Securities & Exchange Commission v. Razmilovic , 738 F.3d 14 ( 2013 )

12-0357
SEC v. Razmilovic
1 UNITED STATES COURT OF APPEALS
2 FOR THE SECOND CIRCUIT
3 ------
4 August Term, 2012
5 (Argued: February 5, 2013 Decided: July 22, 2013)
6 Docket No. 12-0357
7 _________________________________________________________
8 SECURITIES AND EXCHANGE COMMISSION,
9 Plaintiff-Appellee,
10 - v. -
11 TOMO RAZMILOVIC,
12 Defendant-Appellant,
13 SYMBOL TECHNOLOGIES, INC., KENNETH JAEGGI, LEONARD
14 GOLDNER, BRIAN BURKE, MICHAEL DEGENNARO, FRANK
15 BORGHESE, CHRISTOPHER DESANTIS, JAMES HEUSCHNEIDER,
16 GREGORY MORTENSON, JAMES DEAN, ROBERT DONLON,
17 Defendants.
18 _________________________________________________________
19 Before: JACOBS, Chief Judge, KEARSE and CARNEY, Circuit Judges.
20 Appeal from a judgment of the United States District Court for the Eastern District of
21 New York, Sandra J. Feuerstein, Judge, ordering appellant, following entry of his default for
22 noncompliance with an order to appear for his deposition in the United States, to, inter alia, disgorge
23 $41,753,623.04, plus interest in the amount of $27,260,953.99, and to pay a civil penalty of
1 $22,876,811.52. See 822 F.Supp.2d 234 (2011).
2 Affirmed in part, vacated and remanded in part.
3 SUSAN S. McDONALD, Senior Litigation Counsel, Securities and
4 Exchange Commission, Washington, D.C. (Mark D. Cahn, General
5 Counsel, Michael A. Conley, Deputy General Counsel, Jacob H.
6 Stillman, Solicitor, Securities and Exchange Commission, Washington,
7 D.C., on the brief), for Plaintiff-Appellee.
8 JEFFREY B. COOPERSMITH, Seattle, Washington (John A.
9 Goldmark, Davis Wright Tremaine, Seattle, Washington; Katherine A.
10 Heaton, DLA Piper, Seattle, Washington, on the brief), for Defendant-
11 Appellant.
12 KEARSE, Circuit Judge:
13 Defendant Tomo Razmilovic appeals from so much of a judgment of the United States
14 District Court for the Eastern District of New York, Sandra J. Feuerstein, Judge, as orders him to
15 disgorge to plaintiff Securities and Exchange Commission ("SEC") $41,753,623.04, plus prejudgment
16 interest in the amount of $27,260,953.99, and to pay a civil penalty of $22,876,811.52, for violations
17 of various provisions of the Securities Act of 1933 (the "Securities Act") and the Securities Exchange
18 Act of 1934 (the "Exchange Act") (collectively the "1933 and 1934 Acts"). The district court entered
19 a default against Razmilovic as a sanction for his refusal to comply with an order to appear for his
20 deposition in the United States; the court ordered Razmilovic to pay the above amounts following an
21 evidentiary hearing. On appeal, Razmilovic contends principally that the district court (1) abused its
22 discretion in imposing a default, rather than a less severe sanction, for his refusal to appear for his
23 deposition, and (2) erred in its calculations of the disgorgement, prejudgment interest, and statutory
24 penalty amounts. Razmilovic also contends, principally in connection with the proceedings on relief,
25 that the district judge exhibited bias in favor of the SEC and against Razmilovic and should have
2
1 recused herself. For the reasons that follow, we find no error or abuse of discretion in the entry of the
2 default, the denial of Razmilovic's recusal motion, and the disgorgement award. However, we remand
3 for recalculation of prejudgment interest and for the clerical correction of a discrepancy between the
4 amount of the civil penalty ordered in the district court's ruling and the amount of the penalty awarded
5 in the judgment.
6 I. BACKGROUND
7 This is a civil enforcement action brought by the SEC against defendant Symbol
8 Technologies, Inc. ("Symbol"), a supplier of mobile information systems using handheld electronic
9 devices for barcode and other data capture technology, and various officers and employees of Symbol,
10 alleging that the defendants engaged in fraudulent and manipulative practices in violation of, inter
11 alia, § 10(b) of the Exchange Act and Rule 10b-5 thereunder, § 13(b)(5) of the Exchange Act and
12 § 17(a) of the Securities Act, and various rules promulgated under the latter sections. The complaint's
13 well-pleaded allegations as to Razmilovic's liability, which, in light of his default, are deemed
14 admitted, see Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir.
15 1992), cert. denied, 506 U.S. 1080 (1993), include the following.
16 Razmilovic was Symbol's president and chief operating officer ("COO") from 1995
17 through June 2000, its President and Chief Executive Officer ("CEO") from July 2000 until February
18 2002, and a member of its board of directors from 1995 to February 2002. "From at least 1998 until
19 as recently as February 2003," Razmilovic and others "engaged in a wide array of fraudulent
20 accounting practices and other misconduct that had a cumulative net impact of over $230 million on
3
1 Symbol's reported revenue and over $530 million on its reported pre-tax earnings." (Complaint ¶ 1.)
2 That conduct included entering into artificial swap transactions and other fraudulent schemes,
3 publishing false reports of earnings, issuing fraudulent press releases, and filing false reports or
4 registration statements with the SEC. (See, e.g., id. ¶¶ 44-48, 143.) Razmilovic regularly authorized
5 changes to quarterly reports in order to conform Symbol's reported results to management's prior
6 forecasts. For example, on one occasion, management's prediction was matched by making fraudulent
7 adjustments, authorized by Razmilovic, that made a $2.5 million quarterly loss appear to be a
8 $13.4 million gain. (See Complaint ¶ 40(f).) The frauds are described in greater detail in the district
9 court's Memorandum of Decision dated September 30, 2011, and reported at 822 F.Supp.2d 23410 ("September 2011 Opinion"), familiarity with which is assumed.
11 Razmilovic received bonuses and other compensation directly related to Symbol's
12 performance. He also profited from the frauds because they artificially inflated Symbol's stock price,
13 and he had received as compensation for his employment thousands of Symbol stock options that he
14 was able to exercise at prices well below the inflated market price and to sell at that market price. In
15 the present action, commenced in June 2004, the SEC sought--and largely won--a judgment that
16 would, inter alia, enjoin Razmilovic from further violations of the securities laws, bar him from again
17 serving as an officer or director of any public company, require him to disgorge all executive
18 compensation he had received from Symbol from 1998 onward and all profits from his securities
19 violations, plus prejudgment interest on those sums, and order him to pay penalties authorized by the
20 1933 and 1934 Acts. As to the relief ordered by the district court, only the monetary awards are at
21 issue on this appeal.
4
1 A. The Criminal Case and Razmilovic's Default in the Present Case
2 In mid-2004, prior to the filing of the present complaint, an indictment was handed
3 down in the United States District Court for the Eastern District of New York against Razmilovic and
4 his codefendants, charging them with violations of the securities laws. Razmilovic, who was in
5 Europe at the time, has not since returned to the United States. He is considered a fugitive by the
6 United States Department of Justice ("Justice Department").
7 In 2004 in the present case, Judge Leonard D. Wexler, to whom the case was then
8 assigned, granted a motion by those defendants who were not fugitives for a stay of these proceedings
9 pending resolution of the criminal case. Razmilovic's motion for that relief was denied on the ground
10 of his fugitivity, and he timely filed an answer, denying the material allegations of the complaint; the
11 SEC agreed to postpone discovery until the stay granted by the district court was lifted.
12 In September 2007, the case was reassigned to Judge Feuerstein, who lifted the stay
13 in October 2007. In July 2009, the court set a tentative date for trial in January 2010. Promptly
14 thereafter, the SEC served Razmilovic with notice that his deposition would be taken at the SEC's
15 office in New York City on September 28, 2009.
16 In a letter dated September 11, 2009, Razmilovic's counsel informed the SEC that
17 Razmilovic was "abroad," and asked the SEC to "let us know whether you wish to make arrangement
18 to take Mr. Razmilovic's deposition abroad, either in person or by videoconference or telephone."
19 (Letter from Jeffrey B. Coopersmith to Todd D. Brody dated September 11, 2009.) The SEC rejected
20 these alternatives. Razmilovic's counsel informed the SEC that Razmilovic would not come to the
21 United States.
5
1 On September 29, 2009, after Razmilovic failed to appear for the scheduled September
2 28 deposition, the SEC moved for an order compelling him to appear for his deposition in New York.
