Opinion
1:15-cv-05456 (GBD) (SDA)
02-04-2023
Securities and Exchange Commission, Plaintiff, v. Harold Bailey Gallison, et al., Defendants.
REPORT AND RECOMMENDATION
STEWART D. AARON, UNITED STATES MAGISTRATE JUDGE
TO THE HONORABLE GEORGE B. DANIELS, UNITED STATES DISTRICT JUDGE:
Plaintiff, the Securities and Exchange Commission (“Plaintiff” or the “SEC”), brought this action against various defendants, including Robert S. Oppenheimer (“Oppenheimer”) and Core Business One, Inc. (“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.)
Pending before the Court is the SEC's motion for remedies and entry of final judgments against Oppenheimer and CBO. (9/30/22 Mot., ECF No. 415.) For the reasons set forth below, I respectfully recommend that SEC's motion be GRANTED IN PART and DENIED IN PART.
On October 14, 2022, Oppenheimer and CBO filed their opposition memorandum. (Defs.' Opp. Mem., ECF No. 421.) On October 21, 2022, the SEC filed a reply memorandum. (Pl.'s Reply, ECF No. 423.) On November 21, 2022, the SEC's motion was referred to me for a report and recommendation. (Order of Ref., ECF No. 425.) On December 12, 2022, Oppenheimer and CBO filed a Letter Motion for leave to file a sur-reply that was attached to the Letter Motion. (Defs.' 12/12/22 Ltr. Mot., ECF No. 428.) The Court hereby GRANTS the Letter Motion and has considered the sur-reply in making its recommendation herein.
DISCUSSION
The SEC seeks the following remedies on its motion: injunctive relief against Oppenheimer and CBO; an officer-and-director bar against Oppenheimer; a penny-stock-bar against Oppenheimer and CBO; civil penalties against Oppenheimer and CBO; and disgorgement and prejudgment interest against Oppenheimer and CBO, jointly and severally. (Pl.'s Mem., ECF No. 416, at 4-13.) Oppenheimer and CBO argue that the SEC's motion is procedurally improper and premature and that the SEC's calculation of disgorgement is “fatally flawed.” (Defs.' Opp. Mem. at 2-11.)
The injunctive relief, officer-and-director and penny-stock-bar remedies sought by the SEC are based upon undisputed facts and the Court's prior grant of summary judgment. Thus, it is appropriate for the Court to impose such remedies without need for any trial or hearing. See S.E.C. v. Cavanagh, No. 98-CV-01818 (DLC), 2004 WL 1594818, at *28-29 (S.D.N.Y. July 16, 2004) (granting injunctive relief as part of summary judgment Opinion and Order), affd on other grounds, 445 F.3d 105 (2d Cir. 2006). However, as discussed below, there are issues of fact regarding the penalty to be imposed, as well as the amount of disgorgement and prejudgment interest, which require a hearing before determination.
The Court separately considers each of the remedies in turn.
I. Injunctive Relief
Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act authorize this Court to issue injunctive relief for violation of those Acts. See 15 U.S.C. §§ 77t(b), 78u(d). “Such relief is warranted if there is a reasonable likelihood that [a] defendant[ ] will commit future violations of the securities laws.” Sec. & Exch. Comm'n v. Am. Growth Funding II, LLC, No. 16-CV-00828 (KMW), 2019 WL 4623504, at *1 (S.D.N.Y. Sept. 24, 2019) (citing Sec. & Exch. Comm'n v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99-100 (2d Cir. 1978)). To determine the likelihood of future violations, a court should 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.” Commonwealth Chem. Sec., Inc., 574 F.2d at 100. The more onerous an injunction's burdens, the more persuasive the SEC's showing must be. See Sec. & Exch. Comm'n v. Unifund SAL, 910 F.2d 1028, 1039 (2d Cir. 1990).
Applying the relevant factors, the Court finds that a permanent injunction is warranted. The Court previously found Oppenheimer and CBO liable under Section 5 of the Securities Act and that they “played a substantial role throughout the scheme” upon which their Section 5 liability was based. See Gallison, 588 F.Supp.3d at 521. Moreover, based upon Oppenheimer's conduct, the Court found Oppenheimer (and, through Oppenheimer, CBO) liable under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Id. at 525. Further, the Court found that Oppenheimer acted with the requisite scienter and was not merely “an unwitting instrumentality” in the violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Id.
