The opinion of the court was delivered by: TENNEY
This civil action was instituted by the Securities and Exchange Commission ("SEC") and involves a complex securities fraud scheme in which defendants Sam Ford and Leonard Levin, among others, illegally distributed and manipulated the trading market for the common stock of Dimensional Entertainment Corporation ("Dimensional"). The SEC claims that defendants Ford and Levin violated sections 5(a), 5(c)
of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a) and section 10(b)
of the Securities Exchange Act of 1934 ("Securities Exchange Act"), 15 U.S.C. § 78j(b). Both defendants are also charged with violations of Rule 10b-5,
17 C.F.R. § 240.10b-5, while only Ford is alleged to have violated Rule 10b-6,
17 C.F.R. § 240.10b-6. The SEC seeks a permanent injunction enjoining the defendants from committing further violations of these provisions. In addition, the SEC asks the Court to order Ford and Levin to disgorge the profits they allegedly reaped through the fraudulent securities scheme. The Commission has now moved for summary judgment.
The Court finds that the defendants have committed the various securities laws violations with which they are charged. However, for the reasons given below, the Court concludes that it would be inappropriate to issue a permanent injunction against Ford on the basis of the evidence presented by the SEC. Accordingly, the Commission is granted sixty days from the entry of this Opinion and Order to address the issues discussed herein and to submit additional evidence regarding the likelihood that Ford will repeat his unlawful conduct. If no further submissions are made, the motion for injunctive relief against Ford will be denied. The SEC's motion for a permanent injunction against defendant Levin is granted. Because disgorgement orders against both defendants appear warranted, and the precise sums involved are uncertain, these matters will be referred to Magistrate Naomi R. Buchwald for a report and recommendation. 28 U.S.C. § 636(b)(1)(B). After receiving the Magistrate's recommendation, the Court will rule on the requested disgorgement orders.
The factual and legal background of this case has previously been described in the Court's decision denying Levin's motion to dismiss the SEC's complaint against him, Memorandum and Order dated August 16, 1978, and in the Second Circuit's decision affirming Ford's conviction for wire fraud and perjury in a criminal action stemming from the events involved here. United States v. Ford, 603 F.2d 1043 (2d Cir. 1979). This action was commenced in 1977 when the Commission filed a complaint against fifteen individuals and entities seeking permanent injunctive relief against further violations of certain anti-fraud provisions of the federal securities laws. The complaint also sought an accounting or disgorgement of profits by Ford and Levin. Each of the defendants, except Ford and Levin, have consented to judgments or permanent injunctions.
In March 1978, a federal grand jury in the Southern District of New York returned a twenty-two count indictment against Ford and four other individuals. They were charged in count one with securities fraud, in counts three through eleven with mail fraud, in counts twelve through fourteen with wire fraud, and in count fifteen with conspiracy to obstruct justice. Counts sixteen and seventeen charged Ford with perjury before the SEC. The remaining counts pertained to the other individuals. Before trial, three of the defendants pleaded guilty. Ford and co-defendant Barbara Belle were tried in September 1978. At the close of its case, the government consented to dismiss several of the mail fraud claims. The jury then found Ford and Belle guilty of wire fraud, as alleged in counts twelve through fourteen, convicted Ford on the perjury charge alleged in count seventeen, and acquitted both defendants on the remaining charges. Ford received a sentence of five years imprisonment and a $ 1,000.00 fine on each of the wire fraud counts, the sentences to run concurrently and the fines to be cumulative. Ford was sentenced to an additional three years imprisonment and an additional $ 2,000.00 fine for the perjury conviction. These convictions were subsequently upheld by the Second Circuit. United States v. Ford, supra.
On the day that Ford was indicted, Levin pleaded guilty to a two-count information charging him with violations of section 17(a) of the Securities Act, section 10(b) of the Securities Exchange Act, and Rule 10b-5. He was fined $ 10,000.00, placed on eighteen months probation, and received a suspended sentence. Levin testified for the government during the grand jury investigation and at Ford's criminal trial. His testimony included statements concerning monies he had received from Ford and his own participation in the fraudulent plan to distribute Dimensional securities.
When confronted with a motion for summary judgment, a district court "cannot try issues of fact; it can only determine whether there are issues to be tried." American Mfrs. Mut. Ins. Co. v. American Broadcasting-Paramount Theatres, Inc., 388 F.2d 272, 279 (2d Cir. 1967). Yet even in an SEC action seeking injunctive relief, the court should not hesitate to grant a request for summary judgment if the defendant fails to demonstrate that there is a genuine issue for trial. SEC v. Research Automation Corp., 585 F.2d 31, 33-34 (2d Cir. 1978); see Fed.R.Civ.P. 56(e). Summary judgment is inappropriate, however, where conflicting inferences regarding state of mind or intent can reasonably be drawn from the facts established. Robertson v. Seidman & Seidman, 609 F.2d 583, 591 (2d Cir. 1979).
