Opinion
13-CV-1403 (VSB)
03-31-2017
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. RANDALL KENT HANSEN, RAHFCO MANAGEMENT GROUP, LLC, VINCENT PUMA, and HUDSON CAPITAL PARTNERS CORPORATION, Defendants.
Appearances: Polly A. Atkinson Kimberly L. Frederick Securities and Exchange Commission Denver, Colorado Counsel for Plaintiff Securities and Exchange Commission Randall Kent Hansen Duluth, Minnesota Pro se
MEMORANDUM & OPINION Appearances: Polly A. Atkinson
Kimberly L. Frederick
Securities and Exchange Commission
Denver, Colorado
Counsel for Plaintiff Securities and Exchange Commission Randall Kent Hansen
Duluth, Minnesota
Pro se VERNON S. BRODERICK, United States District Judge:
The Securities and Exchange Commission (the "Commission" or the "SEC") brought this action against Defendants Randall Kent Hansen, RAHFCO Management Group, LLC ("RAHFCO"), Vincent Puma, and Hudson Capital Partners Corp. ("Hudson") for securities fraud and other securities laws violations in connection with RAHFCO and certain related investment funds. Before me is the Commission's motion for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on all its claims against Defendant Hansen. (Doc. 79.) For the reasons stated herein, the Commission's motion for summary judgment is GRANTED.
Default judgment orders have been entered against Defendants Hudson and RAHFCO. (Docs. 100, 104.) Defendant Puma consented to entry of an Order of Permanent Injunction and Other Relief against him, which enjoined him from further violations of federal securities laws, ordered him to pay disgorgement, prejudgment interest, and civil penalties to be determined by the Court. (Doc. 69.) The Commission moved for entry of final judgment against Puma, (Doc. 81), which I am granting in an Order issued concurrently with this Opinion.
I. Background
A. The Complaint
By the filing of a complaint on March 1, 2013, the Commission alleged that Hansen engaged in a scheme to defraud investors by convincing them to invest in two private hedge funds, RAHFCO Funds LP and RAHFCO Growth Fund LP, and ultimately defrauded investors out of more than $10 million. (Compl. ¶ 1.) It alleged that Hansen did not follow the represented trading strategy, misrepresented their trading success, misused investor funds to make Ponzi payments to other investors, and used funds for their own purposes. (Id. ¶ 2.) It further alleged that he manipulated an accounting firm into verifying false accounting statements and documents that were provided to investors, made Ponzi payments to evade detection, and made false and misleading statements. (Id.) Approximately 100 people invested over $23 million in the RAHFCO Hedge Funds. (Id.)
"Compl." refers to the complaint filed by the SEC on March 1, 2013 ("Complaint"). (Doc. 1.)
The Ponzi payments consisted of paying investors who made redemption requests not with earnings on investments, but largely or exclusively with funds invested by other customers. These payments were used to perpetuate the fraud.
The Commission brought five claims against Hansen: (1) fraud in the offer or sale of securities, in violation of Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), (Compl. ¶¶ 133-37); (2) fraud in the purchase or sale of securities, in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10(b)-5 thereunder, 17 C.F.R. § 240.10b-5, (Compl. ¶¶ 138-41); (3) offer and sale of securities by an unregistered broker-dealer, in violation of Section 15(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78o(a), (Compl. ¶¶ 142-44); (4) fraud by an investment adviser, in violation of Sections 206(1)-(2) of the Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1)-(2), (Compl. ¶¶ 145-47); and (5) fraud by an investment adviser, in violation of Section 206(4) of the Advisers Act of 1940, 15 U.S.C. § 80(b)-6(4), and Rule 206(4)-8 thereunder, 17 C.F.R. § 275.206(4)-8, (Compl. ¶¶ 148-50). The Commission sought an injunction against violations of the charged provisions and disgorgement of money obtained from them. (Compl. ¶¶ 37-38.)
The Commission initially sought third-tier civil penalties against Hansen, but have consented to withdraw that request for relief in light of his nine-year criminal sentence. (SEC Br. (Doc. 80) at 2 n.1.)
