SEC v. Halek Energy, L.L.C.

Case: 12-11045 Document: 00512332065 Page: 1 Date Filed: 08/05/2013
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
August 5, 2013
No. 12-11045
Lyle W. Cayce
Clerk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
Plaintiff–Appellee,
versus
JASON A. HALEK,
Defendant–Appellant.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:10-CV-1719
Before SMITH, GARZA, and SOUTHWICK, Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
The Securities and Exchange Commission (“SEC”) brought a civil enforce-
ment action against Jason Halek and his two companies, CBO Energy, Inc., and
*
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 R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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.
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Halek Energy, LLC.1 The defendants consented to an interlocutory judgment
enjoining them from future violations but leaving open the amount of penalties
and disgorgement. After the parties failed to settle that remaining issue, the
court held Halek and the energy companies liable for disgorgement. Halek
appeals the disgorgement order, the decision to reopen the case after administra-
tive closure, and the entry of final judgment based in part on the terms in
Halek’s consent to the injunction.
I.
The SEC sued Halek and his two energy companies for allegedly making
material misstatements in connection with the offer and sale of securities, in vio-
lation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a); Section 10(b) of
the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R.
§ 240.10b-5. In addition, the SEC alleged that the parties offered and sold
unregistered securities in violation of Section 5(a) and (c) of the Securities Act
of 1933, 15 U.S.C. § 77e(a) and (c).
Without admitting or denying the allegations, the defendants entered con-
sent agreements for an injunction against future violations, including a conces-
sion to pay disgorgement and penalties as determined by a court on the SEC’s
motion. Halek was also precluded from challenging, in relation to the motion for
disgorgement, either the complaint’s allegations or the validity of the consent
agreement.
The court ordered the parties to mediate disgorgement and civil penalties.
A settlement was reached “subject to approval by the SEC Commissioners of the
proposed settlement terms” and “subject to the parties’ agreement on final settle-
ment documents and the form of proposed judgment.” The day after the resolu-
1
The SEC also named Christopher Wilbourn, the President of CBO Energy. He is not
involved in this appeal, nor was he found jointly and severally liable for the disgorgement.
2
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tion summary was signed, the court ordered the case administratively closed,
adding that “should further proceedings become necessary or desirable, any
party or the Court may initiate such further proceedings in the same manner as
if this Order had not been entered.”
Several months later, the SEC moved to reopen the case to determine the
amount of disgorgement, penalty interest, and civil penalties. The SEC
explained that the sworn financial statements submitted by the defendants
“were not reliable such that the Commission staff could recommend to the Com-
mission that the Commission accept the representations and waive payment
owed.” Halek disputed the motion to reopen, contending that the SEC had failed
to uphold the settlement terms and had not specified how the submitted finan-
cial information was insufficient.
Before it would rule on the motion, the district court instructed the SEC
to provide an itemized list of the financial information needed and told Halek to
produce the requested documentation. The parties filed a joint status report at
the court’s request, stating:
Halek submitted further sworn statements of financial condition
and other financial documentation to the Commission as ordered,
and the parties met in person to confer on March 21. The parties
remain at an impasse. In general terms, the Commission’s position
remains that Mr. Halek is unable to meet the conditions for settle-
ment under the terms proposed at mediation. If the Court desires
specific information regarding the parties’ settlement negotiations
or the reasons for the impasse, the parties will be glad to provide it.
However, due to the confidential nature of the discussions, the par-
ties are simply reporting that a settlement is not possible between
the parties at this time.
Therefore, the Commission respectfully re-urges its Motion for
Disgorgement as to Halek . . . and moves the Court to determine the
appropriate amount of disgorgement, if any, owed by Mr. Halek (the
sole remaining issue in the litigation).
(Footnote and citation omitted.)
3
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The district court reopened the case as to Halek only and referred it to a
magistrate judge for a settlement conference.2 When the parties failed to settle,
the district court entered findings of fact that Halek, along with Halek Energy
and CBO Energy, had received $21,452,137 in ill-gotten profits, had jointly parti-
cipated in the profits, had commingled the funds, and had collectively spent the
funds as a single economic unit. As a result, the court held Halek and the two
companies jointly and severally liable for disgorgement of $21,452,137 and pre-
judgment interest of $5,048,920.17. Halek was ordered to pay a $50,000 civil
penalty.
II.
