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describing the court's previously entered freeze order as providing an exception to allow the defendant to "withdraw or transfer a total of $10,000 per month from his account . . . for living expenses"
Summary of this case from Sec. & Exch. Comm'n v. CopeOpinion
97 Civ. 1077 (BSJ)
May 26, 2000
ORDER OPINION
Petitioners Ungaretti Harris and Joseph D'Elia are attorneys who never appeared as counsel in this action, but, rather, represented defendants Adam Lieberman and Sterling Foster Company, Inc. ("Sterling Foster"), a registered broker-dealer, (collectively the "Defendants") in class actions and arbitrations brought by investors whom the defendants defrauded. Petitioners are owed attorney's fees from the Defendants and now seek to intervene in this action after entry of the final consent judgments for the purpose of undoing the settlement with Lieberman. Petitioners seek to break the settlement agreement, not for their client's benefit, but to claim for themselves the nearly $600,000 in legal fees allegedly owed to them by Lieberman. In short, Petitioners seek to tap the illegal profits Lieberman disgorged to the government to resolve the above-captioned enforcement action and a parallel criminal action.
In the above-captioned action, the SEC alleged that Lieberman, through Sterling Foster, defrauded the investing public of at least $75 million, by, among other things, using "boiler room" sales practices to sell micro-cap securities in a large-scale scheme to manipulate the prices of securities for six public companies. On March 7, 1997, the Court entered a superseding Asset Freeze Order which froze Lieberman's assets "pending final adjudication of this matter," with an exception that permitted Lieberman to (1) "withdraw or transfer a total of $10,000 per month from his account . . . for living expenses in each of March, April and May 1997; and (2) transfer funds directly to his attorneys for payment of legal fees." The Asset Freeze Order further provided that: "The Commission shall be informed of all transfers made by Lieberman to pay legal fees since February 14, 1997, and of all future payments by Lieberman of such fees." The Asset Freeze Order was entered to protect the interests of the SEC, and, by extension, the interests of the fraud victims, from any further dissipation of Lieberman's assets.
On November 9, 1998, without admitting or denying these allegations, Sterling Foster and Lieberman entered into the Final Judgments in this action ordering them to disgorge, jointly and severally, the $75 million they made in illegal profits. Based on sworn financial statements, the SEC agreed to waive down the disgorgement to approximately $11.5 million, plus the proceeds of the sale of certain assets that Lieberman had previously agreed to civilly or administratively forfeit pursuant to a plea agreement reached in connection with related criminal charges brought by the United States Attorney's Office for the Southern District of New York ("USAO"). In accordance with the Final Judgments, those funds are to be distributed to victims of the Sterling Foster fraud.
Although Petitioners undoubtedly performed legal services for Lieberman and Sterling Foster in defending against the claims of defrauded Sterling Foster investors, the performance of these services creates no legal or equitable right to intervene in this action, to upset the settlement to which Lieberman agreed with the advice of counsel (and to which he continues to agree), and to deplete the already insufficient pool of money that ought to be returned to investors. Rather, Petitioners are properly viewed for what they are: unsecured creditors of Lieberman.
Simply put, Petitioners' attempt to lay claim to the disgorged funds has no support in law or equity. At the outset, Petitioners cannot intervene as of right in this action under Federal Rule of Civil Procedure 24(a) because Petitioners have no legally cognizable interest in the funds disgorged by Lieberman. To intervene as of right under Rule 24(a), a petitioner must (1) file a timely application, (2) show a direct, substantial and legally protectible interest in the action, (3) demonstrate that such an interest would be impaired by the disposition of the action, and (4) show that the interest is not adequately protected by existing parties to the action. See New York News, Inc. v. Kheel, 972 F.2d 482, 485 (2nd Cir. 1992). "Failure to satisfy any one of these requirements is sufficient grounds to deny the application." Id. (citation omitted).
Petitioners cannot satisfy the second element because they have no legally protectible interest in this action. Petitioners strained argument that they are third-party beneficiaries of the Asset Freeze Order is unavailing. Lieberman had the right under the Asset Freeze Order to transfer otherwise frozen funds to his attorneys for the payment of legal fees, but he was in no way contractually obligated to do so, and he made no attempt to pay Petitioners out of the frozen funds. The Asset Freeze Order was clearly intended to benefit the SEC and, by extension, the victims of Lieberman's fraud. The Order in no way conferred upon Petitioners — who are nothing more than creditors of Lieberman — a legally protectible interest in the disgorged funds. Accordingly, I find that because Petitioners have no legally protectible interest in the action, they have no standing to intervene under Rule 24(a).
