Sec. & Exch. Comm'n v. Liberty
| Docket Number | CIVIL ACTION No. 06-1030 |
| Decision Date | 07 March 2022 |
| Citation | 589 F.Supp.3d 469 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, v. Michael A. LIBERTY, et al. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Christopher Robert Thomson, Nichola Lashann Timmons, Marsha C. Massey, Susan S. Pecaro, Securities & Exchange Commission, Washington, DC, Kingdon Kase, Securities & Exchange Commission, Philadelphia, PA, for Securities and Exchange Commission.
Jay A. Dubow, Richard J. Zack, Abigail A. Hazlett, Troutman Pepper Hamilton Sanders LLP, Philadelphia, PA, for Michael A. Liberty.
This is a civil enforcement action brought by the Securities Exchange Commission. The SEC now moves, pursuant to a consent and final judgment, to lift a suspended disgorgement of funds and impose civil penalties against Michael Liberty for misrepresentations and omissions made regarding his finances on which the SEC relied in its agreement to suspend enforcement of these remedies. The SEC's original complaint detailed a pernicious and extensive fraud directed by Liberty that swindled $27 million from a private venture capital fund whose primary investors were public pension funds, including the City of Philadelphia Board of Pensions and Retirement and the Pennsylvania Statement Employees Retirement System. To resolve the action, Liberty consented to the entry of final judgment against him. As part of this consent, the SEC agreed to suspend all but $600,000 of the $5,956,935 in disgorgement it was seeking for funds that had benefited Liberty directly, and further to refrain from pursuing the imposition of a civil penalty. The SEC negotiated and offered this consent on the basis of Liberty's forthright disclosure of his financial information. That disclosure was assisted by a consulting firm that reviewed but did not audit Liberty's finances based on the information that Liberty provided to it. If it was later found that "Defendant's representations to the Commission concerning his assets, income, liabilities, or net worth were fraudulent, misleading, inaccurate, or incomplete in any material respect as of the time such representations were made," the SEC retained the right to petition the Court to reinstate the full disgorgement and to impose civil penalties. Liberty was limited to contesting whether such a misrepresentation occurred, and he waived all other defenses to the reinstatement and imposition of the disgorgement and civil penalties.
To support the present motion, the SEC has produced evidence that Liberty intentionally withheld information about the bank accounts that he controlled in the name of Xanadu Partners. He used these accounts to conduct the vast majority of both his personal and business spending, and, by burying these accounts, he concealed from the SEC over ten million dollars in receipts and disbursements during the relevant time period. Both the act of concealment and the financial information so concealed would have been extremely relevant to the SEC's determination to offer the consent judgment that included suspended disgorgement and penalties, and it was therefore material to the transaction at issue. I thus conclude that Liberty is in contempt of the consent and final judgment and will reinstate the disgorgement and impose civil penalties as detailed below.
The SEC brought the original enforcement action in 2006 against Liberty and a number of co-conspirators for their exploitation of a venture capital fund, Keystone V—whose primary investors were large public pension funds—as an illicit source of funds for Liberty to use personally and to invest in speculative ventures. Between 1997 and 2002, Liberty leveraged his personal relationship with Kieran J. Dale, one of three managing directors of the fund, to direct the capital contributions of Keystone V limited partners into accounts that Liberty or third-parties associated which Liberty controlled. Compl. ¶ 32. Dale then recorded and reported these disbursements to the limited partners of the fund as investments in portfolio companies, overstating the nature and amount of these investments and failing to disclose Liberty's involvement in the investments. Compl. ¶¶ 32, 34-36. Approximately $27 million in fund assets, more than a quarter of the total committed capital of Keystone V, was disbursed at Liberty's direction. Compl. ¶ 33. Of the $27 million, $9 million was diverted directly to Liberty and his associates, with approximately $4.5 million benefiting Liberty personally. Id. The remaining $18 million was lost when the businesses to which Liberty had directed the funds failed. Id.2
On the same day that the SEC's Complaint was filed in March 2006, all of the named defendants, except for Michael Liberty, filed consents to final judgment, ECF 2, 3, 4, 5, 6, 7, with judgment entered against these defendants a month later, ECF 13, 14, 15, 16, 17, 18. Over the course of the next three years, the SEC and Liberty engaged in both discovery and settlement discussions. As evident from the numerous letters submitted to the Court in the form of status reports and requests for extensions of discovery deadlines, the principal obstacle to settlement was the SEC's attempts to get an adequate picture of Liberty's expansive, convoluted, and byzantine financial status. The SEC noted that initial discussions focused on "questions the staff has relating to the submitted materials, and the means by which Mr. Liberty must clarify and support the information contained in them." Kase Letter of June 28, 2006, ECF 24. Liberty was apparently unable to clarify and support these materials sufficiently, and the parties resumed discovery at the end of that summer. Kase Letter of Aug. 8, 2006, ECF 26. By May 2007, the SEC and Liberty had resumed settlement discussions and requested to delay discovery. Counsel for Liberty represented to the Court that the previous discussions "ended because of the parties' inability to agree on the value of Mr. Liberty's assets and liabilities." Dubow Letter of May 16, 2007, ECF 36. In order to resume settlement negotiations, Liberty's counsel "engaged forensic accountants to assist [them] in valuing Mr. Liberty's assets and liabilities." Id.
