SEC v. Black, et al
Filing
225
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)
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)
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
EXHIBIT 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
EXHIBIT B
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