ROBIN S. ROSENBAUM, United States Magistrate Judge.
This cause is before the Court upon the seven-day bench trial held in this case. The parties consented to trial before a United States magistrate judge, see D.E. 140, and the Honorable William J. Zloch referred the matter to me in accordance with 28 U.S.C. § 636(b). [D.E. 160].
The parties filed certain stipulations for the Court's consideration at trial. See D.E. 217 at 5-8. Following the trial, the parties submitted their Proposed Findings of Fact and Conclusions of Law [D.E. 290, D.E. 291]. The Court has also reviewed the deposition transcripts of Vera Michele Brown, Danny L. Pixler, William Baumgardner, Jr., Richard Steen, Lloyd Davis, Ivan Dobrin, Brian Sly, and Thomas Cunningham, all exhibits entered into evidence at trial, Defendant and Relief Defendants' Motion for Directed Verdict [D.E. 265], all filings in support thereof and in opposition thereto,
This action began on March 6, 2008, when the Securities and Exchange Commission ("SEC") filed the original Complaint [D.E. 1] in this matter against Defendant W. Anthony Huff ("Huff") and Relief Defendants Sheri Huff, Roxann Pixler, and Midwest Merger Management LLC (collectively "Relief Defendants"). Shortly thereafter, on April 4, 2008, the SEC filed its Amended Complaint for Injunctive and Other Relief [D.E. 15]. The Amended Complaint also sought relief against Defendants Otha Ray McCartha, Charles J. Spinelli, Danny L. Pixler, Anthony Russo, and Relief Defendant Brentwood Capital Corporation. See D.E. 15.
Defendants, McCartha, Spinelli, Pixler, and Russo consented to judgment against themselves, see D.E. 2, D.E. 3, D.E. 17, and D.E. 73, respectively, and the Court entered judgments and final injunctions against these Defendants. See D.E. 24, D.E. 23, D.E. 25, D.E. 74. As for the Relief Defendant Brentwood Capital Corporation, on May 21, 2008, the Court affirmed an Order of Default entered by the Clerk against Brentwood Capital Corporation, Inc. See D.E. 33. Because these Defendants and Relief Defendant no longer play a role in this case, these Findings of Fact and Conclusions of Law will not review their involvement except as necessary to explain currently pending matters.
The Amended Complaint alleges that from 2001 through 2004, Defendant Huff, along with others, "siphoned tens of millions of dollars" from Certified Services, Inc. ("Certified"), a professional employee leasing organization. D.E. 15 at ¶ 1. According to the Amended Complaint, Huff secretly served as a "control person of Certified," and, with others, employed "an elaborate scheme conducted in flagrant disregard of the federal securities laws." Id. More specifically, the Amended Complaint asserts that Huff and others artificially inflated Certified's financial condition and failed to disclose related party transactions that benefitted Huff and the others. Id. at ¶ 2. As a result, the Amended Complaint continues, Huff and others overstated Certified's financial condition to the SEC and the investing public by approximately $112 million. Id.
The Amended Complaint further contends that Huff and others accomplished this feat by recording almost $47 million in "bogus Letters of Credit" as an asset on Certified's balance sheet while simultaneously failing to report approximately $65 million in liabilities. Consequently, Certified allegedly overstated its assets by approximately 35% and understated its liabilities by about 38% for the fiscal year-end 2002 and understated its liabilities by more that 50% for the fiscal year-end 2003. Id.
In addition, the Amended Complaint accuses Huff of using his control over Relief Defendant Midwest Management, LLC ("Midwest"), Certified's controlling shareholder, to divert money improperly out of Certified's coffers and into his own pocket by orchestrating Midwest's entry into "bogus agreements" with Certified. Id. at ¶ 3. As a result of these alleged violations, the SEC suggests, Huff and the Relief Defendants reaped "millions of dollars in ill-gotten gains." Id. at ¶ 4. To remedy these purported transgressions, the SEC
The SEC, Huff, and the Relief Defendants (collectively, "the Parties") filed a Notice of Right to Consent to Disposition of a Civil Case By A United States Magistrate. [D.E. 160]. The Honorable William J. Zloch then assigned this matter to me. See D.E. 160. The Court conducted a seven-day bench trial. [D.E.s 258-264]. Prior to trial, the Parties filed a Joint Pretrial Stipulation in which they entered into certain stipulations of fact. See D.E. 217 at 5-8.
During the trial, the Court heard live testimony from Huff, Sheri Huff, Roxann Pixler, Charles Spinelli, Ivan Dobrin, Adam Dobrin, James Feltman, William Romashko, Otha Ray McCartha, Thomas Bean, and R. David Wallace. In addition, the Parties submitted by designation the depositions of Vera Michele Brown, Danny L. Pixler, William Baumgardner, Jr., Richard Steen, Thomas Cunningham, Lloyd Davis, Ivan Dobrin, and Brian Sly. See D.E. 220 at 3-15; D.E. 218 at 62-66. The Court has reviewed these deposition transcripts.
The following exhibits were admitted into evidence during the trial: Plaintiff's Exhibits ("PX") 7, 59, 86, 88, 105, 115,
After the trial, Huff and the Relief Defendants submitted a written Motion for Judgment pursuant to Rule 52, Fed. R.Civ.P. [D.E. 265]. During the trial, the Parties had agreed and the Court had authorized that the written Motion for Judgment would be treated as if it had been made at the close of the SEC's case-in-chief and renewed at the conclusion of all evidence in the event that the Motion had been unsuccessful at the close of the SEC's case-in-chief, and that the Court would reserve ruling until the written Motion had been fully briefed and submitted to the Court. Trial Transcript ("TT"), pp. 1224, 1225. The SEC timely filed its written Response to Huff and the Relief Defendants' Motion for Judgment [D.E. 293], and Huff and the Relief Defendants timely filed their Reply [D.E. 299].
1. The Court has jurisdiction over this action pursuant to Sections 20(b), 20(d), and 22(a) of the Securities Act, 15 U.S.C. §§ 77t(b), 77t(d), and 77v(a), and Sections 21(d), 21(e), and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d), 78u(e), and 78aa.
2. Defendant Huff does not have a college degree, but he did take some college courses and insurance courses, and he did graduate from the Dale Carnegie School. TV
3. In the mid-90's Defendant Huff filed for personal bankruptcy. Id. The bankruptcy court found, however, that Huff had non-dischargeable debt. Id.
4. Defendant Huff previously held State of Kentucky licenses for property and casualty insurance and for life and health insurance. Id. at 834-35. In October 1998, however, following a contested proceeding, the Insurance Commissioner for the State of Kentucky either revoked or forced Defendant Huff to surrender his life and health insurance license. Id. at 836-38. Defendant Huff's property and casualty insurance license expired. Id. at 836.
6. On May 22, 2003, Defendant Huff pled guilty to three counts of mail fraud contained in the indictment. DX 921; TT 839-40. In the plea agreement, Defendant Huff agreed that he had obtained three insurance premium finance loans upon false representations that he would use the loan proceeds to pay premiums due on insurance policies issued by Liberty Mutual Insurance Company. DX 921. According to the statement to which Defendant Huff agreed in the plea agreement, however, after receiving the loan proceeds, Defendant Huff intentionally expended them for purposes other than paying the premiums to Liberty Mutual. Id. Huff further acknowledged in the plea agreement that he pled guilty "because he [was], in fact, guilty of these three charges." TT at 841.
7. Prior to being indicted in the Western District of Kentucky, Defendant Huff had served as a director of two entities with offerings registered with the SEC. TT at 879. These entities included U.S. Trucking, where Defendant Huff held the titles of executive vice president and chairman of the board, and Professional Transportation Group, Ltd., where Defendant Huff was the chairman of the board. Id. at 879, 886. In his capacity as the executive vice president and chairman of the board of these companies, Defendant Huff had to and did disclose his background in offering materials and likewise had to and did sign publicly filed registration statements and reports. Id. at 885-87; see also PX 848 at 18, F-33. Some of the background information that Huff disclosed was negative in that it pertained to his bankruptcy in 1994. PX 848 at 18.
8. As chairman of the board at U.S. Trucking, Huff's duties included raising capital, talking to the market place, communicating with shareholders, and engaging in public relations, although he was not involved in the "day-to-day grind" of the company. TT at 884-85. Nor did Huff find potential acquisitions for U.S. Trucking. Id. at 884. Huff and former co-defendant Danny Pixler also served as the sole members of U.S. Trucking's audit and compensation committee. PX 848 at 18; TT at 880-81. Upon his indictment in the Western District of Kentucky, Defendant Huff resigned his official positions with U.S. Trucking and was removed from his
9. Following Defendant Huff's resignation from U.S. Trucking, U.S. Trucking continued to have debts and obligations. Id. at 212-13. Among these were debts and obligations to Wells Fargo; Neligan, Tarpley, Andrew and Foley; Monarch Capital; and All State World Cargo, Inc. Id. at 212-14. Logistics Management Resources, Inc. ("LMRI") became the successor corporation to U.S. Trucking. Id. at 211.
10. Huff carries a business card, but the card does not state his position, title, or company affiliation. TT at 1071.
11. Relief Defendant Sheri Huff has lived with Defendant Huff
12. Sheri Huff owns a house at 313 Longview Park Place in Kentucky, where she resides with Huff. TT at 353, 142, 959-60. Huff's name is not on the property. Id. at 959-60. Sterling Development built and owned the home before Sheri Huff purchased it. Id. Prior to living at that address, Sheri Huff and Defendant Huff resided at a house at 707 Oxmor Woods Parkway in Kentucky. Id. at 960. Previously, that house was owned by the Huff Grandchildren Irrevocable Trust, of which Defendant Huff is a trustee, but currently, Sheri Huff owns the property. Id. In addition to these residences, for a period in 2004, Sheri Huff stayed with Defendant Huff at a condominium in Hollywood, Florida, in part, so Huff could be close to Certified's office in Fort Lauderdale. Id. at 404-05.
13. Relief Defendant Roxann Pixler has been married to former Defendant Danny Pixler for the past 31 years. Id. at 133-34. Roxann Pixler worked for Gulf Northern, which changed its name to U.S. Trucking. Id. at 137. While employed at Gulf Northern, Roxann Pixler met Defendant Huff in the mid-1990's. Id. She worked for U.S. Trucking until the fall of 1999. Id. From the mid-1990's until at least 2005, Danny Pixler and Huff were involved in business together. Id. at 137-38. Roxann Pixler has resided with her husband Danny Pixler in various locations, including Fort Lauderdale, Florida. TT at 134.
14. Roxann Pixler eventually invested approximately $150,000 with Huff. TT at 181-82. When she asked him to put her investment into some type of written form, Huff told Roxann Pixler to "shut up," told her she was a trouble-maker, and banned her from future meetings relating to the investment. Id.
15. Charles Spinelli ("Spinelli") graduated from the Fordham University College
16. Spinelli first met Defendant Huff in approximately 1996, when Spinelli served as counsel for a small broker-dealer located in New York City. Id. at 184. At the time, Huff was a shareholder in U.S. Trucking, Inc., which was a client of the same broker-dealer. Id. Subsequently, U.S. Trucking retained Spinelli to perform some legal work. Id.
17. Between 1999 and 2002, Spinelli practiced law at a law firm called Levy & Boonshoft, P.C. Id. at 183. During that period, Spinelli and Levy & Boonshoft, P.C., represented Defendant Huff, Defendant Huff's entities, and Certified. Id. at 59, 204. In March 2002, however, Spinelli left Levy & Boonshoft, P.C., and stopped practicing law. Id. at 184, 203-04, 319; see also id. at 126.
18. In addition to providing legal representation to Huff prior to retiring his law license in 2002, Spinelli also had a separate business relationship with Huff beginning in 2001. Id. at 204. Spinelli's personal relationship with Huff led to a partnership involving Spinelli and Huff as the majority partners, with Dan Pixler also receiving a percentage of profit from the venture. Id. at 196-97, 293, 309. Spinelli and Huff's partnership pursued a business enterprise intended to have involvement in three areas: (1) a professional employment organization ("PEO"); (2) an insurance carrier; and (3) a financing arm. Id. at 196. The companies corresponding to each of these functions were as follows: Certified was the PEO, Brentwood Capital ("Brentwood") sought to serve as the insurance arm, and Midwest Merger Management, Inc. ("Midwest"), was intended to be the finance company. Id. at 196-97. Despite the existence of the partnership, no documents memorialized the relationship, and on paper, the companies did not reflect that they were controlled by the partnership. See id. at 292-94.
19. Nevertheless, those who interacted with Huff, Spinelli, and their entities saw them as a close group. William Baumgardner, who sold the PEO company Staff America to Certified, for example, described Huff, Spinelli, Pixler, those with whom they worked, and the various entities as being "a very tight group of people," with Huff at the "dead center" of the relationship. D.E. 214-11 at 13. Baumgardner further explained, "[W]ho was Brentwood on a day, who was Huff on a day, who was Pixler on a day, it depended on the circumstances and the need. And that covers the whole time I knew them." Id.; see also id. at 65 ("At the center of the hub would have been Pixler, Spinelli, one inch out Campitiello, Huff at the middle.").
20. Based on Spinelli's involvement with Certified, Brentwood, and Midwest, the United States of America criminally prosecuted Spinelli. Id. at 264-65. Spinelli pled guilty to a count of misprision of a felony and served a prison sentence. Id. at 265, 321. At the time that he testified at trial in the pending case, Spinelli was on supervised release from the criminal case. Id. at 264. Spinelli characterized his experience with the criminal justice system as "a very cathartic and important experience for me and my family and we are much, much better off as a result of it." Id. at 321.
21. Additionally, the SEC filed the pending enforcement action against Spinelli as well as against Huff and other defendants. Id. at 278-79, 281. Prior to filing the enforcement action, the SEC took Spinelli's deposition on more than one occasion.
22. Spinelli entered into a settlement agreement with the SEC to resolve his involvement in the instant matter. Id. at 279-82. The terms of the settlement agreement administratively barred Spinelli from acting as a securities lawyer before the SEC, from serving as an officer or director, and from participating in penny stocks, and it enjoined Spinelli from violating securities laws. Id. Additionally, under the terms of the settlement agreement, Spinelli agreed to cooperate fully with the SEC. Id. at 282. The settlement agreement did not subject Spinelli to disgorgement. Id. at 282. As for Spinelli's take on the SEC's enforcement action against him, Spinelli opined that he was not a "fall guy," but, rather, "got exactly what [he] deserved." Id. at 266.
23. In addition to the criminal and SEC enforcement litigation, the bankruptcy trustee acting on behalf of the creditors of Certified also sued Spinelli and Huff, as well as others. Id. at 280, 291, 319. Spinelli and Huff settled the litigation with the bankruptcy trustee. Id. at 291.
24. Continental Casualty Company ("CNA"), an insurance company, and Staff America, a PEO company that Certified acquired, also each filed a lawsuit against Spinelli, Huff, and others. Id. at 279-80, 318, 324. Spinelli's insurance carrier settled Spinelli's involvement in the CNA lawsuit for $40,000. Id. at 279-80. Huff settled the CNA litigation for a lot more. Id. at 318-19.
25. The Court finds Spinelli to have been a credible witness during the trial of this matter. His demeanor on the witness stand, his responses to questioning—particularly cross-examination, and other evidence corroborating Spinelli's testimony guide the Court in this determination. Although the Court initially had some reservations about believing an individual who admitted to having committed perjury in the course of the 2005 SEC deposition preceding the filing of the matter at hand, the reason expressed by Spinelli for having done so—that he was trying to protect himself and others from legal action— rings true and no longer existed at the time that Spinelli testified in the instant matter. Moreover, as reflected through the citations supporting other findings of fact in this document, in many cases, other evidence tends to corroborate Spinelli's testimony. In addition, as Spinelli was on supervised release at the time of his testimony, he stood to lose more than the average witness, had he perjured himself in a detectable way during this trial. Finally, and significantly, Spinelli's demeanor on the stand and answers to questions concerning his involvement in the matters at issue in this case reflect that Spinelli has taken responsibility for his actions and that he appears genuinely to have turned over a new leaf.
26. Midwest was formed on July 20, 2001, as a limited liability holding company
27. Originally, Relief Defendants Sheri Huff and Roxann Pixler each owned a 50% interest in the company, although Roxann Pixler never took part in any initial meetings regarding the formation of Midwest. Id. at 146, 152; PX 683 at 3. The opening corporate records for Midwest identified Roxann Pixler as the secretary of the company, although no one asked her whether she wished to assume this role, and she never actually performed any functions in this position. Id. at 148. Nor did Roxann Pixler ever manage or control Midwest. Id. at 147-48; see also id. at 176. She similarly never made any business decisions for the company or contributed any capital to it. Id. at 147-48, 164.
28. Likewise, Sheri Huff never invested any money into Midwest. Id. at 368. She testified that she has no understanding as to why she had an ownership interest in Midwest, as she never negotiated with anyone to obtain it. Id. at 367-68. In addition, Sheri Huff did not know who the other owners of the company were, had no understanding of whether Midwest ever made money, and had no knowledge of the company's business. Id. at 367-69. Nor did Sheri Huff actually ever perform any work for Midwest. Id. at 373, 403-04; PX 909 at 3. On occasion, however, Sheri Huff personally signed documents and others signed her name on her behalf for Midwest. PX 909 at 3.
29. Defendant Huff placed Sheri Huff as his nominee for any financial benefit he would receive from Midwest. TT at 870. At the time that the ownership structure of Midwest was being determined, Huff was winding down liabilities he had from prior business dealings. Id. at 871. In addition, at the time of Midwest's formation, Huff still had personal liability arising out of guarantees he had made in connection with U.S. Trucking. Id. at 872-74. Indeed, in order to satisfy a personal guarantee Huff made to GE Lending in connection with the U.S. Trucking business, Huff had to pay more than a million dollars. Id. at 872-73. As Danny Pixler explained with respect to Midwest, he and Huff "decided to put a company together that we could hold our assets through our wives in and go back into business." July 9, 2009, Deposition of Danny Pixler ("Pixler Depo.") at 166. Subsequently, Huff arranged for the paperwork to establish Midwest's structure to be drawn up. Id. at 264-65.
