Sec. & Exch. Comm'n v. Life Partners Holdings, Inc., A-12-CV-00033 RP

SECURITIES AND EXCHANGE COMMISSION v. LIFE PARTNERS HOLDINGS, INC., BRIAN PARDO, R. SCOTT PEDEN

A-12-CV-00033 RP

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS AUSTIN DIVISION

August 15, 2018

REPORT AND RECOMMENDATION OF THE UNITED STATES MAGISTRATE JUDGE

TO: THE HONORABLE ROBERT PITMAN UNITED STATES DISTRICT JUDGE

Before the Court are Plaintiff's Security and Exchange Commission's Motion to Enter Judgment on Remand and Brief in Support (Dkt. No. 417); Defendant R. Scott Peden's Response (Dkt. No. 419); Defendant Brian D. Pardo's Response (Dkt. No. 420); the Security and Exchange Commission's Replies (Dkt. Nos. 423 and 424); and Pardo's Sur-Reply (Dkt. No. 426). The District Court referred the above-motions to the undersigned Magistrate Judge for a report and recommendation pursuant to 28 U.S.C. §636(b) and Rule 1(c) of Appendix C of the Local Rules of the United States District Court for the Western District of Texas, Local Rules for the Assignment of Duties to United States Magistrate Judges. Having reviewed the parties' filings, the entire case file, and the applicable law, the Court enters the following Report and Recommendation.

I. GENERAL BACKGROUND

This securities fraud case is before the Court after remand by the Fifth Circuit. The Honorable James R. Nowlin presided over a jury trial in this case commencing January 29, 2014. Life Partners Holdings, Inc. (LPHI) was in the business of facilitating the sales of life insurance policies to investors in the secondary market, commonly referred to as life settlements. LPHI, a publicly-held company, derived its income from the fees earned on these life settlement transactions. The Securities and Exchange Commission alleged that LPHI knew that its life expectancy estimates for the insureds (whose policies were being sold) were materially short, that life expectancy estimates were of "critical importance in determining the policy's sale price" (854 F.3d at 773), and that LPHI should have disclosed this knowledge in public filings as a known problem rather than an unmaterialized contingent risk.

At trial, the SEC alleged, and the jury ultimately found, that Brian Pardo, Scott Peden, and Life Partners Holdings, Inc., violated Section 17(a) of the Securities Act of 1933. The jury also found that LPHI, aided and abetted by Pardo and Peden, violated Section 13(a) of the Securities and Exchange Act of 1934 and Rules 12b-20, 13a-1, and 13a-13 thereunder. In addition, the jury found that Pardo violated Exchange Act Rule 13a-14 by knowingly certifying false public reports that LPHI filed with the SEC during that period. After trial, the Court set aside the jury's 17(a) verdicts and also declined to order reimbursement under Section 304 of the Sarbanes-Oxley Act of 2002. Nevertheless, the Court ordered disgorgement and civil penalties against the company and ordered Pardo and Peden to pay second-tier civil penalties of $6,161,843 and $2,000,000, respectively. The Court also enjoined all defendants from violating or aiding and abetting violations of Section 13(a) of the Exchange Act. SEC v. Life Partners Holdings, Inc., 71 F.Supp.3d 615 (W.D. Tex. 2014).

On cross-appeals, the Fifth Circuit Court of Appeals upheld the verdicts and judgments against Pardo and Peden, reinstated the jury's verdict finding that Pardo and Peden violated Section 17(a), vacated the civil penalty orders, and reversed the Court's ruling denying the SEC's request for reimbursement under SOX 304. The Fifth Circuit remanded this matter for reassessment of the civil penalty amounts against Pardo and Peden, for determination of the SOX 304 reimbursement owed by Pardo, and for determination of the remedy appropriate for the violation of Section 17(a). SEC v. Life Partners Holdings, Inc., 854 F.3d 765 (5th Cir. 2017).

On remand, the SEC requests an order from the Court: (1) permanently enjoining Defendants from future violations of all relevant securities laws; effectively adding Section 17(a) to the standing injunctions; (2) requiring Defendants to disgorge their ill-gotten gains received as a result of their fraud; (3) requiring each Defendant to pay civil penalties commensurate with their violations; and (4) requiring Pardo to reimburse LPHI $13,340,371 in accordance with SOX 304. Pardo and Peden dispute the SEC's requested relief, asserting that the imposition and/or the amount of the requested penalties are inappropriate.

