Sec. & Exch. Comm'n v. Mgmt. Solutions, Inc., Civil No. 2:11-CV-1165-BSJ

• Decision Date: 22 August 2013
• Docket Number: Civil No. 2:11-CV-1165-BSJ
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MANAGEMENT SOLUTIONS, INC., et al., Defendants.
• Court: U.S. District Court — District of Utah

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MANAGEMENT SOLUTIONS, INC., et al., Defendants.

Civil No. 2:11-CV-1165-BSJ

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION

Dated: August 22, 2013

MEMORANDUM OPINION ANDORDER

INTRODUCTION

On November 13, 2012, the Receiver filed a Motion for Findings regarding the Existence and Start Date of an alleged Ponzi Scheme and for Approval to Pool Claims and Assets for administrative purposes of the receivership.¹ Namely, he asked the court to find a Ponzi scheme involving Management Solutions, Inc. ("MSI") existed beginning April 1, 1996, in order to calculate investor claims and pursue receivership claims in ancillary cases.² Further, the Receiver sought court approval to pool investor claims and assets for pro-rata distribution. After several pre-hearing conferences, a Joint Pre-Hearing Order was signed on May 24, 2013.³ The orderdenied the Jacobsons' standing to contest the issue as a party and bifurcated the issue of the existence and beginning of the Ponzi scheme and the pooling of assets.⁴ The Receiver's motion came on for evidentiary hearing June 17, 2013, with the following appearances: Daniel J. Wadley appeared on behalf of Plaintiff, the Securities and Exchange Commission ("SEC"); Doyle S. Byers and Brent E. Johnson appeared on behalf of the Receiver, John A. Beckstead; Joseph Covey, Robert S. Clark and Royce B. Covington appeared on behalf of Intervenor Objectors, the McDermott family; and Matthew C. Barneck appeared on behalf of Intervenor Objectors, Matthew A. Nielson and Jill R. Nielson. Testimony and evidence was received, final argument was heard on June 20, 2013, and the matter was taken under advisement.

Having reviewed the testimony and exhibits received and considered the arguments of counsel, this court now denies the Receiver's limited motion and has chosen to elaborate upon the reasons for doing so.

PROCEDURAL HISTORY

The Complaint in the above-entitled matter of the SEC was filed on December 15, 2011.⁵ Among other things, the SEC alleged that the Jacobsons and MSI employed schemes or artifices "typical of a Ponzi scheme" in violation of Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1); committed fraud in the offer and sale of securities in violation of Sections 17(a)(2) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(2) and (3); committed fraud in connection with the purchase and sale of securities in violation of Section 10(b) and Rule 10b-5 of the SecuritiesExchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; offered and sold unregistered securities in violation of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and (c); and offered and sold securities by an unregistered broker or dealer in violation of Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a).

Early on, at the instance of the SEC—which was seeking a temporary restraining order—the court made the following findings:

2. The commission has made a sufficient and proper showing in support of the relief granted herein as required by Section 20(b) of the Securities Act of 1933 . . . and Section 21(d) of the Securities Exchange Act of 1934 . . . by evidence establishing a prima facie case of and a strong likelihood that the Commission will prevail at trial on the merits and that the Defendants, directly or indirectly, have engaged in and, unless restrained and enjoined by order of this Court, will continue to engage in acts, practices and courses of business constituting violations of Sections 5(a), 5(c), and 17(a) [of the Securities Act of 1933] . . . and Sections 10(b) and 15(a) of the Exchange Act . . . and Rule 10b-5 thereunder.⁶

The temporary restraining order was issued December 15, 2011.

On November 8, 2012, Wendell A. Jacobson consented to the relief sought by the SEC:

2. Without admitting or denying the allegations of the complaint (except as to personal and subject matter jurisdiction, which Defendant admits), Defendant hereby consents to the entry of a Final Judgment in the form attached hereto (the "Final Judgment") and incorporated by reference herein, which, among other things:

(a) Permanently restrains and enjoins Defendant from violation of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.

(b) Orders Defendant to pay disgorgement of $11,193,005 plusprejudgment interest thereon in the amount of $2,147,057.52 for a total of $13,340,062.52. Disgorgement shall be deemed satisfied by the Defendant turning over to the Court-appointed Receiver and relinquishing any interest, ownership, or claim to any and all assets and/or interests in any assets he holds and/or has held in the past, through December 15, 2011, together with any interest he holds and/or has held in any entity, directly or indirectly, through December 15, 2011, necessary to satisfy all Court-approved claims against the Defendants herein and any Receivership entity.

