"the evidence was more than sufficient to support the district court's finding that . . . Posner violated the securities laws."). Moreover, Posner offers no persuasive authority for the proposition that collateral estoppel may not be utilized where a specific piece of evidence in the prior action was not adduced. This Court declines to expound such a proposition here. Posner's second contention--that no judicial economies stand to be realized in this case--is simply irrelevant. In Parklane Hosiery, the Supreme Court noted that considerations of judicial economy justify the doctrine of collateral estoppel in general. However, contrary to Posner's contentions, the Court never suggested that the "quantity" of judicial resources to be saved should influence, let alone determine, whether to apply collateral estoppel offensively.
In light of the criteria that the Supreme Court did advance in Parklane Hosiery, this Court concludes that the doctrine of collateral estoppel may be used offensively to preclude defendant in the instant case from relitigating issues previously litigated and resolved in Drexel. Plaintiff in the instant case is clearly not a "fence-sitter" who deliberately avoided joining the SEC action. Nor is the application of collateral estoppel in the instant case unfair; the defendant had every incentive to, and did in fact, vigorously litigate every issue relating to his liability in the SEC suit, and the existence of the instant suit was known to defendant from the outset. Finally, defendant had a full and fair opportunity to litigate the claims in the SEC action; and, the Second Circuit found on appeal that "Posner received a fair trial." SEC v. Posner, 1994 WL 55043, at * 1. Plaintiff may thus utilize collateral estoppel to preclude relitigation of the same matters necessarily litigated and resolved in the Drexel suit. See Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44 (2d. Cir. 1986).
B. Section 10(b) and Rule 10b-5 violations
A plaintiff must establish five elements to prevail in a private suit alleging 10b-5 violations: (1) fraud in connection with the purchase or sale of a security; (2) the materiality of the alleged misrepresentations or omissions; (3) scienter; (4) reliance; and (5) loss causation. Citibank v. K-H Corp., 968 F.2d 1489, 1494 (2d Cir. 1992). The first three elements pose issues identical to those in the SEC suit; they were actually litigated in that suit; and they were necessary to the SEC's judgment therein against Posner. See Drexel, 837 F. Supp. at 609 (Posner's "arrangement with Boesky . . . constituted a blatant scheme to defraud in violation of Section 10(b) and Rule 10b-5."). Relitigation of these three key elements is clearly precluded by the doctrine of collateral estoppel.
The only question raised by Posner hereon with respect to plaintiff's 10b-5 claim is whether the factual findings underlying the fourth and fifth elements--reliance and causation--were necessarily litigated and determined in Drexel. To establish reliance, the plaintiff must show that defendant's violations actually caused PEC to engage in the transaction at issue. Citibank, 968 F.2d at 1495. Reliance is established by a rebuttable presumption which exists in cases, such as the instant one, in which defendant has failed to disclose material information to PEC (rather than making affirmative misrepresentations). Loss causation is established by the showing that the securities violations actually caused the losses that PEC suffered. Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb, Inc., 967 F.2d 742, 747 (2d Cir. 1992). Defendant contends that findings of reliance and the actual losses caused to PEC were not necessary and essential to the judgment in the SEC's favor. Analysis of the findings establishes otherwise.
In Drexel, the Court found that Posner's violations of Rule 10b-5 were manifold, and stemmed in part from his failure to file disclosures under Section 13(d) of the Exchange Act of his total beneficial ownership in Fischbach, and in part from his comprehensive scheme to defraud, in conspiracy with Boesky, Milken and Drexel. The Court found that in the course of this fraud, Posner caused PEC to purchase Fischbach securities at an inflated price, to incur a substantial debt to pay for the purchase, to incur $ 3 million in investment banking fees, and to bear the risk of the decline in the market price for Fischbach.
These findings of integral aspects of Posner's scheme, essential to the coherence of the SEC's argument in Drexel and to the Court's judgment in that case, are simply irreconcilable with Posner's argument that had he disclosed his extensive control of Fischbach and his illegal parking scheme, PEC would nonetheless have purchased Fischbach securities at the inflated price, thereby incurring substantial debt.
The Supreme Court has held that a rebuttable presumption of reliance exists when the 10b-5 violation in question is one of non-disclosure or omission, rather than one of affirmative misrepresentation and the need for proof of actual reliance is obviated. See Affiliated Ute Citizens v. United States, 406 U.S. 128, 153-54, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). See also Rifkin v. Crow, 574 F.2d 256, 262 (5th Cir. 1978) ("Where a plaintiff alleges deception by defendant's nondisclosure of material information, the Ute presumption obviates the need for plaintiff to prove actual reliance on the omitted information.") The 10b-5 violations in this case indisputably derived in part from Posner's failure to disclose material information. Posner has furnished no evidence hereon to rebut the presumption that PEC relied upon his non-disclosure and omissions. In short, defendant has failed to demonstrate that any genuine issue of material fact exists as to PEC's reliance.
