DocketNumber: No. 10 Civ. 5760 (SAS)
Citation Numbers: 860 F. Supp. 2d 275
Judges: Scheindlin
Filed Date: 1/27/2012
Status: Precedential
Modified Date: 11/26/2022
OPINION AND ORDER
I. INTRODUCTION
In July 2010, the Securities and Exchange Commission (“SEC”) brought a securities enforcement action against Charles J. Wyly, Jr. and three other defendants. The action sought civil penalties, injunctive relief, and disgorgement against Charles Wyly. On August 7, 2011, Charles Wyly was killed in an automobile
II. APPLICABLE LAW ON SUBSTITUTION
Rule 25(a)(1) of the Federal Rules of Civil Procedure provides that “[i]f a party dies and the claim is not extinguished, the court may order substitution of the proper party.” The survival of a federally created claim is a matter of federal substantive law and is governed by the provisions of the United States Code.
Courts have often looked to the federal common law to determine whether a securities law claim survives.
III. PARTIES’ARGUMENTS A. The Executor
The Executor argues that the rule for survival is quite simple. The Executor contends that for an action to be “remedial” for purposes of survivability it must be an action that is compensatory.
The Executor attempts to distinguish cases referring to disgorgement as “remedial.”
B. The SEC
The SEC argues that “the Executor engages in a sleight-of-hand by replacing the term ‘remedial’ with ‘compensatory,’ ” and “[sjimply because courts hold that compensatory claims in eases brought by injured plaintiffs are remedial, does not mean that in SEC enforcement actions all remedial claims must be compensatory for purposes
In drawing a distinction between “remedial” and “compensatory,” the SEC relies on cases in the civil forfeiture context holding that claims serving a deterrent purpose are also “remedial” and survive a defendant’s death
Finally, the SEC contends that the Executor’s effort to distinguish the SEC’s cases classifying “disgorgement” as remedial is untenable. While “remedial” might have slightly different meanings in different contexts, the underlying rationale for classifying disgorgement as “remedial” focuses on its goal of “preventing wrongdoers from unjustly enriching themselves through violations, which has the effect of deterring subsequent fraud.”
IV. DISCUSSION
The Executor asks this Court to craft a rule, for the first time, permitting the estate of an individual who has violated the securities laws to avoid an SEC enforcement action and retain the profits of illicit activity. However, most courts have con
There is no ease directly on point where an estate opposed substitution in an SEC enforcement action seeking disgorgement.
A. Claims May Survive Although They Do Not Seek Compensation
1. Pricing Regulation Cases Are Not Controlling
The Executor relies on cases concerning government claims for pricing regulation violations to prove his point that only compensatory claims survive.
2. Restitution Cases Are Not Controlling
The Executor also relies on cases concerning restitution. These cases are inapposite because restitution is a collateral remedy to a criminal conviction. Without a final criminal conviction, which abates upon the death of a criminal defendant, it would be inappropriate to require restitution.
Contrary to the Executor’s argument that a claim must be “compensatory” to survive, other bodies of law indicate that a government action may survive even if it does not seek compensation to the government or to private victims. For example, civil forfeiture proceedings do not abate after the death of the property owner. Such proceedings do not seek to compensate the government for any loss it has incurred. Rather, they require forfeiture of property used in illicit activities.
The Executor attempts to distinguish the civil forfeiture cases by arguing that they (1) are in rem proceedings, and (2) apply the wrong standard by looking to the law on double jeopardy. First, although these actions are directed against property, the courts conducted the survivability analysis as though the actions were against the owners of the property. If in rem proceedings could continue solely because they seek the forfeiture of property, the courts could have ended their analysis without the need to determine whether certain forfeiture actions survived the death of the concerned individual. Instead, the courts considered whether forfeiture was punitive.
Although the opinions may not be meticulous in distinguishing between the different contexts in which the term “remedial” is used, multiple circuits have concluded that civil forfeiture proceedings survive even though they do not seek compensation. This conclusion, in a context quite similar to disgorgement, is highly persuasive.
