FEUERSTEIN, District Judge.
On June 3, 2004, the Securities and Exchange Commission ("SEC") commenced this action against defendant Tomo Razmilovic ("Razmilovic"), and others
On July 21, 2009, the SEC served Razmilovic's counsel with a notice to take Razmilovic's deposition at the SEC's offices in New York on Monday, September 28, 2009. (See Motion to Compel, Doc. No. 100, Ex. B). Razmilovic's counsel informed the SEC that Razmilovic refused to appear for a deposition in the United States
On December 21, 2009, the SEC moved, pursuant to Rule 37 of the Federal Rules of Civil Procedure, for a default judgment against Razmilovic based upon his failure to comply with this Court's October 9, 2009 order. (Doc. No. 137). On December 22, 2009, I granted the SEC's motion for a default judgment against Razmilovic pursuant to Rule 37 of the Federal Rules of Civil Procedure based upon his failure to comply with this Court's October 9, 2009 order. By order dated February 25, 2010, 2010 WL 744359, I denied Razmilovic's motion for reconsideration of the December 22, 2009 order.
On March 15, 2010, a bench trial commenced to determine the appropriate remedies for Razmilovic's violations of the securities laws established by the entry of a default judgment against him. The SEC rested its case-in-chief on that date. The following day, the trial was continued to May 10, 2010
On April 5, 2010, Razmilovic filed a motion for judgment on partial findings pursuant to Rule 52(c) of the Federal Rules of Civil Procedure. On April 12, 2010, I granted, over Razmilovic's objection, the SEC's motion to reopen its case-in-chief to call Edward S. O'Neal
By order entered June 15, 2010, I, inter alia, denied Razmilovic's motion for judgment on partial findings. During the proceedings on June 21, 2010, I, inter alia, denied the parties' respective motions to exclude the testimony of each other's expert witness at trial and, over the SEC's objection, granted Razmilovic's request to determine the remaining issues upon submission of experts' reports, deposition transcripts and post-hearing briefs. Accordingly,
1. Razmilovic was the president and chief operating officer of Symbol from 1995 through June 2000. (Complaint [Compl.], ¶ 18; Trial Exhibits [TE.], 4 (Employment Agreement between Symbol and Razmilovic dated October 16, 1995 ["1995 Employment Agreement"])).
2. In consideration of the services rendered by Razmilovic under the 1995 Employment Agreement, Symbol agreed, inter alia, to compensate him with a base salary and an annual bonus to be determined pursuant to Symbol's Executive Bonus Plan. (TE 4, ¶¶ 4(a) and (b)).
3. As set forth in its 2000, 2001 and 2002 Proxy Statements, Symbol's "executive compensation program" ("ECP"):
4. Pursuant to the minutes of meetings of the Compensation/Stock Option Committee of Symbol's Board of Directors ("Symbol's Compensation Committee") held on December 14, 1998, December 13, 1999 and December 11, 2000, the Committee adopted performance criteria for its Executive Bonus Plan for the years 1999, 2000 and 2001, respectively, pursuant to which, inter alia, Razmilovic's bonus "would be based entirely on corporate financial performance * * *." (TE 38
5. Pursuant to the minutes of a meeting of Symbol's Compensation Committee held on February 26, 2001, "biennial performance [stock] options" awarded to Symbol's executive officers were:
6. In 1999, Razmilovic was paid a base salary in the amount of six hundred thirty-five thousand seven hundred forty-nine dollars ($635,749.00) and a bonus in the amount of seven hundred forty-two thousand dollars ($742,000.00). (TE 11, at 14; TE 12, at 14; TE 13, at 12; TE 20; TE 37[
7. The "performance" stock options awarded in 1999 met the criteria for accelerated vesting. (TE 19, at 4).
8. On February 15, 2000, Symbol reported its results for the fourth quarter and full year ended December 31, 1999 indicating: (1)(a) a more than sixteen percent (16.2%) increase in revenue, (b) a more than thirty-four percent (34.7%) increase in operating earnings, (c) a more than thirty-five percent (35.3%) increase in net earnings and (d) a more than thirty-four percent (34.6%) increase in diluted earnings per share, for the 1999 fourth quarter; and (2)(a) a sixteen and one-half percent (16.5%) increase in revenue, (b) an almost twenty-five percent (24.9%) increase in operating earnings, (c) a more than twenty-five percent (25.2%) increase in net earnings and (d) a more than twenty-four percent (24.2%) increase in diluted earnings per share, for the 1999 full year. (TE 42).
9. In February 2000, "in connection with [him] being promoted to Chief Executive Officer," Razmilovic was awarded stock options to purchase three hundred seventy-five thousand (375,000) shares of Symbol's common stock at an exercise price of fifty-three dollars and seventy-five cents ($53.75). (TE 12, at 12).
10. One hundred fifty thousand (150,000) of those options were to vest on February 14, 2002, one hundred twelve thousand five hundred (112,500) of those options were to vest on February 14, 2003 and one hundred twelve thousand five hundred (112,500) of those options were to vest on February 14, 2004. (Id.)
11. In July 2000, "in connection with [him] entering into a new five-year employment agreement with [Symbol]," Razmilovic was awarded additional stock options to purchase two hundred fifty thousand (250,000) shares of Symbol's common stock at an exercise price of thirty-nine dollars and eighty seven and a half cents ($39,875) per share. (Id.)
12. Razmilovic's right to purchase twenty-five thousand (25,000) shares under those options vested on July 31, 2001; his right to purchase an additional thirty-seven thousand five hundred (37,500) shares vested six (6) months thereafter, i.e., on January 31, 2002; and the remaining options were to vest on each of the next five (5) consecutive six (6) month anniversary dates, beginning on July 31, 2002. (Id.)
13. From July 2000 until February 2002, Razmilovic was the president and chief executive officer ("CEO") of Symbol. (Compl., ¶ 18; TE 5) (Employment Agreement between Symbol and Razmilovic dated July 1, 2000 ["2000 Employment Agreement"]).
15. On November 30, 2000, a wholly-owned subsidiary of Symbol was merged with Telxon Corporation ("the Telxon acquisition") in a stock-for-stock merger. (TE 45, at 10, 46).
16. "The [Telxon] acquisition was accounted for as a purchase and the excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded as goodwill." (TE 45, at 46).
17. In its restatement, Symbol subsequently "adjusted goodwill for revisions to the fair values of the assets and liabilities acquired." (Id.)
18. In 2000, Razmilovic was paid a base salary in the amount of eight hundred thirty-two thousand seven hundred seventy dollars ($832,770.00), a bonus in the amount of nine hundred forty-nine thousand four hundred dollars ($949,400.00), and a special bonus in the amount of two hundred sixty thousand dollars ($260,000.00), related to Symbol's acquisition of Telxon Corporation. (TE 10; TE 12, at 12, 14; TE 13, at 12; TE 45 (Symbol's Annual Report on Form 10-K/A for the year ended December 31, 2002 ["2002 Annual Report"]), at 78; TE 19, at 3-4; TE 20; TE 37).
19. Symbol's 2001 Proxy Statement provides, in relevant part, that "special bonuses were paid to certain participants in the Executive Bonus Plan in recognition of the additional duties and responsibilities relating to the acquisition of Telxon Corporation." (TE 12, at 10-12, 15).
20. On February 27, 2001, Symbol reported its results for the fourth quarter and full year ended December 31, 2000, indicating: (1) a more than thirty-two percent (32.7%) increase in revenue for the fourth quarter of 2000; (2) a more than twenty-seven percent (27.3%) increase in revenue for the full year; but (3) a net loss in income and diluted earnings per share for both the fourth quarter and full year ended December 31, 2000. (TE 44).
21. In May 2001, Symbol initiated an internal review of certain financial matters in response to an inquiry from the SEC. (TE 45, at 2, 16, 42, 71).
22. In 2001, Razmilovic received a base salary of one million two dollars ($1,000,-002.00) and no performance bonus. (TE 13, at 9, 12; TE 45, at 78; TE 37[
23. Symbol's 2002 Proxy Statement indicates, in relevant part, that in February 2001 "in connection with a periodic performance review," Razmilovic was granted stock options to purchase three hundred seventy-five thousand (375,000) shares of Symbol's common stock at an exercise price of twenty-seven dollars and ninety-seven cents ($27.97).
24. Twelve thousand seven hundred fifty (12,750) of those options vested on January 1, 2002 and the remaining options would
25. On February 14, 2002, Razmilovic "resigned" as president and CEO of Symbol, but entered into two (2) new agreements with Symbol that superceded and replaced the 2000 Employment Agreement. (TE 6) (Employment Agreement between Symbol and Razmilovic dated February 14, 2002 ["2002 Employment Agreement"], ¶¶ 3, 4(a), 14; TE 7 (Separation, Release and Non-Disclosure Agreement ["Separation Agreement"], ¶¶ 1, 2(B)); see TE 13, at 13).
