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Securities and Exchange Commission v. Durham

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

February 26, 2019

SECURITIES AND EXCHANGE COMMISSION, Plain tiff,
v.
TIMOTHY S. DURHAM, JAMES F. COCHRAN, Defendants. UNITED STATES OF AMERICA, Intervenor.

          ORDER

          Hon. Jane Magnus-Stinson, Chief Judge

         Nearly seven years ago, a jury found Defendant James Cochran guilty of wire fraud, securities fraud, and conspiracy to commit wire and securities fraud. Mr. Cochran has since exhausted his criminal appellate rights, and the Court reopened this parallel civil proceeding brought by the Securities and Exchange Commission (the “Commission”) in 2016.[1]

         On November 1, 2018, the Commission filed a Motion for Summary Judgment, [Filing No. 131], to which Mr. Cochran did not respond. That Motion is now ripe for the Court's review.

         I. Standard of Review

          A motion for summary judgment asks the Court to find that a trial is unnecessary because there is no genuine dispute as to any material fact and, instead, the movant is entitled to judgment as a matter of law. SeeFed. R. Civ. P. 56(a). As the current version of Rule 56 makes clear, whether a party asserts that a fact is undisputed or genuinely disputed, the party must support the asserted fact by citing to particular parts of the record, including depositions, documents, or affidavits. Fed.R.Civ.P. 56(c)(1)(A). A party can also support a fact by showing that the materials cited do not establish the absence or presence of a genuine dispute or that the adverse party cannot produce admissible evidence to support the fact. Fed.R.Civ.P. 56(c)(1)(B). Affidavits or declarations must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on matters stated. Fed.R.Civ.P. 56(c)(4). Failure to properly support a fact in opposition to a movant's factual assertion can result in the movant's fact being considered undisputed, and potentially in the grant of summary judgment. Fed.R.Civ.P. 56(e).

         In deciding a motion for summary judgment, the Court need only consider disputed facts that are material to the decision. A disputed fact is material if it might affect the outcome of the suit under the governing law. Hampton v. Ford Motor Co., 561 F.3d 709, 713 (7th Cir. 2009). In other words, while there may be facts that are in dispute, summary judgment is appropriate if those facts are not outcome determinative. Harper v. Vigilant Ins. Co., 433 F.3d 521, 525 (7th Cir. 2005). Fact disputes that are irrelevant to the legal question will not be considered. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         On summary judgment, a party must show the Court what evidence it has that would convince a trier of fact to accept its version of the events. Johnson v. Cambridge Indus., 325 F.3d 892, 901 (7th Cir. 2003). The moving party is entitled to summary judgment if no reasonable fact-finder could return a verdict for the non-moving party. Nelson v. Miller, 570 F.3d 868, 875 (7th Cir. 2009). The Court views the record in the light most favorable to the non-moving party and draws all reasonable inferences in that party's favor. Darst v. Interstate Brands Corp., 512 F.3d 903, 907 (7th Cir. 2008). It cannot weigh evidence or make credibility determinations on summary judgment because those tasks are left to the fact-finder. O'Leary v. Accretive Health, Inc., 657 F.3d 625, 630 (7th Cir. 2011). The Court need only consider the cited materials, Fed.R.Civ.P. 56(c)(3), and the Seventh Circuit Court of Appeals has “repeatedly assured the district courts that they are not required to scour every inch of the record for evidence that is potentially relevant to the summary judgment motion before them, ” Johnson, 325 F.3d at 898. Any doubt as to the existence of a genuine issue for trial is resolved against the moving party. Ponsetti v. GE Pension Plan, 614 F.3d 684, 691 (7th Cir. 2010).

         II. Background

         As set forth by the Seventh Circuit Court of Appeals in its decision affirming Mr. Cochran's criminal conviction, this case involves Mr. Cochran's dealings with Fair Finance Company (“Fair”). United States v. Durham, 766 F.3d 672, 675-76 (7th Cir. 2014). As the Seventh Circuit explained, “Timothy Durham and James Cochran bought the business in 2001 through a holding company formed for that purpose and named Fair Holdings, Inc. Durham was its CEO, Cochran was its COO and chairman of the board.” Id. at 676.

