SEC v. Current Financial Services, Inc., Civ. A. No. 91-3089 SSH.

• Citation: 798 F. Supp. 802
• Decision Date: 28 August 1992
• Docket Number: Civ. A. No. 91-3089 SSH.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CURRENT FINANCIAL SERVICES, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

798 F. Supp. 802

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CURRENT FINANCIAL SERVICES, INC., et al., Defendants.

Civ. A. No. 91-3089 SSH.

United States District Court, District of Columbia.

August 28, 1992.

COPYRIGHT MATERIAL OMITTED

Thomas C. Newkirk, Ellen B. Cohn, Bruce A. Hiler, Julie K. Lutz, Jonathan I. Golomb, William E. Morse, Petrna M. Burnham, SEC, Washington, D.C., for plaintiff.

John P. Sweeney, Gregg L. Bernstein, Ann M. Sheridan, Miles & Stockbridge, Baltimore, Md., for defendant Librandi.

John D. Wogan, Monroe & Lemann, New Orleans, La., for defendants Current Financial, Richard Hope, Goff, Otis Hope and Alpha Inv.

David W. Benner, pro se.

Douglas R. Rayburn, pro se.

Dougald D. McMillan, James V. Grevelle, Dallas, Tex., for defendants Strength Financial, Wilson, Victory Financial and Worley.

John A. Chalk, Gandy, Michener, Swindle, Whitaker & Pratt, Fort Worth, Tex., for defendants Med-Fac and Hammond.

James A. Backstrom, Anthony J. Guida, Jr., Buchanan Ingersoll Prof. Corp., Philadelphia, Pa., for defendants American Equity and Kennison.

OPINION

STANLEY S. HARRIS, District Judge.

Plaintiff Securities and Exchange Commission (SEC) applied for an order of civil contempt against defendants Keith Hammond and Med-Fac Investments, Inc. (Med-Fac), and non-parties John Allen Chalk and the MFI Liquidation Trust (MFI Trust). On July 8, the Court directed those four parties (respondents) to show cause why they should not be held in civil contempt for violating its December 5, 1991, temporary restraining order (TRO) and December 18, 1991, preliminary injunction. The Court held a hearing on the SEC's application for civil contempt on August 13, 1992. For the reasons that follow, the Court cites respondents for civil contempt and orders them to purge the contempt within 30 days.

I. The Court's Orders

The SEC alleges in its complaint that Med-Fac, Hammond, and fifteen other defendants violated the registration and antifraud provisions of the federal securities laws.¹ On December 5, 1991, the Court granted the SEC's unopposed application for a TRO prohibiting further securities violations and for an Order freezing the assets of certain defendants, including the assets of Med-Fac.

The TRO and its freeze order provided in pertinent part:

The defendants Med-Fac, ... and Hammond ... their subsidiaries, officers, directors, agents, servants, employees, attorneys, and those persons in active concert or participation with them who receive actual notice of this Order by personal service or otherwise ... shall hold and retain within their control, and otherwise prevent any disposition, transfer or dissipation whatsoever of any and all assets under the direct or indirect control of defendant Med-Fac, ... or in which it holds a direct or indirect beneficial interest (including without limitation, bank, brokerage, and money market accounts in the names of any of these defendants, and any lock boxes); provided, however, that if applicable, any of the defendants subject to this Freeze Order may collect on accounts receivable presently held in inventory, and any and all funds received shall be subject to the provisions of this Freeze Order. (December 5, 1991, Order ¶ IV.)

The TRO and its freeze order also required Med-Fac to provide an accounting of assets held in its name or for its direct or indirect beneficial interest.² (December 5, 1991, Order ¶ VI(a)). On December 18, the Court entered a preliminary injunction with the consent of defendants Med-Fac and Hammond. The preliminary injunction incorporated the asset freeze provision of the December 5 Order and extended it until final disposition of the case. (December 18, 1992, Order ¶ IV.)

II. Respondents' Actions

Prior to filing the complaint, the SEC notified defendants Med-Fac and Hammond of its intention to seek a TRO and its freeze order on November 29, 1991.³ On December 2, Hammond consulted with Med-Fac's counsel, respondent Chalk.⁴ On Chalk's advice, Hammond and Med-Fac adopted a plan to liquidate Med-Fac and to create the MFI Trust.⁵ The stated purpose of the plan was "for the assembling and marshalling of the assets of Med-Fac, the paying of, or making adequate provisions for, the creditors and debtors of the Corporation, and the apportioning of the remaining assets among the shareholders." (Plaintiff's ex. G, at 1.)

