Court Opinion

ID: 34020
Source: CourtListenerOpinion
Date Created: 2010-04-25 19:11:44+00
Date Added: 2024-06-11T14:55:45.516445
License: Public Domain

United States Court of Appeals
                                                                Fifth Circuit
                                                             F I L E D
                  UNITED STATES COURT OF APPEALS
                           FIFTH CIRCUIT                    February 18, 2004

                                                         Charles R. Fulbruge III
                           No. 02-10850                          Clerk
                         c/w No. 03-10322

                SECURITIES AND EXCHANGE COMMISSION,

                                               Plaintiff-Appellee,
                              versus

               UNITED ENERGY PARTNERS, INC., ET AL.,

                                                         Defendants,

                RICHARD A. QUINN; SCOTT W. TUCKER,

                                            Defendants-Appellants.

          Appeal from the United States District Court
               for the Northern District of Texas
                         (3:98-CV-218-R)

Before SMITH, BARKSDALE, and CLEMENT, Circuit Judges.

PER CURIAM:*

     In these consolidated appeals, Richard A. Quinn and Scott W.

Tucker contest the underlying summary judgment, injunction, and

other aspects of the judgment entered against them, arising out of

their investment solicitation and related activities with United

Energy Partners, Inc.   Essentially for the reasons stated by the

     *
      Pursuant to 5TH CIR. R. 47.5, the court has determined that
this opinion should not be published and is not precedent except
under the limited circumstances set forth in 5TH CIR. R. 47.5.4.
district     court,       as    briefly     discussed     below,   the    judgment    is

AFFIRMED.

                                             I.

       Quinn was, among other things, chief executive officer and 90

percent shareholder of United Energy, which was in the business of

drilling oil and gas wells; Tucker was executive vice president and

ten percent shareholder.               Quinn and Tucker sold working interests

in    United      Energy       wells   to   at    least   285   investors,       raising

approximately $7.5 million.

       The Securities and Exchange Commission filed this action

against United Energy, Quinn, and Tucker in 1998, claiming knowing

false and misleading statements in selling securities, in violation

of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.

§    78b,   and    Rule    10b-5       thereunder,   and    Section      17(a)   of   the

Securities Act of 1933, 15 U.S.C. § 77q.

       Quinn and Tucker were charged with misrepresenting the uses of

investors’ funds by failing to disclose, among other things, that

half of the money raised was used for United Energy’s operations

(despite statements in the offering memoranda that all funds raised

would be spent on drilling).

       The district court:             appointed a special master to represent

United Energy; granted partial summary judgment for the SEC on its

claims against Quinn and Tucker but took no action on the claims

against United Energy; enjoined Quinn and Tucker from further

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violation of the securities laws; ordered them to disgorge, jointly

and severally, the $7.5 million; awarded the SEC pre-judgment

interest of approximately $2 million; and imposed a $110,000 civil

penalty each against Quinn and Tucker.

                                        II.

     Quinn      and    Tucker    challenge    the     summary     judgment,     the

injunction, the disgorgement order, the pre-judgment interest, and

the penalty.

                                        A.

     A summary judgment is reviewed de novo, applying the same

standard   as    the    district   court.       E.g.,    Daniels    v.   City    of

Arlington, 246 F.3d 500, 502 (5th Cir.), cert. denied, 534 U.S. 951

(2001).    Such judgment is proper if the movant demonstrates there

is no material fact issue and that it is entitled to a judgment as

a matter of law.       FED. R. CIV. P. 56(c); e.g., Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 248 (1986); Crawford v. Formosa Plastics

Corp., 234 F.3d 899, 902 (5th Cir. 2000).

     The summary judgment was proper.               For example, the offering

memoranda represented that the total funds raised would be spent on

completion of the wells and did not disclose that part of those

funds would be given to United Energy or to its employees as

commission.       Although      Quinn   and   Tucker    dispute    raising    $7.5

million, they admitted doing so in their answer.

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     Quinn and Tucker contend the SEC was not entitled to judgment

because the undisputed facts did not establish scienter, but it is

obvious that the summary judgment record showed they acted with

intent to defraud.     For example, they were aware that the stated

drilling costs were double the anticipated costs.

                                    B.

     Quinn and Tucker’s being enjoined from further violations of

the federal securities laws is proper if “the inferences flowing

from defendant’s prior illegal conduct, viewed in light of present

circumstances,     betoken   a   ‘reasonable   likelihood’   of   future

transgressions”.    SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir.),

cert. denied, 454 U.S. 1124 (1981).      Injunctive relief is reviewed

for abuse of discretion.     E.g., SEC v. Blatt, 583 F.2d 1325, 1334

(5th Cir. 1978).

