Securities and Exchange Commission v. Paul A. Bilzerian
Docket: 91-5187, 93-5050
Court: Court of Appeals for the D.C. Circuit; July 22, 1994; Federal Appellate Court
Paul A. Bilzerian appeals two orders from the District Court favoring the Securities and Exchange Commission (SEC). The first order grants the SEC partial summary judgment on claims that Bilzerian violated securities laws and permanently enjoins him from further violations. The second order requires him to disgorge $33,140,787, the profits from his violations. Both orders are affirmed by the Court of Appeals.
Prior to this civil action, Bilzerian was convicted of multiple federal securities law violations, leading to a four-year prison sentence, a $1.5 million fine, and 250 hours of community service, with his convictions affirmed by the Second Circuit.
The SEC's civil action is based on the same conduct that resulted in his criminal convictions. Between 1985 and 1986, Bilzerian acquired significant stock in Cluett, Peabody and Company and Hammermill Paper Company through a stock accumulation agreement with Jefferies, a registered broker-dealer. Although Bilzerian was the beneficial owner of the stocks, Jefferies remained the record owner until Bilzerian purchased them, allowing him to obscure the extent of his ownership and delay the required SEC filing of Schedule 13D.
When Bilzerian eventually disclosed his stock accumulations, he misrepresented the source of the funds used for the purchases, claiming they were personal funds while actually obtaining them from investors he had guaranteed against losses. He repeated these misrepresentations in subsequent filings. Bilzerian's misrepresentations aimed to mislead shareholders into believing he was financially capable of executing hostile takeovers of Cluett and Hammermill, potentially inducing a "white knight" to intervene by purchasing stock at a premium.
Bilzerian successfully profited by selling Cluett and Hammermill stocks, while his convictions involved "parking" agreements with Jefferies regarding H.H. Robertson and Armco Steel stocks. Under these agreements, Jefferies purchased stocks from Bilzerian with the expectation that he would repurchase them later, effectively concealing his ownership. To disguise these transactions, Bilzerian and Jefferies exchanged false invoices. The district court issued two orders now under appeal: one granting partial summary judgment to the SEC based on the collateral estoppel effect of Bilzerian's prior criminal convictions, which found him in violation of various securities laws; and a second order for disgorgement of his illicit profits. Bilzerian contests the application of collateral estoppel, claiming it was improperly applied as his criminal convictions did not conclusively establish the facts for the SEC's civil charges. He also argues that genuine issues of material fact existed, the injunction violates the double jeopardy clause, and the disgorgement amount was incorrectly calculated. The court found that Bilzerian was collaterally estopped from disputing facts established in his criminal case, including the materiality of his misrepresentations, which had been affirmed by the Second Circuit. Bilzerian's challenge regarding materiality failed as the jury had already determined it in the earlier case.
Bilzerian contends that his criminal convictions do not substantiate the SEC's civil claims regarding violations of margin requirements, aiding and abetting margin violations, and falsifying records. However, the review confirms that his convictions established all necessary facts for the SEC's claims, leading to the affirmation of the district court's partial summary judgment. The court's de novo review of the SEC's request for permanent injunctive relief finds that an injunction is warranted if there is a reasonable likelihood of future violations. Factors considered include whether the violations were isolated or part of a pattern, their nature (flagrant or technical), and the defendant’s opportunities to violate the law again. Bilzerian's violations were determined to be part of a pattern and flagrant, justifying the need for injunctive relief. Bilzerian argues that a genuine issue exists regarding his opportunities to violate securities laws; however, the court disagrees, indicating that past violations could occur regardless of his occupation. His securities violations stemmed from actions as an investor, allowing for potential future violations. Bilzerian's assurances against future violations, based on his affidavit expressing intent to comply with the law, are deemed insufficient to negate the need for a permanent injunction. The court rejects the notion that self-serving statements could preclude summary judgment, affirming that the factors favoring injunctive relief support the decision.
Bilzerian contends that the district court should have held a hearing before issuing a permanent injunction against him. However, courts have permitted permanent injunctions based solely on a defendant's prior criminal convictions, as illustrated in SEC v. Gruenberg and SEC v. Everest Management Corp. The district court's grant of injunctive relief is thus affirmed.
Bilzerian also claims that the disgorgement order violates the Fifth Amendment's double jeopardy clause by punishing him for conduct already addressed in his criminal convictions. Double jeopardy prohibits multiple punishments for the same offense, but the key issue is whether the disgorgement constitutes renewed punishment. Bilzerian relies on United States v. Halper, arguing that disgorgement, which serves deterrent purposes, is punitive. However, the court finds his reliance on Halper misplaced, noting that the case addressed only rare instances of disproportionate penalties which do not apply here, as the disgorgement order corresponds to his illicit gains.
The court clarifies that disgorgement is remedial, not punitive, and does not violate double jeopardy. It also rejects Bilzerian's claim that disgorgement is punishment unless it aims to compensate the government, emphasizing that the order merely requires him to relinquish his ill-gotten gains without imposing an additional penalty. The court reinforces that disgorgement restores the financial status quo prior to his illegal activities, aligning with precedents such as United States v. Tilley.
