S.E.C. v. Bilzerian

• Decision Date: 22 July 1994
• Docket Number: 93-5050,Nos. 91-5187,s. 91-5187
• Parties: , 63 USLW 2080, Fed. Sec. L. Rep. P 98,325 SECURITIES AND EXCHANGE COMMISSION, Appellee, v. Paul A. BILZERIAN, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 689

29 F.3d 689

308 U.S.App.D.C. 43, 63 USLW 2080, Fed.

Sec. L. Rep. P 98,325

SECURITIES AND EXCHANGE COMMISSION, Appellee, v. Paul A. BILZERIAN, Appellant.

Nos. 91-5187, 93-5050.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 13, 1993.

Decided July 22, 1994.

Appeals from the United States District Court for the District of Columbia (Civil Action No. 89-1854).

Paul A. Bilzerian, pro se.

Judith R. Starr, Counsel, S.E.C., Washington, DC, argued the cause for the appellee. On brief were Paul Gonson, Sol., Eric Summergrad, Principal Asst. Gen. Counsel, and Lucinda Burwell, Counsel, S.E.C., Washington, DC. Jacob H. Stillman and Brian D. Bellardo, Washington, DC, also entered appearances.

Before SILBERMAN, SENTELLE and HENDERSON, Circuit Judges.

Opinion for the court filed by Circuit Judge KAREN LeCRAFT HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

Paul A. Bilzerian appeals two district court orders entered against him in favor of the Securities and Exchange Commission (SEC). First, Bilzerian appeals the order granting partial summary judgment to the SEC on its claims that Bilzerian violated numerous securities laws and permanently enjoining him from further violations. Second, Bilzerian challenges the order that he disgorge $33,140,787, representing the profit he obtained from his securities law violations. 814 F.Supp. 116. We affirm both orders.

I.

Before the commencement of this civil action, Bilzerian was convicted in the United States District Court for the Southern District of New York of numerous violations of the federal securities laws. He was sentenced to four years in prison, fined $1.5 million dollars and ordered to perform 250 hours of community service. ¹ The Second Circuit affirmed Bilzerian's convictions in all respects. See United States v. Bilzerian, 926 F.2d 1285 (2d Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 63, 116 L.Ed.2d 39 (1991).

The same conduct that led to Bilzerian's criminal convictions forms the basis of the SEC's civil action against him. In 1985 and 1986, Bilzerian accumulated substantial blocks of stock in Cluett, Peabody and Company (Cluett) and Hammermill Paper Company (Hammermill) through a stock accumulation agreement with Jefferies & Company (Jefferies), a broker-dealer registered with the SEC. Under the terms of the accumulation agreement, Jefferies purchased stock in its own account and Bilzerian agreed to buy the stock on a specific future date at Jefferies' cost plus interest and commissions. Although Bilzerian was the beneficial owner of the stock at all times after the agreement was entered into, Jefferies remained the record owner until the date on which Bilzerian bought the stock. ² Bilzerian used his stock accumulation agreement with Jefferies to conceal the extent of his ownership of Cluett and Hammermill stocks in order to delay filing a required form, Schedule 13D, with the SEC. ³ When Bilzerian eventually disclosed his accumulations of Cluett and Hammermill stocks to the SEC, he misrepresented the source of funds used to purchase the stocks. Bilzerian certified that he had used "personal funds" to purchase the stocks when in fact he had obtained the funds from investors whom he had guaranteed against losses and granted a share in his profits. Bilzerian repeated the misrepresentations on the Schedule 14D-1 form he subsequently filed with the SEC. ⁴

Bilzerian's misrepresentations were designed to create the impression that he was ready, willing and able to mount hostile takeovers of Cluett and Hammermill--if shareholders had known that Bilzerian had indemnified his investors against any losses, they would have questioned his financial ability to effectuate a hostile takeover. The purpose of Bilzerian's scheme was to induce a "white knight" to rescue the companies from his hostile takeover by purchasing stock, including his own, at a premium. ⁵ The scheme succeeded--Bilzerian sold his Cluett stock and his Hammermill stock at a substantial profit. ⁶

Bilzerian's convictions were also based on his "parking" of H.H. Robertson Company (H.H. Robertson) and Armco Steel (Armco) stock with Jefferies. Under two separate "stock parking" agreements between Bilzerian and Jefferies, Jefferies bought stock from Bilzerian with the understanding that Bilzerian would buy the stock back on a future date for the purchase price plus interest and commission. These agreements, like Bilzerian's accumulation agreements, served the purpose of concealing his beneficial ownership of the stock. In order to mask the agreements, Bilzerian and Jefferies exchanged a number of false invoices. ⁷

The district court issued two orders that Bilzerian now appeals. The first order granted partial summary judgment to the SEC on its claims that Bilzerian had violated certain securities laws and regulations and accordingly enjoined Bilzerian from future violations. The court based its grant of summary judgment on the collateral estoppel effect of Bilzerian's criminal convictions. In its second order, the court ordered disgorgement of Bilzerian's illicit profits.

