[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
U.S. COURT OF APPEALS
_____________ ELEVENTH CIRCUIT
August 10, 2005
No. 04-11985 THOMAS K. KAHN
_____________ CLERK
D.C. Docket No. 01-01344 CV-CC-1
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
RICHARD P. SMYTH,
MICHAEL J. BECKER et al.,
Defendants,
ARNOLD E. JOHNS, JR.,
Defendant-Appellant.
__________________________
Appeal from the United States District Court
Northern District of Georgia
__________________________
(August 10, 2005)
Before EDMONDSON, Chief Judge, and TJOFLAT and KRAVITCH, Circuit
Judges.
TJOFLAT, Circuit Judge:
In this case, the Securities and Exchange Commission obtained a judgment
against Arnold E. Johns, Jr., for $743,217.02, which represented the profits he
reaped from insider trading in the shares of Vista 2000, Inc. Johns appeals the
judgment, contending that the procedure the district court employed in
determining the profits he should disgorge denied him due process. We agree and
therefore vacate the judgment and remand the case for further proceedings.
I.
Johns was president and a director of Vista 2000, Inc. (Vista), a Delaware
corporation based in Roswell, Georgia, from February 1995 to the summer of
1996.1 Vista designed and sold a variety of consumer safety products, including
trigger guards for firearms and radon and carbon monoxide detectors for homes.
When Johns joined the company, Vista was a public company, having completed
an initial public offering in October 1994. Johns answered to Richard Smyth,
Vista’s CEO and the officer primarily responsible for the company’s day-to-day
operations.
Johns signed on with a starting annual salary of $125,000, and he received
options to purchase Vista stock—up to 200,000 shares—at an exercise price of
1
Johns resigned as president in June and as a director in July.
2
$1.28 per share. As president, Johns acquired a wealth of material and adverse
inside information about the company, and he ultimately exercised some of his
options and sold the resulting shares of stock before any of this information
became public.
Almost immediately after coming to Vista, Johns was called upon to
perform functions in the role of “Chief Financial Officer.” Specifically, Smyth
charged him with signing and filing the quarterly Form 10-Q for the period ending
March 31, 1995.2 Although Vista hired Michael Becker in June 1995 to take over
its financial reporting duties, Johns also signed and filed the 10-Q for the period
ending June 30, 1995. Both quarterly forms had been prepared by other
employees at Vista and contained materially incorrect information due to the
method used to calculate quarterly earnings and shares outstanding. Johns felt that
the content of the June 30 10-Q was misleading and expressed his concern to
Smyth, telling him that he would not sign the document. Smyth instructed him to
sign it, and Johns relented, and he signed and filed the 10-Q.
In May and August 1995, Vista issued press releases indicating that it had
acquired Alabaster, Inc. The May release stated that the product lines of the two
2
Publicly traded corporations must file the Form 10-Q quarterly as required by the
Securities Exchange Act of 1934, 15 U.S.C. § 78m, 17 C.F.R. § 240.13a-13. In the form, the
corporation must make certain financial statements and disclosures regarding its activities.
3
companies had already been integrated; the August release gave an effective
acquisition date of June 30. Both of these statements were false. Johns
confronted Smyth, insisting that the press releases were inaccurate, but the
misstatements stood uncorrected.
In December 1995, Steven Cunningham, Vista’s outside counsel, advised
Becker that the company’s 10-Qs would have to be restated because of the
improper method Vista had employed in computing earnings per share. Becker
went to Smyth, and Smyth disregarded Cunningham’s advice. The 10-Qs were not
amended. Later that month, Johns contacted Cunningham to discuss the
possibility of exercising his options. On December 21, 1995, Johns exercised
some of his options in a cashless exercise. Around the same time, Vista’s new
controller, Mary Beth Warwick, told Johns that the company’s books were not in
order.
On February 7, 1996, Cunningham sent a letter to Johns and Smyth
reiterating his concerns about the company’s 10-Qs for the periods ending March
31, June 30, and September 30, 1995, and instructing them to tell the officers and
directors not to sell any Vista securities until the misstatements in the 10-Qs had
been cured. Two days later, Johns exercised additional options; he sold stock the
exercises had yielded at various times over the remaining days of the month.
