United States Securities and Exchange Commission, Appellee, v. Nicholas A. Zahareas; Tuschner & Company, Inc.; Defendants, John M. Tuschner; Appellant, Euroamerican Securities, S.A. Defendant.
No. 03-2630
United States Court of Appeals FOR THE EIGHTH CIRCUIT
Submitted: February 13, 2004 Filed: July 7, 2004
HEANEY, Circuit Judge.
I. BACKGROUND
This case has been in the courts for over six years and is currently before this court for the fourth time. The facts have been clearly articulated in prior opinions. We summarize them here for the purposes of this appeal.
In July 1993, the Securities and Exchange Commission (SEC) settled a civil enforcement proceeding filed against Nicholas Zahareas resulting in Zahareas being permanently barred from “associating with” an investment broker, dealer, advisor, or company or participating in the securities industry in the United States. In 1996, Zahareas, who was then living in Greece, founded Euroamerican Securities (Euroamerican), a brokerage and financial consulting company doing business in Athens, Greece. Also in 1996, Zahareas entered into an agreement with Tuschner in which Zahareas would recruit Greek investors to open accounts with Tuschner & Co., a securities broker-dealer located in Minneapolis, Minnesota, to purchase shares in an initial public offering that Tuschner & Co. was underwriting.
In 1997, the SEC filed suit against Tuschner, Tuschner & Co., Zahareas, and Euroamerican alleging that Zahareas‘s relationship with Tuschner & Co. violated the 1993 bar order and that the defendants had violated various provisions of the Securities and Exchange Act. On January 28, 1998, the district court denied the defendants’ motions to dismiss for lack of jurisdiction and granted the SEC‘s motion for a preliminary injunction. The defendants appealed the injunction and a divided panel of this court affirmed the district court‘s order. SEC v. Zahareas, 167 F.3d 396 (8th Cir. 1999).
Tuschner then filed for attorney‘s fees pursuant to
II. EQUAL ACCESS TO JUSTICE ACT
The EAJA provides that a prevailing party is entitled to an award of fees and expenses in any action brought by or against the United States “unless the court finds that the position of the United States was substantially justified or that special circumstances make an award unjust.”
The substantial justification standard, however, should not be used to deter the government from bringing cases of first impression or offering novel arguments. The special circumstances exception “is a ‘safety valve’ designed to ‘insure that the Government is not deterred from advancing in good faith the novel but credible extensions and interpretations of the law that often underlie vigorous enforcement efforts.‘” Russell v. Nat‘l Mediation Bd., 775 F.2d 1284, 1290 (5th Cir. 1985) (quoting H.R. Rep. No. 96-1418 at 11 (1980)). Still, the mere fact that the government advances a novel argument does not automatically insulate it from EAJA liability. Keasler, 766 F.2d at 1234 (“That a case presents an issue of first impression in the forum does not ipso facto make the government‘s position in the litigation reasonable.“); Russell, 775 F.2d at 1290 (stating that the special circumstances
In addition, the EAJA provides that the “United States shall be liable for such fees and expenses to the same extent that any other party would be liable under the common law.”
III. ANALYSIS
We review the district court‘s decision denying attorney‘s fees under the EAJA for an abuse of discretion; reviewing conclusions of law de novo and findings of fact for clear error. United States Dep‘t of Labor v. Rapid Robert‘s Inc., 130 F.3d 345, 347 (8th Cir. 1997).
A. Substantial Justification
The district court cited to several factors in finding that the SEC‘s case was substantially justified. First, the district court referred to the previous district and circuit court holdings in the government‘s favor. According to the district court, the
The fact that the district court and our court found for the SEC at various stages in the litigation does not automatically grant the government immunity from EAJA liability. See Herman v. Schwent, 177 F.3d 1063 (8th Cir. 1999) (reversing district court and granting attorney‘s fees); Friends of the Boundary Waters Wilderness, 53 F.3d at 885 (holding that the district court erred in denying fees by relying “too heavily upon its original opinion and Judge Magill‘s dissent from our decision reversing that opinion“). Instead, we must fully analyze the facts and law under the applicable standards. In addition, we have the benefit of looking at the case in its entirety, reviewing all the issues presented and the SEC‘s actions both prior to and during the litigation. From this vantage point, we find that the SEC‘s case was not substantially justified.