3 Razmilovic cross-moved to have his deposition taken via videoconference pursuant to Fed. R. Civ.
4 P. 30(b)(4).
5 In an Order dated October 9, 2009 ("October 2009 Order"), the district court granted
6 the SEC's motion and denied that of Razmilovic. The court ordered Razmilovic "to appear in person,
7 on a mutually agreeable date on or before October 22, 2009, as provided in plaintiff's notice of
8 deposition." October 2009 Order at 1. The court warned that "[f]ailure of Mr. Razmilovic to appear
9 in person for a deposition on or before October 22, 2009 may result in sanctions being imposed
10 against him and/or his attorneys pursuant to Rule 37(b)(2)(A), including a default judgment being
11 entered against him." October 2009 Order at 1.
12 The SEC thereafter proposed to Razmilovic several alternative dates for his deposition.
13 On October 15, Razmilovic informed the SEC that, despite the court's October 2009 Order, he would
14 not appear for the deposition.
15 On December 10, the SEC moved pursuant to Fed. R. Civ. P. 37(b)(2)(A)(vi) for entry
16 of a default judgment against Razmilovic as a sanction for his refusal to obey the court's order to
17 appear for his deposition. Razmilovic opposed the motion. He acknowledged that his violation of
18 the court order "may result in some form of sanction" but argued that a default judgment was drastic,
19 the "harshest of sanctions," and was not warranted because "lesser, effective sanctions may be
20 imposed." (Razmilovic Memorandum of Law in Opposition to Motion for Sanctions ("Razmilovic
21 Sanctions Memorandum") at 4-5.) Razmilovic proposed, for example, that he instead be barred from
22 disputing certain facts or asserting certain defenses, or be required to appear for his deposition in
6
1 Sweden and to pay for the expenses of the deposition. (See id. at 5-6.) Razmilovic also argued that
2 a default judgment would be improper because, in his view, the Supreme Court, in Degen v. United
3 States, 517 U.S. 820 (1996), had "rejected automatic disentitlement" of fugitives in civil cases.
4 (Razmilovic Sanctions Memorandum at 9.) He argued that imposing a default "as the sanction for
5 the sole discovery transgression of failing to attend an in-person deposition in the United States as
6 ordered would be the same as automatic disentitlement." (Id.)
7 In an order announced on the record at the ensuing status conference, the district court
8 granted the SEC's motion and imposed a default against Razmilovic ("Default Order"). (See Status
9 Conference Transcript, December 22, 2009 ("Conf. Tr."), at 5.) The court noted that the SEC was
10 entitled, except in circumstances not present here, to choose the location for depositions it wished to
11 take and that Razmilovic had offered "no excuse for his failure to appear at the deposition which was
12 ordered other than his [own] convenience." (Id. at 2.) The court found that Razmilovic's refusal to
13 appear was "willful and intentional." (Id. at 3; see also id. at 4-5 ("Considering the factors that courts
14 are to consider in cases of this type, there is no question that Razmilovic's noncompliance with this
15 court's October 9th order was willful . . . .").)
16 Although Razmilovic argued that Degen foreclosed entry of a default against him
17 under the fugitive disentitlement doctrine, the court pointed out that the SEC was not invoking that
18 doctrine: The SEC sought a default judgment not because Razmilovic was a fugitive from the
19 criminal case but solely because he had willfully violated the court's October 2009 Order to appear
20 for his deposition in the present case. (Id. at 3.)
21 Quoting from its October 2009 Order, the district court also pointed out that
22 Razmilovic had been "specifically warned" that if he failed to comply with that order "'to appear in
7
1 person for a deposition on or before October 22, 2009,'" he could be subject to sanctions, "'including
2 a default judgment.'" (Id. at 5.) The court noted that Razmilovic himself, in opposition to the SEC's
3 Rule 37 motion, "admits that he should be sanctioned" (id. at 3), and it rejected his request for a
4 sanction less severe than the entry of a default. The court found that Razmilovic's proposal that the
5 court should simply order him to have his deposition taken in Sweden--given that this was what
6 Razmilovic had proposed all along--could hardly be considered a "sanction" at all. (Id.)
7 Given the facts that Razmilovic had received an explicit warning that his failure to
8 comply with the October 2009 Order could result in a default, that the SEC's motion papers described
9 evidence indicating that there was a factual basis for finding that Razmilovic had violated the
10 securities laws (see id. at 4), and that Razmilovic's refusal to comply with the October 2009 Order was
11 willful and intentional, the court concluded that the entry of a default was appropriate (see id. at 5).
12 Razmilovic moved for reconsideration, largely reiterating his Degen argument and his
13 contention that lesser sanctions would be more appropriate, and arguing that the district court had
14 failed to assess whether Razmilovic had a meritorious defense to the complaint's allegations. In an
15 order dated February 25, 2010 ("February 2010 Order"), the district court denied the motion, stating,
16 inter alia, that a motion for a default judgment under Rule 37(b)(2)(A)(vi) does not require
17 determination of the merits of the complaint. The court noted that Razmilovic's other arguments had
18 been previously raised and rejected, and there was neither an intervening change of controlling law
19 nor a clear error by the court warranting a different result.
8
1 B. The Proceedings With Respect to Relief
2 With Razmilovic's liability established by the default, the district court held a trial to
3 determine the relief to which the SEC was entitled against Razmilovic. (All of Razmilovic's
4 codefendants reached settlements with the SEC.)
5 1. The Expert Evidence With Regard to Disgorgement
6 With respect to the SEC's request for disgorgement of the profits gained by Razmilovic
7 as a result of his fraud, Razmilovic and the SEC submitted expert reports (see Part II.B.2. below)
8 principally addressing how to calculate the total amount of Razmilovic's fraud-related profits from
9 stock transactions. In order to determine the value by which Symbol's share price was inflated due
10 to Razmilovic's fraud, both the SEC's expert, Edward S. O'Neal, and Razmilovic's expert, Denise
11 Neumann Martin, used "event-study methodology." That is, assuming that the company's share price
12 has been affected by prior fraud, the economist seeks to quantify that effect by looking at changes in
13 the stock's prices in the one or two days after the public availability of new information suggesting
14 a fraud, and comparing those changes to the changes that would have been predicted based solely on
15 market or industry factors. The two experts differed in their applications of that methodology.
16 O'Neal identified three statistically significant events which publicly disclosed or
17 suggested that Symbol's profitability had previously been overstated and which were followed by
18 declines in Symbol's share price. O'Neal opined that as a result of Razmilovic's prior frauds, Symbol's
19 share price, prior to the first of these events, had been inflated by a total of $11.54. Martin, in
20 contrast, found eleven statistically significant events--only one of which was among the three
21 identified by O'Neal--and she opined that much of the stock price movement following the events she
9
1 cited was attributable to industry trends. She thus calculated that the frauds had inflated Symbol's
2 share price by a total of only $3.42.
3 2. The District Court's Decision
4 In its September 2011 Opinion, the district court ruled, to the extent pertinent to this
5 appeal, that Razmilovic should disgorge $41,753,623.04, plus prejudgment interest, and pay a civil
6 penalty of $20,876,811.52 [sic]. See 822 F.Supp.2d at 284.
7 With respect to the SEC's request that Razmilovic be required to disgorge all of the
8 compensation he received from Symbol from the time his fraudulent conduct began, the district court
9 disagreed, ruling that he should disgorge only so much as was causally related to the fraud. The court
10 found that since Razmilovic's promotion from COO to CEO occurred shortly after an announcement
11 of Symbol's increased revenue "which indisputably resulted from the fraud," the part of his salary that
12 should be disgorged was the difference between his salaries as COO and CEO. Id. at 255-56. The
13 district court also ordered disgorgement of, inter alia, Razmilovic's performance bonuses and
14 severance payment, finding that both had been dependent on Symbol's fraudulently inflated success.
15 See id. at 256-59. The court found that the amount of executive compensation Razmilovic should
16 disgorge totaled $7,883,647.84.
17 As to the SEC's request that Razmilovic be required to disgorge his profits from
18 transactions in Symbol stock, measured simply by the difference between his sales price and his
19 purchase price, the district court again disagreed. It ruled that his unlawful gains from the stock
20 transactions should be measured by the "amount by which the value of Symbol's stock was inflated
21 as a result of the fraud." Id. at 261. In determining the amount of that inflation, the court credited the
10
1 calculation by the SEC's expert, O'Neal, over that of Razmilovic's expert, Martin. The court noted
2 that Martin lacked "prior experience with disgorgement cases involving the exercise of stock options,"
3 that she failed to base her opinions on economic literature, and that she failed to follow her own
4 described procedures. Id. at 262-63. The court concluded that the frauds in which Razmilovic
5 participated had inflated Symbol's stock price by $11.54 per share. See id. at 261-66. On that basis,
6 the court calculated that with respect to Razmilovic's stock transactions--including his exercise of
7 stock options by selling fraudulently inflated shares to Symbol to fund the exercise of options having
8 far lower prices; "zero-cost collar" transactions (i.e., offsetting put and call options), that Razmilovic
9 entered into while fraudulently representing to the other party that he had no material, non-public
10 information concerning Symbol; and his sales of Symbol stock on the open market while its price was
11 inflated--Razmilovic's fraudulent gains totaled $33,869,975.20.
