Legal Opinions - U.S. District Court, Maryland: June 23, 2008

Securities

Collateral estoppel

BOTTOM LINE: Defendant could be collaterally estopped from relitigating issues resolved in a criminal case provided the five- part test set forth in Sedlack v. Braswell Servs. Group, 134 F.3d 219 (4th Cir. 1998) was met.

CASE: S.E.C. v. Resnick, et al. USDMD No. CCB-05-1254 (decided June 3, 2008) (Judge Blake).

FACTS: The SEC sued Mark Kaiser in federal district court, asserting claims of securities fraud, false filings with the SEC, and books and records violations based on violations of the Securities Exchange Act of 1934.

Kaiser was the Executive Vice President of Purchasing, Marketing and Procurement of U.S. Foodservices (USF), and a member of USF's executive committee. He later became USF's Chief Marketing Officer.

The SEC alleged that Kaiser, along with Michael Resnick, USF's Chief Financial Officer, engaged in a scheme to artificially inflate USF and Ahold's earnings in order to meet budgeted earnings targets and obtain, or be in a position to obtain, substantial monetary bonuses. Ultimately, the operating income for two years for Ahold and USF was overstated by some $700 million.

Kaiser allegedly reported inflated earnings from the "promotional allowance" system at USF, and encouraged vendors to sign false confirmation letters, which he then provided to the company's auditors. The SEC also claimed that Kaiser employed improper accounting adjustments to make it appear that USF was meeting earnings targets despite declining sales.

A jury convicted Kaiser in a criminal action based on essentially the same conduct as that alleged by the SEC. He was sentenced to 84 months in prison. Kaiser's sentence was stayed pending his appeal.

The SEC filed a motion in limine as to the effect of Kaiser's pending criminal appeal. The motion sought to use offensive collateral estoppel to bar Kaiser from relitigating the facts underlying his criminal conviction.

The district court granted the SEC's motion, finding that Kaiser's criminal conviction could be used as collateral estoppel, provided the five-part test described in Sedlack v. Braswell Servs. Group, 134 F.3d 219 (4th Cir. 1998) was met.

LAW: The doctrine of collateral estoppel dictates that "once an issue is...determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v.United States, 440 U.S. 147, 153 (1979).

The requirements for exercising collateral estoppel, or "issue preclusion," are that: (1) the issue sought to be precluded must be identical to one previously litigated; (2) the issue must have been actually determined in the prior proceeding; (3) determination of the issue must have been a critical and necessary part of the decision in the prior proceeding; (4) the prior judgment must be final and valid; and (5) the party against whom preclusion is asserted must have had a full and fair opportunity to litigate the issue in the previous forum. Eddy v. Waffle House, Inc., 482 F.3d 674, 679 (4th Cir. 2007) (citing Sedlack, 134 F.3d at 224).

The fact that Kaiser appealed his criminal conviction did not affect the finality of that judgment for purposes of collateral estoppel. "The pendency of a criminal appeal generally does not deprive a judgment of its preclusive effect." United States v. Int'l Brotherhood of Teamsters, 905 F.2d 610, 621 (2d Cir. 1990). "The established rule in the federal courts is that a final judgment retains all of its res judicata consequences pending decision of the appeal." Warwick Corp. v. Maryland Dep't of Transp., 573 F. Supp. 1011, 1014 (D. Md. 1983).

This is true regardless of whether the underlying case is civil or criminal. The criminal conviction against Kaiser was final, however, despite the sentencing court's having stayed enforcement of the sentence pending appeal. See S.E.C. v. O'Hagan, 901 F. Supp. 1461, 1465-66 (D. Minn. 1995). "In the federal courts the general rule has long been recognized that while appeal with proper supersedeas stays execution of the judgment, it does not-until and unless reversed-detract from its decisiveness and finality." Id.

Here, the underlying criminal conviction was final for purposes of collateral estoppel even though the criminal sentence had been stayed pending appeal. Id. Similarly, the fact that Kaiser's sentence had been stayed did not affect whether or not that judgment had become final after it was imposed, even where, as in O'Hagan, 901 F. Supp. at 1465, the court expressed doubt about the outcome on appeal.

COMMENTARY: Kaiser could, in theory, avoid the preclusive effect of his criminal conviction for a substantial period of time by extending his criminal appeal through a request for an en banc hearing or a petition for certiorari to the Supreme Court. That would force the district court either to stay the proceedings indefinitely or waste judicial resources relitigating the facts underlying Kaiser's conviction. S.E.C. v. Blackwell, 477 F. Supp. 2d 891, 901 (S.D. Ohio 2007).