Sec. & Exch. Comm'n v. Barry

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SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. BRENDA CHRISTINE BARRY/ BAK WEST, INC., ERIC CHRISTOPHER CANNON/ CENTURY POINT, LLC, and CALEB AUSTIN MOODY dba SKY STONE Defendants.

No. 2:15-cv-02563 DDP (MAAx)

United States District Court, C.D. California

July 12, 2023

ORDER RE:REMEDIES

DEAN D. PREGERSON, UNITED STATES DISTRICT JUDGE

Further to the Court's order granting summary judgment, Dkt. 546 and having considered the parties' additional briefing and heard oral argument, the Court adopts the following order regarding remedies.

The SEC requests the following remedies:

(1) injunctive relief pursuant to Securities Act § 20(b) and Exchange Act § 21(d), enjoining Defendants^[1] from violating federal securities laws;

(2) disgorgement of all commissions Defendants received for selling unregistered life settlement investment contracts;^[2] and

(3) “substantial” civil penalties

(Dkt. 551 at 7). Each remedy is discussed in turn.

A Disgorgement

The SEC requests a disgorgement award against Defendants in the full amount of profits received. Defendants argue that disgorgement is precluded by the Supreme Court's admonition that disgorgement must be “awarded for victims.” Liu v. SEC, 140 S.Ct. 1936, 1940 (2020). Defendants dispute that disgorgement here would be awarded for victims, because the victims are investors who “are likely to be made whole” when they receive payouts from policies still held by the Receivership. (See Opp. at 20).

First the Court disagrees with Defendants' characterization of the facts. The investors are not “likely to be made whole” by distributions from the Receivership. PCWG, often through Defendants, advertised a minimum fixed total return on investment of 100%. (Dkt. 28-2). The Receiver's net losses calculation is based on a “money in, money out” calculation, meaning the difference between the amounts invested by investors (money-in) and amounts distributed to investors in return (money-out). (See Dkt. 375). This does not include investors' expectations, based on Defendants' representations, that they would double their investments “in typically 4 to 7 years” (Dkt. 7-66), and it does not account for the substantial delay in recouping the principal amount of their investments.

Second, Liu does not preclude disgorgement here. In Liu, the Supreme Court addressed whether courts may order disgorgement pursuant to the Securities Exchange Act provision for “any equitable relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C § 78u(d)(5). Analyzing the history of equity courts, the Court held that courts may indeed order disgorgement in SEC actions so long as the award “satisfies the SEC's obligation to award relief ‘for the benefit of investors'” and is “consistent with the equitable principles underlying § 78u(d)(5).” 140 S.Ct. at 1948, 1950. The Court remanded to the lower court to determine whether the disgorgement award at issue in Liu satisfied the SEC's obligation and adhered to equitable principles, despite not being distributed to victims, imposing joint-and-several liability, and not including-rather than deducting-business expenses. Id. at 1950.

After Liu, Congress added the following provision to the Securities Exchange Act:

“In any action or proceeding brought by the Commission under any provision of the securities laws, the Commission may seek, and any Federal court may order, disgorgement.”

15 U.S.C. § 78u(d)(7). Unlike §78u(d)(5), the new disgorgement provision does not include the phrase “for the benefit of investors.” It is not clear whether Congress intended thereby to override Liu's admonition that disgorgement awards must “satisfy[y] the SEC's obligation to award relief ‘for the benefit of investors.'” See, e.g., Neil Thoms Smith et. al., Liu v. SEC: The Supreme Court Limits the SEC's Disgorgement Power and Sets the Stage for Future Legal Battles, AMERICANBAR.ORG (Sep. 3, 2020), https://www.americanbar.org/groups/business law/resources/business-law-today/2020-september/liu-v-sec-the-supreme-court-limits-the-sec/. The Ninth Circuit has not yet addressed whether §78u(d)(7) overrides any of Liu's admonitions. Cf. SEC v. Hallam, 42 F.4th 316, 343 (5th Cir. 2022) (holding that §78u(d)(7)'s new text distinguishes between disgorgement and equitable remedies, such that federal courts may order “legal disgorgement” without meeting the standards for equitable remedies).