26. Pursuant to those two (2) agreements, Razmilovic was to remain a full-time employee of Symbol until May 6, 2002 and thereafter he would be a part-time employee of Symbol in a "consultative capacity" for a five (5)-year term. (TE 6, ¶¶ 3, 4(a), 14; TE 7, ¶¶ 1, 2(B); see also TE 45, at 82).
27. In consideration of the services rendered by Razmilovic under the 2002 Employment Agreement, Symbol agreed, inter alia, to compensate him: (a) with a salary at the rate of thirty-eight thousand four hundred sixty-one dollars and fifty-three cents ($38,461.53) per bi-weekly pay period (one million dollars ($1,000,000.00) on an annualized basis) through and including May 6, 2002; and (b) with a salary at the rate of two hundred thousand dollars ($200,000.00) per annum for the period from May 7, 2002 through May 6, 2007, (TE 6, ¶ 5(a); see TE 13, at 13).
28. The Severance Agreement provides, in relevant part: "In consideration for executing this Agreement and in full and complete satisfaction of [Symbol's] contractual obligation to Razmilovic under the [2000] Employment Agreement, Symbol will provide Razmilovic the following: (A) * * * Razmilovic will receive a lump sum payment of $5 million dollars. Razmilovic relinquishes his right to all outstanding stock options whether vested or unvested as of [February 14, 2002], with the exception of 236,250 shares granted to Razmilovic on October 19, 1998, under [Symbol's] 1997 Stock Option Plan. * * *"
29. In accordance with that provision of the Separation Agreement, Razmilovic relinquished one million eight hundred eighteen thousand seven hundred fifty (1,818,750) stock options. (Brody Deck, Ex. 1; TE 7, ¶ 2(A); see TE 13, at 13).
30. Symbol's 2002 Proxy Statement indicates that those stock options had been granted to Razmilovic in February 2001 "in connection with a periodic performance review," but had been canceled in February 2002 "in connection with arrangements entered into between Symbol and Mr. Razmilovic." (TE 13, at 9-10).
31. In 2002, Razmilovic received a base salary of four hundred seventy-six thousand nine hundred thirty-two dollars ($476,932.00), the five million dollar ($5,000,000.00) severance payment and no performance bonus. (TE 45, at 78; TE 37).
32. The 1995, 2000 and 2002 Employment Agreements: (1) required Razmilovic, inter alia, to "use his best efforts to promote [Symbol's] * * * best interests * * *," (TE 4 and 5), ¶¶ 3(a); TE 6, ¶ 4(a), and (2) could be terminated, inter alia, (a) voluntarily by Razmilovic, (TE 4 and 5, ¶¶ 12(a)(iii)); TE 6, ¶¶ 13(a)(iii), or (b) for "cause" upon written notice to Razmilovic of election of Symbol's Board of Directors to terminate his employment. (TE 4 and 5, ¶¶ 12(a)(iv); TE 6, ¶ 13(a)(iv)).
33. "Cause" is defined in the 1995, 2000 and 2002 Employment Agreements as "a determination made in good faith by vote of a majority of the members of the Board
34. The 1995 and 2000 Employment Agreements further provide that Razmilovic would be entitled to a severance payment "[i]n the event of the termination of [his] employment * * * for any reason * * * other than due to * * * (ii) his voluntary termination of his employment with [Symbol] pursuant to subsection 12(a)(iii); or (iii) his termination for cause as provided in subsection 12(a)(iv) * * *." (TE 4 and 5, ¶¶ 12(c)) (emphasis added).
35. The 2000 Employment Agreement also provided for an additional severance payment "[i]n the event of the termination of [Razmilovic's] employment prior to July 1, 2003 for any reason other than due to * * * (ii) his voluntary termination of his employment with [Symbol] pursuant to subsection 12(a)(iii); or (iii) his termination for cause as provided in subsection 12(a)(iv) * * *." (TE 5, ¶ 12(d)) (emphasis added).
36. The Separation Agreement indicates, inter alia, that Razmilovic resigned his position with Symbol as president and CEO pursuant to paragraph 12(a)(iii) of the 2000 Employment Agreement. (TE 7, ¶ 1).
37. Although Symbol's internal investigation was "hindered by certain of [its] former employees," (TE, at 16, 42, 43), it eventually "identified accounting errors and irregularities relating to [its] previously issued financial statements," requiring it to restate its "selected financial data for 1998, 1999, 2000 and 2001, financial statements for the years ended December 31, 2000 and 2001, and unaudited selected quarterly information for each of the four quarters of 2001 and first three quarters of 2002." (TE 45, at 1).
38. On February 25, 2004, Symbol filed an amendment to its Form 10-K (Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934) for the fiscal year ended December 31, 2002 ("the Restatement"), that had originally been filed on December 30, 2003
39. Pursuant to the Restatement, Symbol "reversed cumulative net revenue of $234,220,000 and cumulative net earnings of $325,536,000 that had previously been recognized through the period ended September 30, 2002." (TE 45, at 3).
40. As of September 30, 2002, [Symbol's] restated Stockholders' Equity was $946,261,000 as compared with $1,171,393,000 as originally reflected in [Symbol's] Form 10-Q for the quarter then ended." (TE 45, at 3; see also TE 45, at 43).
41. As noted in Symbol's Restatement:
42. Symbol's Restatement further indicates that:
43. Examples of the fraud included in Symbol's Restatement are: (1) the improper recognition of revenue from non-binding sales agreements, (TE 45, at 44); (2) the improper amount and timing of (a) the restructuring, impairment and merger integration charges associated with the Telxon acquisition recorded in December 2000 and (b) the restructuring charge associated with the reorganization of Symbol's manufacturing facility recorded in September 2001, as well as the subsequent utilization of the established reserves relating to both transactions, (TE 45, at 44-45); (3) the improper nature, timing and amount of inventory charges recorded in June 2001, (TE 45, at 45); (4) the incorrect capitalization of certain computer hardware development costs, (id.); (5) the misapplication of accounting principles relating to computer software design and development costs, (id.); (6) the incorrect amortization of certain patent-related costs beyond the life of the related patent, (id.); (7) the inability to associate various legal costs incurred with a specific patent, (id.); (8) improper adjustments to goodwill relating to the Telxon acquisition and the incorrect recording of adjustments properly made in accounts other than goodwill, (TE 45, at 46); (9) the erroneous establishment or release of reserves relating to accruals for costs incurred that had not been paid and prepayments for goods or services to be received that had been paid in advance, (id.); (10) the improper classification of certain categories of expenses in the statements of operations, (id.); (11) irregularities and improper administration of option exercises relating to Symbol's stock option plans, (TE 45, at 47); (12) the improper acceleration of cash receipts into earlier accounting periods and incorrect reclassifications to certain balance sheet accounts, such as accounts receivable and other assets, (TE 45, at 48); (13) the carrying of marketable securities, property, plant, equipment and other long-lived assets at amounts exceeding
44. Razmilovic and his co-defendants, "engaged in a fraudulent scheme to inflate revenue, earnings and other measures of financial performance in order to create the false appearance that Symbol had met or exceeded its financial projections," (Compl., ¶ 34), resulting in "material misstatements of revenue, earnings and other financial information reported by Symbol for annual and quarterly reporting periods from at least 1998 through the fourth quarter of 2002." (Id.)
45. The fraudulent accounting practices include: "patently improper topside adjustments, a multitude of revenue recognition schemes, the manipulation of non-recurring charges and `cookie jar' reserves to manage earnings * * *." (Id.; see also ¶ 158).
46. Due to the fraudulent practices of Razmilovic and his co-defendants, documents filed by Symbol with the SEC "contained financial statements that materially overstated Symbol's revenue and net income for the subject reporting periods and other material misstatements concerning Symbol's financial performance." (Compl., ¶ 166).
47. Razmilovic and four (4) of his co-defendants directed the fraud, which was implemented by the other five (5) co-defendants. (Compl., ¶ 34).
48. Specifically, inter alia: (1) Razmilovic authorized adjustments made, and directed additional adjustments to be made, on Symbol's "Tango" sheets in order to understate Symbol's expenses and overstate its revenue and earnings, (Compl., ¶¶ 35-41); (2) Razmilovic, and others, "negotiated large quarter-end transactions designed to pump additional revenue into [Symbol's] financial statements" and otherwise "engaged in multiple fraudulent schemes to inflate Symbol's reported sales revenue and income * * *," (Compl., ¶¶ 42-43); (3) "[a]t the end of the second quarter of 2001, Razmilovic negotiated an artificial `swap' transaction with a software company on which Symbol improperly recognized $4.25 million in revenue that quarter," (Compl., ¶ 44); and (4) Razmilovic signed (a) Form 10-K and/or Form 10-Q reports filed with the SEC which contained materially false and misleading information inflating Symbol's financial results, (Compl., ¶¶ 142-146), and (b) registration statements filed with the SEC which incorporated one or more of those false and misleading reports, (Compl., ¶¶ 147-148).
49. Razmilovic benefitted from his fraud by receiving "performance bonuses and other incentive compensation, severance payments and the proceeds of multiple transactions in Symbol securities," including "European `zero cost collar' transactions with a brokerage firm" and the exercise of stock options priced below the inflated market price. (Compl., ¶ 155(a)).
