SEC v. Comcoa Ltd.

Decision Date22 March 1995
Docket NumberNo. 94-8256-CIV.,94-8256-CIV.
Citation887 F. Supp. 1521
PartiesSECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. COMCOA LTD., a/k/a Comcoa Ltd., Inc., and Thomas W. Berger, Defendants.
CourtU.S. District Court — Southern District of Florida

COPYRIGHT MATERIAL OMITTED

Howard A. Tescher, Kipnis, Tescher, Lippman, Valinsky & Kain, Ft. Lauderdale, FL, for J.B. Grossman.

William Nortman, Nortman & Bloom, P.A., Miami, FL, for Comcoa defendants.

John C. Mattimore, Eric Bustillo, S.E.C., Miami, FL, for plaintiff.

Steven E. Siff, P.A., McDermott, Will & Emery, Miami, FL, for receiver for Comcoa.

ORDER

HIGHSMITH, District Judge.

This cause came before the Court for a show cause hearing on February 27, 1995, to determine whether the Law Offices of J.B. Grossman ("Grossman") should be held in contempt of Court for violation of a temporary restraining order ("TRO") entered in the above-styled action; and also upon Grossman's Motion for Clarification, filed November 4, 1994.

BACKGROUND

On May 6, 1994, a temporary restraining order was entered in the above-styled action which, inter alia, restrained the defendants and their agents, including their attorneys, from either "directly or indirectly transferring, setting off, receiving, changing, selling, pledging, assigning, liquidating or otherwise disposing of, or withdrawing any assets or property owned or controlled by the defendants." On May 16 and 17, 1994, the Court held a preliminary injunction hearing. At that hearing, the Court also considered the defendants' various pending motions, including their motion to dismiss for lack of subject matter jurisdiction and motion to vacate TRO.

At the time of the entry of the TRO, Grossman, counsel for the defendants, held $105,100.00 in a trust account on behalf of the defendants. Pursuant to the terms of the retainer agreement between Grossman and the defendants, the funds in this account would become nonrefundable upon the institution of an SEC enforcement action against the defendants.

At the hearing, the Court determined that the TRO would remain in effect until further order of the Court. Specifically, the Court stated that: "The status quo remains until I rule on the substantive motion, which I will, I will rule now on the substantive motion to dismiss for lack of subject matter jurisdiction, and depending upon that ruling, I will then rule upon the request for preliminary injunction as either moot, not warranted, or warranted. All right? Do you have anything further, questions that is?" At this point, Grossman responded "No sir." At no time did Grossman raise any objections or concerns with regard to the extension of the TRO.

On June 3, 1994, the Court issued its ruling on the defendants' various pending motions, including the motion to dismiss and the motion to vacate the TRO. All the defendants' motions were denied. Thereafter, on June 7, 1994, the Court issued an order of preliminary injunction. The preliminary injunction was dated "nunc pro tunc" to June 3, 1994, to correspond with the entry of the omnibus order of that date.1

On June 6, 1994, Grossman filed an emergency motion for release of funds. On that same day, instead of awaiting the Court's ruling on his emergency motion, Grossman transferred $91,500.00 out of the defendants' trust account and into an operating account held by the law firm, in satisfaction of the defendants' outstanding bill for Grossman's legal services; i.e., for costs incurred.2 Thereafter, the SEC filed its motion for an order to show cause why Grossman should not be held in contempt of court for violating the Court's May 6, 1994, TRO and "subsequent orders effectively extending it."

DISCUSSION

The principal purpose of the federal securities laws is to protect investors by requiring the full disclosure of information material to investment decisions, by compensating defrauded investors, and by deterring fraud and manipulative practices. Randall v. Loftsgaarden, 478 U.S. 647, 664, 106 S.Ct. 3143, 3153, 92 L.Ed.2d 525 (1986). Because these laws are remedial in nature, they are to be liberally construed. Craighead v. E.F. Hutton & Co., 899 F.2d 485, 493 (6th Cir. 1990); Castleglen, Inc. v. Commonwealth Sav. Ass'n, 689 F.Supp. 1069, 1072 (D.Utah 1988). In an SEC enforcement action, the district court has the authority, through its equitable jurisdiction, to fashion an appropriate remedy on a proper showing of a securities violation. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103 (2d Cir.1972). The ultimate remedies available to the court include disgorgement, restitution, and rescission. SEC v. Current Financial Servs., Inc., 783 F.Supp. 1441, 1443 (D.D.C.1992). To preserve a basis for such remedies, the district court may impose an interim asset freeze. CFTC v. American Metals Exchange Corp., 991 F.2d 71, 79 (3d Cir.1993); SEC v. Unifund SAL, 910 F.2d 1028, 1041 (2d Cir. 1990).

