U.S. S.E.C. v. Lowery
| Decision Date | 15 July 2009 |
| Docket Number | No. 1:05-cv-354.,1:05-cv-354. |
| Citation | 633 F.Supp.2d 466 |
| Parties | UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Philip E. LOWERY, Defendant. |
| Court | U.S. District Court — Western District of Michigan |
Agnes Kempker-Cloyd, U.S. Attorney, Grand Rapids, MI, Carl Alan Tibbetts, U.S. Securities and Exchange Commission, Washington, DC, for Plaintiff.
Philip E. Lowery, Denver, CO, pro se.
Granting the Plaintiff's Motion for Summary Judgment;
Referring the Case to the Magistrate Judge for Determination of:
Amount of Unlawful Gains to be Disgorged by Lowery, and Prejudgment Interest Thereon; Civil Monetary Penalties, if any, Under 15 U.S.C. §§ 77t(d) and 78u(d)(3)
This is an action under the Securities Act, 15 U.S.C. § 77c and 77q, and the Exchange Act, 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5, so the court has unquestioned federal-question jurisdiction under 28 U.S.C. § 1331. Plaintiff, the United States Securities and Exchange Commission ("SEC"), moves for summary judgment against the lone remaining defendant, Philip Eugene Lowery ("Lowery"). For the reasons that follow, the court will grant summary judgment to the SEC and issue the injunctive and other relief which it requests.
Defendant Philip Lowery, who is 77 years old, is a retired lawyer living in Colorado, while the late former defendant Gary L. Harden Senior was a Michigan resident. See Complaint filed May 19, 2005 ("Comp") ¶¶ 4-5. The SEC claims that between January 1999 and March 2001, Lowery and Harden violated the anti-fraud and registration provisions of the federal securities laws in connection with the sale of $5.8 million in interests in purported Colorado Registered Limited Liability Partnership ("RLLPs"). See Comp ¶ 2; Deposition of Philip E. Lowery dated September 25, 2008 ("Lowery Dep") (Ex N1) at 21-22; Philip E. Lowery's SEC Investigative Testimony dated Oct. 3, 2001 ("Lowery 10/2001 SEC Test'y") (Ex Z) at pp. 109-118 and 146-47 and 167 and Philip E. Lowery's SEC Investigative Testimony dated November 4, 2002 ("Lowery 11/2002 SEC Test'y") (Ex AA) at pp. 53-54; Gary L. Harden Senior's SEC Investigative Testimony dated May 23, 2002 ("Harden SEC Test'y") (Ex V) at pp. 387-88.
Lowery, an attorney, drew up an agreement which he and Harden executed, whereby Harden would serve as managing general partner ("MGP") of each of the RLLPs and would obtain on behalf of the RLLPs a 33% interest in the profits of each online casino; Harden was to give each RLLP a 27% share of the corresponding online casino's profits. For his part, Lowery would develop and manage the online casinos in exchange for about $510,000 in investor funds from the RLLP for each casino. Harden would manage the RLLPs through his company, Cyberspace, while Lowery would develop and manage the online casinos through his companies, Palancar LLC and Princeton Holdings LLC. See Lowery Dep (Ex N) at pp. 16, 21-24; see also Lowery 10/2001 SEC Test'y (Ex Z) at pp. 56-57, 87, 127-34, and Ex 12; see also Harden 11/13/2002 SEC Test'y (Ex W) at pp. 72 and Harden 11/14/2002 SEC Test'y (Ex X) at pp. 4-7.
Lowery and Harden raised about $5.8 million from more than 80 individual and corporate/partnership investors. Harden used some of this money to fund the ten RLLPs (each with three to twenty-eight investors) and forwarded $4.5 million to Lowery. See Lowery 10/03/2001 SEC Test'y (Ex Z) at pp. 133-37; see also Harden 11/15/2002 SEC Test'y (Ex Y) at pp. 120-158 and its Exs. 35 through 44; see also Declaration of Carolyn E. Kurr dated February 13, 2009 ("Kurr Dec") ¶ 2(a).
It is undisputed that Lowery and Harden failed to register any of the offers for, or sales of, those RLLP units with the SEC as required by Securities Act section 5. See Comp ¶ 2; see also Ex CC (Attestation of Non-Registration issued by SEC Records Officer Larry Mills on February 11, 2009); see also Harden 11/13/2002 SEC Test'y (Ex W) at p. 73 and its Ex 30. Harden formed and served as managing partner for all ten RLLPs and sold the RLLP units to investors, ostensibly to give them an opportunity to share in the profits of planned Internet casinos offering blackjack, slots, roulette, and video poker. Lowery solicited investors to buy the online-casino RLLP units, and he was to form and operate the online casinos. Harden and Lowery solicited more than eighty investors to purchase partnership units in ten RLLPs. See Comp ¶¶¶ 2, 4-5 and 11. Harden raised $550,000 to $750,000 for each of the ten RLLPs. See Comp ¶ 11.
targeted uneducated and financially unsophisticated, elderly investors using high-pressure sales tactics. In connection with their selling efforts, Harden and Lowery made false and misleading statements to investors. Specifically, some investors were provided with unrealistic profit projections. . . .