50. On May 28, 2004, Razmilovic was indicted in the United States District Court for the Eastern District of New York for his participation in the fraudulent scheme and accounting practices at Symbol.
51. At the time of his indictment, Razmilovic was living in the United Kingdom, but he subsequently moved to Croatia, then Sweden, where he currently resides.
The SEC retained Edward S. O'Neal, Ph.D. ("O'Neal") to evaluate the inflation
O'Neal identified three (3) statistically significant announcements:
According to O'Neal, those three (3) announcements "caused a total abnormal return to Symbol stock of -$11.54." (O'Neal Rpt., at 12). Thus, O'Neal applied that amount, adjusted accordingly to account for the three-to-two (3-2) stock splits of Symbol stock on two (2) separate occasions and/or for the correction of some financial results following the July 16, 2001 announcement, as the inflation present in Symbol's stock price during the fraud period. (Id. at 12-13).
Razmilovic retained Denise Neumann Martin, Ph.D. ("Martin") to calculate his disgorgement liability. (Expert Report of Denise Neumann Martin, Ph.D. [Martin Rpt.] dated April 9, 2010, Brody Deck, Ex. 5). Martin also utilized an "event study" methodology and identified eleven (11) statistically significant announcements: the February 13, 2002 article and ten (10) dates subsequent to Razmilovic's resignation and stock transactions. (Id. at 7 and Ex. 6A). According to Martin, "much of the movement in Symbol's stock price was attributable to industry trends, and should not be included in any measure of disgorgement."
The SEC contends that it is not required to prove the disgorgeable amount with certainty. Rather, according to the SEC, the amount of disgorgement need only be a reasonable approximation of profits connected to the violation, with any risk of uncertainty falling upon Razmilovic, the wrongdoer. The SEC contends that since its calculation of the disgorgement amount is reasonable, the burden shifted to Razmilovic to show that its calculation is not a reasonable approximation and to rebut the presumption that all profits earned during the fraud period are disgorgeable.
Razmilovic contends that the SEC has the burden of proving a causal connection between his compensation and the alleged fraud.
Disgorgement is a form of equitable relief, see SEC v. Wang, 944 F.2d 80, 85 (2d Cir.1991); see also SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir.1996), and is "a method of forcing a defendant to give up the amount by which he was unjustly enriched." Federal Trade Commission v. Bronson Partners, LLC, 654 F.3d 359, 372 (2d Cir.2011) (quoting SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir.1978)). "[T]he primary purpose of disgorgement orders is to deter violations of the [] laws by depriving violators of their ill-gotten gains." Id., at 373 (quoting SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir.1997)); see also SEC v. DiBella, 587 F.3d 553, 572 (2d Cir.2009); First Jersey Securities, 101 F.3d at 1474, 1475; Wang, 944 F.2d at 85, 88. The relevant inquiry is, thus, whether the defendant was unjustly enriched by his illegal conduct. See DiBella, 587 F.3d at 572.
The remedy of disgorgement "consists of factfinding by a district court to determine the amount of money acquired through wrongdoing * * * and an order compelling the wrongdoer to pay that amount plus interest to the court." SEC v. Cavanagh, 445 F.3d 105, 116 (2d Cir.2006). Since the purpose of disgorgement is remedial, not punitive, disgorgement may not be awarded above that amount. Id. at 116, n. 25. "A district court order of disgorgement forces a defendant to account for all profits reaped through his securities law violations and to transfer all such money to the court * * *." Id. at 117. The SEC must first demonstrate that its calculation of disgorgement reasonably approximates the amount of the defendant's unjust enrichment, after which the burden shifts to the defendant to show that the SEC's calculation was unreasonable, i.e., that he received less than the full amount sought to be disgorged. See SEC v. Colonal Investment Management LLC, 659 F.Supp.2d 467, 501 (S.D.N.Y.2009), aff'd, 381 Fed. Appx. 27 (2d Cir.2010); U.S. SEC v. Universal Exp., Inc., 646 F.Supp.2d 552, 563 (S.D.N.Y.2009); SEC v. Aimsi Technologies, Inc., 650 F.Supp.2d 296, 304 (S.D.N.Y.2009); SEC v. Opulentica, LLC, 479 F.Supp.2d 319, 330 (S.D.N.Y.2007).
"Disgorgement need only be a reasonable approximation of profits causally connected to the violation." SEC v. Patel, 61 F.3d 137, 139 (2d Cir.1995) (quotations, alterations and citations omitted); see also U.S. SEC v. Universal Exp., Inc.,
Notwithstanding language in certain cases suggesting otherwise, the Second Circuit has recently stated that the appropriate measure of disgorgement is not necessarily the calculation of the defendant's net profits from his illegal acts, since the defendant is "not entitled to deduct costs associated with committing [his] illegal acts." See Bronson Partners, 654 F.3d at 375 (quoting SEC v. Cavanagh, No. 98-Civ-1818-DLC, 2004 WL 1594818, at *30 (S.D.N.Y. July 16, 2004), aff'd, 445 F.3d 105 (2d Cir.2006)). As the Second Circuit held, "where the profits from fraud and the defendant's ill-gotten gains diverge, the district court may award the larger sum." Id.
The SEC seeks disgorgement of the entire amount of compensation Razmilovic received during the fraud period, i.e., from 1998 through 2002, including his base salary, bonus and lump sum severance payment, on the basis: (1) that Razmilovic's employment at Symbol should have (and would have) been terminated based upon his participation in the fraud scheme and, therefore, he should not have received any compensation during the period that he participated in the fraud scheme prior to its discovery; (2) that Razmilovic's base salary and bonus were contractually premised upon either Razmilovic's promise to act in Symbol's best interests or upon Symbol's financial performance, but neither requirement was met; (3) that Razmilovic's severance payment was a performance bonus, but his "performance" was fraudulent; and (4) that Razmilovic should not be entitled to retain the special bonus related to the Telxon acquisition because that transaction was improperly used by him and his co-defendants to "prop up" Symbol's financial performance. The SEC seeks disgorgement liability from compensation, including prejudgment interest from April 5, 2002, the date on which Razmilovic received the severance payment,
According to Razmilovic, the SEC has failed to satisfy its burden of establishing a causal connection between the base salary, bonus payments and severance payment he received during the fraud period.
Several courts have found that "[disgorgement of salaries and other forms of compensation may be an appropriate remedy" in SEC enforcement cases. SEC v. Black, No. 04 C 7377, 2009 WL 1181480, at *2 (N.D.Ill. Apr. 30, 2009) (citing cases).
Razmilovic contends that the SEC has not established that his base salary was tied to Symbol's financial performance. Razmilovic does not, however, dispute that all of his Employment Agreements with Symbol required him, inter alia, to "use his best efforts to promote [Symbol's] * * * best interests * * *." (TE 4 and 5, ¶¶ 3(a); TE 6, ¶ 4(a)). By participating in the pervasive fraud scheme alleged in the complaint, Razmilovic clearly did not act to promote Symbol's best interests during the fraud period, i.e., during the years 1999 through 2002.
Nonetheless, the SEC has not established that the entire base salary Razmilovic received during the fraud period was causally linked to his unlawful conduct. See, e.g. SEC v. Kelly, 765 F.Supp.2d 301, 325-26 (S.D.N.Y.2011) (declining to order disgorgement of the defendants' entire yearly compensation and bonuses absent any evidence that they were linked to the company's financial performance or were otherwise causally connected to the alleged wrongdoing); SEC v. Resnick, 604 F.Supp.2d 773, 783 (D.Md.2009) (declining to order disgorgement of the defendant's salary where there was no evidence that the defendant's salary was causally linked to his unlawful conduct). Indeed, although the Employment Agreements tied the overall compensation of its senior executives, including base salary, bonuses and stock options, to Symbol's
All but two (2) of the cases requiring a defendant to disgorge his or her salary, and upon which the SEC relies, are distinguishable because the fraud committed by those defendants extended the life of the employer-company and, therefore, the defendants would not have received any compensation from a company that would not have existed but for their fraud. See, e.g. SEC v. First Pac. Bancorp., 142 F.3d 1186, 1192 (9th Cir.1998) (the defendant's fraud extended the bank's life, thereby allowing him to continue drawing, inter alia, a salary); SEC v. Conaway, No. 2:05-CV-40263, 2009 WL 902063, at *20 (E.D.Mich. Mar. 31, 2009) (finding a question of fact regarding whether the defendant should be required to disgorge his salary since the company might have been forced into bankruptcy earlier absent the defendant's illegal conduct, thereby shortening his tenure there); U.S. SEC v. Church Extension of the Church of God, Inc., 429 F.Supp.2d 1045, 1050 (S.D.Ind.2005) (the defendants' fraud delayed the collapse of the church, thereby enabling them to continue their employment and receive compensation therefor). Thus, the salaries of the defendants in those cases were clearly connected to the defendants' wrongdoing and, therefore, constituted ill-gotten gains. To the contrary, Symbol remained a viable company notwithstanding Razmilovic's fraud.
