Securities and Exchange Commission v. Fox

Filing 52

OPINION AND ORDER by Judge Claire V Eagan ; granting 40 Motion for Judgment; granting 44 Motion for Miscellaneous Relief (djh, Dpty Clk)

UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF OKLAHOMA
SECURITIES AND EXCHANGE
COMMISSION,

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Plaintiff,
v.
BRIAN D. FOX,
Defendant.

Case No. 11-CV-0211-CVE-PJC

OPINION AND ORDER
Now before the Court are the Unopposed Motion to Enter Final Judgment as to Defendant
Brian D. Fox (Dkt. # 40) and Plaintiff’s Motion for Order of Disgorgement, Prejudgment Interest
and Third-Tier Civil Penalties against Defendant Brian D. Fox and Brief in Support (Dkt. # 44).
Defendant consented to the entry of an agreed final judgment and the Securities and Exchange
Commission (SEC) filed an “unopposed” motion for entry of judgment. Dkt. # 40. Defendant now
claims that he did not understand that he would give up his right to challenge the facts alleged in the
complaint or that the agreed judgment would include an award of disgorgement and a civil monetary
fine, and he asks the Court to deny plaintiff’s motion for entry of judgment. Dkt. # 50, at 1.
I.
Fox served as the president, chief executive officer (CEO), and chairman of the board of
Powder River Petroleum International, Inc. (Powder River) from December 2003 to July 2008, and
he also served as Powder River’s chief financial officer (CFO) from December 2003 to August 2007.
Dkt. # 9, at 4. Powder River maintains its headquarters in Alberta, Canada, but the SEC alleges that
Powder River conducted investor-related activities from its office in Tulsa, Oklahoma. Id. at 5. In
2004, Powder River began soliciting investors in Asia and it entered into contracts with many Asian

investors. In these contracts, the investors agreed to pay a principal amount, and Powder River
agreed to repay an agreed percentage of the principal each year. Id. at 6. After the principal was
fully repaid, the investor would continue to receive payments from Powder River based on the
investor’s percentage share of the company’s oil and gas interests. Id. The SEC alleges that Fox
negotiated with the Asian investors and signed the contracts on behalf of Powder River. Id. at 1, 7.
Powder River treated the investment income as revenue in its public filings, but the SEC
states that the money from Asian investors should have been listed as loans. Id. at 6. The SEC
claims that Powder River significantly overrepresented its income by this false and misleading
characterization of the Asian investments. From 2004 to 2007, Fox allegedly misrepresented the
nature of the guaranteed minimum payments to Asian investors when communicating with auditors
and outside consultants. Id. at 7-8. Fox resigned as CFO of Powder River in August 2007, but he
continued to serve as CEO, president, and chairman of the board. Id. at 4, 8. Fox continued to sign
Powder River’s quarterly and annual filings, and Powder River represented to the SEC that the
proceeds from Asian investors were revenue. Id. at 8. In the second quarter of 2007, Powder River
instituted a policy of using proceeds from new investors to pay the guaranteed minimum payments
to existing investors and, by March 2008, Powder River was making the guaranteed minimum
payments entirely from the proceeds obtained from new investors. Id. According to the SEC,
Powder River’s obligation to investors was almost double the incoming oil and gas revenue. Id. at
9. In March 2008, an outside consultant conducted an audit of Powder River’s finances and
determined that Powder River’s accounting treatment of the investment income was improper. Id.
Powder River filed a Form 8-K in March 2008 publicly disclosing that Powder River’s financial
statements for the first, second, and third quarter of 2007 were not reliable. Id. at 10.

