Summary
describing scheme to "purchase certain stocks and then . . . artificially inflate the market prices of those stocks by posting false information . . . on Internet message boards"
Summary of this case from Universal v. LycosOpinion
No. 00 Civ. 6635 (LTS)(FM).
September 27, 2004
SECURITIES AND EXCHANGE COMMISSION, James K. Hanson, Esq., Northeast Regional Office, New York, NY, Attorney for Plaintiff.
GURSEL MANDACI, Brooklyn, NY, Defendant Pro Se.
OPINION, INJUNCTION AND ORDER
This matter, in which Plaintiff Securities and Exchange Commission ("SEC" or "Plaintiff") seeks injunctive and monetary relief in connection with an alleged "pump-and-dump" scheme operated by Defendant Pro Se Gursel Mandaci ("Mandaci" or "Defendant"), comes before the Court on the parties' cross-motions for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The SEC alleges that Mandaci purchased certain stocks and then endeavored to artificially inflate the market prices of those stocks by posting false information and making groundless price predictions on Internet message boards before selling out his positions in those stocks in order to make a profit. The SEC contends that Mandaci's fraudulent scheme violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C.A. § 77q(a) (West 2004). Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.A. § 78j(b) (West 2004), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The SEC seeks a permanent injunction restraining Mandaci from future violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder, an order requiring Mandaci to disgorge any gains he received from his allegedly unlawful conduct plus prejudgment interest, and an order requiring Mandaci to pay a third-tier civil penalty pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act.
The SEC's moving papers were accompanied by a Notice to Pro Se Litigant Opposing Motion for Summary Judgment regarding the obligation to produce evidence in opposition to a summary judgment motion, as required by Local Civil Rule 56.2.
The Court has considered thoroughly all of the submissions the parties have made in connection with the instant motions. For the following reasons. Plaintiff's motion for summary judgment is granted, and Defendant's cross-motion for summary judgment is denied.
BACKGROUND
The following facts are undisputed except where specified otherwise. Defendant Gursel Mandaci is a foreign national who entered the United States on a student visa in 1996. (Mandaci Test. at 8. Exh. 2 to Declaration of James S. Kasmarcik ("Kasmarcik Decl.").) Mandaci was a student at Baruch College and has been employed as a driver for Victory Car Service. (Id. at 6-8.) Mandaci has not formally studied finance or the stock market. (Id. at 9.)
In February 1999, Mandaci opened an online margin trading account on E*Trade. (Id. at 9.) Mandaci made an initial deposit of $2,000.00 into the account on March 3, 1999, and then deposited an additional $3,500.00 into the account on April 5, 1999. (E*Trade Production at 001005, 001014, Exh. 3 to Kasmarcik Decl.) Throughout the rest of 1999, Mandaci lost money in connection with his E*Trade account. (Id. at 001010-001033.) Then, in early 2000, Mandaci began posting messages on Internet bulletin boards. (Mandaci Test. at 13-14, Exh. 2 to Kasmarcik Decl.) At around the same time that Mandaci began posting these messages on the Internet, Mandaci started to make a profit in connection with his E*Trade account. (Id.)
The SEC has proffered undisputed evidence that Mandaci purchased shares of six companies and, after making the purchases, began posting messages on Internet bulletin boards touting those stocks and predicting that the prices of those stocks would rise to certain target levels. After the prices of those stocks began to rise but before the prices reached Mandaci's predicted target levels. Mandaci sold his positions in those stocks at a profit.
Parallel Technologies, Inc.
On February 7, 2000, Mandaci, through his E*Trade account, bought 25,000 shares of stock in Parallel Techologies, Inc. (" PLLK") for $3,519.95 at a price of $0.1400 per share. On that same day, Mandaci purchased an additional 2,750 shares of PLLK stock for $391.20 at a price of $0.1350 per share. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.).
After purchasing the stock, Mandaci, using multiple screen names, posted numerous messages on the Yahoo! Finance Internet message board from February 7, 2004, through February 9, 2004, touting PLLK's stock. In his postings, Mandaci also set various short-term target prices for PLLK stock. (Mandaci PLLK Internet Postings, Exhs. 5-12 to Kasmarcik Decl.) Mandaci changed his target price in successive postings (after setting his target price at $2.00 per share, he lowered it to $0.50-$0.60 before raising it again to $0.75), some of which were only a few minutes apart. (Id., Exh. 8 to Kasmarcik Decl.) According to Mandaci, his messages recommending the stock were premised largely on information about the company's revenues and customer base found on the company's website. (Mandaci Dep. at 21-23, Exh. 1 to Kasmarcik Decl.) However, after buying the shares of PLLK stock and posting the messages, Mandaci telephoned the company whose website he had reviewed and learned that the company whose information on which he was relying was not PLLK, but rather another privately held company named Parallel Technologies, Inc. ("PT"). (Id. at 24.) In addition, Mandaci, using various screen names, had posted multiple messages on February 7, 2000, and at least one more message on February 9, 2000, touting PLLK, but actually containing language copied from a 1999 press release referring to PT. (Mandaci PLLK Internet Postings, Exs. 5, 6, 11, 12 to Kasmarcik Decl.; PT Press Release Exh. 13 to Kasmarcik Decl.). Mandaci testified that he believes that he made a posting identifying his mistake after he learned that he had been relying on information about the wrong company, but was unable to proffer any documentation relating to such a posting. (Mandaci Dep. at 17, 39-40, Exh. 1 to Kasmarcik Decl.)
