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finding defendant's conduct was "egregious" when defendant lied about his company having a product to market, ties to established telecommunications companies, and an expectation of reaping billions of dollars in sales revenue
Summary of this case from Sec. & Exch. Comm'n v. BankoskyOpinion
00 Civ. 7452 (RMB) (AJP)
July 16, 2002
REPORT AND RECOMMENDATION
Plaintiff Securities and Exchange Commission ("SEC") brought this action against Carl M. Robinson and Cellular Video Car Alarms, Inc. ("CVCA") for violations of the federal securities laws in connection with the public offer and sale of CVCA common stock. (See Dkt. No. I: Compl.) Judge Berman granted the SEC a preliminary injunction and, after discovery, summary judgment against Robinson and a default judgment against CVCA, and referred to me for a Report and Recommendation the SEC's request for remedies against Robinson. (Dkt. Nos. 14-15, 42-44.) For the reasons set forth below, this Court recommends that Robinson be ordered: (1) permanently barred from serving as an officer or director of any public company, (2) to disgorge his ill-gotten gains in the amount of $420,000 in addition to prejudgment interest (to be recalculated by the SEC); and (3) to pay a civil monetary penalty in the amount of $100,000.
BACKGROUND
On October 3, 2000, the SEC filed its complaint in this case alleging,inter alia, that beginning no later than September 1999, Robinson obtained at least $400,000 from investors by fraudulently inducing them to purchase stock in CVCA through false and misleading offering material on the internet and in national advertisements. (Dkt. No. 1: Compl. ¶ 1, 3, 15-17, 18-57.) The complaint alleged that Robinson represented to potential investors that CVCA's sales of"mobile wireless digital personal security alarm systems for cars, RVs, and homes" were estimated to grow to $44 billion by 2005, even though CVCA had no product, no financing, and no manufacturing contract. (Compl. ¶¶ 28-29.) The complaint alleged violations of Sections 5(a), 5(c) and 17 (a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77e(a), 77e(c), 77t(a), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. (Compl. ¶¶ 4, 58-74.) The complaint sought injunctive relief, disgorgement, civil monetary penalties, and an officer and director bar for Robinson. (Compl. ¶ 7 Wherefore ¶¶.)
Defendants' Answer denied the allegations of the complaint "except those allegations approximating the amount of funds invested in the corporation investors. . . ." (Dkt. No. 5: Answer at 1; see also Dkt. No. 32: Robinson 9/8/01 Aff. ¶ 17 ("over $400,000 invested" in CVCA).)
Upon the SEC's application, Judge Berman issued a temporary restraining order and asset freeze order on October 3, 2000, and scheduled a preliminary injunction hearing. (Dkt. No. 2: 10/3/00 TRO.) Judge Berman held a hearing on the preliminary injunction motion on November 29, 2000 and December 19-20, 2000. (Dkt. No. 16-17, 20; see also Dkt. No. 14: Findings at 1.) Judge Berman granted the preliminary injunction on December 21, 2000, and issued Findings of Fact and Conclusions of Law ("Findings/Conclusions"). (Dkt. No. 14: Findings/Conclusions; Dkt. No. 15: Preliminary Injunction Order.) Judge Berman found, inter alia, that beg inning in September 1999, Robinson made offers to the general public, through the internet, press releases and newspaper advertisements, to sell $10 million in CVCA common stock. (Dkt No. 14: Findings ¶¶ 1-28.) Judge Berman held that such offers violated Regulation D, Rule 504, of the Securities Act because they constituted general solicitations for the sale of stock and because they exceeded the statutory $1 million exemption limit. (Dkt. No. 14: Conclusions ¶¶ 1-2.) Further, Judge Berman found that defendants' stock offers contained numerous material misrepresentations, including that: (1) CVCA's annual sales would reach nearly $17 bilhon by the end of 2002, even though the company "had no working product" (Findings ¶¶ 15(f), 24; Conclusions ¶ 5); (2) CVCA's "products would be cobranded with ATT," "bear the ATT logo," and "be sold through 8, 802 ATT stores," even though CVCA had no such arrangements with ATT (Findings ¶¶ 19-23; Conclusions ¶¶ 3-4); and (3) CVCA's management "team" was "'knowledgeable in telecommunications marketing [and] strategic planning,'" even though Robinson was the sole member of the management team and he had "no formal education" or substantive experience in "the telecommunications field" (Findings ¶¶ 16-18; Conclusions 6). Based on these Findings of Fact and Conclusions of Law, Judge Berman preliminarily enjoined defendants from selling unregistered securities or using untrue or misleading statements to sell securities, froze defendants' assets, required defendants to submit to an audit, and required defendants to preserve documents. (Dkt. No. 15: 12/21/00 Preliminary Injunction Order.)
After the conclusion of discovery, the SEC moved for summary judgment (Dkt. Nos. 24-26, 28), and on February 19, 2002, Judge Berman heard argument on the motion (Dkt. No. 52: 2/19/02 S.J. Hearing Transcript ["Tr."]). At the conclusion of the hearing, Judge Berman: (1) granted a default judgment against CVCA; (2) granted summary judgment against Robinson; (3) permanently enjoined CVCA and Robinson from further violations of the federal securities law; and (4) referred to me for a Report Recommendation the SEC's request for remedies with respect to Robinson, including an officer and directorbar, disgorgement of profits, prejudgment interest and a civil penalty. (Dkt. No. 52: Tr. 9, 26-30; see also Dkt. No. 42: 2/20/02 Order; Dkt. No. 43: Order of Reference; Dkt. No. 44: 2/25/02 Judgment.).
