Summary
granting summary judgment on Section 17 and Section 10(b) claims after finding defendant was estopped from contesting liability based on his pleading guilty to criminal count of Section 10(b) violation
Summary of this case from Securities Exchange Commission v. TzolovOpinion
No. 99 Civ. 3372 (HB).
August 29, 2004.
OPINION ORDER
In this civil enforcement action, plaintiff Securities and Exchange Commission ("SEC") alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, as well as Section 17(a) of the Securities Act of 1933 ("Securities Act"), 17 U.S.C. § 77q(a). The SEC's claims, in broad brush, allege that the defendants engineered and promoted fictitious investment programs on the internet that promised astronomical returns on purportedly risk-free investments. This case was originally assigned to Judge Martin, but after the case was re-opened on February 4, 2004 on the SEC's motion, it was re-assigned to me. The SEC now moves pursuant to Federal Rule of Civil Procedure ("Fed.R.Civ.P.") 56 for summary judgment against defendants Peter Roor ("Roor") and Ronald L. Templin ("Templin"). The SEC seeks a final judgment permanently enjoining Roor and Templin from future violations of federal securities laws, disgorgement of all ill-gotten profits and pre-judgment interest thereon, civil penalties, and turnover of the defendants' previously frozen assets. For the reasons set forth below, the SEC's motion is granted.
I. BACKGROUND
A. Roor
Roor is a Dutch citizen who lives in Amsterdam, The Netherlands. From as early as December 1998 until May 1999, Roor operated the Oxford Savings Club ("Oxford") and served as its Director of International Operations. According to Roor, he was primarily responsible for marketing investments in Oxford to new potential members. His wife assisted with the administration. Oxford was marketed as a registered savings club and managed by "Internationally Oriented Businessmen and Financial Experts." Akhtar Decl., Ex. 2 at 3. Roor's prior employment consisted of waiting tables aboard a cruise ship and managing a department store. In Oxford's promotional materials and internet website, Roor invited the public to invest between $25 to $325,000 in the savings club and promised a return of 10% per month, which, if retained in an investor's account, would, he represented, result in earnings of 213.5% when compounded annually. Roor also offered members the opportunity to "purchase a special $50.00 'Oxford Growth Certificate' and in exactly 8 years from the date of receipt, the owner of this Oxford Growth Certificate can cash in this Certificate for US $1,000,000.00." Id. Finally, as another "come on," Roor promised members between 1-3% interest on all contributions from new members sponsored by current members.
http://www.oxford-club.com
Roor gave voluntary testimony to the SEC via telephone on February 25, 1999 and in-person on March 8, 1999, during which time he discussed his investment programs. According to Roor, such returns were possible because the "Oxford Savings Club combines small loans from many individuals. This makes it possible to invest large amounts in the Money Market. All loans are secured by Bankers Guarantees so that the funds are never in jeopardy." Id. When questioned by the SEC as to how it was possible to pay such high returns, Roor explained that
Oxford intends to invest in "Bank Debenture Trading Program" which generate large returns in connection with expansion of the money supply by the Federal Reserve . . . [T]he Federal Reserve injects "billions" of dollars into the economy as follows: Since the end of World War II, the Federal Reserve has been transferring funds into numerous foreign banks, which loan these funds to multinational corporations at market interests rates. The Federal Reserve requires only that the banks have on deposit liquid funds approximately seven percent of the amount that the Federal Reserve gives to banks. Wealthy "private investors" who have at least one million dollars to invest have entered into contracts, called "programs" . . . These "programs" typically promise private investors returns ranging between 500% to 1,000% per year, and the banks guarantee the private investors' deposits with a "certified bank draft."Id., Ex. 4 ¶ 12.
Roor informed the SEC that he read about the "Bank Debenture Trading Program" in a book, whose title he could no longer recall. Roor said that he knew of some people — who he refused to identify — who had invested in this type of program, although he did not know whether they actually received the promised return. Roor asserted that banks and the Federal Reserve do not acknowledge the existence of this type of program because they do not want to disclose the existence of such high rates of return.
Roor also reported to the SEC that thousands of people joined Oxford, including some 600 to 800 United States citizens, although he refused to identify the members and the amount of their contribution. On March 8, 1999, Roor disclosed to the SEC that he received "'close to one million dollars' from Oxford members." Id. ¶ 10. To promote Oxford, Roor twice traveled to the United States and used a 212 area code telephone number for Oxford to "'make it cheaper for US citizens' to invest in Oxford." Id. ¶ 8.
