Opinion
Case No. 2:02 CV 0039 TC
May 21, 2004
ORDER
This matter is before the court on the motion by the Plaintiff Securities and Exchange Commission ("SEC") seeking an order of civil contempt against Defendant David Ross. The SEC contends that Mr. Ross, in his capacity as an officer, employee, attorney, and agent of Defendant Merrill Scott Associates, Ltd., and its affiliated entities, violated two court orders. The court held hearings regarding the SEC's allegations of contempt. For the reasons set forth below, the court grants the motion in part and denies it in part.
The court now enters its Findings of Fact and Conclusions of Law.
FINDINGS OF FACT
Procedural BackgroundOn January 14, 2002, the court issued a Temporary Restraining Order ("TRO") freezing the assets of Defendant Merrill Scott Associates, Ltd., and affiliated entities ("Merrill Scott"). The TRO orders in pertinent part:
A. Defendants [Merrill Scott Associates, Ltd., Merrill Scott Associates, Inc., Phoenix Overseas Advisers, Ltd., Gibraltar Permanente Assurance, Ltd., and Patrick M. Brody], and their officers, directors, subsidiaries, affiliates, agents, servants, employees, attorneys-in-fact, and those persons in active concert or participation with them who receive actual notice of this order by personal service or otherwise, and each of them, [shall] hold and retain within their control, and otherwise prevent any disposition, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal whatsoever of any of their funds or other assets or things of value presently held by them, under their control or over which they exercise actual or apparent investment or other authority, in whatever form such assets may presently exist and wherever located; and
B. That any financial institution or other person or entity located within the territorial jurisdiction of the United States courts and holding any funds or other assets in the name of, for the benefit of, or under the control of MSA, MSAI, Phoenix, Gibraltar, or Brody officers, directors, subsidiaries, affiliates, agents, servants, employees, attorneys-in-fact, and those persons in active concert or participation with them, and each of them, shall hold and retain within their control and prohibit the withdrawal, removal or transfer or other disposal of any such funds or other assets.
(Jan. 14, 2002 T.R.O. at 7, Dkt. # 8 (emphasis added).)
Shortly thereafter, on January 23, 2002, the court entered a Stipulated Order Appointing Receiver ("Stipulated Order"). The following language of the Stipulated Order is relevant:
The Receiver [David K. Broadbent] shall take control of Merrill Scott's funds, assets and property wherever situated, with the powers set forth herein, including powers over all funds, assets, premises (whether owned, leased, occupied, or otherwise controlled), choses in action, books, records, and other property belonging to or in the possession of or control of Merrill Scott, . . . .
g. Defendants and their respective officers, agents, servants, employees, and attorneys-in-fact, consultants, accountants, . . . shall take no action, directly or indirectly, to hinder, obstruct, or otherwise interfere with the Receiver in the conduct of his duties or to interfere in any manner, directly or indirectly, with the custody, possession, management, or control by the Receiver of the funds, assets, premises, and choses in action described above.
(Stipulated Order, Dkt. # 15, at 2, 6 (emphasis added).)
On that same date, January 23, 2002, Defendants Patrick M. Brody, Merrill Scott Associates, Ltd., Merrill Scott Associates, Inc., Phoenix Overseas Advisors, Ltd., and Gibraltar Permanente Assurance, Ltd. stipulated that the TRO be extended until the case was settled. (Stipulation, Dkt. #17.)
Mr. Ross did not personally stipulate to either order. On January 23, 2002, Mr. Ross stipulated to the entry of a permanent injunction against him. The consent to an order of permanent injunction was signed by Mr. Ross and by his attorney. (Consent of David E. Ross II to the Entry of Order of Prelim. Inj., Dkt. # 18.)
Plaintiff SEC contends that Mr. Ross, in his capacity as an officer, employee, attorney, and agent of Merrill Scott and its affiliated entities, violated the TRO and the Stipulated Order (collectively "the Orders" unless otherwise noted). Specifically, the SEC claims that Mr. Ross caused two transfers of funds from a Nevada limited liability company, Grand Slam Park ("Grand Slam"), and one transfer from an entity located in the Bahamas, Evergreen Management Services, Ltd. ("Evergreen"). The Grand Slam and Evergreen funds were Merrill Scott accounts. The SEC contends that in causing these transfers, Mr. Ross violated the Orders. In addition, the SEC claims that Mr. Ross violated the Orders by failing to inform the Receiver of the Grand Slam and Evergreen accounts.