B. The SEC’s Disgorgement Claim Is “Remedial” and Survives Because It Seeks to Prevent a Party from Being Unjustly Enriched
Like cases concerning civil forfeiture, courts considering the nature of a disgorgement claim have consistently held, in a variety of contexts including double jeopardy and the scope of a court’s equitable powers, that disgorgement is not punitive.
1. Affording or providing a remedy; providing the means of obtaining redress <a remedial action >. 2. Intended to correct, remove, or lessen, a wrong, fault, or defect <a remedial statute >. 3. Of or relating to a means of enforcing*283 an existing substantive right <a remedial right>.47
Although the dictionary definition may prove too much — every action has a “remedial” aspect — the critical distinction is to focus on whether a claim is barred because it is punitive in nature. In requiring a defendant to disgorge illicit profits, courts have concluded the government is not imposing any penalty but rather seeking to restore the defendant, or his estate, to the position he or it would have been in absent any wrongdoing. Indeed, the SEC originally sought civil penalties against Charles Wyly, and the SEC subsequently withdrew those claims recognizing that punitive actions abate upon the defendant’s death. Unlike the actions for civil penalties, SEC enforcement actions for disgorgement are “remedial” as opposed to punitive — and survive the defendant’s death — because they merely seek to prevent a wrongdoer, or his estate, from profiting from illegal activity, but they do not seek to impose any penalties on the defendant for his conduct beyond restoring the status quo ante.
The cases concerning disgorgement in a variety of contexts, including the survival of RICO disgorgement claims that are non-compensatory, are closely analogous and suggest that an SEC enforcement action for disgorgement survives the death of the alleged wrongdoer and counsel against permitting an estate to reap a windfall resulting from violations of the securities laws. The Executor’s argument that World War II-era pricing regulation cases holding that government actions for penalties for violating pricing regulations must abate upon the death of the wrongdoer is less convincing for the reasons described above.
C. The Equities Support Permitting Survival of SEC Disgorgement Claims Because “Innocent” Parties May Not Retain the Profits of Securities Fraud
The Executor argues that the disgorgement action should abate because it only serves to punish an innocent party. However, this argument is contradicted by cases concerning “relief’ or “nominal” defendants. These cases recognize the SEC’s authority to disgorge funds from “innocent” third-parties that have acquired the profits of securities fraud.
V. CONCLUSION
For the aforementioned reasons, the SEC’s Motion to Substitute the Executor as a Party Defendant is granted. The Clerk of the Court is directed to modify the docket by replacing defendant Charles J. Wyly, Jr. with Donald R. Miller, Jr., in his capacity as the Independent Executor of the Will and Estate of Charles J. Wyly,
SO ORDERED.
. See Plaintiff Securities and Exchange Commission’s Memorandum of Law in Support of Motion to Substitute Donald R. Miller, Jr., Independent Executor of the Will and Estate of Charles J. Wyly, Jr., as a Party Defendant ("SEC Mem.”) at 1-2; Opposition of the Estate of Charles Wyly to the Motion to Substitute the Estate as a Defendant ("Opp. Mem.”) at 2.
. See SEC Mem. at 2.
. See Epstein v. Epstein, 966 F.Supp. 260, 260 (S.D.N.Y.1997).
. See U.S. ex rel. Collucci v. Beth Israel Med. Ctr., 603 F.Supp.2d 677, 680 (S.D.N.Y.2009) ("Unless a statute directly addresses the issue, courts are generally guided by principles of federal common law.”).
. See Derdiarian v. Futterman Corp., 223 F.Supp. 265, 267 (S.D.N.Y.1963) ("[W]hether an action based on [the Securities Act of 1933 or the Securities Exchange Act of 1934] abates upon death is to be determined on federal common law principles.”).
. Epstein, 966 F.Supp. at 260-61. See also Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1954 (2011) ("It is still the rule that penal actions do not survive but courts generally have held that treble-damage provisions are remedial and that actions of that kind survive.”) (footnote omitted).
. See United States v. NEC Corp., 11 F.3d 136, 137 (11th Cir.1993) ("[R]esolution of the survivability issue depends on whether the recovery is deemed ‘remedial’ or ‘penal.’ A remedial action is one that compensates an individual for specific harm suffered, while a penal action imposes damages upon the defendant for a general wrong to the public”).
