S.E.C. v. Prudential Securities Inc.

• Decision Date: 20 February 1998
• Docket Number: No. 97-5109,97-5109
• Citation: 136 F.3d 153
• Parties: , Fed. Sec. L. Rep. P 90,155, 39 Fed.R.Serv.3d 1426 SECURITIES AND EXCHANGE COMMISSION, Appellee, John H. Lomax, et al., Appellants, v. PRUDENTIAL SECURITIES INCORPORATED, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 153

136 F.3d 153

329 U.S.App.D.C. 10, Fed. Sec. L. Rep. P 90,155,

39 Fed.R.Serv.3d 1426

SECURITIES AND EXCHANGE COMMISSION, Appellee John H. Lomax, et al., Appellants, v. PRUDENTIAL SECURITIES INCORPORATED, Appellee.

No. 97-5109.

United States Court of Appeals District of Columbia Circuit.

Argued Jan. 20, 1998.

Decided Feb. 20, 1998.

Graeme W. Bush, Washington, DC, argued the cause for appellants, with whom Albert G. Lauber, Carl S. Kravitz and Peter Van Lockwood were on the briefs.

Arthur F. Mathews, Washington, DC, argued the cause for appellee Prudential Securities Incorporated, with whom Stephen F. Black was on the brief.

Jacob H. Stillman, Associate General Counsel, Washington, DC, argued the cause for appellee Security & Exchange Commission, with whom Richard H. Walker, General Counsel, Susan S. McDonald, Senior Litigation Counsel, and Paul Gonson, Solicitor, were on the brief.

Before: EDWARDS, Chief Judge, WALD and ROGERS, Circuit Judges.

ROGERS, Circuit Judge:

Appellants John H. Lomax, Ann D. Lomax, Emory C. Camp, and Robert A. Callewart appeal the denial of their motion to intervene in the ongoing enforcement of a consent decree negotiated by the Securities and Exchange Commission and Prudential Securities Inc. Under the decree, Prudential provided a "claims resolution process" as an alternative to judicial relief for certain investors whom Prudential had allegedly defrauded. Appellants, former investors, voluntarily submitted their claims to this process and received damage awards, but they then sought to intervene as representatives of a class in the enforcement of the consent decree, claiming that Prudential had violated the consent decree by making initial damage award offers that were improperly low. In their "complaint in intervention," they sought enforcement of their interpretation of the decree's terms through common law claims based in contract, fraud, and unjust enrichment. Under Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and its progeny, the district court denied intervention as of right under Federal Rule of Civil Procedure 24(a)(2) and permissive intervention under Rule 24(b). In light of the express language in the consent decree indicating the parties' intention not to confer standing on third parties to enforce the decree, we affirm.

I.

On October 20, 1993, the Securities and Exchange Commission ("SEC" or "the Commission") sought an order under section 21(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78u(e) (1988), and other equitable relief against Prudential Securities Inc. ("Prudential") on the ground that Prudential had violated federal securities laws and an earlier SEC order by "misrepresent[ing] speculative, illiquid limited partnerships as safe, income-producing investments suitable for safety-conscious and conservative investors." As a result, the Commission asserted, Prudential "sold limited partnerships to a significant number of investors for whom the investments were not suitable." Concurrently, the Commission and Prudential submitted a consent decree, which the district court approved on October 21, 1993.

Under the terms of the consent decree, Prudential instituted a process to resolve the claims of the approximately 340,000 investors whom Prudential had allegedly defrauded over an eleven year period through offer and sale of interests in over 760 limited partnerships. Under this claims resolution process, an investor could choose to submit claims to Prudential for evaluation of their merit, after which Prudential would decide to make a settlement offer or to reject the claim. Any investor who was dissatisfied with this initial offer, or whose claim was rejected, could submit the claim to binding arbitration, subject to appeal to the court-appointed Claims Administrator. Alternatively, such an investor could forgo arbitration and pursue judicial relief. Similarly, the consent decree did not affect the rights of investors who did not submit their claims to Prudential for evaluation; these investors retained all rights to seek relief in the courts. Any investor who chose to submit a claim to arbitration was required, however, to sign a form acknowledging that the arbitrator's decision was final, subject to appeal to the Claims Administrator, and any investor who accepted the initial settlement offer was similarly required to sign a release preventing any future legal action against Prudential based on the limited partnership interests.

