STEVEN D. MERRYDAY, District Judge.
The Commission sues (Doc. 1) Sky Way Global, LLC; Brent C. Kovar; Glenn A. Kovar; James S. Kent; Kenneth Bruce Baker; and Kenneth R. Kramer for "selling unregistered securities and defrauding investors through multiple so-called `pump-and-dump' schemes in violation of the registration and anti-fraud provisions of the federal securities laws." The Commission seeks a permanent injunction, disgorgement, and a civil penalty.
On September 21, 2009, the Clerk defaulted (Doc. 23) the defendant Sky Way Global. The Commission moves unopposed (Doc. 40) for a default judgment
S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1322 (11th Cir.1982) (quoting S.E.C. v. Blatt, 583 F.2d 1325, 1334 n. 29 (5th Cir. 1978)). In this action, the severity and the recurrence of the defendant's misrepresentations, the defendant's scienter (exhibited by the defendant's baseless assertions to potential investors), the defendant's failure to recognize wrongfulness, and the defendant's failure to conform to the law, combine to exceed the threshold for granting relief. Therefore, the circumstances warrant an injunction.
The Commission proposes an obey-the-law injunction that tracks the governing statutes and regulations
Articulating the standard of specificity that every injunction must satisfy, Rule 65(d), Federal Rules of Civil Procedure, states that "[e]very order granting an injunction ... must: state the reasons why it issued; state its terms specifically; and describe in reasonable detail—and not by referring to the complaint or other document—the act or acts sought to be restrained or required. ..." The specificity requirement "prevent[s] uncertainty and confusion on the part of those faced with injunctive orders and ... avoid[s] the possible founding of a contempt citation on a decree too vague to be understood." Schmidt v. Lessard, 414 U.S. 473, 476, 94 S.Ct. 713, 38 L.Ed.2d 661 (1974) (finding that because "an injunctive order prohibits
In addition to providing the defendant with "fair and precisely drawn notice of what the injunction actually prohibits," Epstein Family P'ship v. Kmart Corp., 13 F.3d 762, 771 (3d Cir.1994), the specificity requirement of Rule 65(d) serves another vital function. Unless a district court's injunctive order delineates the bounds of compliance, "it is impossible for an appellate tribunal to know precisely what it is reviewing." Hughey, 78 F.3d at 1531 ("`In the absence of specific injunctive relief, informed and intelligent appellate review is greatly complicated, if not made impossible'") (quoting Schmidt, 414 U.S. at 476, 94 S.Ct. 713); see also City of Belle Glade, 178 F.3d at 1200-01 ("A court is incapable of enforcing so broad and vague an injunction"). For example, in City of Belle Glade, three African-American occupants of a housing project located in an unincorporated part of the county alleged discrimination in the City's refusing to annex the housing project. The occupants sought an injunction against the City's discriminating on the basis of race in annexation decisions. Because the injunction "would do no more than instruct the City to `obey the law,'" the Eleventh Circuit found that "an injunction prohibiting the City from discriminating against [the housing project] in future annexation decisions is not an available remedy to redress the [occupants'] alleged injuries."
In Hughey, the developer of a residential subdivision in Georgia was enjoined from discharging storm water into the waters of the United States "if such discharge would be in violation of the Clean Water Act." Every rainstorm that blew through Gwinnett County caused some "discharge" that was beyond the developer's control. Vacating the injunction, the Eleventh Circuit described the injunction as "incapable of enforcement as an operative command," because the injunction failed to specify how the defendant should prevent discharges and comply with the injunction. "Was [the defendant] supposed to stop the rain from falling? Was [the defendant] to build a retention pond to slow and control discharges? Should [the defendant] have constructed a treatment plant to comply with the requirements of the [Clean Water Act]?" The injunction's lack of specificity resulted in neither the defendant's nor the court's knowing what the injunction required of the defendant, other than the defendant's obeying the law (which the defendant was already obligated to do perforce the governing
Furthermore, as explained in S.E.C. v. Smyth, 420 F.3d 1225 (11th Cir. 2005) (Tjoflat, J.), an obey-the-law injunction unacceptably conflicts with a defendant's constitutional rights. Smyth vacates a judgment—entered without an evidentiary hearing—against the defendant for disgorgement and prejudgment interest. In a footnote,
As an initial matter, Smyth explains that Rule 65(d), Federal Rules of Civil Procedure, is "no mere technicality" but requires an injunction "framed so that those enjoined know exactly what conduct the court has prohibited and what steps they must take to conform their conduct to the law." More importantly, Smyth describes the serious constitutional conflict inherent in a court's enforcing an obey-the-law injunction. After entry of such an injunction, the Commission could return to the court at any time and seek through a basic contempt proceeding to enforce the law based on an alleged violation by the defendant—no matter how distinct the alleged violation (in nature, time, or location) from the violation underlying the injunction. Thus, an obey-the-law injunction permits the Commission to achieve through the mere filing of a motion a result that, absent the injunction, the Commission could achieve only through a full-scale prosecution. The contempt proceeding (while perhaps increasing the ease and efficiency of the government's enforcement of the securities laws) impermissibly bypasses not only the Federal Rules of Civil Procedure but the defendant's rights under the Due Process Clause and Seventh Amendment.