30. At some point in time prior to the filing of Midwest's 2001 tax return, the ownership interests changed so that Roxann Pixler held 40% interest in the company, even though she signed no document authorizing a reduction to her share in the company. TT at 147; see also PX 308: PX 309. When Roxann Pixler held a 40% interest, Relief Defendant Sheri Huff held a 51% interest in the company, and Vera Michele Brown ("Brown"), who has served as Defendant Huff's secretary since approximately 1995, held the remaining 9%. TT at 147, 353, 369-75; see also PX 308; PX 309.
32. By the time that Midwest filed its 2003 tax return, the ownership interests in the company had changed again. PX 680. Although Roxann Pixler continued to own 40% of the company, Sheri Huff at that time held a 59% share, while Brown held 1%. Id. These interests remained the same through at least the filing of Midwest's 2005 tax return. See PX 681; PX 682. As of the time of trial, Roxann Pixler owned no part of Midwest, although she never signed a document giving away or otherwise assigning her interest in the company. TT at 178. Instead, the Huff Grandchildren Trust is the 100% owner of the company. Id.
33. Midwest's tax returns show the following ordinary income or loss for each of the following years: 2001:-$744 (PX 308); 2002:-$755,749 (PX 309); 2003: $362,689 (PX 680); 2004: $909,834 (PX 681); 2005:-$569,231 (PX 682). In 2004, Roxann Pixler received $60,379.98 from Midwest Merger. TT at 177; PX 683 at 6. She used the money to pay taxes related to Midwest for that year. TT at 177. The $60,379.98 is the only money that Roxann Pixler ever received from Midwest. Id.; see also PX 683. Between 2002 and 2005, Sheri Huff received approximately $899,714 from Midwest. TT at 388-400, 405.
34. In 2005 Defendant Huff became a manager of Midwest. Id. at 149. Roxann Pixler did not participate in that decision and was not asked for involvement in that determination. Id. Even prior to this time, however, Huff made the substantive decisions with regard to Midwest and ran it on a day-to-day basis. Id. at 205, 413, 871-72. Although Roxann Pixler originally believed that Midwest was "Danny [Pixler] and Anthony [Huff's], and . . . they were taking care of everything," she subsequently came to believe that Huff was controlling Midwest. TT at 149, 162. Huff even had a Midwest e-mail address— ahuff@midwestmerger.com. PX 635; TT at 920. In hindsight, Danny Pixler agreed that he never made decisions regarding Midwest's business. Pixler Depo. at 173. Instead, Huff did. Id. at 173-74.
35. As for Brown's involvement in Midwest, Brown never directed any of Huff's activities with regard to Midwest. TT at 845. Instead, Huff was always the decision-maker, and Midwest always did what Huff recommended. Id. at 843, 1057. Huff gave Brown duties to perform, and she executed those tasks. Id. For example, if transactions required negotiations between Midwest and Certified, Huff, not Brown or anyone else, negotiated, even though Brown signed resulting agreements on behalf of Midwest. Id. at 845-47. To the extent that Brown ever offered any opinions regarding Midwest, Huff's opinion controlled, and he would have overruled Brown, had she ever disagreed. Id. at 842-44. In fact, however, Brown never disagreed with Huff. Id. at 844.
36. Based on the findings of fact set forth both previously and below in these Findings of Fact and Conclusions of Law, this Court concludes that Huff always controlled Midwest and that Sheri Huff and Roxann Pixler never had any substantive involvement in the company. Rather, they always acted essentially as straw owners.
38. Midwest had a controlling interest in Certified's stock. Id. at 152.
39. Midwest had at least three bank accounts at National City Bank until the accounts were closed in 2005. TT at 1005-06.
40. According to filings with the SEC, Certified was incorporated in Nevada in 1999. D.E. 217 at 5. Certified registered its class of common stock, par value $.0001 per share, with the SEC and therefore was subject to the disclosure and reporting provisions of the federal securities laws. Id. Certified traded on the NASD OTC Bulletin Board under the ticker symbol CSRV. See PX 831 at Part II, Item 5.
41. On November 21, 2001, Midwest acquired 52.6% of the issued and outstanding common stock of Certified after Huff had recommended to Midwest that it purchase Certified. TT at 245, 1057; D.E. 214-3 at 3 (p. 166); D.E. 217 at 5. Pixler learned of Certified from Huff. Id. at 265-67. Although Certified previously had stated in its SEC filings that it provided services to mortgage, real estate, and other financial service firms and their customers, D.E. 217 at 5, at the time that Midwest purchased Certified, Certified was a shell without an operating business, and its price per share never exceeded $.40 in 2001. TT at 245, 1057; PX 677 at Certified Form 10K-SB for the period ending Dec. 31, 2001, at Item 5. Market for Registrant's Common Equity.
42. On November 28, 2001, Midwest made various filings with the SEC in relation to its purchase of a majority interest in Certified. D.E. 217 at 5-6. Among these, Midwest filed Schedule 13-D disclosing that it had a beneficial interest in the common stock of Certified and Forms 3 and 4 disclosing that Midwest had acquired more than a 10% direct interest in the common stock of Certified. Id.
43. Certified then began focusing on acquiring PEO businesses. See D.E. 217 at 6. A PEO serves as the employer of its client companies for purposes of providing benefits, paying taxes, ensuring human resource compliance, and engaging in similar functions. TT at 70. In approximately November 2001, Certified purchased all of the issued and outstanding common stock of America's PEO Holdings, Inc., a PEO business. Id. at 1048; D.E. 217 at 6.
44. Ivan Dobrin ("Dobrin"),
45. Certified's acquisition of Cura occurred in three stages. Id. at 75. In March 2002, Certified wired $1 million to Cura and effectively took over control of the company. Id. Certified then bought a significant portion of the stock of Cura in June 2002, completing the purchase of Cura's stock and the acquisition of the company on December 31, 2002. Id. At that time, Cura became an operating subsidiary of Certified. Id.
46. Certified also acquired other PEO businesses such as Staff America. Id. at 511-12. William Baumgardner ("Baumgardner"), who started Staff America and conducted discussions with Certified regarding the arrangement by Certified of a letter of credit for Staff America, stated that his initial discussions with Certified were with Huff and Dobrin. D.E. 214-11 at 3, 10-11. Baumgardner understood that Huff represented Certified. Id. at 11. Based on his dealings with Huff, Baumgardner came to regard Huff, in his "mind and heart, [as] [someone who] would lie if his lips would move. Everything that came to be promised came with strings, attachments, different terms, anything. Everything changed, everything. Nothing was as he agreed to do, nothing. . . ." Id. at 19.
47. All of Certified's acquisitions went through Midwest, and Certified used capital from Midwest to obtain them. TT at 512-14. Subsequently, Certified combined all of its PEO operating subsidiaries under the name Certified HR Services, which remained a subsidiary of Certified. Id. at 75, 507-08.
48. Danny Pixler held the positions of president and chief executive officer of Certified. D.E. 200-3 at 6. He also served as the president of all of Certified's subsidiaries. Id. at 7. Before Pixler became an officer of Certified, however, Pixler was compensated by Brentwood for his work for Cura/Certified. Id. at 12. Pixler also received compensation from Midwest. Id. at 13. Brown testified that she worked for Pixler at Certified as Pixler's secretary, although Pixler was located in Fort Lauderdale, and Brown was in Kentucky. D.E. 214-17 at 4-6. Pixler, on the other hand, disputed this assertion. D.E. 200-4 at 17. In view of her location, her subservient position to Huff, and the facts that Pixler had his own secretary in Fort Lauderdale and Brown admitted that at the time that Brown was supposedly working as Pixler's secretary she continued to serve as Huff's secretary and to do work for Midwest, this Court does not find Brown's assertion to be credible. See 214-17 at 5-6. Nevertheless, Brown received her compensation from Certified. D.E. 200-4 at 17.
49. Following Certified's acquisition of Cura, Dobrin remained involved with the company as the managing director. Id. at 76. In his position as managing director, Dobrin had responsibility for sales, workers' compensation, and operations. Id. These duties required Dobrin to interact with Defendant Huff. Id. at 76-77. Typically, Dobrin communicated with Huff several times weekly regarding sales, workers' compensation, operations, and other matters. Id. at 76-77, 112. Certified also communicated with Huff regarding its financials. Id. at 535.
51. Based on his frequent interactions with Huff between 2002 and 2004, even though on paper Dobrin reported to Danny Pixler, Dobrin felt that he really reported to both Pixler and Huff and concluded that, with regard to Certified, Huff "was the man. He ran, he made all the ultimate decisions." TT at 78, 81, 87, 113. Adam Dobrin agreed. See id. at 513-14, 517-18 (Adam Dobrin stating, "To me, it seemed that the larger macro decisions were influenced greatly or derived from Midwest," and Pixler, Ivan Dobrin, and Ray McCartha deferred to Huff).
52. Dobrin wanted Certified to acquire a company called Presideon, for example, so he discussed the matter with Danny Pixler. Id. When Pixler opined that it was a "terrible idea," Dobrin approached Huff about the plan. Id. Nearly immediately
53. On another occasion, Dobrin had scheduled a vacation. Id. at 80. Although Certified/Cura was going through some upheaval at the time, Dobrin advised Pixler that Dobrin still intended to take his vacation. Id. at 80-81. Pixler did not object. Id. at 81. Later that day or the next day, however, Huff called Dobrin and told Dobrin that he really needed Dobrin not to go on vacation. Id. Consequently, Dobrin canceled his plans. Id.
54. Similarly, at some point, Dobrin mentioned to Huff that the sales people had expressed concern about Certified/Cura because it was going through a difficult time. Id. at 82. Dobrin asked Huff to come down to South Florida to speak to the sales force because Huff "was running the show." Id. at 83. When Huff met with the sales force, he committed to doing things that would improve the lives of the sales people. Id.
55. Huff also frequently called Danny Pixler on the telephone. TT at 86. These calls occurred at multiple times throughout the work day and into the evenings. Id. Indeed, Dobrin recalled that Pixler received pages to speak with Huff on the telephone two to three times an hour at Certified's offices. Id. Because of the high frequency of calls that Pixler received from Huff, Dobrin suggested that they make up an alias for Huff so the same page would not recur so often. Id. In Dobrin's opinion, "there was no question" that Huff was more "dominant" than Pixler. Id. at 87.
56. In the spring or summer of 2002, Dobrin became a member of the board of directors of Certified after Huff asked him to do so. TT at 83-84. Dobrin remained on the board until he left Certified in 2004. Id. at 84. Certified had approximately five board-of-director meetings during this time. Id. at 121-22. Although Huff attended none of these meetings, id. at 122, the meetings were not really substantive. According to Dobrin, little discussion occurred, and the attendees were there to "rubber-stamp" proposed actions. Id. at 85-86.
57. After Dobrin left Certified, he remained in touch with Huff. TT at 87. Dobrin attempted to work with Huff regarding the acquisition of other businesses for Certified. Id. In so doing, Dobrin never spoke with anyone other than Huff. Id. at 87-88.
58. Like Dobrin, Spinelli testified that Huff "was, for all intents and purposes, running the operations of Certified. . . ." Id. at 251.
59. Through Midwest's ownership of Certified's common stock and preferred stock that had voting rights, Huff controlled a majority of Certified's stock. TT at 1402. Huff also participated in discussions with Breene Murphy, an investment firm, regarding marketing Certified's securities. See D.E. 214-15 at 9. In addition, Huff participated in discussions regarding financing for Certified with the Laurus Family of Funds. See id.
60. Brown, Huff's administrative assistant, had check-writing privileges on at least one of Certified's bank accounts. TT at 1036.
61. Sheri Huff was never involved in the business affairs of Certified. TT at 404.
62. Certified operated out of offices located in Fort Lauderdale, Florida. TT at
63. Brentwood had offices in Kentucky. TT at 873-74. At its Kentucky location, Brentwood operated out of the same offices as Midwest. Id.
64. Although Sheri Huff was identified as a consultant for Brentwood, she never performed any work for the company. TT at 373-74, 404, 875; PX 909. Nevertheless, Sheri Huff reported $151,875.03 in income from Brentwood during 2002. PX 909 at 7-8; TT at 379-80, 384-85. In 2003, Sheri Huff reported $211,666.72 in income from Brentwood. PX 909 at 8; TT at 380, 384-85, 405. In total, Sheri Huff received $2,086,000 from Brentwood. Id. at 877.
65. The income that Sheri Huff received was Defendant Huff's salary draw from Brentwood. TT at 202-03, 875. Huff made the decision to have his Brentwood monies paid to Sheri Huff because of a concern about outstanding liabilities relating to prior businesses. Id. at 203, 879. In addition, Huff received payments from Brentwood by cash, checks, and wire. Id. at 876. Huff maintained a Brentwood e-mail address. Id. at 530.
66. Besides Brentwood, a separate corporation called Brentwood Realty Corporation ("Brentwood Realty") existed. In 2002, Sheri Huff solely owned Brentwood Realty Corporation. TT at 916. Subsequently, the company changed its name to SDH (for Sheri D. Huff) Realty. Id. Brentwood Realty had its offices at the same location as the offices of Midwest and Brentwood. See PX 609. Huff signed substantive documents on behalf of Brentwood Realty. TT at 918; PX 609.
67. Certified's clients were required to carry workers' compensation insurance. D.E. 200-3 at 8. Thus, one of the services that Certified and its subsidiaries offered its clients included providing for their workers' compensation insurance needs. Id. Before June of 2003, Cura covered its clients' workers' compensation insurance needs through a series of policies with CNA Insurance or one of its subsidiaries. Id. CNA allowed Cura, under assignment agreements, to bring other subsidiary PEO businesses into the CNA policy. Id. Thus, Certified used this arrangement to provide workers' compensation insurance to the clients of all of its subsidiaries. Id.
68. By the late summer of 2002, however, CNA advised Cura/Certified that it would not renew the workers' compensation insurance policies after June of 2003. D.E. 200-3 at 8, 13. CNA also informed Cura/Certified that, as of the summer of 2002, Cura/Certified's deductible under the policies would be increased to $1 million per occurrence. D.E. 200-3 at 12-13. This meant that for the remainder of the existence of the CNA policy, Cura/Certified was responsible for claims up to $1 million, and CNA was responsible for amounts over $1 million on any claims. Id. at 13; see also TT at 326-27. During the entire pendency of the $1 million-per-occurrence deductible on the CNA policy, no occurrence ever exceeded the $1 million deductible. D.E. 214-2 at 19.
69. Despite the deductible, if a covered employee filed a legitimate claim, CNA generally would pay the claim, despite its amount, and then seek reimbursement from Cura/Certified. D.E. 200-3 at 14.
70. To guard against the risk of non-payment by the insured on claims below the deductible that the insurer pays in the first instance, insurers such as CNA require collateral, generally in the form of letters of credit or trust arrangements. Id. at 328-29. The amounts required as collateral are determined by estimates of the amounts for which the policy holder is expected to be liable over time. Id. at 335.
71. Because CNA would no longer provide the required coverage as of June 2003, Cura/Certified searched for another carrier. D.E. 200-3 at 9. Huff was involved in trying to find such an alternative carrier. Id. at 10. Cura/Certified, however, could find no alternative insurance carrier that would provide workers' compensation coverage to Cura/Certified on a national basis. Id. at 9. Consequently, Cura/Certified attempted to procure workers' compensation insurance coverage from a variety of regional carriers. Id. at 9-12. In the meantime, however, Certified did not set any cash aside to deal with claims that might be made after the CNA policy ended in June 2003. Id. at 21.
72. One of the insurance providers from whom Cura/Certified ultimately obtained some coverage was Providence Property Insurance Company. D.E. 200-3 at 11. In order for Providence to provide insurance, Midwest put up collateral of either $1 million or $2 million. Id.
73. With regard to the state of Florida, Union American Insurance Company required a $3.5 million letter of credit as collateral. D.E. 200-3 at 11. Thus, on November 11, 2003, UBS issued a $3.5 million letter of credit. See PX 505; see also TT at 908. UBS was Harmon Burns's bank. TT at 908. Harmon Burns, in turn, was a client of Brian Sly, a substantial investor in Midwest and in Huff's other business ventures. TT at 908, 910-14, 928-940. In connection with the $3.5 million letter of credit, Midwest, Certified, and Huff personally, as well as jointly and severally, promised and guaranteed to pay Brian Sly $50,000 upon the establishment and issuance of the letter of credit. TT at 895-96. Huff signed this document in his personal capacity and as an agent for Midwest. Id. at 897. Huff also bound Certified to this agreement, as he was the only person other than Sly signing the document, which bound Midwest, Certified, and Huff "personally, jointly and severally." PX 505. Huff understood this document to represent his personal guarantee to Sly that monies extended under the letter of credit would be paid back. Id. at 896. If someone actually drew down on a letter of credit, Certified would have been the liable party because the letters of credit were posted on Certified's behalf. TT at 866.
74. In the spring of 2002, Huff, Spinelli, and Otha Ray McCartha
75. With regard to Brentwood, Leyton was to provide a letter to act as a balance sheet enhancement. TT at 206-07. The purpose of the letter was to boost Brentwood's balance sheet so it would qualify to purchase an insurance carrier. Id. at 207-08. More specifically, the letter regarded an account that Leyton had that Brentwood would "lease" and carry on its books as an asset. Id. The amount of the "leased asset" was approximately $5.2 million, and the "lease" payments were $29,000 periodically. Id. at 220-21. To pay the lease fee, monies were sent to Strategic Bancorp. Id. Huff and Spinelli authorized such payments. Id. at 219-21, 242; see also, e.g., PX 88. Spinelli and Huff purposely chose not to disclose the fact that Brentwood did not own the asset and the nature of the "leased asset" to auditors. Id. at 207-08. Audit financials were then prepared based on the inclusion of the "leased asset" in Brentwood's stated assets. Id.
76. As for Leyton's involvement with Certified, Leyton provided letters of credit to Certified. TT at 208. In mid to late 2002, after Leyton had provided Certified with four or five letters of credit, one of the letters of credit was sent to McCartha's attention at Spinelli's office. Id. The letterhead logo of United California Bank, the bank that purportedly issued the letter of credit, however, became dislodged from the letter and fell off. Id. at 208-09, 249.
