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ruling that the defendant's guilty plea to a Section 10(b) and Rule 10b-5 served as an admission all of the elements of SEC's Section 17 claim
Summary of this case from SECURITIES AND EXCHANGE COMMISSION v. ROOROpinion
98 Civ. 6153 (SWK)
September 4, 2001
MEMORANDUM OPINION AND ORDER
In this action alleging violations of the federal securities laws, plaintiff Securities and Exchange Commission ("S.E.C.") moves for partial summary judgment against Douglas G. McCaskey ("McCaskey") pursuant to Federal Rule of Civil Procedure 56(a). For the reasons set forth below, the S.E.C.'s motion is granted in part.
BACKGROUND
The S.E.C. filed the complaint in the instant case on September 1, 1998 alleging that from in or about May 1994 through December 1994, McCaskey violated the anti-fraud provisions of the federal securities laws in connection with a scheme to manipulate the market for Marcorp, Inc. ("Marcorp") common stock.
In December 1993, Marcop, Inc. purchased exclusive world-wide licensing rights to low-voltage electron beam technology being developed by American International Technologies, Inc. ("AIT"). Under the terms of the licensing agreement with AIT, Marcorp agreed to make certain installment payments to AIT. In or about 1994, Marcorp attempted to raise capital to make the installment payments to AIT by selling shares of its unregistered stock pursuant to Regulation S of the Securities Act. In March 1994, certain of the Regulation stock purchasers began to sell their Marcorp shares back into the United States market and the price of the Marcorp shares began to decline. From in or about May 1994 through on or about December 7, 1994, the S.E.C. maintains that McCaskey bought and sold Marcorp stock through accounts he controlled at various broker dealers located in the United States and Canada. During this period, McCaskey allegedly traded shares of Marcorp stock to and from his accounts through "washed sales", "matched orders" and other transactions designed to create the illusion of active trading, and in this fashion artificially affected the price of Marcorp shares. On April 13, 2000, the United States Attorney for the District of Connecticut moved. to intervene and stay this action pending a criminal investigation. On October 13, 2000, McCaskey pleaded guilty to a one count information in the parallel criminal case and was adjudged guilty of violating Section 10(b) of the Securities Exchanged Act of 1934 ("Section 10(b)") and Rule 10b-5 promulgated thereunder ("Rule 10b-5").See United States v. McCaskey, 3:00 CR 219 (SRU) (D. Conn). On April 30, 2001 McCaskey was sentenced to five years probation, a thirty thousand dollar fine and a one hundred dollar special assessment.
Wash sales are defined as "transactions having no change in beneficial ownership," Ernst Ernst v. Hochfelder, 425 U.S. 185, 205 n. 25 (1976), and matched orders are defined as "orders for the purchase/sale of a security that are entered with the knowledge that orders of substantially the same size, at substantially the same time and price, have been or will be entered by the same or different persons for the sale/purchase of such security." Id.
On April 18, 2001 the S.E.C. moved for partial summary judgment on the violations charged in the Second Claim for Relief of their complaint which is based upon violations of Section 10(b), Rule 10b-5, and Section 17(a) of the Securities Act of 1933 ("Section 17(a)"). Based upon the alleged violations, the S.E.C. seeks an injunction against future statutory violations, an order enjoining McCaskey from serving as an officer or director of a public company, disgorgement of illegal profits, and civil monetary penalties.
DISCUSSION
I. Standard of Law
Rule 56(a) of the Federal Rules of Civil Procedure provides that summary judgment shall be granted if the pleadings, depositions, interrogatories and affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. See Massachusetts Mutual Life Ins. Co. v. Milistein, 129 F.3d 688, 1997 WL 602726, at 2 (2d Cir. 1997). See also Anderson v. Liberty Lobby Inc., 477 U.S. 242, 247-48 (1986).
The moving party must initially satisfy a burden of demonstrating the absence of a genuine issue of material fact, which can be done merely by pointing to an absence of evidence in support of the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). The nonmoving party must then come forward with "specific facts showing that there is a genuine issue for trial," Fed.R.Civ.P. 56(e), by "a showing sufficient to establish the existence of [every] element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. at 322.
