The opinion
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
SECURITIES AND CIVIL ACTION
EXCHANGE COMMISSION
VERSUS No.: 15-2451
RONALD L. BLACKBURN, ET SECTION: “J” (1)
AL.
ORDER & REASONS
Before the Court are the Security and Exchange Commission’s (“SEC”) Motion
for Remedies as to Treaty and the Officer Defendants (Rec. Doc. 235) and its Motion
for Remedies as to Defendant Samuel E. Whitley (Rec. Doc. 250). The motions are
opposed (Rec. Docs. 251–54). Considering the motions and memoranda, the record,
and the applicable law, the Court finds that the Motion for Remedies as to Treaty and
the Officer Defendants should be GRANTED and the Motion for Remedies as to
Defendant Samuel E. Whitley should be GRANTED in part as set forth herein.
FACTS AND PROCEDURAL BACKGROUND
This action arises from alleged violations of securities laws in connection with
the operation of Treaty Energy Corp. (“Treaty”), an oil and gas production company
incorporated in Nevada and located in New Orleans, Louisiana. The facts of this case
are set forth more fully in the Court’s earlier opinion granting partial summary
judgment in favor of the SEC against Defendants Ronald Blackburn, Andrew Reid,
Bruce Gwyn, and Michael Mulshine (collectively, the “Officer Defendants”). See SEC
v. Blackburn, No. 15-2451, 2019 WL 6877655, at *1-9 (E.D. La. Dec. 17, 2019).
The Court previously granted summary judgment to the SEC on the following claims:
• Blackburn violated Section 5 of the Securities Act; Section 17(a) of
the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-
5; and Section 16(a) of the Exchange Act and Rule 16a-3.
• Reid violated Section 5 of the Securities Act; Section 17(a) of the
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5;
and Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-14.
• Gwyn violated Section 5 of the Securities Act; Section 17(a) of the
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5;
and Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-14.
• Mulshine violated Section 5 of the Securities Act; and Section 17(a)
of the Securities Act, Section 10(b) of the Exchange Act, and Rule
10b-5.
• Defendant Samuel E. Whitley violated Section 5 of the Securities Act.
Additionally, the Court entered an Agreed Partial Judgment as to Treaty that
enjoined Treaty from violating Section 10(b) of the Exchange Act and Rule 10b-5,
Section 17(a) of the Securities Act, Section 5 of the Securities Act, and Section 13(a)
of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Agreed Partial
Judgment also provided that the Court “shall order disgorgement of ill-gotten gains,
prejudgment interest thereon, and a civil penalty” against Treaty.1
The SEC now seeks to impose permanent injunctions against the Officer
Defendants and Whitley as well as disgorgement orders and civil penalties on each
Defendant.2 Additionally, the SEC seeks officer-and-director and penny-stock bars
against the Officer Defendants and a penny-stock bar against Whitley.
1 (Rec. Doc. 157, at 5).
2 The SEC also brought claims in this action against Lee Schlesinger, who settled the claims against
him. (Rec. Doc. 207). The Court’s use of “each” or “all Defendants” in this opinion does not include
Schlesinger.
PARTIES’ ARGUMENTS
The SEC asserts that permanent injunctions are warranted because of the
egregious and repeated nature of the Defendants’ conduct and their lack of
recognition of their wrongdoing. The SEC requests a conduct-based injunction
against Whitley because otherwise, it contends, his disregard of the registration
requirements is likely to be repeated. It seeks disgorgement of the Officer Defendants’
ill-gotten gains, the net total of illicit proceeds received by Treaty, and all the legal
fees Whitley received from Treaty. The SEC also contends maximum third-tier civil
penalties are appropriate against each of the Defendants.
All the Defendants oppose the SEC’s motions on grounds that it lacks authority
to seek disgorgement in civil enforcement proceedings. Treaty does not otherwise
oppose the SEC’s requested relief. Blackburn and Mulshine do not discuss any of the
SEC’s proposed remedies but merely seek to relitigate the issue of liability. Gwyn,
acting pro se, filed a memorandum in which he contends that a third-tier civil penalty
should not apply to him because there is no evidence that he committed fraud that
resulted in substantial losses to investors. Reid has not filed a response.
