United States District Court, Southern District of New York
January 13, 2003
SECURITIES AND EXCHANGE COMMISSION PLAINTIFF,
ISRAEL G. GROSSMAN, NORMAN STEIN, WALTER HERZBERG, SAUL LISTOKIN, DAVID LEV, GEORGE HIRSHBERG, AND ALAN HIRSHBERG, DEFENDANTS.
The opinion of the court was delivered by: Shirley Wohl Kram, United States District Judge
OPINION AND ORDER
Presently before the Court is Plaintiff Securities and Exchange Commission's (the "Commission" or "SEC") motion for an Order Requiring a Sworn Accounting, Transfer of Frozen Assets to the Court's Registry, and Payment of Disgorged Profits to the United States Treasury. Specifically, the Commission moves for an order directing: (1) North Fork Bank, a non-party custodian of frozen assets of defendant George Hirshberg, to open a safe deposit box maintained in Hirshberg's name, provide a sworn accounting of its contents to the Court and to the Commission's counsel, and preserve the contents, if any, pending further order of the Court; (2) the non-party custodians of frozen assets of the defendants to transfer those assets into the Registry of the Court; and (3) the Clerk of the Court to remit to the United States Treasury all funds on deposit in the Court's Registry from this action.
Defendant Israel Grossman cross-moves for an Order Finalizing Disgorgement Proceedings against him. Grossman asserts that: (1) the frozen bank accounts in his and his wife's names should be released to them; (2) his financial condition is such that he lacks sufficient assets to pay the disgorgement previously ordered by the Court; and (3) the Court should issue an order that any future assets acquired by Grossman are not subject to disgorgement as a result of his financial condition.
Defendant Walter Herzberg moves to have his tax liability for trading profits from the tax year 1986 paid from the money he has disgorged to the Commission.
Additionally, counsel for the Estate of George Hirshberg, Dennis Rapps, Esq., requests that the Court authorize payment of his fees from previously frozen assets of George Hirshberg.
I. BACKGROUND AND PROCEDURAL HISTORY*fn1
While the factual and procedural history of this case is lengthy and complicated, the relevant facts are as follows. The SEC filed this civil enforcement action in 1987, charging defendants Israel G. Grossman, Norman Stein, Walter Herzberg, Saul Listokin, David Lev, George Hirshberg and Alan Hirshberg with insider trading based upon material nonpublic information concerning a planned recapitalization of Colt Industries, Inc. that defendant Grossman misappropriated from his employer and tipped to the other defendants in July 1986. On February 17, 1987, the Court entered a temporary restraining order freezing the assets of the defendants pending final adjudication of the Commission's claims against them. This asset freeze order was subsequently modified on several occasions for the limited purpose of permitting certain of the defendants to pay living expenses and attorneys' fees. However, that order has otherwise remained in effect continually through the present.
Without admitting or denying the allegations contained in the Commission's complaint, defendants David Lev, Saul Listokin, Walter Herzberg, and Norman Stein consented to the entry of Final Judgments of Permanent Injunction and Other Equitable Relief ("Final Judgments"). The Final Judgments as to defendants Lev, Listokin, Herzberg and Stein were entered on October 26, 1987, November 2, 1987, October 27, 1988 and March 10, 1989, respectively. Among other things, defendant Lev agreed to disgorge illegal profits of $101,431.38; defendant Herzberg consented to disgorge illegal profits of $196,593.60; and defendant Stein agreed to disgorge all of his assets.*fn2
Defendants Lev, Herzberg, and Stein have each paid monies into the Registry of the Court pursuant to the terms of the Final Judgments entered against them in this action. On December 7, 1987, defendant Lev paid $101,431.38 into the Registry; on November 2, 1988, defendant Herzberg paid $196,593.60 into the Registry; and on March 14, 1989, $2,843.41 was paid into the Registry.*fn3 The SEC asserts that "a financial specialist in the court clerk's office has reported that, with accrued interest, at least $546,067.27 is on deposit in the Registry for this action." SEC Mem. at 3.
