The opinion of the court was delivered by: SAND
Following a remand from the United States Court of Appeals for the Second Circuit, the Plaintiff United States Securities and Exchange Commission ("SEC") renews its motion for summary judgment against the Defendant Richard O. Bertoli ("Bertoli"). Specifically, the SEC seeks reaffirmation of this Court's Final Judgment of Permanent Injunction and Disgorgement against Bertoli. (See SEC Ex. D.) For the reasons stated below, the Plaintiff's motion is granted in part and denied in part.
This Opinion represents the latest stage in the protracted litigation concerning Richard O. Bertoli. Familiarity with the facts is assumed,
and details are set forth below only insofar as they are relevant to the present motion.
The SEC initially filed suit on September 9, 1985, alleging that Bertoli violated numerous provisions of the federal securities laws in connection with the issuance of two securities, Liquidation Control, Inc. ("LCI") and Toxic Waste Containment, Inc. ("Toxic Waste"). Specifically, the SEC charged that the Defendant violated Section 10(b) of the Securities Act of 1934 ("1934 Act") and Rule 10b-5 promulgated thereunder,
as well as Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("1933 Act").
As relief, the Plaintiff sought a permanent injunction and disgorgement of the Defendant's ill-gotten gains. See S.E.C. v. Monarch Funding Corp., 1996 U.S. Dist. LEXIS 8756, No. 85 Civ. 7072, 1996 WL 348209, at *1 (S.D.N.Y. June 24, 1996).
This civil case was placed on the Court's suspense calendar pending the outcome of a related criminal prosecution in the United States District Court for the District of New Jersey ("Related Prosecution"). See United States v. Bertoli, 854 F. Supp. 975 (D.N.J.), aff'd in part, vacated in part, 40 F.3d 1384 (3d Cir. 1994). The indictment in the criminal case charged Bertoli with two racketeering counts under RICO, 18 U.S.C. §§ 1962(c)-(d), and several obstruction of justice counts. The RICO counts included as underlying predicate acts the fraudulent securities schemes concerning LCI and Toxic Waste ("Stock Manipulation Schemes"). See Bertoli, 854 F. Supp. at 991-97 (providing detailed description of factual predicates for both RICO claims).
Following a three-month trial, Bertoli was found guilty of one count of obstruction of justice under 18 U.S.C. § 1503, and one count of conspiracy to obstruct justice under 18 U.S.C. § 307. Id. at 1009. The Defendant was acquitted of the remaining counts, including the RICO charges. Id. On March 28, 1994, the Honorable Alfred J. Lechner, Jr., sentenced Bertoli to two concurrent prison terms of 100 months, coupled with supervised release and a fine of $ 7 million. Id. at 1126.
Following Bertoli's resentencing, the SEC moved for summary judgment in this action. It argued that Bertoli was collaterally estopped, by virtue of certain findings of fact made at Bertoli's sentencing hearings ("Sentencing Findings"), from defending the securities claims in this suit. Bertoli filed a cross-motion for summary judgment.
On June 24, 1996, this Court granted in part the SEC's motion for summary judgment and assessed damages of $ 1,466,000 plus interest. See Monarch Funding, 1996 U.S. Dist. LEXIS 8756, *25, 1996 WL 348209, at *11 (finding Bertoli guilty of violating § 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, as well as § 17(a) of the 1933 Act). In so doing, we found that the doctrine of offensive collateral estoppel was appropriate under the particular facts of this case. To wit:
As to defendant Bertoli, the factfinding contained in the district court's sentencing opinion, issued at the conclusion of Bertoli's criminal trial, see Bertoli, 854 F. Supp. at 1128-30, has collateral-estoppel effect in the instant matter. In arriving at its sentencing, the court made certain factual findings, based on the evidence adduced at trial and reports submitted for sentencing purposes, "by at least a preponderance of the evidence." Id. at 1126. Facts adduced by a trial court carry the same estoppel weight as facts found by a jury or admitted in a plea allocution. . . .
