SEC PART 2...
The Commission's request for a temporary restraining order and other injunctive relief in this action is made in the discharge of its Congressional mandate to safeguard the public interest by enforcing the federal securities laws. SEC v. Management Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975). This Court has authority to grant the Commission's request for relief pursuant to 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)], which provide that a United States District Court "shall" upon "proper showing" by the Commission grant a "permanent or temporary injunction" against any person who "is engaged or [is] about to engage in any acts or practices" constituting a violation of the Securities Acts. SEC v. Mize, 615 F.2d 1046, 1051 (5th Cir. 1980).
In determining whether to grant agency requests for injunctive relief, "the standards of the public interest not the requirements of private litigation measure the propriety and need for injunctive relief." Management Dynamics, Inc., 515 F.2d at 808, (quoting), Hecht Co. v. Bowles, 321 U.S. 321, 331 (1944). See also SEC v. Globus Int'l, Ltd., 320 F. Supp. 158, 160 (S.D.N.Y. 1970). Thus, the Commission need not establish "irreparable harm" or "inadequate remedy at law," as would a private litigant, but rather is required only to make a proper showing of what the statutes themselves require: that the defendants "[are] engaged or about to engage" in violative conduct. SEC v. Caterinicchia, 613 F.2d 102, 105 n.3 (5th Cir. 1980).
1. Temporary Restraining Order
Great White and Smith, have been and are now engaged in violations of the securities registration and antifraud provisions of the federal securities laws. When the Commission has established a prima facie showing of violations and the likelihood that such violations will continue, issuance of a temporary restraining order and order of preliminary injunction is appropriate. SEC v. First Financial Group of Texas, 645 F.2d 429, 434-35 (5th Cir. 1981); SEC v. United Financial Group, Inc., 474 F.2d 354, 358 (9th Cir. 1973); SEC v. Keller Corp., 323 F.2d 397, 402-03 (7th Cir. 1963). Because this scheme involves “systematic wrongdoing, rather than an isolated occurrence,” and a high degree of scienter, this Court should conclude that there exists a reasonable likelihood that they will continue to violate the law, and issue orders providing the requested injunctive relief. SEC v. First Jersey Secs. Inc., 101 F.3d 1450, 1477 (2d Cir. 1996), cert. denied, 118 S.Ct. 57 (1997); SEC v. Lorin, 76 F.3d 458, 461 (2d Cir. 1996); SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. 1981); SEC v. Blatt, 583 F.2d 1325, 1334 (5th Cir. 1978).
2. Asset Freeze and Repatriation Order
This Court should employ its broad equitable power to fashion appropriate equitable and ancillary relief to ensure that the defendants are deterred from future violations and do not profit from their past wrongdoing. The facts before this Court justify issuance of orders prohibiting Great White, Smith and K.Ursrey from, directly or indirectly, dissipating monies or assets gained through, or as the result of, unlawful securities sales. Assets should be temporarily frozen where such assets "are clearly related to the alleged scheme, in order to assure a source to satisfy that part of the final judgment, which might [ultimately] be ordered." SEC v. General Refractories Co., 400 F. Supp. 1248, 1259 (D.D.C. 1975); see also, SEC v. Antar, 831 F.Supp. 380, 398-99 (D.N.J. 1993); SEC v. Cavanagh, 1 F.Supp.2d. 337, 385 (S.D.N.Y. 1998).
A repatriation order serves this same purpose, by prohibiting the defendants from secreting their ill-gotten gains outside the jurisdiction of this Court. See, e.g., U.S. v. Antar, 53 F.3d 568, 571 (3d Cir.) (appeal following order of contempt for failure to comply with repatriation order in SEC v.Antar, 831 F.Supp.at 398); SEC v. Infinity Group Co., 27 F.Supp. 2d 559, 561-62 (E.D.Pa. 1998) (repatriation order granted).
Indeed, courts have recognized that without an asset freeze prior to the entry of a final judgment, disgorgement might be meaningless. SEC v. Musella, 578 F. Supp. 425, 445 (S.D.N.Y. 1984), citing Manor Nursing Centers, 458 F.2d 1082, 1104 (2d Cir. 1972). Such an order is warranted to preserve the status quo and to prevent further injury to the interests of public investors whose funds the defendants have obtained by fraudulent conduct. See Manor Nursing Centers, Inc., 458 F.2d at 1103-06; Commodity Futures Trading Commission v. Muller, 570 F.2d 1296, 1300-01 (5th Cir. 1978).
The freeze order should also attach to funds and assets held by relief-defendant K.Ursrey. The Commission is entitled to equitable relief from parties who are not charged with wrongdoing where they “possess illegally obtained profits but have no legitimate claim to them.” SEC v. Cherif, 933 F.2d 403, 414, n. 11 (7th Cir. 1991), cert. denied, 502 U.S. 1071 (1992). Consequently, it is not necessary for the person holding the property to have done anything wrong in order for that person to be required to return property to its rightful owner. As recognized by the court in United States v. Cannistraro, 694 F. Supp. 62, 72, n. 11 (D.N.J. 1988), “[t]he courts impose the remedy of constructive trust where, rightfully or wrongfully, a party has obtained property which unjustly enriches him.” (emphasis supplied), modified, 871 F.2d 1210 (3rd Cir. 1989). Accordingly, the Commission requests that the asset freeze and other equitable relief be extended to K.Ursrey.