Bilzerian argues: (1) collateral estoppel was improperly applied by the trial court because his criminal convictions did not conclusively establish the facts necessary to conclude that he had committed the violations with which he was charged in this action; (2) the court erred in issuing a permanent injunction on the SEC's motion for summary judgment because genuine issues of material fact existed; (3) the disgorgement order violates the double jeopardy clause of the fifth amendment; and (4) the court erred in calculating the amount to be disgorged.

II.

Based on the collateral estoppel effect of Bilzerian's criminal convictions, the district court entered summary judgment on the SEC's claims that Bilzerian aided and abetted Jefferies' violation of section 7(c) and Regulation T and that Bilzerian himself violated sections 7(f), 10(b), 13(d), 14(d), 14(e) and 17(a)(1) of the Act; SEC Rules 10b-5, 13d-1, 13d-2, 14d-3, 14d-6, and 17a-3 promulgated under the Act; and Regulation X. ⁸ The doctrine of collateral estoppel prohibits relitigation of an issue of fact or law that has been decided in earlier litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 649 n. 5, 58 L.Ed.2d 552 (1979). The district court found that Bilzerian was collaterally estopped from contesting the facts set forth in support of the SEC's civil claims because the same facts formed the basis of his criminal conviction. Appendix (App.) of SEC at 792. Bilzerian argues that the facts the SEC had to establish to prevail in its civil action were either not litigated in his criminal case or were not necessary to his convictions.

Specifically, Bilzerian argues that the district court erred in holding that his section 10(b) convictions estop him from challenging his civil liability under sections 13(d), 14(d) and 14(e) of the Act because the jury did not necessarily find that his misrepresentations were material as the SEC is required to establish under those sections. We disagree. Bilzerian appealed his criminal convictions on the ground that his misrepresentations and omissions were not material. The Second Circuit rejected his argument explaining that "[a]fter hearing the evidence in this case, the jury concluded that the misstatements and omissions were material." United States v. Bilzerian, 926 F.2d 1285, 1298-99 (2d Cir.1991). The Second Circuit's holding conclusively establishes the materiality of Bilzerian's misstatements and omissions; his argument that collateral estoppel is inappropriate because the jury never determined materiality accordingly fails.

Bilzerian also argues that his convictions did not establish the facts necessary to support the SEC's civil claims that he violated margin requirements ⁹ (Seventh Claim, App. of SEC at 1197 p 154-56), aided and abetted Jefferies' margin violations (Eighth Claim, App. of SEC at 1197-98 p 157-61) and aided and abetted Jefferies' falsification of records (Sixth Claim, App. of SEC at 1196 p 149-53). Our review of the record indicates that Bilzerian's criminal convictions conclusively established all of the facts the SEC was required to prove with respect to the specified claims. ¹⁰ Accordingly, we affirm the district court's grant of partial summary judgment.

III.

We review de novo the district court's grant of summary judgment to the SEC on its request for permanent injunctive relief. When a defendant has violated the securities laws, an injunction is appropriate if the court determines there is a reasonable likelihood that he will violate the laws again in the future. See SEC v. First City Fin. Corp., 890 F.2d 1215, 1228 (D.C.Cir.1989). In order to determine whether a reasonable likelihood of future violations exists, the court considers "whether a defendant's violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant's business will present opportunities to violate the law in the future." Id.

There is no genuine issue of material fact regarding whether Bilzerian's securities violations were part of a pattern or whether they were flagrant and deliberate in nature; they unquestionably were, as the brief summary of his conduct set forth earlier manifests. Courts have often found that the combination of these two factors justifies injunctive relief prohibiting future violations of the securities laws. See, e.g., SEC v. Blatt, 583 F.2d 1325, 1334-35 (5th Cir.1978) (nature and extent of securities violations warranted injunction); SEC v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir.1975) (serious and intentional nature of defendant's conduct warranted injunction). Accordingly, we agree with the district court that injunctive relief is appropriate.

Bilzerian argues, however, that a genuine issue of material fact exists regarding whether his occupation...