SEC v. Bilzerian, Civ. A. No. 89-1854 SSH.

• Decision Date: 28 January 1993
• Docket Number: Civ. A. No. 89-1854 SSH.
• Citation: 814 F. Supp. 116
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Paul A. BILZERIAN, et al., Defendants.
• Court: U.S. District Court — District of Columbia

814 F. Supp. 116

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Paul A. BILZERIAN, et al., Defendants.

Civ. A. No. 89-1854 SSH.

United States District Court, District of Columbia.

January 28, 1993.

Barry Goldsmith, Catherin Mary Shea, Washington, DC, for SEC.

No appearance for defendants.

OPINION

STANLEY S. HARRIS, District Judge.

Before the Court is plaintiff's motion for judgment of disgorgement as to defendant Paul A. Bilzerian. Upon consideration of the motion, the opposition, and replies thereto, the Court grants judgment for plaintiff in the amount of $33,140,787.07 plus interest.

Background

The Securities and Exchange Commission ("the SEC") seeks disgorgement of profits obtained by defendant Bilzerian through transactions in the securities of Cluett, Peabody & Company ("Cluett") and Hammermill Paper Company ("Hammermill"). On September 27, 1989, defendant was convicted in the United States District Court for the Southern District of New York on all counts of a nine-count indictment alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b) (1988), the federal false statements statute, 18 U.S.C. § 1001 (1988), and the criminal conspiracy statute, 18 U.S.C. § 371 (1988), in connection with activities in the securities of Cluett, Hammermill, H.H. Robertson Company, Inc., and Armco, Inc.¹ Defendant was fined $1,500,000, sentenced to a four-year prison term, placed on two years' probation, and ordered to perform 250 hours of community service.

On August 5, 1991, prior to the commencement of this action, defendant filed a voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Middle District of Florida. Subsequently, defendant sought to enjoin the SEC from pursuing this disgorgement action on the grounds of the automatic stay provision of 11 U.S.C. § 362(a). The bankruptcy court rejected defendant's argument, finding that the disgorgement action was excepted from the automatic stay as an exercise of the government's police or regulatory powers. Bilzerian v. SEC, 146 B.R. 871, 873 (Bankr.M.D.Fla.1992).

In this action, the Court entered partial summary judgment against defendant, pursuant to Fed.R.Civ.P. 54(b), finding that defendant's conviction was based on the same facts alleged here, and thus collaterally estopped defendant from relitigating the facts underlying his conviction. See Order of Partial Summary Judgment and Final Judgment of Permanent Injunction Against Defendant Paul A. Bilzerian (D.D.C. filed April 8, 1991) ("April 8th Order"). This Court further found that defendant had violated Exchange Act §§ 10(b), 13(d), 14(d), 14(e), 17(a)(1), 7(c) and 7(f), 15 U.S.C. §§ 78j(b), 78m(d), 78n(d), 78n(e), 78q(a)(1), 78g(c) and 78g(f) and Rules 10b-5, 13d-1, 13d-2, 14d-3, 14d-6, 17a-3, Regulation X and Regulation T, 17 C.F.R. §§ 240.10-5, 240.13d-1, 240.13d-2, 240.14d-6, 240.17a-3, 220.1 et seq., and permanently enjoined defendant from any such future violations.

The Cluett Trades

From April 12, 1985, to May 28, 1985, defendant raised $8,750,000 from individual investors for the purpose of purchasing Cluett securities. A series of trusts was established into which investors deposited their funds. The funds were guaranteed against loss and the proceeds were to be shared among defendant and the other investors. A total of 581,000 shares of Cluett common stock was purchased with these funds.

The first purchases of Cluett took place on April 23 and 24, 1985. Defendant purchased a total of 131,000 shares through Morgan Stanley & Co. ("Morgan Stanley") at an average price of $30.61 per share.

Approximately one month later, on May 21, 1985, defendant entered into an agreement with Jefferies & Company ("Jefferies") pursuant to which Jefferies agreed to acquire 302,000 shares of Cluett in its own account and later sell them to defendant at cost plus interest. On May 28, 1985, defendant consummated the agreement, taking delivery of the shares with a payment of $29.9791 per share.² In separate transactions also on May 28, 1985, defendant purchased an additional 98,000 shares of Cluett through Jefferies at a price of $30.06 per share and 50,000 shares through Morgan Stanley at a price of $30.33 per share.

Thus, by May 21, 1985, defendant effectively had acquired control of over five percent of the outstanding shares of Cluett. As such, he was required to file a Schedule 13D on or before May 31, 1985. Defendant, however, failed to make any filing until June 4, 1985. When made, the filing reported the purchase of 581,000 shares of common stock and 2,100 call options at a total cost of $17,821,016.³ The filing, however, only disclosed the source of $8,800,000 (extended on margin by Morgan Stanley) of the total purchase funds.⁴ It did not report the source of the additional $9,021,016.

