Opposition Brief — Commercial Union Assurance Co. v. Milken

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| Supreme Court, U.S,

\dy tI LED

AUG 17 1994

OFFICE OF THE CLERK

In the

Supreme Court of the Anited

October Term, 1994

COMMERCIAL UNION ASSURANCE CO., PLC,

COMMERCIAL UNION PENSIONS MANAGEMENT, LTD.,

GEMINI OVERSEAS CORPORATION, MERCIA ZURICH, A.G.,

OVERBROOK NOMINEES, LTD.

and STRAND NOMINEES, LTD.,

Petitioners,

-against-

MICHAEL R. MILKEN and LOWELL J. MILKEN,

Respondents.

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

MARK A. BELNICK

Counsel of Record

PAUL, WEISS, RIFKIND, WHARTON & GARRISON

1285 Avenue of the Americas

New York, New York 10019-6064

(212) 373-3000

Attorneys for Respondent Michael R. Milken

Of Counsel:

Davip L. KORNBLAU

STEVEN PACHT

MICHAEL O. FINKELSTEIN

LorD, Day & LORD, BARRETT SMITH

1675 Broadway

New York, New York 10019-5874

(212) 969-6000

Attorneys for Respondent Lowell J. Milken

August 17, 1994

Questions Presented

In this case, sophisticated offshore investors in a high-risk

arbitrage partnership—who received back the full amount of their

investment plus a profit directly from the partnership—sought

damages under the securities laws and RICO. The district court held

that these fully repaid investors had suffered no compensable injury,

and granted summary judgment dismissing their action. The Second

Circuit unanimously affirmed, and denied the investors’ petition for

rehearing with a suggestion for rehearing en banc. The certiorari

petition raises the following issues, none of which is worthy of this

Court’s review:

1. Whether investors in a speculative partnership venture

who shortly after filing suit received back all of their capital (plus

a profit) from the partnership’s assets, exclusive of litigation

settlements, suffered an injury to their business or property entitling

them to pursue a RICO treble-damages award.

2. Whether RICO entitles these investors to a mandatory

attorneys’-fee award, where their lack of RICO injury deprives

them of any legally cognizable RICO claim.

3. Whether the “proportionate fault” judgment-reduction

rule endows these investors with damages under the federal

securities laws, where their full recoupment (and profit) from the

partnership deprived them of any compensable injury even before

deducting their litigation recoveries from settling defendants.

TABLE OF CONTENTS

Page

re Lo ae 6's pbb kOe ON ae ee i

Table of Authorities ...... OE AP a PEN or PPD Pde iii

Eo 1

REASONS FOR DENYING THE PETITION ......... 11

1. THE SECOND CIRCUIT’S DECISION DOES

NOT CONFLICT WITH THIS COURT’S SEDIMA

ee ee ale a 12

Ii. THERE IS NO CONFLICT WITH

THE JUDGMENT-REDUCTION RULE ....... 15

Il. PETITIONERS’ ATTORNEYS’-FEES

ARGUMENT IS UNPRESERVED AND

EE Se 18

IV. THE “PROPORTIONATE FAULT” RULE

IS INAPPOSITE AND WAS NOT RAISED

a IS A a i a 19

a Me a ss aw ok 21

ee

TABLE OF AUTHORITIES

CASES

Aetna Casualty & Surety Co. v.

Liebowitz, 730 F.2d 905 (2d Cir.

ES a ee ee ee eee ee

Belfiore v. New York Times Co., 826

F.2d 177 (2d Cir. 1987), cert.

denied, 484 U.S. 1067 (1988) ............

Burlington Coat Factory Warehouse Corp.

v. Esprit de Corp., 769 F.2d 919

ee a Nae on 00.48 480

Central Bank of Denver, N.A. v. First

Interstate Bank of Denver, N.A.,

foe se eee

Fleischhauer v. Feltner, 879 F.2d 1290

(6th Cir. 1989), cert. denied, 493

le, ee a nek ne KCADH 8 n.d ack On

Gulfstream III Assocs., Inc. v.

Gulfstream Aerospace Corp., 995

ae, OD pe ok ae eee

Heinold v. Perlstein, 651 F. Supp. 1410

I a i as 6 4

In re The Drexel Burnham Lambert Group,

pac., oe Fe ceo Ge Coe. TORE) 2. ee es

Page

Korman v. Trusthouse Forte PLC, No.

898734, 1990 WL 83353 (E.D. Pa.

Rl eee as le hg gb kA ON ER 16

Lehighton Area School District v.

Gilbert, 787 F. Supp. 429 (M.D.

Se ee ee ee ee ea nk eee RRS 17

Liquid Air Corp. v. Rogers, 834 F.2d

1297 (7th Cir. 1987), cert.

PE A: rear 17

McDermott, Inc. v. AmClyde, 114 S. Ct.

IE 6 6 oe Ok es so 19, 20

Pinger v. Dall, 466 U.S. G22 (198) 2 www cee 11

Sciambra v. Graham News, 892 F.2d 411

AEE a hard 97d pte Wd 5 4 8 AS ve ee 18

Sedima, §.P.R.L. v. Imrex Co., 473 U.S.

I eM ie a AON hig kh ead Z% &

Singer v. Olympia Brewing Co., 878 F.2d

596 (2d Cir. 1989), cert. denied,

ne eb pc ken ee eeeeeenan 19

United States v. Bornstein, 423 U.S.

