Grossman's objection that the Report is tainted by procedural defects lacks merit.
For his second objection, Grossman contends that Magistrate Judge Dolinger should have disqualified himself based on his prior employment at Kramer Levin. He argues that Kramer Levin is an adverse party, as a key issue in this litigation is whether other Kramer Levin attorneys disclosed the confidential information about the Colt recapitalization plan. Thus, according to Grossman, Magistrate Judge Dolinger should have recused himself on the ground that his impartiality is subject to question. The Court disagrees.
Under 28 U.S.C. § 455(a), "any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned." See 28 U.S.C. § 455(a). In particular, a judge must disqualify himself "where he has a personal bias or prejudice concerning a party" in the case before the court. 28 U.S.C. § 455(b)(1). Under 28 U.S.C. § 144, a party may seek a judge's recusal on the grounds of bias or prejudice by submitting an affidavit to the court setting forth the basis for the request. See 28 U.S.C. § 144. In determining whether recusal is warranted, the test of impartiality is "what a reasonable person, knowing and understanding all the facts and circumstances, would believe." In re Drexel Burnham Lambert, Inc., 861 F.2d 1307, 1309 (2d Cir. 1988), cert. denied, 490 U.S. 1102 (1989); see also In re IBM Corp., 45 F.3d 641, 643 (2d Cir. 1995) (same).
A motion to disqualify must be made, however, "at the earliest possible moment" after obtaining information of possible bias. United States v. Yonkers Bd. of Educ., 946 F.2d 180, 183 (2d Cir. 1991) (citing Apple v. Jewish Hosp. & Medical Ctr., 829 F.2d 326, 333 (2d Cir. 1987)); see also Polizzi v. United States, 926 F.2d 1311, 1321 (2d Cir. 1991) (noting that, while § 455 does not contain an explicit timeliness requirement, the courts have read such a requirement into the provision); United States v. York, 888 F.2d 1050, 1054 n.6 (5th Cir. 1989) (same). This rule serves the dual purpose of preserving judicial resources and preventing a litigant from hedging its bets against the eventual outcome. United States v. Yonkers Bd. of Educ., 946 F.2d at 183 (citations omitted); Herskowitz v. Charney, 93 Civ. 5248, 1994 U.S. Dist. LEXIS 11594, at **6-7 (S.D.N.Y. Aug. 18, 1994).
In the present case, Grossman has been aware of the information forming the basis for his disqualification argument since at least October 1993, approximately nineteen months ago. Rather than raising an objection at that time, however, Grossman chose to delay any motion and gamble on the results of the Report. Now that the Report contains recommendations adverse to his position, the Court concludes that his disqualification objection is untimely. See E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1296 (9th Cir. 1992) (rejecting plaintiff's argument that the trial judge should have disqualified himself, finding that the delay suggested a misuse of the recusal statute for strategic purposes); United States v. Yonkers Bd. of Educ., 946 F.2d at 183 (finding untimely defendant's motion to disqualify as the facts supporting the motion were available months prior to the actual motion); United States v. Wallach, 788 F. Supp. 739, 742 (S.D.N.Y.) (denying defendant's motion to disqualify on the ground that it should have been made two years earlier), aff'd, 979 F.2d 912 (2d Cir. 1992).
In any event, the Court finds that the Magistrate Judge was not obligated to recuse himself under the present circumstances. It is well-settled that a judge has "an affirmative duty . . . not to disqualify himself unnecessarily." National Auto Brokers Corp. v. General Motors Corp., 572 F.2d 953, 958 (2d Cir. 1978) (affirming judge's denial of a recusal motion based on his prior affiliation with a law firm which had represented defendant in other matters) (quoting Rosen v. Sugarman, 357 F.2d 794, 797-98 (2d Cir. 1966)), cert. denied, 439 U.S. 1072 (1979); see also Mass v. McClenahan, 93 Civ. 3290, 1995 U.S. Dist. LEXIS 2845, at **3-4 (S.D.N.Y. Mar. 9, 1995) ("A judge has as much of a duty not to recuse himself absent a factual basis for doing so as he does to step aside when recusal is warranted."). Kramer Levin is not, as Grossman suggests, an adverse party in this litigation, and there is no other basis to question the Magistrate Judge's impartiality. The mere fact that the Magistrate Judge once worked at Kramer Levin provides no reasonable basis to question his impartiality in this case. Accordingly, Grossman's objection on this ground is meritless.
