Sec. & Exch. Comm'n v. Hallam

• Decision Date: 19 July 2022
• Docket Number: 21-10222
• Citation: 42 F.4th 316
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff—Appellee, v. Parker R. HALLAM, Defendant—Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

42 F.4th 316

SECURITIES AND EXCHANGE COMMISSION, Plaintiff—Appellee,

v.Parker R. HALLAM, Defendant—Appellant.

No. 21-10222

United States Court of Appeals, Fifth Circuit.

Filed July 19, 2022

Theodore Joseph Weiman, U.S. Securities & Exchange Commission, Washington, DC, B. David Fraser, Senior Attorney, U.S. Securities & Exchange Commission, Fort Worth, TX, for Plaintiff-Appellee.

S. Michael McColloch, S. Michael McColloch, P.L.L.C., Dallas, TX, Karen L. Cook, Karen Cook, P.L.L.C., Dallas, TX, for Defendant-Appellant.

Before Smith, Elrod, and Oldham, Circuit Judges.

Jerry E. Smith, Circuit Judge:

Parker Hallam helped run a thicket of ersatz energy companies. When the SEC sued him for numerous securities violations, he agreed not to contest liability, and he agreed to certain remedies at a high level of generality. He appeals the particulars of the remedies ordered by the district court. Among other things, he says the court ignored Liu v. SEC , ––– U.S. ––––, 140 S. Ct. 1936, 207 L.Ed.2d 401 (2020), when it ordered him to "disgorge" his ill-gotten gains. Because the district court had authority to impose the contested relief, we affirm.

I.

The SEC accused Hallam of violating antifraud¹ and registration² provisions of the Securities Act and antifraud³ provisions of the Exchange Act and Rule 10b-5. Hallam neither admitted nor denied those allegations but consented to a judgment containing four relevant prongs of relief. First , he agreed to pay a civil penalty in an amount to be determined by the court. Second , he agreed that the court could determine whether he should be permanently enjoined from dealing in securities except for his own account. Third , Hallam agreed to "pay disgorgement of ill-gotten gains." Fourth , he agreed to pay "prejudgment interest" on those gains, "based on the rate of interest used by the [IRS] for the underpayment of federal income tax." The court entered judgment to those effects.

Nearly three years later, the SEC moved the district court to calculate the monetary remedies and enjoin Hallam from dealing in securities. The SEC requested a finding that Hallam's ill-gotten gains totaled $1,901,480. That figure derived from a forensic accounting firm's calculation of the total disbursements Hallam had received from the fraudulent entities within the statutory limitations period. The SEC asked for "disgorgement" in that amount and calculated the prejudgment interest at $424,375.38. It did not specify the appropriate civil penalty but requested that the court impose one of the options in the highest tier allowed by statute.

Before Hallam responded to the SEC's motion, the Supreme Court decided Liu , which identified constraints on the "disgorgement" remedy sought by the SEC. More on that later.

Liu changed Hallam's tune. He told the district court that Liu "banished" existing precedent on securities remedies, which he said vitiated his prior consent. His brief focused on the SEC's supposed inability to force him to disgorge his profits. But according to Hallam, Liu also foreclosed the SEC's ability to get prejudgment interest, a "penalty offset,"⁴ or an injunction against his future securities dealings, even though Liu didn't directly address those topics. In the alternative, Hallam requested a "live" evidentiary hearing to help the court "in the assessment of [which civil] penalty tier[ ]" to apply to his conduct.

Just before the district court ruled, Congress amended the Exchange Act explicitly to authorize "disgorgement" of wrongdoers' "unjust enrichment."⁵ Again, more on that later.

The district court rejected Hallam's positions entirely. It denied his request for a hearing. It read Liu to reaffirm disgorgement's availability in Exchange Act cases. It relied on pre- Liu precedent to hold that the SEC was entitled to disgorgement. Likewise, it concluded that Liu imposed no new constraints on the SEC's ability to get prejudgment interest, a "penalty offset,"⁶ or an injunction against his future securities dealings. And it didn't mention the (then very recent) statutory amendment.

The court entered final judgment ordering Hallam to pay $1,901,480 in "disgorgement" and $424,375.38 in prejudgment interest. It also imposed a civil penalty of an extra $1,901,480 after concluding that Hallam's conduct merited the highest amount provided by the Exchange Act: a penalty equal to his "pecuniary gain." Finally, the court enjoined Hallam from "participating ... in the issuance, purchase, offer, or sale of any unregistered securities" except in regard to his own account.

