(Amended Complaint ¶ 17.) This scheme to depress the market price
of Olympia was concealed from plaintiffs, who relied on the
integrity of the market when they purchased Olympia shares. (Id.
at ¶ 18.) Hilda Mangel, for example, is the sole beneficiary of
a trust that purchased 900 shares of Olympia on September 16,
1976 and 1,875 shares of Lone Star Brewing Company on December
31, 1976. On March 7, 1977, the Trustee sold 100 of these shares.
Wendell W. Mew was an owner of 5,000 shares of Lone Star Brewing
Company, purchased at some undisclosed time and sold at a loss
sometime after March 7, 1977. According to plaintiffs, the scheme
to depress artificially the price of Olympia constituted a
"device, scheme or artifice to defraud and an act, practice or
course of business which operated as a fraud or deceit
in connection with the short sales of the securities of Olympia."
(Id. at ¶ 19.)
The Wilson defendants have moved for summary judgment, arguing
that the facts demonstrate that no unlawful scheme to depress the
price of Olympia shares took place. Plaintiffs submit evidence
tending to show the existence of substantial short positions in
Olympia and the correlation between an article unfavorable to
Olympia and trading by the Wilson defendants. Unfortunately,
neither party discusses the law applicable to a market
manipulation claim. Before examining the evidence, therefore, the
court must set forth what it understands to be plaintiffs' legal
theory in this case.
A. Market Manipulation
Section 10(b) proscribes the use of "any manipulative or
deceptive device or contrivance in contravention of the rules and
regulations [of the SEC]" employed in the purchase or sale of
designated securities. Rule 10b-5, promulgated under this
provision, details certain prohibited deceptive practices.
Section 17(a) of the 1933 Act makes it unlawful, in the offer
or sale of designated securities:
(1) to employ any device, scheme, or artifice to
(2) to obtain money . . . by means of any untrue
statement of a material fact or any omission to state
a material fact necessary in order to make the
statements made, in the light of circumstances under
which they were made, not misleading, or
(3) to engage in any transaction, practice, or course
of business which operates or would operate as a
fraud or deceit upon the purchaser.
Section 10(b) targets "manipulative or deceptive" conduct, and
thus all of the activities of Rule 10b-5, to be unlawful, must be
accompanied by scienter. See Santa Fe Industries, Inc. v. Green,
, 473-74, 97 S.Ct. 1292, 1300-01, 51 L.Ed.2d 480
(1977). However, if an implied claim exists under § 17(a), it is
possible that scienter is not required under § 17(a)(2) & (3). L.
Loss, Fundamentals of Securities Regulation 1150 (1983 & Supp.
1984). Otherwise, the elements of § 17(a) and Rule 10b-5 are
substantially the same as applied to sellers. Because of the
court's ruling, it need not determine whether an implied claim
exists under § 17(a).
It is clear from the Amended Complaint and the plaintiffs'
August 8, 1984 memorandum, that plaintiffs are seeking to
establish market manipulation. Plaintiffs' injuries stem from
their purchase at a price that subsequently declined as a result
of manipulative activities such as end-of-the-day trading and
"naked" sales by the Wilson defendants. It is thus important to
determine the types of acts that would constitute actionable
A. Not exactly.
Generally, mid-30's to mid-50's.
(Hedrich Dep. at 423.) Hedrich later testified that the stock
dropped several times during the relevant period. His testimony
never makes clear whether the declines in question included the
drastic March 1977 decline, a decline from the low-60's. Indeed,
his testimony supports an interpretation that he is not referring
to the decline by which plaintiffs were injured. He cannot be
sure whether any decline was more than temporary and seeks to
give examples "in terms of the incremental drops that occurred."
(Id. at 424.)
Kowski believed that short selling may have depressed the stock
"once or twice." (Kowski SEC Dep. at 170.) Again, his inability
to remember these depressions supports the court's interpretation
of the evidence as not referring to the March 1977 decline.
Rather, Hedrich's and Kowski's testimony at most supports an
inference that selling may have had a downward effect on
Olympia's price at certain times. No support for the proposition
that short selling contributed to the March 1977 decline can be
derived from Hedrich's and Kowski's testimony.
