U.S. COMMODITY FUTURES TRADING COMMISSION v. SIEGEL et al
Filing
12
ORDER granting 11 Motion for Default Judgment. Signed by Judge Noel L. Hillman on 12/30/2014. (tf, )
.
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
_________________________________
UNITED STATES COMMODITY FUTURES
TRADING COMMISSION,
Plaintiff,
Civil No. 13-5755 (NLH/JS)
v.
FINAL ORDER OF DEFAULT
JUDGMENT AS TO DEFENDANTS
MICHAEL J. SIEGEL, TOTE
FUND LLC AND MJS CAPITAL
MANAGEMENT LLC
MICHAEL J. SIEGEL, et al.,
Defendants.
__________________________________
HILLMAN, District Judge
On September 27, 2013, the Commodity Futures Trading
Commission (hereafter, “Commission”) filed a complaint against
Defendants Michael J. Siegel, TOTE Fund LLC (hereafter, “TOTE”)
and MJS Capital Management LLC (hereafter, “MJS”) seeking
injunctive and other equitable relief, as well as the imposition
of restitution and civil monetary penalties, for violations of
the Commodity Exchange Act, as amended (“Act”), 7 U.S.C. §§ 1 et
seq. (2002), and the Commission’s Regulations promulgated
thereunder, 17 C.F.R. § 1 et seq. (2004).
Defendants failed to respond to the complaint, and the
Commission thus requested a Clerk’s entry of default on January
31, 2014.
Thereafter, Defendants having failed to seek to
vacate the entry of default, the Commission filed the present
1
motion for default judgment.
The Court, having carefully
considered the complaint, the allegations of which are wellpleaded and hereby taken as true, the Commission’s motion for
entry of default judgment, and the Declaration of Kara L. Mucha,
Futures Trading Investigator for the Commission (hereafter,
“Mucha Decl.”), finds that there is good cause for the entry of
this Final Order of Default Judgment as to Defendants Siegel,
TOTE, and MJS and that there is no just reason for delay.
Therefore, on this
30th
day of December, 2014, the Court:
GRANTS the Commission’s motion [Doc. No. 11] for judgment
of default as to Defendants Siegel, TOTE and MJS;
ORDERS the entry of the Findings of Fact and Conclusions of
Law set forth below; and
GRANTS the Commission’s requests for relief, as set forth
below.
I.
FINDINGS OF FACT
The Court hereby finds as follows:
A.
The Parties
1.
The Commission is an independent federal
regulatory agency charged with the responsibility for
administering and enforcing the provisions of the Act and the
Regulations promulgated under it.
2.
(Compl. ¶ 12.)
Defendant TOTE was a Delaware limited liability
company with its principal place of business in Los Angeles,
2
California.
TOTE served as the commodity pool operator
(hereafter, “CPO”) for a commodity pool, the Monarch Futures
Fund LLC (hereafter, “Monarch”), from August 2007 through at
least October 2010.
TOTE acted as the manager of Monarch.
(Id.
¶¶ 13, 16, 18.)
3.
Defendant MJS was a Delaware limited liability
company with its principal place of business in Los Angeles,
California.
MJS served as the CPO for a commodity pool, the QEP
Futures Fund LLC (hereafter, “QEP”), from August 2008 through at
least October 2010.
MJS acted as the manager of QEP.
(Id. ¶¶
14, 16, 20.)
4.
Defendant Siegel is an individual who resides in
Northfield, New Jersey.
Siegel is the chief executive officer
and sole principal of both TOTE and MJS, and was responsible for
the day-to-day operations of TOTE and MJS.
Siegel controlled
the operations of TOTE including controlling its bank accounts,
and distributing all promotional materials.
B.
(Id. ¶ 15.)
Siegel’s Formation and Operation of the Monarch and
QEP Pools
5.
In August 2007, Siegel formed Monarch as a
vehicle for trading futures contracts using an automated trading
system he developed called MX2.
In August 2008, Siegel formed
QEP for the same purpose. (Id. ¶ 16.)
3
6.
Siegel solicited pool participants for Monarch
and QEP from among students and family members of students he
taught to trade using his MX2 trading program, which
computerized Siegel’s trading philosophy.
7.
(Id. ¶ 17.)
Approximately ten individuals and one entity
placed funds totaling $400,000 with Monarch.
8.
(Id. ¶ 19.)
TOTE filed a Notice of Claim Exemption from
Commodity Pool Operator registration pursuant to Commission
Regulation 4.13(a)(2), 17 C.F.R. § 4.13(a)(2) (2007), with
reference to Monarch, which is listed as a commodity pool
operated by TOTE.
9.
(Id. ¶ 18; see also Mucha Decl., Ex. A.)
Three individuals placed funds totaling
approximately $975,000 with QEP.
10.
(Compl. ¶ 21.)
MJS filed a Notice of Claim Exemption from
Commodity Pool Operator registration pursuant to Commission
Regulation 4.13(a)(4), 17 C.F.R. § 4.13(a)(4) (2007), with
reference to QEP, which is listed as a commodity pool operated
by MJS.
(Id. ¶ 20; see also Mucha Decl., Ex. B.)
11.
Defendants used the mails or other
instrumentalities of interstate commerce by, inter alia, using
the United States Postal Service or other private or commercial
interstate carriers to send payments to pool participants and
wiring funds to and from pool accounts to Siegel’s personal bank
accounts.
(Compl. ¶ 49.)
4
C.
Siegel’s Misappropriation of Monarch and QEP Pool
Participant Funds
12.
TOTE and MJS were each to receive an incentive
fee of thirty-five percent (35%) of all net new trading profits
each month, plus 0.2 percent of the net asset values of the
pools as a monthly management fee and approximately two percent
(2%) of the net asset value of the pools annually as
administrative fees or operating expenses.
13.
(Compl. ¶ 23.)
Although Siegel’s trading generated some profits
in 2008, overall trading for both pools was unprofitable in
2009.
(Id. ¶ 24.)
14.
Because there were no profits for either pool in
2009, no incentive fees were due to Defendants.
15.
(Id. ¶ 25.)