The forensic accountant retained for this purpose was FTI Consulting. By August 2007, "the forensic accountants' initial evaluation [was] near completion and the parties [had] scheduled a meeting to discuss settlement right after Labor Day." Dubow Letter of Aug. 14, 2007, ECF 39. As of January 2008, discussions were ongoing, with both parties agreeing that the retention of FTI had "greatly assisted the parties' settlement discussions." Dubow Letter of Jan. 15, 2008. In March 2008, the parties had reached an agreement in principle that the SEC attorneys were prepared to recommend to the Commission for approval. Kase Letter of Mar. 18, 2008. Before presenting the Court with a final judgment, the SEC was waiting for Liberty to provide "more current financial information in the form of a sworn financial affidavit or declaration, and to execute a written Consent." Id. As of September 2008, the SEC had "reviewed the numerous forensic accounting schedules regarding Mr. Liberty's financial situation that Mr. Liberty had provided previously" and at that time Liberty was "in the process of reviewing these schedules with his accountants so they can be finalized as of a current date." Knauer Letter of Sept. 17, 2008, ECF 51. Over the next two years, counsel for the SEC filed five more letters with the Court requesting extensions, and in each of those letters the SEC noted a new instance where it requested more information about "his complex financial arrangements," with Liberty providing additional documentation, and the SEC reviewing that new information prior to obtaining Commission approval. Kase Letter of Mar. 17, 2009, ECF 55; Kase Letter of June 17, 2009, ECF 57; Kase Letter of Sept. 16, 2009, ECF 59; Kase Letter of Dec. 14, 2009, ECF 61; Kase Letter of Mar. 15, 2010, ECF 63. Together, these letters reflect that Liberty made ongoing representations to the SEC regarding his finances over the course of the litigation and that his representations were not restricted to his documented disclosures.
On June 9, 2010, the Consent and Final Judgment were finally entered by the Court. Consent, ECF 64; Final Judgment, ECF 65. As part of the Consent, Liberty consented to the Final Judgment as it was entered, and specifically consented to the conditions related to the suspension of the full disgorgement and civil penalties, with the same language used in the Consent as in the Final Judgment. Compare Consent ¶ 3 with Final Judgment § IV.3 Section IV of the Final Judgment reads in full:
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant is liable for disgorgement of $4,049,000, representing profits gained as a result of the conduct alleged in the Complaint, together with pre-judgment interest thereon in the amount of $1,907,935, for a total of $5,956,935. Based on Defendant's sworn representations in his financial Declaration and other documents and information submitted to the Commission, however, the Court is not ordering Defendant to pay a civil penalty, and payment of all but $600,000 of the disgorgement and pre-judgment interest thereon is waived. Defendant shall pay that portion of disgorgement and pre-judgment interest not hereby waived, which totals $600,000, in the manner provided for in paragraph V of this Final Judgment. Defendant shall also pay post-judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961. The determination not to impose a civil penalty and to waive payment of all but $600,000 of the disgorgement and pre-judgment interest is contingent upon the accuracy and completeness of Defendant's financial Declaration. If at any time following the entry of this Final Judgment the Commission obtains information indicating that Defendant's...
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