Summary
imposing penalty for each of 200 defrauded investors
Summary of this case from Sec. & Exch. Comm'n v. Lek Sec. Corp.Opinion
00 CIV. 0108 (DLC).
August 14, 2001
OPINION AND ORDER
Following notice to the defendants and relief defendants, plaintiff Securities and Exchange Commission ("SEC") moves for summary judgment and for the entry of final judgment against the defendants and relief defendants in this securities fraud action. For the reasons set forth below, that unopposed motion is granted.
BACKGROUND
The SEC brought this enforcement action on January 7, 2000, alleging that Milan Capital Group, Inc. ("Milan") had violated broker-dealer registration requirements. The SEC named Ira Monas ("Monas") and his former wife, Rita Monas, as relief defendants. The SEC alleged that Milan had received funds from investors based on representations that it would use the funds to purchase shares ("IPO shares") in certain highly-publicized initial public offerings, but that Milan did not have access to and did not obtain any IPO shares for these investors. The SEC alleged that Monas was Milan's president and sole owner. Meanwhile, the SEC obtained a temporary restraining order ("TRO") restraining Milan from acting as a broker and freezing its assets. On January 18, 2000, Milan stipulated to the entry of a preliminary injunction.
On January 21, 2000, upon the ex parte application of the SEC, the Court appointed Aaron Marcu (the "Receiver") as the Receiver of Milan and empowered it to take all steps necessary to recover the assets of Milan. On February 14, 18, 23, and 25, the Court granted applications made by the Receiver for TROs freezing assets of the relief defendants.
On February 29, 2000, the SEC filed an amended complaint alleging that Milan, Monas, and additional defendants Jason Cope ("Cope), Michael Lamhut ("Lamhut"), and Investment Offices d/b/a/ AC Financial, Inc. ("AC Financial"), had violated the anti-fraud provisions of the securities laws. The SEC also charged Monas, Cope, and Lamhut with aiding and abetting Milan's violation of the broker-dealer registration law. The SEC named Rita Monas, Jennifer Monas, Douglas Monas, Sands Point International Corp. (AC Financial's parent which was allegedly owned by Douglas Monas and controlled by Ira Monas), and two entities owned by Lamhut, Michael's Capital Consultants, Inc. and HWK Consultants, Inc., as relief defendants.
On June 2, 2000, the Court entered orders of default against AC Financial, Michael's Capital Consultants, Inc., and HWK Consultants, Inc. On June 13, 2000, the Court entered an order of default against Sands Point International Corp.
On November 9, 2000, the Court granted the SEC's motion for partial summary judgment against defendants Monas, Cope, and Lamhut on the first, second, and fourth claims of the amended complaint. The Court found each of these defendants liable for securities fraud and for aiding and abetting Milan's violation of the broker-dealer registration requirements. Securities and Exchange Comm'n v. Milan Capital, No. 00 Civ. 108 (DLC), 2000 WL 1682761, at * 6-8 (S.D.N.Y. Nov. 9, 2000). The Court also stated that permanent injunctions would be entered against each defendant, and that both full disgorgement and prejudgment interest at the IRS underpayment rate were appropriate. Id. at *9-10. The Court stated that the SEC's request for imposition of civil penalties would be addressed at the close of the case, following the conclusion of the Receiver's investigation and in conjunction with the determination of the amount of disgorgement. Id. at *10.
After the entry of partial summary judgment against these defendants on the first, second, and fourth claims of the amended complaint, the only remaining claim of the amended complaint was the third claim, which was solely against Milan. On June 14, 2001, the Court entered a Stipulated Judgment of Liability Against Defendant Milan Capital Group, which was submitted by the Receiver and the SEC. See infra.
On December 29, 2000, a Final Judgment of Permanent Injunction was entered against Monas, Lamhut, Cope, and AC Financial, which enjoined these defendants from future violations of the anti-fraud provisions of the securities laws. Cope appealed that judgment, but abandoned the appeal, which has since been dismissed by the Second Circuit Court of Appeals for failure to prosecute.
