2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 CENTRAL DISTRICT OF CALIFORNIA 9 19 || SECURITIES AND EXCHANGE ) Case No. 2:15-cv-02563 COMMISSION, ) DDP (MAAx) 11 ) D Plaintiff, ) ORDER RE: ) REMEDIES 13 v. ) 14 ) BRENDA CHRISTINE BARRY/ ) 15 || BAK WEST, INC., ERIC ) CHRISTOPHER CANNON/ 16 || CENTURY POINT, LLC, and ) CALEB AUSTIN MOODY (dba ) 17 || SKY STONE) ) Defendants. 18 )

20 ) 21 22 || Further to the Court’s order granting summary judgment, Dkt. 546, and having 23 || considered the parties’ additional briefing and heard oral argument, the Court adopts 24 || the following order regarding remedies. 25 || // 26 27 28

1 The SEC requests the following remedies: 2 (1) injunctive relief pursuant to Securities Act § 20(b) and Exchange Act § 21(d), 3 enjoining Defendants' from violating federal securities laws; 4 (2) disgorgement of all commissions Defendants received for selling unregistered 5 life settlement investment contracts;? and 6 (3) “substantial” civil penalties 7 || (Dkt. 551 at 7). Each remedy is discussed in turn. 8 A. Disgorgement 9 The SEC requests a disgorgement award against Defendants in the full amount 10 |} of profits received. Defendants argue that disgorgement is precluded by the Supreme 11 |} Court’s admonition that disgorgement must be “awarded for victims.” Liu v. SEC, 140 12 |} S.Ct. 1936, 1940 (2020). Defendants dispute that disgorgement here would be awarded 13 |} for victims, because the victims are investors who “are likely to be made whole” when 14 |} they receive payouts from policies still held by the Receivership. (See Opp. at 20). 15 First, the Court disagrees with Defendants’ characterization of the facts. The 16 |} investors are not “likely to be made whole” by distributions from the Receivership. 17 || PCWG, often through Defendants, advertised a minimum fixed total return on 18 || investment of 100%. (Dkt. 28-2). The Receiver’s net losses calculation is based on a 19 || “money in, money out” calculation, meaning the difference between the amounts 20 |} ———_ 21) Pacific West Capital Group, Inc., (“PWCG”), its principal Andrew B. Calhoun IV, and 22 || one of its sales agents Andrew B. Calhoun Jr. were dismissed as defendants pursuant 03 to a settlement agreement. (Dkt. 165, 167, 168). Remaining defendants are former PWCG sales agents Brenda Christine Barry/BAK West, Inc. (“Barry”), Eric Christopher 24 || Cannon/Century Point, Inc. (“Cannon”), and Caleb Austin Moody/Sky Stone 25 (“Moody”) (collectively, “Defendants”). 26 || * Specifically, the SEC requests that the Court order disgorgement of: $681,000 in ill- 57 gotten gains and $272,273.64 in prejudgment interest from Barry; $658,000 in ill-gotten gains and $263,077.89 in prejudgment interest from Cannon; and $540,000 in ill-gotten 28 || gains and $215,899.78 in prejudgment interest from Moody.

1 || invested by investors (money-in) and amounts distributed to investors in return 2 || (money-out). (See Dkt. 375). This does not include investors’ expectations, based on 3 || Defendants’ representations, that they would double their investments “in typically 4 4 || to 7 years” (Dkt. 7-66), and it does not account for the substantial delay in recouping 5 || the principal amount of their investments. 6 Second, Liu does not preclude disgorgement here. In Liu, the Supreme Court 7 || addressed whether courts may order disgorgement pursuant to the Securities 8 || Exchange Act provision for “any equitable relief that may be appropriate or necessary 9 || for the benefit of investors.” 15 U.S.C § 78u(d)(5). Analyzing the history of equity 10 |} courts, the Court held that courts may indeed order disgorgement in SEC actions so 11 || long as the award “satisfies the SEC’s obligation to award relief ‘for the benefit of 12 |} investors” and is “consistent with the equitable principles underlying § 78u(d)(5).” 140 13 |] S.Ct. at 1948, 1950. The Court remanded to the lower court to determine whether the 14 || disgorgement award at issue in Liu satisfied the SEC’s obligation and adhered to 15 |} equitable principles, despite not being distributed to victims, imposing joint-and- 16 |} several liability, and not including—rather than deducting — business expenses. Id. at 17 || 1950. 18 After Liu, Congress added the following provision to the Securities Exchange 19 || Act: 20 “In any action or proceeding brought by the Commission under any provision 21 of the securities laws, the Commission may seek, and any Federal court may 22 order, disgorgement.” 23 || 15 U.S.C. § 78u(d)(7). Unlike §78u(d)(5), the new disgorgement provision does not 24 || include the phrase “for the benefit of investors.” It is not clear whether Congress 25 || intended thereby to override Liu’s admonition that disgorgement awards must 26 || “satisfy[y] the SEC’s obligation to award relief ‘for the benefit of investors.” See, e.g., 27 || Neil Thoms Smith et. al., Liu v. SEC: The Supreme Court Limits the SEC's Disgorgement 28 || Power and Sets the Stage for Future Legal Battles, AMERICANBAR.ORG (Sep. 3, 2020),