As Smyth notes:
420 F.3d at 1233 n. 14. For example, consider the defendant who, in response to an allegation of selling an unregistered security, consents to an obey-the-law injunction by a federal court in Florida. If the defendant moves to California and ten years later allegedly engages in insider trading, the Commission could seek from the Florida court an order to show cause, which compels the defendant to appear in Florida and explain why the Florida court should not fine or imprison the defendant for allegedly violating the injunction by activity in California. Although the Due Process Clause otherwise would prohibit a prosecution in Florida based on the California violation, the Commission would argue that the defendant's due process rights are unaffected by a contempt hearing pursuant to the injunction (because the defendant in stipulating to the injunction "voluntarily" waives objections to personal jurisdiction).
Additionally, an obey-the-law injunction conflicts with the separation of powers principle. "If the law on which the injunction is based is legislatively created, then the legislature is likely also to have created rules regarding the means by which the law should be enforced and the appropriate sanction for a violation of the law." Chandler v. James, 180 F.3d 1254, 1271 (11th Cir.1999) (Tjoflat, J., specially concurring). An obey-the-law injunction creates an "individualized criminal or civil law" that impermissibly modifies the existing law by substituting (1) a contempt hearing for the statutorily provided procedure and (2) contempt sanctions for the statutorily provided remedy. For example, 15 U.S.C. § 77t prescribes a three-tiered system of civil monetary penalties for a violation of the Securities Act and permits the Commission to transmit any evidence to the Attorney General for criminal proceedings, if warranted. Additionally, Section 77t states, in relevant part, that "[w]henever it shall appear to the Commission that any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of the [Securities Act] . . . the Commission may . . . bring an action . . . to enjoin such acts or practices. . . ." A plain reading of Section 77t reveals that Congress authorized an injunction against an "act or practice" that a person "is engaged in or [is] about to engage in" and that violates the Securities Act. Authorization to enjoin a certain, identifiable, and demonstrably imminent "act or practice" differs markedly from authorization to enjoin any act or practice and all possible acts or practices that violate the law, wherever and whenever the act or practice occurs. Nevertheless, by virtue of the Commission's proposed enforcement-by-motion mechanism, the Commission (vested with only civil enforcement authority)
An obey-the-law injunction is both unenforceable and ineffective. Because an obey-the-law injunction is not susceptible to enforcement through coercive sanctions, such an injunction completely lacks deterrent power. See Chandler, 180 F.3d at 1266-68 (explaining that coercive sanctions "are intended to coerce the contemnor into doing an act that he is already required to do, but refuses to perform."). In other words, the court lacks the ability to "pressure[ ] the defendant into performing an action that the plaintiff desires to have performed," and the defendant lacks the ability to "purge his contempt," because, as soon as the defendant violates the law, "the act to be prevented by the injunction has already occurred."
180 F.3d at 1269.
A securities fraud recidivist vividly illustrates this point.
Hatfield and other securities recidivists
In arguing for a permanent, obey-the-law injunction, the Commission asserts that the law expressly excepts an S.E.C. enforcement action from the general prohibition against an obey-the-law injunction. In support of this position, the Commission cites S.E.C. v. Carriba Air, Inc., 681 F.2d 1318
Additionally, neither Ginsberg nor Sidoti persuasively supports the Commission's argument. Ginsberg reversed the district court's denial of a permanent injunction against future violation of the Exchange Act. Although the district court applied the correct legal standard, Ginsberg re-evaluated the Carriba Air factors,
Smyth explains the inherently problematic result of accepting an interpretation of Section 77t that permits an obey-the-law injunction, and Smyth provides the most persuasive and immediate precedent against the enforceability of an obey-the-law injunction in an S.E.C. prosecution. In this instance, the Commission's proposed obey-the-law injunction, which seeks to enjoin the defendant's violating Sections 5 and 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act, and Rule 10b-5, purports to establish a pervasive prohibition against inadequately specified conduct and fails to satisfy the requirement that "`an ordinary person reading the court's order should be able to ascertain from the document itself exactly what conduct is proscribed.'" Hughey, 78 F.3d at 1531 (quoting 11A WRIGHT, MILLER & KANE, FEDERAL PRACTICE AND PROCEDURE § 2955 (1995)). As proposed, the obey-the-law injunction permits the Commission to assert against the defendant (or any agent, servant, employee, attorney, or "person in active concert" with any agent, servant, employee, or attorney of the defendant) any future prosecution under the pertinent securities laws by the simple expedient of filing a motion to enforce the injunction, thereby circumventing important procedural, jurisdictional, and constitutional requirements.
