Opinion
02 Civ. 6644 (VM).
September 6, 2006
DECISION AND ORDER
By Order dated May 15, 2006, Magistrate Judge Debra Freeman, to whom this matter had been referred, issued a Report and Recommendation (the "Report"), a copy of which is attached and incorporated herein, recommending that the Court deny the motion of plaintiffs TVT Records, Inc. and TVT Music, Inc. (collectively, "TVT") to impose sanctions on defendant Lyor Cohen ("Cohen") pursuant to Federal Rule of Civil Procedure 11. TVT filed timely objections to the Report and Cohen responded to TVT's submission. For the reasons stated below, the Court adopts the Report's recommendation that TVT's application for sanctions be denied.
The Report notes some dispute as to whether TVT's motion should be considered as more appropriately filed under Rule 37 rather than Rule 11. Magistrate Judge Freeman recommended that the Court not consider the applicability of Rule 37 because TVT did not move on that basis and did not address the Rule 37 alternative until its reply brief. (See Report at 7-8, n. 5.) Having reviewed the matter the Court adopts the Report's recommendation on this point.
I. BACKGROUND
The relevant facts regarding the instant matter and the parties' larger dispute are set forth in the Report, as well as in previous rulings of this Court and are thus incorporated herein by reference. At issue is the testimony and documentary evidence Cohen presented, at trial of TVT's claims against Cohen and co-defendant The Island Def Jam Music Group ("IDJ"), relating to his net worth, specifically the value of his interest in a company known as Phat Fashions. TVT contends that in a Net Worth Statement Cohen filed with the Court that was admitted into evidence, he knowingly understated his interest in the company, as indicated by the price at which that company was sold within a matter of months after the trial of TVT's underlying claims. On this basis, TVT requested additional discovery and an evidentiary hearing in support of a motion for sanctions against Cohen, pursuant to Federal Rule of Civil Procedure 11. As remedy, TVT proposes a penalty in an amount of approximately $4.5 million to be paid to TVT. It is TVT's theory that Cohen provided deliberately false evidence to the jury and the Court in this regard, and that his statements may have been relevant and material to the jury's verdict on Cohen's liability and damages, as well as to the Court's consideration of Cohen's and IDJ's motions for a new trial.
See, e.g., TVT Records v. The Island Def Jam Music Group, 279 F. Supp. 2d 366, 373-75 (S.D.N.Y. 2003), rev'd, 412 F.3d 82 (2d Cir. 2005).
This figure derives from the approximately $3.5 million that TVT asserts it incurred in legal fees and costs associated with litigating the underlying action, plus another $1 million TVT allegedly spent in producing a recording that was never delivered, purportedly by reason of Cohen's misconduct in connection with TVT's dealings with Cohen and IDJ. (See Report at 6.) The Court notes that in this respect TVT seeks to use its Rule 11 motion compensatorily, to make TVT whole for some of its outlays from a failed business venture that involved action by Cohen and IDJ. The Court questions the application of Rule 11 sanctions for this purpose. Among permissible remedies, Rule 11 countenances a monetary award to the movant that may include payment of attorneys' fees and other costs "incurred as a direct result of the violation." Fed.R.Civ.P. 11(c) (2); Divane v. Krull Elec. Co., Inc., 200 F.3d 1020, 1031 (7th Cir. 1999). The amounts TVT seeks to recover here bear no direct relation to the conduct by Cohen it alleges warrants sanctions, as TVT incurred virtually all of those expenses prior to Cohen's trial statement, and there is no clear and convincing evidence establishing any connection between Cohen's alleged Rule 11 violation and TVT's expenditures, perhaps with the exception of those undertaken in connection with the instant motion, directly attributable to that conduct. Given the legal posture of the parties' controversy following TVT's loss on appeal, what TVT's motion amounts to is an attempt to recover through Rule 11 sanctions financial losses it is no longer able to remedy through the underlying litigation. Insofar as the Second Circuit's ruling disposed of the punitive damages awards that may have served as a means by which TVT may have been able to recover attorneys' fees and costs, the Rule 11 motion at hand effectively represents an end run around the results of that decision. (The Court notes that TVT subsequently modified its request to "welcome sanctions even if they were payable only to the Court." (See TVT's Reply in Further Support of its Objections to Magistrate's Report and Recommendations Regarding Motion for Sanctions, dated August 11, 2006, at 5.) In either event, as elaborated below, the Court finds insufficient justification for sanctions in the record of this case.)
Magistrate Judge Freeman authorized certain discovery TVT sought for the purposes of filing this motion, and indeed enlarged its scope to allow TVT to pursue additional allegations that in his Net Worth Statement Cohen had failed to disclose ownership of other substantial assets.
Upon review of the parties' respective submissions, Magistrate Judge Freeman ruled that TVT's motion for sanctions was untimely in that it was filed almost 10 months after Cohen's Net Worth Statement was submitted in connection with the trial, five months after this Court's denial of defendants' motion for a new trial, and two months after the Second Circuit vacated the final judgment against Cohen. According to Magistrate Judge Freeman: "Indeed, by the time TVT's motion was filed in August 2005, the Net Worth Statement no longer had any substantive relevance to the case." (Report at 11.) On this basis, the Report concludes that TVT's application for sanctions did not comply with Rule 11's "safe harbor" provision, which disallows such motions as untimely "when filed after a point in the litigation when the [party] sought to be sanctioned lacked an opportunity to correct or withdraw the challenged submission."In re Pennie Edmonds LLP, 323 F.3d 86, 89 (2d Cir. 2003) (citation omitted).
Second, the Report recommends that the Court deny the imposition of sanctions on its own initiative, or in exercise of its inherent powers to impose sanctions for fraud upon the Court. These recommendations are predicated essentially on the ground that the record lacks clear and convincing evidence to support a finding that Cohen acted in actual bad faith at the time his Net Worth Statement submission was made, or that Cohen knowingly filed a false or misleading statement to the Court as part of a deliberate and unconscionable scheme to interfere with the Court's ability to adjudicate the case fairly. Reviewing the totality of the circumstances, Magistrate Judge Freeman found that no basis existed to conclude that Cohen acted in bad faith or purposely with such knowledge and intent, and on that basis recommended that the Court not impose sanctions.
TVT's objections argue that the Report's conclusions were clearly erroneous or contrary to law because: (1) TVT's motion was timely, given that there is no explicit limit for filing Rule 11 motions, that the matter of timeliness lies within the discretion of the Court, and that in submitting its motion TVT complied fully with the discovery and scheduling orders approved by Magistrate Judge Freeman and this Court; (2) the evidence of Cohen's "perjury" or lack of candor in the course of the litigation of this action was not an "isolated instance," but rather part of a long and consistent pattern of conduct by Cohen that constituted a deliberate scheme to mislead; (3) Cohen should be sanctioned for failing to disclose other allegedly material assets and financial interests in his Net Worth Statement, one of which in fact was Cohen's single greatest asset; and (4) Cohen should be sanctioned for understating his interest in Phat Fashions, as Cohen's lack of candor in this connection was continual. To develop the record further in support of its theories, TVT renews its request for an evidentiary hearing.
Cohen filed a response taking issue with TVT's objections and endorsing the Report's findings and recommendations in every respect. Cohen, in turn alleging a violation of Rule 11 by TVT in pursuing its sanctions motion, requests an award of fees and costs Cohen incurred in opposing TVT's application.
II. STANDARD OF REVIEW
A district court evaluating a Magistrate Judge's report with respect to a matter not dispositive of a claim or defense may adopt the Magistrate Judge's findings and conclusions as long as the factual and legal bases supporting the recommendations are not clearly erroneous or contrary to law. See 28 U.S.C. § 636(b) (1) (A); Fed.R.Civ.P. 72(a); Thomas v. Arn, 474 U.S. 140, 149 (1985). A district judge, after considering any objections by the parties, may accept, set aside, or modify, in whole or in part, the findings and recommendations of the Magistrate Judge with regard to such matters. See Rule 72(a);see also DeLuca v. Lord, 858 F. Supp. 1330, 1345 (S.D.N.Y. 1994).
III. DISCUSSION
The Court need not address TVT's objections to the Report's determination that TVT's Rule 11 motion was untimely. For, whether or not the sanctions application was properly filed, the Court finds no sufficiently compelling basis to grant TVT the remedy it seeks.
Having conducted a review of the full factual record, including, among other things, the parties' respective submissions in this matter, Magistrate Judge Freeman's thorough and well-considered Report, as well as applicable legal authorities, the Court concludes that the findings, reasoning and legal support for the Report's recommendations are appropriate. First, upon its own examination of the record and the circumstances as a whole, the Court is not persuaded that Cohen's conduct in connection with submitting and testifying about his Net Worth Statement amounts to sanctionable wrongdoing. Cohen's sworn declaration that he had reviewed the document when in fact he had relied upon his accountants and attorneys in that regard does not warrant the extreme penalty TVT's motion seeks, absent evidence, which the Court finds the record before it does not sufficiently establish under either an objective or an actual standard, that Cohen acted knowingly and deliberately to mislead or otherwise defraud the Court.
Second, substantially for the reasons set forth in the Report, the Court concludes that the evidence on the record of this motion adequately supports a determination that Magistrate Judge Freeman's findings were not clearly erroneous or contrary to law. The Report's analysis convincingly establishes that Cohen's conduct and testimony in connection with the Phat Fashions valuation in the Net Worth Statement and other financial interests at issue did not exhibit sufficient actual bad faith, or that it was part of a knowing and deliberate scheme to commit fraud upon the Court, so as to warrant imposition of sanctions upon the Court's initiative under Rule 11 or pursuant to its inherent power.
Based on the preceding considerations, the Court finds no reason to grant TVT's request for an evidentiary hearing, an application which this Court and Magistrate Judge Freeman had previously denied. The Court fails to see what substance could come out such proceedings that would be foreseeably likely to alter the outcome of this ruling.
For additional considerations on this point, see postscript in footnote 5 below.
In a similar vein, the Court denies Cohen's motion for an award of attorneys' fees and costs expended in opposing this motion. Though in the end the Court has found insufficient grounds for TVT's motion, two considerations are worthy of note in this regard. First TVT did signal early on, during and shortly after the trial, that it intended to pursue sanctions against Cohen, and it was permitted by the Court and Magistrate Judge Freeman to file such a motion on a schedule of discovery and briefing that concluded after the Second Circuit's ruling on Cohen's and IDJ's appeals of the verdict against them. Second, even if TVT pressed this motion with utmost zeal and certain aspects of it rest on grounds that are somewhat tenuous, in viewing the relevant circumstances as a whole the Court is not persuaded that TVT's application was frivolous, objectively unreasonable or pursued in bad faith.
The Court adds an admittedly gratuitous postscript to what it hopes is the final episode of the parties' epic feud as it unfolded in this case. In further response to TVT's insistent demand for an evidentiary hearing, and anticipating the motions for reconsideration that have become part of common practice in this litigation, this note may serve some preemptive purpose. There appears little else of legal value to be gained by more court proceedings on this matter at this point, other than to prolong the agony of a dispute whose public din, personal disruption and impact on judicial (and natural) resources have already scaled volcanic proportions, its tremors, plume and eruptions having travelled as far as the United States Supreme Court. Now in the rigors of the lawsuit's final gasps after four years of relentless activity, it would not serve the interest of justice, finality, or judicial economy for the parties not to allow the case a merciful, dignified and peaceful rest. Further recycling of arguments that by now are quite stale, and stirring the ashes of claims that the appellate courts have decisively buried, can be fairly viewed only as carrying on the parties' private quarrel well beyond the point of diminishing public returns, pushing it to the border of litigation for its own sake, and to that extent potentially supplying valid ground to question the good faith basis for persisting with such efforts through the courts. Any sober appraisal of the long record of this controversy could not fail to note the utter futility of the stalemate to which all the sound and fury the parties have brought to bear in stoking their business and personal battles have driven them at this juncture. Both sides have wound up with virtually nothing to show for their expenses and troubles, as gauged by the absence of material financial gain yielded by the substance of their claims and counterclaims, while having burned deep holes in their pockets through which, by their own accounts, each has dropped in excess of $3.5 million in fees and costs. These adversaries should bear in mind that in the annals of humankind, many individuals locked in intense personal conflicts, and even nations at war, when the toll of combat surpassed all reasonable expectation and justification of compensating gains, have summoned the courage, the will and the means to say "enough," and to bring an end to their strife — in countless instances involving interests and stakes far greater than those implicated in this action. A lot more than additional money may stand to be lost from a contrary course. Wise counsel would urge that the litigants here would be far better off, perhaps even enriched, recalling that there is much more to life to be lived beyond courtroom brawls.
IV. ORDER
For the reasons discussed above, it is herebyORDERED that the Report and Recommendation of Magistrate Judge Debra Freeman dated May 15, 2006 is adopted to the extent described in the foregoing decision, and the motion of plaintiffs TVT Records, Inc. and TVT Music, Inc. for sanctions under Federal Rule of Civil Procedure 11 is DENIED; and it is further
ORDERED that the request of defendant Lyor Cohen for an award of attorneys' fees and costs associated with opposing the instant motion is DENIED.
SO ORDERED.
REPORT AND RECOMMENDATION (FILED UNDER SEAL)
See Stipulation and Order of Confidentiality, dated Sept. 13, 2005 (Dkt. 294).
BACKGROUND
A. Procedural History
In 2003, Judge Marrero held a bifurcated jury trial in this action. In the liability phase, the jury returned a verdict in TVT's favor, as against all defendants, on claims of breach of contract, tortious interference with contractual relations, fraud, and willful copyright infringement. See TVT Records v. Island Def Jam Music Group, 279 F. Supp. 2d 413, 416 (S.D.N.Y. 2003). In the damages phase, the jury assessed both compensatory and punitive damages against defendants, in a total amount of approximately $132 million. See id. As against Cohen (jointly and severally with defendant The Island Def Jam Music Group ("IDJ")), the jury awarded TVT $23,781,301 in compensatory damages, plus another $56,025,000 in punitive damages, to be paid by Cohen personally. See id. at 417 (summarizing jury's damages awards). Prior to determining that punitive damages sum, the jury had been provided with evidence regarding Cohen's personal net worth, specifically a Statement of Net Worth, dated April 11, 2003 (the "Net Worth Statement"), which valued Cohen's total wealth at approximately $22 million. ( See Cohen Ex. 1 (Net Worth Statement) at 4.) In a Declaration dated April 14, 2003, Cohen stated that he had "reviewed" the Net Worth Statement, and certified that it "represent[ed] a true and accurate statement of [his] assets, liabilities and net worth." ( Id. at 1.)