That said, even under Liu, disgorgement is well within the Court's discretion in this case. Courts have routinely allowed disgorgement in similar circumstances after Liu. See, e.g., SEC v. Almagarby, No. 17-62255-CIV, 2021 WL 4461831, at *3 (S.D. Fla. Aug. 16, 2021) (awarding disgorgement and noting that Liu “made no ruling, as Defendants suggest, that the SEC must identify specific victims to whom a disgorgement award should be distributed, or that all disgorged funds must be returned to investors, or that a disgorgement award should be limited to those funds that could be returned to investors”); Sec. & Exch. Comm'n v. Westport Cap. Markets, LLC, 547 F.Supp.3d 157, 170 (D. Conn. 2021) (ordering disgorgement in spite of defendants' argument that it “would be an inequitable windfall in contravention of the Supreme Court's clear holding in Liu.”).

Independent of its legal availability, Defendants consider disgorgement a “draconian” punishment, disproportionate to the wrongfulness of their failure to register with the SEC. (Dkt. 491 at 19). Indeed, unlike PWCG and Calhoun, the SEC did not assert fraud claims against Defendants and the other sales agents named in the Complaint. Nonetheless, the SEC seeks the same amount of disgorgement from Defendants for failure to register as it sought from PWCG and Calhoun: all of their profits.

The SEC is correct that the Court has discretion to order disgorgement of all of Defendants' profits for their failure to register alone. See, e.g., SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1097 (9th Cir. 2010) (ordering disgorgement for failure to register without ruling on liability for fraud); SEC v. Thomas, No. 2:19-cv-01515-APG-VCF, 2021 U.S. Dist. LEXIS 238166, at *34 (D. Nev. Aug. 24, 2021) (ordering disgorgement where defendants sold unregistered securities but were not involved in the Ponzi scheme and were regularly reassured of the scheme's legality by management). Where, as here, disgorgement is an available remedy, the Court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged. SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (citation omitted). In exercising its discretion, the Court considers the totality of circumstances underlying the present litigation.

Although the SEC did not bring fraud claims against Defendants, Defendants were, in many cases, the sales agents who provided the allegedly misleading information to investors. For example, Barry told investors that the risk of premium calls was “negligible” because “plenty of funds” were available in reserves (Dkt. 106-4 at 113:10-24, 156:1-19) and that, if issued, premium calls would be a pro-rata share of the premium amount listed on the disclosure form (see 106-65 at 155:5-19). Moody told an investor that PWCG had “yet to use any funds from the secondary reserve[,] much less the third” (Dkt. 7-59). Cannon told investors that PWCG had “accumulated millions of dollars in the secondary and tertiary premium reserves,” and that, because PWCG had yet to dip into those reserves, he did not “anticipate” investors would be subject to premium calls. (Dkt. 7-102, Dkt. 7-99). At the time that Defendants made these statements, premium reserves for some of the policies in PWCG's portfolio had in fact run out. (Dkt. 28-3 at ¶13).

Defendants claim they relied on information from Calhoun, who lied to or misled Defendants. (See, e.g., Dkt. 106-65 at 156:13-19). It is unclear how reasonable it was for Defendants to parrot, without verifying, these statements to investors. That said, Calhoun's reassurances mitigate, at least somewhat, Defendants' culpability for misleading investors. See SEC v. Thomas, 2021 U.S. Dist. LEXIS 238166, at *34 (D. Nev. Aug. 24, 2021) (finding that the SEC's requested penalties were too high because defendants were “regularly assured...of the scheme's legality”).

The SEC's settlements with Calhoun, compared to their settlement with sales agent Calhoun Jr., further support the notion that Calhoun's blameworthiness exceeds Defendants'. Calhoun was the founder, owner, and sole president of PWCG and, as discussed above, “controll[ed] the information provided to investors through the Sales Agent Defendants.” (Complaint at ¶ 23). The SEC's settlement with Calhoun included disgorgement of $3,745,416, about half of his approximately $7,600,000 in profits from the life insurance investment contracts. (Compare id. ¶ 100 with Dkt. 165). Calhoun Jr., like Defendants, was a sales agent. The Calhoun Jr. settlement included disgorgement of $104,800, less than a quarter of his approximately $485,000 in profits. (Compare Complaint ¶ 102 with Dkt. 168). This settlement apportioning tracks the Court's understanding of the relative culpability of PWCG employees; that is, Calhoun, PWCG's founder and owner, was more culpable than Calhoun Jr. and Defendants, PWCG's sales agents.

Lastly the Court considers Defendants' legitimate business expenses. Liu, 140 S.Ct. at 1950 (“We leave it to the lower court to examine whether including those expenses in a profits-based remedy is consistent with the equitable principles underlying § 78u(d)(5).”). It is incumbent on Defendants, not the Court, to identify these expenses. SEC v. World Tree Fin., L.L.C., 43 F.4th 448, 467 (5th Cir. 2022) (“Liu does not...