SEC v. Black, et al, No. 1:2004cv07377 - Document 225 (N.D. Ill. 2012)
Court Description: MOTION by Plaintiff Securities and Exchange Commission for judgment , FOR SETTING OF CIVIL PENALTIES AND PREJUDGMENT INTEREST AND ENTRY OF FINAL JUDGMENT AGAINST DEFENDANT CONRAD M. BLACK (Polish, Jonathan)
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SEC v. Black, et al Doc. 225 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, C.A. No. 04 CV 7377 v. Judge William T. Hart CONRAD M. BLACK, F. DAVID RADLER AND HOLLINGER INC., Defendants. PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION FOR SETTING OF CIVIL PENALTIES AND PREJUDGMENT INTEREST AND ENTRY OF FINAL JUDGMENT AGAINST DEFENDANT CONRAD M. BLACK In this motion, the SEC moves for a final determination of the amount of civil penalties against defendant Conrad M. Black and submits a calculation of prejudgment interest pursuant to this Court’s order. Based on the undisputed facts established by Black’s criminal convictions for mail fraud in U.S. v. Black, et al., No. 05 CR 727 (N.D. Ill.) (“Criminal Matter”), the SEC previously moved for partial summary judgment under the collateral estoppel doctrine on its claims regarding the purported non-competition payments that Black received in connection with APC, Paxton and Forum transactions.1 (Docket No. 127) Based on the Delaware court of 1 Based upon subsequent proceedings in the Criminal Matter, the collateral estoppel effect of Black’s convictions is limited to the Paxton and Forum payments. That modification is reflected in this Court’s Judgment and Order, dated April 19, 2012. (Docket No. 219) Dockets.Justia.com chancery’s findings in Hollinger International, Inc. v. Conrad M. Black, 844 A.2d 1022, 1045 (Del. Ch. 2004), aff’d, 872 A.2d 559 (Del. Supr. 2005) (“Delaware Proceeding”), the SEC also previously sought summary judgment concerning Black’s participation in the false November 17, 2003 Press Release. (Docket No. 127) The Court substantially granted the motion and permanently enjoined Black from violating Sections 10(b), 13(b)(5), and 14(a) of the Exchange Act and Rules 10b5, 13b2-1, 14a-3 and 14a-9 thereunder and, as a control person, Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. See SEC v. Black, 2008 WL 4394891, at *20-21 (N.D. Ill. Sept. 24, 2008).2 The Court also barred Black from acting as an officer or director of a public company. Id. The SEC thereafter moved for certain monetary relief including disgorgement, prejudgment interest, and civil penalties. (Docket No. 171). After the matter was fully briefed, the Court awarded the Commission disgorgement of Blacks’ ill-gotten compensation from 2002 until his forced resignation in November 2003, amounting to $3,819,689.50. See SEC v. Black, 2009 WL 1181480, at *5-6 (N.D. Ill. Apr. 30, 2009). The Court held: “It is a reasonable inference [that] International would have promptly terminated its relationships with Black had he, as required by the securities laws he violated, made a full and accurate disclosure of the transactions…” Id. at *4. The court further held that the SEC was entitled to prejudgment interest and ordered the SEC to submit a prejudgment interest calculation at the appropriate time. Id. at *12. 2 The Court dismissed Count VIII, for violation of Section 302 of the Sarbanes-Oxley Act of 2002, holding that a violation of the “certification requirement” of Rule 13a14(b) does not constitute an independent cause of action. Id. at *16-17. 2 The SEC’s complaint also alleges other improper transactions and malfeasance by Black that have yet to be adjudicated. If proven, these allegations could have altered the remedies imposed, including increased disgorgement, which in turn could have increased civil penalties. Given this reality, this Court found that – while Black’s conduct warranted third-tier penalties – it was premature to calculate civil penalties until “after all the claims against Black that have been raised in the present case have been resolved.” Id. at *6. At the last hearing, the SEC advised the Court that it will not pursue any unadjudicated matters alleged in its complaint Accordingly, the only remaining issues to be resolved in this matter are the calculation of penalties (Section A below) and a current, final calculation of prejudgment interest (Section B below). ARGUMENT The SEC previously articulated its entitlement to penalties and prejudgment interest. (See Docket No. 173) Here, the SEC endeavors to prove-up and quantify appropriate penalties and prejudgment interest. In Section A, the SEC requests that the Court impose as third-tier penalties Black’s adjudicated ill-gotten compensation and the Forum and Paxton “non-compete” payments. In Section B, the SEC requests prejudgment interest of $2,321,220 on the previously-ordered disgorgement. These requests are reflected in the proposed final judgment attached as Exhibit A. A. The SEC is Entitled to Third-Tier Civil Penalties Exceeding $4 Million. This