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S.E.C. v. Bilzerian 112 F.Supp.2d 12
D.D.C.,2000. Aug.
21, 2000. [*13] COUNSEL: Judith Roxanne Starr, Securities
& Exchange Commission, Division of Enforcement, Washington, DC, for
Plaintiff. Paul A. Bilzerian (Pro Se), Tampa, FL. OPINION JUDGE:
STANLEY S. HARRIS, District Judge. This matter now is before the Court on plaintiff
Securities and Exchange Commission’s (“SEC”)
application for an order holding defendant Paul A. Bilzerian in contempt of the
Court’s January 28, 1993, and June 25, 1993, disgorgement orders. The
SEC also seeks an order holding Bilzerian in contempt of the Court’s
November 20, 1998, order directing Bilzerian to file an accounting of his
assets. The Court held a hearing on the SEC’s application for civil
contempt on March 5, 1999. The Court also held a telephone conference with the
parties on April 19, 1999, at which a court reporter was present. In addition,
the parties have submitted numerous memoranda in support of and in opposition
to the SEC’s application (detailed below). After considering the
arguments made and evidence presented by the SEC and Bilzerian (appearing pro
se ), as well as the entire record herein, the Court finds Bilzerian in
contempt of its 1993 disgorgement orders and orders him to purge his contempt
as set forth in the accompanying Order. The Court declines now to find
Bilzerian in contempt of its order for an accounting, but orders him to file
another, more detailed accounting. Also before the Court are Bilzerian’s
motion to strike and request [*14]
for oral argument, and the SEC’s opposition thereto. Upon
consideration of these submissions, as well as the entire record herein, the
Court denies Bilzerian’s motion to strike and request for oral argument.
The Court’s reasons for these decisions follow. PROCEDURAL BACKGROUND This is the latest phase of a long history of
litigation involving Bilzerian and the SEC, both in this Court and elsewhere.
The Court provides a summary of this litigation. A. Criminal Conviction in the Southern District
of New York Bilzerian was convicted of securities fraud and
conspiracy to defraud the United States on September 27, 1989, in the United
States District Court for the Southern District of New York. The Second Circuit
affirmed his criminal conviction. United States v. Bilzerian, 926
F.2d 1285 (2d Cir.1991), and the Supreme Court denied his petition for a writ
of certiorari. Bilzerian v. United States, 502 U.S.
813, 112 S.Ct. 63, 116 L.Ed.2d 39 (1991). He was sentenced to four years
imprisonment and a $1.5 million fine. Bilzerian paid the fine, and the district
court later reduced his sentence to twenty months. In addition to his direct
appeal, Bilzerian moved to vacate and set aside his conviction pursuant to 28 U.S.C.
§ 2255. The district court denied that motion, the Second Circuit
affirmed, and the Supreme Court denied his petition for a writ of certiorari. Bilzerian
v. United States, 1996 WL 524340 (S.D.N.Y.); Bilzerian v.
United States, 127 F.3d 237 (2d Cir.1997); Bilzerian v. United
States, 527 U.S. 1021, 119 S.Ct. 2365, 144 L.Ed.2d 770 (1999). B. Civil Liability in this Court After Bilzerian’s criminal conviction in
New York, the SEC filed this civil suit against him on June 29, 1989. Based on
the collateral estoppel effect of his criminal conviction for securities fraud,
the Court granted the SEC’s motion for partial summary judgment, found
Bilzerian liable for securities fraud, and imposed permanent injunctions
against any further securities law violations by him. SEC v. Bilzerian,
1991 WL 83964 (D.D.C.1991). The Court of Appeals affirmed the Court’s
decision. SEC v. Bilzerian, 29 F.3d 689 (D.C.Cir.1994). His
untimely petition for a writ of certiorari was not accepted for filing. Bilzerian
v. SEC, 514 U.S. 1011, 115 S.Ct. 1350, 131 L.Ed.2d 210 (1995).
See also Bilzerian v. SEC, 514 U.S. 1094, 115 S.Ct. 1820, 131
L.Ed.2d 742 (1995) (denying motion for reconsideration). In connection with his civil liability for
securities fraud, the Court ordered Bilzerian to disgorge $33,140,787.07, his
profit from the fraud, on January 28, 1993. SEC v. Bilzerian, 814
F.Supp. 116 (D.D.C.1993). On June 25, 1993, the Court ordered Bilzerian to
disgorge an additional $29,196,812.46 in prejudgment interest. SEC v.
Bilzerian, 1993 WL 542584 (D.D.C.). The Court of Appeals affirmed
the disgorgement orders. Bilzerian, 29 F.3d at 696. Bilzerian readily admits
that he has yet to pay one penny of the more than $62 million judgment. [FN1]
However, the SEC did not seek to enforce this judgment for more than five
years, due to protracted litigation over the dischargeability of the judgment
in a bankruptcy proceeding. FN1. A newspaper article stated that he is the
fourth biggest non-payer of SEC penalties to date. Michael Schroeder, SEC
Collects Only Half Its Financial Penalties, Wall St. J. (Aug. 26, 1998). C. Bankruptcy Petition in the Middle District of
Florida On April 6, 1991, two days before the
Court’s grant of partial summary judgment against him, Bilzerian filed
for bankruptcy in the Middle District of Florida. [FN2] [*15] During the pendency of the bankruptcy
proceeding, Bilzerian claimed that this Court’s disgorgement judgment
was dischargeable in bankruptcy, while the SEC argued that it was not. On
September 9, 1998, after several years of litigation, the Eleventh Circuit
affirmed the Florida district court’s decision that the disgorgement
judgment was not dischargeable in bankruptcy. In re Bilzerian, 153 F.3d 1278
(11th Cir.1998). Bilzerian then sought rehearing en banc and also filed suit
against the SEC in the Middle District of Florida seeking to set aside the
decision on the ground that it was obtained as a result of the SEC’s
fraud on the court. Bilzerian v. SEC, No.
98-CV-2563 (M.D.Fla.). On December 14, 1998, the Eleventh Circuit denied
Bilzerian’s petition for rehearing en banc. In re Bilzerian, 166
F.3d 355 (11th Cir.1998). On March 16, 1999, the Florida district court granted
the SEC’s motion to dismiss Bilzerian’s fraud case against
it. (Pl.’s Response to Def.’s Suppl. Opp’n Ex. 2.)
On January 24, 2000, the Eleventh Circuit affirmed the district
court’s dismissal of Bilzerian’s fraud case. Bilzerian v.
SEC, 208 F.3d 1011 (11th Cir.2000). On April 11, 2000, the
Eleventh Circuit denied Bilzerian’s petition for rehearing en banc.
[FN3] 213 F.3d 650 (11th Cir.2000) FN2. Apparently, he filed the petition in
response to a $26 million judgment entered against him on April 2, 1991, in
connection with an unrelated matter in Texas. FN3. Per Bilzerian’s request, the Court
takes judicial notice of the briefs and petition for rehearing filed with the
United States Court of Appeals for the Eleventh Circuit. See FRE 201(d). The
Court notes that, until such time as the district court’s decision is
reversed, Bilzerian obtains the relief he sought in the dismissed complaint,
and the disgorgement judgment is redetermined, these filings do not affect the
Court’s analysis of whether he should be held in contempt of this
Court’s disgorgement judgment. See D. Patrick, Inc. v. Ford Motor
Co., 8 F.3d 455, 459 (7th Cir.1993) (noting that a contempt
proceeding is “concerned solely with whether or not the
respondent’s conduct violates a prior court order.”) D. The SEC’s Application To Hold
Bilzerian in Civil Contempt of this Court’s 1993 Orders After the Eleventh Circuit’s decision,
the SEC applied to this Court on November 12, 1998, seeking to hold Bilzerian
in civil contempt of the 1993 disgorgement orders. On November 20, 1998, the
Court issued a show cause order that set a briefing schedule, ordered Bilzerian
to file a sworn accounting identifying all assets in which he had any direct or
indirect beneficial interest, and set a hearing date for January 6, 1999.