The Posner case is also distinguishable because the district court expressly found that any contention that the defendants' services "were of real value to the company [was] belied by the results reported in [the company's] public filings." SEC v. Drexel Burnham Lambert, Inc., 837 F.Supp. 587, 612 (S.D.N.Y.1993), aff'd sub nom., SEC v. Posner, 16 F.3d 520 (2d Cir.1994). In this case, such evidence is lacking. Indeed, it is reasonable to infer that since Symbol remained a viable company notwithstanding the pervasive fraud scheme, some of the services performed by Razmilovic for Symbol were of real value to the company.
In addition, the Black case is distinguishable because the district court in that case found that it was reasonable to infer from the company's termination of its relationship with the defendant only two (2) months after learning of his illegal conduct that it would have promptly terminated its relationship with the defendant earlier had it known of the defendant's unlawful conduct earlier. Black, 2009 WL 1181480, at *10-11. Since Razmilovic resigned from his position as CEO, any causal connection between his fraud and his continued employment at Symbol is not patently evident.
Nevertheless, it is reasonable to infer a causal connection between Razmilovic's fraud and his promotion to CEO of Symbol, effective July 2000
In sum, Razmilovic must disgorge the total amount of
Since Razmilovic's bonuses under the Executive Bonus Plan were directly tied to the financial performance of Symbol, and the bonuses he received in 1999 and 2000 were based upon fraudulently reported financial numbers, Razmilovic is liable to disgorge the entire amount of those bonuses, i.e., one million six hundred
Razmilovic's contention that he should not be required to disgorge his performance bonuses because certain trial exhibits should be excluded from evidence, (Razmilovic Mem., at 6), is unpersuasive since, inter alia, his own expert admitted in her report that Symbol's restated earnings would not have met the target earnings amounts for performance-related bonuses in either year that he received those bonuses and, therefore, that Razmilovic is liable to disgorge the amount of those performance bonuses. (Martin Rpt., at 11; Brody Decl., Ex. 2, at 119-122). I reject Razmilovic's contention that that portion of Martin's expert report should be ignored because the report had been submitted after he had moved for partial judgment pursuant to Rule 52(c) of the Federal Rules of Civil Procedure at the close of the SEC's case.
Razmilovic contends that the SEC has failed to establish that the special bonus he received in connection with the Telxon acquisition ("the Telxon bonus") was paid to him "for any reason related to [Symbol's] financial performance or any alleged fraud." (Razmilovic Mem., at 6). Razmilovic's expert also opines that the Telxon bonus is not disgorgeable because, unlike the performance bonuses, it was not contingent on Symbol's earnings. (Martin Rpt., at 11).
Razmilovic ignores the allegations in the complaint, deemed true by this Court's December 22, 2009 order granting the SEC a default judgment against Razmilovic pursuant to Rule 37 of the Federal Rules of Civil Procedure, and evidence, (see TE 45, at 44-45, 46), that the entire Telxon restructuring charge had been improperly recorded and fraudulently used to "prop up" Symbol's earnings and that Razmilovic, at the very least, signed Symbol's financial reports and registration statements based upon those improper charges during the fraud period. Since the accounting of the Telxon acquisition was entirely fraudulent, it is reasonable to infer that Razmilovic would not have received the Telxon bonus if the true value of that acquisition had been known. Therefore, the entire amount of the Telxon bonus constitutes ill-gotten gains. Accordingly, Razmilovic is liable to disgorge the entire amount of the Telxon bonus, i.e.,
Razmilovic contends that the SEC has not demonstrated that the five million dollar ($5,000,000.00) severance payment he received upon his resignation, and after Symbol had already learned of the SEC's investigation of it
In the same provision of the Separation Agreement, Symbol agreed to pay the lump sum severance payment to Razmilovic and Razmilovic agreed to "relinquish[] his right to all outstanding stock options * * *." (TE 7, ¶ 2(A)).
The SEC also seeks disgorgement of all profits Razmilovic earned from Symbol stock transactions during the fraud period, including his sales of Symbol stock on the open market, his transfers of Symbol stock directly to Symbol at market value to pay options exercise prices and withholding taxes on his stock options exercises and European "zero-cost" collar transactions.
Since one of the effects, if not the very purpose, of the pervasive fraud scheme at Symbol was to manipulate Symbol's earnings and, thereby, inflate the value of its stock, it is reasonable to infer that Razmilovic profited from the scheme in all of his transactions involving Symbol securities during the fraud period. See, e.g. Lorin, 76 F.3d at 462 (holding that it was "well within the discretion of the district court * * * to reason that because the purpose and effect of the scheme was to manipulate and stabilize the prices of the [company's] stocks, [the defendants] likely profited from the scheme in all of their trades in those securities.") Indeed, Razmilovic's expert concedes that the profits Razmilovic earned on the shares of Symbol stock that he "swapped" during his exercise of stock options to pay the options price and withholding taxes should be included in any disgorgement calculation "since they would not have been earned absent the alleged earnings misstatement and associated stock price inflation." (Martin Rpt., at 8; see Martin Deck, at 8) ("Once the correct inflation is calculated, * * * it has to be applied to Mr. Razmilovic's four exercises of employee stock options * * *.") However, both parties have submitted expert reports utilizing similar "event study" methodologies, but containing divergent conclusions with respect to the effect the fraud scheme had on the price of Symbol stock during the fraud period.
The SEC seeks a disgorgement award from Razmilovic's stock transactions, including prejudgement interest thereon from February 1, 2002, the date of Razmilovic's last options exercise, in the total amount of seventy million two hundred sixty-five thousand three hundred twenty-six dollars and eighty cents ($70,265,326.80). The SEC calculates the amount of Razmilovic's profits from his exercise of stock options by using the number he and Symbol reported to the IRS on his W-2s.
With respect to insider trading, the Second Circuit has held that "where stock is purchased [or sold] on the basis of inside information, the proper measure of damages is the difference between the price paid for shares at the time of purchase [or the price at which the shares were sold] and the price of the shares shortly after the disclosure of the inside information." Patel, 61 F.3d at 139-140; see also Warde, 151 F.3d at 50 (finding that the district court reasonably fixed disgorgement as the difference between the price of the defendant's warrants when purchased on inside information and their price after the disclosure of the inside information); SEC v. Drucker, 528 F.Supp.2d 450, 451-52 (S.D.N.Y.2007), aff'd, 346 Fed.Appx. 663, 666 (2d Cir.2009) (calculating the amount to be disgorged as the difference between the amount realized by each defendant via his insider sales and the amount he would have realized if he had sold after the disclosure of the inside information concerning the company's earnings). Although this is not an insider trading case, it is reasonable to similarly calculate the amount of Razmilovic's ill-gotten gains from his exercise of stock options during the fraud period as the difference between the inflated value of the proceeds realized by him on the date of the relevant stock option exercise and the value of the proceeds he would have otherwise realized absent the fraud. See, e.g. United States v. Hatfield, 795 F.Supp.2d 219, 225-26 (E.D.N.Y.2011) (holding that only the difference between the stock's inflated value and what it would have sold for absent the fraud was subject to criminal forfeiture).
Although I accept Razmilovic's contention that the proper measure of disgorgement in this case is the amount by which the value of Symbol's stock was inflated as a result of the fraud, I nonetheless reject his expert's calculation of the value of that inflation.
Upon presentation of expert opinion, the court must make a "preliminary assessment of whether the reasoning or methodology underlying the [opinion] is. . . valid and of whether the reasoning or methodology properly can be applied to the facts in issue." Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 592-93, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993). Both parties' experts utilized an "event study" methodology, which, inter alia, examines the effect of an event on a corporation's stock price by looking for "abnormal returns during those event periods, usually days, when a stock moves differently than predicted based upon market and industry factors" and determines whether those abnormal returns are related to the alleged fraud. In re Xerox Corp. Securities Litigation, 746 F.Supp.2d 402, 408 (D.Conn. 2010). It is undisputed that such methodology is a generally accepted method of calculating the inflation in a stock's price in cases involving securities fraud. See, e.g. SEC v. Yuen, 272 Fed.Appx. 615, 618 (9th Cir.2008); In re Imperial Credit Industries, Inc. Sec. Litig., 252 F.Supp.2d 1005, 1015-16 (C.D.Cal.2003), aff'd sub nom. Mortensen v. Snavely, 145 Fed. Appx. 218 (9th Cir.2005) (holding that an event study is necessary to distinguish between fraud-related and non-fraud related influences on stock price); Xerox Corp., 746 F.Supp.2d at 411 (finding that an event study is an accepted methodology); U.S. v. Grabske, 260 F.Supp.2d 866, 867-68 (N.D.Cal.2002) ("Economists often determine the amount of stock price inflation due to fraud through an `event study[,]' * * * [which] looks to how the price of the stock changed after the fraud was disclosed as evidence of the amount by which it was inflated prior to disclosure."). Where the experts' opinions diverge, however, is in their selection of the variables to use in their analysis and the weight to be accorded to such variables. For the reasons set forth below, I find O'Neal's opinion to be entitled to greater weight than Martin's.