1 || https://www.americanbar.org/groups/business_law/resources/business-law- 2 || today/2020-september/liu-v-sec-the-supreme-court-limits-the-sec/. The Ninth Circuit 3 || has not yet addressed whether §78u(d)(7) overrides any of Liu’s admonitions. Cf. SEC || v. Hallam, 42 F.Ath 316, 343 (5th Cir. 2022) (holding that §78u(d)(7)’s new text 5 || distinguishes between disgorgement and equitable remedies, such that federal courts 6 || may order “legal disgorgement” without meeting the standards for equitable 7 || remedies). 8 That said, even under Liu, disgorgement is well within the Court’s discretion in 9 || this case. Courts have routinely allowed disgorgement in similar circumstances after 10 |} Liu. See, e.g., SEC v. Almagarby, No. 17-62255-CIV,

, at *3 (S.D. Fla. 11 |} Aug. 16, 2021) (awarding disgorgement and noting that Liu “made no ruling, as 12 || Defendants suggest, that the SEC must identify specific victims to whom a 13 || disgorgement award should be distributed, or that all disgorged funds must be 14 |} returned to investors, or that a disgorgement award should be limited to those funds 15 || that could be returned to investors”); Sec. & Exch. Comm'n v. Westport Cap. Markets, 16 |} LLC,

, 170 (D. Conn. 2021) (ordering disgorgement in spite of 17 || defendants’ argument that it “would be an inequitable windfall in contravention of the 18 || Supreme Court's clear holding in Liu.”). 19 Independent of its legal availability, Defendants consider disgorgement a 20 || “draconian” punishment, disproportionate to the wrongfulness of their failure to 21 || register with the SEC. (Dkt. 491 at 19). Indeed, unlike PWCG and Calhoun, the SEC did 22 || not assert fraud claims against Defendants and the other sales agents named in the 23 || Complaint. Nonetheless, the SEC seeks the same amount of disgorgement from 24 || Defendants for failure to register as it sought from PWCG and Calhoun: all of their 25 || profits. 26 The SEC is correct that the Court has discretion to order disgorgement of all of 27 || Defendants’ profits for their failure to register alone. See, e.g., SEC v. Platforms Wireless 28 || Int'l Corp.,

, 1097 (9th Cir. 2010) (ordering disgorgement for failure to

1 || register without ruling on liability for fraud); SEC v. Thomas, No. 2:19-cv-01515-APG- 2 || VCF,

, at *34 (D. Nev. Aug. 24, 2021) (ordering 3 || disgorgement where defendants sold unregistered securities but were not involved in 4 || the Ponzi scheme and were regularly reassured of the scheme’s legality by 5 || management). Where, as here, disgorgement is an available remedy, the Court has 6 || broad discretion not only in determining whether or not to order disgorgement but 7 || also in calculating the amount to be disgorged. SEC v. Contorinis,

