Opinion
98 CIV. 7347 (DLC).
May 30, 2006
Appearances
For Plaintiff Security and Exchange Commission: Robert Blackburn Securities and Exchange Commission New York, NY.
Gregory Miller Rosemary Filou Securities and Exchange Commission Washington, D.C.
For Intervenor Heard LLC: Robert Friese Jason Lee Shartsis Friese LLP San Francisco, CA.
Marvin Pickholz Jason Pickholz Jeremy Shure Akerman Senterfitt LLP New York, NY.
OPINION ORDER
Heard LLC ("Heard"), a market maker in the securities of Elsag Bailey Process Automation, N.V. ("Elsag"), has filed a combined motion to intervene, to modify the distribution plan, and for an accounting in this enforcement action brought by the Securities and Exchange Commission ("SEC") to recover funds for investors injured by the defendants' insider trading in Elsag securities. Principally because Heard's motion is untimely and would delay distribution of recovered funds to injured investors, Heard's motion to intervene is denied and the other motions are denied as moot.
Background
On October 14, 1998, ABB Asea Brown Boveri ("ABB") announced a tender offer for Elsag. Between September 10 and October 13, the defendants in this action purchased significant amounts of Elsag securities while in possession of material, non-public information concerning the impending sale. On the day after the October 14 announcement, Elsag's stock, which had been trading in the range of $19-$21 a share, jumped to $34 a share.
The SEC initiated this action on October 19, 1998. Immediately after the filing of the complaint, the Court froze the assets of defendants through a temporary restraining order and then a preliminary injunction. Through a series of consent and default judgments in this action and in a related action, SEC v. Angelus Trading, 99 Civ. 4575 (DLC), $7,050,341.84 in profits from purchases of Elsag securities were disgorged by defendants.
On February 26, 2003, a plan for the distribution for the disgorged funds was approved ("Plan"). The February 26 Order also appointed a receiver ("Receiver") to implement the Plan. On July 25, 2003, the Clerk of Court transferred $5,343,917.27 to the Receiver. On November 28, 2005, the Clerk of Court was ordered to transfer the funds recovered in Angelus Trading to the Receiver. The period for filing claims ended that same day. Distribution of the funds will occur shortly.
The stated purpose of the Plan is to distribute funds equitably among Contemporaneous Sellers or Claimants ("Claimants"). Claimants are those who sold Elsag common stock and options on specific dates on which defendants made purchases ("Contemporaneous Sales").
Transactions which qualify as contemporaneous sales under the Plan are sales of Elsag common stock on October 8, 9, 12 and 13 and certain Elsag calls sold on September 10 and 27 and October 2, 5, 6, and 7.
Claimants were instructed to file a preliminary claim in order to measure the extent of their losses attributable to the insider trading. The measurement of loss was derived from two calculations. First, actual losses are measured from Claimants' Contemporaneous Sales by calculating how much the Claimants would have received for the same sale at the closing price for Elsag shares or options on October 15, 1998, and subtracting the actual price at which they made the Contemporaneous Sale. Second, net profits made trading in Elsag securities are calculating from the time of a Claimant's first Contemporaneous Sale through October 15. A Claimant's preliminary claim under the Plan is its calculated actual loss less net profits. If the net profit calculation is negative it is not considered. As a result, a Claimant's preliminary claim can never be larger than its calculated actual losses.
The funds available will be distributed to the Claimants based on the ratio of their preliminary claim to the total of all the preliminary claims. The Receiver has already determined that the total amount of the preliminary claims filed is greater than the funds available for distribution.
Heard was the lead market maker for Elsag options on the Pacific Exchange during the time of the insider trading. Heard calculates its actual losses as $263,454.05. Based on the Plan formula, Heard had no net profits; it suffered a loss of $611,381.70. Because negative net profits are not included in the calculation of preliminary claims, Heard's preliminary claim under the Plan is limited to its actual loss or $263,454.05.
In a letter to the Court dated November 26, 2002, Heard noted its position as a market maker and requested that potential Claimants be given the opportunity to review any proposed plan of distribution. The SEC was ordered to respond to Heard's letter. Based on discussions with Heard the SEC modified its proposed plan. As noted, the Plan was approved by the Court on February 26, 2003. On November 17, 2005, Heard wrote again to the Court and indicated its intention to file motions to intervene, to amend the Distribution Plan, and for an accounting. On January 13, 2006, Heard filed the combined motion.
Discussion
Heard seeks to intervene both as a matter of right under Rule 24(a), and permissively under Rule 24(b), Fed R. Civ. P. A prerequisite for either form of intervention is that the application to intervene is timely. Since Heard's application to intervene is not timely, its motion is denied.
It is unnecessary to resolve the issue of whether aggrieved investors have any right to intervene pursuant to Rule 24(a) in an SEC enforcement action, see SEC v. Bear, Stearns Co. Inc., 03 Civ. 2937 (WHP), 2003 WL 22000340 (S.D.N.Y. Aug. 25, 2003), since Heard's motion must be denied in any event on its merits.