At the hearing, Judge Berman described in detail the grounds supporting summary judgment against Robinson, which in large part relied on his December 21, 2000 Findings of Fact and Conclusions of Law. (Tr. 9-30.) Judge Berman found that "[b]etween November of 1999 and October 3, 2000, defendants in fact sold CVCA securities to at least 220 people and received in excess of approximately $420,000 from public investors for the purchase of the CVCA Securities." (Tr. 10.) Judge Berman further found that after the issuance of the preliminary injunction on December 21, 2000, and in violation of the injunction, Robinson sent letters to CVCA shareholders on March 3 and 4, 2001, "appealing to shareholders of record to each contribute a personal bridge loan, minimum of $200, to the CVCA Corporation Bridge Loan Fund," and that "'each investor who contributed to the CVCA Corporation Bridge Loan Fund would receive a gift of four shares of company stock for each dollar contributed.'" (Tr. 8.)
Later in the hearing transcript, however, Judge Berman referred to the SEC's contention that "Defendants received approximately $445,288 from the sale of CVCA securities." (Tr. 28.)
Judge Berman granted a default judgment against CVCA since "companies cannot appear pro se under appropriate case law," and in addition, "there have not been presented any material issues of fact with respect to the CVCA defendant, so that summary judgment would be appropriate on the merits against CVCA." (Tr. 12-13, citing cases; see also Dkt. No. 37: 11/29/01 Order at 5 n. 5.)
Judge Berman held that Robinson violated Sections 5(a) and 5(c) of the Securities Act by offering for sale CVCA securities without a registration statement. (Dkt. No. 52: S.J. Tr. 13-16.) Robinson failed to sustain his burden of proving that the securities were exempt, both because the $10 million offering clearly exceeded the $1 million exemption ceiling, and because Robinson's advertising on the internet and in national newspapers violated the statute's prohibition against "general solicitation or general advertising." (Id. at 15-16, quoting Regulation D, Rule 504, of the Securities Act.)
Judge Berman also held that Robinson violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 by misrepresenting material facts in connection with the purchase and sale of CVCA securities. (Tr. 16-22, 26.) These misrepresentations (previously itemized in Judge Berman's December 21, 2000 Findings) included: (1) the claim that CVCA would be co-branded with ATT and that Nokia Mobile Phones, Inc. would provide vendor support, although both ATT and Nokia provided affidavits stating that no such contracts or even agreements existed (Tr. 18-19); (2) the assertion of "what can only be described as fantastic favorable financial projections for CVCA," including that sales revenue would reach about $17 billion by 2002 and reach $44 billion by 2005 (Tr. at 19-20); and (3) the assertion that CVCA's "management team" was knowledgeable in, among other things, telecommunications marketing, when Robinson, "who has no formal education in telecommunications or marketing," was the only member of CVCA's "team" (Tr. at 20).
Judge Berman also disposed of a variety of defenses offered by Robinson, including that he was unfairly denied court-appointed counsel, that he was denied appropriate discovery, that the Court improperly admitted evidence of his prior conviction, and that the SEC attorneys were racists who were violating his civil rights. (Tr. 22-26.)
Judge Berman granted a permanent injunction against defendants from further violations of the federal securities laws because "here, there is a likelihood that, unless enjoined, violations will continue." (Id. at 26.) He explained:
The Second Circuit . . . has identified several considerations that warrant imposition of injunctive relief including a history of past violations, whether the present violation was founded on systemic wrongdoing rather than an isolated occurrence, the degree of culpability of defendants, and whether defendants have admitted wrongdoing. These considerations are present here and warrant the issuance of a permanent injunction.
For one thing, among others, defendants have already demonstrated their intent and [culp]ability in engaging in future unlawful acts — that is to say I am referring now to the offering of CVCA securities in March of 2001 after the issuance of the preliminary injunction. The record reflects that defendants acted knowingly and made several flagrant, indeed one might say outrageous, misrepresentations — [Findings ¶ 15(h)]; now I'm referring to the . . . findings — that, quote, sales revenue would reach $44 billion by 2005.
Mr. Robinson was highly culpable as he, among other things, authored the advertisements and the offering circular and private placement memorandum. Rather than addressing these issues of wrongdoing, Mr. Robinson contends that there is no issue, that the SEC lawyers are out to squelch creativity and entrepreneurial drive. He says that in his affidavit at paragraph 20. These circumstances suggest a substantial likelihood of further violations and warrant injunctive relief against both defendants.
(Tr. 26-28.)
In referring to me the questions of whether to order disgorgement, prejudgment interest a civil penalty and/or an officer and director bar, Judge Berman described the appropriate factors to guide each determination. (Tr. 28-30, citing cases.)
Robinson filed a Notice of Appeal to the Second Circuit from Judge Berman's grant of summary judgment (Dkt. No. 46), and requested that this Court stay any further proceedings pending the appeal (Dkt. No. 50), which I denied (Dkt. No. 49: 4/30/03 Order). On May 22, 2002, the Second Circuit dismissed Robinson's appeal. (Dkt. No. 53.)
The SEC submitted a memorandum of law and related papers in support of its request for remedies against Robinson. (Dkt. No. 48.) At Robinson's request, this Court accepted Robinson's pro se Notice of Appeal (Dkt. No. 46) and letter dated March 18, 2002 as his opposition to the SEC's request for remedies. (See Dkt. No. 51: 3/22/02 Memo Endorsed Order.) Among other things, Robinson's papers asserted that: (1) he had "no money or assets" to pay a fine or disgorgement, "and no reasonable prospect of being able to pay in the future" (Dkt. No. 51: 3/18/02 Robinson Letter to the Court; see also Dkt. No. 50: 3/11/02 Robinson Letter to the Court attached Robinson Aff); (2) the SEC "is a terror organization," and the SEC's investigation and prosecution of Robinson were the product of "racial profiling" (Dkt. No. 50: 3/11/02 Robinson Letter; Dkt. No. 50: Robinson Aff. at 2-3); and (3) in granting summary judgment, the Court violated Robinson's Fifth Amendment right against self incrimination and Sixth Amendment right to counsel (Dkt. No. 50: Robinson Aff. at 3-4).