In addition to the six-volume "Appendix" submitted by TVT with its motion (citations to which are referred to herein as "A___"), both parties have submitted tabbed compilations of materials on which they principally rely. References to TVT's compilation, entitled "Documentary Evidence Re Request for Sanctions Against Lyor Cohen," are referred to herein as "TVT Ex. ___." References to Cohen's compilation, entitled "Appendix of Documents and Authorities Re Lyor Cohen's Opposition To Plaintiff's Request for Sanctions," are referred to herein as "Cohen Ex. ___."
By decision dated September 3, 2003, Judge Marrero granted defendants' motion for a new trial unless TVT elected to remit the punitive damages awards to lesser amounts. See TVT Records, 279 F. Supp. 2d at 461. Specifically, the Court found that the punitive damages award against Cohen should be remitted to $2 million and $1 million on the two claims on which he was found liable, tortious interference and fraud. See id. In making this determination, the Court, of course, had available to it Cohen's Net Worth Statement.
On February 5, 2004, five months after the Court's remittitur, and nearly 10 months after Cohen's submission of his Net Worth Statement, TVT requested a pre-motion conference concerning a potential motion for sanctions against Cohen, based on his purported failure to disclose his net worth accurately on the statement. ( See TVT Ex. 5 (Letter to the Court from Peter L. Haviland, Esq., dated Feb. 5, 2004).) The impetus for TVT's application was the reported sale of a company — Phat Fashions — in which Cohen had held an interest. According to TVT, the sale price of Phat Fashions was substantially higher than might have been expected from Cohen's valuation of his stake in the company, leading TVT to suspect that Cohen had knowingly undervalued his interest in the company on his Net Worth Statement. ( See id.) TVT argued that, if Cohen had done so, then he had deliberately provided false evidence to the jury and to the Court — evidence that would have been relevant to both the jury verdict and the Court's consideration of defendants' motion for a new trial. ( See id.) Judge Marrero referred TVT's new application to me (Dkt. 276), to consider whether it would be appropriate for the Court to allow additional discovery and/or to conduct an evidentiary hearing on the questions of Cohen's net worth and the truthfulness of his statements to the Court, and to report and recommend as to a potential sanctions motion.
According to Cohen's counsel, "Phat Fashions is a group name for the licensing and retail businesses focused around 'Phat Farm' related trademarks, which are conducted primarily through Phat Licensing, LLC ('Phat Licensing') and/or Phat Fashions, L.L.C." (Letter to the Court from Matthew S. Dontzin, Esq., dated Mar. 28, 2006 ("3/28/06 Dontzin Ltr.") at 5.) "Phat Licensing derived revenue related to sales made by its licensors; Phat Fashions L.L.C. owned 99% of Phat Licensing and conducted retail operations in a showcase store located in Soho." ( Id. at 5 n. 10; see also A36-38 (Letter to the Court from Matthew S. Dontzin, Esq., dated July 29, 2003), at 2.)
B. The Discovery Permitted by This Court
Over a substantial period of time, this Court proceeded to supervise supplemental discovery related to a potential sanctions motion.
Initially, the Court only permitted discovery with respect to the issue of what Cohen knew regarding the value of Phat Fashions prior to September 2, 2003 (the date of the Court's decision on remittitur). On this subject, the Court issued an Order allowing TVT to request documents from both Cohen and non-parties, as well as to conduct limited depositions. ( See A356-58 (Order dated Mar. 17, 2004) (Dkt. 277).) Following this Order by the Court, TVT proceeded to serve subpoenas on no fewer than 24 individuals and entities, including but not limited to Cohen's attorneys, accountants, banks and employer, and Phat Fashions' principal, attorneys, accountants, investment bank and negotiating partners. ( See A371-74 (Letter to the Court from Matthew S. Dontzin, Esq., dated Apr. 7, 2004) at 1 n. 1; but see A1262-63 (Transcript of Conference, dated Apr. 13, 2004 ("4/13/04 Conf. Tr.") (stating TVT's willingness to withdraw a few of these many subpoenas).) For the most part, the Court allowed TVT to proceed with the large number of subpoenas it had served, provided its demands remained focused on information that had been communicated to or by Cohen regarding the value of Phat Fashions. ( See generally A1253-98 (4/13/04 Conf.Tr.).)
In July 2004, however, TVT wrote to the Court asserting that, based on a recently published interview of Cohen, there was also now reason to believe that Cohen had failed to disclose, on his Net Worth Statement, his ownership in certain "Def Jam" trademarks. ( See A662-66 (Letter to the Court from Peter L. Haviland, Esq., dated July 25, 2004) at 1-2.) After considering argument from the parties, and over Cohen's strenuous objections, the Court then expanded the permissible scope of discovery, so to allow TVT to explore this issue as well. ( See Order, dated Aug. 10, 2004 (Dkt. 284).) Overall, after considering TVT's many letters to the Court, and the arguments advanced in lengthy Court conferences ( see, e.g., A2748-69, A2870-2977, A2978-3064 (transcripts of Court conferences from Aug. 2004 to May 2005)), the Court afforded TVT a substantial opportunity to obtain discovery relevant to all of the core issues it now raises in its sanctions motion.
C. The Court of Appeal's Reversal of the Judgment Against Cohen, and TVT's Decision To Proceed, Nonetheless, with a Sanctions Motion
On June 14, 2005, prior to the conclusion of this discovery, the Court of Appeals for the Second Circuit reversed the judgment entered by Judge Marrero as to three of TVT's claims and largely set aside the jury's damages award. See TVT Records v. Island Def Jam Music Group, 412 F.3d 82 (2d Cir. 2005). As part of that decision, the Second Circuit set aside entirely the jury's findings of liability and awards of damages, including punitive damages, as against Cohen. TVT was left with a judgment of only $126,720 as against IDJ, for compensatory damages on TVT's breach of contract claim. ( See id. at 96.)
Given that TVT would no longer be able to argue that either the jury's or the Court's punitive damages analysis had been affected by Cohen's supposed misrepresentations, this Court then inquired of TVT as to whether its potential sanctions motion against Cohen had been rendered moot. TVT took the position that the sanctions issue remained alive, and requested that the Court conduct an evidentiary hearing. ( See A1194-97 (Letter to the Court from Peter Haviland, dated July 5, 2005) at 2.) The Court declined to do so, but set a schedule for submission of relevant evidence and briefing. ( See id.) TVT's sanctions motion was fully briefed on September 22, 2005, although, in February 2006, the Court requested and received short supplemental submissions by counsel. In its motion, TVT requests that the Court award sanctions against Cohen in an amount "not less than $4.5 million," plus an unspecified sum for attorneys' fees incurred by TVT in connection with its "investigation" of the sanctions issue. ( See Request for Sanctions Against Lyor Cohen, dated Aug. 12, 2005 ("TVT Moving Br.") at 19.) The figure of $4.5 million was apparently derived from (a) the roughly $3.5 million in legal fees that TVT purportedly incurred in litigating the entire underlying action, plus (b) the approximately $1 million that it purportedly cost TVT to produce a musical recording (the so-called "CMC" album) that was "never delivered," ostensibly because of "Mr. Cohen's breaking of his word and the resulting breach of contract by his company." ( Id. at 18-19.)
On TVT's appeal, Judge Marrero upheld those portions of this Court's ruling that closed discovery and denied an evidentiary hearing. ( See A1250-52 (Order, dated July 12, 2005) (Dkt. 287).)
In opposition to TVT's sanctions motion, Cohen argues that he made no actual misrepresentations to the Court — and certainly none that were intentional, that TVT has not shown otherwise, and that
TVT's request for a legally unprecedented $4.5 million award (including, incredibly, the $1 million TVT paid to produce the CMC album) is simply an improper attempt on TVT's part to use this motion to make an end-run around the Second Circuit's reversal of the trial court's judgment.
(Lyor Cohen's Opposition to Plaintiffs' Request for Sanctions, dated Sept. 12, 2005 ("Cohen Opp. Br.") at 3.) Indeed, Cohen goes so far as to argue that the sanctions motion itself was filed by TVT in bad faith. ( Id.)
DISCUSSION
I. APPLICABLE LEGAL STANDARDS A. Rule 11In its moving papers, TVT argues that sanctions against Cohen are warranted under Rule 11 of the Federal Rules of Civil Procedure, which provides, inter alia, that, by submitting a signed pleading, motion or other paper to the Court, a party or attorney "is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, . . . the allegations and other factual contentions have evidentiary support." Fed.R.Civ.P. 11(b)(3) (cited in TVT Moving Br. at 13). Generally, where the Court finds that a party, without reasonable inquiry, has made an unsupported factual contention in a pleading or other court submission, the Court may impose sanctions under the Rule. See Fed.R.Civ.P. 11(c). As Rule 11 applies to affidavits and declarations submitted in the course of litigation, see, e.g., Pfizer, Inc. v. Y2K Shipping Trading, Inc., No. 00 CV 5304 (SJ), 2004 U.S. Dist. LEXIS 10426, at *37-39 (E.D.N.Y. Mar. 26, 2004), TVT is correct that Cohen's Net Worth Statement — the accuracy of which was certified by Cohen in a declaration — could be subject to challenge under this Rule. 1. Sanctions Initiated by Motion
In its moving brief, in the course of a string citation regarding the "principle" underlying Rule 11, TVT makes one parenthetical reference to Fed.R.Civ.P. 37, which governs sanctions for discovery abuses. ( See TVT Moving Br. at 14.) Overall, a fair reading of TVT's motion is that it is not based on Rule 37, but rather on Rule 11 and the Court's inherent authority to impose sanctions. ( See id. at 13-19.) In his opposition brief, however, Cohen notes that his Net Worth Statement was created, at the Court's direction, to serve as a response to TVT's discovery request for information regarding Cohen's net worth. ( See Cohen Opp. Br. at 12.) For this reason, Cohen seems to imply that Rule 37 would have provided TVT with the most appropriate vehicle for seeking sanctions, had it believed that the Net Worth Statement was an inaccurate or incomplete disclosure. ( See id. at 12, 19-20.) In reply, TVT maintains its initial position that Rule 11, rather than Rule 37, provides the appropriate authority for the requested sanctions, but, as a fall-back position, asks that the Court award sanctions under Rule 37, "if the Court concludes that Rule 37 is applicable." (TVT Reply Br. at 9.) As TVT did not move on the basis of Rule 37 (and concedes as much in its reply brief), and as the Court should not entertain arguments raised for the first time on reply, Tischmann v. ITT/Sheraton Corp., 145 F.3d 561, 568 n. 4 (2d Cir. 1998), there is no reason for the Court even to consider the applicability of Rule 37 here, and I recommend that it not do so.
A motion for sanctions under Rule 11 must "be made separately from other motions or requests" and must "describe the specific conduct alleged to violate subdivision (b)" of the Rule. Fed.R.Civ.P. 11(c)(1)(A). Rule 11, however, contains a "safe harbor" provision, affording protection to a party that voluntarily withdraws its challenged statement after receiving notice of the specific grounds for a potential sanction. Specifically, the Rule provides that a sanctions motion under the Rule must be served "but shall not be filed with or presented to the court unless, within 21 days after service of the motion (or such other period as the court may prescribe), the challenged paper, claim, defense, contention, allegation, or denial is not withdrawn or appropriately corrected." Id. A movant is required to follow this procedure, and a Rule 11 motion that is not made in compliance with this procedural aspect of the Rule is subject to denial on this basis alone. See Storey v. Cello Holdings, L.L.C., 347 F.3d 370, 389 (2d Cir. 2003); ESI, Inc. v. Coastal Corp., 61 F. Supp. 2d 35, 67-68 (S.D.N.Y. 1999) (holding that a motion for sanctions under Rule 11 must be denied where the movant fails to comply with the mandatory "safe harbor" provision of the Rule).
In addition, "[a]lthough Rule 11 contains no explicit time limit for serving the motion, the 'safe harbor' provision functions as a practical time limit, and motions have been disallowed as untimely when filed after a point in the litigation when the lawyer [or party] sought to be sanctioned lacked an opportunity to correct or withdraw the challenged submission." In re Pennie Edmonds LLP, 323 F.3d 86, 89 (2d Cir. 2003) (citations omitted). As noted by the Second Circuit, "[t]he Advisory Committee on Civil Rules contemplated that Rule 11 motions would be deemed untimely if filed too late to permit correction or withdrawal, and the Moore treatise endorses this approach." Id. (citing and quoting in footnotes Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments and 2 Moore's Federal Practice § 11.22[1](c) (3d ed. 2001)); see also, e.g., Rowe Entm't, Inc. v. William Morris Agency, Inc., No. 98 Civ. 8272 (RPP), 2005 U.S. Dist. LEXIS 15490, at *31-33 (S.D.N.Y. Aug. 1, 2005) (denying Rule 11 motion that was filed after the entry of summary judgment, as counsel was thus "precluded from correcting or withdrawing their allegedly frivolous contentions under the safe harbor provision"); Langdon v. County of Columbia, 321 F. Supp. 2d 481, 485 (N.D.N.Y. 2004) ("Rule 11 does not permit the court to entertain motions for sanctions filed after the conclusion of the case or judicial rejection of the offending contention."); Safe-Strap Co. v. Koala Corp., 270 F. Supp. 2d 407, 413 (S.D.N.Y. 2003) ("In sum, in the wake of the 1993 Amendments to Rule 11 [adding the 'safe harbor' provision], a party may no longer wait until the end of the litigation to serve up the Rule 11 violation.") (internal quotation marks and citations omitted).
The Advisory Committee Notes state that "[o]rdinarily the motion should be served promptly after the inappropriate paper is filed, and, if delayed too long, may be viewed as untimely. . . . Given the 'safe harbor' provisions . . . a party cannot delay serving its Rule 11 motion until conclusion of the case (or judicial rejection of the offending contention)." Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments.
According to Moore's, "[t]he 21-day, safe-harbor service requirement controls not only the earliest date on which a motion may be filed . . ., it also indirectly controls the last date on which a Rule 11 sanctions motion may be filed. At the very least, a party must serve its Rule 11 motion before the court has ruled on the pleading, and thus before the conclusion of the case. Otherwise, the purpose of the 'safe harbor' provision would be nullified. This has been interpreted to mean that Rule 11 motions must be served at least a full 21 days before the court concludes the case or resolves the offending contention. . . ." 2 Moore's Federal Practice § 11.22[1](c) (3d ed. 2005) (footnotes omitted).