The court notes that the record of the Wilson defendants'
trades flies in the face of plaintiffs' conjectures about the
effects of the short selling. The Wilson trades constitute the
sum of the evidence on short selling. Yet, during the sale of the
first 36,000 shares by the Wilson defendants, Olympia's price was
roughly stable or went up. At any given period of consistent
trading in Olympia by the Wilson defendants, the price did not
change by more than two points. The sale of 6,000 shares from
March 3 to March 7, 1977 occurred with the price fluctuating
between 60 1/2 to 60 1/4. It is implausible that Wilson's last
3,000 out of 43,533 sales contributed in any significant way to
the alleged 16 3/4 point decline on March 11, 1977.
Plaintiffs have not produced any competent or plausible
evidence that Wilson's market activities contributed in any
substantial way to the March 1977 decline causing plaintiff's
injury. At least this much must be established before the court
may draw the next inference, that is, that the sales were somehow
The second factor plaintiffs contend is responsible for the
March 1977 decline is the March 7, 1977 Barron's article. The
court has already noted, however, that Wilson believed that
article was accurate and consistent with his own market
evaluation of Olympia. Plaintiffs never claim the article was
inaccurate. They admit that Wilson believed Olympia was
overpriced. (Plaintiffs' Memorandum, filed 8/8/84, p. 31, n. 22.)
Hence, even assuming that Wilson knew that such an article would
appear, the article is not responsible for an artificial decline
in Olympia's price. The court has already pointed out that the
essence of market manipulation is the injection of inaccurate
facts into the market.
As explained above, the evidence establishes a lawful and
reasonable interpretation of the Wilson defendants' series of
trades. Plaintiffs' evidence is far from that necessary to
support a compelling inference that a broad, market manipulation
conspiracy existed. Summary judgment in favor of defendants is
therefore granted on the allegations of market manipulation.
B. Insider Trading
Id. Moreover, delay must be unreasonable under all the
circumstances of the case. Link v. Wabash Railroad Company,
, 634, 82 S.Ct. 1386, 1390, 8 L.Ed.2d 734 (1962); Nealey,
662 F.2d at 1280 ("unavoidable delay" cannot be basis for
dismissal under Rule 41(b)). Because the record
in this case exposes a clear "lack of prosecutive intent on
plaintiff's part," dismissal with prejudice is the appropriate
sanction. Locascio, 694 F.2d at 499.
Defendants' July 7, 1983 memorandum in support of their motion
for dismissal with prejudice sets forth in some detail the
careless way in which this litigation was handled. The court's
own examination of the docket sheet and the file largely confirms
defendants' history, as in fact does plaintiff's responding
memorandum of October 7, 1983. The court will summarize the
factors supporting its decision to dismiss this case with
prejudice under Rule 41(b).
On July 15, 1977, Hilda Mangel and Wendell Mew filed this
action on behalf of a class of persons injured by a scheme of
downward market manipulation by the Wilson defendants and other
co-conspirators. On January 12, 1979, plaintiffs dismissed their
claims against three defendants in an agreed order. At that
point, the Wilson defendants and Loeb Rhoades & Co., Inc. were
the sole defendants. Until the case was reassigned to this court
on December 2, 1980, plaintiffs did virtually nothing to
prosecute this case. All activity in the case up to that date was
in response to defendants' motions, such as plaintiffs' objection
to coordination and opposition to severance and transfer.
(Plaintiffs did, however, serve a document production request on
Loeb Rhoades. No discovery was directed to the Wilson
On January 26, 1981, the court ordered plaintiffs to file an
Amended Complaint and a motion for class certification.
Plaintiffs have not explained why they waited until February 1981
to file a complaint dropping defendants who had been dismissed in
January 1979. The court did not allow plaintiffs to add upward
manipulation claims to the Amended Complaint, as these were
within the ambit of other, already pending class actions. The
plaintiffs made a decision, however, to continue their downward
manipulation claims against the Wilson defendants. From the
filing of the Amended Complaint in February 1981 to the Wilson
defendants' August 1983 filing of the pending motions for summary
judgment and for dismissal, plaintiffs did nothing to prosecute
Two explanations for the inactivity in this case should be
examined. First, plaintiffs contend that they could justifiably
rely on discovery by the plaintiffs' committee in the cases
consolidated under Civil Action 77 C 1206. Indeed, plaintiffs
point to this reliance on other parties as a benefit to the
Wilson defendants, as it prevented duplication of efforts by
plaintiffs' counsel. Second, plaintiffs argue that they could
rely on other pending class actions for vindication of their
rights. Since some or all of plaintiffs' injuries could be
redressed through claims of upward manipulation against Loeb
Rhoades, plaintiffs should be allowed to wait and see if they
would be included in any of those pending class actions. Both
these justifications demonstrate that plaintiffs maintained their
action against the Wilson defendants primarily as an insurance
policy against failure of other parties to prevail in their
motions for class certification.