RE SS ee 15, 17

United States v. Turkette, 452 U.S. 576

EN aia Ne a hs a gw 'S yao 4 Hee 10

Viacom Intl Inc. v. Icahn, 946 F.2d 998

(2d Cir. 1991), cert. denied, 112

ia Seas AE Sno vie en ite ein oA le oe 16

iv

STATUTES AND OTHER AUTHORITIES

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Siok iy . EET OT eee ah 3

TE i sak ds vesdeeete ite eee 4

bwin | Lge SECT TOP OEE ee eh 4

Pere 0 ND seks iieeatr as. eee 20

eee SOE oe 4, 5, 15, 16, 18

Hy Gy BRE ike kak ee 3

Pee OO eek eee 8

Pee... Oe 8 S60 oe ee ee eee 9

Pe I OE ois cen ouekdus Poe 1

Vv

No. 94-153

In the

Supreme Court of the United States

October Term, 1994

COMMERCIAL UNION ASSURANCE CO., PLC,

COMMERCIAL UNION PENSIONS MANAGEMENT, LTD.,

GEMINI OVERSEAS CORPORATION, MERCIA ZURICH, A.G.,

OVERBROOK NOMINEES, LTD.

and STRAND NOMINEES, LTD.,

Petitioners,

-against-

MICHAEL R. MILKEN and LOWELL J. MILKEN,

Respondents.

Counterstatement of the Case

Petitioners’ Investments

in the Boesky Partnership

On March 21, 1986, Ivan F. Boesky, a takeover-stock

speculator, reorganized his risk-arbitrage business from corporate

to limited partnership form. His new partnership was called Ivan F.

Boesky & Co., L.P. (the “Boesky Partnership”). (A12)}” The

transaction inciuded a private placement of $250 million of limited

partnership interests.

Petitioners collectively purchased approximately $10.5 mil-

lion (Or 4.2%) of these Boesky limited partnership interests.

Petitioner Commercial Union Assurance Co. plc, a large U.K

insurance company, and three of its corporate affiliates (petitioners

¥ “A __” refers to the appendix filed with the petitioner for certiorari. “Pet. _”

refers to the petition for certiorari. “JA __” refers to the jcint appendix filed in the

court of appeals.

!

;

|

Commercial Union Pensions Management, Ltd., Overbrook

Nominees, Ltd., and Strand Nominees, Ltd.) invested a total of

$7,503,175. Petitioner Mercia Zurich A.G., a Swiss investment

vehicle owned by a wealthy Japanese investor, invested $2,006,572.

And petitioner Gemini Overseas Corporation, a Panamanian shell

corporation owned by Swiss residents, invested $1,001,927. (A13)

Petitioners were well aware that their Boesky Partnership

investments—in an arbitrage venture trading in the highest risk

securities transactions (corporate takeovers)—could not he more

speculative. (A12, A18) Indeed, the very first page of the Boesky

Partnership prospectus proclaimed:

THE BUSINESS OF THE PARTNERSHIP

ENTAILS A HIGH DEGREE OF RISK. SEE

“RISK FACTORS” BELOW. INVESTMENTS

IN THE PARTNERSHIP ARE THUS ONLY

SUITABLE FOR CERTAIN “ACCREDITED

INVESTORS.” SEE “THE OFFER-

ING—QUALIFIED INVESTORS” BELOW.

The same 1986 prospectus also disclosed that the investment would

be long-term and illiquid, and that investors could not withdraw

their capital for five years.

Because of the extraordinary risks, prospective investors in

the Boesky Partnership, including petitioners, were required before

investing to sign and submit an “Investor Suitability Questionnaire”

divulging their net worth and acknowledging (among other things)

that they had read the prospectus and “understood the nature of this

particular investment in the Partnership and the risks associated with

such an investment[.]” (A12) In the same questionnaire, petitioners

and the other investors also certified their understanding “that there

[was] no guarantee of any financial return on this investment{.]”

(emphasis added).

Although petitioners’ investment was admittedly as specula-

tive as could be, and Boesky, the partnership’s principal, ultimately

pled guilty to securities fraud, petitioners did not lose one cent. To

the contrary, as detailed below, they received all of their money

a ee eT ee

back, plus a profit, not from any litigation settlement, but from the

Boesky Partnership itself.

Boesky’s Confession and the

Boesky Limited Partners’ Lawsuit

Ivan Boesky publicly confessed to a wide insider-trading

scheme on November 14, 1986. Luckily for his limited partners,

however, substantial assets remained in the Boesky Partnership.

Harvard Law Professor David R. Herwitz was quickly appointed as

the partnership’s trustee, and began carrying out an orderly

liquidation of its assets.

Concurrently with the liquidation process, purchasers of

approximately $338 million in Boesky limited partnership interests,

including petitioners, commenced this federal securities-fraud action

in the Southern District of New York on March 20, 1987. The

limited partners sued, among others, Boesky, the Boesky Partner-

ship, Boesky’s outside law and accounting firms, Dennis Levine,

Martin Siegel, and a London brokerage house. Neither Drexel

Burnham Lambert Inc. (Boesky’s investment bank) nor respondents

Michael and Lowell Milken were then named as defendants. The

district court (Pollack, J.) permitted massive document discovery,

but stayed all depositions pending the ongoing criminal proceedings

involving Ivan Boesky and others.