In addition to Oxford, Roor created two other investment programs, Manumit Unlimited ("Manumit") and Top Return on Investment ("TROI"), in March and April of 1999, respectively. Roor served as the Director of Manumit and advertised it as "Formerly Known As The Oxford Savings Club" in the promotional materials. Id., Ex. 3 at 1.
http://www.manumit.com
http://troi.tradelandnet/dummy
Templin did not submit a counterstatement of undisputed material facts that comports with the requirements of Local Civil Rule 56.1 of the Local Rules of the United States District Courts for the Southern and Eastern Districts of New York ("Local Rule 56.1"), as amended on February 26, 2004. Under the amended rule, "[t]he papers opposing a motion for summary judgment shall include a correspondingly numbered paragraph responding to each numbered paragraph in the statement of the moving party, and if necessary, additional paragraphs containing a separate, short and concise statement of the material facts as to which it is contended that there exists a genuine issue to be tried." Local Rule 56.1(b) (emphasis in original). Templin's 56.1 Counterstatement consists of a four paragraph letter that does not contain correspondingly numbered paragraphs or cite to "evidence which would be admissible, as required by Federal Rule of Civil Procedure 56(e)." Local Rule 56.1(d). Contrary to Templin's assertion in his first paragraph, the SEC's 56.1 Statement does not "appear in its Memorandum of Law, pages 2 through 11." Instead, the SEC's 56.1 Statement is separate document — titled "Plaintiff's Statement of Undisputed Facts Pursuant to Local Civil Rule 56.1" — and consists of 33 numbered paragraphs. See docket entry number 82, filed on March 5, 2004. Templin's failure to comply with the amended rule is particularly troubling given that at the close of the briefing cycle, the Court, as a courtesy, asked Templin if he would be submitting a 56.1 Counterstatement and referred him to Local Rule 56.1. Consequently, the undisputed material facts in the SEC's 56.1 Statement are deemed admitted to the extent that the evidence cited therein supports the propositions stated. Local Rule 56.1(c); Giannullo v. City of New York, 322 F.3d 139, 140 (2d Cir. 2003).
Templin is a resident of Kokomo, Indiana, who served in the United States Marine Corps from January 1959 to July 1972 and was later employed as a computer programmer. On March 20, 1999, Templin gave voluntary testimony to the SEC about his involvement in Oxford and other internet investment programs. Templin informed the SEC that when he first learned of Oxford, he contacted Roor to request his permission to set up a replicating website to duplicate that of Oxford. Templin did not recall specifically asking Roor how the investment program worked, nor did he think that Roor would have offered to explain it to him if he had. Templin informed the SEC that he simply believed the promotional materials originally provided by Roor even though he "didn't know it was a hundred percent true." Id. at 81:20-21. In fact, Templin admitted that he had no idea what the Oxford funds were invested in or whether it was a registered club that was run by "internationally oriented businessmen and financial experts," id. at 89:19-21, as it purported to be. What Templin did know was that "[i]f it was running I'd make a bunch of money." Id., Ex. 5 at 49:10-11.
Templin's website announced, "[a]t first glance, the enclosed information may appear ' too good to be true,' but the five minutes it takes you to read my web page could change your life and place YOU on the road to financial freedom." Id., Ex. 10 at 1 (italics and caps in original). Templin's website promised the same returns and investment security outlined in Roor's Oxford investment plan. At this same website, Templin offered other investment programs, including Internet Marketing Partners ("IMP"), Secured Private Placements ("SPP"), and the 650 Club, each of which promised risk-free astronomical returns. The SPP, for example, purportedly used investors' money to rent securities, such as Treasury Bills, that are leveraged into trading program to produce a 200% return every sixty days. Id., Ex. 12 at 1, 3. Templin marketed the 650 Club as a "unique offshore financial opportunity," whereby an initial investment of $650 would yield a $2,000 payout and members would receive $100 for each new member they referred. Id., Ex. 13 at 1. Finally, the IMP "Private Party Loan Program," which required a minimum $220 investment or "loan," promised a $20 return for each dollar invested after a 120-day maturation period.
