Free Motion for Disbursement of Funds - District Court of Colorado - Colorado

Case 1:01-cv-01903-MSK-OES

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Filed 04/17/2008

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 01-CV-01903-MSK-OES

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. VARI-L COMPANY, INC., DAVID G. SHERMAN, JON L. CLARK, and SARAH E. HUME, Defendants. ________________________________________________________________ PLAINTIFF'S MOTION FOR AN ORDER DIRECTING PAYMENT OF FUNDS TO THE UNITED STATES TREASURY

Plaintiff Securities and Exchange Commission ("Commission") hereby moves the Court to enter an order directing payment to the United States Treasury of funds presently in the Registry of the Court. The grounds for this motion are set forth below. I. INTRODUCTION AND PROCEDURAL HISTORY The SEC brought this action in 2001 against four Defendants, claiming that they violated the federal securities laws. The Complaint alleged that, from 1996 through March 31, 2000, the Defendants engaged in a financial reporting fraud designed to show consistently increasing revenue and earnings at defendant Vari-L Company, Inc., by recognizing false revenue, improperly

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capitalizing and depreciating costs, overstating inventory, and improperly deferring period costs. The action has now been settled with respect to each of the Defendants.1 However, $10,000.00 plus over $900.00 in interest remains in the court registry. On September 26, 2003, this court entered a final judgment of permanent injunction against Defendant David G. Sherman, based on his consent, ordering Sherman to pay disgorgement of $1,750,000, plus prejudgment interest of $519,916, and ordering that payment of all but $85,000 was waived based on Sherman's inability to pay as reflected in his sworn statement of financial condition. A distribution ordered by the Court on October 28, 2004 provided in part that $60,000.00 paid by defendant David G. Sherman would be paid directly to Lerach, Coughlin, Stoia, Geller, Rudman & Robbins, LLP ("Coughlin") as acting successor escrow agent for Milberg, Weiss, Bershad, Hynes & Lerach LLP, for the settlement fund in Rasner, et al. v. Vari-L Company, Inc., et al., Civil Action No. 00-RB-1181(CBS), a class action related to the instant action. The docket reflects that $50,000.00 was paid by Sherman prior to the court ordered distribution. The

docket then reflects one year later, an additional $10,000.00 paid into the registry by defendant Sherman. It appears that the $10,000.00 sitting in the registry to date and accruing interest was intended to be part of the distribution ordered in 2004. The Rasner case is closed and the docket reflects a final distribution was made.

Each defendant settled with Plaintiff resulting in the following dates of entry of final judgment: Vari-L and Clark on 11/08/2001 (Docket No.s 11 and 10 respectively); Hume on 8/7/2002 (Docket No. 41), and Sherman on 9/26/2003 (Docket No. 56). 2

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Plaintiff now requests that the Court enter an order directing that these funds, including interest earned, be paid into the United States Treasury. Although it is the Plaintiff's policy wherever possible to recommend a distribution plan by which disgorged funds are distributed to defrauded investors, the facts and circumstances of this case make it impracticable to identify injured parties with quantifiable claims. Accordingly, Plaintiff moves the Court to enter the

accompanying proposed order directing the Court Registry Investment System ("CRIS") to pay the deposited sums, plus all accrued interest, to the United States Treasury. II. COMPLIANCE WITH D.C.COLO.LCivR 7.1 A. Prior to filing this motion, the undersigned counsel for Plaintiff attempted to confer with each counsel of record for the defendants in this matter as well as Coughlin, the successor escrow agent counsel, in Rasner, et al. v. Vari-L Company, Inc., et al., Civil Action No, 00-RB-1 181(CBS) by leaving detailed telephone messages, sending electronic mail and delivering overnight letters. Undersigned counsel spoke with Jeffrey Smith, counsel for Vari-L in the Rasner case whom stated that the company is no longer in existence and he had no objection. Undersigned counsel also corresponded with David Zisser, counsel for Vari-L in this matter who stated that it was his understanding that the company has gone through bankruptcy and dissolved, leaving him without a client on whose behalf he was able to object or not object. Specifically as to the successor escrow agent counsel, Plaintiff spoke to Greg Wood at Coughlin, Stoia, Geller, Rudman and Robbins, the current name of