Oppenheimer's conduct at issue in this case was not an isolated occurrence. Violations of federal securities laws over a period of two years do not qualify as an isolated occurrence. See Sec. & Exch. Comm'n v. Mattessich, 18-CV-05884 (KPF), 2022 WL 16948236, at *8 (S.D.N.Y. Nov. 15, 2022) (finding that monthly violations of securities laws over period of years did not qualify as “isolated occurrence”); Sec. & Exch. Comm'n v. Am. Growth Funding II, LLC, No. 16-CV-00828 (KMW), 2019 WL 4623504, at *1 (S.D.N.Y. Sept. 24, 2019) (“The violations continued over a period of years, and were not simply an isolated occurrence of bad judgment.”). Further, Oppenheimer continues to maintain that his past conduct was blameless. See Gallison, 588 F.Supp.3d at 525.
Oppenheimer argues that there is no likelihood of future violations since “[t]he conduct at issue in the case occurred more than 12 years ago . . . [and] Oppenheimer has not done any consulting work for any publicly traded entities since 2010, and has no plans to do so prior to retirement.” (See Defs.' Opp. Mem. at 5.) However, these arguments are insufficient to prevent the imposition of an injunction that is otherwise justified. See Sec. & Exch. Comm'n v. Mgmt. Dynamics, Inc., 515 F.2d 801, 807 (2d Cir. 1975) (permanent injunction may be appropriate despite “defendant's disclaimer of an intent to violate the law in the future, or even by cessation of the illegal acts”). Finally, the injunction is not onerous because it merely requires defendants not to break the law. See Sec. & Exch. Comm'n v. Bronson, 246 F.Supp.3d 956, 974 (S.D.N.Y. 2017).
Accordingly, a permanent injunction is warranted, enjoining Oppenheimer and CBO from violating Sections 5 and 17 of the Securities Act and Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder).
II. Officer-And-Director Bar
The SEC seeks a permanent officer-and-director bar against Oppenheimer. (See Proposed Final Judgment Against Oppenheimer, ECF No. 420-1, at 5.) Section 21(d)(2) of the Exchange Act provides that:
the court may prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who violated section [10(b)] of this title or the rules or regulations thereunder from acting as an officer or director of any issuer that has a class of securities registered pursuant to section [12] of this title or that is required to file reports pursuant to section [15(d)] of this title if the person's conduct demonstrates unfitness to serve as an officer or director of any such issuer.15 U.S.C. § 78u(d)(2). There are six non-exclusive factors to consider in making an unfitness assessment: “(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. & Exch. Comm'n v. Bankosky, 716 F.3d 45, 48 (2d Cir. 2013).
Based upon this Court's prior Memorandum Decision and Order granting summary judgment against Oppenheimer, an officer-and-director bar is warranted for some duration. Oppenheimer's conduct was egregious, inasmuch as over the course of more than a two-year period, he violated several provisions, including the anti-fraud provisions, of the federal securities laws. Moreover, the Court found that Oppenheimer “played a substantial role throughout the scheme,” see Gallison, 588 F.Supp.3d at 521, and that he acted with the requisite scienter. Id. at 524-26 (finding that Oppenheimer acted with requisite scienter because “[t]he record supports the conclusion that Oppenheimer knew the statement [in the October 3, 2009 disclosure statement] was false when made . . . [and] knew the statement [in the December 14, 2009 press release] was untrue when made.”). In addition, the summary judgment record before the Court reflected that Oppenheimer had a significant economic stake in the securities law violations. See id. at 517.
On the other hand, Oppenheimer was not a repeat offender. While the Court found that, over more than a two-year period, Oppenheimer committed violations of the federal securities laws, see Gallison, 588 F.Supp.3d at 514-26, a “repeat offender” is “a recidivist who repeats the violation after prosecution for committing the earlier [violation],” not an individual who commits “multiple violations as part of a unified scheme.” See Sec. & Exch. Comm'n v. See ThruEquity, LLC, No. 18-CV-10374 (LLS), 2022 WL 171196, at *3-4 (S.D.N.Y. Jan. 19, 2022); see also Sec. & Exch. Comm'n v. Bankosky, No. 12-CV-01012 (HB), 2012 WL 1849000, at *2 (S.D.N.Y. May 21, 2012), aff'd, 716 F.3d 45 (2d Cir. 2013) (“Bankosky did trade on inside information repeatedly over a period of two years, but this does not mean that he is a repeat offender in the sense that he is ‘someone who has committed separate violations of securities laws in the past.'” (citation omitted)).
