FTC v. Sharp
| Decision Date | 10 September 1991 |
| Docket Number | No. CV-S-89-870 RDF (RJJ).,CV-S-89-870 RDF (RJJ). |
| Citation | 782 F. Supp. 1445 |
| Parties | FEDERAL TRADE COMMISSION, Plaintiff, v. Lloyd SHARP, et al., Defendants. |
| Court | U.S. District Court — District of Nevada |
COPYRIGHT MATERIAL OMITTED
Stephen Gurwitz, F.T.C., Washington, D.C., Ruth Cohen, Asst. U.S. Atty., Las Vegas, Nev., for plaintiff.
Matthew Callister, Las Vegas, Nev., for trustee.
Capers G. Barr, III, Barr, Barr & McIntosh, Charleston, S.C., Robert P. Dickerson, Dickerson, Dickerson, Lieberman & Consul, Las Vegas, Nev., for defendants.
ORDER GRANTING PARTIAL SUMMARY JUDGMENT AND PERMANENT INJUNCTION
Plaintiff, Federal Trade Commission seeks summary judgment that Defendants George Anderson, Merlyn Berg, Jack Edwards a/k/a Gale Jackson, Carl Grodin, Steven Bourque a/k/a J.W. Hall, Reese T. Houston, Lloyd Sharp, Gayle Gunn, Roy Bonn, Roger Swayze, White Rock Mining, Inc., Lloyds International, Inc., Houston R & R, Inc., Golden Sands Development, Inc., and Marcel, Edwards, Hall & Associates, violated Section 5(a) of the Federal Trade Commission Act, 15 U.S.C. § 45(a), by engaging in deceptive acts and practices, and that equitable relief, including a permanent injunction and consumer redress is appropriate under Section 13(b) of the FTC Act, 15 U.S.C. § 53(b) and Fed.R.Civ.P. 65.
The Honorable Roger D. Foley, Senior United States District Court Judge has referred this motion to the undersigned for consideration.
This court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331(a), 1337(a) and 1335. Defendants' alleged violations of the FTCA were clearly "in or affecting commerce;" therefore, the FTC has authority under Section 13(b) to bring this action.
For the following reasons, this court concludes that Defendants violated Section 5(a) of the FTCA. The court grants the FTC's Motions for Partial Summary Judgment that the Defendants are jointly and severally liable for consumer redress. Doc. Nos. 284 and 293. Moreover, the court finds that good cause exists to permanently enjoin Defendants from violating the FTCA.1 Doc. Nos. 284 and 293. Final judgment will be delayed until the amount of equitable monetary relief for which each Defendant is liable is established.
Defendants sold "ore purchase contracts" to three mines, Cinder Mountain, Golden Sands/Claim 72 and White Rock. These contracts purported to convey ore from one of the mines. The Defendants promised to process the ore and recover its gold and silver. The purchasers were to receive the precious metal recovered from the ore they purchased. The Defendants claimed they were selling ore purchase contracts in order to raise enough money to put the mines into full production.
Apparently, Defendants promoted ore purchase contracts for all three mines in the same way. Defendants used a tele-marketing approach that combined oral representations and printed material mailed to prospective purchasers. Defendants also solicited investors through print and cable TV.
The FTC alleges Defendants made the following misrepresentations while promoting the mines. First, Defendants misrepresented the value of the ore in all three mines, and misrepresented that the amount of extractable ore in the mines justified commercial exploitation. For example, the FTC alleges Defendants represented that each ton of ore from the White Rock project contained $400 worth of gold and silver. However, the FTC's expert concluded that each ton of White Rock ore contained only $2 worth of gold and even less silver.
Second, Defendants misrepresented how soon delivery of precious metals would begin. For example, Defendants represented that they would deliver gold, silver or cash to White Rock and Cinder Mountain ore purchasers within one to three years. However, Defendants did not have the legal right to mine those claims,2 they did not have a proven ore processing method,3 nor had they constructed ore processing plants.4
Third, Defendants misrepresented that a portion of the purchasers' payments would be held in interest bearing trust accounts. The money was supposed to be left in the trust account until precious metals were delivered to the purchaser. The money was to be refunded to the purchasers if they elected to discontinue monthly payments. However, the White Rock trust account contained only one third of the funds it was supposed to contain, and the Golden Sands trust account contained less than ten percent (10%) of the amount the bookkeeper stated was on deposit.