On February 20, 2001, on behalf of Milan, the Receiver answered the SEC's amended complaint. Based upon the results of his investigation, the Receiver admitted the essential allegations of the IPO scheme. On June 12, 2001, the SEC and the Receiver submitted a Stipulated Judgment of Liability Against Defendant Milan Capital Group on the third claim of the amended complaint, which was entered on June 14, 2001.
DISCUSSION
A. Final Judgment and Disgorgement
The SEC requests that final judgment be entered against defendants Monas, Cope, Milan, and AC Financial, and requests that the Court adopt the Receiver's findings as to the amount of disgorgement. A district court has broad discretion to order disgorgement of profits from illegal activities. See Securities and Exchange Comm'n v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996). "The primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their illegal gains, thereby effectuating the deterrence objectives of those laws." Id.
After an 11-month investigation, the Receiver filed under seal a detailed accounting of the flow of over $8 million from the accounts of defrauded investors to the defendants. According to the Receiver's accounting, the defendants took in at least $8,370,680 from about 200 investors for the purchase of IPO shares. The SEC requests that the Court adopt the Receiver's findings and enter a final judgment of disgorgement against Monas, Cope, Milan, and AC Financial in this amount, in addition to $1,024,386.67 in prejudgment interest. The Court having found that disgorgement is the appropriate remedy to deter future violations of the securities laws by these defendants, Monas, Cope, Milan, and AC Financial are jointly and severally liable for disgorgement and prejudgment interest in the amount of $9,395,066.67.
The SEC does not seek a final judgment of disgorgement against Lamhut, who died sometime after the entry of partial summary judgment.
The SEC further requests that Monas, Cope, Milan, and AC Financial be held liable for payments made to the Receiver to cover his fees and costs. On January 21, 2001, the Court approved payment of $854,316.61 in fees and costs to the Receiver. Accordingly, Monas, Cope, Milan, and AC Financial are jointly and severally liable for this amount, as well as any future costs and fees incurred by the Receiver which are approved.
The SEC also requests that substantial civil monetary penalties be imposed against Monas and Cope. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 15 U.S.C. § 78u(d)(3), prescribes three tiers of penalties for violations of the securities laws. The third tier provides for a maximum of $100,000, if the violation "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 78u(d)(3)(B) (iii). The SEC suggests that each of the defendants' violations should fall under the third tier of civil penalties available and that the total amount imposed should be more than $20 million.
Because Lamhut is dead and Milan and AC Financial are "empty shells," the SEC does not seek civil penalties against Lamhut, Milan, and AC Financial.
As set forth in the November 9, 2000 Opinion, Monas and Cope acted with scienter. Monas was at the center of the fraud, and Cope at best acted with reckless disregard of evidence that the transactions he recommended to customers were fraudulent, or at worst with actual knowledge of the fraud. Milan Capital, 1996 WL 1682761, at *7, *10. Moreover, Monas' and Cope's fraud resulted in potential losses to investors of over $8 million. While the SEC and the Receiver obtained a TRO and asset freeze against Milan, the SEC represents that millions of dollars of investor funds have not been traced and remain missing.
The Commission has established that defendants' violations of Section 17(a) of the Securities Act and Section 10 of the Exchange Act and Rule 10b-5 thereunder involved fraud and deceit, and that their violations resulted in substantial losses to other persons. Third tier statutory penalties are warranted against Monas and Cope. Accordingly, Monas and Cope are each directed to pay a statutory penalty of $50,000 per violation. Monas and Cope purported to conduct at least one transaction for some 200 investors. Because there have been at least 200 violations of the Exchange Act, Monas and Cope are ordered to pay a civil penalty of $10 million. The SEC having made no showing that the defendants are able to satisfy a judgment of even this size, its request for an even larger penalty is denied.
The SEC requests a $20 million penalty by multiplying the maximum penalty of $100,000 and 200 investors.
