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, 486 U.S. 1015, 100 L. Ed. 2d 213, 108 S. Ct. 1751 (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
"The 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, 66 L. Ed. 2d 469, 101 S. Ct. 566 (1980)), cert. denied, 460 U.S. 1069, 75 L. Ed. 2d 946, 103 S. Ct. 1522 (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, 93 L. Ed. 2d 120, 107 S. Ct. 186 (1986); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971) and reh'g denied, 404 U.S. 1064, 30 L. Ed. 2d 753, 92 S. Ct. 733 (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, 281 U.S. App. D.C. 410, 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 concerning disgorgement are to be resolved against the defrauding party).
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 companies 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.
This results in a total disgorgement request of $ 35,316,711.50.
In response to the SEC's contentions defendant makes several relevant points.
With respect to Cluett, defendant contends be is required to disgorge no profit as he purchased no shares of Cluett between May 31, 1985, the Schedule 13D filing deadline, and July 4, 1985, the date on which the filing was made. He concludes, therefore, that his late filing was harmless and caused him to realize no more profit than would otherwise have been realized. This contention fails since defendant is held not only to have made an untimely filing but also, and more importantly, to have made numerous misrepresentations in the filing when made.
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.
Defendant, however, fails to disclose or discuss his direct contributions to Bilzerian Investors. He states only that "there is no way to tell from the [Schedule 13D) what my interest was in (Bilzerian Investors]. As it turns out there were several other partners including Bilzerian Ventures, L.P. which also had other partners." (Mem. Opp'n Mot. Pl. J. Disgorgement at 23.) Defendant bears the burden of rebutting the SEC's claim. See First City Fin., 890 F.2d at 1232; MacDonald, 699 F.2d at 55. No such attempt has been made; thus the SEC's figure must prevail.
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 130 and misinformation contained in the Schedule 130. Therefore, the first instances of wrongdoing occurred when defendant failed to meet the Schedule 130 filing deadlines. In Cluett, 581,000 shares of the 791,000 total were purchased on or before May 28, 1985, prior to the Schedule 130 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 130 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, 293 U.S. App. D.C. 37, 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 rehired 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.
The illicit profit on these shares was $ 3,994,375. Subsequently, on additional 210,000 shares were purchased at a total cost of $ 36.0631 per share. The illicit profit on these shares was $ 826,749. Thus the Court requires defendant to disgorge $ 4,821,124, the total profits gained from Cluett stock while in violation of the law.
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.
The profit on these shares was $ 26,143,688.14.
Subsequently, 172,900 shares were purchased for $ 42.78 per share, 276,500 shares were purchased for $ 43.50 per share, and 1,674,700 shares were purchased for $ 52.00 per share. The profit on these shares was $ 30,495,638. Thus the total profits in Hammermill were $ 56,639,326.14. Of this amount, one-half was attributable to defendant. Thus the Court requires defendant to disgorge $ 28,319,663.07 as a result of his illegal conduct regarding his trades in Hammermill stock.
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.
Stanley S. Harris
United States District Judge
Date: JAN 28 1993
ORDER - January 28, 1993, Filed
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.
Stanley S. Harris
United States District Judge
Date: JAN 28 1993