Drexel Burnham Lambert Inc., In re, 578

• Citation: 861 F.2d 1307
• Decision Date: 15 November 1988
• Docket Number: No. 578,D,578
• Parties: , Fed. Sec. L. Rep. P 94,085 In re DREXEL BURNHAM LAMBERT INCORPORATED, Drexel Burnham Lambert Group Incorporated, Michael R. Milken, Lowell J. Milken, Cary J. Maultasch, and Pamela R. Monzert, Petitioners. In re IVAN F. BOESKY SECURITIES LITIGATION. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DREXEL BURNHAM LAMBERT INCORPORATED, Drexel Burnham Lambert Group Incorporated, Michael R. Milken, Lowell J. Milken, Cary J. Maultasch, and Pamela Monzert, Defendants. ocket 88-3060.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1307

861 F.2d 1307

57 USLW 2325, Fed. Sec. L. Rep. P 94,085

In re DREXEL BURNHAM LAMBERT INCORPORATED, Drexel Burnham

Lambert Group Incorporated, Michael R. Milken,

Lowell J. Milken, Cary J. Maultasch, and

Pamela R. Monzert, Petitioners.

In re IVAN F. BOESKY SECURITIES LITIGATION.

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DREXEL BURNHAM LAMBERT INCORPORATED, Drexel Burnham Lambert

Group Incorporated, Michael R. Milken, Lowell J.

Milken, Cary J. Maultasch, and Pamela

Monzert, Defendants.

No. 578, Docket 88-3060.

United States Court of Appeals, Second Circuit.

Argued Oct. 31, 1988.

Decided Nov. 15, 1988.

Peter Fleming, Jr., New York City (Eliot Lauer, Mark H. O'Donoghue, Curtis, Mallet-Prevost, Colt & Mosle, New York City, of counsel), for defendants Drexel Burnham Lambert Inc. and Drexel Burnham Lambert Group, Inc.

Arthur Liman, New York City (Martin Flumenbaum, Paul, Weiss, Rifkind, Wharton

& Garrison, New York City, of counsel), for defendant Michael R. Milken.

Paul Gonson, Washington, D.C. (Thomas C. Newkirk, S.E.C., Washington, D.C., of counsel), for S.E.C.

George Reycraft, New York City (Richard J. Wiener, Pamela Rogers Chepiga, Debra L. Brown, Cadwalader, Wickersham & Taft, New York City, of counsel), for Arden Way.

David Berger, Philadelphia, Pa. (Berger & Montague, P.C., Philadelphia, Pa., of counsel), for class plaintiffs in In re Boesky Securities Litigation.

Before LUMBARD, CARDAMONE and PIERCE, Circuit Judges.

CARDAMONE, Circuit Judge.

A petition for a writ of mandamus has been presented seeking the disqualification of Senior United States District Court Judge Milton Pollack from presiding over certain civil fraud actions arising from claims of illegal insider trading. One action has been instituted by the plaintiff Securities and Exchange Commission (SEC or Commission) against the present petitioners, defendants Drexel Burnham Lambert Incorporated, Drexel Burnham Group Incorporated, Michael R. Milken, Lowell J. Milken, Cary J. Maultasch, and Pamela R. Monzert (Drexel). The other action is an amalgam of similar consolidated civil fraud actions instituted by individual plaintiffs that include the Drexel corporations as named defendants. Plaintiffs in both of these pending civil suits have appeared in opposition and have filed responses to Drexel's petition.

It is axiomatic that a judge may not preside over a case when his impartiality might reasonably be questioned. In deciding the sensitive question of whether to recuse a judge, the test of impartiality is what a reasonable person, knowing and understanding all the facts and circumstances, would believe. It is for that reason that we cannot adopt a per se rule holding that when someone claims to see smoke, we must find that there is fire. That which is seen is sometimes merely a smokescreen. Judicial inquiry may not therefore be defined by what appears in the press. If such were the case, those litigants fortunate enough to have easy access to the media could make charges against a judge's impartiality that would effectively veto the assignment of judges. Judge-shopping would then become an additional and potent tactical weapon in the skilled practitioner's arsenal. Instead, the sensitive issue of whether a judge should be disqualified requires a careful examination of those relevant facts and circumstances to determine whether the charges reasonably bring into question a judge's impartiality.

