United States Securities and Exchange Commission v. Delphi Corporation et al

Filing 413

ORDER Granting In Part 397 Plaintiff's Motion to Establish A Fair Fund, Turn Over Assets, And Appoint A Distribution Agent and Tax Administrator, And Establishing A Deadline For Submitting A Proposed Plan of Distribution. Signed by District Judge David M. Lawson. (see image for details and dates) (LVer)

Case 2:06-cv-14891-DML-SDP ECF No. 413, PageID.22934 Filed 08/01/23 Page 1 of 5

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION,
Plaintiff,
v.

Case Number 06-14891
Honorable David M. Lawson

DELPHI CORPORATION, J.T. BATTENBERG, III,
ALAN DAWES, PAUL FREE, JOHN BLAHNIK,
MILAN BELANS, CATHERINE ROZANSKI,
JUDITH KUDLA, B. N. BAHADUR, ATUL
PASRICHA, LAURA MARION, STUART DOYLE,
and KEVIN CURRY,
Defendants.
____________________________________________/
ORDER GRANTING IN PART PLAINTIFF’S MOTION TO ESTABLISH A FAIR
FUND, TURN OVER ASSETS, AND APPOINT A DISTRIBUTION AGENT AND TAX
ADMINISTRATOR, AND ESTABLISHING A DEADLINE FOR SUBMITTING A
PROPOSED PLAN OF DISTRIBUTION
On November 7, 2006, the Court entered judgments against defendants Alan Dawes and
B.N. Bahadur for violations of various federal security laws caused by fraudulent accounting
practices at the Delphi Corporation in 2000 and 2001. Pursuant to the orders, defendants Dawes
and Bahadur paid to the Clerk of the Court disgorgement, prejudgment interest, and civil penalties
totaling $687,000 and $569,257, respectively, presently held in the Court’s Registry.
In its complaint, plaintiff United States Securities and Exchange Commission alleged that
Delphi engaged in a pattern of fraudulent misconduct that mislead investors about its financial
condition and operating results. Delphi’s misconduct occurred between 2000 and 2004, but by the
time that the SEC filed this case, Delphi was in bankruptcy and its stock, which previously had
traded on the New York Stock Exchange, was traded on the over-the-counter market. Dawes and
Bahadur entered their settlement agreements with the SEC on the same date this complaint was

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filed. The disgorgement judgments against them each stated that they relinquished all their
interests in the funds that they paid in to the Court. The judgments called for the funds to be held
in the Court’s Registry and contemplated that the SEC would “propose a plan to distribute the
Fund subject to the Court’s approval . . . pursuant to the Fair Fund provisions of Section 308(a) of
the Sarbanes-Oxley Act of 2002 [15 U.S.C. § 7246(a)].” ECF No. 10, PageID.130; ECF No. 11,
PageID.133. That statute authorizes the SEC to use disgorged funds and civil penalties to
compensate injured investors. See Off. Comm. of Unsecured Creditors of WorldCom, Inc. v. SEC,
467 F.3d 73, 82 (2d Cir. 2006) (Sotomayor, J.).
The SEC never proposed a distribution plan. Instead, in July 2022, it filed a motion asking
that the funds in the Court’s Registry be turned over to the United States Treasury. At that time,
the SEC asserted that it was “infeasible” to identify the investors that were injured by the
defendants’ fraud in this case. The Court questioned that representation and the propriety of the
remedy requested, and it appointed amicus curia to brief the issue.
In April of this year, after taking a second look at the task of identifying injured investors,
the SEC moved to withdraw its turnover motion and suggested that it could propose a plan for
distribution. The Court agreed to hold the turnover motion in abeyance and scheduled a status
conference. Later, in lieu of a conference, the SEC filed the present motion to establish a Fair
Fund, appoint certain administrators, cause a transfer of the Registry funds to the Fair Fund in its
control, and establish a deadline for submitting a distribution plan. Amicus curia generally does
not oppose that approach.
In a declaration filed with the SEC’s April 2023 motion, SEC economist Thomas A. Dunn
stated that he believed he could identify 236 investors that held 82% of Delphi’s shares outstanding
in the quarter just before key corrective disclosures were made that affected the stock price. Those