The court "must resolve all ambiguities and draw all reasonable inferences in favor of the party defending against the motion." Eastwav Constr. Corp. v. New York, 762 F.2d 243, 249 (2d Cir. 1985); see also Adickes v. S.H. Kress Co., 398 U.S. 144, 158-59 (1970); Hathaway v. Coughlin, 841 F.2d 48, 50 (2d Cir. 1988); Knight v. United States Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), cert. denied, 480 U.S. 932 (1987). But the Court is to inquire whether "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party," Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 249 (1986), and to grant summary judgment where the nonmovant's evidence is merely colorable, conclusory, speculative or not significantly probative. See id. at 249-50; Knight v. United States Fire Ins. Co., 804 F.2d at 12, 15; Argus Inc. v. Eastman Kodak Co., 801 F.2d 38, 45 (2d Cir. 1986),cert. denied, 479 U.S. 1088 (1987). To determine whether the nonmoving party has met his or her burden, the court must focus on both the materiality and the genuineness of the factual issues raised by the nonmovant. As to materiality, "it is the substantive law's identification of which facts are critical and which facts are irrelevant that governs."Anderson v. Liberty Lobby, Inc., 477 U.S. at 248. A dispute over irrelevant or unnecessary facts will not preclude summary judgment, see id but the presence of unresolved factual issues that are material to the outcome of the litigation mandates a denial of the summary judgment motion. See, e.g., Knight v. United States Fire Ins. Co., 804 F.2d at 11-12. In sum, if the court determines that "the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial."' Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (quoting First Nat'l Bank of Arizona v. Cities Serv. Co., 391 U.S. 253, 289 (1969)
II. Violations of Federal Securities Laws
McCaskey was convicted by guilty plea on securities fraud charges related to the same activities at issue here. All questions of fact material to and underlying McCaskey's criminal conviction, as established during the plea allocution, bind McCaskey in this subsequent civil action. See e.g., Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 42-43, 44 (2d Cir. 1986) (federal criminal convictions have collateral estoppel effect in federal civil actions, using a four part test: "(1) the issues in both proceedings must be identical, (2) the issue in the prior proceeding must have been actually litigated and actually decided, (3) there must have been a full and fair opportunity for litigation in the prior proceeding, and (4) the issue previously litigated must have been necessary to support a valid and final judgment on the merits."); United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978) (holding that "[i]t is well-settled that a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel . . . in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case.");S.E.C. v. Grossman, 887 F. Supp. 649, 659. (S.D.N.Y. 1995) (criminal conviction given collateral estoppel effect in subsequent civil S.E.C. action); United States v. United States Currency in the Amount of One Hundred Forty-Five Thousand, One Hundred Thirty-Nine Dollars, 803 F. Supp. 592, 597-98 (E.D.N.Y. 1992) (collateral estoppel given to guilty plea from criminal case in subsequent civil proceeding that was "foreseeable at the time of the criminal action"); S.E.C. v. Dimensional Entertainment Corp., 493 F. Supp. 1270, 1274-76 (S.D.N.Y. 1980) (summary judgment in S.E.C. civil action based on defendant's criminal conviction that "establish[ed] the violations of the securities laws alleged" in the civil case). The fact that the S.E.C. was not a party to the prior criminal case does not alter this conclusion because "[m]utuality is no longer an absolute requirement under the law," S.E.C. v. Morarch Funding Corp., 85 Civ. 7072, 1996 WL 348209, at 3 (S.D.N.Y.), and because "the United States Attorney's Office and the S.E.C. have been considered to be the same party in that both represent the United States." Id. Moreover, the fact that McCaskey's conviction was obtained though a guilty plea as opposed to a jury verdict does not lessen the resulting collateral-estoppel consequences. See id. Whether established at plea allocution or at trial, all facts material to the conviction bind the criminal defendant in later civil litigation. See id.
With respect to the S.E.C.'s claim involving Section 10(b) and Rule 10-5, the fact that McCaskey allocuted to these very offenses in his criminal prosecution has a binding estoppel effect against him in the instant civil action. The factual background set forth by McCaskey during his allocution describes his involvement in the same activities alleged by the S.E.C. in the instant action. McCaskey admitted that he "was trying to stabilize the stock and keep it from going down and then in order to do that I was moving the stock from one brokerage account to another. . ." Plea Allocution at 36. In his opposition to the instant motion McCaskey further concedes that his "trading activities did have an impact on the value of Marcorp stock," McCaskey Declaration in Opposition to the S.E.C.'s Motion for Partial Summary Judgment dated May 24, 2001 ("McCaskey Decl.") at 15, and that he commenced buying and selling Marcorp shares" in order "[t]o stabilize the price of its stock." Id. at 8. Moreover, during his plea allocution McCaskey stated that he understood that by pleading guilty he could preclude "certain aspects or perhaps completely preclude a defense of the civil action in the Southern District," and that his "admissions of guilty . . . can . . . and probably will be used against [him] in the civil action to prove [his] liability in [the] civil action." Plea Allocution at 29. With these details thus established, and with the Connecticut district court's acceptance of McCaskey's plea as a knowing. and voluntary admission of guilt, see Plea Allocution at 38, McCaskey is now precluded from denying the facts underlying his criminal conviction. The S.E.C's motion for summary judgment on the claims relating to McCaskey's Section 10(b) and Rule 10b-5 violations is therefore granted.