On February 9, 2000, Mandaci sold his shares of PLLK stock at prices ranging from $0.3600 to $0.3650 per share, for a total profit of $6,127.36. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) According to the SEC, PLLK's stock experienced a sharp increase in trading volume and share price beginning on February 7, 2004, despite no reported news regarding the company. (PLLK Chart. Exh. 14 to Kasmarcik Decl.) On February 8, 2004, the day after Mandaci began posting messages relating to PLLK, the company's trading volume peaked at more than six million shares, after having traded at less than two million shares per day the week before. (Id.) PLLK's stock price peaked at $.3800 per share on February 9, 2000, the day that Mandaci sold his position in PLLK stock, before declining dramatically in the days to follow. (Id.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding PLLK ceased after he sold his position in that company. At the time Mandaci began posting messages touting PLLK stock, PLLK's most recent SEC filing containing financial information, a Form 10-K for fiscal year 1993, reported net losses of $1,581,542. (PLLK Form 10-K at 9, Exh. 4 to Kasmarcik Decl.)
PayForView.Com
On February 15, 2000, Mandaci bought 20,000 shares of PayForView.Com ("PAYV") stock at $0.6000 per share for $12.019.95 through his E*Trade account. Mandaci then bought an additional 2.800 shares of PAYV stock at $0.7700 per share for $2,175.95 on February 16, 2000, and an additional 9.760 shares of PAYV stock at $0.8300 per share for $8,120.75 on February 18, 2004. (E*Trade Production at 001038-001039, Exh. 3 to Kasmarcik Decl.)
Subsequent to making his initial purchase of PAYV stock, Mandaci, using multiple screen names, posted at least five messages on the Yahoo! Finance and ClearStation Internet message boards recommending PAYV stock. (Mandaci PAYV Internet Postings, Exhs. 16-20 to Kasmarcik Decl.; Mandaci Dep. at 40, 41, 42, 46, 47, 49, Exh. 1 to Kasmarcik Decl.) On February 15, 2000, Mandaci posted at least two messages on the Yahoo! Finance message board, touting PAYV as a "STRONG BUY" and predicting that the market price would make a "QUICK JUMP TO $1-$1.5 RANGE." (Mandaci PAYV Internet Postings, Exhs. 16,17 to Kasmarcik Decl.) Mandaci also posted information about PAYV on his own "Weekly Penny Picks" website. (Mandaci Dep. at 45, Exh. 1 to Kasmarcik Decl.) Mandaci testified that these recommendations were based on information that he saw posted on message boards and the fact that the stock was trading at unusual volume. (Id. at 42-44.) On February 18, 2000, Mandaci posted a message on the Yahoo! Finance message board stating, inter alia, that the price of PAYV stock was on the up trend and targeted to reach $2.00 over the short term. (Mandaci PAYV Internet Postings. Exh. 18 to Kasmarcik Decl.) On February 20, 2000, Mandaci posted a message on the ClearStation message board predicting that PAYV stock would reach a target price of $10.00 in the short term, and referring readers to the Weekly Penny Picks website, which, according to the posting, had set a $25.00 target price. (Id., Exh. 19 to Kasmarcik Decl.) The message failed to inform readers that Mandaci, himself, was solely responsible for the content of the Weekly Penny Picks site. On February 22, 2000, Mandaci posted another message on the Yahoo! Finance board calling PAYV a strong buy with a "12 Months Target Price $25.00." (Id., Exh. 20 to Kasmarcik Decl.)
On February 16, 2000, Mandaci sold 2,500 shares of the PAYV stock he had bought for $0.8200 per share. On February 23, 2000, Mandaci sold 19,760 shares at $0.9000 per share. (E*Trade Production at 001038-001039, Exh. 3 to Kasmarcik Decl.) According to the SEC, Mandaci's trading in PAYV stock between February 15, 2000, and February 23, 2000, resulted in a total profit of $5,284.56. The SEC asserts, and Mandaci does not dispute, that Mandaci seems to have made no postings relating to PAYV after February 23, 2003. According to the SEC, during the time Mandaci was touting PAYV, trading volume in PAYV increased from less than 1.5 million shares on February 14, 2000, to approximately 4 million shares on February 24, 2000, and the price of PAYV's stock rose from $0.53 to a high of $1.50 per share on February 24, 2000. (PAYV Chart, Ex. 21 to Kasmarcik Decl.)
Power Technologies, Inc.
On February 10, 2000, Mandaci bought 7,500 shares of Power Technologies, Inc. ("PWTC") stock through his E*Trade account for $9,394.69, or $1.2500 per share. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) Later that day, Mandaci purchased another 100 shares of PWTC stock for $122.26, or $1.2200 per share. (Id.)
