Free Motion for Miscellaneous Relief - District Court of Arizona - Arizona

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MOLLY M. WHITE, Cal. Bar No. 171448 E-mail: [email protected] Attorneys for Plaintiff Securities and Exchange Commission Rosalind Tyson, Acting Regional Director Michele Wein Layne, Associate Regional Director Andrew G. Petillon, Associate Regional Director 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036 Telephone: (323) 965-3998 Facsimile: (323) 965-3908 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SECURITY TRUST COMPANY, N.A., et al., Defendants. Case No. CV-03-2323-PHX-JWS MEMORANDUM SUPPORTING MOTION TO PAY TAX ADMINISTRATOR'S FEES AND TO REMIT MONEY TO TREASURY

Case 2:03-cv-02323-JWS

Document 120-3

Filed 09/13/2007

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Plaintiff Securities and Exchange Commission ("Commission") files this motion seeking an order directing that a $2,091.15 tax refund to the Distribution Fund in this action, which is now being held in a trust account at Damasco & Associates ("Damasco"), be used to pay Damasco $1,528.45 in outstanding tax administrator fees, and that any remaining amounts be paid to the United States Treasury. I. FACTUAL BACKGROUND On November 25, 2003, the Commission brought this action against the defendants claiming that they violated the federal securities laws. The complaint alleged that the defendants helped two hedge funds engage in market timing and late trading in about 400 different mutual funds. The Commission reached settlements with three defendants: Security Trust Company ("STC"), Willam A. Kenyon ("Kenyon"), and Nicole McDermott. The only remaining defendant in this action is Grant D. Seeger ("Seeger"), against whom the Commission has filed a summary judgment motion. Pursuant to its settlement agreements, the Commission set up a distribution fund (the "Distribution Fund") into which settlement payments were made. A. Settlement Payments to the Distribution Fund

Three defendants paid money into the Distribution Fund: Seeger, Kenyon, and STC. On March 31, 2004, the Court entered Final Judgment against STC. The Final Judgment enjoined STC from future violations of the securities laws and ordered STC to pay $1,000,000 of its $5.8 million disgorgement obligation to the Clerk of the Court by March 31, 2004. (See March 31, 2004 Final Judgment, Docket No. 32.) STC made the payment, and the Clerk deposited the money into the Distribution Fund, which was held in an interest bearing account with the Court Registry. (See March 31, 2004 Notice, Docket No. 33.) On November 23, 2005, the New York Attorney General ("NYAG") also
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filed a criminal action against Seeger and Kenyon. On August 30, 2005, Seeger and Kenyon both pleaded guilty to certain counts in the indictment. As part of their sentences in the criminal action, Kenyon and Seeger each paid $50,000 in restitution. Pursuant to this Court's December 16, 2005 order, the $50,000 check from Seeger and the $50,000 check from Kenyon were deposited into the Distribution Fund. (See Dec. 16, 2005 Order, Docket No. 55; see also Jan. 20, 2006 Notice, Docket No. 56.) B. Distribution of the Fund