Lastly, Bilzerian challenges the appropriateness of the disgorgement order, arguing that he did not profit from his violations. This assertion reflects a misunderstanding of the rationale behind the disgorgement, which was not based on profits from misrepresentations affecting stock prices but rather on the need to address his illicit gains.
The district court determined that Bilzerian's misrepresentations inflated the sale price of his securities, concluding that if he had disclosed the truth about his stock purchases and funding sources, the market would have reduced the perceived likelihood of his hostile takeovers, resulting in lower stock prices. As a consequence, the court ordered Bilzerian to disgorge the difference between the inflated sale price and the true market value, acknowledging that his argument regarding the lack of stock purchases after the misrepresentations was irrelevant.
Bilzerian contested the disgorgement amount of $33,140,787.00, but the court found no clear error in its calculation, which effectively traced profits to his securities violations. The court carefully adjusted the calculations to exclude profits from shares purchased after the violations and ensured that any appreciation prior to the violations was not included in the disgorged amount. Bilzerian bore the burden to prove that any price increases during his ownership were due to market forces rather than his violations, but he failed to do so, affirming the court's calculations.
Bilzerian also argued that disgorgement was improper due to a lack of injury to others, but this was deemed irrelevant. The primary goal of disgorgement is to remove ill-gotten gains, not to compensate victims. The court noted that investors were indeed harmed, paying inflated prices due to Bilzerian's actions. Consequently, the district court's decisions were upheld. Additionally, it was noted that the court later reduced Bilzerian's prison sentence to twenty months.
Section 13(d)(1) of the Securities Exchange Act mandates that any stock purchaser acquiring more than five percent beneficial ownership of a company's equity must disclose this within ten days using Schedule 13D. Bilzerian failed to file his Schedule 13D for Cluett by the May 31, 1985 deadline, submitting it on June 4, 1985, and for Hammermill, he missed the July 7, 1986 deadline, filing it on July 25, 1986. Section 14(d)(1) requires individuals making tender offers to file a statement with the SEC, which includes disclosures similar to those in section 13(d). Bilzerian filed a Schedule 14D-1 for Cluett on October 15, 1985, and for Hammermill on July 25, 1986, but failed to disclose key financing details: he omitted that he borrowed $2 million for the Cluett tender offer and misrepresented $10 million for Hammermill as personal funds. As a result of these violations, Bilzerian was convicted of violating section 10(b) and 18 U.S.C. Sec. 1001 for misrepresentations in his filings, and he also faced charges of conspiracy under 18 U.S.C. Sec. 371 for schemes involving Cluett and Hammermill shares. Further, he was convicted of conspiracy to defraud the SEC and the IRS related to other dealings. Additionally, Section 7(c) prohibits brokers from extending credit for security purchases without collateral, while Section 7(f) forbids obtaining loans for the purchase of U.S. securities without proper disclosures. Section 10(b) prohibits manipulative or deceptive practices in securities transactions, and Section 13(d) and Section 14(d) establish the disclosure requirements related to beneficial ownership and tender offers, respectively.
Section 14(e) of the Securities Exchange Act makes it unlawful to make untrue statements or omit material facts in tender offers, and Section 17(a)(1) mandates brokers and dealers to maintain records as prescribed by the Commission. Rule 10b-5 prohibits fraudulent practices in securities transactions, while Rules 13d-1 and 13d-2 regulate the filing of Schedule 13D related to stock ownership. Rules 14d-3 and 14d-6 govern tender offer statement filings, and Rule 17a-3 imposes additional record-keeping obligations on brokers. Margin requirements, outlined in 15 U.S.C. Sec. 78g, prohibit brokers from extending credit for securities purchases without collateral and restrict stock purchasers from obtaining credit from lenders.
In the case of Bilzerian, the jury found he intentionally acquired Cluett and Hammermill stock through a nominee, violating margin requirements since his accumulation agreement allowed him to gain beneficial ownership without payment. The evidence indicated he aided and abetted Jefferies' margin and record-keeping violations, although his civil liability for such actions is questionable based on the precedent set in Central Bank of Denver regarding aiding and abetting liability under the Act. To establish aiding and abetting, the SEC needed to show Bilzerian had a general awareness of his improper role and significantly assisted in the violations. Bilzerian was aware that Jefferies had not received the required down payment when transferring beneficial ownership to him and played a key role in facilitating Jefferies' margin violations through his agreements.
His argument against liability for aiding and abetting due to his own convictions was dismissed, as overlap in violations does not limit the charges against a defendant. Furthermore, his criminal convictions supported his liability for aiding and abetting Jefferies' record-keeping violations, as he was aware of the lack of proper documentation regarding his stock ownership, which was the intent behind his agreements with Jefferies.
Bilzerian's criminal convictions provided the necessary foundation for the district court to grant summary judgment regarding his violations of margin requirements related to Robertson and Armco stocks. The jury concluded that Bilzerian unlawfully conspired to acquire Armco stock and improperly managed Robertson and Armco stock with Jefferies, which resulted in him gaining beneficial ownership without a down payment. Bilzerian was aware of Jefferies' violations and actively contributed to them. Additionally, he misinterprets a portion of the Halper opinion, which states that a civil sanction can be deemed punitive if it is purely for deterrent or retributive purposes. Disgorgement is clarified in this context as not being a secondary punishment, as it serves purposes beyond mere deterrence or retribution.
