JULIE E. CARNES, Chief Judge.
This case is presently before the Court to determine remedies for plaintiff Securities and Exchange Commission ("SEC") after a jury found John P. Miller ("Miller" or "defendant") liable for five counts of federal securities fraud. After review of the record and the arguments of the parties, the Court issues: (1) a permanent injunction enjoining defendant (his agents, servants, employees, attorneys, and all persons in active concert or participation with them) from violating Section 17(a) of the Securities Act of 1933 ("Securities Act"); Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; and enjoining defendant from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder and Section 13(b)(2)(A) of the Exchange Act; (2) a civil penalty in the amount of $75,000; and (3) a director and officer bar of five (5) years.
Miller was President, Chief Executive Officer ("CEO"), and Chairman of the Board of Master Graphics, Inc. ("Master Graphics" or "the Company"), a company formed in 1997 and located in Memphis, Tennessee. (Tr. [168] at 68:2-5.)
Starting in June 1997, Master Graphics acquired printing companies throughout the United States that were then consolidated into divisions. (Id. at 74:3-7; 75:9-11.) Most former owners became employed by Master Graphics as division presidents and retained ownership of the property that housed the printing companies they had owned. Master Graphics then leased the property for the various divisions from the division presidents. Each division's purchase price was based on financial targets the division presidents had represented they would meet, post-acquisition. (Id. at 76:19-25; 77:8-13.)
The Company completed an initial public offering ("IPO") of 3.6 million shares of common stock in June 1998 and raised approximately $36 million. (Id. at 75:4-5; 79:1-3, 24-25; 80:3.) At the time of the IPO, Miller had purchased approximately eleven companies; he bought nine more by the end of 1999. (Id. at 75:20-23.) At the time the Company went public, Lance Fair ("Fair") was the Chief Financial Officer ("CFO"), and Mel Henson ("Henson") was the Chief Accounting Officer ("CAO").
While the Company initially thrived, around April 1999, Miller learned that the Company's first quarter results would not meet the estimate set by Morgan Keegan, as the majority of divisions had failed to achieve the financial targets they had represented to Master Graphics. (Def.'s Mem. Advising Ct. Materials to Focus on upon Review of Trial Proceedings ("Def.'s Mem.") [179] at 2; Tr. [168] at 98:9-16.) He was worried that missing the target would trigger a margin call by Prudential, as the stock was trading around $6.00 per share, and he knew that a margin call would occur if the stock price dropped to $4.25 per share. (Pl.'s Resp. to Assist Ct. in Review of Record ("Pl.'s Resp.") [180] at 9.) He also was concerned about how the numbers would affect a transaction with Heidelberg Equipment ("Heidelberg"), the largest manufacturer of printing equipment in the world, that he hoped would lead to a cash infusion of approximately $12 million.
Therefore, Miller devised the Salary and Rent Incentive Plan ("the Plan"), a plan to reclassify the rent and salary payments for the first quarter of 1999 as prepaid expenses or receivables that would be repaid by the division presidents unless certain performance targets were met over the subsequent quarters. (Id. at 104:4-25; 107:10-20.) Miller presented the Plan to division presidents and other personnel during a meeting in Atlanta, Georgia on April 22 and 23, 1999. (Id.)
According to Miller, the response of the division presidents to this idea was positive, and no one opposed the Plan during the meeting. (Id. at 107:10-20; 108:1-5.) However, several division presidents have contradicted Miller, noting that they expressed negative reactions to the Plan, including the opposition by some to the rent aspect. (See, e.g., Tr. [169] at 314:21; Tr. [175] at 1171:1-8.) Miller did not seek any firm commitments to the Plan from any of the division presidents at the meeting. (See, e.g., Tr. [169] at 233:2-5; 315:7-12.)
Over the next two weeks, Miller spoke by phone with the division president of each of the twenty printing companies, and he testified that everyone agreed to the Plan (Tr. [168] at 112:2-24),
Before presenting the Plan to the division presidents, Miller had previously discussed it with Fair, and he testified that he
While there was no e-mail documentation about any complaints, numerous employees testified at trial that they, in fact, did not agree to the Plan. For example, Mike Harper ("Harper"), president of Harperprints, testified that he refused to participate in the Plan because his division had met its first quarter 1999 earnings target, and he did not want to be penalized for other divisions' poor performance; furthermore, Miller never asked Harper's wife, Harper's co-owner, if she agreed to the Plan. (Tr. [168] at 117:25-118:9; Tr. [170] at 529:18-25; 530:8.) Keith Jefferies, president of the Golden Rule Division, stated that he agreed to the Plan, but only because he was told the Plan involved accounting entries and would not impose any future financial obligation on him; he stated that he would not have agreed to the Plan if he had been told that he actually might have to repay his rent and salary. (Tr. [171] at 711:20-712:7.) Carey Rosenthal, president of the Phoenix Division, agreed to have his salary reclassified, but would not agree to the rent part of the Plan because he had to pay mortgage; Rosenthal's partner stated that he needed to see the proposal in writing before he could evaluate it properly. (Tr. [170] at 631:8-24; 656:8-14.) Likewise, Wendell Burns, president of Jones Printing, testified that he did not agree to the Plan because he needed the rent payments to pay the mortgage. (Burns Dep. [37] at 27:21-28:5 (played in open court before the jury).) Eli Huffman, president of the Technigrafiks Division, testified that he asked if he could repay his first quarter salary without having it reclassified as a loan because he thought the Plan sounded dishonest. (Tr. [172] at 849:1-8; 850:10-25; 851:1.) David Sutherland, president of the Sutherland Division, testified that he refused to agree to the Plan because he did not want to repay for what he had already done. (Sutherland Dep. [33] at 96:16-17:6 (played in open court before the jury).)