In September 1988, the SEC brought a civil enforcement

action against Drexel, Michael Milken (the former head of Drexel’s

high-yield bond department), Lowell Milken (Michael Milken’s

brother and a former Drexel high-yield bond department employee),

and others. Parroting the allegations in the SEC’s action and

Drexel’s January 1989 guilty plea, the Boesky limited partners

obtained leave to add Drexel and the Milkens as defendants ir this

action on May 10, 1989. The claims against the Milkens (as

subsequently amended) were predicated on an implied cause of

action for “aiding and abetting” Boesky’s primary violations of

Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78}(b), and Rule 10b-S, 17 C.F.R. § 240.10b-5;? on Section

12(2) of the Securities Act of 1933, 15 U.S.C. §771(2); on

controlling-person liability under 15 U.S.C. §§ 78t and 770; on

RICO’s provision for private damages actions, 18 U.S.C. § 1964(c);

and on common-law principles. (A13-14; Pet. 5)

Petitioners’ Full Recoupment and

Profit from the Boesky Partnership

Eight months after the Milkens were added to the lawsuit,

Professor Herwitz, the Boesky Partnership’s liquidation trustee,

began distributing partnership assets to the limited partners.

As set forth in an uncontradicted affidavit submitted by

Professor Herwitz in this litigation, all of the limited partner-

plaintiffs, including petitioners, received a distribution equal to the

full amount of their invested capital on January 7, 1990. (Pet. 5)”

Professor Herwitz’s affidavit makes clear that this distribution came

entirely “from the assets of the Partnership”—not from litigation

settlements. Two subsequent distributions, in December 1991 and

April 1992, also made exclusively from the Boesky Partnership’s

assets according to Professor Herwitz’s affidavit, yielded petitioners

a 10.2% profit on top of their 100% capital recoupment. (A14) And

after Professor Herwitz submitted his affidavit, we understand that

petitioners received an additional distribution (not included in the

¥ Petitioners’ Section 10(b) claims do not survive this Court’s recent decision in

Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 114 S. Ct.

1439, 1455 (1994), which abolished “aiding and abetting” liability under that

statute. In a conclusory footnote, petitioners assert that their complaint “pleads

facts sufficient to allege a primary violation” under Central Bank. (Pet. 5 n.2)

Petitioners do not explain how they can transform these “aiding and abetting”

claims into direct claims because they cannot. Central Bank constitutes an

additional independent ground to affirm dismissal of these claims.

¥ To be precise, the Commercial Union entities received back 99.7% of their

Boesky Partnership investment on January 7, 1990. The other petitioners each

recouped 100% of their investments on that date.

Pei

Second Circuit’s analysis), lifting petitioner’s profit to 13.8%.%

The courts below unanimously found that petitioners’ undisputed

recoupment and profit from the corpus of the Boesky Partnership

deprived them of any compensable injury and therefore any

cognizable claim for relief.

In addition, petitioners, together with other Boesky limited

partners, received proceeds from two third-party litigation settle-

ments (with Boesky’s outside law and accounting firms) on

October 7, 1991. Combining these litigation settlements with all

Partnership distributions to date, petitioners got back all of their

money plus a profit of 18.2%—in a high-risk venture where they

had acknowledged the distinct possibility of receiving nothing.

As below, in an effort to prevent dismissal of their claims,

petitioners mischaracterize the liquidation agreement pursuant to

which the Boesky limited partners recouped their capital (plus a

profit). This agreement reordered certain Boesky Partnership

interests to facilitate the liquidation of the Partnership and the return

of the limited partners’ capital (including petitioners’ investments)

from the Partnership’s assets. In addition, the agreement provided

that Drexel and an affiliate would receive payments of $20.3 million

for certain Boesky Partnership interests, and that Drexel would be

dismissed from this action “without prejudice.” (JA1155-1496;

Pet. 5)

Petitioners attempt to turn this liquidation agreement into a

settlement of their claims against defendants in this action. They

assert that their recoupment of their “March 1986 capital investment

[was] pursuant to an Agreement of Settlement with several defen-

dants, including Drexel and the partnership.” (Pet. 5) Petitioners

add that “[t]he Milkens were not parties to the Settlement Agree-

ment and did not contribute to the payments made under it.” (/d.)

These statements are plainly intended to suggest that the amounts

petitioners received back in January 1990 were paid by “Drexel, the

Y Specifically, on November 22, 1993 (including certain prior tax withholdings

and interest payments), the Commercial Union entities received a further gross

distr#hution of $290,277; Mercia Zurich received $77,629; and Gemini Overseas

Corp. received $38,762.

Partnership and certain other defendants” in settlement of peti-

tioners’ purported securities and RICO claims in this action.

The courts below correctly rejected this distortion of the

record. The so-called “settlement agreement” did not “settle”

petitioners’ purported claims against Drexel or any other defendant.

Neither Drexel nor the Boesky Partnership received a release of

petitioners’ claims in this action; Drexel was dismissed “without

prejudice”; the Boesky Partnership was not dismissed at all; and

Drexel did not pay a cent to petitioners—to the contrary, Drexel and

an affiliate received a multimillion-dollat payment from the

Partnership. The Second Circuit summed it up perfectly:

[W]e reject anpellants’ contention that the payments

by Professo: Herwitz were settlements and not a

return of appellants’ capital investment. This

conclusion is warranted given that the monies paid

to appellants derived directly from the proceeds of

the sale of assets held by the partnership, as

appellants’ counsel conceded. The complex ‘settle-

ment’ appellants constantly refer to was simply a

reordering of partnership interests to facilitate the

Boesky partnership liquidation.

(A16-17)

In reaching this conclusion, the Second Circuit did not

engage in “appellate factfinding,” as petitioners assert. (Pet. 7) The

detailed Boesky Partnership “Settlement Agreement” and Professor

Herwitz’s affidavit setting forth the amounts and nature of peti-

tioners’ recoupments and settlements were both part of the undis-

puted summary judgment record. Based on its review of these

unambiguous documents and other undisputed facts, the court of

appeals simply agreed with the district court’s legal conclusion that

petitioners had no damages, and thus no claims, under the securities

laws and RICO.

