SECURITIES AND EXCHANGE COMMISSION v. COOPER et al
Filing
50
OPINION. Signed by Judge Renee Marie Bumb on 11/5/2015. (tf, )
[Dkt. Ent. 37]
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
CAMDEN VICINAGE
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
Civil No. 13-5781 (RMB/AMD)
OPINION
v.
BRETT A. COOPER, et al.,
Defendants.
Plaintiff, the Securities and Exchange Commission (the
“SEC” or “Commission”) has moved for summary judgment under Rule
56 of the Federal Rules of Civil Procedure against defendant
Brett A. Cooper (“Cooper”).
The SEC has also moved pursuant to
Rule 55(b)(2) for default judgment against Cooper’s purported
alter egos Global Funding Systems LLC, (“Global Funding”), Dream
Holdings, LLC (“Dream Holdings”), REOP Group Inc. (“REOP”),
Fortitude Investing, LLC (“Fortitude”), and Peninsula Waterfront
Development, L.P. (“Peninsula”) (Global Funding, Dream Holdings,
Fortitude and Peninsula are collectively, “the Cooper
Companies”) (Cooper Companies, REOP and Cooper are collectively,
the “Defendants”).1
The Court is aware that the SEC has also moved for summary
judgment against the defaulted defendants, REOP and the Cooper
Companies. The Court does not find that summary judgment is
appropriate against the defaulted parties as this juncture, and
1
1
I.
BACKGROUND
In its Complaint, the SEC alleges that Cooper, the Cooper
Companies, and REOP employed fraudulent schemes and deceptive
acts, and made untrue statements of material fact or omitted
material facts, in connection with the purchase or sale of
securities in violation of Section 17(a) of the Securities Act
of 1933 (“Securities Act”), 15 U.S.C. § 77q(a), Section 10(b)
and Rule 10b-5 of the Securities Exchange Act of 1934 (“Exchange
Act”), 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5. Further,
the Complaint alleges that Cooper aided and abetted the Cooper
Companies’ violation of these statutes and the rule. Complaint
(“Compl.”) ¶¶ 27-37. The Complaint also alleges that Cooper
induced, or attempted to induce, the purchase or sale of a
security without being registered with the Commission as a broker
or dealer, or an associated person of a registered broker or
dealer, in violation of Section 15(a) of the Exchange Act, 15
U.S.C. § 78o(a). Compl. ¶¶ 38-40.
In general, the Complaint alleges and the evidence adduced
by the SEC establishes that from November 2008 through April
2012, the Defendants engaged in three schemes that defrauded at
least 11 investors out of approximately $2.1 million. The first
instead addresses the SEC’s motion with regard to the Cooper
Companies and REOP as one for default judgment. See SEC Br. at
1, n.1.
2
two schemes involved fictitious “Prime Bank” instruments and
trading programs that promised extraordinary returns in a matter
of weeks. The third involved a “finder’s fee” scheme where
defendants Cooper and REOP provided fraudulent documents to
investors and collected $50,000 that they did not earn. Compl.
¶¶ 1-4; SOF ¶¶ 33, 120-23.
Cooper has never been licensed to sell securities or
registered with the Commission in any capacity. SOF ¶ 7. He is
the sole Managing Member of Global Funding, Dream Holdings and
PWD Philadelphia Unit, LLC, the general partner of Peninsula.
SOF ¶¶ 8-9, 11, 17-18. He is the founder and sole Principal of
Fortitude and the sole Director of REOP. SOF ¶¶ 10, 12, 17.
Cooper had ultimate authority over statements made by REOP and
the Cooper Companies, and was the only person to represent these
entities in connection with the “Prime Bank” and “Finder’s Fee”
transactions described in the Complaint. SOF ¶¶ 13-14, 17-18.
During the relevant period, neither REOP nor the Companies
maintained any formalities of incorporation. They did not hold
board or executive meetings, nor did they have any employees,
directors, officers or principals besides Cooper. SOF ¶¶ 8-12,
17-18. The addresses Cooper used to register REOP and the Cooper
Companies were either his personal addresses or temporary office
rental locations. SOF ¶¶ 8-12, 17-18. REOP and the Cooper
Companies had no operations – Cooper’s sole income during the
3
relevant period was from the fictitious transactions alleged in
the Complaint. SOF ¶¶ 17-18, 35-36, 117. The funds in these
entities’ accounts were commingled with each other’s and with
Cooper’s personal funds, and Cooper routinely used these
entities’ funds for personal items like gambling trips to Vegas
and the Bahamas, cruises, hotels, expensive cars, designer
clothes, and retail expenses. SOF ¶¶ 17-18, 35, 42, 45-46, 53,
65, 67, 71, 74, 84, 95-96, 107-08, 117-19, 122-23.
A. Schemes Alleged by the SEC
The evidence put forward by the SEC, as summarized below,
demonstrates that Cooper carried out a variety of financial
schemes.
i. Classic Prime Bank Transactions Scheme
During 2008 through 2011, Cooper, through the Cooper
Companies, lured investors into fictitious “Prime Bank” or
“High-Yield” investment contracts with the promise of
extraordinary returns on their investments in a matter of weeks,
with little to no risk. SOF ¶¶ 32-33, 35-38, 47- 48, 57-59, 68,
74, 77-78, 81, 89, 99, 108. The purported investments involved
the purchase of bank instruments, including “standby letters of
credit” (“SBLCs”) and “bank guarantees”, from major
international banks. SOF ¶¶ 35-46, 56-67, 68-74, 75-86, 87-96,
97-108. The instruments were to be “monetized” or “traded” on a
“platform” generating astronomical profits from complex and
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secretive transactions. Id. None of the investors received any
returns on the money they invested with Cooper and the Cooper
Companies, and none of it was used to acquire any bank
instruments or SBLCs. When asked at his deposition about facts
relating to his schemes and if he was presently involved in
“Prime Bank” or “High Yield” investments, Cooper declined to
answer and asserted his privilege against self-incrimination
under the Fifth Amendment to the U.S. Constitution (“Fifth
Amendment Privilege”). He also failed to respond to Plaintiffs’
request for admissions about these transactions.
