Securities and Exchange Commission v. LADP Acquisition, Inc. et al

MEMORANDUM OF POINTS AND AUTHORITIES In Support of Ex Parte Application

C.D. Cal.September 14, 2010

1 KAEN MATTESON, CaL. BarNo. 102103 Email: mattesonktãsec.gov 2 JASON P. LEE, CID. BarNo. 196520 ' Email: leejas(Ðsec.gov 3 4 5 6 7 8 9 10 Attorneys for Plaintiff Securities and Exchange Commission Rosalind R. Tyson Regional Director John M. McCoy iii, Associate Regional Director 5670 Wilshire Boulevard, 11th Floor Los Angeles, Californa 90036 Telephone: (323) 965-3998 Facsimile: (323) 965-3908 FILED 10 SEP 14 PH 3: 27 ci q;K II s~ DISH\iCT caUKT è Ë ~T R !. L DiS L C ~ C t. iF. L G S :. ~i S r, L to S n ï :-e----.-..-.---' UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA 11 SECURITIES AND EXCHANGE Cas~~"'10 h835.R' K JCG./COMMISSION, ~'" \.,j . ~ MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF EX PARTE APPLICATION By PLAINTIFF SECURITIES AND EXCHANGE COMMISSION FOR TEMPORARY RESTRAINING ORDER AND ORDERS: ßlFREEZING ASSETS; 2 PROHIBITING THE STRUCTION OF DOCUMENTSj (3) REQUIRING ACCOUNTINuS; AND ORDER TO SHOW CAUSE RE PRELIMINARY INJUNCTION 12 13 . 14 Plaintiff, v. 15 LADP ACQUISITION, INC.;WILLIAM À. GOLDSTEIN and 16 MARC E. BERCOON, 17 Defendants. 18 19 20 21 22 23 24 25 26 27 28 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 1 of 25 Page ID #:17 1 2 3 4 I. 5 II. 6 7 8 9 . 10 11 12 III. 13 . 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TABLE OF CONTENTS PAGE NO. INTRODUCTION ...................................................................................... 1 STATEMENT OF FACTS ........................................................................2 A. The Defendants .................................................................................2 B. The Fraudulent Scheme ...................................................................5 1. The Defendants Generally Solicit Investors Through Cold Calls ........................................................................................5 2. The Defendants Make Material Misrepresentations About The Investment And Misappropriate Investor Monies........ 6 ARGUMENT........ ... ... ..... ........... ...... .................... ......... ...... .... .... ...... ....... 10 A. The Court Should Issue A Temporary Restraining Order Prohibiting. Violations of the Antifraud Provisions of the Exchange Act ........... .... ..... ................ ........... ..... .... .... ..... ...... .... ..... 10 1. Special Standards Apply to the Commission's Application 10 2. Defendants Violated the Securities Registration Provisions of the Securities Act........ ............ ......... ............. ........... ... ..... 1 1 a) LADP Shares Are Securities ...........................................11 b) The Defendants Violated Sections Sea) and S(c)............. 11 3. The Defendants Have Violated the Antifraud Provisions.. 13 a) The Defendants Misrepresented and Omitted Material Facts................................................................................. 13 b) The Defendants' Misrepresentations and Omissions Were Material........................................................................... 14 c) The Defendants Acted with Scienter .............................. 15 B. The Defendants Will Continue Their Fraudulent Scheme Unless Enjoined.......................................................................................... 16 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 2 of 25 Page ID #:18 1 2 3 4 5 iv. 6 7 8 9 10 . 11 12 13 14 15 16 17 18 19 20 21 .22 23 24 25 26 27 28 C. The Court Should Order An Immediate Asset Freeze To Protect Investor Funds.............................................................................. 17 D. Orders Prohibiting Destruction Of Documents And Requiring Accountings Are Necessary And Appropriate.............................. 18 CONCLUSION ........................................................................................ 19 11 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 3 of 25 Page ID #:19 CASES Aaron v. SEC 446 U.S. 680,100 S. Ct. 1945,64 L.Ed.2d 611 Anderson v. Aurotek 774 F.2d 927(9th Cir. 1985)............................ Basic Inc. v. Levinson - 485 U.S. 224, 108 S.Ct.978, 99 L.Ed.2d 194 ( Ernst & Ernst v. Hochfelder 425 U.S. 185(1976)......................................... FSLIC v. Sahni 868 F.2d 1096 (9thCir. 1989).................... FTC v. Affordable Media, LLC 179 F.3d 1228(9th Cir. 1999).......................... FTC v. H.N. Singer, Inc. 668 F.,2d 1 107(9th Cir. 1982).............,............ Herman & MacLean v. Huddleston 459 U.S. 375,103 S. Ct. 683, 74 L.Ed.2d 548 SECv.Burns 816 F.2d 471 (9th Cir. 1987)............................ SEC v. Calvo 378 F.3d 121 l(1Ith Cir. 2004)........................ SEC v. Continental Tobacco Co. of S.C., Inc. 463 F.2d 137(5th Cir. 1972)............................ SEC v. Dain Rauscher, Inc. 254 F.3d 852(9th Cir. 2001)............................ SEC v. Fehn 97 F.3d 1276(9th Cir. 1996)............................ 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 PAGE NO. (1980)........................................... 16 ........................................................ 12 1988).............................................. 15 ........................................................ 16 . ........ ........................... .11,20 ........................................................ 19 ................................................... 11,20 (1983).............................................16 ........................................................17 ......................................................... 12 ........................................................ 12 .............................................. 14,15,16 ........................................................ 15 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 4 of 25 Page ID #:20 1 SEC v. Hickey 2 322 F.3d 1123(9th Cir. 2003)................................................................................... 