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Phillips v. Department of Commerce

Court of Appeals of Utah

May 18, 2017

Jack Phillips, Petitioner,
Department of Commerce, Division of Securities, Respondent.

         Original Proceeding in this Court

          Maria E. Windham, Beth J. Ranschau, and Whitney Hulet Krogue, Attorneys for Petitioner

          Sean D. Reyes, Brent A. Burnett, and Thomas M. Melton, Attorneys for Respondent

          Judge Stephen L. Roth authored this Opinion, in which Judges Kate A. Toomey and David N. Mortensen concurred.

          ROTH, Judge.

         ¶1 Petitioner Jack Phillips seeks review of a state agency's assessment against him of $413, 750 in civil penalties for securities fraud. We set aside the penalty and return the case to the agency to reconsider the fine amount.


         ¶2 In late 2011, the Division of Securities (the Division) filed a Notice of Agency Action and Order to Show Cause against Jack Phillips. The Division alleged that Phillips violated the Utah Uniform Securities Act (the Act) by making false statements in connection with the sale of securities to investors on several occasions.

         ¶3 After a formal administrative adjudication, the Utah Securities Commission (the Commission) determined that Phillips committed four violations of the Act, once by soliciting Utah residents to invest in a multi-level marketing opportunity and three times by soliciting residents to invest in a deal to import emeralds from Brazil. The Commission ordered Phillips "to pay to the Utah Division of Securities a civil penalty in the amount of $413, 750, " including "$315, 000 in investor losses, " "$78, 750 as a fine for violations of [the Act], " and "$25, 000 in investigative costs."[1]

         ¶4 Phillips requested agency review from the Department of Commerce. The Department adopted the substance of the Commission's decision but remanded for the "limited purpose of obtaining a more detailed Order that discusses the Commission's thought process and analysis with respect to" the regulatory guidelines used to determine the amount of the penalty. On remand, the Commission amended two paragraphs of its original decision to provide additional explanation for its penalty assessment. One of those paragraphs is central to this review and reads in part as follows:

In this case, Respondent [Phillips] developed very personal, trusting relationships with the [victims] over time. On the basis of these relationships of trust and confidence, and through repeated and persistent solicitation, Respondent convinced the [victims] that he was favoring them with an exclusive opportunity not otherwise available. This predatory behavior in taking advantage of persons with whom he had a close, personal relationship constitutes affinity fraud by Respondent, which is a particularly serious and repellent form of deceit and must be severely sanctioned in order for the sanction to act as a deterrent. In addition, Respondent has not cooperated with the Division, either to locate [a co-defendant] or in any other manner. In these circumstances, the total investor losses of $315, 000 directly caused by Respondent's actions are appropriately included in the total fine amount, as are the Division's claimed investigative costs of $25, 000. In accordance with precedent, the Commission also finds it appropriate to assess, as a penalty for violations of the chapter, a fine calculated at 25% of the total investor losses.

         (Footnote omitted.)

         ¶5 After the Commission entered its amended order, Phillips again sought agency review from the Department of Commerce, claiming that the amendments were an impermissible post hoc rationalization for the civil penalty. The Department of Commerce rejected Phillips' contention and adopted the bulk of the Commission's amended decision.[2] Phillips petitioned this court to review the Department's decision.


         ¶6 This court is empowered to conduct "judicial review of final agency action." Utah Code Ann. § 63G-4-401(1) (LexisNexis 2014). Here, the final agency action for our review is the Department of Commerce's Second Findings of Fact, Conclusions of Law, and Order on Review. However, the Department's order simply adopted the Commission's amended order as discussed above. Therefore, our review focuses on the substance of the Commission's decision.

