US v. 105,800 SHARES OF COMMON STOCK

• Decision Date: 11 August 1993
• Docket Number: No. 92 C 20288-92 C 20290.,92 C 20288-92 C 20290.
• Citation: 830 F. Supp. 1101
• Parties: UNITED STATES of America, Plaintiff, v. 105,800 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant. UNITED STATES of America, Plaintiff, v. 122,942 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant. UNITED STATES of America, Plaintiff, v. 49,032 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant.
• Court: U.S. District Court — Northern District of Illinois

830 F. Supp. 1101

UNITED STATES of America, Plaintiff, v. 105,800 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant.

UNITED STATES of America, Plaintiff, v. 122,942 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant.

UNITED STATES of America, Plaintiff, v. 49,032 SHARES OF COMMON STOCK OF FIRSTROCK BANCORP, INC., Defendant.

Nos. 92 C 20288-92 C 20290.

United States District Court, N.D. Illinois, W.D.

August 11, 1993.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Keith Syfert, U.S. Attorney's Office, Rockford, IL, for plaintiff.

Gregory P. Guth, Richard D. Gaines, Holmstrom & Kennedy, Rockford, IL; Stephen A. Glickman, John M. Foley, Chuhak & Tecson; Robert M. Stephenson, Theodore T. Poulos, Cotsirilos, Stephenson, Tighe & Streicker, Ltd., Chicago, IL; Maurice H. Connelly, Bayonne, NJ; Michael N. Bledsoe, Bledsoe & Tuohy; George J. Murtaugh, Jr.; George N. Vurdelja, Jr.; Kevin M. Flynn, Coffield, Ungaretti and Harris; and Renan I. Sugarman, Fishman & Merrick, P.C., Chicago, IL, for defendants.

ORDER

REINHARD, District Judge.

INTRODUCTION

On October 4, 1992, the United States of America (government) brought three civil forfeiture actions against various shares of common stock of FirstRock Bancorp, Inc. (FirstRock) pursuant to 18 U.S.C. § 981(a)(1)(C). The government seeks to forfeit property which constitutes proceeds traceable to a bank fraud in violation of 18 U.S.C. § 1344. FirstRock is a holding company for First Federal Savings Bank of Rockford, Illinois (First Federal).

James Leichter, James Shaw, Bradley Frericks, Zvi Fishbane, Sheila Powsner, Joel Pogolowitz, Robert Rubinstein, Dolores Jugo, Nathen Schwitzer, Susan B. Kirschner, Dennis Bragelman, Gus Boosalis, the Trustee for Robinson Engineering, Ltd. Profit Sharing Trust (Robinson Engineering) and Elite have filed motions to dismiss or for summary judgment of the government's forfeiture complaint and to vacate a prior ex parte order dated October 4, 1992, authorizing the immediate seizure of their FirstRock stock. The government has also filed a motion to strike claims and for entry of a default judgment against nonclaimants. Claimant Walter J. Luscy has filed a certification in opposition to the government's motion to strike.

This court has jurisdiction over this dispute pursuant to 28 U.S.C. §§ 1345, 1355 (See Order Dated June 14, 1993) 825 F.Supp. 191. For purposes of this order only, the court will consolidate the three civil forfeiture actions and will address all pending motions to dismiss, motions for summary judgment, the government's motion to strike and its motion for entry of default judgment. The court's decision on the motion for default judgment against nonclaimants is contained in a separate consolidated order.

FACTS

First Federal Savings and Loan Association of Rockford, Illinois ("Association") operated as a federally chartered mutual savings association owned collectively by all its depositors until 1992. Beginning in May 1992, the Association started converting to First Federal, owned directly by FirstRock and indirectly by FirstRock's shareholders.

The Office of Thrift Supervision (OTS) monitors the conversion of a mutual savings association to a capital stock association in compliance with conversion regulations. See 12 C.F.R. § 563b (1993). The purpose of the conversion regulations is to provide an opportunity for existing depositors to continue ownership in the newly formed institution. Thus, pursuant to the regulations, existing depositors having accounts opened at a converting association on a specified date must have the right to purchase stock in the new institution before the stock is offered to the general public. See generally 12 C.F.R. § 563b.3(c) (1993). According to the regulations, no person shall transfer, or enter an agreement to transfer, the legal or beneficial ownership of conversion subscription rights, or the underlying securities to the account of another. See 12 C.F.R. § 563b.3 (1993).

