The opinion of the court was delivered by: Aspen, District Judge:
MEMORANDUM OPINION AND ORDER
Plaintiffs, security holders of Cenco, Inc. ("Cenco"),
brought this consolidated class action*fn1 to enforce rights
created under the federal securities laws, regulations
promulgated thereunder, and the common law charging that
between 1970 and 1975 Cenco and several of its officers,
directors and employees along with its outside auditors and
certain other persons manipulated inventory and altered sales
figures as part of a common scheme to falsify Cenco's
financial position. Most of this case has been resolved
through settlement agreements between the plaintiff class and
all but two of the defendants, and between many of the
defendants on their various cross-claims against each other.
Those cross-claims that were not settled were resolved by
Judge Crowley, who previously presided over this matter,
either by trial or by motion for
summary judgment.*fn2 Judge Crowley also determined the
matter of fees and costs to be awarded to attorneys for the
plaintiff class before he left the bench in June, 1981.*fn3
This matter is presently before the Court on the plaintiff
class' motion for partial summary judgment against the two
non-settling defendants, David Marose ("Marose") and Rose
Packaging Co. ("Rose"), for fraud under the federal securities
laws and the common law. Marose and Rose have also filed a
cross-motion for summary judgment in their favor on the class'
claims. For the reasons set forth below, both motions will be
denied. Consistent with this Court's opinion, however,
defendants will be precluded from relitigating any issues
actually litigated in this or related matters under the
doctrine of collateral estoppel to the extent that such issues
bear on defendants' ultimate alleged liability to the class.
Invoking the doctrine of collateral estoppel offensively,
the class maintains that the liability of Rose and Marose for
securities fraud and common law fraud has been established by
three prior judgments entered against them in connection with
the Cenco fraud litigation. Specifically, the class contends
that Marose and Rose are estopped to deny their liability
herein because: (1) in 1979, Marose pled guilty to a two-count
criminal indictment for mail fraud arising out of his
participation in the fraud at Cenco, United States v. Marose,
No. 79 CR 305; (2) both Marose and Rose consented to the entry
of a permanent injunction restraining them from engaging in
future securities fraud, Securities and Exchange Commission v.
Cenco, Inc., No. 76 C 3258 (N.D.Ill., March 28, 1980); and (3)
both Marose and Rose were found liable to Cenco for fraud,
aiding and abetting breaches of fiduciary duty by Cenco
employees, and contribution, In re Cenco Incorporated
Securities Litigation, No. 75 C 2227 (N.D.Ill., June 10, 1981).
Rose and Marose deny that any of these prior judgments should
be accorded preclusive effect and, in support of their
cross-motion for summary judgment, contend that their alleged
involvement in the conspiracy to defraud Cenco and the class of
investors did not result in any injury or damage to the
plaintiff class. They contend that they cannot be held liable
for damages attributable to the actions of other members of the
conspiracy because they joined the conspiracy at a late stage
in the overall scheme.
Under the doctrine of collateral estoppel, once an issue is
actually and necessarily determined by a court of competent
jurisdiction, that determination is conclusive in subsequent
suits based on the same or a different cause of action
involving a party to the prior litigation. Montana v. United
States, 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210
(1979); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5,
99 S.Ct. 645, 649, 58 L.Ed.2d 552 (1979); Restatement (Second)
of Judgments § 68 (Tent. Draft No. 4, April 15, 1977).
Offensive use of collateral estoppel — when a plaintiff seeks
to estop a defendant to relitigate an issue that the defendant
previously litigated and lost against another plaintiff — was
approved by the Supreme Court in Parklane Hosiery Co. v. Shore,
supra. Collateral estoppel is appropriate in such a situation,
however, only if the issue to be concluded is identical to that
involved in the prior action, the issue was fully litigated in
the prior action, and determination of the issue was necessary
and essential to the judgment in the prior action.
Rufenacht v. Iowa Beef Processors, Inc., 656 F.2d 198, 202 (5th
Cir. 1981); Lektro-Vend Corp. v. Vendo Corp., 500 F. Supp. 332,
347 (N.D.Ill. 1980), affirmed, 660 F.2d 255 (7th Cir. 1981).
The Court should also consider whether controlling facts or
legal principles have changed significantly since the prior
action and whether other special circumstances warrant an
exception to the normal rules of preclusion.*fn4 Montana v.
United States, supra, 440 U.S. at 155, 99 S.Ct. at 974. The
Supreme Court has acknowledged that district courts have broad
discretion to determine whether collateral estoppel should be
applied in the circumstances of an individual case. Parklane
Hosiery Co. v. Shore, supra, 439 U.S. at 331, 99 S.Ct. at 651.
Applying these standards to the case at bar, the Court
concludes that the class has failed to establish that the
defendants should be completely estopped to deny their alleged
liability for securities fraud or common law fraud on the
basis of the three prior judgments in this and related cases.
Of course, as set forth below, to the extent that individual
issues relevant to the fraud alleged herein were fully
litigated and determined in a prior action, Rose and Marose
will be precluded from litigating those issues again. But we
cannot conclude that all the elements of the fraud with which
these defendants are charged have been necessarily determined
adversely to them in any earlier adjudication so as to invoke
the principles of offensive collateral estoppel as a complete
conclusion to the instant litigation.