The SEC‘s legal theory in this case went through several twists and turns. Originally, the SEC argued that Zahareas was akin to an employee of Tuschner & Co. and, therefore, was “associated with” Tuschner & Co. In granting the preliminary injunction, the district court agreed with the SEC and found both that Zahareas was an agent of Tuschner & Co., and that “Zahareas exerted control over Tuschner & Co.”
The SEC‘s changing legal theories were accompanied by unsupportive facts. The SEC claimed that the relationship between Tuschner and Zahareas was so close that Tuschner effectively “controlled” Zahareas. The findings of our court, however, directly contradict this assertion. Our court found that Zahareas was never on Tuschner & Co.‘s payroll, that Tuschner had never visited Zahareas‘s office and knew little about how Zahareas conducted his business, and that Zahareas conducted his own financial consulting business with his own Greek clients and his own employees, none of whom were hired by or took direction from Tuschner. “Simply put, the SEC failed to present evidence sufficient for a reasonable jury to conclude that Zahareas was ‘controlled by’ Tuschner.” Id. at 1107.
The SEC‘s changing legal theories and nonconforming facts were likely a result of its failures during its investigation of Tuschner. The SEC fell short on several procedural fronts while investigating Zahareas and Tuschner. First, the SEC failed to obtain testimony or documents from Zahareas before filing suit. The SEC entered this litigation with the belief that Zahareas established Euroamerican specifically to conduct business with Tuschner & Co., when in fact Euroamerican is a financial consulting business in its own right, conducting business with several other Greek companies which trade in Greek securities and employing more people than Tuschner & Co. ever did. Second, the SEC failed to make inquiries of Greek securities regulators as to the business activities of Euroamerican until nearly two years after it filed an action against Tuschner. Third, the SEC failed to allow
The SEC argues that the information eventually obtained from Zahareas and the Greek regulators was not dispositive of the SEC‘s case. Perhaps not, but the information would have aided the SEC in determining the extent and significance of Zahareas‘s relationship with Tuschner & Co. This, no doubt, would have affected the SEC‘s decision to bring an action and the legal theory under which an action would have been brought. In addition, had Tuschner and Zahareas been able to make a
It is not our intent to tell the SEC how to conduct its investigations or how to decide when to bring an action. In this case, however, we find that the SEC‘s failure to appropriately and adequately investigate Tuschner according to its own rules and guidelines, led the SEC to bring an action based on an ungrounded and unsubstantiated legal theory, and without sufficient factual support. Accordingly, we find that the SEC‘s case was not substantially justified.
B. Special Circumstances
The district court held that an award of attorney‘s fees was not warranted in this case because the novel argument presented by the SEC fell under the special circumstances exception. See
We find it difficult, however, to protect the SEC from liability due to its presentation of a novel argument in this case when the SEC failed to thoroughly investigate before bringing suit. See United States v. Estridge, 797 F.2d 1454, 1458
C. Bad Faith
An award of attorney‘s fees for government actions taken in bad faith is only available in “exceptional circumstances.” Havrum v. United States, 204 F.3d 815, 819 (8th Cir. 2000) (citing Brown, 916 F.2d at 495). Although the SEC‘s actions were not substantially justified, we cannot say that the SEC‘s actions were “vexatious, wanton or oppressive.” Brown, 916 F.2d at 495). Therefore, we hold that the SEC‘s conduct was not in bad faith and did not violate
D. Eligibility for an Award
The goal of the EAJA is to remove the deterrent effect of having to pay attorney‘s fees to defend against unreasonable government action. SEC v. Comserv Corp., 908 F.2d 1407, 1415 (8th Cir. 1990). The EAJA provides for the award of attorney‘s fees if: (1) the person is a prevailing party; (2) the individual‘s net worth did not exceed $2,000,000 at the time the civil action was filed; and (3) the fees and expenses were “incurred by that party in [the] civil action” in which it prevailed.
According to the district court, because Tuschner & Co. was contractually obligated to pay Tuschner‘s fees, Tuschner never actually “incurred” any fees. Even though Tuschner stated that he agreed to be personally responsible for the fees, the district court found that “no such agreement has been produced by Tuschner or his attorneys [and] no evidence has been produced indicating that Tuschner ever actually paid a bill.” (Appellant‘s Addendum B at 20.)
