Securities And Exchange Commission v. Bruce A Cole et al

NOTICE OF MOTION AND MOTION for Summary Judgment as to Defendant Bruce A. Cole and Relief Defendant Nanette H. Cole

C.D. Cal.September 16, 2016

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JOHN W. BERRY, Cal. Bar No. 295760 Email: berryj@sec.gov DAVID J. VAN HAVERMAAT, Cal. Bar No. 175761 Email: vanhavermaatd@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Michele Wein Layne, Regional Director John W. Berry, Regional Trial Counsel 444 S. Flower Street, Suite 900 Los Angeles, California 90071 Telephone: (323) 965-3998 Facsimile: (213) 443-1904 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. BRUCE A. COLE, Defendant, and NANETTE H. COLE, Relief Defendant. Case No. 2:12-cv-08024-AB-JEM PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT Date: October 17, 2016 Time: 10:00 a.m. Ctrm: 4 Judge: Hon. André Birotte Jr. Case 2:12-cv-08024-AB-JEM Document 98 Filed 09/16/16 Page 1 of 5 Page ID #:487 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PLEASE TAKE NOTICE THAT on October 17, 2016, at 10:00 a.m., or as soon thereafter as the matter may be heard, in the courtroom of the Honorable André Birotte Jr., Courtroom 4, 2nd Floor, 312 North Spring Street, Los Angeles, California 90012, Plaintiff Securities and Exchange Commission (“SEC”) will and hereby does move the Court for summary judgment against defendant Bruce A. Cole (“Cole”) and relief defendant Nanette H. Cole. This motion is made on the grounds that there is no material issue of fact to be decided and the SEC is entitled to judgment as a matter of law against Bruce Cole and Nanette Cole. The SEC’s motion is based primarily upon the undisputed facts established in the criminal trial against Bruce Cole in State of Missouri v. Cole, Case No. CR-1311-CR01981 (Mo. 11th Circ.). The criminal case against Cole concerned the same fraudulent scheme as is at issue in this action. In the criminal case, Cole pleaded guilty to two counts of felony securities fraud and one count of felony stealing. In addition to the collateral estoppel effect of Cole’s guilty plea, which establish that Cole engaged in a scheme to defraud, that his scheme was in connection with the purchase or sale of a security or in the offer or sale of a security, and that Cole acted with scienter, the SEC presents additional undisputed evidence that Cole’s fraud involved interstate commerce, that establish the amount of the Coles’ ill-gotten gains, and establish that Nanette Cole has no legitimate claim to the funds. The SEC seeks a permanent injunction enjoining Cole from future violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §§ 77q(a), and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. The SEC also seeks an order requiring Cole and relief defendant Nanette Cole to pay disgorgement of $904,167, with prejudgment interest of $119,885, for a total of $1,024.052. This Motion is based on this Notice of Motion and Motion, the supporting Memorandum of Points and Authorities, the Statement of Uncontroverted Facts, the accompanying Declaration of David J. Van Havermaat and all exhibits thereto, Case 2:12-cv-08024-AB-JEM Document 98 Filed 09/16/16 Page 2 of 5 Page ID #:488 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 together with the files and records of this entire case and any evidence and/or argument that may be adduced at a hearing held by the Court on this Motion. This motion is made following the conference of counsel for the SEC and relief defendant Nanette Cole pursuant to Local Rule 7-3, which took place on July 6, 2016. In accordance with Local Rule 7-3, counsel for the SEC attempted to contact defendant Cole to meet and confer on the SEC’s planned motion for summary judgment. Cole is currently incarcerated at Tipton Correctional Institution in Tipton, Missouri. On several occasions, and as recently as September 6, 2016, counsel for the SEC contacted officials at Cole’s correctional facility to attempt to inquire whether Cole would be willing to meet and confer regarding the SEC’s proposed motion. Counsel for the SEC has not received any response to those inquiries. DATED: September 16, 2016 Respectfully submitted, /s/ David J. Van Havermaat David J. Van Havermaat Attorneys for Plaintiff Securities and Exchange Commission Case 2:12-cv-08024-AB-JEM Document 98 Filed 09/16/16 Page 3 of 5 Page ID #:489 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: U.S. SECURITIES AND EXCHANGE COMMISSION, 444 S. Flower Street, Suite 900, Los Angeles, California 90071 Telephone No. (323) 965-3998; Facsimile No. (213) 443-1904. On September 16, 2016, I caused to be served the document entitled PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S NOTICE OF MOTION AND MOTION FOR SUMMARY JUDGMENT on all the parties to this action addressed as stated on the attached service list: ☒ OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency’s practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. ☐ PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. ☐ EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid. ☐ HAND DELIVERY: I caused to be hand delivered each such envelope to the office of the addressee as stated on the attached service list. ☐ UNITED PARCEL SERVICE: By placing in sealed envelope(s) designated by United Parcel Service (“UPS”) with delivery fees paid or provided for, which I deposited in a facility regularly maintained by UPS or delivered to a UPS courier, at Los Angeles, California. ☐ ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. ☒ E-FILING: By causing the document to be electronically filed via the Court’s CM/ECF system, which effects electronic service on counsel who are registered with the CM/ECF system. ☐ FAX: By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. I declare under penalty of perjury that the foregoing is true and correct. Date: September 16, 2016 /s/ David J. Van Havermaat David J. Van Havermaat Case 2:12-cv-08024-AB-JEM Document 98 Filed 09/16/16 Page 4 of 5 Page ID #:490 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Bruce A. Cole, et al. United States District Court—Central District of California Case No. 2:12-cv-08024-AB-JEM SERVICE LIST Bruce A. Cole (served by U.S. mail only) ID# 1247202 Tipton Correctional Center 619 N. Osage Avenue Tipton, MO 65081 Pro Se Nanette H. Cole (served by CM/ECF and U.S. mail) 34281 Doheny Park Road, #2429 Capistrano Beach, CA 92624 Email: nanhcole@aol.com Pro Se Case 2:12-cv-08024-AB-JEM Document 98 Filed 09/16/16 Page 5 of 5 Page ID #:491 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JOHN W. BERRY, Cal. Bar No. 295760 Email: berryj@sec.gov DAVID J. VAN HAVERMAAT, Cal. Bar No. 175761 Email: vanhavermaatd@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Michele Wein Layne, Regional Director John W. Berry, Regional Trial Counsel 444 S. Flower Street, Suite 900 Los Angeles, California 90071 Telephone: (323) 965-3998 Facsimile: (213) 443-1904 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. BRUCE A. COLE, Defendant, and NANETTE H. COLE, Relief Defendant. Case No. 2:12-cv-08024-AB-JEM MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION FOR SUMMARY JUDGMENT Date: October 17, 2016 Time: 10:00 a.m. Ctrm: 4 Judge: Hon. André Birotte Jr. Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 1 of 31 Page ID #:492 i 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS I. INTRODUCTION ................................................................................................ 1 II. STATEMENT OF FACTS ................................................................................... 2 A. The SEC’s Complaint ................................................................................. 2 B. The Criminal Case Against Cole And His Guilty Plea .............................. 4 C. Additional Undisputed Facts ...................................................................... 6 1. Additional undisputed facts show Cole’s scheme to misappropriate bond proceeds ......................................................... 7 2. Nanette Cole has no legitimate claim to the bond proceeds ............ 9 III. ARGUMENT ........................................................................................................ 9 A. Summary Judgment On The Key Elements Of The SEC’s Fraud Claims Is Warranted By Collateral Estoppel ........................................... 10 1. Cole pleaded guilty in his criminal case ........................................ 11 2. Cole’s guilty plea is co-extensive with the SEC’s claims ............. 12 B. Summary Judgment Is Also Warranted By The Other Undisputed Facts That Establish His Fraud ................................................................. 15 1. Cole engaged in a material fraudulent scheme .............................. 16 2. Cole acted with scienter ................................................................. 19 C. The Court Should Issue A Permanent Injunction Against Cole .............. 19 D. The Court Should Order Cole To Pay Disgorgement With Prejudgment Interest................................................................................. 20 E. The Court Should Order Nanette Cole To Pay Disgorgement With Prejudgment Interest ....................................................................... 21 IV. CONCLUSION ................................................................................................... 22 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 2 of 31 Page ID #:493 ii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF AUTHORITIES CASES Aaron v. SEC, 446 U.S. 680 (1980)....................................................................................... 16 Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)....................................................................................... 10 Celotex Corp. v. Catrett, 477 U.S. 317 (1986)......................................................................................... 9 Emich Motors Corp. v. General Motors Corp., 340 U.S 558, 71 S. Ct. 408, 95 L. Ed. 2d 534 (1951) ................................... 10 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)....................................................................................... 16 Herman & MacLean v. Huddleston, 459 U.S. 375 (1983)....................................................................................... 16 Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990) ....................................................................... 15 In re Towers Financial Corp. Noteholders Litig., 75 F. Supp. 2d 178 (S.D.N.Y 1999) .............................................................. 11 Ivers v. United States, 581 F.2d 1362 (9th Cir. 1978) ....................................................................... 12 Matsushita Electric Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986)....................................................................................... 10 Merrill Lynch, Pierce, Fenner & Smith Inc., v. Dabit, 547 U.S. 71 (2006) ......................................................................................... 18 Municipality of Anchorage v. Hitachi Cable, LTD, 547 F. Supp. 633 (D. Alaska 1982) ............................................................... 12 Parklane Hosiery Co. v. Shore, 439 U.S. 322 (1979) ............................................. 10 Sanchez v. Vild, 891 F.2d 240 (9th Cir. 1989) ......................................................................... 10 SEC v. Bilzerian, 29 F.3d 689 (D.C. Cir. 1994) ......................................................................... 11 SEC v. Burns, 816 F.2d 471 (9th Cir. 1987) ......................................................................... 16 SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185 (D. Nev. 2006) ........................................................... 20 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 3 of 31 Page ID #:494 iii 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Cobalt Multifamily Investors I, LLC, 2011 U.S. Dist. Lexis 120215 (S.D.N.Y. June 14, 2011) ............................. 20 SEC v. Colello, 139 F.3d 674 (9th Cir. 1998) ......................................................................... 22 SEC v. Cross Fin. Services 908 F. Supp. 718 (C.D. Cal. 1995) ......................................................... 20, 21 SEC v. Dain Rauscher, Inc., 254 F.3d 852 (9th Cir. 2001) .................................................................. 13, 16 SEC v. Dimensional Entertainment Corp., 493 F. Supp. 1270 (S.D.N.Y 1980) ............................................................... 13 SEC v. Everest Management Corp., 466 F. Supp. 167 (S.D.N.Y. 1979) ................................................................ 11 SEC v. Fehn, 97 F.3d 1276 .................................................................................................. 19 SEC v. First Jersey Securities, Inc., 101 F.3d 1450 (2d Cir. 1996) ........................................................................ 21 SEC v. First Pacific Bancorp, 142 F.3d 1186 (9th Cir. 1998) ....................................................................... 20 SEC v. Gordon, 822 F. Supp. 2d 1144 (N.D. Ok. 2011) ......................................................... 21 SEC v. Gruenberg, 989 F.2d 977 (8th Cir. 1993) ......................................................................... 11 SEC v. Hilsenrath, 2008 U.S. Dist. LEXIS 50021 (N.D. Cal. May 30, 2008)...................... 11, 12 SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109 (9th Cir. 2006) ....................................................................... 20 SEC v. Koracorp Indus., Inc., 575 F.2d 692 (9th Cir. 1978) ......................................................................... 19 SEC v. Management Dynamics, Inc., 515 F.2d 801 (2d Cir. 1975) .......................................................................... 19 SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir. 1972) ................................................................. 20, 21 SEC v. McCaskey, 2001 U.S. Dist. LEXIS 13571 (S.D.N.Y. Sept. 6, 2001) ....................... 11, 12 SEC v. Moran 944 F. Supp. 286 (S.D.N.Y. 1996) ................................................................ 21 SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980) ......................................................................... 19 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 4 of 31 Page ID #:495 iv 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Opulentica LLC, 479 F. Supp. 2d 319 (S.D.N.Y. 2007) ........................................................... 12 SEC v. Pace, 173 F. Supp. 2d 30 (D.D.C. 2001) ................................................................. 