Bilzerian filed an opposition to the SEC’s motion on December 23,
1998, and the SEC filed its reply on December 29, 1998. Because Bilzerian
suffered a skiing injury shortly before the hearing, the Court granted
Bilzerian’s January 4, 1999, motion to continue the hearing to a later
date. Over the SEC’s opposition, the Court rescheduled the hearing for
March 5, 1999. [FN4] Because Bilzerian had not yet filed the ordered
accounting, the Court again ordered him to file it. Bilzerian filed his
purported accounting on February 26, 1999. At the March 5 hearing, at
Bilzerian’s request, the Court granted him another opportunity to
respond to the SEC’s motion. Accordingly, he submitted a supplemental
memorandum in opposition to the SEC’s motion for a contempt order on
March 19, 1999, to which the SEC filed a response. The Court held a telephone
conference with the parties on April 19, 1999, during which the Court granted
Bilzerian yet another opportunity to respond to the SEC’s motion. On
May 3, 1999, Bilzerian submitted a second supplemental memorandum in opposition
to the SEC’s motion, to which the SEC filed a response as well as two
supplemental declarations. Finally, on May 25, 1999, Bilzerian filed a motion
to strike certain paragraphs of the SEC’s supplemental declarations as
well as a request for another hearing, to which the SEC filed an opposition. FN4. The SEC opposed any continuance longer than
two weeks, as it understandably was concerned that a long continuance would
give Bilzerian the opportunity to take further steps to frustrate the relief
sought in its motion. (Pl.’s Opp\n to Def.’s Mot. for a
Continuance at 1.) [*16] CIVIL
CONTEMPT STANDARDS The Court has both an inherent and a statutory
power to enforce compliance with its orders through the remedy of civil
contempt. See Shillitani v. United States, 384 U.S. 364, 370, 86
S.Ct. 1531, 16 L.Ed.2d 622 (1966); Petties v. District of Columbia, 897
F.Supp. 626, 629 (D.D.C.1995); SEC v. Current Fin. Servs., Inc., 798
F.Supp. 802, 806 (D.D.C.1992); 18 U.S.C. § 401. A civil contempt
proceeding generally involves three stages: (1) the court issues an order; (2)
after the party disobeys the order, the court issues a conditional order
finding the recalcitrant party in contempt and threatening to impose a
specified penalty unless the recalcitrant party purges itself of contempt by
complying with prescribed purgation conditions; and (3) if the party does not
fulfill the purgation conditions, the court exacts the threatened penalty. See NLRB
v. Blevins Popcorn Co., 659 F.2d 1173, 1184 (D.C.Cir.1981);
SEC v. Parkersburg Wireless, L.L.C., 156 F.R.D. 529
(D.D.C.1994); Current Fin. Servs., 798 F.Supp. at 806. This matter is currently
at the second stage; the SEC seeks an order finding Bilzerian in civil contempt
of the Court’s 1993 disgorgement orders and directing him to comply
with certain conditions in order to purge the contempt. A party is in contempt of court when he
“violates a definite and specific court order requiring him to perform
or refrain from performing a particular act or acts with knowledge of that
order.” SEC v. Bankers Alliance Corp., 881 F.Supp.
673, 678 (D.D.C.1995) (quoting Whitfield v. Pennington, 832
F.2d 909, 913 (5th Cir.1987)). As the party seeking a finding of contempt, the
SEC bears the initial burden of showing, by clear and convincing evidence, that
(1) court orders were in effect, (2) the orders required certain conduct by
Bilzerian, and (3) Bilzerian failed to comply with the Court’s orders.
See Bankers Alliance Corp., 881 F.Supp. at 678.
Bilzerian’s intent is irrelevant; the Court need not find that his
failure to comply with the orders was willful or intentional. See Blevins
Popcorn Co., 659 F.2d at 1184; Petties, 897 F.Supp.
at 629; Current Fin. Servs., 798 F.Supp. at 806. Once the SEC has made a prima facie showing that
Bilzerian did not comply with the Court’s orders, the burden shifts to
Bilzerian to produce evidence justifying his noncompliance. See Chairs v.
Burgess, 143 F.3d 1432, 1436 (11th Cir.1998). Bilzerian may
defend against a finding of contempt on the ground that he is unable to comply
with the orders. [FN5] See United States v. Rylander, 460 U.S. 752, 757, 103
S.Ct. 1548, 75 L.Ed.2d 521 (1983); SEC v. Ormont Drug & Chem. Co.,
739 F.2d 654, 656 (D.C.Cir.1984); Bankers Alliance Corp.,
881 F.Supp. at 678. Notably, Bilzerian bears the burden of production on such a
defense. See Rylander, 460 U.S. at 757, 103 S.Ct. 1548; Ormont
Drug & Chem. Co., 739 F.2d at 657 n. 7; Bankers Alliance
Corp., 881 F.Supp. at 683. A mere claim of poverty—wholly
unrealistic on its face here—without adequate proof is not sufficient
to satisfy his burden. Loftus v. Southeastern Pa. Trans. Auth., 8
F.Supp.2d 464, 467 (E.D.Pa.1998). See also SEC v. Kenton Capital, Ltd., 983
F.Supp. 13, 15 (D.D.C.1997) (finding party’s “bald and
conclusory statements in his affidavit,” without more, were not
sufficient evidence of his inability to comply with the court’s
disgorgement order). Bilzerian must substantiate his inability to comply with
the Court’s orders “categorically and in detail.”
Current Fin. Servs., 798 F.Supp. at 808. See also Huber v. Marine Midland
Bank, 51 F.3d 5, 10 (2d Cir.1995) (stating that it is the
alleged contemnor’s burden to establish his inability to comply
“clearly, plainly, and unmistakably.”). [*17] Further, a party seeking to establish an
impossibility defense to a charge of contempt should “show[ ] that he
has made in ‘good faith all reasonable efforts to comply.’
“ Chairs, 143 F.3d at 1436 (quoting United
States v. Ryan, 402 U.S. 530, 534, 91
S.Ct. 1580, 29 L.Ed.2d 85 (1971)). See Kenton Capital, Ltd.,
983 F.Supp. at 16 (noting that alleged contemnor had burden of proving that
“he has made reasonable efforts to meet his obligations to the
court.”). Cf. Natural Resources Defense Council, Inc. v. Train, 510
F.2d 692, 713 (noting that a court may choose not to hold a party in contempt
if “he has in good faith employed the utmost diligence in discharging
his … responsibilities.”). Thus, to the extent
Bilzerian’s claimed inability to comply has been self-created, it is
not a defense to a finding of contempt. See In re Power Recovery Sys., Inc.,
950 F.2d 798, 803 (1st Cir.1991) (noting that a self-induced inability to
comply does not establish an inability defense); Pesaplastic, C.A. v.
Cincinnati Milacron Co., 799 F.2d 1510, 1521 (11th
Cir.1986) (“[W]here the person charged with contempt is responsible
for the inability to comply, impossibility is not a defense to the contempt
proceedings.”). See also Ormont Drug & Chem. Co.,
739 F.2d at 657 (noting that the court must consider the defendant’s
inability to comply, but only to the extent it was without fault on the
defendant’s part). Finally, Bilzerian cannot avoid a finding of
contempt merely by showing that he is unable to pay the entire $62 million
judgment at this time. Inability to comply is only a complete defense if he
cannot pay any of the judgment; otherwise, he must pay what he can. See SEC
v. Musella, 818 F.Supp. 600, 602 (S.D.N.Y.1993). See also Loftus, 8
F.Supp.2d at 468 (“[U]nless a party is completely unable to comply
with the Court’s Order’s [sic ] due to poverty, he must
comply to the extent that his finances allow him.”). FN5. A party also may defend on the ground of
good faith substantial compliance with the orders, see Food Lion, Inc. v.