Fourth, Defendants misrepresented that Claim 72/Golden Sands, White Rock and Cinder Mountain ore contracts were low risk investments that could return between one hundred percent (100%) and twenty-six hundred percent (2600%) of the initial investment. The FTC alleges that:
A more speculative investment is difficult to imagine. Defendants did not have "successful" mining projects. Project Manager Houston admitted that he had not demonstrated that White Rock was economically feasible. Similarly, Cinder Mountain was never proved feasible, as whatever evaluation work Houston completed was irrelevant once he decided to move the project to another location because of permitting problems. Defendants' ore did not contain appreciable amounts of recoverable precious metals; defendants were not legally entitled to conduct mining actions on the claims and faced substantial delay in obtaining approval to mine. In addition, defendants lacked the financial capability to construct processing plants; thus defendants could not deliver precious metals in fulfillment of the ore purchase agreements. A purchaser of defendants' ore contracts was virtually guaranteed to lose his entire investment.
Memo. accompanying Doc. No. 284, at 23 (citations omitted).
Section 5(a) of the FTCA prohibits "misrepresentations of material facts made to induce the purchase of goods or services." F.T.C. v. Kitco of Nevada, Inc., 612 F.Supp. 1282, 1291 (D.Minn.1985). Section 13(b) of the FTCA authorizes this court to permanently enjoin defendants from violating the FTCA if "there is some cognizable danger of recurrent violation." 15 U.S.C. § 53(b); United States v. W.T. Grant, 345 U.S. 629, 633, 73 S.Ct. 894, 898, 97 L.Ed. 1303 (1953). An individual defendant can be held jointly and severally liable for consumer redress of injuries caused by FTCA violations if: (1) the individual defendant made the misrepresentation or had authority to control the person who made the misrepresentation; (2) the misrepresentation was the kind usually relied on by reasonably prudent consumers, was widely disseminated and consumers actually purchased the product; (3) the individual defendant possessed the requisite scienter. Kitco, 612 F.Supp. at 1292-93.
The FTC has moved for summary judgment that the Defendants are jointly and severally liable for consumer redress.5 The FTC also requests this court issue a permanent injunction enjoining the Defendants from further violating the FTCA.
Under Federal Rule of Civil Procedure 56(c), summary judgment is appropriate only if "the pleadings, deposition, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Thus, the question is whether the evidence, considered with any reasonable inferences drawn from that evidence, establishes a "genuine issue as to any material fact." United Steel Workers Of America v. Phelps Dodge Corporation, 865 F.2d 1539, 1540 (9th Cir.), cert. denied, 493 U.S. 809, 110 S.Ct. 51, 107 L.Ed.2d 20 (1989).
In 1986, George Anderson hired Hall to market the Claim 72/Golden Sands mining project. Defendants Berg, Edwards and Hall formed Marcel, Edwards, Hall and Associates (MEHA) to sell Claim 72/Golden Sands ore purchase contracts. MEHA's advertisements said they were a licensed mining and metallurgical consultant. However, MEHA's only license was a Clark County Business License.
In June of 1987, MEHA was hired to market the White Rock project. Hall was also the president of Accrued Financial Services, White Rock's bookkeeper. A December 10, 1987, letter, signed by Hall, stated that ground breaking for the White Rock processing plant was scheduled to begin the following week, and that the project would be mined out five to six months later. Plaint. Ex. 11, at 53. The letter also stated that investors could "realize from 600% to 2600% return in fairly short order." Id. at 54.
Around November 22, 1989, Hall told an investor that he now owned the mineral rights to the White Rock claim, he was going to start a new project on the claim, and he thought the new project could be in production within 30-60 days. Ex. 11, at 7. Finally, between 1988 and 1989, Hall withdrew $120,000 from the customer trust account. Ex. 29, at 13-18, 22. Hall knew that some of his Co-Defendants also took money from the trust fund. Ex. 22, at 4-7; Ex. 23, at 3-5, 11-12. Hall claims that he repaid $55,000 of the money he "borrowed" to the trust account.
The FTC alleges that the above uncontroverted facts satisfy the elements necessary to hold Hall liable for damages caused by the Defendants FTCA violations. Hall does not deny that the first two elements necessary to hold him personally liable are satisfied (he made material misrepresentations that were the type normally relied on by consumers, for the purpose of inducing the purchase of ore contracts, those misrepresentations were widely disseminated and consumers did purchase ore contracts). Rather, Hall claims he cannot be held liable because he did not know his representations were false.
To establish personal liability for an FTC violation The FTC is required to establish the defendants had or should have had knowledge or awareness of the misrepresentations, Kitco, 612 F.Supp. at 1292, but that knowledge...
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