Whitley contends that injunctive relief and a penny stock bar against him are
not warranted because the Court did not find that he participated in any fraud, the
claims against him did not require a showing of scienter, and the SEC has not offered
any positive proof that he is likely to engage in future violations. He disputes the
SEC’s proposed disgorgement amount, contending that the Court can only order him
to disgorge his profits from the letters that were proven to violate the Securities Act,
not all of the legal fees he received from Treaty. As to civil penalties, he asserts that
the Court can only impose first-tier penalties against him because the SEC did not
establish he acted with scienter in proving its claims against him.
DISCUSSION
I. PERMANENT INJUNCTION
Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act
authorize the Court to enter a permanent injunction against a defendant when the
SEC establishes a “reasonable likelihood” that the defendant will engage in a future
violation of the securities laws. SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. Unit A
July 1981); see 15 U.S.C. §§ 77t(b), 78u(d). In determining whether to impose an
injunction, the Court considers the following factors: (1) the egregiousness of the
defendant’s conduct; (2) the isolated or recurrent nature of the violation; (3) the
defendant’s degree of scienter; (4) the sincerity of the defendant’s recognition of his
transgression; and (5) the likelihood of the defendant’s job providing opportunities for
future violations. SEC v. Gann, 565 F.3d 932, 940 (5th Cir. 2009).
A. The Officer Defendants
The SEC contends that permanent injunctions are warranted against the
Officer Defendants because their conduct was particularly egregious, occurred over
several years, and displayed a high degree of scienter, and they have shown no
recognition of their wrongdoing. Additionally, Blackburn was accused of
misappropriating funds from the previous firm he consulted for and settled the claim
against him for $1.3 million, and Gwyn was criminally prosecuted for securities fraud
in Alabama for misleading investors of a futures firm he was operating while he was
a director of Treaty. The Officer Defendants do not oppose the requests for
injunctions. Accordingly, the Court will permanently enjoin the Officer Defendants
from committing future violations of the respective securities laws they have violated.
B. Whitley
The SEC seeks a permanent injunction against Whitley for future violations of
Section 5(a) and (c) of the Securities Act and a conduct-based injunction prohibiting
him from offering legal services in connection with the offer or sale of securities
claiming any exemption from registration and the filing of a Form S-8. Whitley
contends that the SEC has not carried its burden of showing that an injunction is
appropriate against him and that its requested injunction is overbroad. He submits
that if the Court finds an injunction is necessary, that it be narrowly tailored to the
violations the Court found he committed and limited to a period of five years.
The Court finds that the SEC has not shown a reasonable likelihood that
Whitley will commit a future securities law violation. The mere fact of a prior
violation is not enough. See Gann, 565 F.3d at 940. First, Whitley assisted Treaty and
the Officer Defendants in committing technical violations of reporting requirements;
unlike the Officer Defendants, he did not commit blatant fraud. Second, his violations
were isolated rather than repeated: of the 105 opinion letters Whitley authored for
Treaty, the SEC only established violations for four of them, and Whitley has no other
history of violations. Third, while the SEC contends that Whitley’s actions show
severe recklessness, he was only shown to have violated Section 5, a strict liability
statute with no scienter requirement. Fourth, Whitley has shown some sincerity in
his recognition of wrongdoing. Although it is difficult to discern sincerity from a
written affidavit, the Court finds his willingness to be subjected to an injunction
noteworthy. Finally, although Whitley’s job as an attorney provides opportunities for
future violations, he attests that since this case began, he has prepared no S-8
registration statements or opinion letters and at most two Rule 144 opinion letters
(but not for any Treaty shareholders), which shows a voluntary cessation of his
violative conduct. The Court finds that this factor alone is insufficient to support a
permanent injunction against Whitley. Accordingly, the Court declines to impose a
permanent injunction.