In calculating the applicable inflation amount, Martin, Razmilovic's expert, inter alia, excludes two (2) of the three (3) events upon which O'Neal relied as statistically relevant: (1) the July 16, 2001 announcement and (2) the February 14, 2002 announcements. (See O'Neal Rpt., at 17).
Martin's opinions, and particularly her calculations of the amount by which the value of Symbol shares were inflated during the fraud period and the amount Razmilovic is liable to disgorge, are entitled to little or no weight because, inter alia, in addition to her omission of two (2) statistically relevant dates,: (a) she is not qualified to testify as to the amount Razmilovic is liable to disgorge from his stock transactions insofar as she testified during her deposition that she has no prior experience with disgorgement cases involving the exercise of stock options and that she did not "literally know how the [stock exercise] transaction occur[red]" in this case, (Brody Decl., Ex. 2, at 108, 109), see, e.g. Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137, 152, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999) (holding that Rule 702 of the Federal Rules of Evidence requires "a reliable basis in the knowledge and experience of the relevant discipline."); Xerox Corp., 746 F.Supp.2d at 416 (rejecting the defendants' expert's opinion on the effect of the fraud on the company's stock price because, inter alia, he did not have the requisite experience in the field); (b) she did not base her opinion upon economic literature, (Brody Decl., Ex. 2, at 108), and used an earnings response model unsupported by accepted econometric principles; and (c) she did not follow her own procedures in this case, e.g., she compared the performance of Symbol stock against only one (1) index, as opposed to two (2) or more.
To the contrary, O'Neal's opinions are based upon a reliable foundation. In his report, O'Neal, inter alia, adequately explains how he identified the statistically relevant dates he utilized in his event study and how he utilized those events to determine the effect that the pervasive fraud scheme had on the value of Symbol's stock during the fraud period.
The case In re IPO Sec. Litig., 399 F.Supp.2d 261, 265 (S.D.N.Y.2005), affd sub nom. Tenney v. Credit Suisse First Boston Corp., Inc., 2006 WL 1423785 (2d Cir. May 19, 2006), upon which Razmilovic primarily relies to justify Martin's failure to consider the July 16, 2001 announcement, is distinguishable.
The other cases upon which Razmilovic relies are also distinguishable from this case. In Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir.2005), the plaintiffs claimed that the defendants issued false and misleading reports recommending that investors purchase shares of companies,
In Leykin v. AT & T Corp., 423 F.Supp.2d 229 (S.D.N.Y.2006), aff'd, 216 Fed.Appx. 14 (2d Cir.2007), the scheme alleged by the plaintiffs involved corporate abuse, misconduct and diversion of assets, but no transactions in the relevant securities, i.e., it was not alleged that the defendant made any materially false or misleading statements upon which investors relied in purchasing or selling securities, nor that he actually traded in the securities as part of the fraud; and there was no showing that a concealed risk materialized during the relevant period. 423 F.Supp.2d at 241-42. In any event, the district court recognized that "[a] concealed risk can lead to a decline in stock price either because a corrective disclosure reveals the falsity of the misrepresentations or omissions, or because the risk which was concealed materializes and causes the price decline." 423 F.Supp.2d at 240 (emphasis added).
The case In re Oracle Corp. Sec. Litig., 627 F.3d 376 (9th Cir.2010), which Razmilovic cites as supplemental authority for his position by letter dated November 18, 2010, is distinguishable, inter alia, because, unlike the Second Circuit, the Ninth Circuit has not endorsed a "materialization of the risk" theory. See, e.g. In re Nuveen Funds/City of Alameda Sec. Litig., Nos C 08-4575 SI, C 09-1437 SI, 2011 WL 1842819, *10 (N.D.Cal. May 16, 2011).
Unlike the above-cited cases, Razmilovic's misrepresentations and omissions concealed Symbol's true financial performance during the fraud period and it was foreseeable that had Symbol's true financial performance been known, the value of its stock would have been less. Once the subject of Razmilovic's fraud, i.e., Symbol's true financial performance, began to materialize, the value of Symbol stock started to decline. The Second Circuit has held that an allegation that the defendant's fraudulent misrepresentations concealed the subject that caused the foreseeable loss is sufficient to establish a causal connection between the fraud and the effect on the stock's value, Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 98 (2d Cir.2001), and other district courts in this Circuit have held that a corrective disclosure is not necessary to establish causation where it is alleged that the subject of the misrepresentations and omissions, i.e., a risk allegedly concealed by the defendants which subsequently materialized, caused the value of the securities to decline. See, e.g. In re Lehman Brothers Securities and Erisa Litig., 799 F.Supp.2d 258, 304, 2011 WL 3211364, at *30 (S.D.N.Y. July 27, 2011) (holding that
The concealed risk of the pervasive fraudulent scheme here, including, inter alia, an SEC investigation, a financial restatement and a decline in stock value, began to materialize when the July 16, 2001 announcement partially revealed the true financial performance of Symbol. The relevant "truth" revealed by that announcement was not that a fraud was committed per se; but rather was the "truth" about Symbol's financial condition, which, upon revelation, caused a sudden decline in Symbol's stock value. See, e.g. Freudenberg, 712 F.Supp.2d at 202.
Morever, the truth of the subject of the fraud scheme in which Razmilovic participated, i.e., Symbol's true financial performance, was revealed to the market not as a single event, but through a series of disclosing events. Accordingly, the July 16, 2001 announcement, which disclosed the beginning of the materialization of the risk of Symbol's previously-concealed true financial performance, i.e., a failure to meet earnings estimates and lowered earnings guidance, was properly considered by O'Neal in his event study and, conversely, was improperly omitted by Martin in her event study. See, e.g. Freudenberg, 712 F.Supp.2d at 202 (holding that the materialization of concealed risks and information regarding the quality of the company's investments sufficed to plead a causal connection between the fraud and the effect on the company's securities, and that a corrective disclosure need not take the form of a single announcement, but can occur through a series of disclosing events); In re Bradley Pharmaceuticals, Inc. Sec. Litig., 421 F.Supp.2d 822, 828-29 (D.N.J.2006) (holding that the plaintiffs adequately pled loss causation, i.e., a causal connection between the fraud and the effect on the company's securities, where the revelation of the "truth" did not take the form of a single, unitary disclosure, but occurred through a series of disclosing events beginning almost two (2) months earlier); Parmalat, 375 F.Supp.2d at 307 (holding that the fact that the true extent of the fraud was not revealed to the public until two (2) months after the price of the company's shares had declined was immaterial where the risk allegedly concealed by the defendants materialized during the time that the shares began to decline and arguably caused the decline in value).
Razmilovic's reliance on In re Flag Telecom Holdings, Ltd. Sec. Litig., 574 F.3d 29 (2d Cir.2009), is misplaced because, inter alia, the "industry events" upon which the plaintiffs relied in that case involved the defendants' misrepresentations themselves regarding the company's condition and
The case, In re Omnicom Group, Inc. Sec. Litig., 597 F.3d 501 (2d Cir.2010), to which Razmilovic cites in further support of his contention that the February 14, 2002 disclosure should not have been included in any event study, is inapposite because, inter alia: the disclosure at issue in that case reported, inter alia, that an outside director and chair of the audit committee of the company, not its CEO, had resigned; it was never alleged that the director who had resigned had participated in any way in the fraudulent accounting scheme alleged; and none of the matters reported in the disclosure at issue had "even purported to reveal some then-undisclosed fact with respect to the specific misrepresentations alleged in the complaint * * *." Id. at 505, 511-12. The Second Circuit held that since the facts underlying the alleged fraud and the director's resignation had been known to the market for a year prior to the resignation, the resignation did not add to the public's knowledge any new material facts. Id. at 512. To the contrary, the February 14, 2002 announcement disclosed more than just Razmilovic's abrupt resignation as CEO of Symbol; it also disclosed previously undisclosed information regarding, inter alia, Symbol's financial performance during the fourth quarter and full year ended December 31, 2001, which necessarily could not have been included in the July 16, 2001 announcement.
On July 27, 1999, Razmilovic exercised options to purchase two hundred forty-three thousand four hundred twenty-five (243,425) at an average option price per share of approximately nine dollars and eighty-seven cents ($9.8680).
According to O'Neal, in the absence of any fraud, the price of Symbol stock on the date of the 1999 options exercise would have been fifteen dollars and twenty-nine cents ($15.29).
Following the 1999 stock options exercise, Razmilovic was left with ninety-nine thousand three hundred nine (99,309) new shares of Symbol common stock.
Pursuant to the Confirmation Agreement between Razmilovic and BofA dated July 30, 1999 and the Revised Confirmation Agreement between Razmilovic and BofA dated April 14, 2000, Razmilovic warranted to BofA that he was "not entering into [the zero cost collar] while in
On the expiration date of the 1999 collar transaction, the market price for Symbol stock was approximately eight dollars and ninety-seven cents ($8.97), lower than the adjusted high put strike price.
