Initial Decision of an SEC Administrative Law Judge

In the Matter of
Larry R. Crowder and John R. Powell

The Securities and Exchange Commission (Commission) instituted these proceedings on September 30, 2003, with an Order Instituting Proceedings (OIP), pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). The OIP alleges that on July 28, 1998, the Commission filed a Complaint in the United States District Court for the Central District of California against Respondents John R. Powell (Powell) and Larry R. Crowder (Crowder).¹ SEC v. Environmental Energy, Inc., Case No. 98-6060 CM (BQRx) (Civil Action). The OIP further alleges that on October 4, 2002, without admitting or denying the allegations in the Complaint, Powell consented to entry of a permanent injunction against him on all allegations in the Complaint, enjoining him from committing future violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. On October 27, 2003, Powell filed an Answer denying all of the allegations in the OIP.

On November 13, 2003, I granted the Division of Enforcement (Division) leave to file a motion for summary disposition against Powell. See 17 C.F.R. § 201.250(a). On November 5, 2003, the Division filed a motion for summary disposition (Motion).² On January 12, 2004, Powell filed an opposition to the Division's Motion (Opposition).³ On January 23, 2004, the Division filed a reply brief (Reply).⁴

STANDARD FOR SUMMARY DISPOSITION

Pursuant to Rule 250(a) of the Commission's Rules of Practice, 17 C.F.R. § 201.250(a), a party may make a motion for summary disposition as to any or all allegations in the OIP against a respondent. The facts of the pleadings of the party against whom the motion is made shall be taken as true, except as modified by stipulations or admissions made by that party, by uncontested affidavits, or by facts officially noted pursuant to Rule 323 of the Commission's Rules of Practice. According to Rule 250(b) of the Commission's Rules of Practice, the administrative law judge may grant the motion for summary disposition if there is no genuine issue of material fact and the party making the motion is entitled to summary disposition as a matter of law.

FINDINGS OF FACT

The material facts in this proceeding are not in dispute. On October 4, 2002, without admitting or denying the allegations in the Complaint, Powell consented to entry of a permanent injunction against him in the Civil Action. (Opposition, Decl. Ex. 4.) Thereafter, on October 16, 2002, the district court permanently enjoined Powell from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (Motion, Decl. Ex. 4 at 2-5.) Powell holds multiple securities licenses and is the President of Irvine, Inc. (Irvine), a registered broker-dealer with the Commission since August 12, 1993. (Motion, Decl. Exs. 1 at 5, 3 at 3.)

CONCLUSIONS OF LAW

Sections 15(b)(6) and 15(b)(4)(C) of the Exchange Act authorize the imposition of sanctions on any person associated with a broker or dealer, if it is in the public interest and the person has been permanently enjoined from engaging in or continuing any conduct in connection with the purchase or sale of any security. As the President of Irvine, Powell is an associated person of a broker or dealer as defined in Section 3(a)(18) of the Exchange Act. In addition, he was permanently enjoined from engaging in conduct in connection with the purchase or sale of any security. The only remaining question is whether sanctions are appropriate in the public interest.

SANCTIONS

In determining the sanctions that are in the public interest, I am guided by the following factors:

[T]he egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations.

Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd on other grounds, 450 U.S. 91 (1981) (citation omitted). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Leo Glassman, 46 S.E.C. 209, 211-12 (1975).

The Division requests that Powell be barred permanently from association with any broker or dealer. Powell argues against the imposition of a permanent bar. Instead, he recommends a bar from association with any broker or dealer with the right to reapply after three years. In support, he states that prior to entering into the consent injunction in the Civil Action, on October 4, 2002, the Division sent him three documents: (1) the Judgment of Permanent Injunction and Other Relief; (2) the Consent of Defendant John R. Powell to Judgment of Permanent Injunction and Other Relief; and (3) an Offer of Settlement. (Opposition at 3, 4.) Powell further states that the Division sent to him for his approval a draft order making findings and imposing sanctions in a latter administrative proceeding based on the underlying facts in the Civil Action. On October 7, 2002, Powell states that he returned to the Division an executed Offer of Settlement, and the Consent of Defendant John R. Powell to Judgment of Permanent Injunction and Other Relief. The Offer of Settlement and order making findings and imposing sanctions contain language that the remedial sanction imposed pursuant to Section 15(b)(6) of the Exchange Act will be a bar from association with any broker or dealer with the right to reapply after three years. (Opposition at 4, Decl. Exs. 2, 3.)