After these purchases, Mandaci posted at least three messages on the Yahoo! Finance and ClearStation message boards touting PWTC stock. Hours after making the second purchase of PWTC shares. Mandaci posted a message on the ClearStation board stating that PWTC looks strong and that the float would be 7 million, and predicting that the price would be "GOING TO $3.00 SOON." (Mandaci PWTC Internet Postings, Exh. 23 to Kasmarcik Decl.) Mandaci testified that he based his prediction on information found on web pages and other Internet message boards. (Mandaci Dep. at 69-70, Exh. 1 to Kasmarcik Decl.) Mandaci posted another message on the ClearStation board on February 10, 2000, stating that PWTC was a strong buy with a float of only 2 million shares and a "12 Months Target Price $20.00." (Mandaci PWTC Internet Postings, Exh. 24 to Kasmarcik Decl.) Mandaci testified that he "cut and paste" the target price information from another website, although he could not recall with certainty which one (he thought it might have been the issuing company's site but was unsure). (Mandaci Dep. at 71-72, Exh. 1 to Kasmarcik Decl.) On February 14, 2000, Mandaci posted a message on the Yahoo! Finance board stating, inter alia, that PTWC was on a strong uptrend with a float of only 2 million, and referring readers to a full story about the company on the Weekly Penny Picks website. (Mandaci PWTC Internet Postings, Exh. 25 to Kasmarcik Decl.) Again, Mandaci failed to inform readers that he was responsible for the content on the Weekly Penny Picks site.
On February 11, 2000, Mandaci sold 1,600 shares of PWTC stock for $1.2200 per share. On February 15, 2000, Mandaci liquidated the remainder of his position in PWTC, selling 7,540 shares at prices ranging from $1.6100 to $1.6250 per share. By virtue of his trading in PWTC stock from February 10, 2000, through February 15, 2000, Mandaci made a profit of $2,141.01. (E*Trade Production at 001038, Exh. 3 to Kasmarcik Decl.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding PWTC ceased after he sold his position in that company. According to the SEC, PWTC stock experienced an increase in trading volume, from less than 350,000 shares on February 9, 2000, to over 1.8 million shares on February 10, 2000, and market price, from less than $1.00 per share on February 9, 2000, to $2.00 per share on February 16, 2000, despite a lack of any reported news about the company. (PWTC Chart. Exh. 26 to Kasmarcik Decl.) At the time that Mandaci began posting messages touting PWTC stock, PWTC's most recent SEC filing containing financial information, a Form 10-QSB for the period ended October 31, 1999, reported a net loss of $460,909 for the nine months ended October 31, 1999, and a shareholder deficit of $193,172. (PWTC Form 10-QSB at 2,6, Exh. 22 to Kasmarcik Decl.)
Internet Businesses International, Inc.
On February 23, 2000, Mandaci bought 27,500 shares of stock in Internet Businesses International, Inc. ("IBUI") through his E*Trade account for $17,748.95 at prices ranging from $0.6250 to $0.7500 per share. (E*Trade Production at 001039, Exh. 3 to Kasmarcik Decl.)
After making his first purchase of IBUI stock on February 23, 2000, Mandaci posted, using multiple screen names, at least four messages on Yahoo! Finance and ClearStation message boards touting IBUI's stock. (Mandaci IBUI Internet Postings, Exhs. 27, 29-31 to Kasmarcik Decl.) On February 23, 2000, Mandaci posted a message on the Yahoo Finance! board stating, inter alia, that IBUI was a "STRONG BUY." (Id., Exh. 27 to Kasmarcik Decl.) Also on February 23, 2000, Mandaci posted a message on the ClearStation message board stating that IBUI was "ON STRONG UP TREND" and predicting that the price would be going to "$2+ SOON." (Id., Exh. 29 to Kasmarcik Decl.) Mandaci testified that he based these predictions on information he found on Internet message boards and research he had done suggesting that the company expected to benefit from huge future DSL contracts. (Mandaci Dep. at 53-54, Exh. 1 to Kasmarcik Decl.) On February 24, 2004, Mandaci posted at least two messages, less than three hours apart, on the Yahoo! Finance board touting IBUI stock. In the first message, Mandaci stated a short term target price of $2.00. In the second message, Mandaci set the target price at $5.00. (Mandaci IBUI Internet Postings, Exhs. 30, 31 to Kasmarcik Decl.)
On February 24, 2000, Mandaci sold all 27,500 shares of IBUI stock that he had purchased the day before for prices ranging from $0.7050 to $0.7200 per share. Mandaci's total trading in IBUI stock between February 23, 2004, and February 24, 2004, resulted in a profit of $1,998.40. (E*Trade Production at 001039, Exh. 3 to Kasmarcik Decl.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding IBUI seem to have ceased after he sold his position in that company. According to the SEC, IBUI stock experienced an increase in trading volume, from about 5 million shares on February 22, 2000, to approximately 12 million shares on February 23, 2000, and market price, from $0.48 to $0.57 per share on February 23, 2000, to $0.77 per share on February 23, 2000, despite a lack of any reported news about the company. (IBUI Chart, Exh. 32 to Kasmarcik Decl.) At the time Mandaci began posting his messages touting IBUI stock, IBUI's most recent SEC filing containing financial information, a Form 10-Q for the period ended December 31, 1999, reported revenues of $835,548, net income of $24,565 and shareholder equity of $4,020.872. (IBUI Form 10-Q at 5-6, Exh. 28 to Kasmarcik Decl.)