The SEC contends that Ford's criminal conviction "for the same unlawful conduct alleged in the Commission's amended complaint" conclusively establishes the violations of the registration and anti-fraud provisions that are the grounds for the injunctive and disgorgement relief sought in this civil action. As stated by the Second Circuit, "(i)t is well-settled that a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case." United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978), citing McCarthy v. United States, 394 U.S. 459, 466, 89 S. Ct. 1166, 1170, 22 L. Ed. 2d 418 (1969); United States v. Frank, 494 F.2d 145, 160 (2d Cir.), cert. denied sub nom. Borgman v. United States, 419 U.S. 828, 95 S. Ct. 48, 42 L. Ed. 2d 52 (1974). The doctrine of collateral estoppel may apply even though a different party has instituted the second action because mutuality is generally no longer required. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S. Ct. 645, 58 L. Ed. 2d 552 (1979); Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 320-27, 91 S. Ct. 1434, 1438-1442, 28 L. Ed. 2d 788 (1971); SEC v. Kelly, Andrews & Bradley, Inc., 385 F. Supp. 948, 954-55 n.27 (S.D.N.Y.1974). Indeed, the United States Attorney's office and the SEC have been considered to be the same party "in that both represent the United States." SEC v. Everest Management Corp., 466 F. Supp. 167, 172 n.6 (S.D.N.Y.1979).
In Podell, the Second Circuit indicated that to determine the collateral estoppel effect of a criminal judgment, the court in a subsequent civil action should ascertain what was decided in the criminal case by examining the record, the pleadings, the evidence submitted, and any judicial opinions issued in the case. United States v. Podell, supra, 572 F.2d at 36; see Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 569, 71 S. Ct. 408, 414, 95 L. Ed. 534 (1951). For example, in SEC v. Everest Management Corp., supra, the court granted the SEC's motion for summary judgment on the basis of the defendant's prior criminal convictions. The court stated:
These fraudulent activities, alleged against Persky in this civil action, were "distinctly put in issue and directly determined," . . . in Persky's two prior criminal convictions. Persky was initially convicted for filing a false and misleading Form 10-K for Microthermal in violation of section 15 of the Securities Exchange Act of 1934 . . . . The criminal indictment . . ., the record of that case, and the affirming appellate decision . . . make clear that Persky's conviction rested upon the same fraudulent acts outlined above and alleged in the civil complaint of this action: the attempt by Persky and others to conceal from the public and the Commission the misappropriation of approximately $ 500,000 of Microthermal's funds. Persky's subsequent criminal conviction for violating section 10(b) of the Securities Exchange Act of 1934 . . . and SEC Rule 10b-5 concerned in large part the very same transaction Microthermal's purchase of U. S. Secretarial stock which is alleged in the civil complaint of this case. . . . It is far too late in the day for Persky to deny the existence of these violations for purposes of this civil suit.
466 F. Supp. at 173-74 (citations and footnote omitted).
Upon reviewing the various documents submitted by the SEC, and reading the comments of the trial court judge in Ford's criminal case and the Second Circuit's opinion affirming his conviction, the Court concludes that the factual determinations necessarily made by the jury in convicting Ford for wire fraud and perjury also establish the violations of the securities laws alleged here. The judgment entered after Ford's trial states that he was
convicted as charged to the offenses of unlawfully, wilfully and knowingly, and for the purpose of employing the fraudulent scheme and artifice to defraud set forth in paragraphs 1 through 7 of the Indictment, 78 Cr. 141, causing to be transmitted by means of wire and radio communications in interstate commerce certain writings, signals, pictures and sounds, as set forth in Counts 12, 13 and 14 of said indictment (18 U.S.C. §§ 1343 and 2); and unlawfully, wilfully and knowingly, and contrary to an oath that defendant would testify truly before . . . (the SEC), in a case in which a law of the United States authorized an oath to be administered making false and material declarations which he knew to be false, as set forth in Count 17 of the indictment (18 U.S.C. § 1621).
Judgment and Disposition, 78 Cr. 141 (LFM), filed October 17, 1978, Exhibit C to Affidavit of Jason R. Gettinger, sworn to September 28, 1979 (hereinafter referred to as the judgment). The jury convicted Ford on counts twelve through fourteen, which stated, in part, that he and others "unlawfully, wilfully, and knowingly, and for the purpose of employing and executing the fraudulent scheme and artifice set forth in paragraphs 1 through 7 of this Indictment (the allegations of which are hereby incorporated by reference and realleged as though fully set forth in Counts Twelve through Fourteen), did cause to be transmitted" various communications. In order to convict on the wire fraud counts, the jury must have found that the facts alleged in paragraphs one through seven of the indictment were proved beyond a reasonable doubt. See SEC v. Everest Management Corp., supra; United States v. Levinson, 369 F. Supp. 575 (E.D.Mich.1973). Both the judgment and the wire fraud charges expressly incorporate the allegations made in the first seven paragraphs of the indictment. These charges, set out in full below, n.6 [Footnote Omitted] essentially alleged that Ford and others knowingly devised a securities scheme to defraud purchasers and obtain funds through false representation by creating an artificial market for unregistered stock. These allegations described Ford's knowing and successful efforts to acquire ...