Sec. & Exch. Comm'n v. SBM Inv. Certificates, Inc.
| Decision Date | 02 March 2012 |
| Docket Number | Civil Action No. DKC 06-0866 |
| Parties | SECURITIES AND EXCHANGE COMMISSION v. SBM INVESTMENT CERTIFICATES, INC., et al. |
| Court | U.S. District Court — District of Maryland |
Presently pending and ready for resolution in this action is a motion filed by Plaintiff Securities and Exchange Commission ("SEC") seeking to hold Defendants SBM Investment Certificates, Inc. ("SBMIC") and SBM Certificate Company ("SBMCC") (collectively, "the SBM companies" or "the companies") in contempt of court and for expedited discovery in advance of a September 13, 2011, hearing (ECF No. 234), and four motions filed by the SBM companies: (1) a motion to stay partially the final consent judgment ("FCJ") (ECF No. 222), (2) a "second motion" for limited relief from the FCJ (ECF No. 225), (3) a motion to extend the time to file an opposition to the SEC's contempt motion (ECF No. 239), and (4) a motion to stay the evidentiary portion of the October 17, 2011, contempt hearing pending the court's construction of the plain language of theFCJ (ECF No. 249).1 The issues are fully briefed, and, following hearings on September 13, October 17, November 18, and November 30, 2011, the court now rules. For the reasons that follow, the SBM companies will be held in civil contempt, and the SEC's motion will thus be granted in part. A hearing will be scheduled to determine the proper remedy for the companies' contempt. The portion of the motion seeking expedited discovery was previously resolved by the parties and will, therefore, be denied as moot. The SBM companies' motion to extend the time to file an opposition to the contempt motion will be granted, while the remaining motions will be denied as moot.
Because many of the facts underlying this suit have been recounted elsewhere, see, e.g., SEC v. SBM Inv. Certificates, Inc., No. DKC 2006-0866, 2007 WL 609888 (D.Md. Feb. 23, 2007), only a brief recitation of the facts relevant to the pending motion is necessary here.
Following extensive negotiations, the SEC and the SBM companies entered into the FCJ to settle this action, which the SEC had brought to obtain relief from the companies' purported violation of numerous securities laws, including Section 28 ofthe Investment Company Act of 1940 ("Section 28"). The court approved and entered the FCJ on February 28, 2011. (ECF No. 214). Pursuant to the FCJ, the SBM companies agreed to the following provisions: (1) to retain Laurence Friend, C.P.A., an Independent Consultant who would provide comprehensive review and reporting functions, within thirty days; (2) to submit monthly reports to the SEC regarding the companies' steps toward compliance with Section 28; (3) to place all funds from the sale of any assets into an escrow account for the benefit of certificate holders; and (4) to file SBMCC's annual reports for calendar years 2007, 2008, 2009, and 2010 with the SEC within 180 days.
Shortly after the court entered the FCJ, Friend informed Eric Westbury, the Chairman and CEO of the SBM companies, that he would not begin any consulting work under the FCJ until the companies had set aside $500,000 to fund that work.2 On March 21, 2011, Westbury informed Friend via e-mail that the SBM companies could not yet commit to providing a set aside of that amount because they lacked the necessary funding. The e-mail further indicated that the companies were attempting to obtainthese funds through monetization of an asset held by the Bank of New York Mellon or through a personal loan to Westbury.3 On March 30, 2011, the SBM companies requested a twenty-one day extension of the FCJ's terms to fund the set-aside and "finalize . . . Friend's retention." (ECF No. 219, at 6). The court granted this request.
Having received only a recurring interest payment of approximately $6,000 by mid-April, however, the companies requested an additional ten-day extension to gather funds on April 20, 2011. (ECF No. 222). On May 2, 2011, the SEC opposed this motion. Four days later, after receiving the next recurring interest payment - this time totaling roughly $7,700, the SBM companies filed a motion seeking to extend the time to hire Friend until June 15, 2011. (ECF No. 225). In a declaration attached to the motion, Westbury identified four funding sources for the $500,000 set-aside that the companies expected to receive no later than June 15, 2011.4 The SEC also opposed this motion, noting that the SBM companies had failed to "explain the good faith efforts [they had taken] to ascertain whether Mr. Friend would begin work at a minimal funding level." (ECF No. 226, at 5).