Notwithstanding the above, Miller testified that he believed that all the division presidents had agreed to the Plan. (Tr. [168] at 117:3-24; Tr. [170] at 271:4-25; 272:1-21.) There was no documentation that any division presidents ever stated that their divisional numbers were inconsistent with their division's financial performance for the first quarter of 1999. (Tr. [169] at 252:3-9.) Miller cited at trial a May 14, 1999 electronic memorandum to each of the division presidents in which he generally discussed their commitment to the Plan and the impact of the Plan on the financial statements for the first quarter of 1999. (Tr. [170] at 193:7-25; 194:1-20.) None of the division presidents ever responded by e-mail to state that they did not commit to the Plan. (Id. at 270:7-10; 272:16-21.) After Miller sent out this memorandum, an e-mail to each of the division controllers was sent on May 17,
Defendant noted the testimony of David McQuiddy ("McQuiddy"), division president of McQuiddy Printing, one of the divisions purchased by Master Graphics, who testified that he recalled Miller's proposing the Plan, that he agreed to the Plan and understood how it would work, and that his company satisfied the financial benchmarks of the Plan. (Def.'s Mem. [179] at 9; Tr. [175] at 1156:2-14; 1157:6-25; 1158:1-4.) McQuiddy's financial statements were not restated and were therefore in accordance with GAAP ("Generally Accepted Accounting Principles"). (Tr. [176] at 1430:10-25; 1431:1-4.)
Miller testified that he told the Board of Directors about the Plan at a Board of Directors meeting on May 5, 1999. (Tr. [168] at 123:23-25; 124:1-4.) However, this discussion was not in the minutes of the meeting. (Id. at 125:1-9.) Fair, who recorded the minutes, could not say why the minutes were not recorded. (See generally Tr. [169].) Master Graphics issued a press release announcing first quarter earnings on May 6, 1999. It did not, however, mention its reclassification of rents and salaries as assets. (Additional Facts [29] at ¶ 3.) No one from KPMG ever saw any information about the Plan while it conducted its first quarter review; Miller also did not disclose the reclassifications to the Morgan Keegan analyst, John Lawrence ("Lawrence"), who covered the Company. (Tr. [168] at 133.)
The inflation of Master Graphics' earnings accomplished Miller's goal, as it buoyed the stock price from $5.50 on May 5, 1999, the day before the press release, to $6.0625 on May 6, 2009. (Pl.'s Resp. to Def.'s Statement of Undisputed Facts and Pl.'s Additional Facts ("Additional Facts") [29] at ¶ 22.) On May 10, 1999, Lawrence confirmed that the first quarter results met estimates and maintained both the "outperform" rating and the earnings target for the second quarter. (Lawrence Dep. [28-39] at 50:24-51:6 (played in open court before the jury).) Plaintiff's expert concluded that the reclassification of expenses caused the Form 10-Q to overstate the Company's pretax earnings by approximately $896,000, or 68%.
The stock price fell drastically in response to the announcements: the share price closed on June 28, 2009 at $3.94 per share, 21% below the June 23 closing price of $5.00, and the value of Miller's shares had dropped to $15,799,400. (Id. at 49:19-60:4.) The falling stock price caused Prudential to begin making margin calls in Miller's account. (Tr. [168] at 143:13-144:8.) On July 2, 1999, Miller transferred $623,366 of his own funds to Prudential to maintain that firm's minimum equity requirement in his margin account. (Id. at 144:3-8.) He did not tell his executive committee about the margin loan until a conference call on July 15. He also asked the division presidents collectively to loan him $3 million, but they refused. (Id. at 146:4-25; 147:1-20.) Over the next three weeks, defendant transferred an additional $204,487 of his own funds to Prudential to continue to maintain the firm's minimum equity requirement in his margin account. (Additional Facts [29] at ¶ 34.) He testified that he was in a "panic" at this point. (Tr. [168] at 147:21-23.) While this payment temporarily satisfied the minimum equity requirement, Prudential demanded additional funds as the stock price shrunk further, and when Miller failed to comply, Prudential liquidated all Miller's Master Graphics shares in November and December 1999. (Additional Facts [29] at ¶ 37.) After the shares were liquidated, defendant still owed Prudential $393,000, but Prudential ultimately forgave this debt. (Id. at ¶¶ 38, 39.)
