Appellant, whose cause of action contained various claims against appellees, sought reversal of order below, S.D.N.Y. MacMahon, J., holding that claims remaining for adjudication were not adjudicable in federal courts, but jurisdiction over the action was reserved pending state court disposition. On appeal appellant seeks reversal of district court determination that his claims were not federally justiciable. Held : Appellant's claims are not adjudicable in federal court, and order below retaining jurisdiction over the action is reversed.
Before Lumbard, Waterman and Van Graafeiland, Circuit Judges.
On May 31, 1972, Empire Fire and Marine Insurance Company, pursuant to a registration statement and prospectus filed with the Securities and Exchange Commission (SEC), made a public offering of 500,000 shares of common stock. The law firm of Sitomer, Sitomer & Porges (Sitomer) was retained by Empire to prepare the registration statement and prospectus for the offering. Stuart C. Goldberg, an attorney with the Sitomer firm, assisted to a limited extent in the preparation of the issue.
On May 2, 1973, plaintiffs,*fn1 Deitrich Meyerhofer and Herbert Federman, on behalf of themselves and all similarly situated purchasers, filed the original complaint in this consolidated action. The complaint alleged that the registration statement and prospectus under which Empire stock had been issued was false and misleading in that, among other things, it inflated the amount shown to be received from the offering for it did not disclose that the Sitomer firm was to receive a $200,000 finder's fee from the proceeds.*fn2 An amended complaint, identical in legal theory to the May 2 complaint, was served on June 5, 1973, in which violations of the Securities Act of 1933, the Securities Exchange Act of 1934, SEC Rule 10b-5, and common law negligence, fraud, and deceit were alleged.*fn3
The factual basis underlying the alleged violations of the Securities Acts, and rules and regulations thereunder, related specifically to Empire's failure to disclose in the registration statement or prospectus the proposed fee arrangements between Empire and Sitomer.*fn4
Named as defendants were Empire, and the officers and directors of Empire; the Sitomer firm and its three partners, A. L. Sitomer, S. J. Sitomer, and R. E. Porges; Faulker, Dawkins & Sullivan Securities Corporation (managing underwriter); Stuart C. Goldberg (an attorney with the Sitomer firm); and certain selling Empire shareholders.
The Empire defendants cross-claimed against the Sitomer defendants, and against Stuart C. Goldberg and Jacob Aschkenasy (both of whom worked on the Empire offering) as additional defendants, alleging negligence and malpractice in the preparation of the registration statement. Goldberg, in turn, counterclaimed against Empire and cross-claimed against Sitomer and Aschkenasy, alleging that they had conspired to violate the securities laws by failing to disclose the fee arrangement in the Empire registration, and Goldberg also charged that Sitomer and Aschkenasy, as co-conspirators with Empire, had knowingly and intentionally exposed him to liability under the securities laws by misrepresenting to him the nature of the fee arrangement.
In January 1976 a court-approved settlement disposed of all claims in the present controversy with the exception of the claims asserted by and against Goldberg. In December 1976 Goldberg's claims were dismissed with leave to amend. Goldberg filed an amended complaint and the remaining defendants moved for dismissal. On April 12, 1977, the district court entered an order denying without prejudice the defendants' motions to dismiss. The court retained jurisdiction over the case but suspended all further proceedings in federal court pending the commencement of actions in state court. Meyerhofer v. Empire Fire and Marine Ins. Co., 74 F.R.D. 151 (S.D.N.Y.1977). Goldberg appeals from this April 12, 1977, order.
This appeal represents but one episode in the unremitting litigation arising out of a 1972 public offering of stock, and as such, requires that we briefly review the events leading up to the district court's order and Goldberg's participation in those events.