19 3 SEC v. International Swiss Investments Corp. 4 895 F.2d 1272(9th Cir. 1990).............................................................................19,21 5 SEC v. JT Wallenbtock & Associates 6 440 F.3d 1 109 (9th Cir 2006)..... ............... ......................... ............... ....................... 17 7 SEC v. Koracorp Industries, Inc. 8 575 F.2d 692(9th Cir. 1978).................................................................................... 18 9 SEC v. Management Dynamics, Inc. 10 515 F.2d 801 (2d Cir.1975).....................................................................................10 1 1 SEC v. Manor Nursing Centers . nd12 458 F.2d 1082 (2 Cir 1972) ..................................................................................19 13 SEC v. Murphy 14 626 F.2d 633(9th Cir. 1980)..........................................................................12,13,18 15 SEC v. Musella 16 578 F. Supp. 425(S.D.N.Y. 1984)...........................................................................20 17 SEC v. Ralston Purina Co. 18 346 U.S. 1 19(1953) ................................................................................................. 13 19 SEC v. Unifund SAL 20 910 F.2d 1028, 1041 (2d Cir. 1990);.......................................................................20 21 SEC v. Unique Fin. Concepts, Inc. 22 196 F.3d 1195 (1Ith Cir. 1999)............................................................................... 10 23 SEC v. Wencke 24 622 F.2d 1363,1369 (9th Cir. 1980)..................................................................19,21 25 SEC v. Phan 26 500 F.3d 895, 905-07 (9th Cir. 2007) ................................................................ 12,13 27 TSC Indus., Inc. v. Northway, Inc. 28 426 U.S. 438, 96 S.Ct. 2126,48 L.Ed.2d, 757 (1976)............................................. 14 iv Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 5 of 25 Page ID #:21 1 United States v. Nutr-Co1ogy, Inc. 2 3 4 5 6 7 8 9 10 982 F.2d 394 (9th Cir. 1992)................................................................................... 11 United States v. Odessa Union Warehouse Coop 833 F.2d 172,176 (9th Cir. 1987)...........................................................................18 STATUTORY PROVISIONS 15 U.S.C. § 77b(a)(I).............................................................................................. 11 15 U.S.C. § 77e(a) & 77e(c) ................................................................................ 1,11 15 U.S.C. § 77q(a)..................................................................................................... 1 15 U.S.C. § 78c(a)(10) ...........~................................................................................11 15 U.S.C. § 78j(b) ..................................................................................................... 1 11 15 U.S.C. § 78u(d) ................................................................................................... 10 12 13 14 RULES AND REGULATIONS 15 17 C.F.R. §240.10b-5....................................................................1,13 16 Reg. D, Rules 505 and 506,17 C.F. R. §§ 230.505 & 230.506.......................12 17 18 19 20 21 22 23 24 25 26 27 28 FEDERA RULES OF CIVIL PROCEDUR Fed. R. Civ. P. 65(b) ...................................................................................................2 LOCAL RULES L.R.7-9......................................................................................................................2 L.R.7-19.2 ......................................................................................2 L.R. 65.1........................................................................................2 v Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 6 of 25 Page ID #:22 1 I. INTRODUCTION 2 By its Ex Parte Application, Plaintiff Securities and Exchange. Commssion '3 ("Commssion") seeks a temporar restraining order and other emergency relief to 4 halt the fraudulent sale of securties by Defendants LADP Acquisition, Inc. 5 ("LADP"), William A. Goldstein ("Goldstein"), and Marc E. Bercoon 6 ("Bercoon"). 7 From about mid-2009 through the present, the Defendants have raised at 8 least $3.2 million from approximately 110 investors in the United States, in an 9 unregistered, fraudulent securities offering. The Defendants, through their sales 10 agents, cold-called investors, offering and purporting to sell shares in L.A. Digital 11 Post, Inc. ("L.A. Digital"), a television and film production company with offices ( 12 in Los Angeles and New York, purportedly to grow the business of L.A. DigitaL. 13 Among other representations, the Defendants and their agents tell investors that 14 L.A. Digital will conduct an initial public offering ("IPO") of its stock within two 15 to six months, and that its shares will soon trade on the New York Stock Exchange 16 or the American Stock Exchange. In fact, the defendants have been employing a 17 "bait-and-switch" scheme whereby purchasers of the shares instead receive stock 18 certificates stating that they own shares in Defendant LADP. No public offering of 19 L.A. Digital stock has occurred. Moreover, the Defendants have not distributed 20 any monies raised in the LADP offering to L.A. DigitaL. Instead, Defendants 21 Goldstein and Bercoon, who control LADP's bank accounts, have misappropriated 22 for their own use at least $874,289 of the $3.2 million in investor funds raised. 