738 F.3d 14
2d Cir.2013Background
- SEC sued Symbol Technologies and officers, including Tomo Razmilovic, for long-running accounting and securities fraud that inflated revenues and pre-tax earnings; complaint allegations deemed admitted after Razmilovic defaulted.
- Razmilovic was CEO/board member during the fraud period (1998–2003) and profited via salary, bonuses, severance, stock-option exercises, collars, and open-market sales.
- Razmilovic, indicted in a related criminal case, remained in Europe and refused a court order to appear in New York for a deposition; the district court found his refusal willful and entered a default sanction under Fed. R. Civ. P. 37.
- After default established liability, the district court held proceedings on relief and concluded disgorgement of $41,753,623.04 (executive compensation + stock-transaction gains), prejudgment interest of $27,260,953.99, and a civil penalty equal to one-half the disgorgement.
- On appeal, Razmilovic challenged (1) the default sanction, (2) expert-based disgorgement calculations (stock-price inflation and compensation causation), (3) prejudgment interest (given his frozen Swiss assets), and (4) the judge’s refusal to recuse.
- The Second Circuit affirmed default and disgorgement, vacated and remanded for recalculation of prejudgment interest with respect to frozen assets, and corrected a clerical error in the civil-penalty figure.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Razmilovic) | Held |
|---|---|---|---|
| Whether entry of default under Rule 37 was proper for failing to appear for deposition | Default appropriate because defendant willfully disobeyed a specific court order after warning; severe sanction justified to enforce discovery and deter fugitivity-related noncompliance | Entry of default was an abuse of discretion; Degen and fugitive-disentitlement principles bar automatic denial of civil process and harsher sanctions; lesser sanctions available | Affirmed: default not barred by Degen because sanction was for willful violation of a discovery order under Rule 37 and court properly weighed factors (willfulness, warning, ineffectiveness of lesser sanctions). |
| Whether district judge should have recused herself | No bias; rulings were lawful case administration and any inadvertent premature rulings were not extrajudicial bias | Judge’s case-management rulings (allowing SEC to reopen, premature rulings) show bias; §455 recusal required | Affirmed: no abuse of discretion. Rulings arose from courtroom proceedings, not extrajudicial sources, and did not show deep-seated antagonism. |
| Proper measure and calculation of disgorgement (executive comp. and stock gains) | Disgorgement reasonably approximates unjust enrichment: disgorge compensation causally tied to fraud and gains measured by stock-price inflation using event-study (SEC expert) | Disgorgement should be much lower; defense expert’s lower inflation estimate preferred; challenge to inclusion of certain compensation and ‘‘paper’’ gains | Affirmed: district court reasonably credited SEC expert (inflation $11.54/share) and distinguished performance-linked compensation; disgorgement of $41,753,623.04 upheld. |
| Prejudgment interest & civil penalty amounts | Prejudgment interest appropriate on disgorgement to deprive defendant of use of ill-gotten gains; civil penalty within statutory discretion (court chose half of disgorgement) | Prejudgment interest improper as ~$17.4M of defendant’s assets were frozen by DOJ (denied use); clerical error inflated penalty by $2M | Mixed: vacated prejudgment-interest award as to sums frozen during government freeze (remanded to determine whether frozen funds will be applied to civil judgment); penalty otherwise within discretion but judgment must be corrected to the amount stated in opinion. |
Key Cases Cited
- Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155 (2d Cir. 1992) (default admits well‑pleaded allegations)
- Degen v. United States, 517 U.S. 820 (1996) (fugitive‑disentitlement doctrine limits but does not bar discovery sanctions when party willfully disobeys court orders)
- National Hockey League v. Metropolitan Hockey Club, Inc., 427 U.S. 639 (1976) (severe sanctions available to courts to enforce orders and deter misconduct)
- SEC v. First Jersey Securities, Inc., 101 F.3d 1450 (2d Cir. 1996) (disgorgement is equitable remedy; reasonable approximation standard)
- Liteky v. United States, 510 U.S. 540 (1994) (judicial rulings or remarks during proceedings do not alone establish disqualifying bias)
- Southern New England Tel. Co. v. Global NAPs Inc., 624 F.3d 123 (2d Cir. 2010) (factors for Rule 37 sanctions: willfulness, efficacy of lesser sanctions, duration, warning)