The S.E.C.'s Second Claim for Relief also charges McCaskey with a violation of Section 17(a); a violation that McCaskey was not charged with in the parallel criminal case, and did not plead guilty to. Section 17(a) of the Securities Act is a general prohibition against fraud in the offer or sale of securities, using the mails or the instruments of interstate commerce. See 15 U.S.C. § 77q(a). The Second Circuit has held that "essentially the same elements are required under Section 17(a)(1) in connection with the offer or sale of a security," as are required for a violation of Section 10(b) and Rule 10b-5. including scienter. S.E.C. v. Monarch Funding Group, 192 F.3d at 308. Because McCaskey's guilty plea to Section 10(b) and Rule 10b-5 served as "an admission of all the elements of [the] formal criminal charge," LaMagna v. United States, 646 F.2d 775 (2d Cir. 1981), the elements of Section 17(a) have also been met. Moreover, during McCaskey's allocution he admitted that he bought and sold Marcorp stock through various activities including "wash sales, matched orders and other transactions designed to create the illusion of active trading, and in this fashion artificially effect the price of the Marcorp shares and create the illusion there was a liquid market for Marcorp stock." Allocution at 33. McCaskey also recognized that he used the means and instrumentalities of interstate commerce in carrying out his scheme. See Allocution at 33. Thus, although not explicitly pleading to a Section 17(a) violation, McCaskey nonetheless provided the factual foundation to support such a claim. These facts were material to his conviction on related securities charges. McCaskey is therefore estopped from denying these allocuted facts, which here form the basis for a Section 17(a) civil violation. Accordingly, summary judgment is granted on the S.E.C.'s Section 17(a) claim.
In opposing the S.E.C.'s summary judgment motion, McCaskey argues that "nothing in the record . . . supports that the element of loss causation is met," Def.'s Memo. of Law at 19, and that "the issue of whether investors relied upon anything said or done by McCaskey . . . was never addressed in the [criminal] action and may not by [sic] resolved by the mere implications of a guilty plea." Id. at 24. Unlike private plaintiffs, however, the S.E.C. is not required to prove reliance or injury in order to enjoin violations of the securities laws. See S.E.C. v. Norton, No. 95 Civ. 4451, 1997 WL 611556, at 10 (S.D.N.Y. Oct. 3, 1997) ; see also S.E.C. v. Todt, No. 98 Civ. 3980, 2000 WL 223836, at 9 (S.D.N.Y. Feb. 25, 2000) (holding "the S.E.C. need not prove actual reliance in an enforcement action"); S.E.C. v. Lum's, 365 F. Supp. 1046, 1059 (S.D.N.Y. 1973) (stating that "[i]n an enforcement proceeding, . . . no proof of reliance is necessary, and the only causal nexus required is the statutory connection with the purchase or sale of a security.").
Accordingly, by virtue of the collateral estoppel effect from McCaskey's criminal conviction of securities fraud in violation of Section 10(b) and Rule 10b-5, and McCaskey's admissions in his opposition to the instant motion, the S.E.C. is awarded summary judgment against McCaskey for civil violations of Section 10(b), Rule 10b-5, and Section 17(a).
III. Remedies
A. Permanent Injunction
The S.E.C. seeks a permanent injunction against the statutory violations charged in the Second Claim for Relief of its complaint. Both the 1933 and 1934 Acts provide for the issuance of permanent injunctive relief in the face of a violation of any of their provisions. See 15 U.S.C. § 77t(b); 15 U.S.C. § 78u(d)(e), 78u-1. The standard to be employed by courts in assessing the suitability of permanent injunctive relief centers around the "realistic likelihood of recurrence" of past securities violations. See S.E.C. v. Commonwealth Chem. Secs., 574 F.2d 90, 100 (2d Cir. 1978). Stated differently, to award a permanent injunction a court must find (1) past violations of the securities laws and (2) a reasonable probability of future violations. See S.E.C. v. Champion Sports Management. Inc., 599 F. Supp. 527, 533 (S.D.N Y 1984). In the instant case, McCaskey's violations of Sections 10(b), Rule 10b-5 and Section 17(a) have been conclusively established. Therefore, the Court must determine the likelihood of repeated violations.