23 By engaging in this conduct, the Defendants violated, and unless enjoined 24 will continue to violate (1) the registration provisions of Sections 5(a) and 5(c) of 25 ' the Securities Act, 15 U.S.C. §§ 77e(a) & (c), and (2) the antifraud provisions of 26 Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), 27 and Section 1 O(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 28 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. Accordingly, 1 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 7 of 25 Page ID #:23 1 the Commission seeks temporary, preliminary, and permanent injunctions 2 enjoining each of the Defendants from violating the above-described antifraud 3 provisions; a temporar restraining order and preliminar injunction freezing the 4 assets of each of the Defendants and prohibiting them from destroying documents; . 5 and an order that the Defendants provide accountings. The Commission also seeks 6 an order to show cause why a preliminary injunction should not be granted. 7 The Commission requests, pursuant to Fed. R. Civ. P. 65(b) and Local Rules 8 7-19, 7-19.2 and 65-1, that the Court consider its Ex Parte Application for 9 emergency relief without prior notice to the Defendants, in' order to prevent further i 0 dissipation of investor funds and other assets by the Defendants before the 11 Commission's Application is considered. 12 For these reasons, as explained in greater detail below, the Commssion's Ex 13 Parte Application should be granted. 14 II. STATEMENT OF FACTS 15 A. The Defendants 16 LADP Acquisition, Inc. is a Delaware corporation located in Atlanta, 17 Georgia. (Declaration of Jason P. Lee ("Lee Declaration") ir 3, Ex. 2 (LADP 18 Certificate of Incorporation).) On January 8, 2010, the State of Pennsylvania 19 issued a cease and desist order against LADP to halt the unregistered offering of 20 LADP shares. (Lee Declaration ir 6, Ex. 5 (Pennsylvana Summary Order and 21 press release).) There is no evidence that it has any business operations. 22 William A. Goldstein resides in Atlanta, Georgia. He purports to be an 23 investor and entrepreneur and claims to be a founding member of Web MD. 24 (Matthews Declaration ir 5, Exs. 1,2 (L.A. Digital Confidential Investor 25 Information memorandum ("LADP memo") at 3 and LADP PPM at 30, 26 respectively).) Goldstein owns, directly or indirectly in conjunction with Bercoon, 27 a substantial interest in L.A. Digital, a television and film production company 28 with offices in Los Angeles and New York. (Lee Declaration ir 4, Ex. 3 (Gar 2 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 8 of 25 Page ID #:24 I Migdai1 testimony transcript ("Migdal testimony") 22:19-25, 23, 24:1-10).) He 2 represents that he is the Chairman of L.A. Digital and/or LADP, but he in fact is 3 not involved in the daily operations of L.A. DigitaL. (See id., Ex. 3 (Migdal 4 testimony 23:20-22); Matthews Declaration ir 8, Ex. 4 (November 16,2009 5 Goldstein correspondence).) Together with Bercoon, Goldstein controls Defendant 6 LADP and has signatory authority over its ban accounts, including at least one 7 account in the name of "LADP, LLC," where investor monies are deposited. 8 (Matthews Declaration ir 8, Ex. 4; Declaration of Nina Yamamot02 ("Yamamoto 9 Declaration") irir 6, 7.) lOIn the past, Defendant Goldstein has held various positions with public 11 companies, including: 12 . Chairman of the Board and CEO of RCG Companies, Inc. (now 13 known as OneTravel Holdings, Inc.) during the period Februar 1, 14 2004, to June 6, 2006, and Apri128, 2005, to June 6, 2006, 15 respectively; , 16 . A Director of Market Central, Inc. (now known as Scientigo, Inc) 17 during the period February 2003 to November 2004; and 18 . The Company and Investor Relations contact for Generation Zero 19 Group as of June 14,2010. 20 Defendant Goldstein is also an offcer and manager of Ibar Management Group, 21 LLC, a company located in Atlanta, Georgia. (Yamamoto Declaration ir 13.) 22 Marc E. Bercoon resides in Atlanta, Georgia, and owns, directly or 23 indirectly in conjunction with Goldstein, a substantial interest in L.A. DigitaL. (Lee 24 Declaration ir 4, Ex. 3 (Migdal testimony 23:1 1-25,24:1-10).) Bercoon is, in fact, 25 26 27 i Migdal is the president and CEO of L.A. DigitaL. 2 Ms. Yamamoto is a CPA employed by the Commission as a staff 28 accountant. 3 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 9 of 25 Page ID #:25 1 the Chairman of L.A. Digital, but he is not involved in its daily operations. (See 2 id., Ex. 3 (Migdal testimony 14:10-25, 15:1-5).) Together with Goldstein, 3 Bercoon controls Defendant LADP and has signatory authority over its ban 4 accounts, including the account in the name of "LADP, LLC," where investor 5 monies are deposited. (Yamamoto Declaration irir 6, 7.) Bercoon is an attorney 6 who was licensed to practice law in the State of Illinois until at least 2008. 7 (Matthews Declaration ir 5, Exs. 1,2 (LADP memo at 3 and LADP PPM at 30, 8 respectively); Lee Declaration ir 5, Ex. 4 (State Bar of Illinois record of Marc E. 9 Bercoon). Bercoon has also held himself out either as a Certified Public 10 Accountant, or as having passed the CPA examination. (Matthews Dechiration ir 5, 11 Ex. 1 (LADP memo at 3); Lee Declaration ir 4, Ex. 3 (Migdal testimony 32: 17-20, 12 82:23-25,83:1-4).) In the past, Bercoon has held varous positions with public 13 companies, including: 14 . General Counsel and Secretary of the Broadway Stores, Inc. from 15 February 1993 to February 1994, and Senior Vice President 16 beginning in February 1994; 17 . Chief Financial Officer and President of RCG Companies, Inc. 18 (now known as OneTravel Holdings, Inc.) from Februar 28,2005, 19 to April 28, 2005, and from April 28, 2005, to June 6, 2006, 20 respectively; 21 . Assistant Secretary for Market Central, Inc. (now known as 22 Scientigo, Inc.) as of March 25,2005, when he signed a restated 23 certificate of incorporation that was attached as an Exhibit to a 24 Form S-4 registration statement filed on November 10,2005; and 25 . A Director, as of March 2, 2001, of Mixson Corporation. 26 Defendant Bercoon is also a Director of Growth Capital Group, a company that 27 purportedly provides financial advisory and investment bankng services; and an 28 officer and manager ofIbar Management, LLC. (Yamamoto Declaration ir 12(c).) 