However, even assuming that Petitioners could intervene and were somehow "parties" for purposes of Rule 60(b), there is no colorable argument that the balance of equities tips in favor of further depleting the already inadequate disgorgement and, in essence, requiring the defrauded investors to pay the legal fees of their defrauder.
Rule 60(b) provides in pertinent part that:
[T]he court may relieve a party or a party's legal representative from a final judgment, order or proceedings for the following reasons: (1) mistake, inadvertence, surprise, or excusable neglect; . . . (3) fraud . . ., misrepresentation, or other misconduct of an adverse party; . . . or (6) any other reason justifying relief from the operation of the judgment.
Petitioners attempt to recover under the common-fund doctrine is equally unavailing. The common-fund doctrine embodies the equitable principle that if a plaintiff or his attorney creates, discovers, increases or preserves a fund to which others also have a claim, then the plaintiff is entitled to recover from the fund the litigation costs and attorney's fees. See Blacks Law Dictionary 269 (7th ed. 1999). Here, Petitioners did not create, discover, increase or preserve the regrettably small fund in which the fraud victims will share. Rather, Petitioners are the very attorneys who attempted to defeat the creation of a fund. Moreover, Congress has preempted application of the common-fund doctrine to funds collected by SEC enforcement actions. The policy against using funds collected by SEC enforcement efforts to pay attorney's fees has been codified by the Private Securities Litigation Reform Act of 1995 which added Section 20(f) to the Securities Act of 1933 and Section 21(d)(4) to the Securities Exchange Act of 1934. These sections provide:
Except as otherwise ordered by the court upon motion by the Commission, or, in the case of an administrative action, as otherwise ordered by the Commission, funds disgorged as the result of an action brought by the Commission in Federal Court, or as a result of any Commission administrative action, shall not be distributed as payment for attorneys' fees or expenses incurred by private parties seeking distribution of the disgorged funds.15 U.S.C. § 77t(f); 78u(d)(4). These provisions preclude attorneys of fund participants (i.e., investors) from invoking the common fund doctrine for payment of their fees. It would be a perverse result if Petitioners, whose role as defense attorneys was to prevent the creation of a recovery fund, would be permitted to benefit from the common-fund doctrine when attorneys for victims cannot. See e.g., Grace v. Ludwig, 484 F.2d 1262, 1268 (2nd Cir. 1973), cert. denied, 416 U.S. 905 (1974) (court denied claim for fees by attorneys for shareholders despite claim of equitable right to fund because they pulled laboring oar in SEC proceeding where they could not show that but for their participation benefit to fund would not have accrued); In re Ivan Boesky Sec. Litigation, 888 F. Supp. 551, 558 (S.D.N.Y. 1995) (class action plaintiffs' attorneys granted fees from funds collected through class litigation but denied fees from funds collected in SEC enforcement action).
Furthermore, as if the equities presented by this dispute, ostensibly between the defrauder's lawyers and the fraud victims, were not in stark enough relief, I find that Petitioners conduct here — as they themselves describe it — amounts to a want of adequate care and further undermines their already untenable position that fairness dictates that the disgorgement be tapped for their benefit. There was no "surprise" to the Petitioners in the Asset Freeze Orders or the Final Judgments that would not have been avoided by a glance at the docket in this action. Their protestations notwithstanding, Petitioners are simply unsecured creditors of Lieberman who continued to extend him credit at their own peril. Petitioners have no one to blame but themselves and their client for their having continued to generate billable hours while Lieberman repeatedly ignored their invoices month after month. In short, the amount of the Sterling Foster fraud is more than six times greater than the amount disgorged, and there is no just reason to further deplete the victims' recovery to benefit Petitioners.
CONCLUSION
Accordingly, the Petition of Ungaretti Harris and Joseph D'Elia for Relief from Judgment and for Release of Monies is
DENIED.
SO ORDERED:
May 24, 2000