Securities and Exchange Commission v. Braslau et al
Filing
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ORDER GRANTING PLAINTIFFS MOTION FOR DEFAULT JUDGMENT AGAINST DEFENDANT STUART E. RAWITT 36 by Judge Otis D. Wright, II: Rawitt be permanently enjoined from future violations of: (i) Section 17(a) of the Securities Act; (ii) Section 10(b) of the Ex change Act and Rule 10b-5; (iii) Section 15(a)(1) of the Securities Exchange Act; and (iv) Section 15(b)(6)(B)(i) of the Securities Exchange Act. The Court also ORDERS that Rawitt pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined at a later date upon noticed motion. (lc).Modified on 11/18/2014 .(lc).
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United States District Court
Central District of California
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SECURITIES AND EXCHANGE
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Case № 2:14-cv-01290-ODW(AJWx)
COMMISSION,
Plaintiff,
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ORDER GRANTING PLAINTIFF’S
v.
MOTION FOR DEFAULT
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SAMUEL BRASLAU, RAND J.
JUDGMENT AGAINST
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CHORTKOFF, and STUART E.
DEFENDANT STUART E. RAWITT
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RAWITT,
[36]
Defendants.
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I.
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INTRODUCTION
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Samuel Braslau, Rand J. Chortkoff, and Stuart E. Rawitt fraudulently offered
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and sold securities to investors who were told their money would finance a multi-
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million dollar movie starring A-list celebrities that was “sure” to generate significant
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returns.
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percentage of investor proceeds earmarked for purposes unrelated to making the
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movie, likely never could have been made.
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Commission (“SEC”) filed suit against Braslau, Chortkoff, and Rawitt for multiple
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violations of the Securities Act and the Securities Exchange Act. (ECF No. 1.) When
(Compl. ¶ 1.)
The movie was never made and, considering the large
(Id.)
The Securities Exchange
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Rawitt failed to respond to the Complaint, default was entered and the SEC moved for
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entry of default judgment. (ECF No. 36.) For the reasons discussed below, the Court
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GRANTS the SEC’s Motion.1 (Id.)
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II.
FACTUAL ALLEGATIONS
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1.
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In 2010, Braslau and Chortkoff discussed acquiring several million dollars
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purportedly to finance the production of a movie. (Compl. ¶ 19.) In December 2010,
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Braslau formed Mutual Entertainment, LLC—a company that offered and sold
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securities in the form of “membership units” investors purchased ostensibly to finance
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Formation of the Fraud
the movie. (Id. ¶ 20.)
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An unemployed actor was named the managing member of Mutual
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Entertainment, but Braslau exercised de facto control over the company, its finances,
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and operations. (Id. ¶ 21.) The actor-managing member and Braslau shared signature
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authority over Mutual Entertainment’s bank accounts, but Braslau transacted all the
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activity and did not share records of his transactions. (Id. ¶ 22.)
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In January 2011, Mutual Entertainment contracted with a film director to
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purchase the rights to an unpublished story titled Marcel, later retitled The Smuggler,
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for “$25,000 or 1% of the final going in budget, whichever amount is greater.” (Id.
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¶ 23.) Film Shoot, LLC paid $25,000 to Jasmine Pictures pursuant to this agreement.
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(Id.) An unemployed musician was named the managing member of Film Shoot, but
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Braslau exercised de facto control over the company, its finances, and operations. (Id.
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¶ 42.) The musician-managing member and Braslau shared signature authority over
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Film Shoot’s bank accounts, but Braslau transacted all the activity and did not share
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records of his transactions. (Id.)
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Mutual Entertainment contracted with the same director to direct the movie and
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agreed to finance the estimated $3.5 million budget. (Id. ¶ 24.) The director was
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After carefully considering the papers filed concerning the Motion, the Court deems the matter
appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15.
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never used or paid. (Id.)
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In February 2011, Mutual Entertainment contracted with Film Vergnuegen,
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Inc. to secure a producer. (Id. ¶ 25.) The producer was never used and was paid
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$75,000. (Id.)
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In March 2011, Mutual Entertainment began offering and selling up to $7.5
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million of securities in the form of membership units at $1 per unit with a $25,000
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required minimum. (Id. ¶ 27.) The company reserved, and exercised, the right to
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accept investments less than $25,000. (Id.)
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2.