Hallam appeals each of those orders and the denial of an evidentiary hearing. He says the lack of an evidentiary hearing denied him due process. He also renews three substantive challenges to the district court's remedies. First , he claims that the SEC failed to ground its request for "disgorgement" in a category of relief that was typically available in equity.⁷ Second , he submits that prejudgment interest is permitted neither by the securities laws nor by equity jurisprudence. Third , he posits that the district court had no power to enjoin him from dealing in unregistered securities, which is ordinarily lawful. None of those contentions can defeat this judgment.

II.

Hallam says he was entitled to a live hearing before being "deprived of [a] significant property interest." Boddie v. Connecticut , 401 U.S. 371, 379, 91 S.Ct. 780, 28 L.Ed.2d 113 (1971). Only that procedure, he claims, could have disentangled the "unusually complex set of facts, ... lengthy chronology, and numerous transactions and parties" underlying the SEC's request for relief. At that hearing, Hallam maintains, he could have mounted "many challenges to the sufficiency and content of the financial data ... [that] formed the basis for the court's disgorgement award ... and the credibility assessments necessary for the multifaceted penalty-tier determination."

Part of that claim is new. Hallam never asked the district court for a live hearing to challenge the evidence establishing the financial transactions that unjustly enriched him. In his brief, he titled the tenth section "Request for Supplemental, Post-Discovery Briefing and a Hearing." He said that "the issues to be resolved in the assessment of penalty tiers " merited "the live appearance of the defendant[ ] for the Court to judge the veracity of his account and the sincerity of his testimony." (Emphasis added.) For the other issues, he noted that the court would have to "sift through competing versions of facts and challenged accountings," but he never said that had to happen in a courtroom. Instead, he requested "some limited discovery" and "supplemental briefing" on those questions.

So Hallam forfeited any right he may have had to a live hearing to hash out the details of his financial transactions. To preserve it for appeal, he was required to "press and not merely intimate" that due process claim "before the district court."⁸ He didn't just fail to press the issue; he effectively disclaimed it by explicitly requesting a hearing on one set of issues but not the other—within the same section of his brief. That's why the district court understood his request for a hearing to relate only to his state of mind, such as whether he acted in "good faith" and "on the advice of an attorney, accountant, or auditor." Accordingly, we consider only whether Hallam was entitled to a live hearing regarding the appropriate civil penalty.

A.

The process required to deprive someone of property depends on "the nature of the case." Mullane v. Cent. Hanover Bank & Tr. Co. , 339 U.S. 306, 313, 70 S.Ct. 652, 94 L.Ed. 865 (1950). The "essential requirements" are "notice and an opportunity to respond" to the government's position. Cleveland Bd. of Educ. v. Loudermill , 470 U.S. 532, 546, 105 S.Ct. 1487, 84 L.Ed.2d 494 (1985). Whether that opportunity to respond includes the right to provide live testimony depends on the extent to which a full hearing would aid the court in resolving complex, difficult issues of fact. See Merriman v. Sec. Ins. Co. of Hartford , 100 F.3d 1187, 1191–92 (5th Cir. 1996). So we must consider the question posed to the district court.

Both the Securities Act and the Exchange Act authorize civil penalties in a three-tiered structure.⁹ Both statutes instruct courts to determine the "amount of the penalty ... in light of the facts and circumstances."¹⁰ The penalties allowed by each tier are capped by the greater of a fixed amount per violation or "the gross amount of pecuniary gain" that the violation created for the defendant.¹¹ The fixed amount is higher for higher tiers.¹² An offense makes a defendant eligible for a second-tier penalty if it "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement."¹³ And it makes a defendant eligible for a third-tier penalty if it also "resulted in substantial losses or created a significant risk of substantial losses to other persons."¹⁴

But those provisions set only the maxima and provide courts with little guidance in fixing the amount. Nor have we explained what factors that court must or may consider.¹⁵ Instead, we review a civil-penalty order for abuse of discretion. Life Partners Holdings , 854 F.3d at 781. A district court abuses its discretion when it omits a factor "that should be given significant weight,"¹⁶ relies heavily on an irrelevant factor,¹⁷ or unreasonably balances the relevant factors.¹⁸ See In re Volkswagen of Am., Inc. , 545 F.3d 304, 310 & n.4 (5th Cir. 2008) (en banc). That standard leaves the district court substantial latitude in structuring its decisionmaking process.

The district court explained that it considered five factors in assessing the appropriate penalty: (1) the seriousness of the offenses; (2) Hallam's state of mind; (3) the risk or realization of financial losses created by the conduct; (4) the frequency of the violations; and (5) Hallam's financial condition. It held that Hallam was eligible for...