12 SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) ............................................................................ 20 SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072 (9th Cir. 2010) ....................................................................... 16 SEC v. Quinlan, 2008 U.S. Dist. LEXIS 95789 (E.D. Mich. Nov. 7, 2008)............................ 12 SEC v. Rana Research, 8 F.3d 1358 (9th Cir. 1993) ........................................................................... 13 SEC v. Research Automation Corp., 585 F.2d 31 (2d Cir. 1978) ............................................................................ 19 SEC v. Reyes, 2008 U.S. Dist. LEXIS 65895 (N.D. Cal. Aug. 25, 2008) ..................... 10, 11 SEC v. Roor, 2004 U.S. Dist. LEXIS 17416 (S.D.N.Y. Aug. 30, 2004) ............................ 12 SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992) ....................................................................... 15 SEC v. Zandford, 535 U.S. 813, 819 (2002) .............................................................................. 18 Simpson v. AOL Time Warner, Inc., 452 F.3d 1040 (9th Cir. 2006), vacated on other grounds sub nom., Avis Budget Group Inc. v. Cal. State Teachers’ Ret. System, 552 U.S. 1162 (2008) ............................................................................. 17, 18 Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971) ........................................................................................... 18 Taylor v. List, 880 F.2d 1040 (9th Cir. 1989) ....................................................................... 10 United States v. Bejar-Matrecios, 618 F.2d 81 (9th Cir. 1980) ........................................................................... 12 United States v. Podell, 572 F.2d 31 (2d Cir. 1978) ............................................................................ 10 United States v. Real Property Located at Section 18, 976 F.2d 515 (9th Cir. 1982) ......................................................................... 11 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 5 of 31 Page ID #:496 v 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 FEDERAL STATUTES Securities Act of 1933 Section 2(a)(1) [15 U.S.C. § 77b(a)(1)] .................................................................................. 18 Section 17(a) [15 U.S.C. § 77q(a)] ............................................................. 13, 14, 15, 16, 18 Section 17(a)(1) [15 U.S.C. § 77q(a)(1)] ..................................................................... 13, 16, 17 Section 17(a)(2) [15 U.S.C. § 77q(a)(2)] ........................................................................... 15, 17 Section 17(a)(2)-(3) [15 U.S.C. § 77q(a)(2)-(3)] ............................................................................ 16 Section 17(a)(3) [15 U.S.C. § 77q(a)(3)] ............................................................... 13, 15, 16, 17 Section 20(b) [15 U.S.C. § 77t(b)] ....................................................................................... 19 Securities Exchange Act of 1934 Section 3(a)(10) [15 U.S.C. § 78c(a)(10)] ................................................................................ 18 Section 10(b) [15 U.S.C. § 78j(b)] .......................................................................... 13, 14, 16 Section 21(d) [15 U.S.C. § 78u(d)] ...................................................................................... 19 FEDERAL REGULATIONS Rule 10b-5 [17 C.F.R. § 240.10b-5] .............................................................. 13, 14, 15, 16 Rule 10b-5(a) [17 C.F.R. § 240.10b-5(a)] ..................................................................... 16, 17 Rule 10b-5(b) [17 C.F.R. § 240.10b-5(b)] ............................................................................ 17 Rule 10b-5(c) [17 C.F.R. § 240.10b-5(c)] ..................................................................... 16, 17 FEDERAL RULES OF CIVIL PROCEDURE Fed. R. Civ. P. 56(c) ................................................................................................... 9 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 6 of 31 Page ID #:497 vi 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 LOCAL RULES Local Rule 7-3 ............................................................................................................ 1 OTHER AUTHORITIES Section 409.5-501 of the Missouri Revised Statutes ........................................ 14, 15 Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 7 of 31 Page ID #:498 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. INTRODUCTION Plaintiff Securities and Exchange Commission (“SEC”) moves for summary judgment against defendant Bruce Cole (“Cole”) and his wife, relief defendant Nanette Cole, based primarily upon the undisputed facts established in Cole’s guilty plea in State of Missouri v. Cole, Case No. CR-1311-CR01981 (Mo. 11th Circ.). With its motion, the SEC seeks a permanent injunction against future violations of the federal securities law against Cole, and an order ordering Bruce and Nanette Cole to disgorge their ill-gotten gains.1 Cole is the former chairman and chief executive officer of Mamtek International, a Hong Kong corporation that did work in the United States through an affiliate, Mamtek U.S. Inc. (“Mamtek”). In 2010, Mamtek sought financing to construct a sucralose factory in Moberly, Missouri. The Industrial Development Authority of Moberly issued $39 million in municipal bonds to finance the project’s construction. Cole misrepresented the use of proceeds and diverted bond proceeds to his wife, Nanette Cole, the plant was never completed, the bonds went into default, and Mamtek filed for bankruptcy. Cole’s fraudulent conduct resulted in the misappropriation of over $900,000 by Cole and his wife. The Missouri criminal case against Cole concerned the same fraudulent scheme as is at issue in this action. In September 2014, Cole pleaded guilty to one count of felony stealing and two counts of felony securities fraud. As part of his plea agreement, Cole executed a detailed exhibit outlining the factual basis for his guilty plea. In that document, Cole admitted that some of the bond proceeds were funneled 1 In accordance with Local Rule 7-3, counsel for the SEC has attempted to contact Cole to meet and confer on the SEC’s planned motion for summary judgment. Cole is currently incarcerated at Tipton Correctional Center in Tipton, Missouri on three concurrent 7-year sentences as the result of a criminal conviction for the same conduct as the SEC alleges in its action against Cole. On several dates, most recently September 6, 2016, counsel for the SEC has communicated with officials at Cole’s correctional facility to try to inquire with Cole regarding whether he would be willing to meet and confer regarding the SEC’s proposed motion. The officials informed the SEC staff that they would forward the request, but to date no response has been received. Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 8 of 31 Page ID #:499 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 to his wife’s bank account, purportedly to be used to pay a third party for work on the factory project. Cole also admitted that the purported third party had never been formed and did not provide any services on the project, and that the transferred funds were retained by Cole. In addition to the collateral estoppel effect of the guilty plea and the facts Cole admitted in the plea, the SEC also submits additional undisputed facts regarding the amount of the misappropriated funds, and showing that Nanette Cole has no legitimate claim to the funds and should be required to disgorge them. The SEC seeks a final judgment of permanent injunction against Cole, along with disgorgement and prejudgment interest against him and Nanette Cole.2 II. STATEMENT OF FACTS A. The SEC’s Complaint The SEC filed this action on September 18, 2012, alleging violations of the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. See Dkt. No. 1 (Complaint), ¶¶ 1-4, 49-55; see also SEC Statement of Undisputed Facts (“SUF”), ¶ 1. The SEC’s complaint alleges that Cole violated the antifraud provisions of the federal securities laws by misappropriating proceeds from bond issued by the City of Moberly, Missouri. Id. The complaint alleges that Cole reached out to the City of Moberly in early 2010 to identify municipalities willing to partner with Mamtek on the sucralose factory project. See Complaint, ¶¶ 10-17; SUF ¶ 2. Moberly agreed to guarantee a bond offering that Mamtek could use to finance the construction of the proposed factory. Complaint, ¶¶ 18-19; SUF ¶ 3. The Industrial Development Authority for the City of Moberly (“IDA”) actually issued the bonds, and the City made available the unencumbered 2 The SEC’s complaint included in the prayer for relief a request for an order of civil penalties against Cole. The SEC has determined to forgo seeking civil penalties against Cole. Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 9 of 31 Page ID #:500 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 general revenues of the City for all payments of principal and interest due under the bond offering. Id. Mamtek agreed to make periodic payments to the City from revenue generated from the plant, ensuring a stream of income to fund the City’s repayment obligations. Complaint, ¶ 20; SUF ¶ 4. The bond issuances closed on July 28, 2010, raising a total of $39 million. Complaint, ¶ 24; SUF ¶ 5. Mamtek submitted draw requests consisting of invoices and receipts documenting the expenditure of funds for purported construction-related expenses. Complaint ¶ 29; SUF ¶ 6. The SEC’s complaint alleges that, for the initial draw request submitted on the date the bonds were issued, Cole used the purported third party Ramwell Industrial, Ltd. (“Ramwell”) as a means to obtain funds for his and his wife’s personal use. Complaint, ¶ 31; SUF ¶ 7. Cole represented to a consultant that Ramwell had performed engineering work on the project and, approximately two weeks before the bond offering closed, Cole asked the consultant to create an invoice for Ramwell to bill Mamtek for the purported construction work, which would be submitted to the City for payment. Complaint, ¶ 31; SUF ¶ 8. At Cole’s direction, the consultant created a Ramwell invoice dated July 21, 2010 in the amount of $4,062,500, purportedly billing Mamtek for production line engineering, design, and project supervision. Complaint, ¶ 32; SUF ¶ 9. The complaint alleges that Cole knew that Ramwell did not exist and had not performed the services itemized in the invoice. Complaint, ¶ 32; SUF ¶ 10. On July 29, 2010, the bond trustee wired $4,278,648 to Mamtek’s bank account, which consisted of full reimbursement for the Ramwell invoice, as well as payment of additional invoices. Complaint, ¶ 34; SUF ¶ 11. Cole directed how these funds were to be used. Complaint, ¶ 35; SUF ¶ 12. He prepared a list of payments to be made from the bond proceeds and gave it to a Mamtek employee. Id. None of the funds were remitted to Ramwell, because it did not exist. Id. Cole directed two separate payments to be made to his wife from the bond proceeds that were wired to Mamtek as payment of the Ramwell invoice: one in the amount of $700,000, and Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 10 of 31 Page ID #:501 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 another in the amount of $271,046. Complaint, ¶¶ 35-38; SUF ¶ 13. The money was then used for the Coles’ personal expenses, including credit card debt, mortgage payments, and household employees, and the issuance of a cashier’s check for $271,046. Complaint, ¶¶ 37, 38; SUF ¶ 14. In March 2013, Cole moved for a stay of this action, arguing that the factual allegations of the criminal case against him “significantly – if not completely – overlap[ped]” with the SEC’s allegations. Dkt. No. 23, at p. 1; SUF ¶ 15. The Court granted the motion on March 21, 2013. B. The Criminal Case Against Cole And His Guilty Plea The same day that the SEC filed its complaint in this action, the Missouri Attorney General filed a felony complaint against Cole. SUF ¶ 16. The felony complaint charged Cole with one count of felony stealing and four counts of felony securities fraud. SUF ¶ 17. The allegations of the second count against Cole, for felony securities fraud, closely mirrored the allegations of the SEC’s complaint. The felony complaint alleged that Cole “willfully,” and in connection with municipal bonds issued by the Moberly IDA, “employed, with intent to defraud, a device, scheme, or artifice to defraud in that he arranged to submit to Mamtek U.S. an invoice for engineering services under the defendant’s business name of ‘Ramwell,’ with the intent to immediately direct Mamtek U.S. to use the funds for other purposes, including the payment of $700,000 to the defendant’s wife for the defendant’s personal use and benefit.”3 SUF ¶ 18. In September 2014, Cole pleaded guilty to three of the felony charges against him in the state action, two counts of felony securities fraud, including the second count referenced above, and one count of felony stealing. SUF ¶ 19. In connection 3 Although the Missouri criminal complaint references only the wire of $700,000 of bond proceeds to Nanette Cole, the SEC has submitted additional undisputed evidence regarding the second wire in the amount of $204,167, described more fully below. See, e.g., SUF ¶¶ 59, 60. Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 11 of 31 Page ID #:502 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 with his guilty plea, Cole executed a document captioned “Defendant’s Factual Basis for Guilty Plea.” SUF ¶ 20. In that document, Cole admitted numerous specific facts regarding his misappropriation of proceeds from the Moberly bond offering. Specifically, Cole admitted the following: • In early 2010, Mamtek sought financing to construct a sucralose factory in Moberly. A major component of that financing was a series of municipal bonds totaling approximately $39 million, issued by the Industrial Development Authority of the City of Moberly. Cole was the chairman and CEO of Mamtek and participated in securing the financing. SUF ¶¶ 21-23. • Ramwell was represented to investors as a “captive vendor” that maintained the knowledge regarding the design and installation of sucralose production lines. SUF ¶ 24. • Investors were told that Ramwell would conduct all intellectual property activities, install and maintain Mamtek’s production lines, train the production labor force, perform maintenance, conduct research, and mix basic chemical formulations. SUF ¶ 25. • Before the bonds closed in late July 2010, Cole caused an invoice to be created, purportedly from Ramwell, that listed a total of more than $4 million in charges, purportedly in connection with the sucralose plant, including for the design, engineering, acquisition, and installation, and project supervision of five production lines. SUF ¶ 26. • The purported Ramwell invoice was submitted to the City of Moberly for payment as part of Mamtek’s first draw requesting payment from the bond proceeds. SUF ¶ 27. • Subsequent requests from Mamtek to draw money from the bond proceeds included additional purported Ramwell invoices, which were roughly 10% of the total amount requested for the bond draws. SUF ¶ 28. The Ramwell invoices were prepared with Cole’s knowledge. SUF ¶ 29. Some of the money received for Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 12 of 31 Page ID #:503 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 payment of the Ramwell invoices was used to pay Mamtek’s operating and overhead costs. SUF ¶ 30. • When the invoices for Ramwell were submitted, Cole knew that Ramwell had not performed any services or provided any goods because Mamtek had hired a separate group of consulting engineers to provide those services on behalf of Ramwell. SUF ¶ 31. • When Mamtek received the first bond payment, which included payment of the first Ramwell invoice, Cole directed that $700,000 be wired to his wife’s account. SUF ¶ 32. Cole stated that the money was to be paid to Ramwell for costs it had incurred in connection with the sucralose factory project. SUF ¶ 33. • Contrary to his representations to the City of Moberly, the bond proceeds that Bruce Cole caused to be transferred to Nanette Cole’s bank account were not used to pay Ramwell for goods or services provided. SUF ¶ 34. Those bond proceeds were retained by Bruce Cole. SUF ¶ 35. • Cole did not inform the City of Moberly or the bond trustee that the bond proceeds that had been transferred to Nanette Cole’s account had not been used to pay Ramwell, or that he had retained the funds for his personal use. SUF ¶ 36. As a result of his guilty plea, on November 10, 2014, Cole was sentenced to imprisonment for three concurrent seven-year terms. SUF ¶ 37. C. Additional Undisputed Facts In addition to Cole’s guilty plea, which establishes conclusively his theft of bond proceeds through the false Ramwell invoice, additional undisputed facts establish that Cole engaged in a scheme to defraud by causing additional false documents to be created to facilitate the transfer of bond proceeds to his wife. These additional facts are not needed to establish Cole’s liability, which is established through collateral estoppel, but they provide a separate, independent basis for the SEC’s motion for summary judgment. The SEC also provides further undisputed facts that establish that Cole misappropriated a total of $904,167 of bond proceeds by Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 13 of 31 Page ID #:504 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 causing two wires, in the amounts of $700,000 and $204,167, to be sent to his wife, and that his wife did not have any legitimate claim to those funds. 1. Additional undisputed facts show Cole’s scheme to misappropriate bond proceeds Pursuant to a process instituted by the City and the bond trustee, Mamtek submitted draw requests consisting of invoices and receipts documenting the expenditure of funds for construction-related expenses. SUF ¶ 38. A draw request would include invoices from the various contractors Mamtek employed onsite for various tasks and receipts or purchase orders for equipment. SUF ¶ 39. In evaluating the submitted reimbursements, the City’s finance manager reviewed the invoices and receipts in each request. SUF ¶ 40. If he concluded that an expenditure was not directly related to building the facility, such as travel expenses, he rejected that particular item and reduced the draw request accordingly. SUF ¶ 41. For permitted expenses, the finance manager submitted a requisition form attaching the draw request, asking the bond trustee to disburse funds to the appropriate recipients. SUF ¶ 42. In the case of Ramwell invoices, the disbursements for Mamtek’s vendors were forwarded to Mamtek. SUF ¶ 43. For the initial draw request, Cole used Ramwell as a means to obtain funds for personal use. To facilitate the transfer of bond proceeds to Mamtek, Cole asked Thomas Smith, a Mamtek consultant, to create an invoice for Ramwell to bill Mamtek $4,062,500, purportedly for production line engineering, design, acquisition, installation, and project supervision. SUF ¶ 44. Mr. Smith transmitted the draw request to Moberly’s finance manager. Id. Cole reviewed and approved the invoice. SUF ¶ 45. At the time that he approved the invoice, Cole knew that Ramwell did not exist, and had not performed the services itemized in the invoice. SUF ¶ 31. Cole did not disclose to Mr. Smith consultant that any of the bond proceeds would be diverted to Cole. SUF ¶ 46. Indeed, Mr. Smith believed that if any of the bond proceeds were diverted to Cole or for purposes other than as described in the invoice Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 14 of 31 Page ID #:505 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (i.e., the engineering, design, acquisition, installation, and supervision of the production line), the entire project would be endangered. SUF ¶ 47. While the consultant was preparing the draw request, Cole sought the assistance of another Mamtek official, David Ho, to further document the nonexistent relationship between Mamtek and Ramwell. SUF ¶ 48. Cole asked Mr. Ho to sign a contract, known as an application for payment, between Mamtek and Ramwell, establishing a total amount of $22,850,000 purportedly to be paid by Mamtek for engineering work on the project. SUF ¶ 49. Mr. Ho initially refused to sign the application for payment. SUF ¶ 50. Ho reluctantly signed the document because he felt he had no choice given the intense pressure Cole had placed on him. Id. The application for payment was notarized and included in the first draw request submitted to the City. SUF ¶ 51. On July 29, 2010, the bond trustee wired $4,278,648 to Mamtek, which encompassed the Ramwell invoice, as well as additional smaller invoices. SUF ¶ 52. Cole had not told the consultant or the City that Ramwell did not exist and had not performed the services identified on the invoice. SUF ¶ 53. The City’s finance manager, had he known that Ramwell did not exist and had not performed the services identified on the invoice, would not have approved payment of the Ramwell invoice. SUF ¶ 54. Cole directed how the bond proceeds received by Mamtek pursuant to the Ramwell invoice were to be used. SUF ¶ 55. He prepared a list of payments to be made from the wired funds and gave it to a Mamtek employee a few days before the bond closed. SUF ¶ 56. First, the day after Mamtek received the bond proceeds pursuant to the Ramwell invoice, Cole directed $700,000 to be wired to his wife. SUF ¶ 57. The funds were used solely for expenses of the Cole family, including, among other things, payments for credit card debt, mortgage payments, insurance payments, and the issuance of a check made out to cash for more than $281,000, most of which was used to purchase a cashier’s check. SUF ¶ 58. Cole also directed a Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 15 of 31 Page ID #:506 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 second wire of $204,167 to his wife’s bank account the day after Mamtek received the bond proceeds pursuant to the Ramwell invoice. SUF ¶ 59. That money was also used to pay the Coles’ personal expenses. SUF ¶ 60. 2. Nanette Cole has no legitimate claim to the bond proceeds Nanette Cole’s sworn testimony confirms that she has no legitimate claim to the bond proceeds that Bruce Cole funneled to her. Nanette Cole testified that she was never employed by or had any job responsibilities in connection with Mamtek or Ramwell. SUF ¶ 63. She never provided any services for either of them, even on a voluntary basis. SUF ¶ 64. Indeed, Nanette Cole did not know why the bond proceeds were wired to her, and she did not even know the source of the funds she received, or that they were related to Ramwell. SUF ¶ 65. Bruce Cole’s statements confirm that Nanette Cole had no legitimate claim to the funds. In his guilty plea, Bruce Cole admitted that he retained at least $700,000 of the funds for his personal use. SUF ¶ 35. Bruce Cole also testified that he caused the bond proceeds to be sent to his wife as “a matter of convenience and just to put it there,” and he admitted that the funds “were not used for any services performed by anybody on behalf of Mamtek.” SUF ¶ 66. In short, there is no claim by Nanette Cole that she provided any services to Mamtek or Ramwell in exchange for the bond proceeds, which she used to pay the Coles’ debts and obligations. III. ARGUMENT A party is entitled to summary judgment “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 judgment as a matter of law.” Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). A party moving for summary judgment meets its burden by establishing, for each element of the claim or defense, that no reasonable trier of fact could find for the opposing party. See Celotex, 477 U.S. at 323. Once the moving party has met its burden, the “nonmoving party must come Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 16 of 31 Page ID #:507 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 forward with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (emphasis in original). The nonmoving party may not rest on conclusory allegations or bald assertions, see Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989), but must come forward with significant probative evidence tending to support its contention that material, triable issue of fact remain. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-250 (1986); Sanchez v. Vild, 891 F.2d 240, 242 (9th Cir. 1989). A “mere existence of a scintilla of evidence” does not suffice; rather, the nonmoving party must present “concrete evidence from which a reasonable juror could return a verdict in his favor.” Liberty Lobby, 477 U.S. at 252, 256. A. Summary Judgment On The Key Elements Of The SEC’s Fraud Claims Is Warranted By Collateral Estoppel Summary judgment on SEC’s fraud claims is appropriate against Cole under the doctrine of collateral estoppel in light of Cole’s criminal conviction in State of Missouri v. Cole, which was based on the same underlying conduct that is alleged in the SEC’s complaint (together with additional undisputed evidence regarding the amount of the misappropriated funds and that Nanette Cole has no legitimate claim to the funds and should be required to disgorge them). Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, n.5 (1979) (the doctrine of collateral estoppel prohibits relitigation of an issue of fact or law that has been decided in earlier litigation); Emich Motors Corp. v. General Motors Corp., 340 U.S 558, 568-69 (1951) “[i]t is well established that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding.”); SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *7 (N.D. Cal. Aug. 25, 2008) (“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 government in the criminal case.”) (quoting United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978)). When a defendant has already been convicted of or pleaded guilty to criminal Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 17 of 31 Page ID #:508 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 fraud, the courts in this Circuit have not hesitated to apply the doctrine of collateral estoppel to civil securities fraud violations to bar relitigation of factual issues necessarily decided in the criminal case. See, e.g., SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *7-8 & *15; SEC v. Hilsenrath, 2008 U.S. Dist. Lexis 50021 (N.D. Cal. May 30, 2008); accord SEC v. Bilzerian, 29 F.3d 689, 694 (D.C. Cir. 1994); SEC v. Gruenberg, 989 F.2d 977, 978 (8th Cir. 1993); SEC v. McCaskey, 2001 U.S. Dist. Lexis 13571 (S.D.N.Y. Sept. 6, 2001); In re Towers Financial Corp. Noteholders Litig., 75 F. Supp. 2d 178 (S.D.N.Y 1999); SEC v. Everest Management Corp., 466 F. Supp. 167, 172 (S.D.N.Y. 1979). Where, as here, a party seeks to invoke the doctrine of collateral estoppel in a case involving a criminal matter, the moving party must establish that: (1) the prior conviction must have been for a serious offense so that the defendant was motivated to fully litigate the charges; (2) there must have been a full and fair trial to prevent convictions of doubtful validity from being used; (3) the issue on which the prior conviction is offered must of necessity have been decided in the criminal case; and (4) the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior trial. SEC v. Hilsenrath, 2008 U.S. Dist. Lexis 50021, *11 (quoting United States v. Real Property Located at Section 18, 976 F.2d 515, 518 (9th Cir. 1982)); see also SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *8 (setting forth an equivalent four-factor test). These elements are established here. 1. Cole pleaded guilty in his criminal case The first, second and fourth elements for establishing collateral estoppel are easily satisfied in this case. There is no dispute that Cole was motivated to litigate fully the charges. Cole faced severe criminal sanctions and, in fact, received three concurrent sentences of seven years of imprisonment for his criminal violations for the same conduct as is alleged in the SEC’s complaint. In addition, Cole was represented by counsel in his criminal action. The fact that Cole pleaded guilty, instead of being convicted after a trial, does not change the collateral estoppel effect. The Ninth Circuit Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 18 of 31 Page ID #:509 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 has held that a guilty plea may be used for collateral estoppel with respect to an element of the crime to which the defendant pled guilty. Hilsenrath, 2008 U.S. Dist. Lexis 50021 at *12. “Because a knowing and voluntary guilty plea constitutes an admission of all the material facts alleged in the indictment, it is fair to estop a defendant from relitigating a common material fact even at a subsequent criminal proceeding.” United States v. Bejar-Matrecios, 618 F.2d 81, 84 (9th Cir. 1980). 