See Fed. R.
Civ. P. 36(a)(3) (“A matter is admitted unless, within 30 days
after being served, the party to whom the request is directed
serves on the requesting party a written answer or objection
addressed to the matter and signed by the party or its
attorney.”).2
ii.
Fraudulent Escrow Account Information Scheme
In February 2011, Cooper was approached by an associate
named Jack Riley about partnering with a company called Alliance
Building Systems (“Alliance”) to invest in a purported “Swiss
The First Request for Admission contained the instruction that
failure to respond within 30 days would prompt the SEC to
request the matters admitted. SOF ¶ 18. Plaintiff has argued in
his very brief response to the SEC’s Statement of Undisputed
Material Facts that he told the SEC he would “plead the fifth to
all written requests.” Resp. to Pl.’s Statement of Uncontested
Facts, at 1 [Dkt. No. 43.]
2
5
Cash Trade” private placement program (“Swiss Cash Trade
program”). SOF ¶¶ 87, 96. Under the Swiss Cash Trade program, a
purported entity named Leybourne Holdings Limited (“Leybourne”)
would purchase and monetize a “One Hundred Million Euro Bank
Guarantee” by placing the instrument into “trade”. Id. In
response, Cooper told Riley that he had a client with $5 million
in attorney David H. Frederickson’s client trust account and
suggested that Cooper and Alliance each use their investors’
funds to contribute half of the 3 million euro required for the
purported deal and recommended Frederickson act as escrow agent
and take possession of the combined funds. SOF ¶¶ 88-89, 96.
Shortly thereafter, Cooper, through Global Funding, executed an
agreement with Alliance and Leybourne, which stated that upon
receipt of the 3 million euros, Leybourne would be “ready,
willing and able” to purchase a bank guarantee from “a top
twenty five world bank which will be delivered via [SWIFT]
MT760” to an account with “Barclays Bank” in Geneva. SOF ¶ 89.
In reality, neither Cooper nor Global Funding had an investor
with $5 million in escrow with Frederickson. SOF ¶¶ 88, 96.
Cooper sent Frederickson a “final version” of the escrow
agreement for the Swiss Cash Trade program that contained 11
paragraphs, but did not include any account information for
Frederickson’s client trust account. SOF ¶¶ 90, 96. Cooper sent
Riley an escrow agreement for transmittal to Alliance and its
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investors, which included an additional 12th paragraph that
Cooper inserted. SOF ¶¶ 91-92, 96. Below the new paragraph,
entitled “WIRING INSTRUCTIONS TO BANK OF THE ESCROW AGENT”, the
account type was listed as “Attorney/Client Trust- IOLTA” and
the account name was “DHF LLC”. Id. But the account number
Cooper provided was not Frederickson’s. SOF ¶¶ 94, 96.
Unbeknownst to the investors, Cooper had recently filed
documents adopting Frederickson’s initials (DHF) for one of
Cooper’s companies, which allowed Cooper to make it appear as
though the account name on the wiring instructions was for
attorney Frederickson’s account when it in fact it was for Dream
Holdings’ account. Id.
In order to raise its share of the program funds, Alliance
(through a related entity) entered into joint venture agreements
with four investors: Francis Musso, Calibrated Capital, Fisher &
Associates and James Shannon Logan. SOF ¶ 93. Those investors
wired $925,000 to the bank account number provided by Cooper.
SOF ¶¶ 93, 96. A few days after receiving the investors’ money,
Cooper spent it on hotels, cars, and other personal items. SOF
¶¶ 95-96.
iii. Brazilian Bond Fee Scheme
In April 2012, Cooper and his company REOP entered into a
finder’s fee agreement with the owners of a purported Brazilian
bond whereby Cooper and REOP would be paid $50,000 for finding a
7
bank or brokerage firm to accept the bond for listing and
eventual sale. SOF ¶ 109. Cooper contacted Fred Schrodt
(“Schrodt”), a representative at Penserra Securities LLC
(“Penserra”), about opening an account at the broker-dealer, but
the bond was never accepted by the firm. SOF ¶¶ 110, 114, 116.
While Penserra was reviewing the deal, Cooper or others
acting at his direction or with his knowledge sent a forged
email purportedly from Schrodt, though misspelling his name, to
counsel for the seller, responding to counsel’s questions about
the transaction. SOF ¶¶ 112, 116. A few days later, Cooper or
others acting at Cooper’s direction or with Cooper’s knowledge
drafted and sent a letter, purportedly from Schrodt, to counsel
for the bond owner indicating that Penserra had “accepted” the
bond. SOF ¶¶ 110-111, 116. In actuality, the letter was a
forgery. Id. Penserra confirmed that the letter was not drafted
by its employee or on any of its systems, and it was not
transmitted using its network. Id. Indeed, the letter’s metadata
showed it was authored by “Brett-toshiba”. Id. Cooper was asked
during his deposition if he drafted the letter or owned a
Toshiba computer. He acknowledged he participated in drafting
the letter and stated it “was possible” he owned a Toshiba
computer. SOF ¶¶ 111, 116. No Brazilian Bond was ever “accepted”
by Penserra. SOF ¶ 114. Cooper was paid a $50,000 “fee” even
8
though he and REOP had not satisfied the terms of the agreement.
