Opinion
CV 01-1283-PA.
February 1, 2005
OPINION AND ORDER
The Receiver and the SEC (hereafter, "Receiver" unless the context specifies otherwise) sought an order requiring 165 former sales agents to disgorge commissions received in connection with the sale of unregistered securities. I granted the motion. I also allowed certain setoffs requested by the agents and disallowed others. Finally, each agent was given 20 days to dispute the amount of commissions attributed to the agent. In re Alpha Telcom, Inc., 2004 U.S. Dist. LEXIS 20002 (Aug. 18, 2004).
Objections were received from 16 agents. The Receiver has resolved the objections by Mary Abdallah, Secured Financial Concepts, Inc. (Steven LeBaron), William Orcutt, Shari Mattingly-Bevan, Ray Vallejo, and Dennis Watts. The remaining objections are discussed below.
The resolution is limited to factual disputes such as the amount of commissions that agent received, settlements or restitution that the agent has paid, or the amount of telephone purchases made by the agent or his family. These agents have not conceded other contested issues, such as whether the agents should be liable at all, or whether the agents are entitled as a matter of law to additional setoffs.
The court also was advised of a bankruptcy filing by agent Stephen Brittain. The SEC may recover a judgment against Brittain, notwithstanding the automatic stay, but efforts to collect on that judgment remain subject to the bankruptcy proceeding. In re Alpha Telcom, 2004 U.S. Dist. LEXIS 20002, *17-18, n. 3.
Kathleen Sommer
Sommer entered into a Consent Order with the Arizona Corporation Commission, obligating Sommer to pay restitution of $140,750, plus interest, in connection with her sale of the unregistered securities at issue. That sum equals the commissions Sommer received from her sales of Alpha Telcom's payphone securities. The restitution Sommer pays pursuant to that Consent Order is to be distributed to the investors who purchased payphones through Sommer and lost their investments when that company went bankrupt.
The Receiver has offered to give Sommer a setoff for all sums she actually pays pursuant to the Consent Order. However, the Receiver still wants this court to enter a disgorgement order against Sommer in the amount of $84,187.50, which sum the Receiver will then attempt to collect from Sommer.
Sommer objects to entry of what she characterizes as duplicative restitution orders. That characterization is not entirely accurate. The Consent Order requires that restitution be paid at $150 per month, which is $1,800 per year. The interest on the balance due is accruing at over twice that rate. If Sommer pays only the minimum amount due each month, the amount owing will steadily increase, not decrease.
Perhaps $150 a month is all Sommer can pay at this time — I express no opinion as to whether that is true — but her circumstances could change in the future. I conclude that Sommer's agreement with the state regulatory authority does not preclude the Receiver from requiring that restitution be made on more favorable terms.
I will impose two conditions, however. First, the Receiver must credit Sommer for any restitution that she actually pays under the Arizona Consent Order. Second, the Receiver's recovery from Sommer must not be at the expense of those individuals to whom Sommer is required to make restitution under the terms of the Consent Order. Therefore, any money the Receiver recovers from Sommer must be above and beyond Sommer's monthly payments pursuant to that Consent Order. In addition, if Sommer increases the amount of restitution she pays each month under the Consent Order, or makes any lump sum payments to the beneficiaries under that Order, such additional payments shall be credited against the amount Sommer owes to the Receiver.
Financial Security Group of Arizona (Joann Dominguez)
Two issues are disputed here. The first concerns a settlement FSGA and Dominguez (hereafter, FSGA) entered into resolving claims by certain persons who purchased payphones through FSGA. The confidential settlement requires FSGA to pay a substantial sum to those claimants, though less than the total amount the Receiver is seeking from FSGA. The settlement also contains terms that suggest the payments are likely to be made, and — unlike Sommer — that restitution will not stretch out indefinitely into the future.
The Receiver has agreed to credit FSGA for any payments actually made pursuant to the settlement, but still wants this court to enter a disgorgement order against FSGA for the full amount that would be due before such credits. The Receiver is entitled to the requested order, with the understanding that the Receiver will credit FSGA for any payments actually made pursuant to the settlement agreement, providing FSGA furnishes adequate proof of such payments. The Receiver shall also ensure that any sums he recovers from FSGA are in addition to, and not in lieu of, the payments required under the settlement agreement.
