Paul A. Bilzerian appeals the district court's order applying collateral estoppel in the Securities and Exchange Commission's (SEC) action to except a debt from discharge in bankruptcy. The district court found that Bilzerian's previous criminal conviction for securities fraud, combined with a civil judgment requiring Bilzerian to disgorge fraudulently obtained profits, satisfied the requirements for application of 11 U.S.C. § 523(a)(2)(A), which excepts from discharge in bankruptcy debts for money obtained by fraud. Bilzerian also raises a constitutional challenge to the grant of exception from discharge. We affirm.
Bilzerian was convicted of federal securities fraud for his failure to properly report his stock transactions with two corporations, Cluett, Peabody & Company, Inc. (Cluett) and Hammermill Paper Company (Hammermill). The securities laws require investors who commence a tender offer of a publicly traded company to make certain disclosures to the SEC in order to inform investors about any potential takeover attempt. Bilzerian did not file the required disclosures in a timely fashion, and his disclosures were misleading because he listed as "personal funds" money he had actually borrowed. He also failed to disclose that he had entered into an accumulation agreement with a broker. As a result of Bilzerian's misleading disclosures, Cluett and Hammermill believed that Bilzerian posed a credible threat to mount a hostile takeover, and they sought the aid of friendly "white knights," who eventually outbid Bilzerian. Bilzerian then sold his shares in Cluett and Hammermill for a substantial profit.
In 1989, Bilzerian was convicted of nine counts of securities fraud for violations of § 10(b) of the Securities Exchange Act of 1934, which is the general anti-fraud provision of the securities laws.
During the litigation in the district court, Bilzerian filed for bankruptcy. After the disgorgement award was upheld, the SEC sought to except the disgorgement award from discharge in bankruptcy under § 523(a)(2)(A) on the ground that it was a debt for money obtained by fraud. The SEC argued that the doctrine of collateral estoppel compelled a decision in their favor. The bankruptcy court disagreed, holding that the SEC did not have standing to pursue a § 523(a)(2)(A) claim, and that the complaint failed to state a claim because obtaining illegal profits was not part of § 523(a)(2)(A). The district court reversed, holding that because Bilzerian owed the SEC money, it had standing to pursue exception from discharge. On remand, the bankruptcy court granted summary judgment for Bilzerian, holding that the previous judgments against Bilzerian did not meet the loss and reliance requirements of § 523(a)(2)(A).
This court reviews the bankruptcy court's order independently of the district court, reviewing conclusions of law de novo and factual findings under a clearly erroneous standard.
Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge in bankruptcy any debt "for money ... to the extent obtained by ... false pretenses, a false representation, or actual fraud."
The question in this case is whether a criminal conviction for securities fraud, combined with a civil disgorgement judgment in favor of the SEC, satisfies the requirements of collateral estoppel for determining "fraud" under § 523(a)(2)(A). Collateral estoppel requires that: (1) the issue be identical in both the prior and current action; (2) the issue was actually litigated; (3) the determination of the issue was critical and necessary to the judgment in the prior action; and (4) the burden of persuasion in the subsequent action not be significantly heavier.
Courts have generally interpreted § 523(a)(2)(A) to require the traditional elements of common law fraud. A creditor must prove that: (1) the debtor made a false representation to deceive the creditor, (2) the creditor relied on the misrepresentation, (3) the reliance was justified, and (4) the creditor sustained a loss as a result of the misrepresentation.
Common law fraud and securities fraud have traditionally had related but distinct causation requirements. Whereas common law fraud requires proof of loss and reliance, securities fraud has substituted the concept of "materiality."
While some courts have not required proof of actual reliance in SEC enforcement actions,
In appealing the disgorgement award, Bilzerian argued that disgorgement was not proper because no one was injured by his fraudulent schemes.
Bilzerian also raises constitutional objections, claiming that an order holding the disgorgement judgment nondischargeable would violate the Double Jeopardy Clause and would constitute an excessive fine in violation of the Eighth Amendment. These constitutional claims are groundless. A civil remedy following criminal conviction only constitutes "punishment" for purposes of the Double Jeopardy Clause when it is so severe or so unrelated to remedial goals that it amounts to a second criminal punishment.
The district court's ruling is AFFIRMED.