Court previously noted that, when considering appropriate civil penalties, “Factors that may be considered include the egregiousness of the violations, defendant's intent, whether the violations were recurring, whether defendant has 3 admitted wrongdoing, the losses or risks of losses caused by the conduct, any cooperation defendant provided to enforcement authorities, and the imposition of other remedies or penalties.” Black, 2009 WL 1181480, at *4. The Court has already found that applying these factors, Black’s conduct warranted third-tier penalties: “Third-tier penalties may be applied if the violation ‘involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement’ and the violation ‘directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.’ Such findings are supported by the Estoppel Ruling.” Id. at *5 (citations omitted). The Court’s conclusion is supported by myriad adjudicated facts, including: The jury necessarily found the violations to be substantial and knowing. (Docket No. 166, p. 56) Black’s malfeasance was part of a wide-ranging scheme resulting in the diversion of millions in corporate assets. (Id., pp. 25-27) The jury verdict constituted a finding that Black knew the payments were neither legitimate nor approved by International’s Board. (Id., pp. 21-22) Black is a recidivist, having previously been permanently enjoined from further violations of the antifraud and tender offer provisions of the Exchange Act in connection with a tender offer. (Id., p. 56) Black is unrepentant, having “point[ed] to nothing supporting that he has acknowledged his culpability nor anything indicating a sincere desire to act properly in the future.” (Id.) These findings are as true today as they were when the Court made them. Black’s lack of repentance and continued unwillingness to accept responsibility for his actions justifies the imposition of third-tier penalties. Black’s misconduct reflects greed 4 and an abuse of power. He exposed shareholders to enormous actual and potential harm. A substantial third-tier penalty approximating his disgorgement is necessary to provide a strong financial deterrent to corporate executives who may be tempted to steal from their own shareholders. There is ample precedent for awarding sizeable civil penalties approximating a defendant’s pecuniary gain. See, e.g., Koenig, 532 F. Supp. 2d 987, 995 (N.D. Ill. 2007) (imposing civil penalty of $831,500, equal to amount of disgorgement); SEC v. Asset Recovery and Management Trust, S.A., 2008 WL 4831738, at *10 (M.D. Ala. Nov. 3, 2008) (imposing civil penalty of $1.2 million, equal to amount of ill-gotten gains); SEC v. Halligiannis, 470 F. Supp. 2d 373, 386 (S.D.N.Y. 2007) (imposing $15 million penalty, one time amount of ill-gotten gain, joint and severally on president and CEO of hedge fund); SEC v. Maxxon, 2005 WL 6090229, at *8 (N.D. Okla. Mar. 11, 2005) (imposing $433,228.52 civil penalty, equal to amount of illgotten gain), aff’d, 465 F.3d 1174 (10th Cir. 2006); SEC v. Rosenfeld, 2001 WL 118612, at *4 (S.D.N.Y. Jan. 9, 2001) (imposing civil penalty equal to ill-gotten gain of $1,093,189); SEC v. Alliance Leasing Corp., 2000 WL 35612001, at *14 (S.D. Cal. Mar. 20, 2000) (imposing civil penalty against individual defendants equal to their pecuniary gain of $477,467), aff’d, 28 Fed. Appx. 648 (9th Cir. 2002). Remarkably, Black has grown even less contrite with time. In his book “A Matter of Principle” Black casts himself as an innocent “degraded beyond recognition in this ghastly sequence of outrages” and “dangle[d] on a string like a hooked trout, awaiting the pleasure of the notoriously aggressive and devious U.S. prosecutors.” (See Ex. B hereto, Excerpts from “A Matter of Principle,” pp. 269, 291) He fashions 5 himself a victim of the “fetid, ward-heeling political bazaar of the Chicago Federal Courthouse, made no less sinister by the Little Red Riding Hood demeanor of [Judge] St. Eve and the sterterous and insolent biases of [Judge] Posner.” (Id., p. 519) Notwithstanding such perceived indignities, Black magnanimously offers to “forgive America for wrongly imprisoning me and victimizing my shareholders.” (Id., p. 524) Impenitence of this magnitude is deserving of significant penalties. The SEC submits that such a penalty should include at least the following components: (a) A one-time penalty capturing Black’s ill-gotten compensation of $3,819,690, which this Court previously ordered Black to disgorge. Black, 2009 WL 1181480, at *5-6; and (b) A one-time penalty capturing the Forum and Paxton “non-compete” payments of $285,000 (which the Court did not require Black to disgorge because he had previously repaid them in other litigation). Black, 2009 WL 1181480, at *2.3 B. The SEC is Entitled to Prejudgment Interest of $2,321,220. To prevent a defendant from profiting from their illegal activities, courts routinely require the payment of prejudgment interest on disgorged amounts. See, e.g., SEC v. Lipson, 129 F. Supp. 2d 