4
Altogether, the sales yielded nearly $550,000. At Johns’s selling points, Vista’s
stock was trading at prices ranging from $10.56 to $12.50 a share.
On March 22, 1996, Cunningham resigned as Vista’s counsel, citing the
company’s continued refusal to follow his advice on the conduct of its affairs. On
March 26, 1996, Vista issued a press release indicating that it would be amending
its 10-Qs and other filings to reflect a net loss of $5,000,000 for 1995.3 On March
26, Vista’s stock was trading at $12.875 a share. The next day, on a volume nearly
five times that of March 26, the stock declined twenty-two percent in value to
close at $10.062 a share.
On April 15, 1996, Vista issued another press release stating that Smyth had
resigned and that its audit committee had found “material accounting and financial
improprieties that the Company will have to remedy through the issuance of
restated financials for several historical periods.” The stock, which had been in a
steady decline since the March 26 press release, declined further, sliding to $2.50
a share by April 18.
At some point during 1996, the Securities and Exchange Commission (SEC)
launched an investigation into Vista’s financial affairs. Its investigation
3
Although Vista had not yet completed its final filings for 1995, the 10-Qs it had filed
that year routinely reflected net income when in fact the company was losing money, as the
$5,000,000 loss indicated.
5
culminated in this lawsuit, which the SEC brought against Johns, Smyth, and two
other Vista officers on May 25, 2001.4
II.
In its complaint, the SEC alleged that Johns violated various provisions of
the Securities Act and the Securities Exchange Act, and rules promulgated
thereunder, and engaged in insider trading while an officer at Vista.5 As remedies,
the SEC sought a permanent injunction barring Johns from further violation of the
4
The SEC filed a “First Amended Complaint for Injunctive and Other Relief” on June
20, 2001, and it is that complaint on which the case proceeded to judgment. We therefore refer
to the amended complaint as “the complaint.”
5
The complaint contains nine counts, six against Johns. Count I alleges violations of
section 17(a) of the Securities Act (15 U.S.C. § 77q(a)) by Johns and others; Count II alleges
violations of section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5
(17 C.F.R. § 240.10b-5) by Johns and others; Count III alleges liability as a control person for
Vista’s violations of section 13(a) of the Securities Exchange Act (15 U.S.C. § 78m(a)) and
Rules 12b-20 and 13a-1 (17 C.F.R. §§ 240.12b-20 and 240.13a-1) for Smyth only; Count IV
alleges liability as control persons for Vista’s violations of section 13(a) of the Securities
Exchange Act and Rules 12b-20 and 13a-11 (17 C.F.R. § 240.13a-11) for Johns and Smyth;
Count V alleges liability as control persons for Vista’s violations of section 13(a) of the
Securities Exchange Act and Rules 12b-20 and 13a-13 (17 § C.F.R. 240.13a-13) for Johns and
Smyth; Count VI alleges liability as control persons for Vista’s violations of sections 13(b)(2)(A)
and 13(b)(2)(B) of the Securities Exchange Act (15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B))
for Johns and Smyth; Count VII alleges violations of section 13(b)(5) of the Securities Exchange
Act (15 U.S.C. § 78m(b)(5)) and Rules 13b2-1 and 13b2-2 (17 C.F.R. §§ 240.13b2-1 and
240.13b2-2) by Johns and others; Count VIII alleges violations of section 14(e) of the Securities
Exchange Act (15 U.S.C. § 78n(e)) and Rule 14e-3 (17 C.F.R. § 240.14e-3) by Alan T. Davis, a
co-defendant who had provided accounting services to Vista; and Count IX alleges violations of
sections 16(a) and 16(c) of the Securities Exchange Act (15 U.S.C. §§ 78p(a) and 78p(c)) and
Rules 16a-2 and 16a-3 (17 C.F.R. §§ 240.16a-2 and 240.16a-3) by Smyth. Each count
incorporates the first 457 paragraphs of the complaint, which together contain its factual
allegations.
