Opinion ID: 527542
Heading Depth: 3
Heading Rank: 3

Heading: The SEC's Original Plans

Text: 96 On the other hand, we believe the district court did not give proper effect to agreements that in fact were reflected in the consents and judgments. Primarily, we conclude that, because these were consent judgments and because the consents and judgments gave broad discretion to the SEC to propose plans for the distribution of the disgorged assets, the district court erred in disapproving so much of the original SEC plans as provided for payment of portions of the tax claims against Levine and Wilkis and in interposing its equity powers to impose constructive trusts. 97 The district court imposed constructive trusts because of its views that the assets disgorged by Levine and Wilkis had been obtained by wrongful means, i.e., obtained ... through illegal trading activities, and that as a matter of equity, those assets should be used not to pay defendants' taxes but to provide restitution to injured investors and ... [to] prevent[ ] Levine and Wilkis from enjoying personal gain. 689 F.Supp. at 322. The court further stated that if the amount of disgorged funds exceeded the claims of contemporaneous investors, the court would determine the priorities among the other claimants. For two reasons, we conclude that the court expanded its role inappropriately. 98 First, the district court's premise was that all of the assets disgorged were the fruits of illegal transactions as alleged in the present complaints. As discussed in Part II.A. above, however, Levine and Wilkis did not admit those allegations; the allegations were not adjudicated in the present action; and the criminal proceedings with respect to each defendant involved only one of more than 50 securities at issue in his civil case. Thus, the court's premise overstated what was established by the record. 99 Second, as the Supreme Court noted in Armour, when a defendant agrees to a consent judgment, he waive[s] his right to litigate the issues raised, a right guaranteed to him by the Due Process Clause, and thus, the conditions upon which he has given that waiver must be respected. 402 U.S. at 682, 91 S.Ct. at 1757. We have seen no reason in the present cases to depart from the general rule that the proper role of the court vis-a-vis a consent judgment is to give effect to the terms negotiated by the parties. All of the cases relied on by the district court--or by the SEC in support of the district court's decision--for the proposition that a court may properly impose a constructive trust were cases in which the wrongdoing alleged had been established by adjudication. We are unaware of any case in which a constructive trust has been imposed in the absence of consent and in the absence of an adjudication. When the parties have agreed to confer on either party certain rights or privileges, and those agreements have been embodied in a judgment approved by the court, the court is not free to expand or constrict those terms or to impose unagreed-to equitable remedies that it might have fashioned had the plaintiff established his factual claims and legal theories in litigation. Id. 100 To be sure, when the district judge is presented with a proposed consent judgment, he is not merely a rubber stamp. If he found, for example, that the proposed decree would not further the objectives of the law on which the complaint was based, he could properly decline to approve the proposed judgment. See Local No. 93, International Association of Firefighters v. City of Cleveland, 478 U.S. 501, 525, 106 S.Ct. 3063, 3076, 92 L.Ed.2d 405 (1986); see generally id. at 524-29. But if he elected to disapprove unless a certain term that he thought appropriate were included, the parties would have the options of including that term or declining to proceed with the consent judgment. For example, had the Levine Consent and Proposed Judgment provided that Levine's taxes and criminal fine were to be paid out of the assets he disgorged, and had the court refused to enter such a judgment, Levine would have been free not to go forward with the settlement. Once the judgment consented to has been entered as the judgment of the court, the court is by and large required to honor the terms agreed to by the defendant. But see System Federation No. 91, Railway Employes' Department v. Wright, 364 U.S. 642, 651, 81 S.Ct. 368, 373, 5 L.Ed.2d 349 (1961) (court may subsequently modify decree if law has changed). 