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Disgraced penny stock mogul Robert E. Brennan will not be forced to repatriate $5 million from an offshore asset protection trust following a ruling Oct. 26 by the 2nd U.S. Circuit Court of Appeals. In Securities and Exchange Commission v. Brennan, 00-6128, a case of first impression, a divided court found that a lower court’s order to have Brennan, now in bankruptcy, return the money to the United States violated the automatic stay provision of the Bankruptcy Code. In 1995, Southern District Judge Richard Owen, on the heels of a 1994 bench trial, found that Brennan and his company, First Jersey Securities Inc., had perpetrated a “massive and continuing fraud” on customers, and the judge ordered the defendants to pay $75 million. During the trial, but before judgment, Brennan established the Cardinal Trust on Gibraltar, naming his three sons and the Robert E. Brennan Foundation Inc. as beneficiaries. Under the trust terms, the trustee had no obligation to make payments to the beneficiaries during the life of the trust. When Brennan filed for bankruptcy, he did not list the trust as part of his estate. The SEC charged that he continued to exercise control over the trust to support a “lavish, globetrotting lifestyle.” The SEC also said that Brennan relocated the trust on two occasions, with its final resting place being the island of Nevis in the Caribbean. In 1998, a New Jersey bankruptcy court denied the SEC’s application to have the trust repatriated, but blocked Brennan from any further transfers. The SEC then went before Judge Owen and successfully argued that Brennan should be the subject of a contempt hearing for violating the 1995 judgment. Judge Owen ordered the trust to be repatriated, but the 2nd Circuit stayed both that order and the contempt proceedings. On the appeal, the SEC argued that the trust fits within an exception of the automatic stay provision for any “action or proceeding by a governmental unit” to enforce its “police and regulatory power.” Brennan, now facing criminal charges for lying in bankruptcy proceedings, contended that Judge Owen erred because the trust fell within an exception to the “governmental unit” provision for any effort to enforce a money judgment. “Although the question is a close one, we agree with Brennan that the repatriation order fits within the exception to the governmental unit exception and that the order therefore violates the automatic stay,” said Judge Jose A. Cabranes. “It is well established that the governmental exception of �362(b)(4) permits the ENTRY of a money judgment against a debtor so long as the proceeding in which such a judgment is entered is one to enforce the governmental unit’s police or regulatory power.” However, Judge Cabranes said, the cases hold that “anything beyond the mere entry of a money judgment against a debtor is prohibited by the automatic stay.” There is a distinction, he said, “between mere entry of a money judgments and proceedings beyond such entry.” “When the government seeks to impose financial liability on a party, it is plainly acting in its police or regulatory capacity — it is attempting to curb certain behavior (such as defrauding investors, or polluting groundwater) by making the behavior that much more expensive,” he said. “However, once liability is fixed and a money judgment has been entered, the government necessarily acts only to vindicate its own interest in collecting its judgment.” Judge Cabranes said that “it was plain that the District Court went beyond a mere entry of a money judgment in entering the repatriation order since the money judgment obtained by the SEC against Brennan was entered in July 1995.” And even though the SEC “purported” not to claim an entitlement to the Cardinal Trust, he said, the SEC was plainly trying to “satisfy at least part” of the 1995 judgment. In dissent, Judge Guido Calabresi said the majority’s holding “unduly restricts the government’s exercise of regulatory authority under �362 of the Bankruptcy Code.” “The majority, incorrectly in my view, concludes that the Commission’s repatriation order constitutes the enforcement of a money judgment,” Judge Calabresi said, adding that the 2nd Circuit’s decision did not have “adequate support in the existing case law.” He said that “since the Commission will not receive any of Brennan’s repatriated assets unless and until the bankruptcy court has determined their proper disbursement, the repatriation order in no way amounts to satisfaction or an enforcement of the 1995 disgorgement judgment.” Judge Rosemary S. Pooler joined in the majority opinion. Martin L. Perschetz, Alan R. Glickman and Adam J. Freedman, of Schulte Roth & Zabel, represented Brennan. Assistant General Counsel Mark Pennington, General Counsel David M. Becker, Solicitor Jacob H. Stillman, Special Counsel Christopher Paik and Deputy General Counsel Meyer Eisenberg represented the SEC.

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