On May 24, 2011, Westbury again contacted Friend. He requested that Friend begin the work specified in the FCJ and that the parties enter into a payment schedule whereby the companies would pay Friend $100,000 within six months. Friend rejected this proposition and made a counteroffer the following day. Friend proposed to "change the arrangement" such that the SBM companies would provide a $150,000 "Evergreen Retainer" that "would be replenished as necessary to maintain a balance of at least $100,000." (Def.'s Hr'g Ex. 7, at SBM-MWHITE 2333). Although Friend welcomed Westbury's "thoughts" on the proposal (id.), Westbury never responded to this letter.
Near the end of June, SBMCC received a check for approximately $6,300 from U.S. Bank related to "the sale of a Ginnie Mae," one of the company's assets. (Contempt Mot. Hr'g Tr. 56, Nov. 18, 2011).5 Westbury did not set these funds aside for certificate holders. Around this time, Westbury also learned that a county tax sale of collateral in Texas that secured one of SBMCC's assets had generated excess proceeds of nearly $67,000. Westbury did not set these funds aside or offer to use them to fund Friend's work. Rather, on June 29, 2011, ina joint status report, the SBM companies acknowledged their non-compliance with numerous terms of the FCJ, including retention of Friend, and asserted that "they [were] financially unable to meet the outstanding obligations in the FCJ" and would deregister as "investment companies." (ECF No. 228, at 3-6). Westbury subsequently used approximately $37,000 of these funds to pay for his children's school tuition.6
On August 24, 2011, the SEC filed a motion to hold the SBM companies in contempt of court and to obtain expedited discovery in advance of a hearing previously scheduled for September 13, 2011. During a telephone conference with the court on August 30, 2011, the SBM companies agreed to provide the discovery sought by the SEC prior to the hearing.7 The SBM companies moved to extend the time to file an opposition to the SEC's motion on September 10, 2011,8 and ultimately filed their opposition later that day.
At the September 13, 2011, hearing, the parties presented legal argument regarding the merits of the contempt motion. The SBM companies emphasized, as they had in the June 29, 2011, status report, that they planned to seek deregistration in the immediate future. In response, the SEC proposed that the SBM companies hire Friend "in the interim" to begin performing certain limited duties set forth in the FCJ. (Contempt Mot. Hr'g Tr. 8, Sept. 13, 2011).9 Both parties then agreed to contact Friend and request that he commence this "prioritized" work with a set-aside of $50,000. (Def.'s Hr'g Ex. 9). The companies further agreed "not . . . to expend any funds they receive[d]" until this payment had been made. (Contempt Mot. Hr'g Tr. 30-31, Sept. 13, 2011).
By mid-October, however, the SBM companies had only provided approximately $7,100, the net proceeds from the September interest payment, to fund Friend's preliminary work. A second hearing was scheduled for October 17, 2011, to address the pending contempt motion. On October 12, 2011, the SBM companies moved to stay the evidentiary portion of that hearing "pending the court's construction" of the FCJ, which theycontended was "plain and unambiguous" in permitting them to comply with the FCJ without engaging Friend once they had elected to seek deregistration. (ECF No. 249-1, at 2). The court held the previously scheduled hearing on October 17, 2011, to address the parties' legal arguments on this issue.10
Evidentiary hearings on the contempt motion were held on November 18 and November 30, 2011. Both parties presented testimony from Westbury and Phillip Hayden, the Chief Compliance Officer for the SBM companies. They acknowledged that the companies had "not taken any steps to de-register" and that funds subsequently received had not been used to fund Friend's work. (Contempt Mot. Hr'g Tr. 16, Oct. 17, 2011; Contempt Mot. Hr'g Tr. 100, Nov. 18, 2011).11 They also admitted that the companies had not submitted any monthly or annual reports to the SEC.
The SEC has moved to hold the SBM companies in contempt for failing to abide by numerous provisions of the FCJ. The SBM companies oppose this motion on two grounds. First, they contend that the SEC has failed set forth a prima facie case forcivil contempt. Second, assuming arguendo that the SEC has made this showing, the SBM companies contend they are financially unable to comply with the FCJ, despite their diligent efforts to do so, and that this defense precludes a finding of contempt. These arguments will be addressed in turn.
To establish civil contempt, the SEC must prove the following four elements by clear and convincing evidence:
(1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) ... that the decree was in the movant's 'favor'; (3) ... that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive) of such violations; and (4) ... that [the] movant suffered harm as a result.
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