101 In accordance with these principles, we note that if the consent judgments in the present matters had explicitly required the SEC to pay a portion of the defendants' taxes out of the disgorged assets, the district court would have been obliged to enforce those provisions. These judgments did not so provide; but they did provide that the SEC was to devise plans for the distribution of the disgorged assets. It is true that each judgment provides that the court shall ... determine the appropriate disposition of the assets held by the receiver, but the consents and judgments repeatedly state that the court-approved plan is to be proposed by the COMMISSION. Implicit in this language was a grant of discretion to the Commission, including the flexibility to decide that certain groups of claimants would receive payments and others would not. No restrictions were imposed on the Commission's authority to make these choices or to give priority to one group over another. Though the Commission's discretion was made subject to the approval of the court, the consents and proposed judgments made clear that the parties gave primary responsibility for devising a plan to the Commission. By approving the proposed judgments, the district court approved the grants of discretion to the SEC. 102 In light of these provisions, we conclude that the district court was not empowered to exclude from the distribution plans any legitimate claimant or class of claimants designated as eligible by the SEC's plans. Thus, if the SEC believed it appropriate to use a portion of the disgorged assets to pay a portion of the tax claims, federal or state, against the defendants, the court was not entitled to forbid that allocation. 103 Nor was the court, having entered the consent judgments, entitled to impose its own views as to the appropriate priorities among legitimate claimants and to reorder the choices made by the SEC. For example, though the district court rejected the contention of the Arden Way claimants that they were entitled to be included in the SEC's distribution plan because the claims of contemporaneous investors were more worthy than the more general claims of Arden Way in the eyes of the court, we uphold the result on the basis that the exclusion of those claimants was within the prerogative of the Commission. Similarly, the court's statement that if the approved distributions did not exhaust the disgorged funds the court would decide the priorities among the remaining claimants was beyond the scope of its authority. The consent judgments conferred that authority principally on the SEC. 104 In sum, we conclude that whether or not the court would have been empowered to impose a constructive trust on assets disgorged pursuant to a judgment entered after adjudicating claims unfavorably to a defendant, it did not have a proper basis for imposing such trusts here. 105 Finally, though we note that the Commission states on these appeals that it believes that Congress did not intend to allow identifiable, unlawfully obtained property rightfully belonging to the victims of securities fraud, to be used to pay the wrongdoer's taxes, we decline to adopt this position principally for two reasons. First, for the reasons stated in Part II.A.1. above, we have concluded that certain of the predisgorgement tax claims have priority as a matter of federal law. We would find it difficult, in light of this conclusion, to conclude that as a matter of public policy payment of postdisgorgement assessments, simply because they were made later, is forbidden. Second, the SEC's original position, as stated to the district court, was that tax claims were among those that could potentially be satisfied from the disgorged assets, and that its initial plans, which proposed some distribution to the taxing authorities and some to defrauded investors, were fair accommodations of the various competing interests. There being no apparent reason to believe the initial plans were contrary to public policy or were proffered or endorsed by the Commission in bad faith, we think those plans, except to the extent that IRS statutory priorities interfered, should have been upheld. 106 We do not mean to suggest that the Commission could not properly have taken the position from the outset that no voluntary payments would be made to the taxing authorities. Just as we deem it within the Commission's discretion, under the consents and judgments negotiated here, to exclude the criminal fines imposed against Levine or the claims of persons such as the Arden Way claimants, we think the Commission could properly have exercised the discretion conferred on it in any of a number of ways. If a defendant wishes to ensure that a certain class of claims will be paid out of funds to be disgorged in settlement of an action against him, he is free to insist in negotiations that such a provision be included in the consent and judgment and is free not to agree to the judgment if the desired provision is not included. In the absence of such an enforceable agreement, however, the defendant has no assurance that the allocation he desires will be forthcoming. 107 In the present case, though the defendants did not have the right to compel specific allocations because they did not negotiate inclusion of such an agreement by the Commission in the consent judgments entered by the court, we conclude that since the SEC exercised its discretion in the first instance to propose distribution of part of the disgorged funds to the taxing authorities and urged the court to approve those plans as fair accommodations of the various competing interests, and since there is no public policy of which we are aware that would preclude that exercise of discretion, the SEC's initial plans should have been largely approved.