Securities and Exchange Comm'n v. Patrick Quinlan

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 10a0246n.06
FILED
No. 08-2619 Apr 21, 2010
LEONARD GREEN, Clerk
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
v. On Appeal from the United
States District Court for the
PATRICK D. QUINLAN, Eastern District of Michigan
at Ann Arbor
Defendant-Appellant.
/
Before: GUY, COLE, and SUTTON, Circuit Judges.
RALPH B. GUY, JR., Circuit Judge. Defendant Patrick D. Quinlan, Sr., appeals
from the entry of judgment against him in this civil enforcement action brought by the
Securities and Exchange Commission (SEC or Commission). The district court, finding that
Quinlan’s criminal convictions established that he committed various securities law
violations, entered judgment enjoining him from future violations of securities laws and
ordering that Quinlan be prohibited from acting as an officer or director of any issuer having
a class of securities registered with the SEC pursuant to Section 12 of the Exchange Act (15
U.S.C. § 78l), or that is required to file reports pursuant to Section 15(d) of the Exchange Act
(15 U.S.C. § 78o(d)). Quinlan’s pro se appeal raises a number of complaints about the
proceedings, most of which he also disavows as a basis for relief from this court. After
No. 08-2619 2
reviewing the record and considering the arguments presented on appeal, we find no error
and affirm.
I.
The SEC filed this civil enforcement action in April 2002, against Patrick Quinlan,
Sr., and six other defendants alleging a “large scale securities offering and accounting fraud
perpetrated by senior officers and personnel of MCA Financial Corporation (“MCA”) to
buttress a failing, high-risk mortgage banking business.” MCA, a privately held holding
company, consisted of three mortgage-related businesses. Those businesses included the
origination of conforming mortgages, the origination and securitization of nonconforming
loans and mortgages, and the acquisition and rental of low income housing in and near the
City of Detroit. Quinlan was MCA’s CEO, Chairman of the Board, and a director from its
inception in 1989 until it filed for bankruptcy in January 1999. MCA had, at its height,
offices in 12 states and as many as 1,000 employees.
The SEC alleged that from 1994 until January 1999, the defendants engaged in a
fraudulent scheme to falsely inflate income and equity to enhance cash flow to hide losses.
Material misrepresentations were made in connection with the offer or sale of securities;
specifically, corporate debentures and securitized pools of nonconforming mortgages sold
as “real estate pass-through certificates.” The misrepresentations made the financial reports
and registration statements relied upon by investors and lenders materially false. Ultimately,
the fraud at MCA resulted in losses of more than $256 million.
Federal criminal proceedings were already under way when this action was filed, and
No. 08-2619 3
charges against Quinlan and two others were added by superceding indictment in June 2002.
Not long after, at the request of the United States Attorney’s Office, the district court ordered
a stay of this action pending resolution of the criminal charges. In February 2004, Quinlan
pleaded guilty pursuant to a Rule 11 Plea Agreement to two counts—making false statements
to the SEC and conspiring with others to commit a federal crime—and the remaining counts
were dismissed. More than a year later, after several changes in counsel, Quinlan moved
unsuccessfully to withdraw his guilty plea. Quinlan was sentenced to 120 months’
imprisonment and ordered to pay more than $256 million in restitution.
Without repeating in full the factual basis set forth in the Plea Agreement, Quinlan
admitted that: (1) he directed and participated in the raising of funds from investors and
lenders to finance MCA; (2) he knowingly conspired to obtain such funds by false and
fraudulent representations; and (3) as part of MCA’s Financial Management Committee, he
knowingly made decisions to deliberately engage in business and accounting practices that
were fraudulent. Quinlan stipulated that material misrepresentations were made with respect
to both the risks of and returns on the pass-through certificates. Investors were sent
statements that contained material misrepresentations, and some pool assets were sold and
used for MCA corporate purposes.
Quinlan also admitted that MCA knowingly prepared false and fraudulent financial
statements that concealed MCA’s true financial condition, as well as the value, quality, and
even ownership of the loans and mortgages. Those financial statements were provided to
MCA’s lenders that provided secured lines of credit of as much as $210 million and a
No. 08-2619 4
pension fund that provided guarantees and loans totaling $60 million. It was also stipulated
that MCA filed quarterly reports (10-Qs), annual reports (10-Ks), and registration statements
(S-18s, SB-2s, S1s) with the SEC that contained materially false statements and omissions
concealing MCA’s true financial condition. Specifically, Quinlan stated that on April 29,
1998, during and in furtherance of the conspiracy, he signed the Form 10-K (annual report)
for fiscal year ending January 31, 1998, as CEO and Chairman of MCA, “knowing that the
10-K contained materially false and fraudulent statements and concealed material facts.”