Mr. Ross responds that he was not bound by the Orders and, in any event, the SEC has failed to prove its allegations by clear and convincing evidence.
Background Facts
Mr. Ross is an attorney. He has held various positions with the entities that comprise the Merrill Scott organization, including those of registered agent, director, and manager. (Ex. C to Aff. of Scott R. Frost in Supp. of Pl's Ex Parte Mot. for a T.R.O. and Other Relief, Dkt. # 4.) In his answer to the complaint filed in this case, Mr. Ross admitted that he has been associated with Merrill Scott since 1998. He also admitted that he "has functioned as General Counsel for Merrill Scott." (Def. David E. Ross' Answer ¶ 13, Dkt. # 20.)
The Receiver, David K. Broadbent, identified the entities that comprise the Merrill Scott organization:
Merrill Scott Associates, Ltd.; Merrill Scott Associates, Inc.; Alex Jones; Alex Jones Associates; EPI International Limited; EPI Management, Ltd.; Estate Planning Institute, P.C.; Estate Planning Institute, Ltd.; Fidelity Funding, Ltd.; Fidelity Permanente Investments, Ltd.; Global Management Limited; Phoenix Overseas Advisors, Ltd.; Gibralter [sic] Permanente Assurance, Ltd.; Legacy Capital, LLC; and multiple other entities. These other entities include Grand Slam Park, LLC and Evergreen Management Services Ltd. These entities were formed as part of Merrill Scott's asset protection and tax planning activities for clients, which were created by and controlled by Merrill Scott for the purposes of shielding its clients' assets.
(July 22, 2003 Decl. of David K. Broadbent ("Broadbent Decl.") ¶ 4, Dkt. # 12.)
Notice to Mr. Ross
Mr. Ross was personally served with the complaint in this lawsuit on January 15 or 16, 2002. (Return of Summons as to David E. Ross II, Dkt. #11.) Attached to the complaint were, among other items, a Motion for Temporary Restraining Order, Asset Freeze, Order Appointing Receiver and Other Relief. (Id.) On January 23, 2002, Mr. Ross consented to an Order of Preliminary Injunction. (See Dkt. # 16, 18.) No hearing was held on this motion.
On that same date, January 23, 2002, following a hearing before the court, the SEC, Merrill Scott Associates, Ltd., Merrill Scott Associates, Inc., Phoenix Overseas, Gibraltar Permanente and Patrick Brody stipulated to extend the TRO, Asset Freeze Order, and to the appointment of David K. Broadbent as the Temporary Receiver. (Dkt. # 15, 17.) Mr. Ross contends that he had no notice of the hearing preceding entry of the stipulation. But Ms. Barbara Zamora-Tueller, an employee of the SEC, testified in her affidavit that on January 23, 2002, she sent, by facsimile, a copy of the Stipulated Order Appointing Receiver ("Receiver Order") to Mr. Max Wheeler, Mr. Ross' attorney. (Decl. of Barbara Zamora-Tueller, Ex. H To Second Supplemental Br. Concerning Civil Contempt Against David E. Ross II.) Significantly, she did not testify that she sent a copy of the stipulation to extend the TRO to Mr. Wheeler.
Mr. Ross admits that he knew of the Receiver Order: "Mr. Ross concedes, however, that he learned of the appointment of the Receiver." (Def. Ross' Proposed Findings of Fact Conclusions of Law at 3.) At the contempt hearing, Mr. Ross testified that he knew about the Receiver Order when he took the steps, described below, to take the funds out of the Evergreen Management Services, Ltd. Account. (Tr. of Oct. 2, 2003 Hearing at 36-37.)
The Evergreen Transaction
On June 11, 1999, Mr. Ross established on behalf of a Merrill Scott customer, Dr. Shelton Powers, an account in the name of Evergreen Management Services, Ltd. ("Evergreen") with Wall Street Financial Group, Inc. ("Wall Street"), a broker-dealer registered with the SEC. Dr. Powers was a client of Merrill Scott. In addition, Mr. Ross represented Dr. Powers in other legal matters. Evergreen was a Bahamian international business corporation. In 1999, Merrill Scott Associates, Ltd., Global Management Limited, the Estate Planning Institute (Bahamas) Ltd. and the Private Trust Corporation were the directors of Evergreen. Mr. Ross was the Corporate Secretary and Director of Global Management.
