Opinion
Case No. 99-8694-CV-RYSKAMP
July 8, 2002
ORDER ON RELIEF ASSESSED AGAINST SCOTT K. GINSBURG
THIS CAUSE is before the Court upon the parties' memorandum regarding the appropriate relief to be assessed against Defendant Scott K. Ginsburg. The issue of relief is now ripe for review.
I. Background
On September 9, 1999 the United States Securities and Exchange Commission ("SEC") brought this action against Defendants Scott K. Ginsburg, Mark J. Ginsburg, and Jordan E. Ginsburg for insider trading in violation of federal securities laws. At the time of the alleged illegal action, Scott Ginsburg was the chairman of the board and CEO of Evergreen Media Corporation ("Evergreen"), which owned and operated various radio stations nationwide. Mark Ginsburg, Scott Ginsburg's brother, is a physician and lives next door to his father, Jordan Ginsburg, who was one of the founders of Evergreen.
Count I of the SEC's complaint, brought under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, involves a series of alleged tips in July 1996 from Scott Ginsburg to Mark Ginsburg and from Mark Ginsburg to Jordan Ginsburg of material, nonpublic information regarding Evergreen's attempt to acquire EZ Communications, Inc. ("EZ"), another radio broadcast corporation. The SEC alleges that on either the same or following day after each alleged tip, Mark Ginsburg and Jordan Ginsburg each placed substantial orders for EZ stock. When EZ announced its merger in August 1996, Mark Ginsburg and Jordan Ginsburg traded their EZ stock and realized gains of $664,024 and $412,875, respectively.
Count II of the SEC's complaint, brought under Section 10(b) and Rule 10b-5 thereunder, and Count III, brought under Section 14(e) and Rule 14e-5 thereunder, concern another tip from Scott Ginsburg to Mark Ginsburg regarding plans for a tender offer to Katz Media Group, Inc. ("Katz Media") by Evergreen and Chancellor Broadcasting. As with the EZ transaction, Mark Ginsburg placed a substantial order for Katz Media stock on the same day he was allegedly tipped, and realized a gain of $729,200 after the public announcement of the tender offer in July, 1997.
Prior to the start of trial, Defendants Mark Ginsburg and Jordan Ginsburg entered into settlement agreements with the SEC. Pursuant to consent judgments, on April 1, 2002, final judgments were entered for the SEC and against Defendants Mark Ginsburg and Jordan Ginsburg. Permanent injunctions were entered against both Mark Ginsburg and Jordan Ginsburg. Additionally, Mark Ginsburg was ordered to pay disgorgement in the amount of $1,393,224, prejudgment interest in the amount of $703,017, and a civil penalty in the amount of $1,599,661. Jordan Ginsburg was ordered to pay disgorgement in the amount of $412,875, prejudgment interest in the amount of $234,898, and a civil penalty in the amount of $412,875.
This Court draws no adverse inferences from the settlements by Mark Ginsburg and Jordan Ginsburg. Jordan Ginsburg had a prior criminal conviction which surely would have been known to the jury if this case went to trial. Mark Ginsburg was suffering from health problems which probably was a factor in deciding whether to go to trial. Furthermore, Mark Ginsburg's considerable wealth made the settlement figure a reasonable compromise.
Defendant Scott Ginsburg did not enter into a settlement agreement with the SEC and proceeded to trial in April, 2002. Following a seven day trial, the jury found that Scott Ginsburg violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, based on his tips to, and the trading by, Mark Ginsburg and Jordan Ginsburg in the common stock of EZ and Katz Media. In reaching its verdict, the jury relied on the SEC's circumstantial evidence consisting of dates of meetings between Scott Ginsburg and certain other radio company executives, records of phone calls between numbers registered to Scott Ginsburg and numbers registered to Mark Ginsburg and Jordan Ginsburg, and dates of trades in EZ and Katz Media by Mark Ginsburg and Jordan Ginsburg.