Execution of the Fraud
Mutual Entertainment obtained investors through Mutual Entertainment
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Ventures, Inc. (“MEV”) and Chortkoff.
(Id. ¶ 28.)
MEV and Chortkoff hired
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“fronters” to cold call potential investors from lead lists that MEV and Chortkoff
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purchased. (Id.) Braslau and Chortkoff created a script that fronters used to solicit
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potential investors. (Id. ¶ 29.) Per the script, fronters asked whether the person was a
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qualified investor and, if so, whether the person wanted to opt in and hear more about
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an “opportunity to get in with a production company seeking qualified investors.”
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(Id.)
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Once the self-accredited potential investor opted in, fronters explained that
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Mutual Entertainment was looking for people to invest in “the kind of project that
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only comes around once in a great while.” (Id. ¶ 31.) Fronters said the movie would
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be directed and produced by professionals with previous commercial success. (Id.)
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Fronters provided a website with the movie’s “proposed” A-list cast and asked
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whether the person was interested in hearing more about the investment opportunity
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from a “Production Executive.” (Id.)
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Once the self-accredited potential investor expressed continued interest, the
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fronter provided the person’s information to Chortkoff, and Chortkoff provided the
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information to a “closer.” (Id. ¶ 32.)
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Chortkoff oversaw the mailing of written offering materials to potential
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investors. (Id. ¶ 34.) Among other materials, he supplied a glossy brochure that
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included biographical sketches of the director and producer, a “proposed” A-list cast,
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and budget and revenue figures for “comparable” movies. (Id.) The named director
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and producer never provided any services. (Id. ¶¶ 24–25.) The proposed A-list cast
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members were never contacted about appearing in the movie. (Id. ¶ 36.) And the
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movies advertised as comparable were actually filmed and released. (Id. ¶ 35.)
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From April 2011 through August 2013, Braslau, Chortkoff, and salespeople
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raised over $1.8 million from at least 60 investors nationwide. (Id. ¶ 5.) Braslau
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drafted and Chortkoff distributed memoranda to investors that affirmatively
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misrepresented or failed to disclose material facts, including the rates of commissions
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paid to salespeople.
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Defendants and their associates, often as sales commissions or consulting fees, or to
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facilitate the offering. (Id. ¶ 7.)
(Id. ¶ 44.) Almost all investor money was diverted to the
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3.
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Chortkoff hired Rawitt as a “closer.” (Id. ¶ 57.) Rawitt received a commission
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of 27% of the amount invested by any person that Rawitt closed by himself and 10 to
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15% of the amount invested by any person that Rawitt closed with the assistance of
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others. (Id.) Through his involvement, Rawitt acted as a broker and dealer; however,
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he was not registered with the SEC. (Id. ¶ 10.)
Rawitt’s Role
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On July 15, 2010, Rawitt entered into a consent judgment permanently barring
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him from violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of
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the Securities Exchange Act. See SEC v. Rockwell Energy of Texas, LLC, et al., 4:09-
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cv-4080 (S.D. Texas).
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Chortkoff, Rawitt was subject to the SEC Order. (Id. ¶ 11.)
(Id. ¶ 15.)
During his involvement with Braslau and
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4.
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On February 20, 2014 the SEC filed this action against Defendants for multiple
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The Civil Action
violations of the Securities Act and the Securities Exchange Act.
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(ECF No. 1)
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Discovery was stayed pending completion of a parallel criminal case against
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Defendants. (ECF No. 14.) On August 27, 2014, the SEC’s process server personally
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served Rawitt with the Summons and Complaint. (ECF No. 22.) When Rawitt failed
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to answer or otherwise respond, the Clerk of Court entered default. (Id.) On October
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9, 2014, the SEC moved for default judgment. Because Rawitt has not appeared or
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retained counsel in this action, the SEC served the instant Motion on Rawitt’s criminal
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defense attorney by U.S. mail and email. (Greco Decl. ¶ 9.) Rawitt has not filed an
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opposition.
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5.
The Criminal Action and Rawitt’s Guilty Plea
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On October 24, 2014, Rawitt entered a plea agreement with the United States
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Attorney’s Office in United States v. Samuel Braslau, et al., 2:14-cr-44-RGK (C.D.
