SECURITIES AND EXCHANGE COMMISSION, Plаintiff-Appellee, v. Patrick D. QUINLAN, Defendant-Appellant.
No. 08-2619.
United States Court of Appeals, Sixth Circuit.
April 21, 2010.
581
RALPH B. GUY, JR., Circuit Judge.
Defendant Patrick D. Quinlan, Sr., appeals from the entry of judgment against him in this civil enforcement action brought by the Securities and Exchange Commission (SEC or Commission). The district court, finding that Quinlan‘s criminal convictions established that he committed various securities law violations, entered judgment enjoining him from future violations of securities laws and ordering
I.
The SEC filed this civil enforcement action in April 2002, against Patrick Quinlan, Sr., and six other defendants alleging a “large scale securities offering and accounting fraud perpetrated by senior officers and personnel of MCA Financial Corporation (“MCA“) to buttress a failing, high-risk mortgage banking business.” MCA, a privately held holding company, consisted of three mortgage-related businesses. Those businesses included the origination of сonforming mortgages, the origination and securitization of nonconforming loans and mortgages, and the acquisition and rental of low income housing in and near the City of Detroit. Quinlan was MCA‘s CEO, Chairman of the Board, and a director from its inception in 1989 until it filed for bankruptcy in January 1999. MCA had, at its height, offices in 12 states and as many as 1,000 employees.
The SEC alleged that from 1994 until January 1999, the defendants engaged in a fraudulent scheme to falsely inflate income аnd equity to enhance cash flow to hide losses. Material misrepresentations were made in connection with the offer or sale of securities; specifically, corporate debentures and securitized pools of nonconforming mortgages sold as “real estate passthrough certificates.” The misrepresentations made the financial reports and registration statements relied upon by investors and lenders materially false. Ultimately, the fraud at MCA resulted in losses of more than $256 million.
Federal criminal proceedings were already under way when this action was filed, and charges against Quinlan and two others were added by superceding indictment in June 2002. Not long after, at the request of the United States Attorney‘s Office, the district court ordered a stay of this action pending resolution of the criminal charges. In February 2004, Quinlan pleaded guilty pursuant to a Rule 11 Plеa Agreement to two counts—making false statements to the SEC and conspiring with others to commit a federal crime—and the remaining counts were dismissed. More than a year later, after several changes in counsel, Quinlan moved unsuccessfully to withdraw his guilty plea. Quinlan was sentenced to 120 months’ imprisonment and ordered to pay more than $256 million in restitution.
Without repeating in full the factual basis set forth in the Plea Agreement, Quinlan admitted that: (1) he directed and participated in the raising of funds from investors and lenders to finance MCA; (2) he knowingly conspired to obtain such funds by false and fraudulent representations; and (3) as part of MCA‘s Financial Management Committee, he knowingly made decisions to deliberately engage in business and accounting practices that were fraudulent. Quinlan stipulated that material misrepresentations were made with respect to both the risks of and returns оn the pass-through certificates. Investors were sent statements that contained material misrepresentations, and some pool assets were sold and used for MCA corporate purposes.
Quinlan also admitted that MCA knowingly prepared false and fraudulent financial statements that concealed MCA‘s true financial condition, as well as the value,
During 2004, Quinlan also pleaded guilty in state court to conspiracy to commit securities fraud and three counts of violating anti-fraud provisions under Michigan Securities law. The criminal complaint in that case focused on the mаterial misstatements made to investors with respect to the mortgage pools, including: that investors were not informed that mortgages were removed from pools; that, as a result, certain pools did not have sufficient assets to pay investors what would be due; and that MCA sent investors letters that contained false information about the rate of return to conceal the shortfall. The state court sentenced Quinlan to one yeаr in prison, to run concurrently with his federal sentence, and ordered that he pay restitution of $83 million.