United Food & Commercial Workers Int’l Union, 103
F.3d 1007, 1016 (D.C.Cir.1997); Cobell v. Babbitt, 37
F.Supp.2d 6, 9-10 (D.D.C.1999); however, Bilzerian’s opposition
focuses solely on his alleged inability to comply with the orders. DISCUSSION I. Whether Bilzerian is in Contempt of the
Court’s 1993 Disgorgement Orders Bilzerian readily acknowledges that he has not
paid any of the approximately $62 million the Court ordered him to disgorge in
its 1993 orders. Thus, the SEC has easily met its initial burden of
demonstrating Bilzerian’s failure to comply with the Court’s
disgorgement orders by clear and convincing evidence. However, Bilzerian claims
to have no assets with which to pay the disgorgement judgment and therefore
defends against a finding of contempt on the ground that he is presently unable
to comply with the Court’s orders. [FN6] The SEC argues that Bilzerian
has failed to adequately demonstrate his inability to comply with the
Court’s judgment, that he does have the financial ability to pay at least
part of it, and that, to the extent he cannot comply, it is the result of his
own self-induced inability. The Court’s review of the evidence and
arguments presented by the parties leads it to the unmistakable conclusion that
Bilzerian has not established his defense of financial inability and should be
found in contempt of this Court. FN6. While not included in the Argument section
of his opposition, Bilzerian devotes much of the
“Introduction” to rearguing issues already decided by this
and other courts. For example, Bilzerian claims that his New York criminal
conviction was erroneous, that this Court’s grant of summary judgment
and disgorgement orders were inappropriate, and that the Florida district court
should have held that the disgorgement judgment was discharged by his
bankruptcy. Courts of appeals in the Second, District of Columbia, and Eleventh
Circuits, respectively, have rejected these arguments and Bilzerian may not
reargue them in the context of this civil contempt proceeding. A civil contempt
proceeding is not a retrial of the original controversy and does not open to
reconsideration the legal or factual basis of the order alleged to have been
disobeyed. Rylander. 460 U.S. at 756, 103 S.Ct. 1548 (quoting Maggio v. Zeitz, 333 U.S. 56, 69, 68 S.Ct.
401, 92 L.Ed. 476 (1948)). A. Evidence of Bilzerian’s Financial
Status Bilzerian maintains that he has no meaningful
assets with which to pay the [*18]
judgment, claiming that all of his assets were lost, disgorged, or transferred
long ago. (Def.’s Opp’n at 25.) However, the SEC has provided
the Court with substantial, documented evidence of assets which belie his claim
of “poverty.” Bilzerian has transferred his substantial
assets into a complex ownership structure of off-shore trusts and family-owned
companies and partnerships. The following is a description of these assets and
entities and Bilzerian’s relationship to them. Most, if not all, of
this evidence is not disputed by Bilzerian. [FN7] In fact, Bilzerian provided
much of the evidence himself. Bilzerian essentially disputes only the
conclusion the SEC draws from this evidence—that Bilzerian is able to
pay at least part of the disgorgement judgment. FN7. The overwhelming majority of this evidence
is documented by public records, such as property records and
Bilzerian’s public filings with the SEC. 1. The Paul A. Bilzerian and Terri L. Steffan
1995 Revocable Trust (“Family Trust”) The Family Trust is a revocable trust located in
the Cook Islands that was established in 1995 by Bilzerian and his wife, Terri
Steffan. (Def.’s Suppl. Opp’n Ex. 12; Starr Decl. Ex. 15.)
Bilzerian was a settlor of the Trust and, at the time the Court issued its
order to show cause on November 20, 1998, he was both a trustee and a
beneficiary of the Trust as well. (Starr Third Suppl. Decl. Ex. 2.) Bilzerian
was removed as trustee on either December 5, 1998, or November 29, 1998. [FN8]
(Id., Def.’s Mot. To Strike Ex. 3.) He was removed as a beneficiary on
December 21, 1998. (Starr Third Suppl. Decl. Ex. 2.; Def.’s Suppl.
Opp’n Ex. 12; Terri Steffan Decl. ¶ 3; Hodges Decl.
¶ 3.) The current trustees are Bilzerian’s mother- and
father-in-law and the current Trust protector is Bilzerian’s
sister-in-law. (Starr Third Suppl. Decl. Ex. 2; Harry Steffan Decl. ¶
2; Terri Steffan Decl. ¶ 3; Hodges Decl. n 3.; Def.’s Mot. To
Strike Exs. 2, 3.) Apparently, Bilzerian’s wife is the Family
Trust’s sole current beneficiary. (Def.’s Suppl.
Opp’n Ex. 12; Starr Second Suppl. Decl. Ex. 2 at 9 n. 1.) According to
Bilzerian’s wife, her husband “did not contribute any
property or assets to the Family Trust that he individually owned.”
(Def.’s Mot. To Strike Ex. 2.) FN8. A Cimetrix Schedule 13D signed by Bilzerian
states that he was removed as trustee on December 5, 1998 (see Starr Third
Suppl. Decl. Ex. 2); however, Bilzerian has submitted a letter from the trust
protector dated November 29, 1998, removing him and his wife as trustees on
that date. (See Def.’s Mot. To Strike Ex. 3.) The Family Trust is at the apex of the complex
ownership structure into which Bilzerian has transferred his assets. The Family
Trust directly or indirectly holds every other asset or entity documented by
the SEC, with one exception: the Paul A. Bilzerian and Terri L. Steffan 1994
Irrevocable Trust, a trust set up for the benefit of Bilzerian’s
children. The Family Trust owns 100% of the shares of Overseas Holding Company,
owns 100% of the shares of Bicoastal Holding Company, and is the sole limited
partner of Overseas Holdings Limited Partnership. (Harry Steffan Decl.
¶¶ 4, 6-8.) As described in more detail below, these three
entities either directly or indirectly own the following assets: (1) the
Bilzerian family home, valued at approximately $3.5 million; (2) approximately
$407,000 in proceeds from the sale of another house located in Tampa, Florida;
(3) a Minnesota vacation home valued at $792,500; (4) 3,080,000 shares of
common stock in Cimetrix, Inc., valued at approximately $10,010,000; [FN9] and
(5) contracts [*19] with Cimetrix,
Inc., for Bilzerian’s services, valued at approximately $500,000. In
sum, these assets add up to approximately $15.2 million. FN9. According to a Schedule 13D filed with the
SEC on January 8, 1999, the Trust beneficially owns 3,080,000 shares.
(Def.’s Suppl. Opp’n Ex. 12.) The Court calculated the
shares’ value according to the closing sale price of Cimetrix, Inc.,
stock on July 24, 2000: $3.25. See Yahoo! Finance, OTC BB Historical Quotes:
CMXX.OB <http://chart.yahoo.com/d? s=cmxx.ob>. The Court notes that the
value of Cimetrix shares has fluctuated considerably over the past four years
from a high in June 1996 of $9.50 to a low in March 1999 of $0.4375. Id. Thus,
the Court’s valuation of these shares is subject to change. Bilzerian does not dispute that the Family Trust
owns the listed assets, that he was a settlor of the Trust, and that he was
also, until very recently, both a trustee and beneficiary of the Trust. [FN10]
He simply claims that he presently is not a beneficiary or trustee of the
Trust. (Def.’s Opp’n at 4- 5.) As evidence of his lack of a
beneficial interest in or control over the Trust, Bilzerian provides only the
declarations of his father-in-law, his wife, and the Trust’s attorney.
These declarations state that Bilzerian is not a trustee or beneficiary of the
Trust, that he was removed as a beneficiary of the Trust by the Trust protector
(who is his sister-in-law) on December 21, 1998, that he did not participate in
his removal, that he was informed he was going to be removed several weeks
before December 21, 1998, that he has no authority to dissolve the Trust, and
that, if the Trust were dissolved that day, Bilzerian would not be entitled to
receive any of its money or property. (Harry Steffan Decl. ¶ 3; Terri
Steffan Decl. ¶¶ 3-4; Hodges Decl. ¶¶ 3-4.)
Bilzerian has not provided the Court with a copy of the Trust instrument or the
Trust’s financial records. FN10. A Schedule 13D filed as late as December
15, 1998, and signed by Bilzerian, states that Bilzerian is a beneficiary of
the Family Trust. (Starr Third Suppl. Decl. Ex. 2.) 2. Overseas Holding Company Overseas Holding Company is a Cayman Islands
corporation. (Def.’s Suppl. Opp’n Ex. 12.) The Family Trust
owns 100% of its shares. (Id.; Harry Steffan Decl. ¶ 7.)
