The opinion of the court was delivered by: Judge Marbley
This enforcement action filed by the United States Securities and Exchange Commission (the "SEC" or the "Commission") involves alleged insider trading in the stock of Worthington Foods, Inc. ("Worthington"). The SEC alleges that Defendant, Roger D. Blackwell ("Blackwell"), a director of Worthington, provided illegal tips to close friends and family members prior to the October 1, 1999 announcement that the Kellogg Company ("Kellogg") had entered into an agreement to acquire Worthington. The SEC contends that these tips allowed the other named Defendants to profit in violation of federal securities laws. Jurisdiction is proper under Sections 21 and 27 of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78u and 78aa. In Count I of its complaint (the "Complaint"), the SEC alleges that Blackwell tipped his co-defendants in violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. In Count II, the SEC alleges that Blackwell failed to file reports of ownership and change in beneficial ownership as required by Section 16(a) of the Exchange Act, 15 U.S.C. § 78(p)(a), and Rules 16a-2, 17 C.F.R. § 240.16a-2, 16a-3, 17 C.F.R. § 240.16a-3, and 16a-8, 17 C.F.R. § 240.16a-8, thereunder.
This matter is currently before the Court on the SEC's Motion for Partial Summary Judgment. The Commission is seeking to use the doctrine of collateral estoppel against Defendants Blackwell, Kelly Hughes ("Hughes"), and Kevin Stacy ("Stacy") to prevent them from relitigating their alleged liability for violating Section 10(b), which the SEC contends has already been decided in a related criminal action. The Commission also asks this Court to impute Blackwell's and Hughes' illegal conduct to their co-defendant, the Blackwell Pension Plan Trust (the "Trust")*fn1, and grant summary judgment with respect to Count I against the Trust on this basis. Additionally, the SEC asks this Court to grant summary judgment against Blackwell on Count II because the Commission alleges that there are no material facts left in dispute regarding whether Blackwell failed to file the appropriate forms as required by Rule 16(a). Finally, the SEC requests that this Court grant permanent injunctions against Defendants*fn2 and order that they disgorge their profits and pay prejudgment interest. For the reasons stated herein, the Court GRANTS in part and DENIES in part the SEC's Motion for Partial Summary Judgment.
Some of the following facts are taken from the SEC's Complaint.
Defendant Roger Blackwell is a nationally recognized expert in consumer behavior and marketing. He is a high-profile marketing professor at The Ohio State University and is a member of the boards of directors of several public and private companies. From 1992 to November 29, 1999, Blackwell was a member of the board of directors of Worthington (the "Board"), which, at the time, was a publicly traded corporation based in Worthington, Ohio, that produced meat alternative food products made from soy and wheat proteins. Worthington's securities were registered under Section 12(g) of the Exchange Act. Its common stock was traded on the Nasdaq National Market, and its options were traded on the Philadelphia Stock Exchange.*fn3 Blackwell was also, at all relevant times, the president and sole owner of Blackwell & Associates, a consulting firm; the trustee of the Trust; and a general partner and 50% owner, along with Defendant Jack, of Defendant Black-Jack, an investment partnership.
On July 8, 1999, representatives from Kellogg approached Worthington's Chairman, President, and Chief Executive Officer, Dale Twomley ("Twomley"), to discuss the possibility of a business combination. On July 16, 1999, top Kellogg officials met with Twomley and other Worthington officials to execute a confidentiality agreement. On July 20, 1999, during a regularly scheduled Board meeting, Twomley informed the Board of the ongoing discussions with Kellogg. At that meeting, the Board authorized management to engage an investment banker. Blackwell attended this and all other Board meetings in July, August, and September 1999, appearing either in person or by telephone.
On August 10, 1999, Twomley and Worthington officials discussed pricing the deal at $26.08 per Worthington share. In August and September 1999, Worthington's stock was trading in the $11 15/16 to $14 3/8 range. On August 11, 1999, during a special telephonic meeting, the Board authorized the negotiation of a definitive merger agreement. Soon thereafter, Worthington formally engaged an investment banker and began its due diligence process.
On August 26, 1999, during a special telephonic meeting, the Board authorized management to pursue an all cash transaction. On August 30, 1999, Kellogg delivered to Worthington an initial draft of the merger agreement. On September 8, 1999, the Board met with legal counsel to review the merger agreement. On September 23, 1999, Twomley and Kellogg officials agreed to a price of $24 per share for Worthington stock. The next day, on September 24, 1999, the Board held a special meeting during which the directors authorized management to complete the definitive agreement. Copies of the merger agreement were sent to the Worthington directors on September 27, 1999. On September 29, 1999, the Board met and approved the merger agreement. The parties executed the merger agreement by the end of the day on September 30, 1999. On the morning of October 1, 1999, the parties issued a press release announcing the merger agreement in which Kellogg would pay $24 for each share of Worthington stock. On that day, Worthington's stock price closed at $23 1/16, up $8.75 or 61.4%, from the previous day's closing price.
