UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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: 73 Civ 2665 (CHT)
INDEX FUND, INC., :
:
Plaintiff, :
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-against- :
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ROBERT HAGOPIAN et al, :
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Defendants. :
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ARMSTRONG DEFENDANTS' MEMORANDUM IN SUPPORT
OF THEIR MOTION FOR SUMMARY JUDGMENT OR IN
THE ALTERNATIVE FOR PARTIAL SUMMARY JUDGMENT
AND TO EXCLUDE IN LIMINE CERTAIN EVIDENCE
Introduction.
This memorandum is submitted in support of the motion
by defendants Armstrong Capital, S.A. ("Armstrong Capital") and
Armstrong Investors, S. A. ("Armstrong Investors") (collectively
the "Armstrong defendants" or the "Armstrong Fund") for summary
judgment dismissing the plaintiff's amended complaint. As
alternative relief, the Armstrong defendants seek partial
summary judgment striking certain allegations in the amended
complaint and to exclude in limine evidence on certain
irrelevant, collateral or otherwise improper points.
This alternative relief parallels the relief requested
by defendants Citibank, N.A. ("Citibank") and Citirust (Bahamas)
Limited ("Cititrust") in a concurrent motion dated April 10, 1987
and returnable April 24, 1987. The issues are identical and
rather than duplicate the thorough presentation of the Citibank
papers, the Armstrong defendants would simply refer the court to
the presentation of those issues in the moving papers of Citibank
and Cititrust. For purposes of this memorandum, those papers will
be cited as "CITI".
Statement of the case.
The facts which support the Armstrong defendants'
motion are not in dispute and may be drawn from either the
allegations of the amended complaint or the Undisputed Facts
("U.F.") which appear as Part III of the JOINT PRE-TRIAL ORDER
herein (CITI, Ex. 7). Among the relevant material facts about
which there is no genuine issue to be tried are these:
Defendants John P. Galanis ("Galanis") and Akiyoshi
Yamada ("Yamada") organized the Armstrong Fund (the Armstrong
defendants collectively) to induce foreign investors to invest
money in the Armstrong Fund and thereafter to defraud the
Armstrong Fund and its shareholders by depleting the assets of
the Armstrong Fund and using such assets for their own benefit
(U.F., par. 46).
Defendants Galanis and Yamada, through defendant
Everest Management Company, invested monies of the Armstrong Fund
for their own personal gain in securities that were worthless and
overpriced. In so doing, defendants Galanis and Yamada violated
their contractual and fiduciary duties to the Armstrong Fund, as
well as the provisions of the Exchange Act, the Securities Act,
the Investment Company Act and common law principles of fraud
with respect to the Armstrong Fund. As a result of the activities
of Defendants Galanis and Yamada, virtually all the funds of
Armstrong Capital were dissipated (U.F., par. 47).
Plaintiff's contention is that Galanis and Yamada
bribed Hagopian to participate in their conspiracy and cause
plaintiff to purchase share of various issuers which were subject
to the manipulation (JOINT PRE-TRIAL ORDER, PART IV, SUBPART A,
Factual Position of Plaintiff, CITI Ex. 7, p. 15). The first
challenged purchase by plaintiff occurred on June 16, 1970, the
last on September 25, 1970 (Amended Complaint, par. 21(h), CITI,
Ex. 2).
There was no fiduciary relationship between plaintiff
and the Armstrong defendants (U.F., par. 19, 20 and 21). None of
the conspirators were an officer, employee or director of either
of the Armstrong defendants. The plaintiffs have not alleged, and
there is no evidence of, any wrongdoing on the part of any
officer or employee of either of the Armstrong defendants (U.F.,
par. 22).
On the other hand, Hagopian was not only the principal
of plaintiff's investment advisor, but from November 4, 1969 to
September 16, 1970, he was an officer and director of the
plaintiff itself (U.F., par. 15).
Nearly six months prior to the disputed transaction, as
early as January 28, 1970, plaintiff's Board of Directors learned
of a pending SEC proceeding against Hagopian with respect to his
activities as an employee of Winfield Growth Fund, Inc. (U.F.
paras. 11, 12). They took no action to remove him or curb his
authority.
