The opinion of the court was delivered by: KATZ
In this case the financier of crooked insider trading deals seeks to recover his losses. I find him barred by illegality. I reject his attempt to turn on its head a recent decision of the Supreme Court of the United States which allows disappointed tippees to blow the whistle on their tippers. In this case, I allow the touts to blow the whistle on the financiers of insider trading in "hot issues" of stock. I leave these co-conspirators where the market left them. Such an approach enhances the purposes of the securities laws. Future bankrollers of illegal trading are less likely to provide the wherewithal to weak insiders who sell inside corporate information for a stake in the deal. The providers of capital have an aversion to risk. My decision puts them at risk, or at least uncertainty. In the future, insider touts will have more difficulty finding rich co-venturers to fund joint ventures in crime.
Plaintiff Benjamin Rothberg ("Rothberg") brought this suit to enforce two promissory notes, dated February 7, 1979. Defendant Sanford M. Rosenbloom ("Sanford") signed one of the notes, which obliges him to pay Rothberg $441,050 on demand. This note was unconditionally guaranteed by Sanford's brother, defendant David Rosenbloom ("David").
The other note was signed by David and obliges him to pay Rothberg $135,000 on demand.
Defendants concede that the notes and guaranty are genuine, that they were duly delivered to Rothberg, and that Rothberg made a demand for payment. Nevertheless, they have refused to honor the notes and guarantee. The defendants have proved that the notes represent obligations in two joint ventures to make secret profits from insider trading in violation of federal securities law.
After a bench trial, I ruled that both notes and the guarantee were unenforceable under the defense of in pari delicto. The notes represented losses sustained as a result of illegal insider trading: Rothberg, as part of two joint ventures, traded on inside information provided by David. This Court would not aid the plaintiff to recover his losses under those circumstances, any more than if the notes were given to secure losses in a narcotics venture. Rothberg appealed, contending that I had erred in finding insider trading violations and in admitting evidence of other joint ventures in which the parties had been involved. Rothberg also argued that, as a matter of law, the promissory notes and guarantee were not subject to the in pari delicto defense.
The Third Circuit affirmed my finding that the joint venturers had engaged in insider trading in violation of the securities law. Rothberg v. Rosenbloom, 771 F.2d 818, 819-23 (3d Cir. 1985). The Court also upheld admission of evidence of other similar joint ventures in which the parties engaged, under Rule 404(b) of the Federal Rules of Evidence. Such evidence was admissible to show the nature and purpose of the two joint ventures in question.
With respect to my application of the in pari delicto defense, the panel remanded the case to me in view of a Supreme Court case, issued after my opinion, which undercut the rationale of the Third Circuit decision on which I relied.
However, the more recent Supreme Court decision in Bateman Eichler, Hill Richards, Inc. v. Carl F. Berner, et al., 472 U.S. 299, 105 S. Ct. 2622, 86 L. Ed. 2d 215 (1985), called into question the Third Circuit's holding in Tarasi. Accordingly, I must make findings under the standards in Bateman Eichler.
In particular, I must make findings as to 1) whether Rothberg bears at least substantially equal responsibility for the violations he seeks to redress, and 2) whether preclusion of Rothberg's suit would significantly interfere with the effective enforcement of the securities laws and protection of the investing public. Rothberg v. Rosenbloom, 771 F.2d at 824.
For the reasons below, I find that this case presents a "different mix of deterrent incentives" from that in Bateman Eichler and that the defense of in pari delicto applies. Bateman Eichler, 105 S. Ct. at 2632. Rothberg, as the instigator and financier of the joint ventures involved, bears "at least substantially equal responsibility" for the violations of federal securities laws which resulted in the trading losses he seeks to recoup. Id. at 2629. Moreover, precluding Rothberg will enhance, rather than significantly interfere with, the enforcement of the securities laws and will protect the investing public by encouraging whistleblowing on illegal insider trading.
1. Plaintiff Benjamin Rothberg ("Rothberg") is the payee of two interest-bearing promissory notes which he seeks to enforce. Defendant Sanford M. Rosenbloom ("Sanford") is the maker of one of the notes, which obliges him to pay Rothberg $441,050 on demand. Sanford's brother, defendant David Rosenbloom ("David"), unconditionally guaranteed Sanford's note. Ex. P-32.