B. The Criminal Prosecution
In May of 2013, Hansen was criminally indicted in the District of South Dakota, and this case was stayed pending the resolution of the criminal matter. The facts alleged in the criminal prosecution were the same as the facts alleged in this case, namely that, between March of 2006 and May of 2011, Hansen knowingly and intentionally devised and participated in a scheme to defraud and obtain money by means of materially false and fraudulent pretenses, representations, and promises, and by the omission of certain material facts using the RAHFCO investment companies. (SOF Exh. 2 (Second Superseding Indictment) ¶¶ 1-6.) The criminal indictment also alleged that Hansen misrepresented the trading strategy used, misrepresented the funds' trading success, misused investor funds to make Ponzi payments to other investors, misappropriated investor funds for his own purposes, misrepresented the participation of an accounting firm, provided false documents to investors, made Ponzi payments, and made false and misleading statements. (Id. at Exh. 2 ¶¶ 6-10.)
This case was initially assigned to Judge Alison Nathan and then reassigned to me on January 30, 2014. (ECF Dkt. Entry, Jan. 30, 2014.)
"SOF" refers to Plaintiff's Statement of Material Facts in Support of Motion for Summary Judgment Against Randal Kent Hansen. (Doc. 78.)
After a jury trial, on May 19, 2014, Hansen was convicted of one count of conspiracy, four counts of wire fraud, and twenty-one counts of mail fraud, in violation of 18 U.S.C. §§ 1341 and 1343. He was sentenced to 108 months' imprisonment, and ordered to pay restitution of over $17 million. (SOF Exh. 5 (Amended Judgment).) Hansen's convictions were affirmed by the Eighth Circuit on June 30, 2015. See United States v. Hansen, 791 F.3d 863, 865 (8th Cir. 2015).
C. The SEC Administrative Proceedings
In September 2014, the Commission instituted administrative proceedings against Hansen to bar him from future participation in the securities industry. On March 18, 2015, the administrative law judge issued a decision barring Hansen from participating in the securities industry. (SOF Exh. 10.)
D. The Proceedings in this Case Following the Stay
After the stay was lifted in this action, Hanson answered the Complaint on July 17, 2015. (Doc. 65.) The Commission sought permission to file a motion for summary judgment on its claims against Hansen. (Doc. 66.) I granted the request and endorsed the Commission's proposed briefing schedule, directing that moving papers be filed by August 31, 2015, response papers by October 13, 2015, and the reply by October 30, 2015. (Doc. 67.) A copy of that endorsed letter was mailed to Hansen by the Clerk's Office. (Dkt. Entry June 16, 2015.) The Commission also filed and sent Hansen a document entitled "Notice to Pro Se Litigant Who Opposes a Motion for Summary Judgment," which informed Hansen that not responding to the motion would result in the Court granting the relief sought in the Complaint. (Doc. 76.) The Commission timely moved for summary judgment against Hansen on all claims and sought an injunction against violations of securities laws as well as an order of disgorgement against him. (Docs. 78-80.) Hansen, proceeding pro se, never responded to the Commission's motion. (See Doc. 91.)
Hansen did, however, submit documents objecting to Defendant Puma's consent to entry of final judgment, (Docs. 70, 96), as well as the default judgment proceedings against RAHFCO, (Docs. 97, 98, 107). I granted a default judgment as to RAHFCO on December 16, 2015, (Doc. 101), and amended that judgment on December 21, 2015, (Doc. 104).
II. Applicable Law
A. Summary Judgment Standard
Summary judgment is appropriate when "the parties' submissions show that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Fay v. Oxford Health Plan, 287 F.3d 96, 103 (2d Cir. 2002); see Fed. R. Civ. P. 56(a). "[T]he dispute about a material fact is 'genuine[]' . . . if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is "material" if it "might affect the outcome of the suit under the governing law," and "[f]actual disputes that are irrelevant or unnecessary will not be counted." Id.
On a motion for summary judgment, the moving party bears the initial burden of establishing that no genuine factual dispute exists, and, if satisfied, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial," id. at 256, and to present such evidence that would allow a jury to find in his favor, see Graham v. Long Island R.R., 230 F.3d 34, 38 (2d Cir. 2000). To defeat a summary judgment motion, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts," Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "A party asserting that a fact cannot be or is genuinely disputed must support the assertion by . . . citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials . . . ." Fed. R. Civ. P. 56(c)(1). In the event that " a party fails . . . to properly address another party' s assertion of fact as required by Rule 56(c), the court may," among other things, "consider the fact undisputed for purposes of the motion" or "grant summary judgment if the motion and supporting materials—including the facts considered undisputed—show that the movant is entitled to it." Fed. R. Civ. P. 56(e)(2), (3).