On May 1, 2000, Razmilovic exercised options to purchase two hundred thirteen thousand eight hundred thirty-three (213,833) shares of Symbol stock at an average option price per share of approximately six dollars and eighty-nine cents ($6.8913)
According to O'Neal, absent the fraud, the price of Symbol stock on the date of exercise would have been approximately forty dollars and twenty-five cents ($40.2526)
Following the 2000 stock options exercise, Razmilovic was left with one hundred thousand (100,000) shares of Symbol common stock. On November 3, 2000, Razmilovic entered into another "zero cost" collar transaction with BofA with respect to those one hundred thousand (100,000) shares, pursuant to which: (1) he sold call options to BofA allowing BofA to purchase, and obligating him to sell, the shares on the expiration date, i.e., January 5, 2004, if the stock price at expiration was higher than the call strike price
On January 6, 2004, one day after the expiration date of the collar transaction, the market price for Symbol stock was seventeen dollars and eighty-eight cents ($17.88), lower than the adjusted put strike price.
On May 2, 2001, Razmilovic exercised options to purchase four hundred sixty-four thousand four hundred fifteen (464,415) shares of Symbol stock at an average option price per share of approximately five dollars and fifty-three cents ($5.5355).
According to O'Neal, absent the fraud, the price of Symbol stock on the date of exercise would have been sixteen dollars and fifty-seven cents ($16.57)
On May 14, 2001, Razmilovic entered into another "zero cost collar" transaction with BofA with respect to the two hundred thousand (200,000) shares he acquired in the 2001 stock options exercise, pursuant to which: (1) he sold call options to BofA allowing BofA to purchase, and obligating him to sell, the shares on the expiration date, i.e., May 14, 2003, if the stock price at expiration was higher than the call strike price
Pursuant to the Confirmation Agreement between Razmilovic and BofA dated May 17, 2001, Razmilovic warranted to BofA that he was "not entering into [the zero cost collar] while in possession of material, non-public information concerning the business, operations or prospects of [Symbol]. `Material' information for these purposes is any information to which an investor would reasonably attach importance in reaching a decision to buy, sell, or hold securities of [Symbol]." (TE 32, at 6). Clearly, in light of the pervasive fraud scheme at Symbol in which Razmilovic participated, that representation was fraudulent, rendering the entire collar transaction fraudulent.
On May 14, 2003, the expiration date of the 2001 collar transaction, the market price for Symbol stock was twelve dollars and twelve cents ($12.12), lower than the adjusted put strike price.
In sum, Razmilovic realized ill-gotten gains in, and is liable to disgorge, the total amount of eight million one hundred forty-two thousand two hundred twenty dollars and thirty cents ($8,142,220.30) from the fraudulent collar transactions.
On February 1, 2002, Razmilovic exercised options to purchase one million seven hundred forty-four thousand six hundred thirty (1,744,630) shares of Symbol stock at an average option price per share of approximately six dollars and eighty-eight cents ($6.8833).
The SEC contends that the 2002 options exercise was entirely fraudulent because approximately seventy-seven (77%) of the shares transferred by Razmilovic to Symbol to pay the option price had previously been "collared" with BofA and, thus, Razmilovic was precluded from further transferring those shares prior to the expiration dates of the collared shares.
As noted above, the ninety-nine thousand three hundred nine (99,309) shares of Symbol stock that had been acquired by Razmilovic pursuant to his 1999 stock options exercise had previously been "collared" with BofA on July 30, 1999, (TE 22-23); as a result of two (2) three-to-two (3-2) stock splits on April 6, 2000 and April 16, 2001, the number of shares "collared" by the 1999 transaction was adjusted to two hundred twenty-three thousand four hundred forty-five (223,445), (TE 24); the one hundred thousand (100,000) shares of Symbol stock that had been acquired by Razmilovic pursuant to his 2000 stock options exercise had previously been "collared" with BofA on November 3, 2000, (TE 27-28); as a result of the April 16, 2001 stock split, the number of shares "collared" by the 2000 transaction was adjusted to one hundred fifty thousand (150,000), (TE 28); and the two hundred thousand (200,000) shares that had been acquired by Razmilovic pursuant to his 2001 stock options exercise had been "collared" by him with BofA on May 14, 2001, (TE 17, 31 and 32).
Pursuant to the terms of the relevant Confirmation Agreements, Razmilovic agreed that "until the Expiration Date, other than in connection with the Assignment and Security [or Pledge] Agreement and the Transaction or with the prior consent of BofA, * * * no sale, pledge, option, hedge, or other arrangement to transfer or dispose of any interest in any securities [or in any Shares (or securities convertible into or exchangeable or exercisable for Shares)] of [Symbol] shall be made by or for the account of [Razmilovic] * * *." (TE 22, 23 and 32, at 7) (emphasis added). Thus, Razmilovic's agreements with BofA restricted any transfer of at least the "collared" shares prior to the expiration dates
The remaining four hundred ninety-one thousand three hundred fifty-three (491,353) shares transferred by Razmilovic to Symbol as payment for the 2002 options price and withholding tax were not previously "collared" with BofA. Since Razmilovic is liable to disgorge the entire amount of proceeds he received from fraudulently transferring the "collared" shares to Symbol as payment for the 2002 options exercise, it would constitute "double" disgorgement to also hold him liable for the proceeds he received on the inflated price of those "collared" shares. Accordingly, Razmilovic is only liable to disgorge the amount of proceeds he received from transferring the remaining four hundred ninety-one thousand three hundred fifty-three (491,353) shares to Symbol at an inflated value as payment for the 2002 options price and withholding tax.
According to O'Neal, absent the fraud, the price of Symbol stock on the date of the 2002 options exercise would have been nine dollars and forty cents ($9.40).
In sum, Razmilovic realized ill-gotten gains from his exercise of stock options during the fraud period in, and is liable to disgorge, the total amount of twenty million two hundred eighty-six thousand six hundred sixty-nine dollars and seventeen cents ($20,286,669.17).
The SEC seeks disgorgement of the entire proceeds Razmilovic received from his sales of Symbol stock on the open market in February and March 2002. However, for the reasons set forth above, Razmilovic is only liable to disgorge the difference between the amount of proceeds he actually received from the sales and the amount he would have received absent his fraud.
Razmilovic's expert estimates an additional disgorgement amount of four hundred ninety-seven thousand seven hundred eleven dollars ($497,711.00) based upon the difference Razmilovic would have received on the sale of Symbol stock on the open market in 2002 and the price he would have received absent the inflation in Symbol's stock price. (Martin Rpt., at 8; Martin Decl., at 17).
On February 14, 2002, Razmilovic sold seventy-four thousand eight hundred fifty (74,850) shares of Symbol stock at an inflated price of eleven dollars and seventy-nine cents ($11.79), for a total amount of eight hundred eighty-two thousand four hundred eighty-one dollars and fifty cents ($882,481.50).
On March 1, 2002, Razmilovic sold seven hundred thirty-one thousand five hundred forty-nine (731,549) shares of Symbol stock at a price of approximately eight dollars and eighty-five cents ($8.8468)
In sum, Razmilovic is liable to disgorge the total amount of thirty-three million eight hundred sixty-nine thousand nine hundred seventy-five dollars and twenty cents ($33,869,975.20) as the ill-gotten gains resulting from his stock transactions, for a total disgorgement amount, exclusive of prejudgment interest, of forty-one million seven hundred fifty-three thousand six hundred twenty-three dollars and four cents ($41,753,623.04).
Razmilovic contends that any amount awarded to the SEC as disgorgement should be offset by the amount of two million two hundred fifty thousand dollars ($2,250,000.00), which is the amount he agreed to pay to settle Symbol's private claims against him commenced in the Court of Chancery of the State of Delaware in and for New Castle County, because "[t]he allegations in Symbol's case against [him] are analogous to the allegations of the SEC's Complaint in this case." (Razmilovic Mem., at 19; see Declaration of Jess Velona in Support of Plaintiffs Opposition Post-Hearing Memorandum in Further Support of its Claims against Defendant Tomo Razmilovic for Disgorgement, Pre-Judgment Interest, Penalties, Permanent Injunctive Relief, and a Permanent Officer and Director Bar [Velona Decl.], Ex. 2 (Settlement and Release Agreement between Symbol and Razmilovic dated July 20, 2009)).
