Opinion
02 Civ. 253 (SWK).
June 25, 2003.
OPINION ORDER
Plaintiff Securities and Exchange Commission ("SEC") moves for summary judgment against defendant Darius L. Lee in connection with an alleged fraudulent scheme to sell unregistered securities purportedly issued by JB Stanley Group, LP ("JB Stanley"), Cambridge Capital Holdings Management, LLC ("Cambridge"), and Union Transfer and Cargo Corporation ("UTC"), a subsidiary of Cambridge. Lee has not responded to the motion. Lee was notified that his response was to be served upon the SEC on or before March 21, 2003.
For the reasons set forth below, plaintiff's summary judgment motion is granted and judgment entered against defendant Darius L. Lee permanently enjoining him from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77e(a), 77e(c), and 77q(a), and Section 10(b) of the Securities and Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, and ordering Lee to pay the amount of $10,691.13.
I. FACTS
In January 2002, plaintiff filed a complaint against defendants Jean Baptiste Jean Pierre, Gabriel Toks Pearse and Darius L. Lee alleging that each were involved in a fraudulent scheme to sell shares of JB Stanley, Cambridge and UTC, three related companies controlled by Jean Pierre. Jean Pierre was president and chief executive officer of JB Stanley, president of Cambridge, and chairman of UTC. Pearse, an employee of Cambridge and UTC, drafted allegedly false and misleading offering documents and newsletters regarding the companies that were sent to investors. Lee, as an employee of JB Stanley and Cambridge, solicited purchases of JB Stanley, Cambridge and UTC by making allegedly false statements about the offerings. Lee was employed at JB Stanley and Cambridge as an account executive and salesman from November 1998 to September 1999.
A default judgment against Jean Pierre has been entered in this action. The New York Attorney General's Office has advised the SEC that Jean Pierre is a fugitive from justice.
Pearse executed a settlement offer with the SEC on February 4, 2003, which was so ordered and entered by the Court on March 19, 2003.
JB Stanley, Cambridge and UTC all operated out of one office located at 67 Wall Street, Suite 2411, in New York, New York. JB Stanley was a purported hedge fund and asset management firm; Cambridge was the general partner of, and investment advisor to, JB Stanley; UTC, a wholly-owned subsidiary of Cambridge, operated a wire transfer business in Brooklyn, New York, as an agent of MoneyGram, for approximately two months from November 1999 through January 2000.
Plaintiff alleges that from approximately February 1999 through August 1999, Lee solicited numerous investors and offered to sell them JB Stanley limited partnership interests. During that period, JB Stanley raised at least $291,700.00 from the sale of limited partnership interests in JB Stanley, with Lee raising at least $53,000.00 from at least eight investors. The offering of JB Stanley securities was not registered with the SEC, and there is no claim that it was exempt from registration. See Plf. SEC Mem. of Law in Supp. of Motion for Summary Judgment ("SEC Mem."), dated March 6, 2003, at 4.
Additionally, as an employee of Cambridge, Lee solicited investors and offered to sell them Cambridge stock for $5.00 per share in a purported private placement. From January 1998 through September 1999, Cambridge raised $116,000.00 from the sale of Cambridge stock to 11 investors, of which Lee personally raised at least $90,000.00 from at least nine investors. On January 21, 1999, Cambridge filed a Form D with the SEC, seeking to sell shares to the public that were purportedly exempt from registration under Regulation D and Rule 506 promulgated thereunder. However, that exemption requires that investors be "accredited," and Lee admits that several investor applications were received from investors that did not identify themselves as accredited. See Decl. of David A. Markowitz in Supp. of SEC's Motion for Summary Judgment at 2, Ex. I at 202:8-204:25.
Lee also induced at least one investor to purchase shares of UTC with proceeds of a $10,000.00 check sent to JB Stanley. UTC did not file a registration statement with the SEC, and there is no claim that the UTC offering was exempt from registration.See SEC Mem. at 5.
Plaintiff alleges that Lee made a number of false and misleading statements regarding each of the above offerings. Lee allegedly made oral misrepresentations to investors and knew that the materials containing false statements were being mailed to investors. Specifically, the SEC alleges that Lee made the following oral misrepresentations to investors in an attempt to solicit purchases in the various offerings:
• In connection with the offer and sale of JB Stanley limited partnership interests, Lee told investors that JB Stanley is a hedge fund and money or asset management firm that pooled investor funds to purchase and sell securities. In fact, a substantial portion of investor funds was not pooled for investing but instead was misappropriated by Jean Pierre and his affiliates.