Although the Commission's widespread practice of procuring an obey-the-law injunction as a component of resolving litigation is legally flawed and practically mischievous, the practice is especially flawed and mischievous in this action. First, three of the five individual defendants, four of whom still defend against the claims of the Commission, appear in defense pro se. The corporate defendant, Sky Way Global, defaults without any evidence of representation by counsel. Neither a defaulting party nor an unrepresented party is normally presumed capable of effecting the knowing, voluntary, and intelligent waiver of valuable constitutional and other substantive and procedural rights, especially rights outside the litigation in which the default occurs (of course, a defaulting party forbears certain procedural rights within the particular case). In other words, the Commission benefits in this instance from no stipulation, settlement agreement, or other subscribed memorialization, or even a procedural history, arrived at with the advice of counsel, on which to premise a claimed consensual relinquishment of the defendants' many constitutional and other objections both to an obey-the-law injunction and to that injunction's enforcement, based upon events whenever and wherever occurring and of whatever nature consisting. Second, the Commission proposes an obey-the-law injunction that by force of Rule 65(d)(2) binds not only the corporate entity, Sky Way Global, but also Sky Way Global's "officers, agents, servants, employees, and attorneys; and other persons in active concert" upon receiving "actual notice" of the injunction. Each of the four individuals defending against this action is within the scope of the obey-the-law injunction as fortified by Rule 65(d)(2), which creates an onerous circumstance in which an actively litigating defendant is subject to the sanctions visited upon a defaulting corporate defendant even though the individual defendant persists in his defense.
The Commission's motion (Doc. 40) is
ORDERED in Tampa, Florida, on April 22, 2010.
An April 22, 2010, order (Doc. 53) ("the order") grants in part and denies in part the Commission's motion (Doc. 40) for a default judgment against the defendant Sky Way Global. To the extent that the Commission seeks a civil penalty and disgorgement, the order (Doc. 53) retains jurisdiction to enter against Sky Way Global a money judgment for an amount certain. The order (Doc. 53) denies the Commission's request for a pervasive, permanent obey-the-law injunction (1) because an obey-the-law injunction violates Rule 65(d), Federal Rules of Civil Procedure; (2) because an obey-the-law injunction violates the defendant's constitutional rights; (3) because an obey-the-law injunction affronts the separation of powers embodied in the Constitution; (4) because an obey-the-law injunction is both unenforceable and ineffective; (5) because the Commission fails to establish an exception for an enforcement action from the general and constitutional prohibition against an obey-the-law injunction; and (6) because in this action an obey-the-law injunction against a defaulted, unrepresented, defunct corporate defendant creates an "onerous circumstance" in which each of the four actively litigating pro se defendants falls within the scope of the injunction. The order (Doc. 53) invites the Commission to propose a properly refined, reasonably focused, permanent injunction that complies with Rule 65(d), Federal Rules of Civil Procedure. The Commission moves (Doc. 67) for "reconsideration" of the order and, in the alternative, proposes a "revised injunction." In moving for reconsideration, the Commission argues (1) that Rule 65(d) permits an obey-the-law injunction in an enforcement action; (2) that an obey-the-law injunction violates no constitutional right of the defendant; (3) that an obey-the-law injunction comports with the separation of powers; and (4) that an obey-the-law injunction properly extends to each actively litigating pro se defendant.
