Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Securities and Exchange Commission v. Kovzan

United States District Court, Tenth Circuit

October 15, 2013

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
STEPHEN M. KOVZAN, Defendant.

MEMORANDUM AND ORDER

JOHN W. LUNGSTRUM, District Judge.

In this case, the Securities Exchange Commission ("SEC") has brought various claims against defendant Stephen M. Kovzan under the federal Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77a et seq., and the federal Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78a et seq. The matter is presently before the Court on plaintiff's motion for partial summary judgment (Doc. # 217) and defendant's motion for summary judgment (Doc. # 224). As more fully set forth below, both motions are granted in part and denied in part. Plaintiff's motion is granted with respect to defendant's vagueness defense, and the motion is otherwise denied. Defendant's motion is granted to the extent that certain of plaintiff's claims are time-barred, and the motion is otherwise denied.

I. Background

Beginning in 2000, defendant served as Vice President of Financial Operations and as Chief Accounting Officer ("CAO") at NIC Inc. ("NIC"), a company located in Olathe, Kansas. In August 2007, defendant became NIC's Chief Financial Officer ("CFO"). Jeffery Fraser, one of NIC's founders, served as NIC's Chief Executive Officer ("CEO") and Chairman of the Board of Directors from May 2002 until 2008.

In this civil enforcement action, plaintiff brings claims against defendant under the Securities Act and the Exchange Act, seeking civil money penalties, an injunction against further violations, a prohibition against defendant's acting as an officer or director of a publicly-traded company, and disgorgement of any ill-gotten gains. Plaintiff's claims are centered on its allegations that from 2002 to 2005 Mr. Fraser received over $1, 000, 000 in perquisites that were not reported by NIC as his income, including (a) the costs for Mr. Fraser to commute by private aircraft from his home in Wyoming to NIC's headquarters in Kansas, and (b) reimbursements for other personal expenses, including for homes, vacations, cars, electronics, and other items. Plaintiff alleges that defendant was involved with the preparation and signing of public filings with the SEC from 2002 to 2006 that were materially false and misleading because they failed to disclose Mr. Fraser's perquisites as income. Plaintiff also alleges that defendant was involved in misrepresentations in letters by NIC to its auditors, and it alleges violations of internal-controls and books-and-records provisions of the Exchange Act.

II. Standards Governing a Motion for Summary Judgment

Summary judgment is appropriate if the moving party demonstrates that there is "no genuine dispute as to any material fact" and that it is "entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(a). In applying this standard, the court views the evidence and all reasonable inferences therefrom in the light most favorable to the nonmoving party. Burke v. Utah Transit Auth. & Local 382, 462 F.3d 1253, 1258 (10th Cir. 2006). An issue of fact is "genuine" if "the evidence allows a reasonable jury to resolve the issue either way." Haynes v. Level 3 Communications, LLC, 456 F.3d 1215, 1219 (10th Cir. 2006). A fact is "material" when "it is essential to the proper disposition of the claim." Id.

The moving party bears the initial burden of demonstrating an absence of a genuine issue of material fact and entitlement to judgment as a matter of law. Thom v. Bristol-Myers Squibb Co., 353 F.3d 848, 851 (10th Cir. 2003) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). In attempting to meet that standard, a movant that does not bear the ultimate burden of persuasion at trial need not negate the other party's claim; rather, the movant need simply point out to the court a lack of evidence for the other party on an essential element of that party's claim. Id. (citing Celotex, 477 U.S. at 325).

If the movant carries this initial burden, the nonmovant may not simply rest upon the pleadings but must "bring forward specific facts showing a genuine issue for trial as to those dispositive matters for which he or she carries the burden of proof." Garrison v. Gambro, Inc., 428 F.3d 933, 935 (10th Cir. 2005). To accomplish this, sufficient evidence pertinent to the material issue "must be identified by reference to an affidavit, a deposition transcript, or a specific exhibit incorporated therein." Diaz v. Paul J. Kennedy Law Firm, 289 F.3d 671, 675 (10th Cir. 2002).

Finally, the court notes that summary judgment is not a "disfavored procedural shortcut;" rather, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action." Celotex, 477 U.S. at 327 (quoting Fed.R.Civ.P. 1).

III. Statute of Limitations

Both parties have moved for summary judgment with respect to defendant's assertion of the statute of limitations as a defense. 28 U.S.C. § 2462 imposes a five-year limitations period for an action for the enforcement of "any civil fine, penalty, or forfeiture, pecuniary or otherwise." See id. This suit was filed on January 12, 2011; accordingly, defendant seeks summary judgment on plaintiff's claim for a civil penalty based on conduct prior to January 12, 2006. In particular, defendant seeks summary judgment on plaintiff's claims based on alleged misrepresentations or omissions occurring prior to that date.

