Sec. & Exch. Comm'n v. Loomis
| Decision Date | 23 April 2014 |
| Docket Number | Civ. No. S–10–458 KJM KJN. |
| Citation | 17 F.Supp.3d 1026 |
| Court | U.S. District Court — Eastern District of California |
| Parties | SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Lawrence “Lee” LOOMIS, Defendant. |
Jeremy E. Pendrey, John Scott Yun, Govt., Susan Frances Lamarca, U.S. Securities and Exchange Commission, San Francisco, CA, for Plaintiff.
Douglas J. Beevers, Federal Defender, Sacramento, CA, Klaus J. Kolb, Auburn, CA, for Defendant.
A motion for remedies filed by the Securities and Exchange Commission (SEC) against defendant Lawrence “Lee” Loomis (Loomis) is currently pending before the court. The motion was submitted without argument and the court now GRANTS the motion in part and DENIES it in part.
On February 23, 2010, the SEC filed a complaint against Loomis, Loomis Wealth Solutions (LWS), LLC, John Hagener, and Lismar Financial Services, LLC (defendants), alleging the defendants had misappropriated approximately $10 million from investors through the fraudulent sale of interests in the Naras Funds. ECF No. 1 ¶ 1. The complaint is comprised of six claims: (1) violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b–5, 17 C.F.R. § 240.10b–5 against all defendants; (2) violations of Section 17(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77q(a) against all defendants; (3) violations of Sections 17(a)(2) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(2) against all defendants; (4) violations of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c) against all defendants; (5) violations of Section 206(1) and 206(2) of the Advisers Act, 15 U.S.C. § 89b–6(a), against Hagener and Lismar; and (6) violations of Section 206(4) of the Advisers Act, 15 U.S.C. § 206(4), 15 U.S.C. § 80b–6(4) against Hagener and Lismar. ECF No. 1.
On June 10, 2010, the Clerk of the Court entered defaults as to Lismar and LWS. ECF No. 16. The court denied the SEC's motion for default judgments without prejudice to a later renewal. ECF Nos. 23, 25.
On May 3, 2011, Hagener filed a motion to stay the case pending resolution of criminal charges. ECF No. 30. After further proceedings, the court ultimately denied the motion for a stay on February 24, 2012. ECF No. 52.
On February 13, 2013, the SEC filed a motion for summary judgment against Loomis and Hagener, alleging that Loomis had violated the following provisions of the securities laws: (1) Section 10(b) and Rule 10b–5 of the Securities Exchange Act of 1934 (Exchange Act) and Section 17(a)(1) of the Securities Act of 1933 (Securities Act) by knowingly or recklessly making material misstatements and omissions to the investors in Naras Secured Funds, LLC (Naras Fund 1) and Naras Secured Fund # 2 (Naras Fund 2) and by knowingly or recklessly engaging in a fraudulent scheme; (2) Sections 17(a)(2) and (3) of the Securities Act by negligently making material misstatements and omissions to the Naras Funds 1 and 2 investors and by negligently engaging in a fraudulent scheme; and (3) Sections 5(a) and 5(c) of the Securities Act by offering and selling Naras Fund 1 securities and Naras Fund 2 securities in interstate commerce without first registering the offers and sales with the SEC and without having an exemption from registration. ECF No. 64 at 2. The motion raised additional claims against Hagener.
On March 5, 2013, defendant filed a motion for an extension of time and appointment of counsel. ECF No. 73. The court stayed the motion as to Loomis until resolution of his motion for the expansion of the appointment of his counsel in the criminal case. ECF No. 70.
On March 6, 2013, the SEC and Hagener submitted a stipulation for an injunction and on March 13, 2013, the SEC filed a notice that Hagener's consent to the injunction resolved the summary judgment motion as to him. ECF Nos. 69, 71. The court issued the order of injunction as to Hagener on April 15, 2013. ECF No. 82.
On April 1, 2013, counsel appeared on behalf of Loomis and thereafter the parties stipulated to new dates for hearing on the summary judgment motion. ECF Nos. 79, 81. After the opposition and reply had been filed on the summary judgment motion, Loomis filed a motion to stay the motion. ECF Nos. 86, 88. The court denied the requested stay without prejudice on August 27, 2013 2013 WL 4543939.