. United States v. Price, 290 F.2d 525, 527 (6th Cir.1961) (denying government's substitution motion, under 28 U.S.C. § 2404, in suit brought against deceased defendant for price-ceiling violations under the Defense Production Act because it was an action for a penalty rather than damages).
. Porter v. Montgomery, 163 F.2d 211, 215 (3d Cir.1947).
. 1/23/12 Transcript ("Tr.”) at 21:13-24.
. See Derdiarian, 223 F.Supp. at 271 (“The use of labels such as 'penal' or ‘remedial' is ... unsatisfactory unless it is recognized as a shorthand way of expressing relevant considerations.”).
. See SEC v. Palmisano, 135 F.3d 860, 864 (2d Cir.1998) ("[T]he Double Jeopardy Clause does not prohibit the imposition of all additional sanctions ‘that could in common parlance, be described as punishment’; rather it 'protects only against the imposition of multipie criminal punishments ....”) (quoting Hudson v. United States, 522 U.S. 93, 98-99, 118 S.Ct. 488, 139 L.Ed.2d 450 (1997)). Indeed, Palmisano recognizes that disgorgement could be described as "punishment” yet not be "criminal” for purposes of the Double Jeopardy Clause. Id.
. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1103-04 (2d Cir.1972) ("Clearly the provision requiring the disgorging of proceeds received in connection with the Manor offering was a proper exercise of the district court’s equity powers.”).
. See, e.g., Bowles v. Farmers Nat’l Bank of Lebanon, 147 F.2d 425 (6th Cir.1945).
. Plaintiff Securities and Exchange Commission’s Reply Memorandum of Law in Support of Motion to Substitute Donald R. Miller, Jr., Independent Executor of the Will and Estate of Charles J. Wyly, Jr., as a Party Defendant ("Reply Mem.”) at 2.
. See SEC v. Coven, 581 F.2d 1020, 1027-28 (2d Cir.1978) ("The essential nature of an SEC enforcement action is equitable and prophylactic; its primary purpose is to protect the public against harm, not to punish the offender.”).
. See 28 U.S.C. § 2404 ("A civil action for damages commenced by or on behalf of the United States or in which it is interested shall not abate on the death of a defendant but shall survive and be enforceable against his estate as well as against surviving defendants.”) (emphasis added).
. See United States v. Land, Winston Cnty., 221 F.3d 1194, 1197-98 (11th Cir.2000); United States v. $120,751.00, 102 F.3d 342, 344 (8th Cir.1996); In re One 1985 Nissan 300ZX, 889 F.2d 1317, 1319 (4th Cir.1989).
. 18 U.S.C. § 1961 etseq.
. See United States v. Private Sanitation Indus. Ass’n of Nassau/Suffolk, 159 F.R.D. 389, 391 (E.D.N.Y.1994).
. SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir.2006) (holding that disgorgement is remedial and within court's equitable powers).
. Reply Mem. at 7.
. See Opp. Mem. at 1 n. 1 ("Counsel for the Estate has found no federal court, in the Second Circuit or elsewhere, that has squarely answered" the question of whether "a civil action brought by the SEC seeking only disgorgement survive[s] the death of the defendant”). That said, a number of courts have substituted an estate as a defendant in the absence of any opposition. See, e.g., SEC v. Schiffer, No. 97 Civ. 5853, 2001 WL 504860 (S.D.N.Y. May 11, 2001); SEC v. Grossman, No. 87 Civ. 1031, 1997 WL 231167 (S.D.N.Y. May 6, 1997).
. See Tr. at 11:6-9 ("MR. SUSMAN: ... We think that those [emergency price regulation] cases turn on the identity of the plaintiff, the government ...”).
. See id. at 16:18-23 ("MR. SUSMAN: If you look at the cases ... where a penalty is recovered by the government, whether it survives or not depends upon whether ... the court makes a finding it was intended to compensate the government for some kind of expense.”).