From approximately January 2008 through October
2010, Siegel transferred from Monarch and TOTE to his personal
bank accounts and a credit card account approximately $105,186
more than he and TOTE were purportedly due in incentive and
other fees.
(Id. ¶ 26.)
16.
In September 2008, Siegel withdrew approximately
$36,000 from QEP to pay non-pool expenses.
In addition, from
September 2008 through October 2010, Siegel transferred from QEP
and MJS to his personal bank account and a credit card account
approximately $50,503 more than he and MJS were due in incentive
and other fees.
Thus, in total, Siegel transferred from the QEP
5
bank accounts and related account approximately $86,503 more
than he was purportedly due in incentive and other fees to his
personal bank accounts, a credit card account, and for the
purpose of paying non-pool expenses.
17.
(Id. ¶ 27.)
Siegel transferred approximately $511,598 from
bank accounts in the names of Monarch, QEP, and TOTE to his
personal bank accounts, to a credit card account and to at least
one individual.
expenses.
Siegel used some of these funds to pay personal
(Id. ¶ 28.)
18.
From September 2008 through October 2010, Siegel
earned $319,909 in incentive, management and administrative fees
based on his trading for Monarch and QEP.
19.
(Id.)
From August 2007 through October 2010, Defendants
withdrew in total approximately $191,689 from Monarch and QEP
for non-pool expenses and fees to which Defendants were not
entitled.
(Id.)
20.
Siegel testified that he did not keep track of
the incentive fees, and that he “was just drawing against the
fees that [he] felt . . . were being earned and [he] assumed
that the records and the brokerage office and the records at the
bank ultimately would . . . balance out.”
at 88:8-14.)
(Mucha Decl., Ex. E
He further testified that his principle in
determining the amount of incentive fees was “arbitrary,” that
he took whatever amount of money he felt he needed to pay
6
personal expenses and living expenses, and that he would
thereafter calculate what amount of funds should have been
withdrawn.
(Id. at 89:2-14.)
21.
Defendants Siegel and MJS failed to return funds
to at least two pool participants who sought to withdraw their
funds from QEP at or near the end of 2009.
(Compl. ¶ 29.)
Specifically, two QEP pool participants, Carl Coffman and Robert
Lund, sought to withdraw their funds from QEP at or near the end
of 2009.
(Mucha Decl. ¶ 46.)
Siegel and MJS failed to return
approximately $71,998.60 to Coffman and approximately $32,685.87
to Lund.
D.
(Id.)
Defendant TOTE Failed to Provide Copies of Monthly
Futures Commission Merchants Statements to the Monarch
Pool Participants
22.
From August 2007 through October 2010, TOTE,
acting through Siegel, failed to provide pool participants with
copies of the monthly statements received by TOTE from the
futures commission merchants (hereafter, “FCM”) who carried
Monarch’s trading accounts.
23.
(Compl. ¶ 30.)
Instead of providing monthly statements from the
FCM, TOTE, acting through Siegel, provided only a few quarterly
updates generally describing the status of Monarch’s trading and
sometimes included only a page or two of the statements received
from the FCM.
(Id. ¶ 32.)
7
E.
Siegel Controlled TOTE and MJS and was their Agent
24.
From August 2007 through October 2010, Siegel was
a controlling person of TOTE and MJS.
Siegel acted as the Chief
Executive Officer and sole principal of both TOTE and MJS.
Siegel was the sole person responsible for directing trades on
behalf of TOTE and MJS and for the day-to-day operations of TOTE
and MJS.
F.
(Id. ¶ 33.)
Recent Trading Communications
25.
Since the filing of the complaint in this matter,
the Commission has received inquiries from some individuals who
had prior dealings with Siegel concerning his trading system or
his mentoring.
These individuals informed Commission staff that
Siegel contact them recently to discuss participation in trading
activity.
II.
(Mucha Decl. ¶ 49.)
CONCLUSIONS OF LAW
A.
Jurisdiction and Venue
1.
This Court has jurisdiction over this action
pursuant to Section 6c of the Act, 7 U.S.C. § 13a-1, which
authorizes the Commission to bring an action in the United
States district court for injunctive relief against any person
whenever it shall appear to the Commission that such person has
engaged, is engaging, or is about to engage in any act or
practice constituting a violation of any provision of the Act or
any rule, regulation or order thereunder.
8
2.
Venue properly lies with the Court pursuant to
Section 6c(3) of the Act, 7 U.S.C. § 13a-1, in that the
Defendants are found in, inhabit, reside and/or transact
business in the District of New Jersey.
B.
Standard for Default Judgment
3.
The first step in obtaining a default judgment is
the entry of default.
“When a party against whom a judgment for
affirmative relief is sought has failed to plead or otherwise
defend, and that failure is shown by affidavit or otherwise, the
Clerk must enter the party’s default.”
4.
Defendants.
Fed. R. Civ. P. 55(a).
The Clerk properly entered default against
Pursuant to Federal Rule of Civil Procedure
4(e)(1), service of process may be effected on an individual by
“delivering a copy of the summons and of the complaint to the
individual personally[.]”
Fed. R. Civ. P. 4(e)(1).
Service of
process as to corporate defendants is proper if made, as was
done in this case, on a corporation’s officer “by delivering a
copy of the summons and of the complaint to an officer[.]”
R. Civ. P. 4(h)(1).
Fed.
Here, Defendant Siegel was served with the
summons and complaint directed to him, individually, and as an
officer of Defendants TOTE and MJS, on October 20, 2013.
of James A. Garcia ¶ 4.)
(Decl.
Pursuant to Federal Rule of Civil
Procedure 12(a)(1), Defendants were required to respond to the
Commission’s complaint within twenty-one days from the date of
9
service.
Although service of process was properly effected,
Defendants failed to timely respond to the complaint and have
otherwise failed to appear in this action.1
Accordingly, the
Commission requested entry of default on January 31, 2014 and
the Clerk properly entered default on February 3, 2014.
5.
“Federal Rule of Civil Procedure 55(b)(2)
authorizes courts to enter a default judgment against a properly
served defendant who fails to a file a timely responsive
pleading.”