• Lee also told investors that JB Stanley would conduct an IPO, at a specific price, which would allow investors to sell their JB Stanley shares for a profit. In fact, JB Stanley never was in a position to conduct an IPO, never took any steps to prepare for one, and never conducted any legitimate business.
• Similarly, in connection with the offer and sale of Cambridge stock, Lee told several investors that Cambridge would be imminently conducting an IPO and investors would be able to sell their shares for a substantial profit. For example, in or around February 1999, Lee told at least two investors that Cambridge would conduct an IPO of its shares in September 1999 at $15 per share. Lee told another investor that Cambridge would conduct an IPO within one year that would cause the value of Cambridge stock to at least double. Lee advised yet another investor that he would be able to resell any private placement shares for two to three times the $5 purchase price. Lee admitted to having told investors that Cambridge would go public at between $10 and $12 per share, though he said this was "not a price prediction." Cambridge, however, neither conducted an IPO nor took any steps to prepare for one.
• Lee also misrepresented to investors that Jean Pierre had consistently achieved a 50% return from other funds that he managed. Lee had no basis for making his false statement, particularly given that Lee had no knowledge, nor did he ever try to determine, whether Jean Pierre had managed any funds other than JB Stanley.
• Lee also induced at least one investor to purchase shares of UTC by telling him that UTC was structured along the lines of Western Union, that UTC stock would trade publicly within one year, and that the investor could earn up to 4 to 5 times the amount invested if their money was kept in UTC for at least one year. However, UTC was a start-up, local enterprise that only conducted a wire transfer business for two months.
SEC Mem. at 6-7 (citations omitted).
Plaintiff further alleges that Lee knew of a series of fraudulent written materials that were being mailed to potential investors. These written misrepresentations included: false account statements to investors that overstated the performance of the JB Stanley fund; misstatements in the JB Stanley brochure regarding the experience of its employees and its prominence as an asset management firm; misstatements in the April 1999 Cambridge quarterly report regarding the structure of UTC's business and a proposed merger with another company; and misrepresentations in a 1999 letter sent to JB Stanley investors soliciting investments in UTC. See SEC Mem. at 7-11. Lee allegedly did not investigate any of the offerings before soliciting investors to purchase securities and "ignored numerous red flags that a fraud was occurring." Id. at 11.
II. DISCUSSION
Plaintiff brought this motion for summary judgment on March 6, 2003. Attached to the notice of motion was a "Notice to Pro Se Litigant Opposing Motion for Summary Judgment" which outlined the proper procedures for filing an opposition to the motion and the consequences of failing to oppose the motion. Moreover, affixed to the Notice was a copy of Rule 56 of the Federal Rules of Civil Procedure. To date, Lee has not responded to Plaintiff's summary judgment motion, and his response was to be served on or before March 21, 2003.
Pursuant to Fed.R.Civ.P. 56(e), if the non-movant fails to respond to a summary judgment motion, "summary judgment, if appropriate, shall be entered against the adverse party." As the Second Circuit has previously announced:
litigants should be on notice from the very publication of Rule 56(e) that a party faced with a summary judgment motion "may not rest upon the mere allegations or denials" of the party's pleading and that if the party does not respond properly, "summary judgment, if appropriate, shall be entered" against him.Champion v. Artuz, 76 F.3d 483, 485 (2d Cir. 1996) (quotingGraham v. Lewinski, 848 F.2d 342, 344 (2d Cir. 1988)).
However, the Second Circuit has cautioned that "summary judgment should not be entered by default against a pro se [party] who has not been given any notice that failure to respond will be deemed a default." Champion v. Artuz, 76 F.3d at 486; see also Ruotolo v. IRS, 28 F.3d 6, 8-9 (2d Cir. 1994); Graham v. Lewinski, 848 F.2d at 344. "The notice should be `easily comprehensible' and inform the pro se party that `failure to respond' to the summary judgment motion `will be deemed a default.'" In re Towers Fin. Corp. Noteholders Litig., 996 F. Supp. 266, 272 (S.D.N.Y. Jan. 8, 1998) (quotingChampion v. Artuz, 76 F.3d at 486)). In Champion v. Artuz, the Second Circuit found satisfactory a notice that "expressly warned" the pro se party that (1) "under Rule 56(e) he could not simply rely on his complaint"; (2) if the pro se party did not respond to the motion with an affidavit or other evidence, the factual assertions in the moving party's affidavits would be accepted as true; (3) if the pro se party does "not provide the court with a short statement of any material facts as to which he contend[s] there existed a genuine issue, the court would accept the assertions of the [moving party's] Rule 3(g) [now S.D.N.Y. Local Rule 56.1] statement as true"; and (4) if the pro se party "did not respond to the motion with his own evidence, summary judgment could be granted against him." 76 F.3d at 486;see also In re Towers Fin. Corp. Noteholders Litig., 996 F. Supp. at 272; Anderson v. Phoenix, 95 Civ. 4605, 1997 WL 362255, *2 (S.D.N.Y. June 27, 1997); Reaves v. Williams, 95 Civ. 0281, 1997 WL 10132, *3 (S.D.N.Y. Jan. 10, 1997); Dent v. Bliden, 93 Civ. 5609, 1996 WL 721087, *2 (S.D.N.Y. Dec. 13, 1996).