12 Thus, the court concluded that, given his fraud-related gains in executive compensation
13 and stock transactions, Razmilovic should disgorge a total of $41,753,623.04. Id. at 276.
14 As discussed in Part II.C.1. below, the district court ruled that Razmilovic should pay
15 prejudgment interest on that disgorgeable amount "from the time of his unlawful gains to the entry
16 of judgment," 822 F.Supp.2d at 278. The court rejected Razmilovic's contention that he should not
17 be required to pay such interest because the Justice Department had caused $17.4 million of his funds
18 in Swiss bank accounts to be frozen in 2004, denying him access to those funds since that time. See
19 id. at 277-78. The court directed the SEC "to file a proposed judgment including the amount of
20 prejudgment interest calculated in accordance with this order." Id. at 279.
21 Finally, as discussed in Part II.C.2. below, the district court imposed a statutory penalty
22 pursuant to § 20(d) of the Securities Act, 15 U.S.C. § 77t(d)(1), and § 21(d) of the Exchange Act, 15
11
1 U.S.C. § 78u(d)(3)(A), to the extent of one-half the amount of Razmilovic's disgorgeable pecuniary
2 gain, or $20,876,811.52. See 822 F.Supp.2d at 279-82. In the proposed judgment submitted by the
3 SEC and entered by the court, however, the penalty figure was $2 million higher, $22,876,811.52.
4 II. DISCUSSION
5 On appeal, Razmilovic argues principally that the district court's imposition of a default
6 judgment was an abuse of discretion and that its disgorgement, penalty, and prejudgment interest
7 awards were erroneous. He also contends that the district judge should have recused herself from the
8 case, arguing that her rulings evinced partiality toward the SEC. We reject Razmilovic's contentions
9 except to the extent that Razmilovic was ordered to pay prejudgment interest on funds that had been
10 frozen at the behest of the United States government, and except to the extent that the judgment must
11 be corrected to have the civil penalty match the amount awarded by the district court in its September
12 2011 Opinion.
13 A. The Entry of Default
14 Rule 37 of the Federal Rules of Civil Procedure provides in part that if a party "fails
15 to obey an order to provide . . . discovery, . . . the court where the action is pending may issue further
16 just orders," including
17 (i) directing that the matters embraced in the order or other designated
18 facts be taken as established for purposes of the action, as the prevailing party
19 claims;
20 (ii) prohibiting the disobedient party from supporting or opposing
21 designated claims or defenses, or from introducing designated matters in
12
1 evidence;
2 (iii) striking pleadings in whole or in part;
3 (iv) staying further proceedings until the order is obeyed;
4 (v) dismissing the action or proceeding in whole or in part;
5 (vi) rendering a default judgment against the disobedient party; or
6 (vii) treating as contempt of court the failure to obey . . . .
7 Fed. R. Civ. P. 37(b)(2)(A). Clearly, the most severe of these sanctions for a disobedient plaintiff is
8 the dismissal of his action; the most severe for a disobedient defendant is the imposition of a default.
9 "[D]ismissal or default" should be ordered "only when the district judge has considered lesser
10 alternatives." Southern New England Telephone Co. v. Global NAPs Inc., 624 F.3d 123, 144 (2d Cir.
11 2010) ("SNET"). No sanction should be imposed without giving the disobedient party notice of the
12 particular sanction sought and an opportunity to be heard in opposition to its imposition. See, e.g.,
13 Reilly v. NatWest Markets Group Inc., 181 F.3d 253, 270 (2d Cir. 1999), cert. denied, 528 U.S. 111914 (2000); United States Freight Co. v. Penn Central Transportation Co., 716 F.2d 954, 955 (2d Cir.
15 1983) ("U.S. Freight").
16 We review a district court's imposition of sanctions for abuse of discretion. See, e.g.,
17 National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639, 642 (1976) ("NHL");
18 Agiwal v. Mid Island Mortgage Corp., 555 F.3d 298, 302 (2d Cir. 2009) ("Agiwal"); U.S. Freight, 716
19 F.2d at 955; Sieck v. Russo, 869 F.2d 131, 134 (2d Cir. 1989) ("Sieck").
20 "[S]everal factors may be useful in evaluating a district court's exercise of
21 discretion" to impose sanctions pursuant to this rule, including "(1) the
22 willfulness of the non-compliant party or the reason for noncompliance; (2) the
23 efficacy of lesser sanctions; (3) the duration of the period of noncompliance,
24 and (4) whether the non-compliant party had been warned of the consequences
25 of noncompliance."
13
1 SNET, 624 F.3d at 144 (quoting Agiwal, 555 F.3d at 302).
2 Because the text of the rule requires only that the district court's orders be
3 "just," however, and because the district court has "wide discretion in
4 imposing sanctions under Rule 37," Shcherbakovskiy v. Da Capo Al Fine,
5 Ltd., 490 F.3d 130, 135 (2d Cir.2007) (internal quotation marks omitted), these
6 factors are not exclusive, and they need not each be resolved against the party
7 challenging the district court's sanctions for us to conclude that those sanctions
8 were within the court's discretion.
9 SNET, 624 F.3d at 144. In Sieck, we affirmed the entry of defaults against defendants who "elected
10 to defy" two court orders to attend their depositions. 869 F.2d at 134. We noted that
11 [t]he mere availability of softer sanctions . . . does not bar a court from
12 imposing the default sanction. As the Supreme Court recognized,
13 here, as in other areas of the law, the most severe in the spectrum of
14 sanctions provided by statute or rule must be available to the district
15 court in appropriate cases, not merely to penalize those whose conduct
16 may be deemed to warrant such a sanction, but to deter those who
17 might be tempted to such conduct in the absence of such a deterrent.
18 Sieck, 869 F.2d at 134 (quoting NHL, 427 U.S. at 643); see also NHL 427 U.S. at 640, 642 (extreme
19 sanction of dismissal of complaint justified where failure to comply with court's order was due to
20 plaintiffs' willfulness and bad faith); Agiwal, 555 F.3d at 302 ("dismissal with prejudice is a harsh
21 remedy to be used only in extreme situations, and then only when a court finds willfulness, bad faith,
22 or . . . fault by the non-compliant litigant" (internal quotation marks omitted)); id. ("[w]hether a
23 litigant was at fault or acted willfully or in bad faith are questions of fact").
24 An abuse of discretion may consist of an erroneous view of the law, a clearly erroneous
25 assessment of the facts, or a decision that cannot be located within the range of permissible decisions.
26 See, e.g., Agiwal, 555 F.3d at 302 n.2; Sims v. Blot, 534 F.3d 117, 132 (2d Cir. 2008). "A district
27 court would necessarily abuse its discretion if it based its ruling on an erroneous view of the law or
28 on a clearly erroneous assessment of the evidence." Cooter & Gell v. Hartmarx Corp., 496 U.S. 384,
14
1 405 (1990) (reviewing sanction imposed pursuant to Fed. R. Civ. P. 11). But in the absence of such
2 an error, "[t]he question, of course, is not whether [the reviewing court] would as an original matter
3 have [imposed the sanction in question]; it is whether the District Court abused its discretion in so
4 doing." NHL, 427 U.S. at 642; see, e.g., SNET, 624 F.3d at 143.
5 In the present case, we see no error of law nor any clearly erroneous finding of fact
6 with respect to the district court's decision to impose on Razmilovic the sanction of default. To begin
7 with, we reject Razmilovic's contention that the district court violated the principle established by
8 Degen, i.e., that the fugitive disentitlement doctrine should not be applied to prevent a fugitive from
9 a criminal case from participating in a civil case.
10 The fugitive disentitlement doctrine allows an appellate court to, inter alia, "dismiss
11 the appeal of a defendant who is a fugitive from justice during the pendency of his appeal." Ortega-
12 Rodriguez v. United States, 507 U.S. 234, 239 (1993). The Degen Court held that this doctrine does
13 not authorize the district court to "strike the filings of a claimant in a forfeiture suit" and enter
14 judgment against him merely "for failing to appear in a related criminal prosecution," 517 U.S. at 821,
15 "or otherwise . . . resisting[ the] related criminal prosecution," id. at 823.