6
securities laws and the disgorgement of his insider-trading profits. Johns, in his
answer, denied liability and asserted several affirmative defenses, none of which is
relevant here.6 Following some discovery, Johns and the SEC entered into a
stipulation under which Johns withdrew his answer to the extent that it denied
liability and consented to the issuance of a permanent injunction. The stipulation
reserved for further proceedings the amount of the profits Johns would disgorge;
that is, Johns reserved the right to litigate the amount of the disgorgement and
prejudgment interest.7 The parties attached to the stipulation the “Order of
Permanent Injunction” they would present to the district court.
On October 30, 2002, the district court entered the Order of Permanent
Injunction (hereafter “consent decree” or “decree”). The consent decree contains
sweeping injunctive provisions, each of which enjoins Johns, “his agents, servants,
employees and attorneys, and those persons in active concert or participation with
him who receive actual notice of this Order of Permanent Injunction” from
6
Prior to answering the complaint, Johns moved the court to dismiss the complaint, and
each count lodged against him, for failure to state a claim for relief, and alternatively to strike
portions of the complaint on the ground that they were redundant and immaterial. See Fed. R.
Civ. P. 12(b)(6) and (f). The court denied both motions. Johns’s brief challenges these rulings.
We do not address them because, as we point out in the text, Johns entered into a stipulation with
the SEC and consented to the entry of a decree that disposed of the issues of liability.
7
Specifically, the stipulation and the subsequent consent decree indicated that “the
allegations of the Commission’s complaint, except any allegations that the amount of losses
avoided is $421,563 as alleged by the Commission in paragraphs 406 and 421 of the First
Amended Complaint, shall be deemed true.”
7
disobeying one or more of the securities laws cited in the SEC’s complaint.8
Regarding the SEC’s claim for disgorgement and prejudgment interest, the decree
replicates the stipulation by providing that the claim would “be resolved upon
motion of the [SEC] Commissioner at a later date.”9
On July 21, 2003, the SEC moved the district court to determine the amount
of disgorgement and prejudgment interest and to “enter final judgment” against
Johns. The motion asserted that the SEC was entitled to disgorgement in the sum
of $421,563. The SEC arrived at this amount by calculating the losses Johns
8
The consent decree permanently enjoined Johns and the others from “violating, directly
or indirectly,” the statutes and regulations cited in the SEC’s complaint, see supra note 5.
Paragraph I of the injunctive portions of the decree is illustrative. It states, in full:
IT IS HEREBY ORDERED, ADJUDGED AND DECREED that defendant
Johns . . . be and hereby [is] permanently enjoined and restrained from violating,
directly or indirectly, Section 17(a) of the Securities Act of 1933 . . ., [15 U.S.C.
77q(a),] by, through the use of any means or instruments of transportation or
communication in interstate commerce or the use of the mails:
1. employing any device, scheme or artifice to defraud;
2. obtaining money or property by means of any untrue statement
of a material fact or any omission to state a material fact necessary
in order to make the statements made, in the light of the
circumstances under which they were made, not misleading; or
3. engaging in any transaction, practice, or course of business
which operates or would operate as a fraud or deceit upon the
purchaser,
in the offer or sale of any security.
9
Although it is styled Order of Permanent Injunction, the consent decree is a partial final
judgment because the SEC’s claim for disgorgement remained to be litigated. The district court
entered a final judgment, which is now before us, after determining the amount of the
disgorgement due from Johns.
8
avoided, using the April 18, 1996 value of the stock—$2.50 a share—as the
baseline, and reasoning that by that date the market had absorbed the negative
information announced by Vista on April 15.10 Using this disgorgement amount,
the SEC claimed that $321,564.02 in prejudgment interest was also due.
Johns opposed the SEC’s motion. Treating it as a motion for summary
judgment, Johns argued that the motion should be denied since material issues of
fact concerning the appropriate disgorgement figure remained to be litigated.
