery. Defendants' counsel accepted Class Plaintiffs' counsel's offer. The file included the expert report and testimony of Professor Michael J. Barclay at the inquest held by the Court on February 9, 2000, on the default damages against Gaming Lottery suffered by Class Plaintiffs.
On February 25, 2000, at a pre-trial conference, the Court ordered that: (1) except with respect to the deposition of Mr. Seale (a Fifth Amendment witness) fact discovery was closed; (2) final expert witness reports would be exchanged on March 15, 2000; (3) a pre-trial order would be submitted to the Court by April 3, 2000; and (4) a trial date was set for May 1, 2000. At no time thereafter until argument of the summary judgment motion on June 30, 2000, did Defendants seek to submit an expert report or seek to depose Class Plaintiffs' damages expert, Professor Barclay. Defendants' request on June 30, 2000, at oral argument to submit an expert report on damages was not made either within ninety days of the trial date or within thirty days after disclosure was made by Class Plaintiffs, as required by Fed.R.Civ.P. 26(a)(2)(C). Accordingly, Defendants' request at oral argument on June 30, 2000, to submit an opposing expert report was denied. As a result, the only evidence before the Court on the amount of damages Class Plaintiffs have sustained is the testimony of Class Plaintiffs' expert Professor Michael J. Barclay. Instead of relying on evidence, Defendants attack the analysis of Professor Barclay through arguments which largely lack merit.
Professor Barclay in his report uses an event study technique measuring the price of Gaming Lottery stock on the NASDAQ to compute damages to the stockholders. (Barclay Report dated Jan. 25, 2000 ("Barclay Rept."), ¶ 15-16.) Professor Barclay determined in his report that statements by Defendants incorporating the earnings of Specialty Manufacturing in its quarterly financial reports and announcing further acquisitions by Gaming Lottery and major sales contracts it had entered into in the gaining industry, while not declaring that it was operating Specialty Manufacturing without a license from the State of Washington where the business was located, in violation of Washington law, artificially inflated Gaming Lottery's common stock price throughout the class period and resulted in monetary damages to Class Plaintiffs. (Id. ¶ 10(b)-10(c), 19-29.) That inflation factor was reduced under the analysis as Defendants were forced to make curative disclosures which had a negative effect on the price of Gaming Lottery's stock. (Id. ¶ 48.) Professor Barclay through his event analysis determined the damages to purchasers of Gaming Lottery stock on a per share basis for each date of the class period. (Id. ¶ 39-40.) Professor Barclay estimated the total damages sustained by the members of the class to be $22,084,844. (Id. ¶ 10(d).)
Gaming Lottery common stock was listed on the Toronto Stock Exchange, the NASDAQ SmallCap Market, and beginning in June 1995, the NASDAQ National Market. (See Barclay Rept. ¶ 12.)
Professor Barclay in his report follows the well-defined steps for conducting such an analysis in securities fraud cases. Such an analysis can be tested by testimony from an opposing expert on the bases for the various estimates and the regression analysis Professor Barclay utilized in his report. Professor Barclay's technique has been subjected to peer review, and his methodology and techniques have been generally accepted by the scientific community for securities fraud cases. There is, however, considerable question as to the potential rate of error which might apply. See e.g., Kenneth R. Cone and James E. Laurence, "How Accurate Are Estimates of Aggregate Damages in Securities Fraud Cases?"The Business Lawyer, Feb. 1994 (Def.s' Ex. R); Daniel R. Fischel and David J. Ross, "The Use of Trading Models to Estimate Aggregate Damages in Securities Fraud Litigation: A Proposal for Change, Securities Class Actions: Abuses and Remedies (Def.s' Ex. S).
Defendants Banks and Weltman argue first that Barclay's analysis is flawed because Defendants reasonably relied on Ace Novelty's lawyer Ronald Meltzer's opinion that the closing of the Specialty Manufacturing acquisition could take place without the license from the WSGC. (See Def.s' Mem. in Opp. at 24-25.) However, Defendants have admitted in their plea allocutions that they did not disclose the closing, and that they operated Specialty Manufacturing after the closing knowing that this omission, if revealed, would significantly adversely affect Gaming Lottery's financial condition. (See Finkel Aff., Ex. C at 52-58.) Accordingly, Defendants' argument is inconsistent with their plea allocutions.
