Ed, All-In case you couldn't find the case:
----------------------------------------------
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
- against -
DCI TELECOMMUNICATIONS, INC., JOSEPH J. MURPHY, and RUSSELL B. HINTZ,
Defendants.
- and -
GRACE P. MURPHY,
Relief Defendant.
----------------------------------------X
O P I N I O N
00 Civ. 4664 (RWS)
A P P E A R A N C E S:
SECURITIES AND EXCHANGE COMMISSION
Attorney for Plaintiff
450 Fifth Street,
NW Washington, DC 20549-0808
By: DEBRA PATALKIS, ESQ.
REID A. MUOIO, ESQ.
JOHN J. FIELD, ESQ.
Of Counsel
GREENBERG TRAURIG
Attorney for Defendants
885 Third Avenue New York, NY 10022-4834
By: ROBERT A. HOROWITZ, ESQ.
KAREN Y. BITAR, ESQ.
TOBY S. SOLI, ESQ.
Of Counsel
Sweet, D.J.,
The plaintiff Securities and Exchange Commission (the
"SEC") has moved to (1) amend its complaint pursuant to Rule 15(a),
Fed. R. Civ. P.; (2) strike the jury demand of defendants Joseph
Murphy, Grace Murphy, Russell B. Hintz, and DCI Telecommunications,
Inc. (collectively "DCI") pursuant to Rule 39(a), Fed. R. Civ. P.;
and (3) substitute an expert witness pursuant to Rule 16(b), Fed.
R. Civ. P. For the reasons set forth below, the motion is granted.
Prior Proceedings
On August 28, 1995, the SEC's Division of Enforcement
began an informal investigation of DCI and requested that DCI
produce a variety of documents relating to its financial statements
and the "basis for the recording and valuation" of certain assets.
In late 1997, the SEC's Division of Corporate Finance began a more
intensive review of DCI's financial statements contained in its SEC
filings including, among other things, an S-1 Registration
Statement DCI filed earlier in the year, and an S-3 Registration
Statement filed in early 1998. An exchange of correspondence both
to and from the SEC's Division of Corporate Finance concerning the
accounting issues continued throughout most of 1998. In October
1998, the SEC's Division of Corporate Finance demanded that DCI
restate its financials for its fiscal years ended March 31, 1997,
and March 31, 1998, to correct what the SEC contended to be
improper accounting for various transactions. After further
discussions with the SEC, DCI filed an amended Form 10-K, which
included the restated financials, on February 2, 1999.
The SEC began a formal investigation of DCI in February
1999, and served on DCI a subpoena duces tecum. During the formal
investigation, the SEC also subpoenaed documents directly from
DCI's transfer agent, Nevada Agency & Trust Company ("NATCO").
On May 3, 1999, the SEC ordered a ten-day suspension in
trading of DCI stock because of questions regarding the accuracy
and adequacy of DCI's financial statements.
In the fall of 1999, the SEC staff advised DCI that it
intended to recommend to the Commission that it file an enforcement
action primarily based on the alleged accounting irregularities at
issue in this action. In the spring of 2000, the SEC staff advised
DCI that it also intended to recommend to the Commission that it
file an enforcement action based on DCI's issuance of certain S-8
stock to Joseph Murphy and Larry Shatsoff because they sold the
stock and delivered the proceeds to DCI.
On June 23, 2000, the SEC filed this enforcement action
against DCI alleging securities violations arising out of: (1) an
alleged Generally Accepted Accounting Principles (GAAP) accounting
fraud with respect to ten distinct corporate transactions; (2) the
sale by Joseph Murphy and Lawrence Shatsoff of S-8 stock to the
public and their return of the proceeds to DCI; (3) DCI's payment
of certain expenses on behalf of Joseph Murphy; and (4) Joseph
Murphy's and Russell Hintz's alleged unjust enrichment from the
sale of their stock.
On June 13, 2001, the SEC served DCI with requests to
admit relating to the issuance of S-8 shares, asking DCI to admit
that, among other things, it had issued millions of S-8 shares --
some to individuals who were not permitted by law to receive S-8
shares, including defendant Joseph Murphy's father (Joseph Murphy,
Sr.), and some pursuant to certain S-8 registration statements that
had not been filed with the SEC.
On July 6, 2001, the SEC requested the production of
NATCO's S-8 registration file for DCI. The SEC received the S-8
registration file on July 9, 2001.
On October 12, in connection with discovery issues and a
request by DCI, the SEC agreed to amend the complaint to allege
additional violations of the antifraud and registrations provisions
of the securities laws.
The production of NATCO records has been the subject of
a dispute that includes NATCO's understanding of the initial SEC
subpoena, an action by DCI requiring NATCO to produce its records,
and the implications and inferences to be drawn from the production
of records by DCI in 1999.
Discovery has been extended and the instant motion was
heard and marked submitted on January 16, 2002.
Discussion
I. The Jury Demand Will Be Stricken and Substitution of An Expert Witness is Granted
The submissions on striking the jury demand and the
substitution of an expert witness establish that there is no longer
a dispute on these matters. These motions are granted, there being
no opposition.
II. The SEC is Granted Leave to File Its Amended Complaint
Rule 15(a) of the Federal Rules of Civil Procedure
provides that leave to amend a pleading “shall be freely given when
justice so requires.” The Supreme Court has long declared that
“this mandate is to be heeded,” and that ”in the absence of any
apparent or declared reason -- such as undue delay, bad faith or
dilatory motive on the part of the movant, repeated failure to cure
deficiencies by amendments previously allowed, undue prejudice to
the opposing party by virtue of allowance of the amendment,
futility of amendment, etc. -- the leave sought should, as the
rules require, be ‘freely given.’” See Foman v. Davis, 371 U.S.