Before addressing the Commission's motion, three points deserve mention. First, this order and the preceding order (Doc. 53) use the term "obey-the-law injunction" to mean an injunction that compels a person to refrain from violating—in any manner and at any time or at any place—one or more statutes that, in turn, prohibit an array of categories of action. The Commission in this action sought an injunction, quoted at length in footnote 2 in the earlier order (Doc. 53), that enjoined a person from any and every violation, whenever and wherever committed, of Sections 5 and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. An obey-the-law injunction prohibits not merely some adequately identified act or omission that is against the law (which is a permissible prohibition) but prohibits every act or omission (or a broad encompassing array of acts or omissions), even
Second, the order finds that the Commission establishes facts sufficient to warrant an injunction against Sky Way Global. Thus, no question remains as to the propriety of permanent injunctive relief. Rather, the issue is the appropriate form of relief. Must the injunction describe in reasonable detail (and not merely by tracking the broad language of the statute) the act or acts prohibited, by generally prohibiting either the same modus operandi or category of conduct as the conduct warranting the injunction in the first instance? Or may the injunction, by tracking the broad, general language of a statute, impose a global, broadly indiscriminate, permanent prohibition on any future conduct that violates the statute, no matter where, when, how, or even whether related to the underlying, established violation? In other words, may a court order a defendant to either "be good forever" or face contempt and thereby substitute entirely the remedy of contempt for the statutory remedy for breach of the pertinent statute?
The final point is the Commission's problematic claim that an obey-the-law injunction is a mechanism essential to fulfill the Commission's paramount obligation to protect investors from securities recidivists. The Commission's claim erodes promptly upon a review of the practice of other enforcement agencies. For example, the Federal Trade Commission (the "FTC") routinely seeks both a preliminary and permanent injunction against a defendant who demonstrates a proclivity for repeated violation of the Federal Trade Commission Act. The FTC's duty to protect the public interest—i.e., consumers—is neither less important nor less burdensome than the Commission's. Nevertheless, the FTC (with relative ease and efficiency) consistently proposes a reasonably detailed injunction that prohibits the same category of act or acts as those warranting an injunction in the first instance. For example, in F.T.C. v. Home Assure, LLC, No. 8:09-cv-547-T-23TBM, the FTC proposed (and received in this court) a permanent injunction against a defendant who operated a foreclosure relief business, which order (in part) enjoined (Doc. 278) the defendant from:
If the FTC can effectively protect the public interest with a reasonably detailed, appropriately refined permanent injunction (that does more than simply track the language of the FTC Act), nothing should prevent the Commission from doing the same.
Arguing that Rule 65(d) permits an obey-the-law injunction in an enforcement action, the Commission asserts that the April 22, 2010, order (Doc. 53) (1) "failed to consider the plain language of the securities laws that provide for injunctions tracking statutory language," (2) "failed to follow binding Eleventh Circuit precedent," (3) "relied on dicta that contradicts that precedent," (4) "ruled contrary to Supreme Court and other Circuit Courts finding that statute-based injunctions are permissive," and (5) "relied on case law involving private litigants[] rather than enforcement agencies entitled to statute-based injunctions."
The Commission argues that the order (Doc. 53) "failed to consider the plain language of the securities laws that provide for injunctions tracking statutory language." Contrary to the Commission's assertion, the order exhaustively analyzes the "plain language" of 15 U.S.C. § 77t ("Section 77t"), which empowers the Commission to seek an injunction. (Doc. 53 at 11-13) The order finds that Section 77t permits the Commission to seek an injunction against an "act or practice" that a person "is engaged in or [is] about to engage in" and that violates the Securities Act. Section 77t states:
15 U.S.C. § 77t(b). The Commission's construction of the statute overreaches. Section 77t permits an injunction against only an identifiable "act or practice" that a person "is engaged or about to engage in" and not any conceivable or imaginable act or practice that violates any part of the securities law without respect to whether a person may or is "about to" engage in the act. Accordingly, the order finds that "Authorization to enjoin a certain, identifiable, and demonstrably imminent `act or practice' differs markedly from authorization to enjoin any act or practice and all possible acts or practices that violate the law, wherever and whenever the act or practice occurs." The plainest aspect of Section 77t is that Section 77t neither "explicitly" authorizes a boundless, pervasive obey-the-law injunction nor "explicitly" permits an injunction "tracking the statutory language." (Doc. 67, p. 6)
Additionally, the Commission cites
Section 78u(a) neither "explicitly" authorizes an injunction tracking the statutory language nor appears at all germane to an injunction (obey-the-law or otherwise) under the securities law.
Section 78u(e) governs "Mandamus" and states that:
The current language of Section 78u(e)— formerly Section 21(f) of the Exchange Act, 15 U.S.C. § 78u(f)—became a part the Exchange Act in 1975 upon the passage of certain amendments by Congress (the "1975 Amendments"). The 1975 Amendments also modified Section 78u(d)—formerly Section 21(e) of the Exchange Act, 15 U.S.C. § 78u(e). In order to enact "meaningful reform" of securities trading mechanisms and establish a "national market system," Congress sought in the 1975 Amendments to "reform . . . the method and manner by which the self-regulatory organizations operate and . . . the way that the [Commission] oversees the performance of their regulatory responsibilities."