II. DISGORGEMENT
The Court has broad discretion to award disgorgement and the amount of any
award. SEC v. AMX, Int’l, Inc., 7 F.3d 71, 73 (5th Cir. 1993). The purpose of this
remedy is to deprive wrongdoers of their ill-gotten gains. Id. at 75. A defendant may
be liable for disgorgement equal to “a reasonable approximation of the proceeds
causally connected to the wrongdoing.” Allstate Ins. Co. v. Receivable Fin. Co., 501
F.3d 398, 413 (5th Cir. 2007). The Court, in its discretion, may also award
prejudgment interest on any disgorgement amount. SEC v. Helms, No. A-13-CV-
01036 ML, 2015 WL 5010298, at *19 (W.D. Tex. Aug. 21, 2015). In calculating
disgorgement, any risk of uncertainty “should fall on the wrongdoer whose illegal
conduct created that uncertainty.” Id. (quoting SEC v. Patel, 61 F.3d 137, 140 (2d Cir.
1995)). “[T]he overwhelming weight of authority hold[s] that securities law violators
may not offset their disgorgement liability with business expenses.” SEC v. Kahlon,
873 F.3d 500, 509 (5th Cir. 2017) (alterations in original) (citation omitted).
The Defendants first argue that the SEC lacks authority to seek disgorgement
in civil enforcement proceedings, relying on Kokesh v. SEC, 137 S. Ct. 1635 (2017). In
Kokesh, the Supreme Court held that a five-year statute of limitations applied to
claims for disgorgement for violating federal securities laws because disgorgement is
a “penalty” within the meaning of 28 U.S.C. § 2462. 137 S. Ct. at 1639. The Court
explicitly stated that it was not deciding “whether courts possess authority to order
disgorgement in SEC enforcement proceedings.” Id. at 1642 n.3. Following Kokesh,
this question was raised in SEC v. Liu, 754 F. App’x 505 (9th Cir. 2018), cert. granted,
140 S. Ct. 451 (2019). Like the petitioners in Liu, Defendants argue that, under
Kokesh, disgorgement is a legal rather than equitable remedy. Because of this,
Defendants contend that the SEC lacks statutory authority to seek disgorgement in
judicial proceedings (as opposed to administrative proceedings). Defendants also
reurge their request to stay the remedies proceedings until the Supreme Court
decides Liu and resolves this issue.
No court has held that the SEC lacks authority to order disgorgement in civil
proceedings; the Fifth Circuit recently rejected Defendants’ argument in SEC v. Team
Resources Inc., 942 F.3d 272, 275-77 (5th Cir. 2019), petition for cert. filed, No. 19-978
(Feb. 3, 2020). Considering this binding precedent, which is uniform across the
circuits, the Court concludes that a stay is also unwarranted at this late stage of this
litigation.
A. Treaty and the Officer Defendants
The SEC seeks disgorgement, plus prejudgment interest, from Treaty and the
Officer Defendants in the following amounts:
Disgorgement Prejudgment Interest Total
Blackburn $1,512,059.96 $359,099.64 $1,871,159.60
Reid $525,030.52 $124,689.69 $649,720.21
Mulshine $108,291.05 $25,718.10 $134,009.15
Gwyn $772,434.90 $183,445.85 $955,880.75
Treaty $2,270,561.60 $539,236.47 $2,809,798.07
Treaty and the Officer Defendants do not contest the proposed disgorgement
amounts. Because the Court concludes that these amounts are supported by sufficient
evidence,3 the Court will grant the SEC’s requested disgorgement as to these
Defendants.
B. Whitley
The SEC asserts that a reasonable disgorgement amount for Whitley is the
total amount of legal fees he received in connection with his work for Treaty, which
is $54,852.67, plus $13,026.97 in prejudgment interest. Whitley contends this amount
is unreasonable because most of it was for other services he provided Treaty that did
not form the basis of the SEC’s claims against him. Instead, Whitley claims that a
reasonable amount would be the fees he received for the four opinion letters that the
SEC has shown violated Section 5. He asserts that these amounts are: (1) $300 for
the February 14, 2013 letter that allowed Blackburn to sell his unregistered shares;
3 (Rec. Doc. 235-1, at 2-5; Rec. Docs. 235-2, 235-3).
(2) $500 for the October 10, 2011 letter that allowed David V. Smith to resell the S-8
shares he improperly received; and (3) $3,000 for each of Treaty’s Form S-8
registration statements for 2012 and 2013, of which he asserts approximately $500 is
attributable to the opinion letter. Thus, Whitley contends that a reasonable amount
for disgorgement is $1,800 or, at the most, $6,800.