Halek claims that the court procedurally erred in reopening the case. An
administrative closure is more akin to a stay than a dismissal.3 Unlike a stay
however, an administratively closed case is not counted as active although it
remains on the docket, Mire, 389 F.3d at 167; it “is merely a case-management
tool used by district court judges to obtain an accurate count of active cases.”
CitiFinancial, 453 F.3d at 250. Recognizing that “[d]istrict court judges have
broad discretion in managing their own dockets,” Saqui v. Pride Cent. Am., LLC,
595 F.3d 206, 211 (5th Cir. 2010), we review administrative-closure determina-
tions for abuse of discretion.4
Halek argues that the SEC was required to move forward with the settle-
ment agreement despite its claim that he had provided insufficient financial doc-
2
Final judgments were entered against CBO Energy and Halek Energy and are not at
issue in this appeal.
3
Mire v. Full Spectrum Lending Inc., 389 F.3d 163, 167 (5th Cir. 2004); see also
CitiFinancial Corp. v. Harrison, 453 F.3d 245, 250–51 (5th Cir. 2006).
4
See Ali v. Quarterman, 607 F.3d 1046, 1049 (5th Cir. 2010); United States v. Texas,
457 F.3d 472, 476 (5th Cir. 2006).
4
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umentation. Halek explains that he made a good-faith effort, and any failure to
comply was because the SEC failed to clarify what information it needed. Even
if the SEC failed sufficiently to enumerate what information it needed, however,
it was not required to accept the proposed settlement, which was left subject to
the parties’ agreement on final settlement documents. Considering the impasse
over whether Halek had submitted sufficient documentation, it is evident there
was no agreement. Furthermore, the order of administrative closure explicitly
stated that any party could initiate further proceedings as necessary. It was not
an abuse of discretion for the court to return the case to the active docket to seek
resolution of the disgorgement issue.
III.
Halek contends the district court should not have considered his stipulated
consent agreement when entering the final judgment. He categorizes his con-
sent to interlocutory judgment as part of the same settlement agreement as the
failed disgorgement negotiations; he urges that when the SEC refused to settle
on disgorgement, it also lost the right to rely on the terms of the consent
agreement.
Consent agreements such as the one here are “in the nature of a settle-
ment and [have] the elements of a contract.” SEC v. AMX, Int’l, Inc., 7 F.3d 71,
75 (5th Cir. 1993). We review their interpretation de novo.5 The district court
did not err in relying on Halek’s consent agreement, because it was not conting-
ent on the parties’ agreement as to the amount of disgorgement. Instead, the
consent explicitly left open the amount of disgorgement for the Court to deter-
mine “upon motion of the Commission[.]” Halek’s consent also explicitly stated
that, for purposes of determining disgorgement, he would not challenge the con-
5
See Alford v. Kuhlman Elec. Corp., 716 F.3d 909, 912 (5th Cir. 2013) (noting that set-
tlement agreements are contracts and are reviewed de novo).
5
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sent and had received no promises in exchange for executing it.
IV.
Halek’s main issue on appeal presents the question whether the district
court erred in ordering over $21 million in disgorgement. Specifically, he claims
that the amount is incorrect because (1) he should not have been held jointly and
severally liable with the companies; (2) he did not personally receive the entire
sum of the profits; (3) the court did not subtract the amount paid to the fraud
victims; and (4) the SEC did not follow its rules and procedures for disgorge-
ment.
The purpose of disgorgement is not to make victims whole but to prevent
the wrongdoer’s enrichment from ill-gotten profits. SEC v. Huffman, 996 F.2d
800, 802 (5th Cir. 1993). Disgorgement is “limited to property causally related
to the wrongdoing,” but it need only be a “reasonable approximation” of those
profits.6 District courts have “broad discretion in fashioning the equitable rem-
edy of a disgorgement order,” Huffman, 996 F.2d at 803, and we review disgorge-
ment orders for abuse of discretion, AMX, Int’l, 7 F.3d at 73. We review pure
questions of law de novo, id., and findings of fact will stand unless clearly errone-
ous, FED R. CIV. P. 52(a)(6).
First, we address whether the court erred in holding Halek, CBO Energy,
and Halek Energy jointly and severally liable. “[J]oint and several liability is
appropriate in securities cases where, as here, individuals collaborate or have
close relationships in engaging in illegal conduct.”7 The court found that Halek
and the two companies “jointly participated in ill-gotten profits received from
6
Allstate Ins. Co. v. Receivable Fin. Co., L.L.C., 501 F.3d 398, 413 (5th Cir. 2007) (citing
SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989)).