New Sky Communications, Inc.
On February 28, 2000, Mandaci bought 41,000 shares of New Sky Communications, Inc. ("NSKY") through his E*Trade account for $10,269.95, or $0.2500 per share. On February 29, 2000, Mandaci purchased 30,275 more NSKY shares for $9,547.85, at prices ranging from $0.3100 to $0.3200 per share. (E*Trade Production at 001039-001040, Exh. 3 to Kasmarcik Decl.)
After purchasing the stock, Mandaci made at least five postings on the Internet, using multiple screen names, touting NSKY stock. (Mandaci NSKY Internet Postings, Exhs. 34-39 to Kasmarcik Decl.) On February 29, 2000, Mandaci posted at least two messages on the Yahoo! Finance message board lauding NSKY stock and, in the case of one of the messages, setting a short term target price of $1.00+. (Id., Exhs. 34, 35 to Kasmarcik Decl.) Mandaci testified that he based these statements on information obtained from the Yahoo!, Raging Bull and/or ClearStation message boards. (Mandaci Dep. at 56-57, Exh. 1 to Kasmarcik Decl.) On March 5, 2000, Mandaci posted a message on the Yahoo! Finance board stating,inter alia, that NSKY stock would rise to $2-$3 per share within 3-4 months and referring readers to the Weekly Penny Picks website, which, according to the posting, had set a long term (12-month) target price for NSKY of $5.00. (Mandaci NSKY Internet Postings, Exh. 36 to Kasmarcik Decl.) On that same day, Mandaci posted a similar message on the ClearStation board, also referring readers to the predictions made on the Weekly Penny Picks site. (Id., Exh. 37 to the Kasmarcik Decl.) Again, according to Mandaci, the postings were based on information obtained from other postings on the Internet. (Mandaci Dep. at 57-58, Exh. 1 to Kasmarcik Decl.) On March 6, 2000, Mandaci posted a story on his Weekly Penny Picks site including the $5.00 12-month target price for NSKY. (Mandaci NSKY Internet Postings, Exh. 38 to Kasmarcik Decl.) On March 8, 2004, Mandaci posted a message on the Yahoo! Finance board touting NSKY and referring readers to the 12-month target price of $5.00 predicted on the Weekly Penny Picks site. (Id., Exh. 39 to Kasmarcik Decl.) None of Mandaci's messages referring readers to the Weekly Penny Picks site informed readers that Mandaci was responsible for the content of that site.
Between March 1, 2000, and March 14, 2000, Mandaci made a series of sales and purchases of NSKY stock, culminating in his liquidation of his position in NSKY stock by virtue of his sale of his final 4,000 shares at $0.39 per share. Mandaci made $1,233.87 as a result of his trading in NSKY stock between February 28, 2004, and March 14, 2004. (E*Trade Production at 001039-001045, Exh. 3 to Kasmarcik Decl.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding NSKY seem to have ceased after he sold his position in that company. According to the SEC, NSKY stock experienced an increase in trading volume, from about 2.5 million shares on February 28, 2000, to over 13 million shares on March 8, 2000, and market price, from $0.24-$0.30 per share on February 28, 2000, to $0.47 per share on March 8, 2000, despite a lack of any reported news about the company. (NSKY Chart, Exh. 40 to Kasmarcik Decl.) At the time Mandaci began posting messages touting NSKY stock, NSKY's most recent SEC filing containing financial information, a Form 10-Q for the period ended September 30, 1999, reported that for the nine months ended September 30, 1999, NSKY had no revenues and a net loss of $27,085. The company's shareholder equity was stated at $1,284,566. (NSKY Form 10-Q at 4-6, Exh. 33 to Kasmarcik Decl.)
National Datacomputer, Inc.
On March 6, 2000, Mandaci bought 11,000 shares of stock in National Datacomputer, Inc. ("IDCP") through his E*trade account at prices ranging from $0.6250 to $0.6562 per share. Mandaci purchased an additional 500 shares of IDCP stock on March 8, 2000, for $1.0312 per share. (E*Trade Production at 001044, Exh. 3 to Kasmarcik Decl.)
Subsequent to making his initial purchase of IDCP stock, Mandaci posted at least four messages on Internet message boards, using multiple screen names, recommending IDCP stock. (Mandaci IDCP Internet Postings, Exh. 42-45 to Kasmarcik Decl.) On March 6, 2000, Mandaci posted a message on the ClearStation board touting IDCP and predicting that its stock price would be around $5.00 soon. (Id., Exh. 45 to Kasmarcik Decl.) Mandaci testified that he could not remember the basis for his statements, but believed they might have been based on the fact that there was "unusual volume" at the time. (Mandaci Dep. at 69, Exh. 1 to Kasmarcik Decl.) On that same day, Mandaci posted several messages on the Yahoo! Finance board recommending IDCP and stating, inter alia, that IDCP would be around $5.00 soon and, in one of the messages, that there was "% 1000 SHORT TERM POTENTIAL." (Mandaci IDCP Internet Postings, Exh. 42-44 to Kasmarcik Decl.) According to Mandaci, these statements were predicated on information about volume and the fact that the numbers looked good to him. (Mandaci Dep. at 67-68, Exh. 1 to Kasmarcik Decl.)