Bilzerian’s wife is president of the company. (Terri Steffan Decl.
¶ 2.) Apparently, it was formed in December 1998 for only one
purpose—to be the general partner of Overseas Holdings Limited
Partnership. (Harry Steffan Decl. ¶ 9.) As general partner of the Partnership
it indirectly owns (1) the Bilzerian family home, (2) the proceeds from the
sale of the Tampa house, (3) the Minnesota property, and (4) 2,900,00 shares of
common stock in Cimetrix, Inc. (Def.’s Suppl. Opp’n Ex. 12.)
Bilzerian does not dispute these facts, but claims that he is not an officer,
director, employee, or shareholder of Overseas Holding Company.
(Def.’s Opp’n at 3, 5; Harry Steffan Decl. ¶ 10.) He
has not provided copies of Overseas Holding Company’s formation
documents to the Court, nor any of its financial records. 3. Overseas Holdings Limited Partnership Overseas Holdings Limited Partnership was formed
on December 21, 1995, and is a Nevada limited partnership. (Starr Decl. Ex.
14.) The Partnership has only two partners—a limited partner that owns
99% and a general partner that owns 1%. (Def.’s Suppl. Opp’n
Ex. 12; Starr Suppl. Decl. Ex. 2 at 9 n. 1.) The sole limited partner is the
Family Trust. (Harry Steffan Decl. ¶ 8; Def.’s Suppl.
Opp’n Ex. 12.) As of December 1998, the sole general partner is
Overseas Holding Company. (Harry Steffan Decl. ¶ 8; Def.’s
Suppl. Opp’n at 3-5.) As the Family Trust owns 100% of the shares of
Overseas Holding Company, it effectively owns all of the Partnership. Before
December 1998, the sole general partner was Bicoastal Holding Company (which is
also 100%-owned by the Trust). (Starr Decl. Ex. 14.) The Partnership directly
owns (1) the Bilzerian family home, (2) the proceeds from the sale of the Tampa
house, (3) the Minnesota property, and (4) 2,900,000 shares of common stock in
Cimetrix, Inc. (Tr. 3/5/99 Hr’g Ex. 1; Starr Decl. Exs. 12, 13, 15;
Def.’s Suppl. Opp’n Ex. 12.) Bilzerian has not provided any financial
records for the Partnership. [*20] 4.
Bicoastal Holding Company Bicoastal Holding Company is a private investment
company incorporated in Nevada. Until 1995, Bicoastal was held by Bilzerian and
his wife as tenants by the entireties. In December 1995, Bilzerian and his wife
transferred all of Bicoastal’s shares to the Family Trust. Thus, since
December 1995, the Family Trust has owned 100% of the shares of Bicoastal.
(Def.’s Suppl. Opp’n at 7 & Ex. 12; Harry Steffan Decl. ¶
4; Hodges Decl. ¶ 5; Starr Decl. Ex. 15 at 11 n. 1.) Bilzerian is
president and a director of Bicoastal. (Harry Steffan Decl. ¶ 5;
Hodges Decl. ¶ 5.) Bicoastal currently owns about 180,000 Cimetrix
shares. (Def.’s Suppl. Opp’n Ex. 12; Starr Suppl. Decl. Ex. 2
at 9.) It previously owned 600,000 shares, but sold 300,000 shares on October
19, 1997, for $201,000, and disposed of another 100,000 shares on December 26,
1997, for an undisclosed amount. (Starr Decl. Exs. 18, 20.) In addition to
being a major Cimetrix shareholder, Bicoastal receives a substantial monthly
income from Cimetrix pursuant to an employment contract for
Bilzerian’s services as president, CEO, and director of Cimetrix
(discussed in more detail below). Bilzerian claims to have no present ownership
interest in Bicoastal and states that he has not received a salary from
Bicoastal in three years. [FN11] (Def.’s Suppl. Opp’n at 7,
10.) As supporting evidence, he provides a declaration from his father-in-law
stating that “Bicoastal Nevada did not pay Paul A. Bilzerian a salary
in 1996, 1997 or 1998 and has not paid him a salary in 1999.” (Harry
Steffan Decl. ¶ 11.) Bilzerian has refused to provide
Bicoastal’s formation documents or its financial records to the Court
on the ground that Bicoastal’s board of directors (consisting of his
father-in-law, his mother-in-law, and his wife) have informed him that the
company’s business records are not to be used by him or provided to
third parties for personal purposes. (Bilzerian Suppl. Decl. ¶ 3.) FN11. In other submissions to the Court,
Bilzerian claims to have not been paid a salary since 1989 or 1987. (Bilzerian
Decl. ¶ 7; Terri Steffan Decl. ¶ 6; Bilzerian Suppl. Decl.
¶ 6.) 5. The Bilzerian Family Home Bilzerian and his family live in an over 30,000
square foot mansion in Tampa, Florida. [FN12] In 1993, the mansion was
appraised at $3.5 million. (Starr Decl. Ex. 10.) The most recent tax assessment
valued the home at $3.4 million. (Starr Decl. Ex. 8 at 3.) The home is believed
to be currently for sale with no set asking price. Bilzerian and his wife
originally owned it jointly. In 1991, before the Court’s disgorgement
orders, Bilzerian transferred his interest in the property to his wife to make
it her sole property. [FN13] (Starr Decl. Ex. 3 at 15-16.) In June 1994, one
week after the closing of the bankruptcy settlement and more than one year
after the Court issued its disgorgement orders, Bilzerian’s wife
transferred the property back to both her and Bilzerian as tenants by the
entireties. [FN14] (Def.’s Suppl. Opp’n at 5; Terri Steffan
Decl. ¶ 5; Starr Decl. Ex. 8.) As of December 1998, this appeared to
be the current state of ownership according to county records. (Id.) However,
at the March 5, 1999, show cause hearing, the SEC introduced evidence that
Bilzerian and his wife transferred the property to Overseas Holdings Limited
Partnership in March 1997, but did not record the transfer until January 6, 1999.
(Tr. 3/5/99 Hr’g [*21] Ex.
1. See also Def.’s Suppl. Opp’n at 5 & Ex. 8.) Bilzerian
stated that he did not know why the 1997 deed was not recorded earlier. (Tr.
3/5/99 Hr’g at 32-33.) Thus, the current owner of the Bilzerian family
home is the Family Trust, as it owns the Partnership in its entirety. Bilzerian
disclaims any interest in the home. FN12. According to a newspaper article, the home
is believed to be the largest private residence in the Tampa Bay area. See Jean
Gross, Steffan Manor on the Block: Area’s Largest Home for Sale, Tampa
Tribune (Feb. 11, 1999). FN13. Bilzerian states that he transferred his
interest to his wife so that she could qualify for a loan to complete
construction on the mansion and that the home was completed primarily with her
own money. (Def.’s Opp’n at 15-16; Bilzerian Decl. ¶
5; Tr. 3/5/99 Hr’g at 35.) FN14. Bilzerian states that the primary purpose
for this transfer was so that he could assist his wife in property tax litigation
concerning the property. (Tr. 3/5/99 Hr’g at 37.) 6. Florida Property at Taray Bilzerian and his wife owned another Florida home
jointly, which they also transferred to his wife’s sole ownership in
1991, before the Court’s disgorgement orders. (Starr Decl. Ex. 3 at
15-16.) In June 1994, a court- approved settlement with Bilzerian’s
bankruptcy trustee provided his wife undisputed ownership of the property.
[FN15] (Def.’s Opp’n at 16; Def.’s Suppl.
Opp’n at 3 & Ex. 5.) On December 20, 1995, both Bilzerian and his
wife signed documents transferring the home to Overseas Holdings Limited
Partnership. [FN16] (Def.’s Suppl. Opp’n at 6 & Ex. 9;
Starr Decl. Ex. 13.) Bilzerian claims that he had no ownership interest in the
property at the time, but was advised by his attorney to sign the deed in order
to remove any cloud on the title that might impair the property’s
marketability. (Def.’s Opp’n at 16; Bilzerian Decl.