77. As Huff acknowledged in his testimony, Huff, Spinelli, and McCartha were aware that the logo of United California Bank on the letterhead had fallen off. Id. at 1058-59,
78. When Certified acquired Staff America, part of the transaction required the provision of a letter of credit to Staff America. TT at 243-44. As a result of a conversation that William Baumgardner had had with Huff and Dobrin in August and following negotiation and payment of origination fees of approximately $400,000 by Staff America to Brentwood, a purported letter of credit dated August 30, 2002, was to be provided on behalf of Staff America to CNA. D.E. 214-11 at 14-15, 18. Although Staff America paid the fees to Brentwood, Baumgardner understood that the beneficiaries of this payment were Huff, Spinelli, Pixler, those with whom they worked, and "whatever company they wanted it moved to, to include Brentwood and Certified and Midwest . . ., whoever." Id. at 18. The letter of credit provided turned out to be fake. TT at 243-44. According to Baumgardner, Huff was the leader of the group who provided the letter of credit at issue. D.E. 214-11 at 55; see also TT at 318 (Spinelli's testimony that "I don't think there's any doubt that Mr. Huff controlled Certified and Midwest and, to a large extent, Brentwood. Whatever he wanted to have occur occurred in. . . those three enterprises.").
79. In September 2002, Baumgardner had another meeting with Huff, Pixler, Spinelli, Dobrin, and others. D.E. 214-11 at 19-20. This meeting concerned the provision of a second letter of credit. Id. at 20. Huff ran the meeting. Id. As Baumgardner described, "If Huff was present, Huff was in control. . . . [W]hat Huff said, went. . . . If Huff wasn't happy, wasn't nobody going to be happy." Id. As a result of this meeting, a second letter of credit was issued to CNA on behalf of Staff America. Id. at 22-23. It, too, turned out not to be valid. See id. at 23.
80. In August and September 2003, CNA, to whom Certified had provided some of these fraudulent letters of credit, became aware that the letters of credit it was holding for Cura/Certified and its subsidiaries were not valid. TT at 338-39; PX 966. Although nothing in the appearance of the letters of credit tipped off CNA, when CNA attempted to draw on the letters of credit, Bank of the West and United California, the banks that purportedly issued the letters of credit at issue, informed CNA that they had no record of such letters of credit. TT at 339, 347-48; PX 966. In all, sixteen letters of credit totaling in excess of $44 million were rejected as fraudulent. TT at 339-40; PX 966. These sixteen bogus letters of credit represent the only fraudulent letters of credit that William Romashko, a 38-year employee with CNA, is aware of that have ever been provided by policy holders to CNA. TT at 350.
81. In late 2003, CNA sued Midwest, Certified, and Huff personally regarding the bogus letters of credit. TT at 951-52; see also D.E. 200-3 at 15.
82. While this Court does not find that Huff had actual, definitive knowledge that the letters of credit were fraudulent, Huff's lack of concrete knowledge resulted solely from Huff's deliberate ignorance or, at best, severe recklessness. First, Huff knew something was wrong when the logo of United California Bank on the letterhead fell off. Indeed, that was the reason why he and McCartha called Leyton. Second, Huff was certainly aware that if he learned that the letters of credit supporting the CNA policy were, in fact, fraudulent,
83. Meanwhile, sometime after February 13, 2003, Certified and Midwest executed the Risk Allocation Agreement ("RAA"). See DX 14. Although the RAA indicates in its language that it was "made this 1st [d]ay of January 2002," DX 14, in reality, the parties did not execute the RAA until some time after February 13, 2003. PX 115; D.E. 214-17 at 70; see also TT at 867-69. In fact, Anthony Russo, who signed the agreement for Certified as an executive officer did not become a member of Certified's board of directors until April 27, 2002, and did not become the chief financial officer and chief executive officer of the company until August 7, 2002. PX 831 at 49 (Business Experience). Moreover, the first time that Certified referred to the RAA was in its 2002 10-KSB, filed March 31, 2003. See PX 831 at 4-5 (Risk Management Agreement).
84. Because the RAA was not executed until at least February 2003, at the time that Certified and Midwest executed the RAA, CNA was providing Certified's workers' compensation insurance coverage, and Certified was subject to a $1 million-per-occurrence deductible. The RAA purported to bind Midwest to procure workers' compensation insurance and to provide workers' compensation claims administration and management in exchange for a service fee to be paid by Certified. Id. The service fee varied at different times during the relationship between 3.5% and 4.2% of the gross payroll of Certified's clients. TT at 1307-08; see also DX 14.
85. Russo signed the RAA on behalf of Certified, and Brown signed the RAA on behalf of Midwest. As Brown did not sign any documents for Midwest unless Huff authorized her to do so, D.E. 214-17 at 14, Brown's signature on the RAA demonstrates that Huff was well aware of the contents of the RAA and had approved the agreement prior to Brown's having signed it in 2003.
86. According to the terms of the RAA, Midwest was to, among other tasks, "retain and service Workers Compensation Insurance coverage . . . at its sole cost and expense . . . [and] assume responsibility for and promptly make all required payments in excess of the applicable deductibles." DX 14. Nothing in the RAA bound Midwest to make any workers' compensation insurance or claims payments other than procurement and premium costs and amounts above the deductible. See generally DX 14; see also TT at 855-59. Because Certified was bound by the RAA to pay Midwest a service fee that greatly exceeded the cost of the insurance, see TT at 860-64, 1308; DX 14, however, Midwest's payment of Certified's
87. Moreover, because the insurance companies were contractually bound to pay claims that exceeded the deductibles, despite the wording of the RAA, Midwest had no actual liability or risk for amounts beyond the deductible. TT at 858-59; see also DX 14. In addition, the RAA expressly provided that "Midwest's compensation. . . does not include the normal out-of-pocket expenses, including but not limited to long distance communication, airfare, hotel lodging and meals, transportation, express mail, etc., incurred by Midwest in performing the Services and carrying out its duties under the Agreement." DX 14. In other words, besides the fee that Midwest was to receive under the RAA, it was also to be reimbursed for any expenses incurred in conducting its alleged duties under the RAA. In short, as the RAA was worded, it allowed Midwest to take a substantial amount of money from Certified and provide nothing of substance in return. See TT at 863. Although Midwest drained a substantial amount of money from Certified under the RAA, Midwest did not take the full amount of the fee allowed under the agreement. Id. at 863-64.
88. Prior to the RAA's being put into place, Dobrin was provided with a copy of it to review and to comment upon. TT at 117. At the time, Dobrin was at Brentwood's offices in New York. Id.
89. Dobrin believed that Certified paid money to Midwest under the RAA to create a guaranteed-cost workers' compensation insurance program for Certified's operating companies (such as Cura), as opposed to continuing to have Certified obtain insurance coverage under a large-deductible policy as it had been from CNA. TT at 89. When Dobrin initially discussed the RAA with Huff, Huff advised Dobrin that the RAA involved a fixed, or guaranteed, cost program. Id. at 90. Under such a program, Certified would have paid Midwest the percentage required by the RAA, and in exchange, Certified's insurance costs would be fixed because Midwest would take care of any costs outside of those provided by insurance, in exchange for the fee. Id. at 90-91. About a year or two later, however, Huff no longer considered the RAA a fixed program but, rather, viewed it simply as a method for facilitating payment of the risk-related services. Id. In contrast to a fixed program, this meant that despite paying Midwest a fee under the RAA, Certified remained liable for insurance costs that fell outside insurance coverage. Id.
90. Certified faxed and Federal Expressed invoices to Midwest regarding premium and claim payments due the insurance carrier. TT at 523. Once Midwest received the invoices, Huff reviewed them and, in his sole discretion, determined
91. With regard to duties that the RAA required Midwest to perform, Huff and Brown were the only individuals who had any substantive involvement in any such tasks. TT at 851-52.
92. On February 1, 2002, Huff, as the sole signatory on behalf of Midwest, entered into a memorandum of understanding with Brian Sly, an investor. See PX 609. In this memorandum of understanding, Midwest, through Huff, promised to issue Sly convertible preferred stock in Midwest with a value of $12 million, in increments of $1.2 million per year for a ten-year period. Id. On the same day, Huff, as sole signatory on behalf of Midwest, entered into another agreement with Sly in which Midwest repurchased Sly's equity position in Midwest for $15,195,570. PX 576. Pursuant to the terms of the agreement, Midwest guaranteed that it would pay the full amount in installments due over a ten-year period. Id.
93. On December 7, 2003, Sly sent Huff a proposed memorandum of understanding relating to discussions Huff and Sly had had regarding evenly splitting the assets, transactions, and fees of various entities. TT at 935-36. Although the agreement was never executed, TT at 1302, in the proposed memorandum of understanding, Sly identified numerous entities to be subject to the business proposition. See PX 575; TT at 936. According to Huff, Sly obtained the list of entities set forth in the proposed memorandum of understanding from Huff or Spinelli. TT at 936-38. One of the entities listed in the proposed memorandum of understanding includes "Anthony Huff and/or Brentwood Capital and/or Midwest Management LLC and/or Midwest Merger Management LLC and/or Brentwood International Group and/or Brentwood Financial Corp[.] and/or Brentwood Realty Inc. and/or any other affiliated, related or controlled entity of Anthony Huff or [S]heri Huff. . . ." PX 575; see also TT at 939-40. Another included Certified Services. PX 575; see also TT at 940.
94. On November 14, 2004, Huff, as the sole signatory on behalf of Midwest, entered into a memorandum of understanding with Sly in which the parties noted that previously, Sly had obtained from Midwest the option to purchase 2 million shares of Certified's common stock. PX 652; TT at 929-30. In the memorandum of understanding, Midwest, through Huff, granted Sly the option of converting any of his Certified shares into any other stock, note, financial asset, or ownership interest of Midwest of "any of its related entities or that of Anthony Huff and/or any of his related entities," for a period expiring on November 15, 2015. PX 652; TT at 929-30.
95. On December 7, 2004, Huff, as the sole signatory on behalf of Midwest, assigned 350,000 common shares of Certified and 350 shares of Series B Convertible Preferred Certified stock to Sly as collateral for Sly's investments in Midwest, after Harmon Burns, a client of Sly, no longer required them as collateral in connection with the establishment of a letter of credit
96. Sly also invested other monies in Midwest. On these occasions, Huff similarly signed memoranda of understanding with Sly, committing Midwest to make repayment in full, plus interest. TT at 897-901, 907-10; PX 548; PX 608; PX 636; PX 647. Besides the monies noted previously, Sly's investments included additional amounts of $300,000, $750,000, $250,000, $120,000, and $500,000. TT at 897-901; see also PX 548; PX 608; PX 636; PX 647. When Huff entered into these agreements with Sly, he had the authority to do so, even though no written document bestowed such authority upon Huff. TT at 899-901.
97. In addition to investing in Midwest, Sly also invested in Brentwood. TT at 910-11. On the memoranda of understanding reflecting Sly's investments in Brentwood, Huff signed on behalf of Brentwood. Id.; see also PX 612; PX 630; PX 631; PX 632. Sly's investments in Brentwood concerned amounts including $2.2 million, $410,000, $90,000, and $10,000. TT at 910-14; PX 612; PX 630; PX 631; PX 632. As with the other memoranda of understanding memorializing Sly's investments in Brentwood, Huff signed on behalf of Brentwood as the sole signatory. TT at 912-14; PX 630; PX 631; PX 632.
98. Once the money came under Midwest's control, Huff caused it to be spent, in substantial amounts for his own personal benefit and for the benefit of his family members.
99. Between March 2003 and April 2004, Huff caused more than $240,000 in Midwest checks to be issued to Sterling Development in connection with the building of his residences and other personal matters. TT at 961-62; PX 578. Similarly, from May through September 2003, Huff caused approximately $136,000 in Midwest checks to be issued to Beth Baker Interior Design for services rendered with regard to the Huffs' 313 Longview Park Place residence. TT at 966; PX 585.
100. Huff likewise caused approximately $16,000 in Midwest checks to be issued to Future Designs, Inc., in July and August, 2003. PX 584; TT at 967. Huff explains these checks as possibly having been issued for the purpose of developing properties for Brentwood Realty. TT at 964-65, 967. The Court does not believe Huff. Not only did Huff fail to tell the truth regarding other material matters in this case, these checks were also issued during the time frame in which the Huffs were decorating their 313 Longview Park Place residence and checks payable to Beth Baker Interior Design were issued. Additional checks that Huff caused Midwest to issue to Brentwood Realty between January and June 2004 totaled more than $42,000. PX 588; TT at 967.
101. Between July and October 2003, Huff caused approximately $158,000 in Midwest checks to be issued to a company called Admiral's Anchor. See PX 583; TT at 963-64. These monies were for the purchase of various seacraft. TT at 963-64. The relevant marine vessels were purchased in the names of Sheri Huff and Midwest. Id.
102. Additionally, Huff Farms, a company unrelated to Certified but owned by the Huffs, see TT at 980; see also D.E. 214-17 at 27, received approximately $2,765,525 from Midwest. See PX 564-PX 566; PX 930-PX 931. In Midwest's QuickBooks records, however, many of the
103. Although Huff claimed at trial that the "adjusting" entries were appropriate because Sly was Huff's "investor and lender" for Huff Farms, he told a different story in his deposition testimony. See TT at 1108-13. At that time, Huff gave the following testimony in response to the questions asked below:
TT at 1110. Consequently, The Court finds that Huff's latest version of the facts is not credible and that the QuickBooks records incorrectly characterize more than $2 million in monies that Huff Farms received from Certified through Midwest as having been paid back by Huff.
104. Huff directed Brown to cash checks made out to cash on Midwest's bank accounts and provide the money to Huff. TT at 946-47. When Huff received the money, Huff—and only Huff—stored it in a safe at his house. Id. at 947, 957-58; D.E. 214-2 at 32. These withdrawals began in approximately April 2002 and continued until roughly July 2004, with the frequency increasing to repeated times weekly beginning in October 2002. See PX 560; PX 562. Often, the withdrawals totaled between $7,000 and $8,000 daily. TT at 946-47. In all, Huff caused approximately $2.6 million of Midwest's monies to be withdrawn in this way. Id. at 948.
105. Although Huff claims that he directed this activity to avoid the consequences of any asset freeze order that a court might impose in connection with litigation in which Huff was involved, see TT at 948-50, this Court does not find this
105. Second, and more significantly, Huff's proffered explanation makes no sense. Huff expressed concern that if a court suddenly imposed an asset freeze, the $2.6 to $2.7 million that Sly had invested might be at risk. Id. at 948-49, 953, 957-58. Thus, Huff explained, he wished to protect Sly's investment. Id. Although Huff contended that he feared being subjected to a sudden asset freeze without any notice and losing the entirety of Sly's $2.6 to $2.7 million investment, see TT at 948-49, he, nevertheless, spent more than two years systematically withdrawing money in amounts almost always under $10,000. Had a desire to safeguard Sly's money from a hypothetical sudden asset freeze really motivated Huff, this Court would have expected to see evidence that Huff took action all at once with respect to the entire $2.6 to $2.7 million in order to protect Sly's investment—or at least that Huff would not move a $2.6 million haystack of money straw by straw over more than a two-year period.
106. Third, Huff's explanation regarding preserving Sly's investment is also inconsistent with what he told Pixler when Pixler questioned Huff about the stacks of cash in his safe. More specifically, Huff told Pixler that he was keeping the money there for "emergency business purposes." D.E. 214-2 at 32.
107. Thus, this Court concludes that Huff caused the removal of the cash from Midwest in piecemeal fashion in an effort to disguise the fact that he was taking money out of Midwest for his own benefit. The trial evidence shows that Huff was living an expensive lifestyle. Among other such evidence, Roxann Pixler testified that the Huffs were spending a lot of money, purchasing luxury cars and diamonds. TT at 178-79. In addition, the Huffs had more than one residence and their own farm.
108. Finally, this Court also finds suspicious the amounts of money removed per day. In generally keeping the amounts to approximately $7,000 to $8,000 and under, Huff appears to have intended to avoid currency transaction-reporting requirements applying to aggregate transactions involving more than $10,000 in a single day. See 31 U.S.C. § 5313; 31 CFR § 103.22. During his testimony, Huff admitted some knowledge of currency transaction-reporting requirements. See TT at 952-53. These facts further support the proposition that Huff was attempting to hide his removal of the money.
109. Besides the Certified/Cura monies transferred to Midwest in connection with the RAA, Huff also expended Certified/Cura monies directly from Certified/Cura.
110. In the summer of 2002, Danny Pixler approached Dobrin and told Dobrin that "it would be good if [he] could get a[] [Cura Group] American Express card for [Pixler] and [Huff]." TT at 95. Pixler explained to Dobrin that when he and Huff had been affiliated with U.S. Trucking, he and Huff had had a problem with American Express whereby American Express had effectively barred them from obtaining an American Express card. Id. at 96. Consequently, Dobrin obtained the requested American Express cards for Pixler and Huff. Id. Later, Huff obtained another credit card in his own name on the account of Certified HR Services. TT at 992-94; PX 866. Between July 2000 and January 2006, Huff made approximately
111. The purpose of the Cura and Certified American Express cards that Dobrin obtained for Pixler and Huff was to charge company expenses. Id. at 96. It was not for personal expenditures. Id. at 97. Cura/Certified's American Express card bills from Pixler and Huff were paid using Certified funds. See PX 591.
112. Nevertheless, Huff made numerous personal or non-Cura/Certified-related charges on the Cura American Express card. See PX 724, PX 725; TT at 969-91; see also TT at 742-49 (identifying questionable charges). Although Huff claims that he understood that the expenditures that he charged on the American Express card would be charged back to him or his other entities, he admits that he has no knowledge of that ever happening. TT at 969-72, 991. Nor does any other evidence in the record suggest that Huff ever reimbursed Cura/Certified for these charges.
113. While Huff suggested during his testimony that many of the apparently personal expenses he charged on the Cura card could have been business-related (albeit mostly non-Cura/Certified business-related), this Court does not find Huff's testimony to be credible. First, even Huff himself was somewhat equivocal in this testimony.