Because disgorgement is an equitable remedy, the Court concludes that
disgorgement of fees not shown to be the profits of wrongdoing would be improper.
See SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993). Accordingly, the Court will
order Whitley to disgorge the $6,800 he received in connection with the four opinion
letters. Additionally, because the SEC has not provided the Court with a reasonable
sum of prejudgment interest connected to this amount, no prejudgment interest will
be awarded; however, the Court will keep the lack of prejudgment interest in mind
when setting a civil penalty.
III. CIVIL PENALTIES
Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act
authorize the Court to assess civil monetary penalties for securities violations based
on an escalating, three-tier structure. 15 U.S.C. §§ 77t(d), 78u(d)(3). A first-tier
penalty may be imposed for any securities violation; no showing of scienter is
required. Id. Second-tier penalties may be awarded upon a showing that the violation
involved “fraud, deceit, manipulation, or deliberate or reckless disregard of a
regulatory requirement.” Id. Finally, a third-tier penalty may be imposed if a second-
tier penalty may apply and the “violation directly or indirectly result[ed] in
substantial losses or create[d] a significant risk of substantial losses to other
persons.” Id. The maximum penalty that can be awarded is the greater of the amount
set by statute or “the gross amount of pecuniary gain to [the] defendant as a result of
the violation.” Id. For the relevant time period, the maximum penalty amounts are:
Natural Person Any Other Person
First Tier $7,500 $75,000
Second Tier $75,000 $375,000
Third Tier $150,000 $725,000
17 C.F.R. § 201.1001, Table 1. The amount of civil penalties to assess within the
permissible statutory range is left to the Court’s discretion. SEC v. Kern, 425 F.3d
143, 153 (2d Cir. 2005). In determining the appropriate penalty, the Court considers:
(1) the egregiousness of the defendant’s conduct; (2) the degree of the
defendant’s scienter; (3) whether the defendant’s conduct created
substantial losses or the risk of substantial losses to other persons; (4)
whether the defendant’s conduct was isolated or recurrent; and (5)
whether the defendant has admitted wrongdoing; and (6) whether the
penalty should be reduced due to the defendant’s demonstrated current
and future financial condition.
SEC v. Life Partners Holdings, Inc., 71 F. Supp. 3d 615, 623 (W.D. Tex. 2014).
A. Treaty and the Officer Defendants
The SEC seeks maximum third-tier penalties against Treaty and the Officer
Defendants. Gwyn contends that a third-tier penalty against him is unwarranted
because there is no evidence that his violations resulted in substantial losses to
investors. However, in addition to making a material misrepresentation to a Treaty
investor, the Court found that Gwyn committed fraud by failing to disclose
Blackburn’s involvement with Treaty on a required filing with the SEC. Had
Blackburn’s involvement been disclosed earlier, substantial losses could have been
avoided, including by the SEC taking enforcement action sooner. Accordingly, the
Court finds a third-tier penalty is warranted against Gwyn because his violations
created a significant risk of substantial losses to other persons. The Court will impose
civil penalties against Treaty and the Officer Defendants in the following amounts:
$1,512,059.96 against Blackburn; $525,030.52 against Reid; $150,000 against
Mulshine; $772,434.90 against Gwyn; and $2,270,561.60 against Treaty.
B. Whitley
The SEC also seeks maximum third-tier penalties against Whitley because his
conduct involved reckless disregard of a regulatory requirement and created a
significant risk of substantial losses to others. The Court is not convinced that the
SEC has presented sufficient evidence of Whitley’s state of mind, which is typically a
question of fact not appropriate for resolution on summary judgment. Accordingly,
the Court will impose a first-tier penalty on Whitley. Because the SEC proved that
four of Whitley’s opinion letters violated Section 5, the Court finds that Whitley
committed four violations and will impose a penalty of $7,500 per violation, for a total
of $30,000. See SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 288 n.7 (2d Cir.
