The opinion of the court was delivered by: SHIRLEY WOHL KRAM
SHIRLEY WOHL KRAM, U.S.D.J.
In this "insider trading" action, defendants George Hirshberg ("Hirshberg") and Alan Hirshberg (collectively, the "Hirshbergs")
and Israel G. Grossman ("Grossman") object to a Report and Recommendation issued by Magistrate Judge Michael H. Dolinger on March 2, 1995 (the "Report"). For the reasons set forth below, the Report is adopted in full.
On February 17, 1987, the Securities and Exchange Commission (the "Commission" or the "SEC") filed the present action against Grossman, the Hirshbergs and several other individuals, alleging insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The complaint alleges that Grossman, in his capacity as a lawyer at the law firm of Kramer, Levin, Nessen, Kamin & Frankel ("Kramer Levin"), misappropriated confidential information about a Kramer Levin client, Colt Industries, Inc. ("Colt"), regarding a pending recapitalization plan. The Commission alleges further that Grossman passed on this information to several friends and relatives, including the Hirshbergs, enabling them to realize substantial profits by investing in Colt securities.
The Court issued a temporary restraining order on February 17, 1987, freezing unspecified assets of Grossman and Hirshberg (the "Assets Freeze"). That same day, Grossman was arrested and charged with criminal securities law violations based on the same allegations of misconduct.
On March 3, 1987, the Hirshbergs appeared at a deposition in connection with the civil action (the "Deposition"). The Hirshbergs did not provide any information, however, relying on their Fifth Amendment privilege against self-incrimination. Subsequently, on June 17, 1987, after a grand jury indicted Grossman on multiple counts of securities and mail fraud, the Court stayed the civil action pending resolution of the criminal case.
In August 1987, Grossman proceeded to trial on the criminal charges. During the course of the trial, the Government presented evidence that Grossman was aware of Kramer Levin's policy forbidding attorneys from trading on confidential information or providing such information to others. Testimony elicited at trial established that Grossman learned about the Colt recapitalization plan from a colleague at Kramer Levin. Kramer Levin telephone records revealed that Grossman had placed numerous telephone calls to brokerage firms and several friends and relatives during the ten days preceding the public announcement of the recapitalization plan. The Government presented evidence that these individuals then made highly speculative purchases of Colt securities, ultimately realizing a total profit of nearly $ 1.5 million.
On August 18, 1987, Grossman was convicted of nineteen counts of securities fraud, in violation of 15 U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b-5, and nineteen counts of wire mail fraud, in violation of 18 U.S.C. §§ 2 and 1341. On March 25, 1988, the Second Circuit Court of Appeals affirmed Grossman's conviction and, on January 23, 1989, the Supreme Court denied certiorari. See United States v. Grossman, 843 F.2d 78, 87 (2d Cir. 1988), cert. denied, 488 U.S. 1040, 102 L. Ed. 2d 988, 109 S. Ct. 864 (1989).
After the resolution of the criminal trial, the Commission moved for summary judgment against Grossman and the Hirshbergs in the present action.
In brief, the Commission argued that it is entitled to judgment as a matter of law (1) against Grossman based on the collateral estoppel effect of his criminal conviction; and (2) against the Hirshbergs based on the evidence produced at Grossman's trial and the Hirshbergs' refusal to answer questions at the Deposition. The Hirshbergs cross-moved to dismiss the complaint for failure to state a claim, or, alternatively, for summary judgment dismissing the complaint on the ground that the Commission cannot establish scienter as a matter of law.
Thereafter, the Commission moved for a modification of the Assets Freeze to permit the Internal Revenue Service (the "IRS") to execute on a lien against Hirshberg's assets.
In response, Hirshberg and Grossman each cross-moved to lift the Assets Freeze on the ground that the affected assets are not traceable to the unlawful activity. Hirshberg also cross-moved to modify the Assets Freeze to permit the payment of various expenses, including attorneys' fees, funeral and burial expenses.
