Sec. v. Llc

• Decision Date: 01 September 2010
• Docket Number: Case No. 8:09-cv-455-T-23TBM
• Citation: 710 F.Supp.2d 1274
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SKY WAY GLOBAL, LLC, et al., Defendants.
• Court: U.S. District Court — Middle District of Florida

710 F.Supp.2d 1274

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.SKY WAY GLOBAL, LLC, et al., Defendants.

Case No. 8:09-cv-455-T-23TBM.

United States District Court,

M.D. Florida,

Tampa Division.

April 22, 2010.

Order Denying Reconsideration Sept. 1, 2010.

Amie Riggle Berlin, Drew Douglas Panahi, Securities & Exchange Commission, Miami, FL, for Plaintiff.

Brent C. Kovar, Palm Springs, CA, pro se.

Glenn A. Kovar, Johns Creek, GA, pro se.

James S. Kent, Parrish, FL, pro se.

Barton S. Sacher, Joseph A. Sacher, Sacher, Zelman, Hartman, Paul, Beiley & Rolnick, PA, Miami, FL, for Defendants.

ORDER

STEVEN D. MERRYDAY, District Judge.

The Commission sues (Doc. 1) Sky Way Global, LLC; Brent C. Kovar; Glenn A. Kovar; James S. Kent; Kenneth Bruce Baker; and Kenneth R. Kramer for "selling unregistered securities and defrauding investors through multiple so-called 'pump-and-dump' schemes in violation of the registration and anti-fraud provisions of the federal securities laws." The Commission seeks a permanent injunction, disgorgement, and a civil penalty.

On September 21, 2009, the Clerk defaulted (Doc. 23) the defendant Sky Way Global. The Commission moves unopposed (Doc. 40) for a default judgment ¹ and a permanent injunction. Injunctive relief is appropriate if the Commission establishes (1) "a prima facie case of previous violations of federal securities laws" and (2) "a reasonable likelihood that the wrong will be repeated." S.E.C. v. Calvo, 378 F.3d 1211, 1216 (11th Cir.2004). By virtue of the default, Sky Way Global admits the violations alleged in the complaint. Assessing the probability of the defendant's again violating the securities laws requires consideration of:

[t]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.

S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir.1982) (quoting S.E.C. v. Blatt, 583 F.2d 1325, 1334 n. 29 (5th Cir.1978)). In this action, the severity and the recurrence of the defendant's misrepresentations, the defendant's scienter (exhibited by the defendant's baseless assertions to potential investors), the defendant's failure to recognize wrongfulness, and the defendant's failure to conform to the law, combine to exceed the threshold for granting relief. Therefore, the circumstances warrant an injunction.

The Commission proposes an obey-the-law injunction that tracks the governing statutes and regulations ² and that permanentlyenjoins the defendant (and any agent or person acting in concert with any agent of the defendant) from violating Sections 5 and 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5.

Discussion

I. The Problems With An Obey-the-Law Injunction

1. An Obey-the-Law Injunction Violates Rule 65(d)

Articulating the standard of specificity that every injunction must satisfy, Rule 65(d), Federal Rules of Civil Procedure, states that "[e]very order granting an injunction ... must: state the reasons why it issued; state its terms specifically; and describe in reasonable detail-and not by referring to the complaint or other document-the act or acts sought to be restrained or required...." The specificity requirement "prevent[s] uncertainty and confusion on the part of those faced with injunctive orders and ... avoid[s] the possible founding of a contempt citation on a decree too vague to be understood." Schmidt v. Lessard, 414 U.S. 473, 476, 94 S.Ct. 713, 38 L.Ed.2d 661 (1974) (finding that because "an injunctive order prohibitsconduct under threat of judicial punishment, basic fairness requires that those enjoined receive explicit notice of precisely what conduct is outlawed."). Thus, every injunction must contain "an operative command capable of 'enforcement.' " Int'l Longshoremen's Ass'n v. Phila. Marine Trade Ass'n, 389 U.S. 64, 73-74, 88 S.Ct. 201, 19 L.Ed.2d 236 (1967). "A person enjoined by court order should only be required to look within the four corners of the injunction to determine what he must do or refrain from doing." Hughey v. JMS Dev. Corp., 78 F.3d 1523, 1532 n. 12 (11th Cir.1996); see Burton v. City of Belle Glade, 178 F.3d 1175, 1201 (11th Cir.1999) (Marcus, J.) (quoting Hughey ); Am. Red Cross v. Palm Beach Blood Bank, Inc., 143 F.3d 1407, 1411-12 (11th Cir.1998) (Birch, J.) (citing Hughey and stating that "[t]he district court may not simply order Palm Beach to 'obey the law.' "). Accordingly, "appellate courts will not countenance injunctions that merely require someone to 'obey the law.' " Hughey, 78 F.3d at 1531 (quoting Payne v. Travenol Lab., Inc., 565 F.2d 895, 897-98 (5th Cir.1978)); Daniels v. Woodbury County, Iowa, 742 F.2d 1128, 1134 (8th Cir.1984) ("[A]n injunction which does little or nothing more than order the defendants to obey the law is not specific enough.").