In this case, Cohen points out that TVT did not comply with the "safe harbor" provision of Rule 11, in that it filed its Rule 11 motion without first serving it. ( See Cohen Opp. Br. at 12-13.) TVT, however, argues that, because Cohen was "on notice" for two years that TVT "intended to move for sanctions," it would not make sense to hold TVT to the procedural requirements of the Rule. (Reply in Support of Sanctions Against Lyor Cohen ("TVT Reply Br.") at 9.)
TVT's argument is misplaced. While it is true that the "safe harbor" provision of Rule 11 does not logically apply here, the principal reason for this is not that Cohen had fair advance notice of the basis of TVT's motion, but rather that the motion was made far too late for Cohen to have had the opportunity to withdraw or correct the allegedly false statement. TVT did not seek leave to file its motion until almost 10 months after the challenged Net Worth Statement was submitted to the Court in April 2003, and five months after the Court's decision on remittitur in September 2003. TVT did not actually file its motion until two months after the Second Circuit's issuance of a decision on appeal in June 2005, disposing of TVT's claim against Cohen (including TVT's claim for punitive damages). Indeed, by the time TVT's motion was filed in August 2005, the Net Worth Statement no longer had any substantive relevance to the case. Certainly, it would have been meaningless for Cohen to have "withdrawn" or "corrected" that statement in response to the sanctions motion.
This proposition is actually questionable, given the extent to which TVT's arguments as to why the Net Worth Statement was false or misleading appeared to shift — or at least to evolve — over the course of discovery on the issue. The purpose of the "safe harbor" provision of Rule 11 is not merely to notify the opposing party or its counsel that a statement will be challenged on one or more grounds; rather, the point of the provision requiring service of the actual motion is to demonstrate to that party or counsel the precise nature of the argument as to why sanctions are warranted, so that such argument can be evaluated and action taken accordingly. See Storey, 347 F.3d at 389 ("This notice requirement permits the subjects of sanctions motions to confront their accuser and rebut the charges leveled against them in a pointed fashion. Moreover, when Rule 11 sanctions are initiated by the motion of a party, it gives the subject the opportunity to withdraw the potentially offending statements before the sanctions motion is officially filed."); see also Ted Lapidus, S.A. v. Vann, 112 F.3d 91, 96 (2d Cir. 1997) ("The purpose of particularized notice is to put counsel on notice as to the particular factors that he must address if he is to avoid sanctions.") (internal quotation marks and citation omitted).
The Court does, however, note that TVT has now filed a petition for a writ of certiorari to the Supreme Court, seeking to reverse the decision of the Second Circuit. ( See Letter to the Court from Peter L. Haviland, Esq., dated Mar. 28, 2006.)
The Court recognizes that, if Cohen engaged in fraud, then TVT may not have been immediately able to discover the falsity of the Net Worth Statement. The Court also acknowledges that it granted TVT's request to conduct pre-motion discovery regarding the accuracy of the Net Worth Statement. Also, as TVT points out, the Court itself set a briefing schedule for the motion, with a filing deadline. Nonetheless, and although it may seem harsh for the Court to reject TVT's Rule 11 motion as untimely under such circumstances, rejection of the motion is still the required and appropriate result.
The "safe harbor" provision of Rule 11 is integral to the structure of the Rule, affecting both the standard by which sanctionable conduct must be shown by a movant, and the nature of the sanctions that may be imposed. Where, as required, a party proceeds with its motion only after the declarant has refused to withdraw or correct the challenged statement despite being given a fair opportunity to do so, the movant need only show that the declarant's "claim to have evidentiary support is not objectively reasonable." Pennie Edmonds, 323 F.3d at 90. If the Court is satisfied that such a showing has been made, it may, in its discretion, impose sanctions, perhaps including an award to the moving party of "some or all of the reasonable attorneys' fees and other expenses incurred as a direct result of the violation." Fed.R.Civ.P. 11(c)(2).
To the extent TVT suggests in its motion that sanctions under Rule 11 are mandatory where a violation of the Rule is found ( see TVT Moving Br. at 12 (quoting the observation of the Supreme Court in Cooter Gell v. Hartmarx Corp., 496 U.S. 384, 395-96 (1990), that the court "shall" impose sanctions for a violation of the Rule)), TVT is relying on the Rule as it existed prior to the 1993 Amendments. Those amendments changed the Rule to make the imposition of sanctions under the Rule discretionary, rather than mandatory. MacDraw, Inc. v. CIT Group Equip, Fin., Inc., 73 F.3d 1253, 1258 (2d Cir. 1996); see also Perez v. Posse Comitatus, 373 F.3d 321, 325 (2d Cir. 2004) ("Even if the district court concludes that the assertion of a given claim violates Rule 11, . . . the decision whether or not to impose sanctions is a matter for the court's discretion").
Where, on the other hand, a party does not first afford the declarant with a timely opportunity to withdraw or correct the offending statement, the Rule provides that the motion cannot be entertained. Although the Court would remain empowered — even after trial — to impose sanctions under the Rule on its own initiative, both the standard for finding sanctionable conduct and the nature of any permissible sanctions would be altered, given that the declarant would have lost the benefit of the "safe harbor." See Pennie Edmonds, 323 F.3d at 91-92. Were the Court to consider imposing Rule 11 sanctions sua sponte, a "heightened mens rea standard" would apply, requiring the Court to find that the offending statement was made in subjective "bad faith." Id.; accord HD Brous Co. v. Mrzyglocki, No. 03 Civ. 8385 (CSH), 2004 U.S. Dist. LEXIS 11245 (S.D.N.Y. June 15, 2004); see also Hadges v. Yonkers Racing Corp., 48 F.3d 1320, 1329 (2d Cir. 1995) (observing that, based on the advisory committee note, sanctions imposed on the Court's own initiative "will ordinarily be [imposed] only in situations that are akin to a contempt of court"). In addition, any monetary sanction imposed by the Court on its own initiative would be limited to a penalty payable to the Court. See Fed.R.Civ.P. 11(c)(2); see also Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments ("The revision provides that a monetary sanction imposed after a court-initiated show cause order be limited to a penalty payable to the court."); Nuwesra v. Merrill Lynch, Fenner Smith, Inc., 174 F.3d 87, 94 (2d Cir. 1999) (per curiam) ("By its terms, the rule . . . precludes a court from awarding attorneys' fees on its own initiative.").
Here, permitting TVT to proceed under Rule 11 so long after the time when it would have been possible for Cohen to withdraw or correct his statement would vitiate the "safe harbor" requirement of the Rule. Further, disallowing the motion as untimely would not place sanctionable conduct out of the reach of the Court; on the contrary, if Cohen deliberately sought to defraud the Court, he could still be sanctioned under the Rule, although under a heightened "bad faith" standard.
Moreover, in this case, there would be no inherent unfairness to TVT in limiting any monetary sanctions to a penalty payable to the Court. As noted by the Advisory Committee, "the purpose of Rule 11 sanctions is to deter rather than to compensate," and thus, "if a monetary sanction is imposed [under the Rule], it should ordinarily be paid into court as a penalty." Fed.R.Civ.P. 11 advisory committee's note to 1993 Amendments. In any event, even on a proper motion, the Rule expressly contemplates that any monetary award paid to the movant should be for expenses incurred "as a direct result of the violation," Fed.R.Civ.P. 11(c)(2), and, here, the very nature of the sanctions award TVT seeks — i.e., all of its attorneys' fees for the entire case, plus $1 million it purportedly incurred in connection with the production of the CMC album — belies any notion that TVT is legitimately seeking the costs it incurred "as a direct result of" any inaccuracy in Cohen's Net Worth Statement. TVT would presumably find it difficult to show that it incurred significant litigation expenses as a direct result of any false aspect of the Net Worth Statement, as the Court directed that Cohen provide that statement in lieu of costly discovery. Additionally, as TVT has been found by the Second Circuit to have had no right to punitive damages against Cohen, TVT would be hard-pressed to contend that it has suffered any ultimate injury from Cohen's purportedly false statement, which was submitted only to assist the jury and the Court in assessing damages to which TVT was never entitled.
The Court notes that this is not a circumstance where a judgment has allegedly been procured by fraud. In such a circumstance, the aggrieved party has a remedy under Rule 60(b), which allows for the judgment to be set aside based on "fraud, misrepresentation, or other misconduct of an adverse party." Fed.R.Civ.P. 60(b).
Finally, TVT cannot successfully argue that its Rule 11 motion should be deemed timely because the Court allowed discovery or set a briefing schedule for the motion. Although TVT requested leave to file a "sanctions" motion, it did not specify to the Court that it was seeking leave to move under Rule 11, as opposed to some other authority. Further, the mere fact that the Court permitted TVT an opportunity to articulate its arguments — including, apparently, an argument that, under Rule 11, it should receive a monetary award — does not mean that the Court is obliged to accept those arguments.
For all of these reasons, to the extent that TVT has sought to rely on Rule 11 as the basis for its motion, I recommend that the motion be denied as untimely.
2. Sanctions on Court's Initiative
This leaves the separate question of whether the Court should impose Rule 11 sanctions on its own initiative based on Cohen's allegedly false or misleading Net Worth Statement. The Court should not do so lightly. As discussed above, any such sanctions would have to be justified based on a finding that Cohen acted in actual bad faith. Further, in determining whether Cohen's conduct met this standard, the Court would be required to resolve all doubts in Cohen's favor. See Carlton Group, Ltd. v. Tobin, No. 02 Civ. 5065 (SAS), 2003 U.S. Dist. LEXIS 13332, at *8 (July 31, 2003) ("[A]ll doubts must be resolved in favor of the signer. . . .") (citations omitted).
Moreover, Rule 11 sanctions would only be appropriate if Cohen's Net Worth Statement itself lacked support when made, despite TVT's argument to the contrary that, up to the date of the Court's decision on remittitur, Cohen had a continuing obligation to bring to the Court's attention any changed circumstances that might have increased his personal net worth. See Lapidus, 112 F.3d at 96 ("[M]isconduct under Rule 11 must be judged as of the time the paper was signed. . . .") (quoting United States v. Int'l Bhd of Teamsters, 948 F.2d 1338, 1345-46 (2d Cir. 1991); see also, e.g., Carlton Group, 2003 U.S. Dist. LEXIS 13332, at *20-21 ("It is well established that Rule 11 does not impose a continuing obligation on the presenter to update, correct or withdraw any pleading, written motion or other paper which, when presented, satisfies the requirements of the Rule.") (internal quotation marks and citation omitted).
Although, in its most recent letter to the Court, TVT seems to suggest that, by continuing to rely on his Net Worth Statement, Cohen made false or misleading statements in his motion for a new trial ( see Letter to the Court from Peter L. Haviland, Esq., dated Apr. 4, 2006, at 1, 4), TVT's moving papers neither identify with particularity any sanctionable statements made in Cohen's post-trial submissions, nor otherwise argue that any statement — other than the Net Worth Statement itself — should be the basis for Rule 11 sanctions.
Finally, before the Court could impose any sanctions sua sponte under Rule 11, it would first need to apprise Cohen of the specific reason why, in the Court's view, the Net Worth Statement was sanctionable when made, and then provide Cohen with a reasonable opportunity to show cause why sanctions should not be imposed on that basis. Fed.R.Civ.P. 11(c)(1)(B); Nuwesra, 174 F.3d at 92-94. B. The Court's Inherent Authority
See generally Mickle v. Morin, 297 F.3d 114, 126 (2d Cir. 2002) (requiring that a litigant be afforded procedural due process before imposition of a punitive sanction); Mackler Productions, Inc. v. Cohen, 225 F.3d 136 (2d Cir. 2000) (same).
TVT also seeks to recover attorneys' fees and additional costs under the Court's inherent authority "to fashion an appropriate sanction for conduct which abuses the judicial process." Chambers v. NASCO, Inc., 501 U.S. 32, 44-45 (1991). ( See TVT Moving Br. at 13.) Under this inherent power, "a court may assess attorney's fees when a party has 'acted in bad faith, vexatiously, wantonly, or for oppressive reasons.'" Chambers, 501 U.S. at 45-46 (quoting Alyeska Pipeline Serv. Co. v. Wilderness Soc'y, 421 U.S. 240, 258-59 (1975) (internal quotation marks and citation omitted)). While other types of sanctions are also available to the Court in its discretion, see Chambers, 501 U.S. at 44-45, an award of attorneys' fees may, in appropriate circumstances, serve "the dual purpose" of "vindicating judicial authority" and "making the prevailing party whole" for expenses caused by the misconduct, id. at 46 (internal quotation marks and citation omitted). The usual "American Rule," however, requires each party to a litigation to bear the cost of its own attorneys' fees, and thus any fee awards made pursuant to the Court's inherent authority "are to be made restrictively," "lest the court's inherent powers swallow the American Rule." United States ex rel. Evergreen Pipeline Constr. Co. v. Merritt Meridian Constr. Corp., 95 F.3d 153, 171 (2d Cir. 1996) (internal quotation marks and citation omitted).
In general, the Supreme Court has made clear that a court's inherent power to sanction "must be exercised with restraint and discretion." Chambers, 501 U.S. at 44. For this reason, the Second Circuit "has always required a particularized showing of bad faith to justify the use of the court's inherent power." Int'l Bhd of Teamsters, 948 F.2d at 1345. Further, the showing of bad faith must be based on "clear evidence that the challenged actions [were] entirely without color, and [were] taken for reasons of harassment or delay or for other improper purposes." Id. (internal quotation marks and citations omitted); see also Schlaifer Nance Co. v. Estate of Warhol, 194 F.3d 323, 338 (2d Cir. 1999) ("Bad faith can be inferred when the actions taken are so completely without merit as to require the conclusion that they must have been undertaken for some improper purpose.") (internal quotation marks and citations omitted).
Here, TVT suggests that Cohen made deceptive statements in his Net Worth Statement and, by then failing to correct any false statements prior to the Court's remittitur, continued the deception for the improper purpose of defrauding the Court as to the extent of his ability to pay punitive damages. If the Court indeed finds that "fraud has been practiced upon it," it may, in the exercise of its inherent authority, "assess attorney's fees against the responsible party." Chambers, 501 U.S. at 46 (internal quotation marks and citations omitted). Yet "an isolated instance of perjury, standing alone, will not constitute a fraud upon the court." McMunn v. Mem'l Sloan-Kettering Cancer Ctr., 191 F. Supp. 2d 440, 445 (S.D.N.Y. 2002).