In imposing a freeze of assets, there is no requirement that the court exempt sufficient assets for the payment of legal fees. See SEC v. Cherif, 933 F.2d 403, 416-17 (7th Cir.1991), cert. denied, 502 U.S. 1071, 112 S.Ct. 966, 117 L.Ed.2d 131 (1992). Indeed, the use of frozen assets for attorney's fees has been disallowed in circumstances more extreme than in the instant case. See, e.g., Caplin & Drysdale Chartered v. United States, 491 U.S. 617, 109 S.Ct. 2646, 105 L.Ed.2d 528 (1989) (criminal forfeiture statute) (defendant paid attorney $25,000.00 in violation of restraining order); United States v. Monsanto, 491 U.S. 600, 109 S.Ct. 2657, 105 L.Ed.2d 512 (1989) (criminal forfeiture statute) (defendant's motion to vacate restraining order to permit use of frozen assets to retain attorney denied); United States v. One Residential Property Located at 501 Rimini Road, 733 F.Supp. 1382 (S.D.Cal. 1990) (civil forfeiture statute) (no constitutional right to civilly forfeitable assets for payment of legal fees). Moreover, in other contexts, attorneys have been required to disgorge nonrefundable retainers. See, e.g., In re Mondie Forge Co., 154 B.R. 232, 239 (N.D.Ohio 1993) (bankruptcy case); United States v. Harvey, 814 F.2d 905, 913, 918 (4th Cir.1987) (RICO/CCE action). In all of these cases, the courts have essentially held that a defendant has no right to spend another's money for services rendered by an attorney, even if those funds are the only way that the defendant will be able to retain counsel of his choice. See Property Located at 501 Rimini Road, 733 F.Supp. at 1386 (quoting Caplin & Drysdale, 491 U.S. at 625, 109 S.Ct. at 2652). The reasoning of these cases has been extended to SEC enforcement actions. See, e.g., Cherif, 933 F.2d at 416-17.

In this case, the Court imposed an asset freeze on May 5, 1994. Subject to that freeze was the trust account maintained by Grossman on behalf of the defendants. Grossman contends that at the moment of the freeze, the law firm garnered title to the funds in that account. Hence, the Court must first determine who has the superior interest in the funds, thereby establishing whether the funds were subject to the TRO.

1. The Nonrefundable Retainer Account.

Grossman contends that "the representation agreement and retainer the law firm fashioned for the Defendants was based on the firm's experience, business judgment and what may be needed to meet the clients' instructions to defend their rights in an asset freezing action," because, "in its experience, the law firm has found that regulatory agencies move quickly and without notice in many circumstances involving telecommunications and securities questions." By example, Grossman cites to its experience with an ongoing, unrelated SEC action, FTC v. Metropolitan Communications, et al., 94-CIV-0142-(JFK) (SDNY).

It is a well-founded principle of contract construction that an instrument shall be construed most strongly against its draftsman. See United States v. Seckinger, 397 U.S. 203, 210, 90 S.Ct. 880, 884, 25 L.Ed.2d 224 (1970). In this regard, given Grossman's vast experience with the securities laws, the Court finds that, without a doubt, Grossman drafted the retainer agreement with the intention of circumventing federal securities laws.3 By drafting the retainer agreement in such a fashion as here, Grossman has protected its own economic interests at the expense of others. Indeed, to uphold this type of retainer agreement would not only render the SEC powerless to effectively freeze assets to protect the interests of defrauded investors, but would also, in essence, require the defrauded investors to foot the bill of their opposing counsel. Such an outcome is extremely offensive to this Court, and unquestionably contrary to public policy and the intent and goals of the federal securities laws.4 Because the Court finds that the retainer agreement at issue in this case contravenes public policy and the law, it concludes that such agreement is void and unenforceable as drafted. See American Casualty Co. v. FDIC, 1993 WL 610760, at *7 (S.D.Miss.1993). The fact that Florida generally recognizes nonrefundable retainers does not defeat this conclusion. Even under Florida law, an agreement that contravenes public policy is not enforceable as a matter of law. See American Casualty Co. v. Coastal Caisson Drill Co., 542 So.2d 957, 958 (Fla. 1989). Hence, the funds at issue were subject to the TRO entered on May 5, 1994.

The Court further finds that Grossman is not without recourse. The funds in question are only forfeitable to the extent they are comprised of the defendants' ill-gotten gains. See, e.g., SEC v. Unioil, 951 F.2d 1304, 1306-07 (D.C.Cir.1991) (Edwards, J., concurring) (Party seeking disgorgement is entitled to recover only the amount of the fraud.). If Grossman can show that the funds are from some other, untainted source, it may have a legitimate claim to those funds.5 In addition, Grossman may have a suit in quantum meruit against the defendants. See, e.g., Wong v. Michael Kennedy,...

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