[O]thers were falsely told that their investments were guaranteed.
Investors were also led to believe that their money would be used for partnership and casino business expenses, but most of it was actually used to pay for personal expenses and to support Lowery's extravagant lifestyle. Many of the investors liquidated retirement accounts and other conservative investments to invest in the RLLPs. Eventually, investors lost all of their money after the casinos were shut down due to operational problems.
* * *
All of the RLLP units were sold using the same techniques. Harden obtained the initial sales leads by sending mass mailings [which] advertis[ed] seminars on how to make money from the Internet, soliciting investors on Cyberspace's website and contacting his former insurance clients.
Harden and Lowery then personally solicited investors in the RLLPs by speaking at these seminars and in follow-up meetings and telephone conversations with potential investors.
Harden also made many door-to-door sales calls, soliciting investors at their homes. Harden provided potential investors with an information packet that included an offering memorandum, a sample registration form, a partnership agreement, and a ballot to elect Harden as managing partner. Many investors were also provided with a sales brochure. Harden closed the transactions by obtaining investors' signatures on the RLLP documents and collecting their money.
Although Harden was primarily responsible for procuring sales leads, conducting door-to-door sales calls and obtaining investors' complete paperwork, Lowery also actively solicited investors by appearing as the featured speaker during certain seminars, including ones in Michigan and Iowa. At these seminars, Lowery gave presentations to potential investors describing the online casinos' business prospects and proposed operations. Numerous individuals invested after hearing his presentations. Lowery also met with potential investors, spoke on the telephone to prospective investors who had questions about the online casinos (referred to him by Harden), and personally solicited one of his doctors to invest. (The doctor invested a total of $150,000 in three different RLLPs.)
Lowery spoke particularly frequently to the managing partner of several partnerships that, with Lowery's encouragement, invested $2.74 million in the casino RLLPs over a thirteen[-]month period. In addition, Lowery contributed to the content of the casino RLLPs' offering documents and the Cyberspace website, and reviewed and edited all of the offering documents' and website's content.
Comp ¶¶ 1 and 12-13 (). Specifically, Harden confirmed that RLLP sales materials drafted and approved by Lowery projected that each online casino would earn a profit of about $2 million in the first year, $7 million in the second year, and $6.5 million in each of years three and four, for a total four-year profit of $22 million per RLLP. See Harden 11/13/2002 SEC Test'y (Ex W) at 73 and its Ex 30, as well as Harden 11/15/2002 SEC Test'y (Ex Y) at 59-71.
The SEC estimates that 60% of the investors were at least 60 years old, and 43% were at least 70 years old. See Comp ¶ 14. The SEC presents ample uncontradicted testimony that many of the investors had little formal education and little or no experience in investing or in operating a business, and many of them used their retirement funds to purchase the RLLP interests. See Declaration of Albert C. Emery dated April 15, 2002 ("Emery Dec") (Ex E); Deposition of Faye Dexter taken November 27, 2006 ("Dexter Dep") (Ex I) at pp. 6-7 and 10-11; Deposition of Helen Hutchins taken December 12, 2006 ("Hutchins Dep") (Ex K) at pp. 6-9 and 21; see also Deposition of Dorothy K. Kremer taken November 3, 2006 ("Kremer Dep") (Ex M) at pp. 1-3 and 35; Deposition of Dorothy C. O'Neill taken November 17, 2006 ("O'Neill Dep") (Ex O) at pp. 7-13; Deposition of June E. Rice taken November 13, 2007 ("Rice Dep") (Ex P) at pp. 7-9 and 16. Some of the investors were not even aware that they were investing in gambling websites. See Emery Dec (Ex E); Hoskins Dec (Ex G); Johnson Dec (Ex H); Hutchins Dep (Ex K) at 21; O'Neill Dep (Ex O) at 94.
Lowery traveled to Michigan and gave presentations to prospective Michigan investors, see Lowery Dep (Ex N) at pp. 41-42 and Lowery 11/04/2002 SEC Test'y (Ex AA) at pp. 55-57. In a criminal proceeding arising out of this same RLLP scheme, Lowery pled guilty to misdemeanor federal blackmail for demanding (after he learned that the SEC was investigating) that Harden destroy a videotape of one such sales presentation, in exchange for which Lowery would not inform against Harden. See Exs A, B and D (Judgment of Conviction and Sentence, Minutes of Guilty-Plea Hearing, and Superseding Information in US v. Philip Lowery (W.D.Mich.)).
Lowery met several times with a major Florida investor, William Wimble...
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