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SEC v. KIMMES

February 25, 1991

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ARNOLD KIMMES, ET AL., Defendants


Milton I. Shadur, United States District Judge.


The opinion of the court was delivered by: SHADUR

MILTON I. SHADUR, UNITED STATES DISTRICT JUDGE

 On August 3, 1989 the Securities and Exchange Commission ("SEC") brought this action against 14 individuals and two corporations, charging a large-scale securities fraud in the marketing and sale of low-priced securities (so-called "penny stocks"). This opinion deals with the legal issues that have arisen out of the alleged failure of defendant Thomas Quinn ("Quinn") to obey this Court's September 1, 1989 Order of Preliminary Injunction and Other Equitable Relief (the "Order").

 Quinn was incarcerated at the Maison d'Arret de la Sante in Paris, France before this case was filed and is still in custody there. He is currently unavailable *fn1" to attend any of the hearings in this case but is represented by counsel. In response to Quinn's surreptitious movement of funds in violation of the Order, SEC has asked that Quinn be held in contempt. *fn2" For the reasons set forth in this memorandum opinion and order, this Court finds that Quinn may not be tried for criminal contempt until he is able to appear in person for a hearing.

 Procedural Background

 SEC coupled its initiation of this action with a motion seeking to prevent Quinn and four other defendants from dissipating, secreting or otherwise placing their assets outside of the jurisdiction of this Court. On August 4, 1989 this Court issued a temporary restraining order ("TRO") that among other things froze the funds and other assets of those defendants. After the TRO had been given the one brief extension permitted by Fed. R. Civ. P. 65(b), on September 1, 1989 this Court entered the Order against Quinn. *fn3" At issue now is Quinn's alleged violation of the paragraph of the Order that froze his assets:

 
9. Defendant Quinn, his agents, servants, employees and attorneys and those persons in active concert or participation with any of the foregoing who receive actual notice of this Order by personal service or otherwise, and each of them, are preliminarily restrained and enjoined from directly or indirectly transferring, selling, assigning, pledging, dissipating, concealing or otherwise disposing of in any manner, any funds, assets or other property, wherever located, belonging to or in the possession, custody or control of defendant Quinn or his immediate family.

 On January 25, 1990 SEC moved for an order to show cause, seeking to hold Quinn in civil contempt for violation of that provision of the Order. SEC pointed to Quinn's having caused the transfer of $ 75,000 about November 15, 1989 -- well after he had been made aware of the restrictions imposed by the Order *fn4" -- from a brokerage account (which he maintained under an alias) in the United States to attorney Philippe Cywan ("Cywan") in the United Kingdom. Three months later SEC identified still another transfer of funds that Quinn had made in contravention of the Order's provisions in early February 1990.

 SEC's motion for an order to show cause sought a finding of civil contempt against Quinn. But its initial January 25, 1990 filing, which comported with the civil contempt concept by asking for coercive relief (January 25, 1990 P. Mem. 6), also said (id. n. 1) (citation omitted):

 
Defendant Quinn's contempt may also be criminal and nothing in the SEC's motion should be read as precluding his prosecution for criminal contempt.

 It was clear from both the nature of the relief requested and the type of violations alleged that -- with the exception of the possibility of a limited remedial fine discussed below -- there are only two remedies that may be available to the Court: a monetary penalty or a prison term. Both are designed to punish the defendant, although each can have an ancillary effect of deterrence. Because both of those potentially available remedies involved the prospect of punishment, in the August 21, 1990 Opinion at [slip op] 18 this Court ordered Quinn and his counsel to show cause why Quinn should not be held in criminal contempt. Quinn has responded through his counsel, objecting in principal part that Quinn has an absolute right to be present at the contempt hearing. *fn5" Before that issue may be addressed directly, it is useful to take a brief look at some underlying contempt-of-court principles.

 Contempt of Court

 Both parties have submitted memoranda addressing both civil and criminal contempt. Although this Court directed the parties to focus on the prospect of criminal contempt, *fn6" the possibility of civil contempt sanctions for Quinn remains. This opinion will not deal with that issue, in part because SEC has decided to delay any action on its motion for civil contempt until the issue of criminal contempt is resolved. *fn7" More importantly, however, an analysis of this case in terms of the distinctions between the two forms of contempt (although not always a bright line) clearly discloses that with the exception of a possible remedial fine, the only kind of contempt that is relevant to the issue of Quinn's past violations of the Order is criminal.

 Hicks v. Feiock, 485 U.S. 624, 631-32, 99 L. Ed. 2d 721, 108 S. Ct. 1423 (1988) explains the difference between civil and criminal contempt:

 
Instead, the critical features are the substance of the proceeding and the character of the relief that the proceeding will afford. "If it is for civil contempt the punishment is remedial, and for the benefit of the complainant. But if it is for criminal contempt the sentence is punitive, to vindicate the authority of the court." Gompers v. Bucks Stove & Range Co., 221 U.S. 418, 441, 55 L. Ed. 797, 31 S. Ct. 492 (1911). The character of the relief imposed is thus ascertainable by applying a few straightforward rules. If the relief provided is a sentence of imprisonment, it is remedial if "the defendant stands committed unless and until he performs the affirmative act required by the court's order," and is punitive if "the sentence is limited to imprisonment for a definite period." Id., at 442. If the relief provided is a fine, it is remedial when it is paid to the complainant, and punitive when it paid to the court, though a fine that would be payable to the court is also remedial when the defendant can avoid paying the fine simply by performing the affirmative act required by the court's order.

 It can be seen from that explanation that any punishment for Quinn's alleged past violations necessarily comes within the ambit of criminal contempt. Because the Order merely requires Quinn to refrain from action, a coercive penalty could never be purged by Quinn by any action on his part. Indeed, so far as this Court is aware, Quinn is complying fully with the Order at this very moment and thus could not be coerced into any greater degree of compliance. *fn8" Accordingly no coercive penalties are proper in this case. Any punishment for past acts of disobedience can be imposed only through a criminal contempt procedure. Only one remedial form of relief might perhaps be granted: a fine for the damages, if any, occasioned by Quinn's prior disregard of the Order. *fn9" In the latter respect Gompers, 221 U.S. at 443-44 (citations omitted) is directly on point:

 
In this case the alleged contempt did not consist in the defendant's refusing to do any affirmative act required, but rather in doing that which had been prohibited. The only possible remedial relief for such disobedience would have been to impose a fine for the use of complainant, measured in some degree by the pecuniary injury caused by the act of disobedience.

 While civil contempt is primarily remedial, criminal contempt is used primarily to vindicate the court's authority by punishing those who refuse to obey its orders. Gompers, id. at 443 explained, however:

 
It is true that either form of [sanction] has also an incidental effect. For if the case is civil and the punishment is purely remedial, there is also a vindication of the court's authority. On the other hand, if the proceeding is for criminal contempt and the [sanction] is solely punitive, to vindicate the authority of the law, the complainant may also derive some incidental benefit from the fact that such punishment tends to prevent a repetition of the disobedience. But such indirect consequences will not change [a sanction] which is merely coercive and remedial, into that which is solely punitive in character, or vice versa.

 Such incidental remedial effects of a criminal contempt punishment might well be welcome in this case, but it remains true that the primary reason for any court (including this one) to exert its contempt power is to ensure that parties respect its authority. Here the only problem is that this Court's ability to enforce its authority over Quinn is temporarily limited because of his absence -- a matter that becomes clear on examination of the procedure for criminal contempt.

 Criminal Contempt Procedure

 Fed. R. Crim. P. ("Rule") 42(b) defines the required procedure in ...


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