S.E.C. v. Levine, s. 870-875
| Decision Date | 02 August 1989 |
| Docket Number | D,Nos. 870-875,s. 870-875 |
| Citation | 881 F.2d 1165 |
| Parties | -5361, 58 USLW 2105, 89-2 USTC P 9515, Fed. Sec. L. Rep. P 94,534 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. Dennis LEVINE, a/k/a Mr. Diamond, International Gold, Inc., Diamond Holdings, S.A., and Bernhard Meier, Defendants, Appeal of ARDEN WAY ASSOCIATES, et al. (The Arden Way claimants), United States of America, Robert M. Wilkis, Dennis B. Levine, and New York State Department of Taxation and Finance. ockets 88-6294, 88-6296, 88-6298, 88-6300, 88-6302 and 88-6304. |
| Court | U.S. Court of Appeals — Second Circuit |
Richard A. Kirby, Sr. Litigation Counsel (Daniel L. Goelzer, Gen. Counsel, Jacob H. Stillman, Associate Gen. Counsel, Paul Gonson, Sol., Joseph H. Harrington, Randall W. Quinn, Attys., S.E.C., Washington, D.C., on the brief), for plaintiff-appellee.
Arthur L. Liman (Martin Flumenbaum, Lewis R. Clayton, Brad S. Karp, Robert Ernst, Paul, Weiss, Rifkind, Wharton & Garrison, New York City, on the brief), for defendant-appellant Levine.
Debra L. Brown (George D. Reycraft, Richard J. Wiener, Pamela Rogers Chepiga, Cadwalader, Wickersham & Taft, New York City, on the brief), for appellants Arden Way claimants.
James B. Mann, Deputy Asst. Atty. Gen., Tax Div., Dept. of Justice (William S. Rose, Jr., Asst. Atty. Gen., James I.K. Knapp, Acting Asst. Atty. Gen., Gary R. Allen, William S. Estabrook, Joan I. Oppenheimer, Attys., Tax Div., Dept. of Justice, Washington, D.C., on the brief), for appellant U.S.
Marvin E. Frankel (Gary P. Naftalis, Michael J. Dell, Debora K. Grobman, Kramer, Levin, Nessen, Kamin & Frankel, New York City, on the brief), for appellant Wilkis.
Rosalie J. Hronsky, Asst. Atty. Gen., New York City (Robert Abrams, Atty. Gen. of the State of N.Y., Frederic L. Lieberman, on the brief), for appellant New York State.
Stanley Nemser, New York City (Wolf Popper Ross Wolf & Jones, New York City, David Berger, Berger & Montague, Philadelphia, Pa., on the brief), for amici curiae class action plaintiffs.
Commodity Futures Trading Com'n (Marshall E. Hanbury, Gen. Counsel, Jay L. Witkin, Pat G. Nicolette, Deputies Gen. Counsel, Glynn L. Mays, Sr. Asst. Gen. Counsel, Susan M. Milligan, Atty., Washington, D.C.), amicus curiae.
F.T.C. (Kevin J. Arquit, Gen. Counsel, Jay C. Shaffer, Deputy Gen. Counsel, Ernest J. Isenstadt, Asst. Gen. Counsel, Heather Hippsley, Leslie Rice Melman, Attys., Washington, D.C.), amicus curiae.
Before OAKES, Chief Judge, and KEARSE and MAHONEY, Circuit Judges.
These appeals by (1) Dennis B. Levine and Robert M. Wilkis, defendants in civil actions commenced by plaintiff Securities and Exchange Commission ("SEC" or "Commission"), (2) the United States of America, to wit, the Internal Revenue Service ("IRS"), and the New York State Department of Taxation and Finance (the "State"), which have claims against Levine and Wilkis, and (3) Arden Way Associates, et al. ("Arden Way" or the "Arden Way claimants"), who are plaintiffs in a related action, challenge orders of the United States District Court for the Southern District of New York, Richard Owen, Judge, which, inter alia, imposed constructive trusts on the assets disgorged by Levine and Wilkis in the SEC actions and forbade payment of federal or state tax claims from the disgorged assets. See 689 F.Supp. 317 (S.D.N.Y.1988). On appeal, Levine, Wilkis, the IRS, and the State contend principally that the district court erred in refusing to require the SEC to pay the tax liabilities of Levine and Wilkis out of the disgorged assets; Arden Way contends that the court abused its discretion by approving a proposed distribution plan that does not provide for payments to Arden Way. For the reasons below, we conclude principally that the IRS is entitled to priority to the extent of approximately $8.5 million with respect to the assets disgorged by Levine; that in most other respects, the district court properly rejected the claims of Levine, Wilkis, and Arden Way; and that further proceedings are required for determination of certain additional claims advanced by the IRS.