The Order "warn[ed] Mr. Robinson, however, that the mere statement that he has no money is not sufficient to support his burden on this issue." (Id.) Robinson nevertheless did not further supplement his papers.
ANALYSIS
As Judge Berman noted at the summary judgment hearing, "although the same standards for [summary judgment] dismissal apply, a court should give the pro se litigant special latitude. . . . In particular, the pro se party must be given express notice among other things of the consequences of failing to respond appropriately to a motion for summary judgment." (Dkt. No. 52: 2/19/02 S.J. Tr. 11 (citing SEC v. Zubkis, 97 Civ. 8086, 2000 WL 218393 at *2 (S.D.N.Y. Feb. 23, 2000)); see also, see also e.g., McPherson v. Coombe, 174 F.3d 276, 280-81 (2d Cir. 1999) ("'[t]he failure of a district court to apprise pro se litigants of the consequences of failing to respond to a motion for summary judgment is ordinarily grounds for reversal.'") (citations omitted). Both Judge Berman and I repeatedly advised Mr. Robinson of the nature of a summary judgment motion and repeatedly warned him that it would be in his best interest to retain counsel to represent him. (See, e.g., Tr. 11-13.) More specifically, the Court warned Robinson that if he did not file papers opposing the SEC's motion papers on the issue of appropriate relief, "the Court may and likely will grant the S.E.C.'s application on default." (Dkt. No. 45: 3/7/02 Scheduling Order.) Mr. Robinson chose to proceed pro se. As such his "pro se status does not exempt him from the usual requirements of summary judgment." Smith v. Planas, 975 F. Supp. 303, 305 n. 2 (S.D.N.Y. 1997).
The SEC has requested an order: (1) permanently barring Robinson from serving as a director or officer of a public company (Dkt. No. 48: SEC 3/20/02 Remedies Br. at ¶ 2, 6-8); (2) requiring Robinson to disgorge $438,844.44 in ill-gotten gains, plus $59,028.12 in prejudgment interest (id. at 2-4); and (3) levying a civil monetary penalty against Robinson of as much as $22,770,000 (id. at 4-6). Each of these requests is addressed below.
I. ROBINSON SHOULD BE PERMANENTLY BARRED FROM SERVING AS AN OFFICER OR DIRECTOR OF A PUBLIC COMPANY
Based on Robinson's violations of the securities laws, the SEC requests that he be permanently barred from serving as an officer or director of a public company. (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 6-8.) Robinson's papers do not directly address the issue.
For violations of the antifraud provisions of the securities laws,
the court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated [the applicable provisions] from acting as an officer or director [of a public company] if the person's conduct demonstrates substantial unfitness to serve as an officer or director. . . .15 U.S.C. § 77t(e) 78u(d)(2); see SEC v. Patel, 61 F.3d 137, 140-41 (2d Cir. 1995). The Second Circuit has described six factors as "useful in making the unfitness assessment," including: "(1) the "egregiousness' of the underlying securities law violation; (2) the defendant's "repeat offender' status; (3) the defendant's "role' or position when he engaged in the fraud; (4) the defendant's degree of scienter; (5) the defendant's economic stake in the violation; and (6) the likelihood that misconduct will recur." SEC v. Patel, 61 F.3d at 141 (citation omitted); accord, e.g., SEC v. McCaskey, 98 Civ. 6153, 2001 WL 1029053 at *6 (S.D.N.Y. Sept. 6, 2001); SEC v. Zubkis, 97 Civ. 8086, 2000WL 218393 at *10 (S.D.N.Y. Feb.23, 2000). (See also Dkt. No. 52: 2/19/02 S.J. Tr. 29-30.) The Patel court explained that "we do not mean to say that they are the only factors that may be taken into account or even that it is necessary to apply all these factors in every case. A district court should be afforded substantial discretion in deciding whether to impose a bar to employment in a public company." SEC v. Patel, 61 F.3d at 141; accord SEC v. McCaskey, 2001 WL 1029053 at *6. (See also Tr. 30.)
In this case, all of the relevant factors lead the Court to conclude that Robinson should be permanently barred from serving as a director or officer of a public company. First, his violations were certainly egregious. Judge Berman described Robinson's misrepresentations as "flagrant, indeed one might say outrageous." (Tr. 27.) Given that CVCA had no product to market, no telecommunications marketing "team," no ties to Nokia or ATT, and no reasonable expectation of reaping millions, much less billions, of dollars in sales revenue, Robinson's actions constituted nothing but a polite form of theft.
Second, as Judge Berman pointed out, "after the issuance of the preliminary injunction" on December 21, 2000 (Dkt. No. 15), Robinson made an additional offering of CVCA securities in March 2001. (Tr. 27; see Dkt. No. 48: SEC Ex. 21: 3/21/01 Letters to Shareholders.) Robinson is thus, in a sense, a "repeat offender," and has, in Judge Berman's words, "already demonstrated [his] intent and [culp]ability [to] engag[e] in future unlawful acts." (Tr. 27.)
Third, the evidence suggests that Robinson was the sole driving force behind the scheme to defraud investors. Robinson was an officer and director of CVCA during the relevant period (Dkt. No. 26: SEC Rule 56.1 Stmt. ¶ 1), and owned 87% of the company's outstanding shares at the end of 2000 (id. ¶ 11). Further, Judge Berman found that Robinson was the sole member of CVCA's management "team," and that he authored the advertisements and offering documents containing the relevant misrepresentations. (Tr. 17-20, 27.)
