FTC v. Richard Neiswonger

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 08-3077
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Federal Trade Commission, *
*
Plaintiff/Appellee, *
*
United States of America, *
*
Intervenor Plaintiff, *
*
v. * Appeal from the United States
* District Court for the
Richard C. Neiswonger, individually * Eastern District of Missouri.
and as an officer of each corporate *
defendant doing business as Marketing *
Systems, *
*
Defendant/Appellant, *
*
SKGroup Inc.; Shapiro, Kossmeyer & *
Flom, PC, doing business as SKPC; *
Carl F. Kossmeyer, individually and as *
an officer of SKGroup, Inc. – Shapiro, *
Kossmeyer & Flom, PC; Medical *
Recovery Service, Inc.; Nancy Freeman, *
individually and as an officer of *
Medical Recovery Service, Inc.; Marc *
Freeman, individually and as an officer *
of Medical Recovery Service, Inc., *
*
Defendants, *
*
William S. Reed, *
*
Defendant/Appellant, *
Asset Protection Group, Inc., *
*
Defendant, *
*
Robb Evans & Associates, LLC, *
*
Receiver. *
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Submitted: April 16, 2009
Filed: September 9, 2009
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Before RILEY, BENTON, and SHEPHERD, Circuit Judges.
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RILEY, Circuit Judge.
Richard Neiswonger (Neiswonger) appeals the district court’s1 entry of a civil
contempt order against Neiswonger for Neiswonger’s violations of a prior permanent
injunction, enjoining him from using deceptive and misleading sales practices.
Neiswonger claims the district court erred in denying Neiswonger’s motion for a
separate hearing on the issues of damages and disgorgement of profits and also raises
sufficiency of the evidence and other issues. For the reasons stated in this opinion, we
affirm.
I. BACKGROUND
In November 1996, the FTC brought an action against Neiswonger and others,
seeking to enjoin Neiswonger from using deceptive and misleading practices in the
sale of business opportunity programs. In 1997, the parties stipulated to the entry of
a permanent injunction, enjoining Neiswonger and his co-defendants from making
1
The Honorable Stephen N. Limbaugh, Sr., United States District Judge for the
Eastern District of Missouri, now retired.
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misrepresentations and omissions of material fact in the advertising, marketing and
sale of business opportunity programs. Neiswonger paid $425,000 in redress to the
FTC.
In a separate criminal proceeding, Neiswonger pled guilty to wire fraud and
money laundering in connection with the sale of the business opportunity programs
and was sentenced to 18 months imprisonment. Later, a civil forfeiture action was
initiated against Neiswonger after it was determined Neiswonger failed to disclose,
during plea negotiations, approximately $1.3 million in proceeds from the deceptive
business opportunity scheme. Neiswonger settled for a $750,000 forfeiture to the
government.
Neiswonger and William Reed (Reed)2 became business partners and formed
a company called Asset Protection Group, Inc. (APG), which began operation after
Neiswonger was released from prison. In exchange for paying a $9,800 “performance
deposit,” APG offered consumers the opportunity to become certified “asset
protection consultants” (APG consultants). The function of an APG consultant was
to market and sell APG’s services to clients seeking to protect their assets. APG’s
asset protection services included (1) the creation of Nevada corporations, and (2) the
formation of “offshore corporation[s] from the Commonwealth of the Bahamas, with
a corporate brokerage account in the Cayman Islands.”
APG consultants were told their “performance deposits” would be “100 percent
REFUNDED . . . at a rate of a $100 bonus per Nevada Corporation and a $250 bonus
per Bahamas Corporation” the consultant placed. In addition, APG’s marketing
literature claimed APG consultants could expect to make “very substantial profits”
2
Reed was a Colorado attorney. The Colorado Supreme Court suspended
Reed’s license in 1997 after finding Reed “engaged in misrepresentations and
dishonesty.” Colorado v. Reed, 942 P.2d 1204, 1205 (Colo. 1997). Reed authored
a book called Bulletproof Asset Protection, which provided advice on protecting
assets from judgments, creditors, and government agencies.