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the successor escrow agent counsel in Rasner, on February 21, 2008 by telephone. Mr. Wood requested we submit a written explanation which he would direct to the appropriate person for a response. Plaintiff then sent electronic mail and a letter on March 5, 2008. The undersigned counsel for Plaintiff provided in the written correspondence the information set forth in Section I above and requested a response by April 4, 2008. As of the date of this filing, Plaintiff has not received any objection to this motion. III. LEGAL ARGUMENT A. The Equitable Remedies Ordered in This Case As the Second circuit has observed: "Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits." SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1474 (2nd Cir. 1996), cert. denied, 522 U.S. 312 (1997); see also SEC v. Lorin, 76 F.3d 458, 461-62 (2d Cir. 1996) (per curiam); SEC v. Posner, 16 F.3d 520, 521 (2nd Cir. 1994), cert. denied, 573 U.S. 1077 (1995); SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103-04 (2d Cir. 1972). The equity jurisdiction of this Court was properly invoked by a showing of securities law violations in connection with the previously filed settlements. B. The Funds in the CRIS Account Should Be Distributed to the Treasury Although disgorged money is often distributed to victims of the violation in accordance with a plan proposed by the SEC and approved by the Court, such a

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distribution is not required by statute, and may be impracticable "where numerous victims suffered relatively small amounts ...; [or] where the victims cannot be identified ...; [or] where there are no victims entitled to damages." SEC v. Lorin, 869 F. Supp. 1117, 1129 (S.D.N.Y. 1994) (citations omitted); see SEC v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y. 1997), aff'd sub nom. SEC v. Fischbach, 133 F.3d 170 (2nd Cir. 1997). Thus, whether it is feasible and appropriate to effect such a distribution depends on whether there are identifiable victims who were injured by the violation and, if so, whether the costs associated with identifying them and distributing the money can be justified relative to the pro rata amounts the victims stand to receive. Where distribution to identifiable injured parties is not feasible or appropriate, the money disgorged by the defendant has been paid to the Treasury. See, e.g., SEC v. Dimensional Entertainment Corp., 1996 WL 107290 (S.D.N.Y. 1996) (ordering payment to Treasury of disgorgement fund of $366,277 in complex fraud case involving unlawful distribution and manipulation of securities); SEC v. Marcus Schloss & Co., Inc., 714 F. Supp. 100 (S.D.N.Y. 1989) (denying third party claim against disgorgement fund in insider trading case and ordering payment of disgorgement money to Treasury); SEC v. Courtois, [1984-85 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 92,000 (S.D.N.Y. April 11, 1985) (disgorgement paid to Treasury in view of difficulty of identifying particular claimants and likelihood that distribution would result in only nominal distribution to claimants).

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Given the facts and circumstances of this case, distribution of the funds in the CRIS account other than to the Treasury would be neither feasible nor appropriate. It would be extremely difficult and expensive to identify and locate investors, because of the passage of nearly three years since the Court's prior order regarding payment. Moreover, determining how much any of the located investors may have lost, and distributing the roughly $10,900.00 on a pro rata basis would not be feasible, given the potentially large number of defrauded investors. As such, it is not feasible to distribute the funds in the Registry of the Court to investors. IV. CONCLUSION For the foregoing reasons, Plaintiff requests that the Court order that the remaining $10,000.00 paid in this action, reflecting the funds presently in the CRIS account, plus interest less registry fee assessment, be disbursed to Plaintiff which funds Plaintiff will remit to the United States Treasury. Dated: April 17, 2008. Respectfully submitted,

s/ Elizabeth E. Krupa Elizabeth E. Krupa Attorney for Plaintiff Securities and Exchange Commission 1801 California Street, Ste.1500 Denver, CO 80202 Phone 303.844.1000 Fax 303.844.1068 Email: [email protected]

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CERTIFICATE OF SERVICE I hereby certify that on this 17th day of April, 2008, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF:

Kenneth Siegel, Esq.- [email protected] Attorney to Defendant Sherman David W. Stark, Esq.- [email protected] Attorney to Defendant Clark David A. Zisser, Esq.- [email protected] Attorney for Defendant Vari-L Company, Inc.

I further certify that I have mailed the document to: Ellen G. Stewart, Esq. Coughlin, Stoia, Geller, Rudman & Robbins LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Norman Berman, Esq. Berman De Valerio Pease Tabacco, Burt & Pucillo One Liberty Square Boston, MA 02109 Michael Yarnoff, Esq. Schiffrin Barroway Topaz & Kessler, LLP 280 King of Prussia Rd Radnor, PA 19087 Jeffrey Smith, Esq. Peter A. Gergely, Esq. Cooley Godward Kronish, LLP 380 Interlocken Crescent, Ste. 900 Broomfield, CO 80021

s/ Nicole L. Nesvig

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