2013); see also, e.g., SEC v. AmeriFirst Funding, Inc., No. 3:07-CV-1188-D, 2008 WL
1959843, at *9 (N.D. Tex. May 5, 2008) (finding that each fraudulently obtained
payment constituted a separate violation of the securities laws and imposing a $2,000
penalty per violation, for a total penalty of $1,178,000 based on 589 violations).
IV. OFFICER-AND-DIRECTOR AND PENNY-STOCK BARS
Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange Act
authorize the Court to permanently or temporarily prohibit a person who has violated
scienter-based anti-fraud provisions of the Securities Act or Exchange Act from acting
as an officer or director of an issuer “if the person’s conduct demonstrates unfitness
to serve as an officer or director.” 15 U.S.C. §§ 77t(e), 78u(d)(2).
Section 20(g)(1) of the Securities Act and Section 21(d)(6)(A) of the Exchange
Act authorize the Court to permanently or temporarily prohibit a person who was
participating in an offering of penny stock at the time of alleged misconduct from
participating in any future offering of penny stock. 15 U.S.C. §§ 77t(g), 78u(d)(6)(A).
The Court considers the following factors in determining whether an officer-
and-director or penny-stock bar is appropriate: (1) the egregiousness of the
defendant’s actions; (2) the isolated or recurrent nature of the infraction; (3) the
degree of scienter involved; (4) the sincerity of the defendant’s assurances against
future violations; (5) the defendant’s recognition of the wrongful nature of the
conduct; and (6) the likelihood that the defendant’s conduct will present opportunities
for future violations.” Kahlon, 873 F.3d at 506. These factors are substantially similar
to the factors for determining whether a permanent injunction is warranted. See id.
Two additional factors that may be useful in determining whether an officer-and-
director bar is appropriate are the defendant’s role when he engaged in the fraud and
the defendant’s economic stake in the violation. Id. at 507.
A. Treaty and the Officer Defendants
The SEC seeks officer-and-director and penny-stock bars against the Officer
Defendants and a penny-stock bar against Treaty. In addition to the reasons given
above for imposing permanent injunctions, the Court notes that none of the Officer
Defendants have provided any recognition of the wrongful nature of their conduct or
any assurances against future violations. Blackburn and Mulshine’s brief attempts
to relitigate their liability, claiming in conclusory fashion that they committed no
violation of Section 5, Section 17(a), Section 10(b) or Rule 10b-5. Gwyn, who filed a
brief pro se, attempts to shift the blame to Blackburn and contends he did not make
the statement that the Court found to be a material misrepresentation to a Treaty
investor. Further, Mulshine, Reid, and Gwyn all held officer or director positions at
various times while at Treaty: Mulshine was assistant secretary and corporate
secretary; Reid was CEO and chairman of the board of directors; and Gwyn was co-
CEO, COO, and member of the board of directors. While Blackburn was never a
formal officer or director, the high degree of control he exercised over Treaty
informally as well as his economic stake in the violations – over $1.5 million – support
imposing these prohibitions against him. Finally, a penny-stock bar is warranted
against Treaty because it engaged in fraud over several years intended to inflate the
price of its penny stock and increase demand.
B. Whitley
The SEC also seeks a penny-stock bar against Whitley, relying primarily on
the fact that he is a securities attorney and so should have known that his conduct
was illegal. Considering the Court’s analysis above, including his recognition of
wrongdoing and his voluntary cessation of activities that are similar to his
misconduct here, the Court concludes that a penny-stock bar against Whitley is not
warranted; the Court believes that the financial penalties imposed herein will serve
as a sufficient deterrent.
CONCLUSION
Accordingly,
IT IS HEREBY ORDERED that the SEC’s Motion for Remedies as to Treaty
and the Officer Defendants (Rec. Doc. 235) is GRANTED.
IT IS FURTHER ORDERED that the SEC’s Motion for Remedies as to
Defendant Samuel E. Whitley (Rec. Doc. 250) is GRANTED in part and DENIED
in part. The SEC’s requests for disgorgement and a civil penalty are GRANTED,
and its requests for a permanent injunction and penny-stock bar are DENIED.
New Orleans, Louisiana, this 8th day of April, 2020.
°
CARL J. BA R
UNITED ST S DISTRICT JUDGE
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