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Securities and Exchange Commission v. Lazare Industries

September 26, 2007


The opinion of the court was delivered by: Thomas I. Vanaskie United States District Judge



On April 22, 1996, the Securities and Exchange Commission ("SEC") brought this action, alleging that Defendants Lazare Industries, Inc. ("Lazare") and Richard J. Harley had engaged in a scheme to defraud more than seventy investors by making fraudulent representations and omissions in connection with an offer and sale of more than $1 million of Lazare common stock. The Complaint further alleged that relief defendant Jacqueline Kube had improperly converted investor funds for her personal use. The fraudulent scheme concerned defendant Harley's efforts to market ozone therapy by rectal insufflation and other means as a treatment modality for cancer, AIDS, and other serious maladies.

On April 25, 1996, this Court, acting ex parte, issued an Order temporarily freezing Defendants' assets, requiring that they account for investor funds, and establishing an expedited discovery schedule. On May 1, 1996, the SEC attempted to depose both Harley and Kube in preparation for a preliminary injunction hearing, but each invoked the Fifth Amendment privilege against self-incrimination.

On May 16, 1996, Harley, Kube, and Lazare, acting upon the advice of counsel, agreed to a "Permanent Injunction by Consent and Continued Asset Freeze." On May 20, 1996, the consent Order was issued. Among other things, the Order restrained Defendants from violating the federal securities laws, enjoined Defendants from seeking protection under the bankruptcy laws, and restrained Defendants from disposing, transferring, pledging, encumbering, assigning, dissipating, concealing, or otherwise disposing of any funds or assets. The Order further provided that "the sole remaining issue in this action shall be whether the defendants and relief defendant must disgorge funds, the amount of disgorgement, if any, and whether civil penalties, if any, should be assessed against the defendants." (Dkt. Entry 19 at 5.)

On November 12, 1996, a multi-count indictment was returned against Lazare, Harley and Kube, charging violations of criminal law for the same conduct that formed the predicate for this SEC civil enforcement action. As a consequence of the commencement of criminal proceedings, litigation in this action was stayed by Order entered on January 23, 1997.

The criminal proceedings were protracted. Defendants filed a number of motions, including a motion to suppress evidence seized from the personal residence occupied by Defendants Harley and Kube. The government conceded that it had erroneously attached to the search warrant application for the residence an affidavit that pertained to Defendants' business premises. In a Memorandum and Order entered on April 3, 1998, this Court concluded that the warrant issued for the search of the Harley/Kube residence was not supported by probable cause and that the good faith exception recognized in United States v. Leon, 468 U.S. 897 (1984), did not apply. Accordingly, the motion to suppress was granted.

Of course, the suppression ruling did not terminate the criminal prosecution. An evidentiary hearing was held on May 8, 1998, for the purpose of determining what evidence had not been derived from the search of the residence. The case proceeded to a jury trial in late May of 1998. After several days of deliberations, the jury reported that it was deadlocked, and a mistrial was declared. A second trial was held in May of 2000, resulting in the convictions of Harley, Kube, and Lazare.

A sentencing hearing was conducted on March 30, 2001. Harley had objected to the calculation of loss, asserting that stock subscription agreements taken from his residence had been used to tabulate the amount. Based upon the evidence presented by the government at the sentencing hearing, this Court determined that the government had established an independent source for the stock subscription agreements used in the loss calculation. Specifically, the evidence showed that a disgruntled former employee and investor, Dawn Loikits, had provided the stock subscription agreements to an SEC staff attorney. (Transcript of March 30, 2001 Sentencing Hearing in United States v. Harley, 96-CR-286, at 19;*fn1 Declaration of John J. Heffernan, submitted as Exhibit "B" to the SEC brief in Opposition to Defendants' Motion to Vacate, Dkt. Entry 101-5.) Harley received a five year prison term, to be followed by a supervised release period of two years.

In August of 2002, the Court of Appeals for the Third Circuit affirmed the convictions and sentences of Harley and Kube. The Supreme Court denied Harley's petition for a writ of certiorari in February of 2003.

The criminal proceedings having been completed, the SEC, in November of 2004, moved to lift the stay of litigation in this matter. In the brief supporting its motion, the SEC asserted that Defendants had transferred and encumbered property in violation of the Asset Freeze Order. (Brief in Support of Motion to Lift Stay, Dkt. Entry 70, at 5.) By Order dated September 26, 2005, this Court granted the Motion to Lift the Stay. (Dkt. Entry 74.)

On January 27, 2006, the SEC moved for an Order to show cause why Harley and Kube should not be held in contempt of the May 20, 1996 "Permanent Injunction by Consent and Continued Asset Freeze." (Dkt. Entry 79.) By Order dated February 3, 2006, Harley and Kube were directed to appear in Court to show cause why they should not be held in contempt for violating the May 20, 1996 Asset Freeze Order. (Dkt. Entry 84.) They were also directed to provide the SEC with a sworn accounting of all assets that were subject to the May 20, 1996 Asset Freeze Order. (Id.) Finally, the Order authorized expedited discovery. (Id.)

Harley and Kube failed to comply with the February 3, 2006 Order. Instead, on March 2, 2006, one day before the scheduled hearing date on the show cause order, they moved to dismiss this matter on the grounds that it rested upon evidence illegally seized from their residence. Concluding that Defendants could not collaterally challenge the validity of the Asset Freeze Order in a contempt proceeding (Transcript of March 3, 2006 Hearing, Dkt. Entry 90, at 7-8), this Court denied the motion to dismiss.

By Order dated March 13, 2006, this Court found Harley and Kube in civil contempt of the Asset Freeze Order. To purge this contempt, Harley and Kube were directed to pay $108,000 plus prejudgment interest in the amount of $23,732 into the Registry of this Court. In addition, Harley and Kube were directed to make a full and complete sworn accounting of all assets that were ever subject to ...

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