On December 16, 2005, the Court granted the Commission's Motion for Disbursement of Funds. (See Dec. 16, 2005 Order, Docket No. 55.) Pursuant to that Order, Damasco was appointed as Tax Administrator for the Distribution Fund and was authorized to be paid for its services as Tax Administrator. (Dec. 16, 2005 Order ¶ 4, Docket No. 55.) The Court ordered that the Distribution Fund pay the Tax Administrator's fee for the preparation of the Distribution Fund's tax returns for 2004, 2005 and 2006. (Dec. 16, 2005 Order ¶ 4, Docket No. 55.) In particular, the Court ordered that the Tax Administrator be paid $1,500 for the preparation of each annual income tax return. (Dec. 16, 2005 Order ¶ 4, Docket No. 55.) The Court ordered that after the Distribution Fund paid its taxes and the Tax Administrator fees, then the Clerk should distribute the remaining funds among approximately 30 of the mutual funds that were victimized by STC's conduct. (Dec. 16, 2005 Order ¶ 5, Docket No. 55.) Damasco prepared the Distribution Fund's tax returns for 2004, 2005, and 2006. The Clerk of the Court sent Damasco $13,589 in order to pay the Distribution Fund's 2004, 2005, and 2006 tax liabilities. (Damasco Dec. ¶ 4.) As a result of successful penalty abatements for the tax years 2004 and 2005, Damasco is holding in its client trust account a remainder of $1,421.15. (Damasco Dec. ¶ 4.) Damasco also received a refund of $670 from the IRS for the overpayment of taxes on the Distribution Fund's behalf. (Damasco Dec. ¶ 5.)
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Thus, Damasco is now holding a total of $ 2,091.15 of the Distribution Fund's money in its client trust account. (Damasco Dec. ¶ 6.) Damasco was paid $4,500 for its preparation of the Distribution Fund's 2004, 2005, and 2006 tax returns. Damasco, however, was not paid for reviewing and responding to notices from the IRS regarding potential penalties for 2004 and 2005. (See Damasco Dec. Ex. 1.) Nor was Damasco paid for its work in connection with the submission of a request for abatement of penalties to the IRS. (See Damasco Dec. Ex. 1.) Damasco incurred $1,528.45 in fees for that work. (See Damasco Dec. Ex. 1.) The Commission now asks that the Court enter an order directing that Damasco use $1,528.45 of the $2,091.15 remaining in Damasco's client trust account to pay Damasco's outstanding Tax Administrator fees. Because it would be impractical to distribute the remaining $562.70 among the 30 mutual funds, the Commission asks the Court to order Damasco to pay any remaining funds to the United States Treasury. II. IT IS APPROPRIATE FOR THE COURT TO ORDER THAT THE REMAINING MONEY BE SENT TO THE TREASURY "The district court has broad equity powers to order the disgorgement of `illgotten gains' obtained through the violation of the securities laws." SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). "Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable." Id. "[T]he primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched." SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 102 (2d Cir. 1978); see also SEC v. Wang, 944 F.2d 80, 85 (2d Cir. 1991) ("the primary purpose of disgorgement is not to compensate investors . . .but to ensure that those guilty of securities fraud are not unjustly enriched"). As the Ninth Circuit has recognized,
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"[o]nce the primary purpose of disgorgement has been served by depriving the wrongdoer of ill-gotten gains, the district court has broad discretion in determining the disposition of the disgorged funds." SEC v. First Pac. Bancorp, 142 F.3d 1186, 1192 (9th Cir. 1998). Although disgorged money often is distributed to victims of the violation in accordance with a plan proposed by the Commission and approved by the court, such a distribution is not required by statute, and may be impracticable. See SEC v. Drexel Burnham Lambert, Inc., 956 F. Supp. 503, 507 (S.D.N.Y. 1997). "Where distribution to identifiable injured parties is not feasible or appropriate, the money disgorged by the defendant is paid to the Treasury." Id. Given the facts and circumstances of this case, distribution of the remaining money in Damasco's client trust account to the victimized mutual funds would not be appropriate. Given that there is only a remainder of about $600 and that the money would be divided among 30 mutual funds, it does not make sense to burden Damasco with disbursing the money to the mutual funds. Because it is not feasible to distribute the remaining $562.70 among the 30 mutual funds, the Court should order Damasco to pay that money to the Treasury. III. CONCLUSION For the foregoing reasons, the Court should grant the Commission's Motion and issue an order directing that Damasco be paid $1,528.45 in fees and that the Distribution Fund's remaining money in Damasco's client trust account be paid to the United States Treasury.

DATED: September 13, 2007

/s/ Molly M. White MOLLY M. WHITE Attorney for Plaintiff Securities and Exchange Commission

Case 2:03-cv-02323-JWS

Document 120-3 4

Filed 09/13/2007

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