178, 182 (1962). This customary freedom to amend is challenged by
DCI on grounds of undue delay, bad faith, and undue prejudice, see
Grace v. Rosenstock, 228 F.3d 40 (2d Cir. 2000).
Over six years have passed from the SEC’s initiation of
its interest in DCI to the instant motion for leave to file an
amended complaint. This action was initiated a year and nine
months ago, and according to the SEC the critical evidence was not
revealed until July 9, 2001. Whether the delay was due to
obfuscation, as maintained by the SEC, or ineptitude as alleged by
DCI, under the circumstances of this action it is not undue.
In Monahan v. New York City Department of Corrections,
214 F.3d 275 (2d Cir. 2000), the defendants, in support of summary
judgment motions filed 15 months after the original complaint,
asserted res judicata as an affirmative defense for the first time.
The district court treated the assertion of this argument as a
motion to amend the answers, granted the motion to amend, and then
granted summary judgment to the defendants based on that defense.
The Second Circuit, in approving the district court’s decision,
stated that the liberal approach embodied in Rule 15(a):
reflects two of the most important principles behind the Federal Rules:
pleadings are to serve the limited role of providing the opposing party with notice of the claim or
defense to be litigated, see Conley v. Gibson, 355 U.S. 41, 47-48, 78 S.Ct. 99, 2 L.Ed.2d 80
(1957), and "mere technicalities" should not prevent cases from being decided on the merits. See
Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962). See also 6 Charles Alan Wright,
Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure: Civil 2d § 1471 (2d ed.1990).
Id., 214 F.3d at 283.
In Block v. First Blood Associates, 988 F.2d 344 (2d Cir.
1993), the plaintiffs filed their first complaint in November of
1986, and filed an amended complaint in July of 1989. The
defendants filed an amended answer on November 5, 1990, nine days
before the discovery cut-off, and asserted a statute of limitations
defense for the first time. The defendants then moved for summary
judgment based on the statute of limitations, and the district
court treated that motion as including a motion for leave to amend,
granted both motions, and dismissed the complaint. The Second
Circuit upheld this decision stating that "he rule in this
Circuit has been to allow a party to amend its pleadings in the
absence of a showing by the nonmovant of prejudice or bad faith."
Id. at 350.
"Furthermore, parties . . . have been permitted to amend
their pleadings long after they acquired the facts necessary to
support those claims." Richardson Greenshields Securities, Inc. v.
Lau, 825 F.2d 647, 653 n.6 (2d Cir. 1987) (citing Howey v. United
States, 481 F.2d 1187, 1188-89, 1191 (9th Cir. 1981) (allowing
amendment after five-year interval and on second day of trial,
stating that "the mere fact that the government could have moved at
an earlier time to amend does not by itself constitute an adequate
basis for denying leave to amend"); Middle Atl. Utils. Co. v.
S.M.W. Dev. Corp., 392 F.2d 380, 385 (2d Cir. 1968) (allowing
amendment after three-year interval and notice of trial readiness);
Green v. Wolf Corp., 50 F.R.D. 220, 223 (S.D.N.Y. 1970) (allowing
amendment after almost four years where plaintiff was aware of
facts asserted in amended complaint from outset of case)).
As to bad faith, there is no showing of malice or any
facts beyond those proceedings set forth above. Undue delay,
standing alone, does not constitute bad faith.
Prejudice, of course, exists. Additional time, money and
effort will be expended to meet this new charge. Given the state
of DCI's existence and the difficulties of locating files, DCI is
disadvantaged. The disadvantage, however, is not so substantial as
to preclude a defense or to bar the amendment.
DCI cites Sanders v. Thrall Car Manufacturing, 582 F.
Supp. 945 (S.D.N.Y. 1983), aff'd, 730 F.2d 910 (2d Cir. 1984), in
which the movant sought leave to file a third amended complaint to
add charges under the Racketeer Influenced and Corrupt Organization
Act more than two and a half years after filing the original
complaint. However, in that case, the only reason for the delay
was counsel's "ignorance of the statute." Id. at 952. Such is not
the case here.
Nor does the instant action resemble a markedly different
and vexatious action heard by this Court, Briarpatch Ltd. L.P. v.
Geisler Roberdeau, Inc., 148 F. Supp.2d 321 (S.D.N.Y. 2001). In
that case, the motion to amend was denied in part as to proposed
new claims that duplicated existing claims, id. at 329, and as to
proposed new defendants that would have likely destroyed diversity
jurisdiction. Id. at 330. Neither situation is present here.
With the documents it now has in hand, the SEC maintains
that it could file a separate action in this Court on the new
claims, which DCI concedes could occur. Additional cost in time,
inconvenience and expense to all involved would result. Under
these circumstances, "prejudice" under Rule 15(a) has not been
established.
Conclusion
The motion of the SEC to amend the complaint, strike the
defendant's jury demand and substitute an expert witness is
granted.
Discovery with respect to the amendments is extended for
two months from the date hereof, after which any dispositive
motions shall be filed.
It is so ordered.
New York, NY
_________________________
April 17, 2002
ROBERT W. SWEET U.S.D.J. |