¶ 5.) On May 29, 1998, Bilzerian and his wife, by quitclaim deed, and
the Partnership, by warranty deed, transferred the property to third parties
for $667,000. (Def.’s Suppl. Opp’n at 6 & Ex. 10; Starr
Decl. Ex. 17.) About $260,000 of the sale proceeds were used to pay the
bankruptcy settlement. (Tr. 3/5/99 Hr’g at 36; Def.’s Suppl.
Opp’n Ex. 3.) Thus, the current owner of the remaining $407,000 in
proceeds is the Family Trust, as it owns the Partnership. Bilzerian disclaims
any interest in these proceeds. FN15. The bankruptcy trustee filed suit against
Bilzerian’s wife seeking to set aside three property transfers as
fraudulent conveyances. (Def.’s Suppl. Opp’n Ex. 1; Tr.
3/5/99 Hr’g at 36.) Bilzerian and his wife ultimately settled with the
trustee for $310,000. (Id.; Def.’s Suppl. Opp’n Ex. 3). FN16. Notably, the transfer took place the day
before the Partnership’s formation documents were filed. 7. Minnesota Property Bilzerian and his wife owned a vacation home in
Minnesota, which they transferred to his wife’s sole ownership in
February 1991, before this Court’s disgorgement orders.
(Def.’s Suppl. Opp’n at 2.) In June 1994, a court- approved
settlement with Bilzerian’s bankruptcy trustee provided his wife
undisputed ownership of the property. (Def.’s Opp’n at 16;
Def.’s Suppl. Opp’n at 3 & Ex. 3.) On December 20, 1995,
both Bilzerian and his wife signed documents transferring the home to Overseas
Holdings Limited Partnership. [FN17] (Def.’s Suppl. Opp’n at
3 & Ex. 5; Starr Decl. Ex. 12.) Bilzerian claims that he had no ownership
interest in the property at the time, but was advised by his attorney to sign
the deed in order to remove any cloud on the title that might impair the
property’s marketability. (Def.’s Opp’n at 16;
Bilzerian Decl. ¶ 5.) Thus, the property is currently owned by the
Family Trust, as it owns the Partnership. Bilzerian disclaims any interest in
the property. The property is currently valued at $792,500, according to recent
tax assessments. (Starr Decl. Ex. 16). FN17. Again, the transfer took place the day
before the Partnership’s formation documents were filed. 8. Six million shares of Cimetrix stock In June 1994, Cimetrix granted Bicoastal Holding
Company options to purchase up to six million shares of its common stock for
$0.16 per share. (Def.’s Suppl. Opp’n at 8.) At the same
time, Bicoastal paid its shareholders—at that time, only Bilzerian and
his wife—a dividend of options to purchase 5.4 million shares for
$0.16 per share. (Id.) Bilzerian and his wife then transferred options to
purchase 2.4 million shares to an irrevocable trust [*22] set up for the benefit of their children.
(Id. at 9.) In December 1995, Bilzerian and his wife transferred the remaining
options to purchase three million shares to Overseas Holdings Limited
Partnership, thus effectively to the Family Trust. (Id.) In April 1997,
Bicoastal, the Family Trust, and the Children’s Trust exercised their
options and acquired six million shares of Cimetrix stock. [FN18] (Id.) About
600,000 shares have been sold, for what amount Bilzerian has not made known to
the Court. Of the approximately 5.4 million shares that remain, 2,315,000 are
owned by the Children’s Trust, 180,000 are owned by Bicoastal, and
2,900,000 are owned by the Partnership. Because the Family Trust owns Bicoastal
and the Partnership, it is the beneficial owner of 3,080,000 shares. As
Bilzerian claims to have no interest in these entities, Bilzerian claims to
have no interest in these shares. The total current value of the 5.4 million
remaining shares is approximately $17.55 million. See supra note 9. FN18. The value of Cimetrix shares on April 30,
1997, was $5.375 per share. See Yahoo! Finance, OTC BB Historical Quotes:
CMXX.OB <http:// chart.yahoo.com/d?s=cmxx.ob>. Thus, deducting the $0.16
exercise price, the total value of the shares at the time they were acquired
was approximately $31,290,000. 9. Cimetrix Employment Contracts Bilzerian is the president, CEO, and a director
of Cimetrix, Inc. (Starr Second Suppl. Decl. Ex. 2 at 2.) Bicoastal and
Cimetrix have contracted to have Bilzerian’s salary paid directly to
Bicoastal, rather than to Bilzerian himself. (Starr Second Suppl. Decl. Ex. 2
at 5; Starr Decl. Exs. 15, 18.) The most recent contract provides for a $10,000
per month salary and a $1,500 monthly living allowance. (Starr Second Suppl.
Decl. Ex. 2 at 7 & E-1.) The contract also provides Bilzerian with housing,
the use of an automobile, and all reasonable travel expenses, including one
coach class round trip airfare per month to any destination in the United
States. (Id.) The contract began on April 1, 1999, and extends through December
31, 2000. (Id.) Thus, pursuant to this contract, Bicoastal will receive
$241,500 from Cimetrix for Bilzerian’s services, excluding the value
of the housing, car, and airfare. In addition, Bicoastal received $120,000 for
Bilzerian’s services in 1998, $90,000 in 1997, and $50,000 in 1996.
(Starr Second Suppl. Decl. Ex. 2 at 5.) In addition to the $10,000 per month
salary, the 1998 contract also provided for all living expenses and paid $2,700
a month in rent on a home in Utah for Bilzerian. [FN19] (Starr Decl. Ex. 15 at
9-10, Ex. 18.) Notwithstanding these facts, Bilzerian insists that he is not an
employee of Cimetrix, is not paid a salary, and disclaims any interest in these
contracts. (Def.’s Opp’n at 18.) As evidence, he provides a
copy of his 1997 tax return in which he has claimed to have earned no wages.
(Def.’s Suppl. Opp’n Ex. 13.) However, Bilzerian does not
dispute that Cimetrix pays this salary to Bicoastal as compensation for his
services as president, CEO, and a director of Cimetrix. FN19. The 1998 contract also paid Bicoastal
$4,000 per month for the services of Bilzerian’s wife. The filing does
not disclose her position with the company or the services she provides to the
company. (Starr Decl. Ex. 15 at 10.) 10. Children’s Trust Bilzerian and his wife set up an irrevocable
trust for the benefit of their children in 1994. (Def.’s
Opp’n at 8.) As noted above, Bilzerian and his wife transferred
options to purchase 2.4 million Cimetrix shares to this Trust in June 1994.
(Id.) The Trust exercised these options in April 1997. (Id. at 9.) The Trust
currently holds 2.315 million shares of Cimetrix stock. (Starr Second Suppl.
Decl. Ex. 2 at 8.) 11. Other Evidence of Bilzerian’s
Alleged Financial Inability In addition to providing evidence relating to the
specific assets and entities noted [*23]
above, Bilzerian provided evidence relating to his claimed general financial
inability to comply. Bilzerian submitted a sworn declaration, dated December
16, 1998, stating that he disgorged all of his assets to the bankruptcy trustee
in 1991 and that he “presently do[es] not own any assets other than
clothing, a used Casio watch, and the like.” (Bilzerian Decl.