1148, 1159 (N.D. Ill. 2001), aff’d, 278 F.3d 656 (7th Cir. 2002); SEC v. Randy, 38 F. Supp. 2d 657, 674 (N.D. Ill. 1999); SEC v. Jakubowski, 1997 WL 598108 at *1 (N.D. Ill. Sept. 19, 1997). “This prevents a defendant from obtaining the benefit of what amounts to an interest free loan procured as a result of 3 The SEC also seeks a third-tier penalty amounting to $120,000 for the misrepresentations in the November 17, 2003 press release. See Black, 2008 WL 4394891, at *18. The Court previously that such a penalty would be duplicative of any penalties derived from Black’s ill-gotten compensation. Id. at 5. While the SEC maintains that such a penalty is appropriate, in light of that ruling no such penalty is included in the proposed final judgment attached as Exhibit A hereto. 6 illegal activity.” Id. at *2 (citation omitted). Prejudgment interest is generally calculated according to the underpayment rate published by the Internal Revenue Service (“IRS”), which courts typically use in connection with disgorgement in SEC cases. See SEC v. Koenig, 532 F. Supp. 2d 987, 995 (N.D. Ill. 2007); Randy, 38 F. Supp. at 674; Jakubowski, 1997 WL 598108 at *2. This Court previously found that Black did not dispute the propriety of prejudgment interest, and directed the SEC to provide an updated prejudgment interest calculation in conjunction with its request for a final judgment. See SEC v. Black, 2009 WL 1181480, at *5. The SEC does so in this submission. 4 It seeks prejudgment interest on the disgorgement of Black’s ill-gotten compensation of $3,819,690. That amount, in turn, is comprised of two “buckets” of Black’s compensation: (a) $2,051,026.50 from his 2002 compensation, the interest of which the SEC calculated from December 31, 2002 through June 30, 2012, and (b) $1,768,663.00 from his 2003 compensation, calculated from December 31, 2003 through June 30, 2012. The SEC utilized the interest rate, adjusted quarterly, used by the IRS for computation of interest on underpayment of taxes, pursuant to SEC Rule of Practice § 201.600(b). See 17 CFR § 201.600(b). Interest has been compounded quarterly on each amount beginning on first day of the month following December 31, 2002 and 4 The SEC will soon be filing an executed declaration of John Kustusch, an SEC accountant, detailing the calculations of prejudgment interest, similar to the declaration of Mr. Kustusch that the SEC previously filed in support of prejudgment interest. (See Docket No. 173-3) The SEC has, contemporaneous with the filing of this submission, emailed Black’s counsel an unexecuted copy of the declaration it anticipates filing. 7 December 31, 2003, respectively. The resulting interest amounts to $2,321,220.06 – of which approximately $1.32 million corresponds with Black’s 2002 compensation and approximately $1 million corresponds with Black’s 2003 compensation. CONCLUSION For these reasons, plaintiff Securities and Exchange Commission respectfully requests that this Court enter the final judgment substantially similar to Exhibit A hereto, constituting: (a) the Judgment and Order, entered on April 19, 2012 (Docket No. 219), in addition to (b) civil penalties against Black of at least $4,104,690 and (c) prejudgment interest of $2,321,220. Dated: July 26, 2012 Respectfully submitted, UNITED STATES SECURITIES AND EXCHANGE COMMISSION By: /s/ Jonathan S. Polish Jonathan S. Polish Rebecca R. Goldman U.S. Securities and Exchange Commission 175 W. Jackson Blvd., Suite 900 Chicago, Illinois 60604 (312) 353-7390 8 EX H I BI T A IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, C.A. No. 04 CV 7377 v. Judge William T. Hart CONRAD M. BLACK, et al. Defendant. [PROPOSED] FINAL JUDGMENT AS TO DEFENDANT CONRAD M. BLACK This matter coming to be heard on plaintiff United States Securities and Exchange Commission’s (“SEC”) Motion for Civil Penalties and Prejudgment Interest Against Defendant Conrad M. Black (“Mr. Black” or “Defendant”) (Docket No. 225), the parties having fully briefed the matter, and the Court being advised of such in the premises, it is HEREBY ORDERED that final judgment is entered as to Mr. Black as follows: Summary Judgment on Liability A. Summary judgment is entered for the SEC and against Mr. Black on liability for Count I of its Complaint based on (1) statements in the 2001 Form 10–K, 2002 Form 10–K, 2002 Proxy, and 2002 Proxy Questionnaire related to the “Supplemental Payments” to Mr. Black for the “Forum” and “Paxton” transactions; and (2) Mr. Black's representations in the November 17, 2003 press release that he had a present intent to comply with the Restructuring Proposal including by devoting his time and attention to the Strategic Process for selling International's assets and by refraining from engaging in transactions for his own benefit that would undermine the Strategic Process; B. Summary judgment is entered for the SEC and against Mr. Black for Count II based on statements in the 2002 Proxy related to the Supplemental Payments; C. Summary