I FACTS

We trace the facts and circumstances chronologically. Nearly two years ago, in December 1986, 11 shareholders' class action suits alleging injury as a result of insider trading were brought against Ivan Boesky and others, including Drexel Burnham agents. These actions were filed in the Southern District of New York and in the Northern and Central Districts of California. The suits brought in the Southern District of New York were assigned to Judge Pollack. In March of 1987 an additional civil fraud action, in which Drexel was also a named defendant, styled Arden Way Associates, et al. v. Ivan F. Boesky, et al., (Arden Way ), was begun in the Southern District. The two Drexel corporations were represented in these suits by Cahill Gordon & Reindel (Cahill Gordon) of New York City. As a result of the multiple claims asserted in these related class and individual actions, the Judicial Panel on Multidistrict Litigation, on July 24, 1987, brought together all the pending actions, including Arden Way, in the Southern District of New York for coordinated or consolidated pretrial proceedings pursuant to 28 U.S.C. Sec. 1407 (1982). This request to transfer was addressed to Southern District Chief Judge Brieant with a suggestion that all of the class and non-class actions be assigned to Judge Pollack. An order consenting to the transfer was filed on August 5, 1987. The entire group of cases For well over a year substantial pretrial activity has occurred in the class and non-class actions. Judge Pollack has issued three published decisions in the multi-district cases--one of which involved Drexel's motion to dismiss the Arden Way complaint. He also has issued 36 management orders resolving discovery disputes and establishing discovery schedules. Drexel has, in addition, litigated a number of substantive, procedural, and discovery matters before Judge Pollack.

are referred to as "In re Ivan F. Boesky Securities Litigation " (Boesky Litigation ) and charged Drexel, along with other defendants, with acting in concert with Boesky and his affiliated companies to violate the securities and civil anti-racketeering laws of the United States.

In June 1988 while the Boesky Litigation against Drexel was in full swing, Palais Royal, Inc., a closely held corporation operating a retail chain in Texas entered into negotiations to sell its business in a leveraged buyout (LBO) transaction. The stockholders include Mrs. Moselle Pollack and members of her family. Mrs. Pollack, who is Judge Pollack's wife, is a controlling stockholder. The purchaser is Bain Venture Capital (Bain), which plans to carry-out the transaction through Specialty Holdings, Inc. (SHI), a corporation formed for the purpose of effectuating the acquisition. On June 29, 1988 the stockholders of Palais Royal entered into a contract--called an "Agreement and Plan of Merger"--to sell all of their shares to Bain in exchange for cash. Drexel is not a party to that agreement. The agreement is contingent on Bain's obtaining the necessary financing for the LBO. Bain agreed to use its best efforts to obtain financing on "terms reasonably satisfactory to [Bain]." The financing was Bain's exclusive responsibility, and, at Bain's request, none of the selling stockholders has had any contact with potential lenders. Reliable expert testimony in the form of an affidavit executed by Lewis L. Glucksman, former Chairman and Chief Executive Officer of Lehman Brothers Kuhn Loeb, which the district court credited, stated that the acquisition was not a difficult LBO to finance and that a number of investment banking firms could provide the financing on terms comparable to those offered by Drexel. This opinion was based on the fact that Palais Royal's current management has agreed to continue to operate the company after the consummation of the transaction, and that these same managers have, in recent years, operated the business profitably despite Houston's adverse economic climate. Glucksman concluded that the sale could be successfully financed with or without Drexel's participation.

When the sale occurs, no member of the now-controlling family will have any interest in Palais Royal. Further, Drexel will have no equity interest in the business. As the deal is now structured, Drexel will have no dealings with Palais Royal or with Mrs. Pollack. Its role is to act as a "best efforts" underwriter or "placement agent" of the debt to be issued by Bain. The dissenting opinion refers frequently to Drexel's role in financing the deal. Yet, even at the time of oral argument before us, Drexel stated that, though it was still exploring the matter and expected to participate, it still had no binding contractual obligation to act for Bain, i.e., to obtain the financing to enable Bain to conclude the transaction. Although Drexel may acquire an option to purchase 15 percent of the new company formed by Bain, it is not obligated to do so, and even if it were to purchase an equity interest in the acquisition vehicle, it would do so only after the Bain/Palais Royal deal had been fully consummated. Thus, Drexel's option to purchase equity securities in the new corporation created by Bain will only arise after Mrs. Pollack is completely disassociated from Palais Royal.

Bernard Fuchs, President and Chief Executive of Palais Royal, stated that, as management's representative (he is not a stockholder), he informed potential lenders with whom he met, including Drexel, that Moselle Pollack is the widow of the company's founder and the wife of Judge Pollack of New York. In addition, in late July or early August, 1988 Bain gave Drexel, as a would-be best efforts underwriter, a copy of the June 29, 1988 agreement, that listed Earlier, in the spring of 1988, George and Phyllis Asch, stockholders in Palais Royal, met with attorneys at Paul, Weiss, Rifkind, Wharton & Garrison of New York City (Paul Weiss). This law firm represents petitioner Michael R. Milken, a top Drexel official. George Asch claims that, at a meeting in the Paul Weiss law offices on June 2, 1988, the sale of Palais Royal was discussed, particularly with respect to the tax implications for the Aschs as New York resident stockholders. Asch further states that Moselle Pollack's relationship to Judge Pollack and her status as a stockholder in Palais Royal was fully known to Paul Weiss, as reflected in correspondence from a Paul Weiss partner who sent a copy of a letter concerning Palais Royal dated April 6, 1987 to "Mrs. Milton Pollack."

Mrs. Moselle Pollack...