On September 26, 2009, Fair sent Miller an e-mail that addressed the Plan, which stated:
(Tr. [168] at 155:1-20, Tr. [169] at 246:2-10.) Miller sent out a form on November 22, 2009 to the division presidents for them to sign, which stated, "I will repay the loans that were made to me in the first quarter of the year" and in which they agreed retroactively to take a reduction of their salaries beginning in October. (Tr. [169] at 182:12-14; 20-24; 184:7-11; 184:13-14.) However, no division presidents signed the form, and they all asked
Miller resigned from his positions as President and CEO, effective December 1, 1999, and resigned as Chairman effective February 1, 2000; Diehl succeeded him. (Id. at 187:20-25.) On February 18, 2000, Master Graphics issued a press release in which it first identified an issue with the accounting surrounding the Plan. (Def.'s Statement of Undisputed Material Facts ("Def.'s SUMF") [26] at ¶ 13.) The Dow Jones News Service reported on February 19, 2000 that Master Graphics discovered a "`potentially inappropriate deferral of certain compensation and rent expenses' paid in the first quarter of 1999 totaling about $1 million." (Id.) It said that the discovery would "delay until March the public release of its results of operations for the year ended Dec. 31" and that "the deferral could impact its unaudited financial statements for the periods ending March 31, 1999, June 30, 1999, and Sept. 30, 1999, and may result in the restatements of those periods." (Id.)
On February 18, 2000, Master Graphics' stock closed at $0.75 a share, and on February 22, 2000, the first day after the accounting issues were disclosed, it closed at $0.81 a share. (Id. at ¶ 14.) On February 23, 2000, it closed at $0.75 a share. (Id. at ¶ 15.) On April 13, 2000, Master Graphics issued another press release that stated that "[i]n addition to announcing its fourth quarter and full year results, . . . it would restate previously released quarterly financial statements" because it had "determin[ed] that the deferral of certain compensation and rent expenses of approximately $0.9 million ($0.5 million net of taxes) in the first quarter was inappropriate." (Def.'s SUMF [26] at ¶ 17.) The press release "also determined that depreciation expense and loss on sale of assets associated with its 1999 press replacement program was understated for the first three quarters of 1999" and that "[t]he aggregate impact of these restatements was to decrease net income by $0.7 million for the three months ended March 31, 1999, to increase net loss by $0.5 million and $1.2 million for the three months and six months ended June 30, 1999, and to increase net loss by $1.4 million and $2.6 million for the three months and nine months ended September 30, 1999." (Id. at ¶ 19.) Master Graphics stated that it had experienced a $96 million net loss for the previous quarter and a $105.2 million net loss for the year and that it continued to experience "costs and problems associated with the installation and start up of its new printing presses" which "resulted in significant waste and shrinkage" at several locations. (Id. at ¶¶ 20-21.)
During this period, the Independent Auditors Report filed with Master Graphics' Form 10-K
The Complaint [1] alleged five counts against Miller: (1) fraud in connection with the offer or sale of Master Graphics' securities in violation of 15 U.S.C. § 77q(a), Section 17(a) of the Securities Act (Compl. [1] at ¶¶ 34-37); (2) fraud in connection with the purchase or sale of Master Graphics securities in violation of 15 U.S.C. § 78j(b), Section 10(b) of the Exchange Act and Rule 10b-5 thereunder (id. at ¶¶ 38-41); (3) failing to implement a system of internal accounting controls or knowingly falsifying an accounting book, record, or account, in violation of 15 U.S.C. § 78m(b)(2)(A), Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder (id. at ¶¶ 42-45); (4) aiding and abetting in violation of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder (id. at ¶¶ 46-49); and (5) aiding and abetting in violation of Section 13(b)(2)(A) of the Exchange Act, "which occurred when Master Graphics, as an issuer of securities, failed to make and keep accounting books, records and accounts which accurately and fairly reflected its transactions and the disposition of its assets." (Id. at ¶¶ 50-52.)
In a jury trial before Magistrate Judge Alan J. Baverman ("Judge Baverman"), the jury found Miller liable as to all counts. (See, e.g., Tr. [176].) Judge Baverman held a hearing ("the Remedies Hearing") on December 10, 2008 in which he indicated his preliminary thoughts regarding his ruling on remedies. (See Tr. [154].) Before Judge Baverman could issue remedies, however, he recused himself from the case. (See Order of Recusal [152].) Therefore, this Court will address remedies. Plaintiff seeks a civil penalty, a director and officer bar, an injunction against future violations of the federal securities laws, and disgorgement and prejudgment interest. (Pl.'s Br. [142] at 2.)
Plaintiff asks the Court to issue a permanent injunction enjoining defendant (his agents, servants, employees, attorneys, and all persons in active concert or participation with them) from violating Section 17(a) of the Securities Act; Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and for a permanent injunction enjoining defendant from aiding and abetting violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder and Section 13(b) (2) (A) of the Exchange Act. (Plaintiff's Brief Supporting Imposition of Disgorgement, Prejudgment Interest, Civil Penalties, and an Officer and Director Bar Against John P. Miller ("Pl.'s Br.") [142] at 15-16.)
Under Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), "[t]he 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) (affirming issuance of injunction). See also SEC v. Blatt, 583 F.2d 1325, 1334 (5th Cir.1978)
Blatt, 583 F.2d at 1334 n. 29 (citations omitted).