During 2004, Quinlan also pleaded guilty in state court to conspiracy to commit
securities fraud and three counts of violating anti-fraud provisions under Michigan Securities
law. The criminal complaint in that case focused on the material misstatements made to
investors with respect to the mortgage pools, including: that investors were not informed that
mortgages were removed from pools; that, as a result, certain pools did not have sufficient
assets to pay investors what would be due; and that MCA sent investors letters that contained
false information about the rate of return to conceal the shortfall. The state court sentenced
Quinlan to one year in prison, to run concurrently with his federal sentence, and ordered that
he pay restitution of $83 million.
On May 26, 2006, after sentencing in the federal case, the SEC filed a motion to lift
the stay in this civil enforcement action. Quinlan asked that the district court defer ruling on
the motion to allow time for a decision in his direct appeal, which the court did. Once this
court affirmed, United States v. Quinlan, 473 F.3d 273, 277-78 (6th Cir.), cert. denied, 128
No. 08-2619 5
S. Ct. 251 (2007), the district court lifted the stay and directed that Quinlan answer.1
Quinlan’s February 14, 2007 responsive pleading moved to dismiss the action as
barred by the three-year statute of limitations found applicable to private securities fraud
actions under § 10(b) of the Exchange Act in Lampf, Pleva, Lipkind, Prupis & Pettigrow v.
Gilbertson, 501 U.S. 350 (1991). The SEC’s twofold response argued that this limitations
period did not apply to enforcement actions, but conceded that the general “catch-all” five-
year limitations period found in 28 U.S.C. § 2462 would apply to the request for civil
penalties. Quinlan’s requests for extensions of time to reply were granted, but his motion for
appointment of counsel was denied. Quinlan filed his reply on May 7, 2007.2
Before Quinlan’s motion to dismiss was decided, the SEC filed its own motion for
voluntary dismissal of the request for civil penalties. The district court granted the SEC’s
motion and denied Quinlan’s several motions for reconsideration, finding, inter alia, that
Quinlan was not prejudiced by what was in effect an amendment dismissing the request for
civil penalties; that the limitations period implied for private securities fraud claims does not
apply to civil enforcement actions by the SEC; and that § 2462 was not a bar to the SEC’s
remaining claims for injunction and an officer/director bar. The statute of limitations would
1
Quinlan complains repeatedly that he was not present at this hearing, but he stated in his next
district court filing that he would not have opposed lifting the stay had he been there. In fact, this is one of
the complaints that Quinlan expressly disavows as a basis for relief on appeal. Nor has he made a showing
of either error or prejudice resulting from the lifting of the stay.
2
Quinlan argues that the denial of his request for appointment of counsel caused him to be unable
to mount a “complete defense” in violation of his Sixth and Fourteenth Amendment rights. As a civil action,
however, Quinlan had no Sixth Amendment right to counsel. Shepherd v. Wellman, 313 F.3d 963, 970 (6th
Cir. 2002). Nor can we conclude that it was an abuse of discretion to deny his request for court-appointed
counsel. Lavado v. Keohane, 992 F.2d 601, 605 (6th Cir. 1993).
No. 08-2619 6
be raised again on summary judgment, and Quinlan’s main contention on appeal is that the
district court erred in its application of § 2462.