Second, Defendants Banks and Weltman argue that Barclay wrongly assumed that: (I) because Gaming Lottery was operating Specialty Manufacturing without a license, it was not entitled to claim the earnings of Specialty Manufacturing; and (2) all state lotteries and private concerns would have cancelled their contracts if they had known that Gaming Lottery was operating Specialty Manufacturing without a license. (See Def.s' Mem. in Opp. at 26.) Although these assumptions are contained in the Barclay Report, their inaccuracy is irrelevant. Defendants did not disclose the risks to Class Plaintiffs of operating Specialty Manufacturing without a license and Defendants have admitted to the material risk that disclosure of that fact would significantly adversely affect Gaming Lottery's financial condition. See Finkel Aff. Exs. A and B, ¶ 6, Ex. C at 52-58.)
Defendants then argue that Gaming Lottery did not know that the WSGC would not grant a license when it embarked on its acquisition program. (See Def.s' Mem. in Opp. at 26-27.) This argument misses the point. Defendants have admitted knowing that by concealing that Gaming Lottery had acquired and was operating Specialty Manufacturing without a license, they were subjecting Gaming Lottery to the risk of significant adverse financial effect. (See Finkel Aff., Ex. C at 52-58.) Defendants were aware of the risk of their conduct and elected not to advise purchasers of Gaming Lottery stock of that risk.
Next, Defendants Banks and Weltman argue that Professor Barclay wrongly assumed in paragraph 30 of his report "that any hypothetical corrective disclosures would have put the market on notice that Gaming Lottery would not be able to obtain regulatory approval and consummate these acquisitions and moreover that the company would not be able to participate in the gaming industry." (See Def.s' Mem. in Opp. at 27-28.) However, Professor Barclay has explained that his analysis determined that there was a causal relationship between the curative disclosures and the material misrepresentations and omissions alleged in the Complaint that Barclay determined to be statistically significant. (See Barclay Reply Affidavit dated June 29, 2000 ("Barclay Reply Aff."), ¶ 12.) Professor Barclay also explained that he did not assume, as Defendants argue, that all the facts that were disclosed at the end of the class period, such as the fact that Gaming Lottery had not obtained licensing to operate Specialty Manufacturing, should or could have been disclosed at the outset of the period. (Id.)
Defendants Banks and Weltman next argue that Barclay's report assumes without explanation that Gaming Lottery's stock price was inflated beginning February 1, 1995, although his event study shows no price movement during that period. See Def.s' Mem. in Opp. at 28.) Professor Barclay's analysis does conclude that between February 1, 1995, and June 26, 1995, Gaming Lottery's stock price was inflated by $0.47 to $0.60. (Barclay Reply Aff. ¶ 14.) He assumed, as alleged in the Complaint, that it was a practical impossibility for Gaming Lottery to have closed the Specialty Manufacturing acquisition prior to April 30, 1995, under the Purchase Agreement. (Id. ¶ 15.) However, Gaming Lottery's February 1, 1995, announcement that it had completed the acquisition of Specialty Manufacturing subject to receipt of regulatory approval for the requisite gaming licenses is not shown to have been false or misleading. Accordingly, Defendants are correct that any inflation of the price of Gaming Lottery stock at that time would not be due to that conduct. See Ravens v. Iftikar, 174 F.R.D. 651, 668 (N.D. Cal. 1997) ("[I]n the absence of a misstatement or misleading omission, the price of a security on an open and developed securities market reflects the value of that security in the market conditions that then prevail." (citing Blackie v. Barrack, 524 F.2d 891, 907 (9th Cir. 1975))). The class period therefore should begin at that time that the Barclay Report finds that an event where Defendants omitted to state material facts caused artificial inflation in Gaming Lottery's stock. Accordingly, the class period will begin on May 3, 1995, the date that the Final Closing Agreement was executed despite the lack of a license from the WSGC with no announcement of those facts. Barclay's findings of subsequent inflation of Gaming Lottery's stock price are found to be valid.
This assumption, however, ignores the fact that the Purchase Agreement provided that Specialty Manufacturing's earnings between February 1995 and the final closing were to be for Gaming Lottery's benefit, that Ace waived the licensing requirements in the Purchase Agreement, and that the final closing occurred on or about May 3, 1995.
