Before the Court are three motions: (1) Motion of the Securities and Exchange Commission for a Judgment Against Thomas C. Fitzgerald, Jr. Assessing Fines Previously Imposed for Failure to comply with this Court's Judgment of Permanent Injunction ("SEC motion"); (2) Motion of Defendant Eastern Empire Corporation for Order of Civil Contempt and Sanctions against Thomas C. Fitzgerald, Jr., Diversified Growth Corporation, and American Diversified Corporation ("Eastern motion"); and (3) Motion of Thomas C. Fitzgerald, Jr. for Relief from Findings, Orders, and Judgment of this Court ("Fitzgerald motion"). Upon consideration of the entire record, the Court grants the SEC's and Eastern's motions and denies Fitzgerald's motion.
In January 1981, the Securities and Exchange Commission ("SEC") commenced this action against Diversified Growth Corporation ("DGC"), American Diversified Corporation ("ADC"), and Eastern Empire Corporation ("EEC") alleging, among other things, violations of the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78m(a), and Rules 13a-1 and 13a-13 thereunder, 17 CFR §§ 240.13a-1 and 240.13a-13. The Complaint specifically alleged that DGC, ADC, and EEC had failed to file their annual reports (10-Ks) for the fiscal years 1976 through 1979 (ADC and EEC) and 1977 through 1980 (DGC), and quarterly reports (10-Qs) for the fiscal quarters ended June 30, 1977 through September 30, 1980 (DGC) and March 31, 1978 through September 30, 1980 (ADC and EEC).
On June 8, 1983, after hearing and argument, this court entered a Permanent Injunction ("Injunction") against DGC, ADC, and EEC. The Injunction ordered, inter alia, DGC and ADC to file their delinquent 10-K and 10-Q reports on or before June 10, 1983,
to file in timely fashion all required reports in the future, and to provide EEC with all information and documents necessary to enable EEC to prepare its annual and quarterly reports.
Neither DGC nor ADC complied with the Court's Injunction. On June 18, 1983, after negotiations with the SEC's staff, DGC, ADC, and Fitzgerald consented to findings of civil contempt and entry of an order requiring the reports to be filed on or before July 15, 1983. In addition, Thomas C. Fitzgerald, Jr., the Chief Executive Officer and Chairman of the boards of DGC and ADC, consented to entry of an order imposing coercive fines of $1,000 per day on him personally should DGC and ADC fail to file the delinquent reports by the July 15 deadline. This order was entered on June 20, 1983 ("June 20 Order").
On July 15, 1983, DGC filed documents which purported to be 10-Ks for the fiscal years ended March 31, 1977 through 1983, and ADC filed documents which purported to be 10-Ks for the fiscal years ended December 31, 1976 through 1982, 10-Qs for the quarters ended March 31, June 30, and September 30, 1976 through 1982, and 10-Qs for the quarters ended March 31, and June 30, 1982.
DGC did not file any 10-Qs until July 18, 1983.
On July 18, 1983, counsel for the SEC telephoned counsel for DGC, ADC, and Fitzgerald to advise them that the documents submitted were deficient. On July 19, 1983, counsel for the SEC wrote a follow-up letter advising the defendants that although a thorough review had not yet been completed, a preliminary examination showed that the 10-Ks were deficient for their failure to include audited financial statements, and that further deficiencies might surface. The letter also advised the defendants that it was the position of the SEC that neither the June 20 Order nor the Injunction had been complied with and that the $1,000 per day fines were running. The SEC received no response.
On September 9, 1983, EEC filed its own motion to hold DGC, ADC, and Fitzgerald in contempt and to impose sanctions for their failure to provide EEC the corporate records specified in the Injunction.
On September 19, 1983, the SEC, taking the position that the July 15 filings did not comply with the Court's orders, moved to enforce the June 20 Order. The motion sought, inter alia, an order reducing the fines to judgment and an order permitting the SEC to execute against Mr. Fitzgerald's assets and/or property.