114. Second, Huff could point to no records to support his suppositions that the contested charges were not personal, even though according to Huff's testimony, it was his responsibility to reimburse Cura/Certified for any personal expenditures on the card. If even Huff purported not to know whether charges were personal based on the American Express record entries, this Court cannot fathom how Cura/Certified was supposed to have known without the submission by Huff of receipts or other records indicating the personal nature of expenses. Yet nothing in the record suggests that Huff ever provided Cura with any such documentation or reimbursed Cura/Certified for the amounts charged. To the contrary, as indicated above, Huff conceded that he had no knowledge of actually having been charged back by Cura/Certified for his personal expenditures on that company's American Express card.
115. Third, the record in this case demonstrates that Huff has a history of disguising his actions. He has repeatedly arranged for others to act as front people while he has pulled the strings. For example, in the case of Midwest, Huff did not identify himself as having any interest or office in the company until 2005—after he had been running the company on a day-to-day basis for at least four years.
116. Similarly, although Huff allegedly served as a consultant to Brentwood, he directed that his wife receive his salary in her name. Likewise, as noted above, to this day Huff also does not admit that he controlled Certified, yet the evidence firmly establishes that he did. Besides these examples of the lengths to which Huff has gone to disguise his actions, as discussed above, Huff also directed the systematic withdrawal of approximately $2.6 million in cash from Midwest in increments of under $10,000 over a two-year period. In short, the illustrations of Huff's efforts to hide the true nature of his actions abound in the record, and they support the conclusion that Huff testified less than truthfully when he believed that doing so would inure to his best interests, such as with regard to his personal charges on the Cura/Certified American Express cards.
118. Similarly, although Huff had no problem identifying the signatures of Brown and Pixler on DX 7 and the RAA (DX 14) at trial when he needed to establish a foundation for the admission of these documents, see TT at 1273-75, 1278-79, 1300-01, 1409-10, on prior occasions when adverse parties have asked Huff to identify Brown's signature and Pixler's signature, he has refused to do so, stating that he had "no idea" of whether a signature was Brown's or Pixler's, he was "definitely not a handwriting expert," and "I'm not good at this. I don't know. I don't pay any attention to that." TT at 1412-14.
119. As a result of the RAA, more than $130 million of Certified's funds were transferred to Midwest. TT at 1002-1051; PX 600; PX 875; PX 879; PX 932; PX 886; PX 879B; PX 879B2; PX 879B4; PX 879B5; PX 879B7; PX 879B8; PX 879B10; PX 879B11; PX 879B13; PX 879B15; PX 879B17; PX 879B19; PX 879C; PX 886A3; PX 886A6; PX 886A10; PX 886A14; PX 886A32. Although Huff contends that the actual amount flowing from Certified to Midwest was $123,054,635, see TT at 1002-03, 1302-26, this Court finds Huff's testimony to be unreliable.
120. The Court arrives at the $130 million figure by adding several smaller sums. First, the Court begins with $123,054,634.61, the amount of money that Huff concedes Midwest received from Certified. See TT at 1002-03; PX 908 at 4, 71. This amount, however, fails to capture all Certified monies that Midwest obtained, as it was derived from Midwest's QuickBooks records, which were inaccurate and omitted deposits from America's PEO, a subsidiary of Certified; deposits from Certified into Midwest's "Surplus" bank account; a $2 million wire transfer by Brown from a Certified account into a Midwest savings account; and deposits by Certified into a Midwest bank account held at Signature Bank. TT at 1000-54; PX 553; PX 600; PX 875; PX 877; PX 879; PX 879B; PX 879C; PX 886A; PX 908; PX 932; see also PX 994 in relation to TT 1102-07.
121. Significantly, although the deposits from Certified into the three Midwest accounts identified above were left out of Huff's proposed total funds that Midwest received from Certified, Huff, nonetheless, asks the Court to credit Midwest for monies it paid for the benefit of Certified,
122. As for the monies that Midwest expended for the benefit of Certified, Huff directs the Court to DX 159 and DX 160 (p. strat 000003 of DX 23, which Defendants submitted to the Court prior to trial but did not seek to admit at trial as DX 23),
123. To assist in his testimony, Huff referred to a chart prepared by R. Wayne Stratton ("Stratton"), an accountant Defendant hired who did not testify at trial. See id. At trial, however, Defendant submitted no documentation to show how the numbers on the one-page summary chart were developed. See id. Moreover, when Huff claimed to have reviewed the underlying bank records in working with Stratton to prepare the chart, the SEC protested that Huff had failed to produce the documents to the SEC, although required to do so under Rule 1006, Fed.R.Evid., when seeking to admit summary evidence. Id. at 1321-23. Although counsel for Huff initially suggested that Huff had, in fact, produced the documentation,
124. Alternatively, Huff argued that the SEC had obtained the underlying records directly from the banks on its own initiative. TT at 1323-24. The SEC did not contest this assertion, but noted that even if the SEC had the documents, no evidence existed to demonstrate that Huff did. Id. Based on the fact that the SEC had obtained the underlying documentation, the Court allowed the summary chart in. Id. at 1324-25. Nevertheless, the Court cautioned that it was wary of giving the exhibit any weight at all because the record provided no indication of any supporting documentation for the numbers in DX 160, and further, the evidence tended to suggest that, contrary to Huff's testimony at that time, he could not have reviewed any underlying records about which he was testifying. Id. at 1320-26.
125. Huff therefore requested the opportunity to submit the documentation underlying the calculations appearing in DX 160 after trial, as well as to provide an explanation of them at that time. TT at 1332-33. The Court explained,
TT at 1333. The SEC had no objection to the post-trial filing of the underlying documentation, so the Court authorized it, but expressly instructed Defendant and Relief Defendants that it should contain nothing but the underlying documentation itself. Id. at 1334-35. The Court further cautioned Defendant and Relief Defendants that they would need to present during trial any other information necessary to understand DX 160 and the manner in which the documentation relates to it so that the SEC could conduct cross-examination on such matters. Id. After the Court advised Defendant of this condition, defense counsel announced that he had no further questions for Defendant. Id. at 1335.
126. Cross-examination then revealed that Huff had no real understanding of how the numbers appearing on the summary chart were derived.
127. The number $108,696,858.63, in turn, comes from D.E. 287-3 at 38-50 (first 13 pages of 35-page Vendor QuickReport) and D.E. 286-13 at 32-54 (last 22 pages of 35-page Vendor QuickReport), and the number $6,009,558.57 comes from DX 159 at strat 000123-strat 000160 (in what Defendant and Relief Defendants submitted pre-trial as DX 25 but did not seek to admit it under that number at trial, instead choosing to incorporate it into DX 159). First, Huff admitted that he had not even read the entire exhibit. TT at 1336. Furthermore, he showed a lack of understanding of what it contained. More specifically, because the defense deducted the $114,706,417 as monies that Midwest spent for the benefit of Certified, from the amount that the defense contended that Midwest received from Certified, to the extent that any amounts aggregated into the total of $114,706,417 actually were not spent by Midwest for the benefit of Certified, they should not have been included in this number.
128. Huff did not seem to understand this concept, instead insisting that if expenditures
129. Most significantly, cross-examination revealed that the numbers comprising the $114,706,417 included numerous expenditures by Midwest that did not benefit Certified, even by Huff's own admission. Among these, for example, Huff conceded that monies Midwest paid related to U.S. Trucking, or LMRI, were not for Certified's benefit. TT at 1338-41, 1353-54; see also TT at 211-12 (Spinelli's testimony that LMRI had no connection with Certified). Included in this group were certain payments to the following: (1) Eric Gruber; (2) Scott Zoppoth; (3) Monarch; (4) Wells Fargo; (5) Nelligan Tarpley, et al.;
130. Huff also admitted that the report showing how the $108,696,858.63 was calculated contained duplicate entries. TT at 1356-57. The reports further credit Midwest as having made payments for the benefit of Certified, for more than $20 million it paid to Brentwood. See DX 159 at strat 000162-strat 000167. While the Court believes that at least some of the money Midwest paid to Brentwood did, in fact, benefit Certified, it has no way of knowing precisely how much. Moreover, this information would seem to be uniquely in the possession of Midwest and Brentwood (and, therefore, Huff).
132. Furthermore, although Brentwood received some payments from Midwest relating to potential workers' compensation claims, that program did not begin until June 30, 2003. Id. at 215-16. Thus, no payments to Brentwood before that date were related to workers' compensation claims. Id. Nevertheless, Defendant and Relief Defendants included pre-June 30, 2003, payments to Brentwood in their calculations of monies that Midwest paid for the benefit of Certified. For these reasons, without any records at all from Brentwood (or any documents supporting the contention that the amounts sent to Brentwood were all for the benefit of Certified), this Court declines to conclude that all $20 million that Midwest paid Brentwood—or even a substantial portion of that amount, in fact, benefitted Certified.
133. Besides these errors in the calculations, Spinelli testified that payments to John Burcham for jet fuel and to Huff Farms did not inure to the benefit of Certified. TT at 213-15.
134. As for payments to Spinelli that the defense deducted as monies Midwest paid for the benefit of Certified, Spinelli testified credibly that he had no knowledge of how the $10,000 he received each week from Midwest benefitted Certified. TT at 215.
135. In addition to the deficiencies in methodology rendering the defense's $114,706,417 number unreliable, the DX 160 summary chart credits Midwest $10,290,000 for the "[p]urchase price of Certified/Cura from trustee." In the Certified/Cura bankruptcy purchase transaction, O2HR, LLC ("O2HR") purchased the bankruptcy estate of Certified/Cura.
136. O2HR was a company over whose ownership Huff had "significant influence" and "significant control." TT at 1201-02. According to James Feltman, the Chapter 11 bankruptcy and liquidating trustee for the estate of Cura/Certified, the ownership structure of O2HR was "similar" to that of the other entities involved in the Cura/Certified bankruptcy settlement. See id. at 1164-65, 1204-06. These entities included Certified, Midwest, and Brentwood. See D.E. 288-3 at 2. More specifically, Feltman explained that for all of these entities, regardless of what the ownership structure looked like on paper, the actual owner, directly or indirectly, was Huff. Id. at 1205-06.
137. As a result of the Certified/Cura bankruptcy purchase transaction, O2HR acquired Certified/Cura, a "turnkey PEO
138. In exchange for what O2HR received from the transaction, O2HR paid a little bit more than $11 million. See D.E. 288-3 at 5; see also TT at 1193, 1199-1200. Although the trustee required Huff to provide a personal guarantee for the $10,290,000 promissory note that O2HR was to pay in furtherance of the transaction, the bankruptcy estate received all of its payments on this note from O2HR; Huff made no direct payments on it. TT at 1199-1200.
139. As a result of the bankruptcy settlement, unsecured creditors of Certified will receive between $.15 and $.30 on each dollar Certified owed, and the Certified/Cura estate will be left approximately $40 to $50 million under water. TT at 1188-90, 1209. Because Huff controls O2HR and he controlled Certified, Huff, effectively, was able to re-obtain Certified, along with its assets, while receiving a substantial break on Certified's liabilities. In other words, Huff re-acquired the benefits of controlling Certified without having to continue to be responsible for significant debts that Certified, when Huff had previously controlled it, had incurred. This Court fails to see how these monies tendered in the O2HR bankruptcy transaction were paid for the benefit of Certified; rather, they were paid for the benefit of Huff.
140. In short, although Huff and the Relief Defendants assert that Midwest expended more money for the benefit of Certified than Certified obtained from Midwest under the RAA, this Court does not agree with this assessment. Not only, as explained previously, are the numbers that Defendant and Relief Defendants used on both sides of the equation deficient, but even the bankruptcy trustee, who Defendant and Relief Defendants urge this Court to rely upon, found that Midwest took more from Certified than it received. TT at 1201.
141. From at 1996 through 2005, Certified's common stock was registered with the SEC and its stock was publicly traded. See PX 832 at Part II, Item 5. In 2002, the stock price ranged from $.38-$1.80. Id. In 2003, the stock price ranged from $.52-$1.55. PX 823 at 21; PX 822 at 21.
142. During this time, Certified filed quarterly reports and amended quarterly reports, as well as annual reports and amended annual reports, with the SEC. See D.E. 217 at 6-8. Certified failed, however, to file its 2004 Form 10-K and subsequent quarterly Form 10-Qs and 10-Ks. TT at 1191. In 2005 Certified filed for bankruptcy. Id.; see also D.E. 288-3.
143. As of February 28, 2003, the value of stock of non-affiliated holders of Certified's common stock was $4,036,439. DX 831 at 2. By March 17, 2004, the value of stock of non-affiliated holders of Certified's common stock had grown to $5,482,811. DX 822 at 2. In bankruptcy, however, only a $100,000 fund was created for the shareholders' benefit. TT at 1180.
144. While Huff did not sign Certified's public filings, he, nonetheless, was aware of their contents and approved them. Spinelli sent drafts of filings and the actual filings to Huff for him to "sign off" on them. See TT at 201-02. Moreover, Dobrin had conversations with Huff about the SEC filings. TT at 122-23. In addition, on one occasion, Dobrin was present at Brentwood and Certified's offices in New York when Huff and Pixler met with Frank LaForgia, an outside auditor from a firm called Rosenberg Rich, regarding one of the upcoming filings. Id. at 124, 130-32. During this meeting, the conversation became heated. Id. Spinelli further testified that an assistant of LaForgia had conversations with Huff and Pixler about Certified's financial statements. Id. at 201.
145. Documentary evidence further supports the finding that Huff was aware of and had input into the public SEC filings. PX 464 is a facsimile transmittal addressed to Huff and Spinelli from Pixler. It notes that following the cover sheet are the "[w]orkers' compensation agreement between [Midwest] and The Cura Group, Inc.";
146. The content of the SEC filings, including the content of audited financial statements appearing in the SEC filings, was the responsibility of the management of the filing company. See, e.g., PX 831 at Independent Auditors' Report (dated Mar. 21, 2003) & at Certifications.
147. On November 14, 2002, Certified filed its third-quarter 2002 10-QSB report. See PX 832. This report contained materially misleading and false statements. As a result, the manner in which certain items were accounted for created the false impression that Certified's shareholders enjoyed $12 million in equity, when, in fact, Certified was insolvent and shareholders' equity was negative.
148. In support of this fact, the SEC presented the expert testimony of R. David Wallace ("Wallace"). Wallace has been licensed as a certified public accountant ("CPA") for the past 44 years. TT at 581. Additionally, he spent approximately 19 years (16 while a CPA) working for Deloitte. Id. at 581-82. While at Deloitte, Wallace served as an audit partner
149. Wallace's experience also includes having served as the chief financial officer of a $135 million company. Id. at 582-83. In that role, Wallace was involved in all aspects of the company's financial and accounting reporting. Id. He further bore the responsibility of preparing the company's financial statements in accordance with GAAP so that they could be included in the company's filings with the SEC. Id. at 583-84. Since leaving Deloitte, Wallace has worked as a litigation and forensic accounting consultant. Id. at 584-85. This Court finds Wallace's testimony to be reliable on accounting issues. Defendant and Relief Defendant have not offered a contradictory expert (or any expert, although they retained an expert who was present in the courtroom during the trial, see TT at 1335-36). Nor have they otherwise shown Wallace's testimony, as relied upon by this Court in these Findings of Fact and Conclusions of Law, not to be trustworthy.
150. Wallace testified that the assets on the financial statement of Certified's 2002 third-quarter 10-QSB were overstated by approximately $9 million. TT at 614-20. In particular, Certified recorded $9 million of "[s]ecurity deposits" as assets. Id.; see also PX 831 at 3. These so-called "security deposits," however, referred to the total face value of the fraudulent letters of credit. TT at 614-20. The inclusion of the face value of these letters of credit is problematic for two reasons: first, the letters of credit were fraudulent, so no assets supported them. TT at 617-20.
151. Second, even had they not been, letters of credit do not constitute an asset. Id. at 614-20. Under GAAP, equity must be paid for. Id. at 615. Letters of credit, however, are not "a thing owned;" they cannot be converted to cash. Id. at 615-16. They have no value until they are drawn upon by the beneficiary—in this case, CNA, not even Certified. Id. at 614-21. In his 46 years of accounting, Wallace had never seen letters of credit recorded as an asset. TT at 587. Nor had any of the other four or five PEO businesses whose filings Wallace reviewed recorded them as such. Id. at 780-84. Indeed, even Huff conceded that if CNA drew against the letters of credit, Certified would be liable in those amounts. See TT at 866. Thus, the letters of credit did not constitute assets, and, as a result, the assets on the financial statements were overvalued by approximately $9 million.
152. On the other side of the equation, the liabilities were undervalued by about the same amount. More specifically, the liabilities did not account for Certified's responsibility to pay workers' compensation claims under the deductible. TT at 620-27; see also PX 832 at 3. As Certified remained responsible for paying all continuing workers' compensation claims under the deductible and the face value of the letters of credit represents the insurer's estimate of the value of those liabilities, see TT at 335, Certified had an approximate $9 million liability for continuing workers' compensation claims, or the claims tail. That liability should have been accounted for in Certified's financial statements. Id. at 620-27. It was not, even
153. The net effect of the overvaluation of the assets and the undervaluation of the liabilities yielded an $18 million difference in the actual shareholders' value. TT at 633-36. Consequently, instead of having $12 million in shareholders' equity, Certified was actually insolvent and had a negative shareholders' equity of—$6 million. Id.
154. Obviously, the difference between having $12 million in shareholders' equity and being insolvent—and not just insolvent, but having a negative shareholders' value of -$6 million—is a material one, and the misstatements and omissions in the 2002 third-quarter 10-QSB that masked Certified's actual financial condition are, therefore, necessarily material as well.
155. Certified filed its 2002 10-KSB on March 31, 2003. See PX 831. This document mentioned the RAA for the first time. See id. at 4-5 (Risk Management Agreement). Its description of the RAA, however, was materially misleading and false. First, the report noted that Certified had entered into the RAA with Midwest, which was the principal and controlling stockholder of Certified. See id. The description of Midwest, as well as a later discussion of Midwest, see DX 831 at 10 (The Registrant is Economically Dependent Upon Its Principal and Controlling Stockholder), omits crucial facts that make it materially misleading for purposes of this annual report. More specifically, the report fails to disclose that Huff controlled Midwest. Nor could a stockholder discover such information through public filings because Huff hid his ownership and control of Midwest by making his wife, his secretary, and Roxann Pixler the owners and officers of the company on paper. This fact is critical, in view of the fact that Huff's control of Certified is not identified elsewhere in the report and in light of the fact that Huff controlled both Certified and Midwest, meaning that under the RAA, Certified was making payments to a control person of Certified.