They used money invested in Fair to support their lavish lifestyles and to fund loans to related parties that would never be repaid. When the company's auditors raised red flags about its financial status, the auditors were fired. When Fair experienced cash-flow problems, it misled investors and regulators so it could keep raising capital.
Eventually the scheme began to unravel. One of the company's directors, himself under investigation in a separate matter, alerted the FBI that Fair was being operated as a Ponzi scheme. After an investigation, the FBI seized Fair's computer servers and arrested Durham, Cochran, and Snow.

Id. at 676.

         On June 20, 2012, a jury found Mr. Cochran guilty of conspiracy to commit wire fraud and securities fraud, securities fraud, and six counts of wire fraud. SeeJury Verdict, U.S. v. Durham, et al., No. 1:11-cr-42-JMS (SD Ind. June 22, 2012), ECF No. 354. Thereafter, Mr. Cochran was sentenced to 25 years of imprisonment and the Court imposed criminal restitution in the amount of $202, 830, 082.27. SeeEntry for November 30, 2012, U.S. v. Durham, et al., No. 1:11-cr-42-JMS (SD Ind. December 5, 2012), ECF No. 444. Upon entry of judgment, the Court directed that restitution be paid to payees listed on a 115-page spreadsheet that was attached to the judgment. SeeList of Payees, U.S. v. Durham, et al., No. 1:11-cr-42-JMS (SD Ind. December 10, 2012), ECF No. 450-1. On September 4, 2014, the Seventh Circuit Court of Appeals affirmed Mr. Cochran's conviction, and denied rehearing on March 10, 2015. SeeMandate of the USCA, U.S. v. Durham, et al., No. 1:11-cr-42-JMS (SD Ind. March 18, 2015), ECF No. 537.

         Throughout the pendency of the criminal case, including the appeal, this parallel civil action, which was filed on March 16, 2011, was stayed. On June 8, 2016, the Court ordered the civil case reopened. [Filing No. 39.] The substance of this action involves allegations that Mr. Cochran committed civil violations of the Securities and Exchange Acts of 1933 and 1934 (collectively, the “Securities Acts”), in particular, Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 thereunder. [Filing No. 1 at 26-27.] The Commission requested that the Court: (1) issue an injunction permanently restraining and enjoining Mr. Cochran from violating Sections 17(a) and 10(b) and Rule 10b-5; (2) order Mr. Cochran to disgorge all ill-gotten gains derived from his unlawful activities with prejudgment interest; (3) order Mr. Cochran to pay civil penalties pursuant to the Securities Acts; and (4) prohibit Mr. Cochran from acting as an officer or director pursuant to the Securities Acts. [Filing No. 1 at 28-29.]

         On January 26, 2017, the Commission moved for summary judgment on its claims against Mr. Cochran and Mr. Durham. [Filing No. 68.] On July 13, 2017, in lieu of a response to the Commission's Motion for Summary Judgment, Mr. Cochran informed the Court that he “desired” to settle the matter with the Commission. [Filing No. 79.] On August 18, 2017, the Court ruled on the Commission's Motion for Summary Judgment, but only as it related to the Commission's claims against Mr. Durham. [Filing No. 86.] With regard to Mr. Cochran, the Court stated that “the Magistrate Judge assigned to this case has been asked to convene a conference to attempt to resolve the claims against Mr. Cochran” and that the Court's Order “only relates to the Commission's claims against Mr. Durham.” [Filing No. 86 at n.2.]

         On December 14, 2017, the Commission advised that it had not yet reached a settlement agreement with Mr. Cochran. [Filing No. 97.] Five days later, Mr. Cochran filed a document with the Court in which he argued that the Commission had relied upon inadmissible hearsay in pursuing its claims against him and that, in attempting to settle the matter, the Commission was “trying to get one over on” him. [Filing No. 99 at 4.] Following additional settlement efforts before the Magistrate Judge, on February 26, 2018, Mr. Cochran filed a document with the Court in which he questioned the $183 million disgorgement amount sought by the Commission in its previous Motion for Summary Judgment and proposed a new disgorgement amount of approximately $24.5 million. [Filing No. 108.]

         On April 13, 2018, the Commission filed a Motion to Determine Disgorgement with regard to Mr. Durham, in which it advised the Court that it expected an imminent settlement with Mr. Cochran. [Filing No. 111 at 2 n.1.] Despite the fact that this Motion did not pertain to him, Mr. Cochran filed a response to the Commission's Motion, in which he again proposed a disgorgement amount of $24.5 million. [Filing No. 113 at 5.] On June 29, 2018, the Court ruled on the Commission's Motion as it related to Mr. Durham, and specifically stated that the Order did not apply to Mr. Cochran. [Filing No. 118 at 1 n.2.] Days later, the Court noted that Mr. Cochran and the Commission were still in settlement negotiations, and denied Mr. Cochran's motion concerning disgorgement as premature, but without prejudice should settlement not be achieved. [Filing No. 119 at 1.]