See Smith v. Planas, 975 F. Supp. 303, 305 n. 2 (S.D.N.Y. 1997) (deeming admitted certain uncontroverted facts set forth in moving party's Rule 56.1 Statement, notwithstanding non-movant's pro se status, on grounds that his "pro se status does not exempt him from the usual requirements of summary judgment"), cited in v. Zubkis, 2000 WL 218393 at *2.
Fourth, Judge Berman deemed Robinson "highly culpable" in "knowingly' authoring "flagrant" and "outrageous" misrepresentations. (Tr. 27.) "[T]here is no issue of fact — that Mr. Robinson made a variety of false and misleading statements in connection with the purchase and sale of the CVCA securities." (Tr. 17-18.) Robinson's "degree of scienter" can therefore be described as extremely high. Fifth, Robinson's economic stake in the violation is manifest, as owner of 87% of CVCA's stock (SEC 56.1 Stmt. ¶ 11) and the recipient of over $260,000 in company "loans" (SEC 56.1 Stmt. ¶ 43, citing Dkt. No. 48: SEC Ex. 10: Robinson banking records).
Finally, the likelihood is high that Robinson will continue to violate the securities laws. To this day, he continues to deny wrongdoing in the face of overwhelming evidence, preferring instead to claim that the SEC's entire investigation was the product of racial bias. (See page 7 above.) Judge Berman cited to Robinson's failure to admit wrongdoing as one factor supporting a permanent injunction. (Tr. 27.) Further, Judge Berman noted that Robinson continued to make misrepresentations in connection with the sale of CVCA stock even "after the issuance of the preliminary injunction" on December 21, 2000. (Tr. 27; see Dkt. No. 48: SEC Ex. 21: 3/21/01 Letters to Shareholders.) Robinson has thus "already demonstrated [his] intent and [culp]ability [to] engag[e] in future unlawful acts." (Tr. 27.)
The Second Circuit has cautioned that, given the "loss of livelihood and the stigma attached to permanent exclusion from the corporate suite," there must be strong support in the record before a lifetime — as opposed to a "conditional" — officer/director bar should be levied.SEC v. Patel, 61 F.3d at 142. The Patel court specifically emphasized the importance of a finding of past securities law violations: "[a]lthough it is not essential for a lifetime ban that there be past violations, we think that it is essential, in the absence of such violations, that a district court articulate the factual basis for a finding of the likelihood of recurrence." Id. "[B]efore imposing a permanent bar, the court should consider whether a conditional bar (e.g., a bar limited to a particular industry) and/or a bar limited in time (e.g., a bar of five years) might be sufficient, especially where there is no prior history of unfitness." Id.
This Court recognizes the gravity of a permanent bar, and does not offer this recommendation lightly. The Court believes that given the egregiousness of Robinson's actions, his failure to admit wrongdoing, and his flagrant violation of the preliminary injunction, a permanent bar is appropriate. As Judge Timbers observed in SEC v. Posner:
The [defendants] seem to be shocked by what they see as the draconian remedy of eternal boardroom banishment. We intend our affirmance of [the district court's] judgment in this respect as a sharp warning to those who violate the securities laws that they face precisely such banishment. . . . We hold that the [district] court's order enjoining the defendants from acting as officers or directors of any public company was within the court's well-established equitable power. . . .SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994), cert. denied, 513 U.S. 1077, 115 S.Ct. 724 (1995).
II. ROBINSON SHOULD BE ORDERED TO DISGORGE HIS ILL-GOTTEN GAINS ALONG WITH PREJUDGMENT INTERESTA. Applicable Law Regarding Disgorgement
"Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996), cert. denied, 522 U.S. 812, 118 S.Ct. 57 (1997); see also, e.g., SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997); SEC v. Loin, 76 F.3d 458, 462 (2d Cir. 1996) (district court "must be given wide latitude in these matters") (quoting SEC v. Patel, 61 F.3d 137, 140 (2d Cir. 1995)); SEC v. McCaskey, 98 Civ. 6153, 2002 WL 850001 at *2 (S.D.N.Y. Mar. 26, 2002); SEC v. Rosenfeld, 97 Civ. 1467, 2001 WL 118612 at *1 (S.D.N.Y. Jan. 9, 2001); SEC v. Zubkis, 2000 WL218393 at *11 (S.D.N.Y. Feb. 23, 2000).
The Second Circuit has held that:
The primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws See e.g., v. Wang, 944 F.2d 80, 85 (2d Cir. 1991); SEC v. Commonwealth Chemical Securities. Inc., 574 F.2d 90, 102 (2d Cir. 1978). "The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable. The deterrent effect of an SEC enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits." SEC v. Manor Nursing Centers. Inc., 458 F.2d [1082,] 1104 [(2d Cir. 1972)]; see SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971) ("It would severely defeat the purposes of the Act if a violator of Rule 10b-5 were allowed to retain the profits from his violation.").SEC v. First Jersey Sec., Inc., 101 F.3d at 1474; accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *3; see also, e.g., SEC v. Fischbach Corp., 133 F.3d at 175 ("The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ingotten gains."); SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987),cert. denied, 486 U.S. 1014, 1015, 108 S.Ct. 1751 (1988); SEC v. McCaskey, 98 Civ. 6153, 2001 WL 1029053 at *7 (S.D.N.Y. Sept. 6, 2001) ("Disgorgement of illicit profits is a proper equitable remedy for securities fraud, designed to deprive wrongdoers of the profits of their wrongdoing.") (citations omitted); SEC v. Rosenfeld, 2001 WL 118612 at *1; SEC v. Zubkis, 2000 WL218393 at *11; SEC v. Bilzerian, 814 F. Supp. 116, 121 (D.D.C. 1993), affd, 29 F.3d 689 (D.C. Cir. 1994).