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and would have “6-figure income potential, from, less than full-time schedule.” The
literature explained APG consultants earned an average of $1,700 to $6,400 per client,
and offered to arrange appointments for APG consultants “with new, good prospective
clients.” APG placed advertisements in The Wall Street Journal and USA Today, and
paid for advertisements during the radio shows of Larry King, Rush Limbaugh, Bill
O’Reilly, and Charles Osgood.
In July 2006, the FTC filed a motion requesting the district court to order
Neiswonger, Reed, and APG (collectively, defendants) “to show cause why they
should not be held in contempt” for violations of the 1997 permanent injunction. The
FTC sought injunctive and compensatory relief and disgorgement of profits obtained
from the deceptive business practices. The FTC claimed “APG consultants have
suffered considerable losses or have not seen earnings even close to those touted,” and
“it is extraordinarily unlikely that consumers will earn a substantial or ‘six-figure’
income as APG consultants.” Thus, the FTC claimed the defendants were “making
false and misleading income claims” in violation of the permanent injunction. The
FTC also claimed the defendants were in violation of the permanent injunction for
failure to disclose material facts, including (1) the fact APG was using paid references
to promote its program without disclosing this fact to consumers, and
(2) Neiswonger’s prior civil forfeiture for deceptive practices and his criminal
convictions. Finally, the FTC alleged Neiswonger violated the permanent injunction
“by failing to report his affiliation with APG to the FTC, and by failing to provide the
FTC with proof of a current $100,000 performance bond before promoting the APG
program over the past two years.”
The FTC also filed a motion for a temporary restraining order and other
ancillary equitable relief, which the district court granted, enjoining the defendants
from further violations of the permanent injunction, freezing the defendants’
individual and corporate assets, and appointing a temporary receiver to assume control
of APG. The district court also ordered the defendants to appear before the court to
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show cause why it should not enter a preliminary injunction pending the outcome of
the FTC’s motion seeking to hold the defendants in civil contempt.
The district court convened a two-day hearing on October 25, 2006. The FTC
presented testimony from five witnesses: an FTC investigator, three consumers who
had become APG consultants and incurred losses, and a representative of the receiver.
The FTC also presented deposition testimony and declarations of various other
consumers. Only Neiswonger testified for the defendants. The receiver prepared a
report, which was admitted into evidence. According to the report, of the 1,930
individuals who became APG consultants, only 121 (6.3%) sold enough corporations
to earn back their initial $9,800 payment. Approximately 94% of the 1,930
consultants either did not sell a single corporation or did not sell enough corporations
to earn back their $9,800 payment. APG’s records indicated the defendants’ gross
sales from the APG consultant program were approximately $19.8 million.
The FTC moved to admit a document into evidence that purported to calculate
the income Neiswonger had received from his involvement in APG. Defendants
objected to the admission of the document, contending it was a self-serving document
that was generated at the request of the FTC, was missing information, and contained
unauthenticated information. Defendants also claimed the document was inadmissible
as a summary exhibit because the document and the underlying data were not made
available to defendants. The FTC claimed the underlying information came from the
data maintained by and accessible to the defendants, and the FTC had attempted to
email the document the previous week, but there had been a computer problem on the
defendants’ end of the transmission. The district court suggested, in light of
defendants’ objections, that the hearing may need to be postponed to give the
defendants adequate time to review the contested document and the underlying data.
Defendants withdrew their objection, stating they did not wish to postpone the
hearing, and the district court received the document subject to the defendants’ other
objections. The representative of the receiver estimated Neiswonger’s income from
sales of the APG program was $3,089,000, and Reed’s income was approximately
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$4,900,000. The defendants declined to cross-examine the representative of the
receiver.
On April 23, 2007, the district court entered an order, finding Neiswonger in
contempt for several violations of the 1997 permanent injunction. The district court
also found Reed and APG in contempt for acting in concert and participating with
Neiswonger in violations of the permanent injunction. The district court modified the
permanent injunction, banning Neiswonger “from marketing and selling business
opportunity programs in the future.” The court determined it was appropriate to wait
to levy a compensatory sanction until the receiver submitted a final computation of
Neiswonger’s and Reed’s proceeds.
