Securities and Exchange Commission v. Mapp, III et al

MOTION for Judgment on the Pleadings

E.D. Tex.September 29, 2017

THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. WILLIAM E. MAPP, III, WARREN K. PAXTON, JR., CALEB J. WHITE, and SERVERGY, INC. Defendants. § § § § § § § § § § § § § Case No.: 4:16-CV-00246 ______________________________________________________________________________ DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS ______________________________________________________________________________ GREENBERG TRAURIG, LLP Jason S. Lewis Texas Bar No. 24007551 lewisjs@gtlaw.com David W. Klaudt Texas Bar No. 00796073 klaudtd@gtlaw.com Amanda R. McKinzie Texas Bar No. 24088028 mckinziea@gtlaw.com Natalie D. Thompson Texas Bar No. 24088529 thompsonna@gtlaw.com 2200 Ross Avenue, Suite 5200 Dallas, Texas 75201 (214) 665-3600 (Telephone) (214) 665-3601 (Facsimile) ATTORNEYS FOR WILLIAM E. MAPP, III Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 1 of 20 PageID #: 2103 i TABLE OF CONTENTS I. INTRODUCTION .................................................................................................................... 1 II. STATEMENT OF ISSUES ......................................................................................................... 2 III. LEGAL STANDARD ............................................................................................................... 2 IV. ARGUMENT AND AUTHORITIES ............................................................................................. 2 A. The Commission Has Not Stated a Claim for Scheme Liability under Section 17(a) or Rule 10b-5. ................................................................................... 3 1. Scheme liability requires inherently deceptive conduct that is distinct from misrepresentations. ................................................................ 4 2. The Commission has not alleged inherently deceptive conduct that is distinct from misrepresentations ............................................................. 6 B. Disgorgement is Not Available to the SEC ............................................................ 7 1. The disgorgement award sought by the Commission would not have been available in a court of equity. ..................................................... 7 a. SEC disgorgement bears no relationship to compensation and functions as a penalty. .............................................................. 8 b. SEC disgorgement is not restitution as traditionally understood. ...................................................................................... 9 i. Restitution is aimed at a defendant who has been enriched, and Mapp has not been enriched by the funds invested in Servergy. ............................................... 10 ii. Restitution aims to return the property sought to its rightful owner, not to provide a monetary judgment to the Government............................................................. 11 iii. Equitable restitution is directed at a particular thing, not a right to recover a sum of money generally. ............. 11 c. SEC disgorgement-a monetary award in favor of the government-has no precedent in courts of equity. ..................... 12 2. The disgorgement award sought by the Commission is not appropriate or necessary for the benefit of investors. ............................... 14 V. CONCLUSION AND PRAYER ................................................................................................ 15 Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 2 of 20 PageID #: 2104 i TABLE OF AUTHORITIES Page(s) Cases Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...................................................................................................................2 Baker v. Putnal, 75 F.3d 190 (5th Cir. 1996) .......................................................................................................2 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) ...................................................................................................................2 Cotter v. Gwyn, No. CV 15-4823, 2016 WL 4479510 (E.D. La. Aug. 25, 2016) ...............................................5 Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931 (9th Cir. 2009) .....................................................................................................4 In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011), abrogated on other grounds by Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455 (2013) .................................................................4 F.T.C. v. Bronson Partners, LLC, 654 F.3d 359 (2d Cir. 2011).....................................................................................................11 Gabelli v. SEC, 568 U.S. 442 (2013) .............................................................................................................9, 13 Gentilello v. Rege, 627 F.3d 540 (5th Cir. 2010) .....................................................................................................2 Gonzalez v. Kay, 577 F.3d 600 (5th Cir. 2009) .....................................................................................................2 Great-W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002) ...................................................................................................3, 7, 10, 12 Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999) .................................................................................................................12 Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) ...................................................................................................................4 Kokesh v. SEC, 137 S. Ct. 1635 (2017) ...........................................................................................................7, 9 Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005).......................................................................................................5 Montanile v. Bd. of Trs. of Nat. Elevator Indus. Health Benefit Plan, 136 S. Ct. 651 (2016) ...............................................................................................................11 Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 3 of 20 PageID #: 2105 ii In re Parmalat Sec. Litig., 376 F. Supp. 2d 472 (S.D.N.Y. 2005) ........................................................................................5 Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972 (8th Cir. 2012) .....................................................................................................5 SEC v. Benger, 931 F. Supp. 2d 908 (N.D. Ill. 2013) .........................................................................................5 SEC v. Blatt, 583 F.2d 1325 (5th Cir. 1978) .................................................................................................10 SEC v. Custable, 796 F.3d 653 (7th Cir. 2015) ...................................................................................................11 SEC v. Farmer, No. 4:14-cv-2345, 2015 WL 5838867 (S.D. Tex. Oct. 7, 2015) ...........................................5, 6 SEC v. Fischbach Corp., 133 F.3d 170 (2d Cir. 1997).....................................................................................................11 SEC v. Kelly, 817 F. Supp. 2d 340 (S.D.N.Y. 2011)...............................................................................4, 5, 6 SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342 (D.N.J. 2009) ............................................................................................6 SEC v. Mapp, 240 F. Supp. 3d 569, Slip Op. [Dkt. 96] (E.D. Tex. 2017) ....................................................1, 2 SEC v. Narayan, No. 3:16-cv-01417-M, Slip Op. (N.D. Tex. Aug. 28, 2017) (Lynn, C.J.) .........................4, 5, 6 Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) ...................................................................................................................5 United States v. Bernard, 202 F. 728 (9th Cir. 1913) .........................................................................................................8 United States. v. Naftalin, 441 U.S. 768 (1979) ...................................................................................................................5 WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039 (9th Cir. 2011) ...............................................................................................1, 5 Statutes 15 U.S.C. § 77q(a)(1) .......................................................................................................................4 15 U.S.C. § 77q(a)(2) .......................................................................................................................3 15 U.S.C. § 77q(a)(3) .......................................................................................................................4 15 U.S.C. § 78u(d)(5) ............................................................................................................1, 7, 14 Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 4 of 20 PageID #: 2106 iii Regulations 17 C.F.R. § 240.10b-5(a) .................................................................................................................3 17 C.F.R. § 240.10b-5(b) .................................................................................................................3 17 C.F.R. § 240.10b-5(c) .................................................................................................................4 Rules FED. R. CIV. P. 8(a)(2) ......................................................................................................................2 FED. R. CIV. P. 12(b)(6) ....................................................................................................................2 FED. R. CIV. P. 12(c) .....................................................................................................................1, 2 Rule 10b-5 ....................................................................................................................................3, 4 Rule 10b-5(a) .............................................................................................................1, 3, 4, 5, 6, 15 Rule 10b-5(b) .............................................................................................................................4, 15 Rule 10b-5(c) ...................................................................................................................1, 3, 4, 5, 6 Other Authorities 30A C.J.S. EQUITY §§ 67-68 ...........................................................................................................8 Dan