The Final Judgments as to defendants Lev and Herzberg provide, in pertinent part, that the Clerk of the Court shall hold all disgorged funds "until the final determination of all proceedings in this action . . . or such earlier time as the Court shall order, at which time the Commission shall submit for approval by the Court a fair and equitable application of said funds." The Final Judgment as to defendant Stein provides, in pertinent part, "[t]he disgorged funds shall be held by the Clerk pending further order of this Court" and that "[t]he Receiver shall distribute the assets disgorged by defendant Stein pursuant to a plan to be proposed by the Commission and approved by the Court."*fn4
On April 14, 1999, after this case was remanded to this Court by the Second Circuit Court of Appeals for clarification of the Court's previous order regarding disgorgement, the Court entered an Order holding: (1) defendant Israel Grossman liable for disgorgement in the amount of $1,182,907.19, together with prejudgment interest in the amount of $1,334,413.10, for a total liability of $2,517,320.29; (2) the estate of defendant George Hirshberg liable for disgorgement in the amount of $496,410.38, together with prejudgment interest in the amount of $378,740.66, for a total liability of $875,151.04;*fn5 and (3) defendant Alan Hirshberg liable for disgorgement in the amount of $248,205.19, together with prejudgment interest in the amount of $189,370.33, for a total liability of $437,575.52.*fn6 The time for filing an appeal from that Order has expired.
To date, neither Grossman, the Hirshberg Estate, nor Alan Hirshberg have paid any of the disgorgement ordered by the Court. A review of Grossman's tax returns and financial statements led Magistrate Judge Dolinger to conclude that Grossman appeared to lack sufficient assets to pay the disgorgement. See SEC v. Grossman, Report and Recommendation, December 11, 1996. However, Magistrate Judge Dolinger entered the disgorgement order against Grossman, the Hirshberg Estate and Alan Hirshberg on the ground that each might later acquire the means to satisfy the judgment. See id. at 12. That Report and Recommendation was adopted in full by the Court on May 6, 1997. See SEC v. Grossman, No. 87 Civ. 1031, 1997 WL 231167 (S.D.N.Y. May 6, 1997).
In addition to the approximately $546,000 previously deposited into the Registry by defendants Lev, Herzberg and Stein, the SEC maintains that approximately $304,247 in cash and several shares of stock held in two brokerage accounts maintained in the name of George Hirshberg, and a bank account in the name of Israel Grossman that contains less than $900.00, remain frozen pursuant to the Court's February 17, 1987 Order. A safe deposit box rented by George Hirshberg, its contents unknown to the SEC at this time, also remains frozen. The known assets for distribution potentially total approximately $851,000.
II. SWORN ACCOUNTING
The Commission moves for an order compelling North Fork Bank ("NFB"), the successor of Jamaica Savings Bank ("JSB"), to open the safety deposit box rented at JSB in the name of George Hirshberg, and provide in writing, both to the Commission and the Court, a sworn accounting of the contents contained therein, and to preserve any things of value found in the safe deposit box pending further order of the Court. NFB, though counsel, has declined the Commission's request to open the safe deposit box and has stated that it will not do so unless compelled by a court order.
Counsel for the Hirshberg Estate does not object to the Commission's request for an order directing NFB to open the safe deposit box and provide a sworn accounting of its contents. See Letter from Dennis Rapps, Esq., to the Court, dated June 28, 2002, at 3 ("Rapps Letter").
Absent any objections, the Court grants the Commission's motion for an order compelling NFB to open the safe deposit box rented at JSB in the name of George Hirshberg, and provide in writing, both to the Commission and the Court, a sworn accounting of the contents contained therein, and to preserve any things of value found in the safe deposit box pending further order of the Court. Such accounting is to be provided to the Court and the Commission within 30 days of the date of entry of this Order.