Defendant argues unpersuasively that the phrase "previous violations of federal securities laws" means that the violations must have occurred before the ones at issue in the present case. (Opp'n [144] at 14.) As authority for this proposition, defendant cites Calvo, in which the Eleventh Circuit granted an injunction, stating that "[a]s the district court recognized, this is not the first time [defendant] has violated federal securities laws." (Id.) See Calvo, 378 F.3d at 1216.
As a jury found that Miller had violated several federal securities laws in this case, the Court finds that plaintiff has made a sufficient showing that defendant has previously violated the federal securities laws. Judge Baverman also found that plaintiff had met its burden of making a prima facie case as to a previous federal securities law violation. (Tr. [154] at 91:16-19.)
In determining the likelihood of future violations, courts consider the totality of the circumstances. SEC v. Murphy, 626 F.2d 633, 655 (9th Cir.1980). The Court will address each of the factors and whether
Plaintiff argues that Miller's conduct was egregious because he: (1) directed his staff to reclassify rents and salaries as loans, even though he knew the division presidents had not agreed to the Plan; (2) placed his personal desire for wealth ahead of the interest of Master Graphics' employees and shareholders by focusing on the stock price instead of improving the Company's performance "in real ways"; and (3) defrauded investors who purchased Master Graphics shares while the price was artificially inflated.
Defendant states that his actions were not egregious enough to warrant an injunction because: (1) he believed that the development and instituting of the Plan were legitimate from an accounting and legal perspective; (2) he believed all the division presidents with whom he spoke agreed to the Plan, and (3) he never had reason to believe his actions in the case were wrong. (Opp'n [144] at 18.)
Defendant also states that plaintiff cannot support its claim that investors were defrauded, relying heavily on a Southern District of Texas case that found: "the Court is unable to conclude that [an unsupportable showing of drop in stock] [wa]s enough to make [d]efendant's violation egregious, so as to warrant injunctive relief. Additionally, even if the information about [the company's] first quarter adjustments had a $2.91 per share effect on [the company's] stock . . . this is not enough to make [d]efendant's actions so egregious as to require a permanent injunction." SEC v. Snyder, No. H-03-04658, 2006 WL 6508273, at *3 (S.D.Tex. Aug. 22, 2006).
In other cases in the Northern District of Georgia, however, courts have frequently found that defendants have acted egregiously when they have misled investors. See, e.g., SEC v. ETS Payphones, Inc., 123 F.Supp.2d 1349, 1355 (N.D.Ga.2000), aff'd, SEC v. ETS Payphones, Inc., 408 F.3d 727, 737 (11th Cir.2005) (finding that defendant acted egregiously "in operating an investment scheme at a significant loss while only he profited. While the company lost millions, [d]efendant sponsored a NASCAR racing team, purchased a home on Sea Island, and received $700,000 in `consultant' fees from another payphone enterprise."); Phoenix Telecom, LLC, 239 F.Supp.2d at 1299 ("[d]efendants['] conduct was egregious, systematic, and continuous for a number of years" when promoters made false statements in sales literature); SEC v. Crowell & Co., Inc., Civ. A. No. CV190-211, 1992 WL 206270, at *6 (S.D.Ga. July 1, 1992) (finding that "violations are sufficiently egregious, although minimally so, to warrant an injunction," because while "the action with respect to both violations could be said to be harmless," "the discrepancies [in documents filed with the SEC] are not entirely harmless and have a potential for further mischief simply by way of their historical inaccuracy."); SEC v. Global Express Capital Real Estate Inv. Fund, I, LLC, 289 Fed. Appx. 183, 189 (9th Cir.2008) (finding that district court did not abuse its discretion in issuing a permanent injunction against defendant because her behavior was "egregious
The Court concludes that defendant's behavior is sufficiently egregious given his repeated lies to Fair and Henson about the division presidents' agreement to the Plan.
Plaintiff argues that there was a "recurrent aspect" to Miller's misconduct because Miller caused Master Graphics to misrepresent its earnings in financial statements for three successive reporting periods. (Pl.'s Br. [142] at 14.)
Defendant argues that this offense is isolated because the infractions at issue all relate to the Plan, which was one isolated occurrence (Opp'n [144] at 17), and an isolated occurrence does not warrant injunctive relief. See SEC v. Bausch & Lomb, Inc., 565 F.2d 8, 18 (2d Cir.1977) (denying injunction because judge determined "past transgression was no more than an isolated occurrence"; "[i]llegal activity, without more, does not automatically justify the issuance of an injunction[;] [t]he SEC must show a cognizable risk of future violation, something more than the mere possibility which serves to keep the case alive.") (citations and internal quotation marks omitted).
Defendant also cites Snyder, in which the SEC alleged that defendant filed a materially false and misleading Form 10-Q for the first quarter of 1999. (Opp'n [144] at 17-18.) See Snyder, 2006 WL 6508273, at *1. The Snyder court stated that the fact that the "case involved more than one charge" did not demonstrate "that [d]efendant engaged in or was accused of engaging in the violation of any securities laws prior to the events of early 1999. Further, there is no evidence that [d]efendant violated the securities laws subsequent to the events underlying the present case." Id. at *4.