SOF ¶¶ 113-114.
B. Report of the SEC’s Expert Witness, Professor James E.
Byrne
The SEC retained Professor James E. Byrne as its expert
witness to opine on Defendants’ transactions, including the
resemblance of the fraud alleged in this case to typical “Prime
Bank” or “High Yield” investment schemes. Professor Byrne
concluded that the investments offered by Cooper and the Cooper
Companies lack legitimacy and are, instead, instances of “Prime
Bank” or “High Yield” investment schemes. Professor Byrne also
concluded that the transaction with REOP and Cooper involving a
purported Brazilian Bond is a “Finder’s Fee” scheme, “where a
fee is claimed and paid on the basis of a representation that
turns out to be worthless.” SOF ¶¶ 20-21, 24-25; Byrne Report,
Ex. A ¶¶ 3, 20, 25, 84-86, 91.
In his expert report, Professor Byrne stated that the
“investments” offered by Cooper and the Cooper Companies “do not
exist in legitimate finance.” SOF ¶ 23; Byrne Report, Ex. A ¶
25. They “do not yield or pay any funds and the bulk of the
principal is invariably dissipated.” Id. Professor Byrne
highlighted a few of the common features of “Prime Bank” or
“High Yield” schemes, including: (1) offered returns that are
disproportionate to the low risk involved; (2) promises that the
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investments or returns are “safe”; (3) mimicking of legitimate
financial instruments and tools like SWIFT messaging and SBLCs;
(4) obscuring of the commercial basis for and source of the
return, often under the rubric of some obscure or implausible
“trading”; (5) significant technical flaws in spelling, use of
terms and phrases, terms of art, or confusing transactions that
would not be expected in a legitimate investment of the same
caliber; (6) improper references to legitimate financial
institutions or similar organizations; (7) unnecessary secrecy;
(9) misuse of attorney, escrow, or trust accounts; (8) an
international dimension to the transaction; and (9) no
investment of perpetrator’s own funds despite attractive
returns. SOF ¶¶ 23-24; Byrne Report, Ex. A ¶¶ 26, 29-91.
II.
SUMMARY JUDGMENT
Summary judgment shall be granted if “the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
Civ. P. 56(a).
14 Fed. R.
A fact is “material” if it will “affect the
outcome of the suit under the governing law . . . .”
v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Anderson
A dispute is
“genuine” if it could lead a “reasonable jury [to] return a
verdict for the nonmoving party.” Id.
When deciding the existence of a genuine dispute of
material fact, a court’s role is not to weigh the evidence; all
10
reasonable “inferences, doubts, and issues of credibility should
be resolved against the moving party.”
Meyer v. Riegel Prods.
Corp., 720 F.2d 303, 307 n.2 (3d Cir. 1983). However, a mere
“scintilla of evidence,” without more, will not give rise to a
genuine dispute for trial.
Anderson, 477 U.S. at 252.
Further,
a court does not have to adopt the version of facts asserted by
the nonmoving party if those facts are “utterly discredited by
the record [so] that no reasonable jury” could believe them.
Scott v. Harris, 550 U.S. 373, 380 (2007).
In the face of such
evidence, summary judgment is still appropriate “where the
record . . . could not lead a rational trier of fact to find for
the nonmoving party . . . .”
Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The movant “always bears the initial responsibility of
informing the district court of the basis for its motion, and
identifying those portions of ‘the pleadings, depositions,
answers to interrogatories, and admissions on file, together
with the affidavits, if any,’ which it believes demonstrate the
absence of a genuine issue of material fact.”
Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986) (quoting Fed. R. Civ. P.
56(c)).
Then, “when a properly supported motion for summary
judgment [has been] made, the adverse party ‘must set forth
specific facts showing that there is a genuine issue for
trial.’”
Anderson, 477 U.S. at 250 (quoting Fed. R. Civ. P.
11
56(e)).
The non-movant’s burden is rigorous: it “must point to
concrete evidence in the record”; mere allegations, conclusions,
conjecture, and speculation will not defeat summary judgment.
Orsatti v. N.J. State Police, 71 F.3d 480, 484 (3d Cir. 1995);
Jackson v. Danberg, 594 F.3d 210, 227 (3d Cir. 2010) (citing
Acumed LLC v. Advanced Surgical Servs., Inc., 561 F.3d 199, 228
(3d Cir. 2009)) (“[S]peculation and conjecture may not defeat
summary judgment.”).
Additionally, Defendant Cooper is appearing in this case
pro se.
As such, this Court is mindful of the requirement that
pro se parties’ submissions must be construed liberally.
Paris
v. Pennsauken Sch. Dist., Civ. No. 12-7355, 2013 WL 4047638
(D.N.J. Aug. 9, 2013).
As to the remaining defendants, REOP and the Cooper
Companies, who have all defaulted, “[b]efore granting a default
judgment, the Court must determine (1) whether there is
sufficient proof of service, (2) whether a sufficient cause of
action was stated, and (3) whether default judgment is proper.”
Teamsters Health & Welfare Fund of Phila. & Vicinity v. Dubin
Paper Co., No. 11–7137, 2012 WL 3018062, at *2 (D.N.J. July 24,
2012) (citations omitted).
Whether default judgment is proper
depends on (1) whether a plaintiff will be prejudiced if default
is not granted, (2) whether a defendant has a meritorious
defense, and (3) whether the defendant’s delay is the result of
12
culpable misconduct.
