[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
FILED
_________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
July 27, 2004
No. 02-13445
THOMAS K. KAHN
________________ CLERK
D.C. Docket No. 01-00369-CIV-DMM
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff-Appellee,
versus
WILLIAM A. CALVO, III,
Defendant-Appellant.
__________
Appeal from the United States District Court
for the Southern District of Florida
__________
(July 27, 2004)
Before TJOFLAT and CARNES, Circuit Judges, and CONWAY*, District Judge.
_________________________
* Honorable Anne C. Conway, United States District Judge for the Middle District of Florida,
sitting by designation.
PER CURIAM:
This appeal arises from an enforcement action brought by the Securities and
Exchange Commission (“SEC”) against William A. Calvo III (“Calvo”),
Diversified Corporate Consulting Group (“Diversified”), Jerome E. Rosen
(“Rosen”), and Joseph D. Radcliffe (“Radcliffe”) for violations of the Federal
Securities Act of 1933 (“the Securities Act”), and the Federal Securities Exchange
Act of 1934 (“the Exchange Act”).
The instant Order concerns only Calvo’s appeal; Rosen and Radcliffe did
not appeal and we address Diversified’s appeal in a separate opinion released
simultaneously herewith. Having reviewed the record and the parties’ briefs, we
determine that no reversible error has been shown; accordingly we affirm.
BACKGROUND
In a Complaint filed in the United States District Court for the Southern
District of Florida on January 30, 2001, the SEC alleged that Calvo, Rosen,
Radcliffe, and Diversified engaged in a “pump and dump” scheme involving a
company known as Software of Excellence, Inc., a.k.a., Systems of Excellence,
Inc. (“SOE”). Simply stated, the SEC claimed that the parties artificially pumped
up the price of SOE stock only to dump it on unsuspecting investors in order to
reap millions of dollars in illicit gains.
2
On summary judgment, the district court adjudicated Calvo and Diversified
liable for the sale of unregistered securities in violation of § 5(a) and (c) of the
Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c). The remaining claims against
Diversified and Rosen were then tried before a jury which returned a verdict in
favor of the SEC, finding liability for material misrepresentations in the sale of
securities in violation of § 17(a) of the Securities Act, 15 U.S.C. §77q(a), § 10(b)
of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R.
240.10b-5.
On March 19, 2002 the district court conducted a remedies hearing in
connection with the abovementioned securities laws violations. Taking into
account the evidence adduced there, the court entered a judgment against Calvo
and Diversified, jointly and severally, for $2,511,145.60 in disgorgement. The
court also assessed civil penalties, and permanently restrained and enjoined Calvo
from violating § 5(a) and (c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c).
Calvo now appeals, contending that the district court erred in granting
summary judgment on the SEC’s § 5 claims and in formulating the remedy it
imposed.
3
DISCUSSION
A.
Calvo’s first assignment of error charges the district court with improperly
granting summary judgment on the SEC’s §5(a)1 and (c)2 claims; he argues that he
did not participate in the sale of SOE securities so as to render him responsible for
such sales.
Summary judgment is proper if the record evinces that “there is no genuine
issue as to any material fact and that the moving party is entitled to a judgment as
a matter of law.” Fed. R. Civ. P. 56(c). A dispute is genuine if the evidence is such
1
Section 5(a), 15 U.S.C. §77e(a) of the Securities Act provides as follows:
(a) Sale or delivery after sale of unregistered securities. Unless a registration statement is in
effect as to a security, it shall be unlawful for any person, directly or indirectly -
(1) to make use of any means or instruments of transportation or communication in
interstate commerce or of the mails to sell such security through the use or
medium of any prospectus or otherwise; or
(2) to carry or cause to be carried through the mails or in interstate commerce, by any
means or instruments of transportation, any such security for the purpose of sale
or for delivery after sale.