Bertoli was not convicted of violating Section 10(b) or Rule 10b-5. However, in conjunction with the imposition of sentence, the trial court made various factual findings concerning Bertoli's criminal stock activities. Judge Lechner concluded that Bertoli had both orchestrated and directed the fraudulent LCI and Toxic [Waste] schemes, without disclosing to the public his beneficial stock ownership, in an attempt artificially to manipulate prices and profit unlawfully. Bertoli, 854 F. Supp. at 1128-30. The court also found persuasive evidence of Bertoli's involvement in the circulation, by use of the mails, of [co-defendant Richard M.] Cannistraro's misleading research report on Toxic [Waste]. Id. at 1129.
These factual findings support, "by at least a preponderance of the evidence," id. at 1126, the conclusion that Bertoli acted in violation of Section 10(b) and Rule 10b-5.
Id. at *7-8 (finding Bertoli also guilty of Section 17(a) violation). In a separate Opinion dated October 3, 1996, this Court assessed prejudgment interest of $ 1,076,079.16, and directed that final judgment be entered. See S.E.C. v. Monarch Funding Corp., 1996 U.S. Dist. LEXIS 14559, at *7, No. 85 Civ. 7072, 1996 WL 562983, at *2-3 (S.D.N.Y. Oct. 3, 1996).
Bertoli then filed a motion under Rules 59(e) and 62(b), seeking to amend and stay this Court's judgment. The Court denied this motion on November 14, 1996. Bertoli thereafter appealed to the Second Circuit. While the appeal was pending, however, the SEC discovered the existence of a resentencing opinion written by Judge Lechner ("Resentencing Opinion") that was not brought to the attention of this Court during its consideration of the aforementioned motions for summary judgment. (Pl.'s Mem. Supp. Renewed Mot. Summ. J. at 4.) On the SEC's motion, the Second Circuit remanded this action to permit the Court "to consider materials that were not part of the record when the district court granted in part the summary judgment motion underlying this appeal." (SEC Ex. A.)
The Defendant argues that the doctrine of offensive collateral estoppel should never apply to judicial findings of fact rendered at sentencing. This position is likewise advanced by the New York Council of Defense Lawyers ("NYCDL") and the Association of Criminal Defense Lawyers of New Jersey ("ACDLNJ"), which have jointly submitted a brief as amici curiae. (Amici's Br. at 13.) For the reasons articulated below, the Court declines to adopt a per se rule prohibiting the application of collateral estoppel to sentencing findings. Instead, the Court concludes that collateral estoppel may apply to fact determinations at sentencing provided that, after close scrutiny, the trial court finds that the traditional safeguards associated with this doctrine are present.
1. Offensive Collateral Estoppel
Under the doctrine of offensive collateral estoppel, a litigant who was not a party to a prior judgment may nevertheless use that judgment "offensively" to prevent a defendant from relitigating issues resolved in the earlier proceeding. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, 58 L. Ed. 2d 552, 99 S. Ct. 645 (1979). Specifically, "in this context, offensive use of collateral estoppel occurs when the plaintiff seeks to foreclose the defendant from litigating an issue the defendant has previously litigated unsuccessfully in an action with another party." Id. at 326 n.4.
The general rule is to disallow the use of offensive collateral estoppel where the plaintiff could easily have joined in the earlier action,
or where application of this doctrine would be "unfair" to the defendant. Id. In Parklane Hosiery, the Supreme Court offered three illustrations of such unfairness. First, "if a defendant in the first action is sued for small or nominal damages, he may have little incentive to defend vigorously, particularly if future suits are not foreseeable." Id. at 330. Second, allowing offensive collateral estoppel "may also be unfair to a defendant if the judgment relied upon as a basis for the estoppel is itself inconsistent with one or more previous judgments in favor of the defendant." Id.5 Third, permitting offensive estoppel may be unfair where "the second action affords the defendant procedural opportunities unavailable in the first action that could readily cause a different result." Id. at 330-31; see also United States v. International Broth. of Teamsters, 905 F.2d 610, 621 (2d Cir. 1990).