On November 1, 1983, the parties appeared before the Court to announce a tentative settlement. The parties, with Mr. Fitzgerald present, represented to the Court that a settlement had been reached, and that the only unresolved matter was agreement on the name (but not the concept) of a special agent to examine the defendants' books and prepare the delinquent reports. It is the unrebutted
assertion of the SEC that on November 16, 1983, defendants advised the SEC that one of the suggested candidates was acceptable. However, on November 17, 1983, Mr. Fitzgerald refused to sign the settlement. See Plaintiff's Motion for Oral Argument at 3, and transcript of the December 5, 1983 hearing ("Transcript") at 55-56.
Oral argument on the SEC's and Eastern's motions was set down for December 5, 1983. Approximately eight minutes before the hearing, counsel for Fitzgerald filed an affidavit in opposition to Eastern's September 9 motion for contempt. This was the first time Fitzgerald had responded to Eastern's motion. In addition, Fitzgerald submitted a motion for relief from findings, orders, and judgment of the Court, arguing lack of personal jurisdiction,
and amendments to the July 15 filings. The Court heard oral argument on all three motions and took under advisement the SEC's and Fitzgerald's motions. With regard to Eastern's motion, the court ruled from the bench that since the motion had not been responded to in timely fashion, the motion would be deemed conceded pursuant to the Local Rules. Transcript at 57.
A. Eastern's Motion
Local Rule 1-9(d) provides that if an opposing statement to a motion is not filed within the prescribed time -- thirteen days if the motion was mailed -- the court may treat the motion as conceded. In this case, the opposition was filed nearly three months late.
No excuse for this delay has been offered. Accordingly, the Court holds by its earlier ruling and deems the motion conceded.
In his opposition to Eastern's motion, Fitzgerald asserts that all of EEC's documents have been turned over to EEC and therefore that there has been compliance with the Injunction. The Court is unpersuaded. Counsel for EEC has pointed out to the Court that Fitzgerald has made this same assertion several times in the past in response to document requests and subsequently found the requested documents to exist. More significantly, counsel for EEC has argued that certain financial statements contained in a settlement disclosure in a prior action involving the defendants could not have been made without EEC documents which EEC has not received. Transcript at 52-54. This argument has not been rebutted by defendants.
For the foregoing reasons, Eastern's motion is granted. DGC, ADC, and Fitzgerald are hereby found in contempt for failing to furnish records to EEC as required by this Court's Injunction. Compensatory and coercive sanctions have been imposed according to terms set forth in the Order accompanying this Memorandum.
B. Fitzgerald's Motion
Fitzgerald has made a motion for relief from this Court's June 20 Order, November 2, 1983 Order,
and Judgment of Permanent Injunction. The motion is accompanied by a document entitled "Withdrawal of Admission to the Jurisdiction of this Court and Withdrawal of Consent to Findings and Order of June 20, 1983". The basis for the motion is that the Court lacks personal jurisdiction over Mr. Fitzgerald. Fitzgerald argues that he is not a party to the lawsuit and was not served with a copy of the complaint, summons, or injunction.
Simply put, Fitzgerald's motion is frivolous and factually incorrect. The SEC has provided the Court with copies of the U.S. Marshals Process Receipt and Return which show that Mr. Fitzgerald was personally served with a copy of the summons and complaint on January 27, 1981. Fitzgerald's own consent, dated June 18, 1983, acknowledges receipt of the Injunction.
Fitzgerald's argument that the Court lacks personal jurisdiction over him, and his attempt to withdraw his consent to the jurisdiction of this Court and to the entry of prior orders are both unavailing. Fed. R. Civ. P. 65(d) provides that "every order granting an injunction . . . is binding only upon the parties to the action, their officers, agents, servants, employees, and attorneys, and upon those persons in active concert or participation with them who receive actual notice of the order by personal service or otherwise " (emphasis added). See also Wilson v. United States, 221 U.S. 361, 376, 55 L. Ed. 771, 31 S. Ct. 538 (1911); SEC v. VTR, Inc., 410 F. Supp. 1309, 1314 (D.D.C. 1975); U.S. v. Greyhound Corp., 363 F. Supp. 525, 571 (N.D. Ill.), aff'd, 508 F.2d 529 (7th Cir. 1974). Fitzgerald was an officer of the defendant corporations -- Chief Executive Officer and Chairman of the board -- and received notice of the Injunction.