2. Cole’s guilty plea is co-extensive with the SEC’s claims With respect to the third element needed to establish collateral estoppel – that the issue on which the prior conviction is offered must of necessity have been decided in the criminal trial – there is also no genuine dispute. In assessing this element, courts have held that, as long as the factual bases of the two actions are the same, the doctrine will apply even where the statutes charged in the civil suit are not identical to those charged in the criminal case. Ivers v. United States, 581 F.2d 1362, 1367 (9th Cir. 1978); Municipality of Anchorage v. Hitachi Cable, Ltd., 547 F. Supp. 633, 641 (D. Alaska 1982); accord, SEC v. Quinlan, 2008 U.S. Dist. Lexis 95789, *14 (E.D. Mich. Nov. 7, 2008) (although [defendant] did not plead guilty to securities fraud, “commonality of factual issues” between criminal and civil cases supported application of collateral estoppel doctrine); SEC v. Opulentica, LLC, 479 F. Supp. 2d 319, 327 (S.D.N.Y. 2007) (doctrine applies even in the absence of identical causes of action); SEC v. Roor, 2004 U.S. Dist. Lexis 17416, *24 (S.D.N.Y. Aug. 30, 2004) (“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. Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001) (conviction for two counts of wire fraud collaterally estopped defendant from contesting element of scienter under all of the securities laws he was charged with civilly violating); SEC v. McCaskey, 2001 U.S. Dist. Lexis 13571, *11-12 (although defendant was not charged with a violation of Section 17(a) in his criminal case, defendant’s guilty plea to Section 10(b) prevented defendant from contesting his liability, as the elements of Section 17(a) and 10(b) are essentially the Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 19 of 31 Page ID #:510 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 same); SEC v. Dimensional Entertainment Corp., 493 F. Supp. 1270, 1275-77 (S.D.N.Y. 1980) (wire fraud conviction collaterally estopped relitigation of Section 10(b) claims), supp. op. 518 F. Supp. 773 (S.D.N.Y. 1981). In order to sustain its burden of proof on the claim that a defendant violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the SEC must establish by a preponderance of the evidence that: (i) in connection with the purchase or sale of securities, the defendant (a) employed a device, scheme or artifice to defraud; or (b) made an untrue statement of a material fact or omitted to state a material fact which made what was said, under the circumstances, misleading; or (c) engaged in any act, practice, or course of business which operated or would operate as a fraud or deceit upon any person; (ii) the defendant acted with scienter; and (iii) the defendant used an instrumentality of interstate commerce, such as mail or telephone, in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b) & 17 C.F.R. § 240.10b-5; SEC v. Rana Research, 8 F.3d 1358, 1362-64 (9th Cir. 1993). To prove a violation of Section 17(a)(1) of the Securities Act, the SEC must establish by a preponderance of the evidence that: (i) the defendant, directly or indirectly, employed a device, scheme, or artifice to defraud; (ii) the defendant’s conduct was in the offer or sale of a security; (iii) the defendant used or caused to be used any means or instruments of transportation or communication interstate commerce or by use of the mails; and (iv) the defendant acted with scienter. 15 U.S.C. § 77q(a)(1). To prove a violation of Section 17(a)(3) of the Securities Act, the SEC must establish by a preponderance of the evidence that: (i) the defendant, directly or indirectly, engaged in any transaction, practice or course of business which operated or would operate as a fraud or deceit upon the purchaser; (ii) the defendant’s conduct was in the offer or sale of a security; (iii) the defendant used or caused to be used any means or instruments of transportation or communication interstate commerce or by use of the mails; and (iv) the defendant acted, a minimum, with negligence. 15 U.S.C. § 77q(a)(3); SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855-856 (9th Cir. 2001). Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 20 of 31 Page ID #:511 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Here, the record in Cole’s criminal case supports the application of the collateral estoppel doctrine to all of the key elements of the fraud claims in the SEC’s Complaint: a scheme to defraud, made in connection with the purchase or sale of a security or in the offer or sale of a security, with scienter.4 Cole pleaded guilty to one count of felony stealing and two counts of felony securities fraud. The second count against Cole, in particular, which alleged a violation of Section 409.5-501 of the Missouri Revised Statutes, Mo. Rev. Stat § 409.05-501, is co-extensive with the SEC’s claims against him for violations of the antifraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. These statutory provisions are worded nearly identically, in that they each provide for liability when a defendant employs a device, scheme, or artifice to defraud, or engages in an act, practice, or course of business that operates as a fraud.5 In addition, the Missouri 4 The requirement that the fraud involve interstate commerce is satisfied here. The bonds were sold to investors in several states. SUF ¶ 61. In addition, Cole used wire transfers to receive funds pursuant to the draw request and to facilitate transactions between financial institutions in different states to send his wife the bond proceeds that he misappropriated. SUF ¶ 62. 5 The Missouri felony securities fraud statute to which Cole pleaded guilty provides: It is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly: (1) to employ a device, scheme, or artifice to defraud; (2) to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it is made, not misleading; or (3) to engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person. Mo. Rev. Stat § 409.05-501. Rule 10b-5 under the Exchange Act provides: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to 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, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. Section 17(a) of the Securities Act is worded nearly identically, except that Section Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 21 of 31 Page ID #:512 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 felony statute to which Cole pled guilty requires that the fraud have been “in connection with the offer, sale or purchase of a security.” Mo. Rev. Stat § 409.05- 501. Similarly, the federal securities laws at issue here require that the fraud have been “in connection with the purchase or sale of” a security, in the case of Rule 10b-5 under the Exchange Act, or “in the offer or sale of” a security, in the case of Section 17(a) of the Securities Act. 17 C.F.R. § 240.10b-5, 15 U.S.C. § 77q(a). The cases are essentially identical factually, as well. Both the criminal and civil actions involved the same misuses of bond proceeds, and the same fraudulent scheme that was perpetrated by Cole causing the fabricated Ramwell invoice to be prepared and submitted so that bond funds could be misused. Moreover, the felony complaint, to which Cole pleaded guilty, requires that Cole have acted “willfully.” Some of the claims alleged in the SEC’s action require proof of scienter (Section 10(b) and Section 17(a)(1), which can be satisfied with a showing of “recklessness,” which is a lower level of mens rea than the willful standard required in Cole’s criminal case. See, e.g., Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990). Also, Section 17(a)(3) of the Securities Act merely requires a showing of negligence. SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992). Therefore, Cole’s guilty plea to a charge that he acted “willfully” more than satisfies the scienter and negligence standards under the federal securities laws Cole is alleged to have violated. Under these facts, a more compelling case for the application of the collateral estoppel doctrine is difficult to imagine. B. Summary Judgment Is Also Warranted By The Other Undisputed Facts That Establish His Fraud The collateral estoppel effect of Cole’s guilty plea in his felony case establishes all of the elements to provide a basis for granting summary judgment against Cole, specifically that Cole engaged in a scheme to defraud, in connection with the purchase 17(a) requires that the fraudulent conduct be “in the offer or sale of” a security, instead of “in connection with the purchase or sale of” any security. 15 U.S.C. § 77q(a). Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 22 of 31 Page ID #:513 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 or sale of a security, with scienter. Although all of the elements of Cole’s scheme to defraud are established through his guilty plea, the additional undisputed evidence provides further detail regarding his fraudulent scheme. Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act prohibit fraud perpetrated by engaging in a fraudulent scheme. Section 17(a) prohibits fraud in the offer or sale of securities, and Section 10(b) prohibits fraud in connection with the purchase or sale of any security. See 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855 (9th Cir. 2001). Violations of Section 17(a)(1) and Section 10(b) (and Rule 10b-5 thereunder) require a showing of scienter, while violations of Section 17(a)(2)-(3) only require a showing of negligence. Aaron v. SEC, 446 U.S. 680 (1980). Scienter is defined as a “mental state embracing intent to deceive, manipulate or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). In the Ninth Circuit, scienter may be established by a showing of either “deliberate recklessness” or “conscious recklessness.” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1093 (9th Cir. 2010). Further, recklessness may be inferred from circumstantial evidence. Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91, n.30 (1983); SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987). 1. Cole engaged in a material fraudulent scheme Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder make it unlawful, in connection with the purchase or sale of a security by the use of interstate commerce, “to employ any device, scheme, or artifice to defraud” and “to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” in connection with the purchase or sale of any security. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(a), (c). Sections 17(a)(1) and (3) of the Securities Act make it unlawful for any person in the offer or sale of any securities by the use of interstate commerce to employ any device, scheme, or artifice to defraud; or 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. §§ Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 23 of 31 Page ID #:514 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 77q(a)(1), (3). To be liable for a scheme to defraud, a defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. See Simpson v. AOL Time Warner Inc., 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds sub nom., Avis Budget Group Inc. v. Cal. State Teachers’ Ret. System, 552 U.S. 1162 (2008).6 The undisputed evidence shows that Cole engaged in a scheme to defraud city officials and bondholders. Specifically, he directed a series of acts with the principal purpose and effect of creating a false appearance about the true use of the bond proceeds, and deceiving Mamtek employees and third parties to further his scheme to misappropriate those proceeds. Cole used innocent surrogates to shield his scheme from detection. The undisputed evidence shows that Cole asked Ho to sign an application for payment as a representative of Ramwell, documenting an agreement by Ramwell to perform work for Mamtek. The document was submitted to the City to falsely establish Ramwell’s role in the construction of the sucralose facility. The evidence further shows, and Cole admitted, that Cole directed the preparation of an invoice billing Mamtek for work performed by Ramwell when Cole knew that Ramwell had never been formed and did not perform the work stated. Cole reviewed this invoice and authorized it for submission to the City to obtain bond proceeds. The undisputed evidence also shows, and Cole also admitted, that Cole directed Mamtek employees to wire funds to his wife and lied to them about the reason his wife should receive the money. Cole and his wife then used those funds to pay their personal expenses. Each of these acts was inherently deceptive and had the principal purpose and effect of facilitating a scheme to induce the City to release bond proceeds to Mamtek, 6 The SEC’s complaint also asserts fraud claims under Section 17(a)(2) and Rule 10b- 5(b), which prohibit false representations or omissions in the offer or sale of securities or in connection with the purchase or sale of securities, respectively. 17 C.F.R. § 240.10b-5(b), 15 U.S.C. § 77q(a)(2). At this time, the SEC, however, is not moving for summary judgment under these provisions, and is only moving to have Cole found liable for engaging in a fraudulent scheme in violation of Sections 17(a)(1) and (3) and Rules 10b-5(a) and (c). Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 24 of 31 Page ID #:515 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 resulting in Cole’s misuse of those funds. See Simpson, 452 F.3d at 1048. Cole designed the scheme to conceal the true facts from the City and the agents that he used to effectuate the scheme. He used a sham company as a front to obtain money from the trustee. The City and the trustee had put controls in place to prevent this type of deception and misuse, causing the need for Cole to create the Ramwell fiction to undermine those controls. As a result, the City and bond trustee were duped into releasing bond proceeds to Mamtek that were used for undisclosed and fraudulent purposes. Cole’s violations were “in the offer or sale,” and “in connection with the purchase or sale” of securities and in interstate commerce. The phrase “in connection with the purchase or sale” of a security is met when the fraud alleged “coincides with a securities transaction.” Merrill Lynch, Pierce, Fenner & Smith Inc., v. Dabit, 547 U.S. 71, 85 (2006). Moreover, “in connection with” requires only that there be “deceptive practices touching” the purchase or sale of securities. See Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12-13 (1971); see also SEC v. Zandford, 535 U.S. 813, 819 (2002). Here, Cole’s conduct satisfied these elements. First, Cole diverted and misused money raised from the purchase or sale of a security, in this case, municipal bonds issued by the IDA and backed by the City of Moberly.7 For the same reasons, his conduct coincided with the securities transactions and therefore was in connection with the purchase or sale of a security. Similarly, Cole’s misconduct satisfied the Section 17(a) requirement that the fraud occur in the offer or sale of a security. His fraud was material, in that any reasonable investor would have considered it important to know that Cole had directed the preparation of false documentation to divert bond proceeds to him and his wife, and that Cole intended to use the bond proceeds for personal expenses and other improper purposes. See, e.g., 7 Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act define “security” to include, among other things, any bond. 15 U.S.C. §§ 77b(a)(1) & 78c(a)(10). Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 25 of 31 Page ID #:516 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Research Automation Corp., 585 F.2d 31, 35-36 (2d Cir. 1978). 2. Cole acted with scienter Cole acted with a high degree of scienter. In the weeks leading up to the closing of the bond offering, Cole set in motion a series of acts designed to divert bond proceeds fraudulently for his own use. Cole knew that Ramwell did not exist, and had not performed the services itemized in the invoice. Cole took steps to conceal his acts from detection, and he lied to Mamtek employees and consultants. C. The Court Should Issue A Permanent Injunction Against Cole Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), provide that upon proper showing, a permanent injunction shall be granted in enforcement actions brought by the SEC. That burden is met when the evidence establishes a reasonable likelihood of a future violation of the securities laws. SEC v. Murphy, 626 F.2d 633 (9th Cir. 1980); SEC v. Koracorp Indus., Inc., 575 F.2d 692 (9th Cir. 1978); SEC v. Fehn, 97 F.3d 1276, 1295-96 (9th Cir. 1996). In predicting the likelihood of future violations, courts evaluate the totality of the circumstances. See Murphy, 626 F.2d at 655 (the existence of past violations may give rise to an inference that there will be future violations); Koracorp Indus., 575 F.2d at 699. Foremost among these circumstances is the past illegal conduct of the defendant, from which a court may infer the likelihood of future violations. SEC v. Management Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975). Factors to be considered also include the degree of scienter involved; the isolated or recurrent nature of the infractions; the defendant’s recognition of the wrongful nature of his conduct; the likelihood that, based on the defendant’s occupation, future violations might occur; and the sincerity of the defendant’s assurances against future violations. Murphy, 626 F.2d at 655. Here, the totality of the circumstances weighs strongly in favor of a permanent injunction. As described above, and as he admitted, Cole acted with a high level of scienter. His conduct was not isolated, but instead involved a complicated scheme Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 26 of 31 Page ID #:517 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 that included creating false documents for a sham company. In addition, there is no evidence that Cole has recognized the wrongful nature of his conduct, and he has not provided any assurances against future violations. The Court should enter a permanent injunction against future violations. Furthermore, a permanent injunction is appropriate even in light of Cole’s sentence of imprisonment. See, e.g., SEC v. Cobalt Multifamily Investors I, LLC, 2011 U.S. Dist. Lexis 120215, *14-16 & n.8 (S.D.N.Y. June 14, 2011) (finding permanent injunction appropriate where defendant was sentenced to 85 years in prison for operating a Ponzi scheme). As the court noted in Cobalt, “[t]o allow those with long prison sentences to avoid injunctions would have the perverse effect of rewarding a category of offenders who are particularly culpable.” D. The Court Should Order Cole To Pay Disgorgement With Prejudgment Interest It is well settled that the SEC may seek, and courts may order, disgorgement of ill-gotten gains. See SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998); SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995). Courts have “broad equity powers to order the disgorgement of ‘ill-gotten gains’ obtained through the violation of the securities laws.” First Pacific Bancorp, 142 F.3d at 1191; see also SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). A disgorgement calculation requires only a “reasonable approximation of profits causally connected to the violations.” JT Wallenbrock, quoting SEC v. First Pacific Bancorp, 142 F.3d at 1114. The amount of disgorgement should include “all gains flowing from the illegal activities.” Id., quoting SEC v. Cross Fin. Services, 908 F. Supp. 718, 734 (C.D. Cal. 1995). Disgorgement usually includes prejudgment interest, which courts order to ensure that the wrongdoer does not profit from the illegal activity. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972); SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1190 (D. Nev. 2006). Here, the SEC seeks an order that Cole disgorge $904,167, consisting of the Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 27 of 31 Page ID #:518 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 bond proceeds that Cole funneled to his wife. These funds were directly misappropriated by Cole from the bond proceeds. The facts to which Cole admitted in connection with his guilty plea establish that at least $700,000 of the proceeds constitute ill-gotten gains, and the other undisputed facts establish that the remaining $204,167 are also ill-gotten gains that Cole misappropriated from the bond proceeds. Disgorgement normally includes prejudgment interest. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972); SEC v. Cross Fin. Services, Inc., 908 F. Supp. at 734. An award of prejudgment interest is designed to deprive the wrongdoer of 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). As with disgorgement, the aim is to prevent unjust enrichment and, by making violations unprofitable, to deter the defendant and others from committing securities fraud. SEC v. First Pacific Bancorp, 142 F.3d at 1191. The prejudgment interest rate used by the Commission is the same rate used by the Internal Revenue Service to calculate underpayment penalties. That rate is defined as the Federal short term rate (also known as the period rate) plus three percentage points (also known as the annual rate). 26 U.S.C. § 6621(a)(2). Courts have upheld the use of this rate in SEC enforcement actions. See SEC v. Gordon, 822 F. Supp. 2d 1144, 1161-1162 (N.D. Ok. 2011); SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996). As set forth in the concurrently filed Declaration of David J. Van Havermaat, prejudgment interest in the amount of $119,885 is due from September 18, 2012, the day the SEC filed its Complaint, to October 16, 2016, which is the date this motion is noticed to be heard. SUF ¶ 67. The Court should order Cole to pay disgorgement of $904,167 and prejudgment interest of $119,885, for a total of $1,024,052. E. The Court Should Order Nanette Cole To Pay Disgorgement With Prejudgment Interest The broad equitable powers of this Court may be employed to recover ill-gotten gains from illegal conduct, whether held by the original wrongdoer or by one who has Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 28 of 31 Page ID #:519 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 received the proceeds after the wrong, as did Nanette Cole here. See SEC v. Colello, 139 F.3d 674, 676 (9th Cir. 1998). The SEC named Nanette Cole as a relief defendant to recover ill-gotten gains she received when Bruce Cole fraudulently transferred the bond proceeds to her. In the typical case, the SEC must prove two elements to recover ill-gotten gains from a relief defendant: (1) that the relief defendant has received ill-gotten funds; and (2) that the relief defendant does not have a legitimate claim to the funds. Id. at 677. As set forth above, the facts are undisputed as to the first element – the funds Bruce Cole transferred to Nanette Cole were ill-gotten monies he obtained as a result of his fraud. The undisputed facts also establish the second element – that Nanette Cole does not have a legitimate claim to the bond proceeds that she received. Nanette Cole acknowledged that she was never employed by or had any job responsibilities in connection with Mamtek or Ramwell, and that she never provided any services for either of them, even on a voluntary basis. Nanette Cole did not even know why the bond proceeds were wired to her, and did not know the source of the funds she received. The undisputed facts show that Nanette Cole has no legitimate claim to the bond proceeds that she received, and she should be ordered, jointly and severally with Bruce Cole, to disgorge those ill-gotten gains, totaling $904,167, with prejudgment interest of $119,885, for a total of $1,024,052. IV. CONCLUSION For all the foregoing reasons, the SEC’s motion for summary judgment should be granted. Dated: September 16, 2016 Respectfully submitted, /s/ David J. Van Havermaat David J. Van Havermaat Attorney for Plaintiff Securities and Exchange Commission Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 29 of 31 Page ID #:520 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: U.S. SECURITIES AND EXCHANGE COMMISSION, 444 S. Flower Street, Suite 900, Los Angeles, California 90071 Telephone No. (323) 965-3998; Facsimile No. (213) 443-1904. On September 16, 2016, I caused to be served the document entitled MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION FOR SUMMARY JUDGMENT on all the parties to this action addressed as stated on the attached service list: ☒ OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency’s practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. ☐ PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. ☐ EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid. ☐ HAND DELIVERY: I caused to be hand delivered each such envelope to the office of the addressee as stated on the attached service list. ☐ UNITED PARCEL SERVICE: By placing in sealed envelope(s) designated by United Parcel Service (“UPS”) with delivery fees paid or provided for, which I deposited in a facility regularly maintained by UPS or delivered to a UPS courier, at Los Angeles, California. ☐ ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. ☒ E-FILING: By causing the document to be electronically filed via the Court’s CM/ECF system, which effects electronic service on counsel who are registered with the CM/ECF system. ☐ FAX: By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. I declare under penalty of perjury that the foregoing is true and correct. Date: September 16, 2016 /s/ David J. Van Havermaat David J. Van Havermaat Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 30 of 31 Page ID #:521 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Bruce A. Cole, et al. United States District Court—Central District of California Case No. 2:12-cv-08024-AB-JEM SERVICE LIST Bruce A. Cole (served by U.S. mail only) ID# 1247202 Tipton Correctional Center 619 N. Osage Avenue Tipton, MO 65081 Pro Se Nanette H. Cole (served by CM/ECF and U.S. mail) 34281 Doheny Park Road, #2429 Capistrano Beach, CA 92624 Email: nanhcole@aol.com Pro Se Case 2:12-cv-08024-AB-JEM Document 98-1 Filed 09/16/16 Page 31 of 31 Page ID #:522 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JOHN W. BERRY, Cal. Bar No. 295760 Email: berryj@sec.gov DAVID J. VAN HAVERMAAT, Cal. Bar No. 175761 Email: vanhavermaatd@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Michele Wein Layne, Regional Director John W. Berry, Regional Trial Counsel 444 S. Flower Street, Suite 900 Los Angeles, California 90071 Telephone: (323) 965-3998 Facsimile: (213) 443-1904 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. BRUCE A. COLE, Defendant, and NANETTE H. COLE, Relief Defendant. Case No. 2:12-cv-08024-AB-JEM PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT Date: October 17, 2016 Time: 10:00 a.m. Ctrm: 4 Judge: Hon. André Birotte Jr. Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 1 of 26 Page ID #:523 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 I. INTRODUCTION In accordance with Local Rule 56-1 of the Local Civil Rules for the United States District Court for the Central District of California and Federal Rule of Civil Procedure 56, Plaintiff Securities and Exchange Commission (“SEC”) submits this Proposed Statement of Uncontroverted Facts and Conclusions of Law (“Statement”) in support of its Motion for Summary Judgment, filed concurrently herewith. II. UNCONTROVERTED FACTS UNCONTROVERTED FACT EVIDENCE 1. The Securities and Exchange Commission (“SEC”) filed this action on September 18, 2012, alleging violations by Bruce Cole (“Cole”) of the antifraud provisions of Section 17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. The SEC’s complaint alleges that Cole violated the antifraud provisions of the federal securities laws by misappropriating proceeds from bond issued by the City of Moberly, Missouri (“City of Moberly” or “Moberly”). Docket No. 1 (“Complaint”), ¶¶ 1- 4, 49-55. 2. The complaint alleges that Cole reached out to the City of Moberly in early 2010 to identify municipalities willing to partner with Mamtek on a sucralose factory project Complaint, ¶¶ 10-17. 3. The SEC’s complaint alleges that Moberly agreed to guarantee a bond offering that Complaint, ¶¶ 18-19. Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 2 of 26 Page ID #:524 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE Mamtek could use to finance the construction of the proposed factory. The Industrial Development Authority for the City of Moberly (“IDA”) actually issued the bonds, and the City made available the unencumbered general revenues of the City for all payments of principal and interest due under the bond offering. 4. The complaint alleges that Mamtek agreed to make periodic payments to the City from revenue generated from the plant, ensuring a stream of income to fund the City’s repayment obligations. Complaint, ¶ 20. 5. The bond issuances closed on July 28, 2010, raising a total of $39 million. Complaint, ¶ 24. 6. The complaint alleges that Mamtek submitted draw requests consisting of invoices and receipts documenting the expenditure of funds for purported construction-related expenses. Complaint, ¶ 29. 7. The SEC’s complaint alleges that, for the initial draw request submitted on the date the bonds were issued, Cole used the purported third party Ramwell Industrial, Ltd. (“Ramwell”) as a means to obtain funds for his and his wife’s personal use. Complaint, ¶ 31. Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 3 of 26 Page ID #:525 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE 8. The complaint alleges that Cole represented to a consultant that Ramwell had performed engineering work on the project and, approximately two weeks before the bond offering closed, Cole asked the consultant to create an invoice for Ramwell to bill Mamtek for the purported construction work, which would be submitted to the City for payment. Complaint, ¶ 31. 