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investors fairly could be considered as having been harmed by the fraud. Dr. Dunn also proposed
a method to notify thousands of smaller institutional and retail investors that also were harmed.
He said that he could draft a distribution plan, and that executing that plan would take about a year.
Congress and the courts have expressed a preference that disgorged funds and civil
penalties be used to compensate injured investors and not to benefit the Treasury unless other
options have been attempted. See Liu v. SEC, --- U.S. ---, 140 S. Ct. 1936, 1948 (2020) (discussing
the “the SEC’s obligation to award relief ‘for the benefit of investors.’”) (citing 15 U.S.C. §
78u(d)(5)). The SEC’s request here aligns with that preference. The Court believes, therefore,
that it is appropriate to direct the SEC to establish a Fair Fund under 15 U.S.C. § 7246(a), propose
a plan to distribute the fund to investors harmed by the fraud that is “fair and reasonable,” see
Creditors of WorldCom, Inc., 467 F.3d at 82, and appoint and provide compensation for the
appropriate agents and administrators.
The SEC also asks the Court to transfer the Registry funds to the U.S. Treasury right away,
asserting that it “would speed the distribution process” and would “avoid any delays in making
necessary tax payments.” However, the Court does not believe that prudence supports an
immediate fund transfer. The judgments against Dawes and Bahadur were entered in 2006, and
the funds have been available in the Registry since then. The SEC did not attempt to address
disbursement or distribution until last year, and it still has not proposed a distribution plan.
Alacrity does not appear to be its prime motivator. The Court will order the transfer of the funds
from the Registry to the Fair Fund after evaluating and approving the proposed plan.
Accordingly, it is ORDERED that the plaintiff’s motion to establish a Fair Fund and for
other relief (ECF No. 409) is GRANTED IN PART.

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It is further ORDERED that the plaintiff’s motion to disburse funds to the U.S. Treasury
(ECF No. 397) is DISMISSED as moot.
It is further ORDERED that plaintiff Securities and Exchange Commission shall establish
a Fair Fund pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended by the
Dodd-Frank Act of 2010, 15 U.S.C. § 7246(a). The request to transfer the funds from the Court’s
Registry to the SEC is DENIED. The request shall be revisited after the Court evaluates the SEC’s
proposed distribution plan, to be submitted.
It is further ORDERED that the SEC must file a proposed Distribution Plan with the Court
and submit a copy to amicus curia on or before August 8, 2023.
It is further ORDERED that Miller Kaplan Arase LLP (“Miller Kaplan”), a certified public
accounting firm is APPOINTED as Tax Administrator with respect to funds under this Court’s
jurisdiction in this case. The Tax Administrator may submit an application for compensation for
its reasonable services, costs, and expenses, not to exceed $15,000, to be paid from the Fund, at
the conclusion of its duties. Upon approval of the Distribution Plan, the Tax Administrator shall
provide the following services:
1. Obtain a federal tax identification number for the Fair Fund as a Qualified Settlement Fund
(QSF) under 26 U.S.C. § 468B(g);
2. Evaluate the Fair Fund’s tax liability for each year since the defendants made their
payments to the CRIS through the present;
3. Prepare and file federal and state income tax returns, as required, including returns for prior
taxable years;
4. Where required, calculate estimated tax payments and potential penalties and provide
information to the SEC so that payments may be made timely;
5. Make arrangements with the SEC or its agents to pay tax liabilities;
6. Calculate and recommend retention of a reserve for penalties and interest to be assessed as
a result of any late filing of tax returns and late payment of taxes;

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7. Determine and comply with tax reporting obligations of the QSF relating to distributions
or payments to vendors, if applicable; and
8. Perform all administrative tasks necessary to the foregoing services.
It is further ORDERED that Joshua E. Braunstein, Senior Trial Counsel for the SEC, is
APPOINTED as Distribution Agent of the Fair Fund. Upon approval of the Distribution Plan,
the Distribution Agent shall provide the following services:
1. Implement the Court-approved Distribution Plan;
2. Oversee the administration of the Fair Fund;
3. Coordinate with the Tax Administrator to prepare accountings and to ensure that the Fair
Fund complies with all related legal and regulatory requirements; and
4. Maintain accurate records concerning the Fair Fund.
The Distribution Agent shall serve without additional compensation than his remuneration as an
employee of the SEC. However, the Distribution Agent may engage a third party, to be approved
by the Court, to assist with distributing the Fair Fund by, for example, performing discreet
administrative duties relating to the distribution, including conducting address searches, and
issuing checks or wires. The Distribution Agent may seek reasonable compensation for the third
party, not to exceed $8,600, to be paid from the Fund.
It is further ORDERED that, upon completion of the assignment, amicus curia may apply
to the Court for reasonable compensation for work performed to be paid from the Fund.
s/David M. Lawson
DAVID M. LAWSON
United States District Judge
Dated: August 1, 2023

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