Harvey M. Stone and Richard H. Dolan

This column reports on several significant representative decisions handed down recently in the U.S. District Court for the Eastern District of New York. Judge Jack B. Weinstein, denying a motion to suppress, found that officers had reasonable suspicion to stop and search defendant. Judge Nina Gershon found liability and assessed damages against a hookah lounge for broadcasting a boxing match without authorization from the closed-circuit distributor. And Judge Nicholas G. Garaufis dismissed a complaint alleging securities fraud in connection with a corporation's failure to divulge in various communications certain misconduct by its CEO designed to "advance his romantic and personal interests," where these were not material misrepresentations.

'Reasonable Suspicion' To Stop and Search

In United States v. Ford, 19 CR 81 (EDNY, Nov. 19, 2019), Judge Weinstein held that police officers had reasonable suspicion to stop defendant and search him for a handgun carried inside his pants, resulting in probable cause to arrest him. There was thus no basis to suppress the seized gun or his post-arrest statements.

At about 1:30 a.m. three officers were driving an unmarked car in the 60th Precinct, near West 24th Street and Neptune Avenue in Brooklyn. That precinct had seen a recent increase in violent crime. The officers heard people yelling in the parking lot of a New York City Housing Authority apartment complex. As the officers drove closer to the lot, they saw four men arguing as though a physical fight could break out. The group dispersed when the officers entered the lot. At one point, defendant walked in front of the police car.

The lot was well lit by building lights, street lamps and the police car headlights. In addition to the officers' testimony, Weinstein viewed a video of the scene. The officers observed in defendant's right pants leg a large bulge, with the outline of a firearm, at first slightly above the knee, then sliding down to his ankle. They walked towards defendant, recovered the gun from his ankle and took him to the precinct, where he made oral admissions.

Under Terry v. Ohio, 392 U.S. 1 (1968), a police officer may briefly detain someone for questioning based on a "reasonable suspicion" of criminal activity. The circumstances here showed a "strong reasonable suspicion" supporting the stop and search, with the video evidence corroborating the officers' testimony.

Weinstein summarized the salient facts giving rise to reasonable suspicion: "The gun is large and Defendant's pants were relatively tight. As the gun moved down the pants leg, it would have created a large bulge. The light in the parking lot was sufficient for the officers to have seen the bulge. Defendant was walking irregularly as the bulge moved down his leg." Slip op. 6.

FCA: Liability, Damages for Unauthorized Broadcast

In J&J Sports Productions v. Nosherwan Usman, 17 CV 5335 (EDNY, Dec. 11, 2019), Judge Gershon granted summary judgment to the distributor of a closed-circuit boxing match, against a Brooklyn hookah lounge (Red Mist) and its owner (Usman) that broadcast the fight without authorization.

It was undisputed that Red Mist charged an entrance fee to its customers on the evening of Sept. 13, 2014, and transmitted a sports program that included a WBC World Lightweight Championship fight between Floyd Mayweather Jr., and Marcos Rene Maidana. As plaintiff had been granted exclusive commercial distribution rights for that program and Red Mist did not obtain its authorization, Red Mist violated §§553 and 605 of the Federal Communications Act (FCA). Where both statutes have been violated, a plaintiff may recover under only one of them, and courts are directed to award the higher damages under §605. Slip op. 3.

Gershon rejected defendants' argument that there was no evidence of satellite transmission, as required by the statute, as defendants did not dispute the allegation of satellite transmission in plaintiff's moving papers. Defendants' argument that, in the absence of an express statute of limitations in FCA §605, the court should apply the two-year statute of the Wiretap Act (18 U.S.C. §§2510-2522) fared no better. Plaintiff filed its claim on Sept. 12, 2017, and courts in the Second Circuit apply the three-year statute of the Copyright Act, 17 U.S.C. §507(b), to FCA §605 claims. Slip op. 4.

Usman was individually liable because, as director and CEO of Red Mist, he had the right and ability to supervise the infringing activity. Slip op. 5, citing J&J Sports Prods. v. Ahuachapan, 2019 WL 1274693 (E.D.N.Y. March 20, 2019).