Regarding discovery, plaintiffs agree that they did not
personally depose witnesses, file interrogatories, or subpoena
documents with the end of proving their claims against the Wilson
defendants. An examination of the record reveals that this is the
case, even though plaintiffs suggest at one point that they were
able to get some information from Jack Bernhardt through their
personal relationship with him and that other "informal
discovery" efforts were made. It is noteworthy that plaintiffs
missed Wilson's deposition, even though they were the only
parties asserting claims against him. However, plaintiffs
continue, they were justified in this failure. In a motion for a
protective order, filed on April 22, 1983 with the design of
preventing the deposition of Hilda Mangel, plaintiffs state:
As a matter of practicality and prudence and in order
to avoid pursuing duplicative litigation which would
likely be mooted by the certification of a class in
the Healy action, the plaintiff in Mangel has
refrained from separate, active participation in
discovery conducted under the aegis of the
plaintiffs' committee in the consolidated litigation.
(Motion for Protective Order, filed 4/22/83, at ¶ 3.) This
admission is supported by plaintiffs' statements in their
depositions that they believed their claims somewhat duplicative
of other actions in the consolidated case.
An examination of plaintiffs' own description of their claims,
however, reveals that plaintiffs' claims differed dramatically
from those of the other cases:
There is simply no good reason for coordinating the
Mangel case with the thirteen other "Loeb Rhoades"
cases pending before this Court pursuant to the
Manual for Complex Litigation, and there are
compelling reasons for not doing so. . . . [T]he
allegations which plaintiffs Mangel and Mew make
against the publishing and investing defendants are
completely distinct from those made against Loeb
Rhoades in the thirteen other cases.
(Plaintiffs Opposition to Coordination, filed 6/2/78, p. 2.)
While the court agrees that reliance on coordinated discovery
is justified to an extent, complete reliance is not. Plaintiffs'
downward manipulation claims against the Wilson defendants are
unique. There would be little reason for the other parties to
conduct discovery on allegations so far removed from their own
theories against persons not defendants in their actions. In
fact, the testimony attached to plaintiffs' memorandum in
opposition to the motion for summary judgment appears to have
been gleaned from depositions having little to do with
plaintiffs' claims. Wide gaps in plaintiffs' case that could have
been filled through discovery additional to that of the
plaintiffs' committee are left open. This is the unfortunate but
predictable result of relying on discovery by parties whose
claims are, by plaintiffs' admission, "completely distinct." It
should also be noted that it took plaintiffs a year to respond to
the motion for summary judgment, in part because of the efforts
in "compiling . . . the necessary information." (Motion for Leave
to File Instanter, filed 8/8/84, p. 1.) This supports an
inference that plaintiffs were not even keeping track of the
discovery being conducted for them by other parties.
The court, therefore, rejects plaintiffs' excuse that they
could rely on others to find the evidence to support their
claims. At the very least, plaintiffs should have deposed Wilson,
a defendant in their case only. In addition to failing to conduct
discovery, however, plaintiffs appear to have had no intention of
proceeding against the Wilson defendants.
In the October 7, 1983 memorandum, plaintiffs reiterate that
they in effect suspended prosecution of this action pending
resolution of matters in class actions against Loeb Rhoades. This
tactic was revealed in the April 26, 1983 motion for a protective
order. In August 1983, after a class action had been certified in
an upward manipulation case against Loeb Rhoades, Hilda Mangel
attempted to dismiss this case with prejudice and without costs.*fn3
The motion was opposed by the Wilson defendants who sought fees
and costs. The court denied Mangel's motion, and ordered briefing
of the Wilson defendants' August 1983 motion for summary
judgment, dismissal, costs, and fees.