         ¶7 In his petition, "Phillips challenges only the monetary penalty the Commission imposed." He raises multiple issues under the Utah Administrative Procedures Act that focus on various ways in which the Commission either violated the federal constitution, acted beyond its statutory jurisdiction, or erroneously applied the law. See id. § 63G-4-403(4)(a), (b), (d), (e). "Those arguments present questions of law subject to review for correctness." Hughes Gen. Contractors, Inc. v. Labor Comm'n, 2014 UT 3, ¶ 6, 322 P.3d 712. One of Phillips' arguments also involves the Commission's interpretation and application of a regulation. "We review administrative rules in the same manner as statutes, focusing first on the plain language of the rule. In our inquiry, we seek to give effect to the intent of the body that promulgated the rule." Utah Chapter of Sierra Club v. Air Quality Board, 2009 UT 76, ¶ 13, 226 P.3d 719 (citations and internal quotation marks omitted).


         ¶8 Phillips challenges the monetary penalty assessed against him by the Commission. Specifically, he argues that (1) part of the Commission's enforcement action was time-barred, (2) the penalty exceeded the Commission's statutory authority, and (3) the penalty was unconstitutionally excessive under the Eighth Amendment to the United States Constitution. At bottom, these arguments rest on the scope of the enforcement powers available to the Commission under the Act, and we therefore begin by describing the statutory framework controlling his challenge before addressing Phillips' arguments.

         ¶9 "Under the Utah Uniform Securities Act the Division has three avenues for enforcing the provisions of the Act: equitable actions, administrative proceedings, and criminal actions." Mack v. Department of Commerce, 2009 UT 47, ¶ 27, 221 P.3d 194. This case involves a proceeding along the administrative path and the criminal avenue is not at issue. And while the statutory provision allowing an equitable enforcement action in district court is not directly at issue, that provision does play a part in our resolution of both the statute of limitation and the fine issues Phillips raises.

         ¶10 At the time in question, the Act set forth two parallel avenues for civil enforcement.[3] One-the equitable action avenue-allowed the Division to bring a judicial action to enforce the Act in district court. Utah Code Ann. § 61-1-20(2) (LexisNexis 2011). Under this option, the district court was authorized to provide injunctive relief, order restitution of victim losses and disgorgement of gains from the unlawful activity, and impose fines of not more than $10, 000 per violation, among other remedies. Id. § 61-1-20(2)(b) (outlining the court's power). Alternatively, the second avenue for civil enforcement- the one the Division chose here-allowed it to enforce the Act administratively by bringing a case before the Commission. Id. § 61-1-20(1).

         ¶11 With the statutory framework in mind, we turn to Phillips' arguments. We begin by addressing whether the Division was time-barred from enforcing one of the violations against Phillips. We then examine the Commission's civil penalty assessment in light of its statutory authority. Finally, we address the Eighth Amendment's limitation on excessive fines.

         I. Statute of Limitation

         ¶12 One of the four violations of the Act related to Phillips' solicitation of investments in a multi-level marketing scheme in July 2006. Phillips argues that the Division was time-barred from seeking enforcement in connection with that particular transaction, but concedes that enforcement of the other three violations was timely. In support, he urges us to apply the five-year statute of limitation found in the 2011 version of the Act. In this case, there is no dispute that the Division commenced its enforcement proceeding five years and six months after the violation. The only question for us on review is therefore whether the Act's limitation period applied to the Division's enforcement action.

         ¶13 The State argues that the statute of limitation does not apply, and we agree. The statute provides, "No indictment or information may be returned or civil complaint filed under [the Act] more than five years after the alleged violation." Utah Code Ann. § 61-1-21.1(1) (LexisNexis 2011). The limitation clearly applied to criminal prosecutions because it expressly discussed indictments and informations, which are the first step in a criminal prosecution. See Utah Const. art. I, § 13 ("Offenses . . . shall be prosecuted by information . . . or by indictment .....). Similarly, the Act's limitation period expressly applied to civil actions, which are initiated by civil complaint. Compare Utah R. Civ. P. 3(a) ("A civil action is commenced (1) by filing a ...

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