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The improper accounting treatment of the funds from Asian investors was not the only
misrepresentation in Powder River’s public filings. Fox represented to accountants that Powder
River had acquired oil and gas leases in Texas and New Mexico, even though Powder River actually
forfeited its right to the leases before the agreements could be completed. Id. at 11. Powder River
inflated the value of its proven reserves in SEC filings based on questionable reserve estimates and
the inclusion of properties not owned by Power River. Id. at 12. Fox drafted and disseminated false
press releases about Powder River’s financial status, even though Fox allegedly knew that the press
releases misrepresented Powder River’s income. Id at 13-14. Fox received a bonus of $320,000
from Powder River based on the company’s revenue, and the SEC claims that this bonus is directly
linked to inflated revenues reported by Fox. Id. at 21.
On April 8, 2011, the SEC filed this case alleging six statutory and regulatory violations
against Fox. The SEC seeks a permanent injunction preventing Fox from serving as an officer or
director of any public company or from engaging in future violations of, inter alia, Sections 10(b)
and 13(b)(5) of the Securities and Exchange Act of 1934 (Exchange Act), and rules promulgated by
the SEC to enforce these sections of the Exchange Act. The SEC also asks the Court to order
defendant to disgorge all wrongfully obtained funds, plus prejudgment interest, and to impose a civil
monetary fine. Fox appeared pro se and filed an answer to the complaint. Dkt. # 7. The SEC filed
an amended complaint (Dkt. # 9) but Fox failed to file an answer to the amended complaint. The
SEC obtained the entry of default (Dkt. # 16) against Fox, but the default was later set aside when
counsel entered an appearance on behalf of Fox. Dkt. # 22.
Fox appeared for his deposition on June 20, 2012, and the SEC states that the “first half of
the deposition had gone poorly for Fox.” Dkt. # 48, at 2. Fox’s attorney asked the SEC to adjourn

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the deposition and the SEC presented Fox with a consent form and a proposed judgment. Id. Fox
met with his attorney and counsel for the SEC for about an hour and a half, and counsel for the SEC
left the room whenever Fox requested. Id. Fox signed the consent form before a notary public and
the deposition was adjourned. Fox agreed to the entry of a judgment enjoining him from committing
future violations of sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934. Dkt. # 40-1,
at 1. Fox also agreed to the entry of a money judgment for disgorgement, prejudgment interest, and
a civil fine in amounts to be determined by the Court. Id. at 2. In connection with the SEC’s request
for disgorgement, prejudgment interest, and a civil fine, Fox agreed to the following conditions:
(a) Defendant will be precluded from arguing that he did not violate the federal
securities laws as alleged in the complaint; (b) Defendant may not challenge the
validity of this Consent or the Judgment; (c) solely for the purposes of such motion,
the allegations of the First Amended Complaint shall be accepted as and deemed true
by the Court; and (d) the Court may determine the issues raised in the motion on the
basis of affidavits, declarations, excerpts of sworn deposition or investigative
testimony, and documentary evidence without regard to the standards for summary
judgment . . . .
Id. Fox represented that he signed the consent form voluntarily and that “no threats, offers,
promises, or inducements of any kind have been made by the [SEC] . . . to induce Defendant to enter
into this Consent.” Id. at 3.
The SEC filed an unopposed motion for entry of judgment. Dkt. # 40. However, the
proposed judgment did not state the amount of disgorgement or other monetary relief to be awarded
to the SEC, and the Court determined that this issue should be resolved before the entry of judgment.
Dkt. # 41. The Court entered a briefing schedule (Dkt. # 43) as to the monetary relief to be awarded
in the judgment, and the SEC filed a motion for disgorgement, prejudgment interest, and a third-tier
civil fine. Dkt. # 44. Plaintiff filed an untimely response, arguing that the award of any monetary
relief would be “unjust,” because he believed he agreed to the entry of a judgment as to injunctive
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relief only. Dkt. # 46. He also challenges the factual allegations of the amended complaint. Id. at
2-4.
II.
A.
Defendant argues that his consent to entry of an agreed judgment is invalid, because he did
not understand that he would be stipulating to the facts alleged in the complaint if he signed the
consent. Dkt. # 46, at 2. He also claims that he did not realize that he was agreeing to the entry of
a judgment including monetary relief. Id. However, defendant cites no authority supporting his
argument that the consent is invalid, in whole or in part, because he did not fully understand the
terms of the consent and the proposed judgment. The Tenth Circuit follows the general rule that
a party may not avoid enforcement of a written agreement because he claims he did not read or
understand it unless he can show that he signed the written agreement because of fraud or false
representation. Elsken v. Network Multi-Family Sec. Corp., 49 F.3d 1470, 1474-75 (10th Cir.
1995). In this case, defendant had ample time to read the consent form and he was represented by
counsel at the deposition. See Dkt. # 49 (deposition transcript evidencing that defendant agreed to
sign consent form and that the terms of the consent form were explained to defendant in the presence
of his attorney). He has made no allegations of fraud or misconduct on the part of the SEC, and his
argument to set aside the consent form is based solely on his own alleged misunderstanding of the
parties’ agreement. The terms of the consent form are clear and unambiguous and defendant does
not claim that he was misled by the language of the consent form. The Court also notes that the
plain language of the consent form states that defendant “may not challenge the validity of the
Consent . . . .” Dkt. # 40-1.