On May 26, 2006, after sentencing in the federal case, the SEC filed a motion to lift the stay in this civil enforcement action. Quinlan asked that the district court defer ruling on the motion to allow time for a decision in his direct appeal, which the court did. Once this court affirmed, United States v. Quinlan, 473 F.3d 273, 277-78 (6th Cir.), cert. denied, 552 U.S. 908, 128 S.Ct. 251, 169 L.Ed.2d 184 (2007), the district court lifted the stay and directed that Quinlan answer.1
Quinlan‘s February 14, 2007 responsive pleading moved to dismiss the action as barred by the three-year statute of limitations found applicable to private securities fraud actions under § 10(b) of the Exchange Act in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). The SEC‘s twofold response argued that this limitations period did not apply to enforcement actions, but conceded that the general “catch-all” five-year limitations period found in
Before Quinlan‘s motion to dismiss was decided, the SEC filed its own motion for voluntary dismissal of the request for civil penalties. The district court granted the
The SEC‘s motion for summary judgment, filed April 28, 2008, relied on Quinlan‘s convictions to preclude him from relitigating the facts of MCA‘s fraudulent conduct or his knowledge and participation in the fraud. Quinlan‘s response argued the statute of limitations issue, asked that a decision on the motion be deferred because he intended to file a
On November 7, 2008, 2008 WL 4852904, in a thorough 25-page opinion, the district court, in turn, considered the alleged violations by Quinlan; found application of collateral estoppel was warranted; and determined that injunctive relief and a permanent officer and director bar should be imposed against Quinlan. The district court also found that the statute of limitations did not apply to the claims for this relief. Judgment was entered accordingly on November 14, 2008, and Quinlan‘s motion for reconsideration was denied on December 1, 2008. This appeal followed.
II.
In deciding a motion for summary judgment, the court must view the factual evidence and draw all reasonable inferences in favor of the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Summary judgment is appropriate when there are no issues of material fact in dispute and the moving party is entitled to judgment as a matter of law.
A. Collateral Estoppel
Collateral estoppel, also known as issue preclusion, “bars ‘successive litigation of
- the precise issue raised in the present case must have been raised and actually litigated in the prior proceeding;
- determination of the issue must have been necessary to the outcome of the prior proceeding;
- the prior proceeding must have resulted in a final judgment on the merits; and
- the party against whom estoppel is sought must have had a full and fair opportunity to litigate the issue in the prior proceeding.
Smith v. SEC, 129 F.3d 356, 362 (6th Cir. 1997) (en banc) (quoting Detroit Police Officers Ass‘n v. Young, 824 F.2d 512, 515 (6th Cir. 1987)).
The district court found, and Quinlan does not dispute, that the prerequisites for collateral estoppel are met and he is precludеd from relitigating MCA‘s fraud or his knowledge of and participation in the fraudulent conduct. Quinlan‘s misrepresentation and securities fraud were essential to his convictions, and the same conduct formed the basis of the violations alleged in this enforcement action. Quinlan‘s culpability was actually litigated, was necessary to the outcome, resulted in a final judgment of conviction, and was resolved after a full and fair opportunity to litigate in the criminal case.
B. Substantive Violations, Permanent Injunction, and Officer/Director Bar
Addressing the allegations by type, the district court found that the SEC had established that Quinlan was primarily liable for violating the anti-fraud provisions of Section 17(a) of the Securities Act (
The SEC may seek permanent or temporary injunсtion against future violations of securities laws under Section 20(b) of the Securities Act (
In addition, Section 20(b) of the Securities Act and Section 21(d)(1) of the Exchange Act provide that a person may be barred from serving as an officer or director of a public company if that person violates the anti-fraud provisions of either Act and his conduct demonstrates “unfitness to serve as an officer or director.” The following factors may be considered in determining whether a defendant is “unfit“: “(1) the ‘egregiousness’ of the underlying securities law violation; (2) the defendant‘s ‘repeat offender’ status; (3) the defendant‘s ‘role’ or position when hе engaged in the fraud; (4) the defendant‘s degree of scienter; (5) the defendant‘s economic stake in the violation; and (6) the likelihood that misconduct will recur.” SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995) (internal quotation marks and citation omitted).
The district court found that a permanent injunction against future violations of securities law and imposition of a permanent officer/director bar were warranted, reasoning as follows:
First and foremost, the evidence shows that Quinlan knowingly and deliberately engaged in fraudulent business and accounting practices for an extended period of time for 1994 through 1999. In his capacity as CEO of MCA, Quinlan repeatedly made false financial statements and misrepresented material facts with the intention to mislead investors, causing investors to lose millions of dollars. He lied to the auditors. Quinlan‘s conduct certainly was egregious. At his sentencing, the trial court characterized Quinlan as the “dominant force” and the “architect” of the scheme. (Pl‘s Exh. 26, p. 2). Moreover, the Court is not persuaded that Defendant recognizes the wrongful nature of his conduct, in light of his repeated denials of any wrongdoing in the downfall of MCA, his lack of remorse for the tremendous loss suffered by the investors, and his attempt to withdraw his guilty plea. (Id., p. 39). He benefited from his conduct; he “lived a very good life for a very long time based on the proceeds generated by [the] offense.” (Id., p. 40). Should Quinlan retain access to the same occupation upon his scheduled release from prison, the Court cannot disregard the reasonable and substantial likelihood that he will engage in future violations of the federal securities laws at the public‘s risk and expense. (See id., p. 40, recognizing the likelihood that the public is likely to suffer additional danger from Quinlan).