16 In the present case, however, as described in Part I.A. above, the court rejected
17 Razmilovic's Degen argument because the SEC did not seek--and the court did not enter--sanctions
18 under the fugitive disentitlement doctrine (see Conf. Tr. 3). Rather, the court entered the default
19 against Razmilovic on the express basis that he had willfully disobeyed the October 2009 Order. (See
20 id. at 3, 4-5.)
21 Further, that basis for imposition of a default was plainly one as to which the Degen
22 Court had indicated approval. That Court stated that a "District Court has its usual authority to
15
1 manage discovery in a civil suit, including the power to enter protective orders limiting discovery as
2 the interests of justice require." 517 U.S. at 826. The Degen Court added:
3 [O]f course, [the fugitive's] absence entitles him to no advantage. If his
4 unwillingness to appear in person results in noncompliance with a legitimate
5 order of the court respecting pleading, discovery, the presentation of evidence,
6 or other matters, he will be exposed to the same sanctions as any other
7 uncooperative party. A federal court has at its disposal an array of means to
8 enforce its orders, including dismissal in an appropriate case. Again, its
9 powers include those furnished by federal rule, see, e.g., Fed. Rules Civ. Proc.
10 37, 41(b); National Hockey League v. Metropolitan Hockey Club, Inc., 427
11 U.S. 639 (1976) (per curiam) . . . .
12 Degen, 517 U.S. at 827 (emphases added). The entry of a default in the present case pursuant to Rule
13 37(b)(2)(A)(vi) because of Razmilovic's refusal to comply with the district court's legitimate
14 discovery order plainly did not run afoul of Degen.
15 Razmilovic does not even attempt to argue that the court's finding of willfulness was
16 erroneous. Nor, plausibly, could he. His adamant and express insistence that he would not comply
17 with the October 2009 Order requiring that he appear for his deposition in New York made plain that
18 his disobedience was willful and intentional.
19 None of Razmilovic's proposed alternative sanctions was likely to lead to his
20 compliance with the court's order for his deposition as noticed by the SEC or to provide the SEC with
21 the discovery methods to which it was entitled. As indicated in Part I.A. above, the court had warned
22 that if Razmilovic did not appear for his deposition in accordance with the SEC's notice he would be
23 exposed to "sanctions . . . pursuant to Rule 37(b)(2)(A), including a default judgment being entered
24 against him," October 2009 Order at 1. Although Razmilovic disobeyed only that single court order,
25 his adamance in the face of the court's warning of possible sanctions that included the extreme
26 sanction of default clearly supported an inference that renewed orders to appear would be unavailing
16
1 and that no lesser sanction would be effective to induce Razmilovic to appear in New York for his
2 deposition. The court was not required to relieve him of that obligation. Given that "the most severe
3 in the spectrum of sanctions provided by" Rule 37 "must be available to the district court in
4 appropriate cases," not only to make such discovery orders effective in the case at hand but also "to
5 deter those who might be tempted to [engage in similar disobedience] in the absence of such a
6 deterrent," NHL, 427 U.S. at 643, we cannot conclude that the entry of default against Razmilovic in
7 the present case was an abuse of discretion.
8 B. Disgorgement
9 Razmilovic attacks the district court's disgorgement order on several grounds. First,
10 he contends that the judge should have recused herself on the ground of what he characterizes as
11 "extreme bias against" him and an abuse of discretion in, inter alia, allowing the SEC to reopen its
12 case-in-chief in the remedies hearing in order to present expert evidence in support of disgorgement.
13 (Razmilovic brief on appeal at 23.) He urges this Court to vacate the default judgment against him
14 and remand for proceedings before a different district judge. Second, Razmilovic argues that the
15 court's calculations of the disgorgeable amounts were without foundation and that the court should
16 have credited the views of Razmilovic's expert and excluded the report of the SEC's expert. None of
17 these contentions is persuasive.
18 1. Recusal
19 As indicated above, the district court entered the default against Razmilovic in
20 December 2009 and denied his motion for reconsideration in February 2010. March 15, 2010, was
17
1 eventually set as the date for the evidentiary hearing needed to determine the amounts that Razmilovic
2 should be required to disgorge. The hearing started on that date; the SEC rested after presenting
3 evidence of Razmilovic's executive compensation at Symbol and of the proceeds of his other
4 transactions in Symbol stock after his fraudulent activity began. On March 16, the hearing was
5 resumed but was adjourned without either side presenting evidence; the SEC said it had not decided
6 whether it would call an expert witness in rebuttal to the expert to be called by Razmilovic. The
7 hearing was adjourned until May 10 to allow the parties to produce and exchange information with
8 regard to the reports of their respective experts. After a further adjournment--and after the district
9 court "denied the parties' respective motions to exclude the testimony of each other's expert witness"--
10 the court, over the SEC's objection, granted Razmilovic's request that the remaining issues be
11 determined "upon submission of experts' reports, deposition transcripts and post-hearing briefs." 822
12 F.Supp.2d at 242.
13 In the meantime, on April 5, 2010, Razmilovic moved pursuant to Fed. R. Civ. P. 52(c)
14 for a judgment on partial findings, dismissing the SEC's disgorgement claims on the ground that the
15 SEC had failed to introduce evidence of any causal connection between the moneys gained by
16 Razmilovic and his fraudulent conduct. At an unrecorded telephone conference call among the court
17 and the parties on April 9, 2010, the SEC indicated that it wished to reopen its case-in-chief to offer
18 two documents it had inadvertently failed to introduce. The SEC also said it would produce an expert
19 in rebuttal to the evidence anticipated from Razmilovic's expert. At that point, counsel for Razmilovic
20 announced that Razmilovic did not intend to put on a defense case. According to Razmilovic, the
21 district court
22 then pointedly asked [SEC counsel] whether the Commission wanted to move
23 to reopen its case-in-chief to present an expert witness. It was the Court, not
18
1 SEC counsel, that suggested reopening for the purpose of presenting an expert
2 witness. [SEC counsel] hesitated, and then responded that the Commission did
3 want to reopen its case to present an expert witness.
4 (Declaration of Jeffrey B. Coopersmith dated April 27, 2010 ("Coopersmith Decl."), ¶ 21.) Over
5 Razmilovic's objection, the court set dates for the making of, and the response to, the SEC's motion
6 to reopen. The court thereafter granted the SEC's motion before Razmilovic's formal response was
7 due.
8 On April 27, 2010, Razmilovic moved pursuant to 28 U.S.C. § 455 to have the district
9 judge recuse herself from further presiding over the case "on the ground that the Court's impartiality
10 might reasonably be questioned." (Razmilovic Memorandum of Law in Support of Motion for
11 Recusal at 1 (internal quotation marks omitted).) The motion, supported also by a declaration of
12 counsel, argued that the court had exhibited bias against Razmilovic and in favor of the SEC by, inter
13 alia, granting default as a sanction; denying Razmilovic's motion to preclude the SEC from presenting
14 any evidence in support of disgorgement or civil penalties because the SEC's damages statement was
15 filed less than 15 days before the hearing date, in violation of the judge's individual rules; denying that
16 motion prior to the deadline for Razmilovic's reply brief in support of his motion; urging the SEC to
17 move to reopen its case-in-chief in order to introduce expert evidence on disgorgement; and granting
18 that motion prior to the deadline the court had set for Razmilovic's response to the motion. (Id. at 3-5;
19 see also Coopersmith Decl. ¶¶ 10-22.)
20 The SEC opposed the motion for recusal on several grounds. It argued that the motion
21 principally complained of legal rulings by the court with which Razmilovic disagreed, and that such
22 rulings and disagreements were not a valid basis for a motion to recuse. The SEC also argued that
23 the motion was untimely: that a litigant must make such a motion "'at the earliest possible moment
19
1 after obtaining knowledge of facts demonstrating the basis for such a claim,'" rather than continuing
2 to participate in the proceedings and waiting to see how the court rules on the various issues, as
3 Razmilovic had done. (SEC Memorandum in Opposition to Razmilovic Motion for Recusal at 7
4 (quoting In re International Business Machines Corp., 45 F.3d 641, 643 (2d Cir. 1995)).) And the
5 SEC argued that the court had exhibited no bias but had treated the parties even-handedly,
6 overlooking many procedural transgressions by Razmilovic.
