Filed: Sep. 30, 2008
Latest Update: Mar. 02, 2020
Summary: Opinions of the United 2008 Decisions States Court of Appeals for the Third Circuit 9-30-2008 SEC v. Lazare Inds Inc Precedential or Non-Precedential: Non-Precedential Docket No. 07-4009 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2008 Recommended Citation "SEC v. Lazare Inds Inc" (2008). 2008 Decisions. Paper 465. http://digitalcommons.law.villanova.edu/thirdcircuit_2008/465 This decision is brought to you for free and open access by the Opinions of
Summary: Opinions of the United 2008 Decisions States Court of Appeals for the Third Circuit 9-30-2008 SEC v. Lazare Inds Inc Precedential or Non-Precedential: Non-Precedential Docket No. 07-4009 Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2008 Recommended Citation "SEC v. Lazare Inds Inc" (2008). 2008 Decisions. Paper 465. http://digitalcommons.law.villanova.edu/thirdcircuit_2008/465 This decision is brought to you for free and open access by the Opinions of ..
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Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
9-30-2008
SEC v. Lazare Inds Inc
Precedential or Non-Precedential: Non-Precedential
Docket No. 07-4009
Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2008
Recommended Citation
"SEC v. Lazare Inds Inc" (2008). 2008 Decisions. Paper 465.
http://digitalcommons.law.villanova.edu/thirdcircuit_2008/465
This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________
Nos. 07-4009 & 08-1127
___________
SECURITIES AND EXCHANGE COMMISSION
v.
LAZARE INDUSTRIES, INC.;
RICHARD J. HARLEY; JACQUELINE KUBE
Richard J. Harley; Jacqueline Kube,
Appellants
____________________________________
On Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 96-cv-0705
(Honorable Thomas I. Vanaskie)
_______________________________________
Submitted Pursuant to Third Circuit LAR 34.1(a)
September 26, 2008
Before: SCIRICA, Chief Judge, HARDIMAN and COWEN, Circuit Judges
(Filed: September 30, 2008)
_________
OPINION OF THE COURT
_________
PER CURIAM.
Richard J. Harley and Jacqueline Kube appeal pro se from the District Court’s
order entered September 26, 2007, and its final judgment entered January 4, 2008. For
the following reasons, we will affirm the judgment of the District Court.
I.
Harley and Kube, husband and wife, owned and operated a company called Lazare
Industries, Inc. (“Lazare”), through which they provided an “ozone/oxygen enema”
treatment to people suffering from HIV/AIDS and other medical conditions. From 1989
through 1996, Harley represented in various media that this treatment was a clinically-
tested, patented procedure that neutralizes the virus that causes HIV/AIDS. On the basis
of these representations, Harley sold unregistered shares of stock in Lazare. These sales
were evidenced by stock subscription agreements, which are central to the issues on
appeal. In 1996, the Securities and Exchange Commission (“SEC”) instituted this civil
enforcement action against Lazare, Harley and Kube, alleging, inter alia, that Harley’s
representations were knowingly false. Shortly after the SEC filed suit, defendants
consented to a permanent injunction, which barred them from, inter alia, transferring
assets during the pendency of the litigation.
Several months later, defendants were indicted on federal charges of mail fraud,
wire fraud and violations of the Federal Food, Drug and Cosmetic Act. The District
Court stayed the civil action pending resolution of defendants’ criminal charges, which
2
ultimately resulted in convictions. During their criminal proceedings, defendants moved
to suppress the subscription agreements on the grounds that they had been seized at their
residence pursuant to a search warrant obtained by the Food and Drug Administration that
the government conceded was defective. The District Court initially held the search
illegal under the Fourth Amendment. At sentencing, however, the District Court allowed
the government to use the subscription agreements to fix the appropriate amount of
restitution after finding that the SEC had obtained them from an independent source – i.e.,
a former employee of Lazare named Dawn Loikits. The District Court sentenced Harley
and Kube to terms of imprisonment and ordered Harley to pay restitution. We affirmed
the criminal judgments. See United States v. Harley, C.A. Nos. 01-1823, 01-1916, 39
Fed. Appx. 789 (3d Cir. 2002). Defendants raised no issue regarding the subscription
agreements on appeal.
