United States District Court, S.D. New York
January 15, 2004.
EDWIN B. MISHKIN, AS SIPA TRUSTEE FOR THE LIQUIDATION OF THE BUSINESS OF ADLER, COLEMAN CLEARING CORP., Plaintiff, -against- ROY AGELOFF, ROBERT F. CATOGGIO, LOWSLL SCHATZER, RONAN GARBER, JOSEPH DIBELLA, JOHN LEMBO, MARK A. MANCINO, JOSEPH SCARFONE, CHRIS WOLF, RANDY M. ASHENFARE, EARL RUSNAK, and DANNY GARBERG, Defendants
The opinion of the court was delivered by: VICTOR MARRERO, District Judge
DECISION AND ORDER
Plaintiff, as trustee (the "Trustee") for the liquidation of the
business of Adler, Coleman Clearing Corp. ("Adler"), brought this action
pursuant to the Securities Investor Protection Act of 1970 ("SIPA"),
15 U.S.C. § 78aaa-111, alleging violations of federal securities laws
and state common law fraud. Defendants (collectively "Defendants") were
traders and/or brokers of Hanover Sterling & Company, Ltd.
("Hanover"), an introducing broker/dealer firm for which Adler served as
clearinghouse. In related proceedings addressing claims filed in the
Bankruptcy Court in this District by Hanover customers serviced by
Defendants, the Bankruptcy Court made findings of fact, thoroughly
detailed in an opinion affirmed by this Court, that Defendants had
engaged in a
massive scheme designed to defraud Adler and the Securities Investors
Protection Corporation created by SIPA, activities that ultimately
resulted in the insolvency of both Hanover and Adler. See Mishkin v.
Ensminger (In re Adler, Coleman Clearing Corp.), 247 B.R. 51 (Bankr.
S.D.N.Y. 1999), aff'd., 263 B.R. 406, 433-35 (S.D.N.Y. 2001).
In separate proceedings initiated by the United States following
investigations by Government regulators, Defendants and other Hanover
officers and employees were charged with criminal violations of Section
10(b) of the Securities and Exchange Act of 1933 ("§ 10(b)"),
15 U.S.C. § 78j (b), and Rule 10b-5 promulgated thereunder by the
SEC.*fn1 Defendants Roy Ageloff ("Ageloff"), Robert F. Catoggio, Joseph
DiBella, Randy M. Ashenfarb, John Lembo, Mark A. Mancino and Joseph
Scarfone pled guilty to various charges of fraud, rigging initial public
offerings, manipulation of stock prices and/or
unauthorized trading arising out of their securities services at
Hanover. See united States v. Catoggio, et al., Superseding Indictment,
No. 98 Cr. 1129(S) (E.D.N.Y.) (the "Criminal Action"). Two other Hanover
brokers were convicted after a trial in the Eastern District of New York
(the "Hanover Trial"). See United States v. Nazareno, No. CR 98-1129(3)
(E.D.N.Y. Apr. 10-May 3, 2001). At the Hanover Trial, several of the
Defendants in the present case testified and admitted having engaged in
illegal conduct that the Trustee asserts encompasses the unlawful
activities charged in the complaint in the underlying action now before
this Court. Their testimony also implicated the other Defendants in the
same fraudulent practices that permeated Hanover. Defendants' scheme
included manipulating the market for certain Hanover house stocks;
booking fake purchases and sales of stock during a period Defendants knew
Hanover was insolvent; knowingly shifting losses anticipated from their
scheme and the impending Hanover insolvency away from certain favored
customers and on to Adler, which was obligated by a clearinghouse
agreement to guarantee Hanover's trades; and booking false entries into
customer accounts in order to conceal Defendants' fraud and thereby place
their favored customers in a preferred position in the event of Hanover's
bankruptcy. See Mishkin, 247 B.R. at 64; 263 B.R. at 482.
As a consequence of Defendants unlawful activities, Adler, which as
Hanover's clearing firm was compelled to honor its guarantee of Hanover
trades, suffered losses that the Trustee seeks to recover from Defendants
in this action. To that end, the Trustee filed the instant motion for
summary judgment on liability.*fn2 The Court established a schedule that
called for Defendants to respond by November 12, 2003 and the motion to
be fully briefed by December 5, 2003. None of the Defendants filed
opposition to the motion.
A. STANDARD OF REVIEW
A party is entitled to summary judgment if on the basis of the record
before it, including the pleadings, admissions and affidavits filed, the
Court concludes that there is no genuine issue as to any material fact,
and that, based on the undisputed facts, the moving party is entitled to
judgment as a matter of law. See Fed.R.Civ.P. 56(c); Celotex Corp. v.
Catrett, 477 U.S. 317, 322 (1986); Whidbee v. Garzarelli Food
Specialties, Inc., 223 F.3d 62, 68 (2d Cir. 2000).
B. COLLATERAL ESTOPPEL
In support of the instant motion for summary judgment on liability, the
Trustee relies on the determination of the essential facts conclusively
decided against Defendants at the Hanover Trial, and contends that by
application of collateral estoppel Defendants are precluded from
relitigating matters already adjudicated in the criminal proceedings.