At the hearing, Mr. Ross testified that his purpose in establishing the account "was in the ordinary course of what Merrill Scott did for its 80 or so clients, setting up foreign accounts — or foreign corporations setting up accounts." (Tr. of Oct. 2, 2003 Hearing at 34.) He further testified that it was his intent, acting for Merrill Scott, to establish the account so that Merrill Scott could control the account on behalf of Dr. Powers. (Id.) Mr. Ross testified that although the intent was to have Merrill Scott control the transactions in the account, in reality, Dr. Powers or his personal broker, Scott Oliver, made the investment decisions for the account. (Id. at 35-36.) As of January 31, 2002, the value of the Evergreen account was $455,421.37,
Beginning in October 2002, approximately eight months after the court entered the Orders, Mr. Ross took a number of complex actions that culminated in the transfer of the funds out of the Evergreen Account into an account with Barclays Bank in the Bahamas. At the hearing, Mr. Ross testified that Dr. Powers (whom he represented in legal matters other than Merrill Scott transactions) asked him to help Dr. Powers take the money out of the Evergreen account. (Tr. of Oct. 2, 2003 Hearing at 37.) Mr. Ross admitted that he was aware that if Evergreen was still "an operative company" the Receiver would have replaced Merrill Scott as a director and trustee of Evergreen, (Id.)
Mr. Ross began the process of removing the funds by sending an e-mail to Amy Bennage. In the e-mail, dated October 7, 2002, Mr. Ross informed Ms. Bennage that "Evergreen Management is having its annual meeting this week and new directors are being appointed and they in turn with [sic] elect new officers. They will be providing you copies of the minutes and resolution of the authorized officer to remit directions to your attention. The Trust [Dr. Power's trust] that originally sent the funds to your company maintains the account for Evergreen Management and will be receiving the proceeds." (Ex. 9 to Broadbent Decl.)
On November 29, 2002, Michelle Powers (the daughter of Dr. Powers and who had been designated "the Beneficial Owner" of Evergreen) removed Merrill Scott Associates, Ltd., Global Management Ltd., and the Estate Planning Institute (Bahamas) Ltd. as officers and directors of Evergreen and appointed Finchley Limited as the "Sole Director, President and Secretary" of Evergreen. (Ex. 10 to Broadbent Decl.) Shortly thereafter, Ms. Powers appointed herself "Sole Director and President" of Evergreen. (Exs. 11 12 to Broadbent Decl.)
Mr. Ross, on December 12, 2002, sent another e-mail to Ms. Bennage informing her that a Bahamian attorney, Bertha M. Cooper-Rousseau, would contact her regarding a transaction in the Evergreen account. The following day, December 13, Ms. Powers sent a letter to Ms. Bennage instructing her to transfer all the funds in the Evergreen account to the account of "Rousseau and Cooper." (Ex. 14 to Broadbent Decl.) Ms. Cooper-Rousseau then sent documents to Ms. Bennage to effect the transfer of the funds in the Evergreen account to an account with Barclays Bank in the Bahamas.
On January 21, 2003, Mr. Ross sent Ms. Bennage a letter (on stationery bearing his attorney letterhead). In the letter, Mr. Ross reiterated that he had "previously served as an officer and director of the companies that served as officers and directors of Evergreen Management Services. . . ." (Ex. 16 to Broadbent Decl.) He ended the letter by informing Ms. Bennage that if she had any questions, "please feel free to contact [him]." (Id.)
On January 31, 2003, the Evergreen account with Wall Street was liquidated and $389,884.01 was wired from the account into the account at Barclays Bank. (The difference between the Wall Street account balance of $455,421.37 on January 31, 2002, and the ending balance of $389,884.01 was apparently the result of "a decline in the value of the securities held in the account." (Broadbent Decl. ¶ 32.)
Around this time, Mr. Ross traveled with Dr. Powers to the Bahamas where they met with the Bahamian attorney Ms. Cooper-Rousseau. At the hearing, Mr. Ross described the trip to the Bahamas with Dr. Powers: "We went over there. He didn't pay for any of it. And we were in Florida together on business, and we spent the whole $189 to go over there and spend the evening, . . . and spent about two hours of our day-and-a-half trip over there going to the registrar's office and met with some attorneys." (Tr. of Oct. 2, 2003 Hearing at 63.) Mr. Ross also admitted that he and Dr. Powers discussed the transfer of the funds with Ms. Cooper-Rousseau and that he and Dr. Powers met with representatives of a bank (presumably in connection with the transfer).