On March 8, 2000, Mandaci sold 6,500 shares of IDCP stock for $1.0700 per share and, on March 9, 2000. Mandaci liquidated his position in IDCP, selling 5000 shares at $1,2500 per share. As a result of his trading in IDCP stock from March 6, 2000, to March 9, 2000, Mandaci made a profit of $5,526.67. (E* Trade Production at 001044, Exh. 3 to Kasmarcik Decl.) The SEC asserts, and Mandaci does not dispute, that Mandaci's postings regarding IDCP seem to have ceased after he sold his position in that company. According to the SEC, IDCP stock experienced an increase in trading volume, from about 100,000 shares on March 3, 2000, to over 786,400 shares on March 6, 2000, and market price, from $0.4375 — $0.5625 per share on March 3, 2000, to about $1.35 per share on March 9, 2000, despite a lack of any reported news about the company. (IDCP Chart, Exh. 46 to Kasmarcik Decl.) At the time Mandaci began posting his recommendations of IDCP, IDCP's most recent SEC filing containing financial information, a Form 10-QSB for the period ended September 30, 1999, reported net losses of $234.619 and shareholder equity of $1,977.469. (IDCP Form 10-QSB at 4-7, Exh. 41 to Kasmarcik Decl.)
DISCUSSION
Summary Judgment Standard
Summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Summary judgment shall not be granted "if, resolving all ambiguities and drawing all inferences against the moving party, there exists a dispute about a material fact `such that a reasonable jury could return a verdict for the nonmoving party.'"Green v. Harris Publ'ns, Inc., No. 02 Civ. 9825(DC), 2004 WL 1810569, *4 (S.D.N.Y. Aug. 12, 2004) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-49 (1986)). The burden is initially on the moving party to show the absence of a genuine issue of material fact. Am. Home Assurance Co. v. Zim Jamaica, 296 F.Supp.2d 494, 498 (S.D.N.Y. 2003); Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986). "Once the moving party discharges its burden of demonstrating that no genuine issue of material fact exists, the burden shifts to the nonmoving party to offer specific evidence showing that a genuine issue for trial exists." Am. Home Assurance, 296 F.Supp.2d at 498-99. However, "[c]onclusory allegations, conjecture, and speculation . . . are insufficient to create a genuine issue of fact." Niagara Mohawk Power Corp. v. Jones Chem., Inc., 315 F.3d 171, 175 (2d Cir. 2002) (internal citation omitted). "The nonmoving party must produce evidence in the record and `may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible.'" Seiderbaum v. City of New York, 309 F.Supp.2d 618, 620-21 (S.D.N.Y. 2004) (quoting Ying Jing Gan v. City of New York, 996 F.2d 522, 532 (2d Cir. 1993)). When deciding cross-motions for summary judgment, the standard to be applied "`is the same as that for individual motions for summary judgment and the court must consider each motion independent of the other.'" Shultz v. Stoner, 308 F.Supp.2d 289, 298 (S.D.N.Y. 2004) (quoting Aviall, Inc. v. Ryder Sys., Inc., 913 F.Supp. 826, 828 (S.D.N.Y. 1996)).
SEC's Claims that Mandaci Violated the Antifraud Provisions of the Federal Securities Laws
Plaintiff SEC asserts that Defendant Mandaci engaged in a fraudulent scheme in violation of Section 17(a) ("Section 17(a)") of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) ("Section 10(b)") of the Exchange Act ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 ("Rule 10b-5") promulgated thereunder, 17 C.F.R. § 240.10b-5. Section 10(b) "prohibits the direct or indirect employment of manipulative and deceptive devices in connection with the purchase or sale of securities, using the mails, instruments of interstate commerce, or any facility of a national securities exchange," and is enforced through SEC Rule 10b-5. SEC v. Softpoint, Inc., 958 F.Supp. 846, 862 (2d Cir. 1997). "To have violated Section 10(b) and Rule 10b-5, [a defendant] must have: (1) made a material misrepresentation or omission as to which he 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).
Section 17(a) "is a general prohibition against fraud in the offer or sale of securities, using the mails or the instruments of interstate commerce." Softpoint, Inc., 958 F. Supp. at 861. The standard for a violation of Section 17(a)(1) is essentially the same as it is for a violation of Section 10(b) and Rule 10b-5, although no showing of scienter is required for the SEC to obtain an injunction under subsections (a)(2) or (a)(3). Id.; Aaron v. SEC, 446 U.S. 680, 697 (1980); SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1467 (1996).
Section 17(a) provides as follows:
It shall be unlawful for any person in the offer or sale of any securities or any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act) by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.15 U.S.C.A. § 77q(a) (West 2004).