The second disputed issue is whether FSGA received $80,640 in commissions or only $74,400. FSGA contends the remaining $6,240 that it received was for the sale of ATM machines, not payphones. This contention is supported by documentary evidence and a sworn affidavit, which the Receiver has not controverted. For the reasons discussed below, I rule in favor of FSGA on this issue. The Receiver shall adjust the amount owed accordingly.
Manuel Mendoza
Mendoza admits receiving $137,000, but contends $86,240 of this sum was for the sale of ATM machines, not payphones. The Receiver contends that all money paid to Mendoza "came from Alpha/ATC/SPA bank accounts in Oregon containing commingled funds from payphone investors and the Defendants' business operations. The Receiver has not located records that confirm that the source of any money paid to Mr. Mendoza was from the sale of ATMs . . . While Mr. Mendoza may well have sold some ATMs, the money he received came from Alpha, ATC and SPA [and] was wrongly obtained from investors and should be disgorged in its entirety."
Mendoza counters that no court has found that the ATM sales were illegal or that such commissions must be disgorged. Even assuming that payphone investor funds were commingled with other funds, which money was then used to pay commissions on the sale of ATM machines, Mendoza contends this is no different than other business expenses that Alpha Telcom paid from its accounts. If that money was tainted, argues Mendoza, then restitution should be required of every vendor who furnished goods or services to Alpha Telcom and was paid with funds derived from the investors.
Resolution of this question begins, and ends, with an examination of the relief that the Receiver sought. On December 23, 2003, the Receiver asked this court to order 165 agents to disgorge the money they were paid "as so-called commissions for payments for their sales of unregistered securities in violation of Sections 5(a) and 5(c) of the Securities Act of 1933." Receiver's Motion, p. 2. The SEC subsequently joined in that motion. It is undisputed that the unregistered security in question was the Alpha Telcom payphone program. The Receiver/SEC did not ask this court to order the disgorgement of moneys paid to any person for the sale of ATM machines, nor was the court asked to recover moneys that Alpha Telcom paid to vendors other than the agents who sold Alpha Telcom's payphone program.
To the extent the Receiver's argument is premised solely upon the fact that the agents allegedly received an unspecified amount of funds derived from payphone investors, I have already rejected that argument. SEC v. Alpha Telcom (opinion of August 18, 2004), pp. 6-9. The Receiver prevailed on his disgorgement motion because it was established, as a matter of law, that the agents could not legally sell the payphone program, hence the services for which they had been compensated were illegal. The Receiver has not pointed to any final determination that the ATM program was an unregistered security, nor has the Receiver even furnished evidence of commingled accounts or the extent of such commingling. The Receiver has not shown he is entitled to an order requiring the agents to disgorge all funds that they received as commissions from their sales of ATM machines.
The Receiver and Mendoza have until March 4, 2005, to submitevidence concerning the amount of money paid to Mendoza for his services in connection with the sale of payphones (or conversely, proof of the amount Mendoza was paid in connection with his sales of ATM machines). Evidence includes documents and sworn affidavits or declarations, signed under penalty of perjury. If a party submits any evidence or legal memoranda to the court, that party must also send a copy to the opposing party.
Alternatively, if the Receiver prefers, the court will enter a disgorgement order for the amount Mendoza has admitted were payphone commissions, less any setoffs previously allowed. The Receiver shall promptly advise the court, and Mendoza, of the Receiver's decision. For now, Mendoza should proceed on the assumption that he will be required to furnish evidence regarding the commissions he received.
Mendoza also argues that $39,700 of the commissions he received was as a subagent for Diversified Financial Services, from whom the Receiver is also seeking disgorgement. That objection is overruled. The Receiver may obtain a judgment against, and seek to recover from, Mendoza, or Diversified, or both, so long as the Receiver does not actually recover twice for the same commission. Jeffrey Mitchell
Mitchell admits receiving $109,360 in commissions, but contends that only $61,400 was for the sale of payphones. Mitchell contends the other $47,960 was received for selling ATM machines, and has submitted documents that purport to identify each commission payment Mitchell received, the amount, date, what it was for, and other relevant details.
The Receiver says he does not know how much Mitchell was paid for ATM sales, but insists that doesn't matter because the funds paid to Mitchell came from a bank account containing money derived from payphone investors and the operating revenues of the company. Therefore, the Receiver contends, all funds paid to Mitchell from that account must be disgorged.
For the reasons discussed above, I reject the Receiver's argument. The Receiver has until March 4, 2005, to come forward with evidence that Mitchell received more than $61,400 in commissions in connection with his sale of payphones. Otherwise, the court will enter a disgorgement order against Mitchell in the amount of $61,400, less any setoffs previously allowed.
