Opinion ID: 556608
Heading Depth: 2
Heading Rank: 1

Heading: The Underlying Transactions

Text: 1 The indictment charged three fraudulent schemes relating to trades in Cluett. These involved misrepresenting the source of funds used to purchase stock, secretly accumulating stock through nominee, and misrepresenting an open market purchase. By agreeing to share any profits and by guaranteeing against any loss, Bilzerian in April and May of 1985 raised $9 million to buy Cluett stock from various individual investors. The funds were transferred to him through a series of trusts set up for that purpose. Defendant was required to disclose purchase of this large block of stock on a form filed with the SEC known as a Schedule 13D. On the 13D, and its amendment, respecting the Cluett purchase, defendant stated that the stock was purchased with personal funds, and did not disclose that they were raised from other investors with whom he had a profit-sharing and guarantee-against-loss agreement. 2 Bilzerian also engaged an employee of Jeffries & Company, Inc. (Jeffries), a registered broker-dealer, to accumulate stock on his behalf. Under stock accumulation, a broker-dealer purchases stock in its own account with the understanding that the customer will buy it at a later date at the broker's cost plus interest and commissions. In such a transaction the prearranged sale involves no risk of loss to the broker-dealer, who acts as a nominee for the true purchaser. On May 28, 1985 defendant purchased the accumulated stock without revealing the accumulation arrangement to the SEC. The indictment charged that the agreement was fraudulently designed to delay the reporting requirements of the securities laws. 3 Bilzerian also agreed to purchase 347,567 shares of Cluett common stock from a group of shareholders in contemplation of making a tender offer for that company, offering between $38 and $40 per share depending on the price of his tender offer. This proposed purchase was made with the understanding that the trade would not settle for 45 days and that defendant would cancel the purchase proposal if a third party offered more for the shares. Although he learned that 66,667 of the shares included in this block were already under his control, defendant advised the shareholder group to proceed with the sale. The offering statement claimed that 347,567 shares were purchased in an open market transaction. The existence and terms of the privately-negotiated transaction were not disclosed. 4 The indictment alleged that the Cluett transactions violated Secs. 10(b) and 32 of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. Secs. 78j(b) and 78ff (Count One), and the federal false statements statute, 18 U.S.C. Sec. 1001 (Counts Two, Three, and Four). Defendant was also charged with conspiring to defraud the SEC and to commit specific offenses in violation of 18 U.S.C. Sec. 371 (Count Eight).
5 In June 1986 defendant raised $8 million from an individual investor for the purpose of purchasing Hammermill stock. These funds were made available to him through a trust upon his agreeing to share any profits from the eventual sale of the stock. Bilzerian turned the funds over to a limited partnership--of which he was the general partner--and the partnership made the tender offer for Hammermill. The disclosure relating to the stock purchase and tender offer stated that defendant's contribution to the partnership was from personal funds. 6 Once again, defendant arranged to have an employee of Jeffries accumulate Hammermill stock on his behalf. On July 21, 1986 he purchased 551,000 accumulated shares of Hammermill. Although he was required to disclose the acquisition as of July 7, he failed to file until July 25, and at that time did not disclose the accumulation agreement. The Hammermill transactions were alleged to violate 15 U.S.C. Secs. 78j(b) and 78ff (Count Five), 18 U.S.C. Sec. 1001 (Counts Six and Seven) and 18 U.S.C. Sec. 371 (Count Eight).
7 Defendant also engaged in stock parking transactions in shares of Robertson and Armco. Parking refers to a transaction in which a broker-dealer buys stock from a customer with the understanding that the customer will buy the stock back at a later date for the purchase price plus interest and commissions. As with accumulation there is no market risk to the broker-dealer who is the owner of the shares in name only. 8 Bilzerian arranged to park 58,000 shares of Robertson with Jeffries for 30 days. Although he assured Jeffries he would repurchase the stock, the stock price fell substantially in the interim and he refused to honor his commitment. As a result, Jeffries incurred a $250,000 loss. Defendant compensated Jeffries in part for this loss by generating approximately $125,000 in commissions for the broker. He paid the remaining $125,000 with the understanding that it would be refunded when an additional $125,000 of commissions was generated. Jeffries sent Bilzerian a false invoice in the amount of $125,000 for financial services that were never performed, and the latter deducted the payment on a 1985 tax return. When additional commissions were generated in 1986 he sent Jeffries fictitious invoices for consulting services seeking a refund of the $125,000. 9 Defendant also arranged to park 306,600 shares of Armco with Jeffries for a 30-day period beginning September 2, 1986. In addition, Jeffries agreed to accumulate Armco stock in its own account on defendant's behalf and then sell him the accumulated stock when he repurchased the 306,600 shares. On October 2 defendant purchased 818,900 shares of Armco from Jeffries at the prevailing market price of $8 per share. Although the broker realized a $575,000 gain on the sale, the profits belonged to defendant by virtue of the stock parking and accumulation agreements. Defendant sent his broker an invoice for fictitious consulting services in order to account for the profits he realized on the trade. 10 For his part in the Robertson and Armco trades, Bilzerian was charged with conspiring to defraud the SEC and the IRS and to commit specific offenses including violations of 15 U.S.C. Secs. 78g, 78q, and 78ff (1988) and 18 U.S.C. Sec. 1001, in violation of 18 U.S.C. Sec. 371 (Count Nine).