Powell argues that, but for the Division's agreement to a three-year bar from association with a broker or dealer in a latter administrative proceeding, he would not have agreed to a judgment of permanent injunction in the Civil Action. Now, as Powell states, "[s]urprisingly, and in apparent and blatant bad faith, the Enforcement Division has materially breached its agreement . . . ." (Opposition at 5.)

Powell mistakenly believes that the Offer of Settlement was an agreement between Powell and the Division. It clearly was not. Rule 240 of the Commission's Rules of Practice, 17 C.F.R. § 201.240, provides the appropriate procedures regarding a respondent's offer of settlement. Rule 240(c)(7) of the Commission's Rules of Practice states, "[f]inal acceptance of any offer of settlement will occur only upon the issuance of findings and an order by the Commission." (emphasis added.) As the Comment to Rule 240 provides, "[a]lthough the staff is authorized to participate in settlement negotiations under various circumstances, the Commission must approve every settlement." (emphasis added.) In this case, the Offer of Settlement executed by Powell was nothing more than an offer, which the Commission did not accept since it did not issue findings and an order. In addition, the mere fact that a draft of the order making findings and imposing sanctions contained similar language is also of no relevance to these proceedings. The Commission never executed it and it is nothing more than a draft. By signing the consent injunction, Powell took a calculated risk that the Commission would also accept his Offer of Settlement. He cannot now be heard to complain.

Powell further argues that in the Civil Action the Division failed to prove its case following a three-day hearing on the Commission's claims for disgorgement and civil penalties, which took place after he entered into the consent injunction. He argues that there is no factual basis for any of the allegations in the Complaint in the Civil Action. However, since Powell consented to entry of an injunction based on the allegations in the Civil Action, he may not question them now in an action based on that injunction.⁵ See Marshall E. Melton, 80 SEC Docket 2812, 2815 (July 25, 2003) (citing Samuel O. Forson, 53 S.E.C. 31, 32 (1997)). Based on the foregoing, I find that Powell's arguments are without merit.

Because consent injunctions do not include any findings of fact, the Commission has adopted the policy in administrative proceedings based on consent injunctions that the allegations in the underlying complaint be given considerable weight in assessing the public interest. Melton, 80 SEC Docket at 2814-15 (citing Seaboard Investment Advisers, Inc., 74 SEC Docket 201, 206 (Jan. 10, 2001); Forson, 53 S.E.C. at 32; Richard J. Puccio, 52 S.E.C. 1041, 1042 (1996); Charles Phillip Elliott, 50 S.E.C. 1273, 1277 (1992), aff'd, 36 F.3d 86 (11th Cir. 1994) (per curiam)). As the Commission stated, "[i]ndeed, the mere existence of an injunction may support revocation of registration or a bar from participation in the securities industry where the nature of the acts enjoined and the circumstances indicate that it is in the public interest." Melton, 80 SEC Docket at 2816.

The Complaint in the Civil Action contained the following allegations. Powell and Crowder owned and controlled Environmental Energy, Inc. (EEI), a Delaware corporation formed in 1993. Powell is an officer and director of EEI. EEI is the general partner of two oil and gas limited partnerships, Environmental Energy Partners I, Ltd. (EEP-1), and Environmental Energy Partners II, Ltd. (EEP-2). (Motion, Decl. Ex. 1 at 4, 5.)

EEI is the parent company of Environmental Holding Company, Inc. (EHCI), a Nevada corporation formed in 1996 with offices in Irvine, California. Powell is an officer and director of EHCI. EHCI is the general partner of Kentucky Gas Partners, Ltd. (KGP), an oil and gas limited partnership.⁶ (Motion, Decl. Ex. 1 at 4, 5, 7.)