In opposing defendant's motion to dismiss, plaintiff relied on application of the discovery rule. The Supreme Court, however, has since ruled that the discovery rule does not apply to Section 2462's limitations period, and that a claim based on fraud accrues for purposes of that statute from the date of the fraud's occurrence. See Gabelli v. SEC, 133 S.Ct. 1216, 1220-24 (2013). Plaintiff also relied on the doctrine of fraudulent concealment, but it has since abandoned that theory and has not relied on it in its summary judgment briefs.

Plaintiff does continue to rely on the continuing violation doctrine. Under that doctrine, if the alleged unlawful practice continues into the limitations period, the complaint is timely if filed within the required limitations period measured from the end of that practice. See Havens Realty Corp. v. Coleman, 455 U.S. 363, 380-81 (1982). Defendant argues, however, that the continuing violation doctrine should not apply in this case. Defendant relies on National Railroad Passenger Corp. v. Morgan, 536 U.S. 101 (2002), in which the Supreme Court explained that the continuing violation doctrine does not apply to make timely claims based on discretely actionable acts occurring outside the limitations period, even if those acts are related to or part of a series with acts committed within the limitations period. See id. at 113-15. Defendant argues that each alleged misrepresentation or omission was a discrete and separately actionable act, and thus is not subject to the continuing violation doctrine.

Plaintiff first argues that the Court has already recognized that the continuing violation doctrine applies in this case. In ruling on defendant's motion to dismiss, however, the Court merely rejected defendant's argument that the doctrine should not apply in an SEC enforcement action generally, and it ruled that the doctrine could not be rejected at that stage as a matter of law. See SEC v. Kovzan, 807 F.Supp.2d 1024, 1035-36 (D. Kan. 2011). The Court has not yet addressed defendant's present argument that the doctrine cannot apply under Morgan.

The Court also rejects plaintiff's argument that proof of the element of scienter evolved over time here, as defendant allegedly learned additional facts relating to Mr. Fraser's expenses. Plaintiff has not shown, however, that changes in a defendant's level of scienter may satisfy the requirements of the continuing violation doctrine. With respect to any violation, plaintiff is required to prove that the requisite scienter existed at that time.

Plaintiff also suggests that conduct outside the limitations period may become actionable within the limitations period pursuant to a duty to correct previous misrepresentations and omissions. Plaintiff has not preserved in the pretrial order, however, any claim based on a violation of any duty to correct.[1]

Plaintiff has not explained why its claims based on particular misrepresentations and omissions occurring prior to 2006 would not be discretely actionable and thus outside the doctrine pursuant to Morgan. Plaintiff does note that it has brought claims pursuant to Rule 10b-5(a) and (c) based on the existence of a scheme to defraud, and it argues that a single misrepresentation may be part of a larger scheme to defraud. Defendant's only rejoinder is that plaintiff has not cited similar cases discussing the continuing violation doctrine in the civil context. The Court is not persuaded at this juncture, however, that the doctrine may not apply to an ongoing scheme that goes beyond single misrepresentations.

Accordingly, the Court concludes that plaintiff's claim for a civil penalty based on particular misrepresentations and omissions occurring prior to January 12, 2006, are time-barred, and defendant is awarded summary judgment on any such claim. The Court cannot rule at this time that plaintiff's "scheme" claims pursuant to Rule 10b-5(a) and (c) are time-barred, and both parties' motions are denied to that extent.

The parties have not specifically addressed this issue in the context of plaintiff's other claims not based on public filings. In ruling on defendant's motion to dismiss, the Court noted that plaintiff had alleged failures to maintain records and controls. In the absence of argument directed to those claims, the Court will not award summary judgment to either party on those claims on the basis of the statute of limitations. Plaintiff's claims based on misrepresentations to auditors, however, would seem to fall within Morgan 's discrete-claim analysis. Accordingly, defendant is also awarded summary judgment on those claims to the extent based on letters to the auditors prior to January 12, 2006. Plaintiff's motion for summary judgment on this defense is denied.

Finally, the parties agree that whether plaintiff's claims for other forms of relief (officer-director bar, disgorgement, injunctive relief) are subject to the statute of limitations depends on whether any such relief is punitive. See, e.g., United States v. Telluride Co., 146 F.3d 1241, 1244-48 (10th Cir. 1998). Accordingly, the Court will not rule on any limitations defense until it decides to grant any such relief, and both parties' motions are therefore denied to that extent.

IV. Fraud Claims

Plaintiff alleges that defendant violated Section 10(b) of the Exchange Act, 15

U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R. § 240.10b-5; and Section 17(a) of the Securities Act, 15 U.S.C. § 77g(a). These claims are based on plaintiff's allegations that defendant committed fraud by failing to disclose perquisites received by Mr. Fraser, NIC's CEO, and thus by under-reporting Mr. Fraser's income in filings with the SEC. See 17 C.F.R. § 229.402 ("Item 402") (requiring disclosure of CEO compensation, including "perquisites and other personal benefits"). Defendant has moved for summary judgment on these claims.