9. The complaint alleges that, at Cole’s direction, the consultant created a Ramwell invoice dated July 21, 2010 in the amount of $4,062,500, purportedly billing Mamtek for production line engineering, design, and project supervision. Complaint, ¶ 32. 10. The complaint alleges that Cole knew that Ramwell did not exist and had not performed the services itemized in the invoice. Complaint, ¶ 32. 11. The SEC’s complaint alleges that, on July 29, 2010, the bond trustee wired $4,278,648 to Mamtek’s bank account, which consisted of full reimbursement for the Ramwell invoice, as well as payment of additional invoices. Complaint, ¶ 34. 12. The complaint alleges that Cole directed how the funds wired by the bond trustee to Mamtek’s bank account were to be used. He prepared a list of payments to be made from Complaint, ¶ 35. Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 4 of 26 Page ID #:526 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE the funds and gave it to a Mamtek employee. None of the funds were remitted to Ramwell, because it did not exist. 13. The complaint alleges that Cole directed two separate payments to be made to his wife from the bond proceeds that were wired to Mamtek as payment of the Ramwell invoice: one in the amount of $700,000, and another in the amount of $271,046 Complaint, ¶¶ 35-38. 14. The complaint alleges that the money that Cole directed to his wife’s account was then used for the Coles’ personal expenses, including credit card debt, mortgage payments, and household employees, and the issuance of a cashier’s check for $271,046. Complaint, ¶¶ 37, 38. 15. In March 2013, Cole moved for a stay of this action, arguing that the factual allegations of the criminal case against him “significantly – if not completely – overlap[ped]” with the SEC’s allegations. Docket No. 23 (“Defendant’s Motion and Memorandum of Points and Authorities in Support of Motion to Stay Action”), p. 1. 16. The same day that the SEC filed its complaint, the Missouri Attorney General filed a felony complaint against Cole. Declaration of David J. Van Havermaat (“Van Havermaat Decl.”), Ex. 1 (“Cole Felony Complaint”). 17. The Missouri felony complaint charged Cole with one count of felony stealing and four Van Havermaat Decl., Ex. 1 (Cole Felony Complaint, pp. 2-5). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 5 of 26 Page ID #:527 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE counts of felony securities fraud. 18. The allegations of the second count against Cole, for felony securities fraud, closely mirrored the allegations of the SEC’s complaint. The felony complaint alleged that Cole “willfully,” and in connection with municipal bonds issued by the Moberly IDA, “employed, with intent to defraud, a device, scheme, or artifice to defraud in that he arranged to submit to Mamtek U.S. an invoice for engineering services under the defendant’s business name of ‘Ramwell,’ with the intent to immediately direct Mamtek U.S. to use the funds for other purposes, including the payment of $700,000 to the defendant’s wife for the defendant’s personal use and benefit.” Van Havermaat Decl., Ex. 1 (Cole Felony Complaint, p. 3). 19. In September 2014, Cole pleaded guilty to three of the felony charges against him in the state action, two counts of felony securities fraud, including the second count referenced above, and one count of felony stealing. Van Havermaat Decl., Ex. 2 (“Cole’s Petition to Enter Plea of Guilty”). 20. In connection with his guilty plea, Cole executed a document captioned “Defendant’s Factual Basis for Guilty Plea.” Van Havermaat Decl., Ex. 3 (“Cole’s Factual Basis for Guilty Plea”). 21. In early 2010, Mamtek sought financing to construct a sucralose factory in Moberly. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 6 of 26 Page ID #:528 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE Plea, ¶ 1). 22. A major component of the financing for the sucralose factory was a series of municipal bonds totaling approximately $39 million, issued by the Industrial Development Authority of the City of Moberly. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 1). 23. Cole was the chairman and CEO of Mamtek and participated in securing the financing. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 1). 24. Ramwell was represented to investors as a “captive vendor” that maintained the knowledge regarding the design and installation of sucralose production lines. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 2). 25. Investors were told that Ramwell would conduct all intellectual property activities, install and maintain Mamtek’s production lines, train the production labor force, perform maintenance, conduct research, and mix basic chemical formulations. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 3). 26. Before the bonds closed in late July 2010, Cole caused an invoice to be created, purportedly from Ramwell, that listed a total of more than $4 million in charges, purportedly in connection with the sucralose plant, including for the design, engineering, acquisition, and installation, and project supervision of five production lines. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 4). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 7 of 26 Page ID #:529 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE 27. The purported Ramwell invoice was submitted to the City of Moberly for payment as part of Mamtek’s first draw requesting payment from the bond proceeds. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 5). 28. Subsequent requests from Mamtek to draw money from the bond proceeds included additional purported Ramwell invoices, which were roughly 10% of the total amount requested for the bond draws. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 6). 29. The Ramwell invoices were prepared with Cole’s knowledge. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 7). 30. Some of the money received for payment of the Ramwell invoices was used to pay Mamtek’s operating and overhead costs. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 7). 31. When the invoices for Ramwell were submitted, Cole knew that Ramwell had not performed any services or provided any goods because Mamtek had hired a separate group of consulting engineers to provide those services on behalf of Ramwell. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶¶ 8, 9). 32. When Mamtek received the first bond payment, which included payment of the first Ramwell invoice, Cole directed that $700,000 be wired to his wife’s account. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 12). 33. Cole stated that the $700,000 that was wired to his wife’s account was to be paid to Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 8 of 26 Page ID #:530 8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE Ramwell for costs it had incurred in connection with the sucralose factory project. Plea, ¶ 12). 34. The bond proceeds that Bruce Cole caused to be transferred to Nanette Cole’s bank account were not used to pay Ramwell for goods or services provided. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 13). 35. The funds that Bruce Cole caused to be transferred to Nanette Cole’s bank account were retained by Cole for his personal use. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 13). 36. Cole did not inform the City of Moberly or the bond trustee that the bond proceeds that had been transferred to Nanette Cole’s account had not been used to pay Ramwell or that he had retained the funds for his personal use. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 13). 37. As a result of his guilty plea, on November 10, 2014, Cole was sentenced to imprisonment for three concurrent seven-year terms. Van Havermaat Decl., Ex. 4 (printout of Missouri court’s docket information in State v. Bruce A. Cole, Case No. 1311- CR01981). 38. Pursuant to a process instituted by the City and the bond trustee, Mamtek submitted draw requests consisting of invoices and receipts documenting the expenditure of funds for construction-related expenses. Van Havermaat Decl., Ex. 5 (Mamtek U.S., Inc. draw request dated July 23, 2010, and documents attached thereto). 39. A draw request would include invoices from the various contractors Mamtek Van Havermaat Decl., Ex. 5 (Mamtek U.S., Inc. draw request). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 9 of 26 Page ID #:531 9 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE employed onsite for various tasks and receipts or purchase orders for equipment. 40. The City’s finance manager reviewed the invoices and receipts in the request. Van Havermaat Decl., Ex. 13 (Hodge testimony, pp. 34:21- 35:21). 41. If the City’s finance manager concluded that an expenditure was not directly related to building the facility, such as travel expenses, he rejected that particular item and reduced the draw request accordingly. Van Havermaat Decl., Ex. 13 (Hodge Testimony, pp. 33:7-16, 36:11-21); Van Havermaat Decl., Ex. 15 (Smith testimony, pp. 123:12-126:7). 42. For permitted expenses, the finance manager submitted a requisition form attaching the draw request, asking the bond trustee to disburse funds to the appropriate recipients. Van Havermaat Decl., Ex. 13 (Hodge testimony, pp. 35:1-21); Van Havermaat Decl., Ex. 15 (Smith testimony, pp. 123:22- 124:14). 43. In the case of Ramwell invoices, the disbursements for Mamtek’s vendors were forwarded to Mamtek. Van Havermaat Decl., Ex. 13 (Hodge testimony, pp. 43:16- 44:14). 44. Cole asked a Mamtek consultant, Thomas Smith, to create an invoice for Ramwell to bill Mamtek $4,062,500, purportedly for production line engineering, design, acquisition, installation, and project supervision. Mr. Smith transmitted the draw request to Moberly’s finance manager. Van Havermaat Decl., Ex. 5 (Mamtek U.S. Inc. draw request at p. MOBERLY-000015); Van Havermaat Decl., Ex. 15 (Smith testimony, pp. 136:23-138:17, 139:18-140:5,148:17-153:7). 45. Cole reviewed and approved all of the Van Havermaat Decl., Ex. 15 Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 10 of 26 Page ID #:532 10 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE Ramwell invoices, including the first invoice for $4,062,500. (Smith testimony, pp. 175:17-24, 178:4-14). 46. Cole did not disclose to Mr. Smith that any of the bond proceeds would be diverted to Cole Van Havermaat Decl., Ex. 15 (Smith testimony, p. 153:8-18). 47. Mr. Smith believed that if any of the bond proceeds were diverted to Cole or for purposes other than as described in the invoice (i.e., the engineering, design, acquisition, installation, and supervision of the production line), the entire project would be endangered. Van Havermaat Decl., Ex. 15 (Smith testimony, pp. 153:19- 154:15). 48. Cole sought the assistance of another Mamtek official, David Ho, to further document the nonexistent relationship between Mamtek and Ramwell. Van Havermaat Decl., Ex. 12 (Ho testimony, pp. 181:17-191:22); Van Havermaat Decl., Ex. 5 (Mamtek U.S. Inc. draw request at pp. MOBERLY-000012 to -13). 49. Cole asked Mr. Ho to sign a contract, known as an application for payment, between Mamtek and Ramwell establishing a total amount of $22,850,000 purportedly to be paid by Mamtek for engineering work on the project. Van Havermaat Decl., Ex. 12 (Ho testimony, pp. 182:23-183:17, 189:7-15); Van Havermaat Decl. Ex. 5 (Mamtek U.S. Inc. draw request at p. MOBERLY-000012); Van Havermaat Decl., Ex. 15 (Smith testimony, pp. 140:6-141:6, 142:21-143:20). 50. Mr. Ho initially refused to sign the application for payment. Mr. Ho reluctantly signed the document because he felt he had no Van Havermaat Decl., Ex. 12 (Ho testimony, pp. 188:15-191:1). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 11 of 26 Page ID #:533 11 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE choice given the pressure Cole had placed on him. 51. The application for payment signed by Mr. Ho was notarized and included in the first draw request submitted to the City. Van Havermaat Decl., Ex. 5 (Mamtek U.S. Inc. draw request at pp. MOBERLY-000012 to -13). 52. On July 29, 2010, the bond trustee wired $4,278,648 to Mamtek, which encompassed the Ramwell invoice, as well as additional invoices. Van Havermaat Decl., Ex. 14 (Roston testimony, pp. 160:25- 162:12); Van Havermaat Decl., Ex. 6 (Mamtek US Inc. bank statement dated July 31, 2010, at p. 4); Van Havermaat Decl., Ex. 5 (Mamtek U.S. Inc. draw request at p. MOBERLY-000005). 53. Cole had not told the City that Ramwell did not exist and had not performed the services identified on the invoice. Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶¶ 8-10); Van Havermaat Decl., Ex. 13 (Hodge testimony, p. 48:6-9). 54. The City’s finance manager, had he known the truth that Ramwell did not exist and had not performed the services identified on the invoice, would not have approved payment of the Ramwell invoice. Van Havermaat Decl., Ex. 13 (Hodge testimony, pp. 48:6-16, 79:24-81:13). 55. Cole directed how the bond proceeds received by Mamtek pursuant to the Ramwell invoice were to be used. Van Havermaat Decl., Ex. 14 (Roston testimony, pp. 162:24- 163:5, 166:24-167:4). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 12 of 26 Page ID #:534 12 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE 56. Cole prepared a list of payments to be made from the wired funds and gave it to a Mamtek employee a few days before the bond closed. Van Havermaat Decl., Ex. 14 (Roston testimony, pp. 162:24- 163:5, 166:24-167:4). 57. The day after Mamtek received the bond proceeds pursuant to the Ramwell invoice, Cole directed $700,000 to be wired to his wife. Van Havermaat Decl., Ex. 14 (Roston testimony, pp. 167:21- 168:3); Van Havermaat Decl., Ex. 6 (Mamtek bank statement at p. 5); Van Havermaat Decl., Ex. 7 (Nanette H. Cole bank statement dated July 30, 2010, at p. 2); Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 61:21-63:11); see also Van Havermaat Decl., Ex. 3 (Cole’s Factual Basis for Guilty Plea, ¶ 12). 58. The $700,000 that Cole directed to be wired to his wife were used solely for expenses of the Cole family, including, among other things, payments for credit card debt, mortgage payments, insurance payments, and the issuance of a check made out to cash for more than $281,000. Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 61:21-62:20, 67:7-21, 69:2-25, 70:9-22, 75:5-17, 77:15-79:4, 98:5-100:21, 104:4- 105:4). 