Summary judgment is a permissible vehicle in which to grant a permanent injunction. See S.E.C. v. Research Automation Corp., 585 F.2d 31, 36 (2d Cir. 1978) (awarding plaintiff summary judgment and noting propriety of injunctive relief).
In addressing the probability of future infractions, the Second Circuit has articulated several relevant factors including: (1) scienter; (2) the isolated or persistent nature of the past fraudulent acts; (3) the defendant's recognition of the wrongful nature of the past conduct; and (4) the defendant's ability to commit future violations. See S.E.C. v. Softpoint, 958 F. Supp. 846, 876 (S.D.N.Y. 1997) (quoting Commonwealth Chem. Secs., 574 F.2d at 100-101). Examination of these factors shows that, without restraint, there is a realistic likelihood that McCaskey's infractions would recur.
The record reflects that McCaskey acted willingly and knowingly as his stock manipulation scheme involved wash sales and matched orders conducted through 22 accounts held in misleading names or the names of nominees at 14 different firms. See S.E.C. Memo. of Law at 12. McCaskey's fraudulent behavior did not arise from a single, isolated incident, but rather represented a continuing course of wrongful conduct lasting approximately seven months. See id. Furthermore, McCaskey's guilty plea in the parallel criminal case does not conclusively establish his appreciation of his past wrongdoing. McCaskey pled guilty only after a 3-1/2 year investigation, the filing of the instant enforcement action, and a criminal grand jury investigation. See S.E.C. Memo. of Law at 13. Moreover, when the S.E.C. filed the instant enforcement action, McCaskey filed a counterclaim against the S.E.C. claiming that the S.E.C.'s investigation "could only be deemed to have arisen from an invidious intent." Finally, McCaskey is, by virtue of his current occupation, in a position where further violations could be anticipated. Until April 2000, McCaskey was the Chairman of the Board and a Director of J Bird Music Group Ltd., and is currently the General Manager of J-Bird Music Group. Even assuming, however, that McCaskey was not presently involved in the securities market, given that he has previously been engaged in the securities industry, there is reason to believe that McCaskey might in the future attempt to return. In light of the above facts, there is a likelihood that, unless enjoined, McCaskey will continue to violate federal securities laws. Accordingly, the S.E.C.'s request to permanently enjoin Mccaskey from future violations charged in the Second Claim for Relief is granted.
Though McCaskey claims that he is no longer President and a Director of Marcorp, see Def.'s Counter-Statement of Facts at 9, the J-Bird Music Group in its Form l0-KSB filed with the S.E.C. on March 23, 2001, identifies McCaskey as President and a Director of Marcorp.
IV. Director Officer Bar
The S.E.C. also asks that McCaskey be barred from serving as an officer or director of any public company. A court may prohibit any person found to have violated 15 U.S.C. § 77q(a)(1) or 15 U.S.C. § 78j(b) from serving as an officer or director of a company that has a class of securities registered pursuant to 15 U.S.C. § 781 or that is required to file reports pursuant to 15 U.S.C. § 78o(d) "if the person's conduct demonstrates substantial unfitness to serve." 15 U.S.C. § 77t(e), 78u(d)(2). The Second Circuit has described six factors as useful in making the unfitness assessment including: (1) the egregiousness of the underlying securities law violation; (2) the defendant's repeat offender status; (3) the defendant's role or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur. See S.E.C. v. Patel, 61 F.3d 137, 141 (2d Cir. 1995). Though useful, the list of enumerated factors is neither exhaustive nor mandatory; a court may consider factors that are not listed, and need not consider all of those that are listed. See id.
The misrepresentations in this case were egregious. With respect to trading between October 5 and November 30, 1994, McCaskey's trading constituted between 51% and 100% of the total market volume for Marcorp stock. See S.E.C. Memo. of Law at 12. McCaskey's role in the offense was significant because during the time of the fraud he had great influence over Marcorp. McCaskey was the President and a Director of Marcorp, and from at least December 1992 though December 1994, Marcorp maintained its principal place of business in offices rented from McCaskey's wife, and located in the garage of McCaskey's home. See id. at 17. Despite McCaskey's claim that he "sold 35, 000 shares at $1.435, and bought back the same number of shares at $1.50 a loss of $.0565 per share . . . [and therefore could not have] intended to profit with each so-called wash sale or matched order," McCaskey Memo. of Law at 5, McCaskey, a large shareholder of Marcorp stock, had a powerful incentive to try to reverse the stock price decline and bolster the price of Marcorp stock.