The Second Circuit has explained that the application of collateral estoppel "elevates uniformity and repose above correctness." Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 44 (2d Cir. 1986), cert. denied, 480 U.S. 948, 94 L. Ed. 2d 794, 107 S. Ct. 1608 (1987). Accordingly:
Id.; see also Levy v. Kosher Overseers Assoc., Inc., 104 F.3d 38, 41 (2d Cir. 1997).
Moreover, appellate review plays a central role in assuring the accuracy of decisions. Gelb, 798 F.2d at 44. Accordingly, "although failure to appeal does not prevent preclusion, inability to obtain appellate review, or the lack of such review once an appeal is taken, does prevent preclusion." Id. (citations omitted); cf. Johnson v. Watkins, 101 F.3d 792, 795 (2d Cir. 1996) (discussing availability of appellate review under New York law).
2. Application of Offensive Collateral Estoppel to Facts Determined at Sentencing
The application of offensive collateral estoppel to sentencing findings is a novel issue.
The Court has located only two cases that have discussed this issue, albeit briefly. See M. Prusman, Ltd. v. Ariel Mar. Group, Inc., 781 F. Supp. 248, 250, 252 (S.D.N.Y. 1991) (holding that sentencing court's determination after guilty plea that defendants "controlled" corporation had estoppel effect in subsequent civil suit); cf. United States v. Montes, 976 F.2d 235, 239 (5th Cir. 1992) (commenting summarily that "factual findings by the district court as to the relevant conduct for sentencing purposes must be incorporated into a final judgment in order to have preclusive effect") (dicta), cert. denied, 507 U.S. 1024, 123 L. Ed. 2d 459, 113 S. Ct. 1831 (1993). Thus, the Court finds it appropriate to discuss several potential dangers underlying the extension of collateral estoppel to sentencing findings.
One danger is that the procedural protections available at sentencing are often considerably narrower than those available in a plenary civil action.
In general, there is no absolute right to a full-blown evidentiary hearing at sentencing. United States v. Slevin, 106 F.3d 1086, 1091 (2d Cir. 1996); United States v. Prescott, 920 F.2d 139, 143-44 (2d Cir. 1990). Moreover, because the procedure adopted to resolve factual disputes rests in the "sound discretion" of the district court, id. at 144, a defendant may be denied, inter alia, the opportunity to conduct pre-hearing discovery or call witnesses during the sentencing hearing. See, e.g., United States v. Pugliese, 805 F.2d 1117, 1123 (2d Cir. 1986). However:
The Guidelines state in § 6A1.3(a) in relevant part, "when any factor important to the sentencing determination is reasonably in dispute, the parties shall be given an adequate opportunity to present information to the court regarding that factor." The Commentary that follows specifies that the "sentencing court must determine the appropriate procedure in light of the nature of the dispute, its relevance to the sentencing determination, and applicable case law." Guidelines § 6A1.3, Commentary at 6.2.
It further suggests that written statements by counsel or affidavits of witnesses often may be sufficient but that "more formality"--including in some cases an evidentiary hearing--may be "unavoidable if the sentencing process is to be accurate and fair." Id.
Another danger is that a criminal defendant's incentives at sentencing may differ significantly from his incentives during a subsequent civil proceeding. As was summarized by the amici curiae :
[A] criminal defendant will frequently choose not to challenge prospective issues prior to or during his or her sentencing hearing for any number of reasons, e.g., a belief that the issue is irrelevant to the calculation of his or her Guidelines offense level, a belief that the sentencing court will adhere to a prosecutorial departure motion or other recommendation, a belief that the procedural limitations inherent in the hearing will preclude him or her from prevailing on the issue, a refusal to waive his or her Fifth Amendment privilege against self-incrimination by ...