SEC v. O'HAGAN

901 F. Supp. 1461

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. James H. O'HAGAN, Defendant.

Civ. No. 3-90-16.

United States District Court, D. Minnesota, Third Division.

August 8, 1995.

Robert Michael Small, U.S. Atty. Office, Minneapolis, MN, Ellen B. Cohn, Thomas Vincent Sjoblom, Securities & Exchange Commission, Washington, DC, for plaintiff S.E.C.

John Dwyer French, Faegre & Benson, Minneapolis, MN, George Merrill Roehrdanz, Roehrdanz Law Office, Minneapolis, MN, for defendant James H. O'Hagan.

MEMORANDUM OPINION AND ORDER

RENNER, Senior District Judge.

INTRODUCTION

Before the Court are the parties' cross-motions for summary judgment. The plaintiff, the Securities and Exchange Commission ("SEC"), brings this action for disgorgement and permanent injunction based upon the collateral estoppel effect of defendant James O'Hagan's prior criminal conviction for securities fraud. O'Hagan moves for summary judgment on the grounds that the SEC's civil action is barred by the Fifth Amendment Double Jeopardy Clause, merger and res judicata, and that the Supreme Court decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., ___ U.S. ___, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994), precludes the remedies sought by the SEC. O'Hagan further argues that collateral estoppel does not apply to the present action as the criminal judgment against him has been stayed pending appeal.

BACKGROUND

I. THE INDICTMENT

The SEC filed the Complaint in the instant case on January 10, 1990, alleging various securities violations based upon O'Hagan's trading in the securities of the Pillsbury Company, Inc. Following discovery, the SEC moved to stay the civil case in September 1992 and the Court granted the motion. On December 17, 1992, the government indicted O'Hagan based upon the same illegal insider trading in Pillsbury securities as alleged in the civil Complaint. Specifically, the Indictment alleged that from on or before August 26, 1988 through October 17, 1988, O'Hagan

engaged in a scheme and artifice to defraud Grand Met Grand Metropolitan, PLC and Dorsey and Whitney in connection with the purchase and sale of securities by purchasing Pillsbury common stock and call options on Pillsbury while in the possession of material, nonpublic information concerning Grand Met's future tender offer for Pillsbury common stock.

Ex. A to Declaration of Ellen B. Cohn ("Cohn Decl."), Indictment p. 3, ¶ 2.

The Indictment described O'Hagan's alleged scheme to defraud as follows. Dorsey and Whitney, a Minneapolis-based firm in which O'Hagan was a partner, represented Grand Metropolitan, PLC ("Grand Met") in its planned tender offer for Pillsbury common stock. O'Hagan acquired, through his law partner at Dorsey and Whitney, Thomas Tinkham, material, nonpublic information relating to Grand Met's upcoming tender offer.

From about August 29, 1988 through about September 21, 1988, while in possession of this information, O'Hagan purchased 2,500 Pillsbury call option contracts and 5,000 shares of Pillsbury common stock. Shortly thereafter, on October 4, 1988, Grand Met publicly announced the commencement of its tender offer for all outstanding Pillsbury common stock at $60 per share. One day prior to the announcement of the tender offer, October 3, the Pillsbury stock closed at $39 per share. Following Grand Met's announcement, O'Hagan liquidated his Pillsbury securities, realizing a profit of approximately $4,305,025, excluding commissions paid.

The Indictment further alleged that at the time O'Hagan began purchasing Pillsbury securities, Grand Met had taken substantial steps toward commencing the tender offer. Additionally, it charged that O'Hagan acquired the information relating to the tender offer directly and indirectly from the offeror, Grand Met, and from an agent of Grand Met, attorney Thomas Tinkham. O'Hagan allegedly knew that the information he obtained was nonpublic.

Based upon the above-described insider trading, the Indictment charged O'Hagan with thirty-four counts of securities fraud under sections 10(b) and 14(e) of the Securities and Exchange Act of 1934 ("the Exchange Act") (15 U.S.C. §§ 78j(b) and 78n(e)) and Rules 10b-5 and 14e-3 promulgated thereunder (17 C.F.R. §§ 240.10b-5 and 240.14e-3). For intending to use and using the profits of this illegal insider trading to conceal his prior embezzlement and conversion of client funds,¹ the Indictment charged O'Hagan with three counts of money laundering (18 U.S.C. §§ 1956(a)(1)(B)(i), 1957) and sought criminal forfeiture of two million dollars based on those counts (18 U.S.C. § 982(a)). The Indictment also charged O'Hagan with twenty counts of mail fraud (18 U.S.C. § 1341) based upon the mailing of confirmation slips by the brokerage firms O'Hagan engaged to purchase the Pillsbury securities.

