US v. Marcus Schloss & Co., Inc.

• Decision Date: 31 October 1989
• Docket Number: No. 88 Cr. 796 (CSH).,88 Cr. 796 (CSH).
• Citation: 724 F. Supp. 1123
• Parties: UNITED STATES of America v. MARCUS SCHLOSS & CO., INC., Defendant.
• Court: U.S. District Court — Southern District of New York

724 F. Supp. 1123

UNITED STATES of America v. MARCUS SCHLOSS & CO., INC., Defendant.

No. 88 Cr. 796 (CSH).

United States District Court, S.D. New York.

October 31, 1989.

Louis J. Freeh, Acting U.S. Atty., S.D. N.Y., New York City (Carl H. Loewenson, Jr., Elizabeth Glazer and Howard E. Heiss, Asst. U.S. Attys., of counsel), for U.S.

Sullivan & Cromwell, New York City (Marvin Schwartz, Gandolfo V. DiBlasi, Elise A. Bloustein, John D. Lovi and James E. Hough, of counsel), for defendant.

MEMORANDUM OPINION AND ORDER

HAIGHT, District Judge:

A grand jury indicted defendant Marcus Schloss & Co., Inc. ("MS & Co.") on one count of conspiracy and seven substantive counts of insider trading. After a five-week jury trial, MS & Co. was convicted on two of the eight counts. Specifically, MS & Co. was convicted of the conspiracy charged in Count One, and one count of securities fraud relating to trading in American Brands, Inc. ("American Brands"), which was contained in Count Five of the indictment. MS & Co. was acquitted on the remaining six substantive counts.

MS & Co. now renews that part of its pre-trial motion seeking dismissal of Count Five on the grounds that punishment of MS & Co. on that count would violate the Double Jeopardy Clause of the Fifth Amendment to the United States Constitution.¹ MS & Co. relies on a recently decided Supreme Court case, United States v. Halper, ___ U.S. ___, 109 S.Ct. 1892, 104 L.Ed.2d 487 (1989), in support of its argument that the company's settlement with the Securities and Exchange Commission ("SEC") of a civil action arising out of the same trades that form the basis for the criminal prosecution bars the subsequent criminal proceeding.

Background

On February 3, 1989, the SEC filed a civil complaint against MS & Co. The relevant portions of the complaint alleged that on March 10, 1986 trading by MS & Co. in the common stock of American Brands violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. The complaint alleged that MS & Co. realized profits in the amount of $9,825 arising out of its illegal trades in the stock of American Brands. As a result of all the trades listed in the complaint, of which American Brands was one, the SEC sought total disgorgement of alleged illegal profits amounting to $136,000, as well as a double civil penalty of $273,800 under the Insider Trading Sanctions Act of 1984 ("ITSA"), 15 U.S.C. § 78u(d)(2)(A).

On the same date that the civil complaint was filed, MS & Co. consented to the entry of a final judgment against it. While admitting no wrongdoing, the firm paid both the $136,000 in profits² and the double penalty of $273,800 pursuant to the consent judgment. Of those payments, only $9,825 of the profits and $19,650 of the penalty related to trading in American Brands. Settlement of the civil action also included the entry of an order of permanent injunction restraining MS & Co. from engaging in future insider trading.³

The permanent injunction was accompanied by a Consent and Undertaking executed by MS & Co. which provides in § V:

Defendant Marcus Schloss acknowledges that it has been informed that plaintiff Commission, at its sole or exclusive discretion, may refer this matter, or any information or evidence gathered in connection therewith or derived therefrom, to any person or entity having appropriate civil, administrative or criminal jurisdiction.

That provision is consistent with an SEC regulation, 7 C.F.R. § 202.5(f), providing that:

any person involved in an enforcement matter before the Commission who consents, or agrees to consent, to any judgment or order does so solely for the purpose of resolving the claims against him in that investigative, civil, or administrative matter and not for the purpose of resolving any criminal charges that have been, or might be, brought against him. This policy reflects the fact that neither the Commission nor its staff has the authority or responsibility for instituting, conducting, settling, or otherwise disposing of criminal proceedings. That authority and responsibility are vested in the Attorney General and representatives of the Department of Justice.

Lastly, it is common ground that at the time MS & Co. consented to the SEC order, it knew a grand jury investigation into certain of its related trading activities had been in progress for almost two years.

That investigation resulted in the indictment at bar. As to the jury's guilty verdict on Count Five, MS & Co. now sets up the civil consent order, thus negotiated, as the basis for a claim of double jeopardy protection.

