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SECURITIES AND EXCHANGE COMMISSION v. GROSSMAN

January 13, 2003

SECURITIES AND EXCHANGE COMMISSION PLAINTIFF,
v.
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 ...


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