On September 20, 1993, the Court referred all motions to Magistrate Judge Dolinger for a report and recommendation. On October 28, 1993, Magistrate Judge Dolinger held a conference, at which time he directed the parties to submit any additional papers relevant to the disposition of the pending motions. See Declaration of Deborah R. Meshulam in Reply to Grossman's Objections, executed on Apr. 3, 1995 (the "Meshulam Decl."), at PP 2-3. The Magistrate Judge also ordered the Commission to assemble a list of all previously-filed papers relevant to the motions, circulate the list to the remaining defendants for comments and provide the list to the court. See id. at P 4. He advised the parties that he would seek copies of missing documents in the event that the court's files were incomplete. See id.
Pursuant to the Magistrate Judge's directives, the Commission submitted a list of previously-filed papers to the court. See letter from Meshulam to Magistrate Judge Dolinger of 11/12/93, annexed to the Meshulam Decl. as Exh. "2." Apparently responding to the court's invitation to provide additional information, Grossman wrote to the court to explain certain "background information" relevant to the pending motions. See letter from Grossman to Magistrate Judge Dolinger of 11/15/93, annexed to the Meshulam Decl. as Exh. "1." Subsequently, the Commission submitted several other documents to the court at its request, including transcripts, orders, letters, declarations and other papers related to the civil and criminal actions. See letters from Meshulam to Magistrate Judge Dolinger dated 12/21/94, 1/13/95 and 1/27/95, annexed to the Meshulam Decl. as Exh. "3."
At the October 28, 1993 conference, Grossman noted that Magistrate Judge Dolinger previously had worked at Kramer Levin. See Meshulam Decl. at P 6. According to the Commission, Grossman stated his belief that he would benefit from the Magistrate Judge's prior association with the firm. Id. Neither party objected to the Magistrate Judge's procedure for gathering relevant documents, however, or to his continued participation in the litigation. Id.
On March 2, 1995, Magistrate Judge Dolinger issued the Report, recommending that the Court (1) grant summary judgment to the Commission against Grossman and the Hirshbergs with respect to liability and the appropriateness of a disgorgement order; (2) deny the Hirshbergs' motion to dismiss the complaint or for summary judgment; (3) grant the Commission's motion for an injunction against Grossman; (4) reserve for further adjudication the amount of disgorgement, the appropriateness of an injunction against Alan Hirshberg and the propriety of an award of penalties against the Hirshbergs; (5) grant the Commission's motion to modify the Assets Freeze against Hirshberg; and (6) deny Hirshberg's and Grossman's cross-motions to modify the Assets Freeze. See Report at 74.
A. Summary Judgment Motions
Specifically, with respect to the Commission's summary judgment motion against Grossman, the Magistrate Judge found:
Report at 13. Summarizing the facts determined by the jury, the Report concluded that:
To convict Grossman . . . the jury must have found that Grossman possessed confidential information about the Colt recapitalization, that he had a fiduciary duty to Kramer, Levin and to [Colt] not to disclose the information, that he breached this duty by tipping his friends and relatives, . . . and that he knew or acted in reckless disregard of the fact that the information about the recapitalization was material and non-public and had been obtained through breach of his fiduciary duty.
Id. at 17; see also Dirks v. SEC, 463 U.S. 646, 654-64, 77 L. Ed. 2d 911, 103 S. Ct. 3255 (1983) (setting forth standard for establishing tipper liability). Accordingly, Magistrate Judge Dolinger found summary judgment to be appropriate against Grossman.
As for the Commission's summary judgment motion against the Hirshbergs, the Report concluded that the elements necessary for a claim based on tippee liability had been established as a matter of law. See Report at 22. Specifically, the Magistrate Judge determined that (1) the information about Colt was material and non-public, id. at 23; (2) as a Kramer Levin attorney, Grossman had a fiduciary duty not to disclose the information, id. at 24; (3) Grossman breached this fiduciary ...