The jury concluded that certain defenses and claims of innocence testified to by Scott Ginsburg and his fact and expert witnesses were not credible. With respect to EZ, the defenses rejected by the jury included claims that the information that EZ was for sale in July, 1996 was public knowledge, that the information that EZ was for sale was not material information, that Scott Ginsburg did not learn that EZ was for sale prior to a telephone call he had with Mark Ginsburg on July 14, 1996, that Mark Ginsburg had a pre-existing plan to purchase shares of EZ in July, 1996, that Scott Ginsburg did not tip information to his father Jordan Ginsburg because the two were estranged at the time, and that Mark Ginsburg and Jordan Ginsburg did not use the material, non-public information in deciding to purchase EZ stock. With respect to Katz Media, the defenses rejected by the jury included the claims that it was public knowledge that Katz Media was for sale in June, 1997, that Scott Ginsburg did not tip Mark Ginsburg in June, 1997 with material nonpublic information relating to the sale of Katz Media, that Scott Ginsburg did not talk to Mark Ginsburg in a telephone call on the evening of June 16, 1997, that at the time of the telephone call on June 16, 1997, substantial steps had not been taken with respect to a tender offer for Katz Media by Evergreen or Chancellor Broadcasting Corporation, and that Mark Ginsburg did not use material nonpublic information divulged to him by Scott Ginsburg when he purchased shares of Katz Media in June, 1997.
The Court notes that although the jury found against Defendant Scott Ginsburg, there are many factors in this case which could lead a reasonable person to conclude that no tipping was involved. The new telecommunications bill passed by Congress made consolidation in the radio industry inevitable. Many stock pundits were predicting which media companies were targets for acquisition. Both Mark Ginsburg and Jordan Ginsburg had been substantial investors in radio stocks, and both were both very knowledgeable about the radio industry. It is plausible that the investments in EZ and Katz Media made by Mark Ginsburg and Jordan Ginsburg were driven not by tips but rather by public knowledge regarding the likelihood of acquisitions in the radio industry.
Pursuant to Section 21A(a)(2) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u-1, this Court shall determine the relief granted to the SEC. This Court may issue an injunction, require disgorgement and payment of prejudgment interest, and/or require the payment of a civil penalty. See 15 U.S.C. § 78u-1(d)(2) and (3). Following the jury verdict, this Court set a briefing schedule for the relief phase of the trial. On May 20, 2002, the SEC filed its Memorandum in Support of Entry of Final Judgment Imposing Permanent Injunction and Civil Penalty Against Defendant Scott Ginsburg. On May 21, 2002, Defendant Scott Ginsburg filed his Memorandum Regarding the Appropriate Relief to be Assessed. A hearing was held on the issue of relief on May 30, 2002. On June 18, 2002, both parties filed response briefs in support of their positions.
II. Discussion
The SEC requests that this Court enter a permanent injunction against future violations of the securities laws against Defendant Scott Ginsburg, and that this Court require Defendant Scott Ginsburg to pay a civil penalty of 5.4 million dollars, three times the amount of profits acquired by his brother and father on account of the illegal tips. Defendant Scott Ginsburg argues that such requested relief is not warranted, and that at most, this Court should impose a civil penalty of $602,033, one third the amount of profits acquired on account of the illegal tips. For the reasons stated below, this Court finds that the appropriate relief against Defendant Scott Ginsburg is a civil penalty of one million dollars. This Court addresses the permanent injunction and civil penalty in turn.
Permanent Iniunction
Section 21(d)(1) of the Securities Exchange Act of 1934, 15 U.S.C. § 78(u)(d)(1), provides that the SEC may seek injunctive relief for a "violation of any provision of [the Exchange Act or] the rules and regulations thereunder." The law is well established that to obtain a permanent injunction against Scott Ginsburg, the SEC must establish that Scott Ginsburg is reasonably likely to violate the securities laws in the future. See SEC v. Globus Group, Inc., 117 F. Supp.2d 1345, 1347 (S.D. Fla. 2000) (denying injunction and noting that the SEC must prove a "reasonable likelihood that the wrong will be repeated absent the injunction"); SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. 1981). Such a showing is made "when the inferences that flow from a defendant's prior illegal conduct, viewed in light of present circumstances, betoken a `reasonable likelihood' of future transgressions." Zale, 650 F.2d at 720. The fact of a past violation is "not alone tantamount to the `proper showing' of present or future violations;." Id. The Eleventh Circuit looks to the following factors to determine whether an injunction is appropriate relief in an SEC action: "the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations." SEC v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir. 1982) (quoting SEC v. Blatt, 583 F.2d 1325, 1334 n. 29 (11th Cir. 1978)).
