ELAINE E. BUCKLO, District Judge.
Pursuant to Federal Rule of Civil Procedure 54(b) and the Court's December 2, 2008 order (Docket Entry 120), the Securities and Exchange Commission ("SEC") respectfully moves the Court to: (1) find defendant George L. Phelps, also known as "Lin" Phelps and also doing business under the name "Safe Estate Plans," ("Phelps") liable for disgorgement of the illegal Universal Lease commissions paid to him in the amount of $2,002,766.66, and for prejudgment interest thereon in the amount of $919,732.93, for a total of $2,922,499.59; (2) impose a civil penalty against Phelps in the amount of $120,000; and (3) enter a final judgment against Phelps in the form attached as Exhibit 1 which includes both the disgorgement and civil penalties sought in this motion and the permanent injunctive relief previously ordered against him. In support, the SEC states as follows:
1. This is a securities enforcement action brought by the SEC in response to a massive nationwide fraudulent investment scheme orchestrated by Michael E. Kelly ("Kelly"). As alleged in the complaint, Kelly and those working with him raised more than $428 million from American investors through the fraudulent offer and sale of securities in the form of "Universal Leases." To sell Universal Leases, Kelly used a network of unregistered sales people (who could not legally sell these securities) that he trained and who sold the Universal Lease by simply parroting to investors the false and misleading statements Kelly made to them in training. Kelly paid these sales people huge commissions that they did not disclose to investors.
2. Among Kelly's top sales people was Phelps. The complaint alleges that Phelps offered and sold Universal Leases through the use of false and misleading statements, failed to disclose the huge commissions Kelly was paying him, recruited others to sell the Universal Leases and, according to the SEC's preliminary analysis, pocketed at least $1.8 million in commissions for Universal Lease sales.
3. The SEC seeks a judgment against Phelps that: (a) permanently enjoins and restrains him from violating the charged provision of the federal securities laws (i.e., Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 15(a) of the Securities Act of 1934 ("Exchange Act") and Rules 10b-5 and 10b-10 thereunder); (b) requires him to disgorge all ill-gotten gains and unjust enrichment realized from his unlawful conduct, gained directly or indirectly from the conduct alleged in the complaint, together with prejudgment interest thereon; and (c) orders him to pay an appropriate civil money penalty. See Complaint, Docket Entry 1, at pp. 51-63.
4. In response to the complaint, Phelps entered into a bifurcated settlement with the SEC in which he consented to the entry of an order of permanent injunction against him prohibiting future violations of the charged provisions of the securities laws. In addition, Phelps agreed to procedures for resolving the SEC's remaining claims against him for disgorgement and civil penalties (i.e., for resolving this motion). See Consent of Defendant George L. Phelps, Docket Entry 113-3, at ¶ 3.
5. Specifically, Phelps agreed that upon the SEC's motion, the Court would determine whether it is appropriate to order disgorgement of his ill-gotten gains, and whether to impose a civil penalty pursuant to 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)] and, if so, the amount(s) of the disgorgement and civil penalty. Id. Phelps also agreed that that in connection with the SEC's motion: (a) he would be precluded from arguing that he did not violate the federal securities laws as alleged in the Complaint; (b) he could not challenge the validity of his consent or the order of permanent injunction entered against him; (c) solely for the purposes of this motion, the allegations of the complaint would be accepted as and deemed true by the Court; and (d) the Court may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure. Id.
6. The Court included these agreed-upon procedures in the order of permanent injunction previously entered against Phelps. See Amended Order of Permanent Injunction Against Defendant George L. Phelps, Docket Entry 120, at p. 5, Section VI.
7. The SEC now moves the Court to find Phelps liable for disgorgement, prejudgment interest thereon, and a civil penalty. Pursuant to his agreement and the Court's prior order, Phelps may not contest that he violated the federal securities laws as alleged in the complaint. Thus, it is established that he violated Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Exchange Act and Rules 10b-5 and 10b-10 thereunder.
8. In addition, the allegations of the complaint, taken as true for purposes of this motion, amply demonstrate that Phelps fraudulently offered and sold Universal Leases in violation of the federal securities laws and profited handsomely as a result. As discussed more fully in the SEC's memorandum of law submitted in support of this motion and in the Declaration of R. Kevin Barrett (an accountant for the SEC who has examined the bank records showing the commissions paid to Phleps), which is attached as Exhibit 2 to this motion, these uncontested facts and the law show that the Court should order Phelps to disgorge the Universal Lease commissions paid to him in the amount of $2,002,766.66, plus prejudgment interest in the amount of $919,732.93. In addition, the SEC submits that the Court should find that Phelps' conduct is deserving of a single third-tier civil penalty in the amount of $120,000 pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78(d)(3)].
