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Securities and Exchange Commission v. Koenig

December 3, 2007

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
JAMES E. KOENIG, DEFENDANT.



The opinion of the court was delivered by: Wayne R. Andersen District Judge

MEMORANDUM OPINION AND ORDER

Before the court is the Securities and Exchange Commission's ("SEC") request for remedies. On March 26, 2002, the SEC filed a civil action against defendant James Koenig ("Koenig") and five other officers of Waste Management, Inc. ("WM") alleging violations of section 17(a) of the Securities Act of 1933, sections 10(b), 13(a) and 13(b) of the Securities Exchange Act of 1934 and Exchange Act rules 10b-5, 13b2-1 and 13b2-2. All of Koenig's co-defendants settled with the SEC. Koenig decided to proceed to a jury trial as to liability on April 18, 2006. The jury returned a verdict finding Koenig liable on all counts on June 29, 2006. The jury found that, as Chief Financial Officer ("CFO") of WM, Koenig committed sixty securities law violations between 1992 and 1996. In denying Koenig's motion for judgment as a matter of law and his motion for a new trial, the court found that there was sufficient evidence in the record to support the jury's verdict and that the verdict was reasonable. Therefore, for purposes of the remedies phase of this case, Koenig's sixty securities law violations are assumed.

On November 14 and 16, 2007, we conducted a bench trial as to remedies. The SEC presented expert testimony from Dr. Roman Weil ("Weil") and Koenig presented expert testimony from Dr. Frederick Dunbar ("Dunbar"). The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Civil Procedure ("Rule") 52(a). For the reasons set forth below, the SEC's request for remedies is granted in part and denied in part. Koenig is permanently enjoined from committing violations of the applicable federal securities laws and from holding a position of officer or director in any public company. Koenig is ordered to disgorge $831,500 plus pre-judgment interest at the Internal Revenue Service ("IRS") underpayment rate, 26 U.S.C. § 6621(a)(2). Koenig is ordered to pay a civil penalty equal to the amount of disgorgement plus pre-judgment interest at the IRS underpayment rate. The SEC's request for an indemnity bar is denied. Koenig's oral motion to strike the testimony of Weil is denied. Koenig's motion to reconsider the court's May 24, 2004 order denying the motion to strike the SEC's request for civil penalties as time-barred is denied.

I. ORAL MOTION TO STRIKE THE TESTIMONY OF DR. WEIL

Before turning to the remedies the SEC is seeking, we first address Koenig's oral motion to strike and his motion to reconsider. At the close of the SEC's case as to remedies, Koenig orally moved to strike the testimony of Weil, the SEC's remedies expert, pursuant to Rule 26(a)(2) and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993) and its progeny. Koenig, moved to strike the testimony on two grounds. First, he argued that Weil testified as to previously undisclosed opinions in violation of Rule 26(a). Second, he argued that Weil's testimony consisted of unscientific and speculative guesswork. Both grounds lack merit. Therefore, the motion is denied.

Koenig sought to strike Weil's testimony regarding "shareholder loss." Shareholder loss in the context of this case is the dollar figure loss in market value of WM stock associated with Koenig's securities law violations. During the bench trial, Weil testified that shareholder loss attributable to Koenig's violations was approximately $3.59 billion. Koenig's expert, Dunbar, testified that the loss was $1.45 billion. Koenig moved to strike Weil's testimony regarding the $3.59 billion shareholder loss because that figure was not in Weil's expert report. The SEC concedes that the $3.59 billion figure is not in the report. However, Weil's expert report does contain his calculation of the individual loss per share of WM stock attributable to Koenig's violations, which was $7.98 per share. To reach the $3.59 billion figure, Weil merely multiplied the $7.98 per share figure by the number of outstanding shares of WM stock.

Weil's expert analysis came in calculating the $7.98 per share figure, which was disclosed, and not in multiplying that figure by the number of outstanding shares. Therefore, the court will not strike Weil's testimony regarding shareholder loss attributable to Koenig's violations pursuant to Rule 26(a). The court also notes that the shareholder loss calculations by both experts are well in excess of $1 billion. As will be discussed in more detail below, for purposes of analyzing shareholder harm as it relates to a determination of remedies, Dunbar's conservative calculation of shareholder loss is more than sufficient to establish substantial harm. Accordingly, out of an abundance of caution, the court will rely on Dunbar's $1.45 billion calculation even though Weil's figure is admissible and credible.

