Summary
finding Ross v. Bolton, which held that recklessness is insufficient for aiding and abetting liability where no fiduciary duty exists, is distinguishable because in Milan Capital, the defendant owed a fiduciary duty
Summary of this case from Securities Exchange Commission v. DibellaOpinion
00 CIV. 108 (DLC)
November 8, 2000
Debra Patalkis, Brian O. Quinn, Securities and Exchange Commission Washington, D.C. 20549-0808
Kevin J. O'Brien, David S. Hoffner, Swidler Berlin Shereff Friedman, LLP New York, N.Y. 10174 Attorneys for defendant Jason M. Cope
Kevin J. Keating, Garden City, N.Y. 11530 Attorney for defendant Michael Irwin Lamhut
OPINION AND ORDER
Plaintiff Securities and Exchange Commission ("SEC") moves for partial summary judgment in this secur ies fraud case against defendants Ira A. Monas ("Monas"), Michael Lamhut ("Lamhut") and Jason Cope ("Cope"). For the reasons stated below, summary judgment is granted.
PROCEDURAL HISTORY
The SEC brought this case on January 7, 2000, naming Milan Capital Group, Inc. ("Milan") as defendant and Monas and his wife Rita Monas as relief defendants. The SEC alleged that Milan was an unregistered broker-dealer that was offering or purporting to sell securities to investors in several states. The SEC alleged that Milan had received funds from dozens of investors based on representations that it would use the funds to purchase shares ("IPO shares") in certain highly publicized initial public offerings, but that Milan lacked access to and did not obtain any IPO shares for these investors. Monas was alleged to be Milan's president and sole owner. On January 7, 2000, the Court granted the SEC's application for a temporary restraining order ("TRO") restraining Milan from acting as a broker and freezing Milan's assets; Milan stipulated to the entry of a preliminary injunction on January 18.
On January 21, 2000, on an ex parte application of the SEC, the Court appointed Aaron Marcu (the "Receiver") as Receiver for Milan. The Court's January 21 Order empowered the Receiver to take all steps necessary to recover assets of Milan. On February 14, 18, 23 and 25, the Court granted applications made by the Receiver for TROs freezing assets of several parties alleged to have received investor funds from Milan, md. ., Rita Monas, and their daughter, Jennifer Monas; Lamhut and three companies controlled by Lamhut (the "Lamhut Companies"); Sands Point International ("Sands Point"), a compan owned by Monas' brother Douglas Monas, and alleged to be coitrolled by Monas; and Douglas Monas. Monas did not appear and oppose the Receiver's applications; by Opinion and Order dated February 29, 2000, the Court granted the Receiver's motion for a preliminary injunction freezing Monas' assets pending trial and ordering Monas to supply an accounting. The Receiver's motions for preliminary injunctions with respect to the other parties ultimately were resolved among the parties.
The SEC filed an amended complaint on February 29, 2000. In addition to Milan, the amended complaint named Monas, Lamhut, Cope and Investment Offices, doing business as AC Financial, Inc. ("AC Financial"), as defendants. Along with Rita Monas, the amended complaint named Jennifer Monas, Douglas Monas, Sands Point and the Lanihut Companies as relief defendants.
On April 12, 2000, the Court granted the Receiver's application for a TRO freezing assets of Cope and AC Financial. AC Financial did not appear or oppose the Receiver's application; a preliminary injunction was entered against AC Financial by Order dated April 27, 2000. The Receiver's motion for a preliminary injunction against Cope was resolved by stipulation dated May 30, 2000. A sixth application by the Receiver for a TRO, not relevant to the present motions, was granted on April 28 and resolved by stipulation.
On May 12, 2000, the SEC moved by .0 show cause for entry of an order of default against AC Financial and the Lamhut companies for failure to answer the amended complaint. An order of default was issued on June 2, 2000. On June 6, the SEC moved for an order of default against Sands Point; that order was issued on June 13, 2000.
Monas, appearing pro se, answered the amended complaint on March 28, 2000, asserting his Fifth Amendment privilege. Lamhut, appearing through counsel, answered the amended complaint on March 23, asserting his Fifth Amendment privilege with respect to all substantive allegations. Cope, appearing through counsel, answered the amended complaint on April 11, 2000, generally acknowledging the investment scheme marketed by Milan to be a sham, but claiming to have believed it was legitimate.