Thus, the purpose of Section 78u(e)— Section 21(e) of the Exchange Act—is to "authorize[] the [Commission] to move the Court for enforcement of its orders relating to disciplinary actions first initiated by self-regulatory organizations such as the NASD [renamed the Financial Industry Regulatory Authority (`FINRA')]." S.E.C. v. Pinchas, 421 F.Supp.2d 781, 783 (S.D.N.Y.2006); see also S.E.C. v. Vittor, 323 F.3d 930 (11th Cir.2003); S.E.C. v. McCarthy, 322 F.3d 650, 655, 659 (9th Cir.2003). Section 78u(e) "explicitly provides for district court jurisdiction over [an] action[] brought to enforce SEC-ordered sanctions," as well as an action to enforce sanctions imposed by FINRA and affirmed by the Commission. Lang v. French, 154 F.3d 217, 222 (5th Cir.1998).
Nothing in Section 78u(e) entitles the Commission to an obey-the-law injunction that tracks the statutory language. Rather, Section 78u(e) grants a district court jurisdiction to order compliance by a member of a self-regulatory organization with the organization's rule or order. This fact is manifest in the title of the section—"mandamus"—which denotes a pre-existing duty or obligation to perform some ministerial act. The Commission's independent power to seek an injunction resides in Section 78u(d), which contains language identical to Section 77t(b), and authorizes the Commission to seek an injunction against an "act or practice" that a person "is engaged in or [is] about to engage in" and that violates the Exchange Act. Accordingly, the Commission's new reliance on Section 78u(e) is misplaced, because Section 78u(e) neither "explicitly" abrogates the specificity requirement of Rule 65(d) nor "explicitly" empowers the Commission to procure an obey-the-law injunction.
Furthermore, an abundance of precedent rejects an injunction framed entirely in the broad terms of the statutory language. See McComb v. Jacksonville Paper Co., 336 U.S. 187, 195-96, 69 S.Ct. 497, 93 L.Ed. 599 (1949) (Frankfurter, J. and Jackson, J., dissenting) ("For violation of the command of an injunction issued under the [Fair Labor Standards] Act, however, [the defendant] may not only be exposed to more severe civil penalties than the Act
The Commission argues that "[t]his Court erred in failing to follow the binding Eleventh Circuit precedent in Ginsberg, Carriba Air, Blatt, and MacElvain."
The order (Doc. 53) considers both S.E.C. v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir.1982), and S.E.C. v. Ginsburg, 362 F.3d 1292 (11th Cir.2004), and finds (1) that, to the extent Carriba Air finds in Section 77t specific authorization for an obey-the-law injunction, Carriba Air fails to either delineate a cogent statutory analysis or adequately explain the "nuisance exception" to the equitable bar against enjoining a crime, and (2) that Ginsburg "contain[s] no discussion of, and expresse[s] no opinion on, the enforceability of an obey-the-law injunction in an S.E.C. prosecution." In fact, Ginsburg reverses the district court based on the failure to find a "reasonable likelihood" of a future violation by the defendant. Therefore, (1) because of the dearth of analysis of Section 77t, Carriba Air merits no consideration and (2) because Ginsburg expresses no opinion as to the validity of an obey-the-law injunction, Ginsburg is irrelevant to an analysis of both Section 77t and obey-the-law injunctions.
As to S.E.C. v. Blatt, 583 F.2d 1325 (5th Cir.1978), and S.E.C. v. MacElvain, 417 F.2d 1134 (5th Cir.1972), neither case persuasively supports the Commission's argument. Although Blatt affirms in part the district court's permanently enjoining the defendants from violations of Section 10(b), Blatt (1) finds that the granting or denying of injunctive relief "rests within the sound discretion of the trial court" and (2) discusses only the "critical question in issuing the injunction and also the ultimate test on review," which consists of "whether the defendant's past conduct indicates that there is a reasonable likelihood of further
The Commission argues that "reliance on footnote [fourteen] in S.E.C. v. Smyth, 420 F.3d 1225, 1233 n. 14 (11th Cir.2005), in declining to enter the proposed injunction is misplaced," because "the issue of whether statute-based injunctions arising in Commission enforcement actions are enforceable was not raised, argued[,] or briefed, and the footnote commenting on them was dicta." Additionally, the Commission argues that "where panel decisions conflict, courts must follow the earliest decision."