The SEC alleges that Blackwell illegally provided material non-public information regarding Worthington's merger with Kellogg to family members and friends who, in turn, profited by illegally trading on this information.
Defendant Hughes has worked for Blackwell & Associates for ten years and is allegedly a close confidant of Blackwell. She typically makes investment decisions jointly with her husband, Defendant Stacy. In the six month period prior to September 1999, Hughes and Stacy had not placed any trades in the stock market. While they had previously invested in Worthington stock, they had only made three small purchases, the most recent in February 1999 for 250 shares. On August 31, 1999, Blackwell allegedly met with Hughes as part of Hughes's year-end performance review. During this and additional conversations in September 1999, Blackwell allegedly disclosed to Hughes material non-public information concerning Kellogg's proposed acquisition of Worthington. Shortly after the August 31, 1999, conversation and at various points in September, Hughes allegedly disclosed to Stacy material non-public information concerning Kellogg's proposed acquisition of Worthington.
On September 1, 1999, Hughes and Stacy purchased 180 shares of Worthington stock. They purchased an additional 10,106 shares over a period dating from September 20 to September 30, 1999. They spent a total of $129,655.33 on the Worthington stock. When they sold these shares, on October 4 and 5, 1999, their proceeds totaled $234,609.80. Hughes and Stacy's investment in Worthington stock was their largest investment ever in a single stock. The amount of the investment equaled 150% of their combined annual income. The investment utilized substantially all of Hughes and Stacy's liquid assets.
Defendant Roger Blackwell is sole trustee of the Trust, of which both his now ex-wife Kristina and Defendant Hughes are direct beneficiaries. Kristina Blackwell and Defendant Hughes each had authority to make trades on behalf of the Pension Plan Trust. To the extent the pension plan funded by the Trust might be overfunded, Blackwell & Associates owns the excess funds; to the extent it might be underfunded, Blackwell & Associates is responsible for providing the remainder. On September 27 and 29, 1999, Defendant Hughes caused the Trust to purchase 5,300 shares of Worthington stock for a total cost of $61,028.95. These were the first trades Hughes had ever placed on behalf of the Trust. On October 4, 1999, the Trust sold the Worthington stock for a profit of $57,023.29. There is no evidence that Blackwell disclosed these purchases or sales to the SEC pursuant to Rule 16(a).
Blackwell and Defendant Jack have been business associates and friends for 30 years. Jack, a lawyer, has represented Blackwell in the past. The two men have jointly owned real estate and are partners in Defendant Black-Jack. On September 7, 1999, at 1:43 p.m., Defendant Jack made a seven-minute phone call to Blackwell's office at Blackwell & Associates. Blackwell allegedly disclosed material non-public information concerning Kellogg's proposed acquisition of Worthington to Jack during this call. Immediately following the call, at 1:50 p.m., Jack placed a five-minute call to his Advest broker in which he placed a buy order for 1,000 shares of Worthington stock. During the next two days, Defendant Jack purchased an additional 1,500 shares of Worthington stock. In late September 1999, Blackwell used frequent flier miles to provide Jack and his wife with plane tickets to Europe. On September 22 and 23, 1999, Blackwell and Jack stayed at the same hotel in Monaco and dined together. While they were in Monaco, Blackwell allegedly again provided material non-public information to Defendant Jack concerning Kellogg's proposed acquisition of Worthington. On September 27, 1999, Jack purchased an additional 500 shares of Worthington stock. Jack spent a total of $37,386.15 on Worthington stock in September 1999. He sold his 3,000 shares on October 1 and October 12, 1999, deriving a profit of $31,146.35.
Blackwell and Jack each own 50% of Defendant Black-Jack. Blackwell has reported his share of the Black-Jack profits on his tax returns each year. Blackwell's secretary has testified that Blackwell receives brokerage statements from Black-Jack. On September 8, 1999, Defendant Jack bought 2,500 shares of Worthington stock on behalf of Defendant Black-Jack. On September 9, 1999, Jack purchased an additional 500 shares of Worthington stock on behalf of Black-Jack. The total cost to Black-Jack of these purchases was $30,187.13. When the shares were sold, on October 1 and October 4, 1999, Black-Jack realized profits of $26,883.87. There is no evidence that Blackwell disclosed these sales or purchases to the SEC pursuant to Rule 16(a).