IV. Collateral Estoppel
Grossman next objects to the Report's determination that his criminal conviction collaterally estops him from litigating his liability in the civil case. Specifically, Grossman argues that the Magistrate Judge failed to examine the transcript of the criminal trial to ascertain the jury's findings in the criminal action. Further, Grossman contends that collateral estoppel is unfair because he did not have a full and fair opportunity to defend himself against the criminal charges. The Court disagrees.
The doctrine of collateral estoppel prevents parties from litigating issues that already have been decided in prior actions. Beck v. Levering, 947 F.2d 639, 642 (2d Cir. 1991), cert. denied, 504 U.S. 909 (1992). For collateral estoppel to apply:
(1) the issues in both proceedings must be identical, (2) the issue in the prior proceeding must have been actually litigated and actually decided, (3) there must have been a full and fair opportunity for the litigation in the prior proceeding, and (4) the issue previously litigated must have been necessary to support a valid and final judgment on the merits.
Id. (quoting Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44 (2d Cir. 1986)).
The Magistrate Judge found, and the Court agrees, that "the facts necessarily determined by the jury in the criminal case are the same as those alleged by the Commission in this action." Report at 13. Specifically, in order to convict Grossman, the jury must have found that (1) Grossman learned confidential information while employed as an attorney at Kramer Levin; (2) he passed this information to several other individuals in violation of Kramer Levin policy; (3) his conduct was in breach of his fiduciary duties to Kramer Levin and Colt; and (4) he knew or acted with reckless disregard for the fact that the confidential information was material, non-public and in breach of his fiduciary duties. As these facts are identical to the allegations underlying the Commission's civil complaint, the jury's determination supports a final judgment in this case, and the doctrine of collateral estoppel applies here.
The Court finds meritless Grossman's contention that he did not receive a full and fair opportunity to litigate the criminal claims against him. At the criminal trial, Grossman had the opportunity to present evidence in his defense and to set forth any applicable defense theory. The fact that he chose not to testify in his own defense does not require a relitigation of the same issues. See Glosser v. Posner (In re Ivan F. Boesky Sec. Litig.), 848 F. Supp. 1119, 1123-24 (S.D.N.Y. 1994) (finding collateral estoppel applicable where defendant did not testify in the prior proceeding). Accordingly, Grossman's objection to the Magistrate Judge's determination that he is collaterally estopped from litigating the claims against him is unpersuasive.
V. The Injunction
In his next objection, Grossman asserts that the Commission has failed to meet the standard for establishing the propriety of an injunction. A trial court may impose injunctive relief upon a showing of a "reasonable likelihood" that the illegal conduct will be repeated. SEC v. Materia, 745 F.2d 197, 200 (2d Cir. 1984), cert. denied, 471 U.S. 1053, 85 L. Ed. 2d 477, 105 S. Ct. 2112 (1985); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1100 (2d Cir. 1972); SEC v. Lorin, 877 F. Supp. 192, 201 (S.D.N.Y. 1995). Factors that a court should consider in determining whether an injunction is appropriate include, inter alia: "The degree of scienter involved, the sincerity of defendant's assurances against future violations, the isolated or recurrent nature of the infraction, defendant's recognition of the wrongful nature of his conduct, and the likelihood, because of defendant's professional occupation, that future violations might occur." SEC v. Universal Major Indus. Corp., 546 F.2d 1044, 1048 (2d Cir. 1976), cert. denied, 434 U.S. 834, 54 L. Ed. 2d 95, 98 S. Ct. 120 (1977).
