Opinion
Civ. No. 00-882-GMS
November 14, 2001
MEMORANDUM AND ORDER
On October 6, 2000, the plaintiffs, First Lincoln Holdings, et al. ("First Lincoln"), filed a motion for a preliminary injunction (D.I. 3). First Lincoln also filed a motion for an expedited hearing on the same day (D.I. 2). In addition to the submissions of the parties, the court heard argument during an October 25, 2000 teleconference. The court also heard testimony and additional argument during a hearing conducted on October 30 and November 8, 2000. Because the court finds that the injury the plaintiffs allege does not constitute irreparable harm, the court will deny their motion.
A summary of the facts follows. The plaintiffs are investors in a complex of mutual funds ("the Funds") managed and underwritten by Franklin Investors, Inc. et al. ("Franklin"). According to the terms of the Funds' Prospectus in effect during the period in question, investors are permitted to exchange shares among the individual funds ("Exchange Privileges"). The Prospectus defines this activity, with certain additional features, as "market timing." First Lincoln has engaged in market timing since 1998.
Beginning in January, 1999 Franklin began placing restrictions on market timing activity among its funds. First Lincoln was initially put on notice of these restrictions orally in January, 1999. Written notice was provided to First Lincoln by a Franklin "key accounts" manager, Tom Johnson, in an April 27, 2000 letter. First Lincoln agreed to abide by these restrictions. In a letter dated September 12, 2000, Mr. Johnson notified First Lincoln of changes to the Prospectus which were made on September 1, 2000 that further restricted market timing activity. On September 28, 2000, First Lincoln attempted to make a trade of approximately $13,000,000 from one fund to another. Franklin denied the trade.
Although the letter stated that the new restrictions in the Prospectus were to become effective September 15, 2000, the defendants now maintain that the restrictions did not go into effect until November 1, 2000, 60 days from the amendment to the Prospectus.
According to First Lincoln, Franklin's denial of its trade on September 28th constituted a restriction on market timing activity in violation of S.E.C. Reg. 260.11a-3(b)(8). First Lincoln also claims the denial was contrary to the provisions of the Prospectus which explicitly forbids any change or restriction to the terms of the Prospectus without 60 days written notice to all investors. First Lincoln seeks a preliminary injunction to prevent Franklin from refusing its trades until 60 days after the receipt of written notice of an amendment to the Prospectus terminating its Exchange Privileges.
This regulation is promulgated pursuant to 15 U.S.C. § 80a-11 (a) which codifies the Investment Company Act of 1940.
Plaintiffs also assert claims for breach of contract and promissory estoppel. Since at the hearing Plaintiffs stated that the court need not consider these claims to decide the motion before it, the court declines to examine them.
In support of their motion, First Lincoln claims that Franklin's denial of its trades effectively terminated its trading privileges and prevents the Plaintiffs from pursuing a comprehensive strategy of managing liquidity and risk. The Plaintiffs contend this will result in harm that is not compensable by an amount of money damages. First Lincoln argues (1) that it is difficult — if not impossible — to measure money damages ex post, (2) that any damage calculation would be attacked by Defendants as self-serving and (3) that once a violation of the Investment Company Act of 1940 is established, there is then a per se showing of irreparable harm.
In determining whether to grant a preliminary injunction the court must consider the following factors: (1) whether First Lincoln has a reasonable probability of eventual success in the litigation, (2) whether First Lincoln will be irreparably injured during the course of this litigation in the absence of a preliminary injunction, (3) whether the possibility of harm to First Lincoln outweighs the possibility of harm to Franklin and other interested parties and (4) whether the grant of injunctive relief would serve the public's interests. See, e.g., The Pitt News v. Fisher, 215 F.3d 354, 365-66 (3d. Cir 2000). The court can only issue a preliminary injunction if all four factors favor preliminary relief See id.
Keeping these factors in mind, the court finds that the harm First Lincoln alleges is not irreparable since the Plaintiffs may be adequately compensated in money damages. As suggested by Franklin and the court at the hearing, a combination of approaches can be used to calculate First Lincoln's loss. In his testimony, Martin Oliner, the President and CEO of First Lincoln, admitted that although he does not follow a precise model, he does rely on external information to guide his trades. Mr. Oliner asserted that he has historically outperformed the Funds by 250-300 "points". Finally, the record indicates that it is possible to determine First Lincoln's trading history. These facts, and others, will assist First Lincoln in making a damage calculation. Additionally, First Lincoln's argument that any damage calculation is vulnerable to attack by Franklin as self serving will be tempered since a jury hearing evidence on how damages were calculated will be in a position to assess the credibility of any damages claim.