Tuschner submitted in an affidavit that Tuschner & Co. agreed to pay for his legal expenses, but later reneged on that agreement. Since entering that agreement, Tuschner & Co. has dissolved, filed for bankruptcy, and has failed to pay the fees. It follows, both logically, and according to Tuschner‘s sworn statement, that he is currently obligated to pay the fees. Tuschner, and his former company, Tuschner & Co., has been embroiled in litigation with the SEC for over six years. As a result, Tuschner has been unable to work in his chosen profession and his company has gone bankrupt; all due to an action brought by the SEC which we find to have lacked substantial justification. The district court listed several items that Tuschner should have presented to prove that he actually incurred fees; such as a written agreement between Tuschner and his counsel, copies of bills, or cancelled checks. We know of no case that requires such documentation. Both Tuschner and his attorney have submitted affidavits stating that Tuschner & Co. has not paid the fees, that Tuschner & Co. has gone bankrupt and no longer exists, and that Tuschner has agreed to be responsible for the fees. The record lacks any evidence to the contrary and, therefore,
CONCLUSION
For the foregoing reasons we find that the SEC‘s case was not substantially justified, that special circumstances do not dictate against awarding fees, and that Tuschner did incur legal fees for the purposes of the EAJA. Accordingly, we reverse the district court and remand for proceedings consistent with this opinion.
United States Securities and Exchange Commission, Appellee, v. Nicholas A. Zahareas; Tuschner & Company, Inc.; Defendants, John M. Tuschner; Appellant, Euroamerican Securities, S.A. Defendant.
No. 03-2630
United States Court of Appeals FOR THE EIGHTH CIRCUIT
Though I agree with much of the majority‘s analysis, I cannot concur with its holding that the SEC‘s position was not substantially justified. Tuschner can recover fees only if the SEC‘s position was not “substantially justified” or if the SEC brought the action in “bad faith.”
In Pierce, the Supreme Court found that certain “objective indicia” are relevant in determining whether the government‘s position was substantially justified, including without limitation, the stage at which the proceedings were resolved, the terms of any settlement agreement entered into by the parties, and the views
First, the district court denied Tuschner‘s motion to dismiss the SEC‘s action and granted the SEC‘s motion for a preliminary injunction after concluding that the evidence supported a finding that Zahareas and Tuschner & Co. violated the Exchange Act and Tuschner aided and abetted those violations. This court affirmed. The district court subsequently granted the SEC‘s motion for summary judgment, while denying Tuschner‘s cross motion for summary judgment. In addition, this court‘s panel decision reversing the grant of summary judgment was issued over a strong dissent by Judge Bright. Finally, four of the nine judges of this court who considered the SEC‘s petition for rehearing en banc voted to grant the SEC‘s petition, which would have had the practical effect of vacating the panel‘s opinion. The district court concluded that:
[a]ll of these factors individually have, at the very least, some probative force of the existence of substantial justification; collectively, however, these factors stand as a powerful testament to the existence of substantial justification for the SEC‘s position.
The government‘s ability to convince federal judges at the trial and appellate levels of the reasonableness of its interpretation of the law tends to show that the government was substantially justified in bringing this action. See Sierra Club v. Secretary of the Army, 820 F.2d 513, 519 (1st Cir. 1987) (court “readily acknowledge[d] that when the United States wins several rounds but ultimately loses on points, its early success is some evidence of justification which the court should factor into the EAJA analysis“). “Even if the judges’ and Government‘s position is ultimately rejected in a final decision on the merits, it is the ‘most powerful indicator of the reasonableness of an ultimately rejected position.‘” Herman v. Schwent, 177
The majority correctly points out that some success at various stages in the litigation does not automatically grant the government immunity from EAJA liability. In Herman, we reversed the district court‘s denial of attorney‘s fees under the EAJA holding that the district court abused its discretion in concluding that the government‘s position was substantially justified. We rejected the district court‘s conclusion because it based its conclusion upon facts and arguments that we had specifically rejected as clearly erroneous and unsupported by the record. 177 F.3d at 1066. Those are not the facts of this case.
Further, the SEC‘s position that Zahareas was “associated with” and “controlled by” Tuschner was reasonable. In the underlying action, the SEC sought to establish that Zahareas was associated with Tuschner & Co. because sections
The SEC presented evidence that Zahareas was “controlled by” Tuschner & Co. to satisfy section