After careful consideration of all of the relevant factors, the Court agrees with the Report's recommendation to grant the Commission's motion for a permanent injunction. As Magistrate Judge Dolinger correctly found, Grossman initiated an extensive scheme to trade public securities on confidential information. Despite his criminal conviction, he continues to deny that he violated any securities law, contending instead that confidential information was disseminated by other Kramer Levin employees and that the Government has engaged in a cover-up. Moreover, the possibility that he may continue to practice law in the future raises the specter of further misconduct. Under these circumstances, the Court finds an injunction to be an appropriate remedy to prevent future securities law violations.
VI. Hirshbergs' Liability
In their objections, the Hirshbergs argue that the Magistrate Judge erred in recommending that the Court grant the Commission's motion for summary judgment against them on the issue of liability. Specifically, they object to the Report's conclusion that their failure to provide information at the Deposition subjects them to an adverse inference. This objection is based on their assertion that this ruling conflicts with the Court's prior decision in the 1987 Opinion. The Hirshbergs argue further that they should be permitted to submit statements made to the Commission prior to their Deposition, as well as the Alan Hirshberg Affidavit, in order to oppose the Commission's summary judgment motion. The Court disagrees.
Contrary to the Hirshbergs' suggestion, this Court's prior ruling did not address whether defendants' refusal to provide discovery would create an adverse inference in subsequent proceedings. Rather, the 1987 Opinion merely denied the Commission's motion to preclude defendants from introducing evidence pertaining to issues for which defendants had refused to provide discovery. See SEC v. Grossman, 121 F.R.D. at 211. The Court chose instead to provide defendants with the opportunity to respond to the Commission's discovery requests. Id. at 211-12. Nonetheless, the Hirshbergs decided not to provide discovery to the Commission, choosing to let stand their prior refusal to provide information based on their Fifth Amendment privilege against self-incrimination. Having done so, the Hirshbergs cannot now complain that they are precluded from offering evidence on the very issues for which they have declined to provide discovery for several years.
See, e.g., SEC v. Drexel Burnham Lambert Inc., 837 F. Supp. 587, 606 n.6 (S.D.N.Y. 1993) (stating that it would be improper to permit a defendant to invoke his Fifth Amendment privilege during discovery and subsequently permit him to waive the privilege at trial), aff'd sub nom. Posner v. SEC, 16 F.3d 520 (2d Cir. 1994), cert. denied, 130 L. Ed. 2d 629, U.S. , 115 S. Ct. 724 (1995).
As for the Hirshbergs' contention that the Commission was obligated to invite them to provide additional discovery, they provide no authority for this proposition nor is the Court aware of any precedent for imposing such an unusual obligation. Rather, the Court finds that the Hirshbergs were obligated to come forward with any relevant evidence in the event they wished to change their position on issues for which they previously had refused discovery. For this reason alone, the Hirshbergs are precluded from offering their proposed additional evidence.
The Court also agrees with the Magistrate Judge that, as the exculpatory testimony that the Hirshbergs seek to introduce is inconsistent with the rationale underlying their invocation of the Fifth Amendment privilege, such testimony may not be used to defeat the Commission's summary judgment motion. Cf. Trans-Orient Marine Corp. v. Star Trading & Marine, Inc., 925 F.2d 566, 572-73 (2d Cir. 1991) ("[A] party may not, in order to defeat a summary judgment motion, create a material issue of fact by submitting an affidavit disputing his prior sworn testimony."); see also Mack v. United States, 814 F.2d 120, 124 (2d Cir. 1987) (stating that a party may not create an issue of material fact by submitting an affidavit contradicting prior deposition testimony); FDIC v. Betancourt, 865 F. Supp. 1035, 1046 (S.D.N.Y. 1994) (same); Davis v. Holliswood Care Ctr., 858 F. Supp. 18, 22 (E.D.N.Y. 1994) (same). Accordingly, the Hirshbergs' objection to the Report's recommendation to grant summary judgment against them is denied.