III. REMITTANCE OF DEFENDANTS' FROZEN ASSETS TO THE COURT REGISTRY
The Commission also moves to have certain of the defendants' frozen assets, which have been kept under the control of non-party custodians, remitted to the Registry of the Court. These assets consist of: (1) approximately $856.61 held in cash in a joint account in the names of Israel and Yehudis Grossman at Deutsche Banc (the successor to Bankers Trust); (2) approximately $291,744.10 held in an account in the name of George Hirshberg at Shearson Smith Barney, Inc.; (3) $12,090.33 and 17 shares of Flightserve.com stock held in an account in the name of George Hirshberg at U.S. Clearing Corporation; and (4) unknown assets held in a safe deposit box in the name of George Hirshberg at NFB.
The Commission asserts that turning over these frozen assets to the Registry is necessary to relieve the non-party custodians of the continuing burden of maintaining these frozen assets under their control and to consolidate the frozen assets under the Court's control. In opposition, Grossman argues that the assets under his and his wife's names should be returned to them rather than turned over to the Registry, alleging that the SEC has not tried to enforce the judgment against him and that the statute of limitations should bar any further collection efforts. See Def. Israel Grossman's Mem. in Support of Cross Motion for Order Finalizing Disgorgement Proceedings, dated June 7, 2002, at 2 ("Grossman Mem."). Grossman also argues that the Commission's motion conflicts with a February 20, 1988 Order issued by the Court. However, the Order of Disgorgement entered against Grossman is a final order and the time for appeals has expired. As such, Grossman's substantive objections to the Order of Disgorgement are untimely and are hereby denied.
The Hirshberg Estate also objects to the Commission's request to have these assets turned over to the Registry, arguing that when George Hirshberg died, the assets in his name became the property of his wife, Carol Hirshberg, as a matter of law. See Rapps Letter at 3. Specifically, Carol Hirshberg and her daughter, Miriam Hirshberg, request the return of "Carol Hirshberg's personal savings," $32,000 in an account at National Westminster Bank seized by the IRS, and "Miriam Hirshberg's $2,000 wages that were held in another National Westminster account." Id. Mrs. Hirshberg and her daughter have made this request in an apparent attempt to recover monies that the Court previously determined should be unfrozen and turned over to the IRS. See SEC v. Grossman, 887 F. Supp. at 661 ("defendants have failed to present any evidence in support of their claims that the funds are unrelated to the illegal trading in Colt securities"). They assert that the IRS wrongly seized Mrs. Hirshberg's assets to satisfy George Hirshberg's tax liability. Mrs. Hirshberg insists that she was an "innocent spouse" and should not have been liable for her husband's tax liabilities. See Rapps Letter at 3.*fn7 However, the time for appeals of the Court's prior opinion regarding this specific matter has passed. As such, Carol and Miriam Hirshberg's request for the return of money previously turned over to the IRS to satisfy tax liabilities is denied.
This case has been pending for over 15 years and it is no longer necessary nor wise to burden non-party custodians with the maintenance of these frozen assets. Therefore, the Court orders that the following assets in the control of non-party custodians be turned over to the Registry of the Court within 30 days of the date of entry of this Order: (1) approximately $856.61 held in cash in a joint account in the names of Israel and Yehudis Grossman at Deutsche Banc (the successor to Bankers Trust); (2) approximately $291,744.10 held in an account in the name of George Hirshberg at Shearson Smith Barney, Inc.; and (3) $12,090.33 and 17 shares of Flightserve.com stock held in an account in the name of George Hirshberg at U.S. Clearing Corporation. With regard to the safe deposit box maintained at NFB under the name of George Hirshberg, the Court will determine whether this asset should be turned over to the Registry after NFB has provided the Commission and the Court with a sworn accounting regarding its contents.
IV. REMITTANCE OF FUNDS IN THE REGISTRY TO THE UNITED STATES TREASURY
As a final matter, the Commission moves for the remittance of all funds from this action held within the Court's Registry to be turned over to the United States Treasury. The Commission asserts that locating claimants would be impracticable in this case because over 15 years have passed since the violations at issue took place, and all of the trading involved call option contracts for which no records exist that could be used to identify contemporaneous traders who sold or wrote the call options contracts purchased by the defendants. See SEC Mem. at 7.