Despite the fact that the Plan was arguably only a one occurrence matter, the Court finds that defendant acted repeatedly, as he went to Fair and Henson twenty times to tell them that the division presidents had agreed to the Plan. The Plan also affected three separate 10-Qs. Therefore, the Court concludes that defendant's actions were not isolated.
Plaintiff argues that Miller's conduct shows a high level of scienter because he repeatedly lied to Henson and Fair by saying that presidents had agreed to the Plan. (Pl.'s Br. [142] at 14.) The jury found him liable on three counts of fraud, including the scienter-based count of Section 10(b) of the Exchange Act, based on his having made false statements of material fact. (See, e.g., Tr. [176].) Defendant makes no argument in response about scienter. (See generally Opp'n [144].)
Judge Baverman also noted at the Remedies Hearing that he believed "that Mr. Miller's view of the matter today still reflects a high level of scienter." (Tr. [154] at 93:7-9.) The Court agrees and therefore concludes that Miller's level of scienter weighs in favor of an injunction.
Plaintiff argues that Miller has offered no meaningful assurances against future violations. (See, e.g., Pl.'s Br. [142] at 2, 15.) Defendant argues, however, that "it goes without saying that Mr. Miller has no intention of violating the federal securities laws in the future." (Opp'n [144] at 20.)
In the Remedies Hearing, when asked by his attorney about his assurances against future violations, defendant stated:
(Tr. [154] at 57:20-25; 58:1-10.)
However, regardless of defendant's assurances, such assurances are not given significant weight. See, e.g., SEC v. Ginsburg, 362 F.3d 1292, 1305 (11th Cir.2004) (finding district court abused its discretion by denying SEC's request for injunction because of defendant's assurances he would not engage in any actions that would raise suspicion of illegal conduct). Moreover, as noted infra, Miller accepts no responsibility for his conduct, but instead blames everyone else for his plight. Such self-pity and propensity for rationalization greatly undermine defendant's assurances.
Accordingly, the Court finds that this factor weighs in favor of plaintiff.
Miller has also not acknowledged the wrongfulness of his conduct. Defendant points to his testimony at trial that he never intended to commit fraud and that all division presidents agreed to the Plan. (Opp'n [144] at 20-21.) Specifically, he testified as follows:
(Id.; Tr. [168] at 80:6-21.) However, while this testimony shows that Miller is
Plaintiff stresses the fact that Miller is unrepentant. (Pl.'s Resp. [180]; see also Tr. [154] at 74:1-2 ("I don't know that I've ever seen more of a lack of recognition of the wrongful conduct of the defendant.")) At the Remedies Hearing, defendant blamed the jury, the three SEC attorneys, and the division presidents for the verdict against him. (Id. at 8:1-5; 9:17-22 (stating that the division presidents "lied" and were "simple in their thinking"); id. at 10:20-23; 10:8-9 (stating that the three SEC attorneys "have intentionally, [ ] over the last nine years — I don't view this as the government, it's you three — you three make the decision of how to ruin a person's life"
Judge Baverman was unpersuaded by these arguments, stating that "if the jury was thinking like the court was thinking, it did not find the defendant's testimony to be credible," that he did not "see any realization by [defendant] that a fair and impartial jury would look at this evidence and find that [he] violated the securities laws," and that "[t]here is no acceptance of responsibility, to borrow from the sentencing guidelines . . . there is no inclination [sic] in [defendant's] statements that [he] did wrong." (Tr. [154] at 89:8-10, 23-25; 90-6.) He stated that "[t]he jury was very intelligent, and [ ] a jury can differentiate" "between argument and fact and this jury did not, in my opinion, put a strike against Mr. Miller for being a CEO of a company. . . . [it] can distinguish those CEOs who act responsibly and those who do not, and [] that's what they saw in this case." (Id. at 88:21-24.) Finally, he noted that "[t]he fact that other people did wrong or may have done wrong or could have been the greater subject of the SEC's attention does not excuse [defendant's] conduct as found by the jury, who, after all, observed all of these individuals who came in and testified"; rather, "[t]his case was about [defendant's conduct and the jury found that [his] conduct violated the law." (Id. at 90:7-12.)
The Court has reviewed the record and it concurs with Judge Baverman's assessment. The Court concludes that Miller has not shown sufficient recognition of the wrongful nature of his conduct, and accordingly this factor weighs in favor of plaintiff.
Plaintiff argues that Miller is a serial entrepreneur and promoter who has been involved in large deals since the 1980s. (See, e.g., Pl.'s Br. [142] at 15.) Starting in 2002 and during the pendency of this case, he attempted to put together a large deal to create a new commercial airline, DirectAir, with billions of dollars of investor funding and $300 million in loan guarantees from the state of Louisiana. (See Miller Aff., attached as Ex. 4 to Opp'n [144] at ¶ 4.) Judge Baverman stated during the Remedies Hearing that "obviously, there is an opportunity for future violation because this is Mr. Miller's business." (Tr. [154] at 93:15-16.)
Defendant argues that the verdict against him has made it difficult for him to be presented with opportunities to violate the federal securities laws, stating that after the verdict was made public in 2007, he came to an agreement with potential financiers and management of DirectAir that he would not have an executive-related role or board of director position with DirectAir. (Id. at ¶¶ 6, 7.)