Milan's time to answer the amended complaint has been extended until ten days after the Court's decision on the pending motion, which was filed on June 13, 2000. The SEC provided Monas with a notice to pro se litigants opposing a motion for summary judgment; on September 21, 2000, in response to an application from Monas regarding discovery, this Court issued an Order describing the requirements for opposing a motion for summary judgment under Rule 56(f), Fed.R.Civ.P. Lamhut has informed the SEC that he will not oppose the motion. Both Cope, acting through counsel, and Monas, proceeding pro se, have opposed the SEC's motion.
BACKGROUND
The following facts are undisputed for puZpe es of this motion, unless otherwise stated.
The IPO Scheme; the activities of Monas and Lamhut
Milan was incorporated in New York in June 1998. Monas was Milan's president and his wife Rita Monas was Milan's secretary. Milan has never been registered as a broker or dealer of securities. AC Financial is a registered broker-dealer based in Florida. AC Financial is owned by Sands Point, a company owned by Monas' brother Douglas Monas and controlled by Monas. Cope opened and then managed AC Financial's Pittsburgh office.
Through Cope and his sales team at AC Financial in Pittsburgh, Monas and Milan convinced approximately 200 customers to pay almost $9 million for IPO shares in World Wresthng Federation Entertainment, Inc. ("WWF"); United Parcel Service, Inc. ("UPS"); Fogdog, Inc. ("Fogdog"); and FreeMarkets, Inc. ("FreeMarkets"). Customers were told that Monas and Milan had access to these IPOs through contracts with Morgan Stanley and Goldman Sachs. Customers sent funds directly to Milan or Sands Point, and were provided with false sales confirmations on Milan letterhead. In fact, Milan had no access to IPO shares, and never provided any IPO shares to customers. Investor testimony shows that both Larnhut and Cope made false representations to investors in connection with the scheme. Monas and Rita Monas withdrew substantial investor funds from Milan's accounts.
Monas has been incarcerated since October 5, 1999. At that time, Lamhut, a licensed broker, took o th ay1o-day operations of Milan, making frequent telephone' alls and visits to Monas inyrison. Lamhut received bank account statements for Milan and Sands Point. On January 6 and 7, 2000, just before Milan's funds were frozen by this Court's January 7 TRO, nearly $500,000 was transferred from Milan to the Lamhut Companies.
Cope's knowledge of the scheme
Cope has not submitted an affidavit in opposition to this motion. Instead, relying on certain exhibits and argument by his counsel, he contends that the SEC has failed to show that he was aware of circumstances that triggered a duty to investigate the bona fides of the investment plan promoted by Monas.
Cope makes certain denials in his answer to the amended complaint. A verified pleading may be treated as an affidavit on a motion for summary judgment, to the extent it meets the other requirements for an affidavit under Rule 56(e), Fed.R.Civ.P., (requiring, for example, that statements be made on personal knowledge). Monahan v. Dep't of Corrections, 214 F.3d 275, 292 (2d Cir. 2000). Cope's answer, however, is not verified; Cope has made no sworn denial of the allegations against him.
The SEC has not attempted to prove Cope's knowledge of the fraud at this point, but has argued the indicia of fraud were so great that Cope's failure to investigate constituted reckless disregard for the truth. The SEC offers the following evidence as indicia of fraud: the surge of business at AC Financial's pittsburgh office once the IPO shares were being offered; sales confirmations supplied to Cope by Milan that, according to one investor, didn't "look official"; Monas' request that Cope conceal the availability of the IPO shares from people in AC Financial's Florida office — including AC Financial of compliance; the fact that certain of Cope's customers were directed to wire their funds directly to Sands Point and Milan, rather than to accounts at AC Financial; and the fact that Milan required Cope's customers to sign a "Full Disclosure Agreement," indicating that investor funds would be placed in a "pooled account" and that Milan would have the exclusive authority to determine when to sell the IPO shares.
DISCUSSION
Summary judgment may not be granted unless the submissions of the parties taken together "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. The moving party bears the burden of demonstrating the absence of a material factual question, and in making this determination the Court must view all facts in the light most favorable to the nonmoving party. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 247 (1986); Celotex Corp v. Catrett, 477 U.S. 317, 323 (1986). When the moving party has asserted facts showing that the nonmovant's claims cannot be sustained, the opposing party must "set forth specific facts showing that there is a genuine issue for trial," and cannot rest on the "mere allegations or denials" of his pleadings. Rule 56(e), Fed.R.Civ.P.; see also Goenaga v. March of Dimes Birth Defects Found., 51 F.3d 14, 18 (2d Cir. 1995). In deciding whether to grant summary judgment, therefore, this Court must determine (1) whether a genuine factual dispute exists bard o he evidence in the record, and (2) whether the fact in dispute is material based on the substantive law at issue.