See N.J. Bldg. Laborers’ Statewide Pension
Fund and Trustees Thereof v. Pulaski Construction, No. 13-519,
2014 WL 793563, at *3-4 (D.N.J. Feb. 26, 2014) (citing
Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000)).
III. ANALYSIS
The evidence as put forth by the SEC shows that no genuine
issue of material fact exists concerning whether Defendants
violated the statutes and rules as alleged by taking investors’
money for their personal benefit using material
misrepresentations and omissions, and by engaging in deceptive
acts, practices and transactions without even attempting to use
the money in any way likely to realize any return.
When Cooper was asked about his “Prime Bank” and escrow
account schemes during his deposition, he invoked his Fifth
Amendment Privilege—indeed Cooper’s response to the most
questions in his deposition was to invoke his Fifth Amendment
rights. A court in a civil action may draw an adverse inference
against a party that asserts his Fifth Amendment right against
self-incrimination, as Cooper did in his deposition and in his
responses to discovery requests. See SEC v. Chester Holdings,
Ltd., 41 F. Supp. 2d 505, 525 (D.N.J. 1999) (“Invocation of
one’s Fifth Amendment privilege in civil cases, either in
depositions or at trial, permits an adverse inference to be
drawn against the party invoking the privilege.” (citing Baxter
13
v. Palmigiano, 425 U.S. 308, 318 (1976))). Indeed, as an
exercise of abundant caution, this Court entered an Order
advising Defendant Cooper that his frequent invocation of his
Fifth Amendment Privilege will not prevent this Court’s adverse
findings or even summary judgment against him.3 [Dkt. No. 46.]
Defendant Cooper filed no further opposition to the summary
judgment motion other than his previously filed general denials
and Fifth Amendment invocations, along with a brief one-page
memorandum, which principally and summarily contests Cooper’s
liability for the Cooper Companies’ conduct. [Dkt. No. 43.] The
remaining defendants did not appear and, accordingly, default
was entered by the Clerk of this Court against them.
28.]
[Dkt. Ent.
4
The Court’s previous Order corrected Defendant’s apparent
“impression that a material issue in dispute might be created by
a refusal to admit a certain fact or by a lack of response to
certain questions.” Feb. 25, 2015 Ord. at 4. The Court further
noted that, “[N]o court can decline to grant summary judgment on
the basis of mere bold allegations or denials by the non-movant:
instead, evidence must be produced by the non-movant to
establish that a material fact is in dispute. Feb. 25, 2015 Ord.
at 5.
4 Pursuant to the above-described analysis for default judgment,
the Court determines there has been adequate proof of service of
REOP and the Cooper Companies. [Dkt. Nos. 12-23 (affidavits of
service).] Moreover, the Court finds that sufficient causes of
action were stated in the Complaint. With regard to whether
default judgment is proper, the Court finds the factors weigh in
favor of granting the SEC’s request. The Court finds that the
voluminous record assembled by the SEC in the years of the
litigation against all Defendants is sufficient to prejudice the
SEC by denying default judgment. See Nyholm v. Pryce, 259 F.R.D.
101, 105 (D.N.J. 2009) (finding no prejudice where plaintiff had
3
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A. SECTIONS 10(b) AND 17(a)
To establish a violation of Section 10(b) and Rule 10b–5 of
the Exchange Act, the SEC is required to prove that by using any
means or instrumentality of interstate commerce or of the mails
in connection with the purchase or sale of a security, the
Defendants, acting with scienter, made a material
misrepresentation (or a material omission if the defendant had a
duty to speak, as was the case here) or used a fraudulent
device. SEC v. Antar, 15 F. Supp. 2d 477, 528 (D.N.J. 1998).
Liability for fraud under Section 17(a)(1) of the Securities Act
is similar.5
Scienter means intent to deceive, manipulate or defraud.
See Infinity Grp. Co., 212 F.3d at 192, nn. 12-13. To establish
a corporation’s scienter, the mental state of an officer acting
only expended “minimal efforts” in the litigation). As outlined
below, the evidence adduced by the SEC against all Defendants is
considerable, and the Court—even assuming it had a duty to—has
identified no meritorious defense. See Pulaski Construction,
2014 WL 793563, at *3 (“The Court has no duty to construct a
defense for Defendant.”). Moreover, because Defendant Cooper was
served as the representative of these companies, his personal
appearance, but the failure of the Cooper Companies and REOP to
appear amounts to culpable misconduct. As such, the Court will
enter default judgment against REOP and the Cooper Companies.
5 See SEC v. Infinity Grp. Co., 212 F.3d 180, 191 n.11 (3d Cir.
2000) (“Section 17(a) makes it unlawful for any person in the
offer or sale of any security to: (1) employ any device, scheme
or artifice to defraud; (2) obtain money or property by means of
any untrue statement or omission of material fact; or (3) to
engage in any transaction, practice or course of business which
operates as a fraud or conceit upon the purchaser.” (internal
quotation marks and alterations omitted)).
15
on the corporation’s behalf may be imputed to it. See, e.g.,
Adams v. Kinder-Morgan, Inc., 340 F.3d 1083, 1106-07 (10th Cir.
2003). However, the scienter element required under Sections
10(b) and 17(a)(1) is satisfied by proof of recklessness,
defined as “an extreme departure from the standards of ordinary
care . . . which presents a danger of misleading buyers or
sellers that is either known to the defendant or is so obvious
that the actor must have been aware of it.” Id. at 192. Sections
17(a)(2) and 17(a)(3) require the SEC to prove only negligence.