     There was no abuse of discretion.         The district court ruled

that Quinn and Tucker knowingly violated the securities laws and

found that Quinn stated his intention to return to the securities

business (even though Quinn asserts he would only do so if he could

be “in compliance”).

                                   C.

     Concerning the $7.5 million disgorgement order, Quinn and

Tucker claim disgorgement should instead be based only on the much

smaller amount they received through their employment with United

Energy.   Claiming they do not have sufficient funds to disgorge

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$7.5 million, Quinn and Tucker further contend that ordering them

to do so is a penalty, contrary to the purpose of disgorgement.

They also claim that the district court:        should have offset

against the disgorgement order the amounts spent on legitimate

business expenses; and should not have ordered them to disgorge

funds jointly and severally, because the amount each received from

their involvement with United Energy was clearly determined.    The

equitable decision to order disgorgement is reviewed for abuse of

discretion.   E.g., SEC v. AMX, Int’l, Inc., 7 F.3d 71, 73 (5th Cir.

1993).

     There was no abuse of discretion.   The $7.5 million raised is

a reasonable estimate of the profits received by fraud. What Quinn

and Tucker received from their employment with United Energy is not

determinative; likewise, their inability to pay is irrelevant.

Disgorgement deprives wrongdoers of ill-gotten gains; and a person

remains unjustly enriched by what was illegally received, whether

he retains the proceeds of his wrongdoing.     E.g., SEC v. Banner

Fund Int’l, 211 F.3d 602, 617 (D.C. Cir. 2000).

     In addition, although some courts have offset legitimate

business expenses against a disgorgement amount, e.g., SEC v.

Thomas James Associates, Inc., 738 F. Supp. 88, 95 (W.D.N.Y. 1990),

“the overwhelming weight of authority hold[s] that securities law

violators may not offset their disgorgement liability with business

expenses”.    SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 16

                                 5
(D.D.C. 1998) (citing SEC v. Hughes Capital Corp., 917 F. Supp.
1080, 1086 (D.N.J. 1996), aff’d 124 F.3d 449 (3d Cir. 1997)).

Moreover, as the SEC acknowledges, Quinn and Tucker are to receive

a set-off for amounts repaid to investors or collected by the

special master. Lastly, joint and several liability is appropriate

in securities cases where, as here, individuals collaborate or have

close relationships in engaging in illegal conduct.    E.g., SEC v.

Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997).

                                D.

     Quinn and Tucker next challenge the pre-judgment interest on

the disgorgement amount, claiming:   they did not have use of the

full $7.5 million and relinquished their assets to the special

master; there was no wronged party to compensate through such

interest; and the SEC did not settle with Quinn and Tucker despite

their willingness to do so.   An award of pre-judgment interest is

reviewed for abuse of discretion.        E.g., SEC v. First Jersey

Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996), cert. denied,

522 U.S. 812 (1997); Wolf v. Frank, 477 F.2d 467, 479 (5th Cir.),

cert. denied, 414 U.S. 975 (1973).

     There was no abuse of discretion.    For example, the court, in

its discretion, reduced the IRS underpayment rate of interest by

half from the date when Quinn and Tucker turned over their assets

to the special master; and the parties’ not reaching settlement

does not bear on the award.

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                                  E.

     Finally, Quinn and Tucker contest the imposition of third-tier

civil monetary penalties of $110,000 against each of them.     Such

penalties are proper if:    the violation involved “fraud, deceit,

manipulation, or deliberate or reckless disregard of a regulatory

requirement”; and “such violation directly or indirectly resulted

in substantial losses or created a significant risk of substantial

loss to other persons”.    15 U.S.C. § 78u(d)(3)(B)(iii); 17 C.F.R.

§ 200.1001 (raising the maximum penalty per violation to $110,000).

The district court found both requirements met.   The imposition of

civil penalties is reviewed for abuse of discretion.         R & W

Technical Serv. Ltd. v. CFTC, 205 F.3d 165, 177 (5th Cir. 2000).

     Quinn and Tucker contend:    no investor suffered substantial

losses and any risk of loss from the failure of the wells was

disclosed; they did not receive the full $7.5 million they were

ordered to disgorge, therefore a civil fine amounts to a double

penalty; and, under the facts of this case, the penalty serves no

public interest.   In the light of the district court’s findings,

there was no abuse of discretion.

                                 III.

     Essentially for the reasons stated by the district court, the

judgment is

                                                       AFFIRMED.

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