Where a party does not have sufficient essential information to justify its opposition to a motion for summary judgment, the Court may
refuse the application for judgment or may order a continuance to permit affidavits to be obtained or depositions to be taken or discovery to be had or make such other order as is just.
Rule 56(f), Fed.R.Civ.P. A party opposing a summary judgment motion will be entitled to further discovery before the motion will be considered when it submits an affidavit explaining:
1) the nature of the uncompleted discovery, i.e., what facts are sought and how they are to be obtained; and
2) how those facts are reasonably expected to create a genuine issue of material fact; and
3) what efforts the affiant has made to obtain those facts; and
4) why those efforts were unsuccessful.
Burlington Coat Factory Warehouse Core. v. Esprit De Core., 769 F.2d 919, 926 (2d Cir. 1985) . In addition,
[a] court can reject a request for discovery, even if properly and timely made through a Rule 56(f) affidavit, if it deems the request to be based on speculation as to what potentially could be discovered.Paddington Partners v. Bouchard, 34 F.3d 1132, 1138 (2d Cir. 1994)
The SEC brings claims against the individual defendants under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, and Section 17(a)(1) of the SecuritiZs—Kt of 1933 (the "Securities Act"), 15 U.S.C. § 77q(a). Section 10(b) addresses fraud in connection with the purchase or s le of a security; Section 17(a) addresses fraud in connection with the offer or sale of a security. The SEC also brings claims against those defendants for aiding and abetting Milan's violation of the broker-dealer registration requirements of Section 15(a) of the Exchange Act, 15 U.S.C. § 780 (a).
A. Sections 10(b) and 17(a)
Section 10(b) of the Exchange Act provides that:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
. . . .
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.15 U.S.C. § 78j (b) . Section 17(a) (2.) of the Securities Act provides that:
It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly —
(1) to employ any device, scheme, or artifice to defraud. . . .15 U.S.C. § 77q(a)(1). Rule 10b-5 "more specifically delineates what constitutes a manipulative or deceptive device or contrivance" for purposes of Section 10(b). Press v. Chemical Inv. Servs. Corp., 166 F.3d 529, 534 (2d Cir. 1999).
To have violated Section 10(b) and Rule lob-S1 a defendant must have:
(1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999). The standard for a violation of Section 17(a)(1) is "essentially the same."Id. With respect to scienter, the Second Circuit has explained, "[t]he element of scienter . . . requires a plaintiff to show that the defendant acted with intent to deceive, manipulate or defraud, or at least knowing misconduct." Grandon v. Merrill Lynch Co., Inc., 147 F.3d 184, 194 (2d Cir. 1998).
Although the SEC also makes claims under Sections 17(a)(2) and (3), for which no scienter is required, see Monarch Funding, 192 F.3d at 308, at this time the SEC seeks summary judgment only on its claims under Section 17(a)(1).
Cope
The SEC has provided ample evidence of Cope's participation in the fraud, including numerous false representations to investors. The issue of Cope's scienter, however, is more difficult. The SEC argues that Cope acted ith a recklessness that constitutes scienter for purposes of Sectio s 10(b) and 17(a)(1).
These statements were made "in connection with" the sale of a security despite the fact that no sale was ever executed. See SEC v. Gallard, No. 95 Civ. 3099 (HE), 1997 WL 767570 at *3 (S.D.N.Y. Dec. 10, 1997) ("sale" even where security did not exist and was never delivered). The SEC has also satisfied the interstate commerce requirement of Sections 10(b) and 17(a), by showing, for example, evidence of interstate wire transfers of investor funds into Milan's account.