http://www.opameria2.com
http://www.opamerica2.com/imp/about-ppl.htm;http://www.opamerica2.com/IMP/pp12.cfm;http://www.opamerica2.com/imp/termcond.htm;http://opamerica2.com/IMP/imp.cfm?id=loanman;http://www.opamerica2.com/imp/ppl-appl.htm
http://www.opamerica2.com/spp/HowMoneyIsMade.htm;http://www.opamerica2.com/SPP/spp-info.cfm?id=sppgroup;http://www.opamerica2.com/SPP/schedindx.htm;http://www.opamerica2/SPP/schedule.htm
http://www.opamerica2.com/650;wysiwyg://117/http://www.opamerica2.com/650/yield.htm
Templin admitted that although he preferred not to know whether the investment programs were legitimate, "at some point [he] understood that it was illegal," id., Ex. 34 at 28:8-9, and that he was cheating people through these investment schemes. Indeed, unsuspecting investors sent Templin some $1.5 million between October 1998 and May 1999. One such beguiled investor was John B. Friedman ("Friedman"), who learned of SPP through an e-mail in October 1988 and then consulted Templin's website and communicated with Templin via telephone and e-mail. Templin assured Friedman that "SPP was an established program and would pay the returns promised," which were "twenty-to-one in approximately 30 to 60 days." Akhtar Supp. Decl., Ex. 10 ¶¶ 3, 7. Friedman sent Templin a check for $330, but never received any return on his investment. Instead of paying investors as promised, Templin purchased a $100,000 certificate of deposit for himself and his wife, Sandra Templin, wrote $62,745 in checks to himself and $29,715 in checks to his son, and transferred monies to banks in Latvia ($80,000) and Antigua ($90,000).
During his meeting with the SEC on March 20, 1999, "representatives of the SEC told [Templin] in no uncertain terms that this was a scam, that there was [sic] no programs that existed that could generate that type of returns." Id. at 21:19-22. Nevertheless, Templin continued to advertise and solicit investments after being so informed because, as he conceded, he was "greedy." Id. at 21:10-19.
Templin was indicted on June 19, 2002 for four counts of mail fraud in violation of 18 U.S.C. §§ 1341, 2, one count of conspiracy to commit securities fraud in violation of 18 U.S.C. § 371, and four counts of securities fraud in violation of 15 U.S.C. §§ 77q(a), 77x and 18 U.S.C. §§ 2 stemming from his involvement in Oxford, SPP, the 650 Club, and IMP "Private Party Loan Program." United States v. Templin, No. 02 Cr. 792. On May 13, 2003, Templin pleaded guilty before Judge Cedarbaum to Counts Two and Three of the indictment, which charged substantive securities fraud violations for his involvement in Oxford and SPP. Although these two counts charge criminal activity spanning from December 1998 to May 1999, Templin's plea agreement with the Government only pertained to his conduct after meeting with the SEC in March 1999 when the SEC expressly informed him that such activity was illegal. On September 9, 2003, Templin was sentenced to five months imprisonment and 36 months supervised release, with the first five months of supervised release to be home confinement. In addition, Templin was ordered to pay $40,000 in restitution and the $200 mandatory special assessment fee.
II. DISCUSSION
A. Standard of Review
Pursuant to Fed.R.Civ.P. 56(c), a district court must grant summary judgment if the evidence demonstrates that "there is no genuine issue as to any material fact and [that] the moving party is entitled to judgment as a matter of law."Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "Summary judgment is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed to 'secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327 (1986) (quoting Fed.R.Civ.P. 1).
To determine whether there is a genuine issue of material fact, the Court must resolve all ambiguities and draw all inferences against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987). However, the mere existence of disputed factual issues is insufficient to defeat a motion for summary judgment. Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11-12 (2d Cir. 1986). The disputed issues of fact must be "material to the outcome of the litigation," id. at 11, and must be backed by evidence that would allow "a rational trier of fact to find for the non-moving party,"Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The non-movant "must do more than simply show that there is some metaphysical doubt as to the material facts."Id. With respect to materiality, "substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted."Anderson, 477 U.S. at 248.
B. Exchange Act § 10(b) and Securities Act § 17(a) Liability
The SEC has alleged that Roor and Templin violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 17(a) of the Securities Act. These sections of the federal securities law are intended to protect the consumer against fraud and misrepresentation in the offer and sale of securities. To carry its burden with respect to both Section 10(b) and Section 17(a), the SEC must prove that the defendants "(1) made a material misrepresentation or omission as to which [they] had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities." SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999); see also SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1466 (2d Cir. 1996).