The SEC’s motion for summary judgment, filed April 28, 2008, relied on Quinlan’s
convictions to preclude him from relitigating the facts of MCA’s fraudulent conduct or his
knowledge and participation in the fraud. Quinlan’s response argued the statute of
limitations issue, asked that a decision on the motion be deferred because he intended to file
a § 2255 motion to set aside his guilty plea, and claimed that the SEC had engaged in
“unprofessional” or “improper” conduct. Although Quinlan then filed a § 2255 motion in
the federal criminal case, the district court denied his § 2255 motion, and this court has
denied his motion for certificate of appealability. Any claim that a decision on the summary
judgment motion should have been deferred is now moot. But see Smith v. SEC, 129 F.3d
356, 362 n.7 (6th Cir. 1997) (observing that a direct appeal does not deprive conviction of
preclusive collateral estoppel effect).3
On November 7, 2008, in a thorough 25-page opinion, the district court, in turn,
considered the alleged violations by Quinlan; found application of collateral estoppel was
warranted; and determined that injunctive relief and a permanent officer and director bar
3
Quinlan’s assertions concerning improper conduct by the SEC are not entirely clear, although they
seem to rely on a reported statement by FBI Agent Hunt to Quinlan’s defense attorney indicating that the
investigation had revealed that MCA’s general ledgers balanced “to the penny.” Quinlan characterizes this
statement as a “whistleblower’s” accusation that the SEC’s civil complaint in this case was not based upon
its “own” investigation. On appeal, Quinlan complains that the SEC’s failure to respond to questions about
this in connection with its motion for summary judgment denied him his right to confrontation and resulted
in the withholding of information vital to the defense. While it appears that the significance of this
statement was a point of contention between Quinlan and his criminal defense attorney before Quinlan
pleaded guilty, nothing in these arguments suggests that the district court erred in granting summary
judgment in this case. Nor was it error to disregard Quinlan’s multiple supplemental filings, which included
this argument, because they were filed without leave.
No. 08-2619 7
should be imposed against Quinlan. The district court also found that the statute of
limitations did not apply to the claims for this relief. Judgment was entered accordingly on
November 14, 2008, and Quinlan’s motion for reconsideration was denied on December 1,
2008. This appeal followed.
II.
In deciding a motion for summary judgment, the court must view the factual evidence
and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Summary judgment is appropriate
when there are no issues of material fact in dispute and the moving party is entitled to
judgment as a matter of law. F ED. R. C IV. P. 56(c). A district court’s decision granting
summary judgment is reviewed de novo. Smith v. Ameritech, 129 F.3d 857, 863 (6th Cir.
1997).
A. Collateral Estoppel
Collateral estoppel, also known as issue preclusion, “ bars ‘successive litigation of an
issue of fact or law actually litigated and resolved in a valid court determination essential to
the prior judgment,’ even if the issue recurs in the context of a different claim.” Taylor v.
Sturgell, 128 S. Ct. 2161, 2171 (2008) (citation omitted). A federal court decision has
collateral estoppel effect when the following four elements are satisfied:
(1) the precise issue raised in the present case must have been raised and
actually litigated in the prior proceeding; (2) determination of the issue must
have been necessary to the outcome of the prior proceeding; (3) the prior
proceeding must have resulted in a final judgment on the merits; and (4) the
party against whom estoppel is sought must have had a full and fair
opportunity to litigate the issue in the prior proceeding.
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Smith v. SEC, 129 F.3d 356, 362 (6th Cir. 1997) (en banc) (quoting Detroit Police Officers
Ass’n v. Young, 824 F.2d 512, 515 (6th Cir. 1987)).
The district court found, and Quinlan does not dispute, that the prerequisites for
collateral estoppel are met and he is precluded from relitigating MCA’s fraud or his
knowledge of and participation in the fraudulent conduct. Quinlan’s misrepresentation and
securities fraud were essential to his convictions, and the same conduct formed the basis of
the violations alleged in this enforcement action. Quinlan’s culpability was actually litigated,
was necessary to the outcome, resulted in a final judgment of conviction, and was resolved
after a full and fair opportunity to litigate in the criminal case.
B. Substantive Violations, Permanent Injunction, and Officer/Director Bar
Addressing the allegations by type, the district court found that the SEC had
established that Quinlan was primarily liable for violating the anti-fraud provisions 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 (17 C.F.R. § 240.10b-5). The district court also found
that Quinlan was liable for violating the books and records and internal controls provisions
of Section 13(b)(5) of the Securities Act (15 U.S.C. § 78m(b)(5)) and Exchange Act Rules
13b2-1 and 13b2-2 (17 C.F.R. §§ 240.13b2-1 and 240.13b2-2). Finally, the district court
found Quinlan aided and abetted MCA’s violations of the reporting and record keeping
provisions of Sections 13(b)(2)(A), 13b(2)(B), and 15(d) of the Exchange Act (15 U.S.C. §§
78m(b)(2)(A), 78m(b)(2)(B), and 78o(d)), and Exchange Act Rules 12b-20, 15d-1, and 15d-
13 (17 C.F.R. §§ 240.12b-20, 15d-1, 15d-13). On appeal, Quinlan does not argue that there
No. 08-2619 9
are any material questions of fact with respect to the alleged substantive violations, and our
review reveals no error in the district court’s determination that the SEC established
Quinlan’s liability for such violations.
