Opinion
Civil No. CCB-05-1254.
June 3, 2008
MEMORANDUM
The Securities and Exchange Commission ("SEC") has sued Mark P. Kaiser ("Mr. Kaiser") for securities fraud; Mr. Kaiser was found guilty of several counts of fraud following a jury trial in November of 2006. Currently pending before the court is the SEC's motion in limine as to the effect of Mr. Kaiser's pending criminal appeal. The motion seeks to use offensive collateral estoppel to bar the defendant from relitigating the facts that underlie his criminal conviction. For the reasons articulated below, the motion will be granted.
FACTS
The SEC alleges that Mr. Kaiser participated in a fraudulent scheme to inflate the financial results of U.S. Foodservices ("USF") and its parent company, Royal Ahold, N.V. ("Ahold"). From approximately April 2000 until February 2001, Mr. Kaiser was the Executive Vice President of Purchasing, Marketing and Procurement at USF. In February 2001, he became USF's Chief Marketing Officer; he was also a member of USF's executive committee.
During fiscal years 2001 and 2002, the SEC alleges that Mr. Kaiser (along with Michael Resnick, USF's Chief Financial Officer and Mr. Kaiser's former codefendant in this case) "engaged in a scheme to artificially inflate USF and Ahold's earnings in order to meet budgeted earnings targets and obtain, or be in a position to obtain, substantial monetary bonuses." (Pl's Opp'n Mot. Dismiss 3.) Ultimately, the operating income for those two years for Ahold and USF was overstated by some $700 million. (Id.) Mr. Kaiser reported inflated earnings from the "promotional allowance" system at USF, and encouraged vendors to sign false confirmation letters, which he then provided to the company's auditors. Mr. Kaiser also apparently employed improper accounting adjustments to make it appear that USF was meeting earnings targets despite declining sales.
In July 2004, the SEC filed a complaint against Mr. Kaiser and several codefendants, asserting three claims for relief based on violations of the Securities Exchange Act of 1934; an amended complaint was filed in January 2005. The three claims are securities fraud, false filings with the SEC, and books and records violations. On November 8, 2006, a jury convicted Mr. Kaiser in a criminal action based on essentially the same conduct as that alleged by the SEC. Mr. Kaiser was found guilty of six counts: conspiracy to make false filings with the SEC and to falsify books and records, securities fraud, and four counts of false filings with the SEC. Mr. Kaiser moved for a judgment not withstanding the verdict or, in the alternative, for a new trial; the motion was denied. He was sentenced on May 17, 2007 to 84 months in prison. Mr. Kaiser's sentence has been stayed pending his appeal.
The SEC is seeking to use offensive collateral estoppel in this civil case to avoid relitigating issues that it alleges are identical to those decided during the criminal proceedings. Mr. Kaiser claims that collateral estoppel is not available when a conviction has been stayed pending an appeal and that, alternatively, its application in this case would be unwise.
ANALYSIS
The doctrine of collateral estoppel dictates that "once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States, 440 U.S. 147, 153 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5 (1979)). In the Fourth Circuit, the requirements for exercising collateral estoppel, or "issue preclusion," are as follows: (1) the issue sought to be precluded must be identical to one previously litigated; (2) the issue must have been actually determined in the prior proceeding; (3) determination of the issue must have been a critical and necessary part of the decision in the prior proceeding; (4) the prior judgment must be final and valid; and (5) the party against whom preclusion is asserted must have had a full and fair opportunity to litigate the issue in the previous forum. Eddy v. Waffle House, Inc., 482 F.3d 674, 679 (4th Cir. 2007) (citing Sedlack v. Braswell Servs. Group, 134 F.3d 219, 224 (4th Cir. 1998)).