VII. The Assets Freeze
Grossman and Hirshberg next object to Magistrate Judge Dolinger's recommendation to deny their cross-motions to modify the Assets Freeze. According to Grossman, the Assets Freeze affects two bank accounts containing funds unrelated to the illegal activity. Grossman claims that one bank account belongs solely to his wife and the other contains assets deposited by his former employer after the institution of the Assets Freeze. Similarly, Hirshberg argues that the Assets Freeze against him should be lifted on the ground that the monies are not traceable to the illegal activity, but rather are the personal assets of his wife and daughter.
These same arguments were considered and properly rejected by the Magistrate Judge. It is irrelevant whether the funds affected by the Assets Freeze are traceable to the illegal activity, as Grossman and Hirshberg are jointly and severally liable for the profits of their tippees. See SEC v. Tome, 638 F. Supp. 596, 627 (S.D.N.Y. 1986), aff'd, 833 F.2d 1086 (2d Cir. 1987), cert denied, 486 U.S. 1014, 100 L. Ed. 2d 213, 108 S. Ct. 1751 (1988); see also SEC v. Glauberman, 90 Civ. 5205, 1992 U.S. Dist. LEXIS 10982, at **5-6 (S.D.N.Y. July 17, 1992) (rejecting defendant's argument that the funds subject to disgorgement must be traced "dollar for dollar" to the illegal trading). In any event, as the Magistrate Judge noted, defendants have failed to present any evidence in support of their claims that the funds are unrelated to the illegal trading in Colt securities.
Hirshberg also contends that the Assets Freeze should be modified to permit the payment of attorneys' fees, funeral and burial expenses. To succeed on this motion, however, he must establish that such a modification is in the interest of the defrauded investors. SEC v. Coates, 94 Civ. 5361, 1994 U.S. Dist. LEXIS 11787, at *3 (S.D.N.Y. Aug. 23, 1994). As these expenses bear no relation to the interest of other investors, there is no ground for modifying the Assets Freeze to permit such payments. Moreover, with respect to the attorneys' fees, it is well-established that there is no right to use the money of others for legal services. See United States v. Monsanto, 491 U.S. 600, 615, 105 L. Ed. 2d 512, 109 S. Ct. 2657 (1989); Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 624, 105 L. Ed. 2d 528, 109 S. Ct. 2646, 109 S. Ct. 2667 (1989); SEC v. Cherif, 933 F.2d 403, 416-17 (7th Cir. 1991), cert. denied, 502 U.S. 1071, 117 L. Ed. 2d 131, 112 S. Ct. 966 (1992). Accordingly, Grossman's and Hirshberg's cross-motions to modify the Assets Freeze are denied.
For the reasons set forth above, it is hereby
ORDERED that the Report and Recommendation issued by Magistrate Judge Dolinger, dated March 2, 1995, is accepted in accordance with 28 U.S.C. § 636(b). It is further
ORDERED that the Commission's motion, pursuant to Rule 56 of the Federal Rules of Civil Procedure, for summary judgment against Grossman and the Hirshbergs on the issues of liability and the appropriateness of a disgorgement order is granted. It is further
ORDERED that the Commission's motion for an injunction against Grossman is granted, and the Commission is directed to submit a proposed injunction order to the Court on or before June 14, 1995. It is further
ORDERED that the Hirshbergs' motion to dismiss or for summary judgment is denied. It is further
ORDERED that the Commission's motion to modify the Assets Freeze to permit the IRS to execute on a lien against the George Hirshberg estate is granted. It is further
ORDERED that Hirshberg's and Grossman's cross-motions to modify the Assets Freeze are denied in all respects. It is further
ORDERED that the parties appear for a conference on Wednesday, June 28, 1995, at 2:00 p.m., to address the remaining issues including the disgorgement amounts, the propriety of penalty awards against the Hirshbergs and the appropriateness of an injunction against Alan Hirshberg.
SHIRLEY WOHL KRAM
United States District Judge
Dated: New York, New York
June 1, 1995