II. ANALYSIS

A. Permanent Injunction Pursuant to Section 17(a) of the Securities Act

At trial, the jury found that Peden and Pardo violated section 17(a) of the Securities Act of 1933, along with section 13(a) of the Securities Exchange Act of 1934. The District Court set aside the verdict as to section 17(a), and entered a final judgment enjoining the Defendants from committing further violations of section 13(a). On appeal, the Fifth Circuit reinstated the jury's finding that Defendants violated section 17(a), and remanded the case for the Court to "provide appropriate remedy for the appellant's section 17(a) violations consistent with this opinion." Id. at 789. Based upon the Fifth Circuit's reinstatement of the jury's fraud finding under section 17(a), the SEC requests that the Court enter an order permanently enjoining Defendants' conduct under this statute as well as section 13(a). Defendants oppose the request.

Section 21(d) of the Exchange Act allows for the entry of permanent injunctions in enforcement actions brought by the SEC when the evidence establishes a "reasonable likelihood" that a Defendant will engage in future violation of the securities laws. 15 U.S.C. § 77t(b); 15 U.S.C. § 78u(d)(1); SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. 1981). "[T]he Commission is entitled to prevail when the inferences flowing from the defendant's prior illegal conduct, viewed in light of present circumstances,betoken a 'reasonable likelihood' of future transgressions." Zale Corp., 650 F.2d at 720; see SEC v. Caterinicchia, 613 F.2d 102 (5th Cir.1980); SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978). In predicting the likelihood of future violations, courts evaluate the totality of the circumstances. ZaleCorp., 650 F.2d at 720. In imposing a permanent injunction, courts consider a number of factors, including: the (1) egregiousness of the defendant's conduct; (2) isolated or recurrent nature of the violation; (3) the degree of scienter; (4) sincerity of defendant's recognition of his transgression; and (5) likelihood of the defendant's job providing opportunities for future violations. SEC v. Gann, 565 F.3d 932, 940 (5th Cir. 2009) (citing SEC v. Blatt, 583 F.2d 1325, 1334 n. 29 (5th Cir. 1978)).

The SEC asserts that, applying these factors, the District Court and the Fifth Circuit found it proper to enter permanent injunctions against the Defendants enjoining further violations of Section 13(a). The SEC argues that the Court's findings supporting the Section 13(a) injunction equally support a Section 17(a) permanent injunction. See Dkt. No. 417 at 3-8 (citing trial evidence in support of various Gann factors).

1. Pardo

Pardo argues that the Fifth Circuit's holding on the Section 17(a) claim, reversing Judge Nowlin's JMOL on the jury's Section 17(a) verdict, was based in part on its recognition that no scienter was required for a Section 17(a)(2) or (3) violation. Pardo asserts that the Fifth Circuit based its reversal of the Section 17(a) JMOL on the finding that there was sufficient evidence in the record to support that Defendants "negligently represented the risk of underestimated life estimates in its January 2007 quarterly report." Id. at 786. Pardo, relying on SEC v. Blatt, 583 F.2d 1325, 1333 (5th Cir. 1978), argues that the SEC must prove scienter in order to obtain a permanent injunction. Blatt states that, "to justify an injunction on the basis of past violations the Commission must prove that the defendant possessed scienter, defined by the Supreme Court as 'a mental state embracing intent to deceive,manipulate, or defraud.'" Id. (citing Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976)). Because, Pardo argues, the Fifth Circuit's reversal of the District Court was based upon a single, negligence-based violation of the statute, it is insufficient to support the imposition of a permanent injunction as to Section 17(a).

The SEC responds that scienter is merely one factor the Court must consider in determining whether to impose a Section 17(a) injunction. It quotes from the Fifth Circuit's decision in ZaleCorp that "it is not a single factor, but rather the sum of the circumstances surrounding the defendant and his past conduct that governs whether to grant or deny injunctive relief." ZaleCorp., 650 F.2d at 720. Additionally, the SEC argues that the District Court set aside the Section 17(a) jury verdict for lack of evidence within the proper time period, and not because of a lack of scienter. Judge Nowlin stated:

The Court did not set aside the jury's Section 17 verdict aside [sic] on account of a lack of evidence that Defendants had committed securities fraud. Instead, the Court was forced to set the jury's finding aside because the Commission had limited its allegations to a very specific period of time and the evidence the SEC presented did not support a finding that Defendants had committed securities fraud during the specific time alleged. The record did indeed contain evidence that Defendants knowingly or at least recklessly violated the securities laws of this nation.

71 F.Supp.3d at 626 n.1.; Dkt. No. 304 at 4 n.1.

The Court finds that scienter is indeed just one factor to be considered in assessing whether a permanent injunction is appropriate under Section 17(a). The language in the Blatt case, upon which Pardo relies, is not determinative. In a later case, regarding another set of factors similar to those set forth in Gann and Blatt used to determine the propriety of injunctive relief, the Fifth Circuit stated, "when analyzing a case, lists of...