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The Court finds that defendant is bound by the terms of the consent form, and that he may
not challenge the facts alleged in the first amended complaint or the SEC’s right to seek monetary
relief. Defendant’s filings (Dkt. ## 46, 50) directly challenge the factual allegations of the first
amended complaint, but defendant waived his right to do so and the Court will accept the facts
alleged by the SEC as true for the purpose of ruling on the pending motions. Defendant asks the
Court to award the SEC no monetary relief, but he does not challenge the SEC’s arguments
concerning the amount of monetary relief. It is clear that defendant knew that the Court would
consider the SEC’s request for disgorgement, prejudgment interest, and a civil penalty as part of the
final judgment, and the Court will include monetary relief in the judgment if the SEC establishes that
such relief is appropriate.
B.
The SEC asks the Court to award disgorgement, prejudgment interest, and a third-tier civil
penalty as part of the judgment. Defendant has consented to inclusion of this relief in the judgment
in amounts to be determined by the Court. Dkt. # 40-1, at 2. The SEC asks the Court to order
disgorgement in the amount of $320,000, plus prejudgment interest of $59,841.38, and a third-tier
civil penalty of up to $150,000.
Disgorgement is an equitable remedy “designed to deprive a wrongdoer of unjust
enrichment, and to deter others from violating securities laws by making violations unprofitable.”
SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998). Disgorgement is remedial rather
than punitive in nature, and a defendant is required to pay disgorgement only as to gains “causally
connected to the violation.” SEC v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006); see also
SEC v. Cavanaugh, 445 F.3d 105, 116 n.25 (2d Cir. 2006) (district court may not award additional

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amounts of disgorgement solely to punish defendant, and amount of disgorgement is limited to
defendant’s unjust enrichment). “The district court has broad discretion not only in determining
whether or not to order disgorgement but also in calculating the amount to be disgorged.” SEC v.
First Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir. 1996). “Because such calculations are not
capable of exactitude, any risk of uncertainty in calculating disgorgement should fall on the
wrongdoer whose illegal conduct created that uncertainty.” SEC v. Haligiannis, 470 F. Supp. 2d
373, 384 (S.D.N.Y. 2007).
The SEC requests that the Court order disgorgement in the amount of $320,000, because
defendant received a bonus from Powder River in this amount based on the inflated net income
reported by defendant. According to the Form 10-K filed by Powder River on December 31, 2007,
Powder River paid defendant a “cash bonus of 10% of the Company’s net income before taxes to
the Company that exceeds $750,000 per quarter.” Dkt. # 45-2, at 24. For the year ending December
31, 2007, Fox received a bonus of $320,000. Id. The amended complaint states that defendant
received this bonus because he fraudulently inflated Powder River’s revenue, and the Court accepts
this factual allegation as true. Dkt. # 9, at 21. The SEC states that this is a conservative estimate
of defendant’s unjust enrichment, because it is possible that his 2007 annual salary of $909,420.27
could also be linked to Powder River’s inflated revenue reported by defendant. The Court finds that
the SEC has presented sufficient evidence causally connecting the $320,000 bonus to defendant’s
unlawful conduct, and defendant should be ordered to disgorge this amount.
The SEC also requests prejudgment interest on the $320,000 from the date Fox received the
bonus, December 31, 2007, until the date on which judgment is entered. Dkt. # 44, at 13. The SEC
has calculated prejudgment interest based on the interest rate for underpayment of federal income