Under this analysis, "[a] fact is material for the purposes of the antifraud provisions if there is a 'substantial likelihood that a reasonable investor would consider it important when making an investment decision.'" SEC v. Gallard, No. 95 Civ. 3099 (HB), 1997 WL 767570, at *3 (S.D.N.Y. Dec. 10, 1997) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)). As defined by the Supreme Court, "the term 'scienter' refers to a mental state embracing intent to deceive, manipulate, or defraud." Ernst Ernst v. Hochfelder, 425 U.S. 185, 194 n. 12 (1976). Scienter is established by knowing or reckless conduct, Rolf v. Blyth, Eastman Dillon Co., 570 F.2d 38, 45-46 (2d Cir. 1978), amended by, 1978 WL 4098 (2d Cir. May 22, 1978), or even in some cases, by "willful blindness," i.e., a deliberate refusal to acquire information,In re Fischbach Corp. Sec. Litig., No. 89 Civ. 5826, 1992 WL 8715, at *6 (S.D.N.Y. Jan. 15, 1992). Finally, a misrepresentation made "in connection with the purchase or sale of securities" is actionable even if the "security" at issue does not exist. Gallard, 1997 WL 767570, at *3. With these principles in mind, I turn to the liability of the two defendants at issue on this motion.
1. Roor
As outlined above, Roor made a series of misrepresentations on his Oxford website and in his promotional materials and promised what can only be described as phantasmagorical returns on purportedly risk-free investments. Yet, Roor could not explain in any sensible fashion how such returns were attainable. What he described to the SEC — that the Federal Reserve loans billions of dollars to private banks who then provide investment opportunities to wealthy investors at rates of 500% to 1,000% per year, secured by a "certified bank draft" — is akin to "prime bank instrument" ("PBI") scheme that, as one court has observed, have become "rife in recent years." SEC v. Bremont, 954 F. Supp. 726, 728 (S.D.N.Y. 1997). As described by the Bremont court, these schemes "rest on the premise that major international banks buy and sell PBIs — said to be high yield bank instruments — on a secret market that offers large and essentially risk free profits . . . In fact, there is substantial evidence that no such instruments exist." Id. Indeed, the Federal Reserve and the SEC have issued press releases warning potential investors of these schemes. As the SEC's October 1993 "Information for Investors" release makes clear, the use of the word "prime" "is used to refer, generically, to financial institutions of purportedly high repute and financial soundness." Akhtar Decl., Ex. 20 at 1 n. 1. Roor seized upon the reputation and stability of the Federal Reserve in the various incarnations of his scheme. Nevertheless, the Federal Reserve has specifically disavowed any knowledge of these alleged instruments and warned that individuals may improperly be using the names of well-known banks and regulatory agencies. To say that the Federal Reserve, as Roor contends, is somehow involved in a massive investment opportunity conspiracy to benefit the wealthy is simply beyond cavil.
According to the Federal Reserve's October 31, 1993 press release and accompanying October 21, 1993 Interagency Advisory, "[t]he questionable instruments are often denominated as 'Prime Bank Notes', 'Prime Bank Guarantees', or 'Prime Bank Letters of Credit'. They are also called by such other names as 'Prime European Bank Letters of Credit', 'Prime World Bank Debentures', or 'Prime Insurance Guarantees'." Akhtar Decl., Ex. 21 at 2.
There is therefore no serious question that Roor made material misrepresentations in connection with the purchase and sale of securities, thus satisfying the first and third elements of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Gallard, 1997 WL 767570, at *3 (ruling that the sale of non-existent securities constituted a violation of the federal securities law antifraud provisions); see also S.E.C. v. Lauer, 52 F.3d 667, 671 (7th Cir. 1995) ("An elementary form of misrepresentation is misrepresenting an interest as a security when it is nothing of the kind.") (internal citations omitted). As I previously held, "there is no question a reasonable investor would consider important the fact that the 'security' at issue did not exist . . . and that the money would be misappropriated." Gallard, 1997 WL 767570, at *4. For our purposes, the "securities" at issue were "sold" at the time Roor received the duped would-be investors' money. Id.
The only remaining issue is whether Roor acted with the requisite scienter in making such misrepresentations. Roor filed no opposition to the SEC's motion for summary judgment. Instead, his submission was limited to a letter to the Court — which was sent more than three months after he was served with the SEC's motion papers — in which he stated, "I receive [sic] copies of all the correspondence sent to you by Mr. Kaufman from the SEC. I do not really understand what presently is going on, whether I have to go to jail, or have to pay a huge penalty, I really have no clue. I hope that you can give me an update on the status and what I can expect will happen." Letter from Roor to the Court of 6/8/04 at 1. In his correspondence, Roor further asserted that he "was not aware of doing anything illegal, like offering securities without a license," and that had he "been aware of any fraudulent activity [he] would have used a pseudonym." Id. Finally, Roor wrote that he was "afraid to travel to the USA, because before I know [sic] I might be spending the rest of my life in a US prison." Id. This last comment is particularly prescient given that on May 10, 1999 and June 7, 1999, Judge Martin ordered Roor to, inter alia, repatriate, held him in contempt on December 29, 1999 for his failure to do so, and issued a warrant on January 10, 2000 for Roor's arrest upon entry into the United States.
