Opinion
Civil Action No. 3:98-CV-0218-R
January 28, 2003
MEMORANDUM OPINION AND ORDER
Now before this Court is Plaintiff, the Securities and Exchange Commissions's ("SEC"), Motion to Enter Judgment as to Richard A. Quinn and Scott W. Tucker Establishing Amount of Prejudgment Interest and Setting Civil Money Penalties and to Administratively Close Case and Memorandum in Support (filed October 2, 2002)("Plaintiff's Motion"). For the reasons discussed below, Plaintiff's Motion is GRANTED as modified herein.
Plaintiff's Motion has been copiously briefed by the parties. Specifically, the additional pleadings addressed in this Opinion are: Defendants' Response to Motion to Enter Judgment (filed October 23, 2002)("Defendants' Response"); Reply Memorandum in Support of Motion to Enter Judgment as to Richard A. Quinn and Scott W. Tucker Establishing Amount of Prejudgment Interest and Setting Civil Money Penalties (filed October 31, 2002)("Plaintiff's Reply"); Quinn and Tuckers' Sur-Reply and Memorandum in Support (filed December 2, 2002)("Defendants' Sur-Reply"); Response to Surreply [sic] of Richard A. Quinn and Scott W. Tucker (filed December 9, 2002)("Plaintiff's Response to Sur-Reply"); and Quinn and Tuckers Reply (Sur-Reply) (filed December 19, 2002)("Defendants' Sur-Sur-Reply").
I. BACKGROUND
On June 5, 2002 this Court granted partial summary judgment against Defendants, Richard A. Quinn and Scott W. Tucker ("Quinn and Tucker"). Among the specific conclusions of law made by the Court, in its June 5, 2002 Opinion, were that each of Quinn and Tucker "has violated and unless enjoined is likely to continue to violate 15 U.S.C. § 77q(a)(1)-(3), 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5." The Opinion found Quinn and Tucker jointly and severally liable for the violations of United Energy Partners, Inc. ("UEP") and enjoined Quinn and Tucker from future violations of 15 U.S.C. § 77q(a), 15 U.S.C. § 78j(b), 15 U.S.C. § 78o(a)(1), and 17 C.F.R. § 240.10b-5 In addition, Quinn and Tucker were each ordered to make disgorgement to the court-appointed agent, Leland C. de la Garza, in the amount of $7.5 million "together with prejudgment interest and post-judgment interest at the statutory rate provided for in 28 U.S.C. § 1961." The Court also stated that, "[o]n proper motion," the SEC "may seek an award of civil monetary penalties."
Partial Summary Judgment as to Richard A. Quinn and Scott W. Tucker (entered June 5, 2002) (the "Opinion").
See Opinion at 7 ( Conclusions of Law ¶¶ 4-5).
Id. at 7-9.
Id. at 9-10.
Id. at 10.
Subsequently, after their motion for reconsideration was denied, Quinn and Tucker appealed the Court's grant of partial summary judgment to the Fifth Circuit Court of Appeals (where the appeal is currently pending).
See Order (entered July 25, 2002) and Notice of Appeal (filed July 25, 2002).
II. ANALYSIS
Given that the Opinion granting partial summary judgment against Quinn and Tucker is currently pending on appeal, this Court will not revisit any issue which was decided therein — such issues are no longer properly before this Court. Leaving those issues aside, the remaining issues to be addressed are: 1) prejudgment interest, 2) civil penalty, and 3) administrative closure of this case. Each will be considered in turn.A. PREJUDGMENT INTEREST
The Opinion of June 5, 2002 ordered Quinn and Tucker to each make disgorgement in the amount of $7.5 million " together with prejudgment interest and post-judgment interest at the statutory rate provided for in 28 U.S.C. § 1961." Thus, there is no question as to whether prejudgment interest will be due, rather the Court now need only determine the appropriate interest rate and start date so that the calculation can be made. As stated by the Second Circuit, "[t]he decision whether to grant prejudgment interest and the rate used if such interest is granted are matters confided to the district court's broad discretion." S.E. C. v. First Jersey Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996) (citing Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1071-72 (2d Cir. 1995)). Similarly, the Fifth Circuit has stated that "whether prejudgment interest should be awarded" in a Rule 10b-5 action "is a question of fairness resting within the District Court's sound discretion." Wolf v. Frank, et al., 477 F.2d 467, 497 (5th Cir. 1973); see also Riseman v. Orion Research, Inc., et al., 749 F.2d 915, 921 (1st Cir. 1984).
Id. at 9-10 (emphasis added).
The SEC argues that prejudgment interest should be assessed at the IRS underpayment rate as set out in the regulations governing SEC administrative proceedings. See 17 C.F.R. § 201.600(b) (2002) (prejudgment interest "shall be computed at the underpayment rate of interest established under Section 6621(a)(2) of the Internal Revenue Code, 26 U.S.C. § 6621(a)(2), and shall be compounded quarterly.") The IRS underpayment rate is defined as the Federal short-term treasury-bill rate plus 3 percentage points, rounded to the nearest percent. 26 U.S.C. § 6621(a)-(b). Defendants respond by arguing that the Court "should set the amount at zero based on all the facts and circumstances of this matter." Given that this Court has found Quinn and Tucker to have violated several provisions of federal securities laws and ordered disgorgement of $15 million, the Court will not provide Defendants with an interest free loan. Alternatively, Defendants argue that a lower rate of interest should be applied because use of the IRS underpayment rate "fails to make allowances for the value of cash and property already paid over to the Special Master" and does not take into account Quinn and Tucker's "demonstrated penury." Defendants also claim that any delay in entering the final judgment is the fault of the SEC.
