U.S. v. Bilzerian

• Decision Date: 03 January 1991
• Docket Number: No. 787,D,787
• Parties: , Fed. Sec. L. Rep. P 95,701, 31 Fed. R. Evid. Serv. 1185 UNITED STATES of America, Appellee, v. Paul A. BILZERIAN, Defendant-Appellant. ocket 89-1502.
• Court: U.S. Court of Appeals — Second Circuit

Page 1285

926 F.2d 1285

59 USLW 2427, Fed. Sec. L. Rep. P 95,701,

31 Fed. R. Evid. Serv. 1185

UNITED STATES of America, Appellee, v. Paul A. BILZERIAN, Defendant-Appellant.

No. 787, Docket 89-1502.

United States Court of Appeals, Second Circuit.

Argued Feb. 13, 1990.

Decided Jan. 3, 1991.

Charles Fried, Cambridge, Mass. (Langdell Hall, Cambridge, Mass. of counsel; Arthur F. Mathews, Stephen H. Sachs, Stephen F. Black, Joseph K. Brenner, Lee T. Lauridsen, W. Hardy Callcott, Mark J. Leimkuhler, Wilmer, Cutler & Pickering, Washington, D.C., also of counsel), for defendant-appellant.

David E. Brodsky, Asst. U.S. Atty., S.D.N.Y. (Roger S. Hayes, Acting U.S. Atty., John W. Auchincloss II, Asst. U.S. Atty., S.D.N.Y., New York City, of counsel), for appellee.

Samuel J. Buffone, Washington, D.C. (Asbill, Junkin, Myers & Buffone, Chartered, Washington, D.C., of counsel), filed a brief for amicus curiae National Ass'n of Criminal Defense Lawyers.

Before LUMBARD, CARDAMONE, and WINTER, Circuit Judges.

CARDAMONE, Circuit Judge:

One of the principal questions posed by this appeal is whether the availability of civil proceedings--often used to enforce the securities laws--forecloses the government from instituting criminal prosecution for the violation of these same laws. The complex contrivances revealed in the present record, such as "parking" stock at a brokerage firm in order to create the impression that the stock has been sold, or having a broker "accululate" stock on an investor's behalf in order to delay disclosure of the purchase, carry home the meaning of Scott's "O, what a tangled web we weave, When first we practice to deceive!" 2 Sir Walter Scott, Marmion, Canto VI, XVII (Little Brown & Co. 1857). Although these schemes are not specifically dealt with in the securities laws, the Securities Exchange Act nonetheless contains a general antifraud provision and other federal laws prohibit conspiracy, fraud, and making false statements to United States agencies. This appeal addresses the propriety of enforcing the complained of trading methods through these general fraud and false statement provisions.

Appellant Paul A. Bilzerian (hereafter referred to as Bilzerian or defendant) was convicted on nine counts of an indictment charging violations of securities fraud, making false statements to the Securities and Exchange Commission (SEC), and conspiracy to commit specific offenses, and to defraud the SEC and the Internal Revenue Service (IRS). The charges relate to transactions defendant made between May 1985 and October 1986 in the common stock of four companies: Cluett, Peabody and Company, Inc. (Cluett), Hammermill Paper Company (Hammermill), H.H. Robertson Company (Robertson) and Armco Steel (Armco). On September 29, 1989, the United States District Court for the Southern District of New York (Ward, J.), entered a judgment of conviction and sentenced Bilzerian to four years in prison and a $1.5 million fine.

FACTS

A. The Underlying Transactions

1. The Cluett Transactions

The indictment charged three fraudulent schemes relating to trades in Cluett. These involved misrepresenting the source of funds used to purchase stock, secretly accumulating stock through nominee, and misrepresenting an "open market" purchase. By agreeing to share any profits and by guaranteeing against any loss, Bilzerian in April and May of 1985 raised $9 million to buy Cluett stock from various individual investors. The funds were transferred to him through a series of trusts set up for that purpose. Defendant was required to disclose purchase of this large block of stock on a form filed with the SEC known as a Schedule 13D. On the 13D, and its amendment, respecting the Cluett purchase, defendant stated that the stock was purchased with "personal funds," and did not disclose that they were Bilzerian also engaged an employee of Jeffries & Company, Inc. (Jeffries), a registered broker-dealer, to accumulate stock on his behalf. Under stock accumulation, a broker-dealer purchases stock in its own account with the understanding that the customer will buy it at a later date at the broker's cost plus interest and commissions. In such a transaction the prearranged sale involves no risk of loss to the broker-dealer, who acts as a nominee for the true purchaser. On May 28, 1985 defendant purchased the accumulated stock without revealing the accumulation arrangement to the SEC. The indictment charged that the agreement was fraudulently designed to delay the reporting requirements of the securities laws.

raised from other investors with whom he had a profit-sharing and guarantee-against-loss agreement.