Scienter "may be established through a showing of reckless disregard for the truth." SEC v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998). "Reckless conduct is, at the least, conduct which is highly unreasonable and which represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it." Rolf v. Blyth. Eastman Dillon Co., Inc., 570 F.2d 38, 47 (2d Cir. 1978) (internal quotations omitted). See also McNulty, 137 F.3d at 741. A broker is under a duty to investigate the truth of his representations to clients, because "by his position he implicitly represents he has an adequate basis for the opinions he renders." Hanly v. SEC, 415 F.2d 589, 596 (2d Cir. 1969). See also Keenan v. D.H. Blair Co., Inc., 838 F. Supp. 82, 89 (S.D.N.Y. 1993) ("In addition, a dealer implies that his conclusions are the result of a reasonable investigation. If essential information about a security is not available to the dealer, he must disclose this and identify the risks associated with the absence of information.") (citing Hanly, 415 F.2d at 596-97)
Accordingly, in recommending a company's securities to investors, a broker may not rely solely on materials submitted by the company without independent investigation; this duty to investigate is even greater where promotional materials are in some way questionable, for example, by promising unusually high returns. See SEC v. Randy, 38 F. Supp.2d 657, 670 (N.D. Ill. 1999) (issuer's promotional materials "so questionable on their face as to put [defendant] on notice that further investigation was necessary to avoid misleading potential investors"); SEC v. Kenton Capital. Ltd., 69 F. Supp.2d 1, 10 (D.D.C. 1998). Courts have also found that brokers that have recommended trades in securities such as "prime bank notes," widely known to be fictitious, acted with the requisite scienter. See Gallard, 1997 WL 767570 at *4; SEC v. Bremont, 954 F. Supp. 726, 730 (S.D.N Y 1997)
A variety of circumstances may raise enough questions about the legitimacy of an investment to make a person's failure to investigate before recommending that investment reckless. See McNulty, 137 F.3d at 741 ("obviously evasive and suspicious statements" by principal);Benjamin v. Kim, No. 95 Civ. 9597 (LMM), 1999 WL 249706 at *8 (S.D.N Y Apr. 28, 1999) (series of memoranda regarding financial difficulties, rapid turnover of management, errors in financial statements). In Meadows v. SEC, 119 F.3d 1219 (5th Cir. 1997), the petitioner had played an active role in soliciting investors for two companies — one a wholesaler of recycled golf balls, the other a natural gas exploration company — run by a business associate. The Fifth Circuit upheld an administrative law judge's determination that the petitioner's actions were reckless for purposes of scienter under Section 17(a)(1), based on, among other things, the fact that the petitioner had conducted no background check into his associate, despite his awareness of a prior allegation of misconduct; that he initially conducted no investigation into the activities of the companies; and that his only attempt to investigate was rebuffed when he was temporarily denied afterhours access to the company's books. See id. at 1226. Where a defendant plays a central role in marketing an investment, his defense that he was unaware that the investment was fraudulent is less credible. See SEC v. Infinity Group Company, 993 F. Supp. 324, 330 (E.D. Pa. 1998)
Here, the SEC has set forth substantial evidence that Cope either knew of the fraud, or that the fraud was so obvious that he was reckless in failing to make sufficient inquiry to uncover the fraud. Cope played a central role in the fraud — not only did he personally solicit customers, he also was responsible for the supervision of the other brokers offering the IPO shares. As a broker, he had a duty to ascertain that the information he supplied to customers was accurate. Although there was no question regarding the value of the IPO shares themselves, Cope had ample reason to question the availability of the shares to Milan, and Milan's bona f ides in executing the transactions.
The most significant warning sign was the "Full Disclosure Agreement" Milan required customers to sign, stating tha funds would be placed in a "self-induced pooled account" over which Milan had full discretion. The agreements, in effect, provided an explanation for why sales were not executed, and proceeds not returned, upon the investors' request. Although investors had been informed that sales of their IPO shares would be restricted in the first thirty or ninety days, depending on the issuer, following the offering, or that Milan would have control over the shares during that initial restricted period, at least some investors did not learn about the "pooling" arrangement until after they had made their investments, when they were presented with the disclosure agreement. Moreover, under the disclosure agreement, Milan's control over the sales of the shares and distribution of the proceeds was indefinite in duration, rather than limited to the initial restricted period. One investor, Keith Kronk ("Kronk") responded by marking up t disclosure agreement to reflect the restrictions on sales as initially described to him by Cope. The existence of such an agreement, with its highly unusual and confusing terms, was a significant indicium of fraud.
A representative example of these agreements states:
I, hereby, swear that I have been informed and understand all of the rules and procedures regarding my purchase of United Parcel Service Inc. I understand that these shares are being purchased for my benefit in a self-induced pooled account through Milan Capital. I further understand that I have no discretion as to the sale of these securities, including, but not limited to, time or price although Milan Capital Group will obtain the best price available for me under the rules of the pooling agreement and underwriters. I further understand that the proceeds of the sales of these securities will be distributed at Milan Capital's discretion.