Defense counsel provided numerous letters in support of Miller, including from his wife, former colleagues, and a Louisiana state senator. (See Exs. A1-A9 to Opp'n [144].) The Court notes that some of these letters are from the early 1990s, and others are from 2002, well before the Complaint [1] was filed in this case in June 8, 2004. (See id.) The most salient recommendation comes from Andrew LaTrobe, a loan officer with whom Miller worked on the DirectAir deal, who wrote, "For almost eight years [,] I have seen no evidence of any attempt by Mr. Miller to exaggerate the facts for the purpose of reaching a goal, in spite of the billions of dollars of potential value (and annual economic impact) that could be created for a region in desperate need." (Ex. Al of Ex. 4 to Opp'n [144].) Miller's wife wrote to the Court on October 22, 2008 that the only paying job he has
(Ex. A2 to Opp'n [144].)
Despite defendant's apparent lack of current job prospects,
Plaintiff asks the Court to issue an order requiring defendant to disgorge any ill-gotten gains together with prejudgment interest and requiring defendant to pay civil monetary penalties.
Plaintiff argues for disgorgement in the amount of $10,184. (Pl.'s Br. [142] at 2.)
Once a court determines that a federal securities law violation has occurred, it has broad equitable powers to fashion appropriate remedies, including ordering culpable defendants to disgorge their profits. SEC v. Lorin, 76 F.3d 458, 461-62 (2nd Cir.1996); see also SEC v. First Jersey Sec, Inc., 101 F.3d 1450, 1474-75 (2nd Cir.1996) (district courts have broad discretion to determine whether to order disgorgement and the amount to be disgorged). In fact, district courts have so much latitude in these matters that a decision not to order disgorgement will not be disturbed by an appellate court unless it is established that the district court abused its discretion. See, e.g., First Jersey Sec., 101 F.3d at 1475; SEC v. Posner, 16 F.3d 520, 522 (2nd Cir.1994).
The primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains. SEC v. Wang, 944 F.2d 80, 85 (2nd Cir.1991); see also Blatt, 583 F.2d at 1335 (the remedy of disgorgement is designed both to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws). Because disgorgement is remedial and not punitive, the court's power to order disgorgement "extends only to the amount with interest by which the defendant profited from his wrongdoing." Id.
In denying defendant's Motion for Summary Judgment [25], the Court rejected all defendant's theories for disgorgement except for the interest theory. (See July 31, 2006 Order [52] at 37.) This theory stated that Miller's ill-gotten gain equaled the interest on the $827,000 that he paid to satisfy the initial margin call from Prudential on July 2, 1999: specifically, had he not inflated the first quarter earnings, the poor earnings would have caused the price of the Company's stock, to drop below $4.25 (the price that triggered the margin call) in or around May 17, 1999 rather than July 1999. (Pl.'s Br. [142] at 19.)
The Court may take judicial notice of prevailing prime rates of interest during that time, which was 7.75%. See Levan v. Capital Cities/ABC, Inc., 190 F.3d 1230, 1235 n. 12 (11th Cir.1999); http://www.federalreserve.gov/releases (identifying prime interest rates). Applying the prevailing interest rate, the ill-gotten gain is $10,184.
Judge Baverman indicated at the Remedies Hearing that he would issue the disgorgement of $10,184. (Tr. [154] at 93:17-24; 94:17; 96:10-12.) The Court, however, concludes that this item of enrichment was more theoretical, than real, and declines to do so.
Plaintiff argues that defendant should be required to pay prejudgment interest on this disgorgement in an amount of $8,476.51. (Pl.'s Br. [142] at 20.)
Like the decision to grant disgorgement and the decision about the amount of disgorgement, the decision whether to award prejudgment interest is left to the Court's broad discretion. First Jersey Sec., 101 F.3d at 1476. "[R]equiring the payment of interest prevents a defendant from obtaining the benefit of what amounts to an interest free loan procured as a result of illegal activity." SEC v. Robinson, No. 00 Civ. 7452 RMB AJP, 2002 WL 1552049, at *9 (S.D.N.Y. July 16, 2002) (citations and internal quotation marks omitted).
Defendant argues with the calculation mechanism plaintiff used to determine the amount of prejudgment interest, stating that plaintiff's calculation began the prejudgment interest period too early. (Opp'n [144] at 39-40.) However, defendant
Judge Baverman indicated he was not likely to award prejudgment interest because of the long delay in trying the case. (Tr. [154] at 94:12-16 ("This case has gone on for a long time and I don't think it's the fault of anybody, so I think that all the delay involved attributing the interest to Mr. Miller, whatever that amount is ... that just doesn't seem right[;] I would [only] impose a disgorgement.").) The Court likewise declines to impose prejudgment interest.
Defendant argues again that the SEC's claim for a civil penalty is time-barred. (Opp'n [144] at 23.) The Court has already rejected this argument in defendant's Motion for Summary Judgment [25], and it will therefore consider the issuance of a civil penalty. (See July 31, 2006 Order [52].)
