Summary
In Inorganic Recycling Corp., the court entered "disgorgement in the amount of $177,000 plus $115,769 in prejudgment interest" against the defendant who ultimately received no civil penalty.
Summary of this case from Sec. & Exch. Comm'n v. Projaris Mgmt., LLCOpinion
No: 99 Civ. 10159 (GEL)
August 22, 2002
Christopher M. Castano, Securities and Exchange Commission. New York, New York (Wayne M. Carlin, Regional Director; Barry W. Rashkover, George N. Stepaniuk, Elisabeth L. Goot, of counsel) for plaintiff Securities and Exchange Commission.
David J. Levenson, Troutman Sanders LLP, McLean, Virginia, for defendant Michele Caridi.
Charles E. Clayman, Clayman Rosenberg, New York, New York, for defendant Daniel J. Moore.
OPINION AND ORDER
The Securities and Exchange Commission ("SEC") brought this action charging the various defendants with engaging in a fraudulent scheme to offer unregistered securities, to divert the proceeds of the offering to the personal use of the defendants, and to make material false representations in the course of selling the securities, in violation of sections 5(a), 5(c), and 17(a) of the Securities Act, 15 U.S.C. § 77e(a), 77e(c), 77q(a), and section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Without admitting or denying the Commission's allegations against them, defendants Michele Caridi and Daniel Moore agreed to the entry of Partial Final Consent Judgments ("Judgments") enjoining them from future violations of those statutes and from ever again acting as officers or directors of a public company. The Judgments also required defendants to "disgorge [their] illgotten gains from the conduct alleged in the Complaint, plus prejudgment interest.., in an amount to be determined by the parties or, failing that, by the Court," and to "pay civil penalties as a result of the conduct alleged in the Complaint in an amount to be determined by the parties or, failing that, by the Court."
The parties having failed to agree on the amounts of disgorgement and civil penalties to be paid, the matter has now been submitted to the Court for resolution, by means of a motion for summary judgment brought by the SEC.
BACKGROUND
The facts relating to liability are essentially undisputed; indeed, the defendants' agreements with the SEC prohibit them from denying the allegations in the Complaint. In brief summary, Caridi and Moore participated in a scheme masterminded by defendant Edward Halloran, a notorious recidivist felon whom Caridi later married, to defraud investors by offering unregistered securities in Inorganic Recycling Corporation, the proceeds of which sales were largely diverted to the personal use of the defendants, primarily Halloran and Caridi. Essentially, the offering was a scam; of the $2.5 million raised, purportedly for working capital for Inorganic, defendants diverted at least $1.6 million from corporate to personal use. Indeed, both Moore and Caridi pled guilty to felony charges in the courts of New York State resulting from the scheme.
Defendants do not contest their liability, and acknowledge that they have consented to the entry of disgorgement and civil penalty orders against them. They contest only the amounts. The SEC seeks disgorgement from Caridi in the amount of $1,010,764 plus interest, and from Moore in the amount of $177,000 plus interest, as well as civil penalties from both in unspecified amounts. Caridi argues that the SEC has failed to prove the amount of ill-gotten gains it claims, that pre-judgment interest should not be required in view of the SEC's delay in calculating the amount of disgorgement, and that a civil penalty is inappropriate. (Caridi Mem. at 1-3.) Moore cites his prompt admission of responsibility, cooperation with the New York County District Attorney's Office, and "insolvent financial condition" in asking that disgorgement be "waived" and that the Court not order any civil penalty. (Moore Mem. at 1).
DISCUSSION
I. The Applicable Law
Both Caridi and Moore having admitted to fraud in their state court guilty pleas and agreed in this action to the propriety of a disgorgement order and civil penalties, the only issue between the parties is the amount of the remedies that should be awarded.
Disgorgement is an appropriate equitable remedy for violations of the securities laws. See, e.g., SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) ("[disgorgement] `is a method of forcing a defendant to give up the amount by which he was unjustly enriched'") (quoting SEC v. Commonwealth Chem. Sec.. Inc., 574 F.2d 90. 102 (2d Cir. 1978)). The purpose of disgorgement is to "deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws." SEC v. First City Fin. Corp.. Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989). The principal issue, therefore, in determining the amount of disgorgement to be ordered is the amount of gain received by each defendant from the fraud. Because the remedy is equitable, and because precision of calculation will often be impossible, Elkind v. Liggett Myers. Inc., 635 F.2d 156, 171 (2d Cir. 1980), "disgorgement need only be a reasonable approximation of profits causally connected to the violation." First City Fin., 890 F.2d at 1231. Where the fraud is "pervasive," courts will order all profits stemming from the scheme to be disgorged. Commodity Futures Trading Comm'n v. British Am. Commodity Options Corp., 788 F.2d 92, 93-94 (2d Cir. 1986).