(2d 8 || Cir. 2014) (citation omitted). In exercising its discretion, the Court considers the totality 9 || of circumstances underlying the present litigation. 10 Although the SEC did not bring fraud claims against Defendants, Defendants 11 || were, in many cases, the sales agents who provided the allegedly misleading 12 |} information to investors. For example, Barry told investors that the risk of premium 13 || calls was “negligible” because “plenty of funds” were available in reserves (Dkt. 106-4 14 |} at 113:10-24, 156:1-19) and that, if issued, premium calls would be a pro-rata share of 15 |} the premium amount listed on the disclosure form (see 106-65 at 155:5-19). Moody told 16 |} an investor that PWCG had “yet to use any funds from the secondary reserve[,] much 17 || less the third” (Dkt. 7-59). Cannon told investors that PWCG had “accumulated 18 |} millions of dollars in the secondary and tertiary premium reserves,” and that, because 19 || PWCG had yet to dip into those reserves, he did not “anticipate” investors would be 20 || subject to premium calls. (Dkt. 7-102, Dkt. 7-99). At the time that Defendants made 21 || these statements, premium reserves for some of the policies in PWCG’s portfolio had 22 || in fact run out. (Dkt. 28-3 at $13). 23 Defendants claim they relied on information from Calhoun, who lied to or 24 || misled Defendants. (See, e.g., Dkt. 106-65 at 156:13-19). It is unclear how reasonable it 25 || was for Defendants to parrot, without verifying, these statements to investors. That 26 || said, Calhoun’s reassurances mitigate, at least somewhat, Defendants’ culpability for 27 || misleading investors. See SEC v. Thomas,

, at *34 (D. Nev. 28

|| Aug. 24, 2021) (finding that the SEC’s requested penalties were too high because 2 || defendants were “regularly assured...of the scheme’s legality”). 3 The SEC’s settlements with Calhoun, compared to their settlement with sales || agent Calhoun Jr., further support the notion that Calhoun’s blameworthiness exceeds 5 || Defendants’. Calhoun was the founder, owner, and sole president of PWCG and, as 6 || discussed above, “controll[ed] the information provided to investors through the Sales 7 || Agent Defendants.” (Complaint at {[ 23). The SEC’s settlement with Calhoun included 8 || disgorgement of $3,745,416, about half of his approximately $7,600,000 in profits from 9 || the life insurance investment contracts. (Compare

J 100 with Dkt. 165). Calhoun Jr., 10 |} like Defendants, was a sales agent. The Calhoun Jr. settlement included disgorgement 11 || of $104,800, less than a quarter of his approximately $485,000 in profits. (Compare 12 |} Complaint J 102 with Dkt. 168). This settlement apportioning tracks the Court’s 13 |} understanding of the relative culpability of PWCG employees; that is, Calhoun, 14 |} PWCG’s founder and owner, was more culpable than Calhoun Jr. and Defendants, 15 |} PWCG’s sales agents. 16 Lastly, the Court considers Defendants’ legitimate business expenses. Liu, 140 S. 17 |} Ct. at 1950 (“We leave it to the lower court to examine whether including those 18 || expenses in a profits-based remedy is consistent with the equitable principles 19 |} underlying § 78u(d)(5).”). It is incumbent on Defendants, not the Court, to identify 20 || these expenses. SEC v. World Tree Fin., L.L.C.,

(5th Cir. 2022) (“Liu 21 || does not require the district court to conduct its own search for business deductions 22 || that defendants have not identified.”). Barry did not even approximate her legitimate 23 || business expenses, instead merely stating that the SEC’s net profits account “does not 24 || take into account my business expenses.” (Dkt. 492-1 J 10). Cannon stated that he paid 25 || $86,479 in taxes on his PWCG income, but he did not specify whether that amount was 26 || accounted for in the SEC’s approximation of his net profits. (Compare Dkt. 491-3 □ 27 || with Dkt. 64 {| 105). Moody listed his tax payments and the total annual business 28 || expenses he deducted from his taxes from 2012-2014, but he did not itemize or describe

1 || those expenses. (Dkt. 491-4 J 7-9). Without clear information about the business 2 || expenses from any of Defendants, the Court is unable to conclude that those expenses 3 || “have value independent of fueling a fraudulent scheme.” Liu, 140 S.Ct. at 1960. 4 That said, circumstances mitigating Defendants’ culpability weigh against an 5 || order of full disgorgement. The Court instead orders Defendants to disgorge a third of 6 || their net profits, to be distributed to investors. Barry is ordered to disgorge $227,000, 7 || Cannon is ordered to disgorge $219,333.33, and Moody is ordered to disgorge 8 || $180,000. 9 B. Prejudgment Interest on Disgorgement 10 The SEC further requests prejudgment interest on the disgorgement award. In 11 |} deciding whether an award of prejudgment interest is warranted, a court should 12 |} consider “(i) the need to fully compensate the wronged party for actual damages 13 |} suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the 14 |} remedial purpose of the statute involved, and/or (iv) such other general principles as 15 |} are deemed relevant by the court.” SEC. v. First Jersey Sec., Inc.,