Unlike damages, "the primary purpose of disgorgement [to the SEC] is not to compensate investors," but rather to force "a defendant to give up the amount by which he was unjustly enriched." SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir. 1978) (Friendly, C.J.); accord, e.g., SEC v. Tome, 833 F.2d at 1096; SEC v. McCaskey, 2002 WL 850001 at *3; SEC v. McCaskey, 2001 WL 1029053 at *7 ("[T]he proper measure of disgorgement is the amount of the wrongdoer's unjust enrichment."); SEC v. Rosenfeld, 2001 WL 118612 at *1; SEC v. Bilzerian, 814 F. Supp. at 120-21. "Thus, the measure of disgorgement need not be tied to the losses suffered by defrauded investors, and a district court may order disgorgement regardless of whether the disgorged funds will be paid to such investors as restitution." SEC v. Fischbach Corp., 133 F.3d at 175-76 (citations omitted); accord, e.g., SEC v. Tome, 833 F.2d at 1096 (""[o]nce the Commission has established that a defendant has violated the securities laws, the district court possesses the equitable power to grant disgorgement without inquiring whether, or to what extent, identifiable private parties have been damaged by [the] fraud"'); SEC v. McCaskey, 2002 WL 850001 at *3.
"It is well established that disgorgement is remedial rather than punitive, since a fundamental policy underlying disgorgement is to prevent the unjust enrichment of the wrongdoer rather than to punish him." SEC v. Grossman 87 Civ. 1031, 1997 WL 231167 at *9 (S.D.N.Y. May 6, 1997),aff'd in part, vacated in part on other grounds sub nom. SEC v. Hirshberg, No. 97-6171, 97-6259, 173 F.3d 846 (table), 1999 WL 163992 (2d Cir. Mar. 18, 1999).
Accord, e.g., United States v. Carson, 52 F.3d 1173, 1183 (2d Cir. 1995) ("The Supreme Court has specifically identified an order of disgorgement as compensatory, as opposed to punitive, in nature."),cert. denied, 516 U.S. 1122, 116 S.Ct. 934 (1996); SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989) ("disgorgement may not be used punitively"); SEC v. Shapiro, 494 F.2d 1301, 1309 (2d Cir. 1974); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) ("the SEC may seek other than injunctive relief in order to effectuate the purposes of [the federal securities laws], so long as such relief is remedial relief and is not a penalty assessment"), cert. denied, 404 U.S. 1005, 92 S.Ct. 561 (1971); SEC v. McCaskey, 2002 WL 850001 at *4; SEC v. Bilzerian, 814 F. Supp. at 120 ("Disgorgement has consistently been recognized as remedial rather than punitive. Furthermore, disgorgement may not be used punitively.") (citations omitted).
"The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged." SEC v. First Jersey Sec., Inc., 101 F.3d at 1474-75;accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *4; see also, e.g., SEC v. Loin, 76 F.3d at 462; SEC v. Posner, 16 F.3d 520, 522 (2d Cir. 1994) (upholding district court disgorgement order, since "[t]he [district] court has broad discretion to tailor the sanction to the wrongful conduct involved."); SEC v. Rosenfeld, 2001 WL 118612 at *2. The disgorged amount must be "'causally connected to the violation,'" but it need not be figured with exactitude. SEC v. First Jersey Sec., Inc., 101 F.3d at 1475 (quoting SEC v. Patel, 61 F.3d at 139); accord, SEC SEC v. McCaskey, 2002 WL 850001 at *4, The only requirement is that the disgorgement sought be a reasonable approximation of the profits causally related to the wrongdoing. SEC v. First Jersey Sec., Inc., 101 F.3d at 1475; accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *4; see also, e.g., SEC v. Patel, 61 F.3d at 139; SEC v. Rosenfeld, 2001 WL 118612 at *2; SEC v. Bilzerian, 814 F. Supp. at 121-22.
"Where disgorgement calculations cannot be exact, 'any risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created that uncertainty.'" SEC v. Lorin, 76 F.3d at 462 (quoting SEC v. Patel, 61 F.3d at 140); accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *4. see also, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d at 1475; SEC v. First City Fin. Corp., 890 F.2d at 1232 (burden shifts to wrongdoer to show what transactions were unaffected by his offenses); SEC v. Bilzerian, 814 F. Supp. at 121. "Thus, once the Commission shows the existence of a fraudulent scheme in violation of federal securities laws, the burden shifts to the defendant to "demonstrat[e] that he received less than the full amount allegedly misappropriated and sought to be disgorged."' SEC v. Rosenfeld, 2001 WL 118612 at *2 (quoting SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987) (Leval, D.J.));accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *4; SEC v. Grossman, 1997 WL 231167 at *8 ("The SEC bears the burden of persuasion that its proposed disgorgement figure reasonably approximates the amount of unjust enrichment. . . . [O]nce the SEC has established that the proposed amount is reasonable, the burden shifts to the defendant to demonstrate that the amount requested is not a reasonable approximation of the unlawfully obtained profits."); SEC v. Bilzerian, 814 F. Supp. at 121.
