In re Olympia Brewing Co. Securities Litigation

674 F. Supp. 597

In re OLYMPIA BREWING COMPANY SECURITIES LITIGATION.

No. 77 C 1206.

United States District Court, N.D. Illinois, E.D.

April 20, 1987.

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William T. Huyck, Nicholas J. Etten, Richard G. Schultz, Foran, Wizz & Schultz, Chicago, Ill., for plaintiff.

Steven L. Bashwiner, Katten, Muchin, Zavis, Pearl, Greenberger & Galler, Howard

R. Koven, Jenner & Block, H. Nicholas Berberian, Howard D. Lieberman, Therese M. Obringer, Neal, Gerber & Eisenberg, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

ANN C. WILLIAMS, District Judge.

In the early spring of 1977, the price of several securities experienced a precipitous drop. Subsequently, seventeen separate actions were filed against Loeb Rhoades & Co. and Loeb Rhoades & Co., Inc. (collectively "Loeb Rhoades"). The seventeen cases, consolidated for discovery and trial, concern the alleged market manipulation of the common stocks of Stange Corp., Olympia Brewing Co., Lawry's Foods, Inc. and Fay's Drugs. The original pleadings ranged in kind from single-plaintiff and single-defendant complaints to multiple-party complaints. Some plaintiffs in their cases named as defendants individuals or entities who were plaintiffs in other cases.

Ten years later, after the matter was transferred to a different judge twice, after countless motions were briefed and ruled on and after settlement agreements were reached in the other cases, five cases remain. The plaintiffs in those cases are as follows:

(1) No. 77 C 3820 and 82 C 1519—Janet Smithson and Paul Smithson, as Executrices of the Estate of Paul B. Smithson, Jr. and others ("the Smithson Parties");

(2) No. 78 C 896—Turn-key Enterprises, Andrew C. Papas, A. Patrick Papas, and John T. Papas (collectively "the Turn-Key Parties");

(3) No. 78 C 2242—Richard M. Shure, Peggy Shure, Strombecker Corp. and Penta Capital (collectively "the Shure Parties");

(4) No. 81 C 3699—Louis Singer ("Singer") as successor in interest to Troster, Singer & Co.

The central figure linking these five cases is a former employee of Loeb Rhoades, Jack Bernhardt. Bernhardt allegedly informed his customers that the securities in question were takeover targets when in fact they were not. Based on this false information, the customers bought the securities. Bernhardt allegedly also bought, at times without authority, those same securities for his customer accounts. According to the complaints, these purchases artificially raised and maintained the prices of these securities. The essence of the plaintiffs' claims in this case is that Loeb Rhoades failed to supervise and control Bernhardt, failed to disclose information which it should have, and is liable for Bernhardt's actions based on respondeat superior. Loeb Rhoades denies that it acted wrongfully, denies responsibility for Bernhardt's actions, and accuses certain plaintiffs of wrongful conduct which either contributed to the fraud or kept Loeb Rhoades from discovering what Bernhardt was doing.¹

The trial of these cases is scheduled to begin on Monday, May 4, 1987. In anticipation of trial, the parties have filed a number of motions to add to the already lengthy list of pending motions in this matter. The court will address each motion separately.

I Loeb Rhoades' Motion for Leave to File Third Amended Counterclaim

Loeb Rhoades first moves the court for an order granting them leave to file its Third Amended Counterclaim.² According to Loeb Rhoades, the Third Amended Counterclaim modifies Loeb Rhoades' Final Amended Counterclaim to comport with prior orders of this court, reflect recent settlements and add an intent allegation to three of the remaining cases. The Shure Parties and the Smithson Parties object to any further amendment of the counterclaim on the grounds that the request for the amendment has been delayed without a valid reason and the amendment would unduly prejudice the affected plaintiffs.

In order to place this motion in proper perspective, the court must briefly review the history of Loeb Rhoades' counterclaim. Loeb Rhoades filed its Counterclaim on February 23, 1979 and its Amended Counterclaim on March 14, 1980. In response to a motion to dismiss, Judge Getzendanner dismissed four of the counts of the Amended Counterclaim but let Loeb Rhoades' indemnity and contribution claims survive subject to certain limitations she expressed in her opinion. See Maryville Academy v. Loeb Rhoades & Co., Inc., 530 F.Supp. 1061, 1074 (N.D.Ill.1981). In the interests of clarifying the remaining claims, she directed Loeb Rhoades to file a second amended counterclaim which Loeb Rhoades did on February 26, 1982. On January 25, 1984, after a settlement of a class action in this group of consolidated cases, Loeb Rhoades moved to amend the prayer for relief in its counterclaim to seek recovery for settlements. On May 7, 1984, Judge Getzendanner granted Loeb Rhoades leave to file this counterclaim which Loeb Rhoades had optimistically but mistakenly dubbed its "Final Amended Counterclaim."