In March 2008, the receiver submitted the final computation of Neiswonger’s
proceeds. The receiver determined Neiswonger had obtained $3,213,719.13 in
connection with the APG program. On April 11, 2008, Neiswonger moved to exclude
the report and requested an evidentiary hearing. The district court denied
Neiswonger’s motion, finding the receiver “filed an exhaustive report” at the direction
of the district court, the defendants “had a full and complete opportunity to challenge
the evidence and testimony presented at the prior contempt hearing but chose not to
do so,” and “[i]t would be nothing less than an unnecessary delay to hold a new
hearing on the disgorgement amount” because there was “no genuine dispute of
material fact regarding the final accounting of the disgorgement amount.” The district
court entered an amended civil contempt order on July 30, 2008, using the receiver’s
final computation as the compensatory sanction. Neiswonger appeals.
II. DISCUSSION
A. Standard of Review
“[W]e review a district court’s imposition of a civil contempt order and
assessment of monetary sanctions for abuse of discretion.” Chaganti & Assocs., P.C.
v. Nowotny, 470 F.3d 1215, 1223 (8th Cir. 2006) (citation omitted). The district
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court’s factual findings underlying that decision are reviewed for clear error.
Warnock v. Archer, 443 F.3d 954, 955 (8th Cir. 2006) (citation omitted).
B. Due Process
Neiswonger first asserts he was not afforded due process of law during the civil
contempt proceedings because the district court issued the civil contempt order
without giving Neiswonger an opportunity to be heard on the issue of damages.
“[C]ivil contempt sanctions, or those penalties designed to compel future compliance
with a court order, are considered to be coercive and avoidable through obedience, and
thus may be imposed in an ordinary civil proceeding upon notice and an opportunity
to be heard.” Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821,
827 (1994) (emphasis added).
Having reviewed the record, including the transcript of the October 2006
hearing, we conclude Neiswonger was afforded due process during the civil contempt
proceedings. In July 2006, the FTC put Neiswonger on notice of the FTC’s intent to
seek compensatory sanctions and disgorgement of Neiswonger’s APG program
profits. Also in July 2006, the court-appointed temporary receiver submitted a
preliminary report, estimating Neiswonger’s proceeds from the APG program were
$2,799,472. The district court initially scheduled the hearing on the motion to show
cause in July 2006; however, the parties filed a joint motion to continue the hearing
until September 2006. The hearing was again rescheduled to October 25 and 26,
2006, giving Neiswonger ample opportunity to prepare for the hearing.
At the October 2006 hearing, when the FTC moved to admit into evidence the
document calculating Neiswonger’s proceeds from the sales of the APG program,
Neiswonger initially objected. Neiswonger complained the compilation was
generated at the FTC’s request and based his objection on the lack of opportunity to
view the underlying data in advance of the hearing, and Neiswonger’s assertion that
the document contained missing and unauthenticated information. After hearing the
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objections to the document and the FTC’s responses, the following exchange
occurred:
THE COURT: Well, it appears to me that after we’re through
here I may need to postpone this hearing and let everybody get up to
speed on it and then come back again.
MR. FRANKEL:3 Well, I hope not.
....
THE COURT: I hope not too. You say you’re not prepared, you
haven’t received the document, Mr. McAllister4 hasn’t received the
underlying documents.
....
MR. McALLISTER: Judge, clearly we do not want the
continuance. If that is the remedy, I withdraw my objection. . . .
....
But for purposes of this proceeding, I made the objection that the
Court wants to accept it subject to the objections to avoid any
continuance, that is fine with me.
MR. FRANKEL: And I agree with him, Mr. McAllister.
The district court received the document subject to the objections and permitted
the representative of the receiver to testify that Neiswonger’s estimated income from
the APG program was $3,089,000. The representative of the receiver testified
Neiswonger’s income was subject to change because the receiver had requested
additional documents that were not yet in the receiver’s possession. The
representative expected that any change in Neiswonger’s income would be an upward
adjustment, rather than a downward adjustment. Neiswonger and the other defendants
declined to cross-examine the representative. At the conclusion of the two-day
hearing, the district court gave the parties the opportunity to submit briefs and
3
Mr. Frankel represented Reed at the October 2006 hearing.
4
Mr. McAllister represented Neiswonger at the October 2006 hearing.
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proposed findings of fact and conclusions of law. Neiswonger did not make any
further submissions; thus, the representative’s estimation of Neiswonger’s income was
otherwise unchallenged by Neiswonger.