The present appeals arise out of SEC civil actions against Levine and Wilkis, New York investment bankers accused of engaging in insider trading, in violation of Secs. 10(b) and 14(e) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Secs. 78j(b), 78n(e) (1982), and SEC Rules 10b-5 and 14e-3, 17 C.F.R. Secs. 240.10b-5, 240.14e-3 (1988). The sequence of the procedural events does not appear to be in dispute.
On May 12, 1986, the SEC commenced its action against Levine and two of his companies (collectively referred to as "Levine"), and one Bernhard Meier for alleged violations of the above securities laws. The complaint charged that from May 1980 through May 12, 1986, Levine had purchased common stock of, or options for common stock of, 54 companies that were targets of potential tender offers or candidates for actual or contemplated mergers or other business combinations. It alleged that Levine had traded on the basis of material nonpublic information that he knew or should have known had been obtained through misappropriation or breach of fiduciary duty, and that he had thereby defrauded other investors. The complaint alleged that Levine had gained some $11 million in profits, and the SEC sought, inter alia, disgorgement by Levine and his companies of funds received as a result of his unlawful conduct.
On May 12, the day its complaint was filed, the Commission obtained a temporary restraining order prohibiting Levine from disposing of any of his assets. On May 29, the district court issued a preliminary injunction extending this temporary freeze order.
In the meantime, the IRS had been investigating Levine's federal income tax liabilities for the years prior to 1986. On May 23, 1986, it issued an assessment for 1983-1985 totaling some $11 million, including deficiencies, interest and penalties, and obtained a lien for some $8.5 million. In November 1987, the IRS issued an assessment against Levine totaling approximately $1.2 million for the years 1980-1982, obtaining an additional lien. By December 31, 1987, Levine's outstanding assessed federal tax liability for the years 1980-1985, including interest, totaled approximately $12.2 million. In December 1987, the State issued an assessment against Levine for approximately $3.8 million of state and New York City (hereafter included in State) income tax liability. All of these amounts were based on Levine's profits in the allegedly unlawful stock transactions during the years 1980-1985, profits he had not reported on his income tax returns.
On June 4, 1986, Levine executed a Consent and Undertaking ("Consent") in which, without admitting or denying any of the allegations in the complaint, he consented to the entry of a "Final Judgment of Permanent Injunction and Other Equitable Relief" ("Proposed Judgment"), as annexed to the Consent. In the Consent, which was "Approved As To Form" by the SEC, Levine agreed to the entry of a permanent injunction prohibiting him from, inter alia, buying or selling securities while he was in possession of material nonpublic information, in violation of the securities laws. Levine also agreed to cooperate fully with the Commission in any other investigation conducted by or on behalf of that body. Most importantly for purposes of the present appeal, in p 8 of the Consent, Levine agreed to "disgorge assets of a value of approximately $11.5 million dollars [sic ] to [a receiver] to be available for satisfaction of any and all claims against the defendants arising out of the purchase and sale of securities by [Levine and his companies] as alleged in the COMPLAINT or by the defendants through Bank Leu International, Ltd. [sometimes referred to as "BLI"], pursuant to a Court approved plan to be proposed by the COMMISSION." The Consent provided that the Consent and the final judgment were to be incorporated in each other.
The Proposed Judgment noted that Levine had consented to the entry of the judgment "without admitting or denying the allegations of the COMPLAINT [and] without ... adjudication of any issue of fact or law." It provided for the appointment of a receiver to control the disgorged assets and to "distribute the assets to claimants with claims arising out of the purchase and sale of securities by Defendants as alleged in the COMPLAINT or by the Defendants through BLI, as ordered by this Court." It provided that none of the assets in the receivership estate would in any event be returned to Levine or his wife Laurie.
Under the Consent, Levine and his wife retained, inter alia, a cooperative apartment on Park Avenue, a 1983 automobile, an Individual Retirement Account, and the monies on deposit in two bank accounts. The Consent provided that Levine and his companies
will forever disclaim all right, title and interest in [the assets transferred to the receiver] except: (1) the Defendants and Laurie Levine retain the right to be heard as to the disposition of the assets held by the receiver pursuant to the FINAL JUDGMENT and (2) to the extent that any distribution of assets held by the receiver may have the effect of satisfying any claims against the defendants or Laurie Levine arising out of the purchase or sale of securities as alleged in the COMPLAINT or through BLI.
Levine acknowledged that "no promises or threats have been made by Plaintiff COMMISSION or any member, officer, agent, employee or representative thereof to induce him to enter this CONSENT except as provided herein." Consent p 4.
On June 5, 1986, the court signed the Proposed Judgment, and it was entered as the judgment of the court ("Judgment"). The Judgment ordered Levine to comply with the terms of the Consent and to disgorge the sum described in the Consent.
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