Summary
concluding that the defendant's "current financial net-wroth is irrelevant to the Court's consideration of the disgorgement award"
Summary of this case from SECURITIES EXCHANGE COMMISSION v. MOHNOpinion
Case No. 2:01-CV-290
September 30, 2002
OPINION AND ORDER
This matter is before the Court on Defendant Karen Estrada's Motion to Resolve all remaining issues against her (Doc. #109) and on Plaintiff's Motion for an Order imposing monetary Relief against Defendants Karen Estrada, Fund Global, LLC and Global Equity Group, LLC (Doc. #119). For the reasons that follow, Defendant's motion is denied and the Plaintiffs' motion is granted in part.
I.
The Plaintiff Securities and Exchange Commission ["SEC"] commenced this action on April 2, 2001 to remedy alleged violations of § 17(a)(1)-(3); § 10(b); and § 15(a)(1), (c)(1) of the Securities and Exchange Act of 1934 by individual Defendants Steven E. Thorn and Karen Estrada as well as Defendants First Financial Ventures, LLC, Second Financial Ventures, LLC and Third Financial Ventures, LLC ["the Ventures Defendants"]. The SEC alleges, inter alia, that Defendant Thorn, through the various defendants, conducted a series of fraudulent investment schemes to raise at least $63.5 million for the purported purpose of investing in European bank trading programs which programs allegedly generated high investment returns with little or no risk.
According to the SEC, Thorn and others raised at least $9.5 million in a series of schemes beginning in 1998 (referred to as the "Early Thorn Programs"); the SEC further alleges that, from November 1999 to April 2001, Thorn and others raised an additional $54 million through the Ventures Defendants (referred to as the "Bank One Program"). Defendant Estrada personally raised approximately $7.15 million from investors for Thorn's programs.
The SEC alleges that Defendant Estrada misrepresented the nature of the Thorn investment programs by referring to them as "trading" programs or bank debenture programs. Estrada's bank records reveal that only $5.7 million of the $7.15 million raised was actually transferred to the Thorn programs. (Exhibit D attached to Plaintiff's Motion). The SEC claims that Estrada kept the remaining $1.4 million and diverted it to other uses; specifically, $954,780 to pay back some investors; $358,500 to invested in another "trading" program not related to Thorn; and $125,220 to pay personal expenses which she and her husband incurred. ( Id.). In addition, Estrada received approximately $4 million back from Thorn entities but passed only approximately $3.4 million to investors. According to the SEC, Estrada used the remaining $620,755 for she and her husband's benefit. ( Id.). The SEC estimates that Estrada's victims are owed approximately $3.4 million but only $1,491,000 million remains available from the frozen accounts of Estrada and the Financial Ventures Defendants.
Specifically, Estrada and her husband paid $237,505 of their own expesnes; "reinvested" $341,750 with Thorn and transferred $160,000 to an offshore account in the Isle of Man. (Exhibit E attached to Plaintiff's Motion).
On April 12, 2001, this Court entered an Order of Permanent Injunction against Defendant Estrada and Defendants Fund Global, LLC and Global Equity Group, LLC. Section VII of the Order provides:
IT IS FURTHER ORDERED that Defendants Estrada, Fund Global and Global Equity disgorge all ill-gotten gains received by them as a result of the conduct alleged in the Commission's Complaint, plus prejudgment interest on those amounts. This Court will set the specific amount of disgorgement, and will determine whether to impose civil penalties on Estrada, and in what amount, in a separate hearing upon due notice and motion by the Commission. At that hearing, the issues will be limited to determining: (i) the amount of disgorgement to be ordered and (ii) whether civil penalties should be imposed on Estrada, Fund Global and Global Equity, and the amount of any such penalties. At that hearing, Estrada, Fund Global and Global Equity will be precluded from arguing that they did not violate the federal securities laws through their alleged involvement in the investment programs that are the subject of the Commission's Complaint. Nothing herein shall be construed to prevent and/or otherwise bar Estrada, Fund Global or Global Equity from challenging the amount of disgorgement, or bar Estrada, Fund Global or Global Equity from challenging whether civil penalties should be imposed against them. Nothing in this Order affects the Estrada Defendants': (i) testimonial obligations; or (ii) right to take legal positions in litigation in which the Commission is not a party.Order of Permanent Injunction, April 12, 2001 at Sec. VII.