2. David is the maker of the other note, which obliges him to pay Rothberg $135,000 on demand. Ex. P-39.
3. David and Sanford do not contest that the notes and guaranty are genuine, that they were duly delivered to Rothberg, and that Rothberg made a demand for payment.
4. Rothberg, who was sixty-six at the time of trial, is a citizen and resident of New Jersey. Educated as a chemist, Rothberg worked with his father for a series of enterprises that eventually became Montrose Chemical Corp. and then worked for Montrose's successor, Baldwin-Montrose, when Montrose merged with two other companies. Rothberg was an officer and director of Montrose. Rothberg also served as a director of Mallory-Randall Corp. At the time of trial, Rothberg was an investor and a technical consultant for Cris Craft. N.T. 2.22-23, 2.40, 2.43-44, 2.45.
5. Defendant David Rosenbloom ("David"), who died on May 12, 1985, was a citizen and resident of Pennsylvania. He was 59 years old at the time of trial. David graduated from the University of Pennsylvania and attended two law schools without finishing the course of study at either. David had served as an officer and director of a number of corporations, including Home Products Sales Co., Centlivre Brewing Company, Harvey's Stores, Eastern Air Devices and Centlivre's successor. In the late 1960's David was a director and Chairman of the Executive Committee of Nytronics, Inc. and held the same positions with Mallory-Randall Corp. At the time of trial, David was unemployed. N.T. 1.110-1.115, 3.45.
7. At the times material to this litigation, Benson Selzer ("Selzer") was a registered representative with a securities brokerage firm in New York. Selzer was a personal friend and business associate of David's and was part of a group, along with David, that acquired control of Nytronics. In addition to being employed as a stockbroker, Selzer served as a vice president and director of Nytronics, Inc. and also held the same positions with Mallory-Randall. At all times relevant to this lawsuit, Selzer was Rothberg's stockbroker. N.T. 2.28, 3.49-53.
8. Rothberg met David when Centlivre, Montrose Chemical and Baldwin merged. After the merger, the two met irregularly on business and more often, but not regularly, at social occasions. N.T. 3.47-48.
9. David became acquainted with Selzer during the time he lived in New York City and introduced him to Rothberg. N.T. 3.48-50.
10. At the time at which the two entered into joint venture agreements, Sanford and Rothberg were barely acquainted. At trial Rothberg could only remember having met Sanford on two occasions prior to 1981. N.T. 2.74-76.
11. Prior to this action, Rothberg and David were defendants in litigation instituted by the S.E.C. in which David was alleged to have provided Rothberg and others with insider information on which Rothberg and others traded. See SEC v. Shapiro, 349 F. Supp. 46 (S.D.N.Y. 1972), aff'd. 494 F.2d 1301 (2d Cir. 1974).
12. The promissory notes and guarantee which Rothberg seeks to enforce represent acknowledgements of debts incurred in connection with the last two of six joint venture agreements executed between February of 1968 and May of 1969. Under those agreements, Rothberg invested sums totalling in excess of $1,365,000 to purchase securities of various publicly owned businesses.
13. Under the terms of each of these joint ventures, Rothberg contributed all the capital involved, except for $100 in cash contributed by the co-venturer (either David or Sanford). Rothberg also agreed to surrender to his joint venturer of record (either David or Sanford) the power to sell the securities involved or their equivalent over specified periods of time and to share equally with that party any profits derived from the investment. However, the other joint venturer was to indemnify Rothberg against any losses sustained by the joint venture. Each joint venture was to last for two years. In substance, these were almost all ventures in crime, i.e., to trade illegally on inside information. The ventures were structured to protect Rothberg's creditor position as their financier.
14. All of the joint ventures but the first involved purchasing securities of firms in which either David or Selzer, or both, served as officers or directors or of companies which were targets for mergers with companies in which David or Selzer, or both, were officers or directors.
15. Selzer's brokerage firm, with Selzer as its representative, handled all of Rothberg's investments in the joint ventures. N.T. 3.62-63.
I. Joint Venture of February 14, 1968
16. On February 14, 1968, Rothberg entered into a Joint Venture Agreement with David. Ex. D-26. Rothberg contributed 10,300 shares of stock of the Harsco Corporation, worth $239,005.42. David contributed $100.00 in cash. Profits were to be evenly divided, but David guaranteed Rothberg against loss on this ...