Although the SEC bears the ultimate burden of persuasion that its disgorgement figure approximates the amount of unjust enrichment, once the SEC has made a reasonable demonstration of that amount, the burden shifts to the defendant to show that the proposal is not a reasonable approximation, First City Fin., 890 F.2d at 1232, by "demonstrating that he received less than the full amount allegedly misappropriated and sought to be disgorged." SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987) (citation omitted). In particular, defendants must bear the risk of any uncertainty in the amount, if their conduct caused the uncertainty, as will often be the case, since fraudsters rarely keep accurate records of what became of the proceeds of their crimes. First City Fin., 890 F.2d at 1232. Financial hardship does not preclude imposition of an order of disgorgement. SEC v. Grossman, 87 Civ. 1031, 1997 WL 231167, at *10 (S.D.N.Y. May 6, 1997). The fact that swindlers have run through the proceeds of the fraud and are now insolvent should not prevent the imposition of a remedy, since defendants may "subsequently acquire the means to satisfy the judgment." Id.
Section 21(d)(3)(B)(iii) of the Exchange Act, 15 U.S.C. § 78u(d)(3)(B)(iii), provides for the imposition of civil penalties, for any violation of the Act involving "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" that "resulted in... or created a significant risk of substantial losses," up to a maximum (for individual defendants) of the greater of $100,000 for each violation or the gross pecuniary gain from the violation.
II. The Law Applied
A. Caridi
Caridi's arguments in opposition to the disgorgement sought are completely without merit. Having pleaded guilty to grand larceny in connection with the very acts charged in this Complaint, and agreed not to contest the Complaint's allegations and to the appropriateness of a disgorgement remedy, she cannot now deny that she engaged in a knowing and intentional fraud that resulted in substantial losses to investors.
The amount of disgorgement sought is amply supported by an analysis of documentary evidence submitted by the SEC, virtually all of which comes from the accounting provided by Caridi herself. These records demonstrate that a total of $1,135,764 was transferred from Inorganic and its investors to Caridi's personal checking accounts and to other accounts that the evidence proves that Caridi controlled. (Baier Decl. Ex. 1, 5-7.) Caridi's objections to this calculation ignore the substantial evidence that Caridi controlled the MC Equities account and the other related entities. She also mistakenly argue that the summary table charges her with payments to Inorganic Recycling, Inorganic Services Corp., and co-defendant Furman, when in fact the table reflects that those payments have been deducted from the proceeds charged to Caridi. (Baier Decl. Ex. 1.) Caridi's objection to the SEC's claim that these proceeds went to support her "lavish" life-style is not well-taken. Putting aside quibbles about the choice of adjective, Caridi's accounting demonstrates that she spent approximately $1,283,500 on personal expenses during the period in question, accounting for the bulk of the proceeds attributed to her by the SEC. (Baier Decl. Ex. 1, 5-8.) Particularly in light of the fact that the Inorganic stock offering was completely pervaded with fraud, the evidentiary record thus fully supports the SEC's contention that $1,135,764 is a conservative estimate of Caridi's gains from the fraudulent scheme.
In light of the detailed documentation of the SEC's position, the burden clearly shifts to Caridi to demonstrate that the amount sought is not a "reasonable approximation" of the gain to be disgorged. First City Fin., 890 F.2d at 1232. Caridi herself offers no evidence casting the slightest doubt on any of the documents or calculations made by the SEC, and submits no calculation of her own of the amount of gain that should be disgorged. Her general assertions that the SEC's accounting overstates her gain do not satisfy her burden. In particular, her arguments that Inorganic had legitimate expenses and business operations cannot defeat the showing that over $1,000,000 in proceeds from Inorganic's stock offering went to her accounts and then went out for personal expenses, particularly in the absence of any evidence at all that any money from Caridi or the associated accounts (beyond relatively token amounts for which the SEC calculation already credits her) went back into the business.
Caridi's objection to the award of pre-judgment interest fares no better. First, the amount of time taken by the SEC to bring its motion was not unreasonable. Caridi submitted voluminous records to the SEC in April 2001, which had to be analyzed before the SEC could act. These records were destroyed in the attack on the World Trade Center on September 11, 2001, and the SEC had to spend months reconstructing the records. The motion was finally filed just under a year from the date Caridi's records were provided. Second, the Second Circuit has upheld the award of prejudgment interest the case of a twelve-year litigation delay, ruling that "Even if defendants were correct that the present litigation was protracted through some fault of the SEC, defendants plainly had the use of their unlawful profits for the entire period," and that the award was proper "[g]iven the remedial purpose of the statute, the goal of depriving culpable defendants of their unlawful gains, and the lack of any unfairness to defendants." SEC v. First Jersey Securities. Inc., 101 F.3d 1450, 1477 (2d Cir. 1996). See also SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998) (same ruling; nine-year delay).