59. Cole directed a second wire of $204,167 to his wife’s bank account the day after Mamtek received the bond proceeds pursuant to the Van Havermaat Decl., Ex. 14 (Roston testimony, p. 169:9-18); Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 62:21-63:11); Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 13 of 26 Page ID #:535 13 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE Ramwell invoice. Van Havermaat Decl., Ex. 6 (Mamtek bank statement at p. 5); Van Havermaat Decl., Ex. 7 (Nanette H. Cole bank statement at p. 2). 60. The bond proceeds that Nanette Cole received pursuant to the $204,167 wire were used to pay the Coles’ personal expenses. Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 61:21-62:20, 67:7-21, 69:2-25, 70:9-22, 75:5-17, 77:15-79:4, 98:5-100:21, 104:4- 105:4). 61. The Moberly bonds were sold to investors in several states. Van Havermaat Decl., Ex. 8 (Moberly Bond Purchaser Data spreadsheet). 62. Cole used wire transfers to receive fund pursuant to the draw requests and to facilitate transactions between financial institutions in different states to send to his wife the bond proceeds that he misappropriated. Van Havermaat Decl., Ex. 5 (Mamtek U.S., Inc. draw request); Van Havermaat Decl., Ex. 6 (Mamtek bank statement at p. 5); Van Havermaat Decl., Ex. 7 (Nanette H. Cole bank statement at p. 2). 63. Nanette Cole was never employed by or had any job responsibilities in connection with Mamtek or Ramwell. Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 33:18-34:17, 37:14-38:13). 64. Nanette Cole never provided any services for Mamtek or Ramwell, even on a voluntary basis. Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 33:18-34:17, 37:14-38:13). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 14 of 26 Page ID #:536 14 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 UNCONTROVERTED FACT EVIDENCE 65. Nanette Cole did not know why the bond proceeds were wired to her, and she did not even know the source of the funds she received, or that they were related to Ramwell Van Havermaat Decl., Ex. 11 (N. Cole testimony, pp. 62:3-63:11, 63:24-64:25). 66. Bruce Cole caused the funds to be sent to his wife as “a matter of convenience and just to put it there,” and he acknowledged that the funds “were not used for any services performed by anybody on behalf of Mamtek.” Van Havermaat Decl., Ex. 10 (B. Cole testimony, pp. 321:19- 323:10). 67. From September 18, 2012 to October 16, 2016, interest on $904,167, calculated pursuant to 26 U.S.C. § 6621(a)(2), is $119, 885. Van Havermaat Decl., ¶ 10 and Ex. 9 (Prejudgment Interest Report). III. CONCLUSIONS OF LAW 1. A party is entitled to summary judgment “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 judgment as a matter of law.” Fed. R. Civ. P. 56(a); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). 2. A party moving for summary judgment meets its burden by establishing, for each element of the claim or defense, that no reasonable trier of fact could find for the opposing party. See Celotex, 477 U.S. at 323. 3. Once the moving party has met its burden, the “nonmoving party must come forward with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Electric Indus. Co. Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (emphasis in original). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 15 of 26 Page ID #:537 15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 4. The nonmoving party in a summary judgment motion may not rest on conclusory allegations or bald assertions, see Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989), but must come forward with significant probative evidence tending to support its contention that material, triable issue of fact remain. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-250 (1986); Sanchez v. Vild, 891 F.2d 240, 242 (9th Cir. 1989). 5. A “mere existence of a scintilla of evidence” does not suffice to defeat a summary judgment motion; rather, the nonmoving party must present “concrete evidence from which a reasonable juror could return a verdict in his favor.” Liberty Lobby, 477 U.S. at 252, 256. 6. The doctrine of collateral estoppel prohibits relitigation of an issue of fact or law that has been decided in earlier litigation. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326, n.5 (1979); see also Emich Motors Corp. v. General Motors Corp., 340 U.S 558, 568-69 (1951) “[i]t is well established that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding.”); SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *7 (N.D. Cal. Aug. 25, 2008) (“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 government in the criminal case.”) (quoting United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978)). 7. When a defendant has already been convicted of or pleaded guilty to criminal fraud, the courts in the Ninth Circuit have not hesitated to apply the doctrine of collateral estoppel to civil securities fraud violations to bar relitigation of factual issues necessarily decided in the criminal case. See, e.g., SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *7-8 & *15 (N.D. Cal. Aug 25, 2008); SEC v. Hilsenrath, 2008 U.S. Dist. Lexis 50021 (N.D. Cal. May 30, 2008); accord SEC v. Bilzerian, 29 F.3d 689, 694 (D.C. Cir. 1994); SEC v. Gruenberg, 989 F.2d 977, 978 (8th Cir. 1993); SEC v. McCaskey, 2001 U.S. Dist. Lexis 13571 (S.D.N.Y. Sept. 6, 2001); In re Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 16 of 26 Page ID #:538 16 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Towers Financial Corp. Noteholders Litig., 75 F. Supp. 2d 178 (S.D.N.Y 1999); SEC v. Everest Management Corp., 466 F. Supp. 167, 172 (S.D.N.Y. 1979). 8. Where a party seeks to invoke the doctrine of collateral estoppel in a case involving a criminal matter, the moving party must establish that: (1) the prior conviction must have been for a serious offense so that the defendant was motivated to fully litigate the charges; (2) there must have been a full and fair trial to prevent convictions of doubtful validity from being used; (3) the issue on which the prior conviction is offered must of necessity have been decided in the criminal case; and (4) the party against whom collateral estoppel is asserted was a party or in privity with a party to the prior trial. SEC v. Hilsenrath, 2008 U.S. Dist. Lexis 50021, *11 (quoting United States v. Real Property Located at Section 18, 976 F.2d 515, 518 (9th Cir. 1982)); see also SEC v. Reyes, 2008 U.S. Dist. Lexis 65895, *8 (setting forth an equivalent four-factor test). 9. A guilty plea may be used for collateral estoppel with respect to an element of the crime to which the defendant pled guilty. Hilsenrath, 2008 U.S. Dist. Lexis 50021 at *12; United States v. Bejar-Matrecios, 618 F.2d 81, 84 (9th Cir. 1980) (“Because a knowing and voluntary guilty plea constitutes an admission of all the material facts alleged in the indictment, it is fair to estop a defendant from relitigating a common material fact even at a subsequent criminal proceeding.”) 10. As long as the factual bases of the two actions are the same, the doctrine of collateral estoppel will apply even where the statutes charged in the civil suit are not identical to those charged in the criminal case. Ivers v. United States, 581 F.2d 1362, 1367 (9th Cir. 1978); Municipality of Anchorage v. Hitachi Cable, Ltd., 547 F. Supp. 633, 641 (D. Alaska 1982); accord, SEC v. Quinlan, 2008 U.S. Dist. Lexis 95789, *14 (E.D. Mich. Nov. 7, 2008) (although [defendant] did not plead guilty to securities fraud, “commonality of factual issues” between criminal and civil cases supported application of collateral estoppel doctrine); SEC v. Opulentica, LLC, 479 F. Supp. 2d 319, 327 (S.D.N.Y. 2007) (doctrine applies even in the absence of Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 17 of 26 Page ID #:539 17 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 identical causes of action); SEC v. Roor, 2004 U.S. Dist. Lexis 17416, *24 (S.D.N.Y. Aug. 30, 2004) (“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. Pace, 173 F. Supp. 2d 30, 33 (D.D.C. 2001) (conviction for two counts of wire fraud collaterally estopped defendant from contesting element of scienter under all of the securities laws he was charged with civilly violating); SEC v. McCaskey, 2001 U.S. Dist. Lexis 13571, *11-12 (although defendant was not charged with a violation of Section 17(a) in his criminal case, defendant’s guilty plea to Section 10(b) prevented defendant from contesting his liability, as the elements of Section 17(a) and 10(b) are essentially the same); SEC v. Dimensional Entertainment Corp., 493 F. Supp. 1270, 1275-77 (S.D.N.Y 1980) (wire fraud conviction collaterally estopped relitigation of Section 10(b) claims), supp. op. 518 F. Supp. 773 (S.D.N.Y. 1981). 11. Section 409.5-501 of the Missouri Revised Statutes provides that “[i]t is unlawful for a person, in connection with the offer, sale, or purchase of a security, directly or indirectly: (1) to employ a device, scheme, or artifice to defraud; (2) to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make the statement made, in the light of the circumstances under which it is made, not misleading; or (3) to engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person. Mo. Rev. Stat § 409.05-501. 12. Rule 10b-5 under the Securities Exchange Act of 1934 provides that: It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to 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, or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 18 of 26 Page ID #:540 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5. 13. In order to sustain its burden of proof on the claim that a defendant violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the SEC must establish by a preponderance of the evidence that: (i) in connection with the purchase or sale of securities, the defendant (a) employed a device, scheme or artifice to defraud; or (b) made an untrue statement of a material fact or omitted to state a material fact which made what was said, under the circumstances, misleading; or (c) engaged in any act, practice, or course of business which operated or would operate as a fraud or deceit upon any person; (ii) the defendant acted with scienter; and (iii) the defendant used an instrumentality of interstate commerce, such as mail or telephone, in connection with the purchase or sale of securities. 15 U.S.C. § 78j(b) & 17 C.F.R. § 240.10b-5; SEC v. Rana Research, 8 F.3d 1358, 1362-64 (9th Cir. 1993). 14. Section 17(a) of the Securities Act of 1933 provides that: “[i]t shall be unlawful for any person in the offer or sale of any securities…by the use of any means or instruments of transportation or communication in interstate commerce or by 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. To prove a violation of Section 17(a)(1) of the Securities Act, the SEC must establish by a preponderance of the evidence that: (i) the defendant, directly or indirectly, employed a device, scheme, or artifice to defraud; (ii) the defendant’s conduct was in the offer or sale of a security; (iii) the defendant used or caused to be used any means or instruments of transportation or communication interstate commerce or by use of the mails; and (iv) the defendant acted with scienter. 15 U.S.C. § 77q(a)(1). Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 19 of 26 Page ID #:541 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 16. To prove a violation of Section 17(a)(3) of the Securities Act, the SEC must the SEC must establish by a preponderance of the evidence that: (i) the defendant, directly or indirectly, (a) engaged in any transaction, practice or course of business which operated or would operate as a fraud or deceit upon the purchaser; (ii) the defendant’s conduct was in the offer or sale of a security; (iii) the defendant used or caused to be used any means or instruments of transportation or communication interstate commerce or by use of the mails; and (iv) the defendant acted, a minimum, with negligence. 15 U.S.C. § 77q(a)(3); SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855-856 (9th Cir. 2001). 17. Sections 17(a)(2) and (3) of the Securities Act require merely negligence. SEC v. Steadman, 967 F.2d 636 (D.C. Cir. 1992). 18. Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act prohibit fraud perpetrated by engaging in a fraudulent scheme, and by making material misrepresentations; Section 17(a) prohibits fraud in the offer or sale of securities, and Section 10(b) prohibits fraud in connection with the purchase or sale of any security. See 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855 (9th Cir. 2001). 19. Violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder require a showing of scienter, while violations of Section 17(a)(2)-(3) only require a showing of negligence. Aaron v. SEC, 446 U.S. 680 (1980). 20. Scienter is defined as a “mental state embracing intent to deceive, manipulate or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). 21. In the Ninth Circuit, scienter may be established by a showing of either “deliberate recklessness” or “conscious recklessness.” SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1093 (9th Cir. 2010). 22. Recklessness may be inferred from circumstantial evidence. Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91, n.30 (1983); SEC v. Burns, 816 F.2d Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 20 of 26 Page ID #:542 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 471, 474 (9th Cir. 1987). 23. To be liable for a scheme to defraud, a defendant must have engaged in conduct that had the principal purpose and effect of creating a false appearance of fact in furtherance of the scheme. See Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006), vacated on other grounds sub nom., Avis Budget Group Inc. v. Cal. State Teachers’ Ret. System, 552 U.S. 1162 (2008). 24. The phrase “in connection with the purchase or sale” of a security is met when the fraud alleged “coincides with a securities transaction.” Merrill Lynch, Pierce, Fenner & Smith Inc., v. Dabit, 547 U.S. 71, 85 (2006). 25. “In connection with” requires only that there be “deceptive practices touching” the purchase or sale of securities. See Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 12-13 (1971); see also SEC v. Zandford, 535 U.S. 813, 819 (2002). 26. To establish a violation of Section 10(b) and Rule 10b-5(b), the SEC must show that a defendant, in connection with the purchase or sale of a security: (1) made an untrue statement or omitted to state a material fact, (2) with scienter. See 17 C.F.R. § 240.10b-5(b). SEC v. Platforms Wireless, 617 F.3d 1072, 1092 (9th Cir. 2010); see also SEC v. Rana Research, Inc., 8 F.3d 1358, 1364 (9th Cir. 1993). 27. Section 17(a)(2) of the Securities Act makes it unlawful, in the offer or sale of a security by the use of interstate commerce, 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. 