The SEC's Contention that Mandaci Made Material Misrepresentations and Omissions
The SEC has proffered evidence that Mandaci, using a variety of screen names, posted numerous and at times inconsistent messages touting certain stocks and suggesting that those stocks would reach various target price levels. The SEC contends that Mandaci's messages included arbitrary and unfounded price predictions concerning certain stocks. Mandaci admits that he made all the postings identified by the SEC. Although Mandaci claims in his deposition testimony and affidavit that his recommendations and price predictions were based on information he read on various Internet message boards and in chat rooms, as well as on information he obtained from unidentified sources about volume increases, such statements are merely conclusory and self-serving, given that Mandaci has neither proffered any documentary support for these assertions nor offered any specifies as to which postings he relied on, how those postings supported his recommendations, the source of his information concerning volume increases, the substance of that information, or any other relevant information. In fact, the SEC has proffered evidence, not refuted by Mandaci, that many of the companies whose stock Mandaci was touting were actually reporting net losses in their public filings around the time Mandaci was making his predictions. "[S]pecific price predictions" are violative of the antifraud provisions of the federal securities laws if there is "no adequate basis" for the representations. SEC v. R.A. Holman Co., Inc., 366 F.2d 456, 458 (2d Cir. 1966), cert. denied, 389 U.S. 991 (1967). The Court concludes that the SEC has proffered sufficient evidence to show that there is no genuine issue of material fact as to the lack of adequate basis for Mandaci's predictions and recommendations. Mandaci has failed to carry his burden of coming forward with concrete evidence sufficient to preclude summary judgment in the SEC's favor by creating a triable issue of fact; thus the Court finds that a rational factfinder could not conclude based on the evidence proffered, even when read liberally and viewed in the light most favorable to Mandaci, that Mandaci had an adequate basis for his predictions.
In addition, the SEC has also proffered evidence that, in some of Mandaci's Internet postings. Mandaci referred readers to predictions made on (and provided a link to) a website, called Weekly Penny Picks, which purportedly provided support for his message board predictions concerning these stocks. The SEC has further proffered evidence that Mandaci was responsible for the content of the Weekly Penny Picks site, and that Mandaci failed to disclose this fact in any of his postings, thus failing to counteract the implicit representation that the Weekly Penny Picks site was an independent source of information. Mandaci admits that he alone was in control of the Weekly Penny Picks site, and that he did not disclose this fact in his postings. Mandaci was clearly under a duty to disclose such information, as Rule 10b-5 specifically provides that a person may not "omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). Mandaci's statements that the predictions made in the postings could be corroborated by predictions and information included on the Weekly Penny Picks website were without question made misleading to potential investors by the omission of the fact that Mandaci, himself, was responsible for the content of the website.
As to whether these omissions and misstatements satisfy the materiality requirement of Rule 10b-5, "there must be a substantial likelihood that a reasonable investor would consider the information important in his decision-making process." RMED Int'l, Inc. v. Sloan's Supermarkets, Inc., 185 F.Supp. 2d 389, 399 (S.D.N.Y. 2002). "Although the misstated or omitted fact must have been one that would have assumed actual significance in the reasonable shareholder's decision-making process, there is no requirement that the fact would have been outcome determinative."Id. Mandaci has proffered no evidence whatsoever to refute the SEC's contentions that a reasonable investor would have considered the above-described information important. Even when viewing the facts in the light most favorable to Mandaci, the Court concludes that a rational factfinder could not determine that a reasonable investor would not have considered important the fact that Mandaci did not have an adequate basis for his price predictions. Similarly, the Court finds that a rational factfinder could not conclude that a reasonable investor would not have considered important the fact that the website to which Mandaci was referring his readers, which was supposed to buttress Mandaci's predictions, was actually his own website.
Whether Mandaci's Material Misrepresentations and Omissions Were Made In Connection With the Offer, Sale or Purchase of Securities
Since section 10(b) and Rule 10b-5 have been always been viewed as "catchalls to prevent manipulation and misrepresentation . . ., courts have liberally construed the requirement that violative conduct must occur `in connection with' the purchase or sale of a security." Softpoint, Inc., 958 F.Supp. at 862. (internal citations and quotation marks omitted). To establish that a scheme to defraud satisfies the "in connection with" requirement, "[i]t is enough that the scheme to defraud and the sale of securities coincide." SEC v. Zandford, 535 U.S. 813, 822 (2002).
Here, the SEC has proffered evidence that Mandaci engaged in a scheme to defraud whereby he purchased stock in certain companies, then began touting and making price predictions concerning the stock of those companies without an adequate basis for his recommendations, and then sold his positions in those stocks before the prices of those stocks reached the level he had predicted. The SEC's evidence thus demonstrates that the scheme to defraud coincided with his and the general public's trading in securities. Defendant Mandaci has proffered no evidence to refute the SEC's position. Hence, Mandaci has failed to meet his burden of proffering evidence sufficient to create a genuine issue of fact for trial on the issue of whether Mandaci's material misrepresentations and omissions were made in connection with the sale or purchase of securities. Evidence that Mandaci Acted With Scienter
"Scienter, as used in connection with the securities fraud statutes, means intent to deceive, manipulate, or defraud."First Jersey Sec., Inc., 101 F.3d at 1467 (citing Ernst Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976)). "Scienter may be inferred from proof of `facts that constitute strong circumstantial evidence of conscious misbehavior or recklessness' or from proof that a defendant had `both motive and opportunity to commit fraud.'" Marcus v. Frome, 2004 WL 1781573, at *6 (S.D.N.Y. Aug. 2, 2004) (quoting Rothman v. Gregor, 220 F.3d 81, 89 (2d Cir. 2000)).
