S.E.C. v. Simpson, s. 88-2426

• Citation: 885 F.2d 390
• Decision Date: 20 September 1989
• Docket Number: 88-2427,Nos. 88-2426,s. 88-2426
• Parties: Fed. Sec. L. Rep. P 94,721 SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. James SIMPSON, Defendant-Appellant, and George E. Becker, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 390

885 F.2d 390

Fed. Sec. L. Rep. P 94,721

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. James SIMPSON, Defendant-Appellant, and George E. Becker, Appellant.

Nos. 88-2426, 88-2427.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 7, 1989.

Decided Sept. 20, 1989.

Patricia C. Holland, Lori T. Vardas, Steven A. Ramirez, S.E.C., Chicago, Ill., Daniel L. Goelzer, Denise O'Brien, Faith D. Ruderfer, S.E.C., Washington, D.C., for plaintiff-appellee.

Max Cohen, Cohen & Thiros, Merrillville, Ind., George E. Becker, Chicago, Ill., for James Simpson, Richard Holiusa, Donald Swanson, Certified Investment Companies, Certified Commodities, Inc., Certified Precious Metals, Inc., and Levitan Inv.

George Becker, Chicago, Ill., pro se.

Stephen Becker, Chicago, Ill., for George E. Becker.

Before FLAUM, RIPPLE and KANNE, Circuit Judges.

RIPPLE, Circuit Judge.

This appeal grows out of an action against James Simpson initiated by the Securities and Exchange Commission (SEC). On July 15, 1988, Mr. Simpson, acting on the advice of his attorney, George E. Becker, failed to appear at a hearing to show cause why he should not be held in civil contempt for failing to comply with a permanent injunction entered in the SEC action. At the hearing, the district court fined Mr. Simpson $5,000 for violating an order of the court by failing to appear at the show cause hearing and fined Mr. Becker $5,000 for advising Mr. Simpson to disobey the court's order. When imposing the fines at the hearing, the district court characterized them as Rule 11 sanctions. However, in an order entered on July 19, 1988 denying the appellants' Emergency Motion to Reconsider Rule 11 Sanctions and reaffirming its imposition of the fines, the district court characterized the fines as sanctions for civil contempt imposed pursuant to 18 U.S.C. Sec. 401. We now reverse and remand.

I. Background

A. Facts

The SEC filed the underlying action against Mr. Simpson giving rise to this appeal on April 25, 1988. It alleged that Mr. Simpson and four corporations with which he was involved violated the registration and antifraud provisions of the federal securities laws. The SEC sought to enjoin the defendants' activities as continuing violations of the securities laws and also sought an accounting of all funds acquired by the defendants through the sales of securities to investors.

On May 5, 1988, Mr. Simpson entered into a consent order permanently enjoining further conduct in violation of the federal securities laws and ordering him and the four corporate defendants to provide the desired accounting within thirty days. The thirty-day time limit expired on June 6, 1988, without any accounting having been made. Mr. Simpson subsequently indicated to the SEC that he would not provide an accounting because he had been advised by counsel that producing the accounting would violate his fifth amendment privilege to be free from self-incrimination. See Tr. of July 15, 1988 at 18-19. ¹ The SEC then filed a motion for an order to show cause why Mr. Simpson should not be held in civil contempt for failing to make the required accounting. On June 24, 1988, the district court entered an order scheduling the show cause hearing for July 15, 1988. This order required that Mr. Simpson appear in the courtroom "to show cause why the defendant Simpson and the corporate defendants should not be adjudged in civil contempt of [the district court] for failure to comply with the Court's Orders of May 5, 1988." R.43. Mr. Becker had notice of the SEC's motion and the court's June 24 order, but filed no objection to the order before the July 15 show cause hearing.

On July 13, 1988, two days before the scheduled show cause hearing, the SEC served a subpoena for Mr. Simpson's attendance at the hearing on a receptionist working for the group of attorneys with whom Mr. Becker shared office space. Mr. Becker received the subpoena that evening. According to the SEC, Mr. Simpson went into hiding some time before this lawsuit was filed, and, the SEC claims, it served the subpoena on Mr. Becker because Mr. Simpson was not receiving mail at his Munster, Indiana address. Mr. Becker claimed he did not know Mr. Simpson's current mailing address.

