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.
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.
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)
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.
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.
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.
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.
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").
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.
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
The SEC claims that one-half of the profits realized was attributable to defendant's illegal activity and thus requests disgorgement in the amount of $28,775,941.50.
Having held in the April 8th Order that defendant violated federal securities laws and having enjoined defendant from committing any such future securities violations, the Court considers whether disgorgement is an appropriate remedy and, if so, the proper amount of such disgorgement.
Defendant contends that this action is improper because ordering disgorgement would be punitive rather than remedial and thus would constitute a second punishment in violation of the Double Jeopardy Clause of the Fifth Amendment.
The Appropriate Remedy
Ordering disgorgement for violations of the Exchange Act is appropriate and is within the authority of this Court. First City Fin., 890 F.2d at 1230. "Disgorgement is an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." Id. This is accomplished by compelling defendants to "give up the amount by which [they] were unjustly enriched." SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir.1987), cert. denied, 486 U.S. 1014, 1015, 108 S.Ct. 1751, 100 L.Ed.2d 213 (1988). This serves to "prevent defendants from profiting from their illegal conduct." SEC v. General Refractories Co., 400 F.Supp. 1248, 1260 (D.D.C. 1975). Furthermore, if securities laws violators were not required to disgorge illicit profits the "deterrent effect of an SEC enforcement action would be greatly undermined." Manor Nursing Centers, 458 F.2d at 1104.
Pursuant to his dealings in Cluett and Hammermill securities, defendant violated §§ 10(b) and 13(d) of the Exchange Act. Defendant violated Exchange Act § 10(b) by engaging in fraudulent activity with respect to the purchases and sales of Cluett and Hammermill securities. Defendant violated Exchange Act § 13(d) by failing to file timely disclosures upon accumulation of more than 5 percent of Cluett's and Hammermill's common stock and by making false statements regarding the source of the funds used to purchase such securities. More specifically, in Schedule 13D filings defendant reported funds as being personal when substantial portions were borrowed, defendant failed to report the terms and conditions of these loans, and defendant failed to disclose the nature and existence of the parking arrangements. Defendant must disgorge the profits he obtained as a result of these violations. The sole remaining issue is what portion of these profits is subject to disgorgement.
Amount of Disgorgement
"[T]he court may exercise its equitable power only over property causally related to the wrongdoing." First City Fin., 890 F.2d at 1231. As such, "the loss complained of must proceed directly and proximately from the violation claimed and not be attributable to some supervening cause." Wellman v. Dickinson, 682 F.2d 355, 368 (2d Cir.1982) (emphasis in original) (quoting Marbury Management, Inc. v. Kohn, 629 F.2d 705, 719 (2d Cir.), cert. denied, Wood Walker & Co. v. Marbury Management, Inc., 449 U.S. 1011, 101 S.Ct. 566, 66 L.Ed.2d 469 (1980)), cert. denied, 460 U.S. 1069, 103 S.Ct. 1522, 75 L.Ed.2d 946 (1983); see also Blatt, 583 F.2d at 1335 (stating that disgorgement extends to amount by which defendant profited from his wrongdoing). Therefore, a distinction must be drawn between benefits from lawful conduct and benefits from unlawful conduct. First City Fin., 890 F.2d at 1231; see also Commodities Futures Trading Comm'n v. British American Commodity Options Corp., 788 F.2d 92, 93 (2d Cir.), cert. denied, 479 U.S. 853, 107 S.Ct. 186, 93 L.Ed.2d 120 (1986); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.), cert. denied, 404 U.S. 1005, 92 S.Ct. 562, 30 L.Ed.2d 558 (1971) and reh'g denied, 404 U.S. 1064, 92 S.Ct. 733, 30 L.Ed.2d 753 (1972); SEC v. Wills, 472 F.Supp. 1250, 1276 (D.D.C.1978).
In many cases, separating legal from illegal profit is difficult. First City Fin., 890 F.2d at 1232. This is due to the inherent difficulty in predicting stock price responses to alternative variables. Id. at 1231. That is, separating price appreciation due to illicit activities from price appreciation which would have otherwise occurred is nearly impossible. "Accordingly, disgorgement need only be a reasonable approximation of profits causally connected to the violation." Id. As such, it is proper to assume that all profits gained while defendants were in violation of the law constituted ill-gotten gains. SEC v. MacDonald, 699 F.2d 47, 54 (1st Cir.1983); SEC v. First City Fin. Corp., 688 F.Supp. 705, 727 (D.D.C.1988), aff'd, 890 F.2d 1215 (D.C.Cir.1989). The courts have rejected attempts to limit disgorgement to the precise impact of the illegal activity on market price. First City Fin., 890 F.2d at 1232. The SEC need only offer a prima facie reasonable approximation; the burden then shifts to defendant to rebut the presumption. Id.; MacDonald, 699 F.2d at 55 (stating that doubts
The SEC contends that defendant's wrongdoing constituted a pervasively fraudulent scheme and that all profits reaped were causally related to his wrongdoing. The SEC argues that defendant's violations permitted him to acquire significant positions in Cluett and Hammermill and to deprive the investing public of critical information necessary to evaluate his desire and ability to acquire Cluett and Hammermill. Furthermore, the SEC alleges that defendant's violations allowed him to represent himself as a takeover threat with sufficient wealth and credibility. This permitted defendant, the government states, to "put the compan[ies] in play," drive up the market price, and then to tender his shares to "white knights" at substantial profit.