Mr. Ross never revealed the existence of the Evergreen account to Mr. Broadbent even though, during the time Mr. Ross was taking the actions described above, he was meeting with Mr. Broadbent to discuss Merrill Scott matters and the location of assets.
According to Mr. Ross, at the time he took part in the transfer of the funds, he believed that the corporate charter for Evergreen had lapsed, thereby freeing the funds from any orders imposed by this court. Mr. Ross testified at the hearing that he based this belief not only on Dr. Powers' representations, but also on documents which Dr. Powers showed him. (Id. at 40-41.) Mr. Ross admitted at the hearing that he did not inquire if the charter had lapsed before the court issued its Orders. He also admitted that he never discussed the question of the lapsed Evergreen Charter with Mr. Broadbent (as noted above, Mr. Ross had never disclosed the existence of the Evergreen account to Mr. Broadbent). Further, he admitted that when he traveled to the Bahamas with Dr. Powers and met with attorneys regarding the transaction, he did not question the attorneys regarding the alleged dissolution of the Evergreen charter. (Id. at 63-64.)
The persuasive evidence shows that Evergreen's corporate charter was never dissolved. Mr. Broadbent testified at the hearing that he had directed an attorney in the Bahamas to review government records to verify whether the Evergreen charter had been dissolved. The results of that review are contained in a letter from the Bahamian attorney. In that letter, the attorney stated:
Based upon our inspection of the filed documents for the above-captioned company [Evergreen Management Services Ltd. Bahamian International Business Company Registration No. 74,063B] at the Companies Registry, there is no record, manually or electronically, to indicate that the company is or has been dissolved, either voluntarily or involuntarily to date [October 14, 2003].
(Oct. 14, 2003 Letter from Halsbury Chambers to the Receiver, submitted during the Oct. 16, 2003 hearing as Gov't Ex. Broadbent (1).)
Further, Mr. Ross' testimony about the lapsed charter was neither persuasive nor credible for the following reasons: Mr. Ross is an attorney, with many years experience. He knew he was a defendant in this lawsuit; he knew that the Merrill Scott assets had been frozen and Mr. Broadbent had been appointed as the Receiver. He met with Mr. Broadbent to discuss the location of Merrill Scott assets during the time he was (unknown to Mr. Broadbent) arranging for the funds to be transferred out of the Evergreen account (and thereby taking the funds out of the court-ordered control of the Receiver), yet he never mentioned the Evergreen account to Mr. Broadbent. Mr. Ross testified that Dr. Powers showed him documents that verified that the charter had lapsed, yet he kept no copies of any such documents. And when he traveled to the Bahamas and met with the attorneys concerning the transfer, he took no steps to verify that the charter had lapsed.
The Grand Slam Transactions
In 1999, Gehrig ("Lou") White became a client of Merrill Scott. In April of 2000, over $100,000 of Mr. White's money was placed in two accounts, both in the name of Grand Slam Park, LLC, through a brokerage firm, MML Investor Services, Inc. ("MML"). The registered representative for the accounts was Thomas Dundorf. (Mr. Dundorf had known Mr. White for several years and had handled other investments for him. Neither Mr. Dundorf nor his brother, John Dundorf, who also worked as a broker, were associated with the Merrill Scott organization.) One of the two Grand Slam accounts, BMA-660876, was established at MML itself. MML placed the second Grand Slam account, 179587, with an entity named SEI Private Trust Company ("SEI Private Trust").
Grand Slam is a Nevada limited liability company that was part of the Merrill Scott organization. It was incorporated on August 23, 2000. An Operating Agreement, dated Sept. 1, 2000, designates Mr. Ross as the "Operating Manager." Mr. Ross signed the document both as "Operating Manager" and on behalf of Grand Slam. (Ex. 8 to Dep. of Gehrig White.)