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Cal.). (Greco Decl. ¶ 3, Ex. 1.) He pleaded guilty to mail fraud in violation of 18
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U.S.C. § 1341. (Id.) In the civil action, the SEC alleges that Rawitt made numerous
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false and misleading statements to potential investors. (Compl. ¶¶ 85–95.) In the
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criminal action, he said, “[a]lthough I do not recall each and every statement, I do
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admit making many, if not most, of them to prospective investors.” (Rawitt Decl.
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¶ 13.) In the civil action, the SEC alleges that Rawitt “knew or was reckless in not
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knowing” that his representations were false. (Compl. ¶ 98.) In the criminal action,
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he said that he did not know his statements were false but admitted that he “chose not
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to know and did not question [co-defendants Braslau and Chortkoff] as to the basis for
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any such statement” and agreed that “at the very minimum [his] lack of knowledge,
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therefore, was ‘reckless.’” (Rawitt Decl. ¶ 16.)
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6.
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The SEC alleges four claims against Rawitt: (i) fraud in the offer or sale of
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securities, in violation of Section 17(a) of the Securities Act; (ii) fraud in connection
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with the purchase or sale of securities, in violation of Section 10(b) of the Exchange
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Act and Rule 10b-5; (iii) acting as an unregistered broker or dealer, in violation of
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Section 15(a)(1) of the Securities Exchange Act; and (iv) associating with a broker or
Judgment Sought
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dealer in contravention of a prior SEC bar order, in violation of Section 15(b)(6)(B)(i)
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of the Securities Exchange Act. (Id. ¶¶ 104 –115.)
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The SEC seeks a permanent injunction barring Rawitt from future violations of
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the Securities Act and the Securities Exchange Act. (Mot. 2.) The SEC also seeks an
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order that Rawitt is subject to disgorgement of all ill-gotten gains, prejudgment
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interest and the imposition of a civil penalty, but will later seek a final judgment
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setting forth specific monetary relief. (Id.)
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III.
LEGAL STANDARD
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Federal Rule of Civil Procedure 55(b) authorizes a district court to grant default
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judgment after the Clerk enters default under Rule 55(a). Local Rule 55-1 requires
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that the movant submit a declaration establishing (1) when and against which party
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default was entered; (2) identification of the pleading to which default was entered;
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(3) whether the defaulting party is a minor, incompetent person, or active service
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member; and (4) that the defaulting party was properly served with notice.
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A district court has discretion whether to enter default judgment. Aldabe v.
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Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). Upon default, the defendant’s liability
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generally is conclusively established, and the well-pleaded factual allegations in the
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complaint are accepted as true. Televideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917–
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(9th Cir. 1977)).
In exercising its discretion, a court must consider several factors, including
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(1) the possibility of prejudice to plaintiff; (2) the merits of plaintiff’s substantive
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claim; (3) the sufficiency of the complaint; (4) the sum of money at stake; (5) the
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possibility of a dispute concerning material facts; (6) whether the defendant’s default
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was due to excusable neglect; and (7) the strong policy underlying the Federal Rules
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of Civil Procedure favoring decisions on the merits. Eitel v. McCool, 782 F.2d 1470,
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1471-72 (9th Cir. 1986).
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Upon proper showing, a permanent injunction shall be granted in enforcement
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actions brought by the SEC pursuant to Section 20(b) of the Securities Act and
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Section 21(d) of the Securities Exchange Act. See 15 U.S.C. § 77t(b); 15 U.S.C.
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§ 78u(d)(1). That burden is met when the evidence establishes a reasonable likelihood
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of a future violation of the securities laws. SEC v. Koracorp Indus., Inc., 575 F.2d
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692 (9th Cir. 1978). The factors to be considered include the degree of scienter
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involved; the isolated or recurrent nature of the infractions; the defendant’s
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recognition of the wrongful nature of his conduct; the likelihood that, based on the
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defendant’s occupation, future violations might occur; and the sincerity of the
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defendant’s assurances against future violations. See id.
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IV.
A.
DISCUSSION
Notice
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On August 27, 2014, the SEC’s process server personally served Rawitt with
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the Summons and Complaint. (ECF No. 22.) Therefore, the Court finds that the SEC
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properly served Rawitt in compliance with Federal Rule of Civil Procedure
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4(e)(2)(A).
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B.
Eitel Factors
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The Court finds that the Eitel factors weigh in favor of default judgment.
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1.
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If the Court does not grant default judgment, the case will be at a standstill.
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Rawitt has had ample opportunity to participate in the adjudicatory process and help
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the Court resolve this matter.
The SEC Would Suffer Prejudice
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2.