Although he had admitted facts sufficient to make out a case for disgorgement, he
had not stipulated to any specific amount due, and thus “the calculation of the
amount of ‘losses avoided,’ if any, [we]re in material dispute.” Johns concluded
his opposition to the SEC’s motion by stating that “the Court must consider the
unrelated events, not even addressed by the SEC, that led to the sharp decline in
Vista’s stock price of approximately 68.7 percent between the time of [his] last
transaction in February 1996 and the public announcement of April 15, 1996.”
According to his formula, Johns avoided losses of only $39,442.81. He also
10
In withdrawing his answer to the SEC’s complaint, Johns was no longer denying that
he was aware of the information contained in Vista’s April 15 press release at the time he made
his trades. The SEC used the formula adopted by Congress in the Insider Trading Sanctions Act
of 1984, codified at 15 U.S.C. § 78u-1(f), which defines “losses avoided” as “the difference
between the purchase or sale price of the security and the value of that security as measured by
the trading price of the security a reasonable period after public dissemination of the nonpublic
information.” Johns does not contest the correctness of the SEC’s application of the formula.
9
contended that he was entitled to offset any amount owed by $192,000, the cost of
the exercise of the 150,000 options at issue in the case. Thus, if his position
prevailed, he would owe nothing in avoided losses. Johns formally moved the
court to hold an evidentiary hearing to establish the facts essential to his
“unrelated events” legal argument. He also informed the court that he was still
waiting to depose one of the SEC’s key witnesses.
The district court denied Johns’s request for an evidentiary hearing on the
grounds that he failed to detail the “unrelated events” that led to the decline in the
price of Vista shares, and the position he espoused had no support in the law. The
legal effect of the court’s ruling was that the SEC’s submission was unassailable;
the SEC need only establish a “reasonable approximation” of losses Johns
avoided, and, in the court’s view, its submission did that. The court therefore
entered judgment against Johns in the sums the SEC requested: $421,563 in
disgorgement and $321,564 in prejudgment interest. Johns now appeals. Because
Johns withdrew his answer to the complaint’s allegations of liability and
consented to the entry of a permanent injunction barring him from further
disobedience of the securities laws, this appeal presents only one issue: whether
the district court should have granted his request for an evidentiary hearing.
III.
10
In appealing the district court’s refusal to hold an evidentiary hearing to
resolve the disgorgement issue, Johns is actually challenging the manner in which
the district court chose to resolve that issue. We therefore review the court’s
failure to convene an evidentiary hearing for abuse of discretion. Cliff v. Payco
Gen. Am. Credits, Inc., 363 F.3d 1113, 1121 (11th Cir. 2004). A district court
abuses its discretion when, in reaching a decision, “it applies an incorrect legal
standard, follows improper procedures in making the determination, or makes
findings of fact that are clearly erroneous.” Martin v. Automobili Lamborghini
Exclusive, Inc., 307 F.3d 1332, 1336 (11th Cir. 2002).
IV.
Johns contends that the SEC’s motion for the entry of a judgment of
disgorgement and prejudgment interest was actually a motion for summary
judgment, and that the court should have denied it because the amount he should
have been required to disgorge was in dispute. The SEC, responding, says that its
motion was not a motion for summary judgment, filed pursuant to Fed. R. Civ. P.
56, motion but simply a “motion for judgment.” The SEC points us to nothing in
the Rules of Civil Procedure, however, that would authorize such a motion. The
district court nonetheless accepted the motion as if authorized; in effect, the court
minted a new rule. The court did so notwithstanding precedent that holds that
11
district courts may not “promulgate an ad hoc procedural code whenever
compliance with the Rules proves inconvenient.” Fla. Med. Ass’n v. U.S. Dept. of
Health, Educ. & Welfare, 601 F.2d 199, 202 (5th Cir. 1979).11
The Rules of Civil Procedure provide guidance for the district court’s
handling of the SEC’s motion for judgment in the form of Rule 55.12 Rule
11
In Bonner v. Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), we adopted as
binding precedent the decisions of the former Fifth Circuit handed down prior to October 1,
1981.