Finally, financial hardship is not grounds for denying disgorgement. The "Court may order disgorgement in the amount of the wrongdoer's total gross profits, without giving consideration to whether or not the defendant may have squandered and/or hidden the ill-gotten profits." SEC v. Rosenfeld, 2001 WL 118612 at *2; accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *5; CFTC v. Avco Fin. Corp., 97 Civ. 3119, 1998 WL 524901 at *1 (S.D.N.Y. Aug. 21, 1998) ("declin[ing] to take into consideration Defendant's . . . claim of an inability to pay" disgorgement under Commodities Exchange Act), aff'd in part rev'd in part on other grounds sub nom. CFTC v. Vartuli, 228 F.3d 94 (2d Cir. 2000); SEC v. Grossman, 1997 WL 231167 at *10 ("there is no legal support for [defendant's] assertion that his financial hardship precludes the imposition of an order of disgorgement"); SEC v. Thomas James Assoc., Inc., 738 F. Supp. 88, 95 (W.D.N.Y. 1990) ("Nor may a securities law violator avoid or diminish his responsibility to return his ill-gotten gains by establishing that he is no longer in possession of such funds due to subsequent, unsuccessful investments or other forms of discretionary spending."). Entry of a disgorgement judgment is appropriate "despite a defendant's inability to pay, given that the defendant may subsequently acquire the means to satisfy the judgment." SEC v. Grossman, 1997 WL 231167 at *10 (citing cases). Although "'the Commission may choose to waive disgorgement upon satisfactory proof of inability to pay, it nonetheless is entitled to an order of disgorgement.'" Id. at *4 (citation omitted); accord, e.g., SEC v. MeCaskey, 2002 WL 850001 at *5.
B. Application of Disgorgement Law to Robinson's Case
The SEC requests that Robinson be ordered to disgorge a total of $438,844.14 that investors allegedly paid Robinson to purchase CVCA common stock. (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 3-4.).
In the case of a patently fraudulent stock offering, such as the case here, it is appropriate to order disgorgement of the entire (gross) proceeds received in connection with the offering. See, e.g., SEC v. ManorNursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) ("We hold that it was appropriate for the district court to order [defendants] to disgorge the proceeds received in connection with the [securities] SEC v. Interlink Data Network of Los Angeles. Inc., Civ. No. 93 3073, 1993 U.S. Dist. LEXIS 20163 at *53.54 (C.D. Cal. Nov. 15, 1993) (ordering disgorgement of gross amount received from fraudulent securities offering).
The Court also reiterates that Robinson's alleged financial hardship is not a basis to deny disgorgement. (See cases cited at pages 16-17 above.).
This Court, nevertheless, is unwilling to accept at face value the SEC's assertion that the public invested $438,844.14 in CVCA stock. "Where disgorgement calculations cannot be exact, 'any risk of uncertainty . . . should fall on the wrongdoer whose illegal conduct created that uncertainty.'" SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996). However, the SEC bears the initial "burden of persuasion that its proposed disgorgement figure reasonably approximates the amount of unjust enrichment." SEC v. Grossman, 87 Civ. 1031, 1997 WL 231167 at *8 (S.D.N.Y. May 6, 1997), aff'd in part, vacated in part on other grounds sub nom. SEC v. Hirshberg, No. 97-6171, 97-6259, 173 F.3d 846 (table), 1999 WL 163992 (2d Cir. Mar. 18, 1999). Here, in support of its $438,844.14 disgorgement figure, the SEC proffered a list of CVCA shareholders (Dkt. No. 48: Ex. 15), copies of Robinson's bank records (id. Ex. 10), and SEC schedules itemizing the activity in Robinson's bank accounts (id. Ex. 11). According to the testimony of an SEC staff accountant the $438,844.14 figure represents the total "deposited" into Robinson's bank accounts from September 1999 through October 2000. (id. Ex. 13B: Laroux: 12/19/00 P.I. Hearing Tr. 72-73.) The SEC, however, offered no evidence that these deposits represented only receipts from investors in CVCA stock.
The Court notes that the SEC's Rule 56.1 Statement asserts that Robinson and CVCA received $445,288.09 from investors — a different figure that does not inspire confidence. (Dkt. No. 26: SEC Rule 56.1 Stmt. ¶ 40.)
Robinson conceded at the preliminary injunction hearing that he received $420,000 or slightly more from investors in CVCA stock. (Dkt. No. 48: Ex. 13A: Robinson 11/29/00 P.I. Hearing Tr. 23-24; see also Dkt. No. 32: Robinson 9/8/01 Aff. ¶ 17: "over $400,000.00 [was] invested" in CVCA; Dkt. No. 5: Answer; page 2 n. I above.) The Court therefore uses the $420,000 number that Robinson has admitted to and recommends that Robinson be ordered to disgorge $420,000 that was invested by the general public in CVCA stock.
C. Prejudgment Interest
The SEC has also requested an award of prejudgment interest totaling $59,028.12 based on the amount disgorged. (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 4.) The decision of whether to order prejudgment interest, like the decision to grant disgorgement and in what amount, is left to the district court's "broad discretion." SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1476 (2d Cir. 1996) (citation omitted);accord, e.g., SEC v. McCaskey, 98 Civ. 6153, 2002 WL 850001 at *12 n. 17 (S.D.N.Y. Mar. 26, 2002) (Peck, M.J.); see also, e.g., Rolf v. Blyth. Eastman Dillon Co., 637 F.2d 77, 86 (2d Cir. 1980); SEC v. Grossman, 87 Civ. 1031, 1997 WL 231167 at *11 (S.D.N.Y. May 6, 1997), affd in part, vacated in part on other grounds sub nom. SEC v. Hirshberg, No. 97-617 1, 97-6259, 173 F.3d 846 (table), 1999 WL 163992 (2d Cir. Mar. 18, 1999). "[R]equiring the payment of interest prevents a defendant from obtaining the benefit of 'what amounts to an interest free loan procured as a result of illegal activity.'" SEC v. Grossman, 1997 WL 231167 at *11 (quoting SEC v. Moran, 944 F. Supp. 286, 295 (S.D.N.Y. 1996)); accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *12 n. 17.
