Opinion
1:15-cv-05456 (GBD) (SDA)
08-08-2023
Securities and Exchange Commission, Plaintiff, v. Harold Bailey Gallison, et al., Defendants.
TO THE HONORABLE GEORGE B. DANIELS, UNITED STATES DISTRICT JUDGE
REPORT AND RECOMMENDATION
STEWART D. AARON, UNITED STATES MAGISTRATE JUDGE
In the Memorandum Decision and Order adopting the prior Report and Recommendation in this case, Sec. & Exch. Comm'n v. Gallison, No. 15-CV-05456 (GBD) (SDA), 2023 WL 3004882 (S.D.N.Y. Feb. 4, 2023), report and recommendation adopted, 2023 WL 3090857 (S.D.N.Y. Apr. 26, 2023), this case was recommitted to the undersigned for a hearing to determine civil penalties, disgorgement and prejudgment interest. See Gallison, 2023 WL 3090857, at *4. Based upon the hearing testimony and the parties' post-hearing submissions, the Court respectfully recommends that civil penalties in the amount of $150,000.00 be imposed upon Robert S. Oppenheimer (“Oppenheimer”) and civil penalties of $725,000.00 be imposed upon Core Business One, Inc. (“CBO”); that Oppenheimer and CBO be ordered to disgorge the sum of $480,000.00, jointly and severally; and that the SEC be awarded prejudgment interest in the amount of $300,858.59 against Oppenheimer and CBO, jointly and severally.
BACKGROUND
Plaintiff, the Securities and Exchange Commission (“Plaintiff” or the “SEC”), brought this action against various defendants, including Oppenheimer and CBO, pursuant to Section 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77e; Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5(b) promulgated thereunder; and Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2). (Compl., ECF No. 37.) On March 1, 2022, the Court granted the SEC's motion for summary judgment in its entirety, finding that Oppenheimer and CBO violated Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act. See Sec. & Exch. Comm'n v. Gallison, 588 F.Supp.3d 509, 521-26 (S.D.N.Y. 2022).
On May 24, 2022, the Court denied the request by Oppenheimer and CBO for leave to file a motion for reconsideration. (See 5/24/22 Order, ECF No. 402.)
On September 30, 2022, the SEC filed a motion for remedies and entry of final judgments against Oppenheimer and CBO. (9/30/22 Mot., ECF No. 415.) In a Report and Recommendation, dated February 4, 2023 (“2/4/23 R&R”), the undersigned recommended that the SEC's motion be granted in part and denied in part. See Gallison, 2023 WL 3004882, at *5. Relevant to the matter presently before the Court, the undersigned recommended that a hearing be held with respect to the appropriate amounts of civil penalty, disgorgement and prejudgment interest to be imposed upon Oppenheimer and CBO. See id.
On April 26, 2023, District Judge Daniels adopted the 2/4/23 R&R, and recommitted this case to the undersigned for a hearing to determine civil penalty, disgorgement and prejudgment interest. See Gallison, 2023 WL 3090857, at *3-4. A hearing was held on June 27, 2023. (See 6/27/23 Tr., ECF No. 453.) The parties filed initial post-hearing memoranda on July 24, 2023 (see Pl.'s 7/24/23 Mem., ECF No. 455; Defs.' 7/24/23 Mem., ECF No. 456), and reply memoranda on August 7, 2023. (See SEC 8/7/23 Mem., ECF No. 457; Defs.' 8/7/23 Mem., ECF No. 458.)
DISCUSSION
Having carefully considered the evidence submitted at the June 27, 2023 hearing, as well as the parties' post-hearing submissions,the Court separately considers below (I) civil penalties, (II) disgorgement and (III) prejudgment interest.