Defendants' Sur-Reply at 3.
Defendants' Response at 4.
Defendants have not provided factual support for the assertions of current penury or SEC delay, and thus this Court finds those arguments unpersuasive. However, fairness concerns do necessitate that this Court take into account the timing of the appointment of the receiver for UEP. Pursuant to an agreement between the SEC, Quinn and Tucker, the receiver was appointed on June 10, 1999. Since that date, Quinn and Tucker have no longer have had access to or control of the funds of UEP. Therefore, in the interests of fairness, the Court chooses to depart from the otherwise generally appropriate benchmark of the IRS underpayment rate for the period after June 10, 1999. See SEC v. First Jersey Securities, Inc., 101 F.3d at 1476-77. The IRS underpayment rate, as specified in 17 C.F.R. § 201.600(b), shall be applied for the period from January 30, 1998 to June 10, 1999 See I.R.S. Rev. Rul. 2002-70, 2002 WL 31685552, *3-4 (table of underpayment rates). During the period from June 10, 1999 to the date Judgment is entered, interest will be applied pursuant to 17 C.F.R. § 201.600(b) except that the interest rate shall be one-half of the IRS underpayment rate.
See Agreed Order Appointing Special Master (entered June 9, 1999). Defendants might argue that the date of the agreed temporary restraining order merits the same analysis. However, the temporary restraining order was, by definition, a temporary measure enacted pending the resolution of the case on its merits. As such, the Court finds that the date on which the receiver was appointed to be a more appropriate date.
The Court notes that the SEC only seeks interest from January 30, 1998, the date the Complaint was filed, "in part because it is unable to state with precision the dates on which Quinn and Tucker received each payment from an investor or the dates on which they made payments to investors." Plaintiff's Motion at 2 fn.2. Defendants have not addressed the issue of the appropriate start date.
The parties are hereby ORDERED to submit to this Court an agreed table calculating prejudgment interest, according to the terms herein specified, no later than 10 calendar days from the date of this Memorandum Opinion and Order.
B. CIVIL PENALTIES
Both the Securities Act of 1933 (the "Securities Act") and the Exchange Act of 1934 (the "Exchange Act") provide the SEC with broad authority to seek civil penalties. 15 U.S.C. § 77t(d), 78u(d)(3). This Court's Opinion of June 5, 2002 did not find that the SEC was entitled to a civil penalty; it simply allowed the SEC to "reserve the issue" for a subsequent motion — which has now been made. The SEC seeks a third tier penalty of $110,000 for each of Quinn and Tucker. Conversely, Defendants argue that this case does not qualify for a third tier penalty, or indeed for any penalty at all.
Opinion at 7, 10.
Defendants' Response at 5-8. Defendants cite R W Technical Services Ltd., v. Commodity Futures Trading Commission, 205 F.3d 165 (5th Cir. 2000), however, R W is inapposite as it is a case brought by the CFTC under the Commodity and Exchange Act.
Section 20 of the Securities Act and § 21 of the Exchange Act allow a third tier penalty of up to $110,000 for each violation of the Securities (or Exchange) Act if two conditions are met: 1) "the violation . . ., involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement," and 2) "such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C), 78u(d)(3)(B)(iii); 17 C.F.R. § 200.1001 (raising the maximum penalty per violation to $110,000). In this case, both of these requirements have been met. In finding that each of Quinn and Tucker "has violated and unless enjoined is likely to continue to violate 15 U.S.C. § 77q(a)(1)-(3), 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5," this Court addressed the legal predicate for the first requirement. Section 17(a) of the Securities Act makes it unlawful, in the offer or sale of securities, to:
Opinion at 7 ( Conclusions of Law ¶¶ 4-5).
(1) employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.15 U.S.C. § 77q(a)(1)-(3). Similarly, Rule 10b-5 makes it unlawful, in the purchase or sale of securities, to:
(1) employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.17 C.F.R. § 240.10b-5. This Court has held Quinn and Tucker each have violated both provisions. Therefore, Quinn and Tucker each satisfied the first part of the standard, to wit, they have been previously found by this Court to be " involved in" "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement." In addition, the Court's factual findings establish that "a significant risk of substantial losses to other persons" was created by the conduct of Quinn and Tucker as owners of UEP. Quinn and Tucker, by failing to disclose that the investors were not treated equally, by not recording the assignment of investors' interest in particular wells, and by not disclosing that Quinn and Tucker would be granted overriding royalty interests at no cost, created "a significant risk of substantial losses" to their investors.
Opinion at 3-4 ( Findings of Fact ¶¶ 22, 25, 29-31)
As both statutory requirements have been met, Quinn and Tucker are each hereby ORDERED to pay a civil penalty of $110,000.
C. ADMINISTRATIVE CLOSURE
The SEC has stated that it does not plan to seek action against the third Defendant, UEP as the court-appointed receiver is "in the process of winding down the affairs of [UEP]. That will leave [UEP] essentially defunct." Therefore, administrative closure of this case will be proper after judgment is issued.
Plaintff's Motion at 5.
III. CONCLUSION
For the foregoing reasons, Plaintiffs motion is GRANTED as modified herein. The parties are hereby ORDERED to submit to this Court an agreed table calculating prejudgment interest, according to the terms herein specified, no later than 10 calendar days from the date of this Memorandum Opinion and Order.