156. Second, the report described Midwest as having assumed responsibility in the RAA for and promptly paying all required workers' compensation claims below the deductibles. See PX 831 at 4-5. Indeed, the filing stated that Midwest "agreed to assume all responsibility for managing the cost of workplace accidents that occur during the five[-]year term of the Agreement." PX 831 at Note 13. In fact, the RAA committed Midwest to do no such thing, and Midwest did not assume responsibility for claims below the deductibles. For at least half of the period that this report covered, Certified had a $1 million-per-occurrence deductible. Thus, the fact that Certified remained liable for any claims arising under that deductible had the significant potential to impact Certified's bottom line substantially. Yet shareholders reading the report would incorrectly believe that Certified had no liability for claims under the deductibles.
157. Third, as with Certified's third-quarter 2002 10-QSB, Certified's 2002 10-KSB overstated Certified's assets by recording the fraudulent letters of credit as approximately $18.7 million of "[i]nsurance deposits," thereby artificially inflating Certified's
158. Fourth, the report stated that the loss of Midwest's "services" in arranging for the placing of letters of credit and under the RAA would have a "material adverse effect" upon Certified's ability to continue in business. PX 831 at Note 21, Contingencies—Economic Dependency on Majority Shareholder. This statement created the false impression that Midwest was providing substantial benefit to Certified and that, but for Midwest and the RAA, Certified might go out of business. In fact, precisely the opposite was true: Midwest was providing no real value under the RAA and instead was using the RAA to loot Certified for the personal benefit of Huff and to the detriment of Certified. Nor were the letters of credit that Midwest arranged for Certified of any value. To the contrary, as previously discussed, the purported letters of credit were fraudulent and caused Certified to be sued. See TT at 318.
159. Fifth, the report failed to disclose Huff as a controlling person of Certified. See PX 831 at Part III, Item 9. Moreover, although the 2002 10-KSB included lengthy biographies of the disclosed officers and directors of Certified, it contained no biography about Huff, even though he was a controlling person of Certified. See id. Consequently, the report failed to reveal material negative information about Huff, including his prior conviction for three counts of mail fraud relating to insurance, and his insurance debarment, both of which took on particular relevance in light of the fact that Huff was so involved in attempting to obtain Certified's workers' compensation insurance and in dealing with the insurance companies, including making and approving payments to the insurance companies through Midwest. Obviously, the facts that Huff had recently been convicted of federal wire fraud relating to his dealings with insurance companies and had also recently been barred from acting as an insurance agent in Kentucky profoundly reflect upon Huff's qualifications to take on the role of dealing with the insurance companies on behalf of Certified. Moreover, the lack of inclusion regarding Huff's role in Certified created the false impression that Russo and Pixler were single-handedly running the company, when, in fact, Huff was actually controlling Certified.
160. This Court finds all of these misrepresentations and omissions to be material in that a reasonable investor would review each such fact—and, certainly, all of them in combination—as significantly altering the total mix of information available concerning the value of Certified's stock. In addition, the Court concludes that Huff knew of each and every one of these facts and knew that failure to reveal the true facts would likely mislead investors in many ways.
161. First, with regard to the failure to disclose Huff as a control person of either Certified or Midwest, as noted previously in these Findings of Fact and Conclusions of Law, Huff knew that officers, directors, and control persons had to be disclosed, as
162. Second, as discussed previously, Huff was well aware of the contents of the RAA. Moreover, as Huff—and only Huff— controlled Midwest, which used the RAA as a mechanism for looting Certified, Huff similarly knew full well that under the RAA, Midwest provided nothing of substance to Certified but instead employed the agreement to drain Certified of its resources. He also understood that under the RAA Midwest was neither liable for Certified's insurance premiums and its insurance claims under the deductible nor for Certified's insurance claims over the deductible. By falsely describing the potential loss of Midwest's role under the RAA as "a material adverse effect upon [Certified's] ability to continue in business," the 10-KSB implicitly acknowledges the materiality of the statements relating to the RAA. Furthermore, Huff obviously knew that the disclosure of the true state of affairs—that the RAA was being used to provide a pretext for Midwest's removal of Certified's monies for the benefit of Midwest and Huff without providing anything real of value in return—would have significantly and materially adversely affected the interest of a potential shareholder in investing in Certified.
163. Indeed, as it relates to the materiality of the issues discussed above, Rosenberg Rich Baker, a firm that served as Certified's auditors, TT at 995, advised Certified in October 2004,
PX 231a. Midwest was never audited. TT at 996. Instead, Rosenberg Rich Baker resigned as Certified's auditors.
164. Third, as this Court has already noted, misrepresentations regarding the assets and liabilities of Certified are certainly material when, as here, they create
165. Finally, although the Court has already addressed Huff's knowledge of the contents of the SEC filings, the Court emphasizes the significance of the contents of the facsimile transmittal to Huff from Pixler regarding the 2002 SEC filings [PX 464]. The fact that the facsimile transmittal focused on "a [m]emo of accounting principles (GAAP) that apply to the [RAA]"; a "[s]chedule of potential related party transactions"; and a memo to Bankers Insurance Group "outlining the strong improvement to the Shareholders' Equity section of the [Certified] 10-QSB for the third quarter ended September 30, 2002," further demonstrates that Huff understood the materiality of these issues in the SEC filings and that these matters represented substantial issues to Huff. Indeed, this facsimile transmittal also suggests that Certified attempted to use the misstated financial information as leverage with Bankers Insurance Group, thus further underscoring Huff's understanding of the importance of the false financial information. In addition, the facsimile transmittal demonstrates that Huff was aware of and considered the application of GAAP in preparation of Certified's SEC filings. Huff's heated discussion with LaForgia, whose function was to audit Certified's financials, also provides evidence of Huff's involvement in the process of reviewing and approving Certified's SEC filings.
166. Certified filed its 2002 10-KSB/A on April 10, 2003, and attached the RAA to it. See D.E. 830. As noted previously, the attached RAA provided that "Midwest shall . . . assume responsibility for and promptly make all required payments [for workers' compensation claims] in excess of the applicable deductibles." D.E. 830 at RAA (Exhibit 10(a), ¶ 2.(iii)). This statement gave the false impression that Midwest was responsible for paying claims in excess of the deductible when, in fact, Certified's insurance carrier, not Midwest, bore the responsibility for paying claims beyond the deductible, thus creating the false notion that Midwest was actually providing something of real value in exchange for the monies Certified paid to it. For the same reasons that misrepresentations about the RAA and the value of Midwest's services were material in Certified's 2002 10-KSB, this misrepresentation was material.
167. Certified filed its first-quarter 2003 10-QSB on April 30, 2003. See D.E. 829. Like Certified's 2002 10-KSB, Certified's first-quarter 2003 10-QSB overstated Certified's assets by recording the letters of credit as approximately $18.7 million of "[i]nsurance deposits," thereby artificially inflating Certified's assets and relying upon fraudulent letters of credit. See PX 830 at Item 1. Financial Statements; TT at 667-69. Similarly, Certified's first-quarter 2003 10-QSB left out approximately $18.7 million in liabilities in the form of workers' compensation claims. See PX 830 at Item 1. Financial Statements; TT at 669. As a result of these misrepresentations, the first-quarter 2003 10-QSB overstated shareholders' equity by approximately $37 million. Thus, instead of having shareholders' equity of $23.6 million, Certified's shareholders actually had negative equity. For the same reasons that misrepresentations about these issues were material in Certified's 2002 10-KSB, these misrepresentations were material.
168. On August 15, 2003, Certified filed its second-quarter 2003 10-QSB. See PX 827. Once again, the report overstated Certified's assets and understated its liabilities. More specifically, the report credited Certified's assets with approximately $47.5 million in "[i]nsurance deposits," which, in reality, were the fraudulent letters of credit. See PX 827 at Item 1. Financial Statements; see also TT at 669-71. Similarly, the second-quarter 2003 10-QSB failed to record as liabilities the corresponding approximately $47.5 million in workers' compensation claims liabilities for which Certified had provided the letters of credit. See PX 827 at Item 1. Financial Statements; see also TT at 671-72. As a result of these misrepresentations, the second-quarter 2003 10-QSB overstated the shareholders' equity by approximately $95 million. See PX 827 at Item 1. Financial Statements. Thus, instead of having $43.3 million in shareholders' equity, Certified shareholders actually had negative equity. For the same reasons that misrepresentations about these issues were material in Certified's 2002 10-KSB, these misrepresentations were material.
169. On November 18, 2003, Certified filed its third-quarter 2003 10-QSB. See PX 824. In this report Certified revealed that it had been served on October 9, 2003, with a complaint by CNA regarding approximately $38 million in letters of credit that CNA alleged were "not authentic." Id. at Note 3—Insurance Deposits. Additionally, another part of the report discloses that "the entire carrying value of the letters of credit of $45,640,000 was written off." Id. at Supplemental Schedule of Non-Cash Investing and Financing Activities. More than a year after the pre-September 16, 2002, incident where the bank logo fell off the letterhead and should have alerted Huff that the letters of credit were fraudulent, this report provided the first notice of the fraudulent letters of credit that Certified provided in a public filing. As a result of these developments, Certified explained in its 2003 third-quarter 10-QSB, "the carrying value of the underlying insurance deposits ha[d] been written down to zero at September 30, 2003." Id. at Note 3—Insurance Deposits.
170. Despite noting that the letters of credit were "not authentic," Certified's third-quarter 2003 10-QSB restated Certified's financial statements for the three months ended September 30, 2002, in setting forth a side-by-side comparison of them to Certified's financial statements for the three months ended September 30, 2003, and continued in the September 30, 2002, numbers to include the fraudulent letters of credit as assets. See id. at Consolidated Statements of Operations.
171. Although the third-quarter 2003 10-QSB did not include the letters of credit in Certified's statement of assets, it also failed to account for the corresponding approximately $46 million in worker's compensation liabilities, thereby significantly deflating the statement of Certified's liabilities. See id. & id. at Supplemental Schedule of Non-Cash Investing and Financing Activities (making reference to the fact that the insurers had required Certified and its subsidiaries to provide $45.6 million in letters of credit to cover the risk of non-payment of anticipated liabilities on the workers' compensation claims); see also TT at 675. As a result, instead of having $6 million in shareholders' equity, Certified shareholders actually had negative equity. For the same reasons that misrepresentations about these issues
172. Certified filed its 2003 10-K on March 30, 2004. See D.E. 823. As in the third-quarter 2003 10-QSB, although Certified knew that the letters of credit accounted for as assets in the year-end December 31, 2002, financial statements were fraudulent, in setting forth Certified's year-end financial statements for 2003 and 2002, Certified, nonetheless, continued to include the fraudulent letters of credit as an asset in the 2002 financial statements. See id. at Certified Services, Inc., and Subsidiaries Consolidated Balance Sheets.
173. Second, the 2003 10-KSB also recorded newly obtained letters of credit as assets, even though they should not have been recorded as such. See id. at 27, 29, 31; see also TT at 681-83. As a result, the assets were overstated by at least $3.5 million.
174. Third, the 2003 10-KSB further contained material misrepresentations and omissions at Note 13-Related Party Transactions and Item 13-Certain Relationships and Related Transactions. Id. at 40 & 56. More specifically, the report noted that Certified had entered into the RAA with Midwest, which was the principal and controlling stockholder of Certified. See id. As discussed previously, the description of Midwest omits crucial facts that make it materially misleading for purposes of this annual report. In particular, the report fails to disclose that Huff controlled Midwest. Nor could a stockholder discover such information through public filings because Huff hid his ownership and control of Midwest by making his wife, his secretary, and Roxann Pixler the owners and officers of the company on paper. This fact is critical, in view of the fact that Huff's control of Certified is not identified elsewhere in the report and in light of the fact that Huff controlled both Certified and Midwest meant that Certified was making payments to a control person of Certified.
175. Fourth, these sections of the report also described Midwest as having assumed responsibility in the RAA for and promptly paying all required workers' compensation claims below the deductibles. See PX 823 at 56. Indeed, the filing stated that Midwest "agreed to assume all responsibility for managing the cost of workplace accidents that occur during the five[-]year term of the Agreement." Id. In fact, the RAA committed Midwest to do no such thing, and Midwest did not assume responsibility for claims below the deductibles. For at least half of the period that this report covered, Certified had a $1 million-per-occurrence deductible. Thus, the fact that Certified remained liable for any claims arising under that deductible had the significant potential to impact Certified's bottom line substantially. Yet shareholders reading the report would incorrectly believe that Certified had no liability for claims under the deductibles.
176. Fifth, the report failed to account for approximately $45.6 million in workers' compensation liabilities. See TT at 691-92; see also PX 824 at Supplemental Schedule of Non-Cash Investing and Financing Activities (making reference to the fact that the insurers had required Certified and its subsidiaries to provide $45.6 million in letters of credit to cover the risk of nonpayment of anticipated liabilities on the workers' compensation claims). Although the figure for these liabilities comes from Certified's third-quarter 2003 10-QSB, nothing in Certified's 2003 10-KSB
177. Sixth, the report failed to disclose Huff as a controlling person of Certified. See PX 823 at 47. Moreover, although the 2003 10-KSB included biographies of the disclosed officers and directors of Certified, it contained no biography about Huff, even though he was a controlling person of Certified. See id. at 48-49. Consequently, the report failed to reveal material negative information about Huff, including his prior conviction for three counts of mail fraud and his insurance debarment, which took on particular relevance in light of the fact that the 10-KSB falsely claimed that Midwest, another company Huff controlled, bore a significant amount of responsibility for providing Certified's workers' compensation insurance. For the same reasons that misrepresentations about these issues were material in Certified's 2002 10-KSB, these misrepresentations were material.
178. On May 12, 2004, Certified filed its first-quarter 2004 10-Q report. See PX 820. This report contained an entry for approximately $9.5 million for "[i]nsurance deposits" under assets. See id. at Part I—Financial Information. Of that amount, at least approximately $4.7 million was for letters of credit, which are not considered assets. See TT at 695-97; see also PX 820 at 7, Note 3. In addition, the report failed to disclose a liability for workers' compensation claims other than $1.25 million that was already on the books of a company that Certified acquired. See PX 820 at 7, Note 5; see also TT at 696-99. As of the filing of Certified's third-quarter 2003 10-QSB, however, Certified's insurer had required $45.6 million in letters of credit to protect against the risk of non-payment of anticipated claims, and ultimately, CNA paid out approximately $66 million in claims stemming from Certified's policy with CNA that expired at the end of June 2003. See TT at 342. Nor does anything in Certified's first-quarter 2004 10-Q report suggest that these claims decreased significantly during the reporting period. Consequently, the report significantly undervalues liabilities and falsely reflects total shareholders' equity of approximately $17.1 million, when, in fact, shareholders' equity was negative. For the same reasons that misrepresentations about these issues were material in Certified's 2002 10-KSB, these misrepresentations were material.
179. On August 12, 2004, Certified filed its second-quarter 2004 10-Q. See PX 816. This report improperly booked letters of credit as assets under the heading "[i]nsurance deposits" and failed to account for Certified's continuing liability for insurance claims. See id.; see also TT at 700-06. For the same reasons that misrepresentations about these issues were material in Certified's 2002 10-KSB, these misrepresentations were material.
180. On November 18, 2004, Certified filed its third-quarter 2004 10-Q. See PX
181. On June 23, 2004, Certified filed its Amendment Number 1 to Form S-3 Registration Statement. See PX 816. Certified filed its Amendment Number 2 to Form S-3 Registration Statement on June 24, 2004. See PX 817. The Forms S-3 both incorporated by reference, among other reports, Certified's 2004 first-quarter 10-Q, 2003 10-K, 2003 third-quarter 10-QSB, and 2003 second-quarter 10-QSB. See PX 817 at 33; PX 818 at 33. By incorporating these documents by reference, Certified re-issued the materially false statements contained in the respective reports and described previously. For the same reasons that misrepresentations about these issues were material in the Certified filings incorporated into Certified's Form 3, these misrepresentations were material in Certified's Form 3.
In this SEC enforcement action, the Court has jurisdiction over the subject matter and the parties pursuant to Sections 20(b), 20(d), and 22(a) of the Securities Act, and Sections 21(d), 21(e), and 27 of the Exchange Act. The parties do not dispute that venue properly lies in the Southern District of Florida, and the Court finds that to be the case.
The Amended Complaint charges Defendant Huff with five counts of securities law violations. Count I alleges that Huff employed devices, schemes, or artifices to defraud in the offer of securities, in violation of Section 17(a)(1) of the Securities Act, 15 U.S.C. § 77q(a)(1). D.E. 15 at 23-24. Count II also asserts a violation of the Securities Act but contends that Huff, in the offer of securities, obtained money or property by means of false statements of material facts and omissions of material facts necessary to make statements made, in the light of the circumstances under which they were made, not misleading, and engaged in transactions, practices, and courses of business that are operating and will operate as a fraud or deceit upon purchasers and prospective purchasers of such securities, in violation of 15 U.S.C. §§ 77q(a)(2) and 77q(a)(3). D.E. 15 at 24.
In Counts III through V, the SEC sets forth causes of action under the Exchange Act, 15 U.S.C. § 78a, et seq. Count III avers that Defendant Huff violated 15 U.S.C. § 78j(b) and Rule 10b5, 17 C.F.R. § 240.10b-5 by, in connection with the purchase or sale of securities, employing devices, schemes, or artifices to defraud; making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and engaging in acts, practices, and courses of business that have operated as a fraud on the purchasers of such securities.
Before reviewing the elements of each of the causes of action charged and considering the applicable burden of proof, the Court first addresses Defendant and Relief Defendants' argument that the statute of limitations precludes some of the relief that the SEC seeks. More specifically, Defendant contends that the statute of limitations precludes the SEC from obtaining any punitive relief against Defendant.