The reply memorandum submitted on behalf of Oppenheimer and CBO appears to suggest that there is no basis in the record for their liability, arguing that “in the eight years this case has been pending, nothing alleged in the Complaint has been tried to conclusion” and that “there are no findings of fact that can be relied on [in] this case.” (See Defs.' 8/7/23 Mem. at 10.) However, liability already has been established, since Judge Daniels previously granted summary judgment against them, finding that they violated Sections 5 and 17(a) of the Securities Act and Section 10(b) of the Exchange Act. See Gallison, 588 F.Supp.3d at 521-26.
I. Civil Penalties
A. Legal Standards
Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act provide three tiers of civil penalties for securities law violations. 15 U.S.C. §§ 77t(d)(2), 78u(d)(3). Each tier provides for a penalty not to exceed the “gross amount of pecuniary gain to such defendant as a result of the violation.” Id. The highest tier of penalties -- the third tier -- may be imposed “for each . . . violation” that involved “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement,” and “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons.” Id. §§ 77t(d)(2)(C); 78u(d)(3)(b)(iii). The maximum Tier III penalty is the greater of “the gross amount of pecuniary gain to [the] defendant as a result of the violation” or a maximum statutory amount that is adjusted for inflation. Id. §§ 77t(d)(2)(C); 78u(d)(3)(b)(iii). For each violation from March 4, 2009 to March 5, 2013 (the relevant period), the statutory per-violation maximum third tier penalty amount is $150,000.00 for individuals and $725,000.00 for entities. See 17 C.F.R. § 201.1001 (Table I).
Courts have discretion to determine the appropriate amount of a civil penalty “in light of the facts and circumstances.” Sec. & Exch. Comm'n v. Rajaratnam, 918 F.3d 36, 44 (2d Cir. 2019) (citation omitted). Courts often consider several factors in making this determination, including:
(1) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant's demonstrated current and future financial condition.Id.
B. Application
The SEC seeks civil penalties equal to statutory maximum third-tier penalties for a single violation, in the amounts of $150,000.00 for Oppenheimer and $725,000.00 for CBO. (See Pl.'s 7/24/23 Mem. at 9.) Considering the factors relevant to the determination of civil penalties, the Court finds that third-tier penalties are appropriate.
Based upon the Court's Memorandum Decision and Order granting summary judgment, Oppenheimer and CBO engaged in egregious conduct, inasmuch as they knowingly engaged in misconduct involving an unregistered offering of Everock, Inc. (“EVRN”) shares. The Court found that “Oppenheimer and CBO were necessary participants in the purchase and sale of EVRN shares” and “played a substantial role throughout the scheme beginning with participation in the reverse merger.” Gallison, 588 F.Supp.3d at 521. In addition, the Court found that “[t]here is a strong likelihood that, but for roles played by Oppenheimer and CBO, the reverse merger [which undergirded the execution of the scheme to manipulate the market for EVRN stock] would not have occurred,” Id. at 522, and that Oppenheimer and CBO acted with scienter. Id. at 524-26. The SEC submitted evidence (which evidence Oppenheimer and CBO failed to rebut) reflecting that more than $2.4 million in proceeds were generated through the sales of EVRN stock. (See 7/7/23 Tr. at 87-88; Ferrante 6/19/19 Decl., ECF No. 295-23, ¶ 11.) As noted in the 2/24/23 R&R, the conduct at issue in this case was not an isolated occurrence. See Gallison, 2023 WL 3004882, at *2.) Finally, Oppenheimer and CBO have made no showing that their financial condition warrants reducing the penalty.
Accordingly, it is recommended that civil penalties in the amount of $150,000.00 be imposed upon Oppenheimer and civil penalties of $725,000.00 be imposed upon CBO.
II. Disgorgement
A. Legal Standards
“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. & Exch. Comm'n v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013) (citation omitted). Disgorgement is “a remedy tethered to a wrongdoer's net unlawful profits.” Liu v. SEC, __U.S. __, 140 S.Ct. 1936, 1943 (2020). The amount of disgorgement ordered may not “exceed the gains made upon any business or investment, when both the receipts and payments are taken into the account.” Id. at 1949-50 (citation 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. & Exch. Comm'n v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (citation omitted).