Hammond executed the MFI Liquidation Trust Agreement creating the trust on behalf of Med-Fac and designating himself as trustee. (Plaintiff's ex. I.) Med-Fac agreed to convey to the MFI Trust more than $25,000 in cash and its interest in certain accounts receivable, which it valued in excess of $200,000. Hammond executed an assignment of the accounts receivable from Med-Fac to himself as trustee for the MFI Trust, and, on December 3, he transferred the cash from Med-Fac's account to an account for the MFI Trust. (Plaintiff's exs. J and K.) The MFI Trust was created and funded prior to the entry of the TRO on December 5. By express provision of the Trust Agreement, Med-Fac retained the power to revoke the trust at any time.⁶ (Plaintiff's ex. I at 1.) The purpose of the Trust was to "assure the return to Med-Fac's creditors of all cash advanced to it for use in its business operations." (Id.) Therefore, the Trust Agreement empowered Hammond to distribute its assets to eleven of Med-Fac's creditors, who were listed in an exhibit to the Trust Agreement. (Id. at 2 & ex. B.) Hammond also was authorized to discriminate among the listed creditors.⁷ (Id. at 3.)

From December 9, 1991, through June 18, 1992, Hammond, as trustee of the MFI Trust, disbursed more than $60,000 from the Trust to eight of Med-Fac's creditors. (Plaintiff's exs. E, K, L, and M.) In addition, Hammond diverted $16,943 from the MFI Trust, by permitting direct payments from Med-Fac's debtors to its creditors. (Plaintiff's ex. K.)

Hammond, Med-Fac, and Chalk did not disclose to the SEC the creation of the MFI Trust, the transfer of Med-Fac's assets prior to the TRO, or the disbursements from the Trust to Med-Fac's creditors. Hammond did not mention the trust in deposition testimony taken between the entry of the TRO and the preliminary injunction, although he responded to questions regarding several accounts receivable that Med-Fac transferred to the Trust.⁸ Chalk, who accompanied Hammond at the deposition, also did not disclose the transfer of assets.

Hammond submitted an accounting on behalf of Med-Fac purportedly in compliance with the TRO. (Plaintiff's ex. D.) The accounting did not list among Med-Fac's assets the cash and receivables that it transferred to the MFI Trust.⁹ (Id.) The SEC first learned of the MFI trust on June 27, 1992, when Hammond disclosed its existence in deposition testimony.¹⁰ (Plaintiff's ex. E.)

III. Civil Contempt

The Court has both an inherent and a statutory power to enforce compliance with its orders. See Shillitani v. United States, 384 U.S. 364, 370, 86 S.Ct. 1531, 1535, 16 L.Ed.2d 622 (1966); 18 U.S.C.A. § 401. The Court may exercise that authority through a civil contempt proceeding, which generally involves three stages.

Such proceedings involve (1) issuance of an order; (2) following disobedience of that order, issuance of a conditional order finding the recalcitrant party in contempt and threatening to impose a specified penalty unless the recalcitrant party purges itself of contempt by complying with prescribed purgation conditions; and (3) exaction of the threatened penalty if the purgation conditions are not fulfilled.

NLRB v. Blevins Popcorn Co., 659 F.2d 1173 (D.C.Cir.1981). This matter is in the second stage, and the SEC seeks an order finding the respondents in civil contempt and providing them an opportunity to purge the contempt.

To find the respondents in civil contempt, the Court must find by clear and convincing evidence that each respondent violated the December 5 and 18 Orders. NOW v. Operation Rescue, 747 F.Supp. 772, 774 (D.D.C.1990). The Court may consider only the respondents' actions after the entry of the TRO and its freeze order; conduct prior to the Court's Orders could not have violated them and therefore could not constitute contempt. United States v. Landsberger, 692 F.2d 501, 503 (8th Cir. 1982). The Court must conclude that respondents had notice of the terms of the Orders to reach a finding of contempt.¹¹ Douglass v. First Nat'l Realty Corp., 543 F.2d 894, 897 (D.C.Cir.1976); NOW, 747 F.Supp. at 775. However, the Court need not find that the violations were willful or intentional. McComb v. Jacksonville Paper Co., 336 U.S. 187, 191, 69 S.Ct. 497, 499, 93 L.Ed. 599 (1949); Blevins Popcorn, 659 F.2d at 1183.

As a threshold matter, the respondents contend that the Court's TRO and its freeze order and the preliminary injunction did not reach the assets in the MFI Trust, therefore, the disbursements did not violate the Orders. The Orders expressly froze any assets over which Med-Fac had "direct or indirect control" or in which Med-Fac held a "direct or indirect beneficial interest." At a minimum, Med-Fac retained indirect control over the assets in the MFI Trust by virtue of the right of revocation. In addition, Med-Fac retained an indirect beneficial interest in the assets because they were set aside to pay its creditors and, if any assets remained, its shareholders. Thus, the TRO and preliminary injunction imposed on the respondents an obligation to preserve the assets in the MFI Trust.

Respondents argue that the Court's Orders provided insufficient notice that they reached the assets within the Trust. Therefore, respondents contend, the disbursements from the Trust cannot provide a basis for a finding of contempt. Respondents may have believed that the assets in the Trust were beyond the scope of the asset freeze provisions. Nevertheless, the Court concludes that the language "direct or indirect beneficial interest" provided adequate notice that the Orders would cover assets held in...