Chanel v. Gordashevsky, 558 F. Supp. 2d 532, 535
(D.N.J. 2008) (citing Anchorage Assoc. v. Virgin Is. Bd. of Tax
Rev., 922 F.2d 168, 177 n.9 (3d Cir. 1990)).
However, a party
seeking default judgment “is not entitled to a default judgment
as of a right.”
Franklin v. Nat’l Maritime Union of America,
1991 U.S. Dist. LEXIS 9819, at *3-4 (D.N.J. 1991) (quoting 10
Wright, Miller & Kane, Federal Practice and Procedure § 2685
(1983)), aff’d, 972 F.2d 1331 (3d Cir. 1992).
1
The decision to
The Court notes the Declaration of James A. Garcia, which
indicates that counsel for the Commission was contacted by an
attorney, Jack A. Berenato, Esq., on behalf of Defendant Siegel
on November 26, 2013. (Decl. of James A. Garcia (hereafter,
“Garcia Decl.”) ¶ 7.)
The Commission’s counsel represents that
multiple attempts to reach Mr. Berenato were made between
November 27, 2013 and January 27, 2014 to ascertain when he
intended to appear on behalf of Defendants and file answers to
the complaint. (Id. ¶ 8.) Mr. Berenato purportedly contacted
counsel for the Commission on February 7, 2014 and advised that
he intended to seek to vacate the Clerk’s entries of default.
(Id. ¶ 11.) At this time, none of the defendants has filed a
motion to vacate the entry of default.
10
enter a default judgment is “left primarily to the discretion of
the district court.”
Hritz v. Woma Corp., 732 F.2d 1178, 1180
(3d Cir. 1984).2
6.
Although every “well-pled allegation” of the
complaint, except those relating to damages, are deemed
admitted, Comdyne I. Inc. v. Corbin, 908 F.2d 1142, 1149 (3d
Cir. 1990), before entering a default judgment the Court must
decide whether “the unchallenged facts constitute a legitimate
cause of action, since a party in default does not admit mere
conclusions of law,” Chanel, 558 F. Supp. 2d at 535 (citing
Directv, Inc. v. Asher, No. 03-1969, 2006 WL 680533, at *1
(D.N.J. Mar. 14, 2006)).
7.
“Three factors control whether a default judgment
should be granted: (1) prejudice to the plaintiff if default is
denied, (2) whether the defendant appears to have a litigable
defense, and (3) whether defendant's delay is due to culpable
conduct.”
Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir.
2000); United States v. $55,518.05 in U.S. Currency, 728 F.2d
2
Rule 55(b) of the Federal Rules of Civil Procedure provides
that notice of the motion for default judgment must be sent when
“the party against whom a default judgment is sought has
appeared personally or by a representative,” and written notice
of the application must be sent at least seven days before the
hearing. Here, none of the defendants has appeared personally
or through a representative. Nonetheless, counsel for the
Commission represented that he would send copies of this
application to Mr. Berenato and Defendant Siegel so as to
provide notice of the motion. (Garcia Decl. ¶ 16.)
11
192, 195 (3d Cir. 1984).
If a review of the complaint
demonstrates a valid cause of action, the Court must then
determine whether plaintiff is entitled to default judgment.
C.
Defendants Violated Section 4b(a)(2)(i) and (iii) of
the Act for conduct prior to June 18, 2008 and Section
4b(a)(1)(A) and (C) of the Act for conduct on or after
June 18, 20083
8.
With respect to conduct occurring before June 18,
2008, Section 4b(a)(2)(i) and (iii) of the Act, 7 U.S.C. §
6b(a)(2)(i) and (iii), makes it unlawful:
for any person, in or in connection with any
order to make, or the making of, any
contract of sale of any commodity for future
delivery made, or to be made, for or on
behalf of any other person if such contract
for future delivery is or may be used for
(A) hedging any transaction in interstate
commerce in such commodity or the products
or byproducts thereof, or (B) determining
the price basis of any transaction in
interstate commerce in such commodity, or
(C) delivering any such commodity sold,
shipped, or received in interstate commerce
for the fulfillment thereof-(i) to cheat or defraud or attempt to
cheat or defraud such other person;
[or]
. . .
(iii) willfully to deceive or attempt
to deceive such other person by
any means whatsoever in regard to
3
Portions of the Act were amended in 2008. Defendants’ alleged
acts occurred between 2007 and 2010, making both versions of the
Act applicable to this case. The amendments to the relevant
section are not so substantive as to warrant separate
discussion.
12
any such order or contract or the
disposition or execution of any
such order or contract, or in
regard to any act of agency
performed with respect to such
order or contract for such
person[.]
9.
With respect to conduct occurring on or after
June 18, 2008, Section 4b(a)(1)(A) and (C) of the Act, 7 U.S.C.
§ 6b(a)(1)(A) and (C), make it unlawful
(1) for any person, in or in connection with
any order to make, or the making of, any
contract of sale of any commodity in
interstate commerce or for future delivery
that is made, or to be made, on or subject
to the rules of a designated contract
market, for or on behalf of any other person
. . . (A) to cheat or defraud or attempt to
cheat or defraud the other person; [or] . .
. (C) willfully to deceive or attempt to
deceive the other person by any means
whatsoever in regard to any order or
contract or the disposition or execution of
any order or contract, or in regard to any
act of agency performed, with respect to any
order or contract for or, in the case of
paragraph (2), with the other person[.]
10.
Courts have held that misappropriation of pool
participant funds, knowingly or with reckless disregard for the
truth, constitutes a violation of Section 4b(a)(2)(i) and (iii)
of the Act, 7 U.S.C. § 6b(a)(2)(i) and (iii), with respect to
acts occurring before June 18, 2008, and Section 4b(a)(1)(A) and
(C) of the Act, 7 U.S.C. § 6b(a)(1)(A) and (C) with respect to
acts occurring on or after June 18, 2008.