Kevin Rimple
Rimple has acknowledged receiving commissions from the Defendants totaling $147,659.61. The Receiver credited Rimple with an $86,000 setoff, after verifying that Rimple and his family members had invested (and lost) that amount in payphones themselves. Two disputes remain. First, Rimple contends that $12,960 of the commissions he received from SPA Marketing were for the sale of ATM machines, not payphones. Rimple has produced spreadsheets detailing each of those commission payments (including the date, what he sold, to who, and the commission he received). The Receiver has until March 4, 2005, to come forward with evidence controverting Rimple's evidence concerning the $12,960. Otherwise, the court will reduce Rimple's disgorgement obligation accordingly.
Rimple also contends that the percentage setoff I have allowed the agents, in consideration of out-of-pocket expenses they incurred in earning their commissions, should be deducted from the total amount of commissions before deducting the $86,000 setoff that the Receiver has given Rimple. The Receiver contends the $86,000 setoff should be deducted first, and then any credit for expenses computed based upon the remaining amount owed. The Receiver's position is correct. Rimple's proposed method would result in double-counting set-offs, and provide him with a credit for expenses allegedly incurred in selling payphones to himself. I will not permit that. As it is, Rimple is quite fortunate that the Receiver generously agreed to credit him, and other agents, with a setoff for the entire amount they and their families lost, instead of crediting just the commission they earned on that sum.
Excell Inv. Inc. (Jeff Spahn)
The Receiver has agreed to credit certain sums that Excell/Spahn (hereafter, "Excell") paid as part of a confidential settlement reimbursing two investors who purchased a number of payphones through Excell. The latter contends this credit should be a higher figure. Where the parties disagree is whether Excell should be given a setoff for the full amount of that settlement, or only 85 percent.
The underlying lawsuit alleged the purchase of payphones from Excell, along with a separate investment that also proved worthless. Excell admitted selling the payphones, but denied any role in the sale of the other investment. Some other named defendants were more closely associated with that other investment, but they appear to have been judgment proof (and also prison-bound). The action eventually settled.
After reviewing in camera the settlement and related documents furnished by the parties, I find that Excell should receive a setoff for the full amount it paid pursuant to the settlement agreement. The Receiver shall adjust the disgorgement computations accordingly.
Owen Snyder
Snyder seeks an offset of $61,250 for purchases of payphones and ATMs by himself or his immediate family. Snyder recently submitted proof of those purchase to this court, but neglected to send a copy to the Receiver. The latter, being unaware of this documentation, understandably took no action regarding it.
It is imperative that when an agent sends any document to the court, a copy also be sent to the Receiver. The court copy should have, attached to it, a "certificate of service" confirming that a copy of the same document was sent to the Receiver, the date, and the method by which it was transmitted ( e.g., "via first class mail, addressed to 123 Main Street, Metropolis, PA 12345").
The Receiver has now received a copy of Snyder's documentation, and agreed to allow Snyder an offset of $49,000, which is the amount of Snyder's lost investment in Alpha Telcom payphones. The Receiver properly declined to credit Snyder for an additional $12,250 that Snyder paid to purchase an ATM machine. The latter is not part of this case. With the foregoing adjustments, Snyder now owes $65,168.50.
Finally, Snyder asserts that "litigation is still ongoing as to whether the Alpha sales were of a `security.'" Mr. Snyder is mistaken. The question has been conclusively decided. SEC v. Alpha Telcom, 179 F. Supp.2d 1250 (D. Or. 2002) (the Alpha Telcom payphone sales were an unregistered "security"),affirmed, 350 F.3d 1084 (9th Cir. 2003). See also SEC v. Edwards, 540 U.S. 389 (2004) (United States Supreme Court decision unanimously concluding that an almost identical scheme is a "security").
Samir Gosh
Gosh does not contest the Receiver's computations. Instead, he offers various reasons — including advanced age, poor health, and limited financial resources — why the court should not require that he repay over $64,000 in commissions received from the sale of payphones. There are equities on both sides. Some agents will suffer hardship if required to repay the full amount, but many investors also have endured severe hardship as a result of the payphone sales program. In the prior opinion, I stated that:
I will order disgorgement without regard to an individual agent's present ability to pay the full amount. The Receiver will decide who to collect from, and in what amount, and may negotiate settlements and payment plans when appropriate. . . . The court remains available to resolve any dispute, but these determinations will be made by the Receiver in the first instance.
