Securities and Exchange Comm'n v. Patrick Quinlan ( 2010 )

                             File Name: 10a0246n.06
                                            No. 08-2619                               Apr 21, 2010
                                                                                LEONARD GREEN, Clerk
                           UNITED STATES COURT OF APPEALS
                                FOR THE SIXTH CIRCUIT
                  v.                                                On Appeal from the United
                                                                    States District Court for the
    PATRICK D. QUINLAN,                                             Eastern District of Michigan
                                                                    at Ann Arbor
    Before:       GUY, COLE, and SUTTON, Circuit Judges.
           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 that Quinlan be prohibited from acting as an officer or director of any issuer having
    a class of securities registered with the SEC pursuant to Section 12 of the Exchange Act (15
    U.S.C. § 78l), or that is required to file reports pursuant to Section 15(d) of the Exchange Act
    (15 U.S.C. § 78o(d)). Quinlan’s pro se appeal raises a number of complaints about the
    proceedings, most of which he also disavows as a basis for relief from this court. After
    No. 08-2619                                                                                 2
    reviewing the record and considering the arguments presented on appeal, we find no error
    and affirm.
           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 conforming 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 and 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 pass-through 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
    No. 08-2619                                                                                    3
    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 Plea 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 on 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, quality, and
    even ownership of the loans and mortgages. Those financial statements were provided to
    MCA’s lenders that provided secured lines of credit of as much as $210 million and a
    No. 08-2619                                                                                   4
    pension fund that provided guarantees and loans totaling $60 million. It was also stipulated
    that MCA filed quarterly reports (10-Qs), annual reports (10-Ks), and registration statements
    (S-18s, SB-2s, S1s) with the SEC that contained materially false statements and omissions
    concealing MCA’s true financial condition. Specifically, Quinlan stated that on April 29,
    1998, during and in furtherance of the conspiracy, he signed the Form 10-K (annual report)
    for fiscal year ending January 31, 1998, as CEO and Chairman of MCA, “knowing that the
    10-K contained materially false and fraudulent statements and concealed material facts.”
           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 material 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 year 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, 128
    No. 08-2619                                                                                                   
    5 S. Ct. 251
     (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 & Pettigrow v.
    501 U.S. 350
     (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 28 U.S.C. § 2462 would apply to the request for civil
    penalties. Quinlan’s requests for extensions of time to reply were granted, but his motion for
    appointment of counsel was denied. Quinlan filed his reply on May 7, 2007.2
            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 SEC’s
    motion and denied Quinlan’s several motions for reconsideration, finding, inter alia, that
    Quinlan was not prejudiced by what was in effect an amendment dismissing the request for
    civil penalties; that the limitations period implied for private securities fraud claims does not
    apply to civil enforcement actions by the SEC; and that § 2462 was not a bar to the SEC’s
    remaining claims for injunction and an officer/director bar. The statute of limitations would
              Quinlan complains repeatedly that he was not present at this hearing, but he stated in his next
    district court filing that he would not have opposed lifting the stay had he been there. In fact, this is one of
    the complaints that Quinlan expressly disavows as a basis for relief on appeal. Nor has he made a showing
    of either error or prejudice resulting from the lifting of the stay.
             Quinlan argues that the denial of his request for appointment of counsel caused him to be unable
    to mount a “complete defense” in violation of his Sixth and Fourteenth Amendment rights. As a civil action,
    however, Quinlan had no Sixth Amendment right to counsel. Shepherd v. Wellman, 
    313 F.3d 963
    , 970 (6th
    Cir. 2002). Nor can we conclude that it was an abuse of discretion to deny his request for court-appointed
    counsel. Lavado v. Keohane, 
    992 F.2d 601
    , 605 (6th Cir. 1993).
    No. 08-2619                                                                                               6
    be raised again on summary judgment, and Quinlan’s main contention on appeal is that the
    district court erred in its application of § 2462.
            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 § 2255 motion to set aside his guilty plea, and claimed that the SEC had engaged in
    “unprofessional” or “improper” conduct. Although Quinlan then filed a § 2255 motion in
    the federal criminal case, the district court denied his § 2255 motion, and this court has
    denied his motion for certificate of appealability. Any claim that a decision on the summary
    judgment motion should have been deferred is now moot. But see Smith v. SEC, 
    129 F.3d 356
    , 362 n.7 (6th Cir. 1997) (observing that a direct appeal does not deprive conviction of
    preclusive collateral estoppel effect).3
            On November 7, 2008, 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
              Quinlan’s assertions concerning improper conduct by the SEC are not entirely clear, although they
    seem to rely on a reported statement by FBI Agent Hunt to Quinlan’s defense attorney indicating that the
    investigation had revealed that MCA’s general ledgers balanced “to the penny.” Quinlan characterizes this
    statement as a “whistleblower’s” accusation that the SEC’s civil complaint in this case was not based upon
    its “own” investigation. On appeal, Quinlan complains that the SEC’s failure to respond to questions about
    this in connection with its motion for summary judgment denied him his right to confrontation and resulted
    in the withholding of information vital to the defense. While it appears that the significance of this
    statement was a point of contention between Quinlan and his criminal defense attorney before Quinlan
    pleaded guilty, nothing in these arguments suggests that the district court erred in granting summary
    judgment in this case. Nor was it error to disregard Quinlan’s multiple supplemental filings, which included
    this argument, because they were filed without leave.
    No. 08-2619                                                                                    7
    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.
