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Securities and Exchange Commission v. Robert A. Berlacher

February 14, 2012


The opinion of the court was delivered by: Goldberg, J.

Memorandum Opinion

Several entities controlled by Defendant, Robert Berlacher (collectively, the "Applicants"), have moved, pursuant to the Equal Access to Justice Act, 28 U.S.C. § 2412 (2006), for attorneys' fees and costs expended in defending against an SEC enforcement action. Because we find that the SEC's lawsuit was substantially justified, and its demands were reasonable, no attorneys' fees will be awarded.

I. Background

The Court's findings in the initial action are set forth in detail in S.E.C. v. Berlacher, 2010 WL 3566790, at *1-7 (Sept. 13, 2010 Memo. Op., Doc. No. 118). What follows is a short summary of those findings.

After a three day bench trial, the Court found that Berlacher had engaged in two instances of securities fraud, but that there was insufficient evidence to find him liable on two other counts of fraud and one count of insider trading. Prior to trial, the Court also dismissed one of the SEC's claims against Berlacher and other defendants. (Doc. No. 32.)

Regarding the insider trading allegations, the SEC's position was that Berlacher had nonpublic information about Private Investment in Public Equity offerings (PIPE), that the information was material, and that Berlacher traded on that information. Berlacher presented expert testimony attempting to establish that the information was not material.

After hearing testimony from both Berlacher's expert witness, Dr. Stephen Prowse, and an expert witness for the SEC, Robert Lowry, the Court credited the testimony of Dr. Prowse, who opined that the information at issue was not material. While mindful that Mr. Lowry had "more than 28 years of impressive experience working for the SEC," Dr. Prowse's testimony was accepted because he performed an event study in an attempt to determine materiality while Mr. Lowry did not. Berlacher, 2010 WL at *8. The Court recognized that an event study was more "[c]onsistent with the Third Circuit's post hoc analysis of stock price movement to determine materiality." Id. Thus, we concluded that the PIPE information was not material.

The SEC's position on all four fraud claims was that Berlacher "made misrepresentations by creating options in his basket account and later signing the [Stock Purchase Agreements (SPAs)] stating that he had not engaged in certain trading." Id. at *9. In order to participate in the PIPE offerings, Berlacher was required to sign SPAs in which he represented that he had not engaged in specific trading activities.

We rejected the SEC's position as to two of these fraud claims-the Hollywood PIPE transaction and the SmithMicro PIPE transaction. As to the Hollywood transaction, we found that because the SPA only stated that the purchaser had not entered into any short options in Hollywood stock, Berlacher's purchase of long options did not violate the agreement. Id. at *10. Regarding the SmithMicro PIPE, the SEC argued that the SPA prohibited Berlacher from engaging in short sales of SmithMicro's common stock, and that Berlacher had violated the agreement. However, we found that the SPA defined "Common Stock" as the PIPE shares being offered, and noted that the "SEC never raised any allegations suggesting that Berlacher transacted in any way in the SmithMicro PIPE shares prior to signing the SPA." Id. at *6.

II. Discussion

The Equal Access to Justice Act (EAJA) allows certain litigants to collect attorneys' fees from the government. Its stated purpose is to "foster a more cooperative, less threatening regulatory environment among agencies, small businesses, and other small entities" by making federal regulators "more accountable for their enforcement actions." 142 Cong. Rec. S3242 (daily ed. March 29, 1996). The Applicants argue that they are entitled to fees and costs under two distinct provisions of the EAJA: 28 U.S.C. § 2412(d)(1)(A) and 28 U.S.C. § 2412(d)(1)(D).

A. Section 2412(d)(1)(A)*fn1

The first section under which the Applicants' claim fees contains three elements. First, the statute indicates that to be eligible for an award of fees, the applicant must be a "prevailing party."*fn2

Hensley v. Eckerhart, 461 U.S. 424, 433 (1983).*fn3 Second, the statute requires that the prevailing party actually incur the legal fees at issue. S.E.C. v. Comserv Corp., 908 F.2d 1407, 1413 (8th Cir. 1990). Finally, it requires the government's position not to have been substantially justified. Williams v. Astrue, 600 F.3d 299, 301 (3d Cir. 2009). For the reasons stated below, we find that the SEC has carried its burden of showing that its position was substantially justified throughout the litigation. Thus, it is unnecessary to discuss the first two elements of the statute in detail.*fn4

The government bears the burden of proving that its position, both before and during litigation, was substantially justified. Scarborough v. Principi, 541 U.S. 401, 414 (2004). Substantial justification means that the position was "'justified in substance or in the main'--that is, justified to a degree that could satisfy a reasonable person." Pierce v. Underwood, 487 U.S. 552, 565 (1988). In other words, the ...

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