15 U.S.C. § 77q(a)(2). 28. To establish a violation of Section 17(a)(2), the SEC must prove, in connection with the offer or sale of a security: (1) a material false statement or omission; (2) made with negligence; and (3) the receipt of money or property by means thereof. See, e.g., SEC v. Dain Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001). 29. The misstatements and omissions must concern material facts. Basic Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 21 of 26 Page ID #:543 21 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 30. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. See TSC Indus., Inc., 426 U.S. at 449; SEC v. Platforms Wireless, 617 F.2d at 1092. 31. Liability arises not only from affirmative representations but also from failures to disclose material information. SEC v. Dain Rauscher, 254 F.3d at 855-56. The antifraud provisions impose “‘a duty to disclose material facts that are necessary to make disclosed statements, whether mandatory or volunteered, not misleading.’” SEC v. Fehn, 97 F.3d 1276, 1290 n.12 (9th Cir. 1996) (quoting Hanon v. Dataproducts Corp., 976 F.2d 497, 504 (9th Cir. 1992)). 32. Section 20(b) of the Securities Act, 15 U.S.C. § 77t(b), and Section 21(d) of the Exchange Act, 15 U.S.C. § 78u(d), provide that upon proper showing, a permanent injunction shall be granted in enforcement actions brought by the SEC. That burden is met when the evidence establishes a reasonable likelihood of a future violation of the securities laws. SEC v. Murphy, 626 F.2d at 633; SEC v. Koracorp Indus., Inc., 575 F.2d 692 (9th Cir. 1978); SEC v. Fehn, 97 F.3d 1276, 1295-96 (9th Cir. 1996). 33. In predicting the likelihood of future violations, courts evaluate the totality of the circumstances. See Murphy, 626 F.2d at 655 (the existence of past violations may give rise to an inference that there will be future violations); Koracorp Indus., 575 F.2d at 699. 34. Foremost among these circumstances is the past illegal conduct of the defendant, from which a court may infer the likelihood of future violations. SEC v. Management Dynamics, Inc., 515 F.2d 810, 807 (2d Cir. 1975). 35. Factors to be considered also include the degree of scienter involved; the isolated or recurrent nature of the infractions; the defendant’s recognition of the wrongful nature of his conduct; the likelihood that, based on the defendant’s occupation, future violations might occur; and the sincerity of the defendant’s Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 22 of 26 Page ID #:544 22 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 assurances against future violations. Murphy, 626 F.2d at 655. 36. A permanent injunction is appropriate even in light of Cole’s sentence of imprisonment. See, e.g., SEC v. Cobalt Multifamily Investors I, LLC, 2011 U.S. Dist. Lexis 120215, *14-16 & n.8 (S.D.N.Y. June 14, 2011) (finding permanent injunction appropriate where defendant was sentenced to 85 years in prison for operating a Ponzi scheme). 37. The SEC may seek, and courts may order, disgorgement of ill-gotten gains. See SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998); SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995). 38. Courts have “broad equity powers to order the disgorgement of ‘ill- gotten gains’ obtained through the violation of the securities laws.” SEC v. First Pac. Bancorp, 142 F.3d at 1191; see also SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1113 (9th Cir. 2006). 39. A disgorgement calculation requires only a “reasonable approximation of profits causally connected to the violations.” JT Wallenbrock., quoting SEC v. First Pacific Bancorp, 142 F.3d at 1114. 40. The amount of disgorgement should include “all gains flowing from the illegal activities.” Id., quoting SEC v. Cross Fin. Services, 908 F. Supp. 718, 734 (C.D. Cal. 1995). 41. Disgorgement usually includes prejudgment interest, which courts order to ensure that the wrongdoer does not profit from the illegal activity. See SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972); SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1190 (D. Nev. 2006). 42. Disgorgement normally includes prejudgment interest. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1105 (2d Cir. 1972); SEC v. Cross Fin. Services, Inc., 908 F. Supp. at 734. 43. An award of prejudgment interest is designed to deprive the wrongdoer of the benefit of “what amounts to an interest free loan procured as a result of illegal Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 23 of 26 Page ID #:545 23 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 activity.” SEC v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996). 44. As with disgorgement, the aim of ordering prejudgment interest is to prevent unjust enrichment and, by making violations unprofitable, to deter the defendant and others from committing securities fraud. SEC v. First Pacific Bancorp, 142 F.3d at 1191. 45. The prejudgment interest rate used by the Commission is the same rate used by the Internal Revenue Service to calculate underpayment penalties. That rate is defined as the Federal short term rate (also known as the period rate) plus three percentage points (also known as the annual rate). 26 U.S.C. § 6621(a)(2). Courts have upheld the use of this rate in SEC enforcement actions. See SEC v. Gordon, 822 F. Supp. 2d 1144, 1161-1162 (N.D. Ok. 2011); SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996) 46. The broad equitable powers of this Court may be employed to recover ill-gotten gains from illegal conduct, whether held by the original wrongdoer or by one who has received the proceeds after the wrong, as did Nanette Cole here. See Colello, 139 F.3d at 676. 47. In the typical case, the SEC must prove two elements to recover ill- gotten gains from a relief defendant: (1) that the relief defendant has received ill- gotten funds; and (2) that the relief defendant does not have a legitimate claim to the funds. Id. at 677. Dated: September 16, 2016 Respectfully submitted, /s/ David J. Van Havermaat David J. Van Havermaat Attorneys for Plaintiff Securities and Exchange Commission Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 24 of 26 Page ID #:546 24 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: U.S. SECURITIES AND EXCHANGE COMMISSION, 444 S. Flower Street, Suite 900, Los Angeles, California 90071 Telephone No. (323) 965-3998; Facsimile No. (213) 443-1904. On September 16, 2016, I caused to be served the document entitled PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S STATEMENT OF UNCONTROVERTED FACTS AND CONCLUSIONS OF LAW IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT on all the parties to this action addressed as stated on the attached service list: ☒ OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency’s practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. ☐ PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. ☐ EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid. ☐ HAND DELIVERY: I caused to be hand delivered each such envelope to the office of the addressee as stated on the attached service list. ☐ UNITED PARCEL SERVICE: By placing in sealed envelope(s) designated by United Parcel Service (“UPS”) with delivery fees paid or provided for, which I deposited in a facility regularly maintained by UPS or delivered to a UPS courier, at Los Angeles, California. ☐ ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. ☒ E-FILING: By causing the document to be electronically filed via the Court’s CM/ECF system, which effects electronic service on counsel who are registered with the CM/ECF system. ☐ FAX: By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. I declare under penalty of perjury that the foregoing is true and correct. Date: September 16, 2016 /s/ David J. Van Havermaat David J. Van Havermaat Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 25 of 26 Page ID #:547 25 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Bruce A. Cole, et al. United States District Court—Central District of California Case No. 2:12-cv-08024-AB-JEM SERVICE LIST Bruce A. Cole (served by U.S. mail only) ID# 1247202 Tipton Correctional Center 619 N. Osage Avenue Tipton, MO 65081 Pro Se Nanette H. Cole (served by CM/ECF and U.S. mail) 34281 Doheny Park Road, #2429 Capistrano Beach, CA 92624 Email: nanhcole@aol.com Pro Se Case 2:12-cv-08024-AB-JEM Document 98-2 Filed 09/16/16 Page 26 of 26 Page ID #:548 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 JOHN W. BERRY, Cal. Bar No. 295760 Email: berryj@sec.gov DAVID J. VAN HAVERMAAT, Cal. Bar No. 175761 Email: vanhavermaatd@sec.gov Attorneys for Plaintiff Securities and Exchange Commission Michele Wein Layne, Regional Director John W. Berry, Regional Trial Counsel 444 S. Flower Street, Suite 900 Los Angeles, California 90071 Telephone: (323) 965-3998 Facsimile: (213) 443-1904 UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, vs. BRUCE A. COLE, Defendant, and NANETTE H. COLE, Relief Defendant. Case No. 2:12-cv-08024-AB-JEM [PROPOSED] FINAL JUDGMENT OF PERMANENT INJUNCTION AND OTHER RELIEF AGAINST DEFENDANT BRUCE A. COLE AND RELIEF DEFENDANT NANETTE H. COLE Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 1 of 6 Page ID #:549 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Pursuant to Rule 56 of the Federal Rules of Civil Procedure, Plaintiff Securities and Exchange Commission’s (“SEC”) Motion for Summary Judgment (“Motion”) Against Defendant Bruce A. Cole and Relief Defendant Nanette H. Cole (“Motion”) came before the Court. The Court, having considered the SEC’s Motion, the Memorandum of Points and Authorities and the other documents filed in support of the Motion, finds that: I. IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the SEC’s Motion for Summary Judgment against defendant Bruce A. Cole and relief defendant Nanette H. Cole is granted. II. IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant Bruce A. Cole is permanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5], by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (a) to employ any device, scheme, or artifice to defraud; (b) to make any untrue statement of a material fact or to 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; or (c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person. IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, as provided in Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who receive actual notice of this Final Judgment by personal service or otherwise: (a) Defendant Bruce A. Cole’s officers, agents, servants, Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 2 of 6 Page ID #:550 2 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 employees, and attorneys; and (b) other persons in active concert or participation with Defendant Bruce A. Cole or with anyone described in (a). III. IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant Bruce A. Cole is permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. § 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly: (a) to employ any device, scheme, or artifice to defraud; (b) to obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser. IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that, as provided in Federal Rule of Civil Procedure 65(d)(2), the foregoing paragraph also binds the following who receive actual notice of this Final Judgment by personal service or otherwise: (a) Defendant Bruce A. Cole’s officers, agents, servants, employees, and attorneys; and (b) other persons in active concert or participation with Defendant Bruce A. Cole or with anyone described in (a). IV. IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant Bruce A. Cole and Relief Defendant Nanette H. Cole are liable, jointly and severally, for disgorgement of $904,167, representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest thereon in the amount of $119,885, for a total of $1,024,052. Defendant Bruce A. Cole and Relief Defendant Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 3 of 6 Page ID #:551 3 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Nanette H. Cole shall satisfy this obligation by paying $1,024,052 to the Securities and Exchange Commission within 14 days after entry of this Final Judgment. V. IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Judgment. Dated: ______________, 2016 ____________________________________ HONORABLE ANDRÉ BIROTTE JR. UNITED STATES DISTRICT JUDGE Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 4 of 6 Page ID #:552 4 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: U.S. SECURITIES AND EXCHANGE COMMISSION, 444 S. Flower Street, Suite 900, Los Angeles, California 90071 Telephone No. (323) 965-3998; Facsimile No. (213) 443-1904. On September 16, 2016, I caused to be served the document entitled [PROPOSED] FINAL JUDGMENT OF PERMANENT INJUNCTION AND OTHER RELIEF AGAINST DEFENDANT BRUCE A. COLE AND RELIEF DEFENDANT NANETTE H. COLE on all the parties to this action addressed as stated on the attached service list: ☒ OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency’s practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. ☐ PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. ☐ EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid. ☐ HAND DELIVERY: I caused to be hand delivered each such envelope to the office of the addressee as stated on the attached service list. ☐ UNITED PARCEL SERVICE: By placing in sealed envelope(s) designated by United Parcel Service (“UPS”) with delivery fees paid or provided for, which I deposited in a facility regularly maintained by UPS or delivered to a UPS courier, at Los Angeles, California. ☐ ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. ☒ E-FILING: By causing the document to be electronically filed via the Court’s CM/ECF system, which effects electronic service on counsel who are registered with the CM/ECF system. ☐ FAX: By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. I declare under penalty of perjury that the foregoing is true and correct. Date: September 16, 2016 /s/ David J. Van Havermaat David J. Van Havermaat Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 5 of 6 Page ID #:553 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 SEC v. Bruce A. Cole, et al. United States District Court—Central District of California Case No. 2:12-cv-08024-AB-JEM SERVICE LIST Bruce A. Cole (served by U.S. mail only) ID# 1247202 Tipton Correctional Center 619 N. Osage Avenue Tipton, MO 65081 Pro Se Nanette H. Cole (served by CM/ECF and U.S. mail) 34281 Doheny Park Road, #2429 Capistrano Beach, CA 92624 Email: nanhcole@aol.com Pro Se Case 2:12-cv-08024-AB-JEM Document 98-3 Filed 09/16/16 Page 6 of 6 Page ID #:554