"[A] panel cannot overrule a prior one's holding even though convinced it is wrong." United States v. Steele, 147 F.3d 1316, 1318 (11th Cir.1998); Cohen v. Office Depot, Inc., 204 F.3d 1069, 1072 (11th Cir.2000). However, as explained in the previous section, the "binding precedent" cited by the Commission either (1) inadequately analyzes Section 77t and fails to merit adherence or (2) contains no analysis or finding as to the propriety of a statute-based, obey-the-law injunction. Thus, although not a "holding" and, therefore, not a compulsory, binding precedent, Judge Tjoflat's footnote 14 in Smyth provides the most persuasive and immediate precedent informing the propriety of an obey-the-law injunction in an enforcement action. Accordingly, no error arises from the order's finding in accord with footnote 14 of Smyth. Additionally, the order (Doc. 53) (1) disapproves of the dominant trend of a court's entering with only scant analysis an obey-the-law injunction in an enforcement action and (2) disregards as persuasive precedent the Commission's undoubted history of success in obtaining obey-the-law injunctions elsewhere, because the mere number of instances, without more, neither justifies the practice nor meaningfully evidences the Commission's entitlement to such an injunction.
The Commission argues that both the order (Doc. 53) and footnote 14 of Smyth are "contrary to a Supreme Court and several other Circuit Court opinions holding that injunctions tracking the statutory language are not overly broad and are not prohibited `obey the law' injunctions." The Commission relies primarily upon McComb v. Jacksonville Paper Co., 336 U.S. 187, 69 S.Ct. 497, 93 L.Ed. 599 (1949).
In December, 1939, and January, 1940, the Administrator of the Department of Labor's Wage and Hour Division (the "Administrator") inspected Jacksonville Paper Company ("Jacksonville Paper") and discovered Jacksonville Paper's failure to comply with the Fair Labor Standards Act of 1938, 29 U.S.C. §§ 206-07 (the "FLSA"). Because Jacksonville Paper operated primarily within Florida, Jacksonville
Jacksonville Paper failed to appeal the order.
Six years later, the Administrator sued to enforce the injunction, as refined by Fleming. Walling v. Jacksonville Paper Co., 69 F.Supp. 599 (S.D.Fla.1947). The Administrator identified six payment and record keeping practices by Jacksonville Paper that allegedly violated the FLSA. Walling finds that "[n]one of the practices now complained of and for which the [Administrator] [requests] . . . civil contempt were specifically enjoined by the judgment of August 29, 1941, or by the judgment of July 3, 1943, although most of the practices were in existence at the time these orders were entered." Thus, the defendant could not have "willful[ly] violat[ed]" the refined injunction, because the defendant violated none "of the specific provisions of the former judgment prohibiting the doing of any specific thing." Walling concludes that, although each of the six alleged practices violates the FLSA, "[i]t does not lie within the discretionary power of the [c]ourt to inflict punishment upon defendants for violations of the [FLSA], not specifically imposed by the earlier judgments." Based on this conclusion, Walling (1) construes the Administrator's motion for contempt as an amended complaint "seeking a broadening of the injunctive orders heretofore entered in this case. . . ." and (2) enters an amended judgment enjoining Jacksonville Paper "from violating the provisions of the Fair Labor Standards Act. . . ." Both sides appealed.
On appeal, in Jacksonville Paper Co. v. McComb, 167 F.2d 448 (5th Cir.1948), the Administrator argued that the district court erred in concluding that, because none of the practices "had been actually considered before or specifically condemned and forbidden by the court" that entered the original injunction, Jacksonville Paper lacked "any wilful purpose to evade the injunction." Rejecting the Administrator's argument, the Fifth Circuit concludes (1) that "[u]nder all the circumstances. . . the . . . conclusion is justified
McComb v. Jacksonville Paper Co., 336 U.S. 187, 69 S.Ct. 497, 93 L.Ed. 599 (1949), reverses. First, McComb finds that "[t]he absence of wilfulness does not relieve from civil contempt . . . [a]n act does not cease to be a violation of a law and of a decree merely because it may have been done innocently." McComb rejects as irrelevant to contempt the defendant's intent. Additionally, McComb disagrees with the notion that an injunction must specifically prohibit each illegal payment and record keeping practice before a defendant's receiving punishment. "Such a rule," McComb reasons, "would give tremendous impetus to the program of experimentation with disobedience of the law. . . ."