On January 21, 2003, the SEC commenced an action against Blackwell, Dale J. Blackwell, Christian D. Blackwell, Hughes, Stacy, Arnold Jack, Black-Jack Enterprises, and the Trust. The SEC accused these Defendants of various violations of the federal securities laws prohibiting insider trading. According to the SEC, based on illegal tips made by Blackwell that Worthington Foods, Inc. planned to merge with Kellogg, these Defendants purchased and traded shares of Worthington stock in the weeks before the merger, deriving significant profit therefrom.
On August 26, 2004, a grand jury returned indictments against Blackwell, Hughes, Stacy, Jack, Justin Voss, Black-Jack, and Correctional Officer Smith (the "Criminal Action"). The indictment contained various charges including conspiracy to defraud the United States, obstruction of proceedings before governmental agencies, and violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See U.S. v. Blackwell, et al., No. 2:04-cr-134 (S.D. Ohio) (Graham, J.).
After this Court denied Defendants' pre-answer motions, including Defendants' motions to dismiss, the Defendants answered the SEC's complaint and the SEC filed motions to strike several of Defendants' affirmative defenses, which the Court subsequently granted. Following the filing of the Rule 26(f) report on June 27, 2003, the parties conducted discovery until May 2005. The SEC then deposed Defendant Dale Blackwell. Further, the SEC had already deposed a number of "key witnesses" including Tina Blackwell, Gertrude Stephan, Alfred Stephan, Hughes, and Blackwell. The SEC has, by its own admission, conducted all discovery and preserved all the evidence that it considers necessary to bring its civil cases.
On November 15, 2004, Defendants filed a joint motion to stay these proceedings, which the SEC did not oppose because of the pending Criminal Action involving Blackwell, Hughes, Stacy and other Defendants. See U.S. v. Blackwell, et al. On May 23, 2005, this Court granted Defendants' motion to stay pending the resolution of the criminal case.
The criminal trial lasted from May 17, 2005 through June 20, 2005. On June 20, 2005, a jury convicted Blackwell, Hughes, and Stacy on numerous counts of conspiracy to commit insider trading, insider trading, conspiracy to obstruct justice, making false statements in violation of 18 U.S.C. § 1001, and obstruction of the SEC's investigation.*fn4 The jury acquitted Defendants Arnold Jack, Black-Jack, and Justin Voss. The Trust was not a defendant in the Criminal Action.
On December 15, 2005, after denying Defendants' joint motion for a new trial, U.S. District Judge James L. Graham sentenced Defendants Blackwell, Hughes, and Stacy. Blackwell received six years imprisonment and a $1 million criminal fine.*fn5 Hughes received 33 months imprisonment, and Stacy received 27 months imprisonment. Judge Graham also fined Hughes and Stacy each $53,443.00.
On January 3, 2006, a three-judge panel of the Sixth Circuit Court of Appeals denied bail pending appeal for Blackwell, Hughes, and Stacy. The Court put the appeal on an expedited briefing and submission schedule, but noted that "[t]he Defendant has not demonstrated that this appeal raises a substantial appellate issue that would require his release on bail pending appeal." Defendants are currently incarcerated.
On December 21, 2005, the SEC filed a Motion to Lift the Stay of the civil case. Defendants Blackwell, Hughes, and Stacy timely responded. On February 22, 2006, this Court lifted the stay and permitted the SEC to proceed with its civil case while Defendants' criminal appeals are pending.
On March 24, 2006, the SEC filed this Motion for Partial Summary Judgment against Defendants Blackwell, Hughes, Stacy, and the Trust ("Defendants"). The SEC seeks to use Defendants' criminal convictions to preclude Defendants from relitigating the issue of their liability for Rule 10(b) violations. The SEC also asks this Court to grant summary judgment on Count II, as it alleges that there are no genuine issues of material facts regarding Blackwell's alleged failure to comply with Rule 16(a). The SEC requests a permanent injunction against Defendants, ordering them to comport with the requirements of Rule 10(b), and a permanent injunction against Blackwell, ordering him to comply with Rule 16(a). Additionally, the SEC asks this Court to enter orders against Hughes, Stacy, and Blackwell, jointly and severally, for $102,954,72 in disgorgement and $51,363,49 in prejudgment interest, and the Trust and Blackwell, jointly and severally, for $57,023.29 in disgorgement and $27,906.47 in prejudgment interest.
Summary judgment is appropriate "[i]f the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The movant has the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that the nonmoving party lacks evidence to support an essential element of its case. Celotex Corp. v. Vatrett, 477 U.S. 317, 322-23 (1986); Barnhart v. Pickrel, Schaeffer & Ebeling Co., 12 F.3d 1382, 1388-89 (6th Cir. 1993). In response, the nonmoving party must present "significant probative evidence" to show that "there is [more than] some metaphysical doubt as to the material facts." Moore v. Philip Morris Cos., 8 F.3d 335, 339-40 (6th Cir. 1993). "[S]ummary judgment will not lie if the dispute is about a material fact that is 'genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the non-moving party." Anderson v. Liberty Lobby Inc., 477 U.S. 242, 248 (1986); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (concluding that summary judgment is appropriate when the evidence could not lead the trier of fact to find for the nonmoving party).