2
Section 5(c), 15 U.S.C. §77e(c) of the Securities Act provides as follows:
(c) Necessity of filing registration statement. It shall be unlawful for any person, directly or
indirectly, to make use of any means or instruments of transportation or communication
in interstate commerce or of the mails to offer to sell or offer to buy through the use or
medium of any prospectus or otherwise any security, unless a registration statement has
been filed as to such security, or while the registration statement is the subject of a refusal
order to stop order or (prior to the effective date of the registration statement) any public
proceeding or examination under section 8.
4
that a reasonable jury could return a verdict for the nonmoving party. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is material if it
is one that might affect the outcome of the case. See id. When a court considers
whether or not to enter summary judgment, it views all of the evidence, and all
inferences drawn therefrom, in the light most favorable to the non-moving party.
See Hairston v. Gainesville Sun Publ’g Co., 9 F. 3d 913, 918 (11th Cir. 1993).
In order to establish a prima facie case for a violation of § 5 of the Securities
Act, the SEC must demonstrate that (1) the defendant directly or indirectly sold or
offered to sell securities; (2) through the use of interstate transportation or
communication and the mails; (3) when no registration statement was in effect.
See SEC v. Cont’l Tobacco Co., 463 F. 2d 137, 155 (5th Cir. 1972)3; SEC v.
Friendly Power Co. LLC, 49 F. Supp. 2d 1363, 1367 (S.D. Fla. 1999) (accord);
SEC v. Unique Fin. Concepts, Inc., 119 F. Supp. 2d 1332, 1339 (S.D. Fla. 1998),
aff’d 196 F. 3d 1195 (11th Cir. 1999) (accord).
Here, Calvo challenges only the first element of the prima facie case. On
that subject, he states that “[e]ven though it was undisputed that Diversified sold
unregistered SOE stock, that evidence alone was insufficient to render summary
3
In Bonner v. City of Prichard, 661 F. 2d 1206, 1209 (11th Cir. 1981), this Court adopted
as binding precedent all decisions of the Fifth Circuit rendered prior to the close of business on
October 1, 1981.
5
judgment against Calvo. . . Calvo did not sell the securities.” Appellant’s Opening
Brief at 18.
To demonstrate that a defendant sold securities, the SEC must prove that the
defendant was a “necessary participant” or “substantial factor” in the illicit sale.
See Friendly Power Co. LLC, 49 F. Supp. 2d at 1371; see also SEC v. Holschuh,
694 F. 2d 130, 139-40 (7th Cir. 1982); SEC v. Murphy, 626 F. 2d 633, 649-52 (9th
Cir. 1980). Scienter is not a consideration. Swenson v. Engelstad, 626 F. 2d 421,
424 (5th Cir. 1980) (“The Securities Act of 1933 imposes strict liability on offerors
and sellers of unregistered securities . . . regardless of . . . any degree of fault,
negligent or intentional, on the seller’s part”) (internal citation omitted); Friendly
Power Co. LLC, 49 F. Supp. 2d at 1367 (“Neither negligence nor scienter is an
element of a prima facie case under Section 5 of the Securities Act”) (internal
citation omitted); SEC v. Current Fin. Servs., 100 F. Supp. 2d 1, 6 (D.D.C. 2000),
aff’d sub nom. SEC v. Rayburn, 22 Fed. Appx. 1 (D.C. Cir. 2001) (“Scienter is not
required under section 5 of the Securities Act”) (internal citations omitted).
Applying these standards, we find that the undisputed material facts amply
support the district court’s determination that, as a matter of law, Calvo illegally
sold unregistered securities. Calvo negotiated and signed the contract with SOE
pursuant to which Diversified received the unregistered shares as compensation;
6
he extended that contract on behalf of Diversified; he signed the documents that
opened the Diversified brokerage account into which all of the unregistered SOE
shares were deposited; he signed stock transfer authorization and stock powers for
sales or transfers of stock out of Diversified’s brokerage account; and he received
proceeds - albeit through Diversified - from the sale of SOE shares. Clearly,
Calvo was a necessary participant and a substantial factor in the illegal sale of
unregistered SOE stock.
B.