Other terms of the consent decree further show the intent of the Commission and Prudential that the claims resolution process be final for those accepting settlement offers or entering binding arbitration. Paragraph nine of the decree provides that "nothing herein shall be deemed to confer standing upon any persons other than plaintiff COMMISSION, defendant [Prudential] and the CLAIMS ADMINISTRATOR." Paragraph twelve of the decree adds that, "[e]xcept as explicitly provided in this FINAL ORDER and the CONSENT, nothing herein is intended to or shall be construed to have created, compromised, settled or adjudicated any claims, causes of action, or rights of any person whomsoever, other than as between the COMMISSION and [Prudential], in accordance with the CONSENT."

Following district court approval of the consent decree, Prudential notified its investors that it had established this claims resolution process. In this notice, Prudential explained the origin of and reasons for the process and outlined its basic terms. The explanation noted that Prudential had "established court-supervised procedures pursuant to the SEC settlement to resolve claims for compensatory damages." Prudential stressed that participation in the process was voluntary: "If you decide not to resolve your claim through the [process], your rights to pursue any legal remedies will not be restricted or expanded in any way." Prudential also made clear that investors who accepted initial settlement offers had to release Prudential from future liability with respect to the limited partnership interests, and that investors who submitted claims to binding arbitration had to acknowledge that "[t]he arbitrator's awards shall be final and binding on the parties with respect to all claims submitted," subject to appeal to the Claims Administrator.

Over the course of four years, Prudential paid more than $938 million to over 110,000 investors pursuant to the consent decree. The Claims Administrator filed quarterly reports in the district court on the progress of the claims resolution process, addressing various issues, including the net tax benefit policy of concern to appellants, ¹ and describing the procedures taken to ensure the fairness and efficiency of the process. The claims resolution process was nearly complete when, on August 1, 1996, appellants filed a motion to intervene and a "class complaint in intervention" on behalf of themselves and a class of similarly situated claimants. ²

Appellants had purchased limited partnership interests through Prudential in 1980, 1983, and 1984. ³ All submitted their claims to Prudential under the consent decree, and, after receiving initial settlement offers, consented to binding arbitration. Two of the appellants, John H. Lomax and Ann D. Lomax, settled before the arbitrator made an award, while appellants Emory C. Camp and Robert A. Callewart received arbitration awards that they appealed, unsuccessfully, to the Claims Administrator. In a memorandum in support of their motion to intervene, as well as in their class complaint in intervention, appellants asserted that Prudential had intentionally and systematically understated the damages due to claimants under the consent decree. Specifically, appellants claimed that in calculating settlement offers pursuant to the terms of the consent decree, Prudential did not properly account for the tax that investors would have to pay on their damage awards or for the tax that investors would have to pay when realizing the "residual value" of their investments. Appellants alleged that Prudential had breached its agreement to resolve their claims fairly, intentionally defrauded them through misrepresentations and omissions, and was unjustly enriched as a result of its miscalculation of tax benefits. Asserting that the Commission and the Claims Administrator refused to rectify the problem, appellants sought judicial orders directing Prudential to enforce the terms of the consent decree as they interpreted it and to make the additional claims payments.

The district court denied the motion to intervene. Assuming the truth of the facts alleged in appellants' complaint, ⁴ the district court ruled that they could not show a legally protected interest in the proceedings between the Commission and Prudential because, under Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975), and this court's interpretations of it, third party beneficiaries of a government consent decree may not enforce it when the consent decree contains unambiguous language establishing that the government did not intend them to have enforcement rights. The district court concluded that their common law claims were in reality claims for enforcement of the consent decree. Consequently, the district court concluded that appellants had no right to intervene under Federal Rule of Civil Procedure 24(a)(2), or, for the same reason, Rule 24(b). ⁵

II.

Parties have the right under Rule 24(a)(2) to intervene in an action if they meet four requirements: (1) the application to intervene must be timely; (2) the applicant must demonstrate a legally protected interest in the action; (3) the action must threaten to impair that interest; and (4) no party to the action can be an adequate representative of the applicant's interests. See Williams & Humbert, Ltd. v. W. & H. Trade Marks (Jersey), Ltd., 840 F.2d 72, 74 (D.C.Cir.1988)....