WHEREFORE, Plaintiff, the United States Securities and Exchange Commission respectfully requests that the Court:
The Securities and Exchange Commission having filed a Complaint and Defendant George L. Phelps, also known as "Lin" Phleps and also doing business under the name "Safe Estate Plans," ("Phelps" or "Defendant") having entered a general appearance and consented to the Court's jurisdiction over Defendant and the subject matter of this action; and Defendant having previously consented to an Order of Permanent Injunction Against George L. Phleps ("Order of Permanent Injunction"); and the SEC having filed a motion seeking the entry of a Final Judgment setting disgorgement, prejudgment interest and civil penalties to be paid by the Defendant and incorporating in the Final Judgment the permanent injunctive relief previously ordered in the Order of Permanent Injunction; and the Court having considered the SEC's motion, the submissions of all parties concerning this motion, and being apprised of the premises; the Court grants the SEC's motion and orders as follows.
IT IS HEREBY ORDERED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:
IT IS FURTHER ORDERED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security:
IT IS FURTHER ORDERED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 5 of the Securities Act [15 U.S.C. § 77e] by, directly or indirectly, in the absence of any applicable exemption:
IT IS FURTHER ORDERED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Rule 10b-10 promulgated under the Exchange Act [17 C.F.R. § 240.10b-10] by effecting for the account of a customer, or inducing the purchase or sale by such customer, of a security without, at or before completion of such transaction, giving or sending to such customer written notice disclosing the source and amount of any other remuneration received or to be received by them in connection with the transaction.
IT IS FURTHER ORDERED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with him who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 15(a) of the Exchange Act [15 U.S.C. § 78o(a)] by making use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers acceptances, or commercial bills), without registering with the Commission as a broker or dealer.
IT IS FURTHER ORDERED, that Defendant is liable for disgorgement of $2,002,766.66 representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $919,732.93 for a total of $2,922,499.59. Defendant is also liable for a civil penalty in the amount of $120,000 pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. Defendant shall satisfy these obligations by paying these amounts within 14 days after entry of this Final Judgment. The Commission may enforce the Court's judgment for disgorgement and prejudgment interest by moving for civil contempt (and/or through other collection procedures authorized by law) at any time after 14 days following entry of this Final Judgment. In response to any such civil contempt motion by the Commission, Defendant may assert any legally permissible defense.
Payments under this paragraph shall be made to the to the Clerk of this Court, together with a cover letter identifying Phelps as a defendant in this action; setting forth the title and civil action number of this action and the name of this Court; and specifying that payment is made pursuant to this Final Judgment. Defendant shall simultaneously transmit photocopies of such payment and letter to the Commission's counsel in this action. By making this payment, Defendant relinquishes all legal and equitable right, title, and interest in such funds, and no part of the funds shall be returned to Defendant. Defendant shall pay post-judgment interest on any delinquent amounts pursuant to 28 USC § 1961.
The Clerk shall deposit the funds into an interest bearing account with the Court Registry Investment System ("CRIS") or any other type of interest bearing account that is utilized by the Court. These funds, together with any interest and income earned thereon (collectively, the "Fund"), shall be held in the interest bearing account until further order of the Court. In accordance with 28 U.S.C. § 1914 and the guidelines set by the Director of the Administrative Office of the United States Courts, the Clerk is directed, without further order of this Court, to deduct from the income earned on the money in the Fund a fee equal to ten percent of the income earned on the Fund. Such fee shall not exceed that authorized by the Judicial Conference of the United States.
The Commission may by motion propose a plan to distribute the Fund subject to the Court's approval. Such a plan may provide that the Fund shall be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. Regardless of whether any such Fair Fund distribution is made, amounts ordered to be paid as civil penalties pursuant to this Judgment shall be treated as penalties paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Defendant shall not, after offset or reduction of any award of compensatory damages in any Related Investor Action based on Defendant's payment of disgorgement in this action, argue that they are entitled to, nor shall they further benefit by, offset or reduction of such compensatory damages award by the amount of any part of either Defendant's payment of a civil penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty Offset, Defendant shall, within 30 days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed in this Judgment. For purposes of this paragraph, a "Related Investor Action" means a private damages action brought against Defendant by or on behalf of one or more investors based on substantially the same facts as alleged in the Complaint in this action.
IT IS FURTHER ORDERED that the Defendant's Consent signed in connection with the Order of Permanent Injunction previously entered in this action are incorporated herein with the same force and effect as if fully set forth herein, and that Defendant shall comply with all of the undertakings and agreements set forth therein.
IT IS FURTHER ORDERED that this Court shall retain jurisdiction of this matter for all purposes, including enforcement of the terms of this Final Judgment.
IT IS FURTHER ORDERED that there being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.
I, R. Kevin Barrett, declare under penalty of perjury, in accordance with 28 U.S.C. § 1746, as follows:
1. This declaration is submitted in support of the Plaintiff's Motion for Entry of Final Judgment against Defendant George L. Phelps ("SEC Motion").
