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NATIONAL WESTMINSTER BANCORP v. LEONE

November 7, 1988

NATIONAL WESTMINSTER BANCORP NJ, Plaintiff,
v.
RITA GIROLAMO LEONE, DR. ARMAND LEONE, PETER LEONE, RI-ARM CORP. and PAM ASSOCIATES, Defendants


H. Lee Sarokin, United States District Judge.


The opinion of the court was delivered by: SAROKIN

In this action brought under Section 16(b) of the Securities and Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Sec. 78p(b), for alleged "short-swing" profits realized by defendants, defendants move for summary judgment. Plaintiff cross-moves for partial summary judgment.

 BACKGROUND

 Plaintiff National Westminster Bancorp NJ ("Natwest NJ"), formerly known as First Jersey National Corporation ("First Jersey"), brought this action under Section 16(b) of the 1934 Act as the issuer of securities. The complaint demands disgorgement of alleged "short-swing" profits made by defendants Dr. Rita Girolamo Leone, Dr. Armand Leone, Peter Leone, Ri-Arm Corp. and PAM Associates. Rita Girolamo Leone was a member of the board of directors of First Jersey when the transactions relevant to this action took place. First Jersey's common stock traded on NASDAQ. Defendant Armand Leone is the husband of Rita Girolamo Leone and they share the same home. Defendant Peter Leone is their son. Ri-Arm Corp. is a corporation whose common stock is approximately 26%-owned by Rita Girolamo Leone and 25%-owned by Dr. Armand Leone. *fn1" PAM Associates is a partnership in which Mark Leone, Peter Leone, and Armand Leone, Jr. are the partners.

 On August 5, 1987, First Jersey released to the public a plan of merger under which each of the company's shares would be exchanged for $ 82 in cash. In the two days preceding the public announcement, Armand Leone purchased for the accounts of Ri-Arm Corp. and himself a total of 11,750 shares of First Jersey common stock. Purchases of a total of 8,350 shares of First Jersey common stock were also made on August 3 and 4, 1987 for accounts in the names of Peter Leone, Armand Leone, Jr., Mark Leone and PAM Associates. These shares were all exchanged for cash on February 1, 1988 at the rate of $ 82 per share.

 On August 2, 1987, Rita Girolamo Leone received notice that a special meeting of the First Jersey board was scheduled for August 4, 1987. A draft merger agreement and other materials relating to the proposed merger were distributed to the members of the First Jersey board of directors on August 3, 1987, and Rita Girolamo Leone reviewed them at home. On August 4, 1987, the First Jersey board reviewed the merger agreement and voted unanimously to approve it. As noted above, on August 3 and 4, 1987, Armand Leone purchased 11,750 shares of First Jersey stock for his and Ri-Arm Corp.'s accounts, and 8,350 shares for the accounts of his three sons. A public announcement of the plan was made on August 5, 1987, and the exchange pursuant to the merger took place on February 1, 1988.

 On April 21, 1988, the SEC filed a complaint against Rita Girolamo Leone and Armand Leone, alleging violations of Section 10(b) of the Securities and Exchange Act of 1933 ("1933 Act"), 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder. The alleged violations involved the purchase of securities of First Jersey in accounts in their own names or in which they had beneficial interests, made on the basis of material non-public information about the proposed merger.

 Rita and Armand Leone each executed a consent and undertaking on April 15, 1988, in which they consented to the entry of final judgment in the SEC action. The consent final judgments were filed by the SEC on April 22, 1988. Pursuant to the judgment, the Leones were ordered to "disgorge $ 774,302.00 representing the gross profits from the purchase of First Jersey National Corp. securities from July 17 through August 4, 1987 as described in the Complaint." Affidavit of Julian W. Friedman submitted in support of defendants' motion, Exhibit C. The SEC complaint alleged that this amount consisted of $ 500,128.00 in profits made in the Leones' and their family's accounts, and the remainder was attributable to profits made by alleged "tippees" of the Leones. In addition, the Leones were ordered to pay $ 480,916.00 in settlement of the SEC's claim for a civil penalty under the Insider Trading Sanctions Act of 1984.

 Plaintiff alleges that the SEC's figure of $ 500,128.00 for the profits of the Leone family realized through the above transactions is substantially lower than the proper calculation of profits under Section 16(b), which would be based on a rate of $ 82 per share. Affidavit of Robert Kushner in opposition to defendants' motion for summary judgment, Paragraph 8. Also, according to plaintiff, the SEC's figures are lower than what the proper measure of disgorgement should be in a 10(b) and 10b-5 action. *fn2" Id., note 2. Plaintiff states that the SEC has denied its request under the Freedom of Information Act for information concerning its calculations of the "gross profits" in the complaint and consent judgments entered by the Leones.

 Plaintiff brought this action in May of 1988, requesting disgorgement to the plaintiff of profits earned by defendants through "short-swing" trades in First Jersey's stock. Plaintiff's first claim is based on Section 16(b) liability for the securities purchased by the Leone family on August 3 and 4, 1987 and exchanged for cash on February 1, 1988. Plaintiff's second claim is based on liability for breach of the state common law fiduciary obligations with respect to securities bought by the Leone family before the terms of the merger were made public and after Rita Girolamo Leone had obtained information on the proposed merger (i.e., between July 15, 1987 and August 5, 1987).

 Defendants now bring this motion for summary judgment, arguing that all profit realized from the transactions at issue has already been disgorged in the prior SEC action; that the exchange of the First Jersey stock pursuant to the merger on February 1, 1988 was not a "sale" within the terms of Section 16(b); and that insider trading by a director is not a compensable breach of the director's fiduciary duty to the corporation under New Jersey common law. Plaintiff cross-moves for partial summary judgment against defendant Rita Girolamo Leone for the short-swing profits resulting from trades in the Ri-Arm Corp. account and in her husband's account.

 DISCUSSION

 I. Defendants' Motion for Summary Judgment

 The first issue that must be decided with respect to the defendants' motion for summary judgment is whether the prior action by the SEC and the settlement thereunder precludes any recovery by the corporation in this action. The consent judgment entered into between the SEC and the defendants provided for payment of $ 774,302.00 as disgorgement of profits from purchases of stock by the Leone family and their "tippees" during the period from July 17, 1987 through August 4, 1987. Although the SEC complaint alleged that $ 500,128.00 of that amount consisted of the profits from the accounts of the Leone family and entities controlled by the family, no basis for that calculation has been provided to plaintiff by the SEC. In addition to disgorgement of the above amount representing gross profits, the Leones were obligated to pay a civil penalty of $ 480,916.00. The SEC complaint and the consent order were grounded in allegations made by the SEC of violations of Section 10(b) of the 1933 Act and Rule 10b-5 promulgated thereunder.

 Defendants claim that the payment of $ 774,302.00 to the SEC in the Section 10(b) action now precludes any recovery of profits by the corporation under Section 16(b) of the 1934 Act. Having paid the settlement over to the SEC, defendants claim that there are no "profits" remaining that can be "disgorged", even if liability is found to exist. Defendants assert that a recovery by plaintiff in this action would force double liability on defendants. Plaintiff argues, ...


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