In the instant case, Plaintiff notified Lee that failure to respond to the motion could result in plaintiff's summary judgment motion being granted. That notice clearly gave Lee ample notice of the possibilty of a default being entered against him if he failed to respond. Moreover, the notice outlined the proper procedures for submitting a response to the motion and the due date of such a response.
In the Second Circuit, ordinarily "[t]he fact that there has been no response to a summary judgment motion does not . . . mean that the motion is to be granted automatically. Such a motion may be properly granted only if the facts as to which there is no genuine dispute `show that the moving party is entitled to a judgment as a matter of law.'" Champion v. Artuz, 76 F.3d at 486; see also In re Towers Fin. Noteholders Litiq., 996 F. Supp. at 273 (citing cases). "Nevertheless, the courts in this Circuit have granted summary judgment by default where a party has failed to respond to the motion in violation of court rules and/or scheduling orders." In re Towers Fin. Corp. Noteholders Litiq., 996 F. Supp. at 273 (citing cases).
Defendant Lee was served with a copy of Rule 56, which directed him to provide a response to the motion. In addition, Lee was on notice that any and all answering papers were to be served by him on or before March 21, 2003. See Notice of Securities and Exchange Commission's Motion for Summary Judgment, dated March 6, 2003, at 2. The deadline for submission of a response to the motion has long passed, and no opposition papers (or request for an extension of time) have been received. Further, there are no material facts in dispute in this matter, and on the basis of the evidence submitted by the SEC, plaintiff is entitled to judgment as a matter of law. Lee's actions, as alleged by plaintiff, rise to the level of securities fraud, pursuant to Sections 5(a), 5(c) and 17(a) of the Securities Act, 15 U.S.C. § 77e(a), 77e(c), and 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Accordingly, the Court hereby grants plaintiff's motion for summary judgment as against defendant Darius L. Lee.
III. CONCLUSION
Pursuant to Sections 20(b) of the Securities Act and 21(e) of the Exchange Act, the Court has the authority to permanently enjoin future violations of federal securities laws in civil actions brought by the SEC. The Court finds that the SEC has made a showing that: (1) violations of the securities laws have occurred; and (2) there is a substantial likelihood that securities laws violations will occur in the future. See, e.g., SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir. 1998). Therefore, Lee is permanently enjoined from future violations of Sections 5(a), 5(c) and 17(a) of the Securities Act, 15 U.S.C. § 77e(a), 77e(c), and 77q(a), and Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
Moreover, the SEC has demonstrated that Lee received at least $8,050.00 in connection with the offerings by JB Stanley, Cambridge and UTC. Disgorgement as an equitable remedy is designed to compel a defendant to "give up the amount by which he was unjustly enriched." SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987); Sarbanes-Oxley Act of 2002, Pub.L. No. 107-204, § 305, 116 Stat. 745, 779 (2002). Therefore, Lee is ordered to disgorge $8,050.00 plus prejudgment interest in the amount of $2,641.13, such payment shall be due and payable immediately upon entry of this Order.
Prejudgment interest was calculated at the "IRS underpayment rate." Decl. of James S. Kasmarcik in Supp. of the SEC's Motion for Summary Judgment, dated March 6, 2003 at ¶ 6-7, Ex. D.
Additionally, a civil monetary penalty, as authorized by statute, is appropriate in this case. See Section 20(d) of the Securities Act, 15 U.S.C. § 77t(d), Section 21(d) of the Exchange Act, 15 U.S.C. § 77u(d), and Section 209(e) of the Advisors Act, 15 U.S.C. § 80b-9; SEC v. Palmisano, 135 F.3d 860, 865 (2d Cir. 1998) (citing legislative history of "Remedies Act"), cert. denied, 525 U.S. 1023 (1998). The Court hereby orders Lee to pay a civil monetary penalty in the amount of $25,000.00, such penalty to be due and payable immediately upon entry of this Order.
SO ORDERED.