This is, moreover, not the first time that McCaskey has been found in violation of securities-related rules: In or about 1991 an arbitration panel awarded damages in the amount of $330,306 in favor of one of McCaskey's former clients, Doris B. Garrity because it found that McCaskey "ignored [Garrity's] instructions that prohibited particular transactions . . . [and] [d]ue to continued losses in those unauthorized trades, [McCaskey] also sold portions of [Garrity's] original portfolio to cover the account debt." Garrity v. McCaskey, 223 Conn. 1, 2-3, 612 A.2d 742, 743-44 (Conn. 1992). Furthermore, as discussed above, there is a likelihood that McCaskey would, if not enjoined from doing so, continue to violate federal securities laws.
The governing statute provides that an officer or director bar may be imposed "conditionally or unconditionally" and "permanently or for such period of time as [the court] shall determine." The Second Circuit had held that "these provisions suggest that, before imposing a permanent bar, the court should consider whether a conditional bar (e.g., a bar limited to a particular industry) and/or a bar limited in time (e.g., a bar of five years) might be sufficient. . ." 61 F.3d 137, 142.
The Court finds that McCaskey is substantially unfit to serve as an officer or director. A permanent bar is not warranted, however, because a bar limited in time is sufficient. McCaskey is therefore barred for six years from serving as an officer or director of a pubic company.
IV. Disgorgement
The S.E.C. also seeks an order holding McCaskey liable for payment of disgorgement, together with prejudgment interest, but defer quantification of the amount of disgorgement to paid until an evidentiary hearing. See S.E.C. Memo, of Law at 20. Disgorgement of illicit profits is a proper equitable remedy for securities fraud, see S.E.C. v. Patel, 61 F.3d 137, 139 (2d Cir. 1995) (quoting Manor Nursing Ctrs., Inc., 458 F.2d at 1104), designed to deprive wrongdoers of the profits of their wrongdoing. See S.E.C. v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987). Thus, the proper measure of disgorgement is the amount, of the wrongdoer's unjust enrichment. See Commonwealth Chem. Secs., Inc., 574 F.2d at 102.
McCaskey argues that he made no profit from the sale of Marcorp securities because he "lost money in each of the subject trades." Def.'s Memo. of Law at 27. The S.E.C. concedes that there are disputed issues of fact concerning the precise amount of McCaskey's "ill gotten gains", but claims it will offer competent evidence at a hearing that McCaskey did profit from his scheme. See S.E.C. Memo. of Law at 9.
The question of whether disgorgement is warranted, as well as the amount of disgorgement, is not sufficiently free from doubt to be resolved on a motion for summary judgment. Accordingly, the matter will be referred to Magistrate Pitman who will then issue a report and recommendation to the Court. The necessity of disgorgement, and if necessary the amount of disgorgement, will be determined at that time.
V. Civil Monetary Penalty
The S.E.C. also seeks an order requiring McCaskey to pay a civil monetary penalty pursuant to Section 20(d) [ 15 U.S.C. § 77t(u)] of the Securities Act and Section 21(d)(3) of the Exchange Act [U.S.C. § 78u(d)(3)]. See S.E.C. Memo. of Law at 21. The S.E.C. asks that the Court enter the order holding McCaskey liable for payment of the penalty but deferring quantitifation of the amount of the penalty after the proper disgorgement amount has been determined.
This matter is also not sufficiently free from doubt to be resolved on a motion for summary judgment. Accordingly, the determination of whether a civil monetary fine is appropriate, and if necessary the amount of the fine, is also referred to Magistrate Pitman who will then issue a report and recommendation to the Court.
CONCLUSION
For the reasons set forth above, the Court concludes that McCaskey has committed civil violations of Section 10(b), Rule 10b-5, and Section 17(a) and therefore grants the S.E.C.' s motion for summary judgment as it pertains to these claims. The Court grants the S.E.C.'s request for permanent injunctive relief and enjoins McCaskey from violating Section 10(b), Rule 10b-5, and Section 17(a). The Court also grants the S.E.C.'s request for an officer and director bar but limits the bar to six years. The S.E.C. is directed to submit a proposed order and injunction to the Court by September 24, 2001. The S.E.C.'s request for an order directing McCaskey to disgorge his ill-gotten gains and to be held liable for civil penalties is denied at this time and is referred to Magistrate Pitman for a report and recommendation.