The SEC argues that an examination of the factors leads to the conclusion that there is reasonable likelihood that Scott Ginsburg will violate the securities laws in the future. The SEC asserts that Scott Ginsburg's past violations were egregious, intentional, and recurrent as Scott Ginsburg violated his duties of trust and confidence to both EZ and Katz Media and breached his fiduciary duty to his company and its shareholders with respect to two separate transactions. The SEC points to Scott Ginsburg's denial of liability in the media as evidence that Scott Ginsburg has failed to recognize the wrongfulness of his actions. Further, the SEC asserts that Scott Ginsburg's position as the chairman of the board of a public company makes it extremely likely that he will repeat securities offenses in the future.
This Court disagrees with the SEC's analysis of the factors and finds that the SEC has failed to establish reasonable likelihood that Scott Ginsburg will violate the securities laws in the future. This Court finds that Scott Ginsburg did not engage in egregious or recurrent behavior. There is no evidence that Scott Ginsburg or his father or brother took any steps to conceal either their communications or trades, through dummy accounts, covert phone calls, or otherwise. Scott Ginsburg also did not personally trade in EZ or Katz Media and did not profit in the trading by his brother and father. Further, prior to this instant SEC investigation, Scott Ginsburg had never been accused of illegal tipping or otherwise violating securities laws. Given the context of his profession and the amount of material non-public information he received constantly, the fact that he had never been involved in illegal securities actions establishes that the tipping in connection with EZ and Katz Media was isolated. These isolated non-deceptive actions do no approach the degree of egregiousness and recurrence that requires issuance of an injunction. See e.g., SEC v. Chapnick, 1994 WL 113040 *1 (S.D. Fla. Feb. 11, 1994) (enjoining the defendant where he had caused the dissemination of false and misleading financial statements, engaged in unauthorized securities trades, manipulated accounting records to hide losses, appropriated money from his company, and personally benefitted from his scheme).
The SEC makes much of the fact that Scott Ginsburg has failed to publically acknowledge the wrongfulness of his unlawful conduct. The Court does not find that such failure establishes a reasonable likelihood of future violations. Courts have stated that "the court may properly view a culpable defendant's continued protestations of innocence as an indication that injunctive relief is advisable." SEC v. Jacubowski, 1997 WL 598108 at *1 (N.D. Ill. Sept. 19, 1997), aff'd, 150 F.3d 675 (7th Cir. 1998). Courts have also held, however, that the lack of an admission of wrongdoing does not establish the reasonable likelihood required to issue an injunction. See SEC v. Yun, 248 F. Supp.2d 1287, 1294 (M.D. Fla. 2001) (no injunction issued against defendants who had not acknowledged wrongdoing). Scott Ginsburg has stated before this Court that although he continues to assert that he did not engage in illegal tipping activity, he has respect for the jury verdict, the judicial process, and the securities laws. Scott Ginsburg has also given the Court assurances that he will not engage in any actions that will raise suspicion of illegal conduct. The Court finds these assurances to mitigate against the lack of specific admission of wrongdoing and to help establish no reasonable likelihood of future violations of securities law.
The SEC argues that this Court should enter a permanent injunction against Scott Ginsburg because a permanent injunction is very important to Scott Ginsburg. When this Court asked at hearing why the SEC considered a permanent injunction significant, counsel for the SEC replied that an injunction is significant because "it is significant and it is important to Mr. Ginsburg." May 30, 2002 Hearing Transcript at 6. The SEC points out that the sole reason why Scott Ginsburg did not enter into a settlement agreement with the SEC and instead chose to proceed to trial was his desire not to have a permanent injunction entered against him. While this Court understands the SEC's position, this Court may not issue a permanent injunction based on such rationale. An injunction is purely an equitable remedy. As such, it may not be used to punish. See Hartford-Empire Co. v. United States, 323 U.S. 386, 409 (1945) (considering injunctive relief to prevent future violations of antitrust laws and noting that "we may not impose penalties in the guise of preventing future violations"). Because the SEC has failed to establish reasonable likelihood that Scott Ginsburg may entertain future violations of securities laws, no injunction may be entered.