Finally, in considering a summary judgment motion, the Court must "view the evidence in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor, and may grant summary judgment only when no reasonable trier of fact could find in favor of the nonmoving party." Allen v. Coughlin, 64 F.3d 77, 79 (2d Cir. 1995) (internal citations and quotation marks omitted); see also Matsushita, 475 U.S. at 587. "[I]f there is any evidence in the record that could reasonably support a jury's verdict for the non-moving party," summary judgment must be denied. Marvel Characters, Inc. v. Simon, 310 F.3d 280, 286 (2d Cir. 2002).
B. Collateral Estoppel
The SEC posits that the findings made against Hansen in the criminal proceedings and administrative proceedings estop him from relitigating the same facts as they apply to the civil claims here. Collateral estoppel requires the following: "(1) the issues in both proceedings are identical, (2) the issue in the prior proceeding was actually litigated and actually decided, (3) there was full and fair opportunity to litigate in the prior proceeding, and (4) the issue previously litigated was necessary to support a valid and final judgment on the merits." SEC v. Haligiannis, 470 F. Supp. 2d 373, 382 (S.D.N.Y. 2007) (quoting NLRB v. Thalbo Corp., 171 F.3d 102, 109 (2d Cir. 1999)). Where collateral estoppel applies, a plaintiff may use it as a basis for seeking summary judgment. See Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 324 (1979). The moving party bears the burden of showing that that the issues decided are identical, and the non-moving party has the burden of demonstrating the lack of a full and fair opportunity to litigate the prior action. See SEC v. Tzolov, No. 08 Civ. 7699(SAS), 2011 WL 308274, at *1 (S.D.N.Y. Jan. 26, 2011). "Trial courts have 'broad discretion' in applying offensive collateral estoppel and should decline to do so where it 'would be unfair to a defendant.'" Gordon v. Sonar Capital Mgmt. LLC, 116 F. Supp. 3d 360, 364 (S.D.N.Y. 2015) (quoting SEC v. Mattera, No. 11-cv-8323(PKC), 2013 WL 6485949, at *7 (S.D.N.Y. Dec. 9, 2013)).
With respect to the criminal proceedings, it is well established that a criminal conviction "constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by the judgment in the criminal case." United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978); see also Maietta v. Artuz, 84 F.3d 100, 102 n.1 (2d Cir. 1996). This is in large part because "[t]he government bears a higher burden of proof in the criminal than in the civil context." SEC v. Shehyn, No. 04 CV 2003(LAP), 2010 WL 3290977, at *3 (S.D.N.Y. Aug. 9, 2010) (quoting Gelb v. Royal Globe Ins. Co., 798 F.2d 38, 43 (2d Cir. 1986)). "Perhaps the most attractive cases that have extended issue preclusion from criminal convictions to civil actions involve claims by the government for civil remedies based on the same transaction that gave rise to the conviction." Mattera, 2013 WL 6485949, at *7 (quoting 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice & Procedure § 4474 (2d ed.)).
Hansen had a full and fair opportunity to be heard at his criminal trial and the only questions that remain are the identity of issues, discussed below. Under certain circumstances, final decisions of administrative agencies acting in their adjudicative capacity may also be given collateral estoppel effect. See Astoria Fed. Savings & Loan Assoc. v. Solimino, 501 U.S. 104, 107-08 (1991) ("The principle holds true when a court has resolved an issue, and should do so equally when the issue has been decided by an administrative agency, be it state or federal . . . ."); SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1463 (2d Cir. 1996) ("The doctrine may be applied to judgments of administrative agencies acting in an adjudicative capacity."); see also United States v. Utah Constr. Co., 384 U.S. 394, 421-22 (1966). As the Supreme Court recently restated:
Both this Court's cases and the Restatement make clear that issue preclusion is not limited to those situations in which the same issue is before two courts. Rather, where a single issue is before a court and an administrative agency, preclusion also often applies. Indeed, this Court has explained that because the principle of issue preclusion was so "well established" at common law, in those situations in which Congress has authorized agencies to resolve disputes, "courts may take it as given that Congress has legislated with the expectation that the principle [of issue preclusion] will apply except when a statutory purpose to the contrary is evident." This reflects the Court's longstanding view that "'[w]hen an administrative agency is acting in a judicial capacity and resolves disputed issues of fact properly before it which the parties have had an adequate opportunity to litigate, the courts have not hesitated to apply res judicata to enforce repose.'"B & B Hardware, Inc. v. Hargis Indus., Inc., 135 S.Ct. 1293, 1303 (2015) (internal citations omitted). Here, it is apparent that Hansen had a meaningful opportunity to litigate before the SEC at the administrative proceeding. (See SOF Exh. 10 at 2 (describing procedural history, which included a prehearing conference that Hansen attended, and briefing on the SEC's motions for summary disposition, to which Hansen twice filed memoranda in opposition).) Therefore, again, the only questions that remain are whether the issues were in fact identical in both proceedings.