As the SEC notes, Roor's response is deficient for a variety of reasons, not the least of which is its untimeliness and the fact that it is an unsworn statement that does not comport with the requirements of Fed.R.Civ.P. 56(e). United States v. All Right, Title Interest in Real Prop. Appurtenances, 77 F.3d 648, 657-58 (2d Cir. 1996) (finding that an "unsworn letter was an inappropriate response to the government's motion for summary judgment, and the factual assertions made in that letter were properly disregarded by the court"). Roor's failure to respond to the motion does not, however, relieve the SEC of its burden on summary judgment. Instead, as the Second Circuit has recently held, "Fed.R.Civ.P. 56 . . . does not embrace default judgment principles. Even when a motion for summary judgment is unopposed, the district court is not relieved of its duty to decide whether the movant is entitled to judgment as a matter of law." Vt. Teddy Bear Co., Inc. v. 1-800 Beargram Co., 373 F.3d 241, 242 (2d Cir. 2004). Accordingly, the Court has, as the Circuit instructs, independently examined the SEC's submissions to determine whether it is entitled to summary judgment against Roor.
Even if Roor's letter response were to be considered — and as apro se litigant, his submissions should be read more leniently — Roor's protestation of innocence is belied by his other remarks and his conduct during the course of this litigation. Certainly, Roor's assertion that had his acts been knowingly fraudulent he would have used a pseudonym is hardly compelling. In actuality, Roor's acts did not have to be knowingly committed. As mentioned previously, under Second Circuit law, a reckless disregard for the truth or falsity of an assertion or even a willful refusal to acknowledge the truth of a matter is sufficient to satisfy the scienter requirement. Rolf, 570 F.2d at 45-46; In re Fischbach Corp. Sec. Litig., 1992 WL 8715, at *6. Indeed, Roor's behavior seems to be the paradigm of recklessness as described by the Second Circuit: "Reckless conduct is, at the least, conduct which is 'highly unreasonable' and which represents an extreme departure from the standards of ordinary care . . . to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Rolf, 570 F.2d at 47 (internal quotation marks and citation omitted) (ellipse in original). As I found inGallard, scienter can be found as a matter of law based on a defendant's "repeated conduct and total inability to provide any evidentiary support for the existence of the purported instrument." 1997 WL 767570, at *4. Moreover, as the Second Circuit has held, the Court may draw an adverse inference against Roor because he asserted his Fifth Amendment privilege against self-incrimination in response to the SEC's allegations and discovery requests. United States v. Certain Real Prop. Premises Known as 4003-4005 5th Ave., Brooklyn, N.Y., 55 F.3d 78, 82-83 (2d Cir. 1995); Commodity Futures Trading Comm'n v. Int'l Fin. Servs. (New York), Inc., ___ F. Supp.2d ___, No. 02 Civ. 5497, 2004 WL 1048241, at *19 (S.D.N.Y. May 07, 2004) ("While this inference alone does not suffice to meet the Commission's evidentiary burden, it significantly bolsters the Commission's independent evidence.") (internal citation omitted). Thus, the SEC has carried its burden with respect to defendant Roor.
2. Templin
The above discussion is perhaps equally applicable to defendant Templin. Nevertheless, his civil liability need not detain us long as he has already pleaded guilty to a portion of the conduct at issue in this enforcement action. "It is well-settled that a criminal conviction, whether by jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case." United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978). Counts Two and Three of the indictment charged Templin with violations of Section 17(a) of the Securities Act, 15 U.S.C. §§ 77q(a), 77x for his involvement in the Oxford and SPP schemes. On May 13, 2003, Templin pleaded guilty to these two counts insofar as they pertained to his conduct after his March 1999 meeting with the SEC. This ends at least one portion of our inquiry. The fact that the SEC's complaint alleges violations of both Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act is of no moment because, as noted earlier, these provisions have substantially the same elements. SEC v. McCaskey, No. 98 Civ. 6153, 2001 WL 1029053, at *4 (S.D.N.Y. Sept. 6, 2001) (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(a) claim); Stewart v. United Australian Oil, Inc., No. 73 Civ. 3020, 1975 WL 362 (S.D.N.Y. March 12, 1975) (deciding that the defendant's guilty plea to a Section 17(a) violation established his civil liability for a Section 10(b) violation). Indeed, it matters not what the precise charges in the indictment and civil complaint are, so long as they are predicated on the same factual allegations. SEC v. Dimensional Entm't Corp., 493 F. Supp. 1270, 1277 (S.D.N.Y. 1980) (holding that the factual allegations underlying defendant's wire fraud convictions were sufficiently similar to the alleged securities fraud violations so as to conclusively establish his liability in a subsequent civil enforcement action).