Bilzerian also agreed to purchase 347,567 shares of Cluett common stock from a group of shareholders in contemplation of making a tender offer for that company, offering between $38 and $40 per share depending on the price of his tender offer. This proposed purchase was made with the understanding that the trade would not settle for 45 days and that defendant would cancel the purchase proposal if a third party offered more for the shares. Although he learned that 66,667 of the shares included in this block were already under his control, defendant advised the shareholder group to proceed with the sale. The offering statement claimed that 347,567 shares were purchased "in an open market transaction." The existence and terms of the privately-negotiated transaction were not disclosed.

The indictment alleged that the Cluett transactions violated Secs. 10(b) and 32 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. Secs. 78j(b) and 78ff (Count One), and the federal false statements statute, 18 U.S.C. Sec. 1001 (Counts Two, Three, and Four). Defendant was also charged with conspiring to defraud the SEC and to commit specific offenses in violation of 18 U.S.C. Sec. 371 (Count Eight).

2. The Hammermill Transactions

In June 1986 defendant raised $8 million from an individual investor for the purpose of purchasing Hammermill stock. These funds were made available to him through a trust upon his agreeing to share any profits from the eventual sale of the stock. Bilzerian turned the funds over to a limited partnership--of which he was the general partner--and the partnership made the tender offer for Hammermill. The disclosure relating to the stock purchase and tender offer stated that defendant's contribution to the partnership was from "personal funds."

Once again, defendant arranged to have an employee of Jeffries accumulate Hammermill stock on his behalf. On July 21, 1986 he purchased 551,000 accumulated shares of Hammermill. Although he was required to disclose the acquisition as of July 7, he failed to file until July 25, and at that time did not disclose the accumulation agreement. The Hammermill transactions were alleged to violate 15 U.S.C. Secs. 78j(b) and 78ff (Count Five), 18 U.S.C. Sec. 1001 (Counts Six and Seven) and 18 U.S.C. Sec. 371 (Count Eight).

3. The Robertson and Armco Transactions

Defendant also engaged in "stock parking" transactions in shares of Robertson and Armco. "Parking" refers to a transaction in which a broker-dealer buys stock from a customer with the understanding that the customer will buy the stock back at a later date for the purchase price plus interest and commissions. As with "accumulation" there is no market risk to the broker-dealer who is the owner of the shares in name only.

Bilzerian arranged to park 58,000 shares of Robertson with Jeffries for 30 days. Although he assured Jeffries he would repurchase the stock, the stock price fell substantially in the interim and he refused to honor his commitment. As a result, Jeffries incurred a $250,000 loss. Defendant compensated Jeffries in part for this loss by generating approximately $125,000 in commissions for the broker. He paid the Defendant also arranged to park 306,600 shares of Armco with Jeffries for a 30-day period beginning September 2, 1986. In addition, Jeffries agreed to accumulate Armco stock in its own account on defendant's behalf and then sell him the accumulated stock when he repurchased the 306,600 shares. On October 2 defendant purchased 818,900 shares of Armco from Jeffries at the prevailing market price of $8 per share. Although the broker realized a $575,000 gain on the sale, the profits belonged to defendant by virtue of the stock parking and accumulation agreements. Defendant sent his broker an invoice for fictitious "consulting services" in order to account for the profits he realized on the trade.

remaining $125,000 with the understanding that it would be refunded when an additional $125,000 of commissions was generated. Jeffries sent Bilzerian a false invoice in the amount of $125,000 for "financial services" that were never performed, and the latter deducted the payment on a 1985 tax return. When additional commissions were generated in 1986 he sent Jeffries fictitious invoices for "consulting services" seeking a refund of the $125,000.

For his part in the Robertson and Armco trades, Bilzerian was charged with conspiring to defraud the SEC and the IRS and to commit specific offenses including violations of 15 U.S.C. Secs. 78g, 78q, and 78ff (1988) and 18 U.S.C. Sec. 1001, in violation of 18 U.S.C. Sec. 371 (Count Nine).

B. The Trial

At trial defendant argued that he did not intend to violate the securities laws, but believed the financing structure of the transactions, utilizing trusts to borrow funds, would allow him legally to avoid disclosure regarding other investors, and that describing the source of his funds as "personal" was lawful. A motion was made in limine seeking a ruling permitting him to testify regarding his belief in the lawfulness of describing the source of his funds as "personal" without being subjected to cross-examination on communications he had with his attorney on this subject, discussions ordinarily protected by the attorney-client privilege.

Declining to rule on the issue in the...