In plaintiff's initial brief regarding remedies, it did not recommend a specific amount of civil penalty, although it stated that the Court could award up to $880,000. (Pl.'s Br. [142] at 21.) During the October 8, 2009 hearing, the Court suggested that the SEC should recommend a dollar amount for the civil penalty against defendant. (See October 8, 2009 Tr. [178] at 11-12.) Accordingly, the SEC filed a Clarification Regarding Civil Penalties [183] and requested that the Court impose a civil penalty in the amount of $225,000.
Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act provide that the SEC may seek to have a Court impose civil penalties. A civil penalty is determined "in light of the facts and circumstances" of a particular case. 15 U.S.C. § 78u(d)(3)(B)(i). First tier penalties (arising from conduct that occurred before February 1, 2001, but not earlier than 1996) can be imposed up to the larger of $5,500 for a natural person or $55,000 for any other person, for each violation, or the amount of ill-gotten gain. 15 U.S.C. § 78u(3)(B)(i). When the violation involves fraud, second tier penalties may be imposed up to $55,000 for a natural person or $275,000 for any other person, for each violation, or the amount of the ill-gotten gain. 15 U.S.C. § 78u(B)(ii). A third tier civil penalty of up to the larger of $110,000 for a natural person or $550,000 for any other person, for each violation, or the amount of ill-gotten gain may be imposed when any provision of the Securities Act or the Exchange Act is violated, if the violation involved fraud or deceit and the violation resulted in substantial losses or created a significant risk of substantial losses to other persons.
Because the relevant statutes authorize penalties for "each violation," courts are empowered to multiply the statutory penalty amount by the number of statutes the defendant violated, and many do. See, e.g., SEC v. Moran, 944 F.Supp. 286, 296 n. 13 (S.D.N.Y.1996) (for individual defendant found liable for four statutory violations and two rule violations, court noted that second tier penalty could be up to six times the $50,000 statutory amount, or $300,000). Plaintiff initially argued in its Brief Supporting Imposition of Disgorgement, Prejudgment Interest, Civil Penalties, and an Officer and Director Bar Against John P. Miller [142] that the Court should impose a penalty based on the eight rules and statutes Miller violated, for a total of $880,000. (Pl.'s Br. [142] at 21.) Defendant argued, however, that because defendant was accused of conducting a single comprehensive scheme, the scheme should be considered a single violation. (Opp'n [144] at 30.)
In finding Miller liable on all counts, the jury found that Miller's conduct involved fraud on the first three counts; therefore, a second or third tier penalty is appropriate for those counts. See generally 15 U.S.C. § 78u(3)(B). Defendant has argued that plaintiff has failed to show the applicability of a third tier penalty, because plaintiff has neither shown that substantial losses actually occurred or that there was the risk of same.
The Court concludes that an argument could certainly be made that Miller's conduct created a significant risk of substantial losses to other persons. 15 U.S.C. § 78u(3)(B)(iii)(bb). The significant drop in Master Graphics' share price after the Company announced it would not meet its second quarter earnings target shows defendant's earlier manipulation of Master Graphics' earnings created "significant risk of substantial losses"; for example, the share price dropped 21% after it was announced in June 1999 that Master Graphics would not meet its second quarter earnings target. Id. Yet, defendant is also correct that the SEC has not seemed particularly enthusiastic in making this argument. As the Court's ultimate penalty can be supported without the need to decide this, the Court does not reach the question whether third tier penalties are applicable.
The Court also concludes that an analysis of the Sargent favors assessing a civil penalty. Sargent, 329 F.3d at 42. The Court has already determined that Miller's conduct was egregious, involved a high level of scienter, and was more than "one isolated scheme." (Opp'n [144] at 28.) Defendant argues that his actions were not egregious because his conduct "did not involve significant falsification of financial records." (Id. at 27.) He also argues that his scheme did not involve a high degree of scienter because his scheme was "open and notorious" and he did not "take great measures to conceal the plan from Company insiders...." (Id. at 12, 28.) However, Miller's conversations outside the presence of Fair and Henson, as well as his keeping the Plan from the Company accountant and investors, contradict this assertion. (See, e.g., Pl.'s Resp. [180] at 14.) Defendant argues that he did not gain a large personal benefit, but instead lost everything. (See, e.g., Tr. [154] at 80:3-7 ("This was a very narrow, very narrow scheme.... It was a plan that he imposed on others as well as himself. This is not a CEO who was high-handed and wasn't willing to put his own salary at risk. He got no severance, [ ] no economic benefit from this."))
This argument is also unpersuasive, as defendant stood to gain a great deal of money because he hoped his shares of Master Graphics would become worth as much as $200 million. (Pl.'s Resp. [180] at 6). Defendant also argues that he should
Snyder, 2006 WL 6508273, at *12.
Furthermore, the Court has taken defendant's financial circumstances into account in setting a penalty. Yet, even though defendant is not presently employed and he states that he and his wife have less than $5,000 in total assets, Miller still has the potential to acquire enough money to pay a substantial fine. (Opp'n [144] at 29.)
Accordingly, considering all the above factors, the Court assesses a civil penalty of $75,000, against defendant.