¶¶ 6- 7). However, he expressly qualifies this statement by
claiming not to understand what it means to have an “indirect
beneficial interest” in an asset. (Id.) Bilzerian submitted a sworn
accounting, dated February 25, 1999, stating that he has assets with an estimated
value of less than $5,120. [FN20] In addition, he submitted a sworn declaration
made by his wife on May 1, 1999, stating that: (1) “To the best of my
knowledge, my husband has not individually owned any other meaningful assets
since 1991.”; (2) “To the best of my knowledge, my husband
has not been paid a salary since 1989.”; and (3) “To the best
of my knowledge, my husband has no means or ability to pay any portion of the
Disgorgement Judgment obtained by the SEC in January 1993.” (Terri
Steffan Decl. ¶ 6.) FN20. Specifically, he lists, inter alia, the
following assets: (1) a Casio watch valued at less than $20; (2) cash on hand
of less than $100; and (3) “miscellaneous” valued at less
than $5,000. (Bilzerian Accounting.) B. Analysis of Bilzerian’s Financial
Inability Defense Based on its review of the above evidence, the
parties’ arguments, and the case law, the Court finds that Bilzerian
has fallen far short of the showing required to establish a defense of
financial inability. First, he has not provided adequate documentation to
establish “categorically and in detail” his inability to
satisfy the Court’s orders, at least in part. In fact, the Court finds
substantial evidence of his ability to at least partially comply with its
Orders. Second, the Court finds that Bilzerian has not made all reasonable
efforts to comply with the Orders. In fact, the Court finds he has purposefully
sought to insulate his assets from the Court’s reach. Third, the Court
finds that, to the extent that Bilzerian cannot comply with its Orders, it is
the result of his own machinations. 1. Bilzerian has not demonstrated his financial
inability to comply “categorically and in detail” The Court finds that Bilzerian has not met his
burden of demonstrating his present inability to comply “categorically
and in detail.” See Current Fin. Servs., 798 F.Supp. at 808. To
substantiate his purported complete financial inability to comply, Bilzerian
has provided his own declaration, an “accounting,” a
declaration made by his wife, and his 1997 tax return. [FN21] The Court finds
that this evidence does not satisfy his burden. Neither Bilzerian nor his wife
is a disinterested party; accordingly, their unsupported, conclusory
declarations that Bilzerian has no assets will not satisfy his burden. See
Kenton Capital, Ltd., 983 F.Supp. at 16 (finding that a party’s
“bald and conclusory statements in his affidavit,” without
supporting documentation, were not sufficient evidence of his inability to
comply with the court’s disgorgement order); Huber, 51 F.3d at 10
(noting that conclusory statements of poverty are inadequate to carry
one’s burden of establishing an inability to comply); In re Spanish
River Plaza Realty Co., 155 B.R. 249, 255 (Bankr.S.D.Fla.1993) (finding that
“bare financial statements” prepared by interested parties
and unsupported by documentation such as bank statements and financial records
failed to establish an inability to comply). FN21. Bilzerian also has submitted evidence to
the Court specifically addressing the SEC’s claims about
Bilzerian’s ownership of particular assets. Bilzerian has not supported his submissions with
any financial records other than his 1997 tax return, which states that he
earned no income that year. The Court finds that the return is insufficient
support [*24] of
Bilzerian’s claim of financial inability, for two reasons. First, a
tax return by its nature provides only information about income earned during
that filing year, not the total amount of assets held by the taxpayer. Thus,
one tax return is of extremely limited utility in assessing
Bilzerian’s inability claim. Second, a tax return is a self-reporting
document, and the Court believes that Bilzerian has not properly reported his
income. According to Cimetrix’s filings with the SEC, the company paid
$90,000 for Bilzerian’s services in 1997. Although by contractual
arrangement this salary is paid directly to Bicoastal, Bilzerian is the person
who earned the income and therefore, according to well-settled law, the salary
is plainly income attributable to him. See Lucas v. Earl, 281 U.S. 111, 114-15, 50
S.Ct. 241, 74 L.Ed. 731 (1930) (holding that the predecessor tax statute taxed
salaries “to those who earned them” and that “the
tax could not be escaped by anticipatory arrangements and contracts however
skillfully devised.”); United States v. Basye, 410 U.S. 441, 450, 93
S.Ct. 1080, 35 L.Ed.2d 412 (1973) (“The principle of Lucas v. Earl,
that he who earns income may not avoid taxation through anticipatory arrangements
no matter how clever or subtle, has been repeatedly invoked by this Court and
stands today as a cornerstone of our graduated income tax system.”); United
States v. Beall, 970 F.2d 343, 345-46 (7th Cir.1992) (holding
that the government had proved a tax deficiency where defendant had arranged to
have his checks paid to an association but that association did not pay any
portion of the money back to him.). Moreover, although Bilzerian states that he
does not receive a salary from Bicoastal, he admits that in exchange for his
employment with Bicoastal he receives “living expenses, [a] house,
[and a] car.” (Tr. 3/5/99 Hr’g at 43- 44.) Payment of these
expenses is also taxable income. See England v. United States, 345
F.2d 414 (7th Cir.1965). Thus, the Court finds that Bilzerian’s 1997
tax return proves nothing and is entitled to no weight. Without support, the
Court is unwilling to accept the word of Bilzerian and his wife. See Kenton
Capital, Ltd., 983 F.Supp. at 15. Aside from the lack of supporting documentation,
the declarations of Bilzerian and his wife are evasive and incomplete, as they
do not unqualifiedly state that Bilzerian has no assets. See United States
v. Roberts, 858 F.2d 698, 701 (11th Cir.1988) (noting that evasive
and incomplete testimony will not satisfy the alleged contemnor’s
burden of production). Bilzerian’s December 16, 1998, declaration
expressly qualifies his statement that he has no assets by noting that he does
not understand what it means to have an “indirect beneficial
interest” in an asset. [FN22] (Bilzerian Decl. ¶ 7.) His
cover letter to the accounting he filed on February 26, 1999, again claims that
he does not know what the Court means. Assets in which Bilzerian may have an
indirect beneficial interest are at the heart of this contempt application. The
SEC’s primary argument is that Bilzerian has attempted to hide his
ability to comply with the Court’s orders by transferring assets he
held directly into off-shore trusts and other entities in which he maintains an
indirect beneficial interest. Thus, in Bilzerian’s case, failing to
include indirect beneficial interests is a glaring omission and, as a result,
the Court finds that his declaration and “accounting” are
entitled to little, if any, weight. Bilzerian’s declaration is also
misleading; he claims to have disgorged all of his assets to the bankruptcy
trustee, but does not mention that he transferred or exempted substantially all
of his assets before filing for bankruptcy and that the bankruptcy estate
consisted of only $310,000. His wife’s declaration suffers from the
same deficiencies. She states that Bilzerian has not “individually
owned any other meaningful assets [*25]
since 1991.” (Terri Steffan Decl. ¶ 6). By using the
qualifier “individually,” she expressly excludes from her
statement all assets held by her and Bilzerian jointly. The Court may consider
all potential sources of funds available to Bilzerian, including jointly-owned
assets. See Hodgson v. Hotard, 436 F.2d 1110, 1115-16 (5th
Cir.1971). Thus, her exclusion of assets held jointly is another glaring
omission; a one-half interest in Bilzerian’s and his wife’s
jointly-held assets could be a very substantial financial resource. Thus, the
Court also finds that his wife’s declaration is entitled to little, if
any, weight. FN22. As discussed in more detail below, the
Court does not find Bilzerian’s claim of ignorance credible. The Court also finds that Bilzerian has not
demonstrated “categorically and in detail” that he lacks any
beneficial interest in or control over the Family Trust (which, as noted above,
indirectly and directly holds assets with a total value of approximately $15.2
million). Bilzerian claims to have no present beneficial interest in the Trust,
as the Trust protector removed him as a beneficiary on December 21, 1998.