4 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 10 of 25 Page ID #:26 1 B. The Fraudulent Scheme 2 1. The Defendants Generally Solicit Investors Through Cold 3 Calls 4 In approximately mid-2009, the Defendants, through the use of sales agents, 5 began soliciting potential investors throughout the United States, including through 6 the use of cold calling, sometimes followed up by an emaiL. (Declaration of Henr 7 Hubbard ("Hubbard Declaration) ir 3; Declaration of Gar R. Post ("Post 8 Declaration) ir 3; Matthews Declaration ir 3.) Potential investors are told that they 9 are being solicited to invest in L.A. DigitaL. (See id.) The Defendants cause 10 potential investors to be sent, ~y Federal Express, email and/or United States mail, 11 a package containing a brochure entitled "Confidential Investor Information," 12 which also often includes a "Confidential Private Placement Memorandum," a 13 Subscription Agreement, a "Purchaser Questionnaire" and a "Purchaser 14 Representative Questionnaire." (Post Declaration ir 5, Exs. 1-4 (LADP memo, 15 LADP Subscription Agreement, LADP Purchaser Questionnaire, LADP Purchaser 16 Representative Questionnaire, respectively); Matthews Declaration ir 5, Exs.l, 2 17 (LADP memo; LADP PPM, respectively); Hubbard Declaration ir 5 (LADP 18 memo).) Defendants Bercoon and Goldstein paricipated in the drafting of each 19 of these documents. (Lee Declaration irir 8-18, Exs. 7-17 (Emails with 20 attachments).) 3 21 Once LADP has received the investor's investment, the Defendants send to 22 the investor a cover letter purporting to be on "LA Digital Post" letterhead, but 23 instead enclosing a "Certificate" certifyng that the investor is the holder of a 24 certain number of shares of LADP, not L.A. DigitaL. (Matthews Declaration ir 8, 25 Ex. 4 (Goldstein letter and certificate); Declaration of Ali Siddiqui ("Siddiqui 26 27 28 3 This fact is evidenced by drafts of the LADP offering materials being exchanged between mbercoon(inporta.com and wagatlanta(iyahoo.com ("wag" are William A. Goldstein's initials). 5 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 11 of 25 Page ID #:27 1 Declaration") Exs. 2&3 (Goldstein letter and Certificate).) The cover letter and 2 Certificate bear Goldstein's signature. (See id.) 3 2. The Defendants Make Material Misrepresentations About 4 The Investment And Misappropriate Investor Monies 5 The Defendants, through their sales agents, orally represent to potential 6 investors that L.A. Digital is "going public" or going to be the subject of an IPO 7 within a short period of time, such as sixtyor ninety days, and that its shares will 8 be traded on the American Stock Exchange ("AMEX"), or some other public 9 exchange such as the New York Stock Exchange or NASDAQ. (Siddiqui 10 Declaration irir 4, 7; Hubbard Declarationir,4, Ex. A (June 28,2010 Kevin__-0 . . 11 Rodrgues email).) The Defendants further represent through their sales agents 12 that L.A. Digital has only a limited number of shares for sale, that the potential 13 investor needs to act quickly to be included in this opportity, and that the 14 company will be worth $160 million, and that investors who bought shares prior to 15 the IPO will make substantial profits. (See id.; Matthews Declaration ir 4.) 16 In some cases, these oral representations are followed by an email from the 17 sales agent making fuher similar representations, including that the projected 18 return on investment ("ROI") is "in the 200-300% range conservatively," but that 19 "we feel that the market will support a 300-500% return. . . ," and that L.A. Digital 20 "is scheduled to enter the AMEX!" These emails also include a link to the website 21 of L.A. Digital and a description of its post-production business. (Hubbard 22 Declaration ir 4, Ex. A (June 28,2010 Kevin Rodrigues email).) 23 In addition to the oral and email representations made by the Defendants' 24 sales agents, the LADP memo authored by Defendants Bercoon and Goldstein 25 makes representations about "L.A. Digital Post" that are materially misleading, in 26 that the "shares" in fact sold to investors are stock of LADP, not L.A. DigitaL. 27 (Hubbard Declaration ir 5, Ex. B (LADP memo); Post Declaration ir5, Ex. 1 (LADP 28 memo); Lee Declaration irir 7-17, Exs. 8-18 (Emails with attachments).) Among 6 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 12 of 25 Page ID #:28 1 other representations, the LADP memo: 2 . Prominently features the L.A. Digital logo and its website address 3 on the first page; 4 . Includes a detailed description of L.A. Digital's post-production 5 business, history and reputation, and lists prominent motion picture 6 studios and television networks which have, in fact, been clients of 7. L.A. Digital, as well as a "Parial Client List" setting forth highly 8 rated television shows and a list of movies for which L.A. Digital 9 has provided post-production services; 10 . Prominently featUres descriptions of Goldstein, described as 11 "Chairman," and Bercoon, described as "Vice Chairman and Chief 12 Financial Officer," of L.A. Digital, asserting that under Goldstein's 13 leadership, a physician staffing company he founded named 14 Nationwide Medical Services, Inc. grew "at a rate in excess of 15 200% per year for its first six years, achieving $18 million in sales 16 by 1998"; and touting Bercoon' s legal and accounting background, 17 including that he grduated from UCLA School of Law, and 18 passed the Illinois CPA and bar exams in 1982 and 1985 19 specifically. In fact, neither Goldstein nor Bercoon have any 20 current involvement in the day-to-day operations of L.A. DigitaL. 21 . Sets forth "Financial Highlights," including that "LA Digital's 22 revenues for fiscal year end were $13.375 million," and that 23 "There are also several acquisition targets that management has 24 identified," notwithstanding that L.A. Digital in fact does not 25 presently intend to acquire any companies. 