Rather, fraud upon the court occurs where a party has acted knowingly in an attempt to hinder the fact finder's fair adjudication of the case. . . . In other words, a fraud upon the court occurs where it can be demonstrated, clearly and convincingly, that a party has sentiently set in motion some unconscionable scheme calculated to interfere with the judicial system's ability impartially to adjudicate a matter by improperly influencing the trier or unfairly hampering the presentation of the opposing party's claim or defense.Id. (internal quotations and citations omitted).
As noted above, Rule 11 does not impose a continuing obligation on a party to update or modify its prior statements to the Court, in view of changed factual circumstances. ( See supra at 15.) The Court's inherent authority to sanction, however, is not so limited, and can reach any conduct by a party that is intended to deceive the Court or is otherwise in bad faith. Chambers, 501 U.S. at 45-46. Nonetheless, the Court must bear in mind that, as set out above, its inherent authority to sanction must be exercised with restraint to deter egregious misconduct. Further, it should be recognized that the process of remittitur allows the Court to reduce a jury verdict that is excessive in view of the evidence presented at trial, not to expand the trial record. See, e.g., Smith v. Lightning Bolt Prods., Inc., 861 F.2d 363, 373-74 (2d Cir. 1988) (where question of punitive damages was submitted to the jury, and defendants did not request any "procedure that would have preserved their ability to present timely evidence with respect to their financial condition," the incompleteness of the trial record as to an individual defendant's net worth was not a basis for remittitur). For these reasons, the Court should exercise particular caution in imposing sanctions against Cohen based on any alleged failure to bring to the Court's attention, on remittitur, evidence of post-trial factual developments, such as evidence of Cohen's entry into any new business ventures or the post-trial success of any prior ventures. Given the limitations of the remittitur process, it is difficult to see how Cohen's failure to alert the Court to such matters could have been improper, much less have risen to the level of bad faith necessary to justify the extreme step of judicial sanction.
Although there may be reasons for a court to consider new evidence in connection with a remittitur motion (as, in this case, where the Court considered post-trial affidavits on the question of whether Cohen would likely be indemnified by his employer, should he have to pay a punitive damages award ( see A23-37 (Order, dated July 24, 2003)), such reasons are necessarily limited, given that the primary purpose of remittitur is to reduce jury awards that are excessive in light of the evidence presented at trial. See Lin v. McDonnell Douglas Corp., 742 F.2d 45, 49-50 (2d Cir. 1984); King v. Macri, 800 F. Supp. 1157, 1163-64 (S.D.N.Y. 1992).
In sum, the Court should not impose sanctions on Cohen pursuant to its inherent authority unless it finds, by clear and convincing evidence, that Cohen knowingly submitted a materially false or misleading Net Worth Statement to the Court, or knowingly failed to correct false statements, as part of a deliberate and unconscionable scheme to interfere with the Court's ability to adjudicate the case fairly.
C. Mootness
Despite the fact that Cohen's Net Worth Statement was only relevant to the issue of punitive damages, TVT is correct that its sanctions motion has not been rendered moot by the decision of the Second Circuit reversing TVT's punitive damages award. ( See TVT Moving Br. at 11-12.) A sanctions motion is considered "collateral" to an action, and a party's deliberate abuse of the judicial process, if established, can be sanctioned regardless of the outcome of the underlying case. See Cooter Gell, 496 U.S. at 395-96; Schlaifer Nance, 194 F.3d at 333. II. THE NET WORTH STATEMENT
Also, as noted above ( see n. 9, supra), TVT's certiorari petition to the Supreme Court remains pending.
As the only basis for sanctions here — either on the Court's own initiative under Rule 11 or based on the Court's inherent authority — would be subjective "bad faith," the appropriate inquiry is not whether Cohen's Net Worth Statement was inaccurate, but rather whether Cohen deliberately misrepresented his personal net worth to the Court, for an improper purpose. Of course, if nothing about the Net Worth Statement was actually false or misleading, then there can be no basis for imposing sanctions based on that statement. But even if Cohen can be shown to have made a false or misleading statement, the inquiry would not end there. The relevant questions would then become (1) what Cohen knew about the value of his assets, (2) when he knew it, and (3) whether he intentionally understated any asset values or omitted information about his interest in assets, so as to deliberately mislead the jury and/or the Court as to what he could afford to pay in punitive damages, should such damages be imposed against him. What someone else, other than Cohen, may have believed Cohen's assets were worth has no bearing on the analysis, unless it can be shown that Cohen shared that belief. Similarly, any hindsight analysis would be inappropriate. What matters is not what Cohen may have now come to learn, but rather what he actually believed and intended at the time that his Net Worth Statement was before the jury or the Court for consideration.
With these principles in mind, the Court turns to those portions of the evidentiary record that relate to Cohen's knowledge and intent with respect to the alleged misrepresentations or omissions in his Net Worth Statement.
A. Cohen's Equity Interest in Phat Fashions
TVT originally sought pre-motion discovery as to whether Cohen had misrepresented the value of his 16% ownership interest in Phat Fashions, when he listed that value, on his Net Worth Statement, as approximately $5.6 million. ( See Al-4 (Letter to the Court from Peter L. Haviland, Esq., dated July 1, 2003).) In August 2003, shortly before the Court's September ruling on remittitur, TVT brought to the Court's attention that Russell Simmons ("Simmons"), the principal owner of Phat Fashions, had announced in the press that he was seeking to sell the company for $150-$200 million. (TVT Ex. 3 (Letter to the Court from Peter L. Haviland, dated Aug. 27, 2003).) The following January, it was further announced that Kellwood Company ("Kellwood"), a clothing manufacturer, was in fact buying Phat Fashions for $140 million. ( See TVT Ex. 5 (Letter to the Court from Peter L. Haviland, Esq., dated Feb. 5, 2004, at 2).) According to TVT, these press reports showed that Cohen "must have known in July and August of 2003 . . . that the information he was providing to the Court for remitter [ sic] was materially false and misleading." ( Id.)
On Cohen's Net Worth Statement, the value of his equity interest in Phat Fashions is more specifically stated as $5,565,000. ( See Cohen Ex. 1 (Net Worth Statement), at 3.) Further, the percentage of that interest is stated as "approximately 16%" ( id. at 5), although the Court will generally use a 16% figure herein, for ease of reference.
The evidence obtained through discovery shows that Cohen's Net Worth Statement was not prepared personally by Cohen, but rather by his accountants, the firm of Berdon LLP ("Berdon"). ( See A1449-1524 (Deposition Transcript of Lyor Cohen, dated Dec. 7, 2004 ("Cohen Dep. Tr.")), A1463-64 at 57-59.) In order to calculate a value for Cohen's 16% equity interest in Phat Fashions, Berdon valued the company as a whole at $40 million. ( See Cohen Ex. 1 (Net Worth Statement), at 3, 5, Note 4(b).) That $40 million figure was the same figure that was used by Phat Fashions in May 2002, when it entered into a "buy-back" transaction to purchase the shares of another minority shareholder, Peter Lowey. ( See A1267-69 (4/13/04 Conf. Tr.).) According to Cohen, the Lowey transaction was conducted at arms length and, as an actual transaction involving a sale of Phat Fashions' shares, it provided the best available basis for estimating the value of Cohen's minority interest less than one year later. ( See A212-19 (Letter to the Court from Matthew S. Dontzin, Esq., dated Mar. 8, 2004), at 2 n. 1, 4.) In the Net Worth Statement, Berdon specifically disclosed that the Lowey transaction provided the basis for the valuation of Cohen's interest in Phat Fashions (Cohen Ex. 1 (Net Worth Statement) at 5, Note 4(b)), and TVT has not challenged that this was how the stated $5.6 million valuation of Cohen's equity interest was derived. Further, both before and after the Net Worth Statement was prepared, Berdon prepared other financial statements for Cohen that used the same $40 million figure to calculate the value of Cohen's share. Produced in discovery was a financial statement dated November 20, 2002, in which Cohen was stated to have held a 19.5% interest in Phat Fashions, calculated to be worth $7.8 million ( i.e., 19.5% of $40 million). (A1643, A1648.) Also produced was a financial statement dated July 18, 2003 (after the date of the Net Worth Statement), in which Cohen's then-reported 16% interest in Phat Fashions was valued at the same $5.6 million as in the Net Worth Statement. ( See Cohen Ex. 3 at BER 0015.) Cohen points out that this July 2003 statement was submitted by him to the Bank of America in connection with a personal mortgage application ( see Cohen Opp. Br. at 8) — an application in which Cohen presumably had no reason to understate the value of his assets.
Regardless of whether Cohen may have held a 19.5% equity interest in the company in November 2002, it is unrefuted that, at the time of his Net Worth Statement, he held — as stated therein — an approximate 16% equity interest. Although the parties do not mention this, the Court also notes that a January 2003 letter to Cohen from his accountants references a desire by Cohen, at that time, to transfer 4% of his ownership interest in Phat Fashions to a trust that had been established for the benefit of his wife and children, which may explain the discrepancy. ( See A494.)
TVT cannot seriously dispute the reasonableness of Berdon's use of the $40 million valuation for Phat Fashions at the time the Net Worth Statement was prepared, as there is no evidence that, at that point, anyone was even considering purchasing the company, for any price. According to Simmons' deposition testimony, he had been seeking to sell the company since approximately 1992, without success. Although Simmons' testimony on this is not entirely clear, it appears that Phat Fashions was only able to enter into a six-month license deal in 1996, and apparently engaged in some type of talks with another potential partner after that, but that potential partner "went bankrupt." ( See A2257-2368 (Deposition of Russell Simmons, dated July 28, 2004 ("Simmons Dep. Tr.")), A2263-64 at 21-22.) As of April 2003, when Cohen's Net Worth Statement was submitted, the single stock transaction in which the company had engaged was the buy-back acquisition of the Lowey shares, on May 2, 2002. ( See A2263 at 23.) As discussed above, that acquisition was based on a $40 million valuation of Phat Fashions. At his deposition, Simmons testified, "I was hoping [the company] was worth forty million dollars, but did I have proof? No. Did anybody else want to buy in? No." (A2277 at 78.)
In or about July 2003, however, Simmons — who described himself as "very good" at "hype" — asked an investment bank that was apparently working for Phat Fashions (Morgan Stanley) to prepare a "promotion" that would show the company's value to be between $100 and $150 million. (A2287 at 119-21.) Simmons further testified that, prior to September 2, 2003, he had communicated to Cohen the fact that an investment bank was doing a "promotional valuation" of the company. (A2288 at 122-23.) Although Simmons did not testify that he provided Cohen with the specific value (or valuation range) that Simmons had requested that the investment bank place on the company, Simmons did testify that he "always said" to Cohen that the company was worth between $80 and $120 million. (A2287 at 119.) Yet Simmons also testified that Cohen knew that he "was a promotional man," who would "[s]ometimes . . . get less than [he would] shoot for." (A2288 at 124.)
After Morgan Stanley's "promotional valuation" was prepared, Simmons apparently spoke with Tommy Hilfiger about a possible purchase of Phat Fashions. (A2282 at 98-101.) In fact, at Simmons' request, Cohen himself apparently spoke to Edgar Bronfman, Jr., Chairman and Chief Executive Officer of Warner Music, to try to gain his assistance as an intermediary in urging Tommy Hilfiger to engage in such discussions. (A2283 at 105, A2286-87 at 116-19.) Yet Simmons, despite his continuing and apparently aggressive marketing efforts, did not receive "any real interest" in Phat Fashions, nor "any offers that were reasonable in [his] opinion. . . ." (A2282 at 99; see also A2284 at 107.) Thus, even while Simmons was actively promoting the company in the press as being worth $100-$150 million (or more), he was admittedly having no initial luck in courting a high-paying suitor. It is against this backdrop that the Court must consider TVT's contention that Cohen "must have known," months prior to any official announcement, that the Kellwood deal was likely to go forward in the $100-$150 million price range.
In large part, TVT's argument as to what Cohen must have known about the likelihood of the Kellwood deal being consummated is based on the fact that Cohen was in frequent contact with Simmons during the period of the early Kellwood discussions, a fact that is not disputed. Indeed, Simmons testified that, during the period prior to August 2003, he communicated with Cohen on a daily basis. (A2262 at 20.) TVT also seeks to draw inferences from the fact that Cohen's accountants (the Berdon firm), his personal financial advisor (Stuart Kotler), and his personal lawyer (Neil Goldstein) all did some type of work for Phat Fashions, as well as for Cohen, presumably giving Cohen access to inside information regarding both Phat Fashions' finances and the status of the Kellwood negotiations. ( See TVT Moving Br. at 7.) Further, TVT notes that, under the terms of a company operating agreement, the shareholders of Phat Fashions, Inc. (including Cohen) were required to give approval prior to the sale of the company. ( See id.) TVT suggests that the very existence of this contract provision indicates that Cohen had a "different level of authority and access than he has suggested . . . to the Court." (TVT Reply Br. at 5.)
According to Cohen's counsel, Matthew S. Dontzin, Esq., "[t]he agreement in effect between April 11, 2003 and September 2, 2003 relating to the ownership of Phat Fashions was the Second Amended and Restated Limited Liability Company Agreement of Phat Fashions LLC, dated as of July 4, 2002 (the "LLC Agreement"). Section 9.19 of the LLC Agreement provides that the Board of Managers of Phat Fashions LLC 'shall not have the power, without the Consent of the Members, to cause the Company to: . . . (e) merge or consolidate the Company into or with any other entity or sell or pledge or distribute all or a major part of the Company's assets, directly or indirectly. . . .'" (TVT Ex. 13 (Letter to the Court from Matthew S. Dontzin, Esq., dated Apr. 29, 2004), at 1.) Mr. Dontzin further explains that "Phat Fashions, Inc. was a 'Member' of Phat Fashions LLC." ( Id. at 2.) According to counsel, "[o]n January 5, 2004, Mr. Cohen executed a Unanimous Written Consent of the Shareholders of Phat Fashions, Inc., approving the sale of all of the issued and outstanding membership interests of Phat Fashions LLC to a wholly-owned subsidiary of Kellwood Company.'" ( Id.)