See Aaron v. SEC, 446 U.S. 680, 701-02 (1980). To establish a
corporation’s scienter, the mental state of an officer acting on
the corporation’s behalf may be imputed to it. See, e.g.,
Kinder-Morgan, Inc., 340 F.3d 1083, 1106-07 (10th Cir. 2003).
Because “Prime Bank” instruments do not exist, courts have
held that promoters of such schemes acted, at a minimum,
recklessly. See, e.g., SEC v. Asset Recovery and Mgmt. Trust,
No. 2:02-CV-1372-WKW, 2008 WL 4831738, at *8 (M.D. Ala. Noc. 3,
2008) (“What ‘prime banks’ claim to offer—a combination of huge
returns and no risk—is inconceivable on its face and imposes a
heightened duty to investigate.”) (internal quotation marks
omitted); SEC v. Montana, 464 F. Supp. 2d 772, 784 (S.D. Ind.
Nov. 22, 2006) (defendant “failed to verify the details of the
Trading Program, never mind its existence, including whether the
promised rates of return could actually be achieved or whether
16
the investor funds were, in fact, safe”); SEC v. Gallard, Civ.
No. 95 CIV. 3099(HB), 1997 WL 767570, at *4 (S.D.N.Y. Dec. 10,
1997) (defendant “accepted . . . fees for brokering transactions
in securities which, if they exist at all, seem to be the
financial world’s equivalent of the rarest endangered species”).
i. Violations of the Antifraud Provisions of the Securities
Act and the Exchange Act – Prime Bank Schemes
1. The Financial Instruments in the Schemes Did Not Exist
The evidence and relevant case law establishes that the
high return, low-risk prime bank investments Cooper and the
Cooper Companies offered to investors and purported to co-invest
in do not exist. Cooper, acting through the Cooper Companies,
made oral and written representations to, and executed contracts
with, investors describing investment programs whereby they
would acquire bank instruments, leverage them to increase their
value, and then enter a trading program generating massive
returns. There is no dispute that Defendants did not undertake
to complete such transactions. Not only did the investors not
receive their promised returns, all but one investor lost the
entirety of their investment because Cooper misappropriated the
funds for his personal use.
The SEC’s expert report from Professor Byrne confirms that
the instruments and the purported “trading platforms” the
Defendants offered are fictitious and are generally associated
17
with so-called “Prime Bank” or “High Yield” fraud. SOF ¶¶ 20,
25; Byrne Report, Ex. A ¶¶ 3, 20, 22, 24-26, 41-42, 81-83, 91.6
The characteristics of such frauds are identified in his report
and are consistent with those recognized in numerous court
decisions, most of them finding defendants liable on summary
judgment. See, e.g., SEC v. Lyttle, 538 F.3d 601, 602-03 (7th
Cir. 2008) (summary judgment affirmed against defendants
promising high returns and requiring secrecy); SEC v. Graulich,
Civ. No. 2:09–cv–04355, 2013 WL 3146862, at *5 (D.N.J. June 19,
2013) (summary judgment granted against defendants where
“trading program purportedly involved the purchase and sale of
fully negotiable ‘prime bank’ instruments”; Professor Byrne
admitted as expert witness for the SEC); SEC v. Reynolds, No.
1:06–CV–1801, 2010 WL 3943729, at *1 (N.D. Ga. Oct. 5, 2010)
(summary judgment granted against defendants representing that
the low-risk investments involved the world’s largest banks and
major financial institutions with promised high returns); Asset
Recovery, 2008 WL 4831738, at *7 (summary judgment granted
against defendant found to be “trading in obscure bank
instruments by unidentified persons in undisclosed locations,
generating extraordinary returns–a typical ‘prime bank’
scheme”); Montana, 464 F. Supp. 2d at 785 (summary judgment
None of the Defendants provided contrary expert testimony, nor
did they depose Professor Byrne.
6
18
granted for fraud and lack of broker-dealer registration against
defendant touting prime bank instruments that would generate
extraordinary returns); SEC v. Roor, No. 99 Civ. 3372, 2004 WL
1933578, at *5 (S.D.N.Y. Aug. 30, 2004) (summary judgment
granted against defendant who promised investors high returns
and spent the invested funds on himself); Gallard, 1997 WL
767570, at *2 (summary judgment granted against defendant
offering SBLC’s, which court found are not available on any
market).
The Defendants have not produced evidence suggesting that
the investments they offered were legitimate. No evidence
adduced by the SEC indicate that the investors’ funds were used
for the purposes for which they were intended or for which
Defendants represented they would be used.
2. The “In Connection With” Element of Securities Fraud
Although the “securities” offered by the Defendants were
non-existent, their actions nevertheless meet the requirements
for liability in “connection with the purchase or sale of a
security” as required under Section 10(b) of the Exchange Act
and, as to sale, Section 17(a) of the Securities Act. The
Defendants’ transactions, as described to investors, satisfy the
test of a security articulated by the Supreme Court in SEC v.
W.J. Howey Co., where a person (1) invests money, (2) in a
common enterprise, and (3) is led to expect profits solely from
19
the efforts of the promoter or a third party. 328 U.S. 293, 29899 (1946), as cited in Infinity Grp., 212 F.3d 180, 187-88.
“[T]he common enterprise requirement is satisfied by ‘horizontal
commonality’, characterized by ‘a pooling of investors’
contributions and distribution of profits and losses on a prorata basis among investors.” Infinity Grp., 212 F.3d at 187-88.