The matter of loss causation essentially reduces to the question of whether Posner's failures to disclose the elements of his scheme to defraud Fischbach actually inflicted losses on PEC. See Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 61 (2d Cir. 1985) ("Where a 10(b) claim is based not on specific misrepresentations or omissions, but rather on a 'comprehensive scheme to defraud,' the plaintiff must still demonstrate causation in fact by showing that defendant's allegedly fraudulently activities were actually responsible for plaintiff's injuries.") PEC shows that it incurred losses when it overpaid Boesky for the bloc of stock it purchased. The Court in Drexel explicitly found in the SEC action that PEC "picked up . . . about $ 3.6 million of the loss on Boesky's investment," Drexel, 837 F. Supp. at 592; that to pay for the Fischbach stock, PEC was forced to issue $ 56 million in securities, id.; and that Drexel was paid $ 3 million for its services in connection with the transactions. Id.. Again, these findings were integral to the Court's analysis in the SEC suit and essential to the judgment ultimately rendered. While these various elements in the fraudulent scheme may not necessarily determine the quantum of the loss incurred by PEC (i.e., the issue of damages, not now before the Court), they do establish that Posner's comprehensive scheme to defraud was actually responsible for costs and losses caused to PEC. The admission of counsel for the defendant in the record acknowledges that "it is unquestionable that the same facts and circumstances are involved in both [this] case and the SEC case." Fox Aff. Ex. H at 2. No evidence has been presented to suggest that a genuine issue of material fact exists as to loss causation. Summary judgment of liability consequently is due to the plaintiff on plaintiff's 10b-5 claims herein.
C. Breach of fiduciary duties
Plaintiff also seeks summary judgment of liability for Posner's alleged breach of his fiduciary duties to PEC. The Court's findings in Drexel clearly demonstrate that Posner breached his fiduciary duties by virtue of his status as an officer and director of PEC.
Defendant raises two challenges to plaintiff's claim of fiduciary breach: (i) the nature of the fiduciary violations alleged by plaintiff is unclear; and (ii) the breaches of fiduciary duty were neither actually litigated in the SEC action nor were necessary to judgment in that action. Those contentions are specious.
The nature of defendant's alleged violations of his fiduciary duties is clear from even a cursory reading of the complaint herein, plaintiff's summary judgment papers and the decision in the Drexel enforcement action. Drexel establishes the following violations of defendant's fiduciary duties: Posner's secret arrangement with Milken and Boesky to park Fischbach stock with Boesky; PEC was caused to file false reports of the transactions with the SEC; Boesky was secretly guaranteed that any losses Boesky might incur would be made good; Posner's arrangement with Milken that PEC would purchase the stock from Boesky in secrecy on the London over-the-counter exchange at a price $ 10/share in excess of the market price to disassociate the takeover price from the true nature of the transaction to repay Boesky's costs in part; the issuance by PEC of $ 56 million in debt securities in part to pay for said stock; and the use of $ 3 million of PEC funds to pay Drexel for its part of the arrangements. There is nothing unclear about these fiduciary breaches.
Defendant's second contention, that these breaches were not litigated or necessary to the result reached in Drexel, is similarly unavailing. The conduct listed above were key to the findings of liability in the Drexel litigation; all were actually and necessarily established. So too was the Court's factual finding and conclusion that Posner "engaged in fraudulent conduct in [his] corporate capacities." 837 F. Supp. at 615. The Court explicitly took into consideration all these facts--as well as Posner's "long and notorious history of engaging in self-dealing and corporate waste to the detriment of the public shareholders of the companies under their control" id. at 603--in deciding to ban Posner permanently from the boardrooms of listed corporations. Together these acts clearly evidence that Posner repeatedly used his PEC corporate offices to further his personal interests at the expense of the corporation, thereby breaching his fiduciary duties owed to the corporation.
Plaintiff's motion for partial summary judgment of liability on his claim for breach of fiduciary duties established by collateral estoppel emanating from the Drexel findings and judgment is well grounded.
Plaintiff's motion for partial summary judgment of liability of Victor Posner on the claims herein based on Section 10(b) and Rule 10b-5 and on breach of fiduciary duty is granted. This opinion and the minutes of the hearing on this motion, which are hereby made part of this order and decision, shall constitute the findings of fact and conclusions of law in accordance with Fed. R. Civ. P. 52(a). The trial on the issue of damages shall proceed as scheduled.
Dated: March 31, 1994
New York, New York
Senior United States District Judge