Upon consideration of the relevant factors, the Court finds that Oppenheimer should be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act for a period of five years. The Court finds that a five-year bar, as opposed to the permanent bar the SEC seeks, reflects the severity of Oppenheimer's conduct, lack of repeat-offender status and representation that he had no intention of working for a publicly traded company in the future. See See ThruEquity, LLC, 2022 WL 171196, at *3-4 (limiting officer-and-director bar to five-year period where defendants were not repeat offenders and made assurances that they would not disseminate stock research reports even though defendants had committed egregious violations with high degree of scienter, received personal economic benefit from violations at issue, maintained occupations that would present opportunities for future violations and expressed no remorse for their activities); Sec. & Exch. Comm'n v. Metcalf, No. 11-CV-00493 (CM), 2012 WL 5519358, at *7 (S.D.N.Y. Nov. 13, 2012) (limiting officer-and-director bar to five year period where defendant knowingly engaged in a “broker bribery/stock manipulation scheme,” was “entirely open to creating a false market in [company] stock in order to fool the market,” acted with high degree of scienter and refused to acknowledge that he participated in any misconduct.”); see also Sec. & Exch. Comm'n v. Patel, 61 F.3d 137, 142 (2d Cir. 1995)(“[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.”).
During a telephone conference with the Court, Oppenheimer's counsel stated that Oppenheimer had “not worked for a publicly traded company [during the past] 12 years, 14 years, and is not now and has no intention of doing so in the future.” (See 1/26/23 Tr., ECF No. 436, at 16.)
III. Penny-Stock Bar
The SEC seeks a permanent penny-stock bar for Oppenheimer and CBO. (See Proposed Final Judgment Against Oppenheimer at 5; Proposed Final Judgment Against CBO, ECF No. 4202, at 3.) “The standard for imposing [a penny-stock] bar essentially mirrors that for imposing an officer-or-director bar.” Sec. & Exch. Comm'n v. Universal Exp., Inc., 475 F.Supp.2d 412, 429 (S.D.N.Y. 2007), aff'd sub nom. Sec. & Exch. Comm'n v. Altomare, 300 Fed.Appx. 70 (2d Cir. 2008). Thus, “[i]mposition of a penny stock bar is therefore warranted as to [Oppenheimer], for reasons discussed [above] with respect to his prohibition from serving as a company officer or director.” See id. at 429-30. Further, these same reasons justify barring CBO from engaging in future offers of penny stock for some duration. Given the Court's disposition of the officer-or-director bar, and consideration of other relevant factors, the Court finds that Oppenheimer and CBO should be barred from participating in an offering of penny stock for a period of five years.
IV. Civil Penalties
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 -- is appropriate for violations involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement,” as long as the violation either “directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons,” and shall not exceed $100,000 for a natural person or $500,000 for any other person. Id. The maximum penalties are adjusted for inflation. See 17 C.F.R. § 201.1001.
The SEC seeks for the relevant period (i.e., from March 4, 2009 to March 5, 2013), a statutory maximum third-tier penalty amount of $150,000 for Oppenheimer and $725,000 for CBO. (See Pl.'s Mem. at 9 (citing 17 C.F.R. § 201.1001 (Table I)).) In support of its pending motion, the SEC submitted the Declaration of SEC Staff Accountant Christopher Ferrante (“Ferrante”) with respect to the proceeds received by CBO from the defendants' scheme (see Ferrante 9/30/22 Decl., ECF No. 417), but Oppenheimer and CBO never had the opportunity to cross-examine Ferrante about his Declaration.
