Sec. Exchange Comm'n v. Monarch Funding Corp.

• Decision Date: 20 April 1999
• Docket Number: Docket No. 98-6120
• Citation: 192 F.3d 295
• Parties: (2nd Cir. 1999) SECURITIES EXCHANGE COMMISSION, Plaintiff-Appellee, v. MONARCH FUNDING CORPORATION, LEO M. EISENBERG, STEVEN R. CLOYES, and RICHARD M. CANNISTRARO, Defendants, RICHARD O. BERTOLI, Defendant-Appellant. August Term 1998 Argued:
• Court: U.S. Court of Appeals — Second Circuit

Page 295

192 F.3d 295 (2nd Cir. 1999)

SECURITIES EXCHANGE COMMISSION, Plaintiff-Appellee, v. MONARCH FUNDING CORPORATION, LEO M. EISENBERG, STEVEN R. CLOYES, and RICHARD M. CANNISTRARO, Defendants, RICHARD O. BERTOLI, Defendant-Appellant.

Docket No. 98-6120

August Term 1998

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: April 20, 1999

Decided: September 20, 1999

Richard O. Bertoli appeals from an order of the United States District Court for the Southern District of New York (Sand, J.), granting the Securities Exchange Commission summary judgment.

VACATED and REMANDED.

[Copyrighted Material Omitted]

JOHN AVERY, Securities and Exchange Commission, Washington, D.C. (Harvey J. Goldschmid, General Counsel, Jacob H. Stillman, Associate General Counsel, Katharine B. Gresham, Assistant General Counsel, Rada Potts, Senior Counsel; and

Paul Gonson, Solicitor, on the brief) for Plaintiff Appellee.

RICHARD WARE LEVITT, Law Offices of Richard Ware Levitt, New York, New York (Nicholas Kaizer on the brief), for Defendant-Appellant.

John H. Doyle, III, Anderson Kill & Olick, P.C., New York, New York and Jack Arseneault, and David W. Fassett, Arseneault & Krovatin, Chatham, New Jersey, submitted a brief for amici curiae, New York Council of Defense Lawyers and the Association of Criminal Defense Lawyers of New Jersey.

Before: KEARSE, McLAUGHLIN, CALABRESI, Circuit Judges

McLAUGHLIN, Circuit Judge:

The question before us on this appeal, one of first impression, is whether findings made in a criminal sentencing proceeding may preclude relitigation of an issue in a subsequent civil case.

The SEC sued Richard Bertoli in the United States District Court for the Southern District of New York (Sand, J.) seeking injunctive relief based on his alleged violations of the federal securities laws. Those same alleged violations formed the predicate acts for a parallel criminal prosecution of Bertoli under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq., in the United States District Court for the District of New Jersey (Lechner, J.).

In the criminal case, a jury acquitted Bertoli of the RICO charges but convicted him on related obstruction of justice charges. Following the conviction, Judge Lechner enhanced Bertoli's sentence after finding that he had committed securities fraud and had engaged in an eight-year conspiracy to cover it up. The SEC then moved for summary judgment in the civil proceeding, arguing that Bertoli should be collaterally estopped from denying his securities fraud liability by virtue of Judge Lechner's sentencing findings. Judge Sand agreed and granted the SEC a permanent injunction enjoining Bertoli from future violations of Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") together with Rule 10b 5 promulgated thereunder, and Section 17(a) of the Securities Act of 1933 (the "1933 Act").

Bertoli now appeals. Supported by various amici, he maintains that sentencing findings should never be given preclusive effect in civil litigation. Alternatively, Bertoli argues that even if collateral estoppel could extend to sentencing findings, application of the doctrine in this case was inappropriate.

While we decline to adopt the sweeping per se prohibition urged by Bertoli, we conclude that the application of collateral estoppel in this case was improper. Accordingly, we vacate and remand for further proceedings.

BACKGROUND

We recount only the facts necessary to this appeal.¹ The SEC originally filed this civil suit in September 1985 in the Southern District of New York (Sand, J.). See S.E.C. v. Monarch Funding Corp., 85 Civ. 7072 (S.D.N.Y.) (LBS). The Commission alleged that Bertoli and others violated Section 10(b) of the 1934 Act, Rule 10b 5, and Section 17(a)(1)-(3) of the 1933 Act in connection with his involvement in the activities of Monarch Funding Corporation ("Monarch"), a securities brokerage firm in New York City. The SEC sought disgorgement of Bertoli's ill-gotten gains and a permanent injunction enjoining Bertoli from future violations of those laws.

The civil action was placed on Judge Sand's suspense calendar pending the outcome of a related criminal prosecution in the United States District Court for the District of New Jersey (Lechner J.). See United States v. Richard O. Bertoli, 89 Cr. 218 (D.N.J. 1989). That action was prosecuted by the New Jersey United States Attorney's Office with "a high degree of consultation and coordination" with the SEC. S.E.C. v. Monarch Funding Corp., 983 F. Supp. 442, 455 (S.D.N.Y. 1997).