7 In an order dated June 14, 2010, the district court denied Razmilovic's recusal motion.
8 The court ruled that in large part the motion was based on its legal rulings, which provided no basis
9 for recusal. The court acknowledged that in two instances it had inadvertently ruled on motions
10 prematurely, ascribing those errors to the fact that the court had failed to adhere to its own so-called
11 "Bundle" rule, which required that no motion be filed until all of the papers, for and against, were
12 ready. The court noted that after denying Razmilovic's preclusion motion prior to the deadline for his
13 reply brief, the court had rectified that mistake by granting his motion for reconsideration and fully
14 considering Razmilovic's reply brief submitted on reconsideration; the court had adhered to its
15 original decision only after reconsideration. The court also pointed out that Razmilovic had not even
16 bothered to move for reconsideration of the order allowing the SEC to reopen its case-in-chief; he had
17 instead immediately moved for recusal.
18 As to the merits of its order allowing the SEC to reopen its case-in-chief to present
19 expert evidence, the court noted that Razmilovic's Rule 52(c) motion, which was
20 filed with the Court on April 5, 2010, clearly apprized the SEC of the defects
21 in its evidence, of which it presumably was otherwise unaware. Razmilovic
22 had not yet commenced his presentation of a defense and had previously
23 secured an expert witness. There is nothing improper or inappropriate in
24 permitting a party to reopen its case to remedy the defects in its evidence,
25 particularly absent any prejudice to the opposing party.
26 Order dated June 14, 2010, at 12.
20
1 The court concluded that none of the actions attributed to it by Razmilovic could
2 reasonably be perceived as emanating from any bias against Razmilovic or in favor of the SEC, and
3 that recusal would be inappropriate. Razmilovic contends that this conclusion was error. We
4 disagree.
5 A judge is required to recuse herself from "any proceeding in which h[er] impartiality
6 might reasonably be questioned." 28 U.S.C. § 455(a). The standard for disqualification under 28
7 U.S.C. § 455(a) is "an objective" one, ISC Holding AG v. Nobel Biocare Finance AG, 688 F.3d 98,
8 107 (2d Cir. 2012) ("ISC Holding") (internal quotation marks omitted); the question is whether an
9 objective and disinterested observer, knowing and understanding all of the facts and circumstances,
10 could reasonably question the court's impartiality, see, e.g., id.; In re Drexel Burnham Lambert Inc.,
11 861 F.2d 1307, 1313 (2d Cir. 1988), reh'g denied en banc, 869 F.2d 116 (2d Cir.), cert. denied, 490
12 U.S. 1102 (1989).
13 To be disqualifying under § 455, "'[t]he alleged bias and prejudice . . . must stem from
14 an extrajudicial source and result in an opinion on the merits on some basis other than what the judge
15 has learned from his participation in the case.'" In re International Business Machines Corp., 618 F.2d
16 923, 927 (2d Cir. 1980) (quoting United States v. Grinnell Corp., 384 U.S. 563, 583 (1966) (emphasis
17 ours)).
18 [O]pinions formed by the judge on the basis of facts introduced or events
19 occurring in the course of the current proceedings, or of prior proceedings, do
20 not constitute a basis for a bias or partiality motion unless they display a
21 deep-seated favoritism or antagonism that would make fair judgment
22 impossible. Thus, judicial remarks during the course of a trial that are critical
23 or disapproving of, or even hostile to, counsel, the parties, or their cases,
24 ordinarily do not support a bias or partiality challenge.
25 Liteky v. United States, 510 U.S. 540, 555 (1994). Accordingly, recusal is not warranted where the
26 only challenged conduct "consist[s] of judicial rulings, routine trial administration efforts, and
21
1 ordinary admonishments . . . to counsel and to witnesses," where the conduct occurs during judicial
2 proceedings, and where the judge "neither (1) relie[s] upon knowledge acquired outside such
3 proceedings nor (2) display[s] deep-seated and unequivocal antagonism that would render fair
4 judgment impossible." Id. at 556.
5 A district judge's decision not to recuse herself from a proceeding is reviewed under
6 an abuse-of-discretion standard. See, e.g., ISC Holding, 688 F.3d at 107; Diamondstone v. Macaluso,
7 148 F.3d 113, 120 (2d Cir. 1998). It is "rare" for "a district judge's denial of a motion to recuse" to
8 be "disturbed by an appellate court." ISC Holding, 688 F.3d at 107 (internal quotation marks
9 omitted). We see no abuse of discretion here.
10 The court found that Razmilovic's refusal to comply with the court's order was willful--
11 a finding he does not suggest was in any way erroneous or inaccurate. As discussed in Part II.A.
12 above, the entry of a default based on that willful choice was well within the proper bounds of the
13 court's discretion.
14 All of Razmilovic's complaints about the district judge center on judicial rulings,
15 ordinary trial administration efforts, and relatively routine commentary on the positions and conduct
16 of the parties in the litigation. And although, as the court acknowledged, two administrative errors
17 occurred when the court ruled on two motions before they were fully submitted, we see no objective
18 basis for attributing those errors to bias. Judges are human. Errors are made; some are corrected;
19 some are not, but are harmless. Few are attributable to bias.
20 Nor are we persuaded that the district court's allowing the SEC to reopen its case-in-
21 chief could reasonably be viewed as emanating from bias. The absence of bias in favor of the SEC
22 is reflected by the fact that a hearing was being held. The judge had agreed with Razmilovic's
23 position that a hearing was needed to determine the amount Razmilovic gained as a result of the
22
1 frauds, and had rejected the position of the SEC that it was entitled, without the need for a hearing,
2 to disgorgement of "every single dollar of Mr. Razmilovic's compensation while he was at Symbol"
3 (Conf. Tr. 9 (Razmilovic's counsel characterizing the SEC's position)). And having agreed with
4 Razmilovic that the equitable remedy of disgorgement should be granted only with respect to so much
5 of Razmilovic's gains as were causally related to the frauds, it was well within the court's equitable
6 powers and discretion to allow the SEC, prior to Razmilovic's presentation of any defense, to reopen
7 its case-in-chief to present evidence of causation.
8 We note that Razmilovic complains that he "moved in essence for a directed verdict[
9 and] the Court sua sponte invited the SEC to reopen its remedies case to cure th[e] defect"
10 (Coopersmith Decl. ¶ 4 (emphasis added); see id. ¶ 22 (Razmilovic made "a motion effectively for
11 a directed verdict after a party has rested"))--as if such a motion itself precluded any further
12 presentation of evidence by the SEC. But when a party moves for a "directed verdict" (known since
13 1991 as a "judgment as a matter of law") in a jury trial, it must do so--with specificity as to the alleged
14 evidentiary deficiency--before the case is submitted to the jury, see Fed. R. Civ. P. 50(a)(2); both the
15 timing requirement and the specificity requirement are designed "to assure the responding party an
16 opportunity to cure any deficiency in that party's proof," Piesco v. Koch, 12 F.3d 332, 340 (2d Cir.
17 1993) (internal quotation marks omitted)); see, e.g., Lore v. City of Syracuse, 670 F.3d 127, 152-53
18 (2d Cir. 2012); 9B C. Wright & A. Miller, Federal Practice and Procedure § 2533, at 494-507 (3d ed.
19 1998). While the standards for assessing such motions under Rule 50 do not govern motions for
20 judgment in a case tried to the court without a jury, it should be beyond cavil that the court, in a
21 proceeding in which it will rule on proposed equitable remedies, has no less authority than it has in
22 a case to be decided by a jury to allow a party to attempt to cure an alleged deficiency in its proof
23 before the matter is submitted to the decisionmaker.
23
1 In sum, we see no abuse of discretion in the district judge's denial of Razmilovic's
2 recusal motion.
3 2. The Merits
4 Razmilovic contends that the district court erred in ordering him to disgorge any more
5 than $4,870,849, arguing principally (a) that the court should not have required disgorgement of any
6 of his executive compensation from Symbol, and (b) that, with respect to his stock transactions, the
7 court should have, inter alia, excluded the evidence of the SEC's expert O'Neal and should not have
8 found that Razmilovic's expert Martin was unqualified. We are unpersuaded.
9 "Once the district court has found federal securities law violations, it has broad
10 equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge
11 their profits." SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996) ("First Jersey"),
12 cert. denied, 522 U.S. 812 (1997). Disgorgement "is a method of forcing a defendant to give up the
13 amount by which he was unjustly enriched." SEC v. Commonwealth Chemical Securities, Inc., 574
14 F.2d 90, 102 (2d Cir. 1978). Thus, in order to establish a proper disgorgement amount, "the party
15 seeking disgorgement must distinguish between the legally and illegally derived profits," CFTC v.
16 British American Commodity Options Corp., 788 F.2d 92, 93 (2d Cir.), cert. denied, 479 U.S. 85317 (1986), so that disgorgement is ordered only with respect to those that were illegally derived.