26 (Matthews Declaration ir 5, Ex. 1 (LADP memo at 1,5-7,8); see also Post 27 Declaration ir 5, Ex. 1 (LADP memo); Hubbard Declaration il5 (LADP memo).) 28 Additionally, although the Defendants represent that the investment will be 7 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 13 of 25 Page ID #:29 1 highly profitable, they fail to disclose that L.A. Digital is not in fact curently a 2 profitable company, and that it is in default with its secured lender. (Lee 3 Declaration ir 4, Ex. 3 (Migdal testimony 130:15-25).) 4 In order to induce one investor, Ali Siddiqui, who had invested $50,000, to 5 invest an additional $950,000, in or about December 2009, Defendants Goldstein 6 and Bercoon executed a "Put Agreement," in which they agreed to buy back the 7 950,000 in additional shares purchased by Dr. Siddiqui at the $1 per share price at 8 which he purchased them, at any time durig the period from November 4,2010, 9 through February 2,2011. (Siddiqui Declaration irir 3, 4, 5, Ex. 3 (Put 10 Agreement).) 11 In fact, no public offering has been held for L.A. DigitaL. (Lee Declaration 12 irir 4 & 7, Exs. 3, 6 (Migdal testimony 20:9-25,21: 1-20, 89:8-25, 90: 1-7, 130: 11- 13 25, Commssion Attestations).) Instead, in a "bait and switch," investors receive 14 worthless certificates representing "shares" in Defendant LADP, and Defendants 15 Goldstein and Bercoon steal their money. (Matthews Declaration ir 10; Siddiqui 16 Declaration irl0; see generally Yamamoto Declaration ir 9).) 17 Specifically, from July 9,2009 to July 12,2010, undisclosed to investors, 18 Defendants Goldstein and Bercoon have misappropriated for their own use, 19 including for the use of the companies they control, at least $874,289 of the $3.2 20 million in investor fuds raised and deposited into Wachovia Ban accounts in the 21 name ofLADP and "LADP LLC,"which they control, and on which they are 22 signatories, as follows: 23 . Goldstein received at least $1,000 by check, received a total of 24 $22,000 in transfers to a Wachovia Bank Account in his name, and 25 withdrew $107,600 from the LADP, LLC account. (Yamamoto 26 Declaration ir 9(a).) 27 . Bercoon withdrew a total of$171,589 from the LADP, LLC bank 28 account and the LADP bank account. (Yamamoto Declaration ir 8 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 14 of 25 Page ID #:30 1 2 3 4 5 6 7 8 9 10 11 9(c).) . Goldstein and/or Bercoon caused at least $510,800 in transfers to be made from the LADP, LLC ban account to another WachovIa Bank account in the name ofHM Consulting LLC, for which account Bercoon was a signatory when these transfers occurred. (Yamamoto Declaration ir 9( d).) . Goldstein and/or Bercoon caused at least $61,300 in transfers to be made from the LADP, LLC bank account to an account in the name of Ibar Management Group, an entity for which both Goldstein and Bercoon are officers and managers. (Yamamoto Declaration irir 9(e),12(c), 13(d).) 12 In response to repeated inquiries by investor Ali Siddiqui regarding the 13 failure of L.A. Digital to go public, Defendant Goldstein and his sales agent, Alan 14 Weiner, met with Dr. Siddiqui in Fort Lauderdale, Florida in or about June or July 15 2010. (Siddiqui Declaration ir 7.) At this meeting, Goldstein falsely reassured Dr. 16 Siddiqui that he had made a sound investment, and Goldstein and Weiner 17 described Goldstein's prior success at bringing other companies public. (See id.) 18 In order to lull Dr. Siddiqui into believing his $1 million investment was safe, 19 Goldstein and Weiner falsely assured Dr. Siddiqui that they were working on 20 multiple avenues to take L.A. Digital public and that he would profit from his 21 investment. (See id.) 22 Subsequently, on or about August 23,2010, in response to further inquiries 23 from Dr. Siddiqui as to the status of his investment, Defendants Goldstein and 24 Bercoon falsely told Dr. Siddiqui in a telephone conversation that everyhing was 25 fine, and that while two smaller investors had complained to the Commssion, 26 there was nothing to worr about. (See id. ir 8.) 27 In response to inquiries by Migdal, the president and CEO of L.A. Digital, 28 regarding calls he was receiving from investors inquiring why a promised "public 9 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 15 of 25 Page ID #:31 1 offering" of L.A. Digital stock that Migdal knew nothing about had not taken 2 place, Bercoon falsely represented to Migdal that the situation involved "identity 3 theft," and that he was "handling" or "dealing with" it. (Lee Declaration ir 4, Ex. 3 4 (Migdal testimony 30:20-25,31:1-18,45:8-14, 72:9-25, 73:1-16).) 5 il. ARGUMNT 6 A. The Court Should Issue A Temporary Restrainng Order 7 Prohibiting Violations of the Antifraud Provisions of the 8 Exchange Act 9 1. Special Standards Apply to the Commission's Application 10 Section 21(d) of the Exchange Act provides that the Commssion may obtain. 1 i a permanent or temporar injunction or restraining order, without a bond, on a 12 proper showing. 15 U.S.C. § 78u(d). To obtain such relief, the Commssion must 13 demonstrate (1) a prima facie case that a violation of the securities laws has 14 occurred; and (2) a reasonable likelihood that the violation will be repeated. See 15 SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199 n.2 (1Ith Cir. 1999); SEC 16 v. United Financial Group, Inc., 474F.2d 354,358-59 (9th Cir. 1973). 17 The Commission appears before this Court "not as an ordinar litigant, but 18 as a statutory guardian charged with safeguarding the public interest in enforcing 19 the securities laws." SEC v. Management Dynamcs, Inc., 515 F.2d 801,808 (2d 20 Cir. 1975). The need for temporary relief is of great importance where, as here, the 21 Commission acts to protect the public interest and the investing public. "(W)hen 22 the public interest is involved in a proceeding of this nature, (the district court's) 23 equitable powers assume an even broader and more flexible character than when 24 only a private controversy is at stake.'" FSLIC v. Sahni, 868 F .2d 1096, 1097 (9th 25 Cir. 1989), citing FTC v. R.N. Singer, Inc., 668 F.2d 1107, 1112 (9th Cir. 1982). 