Sa SY

Petitioners’ Opt-Out of

the Milken Global Settlement

In April 1990, respondent Michael Milken, after long nego-

tiations with the Government, pled to a six-count information

unrelated to petitioners’ securities purchases. The Government never

filed any charges against respondent Lowell Milken, who has

consistently denied all allegations of wrongdoing.

In March 1992, a $1.3 billion Global Settlement was

reached that was intended to resolve over 180 pending civil

lawsuits, including this action, and involving hundreds of

defendants, including Michael and Lowell Milken. (JA951-93; see

also In re The Drexel Burnham Lambert Group, Inc., 960 F.2d 285,

289 n.2 (2d Cir. 1992)) By that time, all of the Boesky limited

partner-plaintiffs, including petitioners, had received back not only

the full amount of their Partnership investments, but a profit of

nearly 15% (including litigation settlements). Not surprisingly, in

the light of this full recoupment and profit, nearly all of the limited

partner-plaintiffs joined the Global Settlement and ceased this

litigation.

Petitioners, however, who represented only 3.1% of the

Boesky limited partnership interests, opted out of the Global Settle-

ment. They assert here, as below, that they did so because the Glo-

bal Settlement “would have required them to release their claims

against the Milkens in return for an unspecified allocation from an

inadequate settlement fund . . . .” (Pet. 6) Although petitioners had

the right to opt out of the Global Settlement, their stated reason for

doing so is a pretext. The settlement fund that these fully compen-

sated investors call “inadequate” contains $/.3 billion. (JA956-59)

Petitioners’ real goal in pressing this litigation despite their full

recoupment was to inflict massive litigation costs in an effort to

extract an unwarranted payment from the Global Settlement’s

$50 million indemnity fund. (JA972-73)

Petitioners’ Abusive Litigation Tactics

Petitioners pursued this strategy—which the district court

aptly termed “oppressive and prolific litigative conduct”

(A31-32)—with a vengeance. The full record of their abusive tactics

(which ultimately led the district court to invite the Milkens to file

a sanctions motion against them, see id.) included the following:

@ Shortly after Judge Pollack indicated that he would lift

the stay on depositions, petitioners demanded 27 depositions

around the country, repeatedly defying the court’s request that

they narrow their list to necessary witnesses.

@ At the same time, petitioners stonewalled the defense’s

modest discovery program, refusing to confirm the precise

amounts of their own Boesky Partnership investments and

recoupments, and brazenly defaulting on a duly noticed

deposition of petitioner Mercia Zurich.

@ Petitioners also defied Judge Pollack’s orders that they

update and narrow their colossal complaint to comply with Rule

8(a), Fed. R. Civ. P., cavalierly serving three massive

complaints totaling 479 pages (in addition to a 108-page RICO

case statement) designed only to camouflage their lack of

compensable injury. They then demanded that respondents go

through the pointless (but costly) exercise of specifically

responding to each of petitioners’ over 1,100 allegations.”

@ In the summary judgment proceedings, these fully

compensated investors attempted to create nonexistent damages,

and deceive the district court, through (among other means)

double counting. Caught red-handed, petitioners admitted the

error but blamed it on “inadvertence.”

¥ Contrary to petitioners’ assertion (Pet. 7), respondent Michael Milken did

answer the complaint. Consistent with Rule 8(b), Fed. R. Civ. P., his answer

generally denied liability subject to certain specifically admitted matters (princi-

pally, his allocution). (JA905-40)

+ 2 atten Sia

The District Court’s

Summary Judgment Decision

The district court granted summary judgment dismissing

petitioners’ claims against the Milkens on May 3, 1993. (A28-32)

In his decision, Judge Pollack rejected petitioners’ “benefit of the

bargain” damages theory (abandoned in this Court) and exercised

his discretion (based on, among other things, petitioners’ abusive

litigation tactics summarized above) to deny petitioners’ claim for

an equitable award of additional “prejudgment interest” on top of

the 14.8% profit they by then received. (A30)

Next, the decision succinctly disposed of petitioners’ claim

for RICO treble damages, holding that it was “flawed by the

absence of any foundation for a compensatory recovery.” (A31) As

an additional, independent ground for dismissal of the RICO claim,

Judge Pollack ruled that it was “insufficient in law,” in that it

“entirely lacks the existence of an ongoing enterprise separate and

apart from the purported pattern of activity asserted, as well as in

respect to other failings.” (/d.)

Finally, the decision correctly dismissed petitioners’ Sec-

tion 12(2) claims on the ground that the Milkens “are not statutory

sellers” as required by that statute because, among other reasons,

neither Michael nor Lowell Milken “actually solicited the purchases

made by the plaintiffs.” (/d.)

After granting summary judgment in all respects and dis-

missing petitioners’ recently amended complaint with costs, the

district court’s decision invited the Milkens to file a sanctions

motion. The court also certified, pursuant to Rule 54(b), Fed. R.

Civ. P., that “there is no reason for delay and the ongoing process-

ing of the Drexel bankruptcy aspects of the global settlement should

not be delayed and further hampered by this litigation” and accor-

dingly directed the entry of final judgment in favor of the Milkens.