Although the source of the money in the accounts came from Mr. White, his name does not appear on the documents used to open the accounts. Instead, it was David Ross who signed the documents as "Mgr." The customer address given on the documents was the office of Merrill Scott in Salt Lake City, Utah. (See Exs. 3 4 of Dep. of Thomas E. Dundorf.) At the evidentiary hearing, Mr. Ross testified that his purpose in establishing the Grand Slam accounts was "just to have Merrill Scott as the controlling entity over the funds." (Tr. of Oct. 2, 2003 Hearing at 26.) Mr. Dundorf testified in his deposition that it was his understanding that he would take instructions from Mr. Ross regarding transactions in the Grand Slam accounts. (Dep. of Thomas E. Dundorf at 22.)
Mr. Ross never revealed the existence of the Grand Slam accounts to Mr. Broadbent.
In April 2002, approximately four months after the Orders were entered, the Grand Slam accounts were closed at the request of Mr. White. The money was transferred into Mr. White's and his wife's charitable foundation. The controlling question, one that was hotly disputed, is whether it was Mr. Ross who directed that the accounts be closed and the money transferred.
John Dundorf and his brother, Thomas Dundorf, testified at the hearing about the events leading up to closing the Grand Slam accounts. Thomas Dundorf was not involved in the closing of the accounts and he testified only as to what his brother had told him. John Dundorf testified that sometime in April 2000, Mr. White contacted him, asking that the Grand Slam accounts be closed and the money transferred into his family foundation accounts. Mr. Dundorf explained to Mr. White that because David Ross was the official owner of the Grand Slam accounts, Mr. Ross would have to authorize the transfer.
John Dundorf's testimony is found in the transcript of the October 16, 2003 hearing at pp. 27-43.
John Dundorf testified that he recalled he had a telephone conversation with Lou White and a man identifying himself as David Ross (in his own testimony, Mr. Ross denied speaking with John Dundorf). (Tr. of Oct. 2, 2003 Hearing at 30-31.) According to Mr. Dundorf, "Mr. Ross" agreed to the transfer and asked Mr. Dundorf to do what was necessary to transfer the money.
Following that telephone conversation, John Dundorf prepared the documents (see Exs. 13 14 attached to Dep. of Thomas Dundorf (hereinafter, "Exhibit 13" and "Exhibit 14")) and sent them, by facsimile, to Mr. Ross for his signature. Mr. Dundorf sent the documents to the Merrill Scott number he had in his files from earlier transactions. The documents were returned to him, again by facsimile, bearing the signature "David E. Ross."
Exhibit 14 bears the fax number 801-365-5088. This was the fax number for the Concilium group (an entity connected to Merrill Scott) where Mr. Ross maintained an office. Although Mr. Ross claimed not to recognize that number, the evidence established that Mr. Ross had an office with the Concilium group and may have used that fax at times.
Mr. John Dundorf testified that he had never met Mr. Ross in person and had only one telephone conversation (the conversation described above) with anyone identifying himself as Mr. Ross.
Mr. White also testified at the hearing. Significantly, Mr. White testified that although he had learned that Mr. Ross' authorization was necessary to close the Grand Slam accounts, he did not speak to Mr. Ross about closing the accounts and transferring the money. When asked how he was able to get Mr. Ross' authorization, Mr. White answered: "It was gotten. It was gotten through a mixture of stuff that I wasn't directly involved in." (Tr. of Oct. 16, 2003 Hearing at 50.)
In his deposition, Mr. White provided more details about the "mixture of stuff `used to get Mr. Ross' authorization. He spoke to people at Concilium about "unwinding the transaction." (Dep. of Gehrig White at 96.) In response to the question whether it was his "understanding always that Mr. Ross had signed [Exhibit 13 and Exhibit 14]," Mr. White answered:
Somehow they got their signature. Now, I'm not saving that they didn't use a rubber stamp, I don't know. I mean, I would think that it's legal in corporate to have stamps, I don't know anything about that. All I know is if I thought that this was in some way fabricated, there is no way that Lou White would have forwarded those documents onto my broker.
(Id. at 107.)
Mr. Ross testified at the hearing that he did not sign the documents and that he did not know that money was being withdrawn from the Grand Slam accounts. (Tr. of Oct. 2, 2003 Hearing at 28-29.) According to Mr. Ross, the signatures on the documents were forgeries, (Id. at 29.)
CONCLUSIONS OF LAW
Was Mr. Ross Bound by the Orders?