SUMMARY OF ARGUMENT
(1) All of the primary acts for which
liability is complained are the acts of defendant John
P. Galanis ("Galanis"), the principal of defendant
Armstrong Capital's investment advisor, Robert R.
Hagopian ("Hagopian"), an officer and director of
plaintiff as well as the principal of plaintiff's
investment advisor and their co-conspirators;
(2) No wrongdoing has been alleged on the
part of any officer, employee or even director of
either of the Armstrong defendants;
(3) The Armstrong defendants were a victim of
the misconduct alleged in the amended complaint and
realized no profit from it;
(4) The application of the principles of "aider
and abettor" liability, respondent superior and pari delicto
as set forth in this Court's opinion of February 6, 1985
prevents the recovery of damages by the Index Fund from the
Armstrong defendants (CITI, Ex. 1, cited hereafter
as "1985 decision").
POINT ONE
THE FRAUDULENT CONDUCT OF GALANIS MAY NOT BE
IMPUTED TO THE ARMSTRONG DEFENDANTS PURSUANT
TO THE PRINCIPLE OF RESPONDENT SUPERIOR.
There is no evidence that any officer or employee of
the Armstrong defendants committed any culpable act in the course
of the alleged misconduct or possessed any guilty knowledge.
Therefore, under common law, liability for the culpable acts of
the Armstrong's alleged agent Galanis and his co-conspirators can
only attach to the Armstrong defendants vicariously pursuant to
the doctrine of respondeat superior.
The relationship between a mutual fund and its
management is unique.
"This management structure contrasts sharply with
that of a typical corporation. In the usual corporate
situation, the interests of management and shareholders
are identical on most matters. Since the officers who
run the corporation are paid directly by the corpora-
tion and usually have a substantial equity investment
in it, they devote themselves to profit maximization
and thus act in the best interests of both the corpora-
tion and themselves. Control of the mutual fund how-
ever, lies largely in the hands of the investment
advisor, an external business entity whose primary
interest is undeniably the maximization of its own
profit.
"While the management and shareholders of a mutual
fund have certain parallel interests * * * there are
important areas in which there interests may conflict.
(Tannenbaum v. Zeller, 552 F.2d 402, 405 (2d. Cir.
1977)
It its 1985 decision, this Court rejected an argument
that Hagopian's alleged knowledge that the securities it
purchased were overpriced should be imputed to plaintiff. "If an
agent's interests are adverse to the principal, therefore, that
knowledge will not be imputed to the principal." (CITI, Ex. 1, p.
16; see also Mallis v. Bankers Trust, 717 F.2d 683, 689 (2d Cir.
1983); Hartford Accounting & Indemnity Co. v. Walston & Co., 21
N.Y.2d 219, 225-226 (1967).
But the same reasoning applies with even greater force
to the relationship of Galanis to the Armstrong defendants.
Hagopian was both an officer and director of plaintiff. Galanis
held neither position with either Armstrong defendant. From the
inception of the Armstrong Fund, his motive was corrupt and at
total divergence with the interests of both Armstrong Investors
and Armstrong Capital. The literally undisputed facts are:
Defendants John P. Galanis ("Galanis") and
Akiyoshi Yamada ("Yamada") organized the Armstrong Fund
(the Armstrong defendants collectively) to induce
foreign investors to invest money in the Armstrong Fund
and thereafter to defraud the Armstrong Fund and its
shareholders by depleting the assets of the Armstrong
Fund and using such assets for their own benefit (U.F.,
par. 46).
Defendants Galanis and Yamada, through defendant
Everest Management Company, invested monies of the
Armstrong Fund for their own personal gain in securi-
ties that were worthless and overpriced. In so doing,
defendants Galanis and Yamada violated their contrac-
tual and fiduciary duties to the Armstrong Fund, as
well as the provisions of the Exchange Act, the Securi-
ties Act, the Investment Company Act and common law
principles of fraud with respect to the Armstrong Fund.
As a result of the activities of Defendants Galanis and
Yamada, virtually all the funds of Armstrong Capital
were dissipated (U.F., par. 47).
