Free Response in Opposition to Motion - District Court of Arizona - Arizona

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MARSHALL GANDY Attorney for Plaintiff Securities and Exchange Commission Texas Bar No. 07616500 Burnett Plaza, Suite 1900 801 Cherry Street, Unit #18 Fort Worth, Texas 76102-6882 Telephone: (817) 978-6464 Facsimile: (817) 978-4927

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA PHOENIX DIVISION

Securities and Exchange Commission, Plaintiff,

CASE NO. CV 03-1825-PHX-PGR Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt

11 vs. 12 Ronald Stephen Holt, et al. 13 Defendants, 14 and 15 Annette Holt, et al. 16 17 18 19 20 21 22
Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Case 2:03-cv-01825-PGR Document 282 SEC vs. Ronald Stephen Holt, et al.

Related Cases: CFTC v. International Funding Association, et al. Case Number: 03-CV-1826PHX-PGR Investors in IFA, et al. v. International Funding Association, et al. Case Number: 03-CV-1302 PHX-PG

Defendants Solely for Purposes of Equitable Relief.

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Plaintiff, Securities and Exchange Commission ("Commission"), related cases Plaintiffs, Commodity Futures Trading Commission ("CFTC"), Investors in IFA, et al., and Lawrence J. Warfield, the court-appointed receiver ("Receiver"), jointly file this Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt ("Emergency Motion to Release") and based on the following respectfully request that the Court to enter an order denying Defendant Ronald Stephen Holt's ("Defendant" or "Holt") motion for his release from custody for civil contempt. I. Relevant Procedural History 1. On September 18, 2003, the Commission and the Commodities Futures

Trading Commission ("CFTC") filed Complaints in their respective causes of action. 2. On September 25, 2003, the Court conducted a hearing on Defendant's

motion to dissolve the Commission's Temporary Restraining Order. During the hearing, Holt testified that he was the manager of International Funding Associates. Further, Holt admitted responsibility for transferring at least $3 million of investors' funds to overseas accounts, though he denied any specific knowledge of the whereabouts of the money at the time of the hearing. 3. On September 29, 2003, the court entered an Order Appointing Receiver,

and later on November 10, 2003, the Court modified the order and entered an Amended Order Appointing Receiver. The receivership orders in part provided:

Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Case 2:03-cv-01825-PGR Document 282 SEC vs. Ronald Stephen Holt, et al.

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All persons, including Defendants and Relief Defendants, named in the first paragraph of this Amended Order, above, and their officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them, who receive actual notice of this Amended Order by personal service or otherwise, are enjoined from in any way interfering with the operation of the Receivership or in any way disturbing the Receivership Assets and from filing or prosecuting any actions or proceedings which involve the Receiver or which affect the Receivership Assets, specifically including any proceeding initiated pursuant to the United States Bankruptcy Code, except with the prior permission of this Court. (emphasis added) Any actions so authorized to determine disputes relating to Receivership Assets shall be filed in this Court. 4. On May 24, 2004, Plaintiffs in the related cases and the Receiver filed a

Joint Motion for an Order to Show Cause and Order Holding Defendant Ronald Stephen Holt in Contempt ("Joint Motion").1 5. On July 27, 2004 after a hearing, the Court found by clear and convincing

evidence, that Holt had committed at least twenty-five acts of contempt of the Court's orders, found his explanations unworthy of belief, and entered an Order Holding Ronald Holt in Civil Contempt ("Contempt Order"). Among other things, the Contempt Order required Holt to turn over to the Receiver all Receivership Assets whether located within or outside the United States, including the $3 million that Holt previously testified that he had transferred offshore. 6. On no less than four occasions since the entry of the above Contempt

Order, Holt has asserted that he has purged his contempt and requested that the Court

The subject matter and evidence contained in this joint response was previously included in the Joint Motion.

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Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Case 2:03-cv-01825-PGR Document 282 SEC vs. Ronald Stephen Holt, et al.