Investors paid Cooper and the Cooper Companies, to join their
funds with others to acquire an alleged bank instrument, usually
an SBLC or a “bank guarantee”, which would then be “traded” on a
“platform” to realize a quick, high return.
Defendants in prime bank cases often argue that because the
offered securities do not exist, there can be no “connection
with” the purchase or sale of a security. Such arguments have
been universally rejected. See e.g., Graulich, 2013 WL 3146862,
at *5 (“The investments offered by Defendants were securities
because their trading program purportedly involved the purchase
and sale of fully negotiable ‘prime bank’ instruments….”);
Gallard, 1997 WL 767570, at *3 (“It is clear by now that the
antifraud provisions relied upon by the [SEC] are applicable
even where, as here, the ‘security’ at issue does not exist.”);
SEC v. Bremont, 954 F. Supp. 726, 732 (S.D.N.Y. 1997)
(“Extending the protection of the securities laws to the victims
of schemes so fraudulent that the underlying paper does not
exist logically follows, as fraudsters would have a perverse
20
incentive to magnify their deceptive conduct.”) (citation
omitted). Likewise, it would be an absurd outcome to find the
“securities laws do not apply to frauds so complete, so pure,
that no pooling would ever take place.” SEC v. Lauer, 52 F.3d
667, 670 (7th Cir. 1995) (“It would be a considerable paradox if
the worse the securities fraud, the less applicable the
securities laws.”).
3. Material Misrepresentations and Omissions
Cooper, individually and through the Cooper Companies,
materially misrepresented to investors the very existence of the
financial instruments and the status of the fictional
“investments” in bank guarantees and SBLCs, and did so using
wire transfers, the internet, email, and the telephone. See SEC
v. Stinson, No. CIV.A. 10-3130, 2011 WL 2462038, at *3 (E.D. Pa.
June 20, 2011) (holding defendants’ use of telephone, email,
wire transfers and the internet satisfied interstate commerce
requirement; collecting cases). According to the evidence put
forth by the SEC, Cooper and his entities misrepresented the
safety of the investors’ funds through fake collateral and
escrow agents, and lied to investors stating that, in the event
that the deal failed, the investors’ money would be returned.
SOF ¶ 100, 101.
Moreover, the evidence shows that Cooper faked
his identity, posing as an escrow agent, a registered
representative at a broker-dealer, and signing documents using
21
others’ names. SOF ¶ 69. When confronted by an investor
regarding past frauds, he outright lied. SOF ¶¶ 103, 108.
The flow of money further proves that Defendants materially
misrepresented the use of investor funds. Rather than invest any
of the funds as promised, bank records prove that the $2.1
million wired from the victims went directly into bank accounts
controlled by Cooper, and was spent for his benefit. SOF ¶¶ 1718, 42, 45-46, 53, 55, 65, 67, 71, 74, 84, 95-96, 107-08, 11719, 122-23. Defendants never intended to engage in any
investment.
A misrepresentation or omitted fact “is material if there
is a substantial likelihood that a reasonable shareholder would
consider it important” in making an investment decision. TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). In the
context of “Prime Bank” or “High-Yield” trading programs, “there
is no question a reasonable investor would consider important
the fact that the ‘security’ at issue did not exist . . . and
that the money paid for those securities would be
misappropriated.” See Gallard, 1997 WL 767570, at *3; Asset
Recovery, 2008 WL 4831738, at *7 (citing cases). The materiality
of the “omission” that no investor funds would actually be
invested in an asset or financial instrument for purposes of a
return is clear. Had Cooper represented to an investor that his
or her funds would be spent on first-class trips, expensive
22
clothes or with those involved with prostitution, no one would
have invested.
4. Additional Artifices and Devices and Engaged in
Deceptive Acts, Transactions and Practices
The undisputed evidence also indicates that Cooper and the
Cooper Companies engaged in sham transactions that were nonexistent and misappropriated investor assets. By their very
nature, these transactions acted as a fraudulent scheme on the
deceived investors, in violation of the federal securities laws.
See SEC v. Boock, No. 09 Civ. 8261, 2011 WL 3792819, at *22-23
(S.D.N.Y. Aug. 25, 2011) (scheme liability extends to
misappropriated assets).
In addition to the misrepresentations and omissions
described above, Cooper engaged in at least the following
deceptive conduct, acts or practices: (1) inserted his own
account number into escrow agreements and used a misleading name
(DHF, LLC) to make it appear to investors that they were sending
money to an independent escrow agent, when in fact they were
sending their money to Defendant Peninsula SOF ¶¶ 90-96; (2)
created a fake escrow company called PWD Trust complete with a
fake website and fictitious attorneys which he used to send
emails and other documents SOF ¶¶ 50, 53-55, 58-61, 68-69, 74;
(3) created and supplied fake account statements to investors to
make them believe that their money was sitting in an escrow
23
account or that their investments were collateralized with cash,
SOF ¶¶ 54-55; and (4) forged an email and a letter from a
representative of a brokerage firm to make it appear a brokerdealer had “accepted” a Brazilian Bond entitling Cooper and REOP
to a “fee”. SOF ¶¶ 110-112, 116.
5. Scienter Requirements of Section 10(b) and 17(a)(1)
Cooper, and, through him, the Cooper Companies, meet the
scienter requirements for fraudulent conduct. The evidence put
forth by the SEC shows that Cooper acted knowingly to induce
victims to wire money in connection with fictional investment
schemes promising high returns in a short time at low risk.