See, e.g., Commodity
Futures Trading Comm’n v. U.S. Ventures LC, No. 2:11CV00099,
13
2014 WL 3889068, at *6-7 (D. Utah June 6, 2014); Commodity
Futures Trading Comm’n v. Varlesi, Civ. A. No. 12-cv-01658, 2013
WL 3771407, at *5 (N.D. Ill. June 12, 2013); Commodity Futures
Trading Comm’n v. Palmer, Civ. A. No. CV-09-76-S-EJL, 2012 WL
6930320, at *5 (D. Id. Nov. 30, 2012).
11.
The facts alleged by the Commission establish
that from January 2008 through at least October 2010, Defendants
Siegel and TOTE, by and through Siegel, cheated, defrauded,
attempted to cheat or defraud, willfully deceived and/or
attempted to deceive customers of Monarch by misappropriating
customer funds knowingly or with reckless disregard for the
truth.
12.
The facts alleged by the Commission establish
that from September 2008 through October 2010, Defendants Siegel
and MJS, by and through Siegel, cheated, defrauded, attempted to
cheat or defraud, willfully deceived and/or attempted to deceive
customers of QEP by misappropriating customer funds knowingly or
with reckless disregard for the truth.
13.
By this conduct, Siegel, MJS and TOTE, by and
through Siegel, violated Section 4(b)(a)(2)(i) and (iii) of the
Act, 7 U.S.C. § 6b(2)(i) and (iii), with respect to conduct
occurring before June 18, 2008, and violated Section 4b(a)(1)(A)
and (C) of the Act, 7 U.S.C. § 6b(a)(1)(A) and (C) with respect
to conduct occurring on or after June 18, 2008.
14
14.
The foregoing acts of Siegel were committed
within the scope of his employment, office or agency with TOTE
and MJS. Therefore, pursuant to Section 2(a)(1)(B) of the Act, 7
U.S.C. § 2(a)(1)(B), TOTE and MJS are liable for these acts.
15.
Siegel controlled TOTE and MJS, directly or
indirectly, and knowingly induced, directly or indirectly, the
acts of TOTE and MJS by transferring more funds than were due to
Siegel, TOTE or MJS to Siegel’s personal bank account and a
credit card account.
Therefore, pursuant to Section 13(b) of
the Act, 7 U.S.C. § 13c(b), Siegel is liable for TOTE’s and MJS’
violations of Section 4b(a)(2)(i) and (iii) of the Act, 7 U.S.C.
§ 6b(2)(i) and (iii) with respect to conduct occurring before
June 18, 2008 and Section 4b(1)(A) and (C) of the Act, 7 U.S.C.
§ 6b(a)(1)(A) and (C) with respect to conduct occurring on or
after June 18, 2008.
D.
Fraud by a CPO and an AP of a CPO
16.
Section 4o(1) of the Act, 7 U.S.C. § 6o(1) makes
it unlawful for a commodity pool operator or associated person
(hereafter, “AP”) of a commodity pool operator, to “employ any
device, scheme, or artifice to defraud any client or participant
or prospective client or participant,” or “to engage in any
transaction, practice, or course of business which operates as a
fraud or deceit upon any client or participant or prospective
client or participant.”
15
17.
A “commodity pool operator” is any person
“engaged in a business that is of the nature of a commodity
pool, investment trust, syndicate, or similar form of
enterprise, and who, in connection therewith, solicits, accepts,
or receives from others, funds, securities, or property, either
directly or through capital contributions, the sale of stock or
other forms of securities, or otherwise, for the purpose of
trading in commodity interests, including any . . . commodity
for future delivery, security futures product, or swap . . .
[.]”
7 U.S.C. § 1a(11).
18.
From August 2007 through October 2010, Defendants
TOTE and MJS acted as commodity pool operators of the Monarch
and QEP pool by engaging in a business that is of the nature of
an investment trust, syndicate, or similar form of enterprise
and by soliciting, accepting or receiving funds from others for
the purpose of trading in futures.
In fact, TOTE and MJS
registered as CPOs exempt from CPO registration pursuant to
Commission Regulation 4.13(a).
19.
An “associated person” is “any natural person who
is associated in any of the following capacities with . . . [a]
commodity pool operator as a partner, officer, employee,
consultant, or agent (or any natural person occupying a similar
status or performing similar functions), in any capacity which
involves (i) the solicitation of funds, securities, or property
16
for a participation in a commodity pool or (ii) the supervision
of any person or persons so engaged[.]”
20.
17 C.F.R. § 1.3(aa)(3).
As chief executive officer and sole principal of
TOTE and MJS, who solicited pool participants and funds
therefrom, Siegel acted as an associated person (hereafter,
“AP”) of both commodity pool operators.
21.
Defendants TOTE and MJS, as commodity pool
operators, and Defendant Siegel as an associated person of a
commodity pool operator, violated Section 4o(1)(A) and (B) of
the Act, 7 U.S.C. § 6o(1), in that they employed a device,
scheme or artifice to defraud pool participants and/or engaged
in transactions, practices or a course of business which
operated as a fraud or deceit upon pool participants.
These
fraudulent acts include misappropriating funds invested by pool
participants.
22.
The misappropriation of pool participant funds
was made through use of the mails or other instrumentalities of
interstate commerce, including wiring funds to and from pool
accounts to Siegel’s personal bank accounts, in violation of
Section 4o(1)(A) and (B) of the Act.
23.
Defendants engaged in the acts and practices
described above knowingly or with reckless disregard for the
truth.
17
24.
Siegel controlled TOTE and MJS, directly or
indirectly, and knowingly induced, directly or indirectly, the
acts of TOTE and MJS constituting the violations described
above.
Therefore, pursuant to Section 13(b) of the Act, 7
U.S.C. § 13c(b), Siegel is liable for TOTE’s and MJS’ violations
of Section 4o(1)(A) and (B) of the Act, 7 U.S.C. § 6o(1)(A) and
(B).
25.
The foregoing acts of Siegel occurred within the
scope of his employment, office or agency with TOTE and MJS.
Therefore, TOTE and MJS are liable for Siegel’s violations of
Section 4o(1)(A) and (B) of the Act, 7 U.S.C. § 6o(1)(A) and
(B), pursuant to Section 2(a)(1)(B) of the Act, 7 U.S.C. §
2(a)(1)(B).
E.