The court rejects plaintiffs' argument that they could keep
their claims against the Wilson defendants dormant while they
determined if they were members of class actions against Loeb
Rhoades (in which the Wilson defendants were not defendants).
Since plaintiffs filed an action against the Wilson defendants,
they were bound to prosecute it or dismiss it. It is simply wrong
to hale a defendant to court as a hedge against losing a case
against another person.
Plaintiffs point to defendants' lack of activity in the case.
This is simply irrelevant
to a failure to prosecute; plaintiffs, not defendants, filed this
[P]laintiff cannot shift the responsibility of
inaction to the defendant. There is no reason why the
party being sued should take any steps to subject
himself to the expense and inconvenience of a trial,
if the plaintiff's neglect could reasonably give the
defendant the hope or expectation that the case will
never be tried.
5 J. Moore, Moore's Federal Practice ¶ 41.11, at 41-124 to 125
(1984). While delays occasioned by defendants cannot be held
against plaintiffs, defendants caused no delays in this case.
Plaintiffs have the duty to prosecute their case, and this simply
was not done here.
Plaintiffs' failure to prosecute this case, coupled with an
intention not to prosecute and the lack of other sanctions
appropriate to correct plaintiffs' inactivity, persuade the court
to dismiss this action with prejudice under Rule 41(b). This
provides a second, independent reason to dismiss this action.
Defendants' motions for summary judgment and for dismissal with
prejudice for want of prosecution are granted in full.
Defendants' motion for costs and fees, the only remaining motion
in this action, will be decided pending receipt on February 15,
1985 of Mangel's memorandum concerning the proposed voluntary
It is so ordered.
ON MOTION FOR ATTORNEY FEES
This case is before the court on the motion of defendants
Robert Wilson and Robert Wilson Associates ("the Wilson
defendants") for their costs and attorney's fees in defending
this action. On January 30, 1985, this court granted defendants'
motion for summary judgment and for dismissal for want of
prosecution. Plaintiff Hilda Mangel contends that an award of
attorney's fees is not warranted in this case. For the reasons
stated below, the Wilson defendants' motion for costs and
attorney's fees is granted in part and denied in part.
Regarding costs, Fed.R.Civ.P. 54(d) provides:
Except where express provision therefor is made
either in a statute of the United States or in these
rules, costs shall be allowed as a matter of course
to the prevailing party unless the court otherwise
directs. . . .
Rule 54(d) creates a presumption in favor of awarding costs to
the prevailing party which is not rebutted solely by an assertion
that the nonprevailing party acted in good faith. Gardner v.
Southern Railway Systems,
, 954 (7th Cir. 1982).
Instead, a court exercising its discretion to deny costs must
provide specific reasons therefor. Id. No such reason exists in
this case, and hence the court grants under Rule 54(d) the Wilson
defendants' motion for costs against Mangel. This obviates ruling
on whether costs may be recovered as a sanction. The Wilson
defendants shall file their Bill of Costs by July 12, 1985.
Mangel shall file her objections to this bill, if any, by August
Knorr Brake Corp. v. Harbil, Inc.,
, 226-27 (7th Cir.
1984). While an express finding of bad faith or intent to delay
is not necessary under § 1927, "some degree of culpability on the
part of counsel is required." Id. at 27.
Rule 11 also requires culpability of counsel. The version of
Rule 11 predating the August 28, 1983 amendment (which became
effective on August 1, 1983) governs, since most of the conduct
complained of occurred before the amendment. The former Rule 11
provides, in relevant part, that
The Wilson defendants argue first that this action was brought
in bad faith and without a factual basis. Apart from the fact
that the action was not filed by the present attorneys, against
whom sanctions are sought, this argument must fail. The Second
Circuit case of Nemeroff v. Abelson,
(2d Cir. 1980),
is instructive on the standard for determining if an action is
commenced with such bad faith and an absence of factual basis
that an award of fees under the judicial exception to the
American Rule is appropriate. The Court found that such an action
is one "`entirely without color and made for reasons of
harassment or delay or for other improper purposes.'" Id. at 348
(emphasis added in Nemeroff) (quoting Browning Debenture Holders'
Committee v. DASA Corp.,
, 1088 (2d Cir. 1977)). The
Court explained further:
Id. (emphasis original).