12
Rule 55 states in relevant part as follows:
(b) [Default] Judgment. Judgment by default may be entered as follows:
(1) By the Clerk. When the plaintiff’s claim against a defendant is for a sum
certain or for a sum which can by computation be made certain, the clerk upon request of
the plaintiff and upon affidavit of the amount due shall enter judgment for that amount
and costs against the defendant, if the defendant has been defaulted for failure to appear
and is not an infant or incompetent person.
(2) By the Court. In all other cases the party entitled to a judgment by default
shall apply to the court therefor; but no judgment by default shall be entered against an
infant or incompetent person unless represented in the action by a general guardian,
committee, conservator, or other such representative who has appeared therein. If the
party against whom judgment by default is sought has appeared in the action, the party
(or, if appearing by representative, the party’s representative) shall be served with written
notice of the application for judgment at least 3 days prior to the hearing on such
application. If, in order to enable the court to enter judgment or to carry it into effect, it is
necessary to take an account or to determine the amount of damages or to establish the
truth of any averment by evidence or to make an investigation of any other matter, the
court may conduct such hearings or order such references as it deems necessary and
proper and shall accord a right of trial by jury to the parties when and as required by any
statute of the United States.
Fed. R. Civ. P. 55.
None of the Rules of Civil Procedure fits hand in glove the situation the district court
12
55(b)(1) permits entry of judgment by the clerk without any hearing when “the
plaintiff’s claim against a defendant is for a sum certain or for a sum which can by
computation be made certain.” In this case, however, the disgorgement and
prejudgment interest sums are contested and, as the district court acknowledged,
even the SEC’s formula for determining those sums represents only “a reasonable
approximation of the losses avoided by Johns.” In other words, this case involves
neither a sum certain nor a sum that could be made certain by computation.
Rule 55(b)(2), which covers “all other cases,” requires the district court to
hold an evidentiary hearing “to determine the amount” of losses avoided. E.g.,
Adolph Coors Co. v. Movement Against Racism and the Klan, 777 F.2d 1538,
1543 (11th Cir. 1985) (“[J]udgment of default awarding cash damages could not
properly be entered ‘without a hearing unless the amount claimed is a liquidated
sum or one capable of mathematical calculation.’” (quoting United Artists Corp.
v. Freeman, 605 F.2d 854, 857 (5th Cir.1979))); Lowe v. McGraw-Hill Cos., 361
F.3d 335, 339-40 (7th Cir. 2004) (“The Federal Rules of Civil Procedure make a
clear distinction between the entry of default and the entry of a default judgment.
The default is entered upon the defendant’s failure to plead or otherwise defend,
faced. The common sense notions of justice that inhere in the Due Process Clause, however,
mandated that Johns was entitled to a fair hearing on the fact issues involved in the disgorgement
determination. The rule that most closely satisfies this due process concern is Rule 55(b)(2).
13
Fed.R.Civ.P. 55(a), but if an evidentiary hearing or other proceedings are
necessary in order to determine what the judgment should provide, such as the
amount of damages that the defaulting defendant must pay, those proceedings
must be conducted before the judgment is entered. See Rule 55(b)(2).”).13
Basic notions of due process underpin this requirement. As the Supreme
Court noted in Mullane v. Central Hanover Bank & Trust, Co., “‘[t]he
fundamental requisite of due process of law is the opportunity to be heard.’” 339
U.S. 306, 314, 70 S. Ct. 652, 657, 94 L. Ed. 865 (1950) (quoting Grannis v.
Ordean, 234 U.S. 385, 394, 34 S. Ct. 779, 783, 58 L. Ed. 1363 (1914)). We
believe that the right to be heard is of little value unless the party has some point
of reference in established procedural rules to guide his continued participation in
the proceedings, particularly when final judgment looms. In this case, Rule
13
An evidentiary hearing is not a per se requirement; indeed, Rule 55(b)(2) speaks of
evidentiary hearings in a permissive tone. See Fed. R. Civ. P. 55(b)(2) (“[T]he court may
conduct such hearings . . . .” (emphasis added)). We have held that no such hearing is required
where all essential evidence is already of record. See S.E.C. v. First Fin. Group of Tex., Inc., 659
F.2d 660, 669 (5th Cir. 1981) (“Rule 55(b)(2) does not require the district court to hold either an
evidentiary hearing or oral argument on a motion for a default judgment.”) (citing Thomas v.