Regardless of whether the claims asserted against Razmilovic by the SEC in this case are analogous to the claims asserted against him in a private securities fraud action commenced by Symbol, the relief sought is different. The damages sought by Symbol were compensatory in nature, whereas the disgorgement sought by the SEC is remedial in nature, i.e., designed to deter future violations of the securities laws by depriving Razmilovic of the rewards he obtained through his violation of the securities laws. The Second Circuit has held:
First Jersey Securities, 101 F.3d at 1475 (citation omitted); see also SEC v. Shah, 92 Civ. 1952, 1993 WL 288285, at *5 (S.D.N.Y., July 28, 1993); SEC v. Penn Central Co., 425 F.Supp. 593, 599 (E.D.Pa. 1976) ("The fact that defendants have been sued in private litigation based on the same allegations as those made by the SEC does not make the relief sought any less remedial. * * * Disgorgement contemplates total recovery from the wrongdoer, not recovery that may be * * * subject to a compromise of actual damages. * * * To the extent that defendants have
In light of the vast amount of the disgorgement award, and in order to convey the fact that the award is not punitive, but only encompasses the ill-gotten gains Razmilovic realized from his fraud, I will exercise my discretion to offset the disgorgement award by any amount Razmilovic pays to Symbol to settle its claims against him.
In a footnote in his brief in opposition to the SEC's post-trial memorandum, Razmilovic requests an offset of the disgorgement amount "[b]ecause the evidence shows that [he] paid taxes" on the profits he realized from the stock options exercises. (Defendant Tomo Razmilovic's Brief in Opposition to Plaintiffs Post-Hearing Memorandum [Razmilovic Opp.], at 18-19, n. 12).
Contrary to Razmilovic's contention, there is no legal authority to support a deduction for taxes paid upon ill-gotten gains. See, e.g., SEC v. Dibella, 3:04CV1342, 2008 WL 6965807, at *3 (D.Conn. Mar. 13, 2008), aff'd, 587 F.3d 553 (2d Cir.2009) (income taxes are not deductible from disgorgement amount); U.S. SEC v. Zwick, 03 Civ. 2742, 2007 WL 831812, at *24 (S.D.N.Y. Mar. 16, 2007), aff'd, 317 Fed.Appx. 34 (2d Cir.2008) (accord); U.S. SEC v. Svoboda, 409 F.Supp.2d 331, 345 (S.D.N.Y.2006) (finding no legal authority to support deducting capital gains taxes from disgorgement amount). Razmilovic's attempt to distinguish those cases is unpersuasive, since, inter alia, the courts only held in the alternative that the defendants therein had not shown the amount of taxes paid. Accordingly, the disgorgement amount will not be offset by any amount paid by Razmilovic as taxes on his ill-gotten gains.
Razmilovic contends that the SEC should not be awarded prejudgment on the disgorgement amount because he has not had the "use" of his unlawful gains since 2004 since "far more than the amount of funds subject to disgorgement [which he contends is four million eight hundred seventy thousand eight hundred forty-nine dollars ($4,870,849.00) ] are held in Swiss bank accounts that have been frozen," by the government. (Razmilovic Mem., at 22-23).
"The decision whether to grant prejudgment interest and the rate used if such interest is granted are matters confided
In SEC v. Zafar, No. 06-CV-1578, 2009 WL 129492, at *7 (E.D.N.Y. Jan. 20, 2009), upon which Razmilovic relies, the Honorable John Gleeson, United States District Judge, denied the SEC's motion for summary judgment on the award of prejudgment interest on the basis that "it [was] not clear that prejudgment interest should be awarded for the period during which all of [the defendant's] assets were frozen" (emphasis added), since the freeze order "sufficed to deprive [the defendant] of th[e] potential benefit [of an interest-free loan in the amount of his ill-gotten gains]." Id. Judge Gleeson found that the SEC had failed to demonstrate that it was appropriate to award prejudgment interest for the entire period during which the defendant had use of unlawful profits "when the defendant [had] already [been] restrained from using those profits." Id.
In this case, however, there is no evidence, and indeed Razmilovic carefully avoids even alleging, that all of his assets have been frozen by the government since 2004. Whereas in Zafar, the defendant had sought access to some of the frozen funds during the course of the litigation in order to pay living expenses, legal expenses and expert witness fees, 2009 WL 129492, at *3-4, Razmilovic has never once sought to modify the freeze orders issued by the Swiss Department of Justice's Central Authority for United States Request, dated July 2, 2004 (temporary freeze order for ninety [90] days) and October 1, 2004 (permanent freeze order), (see Declaration of Simon Kunz in Support of Defendant Tomo Razmilovic's Post-Trial Brief, at ¶¶ 3-4), in order to access the frozen funds to pay living expenses, etc. Thus, it is clear that not all of Razmilovic's assets have been frozen since July 2004. Moreover, since I have found the amount of Razmilovic's ill-gotten gains to be in excess of forty-one million dollars ($41,000,000.00), but only seventeen million three hundred seventy-nine thousand seven hundred thirty-five dollars ($17,379,735.00) have been frozen, (see Razmilovic Mem., at 23)
Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d)(1), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d)(3)(A), authorize a district court to impose civil monetary penalties upon any person found to have committed a violation of those securities laws, and provide for three (3) tiers of potential penalties to "be determined by the court in light of the facts and circumstances." The first tier is generally applicable, see SEC v. Kern, 425 F.3d 143, 153 (2d Cir.2005), and provides for a penalty to be imposed in an amount, as adjusted for inflation, see 17 C.F.R. §§ 201.1001-1002, not to exceed the greater of: (1)(a) five thousand five hundred dollars ($5,500.00) for each violation occurring prior to, and including, February 2, 2001, 17 C.F.R. Pt. 201, Subpt. E, Tbl. I, and (b) six thousand five hundred dollars ($6,500.00) for each violation occurring after February 2, 2001 and prior to, and including, February 14, 2005, 17 C.F.R. Pt. 201, Subpt. E, Tbl. II; or (2) "the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(A), 78u(d)(3)(B)(i). The second tier increases the penalty to be imposed where the violation(s) "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" to an amount, as adjusted for inflation, see 17 C.F.R. §§ 201.1001-1002, not to exceed the greater of: (1)(a) fifty-five thousand dollars ($55,000.00) for each violation occurring prior to, and including, February 2, 2001, 17 C.F.R. Pt. 201, Subpt. E, Tbl. I, and (b) sixty thousand dollars ($60,000.00) for violations occurring after February 2, 2001 and prior to, and including, February 14, 2005, 17 C.F.R. Pt. 201, Subpt. E, Tbl. II; or (2) "the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(B), 78u(d)(3)(B)(ii). The third tier further increases the penalty to be imposed where the violation(s) "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and where "such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other
The civil penalties authorized by the securities laws serve a dual purpose, i.e., to both punish the individual violator for his past violations and deter future violations of the securities laws. See Colonial Investment, 659 F.Supp.2d at 503; Universal Exp., 646 F.Supp.2d at 567; Opulentica, 479 F.Supp.2d at 331. The following factors are relevant in determining whether civil penalties are appropriate and, if so, in what amount: "(1) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; (5) whether the defendant has admitted wrongdoing; and (6) whether the penalty should be reduced due to the defendant's demonstrated current and future financial condition." Colonial Investment, 659 F.Supp.2d at 503; see also Universal Exp., 646 F.Supp.2d at 568; Opulentica, 479 F.Supp.2d at 331. However, each case must ultimately be decided upon its own particular facts and circumstances. Colonial Investment, 659 F.Supp.2d at 503; see also Opulentica, 479 F.Supp.2d at 331.
Razmilovic contends that even assuming the applicability of third-tier civil penalties, under the "principle of proportionality," (Razmilovic Mem., at 20), the maximum amount of any civil penalties imposed upon him should be seven hundred twenty thousand dollars ($720,000.00) because his co-defendants only paid between thirty-five thousand dollars ($35,000.00) to two hundred fifty thousand dollars ($250,000.00) pursuant to their settlements with the SEC.
Razmilovic was a direct participant in a pervasive fraud scheme, spanning over three (3) years and involving fraud, deceit, manipulation and deliberate, or at least, reckless disregard of regulatory requirements, which either resulted in substantial losses to Symbol investors or, at the very least, created a risk of substantial losses to Symbol investors. Yet instead of responding to the charges against him, Razmilovic fled the country, continues to refuse to admit any wrongdoing, and has never expressed any remorse for his conduct. See, e.g. Universal Exp., 646 F.Supp.2d at 568 (finding the imposition of third-tier penalties appropriate because the defendant's dissemination of materially false information created a significant risk of substantial loss to the investing public, and his actual sale of the company's shares at artificially
I reject Razmilovic's contention that any civil penalty imposed upon him should be proportionate to the civil penalties imposed upon his co-defendants on the basis, inter alia, that Razmilovic ignores the crucial fact that all of his co-defendants not only appeared and defended the claims against them in this case, but also ultimately settled the claims against them. Conversely, Razmilovic is a fugitive from the criminal charges against him, whose default during discovery in this case led to a default judgment against him, but who then insisted on proceeding to trial on the issue of damages. Accordingly, the compromised amount of the civil penalties imposed upon Razmilovic's co-defendants in this case have no bearing upon the appropriate amount of any penalty imposed upon him.