Calvo’s second assignment of error charges the district court with
improperly adjudicating Calvo and Diversified jointly and severally liable for
$2,511,145.60 in disgorgement damages irrespective of the fact that Calvo’s
liability was predicated on strict liability whereas Diversified’s liability was
predicated on fraud.
It is a well settled principle that joint and several liability is appropriate in
securities laws cases where two or more individuals or entities have close
relationships in engaging in illegal conduct. See SEC v. Hughes Capital Corp.,
124 F. 3d 449, 455 (3rd Cir. 1997); SEC v. Fist Pac. Bancorp, 142 F. 3d 1186,
1191 (9th Cir. 1998), cert. denied sub nom. Sands v. SEC, 525 U.S. 1121 (1999).
This holds true even where one defendant is more culpable than another.
7
In this instance, Calvo and Diversified had the requisite close relationship.
Calvo and his family founded Diversified; they maintained a 50% ownership
interest in Diversified throughout the entire course of the sale of unregistered
stock; and Calvo served as Diversified’s sole managing member.
Moreover, both parties engaged in securities laws violations. Calvo was a
necessary participant and a substantial factor in Diversified’s sale of unregistered
securities.
Accordingly, we find that the district court did not err in holding Calvo and
Diversified jointly and severally liable.
C.
Calvo’s third assignment of error challenges the district court’s issuance of
an injunction permanently restraining and enjoining Calvo from violating §5(a)
and (c) of the Securities Act.
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. See SEC v. Unique Fin. Concepts, Inc.,
196 F. 3d 1195, 1199 n.2 (11th Cir. 1999). Indicia that a wrong will be repeated
include the “egregiousness of the defendant’s actions, the isolated or recurrent
nature of the infraction, the degree of scienter involved, the sincerity of the
8
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.” SEC v. Carriba Air, Inc., 681 F.
2d 1318, 1322 (11th Cir. 1982) (internal citations omitted); SEC v. Friendly Power
Co. LLC, 49 F. Supp. 2d 1363, 1372 (S.D. Fla. 1999). While scienter is an
important factor in this analysis, it is not a prerequisite to injunctive relief. See
SEC v. Alpha Telecom, Inc., 187 F. Supp. 2d 1250, 1263 (D. Or. 2002); SEC v.
L&S Petroleum, Inc., 444 F. Supp. 38, 41 (W.D. Okla. 1977).
Inasmuch as these factors were properly weighed, we find that the district
court did not abuse its discretion.
As the district court recognized, this is not the first time Calvo has violated
federal securities laws. In SEC v. Electronics Warehouse, Inc., 689 F.Supp. 53
(D.Conn. 1988), aff’d sub nom. SEC v. Calvo, 891 F. 2d 457 (2d Cir. 1989), he
was found liable for securities fraud in connection with a public offering, and, as a
result, was enjoined from committing like violations in the future.4 Although the
4
In Electronics Warehouse, the United State District Court for the District of Connecticut
adjudged Calvo liable for violating §17(a) of the Securities Act, 15 U.S.C. §77q, 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and SEC Rules 10b-5 and 10b-9. In addition, the court found
that he was liable as an aider and abetter in violation of §15(c) of the Exchange Act, 15 U.S.C.
§78o(c), and SEC Rule 15c2-4.
9
injunction was later dissolved, that does not eliminate the fact that Calvo
committed securities fraud.
Moreover, the record indicates that there is a reasonable likelihood that
Calvo will engage in wrongful actions in the future. Calvo is a recidivist, and has
repeatedly failed to acknowledge the wrongful nature of his conduct. In addition,
his current occupation - which is investment-related - presents opportunities for
future securities violations; violations which Calvo has not adequately assured
against. This is particularly apparent from Calvo’s decision to hire Lenny Tucker -
a convicted felon with past security law violations - to administer investments and
control brokerage accounts in his new company. Taken together, the evidence
preponderates in favor of finding a reasonable likelihood that a wrong will be
repeated.
D.