Accordingly, McComb approves an injunction that "[b]y its terms . . . enjoin[s] any practices which [a]re violations of th[e] . . . [minimum wage, overtime, and record keeping] provisions." In approving the injunction, McComb states that a "decree of that generality"—that is, an injunction that goes beyond prohibiting the specific scheme or schemes that the defendant perpetrated or may perpetrate—is "often necessary to prevent further violations where a proclivity for unlawful conduct has been shown." For example, rather than requiring that an injunction identify each possible method by which an employer may circumvent the minimum wage requirement, an injunction may simply order an employer to pay a minimum wage. That way, the injunction is both precise enough to give an employer fair warning of the prohibited conduct and general enough to prevent the employer's evading the injunction by simply inventing a new method of circumventing the minimum wage requirement, which method the highly specific injunction failed to identify.
The Commission asserts that McComb's approval of a "decree of . . . generality" supports the Commission's request for an obey-the-law injunction. However, the Commission's argument arises from a fundamental misunderstanding of McComb (a misunderstanding of which the dissenters in McComb were presciently aware).
In contrast, the Commission seeks (for example) to enjoin Sky Way Global from violating Section 10(b) of the Exchange Act by (directly or indirectly):
Rather than support the Commission's requested injunction, McComb highlights the problem with an injunction tracking the language of the securities laws. The Exchange Act, for example, prohibits an expansive, indefinite category of acts and omissions, generally encompassing any imaginable fraudulent or deceptive scheme in connection with the purchase or sale of any kind of security. In contrast, the FLSA narrowly proscribes the failure to pay a defined minimum wage and rate of overtime compensation. The detail inherent in the FLSA permits an injunction that simply commands the defendant to comply with an FLSA provision or provisions (as would the command of statute mandating the purchase of car insurance before driving, or compliance with the applicable speed limit). Accordingly, an injunction ordering compliance with the FLSA's minimum wage requirement easily satisfies Rule 65(d). On the other hand, the Exchange Act permits no such injunction, because the Exchange Act utterly lacks a comparable level of detail. An employer enjoined from violating the minimum wage requirement knows that failure to pay the minimum wage will result in contempt, but a company enjoined from violating (generally and in any way) the Exchange Act faces a limitless array of scenarios sufficient to warrant a sanction for contempt. Thus, McComb aptly demonstrates that the problem with an injunction's commanding compliance with the securities laws is not the mere fact that the injunction tracks the statutory language—the problem with ordering a
The Commission argues that, in declining to enter the Commission's proposed injunction, the order (Doc. 53) (1) fails to consider the "strong public policy reasons for broad, statute-based injunctions in the context of [a] civil enforcement action" and (2) errs in relying "extensively on cases where private parties sought injunctions not involving the federal securities laws. . . [and][t]he prophylactic law enforcement deterrence of a reasonable statutory injunction was not at issue."
Although some cases cited in the order (Doc. 53) involve no enforcement agency, the order (Doc. 53) specifically considers (1) public policy, (2) the Commission's role in protecting the investing public, and (3) the deterrent power of an obey-the-law injunction. The order both describes in-depth why an obey-the-law injunction is unenforceable and ineffective (Doc. 53, pp. 13-15) and illustrates how the Commission's "`current practice of privileging hope (in the form of an obey-the-law injunction) over experience (the many cases in which fraud defendants recidivate)' neither deters violators nor protects investors."
The Commission argues that both the order (Doc. 53) and Smyth "incorrectly suggested defendants in civil contempt proceedings resulting from Commission statute-based injunctions are entitled to a
However, the order never "suggests" that a defendant in a civil contempt proceeding possesses the right to a jury trial. In fact, the order both describes the federal statute depriving the defendant of the right to a jury trial in a contempt hearing and discusses in detail the fact that a defendant enjoys no right to a jury trial in a civil contempt proceeding. The order explains the precise problem with an obey-the-law injunction: a defendant who once violates the law and, after a jury trial, becomes subject to an obey-the-law injunction never again enjoys the right to a jury trial, no matter how distinct in time, nature, and location any subsequent offense from the original offense. The obey-the-law injunction subjects the defendant to prosecution by motion for any conceivable act or practice that violates the law, whenever and wherever the act occurs, irrespective of the similarity between the new violation and the violation underlying the injunction. Thus, the order thoroughly considers the fact that, in "civil contempt hearings the government litigates," a defendant enjoys no right to a jury trial. Accordingly, the Commission's argument for reconsideration on this point lacks merit.