Nonetheless, imposing civil penalties upon Razmilovic equal to the maximum statutory amount, i.e., the gross amount of his pecuniary gain from the securities law violations, would result in a penalty amount of more than forty-one million dollars ($41,000,000.00). This Court was unable to find any case imposing third-tier civil penalties in such an amount. At least one court in this Circuit has held that in determining the amount of a third-tier civil penalty to impose, it is appropriate to "also consider[ ] the extent to which other aspects of the relief and/or judgment * * * will have the desired punitive effect." Universal Exp., 646 F.Supp.2d at 568; see also SEC v. Conaway, 697 F.Supp.2d 733, 771-72 (E.D.Mich.2010) (imposing third-tier penalties in an amount equal to one-half of the defendant's economic benefit considering the disgorgement amount and substantial prejudgement interest on that amount, and the fact that the alternative amount of seven hundred twenty thousand dollars ($720,000.00) was not a sufficient penalty given the facts of that case). In Universal Exp., the defendant was required to pay thirteen million dollars ($13,000,000.00) in disgorgement and prejudgment interest, and injunctive relief was granted against him, which the district court found would all have "retributive effect." Id. The district court held that the SEC's request for civil penalties in an amount equal to the defendant's gross pecuniary gain exceeded the additional punishment required under the circumstances of that case and, therefore, imposed a third-tier civil penalty in the amount of one million dollars ($1,000,000.00).
Since Razmilovic is liable for disgorgement in an amount over forty-one million dollars ($41,000,000.00), exclusive of prejudgement interest, and, for the reasons set forth below, is permanently enjoined from further violations of the securities laws and from acting as an officer or director of any public corporation, a civil
Section 20 of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d)(1), also authorize a district court to grant a permanent injunction enjoining the defendant from engaging in any acts or practices in violation of the securities laws. 15 U.S.C. §§ 77t(b), 78u(d)(1). To obtain a permanent injunction from future violations of the securities law, the SEC must demonstrate: (1) that the defendant committed violations of the securities laws in the past; and (2) a substantial likelihood that the defendant will commit future violations of the securities law. See SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir.1998); see also First Jersey Securities, 101 F.3d at 1477 (holding that an injunction prohibiting a party from violating statutory provisions is appropriate where there is a likelihood that the violations will continue absent an injunction); U.S. SEC v. Suman, 684 F.Supp.2d 378, 391 (S.D.N.Y. 2010), aff'd, 421 Fed.Appx. 86 (2d Cir.2011) (accord). The "court must look beyond the mere facts of past violations and demonstrate a realistic likelihood of recurrence, but fraudulent past conduct gives rise to an inference of a reasonable expectation of continued violations." Opulentica, 479 F.Supp.2d at 329 (quotations and citations omitted).
"In determining whether there is a realistic likelihood that a defendant will violate the securities laws in the future, courts look to a number of factors: (1) the degree of scienter involved; (2) the isolated or persistent nature of the past fraudulent acts; (3) the defendant's appreciation of his wrongdoing; and (4) the defendant's opportunities to commit future violations." Opulentica, 479 F.Supp.2d at 329; see also Colonial Investment, 659 F.Supp.2d at 500 (holding that in determining whether to issue a permanent injunction enjoining future violations of securities laws, a district court may consider: the fact that the defendant was found liable for illegal conduct; the degree of scienter involved; whether the infraction was an "isolated occurrence;" whether the defendant continues to maintain that his past conduct is blameless; and whether the defendant might be in a position to commit future violations); First Jersey Securities, 101 F.3d at 1477 (holding that an injunction is particularly appropriate "where a violation was founded on systematic wrongdoing, rather than an isolated occurrence" and the defendant's "degree of culpability and continued protestations of innocence" indicate that future violations of securities laws are likely).
Since Razmilovic was a direct participant in the pervasive fraud scheme spanning over a three (3) year period, for which he has been found liable by virtue of his default in this action; he acted with a significant degree of scienter, i.e., knowingly, intentionally and willfully; he has refused to accept responsibility, and has
The Securities Act and Exchange Act also authorize a district court to permanently prohibit, conditionally or unconditionally, "any person who violated section 77q(a)(1) of [the Securities Act] [or Section 78j(b) of the Exchange Act or the rules and regulations thereunder] from acting as an officer or director of [a public company] if the person's conduct demonstrates unfitness to serve an as officer or director of any such [public company]." 15 U.S.C. §§ 77t(e), 78u(d)(2); see Patel, 61 F.3d at 140-41. In determining the appropriateness of such an injunction, the following factors are appropriately considered: (1) the egregiousness of the defendant's securities laws violations; (2) whether the defendant is a "repeat offender"; (3) the defendant's position in, or role with, the company when he engaged in the fraud; (4) the degree of scienter involved; (5) the defendant's economic stake in the violation; and (6) the likelihood of recurrence. See Patel, 61 F.3d at 141 (finding the district court's application of those six (6) factors to be "useful in making the unfitness assessment"). Nonetheless, those factors are not exclusive and district courts are afforded "substantial discretion" in determining whether to impose an officer and director bar. Id.
Since Razmilovic has been found liable, inter alia, of violating Section 17(a) of the Securities Act, 15 U.S.C. 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, the issue is whether his conduct demonstrates his unfitness to serve as an officer or director of a public company. In light of, inter alia, the seriousness and pervasiveness of the fraud scheme in which Razmilovic directly participated over a more than three (3) year period; Razmilovic's position first as COO, then as CEO of Symbol, when he engaged in the fraud; the high degree of scienter involved in the fraud scheme; the substantial economic benefits Razmilovic reaped from his fraud; and the likelihood that Razmilovic's misconduct will recur, as evidenced by his failure to answer for the fraud, to express any remorse therefor or to assure against his future violations of the securities laws, I find that Razmilovic is unfit to serve as an officer or director of a public company. See, e.g. Posner, 16 F.3d at 521-22 (affirming officer and director bar where the defendants had committed securities law violations with a high degree of scienter and their past securities law violations and lack of assurances against future violations demonstrated that such violations were likely to continue); see also Lorin, 76 F.3d at 461 ("[P]ersistent refusals to admit any wrongdoing ma[k]e it rather dubious that [the defendant] [is] likely to avoid such violations of the securities laws in the future in the absence of an injunction.") Accordingly, Razmilovic is hereby permanently
For the foregoing reasons: (1) Razmilovic is permanently enjoined from violating Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Sections 10(b) 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2) and 78m(b)(5), and Rules 10b-5, 240.12b-20, 240.13a-1, 240.13a-13, 13b2-1 and 13b202 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-13, 240.13b2-1 and 240.13b2-2; (2) Razmilovic is liable to disgorge the total amount of forty-one million seven hundred fifty-three thousand six hundred twenty-three dollars and four cents ($41,753,623.04), plus prejudgment interest determined in accordance with the IRS rate for underpayment of taxes, 26 U.S.C. § 6621(a)(2), and this memorandum of decision; (3) Razmilovic shall pay a civil penalty in the amount of twenty million eight hundred seventy-six thousand eight hundred eleven dollars and fifty-two cents ($20,876,811.52); and (4) Razmilovic is permanently prohibited from serving as an officer or director of any public company.
Within thirty (30) days from the date of this memorandum of decision, the SEC shall file a proposed judgment in accordance herewith, and calculating prejudgment interest at the IRS underpayment rate, 26 U.S.C. § 6621(a)(2), as set forth herein through the date of entry of the judgment.
SO ORDERED.
Contrary to the SEC's contention, Razmilovic's reliance on private securities fraud cases addressing the issue of inflation, but in the context of loss causation, is not misplaced. Although the SEC is not required to prove the element of loss causation in order to establish liability, see, e.g. SEC v. Kelly, 765 F.Supp.2d 301, 318 (S.D.N.Y.2011); SEC v. Lee, 720 F.Supp.2d 305, 325 (S.D.N.Y.2010); SEC v. Simpson Capital Management, Inc., 586 F.Supp.2d 196, 201 (S.D.N.Y.2008); SEC v. Credit Bancorp., Ltd., 195 F.Supp.2d 475, 490-91 (S.D.N.Y.2002), it is required to prove a causal connection between the fraud and Razmilovic's ill-gotten gains for the purposes of disgorgement. See Patel, 61 F.3d at 139 (holding that for the purposes of disgorgement, the calculation of profits need only be "a reasonable approximation of profits causally connected to the [securities law] violation." (emphasis added)); see also SEC v. Haligiannis, 470 F.Supp.2d 373, 384 (S.D.N.Y.2007); Hasho, 784 F.Supp. at 1111. The determination of the extent to which the value of a security was inflated due to fraud is the same regardless of whether the plaintiff must demonstrate loss causation, i.e., that its loss was causally connected to the fraud, or, in essence, gain causation, i.e., that the defendant's ill-gotten gain is causally connected to the fraud.
Moreover, unlike O'Neal, who proffered alternative calculations of the inflation amount in the event I rejected his methodology in favor of Martin's, Martin does not proffer any alternative calculation "even assuming some portion of the July 16, 2001 and February 14, 2002 disclosures were revelatory of fraud." (Martin Supp. Decl., at 8, 12). Rather, she avers only that the disclosures should then have been rejected by O'Neal under his stated methodology. (Martin Supp. Decl., at 8, 12).