All of these arguments, however, are speculative and based on hindsight. The evidence shows that Simmons himself placed a wide range of values on Phat Fashions prior to the Kellwood sale: $40 million, $80-$120 million, $100-$150 million, and $150-$200 million were all figures apparently mentioned by Simmons within the space of less than a year. (A2277 at 78; A2287 at 119-21; A2286 at 115.) The evidence further suggests that even Simmons did not necessarily believe that the company was worth the values he placed on it at various points in time. At the time Cohen submitted his Net Worth Statement, only the $40 million figure was based on the hard data of an actual sale. Further, even if Cohen knew in August 2003 from Simmons, or from someone else with whom Cohen had a close relationship, that Simmons and Kellwood were engaged in serious discussions for the purchase of the company at a substantially higher price, TVT has not demonstrated why any initially-discussed price would necessarily have remained firm through the end of the parties' negotiations, or why it was certain that the deal would even go to contract. Even Simmons testified that he did not believe until "the end of September" or "middle of October" 2003 that the sale to Kellwood would actually go through. (A2263 at 22-23.) TVT has neither suggested, nor offered any evidence, that Kellwood gave Phat Fashions any firm commitment prior to the date of the Court's remittitur on September 3, 2003.
At his deposition, Simmons explained that using "hype" is "how you develop an image for companies." (A2268 at 46.) He even testified: "So in other words, you give out false statements to mislead the public so they will then increase in their mind the value of your company." ( Id.)
Even if Cohen's equity interest in Phat Fashions was, in fact, considerably greater than the amount stated on his Net Worth Statement, this Court finds no basis for concluding that, at the time Cohen submitted the statement, he should have used any other starting-point valuation than the one he did. On the contrary, given Simmons' history of "hype," the use of the $40 million figure seems to have been completely sensible, and the use of any other figure would have seemed highly speculative. Moreover, given the unsuccessful history of Simmons' prior efforts to sell Phat Fashions, the Court finds no reason why Cohen should have believed, in August 2003, that the Kellwood deal was such a "sure thing" that he needed to abandon the valuation he had provided to the Court. Although perhaps Cohen should have kept the Court apprised of the fact that the company was engaging in discussions with Kellwood, that fact was, in any event, disclosed to the Court by TVT, based on public reports, and the basis of Cohen's $5.6 million valuation was also disclosed. Despite engaging in extensive discovery on this issue, TVT has uncovered no evidence that Cohen actually knew — or even could have known — that the Kellwood deal was definite, and the purchase price confirmed, prior to January 2004, when the deal was apparently approved and finalized. ( See TVT Ex. 6 (Letter to the Court from Matthew S. Dontzin, Esq., dated Feb. 11, 2004) ("2/11/04 Dontzin Ltr.") at 2 n. 1.)
Overall, on the record before the Court, there is no basis for the Court to conclude that Cohen acted in bad faith — either by accepting his accountant's calculation of his equity interest in Phat Fashions based on a $40 million valuation for the company, or by failing to retract or modify that calculation prior to the Court's remittitur. Accordingly, I recommend that the Court impose no sanctions with respect to Cohen's stated valuation of his 16% equity interest in Phat Fashions.
B. The "Participation Agreement" Between Cohen and Simmons
Although TVT had originally sought pre-motion discovery on the sole question of whether Cohen had knowingly misrepresented the value of his equity interest in Phat Fashions on his Net Worth Statement, TVT largely altered its focus over the course of that discovery, and, with the Court's permission, began investigating a different question: whether Cohen had knowingly failed to disclose, on his Net Worth Statement, the value of his interest in the "Def Jam" trademark, as well as his interest in various other "Def Jam" assets. As no "Def Jam" assets were listed by name on Cohen's Net Worth Statement, this Court asked Cohen's counsel, in August 2004, if such assets were disclosed on that statement in some other fashion. ( See TVT Ex. 9 (excerpt of Transcript of Conference, dated Aug. 9, 2004), at 92.)
Although the August 9, 2004 transcript is largely included in Volume VI of the Appendix submitted by TVT in connection with its motion ( see A2748-2869), certain pages from that transcript are missing from the Appendix, and are instead contained in TVT Ex. 9.
According to Mr. Dontzin, Cohen's interests in the "Def Jam" assets were disclosed on page 7, Note 10, of the Net Worth Statement, which identifies "accounts payable, accrued expenses and other liabilities." ( Id.) Specifically, Note 10 reads: "Accounts payable, accrued expenses and other liabilities consist primarily of amounts owed to a business partner of Mr. Cohen's." (Cohen Ex. 1 (Net Worth Statement) at 7.) While conceding that his explanation may have sounded "convoluted" (TVT Ex. 9 at 94), Mr. Dontzin explained to the Court that Cohen had an "income sharing or income distribution arrangement" with Simmons with respect to various assets, and that, in the prior two years, this arrangement, as a whole, had resulted in a net loss to Cohen, obligating him, in each of those years, to pay Simmons a substantial sum of money. ( See id.). Thus, according to Mr. Dontzin, Cohen's accountants, in preparing Cohen's Net Worth Statement, identified those assets only in terms of the income-sharing arrangement itself, which was referred to (albeit obliquely) in the statement as a liability, rather than an asset. ( See id. at 92-95.)
Upon hearing this explanation and further argument by the parties ( see A2888-2914 (Transcript of Conference, dated Apr. 1, 2005 ("4/1/05 Conf. Tr.")), and after reviewing in camera Cohen's income-sharing agreement with Simmons (also known as the "Participation Agreement"), the Court directed that this agreement be produced to TVT ( see A3039 (Transcript of Conference, dated May 9, 2005 ("5/9/05 Conf. Tr.")); see generally A2980-3039 (same)). TVT now argues that this agreement is the "smoking gun" that demonstrates that Cohen intended to mislead the Court (TVT Moving Br. at 7); Cohen, on the other hand, maintains that the agreement was properly characterized as a liability and that, in any event, TVT has not demonstrated that Cohen acted with the requisite intent to deceive (Cohen Opp. Br. at 4-5). In the Court's view, the truth lies somewhere in between the parties' positions, as discussed below. 1. Structure of the Agreement
The apparent genesis of the Participation Agreement between Cohen and Simmons was the 1994 sale of their interests in certain music or entertainment-industry assets to PolyGram Holding, Inc. and related entities (collectively, "Polygram"). Through the Participation Agreement, Cohen and Simmons sought to memorialize their understandings as to how the proceeds of that transaction would be used, and they further agreed, on a forward-looking basis, as to how they would share in the economic benefits of certain assets they continued to own, or might in the future own or control. ( See Cohen Ex. 4 (Participation Agreement) at 1.)
Universal Music Group, Inc., or "UMG," is apparently the successor in interest to Polygram. ( See 3/28/06 Dontzin Ltr. at 2-3.)
The original Participation Agreement, dated October 18, 1994, contains many terms that are of limited relevance here. Of most relevance is the provision by which Cohen and Simmons agreed that neither of them, without the other's consent, would own or control any Economic Interest in any "Entertainment Company" without jointly sharing, in certain specified percentages, "the benefit of such Economic Interest (including without limitation the benefit to be realized from any sale, transfer, or other disposition thereof)." ( Id. at 3, ¶ 1(b).) At the time of the agreement, the parties listed, on a schedule, the 13 "Shared Enterprises" that were then covered by this provision, although the agreement expressly contemplated that, in the future, additional Entertainment Companies (and other types of businesses, if the parties so agreed) in which either party obtained an Economic Interest, would be covered as well. ( See id. at Schedule I; id. at 2-3, ¶ 1(a)(ix).) Depending on the specific type of business involved, the percentage of Cohen's stated participation right, under the agreement, varied from 25% to 50%. ( See id. at 3, ¶ 1(b); id. at Schedule I.) The parties also agreed that, notwithstanding the stated percentages of their respective participation interests in the Shared Enterprises, they would initially share all distributions of profits or other proceeds from these businesses equally, until the parties had each received $3.5 million in such distributions. ( Id. at 3, ¶ 1(b).)
"Economic Interest" was defined in the agreement as "any equity, profits or any other beneficial or contractual interest in any business or entity, whether held directly or indirectly through another entity," (Cohen Ex. 4 (Participation Agreement) at 1, ¶ 1(a)(I)), except that the parties carved out from this definition (a) salaries or bonuses for services actually rendered by them to certain types of music businesses, (b) consideration paid to them for assets they transferred to such businesses, and (c) investments of less than two percent of the outstanding voting stock of publicly-traded corporations. ( Id. at 4, ¶ 1(d).)
"Entertainment Company" was defined to mean "any business and/or venture whose primary purpose is the acquisition, creation, development, production, management, marketing or distribution of products and services for use in or as part of the entertainment, amusement, recreation or leisure industries, including without limitation (A) products, whether or not presently existing, based on or incorporating musical, literary, dramatic, visual or other artistic material, such as literary works, musical compositions, sound recordings, musical and/or dramatic performances, amusement attractions (including arcade games), radio and television programs, motion pictures, games (including video games) and audio and audiovisual works, and (B) services, whether or not presently existing, such as arranging, producing or promoting musical and dramatic performances, personal appearances, concerts, roadshows, tourist, café and cabaret performances, commercial merchandising endorsements and tie-ins, literary and theatrical engagements and acting as agent or manager for artistic persons, including without limitation in connection with any of the foregoing." (Cohen Ex. 4 (Participation Agreement), at 1-2, ¶ 1(a)(iii).)
The Participation Agreement was twice amended, first on August 1, 1998 (the "1998 Amendment"), and then on May 1, 2001 (the "2001 Amendment"). The 1998 Amendment modified the parties' original agreement slightly, to increase the percentage of Cohen's participation right with respect to certain types of businesses from 36.5% to 40%. ( See Cohen Ex. 4 (1998 Amendment) at 1-2, ¶ 1; id. at Schedule I (Revised).) The 2001 Amendment was more significant, in several relevant respects. First, the amendment acknowledged that, by its date, each party had received $3.5 million in distributions from the Shared Enterprises, so that such distributions no longer needed to be made equally. ( See Cohen Ex. 4 (2001 Amendment), at 1-2, ¶ 2.) Second, the amendment provided that Cohen would have a 75% (rather than a 40%) participation right in any Shared Enterprises formed after the date of that amendment that were in the recorded music business, recorded music interactive business, or music publishing business. ( See id. at 3, ¶ 5.) Third, the 2001 Amendment seems to have provided for a future, determinate end to the parties' obligation to share their Economic Interests in the businesses covered by the agreement. Specifically, the amendment stated that "[n]either party shall be obligated to share an Economic Interest in any Entertainment Company . . . or any other business after the Separation Date," ( id.), which was then defined in the amendment as "the earliest to occur of [(i)] the date on which Cohen or Simmons ceases to own any share of the Economic Benefit of any and all Shared Enterprises and (ii) December 31, 2006." ( Id. at 5-6, ¶ 7(c).)
Despite this language in the 2001 Amendment, Cohen's counsel has informed the Court that, to his understanding, the Participation Agreement "had no end date." Counsel has further advised the Court that, in any event, "the agreement was terminated by the parties in September 2004, effective as of December 31, 2003." (3/28/06 Dontzin Ltr. at 4.)
Finally, the 2001 Amendment added an entirely new provision to the parties' agreement, requiring an "adjustment" (based on the parties' "salary differential") to be made to any distributions or other benefits to which the parties were otherwise entitled under the agreement. ( Id. at 2-3, ¶ 4.) Under the Participation Agreement as originally executed, the parties' salaries or bonuses were excluded from any income-sharing obligation created by the agreement. ( See Cohen Ex. 4 (Participation Agreement) at 4, ¶ 1(d), summarized in n. 22, supra.) This was no longer the case under the 2001 amendment. ( See Cohen Ex. 4 (2001 Amendment) at 2-3, ¶ 4(b).) Rather, Cohen and Simmons agreed as follows:
In the event that, in any calendar year, either Simmons or Cohen receives aggregate salary or bonuses or other compensation for services actually rendered to a Shared Enterprise(s), which for purposes of this adjustment shall include salary, bonuses or other compensation received for services rendered to Universal Music Group, Inc. ("UMG"), in an amount greater than the other for such calendar year, the party receiving the greater aggregate compensation shall, within ninety (90) days after the end of the calendar year during which such compensation differential occurs, pay to the other an amount equal to fifteen (15%) percent of the amount by which his aggregate compensation for services rendered to a Shared Enterprise(s) exceeds that of the other party.
( Id. at 2, ¶ 4(a).) In other words, if, on an annual basis, either party were to earn more than the other in salary/bonuses for services rendered to any Shared Enterprise or to UMG (where Cohen was, by then, employed), then the party with the greater salary/bonus income would pay a portion of that income to the other.
According to Cohen's counsel, it was this last provision that made it appropriate for Cohen's accountants to characterize the Participation Agreement as a liability, rather than an asset, on Cohen's Net Worth Statement. Specifically, Mr. Dontzin explained to this Court that, by the date of the 2001 Amendment, Cohen had been hired by UMG and was receiving substantial compensation in connection with that employment. ( See A2991 (5/9/05 Conf. Tr.); see also A3000-01 (same).) This was the impetus for parties' decision to add the requirement that they adjust any distributions they would receive under the Participation Agreement to take account of the difference in their respective employment incomes. According to Mr. Dontzin, by the date of Cohen's Net Worth Statement, most of the 13 Shared Enterprises originally covered by the agreement had either been transferred to UMG or were generating little or no revenue ( see A1133-46 (Letter to the Court from Matthew S. Dontzin, Esq., dated May 17, 2005) ("5/17/05 Dontzin Ltr.")) at 1-3), and the salary adjustment provision of the 2001 Amendment had effectively turned the Participation Agreement into a losing proposition for Cohen ( see A2981 (5/9/05 Conf. Tr.) ("[F]or 2002 and 2003 Mr. Cohen had to make payments to Mr. Simmons [totaling] . . . $509,000 [inaudible] in those two years."); see also A2953 (4/1/05 Conf. Tr.) ("[Mr. Cohen] went negative several hundred thousand dollars in 2002 and 2003 paying Russell Simmons because under the [P]articipation [A]greement there was no upside for him.")).
2. Adequacy of Cohen's Disclosure of the Agreement
As a threshold matter, the Court observes that, despite Cohen's attempts to paint the Participation Agreement as unimportant, it plainly demonstrates that, even if he was not a shareholder in certain companies owned at the time by Simmons, Cohen nonetheless held a potentially significant "Economic Interest" in those companies under the terms of the agreement. Further, if Cohen himself held an equity interest in a company covered by the Participation Agreement (such as Phat Fashions, for example, which the parties listed as a Shared Enterprise in the schedule to the agreement), the value of his equity interest, standing alone, might not be a true measure of his "Economic Interest" in that asset, both because, under the agreement, he would be required to share a portion of the benefits of his equity interest with Simmons, and also because, if Simmons owned a stake in the same company, Simmons would be required to share the benefits of that interest with him. Moreover, even if, in the years immediately prior to his submission of the Net Worth Statement, Cohen's salary and bonus package at UMG was far greater than Simmons' employment compensation from any covered business, such that Cohen had been required to pay a substantial "adjustment" to Simmons under the Participation Agreement, offsetting any gains he may have otherwise realized in those years, that would not mean that Cohen's interests in the covered businesses, as derived from the agreement, were necessarily immaterial.