These counts of the indictment also charged Templin with violations of 18 U.S.C. § 2, the aider and abettor statute, which is not germane to this discussion.
It remains to be determined whether Templin's conduct from December 1998 to March 1999 can be included, since collateral "estoppel extends only to those issues that were essential to the plea." Goodridge v. Harvey Group Inc., 728 F. Supp. 275, 278-79 (S.D.N.Y. 1990). As discussed earlier with respect to defendant Roor, there is no serious question that the defendants' acts were material misrepresentations in connection with the purchase and sale of securities. However, Templin argues that before the SEC told him that his actions were illegal in March 1999, he did not act with the requisite scienter because he honestly believed that fantastic rates of return he offered were obtainable. Templin's assertion in this regard is at best suspect in light of the fact that after being so warned, he continued his fraudulent activities. And, as with Roor, the Court can and does find that an adverse inference is appropriate given Templin's assertion of his Fifth Amendment privilege in the course of this litigation.SEC v. Princeton Econ. Int'l Ltd., Nos. 99 Civ. 9667, 99 Civ. 9669, 1999 WL 997149, at *3 (S.D.N.Y. Nov. 3, 1999); Bremont, 954 F. Supp. at 733. These adverse inferences are further buttressed by the SEC's submissions, which show that instead of paying investors as promised, Templin spent the money on himself and his family and wired it to overseas accounts.
Further, it is clear that Templin's conduct standing alone rises to the level of recklessness. At his plea allocution, Templin acknowledged that he did no investigation into viability of the "investment" opportunities he offered on his various websites, how the programs functioned, who managed the funds, or the degree of risk involved. Despite all of his promises and representations, Templin confessed that he did not even know if these purported investment programs were legitimate; indeed, he preferred not to know. Yet, "[w]here a defendant plays a central role in marketing an investment, his defense that he was unaware that the investment was fraudulent is less credible." SEC v. Milan Capital Group, Inc., No. 00 Civ. 108, 2000 WL 1682761, *5 (S.D.N.Y. Nov. 9, 2000). Moreover, "[a]n egregious refusal to see the obvious, or to investigate the doubtful, may . . . give rise to an inference of . . . recklessness," Chill v. General Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996). As discussed in In re Fischbach Corp. Sec. Litig., 1992 WL 8715, at *6, this refusal to acquaint himself with, but rather, to turn a blind eye to information that would have revealed the misrepresentation can satisfy the scienter requirement so long as it was deliberate and intentional. Thus, by his own admissions, Templin has satisfied the standard for scienter in this Circuit. E.g., Bremont, 954 F. Supp. at 730 (ruling that the defendant's failure "to make the slightest attempt to verify" the fraudulent transactions "comfortably qualifies as reckless").
C. Remedies
1. Permanent Injunction
The SEC seeks a permanent injunction enjoining Roor and Templin from future violations of the federal securities law provisions. A permanent injunction is appropriate where there has been a violation of the federal securities laws and there is a reasonable likelihood of future violations. SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir. 1978). Templin, whose counsel asserts that he has agreed not to be involved in the securities business, has apparently consented to such an injunction. Regardless, injunctive relief is appropriate where, as here, the defendants do not acknowledge their wrongdoing and continue to engage in fraudulent activity after having been warned of its illegality. E.g., Gallard, 1997 WL 767570, at *5. Both Roor and Templin have claimed ignorance of the fraudulent nature of their acts, which, as discussed previously, is belied both by the patently impossible returns promised and their subsequent conduct. Judge Martin already held Roor in contempt for his failure to abide by Court orders and Templin continued his fraud after the SEC told him to cease and desist. Under these circumstances, a permanent injunction seems particularly appropriate and will be granted with respect to both defendants.
2. Disgorgement
The SEC also seeks disgorgement of Roor and Templin's ill-gotten gains in the amounts of $1 million and $1,502,265.04 respectively and prejudgment interest thereon. Disgorgement is a remedial measure that derives from the Court's equitable powers.First Jersey Sec., Inc., 101 F.3d at 1474. "[T]he primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched." Commonwealth Chem. Sec., Inc., 574 F.2d at 102. Because of the equitable nature of the remedy, the Court has broad discretion in determining the amount of any disgorgement. First Jersey Sec., Inc., 101 F.3d a 1474-75. "[D]isgorgement need only be a reasonable approximation of profits causally connected to the violation," and "any risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created the uncertainty." SEC v. Patel, 61 F.3d 137, 139, 140 (2d Cir. 1995) (alteration in original).