18 Nonetheless, because of the difficulty of determining with certainty the extent to which
19 a defendant's gains resulted from his frauds--especially profits from transactions in securities whose
20 market price has been affected by the frauds--the court need not determine the amount of such gains
21 with exactitude. "The amount of disgorgement ordered need only be a reasonable approximation of
22 profits causally connected to the violation." First Jersey, 101 F.3d at 1475 (internal quotation marks
24
1 omitted); see also SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998) ("Warde"); SEC v. Patel, 61 F.3d
2 137, 139 (2d Cir. 1995) ("Patel").
3 Despite sophisticated econometric modelling, predicting stock market
4 responses to alternative variables is . . . at best speculative. Rules for
5 calculating disgorgement must recognize that separating legal from illegal
6 profits exactly may at times be a near-impossible task.
7 SEC v. First City Financial Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989) ("First City"). Given these
8 difficulties, "[s]o long as the measure of disgorgement is reasonable, any risk of uncertainty should
9 fall on the wrongdoer whose illegal conduct created that uncertainty." Warde, 151 F.3d at 50 (internal
10 quotation marks omitted); see, e.g., First Jersey, 101 F.3d at 1475; Patel, 61 F.3d at 140.
11 Once the SEC has met the burden of establishing a reasonable approximation of the
12 profits causally related to the fraud, the burden shifts to the defendant to show that his gains "were
13 unaffected by his offenses." SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996) ("Lorin"); see also Warde,
14 151 F.3d at 50 (after district court reached a "reasonable approximation of profits causally connected
15 to the violation," defendant "was entitled to prove that the district court's measure [wa]s inaccurate"
16 (internal quotation marks omitted)); First City, 890 F.2d at 1232 (after SEC provided a reasonable
17 approximation of unjust enrichment, defendants "were then obliged clearly to demonstrate that the
18 disgorgement figure was not a reasonable approximation"); SEC v. Platforms Wireless International
19 Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (same).
20 We review a district court's disgorgement order, and its ancillary findings, for abuse
21 of discretion. See, e.g., Warde, 151 F.3d at 49; First Jersey, 101 F.3d at 1475; Lorin, 76 F.3d at 462
22 (amount to be disgorged); Patel, 61 F.3d at 140 (causation).
23
25
1 a. Razmilovic's Executive Compensation
2 With regard to Razmilovic's executive compensation, the district court rejected the
3 SEC's contention that all of the salary and bonuses received by Razmilovic throughout his tenure at
4 Symbol should be disgorged, finding that only so much of that compensation as resulted from the
5 fraud should be disgorged. Although Razmilovic argues that the court made no sustainable finding
6 as to causation, we disagree.
7 The frauds at issue were principally accounting frauds that created the appearance that
8 Symbol's performance met the company's prior optimistic financial predictions. The district court
9 excluded from disgorgement most of Razmilovic's base salary because, inter alia, under Razmilovic's
10 employment agreement, adjustments in his base salary were unrelated to Symbol's performance.
11 However, noting that Symbol's reported increase in earnings in 1999 "indisputably resulted from the
12 fraud," 822 F.Supp.2d at 255, and that Razmilovic was promoted from COO to CEO shortly
13 thereafter, id. at 255-56, the court found it "reasonable to infer a causal connection between
14 Razmilovic's fraud and his promotion to CEO," id. at 255. It thus ordered disgorgement of the
15 difference between Razmilovic's salary as COO and his higher salary as CEO. The district court's
16 findings as to the sequence and timing of these events are not clearly erroneous, and we see no abuse
17 of discretion in its ruling that Razmilovic should disgorge that difference.
18 The court also noted that Symbol's proxy materials stated that, while adjustments in
19 an executive's base salary were generally not tied to the company's performance, the opposite was true
20 of bonuses and stock options. Those materials stated that "'[Symbol] promotes a pay-for-performance
21 philosophy,'" that "'[o]verall compensation paid to senior executives should be tied to how well
22 [Symbol] performs financially,'" and that "'[u]nder the Executive Bonus Plan, each year [Symbol]
23 establish[es] corporate financial performance objectives . . . , based on earnings per share.'" 822
26
1 F.Supp.2d at 243 (quoting Symbol's 2000, 2001, and 2002 proxy statements). The district court found
2 that "there is evidence in the record as [a] whole, including Martin's expert report, supporting the
3 SEC's claim that Razmilovic's performance bonuses were causally connected to his fraud," noting that
4 "[Razmilovic's] own expert admitted in her report that Symbol's restated earnings would not have met
5 the target earnings amounts for performance-related bonuses in either year that he received those
6 bonuses." 822 F.Supp.2d at 257 (emphasis added). Thus, the court reasonably ruled that Razmilovic
7 should disgorge the performance bonuses he received during his fraudulent conduct.
8 Nor do we see any abuse of discretion in the district court's ruling that Razmilovic
9 should disgorge the bonus he received in connection with Symbol's acquisition of Telxon Corporation
10 in a stock-for-stock merger. The court noted that the complaint--whose factual allegations are deemed
11 true by reason of Razmilovic's default--alleged that the entire transaction "had been improperly
12 recorded and fraudulently used to 'prop up' Symbol's earnings." Id. at 258.
13 The court also reasonably ruled that Razmilovic should disgorge his $5 million
14 severance payment, see 822 F.Supp.2d at 258-59, which he received at least in part for
15 "'relinquish[ing] his right to all outstanding stock options whether vested or unvested as of [February
16 14, 2002], with the exception of 236,250 shares granted to Razmilovic on October 19, 1998,'" id.17 at 247 (quoting the severance agreement).
18 In sum, the district court carefully sought to distinguish compensation Razmilovic
19 received from Symbol that was not dependent on the company's performance--and thus was not
20 disgorgeable--from his various bonuses and stock option awards that were dependent on that
21 performance and from the increased salary resulting from his promotion to CEO shortly after the
22 fraudulently manipulated financial reports "improved" Symbol's performance. We see no abuse of
27
1 discretion in the court's order that Razmilovic should disgorge those sums, which totaled
2 $7,883,647.84.
3 b. Razmilovic's Stock Transactions
4 As indicated in Part I.B. above, the parties' experts presented competing views as to
5 the amount by which the frauds in which Razmilovic participated had inflated the market price of
6 Symbol's shares. The SEC's expert, O'Neal, focused on three sharp declines in the market price of
7 Symbol's shares: (1) a drop of 30 percent following a July 16, 2001 announcement by Symbol that
8 its quarterly earnings were below expectations, (2) a drop of 17 percent following a February 13, 2002
9 Newsday article revealing, inter alia, that Symbol had received an SEC inquiry and had commissioned
10 an independent review of its sales practices, and (3) a drop of 29 percent following announcements
11 by Symbol after the close of trading on February 14, 2002, that it was lowering earnings guidance for
12 future quarters and that Razmilovic had retired that day--a retirement that investors could view as
13 significantly abrupt, given the announcement of an SEC inquiry the day before. O'Neal opined that
14 prior to the first of these events, the frauds had inflated Symbol's share price by $11.54.
15 Martin, Razmilovic's expert, opined that the amount by which the frauds had inflated
16 Symbol's share price was only $3.42. Her analysis focused on the price change following the
17 Newsday report of the SEC inquiry and on price changes following 10 other events not mentioned by
18 O'Neal; and she concluded that most of the declines in Symbol's share price were attributable to
19 industry trends. Martin disregarded both the 30 percent price decline that followed the July 16, 2001
20 announcement that Symbol would not meet prior expectations for quarterly earnings and the 29
21 percent decline that followed the similar February 14, 2002 announcement of lower earnings
22 guidance, which was accompanied by the announcement of Razmilovic's sudden retirement.
28
1 Razmilovic contends the district court's conclusion that the Symbol share price was
2 inflated by $11.54 was erroneous, arguing first that the court should have excluded the opinion of
3 O'Neal on the ground that O'Neal confined his price fluctuation analysis to the time period that the
4 SEC instructed him to consider, and second that the court should not have viewed Martin as less
5 qualified than O'Neal to opine on the inflation question. We disagree.
6 In a section of its opinion entitled "Weight Afforded Expert Reports," the district court
7 explained as follows:
8 Although I accept Razmilovic's contention that the proper measure of
9 disgorgement in this case is the amount by which the value of Symbol's stock
10 was inflated as a result of the fraud, I nonetheless reject his expert's calculation
11 of the value of that inflation.