EEI is also the parent company of Environmental Operating, Inc. (EOI), a Tennessee corporation formed in 1994, which is the general partner of Environmental Operating Partners, Ltd. (EOP), an oil and gas limited partnership. Crowder is the Chief Executive Officer, Chairman of the Board of Directors, and Secretary of EOI. Powell is the Vice President and a director of EOI. (Motion, Decl. Ex. 1 at 4, 5, 7.)

Irvine is a California corporation formed in 1993 and has been registered with the Commission as a broker-dealer since August 12, 1993. EEI and Powell each own fifty percent of Irvine. Powell is the President of Irvine. (Motion, Decl. Ex. 1 at 5.)

From October 1993 through 1997, Powell, Crowder, EEI, EOI, and EHCI, through Irvine, raised at least $15.7 million from more than 600 investors nationwide by selling unregistered securities in the limited partnerships.⁷ (Motion, Decl. Ex. 1 at 8, 13.) Powell and Crowder had exclusive control over the flow of funds in and out of the accounts of both the general partners and the limited partnerships. Each had exclusive check signing authority for the operating accounts of the general partners. Each had knowledge of how investor proceeds flowed from the various limited partnerships to EEI. (Motion, Decl. Ex. 1 at 8.)

Powell and Crowder reviewed the offering materials used to sell the limited partnerships interests before they were distributed to their sales force and to potential investors. The offering materials contained material misrepresentations regarding the purchase of oil and gas rights and failed to disclose the extent of massive profits that the general partners would make.⁸ By his conduct, Powell violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5. (Motion, Decl. Ex. 1 at 8, 14, 15.)

In addition, at the time the limited partnership interests were sold by Powell, Crowder, EEI, EOI, and Irvine, the securities were not registered with the Commission, no exemption applied, and they were sold through interstate commerce. By doing so, Powell violated Sections 5(a) and 5(c) of the Securities Act. (Motion, Decl. Ex. 1 at 13, 14.)

After reviewing the allegations contained within the Complaint, I conclude that it is in the public interest to bar Powell permanently from association with any broker or dealer. Powell's actions were egregious and by no means isolated. He flagrantly violated the registration and antifraud provisions of the securities laws. Powell, along with others, conducted an elaborate scheme that defrauded 600 investors of at least $15.7 million over a five-year period. I also find that Powell's conduct and role in the overall scheme demonstrate that he acted with a high degree of scienter. Powell has not given any assurances that he will not commit the same violations in the future and fails to admit any wrongdoing on his part. Finally, Powell's occupation and positions with EEI and the other related entities present opportunities for him to commit future violations. Given the seriousness of Powell's violations and his failure to recognize any wrongdoing, there is a strong likelihood that he will again violate the securities laws. I conclude that a permanent bar is the appropriate sanction to be imposed against Powell.⁹

ORDER

IT IS ORDERED that the Division of Enforcement's motion for summary disposition against Respondent John R. Powell is GRANTED; and

IT IS FURTHER ORDERED that, pursuant to Section 15(b)(6) of the Securities Exchange Act of 1934, Respondent John R. Powell is hereby BARRED from association with any broker or dealer.

This Order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R. § 201.360. Pursuant to that rule, a petition for review of this Initial Decision may be filed within twenty-one days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within twenty-one days after service of the Initial Decision upon it, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this Initial Decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the Initial Decision shall not become final as to that party.

Endnotes

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¹ On November 4, 2003, I entered an Order Making Findings and Imposing Remedial Sanction by Default Against Larry R. Crowder. Larry R. Crowder, Exchange Act Rel. No. 48,747, __ SEC Docket __ (Nov. 4, 2003).