26 For these reasons, the Commission faces a lower burden than a private civil litigant 27 when seekig a temporary restraining order or other pretral relief. Unlike private 28 litigants, the courts presume irreparable injury in Commission enforcement actions 10 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 16 of 25 Page ID #:32 1 in which injunctive relief is sought. United States v. Nutr-Cology, Inc., 982 F.2d 2 394,397-98 (9th Cir. 1992) ("(i)n statutory enforcement cases ... passage of the 3 statute is itself an implied finding by Congress that violations will harm the 4 public"). In fact, under estabÚshed Ninth Circuit precedent, an injunction is 5 authorized "solely upon a showing of a statutory violation." Id. at 398. Because the 6 evidence in this case establishes that the Defendants are violating the federal 7 securities laws, and that it is reasonably likely they will continue to do so unless 8 enjoined, the Court should grant the Commssion's Motion for temporar relief. 9 2. Defendants Violated the Securities Registration Provisions , 10 of the Securities Act 11 a) LADP Shares Are Securities 12 The investments sold by LADP are shares ofLADP and as such are 13 securities in the form of stock. See Section 2(a)(1) of the Securities Act, 15 U.S.C. 14 § 77b(a)(I), and Section 3(a)(10) of the Exchange Act, 15 U.S.C. § 78c(a)(10) 15 (defining "security" to include "stock"). 16 b) The Defendants Violated Sections Sea) and 5(c) 17 Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) & 77e(c), 18 prohibit the offer and sale of securities in interstate commerce, unless a registration 19 statement has-been filed with the Commission or is in effect, or the securities are 20 exempt from registration. Anderson v. Aurotek, 774 F.2d 927,929 (9th Cir. 1985); 21 SEC v. Murphy, 626 F.2d 633,649. (9th Cir. 1980). Section 5 operates as a strct 22 liability statute and no proof of scienter is required to establish a violation. See 23 SEC v. Phan, 500 F.3d 895, 905-07 (9th Cir. 2007). A prima facie violation of 24 Section 5 is established by showing that (1) no registration statement was in effect 25 or had been filed as to the securties offering, (2) the Defendants, directly or 26 indirectly, sold or offered to sell the securities, and (3) the offer or sale was made 27 through the use of interstate facilities or the mails. 15 U.S.C. §§ 77e(a) & 77e(c). 28 See also SEC v. Continental Tobacco Co. of S.C., Inc., 463 F.2d 137, 155 (5th Cir. 11 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 17 of 25 Page ID #:33 1 1972). A person violates Section 5 by engaging in the unregistered offer or sale of 2 a security. SEC v. Calvo, 378 F.3d 1211, 1214-15 (1Ith Cir. 2004). So long as 3 Defendants Goldstein's and Bercoon's role in an -uegistered offering is a 4 "significant" one, i.e. they were "necessary participant( s 1" and "substantial 5 factor(sl" in the offering, liability will attach. See SEC v.Phan, 500 F.3d at 906. 6 All of the above factors are met here. No registration statement was filed 7 with the Commssion for theLADP offering. (Lee Declaration ir 7, Ex. 6 8 (Commssion Attestations).) Defendants engaged in efforts to offer and sell ~ADP 9 securities, and they used the mail and other interstate facilities to do so. Both 10 Goldstein and Bercoon were "necessary paricipants" and "substantial factors" in 11 the offering. Goldstein spoke with prospective investors and sent letters to 12 investors confirmng their investment and enclosing share certificates bearing his 13 signature. Goldstein and Bercoon authored, edited, and/or reviewed the LADP 14 offering materials, are signatories on ban accounts into which investor funds were 15 deposited, and are featured in the LADP offerig materials. In addition, Bercoon 16 and Goldstein personally guaranteed the investment of Dr. Siddiqui, one of the 17 largest LADP investors. These activities constitute a prima facie violation of 18 Sections 5(a) and 5(c). 19 Once the prima facie elements of a Section 5 violation have been 20 established, the Defendants bear the burden of proving an available exemption. 21 SEC v. Ralston Purina Co., 346 U.S. 119, 125 (1953). Because Defendants 22 engaged in general solicitations though the use of sales agents that made 23 unsolicited cold calls to investors across the countr and targeted the general 24 public as potential investors without regard to any level of financial sophistication, 25 no exemptions would appear to apply. See SEC v. Murphy, 626 F.2d at 644; see 26 also Regulation D, Rules 505 and 506, 17 C.F.R. §§ 230.505 & 506. 27 * 28 * 12 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 18 of 25 Page ID #:34 1 3. The Defendants Have Violated the Antifraud Provisions 2 a) The Defendants Misrepresented and Omitted 3 Material Facts 4 Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), prohibits fraud in the 5 offer or sale of securities, and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) 6 and Rule 10b-5 thereunder, 17 C.F.R. § 240.iOb-5, prohibit fraud in connection with 7 the purchase or sale of any securty. Rule i Ob-5 provides that: 8 It shall be unlawful for any person, directly or indirectly, by 9 the lise of any means or instrentality of interstate 10 commerce, or of the mails, or of any facility of any national 11 securities exchange, 12 (a) to employ any device, scheme or artifice to defraud, 13 (b) to make any untre statement of a material fact or to 14 omit to state a material fact necessary in order to make 15 the statements made, in the light of the circumstances 16 under which they were made, not misleading; or 17 (c) to engage in any act, practice, or course of business 18 which operates or would operate as a fraud or deceit 19 upon any person, in connection with the purchase or sale 20 of any security. 