The SEC may seek permanent or temporary injunction against future violations of
securities laws under Section 20(b) of the Securities Act (15 U.S.C. § 77t(b)) and Section
21(d)(1) of the Exchange Act (15 U.S.C. § 78u(d)(1)), upon showing there is a reasonable
and substantial likelihood that, if not enjoined, the defendant would violate securities laws
in the future. See SEC v. Youmans, 729 F.2d 413, 415 (6th Cir. 1984). This court has
identified the following factors to be considered in determining the likelihood of future
violations: (1) “the egregiousness of the violations”; (2) “the isolated or repeated nature of
the violations”; (3) “the degree of scienter involved”; (4) “the sincerity of the defendant’s
assurances, if any, against future violations”; (5) “the defendant’s recognition of the wrongful
nature of his conduct”; (6) “the likelihood that the defendant’s occupation will present
opportunities (or lack thereof) for future violations”; and (7) “the defendant’s age and
health.” Id. No single factor is determinative. Id.In addition, Section 20(b) of the Securities Act and Section 21(d)(1) of the Exchange
Act provide that a person may be barred from serving as an officer or director of a public
company if that person violates the anti-fraud provisions of either Act and his conduct
demonstrates “unfitness to serve as an officer or director.” The following factors may be
considered in determining whether a defendant is “unfit”: “(1) the ‘egregiousness’ of the
underlying securities law violation; (2) the defendant’s ‘repeat offender’ status; (3) the
No. 08-2619 10
defendant’s ‘role’ or position when he engaged in the fraud; (4) the defendant’s degree of
scienter; (5) the defendant’s economic stake in the violation; and (6) the likelihood that
misconduct will recur.” SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995) (internal quotation
marks and citation omitted).
The district court found that a permanent injunction against future violations of
securities law and imposition of a permanent officer/director bar were warranted, reasoning
as follows:
First and foremost, the evidence shows that Quinlan knowingly and
deliberately engaged in fraudulent business and accounting practices for an
extended period of time for 1994 through 1999. In his capacity as CEO of
MCA, Quinlan repeatedly made false financial statements and misrepresented
material facts with the intention to mislead investors, causing investors to lose
millions of dollars. He lied to the auditors. Quinlan’s conduct certainly was
egregious. At his sentencing, the trial court characterized Quinlan as the
“dominant force” and the “architect” of the scheme. (Pl’s Exh. 26, p. 2).
Moreover, the Court is not persuaded that Defendant recognizes the wrongful
nature of his conduct, in light of his repeated denials of any wrongdoing in the
downfall of MCA, his lack of remorse for the tremendous loss suffered by the
investors, and his attempt to withdraw his guilty plea. (Id., p. 39). He
benefitted from his conduct; he “lived a very good life for a very long time
based on the proceeds generated by [the] offense.” (Id., p. 40). Should
Quinlan retain access to the same occupation upon his scheduled release from
prison, the Court cannot disregard the reasonable and substantial likelihood
that he will engage in future violations of the federal securities laws at the
public’s risk and expense. (See id., p. 40, recognizing the likelihood that the
public is likely to suffer additional danger from Quinlan).
Based on our review of the record, we find that the district court did not abuse its discretion
either by enjoining Quinlan from future violations or permanently barring Quinlan from
serving as an officer or director of a public company.
C. Statute of Limitations
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Neither the Securities Act nor the Exchange Act explicitly contain a statute of
limitations for SEC civil enforcement actions; but Quinlan argues that the SEC’s claims for
injunctive relief and imposition of the officer/director bar are governed by the five-year
limitations period found in 28 U.S.C. § 2462. Section 2462 provides that:
Except as otherwise provided by Act of Congress, an action, suit or
proceeding for the enforcement of any civil fine, penalty, or forfeiture,
pecuniary or otherwise, shall not be entertained unless commenced within five
years from the date when the claim first accrued if, within the same period, the
offender or the property is found within the United States in order that proper
service may be made thereon.
The SEC’s abandonment of the claim for civil penalties in this case obviates the need to
determine when they “first accrued” in this case. Not surprisingly, however, claims for civil
penalties in a civil enforcement action brought by the SEC have been recognized as being
governed by § 2462. See SEC v. Jones, 476 F. Supp.2d 374, 380 (S.D.N.Y. 2007); SEC v.