Mr. Becker appeared at the show cause hearing on July 15 without Mr. Simpson. When the court asked Mr. Becker why Mr. Simpson was not in the courtroom, Mr. Becker revealed that he had instructed Mr. Simpson not to appear at the hearing. He also stated, however, that Mr. Simpson was supposed to be five minutes from the courtroom. Mr. Becker told the court that he "advised his client not to attend the hearing, based on his belief that the Subpoena [served on him by the SEC] should be quashed because it was improperly served and because [Mr. Becker] advised Simpson that he would seek a reconsideration of the Court's June 24, 1988 Order." R.48 (July 19, 1988 Order) at 5. The appellants maintained that the subpoena was improperly served since it was served at Mr. Becker's office rather than on Mr. Simpson personally. At this point, the district court "suggest[ed]" that Mr. Becker summon Mr. Simpson to the hearing and adjourned the hearing for ten minutes for that purpose. See Tr. of July 15, 1988 at 21. The court, however, did not at that time impose sanctions, or threaten the imposition of sanctions, on Mr. Becker.

When Mr. Becker and Mr. Simpson arrived back in the courtroom, the district court asked Mr. Becker whether he had instructed his client not to attend the hearing and whether he had ever advised his client to be present at the hearing as scheduled. Even though Mr. Becker had received and read the court's June 24 order, he admitted that he had not told Mr. Simpson to be present at the hearing until the court directed him to do so that morning. The court then imposed a $5,000 fine on Mr. Becker. The district court next asked Mr. Simpson if he knew that the June 24 order required his presence at the show cause hearing. He informed the court that he did know that he was supposed to be in attendance at the hearing and also stated that "[o]n the advice of my attorney I was made aware that I should be within five minutes." Tr. of July 15, 1988 at 25. The court then imposed a $5,000 fine on Mr. Simpson. Mr. Becker's fine was to be paid by 5:00 p.m. that day (Friday, July 15), while Mr. Simpson's fine was to be paid by 10:00 a.m. on Monday, July 18. The district court denied an oral motion to stay the fines. The court also stated that it believed that both Mr. Becker and Mr. Simpson had "delayed" the "administration of justice" and "made a mockery of this Court and its orders," id. at 26, and stated that it intended to refer the hearing transcript to the Illinois Disciplinary Committee. Id. ² As noted earlier, the district court cited Rule 11 as the authority for the imposition of these fines.

The hearing had commenced at 11:00 a.m. on July 15. By the time Mr. Simpson had been summoned to the courtroom and the district court had imposed sanctions on both Mr. Simpson and Mr. Becker, it was 11:40 a.m. The court thus recessed the hearing until 2:00 p.m. that same day. At that time, the hearing resumed and the court proceeded to hear argument on the SEC's motion to show cause. Because Mr. Becker argued that requiring Mr. Simpson to prepare an accounting would violate his fifth amendment privilege against self-incrimination, the district court ordered the hearing continued and ordered the parties to file briefs discussing the fifth amendment issue within ten days. See Tr. of July 15, 1988 at 47. ³

B. District Court Order

In its July 19, 1988 order denying the appellants' Emergency Motion to Reconsider Rule 11 Sanctions, the district court explained that the appellants' "deliberate and willful disregard" of its June 24 order justified the imposition of sanctions. However, the court now held that Rule 11 was not a proper vehicle for the imposition of sanctions in this case. Rather, it noted that it did have discretion to impose fines for civil contempt on the appellants pursuant to 18 U.S.C. Sec. 401. ⁴

In concluding that contempt sanctions were warranted in this case, the court first rejected Mr. Becker's explanation for his advice to his client. As noted above, Mr Becker instructed Mr. Simpson not to appear at the hearing since he intended, at the hearing itself, to seek a reconsideration of the court's June 24 order. The court explained that persons who refuse to obey a court order generally risk contempt sanctions even if the order is ultimately found to be incorrect. See R.48 at 8 (citing Maness v. Meyers, 419 U.S. 449, 458-60, 95 S.Ct. 584, 590-92, 42 L.Ed.2d 574 (1975)). Indeed, noted the district court, a court order " 'must be obeyed by the parties until it is reversed by orderly and proper proceedings.' " Maness, 419 U.S. at 459, 95 S.Ct. at 591 (quoting United States v. Mine Workers, 330 U.S. 258, 293, 67 S.Ct. 677, 695, 91 L.Ed. 884 (1947)). Mr. Becker received the June 24 order requiring Mr. Simpson to appear three weeks before the scheduled hearing; nothing prevented Mr. Becker from filing a motion for reconsideration sometime prior to the hearing itself. Thus, the district court explained that Mr. Becker was being fined "for his willful and blatant disrespect of this Court when he intentionally advised his client to disobey this Court's Order which resulted in the delay of the administration of justice." R.48 at 9.

The court also noted that there was nothing ambiguous about its June 24 order. Mr. Becker and Mr. Simpson both were aware that Mr. Simpson had been ordered to appear in court on July 15. Their own admissions in open court provided clear and convincing evidence of contempt. The court believed that contempt sanctions, therefore, were proper in order to "enforce the Court's June 24th Order, of which both parties had knowledge, and admittedly disregarded." R.48 at 10.

Although the district court recognized...