Meadows v. S.E.C.

• Decision Date: 22 August 1997
• Docket Number: No. 96-60328,96-60328
• Citation: 119 F.3d 1219
• Parties: Fed. Sec. L. Rep. P 99,520 Jay Houston MEADOWS, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1219

119 F.3d 1219

Fed. Sec. L. Rep. P 99,520

Jay Houston MEADOWS, Petitioner, v. SECURITIES AND EXCHANGE COMMISSION Respondent.

No. 96-60328.

United States Court of Appeals, Fifth Circuit.

Aug. 22, 1997.

Rehearing Denied Oct. 22, 1997.

Robert F. Watson, Dabney Dorsett Bassel, Christopher Alan Butner, Law, Snakard & gambill, Fort Worth, TX, for Petitioner.

Susan Ferris Wyderko, Catherine Anne Broderick, Jonathan G. Katz, Securities & Exchange Commission, Washington, DC, for Respondent.

On Petition for Review of an Order of the Securities and Exchange Commission.

Before DUHE, BENAVIDES and STEWART, Circuit Judges.

DUHE, Circuit Judge:

Petitioner Jay Houston Meadows seeks review of an order of the Securities and Exchange Commission sustaining sanctions imposed on him by an administrative law judge for violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 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, promulgated thereunder. We affirm.

I

At all relevant times, Jay Houston Meadows was a registered representative affiliated with Rauscher Pierce Refsnes, Inc. ("RPR"), a registered broker-dealer. In late 1990, Meadows, along with Marc W. Gunderson and William Craig Harriger, ¹ formed Mundiger International, Inc. ("Mundiger") and Mira Golf International, Inc. ("Mira Golf") (collectively, the "Companies") to engage in two businesses: Mira Golf was to wholesale recycled golf balls, and Mundiger was to use the sale proceeds of the recycled golf balls to drill and operate gas wells. ²

The three principals, along with Brian Catlin, shouldered the management obligations for both Companies. Gunderson, the brains behind the ventures, claimed to have much experience in both businesses and thus assumed the daily operating responsibilities; Harriger, an attorney, provided legal and administrative support; Catlin served as the Companies' CPA; and Meadows joined purportedly to assist Gunderson with managerial duties, to provide labor at Mira Golf, and to invest Mundiger's excess cash flow. The Division of Enforcement ("Division") ³ contends, however, that Gunderson and Harriger recruited Meadows solely to raise capital, noting Meadows's lack of relevant business experience other than his contacts to potential investors. Whether Meadows did in fact raise capital forms the basis of this appeal.

Pursuant to RPR's instructions, Meadows took no formal position at Mundiger, and he confined his investment in Mundiger to $10,000, for which he received 10% of its stock. Meadows also invested $100 in Mira Golf, for which he received an 8 1/2% interest, and was appointed its secretary-treasurer and one of its directors.

Meadows and Harriger presented Mundiger to the "Masterminds," a small networking group established solely to discuss money-making opportunities, ⁴ and they arranged for Gunderson to speak at an upcoming meeting. At this meeting, Gunderson enthusiastically represented the Companies' prospects, promising that investors could expect high returns within months of their investment. Gunderson explained he had retained a lease on valuable gas-producing property in the Fort Worth Basin ("Property"), and that Mundiger had a contract to supply gas to the Texas Utility and Fuel Company ("TUFCO"), a local Texas utility, at a price above the current market price. He indicated he sought investors to help finance the drilling on the Property before the TUFCO contract expired in two-and-one-half years. Gunderson represented there was only a six-percent possibility--a figure he attributed largely to human error--that a particular well would fail to produce. Meadows challenged none of these assertions. Rather, he echoed Gunderson's enthusiasm, claiming Mundiger would hit gas wherever it drilled.

Meadows, however, never seriously investigated the validity of such claims. He testified he relied largely on both Harriger's opinion of Gunderson and Gunderson himself. The only independent inquiry Meadows made was in late 1990 when he visited the Companies' offices after regular business hours--and in the absence of Gunderson and Harriger--to verify Mira Golf's golf ball inventory. When Harriger learned of the unannounced visit, he changed the locks and temporarily refused to give Meadows a key. Meadows, who was one of Mira Golf's officers and directors, was somehow untroubled by Harriger's action, testifying he knew he still had authority to inspect the books during business hours. Meadows, however, never chose at any time to examine any of the books because he "trusted that it was being taken care of."

