US Securities and Exchange Commission v. Patel et al

Filing 364

ORDER granting in part 361 the SEC's motion for default judgment. So Ordered by Judge Steven J. McAuliffe.(lat)

UNITED STATES DISTRICT COURT
DISTRICT OF NEW HAMPSHIRE
United States Securities
and Exchange Commission,
Plaintiff
v.

Case No. 07-cv-39-SM
Opinion No. 2013 DNH 101

Hor Chong (David) Boey,
and Jerry A. Shanahan,
Defendants
O R D E R
The United States Securities and Exchange Commission (the
“SEC”) seeks a default judgment against Defendant Hor Chong
(David) Boey, and relief in the nature of a permanent injunction,
disgorgement, civil penalties and an officer and director bar.
Doc. no. 361.

On October 15, 2008, the SEC filed its amended complaint,
naming Boey and others as defendants.

Doc. no. 150.

Because

Boey “failed to plead or otherwise defend,” on June 4, 2013,
pursuant to Fed. R. Civ. P. 55(a) and Local Rule 55.1, the clerk
entered a default.

A damages hearing was held on July 17, 2013.

Although provided notice, neither Boey nor his counsel appeared.

I.

Liability
In its amended complaint, the SEC alleges that Boey, Vice

President of Finance for Enterasys Network Inc.’s Asia Pacific
region, (1) used a devise, scheme, or artifice to defraud
investors and engaged in a transaction, practice, or course of
business that operated as a fraud or deceit in connection with
the offer, sale, or purchase of securities of Enterasys, all in
violation of the anti-fraud provisions of Section 17(a) of the
Securities Act, Section 10(b) of the Exchange Act, and Rule 10b5.; (2) violated Section 13(b)(5) of the Exchange Act and Rule
13b2-1 by falsifying Enterasys’ books and records; (3) violated
Rule 13b2-2 of the Exchange Act by providing false documents
during an audit; and (4) aided and abetted violations of Section
13(a) and 13(b)(2)(A) of the Exchange Act and the rules enacted
under these provision.

Am. Compt., doc. no. 150, at 98-102.

See

15 U.S.C. § 77(a)(1)-(3); 15 U.S.C. § 78j(b); 15 U.S.C.
§§ 78m(a), 78(b)(2)(A); 15 U.S.C. § 78m(b)(5); 17 C.F.R.
§§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13.

Having failed to answer or otherwise respond to the
allegations, Boey “is taken to have conceded the truth of the
factual allegations in the complaint as establishing the grounds
for liability.”

Franco v. Selective Ins. Co., 184 F.3d 4, 9 n.3

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(1st Cir. 1999).

The court finds that the conceded factual

allegations establish the violations alleged.1

II.

Remedy

Disgorgement and Prejudgment Interest
The SEC seeks disgorgement of profits and prejudgment
interest.

As an equitable remedy, disgorgement “does not serve

to punish or fine the wrongdoer, but simply serves to prevent
[his] unjust enrichment.”

SEC v. Druffner, 802 F. Supp. 2d 293,

297 (D. Mass. 2011) (quotation marks omitted).

The court has

broad discretion to order disgorgement and prejudgment interest.
SEC v. Dibella, 2008 WL 6965807, at *2-3 (D. Conn. March 13,
2008).

The SEC has established a disgorgement figure of $29,576.40,
representing Boey’s net profits from his exercise of 4000 options
on January 31, 2002, after Enterasys had filed its 10Q for
Q2TY2001.

Because this figure is “the amount by which [Boey] was

unjustly enriched,” disgorgement of that amount is fair and
equitable.

SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978).

In addition, an award of prejudgment interest of $24,044.21 “is
necessary to prevent” Boey “from receiving the benefit of what

1

Prior to the filing of this civil suit, Boey was found
guilty of criminal securities fraud related to the transaction
with Ariel International Technology Co., Ltd.
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would otherwise be an interest-free loan.”

Druffner, 802 F.

Supp. 2d at 298.

Civil Penalty
The SEC asks the court to impose on Boey a “third tier”
civil penalty of $120,000.
15 U.S.C. § 77t(d)(2)(C).