However, Bilzerian has not provided the Court with the most important evidence
of his relationship to the Trust: a copy of the trust instrument. [FN23] In
light of the nature of Cook Islands’ trusts, the omission deeply
concerns the Court. The Cook Islands are a popular location for asset
protection trusts, as the laws of the Cook Islands provide a settlor with much
greater control over the trust than any United States jurisdiction allows. See
James T. Lorenzetti, The Offshore Trust: A Contemporary Asset Protection
Scheme, 102 Com. L.J. 138, 139-140 (1997). See also FTC v. Affordable Media,
L.L.C., 179 F.3d 1228, 1239-41 (9th Cir.1999) (providing
background information on the nature of Cook Islands’ asset protection
trusts). Bilzerian was a settlor of the Family Trust. The law of the Cook
Islands allows a settlor to retain the power to change the trustee and the
trust protector. Lorenzetti, supra, at 149-50. Thus, even if
Bilzerian’s claim that he is no longer a beneficiary or trustee of the
Trust is true, the trust instrument may provide him with the power to reinstate
himself as trustee and beneficiary at any time he chooses. Also, the
Trust’s current trustees and Trust protector—all
Bilzerian’s family members—may have the authority under the
trust instrument to reinstate Bilzerian as a trustee and beneficiary. Bilzerian
provides sworn declarations from his wife and the Trust’s attorney
stating that: he was removed as a beneficiary of the Trust; that he has no
authority to dissolve the Trust; that if the Trust were dissolved that day, he
would not be entitled to receive any money or property from the Trust; and that
the only legal relationship he has to the Family Trust is as an officer and
director of Bicoastal Holding Company. [FN24] (Terri Steffan Decl.
¶¶ 3-4; Hodges Decl. ¶¶ 3-5.) However, even
if these declarations are true, they are phrased only in the present tense and
do not address whether Bilzerian could be reinstated as a beneficiary [*26] or trustee at a later date. [FN25] In
addition, the Trust is revocable and Bilzerian has not informed the Court under
what circumstances the Trust may be revoked. Where assets are held in an
offshore trust, the “burden of proving impossibility as a defense to a
contempt charge will be especially high.” See Affordable Media, L.L.C.,
179 F.3d at 1241. By providing only incomplete disclosure concerning the Trust
and refusing to provide the Trust instrument, Bilzerian clearly has not met
this high burden. Moreover, his failure to provide the Trust instrument leads
the Court to doubt the veracity of his claim to have no interest in or control
over it. See Huber, 51 F.3d at 10 (noting that a district court is entitled to
consider the contemnor’s refusal to provide documents in assessing the
credibility of his representations of poverty). In sum, without a proper copy
of the Trust instrument, the Court cannot adequately assess whether Bilzerian
has actually relinquished all control over its assets. [FN26] FN23. It is inconceivable that Bilzerian does not
have the ability to provide the Court with a copy of the Trust instrument; he
and his wife were the Trust’s settlors, until recently he was both its
trustee and a beneficiary, its current trustees and Trust protector are members
of the family, and the sole current beneficiary is his wife. Thus, he clearly
has access to the document. FN24. Bilzerian has also provided a second
declaration from his wife stating, inter alia, that her husband did not
contribute any individual assets to the Family Trust and that prior to
transferring their family home to the Trust she was advised by two attorneys
that the property was exempt from any claims by his creditors, including the
SEC. (Second Terri Steffan Decl. ¶ 2.) The Court fails to see the
relevance of these statements. The Court may consider Bilzerian’s
beneficial interest in the Family Trust in determining his ability to comply no
matter what the origin of the Trust’s assets. Moreover, as noted
above, the Court is not limited to considering only Bilzerian’s
individually owned assets in determining his ability to comply. Finally, the
legal conclusions of Ms. Steffan’s attorneys are not relevant to these
proceedings. FN25. Also, the SEC argues that the
declarations’ statements about the terms of the Trust and the
circumstances of Bilzerian’s removal as beneficiary are inadmissible
under Federal Rules of Evidence 1002 and 1004, the best evidence rule, and that
only the actual trust instrument and removal documents are evidence of their
terms and legal effect. As the declarations do not affect the Court’s
analysis, the Court does not address the issue of their admissibility. FN26. From what the Court knows about the
Trust—(1) it is revocable; (2) until recently, a settlor of the Trust
was also its trustee; (3) until recently, both settlors of the Trust were its
only beneficiaries; and (4) the current trustees and
Trust protector are family members—it appears to have many of the
indicia of a sham trust erected as a shell to defraud creditors. See
Lorenzetti, supra, at 150-51. Bilzerian has also failed to demonstrate that he
lacks an interest in the Cimetrix salary paid to Bicoastal. In fact, the Court
affirmatively finds that this salary demonstrates Bilzerian’s present
ability to comply, at least partially, with the Court’s disgorgement
orders. As noted above, Cimetrix currently pays $10,000 per month in salary and
$1,500 per month in living expenses, and provides free housing, use of an
automobile, and airfare in exchange for Bilzerian’s services.
Bilzerian claims that he is not paid a salary because, by contract, his salary
is paid to Bicoastal. This argument is patently absurd. Cimetrix pays this
salary in exchange for Bilzerian’s services as president, CEO, and a director
of the company; thus, they clearly are his earnings, no matter what the
formalities of the payment arrangement he has structured. See Earl, 281 U.S. at
114-115, 50 S.Ct. 241; Beall, 970 F.2d at 345-46. Bilzerian remains
suspiciously silent as to why he chose this payment arrangement, making only
one vague reference to the reason for the arrangement by stating that it
“reflects the realities of my present condition.” (Tr. 3/5/99
Hr’g at 44.) It is obvious to the Court that Bilzerian has voluntarily
chosen this payment arrangement in order to avoid his obligations to his
creditors and that, if he so desired, he could arrange for direct payment to
himself. Bilzerian has not indicated that Cimetrix is unwilling to modify the
employment contract and pay him directly. Nor has he indicated that Bicoastal
Holding Company, which currently receives his income, will refuse to pass it on
to him. Thus, the Court finds that Bilzerian’s substantial salary
clearly demonstrates a present ability to pay at least part of the
Court’s judgment. 2. Bilzerian has not made all reasonable efforts
to comply with the Orders Bilzerian has also failed to demonstrate that he
has made in good faith all reasonable efforts to comply with the
Court’s disgorgement Orders. A party seeking to avoid a finding of
contempt must demonstrate that “all reasonable avenues for raising
funds have been explored and exhausted.” See Phoenix Marine Enter.,
Inc. v. One Hylas 46’ Convertible Sportfisherman Hull No. 1, 681
F.Supp. 1523, 1529 (S.D.Fla.1988) (internal quotation [*27] marks omitted). Bilzerian has not pointed
to even a single example of an attempt to comply with the Court’s
judgment. Rather, his diligent efforts have been focused on how to avoid compliance
with the Court’s orders. As the following examples demonstrate,
Bilzerian has had an ownership interest in many substantial assets since the
Court’s January 23, 1993, disgorgement judgment was entered, in
addition to whatever assets he had at the time of the judgment. [FN27] However,
rather than use these assets to pay the judgment, he has consistently tried to
transfer them beyond the SEC’s reach. FN27. Bilzerian filed a declaration with the
Court about three and one-half years before the judgment stating that he had a
net worth of $50 million. (Starr Decl. Ex. 1.) Due to subsequent potential
business losses and asset transfers, it is unclear exactly what assets he had
at the time of the judgment. Bilzerian has been the president, CEO, and a
director of Cimetrix, Inc., since 1994, but has arranged for his substantial
salary to be paid to Bicoastal Holding Company, rather than to himself. From
1996 to date, Bilzerian has earned more than $300,000 in Cimetrix salary alone.
