Chris Lazarini Discusses Recoupment of Civil and Criminal Penalties under Bankruptcy Code

March 8, 2018
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini discussed a case in which the defendant – who had pleaded guilty in a criminal case to one count of fraud under the Commodity Exchange Act (CEA) and one count of money laundering, and was sentenced to 135 months in prison and ordered to pay $2.1 million in restitution to his victims and who had received a discharge in bankruptcy – challenged the parallel civil complaint brought by the CFTC alleging violations of the CEA. The defendant claimed that because he had been discharged in bankruptcy and ordered to pay restitution in the criminal case, the CFTC claims should be dismissed. The court rejected both arguments, holding that under the bankruptcy code, penalties payable to and for the benefit of a governmental unit are not dischargeable and the relief sought by the CFTC was different than the restitution he was ordered to pay in the criminal case.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

CFTC vs. OTC Investments LLC & Taylor, No. 1:15-cv-00081 (W.D. N.C., 1/19/18) 

*Under the bankruptcy code, penalties payable to and for the benefit of a governmental unit are not dischargeable. 

**A person who violates the Commodity Exchange Act may be subject to civil penalties, orders of restitution or disgorgement and injunctive relief. 

Taylor engaged in an illegal scheme in which he solicited investments in a commodity pool that would trade foreign currency contracts and instead misappropriated the funds for his own use. The CFTC filed a civil complaint alleging that Taylor violated the Commodity Exchange Act (“CEA”). In a parallel criminal case, Taylor pled guilty to one count of fraud under the CEA and one count of money laundering, and was sentenced to 135 months in prison and ordered to pay $2.1 million in restitution to his victims. While the civil and criminal proceedings were ongoing, Taylor filed a Chapter 7 bankruptcy, in which he received an order of discharge.

Returning to the CFTC’s civil case, Taylor moved to dismiss or for summary judgment, arguing that any indebtedness he might owe the CFTC was discharged in bankruptcy. Taylor also argued that, because he was ordered to pay restitution in the criminal proceeding, any additional judgment in the civil action would violate the rule against double recovery.

The Court rejects both arguments, finding that the CFTC sought a civil monetary penalty payable to it, not restitution for Taylor’s victims. Under the Bankruptcy Code, penalties payable to and for the benefit of a governmental unit are not dischargeable. Noting that restitution (the amount lost by victims) and civil penalties (the amount gained by defendants) are often awarded in the same civil action, the Court has no trouble rejecting the double recovery argument.

The Court then considers the CFTC’s cross-motion for summary judgment and finds that Taylor is collaterally estopped from defending the claims, because the same facts and issues were resolved when Taylor elected to plead guilty in the criminal proceeding. Moreover, even if collateral estoppel does not apply, the CFTC is entitled to summary judgment, “because the undisputed forecast of the evidence” reveals that Taylor violated the CEA by misrepresenting and omitting material facts to actual and potential pool participants and misappropriating participants’ funds. Noting that it has discretion in determining the appropriate civil monetary penalty based on the gravity of the offense, the Court orders Taylor to pay a $1 million civil penalty to the CFTC. Finally, the Court permanently enjoins Taylor from engaging in commodities trading.