Oppenheimer and CBO contest the pecuniary gain they received as a result of the violation and challenge Ferrante's analysis. (See Defs.' Opp. Mem. at 7-9 (quoting Oppenheimer Decl., ECF No. 311, ¶¶ 73-81).) Oppenheimer contends in his declaration that he “did not keep any of [the] funds [received by CBO] for [him]self or [his] business operations.” (Oppenheimer Decl. ¶ 73.) Moreover, according to Ferrante, CBO received $480,000 in proceeds from the scheme (see Ferrante 9/30/22 Decl. ¶ 5), which is less than the $725,000 penalty sought from CBO.
Because there are disputed issues of fact regarding the gross amount of pecuniary gain received by Oppenheimer and CBO as a result of the securities law violations, I cannot recommend an appropriate fine amount. Thus, I recommend that a hearing be held regarding the appropriate fine amount.
V. Disgorgement And Prejudgment Interest
The SEC also seeks disgorgement in the amount of $480,000, plus prejudgment interest on the amount of disgorgement. (See Pl.'s Mem. at 11-13.) In Liu v. Sec. & Exch. Comm'n, the Supreme Court held that the SEC could only seek disgorgement as equitable relief if it did not “exceed a wrongdoer's net profits and [was] awarded for victims.” __ U.S.__, 140 S.Ct. 1936, 1940 (2020). The SEC bears the burden of establishing a reasonable approximation of the profits causally related to the fraud. See Sec. & Exch. Comm'n v. Lek Sec. Corp., No. 17-CV-01789 (DLC), 2020 WL 1316911, at *3 (S.D.N.Y. Mar. 20, 2020).
The SEC states that it “intends to return disgorged funds from any defendants for the benefit of investors in this case.” (Pl.'s Mem. at 11.)
In the present case, there are disputed issues of fact regarding the net profits received by Oppenheimer and CBO. For example, Ferrante uses “the amounts . . . of the proceeds received in the CBO bank accounts” to calculate the amount of disgorgement. (See Ferrante 9/30/22 Decl. ¶ 5.) However, he does not calculate the amount of net profits in circumstances where Oppenheimer and CBO contend that there are legitimate business expenses that should be deducted. (See Defs.' Sur-Reply, ECF No. 428, at 8-9.) While the SEC, as the party seeking disgorgement, need only provide “a reasonable approximation of profits causally connected to the violation,” not “the precise amount of a defendant's illegal proceeds,” the SEC's approximation falls short based on the current record. See Lek Sec. Corp., 2020 WL 1316911, at *3; see also Analytical Survs., Inc. v. Tonga Partners, L.P., No. 06-CV-02692 (KMW) (RLE), 2008 WL 4443828, at *16 (S.D.N.Y. Sept. 29, 2008) (“[T]he Court cannot calculate [the] disgorgement because the Court finds genuine issues of material fact .... Accordingly, the Court denies summary judgment to Plaintiff and Defendants with respect to the disgorgement calculation[.]”). Thus, I recommend that a hearing be held regarding the appropriate amount of disgorgement.
Notably, the SEC acknowledged during a telephone conference with the Court that it is within the Court's discretion under the case law to hold a hearing to address any disputed issues of fact prior to awarding disgorgement and prejudgment interest. (See 1/26/23 Transcript at 9.) (“And in theory the Court can, under the case law, hold, you know, a hearing or require depositions, the Court clearly can do anything like that and order anything like that.”)
CONCLUSION
For the foregoing reasons, I respectfully recommend that Plaintiff's motion be GRANTED IN PART and DENIED IN PART. Specifically, I recommend that (1) a permanent injunction be issued, enjoining Oppenheimer and CBO from violating Sections 5 and 17 of the Securities Act and Section 10(b) of the Exchange Act (and Rule 10b-5 promulgated thereunder); (2) Oppenheimer be prohibited from acting as an officer or director of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to Section 15(d) of the Exchange Act for a period of five years; (3) Oppenheimer and CBO be barred from participating in an offering of penny stock for a period of five years; and (4) a hearing be held with respect to the appropriate amounts of civil penalty, disgorgement and prejudgment interest.
During a telephone conference with the Court, counsel for Oppenheimer and CBO expressed a willingness to negotiate these amounts with the SEC without the need for further proceedings. (See 1/26/23 Transcript at 15-16.) The parties are encouraged to do so.
* * *
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).