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release him from incarceration. On each occasion, after a hearing, the Court has found that contrary to the Defendant's assertions not only has he failed to purge his contempt, but he has committed further acts of contempt while on furlough and noting that he has done nothing to account for or turn over missing receivership assets. 7. On January 3, 2006, after an allowed holiday furlough, Defendant filed a

Motion to Extend Furlough. The Court denied Defendant's emergency relief and his motion is pending. Receiver and Plaintiffs responded to the Defendant's motion to extend furlough on January 18, 2006. 8. On January 30, 2006 after another furlough to attend a family funeral, the

Defendant filed his Motion to Reconsider Order Holding Ronald Holt in Civil Contempt ("Motion to Reconsider") suggesting that the Court had made a factual error in the Contempt Order. February 6, 2006. 9. On February 13, 2006, Defendant filed his Emergency Motion to Release Plaintiffs and Receiver responded to the Defendant's motion on

arguing that 28 U.S.C. § 1826 entitles him to immediate release. II. Argument A. Courts' Power to Impose Civil Contempt Sanctions

Courts have inherent power to enforce compliance with their lawful orders through civil contempt. Shillitani v. United States, 384 U.S. 364, 370, 86 S. Ct. 1531, 16 L. Ed. 2d 622 (1966); SEC v. Bilzerian, 112 F. Supp. 2d 12,16 (D.D.C. 2000); SEC v. Pinez, 52 F. Supp. 2d 205, 209 (D. Mass. 1999); SEC v. Bankers Alliance Corp., 881 F. Supp. 673, 678 (D.D.C. 1995); SEC v.
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Parkersburg Wireless LLC, 156 F.R.D. 529, 534 (D.D.C. 1994); SEC v. Current Financial Services, 798 F. Supp. 802, 806 (D.D.C. 1992). If a judgment directs a party . . . to perform any . . . specific act and the party fails to comply within the time specified, the court may direct the act to be done at the cost of the disobedient party by some other person appointed by the court and the act when so done has like effect as if done by the party.... The court may also in proper cases adjudge the party in contempt... FED. R. CIV. P. 70 A party commits contempt when he: (i) violates a definite and specific court order requiring him or her to perform a particular act; (ii) with knowledge of the order. See In re Crystal Palace Gambling Hall, Inc., 817 F.2d 1361, 1365 (9th Cir. 1987); SEC v. First Financial Group of Texas, Inc., 659 F.2d 660, 669 (5th Cir. 1981); SEC v. Bilzerian, 112 F. Supp. 2d at 16; SEC v. Bankers Alliance Corp., 881 F. Supp. at 678; SEC v. Parkersburg Wireless LLC, 156 F.R.D. at 534. Civil contempt sanctions, or those penalties designed to compel future compliance with a court order, are considered to be coercive and avoidable through obedience and thus may be imposed in an ordinary civil proceeding upon notice and an opportunity to be heard. International Union, UMWA v. Baqwell, 512 U.S. 821, 827, 114 S. Ct. 2552, 129 L. Ed. 2d 642 (1994). As in the instant case, once the Commission has met its initial burden the burden is then on the defendant to come forward with evidence showing "categorically and in detail" why he is unable to comply. United States v. Rylander, 460 U.S. at 755; FTC v. Affordable Media, LLC, 179 F.3d at 1239; CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 1529; SEC v. Princeton Economic International Ltd., 2001 U.S. Dist. LEXIS 9948, (S.D.N.Y. July 18, 2001) (burden is on defendant to prove impossibility of compliance); SEC v. Bilzerian, 112 F. Supp. at 16; SEC v. Credit Bancorp, Ltd., 2000 U.S. Dist. LEXIS 9755, (contemnor bears burden of producing
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evidence of inability to comply); SEC v. Bankers Alliance Corp., 881 F. Supp. at 678 & 683; SEC v. Current Financial Services, Inc., 798 F. Supp. at 808. It is well-settled that if a court finds that a defendant could at some time in the past have complied with a court order, the court should presume a present ability to comply. SEC v. Princeton Economic International Ltd., 2001 U.S. Dist. LEXIS 9948.