In short, Note 10 to the Net Worth Statement cannot fairly be said to disclose the Participation Agreement or the nature of Cohen's interest in the assets covered by that agreement. On the contrary, nothing about that footnote would have given the jury or the Court the slightest clue as to the nature of the agreement or its potential import, and the characterization of the agreement as purely a "liability" is, at best, questionable.
On the other hand, as discussed more fully below, TVT's generalities as to the "magnitude" of the Participation Agreement are largely unsupported by the evidence adduced in discovery, and appear to be vastly overblown. There is simply no basis, for example, for TVT's conclusory assertion that the Participation Agreement constituted Cohen's "single greatest asset." (TVT Moving Br. at 3.) Similarly, TVT's assertions regarding the true market values of certain of the underlying assets at issue are wholly speculative, and TVT has not shown that, prior to the submission of the Net Worth Statement, Cohen or his accountants were in possession of any concrete information that should have led them to make such valuations.
The only way to measure the actual materiality of the Participation Agreement to Cohen's disclosures in his Net Worth Statement is to consider the assets covered by that agreement during the relevant period of time and the extent of Cohen's Economic Interests in those assets, under the terms of the agreement, and then to view those interests in light of any economic obligations placed upon Cohen under the agreement. If, on the record presented, the Court finds a material impact of any failure by Cohen to disclose his Economic Interests under the Participation Agreement, the Court must then determine whether Cohen's non-disclosure was an act of bad faith that rose to the level of sanctionable conduct.
The logical starting place for this analysis is the schedule of the 13 Shared Enterprises that were initially identified by the parties as being covered under the agreement.
a. Cohen's Economic Interest in 12 of the 13 Listed Assets Was Apparently Non-Existent or Immaterial.
Cohen's counsel has represented that, to the best of his knowledge, one of the 13 listed businesses (Rush Broadcasting) never actually came into existence, and another seven were dissolved prior to the date of the Net Worth Statement. The remaining five listed Shared Enterprises were:
More specifically, counsel has explained that the assets and businesses of six of these entities (Def Jam Recording, Inc., Def Jam Music, Inc., Def American Songs, Inc., Rushtown Music, Inc., Crackdown Music, Inc., and Rush Productions Co., Inc. (d/b/a Rush Artists Management)) were transferred to UMG in a series of transactions from 1994 to 1999, after which the companies were dissolved. The other entity that was dissolved prior to the date of the Net Worth Statement was RAL Ventures, Inc., which had apparently been used in connection with an office lease that terminated prior to 2002. (A1133-46 (5/17/05 Dontzin Ltr.) at 1-3.)
• Rush Communications of N.Y.C., Inc. ("Rush Communications")
• R.S.V.P., Inc. ("R.S.V.P.")
• R.S.T.V., Inc. ("R.S.T.V.")
• RL Associates L.P., together with Rush Associates Labels, Inc. (collectively, "RL"), and
• Phat Fashions
( See Cohen Ex. 4 (Participation Agreement) at Schedule I; Cohen Ex. 4 (1998 Amendment) at Schedule I (Revised); see also A1133-46 (5/17/05 Dontzin Ltr.) at 1-3.)
At the time of his Net Worth Statement, Cohen apparently held no equity interest in three of these enterprises (Rush Communications, R.S.V.P., and R.S.T.V.), but, under the Participation Agreement, he had the right to 25% of the benefits of Simmons' Economic Interest in each. In each of these three cases, however, based on unrefuted information supplied by Cohen's counsel, this Economic Interest cannot be deemed to have been material to Cohen's Net Worth Statement. First, the sole apparent purpose of Rush Communications was to pay certain overhead costs for other enterprises (A1133-46 (5/17/05 Dontzin Ltr.) at 2), making it unlikely that the company had a positive market value. In fact, Mr. Dontzin states that Cohen's Economic Interest in this entity, under the Participation Agreement, "resulted in a liability in 2002 of $188,980 and in 2003 of $173,465." ( Id.) Second, as to R.S.V.P., Mr. Dontzin represents that the purpose of this company was to grant certain "first look" rights for film production, but that "the final agreement with respect to these rights ended in 2001," and that Cohen received $7,500 from the company as a final distribution in 2002. ( Id. at 3.) Finally, R.S.T.V. was apparently the entity that produced "Def Comedy Jam" (an HBO series) during the period from 1992 to 1997, and, although Cohen still received some income from this entity during 2002 and 2003, there is no basis in the record for the Court to conclude that, by the date of his Net Worth Statement, the entity had significant market value as a going concern.
See http://www.imdb.com/title/tt0435566/combined (last visited May 15, 2006).
According to Mr. Dontzin, Cohen received $287,500 from Def Comedy Jam in 2002 and $43,000 from that entity in 2003, under the Participation Agreement. ( See A1133-46 (5/17/05 Dontzin Ltr.) at 3.) From Cohen's deposition testimony, however, it appears that this income would have been balanced against (1) any other income to which Cohen was entitled under the Participation Agreement in those years, and (2) any obligations incurred under the agreement in the same years — resulting in a single year-end reconciliation. ( See generally discussion at 41, infra.) If this was the case, then any 2002 and 2003 "income" from Def Comedy Jam was likely not segregated and paid separately to Cohen during the course of those years. The same would presumably be true for any other income Cohen can be said to have "received" from any other entity covered by the Participation Agreement.
As to the companies collectively referred to as "RL," Cohen, according to Mr. Dontzin, held a 40% equity interest in those companies at the time of his Net Worth Statement (and his Net Worth Statement disclosed that he held an equity interest), although the assets and businesses of the enterprise had apparently been transferred to UMG in connection with the transfer of certain other businesses previously owned by Cohen and/or Simmons. ( See A1133-46 (5/17/05 Dontzin Ltr.) at 2); see also n. 25, supra.) According to Mr. Dontzin, "RL itself was not transferred to UMG. Because of a potential tax liability, RL remained in existence after the asset transfer. We understand that a tax allocation by UMG resulted in a liability to Mr. Cohen of approximately $200,000 in 2005 (arising from activity in RL between 1997 and 1999)." (A1133-46 (5/17/05 Dontzin Ltr.) at 2.)
In the absence of any evidence to refute Mr. Dontzin's representations, this leaves, for consideration, only Phat Fashions and any additional businesses that were not identified on the original schedule of Shared Enterprises attached to the Participation Agreement, but that were nonetheless covered by the agreement at the time Cohen submitted his Net Worth Statement.
b. Cohen's Undisclosed Economic Interest in Phat Fashions
As discussed above, Cohen apparently held a 16% equity stake in Phat Fashions at time he submitted his Net Worth Statement to the Court, and he accurately disclosed that fact, with a reasonable market valuation. Cohen's failure to reference any of the terms of the Participation Agreement, however, raises the question of whether Cohen deliberately omitted information about the full extent of his economic interest in Phat Fashions that would have been necessary to render the statement of his 16% equity interest not misleading.
The Participation Agreement expressly provided that Cohen and Simmons were to share the benefits of each party's interest in that company on the basis of a 75%-25% split between Simmons and Cohen, respectively. (Cohen Ex. 4 (Participation Agreement) at Schedule I; Cohen Ex. 4 (1998 Amendment) at Schedule I (Revised)). In other words, under the agreement, Cohen was required to afford 75% of the benefits of his equity interest in Phat Fashions to Simmons. By the same token, if Simmons held an equity stake (or other Economic Interest) in the company, then he was required, under the terms of the agreement, to afford 25% of the benefits of his interest to Cohen. Essentially, under the Participation Agreement, Cohen had a 25% Economic Interest in his and Simmons' aggregate interest in Phat Fashions.
At the Court's request, Cohen's counsel has supplied information regarding the extent of Simmons' equity interest in Phat Fashions at the time Cohen submitted his Net Worth Statement. According to Mr. Dontzin, Simmons, at that time, owned approximately 60% of the company. Thus, Cohen's and Simmons' aggregate equity interest in the company was approximately 76% ( i.e., 16% plus 60%). Cohen's Economic Interest in the company, therefore, would have been 25% of 76%, or approximately 19% (as opposed to his equity interest of only 16%). Using an overall company valuation of $40 million ( see discussion supra at 20-27), this would have given Cohen an Economic Interest in the company of approximately $7.6 million, as opposed to the $5.6 million figure stated in the Net Worth Statement as representing Cohen's "equity" interest. Further, Cohen's 19% Economic Interest in Phat Fashions would have entitled him to 19% of the benefit "to be realized from any sale, transfer, or other disposition" of the company. (Cohen Ex. 4 (Participation Agreement) at 3, ¶ 1(b).)
More specifically, Mr. Dontzin states that, "[o]n April 11, 2003, Mr. Simmons owned 59.83% of Phat Fashions." (3/28/06 Dontzin Ltr. at 5.) Although TVT now argues that it needs additional discovery to confirm or refute this figure, the Court is not inclined to reopen discovery again, on the basis of nothing more than TVT's suspicion that the figure is overly "precise" and that other individuals with equity interests in the company may not have held sufficient shares to make the numbers "add up." (Letter to the Court from Peter Haviland, Esq., dated Apr. 4, 2006 ("4/4/06 Haviland Ltr.") at 3.)
Mr. Dontzin's representation that Cohen and Simmons eventually terminated the Participation Agreement, effective as of December 31, 2003 (3/28/06 Dontzin Ltr. at 4), suggests that Cohen did not actually receive the benefit of this Economic Interest in Phat Fashions when the company was sold to Kellwood, as that transaction apparently closed in 2004. ( See TVT Ex. 6 (2/11/04 Dontzin Ltr.) at 2 n. 1.) This is not relevant to the Court's analysis, however, as it is undisputed that the Participation Agreement was in effect at the time Cohen submitted his Net Worth Statement.
It is troubling that Cohen submitted to the Court a Net Worth Statement that specifically identified Phat Fashions and stated his equity interest in that company, without disclosing the fact that, under the Participation Agreement, his Economic Interest in the company (meaning, in part, what he would stand to gain if the company were sold) was effectively greater than his equity interest. Further, although materiality cannot necessarily be assessed by quantitative measures alone, a $2 million potential increase in the valuation of Cohen's interest in Phat Fashions might well be deemed material in the context of his stated $22 million net worth, as it would represent an increase of nearly 10%.
Cf. In re Kidder Peabody Sec. Litig., 10 F. Supp. 2d 398, 409-12 (S.D.N.Y. 1998) (rejecting a purely quantitative approach to materiality in determining what a reasonable investor would consider significant); see also SEC Staff Accounting Bulletin No. 99, 64 Fed. Reg. 45150, 45151 (1999) ("[Q]uantifying, in percentage terms, the magnitude of a misstatement is only the beginning of an analysis of materiality. . . ."); FASB Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information, at 10 (1980) (defining "materiality" as "[t]he magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.").
Nevertheless, as set out above, the standard for imposing sanctions on the Court's own initiative is quite high, and requires specific findings of bad faith that are well supported by the evidence. It is difficult to conclude, on the record presented, that Cohen acted in bad faith in failing to disclose to the jury or the Court the fact that the Participation Agreement gave him an Economic Interest in Phat Fashions that was 3% greater than his ownership interest in the company. As noted above, the Net Worth Statement was prepared by Cohen's accountants, and there is no suggestion in the record that Cohen actively instructed his accountants as to how to list and value his interest in Phat Fashions. Thus, the Court would have to find that Cohen recognized his accountant's failure to explain how the Participation Agreement impacted his interest in Phat Fashions, and then deliberately chose to submit the statement as written, in a conscious attempt to deceive the jury and the Court into believing that his net worth was perhaps $2 million less than it was. It is particularly difficult to believe that Cohen was driven by a desire to hide $2 million from the jury and the Court, when, as his counsel points out, he testified at trial (apparently based on an erroneous reading of his own Net Worth Statement) that his net worth was $29 million, as opposed to $22 million. ( See Cohen Opp. Br. at 1; see also Cohen Ex. 1 (Net Worth Statement), at 4 (showing assets totaling approximately $29 million, and net worth, after liabilities, of approximately $22 million).)
There is certainly no indication that Cohen instructed his accountants to alter the Net Worth Statement, so as to conceal from the Court the true value of Cohen's interest in Phat Fashions. On the contrary, the fact that Cohen's interest in Phat Fashions was valued similarly on the personal financial statements previously prepared for him by Berdon (Cohen Ex. 3 at BER 0015), supports the conclusion that it was Berdon that made the decision as to how to characterize and value this asset on the Net Worth Statement, and that Cohen did not interfere with that decision.
Moreover, based on the record, it appears that Cohen viewed the Participation Agreement as a vehicle by which he and Simmons were to share the income from their respective ongoing holdings and employment. ( See, e.g., A1449-1524 (Cohen Dep. Tr.), A1498 at 194 (referring to the Participation Agreement as an "income participation agreement").) At his deposition, Cohen repeatedly and consistently testified that it was his understanding of the Participation Agreement that it required both him and Simmons to put certain business revenues, certain expenses, and a portion of Cohen's salary into a "pot," and then, "at the end of the year," to "reconcile" those sums. (A1468 at 74; see also id. ("[E]ither he pays me or I pay him. . . ."); A1459 at 39 ("[D]epending on which one was larger, I would either get a distribution or have to make a payment. . . .").) Based on that reconciliation process, Cohen testified in 2004 that, for the prior three years, he had ended up paying Simmons. ( See id. 39, 74; see also A1498 at 194 (testifying that, to his understanding, his interest in certain assets was "ruled by the income participation agreement, and that would be reconciled in cash and cash equivalents [on the Net Worth Statement], and since I was actually negative, that I actually had to make payments to [Simmons] when it was reconciled").)
Cohen focused on the "income" sharing nature of the Participation Agreement throughout his deposition. In this vein, he repeatedly suggested that, both in his personal financial statements and the Net Worth Statement, his accountants may have listed the income he received under the agreement under the category "cash and cash equivalents." ( See, e.g., A1488 at 154-55 (testifying that any payment he received for a license of "Def Jam University" may have been reflected on his personal financial statements under "cash equivalents or cash"); A1498, at 194 (testifying to his understanding that any interest he had in the "Def Jam" name was "ruled by the income participation agreement, and that would be reconciled in cash and cash equivalents" on his Net Worth Statement); A1500 at 202 (testifying that income he received from SIMCOH may have been included in the Net Worth Statement under the category "cash and cash equivalents").
