On Appeal from the United States District Court for the District of New Jersey. (D.C. Civil Action No. 87-02591).
Before: Becker, Nygaard and Roth, Circuit Judges.
In this action, filed under the Commodity Exchange Act and the securities laws of New Jersey and Florida, defendant Robert Maxwell appeals the district court's orders granting summary judgment and ancillary relief in favor of plaintiffs, the Commodity Futures Trading Commission ("CFTC") and the states of New Jersey and Florida. Specifically, Maxwell challenges the court's decision to freeze his assets and its orders holding the defendants jointly and severally liable to disgorge ill-gotten gains in an amount equal to investor losses. Maxwell argues that the district court abused its discretion in fashioning such equitable relief ancillary to the permanent injunction it granted. Maxwell also appeals the district court's reliance in granting summary judgment on factual findings that the court made as part of its preliminary injunction determination. For the reasons set forth below, we will affirm the grant of summary judgment, but we will vacate the disgorgement orders and remand the case to the district court for further proceedings consistent with this opinion.
The case has a complex factual and procedural history. The complaint, filed on June 30, 1987, alleged that American Metals Exchange Corporation ("AME"), Anglo Swiss Metals, Ltd., FC&M Investment Corp., and William Frank were engaging in the offer and sale of illegal off-exchange futures contracts and were defrauding the public in violation of provisions of the Commodity Exchange Act, as amended, (the "Act"), 7 U.S.C. §§ 1-24 (1988), and the securities laws of New Jersey and Florida.
The complaint alleged that from May 1986 to June 1987 the defendants sold an illegal, off-exchange investment program through which 2000 investors purchased specific quantities of precious metals at prevailing market prices. The investment program, called the Equity Building Program ("EBP"), offered purchasers the chance to speculate on price changes in precious metals. EBP contract purchasers made a down payment toward the total price of their investment.*fn1 Investors then had two years to pay off the remaining balance on their purchase and either to take delivery of the metal or to contract with a third party to liquidate their positions. Investors could also extend the contract through the payment of additional fees. Whether profits were earned or losses sustained depended on the difference between the price of the precious metal at the time of the contract's purchase and of its sale.
On July 2, 1987, two days after the filing of the complaint, the district court granted plaintiffs' application for a preliminary injunction and an order freezing the assets of the defendants. The injunction prohibited the defendants from engaging in the commodity futures business. The court also designated a temporary equity receiver and appointed Arthur Young & Co. as accountant to the receiver.*fn2
Subsequently, on December 23, 1987, the plaintiffs filed an amended complaint which asserted additional counts under the Florida securities laws and named Robert Maxwell, Amalgamated Redemption Centers, Inc. ("ARC"), Trans World Metals Corporation, and Michael Jebrock as additional defendants. After a series of hearings, the district court extended the preliminary injunction to Maxwell and the other new defendants. CFTC v. American Metals Exch. Corp., 693 F. Supp. 168 (D.N.J. 1988). The court found that the plaintiffs had shown a likelihood of proving that the defendants were violating provisions of the Commodity Exchange Act by selling metals futures without seeking a designation as a contract market or operating subject to the rules of such a market and by falsely representing, with a deliberate attempt to do so, the risk, cost, profitability, and security of an investment in an EBP contract. The court appointed an equitable receiver for the corporate defendants ARC and Trans World Metals, froze the corporate assets, and ordered an accounting of their assets and liabilities. The court also froze the assets of the individual defendants Maxwell and Jebrock after making findings of fact showing Maxwell's control over AME and ARC and Jebrock's role at AME and Trans World Metals.*fn3 The order permitted the individual defendants to apply to the court for "reasonable and necessary living expenses." The defendants named in the amended complaint opposed the issuance of such relief.
Defendant Maxwell retained new counsel and pursued two interlocutory appeals.*fn4 On March 23, 1989, this Court dismissed Maxwell's first appeal, a challenge to the asset freeze, on jurisdictional grounds. Maxwell withdrew his second appeal. During this period, Maxwell also contended with criminal charges arising from the same conduct at issue in this action. The states of New Jersey and Florida brought charges against him in December 1988. On October 23, 1989, Maxwell pled guilty in New Jersey state court to one count of selling an unregistered security. Maxwell subsequently pled nolo contendere in Florida state court to one count each of selling a security by an unregistered broker and of selling unregistered securities.*fn5
On March 12, 1990, the district court granted summary judgment in favor of the plaintiffs and against all the defendants on Count I of the amended complaint, which count asserted violations of Section 4(a) of the Act, as amended, 7 U.S.C. § 6(a) (1988).*fn6 At the same time, the court denied the application of the plaintiffs for permanent injunctive relief. The court held that the plaintiffs had not adequately demonstrated the likelihood of future violations necessary to support the entry of a permanent injunction. However, the court did grant the plaintiffs' request for ancillary relief. The court held the defendants jointly and severally liable to disgorge the profits they had received either directly or indirectly from their trading in the illegal futures contracts. The court ruled further that, since the defendants' ill-gotten gains could not be measured individually, the amount of disgorgement would equal the total losses suffered by individuals who invested in EBP contracts.
Subsequently, on May 16, 1991, after further briefing, discovery and oral argument, the district court granted summary judgment for the plaintiffs on Counts II through VIII of their amended complaint.*fn7 CFTC v. American Metals Exch. Corp., 775 F. Supp. 767 (D.N.J. 1991). In addition, the court set at $15,593,037.84 the total amount of investor losses for which the defendants would be jointly and severally liable as disgorgement payments. Finally, on November 14, 1991, the court converted the preliminary injunction into a permanent injunction. The court at the same time ordered the temporary equity receiver to serve as the permanent equity receiver for the corporate defendants, ordered the defendants, jointly and severally, to pay the $15,593,037.84 in disgorgement to the receiver's estate for the benefit of the investors, and extended the asset freeze until such time as full payment to the receiver had been made. Defendant Robert Maxwell alone appeals from the district court's summary judgment orders as well as its orders granting ancillary equitable relief.
The evidence shows that early in 1986, Bill Frank of Short Hills, New Jersey, and Michael Jebrock of Coral Springs, Florida, made plans to sell the Equity Building Program to the public. The program offered potential customers a deferred delivery investment in precious metals. Frank and Jebrock had previously sold other precious metal investments to the public. In search of capital, Frank introduced Jebrock to Robert Maxwell, the owner of a furniture ...