B. Dobbs, HANDBOOK ON THE LAW OF REMEDIES (1973)................................................10, 12 1 POMEROY’S EQUITY JURISPRUDENCE (3d ed. 1905) ................................................................8, 13 2 POMEROY’S EQUITY JURISPRUDENCE (3d ed. 1905) ......................................................................8 1 POMEROY’S EQUITABLE REMEDIES (1905) ..................................................................................13 2 POMEROY’S EQUITABLE REMEDIES (1905) ..................................................................................13 4 POMEROY’S EQUITY JURISPRUDENCE § 1234 (5th ed. 1941) .......................................................12 RESTATEMENT (FIRST) OF RESTITUTION (1937) .............................................................................10 Russell G. Ryan, The Equity Façade of SEC Disgorgement, 4 HARV. BUS. L. REV. ONLINE 1 (2013) ........................................................................................................................9 Joseph Story, COMMENTARIES ON EQUITY JURISPRUDENCE, AS ADMINISTERED IN ENGLAND AND AMERICA (9th ed. 1866) ..................................................................................13 Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 5 of 20 PageID #: 2107 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 1 Pursuant to Federal Rule of Civil Procedure 12(c), Defendant William E. Mapp, III (“Mapp”) hereby respectfully submits his motion for partial judgment on the pleadings as to the First Amended Complaint (“Complaint” or “FAC”) filed by the Securities and Exchange Commission (“Commission”). Mapp moves for judgment on the pleadings as to the Commission’s claims under Rule 10b-5(a) and (c) and Section 17(a)(1) and (3)-the “scheme liability” provisions of the securities laws-as well as to the Commission’s request for disgorgement, for the reasons that follow: I. INTRODUCTION The federal securities laws recognize two theories of fraud: misrepresentation liability and scheme liability. This Court has already recognized the importance of maintaining the distinction between the misrepresentation liability and the separate scheme liability provisions of the securities laws. See SEC v. Mapp, 240 F. Supp. 3d 569, Slip Op. [Dkt. 96] at 23-24 (E.D. Tex. 2017) (Mazzant, J.). Accordingly, a plaintiff alleging scheme liability must show more than misrepresentations: “[a] defendant may only be liable as part of a fraudulent scheme based upon misrepresentations and omissions . . . when the scheme also encompasses conduct beyond those misrepresentations or omissions.” WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011). Because the Commission alleges solely misrepresentations and omissions, Mapp is entitled to judgment as a matter of law on its scheme liability claims. Mapp is also entitled to judgment as a matter of law on the Commission’s request for disgorgement. Though the Commission may seek “any equitable relief that may be appropriate or necessary for the benefit of investors,” 15 U.S.C. § 78u(d)(5), a disgorgement award-against Mapp personally in favor of the United States Government-of the $26,491,435.61 raised by Servergy is neither a typical remedy available from a court of equity nor of benefit to investors. Disgorgement is not an equitable remedy available to the Commission in this case. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 6 of 20 PageID #: 2108 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 2 II. STATEMENT OF ISSUES First, whether the Commission’s scheme liability claims are viable where the Complaint alleges only misrepresentations and omissions and does not allege separate, inherently deceptive conduct by Mapp. Second, whether a disgorgement award against Mapp of the entire $26,491,435.61 raised by Servergy is available to the Commission as an “equitable remedy” that is “appropriate or necessary for the benefit of investors” given that there is no precedent for courts of equity awarding such a penalty and the award would not benefit investors. III. LEGAL STANDARD A motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure is evaluated using the same standard applied to a motion to dismiss under Rule 12(b)(6). Gentilello v. Rege, 627 F.3d 540, 543-44 (5th Cir. 2010). As this Court has explained: The Federal Rules of Civil Procedure require that each claim in a complaint include “a short and plain statement . . . showing that the pleader is entitled to relief.” FED. R. CIV. P. 8(a)(2). The claim must include enough factual allegations “to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Thus, “[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). The court must accept as true all well-pleaded facts contained in the plaintiff’s complaint and view them in the light most favorable to the plaintiff. Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). In deciding a Rule 12(b)(6) motion, “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Twombly, 550 U.S. at 555; Gonzalez v. Kay, 577 F.3d 600, 603 (5th Cir. 2009). SEC v. Mapp, Slip Op. [Dkt. 96] at 7-8. IV. ARGUMENT AND AUTHORITIES Two aspects of the Commission’s claims are ripe for judgment on the pleadings. First, though the Commission purports to invoke the scheme liability provisions of Section 17(a) and Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 7 of 20 PageID #: 2109 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 3 Rule 10b-5 [FAC ¶¶ 135, 138], it does not allege any inherently deceptive conduct apart from misrepresentations that could support such claims. The Commission’s claims to scheme liability under Section 17(a)(1) and (3) and Rule 10b-5(a) and (c) should consequently be dismissed. Second, the Commission seeks disgorgement of the entire amount of funds raised by Servergy- $26,491,435.61-from Mapp individually, ostensibly as an equitable remedy.1 In numerous respects, the disgorgement award sought by the Commission would not have been available in a court of equity “in the days of the divided bench,” and consequently is not available to the Commission today. Great-W. Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 212-13 (2002). Moreover, such an award would provide no benefit to investors, as required by statute. The Commission’s request for the remedy of disgorgement should likewise be dismissed. A. The Commission Has Not Stated a Claim for Scheme Liability under Section 17(a) or Rule 10b-5. The federal securities laws include two separate theories of liability for fraud. Section 17(a)(2) of the Securities Act of 1933 and subsection (b) of Rule10b-5 (implementing Section 10(b) of the Securities Exchange Act of 1934) create misrepresentation liability based on “any untrue statement of a material fact” or “any omission to state a material fact necessary in order to make the statement made, in light of the circumstances . . . , not misleading.” 15 U.S.C. § 77q(a)(2) (Section 17(a)(2)); see 17 C.F.R. § 240.10b-5(b). In contrast, Section 17(a)(1) and (3) and Rule 10b-5(a) and (c) are referred to as the “scheme liability” provisions because they prohibit engaging in any “device, scheme, or artifice to defraud” or engaging in “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any 1 Indeed, the Commission did not even obtain an order of disgorgement from Servergy, the issuer of the securities and the entity that received all of the funds. See Dkt. No. 3 & Ex. A (Plaintiff’s Unopposed Motion to Enter Final Judgments Against Defendants Servergy, Inc. and Caleb J. White); Dkt. No. 8 (Final Judgment as to Servergy, Inc.). Instead, the Commission settled with the issuer for a mere $200,000 in civil penalties [Dkt. 3 Ex. A at 2], yet, as stated in its Rule 26(a) disclosures, seeks disgorgement from Mapp of the entire $26,491,435.61 raised by Servergy between 2009 and 2013. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 8 of 20 PageID #: 2110 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 4 person.” 17 C.F.R. § 240.10b-5(a), (c); see 15 U.S.C. § 77q(a)(1), (3). Courts “refer to claims under Rule 10b-5(a) and (c) as ‘scheme liability claims’ because they make deceptive conduct actionable, as opposed to Rule 10b-5(b), which relates to deceptive statements.” In re DVI, Inc. Sec. Litig., 639 F.3d 623, 643 n.29 (3d Cir. 2011), abrogated on other grounds by Amgen Inc. v. Conn. Ret. Plans & Trust Funds, 568 U.S. 455 (2013). The boundaries between the distinct theories of liability are “carefully maintained” and “well-established.” Desai v. Deutsche Bank Sec. Ltd., 573 F.3d 931, 941 (9th Cir. 2009); see SEC v. Kelly, 817 F. Supp. 2d 340, 344 (S.D.N.Y. 2011) (citing Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011)). The Commission’s pleading indicates that it intends to pursue both scheme liability and misrepresentation liability theories.2 Yet the Complaint alleges no more than misrepresentations, which, if proven, give rise to liability only under 10b-5(b) and Section 17(a)(2). Because the Complaint does not allege inherently deceptive conduct that could support a scheme liability claim, Mapp is entitled to judgment as a matter of law on the SEC’s claims under Section 17(a)(1) and (3) and Rule 10b-5(a) and (c). 1. Scheme liability requires inherently deceptive conduct that is distinct from misrepresentations. “The concept of ‘scheme liability’ recognizes that because ‘[c]onduct itself can be deceptive,’ a defendant may incur primary liability for securities fraud without making or using 2 As to Section 17(a), the Commission alleges that that “Mapp . . . in the offer or sale of securities, employed devices, schemes, or artifices to defraud, obtained money or property by means of untrue statements or omissions, and engaged in transactions, practices, or courses of business which operate or would operate as a fraud or deceit, in violation of Section 17(a) of the Securities Act.” [FAC ¶ 135 (emphases added).] The emphasized language refers to Section 17(a)(1) and (3). As to Rule 10b-5, the Commission alleges that “Mapp . . . employed a device, scheme, or artifice to defraud, made untrue statements or omissions of material facts, and engaged in an act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.” [FAC ¶ 138 (emphases added).] The emphasized language refers to Rule 10b-5(a) and (c). Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 9 of 20 PageID #: 2111 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 5 an ‘oral or written statement.’” SEC v. Narayan, No. 3:16-cv-01417-M, Slip Op. at 4 (N.D. Tex. Aug. 28, 2017) (Lynn, C.J.) (quoting Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 158 (2008)).3 The Supreme Court has made clear that “each subsection [of Section 17(a)] proscribes a distinct category of misconduct.” United States. v. Naftalin, 441 U.S. 768, 774 (1979). “[W]here the primary purpose and effect of a purported scheme is to make a public misrepresentation or omission, courts have routinely rejected the SEC’s attempt to bypass the elements necessary to impose ‘misstatement’ liability under subsection (b) by labeling the alleged misconduct a ‘scheme’ rather than a ‘misstatement.’” Kelly, 817 F. Supp. 2d at 343 (citations omitted). Scheme liability exists only where, separate and apart from any misrepresentations, the defendant has engaged in conduct that is “by nature deceptive,” or that “depend[s] on a fiction.” In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 504 (S.D.N.Y. 2005); see SEC v. Farmer, No. 4:14-cv-2345, 2015 WL 5838867, at *14-15 (S.D. Tex. Oct. 7, 2015) (Ellison, J.) (explaining that pleading a fraudulent scheme requires allegations that the defendant “engaged in deceptive conduct distinct from . . . misstatements and omissions”). As this Court has already explained, “[t]he Commission may not use subsections (a) and (c) of Rule 10b-5 as a back door for liability.” Slip Op. [Dkt. 96] at 23. And courts throughout the country, including every court of appeals to have considered the question, have held that “a scheme liability claim must be based on conduct beyond misrepresentations or omissions.” Pub. Pension Fund Group v. KV Pharm. Co., 679 F.3d 972, 987 (8th Cir. 2012); see, e.g., WPP Luxembourg Gamma Three Sarl v. Spot Runner, Inc., 655 F.3d 1039, 1057 (9th Cir. 2011); Lentell v. Merrill Lynch & Co., 396 F.3d 161, 177 (2d Cir. 2005); Narayan, Slip Op. at 12; Cotter v. Gwyn, No. CV 15-4823, 2016 WL 3 A copy of Chief Judge Lynn’s recent opinion in Narayan is attached as Exhibit A hereto for the Court’s convenience. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 10 of 20 PageID #: 2112 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 6 4479510, at *7 (E.D. La. Aug. 25, 2016); Farmer, 2015 WL 5838867, at *14; SEC v. Benger, 931 F. Supp. 2d 908, 913, 915 (N.D. Ill. 2013); Kelly, 817 F. Supp. 2d at 343; SEC v. Lucent Techs., Inc., 610 F. Supp. 2d 342, 360-61 (D.N.J. 2009). 2. The Commission has not alleged inherently deceptive conduct that is distinct from misrepresentations “[A] proper pleading of scheme liability requires that the complaint allege conduct beyond misrepresentations or omissions.” Narayan, Slip. Op. at 12. Starkly absent from the Complaint are any allegations of deceptive conduct, separate and apart from alleged misrepresentations. The Commission alleges that Mapp made various misrepresentations and omissions in connection with fundraising for Servergy:  “[Mapp] made materially misleading claims about the state of Servergy’s technology and its business prospects.” [FAC ¶ 16; see ¶ 20, ¶¶ 51-61 (alleging misrepresentations regarding the server’s processor, power consumption, and thermal output).]  “Servergy and Mapp knowingly misled investors to believe that customers were committed to purchasing the CTS-1000.” [FAC ¶ 23; see ¶¶ 24-50 (alleging misrepresentations regarding pre-orders and orders “that never existed”).] But the Commission does not allege any sham transaction, market manipulation, or other “inherently deceptive act that is distinct from an alleged misstatement.’” Farmer, 2015 WL 5838867, at *14 (internal citations omitted). “[W]here ‘the core misconduct alleged is in fact a misstatement, it [is] improper to impose primary liability . . . by designating the alleged fraud a ‘manipulative device’ rather than a ‘misstatement.’” Id. Because the SEC’s Complaint fails to adequately allege any facts that could give rise to scheme liability, the Court should enter judgment in Mapp’s favor on the SEC’s claims under Section 17(a)(1) and (3) and Rule 10b-5(a) and (c). Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 11 of 20 PageID #: 2113 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 7 B. Disgorgement is Not Available to the SEC Since the 1970s, the SEC’s position has been that it may obtain disgorgement under the theory that a monetary award ancillary to injunctive relief is a traditional equitable remedy. See Kokesh v. SEC, 137 S. Ct. 1635, 1640 (2017) (describing the SEC’s rationale). In the Sarbanes- Oxley Act of 2002, Congress codified the SEC’s ability to seek equitable relief with an important limitation: the Commission may seek “any equitable relief that may be appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). The Supreme Court has made clear that the statutory term “equitable relief” refers to relief available in the courts of equity “in the days of the divided bench.” Knudson, 534 U.S. at 212-13. As such, whether the disgorgement award sought by the Commission is proper turns on whether it would have been available from a court of equity. A court of equity would not have recognized or granted such relief: it is punitive, not compensatory; such an award is far afield from restitution and its equitable remedy as traditionally understood; and there is no historical precedent for such a judgment in favor of the government. Finally, and independently, a disgorgement award measured by all funds raised by Servergy is unavailable here, as such an award is not “appropriate or necessary for the benefit of [Servergy’s] investors.” 