21 Section 17(a) is worded similarly. The antifraud provisions of the Securities Act 22 and the Exchange Act both prohibit fraudulent conduct or practices in connection 23 with the offer or sale of securities. See SEC v. Dain Rauscher, Inc., 254 F.3d 852, 24 855 (9th Cir. 2001). Violations of Section 17(a)(1) of the Securities Act and 25 Section 1 O(b) of the Exchange Act and Rule 10b-5 thereunder require proof of 26 scienter but violations of Sections 17(a)(2) and (3) merely require a showing of 27 negligence. Id. at 856. 28 13 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 19 of 25 Page ID #:35 1 As explained below, (1) the Defendants' actions violated the antifraud 2 provisions and (2) the Defendants acted with the requisite scienter in violating 3 these provisions. 4 b) The Defendants' Misrepresentations and Omissions 5 Were Material 6 Violations of the antifraud provisions require that the omissions and 7 misstatements concern material facts. Basic Inc. v. Levinson, 485 U.S. 224, 231- 8 32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988). A fact is material if there is a 9 substantial likelihood that a reasonable investor would consider it important in 10 making an investment decision. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 11 96 S. Ct. 2126,449,48 L.Ed.2d. 757 (1976). Liability arises not only from 12 affirmative representations but also from failures to disclose material information. 13 SEC v. Dain Rauscher, 254 F.3d at 855-56. The antifraud provisions impose "a 14 duty to disclose material facts that are necessar to make disclosed statements, 15 whether mandatory or volunteered, not misleading." SEC v. Fehn, 97 F.3d 1276, 16 1290 n.12 (9th Cir. 1996). i 7 The Defendants have made material misrepresentations and omitted to state 18 material facts to investors that go to the heart of the investment. Investors 19 understood from oral and wrtten representations that they would be investing in 20 L.A. Digital and/or that L.A. Digital would conduct an IPO or acquisition within 21 the very near future. Yet in reality, investors were " not receiving ownership in L.A. 22 Digital but rather an entity that had no operations or business. Likewise, L.A. 23 Digital had no plans to conduct an IPO or acquire another entity and in fact has not 24 done so. The Defendants also omitted to disclose that they would use investor 25 funds for personal benefit and purposes unelated to L.A. DigitaL. These 26 misrepresentations and omissions are material because they address the very 27 purpose of the investment and the use of in~estor proceeds, which reasonable 28 investors would consider important in deciding whether to invest. 14 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 20 of 25 Page ID #:36 1 c) The"Defendants Acted with Scienter 2 Violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder 3 require a showing of scienter. Aaron v. SEC, 446 U.S. 680,701-02, 100 S. Ct. 4 1945,64 L.Ed.2d 611 (1980). Scienter is defined as a "mental state embracing 5 intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfe1der, 425 U.S. 6 185, 193 n.12, (1976). In the Ninth Circuit,' scienter may be established by a 7 showing of recklessness. SEC v. Dain Rauscher, 254 F.3d at 856. Proof of 8 recklessness may be inferred from circumstantial evidence. Herman & MacLean v. , 9 Huddleston, 459 U.S. 375, 390-91, n.30, 103 S. Ct. 683, 74 L.Ed.2d 548 (1983); 10 SEC v. Burns, 816 F.2d 471,474 (9th Cir. 1987). 11 The Defendants acted with high scienter.4 As the principals ofLADP, par, 12 owners of L.A. Digital, and perpetrators of the fraudulent scheme, Bercoon and 13 Goldstein knew that contrar to oral and wrtten representations that they 14 disseminated, LADP would not use investor funds to provide investors an 15 ownership stake in L.A. Digital or to grow L.A. Digital's business or finance a 16 corporate transaction. They also were responsible for the LADP memo and LADP 17 PPM, both of which were used to solicit investors and misstated or omitted these 18 same material facts to these investors. Bercoon also lied to Migdal when Migdal 19 informed him that he was receiving investor complaints. Instead of telling Migdal 20 that he and Goldstein were involved in the LADP offering, he told Migdal that the 21 situation involved "identity theft." Additionally, in an effort to minimize the 22 Commssion's inquiry and comfort their largest investor, Dr. Siddiqui, Goldstein 23 and Bercoon told Dr. Siddiqui the Commssion's inquiry involved only a few small 24 investors, and that he should not worr about his $lmillion investment with LADP. 25 26 27 28 4 As principals ofLADp, Bercoon's and Goldstein's mental state are also imputed on LADP. SEC v. Manor Nursing Centers, Inc., 458 F .2d 1082, 1089 n.3 (2d Cir. 1972). 15 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 21 of 25 Page ID #:37 1 Finally, as signatories on LADP's bank accounts, Defendants Goldstein and 2 Bercoon knowingly misappropriated at least $874,289 in investor fuds for their 3 personal benefit and undisclosed purposes unrelated to" L.A. Digital, withdrawing 4 and transferrng fuds to tiiemse1ves and to unelated entities they control. See 5 SEC v. JT Wallenbrock & Associates, 440 F.3d 1109, 114 (9th Cir 2006) 6 (defendants benefited by obtaining investor monies under false pretenses in order 7 to fund defendants' speculative business ventures). 8 " B. The Defendants Wil Contiue Their Fraudulent Scheme Unless 9 Enjoined 10 To obtain an injunction, the Commssion must establish that there is a 11 reasonable likelihood of future violations. See SEC v. Murphy. 626 F.2d at 655. 