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taxes, and states that the appropriate amount of prejudgment interest for the period December 31,
2007 through October 31, 2011 is $59,841.38. The Court has the equitable authority to award
prejudgment interest on an order of disgorgement. SEC v. First Jersey Securities, Inc., 101 F.3d
1450 (2d Cir. 1996); SEC v. HedgeLender LLC, 786 F. Supp. 2d 1365 (S.D. Ohio 2011).
“Prejudgment interest, like disgorgement, prevents a defendant from profiting from his securities
violations.” SEC v. Sargent, 329 F.3d 34, 40 (1st Cir. 2003). The SEC has adopted the tax
underpayment rate for prejudgment interest in its administrative proceedings and courts routinely
apply this rate when awarding prejudgment interest on an order of disgorgement. SEC v. Platforms
Wireless Int’l Corp., 617 F.3d 1072, 1099 (9th Cir. 2010); SEC v. One or More Unknown Traders
in the Common Stock of Certain Issuers, 825 F. Supp. 2d 26 (D.D.C. 2010). Defendant does not
challenge the SEC’s calculation of prejudgment interest. The Court has reviewed the SEC’s
calculation of prejudgment interest (Dkt. # 45-6) and finds that the SEC should be awarded
prejudgment interest in the requested amount, plus prejudgment interest at the applicable quarterly
interest rate on the disgorgement award from November 1, 2011 to this date.
A civil fine is authorized under 15 U.S.C. § 78u(d)(3), and the SEC asks the Court to impose
a third-tier fine under the statutory scheme. The Court may order a defendant to pay a third-tier fine
of $150,0001 or the “gross amount of pecuniary gain to such defendant” if the defendant’s violation
of federal securities laws “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 significant risk of losses to other persons.” 15 U.S.C. § 78u(d)(3). The imposition of a

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By statute, the maximum third tier fine is $100,000. 15 U.S.C. § 78u(d)(3). This amount
has been adjusted for inflation and the current maximum third tier fine is $150,000. 17
C.F.R. § 201.1002.
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fine is discretionary and courts have considered several factors in determining the amount of a civil
fine:
(1) the egregiousness of the defendant’s conduct; (2) the degree of the defendant’s
scienter; (3) whether the defendant’s conduct created substantial losses or the risk
of substantial losses to other persons; (4) whether the defendant’s conduct was
isolated or recurrent; and (5) whether the penalty should be reduced due to the
defendant's demonstrated current and future financial condition.
SEC v. Opulentica, LLC, 479 F. Supp. 2d 319, 331 (S.D.N.Y. 2007).
In this case, defendant recruited Asian investors and intentionally misrepresented the nature
of these investments in public filings. Defendant continued to recruit investors and essentially
created a Ponzi scheme of paying existing obligations from new investments. Defendant’s scheme
harmed the Asian investors, many of whom have not been repaid, and he significantly
misrepresented Powder River’s revenues and proven reserves in public filings and press releases.
Defendant’s conduct was egregious and intentional, and his conduct caused substantial losses to
Powder River’s investors. The SEC states that in 2000 the Alberta Securities Commission issued
a cease and desist letter to defendant and barred him from serving as an officer or director for 18
months, and this suggests that defendant is recidivist. Dkt. # 9, at 5; Dkt. # 44, at 16 n.4. Defendant
has provided no evidence as to his ability to pay a fine, and the Court will not consider this as a
factor. The Court finds that defendant engaged in fraudulent and deceitful conduct causing
substantial losses to Powder River’s investors, and that a third tier fine is appropriate. The Court
will impose a third-tier civil fine of $100,000. This amount is sufficient to punish defendant for his
egregious behavior, and it takes into account the substantial losses caused by defendant’s conduct.

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IT IS THEREFORE ORDERED that Plaintiff’s Motion for Order of Disgorgement,
Prejudgment Interest and Third-Tier Civil Penalties against Defendant Brian D. Fox and Brief in
Support (Dkt. # 44) is granted
IT IS FURTHER ORDERED that the Unopposed Motion to Enter Final Judgment as to
Defendant Brian D. Fox (Dkt. # 40) is granted, and the agreed judgment submitted by the parties,
including the amount of disgorgement, prejudgment interest, and civil fine, will be entered
forthworth.
DATED this 2nd day of November, 2012.

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