15 U.S.C. § 78u(d)(5) 1. The disgorgement award sought by the Commission would not have been available in a court of equity. For three reasons, the disgorgement sought by the Commission is not proper as an equitable remedy. First, though courts of equity could award monetary relief in the amount necessary to compensate for a loss, the disgorgement sought by the Commission is not tied to compensation and functions as a penalty. Second, SEC disgorgement is not justifiable under the principles of restitution: (a) there has been no enrichment for which restitution could be awarded, Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 12 of 20 PageID #: 2114 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 8 as the Commission seeks funds that Mapp does not possess (and never has) and (b) a monetary judgment against Mapp’s general assets resembles, at best, the legal remedy for restitution, not the corresponding equitable remedy. Third, a monetary award in favor of the Government-as opposed to a wronged party who has suffered a loss-was unknown in courts of equity; consequently, even if investors could seek disgorgement, the Commission may not. a. SEC disgorgement bears no relationship to compensation and functions as a penalty. Courts of equity “refuse to aid in th[e] enforcement” of a penalty. 30A C.J.S. EQUITY §§ 67-68 (2017). This principle has deep roots in equity jurisprudence. A comprehensive early- twentieth-century treatise explains that a court of equity will grant relief against a penalty since the fundamental aim of equity is to compensate, not to punish. 1 POMEROY’S EQUITY JURISPRUDENCE § 432 (3d ed. 1905). Pomeroy explained that “equity can and will relieve against legal penalties and forfeitures, whenever the person that seeks to enforce them may be fairly compensated by an award of money.” Id. § 162; see also 30A C.J.S. EQUITY §§ 67-68; United States v. Bernard, 202 F. 728, 732 (9th Cir. 1913) (explaining that a court sitting in equity “has no authority to assess exemplary damages” as punishment, such that “[b]y applying to a court of equity for relief, the complainant waives all claim to vindictive damages”). And in another context, Pomeroy recognized the “fundamental” principle “that equity relieves against fraud on account of its effects upon the rights of the injured party, and not on account of the moral delinquency of the wrong-doer.” 2 POMEROY’S EQUITY JURISPRUDENCE § 867 n.4 (3d ed. 1905). Equity does not impose punishment. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 13 of 20 PageID #: 2115 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 9 In Kokesh, the Supreme Court held that the disgorgement sought by the Commission in enforcement actions such as this one is a “penalty.” 137 S. Ct. at 1643-44.4 The Court provided three explanations for this conclusion: First, SEC disgorgement is not “a liability imposed [solely] for the purpose of redressing a private injury”; rather, it is imposed “as a consequence for violating . . . public laws.” Id. at 1643. (citation omitted). Second, “SEC disgorgement is imposed for punitive purposes.” Id. Third, “SEC disgorgement is not compensatory.” Id. at 1644; see also Russell G. Ryan, The Equity Façade of SEC Disgorgement, 4 HARV. BUS. L. REV. ONLINE 1, 2-5 & n.13 (2013) (observing that “any resemblance to a truly equitable remedy largely disappears in most cases” of SEC disgorgement). That SEC disgorgement is a penalty is dispositive. The Kokesh Court rejected the Commission’s contention that disgorgement is “remedial” and cannot be a penalty because it “serves compensatory goals in some cases.” 137 S. Ct. at 1645. The Court explained that “[b]ecause disgorgement orders ‘go beyond compensation, are intended to punish, and label defendants wrongdoers’ as a consequence of violating public laws, [they] represent a penalty.” Id. (citation omitted) (quoting Gabelli v. SEC, 568 U.S. 442, 451-52 (2013)). No court of equity would impose or enforce such a penalty, and consequently it is unavailable to the Commission here. b. SEC disgorgement is not restitution as traditionally understood. Prior to Kokesh, SEC disgorgement was sometimes justified as akin to restitution. This relationship is strained at best, particularly in a case like this one where (i) the Commission seeks “disgorgement” of funds that Mapp never obtained and does not possess; (ii) the disgorged funds 4 Though the Kokesh Court did not reach the question whether the disgorgement remedy habitually sought by the Commission is a proper equitable remedy, the Court signaled its concerns, taking pains to point out that “[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Kokesh, 137 S. Ct. at 1642 n.3. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 14 of 20 PageID #: 2116 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 10 bear no relationship to investors’ alleged losses, if any; and (iii) SEC disgorgement is not akin to equitable restitution because it is not aimed at restoring a particular thing to its rightful owner. i. Restitution is aimed at a defendant who has been enriched, and Mapp has not been enriched by the funds invested in Servergy. Restitution is, at its core, aimed at restoring something held by the defendant to its proper owner. See Knudson, 534 U.S. at 213 (legal remedy for restitution available where a plaintiff could “show just grounds for recovering . . . for some benefit the defendant had received from him” (emphasis added)); RESTATEMENT (FIRST) OF RESTITUTION § 1 (1937) [hereinafter “RESTATEMENT”] (“A person who has been unjustly enriched at the expense of another is required to make restitution to the other.” (emphasis added)). A fundamental requirement is that the defendant has been enriched. Indeed, “restitution is