If, in the several years prior to 2003, the parties to the Participation Agreement had not sold, transferred, or otherwise disposed of their Shared Enterprises, then, regardless of how dubious a proposition this may seem to TVT, it is possible that Cohen did not realize that the Participation Agreement also effectively increased his right to participate in the proceeds of any sale or transfer of the covered businesses. In other words, with respect to Phat Fashions, Cohen may have considered the impact of the Participation Agreement to be on the income he was entitled to receive from the company's operations (prior to the parties' annual reconciliations), rather than on the sale proceeds to which he would be entitled should the company be sold. Although TVT did not specifically question Cohen on this point at his deposition, it is nonetheless what Cohen's testimony suggests. To the extent Cohen had been receiving income distributions from Phat Fashions' operation prior to the date of the Net Worth Statement (or had received credit for such distributions in his and Simmons' annual reconciliations), the impact of those distributions on his net worth was presumably reflected in Note 10 to the statement.
Viewing the record as a whole, it has not been clearly established that Cohen acted in subjective bad faith, or with an intent to defraud the Court, by failing to disclose the impact of the Participation Agreement on his equity interest in Phat Fashions. Even though Cohen's omission in this respect does raise real concerns regarding the accuracy of this portion of his Net Worth Statement, his state of mind remains unclear and, given that there is more than one possible explanation for his omission and that the Court must resolve all doubts in his favor, bad faith cannot merely be inferred from his conduct. For this reason, I recommend that the Court decline to impose sanctions on Cohen based on his Phat Fashions disclosure. c. Cohen's Undisclosed Economic Interest in Various "Def Jam" Assets
In its sanctions motion, TVT also identifies certain "Def Jam" assets that do not appear on the original schedule to the Participation Agreement, but that, nonetheless, may have been covered by that agreement, entitling Cohen to an Economic Interest in them. These assets include "Def Poetry Jam," which was apparently a Broadway show featuring slam-style poetry, the "Def Jam Vendetta" video game, and the entire "Def Jam" family of trademarks, including the "Def Jam University" brand and mark. ( See TVT Moving Br. at 3-4.) The evidence as to each of these is discussed below.
Robert Simonson, Tony Winner Def Poetry Jam Gears Up for 51-City U.S. Tour Oct. 10, Playbill News, Sept. 8, 2004, http://www.playbill.com/news/article/88292.html.
I. "Def Poetry Jam"
According to TVT, Cohen testified at trial that he and Simmons "put on Def Poetry Jam on Broadway." (TVT Moving Br. at 4.) Based on this excerpt of Cohen's trial testimony, TVT infers that, at the time Cohen submitted his Net Worth Statement, he must have had an equity or other Economic Interest in the Broadway production of "Def Poetry Jam," presumably under the Participation Agreement, which he should have specifically disclosed to the Court.
On this subject, the Court first notes that TVT has, to some degree, lifted Cohen's trial testimony out of context. A review of the trial transcript shows that the question by counsel that elicited Cohen's statement had nothing to do with Cohen's personal Economic Interests, but rather with the scope of the responsibilities he had assumed for various entities. Specifically, at trial, TVT's counsel examined Cohen as follows:
Q: Do you see the first paragraph, sir, the first sentence [of a September 15, 2002 Declaration executed by Cohen]?
A: Yes.
Q: Now, do you want to read that out loud, paragraph four?
A: "Although I wish it was otherwise, my memory of the details of the events that led up to this lawsuit is somewhat limited. Although the issues involved and the discussions and the negotiations that I had in connection with this matter were important and concerning to me at the time (and are important and concerning me now) many of them took place more than a year ago, and thus, some are difficult for me to recollect in the precise detail.
"Given the nature of my position with IDJ, I'm constantly involved in negotiations and artist relations issues of one form or another, and it is often difficult for me to retain the details of every such negotiation as time passes."
Q: Mr. Cohen, thank you.
Mr. Cohen, could you give a sense to the jury of what your responsibilities are in terms of the labels that you manage?
A: I have American Recordings; Island Records; Mercury Records; Road Runner Records; Murder, Inc.; Rockefeller Records; Lost Highway. My obligation is for promotion for all of Mercury Nashville. Def Jam Records; Def Soul Records and a new company starting Def Soul Classics.
I'm also, with my partner Russell Simmons, have put on Def Poetry Jam on Broadway.
I'm just now launching a new video game, action video game in two and a half weeks with EA Sports.
I am also involved with Phat Forum [ sic] Clothing Company, which I'm a principal of and am working with Russell with the Rush Philanthropics and the Hip Hop Action Network.
Q; Would you say that you are a busy executive?
A: It's certainly not like the old days when I was strictly Def Jam. Between the explosion of hip hop music and this corporation piling a lot of companies on my shoulders, it's overwhelming sometimes, most of the time, I'm sorry.
While it is unclear from the trial transcript whether Cohen's declaration was dated September 15, 2002 or December 15, 2002 ( see A1299-1366 (Trial Tr. Vol. 5, dated Mar. 14, 200[3] ("Trial Tr."), A1300 at 1021-22), it appears from the docket that September 15, 2002 is the correct date ( see Dkt. 13). Additionally, although the trial transcript was dated March 14, 2002, this was an error, as the trial actually took place in March 2003. TVT Records v. Island Def Jam Music Group, 279 F. Supp. 2d 366, 372 (S.D.N.Y. 2003).
(A1324-25 at 1118-19.)
In this testimony, Cohen did seem to suggest that he had, at least, taken on some type of promotional or other managerial responsibilities for the "Def Poetry Jam" show, whereas, at his subsequent deposition, he denied that he had "any personal involvement" in putting the show on Broadway. ( See A1449-1524 (Cohen Dep. Tr.), A1493 at 177.) But while this seeming contradiction raises questions as to whether Cohen may have padded his trial testimony with responsibilities he did not actually have, that is not the relevant issue here. For purposes of TVT's sanctions motion, the question is whether, at the time of his Net Worth Statement, Cohen held a material financial interest in the "Def Poetry Jam" enterprise, and deliberately failed to disclose it. At no point, including at trial, did Cohen testify that he shared in the profits of such an enterprise, assuming it was profitable, or had any other type of economic interest in the show (under the Participation Agreement or otherwise).
At his deposition, Cohen was questioned at length about the nature of his interest, if any, in the "Def Poetry Jam" venture. In response, he testified that it was his understanding that, under the Participation Agreement, he "ha[d] the right to put up to 50 percent [of a business covered by that agreement] and retain that position in that business." (A1468 at 74.) He further testified:
So, for example, he [Simmons] had a poetry on — on Broadway I opted not to be in, because it was a substantial investment, and so he got all of the economic benefit.
As it turned out, it was an economic loss, and so I didn't have to put up any money or the same thing that went with his tour of Def — Def poetry.
I opted not to put money in it, so I didn't get any of the benefit or loss. I believe that was also a loser.
( Id. at 74-75.) Although TVT asserts that this testimony is "irreconcilably contradictory" with Cohen's trial testimony, TVT has not actually shown a contradiction on the question at hand. Regardless of whether Cohen did (or did not) spend time promoting or managing "Def Poetry Jam," there is actually no evidence in the trial record to contradict his deposition testimony that he opted not to participate in that venture financially, and thereby gave up any right he otherwise had, under the Participation Agreement, to share in any economic benefits that might have flowed from it.
The Court also notes that Cohen's deposition testimony as to how the Participation Agreement operated is consistent with the language of the agreement itself. Paragraph 1(c) of the original agreement states:
Although other provisions of the original Participation Agreement were later amended, this paragraph was not.
Except as Simmons and Cohen may otherwise agree, in the event that a Shared Enterprise requires funding to be provided after the date hereof by means of equity to be contributed or loans to be made or guaranteed by Simmons and Cohen, each of them shall bear that percentage of the funding obligation which is equal to his percentage of the Economic Interest in such Shared Enterprise . . . (the "Required Funding Obligation"). . . . If one party is prepared to meet his Required Funding Obligation (the "Contributing Party") and the other is unable or unwilling to do so, the Contributing Party shall have the option of meeting all or a portion of the Required Funding Obligation of the other party and proportionately increasing his percentage share of the Economic Interest, in which case the other party's percentage share of the Economic Interest shall be proportionately reduced. . . . (Cohen Ex. 4 (Participation Agreement) at 3-4, ¶ 1(c).)
Cohen's unrefuted deposition testimony is that he was unwilling to contribute financially to Def Poetry Jam, and that he therefore gave up his percentage share in the business's potential profits. Thus, regardless of whether the enterprise realized a profit or not (and Cohen testified that it did not), there is, in any event, no basis for the Court to conclude that Cohen retained an interest in this asset that should have been disclosed on his Net Worth Statement or during the Court's remittitur proceedings.
Although Cohen suggested that he might, in the future, again choose to "participate" in "Def Poetry Jam," his testimony was clear that, for the time being, he had "opted not to invest" and would bear the consequences of that decision. ( See A1493 at 176-77 ("My understanding of the way Def Poetry Jam works, is, yes, I do have an interest but because I opted not to invest both on the tour and the Broadway play, that [Simmons] took that on himself and is under water, and until he recoups all of his investment, both in the Broadway [show] and the tour, that's when I — my — it becomes above-water, and I would participate, but because I opted not to invest in that, I didn't take on the win if it won, nor the loss if it lost.").)
ii. The "Def Jam Vendetta" Video Game
Another asset that TVT argues should have been explicitly disclosed by Cohen to the Court was the "Def Jam Vendetta" video game ( see TVT Moving Br. at 3-4), which Cohen also mentioned at trial. When asked about this video game at his deposition, Cohen testified that he had first engaged in informal discussions on the subject in 2002, with executives from a company called "EA Sports." (A1449-1524 (Cohen Dep. Tr.), A1469 at 80-81.) At some point, a decision was made to go forward with the production of the game, and, on March 8, 2002, Cohen and Simmons formed a company called "SIMCOH LLC," apparently for the purpose of licensing rights for the game's development to EA Sports. ( See A1469-70 at 80-82; TVT Ex. 11 (Operating Agreement of SIMCOH LLC, dated Mar. 22, 2002 ("SIMCOH Agreement")) at 1.)
Although Cohen testified that he did not make a financial investment in SIMCOH (A1470 at 82), the company's Operating Agreement indicates that he and Simmons each initially contributed the modest sum of $500 as capital, and that each thereupon held a 50% equity interest in the company (TVT Ex. 11 (SIMCOH Agreement) at 20; see also A1449-1524 (Cohen Dep. Tr.), A1470 at 82). Further, under the Participation Agreement, Cohen's "Economic Interest" in the company may have been as great as 75%, depending on how the business was characterized for purposes of that Agreement. While the parties have not addressed this point, it is clear that, in any event, Cohen had a significant economic interest in SIMCOH as of March 2002, a year prior to his submission of the Net Worth Statement. Moreover, it seems likely that, if the "Def Jam Vendetta" video game had met with market success, then SIMCOH, which apparently had royalty rights to the game ( see 3/28/06 Dontzin Ltr. at 4), would have had market value as a company, perhaps substantial value.
If the parties characterized SIMCOH as a "General Interactive Business" ( see Cohen Ex. 4 (Participation Agreement), at 2, ¶ 1(a)(iv)), then Cohen would have held a 50% "Economic Interest" in SIMCOH, under the Participation Agreement ( see id. at 3, ¶ 1(b)(ii)). If, on the other hand, the parties characterized SIMCOH as a "Recorded Music Interactive Business" ( see id. at 2, ¶ 1(a)(iv) ( i.e., an Interactive Business with the "primary purpose" of "promot[ing] or exploit[ing] the sound recordings of Recording Artists consistent with, or as an extension of, the exploitation and promotion practices commonly used . . . in the Recorded Music Business"), then Cohen would have held a 75% "Economic Interest" in the company, under the terms of the 2001 amendment to the Participation Agreement ( see Cohen Ex. 4 (2001 Amendment), at 3, ¶ 5).
In this instance, however, the question of timing is an important one. At his deposition, Cohen testified that, as of the date of his Net Worth Statement, the video game had not yet "come out." (A1449-1524 (Cohen Dep. Tr.), A1470 at 84; see also A1500 at 202.) Moreover, as noted above, the Court should exercise particular restraint in imposing sanctions on Cohen based on post-trial business developments, as it is not the purpose of remittitur to expand the trial record. ( See discussion supra at 18-19.)
At trial, Cohen testified that the new video game was planned for launch "in two and a half weeks" from the date of his March 14, 2003 testimony. (A1299-1366 (Trial Tr.), A1324-25 at 1118-19; see also A1449-1524 (Cohen Dep. Tr.), A1494 at 179 (clarifying trial date).) There is, however, nothing in the record to refute Cohen's later deposition testimony that, despite this projection at trial, the game was not actually launched prior to Cohen's filing of his Net Worth Statement, in mid-April 2003.
In trying to show that Cohen should have known, prior to the submission of his Net Worth Statement, that "Def Jam Vendetta" was going to be a success, TVT points to a pager record produced in discovery from Cohen's Skytel account, which shows that Cohen received the following text message on January 16, 2003, apparently from Kevin Liles, of IDJ:
Larry Provst [ sic, Probst], Chairman of EA (Electronic Arts), just straight out told me that they have 1.5 billion in cash and would love to be an equity partner in the new Universal Entertainment Group, if its [ sic] going private. He feels life of Vendetta I is @ least a 100 million dollar business. Kevin Liles.
TVT did not provide this Court with any information as to Kevin Liles, but Mr. Liles' own website states that, in 2002, he was Executive Vice President of IDJ. See http://www.kevinliles.com/biography.php (last visited May 15, 2006).
(Cohen Ex. 10.) Based solely on this hearsay within hearsay, as to Larry Probst's reported "feeling," TVT argues that Cohen should have known, even before the launch of the product, that the "Def Jam Vendetta" venture was a highly valuable asset that should have been reported as such on his Net Worth Statement. (TVT Moving Br. at 4.) In opposition, Cohen points out that TVT has submitted "no proof that this [$100 million] figure bore any relation to Mr. Cohen's interest in the game at the time of the [Net Worth Statement] — or at any time," and further argues that, "[i]n fact, the $100 million figure likely referred to potential retail sales of the game and certainly did not reflect Mr. Cohen's interest in the game's profits." (Cohen Opp. Br. at 6.)