(A32)

The Court of Appeals’ Affirmance

The Second Circuit unanimously affirmed the district court’s

dismissal of all of petitioners’ claims in a thorough, published

opinion. The core of the court of appeals’ decision is the same as

the district court’s: the absence of “actual damages or consideration

paid in the securities laws actions, and injury to plaintiffs’ business

or property in the RICO cause of actions.” (A11)

After setting forth the undisputed facts and procedural

background, the Second Circuit’s decision analyzed petitioners’

RICO claim. The decision correctly rejected petitioners’ argument

that under RICO the entire amount of their investment should be

trebled before offsetting their prior recoveries (regardless of whether

through partnership recoupments or litigation settlements). Observ-

ing that petitioners “have now recouped not only their initial

investment, but also have received [a] 10.2 percent return on their

capital,” and noting that petitioners were amply advised of the risks

entailed in the investment, the decision correctly concludes that

petitioners have no “provable damages.” (A18) The Second Circuit

noted that a treble-damages award might be appropriate if “a por-

tion of [petitioners’] investment in the partnership was unrecov-

erable” (assuming the other RICO requirements were satisfied), but

accurately stated that such was not the case here. (/d.)

In view of its affirmance on the absence of RICO damages,

the Second Circuit did not reach the district court’s alternative

ground for dismissal based on petitioners’ failure to plead a legally

sufficient RICO enterprise under United States v. Turkette, 452

U.S. 576, 583 (1981). (A19) This issue, however, provides an

additional basis for affirmance.

After disposing of petitioners’ RICO claim, the court of

appeals turned to petitioners’ securities-law damages theories, which

met the same fate. The Second Circuit correctly held that peti-

tioners’ complete recoupment meant they had no out-of-pocket

damages, and held that the district court had not abused its discre-

tion in denying petitioners’ equitable claim for prejudgment interest

on top of their prior 14.8% profit (now 18.2%). (A19-22) Notably,

the court of appeals correctly found that there is no support in the

record for petitioners’ argument, repeated here (Pet. 7), that Judge

Pollack denied their prejudgment interest claim because they had

opted out of the Milken Global Settlement. (A22)

The decision below also thoroughly analyzed, and rejected,

petitioners’ more exotic, but equally futile, securities-law damages

10

Ao ee) te ibe bel tA Se SiON ere ee MIO! ed A Ne Nl ters arta NA ee a it

Sin

theories—“benefit of the bargain” and “disgorgement.” (A22-24)

Petitioners do not seek certiorari with respect to these rulings.

Finally, the Second Circuit affirmed the dismissal of

petitioners’ Section 12(2) claims, although on a different ground

than that relied upon by the district court. (A24-27) The court of

appeals found that there were disputed factual issues as to whether

the Milkens are statutory sellers under Section 12(2),% but affirmed

dismissal of the claims anyway because petitioners “have not .

suffered compensable damages under § 12(2).” (A25) The decision

concludes, “Allowing them to maintain a cause of action under such

circumstances would constitute a waste of judicial resources and a

thwarting of Congress’ aim in enacting § 12(2).” (/d.)

REASONS FOR DENYING THE PETITION

Nothing in this case warrants plenary review by this Court.

The key issue presented—whether investors have a compensable

RICO injury when they receive back all of their capital (plus a

profit) from a speculative venture shortly after filing suit—was

correctly decided below and is based on an unusual factual setting

that is not likely to recur. The Second Circuit’s unanimous decision

is fully consistent with the precedents of this Court and other

© In so holding, the court misapplied this Court’s decision in Pinter v. Dahl, 486

U.S. 622 (1988). It also improperly considered “the fact that appellants never had

the opportunity to depose either Boesky or the Milkens.” (A26-—27) If petitioners

seriously believed that additional discovery—beyond the vast document and

deposition discovery they obtained—could have somehow raised a genuine issue of

fact, Fed. R. Civ. P. 56(f) required them to file an affidavit in the district court

specifically setting forth “the nature of the requested discovery, its relevance to

genuine issues of material fact, [and] what efforts [petitioners had] made to obtain

the discovery and why these efforts were unsuccessful.” Belfiore v. New York

Times Co. , 826 F.2d 177, 184 (2d Cir. 1987), cert. denied, 484 U.S. 1067 (1988);

Burlington Coat Factory Warehouse Corp. v. Esprit de Corp., 769 F.2d 919, 926

(2d Cir. 1985). Petitioners failed to do so. These issues provide independent bases

for affirmance.

11

circuits, and raises no question of constitutional magnitude or

national importance.

I.

THE SECOND CIRCUIT’S DECISION DOES NOT

CONFLICT WITH THIS COURT’S SEDIMA DECISION

In their primary ground for certiorari, petitioners argue that

the decision below “resurrects,” in the “new guise of ‘unrecover-

able’ loss,” the RICO injury requirement rejected by this Court in

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985). (Pet. 9) This

argument misreads both Sedima and the Second Circuit’s decision

below. In fact, Sedima has nothing to do with this case.

Sedima involved a claim for RICO treble damages based on

$175,000 in alleged overbillings by a co-joint venturer. See Sedima,

473 U.S. at 484. The district court and the court of appeals had

held that no RICO claim was stated because, among other reasons,

the complaint did not allege a “racketeering injury,” i.e., an injury

“‘different in kind from that occurring as a result of the predicate

acts themselves, or not simply caused by the predicate acts, but a’so

caused by an activity which RICO was designed to deter.’” See id.

at 485. This Court reversed in a 5-4 decision, holding that, among

other things, “the compensable injury necessarily is the harm caused

by predicate acts sufficiently related to constitute a pattern.” Jd. at

497.

That holding is fully consistent with the Second Circuit’s

decision here. Indeed, the Sedima majority emphasized that a RICO

plaintiff “can only recover to the extent that[] he has been injured

in his business or property by the conduct constituting the viola-

tion.” Id. at 496 (emphasis added). Here, because of their full

recoupment and profit from the risky Boesky Partnership venture,

petitioners suffered no injury in their business or property, whether

caused by the Milkens’ alleged predicate acts or otherwise. Sedima

is simply irrelevant.