The alleged contemnor may not, in defending against a contempt motion, seek reconsideration of the legal or factual basis for the order alleged to have been violated. See United States v. Rylander, 460 U.S. at 756-57; Huber v. Marine Midland Bank, 51 F.3d 5, 8 (2d Cir. 1995); CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 152829; SEC v. Bilzerian, 112 F. Supp. 2d. B. Incarceration is an Appropriate Sanction

Coercion may be achieved by the incarceration of the contemnor until he or she purges himself or herself of contempt. Shillitani v. United States, Id. at 370; Penfield Co. v. SEC, 330 U.S. at 590; Combs v. Ryan's Coal Co., Inc., 785 F.2d at 981; United States v. Professional Air Traffic Controllers Organization, 678 F.2d 1, 4 (1st Cir. 1982); In re Dinnan, 625 F.2d 1146, 1149 (5th Cir. 1980); In re Grand Jury Investigation, 600F.2d 420, 422 (3d Cir. 1979). [See also International Business Machines Corp. v. United States, 493 F.2d at 115; SEC v. Bilzerian, 131 F. Supp. at 18 (accounting); SEC v. Credit Bancorp, Ltd., 2000 Dist. LEXIS 9755; SEC v. Margolin, 1996 U.S. Dist. LEXIS 11299 at 14-15 (failure to pay disgorgement); SEC v. Elmas Trading Corp., 824 F.2d at 733 (failure to produce documents or provide accounting)].
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C.

There is no time-limit on Holt's incarceration for his failure to comply

In his most recent motion, Defendant asserts that he must be released under the time limitations of 28 U.S.C. § 1826, which provides: Recalcitrant witnesses (a) Whenever a witness in any proceeding before or ancillary to any court or grand jury of the United States refuses without just cause shown to comply with an order of the court to testify or provide other information, including any book, paper, document, record, recording or other material, the court, upon such refusal, or when such refusal is duly brought to its attention, may summarily order his confinement at a suitable place until such time as the witness is willing to give such testimony or provide such information. No period of such confinement shall exceed the life of (1) (2) the court proceeding, or the term of the grand jury including extensions,

before which such refusal to comply with the court order occurred, but in no event shall such confinement exceed eighteen months.2 However, unlike cases involving contempt by witnesses who refuse to testify in

14 grand jury and other proceedings no time limits apply to incarceration of contemnors who 15 violate injunctive orders. SEC v. Princeton Economic International, Ltd., 2001 U.S. Dist. 16 LEXIS 9948 (specifically rejecting defendant's argument that time limits of 28 U.S.C. § 17 1826 apply to one under court order to produce missing receivership assets-copy provided 18 for the convenience of the Court) In its Contempt Order, the Court did not hold Holt in 19 contempt for his refusal to testify but instead for numerous violations of the Court's 20 21 22
Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Case 2:03-cv-01825-PGR Document 282 SEC vs. Ronald Stephen Holt, et al. PAGE 7
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In fact given the length of Holt's release on previous furloughs, his total confinement to date does not exceed 18 months.

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previous orders, and specifically for his failure to cooperate with the Receiver and failure to turn over Receivership Assets. The provisions of 28 U.S.C. § 1826 simply do not apply to Holt's incarceration. When civil contempt sanctions lose their coercive effect, they become punitive and violate the contemnor's due process rights. CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 1530; In the Matter of Dickinson, 763 F.2d at 87; In re Grand Jury Investigation, 600 F.2d at 424-25. The contemnor has the burden to prove that "no such realistic possibility exists" that the coercive sanction might produce its intended result. CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 1530-31. See also In re Grand Jury Investigation, 600 F.2d at 425 (contemnor bears the burden of establishing that there is no "substantial likelihood" that continued confinement would accomplish its coercive purpose). Prison time served by the contemnor, in and of itself, will not satisfy his or her burden of proving that there exists "no reasonable possibility" that he or she can comply with the court's order. CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 1531. While each passing month of incarceration may strengthen the contemnor's claim of inability to comply with the court's order, many months or perhaps even several years may pass before it becomes necessary to conclude that incarceration will no longer serve the purpose of the civil contempt order. CFTC v. Wellington Precious Metals, Inc., 950 F.2d at 1531. The Court need not accept a contemnor's assertions of unwavering refusal to comply with the Court's orders at face value; even if the Court concludes that it is the
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contemnor's present intention never to comply, that conclusion does not preclude the possibility that continued confinement will cause the contemnor to change his mind. SEC v. Princeton Economic International Ltd., 2001 U.S. Dist. LEXIS 9948 (considering the enormous value of the missing assets in determining that the defendant's confinement "has not yet approached an inappropriate duration.) Despite assertions to the contrary in Defendant's pending motions before the Court, Holt has never come forward with credible evidence showing that he is unable to comply with the Court's orders. To the contrary, when given the opportunity Holt has simply exacerbated his failure to comply by committing further contemptuous acts and then giving testimony that is "obfuscating, devious and is not direct" forcing the Court to conclude "...Mr. Holt's testimony in so many different contexts that it wonders ­ and I believe any fact finder could wonder whether or not he ever is capable of directly answering a question."3 The Court concluded the last hearing in August 2005 by finding Holt had not made a good-faith effort to return the investors' money. Nothing has changed since the August hearing, Holt has not met his burden by showing "categorically and in detail" why he is unable to comply with the Court's orders and the simple passage of additional time does not change the conclusion that incarceration will no longer serve the purpose of the civil contempt order.

