«SECURITIES AND EXCHANGE COMMISSION, : : Plaintiff, : : vs. : Civil Action No. : 3:08-CV-0499-N W FINANCIAL GROUP, LLC, : ADLEY H. ABDULWAHAB a/k/a ...»
On December 9, 2008, the Commission served RFAs on Wahab, Wallens Sr. and Wallens Jr. [FF at 39-41]. Pursuant to Fed.R.Civ.P. Rule 36(a), the Defendants were obligated to respond to these RFAs no latter than January 12, 2009. None of the Defendants provided their responses within the prescribed time. 3 [id.].
Rule 36 provides that a party may serve any other party with written requests for admissions of the truth of any matter within the scope of Fed.R.Civ.P. 26(b). The matter is deemed admitted unless the party to whom the request is directed serves the requesting party with a written answer or objection thirty days after service of the request. Fed.R.Civ.P 36(a).
Any matter deemed admitted is “conclusively established unless the court on motion When Defendants’ counsel served the Commission with tardy responses, his papers constituted little more 3 than an unsupported refusal to provide any substantive information. [App 016-017, 134-152][Stewart Dec. at 5 and 6, Exhs. 4-6]. Mr. Teakell asserted objections to every RFA that can only be described as mystifying. First, Mr.
Teakell contends that Defendants are not obligated to respond because “[t]here is a Rule 54 judgment in this case.” [App 016-017, 134—135, 140-141, 146-147][Stewart Dec. at 5 and 6, Exhs. 4-6]. If Mr. Teakell had bothered to glance at the Agreed Interlocutory Judgment, he would have learned that this contention is wrong. Second, Mr.
Teakell contends that Defendants refuse to respond because “[d]iscovery is in progress and has not been completed.” [id.]. This objection is incomprehensible, as Mr. Teakell appears to describe precisely the circumstances that obligate Defendants to respond. Finally, Mr. Teakell objects that the Commission’s RFAs are inappropriate because “they are duplications of the ones previously sent by Plaintiff.” [id.] This objection is Kafkaesque, as Defendants refused to respond to the previous set of discovery requests on the grounds that they were purportedly premature. Once again, Defendants openly parade their strategy of obstruction and delay.
Carolina Insurance Co., 770 F.2d 545, 549 (5th Cir. 1985); In re Carney, 258 F.3d 415, 420 (5th Cir.
2001). This provision has been enforced repeatedly by Courts in the Northern District of Texas.
See Robax Corp. v. Professional Parks, Inc., 2008 WL 3244150 *2 (N.D. Tex. 2008)(District Judge Sidney A. Fitzwater); Unum Life Ins. Company of Am. v. Munoz, 2007 WL 628084 *3 (N.D.
Tex.)(Chief Judge Joe A. Fish); Hall v. Advo, Inc., 2007 WL 210357 * 1-3 (N.D. Tex.)(District Judge Sam A. Lindsay); Williams v. Conseco, 202 WL 31107510 * 2-3 (N.D. Tex. 2002)(District Judge John H. McBryde); Worsham v. Minyard Food Stores, 2001 WL 611173 (N.D. Tex.)(District Judge Jorge A. Solis).
Federal Rule of Civil Procedure 56(c) specifies that “admissions on file” can be an appropriate basis for granting summary judgment. Fed.R.Civ.P. 56(c). Since Rule 36 admissions, whether express or by default, are conclusive as to the matters admitted, they cannot be overcome at the summary judgment stage by contradictory affidavit testimony or other evidence in the summary judgment record. Duke v. South Carolina Ins. Co., 770 F.2d at 548-49; United States v. Kasuboski, 834 F.2d 1345, 1350 (7th Cir. 1987). See also American Automobile. Ass’n (Inc.) v. AAA Legal Clinic of Jefferson Crooke, P.C., 930 F.2d 1117, 1119 (5th Cir. (Tex.) May 13, 1991)(default admissions cannot be overcome by conflicting trial testimony). 4 While “deemed admissions” under Rule 36(b) may be sufficient, without additional evidence, to support a summary judgment motion without any additional evidence, the Commission is not requesting that the Court apply this principle here. Kasuboski, 834 F.2d 1345 at 1350 (citing Duke v. South Carolina Ins. Co., 770 F.2d 545 (5th Cir.1985); Donovan v. Carls Rule 36 provides that the subject of the admissions may file a motion showing that there is good cause to 4 withdraw the admissions. Here, such a motion would constitute a futile gesture, as the Commission’s summary judgment motion is more than sufficiently supported by other evidence.