Goldberg had been an attorney with the Sitomer firm from November 15, 1971, until he resigned from the firm in January of 1973, and he had developed an expertise in the area of securities law. He had participated to a limited extent in the preparation of the Empire issue, but another Sitomer associate had been primarily responsible for the issue. Work on the Empire S-1 Registration Statement began prior to Goldberg's arrival at the law firm, and his contribution to it had largely consisted of rendering legal opinions concerning the firm's obligation to report its fee. Amendment to Amended Answer, P 49(a), December 22, 1976. Goldberg asserts that in his effort to evaluate properly the firm's disclosure obligations he inquired whether the firm's fee was a fixed or contingent one, and that he was specifically informed by defendants Alvin Sitomer, Stephen Sitomer, and Robert Porges that the fee was not contingent. Id. at P 50(a). Goldberg states that, relying on the correctness of this information, he communicated with the SEC in order to obtain additional information from the Commission concerning the firm's disclosure obligations, and that he prepared a memorandum on January 24, 1972, covering the subject. Id. at P 51(a). During the early months of 1972 Goldberg was instructed to review the preliminary draft of the Empire registration with specific emphasis on Sitomer's purchase of Empire stock and the proper disclosure thereof. Id. at P 52(a). As part of his review Goldberg inquired as to whether the stock was fully paid for and unconditionally owned and was told in response to his inquiry that the stock was indeed fully paid for and unconditionally owned.
In connection with the Empire public offering Goldberg subsequently expressed concern over what he considered omissions in the Empire registration statement, specifically, the nondisclosure or inadequate disclosure of Sitomer's fee arrangement and the extent to which such excessive fees might include a finder's fee. The Empire registration statement and prospectus was filed with the SEC on March 28, 1972, and became effective on May 31, 1972. Goldberg's uneasiness over the excessive fee question in the Empire issue was not extinguished, however, upon the registration becoming effective. In fact, Goldberg's suspicions were rekindled on or about January 20, 1973, when the same question arose in connection with the Sitomer firm's fee arrangements with Glacier General Assurance Company (Glacier). Goldberg confronted the Sitomer defendants with the fruits of his personal investigation into the fee arrangement practice of the firm, whereupon said defendants admitted they had lied about the nature of the Empire fee and informed him that it was indeed a contingent arrangement, yet, they refused to make an immediate disclosure thereof. Id. at P 57(a). Goldberg's continued advocacy that full and complete disclosure of the fee arrangement in the Empire offering be forthwith made culminated in his resignation from the firm on January 22, 1973.*fn5 On the following day Goldberg met with SEC officials for the purpose of making a full disclosure of the methods of operation utilized in Sitomer's securities practice.*fn6 The information related to the SEC at this meeting was subsequently embodied in an affidavit prepared by Goldberg dated January 26, 1973.
Goldberg met with the attorneys for the plaintiffs, the firm of Bernson, Hoeniger, Freitag & Abbey, on at least two occasions, the first meeting taking place on May 3, 1973, one day after service of the original complaint. It was through these meetings that the Bernson firm was supplied with a copy of Goldberg's January 26 affidavit which tended to verify his lack of knowledge of the fee arrangement and of his concomitant nonparticipation in the omission of the information about the finder's fee in the prospectus. As a consequence of this, Goldberg was dropped as a party defendant.
After their receipt of the January 26 affidavit the plaintiffs amended their complaint so as to include more specific factual allegations, but the underlying legal theories were consistent with those contained in the original complaint.
As a result of the association between Goldberg and the Bernson firm the remaining defendants filed a motion pursuant to Canons 4 and 9 of the Code of Professional Responsibility,*fn7 the Disciplinary Rules and Ethical Considerations thereto, and the supervisory powers of the district court, seeking an order disqualifying Goldberg and the Bernson firm from acting as attorneys in the premises and from disclosing confidential information relative thereto. The district court (MacMahon, J.) by memorandum and order dated August 23, 1973, held that the Bernson firm and Goldberg were barred from acting as counsel or participating with counsel for plaintiffs in the originally filed Meyerhofer action or in any future action ...