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SEC v. BILZERIAN

January 28, 1993

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
PAUL A. BILZERIAN, et al., Defendants.



The opinion of the court was delivered by: STANLEY S. HARRIS

 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.

 Background

 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. *fn1" Defendant was fined $ 1,500,000, sentenced to a four-year prison term, placed on two years' probation, and ordered to perform 250 hours of community service.

 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, No. 91-10466-8 P7, 146 Bankr. 871, 1992 Bankr. LEXIS 1659, at *7 (Bankr. M.D. Fla. Oct. 22, 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) ("April 8th Order"). This Court further found that defendant had violated Exchange Act §§ 10(b), 13(d), 14(d), 14(e), 17(a)(1), 7(c) and 7(f), 15 U.S.C. §§ 78j(b), 78m(d), 78n(d), 78n(e), 78q(a)(1), 78g(c) and 78g(f) and Rules 10b-5, 13d-1, 13d-2, 14d-3, 14d-6, 17a-3, Regulation X and Regulation T, 17 C.F.R. §§ 240.10-5, 240.13d-1, 240.13d-2, 240.14d-6, 240.17a-3, 220.1 et seq., and 224.1 et seq., and permanently enjoined defendant from any such future violations.

 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. *fn2" In separate transactions also on May 28, 1985, defendant purchased an additional 98,000 shares of Cluett through Jefferies at a price of $ 30.06 per share and 50,000 shares through Morgan Stanley at a price of $ 30.33 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. *fn3" The filing, however, only disclosed the source of $ 8,800,000 (extended on margin by Morgan Stanley) of the total purchase funds. *fn4" It did not report the source of the additional $ 9,021,016.

 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. *fn5" Defendant was outbid. On November 4, 1985, he sold his position to a third party, West Point Pepperell, for $ 40 per share, realizing profits in excess of $ 7,000,000. In December of 1985, defendant repaid investors the full amounts of their loans plus a sum total of one-half the profits earned on the Cluett trades.

 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. *fn6" The investors ...


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