I refuse to approve penalties against a defendant who remains defiantly mute as to the veracity of the allegations against him. A defendant’s options in this regard are binary: he may admit the allegation or he may go to trial.
- U.S. District Judge John L. Kane
In what is believed to be the first of its kind in Ponzi scheme jurisprudence, a federal judge refused to ratify a proposed settlement reached between the Securities and Exchange Commission ("SEC") and two men accused of masterminding a $15 million Ponzi scheme because the agreement lacked any admissions of guilt. United States District Judge John L. Kane issued a terse order denying an unopposed motion to enter final judgments against William P. Sullivan and Jane K. Turnock, who were accused of using their company, Bridge Premium Finance, to operate an insurance premium-financing Ponzi scheme. The rejection is the latest instance of a growing judicial opposition to the use of the "neither admit nor deny" language, which was most famously on display when U.S. District Judge Jed S. Rakoff rejected the SEC's proposed settlement with Citigroup in December 2011 and eloquently noted that the court would not be “a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth…”
From 1996 to 2012, Turnock and Sullivan solicited potential investors to invest in BPF, telling them that their investment would be used to provide capital for BPF's insurance premium financing business. Investors were given promissory notes that promised annual interest payments of 12%, and were told that the investments were safe, conservative, and "100% collateralized." In total, BPF raised nearly $16 million from more than 100 investors in multiple states. However, the insurance loan portfolio generated insignificant returns, and the SEC alleged that BPF was nothing more than a classic Ponzi scheme, using incoming investor funds to make interest and principal payments to existing investors. Indeed, in a telephone call with an investor as the scheme was on the brink of collapse, Sullivan admitted "your money is all gone. This is a Ponzi scheme."
The SEC filed an emergency enforcement action in August 2012, charging Turnock, Sulliva, and BPF with multiple violations of federal securities law and seeking various relief including disgorgement and civil monetary penalties. In a motion filed with the court on January 15, 2013, the SEC sought to have the court enter final judgment against the two and indicated that they had agreed to an order to pay over $12 million. The proposed agreement contained the common "neither admit nor deny" language that has been traditionally employed by the SEC in civil actions. The language is favored by defense attorneys and the SEC alike because such admissions would have adverse consequences for the accused in ancillary civil litigation (and likely doom the chances of settlement).
However, in a sharply-worded order that echoes the rising sentiment among the federal judiciary against such agreements, Judge Kane refused to accept an agreement against "a defendant who remains defiantly mute as to the veracity of the allegations against him." Ironically, as noted by Alison Frankel of Reuters, Judge Kane's position is contrary to his previous stance in 2011, when he approved a similar settlement that did include the questionable language. In explaining his position, he cited similar concerns expressed by Judge Rakoff, noting that he was particularly troubled by the waiver for any entry of findings of fact and conclusions of law that have traditionally served to inform the public.
While Judge Kane indicated that "future motions omitting the unacceptable language...will be entertained," it is more likely that the SEC will pursue appellate review, as it did after Judge Rakoff rejected the Citigroup settlement. There, the Second Circuit has already indicated its inclination to overturn Judge Rakoff, stating that
We doubt whether it lies within a court’s proper discretion to reject a settlement on the basis that liability has not been conclusively determined.
Oral argument is currently scheduled before the Second Circuit in that case for February 9, 2013.
Similar results have been on the rise since Judge Rakoff's ruling, with at least three federal judges rejecting SEC settlements on similar grounds.
A copy of Judge Kane's Order is here.
A copy of the SEC complaint is here.