Therefore, the SEC requests disgorgement of profits from all trades in Cluett and Hammermill. Plaintiff calculates profits by deducting the purchase cost of the shares from the sales proceeds of the shares. The total profits arrived at are $6,540,770 for Cluett and $57,551,883 for Hammermill. The SEC attributes all the profit realized in Cluett and one-half of the profit realized in Hammermill to defendant.
In response to the SEC's contentions defendant makes several relevant points.
With regard to Hammermill, defendant argues that his interest in B & M was only 13.3 percent rather than the 50 percent claimed by the SEC. Defendant contends that his interest in B & M is properly measured by his personal contributions. He states that his interest in B & M should thus only include the $10,000,000 which he directly contributed and not the $27,500,000 contributed by Bilzerian Investors.
The SEC's argument, however, overlooks the fact that a portion of the profit was attributable to legal activity. In both the Cluett and Hammermill transactions, the illegal conduct resulted from untimely filings of the Schedule 13D and misinformation contained in the Schedule 13D. Therefore, the first instances of wrongdoing occurred when defendant failed to meet the Schedule 13D filing deadlines. In Cluett, 581,000 shares of the 791,000 total were purchased on or before May 28, 1985, prior to the Schedule 13D filing deadline of May 31, 1985. In Hammermill, 1,153,100 shares of the 3,277,200 total were purchased prior to the July 7, 1986, Schedule 13D deadline. Thus all of defendant's profits were not attributable to illicit activity.
The amount of profit causally related to the wrongdoing is the stock appreciation resulting from defendant's untimely and inaccurate Schedule 13D filing. Thus, ideally, the appropriate amount of disgorgement should be the difference between the sale price of the securities and what their market price would have been but for defendant's untimely and inaccurate filing. See SEC v. Unioil, 951 F.2d 1304, 1306 (D.C.Cir.1991) (Edwards, J., concurring). The amounts causally related to stock appreciation not resulting from the illegal filing are properly characterized as licit and not subject to disgorgement. See First City Fin., 890 F.2d at 1231. As it is nearly impossible and speculative to determine the market price but for the illicit conduct, Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 172 (2d Cir.1980), a reasonable approximation of this amount must suffice. First City Fin., 890 F.2d at 1231.
A reasonable approximation of defendant's illicit profit is the amount he gained while in violation of the law. First City Fin., 890 F.2d at 1232; MacDonald, 699 F.2d at 54. The Schedule 13D deadlines marked the inception of defendant's wrongdoing. As such, profits from stock appreciation prior to the deadlines are properly treated as legal. Profits from stock appreciation subsequent to the deadline serve as a reasonable approximation of illegal profit. Therefore, the appropriate amount of disgorgement here is the difference between the sale price of the securities and the market price on the day the Schedule 13D was required to be filed.
In Cluett, 791,000 shares of stock were sold for $40 per share. On May 31, 1985, the Schedule 13D filing deadline, defendant possessed 581,000 shares of Cluett. The closing market price of Cluett on that day was $33.125 per share.
In Hammermill, 2,811,056 shares of stock were sold for $64.50 per share and 470,194 shares of stock were sold for $64.31 per share. On July 7, 1986, the filing deadline date, defendant held 1,153,100 shares of Hammermill. The stock closed at $41.75 per share on that day.
Accordingly, for the reasons stated above, the Court finds that defendant profited from violations of the Exchange Act through transactions in the securities of Cluett and Hammermill and is therefore required to disgorge $33,140,787.07 plus interest. Pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Court also expressly finds that, based on the entire record in this case, there is no just reason for delaying entry of final judgment of disgorgement as to defendant Bilzerian. See Fed.R.Civ.P. 54(b). Therefore, the Court directs that this judgment of disgorgement be entered as a final separate judgment. See id. An appropriate Order accompanies this Opinion.
For the reasons stated in the accompanying Opinion, it hereby is
ORDERED, that plaintiff's motion for judgment of disgorgement is granted. It hereby further is
ORDERED, that defendant Bilzerian is required to disgorge $33,140,787.07 plus interest. It hereby further is
ORDERED, that, as the Court finds that there is no just reason for delay, this judgment of disgorgement shall be entered as a final separate judgment pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. It hereby further is
ORDERED, that, within 21 days of the date of this Order, plaintiff shall notify the Court as to how it intends to proceed as to the remaining defendants.