In April 2007, the district court entered an order, finding Neiswonger in
contempt for the violations of the 1997 permanent injunction. When the district court
announced its intention, upon a final computation by the receiver, to disgorge
Neiswonger of his proceeds from the APG program sales, Neiswonger made no effort
then to challenge the evidence concerning Neiswonger’s proceeds. Neiswonger
challenged the receiver’s computation only after the receiver submitted its final
calculation of Neiswonger’s proceeds in March 2008.
We conclude Neiswonger was given notice and ample opportunity to be heard
on the issues of damages and disgorgement. Neiswonger chose not to take full
advantage of the opportunities. Most significantly, Neiswonger turned down the
district court’s offer to continue the show cause hearing to permit Neiswonger to
review the receiver’s computation of proceeds, and Neiswonger chose not to submit
a brief and proposed findings of fact and conclusions of law following the hearing.
We find no abuse of discretion in the district court’s denial of Neiswonger’s motion
for a hearing on the issue of damages and disgorgement.
In his reply brief, Neiswonger also argues he was denied due process because
the receiver’s report did not comply with Fed. R. Civ. P. 26(a)(2)(B)(iv) and Fed. R.
Evid. 706. These arguments were not made in Neiswonger’s opening brief. The FTC
filed a motion to strike this portion of Neiswonger’s reply brief. “Claims not raised
in an opening brief are deemed waived,” Jenkins v. Winter, 540 F.3d 742, 751 (8th
Cir. 2008) (citations omitted), and we do “not consider issues raised for the first time
on appeal in a reply brief ‘unless the appellant gives some reason for failing to raise
and brief the issue in his opening brief,’” id. (quoting Neb. Plastics, Inc. v. Holland
Colors Ams., Inc., 408 F.3d 410, 421-22 n.5 (8th Cir. 2005)). Because Neiswonger
provided no explanation for his failure to raise these arguments in his opening brief,
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the arguments are waived and we grant the FTC’s motion to strike. Even if we were
to consider these arguments, we would nevertheless conclude the arguments lack merit
because we agree with the district court that the receiver was acting in its capacity as
a fiduciary agent of the court, rather than as an expert.
C. Evidentiary Findings
Neiswonger next complains the district court’s finding regarding Neiswonger’s
proceeds from the APG program sales “is not supported by the evidence submitted by
the FTC.” In addition to the due process arguments Neiswonger made above,
Neiswonger suggests the contempt sanction was based on the receiver’s “estimate
testimony of income” and the receiver incorrectly attributed certain amounts to
Neiswonger as proceeds. As we stated above, Neiswonger had ample opportunity to
challenge the receiver’s income computations before, during, and after the October
2006 hearing. Neiswonger withdrew his objection to the district court receiving into
evidence the receiver’s document calculating Neiswonger’s proceeds, chose not to
cross-examine the representative of the receiver at the hearing, made no attempt to
access the records underlying the receiver’s proceed calculations before or after the
hearing, and declined to submit a brief or proposed findings of fact and conclusions
of law to the district court following the hearing. Based upon the record in this case,
we cannot say the district court abused its discretion or clearly erred in adopting the
receiver’s calculation of Neiswonger’s proceeds.
D. Neiswonger’s Remaining Arguments
Neiswonger also asserts the district court’s contempt order violates state and
federal law, and is overly broad because the provision in the district court’s contempt
order which requires Neiswonger to turn over certain assets to the receiver in partial
satisfaction of the judgment violates state and federal law.5 First, Neiswonger claims
5
Neiswonger suggests the district court failed to consider these issues before
entering the amended contempt order. Contrary to Neiswonger’s suggestion, these
arguments were made and addressed by the parties in district court filings before the
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the district court cannot compel Neiswonger to turn over real property located in Las
Vegas, Nevada, because Neiswonger’s wife, who is not a party to the action, has a
marital interest in the property. To support his argument, Neiswonger relies upon a
case which interpreted New Jersey law. See S.E.C. v. Antar, 120 F. Supp. 2d 431
(D.N.J. 2000). In Antar, the court considered whether, under New Jersey law, a
husband’s creditor could obtain partition or foreclosure of a marital home to satisfy
the debts of the husband when the husband held the home in tenancy by the entirety
with his wife. Id. at 449-50. The court held, under the circumstances of that case,
foreclosure and partition of the family home were inappropriate. Id. at 450. However,
Antar has no bearing on this case. The subject Neiswonger real property is located in
Nevada. Nevada is a community property state, and under the law of Nevada,
“community property is subject to a spouse’s debt irrespective of whether both
spouses were a party to the action.” Jones v. Swanson, 341 F.3d 723, 738 n.6 (8th Cir.