EA's website identifies Lawrence F. Probst, III, as EA's Chairman and Chief Executive Officer. See http://www.info.ea.com/company/company_bios.php?exec=larry_probst (last visited May 15, 2006).
Cohen also argues that, as of the time of the Net Worth Statement, his interest in the video game was "entirely contingent and therefore adjudged immaterial by his accountants," that he "played no role in the decision not to specifically identify SIMCOH on his [Net Worth Statement]," and that he "had no reason to question th[e] decision of his accountants], given that the Berdon firm similarly did not identify SIMCOH on his personal financial statements." (Cohen Opp. Br. at 6; see also A1470-71, at 84-86 (testifying that he believed that his accountants were aware of the creation of SIMCOH).)
Although Cohen has offered no support for his interpretation of Mr. Liles' text message, the reality is that TVT's interpretation seems equally to be based on guesswork, and guesswork is insufficient to demonstrate the bad faith that is necessary for the imposition of sanctions. At bottom, TVT has presented nothing but a snippet of ambiguous hearsay in support of its suggestion that Cohen attempted to defraud the Court by failing to list SIMCOH as an asset on his Net Worth Statement. This evidence does not demonstrate that Cohen's interest in SIMCOH was actually material at the time of his Net Worth Statement, that Cohen knew that his interest was actually material, or that Cohen deliberately concealed his interest in SIMCOH so as to mislead the jury or the Court. Certainly, in light of Cohen's unrefuted testimony that the "Def Jam Vendetta" video game had not even "come out" by the date when the Net Worth Statement was filed, it cannot be said that the evidence of Cohen's bad faith is "clear and convincing."
Further, even assuming the "Def Jam Vendetta" video game was successful when eventually launched, there is nothing in the record before the Court to demonstrate that, by the date of the Court's remittitur, this video game had generated royalties to SIMCOH that were so substantial as to have had a material impact on Cohen's stated net worth. The only information before the Court on this subject comes from Cohen's counsel, who states that Cohen did not receive any royalties generated by the "Def Jam Vendetta" video game until August 2003, at which time Cohen only received $125,000. ( See A2838 (Transcript of Conference, dated Aug. 9, 2004).) On this record, any conclusion by the Court as to SIMCOH's market value as of the date of the remittitur would be entirely speculative, as would be any conclusion that Cohen's failure to inform the Court of his post-trial receipt of royalties was a deliberate act of fraud. Indeed, without persuasive evidence of bad faith, the Court should not reach out to sanction Cohen for failing, during the remittitur proceedings, to update the Court on the post-trial success of any of his various business ventures.
iii. The "Def Jam" Trademark, and the "Def Jam University" Brand and Mark
An argument that TVT presses with particular vigor in its motion is that Cohen's Economic Interest in the "Def Jam" family of trademarks, including, inter alia, the "Def Jam University" brand and mark, was significant, and should have been specifically disclosed in his Net Worth Statement or to the Court in connection with the remittitur proceedings. ( See TVT Moving Br. at 3.) On this issue, TVT first points out that, in a June 2004 magazine article, Cohen is quoted as saying the following:
I do own Def Jam's name. I own 50%. Russell [Simmons] and I are partners. We each own 50% of the Def Jam name. We only gave [Universal] the right to sell music under that name. Everything else — whether it's clothing, electronics, travel agencies, [ picks up a bottle of water on his desk] bottled water — is all something Russell and I are gonna maintain our partnership in.
(TVT Ex. 7 ( Lyor Cohen — Beg For Mercy, XXL Magazine, June 2004), at 117 (emphasis in original).) Using this quotation as a starting point, TVT — for the sole purpose of this sanctions motion — retained a trademark valuation expert to investigate public records regarding the ownership of the "Def Jam" trademarks and to prepare a report on the fair market value of those trademarks. (Cohen Ex. 9 (Daley-Hodkin LLC's Opinion re: Fair Market Value of "Def Jam" Trademark, dated Aug. 11, 2005 ("Daley-Hodkin Report")).) That expert discovered that a large number of "Def Jam" trademarks were registered in the name of DJR Holdings, LLC ("DJR Holdings"), and concluded that, "[i]n both April 2003 and today, the Def Jam trademarks had and have a value of not less than $10 million, based on publicly available information." ( Id. at 8.) The expert further opined that "more complete financial disclosures would likely support a much higher valuation for both 2003 and today." ( Id.)
Of the 94 registered "Def Jam" trademarks identified by TVT's expert, only six (mostly registrations for "Russell Simmons Def Poetry Jam on Broadway") were not registered in the name of DJR Holdings. Those six were listed as being held in the name of Russell Simmons, c/o Rush Communications. (Cohen Ex. 9 (Daley-Hodkin Report) at 3.)
Although Cohen argues that the Court should disregard TVT's expert report as improperly submitted ( see Cohen Opp. Br. at 11), the Court need not reach that question, as the expert report, in any event, appears to be a red herring. From the information before the Court, it seems that DJR Holdings is just that — a "holding company," more specifically, a company that holds certain intellectual property. The company does not appear to exploit that intellectual property or profit from it, and, according to Cohen's counsel, the parties to the Participation Agreement have not treated DJR Holdings (which is apparently wholly owned by Simmons) as an entity covered by that agreement. (3/28/06 Dontzin Ltr. at 2.) This is not to say that the trademarks held by the company do not have value. Assuredly they do, and some may have substantial value. But it appears that the way in which Simmons has chosen to exploit that value has been to set up separate entities for that purpose, such as, for example, SIMCOH (to license the "Def Jam Vendetta" video game), or R.S.T.V. (to produce "Def Comedy Jam"), or DJULC, LLC ("DJUCL") (to license or otherwise exploit the "Def Jam University" brand and mark for clothing or other apparel). ( See 3/28/06 Dontzin Ltr.; see also A1449-1524 (Cohen Dep. Tr.), A1472-73 at 91-96.) Thus, to the extent the "Def Jam" trademarks have market value, that value would only be realized by separate business entities, which themselves either would be, or would not be, covered by the Participation Agreement.
See 3/28/06 Dontzin Ltr. at 2; see also A1449-1524 (Cohen Dep. Tr.), A1472 at 91 ("Q. Okay. What is DJR Holdings? A. DJR Holdings is a company Russell [Simmons] owns. . . . Q. Do you hold any interest in DJR Holdings? A. I don't believe so, no.").
The only "Def Jam" — related businesses that have been identified by TVT as potentially having material value and falling under the Participation Agreement are those addressed above ( i.e., the entities that were formed to produce and exploit "Def Poetry Jam" and "Def Jam Vendetta"), and DJULC. The Court's analyses above, with respect to any interests Cohen may have had in the "Def Poetry Jam" and "Def Jam Vendetta" businesses, and the question of whether such interests were adequately disclosed in Cohen's Net Worth Statement, would be unaffected by any trademark valuation. While Court assumes that both "Def Poetry Jam" and "Def Jam Vendetta" were (or are now) valuable trademarks, that assumption is subsumed in the Court's earlier analysis.
As to DJULC, although Simmons and Cohen apparently agreed that this company was to be covered by the Participation Agreement ( see A1449-1524 (Cohen Dep. Tr.), A1468 at 77), the company was apparently not created until May 2003, after the date of the Net Worth Statement ( See A982-93 (Letter to the Court from Matthew S. Dontzin, Esq., dated Dec. 23, 2004), A986 at 5 n. 4, 6; see also A1500 at 202).) At most, the record shows that the company then engaged in one transaction in July or August 2003, apparently licensing the "Def Jam University" trademark to Kellwood at that time. ( See 3/28/06 Dontzin Ltr. at 3-4; A2257-2368 (Simmons Dep. Tr.), A2293 at 144-45.) This evidence falls short of demonstrating that Cohen's interest in this new venture materially altered his net worth during the period of the remittitur proceedings. In fact, Cohen's counsel has represented that, overall, the company has lost money since its inception. (3/28/06 Dontzin Ltr. at 3.) Under these circumstances, the Court has no evidentiary basis for finding that Cohen acted in bad faith, or in an attempt to defraud the Court, by failing to disclose this new venture to the Court during post-trial briefing.
Accordingly, nothing that has been presented to this Court regarding Cohen's interests in any "Def Jam" trademarks suggests that he attempted to perpetrate a fraud on the Court, or constitutes a persuasive reason why the Court should exercise its authority to impose sanctions on him.
C. GAAP Compliance
TVT has also submitted a statement from an accounting expert (TVT Ex. 2), who asserts that Cohen's Net Worth Statement does not comply with Generally Accepted Accounting Principles ("GAAP"), which, according to TVT, is contrary to repeated, false representations by Cohen ( see TVT Moving Br. at 5). Yet neither the Net Worth Statement, nor Cohen's declaration certifying that statement, make any representation regarding GAAP compliance. (Cohen Ex. 1 (Net Worth Statement).) Also, there is no indication in the record that any purported non-compliance with GAAP materially affected Cohen's representation that his net worth, at the time of his statement, was approximately $22 million. Nor does the record contain any evidence that Cohen knowingly submitted a Net Worth Statement that was not in compliance with GAAP, much less that he submitted a non-GAAP-compliant statement for the purpose of defrauding the Court.
TVT additionally points out that, in an earlier financial report prepared for Cohen by the Berdon firm (apparently for Cohen's and his wife's personal use), the firm noted that the report deviated from GAAP in certain ways. ( See TVT Moving Br. at 5.) Specifically, in connection with that earlier report, Berdon noted that, under GAAP, investments in closely-held businesses were supposed to be stated at estimated current value, but this had not been done because Cohen and his wife had informed the firm that they were unable to formulate such values. (TVT Ex. 11 (BER 0003) at 117.) The Berdon firm also noted that, in that report, "substantially all" of the disclosures required by GAAP had not been made, and that "[i]f the required disclosures were included in the financial statement, they might influence the user's conclusions." ( Id.) Focusing on the fact that Cohen's Net Worth Statement similarly "failed to list assets at current value," TVT argues that the "powerful implication is that the decision not to list assets at current values was Mr. Cohen's, not Berdon's," and that the "obvious purpose and effect was to materially understate the value of the assets to reduce improperly punitive damage exposure." (TVT Moving Br. at 5-6.)
The flaw in this argument is that, in the Net Worth Statement, the fact that most of Cohen's closely-held businesses were being valued at cost, rather than at market value, was disclosed. ( See Cohen Ex. 1 (Net Worth Statement), at 6, Note 4(c) ("Investments in other businesses consist of various investments in and advances to privately held businesses in which the market value is not attainable. These investments, with respect to which no discounts are taken, are stated at Mr. Cohen's cost. . . .").) The Net Worth Statement also explicitly stated, as discussed above, that the value of Cohen's equity interest in Phat Fashions was based "on the valuation attributable to Phat Fashions in connection with a capital transaction that occurred on May 2, 2002." ( Id. at 5, Note 4(b).) In light of these disclosures, the Court sees no evidence of fraudulent concealment.
D. Cohen's Certification of the Net Worth Statement
Finally, TVT argues that Cohen's declaration, certifying the truth and accuracy of his Net Worth Statement, is itself sanctionable, because Cohen falsely stated in that declaration that he had "reviewed" the statement prior to its submission, when, based on his deposition testimony, he had not done so, and did not have personal knowledge of its contents. ( See TVT Moving Br. at 1.)
Cohen's deposition testimony on this subject was as follows:
Q. So you were aware, prior to April 11, 2003, that Stuart Kotler [of the Berdon firm] was primarily responsible for the preparation of your net worth statement?
A. That's correct.
Q. And prior to your testimony at the trial, did you confer with Mr. Kotler about the contents of your net worth statement?
A. No. Other than — no. My assumption is that it was accurate and sent to you in the trial in a speedy way.
Q. Okay. So you're saying that you relied on your accountants and your lawyers, presumably, who were involved in the preparation of this net worth statement, for its accuracy?
A. Correct.
. . . .
Q. Did you have any idea, based on your own personal knowledge —
A. Uh-huh.
Q. — separate from just reliance on your accountants and attorneys, about the accuracy of what was in this net worth statement at the time that it was filed?
A. No. I relied on the professionals.
Q. Did you review this net worth statement personally before it was filed?
A. No.
(A1449-1524 (Cohen Dep. Tr.), A1499 at 199-201.)
While Cohen argues that he made clear at his deposition that he "looked at" the Net Worth Statement before submitting it, and that TVT is merely quibbling about the difference between the words "reviewed" and "looked at" ( see Cohen Opp. Br. at 15-16), Cohen did not actually testify at his deposition that he looked at the statement before it was filed. Rather, he testified that he looked at it before giving his trial testimony. ( See Cohen Dep. Tr. at 201 ("Q. And did you review the net worth statement, meaning the content of the net worth statement, before you testified at the trial? A. I wouldn't say I reviewed it. I would say I looked at it. Yes, I did look at it."); see also TVT Reply Br. at 1-3.)
There can be no doubt that a litigant should not declare, under penalty of perjury, that he "reviewed" something before it was submitted to the Court, and was able to certify its accuracy, when, in truth, he did not review it, and thus could not have known if it was accurate or not. Nonetheless, as noted above, "an isolated instance of perjury" does not constitute a fraud upon the court, absent a deliberate scheme to mislead. McMunn, 191 F. Supp. 2d at 445. Here, in light of the totality of the circumstances, it would seem unduly harsh to sanction Cohen for asserting that he had "reviewed" his Net Worth Statement, when he had actually left the matter to his accountants and lawyers, and where there is no evidence that he did so to defraud the Court. It would be especially harsh to find Cohen's Declaration to be sanctionable, where the evidence does not support the imposition of sanctions based on the actual content of the Net Worth Statement itself. Further, the Court is cognizant of the fact that Cohen has likely spent significant sums already, responding to TVT's seemingly relentless quest to obtain sanctions against him. In this Court's view, the most appropriate result at this time would be to put this matter finally to rest, without a sanctions award.
CONCLUSION
For the reasons set forth above, I recommend that TVT's sanctions motion be denied in its entirety.
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections, and any responses to objections, shall be filed with the Clerk of Court, with courtesy copies delivered to the chambers of the Honorable Victor Marrero, United States Courthouse, 40 Centre Street, Room 414, New York, New York 10007, and to the chambers of the undersigned, United States Courthouse, 40 Centre Street, Room 631, New York, New York, 10007. Any requests for an extension of time for filing objections must be directed to Judge Marrero. FAILURE TO FILE OBJECTIONS WITHIN TEN (10) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See Thomas v. Arn, 474 U.S. 140, 155 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir. 1992); Wesolek v. Canadair Ltd., 838 F.2d 55, 58 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983).