A. Rule 24(a)
Intervention as a matter of right is governed by Rule 24(a), which states in part:
Upon timely application anyone shall be permitted to intervene in an action . . . when the applicant claims an interest relating to the property or transaction which is the subject of the action and the applicant is so situated that the disposition of the action may as a practical matter impair or impede the applicant's ability to protect that interest, unless the applicant's interest is adequately represented by existing parties.
Fed.R.Civ.P. 24(a) (emphasis supplied). Intervention as a matter of right is only permitted when an applicant has (1) timely filed an application, (2) shown an interest in the action, (3) demonstrated that the interest will be impaired by the disposition of the action, and (4) shown that the interest is not adequately protected by the parties to the action. In re Bank of New York Derivative Litigation, 320 F.3d 291, 300 (2d Cir. 2003). "Failure to satisfy any one of these requirements is a sufficient ground to deny the application." Id. (citation omitted).
"A district court has broad discretion in assessing the timeliness of a motion to intervene." In re Holocaust Victim Assets Litig., 225 F.3d 191, 198 (2d Cir. 2000). Among the factors that may be considered in determining whether an application is timely are "(1) how long the applicant had notice of the interest before it made the motion to intervene; (2) prejudice to existing parties resulting from any delay; (3) prejudice to the applicant if the motion is denied; and (4) any unusual circumstances militating for or against a finding of timeliness." Bank of New York, 320 F.3d at 300 (citation omitted).
Heard had notice of its interest long before making its motion to intervene. This action was initiated more than seven years ago. Heard expressed its concern about the structure of an eventual distribution plan in November 2002. The Plan was approved in February 2003. The motion to intervene was not filed until January 2006. Heard's delay in filing its motion until almost three years after the approval of the Plan is longer than delays in other actions where courts have found applications untimely. See United States v. Pitney Bowes, Inc., 25 F.3d 66, 71 (2d Cir. 1994) (finding application untimely where there was delay of fifteen months in filing motion and collecting cases); see also Bank of New York, 320 F.3d at 300 (finding motion to intervene after delay of more than two years to be untimely); Holocaust Litig., 225 F.3d at 199 (finding motion to intervene filed after eight month delay untimely).
Heard argues that its motion is not untimely because it has been diligent in pursuing other avenues to protect its interests, including contacting the SEC and the Receiver in an effort to convince them to modify the plan. Diligence in pursuing other avenues for relief is not an adequate substitute for filing a motion to intervene in a timely manner. See Holocaust Litig., 225 F.3d at 199; Pitney Bowes, 25 F.3d at 71.
Heard's delay in intervening has also prejudiced the public by delaying distribution of funds under the Plan. The Receiver represents that it is prepared to "proceed in short order" to the distribution phase once this motion to intervene is resolved.
To the extent Heard seeks compensation for damages it sustained due to conduct beyond that pursued by the SEC through these enforcement actions, Heard could have pursued those claims in separate litigation. See Holocaust Litig., 225 F.3d at 199;SEC v. Everest Management Corp., 475 F.2d 1236, 1239 (2d Cir. 1972). The fund is not sufficient to compensate fully even those investors who have filed claims. Heard essentially seeks revisions to the Plan which are designed to benefit its own unique situation, which are not sufficiently linked to the trades of the defendants for which the SEC obtained disgorgement, and which will further dilute the fund.
Finally, the timeliness inquiry calls for consideration of unusual circumstances that militate for or against a finding of timeliness. No unusual circumstances in this case are relevant to the question of timeliness.
In sum, Heard's motion to intervene is not timely. Heard's delay in filing its motion to intervene is significant and Heard's delay will prejudice other injured parties. Heard has not shown that it would be prejudiced because it has not demonstrated that the interests it seeks to protect through its intervention are appropriately addressed in this litigation. Having determined that Heard's motion to intervene is untimely, it is not necessary to reach any other factors. See Bank of New York, 320 F.3d at 299.
B. Rule 24(b)
Permissive intervention may be granted "[u]pon timely application" and "when an applicant's claim or defense and the main action have a question of law or fact in common." Fed R. Civ. P. 24(b). "A motion for permissive intervention, like one for intervention of right, must be timely." Catanzano By Catanzano v. Wing, 103 F.3d 223, 234 (2d Cir. 1996). Having already determined that Heard's motion is not timely, its motion for permissive intervention is denied.
C. Heard's Other Motions
Because Heard's motion to intervene is denied it is not necessary to reach Heard's other motions. Denial of an application to intervene renders "any substantive motion accompanying the application to intervene moot." In re PaineWebber Inc. Ltd. Partnerships Litig., 94 F.3d 49, 52 (2d Cir. 1996).
Conclusion
Heard's motion to intervene under Rule 24(a) or 24(b) is denied. Having denied Heard's motion to intervene, Heard's motions to modify the distribution plan and for an accounting are denied as moot.
SO ORDERED.