12 . . . . Both parties' experts utilized an "event study" methodology,
13 which, inter alia, examines the effect of an event on a corporation's stock price
14 by looking for "abnormal returns during those event periods, usually days,
15 when a stock moves differently than predicted based upon market and industry
16 factors" and determines whether those abnormal returns are related to the
17 alleged fraud. In re Xerox Corp. Securities Litigation, 746 F.Supp.2d 402, 408
18 (D.Conn. 2010). It is undisputed that such methodology is a generally
19 accepted method of calculating the inflation in a stock's price in cases
20 involving securities fraud. . . . Where the experts' opinions diverge, however,
21 is in their selection of the variables to use in their analysis and the weight to
22 be accorded to such variables. For the reasons set forth below, I find O'Neal's
23 opinion to be entitled to greater weight than Martin's.
24 ....
25 Martin's opinions, and particularly her calculations of the amount by
26 which the value of Symbol shares were inflated during the fraud period and the
27 amount Razmilovic is liable to disgorge, are entitled to little or no weight
28 because, inter alia, in addition to her omission of two (2) statistically relevant
29 dates,[] (a) she is not qualified to testify as to the amount Razmilovic is liable
30 to disgorge from his stock transactions insofar as she testified during her
31 deposition that she has no prior experience with disgorgement cases involving
32 the exercise of stock options and that she did not literally know how the [stock
33 exercise] transaction occur[red] in this case . . . ; (b) she did not base her
34 opinion upon economic literature . . . and used an earnings response model
29
1 unsupported by accepted econometric principles; and (c) she did not follow her
2 own procedures in this case, e.g., she compared the performance of Symbol
3 stock against only one (1) index, as opposed to two (2) or more. . . . In sum,
4 although Martin properly utilized an event study methodology, she did not
5 apply that methodology reliably to the facts of this case.
6 To the contrary, O'Neal's opinions are based upon a reliable foundation.
7 In his report, O'Neal, inter alia, adequately explains how he identified the
8 statistically relevant dates he utilized in his event study and how he utilized
9 those events to determine the effect that the pervasive fraud scheme had on the
10 value of Symbol's stock during the fraud period.
11 822 F.Supp.2d at 261-63 (other internal quotation marks omitted) (emphases added).
12 We see no basis for reversal in these observations and evaluations. Assessments of
13 relevance are committed to the sound discretion of the district court, see, e.g., George v. Celotex
14 Corp., 914 F.2d 26, 28 (2d Cir. 1990), and it was entirely reasonable for the court to discount Martin's
15 opinion on inflation on the basis that she disregarded two events (followed, respectively, by 30
16 percent and 29 percent price drops) that the court considered relevant and significant.
17 Further, perceived gaps, inconsistencies, or errors in the reasoning leading to an
18 expert's opinion are matters that properly go to the weight of the evidence; and the weight of the
19 evidence is a matter to be argued to the trier of fact, not a basis for reversal on appeal, see, e.g.,
20 Anderson v. Bessemer City, 470 U.S. 564, 573-74 (1985); Schwartz v. Capital Liquidators, Inc., 984
21 F.2d 53, 54 (2d Cir. 1993). Although the court's reliance on a clearly erroneous finding of fact would
22 constitute an abuse of discretion, we see no such findings here, for the factfinder's choice between
23 competing views of the facts or events cannot be clearly erroneous. See Anderson, 470 U.S. at 574.
24 Given the district court's permissible assessments of the relevance of the various events
25 and the opinions of the experts, we see no basis for disturbing its finding that Razmilovic's fraud
26 inflated the Symbol share price by a total of $11.54.
27 Razmilovic does not challenge the court's mathematical applications of the $11.54
30
1 figure in its determination of the amounts that Razmilovic should disgorge with respect to his collar
2 transactions and his exercises of stock options, see 822 F.Supp.2d at 267-74, although he does contend
3 that none of his profits from those transactions should be disgorged. These contentions are meritless
4 as well. The district court's order that Razmilovic disgorge his profits from the collar transactions was
5 based on the finding that the transactions themselves were fraudulent because Razmilovic falsely
6 represented to the other party that he was not in possession of material nonpublic information.
7 Further, had it not been for the fraud, the market price of Symbol stock at the time Razmilovic entered
8 into the collar transactions would have been lower, and it was not clear error for the court to infer that
9 the strike price of the put options too would have been set lower. To the extent that there is any
10 uncertainty as to whether a lower strike price would have been below Symbol's market price at the
11 time the option period expired, the burden of that uncertainty must be borne by Razmilovic, whose
12 fraud caused the distortion of the market prices.
13 Razmilovic's argument with respect to his stock options--that he should not have been
14 required to disgorge "paper" profits, i.e., profits from price increases of shares he did not sell--finds
15 no support even from his own expert, as Razmilovic used the fraudulently appreciated value of those
16 shares to fund his exercise of the stock options. The district court noted that
17 Razmilovic's expert concedes that the profits Razmilovic earned on the shares
18 of Symbol stock that he "swapped" during his exercise of stock options to pay
19 the options price and withholding taxes should be included in any
20 disgorgement calculation "since they would not have been earned absent the
21 alleged earnings misstatement and associated stock price inflation." (Martin
22 Rpt., at 8; see Martin Decl., at 8) ("Once the correct inflation is calculated, . . .
23 it has to be applied to Mr. Razmilovic's four exercises of employee stock
24 options . . . .")
25 822 F.Supp.2d at 259.
26 In sum, we reject all of Razmilovic's challenges to the district court's requirement that
27 he disgorge a total of $33,869,975.20 in unlawful profits from his stock transactions. Including the
31
1 $7,883,647.84 in executive compensation gained from his fraud, we affirm the court's order that
2 Razmilovic disgorge a total of $41,753,623.04.
3 C. Prejudgment Interest and the Civil Penalty
4 In connection with a disgorgement award, the district court has discretion to require
5 the defendant to pay prejudgment interest for the period during which he had the use of his unlawful
6 gains. See, e.g., First Jersey, 101 F.3d at 1477. In addition, the 1933 and 1934 Acts give the court
7 discretion to order a defendant who has violated those statutes to pay civil penalties. Razmilovic
8 challenges the amounts of the district court's awards of prejudgment interest and penalties on several
9 grounds. He challenges both on the basis that they were calculated with reference to the amount he
10 is ordered to disgorge and argues that each should be lower because the disgorgement amount should
11 be lower; these challenges fail because we uphold the disgorgement order.
12 1. Prejudgment Interest
13 Razmilovic's other challenge to the order that he pay $27,260,953.99 in prejudgment
14 interest may have somewhat greater merit. The district court ruled that Razmilovic was "liable to pay
15 prejudgment interest on the entire amount of his ill-gotten gains for the entire period from the time
16 of his unlawful gains to the entry of judgment." 822 F.Supp.2d at 278; see id. n.72 (setting various
17 starting dates--the earliest being February 1, 2002--for interest calculations with respect to different
18 components of the $41,753,623.04 disgorgement amount). Razmilovic contended that he should not
19 be liable for prejudgment interest because the United States government had caused some
20 $17.4 million of his funds in Swiss bank accounts to be frozen in 2004, and he had been denied access
21 to those funds since that time. The district court rejected that contention, stating (1) that there was
32
1 "no evidence . . . that all of [Razmilovic's] assets have been frozen by the government since 2004,"
2 (2) that there was no evidence that Razmilovic had attempted to access the frozen funds to pay living
3 expenses, and (3) that the total disgorgement ordered was well in excess of the total amount of frozen
4 funds. Id. at 278 (emphasis in original). Although the district court's third rationale justifies an award
5 of prejudgment interest on at least the amount by which the disgorgement sum exceeds the frozen
6 $17.4 million, the remainder of the court's reasoning appears flawed. And there is uncertainty with
7 respect to the frozen funds that neither side has addressed on appeal or, apparently, in the district
8 court.
9 Since "[t]he primary purpose of disgorgement as a remedy for violation of the
10 securities laws is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence
11 objectives of those laws," First Jersey, 101 F.3d at 1474; see also SEC v. Palmisano, 135 F.3d 860,
12 865 (2d Cir.) ("Palmisano") ("'deterrence may serve civil as well as criminal goals'" (quoting Hudson
13 v. United States, 522 U.S. 93, 105 (1997) (other internal quotation marks omitted))), cert. denied, 525
14 U.S. 1023 (1998), it is within the discretion of a court to award prejudgment interest on the
15 disgorgement amount for the period during which a defendant had the use of his illegal profits, see,
16 e.g., First Jersey, 101 F.3d at 1474-77. However, where, as here, the defendant has had some or all
17 of his assets frozen at the behest of the government in connection with the enforcement action, an
18 award of prejudgment interest relating to those funds would be inappropriate with respect to the
19 period covered by the freeze order, for the defendant has already, for that period, been denied the use
20 of those assets. In such a case, after a final order of disgorgement, the funds previously frozen would
21 presumably be turned over to the government in complete or partial satisfaction of the disgorgement
22 order, along with any interest that has accrued on them during the freeze period. In that circumstance,
23 the remedial purpose of prejudgment interest would already have been served with respect to the
33
1 period of the freeze; to require the defendant to pay prejudgment interest on the entire disgorgement
2 amount including the earlier frozen amount would, for the freeze period, deprive him twice of interest
3 on the portion of the disgorgement award that is satisfied by the frozen assets. Cf. Palmisano, 135
4 F.3d at 863 (noting the SEC's concession that a defendant should not be required to disgorge amounts
5 that he paid as restitution to his victims as ordered in his criminal case, because a "[d]efendant is only
6 required to give back the proceeds of his securities fraud once" (internal quotation marks omitted)).