12 Whether a likelihood of future violations exists depends upon the totality of the 13 circumstances. Id. The existence of past violations may give rise to an inference 14 that there will be future violations. See id.; see also United States v. Odessa Union 15 Warehouse Co-op, 833 F.2d 172, 176 (9th Cir. 1987), SEC v. Koracorp Industries, 16 Inc., 575 F.2d 692, 698 (9th Cir. 1978). Courts also consider factors such as the 17 degree of scienter involved, the isolated or recurrent nature of the violative 18 conduct, the defendant's recognition of the wrongful nature of the conduct, the 19 likelihood that, because of the defendant's occupation, future violations may occur, 20 and the sincerity of defendant's assurances (if any) against futue violations. SEC 21 v. Murphy, 626 F.2d at 655. 22 The Defendants' statutory violations here are egregious. They have raised 23 approximately $3.2 million since at least mid-2009, and are all misappropriating 24' those monies for their personal use. They continue to shamelessly lie to investors 25 about, among other things, L.A. Digital's imminent IPO. The Defendants also 26 continue to disseminate the false and misleading LADP offering materials they 27 drafted. For these reasons, imposition of a temporary restraining order, together 28 16 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 22 of 25 Page ID #:38 1 with an order to show cause why a preliminar injunction should not be entered, is 2 appropriate and necessary. 3 4 5 6 C. The Court Should Order An Immediate Asset Freeze To Protect Investor Funds Federal cours have inherent equitable authority to issue a variety of ancillary relief measures in Commssion injunctive actions. SEC v. Wencke, 622 7 F.2d 1363, 1369 (9th Cir. 1980). Included in these powers is the authority to freeze 8 assets, of both paries and nonparties. SEC v. Hickey, 322 F.3d 1123, 1131 (9th 9 Cir. 2003); SEC v. International Swiss Investments Corp., 895 F.2d 1272, 1276 10 (9th Cir. 1990). Courts use freeze orders to prevent waste and dissipation of assets 11 and to ensure their availability for disgorgement for the benefit of victims of the 12 fraud. See M., SEC v. Hickey, 322 F.3d at 1132 (affirming imposition of asset 13 freeze over nonpar brokerage firm controlled by the defendant to effectuate 14 disgorgement order against defendant); SEC v. Manor Nursing Centers, 458 F.2d 15 at 1105-06. Indeed, the Ninth Circuit specifically has found that "the public 16 interest in preserving the illicit proceeds (of a defendant's fraud) for restitution is 17 great." FTC v. Affordable Media, LLC, 179 F.3d 1228, 1233 (9th Cir. 1999). 18 19 20 21 22 23 24 25 26 27 28 Courts have similarly recognized that a disgorgement order will often be rendered meaningless unless an asset freeze is imposed prior to the entr of final judgment. See SEC v. Unifund SAL, 910 F.2d 1028, 1041 (2d Cir. 1990); SEC v. Musella, 578 F. Supp. 425,429 (S.D.N.Y. 1984). To obtain an asset freeze, the Commssion need only establish the mere possibility that dissipation of assets exists. FSLIC v. Sahi, 868 F .2d at 1096-97, citing FTC v. H. N. Singer, Inc., 668 F.2d at 1112. It is unecessary for the Court to find that dissipation of fuds is likely. Id. 5 Here, the Defendants lied to 5 In a case involving a nongovernental plaintiff, the Ninth Cirçuit aeld that Sahni was overrled in this respect because the Sl!reme Court held in Winters v. Natural Reso\lrces Defense ~ounct~Inc., 129 S: Ct. 365i 374-7S, (2008),.tliat a private plaintiff must establish a "li elìhood of irreparab e harm to obtain a 17 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 23 of 25 Page ID #:39 1 investors that their money would be used to buy equipment for L.A. Digital or fud 2 company acquisitions by L.A. DigitaL. Instead, investors monies were withdrawn 3 by Goldstein and Bercoon and trasferred to other non-LADP accounts. This 4 conduct demonstrates more than a mere possibility that dissipation of assets will 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 occur absent an asset freeze order. D. Orders Prohibiting Destruction Of Documents And Requiring Accountigs Are Necessary And Appropriate The Court's broad equitable powers in Commssion enforcement actions include the ability to order ancillar relief to require an accounting and prohibit document destruction. SEC v. Wencke, 622 F.2d at 1369. It is necessary to identify all available assets to help ensure that fuds and assets are frozen properly and available to satisfy any future order of disgorgement or civil penalties against the Defendants. SEC v. International Swiss Investment Corp., 895F.2d at 1276. Accountings are appropriate here because it is unclear what happened to several millions of dollars in investor monies. Additionally, an order prohibiting the destruction of documents is necessar becaus'e of the possibility that the Defendants may destroy evidence of their ongoing fraud. * * * * Qi:eliminary injunction. See Johnson v. Coutuer 572 F.3d 1Q67, 1085 n.ll (9t Cir.2009). For this reason, the Ninth Circuit heiä that to obtain an asset freeze, the Qrivate plaintiff in the case before it was required to establish likelihood of aissipatlOll of assets, rather than a mere possibilitr of such dissipation. Id. However, as eXp'lained above, unlike a private plaintiff, the Commission need not establish a likelihood of irreparable harm; rather it need only establish a reasonable likelihood of future violations. The ëommssion accordingly believes the more lenient standard of establishing a possibility of dissipation continues to apQlY in its actions. However, whichever standard applies, Defendants Goldstein ana Bercoon's rrsappropriation of investor funds clearly meets the Commission's burden for obtaining an asset freeze. 18 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 24 of 25 Page ID #:40 1 IV. 2 3 4 CONCLUSION ' For the foregoing reasons, Plaintiff Securities and Exchange Co1lssion respectfully requests the Court to grant its Ex Parte Application. 5 DATED: September 14,2010 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Jas . Lee orney for Plaintiff Securties and Exchange Commssion 19 Case 2:10-cv-06835-RGK -JCG Document 3 Filed 09/14/10 Page 25 of 25 Page ID #:41