Calvo’s fourth assignment of error charges the district court with abusing its
discretion in ordering Calvo to pay $2,511,145.60 in disgorgement -
$1,636,556.51 in illicit gains and $874,589.19 in prejudgment interest - in spite of
evidence indicating that Calvo received no more than $337,000 from Diversified.
The SEC is entitled to disgorgement upon producing a reasonable
approximation of a defendant’s ill-gotten gains. See SEC v. First City Fin. Corp.,
10
890 F. 2d 1215, 1231-32 (D.C. Cir. 1989); see also SEC v. Warde, 151 F. 3d 42,
50 (2d Cir. 1998) (accord); SEC v. First Pac. Bancorp., 142 F. 3d 1186, 1192 n.6
(9th Cir. 1998) (accord). The burden then shifts to the defendant to demonstrate
that the SEC’s estimate is not a reasonable approximation. See First City Fin.
Corp., 890 F. 2d at 1232. Exactitude is not a requirement; “[s]o long as the
measure of disgorgement is reasonable, any risk of uncertainty should fall on the
wrongdoer whose illegal conduct created that uncertainty.” Warde, 151 F. 3d at 50
(internal citation omitted); First City Fin. Corp., 890 F. 2d at 1231-32.
By producing evidence that Diversified’s illegal sale of unregistered SOE
securities resulted in proceeds totaling $2,438,643 - $1,636.556.51 of which Calvo
and Diversified received - the SEC satisfied its burden of proof. Any further
apportionment would have been impractical in light of the inadequate
documentation and the complex and heavily-disguised transactions employed in
this scheme.
Calvo’s argument that the testimony of Vanessa Lindsey - his office
administrator - compels apportionment is unavailing. Her testimony on that
subject was irrational at best:
11
Q. Now what accounting methodology did you employ throughout doing
this tracing that you’ve done of Mr. Calvo’s capital contributions as
well as his proceeds? Is there a specific accounting method you
chose?
A. No.
Q. You didn’t choose LIFO versus FIFO?
A. I’m sorry, I am not an accountant. I just basically did the math. That’s
what I did.
***
Q. Do you have any understanding of how one traces funds normally, in
an accounting context, to determine what each person received, when
there’s a pool of assets from which money comes in and goes out?
A. I have a little bit. And no, I’m not an experienced accountant.
Q. In this instance, you are not sure whether you used LIFO or FIFO in
this whole project that you have taken on?
A. Correct.
(R-11-224, 225).
As the district court recognized:
[T]his method of proof is fraught with difficulty. I mean, she’s talking
about, this isn’t really a summary or a summary witness, because what
she’s summarizing aren’t . . . documents; its her interpretation of the
documents; its her interpretation of the documents based on things that you
[Calvo’s attorney] and Mr. Calvo told her, what Mr. Radcliffe has told her,
what she knows from, I guess, knowing people as far as brother-in-law’s
and lawyers and all this kind of thing.
12
(R11-220)
In sum, 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. See CFTC v. Am Bd.
of Trade, Inc., 803 F. 2d 1242, 1252 (2d Cir. 1986).
E.
Calvo’s fifth assignment of error challenges the district court’s rejection of
Calvo’s statute of limitations defense; a defense which would have precluded this
entire action.
When the United States brings suit in its sovereign capacity, a statute of
limitations does not ordinarily apply unless Congress has expressly provided
otherwise. See United States v. Banks, 115 F. 3d 916, 919 (11th Cir. 1997), cert.
denied, 522 U.S. 1075 (1998). Where, however, the government’s action
vindicates a private interest, the defense is typically available. See id.
In this instance, the United States is acting in its sovereign capacity. In
suing to enforce the securities laws, the SEC is vindicating public rights and
furthering public interests. See SEC v. Rind, 991 F. 2d 1486, 1491 (9th Cir. 1993),
13
cert. denied, 510 U.S. 963 (1993). This is so despite the fact that the relief sought
is disgorgement. “Although the Commission . . . may use the disgorged proceeds
to compensate injured victims, this does not detract from the public nature of
Commission enforcement actions: the touchstone remains the fact that public
policies are served and the public interest is advanced by the litigation.” Id. at
1491-92 (internal citation and quotations omitted).