III. Application
The Commission argues, and I agree, that Hansen is collaterally estopped from denying the claims against him by virtue of his criminal convictions and the administrative decision rendered against him. Even if that were not the case, I would deem Hansen's non-response as an admission of the SEC's statement of undisputed facts. See Jackson v. Fed. Express, 766 F.3d 189, 194 (2d Cir. 2014). The undisputed facts support an entry of summary judgment of all five claims.
A. Claims 1 & 2: Section 10(b) of the Exchange Act , Rule 10b-5 , and Section 17(a) of the Securities Act
The SEC alleges that Hansen violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 17(a) of the Securities Act, "collectively referred to as the antifraud provisions of the federal securities laws." SEC v. McGinn, Smith & Co., No. 1:10-cv-457 (GLS/CFH), 2015 WL 667848, at *7 (N.D.N.Y. Feb. 17, 2015). Section 10(b) and Rule 10b-5 require the Commission to establish that Hansen "(1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities." SEC v. Frohling, No. 13-3191-cv, 2016 WL 7093925, at *2 (2d Cir. 2016) (quoting SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 285 (2d Cir. 2013)). "A false statement was made with the requisite scienter if it was made with the 'intent to deceive, manipulate, or defraud.'" Id. The elements of a claim under § 17(a) are "essentially the same" as the elements under § 10(b) and Rule 10b-5. Id. (quoting SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999)).
Section 10(b) of the Exchange Act states:
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 . . . to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j.
Rule 10b-5 states:
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 provides as follows:
It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 78c(a)(78) of this title) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly15 U.S.C. § 77q(a).
(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.
Hansen was convicted of mail and wire fraud, which require a finding of "(1) a scheme to defraud, (2) money or property as the object of the scheme, and (3) use of the mails or wires to further the scheme." Fountain v. United States, 357 F.3d 250, 255 (2d Cir. 2004) (quoting United States v. Dinome, 86 F.3d 277, 283 (2d Cir. 1996)). To assert a scheme to defraud, the government must have established: "(i) the existence of a scheme to defraud, (ii) the requisite scienter (or fraudulent intent) on the part of the defendant, and (iii) the materiality of the misrepresentations." United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000) (citations omitted).
Although the statutory requirements differ, collateral estoppel may still apply if the "factual allegations underlying the convictions are sufficient to establish that the defendant also violated the securities laws provisions at issue." McGinn, Smith, 2015 WL 667848, at *8 (alterations omitted) (quoting SEC v. Dimensional Entm't Corp., 493 F. Supp. 1270, 1277 (S.D.N.Y. 1980) (concluding that acts charged in indictment upon which wire fraud conviction was based constituted violations of Securities Act and Securities Exchange Act)); see also SEC v. Roor, No. 99 Civ. 3372, 2004 WL 1933578, at *7 (S.D.N.Y. Aug. 30, 2004) ("[I]t matters not what the precise charges in the indictment and civil complaint are, so long as they are predicated on the same factual allegations."). To determine what was actually and necessarily decided in the criminal case, courts examine "the record, the pleadings, the evidence submitted, and any judicial opinions issue in the case." Dimensional Entm't, 493 F. Supp. at 1274 (citing Podell, 572 F.2d at 36); see also Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 568 (1951). Courts typically do so by "compar[ing] the criminal indictment with the civil complaint." McGinn, Smith, 2015 WL 667848, at *9.