Defendants Banks and Weltman claim that the class period should end at latest on January 31, 1996, because on that date Gaming Lottery announced that the Trade Products Inc. acquisition was terminated due to lack of regulatory approval. (See Def.s' Mem. in Opp. at 33-34.) However, this announcement did not cure the inflation of Gaming Lottery's stock due to the inflated earnings reports wherein Gaming Lottery incorporated the earnings of Specialty Manufacturing while concealing that it was operating Specialty Manufacturing without a license. Rather, Barclay concluded that the later decline in Gaming Lottery's common stock was a result of three curative disclosures, the last of which occurred on May 23, 1996. (Barclay Reply Aff. ¶ 10.)
Defendants Banks and Weltman also argue that Professor Barclay: (1) failed to utilize the proper number of trading days in assessing whether new information entering into the market was significant; (2) failed to consider other extraneous factors which might have influenced the price of Gaming Lottery's stock; and (3) failed to utilize the proper dates for curative disclosures. (See Def.s' Mem. in Opp. at 30-32.) Defendants offer no expert opinion to support their contentions and Professor Barclay has determined that the alleged extraneous factor, disclosures by Gaming Lottery's competitor Scientific Games, had no impact on Gaming Lottery's stock. (See Barclay Reply Aff. ¶ 16(c).) Professor Barclay has also demonstrated good reasons for determining that May 23, 1996, was the curative disclosure ending the class period, rather than May 2, 1996, as Defendants contend. (See id. ¶ 16(d).)
Finally, Defendants Banks and Weltman argue that the methods used by Professor Barclay are ad hoc estimates of the aggregate damages, relying on the previously cited articles by Fischel and Ross and Cone and Laurence. (See Def.s' Mem. in Opp. at 28-29; Def.s' Exs. R (Fischel and Ross) and S (Cone and Laurence).) Professor Barclay acknowledges that his conclusions as to the number of shares purchased during the class period, when those shares were subsequently sold, and aggregate damages are estimates and that the true damages to the class would have to be determined by a claims process. (See Barclay Reply Aff. ¶ 6.)
This leaves the Court in somewhat of a quandary. There is no doubt that the price of Gaming Lottery's stock was inflated during the class period due to Defendants' concealment of material information from the market while they engaged in an aggressive strategy to acquire other specialized gaming companies. It is also true that a definitive damages amount for the class cannot be determined as of this time. The Court has considered the possibility of trying to follow the procedure utilized in Biben v. Card, 789 F. Supp. 1001, 1003-06 (W.D.Mo. 1992), in which the court required plaintiffs in a fraud on the market securities action to submit proofs of claim before assessment of liability. However, the Court does not believe that members of the class are likely to go to the trouble to respond or submit proofs of claim when Class Plaintiffs' counsel has not been paid and when Gaming Lottery (now GalaxiWorld) is not located in the United States but is now a Gibraltar corporation which is owned by a Nevis corporation that is located in Monaco and when GalaxiWorld has failed to comply with outstanding orders of this Court for over a year. (See Transcript of Feb. 25, 2000, at 7-8; see also In re Gaming Lottery Sec. Litig., 96 Civ. 5567 (RPP) (S.D.N.Y. Feb. 8, 2001).) Under such circumstances, members of the Class may choose not to file proofs of claim without an assurance that more than a nominal damages amount will result.
Accordingly, partial summary judgment is awarded to the Class Plaintiffs on Defendants' liability under Section 10(b)of the Securities Exchange Act and Rule 10b-5 promulgated thereunder and under Section 20(a) of the Securities Exchange Act for the period of May 3, 1995, through May 24, 1996. Judgment will be entered against Defendants Banks and Weltman for $10 million to be paid to the Clerk of the Court of the Southern District of New York by March 16, 2001. Said sum will be held for payment to Class Plaintiffs and their attorneys upon proofs of claim submitted by the Class Plaintiffs, subject to a further order of this Court remitting to the Defendants any funds left over after payment of said claims and fees, and subject to a further order of this Court ordering Defendants to pay additional damages sufficient to pay the approved claims of Class Plaintiffs.
CONCLUSION
For the foregoing reasons, the motion of Class Plaintiffs for summary judgment is granted as to the liability of Defendants Banks and Weltman for the period of May 3, 1995, through May 24, 1996. Judgment is entered against Defendants Banks and Weltman for $10 million to be paid to the Clerk of the Court of the Southern District of New York by March 16, 2001, to be held for payment to Class Plaintiffs and their attorneys upon proofs of claim submitted by Class Plaintiffs, subject to further orders of this Court adjusting the damages upon submission of Class Plaintiffs' proofs of claim and proof of Class Plaintiffs' attorneys' fees.
IT IS SO ORDERED.