Here, both Roor and Temlin have refused to provide the written accounting ordered by the Court on June 7, 1999 and instead asserted their Fifth Amendment privilege. As Second Circuit law makes clear, this is their absolute right, but they cannot then benefit from the uncertainty created by their conduct. I will therefore rely on the evidence provided by the SEC to determine the amount of disgorgement. In his June 7, 1999 order, Judge Martin froze the funds in ten bank accounts in Indiana and Latvia held in the name of Roor, Templin, and their associated businesses. When he met with the SEC on March 8, 1999, Roor reported that he had received "'close to one million dollars' from Oxford members." Akhtar Decl., Ex. 4 ¶ 10. The SEC has also presented evidence that Templin received a total of $1,502,265.04 from unsuspecting investors. The SEC has made a sufficient showing to warrant disgorgement in these amounts and, accordingly, the burden then shifts to the defendants to prove that these amounts are unreasonable. SEC v. Hasho, 784 F. Supp. 1059, 1111 (S.D.N.Y. 1992) ("The SEC has the burden to put forth a disgorgement figure that reasonably approximate the amount of unjust enrichment and then the burden shifts to the defendant to 'demonstrate that the disgorgement figure was not a reasonable approximation.'") (quoting SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1232 (D.C. Cir. 1989)).
The balances of these accounts are not indicated in the Court's June 7, 1999 order and the parties have provided information as to the current balances in connection with this motion. Although there was earlier correspondence to the Court regarding the amounts presently in the ten accounts, the letters do not shed any light on the matter as the parties are in substantial disagreement as to what the current balances are.
In his opposition, Templin argues that the SEC is only entitled to disgorgement of $20,000 to $40,000, the amount of profits Templin received after March 1999 when he met with the SEC, the timeframe that corresponds to his guilty plea. Templin's arguments, however, misapprehend the nature of this equitable remedy and the applicable law. Contrary to Templin's assertions, the SEC does not seek to have these monies forfeited for their own benefit. "Rather, the primary purpose of the equitable remedy of disgorgement in these circumstances is to ensure that those guilty of securities fraud do not profit from their ill-gotten gains." SEC v. Wang, 944 F.2d 80, 81 (2d Cir. 1991).
Roor further contends that monies set aside in a legal defense fund ($42,557.25) and a joint checking account with his wife, Sandra Templin, at First National Bank Trust ($6,721.50) should not be subject to disgorgement because those funds were not derived from the investment scheme. Templin previously sought release of these funds from the Court-ordered freeze, which Judge Martin denied by Memorandum Opinion and Order. SEC v. Roor, No. 99 Civ. 3372, 1999 WL 553823, at *3 (S.D.N.Y. July 29, 1999). In so holding, Judge Martin noted
More alarming is the $36,190 contained in Templin's "Legal Defense Fund." To support his contention that this money was donated by his "supporters" and is the asset of a trust established to pay his legal fees, Templin submits the deposition testimony of Christopher Beal, a North Carolina tobacco farmer who invested $220 with Templin in expectation of receiving $108,000 within a year. Instead of proving that the Legal Defense Fund is a legitimate enterprise, the deposition testimony submitted by the defendant reveals Beal to be the vulnerable victim of a continuing scam. Moreover, Beal, who has a minimal income, could not explain where he obtained the substantial amount of money he allegedly loaned to Templin. The S.E.C. has also provided evidence that Templin treated the Fund as a personal asset and paid household expenses from the Fund. These funds will not be released. In short, Templin has failed to demonstrate a legitimate source for his "Defense Fund" and the asset freeze order will not be modified to permit him to make any use of these funds.Id.
It is unclear why the amount of money contained in the Legal Defense Fund at the time of Judge Martin's Memorandum Opinion and Order is $6,643.35 less than what the parties report it contains now. This apparent discrepancy, however, has no bearing on Judge Martin's or this Court's analysis and thus will be disregarded.
Templin has offered no new evidence to alter this analysis, and therefore this Court adheres to Judge Martin's earlier decision.