Based on our review of the record, we find that the district court did not abuse its disсretion either by enjoining Quinlan from future violations or permanently barring Quinlan from serving as an officer or director of a public company.
C. Statute of Limitations
Neither the Securities Act nor the Exchange Act explicitly contain a statute of limitations for SEC civil enforcement actions; but Quinlan argues that the SEC‘s claims for injunctive relief and imposition of the officer/director bar are governed by the five-year limitations period found in
Except as оtherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or
the property is found within the United States in order that proper service may be made thereon.
The SEC‘s abandonment of thе claim for civil penalties in this case obviates the need to determine when they “first accrued” in this case. Not surprisingly, however, claims for civil penalties in a civil enforcement action brought by the SEC have been recognized as being governed by § 2462. See SEC v. Jones, 476 F.Supp.2d 374, 380 (S.D.N.Y. 2007); SEC v. Alexander, 248 F.R.D. 108 (E.D.N.Y. 2007); SEC v. Kelly, 663 F.Supp.2d 276, 286 (S.D.N.Y. 2009). The question here is whether the equitable remedies ordered in this case are also “penalties” subject to the statute of limitations in § 2462.4
Equitable relief in SEC enforcement actions may include orders of disgorgement, injunctions against future violations, or imposition of an officer and director bar. Some courts have held that some or all of these equitable remedies are exempt from § 2462‘s limitations period as a matter of law. See Kelly, 663 F.Supp.2d at 286 (citing cases); Zacharias v. SEC, 569 F.3d 458, 473 (D.C. Cir. 2009) (holding disgorgement not punitive). Other courts have engaged in a fact-intensive inquiry to determine whether the equitable remedies sought in a particular case are remеdial or punitive. See Alexander, 248 F.R.D. at 115-16 (discussing alternative approaches); Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996). This unsettled question is immaterial to this case, as the district court undertook the fact-intensive inquiry articulated in Johnson and applied in Jones.
Quinlan relies on Jones, which held that “the limitations period in § 2462 applies to civil penalties and equitable relief that seeks to punish, but does not apply to equitable relief which seeks to remedy a past wrong or protect the public from future harm.” Jones, 476 F.Supp.2d at 381; see also Johnson, 87 F.3d at 488-89. Although the court in Jones ultimately concluded that the SEC failed to show that the permanent injunction wаs aimed at protecting the public from future harm, the district court carefully considered the matter and found that this showing had been made in this case. The district court recognized the serious consequences, explaining that:
The potential collateral consequences to Quinlan from a permanent injunction and officer and director bar are admittedly considerable, even from an objective point of view. The practical effect of such an injunction would work to stigmatize Defendant in the investment community. Moreover, the injunction would deprive him of any ability and opportunity to earn a living as an officer or director throughout his life after his release from the prison. Because of the far-reaching consequences to Defendant that the bar poses, the Court carefully considers evidence demonstrating the likelihood of recurrence.
Then, considering the likelihood of recurrence in light of the factors identified by the Second Circuit in SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978), the district court found all the factors favored the SEC‘s position.
First, Quinlan is guilty of conspiracy to commit fraud and to make false statements, and of making false and fraudulent statements in an annual report filed with the SEC. Second, Defendant‘s con-
(Citations omitted.) Based on these findings, the district court concluded that there was a risk of recurrence, that the risk to the investing public outweighed the severe collateral consequences of the equitable relief, and, therefore, that the permanent injunction and officer and director bar were remedial rather than punitive. These findings are supported by the record, and establish that the equitable relief was not a “penalty” subject to § 2462‘s five-year statute of limitations.
AFFIRMED.
RALPH B. GUY, JR.
UNITED STATES CIRCUIT JUDGE