Defendant Grossman objects to the Commission's motion on several grounds. First, Grossman asserts that because he does not have the financial wherewithal to pay the judgment against him, the assets in his name should be returned to him and the Court should issue an order that future attempts at collection would be futile and any future assets he might earn or receive are not subject to disgorgement. Grossman's main support for this argument is that as a result of the Commission's failure to identify any "defrauded investors," it is "certainly inequitable and double jeopardy for [Grossman] to be further penalized by [the] [C]ourt." Grossman Mem. at 2. Grossman also reiterates that he did not personally profit from his insider trading and that some unidentified statute of limitations should bar the Commission from receiving disgorgement after all these years. See id. at 2-3. At the outset, the Court notes that the objections raised by Grossman are without merit and have been previously litigated and appealed in this matter. First, any statute of limitations that may have been applicable to the Commission's claims against Grossman were tolled by the filing, in February 1987, of the Complaint in this action. Second, Grossman's liability for the violations charged in this case and his obligation to pay the court-ordered disgorgement have been fully and conclusively adjudicated and are not subject to any further appeal.*fn8
Additionally, counsel for the Hirshberg Estate moves for the release of frozen funds for the payment of legal fees. Counsel bases his request on the SEC's recent assertion that the assets in the Court's Registry should be turned over to the United States Treasury and not used to compensate defrauded investors, as was previously asserted. See SEC v. Grossman, 887 F. Supp. at 661. Counsel's prior request was denied, by this Court and by Magistrate Judge Dolinger, on the basis that the funds were necessary for defrauded investors. That situation appears to no longer be the case. Although the time for appealing the Court's Order denying the payment of attorneys' fees from the frozen funds has passed, the Court finds that as circumstances in this case have changed since the time of that Order, the basis for that decision is no longer valid. As such, the Court orders that $33,275.00 of the frozen funds in the name of George Hirshberg are disbursed to Dennis Rapps, Esq., as full payment of his services in this matter.*fn9
Finally, Walter Herzberg moves to have his 1986 tax liability of $19,370.30 and statutory additions of $58,607.52 paid from the money he disgorged to the SEC as a condition of his Final Judgment entered on October 27, 1988. Herzberg has submitted a copy of an IRS levy dated July 1, 2002 detailing the above figures. See Letter from Walter Herzberg to the Court, dated July 9, 2002. In response, the SEC notes that Herzberg did not mention a tax lien or any outstanding tax liability in his August 1988 affidavit describing his then-current assets and liabilities. See Letter from Yuri B. Zelinsky, SEC Assistant Director, to the Court, dated December 12, 2002 at 3, Ex. D. The SEC also notes that Herzberg has neglected to pursue this matter for over fourteen years, leading to a considerable amount of interest and penalties assessed on his original tax liability. See id. at 3, n. 1.
An IRS tax assessment creates a valid lien on a defendant's assets if it was made prior to the disgorgement of those assets. See SEC v. Levine, 881 F.2d 1165, 1177 (2d Cir. 1989). However, contrary to Herzberg's assertion that "a final assessment arises when a taxpayer files a tax return acknowledging a liability," see Letter from Walter Herzberg to the Court, dated December 18, 2002 at 1 (the "Dec. 18 Herzberg Letter"), the date and amount of a final assessment is determined by the IRS and not by the taxpayer, most likely when the IRS sends the taxpayer a notice of final assessment for unpaid federal income taxes. See, e.g., United States v. Alfaro, 34 F. Supp.2d 827, 830 (E.D.N.Y. 1999) (final assessments for unpaid taxes made by the IRS 5 years after relevant tax period); United States v. Carlin, 948 F. Supp. 271, 278 (S.D.N.Y. 1996) (final assessment made by IRS after notification to taxpayer of several previous assessments). Herzberg has not provided to the Court a copy of the final assessment notice by the IRS and, therefore, has not substantiated his claim that a valid IRS lien was created prior to the date he disgorged his assets to the SEC.10 Herzberg's motion for the payment of his 1986 tax liability from the assets he previously disgorged to the SEC is hereby denied.