(c) Orders Defendant to pay a civil penalty in the amount of $150,000 under Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.

4. Defendant waives the entry of findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

5. Defendant waives the right, if any, to a jury trial and to appeal from the entry of the Final Judgment.⁷

The court thereafter entered a Judgment of Permanent Injunction and Other Relief Against Defendant Wendell A. Jacobson on December 18, 2012.⁸

The Consent of Defendant Allen R. Jacobson was filed on November 8, 2012.⁹ Allen R. Jacobson also consented to the entry of relief sought by the SEC:

2. Without admitting or denying the allegations of the complaint (except as to personal and subject matter jurisdiction, which Defendant admits), Defendant hereby consents to the entry of a Final Judgment in the form attached hereto (the "Final Judgment") and incorporated by reference herein, which, among other things:

(a) Permanently restrains and enjoins Defendant from violation of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder.

(b) Orders Defendant to pay disgorgement of $4,462,073 plus prejudgment interest thereon in the amount of $855,920.94 for a total of $5,317,993.94. Disgorgement shall be deemed satisfied by the Defendant turning over to the Court-appointed Receiver and relinquishing any interest, ownership, or claim to any and all assets and/or interests in any assets he holds and/or has held in the past, through December 15, 2011, together with any interest he holds and/or has held in any entity, directly or indirectly, through December 15, 2011. Defendant's disgorgement obligation shall exclude Defendant's interest in his residential property and the furnishings therein located at 431 West 1430 South, Payson, Utah; Defendant's personal vehicles, including a 2008 BMW 528xi, VIN ending in 2705, and a 2005 Nissan Armada, VIN ending in 0918; and approximately $3,000 in cash, held in the savings accounts of his three minor children, account numbers ending in 4871, 9114, 4986, and 3228.

(c) Orders Defendant to pay a civil penalty in the amount of $150,000 under Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.

4. Defendant waives the entry of findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

5. Defendant waives the right, if any, to a jury trial and to appeal from the entry of the Final Judgment.¹⁰

The court thereafter entered a Judgment of Permanent Injunction and Other Relief Against Defendant Allen R. Jacobson, filed on December 18, 2012.¹¹

On November 13, 2012, attorneys for the Receiver filed the instant motion and accompanying memoranda.¹²

STATEMENT OF THE FACTS

Uncontested Facts

In the Stipulated Pre-Hearing Order, the parties agreed to the following facts:

1. The Securities and Exchange Commission ("SEC") filed a complaint against Defendants Management Solutions, Inc., Wendell Jacobson and Allen Jacobson in this case on December 15, 2011, alleging, among other things, violations of federal securities laws and the operation of a Ponzi scheme. The SEC alleges that Defendants "have operated the investment program as a wide-scale Ponzi scheme since at least January 1, 2008." (Emphasis added.) The SEC makes claims, among others, that Defendants' operation of a Ponzi scheme violated Section 17(a)(1) of the Securities Act [15 U.S.C. § 77(q)(a)(1)] (Employment of a Device, Scheme or Artifice to Defraud); Section 17(a)(2) and (3) of the Securities Act [15 U.S.C. § 77q(a)(2)] (Fraud in the Offer and Sale of Securities); and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5] (Fraud in Connection With the Purchase and Sale of Securities).

2. Final Judgments were entered against Defendants pursuant to the agreement of Defendants Management Solutions, Inc., Wendell Jacobson and Allen R. Jacobson.

3. From 1996 to 2011, there were extensive inter-company transfers and combining of money between and among Jacobson-owned or controlled entities.

4. The Jacobsons, through their various entities, engaged in substantial real estate-related business operations from 1996 to 2011, which operations generated tens of millions of dollars of revenue.

5. When the Receiver was appointed, the receivership estate included a large number of real estate-related properties and projects with more than 8,000 residential and commercial rental units, valued in the hundreds of millions of dollars.

6. From 1996 to 2011, the Jacobsons routinely offered a return of 5%-8% per annum on loans and/or investments to Investors.

7. Investors who invested with the Jacobsons or their entities in the mid to late 1990s were promised similar returns to Investors who invested

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