This court, having absolved plaintiff of culpability
for Hagopian's actions, can not then impute culpability for the
actions of Galanis to the Armstrong defendants.
POINT TWO
THERE IS NO BASIS FOR HOLDING EITHER OF THE
ARMSTRONG DEFENDANTS LIABLE TO PLAINTIFF AS
AN AIDER AND ABETTOR.
In the 1985 decision (CITI, Ex. 1, pg. 12), this Court
set forth three elements to establish aider and abettor
liability: (1) there must have been a violation of the securities
laws by a primary party, and (2) the defendant must have had
actual knowledge of the violation, or the defendant must have had
a fiduciary relationship with the plaintiff and have acted
recklessly, and (3) the defendant rendered substantial assistance
to the principal actor in effecting the primary violation.
In so far as this motion for summary judgment is
concerned, the Armstrong defendants submit that there is no
evidence establishing the existence of the second element. The
undisputed facts establish no officer or employee of the
Armstrong defendants had any knowledge of the alleged primary
violations of Galanis and his co-conspirators. In is undisputed
that there was no fiduciary relationship between plaintiff and
the Armstrong defendants (U.F., par. 19, 20 and 21).
For the same reasons this Court has refused to impute
Hagopian's knowledge to the plaintiff, the knowledge of Galanis
can not be imputed to the Armstrong defendants (POINT ONE,
supra).
Because the second required element is lacking, no
aider and abettor liability can be imposed upon the Armstrong
defendants.
POINT THREE
THE ARMSTRONG DEFENDANTS AND PLAINTIFF ARE EITHER
EQUALLY CULPABLE OR BOTH NOT CULPABLE AT ALL.
In the 1985 decision, the Court declined to apply the
doctrine of pari delicto in order to absolve Citibank and
Cititrust of liability to the plaintiff. One of the cases cited
by the Court was Berner v. Lazzaro, 730 F.2d 1319, 1321-24 (9th
Cir. 1984). That decision has now been affirmed by the Supreme
Court and while the court did not apply the doctrine to the
matter before it, it did set forth the criteria by which the
doctrine might bar a private action for damages pursuant to the
securities laws:
"* * * Accordingly, a private action for damages
in these circumstances may be barred only where (1) as
a direct result of his own actions plaintiff bears at
least substantially equal responsibility for the
violations he seeks to redress and (2) preclusion of
the suit would not significantly interfere with the
effective enforcement of the securities laws and the
protection of the investing public." Bateman Eichler,
Hill Richards, Inc. v. Berner, 472 U.S. 299, 310-311
(1985).
As noted in POINT ONE, supra, the culpability of
plaintiff and the Armstrong defendants is "at least" equal. In
fact, given the position of Hagopian as an officer and director
of plaintiff, arguably, the plaintiff is substantially more cul
pable than the Armstrong defendants.
Application of the doctrine under the circumstances of
this case would not interfere with enforcement of the securities
laws. A plethora of unquestionable culpable defendants have been
identified. Galanis and Yamada are clearly liable and some
judgments have already been entered. On the other hand, to
award .opone defrauded mutual fund judgment against another
defrauded mutual fund would do violence to the object of the
securities laws which is to award -- not punish -- victims of
security frauds.
If on these facts, the Armstrong defendants are
culpable, then so too is plaintiff and this becomes one of the
rare cases where on the undisputed facts the doctrine of pari
delicto must be applied. The Court need not reach that result,
however. Under the authority of its own 1985 decision, as
discussed in POINTS ONE and TWO, the Armstrong defendants are not
culpable at all.
CONCLUSION
Because of the egregious fraud perpetrated on the
Armstrong defendants by Galanis and his co-conspirators, the
Armstrong defendants are not vicariously liable for his
fraudulent acts. Because the Armstrong defendants had no
knowledge of the fraud alleged and no fiduciary obligation to the
plaintiff, they can not be held liable to plaintiff as aiders and
abettors. The Armstrong defendants and plaintiff are either
equally culpable, or not culpable at all.
Dated: New York, New York
April 13, 1987
Respectfully submitted,
JOHN C. KLOTZ
Attorney for Armstrong Defendants
217 Broadway, Suite 407
New York, New York 10007
(212) 308-1162
