Back From Suspension

An attorney who was suspended for three years has been reinstated to practice by the New York Appellate Division for the second Judicial Department.

From the suspension order

In or about 2000 and 2001, the respondent was associate general counsel to NBTY, Inc. (hereinafter NBTY), a nutritional supplement company that was publicly traded on NASDAQ. On or about March 2, 2006, the respondent was named as a defendant in Securities and Exchange Commission v Drucker, in the United States District Court for the Southern District of New York, under Docket No. 06 Civ. 1644.

The complaint in the foregoing matter alleged, in sum and substance, that, in or about October 2001, the respondent and his father, Ronald Drucker, engaged in unlawful insider trading by selling their shares of NBTY stock one day before NBTY made public a negative earnings announcement. It was alleged that, in his capacity as associate general counsel to NBTY, the respondent “routinely received sensitive and confidential information about NBTY. [The respondent] owed a duty to keep confidential, and not use for personal gain, any material, non-public information concerning NBTY.” At the time of these sales, the respondent was alleged to have been “aware of material, non-public information” concerning NBTY’s fourth-quarter earnings.

At the close of the stock market on October 19, 2001, NBTY publicly announced that its fourth-quarter earnings would be lower than expected. On the next trading day, the value of NBTY’s shares fell approximately 27%. On October 18, 2001, one day prior to NBTY’s public announcement, the respondent placed orders to sell his entire holdings of NBTY stock, consisting of 25,700 shares. At the same time, the respondent contacted his father, Ronald Drucker, and “tipped him.” “Within minutes,” Ronald Drucker sold his entire holdings of NBTY stock. Also at the same time, the respondent “directed the sale” of the entire NBTY holdings of his friend William V. Minerva. By trading in advance of the negative earnings announcement, the respondent, Ronald Drucker, and William V. Minerva avoided losses of approximately $200,000.

The March 2, 2006, complaint charged the respondent with violating section 17(a) of the Securities Act of 1933 (15 USC § 77q[a]), section 10(b) of the Securities Exchange Act of 1934 (15 USC § 78j[b]), and Securities and Exchange Commission (hereinafter SEC) Rule 10b-5 (17 CFR 240.10b-5). A jury trial commenced in the United States District Court for the Southern District of New York on November 26, 2007. On December 3, 2007, the jury returned a verdict finding that (1) the respondent violated section 17(a) of the Securities Act of 1933 (15 USC § 77q[a]), section 10(b) of the Securities Exchange Act of 1934 (15 USC § 78j[b]), and SEC Rule 10b-5 (17 CFR 240.10b-5), when he sold 25,700 shares of NBTY stock on October 18, 2001, and October 19, 2001; (2) the respondent violated section 17(a) of the Securities Act of 1933 (15 USC § 77q[a]), section 10(b) of the Securities Exchange Act of 1934 (15 USC § 78j[b]), and SEC Rule 10b-5 (17 CFR 240.10b-5), when he sold 1,575 shares of NBTY stock for William V. Minerva on October 18, 2001; and (3) the respondent violated section 17(a) of the Securities Act of 1933 (15 USC § 77q[a]), section 10(b) of the Securities Exchange Act of 1934 (15 USC § 78j[b]), and SEC Rule 10b-5 (17 CFR 240.10b-5), as a “tipper.”

The District Court (McMahon, J.) thereafter issued a Decision on Relief (528 F Supp 2d 450 [SD NY]). In that decision, the District Court made several rulings as to the respondent’s conduct. With respect to the amount to be disgorged by the respondent, the District Court held that “the jury necessarily found that [the respondent] had obtained inside information about the earnings of NBTY before he began selling his and Minerva’s stock on October 18, and before he telephoned his father and directed [him] to sell NBTY stock, also on October 18” (528 F Supp 2d at 452). With respect to the respondent’s liability, the District Court ruled that the respondent “is solely liable for disgorging his entire ill-gotten gain [and] is jointly and severally liable for the amounts to be disgorged” by Ronald Drucker and William V. Minerva (id. at 453). The District Court directed the respondent to disgorge the amount of $197,243 plus prejudgment interest, and imposed civil penalties in an amount equal to twice the disgorgement amount, to wit, $394,486 (see id.).

The ruling on the respondent’s liability for civil penalties was based, inter alia, on the [*3]District Court’s finding that the respondent “is a lawyer who betrayed the trust of his client (who also happened to be his employer) for his own benefit and for the benefit of his father and his best friend” (id. at 452-453). “In addition to betraying the trust of his client/employer,” the District Court found that the respondent “failed to cooperate with the NASD investigation . . . thereby misleading his employer” and that he “committed perjury on the witness stand at the trial of this action” (id. at 453). The District Court issued a permanent injunction against the respondent’s “further violation of the securities laws,” as well as his being “an officer and director” (id.). The permanent injunction was based, among other things, on the District Court’s finding that the respondent “demonstrated utter indifference to both the law and to his client” (id. at 454).

On or about December 21, 2007, the District Court issued a “Final Judgment Against Defendant Mitchell S. Drucker.” The District Court reviewed the history of the litigation, permanently restrained and enjoined the respondent from violating, directly or indirectly, section 17(a) of the Securities Act of 1933 (15 USC § 77q[a]), section 10(b) of the Securities Exchange Act of 1934 (15 USC § 78j[b]), and SEC Rule 10b-5 (17 CFR 240.10b-5), prohibited the respondent from acting as an officer or director of any issuer that has a class of securities registered pursuant to section 12 of the Securities Exchange Act of 1934 (15 USC § 781) or that is required to file reports pursuant to Section 15(d) of the Securities Exchange Act of 1934 (15 USC § 78o[d]). The District Court ordered the respondent to disgorge the amount of $201,146.34, which included prejudgment interest, found that the respondent was jointly and severally liable with William V. Minerva, and ordered the respondent to disgorge the amount of $11,577.11, which included prejudgment interest. In addition, the District Court found that the respondent was jointly and severally liable with Ronald Drucker, and ordered the respondent to disgorge the amount of $74,411.76, which included prejudgment interest. Finally, the District Court ordered the respondent to pay a civil penalty in the amount of $394,486. The respondent satisfied the final judgment entered against him, as reflected in a “Satisfaction of Judgments” dated February 6, 2008.

The United States Court of Appeals for the Second Circuit, in Drucker v Securities and Exchange Commission (346 Fed Appx 663 [2d Cir]), affirmed the judgment entered by the District Court in Securities and Exchange Commission v Drucker. In its decision, dated September 21, 2009, the Second Circuit found that “although there was conflicting evidence . . . the jury was entitled to credit the testimony supporting the SEC’s position” (id. at 665). As a result, the Second Circuit ruled that the District Court did not err in denying the defendants’ motion for judgment as a matter of law with respect to the sufficiency of the evidence (see id.). Moreover, the Second Circuit ruled that the District Court did not abuse its discretion in its disgorgement order (see id. at 666). Additionally, the Second Circuit ruled that the District Court’s imposition of a civil penalty, which was twice the total disgorgement amount, was “within the statutory limitations and reasonable based on the record” (id.). The Second Circuit also ruled that the District Court did not commit error in directing injunctive relief against the respondent (see id.).

(Mike Frisch)