II. THE CRIMINAL CONVICTION

O'Hagan contested the charges brought against him in a criminal trial held before Judge James J. Rosenbaum. Judge Rosenbaum gave the following instruction to the jury with respect to the Section 10(b) and Rule 10b-5 violations:

illegal insider trading exists when a defendant, through a relationship of trust and confidence, gains access to material, nonpublic information intended to be used only for corporate purposes, and the defendant trades in the stock of a publicly traded company using information which is not available to the public.

As for counts 1 through 37, the offense of insider trading has the following elements, and here there are five elements. First, that the defendant gained access to, and then misappropriated material, nonpublic information, which was to be used only for Grand Met's purposes through a relationship of trust and confidence; second, that the defendant traded in Pillsbury securities while in possession of nonpublic information obtained as a result of the confidential relationship; third, the information was material; fourth, the defendant used the information to trade securities with the intent to defraud; ... fifth, the defendant directly or indirectly used any means or instrumentalities of interstate commerce, the mails, or any facility of a national securities exchange in furtherance of his fraudulent conduct.

Ex. B to Cohn Decl., Crim.Tr. Vol. XII, pp. 27-28. Judge Rosenbaum then further explained each of the five elements. As to the counts under Section 14(e) and Rule 14e-3, Judge Rosenbaum stated:

The provisions governing Counts 38-54, then, cover the specific situation of insider trading with respect to tender offers. With respect to these counts, illegal insider trading exists when a corporation has taken a substantial step toward the commencement of a tender offer, and the defendant obtains material nonpublic information concerning that tender offer, and the defendant, knowing that this information came from the corporation, invests in securities using material nonpublic information.

Id. at 37-38.

The jury returned a guilty verdict on all counts, including the forfeiture count, on February 10, 1994. The court advised the jury that it later would return to determine which assets would be forfeited to satisfy the judgment. The court then provided counsel its proposed jury instruction pertaining to the forfeiture, which stated that under the money laundering statute the defendant "shall forfeit to the United States any property, real or personal, involved in, or traceable to, any money laundering transactions." Ex. D to Affidavit of Elizabeth L. Taylor ("Taylor Aff.").

The government objected to the forfeiture instruction, arguing that the judgment could be satisfied by "substitute" assets of the defendant. The defendant responded that under the statute in effect in 1988, when the offenses took place, the judgment could be satisfied only with property "involved in" or "traceable to" the violation. Ex. F to Taylor Aff. The government subsequently moved to dismiss the forfeiture count with prejudice and the court granted the motion. Ex. G and H to Taylor Aff.

On October 27, 1994, Judge Rosenbaum sentenced O'Hagan to a term of imprisonment of forty-one months followed by a three-year term of supervised release. The court also ordered O'Hagan to pay a fine of $150,000. After sentencing, O'Hagan moved for release pending appeal. His motion was denied by the district court but granted by the Eighth Circuit on appeal. Following the Eighth Circuit ruling, the district court, upon the defendant's motion, stayed the criminal judgment pending appeal. The appeal of O'Hagan's conviction is currently pending before the Eighth Circuit.

III. THE CIVIL ACTION

Following the conviction and sentence in the criminal action, this Court, upon the SEC's motion, lifted the stay in the instant civil case on November 18, 1994. The Complaint alleges the identical facts as contained in the Indictment and charges O'Hagan with violations of the same federal securities statutes and rules for which he was criminally convicted. The Complaint alleges that O'Hagan violated the federal securities regulations by trading in Pillsbury securities while possessing material, nonpublic information relating to Grand Met's pending tender offer for Pillsbury common stock.² As in the Indictment, the Complaint alleges that O'Hagan learned of the tender offer from his law partner at Dorsey and Whitney, Tom Tinkham, who represented Grand Met in that transaction.

The Complaint further states that O'Hagan breached his duty of trust to Dorsey and Whitney and their client Grand Met by purchasing Pillsbury call option contracts and common stock while in possession of this confidential information. Paralleling the Indictment, the Complaint alleges that Grand Met had taken substantial steps toward the commencement of the tender offer at the time O'Hagan began purchasing Pillsbury securities and that O'Hagan knew he had acquired the material information directly or indirectly from the offering person, Grand Met, or from Dorsey and Whitney,...