Finally, Caridi objects to the imposition of a civil penalty, arguing that the facts do not merit it and that she is unable to pay any penalty assessed. The former contention is frivolous. The uncontested allegations of the Complaint detail a reprehensible scheme in which Caridi played a principal part and from which she reaped huge benefits. Even crediting, for the sake of argument, Caridi's apparent (and erroneous) contention that she can only be held accountable for such guilt as she has affirmatively acknowledged, she not only has consented to the propriety of a civil penalty by entry of the Judgment, but has also pleaded guilty to grand larceny in the scheme, admitting to participation in the theft of at least $50,000 from investors. (Plea allocution, Castano Aff. Ex. E at 6.) These facts alone warrant imposition of a "third tier" civil penalty under section 21(d)(3)(B)(iii), satisfying as it does the requirement that the violations involved fraud and resulted in substantial losses. Caridi presents no evidence of extenuating circumstances, apart from her asserted inability to pay. Disgorgement alone is an insufficient remedy, since there is little deterrent in a rule that allows a violator to keep the profits if she is not detected, and requires only a return of ill-gotten gains if she is caught. Here, in view of the seriousness of the fraud, the significant role played by Caridi, and the extent of the benefits she received from the violation, a fine approximating the maximum would be appropriate. However, in view of the size of the other financial components of the judgment, and the unlikelihood of any recovery, and taking all the facts and circumstances of the case into account, a penalty of only $100,000 is imposed.
Caridi's claims of poverty cannot defeat the imposition of a disgorgement order or civil penalty. Perhaps, if Caridi is indeed impecunious, the SEC will eventually prove unable to collect on any judgment. But to withhold the remedy of disgorgement or penalty simply because a swindler claims that she has already spent all the loot and cannot pay would not serve the purposes of the securities laws. An order of disgorgement and civil penalty are both proper remedies in this case; the future will tell whether the SEC can find assets to levy upon. To the extent the Court has discretion to award less than the full amount of disgorgement because of the defendant's inability to pay, the Court declines to do so in this case, in view of the seriousness of the fraud involved and the importance of requiring disgorgement of ill-gotten gains if there is any possibility that the order can be enforced at some point. As noted above, the Court has already taken defendant's financial situation into account in setting the amount of the civil penalty substantially lower than would otherwise be appropriate.
Accordingly, the motion of the SEC is granted, and judgment will enter against Caridi for disgorgement in the amount of $1,010,764 ($1,135,764 less $125,000 previously paid in restitution in connection with her state conviction), plus $487,535 in prejudgment interest; and for a civil penalty in the amount of $100,000.
B. Moore
Moore makes more modest objections to the SEC's claims. Fully acknowledging his accountability for the fraud, and not challenging the SEC's showing that he received $177,000 in ill-gotten gains, he invokes the Court's equitable powers to fashion a disgorgement remedy, arguing that he is insolvent and should not be ordered to disgorge. For the reasons stated above, the Court declines to order less than the full amount of disgorgement and prejudgment interest. As with Caridi, if the SEC proves unable to collect the award, so be it.
With respect to the civil penalty, however, Moore stands in a different position than Caridi. He was a much smaller beneficiary of the fraudulent scheme, as evidenced by the comparative amounts of disgorgement in question. Moreover, he has demonstrated substantial and meaningful contrition by his prompt and significant cooperation in the criminal investigation conducted by the New York County District Attorney's Office. Such cooperation is important to the investigation, prosecution and punishment of frauds of this kind, and should be rewarded. Taking this cooperation into account, the Court concludes that the appropriate civil penalty in Moore's case is zero.
Accordingly, the motion of the SEC is granted, to the extent that judgment will enter against Moore for disgorgement in the amount of $177,000 plus $115,769 in prejudgment interest.
CONCLUSION
The motion of the SEC is granted. Judgment will enter against Caridi for disgorgement in the amount of $1,010,764 ($1,135,764 less $125,000 previously paid in restitution in connection with her state conviction), plus $487,535 in prejudgment interest; and for a civil penalty in the amount of $100,000. Judgment will enter against Moore for disgorgement in the amount of $177,000 plus $115,769 in prejudgment interest.