(2d 16 |} Cir. 1996) (citing Wickham Contracting Co. v. Local Union No. 3,

(2d 17 || Cir. 1994)). 18 As to the third factor, the registration requirements of the Securities and 19 || Exchange aim to protect investors from fraud. See SEC v. Platforms Wireless Int'l Corp., 20 ||

, 1085 (9th Cir. 2010); Turbeville v. Fin. Indus. Regul. Auth.,

, 21 || 1270 (11th Cir. 2017). In particular, the broker-dealer registration requirement is “of the 22 || utmost importance in effecting the purposes of the Act because it enables the SEC to 23 || exercise discipline over those who may engage in the securities business and it 24 || establishes necessary standards with respect to training, experience, and records.” SEC 25 || v. Benger,

(N.D. III. 2010) (internal quotations omitted). In this 26 || case, requiring better training, more experience, and more thorough records may well 27 || have prevented Defendants from misleading investors about the likelihood of 28 || premium calls and the track record of PWCG’s portfolio. On the other hand, the first

1 || and second factors—the need to fully compensate investors and the relative equities of 2 || the award—weigh against ordering prejudgment interest. As discussed above, PWCG, 3 || Calhoun, and Mills Potoczack & Company have agreed to settlements totaling more 4 || than $106 million, which is the “total allowed investor net loss” claimed from the 5 || receivership.*? The disgorgement order is sufficient to serve a deterrent function 6 || without adding prejudgment interest. Accordingly, the Court declines to exercise its 7 || discretion to order prejudgment interest. 8 C. Injunctive relief 9 The SEC seeks an injunction prohibiting Defendants from violating Section 5 of 10 || the Securities Act and Section 15(b) of the Exchange Act. (Dkt. 481-1 at 24). According 11 |} to the SEC’s oral argument, this permanent injunction would trigger a further “follow 12 || on” administrative procedure in which the SEC would seek to prevent Defendants 13 || from working in the securities industry. 14 The Court may, upon a proper showing, order injunctive relief for securities law 15 |} violations. SEC v. Arthur Young & Co.,

(9th Cir. 1979); SEC v. Martino, 16 ||

(S.D.N.Y. 2003). In doing so, the Court must assess the likelihood 17 || of future violations, given such factors as: (1) the degree of scienter, (2) the isolated or 18 || recurrent nature of the infraction, (3) Defendants’ recognition of the wrongful nature of 19 20 + Settlement amounts and interim distribution amounts are listed below: 1. PWCG Disgorgement (Dkt. 166) $53,654,584.00 22 2. PWCG Prejudgment Interest (Dkt. 166) $5,859,747 □□□ 3. PWCG Civil Penalty (Dkt. 166) $750,000.00 23 4. Calhoun IV Disgorgement (Dkt. 165) $3,745,416.00 24 5. Calhoun IV Prejudgment Interest (Dkt. 165) $409,045.99 6. Calhoun IV Civil Penalty (Dkt. 165) $320,000.00 25 7. Calhoun Jr. Disgorgement (Dkt. 168) $104,800.00 2% 8. Calhoun Jr. Prejudgment Interest (Dkt. 168) $11,445.49 9. Calhoun Jr. Civil Penalties (Dkt. 168) $7,500.00 27 10. MPC State Court Settlement (Dkt. 550) $9,750,000.00 11. Interim Investor Distribution (Dkt. 550) $37,000,000 28

their conduct, (4) the likelihood, because of Defendants’ occupation, that future 2 || violations might occur, and (5) the sincerity of Defendants’ assurances against future 3 || violations. SEC v. Murphy,

, 841-42 (9th Cir. 2022) (internal citations 4 |) omitted). The SEC has the burden to show a reasonable likelihood of future violations. 5 || SEC v. Olins,