Discussion

The Supreme Court in Halper considered the issue of "under what circumstances a civil penalty may constitute `punishment' for the purposes of double jeopardy analysis." 109 S.Ct. at 1895 (footnote omitted).

In Halper, the defendant had been criminally prosecuted and convicted on 65 counts of submitting false claims to the government in violation of the False Claims Act, 18 U.S.C. § 287 ("FCA").⁴ Halper was sentenced to two years imprisonment and a $5,000 fine. Subsequent to the criminal prosecution, the government brought a civil action in district court under the FCA seeking the authorized $2,000 penalty on each of the 65 false claims filed by Halper. In other words, the government sought to recover a total of $130,000. The total loss to the government in terms of wrongly paid claims was $585.

The government moved for summary judgment based on the collateral estoppel effect of Halper's criminal conviction. The district court granted the government's motion, but denied its request for $130,000, on the grounds that requiring payment of that sum would give rise to criminal punishment in violation of the double jeopardy clause. The district court found the $2,000 fine to be discretionary and awarded the government $16,000 in order to "reasonably compensate it for actual damages as well as expenses incurred in investigating and prosecuting the action." 660 F.Supp. 531, 534 (S.D.N.Y.1987).

The government then moved to amend the judgment pursuant to Fed.R.Civ.P. 59(e) on the grounds that the district court erred in its finding that the $2,000 penalty was discretionary. The district court granted the government's motion, but refused to modify its award of $16,000. Rather, the district court reaffirmed its holding that a greater award would be violative of the double jeopardy clause.

The government took a direct appeal to the Supreme Court which affirmed the ruling of the district court on the double jeopardy point, but remanded the case in order to allow the government the opportunity to challenge the district court's assessment of its injuries. In affirming the district court's ruling on double jeopardy, the Supreme Court set forth a "rule for the rare case ... where a fixed penalty provision subjects a prolific but small-gauge offender to a sanction overwhelmingly disproportionate to the damages he has caused." Halper, 109 S.Ct. at 1902.

On the strength of the Court's opinion, MS & Co. argues that the double penalty paid by it in the context of the civil settlement⁵ precludes the government's later criminal prosecution of the company on that charge relating to trading in American Brands.⁶ Specifically, MS & Co. contends that the penalty paid by it in consequence of its trading in American Brands amounts to punishment as the Court interpreted that term in Halper.

The determination whether a given civil sanction constitutes punishment in the relevant sense requires a particularized assessment of the penalty imposed and the purposes that the penalty may fairly be said to serve. Simply put, a civil as well as a criminal sanction constitutes punishment when the sanction as applied in the individual case serves the goals of punishment. These goals are familiar. We have recognized in other contexts that punishment serves the twin aims of retribution and deterrence. See, e.g., Kennedy v. Mendoza-Martinez, 372 U.S. 144, 168, 83 S.Ct. 554, 567, 9 L.Ed.2d 644 (1963) (these are the "traditional aims of punishment"). Furthermore, "retribution and deterrence are not legitimate nonpunitive governmental objectives." Bell v. Wolfish, 441 U.S. 520, 539, n. 20, 99 S.Ct. 1861, 1874, n. 20, 60 L.Ed.2d 447 (1979). From these premises, it follows that a civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can be explained only as also serving either retributive or deterrent purposes, is punishment, as we have come to understand the term. Cf. Mendoza-Martinez, 372 U.S., at 169, 83 S.Ct., at 568 ...

* * * * * *

We therefore hold that under the Double Jeopardy Clause a defendant who already has been punished in a criminal prosecution may not be subjected to an additional civil sanction to the extent that the second sanction may not fairly be characterized as remedial, but only as a deterrent or retribution.

109 S.Ct. at 1901-02.

The first inquiry in the case at bar concerns the question of timing. The Government contends that Halper is inapposite because in that case the criminal conviction preceded the civil sanctions, whereas at bar the order is reversed.

That circumstance takes the case out of the precise holding in Halper that "under the Double Jeopardy Clause a defendant who already has been punished in a criminal prosecution may not be subjected to an additional civil sanction" if the civil sanction is punitive. 109 S.Ct. at 1902. But I do not regard timing as crucial. If in fact a civil sanction may fairly be characterized "only as a deterrent or retribution", id., then its exaction before imposition of criminal punishment should have the same double jeopardy effect as exaction afterwards. Cf. Jeffers v. United States, 432 U.S. 137, 151, 97 S.Ct. 2207, 2216, 53 L.Ed.2d 168 (1977) ("trial on a greater offense after conviction on a lesser ordinarily is just as objectionable under the Double Jeopardy Clause as the...