In the criminal action, Bertoli and his two co defendants, Richard Cannistraro and Leo Eisenberg, faced a multiple count indictment. Of particular relevance to this appeal are Counts One and Two, charging Bertoli with RICO violations based on a pattern of racketeering activity involving, inter alia, predicate violations of Section 10(b) and Rule 10b-5. Also relevant to this appeal are Count Three, which charged Bertoli with conspiracy to obstruct justice in violation of 18 U.S.C. § 371, based on his attempts to obstruct the various civil, grand jury and criminal proceedings arising from his alleged fraud, and Count Six accusing him of obstructing justice in violation of 18 U.S.C. §§ 1502 and 1503 by moving certain proceeds of his racketeering activities from the Cayman Islands to the principality of Andorra in Europe.

After Eisenberg and Cannistraro pled guilty, Bertoli was tried before a jury in the summer of 1993. Following a three-month trial, Bertoli was convicted of the obstruction of justice charges contained in Counts Three and Six. He was acquitted, however, on all other charges, including Counts One and Two, which charged the predicate securities fraud violations.

A. The Original Sentencing

Following Bertoli's conviction, the parties engaged in extensive litigation over various post-trial and sentencing issues. On March 28, 1994, Judge Lechner sentenced Bertoli, issuing a 189- page opinion two days later to, inter alia, "clarify and amplify the rulings made during . . . sentencing." United States v. Bertoli, 854 F. Supp. 975, 1164 (D.N.J. 1994) ("Bertoli I").

Judge Lechner began the sentencing portions of that opinion by recounting Bertoli's long and diverse history of legal troubles. Included in those troubles were several run-ins with the SEC in the 1970s, which resulted in injunctions against Bertoli. See Bertoli I, 854 F. Supp. at 1127. Also noteworthy were Bertoli's efforts to thwart a creditor through the fraudulent transfer of assets to his brother and minor children, see id. at 1127-28, as well as his ensuing personal bankruptcy, see id. at 1060.

Next, Judge Lechner turned to the calculation of Bertoli's sentence, using the 1993 version of the United States Sentencing Guidelines and accompanying Commentary. Specifically, Judge Lechner applied § 2J1.2, the Guideline applicable to obstruction of justice. That provision provides in pertinent part that: "[i]f the offense involved obstructing the investigation or prosecution of a criminal offense, apply § 2X3.1 . . . ." Section 2X3.1, in turn, provides that the offense level is to be calculated on the basis of the criminal conduct underlying the investigation obstructed by the defendant. And, according to Judge Lechner, § 2X3.1 applied even if the defendant was not actually convicted of that underlying criminal conduct. See Bertoli I, 854 F. Supp. at 1144-46.

Judge Lechner found that the underlying criminal conduct that Bertoli had attempted to conceal was securities fraud - specifically, Bertoli's orchestration of what Judge Lechner termed the "Stock Manipulation Schemes." To summarize, Judge Lechner found that in or about 1982 or 1983, Bertoli began to work at Monarch, the securities brokerage firm. See id. at 1128. Eisenberg, Monarch's owner and president, permitted Bertoli to use the firm's offices to promote and arrange securities transactions on a "behind the scenes" basis. Id.

Among the deals arranged by Bertoli was Monarch's underwriting of the initial public offerings ("IPOs") of three new issuers: Liquidation Control, Inc. ("LCI"), Toxic Waste Containment, Inc. ("Toxic"), and High Technology Capital Corp. ("High Tech"). See id. In trading immediately following the IPOs, Bertoli orchestrated an artificial increase in the price of each stock through a series of controlled trades at successively higher prices. See id. at 1129. After the prices had risen to a certain level, unwitting members of the investing public were brought in to purchase the stocks. Cannistraro, an analyst at a New York City brokerage, helped recruit outside buyers by writing favorable research reports about the IPOs. See id. Unsurprisingly, the true nature of this fraudulent scheme was not disclosed in the public documents filed and issued in connection with the IPOs. See id. at 1129 n.237.

The scheme was hugely successful. Within a few months of their issuance, the shares of LCI, Toxic, and High Tech were trading at many times their offering prices. See id. at 1129. Eventually, Bertoli and his cohorts pricked the bubble at the inflated prices, selling out for millions in profit. The stock prices then plummeted leaving the public investors with large losses. See id.

Bertoli, Cannistraro, and Eisenberg initially stashed their profits in Cayman Island accounts, either in their own names or those of various companies they created to serve as repositories. Later, however, Bertoli transferred those profits to the tiny principality of Andorra. See id. at 1130, 1135.

According to Judge Lechner, these findings established that Bertoli had committed securities fraud "by at least a preponderance of the evidence." Id. at 1139. As a result, directed by the cross reference provision of § 2X3.1, Judge Lechner calculated Bertoli's sentence using § 2F1.1 - the Guideline applicable to fraud. Application of that Guideline yielded a total offense level of 28...