The government alleges that First Federal allowed eligible Association depositors to purchase FirstRock stock before making this offer to the general public in accordance with the conversion regulations. Additionally, First Federal tried to prevent speculators from wrongfully acquiring stock during the conversion. For example, the prospectus accompanying all stock order forms distributed by FirstRock included several warnings:

Restrictions on Transfer of Subscription Rights and Shares

Prior to the completion of the Conversion, no person may transfer or enter into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Each person exercising subscription rights will be required to certify that a purchase of Common Stock is solely for the purchaser's own account and that there is no agreement or understanding regarding the sale or transfer of such shares. See "The Conversion-Restrictions on Transfer of Subscription Rights and Shares."

The Company and the Association will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights.

* * * * * * Restrictions on Transfer of Subscription Rights and Shares

Prior to the completion of the Conversion, the OTS conversion regulations prohibit any person with subscription rights, including the Employee Plans, Eligible Account Holders and Other Members of the Association, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the Plan or the shares of Common Stock to be issued upon their exercise. Such rights may be exercised only by the person to whom they are granted and only for his account. Each person exercising such subscription rights will be required to certify that he is purchasing shares solely for his own account and that he has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase such subscription rights or shares of Common Stock prior to the completion of the Conversion.

The Association and the Company will pursue any and all legal and equitable remedies in the event they become aware of the transfer of subscription rights and will not honor orders known by them to involve the transfer of such rights.

Additionally, the subscription offering stock order form FirstRock provided to prospective purchasers contained a similar warning. (See Compl., Exh. B). Moreover, the stock order form which eligible depositors were required to sign stated, "Under penalty of perjury, I certify ... that I am purchasing shares solely for my own account and that there is no agreement or understanding regarding the sale or transfer of such shares, or my right to subscribe for shares herewith." (See Compl., Exh. B).

BACKGROUND

In an affidavit attached to the complaint, Federal Bureau of Investigation (FBI) special agent Lon Christensen explains why speculators are interested in obtaining stock during the initial offering. If eligible depositors exercise their subscription rights to the extent that all stock is purchased, the general public cannot purchase stock in the initial offering and can only purchase stock once public trading in the stock commences. Past conversions have shown that once the stock is traded publicly, the price per share increases significantly shortly thereafter. Thus, a person who is not an eligible depositor in a converting association (a "speculator") has a financial incentive to convince eligible depositors to purchase stock on behalf of the speculator.

Pursuant to the conversion process, FirstRock offered its available stock for sale until 12:00 p.m. on Thursday, September 24, 1992. The conversion closed on October 2, 1992. At that time, FirstRock issued shares to eligible Association depositors who had submitted stock order forms. The government alleges that included among that group were depositors illegally acting on behalf of speculators engaged in a scheme to obtain FirstRock shares through false and fraudulent representations. A federal criminal investigation was initiated during the final days of the FirstRock conversion and included the use of an undercover FBI agent who posed as an eligible First Federal depositor, "Brian T. Grant."

122,942 shares (No. 92 C 20288)

Christensen outlines what the undercover FBI agent discovered when the agent posed as "Grant." On September 23, 1992, "Grant" received a telephone call from a person identifying himself as Jim Shaw. Shaw asked "Grant" if he had a checking or savings account at First Federal. When "Grant" answered affirmatively, Shaw said he would wire money to "Grant's" checking account so that "Grant" could then write a check to First Federal. Shaw told "Grant" he wanted "Grant" to buy $200,000 of First Federal stock. Later that same day "Grant" met with Shaw and another person (later identified as Leichter). Shaw, in the presence of Leichter, executed a FirstRock Subscription Offering Stock Order Form. Shaw required "Grant" to sign the form as well as two irrevocable stock power forms and two forms regarding stock certificates registered in names other than that of an account. (See Compl., Exh. C-3, D-1 to D-5). During their conversation, Shaw told "Grant" he would be dealing with Shaw's partner, Brad Frericks, in the future.¹

Shaw told "Grant" that when "Grant" received the stock, Shaw should get it immediately. When "Grant" asked about the "under penalty of perjury" certification on the stock...