The primary purpose of disgorgement is to prevent a defendant's unjust enrichment, not to compensate investors. See SEC v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y. 1997); SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987); SEC v. Dimensional Entm't Corp., 1996 U.S. Dist. LEXIS 2824, *5 (S.D.N.Y. Mar. 11, 1996); SEC v. Glauberman, No. 90 Civ. 5205, 1992 U.S. Dist. LEXIS 10982, *3 (S.D.N.Y. July 16, 1992). "[O]nce the primary purpose of disgorgement has been served by depriving the wrongdoer of illegal profits, the equitable result is to return the money to the victims of the violation." SEC v. Drexel Burnham Lambert, Inc., 956 F. Supp. at 507. However, such a distribution is not required by statute and, where distribution to victims of securities fraud is impractical, courts have permitted payment of disgorged funds to the Treasury. See, e.g., SEC v. Dimensional Entm't Corp., 1996 U.S. Dist. LEXIS 2824 at *5-6 (where 14 years had passed from time of violation to settlement, locating victims of violation would be impractical and unnecessarily costly); SEC v. Lorin, 869 F. Supp. 1117, 1129 (S.D.N.Y. 1994) ("disgorged profits can very well end up in the United States Treasury . . . where numerous victims suffered relatively small amount thereby making distribution of the disgorged profits to them impracticable"); SEC v. Courtois, No. 84 Civ. 593, Fed. Sec. L. Rep. (CCH) P 92,000 (S.D.N.Y. Apr. 11, 1985) (disgorgement paid to Treasury in view of difficulty of identifying particular claimants and likelihood that distribution would result in only nominal distribution to claimants).
Given the substantial amount of time that has passed since the violations occurred, nearly 15 years, and the difficulty that the Commission would have in locating victims of this crime, the Court finds that the remainder of the funds held in the Court's Registry should be paid to the United States Treasury. See SEC v. Dimensional Entm't Corp., 1996 U.S. Dist. LEXIS 2824 at *4. The Court further directs that any additional funds disgorged by Grossman in the future be remitted directly to the Treasury. "The fact that swindlers have run through the proceeds of the fraud and are now insolvent should not prevent the imposition of a remedy, since defendants may `subsequently acquire the means to satisfy the judgment.'" SEC v. Inorganic Recycling Corp., No. 99 Civ. 10159, 2002 U.S. Dist. LEXIS 15817, *6 (S.D.N.Y. Aug. 22, 2002) (quoting SEC v. Grossman, 87 Civ. 1031, 1997 U.S. Dist. LEXIS 6225, *10 (S.D.N.Y. May 10, 1997)).
For the reasons set forth above, it is hereby ordered that North Fork Bank shall open the safe deposit box rented in the name of George Hirshberg and provide, both to the Commission and the Court, a sworn accounting of the contents contained therein within 30 days of the date of this Order. Further, North Fork Bank is ordered to preserve any items of value found in the safety deposit box pending further Order of the Court.
Second, it is hereby ordered that the following assets in the control of non-party custodians be turned over to the Registry of the Court within 30 days of the date of this Order: (1) approximately $856.61 held in cash in a joint account in the names of Israel and Yehudis Grossman at Deutsche Banc (the successor to Bankers Trust); (2) approximately $291,744.*fn10 held in an account in the name of George Hirshberg at Shearson Smith Barney, Inc.; and (3) $12,090.33 and 17 shares of Flightserve.com stock held in an account in the name of George Hirshberg at U.S. Clearing Corporation.
Third, the Court grants counsel for the Hirshberg Estate's motion for the payment of attorneys' fees from frozen assets in the name of George Hirshberg. The Clerk of the Court is directed to disburse $33,275.00 to Dennis Rapps, Esq., as full and final payment for his work in this matter.
Fourth, Walter Herzberg's motion for the payment of his tax liabilities from the money he disgorged is denied.
Fifth, it is hereby ordered that the remainder of the funds held in the Court's Registry with regard to this case should be paid to the United States Treasury.
Lastly, Grossman's motion to bar any future collection efforts by the SEC regarding the Order of Disgorgement and the Hirshberg's motion for return of money previously in an account under the name of Carol Hirshberg and George Hirshberg are hereby denied.