The petition puts forth a new theory in an attempt to create

an injury flowing from the Milkens’ alleged predicate acts. Peti-

tioners now argue that a jury could find that the Boesky Partnership

securities bought by petitioners were “worthless” at the time they

12

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is

were purchased, and therefore that petitioners were damaged in the

full amount of the purchase price. (Pet. 11) Not only was this

theory never argued below, but it contradicts petitioners’ own

allegations below, lacks any evidentiary support, and defies common

sense.

When petitioners bought their securities, the Boesky Part-

nership was freshly capitalized with approximately $1 billion.

Petitioners do not allege that Boesky or the other defendants

engaged in any scheme to deplete that capital, nor could they in

light of the undisputed fact that they recouped their entire invest-

ment (plus a profit) from that capital. To the contrary, petitioners

specifically alleged in their “benefit of the bargain” damages theory

below that the Boesky Partnership’s capital increased 27% in the

three months following their investments. (JA2257) Moreover, in

their papers opposing summary judgment petitioners submitted no

evidence at all of the Partnership’s value as of the date of peti-

tioners’ investments. In any event, such evidence would have made

no difference: any theoretical loss petitioners might have suffered at

the moment they purchased their Boesky Partnership interests

proved nonexistent when they subsequently received back all of their

invested capital, plus a profit, directly from the Partnership’s assets.

Therefore, neither Sedima nor petitioners’ latest damages theory

gives these fully compensated investors a compensable RICO injury.

Petitioners also attempt to manufacture a conflict with

Sedima by distorting the Second Circuit’s decision. Specifically,

they argue that under the decision below, “a RICO injury arises

only if a portion or all of the plaintiff's damages are ‘unrecoverable’

after exhausting all available sources of collection.” (Pet. 10) This

is incorrect. The relevant paragraph of the decision states:

[Appellants] assert they are entitled to a trebling of

the full amount of their invested capital ($10.5

million), none of which had been returned when

they initiated suit. But, as related, they have now

recouped not only their initial investment, but also

have received [a] 10.2 percent return on their

capital, exclusive of additional funds paid to them

as the result of several third-party settlements.

13

Appellants’ recovery stands in contrast to the

risks—of which they were advised in the prospectus

and investor suitability questionnaire—entailed in

the purchase of the partnership interests. Jf a

portion or all of their investment in the partnership

was unrecoverable, a treble damage award might

be appropriate, assuming the other RICO

requirements were Satisfied. But damages as

compensation under RICO § 1964(c) for injury to

property must, under the familiar rule of law, place

appellants in the same position they would have

been in but for the illegal conduct. Here appellants

have already been placed by defendants in that

position. Hence, in the instant case, without

provable damages, no viable RICO cause of action

may be maintained.

(A18; emphasis added)

Read in context, the italicized language stands for the

straightforward proposition that if, contrary to the undisputed facts

of this case, petitioners had not “recovered” the full amount of their

investments from the Partnership’s assets (and could satisfy RICO’s

other requirements), they might have had a viable RICO treble-

damages claim. Contrary to petitioners’ misreading, however,

nothing in the court of appeals’ decision here imposes a general

requirement that RICO plaintiffs exhaust all “available sources of

collection” (Pet. 10) before they may assert a treble-damages claim.

Petitioners likewise misconstrue the decision below and

other Second Circuit decisions when they argue that “[t]he RICO

limitations clock will not start running under this decision until there

is no possibility that a RICO plaintiff may recoup his losses from

any source.” (Pet. 11) This is a red herring. The decision below did

not even reach the issue of when petitioners’ purported RICO claim

accrued, much less adopt the standard stated by petitioners. Rather,

the courts below found that petitioners had no damages in the light

of their 100% recoupment (plus a profit) from the assets of the

Boesky Partnership. This Court should not grant certiorari in this

14

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case to pass upon an irrelevant RICO claim accrual doctrine not

properly before the courts below, and not in conflict with the

decision of any other circuit.

Equally unavailing is petitioners’ purported “conflict” based

on the antitrust doctrine rejecting a “no injury” defense when the

plaintiff recoups its losses by passing on illegal overcharges to

consumers. (A12-13) Such a doctrine has no bearing on this case,

by analogy or otherwise. Petitioners here did not recover their

alleged losses by “passing them on” to someone else; they got their

own invested capital back and thus did not sustain a compensable

loss.

Il.

THERE IS NO CONFLICT WITH

THE JUDGMENT-REDUCTION RULE

The court of appeals correctly rejected petitioners’ conten-

tion “that they are entitled to a trebling of their damage award

before any offset through settlements, restitution, recoupment or

otherwise.” (A17) According to the judgment-reduction rule applied

in various multiple-damages contexts, third-party settlements are

deducted from a damages award after multiplying the award, see,

e.g., United States v. Bornstein, 423 U.S. 303 (1976), but a return

of a plaintiff's own property prior to judgment is offset prior to

multiplying.

Thus, in computing their damages here, petitioners’ capital

recoupments from the Boesky Partnership’s corpus—as opposed to

their third-party litigation settlements—were properly subtracted

from the amount of petitioners’ investments, before trebling. Since,

exclusive of third-party settlements, petitioners received back all of

their invested capital (plus a profit) from the Partnership, their

“damages” were zero. (A16-18) And zero trebled, even under

RICO, is still zero. or S

This analysis follows directly from RICO’s express statutory

language, which limits civil RICO’s treble-damages remedy to

persons who have been “injured in [their] business or property by

reason of” a substantive RICO violation. 18 U.S.C. § 1964(c); see

also Sedima, §.P.R.L. v. Imrex Co., 473 U.S. 479, 495 (1985).