See 15 U.S.C. § 78(u)(d)(3)(B)(iii);
In authorizing civil penalties,

Congress intended “to punish and deter securities law violations,
and such penalties may be imposed in addition to disgorgement and
injunctive relief.”

SEC v. Tanner, 2003 WL 21523978, at *2

(S.D.N.Y. July 3, 2003).

In order to impose a third tier penalty, the court must find
that Boey’s violation(s) (1) “involved fraud, deceit,
manipulation or deliberate or reckless disregard of a regulatory
requirement,” and (2) “directly or indirectly resulted in
substantial losses or created a significant risk of substantial
losses to other persons.”

15 U.S.C. §§ 78u(d)(3)(B)(iii).

Under

the statute and SEC rules, a third tier penalty for conduct
occurring between February 2, 2001, and February 14, 2005, “shall
not exceed the greater of” $120,000 “for a natural person, . . .
or . . . the gross amount of pecuniary gain to such a defendant
as a result of the violation.”

15 U.S.C. § 78u(d)(3)(B)(iii);

17 C.F.R. §§ 201.1002 and 201.1003.

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Notably, “the statute does

not require that the full . . . allowable penalty be imposed, but
establishes a ceiling for the amount of the penalty.”

SEC v.

Renaissance Capital Mgmt., Inc., 2003 WL 23353464, at *6
(E.D.N.Y. Aug. 25, 2003).

Under the facts of this case, a third tier penalty is
appropriate.

Boey’s conduct involved fraud and deceit.

Moreover, Boey’s direct violations and his aiding and abetting of
Enterasys’ overall fraud “indirectly resulted in substantial
losses,” or a “significant risk” of such losses, to the investing
public.

15 U.S.C. § 78u(d)(3)(B)(iii).

See SEC v. Zwik, 2007 WL

831812, at *2 (S.D.N.Y. March 16, 2007) (imposing third tier
penalty on aider and abetter).

Although the statute authorizes a penalty of up to $120,000
for each violation, a more modest penalty — $10,000 — is
warranted under the circumstances of this case.

Those

circumstances include the relatively small dollar amount of
Boey’s personal ill-gotten gains, and his secondary role in
Enterasys’ overall fraudulent conduct.

See Renaissance Capital,

2003 WL 23353464, at *6 (imposing third tier penalties of
$30,000, $20,000, and $5,000 against co-defendants, based on the
fact that they raised, respectively, 14%, 10%, and 2% of the
total amount fraudulently raised from investors).

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Moreover,

because there is no imminent need for further deterrence, the
penalty is punitive only.

Officer and Director Bar
The SEC requests that the court permanently bar Boey from
serving as an officer or director of a public company.

A court

may impose an officer and director bar “if the person's conduct
demonstrates substantial unfitness to serve as an officer or
director.”

15 U.S.C. § 78u(d)(2).

The bar may be conditional or

unconditional, and permanent or for a period of time.

Id.

In

determining a defendant’s fitness, a court may consider “(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 v. Patel, 61 F.3d 137, 141 (2d Cir. 1995)

(quotation marks omitted).

A lifetime bar — as the SEC seeks here — is an extraordinary
remedy, usually reserved for those defendants who engaged in
prior securities violations, and under circumstances suggesting
the likelihood of future violations.

DiBella, 2008 WL 6965807,

at *10-11 (citing SEC v. Drexel Burnham Lambert, Inc., 837 F.

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Supp. 587 (S.D.N.Y. 1993), aff’d SEC v. Posner, 16 F.3d 520 (2d
Cir. 1994) (affirming lifetime bar against recidivist
defendants)).

Boey has no history of prior violations.

In

addition, although he acted with a high level of scienter, the
SEC has not shown that there is any plausible risk that he will
commit future violations.

As the SEC acknowledges, Boey has

already been “deported and . . . sanctioned by the SEC, which
suspended him from practicing before it.”
1, at 23.

Pl. Br., doc. no. 361-

And, over a decade has passed with no further

misconduct on Boey’s part.
bar is unnecessary.