To resolve this issue, the Court turns first to the Securities Act and to the Exchange Act. Neither of these statutes, however, contains a statute-of-limitations provision that applies to enforcement actions by the SEC. Nor do any other statutes expressly purport to establish a statute of limitations pertaining to the Securities Act or the Exchange Act.
Consequently, the Court considers Title 28, United States Code, Section 2462, which provides,
The Eleventh Circuit has noted that Section 2462, by its terms, "is generally applicable to `proceeding[s] for the enforcement of any civil fine[, penalty, or forfeiture].'" Trawinski v. United Technologies, 313 F.3d 1295, 1298 (11th Cir.2002). Furthermore, numerous other courts have applied Section 2462's statute of limitations to the penalty provisions of the Securities Act and the Exchange Act. See, e.g., SEC v. Koenig, 557 F.3d 736, 739 (7th Cir.2009); SEC v. Quinlan, 373 Fed.Appx. 581, 586-87 (6th Cir.2010); SEC v. Leffers, 289 Fed. Appx. 449, 451 (2d Cir.2008); Johnson v. SEC, 87 F.3d 484, 485 (D.C.Cir.1996); SEC v. Miller, 2006 WL 2189697, *7 (N.D.Ga. July 31, 2006);
Thus, for purposes of evaluating whether any violations are subject to civil penalties, the Court must consider when the SEC's causes of action accrued in the instant case. The Eleventh Circuit has held that an agency's enforcement action accrues at the time of the violation, and not upon discovery of the harm. Trawinski, 313 F.3d at 1298. In reaching this conclusion, the Eleventh Circuit implicitly rejected the so-called "discovery rule," which provides that a cause of action accrues "when `the plaintiff learns, or should have learned through the exercise of ordinary diligence in the protection of one's legal rights, enough facts to enable him[,] by such further investigation as the facts would induce in a reasonable person[,] to sue.'" SEC v. Buntrock, 2004 WL 1179423, *12 (N.D.Ill. May 25, 2004) (quoting Fujisawa Pharm. Co., Ltd. v. Kapoor, 115 F.3d 1332, 1334 (7th Cir.1997) (citations omitted)).
Although the discovery rule does not affect the accrual date of the statutory period under Section 2462, in the appropriate circumstances, the doctrine of equitable tolling may toll the statutory period. The doctrine of equitable tolling does not have an impact on the date of accrual of an action but rather tolls the statutory period once the accrual date has passed, when, "despite the exercise of due diligence, a [plaintiff] fails to timely bring an . . . action due to fraud or extraordinary circumstances beyond the [plaintiff's] control. . . ." In re Int'l Admin. Servs., Inc., 408 F.3d 689, 700 (11th Cir.2005) (citation omitted).
As the Eleventh Circuit has explained, "[W]hile this doctrine is not applicable to the time limitation imposed by every federal statute, it does apply to all federal statutes where the time limits are in the character of a true statute of limitations." Id. at 701 (citations omitted). The time limits of Section 2462 can fairly be characterized as a true statute of limitations, as the entire nature of the statute is directed at restricting the period within which certain types of actions may be brought. Indeed, the statute is entitled, "Time for commencing proceedings." It is therefore not surprising that several
In re Int'l Admin. Servs., Inc., 408 F.3d at 701.
Besides the equitable tolling doctrine, the SEC urges the Court to take into account the "continuing violations" doctrine. When the violation at issue continues to occur within the limitations period, the "continuing violations" doctrine tolls the statute of limitations for a claim that otherwise would be time-barred. Nat'l Parks & Conservation Ass'n v. Tenn. Valley Auth., 502 F.3d 1316, 1322 (11th Cir.2007) (citing Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81, 102 S.Ct. 1114, 71 L.Ed.2d 214 (1982) ("Havens Realty")).
In Havens Realty, for example, the plaintiffs included, among others, three individuals: Coles, an African American who attempted to rent a unit in one of the defendant Havens Realty's apartments in 1978; Coleman, an African-American "tester" who subsequently inquired on more than one occasion about renting at the defendant's properties and was denied; and Willis, a white "tester" who asked about renting on repeated occasions at the defendant's properties after Coles was denied, who was told that vacancies existed. Under the applicable statute of limitations, a claim for discriminatory housing practices had to be brought within 180 days of the violation. Yet only the last incident, which involved only Coles, had occurred within 180 days of the filing of the lawsuit. The Supreme Court, nonetheless, found all five incidents to constitute part and parcel of a single continuing violation. Havens Realty, 455 U.S. at 380, 102 S.Ct. 1114. In explaining the basis for its decision, the Supreme Court stated, "Petitioners' wooden application of § 812(a), which ignores the continuing nature of the alleged violation, only undermines the broad remedial
Some courts have questioned whether the continuing violation doctrine applies to SEC enforcement actions. See, e.g., SEC v. Jones, 2006 WL 1084276, *4 (S.D.N.Y. Apr. 25, 2006). The later decisions simply cite to the first opinion, however, which does not articulate any basis for hesitation in applying the continuing violation doctrine to SEC enforcement actions. See, e.g., Jones, 2006 WL 1084276 at *4 (citing de la Fuente v. DCI Telecom, Inc., 206 F.R.D. 369, 385-86 (S.D.N.Y. 2002); SEC v. Caserta, 75 F.Supp.2d 79, 80 (E.D.N.Y.1999); SEC v. Schiffer, 1998 WL 226101, *3 (S.D.N.Y. May 5, 1998)).
Other courts have relied upon the continuing violation doctrine to hold that enforcement actions by the SEC fall within the statutory period. See, e.g., SEC v. Ogle, 2000 WL 45260 (N.D.Ill. Jan. 11, 2000). In reaching this conclusion, the Northern District of Illinois reasoned that although the Seventh Circuit had not at that time applied the continuing violation doctrine to a securities enforcement action, its basis for invoking the doctrine in other contexts applied with equal force to the securities enforcement area. Ogle, 2000 WL 45260 at *4. As the court explained,
Ogle, 2000 WL 45260 at *4.
This Court agrees with the Northern District of Illinois that, where the appropriate facts exist, the "continuing violations" doctrine may apply to the statute of limitations in SEC enforcement actions. Looking to the purpose of the Securities Act and the Exchange Act, "[i]t is very clear from the legislative history of these Acts that they were passed to protect the investor." Lincoln Nat'l Bank v. Herber, 604 F.2d 1038, 1041 (7th Cir.1979) (citing S.Rep. No. 47, 73d Cong., 1st Sess., to accompany S. 875, Apr. 27, 1933; H.R.Rep. No. 85, 73d Cong., 1st Sess., to accompany H.R. 5480, May 4, 1933; 77 Cong. Rec. 2983 (1933) (statement of Sen. Fletcher, who introduced the bill)). Indeed, the Senate Report accompanying the bill that, with changes, ultimately became the Securities Act explained,
S.Rep. No. 47, 73d Cong., 1st Sess., to accompany S. 875, Apr. 27, 1933.
In view of Havens Realty's example in applying the "continuing violations" doctrine to effectuate congressional intent, this Court concludes that not applying the doctrine in the SEC enforcement context could frustrate congressional purpose in enacting the Securities Act and the Exchange Act in that the nature of certain types of securities violations is such that they necessarily take time to detect. While time passes, however, such violations can inflict significant harm on the investing public. If wrongdoers may continue to reap the benefit of their continuing violations with no threat of punitive enforcement actions, then, for some, the possibility that they may eventually merely have to return what may be left of their illgotten gains may become simply a cost of doing business. Such an outcome conflicts with congressional intent to prevent securities fraud. Consequently, this Court finds that the "continuing violations" doctrine may apply where the appropriate facts exist.
In determining whether facts justifying use of this doctrine exist, a court must "distinguish between the `present consequences of a one-time violation,' which do not extend the limitations period, and `a continuation of a violation into the present,' which does." Id. (quoting Ross v. Buckeye Cellulose Corp., 980 F.2d 648, 658 (11th Cir.1993), and citing Ctr. for Biological Diversity v. Hamilton, 453 F.3d 1331, 1334 (11th Cir.2006)).
In this case, under either the equitable tolling doctrine or the continuing violation doctrine, all of the violations alleged by the SEC fall within the period that the statute of limitations prescribes. The SEC filed the present action on March 6, 2008. See D.E. 1. And, with the exception of Certified's filing of its 10-QSB on November 14, 2002, see PX 832, every filing violation that the SEC charges in this case occurred on March 31, 2003, or later. See PX 831; PX 830; PX 829; PX 827; PX 826; PX 825; PX 824; PX 823; PX 820; PX 816; PX 814. Consequently, each of those filing violations falls within the five-year statutory period, without even considering the operation of the equitable tolling doctrine or the continuing violation doctrine.
As for the filing of Certified's third-quarter 2002 Form 10-QSB, filed on November 14, 2002, the material false statements involved Certified's assets, liabilities, and shareholders' equity. In this regard, the third-quarter 2002 10-QSB counted fraudulent letters of credit among Certified's assets. The fraudulent nature of these letters of credit was not revealed until Certified filed its third-quarter 2003 10-QSB on November 18, 2003. Thus, under the equitable tolling doctrine, the statute of limitations was tolled from November 14, 2002, through November 18, 2003, resulting in the expiration of the statutory period on November 18, 2008, well after the SEC filed its action in this case.
Alternatively, under the continuing violation doctrine, between November 14, 2002, when Certified filed its third-quarter 2002 10-QSB, and November 18, 2003, when Certified disclosed that the letters of
The SEC bears the burden of proof by a preponderance of the evidence on each of the counts that it brings under the Securities Act and under the Exchange Act and the SEC's supplementary rules. See SEC v. Ginsburg, 362 F.3d 1292, 1298 (11th Cir.2004) (citing Herman & MacLean v. Huddleston, 459 U.S. 375, 390 & n. 30, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983)); SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 355, 64 S.Ct. 120, 88 L.Ed. 88 (1943). In seeking to satisfy its burden, the SEC may rely upon direct or circumstantial evidence. Ginsburg, 362 F.3d at 1298. "Circumstantial evidence has no less weight than direct evidence as long as it reasonably establishes that fact rather than anything else." Id. (quoting Burrell v. Bd. of Trustees of Ga. Military College, 970 F.2d 785, 788 (11th Cir.1992)) (additional quotation marks omitted).
As noted previously, the Amended Complaint alleges that Defendant Huff violated Sections 17(a)(1), (2), and (3) of the Securities Act, Section 10(b) of the Exchange Act, and SEC Rule 10b-5. To establish a violation of Section 10(b) and Rule 10b-5, the SEC (as opposed to a private litigant) must prove by a preponderance of the evidence that Huff made "(1) material misrepresentations or materially misleading omissions, (2) in connection with the purchase or sale of securities, (3) made with scienter." SEC v. Merchant Capital, LLC, 483 F.3d 747, 766 & 766 n. 17 (11th Cir.2007) (citing Aaron v. SEC, 446 U.S. 680, 695, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980) & SEC v. Zandford, 535 U.S. 813, 816 n. 1, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002)). While proof of a violation of Section 17(a)(1) through (3) requires "[e]ssentially the same elements" in connection with the offer or sale of a security, a showing of scienter is not required for the SEC to obtain an injunction under Section 17(a)(2) or (3). SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999) (citing SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1467 (2d Cir.1996) (citing Aaron v. SEC, 446 U.S. 680, 701-02, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980))); see also Merchant Capital, 483 F.3d at 766 (citing Aaron, 446 U.S. at 697, 702, 100 S.Ct. 1945).
All of these violations also require proof of an interstate commerce or mails element. More specifically, under the Exchange Act, the SEC must demonstrate that Huff used the mails, an instrumentality of interstate commerce, or the facility of a national securities exchange in connection with the violation. See 15 U.S.C. § 78j(b). Similarly, the Securities Act contains as an element a requirement that a defendant have employed the mails or an instrumentality of interstate commerce in connection with the violation. See 15 U.S.C. § 77q(a).
For purposes of assessing the elements of the causes of action articulated in
15 U.S.C. § 78t(a). In the Eleventh Circuit, a defendant is liable as a controlling person where the controlled person violated the securities laws, if the defendant "had the power to control the general affairs of the entity primarily liable at the time the entity violated the securities laws. . . [and] had the requisite power to directly or indirectly control or influence the specific corporate policy which resulted in the primary liability." Brown v. The Enstar Group, Inc., 84 F.3d 393, 397 (11th Cir. 1996) (citation and quotation marks omitted). The Eleventh Circuit has expressly held that neither Section 20(a) nor the SEC regulation defining "control" as "the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person," 17 C.F.R. § 230.405 (1995), appears to require participation in the wrongful transaction to establish liability. Brown, 84 F.3d at 397 n. 5. Nevertheless, the court has left open the question as to whether "power to control the general affairs of the entity primarily liable" means simply abstract power to control or instead refers to actual exercise of the power to control. Id. at 397 n. 6.
Although the Eleventh Circuit has not further opined on the meaning of "power to control the general affairs of the entity primarily liable," it has explored the congressional intent behind Section 20(a), finding,
Laperriere v. Vesta Ins. Group, Inc., 526 F.3d 715, 721 (11th Cir.2008). Thus, the Court is not without guidance in determining the meaning of "power to control the general affairs of the entity primarily liable."
In the case at hand, the Court need not resolve whether "power to control the general affairs of the entity primarily liable" means simply abstract power to control or instead refers to actual exercise of the power to control because, regardless of the definition chosen, the evidence establishes that Defendant W. Anthony Huff acted in a manner to which Congress intended to attach liability under Section 20(a). Indeed, although the descriptions from the legislative history set forth above pre-date Huff's existence, they nonetheless, sound as though the speakers had Huff in mind when they made these statements.
All of those who have worked with Huff at some point have uniformly described his dominant personality and controlling behavior. They have described Huff and his relationship with Certified in the following ways:
In addition, Huff appointed Certified's board members. See TT at 83-84. Although Huff did not sit on the board, Dobrin testified that board meetings were relatively few, decisions were made in advance of board meetings, and the board merely "rubber-stamped" those determinations. Id. at 83-86. Similarly, while Cunningham was appointed as a member of the board, he never attended a single meeting, was never asked to sign any documents, and received no guidance as to any responsibilities he might have had as a board member. D.E. 214-5 at 21. Two other members of Certified's board of directors included individuals who, at some point, served as Huff's personal lawyers. See TT at 838, 900-01; PX 831 at Part III, Item 9.
And Huff participated in all crucial aspects of Certified's business. Notably, Certified entered into the RAA with Midwest, which Huff controlled. As the RAA offered Certified nothing of substance and allowed Huff to loot Certified, no valid business purpose for it existed, and Certified's agreement to the RAA, in and of itself, demonstrates that Huff controlled Certified.
Huff was also involved in attempting to obtain an extension of Certified's workers' compensation insurance policy with CNA and other insurance issues. TT at 111-12, 255. Dobrin testified that he had conversations with Huff regarding insurance usually several times weekly. Id. at 112. Dobrin also discussed cash management, loss control, claims managements, and other issues that did not specifically relate to the RAA. Id. at 119-20. Besides these issues, Dobrin talked to Huff several times weekly regarding sales and other aspects of Certified. Id. at 77; see also D.E. 214-15 at 10. In fact, when sales were down, Huff went to Certified's sales force meetings and gave a "pep talk." TT at 515.
Likewise, Adam Dobrin sent Huff various weekly reports regarding Certified's business. See id. at 508-09. Moreover, as discussed previously, Huff frequently called Pixler regarding Certified's business, interrupting him several times daily for long periods of time.
Besides these activities, as previously discussed, Huff reviewed and approved Certified's public filings. He was also so involved in Certified's business that he even suggested to Dobrin that Dobrin not take a planned vacation because Certified needed him there at the time. Id. at 81.
Huff also obtained financing for Certified and participated in marketing Certified's securities. See D.E. 214-15 at 9. Moreover, in obtaining a letter of credit
Huff's control of Certified from the background is also consistent with his modus operandi. As discussed above, Huff similarly controlled Midwest and Brentwood, even though he held no position with either company until at least 2005. He also took his Brentwood salary in Sheri Huff's name, although she had nothing to do with the company. Likewise, Huff has "significant influence" and "significant control" over O2HR, the company that succeeded to Certified's bankruptcy estate, although Huff is not listed as an officer or director of the company. TT at 1201-02. For all of these reasons, the Court concludes that Huff was a control person with regard to Certified and that he exercised actual control.
With regard to the elements of the causes of action espoused in the Amended Complaint, the Court begins with that of materiality. For a misrepresentation or omission to be "material," a substantial likelihood must exist that the true, disclosed fact "would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Basic Inc. v. Levinson, 485 U.S. 224, 232-33, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). As the Eleventh Circuit has explained, "The test for materiality in the securities fraud context is `whether a reasonable man would attach importance to the fact misrepresented or omitted in determining his course of action.'" Merchant Capital, 483 F.3d at 766 (quoting SEC v. Carriba Air, 681 F.2d 1318, 1323 (11th Cir.1982) (citation omitted)). Thus, the test embodies an objective standard.
These Findings of Fact and Conclusions of Law have already discussed at length the numerous material misrepresentations and omissions in Certified's SEC filings. For ease of reference, however, the Court summarizes them once again below:
Each one of these misrepresentations and omissions in its own right satisfies the materiality standard because a reasonable person would have attached significance to each true fact in making a decision regarding whether to invest in Certified. Moreover, although each misrepresentation and omission independently is material, the combination of them together is likewise material. These misrepresentations and omissions significantly alter the "total mix" of information available to an investor.
Huff also engaged in a scheme or artifice to defraud as it regards Certified's potential stockholders. More specifically, Huff deliberately decided to control Certified from the background and not to take a named official position with Certified so he would not have to disclose his prior criminal insurance dealings and debarment. Similarly, he schemed to allow his looting of Certified to go undetected by accessing Certified's coffers through the RAA, in the name of Midwest, again not identifying himself as an officer of Midwest, even though he was solely controlling it. Meanwhile, Certified's official filings made no mention of Huff or his involvement in Certified and falsely reflected substantial shareholder equity (based in large part on letters of credit, the bogus nature of which Huff deliberately and severely recklessly ignored), thereby attracting investments in the company, which was doomed to fail, at least in significant part, because Huff was using Certified's coffers as his own personal piggy bank. The execution of the RAA and each of the material omissions and misrepresentations discussed above represent acts in which Huff engaged in furtherance of the scheme or artifice to defraud.