Joint and several damages were awarded against Red Mist and Usman in the amount of $6,600. This included statutory damages of $2,200—the cost of the licensing fee plaintiff would have charged an establishment the size of Red Mist—plus an enhancement of twice that number, under FCA §605(e)(3)(C)(ii). Both the assessment of a cover charge and advertising for the subject event are factors supporting enhanced damages, and defendants failed to dispute plaintiff's showing that Red Mist assessed such charges and promoted the fight broadcast on a chalkboard outside its premises. Slip op. 7-9.

As a prevailing party is entitled to costs and attorney fees under FCA §605(e)(3)(C)(iii), Gershon granted such fees and directed plaintiff to submit a motion detailing the amount sought.

Securities Class Action—Pleading Fraud

In In re Liberty Tax Securities Litigation, 17 CV 7327 (EDNY, Jan. 17, 2020), Judge Garaufis granted defendants' motion to dismiss a complaint alleging securities fraud violations for failure to plead a material misrepresentation or loss causation.

Plaintiffs, investors in Liberty Tax (Liberty), alleged that defendant John Hewitt used his position as CEO and controlling stockholder of Liberty to "inappropriately advance his romantic and personal interests," by dating female employees and franchisees, taking them on business trips, having sex with them in his office and providing their friends and relatives with positions at Liberty. Plaintiff alleged that, while the misconduct was occurring, Liberty released SEC filings and made public statements highlighting its compliance efforts, disclosure procedures and internal controls relating to financial reporting. Plaintiffs also alleged that Liberty omitted information about Hewitt's misconduct and perquisites as CEO from SEC filings, resulting in a drop in Liberty's stock price after the omission was disclosed.

After complaints to the company's ethics hotline, Hewitt was terminated in September 2017, but retained ownership of shares that allowed him to appoint the majority of Liberty's board of directors. In November The Virginian-Pilot published a report revealing Hewitt's misconduct to the public. On the same day the company filed a Form 8-K stating that one of the independent board members would not seek reelection. Liberty's stock went up after that, but down when KPMG resigned as its independent auditor.

Garaufis found no material misrepresentation to satisfy the requirements of §10(b) or §14(a), 15 U.S.C. §§78j, 78n, 78t. Plaintiffs alleged that defendants misrepresented the risks associated with Hewitt's control of the board, even though Liberty warned investors that Hewitt's interests may diverge from those of the stockholders. These were not material misrepresentations because (1) Hewitt's alleged misconduct was "entirely unrelated to his control of the board," and (2) "a reasonable investor would not rely on Liberty's risk disclosures." Slip op. 10. Nor were the company's discussions about its internal controls and commitment to ethics in SEC filings and public statements material misrepresentations. Rather, they were mere puffery, as were Liberty's statements about its compliance task force and policy against fraud. These statements were also not actionable because they were part of periodic comprehensive reports on Liberty's well-being and not intended to lull a discontented investor or regulator. Finally, plaintiff failed to allege that the press release about Hewitt's successor was false at the time it was made.

The court also found no violation of either Item 303 or 402 of SEC Regulation S-K. Hewitt's misconduct did not violate Item 303, requiring disclosure of adverse trends that are reasonably likely to have a negative effect on a corporation's financial condition, because the misconduct was not "extrinsic" or about the company's "operational situation." Defendants did not violate Item 402, requiring disclosure of other personal benefits or property of more than $10,000, because Hewitt's perquisites, while maybe questionable business decisions, were not compensation.

Plaintiff's efforts to establish loss causation by "relying on diminished productivity and increased losses and debt on Form 8-K filings" failed to "allege that Liberty misstated or omitted anything about the company's performance in the past." Slip op. 19. Nor could plaintiffs rely on events that happened after The Virginian-Pilot revealed Hewitt's misconduct. That disclosure "severs the causal connection between Liberty's alleged fraud and subsequent negative news about the company." Slip op. 20.

Harvey M. Stone and Richard H. Dolan are partners at Schlam Stone & Dolan. Bennette D. Kramer, a partner of the firm, assisted in the preparation of the article.