The District Court then reopened the civil enforcement action. The SEC filed a
motion to hold Harley and Kube in contempt for having transferred property in violation
of the permanent injunction. After the District Court ordered them to show cause why
they should not be held in contempt, defendants filed a motion to dismiss the order to
show cause and the enforcement action itself, arguing that it was premised on the
allegedly illegally-obtained subscription agreements. The District Court denied that
motion by order entered March 3, 2006. Defendants appealed, but their appeal was
dismissed for failure to prosecute after they failed to pay the filing fee. See SEC v.
3
Lazare Indus., Inc., C.A. No. 06-1856 (Dec. 6, 2006). On March 13, 2006, the District
Court held defendants in contempt of the permanent injunction. Defendants did not
appeal that order. Instead, they filed a motion to vacate the permanent injunction and
contempt order, once again arguing that they were impermissibly based on the
subscription agreements. The District Court denied that motion by order entered
September 26, 2007. Defendants’ appeal from that order is pending as C.A. No. 07-4009.
Thereafter, the SEC filed a motion for a final judgment directing disgorgement and
the payment of pre-judgment interest and civil penalties. The District Court held a
hearing on the motion, at which the SEC used the subscription agreements to establish the
amount of disgorgement. Defendants once again argued that the agreements should not
be considered because they were illegally obtained, and the District Court once again
rejected their argument. Following the hearing, the District Court entered its final
judgment on January 4, 2008. The final judgment requires Harley and Kube to pay
$975,911 in disgorgement and interest and imposes a $500,000 civil penalty on Harley.
Defendants’ appeal from that order is pending as C.A. No. 08-1127.1
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The final judgment also imposes a $1,000,000 penalty on Lazare, and Harley and
Kube purported to appeal on its behalf. By Clerk’s order issued January 25, 2008 in C.A.
No. 08-1127, they were notified that the appeal on behalf of Lazare would be dismissed
unless an attorney entered an appearance on its behalf within 21 days. See Simbraw, Inc.
v. United States, 367 F.2d 373, 374-75 (3d Cir. 1966); 3d Cir. LAR 107.2. No attorney
has entered an appearance on behalf of Lazare. Accordingly, the appeal of Lazare is
hereby dismissed.
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II.
We have jurisdiction pursuant to 28 U.S.C. § 1291. On appeal, defendants raise no
issue regarding the District Court’s denial of their motion to vacate the permanent
injunction and contempt order, and the only relief that they seek is the vacation of the
final judgment. Accordingly, any potential issues that might relate solely to the order
appealed from at C.A. 07-4009 are waived. Regarding the final judgment, defendants
argue that the District Court erred in allowing the use of the subscription agreements
because they were seized in violation of the Fourth Amendment and that the District
Court held the SEC to too low a burden of proving that it had obtained the agreements
from an independent source. Defendants also argue that the District Court abused its
discretion in fixing the amount of disgorgement and civil penalties. We reject these
arguments.2
Defendants’ first argument assumes that the exclusionary rule applies in civil
enforcement proceedings brought by the SEC, which the SEC vigorously contests. We
need not decide that issue. Even assuming that the exclusionary rule applies, defendants
were collaterally estopped from relitigating the independent source issue in the civil
2
We review all legal issues de novo, but review for clear error the District Court’s
finding of an independent source, see United States v. Provenzano, 620 F.2d 985, 1005
(3d Cir. 1980), and for abuse of discretion its rulings on the amount of disgorgement, see
SEC v. Hughs Capital Corp.,
124 F.3d 449, 455 (3d Cir. 1997), and civil penalties, see
SEC v. Sargent,
329 F.3d 34, 38 (1st Cir. 2003).
5
proceeding and, in any event, the District Court’s ruling on that issue was not clearly
erroneous.