² The Division's Motion contains a declaration of Division attorney John B. Bulgozdy (Bulgozdy), with the following five exhibits attached thereto: (1) the Complaint; (2) the OIP; (3) Powell's Answer in the Civil Action; (4) the permanent injunction entered against Powell in the Civil Action; and (5) the final pretrial conference order submitted and signed by the parties, but not the district court, in the Civil Action. Pursuant to Rule 323 of the Commission's Rules of Practice, 17 C.F.R. § 201.323, I have taken official notice of the following documents filed in the Civil Action: (1) the Complaint; (2) Powell's Answer; and (3) the permanent injunction. I will cite to Bulgozdy's declaration and exhibits attached thereto as (Motion, Decl. Ex. ___.).

³ Powell's Opposition contains a declaration of Thomas M. Brown, Esq. (Brown), with the following eight exhibits attached thereto: (1) two October 4, 2002, letters sent by Nicolas Morgan of the Pacific Regional Office of the Commission addressed to Brown; (2) a draft Order Instituting Administrative Proceedings pursuant to Section 15(b) of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions Against Larry R. Crowder and John R. Powell; (3) an Offer of Settlement of John R. Powell executed and notarized on October 7, 2002, (Offer of Settlement); (4) the Consent Of Defendant John R. Powell to Judgment of Permanent Injunction and Other Relief in the Civil Action; (5) the Commission's post trial brief in the Civil Action; (6) Powell's closing brief in the Civil Action; (7) Powell's reply to the Commission's post trial brief in the Civil Action; and (8) the transcripts of the trial held on January 14, 15, and 16, 2003, in the Civil Action. Pursuant to Rule 323 of the Commission's Rules of Practice, I have taken official notice of all the exhibits attached to Brown's declaration. I will cite to Brown's declaration and exhibits attached thereto as (Opposition, Decl. Ex. ___.).

⁴ The Division's Reply contains a declaration of Division attorney Molly M. White (White), with the following two exhibits attached thereto: (1) Findings of Fact and Conclusions of Law filed in the Civil Action on January 5, 2004; and (2) a March 4, 2003, letter written by Bulgozdy to Brown. Pursuant to Rule 323 of the Commission's Rules of Practice, I have taken official notice of the documents attached to White's Declaration. I will cite to White's declaration and exhibits attached thereto as (Reply, Decl. Ex. __.).

⁵ While reliance on the allegations in the Complaint in the Civil Action is sufficient for purposes of this proceeding, the district court did, in fact, enter an order on January 5, 2004, making findings of fact and conclusions of law, which found that Powell committed the violations alleged in the Complaint. (Reply, Decl. Ex. 1.)

⁶ The four oil and gas limited partnerships, EEP-1, EEP-2, EOP, and KGP, are cited herein collectively as "the limited partnerships."

⁷ Specifically, Powell and others through Irvine raised approximately $5.6 million for EOP, $2.8 million for KGP, $3 million for EEP-1, and $4.3 million for EEP-2. (Motion, Decl. Ex. 1 at 7.)

⁸ Among other things, the EEP-1 offering materials failed to disclose that any acquisitions of wells would be purchased from its general partner, EEI, or that EEI would make a profit from the sale of such rights to EEP-1. In fact, EEP-1 purchased substantially all of its oil and gas rights from EEI and EEI made an undisclosed profit of more that $1.3 million from the sale of such rights to EEP-1. The EEP-2 offering materials stated that one of the oil and gas rights would be purchased from EEI and that EEI would make a profit from the sale. In fact, EEP-2 purchased all of its oil and gas rights from EEI, and EEI made a profit of over $1.5 million from the sale of such rights to EEP-2. (Motion, Decl. Ex. 1 at 9.)

⁹ In three recent cases, the Commission discussed the standard that it uses for review of petitions for relief vel non from administrative bar orders. Ciro Cozzolino, Exchange Act Rel. No. 49,001, __ SEC Docket __ (Dec. 29, 2003); Stephen S. Wien, Exchange Act Rel. No. 49,000, __ SEC Docket __ (Dec. 29, 2003); Edward I. Frankel, Exchange Act Rel. No. 49,002, __ SEC Docket __ (Dec. 29, 2003).

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