2. Since March 1998, I have been employed as an Accountant in the Division of Enforcement of the Securities and Exchange Commission ("SEC") in its Chicago Regional Office, currently located at 175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604. My official duties with the SEC include participating in fact-finding inquiries and investigations to determine whether the federal securities laws have been, are presently being, or are about to be violated, and assisting in the SEC's civil actions arising from such securities law violations.
3. As part of my official duties, I routinely review, schedule, and summarize bank records, trading records and other financial records typically maintained at all varieties of financial institutions, including banks and brokerage firms, and am intimately familiar with the type of records maintained by such entities. I also participate in interviews with personnel of these entities as well as interviews of other witnesses.
4. I received B.S. and M.S. degrees in Accounting from the University of Illinois and an M.S. degree in Financial Markets & Trading from the Illinois Institute of Technology. I received my certification as a certified public accountant from the state of Illinois in 1976.
5. Prior to my employment with the SEC, I worked in the public accounting profession for three and one-half years and in the securities industry for nearly 17 and one-half years in several capacities, including as a controller at a broker-dealer firm and as a trader on the Chicago Stock Exchange and the Chicago Board Options Exchange.
6. In 2004, I was asked to assist in the Commission's investigation into the Yucatan Investment Corporation, Michael E. Kelly ("Kelly") and other persons and entities working with them. This investigation related to the offer and sale of investments called "Universal Leases."
7. In connection with the SEC's investigation and this civil action, I have reviewed and summarized voluminous records obtained by the SEC from a number of financial institutions. The records obtained by the SEC include, but are not limited to: account opening documents, bank signatory forms, canceled checks, monthly statements, deposits, debit and credit memoranda, and wire transfer advices. Included among these voluminous records are thousands of checks reflecting Kelly's payments of the sales commissions to the brokers who were selling the Universal Leases to investors (the "Selling Brokers"). I reviewed and summarized the bank records obtained by the SEC to determine the amount of commissions Kelly paid to the Selling Brokers. As set out in the SEC's complaint, Kelly paid the Selling Brokers huge commissions, undisclosed to investors, totaling more than $72 million. See Complaint, ¶ 3.
8. For the SEC Motion, I was asked to determine the amount of disgorgement that should be paid by George L. Phelps ("Phelps"). As alleged in the SEC's complaint, Phelps conducted business individually and also under the name "Safe Estate Plans." Complaint, ¶¶ 11, 37.
9. I calculated Phelps disgorgement by reviewing and scheduling those bank account records obtained by the SEC that reflected Universal Lease commissions paid to Phelps. Specifically, I reviewed and scheduled bank records from the following bank accounts that Kelly used, in part, to pay commissions to the Selling Brokers:
10. Based on my review of these commission checks, Kelly paid Phelps by check made payable to Lin Phelps, G. Lin Phleps, or Lin G. Phelps and the vast majority of these commission checks included a notation showing they were sent to Phelps business address in San Antonio, Texas. These checks included a notation that they were for commissions, with many of the checks also specifying the Universal Lease number(s) related to the commission payment.
11. I prepared a schedule of the commission payments made to Phelps and that schedule is included at the end of this Declaration as Exhibit A. As shown on this schedule, Kelly and his companies paid Phelps at least $2,002,766.66 in Universal Lease commissions over the period January 2000 through May 2004.
12. I previously filed several declarations in this action in support of similar motions filed by the SEC relating to defendants John E. Tencza and his business American Elder Group, L.L.C., Carl Q. Lee and his business Carl Lee and Associates and Richard E. Riner and his business Southwest Income Marketing, Inc. and the Court entered judgment based on those calculations. I used the same methodology for calculating disgorgement and prejudgment interest for Phelps as for these other defendants.
13. I also calculated the amount of prejudgment interest that has accrued on the above disgorgement figure by applying the interest rate, adjusted quarterly, used by the Internal Revenue Service for computation of interest on underpayment of taxes. I calculated prejudgment interest beginning the day after the last Universal Lease commission check paid to Phelps cleared the bank through the last day of the most recent month (i.e., interest was calculated from June 1, 2004 through the month ending November 30, 2010). This is a conservative calculation of prejudgment interest, as I did not include in my calculation any prejudgment interest accruing on the other commission payments before this date. Based on this method and using the dates described above, I calculated prejudgment interest from this date to be $919,732.93. A copy of the prejudgment interest calculation is attached as Exhibit B to this declaration.
14. The total amount of disgorgement and prejudgment interest owed by Phelps using these calculations is therefore $2,922,499.59. See Exhibit B.
I, R. Kevin Barrett, declare under penalty of perjury that the foregoing is true and correct, and further that this declaration is made on my personal knowledge and that I am competent to testify to the matters stated in this declaration.