"In deciding whether an award of prejudgment interest is warranted, a court should consider "(i) the need to fully compensate the wronged party for actual damages suffered, (ii) considerations of fairness and the relative equities of the award, (iii) the remedial purpose of the statute involved, and/or (iv) such other general principles as are deemed relevant by the court.' In an enforcement action brought by a regulatory agency, the remedial purpose of the statute takes on special importance."SEC v. First Jersey Sec., Inc., 101 F.3d at 1476 (citations omitted);accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *12 n. 17. (See also Dkt. No. 52: S.J. Tr. 28.) In light of that remedial purpose, and considering the egregious nature of Robinson's fraudulent scheme, an award of interest is appropriate here. See SEC v. Grossman, 1997 WL 231167 at * 11 ("In determining the appropriateness of an interest award, courts rely heavily on the level of the defendant's culpability."); accord, e.g., SEC v. McCaskey, 2002 WL 850001 at * 12 n. 17. As the SEC suggested, such interest should be calculated at the IRS underpayment rate see SEC v. First Jersey Sec., Inc., 101 F.3d at 1476;SEC v. McCaskey, 2002 WL 850001 at * 12 n. 17, commencing August 1, 2000 — the midpoint of the stock offering (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 4 n. 4). However, the SEC must recalculate the interest based on a revised disgorgement total of $420,000.
III. ROBINSON SHOULD BE ORDERED TO PAY A CIVIL MONETARY PENALTY OF $100.000
The SEC also seeks an order requiring Robinson to pay up to $22,770,000 as a civil monetary penalty pursuant to Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), and Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3). (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 4-6.) The SEC bases this calculation on 207 investors and the maximum penalty of $110,000 per violation. (Id. at 5.)
Civil penalties were enacted by Congress to deter securities law violations. See, e.g., SEC v. Palmisano, 135 F.3d 860, 866 (2d Cir.),cert. denied, 525 U.S. 1023, 119 S.Ct. 555 (1998); SEC v. McCaskey, 98 Civ. 6153, 2002 WL 850001 at *12 (S.D.N.Y. Mar. 26, 2002) (Peck, M.J.);SEC v. Coates, 137 F. Supp.2d 413, 428 (S.D.N.Y. 2001); SEC v. Rosenfeld, 97 Civ. 1467, 2001 WL 118612 at *4 (S.D.N.Y. Jan. 9, 2001) (quoting SEC v. Moran, 944 F. Supp. 286, 296 (S.D.N.Y. 1996)). The relevant House Report stated:
"The Committee believes that the money penalties proposed in this legislation are needed to provide financial disincentives to securities law violations other than insider trading. . . . Absent a criminal prosecution or a private suit for damages . . . even the defendant who makes a deliberate decision to violate the law and causes significant harm to the markets does not risk any monetary sanction more severe than an order of disgorgement. Disgorgement merely requires the return of wrongfully obtained profits; it does not result in any actual economic penalty or act as a financial disincentive to engage in securities fraud. A violator who avoids detection is able to keep the profits resulting from illicit activities. Currently, even a violator who is caught is required merely to give back his gains with interest, leaving him no worse off financially than if he had not violated the law. The Committee therefore concluded that authority to seek or impose substantial money penalties, in addition to the disgorgement of profits, is necessary for the deterrence of securities law violations that otherwise may provide great financial returns to the violator."SEC v. Coates, 137 F. Supp.2d at 428-29 (quoting H.R. Rep. No. 101-6 16 (1990)); accord, e.g., SEC v. McCaskey, 2002 WL 850001 at *12-13 (quoting same House Report); SEC v. Moran, 944 F. Supp. at 296 (same).
Where a securities law violation has been proven, the Court is authorized to impose such civil monetary penalties, with the amount of any penalty to be "determined by the court in light of the facts andcircumstances." 15 U.S.C. § 77t(d)(2)(A), 78u(d)(3)(B)(i); 17 C.F.R. § 201.1001. Sections 20(d) and 21(d) establish three tiers of penalties. A first tier penalty of up to $5,500 per violation is appropriate for any securities law violation. Id. If however, the violation "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement," second tier penalties of up to $55,000 per violation apply. 15 U.S.C. § 77t(d)(2)(B), 78u(d)(3)(B)(ii); 17 C.F.R. § 201.1001. If the violation, in addition to second tier factors, "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons," third tier penalties of up to $110,000 per violation are appropriate. 15 U.S.C. § 77t(d)(2)(C), 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1001.
17 C.F.R. § 201.1001 provides an inflationary adjustment to the statutory penalties for violations occurring, as here, after December 9, 1996 and before February 2, 2001.
A civil penalty may, of course, be assessed in addition to disgorgement, see, e.g., v. Rosenfeld, 2001 WL 118612 at *4; SEC v. Berger, 00 Civ. 333, 2001 WL 1403028 at *10-11 (S.D.N.Y. Nov. 13, 2001).
The SEC's request for a "third tier" penalty should be granted (but not in the amount of $22 million sought by the SEC). First, Judge Berman's summary judgment opinion found violations of both Section 10(b) of the Exchange Act (and Rule 10-5 thereunder) and Section 17(a) of the Securities Act (Dkt. No. 52: Tr. 26; Dkt. No. 42: Summary Judgment Order), thus establishing the predicate for civil monetary penalties.See, e.g., SEC v. Todt 7 Fed. Appx. 98, 99 (2d Cir. 2001) (affirming civil monetary penalties of $200,000 and $100,000 against two defendants for violations of Section 17(a)).
Second, Robinson concedes that he sold to unwitting members of the investing public at least $420,000 in CVCA stock. (See, page 2 n. 1 page 18 above.) Given CVCA's prospects, it is a certainty that Robinson's sales of stock "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § 77t(d)(2)(C), 78u(d)(3)(B)(iii).
Third, as Judge Berman noted, Robinson's misrepresentations were "outrageous" and "flagrant," and his authorship of the offerings showed him to be "highly culpable." (Tr. 27.) Indeed, his wrongful acts did not even cease after the Court issued its December 21, 2000 Preliminary Injunction. (Id.)
