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Securities and Exchange Commission v. Sample

United States District Court, N.D. Texas, Dallas Division

November 20, 2017




         Before the Court is the Security and Exchange Commission's (SEC) Motion for Monetary Remedies, in which the SEC asks the Court to order Matthew Sample to disgorge his ill-gotten gains, pay prejudgment interest on the disgorged amount, and pay a civil penalty (Doc. 10). The Court GRANTS the SEC's motion. First, the Court ORDERS Sample to disgorge $919, 875 less restitution payments made to Lobo Fund victims. Second, the Court ORDERS Sample to pay prejudgment interest equal to the amount reached by applying the IRS underpayment interest rate to the amount Sample must disgorge as of the date of this order, which is $919, 875 less restitution payments Sample has actually made to the Lobo Fund victims. And Third, the Court ORDERS Sample to pay a civil penalty of $919, 875.


         BACKGROUND [1]

         In December 2008, Sample created the Lobo Volatility Fund, LLC (Lobo Fund). Doc. 1, Compl., ¶8. From October 2009 to June 2012, Sample raised $982, 000 from investors whom he promised he would invest their money and hopefully return them a profit. Id. at ¶9; Doc. 11, App'x, 36. But it was all a ruse. Sample used the invested funds for himself, spending the invested money on luxuries and paying investors from a prior scheme-all the while telling his victims he was investing their money. Doc. 1, Compl., ¶¶11, 15. To support his con, Sample created false IRS forms showing positive account balances and returns on investments. Id. at ¶12. And he refused to return investors' money to them when asked. Id. at ¶13. Though, he eventually returned $50, 000. Id. at ¶15.

         On April 4, 2014, the SEC filed this action, alleging that Sample's Lobo Fund scheme violated various federal securities laws. Id. at ¶¶17-25. Sample then agreed to a bifurcated settlement in which he neither admitted nor denied the SEC's allegations but agreed to be permanently enjoined from violating the securities laws. Doc. 3, Consent of Matthew Sample, ¶2. Sample agreed also that he would disgorge his ill-gotten gains, pay prejudgment interest on those gains, and pay a civil penalty. Id. at ¶3. Per the settlement agreement, the Court is now to decide how much Sample must pay. Id.

         Also relevant is Sample's parallel criminal case. Doc. 11, App'x, 1. In a case brought by the United States Department of Justice, Sample pleaded guilty to mail and wire fraud. Id. at 11. On March 23, 2015, a federal district court in New Mexico sentenced Sample to five years probation and ordered him to pay $1, 086, 453.62 in restitution to the victims of the Lobo Fund scheme and a prior fraudulent scheme. Id. at 29-33.



         A. Disgorgement

         A court may order a party to disgorge profits flowing from securities-law violations. SEC v. Huffman, 996 F.2d 800, 802-03 (5th Cir. 1993). Once the SEC has established that a defendant violated the securities laws, a court may order the defendant to disgorge a sum of money equal to all the illegal payments he received. SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985). The SEC bears the initial burden of showing that its requested disgorgement amount reasonably approximates the amount of profits connected to the violation, and then the burden shifts to the defendant to show that this figure is not a reasonable approximation. SEC v. Amerifirst Funding, Inc., No. 3:07-CV-1188-D, 2008 WL 1959843, at *2 (N.D. Tex. May 5, 2008). A court enjoys broad discretion in determining the amount to be disgorged. SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996). Further, “any risk of uncertainty in calculating disgorgement should fall on the wrongdoer whose illegal conduct created that uncertainty.” SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995).

         Sample must disgorge $919, 875, the amount Sample raised from the Lobo Fund investors less what he gave back to them. Doc. 1, Compl., ¶¶9, 15. Whether Sample lost in the market the money he collected or spent it, he must pay the net amount he collected from the Lobo investors. See SEC v. Shapiro, 494 F.2d 1301, 1309 (2d Cir. 1974) (holding that trading losses do not reduce the amount a fraudster must disgorge); SEC v. Benson, 657 F.Supp. 1122, 1134 (S.D.N.Y. 1987) (“The manner in which [the defendant] chose to spend his misappropriations is irrelevant as to his objection to disgorge.”).

         But even though Sample agreed to disgorge his ill-gotten gains, he now contends he need not. Doc. 13, Resp., 5. Sample's argument hinges on the Supreme Court case Kokesh v. SEC, 137 S.Ct. 1635 (2017), which Sample argues would make ordering him to disgorge an unlawful penalty. Id. at 5-6.

         Sample is wrong. Kokesh merely held that disgorgement claims are subject to 28 U.S.C. § 2462's five-year statute of limitations . Kokesh, 137 S.Ct. at 1638. Kokesh had no effect on ...

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