The fact that Mr. Kaiser has appealed his criminal conviction does not affect the finality of that judgment for purposes of collateral estoppel; indeed, "the pendency of a criminal appeal generally does not deprive a judgment of its preclusive effect." United States v. Int'l Brotherhood of Teamsters, 905 F.2d 610, 621 (2d Cir. 1990). "The established rule in the federal courts is that a final judgment retains all of its res judicata consequences pending decision of the appeal." Warwick Corp. v. Maryland Dep't of Transp., 573 F. Supp. 1011, 1014 (D. Md. 1983) (quoting Wright Miller, Federal Practice and Procedure, § 4433 at 308 (1981)); see also Guinness PLC v. Ward, 955 F.2d 875, 898 (4th Cir. 1992). This is true regardless of whether the underlying case is civil or criminal. See, e.g., Smith v. S.E.C., 129 F.3d 356, 362 n. 7 (6th Cir. 1997); S.E.C. v. Gruenberg, 989 F.2d 977, 978 (8th Cir. 1993); S.E.C. v. Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001).
Mr. Kaiser claims that the fact his sentence was stayed pending appeal argues against the use of offensive collateral estoppel in this case. The criminal conviction against Mr. Kaiser is final, however, despite the sentencing court's having stayed enforcement of the sentence pending appeal. See, e.g., S.E.C. v. O'Hagan, 901 F. Supp. 1461, 1465-66 (D. Minn. 1995); International Teamsters, 905 F.2d at 613; see also Huron Holding Corporation v. Lincoln Mine Operating Co., 312 U.S. 183, 189 (1941) (noting that "in the federal courts the general rule has long been recognized that while appeal with proper supersedeas stays execution of the judgment, it does not-until and unless reversed-detract from its decisiveness and finality."). O'Hagan and International Teamsters are directly on point: in both, the courts concluded that the underlying criminal conviction was final for purposes of collateral estoppel even though the criminal sentences had been stayed pending appeal. Similarly, the fact that Mr. Kaiser's sentence has been stayed does not affect whether or not that judgment had become final after it was imposed — even where, as in O'Hagan, the court expresses doubt about the outcome on appeal. O'Hagan, 901 F. Supp. at 1465.
O'Hagan directly addresses Mr. Kaiser's concern that "it would be inequitable for the appellant to suffer the adverse consequences of the challenged judgment before the appellate process has been completed." (Def's Opp'n Mot. Limine 4.) In granting the government's motion for summary judgment, the court noted that "should O'Hagan's criminal conviction be reversed, he may seek immediate relief from any adverse judgment entered in this action." SEC v. O'Hagan, 901 F. Supp. at 1466. Of course, O'Hagan's story does not stop there — his underlying criminal conviction was reversed by the 8th Circuit on the ground that it could not be based solely on the misappropriation theory, United States v. O'Hagan, 92 F.3d 612 (8th Cir. 1996). That decision was then reversed by the Supreme Court, which held that criminal liability under the Securities Exchange Act of 1934 may be predicated on the misappropriation theory. United States v. O'Hagan, 521 U.S. 642 (1997). The record is silent as to the specific effect of the appeals on the civil judgment against Mr. O'Hagan.
Mr. Kaiser argues that in the interest of judicial economy, collateral estoppel should not be applied until after the appeal has been decided. In support of this argument, Mr. Kaiser notes that "should the court rule on the basis of the prior litigation, the ruling would have to be vacated should the criminal conviction be overturned or vacated on appeal." (Def's Opp'n Mot. Limine 4) (quoting In re Knight, 2004 WL 3186390 (Bankr. E.D. Va. Dec. 15, 2004)). On the other hand, Mr. Kaiser could, in theory, avoid the preclusive effect of his criminal conviction for a substantial period of time by extending his criminal appeal through a request for an en banc hearing or a petition for certiorari to the Supreme Court — forcing this court either to stay the proceedings indefinitely or waste judicial resources relitigating the facts underlying Mr. Kaiser's conviction. See S.E.C. v. Blackwell, 477 F. Supp. 2d 891, 901 (S.D. Ohio 2007) (concluding that "[i]t is proper for this Court to apply collateral estoppel if the requisite four-prong test is met," and noting that if the underlying conviction is overturned, the defendants "may invoke Rule 60(b) of the Federal Rules of Civil Procedure and obtain relief from the civil judgment.")
Accordingly, the SEC's motion with respect to the effect of Mr. Kaiser's appeal will be granted, and Mr. Kaiser's criminal conviction may be used as collateral estoppel provided the five-part test described in Sedlack v. Braswell Servs. Group is met. A separate order follows.