At the hearing the defendants argued that there were other mutual funds available to the plaintiffs to engage in market timing. The plaintiffs countered by maintaining that the funds mentioned, "Pro Funds" and "Rydex Funds" did not fit with its overall trading strategy. The court need not address this issue, however, since there are indicators First Lincoln can rely on to measure any loss.
First Lincoln's last minute argument that a violation of the Investment Company Act of 1940 is per se irreparable injury is without merit. The case on which the plaintiffs rely, Government of the Virgin Islands Dep't of Conservation and Cultural Affairs v. Virgin Islands Paving, Inc., explicitly states that district courts retain the discretion to determine whether a statutory violation constitutes irreparable injury. 714 F.2d 283, 286 (3d Cir. 1983) (agreeing with government that "where a statute contains a finding that violations will harm the public, the courts may grant preliminary equitable relief on a showing of statutory violations without requiring any additional showing of irreparable harm" and stating that "[w]e do not suggest that the district court does not retain discretion as to whether a preliminary injunction should issue.") (emphasis added); see also Natural Resources Defense Counsel, Inc. v. Texaco Refining and Marketing, 906 F.2d 934, 940-41 n. 8 (3d Cir. 1990) (stating that". . . the actual import of Virgin Islands is probably that a court may use its equitable discretion in not issuing an injunction even if the statutory standard is not satisfied. . . ." and stating that district court "erroneously presumed irreparable harm from the mere fact of statutory violation.").
Subsequent to Virgin Islands, the Third Circuit has interpreted the case to suggest that ". . . the necessity of irreparable harm in light of a statute granting courts the power to issue preliminary injunctions varies with particular statutes involved and the relief requested." Rosa v. Resolution Trust Corp., 938 F.2d 383, 400 (3d Cir. 1991). In Rosa, the Third Circuit found that although ERISA grants courts power to issue preliminary injunctions, "nothing in ERISA indicates that, where monetary relief is requested, the traditional requirement of irreparable harm need not be shown." Id. The courts are unwilling to interfere with a court's equitable power to grant injunctive relief when a statute does not explicitly guide or control the court's discretion. See Natural Resources Defense Counsel, Inc., 906 F.2d at 941-42 (stating that where legislature did not explicitly intervene in statute to circumscribe a court's equitable power to grant injunctive relief, courts must apply traditional discretionary test in deciding whether to issue a preliminary injunction).
In support of its position, First Lincoln asserts that the Investment Company Act of 1940 contains a provision stating. ". . . investment companies are affected with a national public interest . . ." See 15 U.S.C. § 80-1(a). Comparing this language with the statute at issue in Virgin Islands, the court cannot read this section as altering or circumscribing a court's equitable power to issue a preliminary injunction.
In Virgin Islands, the plaintiff alleged a violation of the Virgin Islands Costal Zone Management Act of 1978 which provides for preliminary injunctive relief "upon a "prima facie' showing of a violation." See Natural Resources Defense Counsel, Inc., 906 F.2d at 940-41; see also id. at 940 (citing United v. Beamish, 466 F.2d 804, 806 (3d Cir. 1972) (finding that 39 U.S.C. § 3005 provided that "`the United States District court . . . shall . . . upon a showing of probable cause [of a statutory violation] enter a temporary restraining order and preliminary injunction. . . .'")).
There is no allegation by the plaintiffs of a "peculiar' harm. It would therefore appear that First Lincoln's claimed injury is entirely compensable in money damages. Since First Lincoln's motion fails to satisfy the irreparable harm prong of the test for preliminary relief, the court need not address any of the other factors that are mentioned above. For the aforementioned reasons, IT IS HEREBY ORDERED THAT:
1. The plaintiffs' motion for a preliminary injunction (D.I. 3) is DENIED.
2. The plaintiffs' motion for an expedited hearing (D.I. 2) is DENIED as moot.