Cooper knew the investments did not exist. SOF ¶ 102. He knew
the funds were wired into accounts that he controlled, and then
he spent the money. Cooper also created a fake escrow company,
complete with a website and email accounts, and two fictitious
attorneys to run the nonexistent firm. SOF ¶¶ 50, 51-55, 58-59,
69, 71, 74, 84, 107. He then used that fake firm to lure
investors into wiring millions into the bank accounts that he
controlled. Id.
Cooper’s scienter is further evidenced by the fact that,
despite having spent almost all of the investors’ funds on
himself, he continued lulling investors into believing that a
large return was possible by vaguely describing the status of
the supposed transaction and blaming a fake escrow company—one
that he himself created—for the delays. SOF ¶¶ 62-63, 72.
24
The same evidence also proves that Cooper acted with, at a
minimum, reckless disregard of the truth or falsity of his
misrepresentations and the materiality of his omissions to
investors.
Professor Byrne’s unchallenged expert report and all the
evidence indicates that the transactions were fake, and
Defendants have offered no evidence to the contrary. At least
one court has held that a “total inability to provide any
evidentiary support for the existence of the purported
instrument or [defendant’s] contacts with various banks
establishes, as a matter of law, that he acted with scienter.”
Gallard, 1997 WL 767570, at *4. Because Cooper has the requisite
scienter, it may be imputed to the Cooper Companies as well.
See, e.g., Kinder-Morgan, 340 F.3d at 1106-07 (scienter of
corporate defendant’s agent is attributable to the corporation
as a primary violator of section 10(b) and Rule l0b-5).
Accordingly, the Court grants the SEC’s motion for
summary judgment against Defendant Cooper on the claim that
the Prime Bank Schemes violated the Securities Act and the
Exchange Act. Pursuant to the above analysis, supra n. 4, the
Court enters default judgment on this cause of action against
the Cooper Companies and REOP.
ii.
Violations of the Antifraud Provisions of the
Securities Act and the Exchange Act – Finder’s Fee
Scheme
The evidence makes clear that Cooper, individually and
through REOP, created a forged letter which purportedly entitled
25
them to receive a finder’s fee for services that the Defendants
did not render, in violation of Section 10(b) and Rule 10b–5 of
the Exchange Act and Section 17(a) of the Securities Act. In his
expert report, Professor Byrne describes the “phenomenon of
finder’s fee fraud,” noting that “the basis for the fee . . . is
typically based on a superficial event or document that can
readily be manufactured by the fraudster. Thus, the fee is paid
but the transaction is not consummated, leaving the victim with
no recourse . . . .” SOF ¶¶ 21, 25; Byrne Report, Ex. A ¶¶ 28,
84-86.
Cooper and REOP were paid a $50,000 finder’s fee that they
did not earn. There is no dispute that Cooper and REOP never
located a brokerage or bank willing to accept the bond; a fact
that would be material to the investors. Accordingly, there can
is no genuine dispute that the Defendants were not entitled to
any compensation, let alone $50,000.
The fraudulent documents created and sent to the bond owner
by Cooper and REOP prove the Defendants acted with the requisite
scienter. Defendants fraudulently assumed the identity of a
Penserra broker and sent an email to counsel for the seller
responding to counsel’s questions about the transaction. SOF ¶¶
112, 116. Defendants then appropriated Penserra’s logo and used
it to draft and send a letter, purportedly from the firm, to
counsel for the bond owner stating Penserra had “accepted” the
26
bond. SOF ¶¶ 110-111, 116. Penserra and its employee have
disavowed any knowledge of the letter and confirmed that it was
neither drafted nor sent using its systems. Notably, the
metadata for the letter identified its author as “Bretttoshiba”, a computer Cooper acknowledged he “may have” owned.
Id.
Accordingly, the Court grants the SEC’s motion for summary
judgment against Defendant Cooper on the claim that the Finder’s
Fee Scheme violated the Securities Act and the Exchange Act.
Pursuant to the above analysis, supra n. 4, the Court enters
default judgment on this cause of action against the remaining
defendants, the Cooper Companies and REOP.
B. COOPER WAS THE ALTER EGO OF REOP AND THE COOPER COMPANIES
In determining whether to “pierce the corporate veil,”
courts in the Third Circuit consider the following factors:
“failure to observe corporate formalities, . . . siphoning of
funds from the debtor corporation by the dominant stockholder,
nonfunctioning of officers and directors, absence of corporate
records, and whether the corporation is merely a facade for the
operations of the dominant stockholder.” Trustees of Nat’l
Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk,
332 F.3d 188, 194 (3d Cir. 2003). The factors are not “a rigid
test[;]” the essential inquiry is whether the “corporation is
little more than a legal fiction.” Id.
27
As discussed above and in greater detail in the SEC’s
Statement of Undisputed Material Facts, REOP and the Cooper
Companies were fictional entities. At no time during the
relevant period did REOP or the Cooper Companies maintain the
formalities of incorporation.7 They never held a single board or
executive meeting, nor did they have any employees, directors,
officers or principals besides Cooper. The addresses Cooper used
to register the companies were either his personal addresses or
temporary office rental locations. REOP and the Cooper Companies
earned no legitimate income during the relevant period; all of
the capital generated came from fraudulent investment schemes.
Investor funds were routinely transferred between the multiple
bank accounts for REOP and the Cooper Companies, before being
depleted to pay for Cooper’s personal expenses including
gambling trips to Las Vegas, the Bahamas and Atlantic City,
trips to Disney Resort, airline tickets, designer clothes, and
numerous retail expenses. Thus, Cooper acted as the alter ego of
the Cooper Companies and REOP.8 See Lutyk, 332 F.3d at 194
For example, Cooper invoked his Fifth Amendment rights when
asked about the corporate formation and function of Global
Funding. SOF ¶ 8.