Mr. Ross contends that he was not subject to the TRO because it expired on January 25, 2002. According to Mr. Ross, he did not stipulate to the extension of the TRO and he did not know of its existence, although he conceded that he knew of the Receiver Order. Mr. Ross also argues that the Order of Preliminary Injunction to which he did consent "is a standard consent decree not to violate certain laws of the United States. It contained no language ordering or requiring that Mr. Ross cooperate with or disclose to the Receiver information concerning the marshaling of assets or location of assets." (Def. Ross' Proposed Findings of Fact and Conclusions of Law at 3.) Mr. Ross claims, then, that "it is the Order of Preliminary Injunction as to Mr. Ross that specifically governs his conduct herein." (Id. at 4.)
The SEC argues that Mr. Ross violated the Orders, not in his individual capacity, but as an officer, agent, and attorney for the entities within the Merrill Scott organization. The court agrees with the SEC. Both the TRO and the Stipulated Order applied to officers, directors, agents and attorneys of the Merrill Scott entities. And there is no question that Mr. Ross falls into those categories. The fact that he did not personally stipulate to the extension of the TRO or to the Stipulated Order is of no significance. The Orders were signed by counsel for the Merrill Scott entities and were therefore binding on Mr. Ross, if he had knowledge of these orders, as discussed below.
Legal Standard
In the Tenth Circuit, "[t]o prevail in a civil contempt proceeding, the plaintiff has the burden of proving, by clear and convincing evidence, that a valid court order existed, that the defendant had knowledge of the order, and that the defendant disobeyed the order." Reliance Ins. Co. v. Mast Constr. Co., 159 F.3d 1311, 1315 (10th Cir. 1998) (internal citation omitted).
In order to meet its burden of proof, the SEC must present "evidence which `produces in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established, evidence so clear, direct and weighty and convincing as to enable [the factfinder] to come to a clear conviction, without hesitancy, of the truth of the precise facts in issue,'" Cruzan v. Director, Missouri Dep't of Health, 497 U.S. 261, 285 n. 11 (1990) (internal citations omitted).See also Foster v. AlliedSignal, Inc., 293 F.3d 1187, 1194 (10th Cir. 2002) ("Evidence is clear `if it is certain, unambiguous, and plain to the understanding,' and it is convincing `if it is reasonable and persuasive enough to cause the trier of facts to believe it.'") (internal citations omitted); Boyette v. L. W. Looney Son, Inc., 932 F. Supp. 1344, 1347 (D. Utah 1996) ("`[F]or a matter to be clear and convincing to a particular mind it must at least have reached the point where there remains no serious or substantial doubt as to the correctness of the conclusion.'") (internal citation omitted).
There is no dispute regarding the first requirement, that is, that there were valid court orders. The question of whether the SEC has produced evidence to meet the remaining two requirements is more difficult.
Did Mr. Ross have Notice of the Orders?
Mr. Ross does not dispute that he had notice of the Receiver Order. And although he clearly had knowledge of the TRO when it was filed initially, the SEC has failed to produce evidence that would demonstrate that he was aware that it had been extended. Accordingly, the court concludes that Mr. Ross was bound by the requirements of the Receiver Order but not those of the TRO.
Did Mr. Ross Violate the Orders in Connection with the Evergreen Transaction?
As discussed above, Mr. Ross was directly involved in causing the transfer of funds from the Evergreen account with Wall Street to an account in Barclays Bank. In addition, Mr. Ross failed to inform Mr. Broadbent of the Evergreen account, although he was well aware of the existence of the account and his obligation to provide information regarding Merrill Scott assets to Mr. Broadbent.
By these actions, Mr. Ross violated the Receiver Order. The Receiver Order gave Mr. Broadbent wide authority to marshal and take under his control all the assets of Merrill Scott, including accounts such as Evergreen: "The Receiver shall take control of Merrill Scott's . . . funds, assets, premises . . . and the Receiver is hereby authorized, empowered and directed: . . . . to have control of, and to close, transfer or otherwise take possession . . . of any assets deposited by customers or clients with Merrill Scott, . . . or held in trust or deposited with Merrill Scott or its agents or trustees. . . ." (Stipulated Order at 2-3.) The Stipulated Order specifically directed that Mr. Ross, along with other Merrill Scott "officers, agents, servants, employees, and attorneys-in-fact, consultants, accountants, advisers and counsel . . ., shall take no action, directly or indirectly, to hinder, obstruct, or otherwise interfere with the Receiver in the conduct of his duties or to interfere in any manner, directly or indirectly, with the custody, possession, management, or control by the Receiver of the funds, assets, premises and choses in action described above." (Id. at 6.)