7
SEC v. United Energy Partners, Inc., 88 F. App’x 744, 747 (5th Cir. 2004) (per curiam)
(citing SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir.1997)).
6
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investors. The defendants commingled investor funds in bank accounts and
collectively spent the funds as a single economic unit.” Based on a finding that
they acted in concert, the court drew the legal conclusion that Halek and the
entity defendants were jointly and severally liable for the full amount of ill-
gotten profits.
Halek disputes the underlying factual findings, arguing that there was no
evidence of commingling or action as a single economic unit. To the contrary,
those findings were not clear error, because they were “plausible in light of the
record as a whole.” United States v. Morrison, 713 F.3d 271, 279 (5th Cir. 2013)
(internal quotation and citation omitted).
The court relied on the declaration of the SEC’s forensic accountant, who
analyzed the financial records of the three defendants and determined that the
investors’ funds were commingled among the defendants’ bank accounts and
treated as one economic unit. The accountant also noted that Halek had signa-
ture authority to receive and disburse funds from all the relevant accounts. Her
report concluded that “[b]ased on the large volume of transactions, the comming-
led uses of funds, and the inaccuracy of accounting records and financial state-
ments,” she would be unable to divide the profits among the parties.
In addition, the allegations in the underlying complaint, which the court
may accept as true according to Halek’s consent, stated that Halek owned and
operated both energy companies; he controlled the websites that solicited inves-
tors; and the companies commingled funds to pay for costs across several pro-
jects. Finally, both Halek Energy and CBO Energy admitted, in the motion to
enter agreed final judgment, that they acted in concert with Halek and com-
mingled and collectively spent the funds as a single economic unit. They agreed
that it would be “nearly impossible” to determine what amount of profits to
attribute to each defendant.
Halek also maintains that the amount of disgorgement was erroneous,
7
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because he received only $473,502.52 from the energy companies.8 The SEC
carries the initial burden to prove that the amount of disgorgement is a reasona-
ble approximation of profits connected to the violation. See Allstate Ins., 501
F.3d at 413. Halek admits that the burden then shifts to the defendant to prove
that the amount is unreasonable. See Hughes Capital, 124 F.3d at 455; First
City Fin., 890 F.2d at 1232.
Halek failed to show that $21,452,137 was not a reasonable approximation
of Halek and the energy companies’ ill-gotten profits; thus, we cannot say that
the district court abused its discretion, see Huffman 996 F.2d at 803. Halek’s
sole evidence is his unsubstantiated claim that he received only $473,502.52, but
he never disputes that the scheme reaped $21 million in profits. The fact that
Halek may have directed only a small percentage into his personal accounts does
not make the total profit approximation unreasonable.9 Halek, CBO Energy,
and Halek Energy had the full benefit of the $21,452,137 in ill-gotten profits;
how it was distributed and spent “has no relevance to the disgorgement calcula-
tion.” SEC v. JT Wallenbrock & Assoc., 440 F.3d 1109, 1116 (9th Cir. 2006).
Finally, Halek contends that the district court erred in failing to subtract
the amount already paid to fraud victims from Halek Energy’s bankruptcy set-
tlement. Although a court may consider settlement payments when calculating
disgorgement, SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1475 (2d Cir. 1996),
Halek failed to show what payments were actually made to the victims. He sub-
8
Separately, Halek, using SEC Rule of Practice 630(a),17 C.F.R. § 201.630(a), contends
that the SEC should have been estopped from requesting disgorgement beyond his ability to
pay. Those rules, however, govern only administrative proceedings before the SEC. 17 C.F.R.
§ 201.100(a).
9
See United Energy, 88 F. App’x at 746 (citing SEC v. Banner Fund Int’l, 211 F.3d 602,
617 (D.C.Cir. 2000)) (“[A] person remains unjustly enriched by what was illegally received,
whether he retains the proceeds of his wrongdoing.”); see also SEC v. Platforms Wireless Int’l
Corp., 617 F.3d 1072, 1098 (9th Cir. 2010) (“A person who controls the distribution of illegally
obtained funds is liable for the funds he or she dissipated as well as the funds he or she
retained.”).
8
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mitted a declaration that he transferred assets to the victims in the bankruptcy
settlement, but the supporting settlement agreement showed only that he agreed
to assign an unvalued amount of mineral interests to Halek Energy. The court
did not abuse its discretion in fashioning the remedy.10
AFFIRMED.
10
In addition, the SEC declared that it had subtracted from the disgorgement calcula-
tion an unspecified amount that had already been refunded to some investors.
9