Accordingly, Mr. Ghosh should discuss his situation with the Receiver, and see if an amicable resolution can be reached. Any agent who seeks an accommodation from the Receiver, on such grounds, should be prepared to provide the Receiver with adequate documentation concerning that agent's financial circumstances, upon request, and attest to the truth of those representations under penalty of perjury.
West Coast Distributors (Robert Phillips)
West Coast admits receiving $46,900 from Alpha Telcom, but says it retained only $16,150, passing the rest on to sub-agents. I previously ruled that such "pass-throughs are essentially a private matter between the master agent and his sub-agents." The objection is overruled. The Receiver is entitled to a disgorgement order against West Coast for the full amount. To avoid a double recovery, if the Receiver actually recovers commissions from sub-agents of West Coast, then the Receiver cannot also recover the identical commission from West Coast.
Allen Gasper
In an affidavit dated March 5, 2004, Gasper attests that he "sold a total of 8 payphones to one single client." Gasper further attests that he was not "an active sales agent for Alpha Telcom payphones," but "an insurance consultant retained by SPA Marketing . . . for the purpose of speaking to groups around the country regarding the Allstate Insurance . . . and Argent Capital Corporation programs." Gasper contends he "was compensated by SPA Marketing for my consulting work." He professes not to know "the exact amount" he was paid for "consulting services, although I believe it was around $40,000 total for the years 2000 and 2001."
Intervenor Defendants' Reply Brief refers to "Gasper's sworn testimony that he only sold two payphones. . . ." The affidavit I have from Gasper states that he sold eight payphones. Perhaps counsel is aware of a second affidavit, in which Gasper recants his first affidavit, but I have not seen it.
The Receiver contends the $40,000 Gasper received was compensation for Gasper's sales of payphones, but offers little proof of that. If it was all commissions, then Gasper must have sold more than eight payphones. Payphones usually sold for around $5,000, and the commission on each sale was a fraction of that amount.
To date, neither side has come forward with much evidence supporting its position. Gasper should have in his possession Form 1099s or other documents showing precisely how much he was paid. Bank records should pinpoint the timing of the payments, the amount, and what account that money came from. Gasper should be able to produce invoices or other records showing the amount he billed to SPA, and for what purpose. If it was a fixed fee, Gasper ought to have in his possession writings outlining that arrangement. To date, Gasper has not produced any of this. These omissions are particularly notable since Gasper reportedly is an attorney.
The Receiver has produced sales agent contracts signed by Gasper in 1999 and again in 2001. If Gasper was not an active sales agent and made only a single sale, as he claims, then Gasper needs to explain why he renewed his sales agent agreement. Gasper also must furnish proof regarding his "consulting" activities. He claims to have been compensated for speeches he gave around the country for certain products. If so, then Gasper should be able to document where he went, to whom he spoke, and provide copies of the materials that he used. If Gasper was reimbursed for travel expenses, he should have records documenting both his claim for expenses and the reimbursement he received. To date, Gasper has produced none of this.
The Receiver and Gasper have until March 4, 2005, to furnish additional evidence, including documents and sworn affidavits, to assist the court in determining the amount Gasper must disgorge. After reviewing those documents, I may also question Mr. Gasper under oath, subject to penalty of perjury if he were to testify falsely.
Neil Bagchi
Bagchi denies that he ever sold Alpha Telcom payphones, or received any commissions from the sale of such phones. The Receiver contends that Bagchi was paid $303,450 in commissions on payphone sales.
It is undisputed that on or about January 4, 2001, Bagchi executed two "Representative Agreements" with SPA Marketing. One agreement stated that the name of Bagchi's business was "Capital Investor Group," while the other stated that the name of Bagchi's business was "Energy Trading Corp." Bagchi used the same Federal Tax ID Number for both businesses, and the same telephone numbers, but gave different business addresses. In response to questions about the experience of the Representative, Bagchi provided personal data regarding himself. Bagchi instructed that any commissions be paid in the name of the company, rather than to him individually.
Bagchi says he "worked for a short time, from August of 2000 until April 2001, for a man named Walter Reinhardt . . . [who] had Mr. Bagchi sign on as an agent with SPA Marketing." During that time, Bagchi says, Reinhardt "was not involved in marketing investments in pay phones, but rather was selling investments in cashless ATM machines." Bagchi claims he "never received any sales commissions for his work" and that, during the time he worked for Reinhardt, he was not aware of any payphone sales activity. Bagchi further asserts that he "became concerned about the manner in which Mr. Reinhardt conducted his business, and severed all association with Reinhardt" as of April 2001.