Commission easily satisfies the burden of establishing the absence of a genuine issue of material fact. See US v. Persuad, 229 F.R.D. 686, 694 (M.D. Fla. 2005)(request to withdraw admissions moot where, even if defendant were relieved of his deemed admissions, the plaintiff would still be entitled to summary judgment).
IV. THE COURT SHOULD ORDER DEFENDANTS TO PAY DISGORGEMENT EQUAL TO
THE TOTAL AMOUNT OF FUNDS COLLECTED FROM INVESTORS, LESS THE
AMOUNT OF FUNDS RETURNED TO INVESTORS, PLUS PREJUDGMENT INTERESTTHEREON
The central perpetrators in a fraud such as the WFG scheme are liable for disgorgement in the full amount of funds collected from investors, less any monies that are returned to the investors in the course of the scheme. Numerous courts have found that, where wrongdoers engaged in a the pervasively fraudulent offering of securities, the defendants must disgorge all proceeds that they collected in connection with the offering that have not already been returned to investors. See SEC v. JT Wallenbrock & Assoc., 440 F.3d 1109, 1113 (9th Cir.
2006)(proper to hold principals in fraudulent scheme liable for disgorgement for entire amount collected, less amount returned to investors during the scheme); SEC v. Better Life Club of Am., Inc., 995 F.Supp. 167, 179 (D.D.C. 1998)(proper to charge principals in fraudulent scheme with disgorgement of the total amount of unreturned investor principal); SEC v. Chem. Trust, 2000 WL 33231600 at *11 (S.D. Fla. 2000)(proper to charge principal with full amount raised from investors). See also SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1104, 1082 (2nd. Cir. 1972);
SEC v. Merrill Scott & Assoc., 505 F.Supp.2d 1193, 1216 (D. Utah 2007); SEC v. R.J. Allen & Assoc., 386 F.Supp. 866, 880 (S.D. Fla. 1974); SEC v. Kenton Capital, Ltd., 69 F. Supp.2d 1, 15
See also SEC v. Interlink Data Network of Los Angeles, Inc., Fed. Sec. L. Rep. 98,049, 1993 WL 603274 (C.D. Cal. 1993); SEC v. United Monetary Serv., Inc., Fed. Sec. L. Rep. 95,284, 1990 WL 91812 (S.D. Fla. 1990).
Furthermore, the disgorgement liability of the Defendants should not be reduced by expenses incurred in committing their fraud. The disgorgement amount is not reduced, for example, for commission payments to brokers and other business expenses connected with operating the fraudulent scheme. This disgorgement calculation comports with the “overwhelming weight of authority holding that securities laws violators may not offset their disgorgement liability with business expenses.” SEC v. Hughes Capital Corp., 917 F. Supp. 1080, 1086 (D.N.J. 1996). See also SEC v. Great Lakes Equities Co., 775 F. Supp. 211, 214-215 (E.D.
Mich. 1991) (rejecting deductions from the disgorgement amount for overhead, commissions, and other expenses); SEC v. Benson, 657 F. Supp. 1122, 1134 (S.D.N.Y. 1987) (stating that the “manner in which [party] chose to spend his misappropriations is irrelevant as to his objection to disgorge”); SEC v. Kenton Capital, Ltd., 69 F. Supp.2d at 15-16.
Finally, it is appropriate in this case to hold each of the Defendants jointly and severally liable for the entire disgorgement amount. The District Court has broad discretion to hold offending parties jointly and severally liable for disgorgement in a securities case. SEC v.
Hughes Capital Corp., 124 F.3d 449, 455 (3rd Cir. 1997). The allegations in the Commission’s Complaint, deemed admitted for the purpose of this motion, establish that the Defendants acted in concert to perpetrate the scheme at issue here.
The Declaration of CPA Rex Rector and accompanying exhibits establish that the Defendants are jointly and severally liable for disgorgement in the amount of $13,797,966. [FF at 34-37]. As set forth by Mr. Rector, based on an exhaustive review of bank and business records, he determined that the Defendants collected a gross amount of $17,708,200 from WFG victims. [FF at 34]. Mr. Rector further concludes that the Defendants provided $3,080,139 to investors in refunds of principal and made purported interest payments of $666,478 to victims.
