Sec. & Exch. Comm'n v. Offill

• Decision Date: 05 April 2012
• Docket Number: Civil Action No. 3:07-CV-1643-D
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. PHILLIP W. OFFILL, JR., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.PHILLIP W. OFFILL, JR., et al., Defendants.

Civil Action No. 3:07-CV-1643-D

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION

Dated: April 5, 2012

MEMORANDUM OPINIONAND ORDER

After granting plaintiff Securities and Exchange Commission's ("SEC's") motion for summary judgment against all defendants¹ for liability based on violations of § 5 of the Securities Act of 1933 ("Securities Act") and § 15(a)(1) of the Securities Exchange Act of 1934 ("Exchange Act"), SEC v. Offill, 2012 WL 246061, at *1 (N.D. Tex. Jan. 26, 2012) (Fitzwater, C.J.) ("Offill I"), and in accordance with Offill I and the procedure established by the court's February 8, 2012 order, the court now grants the SEC the following relief² for thereasons explained.³

I

In Offill I the court granted the SEC's motion for summary judgment, holding that all the defendants had violated § 5 of the Securities Act, 15 U.S.C. § 77e(a) and (c), and that defendants Ryan M. Reynolds ("Reynolds"), Shane A. Mullholand ("Mullholand"), RSMR Capital Group, Inc. ("RSMR"), Dissemination Services, LLC ("Dissemination"), Timothy T. Page ("Page"), and Page Properties, LP ("Page Properties") had violated § 15(a)(1) of the Exchange Act, 15 U.S.C. § 78o(a)(1). Offill I, 2012 WL 246061, at *1. The court stated that it would "separately issue a decision addressing the relief to which the SEC is entitled." Id. at *10. In a February 8, 2012 order, the court advised the parties that it had "decided to convene a hearing at which the SEC and any parties who oppose the relief the SEC seeks can present pertinent evidence and/or argument." Feb. 8, 2012 Order. The order provided, in pertinent part, that "[a] party [could] rely on evidence and/or argument presented in the summary judgment papers without offering that evidence through additional witnesses or exhibits, and without presenting additional argument at the hearing." Id. Only defendant Mullholand attended the hearing. Defendants Page, Page Properties, Steven P. Fischer ("Fischer"), ATN Enterprises, LLC ("ATN"), Timothy B. Barham ("Barham"), and Ballad Enterprises, Inc. ("Ballad") did not attend. Instead, their attorneys requested that counsel for and Dissemination.the SEC read into the hearing record emails they had submitted to the SEC setting out their positions regarding the SEC's requested relief. The court has considered the evidence introduced at the hearing and the parts of the summary judgment record properly presented for review and now enters this decision regarding the remedies to which the SEC is entitled.

II

The court addresses first whether the SEC should be awarded the remedy of disgorgement.

A

"'Disgorgement wrests ill-gotten gains from the hands of a wrongdoer. It is an equitable remedy meant to prevent the wrongdoer from enriching himself by his wrongs.'" Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398, 413 (5th Cir. 2007) (quoting SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993)). "The district court has broad discretion in fashioning the equitable remedy of a disgorgement order." Huffman, 996 F.2d at 803. "Because disgorgement is meant to be remedial and not punitive, it is limited to property causally related to the wrongdoing at issue." Allstate Ins., 501 F.3d at 413 (internal quotation marks omitted). "Accordingly, the party seeking disgorgement must distinguish between that which has been legally and illegally obtained." Id. "The court's power to order disgorgement extends only to the amount with interest by which the defendant profited from his wrongdoing. Any further sum would constitute a penalty assessment." SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978). "In actions brought by the SEC involving a securities violation, 'disgorgement need only be a reasonable approximation of profits causallyconnected to the violation.'" Allstate Ins., 501 F.3d at 413 (quoting SEC v. First City Fin. Corp., 890 F.3d 1215, 1231 (D.C. Cir. 1989)). Once the SEC meets its burden of showing that "its disgorgement figure reasonably approximates the amount of unjust enrichment," the burden shifts to the defendant to "demonstrate that the disgorgement figure was not a reasonable approximation." First City Fin., 890 F.2d at 1232. "'Where two or more individuals or entities collaborate or have a close relationship in engaging in the violations of the securities laws, they may be held jointly and severally liable for the disgorgement of illegally obtained proceeds.'" SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1117 (9th Cir. 2006) (brackets omitted) (quoting SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998)); see also SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475-76 (2d Cir. 1996).