United States, 531 F.2d 746, 748 (5th Cir. 1976) (“Taxpayer’s first contention that the district
court should have held an evidentiary hearing and/or oral argument on the motion is without
merit. All the essential facts were of record.”)). Other circuits agree. See, e.g., KPS & Assocs.
v. Designs by FMC, Inc., 318 F.3d 1, 21 (1st Cir. 2003). Other circuits also agree, however, that
such hearings are required in all but “limited circumstances,” id., as when the district court
already has a wealth of evidence from the party requesting the hearing, such that any additional
evidence would be truly unnecessary to a fully informed determination of damages. Id.
(collecting cases). Those limited circumstances are not present here, where none of the evidence
Johns sought to present was before the district court.
14
55(b)(2) required the evidentiary hearing that the district court did not grant.
Thus, the court abused its discretion when it granted the SEC’s motion for
judgment.
The SEC argues that Johns was not entitled to a hearing because district
courts have “discretion not to hear oral testimony on motions” and that Johns
waived the right to a trial when he stipulated to the facts in the SEC’s complaint
for purposes of disgorgement: “Johns consented to a procedure whereby the last
remaining issues in the case were to be resolved ‘by motion of the Commission.’”
The court properly denied the motion for a hearing, the SEC continues, because
Johns’s motion stated only “in vague terms” what evidence he planned to elicit in
the hearing and that he “neither identified the factual issues, the expert witness or
the topic, other than ‘trading matters,’ nor did he specify what the expert would
testify.” The SEC specifically disavows having sought judgment pursuant to the
Rules of Civil Procedure, noting that it moved “in accordance with the stipulation”
and that its motion “was governed by the standards applicable to motions
generally, where, unlike in a summary judgment context, the district court may,
when appropriate, resolve the disputed issues of fact on the papers.”
We do not agree with the SEC that Johns agreed to a novel summary
proceeding for the determination of disgorgement. The consent decree indicates
15
that Johns shall “pay disgorgement and pre-judgment interest in amounts to be
resolved upon motion of the Commission at a later date.” This language indicates
a couple of things. First, it establishes that the amounts remain “to be
resolved”—i.e., that resolution was still necessary at the time the stipulation was
entered. Second, it sets the context in which that resolution will take place: “upon
motion of the Commission at a later date.” We do not read this to mean that the
resolution will be exclusively “by motion,” but that the resolution will begin—“at
a later date”—“upon motion” by the SEC—i.e., at the instance of the SEC.
Although we do not find this language ambiguous, any lingering ambiguity is laid
to rest by other language in the consent decree, which expressly states that Johns
still contests the amount owed to the SEC in disgorgement and prejudgment
interest.
The SEC is correct that a hearing is not always required in cases like this
one. As we have explained, however, this was not a case where all essential
evidence was already of record, and it did not present one of the “limited
circumstances” under which the district court could properly exercise its discretion
not to hold a hearing. A hearing was required.
V.
The district court erred in granting the SEC’s motion for judgment without
16
an evidentiary hearing. The district court’s judgment is accordingly vacated, and
the case is remanded for further proceedings.14
14
In this appeal, Johns did not challenge the injunctive provisions contained in the
consent decree, which we set out in note 8 supra and accompanying text. Johns could not
challenge them here because he (and the SEC) stipulated that the court could enter a decree
incorporating those provisions; moreover, in signing the stipulation, he “waive[d] any right he
might have to appeal from the entry of the Order of Permanent Injunction.” Although (for that
reason) the consent decree’s injunctions are not before us for review, they are still before the
district court, which retained jurisdiction to enforce them, and therefore are subject to the court’s
inherent power to modify or revoke them. Because the injunctions are still before the district
court, we would be remiss if we did not inform the court that they are unenforceable.