Plaintiff SEC has proffered a great deal of evidence that Mandaci intentionally engaged in a scheme to deceive and defraud whereby he would profit by artificially raising the prices of various stocks in which he had purchased a position. The SEC's evidence shows that, with respect to several stocks, Mandaci began posting messages on internet boards shortly after purchasing positions in those stocks. In the messages, Mandaci touted the stocks and made predictions that the stocks would rise in price over the short term. "Statements regarding projections of future performance may be actionable under Section 10(b) or Rule 10b-5 . . . if the speaker does not genuinely or reasonably believe them." In re Int'l Bus. Mach. Cor. Sec. Litig., 163 F.3d 102, 107 (2d Cir. 1998). The SEC has proffered evidence that Mandaci's recommendations and predictions were not adequately supported (a contention that Mandaci attempts to refute, as noted above, with only conclusory statements), and that a number of the predictions, which were made in a series of postings on various Internet sites, sometimes within hours or even minutes of each other, were inconsistent. In addition, the SEC has proffered evidence that Mandaci sold his positions in those stocks for a profit before they reached the target price levels he had predicted.
Further, the SEC has proffered evidence that, in certain of the posted messages, Mandaci deceptively referred readers to his Weekly Penny Picks website in order for corroboration of the predictions he made in the postings regarding the stocks. Mandaci has admitted both that he was responsible for the content of the Weekly Penny Picks site, and that he failed to disclose the fact that he was responsible for the site's content, explaing that, "when you tell this is your web page, maybe it is not going to affect people to go to your web page." (Mandaci Dep. at 59-60, Exh. 1 to Kasmarcik Decl.)
As noted above, Mandaci admits that he bought and sold the stock as the SEC has alleged, and that he posted the messages. The only evidence Mandaci has proffered to refute the SEC's contention that he acted with scienter are his own unsupported statements, made during his deposition and in his affidavit, that he was a struggling student trying to fund his education and that his sole motive in making the postings was to generate traffic for his Weekly Penny Picks website so that he could derive advertising revenue from the site. (Mandaci Dep. at 44-45, Exh. 1 to Kasmarcik Decl; Mandaci Aff., dated July 11, 2003, at 2.) Mandaci's assertion, however, is belied by his own conduct; the SEC has proffered undisputed evidence that the vast majority of Mandaci's postings making bold recommendations and predictions about stocks in which he had purchased an interest did not even mention Mandaci's website.
Thus, the Court finds that there is strong circumstantial evidence suggesting that Mandaci could not have reasonably believed in his price predictions, and that Mandaci did intend to deceive investors when he failed to disclose in his postings referring to his website that he was solely responsible for the content of that website. Accordingly, the Court finds that a rational factfinder could not determine, even when viewing the evidence in the light most favorable to Mandaci, that Mandaci did not act with scienter.
Mandaci's Contentions that the SEC has Failed to Establish that His Recommendations and Predictions Had Any Effect on the Prices of the Stocks He Was Touting
Mandaci argues that the SEC has not shown by a preponderance of the evidence that Mandaci actually affected the price of the stocks at issue in this case by his actions. Mandaci attached to his affidavit submitted in opposition to the SEC's motion for summary judgment and in support of his cross-motion for summary judgment various charts showing price increases in the stock of a random assortment of companies over the relevant time period, in an effort to establish that any increases in the prices of the stocks he was touting were the result of an overall bull market between January and March 2000, rather than of anything he said or predicted about those stocks. (Mandaci Aff., dated July 11, 2003, at 1.) However, Mandaci's contentions are irrelevant because it is not necessary for the SEC to establish that he successfully manipulated the stock prices in order for it to succeed on its claims. Specific price predictions that lack an adequate basis are themselves violative of the antifraud provisions of the securities laws. R.A. Holman Co., Inc., 366 F.2d at 458. This is true regardless of whether those predictions actually have the effect of manipulating stock prices.
The Court thus finds that Plaintiff SEC has proffered evidence sufficient to establish each of the elements of its claims under the antifraud provisions of the federal securities laws, and that Defendant Mandaci has failed to come forward with evidence sufficient to create a material issue of fact for trial. Reading Mandaci's pro se submissions liberally and construing the facts and evidence in the light most favorable to Mandaci, the Court concludes that no rational jury could find in Mandaci's favor. Accordingly, the SEC is entitled to judgment as a matter of law as to all its claims. Mandaci's cross-motion for summary judgment is denied.
Relief
As noted above, the SEC seeks relief in the form of: (1) a permanent injunction restraining Mandaci from further violations of the antifraud provisions of the federal securities laws; (2) an order requiring Mandaci to disgorge $22,311.87 in ill-gotten gains Mandaci allegedly received from his unlawful conduct, plus prejudgment interest; and (2) an order requiring Mandaci to pay a third-tier civil penalty.