Violation of Commission Regulation 4.13(c)(2)(i)
26.
Commission Regulation 4.13(c)(2)(i), 17 C.F.R. §
4.13(c)(2)(i), requires that CPOs claiming exemption for
registration under Regulation 4.13(a)(2) must promptly furnish
to all pool participants a copy of each monthly statement for
the pool that the CPO receives from the FCM.
27.
As found above, between August 2007 and October
2010, TOTE, acting through Siegel, failed to provide pool
participants with copies of the statements received by TOTE from
the FCM who carried Monarch’s trading accounts as required under
Commission Regulation 4.13(c)(2)(i), 17 C.F.R. § 4.13(c)(2)(i).
18
Instead, TOTE, acting through Siegel, provided only a few
quarterly updates.
28.
Siegel controlled TOTE, directly and indirectly,
and did not act in good faith or knowingly induced, directly or
indirectly, the conduct of TOTE described above.
Therefore,
pursuant to section 13(b) of the Act, 7 U.S.C. § 13c(b), Siegel
is liable for TOTE’s violations of Commission Regulation
4.13(c)(2)(i), 17 C.F.R. § 4.13(c)(2)(i).
29.
The foregoing acts of Siegel occurred within the
scope of his employment, office or agency with TOTE.
Therefore,
TOTE is liable for Siegel’s acts pursuant to Section 2(a)(1)(B)
of the Act, 7 U.S.C. § 2(a)(1)(B).
F.
Defendants’ Failure to Answer Warrants Entry of
Default Judgment
30.
All three factors that the Court must consider in
deciding whether to enter default judgment support entry of
default judgment against Defendants.
31.
As to the first factor, whether the party subject
to default judgment has a meritorious defense, because
Defendants failed to file responsive pleadings it is difficult
to ascertain any defenses that might be available.
The Court
has considered the well-pleaded allegations in the Commission’s
complaint, which must be accepted as true, and the Mucha
Declaration and attachments thereto, and there is nothing in
19
these documents to suggest that the Commission would not prevail
if this action were to proceed.
See UFCW Local 152 Health &
Welfare Fund v. Holiday Shop N Bag at Welsh Road, No. 12-7305,
2013 WL 3441290, at *3 (D.N.J. July 9, 2013)(“Absent Defendants'
responsive pleadings, however, the Court is unable to readily
ascertain any meritorious defenses that would be available to
Defendants at this time.”).
32.
As to the second factor, prejudice to the party
seeking default judgment, it is evident to the Court that the
Commission will not be able to vindicate the public interest and
recover funds misappropriated by Defendants.
The Commission
seeks through this action, inter alia, injunctive relief so as
to ensure that Defendants do not continue to defraud members of
the public, as well as restitution and disgorgement of funds
misappropriated by Defendants.
Despite being properly served
and having ample opportunity to respond to the complaint,
Defendants have not participated in this action and have thereby
stalled the Commission’s efforts to address Defendants’ alleged
wrongdoing and recover funds that were purportedly
misappropriated by Defendants.
Under these circumstances,
absent a default judgment, the Commission will continue to be
unable to obtain the relief it seeks from Defendants, and
members of the public are at risk of being further defrauded by
20
Defendants.
Accordingly, the second factor weighs in favor of
entry of default judgment.
33.
Finally, under the third factor, which requires
the Court to consider Defendants’ culpability, the record
demonstrates that Defendants, through Defendant Siegel, were
each properly served and had notice that a lawsuit had been
filed against them.
Defendants filed no answer or other
responsive pleading and have made no efforts to obtain an
extension of time to respond to the complaint.
Defendants were
given ample time and opportunity to respond, and counsel for the
Commission attempted without success on several occasions to
contact counsel for Defendant Siegel to assess whether
Defendants intended to participate in this matter.
Nonetheless,
Defendants have not taken any action to respond to the complaint
or otherwise defend against the claims brought by the
Commission.
Thus, the Court finds no excuse or reason for
Defendants’ default other than their own conduct.
The third
factor therefore also weighs in favor of entry of a default
judgment.
G.
Relief Requested
34.
The allegations in the Commission’s pleadings,
taken as true, are sufficient to show that the Commission is
entitled to the requested relief.
Accordingly, having
considered all of the relevant factors, the Court concludes that
21
the relief sought by the Commission in the complaint is
appropriate.
35.
Under Section 6(c) of the Act, 7 U.S.C. § 13a-
1(a), injunctive relief is appropriate where there is a
reasonable likelihood of future violations.
“In reviewing the
grant of an injunction, ‘the ultimate test . . . is whether the
defendant's past conduct indicates that there is a reasonable
likelihood of further violations in the future.’”
Commodity
Futures Trading Comm’n v. Wilshire Inv. Mgmt. Corp., 531 F.3d
1339, 1346 (11th Cir. 2008); Commodity Futures Trading Comm’n v.
Am. Metals Exchange Corp., 991 F.2d 71, 73 n.3 (3d Cir. 1993)
(“injunctive relief may issue upon a showing that the defendants
‘engaged in, [are] engaging in, or [are] about to engage in any
act or practice constituting a violation of any provision of the
Act.’
The plaintiff also needed to show that the defendants
were still in business so that there was a likelihood that
violations would continue.”).
36.
The Court concludes that permanent injunctive
relief is warranted since it is probable that Defendants will
engage in future violations of the Act.
In this case,
Defendants engaged in egregiously fraudulent conduct in
violation of the Act and misappropriated nearly $200,000 for
Siegel’s personal expenses.
Siegel testified that he siphoned
funds arbitrarily, without regard to the amount of fees actually
22
due to him, and according to the Mucha Declaration has contacted
individuals subsequent to the filing of this action to discuss
participation in trading activity.
Considering the totality of
the circumstances, it appears likely that Siegel, individually
or through TOTE or MJS, may engage in future violations of the
Act if not permanently enjoined.
Accordingly, the Court will
enjoin Defendants from future violations of the Act as well as
trading on behalf of any other person or entity, including, but
not limited to, any association, partnership, corporation or
trust.
37.