Fourth, Robinson's failure to own up to his wrongdoing in the face of overwhelming evidence lends further support to the penalty. See, SEC v. Coates, 137 F. Supp.2d at 430 (defendant's failure to take responsibility for his actions was factor in civil penalty); SEC v. Moran, 944 F. Supp. at 297 (defendant's "failure to recognize the harm that his negligence caused, coupled with apparent lack of understanding of the significance of his actions, warrant the imposition of the maximum penalty permitted").
The SEC's current submission noted that the civil penalty, at $110,000 times 207 investors, could "amount [to] as much as $22,770,000." (Dkt. No. 48: SEC 3/20/02 Remedies Br. at 5.) Perhaps recognizing that the Court was not likely to award such a penalty (and that even if it did, the SEC could never collect from Robinson anything near that amount), the SEC suggested "[i]n the alternative" that a "significant civil penalty against Robinson is appropriate." (Id. at 5-6.) The SEC's Remedies Brief did not quantify what it meant by "significant." Surprisingly, the SEC's Remedies Brief did not refer to its prior summary judgment brief where the SEC stated:
The SEC did cite to SEC v. Rosenfeld, 2001 WL 118612 at *4 (SEC 3/20/02 Remedies Br. at 6 n. 1 1), where the Court ordered a civil penalty equal to the amount of the defendant's "pecuniary gain" — $420,000 in Robinson's case.
Each sale in this case could be deemed a violation. But in this case and under these circumstances, the Commission recommends only a $100.000 penalty be assessed. . . . Notwithstanding [Robinson's egregious misconduct], the Commission feels a $100,000 penalty will serve as an effective reminder of past illegal conduct and a significant inducement to future compliance.
(Dkt. No. 25: SEC 7/17/01 S.J. Br. at 20.) While based on the magnitude, duration and egregious nature of Robinson's scheme the Court would otherwise have willingly recommended a third tier civil penalty of $420,000 (the amount of Robinson's gain), in light of the SEC's recommendation of a $100,000 civil penalty, the Court recommends that Robinson be ordered to pay a civil penalty of $100,000. That amount is commensurate with penalties assessed by other courts. See e.g., SEC v. McCaskey, 2002 WL 850001 at *15 ($100,000 civil penalty); SEC v. Berger, 2001 WL 1403028 at * 10 ("In light of the magnitude and duration of the fraud at issue, as well as the degree of scienter involved, the imposition of a civil penalty in the amount of $100,000 is appropriate in this case"); SEC v. Enterprises Solutions. Inc., 142 F. Supp.2d 561, 579 (S.D.N.Y. 2001) ($100,000 third tier penalty); SEC v. Todt, 98 Civ. 3980, 2000 WL 223836 at *13 (S.D.N.Y. Feb. 25, 2000) ("the audacity of the fraud, the magnitude of the sums involved, the repeated nature of the offenses, and the egregious explanations under oath all warrant the imposition of the maximum penalty allowed"; $200,000 penalty imposed, based on $50,000 times four violations), Aff'd, 7 Fed. Appx. 98 (2d Cir. 2001).
Finally, Robinson asserts that no monetary penalty should be assessed because he has "no money or assets" to pay a fine "and no reasonable prospect of being able to pay in the future." (Dkt. No. 51; see also Dkt. No. 50: 3/1 1/02 Robinson Letter to the Court.) A defendant's finances are relevant to the size of a civil penalty. See, e.g., SEC v. Rubin, 91 Civ. 6531, 1993 WL 405428 at *7 (S.D.N.Y. Oct. 8, 1993) (court considers defendant's "impecunious . . . financial condition" in imposing only a $1,000 penalty). Robinson, however, has offered no admissible evidence to support his claim of poverty — despite the Court's express written admonition to Robinson that "the mere statement that he has no money is not sufficient to support his burden on this issue." (Dkt. No. 51: 3/22/01 Memo Endorsed Order.)
In short, Robinson has not sustained his burden of showing that he is financially unable to pay a civil penalty. For the reasons set forth above, the Court should impose a civil monetary penalty of $100,000.
CONCLUSION
For the reasons set forth above, this Court recommends an order: (1) permanently barring Robinson from serving as an officer or director of any public company, (2) mandating disgorgement in the amount of $420,000 in addition to prejudgment interest (to be re-calculated by the SEC); and (3) levying a civil monetary penalty in the amount of $100,000.
FILING OF OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from service of this Report to file written objections. See also Fed.R.Civ.P. 6. Such objections (and any responses to objections) shall be filed with the clerk of the Court, with courtesy copies delivered to the chambers of the Honorable Richard M. Berman, 40 Centre Street, Room 201, and to my chambers, 500 Pearl Street, Room 1370. Any requests for an extension of time for filing objections must be directed to Judge Berman. Failure to file objections will result in a waiver of those objections for purposes of appeal. Thomas v. Arn, 474 U.S. 140, 106S.Ct. 466 (1985); IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1054 (2d Cir. 1993), cert. denied, 513 U.S. 822, 115 S.Ct. 86 (1994); Roldan v. Racette, 984 F.2d 85, 89 (2d Cir. 1993); Frank v. Johnson, 968 F.2d 298, 300 (2d Cir.), cert. denied, 506 U.S. 1038, 113 S.Ct. 825 (1992); Small v. Secretary of Health Human Servs., 892 F.2d 15, 16 (2d Cir. 1989);Wesolek v. Canadair Ltd., 838 F.2d55, 57-59 (2d Cir. 1988); McCarthy v. Manson, 714 F.2d 234, 237-38 (2d Cir. 1983); 28 U.S.C. § 636 (b)(1); Fed.R.Civ.P. 72, 6(a), 6(e).