Summary judgment is appropriate under the doctrine of collateral
estoppel (issue preclusion) when all the material issues of fact in a
pending action have been actually and necessarily resolved in a prior
proceeding. See State of New York v. Julius Nasso Concrete Corp.,
202 F.3d 82, 86 (2d Cir. 200C); NLRB v. Thalbo Corp., 171 F.3d 102, 109
(2d Cir. 1999). 11 [A] criminal conviction, whether by jury verdict or
guilty plea, constitutes estoppel in favor of the United States in a
subsequent civil proceeding as to those matters determined by the
judgment in the criminal case." United States v. Podell, 572 F.2d 31, 35
(2d Cir. 1978) (citations omitted). For collateral estoppel to apply, the
court must find that (1) "the issues in both proceedings are identical;
(2) the issue in the prior proceeding was actually litigated and actually
decided, (3) there was full and fair opportunity to litigate in the prior
proceeding, and (4) the issue previously litigated was necessary to
support a valid and final judgment
on the merits." Thalbo Corp., 171 F.3d at 109.
C. APPLICATION OF STANDARDS
Defendants' convictions of § 10(b) violations stemmed from their
participation in the fraudulent scheme Defendants perpetrated at Hanover
to which their criminal convictions related, as also found by the
Bankruptcy Court and affirmed by this Court. See Mishkin, 263 B.R. at
424. The allegations of § 10(b) violations and common law fraud
described in the Trustee's complaint in this action parallel the events
and charges determined at the Hanover Trial and in the Defendants' guilty
pleas, as well as the conduct of Defendants and others that is described
in the Bankruptcy Court's findings of fact. Consequently, the record
before the Court contains overwhelming uncontroverted evidence
establishing Defendants' liability for the wrongdoing the Trustee asserts
in this action. On this basis, the Court concludes that the essential
elements the Trustee would be required to prove to sustain Defendants'
liability in this action were determined against the Defendants in the
criminal proceeding and embodied in the judgments there rendered. Those
elements include: (1) misstatements or omissions by Defendants; (2)
relating to material facts; (3) involving scienter on the part of
Defendants; (4) relied upon by the Trustee; (5) made in
connection with the purchase or sale of a security; and (6) causing
damage to the Trustee. See Feinman v. Dean Witter Reynolds, Inc.,
84 F.3d 539, 540 (2d Cir. 1996) (citing In re Time Warner Inc. Secs.
Litig., 9 F.3d 259, 264 (2d Cir. 1993), cert. denied, 511 U.S. 1017
(1994)). By application of the doctrine of collateral estoppel,
Defendants are barred from relitigating those issues. See Beck v.
Levering, 947 F.2d 639, 642 (2d Cir. 1991).
It is settled that a party in a civil case may be precluded from
relitigating issues adjudicated in a prior criminal proceeding and that
the Government may rely on the collateral estoppel effect of the
conviction in support of establishing the defendant's liability in the
subsequent civil action. See Podell, 572 F.2d at 35; see also Gelb v.
Royal Globe Ins. Co., 798 F.2d 38, 43 (2d Cir. 1986); SEC v. Tandem
Mgmt. Inc., No. 95 Civ. 8411, 2001 WL 1488218, at *8 (S.D.N.Y. Nov. 21,
2001); SEC v. McCaskey, No. 98 Civ. 6153, 2001 WL 1029053, at *3
(S.D.N.Y. Sept. 6, 2001). Defendants' guilty pleas and convictions
incorporated the actual litigation and conclusive decision of those
underlying issues. See Podell, 572 F.2d at 35. There was a full and fair
opportunity for Defendants to litigate the issues in the criminal
proceedings. Some elected to plead guilty, thereby accepting the truth of
the charges brought against them, and some testified at the
trial at which other Hanover brokers were found guilty of participating
in the unlawful conduct alleged here. Finally, the fraudulent activities
that Defendants admitted or were found to have committed in the Criminal
Action encompass the elements necessary to support a judgment on the
merits in this action. Because those facts and issues established
violations of § 10(b) and Rule 10(b)-5, the Trustee can rely on the
judgments entered in the Criminal Action to establish Defendants'
liability under the same charges alleged by the Trustee in the civil
complaint. See McCaskey, 2001 WL 1029053, at *3.
The facts established by Defendants' convictions, uncontested on the
record of the Trustee's motion that has been presented to the Court, are
sufficient to satisfy all the prerequisites for civil liability under
§ 10(b) and Rule 10(b)-5. Similarly, the Trustee has established the
requirements for liability on the common law fraud claim, insofar as the
elements essentially reflect those applicable to § 10(b) liability.
The Bankruptcy Court's findings in Mishkin are sufficient to establish
that the Defendants' conduct satisfied the prerequisites of common law
fraud. See 247 B.R. at 125. Accordingly, the Trustee in entitled to
summary judgment on liability as to both federal and state law claims.
For the reasons discussed above, it is hereby
ORDERED that the motion of plaintiff Edwin B. Mishkin ("Trustee") for
summary judgment on liability is granted as to defendants Robert F.
Catoggio, Ronan Garber, Joseph DiBella, John Lembo, Mark A. Mancino,
Joseph Scarfone, Chris Wolf, Randy M. Ashenfarb, Earl Rusnak, and Danny
Garber as regards the Trustee's claims alleging securities violations of
Section 10(b) of the Securities Exchange Act and common law fraud; and it
ORDERED that within fifteen (15) days of the date of this Order the
Trustee file with the Court and serve on the defendants subject of the
liability judgment authorized herein, particulars and documentation
concerning the damages to be awarded as against each defendant found