Under these circumstances, a lifetime

Instead, a five-year bar adequately reflects

the circumstances, which include Boey’s role in Enterasys’
widespread fraud, his modest economic stake in the violation, his
first-time offender status, and the small risk of recidivism.
See SEC v. Chester Holdings, Ltd., 41 F. Supp. 2d 505, 530
(D.N.J. 1999) (ordering five-year officer and director bar in
light of defendant’s role in the fraud and her first-time
offender status).

Permanent Injunction
The Commissioner seeks an order permanently enjoining Boey
from engaging in violations of the securities laws.

The court is

“vested with wide discretion when an injunction is sought to
prevent future violations of the statutory securities laws.”

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SEC

v. John Adams Trust Corp., 697 F. Supp. 573, 577 (D. Mass. 1988).
Because a permanent injunction is a severe remedy, the SEC
carries a heavy burden to justify its imposition:
“A permanent injunction is a drastic remedy and should
not be granted lightly, especially when the conduct has
ceased.” SEC v. Steadman, 967 F.2d 636, 648 (D.C. Cir.
1992) . . . “There must be ‘some cognizable danger of
recurrent violation, something more than the mere
possibility which serves to keep the case alive.’”
Although “fraudulent past conduct gives rise to an
inference of a reasonable expectation of continued
violations,” SEC v. Opulentica, LLC, 479 F. Supp. 2d at
329, . . . the SEC must “go beyond the mere facts of
past violations and demonstrate a realistic likelihood
of recurrence.” SEC v. Commonwealth Chem Sec., Inc.,
574 F.2d 90, 99-100 (2d Cir. 1978).
Dibella, 2008 WL 6965807, at *12 (some citations omitted).
As noted, the SEC here has not shown any realistic
likelihood that Boey will commit similar violations in the
future.

Twelve years have passed since Boey’s fraudulent

conduct, and the SEC does not argue that he has engaged in any
additional illegal conduct.

And although Boey has not defended

himself in this civil enforcement action, his inaction does not
constitute a protestation of innocence indicating a lack of
remorse.

Moreover, to the extent there is any lingering danger

of recidivism, the disgorgement, five-year officer and director
bar, and civil penalty will serve as adequate deterrents.
these reasons, a permanent injunction is not warranted.

For
See id.

at *13 (ordering disgorgement and civil penalties, but denying

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SEC’s request for a permanent injunction); SEC v. Jones, 476 F.
Supp. 2d 374, 384-85 (S.D.N.Y. 2007) (denying SEC’s request for a
permanent injunction); SEC v. Ingoldsby, 1990 WL 120731 at *2
(D. Mass. May 15, 1990) (same).

Conclusion
The SEC’s motion for default judgment, doc. no. 361, is
granted in part.

Boey shall pay $29,576.40 as disgorgement,

$24,044.21 in prejudgment interest, and a civil penalty of
$10,000.00, for a total of $63,620.61.

Boey is hereby enjoined

from serving as an officer or director of a public company for
five years.

The Clerk shall enter judgment in accordance with

this order.

SO ORDERED.
____________________________
Steven J. McAuliffe
United States District Judge
July 22, 2013
cc:

Peter D. Anderson, Esq.
John R. Baraniak, Jr., Esq.
Conrad W. P. Cascadden, Esq.
William Cintolo, Esq.
Philip G. Cormier, Esq.
Victor W. Dahar, Esq.
Maria R. Durant, Esq.
Nancy J. Gegenheimer, Esq.
Andrew Good, Esq.
Steven M. Gordon, Esq.
Miranda Hooker, Esq.
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Leslie J. Hughes, Esq.
Lucy J. Karl, Esq.
William H. Kettlewell, Esq.
John C. Kissinger, Esq.
Diana K. Lloyd, Esq.
James Lux, Esq.
Jeffrey S. Lyons, Esq.
Richard J. McCarthy, Esq.
Peter B. Moores, Esq.
Ann Pauly, Esq.
Michelle R. Peirce, Esq.
James W. Prendergast, Esq.
Michael D. Ramsdell, Esq.
Jeffrey B. Rudman, Esq.
James A. Scoggins, II, Esq.
Jonathan A. Shapiro, Esq.
Kevin E. Sharkey, Esq.
Bruce A. Singal, Esq.
Elizabeth H. Skey, Esq.
Peter A. Spaeth, Esq.

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