In addition to providing the defendant with "fair and precisely drawn notice of what the injunction actually prohibits," Epstein Family P'ship v. Kmart Corp., 13 F.3d 762, 771 (3d Cir.1994), the specificity requirement of Rule 65(d) serves another vital function. Unless a district court's injunctive order delineates the bounds of compliance, "it is impossible for an appellate tribunal to know precisely what it is reviewing." Hughey, 78 F.3d at 1531 (" 'In the absence of specific injunctive relief, informed and intelligent appellate review is greatly complicated, if not made impossible' ") (quoting Schmidt, 414 U.S. at 476, 94 S.Ct. 713); see also City of Belle Glade, 178 F.3d at 1200-01 ("A court is incapable of enforcing so broad and vague an injunction"). For example, in City of Belle Glade, three African-American occupants of a housing project located in an unincorporated part of the county alleged discrimination in the City's refusing to annex the housing project. The occupants sought an injunction against the City's discriminating on the basis of race in annexation decisions. Because the injunction "would do no more than instruct the City to 'obey the law,' " the Eleventh Circuit found that "an injunction prohibiting the City from discriminating against [the housing project] in future annexation decisions is not an available remedy to redress the [occupants'] alleged injuries."

In Hughey, the developer of a residential subdivision in Georgia was enjoined from discharging storm water into the waters of the United States "if such discharge would be in violation of the Clean Water Act." Every rainstorm that blew through Gwinnett County caused some "discharge" that was beyond the developer's control. Vacating the injunction, the Eleventh Circuit described the injunction as "incapable of enforcement as an operative command," because the injunction failed to specify how the defendant should prevent discharges and comply with the injunction. "Was [the defendant] supposed to stop the rain from falling? Was [the defendant] to build a retention pond to slow and control discharges? Should [the defendant] have constructed a treatment plant to comply with the requirements of the [Clean Water Act]?" The injunction's lack of specificity resulted in neither the defendant's nor the court's knowing what the injunction required of the defendant, other than the defendant's obeying the law (which the defendant was already obligated to do perforce the governingstatutes of the United States, which apply without the aid of an injunction).³

2. An Obey-the-Law Injunction Violates the Defendant's Constitutional Rights

Furthermore, as explained in S.E.C. v. Smyth, 420 F.3d 1225 (11th Cir.2005) (Tjoflat, J.), an obey-the-law injunction unacceptably conflicts with a defendant's constitutional rights. Smyth vacates a judgment-entered without an evidentiary hearing-against the defendant for disgorgement and prejudgment interest. In a footnote,⁴Smyth discusses the enforceability of the permanent injunction ⁵ entered against the defendant even though the injunction's validity was not before the appellate court (the defendant waived the right to challenge the injunction on appeal). ⁶Smyth finds thatthe injunction is "a quintessential 'obey-the-law' injunction," which "[t]his circuit has held repeatedly [is] unenforceable."

As an initial matter, Smyth explains that Rule 65(d), Federal Rules of Civil Procedure, is "no mere technicality" but requires an injunction "framed so that those enjoined know exactly what conduct the court has prohibited and what steps they must take to conform their conduct to the law." More importantly, Smyth describes the serious constitutional conflict inherent in a court's enforcing an obey-the-law injunction. After entry of such an injunction, the Commission could return to the court at any time and seek through a basic contempt proceeding to enforce the law based on an alleged violation by the defendant-no matter how distinct the alleged violation (in nature, time, or location) from the violation underlying the injunction. Thus, an obey-the-law injunction permits the Commission to achieve through the mere filing of a motion a result that, absent the injunction, the Commission could achieve only through a full-scale prosecution. The contempt proceeding (while perhaps increasing the ease and efficiency of the government's enforcement of the securities laws) impermissibly bypasses not only the Federal Rules of Civil Procedure but the defendant's rights under the Due Process Clause and Seventh Amendment.⁷

As Smyth notes:

[w]hether the court would delay the [contempt] hearing to afford [the defendant] his rights under the Rules, including discovery, and a jury trial of the issues the court would ordinarily submit to a jury were the SEC to sue [the defendant] in a separate action rather than seek enforcement of the injunction

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