15

Under this provision, absent an injury to business or property, a

RICO plaintiff lacks standing to sue; there is nothing to treble.

Accordingly, courts have consistently dismissed civil RICO claims

brought by plaintiffs, like these fully recouped investors, who

“[w]ere not damaged by the transaction.” Viacom Int'l Inc. v.

Icahn, 946 F.2d 998, 100 (2d Cir. 1991), cert. denied, 112 S. Ct.

1244 (1992); Fleischhauer v. Feltner, 879 F.2d 1290, 1300 (6th :

Cir. 1989), cert. denied, 493 U.S. 1074 (1990); Korman v.

Trusthouse Forte PLC, No. 89-8734, 1990 WL 83353, at *5-*6

(E.D. Pa. 1990); Heinold v. Perlstein, 651 F. Supp. 1410, 1411

(E.D. Pa. 1987). :

This rule also makes good sense. Offsetting litigation

settlements after trebling gives RICO and antitrust plaintiffs an

incentive to enter into pretrial settlenvents; otherwise, the plaintiff

would sacrifice three dollars of a potential jury verdict for each

dollar of pretrial settlement. But this salutary incentive does not

operate where, as here, the treble-damages plaintiff simply gets his

own money back from an investment. Deducting such a recoupment

after trebling, under petitioners’ perverse theory, would create an

unseemly rush to the courthouse, as the plaintiff tries to file and

collect on his treble-damages claim before his own money is

returned to him. Petitioners’ theory would even give the RICO

investor-plaintiff an incentive to delay or prevent the return of her

own capital, in the hope that it could be trebled in a subsequent

RICO judgment jackpot. Federal judges are too busy to entertain

such litigation crapshoots by fully compensated speculating inves-

tors.

Notwithstanding this well-settled, statutorily mandated, and

sensible rule, petitioners contend that the Second Circuit’s holding ;

“conflicts with the Act’s language, its legislative history and the rule i

other courts endorse in multiple damages actions.” (Pet. 14)

According to petitioners, the court of appeals’ fidelity to RICO’s

express damage requirement somehow amounts to “adopt[ion] [of]

a judgment reduction rule that in effect makes single damages a

measure of recovery under Section 1964(c).” (Jd. at 14-15) But

once again, petitioners’ argument rests on a misconstruction of the

Second Circuit’s decision, which certainly did not impose a “single

damages” RICO rule. Rather, as discussed above, it found on the

a eat

16

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unusual facts of this case that Partnership distributions had already

more than restored petitioners to “the same position they would

have been in but for the [allegedly] illegal conduct.” (A18)

Accordingly, in the absence of RICO injury, it held that there were

no damages to treble.

The same analysis distinguishes the antitrust and False

Claims Act cases that petitioners erroneously assert are at odds with

the Second Circuit’s decision below. (Pet. 17-20) For example, in

Bornstein, 423 U.S. at 307, the False Claims Act case quoted and

discussed at length in the petition (at 18-20), the compensatory

payments offset after doubling the damages award were litigation

settlements obtained by the Government against another party to the

same fraud. Neither Bornstein nor any of the lower-court decisions

cited by petitioners involved, as here, an investor who received back

100% of its invested capital directly from the investment corpus.

The Second Circuit correctly distinguished the Seventh

Circuit’s decision in Liquid Air Corp. v. Rogers, 834 F.2d 1297

(7th Cir. 1987), cert. denied, 492 U.S. 917 (1989), cited by

petitioners here. (A16) In Liquid Air, a set-off was applied prior to

trebling where the defendants themselves returned the property at

issue to the plaintiff—after losing a RICO trial in which they

contended that the pronerty had already been returned! See id.

at 1310. In contrast, as noted in the decision below, petitioners “in

the case at hand received their capital investment back in full less

than ten months from the time they commenced suit.” (A18)”

? The other cases cited by petitioners are similarly off the mark. In Lehighton

Area School District v. Gilbert, 787 F. Supp. 429 (M.D. Pa. 1992), the court

merely held that the plaintiff had stated a RICO claim where the defendant's

purported restitution “did not include” certain allegedly misappropriated tax funds.

Id. at 432. In In re Nat'l Mortgage, the plaintiffs did not get their own funds back;

set-off was applied to settlement payments made by a third-party trustee. See 636

F. Supp. at 1151-52. And in Pennsylvania v. Cianfranni, 600 F. Supp. 1364 (E.D.

Pa. 1985), which involved a state legislator who had placed “ghost workers” on

the payroll, the Commonwealth had garnished the defendant's retirement benefits.

See id. at 1367-68.

17

Petitioners’ claim that the Second Circuit’s decision

“creates, in effect, a sanctuary for RICO offenders” (Pet. 20-21) is

absurd. Petitioners state that under the decision below a “RICO

offender can avoid treble damages by simply tendering payment of

the plaintiffs out-of-pocket loss at any time before judgment” or

if “the court believed that the plaintiff can find another way to

collect the underlying loss.” (/d.) This is untrue. The decision

below addressed the rare situation where RICO plaintiffs received

back their own money, not from alleged RICO offenders, but from

the assets of their own investment partnership. In such a case, the

alleged RICO offender is given no “sanctuary” because the pur-

ported RICO victims—like petitioners here—suffered no damages

and thus are not victims at all.

Il.