3. Accounting
In order to effectuate freeze of Great White's, Smith's and K. Ursrey's assets, this Court should require them to provide a sworn accounting of all the funds and assets they received that were obtained or derived from investors' funds. To determine accurately the scope of a defendant's fraud and ability to return illegal profits, courts frequently require an accounting of all money or property obtained as a result of the fraudulent activity set forth in the Commission's complaint, as well as his current financial resources or assets. See, e.g., Manor Nursing Centers., Inc., 458 F.2d at 1105. Given that Great White and Smith have sold at least $10.8 million in stock or other securities since 1998, and the fact that Smith has misappropriated at least $3.5 million of this sum, an accounting is particularly appropriate. Accordingly, the Commission requests an order requiring Smith and K.Ursrey to provide a comprehensive accounting of their current assets and all assets obtained from January 1998 to the present.
4. Spoliation Order
An order prohibiting the defendants from altering, removing or destroying their books and records in order to preserve a body of evidence for review by this Court is also necessary and appropriate under these circumstances. See SEC v. R.J. Allen & Assoc., Inc., 386 F. Supp. 866 (S.D. Fla. 1974). Such equitable relief is especially appropriate where the Commission is seeking disgorgement in its prayer for relief as in the case at bar. Id., 386 F. Supp. at 880-881.
5. Expedited Discovery
Accelerated discovery is allowable within the discretion of the Court when the plaintiff makes a showing of urgency. Gibson v. Bagar Restaurants, Inc., 30 Fed. R. Serv. 2d (Callagan) 792, 87 F.R.D. 60 (W.D. Mo. 1980). In addition, where urgent relief is sought and expedited discovery is needed to accomplish that result, a court may grant accelerated discovery. Dayco Products v. Walker, 142 F.R.D. 450 (S.D.Ohio 1992); Rehab Institute of Chicago v. Hicks, 1990 Lexis 844 (N.D.Ill.1990); Notaro v. Koch, 35 Fed. R. Serv. 2d (Callagan) 580, 95 F.R.D. 403 (S.D.N.Y. 1982). An order expediting discovery will allow the Commission to present the best possible case to this Court for purposes of a preliminary injunction hearing concerning defendants' ongoing securities violations.
6. Appointment of a Receiver Pendende Lite
The Commission also seeks appointment of a receiver pendente lite for Great White, to marshal and hold the company's funds and assets; to manage the company during the pendency of this litigation, as the Court's officer; and to pursue claims against Smith, who has grossly mismanaged Great White and breached his fiduciary duties thereto, or other persons who hold funds or assets rightfully belonging to the company. Federal courts have broad equitable powers enabling them to fashion appropriate ancillary remedies necessary to grant full relief. Manor Nursing Centers, 458 F.2d at 1103-04; Blatt, 583 F.2d at 1335.
Courts have appointed receivers in Commission injunctive actions not only to preserve assets from dissipation or misappropriation, but also to render violations of law unprofitable and simultaneously compensate victims. Manor Nursing Centers, 458 F.2d at 1103-04; Blatt, 583 F.2d at 1335. All these objectives would be served in the instant case by appointment of a receiver pendente lite for Great White. The receiver pendente lite would have authority to marshal and hold all remaining investment funds and assets purchased with investment funds, and to pursue assets held by or claims of the company against, Smith, other management, and third-parties. Moreover, since most of Great White's business is conducted, and a significant portion of its assets are held, in Mexico, appointment of a receiver pendente lite for Great White will ensure this Court's ability to supervise and control its operations and these assets for the benefit of shareholders.
Given the evidence that Great White and Smith have already spent investment funds for personal expenses, neither of them should be permitted to control whatever assets remain during the pendency of the litigation. See, U.S. v. Ianniello, 646 F.Supp. 1289, 1299 (S.D.N.Y. 1986) (appointing receiver pendente lite in case involving misappropriation of funds and accounting failures by principals of business); SEC v. Republic National Life Insurance Co., 378 F.Supp. 430, 437-38 (S.D.N.Y. 1974) (setting out relevant factors, but denying appointment of receiver pendente lite due to existing adequate supervision of insurance company by Texas regulators).
Moreover, the appointment of a temporary receiver is particularly important in this case in order to ensure that all investors are treated equally in any recovery of funds or assets. By appointing a receiver pendente lite, for Great White, the Court may stay claimants from taking any action against what funds may be found without leave of this Court. See SEC v. Wencke,622 F.2d 1363, 1369 (9th Cir. 1980) (Upholding a district court's authority to enjoin non-parties from taking any action against receivership properties, except by leave of court.).
IV.
CONCLUSION
Based on the foregoing facts, arguments, and authorities, the Commission respectfully requests this Court enter the relief requested.
Dated and signed this 28th day of July, 1999.
Respectfully submitted,
PHILLIP W. OFFILL, JR.
Okla. Bar No. 10426
Attorneys for Plaintiff
SECURITIES & EXCHANGE COMMISSION
801 Cherry Street, Suite 1900
Fort Worth, Texas 76102
(817) 978-3821/-6450; FAX: (817) 978-2700
CERTIFICATE OF SERVICE
A copy of the foregoing document was served on each of the defendants and the relief-defendant, by hand-delivery, or by hand-delivery to their attorney, on July 28, 1999, as follows:
H. Allen Pennington, Esq.
Reynolds & Pennington, L.L.P.
2900 Bank One Tower
500 Throckmorton
Fort Worth, Texas 76012
Great White Marine & Recreation, Inc.
208 Otis Drive
Waco, Texas 76712
Colin Smith
11004 Sandalwood Drive
Waco, Texas 76712
Kenneth Ursrey
756 Red Gate Rd.
Mart, Texas 76664
Phillip W. Offill, Jr. |