Although Cope provides evidence that one investor was informed before his initial purchase that "[a]ll shares were to be pooled," it is not clear whether this investor came to AC Financial after Milan had begun requiring the disclosure agreements. In no circumstance does that statement help Cope. Kronk's testimony shows that at least with respect to some investors, Milan — through Cope — materially altered the terms of the investment in mid course. In any event, the term in the agreement that ceded all discretion in trading to Milan put Cope on notice that he had a particular duty to satisfy himself that Milan was legitimate.
Other warning signs — Monas' instruction to Cope that the IPO share sales be concealed from AC Financial's Florida office; Milan's requirement that investor funds be wired to Milan or Sands Point, rather than AC Financial; and the crude, handwritten trade confirmations — also gave rise to a duty to investigate on Cope's part. Taken together and viewed in connection with the "Full Disclosure" agreements, they provided ample warning that the sales were not legitimate. Again, Cope's participation in the scheme, and the central role that he played, is evidence that he had actual knowledge of the fraud. Even if he lacked actual knowledge, however, the unorthodox qualities of the trades, and in particular Milan's insistence on obtaining the "Full Disclosure" Agreements, were sufficiently indicative of fra. that Cope had a duty to investigate the bona f ides of the investment, and that his failure to do so constituted recklessness.
As noted, Cope has not submitted an affidavit explaining why his suspicion was not aroused, or what investigation he did make to assuage any suspicion. Instead, he relies on an affidavit of one of his attorneys, David S. Hoffner, made pursuant to Rule 56(f), Fed.R.Civ.P., to argue that he is entitled to further discovery before the SEC's motion can be granted. For example, Hoffner contends that AC Financial employee Michael Farrah would testify that Cope instructed him to disclose the IPO share sales to AC Financial's head of compliance, William Ward, and that Ward would testify that Farrah made that disclosure.
The Hoffner affidavit does not describe, however, any effort made by Cope to obtain this or any other testimony. Many of the other witnesses listed in the Hoffner affidavit, including Monas and Lamhut, have consistently asserted their Fifth Amendment privilege in this action. Moreover, much of the anticipated testimony concerns Cope's actions or even his state of mind. The most relevant evidence here — Cope's own testimony — is unquestionably available to Cope but has not been supplied in connection with this motion. Cope's failure to submit an affidavit demonstrates that his Rule 56(f) application, much of which describes testimony that Cop cannot reasonably expect to obtain, is a mere device intended to delay judgment in this case. Because Cope has not shown that there is any genuine issue of material fact regarding the circumstances of his failure to investigate, summary judgment against him is appropriate without further delay.
Monas
Summary judgment also is appropriate against Monas. Monas has never denied the allegations in the amended complaint, and the Court may draw a negative inference from his assertion of his Fifth Amendment privilege in answer to the amended complaint. See LiButti v. United States, 107 F.3d 110, 121, 124 (2d Cir. 1997) (citing Baxter v. Palmiqiano, 425 U.S. 308, 318 (1976)). Moreover, the SEC has offered ample evidence that Monas was at the center of the fraud. Monas was Milan's president, and he and his wife were Milan's sole shareholders. After his incarceration, Monas remained in close contact with Lamhut, who ran Milan's day-to-day operations. Milan withdrew investor funds from Milan's bank account. There is no issue of material fact with respect to Monas' scienter, or any other element of Monas' violation of Sections 10(b) and 17(a)(1).
In his October 23, 2000 submission in opposition to the SEC's motion, Monas made an application pursuant to Rule 56(f), Fed.R.Civ.P. Monas claims that he has not had access to discovery materials produced to other parties in this litigation, but does not provide any other information reg g what materials he seeks. He gives this Court no basis to believe that any discovery he might undertake could establish a genuine issue of fact with respect to his liability under the securities laws. As with respect to Cope, Monas' failure to submit an affidavit denying his liability demonstrates that his Rule 56(f) application is frivolous.
In his October 23 submission, Monas makes other requests for relief that are not relevant to this motion. Monas renews applications made in previous correspondence relating to the activities of the Receiver and certain funds that the Court has frozen on the Receiver's applications.