The Court further concludes that restitution is
appropriate with respect to Defendants Siegel and MJS so as to
make whole the two QEP pool participants, Messrs. Coffman and
Lund, who sought to withdraw their funds from QEP near the end
of 2009.
“‘Restitution is meant to make the damaged persons
whole and compensate them for a defendant’s wrongful acts.’”
Commodity Futures Trading Comm’n v. Perkins, Civ. No. 06-4674,
2009 WL 806576, at *10 (D.N.J. Mar. 25, 2009) (quoting Commodity
Futures Trading Comm’n v. AVCO Fin., 28 F. Supp. 2d 104, 121
(S.D.N.Y. 1998)).
Siegel and MJS failed to return approximately
$71,998.60 to Coffman and $32,685.87 to Lund for a total of
$104,684.47.
38.
The Court also finds that disgorgement of gains
is an appropriate remedy under the circumstances.
23
“‘The
disgorgement remedy is not intended to compensate investors;
rather, it is intended to deprive the violator of his ill-gotten
gains and to further the deterrence objectives of the [Act].’”
Perkins, 2009 WL 806576, at *11 (quoting AVCO, 28 F. Supp. 2d at
121).
Defendants misappropriated $191,689.25 from Monarch and
QEP pool participants by withdrawing money from the pools for
non-pool expenses and fees to which Defendants were not
entitled.
These ill-gotten gains should be disgorged.
39.
The Commission also seeks in its motion for
default judgment an assessment of civil monetary penalties at
three times the amount of Defendants’ gain.
Section 6c(d)(1) of
the Act, 7 U.S.C. § 13a-1(d), provides that the Court may assess
civil monetary penalties of “not more than the greater of
$100,000 or triple the monetary gain to the person for each
violation.”4
The Court notes that civil monetary penalties “act
to vindicate” the provisions of the Act and the Commission’s
rules and “are also exemplary; they remind both the recipient of
the penalty and other persons subject to the Act that
4
The Commission Regulations set forth inflation-adjusted civil
monetary penalties, which state that the penalty for violations
committed between October 23, 2004 and October 22, 2008 are “not
more than the greater of $130,000 or triple the monetary gain to
such person for each such violation,” and the penalty for
violations committed after October 23, 2008 are “not more than
the greater of $140,000 or triple the monetary gain to such
person for each such violation.” 17 C.F.R. §
143.8(a)(1)(ii)(C)-(D).
24
noncompliance carries a cost. To effect this exemplary purpose,
that cost must not be too low or potential violators may be
encouraged to engage in illegal conduct.”
In re GNP
Commodities, Inc. [1990-92 Transfer Binder] Com. Fut. L. Rep.
(CCH) ¶ 25,360 at 39,222 (CFTC Aug. 11, 1992).
40.
This case warrants the imposition of a civil
monetary penalty against Defendants because they knowingly
engaged in fraud, which is a core violation of the Act.
See
Commodity Futures Trading Comm’n v. Arrington, 998 F. Supp. 2d
847, 875-76 (D. Neb. 2014) (citation omitted).
Defendant Siegel
even contacted individuals after this case was filed to discuss
participation in trading activity, and it is not clear that
Defendant Siegel, individually or through TOTE or MJS, will
comply with the Act in the future unless deterred by civil
monetary penalties.
Accordingly, the Court will award civil
monetary penalties.
41.
The Court notes the Commission’s allegation in
the complaint that “[e]ach act of misappropriation . . . is
alleged as a separate and distinct violation” of the Act.
(Compl. ¶ 41.)
Pursuant to the Act, the Court could award
$130,000 or $140,000 (depending on the date of the violation) or
treble damages for each violation.
Although the complaint does
not delineate each separate withdrawal from pool funds for
improper purposes, it appears from the Mucha Declaration that
25
there were several separate transfers over the course of at
least two years.
(See, e.g., Mucha Decl. ¶¶ 36, 39.)
The
Commission seeks treble damages based solely on the total amount
improperly retained by Defendants,5 i.e., three times $191,689
for a total of $575,067.
This amount is likely less than the
amount the Court could, in its discretion, award if it assessed
a penalty of $130,000 or $140,000 per violation, given that
there were apparently multiple fraudulent withdrawals of pool
participant funds.
Based on Defendants’ knowing and repeated
violations of the Act, the Court finds that a civil monetary
penalty in the amount of triple the monetary gain to Defendants
is appropriate.
5
In this regard, Siegel transferred approximately $511,598 for
personal expenses, when the incentive, management and
administrative fees due totaled only $319,909. The difference
of $191,689 is the amount that Defendants misappropriated, and
Defendants seek triple this amount. In the Order for Relief,
infra, the Court separates this award in accordance with the
respective amounts withdrawn from Monarch and QEP pool funds.
Therefore, the civil monetary penalty against Defendants Siegel
and TOTE is $315,557.67, which is triple the $105,185.89
misappropriated from Monarch pool participants, and the civil
monetary penalty against Defendants Siegel and MJS is
$259,510.08, which is triple the $86,503.36 misappropriated from
QEP pool participants.
26
III. ORDER FOR RELIEF
FOR GOOD CAUSE APPEARING, IT IS HEREBY ORDERED, ADJUDGED
AND DECREED AS FOLLOWS:
A.
Permanent Injunction
1.
Based on and in connection with the foregoing
conduct, pursuant to Section 6c of the Act, as amended, 7 U.S.C.
§ 13a-1, Defendants are permanently restrained, enjoined and
prohibited from, in or in connection with any order to make, or
the making of, any contract of sale of any commodity in
interstate commerce or for future delivery that is made or to be
made, on or subject to the rules of a designated contract market
for or on behalf of any other person -(a)
cheating or defrauding or attempting to cheat or
defraud the other person, or
(b)
willfully deceiving or attempting to deceive the
other person by any means whatsoever in regard to
any order or contract or the disposition or
execution of any order or contract, or in regard
to any act of agency performed, with respect to
any order or contract for the other person,
in violation of Section 4b(a)(1)(A) and (C) of the Act, 7 U.S.C.
§ 6b(a)(1)(A) and (C).
2.