Civil Penalty
Pursuant to Section 21A of the Securities Exchange Act, 15 U.S.C. § 78u-1(a)(A), insider trading defendants are liable for a civil penalty. Such penalty is to "enhance deterrence against insider trading, and where deterrence fails, to augment the current detection and punishment of this behavior." H.R. Report 910, 1988 U.S. Code Cong. Admin. News at 6044. The amount of the penalty "shall be determined by the court in light of the facts and circumstances, but shall not exceed three times the profit gains . . . as a result of [an] unlawful purchase, sale, or communication." 15 U.S.C. § 78u-1(2). In assessing the appropriate amount of a civil penalty, courts have considered various factors including the egregiousness of the defendant's violations, the isolated or repeated nature of the violations, the degree of scienter involved, the amount of the illegal profits, and the deterrent effect of a penalty given the defendant's net worth. See Yun, 148 F. Supp.2d at 1295; Chapnick, 1994 WL 113040 at *4.
The SEC argues that only the maximum civil penalty allowed, three times the profits, 5.4 million dollars, will fulfill the deterrent and punitive purposes of the civil penalty statute. The SEC asserts that Scott Ginsburg's violations were egregious, repeated, and involved a high level of scienter. The SEC also asserts that Scott Ginsburg's refusal to acknowledge any wrongdoing exemplifies the need for a significant deterrent from future violations. Furthermore, the SEC argues that Scott Ginsburg's substantial net worth militates for the maximum civil penalty.
This Court does not find that Scott Ginsburg's actions militate for the maximum civil penalty. The Court is unaware of and neither party has cited to any case where the court imposed a three times penalty against a tipper who did not himself trade or profit. All of the cases in which the maximum civil penalty is awarded involve extremely egregious conduct by a tipper who himself made money from his illegal acts. See, e.g., SEC v. Lipson, 129 F. Supp.2d 1148 (N.D. Ill. 2001) (imposing a three times penalty on a corporate executive who made unauthorized trades in his own company's stock, and engaged in a manipulative pattern of conduct that included engaging in the conduct even after receiving a letter from his attorney warning that the transactions might be improper and trying to involve his lawyers, accountants and family members in covering up his illegal scheme); Chapnick, 1994 WL 113040 (imposing a three times penalty on a defendant who admitted that he had engaged in unauthorized transactions for years, had misused the corporation's funds, had created false accounts to hide the transactions, and had profited from these transactions); SEC v. Ferrero, 1993 WL 625964 (S.D. Ind. 1993) (imposing a three times penalty on the one defendant who had actually traded on insider information). As previously discussed, Scott Ginsburg's violations were not particularly egregious. There is no evidence that Scott Ginsburg, his father, or his brother proceeded in a plan to conceal, deceive, or otherwise manipulate their communications or trades, through dummy accounts, covert phone calls, or otherwise. Scott Ginsburg also did not personally trade in EZ or Katz Media and did not profit in the trading by his brother and father. Given the fact that Scott Ginsburg did not personally trade or profit and did not engage in a devious plan or cover-up, this Court concludes that a three times penalty is not appropriate.
Although this Court does not find a civil penalty of three times the profits to be appropriate in this case, the Court does find that a substantial penalty is necessary to punish and deter Scott Ginsburg. Scott Ginsburg's requested penalty of $602,033 is too low. This Court recognizes and takes into account the fact that Scott Ginsburg is already deterred and punished by the jury verdict and its effects on Scott Ginsburg's career, family life, and ability to make charitable donations. See SEC v. Rubin, 1993 WL 405428 *6, 7 (S.D.N.Y. 1993) (taking into account the adverse consequences that defendants suffer as a result of the jury's verdict in determining the penalty imposed). However, this Court also recognizes the seriousness of Scott Ginsburg's illegal actions. Scott Ginsburg has been found to have violated Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, based on his tips to, and the trading by, Mark Ginsburg and Jordan Ginsburg in the common stock of EZ and Katz Media. The trading by Mark and Jordan Ginsburg resulted in substantial profits. Furthermore, due to Scott Ginsburg's substantial net worth, the penalty must be significant to adequately deter. In light of the seriousness of Scott Ginsburg's actions, Scott Ginsburg's substantial net worth, and the adverse impact brought by the jury verdict, this Court finds it appropriate to levy a civil penalty in the amount of one million dollars.
III. Conclusion
For the reasons stated above and upon review of the pertinent portions of the record, it is hereby
ORDERED AND ADJUDGED that a civil penalty of one million dollars is hereby levied against Defendant Scott Ginsburg. It is FURTHER ORDERED that no permanent injunction shall issue against Defendant Scott Ginsburg. Final Judgment shall be entered by separate order.