A. Commuting Expenses

In part, plaintiff bases its fraud allegations on defendant's failure to disclose as compensation NIC's payments for Mr. Fraser's "commuting" expenses to travel between his Wyoming home and NIC's Kansas headquarters. The SEC stated in 1978 that the use of a company plane for "commuting purposes" is a form of remuneration requiring disclosure. See SEC Release No. 5904, 1978 WL 170874, at *5 (Feb. 6, 1978) ("1978 Guidance"); see also SEC Release No. 8732A, 2006 WL 2589711, at *33 (Sept. 8, 2006) ("2006 Guidance") (company's provision of helicopter service for an executive to commute to work from home constitutes a perquisite that must be disclosed as income). The SEC, however, did not define "commuting" in its guidance to companies. Thus, the Court first considers the meaning of "commuting" in this context.

The parties have not identified any caselaw defining "commuting" in this context. In United States v. Tauferner, 407 F.2d 243 (10th Cir. 1969), the Tenth Circuit considered the issue of "commuting" as distinguished from "ordinary business expense", but it was in the income tax context, and the court did not define "commuting" other than to reject a party's attempt to distinguish his travel from that of the "ordinary suburban commuter." Thus, Tauferner is not particularly helpful.

The Court will therefore apply the ordinary definition of the term "commuting", which requires travel between work and home with some degree of frequency or regularity. See, e.g., Webster's Third New International Dictionary at 461 (1993) (defining "commute" to include "travel back and forth regularly or frequently" and including as an example the usage "commuting between London and New York"). The parties here argue about the degree to which Mr. Fraser's job, including oversight of the company, required his personal attendance in Kansas, and the amount of substantial work he actually performed at his home in Wyoming, vis-a-vis his work while traveling or in Kansas. Certainly, such factors would be relevant in considering how regular or frequent Mr. Fraser's trips to Kansas were.

The Court further concludes that the term "commuting" should also be interpreted in this context as relating to the SEC's more general rule from 1978 that benefits constitute remuneration unless "directly related" to the performance of the job. See 1978 Guidance at *4; see also 2006 Guidance at *32 ("An item is not a perquisite or personal benefit if it is integrally and directly related to the performance of the executive's duties."). Thus, the factual determination whether particular travel constitutes "commuting" could include consideration of the extent to which an executive's choice of residence is related to his job, and thus the extent to which the executive's choice of residence is a matter of mere personal convenience or desire. For instance, a jury might conclude that an executive's regular or frequent travel to his company's headquarters constituted commuting if his residence-even one with a home office at which he performed some work-was chosen far from the headquarters purely for personal reasons unrelated to the job. Thus, an executive who chooses to live abroad, for example, purely for personal reasons, who must regularly visit the headquarters in the United States should not be able to avoid making his travel expenses a perquisite merely by performing some work at home that could be performed anywhere. In the Court's view, such travel expenses would be incurred strictly because of the personal choice of the executive and thus are not directly related to the job performance. At the same time, however, if the executive's job may be performed elsewhere and his travel to the headquarters is not frequent or regular, such travel could not be said to be "commuting" in the ordinary sense of that word. The extent to which the trips to headquarters are required for specific purposes or constitute a significant part of the executive's job responsibilities would also be relevant to the inquiry.

Given that framework, the Court concludes that a question of fact remains, precluding summary judgment, concerning whether Mr. Fraser incurred "commuting" expenses in traveling between Wyoming and Kansas. Plaintiff's evidence includes evidence of the following: Mr. Fraser's home office in Wyoming was located in a condominium at a ski lodge, which the lease indicated would be used for residential purposes; NIC did not perform work in that particular locality in Wyoming; Mr. Fraser traveled to Kansas a substantial number of times throughout the period from 2002 to 2006; Mr. Fraser had an office at the headquarters in Kansas, and on occasion he identified his business address as being in Kansas; in 2006, Mr. Fraser testified that his regular schedule at that time was to come to Kansas from Sunday to Wednesday in two weeks of each month; NIC represented in public filings that Mr. Fraser's travels to Kansas were such that it was more economical for the company to pay for a home in Kansas for him that to pay for hotel rooms; and Mr. Fraser's work included general oversight of NIC. A jury could reasonably conclude from such evidence that the travel constituted "commuting".

The Court also rejects defendant's argument that he did not act with sufficient scienter as a matter of law, as his state of mind presents a question of fact for the jury. Certainly, a jury could reasonably infer that defendant was sufficiently aware of the extent and purposes of Mr. Fraser's travel to Kansas. Moreover, e-mail correspondence reveals that defendant was at least aware of an issue concerning the characterization of these travel expenses. In addition, defendant's responsibility for and relation to these particular disclosures presents a question for the jury. Defendant's motion for summary judgment is denied with respect to this particular category of expenses.

B. Residences

Defendant also seeks summary judgment on plaintiff's claims based on NIC's payments for Mr. Fraser's residences in Wyoming and Kansas City. The Court concludes that questions of fact remain for trial on these claims, ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.