Further, there is no indication that Congress intended for a statute of
limitations to apply to this enforcement action. Rather, as the Ninth Circuit Court
of Appeals recently recognized, the framework of the Securities Act and Exchange
Act suggests the opposite:
In the 1933 and 1934 Acts, Congress developed a comprehensive plan to
regulate the securities market. As part of that plan, Congress created a
number of private claims, each bound by an express statute of limitations.
At the same time, and in the same acts, Congress granted the Commission
broad power to enforce the substantive provisions of the securities laws but
refrained from imposing an explicit time limit on Commission enforcement
actions. Congress clearly devoted its time and attention to limitation issues.
The fact that it did not enact an express statute of limitation for lawsuits
instituted by the Commission, therefore, must be interpreted as deliberate.
Id. at 1490.
Accordingly, we find that the district court did not err when it rejected
Calvo’s statute of limitations defense.
14
F.
Calvo’s final assignment of error charges the district court with improperly
granting summary judgment in the face of evidence that Calvo was an innocent
purchaser of unregistered securities; a defense that Calvo maintains completely
bars a § 5 claim.
Calvo’s innocent purchaser defense hinges on a two-sentence summary of a
telephone interpretation provided by a member of the SEC’s staff. In relevant part,
that interpretation provides as follows:
Securities were inadvertently issued to a Company’s employees under a
stale S-8 registration statement. For purposes of resale by the purchasing
employees, the securities would be treated as if they were unrestricted
because of the policy not to penalize innocent purchases in an illegal
offering.
http://www.sec.gov/interps/telephone/1997manual.txt (Part C (No. 13)).
Assuming, without deciding, that this interpretation is applicable to the facts
presented in this case - which cannot be determined because the record does not
contain the facts underlying the SEC’s advice - we find that it does not afford
Calvo with an innocent purchaser defense. The SEC’s website is replete with
unambiguous statements explaining that this interpretation is not binding.5 In
5
The first statement provides as follows:
(continued...)
15
addition, “[t]he Securities Act of 1933 imposes strict liability on offerors and
sellers of unregistered securities . . . regardless of . . . any degree of fault,
negligent or intentional, on the seller’s part.” Swenson v. Engelstad, 626 F. 2d
421, 424 (5th Cir. 1980) (internal citation omitted).
5
(...continued)
This page provides links to written and oral statements made by members of
the SEC’s staff on various accounting and legal matters. These staff interpretations
provide guidance to those who must comply with federal securities law. However,
because they represent views of the staff, they are not legally binding.
Staff Interpretations; http://www.sec.gov/interprs.shtml (emphasis added).
Another statement, which precedes the statement upon which Calvo relies, provides as
follows:
The Division of Corporation Finance responds to thousands of telephone inquiries
annually
concerning the statutes, rules and regulations it administers. While the statements made
by
members of the staff on the telephone are intended to be helpful to the persons making
the
inquiries, they are not binding due to their highly informal nature. This manual, which is
a public compilation of certain responses to telephone inquiries, was first developed for
staff training and discussion purposes.
The responses discussed in this manual do not necessarily reflect the views and policies
of the Commission or the Division of Corporation Finance. Further, they do not
necessarily contain a discussion of all material considerations necessary to reach the
conclusions stated.
Accordingly, these responses are intended as general guidance and should not be relied
on
as definitive. There can be no assurance that the information in this manual is current, as
the
positions expressed may change without notice.
Manual of Publicly Available Interpretations (July 1997); http://www.sec.gov/interps/ telephone/
1997manual.txt (emphasis added).
16
CONCLUSION
The district court properly granted the SEC’s motion for summary judgment
against Calvo. Furthermore, the district court properly exercised its discretion in
framing a remedy.
AFFIRMED
17