Monas appears to argue that these materials would allow him to refute the accusations made against him by other defendants in this action — such as Cope's allegations regarding Monas in his answer to the amended complaint. The Court, however, has not relied upon any such hearsay statements.
Lamhut
Finally, summary judgment may be entered against Lamhut. There is ample evidence of Lamhut's participation in the scheme, including direct conversations with investors in which material misrepresentations were made. There is also substantial evidence that Larnhut acted with scienter. Lamhut managed Milan's day-today operations following Monas' incarceration; he was well aware of Monas' incarceration and remained in close contact with Monas; and he had knowledge of the activities in Milan and Sands Point's bank accounts. Lamhut converted nearly $500,000 to his own control on the eve of this Court's TRO freezing Milan's funds.
Lamhut has not offered any evidence to rebut the SEC's case, and, as noted with respect to Monas, the Court may draw a negative inference from Lamhut'5 assertion of his Fifth Amendment privilege in answer to the amended complaint. The record amply supports the entry of summary judgment against Lamhut on the claims under Sections 10(b)(5) and 17 (a)(1)
B. Section 15(b): AidinQ and AbettinQ
Section 15(a) of the Exchange Act, 15 U.S.C. § 780 (a), provides in relevant part that
It shall be unlawful for any broker or dealer . . . to make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security . . . unless such broker or dealer is registered in accordance with subsection (b) of this section.15 U.S.C. § 780 (a). A "broker" is defined as "any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank." 15 U.S.C. § 78c (4)
Pursuant to § 104 of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78t(f), liability for aiding and abetting was strengthened and exists where the defendant: (1) acted knowingly; (2) provided substantial assistance; and (3) a primary violation of the federal securities law occurred.SEC v. Moskowitz, No. 97 Civ. 7174 (HB), 1998 WL 524903 at *2 (S.D.N Y Aug. 20, 1998). The SEC argues that it has proven a primary violation of Section 15(a) by Milan, and that Monas, Lamhut and Cope aided and abetted Milan's violation. With respect to Cope, the SEC argues that recklessness satisfies the requirement that a defendant act "knowingly."
Section 104 provides in relevant part:
[A]ny person that knowingly provides substantial assistance to another person in violation of a provision of this chapter, or of any rule or regulation issued under this chapter, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.15 U.S.C. § 78t(f).
Summary judgment can be granted against all three defendants on this claim. The SEC has shown a primary violation of the Section 15(a) by Milan, and none of the individual defendants has disputed Milan's violation. The SEC has shown that Milan has never been registered as a broker or dealer of securities, and that Milan attempted to induce the purchase of securities, using instrumentalities of interstate commerce. Although investors were solicited by AC Financial, Milan was an active participant in the transactions: sales confirmations and the "Full Disclosure" agreements were issued by Milan, and many investors wired their funds directly to Milan. Additionally, Lamhut, a Milan employee, spoke directly with certain investors. Finally, Milan meets the definition of "broker" because it is in the business of effecting transactions in securities for the account of others. Milan sought to effect securities transactions for the account of others, and did so with sufficient regularity to be "engaged in" that business. See, e.g., SEC v. Zubkis, No. 97 Civ. 8086 (JGK), 2000 WL 218393 at *9 (S.D.N.Y. Feb. 23, 2000) ("To qualify as a 'broker,' the activities of the alleged broker must be characterized by a certain regularity of participation in securities transactions at key points in the chain of distribution." (internal quotations omitted)).
Additionally, Monas, Lamhut and Cope knowingly provided substantial assistance to Milan in its violation of Section 15(a). As discussed above, Monas controlled Milan, even after his incarceration. Lamhut acted as Milan's agent, running its day-to-day operations following Monas' incarceration, and personally making false statements to investors. Monas and Lamhut provided substantial assistance to Milan in carrying out its fraud, and there is substantial evidence that both acted knowingly. While there is evidence that Cope also acted with actual knowledge, here, where Cope, as a broker, owed investors a fiduciary duty of care, the knowledge requirement is satisfied by his recklessness. See Mishkin v. Peat. Marwick. Mitchell Co., 658 F. Supp. 271, 273 (S.D.N.Y. 1987) ("with regard to the 'knowledge' element of the aiding and abetting test, where a defendant owes a duty to a victim of fraud, recklessness satisfies the scienter requirement") (citing Rolf v. Blyth, Eastman Dillon Co., 570 F.2d at 44). Ross v. Bolton, 904 F.2d 819 (2d Cir. 1994), where no fiduciary duty was owed, is inapposite. See id. at 824 (recklessness insufficient for aiding and abetting liability where no fiduciary duty).
