133 F.3d 170 (2nd Cir. 1997), 814, S.E.C. v. Fischbach Corp.

Docket Nº:814, Docket 97-6087.
Citation:133 F.3d 170
Party Name:SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. FISCHBACH CORPORATION, Claimant-Appellant, Drexel Burnham Lambert Incorporated, Drexel Burnham Lambert Group Incorporated, Michael R. Milken, Lowell J. Milken, Cary J. Maultasch, Pamela R. Monzert, Victor Posner, Steven N. Posner, and Pennsylvania Engineering Corporation, Defendants.
Case Date:December 30, 1997
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 170

133 F.3d 170 (2nd Cir. 1997)




Drexel Burnham Lambert Incorporated, Drexel Burnham Lambert

Group Incorporated, Michael R. Milken, Lowell J. Milken,

Cary J. Maultasch, Pamela R. Monzert, Victor Posner, Steven

N. Posner, and Pennsylvania Engineering Corporation, Defendants.

No. 814, Docket 97-6087.

United States Court of Appeals, Second Circuit

December 30, 1997

        Argued Oct. 6, 1997.

Page 171

        Eric Summergrad, Principal Assistant General Counsel, Washington, DC (Richard H. Walker, General Counsel, Paul Gonson, Solicitor, Hope Hall Augustini, Securities and Exchange Commission, Washington, DC, on the brief), for Plaintiff-Appellee.

        Nathan Lewin, Washington, DC (David S. Cohen, Miller, Cassidy, Larroca & Lewin, Washington, DC, Glen M. Bronstein, New Providence, NJ, on the brief), for Claimant-Appellant.

        Before: KEARSE, MINER, and CABRANES, Circuit Judges.

        KEARSE, Circuit Judge:

        Claimant Fischbach Corporation ("Fischbach" or "the company") appeals from an order of the United States District Court for the Southern District of New York, Milton Pollack, Judge, granting the request of plaintiff Securities and Exchange Commission ("SEC") that funds totaling some $4 million, plus interest, disgorged by defendants Victor Posner ("Posner") and Steven Posner ("Steven") (collectively the "Posners") pursuant to a 1993 judgment against them in this SEC enforcement action for securities fraud ("disgorgement fund"), be paid to the United States Treasury ("Treasury"). Exercising its equitable discretion, the district court ordered payment to the Treasury because it found that no party before the court was entitled to the funds and that the persons who might have equitable claims were too dispersed for feasible identification and payment. On appeal, Fischbach contends that the company was the direct victim of the Posners' fraud and that the company should therefore receive the disgorged funds as restitution.

Page 172

For the reasons that follow, we affirm.


        The background of this litigation is set out in the opinion and supplemental findings of fact of the district court in SEC v. Drexel Burnham Lambert Inc., 837 F.Supp. 587 (S.D.N.Y.1993) ("Drexel I "), aff'd sub nom. SEC v. Posner, 16 F.3d 520 (2d Cir.1994), cert. denied, 513 U.S. 1077, 115 S.Ct. 724, 130 L.Ed.2d 629 (1995), familiarity with which is assumed. We highlight here the facts most pertinent to this appeal concerning the disposition of the funds disgorged following Drexel I.

  1. Posner's Acquisition of Fischbach

            Fischbach is a Delaware corporation whose shares were once traded on the New York Stock Exchange. In early 1980, Posner, through a corporation he controlled, began purchasing large amounts of Fischbach stock. By March 20, according to documents filed with the SEC, he controlled more than 10.5% of Fischbach's outstanding stock. That rapid accumulation of stock prompted Fischbach to negotiate a so-called "Standstill Agreement" with Posner and his son Steven, which restricted the Posners from increasing their interest in Fischbach to more than 24.9%. The agreement provided, however, that that restriction would end if a third party filed "a Schedule 13D under the [Securities] Exchange Act [of 1934, 15 U.S.C. § 78a et seq.] relating to the acquisition of more than 10%" of Fischbach's outstanding stock. Drexel I, 837 F.Supp. at 597 (internal quotation marks omitted).

            Despite that agreement, Posner continued to pursue control of Fischbach, in part by increasing his holdings of Fischbach stock to 24.8%, just short of the cap imposed by the agreement. In addition, assisted by Michael Milken and Ivan Boesky, Posner embarked on a fraudulent "stock-parking" scheme to acquire still more shares and to trigger the Standstill Agreement's termination provision. Milken and Steven Posner recruited Boesky to buy more than 10% of Fischbach's outstanding shares and to file a Schedule 13D reporting Boesky's ownership. In fact, however, Boesky was not to be the real owner in interest of the stock, for when Milken and Steven recruited him, they assured him that he would be "made whole" if the stock price, then above $50 per share, declined. Drexel I, 837 F.Supp. at 598 (internal quotation marks omitted).

            Boesky agreed to help implement the stock-parking scheme, and in late April 1984 began purchasing Fischbach stock in large quantities. Within a month, he filed a Schedule 13D representing that he owned more than 5% of the company; within three months, he amended his Schedule 13D to reflect that 13.4% of Fischbach's outstanding stock was in his hands. Fischbach concluded from the amended filing that the Standstill Agreement with the Posners was no longer in effect.

            With the Standstill Agreement having ended, Posner set about completing his takeover of Fischbach, the market price of whose shares had declined from more than $50 to approximately $35. In February 1985, he purchased Boesky's block of Fischbach stock at an above-market price designed to help offset Boesky's losses. He then acquired a substantial number of Fischbach shares from Milken's firm, Drexel Burnham Lambert Inc. ("Drexel"). By October, Posner possessed a controlling interest in Fischbach.

            Posner immediately installed himself as chairman of Fischbach's board and made Steven a director. Over the course of the next several years, both Posners drew millions of dollars from Fischbach, ostensibly as compensation for their services. The Posners' services, however, were of no real value to the company. See Drexel I, 837 F.Supp. at 612.

  2. The SEC's Enforcement Action

            Despite the initial success of the fraudulent scheme to gain control of Fischbach, the details of the stock-parking scheme were soon exposed and its participants were haled into court. Amid much publicity, Boesky, Milken, and Drexel pleaded guilty to criminal charges arising, in part, out of their participation in the scheme.

    Page 173

            In 1988, the SEC initiated the present civil action against, inter alios, Milken, Drexel, and the Posners, alleging numerous securities laws violations arising from a variety of schemes, including the stock-parking scheme circumventing the Fischbach Standstill Agreement. The SEC's nearly 200-page complaint included allegations of the events set forth above and asserted that the defendants who participated in that scheme had, either directly or as aiders and abetters, violated §§ 10(b) and 13(d) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§ 78j(b), 78m(d), and Rules 10b-5 and 13d-1 thereunder, 17 C.F.R. §§ 240.10b-5, 240.13d-1. The complaint requested, inter alia, an order requiring the defendants to account for and disgorge all profits they had gained, as well as moneys equivalent to losses they had...

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