On September 3, 2013, 969 F.Supp.2d 1226 (E.D.Cal.2013), the court granted the SEC's motion for summary judgment on the following grounds: (1) Loomis violated Rule 10b–5 and Section 17(a)(1) by informing investors that the Naras loan funds were secured by second mortgages, that the investments were highly liquid and had a twelve percent rate of return; (2) Loomis engaged in a scheme to defraud in violation of Rule 10b–5, subparts (a) and (c), and Section 17(a), subparts (1) and (3), by misrepresenting the solvency of the Naras Funds while accepting money from new investors to use as payments to older investors; and Loomis violated Sections 5(a) and 5(c) of the Securities Act by offering unregistered securities for sale.
On March 11, 2014, the SEC filed a motion for remedies against Loomis. ECF No. 108. Defendant's untimely opposition was filed on April 3 and the SEC's reply was filed on April 4, 2013. ECF Nos. 112, 113.
The SEC seeks three remedies: a permanent injunction against further securities violations by Loomis; disgorgement of $11,695,840 raised from Naras investors plus prejudgment interest of $2,575,426 for a total of $14,271,426; and monetary penalties of $273,000. ECF No. 108–1.
Defendant concedes he is subject to a permanent injunction based on the court's ruling on summary judgment and his continued invocation of his right to remain silent. He argues disgorgement is improper because he no longer has the money, either because it was used to fund his other business entities or was forfeited by the order in United States v. Approximately $133,803.53 in U.S. Currency, Civ. No. S–09–461 TLN, and because the evidence on summary judgment was insufficient to show that all Naras investors were defrauded. Finally, he claims imposing a civil penalty would penalize his invocation of the right to remain silent and would constitute an excessive fine in violation of the Eighth Amendment. He cites no case authority for any of his arguments.
In reply, the SEC says disgorgement is appropriate even though Loomis does not have any of the money and that in its summary judgment order, the court found Loomis had consistently made material misrepresentations to investors. It also argues the proposed civil penalty is not constitutionally excessive.
Under both 15 U.S.C. §§ 77t(b) and 78u(b), the SEC may seek a permanent injunction against a person who has violated securities laws; it bears the burden of showing “ ‘a reasonable likelihood of future violations of the securities laws ....’ ” SEC v. Fehn, 97 F.3d 1276, 1295 (9th Cir.1996) (quoting SEC v. Murphy, 626 F.2d 633, 655 (9th Cir.1980) ). In evaluating the likelihood of future violations, the court must consider:
‘(1) the degree of scienter involved; (2) the isolated or recurrent nature of the infraction; (3) the defendant's recognition of the wrongful nature of his conduct; (4) the likelihood, because of defendant's professional occupation, that future violations might occur; (5) and the sincerity of his assurances against future violations.’
Id. at 1295–96 (quoting Murphy, 626 F.2d at 655 ). This court has discretion to grant or deny the request for injunctive relief. SEC v. Goldfield Deep Mines Co. of Nev., 758 F.2d 459, 465 (9th Cir.1985) ; SEC v. Alpha Telcom, Inc., 187 F.Supp.2d 1250, 1262 (D.Or.2002), affirmed by SEC v. Rubera, 350 F.3d 1084 (9th Cir.2003).
As noted in the order on summary judgment, Loomis solicited over $11 million from investors from March 2007 through August 2008, representing that the investments were secured by second mortgages even though he was aware they were not. ECF No. 97 at 9–10. He also told investors there was a guaranteed rate of return and their investments could be redeemed quickly. Id. at 12–13. Loomis thus acted with a high degree of scienter over a period of time, factors favoring the issuance of the injunction. See, e.g. SEC v. Abellan, 674 F.Supp.2d 1213, 1220–21 (W.D.Wash.2009) (); SEC v. Cross Fin. Servs., 908 F.Supp. 718, 720, 734 (C.D.Cal.1995) ().
Loomis has never acknowledged that his actions were wrong, expressed any remorse, or suggested that he will not engage in future violations, as he relies on his Fifth Amendment right to remain silent. Because the court is not able to evaluate whether Loomis's current attitude suggests future violation, these factors favor an injunction, but only slightly in light of Loomis's Fifth Amendment rights.
Loomis is currently detained and facing charges of mail and wire fraud carrying substantial penalties; the case is set for trial on October 6, 2014. United States v. Lee Loomis, Cr. No. S–12–315 JAM, ECF Nos. 103, 117. Nevertheless courts have enjoined people from future securities violations despite imprisonment. See, e.g., SEC v. Bravata, 3 F.Supp.3d 638, 662, 2014 WL 897348, at *21 (E.D.Mich. Mar. 6, 2014) (); SEC v. Lion Capital Mgmt., LLC, No. C 12–05116 WHA, 2013 WL 5945081,...
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