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Securities And Exchange Commission v. New

United States District Court, S.D. Indiana, Indianapolis Division

February 7, 2019




         Now before the Court is the unopposed motion of Plaintiff Securities and Exchange Commission (SEC) to approve and enter judgments by consent against Defendants Alan H. New (“New”), David N. Knuth (“Knuth”), and Synergy Investment Services, LLC (“Synergy”). For the reasons given below, the motion is denied.


         On December 17, 2018, SEC filed a two-count complaint charging Defendants with selling unregistered securities in violation of 15 U.S.C. § 77e(a) and selling securities without registering as brokers or dealers in violation of 15 U.S.C. § 78o(a). Dkt. 1. The complaint alleges that New, Knuth, and their wholly owned company Synergy, without registering as brokers or dealers, sold the unregistered securities of Woodbridge Group of Companies LLC and its affiliates (“Woodbridge”) to over one hundred retail investors between 2013 and 2017. Woodbridge “was actually operating a massive Ponzi scheme, raising more than $1.2 billion before collapsing in December 2017 and filing for bankruptcy[, ]” Compl. ¶ 3, “with more than $961 million in principal still due to investors[.]” Id. ¶ 24. The complaint seeks permanent injunctive relief against future violations of the statutes above cited, disgorgement, and payment of civil penalties.

         On December 18, 2018, SEC filed the instant motion for entry of judgment, together with a signed consent from each Defendant and a tendered consent judgment as to each. Dkt. 2. As relevant here, the tendered judgments (identical in their material terms) provide that Defendants be enjoined from violating the above-cited statutes; the Court determine whether disgorgement or civil penalties are appropriate upon SEC's motion and after a hearing, if necessary; the signed consents be incorporated into the judgments; jurisdiction over the judgments for the purpose of enforcement be retained; and the judgments be certified as partial final judgments under Federal Rule of Civil Procedure 54(b).


          As we have explained in a recent case,

Parties may settle litigation by entry of a consent decree, consent judgment, or stipulated judgment. “A consent decree is a court order that embodies the terms agreed upon by the parties as a compromise to litigation.” United States v. Alshabkhoun, 277 F.3d 930, 934 (7th Cir. 2002). A district must approve a proposed consent decree if its terms are sufficiently connected to the underlying suit and if it is otherwise fair and reasonable.
In reviewing a proposed consent decree, the court begins from “the federal policy encouraging settlement.” United States v. George A. Whiting Paper Co., 644 F.3d 368, 372 (7th Cir. 2011). Then the court “must determine whether a proposed decree is lawful, fair, reasonable, and adequate.” E.E.O.C. v. Hiram Walker & Sons, Inc., 768 F.2d 884, 889 (7th Cir. 1985). “The district court may not deny approval of a consent decree unless it is unfair, unreasonable, or inadequate[, ]” id., and should be “chary” of so finding. Id. at 890.
But a federal court is more than “‘a recorder of contracts' from whom parties can purchase injunctions[.]” Local No. 93, Int'l Ass'n of Firefighters v. City of Cleveland, 478 U.S. 501, 525 (1986) (citation omitted). As the judgment of a federal court, a consent decree “is an exercise of federal power, enforceable by contempt.” Kasper v. Bd. of Election Comm'rs, 814 F.2d 332, 338 (7th Cir. 1987). Predicate to the exercise of federal power, a consent decree must “(1) spring from and serve to resolve a dispute within the court's subject matter jurisdiction; (2) come within the general scope of the case made by the pleadings; and (3) further the objectives of the law upon which the complaint was based.” Komyatti v. Bayh, 96 F.3d 955, 960 (7th Cir. 1996) (quotations and alterations omitted) (quoting Local No. 93, 478 U.S. at 525).
If Local No. 93 is satisfied, “the parties may create any obligations that are not forbidden by law.” Kasper, 814 F.2d at 342. It is well established that such obligations may be “more than what a court would have ordered absent the settlement.” Rufo v. Inmates of Suffolk Cty. Jail, 502 U.S. 367, 389 (1992).

Lopez-Aguilar v. Marion Cty. Sheriff's Dep't, 296 F.Supp.3d 959, 967-68 (S.D. Ind. 2017).

         The relief proposed by the tendered consent judgments appears to be fair, reasonable, and adequate, and to satisfy the requirements of Local No. 93. We cannot enter the judgments as tendered, however, because to do so would require disregarding the Federal Rules of Civil Procedure, as explained below. And we will not sua sponte reform the judgments and enter them as reformed, for the judgments so entered would be invalid for lack of the parties' consent in the absence of any determination on the merits. See Local No. 93, 478 U.S. at 521-523.

         First, and most importantly, the tendered judgments improperly reserve the question of whether disgorgement or civil penalties shall be ordered. They are therefore not final. Am. Interins. Exch. v. Occidental ...

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