Alexander, 248 F.R.D. 108 (E.D.N.Y. 2007); SEC v. Kelly, 663 F. Supp.2d 276, 286
(S.D.N.Y. 2009). The question here is whether the equitable remedies ordered in this case
are also “penalties” subject to the statute of limitations in § 2462.4
Equitable relief in SEC enforcement actions may include orders of disgorgement,
injunctions against future violations, or imposition of an officer and director bar. Some
courts have held that some or all of these equitable remedies are exempt from § 2462’s
limitations period as a matter of law. See Kelly, 663 F. Supp.2d at 286 (citing cases);
4
Not challenged on appeal is the finding that, as other courts have concluded, no other statute of
limitations is implied or borrowed for civil enforcement actions brought by the SEC to vindicate public (not
private) interests. SEC v. Rind, 991 F.2d 1486, 1488-91 (9th Cir. 1993); SEC v. Calvo, 378 F.3d 1211, 1218
(11th Cir. 2004). We note that there is no authority to the contrary.
No. 08-2619 12
Zacarias v. SEC, 569 F.3d 458, 479 (D.C. Cir. 2009) (holding disgorgement not punitive).
Other courts have engaged in a fact-intensive inquiry to determine whether the equitable
remedies sought in a particular case are remedial or punitive. See Alexander, 248 F.R.D. at
115-16 (discussing alternative approaches); Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir.
1996). This unsettled question is immaterial to this case, as the district court undertook the
fact-intensive inquiry articulated in Johnson and applied in Jones.
Quinlan relies on Jones, which held that “the limitations period in § 2462 applies to
civil penalties and equitable relief that seeks to punish, but does not apply to equitable relief
which seeks to remedy a past wrong or protect the public from future harm.” Jones, 476 F.
Supp.2d at 381; see also Johnson, 87 F.3d at 488-89. Although the court in Jones ultimately
concluded that the SEC failed to show that the permanent injunction was aimed at protecting
the public from future harm, the district court carefully considered the matter and found that
this showing had been made in this case. The district court recognized the serious
consequences, explaining that:
The potential collateral consequences to Quinlan from a permanent
injunction and officer and director bar are admittedly considerable, even from
an objective point of view. The practical effect of such an injunction would
work to stigmatize Defendant in the investment community. Moreover, the
injunction would deprive him of any ability and opportunity to earn a living as
an offic[er] or director throughout his life after his release from the prison.
Because of the far-reaching consequences to Defendant that the bar poses, the
Court carefully considers evidence demonstrating the likelihood of recurrence.
Then, considering the likelihood of recurrence in light of the factors identified by the Second
Circuit in SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978), the
district court found all the factors favored the SEC’s position.
No. 08-2619 13
First, Quinlan is guilty of conspiracy to commit fraud and to make false
statements, and of making false and fraudulent statements in an annual report
filed with the SEC. Second, Defendant’s conduct was not the result of
negligence [or] insufficient attention to the business–he was aware of the
misrepresentations that resulted in inflated values for property, and he also was
aware that MCA’s financial statements did not properly reflect the unfunded
liabilities in the pools. According to the Rule 11 Plea Agreement, Quinlan
“knowingly conspired with other employees, officers and directors of MCA to
obtain these funds by means of false and fraudulent pretense, representations
and promises.” Third, Defendant’s securities laws violations were not an
isolated occurrence, but were carried out over an extended period of time
throughout MCA’s daily operations. Fourth, in his criminal case, Quinlan
attempted to withdraw his Rule 11 guilty plea and to maintain his innocence
after he entered the plea. In the instant civil action, Defendant continues to
assert that he should not be held liable for any and all of the injurious
consequences arising from his misrepresentations and other fraudulent
conduct. Finally, if the equitable relief is not granted, the Court finds it likely
that Defendant would return to the investment industry upon his release from
prison, given that the current dispute over the applicability of Section 2462 is
brought before the Court precisely because Defendant wants to retain access
to the same occupation.
(Citations omitted.) Based on these findings, the district court concluded that there was a
risk of recurrence, that the risk to the investing public outweighed the severe collateral
consequences of the equitable relief, and, therefore, that the permanent injunction and officer
and director bar were remedial rather than punitive. These findings are supported by the
record, and establish that the equitable relief was not a “penalty” subject to § 2462’s five-year
statute of limitations.
AFFIRMED.