As for the joint checking account, Templin asserts that this account contains payroll deposits from the employers of both Templin and his wife and was used to pay household expenses. These contentions are borne out by the banking statements Templin submitted with his opposition papers. Unfortunately, Templin has offered no means to identify with precision the amount of Sandra Templin's payroll deposits. Accordingly, Templin may submit, if he chooses, further proof — supported by admissible evidence and not merely counsel's assertions — within 10 days of the date hereof, which the SEC may oppose within 10 days thereafter.
Finally, the SEC seeks prejudgment interest on the disgorged funds. As with disgorgement, an award of prejudgment interest lies within the sound discretion of the Court. First Jersey Sec., Inc., 101 F.3d at 1476. "Requiring payment of interest prevents a defendant from obtaining the benefit of what amounts to an interest free loan procured as a result of illegal activity." SEC v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996). An award of prejudgment interest is appropriate and it shall be calculated by the Clerk of the Court "at the same rate used by the IRS with respect to underpaid taxes." Gallard, 1997 WL 767570, at *6. The SEC's request for turnover of the frozen assets to satisfy this award of disgorgement is granted.
3. Civil Penalties
In addition to disgorgement, the Court may impose civil penalties upon violators of the antifraud provisions of the federal securities laws. 15 U.S.C. §§ 77t(d), 78u(d)(3). The statutes provide for three levels or "tiers" of penalties. Under the first tier, the Court may impose a penalty of up to "the greater of (i) $5,000 for a natural person or $50,000 for any other person, or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(A), 78u(d)(3)(B)(i). A second tier penalty is warranted for violations that involved fraud and may not "exceed the greater of (i) $50,000 for a natural person or $250,000 for any other person, or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(B), 78u(d)(3)(B)(ii). Here, the SEC seeks a third tier penalty, which is the "greater of (i) $100,000 for a natural person or $500,000 for any other person, or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation" if the violation involved fraud and resulted in substantial losses. U.S.C. §§ 77t(d)(2)(C), 78u(d)(3)(B)(iii).
To support its application, the SEC's motion papers merely track the statutory language and assert that such a penalty is appropriate because the violations of Roor and Templin involved fraud and created a substantial loss. Civil penalties are designed to deter securities fraud violations and extract a price beyond the ill-gotten profits that are disgorged, SEC v. Coates, 137 F. Supp.2d 413, 428-29 (S.D.N.Y. 2001) (quoting H.H.Representation. No. 101-616 (1990)), but a "defendant's finances are relevant to the size of civil penalty, SEC v. Robinson, No. 00 Civ. 7452, 2002 WL 1552049, at *10 (S.D.N.Y. July 16, 2002), supplemented by, 2002 WL 1729559 (S.D.N.Y. July 23, 2002), adopted on October 11, 2002. Here, Templin's counsel asserts that Templin is "financially destitute" and "has no assets to speak of." Mem. Opp. at 9. While Templin offers no evidentiary support for this assertion, Templin has already been ordered to pay $40,000 in restitution in the criminal case against him, United States v. Templin, No. 02 Cr. 792, and this, coupled with his incarceration and the order of disgorgement, will provide sufficient deterrent. As for Roor, I believe a penalty in the amount of $100,000 is appropriate, although it is worth noting that the SEC may never be able to collect, as Roor seems intent on eluding judicial process. A penalty is particularly appropriate because Roor has failed to recognize the harm of his conduct or his own culpability. Robinson, 2002 WL 1552049, at *11. This amount is also "commensurate with penalties assessed by other courts." Id. at *12 (citing cases).
III. CONCLUSION
For the foregoing reasons, the SEC's motion for summary judgment against defendants Roor and Templin is granted. Roor and Templin are permanently enjoined from violating the federal securities laws. Roor is ordered to disgorge $1 million and Templin is ordered to disgorge $1,502,265.04. However, if he so desires, Templin may submit further evidence of the exact amount of Sandra Templin's payroll deposits into the checking account held jointly by the Templins at First National Bank Trust within 10 days of the date hereof and, should Templin avail himself of this opportunity, the SEC will have 10 days to respond and the Court will consider a reduction to the amount of Templin's disgorgement. The Clerk of the Court will calculate pre-judgment interest on the disgorged amounts using the IRS rate for underpaid taxes. The assets ordered frozen on June 7, 1999 are to be turned over to the SEC with all accumulated interest in satisfaction of the amount of disgorgement. Should the interest exceed the Clerk's calculation it will be refunded to the defendants. Roor is further ordered by pay a $100,000 civil penalty. The SEC will provide the Court with a stipulation of settlement or voluntary dismissal with respect to the remaining defendant, Laurie Elizabeth Weiss, or be trial-ready within 30 days of the date hereof. The Clerk of the Court is instructed to close this motion.