The Second Circuit applies a two-step framework for calculating equitable monetary relief. A plaintiff must first show that its calculations are a “reasonable approximation” of the amount of a defendant's unjust gains, and then the defendant may show that those figures are inaccurate. See Razmilovic, 738 F.3d at 31-32. “If the disgorgement amount is generally reasonable, any risk of uncertainty about the amount falls on the wrongdoer whose illegal conduct created that uncertainty.” Sec. & Exch. Comm'n v. Fowler, 6 F.4th 255, 267 (2d Cir.), cert. denied, 142 S.Ct. 590 (2021) (citation omitted); see also Sec. & Exch. Comm'n v. Ahmed, 72 F.4th 379, 398 (2d Cir. 2023) (“[defendant] bears the risk of uncertainty affecting the size of disgorgement”).
B. Application
The SEC seeks disgorgement in the amount of $480,000.00, which it contends is the amount of illegal trading proceeds received by Oppenheimer through CBO. (See Pl.'s 7/24/23 Mem. at 17.) The SEC states that it “intends to return disgorged funds from any defendants for the benefit of investors in this case.” (Pl.'s 7/24/23 Mem. at 16 (citing Liu, 140 S.Ct. at 1947-48).)
SEC Accountant Ferrante (“Ferrante”), who testified at the June 26, 2023 hearing, calculated the $480,000.00 amount by “adding the amounts received in the CBO bank accounts via check, wire or electronic credit from other defendants in this matter. . . who were involved in the pump-and-dump scheme to manipulate the EVRN stock price ....” (6/27/23 Tr. at 88; Ferrante 9/30/22 Decl., ECF No. 417, ¶ 5.) The Court finds that the $480,000.00 is a reasonable approximation of the unjust gains received by Oppenheimer and CBO. Oppenheimer and CBO made no showing that this number is inaccurate. Indeed, Oppenheimer testified at the June 27, 2023 hearing that he did not “have a reason to doubt” Ferrante's $480,000.00 calculation.(6/27/23 Tr. at 39-40.)
In its reply memorandum, the SEC offers to submit additional witness testimony regarding the $480,000 that was received by Oppenheimer and CBO. (See SEC 8/7/23 Mem. at 3 n.2.) The Court finds that such additional testimony would be cumulative and thus is not needed.
Significantly, Oppenheimer and CBO failed to submit any reliable evidence at the June 27, 2023 hearing to prove legitimate expenses that should be deducted from the SEC's disgorgement calculation. The only document regarding expenses that was submitted at the hearing was a chart that was an exhibit to a 2019 Declaration filed by Oppenheimer in this action purporting to list travel and other expenses (including a column labeled “Ref or ck #). (See Oppenheimer 6/19/23 Decl., ECF No. 311, Ex. A, at PDF pp. 19-28.) Oppenheimer and CBO offered no documents to support the claimed expenses - i.e., they submitted no receipts, invoices or other documentation.
Oppenheimer also called no witnesses to corroborate the use of the funds that were received. In a joint letter to the Court, dated May 3, 2023, Oppenheimer and CBO stated that they “intend[ed]” to call Paul Wilkinson as a witness at the hearing to “corroborate the testimony of Mr. Oppenheimer as to the use of funds received from the convicted felons,” and that they “may call Andy Pontius and William Farmer, the corporate attorneys who advised Oppenheimer and Mr. Wilkinson's companies,” to “testify as to the advice given Mr. Oppenheimer regarding the use of funds he received with no instructions or directions from the individuals who sent it to [CBO's] corporate bank accounts.” (5/3/23 Joint Ltr., ECF No. 445, at 2 (emphasis omitted).) However, at the hearing, none of these witnesses was called.