(N.D. Cal. 2011), as amended (Feb. 25, 2011) 6 || (internal citations omitted). 7 1. Scienter 8 Although scienter is not an element of the registration violations for which this 9 || Court found Defendants liable, the degree of Defendants’ scienter regarding their 10 || failure to register does bear on the likelihood of Defendants’ future violations. 11 |} Defendants claim to have relied on Calhoun and his attorneys’ representations that the 12 |} investment contracts here were exempted from registration requirements. (Dkt. 491-2; 13 |} 491-3; 491-4) (asserting, for example, that Calhoun “regularly made comments 14 |} regarding how much he was spending on ‘the best possible attorneys’ to ensure that 15 |} PWCG’s business was in compliance with laws and regulations”). Although this Court 16 || held that Defendants’ investment contracts were indeed federal securities requiring 17 || registration, Dkt. 546, the legal issue was close enough that Defendants could 18 || reasonably have believed Calhoun and his attorneys. Accordingly, Defendants’ level of 19 || scienter regarding their failure to register weighs somewhat against a finding that 20 || future violations are reasonably likely. 21 2. Isolated or Recurrent Nature of Infraction 22 Defendants argue that their infraction was isolated, weighing against granting 23 || an injunction, because the infractions at issue here are Defendants’ first violations of 24 || securities law. (Dkt. 552 at 7). Although Defendants’ unregistered transactions were all 25 || part of a single scheme of life insurance investment contracts, Defendants were 26 27 28

1 || involved in this scheme for several years.’ See SEC v. Alexander,

, 2 || 1086 (N.D. Cal. 2015) (finding that the second factor weighed in favor of finding a 3 || likelihood of recurrence where defendants took part in a scheme “that spanned nearly 4 || two years and impacted dozens of investors”). Thus, the recurrent nature of 5 || Defendants’ violations weighs somewhat in favor of a finding that future violations are 6 || reasonably likely. 7 3. Defendants’ Recognition of the Wrongful Nature of Their Conduct 8 Defendants argue that they should not be penalized for arguing that life 9 || insurance investment contracts were not federal securities requiring registration (Dkt. 10 || 552 at 7). Even without penalizing Defendants for taking that position in defense of the 11 |} SEC’s claims, this Court considers Defendants’ recognition of the wrongful nature of 12 || their misrepresentations to investors relevant to the likelihood of future violations. 13 As discussed above, Defendants misled investors about such facts as the 14 || likelihood of premium calls and PWCG’s track record. Defendants claimed that they 15 |} did so based on information that Defendants received from Calhoun and presumed 16 |} were true. (See, e.g., Dkt. 106-73 at 105:3-22). Relevant to the question of the likelihood 17 || that they will violate securities laws in the future are Defendants’ reactions after 18 |} Calhoun informed Defendants in 2014 that primary reserves on some policies had run 19 || out (Dkt. 7-32 at 26:1-27:13), and after Defendants learned of the allegations underlying 20 || the SEC’s claim in 2015. In particular, Cannon discounted the importance of these 21 || misrepresentations, claiming that many investors told him they were not concerned 22 || with PWCG’s track record (Dkt. 106-173 at 118:19-119:14) and that the reliability of 23 || Calhoun’s seven-year lifespan estimates “doesn’t affect the investor” (id. 120:7-23). 24 || Cannon’s statements “evidence[], at a minimum, a lack of sufficient attention...to the 25 || securities laws.” Olins,

(analyzing the totality of defendant’s 26 |p ——— 27) 4 Barry worked for PWCG since 2004. (Dkt. 28-8). Moody worked for PWCG since 28 || 2012. (Dkt. 491-4). Cannon worked for PWCG sitting 2007. (Dkt. 28-6).