In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). In responding to a motion for summary judgment, however, the nonmoving party "may not rest upon its mere allegations ... but ... must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e); see Celotex, 477 U.S. at 324; Searcy v. City of Dayton, 38 F.3d 282, 286 (6th Cir. 1995).
A. Count I Against Blackwell, Hughes, and Stacy
The government seeks summary judgment on Count I against Blackwell, Hughes, and Stacy based on their convictions in the Criminal Action.
The law is clear "that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding." Emich Motors Corp. v. General Motors Corp., 340 U.S. 558, 568 (1951). In fact, in several prior cases, the Commission has used collateral estoppel against 10b-5 defendants who have been previously convicted on criminal charges.
See, e.g., SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994); S.E.C. v. Gruenberg, 989 F.2d 977 (8th Cir. 1993). As some courts have noted, the prevalence of estoppel in civil cases following their criminal counterparts is due in part to the court's desire to avoid inconsistent verdicts in light of the higher burden of proof required in the prior criminal case. See Gelb v. Royal Globe Insurance Co., 798 F.2d 38, 43 (2d Cir. 1986).
The Sixth Circuit has held that a decision of a federal court is entitled to collateral effect if a four part test is met: (1) precise issue raised in present case must have been raised and actually litigated in prior proceeding; (2) determination of issue must have been necessary to outcome of prior proceeding; (3) prior proceeding must have resulted in final judgment on the merits; and (4) party against whom estoppel is sought must have had full and fair opportunity to litigate issue in prior proceeding. See, e.g., Smith v. SEC, 129 F.3d 356, 362 (6th Cir. 1997).
1. Issues Must Be Identical and Actually Litigated in the Prior Criminal Action
Before this Court may enjoin Defendants from litigating their civil liability under Section 10(b) on the ground that it would be duplicative, it must determine that the Criminal Action is "materially on all fours" with this case; the "issues must have such identity that determination in one action leaves little or nothing to be determined in other." Smith, 129 F.3d at 361 (citations omitted).
The statutory elements for civil and criminal Section 10(b) and Rule 10b-5 violations are nearly identical. See, e.g., SEC v. Freeman, 290 F.Supp.2d 404 (S.D.N.Y. 2003). The criminal indictment and the civil complaint against Defendants allege the same insider trading conduct based on the same set of underlying facts. Courts in similar situations have compared the criminal indictment to the civil complaint to determine whether the actions involved identical issues. See, e.g., Gruenberg, 989 F.2d at 978. The SEC produced a four-page exhaustive list of facts that it alleged in both the criminal indictment and the civil complaint. Based on these identical facts, the jury concluded that Defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the exact statutory basis for Count I in the civil complaint.
Defendants claim that the criminal trial and the civil complaint do not involve identical issues. Defendants assert that the presence of additional defendants, witnesses, and charges in the Criminal Action somehow makes the issues involved in the Criminal Action different from those in this case. While the criminal indictment contains additional parties and charges, the jury specifically returned guilty verdicts on counts 2 through 15 of the indictment, the Section 10(b) offenses. There is no case law that supports the proposition that a criminal indictment must match a civil complaint exactly in terms of parties and claims for there to be a preclusive effect. See SEC v. Namer, 2004 WL 2199471 at *3, (S.D.N.Y. Sept. 30, 2004) (finding collateral estoppel appropriate in a securities fraud case where a criminal jury convicted defendant of violating Section 17(a) of the Securities Act but civil complaint only alleged violations of Section 10(b) because of substantial factual overlay between the claims).
Furthermore, there is no evidence that the jury somehow imputed evidence from one count or party to another. In fact, there is evidence to the contrary. The jury convicted Blackwell, Hughes, and Stacy but acquitted three other defendants. This demonstrates that the jury carefully considered the evidence and parsed it between the different parties and charges.
Because the indictment and the civil complaint involved the same conduct with respect to the 10(b) violations, this Court concludes that the issues underlying Count I of the SEC's civil complaint are identical to the issues in counts 2 through 15 in Defendants' criminal trial for the purposes of collateral estoppel.
2. Determination of Issues Must Have Been Necessary to the Outcome of the Criminal Action
Counts 2 through 15 of the indictment charge the Defendants with violating Section 10(b) and Rule 10b-5. Thus, the jury necessarily must have concluded that Defendants violated 10(b) and 10b-5 for it to have ...