Moreover, Fitzgerald expressly consented to the personal jurisdiction of the Court over him. The "Consent of Thomas C. Fitzgerald, Jr. to Findings of Civil contempt and Order Imposing Fines" (signed by Fitzgerald) states at paragraph 3: "Fitzgerald admits to the jurisdiction of this Court over him and over the subject matter of this action." The language of this consent is unequivocal.
Fitzgerald is himself a lawyer. He has been at all times pertinent to this motion represented by counsel.
He voluntarily, knowingly, and expressly consented to the jurisdiction of this Court over him, to the finding of contempt, and to the imposition of fines. Transcript at 57. Mr. Fitzgerald's motion is merely the latest in a long line of frivolous attempts to delay and avoid the inevitable: contempt, sanctions, and inquiry into the affairs of the corporations he managed. The motion is denied.
C. SEC's Motion
The SEC has filed a Motion for a Judgment Against Thomas C. Fitzgerald, Jr. Assessing Fines Previously Imposed for Failure to Comply with this Court's Judgment of Permanent Injunction. The SEC alleges that although DGC and ADC did submit some filings purporting to be 10-Ks and 10-Qs on July 15, 1983, the filings were so materially deficient that they did not comply with the SEC's Rules and Regulations or the Court's June 20 Order. The SEC requests, inter alia, that the coercive fines specified in the June 20 Order be assessed against Mr. Fitzgerald and that a money judgment in the amount of the fines be entered for execution against Fitzgerald's property and/or assets. In addition, the SEC has requested that a special agent be appointed to prepare and complete accurate filings for DGC and ADC.
Mr. Fitzgerald expressly consented to the June 20 Order finding him and the parties in civil contempt and imposing fines on him personally should DGC and ADC fail to make the requisite filings by July 15, 1983. Consequently, there is no issue as to whether Fitzgerald is in contempt. The only issues are: (1) whether the July 15 filings complied with the June 20 Order and (2) if not, whether the December 5, 1983 amendments rectified the problem. After careful review of the SEC's pleadings, their lengthy and well-documented declarations of the specific deficiencies, the opposing papers, the Court's own review of the filings, and the entire record herein, the Court concludes that neither the July 15 nor the December 5 filings complied with the June 20 Order.
(i) The July 15 Filings
The SEC does not allege a few, superficial deficiencies. Rather, it cites a host of omissions, mistakes, and inconsistencies which are so fundamental that the filings are rendered virtually useless as reporting and disclosure documents.
Foremost in the deficiencies cited is the lack of adequate financial statements. First, DGC's and ADC's 10-Ks fail to contain audited financial statements as required by Regulation S-X, 17 CFR § 210.1-01 et seq. Indeed the 10-Ks contain no financial statements as such. Certain financial statements are included in the 10-Qs. However, there is no cross-reference in the 10-Ks to direct the reader to the 10-Qs and, more critically, the financials in the 10-Qs are not audited as is required for 10-Ks. 17 CFR § 210.3-01 et seq.
The failure to provide audited financial statements is not a mere technical matter. As the court stated in SEC v. Beisinger Industries Corp., 421 F. Supp. 691, 694-95 (D. Mass. 1976), aff'd, 552 F.2d 15 (1st Cir. 1977) (citations omitted):
it is also clear that the registrant's annual reports were inadequate to meet the periodic reporting requirements because of their failure to provide fully audited financial statements. These were not mere technical deficiencies but rather were serious violations of the periodic reporting requirements. The failures to provide timely reports and adequate financial information are offensive to the central purpose of the periodic reporting system Congress established through the Exchange Act. For the system to work properly the information reported must be both current and adequate.