. See id. at 17:4-8 (“MR. SUSMAN: There are a number of cases that say whether there is criminal restitution or not depends upon whether the restitution was designed to compensate a victim or was simply designed to make the defendant cough up his ill gotten gains.”).
. See id. at 15:9-10 ("MR. SUSMAN: ... [W]hat purpose is served by taking the money from innocent heirs?”).
. See id. at 3:13-16 ("MR. MILLER: ... [E]very court that looks [at] disgorgement in terms of ... the nature of the claim ... they find it is remedial.”); id. at 4:15-18 ("[T]he divest[it]ure and disgorgement claims that the government is seeking against these defendants [in a RICO action], they survive because the nature of disgorgement is remedial.”).
. See Reply Mem. at 4-5.
. See Tr. at 25:12-20 ("MR. MILLER: ... [I]f someone comes into the possession of ill gotten gains that were acquired through securities fraud ... the SEC can name that person as a relief defendant to go after the proceeds, even though that particular individual or entity is not a wrongdoer .... ”).
. See id. at 30:14-17 ("MR. MILLER: As to the equities, again, I have to go back to the relief defendant example where ... you're standing in the shoes ... of the alleged wrongdoer.”).
. See Price, 290 F.2d at 527; Porter, 163 F.2d at 215; Bowles, 147 F.2d at 428.
. See SEC v. Texas Gulf Sulphur Co., 312 F.Supp. 77, 92-93 (S.D.N.Y.1970) (rejecting defendant's argument that " ‘[i]f a sum of money is to be recovered by a third person for violation of a statute instead of the person injured ... it constitutes a penalty' ") (quoting Bowles, 147 F,2d at 428).
. See infra Part IV.A.3.
. See United States v. Wright, 160 F.3d 905, 908 (2d Cir.1998) (" '[T]he interests of justice ordinarily require that [a defendant] not stand convicted without resolution of the merits of an appeal.' ”) (quoting United States v. Pogue, 19 F.3d 663, 665 (D.C.Cir.1994) (per curiam)).
. Id.
. See 21 U.S.C. § 881 (“The following shall be subject to forfeiture to the United States and no property right shall exist in them
. See Black’s Law Dictionary at 501 (8th ed. 2004) (defining "disgorgement” as "[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion”).
. See $120,751.00, 102 F.3d at 344 ("We hold that the action does not abate because it is not punitive.”).
. See id. at 344 ("We find this conclusion [that civil forfeiture proceedings do not abate] persuasive, particularly in light of the Supreme Court's recent holding on the nature of forfeiture actions in the context of double jeopardy.”).
. See Private Sanitation Indus. Ass’n of Nassau/Suffolk, 159 F.R.D. at 391 ("This court has ... held that disgorgement (without compensation) of the ill-gotten proceeds of racketeering activity is an appropriate equitable remedy under the civil RICO provisions. In view of the remedial nature of the relief sought ... this action is not extinguished by the death of those defendants.”) (quotation and citation omitted).
. See id. at 390.
. See id.
. Id.
. See, e.g., Cavanagh, 445 F.3d at 117; Palmisano, 135 F.3d at 866 (reasoning that disgorgement "ensure[s] that the defendant not profit from his illegal acts, a goal that is non-punitive” and did not violate defendant’s right to be free from double jeopardy); SEC v. Robinson, No. 00 Civ. 7452, 2002 WL 1552049, at *7 (S.D.N.Y.2002) (holding that "disgorgement is remedial rather than punitive” where "a fundamental policy underlying disgorgement is to prevent the unjust enrichment of the wrongdoer rather than to punish him”); SEC v. Lorin, 869 F.Supp. 1117, 1123-25 (S.D.N.Y.1994) (declining to apply statute of limitations because disgorgement "merely returns the wrongdoer to the status quo before any wrongdoing occurred”).
. Cavanagh, 445 F.3d at 117 (holding that disgorgement is remedial and within court's equitable powers).
. Black's Law Dictionary at 1319 (8th ed. 2004).
. See SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir.1998) ("Federal courts may order equitable relief against a person who is not accused of wrongdoing in a securities enforcement action where that person: (1) has received ill-gotten funds; and (2) does not have a legitimate claim to those funds.").