2003) (citing Randono v. Turk, 466 P.2d 218, 224 (Nev. 1970)); see also Cirac v.
Lander County, 602 P.2d 1012, 1017 (Nev. 1979) (noting “community property of
spouses may be subject to liability of judgments whether or not the wife was a party
to the suit” (citation omitted)).
Neiswonger next argues the district court abused its discretion by ordering him
to turn over the real property in Nevada because the property is owned by a trust that
bears Neiswonger’s wife’s initials, Neiswonger no longer resides in the home, and
Neiswonger’s wife resides in the home with her son. Our review of the trust
documents reveals Neiswonger is a trustor/grantor, trustee, and beneficiary of the
named trust, and Neiswonger cites no authority to support his arguments that he
cannot be compelled to turn over property owned by the trust. See F.T.C. v.
Affordable Media, 179 F.3d 1228, 1241 (9th Cir. 1999) (stating a defendant who
asserts he is unable to comply with a court order requiring him to turn over assets held
in trust “must show ‘categorically and in detail’ why he is unable to comply,” and
entry of the amended civil contempt order.
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observing, ‘[i]n the asset protection trust context, . . . the burden on the party asserting
an impossibility defense will be particularly high because of the likelihood that any
attempted compliance with the court’s orders will be merely a charade rather than a
good faith effort to comply” (citation omitted)).
Finally, Neiswonger contends the portion of the amended contempt order
requiring Neiswonger to turn over the assets in his A.G. Edwards individual
retirement account (IRA) conflicts with state and federal law. Neiswonger claims he
should not be required to comply with this provision of the contempt order because
(1) the funds in his IRA are exempt from collection by creditors under Nevada law,
and (2) he would be required to pay a penalty to the Internal Revenue Service in order
to liquidate and transfer the funds in his IRA.
Neiswonger relies upon Dudley v. Anderson (In re Dudley), 249 F.3d 1170,
1172 (9th Cir. 2001), wherein the Ninth Circuit considered whether, under California
law, IRAs were exempt from creditors’ claims in a bankruptcy estate. The Ninth
Circuit recognized an IRA designed and used solely or principally for retirement
purposes would be exempt under California law. Id. at 1176-77. Neiswonger,
however, cites no authority to support his contention that the district court’s authority
to order him to turn over the assets in his IRA was limited by any Nevada state law
exemptions. On the other hand, the FTC cites other authority demonstrating a district
court is not constrained by state law exemptions in fashioning disgorgement orders.
See Steffen v. Gray, Harris & Robinson, P.A., 283 F. Supp. 2d 1272, 1282 (M.D. Fla.
2003) (“A district court has broad discretion in fashioning a disgorgement order. For
example, a district court can ignore state law exemptions as well as other state law
limitations on the ability to collect a judgment in fashioning a disgorgement order.”
(internal citations omitted)); see also S.E.C. v. Musella, 818 F. Supp. 600, 602
(S.D.N.Y. 1993) (“Contrary to [defendant’s] assertion, the extent to which [his] assets
and income would be exempt from attachment under New York law does not alter his
duty to pay the amount he owes under the [federal civil contempt] order.” (citation
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omitted)). In this case, Neiswonger is not an innocent debtor covered by state debtor
protection legislation. Neiswonger violated a permanent injunction and used a
deceptive and misleading marketing scheme to sell business opportunity programs.
Neiswonger has failed to demonstrate the district court abused or exceeded its
discretion or clearly erred in imposing the amended civil contempt order.
III. CONCLUSION
For the reasons stated in this opinion, we affirm the district court. We also
grant the FTC’s motion to strike portions of Neiswonger’s reply brief.
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