Koenig also sought to strike the entirety of Weil's testimony as unscientific and speculative. Koenig argues that Weil admitted that he "guessed" when calculating the $1.60 adjusted earning per share ("EPS") figure for 1991, which Weil relied on for his disgorgement calculation. Koenig mischaracterizes Weil's testimony. Weil did not testify that he guessed with respect to the $1.60 EPS figure for 1991. Weil used the $1.60 figure because that is the figure that the WM Compensation Committee used to calculate 1992 bonuses for Koenig and other WM executives. Weil testified that he could not state with any certainty how the Compensation Committee determined the 1992 bonuses for Koenig and other WM executives and any testimony he could give regarding that topic would be a guess. This statement is not grounds for striking Weil's testimony.

Finally, Koenig sought to strike Weil's testimony claiming that his disgorgement calculations were based on the incorrect assumption that the jury found that Koenig made a series of incremental choices to commit fraud between 1992 and 1996. The court disagrees and finds that the assumptions Weil made in his expert report and during his testimony at the hearing are consistent with the jury's findings. Therefore, the motion to strike is denied.

II. MOTION TO RECONSIDER

In Koenig's written opposition to the SEC's request for remedies, he moves the court to reconsider the portion of our May 24, 2004 order wherein we found that the SEC's claims for civil remedies were not time-barred. In that order, we found that the SEC's claims for civil penalties were timely based, in part, on the "discovery of violation" rule that the Seventh Circuit adopted in Law v. Medco Research, Inc., 113 F.3d 781 (7th Cir. 1997). We noted that Law involved Rule 10b-5 claims, but found that the Seventh Circuit's general adoption of the "discovery of violation" rule should be extended to civil penalties in securities fraud cases that are governed by the five-year statute of limitations in 28 U.S.C. § 2462. Koenig moves to reconsider that finding, arguing that it was wrong as a matter of law.

In support of his motion, Koenig relies on SEC v. Jones, No. 05-7044, 2006 WL 1084276 (S.D.N.Y. Apr. 25, 2006). In Jones, the court found that the "discovery of violation" rule does not apply to securities fraud cases governed by the five-year statute of limitations in Section 2462. However, the court in Jones found that the "fraudulent concealment doctrine" could toll the five-year statute of limitations for civil penalties in a securities fraud case. Jones, 2006 WL 1084276 at *6.

We still find that the Seventh Circuit's general adoption of the "discovery of violation" rule in securities fraud cases should extend to civil penalties in cases governed by the five-year statute of limitations in Section 2462. However, we also find that, alternatively, the SEC's civil penalty claims would have been timely under the "fraudulent concealment doctrine" as outlined in Jones. Therefore, the motion to reconsider is denied.

III. REMEDIES

Having dealt with Koenig's preliminary motions, we now address the SEC's request for remedies. The SEC is seeking: (1) a permanent injunction that enjoins Koenig from committing future violations of applicable securities laws; (2) a permanent officer and director ("O&D") bar that prohibits Koenig from holding a position as an officer or director of a publically traded company; (3) disgorgement of $831,500 plus pre-judgment interest at the IRS underpayment rate; (4) civil penalties totaling $3 million; and (5) an indemnity bar prohibiting Koenig from seeking or accepting any payment, reimbursement, or indemnification from any third party for any part of his disgorgement, pre-judgment interest, or penalties.

Koenig seeks a finding that the SEC is not entitled to any remedies. Alternatively, to the extent the court is inclined to award remedies, Koenig argues that disgorgement should not exceed $90,722 plus pre-judgment interest at the rate provided by 28 U.S.C. ยง 1961. If the court awards civil penalties, Koenig urges that a "per violation" approach would not be appropriate and the penalties should not exceed the amount of disgorgement. Finally, Koenig argues that the court does not ...


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