C. Remedy
Finally, the SEC seeks the following remedies: a permanent injunction; disgorgement; prejudgment interest on the amount of disgorgement; and a civil monetary penalty. Once a violation of the federal securities laws has been found, a district court "has broad equitable power to fashion appropriate remedies." SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1474 (2d Cir. 1996)
1. Permanent Injunction
A permanent injunction is appropriate where "'there is a likelihood that, unless enjoined, the violations will continue.'" First Jersey Securities, 101 F.3d at 1477 (quoting Commodity Futures TradingCommission v. American Board of Trade. Inc., 803 F.2d 1242, 1250-51 (2d Cir. 1996)) . A permanent injunction may be particularly appropriate where a violation was "founded on systematic wrongdoing, rather than an isolated occurrence," or involved a "high degree of scienter." Id. (quoting United States v. Carson, 52 F.3d 1173, 1184 (2d Cir. 1996); SEC v. Posner, 16 F.3d 520, 521 (2d Cir. 1994)). It is clear that all three defendants' actions constituted systematic wrongdoing, rather than isolated occurrences. The IPO share scheme involved approximately two hundred investors and lasted several months. The SEC has shown that Monas controlled Milan even after his incarceration, and that he paid himself substantial funds from Milan. Lamhut ran Milan's day-to-day operations after Monas was incarcerated, and converted Milan funds on the eve of this Court's orde.r freezing those funds. The SEC also has shown that at best Cope acted with reckless disregard for substantial evidence that the transactions he recommended to customers were fraudulent; at worst, Cope acted with knowledge of the fraud but continues to maintain that he was duped. Cope has supplied no affidavit explaining his failure to act. There is ample basis for the entry of a permanent injunction against Monas, Lamhut and Cope.
In Randy, the court entered a permanent injunction against the defendant against whom summary judgment had been granted on the basis of recklessness. See Randy, 38 F. Supp. at 673. The court reasoned:
[The defendant] continues to maintain that he unknowingly became involved in a fraudulent scheme . Essentially, he depicts himself as an unwitting participant in a scheme that was concocted by [a codefendant]. His position is incredible and ignores the abundance of evidence that he knew or, at the very least, should have known of the nature of the scheme. He has also failed to assure explicitly or through his conduct that he will refrain from similar violations in the future.Id. The same reasoning applies here.
2. Disgorgement; Pre-Judgment Interest
A district court also has broad discretion to order disgorgement of profits from illegal activities. See First Jersey Securities, 101 F.3d at 1474. "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."Id.
In deciding whether to award prejudgment interest, the full compensation of victims is of primary concern. A court must 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."Id. at 1476 (internal quotation omitted). In an SEC enforcement action, "the remedial purpose of the statute takes on special importance." Id. Generally, prejudgment interest at the IRS underpayment rate is appropriate because "[t]hat rate reflects what it would have cost to borrow the money from the government and therefore reasonably approximates one of the benefits the defendant derived from its fraud."Id.
Here, both full disgorgement and prejudgment interest at the IRS underpayment rate are appropriate, in order to deter Monas, Lamhut and Cope from future violations of the securities laws and to make their victims whole to the fullest extent possible. No defendant has identified a reason why such a remedy should not be imposed. The amount of disgorgement will be determined at a hearing after the conclusion of the Receiver's investigation.
3. Civil Monetary Penalty
Finally, the SEC asks that the Court impose a civil monetary penalty pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d) (3). Because the amount of the penalty "shall be determined by the court in light of the facts and circumstances," 15 U.S.C. § 78u(d)(3)(B) (i), the Court will address the issue of penalty at the close of the case, following the conclusion of the Receiver's investigation and in conjunction with the determination of the amount of disgorgement.
CONCLUSION
The SEC's motion for summary judgment against Monas, Lamhut and Cope on its first, second and fourth claims is granted. The SEC shall submit a proposed permanent injunction within two weeks of the date of this Opinion. The SEC is also awarded disgorgement and pre-judgment interest. The amount of disgorgement and pre-judgment interest, as well as the imposition of any civil monetary penalty, shall be determined upon the conclusion of the Receiver's investigation. Finally, for the reasons set forth in this Court's Orders dated August 24 and September 21, 2000, Monas' other applications for relief are denied.
SO ORDERED: