Securities and Exchange Commission v. Mantria Corporation et al

Filing 306

ORDER granting 256 Motion for Judgment by Judge Christine M. Arguello on 8/30/12.(dkals, )

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge Christine M. Arguello
Civil Action No. 09-cv-02676-CMA-MJW
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.
MANTRIA CORPORATION,
TROY B. WRAGG,
AMANDA E. KNORR,
SPEED OF WEALTH, LLC,
WAYDE M. MCKELVY, and
DONNA M. MCKELVY,
Defendants.

ORDER GRANTING MOTION FOR ENTRY OF FINAL
JUDGMENT AS TO TROY B. WRAGG AND AMANDA E. KNORR

This matter is before the Court on the “Motion for Entry of Final Judgment
Against Defendants Troy B. Wragg [and] Amanda E. Knorr . . . [,]” filed by the Securities
and Exchange Commission (“SEC”) on February 22, 2012.1 (Doc. # 256.) After
protracted briefing and a hearing,2 the motion is now ripe. For the following reasons,

1

The SEC filed the original motion also as against Defendants Wayde M. McKelvy
and Donna M. McKelvy. (See Doc. # 256.) Neither of the McKelvys responded to the
motion, which the Court granted as to them during the June 20, 2012 hearing held in
this matter. (See Doc. # 289.)

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Wragg and Knorr filed a “Response to Motion for Entry of Final Judgment” on April 9,
2012 (Doc. # 269), to which the SEC replied on April 23, 2012 (Doc. # 272). The Court
held a hearing on June 20, 2012. (See Doc. # 289.) After the hearing, Defendants
submitted “Supplemental Authority in Support of Defendants Wragg & Knorrs’ Arguments on Disgorgement” (Doc. # 291), to which the SEC responded (Doc. # 293).

the motion filed by the SEC against Wragg and Knorr (occasionally referred to herein
as “Defendants”) is granted.
I. BACKGROUND
Defendants, who are former principals of Defendant Mantria Corporation
(referred to in this Order as “Mantria Corporation” or just “Mantria”) have, for the
purpose of resolving the issue of final judgment, admitted as true the facts alleged by
the SEC.3 Essentially, Defendants, who controlled Mantria Corporation, ran a massive
Ponzi scheme that raised over $54 million and defrauded hundreds of investors.
Defendants lied to promote Mantria securities. Mantria never generated any real
revenue and, in classic Ponzi scheme fashion, old investors were paid with new
investors’ money.
After the SEC filed suit, the Court appointed a Receiver to, among other things,
marshal, conserve, and liquidate the assets of Mantria Corporation for the benefit of the
defrauded investors.4 (Doc. # 82.) On March 29, 2011, the Court ordered the entry of
permanent injunctions as to Wragg and Knorr. (Doc. ## 182 and 183.) The SEC has
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The Court entered, as against Mantria Corporation, a permanent injunction (pursuant
to its August 5, 2011 Order granting summary judgment (Doc. # 211)), and final judgment on September 12, 2011 (Doc. # 215). The Court hereby incorporates the findings
of fact made in those filings.

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Proceeding concurrently with this action is a lawsuit encaptioned John Paul Anderson
v. Astor Weiss Kaplan & Mandel, LLP, et al., No. 12-cv-00488-RBJ (D. Colo.), which the
Receiver filed against several individuals and entities that allegedly advised Defendants
and Mantria Corporation on various business matters. Also pending is a class action
lawsuit, Touchstone Group, LLC v. Daniel J. Rink, et al., No. 11-cv-02971-WYD-KMT
(D. Colo.), which was filed by Mantria investors against the same, and additional,
individuals and entities.
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now moved for entry of final judgment against these Defendants, arguing that the Court
(1) should order them to disgorge, jointly and severally with Mantria Corporation,
$37,031,035.36 plus interest and (2) should assess an additional amount in civil
monetary penalties. (See Doc. # 256.) Wragg and Knorr do not deny that judgment
should be entered against them but, rather, simply “dispute the amounts set forth in the
SEC’s motion.” (Doc. # 269 at 1.)
II. DISCUSSION
A.

DISGORGEMENT
The SEC is entitled to seek disgorgement, under 15 U.S.C. § 78u(d)(5), in SEC-

instigated injunctive actions. See, e.g., S.E.C. v. JT Wallenbrock & Assocs., 440 F.3d
1109, 1115 (9th Cir. 2006) (explaining that district courts have broad equity powers to
order the disgorgement of “ill-gotten gains” obtained through violating federal securities
law). As an equitable remedy, disgorgement is Ameant to prevent the wrongdoer from
enriching himself by his wrongs.” S.E.C. v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993).
Unlike restitution, “[d]isgorgement does not aim to compensate the victims of the
wrongful acts . . . .” Id. Instead, “the primary purpose of disgorgement as a remedy
for federal securities laws violation is deterrence . . . .” S.E.C. v. First Jersey Secs.,
Inc., 101 F.3d 1450, 1475 (2d Cir. 1996). Accordingly, “a district court can order
disgorgement of all profits reaped from securities fraud, even if it exceeds actual
damages to victims.” S.E.C. v. Haligiannis, 470 F. Supp. 2d 373, 384 (S.D.N.Y. 2007).
The amount of disgorgement ordered “need not be an exact calculation of the
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defendant’s profits, but only ‘a reasonable approximation of profits causally connected
to the violation.’” Id. (quoting SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995)).
This amount is determined by subtracting the total distributions to investors from
the total amount they contributed. See id. at 384-85 (citing S.E.C. v. Invest Better 2001,
01 Civ. 11427, 2005 WL 2385452, at *4 (S.D.N.Y. May 4, 2005) (unpublished)
(calculating disgorgement in Ponzi scheme by subtracting total distributions from
total contributions). Finally, defendants may be held jointly and severally liable for
disgorgement. First Jersey, 101 F.3d at 1476.
In the instant case, the SEC asserts, Defendants do not deny, and the Court
agrees that Defendants raised $54,531,488.57 in investor contributions but returned
only $17,500,453.21 to investors in distributions. (Doc. # 256 at 11.) Nonetheless,
Defendants argue that the $37,031,035.36 difference between those figures is not a fair
amount of disgorgement to charge them. (See Doc. # 291.) Instead, they argue that
the proper disgorgement figure is the “amount[] they actually received . . . .” (Id. at 1.)
By way of example, they point to the disgorgement the SEC has sought from the
McKelvys – $6,273,632.78 from Wayde McKelvy and $429,731.84 from Donna McKelvy
(Doc. # 256 at 9-11) – which the SEC based on commissions the McKelvys received
from promoting Mantria securities (id.). These commission-based amounts were
“actually received” by the McKelvys, so Defendants’ argument seems to go, because
they could be deposited in the McKelvys’ personal bank accounts, whereas the

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$37,031,035.36 received by Wragg and Knorr was used not just to pad their personal
bank accounts but, also, to pay Mantria’s lawyers, accountants, etc. (See Doc. # 291.)
The Court rejects this argument because Defendants’ conception of ill-gotten
gains is too narrow. As the principals of Mantria Corporation, it is fair to say that all
contributions to Mantria benefitted Wragg and Knorr. For example, as the SEC points
out (Doc. # 293 at 3), paying commissions to the McKelvys benefited Wragg and Knorr
because doing so prompted and encouraged the McKelvys to continue promoting
Mantria securities and to obtain new investors. Although enjoyment of such a benefit
is, in a certain sense, less obvious than that experienced by depositing money in
a personal bank account, the benefit is still directly caused by the investors’ loss.
Moreover, the commissions Defendants paid to the McKelvys constitute business
expenses, which Defendants are not entitled to have subtracted from the total
contributions made by investors. See, e.g., JT Wallenbrock & Assocs., 440 F.3d at
1114-15 (“It follows that it would be unjust to permit the defendants to offset against the
investor dollars they received the expenses of running the very business they created
to defraud those investors into giving the defendants the money in the first place.”)
Accordingly, disgorgement of all contributions to Mantria, which Mantria did not later
distribute to investors, is appropriate.5

5

For this reason, the Court rejects Defendants’ argument that the Court should subtract
the amount of disgorgement charged to the McKelvys from the disgorgement Defendants owe. (Doc. # 291 at 4-5.)
5

On this point, Defendants raise two related, but distinct, arguments. First, they
assert that if they are “ordered to disgorge the entire amount lost by investors, any
disgorgement amount entered against [them] must be reduced by the amount of any
moneys returned to investors” by the Receiver, including amounts recovered as a result
of the John Paul Anderson v. Astor Weiss Kaplan & Mandel, LLP, et al. lawsuit, which
the Receiver filed. (Doc. # 291 at 4.) Defendants cite caselaw supporting their position
(see id. at 3-4), and the SEC notes that it “does not oppose such terms being included
in the final judgment against Wragg and Knorr” (Doc. # 293 at 2.) Accordingly, the SEC
and Defendants shall submit stipulated language to be included in the final judgments
against Wragg and Knorr, specifying that any moneys returned to investors by Mantria’s
Receiver, which are the result of liquidation of properties or assets directly linked to
investor contributions, shall be deducted from the amount of disgorgement owed by
Defendants.
Defendants’ second argument is that the amount of disgorgement ordered
against them should be further reduced by any moneys returned to investors through
the class action lawsuit, Touchstone Group, LLC v. Daniel J. Rink, et al., No. 11-cv02971-WYD-KMT (D. Colo.). However, as the SEC points out, the problem with
Defendants’ argument is that neither the instant Defendants nor Mantria Corporation
are defendants in the class action. (Doc. # 293 at 2.) Accordingly, as opposed to the
lawsuit instituted by Mantria’s Receiver, in which proceeds from the action would be
transferred to investors by Mantria, any proceeds from the class action lawsuit would
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be transferred to investors not by Mantria but, rather, by the individuals and entities
sued. Defendants cite no authority under which the Court could reduce Defendants’
disgorgement based on amounts paid by other individuals and entities with whom
Defendants are not jointly and severally liable. Moreover, the logic of Defendants’
argument echoes that which forms the basis of their assertion that the McKelvys’
disgorgement should be subtracted from what Defendants owe. Again, however, that
logic rests on an overly narrow conception of ill-gotten gains. As such, the proper
amount of disgorgement applicable to Wragg and Knorr is all contributions to Mantria
not distributed by Mantria to investors.
B.

CIVIL MONETARY PENALTIES
The SEC is also entitled to seek civil monetary penalties. See 15 U.S.C.

§ 78u(d)(3). Similar to disgorgement, civil penalties Aare not >damages= payable to the
victim, but fines or assessments payable to the government.@ Ellett Bros., Inc. v. U.S.
Fidelity & Guar. Co., 275 F.3d 384, 388 (4th Cir. 2001). However, unlike disgorgement,
which “merely restores the defendant to his original position without extracting a real
penalty for his illegal behavior, the imposition of civil penalties is appropriate to
accomplish the goal of punishment.” U.S. S.E.C. v. Universal Exp., Inc., 646 F. Supp.
2d 552, 567 (S.D.N.Y. 2009) (quotation marks, citations, and alterations omitted).
The amount of the penalty assessed “shall be determined by the court in light of
the facts and circumstances” of the case. 15 U.S.C. § 78u(d)(3)(B)(i); see also, e.g.,
Universal Exp., Inc., 646 F. Supp. at 568 (listing several factors courts often consider in
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determining the amount of civil penalties). As stated in § 78u, the amount of the penalty
shall not exceed “the gross amount of pecuniary gain . . . as a result of the violation” if
the violation “involved fraud, deceit, manipulation, or deliberate or reckless disregard of
a regulatory requirement” and “such violation directly or indirectly resulted in substantial
losses or created a significant risk of substantial losses to other persons.” 15 U.S.C.
§ 78u(d)(3)(B)(iii)(aa) & (bb).
In the instant case, the Court agrees with the SEC that a “significant penalty
is warranted.” (Doc. # 256 at 12.) As the SEC argues, “Defendants raised over $54
million from the investors they defrauded, returning just over $17 million through Ponzi
payments, which had ruinous effects on numerous investors.” (Id.) As stated
previously, for purposes of this motion, Defendants do not dispute the facts alleged by
the SEC. Thus, a “third tier” penalty under § 78u(d)(3)(B)(iii) is appropriate. In light
of the facts and circumstances presented, the Court agrees with the SEC that the
egregious nature of this case merits a penalty for Defendants in the amount of their
pecuniary gain: $37,031,035.36 plus interest.
III. CONCLUSION
For the foregoing reasons, it is ORDERED that the SEC’s motion for entry of final
judgment (Doc. # 256), as against Troy B. Wragg and Amanda E. Knorr, is GRANTED.
Final judgment against Wragg and Knorr, as well as against Defendants Speed of
Wealth, LLC, Wayde M. McKelvy, and Donna M. McKelvy, will be entered by separate
orders. Accordingly, it is
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FURTHER ORDERED that the SEC submit new proposed final judgments as to
Troy B. Wragg and Amanda E. Knorr that are consistent with this Order, including the
stipulated language mentioned, supra. It is
FURTHER ORDERED that the SEC submit a supplemental declaration to update
prejudgment interest calculations, showing the amount of prejudgment interest owed
by Defendants Troy B. Wragg. Amanda E. Knorr, Speed of Wealth, LLC, Wayde M.
McKelvy, and Donna M. McKelvy AS OF SEPTEMBER 12, 2012. Such declaration, as
well as the proposed final judgments as to Troy B. Wragg and Amanda E. Knorr SHALL
BE SUBMITTED by September 10, 2012.
DATED: August

30

, 2012
BY THE COURT:

_______________________________
CHRISTINE M. ARGUELLO
United States District Judge

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