The SEC characterizes Estrada as a "bright, savvy and successful person." ( Plaintiff's Motion at 7). In contrast, in moving to have all claims resolved as to her, Estrada claims to be a woman with little formal education and near non-existent financial expertise. Thus, Estrada claims that she was ill-equipped to judge whether Thorn's programs were bona fide. Further, Estrada claims that she had no intent to defraud anyone. ( Estrada Motion at 4-5). According to Estrada, she acted merely as "secretary" for Defendant Thorn. ( Id. at 7). While Estrada acknowledges having prepared Thorn's Member Updates, which were circulated to investors, she claims to have had no knowledge of the substance of what was reported but rather simply provided information as directed by Thorn. ( Id. at 8).
It is undisputed that Estrada is fifty years old, has two sons in college, and her husband, to whom she has been married for thirty years, is disabled and receives approximately $490 per week in disability benefits.
The SEC points out that Estrada operated a successful retail food business and also managed at least two businesses. ( Plaintiff's Motion at 7).
Estrada claims that she should not be required to disgorge anything because she has actually suffered a monetary loss. Estrada calculates her profit from the Thorn investments as $256,151. Estrada claims that $132,212 of the funds currently frozen are traceable to her. Estrada represents her willingness to relinquish these funds toward any disgorgement remedy. Estrada argues that nothing further should be awarded because due to liabilities associated with this case, i.e., tax liability, mortgage payments, and legal fees, she has actually lost approximately $140,000.
The SEC takes issue with Estrada's characterization of her financial well-being. According to the SEC, she has assets worth $491,960, which consist of a home in California appraised at $212,000 three years ago; three automobiles; and over $150,000 in IRA accounts. Estrada argues that the SEC mischaracterizes Estrada's net worth because many assets are in her husband's name alone. The SEC maintains that Estrada should disgorge the total amount of illicit profits or ill-gotten gains she received during the course of the alleged fraudulent investment scheme. The parties disagree on this amount.
According to the SEC, bank records reveal that Estrada used $125,220 of funds she raised from investors for her own purposes and that she gained $620,755 from Thorn and used this money for her own benefit. (Exhibit F attached to Plaintiff's Motion). Thus, the SEC argues that Estrada received a total benefit of $745,975. of this amount, $211,000 was "reinvested" with First and Second Financial Ventures, LLC; $130,750 was "reinvested" with other Thorn-controlled entities; $40,000 was given to Estrada's parents as a loan payment; $160,348 was used by Estrada for expenditures and cash withdrawals; $41,500 was invested in a non-Thorn program; $119,430 was paid in income tax; and $42,947 remained in Estrada-controlled accounts. The SEC credits Estrada with $120,000 she originally invested with Thorn, to arrive at the figure of $625,975 in ill-gotten gains. (Exhibit F attached to Plaintiff's Motion).
Estrada argues that this figure is not accurate. First, she asserts that the monies that were reinvested should not be counted as a profit she realized. Estrada concedes that she kept $125,220 in other investors' funds for her own use and that she then used $237,505 of funds received from Thorn for her own use, for a total profit of $362,725. Deducting the $120,000 initial investment, Estrada argues that her total profit is $242,725. ( Estrada's Memorandum contra at 7). Estrada argues, however, that she should only be required to disgorge the $132,212 which remains frozen. The SEC opposes this position and seeks disgorgement in the amount of $625,975.
II.
It is well-settled that the equitable remedy of disgorgement is an appropriate method of "depriv[ing] a wrongdoer of his unjust enrichment and . . . deter[ing] others from violating the securities laws." SEC v. First City Fin. Corp., Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989). "The principal issue . . . in determining the amount of disgorgement to be ordered is the amount of gain received by each defendant from the fraud. Because the remedy is equitable, and because precision of calculation will often be impossible, `disgorgement need only be a reasonable approximation of profits causally connected to the violation.'" SEC v. Inorganic Recycling Corp., No. 99Civ10159, 2002 WL 1968341 at *2 (S.D.N.Y. Aug. 23, 2002) (internal citations omitted).
The SEC bears the ultimate burden of persuasion that the disgorgement sought approximates the amount of unjust enrichment. Once the SEC meets this burden, it is up to the Defendant to show that the amount is not accurate. First City Fin. Corp., 890 F.2d at 1232. To this end, the Defendant should show that the amount received is less than the full amount sought. SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987). Financial hardship does not preclude the imposition of an order of disgorgement. SEC v. Inorganic Recycling Corp., 2002 WL 1968341 at *2. Further, subsequent investment of funds does not preclude an order of disgorgement. SEC v. Benson, 657 F. Supp. at 1134. Disgorgement may not, however, be used as a punitive measure. SEC v. Antar, 97 F. Supp.2d 576, 577 (D.N.J. 2000).
III.