             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 (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. F ED. R. C IV. P. 56(c). A district court’s decision granting
    summary judgment is reviewed de novo. Smith v. Ameritech, 
    129 F.3d 857
    , 863 (6th Cir.
    A.       Collateral Estoppel
             Collateral estoppel, also known as issue preclusion, “ bars ‘successive litigation of an
    issue of fact or law actually litigated and resolved in a valid court determination essential to
    the prior judgment,’ even if the issue recurs in the context of a different claim.” Taylor v.
    128 S. Ct. 2161
    , 2171 (2008) (citation omitted). A federal court decision has
    collateral estoppel effect when the following four elements are satisfied:
             (1) the precise issue raised in the present case must have been raised and
             actually litigated in the prior proceeding; (2) determination of the issue must
             have been necessary to the outcome of the prior proceeding; (3) the prior
             proceeding must have resulted in a final judgment on the merits; and (4) the
             party against whom estoppel is sought must have had a full and fair
             opportunity to litigate the issue in the prior proceeding.
    No. 08-2619                                                                                   8
    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 precluded 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 (15 U.S.C. § 77q(a)), Section 10(b) of the Exchange Act
    (15 U.S.C. § 78j(b)), and Rule 10b-5 (17 C.F.R. § 240.10b-5). The district court also found
    that Quinlan was liable for violating the books and records and internal controls provisions
    of Section 13(b)(5) of the Securities Act (15 U.S.C. § 78m(b)(5)) and Exchange Act Rules
    13b2-1 and 13b2-2 (17 C.F.R. §§ 240.13b2-1 and 240.13b2-2). Finally, the district court
    found Quinlan aided and abetted MCA’s violations of the reporting and record keeping
    provisions of Sections 13(b)(2)(A), 13b(2)(B), and 15(d) of the Exchange Act (15 U.S.C. §§
    78m(b)(2)(A), 78m(b)(2)(B), and 78o(d)), and Exchange Act Rules 12b-20, 15d-1, and 15d-
    13 (17 C.F.R. §§ 240.12b-20, 15d-1, 15d-13). On appeal, Quinlan does not argue that there
    No. 08-2619                                                                                   9
    are any material questions of fact with respect to the alleged substantive violations, and our
    review reveals no error in the district court’s determination that the SEC established
    Quinlan’s liability for such violations.
           The SEC may seek permanent or temporary injunction against future violations of
    securities laws under Section 20(b) of the Securities Act (15 U.S.C. § 77t(b)) and Section
    21(d)(1) of the Exchange Act (15 U.S.C. § 78u(d)(1)), upon showing there is a reasonable
    and substantial likelihood that, if not enjoined, the defendant would violate securities laws
    in the future. See SEC v. Youmans, 
    729 F.2d 413
    , 415 (6th Cir. 1984). This court has
    identified the following factors to be considered in determining the likelihood of future
    violations: (1) “the egregiousness of the violations”; (2) “the isolated or repeated nature of
    the violations”; (3) “the degree of scienter involved”; (4) “the sincerity of the defendant’s
    assurances, if any, against future violations”; (5) “the defendant’s recognition of the wrongful
    nature of his conduct”; (6) “the likelihood that the defendant’s occupation will present
    opportunities (or lack thereof) for future violations”; and (7) “the defendant’s age and
    health.” Id. No single factor is determinative. Id.
           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
    No. 08-2619                                                                                 10
    defendant’s ‘role’ or position when he 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
           benefitted 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 discretion
    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
    No. 08-2619                                                                                              11
            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 28 U.S.C. § 2462. Section 2462 provides that:
                   Except as otherwise 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 the 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.
    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);
              Not challenged on appeal is the finding that, as other courts have concluded, no other statute of
    limitations is implied or borrowed for civil enforcement actions brought by the SEC to vindicate public (not
    private) interests. SEC v. Rind, 
    991 F.2d 1486
    , 1488-91 (9th Cir. 1993); SEC v. Calvo, 
    378 F.3d 1211
    , 1218
    (11th Cir. 2004). We note that there is no authority to the contrary.
    No. 08-2619                                                                                   12
    Zacarias v. SEC, 
    569 F.3d 458
    , 479 (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 remedial 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 was 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 offic[er] 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.
    No. 08-2619                                                                                   13
           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 conduct was not the result of
           negligence [or] insufficient attention to the business–he was aware of the
           misrepresentations that resulted in inflated values for property, and he also was
           aware that MCA’s financial statements did not properly reflect the unfunded
           liabilities in the pools. According to the Rule 11 Plea Agreement, Quinlan
           “knowingly conspired with other employees, officers and directors of MCA to
           obtain these funds by means of false and fraudulent pretense, representations
           and promises.” Third, Defendant’s securities laws violations were not an
           isolated occurrence, but were carried out over an extended period of time
           throughout MCA’s daily operations. Fourth, in his criminal case, Quinlan
           attempted to withdraw his Rule 11 guilty plea and to maintain his innocence
           after he entered the plea. In the instant civil action, Defendant continues to
           assert that he should not be held liable for any and all of the injurious
           consequences arising from his misrepresentations and other fraudulent
           conduct. Finally, if the equitable relief is not granted, the Court finds it likely
           that Defendant would return to the investment industry upon his release from
           prison, given that the current dispute over the applicability of Section 2462 is
           brought before the Court precisely because Defendant wants to retain access
           to the same occupation.
    (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.