judgment is entered for the SEC and against Mr. Black for Count III based on statements in the 2001 and 2002 Forms 10–K related to the Supplemental Payments; D. Summary judgment is entered for the SEC and against Mr. Black for Count IV based on statements in the 2001 and 2002 Forms 10–K related to the Supplemental Payments and limited to a violation of § 13(b)(2)(A) of the Exchange Act; E. Summary judgment is entered for the SEC and against Mr. Black for Counts V and VI based on statements in the 2001 and 2002 Forms 10–K related to the Supplemental Payments and limited to violations of the recordkeeping requirement of § 13(b)(2)(A) of the Exchange Act; F. As to Count IV’s § 13(b)(2)(B) claim, the SEC is entitled to summary judgment that it is conclusively established that the 2001 and 2002 Forms 10–K contain inaccuracies related to the Supplemental Payments; G. As to the aspect of Count VI based on circumventing the internal control requirements of § 13(b)(2)(B) of the Exchange Act, the SEC is entitled to summary judgment that it is conclusively established that the 2001 and 2002 Forms 10–K contain inaccuracies related to the Supplemental Payments and that Mr. Black caused those inaccuracies to be in the Forms. H. Count VIII of the complaint is dismissed. Injunctive Relief I. Defendant and defendant's agents, servants, employees, attorneys and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j (b)] and Rule 10b-5 promulgated thereunder [17 C.P.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (1) to employ any device, scheme, or artifice to defraud; (2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. J. Defendant and defendant's agents, servants, employees, attorneys and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from, directly or indirectly, falsifying any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)] in violation of Rule 13b2-1 promulgated thereunder [17 C.F.R. § 240.13b2-1]. K. Defendant and defendant's agents, servants, employees, attorneys, and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section 13 (b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] by knowingly falsifying any book, record or account described in Section 13(b)(2) of the Exchange Act [15 U.S.C. § 78m(b) (2)]. L. Defendant and defendant's agents, servants, employees, attorneys and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from directly or indirectly violating Section 14(a) of the Exchange Act [15 U.S.C. § 78n(a)] and Rules 14a-3 and 14a-9 [17 C.F.R. §§ 240.14a-3 and 240.14a9] thereunder, by, among other things, using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of such person's name to solicit proxies, consents, authorizations or notices of meetings in respect of an issuer's securities which contain statements which are false and misleading with respect to material facts or omit to state material facts necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which became false or misleading or which fail to furnish information required under Exchange Act Rule 14a-3. M. Defendant and defendant's agents, servants, employees, attorneys and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from, directly or indirectly, as a control person under Section 20(a) of the Exchange Act, violating Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 [17 C.F.R. 240.12b-20, 240.13a-l and 240.13a-13] thereunder, by failing to file with the Commission, in accordance with such rules and regulations as the Commission may prescribe, such annual and quarterly reports containing the information required to be included in such reports and, in addition to the information expressly required to be included in such reports, such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made not misleading. N. Defendant and defendant's agents, servants, employees, attorneys and assigns who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from, directly or indirectly, as a control person under Section 20(a) of the Exchange Act, violating Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §§78m(b) (2)(A)], by, among other things, failing to make and keep books, records and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. O. Pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], Mr. Black is prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act [15 U.S.C. § 781] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]. Monetary Relief P. Mr. Black is ordered to disgorge $3,819,689.50, constituting Mr. Black’s compensation as calculated in this Court’s Order, dated April 30, 2009 (Docket No. 182) Q. Mr. Black is ordered to pay prejudgment interest amounting to $2,321,220. R. Mr. Black is ordered to pay third-tier penalties amounting to $4,104,690. *** S. This Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment. SO ORDERED. ________________________________________________ UNITED STATES DISTRICT JUDGE DATED: AUGUST __, 2012 EX H I BI T B
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