1 || conduct which evidenced “a willingness to further his goals at the expense of total 2 || candor”). As to Cannon, therefore, the third factor weighs somewhat in favor of a 3 || finding he is reasonably likely to violate securities laws in the future. The SEC did not 4 || point to, and the Court could not locate, similar evidence of Moody or Barry 5 || minimizing the severity of the misrepresentations. Thus, as to Moody and Barry, the 6 || third factor weighs somewhat against a finding that they are reasonably likely to 7 || violate securities laws in the future. 8 4, Defendants’ Occupations 9 The SEC argues that likelihood of recurrence weighs in favor of ordering an 10 |} injunction, because nothing prevents Defendants from acting as unregistered brokers 11 |} in the future. (Dkt. 493 at 16). But Defendants Barry and Moody represent that they do 12 |} not plan to re-enter the securities industry. (Dkt. 552 at 7). Defendant Cannon 13 || represents that he wishes to remain in the financial services industry as an investment 14 || advisor. (Dkt. 551 at 2-3). 15 5. Sincerity of Assurances Against Future Violations 16 Each Defendant included in their declaration the same statement: 17 “T believe it is important to uphold the federal securities laws and will continue 18 |} to do so in my future career.” (Dkt. 491-2 at 19, 491-3 at (8, 491-4 at 110). 19 The SEC did not argue, in its briefing or at argument, that these assurances were 20 || not sincere, but even “sincere assurances of an intent to refrain from aiding and 21 || abetting future violations are insufficient, without more, to militate against an 22 || injunction.” SEC v. Fehn,

(9th Cir. 1996). Thus, this factor weighs 23 || neither for nor against granting an injunction. 24 6. Conclusion 25 As to Defendant Cannon alone, the totality of circumstances warrant the 26 || imposition of an injunction. 27 D. Civil Penalties 28

1 Lastly, the SEC requests “substantial civil penalties be imposed” on each 2 || Defendant. (Dkt. 551 at 7). Courts have discretion to determine the appropriate amount 3 || of a civil penalty "in light of the facts and circumstances." SEC v. Rajaratnam,

|| 36, 44 (2d Cir. 2019) (citation omitted). The Securities and Exchange Acts each provide 5 || that penalties shall be assessed according to a three-tier system. For each tier, the Court 6 || may impose a penalty up to the “gross amount of pecuniary gain.”

|| 77t(d)(2), 78u(d)(3)(B). The first, or lowest tier applies to any violation of the securities 8 || laws; the second tier applies to violations that involve fraud, deceit, or manipulation, 9 || or a deliberate or reckless disregard of a regulatory requirement; and the third, or 10 || highest tier applies to violations described in the second tier, and such violation 11 |} directly or 12 || indirectly resulted in substantial losses or created a significant risk of substantial losses 13 |} to other persons. For each violation, for the period at issue, the maximum first tier 14 || penalty is the greater of: (1) $7,500 for a natural person, and $75,000 for any other 15 || person; or (2) the “gross amount of pecuniary gain” to the defendant as a result of the 16 || violation. 15 U.S.C. §§ 77t(d)(2)(A), 78u(d)(3)(B)(i). 17 Here again, the SEC’s settlements with Calhoun, PWCG, and Calhoun Jr. are 18 || instructive. Calhoun agreed to pay a $320,000 civil penalty and Calhoun Jr. agreed to 19 || pay a $7,500 penalty. (Dkt. 165, 168). These amounts reflect the totality of 20 |} circumstances discussed above, in which Calhoun and PWCG hold more culpability 21 || than their sales agents. Accordingly, the Court finds a Tier 1 penalty appropriate. 22 || Rather than assess the total amount of pecuniary gain, which is already accounted for 23 || in the disgorgement section above, the Court orders each Defendant to pay a civil 24 || penalty of $15,000, to be sent to the Treasury. 25 |) // 26 27 28

1 D. Conclusion 2 In sum, the Court orders as follows: 3 e Disgorgement: Brenda Barry is ordered to disgorge $227,000, Eric 4 Cannon is ordered to disgorge $219,333.33, and Caleb Moody is ordered 5 to disgorge $180,000, to be distributed to investors. 6 e Injunction: Eric Cannon is hereby enjoined from future violations of 7 Section 5 and 15(a) of the Securities and Exchange Acts. 8 e Civil Penalties: Brenda Barry, Eric Cannon, and Caleb Moody shall pay 9 Tier 1 Civil Penalties in the amount of $15,000 each, to be sent to the 10 Treasury. 11 || IT 1S SO ORDERED. 12 13 |} Dated: July 12, 2023 14 15 DEAN D. PREGERSON 16 UNITED STATES DISTRICT JUDGE 17 18 19 20 21 22 23 24 25 26 27 28