In light of the foregoing authority, the Court first concludes that resolution of Estrada's current financial net-worth is irrelevant to the Court's consideration of the disgorgement award. Thus, the Court will not consider such matters in determining the appropriate award.
The Court concludes that the SEC has satisfied its burden of establishing the amount which Estrada was unjustly enriched. The Court finds the amount of $625,975 to be a reasonable calculation. The claim of Estrada goes only to whether she should be allowed an offset for expenses and reinvested amounts. The Court rejects Estrada's argument that monies which she later reinvested should not be considered as part of the amount of unjust enrichment. As stated above, the fact that the wrongdoer makes subsequent investments does not preclude an order of disgorgement of the amount initially realized. Further, the expenses she claims were personal and were not subject to deduction. Thus, the Court rejects Estrada's argument that she only profited in the amount of $242,725.
The SEC's motion for an award of disgorgement in the amount of $625,975 against Defendant Estrada is GRANTED. The SEC also seeks disgorgement as to Defendants Fund Global, LLC and Global Equity Group, LLC in the amount of $1,491,000. These Defendants concede the appropriateness of the award. Thus, the SEC's motion is GRANTED. The Court next considers the SEC's requests for prejudgment interest and civil penalties.
IV.
The SEC seeks prejudgment interest in the amount of $103,665. The SEC seeks a civil penalty against Estrada in the amount of $110,000 pursuant to § 20(d) of the Securities Act of 1933 and § 21(d)(3) of the Securities Exchange Act of 1934. The SEC argues that a civil penalty is justified because Estrada acted with "fraud, deceit and manipulation." ( Plaintiff's Motion at 19). According to the SEC, "Estrada clearly placed her investors' fund at substantial risk when she misrepresented the investment scheme, engaged in a Ponzi scheme while acting as a broker, and diverted investors funds for her own personal benefit." ( Id.).
The civil penalty provisions of the securities laws serve to deter violations of the law. See SEC v. Coates, 137 F. Supp.2d 413, 428-29 (S.D.N.Y. 2001). The penalty provisions consist of three tiers, the third of which encompasses actions involving "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" and which "directly or indirectly resulted in substantial losses or caused a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C)(I), (II). The SEC argues that a third tier penalty is justified because of the egregious nature of Estrada's actions. Estrada maintains that she did not act with the requisite scienter to justify a third tier penalty.
The Court cannot resolve the issue of the appropriateness of a civil penalty at this juncture. The Court finds it appropriate to conduct a hearing on the matter to assess whether Estrada acted with the requisite scienter to justify the award of a third tier civil penalty. This portion of the SEC's motion is held in abeyance.
As to the SEC's request for prejudgment interest on the amount ordered to be disgorged, the Court observes that any such award is within the Court's discretion. See SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1476 (2nd Cir. 1996). Requiring the payment of interest prevents a defendant from obtaining the benefit of monies procured from illegal activity. SEC v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996). In determining whether to award prejudgment interest, the Court should consider: "(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." SEC v. First Jersey Sec., Inc., 101 F.3d at 1476.
The Court reserves ruling on the request for prejudgment interest until resolution of this entire case. At the end of this case, all relevant facts relating to potential profits, losses, and harm, if any, to investors may be more fully determinable. Thus, this portion of the SEC's request is held in abeyance.
V.
In light of the foregoing, Defendant Karen Estrada's Motion to Resolve all remaining issues against her ( Doc. #109) is DENIED; Plaintiff's Motion for an Order imposing monetary Relief against Defendants Karen Estrada, Fund Global, LLC and Global Equity Group, LLC ( Doc. #119) is GRANTED in part.
It is hereby ORDERED that Defendant Estrada shall disgorge $625,975.00. Defendant Estrada shall pay this amount, together with any civil penalties and prejudgment interest, into the registry of the Court within thirty days of October 24, 2002.
It is further ORDERED that Defendants Fund Global, LLC and Global Equity Group, LLC shall disgorge $1,491,000.00, jointly and severally. This amount shall be disgorged by Defendants Fund Global, LLC and Global Equity Group, LLC immediately surrendering and in the future, never asserting, any claim to funds presently frozen in the accounts at Bank One, N.A., including, but not limited to, the accounts of Defendants First Financial Ventures, LLC and Second Financial Ventures, LLC.
This matter is hereby scheduled for a HEARING on the SEC's request for the imposition of civil penalties as to Defendant Estrada on Thursday, October 24, 2002 at 10:30 a.m. before the undersigned.
The Clerk is DIRECTED to remove the foregoing motions from the Court's pending motions list.