Within the context of Section 10(b) of the Exchange Act, Rule 10b-5, and Section 17(a)(1) of the Securities Act, satisfying the element of scienter depends on "a showing of either an `intent to deceive, manipulate, or defraud,' or `severe recklessness.'" Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1238 (11th Cir.2008) (quoting Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1284 (11th Cir.1999)). The Eleventh Circuit defines "severe recklessness" as follows:
Id. (quoting Bryant, 187 F.3d at 1282 n. 18 (quotation marks omitted by Mizzaro Court)).
Huff asserts that he was neither involved in nor knew about Certified's filings before Certified made them, so he could not have had the requisite scienter to sustain a finding of violations of Section 10(b) of the Exchange Act, Rule 10b-5, and Section 17(a)(1) of the Securities Act. He further argues that, regardless, all of Certified's SEC filings were subject to legal review by Certified's lawyers and Certified's outside accounting firm of Rosenberg Rich, which audited some of the financial statements and gave Certified's filings a clean bill.
This Court has been unable to find any Eleventh Circuit cases considering the defense of reliance on the advice of a professional such as an accountant or attorney, in the context of a civil enforcement action by the SEC. The Eleventh Circuit, however, has discussed such a defense in the context of criminal cases, including a criminal mail fraud case involving securities. In United States v. Parker, the Eleventh Circuit stated, "To succeed with a defense of good faith reliance on the advice of counsel, the defendant must show that 1) he fully disclosed all relevant facts to his counsel and 2) he relied in good faith on his counsel's advice." 839 F.2d 1473, 1482 n. 6 (11th Cir.1988) (citing United States v. Johnson, 730 F.2d 683, 686 (11th Cir.), cert. denied, 469 U.S. 857, 105 S.Ct. 186, 83 L.Ed.2d 119 (1984)). The case on which Parker relied in setting forth this standard, in turn, explained, "The defense of good faith reliance on expert advice is `designed to refute the government's proof that the defendant intended to commit the offense.'" Johnson, 730 F.2d at 686 (citation omitted). In other words, this defense addresses scienter.
Other courts outside of the Eleventh Circuit have considered the reliance-on-professional-advice defense within the context of an SEC enforcement case and have reached similar formulations of the doctrine. See, e.g., Markowski v. SEC, 34 F.3d 99 (2d Cir.1994); SEC v. Savoy Inds., Inc., 665 F.2d 1310, 1314 n. 28 (D.C.Cir. 1981); SEC v. Goldfield Deep Mines Co. of Nev., 758 F.2d 459, 467 (9th Cir.1985); SEC v. Johnson, 174 Fed.Appx. 111, 114-15 (3d Cir.2006). In Markowski for example, the Second Circuit recognized the concept, noting that the person attempting to invoke it must show "that he has made complete disclosure to counsel, sought advice as to the legality of his conduct, received advice that his conduct was legal, and relied on that advice in good faith." Markowski, 34 F.3d at 104-05 (citing Savoy Inds., Inc., 665 F.2d at 1314 n. 28). The court further explained, however, "Even where these prerequisites are satisfied, such reliance is not a complete defense, but only one factor for consideration." Id. (citing Savoy Inds., Inc., 665 F.2d at 1314 n. 28).
Moreover, under this formulation of the doctrine, where a responsible defendant knows that financial statements are materially false or misleading but files them anyway, "the willingness of an accountant to give an unqualified opinion with respect
Turning to the material misrepresentations and omissions at issue in this case, the Court has already found that Huff was aware of and participated in reviewing and discussing SEC filings prior to their filing. In this regard, Huff received drafts of filings and actual filings and "signed off" on them. See TT at 201-02; see also PX 464. He further received documents relating to the contents of the proposed SEC filings, including discussions of GAAP principles. See PX 464. In addition, Huff had conversations with Dobrin, the auditor LaForgia, Pixler, and one of LaForgia's assistants regarding Certified's financial statements, including at least one heated discussion with LaForgia. TT at 122-24, 130-32, 201. The heated nature of the conversation indicates that Huff and LaForgia disagreed over the handling of at least some matter pertaining to the financial statements, which, in turn, further shows that Huff actually reviewed draft filings and had input into final filings.
Thus, the Court must consider whether, in allowing the six categories of material misrepresentations and omissions identified above to exist in Certified's SEC filings, Huff intended to deceive or was severely reckless, on the one hand, or whether he acted in good faith, on the other. With regard to the first material misrepresentation, the filings' reference to millions of dollars' worth of fraudulent letters of credit, the Court finds no evidence that Huff actually knew for sure that the letters of credit were fraudulent. Nevertheless, the reason that he did not know resulted from his own deliberate and severely reckless ignorance.
As previously discussed, the existence of letters of credit was absolutely critical to Certified's ability to obtain workers' compensation insurance, which was necessary for Certified to continue in business. Moreover, CNA required millions and millions of dollars' worth of letters of credit— at one point exceeding $40 million. As Certified was paying thousands of dollars for these "letters of credit" and the viability of Certified's business depended upon Certified's ability to obtain letters of credit, Certified—and Huff as a control person of Certified—should have had extremely good reason to ensure the legitimacy of the letters of credit it obtained, particularly when the letterhead fell off one of the purported letters of credit. The fact that Huff called Leyton to inquire about letters of credit following this incident underscores the importance of the letters of credit. Yet Huff did nothing more to ensure their legitimacy than to accept Leyton's "explanation" that the letter of credit provided was merely a sample. Quite simply, this explanation makes no sense. Banks do not cut and paste their letterhead onto "sample" letters.
Furthermore, since Leyton was the individual providing the purported letters of credit, he had an interest in continuing to
Nor can Huff rely upon the defense of reliance on professional advice with regard to this material misrepresentation. He, Spinelli, and McCartha never advised Certified's lawyers or accountants of the incident where the letterhead fell off the page nor of Leyton's senseless explanation. Accordingly, Huff cannot rely on advice of counsel as a defense since he did not disclose all relevant facts to counsel.
As for the second category of material misrepresentations and omissions involving the accounting for letters of credit and workers' compensation claims liabilities (setting aside the fraudulent nature of the letters of credit), Huff asserts the defense of reliance on professional advice, as Certified's auditors signed off on many of the financial statements that include these material misrepresentations and omissions. Plaintiff's Exhibit 464 provides some support for Huff's argument because it shows that Huff obtained memoranda of GAAP accounting principles as they relate to at least some issues involving the financial statements. Moreover, the auditor LaForgia did not testify, even though he was under the SEC's control.
On the other side of the coin, however, Plaintiff's Exhibit 464 also suggests that Certified was very conscious of the fact that its financial statements reflected "strong improvement to the Shareholders' Equity section of the [Certified] 10-QSB for the third quarter ended September 30, 2002," and it attempted to use that circumstance not just in the publicly filed SEC documents, but also to its advantage with the Bankers' Insurance Group. Thus, the issue boils down to one of actual intent.
Ultimately, the Court concludes that the SEC has not established scienter with regard to the accounting of the shareholders' equity misrepresentations and omissions. Although this issue is very close, the auditors were clearly aware of the fact that they were counting letters of credit as assets and that Certified had workers' compensation claims liabilities, making this issue different from the preceding one where the auditors had no knowledge of the fraudulent nature of the letters of credit. Second, the presentation of the accounting relating to the shareholders' equity should depend upon GAAP principles, and, while the Court concludes that the auditors in this case did not make this aspect of the financial statements GAAP-compliant, they nevertheless "blessed" the accounting treatment of the shareholders' equity as being in compliance with GAAP. Where a company provides its auditors with all of the information necessary for the auditors to make a determination regarding an acceptable way in which to treat the information under GAAP, the company should be able to rely upon the auditors' advice, as long as
The Court cannot reach the same conclusion, however, with respect to the material omissions relating to Huff's control of Certified and his background, as well as those relating to Huff's use of the RAA to deplete funds from Certified through Midwest. No evidence suggests that Huff disclosed to auditors or lawyers the full extent of his involvement in and control over the dealings of Certified. Similarly, the auditors never reviewed Midwest's books and records before offering their opinions and instead eventually resigned, noting that in order to continue as Certified's auditors, they would have needed to undertake a complete audit of Midwest's records. Huff's nondisclosure as a control person was by his own design; he purposely set up the company without assigning himself a named role. That way, he hoped to avoid the disclosure requirement. As a result, Huff did not reveal his damaging background information, including his insurance-related wire fraud indictment and conviction and his insurance debarment. Perhaps even more significantly, the lack of control-person disclosure in the SEC filings also provided no indication that Huff was able to use the RAA to siphon money from Certified, which he controlled, to himself through Midwest, which he also controlled. For these reasons, the Court concludes that these material misrepresentations and omissions demonstrate Huff's intent to deceive, and Huff acted with scienter with regard to them.
As for the material misrepresentations falsely indicating that Midwest was responsible for the payment of workers' compensation claims below and above the deductible, the Court likewise finds that Huff acted with scienter. These misrepresentations helped create the false impression that Midwest was actually providing a valuable service to Certified, when, in fact, it was simply using the RAA as a vehicle to drain Certified. Moreover, Huff was certainly well aware of the contents of the RAA, having authorized Michele Brown to sign it on behalf of Midwest and having used the document to his benefit to provide a basis for taking Certified's money. And, with respect to the misrepresentation that Midwest was responsible for insurance claims payments below the deductible, the filings did not even accurately portray what was on the face of the RAA, instead stating precisely the opposite of the language in the RAA. It is difficult to conceive of how anyone could have thought that such a description accurately represented the RAA, even if a lawyer had approved it. Furthermore, Huff presented no credible evidence that he sought the approval of an attorney before agreeing to the wording of these parts of the SEC filings.
As discussed previously, with regard to its causes of action under Section 17(a) of the Securities Act, the SEC must also demonstrate that Huff's conduct occurred in the offer or sale of securities, and, as it pertains to Section 10(b) of the Exchange Act and Rule 10b-5, in connection with the purchase or sale of securities. In SEC enforcement actions, courts broadly construe the "in connection with" language to effectuate the securities statutes' remedial purposes and to protect investors. SEC v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002); SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir.1993). "[W]henever assertions are made ... in a manner reasonably calculated to influence the investing public," the "in connection with" requirement is satisfied. SEC v. Tex. Gulf Sulphur Co., 401 F.2d 833 (2d Cir.1968) (en banc), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756 (1969). Thus, if the material misrepresentation or omission occurred in the context of "public dissemination in a document such as a press release, annual report, investment prospectus or other such document on which an investor would presumably rely, the `in connection with' requirement is generally met by proof of the means of dissemination and the materiality of the misrepresentation or omission." Rana Research, 8 F.3d at 1362; see also SEC v. Benson, 657 F.Supp. 1122, 1131 (S.D.N.Y.1987) (registration statements and annual and quarterly reports are "clearly documents that an investor would rely on in deciding whether to purchase... securities," and thus, satisfy the "in connection with" requirement); cf. Basic, Inc., 485 U.S. at 246, 108 S.Ct. 978 ("Recent empirical studies have tended to confirm Congress' premise that the market price of shares traded on well-developed markets reflects all publicly available information, and, hence, any material misrepresentations").
By definition, SEC filings are publicly disseminated documents. Consequently, the inclusion of the material misrepresentations and omissions in these documents upon which investors rely satisfies the "in connection with" component.
Under the Exchange Act, the SEC must demonstrate that Huff used the mails, an instrumentality of interstate commerce, or the facility of a national securities exchange in connection with the violation. See 15 U.S.C. § 78j(b). Similarly, the Securities Act contains as an element a requirement that a defendant have employed the mails or an instrumentality of interstate commerce in connection with the violation. See 15 U.S.C. § 77q(a). The evidence adduced at trial satisfies these requirements.
First, Certified was publicly traded. Second, evidence abounds of Huff's employment of interstate telephone calls, facsimiles, and other means of interstate commerce in furtherance of the material misrepresentations, omissions, and scheme
Because the Court finds Huff liable as a controlling person on primary violations, the Court need not consider the aiding and abetting theory. Nevertheless, in the interest of completeness, the Court addresses it. For aiding-and-abetting liability under the federal securities laws, the SEC must establish the following three elements: (1) a primary or independent securities law violation was committed by a party other than the aiding-and-abetting party; (2) the aider and abettor was aware or knew this his role was part of an overall activity that was improper (scienter, as it relates to violations of Section 10(b) of the Exchange Act and Rule 10b-5); and (3) the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation. See Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009-10 (11th Cir.1985).
Here, even assuming, arguendo, that only Certified (or, for that matter, Pixler or Spinelli) committed the primary violations discussed above, for all of the reasons previously discussed, Huff certainly knew that his role was part of an overall activity that was improper and violated the securities laws. As demonstrated previously, he also substantially assisted the conduct constituting the violation. Thus, Huff is alternatively liable as an aider and abettor.
The Securities Act provides, in relevant part,
15 U.S.C. § 77t(b). The Exchange Act contains a similar provision authorizing injunctive relief. See 15 U.S.C. § 78u(d)(1). Numerous courts, including the Eleventh Circuit, have construed these statutory sections to authorize injunctions to prevent future securities laws violations. See SEC v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir.1982); see also SEC v. Globus Group, Inc., 117 F.Supp.2d 1345, 1346 (S.D.Fla. 2000) (Jordan, J.).
In this Circuit, the SEC "is entitled to injunctive relief when it establishes (1) a prima facie case of previous violations of federal securities laws, and (2) a reasonable likelihood that the wrong will be repeated." SEC v. Calvo, 378 F.3d 1211, 1216 (11th Cir.2004) (citing SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 n. 2 (11th Cir.1999)). In determining the probability that a party will again engage in violations of the securities laws, a court should consider the "egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of the conduct, and the likelihood that the defendant's occupation will present opportunities for future violations." Id. (quoting Carriba Air, 681 F.2d at 1322 (quotation marks and internal citations omitted)).
In considering these factors, the Court concludes that the facts of this case require injunctive relief. First, the scheme that Huff orchestrated was far-reaching. Not only did it bankrupt Certified, causing the value of shareholders' holdings effectively to cease to exist, but it resulted in more than $60 million in losses to CNA; losses to others such as Baumgardner, who sold Certified his company; and exposure of Certified's clients' workers to potential non-payment of claims—all so Huff and his friends could enjoy the high life.
Second, this is not the first time that Huff has engaged in such a scheme. Indeed, in the U.S. Trucking matter, he pled guilty to wire fraud charges stemming from a similar scheme in which Huff defrauded insurance companies. He also remains involved in O2HR, effectively the successor corporation to Certified, where he continues his less-than-aboveboard ways. For example, Roxann Pixler testified that Huff refused to memorialize her investment in O2HR on paper and barred her from shareholder meetings when she requested such written documentation, calling Roxann Pixler a "trouble-maker" and directing her to "shut up." TT at 181-82. Moreover, although Huff continues to exercise control over the corporation, he once again holds no official position with it. See id. at 1205-06.
Third, as explained in the discussion of scienter set forth earlier in these Findings of Fact and Conclusions of Law, these violations involved a substantial degree of
Finally, Huff's present occupation allows Huff to continue his past pattern of committing violations. Not only does Huff continue to use Midwest as a vehicle for exercising control over other companies, but also, he remains highly involved in O2HR, exercising control over the company. O2HR has succeeded to Certified's business, except with significantly reduced debts as a result of the bankruptcy settlement. Consequently, Huff has the same opportunities with regard to O2HR as he did with respect to Certified. And, for at least the third time, he is involved in a business with a significant insurance component. For all of these reasons, this case demands injunctive relief.
In addition to the injunctive relief described above, the SEC seeks an officer-and-director bar against Huff. Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2), and Section 20(e) of the Securities Act, 15 U.S.C. § 77t(e), authorize courts to "prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section 77q(a)(1) [or Section 10(b) of the Exchange Act] . . . from acting as an officer or director of an issuer of [registered securities] . . . if the person's conduct demonstrates unfitness to serve as an officer or director . . . ." 15 U.S.C. § 77t(e); 15 U.S.C. § 78u(d)(2). Alternatively and additionally, a court may impose an officer-and-director bar under its inherent equitable powers. See SEC v. First Pac. Bancorp, 142 F.3d 1186, 1193 (9th Cir.1998); SEC v. Posner, 16 F.3d 520, 521 (2d Cir.1994).
In determining whether to impose an officer-and-director bar, a court may consider the following factors:
First Pac. Bancorp, 142 F.3d at 1193 (quoting SEC v. Patel, 61 F.3d 137, 141 (2d Cir.1995)). Whether the person considered for injunction has held the precise position of an officer or director in name matters not; rather, "the critical issue is whether the injunction restrains acts `of the same type or class' or that `may fairly be anticipated from the defendant's conduct in the past." SEC v. Sprecher, 81 F.3d 1147 (table), 1996 WL 175216, *4 (D.C.Cir. Apr. 9, 1996) (quoting NLRB v. Express Publ'g Co., 312 U.S. 426, 435, 61 S.Ct. 693, 85 L.Ed. 930 (1941)).
Applying this framework to the instant matter, the Court concludes that Huff should be barred from serving as an officer or director of a publicly traded company. As previously discussed, Huff's violations were egregious and his degree of scienter, substantial. He purposely chose to control Certified from the background at least in part to avoid disclosing his negative history and to obscure his involvement with the company to facilitate
Nor is this Huff's first foray into fraud in publicly traded companies. In connection with U.S. Trucking/LMRI, Huff pled guilty to three counts of wire fraud stemming from a fraud similar to the artifice Huff executed in this case. In the U.S. Trucking/LMRI matter, Huff obtained financing for insurance and used it for his own benefit and that of his family. Here, Huff used the RAA to obtain monies from Certified, which he then used for his personal benefit and that of his family members. In addition, Huff is centrally involved in O2HR, another publicly traded PEO company. In connection with that company, as in this case, Huff has acted as a control person, although he has hidden his involvement in the company by not serving in name as an officer or director. As Roxann Pixler's testimony demonstrates, Huff has further refused to provide written documentation of investment in the company. Huff's past history of violations, the extent of Huff's scienter exhibited in the pending case, and the concrete examples from the O2HR matter all provide substantial indication that, if not enjoined, Huff will continue his violations in the future, and many others will fall victim. For all of these reasons, the Court agrees that Huff should be barred from serving as an officer or director of a publicly traded company.