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The SEC’s allegations establish that Rawitt violated Section 17(a) of the
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Securities Act and Section 10(b) of the Securities Exchange Act. Section 17(a)
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prohibits fraud in the offer and sale of securities. Similarly, Section 10(b) and Rule
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10b-5 prohibit fraud in connection with the purchase or sale of any security. A party
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violates these anti-fraud provisions by making false or misleading representations that
The SEC Has Brought Meritorious Claims
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concern material facts. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC
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Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
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In his criminal guilty plea, Rawitt substantiated the SEC’s civil allegations by
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admitting that he recklessly made false and material misrepresentations to potential
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investors. (Rawitt Decl. ¶¶ 13, 16.) Therefore, he violated Section 17(a) of the
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Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act.
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The SEC’s allegations establish that Rawitt violated Section 15(a)(1) of the
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Securities Exchange Act, which requires that anyone who effects a transaction to
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induce the purchase or sale of any security be registered with the SEC.
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Rawitt acted as a broker in connection with co-Defendants’ securities offerings.
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He directly solicited potential investors and raised substantial amounts of money. He
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received transaction-based compensation, earning 27% of the amount invested by any
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person he closed by himself and 10 to 15% of the amount invested by any person he
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closed with the assistance of others. Rawitt was not registered as a broker or dealer
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when he sold securities. Therefore, he violated Section 15(a)(1) of the Securities
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Exchange Act.
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The SEC’s allegations establish that Rawitt violated Section 15(b)(6)(B)(i) of
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the Securities Exchange Act, which prohibits any person from associating with a
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broker or dealer in contravention of a prior SEC bar order. Through his involvement
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with Braslau and Chortkoff, Rawitt violated the October 27, 2010 Order instituted by
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the SEC. Therefore, he violated Section 15(b)(6)(B)(i).
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The SEC has pleaded actionable Securities Act and Securities Exchange Act
claims against Rawitt.
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3.
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The SEC seeks a Court order that Rawitt be subject to disgorgement,
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prejudgment interest and the imposition of a civil penalty, but does not currently seek
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any specific amount for monetary relief. Therefore, there is no amount at stake in this
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Motion and this factor does not apply.
The Amount at Stake Weighs in Favor of Default Judgment
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4.
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The statements that Rawitt made in his criminal guilty plea substantiate the
There is Little Possibility of Dispute as to Material Facts
3 SEC’s civil allegations and therefore leave little possibility of a dispute as to material
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5.
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The SEC’s process server personally served Rawitt with the Summons and
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Complaint and Rawitt did not answer or otherwise respond. The SEC then filed the
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instant Motion and served Rawitt’s criminal defense attorney by U.S. mail and email.
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Rawitt has not filed an opposition. This leaves little possibility that default was due to
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There is Little Possibility Default was Due to Excusable Neglect
excusable neglect.
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6.
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Policy for Deciding on the Merits Weighs in Favor of Granting Default
Judgment
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Although Rawitt did not respond to the Complaint, his admissions in his guilty
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plea in the criminal case substantiate the SEC’s civil allegations. The Court finds that
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this factor does not preclude entry of default judgment.
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C.
Permanent Injunction
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The factors established for imposing injunctive relief weigh heavily in favor of
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granting a permanent injunction. Rawitt’s violations were continued and egregious.
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Repeatedly, Rawitt made false and misleading representations to potential investors
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that were designed to convince them to invest so that he could earn substantial and
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undisclosed sales commissions drawn from their investment. He did so with full
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knowledge that no movie had been made or likely could ever be made.
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V.
CONCLUSION
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The Court ORDERS that Rawitt be permanently enjoined from future
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violations of: (i) Section 17(a) of the Securities Act; (ii) Section 10(b) of the
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Exchange Act and Rule 10b-5; (iii) Section 15(a)(1) of the Securities Exchange Act;
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and (iv) Section 15(b)(6)(B)(i) of the Securities Exchange Act.
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ORDERS that Rawitt pay disgorgement, prejudgment interest and a civil penalty
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The Court also
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in amounts to be determined at a later date upon noticed motion. For the reasons
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discussed above, the Court GRANTS the SEC’s Motion for Default Judgment. (ECF
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No. 36.)
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IT IS SO ORDERED.
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November 17, 2014
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____________________________________
OTIS D. WRIGHT, II
UNITED STATES DISTRICT JUDGE
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