Defendants are also permanently restrained,
enjoined and prohibited from, by use of the mails or any means
27
or any means or instrumentality of interstate commerce, directly
or indirectly -(a)
employing any device, scheme or artifice to
defraud any client or participant or prospective
client or participant; or
(b)
engaging in any transaction, practice, or course
of business which operates as a fraud or deceit
upon any client or participant or prospective
client or participant,
in violation of Section 4o(1)(A) and (B) of the Act, 7 U.S.C. §
6o(1)(A) and (B).
3.
Defendant TOTE is also permanently restrained,
enjoined and prohibited from engaging directly or indirectly in
conduct in violation of Commission Regulation 4.13(c)(2)(i), 17
C.F.R. § 4.13(c)(2)(i).
4.
Defendants are also permanently restrained,
enjoined and prohibited from directly or indirectly:
(a)
trading on or subject to the rules of any
registered entity, as that term is defined in
Section 1a(40) of the Act, 7 U.S.C. § 1(a)(40);
(b)
entering into any transactions involving
commodity futures, options on commodity futures,
commodity options (as that term is defined in
Commission Regulation 1.3(hh) and 32.1(b)(1), 17
28
C.F.R. §§ 1.3(hh) and 32.1), security futures
products, swaps (as that term is defined in
Section 1a(47) of the Act, 7 U.S.C. § 1a(47) and
as further defined by Commission Regulation
1.3(xxx), 17 C.F.R. § 1.3(xxx)), and/or foreign
currency (as described in Sections 2(c)(2)(B) and
2(c)(2)(C)(i) of the Act, 7 U.S.C. §§ 2(c)(2)(B)
and 2(c)(2)(C)(i) (“forex contracts”), for their
own personal account or for any account in which
they have a direct or indirect interest;
(c)
having any commodity futures, options on
commodity futures, commodity options, security
futures products, swaps and/or forex contracts
traded on their behalf;
(d)
controlling or directing the trading for or on
behalf of any other person or entity, whether by
power of attorney or otherwise, in any account
involving commodity futures, options on commodity
futures, commodity options, security futures
products, swaps and/or forex contracts;
(e)
soliciting, receiving or accepting any funds from
any person for the purpose of purchasing or
selling any commodity futures, options on
29
commodity futures, commodity options, security
futures products, swaps and/or forex contracts;
(f)
applying for registration or claiming exemption
from registration with the Commission in any
capacity, and engaging in any activity requiring
such registration or exemption from registration
with the Commission except as provided for in
Regulation 4.14(a)(9), 17 C.F.R. § 4.14(a)(9);
and
(g)
acting as a principal (as that term is defined in
Commission Regulation 3.1(a), 17 C.F.R. §
3.1(a)), agent, officer, or employee of any
person (as that term is defined in Section 1a(38)
of the Act, 7 U.S.C. §1a(38)), registered,
exempted from registration or required to be
registered with the Commission, except as
provided for in Regulation 4.14(a)(9), 17 C.F.R.
§ 4.14(a)(9).
B.
Restitution
5.
Defendants Siegel and MJS, jointly and severally,
shall pay restitution in the amount of $104,684.47 (hereafter,
the “Restitution Obligation”), plus post-judgment interest.
Post-judgment interest shall accrue beginning on the date of
entry of this Order and shall be determined by using the
30
Treasury Bill rate prevailing on the date of entry of this Order
pursuant to 28 U.S.C. § 1961.
6.
To effect payment of the Restitution Obligation
and the distribution of any restitution payments to Messrs.
Coffman and Lund, the Court appoints the National Futures
Association (hereafter, “NFA”) as Monitor (hereafter,
“Monitor”).
The Monitor shall collect restitution payments from
Defendants and make distribution to Messrs. Coffman and Lund in
accordance with the Findings of Fact, ¶ 21, set forth above.
Because the Monitor is acting as an officer of this Court in
performing these services, the Monitor shall not be liable for
any action or inaction arising from NFA’s appointment as
Monitor, other than actions involving fraud.
7.
Defendants Siegel and MJS shall make Restitution
Obligation payments under this Order to the Monitor in the name
“Siegel/MJS Restitution Fund” and shall send such Restitution
Obligation payments by electronic funds transfer, or by U.S.
postal money order, certified check, bank cashier’s check or
bank money order, to the Office of Administration, National
Futures Association, 300 South Riverside Plaza, Suite 1800,
Chicago, Illinois 60606 under cover letter that identifies the
paying Defendant and the name and docket number of this
proceeding.
The paying Defendant shall simultaneously transmit
copies of the cover letter and the form of payment to the Chief
31
Financial Officer, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C.
20581.
8.
The Monitor shall oversee the Restitution
Obligation and shall have the discretion to determine the manner
of distribution of such funds in an equitable fashion to Messrs.
Coffman and Lund or may defer distribution until such time as
the Monitor deems appropriate.
In the event that the amount of
Restitution Obligation payments to the Monitor are of a de
minimus nature such that the Monitor determines that the
administrative cost of making a distribution to eligible pool
participants is impractical, the Monitor may, in its discretion,
treat such restitution payments as civil monetary penalty
payments, which the Monitor shall forward to the Commission
following the instructions for civil monetary penalty payments
set forth below.
9.
Defendants MJS and Siegel shall execute any
documents necessary to release funds that they have in any
repository, bank, investment or other financial institution,
wherever located, in order to make partial or total payment
toward the Restitution Obligation.
10.
The Monitor shall provide the Commission at the
beginning of each calendar year with a report detailing the
disbursement of funds to Messrs. Coffman and Lund during the
32
previous year.
The Monitor shall transmit this report under a
cover letter that identifies the name and docket number of this
proceeding to the Chief Financial Officer, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street,
N.W., Washington, D.C. 20581.
11.
The amounts payable to each restitution recipient
shall not limit the ability of any restitution recipient from
proving that a greater amount is owed from Defendants or any
other person or entity, and nothing herein shall be construed in
any way to limit or abridge the rights of any pool participant
that exist under state or common law.
12.