Bagchi states that it was Reinhardt, and not he, who owned Capital Investor Group. Bagchi does not say who owned the stock of Energy Trading Corporation. Bagchi does admit that he was the incorporator of Energy Trading Corporation and served as its "registered agent until I left Mr. Reinhardt's employment in April 2001, at which time Mr. Reinhardt became the registered agent." Bagchi insists that he "never had any ownership interest in Capital Investor Group or Energy Trading Corporation nor any business relationship with Mr. Reinhardt other than as his employee. The only compensation I ever received for my employment with Mr. Reinhardt was the salary I received from him. I never personally received any commissions."
The court has viewed photocopies of some commission checks, though this represents only a fraction of the checks the Receiver attributes to Bagchi. Most of the checks made out to Capital Investor Group were endorsed by a rubber stamp bearing the company's name. Some checks were endorsed in the name of "W R Reinhardt," though a rubber stamp may also have been used to effect that endorsement.
One check, dated February 16, 2001 and payable to Energy Trading Corp., was personally endorsed by Neil Bagchi. Another check, that appears to be dated January 29, 2001 (the court's copy is nearly illegible), was payable to Neil Bagchi individually, and endorsed by him personally and by Capital Investor Group. That check was for $22,400, and is the largest single check among the 74 payments identified by the Receiver.
The Receiver also points to a "Quickbooks" computer file, maintained by SPA Marketing, that identifies two other checks to Neil Bagchi in May 2001, and several checks to Energy Trading Corp. during February and March, 2001.
Two checks produced by the Receiver were made payable to an "Emil Estopare." Curiously, the dates and amounts of those two checks correspond to the Quickbooks entries for two checks that the Receiver has attributed to Bagchi. However, the Receiver provides no explanation as to who Estopare is, and the bank information for those two checks appears to be different from all of the other checks that were paid to Bagchi, Capital Investor Group, or Energy Trading Corp.
Two checks payable to Energy Trading Corp. were endorsed over to Capital Investor Group; one check is dated March 26, 2001, and the other April 2, 2001. (The dates on the physical checks do not always seem to be identical to the date listed in the Quickbooks file).
Many of the payments the Receiver attributes to Bagchi date back to early 1999. Bagchi insists he did not begin working for Reinhardt until August 2000. The Receiver relies heavily upon the Representative Agreements with SPA Marketing, but they are dated January 4, 2001, well after many of the payments at issue. Additional payments the Receiver attributes to Bagchi were made after April 2001, when Bagchi claims to have severed all ties to Reinhardt.
In his briefs, the Receiver states he "is in possession of various correspondence between Mr. Bagchi and Mark Kennison of SPA Marketing, LLC regarding Mr. Bagchi's sale[s] efforts and commissions to be paid thereon." The Receiver has not furnished those documents to this court. I cannot consider evidence I have never seen. It also seems likely that, if the persons who purchased these payphones are identified, they can provide further information concerning the person(s) who sold those payphones, or if they even were payphones (or really ATM machines, as Bagchi suggests).
The present record is too fragmentary for the court to determine, with the requisite degree of confidence, who is responsible for the $303,450 in commission payments at issue, or even what those payments were for. It appears that one or more persons did receive that money, and they will be required to account for it.
It is hereby ordered that the books and records of Capital Investor Group and Energy Trading Corporation, as well as Neil Bagchi, be made available to the Receiver for inspection and copying. The Receiver may also depose Bagchi, Reinhardt, and anyone else that was involved, to ascertain who owned those businesses, where the money went, and for what purpose. To minimize the cost of taking depositions, the Receiver may take those depositions by telephone, or else request that the court take testimony from these persons directly.
Entry of Disgorgement Order
The Receiver shall furnish the court with an updated spreadsheet showing the amount owed by each agent, as adjusted above, but leaving blank the amount owed for agents Bagchi and Gasper, and also for agents Mendoza, Mitchell, and Rimple (unless the Receiver elects not to contest the amounts owed, as discussed above).
The court will then enter a disgorgement order covering all agents except the handful whose objections are still pending. The agents are cautioned that this forthcoming order will be a final appealable order for purposes of Federal Rules of Appellate Procedure 3 and 4.
IT IS SO ORDERED.