Plaintiff requests the Court enter an Order permanently prohibiting defendant from acting as an officer or director of any issuer of securities registered with the SEC pursuant to Section 12 of the Exchange Act, or required to file reports with the SEC pursuant to Section 15(d) of the Exchange Act. (Pl.'s Br. [142] at 15-16).
Section 21(d)(2) of the Exchange Act and Section 20(e) of the Securities Act provide for officer and director bars and penalties. See 15 U.S.C. § 78u(d)(2)
The relevant statutes were amended in 2002 as part of the Sarbanes-Oxley Act ("Sarbanes-Oxley") to substitute the term "unfitness" for "substantial unfitness"; i.e., a defendant's conduct must demonstrate "unfitness to serve as an officer or director of any such issuer." 15 U.S.C. § 78u(d)(2); see Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204, § 305(a)(1)-(2), 116 Stat. 745, 778-779 (2002). Congress's intent was to reduce the government's burden. See S. Rep. 107-205, at 27 (2002) ("The Commission has argued that the `substantial unfitness' standard for imposing bars is inordinately high, causing courts to refrain from imposing bars even in cases of egregious misconduct. The amended legislation rectifies this deficiency by modifying the standard governing imposition of officer and director bars from `substantial unfitness' to `unfitness.'").
Furthermore, the parties disagree on whether the Court should apply the "unfitness" test or the "substantial unfitness" test, as the conduct at issue occurred in 1999, before the statute was amended, and courts apply slightly different criteria to the two tests.
The criteria for the "substantial unfitness" test were as follows: "(1) the `egregiousness' of the underlying securities law violation; (2) the defendant's `repeat offender' status; (3) the defendant's `role' or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur." See, e.g., SEC v. Patel, 61 F.3d 137, 141 (2d Cir.1995); SEC v. First Pac. Bancorp, 142 F.3d 1186, 1193 (9th Cir.1998).
In 2007, the District Court for the District of Columbia laid out the factors to use in determining "unfitness":
SEC v. Levine, 517 F.Supp.2d 121, 145-46 (D.D.C.2007).
However, several courts have continued to apply the Patel factors, even post-Sarbanes-Oxley, suggesting that there is not a significant difference between the two tests.
The Court concludes that even the more onerous, pre-Sarbanes test weighs in favor of imposing a bar. The Court has already discussed most of these factors, see supra, in its analysis of injunctive relief. For example, the Court has determined that the scheme was complex and egregious, involving misrepresentations to company accountants and shareholders, and that Miller had a high degree of scienter. See Patel, 61 F.3d at 141; Levine, 517 F.Supp.2d at 145-46. Miller also used stealth and concealment in his wrongdoing. See Levine, 517 F.Supp.2d at 145-46. (Pl.'s Br. [142] at 17.) The Court has also determined that the Plan was not merely an isolated occurrence. See Levine, 517 F.Supp.2d at 145-46. Miller's role was central, as he was the CEO, the scheme was his idea, and only he took part in the telephone conversations with the division presidents. See id. The Court also determined that there was substantial loss to investors and significant risk to investors of substantial losses, see supra. See id.
While Miller's actual gains were not substantial, he had a significant economic stake in the outcome, as he hoped to achieve large gains. See id.; Patel, 61 F.3d at 141. He also had a prior securities infraction: he was sanctioned in 1986 by the Louisiana Commissioner of Securities for the sale of unregistered securities and suspended from any involvement in the securities business in the State of Louisiana from August 28, 1986 to December 19, 1986. (Reply [148] at 21 n. 9.) Levine, 517 F.Supp.2d at 145-46; Patel, 61 F.3d at 141.
Most importantly, Miller has shown no contrition, as he is vehement in his denial of any wrongdoing. (See Pl.'s Br. [142] at 18.) Levine, 517 F.Supp.2d at 145-46. Indeed, Miller's constant finger-pointing, rationalizations, and self-pity are both unattractive and a cause for concern as to the future likelihood of his behaving responsibly and honorably, should he acquire a position of great corporate responsibility.
In short, because Miller intends to continue as an entrepreneur and to work on high-stakes business ventures, there is a likelihood that the violations could recur. See Patel, 61 F.3d at 141. The Court therefore concludes that Miller should be subject to an officer and director bar, as the SEC has proved his substantial unfitness for being an officer or director of a publicly traded corporation.
The question is the duration of the bar. The SEC argues for a lifetime bar. Given Miller's age and the stigma that attaches to any such bar, it is likely that whatever the length of this Court's bar, it will act effectively as a lifetime bar. Nevertheless, the Court believes that it should try to assess a period that will be proportional to the conduct here. The Court concludes that a bar of approximately 15 years would be appropriate on these facts. Yet, even though the defendant clearly aspired to a corporate position during the pendency of this case, he has not served in any responsible position in a publicly-traded corporation in the last 10+ years. Thus, the defendant has already effectively served over 10 years of any bar period that would have been imposed had this case been resolved closer to the time of the offense conduct.
Accordingly, the Court will give the defendant credit for this time when he was largely absent from the corporate world and will now prospectively impose a 5-year bar.
For the above reasons, the Court issues: (1) a permanent injunction enjoining defendant (his agents, servants, employees,
15 U.S.C. § 78u(d)(2).
15 U.S.C. § 77t(e).
