SEC v. United Energy Prt

United States Court of Appeals
Fifth Circuit
F I L E D
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT February 18, 2004
Charles R. Fulbruge III
No. 02-10850 Clerk
c/w No. 03-10322
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
UNITED ENERGY PARTNERS, INC., ET AL.,
Defendants,
RICHARD A. QUINN; SCOTT W. TUCKER,
Defendants-Appellants.
Appeal from the United States District Court
for the Northern District of Texas
(3:98-CV-218-R)
Before SMITH, BARKSDALE, and CLEMENT, Circuit Judges.
PER CURIAM:*
In these consolidated appeals, Richard A. Quinn and Scott W.
Tucker contest the underlying summary judgment, injunction, and
other aspects of the judgment entered against them, arising out of
their investment solicitation and related activities with United
Energy Partners, Inc. Essentially for the reasons stated by the
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
district court, as briefly discussed below, the judgment is
AFFIRMED.
I.
Quinn was, among other things, chief executive officer and 90
percent shareholder of United Energy, which was in the business of
drilling oil and gas wells; Tucker was executive vice president and
ten percent shareholder. Quinn and Tucker sold working interests
in United Energy wells to at least 285 investors, raising
approximately $7.5 million.
The Securities and Exchange Commission filed this action
against United Energy, Quinn, and Tucker in 1998, claiming knowing
false and misleading statements in selling securities, in violation
of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
§ 78b, and Rule 10b-5 thereunder, and Section 17(a) of the
Securities Act of 1933, 15 U.S.C. § 77q.
Quinn and Tucker were charged with misrepresenting the uses of
investors’ funds by failing to disclose, among other things, that
half of the money raised was used for United Energy’s operations
(despite statements in the offering memoranda that all funds raised
would be spent on drilling).
The district court: appointed a special master to represent
United Energy; granted partial summary judgment for the SEC on its
claims against Quinn and Tucker but took no action on the claims
against United Energy; enjoined Quinn and Tucker from further
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violation of the securities laws; ordered them to disgorge, jointly
and severally, the $7.5 million; awarded the SEC pre-judgment
interest of approximately $2 million; and imposed a $110,000 civil
penalty each against Quinn and Tucker.
II.
Quinn and Tucker challenge the summary judgment, the
injunction, the disgorgement order, the pre-judgment interest, and
the penalty.
A.
A summary judgment is reviewed de novo, applying the same
standard as the district court. E.g., Daniels v. City of
Arlington, 246 F.3d 500, 502 (5th Cir.), cert. denied, 534 U.S. 951
(2001). Such judgment is proper if the movant demonstrates there
is no material fact issue and that it is entitled to a judgment as
a matter of law. FED. R. CIV. P. 56(c); e.g., Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 248 (1986); Crawford v. Formosa Plastics
Corp., 234 F.3d 899, 902 (5th Cir. 2000).
The summary judgment was proper. For example, the offering
memoranda represented that the total funds raised would be spent on
completion of the wells and did not disclose that part of those
funds would be given to United Energy or to its employees as
commission. Although Quinn and Tucker dispute raising $7.5
million, they admitted doing so in their answer.
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Quinn and Tucker contend the SEC was not entitled to judgment
because the undisputed facts did not establish scienter, but it is
obvious that the summary judgment record showed they acted with
intent to defraud. For example, they were aware that the stated
drilling costs were double the anticipated costs.
B.
Quinn and Tucker’s being enjoined from further violations of
the federal securities laws is proper if “the inferences flowing
from defendant’s prior illegal conduct, viewed in light of present
circumstances, betoken a ‘reasonable likelihood’ of future
transgressions”. SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir.),
cert. denied, 454 U.S. 1124 (1981). Injunctive relief is reviewed
for abuse of discretion. E.g., SEC v. Blatt, 583 F.2d 1325, 1334
(5th Cir. 1978).
There was no abuse of discretion. The district court ruled
that Quinn and Tucker knowingly violated the securities laws and
found that Quinn stated his intention to return to the securities
business (even though Quinn asserts he would only do so if he could
be “in compliance”).
