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Securities and Exchange Commission v. Team Resources Inc.

United States Court of Appeals, Fifth Circuit

November 5, 2019

SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee
v.
TEAM RESOURCES INCORPORATED; FOSSIL ENERGY CORPORATION; KEVIN A. BOYLES, Defendants-Appellants

          Appeals from the United States District Court for the Northern District of Texas

          Before KING, HIGGINSON, and DUNCAN, Circuit Judges.

          STUART KYLE DUNCAN, CIRCUIT JUDGE.

         The Securities and Exchange Commission ("SEC") filed an enforcement action against Kevin Boyles and two companies he created, Team Resources and Fossil Energy, because it believed Boyles was scamming investors. While the case was pending, the Supreme Court decided Kokesh v. SEC, in which it held that disgorgement in SEC proceedings is a "penalty" under 28 U.S.C. § 2462 and therefore subject to a five-year statute of limitations. 137 S.Ct. 1635, 1643 (2017). We must decide whether Kokesh necessarily overruled our established precedent recognizing district courts' authority to order disgorgement in SEC enforcement proceedings. See, e.g., SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978). It did not. We recognize that the Supreme Court has recently agreed to review a Ninth Circuit decision addressing whether district courts have disgorgement authority after Kokesh. See SEC v. Liu, 754 Fed.Appx. 505 (9th Cir. 2018) (unpublished), cert. granted sub nom. Liu v. SEC, __ S.Ct.__, 2019 WL 5659111 (U.S. Nov. 1, 2019) (No. 18-1501). Nonetheless, "we have traditionally held that even when the Supreme Court has granted certiorari in a relevant case, we will continue to follow binding precedent." United States v. Islas-Saucedo, 903 F.3d 512, 521 (5th Cir. 2018) (citing Wicker v. McCotter, 798 F.2d 155, 158 (5th Cir. 1986)). We therefore affirm the district court's disgorgement order as well as its other decisions challenged here.

         I.

         The SEC alleged the following facts to which Boyles, Team Resources, and Fossil Energy (collectively, "Appellants") stipulated for the limited purpose of the disgorgement order under review here. In 2008 Boyles formed Team Resources Incorporated to be the managing general partner for multiple oil and gas limited partnerships. Boyles used Team Resources to buy oil and gas leases, which he then placed in limited partnerships managed by Team Resources. Through various limited partnerships managed by both Team Resources and Fossil Energy (a company Boyles created later), Boyles raised money from 475 investors to the tune of $33 million. Boyles and his salespeople-none of whom was registered as a securities broker as required by law-promised sky-high returns on investment.

         Things did not work out that way. The oil and gas leases were not commercially viable-a fact the SEC alleges Boyles knew beforehand. Investment returns were bad or non-existent. Yet Boyles painted a positive picture for investors instead of disclosing the dismal reality. All the while, the salespeople collected commissions ranging from 15% to 25% (a detail not disclosed to investors). In the end, the investors lost all or most of their money.

         The SEC then sued Boyle, Team Resources, and Fossil Energy.[1]Settlement was almost instantaneous. Appellants neither admitted nor denied the allegations of the complaint but agreed that the court would enter a permanent injunction against them enjoining any future violations of securities laws. Appellants also agreed "that the Court shall order disgorgement of ill-gotten gains, with prejudgment interest thereon." The agreements provided that "[i]n connection with the Commission's motion for disgorgement and/or civil penalties, the parties may take discovery, including discovery from appropriate non-parties." The district court entered the agreements, required Appellants to "pay disgorgement of ill-gotten gains," and stated that it would determine the amounts of that disgorgement "upon motion of the Commission."

         In February 2017, the SEC moved for remedies and final judgment, asking for disgorgement in the amount of $30, 494, 037. Appellants responded that the five-year statute of limitations in 28 U.S.C. § 2462 barred the SEC from seeking the disgorgement amount it requested. They also contended that the SEC's disgorgement calculation failed to account for legitimate business expenses and generally failed to distinguish lawfully obtained funds from those that were ill-gotten.

         While the SEC's motion was pending, the Supreme Court held in Kokesh v. SEC that disgorgement in SEC enforcement proceedings is a "penalty" under § 2462 and therefore subject to a five-year statute of limitations. 137 S.Ct. at 1643. In response, the SEC amended its motion in this case and reduced the amount of disgorgement sought to $15, 508, 280 to reflect the five-year limit. Appellants again attacked the disgorgement amount, but this time they also argued that, after Kokesh, district courts no longer have authority to order disgorgement in SEC proceedings. Appellants also stated that they would "contend at a hearing" that various expenses must be deducted from the disgorgement amount and asserted that they "should have an opportunity in discovery, in advance of a hearing," to test the SEC's calculation. Appellants did not, however, actually move for a hearing, and one was never held.

         The district court granted the SEC's motion in part. Appellants were ordered to disgorge $15, 508, 280. Noting that Kokesh itself had expressly stated that "[n]othing in [its] opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings," 137 S.Ct. at 1642 n.3, the district court rejected Appellants' argument that it could not order disgorgement. It also rejected Appellants' challenges to the amount of disgorgement and declined to deduct any money as a legitimate business expense because the "overwhelming weight of authority hold[s] that securities law violators may not offset their disgorgement liability with business expenses." SEC v. Kahlon, 873 F.3d 500, 509 (5th Cir. 2017) (per curiam) (alteration in original) (quoting SEC v. United Energy Partners, Inc., 88 Fed.Appx. 744, 746 (5th Cir. 2004)). This appeal followed. We have jurisdiction pursuant to 28 U.S.C. § 1291.

         II.

         Whether the district court had authority to order disgorgement is a legal question reviewed de novo. SEC v. AMX Int'l, Inc., 7 F.3d 71, 73 (5th Cir. 1993). We review the court's decision to order disgorgement for abuse of discretion. Kahlon, 873 F.3d at 504. An abuse of discretion standard also applies to the court's decision not to order discovery or hold an evidentiary hearing. United States ex rel. Taylor-Vick v. Smith, 5 ...


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