Permanent Injunction
Both the Securities Act and the Exchange Act provide for injunctive relief when their provisions have been violated. See 15 U.S.C. §§ 77t(b), 78u(d). Pursuant to those provisions, "a defendant may be permanently enjoined from further violations of either act." Softpoint, Inc., 958 F. Supp. at 866. Injunctive relief should be granted "when there is a `realistic likelihood of recurrence' of the violations, and is appropriate even on summary judgment. Id. at 867 (quoting SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 99-100 (2d Cir. 1978)).
The Second Circuit has directed trial courts to consider certain factors when determining the likelihood of recurrence: "(1) the degree of scienter involved, (2) the isolated or recurring nature of the fraudulent activity, (3) the defendant's appreciation of his wrongdoing, and (4) the defendant's opportunities to commit future violations." Softpoint, Inc., 958 F. Supp. at 867. The Court concludes, after a thorough analysis of these factors, that a realistic likelihood does exist that Mandaci's wrongdoing would recur. As noted above, the SEC has proffered undisputed evidence demonstrating a high degree of scienter. Further, Mandaci's fraudulent behavior was not limited to an isolated incident but, rather, involved the making of numerous postings concerning a number of different stocks during February and March 2000. In addition, Mandaci, although he admits virtually all of the conduct alleged, has shown no appreciation of the wrongfulness of his actions, and there is no reason to think that Mandaci lacks the wherewithal to engage in a similar scheme again. Accordingly, Mandaci is hereby permanently enjoined from committing future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
Disgorgement
"Disgorgement of illicit profits is a proper equitable remedy for securities fraud." Softpoint, Inc., 958 F. Supp. at 867. Rather than being punitive in nature, "the primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws." First Jersey Sec., Inc., 101 F.3d at 1474. Thus, "the proper measure of disgorgement is the amount of the wrongdoer's unjust enrichment." Softpoint, Inc., 958 F. Supp. at 867. The district court is afforded broad discretion in deciding both whether to order disgorgement and in calculating the amount to be disgorged.First Jersey Sec., Inc., 101 F.3d at 1474-75. Further, the amount ordered need only be an approximation of the illicit profits gained. Id. at 1475.
The SEC has proffered evidence that Mandaci's fraudulent scheme generated profits of $22,311.87. Mandaci has proffered no evidence to contradict the SEC's claims. Accordingly, Mandaci is ordered to disgorge $22,311.87, the full amount of his illicit profits. Prejudgment Interest
The SEC also seeks an order requiring Mandaci to pay prejudgment interest. A district court has broad discretion to decide whether to grant prejudgment interest. Id. at 1476. In determining whether to grant such an award, a court should examine a number of factors, including "(i) the need to fully compensate the wronged party for actual damages suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court." Id. (internal citation and quotation marks omitted). The remedial purpose of the statute takes on heightened importance in enforcement actions brought by a regulatory agency.Id. The Court has considered carefully the above-referenced factors and concludes that an award of prejudgment interest in the amount of $8,103.18 would be consistent with the remedial purpose of the relevant statutes, and therefore is appropriate here.
The Court has used the IRS underpayment rate in calculating prejudgment interest from March 15, 2000, through the present.See SEC v. Tanner, 2003 WL 21523978, at *2 (S.D.N.Y. July 3, 2003) (citing First Jersey Sec. Inc., 101 F.3d at 1476)).
Accordingly, the Court directs that Mandaci shall disgorge to the SEC the $22,311.87 that he gained from his fraudulent scheme, and shall also pay to the SEC $8,103.18 in prejudgment interest.
Civil Monetary Penalty
Both the Securities Act and the Exchange Act provide for civil penalties when their provisions have been violated. Softpoint, Inc., 958 F.Supp. at 868; see 15 U.S.C. §§ 77t(d), 78u(d)(3). Both statutes provide for three tiers of potential penalties; which tier is applicable in a given case depends on the severity of the offense. Id. A third tier penalty, the most severe, is appropriate where the violation of the securities laws involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, and where the violation directly or indirectly caused substantial losses to other persons or created a significant risk of substantial losses to other persons. (Id.) The amount of a third tier penalty shall not exceed the greater of $100,000 for a natural person, or the gross amount of pecuniary gain to the defendant. See 15 U.S.C. § 78u(d)(3)(B)(iii); 15 U.S.C. § 77t(d)(2)(C). Here, as noted above, the Defendant acted with a high degree of scienter; thus, the Court finds that Mandaci's violations did involve fraud, deceit and manipulation of the public for personal gain. Further, Mandaci's scheme to induce investors to buy stock in companies based on unfounded information did create a significant risk of substantial losses to other persons. Mandaci is hereby assessed a third tier civil penalty in the amount of $50,000.
CONCLUSION
For the foregoing reasons, Plaintiff SEC's motion for summary judgment is granted, and Defendant Gursel Mandaci's cross-motion for summary judgment is denied. Defendant Gursel Mandaci is permanently restrained and enjoined from future violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Mandaci is also directed to disgorge $22,311.87 to the SEC, and to pay an additional $8,103.18 to the SEC in prejudgment interest. Defendant Mandaci is also directed to pay to the SEC a civil penalty of $50,000. The Clerk of the Court is directed to enter judgment in the SEC's favor and close this case.
SO ORDERED.