[FF at 35 and 36]. Subtracting payments to investors from the amount collected, the Defendants’ unjust enrichment totals $13,797,966. [FF at 37].
As set forth in the Rector Declaration, the Commission submits that the Court should fix the amount of Defendants’ prejudgment interest at $1,846,574. As mandated by the Commission, Rector calculated prejudgment interest using the rate published quarterly by the IRS pursuant to Section 6621 of the Internal Revenue Code to calculate interest on tax underpayments. See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1476 (2d Cir.
1996)(appropriate to calculate prejudgment interest based on the rate used by the Internal Revenue Service for unpaid balances). [FF at 38].
In calculating prejudgment interest, it would obviously be appropriate to start the accumulation of interest at the date that each investor’s funds were acquired by WFG and halt the accumulation at the date that final judgments are entered. The calculation offered by Mr.
Rector, however, uses a simplified procedure that actually results in a reduced prejudgment interest amount. Prejudgment interest has been calculated on the entire disgorgement amount of $13,797,966 for the period starting March 1, 2007, the approximate date that Defendants
conservative calculation yields a prejudgment interest figure of $1,846,574. [id.].
V. THE COURT SHOULD EXERCISE ITS DISCRETION TO AWARD CIVIL
PENALTIES AGAINST THE DEFENDANTS IN APPROPRIATE AMOUNTS BASED
ON THE ALLEGATIONS IN THE COMMISSION’S COMPLAINTPursuant to Paragraph II of the Interlocutory Judgment, the Commission is entitled to civil penalties against each defendant. Moreover, the allegations in the Commission’s Complaint are deemed admitted for the purpose of determining appropriate civil money penalties against defendants. The Commission requests that the Court exercise its discretion to determine what civil penalties are appropriate in light of the conduct of Defendants, as alleged by the Commission.
Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act authorize the Commission to seek, and the Court to impose, a third-tier penalty if the defendant’s violation (1) “involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” and (2) “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.” These provisions authorize third-tier civil penalties of $120,000 per violation for a natural person and $600,000 per violation for any other person. 5 Third-tier civil penalties against WFG, Wahab, Wallens Sr and Wallens Jr. are clearly appropriate under the facts of this case. Based on the allegations in the Commission’s Complaint, which are deemed admitted, there is no question that the Defendants committed violations of the antifraud provisions involving fraud and deceit and that their violations resulted in substantial losses, or the risk of substantial losses, to investors. [FF at 1-38]. According to 5 Given the multitude of victims injured by Defendants’ fraud, the Commission submits that Defendants committed multiple violations and, accordingly, multiple civil penalties would be legally justified. Realistically, however, the Commission concedes that merely collecting the full amount of disgorgement from the Defendants is an unlikely occurrence.
were jointly responsible for the egregious misrepresentations and omissions that induced investors to purchase SDOs. [id.]. The fundraising efforts were saturated with outrageous misrepresentations and omissions concerning the use of investor funds, the safety of the investment and Defendants’ history of financial responsibility. [id.]. Moreover, Defendants together diverted virtually all investor funds to undisclosed uses involving substantial risk. [id.] Moreover, while the Commission continues its efforts to provide meaningful restitution to investors, the victims of the fraudulent conduct are still likely to lose a substantial portion of their investment principal. Accordingly, it is appropriate to assess third-tier civil penalties against each of the Defendants. Rather than request a specific civil penalty amount, the Commission asks the Court to exercise its discretion to determine appropriate civil penalties against each of the Defendants.
VI. THE COURT SHOULD ISSUE A PRECLUSION ORDEREach of the individual Defendants has chosen to assert the Fifth Amendment privilege rather than testify in this matter. [FF at 38]. Having made this choice, they should be precluded from presenting evidence in response to the Commission’s motion.
There is no doubt that a party may assert a legitimate testimonial privilege as a shield and thus prevent an opponent from obtaining certain relevant evidence during pretrial discovery. It is likewise clear that a party cannot use the same undiscoverable evidence as a sword at trial in support of his claims or defenses. See Lyons v. Johnson, 415 F.2d 540, 542 (9th Cir. 1969); 4 Moore's Federal Practice 26.60  (2d ed. 1987). Principles of fundamental fairness and justice require that a party who invokes a testimonial privilege elect either to waive the privilege in a timely manner and allow discovery of the evidence or to forego introducing the evidence at trial.