usually denied . . . if the benefit received by the defendant has been lost, destroyed, damaged or passed on to another, so that in fact he received no net benefit, or only a limited one.” Dan B. Dobbs, HANDBOOK ON THE LAW OF REMEDIES § 4.6, at 279 (1973) [hereinafter “Dobbs”] (citing, inter alia, RESTATEMENT § 142 cmt. b). This principle was recognized in the Fifth Circuit nearly forty years ago: “[t]he court’s power to order disgorgement extends only to the amount with interest by which the defendant profited from his wrongdoing.” SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978) (holding that it was error for the district court to require defendants to disgorge more than the amounts they personally received). In other words, there can be no restitution in the absence of enrichment. Here, the Commission seeks funds received and held at all times by Servergy, not by Mapp. Even if Servergy had been unjustly enriched by the invested funds, Mapp neither received those funds nor was enriched by them. And even if he was, restitution would be denied where he no longer possesses them. See Dobbs § 4.6; RESTATEMENT § 142 cmt. b. Yet the Commission Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 15 of 20 PageID #: 2117 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 11 seeks a monetary award, payable to the United States treasury, against Mapp personally. Such an award does not even serve as restitution for investors’ losses (if any), because SEC disgorgement is not intended as such. SEC disgorgement “need not be tied to the losses suffered by defrauded investors,” as “compensation is a distinctly secondary goal.” SEC v. Fischbach Corp., 133 F.3d 170, 175-76 (2d Cir. 1997) (discussing disgorgement as an implied remedy under the court’s equitable powers). ii. Restitution aims to return the property sought to its rightful owner, not to provide a monetary judgment to the Government. In addition to the reality that Mapp has not been “enriched” by Servergy’s receipt of investors’ funds, SEC disgorgement departs from the principles of restitution in that it is not aimed at providing compensation, or restitution, to investors. A disgorgement award is payable to the United States Treasury, not to investors or alleged victims. See SEC v. Custable, 796 F.3d 653, 656 (7th Cir. 2015) (noting authority to “bypass victims of a fraud and send the disgorged profits and the penalty to the U.S. Treasury”); F.T.C. v. Bronson Partners, LLC, 654 F.3d 359, 373 (2d Cir. 2011) (“While agencies may, as a matter of grace, attempt to return as much of the disgorgement proceeds as possible, the remedy is not, strictly speaking, restitutionary at all, in that the award runs in favor of the Treasury, not of the victims.”). Indeed, the Commission does not allege that investors in this case suffered a loss of their funds. [E.g. FAC ¶ 5.] An award to someone else does not provide restitution. iii. Equitable restitution is directed at a particular thing, not a right to recover a sum of money generally. Moreover, unlike legal remedies, “[e]quitable remedies ‘are, as a general rule, directed against some specific thing; they give or enforce a right to or over some particular thing . . . rather than a right to recover a sum of money generally out of the defendant’s assets.’” Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 16 of 20 PageID #: 2118 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 12 Montanile v. Bd. of Trs. of Nat. Elevator Indus. Health Benefit Plan, 136 S. Ct. 651, 658-59 (2016) (quoting 4 POMEROY’S EQUITY JURISPRUDENCE § 1234 (5th ed. 1941)). A court of equity might order restitution “where money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendant’s possession.” Knudsen, 534 U.S. at 213. For instance, a court of equity might impose a constructive trust over property held by the defendant. Id.; see Dobbs § 4.3 (describing the equitable remedies for restitution: constructive trust, equitable lien, subrogation, and accounting for profits). In contrast, a monetary award of damages-such as the disgorgement order sought here-was available as a legal remedy “[i]n cases in which the plaintiff ‘could not assert title or right to possession of particular property, but in which nevertheless he might be able to show just grounds for recovering money to pay for some benefit the defendant had received from him.’” Knudsen, 534 U.S. at 213 (quoting Dobbs § 4.2(1)). The disgorgement remedy sought here bears no resemblance to an equitable remedy for restitution. “[F]or restitution to lie in equity, the action generally must seek not to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the Defendant’s possession.” Id. at 214. Here, the Commission seeks a money judgment against Mr. Mapp, which is “a quintessential action at law.” Montanile, 136 S. Ct. at 659. Though SEC disgorgement is not restitutionary at all (as discussed supra), at best it resembles legal restitution, not equitable restitution. c. SEC disgorgement-a monetary award in favor of the government- has no precedent in courts of equity. The Supreme Court has made clear that, to qualify as “equitable relief,” a remedy must be of the specific kind typically and traditionally available from a court of equity. See, e.g., Montanile, 136 S. Ct. at 660-61; Knudsen, 534 U.S. at 712; Grupo Mexicano de Desarrollo S.A. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 17 of 20 PageID #: 2119 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 13 v. Alliance Bond Fund, Inc., 527 U.S. 308, 318-19 (1999). Any inquiry into whether a court of equity could act turns on “whether the circumstances and relations presented by the particular case are fairly embraced within any of the settled principles and heads of jurisdiction which are generally acknowledged as constituting the department of equity.” 1 POMEROY’S EQUITY JURISPRUDENCE § 62 (explaining, in 1905, that the system of equitable jurisprudence is well established and courts of equity no longer seek to create new law). Because “the Government is . . . a different kind of plaintiff,” the Commission may not rely on equitable doctrines simply because they are available to private parties. Gabelli, 568 U.S. at 451. Rather, the SEC’s entitlement to a remedy turns on whether it could have been awarded in favor of the government as sovereign by a court of equity. In courts of equity, there was no concept of backwards-looking, punitive money judgments in favor of the government as sovereign. The historical precedent for government enforcement in a court of equity is a suit to enjoin a public nuisance. See Joseph Story, COMMENTARIES ON EQUITY JURISPRUDENCE, AS ADMINISTERED IN ENGLAND AND AMERICA § 923 (9th ed. 1866); 1 POMEROY’S EQUITABLE REMEDIES §§ 479-80.5 There is no historical precedent for the government, which has not itself suffered a loss and is not in need of compensation, seeking a monetary award based on violation of the public laws. Because there is no historical basis for such an award in favor of the state, as opposed to in favor of a private plaintiff seeking restitution or damages for a loss, the Commission may not properly be awarded disgorgement, even if a private plaintiff seeking compensation could do so. 5 POMEROY’S EQUITABLE REMEDIES exhaustively sets out the remedies available in equity. Nowhere does the commentary mention an award of a monetary penalty in favor of the state for violation of the public law. See 1, 2 POMEROY’S EQUITABLE REMEDIES (3d ed. 1905). Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 18 of 20 PageID #: 2120 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 14 2. The disgorgement award sought by the Commission is not appropriate or necessary for the benefit of investors. Even if SEC disgorgement were available as a traditional equitable remedy, Congress has imposed an important limit on the equitable relief available to the Commission: such relief must be “appropriate or necessary for the benefit of investors.” 15 U.S.C. § 78u(d)(5). This limitation means that equitable remedies that are not to the benefit of investors are unavailable. The Commission seeks disgorgement of the entire $26,491,435.61 raised by Servergy between 2009 and 2013. Importantly, the Commission does not allege that Mapp personally received these funds; rather, the funds were sent to Servergy and investors were issued shares in exchange. [See, e.g., FAC ¶¶ 37, 44.] Even without reference to the particular facts of this case, it is clear that the money judgment sought by the Commission would fail to meet this requirement. A monetary judgment in favor of the Government would provide no benefit to investors whatsoever. See supra Section B(1)(b)(ii). This fundamental feature of SEC disgorgement not only shows that it is not an equitable remedy as traditionally understood, but that (even if it were) it cannot satisfy the specific statutory requirement that any equitable relief awarded be to the benefit of investors. Moreover, such an award would be inappropriate and unnecessary in this case, where investors retain their shares in Servergy, which the Commission alleges remains in business and “is now generating revenue using the CTS-1000 to sell secure, cloud-based data storage services.” [FAC ¶ 5.] Investors do not need, and would not benefit from, an award against Mapp of $26,491,435.61 (based on funds that Mapp never personally received or controlled) in favor of the United States Government. This is further evidenced by the Commission’s settlement with Servergy for no disgorgement award at all. [Dkt. 3, 8.] The disgorgement sought by the Commission is unavailable as a matter of law. Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 19 of 20 PageID #: 2121 DEFENDANT WILLIAM E. MAPP, III’S MOTION FOR JUDGMENT ON THE PLEADINGS Page 15 V. CONCLUSION AND PRAYER Defendant William E. Mapp, III, respectfully requests that the Court grant this Motion and enter judgment in his favor on the SEC’s First Claim for Relief as to Section 17(a)(1) and (3) [FAC ¶ 134-36] and the SEC’s Second Claim for Relief as to Rule 10b-5(a) and (b) [FAC ¶ 137-39], as well as on the SEC’s request for disgorgement [FAC at 39 ¶ III]. Respectfully submitted, /s/ Jason S. Lewis Jason S. Lewis Texas Bar No. 24007551 lewisjs@gtlaw.com David W. Klaudt Texas Bar No. 00796073 klaudtd@gtlaw.com Amanda R. McKinzie Texas Bar No. 24088028 mckinziea@gtlaw.com Natalie D. Thompson Texas Bar No. 24088529 thompsonna@gtlaw.com GREENBERG TRAURIG, LLP 2200 Ross Avenue, Suite 5200 Dallas, Texas 75201 (214) 665-3600 (Telephone) (214) 665-3601 (Facsimile) ATTORNEYS FOR WILLIAM E. MAPP, III CERTIFICATE OF SERVICE I hereby certify that the foregoing document was served on all counsel of record via the Court’s CM/ECF system this 29th day of September, 2017. /s/ Jason S. Lewis Jason S. Lewis Case 4:16-cv-00246-ALM Document 112 Filed 09/29/17 Page 20 of 20 PageID #: 2122