Mr. Ross' actions clearly interfered with and obstructed Mr. Broadbent's ability to take control of the Evergreen account and the Merrill Scott assets that had been deposited in that account.
Did Mr. Ross Violate the Stipulated Order in Connection with the Grand Slam Transactions?
After careful consideration of the evidence, the court concludes that the SEC has failed to meet its burden of showing that Mr. Ross caused the transfer of funds from the Grand Slam accounts. Although, as discussed above, Mr. Ross was not a credible witness, on the question of the Grand Slam transactions, his testimony was corroborated to some extent by that of Mr. White and Mr. John Dundorf.
Mr. White testified that he did not speak to Mr. Ross about closing the accounts. Rather, he spoke to unidentified people at the Concilium offices. Mr. John Dundorf s memory of the events differed somewhat from that of Mr. White's (he recalled a telephone conversation with Mr. White and a man identifying himself as "Mr. Ross"). However, he had had limited contact with Mr. Ross and could not testify that he was certain that it was Mr. Ross with whom he was speaking. Further, the signatures on Exhibits 13 and 14 could well be stamped signatures.
As far as Mr. Ross' failure to disclose the existence of the Grand Slam accounts to Mr. Broadbent, this evidence, standing alone, is not sufficient to show that Mr. Ross violated the court's orders that he disclose all asset information to Mr. Broadbent. Unlike Mr. Ross' failure to disclose the existence of the Evergreen account when the evidence showed that he was actively engaged in making arrangements to transfer the funds out of the account, there is nothing in the record that demonstrates that Mr. Ross knowingly failed to reveal the existence of the Grand Slam accounts to Mr. Broadbent.
What the evidence did show is that there were numerous accounts established for Merrill Scott clients. Mr. Broadbent described the breadth of the Merrill Scott assets: "I have found assets of the Merrill Scott organization to consist of bank accounts and brokerage accounts in at least thirty banks and/or brokerage houses and in promissory notes, real estate, mortgages, automobile leases, automobile sales, insurance commissions, equipment, furniture and art, located in more than eight countries and twenty-five states." (Broadbent Decl. ¶ 5.)
Accordingly, without additional evidence that would indicate that Mr. Ross' failure to inform Mr. Broadbent of the existence of the Grand Slam accounts was intentional, the court concludes that the SEC has not established by clear and convincing evidence that Mr. Ross knowingly violated the Receiver Order as regards the Grand Slam Transactions.
Remedy
"Civil contempt may be used `to compensate the contemnor's adversary for injuries resulting from the contemnor's noncompliance' with a court order." Reliance Ins. Co., 159 F.3d at 1318 (quoting O'Connor v. Midwest Pipe Fabrications, Inc., 972 F.2d 1204, 1211 (10th Cir. 1992)). Having established Mr. Ross' contempt by clear and convincing evidence with respect to the Evergreen transaction, the SEC is required to prove its damages by a preponderance of the evidence. (Id.)
The court finds that the SEC has shown by a preponderance of the evidence that Mr. Ross' contempt resulted in a loss of $389,884.01, which was the balance in the account at the time the funds were transferred from the Evergreen account. Although the balance in the account as of January 31, 2002 (immediately following the entry of the Orders) was $455,421.37, the SEC has failed to show that Mr. Ross violated the Orders before November 2002, when he took the initial steps to transfer the funds out of the Evergreen account.
Based on the above, the court concludes:
1. The SEC has established that David E, Ross II acted in contempt of court as regards his actions in connection with the Evergreen account; and
2. The SEC has failed to establish that David E. Ross II acted in contempt of court as regards his actions in connection with the Grand Slam accounts.
ORDER
1. David E. Ross II is ordered to pay to the SEC (or to the Receiver, David K, Broadbent) $389,884.01 once the court has resolved the issue of interest and attorneys' fees,
2. If the SEC believes interest and/or attorneys' fees should be granted, it must file a memorandum and supporting materials within ten days from the date of this order. Mr. Ross will have ten days from receipt of the SEC submission to file an opposition.