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Securities and Exchange Commission v. Catledge

United States District Court, D. Nevada

December 16, 2019

JAMES B. CATLEDGE, et al., Defendants.


         Presently before the court is plaintiff Securities and Exchange Commission's (“SEC”) motion for entry of final judgment against defendant James B. Catledge. (ECF No. 58). Catledge filed a response (ECF No. 61), but the SEC has not filed a reply, and the time for doing so has passed.

         Per the court's September 18, 2019 and October 22, 2019 orders (ECF Nos. 63, 72), the SEC has also submitted two supplemental briefs. (ECF Nos. 69, 75).

         I. Background

         On May 24, 2012, the SEC filed a complaint against Catledge, Derek F.C. Elliott, EMI Resorts (S.V.G.) Inc., EMI Sun Village, and Sun Village Juan Dolio, Inc., alleging the defendants solicited investments in a fraudulent scheme involving the offer and sale of over $163 million of investment contracts in unregistered transactions to approximately 1, 200 investors. (ECF No. 1). The complaint includes five causes of action: (1) violation of Section 17(a)(1) of the Securities Act of 1933, 15 U.S.C. § 77q(a)(1), against all defendants; (2) violation of Section 17(a)(2) and (3) of the Securities Act, 15 U.S.C. § 77q(a)(2) and (3), against all defendants[1]; (4) violation of Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and (c), against Catledge, Elliott, EMI Sun Village, and Sun Village Juan Dolio; (5) violation of Section 15(a) of the Exchange Act, 15 U.S.C. § 780(a), against Catledge and Elliott; and (6) unjust enrichment of relief defendant D.R.C.I. trust. Id.

         On December 20, 2012, and SEC and Catledge filed a joint stipulation to stay this case pending resolution of the criminal charges against Catledge in United States v. James Catledge, et al., No. 3:12-cr-00678 (N.D. Cal.) (“criminal action”). (ECF No. 20). The court granted the motion to stay on December 21, 2012. (ECF No. 23).

         On May 2, 2018, Catledge pleaded guilty to one count of mail fraud. Catledge, No. 3:12-cr-00678, ECF Nos. 241, 242. On December 12, 2018, he was sentenced to a term of sixty (60) months imprisonment to be followed by three (3) years of supervised release. Id. at ECF No. 303. Restitution in the amount of $32, 737, 143.65 was imposed on May 15, 2019. Id. at ECF No. 339.

         On May 3, 2018, the court approved a consent judgment between the SEC and Catledge. (ECF No. 44). The Catledge consent judgment fully incorporates the stipulated consent, which provides, in relevant part, that:

[T]he Court shall determine whether it is appropriate to order disgorgement of ill-gotten gains and/or 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/or civil penalty. The Defendant further understands that, if disgorgement is ordered, Defendant shall pay prejudgment interest thereon, calculated from October, 2004, based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621(a)(2).

(ECF Nos. 43 at 2, 44 at 4). The consent judgment also provides that “solely for the purposes of such motion [for disgorgement], the allegations of the Complaint shall be accepted as and deemed true by the Court.” (ECF No. 44). No. provision is made for the imposition of a civil penalty. Id. In addition, the Catledge consent judgment provides for the issuance of a permanent injunction, enjoining future violation of the federal Securities Act and Exchange Act. Id.

         On June 28, 2019, the SEC filed a motion to lift the stay (ECF No. 56) following the resolution of the criminal action against Catledge, which this court granted on July 3, 2019 (ECF No. 57).

         In their initial motion for final judgment as to Catledge, the SEC asked this court to “order Catledge to pay $32, 737, 143.65 in disgorgement but deem it satisfied based upon the entry of the restitution order in that amount, and not impose any prejudgment interest.” (ECF No. 58 at 4). The SEC also asked this court to issue a permanent injunction against Catledge, enjoining him from future violation of the federal Securities Act and Exchange Act. Id.

         On September 18, 2019, the court ordered the SEC to submit supplemental briefing to explain how the approximately $163 million taken from investors was used. (ECF No. 63). In that same order, the court declined to issue a civil penalty against Catledge. Id. The SEC submitted its response on October 2, 2019. (ECF No. 69). The SEC again requested disgorgement in the amount $32, 737, 143.65. Id.

         In light of the Supreme Court's decision in Kokesh v. S.E.C., 137 S.Ct. 1635 (2017), [2] the court ordered additional supplemental briefing. (ECF No. 72). The SEC was directed to explain what amount of the approximately $163 million at issue was appropriated by the defendants prior to May 24, 2007. Id. The SEC submitted its response on November 26, 2019. (ECF No. 75). The SEC now seeks disgorgement in the amount of $6, 375, 927.58. Id.

         Having now received the SEC's supplemental briefing, the court will address Catledge's liability for disgorgement and the entry of a permanent injunction.

         II. Legal Standard

         The district court has broad powers in equity to order the disgorgement of “ill-gotten gains” obtained through the violation of federal securities laws. SEC v. First Pac. Bancorp., 142 F.3d 1186, 1191 (9th Cir. 1998); see also SEC v. Colello, 139 F.3d 674, 679 (9th Cir. 1998) (“To order disgorgement, the district court … need find only that [the defendant] has no right to retain the funds illegally taken from the victims.”). “Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable.” SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010) (quoting First Pac. Bancorp., 142 F.3d at 1191) (internal quotation marks omitted).

         The district court has broad discretion in calculating the amount to be disgorged. SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). The amount of disgorgement should include “all gains flowing from the illegal activities, ” id. at 1114, though the actual assessment need only be a “reasonable approximation of profits causally connected to the violation, ” First Pac. Bancorp, 142 F.3d at 1192 n. 6 (internal citation omitted). The SEC “bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment.” Platforms Wireless, 617 F.3d at 1096.

         The manner in which a defendant chooses to spend the illegally obtained funds has no relevance to the disgorgement calculation. JT Wallenbrock, 440 F.3d at 1116. A court may order disgorgement even if the violator “is no longer in possession of such funds due to subsequent, unsuccessful investments or other forms of discretionary spending.” Id. at 1115-16 ...

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