In 1979, Marose pled guilty to a two-count indictment for
mail fraud in violation of 18 U.S.C. § 1341. The two necessary
elements for a violation of the mail fraud statute are: (1)
formation of a scheme with intent to defraud; and (2) the use
of the mails in furtherance of that scheme. United States v.
Keane, 522 F.2d 534, 544 (7th Cir. 1975), cert. denied,
424 U.S. 976, 96 S.Ct. 1481, 47 L.Ed.2d 746 (1976); United States
v. Climatemp, Inc., 482 F. Supp. 376, 383 (N.D.Ill. 1979). While
a plea of guilty is a confession to the essential elements of
the crime charged, as the class suggests, a plea to a mail
fraud charge does not necessarily include an admission that
anyone was, in fact, defrauded. United States v. Buchanan,
633 F.2d 423, 427 (5th Cir.), cert. denied, 451 U.S. 912, 101 S.Ct.
1984, 68 L.Ed.2d 301 (1981); United States v. White,
355 F.2d 909, 910 (7th Cir. 1966), cert. denied, 389 U.S. 1052, 88 S.Ct.
796, 19 L.Ed.2d 846 (1967); United States v. Wolfson,
322 F. Supp. 798, 829, affirmed, 454 F.2d 60 (3d Cir.), cert.
denied, 406 U.S. 924, 92 S.Ct. 1792, 32 L.Ed.2d 124 (1971).
Moreover, the indictment charges that Marose "devised and
intended to devise a scheme and artifice to defraud and to
obtain money from Cenco by means of false and fraudulent
pretenses, representations and promises." Marose Indictment at
¶ 3. There is no allegation in the indictment that Marose
intended to defraud investors in the position of the plaintiff
class or that he joined a conspiracy with that purpose, that
any representations were made to purchasers of securities, or
that such purchasers relied on such representations in buying
Cenco stock and were damaged thereby. Accordingly, Marose's
plea to the mail fraud charge does not include an admission
with regard to these crucial elements of the class' claims.
Furthermore, with respect to both Marose's plea of guilty to
the mail fraud charge and both defendants' consent to decrees
entered in March, 1980, in litigation with the Securities and
Exchange Commission, we share the concern of the drafters of
the Second Restatement of Judgments that it would be unwise to
attribute collateral estoppel effect to a judgment entered
upon confession or consent. The most recent draft of the
In the case of a judgment entered without contest
by confession, consent, or default, none of the
issues is actually litigated. Therefore, the rule
of this Section [issue preclusion] does not apply
with respect to any issue in a subsequent action.
The judgment may be conclusive, however, with
respect to one or more issues, if the parties
have entered an agreement manifesting such
Restatement (Second) of Judgments § 68 comment e at 9
(Tent.Draft No. 4, April 15, 1977). The purpose of a consent
decree is typically to avoid the litigation of any issue and
the decree usually states, as do the decrees entered against
Marose and Rose, that the parties neither admit nor deny the
allegations in the complaint. The persuasive weight of
authority declines to ascribe preclusive effect to consent
decrees when there has been no admission of liability and in
the absence of clear evidence concerning the parties' intention
to be bound collaterally. Studiengesellschaft v. Eastman Kodak
Company, 616 F.2d 1315, 1332 (5th Cir.), cert. denied,
449 U.S. 1014, 101 S.Ct. 573, 66 L.Ed.2d 473 (1980); Kaspar Wire Works,
Inc. v. Leco Engineering & Machine, Inc., 575 F.2d 530, 539-40
(5th Cir. 1978) and cases cited therein. The consent decree is
an important weapon in the arsenal of the Securities and
Exchange Commission in policing securities fraud and a holding
that consent to the entry of a decree in one case automatically
precludes a defendant from defending himself in subsequent
litigation would diminish its use and effectiveness.
By contrast, the issue of these defendants' liability to
Cenco for fraud, aiding and abetting breaches of fiduciary
duty, and contribution was actually and fully litigated before
Judge Crowley in the context of Cenco's motion for partial
summary judgment decided on June 10, 1981. In re Cenco
Incorporated Securities Litigation, No. 75 C 2227 (N.D.Ill.,
June 10, 1981).*fn5 In that context, Judge Crowley found that
Marose and Rose joined two Cenco employees, Russell Rabjohns
and Jack Coulson, in a conspiracy to defraud Cenco by falsely
inflating the inventory of its wholly-owned subsidiary, Cenco
Medical/Health Supply Corp. ("CMH"), and then concealing the
inventory inflation by falsely manufacturing and destroying CMH
inventory. Judge Crowley found that Rose and Marose knowingly
joined the conspiracy at the false manufacturing stage. In
furtherance of this scheme, Cenco paid Marose and Rose several
hundred thousand dollars for falsely labeled packages
containing virtually worthless material. Rose and Marose then
kicked back part of the money to Rabjohns, Coulson and others.
The phony inventory destruction aspect of the scheme
contemplated the supposed destruction of over $16 million worth
of medical supplies. In reality, very little valuable
merchandise was destroyed since the purpose of the scheme was
to remove from Cenco's books the false inventory earlier
recorded and the fraud was discovered before the destruction of
much merchandise. Judge ...