3

See Reporter's Transcript of Contempt Hearing, page 81, lines 3-15 (August 8, 2005).
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III.

Conclusion Based on the forgoing, the Plaintiffs and Receiver would respectfully request that

the Court deny Defendant's Emergency Motion to Release and enter an order finding: (i) the Contempt Order was not issued pursuant to 28 U.S.C. § 1826 and; (ii) directing Holt to surrender himself to the U.S. Marshal to be incarcerated for his continuing contempt.

Dated: February 15, 2006. 7 Respectfully submitted, 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Document 282 SECCase 2:03-cv-01825-PGR vs. Ronald Stephen Holt, et al. PAGE 10

/s/ Marshall Gandy MARSHALL GANDY Texas Bar No. 07616500 Attorney for Plaintiff Securities and Exchange Commission Burnett Plaza, Suite 1900 801 Cherry Street, Unit #18 Fort Worth, Texas 76102-6882 Telephone: (817) 978-6464 Facsimile: (817) 978-4927

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Jointly submitted:

/s/ Timothy J. Mulreany TIMOTHY J. MULREANY Chief Trial Attorney D.C. Fed. Bar No.: 467478 Division of Enforcement U.S. Commodity Futures Trading Commission Three Lafayette Centre, 1155 21st Street, NW Washington, D.C. 20581 Telephone: (202) 418-5306 Facsimile: (202) 418-5542

/s/ Patrick M. Murphy PATRICK M. MURPHY Arizona Bar No. 002964 Attorney for the Receiver Lawrence J. Warfield Guttilla & Murphy, P.C. 4150 West Northern Avenue Phoenix, Arizona 85051 Telephone: (623) 937-2795 Fax: (623) 937-6897

/s/ Susanne Elizabeth Ingold SUSANNE ELIZABETH INGOLD Arizona Bar No. 019143 Attorneys for the Plaintiffs Investors in IFA, et al. v. International Funding Association, et al. Cause Number: 03-CV-1302-PHX-PGR Burch & Cracchiolo PA PO Box 16882 Phoenix, AZ 85011-6882 Telephone: (602) 274-7611 Facsimile: (602) 234-0341
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Certificate of Service I affirm that on February 15, 2006, I electronically filed the foregoing Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt with the Clerk of the Court for the District of Arizona, Phoenix Division, by using the CM/ECF system which will send a notice of electronic filing to the following CM/ECF participants: Burton M Bentley Marshall Gandy Merwin D Grant Patrick M Murphy Michael S Reeves [email protected] [email protected] [email protected] [email protected] [email protected], [email protected]

I further certify that on this 15th day of February, 2006, I served a true and correct copy of the foregoing document and the notice of electronic filing by depositing a copy thereof in an authorized Federal Express depository at Fort Worth, Texas, with overnight express charges prepaid and addressed to the following parties and persons entitled to notice that are non-CM/ECF participants: Mario DiFelice 28 Oak Hill Rd Prosperity, SC 29127 Lawrence J Warfield Warfield & Company CPA 14555 N Scottsdale Rd No 340 Scottsdale, AZ 85254

Plaintiff's Response to Defendant Ronald Stephen Holt's Emergency Motion to Release Defendant Ronald Stephen Holt. Document 282 SECCase 2:03-cv-01825-PGR vs. Ronald Stephen Holt, et al.

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