Hansen was convicted of Counts 1 through 13, and 17 through 29. (SOF Exh. 5 (Amended Judgment).) Those counts alleged that, between March of 2006 and May of 2011, Hansen knowingly and intentionally participated in a scheme to defraud, by using materially false and fraudulent pretenses, representations, and promises, and by the omission of material fact. (SOF Exh. 2 ¶¶ 1, 3.) The relevant counts further charged that he made "various false and fraudulent representations to individuals . . . to convince individuals to purchase limited partnerships in private hedge funds known as RAHFCO Funds, LP, and RAHFCO Growth Fund, LP." (Id. ¶ 4.) By convicting him of Counts 1-17 and 17-29, the jury necessarily found that Hansen did in fact sell securities, that he employed a scheme to defraud investors, that he defrauded investors by means of material false representations, that he used the mails, and that his fraudulent activities were intentional. These acts constitute violations of Section 17(a) of the Securities Act and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. See Dimensional Entm't, 493 F. Supp. at 1277 (concluding that acts charged in indictment upon which wire fraud conviction was based constituted violations of Securities Act and Exchange Act); SEC v. Pace, 173 F. Supp. 2d 30, 30-33 (D.D.C. 2001) (defendant's conviction for wire fraud and tax fraud precluded issues of fact with respect to scienter elements of anti-fraud securities laws); SEC v. Opulentica, LLC, 479 F. Supp. 2d 319, 327 (S.D.N.Y. 2007) (plea of guilty to mail fraud provided factual foundation for Section 17(a) civil violation).
B. Claim 3: Section 15(a) Violation
"Section 15(a) makes it unlawful for any 'broker or dealer' to make use of any means of interstate commerce and 'to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security' without registering as a broker with the Commission." SEC v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003). As discussed above, Hansen's criminal conviction established that he sold securities, and used the mail in the process of doing so. The SEC argues that remaining element—failure to register as a broker—can be established if I take judicial notice of BrokerCheck, a publicly available database maintained by the Financial Industry Regulatory Authority ("FINRA") which discloses certain information about all currently and formerly registered broker-dealer firms and individuals associated with them. See www.finra.org/investors/about-brokercheck. "The court may judicially notice a fact that is not subject to reasonable dispute because it . . . can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned." Fed. R. Evid. 201(b). I agree that, given FINRA's mandate to maintain registration information for member brokers and make that information available to the public, taking judicial notice of broker registration on FINRA's website is appropriate. See Forgione v. Gaglio, No. 13 Civ. 9061(KPF), 2015 WL 718270, at *17 (S.D.N.Y. Feb. 13, 2015) (taking judicial notice of FINRA's BrokerCheck report). The BrokerCheck report shows that Hansen was not registered as a broker at the time of his fraudulent conduct. (SOF ¶ 55, Exh. 12.) Therefore, the Commission is entitled to summary judgment on its Section 15(a) claim.
Section 15(a) provides as follows:
(1) It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.15 U.S.C. § 78o.
(2) The Commission, by rule or order, as it deems consistent with the public interest and the protection of investors, may conditionally or unconditionally exempt from paragraph (1) of this subsection any broker or dealer or class of brokers or dealers specified in such rule or order.
C. Claim 4: Sections 206(1) and 206(2)
Sections 206(1) and 206(2) prohibit investment advisers from using a "device, scheme, or artifice to defraud" clients, 15 U.S.C. § 80b-6(1), or from conducting a "transaction, practice, or course of business which operates as a fraud or deceit upon any client," id. at § 80b-6(2). The elements of Sections 206(1) and (2) are "similar to the elements of a claim under Rule 10b-5" such that "facts showing a violation of Sections 10(b) or 17(a) by an investment advisor will also support a showing of a Section 206 violation." SEC v. Penn, No. 14-cv-0581 (VEC), 2016 WL 7413518, at *6-7 (S.D.N.Y. Dec. 21, 2016) (quoting SEC v. Berger, 244 F. Supp. 2d 180, 192 (S.D.N.Y. 2001)).
As explained above, the facts underlying Hansen's criminal conviction collaterally estop him from contesting the fact that he used an investment scheme to defraud clients. The only remaining element is whether Hansen served as an "investment adviser." The ALJ, in concluding that a collateral bar was warranted, explicitly found that "Hansen was an investment adviser" based on the evidence before it. (SOF Exh. 10 (ALJ decision) at 5 ("First, Hansen received compensation in the form of management fees. Second, in his role as president of RAHFCO Management, Hansen initially 'controlled all of the operations and activities' of the RAHFCO entities and was responsible 'for researching, selecting and monitoring the RAHFCO entities' investments." (alterations and citations omitted).) Therefore, Hansen is collaterally estopped from challenging the SEC's Section 206(1) and (2) claims.