PETITIONERS’ ATTORNEYS’-FEES

ARGUMENT IS UNPRESERVED AND INCORRECT

Petitioners make the extraordinary argument that even if

they lack any RICO damages (as the lower courts unanimously

held), they “must be afforded an opportunity to establish by trial,

if necessary, the defendant’s liability as a predicate for the plaintiff's

entitlement to the statutory fee award.” (Pet. 21) In other words,

even though by hypothesis their clients have no right to recover

anything from the Milkens, the Milkens and the courts should be

subjected to a months-long liability trial to enable petitioners’

counsel to generate, and then collect, attorneys’ fees.

To begin, petitioners did not make this argum. : : below, and

the decisions below do not address it. It is therefore an inappropri-

ate basis for certiorari review.

Moreover, the argument is frivolous. The RICO statute pro-

vides for treble damages and a mandatory attorney’s fee award to

“[a]ny person injured in his business or property by reason of a”

substantive RICO violation. 18 U.S.C. § 1964(c). Petitioners (or

their counsel), as we have demonstrated, do not qualify.

The antitrust decisions cited by petitioners (Pet. 21-22)

address a wholly different issue. In those cases, pretrial litigation

settlements exceeded the amount of the treble-damages award. See

18

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Gulfstream III Assocs., Inc. v. Gulfstream Aerospace Corp., 995

F.2d 414, 419 (3d Cir. 1993); Sciambrav. Graham News, 892 F.2d

411, 416-17 (Sth Cir. 1990). The Third and Fifth Circuits held that

the RICO plaintiffs in those cases were still entitled to collect their

mandatory fee awards because they, unlike petitioners, had suffered

a RICO injury. Where, as here, plaintiffs suffer no RICO injury at

all, they are not entitled to attorneys’ fees. See Aetna Casualty &

Surety Co. v. Liebowitz, 730 F.2d 905, 907 (2d Cir. 1984).

IV.

THE “PROPORTIONATE FAULT” RULE IS

INAPPOSITE AND WAS NOT RAISED BELOW

In the proceedings below, petitioners advanced a wide

variety of damages theories under the federal securities laws.

Damages under these theories ranged from $15 million to $40

million to $400 million. Each of these theories was unanimously

rejected by the district court and court of appeals, and all have been

abandoned in this Court. Instead, relying principally on an admiralty

decision, McDermott, Inc. v. AmClyde, 114 S. Ct. 1461 (1994),

petitioners adopt a new tack. Now they contend that the courts

below should not have deducted their recoupments and profits “pro

tanto from any eventual judgment they may have had against the

Milkens under the securities acts.” (Pet. 23) Rather, they argue, a

“proportionate approach,” deducting only amounts reflecting the

settling defendants’ proportionate responsibility, should have been

applied. (Id.)

This argument fails for at least three reasons:

First, once again, petitioners never raised this issue below.

Quite the contrary. Citing Singer v. Olympia Brewing Co., 878

F.2d 596 (2d Cir. 1989), cert. denied, 493 U.S. 1024 (1990), the

case they now contend applies an incorrect “judgment reduction

approach” (Pet. 26), petitioners told the court of appeals that “under

a correct application of the out-of-pocket damage measure,

Appellants are entitled to their capital, plus prejudgment interest,

offset by their settlements.” (Brief of Plaintiffs-Appellants dated

July 9, 1993, at 32) Certiorari is inappropriate under these circum-

stances.

19

Second, the “proportionate fault” rule discussed in

McDermott and the lower-court authorities cited by petitioners is

inapplicable to this case. As petitioners acknowledge, those cases

involve the methodology for calculating the liability of non-settling

defendants in the light of settlement payments made by settling

defendants. (Pet. 23, quoting McDermott, 114 S. Ct. at 1463) Here,

however, as the courts below correctly concluded based on the

undisputed facts, petitioners’ 110.2% recoupment (now 113.8%)

was exclusive of settlement payments by the Milkens’

co-defendants. Nothing in the “proportionate fault” rule gives these

fully recouped investors damages under the federal securities laws.

And third, the Court’s holding and reasoning in McDermott

do not apply in federal securities laws actions. McDermott, an

admiralty law case, was predicated on federal common law. See 114

S. Ct. at 1464-65. Exercising its traditional authority to fashion an

appropriate substantive rule in that area of law, the Court weighed

various policy objectives and adopted “proportionate fault” over the

“pro tanto” rule. Among other things, the Court rejected application

of the so-called “one satisfaction rule,” which limits the plaintiff's

total damages to the amount necessary to compensate him for his

loss. See id. at 1470. That rule, however, may not be disregarded

in the federal securities law context, because Congress has seen fit

to enshrine it in a statute:

[N]o person permitted to maintain a suit for

damages under the provisions of this chapter shall

recover, through satisfaction of judgment in one or

more actions, a total amount in excess of his actual

damages on account of the act complained of.

Section 28(a) of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78bb(a) (emphasis added).

Thus, petitioners’ “proportionate fault” theory is unpre-

served, inapplicable, and inconsistent with the federal securities

laws. It does not merit this Court’s review.

20

Conclusion

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Dated: August 17, 1994

New York, New York

Of Counsel:

DAVID L. KORNBLAU

STEVEN PACHT

Respectfully submitted,

MARK A. BELNICK

Counsel of Record

PAUL, WEISS, RIFKIND,

WHARTON & GARRISON

1285 Avenue of the Americas

New York, New York 10019-6064

(212) 373-3000

Attorneys for Respondent

Michael R. Milken

MICHAEL O. FINKELSTEIN

LorD, Day & LorD, BARRETT SMITH

1675 Broadway

New York, New York 10019-5874

(212) 969-6000

Attorneys for Respondent

Lowell J. Milken

21