Collateral estoppel/issue preclusion bars relitigation of a legal or factual issue
when: “(1) the issue . . . is the same as that involved in the prior action; (2) the issue was
actually litigated; (3) it was determined by a final and valid judgment; and (4) the
determination was essential to the prior judgment.” Peloro v. United States, 488 F.3d
163, 174-75 (3d Cir. 2007) (citations omitted). At their criminal sentencing, defendants
specifically argued that the government could not use the subscription agreements
because it had not shown that it had obtained them from a source independent of the
defective FDA search warrant. The District Court specifically rejected that argument
after concluding that the government had presented sufficient evidence to demonstrate
that the SEC had obtained the agreements from defendants’ former employee, Ms.
Loikits. (CA-00328.) That ruling was necessary to the criminal judgment because the
use of the documents allowed the government to prove the appropriate amount of
restitution. Accordingly, all the elements of collateral estoppel are present here. See also
United States v. Real Prop. Located in El Dorado County at 6380 Little Canton Rd.,
59
F.3d 974, 979-80 (9th Cir. 1995) (holding that defendant in a civil forfeiture action was
collaterally estopped from relitigating Fourth Amendment issue previously litigated in a
criminal action), abrogation on other grounds recognized in United States v. $273,969.04
U.S. Currency,
164 F.3d 462, 466 n.3 (9th Cir. 1999); United States v. United States
6
Currency in the Amount of $228,536.00, 895 F.2d 908, 917-18, 921 (2d Cir. 1990)
(same). Defendants did not base their challenge in the civil proceeding on any
previously-unavailable evidence or legal authority, and there is no other equitable reason
for declining to apply collateral estoppel in this case. See National R.R. Passenger Corp.
v. Pa. Pub. Util. Comm’n,
288 F.3d 519, 525 n.3 (3d Cir. 2002) (discussing equitable
exceptions to application of collateral estoppel).3 Moreover, even if it were proper for
defendants to relitigate this issue in the civil action, the District Court’s finding of an
independent source in that action was not clearly erroneous.4
Finally, defendants argue that the District Court (1) abused its discretion in fixing
the amount of disgorgement because the SEC did not offer bank records showing that
defendants actually received the amounts memorialized on the subscription agreements,
(2) failed to consider relevant factors in fixing the amount of civil penalties, and (3)
3
Defendants argue that the District Court should have required the SEC to prove an
independent source in the civil proceeding by clear and convincing evidence and not
merely by a preponderance of the evidence. Even in criminal cases, however, the
government need only prove an independent source by a preponderance of the evidence.
See United States v. Pelullo, 173 F.3d 131, 137-38 (3d Cir. 1992). Defendants have cited
no authority suggesting that this burden is greater in civil cases. Thus, application of
collateral estoppel is not precluded by any difference in the burden of proof.
4
In particular, the District Court relied on (1) Ms. Loikits’s testimony that she provided
the subscription agreements to the SEC (CA-00547-49, 555, 558), and (2) a sworn
declaration of John J. Heffernan, an SEC attorney and accountant, that Ms. Loikits
delivered the subscription agreements to him (CA-00356-59). Defendants claim to have
demonstrated that it would have been physically impossible for Ms. Loikits to have
obtained the subscription agreements, but our review of the record confirms that the
District Court’s rejection of that argument was not clearly erroneous.
7
imposed civil penalties in excess of those authorized by 15 U.S.C. §§ 77t(d)(2)(C) and
78u(d)(3)(B)(iii). Each of these arguments lacks merit. Kevin DeLacy, an SEC staff
accountant, testified at length at the January 4, 2008, hearing regarding how the
subscription agreements allowed him to reasonably approximate the amount of
disgorgement. (CA-0071-79, CA-0086-103.) As for penalties, the statutes provide that
the court shall determine the amount of penalties “in light of the facts and circumstances.”
15 U.S.C. §§ 77t(d)(2), 78u(d)(3)(B)(i). They also provide for a maximum penalty of
$100,000 for individuals for each violation (i.e., each of Harley’s at least 54 sales of
stock). See id. In imposing a penalty of $500,000 on Harley, the District Court
specifically discussed the “egregious” nature of his fraud and noted, correctly, that it
could have imposed a larger penalty than it did. (CCA-00113-14.) In sum, the District
Court acted well within its discretion and did not otherwise err in determining the
amounts of disgorgement and civil penalties.
Accordingly, we will affirm the judgment of the District Court.
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