Following the initial Masterminds meeting, Meadows, either alone or with Gunderson and/or Harriger, met in the RPR offices and elsewhere with Masterminds members and other potential investors to encourage their investment in the Companies. Between late 1990 and early 1991, Mundiger raised approximately $800,000 from over twenty investors through the sale of participation interests in several separate drilling programs. Mira Golf raised $78,000 from nine investors. Of the twenty or so investors in these Companies, ten were Meadows's RPR clients. ⁵

Mundiger drilled its first two gas wells in early 1991. Output was far short of that represented by the principals; in fact, production costs far exceeded revenues, a pattern that continued for six of the ten wells Mundiger drilled. Gunderson, however, falsely represented otherwise, claiming these wells were profitable. In a February 1991 memo to Meadows and Catlin, Gunderson and Harriger wrote that "we have grossly underestimated our wells['] production[,]" and urged Meadows and Catlin to solicit more investors for future programs. Without verifying Gunderson's claims of above-expectation well production, Meadows repeated them to potential investors. Investors testified that Meadows's positive characterizations of the wells' successes influenced their investment decisions.

In April 1991, Mundiger began paying investors their purported pro rata shares of revenues earned from gas production and sales to TUFCO. These distributions, however, were in excess of investors' actual shares but still significantly less than what Gunderson, Harriger, and Meadows had represented. Mundiger apparently obtained the funds for these overpayments from investor funds furnished for subsequent well programs.

In May 1991, Meadows resigned his positions at Mira Golf following various salary disputes with Gunderson and Harriger. Thereafter, he sold back some of his ownership interests in the Companies for an initial payment of $10,000 and additional monthly payments of $1,000 for one year. The monthly payments were conditioned, however, upon Meadows's silence as to the Companies' financial situation. Under this agreement, Meadows received $13,000 in total, approximately $3,000 more than his aggregate investment just over seven months earlier.

In August 1991, Harriger told Catlin he suspected Gunderson of misappropriating Mundiger funds. In September 1991, Catlin assumed managerial responsibilities for Mundiger and discovered that in fact both Gunderson and Harriger had been misappropriating corporate funds for their personal uses. Catlin also learned that Gunderson had grossly misrepresented the Property's productive capacity; most of the wells had gone dry. Catlin further ascertained that the Companies had never been profitable; in fact, he determined that Mundiger was insolvent. Contrary to the promises of Gunderson, Harriger, and Meadows, none of the investors, except Meadows, recouped his or her initial investment.

In January 1994, the Securities and Exchange Commission ("Commission") instituted administrative proceedings against Meadows. It alleged that Meadows, in connection with the offer and sale of the Companies' securities, willfully violated § 17(a) of the Securities Act of 1933, § 10(b) of the Securities and Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The ALJ agreed, finding Meadows had misrepresented to investors the risks of investing in the Companies, the likelihood the ventures would be profitable, and the speed with which investors would recoup their investments. The ALJ then barred Meadows from association with any broker-dealer with a right to reapply in two years; ordered Meadows to permanently cease and desist from committing or causing any violation of the antifraud provisions; and fined Meadows $100,000. On appeal, the Commission affirmed. Meadows appeals.

II

We uphold an agency's decision unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); accord Hawkins v. Agricultural Marketing Serv., 10 F.3d 1125, 1128 (5th Cir.1993). We uphold the Commission's factual findings if supported by substantial evidence. See 15 U.S.C. § 78y(a)(4); Whiteside & Co. v. SEC, 883 F.2d 7, 9 (5th Cir.1989). "Substantial evidence is such relevant evidence as a reasonable mind might accept to support a conclusion. It is more than a mere scintilla and less than a preponderance." Ripley v. Chater, 67 F.3d 552, 555 (5th Cir.1995) (footnotes omitted). It is not the function of an appellate court to reweigh the evidence or to substitute its judgment for that of the Commission. See id.

By contrast, legal conclusions are "for the courts to resolve, although even in considering such issues the courts are to give some deference to the [agency's] informed judgment.' " Faour v. United States Dept. of Agriculture, 985 F.2d 217, 219 (5th Cir.1993) (quoting Federal Trade Comm'n v. Indiana Fed'n of Dentists, 476 U.S. 447, 454, 106 S.Ct. 2009, 2015, 90 L.Ed.2d 445 (1986)).

III

Section 17(a) of the Securities Act of 1933 states in pertinent part:

It shall be unlawful for any person in the offer or sale of any securities ..., directly or indirectly--

(1) to employ any device, scheme, or artifice to defraud, or

(2) to obtain money or property by means...