Pursuant to Rule 71 of the Federal Rules of Civil
Procedure, each restitution recipient is explicitly made an
intended third-party beneficiary of this Order and may seek to
enforce obedience of this Order to obtain satisfaction of any
portion of the Restitution Obligation that has not been paid by
Defendants Siegel and MJS, to ensure continued compliance with
any provision of this Order, and to hold Defendants in contempt
for any violations of any provision of this Order.
13.
To the extent that any funds accrue to the U.S.
Treasury for satisfaction of the Restitution Obligation, such
funds shall be transferred to the Monitor for disbursement in
accordance with the procedures set forth above.
33
C.
Disgorgement
14.
Defendants Siegel and TOTE, jointly and
severally, shall disgorge $105,185.89, plus post-judgment
interest.
Post-judgment interest shall accrue commencing on the
date of the entry of this Order and shall be determined using
the Treasury Bill rate prevailing on the date of the entry of
this Order pursuant to 28 U.S.C. § 1961.
15.
Defendants Siegel and MJS, jointly and severally,
shall disgorge $86,503.36, plus post-judgment interest.
Post-
judgment interest shall accrue commencing on the date of the
entry of this Order and shall be determined using the Treasury
Bill rate prevailing on the date of the entry of this Order
pursuant to 28 U.S.C. § 1961.
16.
Defendants shall pay their respective
disgorgement obligations to the “Commodity Futures Trading
Commission Customer Protection Fund,” or, if that is fully
funded, to the United States Treasury.
In either case,
Defendants shall pay their respective disgorgement obligations
by electronic funds transfer, U.S. postal money order, certified
check, bank cashier’s check or bank money order.
If payment is
to be made other than by electronic funds transfer, then the
payment shall be made payable to the Commodity Futures Trading
Commission and sent to the address below:
34
Commodity Futures Trading Commission
Division of Enforcement
ATTN: Accounts Receivables -- AMZ 340
E-mail Box: 9-AMC-AMZ-AR-CFTC
DOT/FAA/MMAC
6500 S. MacArthur Blvd.
Oklahoma City, OK 73169
Telephone: (405)954-5644
If payment by electronic funds transfer is chosen, Defendants
shall contact Nikki Gibson or her successor at the address above
to receive payment instructions and shall fully comply with
those instructions.
Defendants shall accompany payment of their
applicable disgorgement obligation with a cover letter that
identifies the paying Defendants and the name and docket number
of this proceeding.
Defendants shall simultaneously transmit
copies of the cover letter and the form of payment to the Chief
Financial Officer, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, N.W., Washington, D.C.
20581.
D.
Civil Monetary Penalties
17.
Defendants Siegel and TOTE shall, jointly and
severally, pay a civil monetary penalty in the amount of
$315,557.67, plus post-judgment interest.
Post-judgment
interest shall accrue on this obligation beginning on the date
of entry of this Order and shall be determined by using the
Treasury Bill rate prevailing on the date of entry of this Order
pursuant to 28 U.S.C. § 1961.
35
18.
Defendants Siegel and MJS, jointly and severally,
shall pay a civil monetary penalty in the amount of $259,510.08,
plus post-judgment interest.
Post-judgment interest shall
accrue on this obligation beginning on the date of entry of this
Order and shall be determined by using the Treasury Bill rate
prevailing on the date of entry of this Order pursuant to 28
U.S.C. § 1961.
19.
Defendants shall pay their respective civil
monetary penalties by electronic funds transfer, U.S. postal
money order, certified check, bank cashier’s check, or bank
money order. If payment is to be made other than by electronic
funds transfer, then the payment shall be made payable to the
Commodity Futures Trading Commission and sent to the address
below:
Commodity Futures Trading Commission
Division of Enforcement
ATTN: Accounts Receivables -- AMZ 340
E-mail Box: 9-AMC-AMZ-AR-CFTC
DOT/FAA/MMAC
6500 S. MacArthur Blvd.
Oklahoma City, OK 73169
Telephone: (405)954-5644
If payment by electronic funds transfer is chosen, Defendants
shall contact Nikki Gibson or her successor at the address above
to receive payment instructions and shall fully comply with
those instructions.
Defendants shall accompany payment of their
applicable civil monetary penalty obligation with a cover letter
36
that identifies the paying Defendants and the name and docket
number of this proceeding.
Defendants shall simultaneously
transmit copies of the cover letter and the form of payment to
the Chief Financial Officer, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, N.W.,
Washington, D.C. 20581.
E.
Provisions Related to Monetary Sanctions
20.
Any acceptance by the Commission or the Monitor
of partial payment of Defendants’ restitution obligation,
disgorgement obligation, or civil monetary penalty obligation
shall not be deemed a waiver of their obligation to make further
payments pursuant to this Order, or a waiver of the Commission’s
right to seek to compel payment of any remaining balance.
21.
Any payments received from Defendants Siegel or
MJS pursuant to this Order shall be applied first to satisfy
their Restitution Obligation and second to satisfy their
disgorgement obligation.
F.
Miscellaneous Provisions
22.
All notices to the Commission required to be
given by any provision in this Order shall be sent via certified
mail, return receipt requested, as follows:
37
Gretchen L. Lowe, Director
Michael Solinsky, Chief Trial Attorney
Division of Enforcement
U.S. Commodity Futures Trading Commission
1155 21st Street, N.W.
Washington, D.C. 20581
All such notices to the Commission shall reference the name
and docket number of this action.
23.
Until such time as Defendants satisfy in full
their restitution, disgorgement and civil monetary penalty
obligations, as set forth in this Order, Defendants shall
provide written notice to the Commission by certified mail of
any change to their telephone number(s) and mailing address(es)
within ten (10) calendar days of the change.
24.
This Court shall retain jurisdiction of this
action to assure compliance with this Order, the restitution
obligation, the civil monetary penalty obligation, and for all
other purposes related to this action, including any motion by
Defendants to modify or for relief from the terms of this Order.
25.
The injunctive and equitable relief provisions of
this Order shall be binding upon Defendants, upon any person
under their authority and control, and upon any person who
38
receives actual notice of this Order by personal service, email, facsimile, or otherwise, insofar as he or she is acting in
active concert or participation with Defendants.
s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.
At Camden, New Jersey
39
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