C.
Concerning the $7.5 million disgorgement order, Quinn and
Tucker claim disgorgement should instead be based only on the much
smaller amount they received through their employment with United
Energy. Claiming they do not have sufficient funds to disgorge
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$7.5 million, Quinn and Tucker further contend that ordering them
to do so is a penalty, contrary to the purpose of disgorgement.
They also claim that the district court: should have offset
against the disgorgement order the amounts spent on legitimate
business expenses; and should not have ordered them to disgorge
funds jointly and severally, because the amount each received from
their involvement with United Energy was clearly determined. The
equitable decision to order disgorgement is reviewed for abuse of
discretion. E.g., SEC v. AMX, Int’l, Inc., 7 F.3d 71, 73 (5th Cir.
1993).
There was no abuse of discretion. The $7.5 million raised is
a reasonable estimate of the profits received by fraud. What Quinn
and Tucker received from their employment with United Energy is not
determinative; likewise, their inability to pay is irrelevant.
Disgorgement deprives wrongdoers of ill-gotten gains; and a person
remains unjustly enriched by what was illegally received, whether
he retains the proceeds of his wrongdoing. E.g., SEC v. Banner
Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000).
In addition, although some courts have offset legitimate
business expenses against a disgorgement amount, e.g., SEC v.
Thomas James Associates, Inc., 738 F. Supp. 88, 95 (W.D.N.Y. 1990),
“the overwhelming weight of authority hold[s] that securities law
violators may not offset their disgorgement liability with business
expenses”. SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 16
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(D.D.C. 1998) (citing SEC v. Hughes Capital Corp., 917 F. Supp.
1080, 1086 (D.N.J. 1996), aff’d 124 F.3d 449 (3d Cir. 1997)).
Moreover, as the SEC acknowledges, Quinn and Tucker are to receive
a set-off for amounts repaid to investors or collected by the
special master. Lastly, joint and several liability is appropriate
in securities cases where, as here, individuals collaborate or have
close relationships in engaging in illegal conduct. E.g., SEC v.
Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997).
D.
Quinn and Tucker next challenge the pre-judgment interest on
the disgorgement amount, claiming: they did not have use of the
full $7.5 million and relinquished their assets to the special
master; there was no wronged party to compensate through such
interest; and the SEC did not settle with Quinn and Tucker despite
their willingness to do so. An award of pre-judgment interest is
reviewed for abuse of discretion. E.g., SEC v. First Jersey
Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996), cert. denied,
522 U.S. 812 (1997); Wolf v. Frank, 477 F.2d 467, 479 (5th Cir.),
cert. denied, 414 U.S. 975 (1973).
There was no abuse of discretion. For example, the court, in
its discretion, reduced the IRS underpayment rate of interest by
half from the date when Quinn and Tucker turned over their assets
to the special master; and the parties’ not reaching settlement
does not bear on the award.
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E.
Finally, Quinn and Tucker contest the imposition of third-tier
civil monetary penalties of $110,000 against each of them. Such
penalties are proper if: the violation involved “fraud, deceit,
manipulation, or deliberate or reckless disregard of a regulatory
requirement”; and “such violation directly or indirectly resulted
in substantial losses or created a significant risk of substantial
loss to other persons”. 15 U.S.C. § 78u(d)(3)(B)(iii); 17 C.F.R.
§ 200.1001 (raising the maximum penalty per violation to $110,000).
The district court found both requirements met. The imposition of
civil penalties is reviewed for abuse of discretion. R & W
Technical Serv. Ltd. v. CFTC, 205 F.3d 165, 177 (5th Cir. 2000).
Quinn and Tucker contend: no investor suffered substantial
losses and any risk of loss from the failure of the wells was
disclosed; they did not receive the full $7.5 million they were
ordered to disgorge, therefore a civil fine amounts to a double
penalty; and, under the facts of this case, the penalty serves no
public interest. In the light of the district court’s findings,
there was no abuse of discretion.
III.
Essentially for the reasons stated by the district court, the
judgment is
AFFIRMED.
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