Given the lack of supporting documents or testimony, the Court finds that Oppenheimer and CBO have failed to prove any legitimate expenses to be deducted. See Fowler, 6 F.4th at 267 (defendant's burden to identify legitimate business expenses that should be deducted from otherwise reasonable disgorgement amount). Nor have they proven that the SEC's calculation of their unlawful gains is in any way inaccurate. See Razmilovic, 738 F.3d at 31-32.
In their initial post-hearing submission (see Defs.' 7/24/23 Mem. at 9-10), Defendants call the Court's attention to an error made in Ferrante's analysis of Oppenheimer's expenses chart. (See 6/27/23 Tr. at 96-97 (testifying about Ferrante 10/21/22 Suppl. Decl., ECF No. 424).) Since the Court finds that Oppenheimer's chart itself is unreliable, Ferrante's error is of no consequence.
Accordingly, it is recommended that Oppenheimer and CBO be ordered to disgorge the sum of $480,000.00, jointly and severally.
III. Prejudgment Interest
A. Legal Standards
“Since the primary purpose of disgorgement as a remedy for violation of the securities laws is to deprive violators of their ill-gotten gains,” district courts may “award prejudgment interest on the disgorgement amount for the period during which a defendant had the use of his illegal profits.” Razmilovic, 738 F.3d at 36 (citation omitted). In determining whether to award prejudgment interest, a district court should consider
(i) the need to fully compensate the wronged party for actual damages suffered,
(ii) 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.Frommert v. Conkright, 913 F.3d 101, 109 (2d Cir. 2019) (citation omitted). These same factors also inform a court's decision to use a particular interest rate, “which must not result in overcompensation to the plaintiff.” Id. (citation omitted).
B. Application
The Court finds that prejudgment interest is appropriate in this case because Oppenheimer and CBO had access to the amount to be disgorged for several years and failing to award such interest would not adequately address the remedial purpose of the disgorgement award. With respect to the rate of interest to be applied, the SEC uses in its calculations the Internal Revenue Service's rates pursuant to 26 U.S.C. § 6621(a)(2), to arrive at prejudgment interest in the amount of $300,858.59. (See SEC 7/24/23 Mem. at 18; 6/27/23 Tr. at 88-89.) Under Section 6621, the prejudgment interest rate is the sum of the Federal short term-rate (which changes quarterly) plus three percentage points. See 26 U.S.C. § 6621(a)(2), (b)(1). “The SEC ordinarily obtains this interest rate for prejudgment interest on awards of disgorgement.” Sec. & Exch. Comm'n v. Amerindo Inv. Advisors Inc., No. 05-CV-05231 (RJS), 2017 WL 3017504, at *4 (S.D.N.Y. July 14, 2017) (citing 17 C.F.R. § 201.600(b)). The Court finds that applying this interest rate in the present case does not result in over-compensation to the SEC.
Accordingly, it is recommended that the SEC be awarded prejudgment interest in the amount of $300,858.59 against Oppenheimer and CBO, jointly and severally.
CONCLUSION
For the foregoing reasons, I respectfully recommend that (1) civil penalties in the amount of $150,000.00 be imposed upon Oppenheimer and civil penalties of $725,000.00 be imposed upon CBO; (2) Oppenheimer and CBO be ordered to disgorge the sum of $480,000.00, jointly and severally; and (3) the SEC be awarded prejudgment interest in the amount of $300,858.59 against Oppenheimer and CBO, jointly and severally. * * *
NOTICE OF PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
The parties shall have fourteen (14) days (including weekends and holidays) from service of this Report and Recommendation to file written objections pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure. A party may respond to another party's objections within fourteen days after being served with a copy. Fed.R.Civ.P. 72(b)(2). Such objections, and any response to objections, shall be filed with the Clerk of the Court. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b). Any requests for an extension of time for filing objections must be addressed to Judge Daniels.
THE FAILURE TO OBJECT WITHIN FOURTEEN (14) DAYS WILL RESULT IN A WAIVER OF OBJECTIONS AND WILL PRECLUDE APPELLATE REVIEW. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72(b); Thomas v. Arn, 474 U.S. 140 (1985).