The Commission argues that the order's (Doc. 53) concern with the defendant's due process rights is "misplaced" (1) because the "inherent power to enforce . . . orders through civil contempt does not terminate if the person subject to the order relocates or if their violative conduct occurs outside of the jurisdiction" and (2) because "the Commission can only seek civil contempt."
As to the "inherent power" of a court, the Commission once again fails to comprehend both Smyth and the order (Doc. 53). The crucial problem with an obey-the-law injunction is that the court retains jurisdiction in perpetuity to enforce an injunction through civil contempt, no matter where or when or of what character the next violation. An obey-the-law injunction transforms the judge into the enforcing agent and instrument, charged forever with enforcing the securities laws against the defendant. Through an obey-the-law injunction, a defendant who once violates the securities laws (and demonstrates a proclivity for violating the law again) forfeits in perpetuity not only his right to due process but his right to a jury trial and "the benefit of a full measure of pleadings, motions, discovery, and the like. . . ." The due process concern with an obey-the-law injunction is anything but "misplaced." Furthermore, the Commission is not limited to civil contempt sanctions.
The Commission argues that the order (Doc. 53) incorrectly finds that the proposed injunction violates separation of powers, because the order "overlooks the fact that . . . Congress specifically authorized injunctions that track the language of
The order (Doc. 53) criticizes the Commission's proposed injunction, because:
The Commission argues for reconsideration on the basis (1) that the order "fails to acknowledge the proposed injunction is not a wholesale injunction against the remaining defendants" and (2) that Rule 65(d) "expressly provides that injunctions can extend to individuals when they act in active concert or participation with the enjoined party." However, the Commission fails to acknowledge (or explain why) an actively litigating, pro se defendant should become—by virtue of both Rule 65(d) and a defaulted, unrepresented corporate defendant—susceptible to sanction. Thus, the Commission's argument again lacks merit.
The Commission states that the "revised injunction" (Doc. 67-2) satisfies the order's (Doc. 53) "concerns under Rule 65(d)," because the injunction "includes language relating more specifically to the misconduct that occurred in this case."
The "revised injunction" mirrors the first proposed injunction by tracking the statutory language. In fact, part one of the revised injunction contains no perceptible "revision." Parts two and three of the "revised" injunction enjoin the defendant from violating the law "including by" engaging in the same unlawful conduct that Sky Way Global admits by virtue of default. The "revised injunction" fails to comply with the order (Doc. 53) and Section 77t.
To the extent that the Commission seeks a permanent, obey-the-law injunction, the motion (Doc. 67) is
ORDERED.
VIOLATION OF SECTION 5 OF THE SECURITIES ACT
IT IS FURTHER ORDERED AND ADJUDGED that Global and its, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 5 of the Securities Act [15 U.S.C. § 77e] by, directly or indirectly, in the absence of any applicable exemption: (a) Unless a registration statement is in effect as to a security, making use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; (b) Unless a registration statement is in effect as to a security, carrying or causing to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale; or (c) Making use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell or offer to buy through the use or medium of any prospectus or otherwise any security, unless a registration statement has been filed with the Commission as to such security, or while the registration statement is the subject of a refusal order or stop order or (prior to the effective date of the registration statement) any public proceeding or examination under Section 8 of the Securities Act [15 U.S.C. § 77h].
IT IS FURTHER ORDERED AND ADJUDGED that Global and its agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
IT IS FURTHER ORDERED AND ADJUDGED that Global and its, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly: (a) to employ any device, scheme, or artifice to defraud; (b) to obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
420 F.3d at 1229 n. 8.
See Weiss, supra note 8, n. 20. Nonetheless, Weiss asserts that Smyth's concerns as to the specificity requirement of Rule 65(d), the Due Process Clause, and the Seventh Amendment are "not compelling." Because the right to a jury trial in a contempt proceeding "is not absolute," Weiss argues that no violation of the Seventh Amendment arises from an obey-the-law injunction. However, Weiss's logic illustrates the precise problem with an obey-the-law injunction. Because generally no right to a jury trial exists in a contempt proceeding, an obey-the-law injunction forever deprives a defendant of a broader right that the defendant possesses, absent the injunction, in a standard prosecution.
See Barnard, supra note 14, at 222.
336 U.S. at 195-96, 69 S.Ct. 497. Therefore, "courts should be explicit and precise in their commands and should only then be strict in exacting compliance. To be both strict and indefinite is a kind of judicial tyranny." 336 U.S. at 195.
David M. Weiss, Reexamining the SEC's Use of Obey-the-Law Injunctions, 7 U.C. DAVIS BUS. L.J. 6 n.20 (2006).