         What followed were numerous updates from the Commission regarding the status of settlement efforts with Mr. Cochran. On August 9, 2018, the Commission advised the Court that it “anticipates an agreement with Cochran on disgorgement within two weeks.” [Filing No. 120 at 1.] On August 23, 2018, the Commission advised that it “anticipates an agreement with Cochran but recognizes that receipt, execution, and return of the consent has proven challenging in the past due to his incarceration.” [Filing No. 124 at 1-2.] On September 28, 2018, however, the Commission advised that “[u]nfortunately, the parties are unable to agree on disgorgement, and therefore the Commission is asking that the Court proceed with ruling on its summary judgment motion.” [Filing No. 126 at 1.] The Court then ordered the Commission to file one consolidated motion as to Mr. Cochran's liability and disgorgement. [Filing No. 127.] On October 15, 2018, Mr. Cochran filed a document with this Court in which he stated that he requested that the Commission provide him with a breakdown of its proposed settlement amount but that he had not received one. [Filing No. 128.]

         On November 1, 2018, the Commission filed a Motion for Summary Judgment against Mr. Cochran. [Filing No. 131.] The Commission notified Mr. Cochran of his right to file a response to its Motion, [Filing No. 134], however, Mr. Cochran did not file any response. As such, the Commission's Motion for Summary Judgment is now ripe for the Court's review.

         III. Discussion

         A. Violation of Securities Laws

          In its Motion, the Commission first argues that the jury's verdict in the criminal trial should be given collateral effect in this matter to establish the Commission's claims against Mr. Cochran. With regard to the Commission's claim based on Section 10(b), 15 U.S.C. § 78j(b), the Commission argues that “when the jury found Defendant guilty, they necessarily found the existence of all the elements that make up a civil Section 10(b) claim, ” including the scienter requirement. [Filing No. 132 at 31.] With regard to Section 17(a), the Commission argues that the elements thereof are substantially similar to Section 10(b), with the addition that the former prohibits fraud in “connection with the offer or sale of securities” and “under the facts here there is no doubt that the jury necessarily concluded this element was present too.” [Filing No. 132 at 31-32.] In further support of its arguments, the Commission points to this Court's order regarding the same civil allegations against Mr. Durham in which this Court held that Mr. Durham was collaterally estopped from litigating violations of Section 10(b), Rule 10b-5, and Section 17(a). [Filing No. 132 at 32.]

         Mr. Cochran did not file any response to the Commission's Motion, nor do any of the various documents Mr. Cochran filed in this Court over the past year address the issue of whether he committed civil violations of Section 10(b), Rule 10b-5, and Section 17(a). [SeeFiling No. 113 (Mr. Cochran's “Motion of . . . Willingness to Negotiate with the SEC and Discern the Correct Disgorgement”); Filing No. 128 (Mr. Cochran's “Motion Report as to Status of Settlement Negotiations with Securities and Exchange Commission”).]

         The question presently before this Court is whether, under the doctrine of collateral estoppel, the jury verdict is sufficient to conclusively establish that Mr. Cochran also committed civil violations of Section 10(b), Rule 10b-5, and Section 17(a).[2]

         The doctrine of collateral estoppel (also known as issue preclusion), holds that “once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Our Country Home Enters., Inc. v. Comm'r of Internal Revenue, 855 F.3d 773, 782 (7th Cir. 2017) (internal citations omitted). “A party is constrained by collateral estoppel as a matter of federal law only where four criteria are satisfied: (1) the issue sought to be precluded must be the same as that involved in the prior litigation, (2) the issue must have been actually litigated, (3) the determination of the issue must have been essential to the final judgment, and (4) the party against whom estoppel is invoked must [have been] fully represented in the prior action.” Grede v. FCStone, LLC, 867 F.3d 767, 776 (7th Cir. 2017) (citations omitted). Under collateral estoppel, an “outstanding criminal judgment or disciplinary sanction, as long as it stands, blocks any inconsistent civil judgment.” Haywood v. Hathaway, 842 F.3d 1026, 1029 ...


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