With regard to the appropriate length of the bar order, this Court recognizes that a permanent bar is a very significant penalty and does not consider it lightly. Nevertheless, Huff's prior conduct, the extent of his role in the Certified-related violations, and his current involvement in O2HR warrant a permanent bar. In cases where, unlike here, a defendant has had no past track record of violations, courts have imposed up to twenty-year bans. See, e.g., SEC v. Save The World Air, Inc., 2005 WL 3077514 (S.D.N.Y. Nov. 15, 2005) (imposing a twenty-year bar where the defendant conducted a one-and-one-half year scheme to defraud but had no prior record of securities fraud in the United States); see also SEC v. Pallais, 2010 WL 2772329, *10 (S.D.N.Y. July 9, 2010) (imposing a ten-year bar where the defendant conducted a one-and-one-half year scheme to defraud but had no prior record of securities fraud violations). Here, where Huff has demonstrated his willingness and ability to repeat his transgressions, along with no recognition of his wrongdoing, nothing less than a lifetime bar will protect investors from Huff. Consequently, the Court imposes such a bar.
The SEC also seeks a penny stock bar against Huff. Under the Securities Act and the Exchange Act, a court may prohibit any person who, at the time of the alleged misconduct, was participating in an offering of penny stock, from participating in an offering of penny stock. See 15 U.S.C. § 77t(g); 15 U.S.C. § 78u(d)(6). Penny stocks include any equity security with a price of less than $5.00, except as exempted under Rule
In this case, Certified's SEC filings for 2002 and 2003 reflect that its stock price never exceeded $1.80 as of December 31, 2003. Beyond that date, the Court has not been able to find evidence of Certified's stock price in the record. Through December 31, 2003, however, Certified meets the initial requirement of a penny stock, as its price always was less than $5.00.
Nevertheless, Defendant Huff suggests that Certified did not qualify as a penny stock under Rule 3(a)(51)(g)(2), which exempts companies with "[a]verage revenue of at least $6,000,000 for the last three years." In its SEC filings, Certified reported the following revenue:
2000: $75,000 2001: $13,711,112 2002: $40,406,261 2003: $78,510,210 2004: $66,906,295 (as of third quarter)
See PX 814 at 4; PX 823 at 28. The SEC did not submit contradictory evidence. Beginning with 2002, the first year where three years of prior revenues existed and the first real year of operations for Certified under the control of Huff, average revenues exceeded $6 million, based on the SEC filings. Similarly, in the years that followed, revenues also surpassed $6 million. In view of this unrebutted evidence, the Court agrees with Huff that the SEC has not satisfied its burden to demonstrate that Certified met the definition of a "penny stock" during the requisite time period. Consequently, the Court declines to impose a penny stock bar.
Disgorgement is an equitable remedy that anticipates depriving "the wrongdoer of his ill-gotten gain." SEC v. ETS Payphones, Inc., 408 F.3d 727, 734 n. 6 & 735 (11th Cir.2005) (internal quotation marks omitted). As the Second Circuit has described disgorgement, "The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits." SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1104 (2d Cir. 1972).
While this rationale allows for broad consideration of all of a defendant's wrongful conduct in violation of the securities laws,
In this analysis, "[e]xactitude is not a requirement; [s]o long as the measurement of disgorgement is reasonable, any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.'" Id. (quoting SEC v. Warde, 151 F.3d 42, 50 (2d Cir.1998), and citing SEC v. First City Fin. Corp., 890 F.2d 1215, 1231-32 (D.C.Cir.1989)). Indeed, "where a defendant's record-keeping or lack thereof has so obscured matters that calculating the exact amount of illicit gains cannot be accomplished without incurring inordinate expense, it is well within the district court's discretion to rule that the amount of disgorgement will be the more readily measurable proceeds received from the unlawful transactions." Id., 378 F.3d at 1217-18 (citations omitted).
In this case disgorgement is appropriate to ensure that Huff does not enjoy any benefits of his violations. While the SEC suggests as its primary position that the Court should disgorge $120.9 million from Huff, See D.E. 292 at 34, this Court concludes that the SEC has not demonstrated that that number reasonably approximates Huff's net gain from his wrongdoing because it does not account for all payments made for the benefit of Certified. For example, that number includes all transfers to Brentwood, even though some of the transfers appear to have been used for payments relating to insurance. Alternatively, the SEC proposes that the Court order Huff to disgorge $10.017 million, calculated in the following way:
_________________________________________________ Monies to Sheri Huff from $1.2 million Brentwood and Midwest __________________________________________________ Cash to Huff $2.6 million __________________________________________________ Huff Farms $2.75 million __________________________________________________ Money to Huff directly $272,000 from Midwest __________________________________________________ Money paid towards Huff's $885,000 settlement costs __________________________________________________ Monies paid towards U.S. $600,000 Trucking/LMRI liabilities and expenses __________________________________________________ Financial service costs $1.43 million __________________________________________________ Monies that Certified/Cura $280,000 paid for Huff's charges on the Certified/Cura American Express card _________________________________________________TOTAL $10.017 million _________________________________________________
While the actual amount by which Defendant Huff was unjustly enriched as a result of his wrongdoing is probably greater $10.017 million, the Court finds that this analysis sets forth a reasonable approximation. Defendant Huff suggests no alternative reasonable approximation. Thus, the Court requires Huff to disgorge $10.017 million.
The SEC seeks to disgorge monies from Relief Defendants Sheri Huff, Midwest, and Roxann Pixler. Equitable relief from a relief defendant (sometimes
In this case the Court finds that Relief Defendants Sheri Huff and Midwest should be subject to disgorgement. Sheri Huff received Defendant Huff's "salary" in her name and nominally owned Midwest. Additionally, she received other monies that were Certified's without providing any benefit to Certified and without any other legitimate right to the monies. Similarly, Huff used Midwest as the vehicle for draining monies from Certified for Huff's own personal benefit and for the benefit of his family. Any Certified monies transferred to Midwest that were not used for the benefit of Midwest must be disgorged.
As all monies that Huff received from Certified traveled through Midwest at some point, disgorgement of the full $10.017 million from Midwest is also appropriate. As for Sheri Huff, she received $1.2 million in her name from Brentwood and Midwest for no legitimate reason. In addition, she and Defendant Huff own Huff Farms, which received $2.6 million. Because Sheri Huff was unjustly enriched by $3.8 million, she must disgorge that amount.
The Court declines, however, to impose the remedy of disgorgement against Roxann Pixler. Although Roxann Pixler received $60,379.98 from Midwest Merger in 2004, TT at 177; PX 683 at 6, she used the money to pay taxes related to Midwest for that year. TT at 177. The $60,379.98 is the only money that Roxann Pixler ever received from Midwest. Id.; see also PX 683. Because Roxann Pixler paid the money she received from Midwest to the federal government in taxes without enjoying a corresponding income or other benefit from Midwest, the Court concludes that disgorgement is not appropriate. Although, in a vacuum, payment of tax liabilities, of course, constitutes a benefit, in this specific case, Roxann Pixler did not enjoy the benefit of the monies on which she was taxed. Consequently, under these limited circumstances, the Court finds that, as a practical matter, Roxann Pixler was not unjustly enriched, and disgorgement should be denied with respect to her.
Next, the SEC asks the Court to hold Defendant Huff and Relief Defendants Sheri Huff and Midwest jointly and severally liable for the entire amount that they are collectively ordered to disgorge. In support of its position, the SEC relies upon SEC v. JT Wallenbrock & Associates, 440 F.3d 1109 (9th Cir.2006); SEC v. Hughes Capital Corp., 124 F.3d 449, 455
Joint and several liability for the entirety of the disgorgement amount, however, is not appropriate where the SEC has not charged the relief defendants with wrongdoing. Imposing joint and several liability on a relief defendant beyond those monies for which a relief defendant has no rightful claim is punitive and violates due process because the relief defendant has had no notice or opportunity to defend against charges of wrongdoing. Indeed, even when more than one defendant has collaborated in the illegal conduct, courts have declined to impose joint and several liability where the defendants have differing levels of culpability. SEC v. Opulentica, LLC, 479 F.Supp.2d 319, 330 (S.D.N.Y. 2007) (citing SEC v. Platinum Inv. Corp., 2006 WL 2707319, *4 (S.D.N.Y. Sept. 20, 2006); SEC v. Falbo, 14 F.Supp.2d 508, 527 (S.D.N.Y.1998); SEC v. Downe, 969 F.Supp. 149, 158 (S.D.N.Y.1997)). As the Amended Complaint does not charge Midwest or Sheri Huff with violations of law, the Court declines to award joint and several liability for the amounts to be disgorged from Midwest and Sheri Huff.
Huff, however, is a different matter. The Court finds Huff solely liable for disgorging his entire ill-gotten gain and jointly and severally liable for the amounts to be disgorged by Midwest and Sheri Huff. To the extent that those individuals disgorge the amounts that they realized on those amounts, Huff's disgorgement amount will be correspondingly reduced.
Whether to award prejudgment interest and, if so, at what rate, constitute matters falling within the Court's discretion. See SEC v. Carrllo, 325 F.3d 1268, 1273 (11th Cir.2003) (citing Indus. Risk Insurers v. M.A.N. Gutehoffnungshütte GmbH, 141 F.3d 1434, 1447 (11th Cir.1998)). Courts impose prejudgment interest to prevent those found liable under the securities laws from enjoying any benefit accrued from the use of the ill-gotten gain. SEC v. Yun, 148 F.Supp.2d 1287, 1293 (M.D.Fla.2001) (citing SEC v. Warde, 151 F.3d 42, 50 (2d Cir.1998)). Although "[w]hether to award prejudgment interest is a question of fairness," SEC v. GMC Holding Corp., 2009 WL 506872, *6 (M.D.Fla. Feb. 27, 2009) (citing Osterneck v. E.T. Barwick Indus., Inc., 825 F.2d 1521, 1536 (11th Cir.1987)), proof of a defendant's scienter justifies such an award. SEC v. K.W. Brown & Co., 555 F.Supp.2d 1275, 1313 (S.D.Fla.2007) (citing Rolf v. Blyth, 637 F.2d 77, 87 (2d Cir. 1980)).
Sheri Huff and Midwest, however, are not subject to the payment of prejudgment interest. By charging Sheri Huff and Midwest as Relief Defendants, the SEC chose not to allege legal wrongdoing on their parts. Consequently, considering whether Sheri Huff and Midwest acted with scienter at this stage would violate due process principles. Accordingly, the Court concludes that an award of prejudgment interest against Sheri Huff and Midwest is not appropriate and declines to make such an award.
As for the amount of the prejudgment interest that Huff must pay, courts employ different methodologies in determining prejudgment interest. Yun, 148 F.Supp.2d at 1293. Nevertheless, "courts have adopted the underpayment rate without controversy." Id. (citing SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1476 (2d Cir.1996); SEC v. Farrell, 1996 WL 788367, *1 (W.D.N.Y. Nov. 6, 1996)); see also SEC v. Aleksey, 2007 WL 1789113, *2 (M.D.Fla. June 19, 2007). "That rate reflects what it would have cost to borrow the money from the government and therefore reasonably approximates one of the benefits the defendant derived from [his] fraud." Aleksey, 2007 WL 1789113 at *2 (quoting SEC v. First Jersey Sec., Inc., 101 F.3d at 1476). The IRS underpayment rate is comprised of the Federal Reserve short-term interest rate plus three percentage points. 26 U.S.C. § 6621(a)(2). Assessed quarterly from January 1, 2006, through February 28, 2010, application of this rate to funds that Huff and others on his behalf received by no later than December 31, 2005, results in a total prejudgment rate of 29.95% as of the time of trial in this matter. On disgorgement of $10.017 million, using this rate, the prejudgment interest amounts to approximately $3 million.
The SEC also seeks the imposition of civil penalties against Defendant Huff. Monetary penalties serve the dual functions of punishment and deterrence. See K.W. Brown & Co., 555 F.Supp.2d at 1314 (quoting SEC v. Lybrand, 281 F.Supp.2d 726, 729-30 (S.D.N.Y.2003) (citations omitted)). Courts have looked to the following general factors when imposing penalties under the civil penalty provisions of the securities laws:
The Court has previously discussed many of these factors in connection of its analysis of the appropriateness of injunctive relief and will not belabor these Findings of Fact and Conclusions of Law by repeating that discussion here. As for the factors not previously addressed, this Court concludes that Defendant Huff's conduct created both substantial losses to other persons and the risk of substantial losses to other persons. CNA, Baumgardner, and investors who purchased Certified stock and held it until Certified's demise all experienced losses. In CNA's case, the loss amounted to more than $60 million. As for the losses to shareholders, the evidence shows that as of February 28, 2003, the value of stock of non-affiliated holders of Certified's common stock was $4,036,439. DX 831 at 2. By March 17, 2004, the value of stock of non-affiliated holders of Certified's common stock had grown to $5,482,811. DX 822 at 2. When Certified declared bankruptcy, however, the value of the stock became virtually worthless. Moreover, even setting aside actual losses, Huff's scheme to defraud and Certified's false SEC filings created a very real risk of substantial losses to other persons.
Under the first six factors, therefore, this Court finds that Huff's conduct warrants the imposition of civil penalties. As for Huff's financial condition, Huff did not present any evidence to show that his financial condition is such that it should affect the Court's determination of the amount of such civil penalties.
The Court therefore considers the appropriate amount of penalties to impose. Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3), which establish basically the same framework, set forth three tiers of penalties. Under the first tier, "[f]or each violation," a court may impose the greater of up to a $5,000
The statutory language referring to "the gross amount of pecuniary
Nevertheless, the inquiry does not end with consideration of the parts of the statutes directing the Court to look to the "gain" to a defendant. In this regard, the remainder of the phrase qualifies the gain that the Court should consider: "pecuniary gain to such defendant
Nor does the plain language of the penalty provisions require the SEC to show that any investor actually experienced any loss in order for a court to consider imposing third-tier penalties. A court may enter third-tier penalties under Subsection 78u(d)(3)(B)(iii)(bb) when it finds that a defendant has committed a violation that has merely "created a significant risk of substantial losses to other persons," although no person has actually incurred a loss. See 15 U.S.C. 78u(d)(3)(B)(iii)(bb); see also SEC v. Aragon Capital Management, LLC, 672 F.Supp.2d 421, 451 (S.D.N.Y.2009). Thus, even under subsection 78u(d)(3)(B)(iii)(bb), the SEC need not prove that any investor lost money in order for a court to consider imposing third-tier penalties. Rather, the SEC must show only that a defendant "created a significant risk of substantial
Here, as previously discussed in this section, the Court finds that Huff, through his scheme and artifice to defraud and through Certified's false SEC filings, did, in fact, engage in fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement and did create a significant risk of substantial losses to other persons. Consequently, third-tier penalties are appropriate.
Although the SEC suggests that the Court should impose civil penalties based on the pecuniary gain to Huff as a result of each violation, this Court instead finds, under the circumstances of this case, a civil penalty of $100,000 per violation will suffice to penalize Huff and to deter similar conduct by others. In this case, the Court considers each of the following filings to constitute third-tier violations for which a civil penalty of $100,000 should be imposed:
Thus, the Court imposes total civil penalties of $600,000 against Defendant Huff.
Based on the foregoing Findings of Fact and Conclusions of Law, it is hereby
1. Plaintiff SEC is entitled to judgment in its favor and against Defendant Huff on Counts I through V of the Amended Complaint, as Huff violated the federal securities laws;
2. Defendant Huff shall be permanently enjoined from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 promulgated thereunder, as set forth in the separate Judgment in this case;
3. Defendant Huff shall be barred indefinitely from serving as an officer or director of a publicly traded company. The scope of this Order shall be set forth more fully in the separate Judgment in this case;
4. Defendant Huff is liable for disgorgement in the amount of $10.017 million, representing ill-gotten gains from Huff's wrongdoing alleged in this matter, along with prejudgment interest thereon in the amount of $3 million, and a civil penalty of $600,000, pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. The scope of this Order shall be set forth more fully in the separate Judgment in this case;
5. Relief Defendant Sheri Huff shall disgorge $3.8 million, representing illegally obtained monies to which Relief Defendant Sheri Huff is not entitled. Defendant Huff shall be jointly and severally liable for this amount. To the extent that Sheri Huff disgorges this money, Huff's disgorgement amount will be correspondingly reduced. The scope of this Order shall be set forth more fully in the separate Judgment in this case;
6. Relief Defendant Midwest shall disgorge $10.017 million, representing illegally obtained monies to which Relief Defendant Midwest is not entitled. Defendant
7. Final Judgment will be entered by separate order, in accordance with Rule 58, Fed. R. Civ. P.
PX 676. During Adam Dobrin's testimony, the defense asked him whether he had carefully researched all of the statements that he made in the letter and whether he believed each statement set forth above to be correct. See TT at 573-74. Adam Dobrin replied that he had and he did. See id. He further testified that he wrote the letter because he was concerned that Pixler "might personally get in some kind of trouble because he was on the line in all these different ways." Id. at 574. The Court understands the statements in this letter to express concern for Pixler because Pixler's name was on everything for Certified, not because Pixler was actually single-handedly controlling Certified. In other words, Adam Dobrin was worried that Pixler was being "hung out to dry." When Adam Dobrin was asked directly about "the influence that Midwest had with Certified," he explained, "To me, it seemed that the larger macro decisions probably were influenced greatly or were derived from Midwest." Id. at 513-14. More specifically, Adam Dobrin clarified, he was speaking about the "mergers and acquisitions that occurred and the choices for options for insurance coverage." Id. at 514. He further opined that Pixler, Dobrin, and McCartha "deferred to" Huff. Id. at 517-18. In light of this testimony, the Court declines to adopt the construction of Adam Dobrin's letter that Defendant and Relief Defendants urge.