B. Relief Defendants
The SEC requests that the Court enter a final judgment of restitution and disgorgement against relief defendants Rita Monas, Jennifer Monas, and Douglas Monas. The Receiver has identified and secured assets in the possession of these relief defendants, who are members of Monas' immediate family. According to the SEC, the proceeds from the sale of these items satisfy the amounts owed in restitution and disgorgement by these relief defendants. The SEC having represented that there are no outstanding issues as to these relief defendants, final judgment shall be entered against them.
C. Defaulted Relief Defendants
Finally, the SEC requests that final judgment be entered against defaulted relief defendants Michael's Capital Consultants, Inc., HWK Consultants, Inc., and Sands Point International Corp. pursuant to Rule 55(b)(2), Fed.R.Civ.P. These relief defendants were served with the amended summons and complaint and failed to answer. As noted above, orders of default were entered against these relief defendants on June 2 and 13, 2000. These relief defendants were also served with the instant motion for summary judgment and proposed order of final judgment, and they have not submitted any response or opposition. The Receiver has identified and secured investor assets in the possession of these relief defendants, and these relief defendants have entered into stipulations with the Receiver regarding the transfer of certain monies to the Receiver. According to the SEC, these transfers satisfy the amounts owed in restitution and disgorgement by these relief defendants, and there are no outstanding issues as to these relief defendants. Accordingly, the SEC is entitled to judgment pursuant to Rule 55(b)(2), Fed.R.Civ.P., against relief defendants Michael's Capital Consultants, Inc., HWK Consultants, Inc., and Sands Point International Corp.
D. Outstanding Issues
Following the instant Opinion and accompanying final judgments, the only outstanding issues in this case concern the cross claims filed by the Receiver on February 20, 2001. The Receiver named nine cross-claim defendants: Monas, Cope, John Doe as executor of Lamhut's estate, AC Financial, Sands Point International Corp., Michael's Capital Consultants, Inc., HWK Consultants, Inc., Scott Eliasoph, and Millennium Global Associates, Inc. The cross-claim defendants have defaulted, and the Receiver has voluntarily dismissed the complaint as to one of them, Scott Eliasoph.
The Court having resolved all issues relating to the SEC's claims against the defendants and relief defendants, the SEC seeks entry of a partial judgment pursuant to Rule 54(b), Fed.R.Civ.P. Rule 54(b) states in relevant part:
When more than one claim for relief is presented in an action . . . or when multiple parties are involved, the court may direct the entry of a final judgment as to one or more but fewer than all of the claims or parties only upon an express determination that there is no just reason for delay and upon an express direction for the entry of judgment.
Fed.R.Civ. p. 54(b). For entry of a partial judgment under Rule 54 (b), there must be
(1) multiple claims or multiple parties . . ., (2) at least one claim, or the rights and liabilities of at least one party must be finally decided within the meaning of 28 U.S.C. § 1291, and (3) the district court must make "an express determination that there is no just reason for delay" and expressly direct the clerk to enter judgment.Advanced Magnetics, Inc. v. Bayfront Partners, Inc., 106 F.3d 11, 16 (2d Cir. 1997). As discussed above, in this case there are multiple parties, and all issues relating the SEC's claims against the defendants and the relief defendants have been resolved. The cross-claim defendants having defaulted and no defendant having opposed entry of partial judgment, there is no just reason for delay. Accordingly, a partial judgment will be entered pursuant to Rule 54(b), Fed.R.Civ.P.
CONCLUSION
For the reasons stated, the SEC's motion for summary judgment is granted. Partial judgment shall therefore be entered pursuant to Rule 54 (b), Fed.R.Civ.P., in favor of the SEC and against defendants Monas, Cope, Milan, and AC Financial, and against relief defendants Rita Monas, Jennifer Monas, Douglas Monas, Sands Point International Corp., Michael's Capital Consultants, Inc., and HWK Consultants, Inc. Defendants Monas, Cope, Milan, and AC Financial are jointly and severally liable for disgorgement of illicit profits in the amount of $8,370,680, prejudgment interest in the amount of $1,024,386.67, and fees and costs to the Receiver in the amount of $854,316.61. Monas and Cope are also jointly and severally liable for a statutory penalty of $10 million.
SO ORDERED.