The injunctions contained in paragraphs II, III, and IV of the consent decree are identical
to the injunction in paragraph I to the extent that they track the provisions of the statute or
regulation the violation of which is enjoined. The paragraphs differ only with respect to the
conduct that the statute or regulations explicitly proscribe. Each of the injunctions is a
quintessential “obey-the-law” injunction. See Florida Ass’n of Rehab. Facilities, Inc. v. Fla.
Dep’t of Health and Rehabilitative Servs., 225 F.3d 1208, 1222-23 (11th Cir. 2000):
This Circuit has held repeatedly that “obey the law” injunctions are unenforceable.
See, e.g., Burton v. City of Belle Glade, 178 F.3d 1175, 1200 (11th Cir. 1999)
(holding that injunction which prohibited municipality from discriminating on the
basis of race in its annexation decisions “would do no more than instruct the City
to ‘obey the law,’” and therefore was invalid); Payne v. Travenol Labs., Inc., 565
F.2d 895, 899 (5th Cir. 1978) (invalidating injunction that prohibited defendant
from violating Title VII in its employment decisions). The specificity requirement
of Rule 65(d) is no mere technicality; “[the] command of specificity is a reflection
of the seriousness of the consequences which may flow from a violation of an
injunctive order.” Payne, 565 F.2d at 897. An injunction must be framed so that
those enjoined know exactly what conduct the court has prohibited and what steps
they must take to conform their conduct to the law. See Meyer v. Brown & Root
Constr. Co., 661 F.2d 369, 373 (5th Cir. 1981) (citing International
Longshoremen’s Assoc. v. Philadelphia Marine Trade Assoc., 389 U.S. 64, 76, 88
S. Ct. 201, 208, 19 L. Ed.2d 236 (1967)).
The injunctions reach any violation of the securities laws and regulations Johns may
commit. If the SEC believes that Johns has committed a violation, it has the right to move the
district court for an order to show cause why he should not be adjudged in civil contempt and
sanctioned. And it would matter not where the violation occurred, as we now explain.
Paragraph II of the decree enjoins Johns from violating section 10(b) of the Securities
17
SO ORDERED.
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5. Thus, if Johns violated the statute
and the rule by employing a “device, scheme, or artifice to defraud . . . in connection with the
purchase or sale” of the shares of Corporation X in California, the district court could make Johns
come to Atlanta on a rule to show cause, issued at the SEC’s behest, and explain why he should
not be jailed, fined or otherwise sanctioned for the violation.
“[T]he Securities Exchange Act permits the exercise of personal jurisdiction to the limit of
the Due Process Clause of the Fifth Amendment. . . .” E.g., SEC v. Unifund SAL, 910 F.2d 1028,
1033 (2d Cir. 1990). In the above hypothetical, because Johns committed the violations in
California and had no presence in Georgia, the district court, and thus the SEC, could not obtain
jurisdiction over his person if the SEC sued him in the Northern District of Georgia. By
persuading the district court to sign the consent decree it presented pursuant to its stipulation with
Johns, the SEC apparently is of the belief that the Due Process Clause would present no hurdle to
the enforcement of the injunction it has obtained. Put another way, the Clause would effectively
bar the prosecution of an independent suit in Atlanta based on the California violation (because in
personam jurisdiction over Johns would be lacking), but it would not bar a contempt proceeding
in Atlanta based on the same violation. The SEC is also apparently of the belief that the Rules of
Civil Procedure would have little application in a contempt proceeding in Atlanta. If the SEC
sued Johns in California, Johns would have the benefit of all of the rights the Rules provide a civil
litigant, not to mention his Seventh Amendment right to a trial by jury. Not so in a contempt
proceeding; the court would issue a show-cause order on the SEC’s motion, and would promptly
convene a hearing to permit Johns to rebut the SEC’s proof that he violated the law. Whether the
court would delay the hearing to afford Johns his rights under the Rules, including discovery, and
a jury trial of the issues the court would ordinarily submit to a jury were the SEC to sue Johns in a
separate action rather than seek enforcement of the injunction are issues a district court should
consider in deciding whether to sign an obey-the-law consent decree such as the one the SEC
drafted in this case.
18