"[T]he SEC may seek disgorgement from 'nominal' or 'relief' defendants who are not themselves accused of wrongdoing in a securities enforcement action where those persons or entities (1) have received ill-gotten funds, and (2) do not have a legitimate claim to those funds." SEC v. DCI Telecomms., Inc., 122 F.Supp.2d 495, 502 (S.D.N.Y. 2000) (citing SEC v. Cavanagh, 155 F.3d 129, 136 (2d Cir. 1998)).

B

Of the named defendants and relief defendants, only defendants Offill⁴ and Reynoldsand relief defendant Bellatalia, LP. ("Bellatalia") do not concede the disgorgement values as calculated by the SEC. Nevertheless, the SEC has demonstrated that its disgorgement calculations regarding all defendants and relief defendants are reasonable approximations of the profits connected to the violation. Reynolds and Bellatalia presented evidence and arguments contesting the SEC's disgorgement calculations,⁵ but they did not meet their burden of showing that the SEC's disgorgement calculations are not reasonable approximations of their profits causally connected to the violation.

The SEC requests that the court also award prejudgment interest on the disgorgement award. "Courts have recognized that an assessment of prejudgment interest, like the disgorgement remedy, is intended to deprive wrongdoers of profits they illegally obtained by violating the securities laws." SEC v. Sargent, 329 F.3d 34, 40 (1st Cir. 2003) (internal quotations and citations omitted). The court concludes that it should award prejudgment interest, calculated according to the Internal Revenue Service ("IRS") underpayment rate. See First Jersey, 101 F.3d at 1476 (approving application of IRS underpayment rate for calculating prejudgment interest on amounts disgorged as a result of securities violations).

Finally, the SEC requests that certain parties be held jointly and severally liable for the disgorgement awards if the parties collaborated when engaging in the established violations. Because many defendants are individuals who used a defendant corporation to engage in a transaction at issue, the court finds that these defendants should be held jointly and severally liable for the disgorgement.

Accordingly, the court holds that defendants and relief defendants are jointly and severally liable for the following amounts of disgorgement and prejudgment interest: Page and Page Properties, $288,223.08 disgorgement and $141,092.36 prejudgment interest; Fischer and ATN, $5,658,859.81 disgorgement and $2,649,978.23 prejudgment interest; Reynolds and RSMR, $6,259,884.82 disgorgement and $3,082,613.89 prejudgment interest; Offill, $12,500.00 disgorgement and $6,233.84 prejudgment interest; relief defendants Barham and Ballad, $865,898 disgorgement; and relief defendant Bellatalia, $3,090,550 disgorgement. The court also grants the SEC's request to assess post-judgment interest pursuant to 28 U.S.C. § 1961. The court will include an award of post-judgment interest in the final judgment.

III

The SEC also seeks an award of third-tier civil penalties under § 20(d) of the Securities Act.

A

"Civil penalties are designed to punish the individual violator and deter future violations of the securities laws." SEC v. Opulentica, LLC, 479 F.Supp.2d 319, 331(S.D.N.Y. 2007). "Without civil penalties, the only financial risk to violators is the forfeiture of their ill-gotten gains." SEC v. Koenig, 532 F.Supp.2d 987, 995 (N.D. Ill. 2007). The Securities Act provides three tiers of penalties. See 15 U.S.C. § 77t(d); 17 C.F.R. § 201.1003 (2007).

Neither § 20(d) of the Securities Act nor § 21(d) of the Exchange Act provides any guidance as to the proper amount of the civil penalty. A number of courts, however, have relied on the same principles when determining whether to award civil penalties. These factors are:

(1) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant's demonstrated current and future financial condition.

Opulentica, 479 F.Supp.2d at 331 (citing SEC v. Coates, 137 F.Supp.2d 413, 428-29 (S.D.N.Y. 2001) (listing factors)); SEC v. Haligiannis, 470 F.Supp.2d 373, 386 (S.D.N.Y. 2007) (relying on these five factors); SEC v. Lybrand, 281 F.Supp.2d 726, 730 (S.D.N.Y. 2003), aff'd sub nom. SEC v. Kern, 425 F.3d 143 (2d Cir. 2005). Other courts have considered such additional factors as the cooperation of the defendant with law enforcement authorities and the adequacy of other criminal or civil sanctions to punish the defendant. See SEC v. Lewis, 492 F.Supp.2d 1173, 1174 (D.S.D. 2007); SEC v. Church Extension of the Church of God, Inc., 429 F.Supp.2d 1045, 1050-51 (S.D. Ind. 2005). "While these factors are helpful in characterizing a particular defendant's actions, the civil penalty framework isof a discretionary nature and each case has its own particular facts and circumstances which determine the appropriate penalty to be imposed." Opulentica, 479 F.Supp.2d at 331 (...