On July 12, 1985, a Schedule 13D amendment was filed in which defendant reported the remaining balance as being derived from "personal funds." In fact, the majority of the balance —$8,750,000 out of $9,021,016— was not personal but rather was attributable to the trust investors. Thus defendant effectively concealed the existence of the multiple investors and made it appear that he was the sole investor. In addition, neither filing disclosed the existence or nature of the May 21, 1985, Jefferies purchase arrangement.

The last relevant Cluett purchase took place on July 16, 1985, when defendant, with non-trust funds, exercised 2,100 call options acquired on April 12, 1985. This allowed defendant to purchase 210,000 shares of Cluett at a strike price of $35 per share. The total cost, option price plus strike price, was $36.0631 per share. Thus by July 16, 1985, defendant had accumulated 791,000 shares of Cluett.

On October 15, 1985, defendant, having acquired control of 1,138,567 shares, or approximately 14 percent, of Cluett stock, made a tender offer to purchase all of the remaining shares of the company for a price of $40 per share.⁵ Defendant was outbid. On November 4, 1985, he sold his position to a third party, West Point Pepperell, for $40 per share, realizing profits in excess of $7,000,000. In December of 1985, defendant repaid investors the full amounts of their loans plus a sum total of one-half the profits earned on the Cluett trades.

The SEC claims that defendant's profits from these transactions as to 791,000 shares of Cluett stock were based upon illegal activity and requests disgorgement in the amount of $6,540,770.

The Hammermill Trades

The Hammermill scheme was substantially similar to the one used in Cluett. From February 25, 1985, to July 11, 1986, defendant raised $13,317,800 from individual investors ("Hammermill investors") for the purpose of purchasing Hammermill securities. The funds were funneled to defendant through a series of trusts.⁶ The investors were guaranteed against loss and the proceeds were to be shared among defendant and the investors.

Defendant used the funds raised to purchase Hammermill securities through Bilzerian & Mack Associates ("B & M"), a partnership, and its wholly-owned subsidiary HPC Acquisition Company ("HPC"). There were three parties to the B & M partnership. They were defendant, who acted as the managing general partner of B & M, Bilzerian Investors, L.P. ("Bilzerian Investors"), of which defendant was general partner, and Mack Asset Co., L.P. ("Mack").⁷ The capital commitments made were $10,000,000, $27,500,000, and $37,500,000 respectively. Thus defendant's two interests represented a total of $37,500,000, one-half of B & M's capital. This amount included the $13,317,800 raised from the Hammermill investors.

Defendant, in his capacity as managing general partner of B & M, first purchased Hammermill common stock on June 23, 1986. A total of 775,000 shares was bought through E.F. Hutton ("Hutton") at a price of $40.07 per share.

Then, on June 26, 1986, defendant entered into a parking agreement with Jefferson whereby Jefferies would acquire shares of Hammermill in its own account and later sell them to defendant at cost plus interest. Pursuant to this arrangement, Jefferies acquired 551,000 shares between June 26, 1986, and July 16, 1986. Defendant did not take delivery of the shares until July 21, 1986. The total cost incurred was $42.78 per share.

As a result of this arrangement, defendant became the beneficial owner of in excess of five percent of Hammermill stock on June 27, 1986, and was thus required to file a Schedule 13D by July 7, 1986. No filing was made.

On July 16, 1986, defendant purchased an additional 276,500 shares of Hammermill through Hutton at a cost of $43.50 per share. On July 24, 1992, defendant purchased 1,674,700 shares for $52.00 per share.

On July 25, 1986, defendant filed a combined Schedule 13D and Schedule 14D-1 tender offer statement. The Schedule 13D filing was 18 days late. It disclosed that B & M and HPC had, at a cost of approximately $153,738,180, acquired 3,281,250 shares, or approximately 20 percent, of Hammermill's stock.⁸ Of the total cost, $87,084,400 had not been borne as the final trade had not yet settled. The filing represented that approximately $10,000,000 of the $66,653,780 actually expended on Hammermill stock was from defendant's "personal funds" while, in fact, the funds were attributable to the Hammermill investors. Furthermore, the filing did not disclose the existence or nature of the Jefferies parking arrangement.

The tender offer statement announced a bid of $52.00 per share for the outstanding shares of Hammermill. However, again defendant was outbid and, on September 10, 1986, all the shares were sold to International Paper Company: 2,811,056 shares were sold for $64.50 per share and 470,194 shares were sold for $64.31 per share. Profits of approximately $57,551,883 were realized from these transactions. Later that month, defendant repaid investors the full amount of their loans...