D. Claim 5: Section 206(4)
Section 206(4) of the Advisers Act and Rule 206(4)-8 thereunder, are substantially the same as Sections 206(1) and 206(2), except that they apply to investment advisers of "pooled investments." See SEC v. Rabinovich & Assocs., LP, No. 07 Civ. 10547(GEL), 2008 WL 4937360, at *4 (S.D.N.Y. Nov. 18, 2008). A "pooled investment vehicle" is "any investment company as defined in section 3(a) of the Investment Company Act." 17 C.F.R. § 275.206(4)-8. The Investment Act defines an investment company as one that "is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities." 15 U.S.C. § 80a-3. As alleged in the counts in the indictment of which Hansen was convicted, the RAHFCO Funds purported to "'pool investment funds of its investors' for the purpose 'of investing and trading in a wide variety of securities and financial instruments.'" (SOF Exh. 2 ¶ 6(a).) By convicting him, the jury necessarily found that a pooled investment vehicle was used, and Hansen is collaterally estopped from arguing otherwise.
Section 206(4) of the Advisers Act prohibits investment advisers from "engag[ing] in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative." 15 U.S.C. § 80b-6(4).
SEC Rule 206(4)-8 provides:
(a) Prohibition. It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser to a pooled investment vehicle to:
17 C.F.R. § 275.206(4)-8(a). --------(1) Make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or
(2) Otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.
E. Relief Requested: Permanent Injunction
"Injunctive relief is expressly authorized by Congress to proscribe future violations of the federal securities laws." SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir. 1998). To establish the need for a permanent injunction, the Commission must show a "substantial likelihood of future violations of illegal securities conduct." Id. In determining the likelihood of future violations, courts consider the following factors:
the fact that the defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an "isolated occurrence;" whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated.Id. (quoting SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 100 (2d Cir. 1978)).
Those factors weigh in favor of an injunction. First, in addition to being found guilty of conspiracy and substantive counts of wire and mail fraud, Hansen has violated the securities laws enumerated above. Second, Hansen is estopped from arguing that the actions he took were not intentional, as the jury was required to find that he acted with intent to defraud. Third, because the scheme lasted for five years, it can hardly be described as an "isolated occurrence." Fourth, as evidenced by the answer he submitted in response to the Complaint, Hansen appears to continue to deny wrongdoing. (See Doc. 65.) While Hansen does not appear to be in a position to participate in future violations of the securities laws, due in part to his current period of incarceration and other measures put in place through supervised release or the SEC, it is not outside the realm of possibility. Therefore, an injunction preventing Hansen from future violations of the securities laws is warranted.
F. Relief Requested: Disgorgement
"Disgorgement of ill-gotten gains is a congressionally and judicially recognized remedy for a violation of the securities law." Shehyn, 2010 WL 3290977, at *7. The primary purpose of disgorgement is to deter violations by depriving violators of their ill-gotten gains. See Official Comm. of Unsecured Creditors of WorldComm, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006). In determining whether to order disgorgement and in what amount, courts have broad discretion. First Jersey, 101 F.3d 1450, 1474-75 ("The district court has broad discretion . . . in calculating the amount to be disgorged."). In calculating the disgorgement amount, "a court must focus on the extent to which a defendant has profited" from the misconduct. SEC v. Univ. Express, 646 F. Supp. 2d 552, 563 (S.D.N.Y. 2009). The disgorgement amount "need only be a reasonable approximation of profits causally connected to the violation." First Jersey, 101 F.3d at 1475. Uncertainty in calculating the amount profited in ill-gotten gains should be resolved in favor of the Commission. See SEC v. Contorinis, 743 F.3d 296, 304-05 (2d Cir. 2014).
The Commission requests disgorgement in the amount of $827,251, which represents the $727,949 Hansen retained from the fraudulent scheme, plus prejudgment interest calculated to be $99,302. (SOF ¶¶ 56-57.) I am satisfied with the Commission's showing that Hansen personally received $727,949 from the scheme, (see SOF Exh. 13 ¶¶ 2-3 (declaration of SEC accountant who examined bank records)), as well as the Commission's calculation of prejudgment interest, facts that Hansen has not disputed.
Therefore, disgorgement in the amount of $827,251 is appropriate, provided that the Commission will reduce the amount owed by Hansen by any amount he actually pays toward discharge of the restitution order against him. (See SEC Br. at 21 n.2.)
IV. Conclusion
Plaintiff's motion for summary judgment, (Doc. 79), is GRANTED. Judgment shall be entered against Hansen in the amount of $827,251 and permanently restraining and enjoining from committing future violations of the securities laws and rules. The Clerk's Office is respectfully directed to mail a copy of this order to the pro se Defendant.
SO ORDERED. Dated: March 31, 2017
New York, New York
/s/_________
Vernon S. Broderick
United States District Judge