7 The first and second facts cited by the district court, i.e., that Razmilovic apparently
8 has assets other than those that were frozen and that he has had no need to use the frozen assets for
9 his living expenses, did not take into account either the fact that Razmilovic has been denied the right
10 to use the assets that were frozen or the fact that the disgorgement order was not designed to strip
11 Razmilovic of "all" of his assets. "The [disgorgement] remedy consists of factfinding by a district
12 court to determine the amount of money acquired through wrongdoing . . . and an order compelling
13 the wrongdoer to pay that amount plus interest to the court. . . . Because the remedy is remedial rather
14 than punitive, the court may not order disgorgement above this amount." SEC v. Cavanagh, 445 F.3d
15 105, 116 & n.25 (2d Cir. 2006). The very purpose of the trial in this case was to allow the court to
16 distinguish Razmilovic's fraudulent gains from those that did not result from his frauds, and to order
17 disgorgement of only the former.
18 The question remains, however, whether Razmilovic's frozen funds can or will be used
19 in satisfaction of his disgorgement obligation. The SEC does not dispute that an order freezing
20 $17,379,735 of Razmilovic's assets in two Swiss bank accounts was obtained on or about July 2, 2004.
21 However, the freeze was sought not by the SEC in connection with this enforcement action but by the
22 Justice Department in connection with the criminal prosecution. The Justice Department explained
23 to the Swiss authorities that Razmilovic had been indicted for various fraud and conspiracy offenses
34
1 in a 25-count indictment, that the funds in those accounts were "believed to be proceeds of fraud," that
2 "each conspiracy and substantive securities fraud count carries a maximum fine of $5,000,000," and
3 that the indictment seeks the "forfeiture" of "approximately $63 million." (Letter from Mary Ellen
4 Warlow, United States Department of Justice, to Raphael Mauro, Swiss Federal Office of Justice
5 dated July 1, 2004, at 1-2 (emphases added).) The Justice Department's letter stated that the freeze
6 was needed "to prevent the dissipation of substantial criminal proceeds which are subject to forfeiture
7 under United States law." Id. at 3 (emphasis added). Thus, Razmilovic's potential monetary liability
8 in criminal fines and forfeiture in the criminal case far exceeds the value of his frozen assets.
9 Since Congress has the power to impose both criminal and civil sanctions for the same
10 conduct, a defendant may be required in a criminal proceeding to pay a fine and forfeiture and be
11 required in a civil enforcement proceeding to disgorge his unlawful gains. See, e.g., Palmisano, 135
12 F.3d at 865-66. If Razmilovic's frozen $17,379,735 is to remain frozen in connection with still-
13 pending criminal charges against Razmilovic, Razmilovic would be obligated to pay the entire
14 $41,753,623.04 disgorgement amount ordered in this civil enforcement action; and given the
15 nonpunitive, remedial purpose of disgorgement, it would be within the district court's discretion to
16 order him to pay prejudgment interest on that entire amount. If, however, Razmilovic's frozen funds
17 are to be used in partial satisfaction of his disgorgement obligation, we would conclude that
18 Razmilovic should not be required to pay prejudgment interest on such funds as were frozen, for the
19 period during which they were frozen.
20 On remand, the government will be required to decide whether to apply the frozen
21 $17.4 million to the judgment in the present case and forgo prejudgment interest on it, or to persist
22 in demanding prejudgment interest on the entire forfeiture amount. But for the reasons stated above,
35
1 a judgment granting prejudgment interest on the entire forfeiture amount would preclude the
2 application of the $17.4 million to this civil judgment.
3 2. The Civil Penalty
4 Razmilovic's remaining challenges to the $22,876,811.52 civil penalty imposed on him
5 are (a) that the amount is disproportionate to the civil penalties imposed on other defendants in this
6 case, and (b) that it is $2 million higher than the penalty amount stated in the court's opinion. Only
7 the latter contention has merit.
8 Both the 1933 and 1934 Acts authorize three tiers of monetary penalties for statutory
9 violations. See 15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d)(3). Under each statute, a first-tier penalty may
10 be imposed for any violation; a second-tier penalty may be imposed if the violation "involved fraud,
11 deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement"; a third-tier
12 penalty may be imposed when, in addition to meeting the requirements of the second tier, the
13 "violation directly or indirectly resulted in substantial losses or created a significant risk of substantial
14 losses to other persons," 15 U.S.C. §§ 77t(d)(2)(A)-(C); 15 U.S.C. §§ 78u(d)(3)(B)(i)-(iii). Each tier
15 provides that, for each violation, the amount of penalty "shall not exceed the greater of" a specified
16 monetary amount or the defendant's "gross amount of pecuniary gain"; the amounts specified for an
17 individual defendant for the first, second, and third tiers, respectively, are $5,000, $50,000, and
18 $100,000. 15 U.S.C. § 77t(d)(2) (emphasis added); 15 U.S.C. § 78u(d)(3)(B) (same). Since the
19 amount of Razmilovic's disgorgeable gain was $41,753,623.04, the maximum civil penalty the court
20 was allowed to impose on him was $41,753,623.04.
21 Beyond setting maximum penalties, the statutes leave "the actual amount of the penalty
22 . . . up to the discretion of the district court." SEC v. Kern, 425 F.3d 143, 153 (2d Cir. 2005). We
36
1 thus review an award of penalties under the statutes for abuse of discretion. See id. at 153-54.
2 The district court determined that the appropriate penalty for Razmilovic was one-half
3 the authorized maximum. In reaching this decision, it stated:
4 Razmilovic was a direct participant in a pervasive fraud scheme,
5 spanning over three (3) years and involving fraud, deceit, manipulation and
6 deliberate, or at least, reckless disregard of regulatory requirements, which
7 either resulted in substantial losses to Symbol investors or, at the very least,
8 created a risk of substantial losses to Symbol investors. Yet instead of
9 responding to the charges against him, Razmilovic fled the country, continues
10 to refuse to admit any wrongdoing, and has never expressed any remorse for
11 his conduct. . . . In light of, inter alia, the seriousness and pervasiveness of the
12 fraud scheme, the significant role played by Razmilovic in the scheme, the
13 extent of the benefits Razmilovic received from his violations of the securities
14 laws and his lack of remorse, a third tier penalty is appropriate.
15 822 F.Supp.2d at 280-81 (emphasis added). The court concluded that a penalty of $20,876.811.52,
16 equal to one-half the amount of Razmilovic's fraud-enabled pecuniary gains, was appropriate "to serve
17 the punitive and deterrent purposes of the civil penalty statutes." Id. at 282.
18 We conclude that the penalty of $20,876.811.52 was within the bounds of the district
19 court's discretion. We reject Razmilovic's proportionality challenge because we see no other similarly
20 situated codefendant.
21 The judgment, however, which was prepared by the SEC, stated the amount of the civil
22 fine as $22,876,811.52, or $2 million greater than the amount ordered in the district court's opinion.
23 Nothing in the record justified this increase; the SEC states that the discrepancy was an inadvertent
24 clerical error (see SEC brief on appeal at 4 n.2). The judgment thus must be corrected to order that
25 Razmilovic pay a civil penalty of $20,876.811.52.
26
37
1 CONCLUSION
2 We have considered all of Razmilovic's contentions on this appeal, and except as
3 indicated above, have found them to be without merit. The judgment of the district court is vacated
4 to the extent that it orders Razmilovic (a) to pay prejudgment interest in the amount of
5 $27,260,953.99, and (b) to pay a civil penalty in the amount of $22,876,811.52 instead of
6 $20,876.811.52, and in all other respects is affirmed. The matter is remanded for further proceedings
7 in accordance with the foregoing to determine the appropriate amount of prejudgment interest
8 Razmilovic is to pay and for correction of the penalty amount to $20,876.811.52.
38