The Final Amended Counterclaim consisted of two counts seeking implied indemnity (Counts I and II), one count seeking implied contribution (Count III) and a final count seeking contractual indemnity pursuant to the customer agreements between certain plaintiffs and Loeb Rhoades (Count IV). After the plaintiffs named as counterdefendants ("counterdefendants") had moved to dismiss the Final Amended Counterclaim for failure to state a claim upon which relief can be granted, see Fed.R.Civ. P. 12(b)(6), the court granted the motion in part and denied it in part. See In re Olympia Brewing Co. Securities Litigation, No. 77 C 1206, slip op. at 20 (N.D.Ill. March 27, 1986) (Williams, J.) Available on WESTLAW, 1986 WL 4188. In summary, this court dismissed both implied-indemnity counts, dismissed the contribution count with respect to all counterdefendants except two,³ and narrowed the contractual-indemnity count. The parties eventually stated they were ready for trial, so this court set a trial date of October 6, 1986. Scheduling difficulties forced the court to strike the October 6, 1986 trial date and reschedule the trial for April 6, 1987.

On February 5, 1987, two months before this ten-year old case was scheduled for trial, Loeb Rhoades filed its motion for leave to file its Third Amended Counterclaim. The most significant amendments are in Paragraphs 8 and 20, in which Loeb Rhoades has added the following underlined allegations:

8. During the period from approximately January 1, 1975 to March 15, 1977, counterdefendants and others, directly, or indirectly through their agents, conspired to, aided and abetted each other to and did secretly and fraudulently misuse the trading and credit facilities of Loeb Rhoades, other broker-dealers, and financial institutions as part of a fraudulent and manipulative scheme with an intent to enrich themselves at the risk and expense of others, including Loeb Rhoades, and to manipulate the price of the Securities in order to enhance the price of any takeover or acquisition with respect to those Securities....

Third Amended Counterclaim ¶ 8, at 5-6 (emphasis added);

20. Each of the counterdefendants named herein, if sued separately by a plaintiff other than itself in one of the lawsuits described in paragraph 5, supra, would have been liable to that plaintiff for that plaintiff's damages as described in its complaint as a result of the conduct alleged above. The counterdefendants engaged in the same conduct alleged against Loeb Rhoades in each of the actions set forth in paragraph 5, supra, and did so with an intent to manipulate the price of the securities.

Id. ¶ 20, at 8-9 (emphasis added).

According to the Federal Rules of Civil Procedure, a party may amend its pleading only by leave of court or by written consent of the adverse party; leave shall be freely given when justice so requires. Fed. R.Civ.P. 15(a). The spirit of the Federal Rules is that controversies shall be decided on the merits and not in a game of skill in which one misstep by counsel may be decisive to the outcome. See Conley v. Gibson, 355 U.S. 41, 48, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957). As the Supreme Court stated in Foman v. Davis, 371 U.S. 178, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962), only in certain rare cases should the court deny the movant leave to amend:

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 should, as the rules require, be "freely given."

Foman v. Davis, 871 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962).

The first issue appropriate for discussion concerns whether the court should deny Loeb Rhoades' motion because the Third Amended Counterclaim fails to remedy the defects of the Final Amended Counterclaim. The Seventh Circuit permits a refusal to grant permission to file an amended pleading where the proposed amendment fails to allege facts which would support a valid theory of liability, or where the party moving to amend has not shown that the proposed amendment has substantial merit. See, e.g., Goulding v. Feinglass, 811 F.2d 1099, 1104 (7th Cir.1987); Rodgers v. Lincoln Towing Service, Inc., 771 F.2d 194, 204 (7th Cir.1985); Textor v. Board of Regents of Northern Illinois Univ., 711 F.2d 1387, 1391 (7th Cir.1983). But since certain counterdefendants have filed a motion to dismiss the Third Amended Counterclaim (apparently in anticipation of this court's granting the motion for leave to file the Third Amended Counterclaim), the court will reserve extensive discussion of the merits of the Third Amended Counterclaim, if necessary, until after the court has considered the briefing on the motion...