In June 1994, Cimetrix granted Bicoastal Holding Company, at the time owned
entirely by Bilzerian and his wife, options to purchase six million Cimetrix
shares. [FN28] After various transfers, the options were held by three separate
entities. When these options were exercised in April 1997, the value of the
shares acquired was approximately $31,290,000. In December 1995, almost two
years after this Court’s judgment, Bilzerian transferred his one-half
interest in Bicoastal Holding Company to the Family Trust. In March 1997, more
than four years after the Court’s disgorgement judgment, Bilzerian
transferred his one-half interest in his $3.5 million Tampa home to the Family
Trust. [FN29] And up until December 21, 1998, more than one month after the
Court issued its order to show cause why he should not be held in contempt,
Bilzerian had a one-half interest in the Family Trust, which holds assets
valued at approximately $15.2 million. [FN30] FN28. Bilzerian has not indicated whether these
options were provided as compensation for his services to Cimetrix. If so, he
was the sole initial owner of all six million options. FN29. The Court is not precluded from considering
Bilzerian’s homestead in determining his ability to comply with its
disgorgement orders. See SEC v. AMX Int’l, Inc., 7
F.3d 71, 76 (5th Cir.1993). FN30. The Court considers Bilzerian’s
recent removal as a beneficiary of the Trust perhaps the most egregious example
of his attempts to avoid paying the judgment. Bilzerian readily admits that, at
the time the Court issued the show cause order, he was one of two beneficiaries
of the Family Trust. Yet, conveniently, he was removed as a beneficiary of the
Trust one month later. The Court is highly skeptical of Bilzerian’s
claim not to have been involved in his removal. The Trust protector is a family
member who lives in his household. While he has provided declarations from his
wife and the Trust’s attorney stating that he was not involved in his
removal, he has not provided the Court with copies of the documents removing
him, a copy of the Trust instrument, or a declaration from the Trust protector
herself. These examples clearly demonstrate that Bilzerian
has been the beneficial owner of substantial assets in the years since the
judgment was entered, but he has made no attempt whatsoever to pay the
judgment. Instead of complying, he has transferred the assets to entities owned
and controlled by his wife and other family members. Bilzerian has never
indicated to the Court that he has asked his family members to return these
assets to him so that he may pay the judgment. Accordingly, it is clear that he
has failed to meet his burden of demonstrating that he has made all reasonable
efforts to comply with the judgment. See, e.g., Kenton Capital, Ltd., 983
F.Supp. at 16 (holding defendant in contempt where he “had more than
sufficient funds or assets to make the required payment, but …
dispersed or spent the funds and assets with no credible explanation as to what
other obligations he has which would take precedence over the obligations to
the court.”); CFTC v. Wellington [*28]
Precious Metals, Inc., 950 F.2d 1525, 1530 (11th
Cir.1992) (finding that defendant had not made all reasonable efforts to comply
with the Court’s disgorgement order where he had made suspicious loans
to friends and relatives and had done nothing to pursue repayment other than
ask for repayment). Bilzerian’s attitude toward complying with the
Court’s order was perhaps best summarized at the March 1999 show cause
hearing, at which he told the Court: “[I]t shouldn’t be a
shock to anybody that I … have no reason, I mean, to dedicate my life
to trying to earn money all of which would go to basically pay a judgment that
I don’t believe, with all due respect to the Court, should have been
entered in the first place.” (Tr. 3/5/99 Hr’g at 31.) 3. Bilzerian’s inability to comply was
self-created Bilzerian claims he no longer has any assets. As
noted above, the Court does not believe this claim. However, even if the claim
were true, Bilzerian has not established an inability defense, as he admittedly
created his alleged inability himself. With full knowledge of the existence of
the Court’s disgorgement judgment, he voluntarily chose to transfer
his assets to the Family Trust and the Children’s Trust. If he cannot
convince the trustees or Trust protector to return his assets to him, it is a
problem of his own making. See. e.g., Piambino v. Bestline Products, Inc., 645
F.Supp. 1210, 1215 (S.D.Fla.1986) (finding that attorneys who had dissipated
disputed funds rather than set them aside pending resolution of the dispute had
created their own inability to comply and therefore had not established an
inability defense); United States v. Lay, 779 F.2d
319, 320 (6th Cir.1985) (upholding district court’s contempt finding
where defendant consciously induced his purported inability to comply by
divesting himself of assets through property conveyances to family members). To
allow Bilzerian to avoid the Court’s disgorgement Orders through his
contumacious conduct would render both the Court’s Orders and the
SEC’s enforcement power meaningless. See SEC v. AMX Int’l,
Inc., 872 F.Supp. 1541, 1545 (N.D.Tex.1994). II. Whether Bilzerian is in Contempt of the
Court’s Order for an Accounting The SEC argues that Bilzerian has committed an
additional act of contempt by failing to disclose his beneficial interest in
the Family Trust in his initial declaration to the Court and by failing to
fully comply with the Court’s order for an accounting. Bilzerian
claims that he did not consider his interest in the Family Trust a beneficial
interest and notes that he expressly stated that he did not understand the meaning
of the term “indirect beneficial interest” in his
declaration. He also claims that he has complied with the Court’s
accounting order. Although
Bilzerian has not completely disclosed all of the financial information
relevant to the SEC’s contempt application, the Court declines to hold
Bilzerian in contempt of its accounting order. Before a party may be held in
contempt, the court must have fashioned an order that is “clear and
unambiguous.” Armstrong v. Executive Office of the President, 1
F.3d 1274, 1289 (D.C.Cir.1993) (quoting Project B.A.S.I.C. v. Kemp, 947
F.2d 11, 16 (1st Cir.1991)). “This requirement of clarity derives from
concepts of fairness and due process.” Project B.A.S.I.C.,
947 F.2d at 17. In light of Bilzerian’s considerable business
experience and history of SEC filings, see infra note 31, the Court harbors no
doubt that he fully comprehended what he was required to disclose under the
terms of the Court’s order for an accounting. Nevertheless, the Court
finds that its order may not have been sufficiently “clear and
unambiguous”—as those terms are construed by case
law—to support a finding of contempt against Bilzerian. Therefore, the
Court has drafted a more specific order explicating what information Bilzerian [*29] must provide to the SEC and the Court.
Failure to comply with this more specific order will result in the imposition
of contempt sanctions. The Court also finds that, despite Bilzerian’s
patently unconvincing claim of ignorance, civil contempt is not an appropriate
remedy for his omission of his beneficial interest in the Family Trust. [FN31]
See Blevins Popcorn, 659 F.2d at 1184 (“Civil contempt … is a
remedial sanction used to obtain compliance with a court order or to compensate
for damages as a result of noncompliance.”). In this case, Bilzerian
has already remedied his omission by disclosing that he had been a beneficiary
of the Family Trust in later submissions to the Court, and the SEC has not
indicated that it suffered any damages as a result of the nondisclosure. FN31. As noted, Bilzerian is currently the
president, CEO, and a director of a public company, Cimetrix, Inc. According to
Cimetrix’s May 15, 1999, annual proxy statement, Bilzerian has years
of experience in the business world, has been involved in over $10 billion in
corporate transactions and financing, and has a Masters in Business
Administration from Harvard University. Moreover, Bilzerian has submitted
filings with the SEC on numerous occasions, both recently and in the past, in
which he has disclosed his indirect beneficial interest in certain assets.
Similarly, he has disclosed indirect beneficial interests in the context of his
bankruptcy filing. Based on his background, the Court finds it highly likely
that Bilzerian was well aware that his status as a beneficiary of the Family
Trust was a beneficial interest that he should have disclosed to the Court. His
claimed lack of understanding of what constitutes an indirect beneficial
interest is ludicrous. III. Bilzerian’s Motion To Strike Bilzerian seeks to strike portions of three of
plaintiff’s submissions to the Court on various evidentiary grounds.
Upon examination of these evidentiary objections, the Court denies
Bilzerian’s motion to strike. The Court finds all of
Bilzerian’s evidentiary objections to be either without merit and/or
irrelevant, as the Court did not rely on the evidence in evaluating
Bilzerian’s purported inability defense. IV. Bilzerian’s Request for Oral
Argument Bilzerian has requested that the Court provide an
additional, final hearing in this matter. The SEC opposes the request. As noted
above, the Court held a hearing on this matter on March 5, 1999, and a telephonic
conference with the parties on April 19, 1999. Bilzerian has also been
permitted to file several supplemental submissions in his defense. [FN32] As
Bilzerian himself points out in his request “[t]his Court hardly needs
any more memoranda and evidence.” The Court finds that Bilzerian has
had a more than adequate opportunity to present his case and an additional
hearing would not be useful. Accordingly, his request for oral argument is
denied. FN32. To date, Bilzerian has submitted the following
to the Court in opposition to the SEC’s contempt application: (1) a
memorandum in opposition; (2) an “accounting” of his assets;
(3) a supplemental memorandum in opposition; (4) a second supplemental
memorandum in opposition; (5) a request for oral argument; (6) a motion to
strike; (7) a request for judicial notice; (8) a second request for judicial
notice; and (9) a third request for judicial notice. |