8 The Court is unpersuaded by Cooper’s general denial that “The
SEC has chosen to ignore the difference between the roles that
Companies and I played in these contracts and that fact that it
was the Companies themselves that directly received the funds.”
Def. Cooper’s Mem. in Opp. [Dkt. No. 43.] To the contrary, the
SEC’s papers establish both through affirmative evidence and
inference from Cooper’s invocation of his Fifth Amendment
7
28
(affirming the piercing of corporate veil where there was a
“dearth of corporate formalities and corporate records” and
defendant siphoned funds from alter ego; noting that a finding
of “constructive fraud and avoiding an inequitable result is
often enough”).9
C. DEFENDANT COOPER FAILED TO REGISTER AS A BROKER-DEALER
Section 15(a)(1) of the Exchange Act makes it unlawful for
a “broker” to effect any transaction in, or to induce or attempt
to induce the purchase or sale of any security, unless such
broker is registered with the Commission or, in the case of a
natural person, is associated with a registered broker-dealer.
15 U.S.C. § 78o(a)(1); SEC v. Kenton Capital, 69 F. Supp. 2d 1,
12 (D.D.C. 1998). Section 3(a)(4) of the Exchange Act defines a
broker as any person “engaged in the business of effecting
transactions in securities for the account of others.” 15
U.S.C.A. § 78c(a)(4). Scienter is not required under Section
15(a)(1). See SEC v. Interlink Data Network of Los Angeles,
Inc., Civ. A. No. 93–3073, 1993 WL 603274, at *10 (C.D. Cal.
Nov. 15, 1993).
For nearly four years, Cooper effected transactions in
securities, or induced the purchase or sale of securities, by
Privilege that Cooper was an alter ego for the Cooper Companies.
Cooper’s one page memorandum in opposition points the Court to
no dispute of fact in the record with regard to alter ego
liability.
9 Because the Court finds that Cooper was in fact the alter ego
of REOP and the Cooper Companies, it need not reach the issue of
whether Cooper in fact aided and abetted the Cooper Companies.
29
bringing in at least 10 investors and more than $2.1 million in
investor money into the Cooper Companies’ prime bank schemes.
Cooper was not registered as, or associated with, a brokerdealer. SOF ¶ 7. Accordingly, summary judgment against Defendant
Cooper for violating Section 15(a)(1) is proper. See Kenton
Capital, 69 F. Supp. 2d at 12 (summary judgment against
unregistered defendant that defrauded investors out of millions
of dollars).
D. RELIEF
i. Injunctive Relief
The SEC is entitled to an injunction if it can show a
reasonable likelihood that the defendant will violate the
securities laws in the future. See SEC v. Bonastia, 614 F.2d
908, 912 (3d Cir. 1980); Graulich, 2013 WL 3146862, at *6
(quoting Bonastia). Specifically, “Section 20(b) of the
Securities Act of 1933 and Section 21(d)(1) of the Securities
Exchange Act of 1934 authorize the SEC to seek injunctive relief
when a person or entity is ‘engaged or is about to engage’ in
conduct constituting a violation of the Acts.”
Graulich, 2013
WL 3146862 at *6. To determine the likelihood of future
violations courts, looking at the totality of the circumstances,
may consider whether a defendant’s violation was isolated or
part of a pattern, whether the violation was egregious and
30
deliberate, and whether the defendant’s business will present
opportunities to violate the law in the future. See id.
Here, the Defendants acted with a high degree of scienter
and engaged in multiple, recurrent and egregious violations of
the securities laws. Cooper has never admitted his role in these
fraudulent schemes which brought in millions of dollars, nor
taken any responsibility for his actions.
Cooper and REOP
engaged in the “Finder’s Fee” scheme after being sued for fraud
by multiple investors, being named as a defendant and served
with the complaint in another prime bank case, and after
becoming aware of the Commission’s investigation in this matter.
Indeed, Cooper has recently held himself out as a
“millionaire” investor, including on international news
networks.8 SOF ¶¶ 118-119. At his deposition, when asked if he
was presently involved in “Prime Bank” or “High Yield”
investments or Brazilian Bonds, Cooper asserted his Fifth
Amendment Privilege. SOF ¶ 115.
Accordingly, pursuant to its
grant of summary judgment, the Court orders injunctive relief
against Defendant Cooper. The Court also grants injunctive
relief against the Cooper Companies and REOP, pursuant to its
entry of default judgment.
31
ii.
Disgorgement and Prejudgment Interest as to the
Defendants
“Disgorgement is an equitable remedy designed to deprive a
wrongdoer of his unjust enrichment and to deter others from
violating securities laws”. SEC v. Hughes Capital Corp., 124
F.3d 449, 455 (3d Cir. 1997) (citation omitted). The SEC “is not
required to trace every dollar of proceeds misappropriated by
the defendants . . . nor is plaintiff required to identify
monies which have been commingled by them.” SEC v. Hughes
Capital Corp., 917 F. Supp. 1080, 1085 (D.N.J. 1996) aff'd, 124
F.3d 449 (3d Cir. 1997) (citation omitted). The SEC need only
show its disgorgement figure “reasonably approximates” the
defendants’ ill-gotten gains. Id. Moreover, “the district court
is . . . invested with broad discretion in fashioning an
appropriate disgorgement order.”
Graulich, 2013 WL 3146862, at
*7. Disgorgement typically includes prejudgment interest so that
wrongdoers do not profit from interest-free loans on their illgotten gains. See Hughes Capital, 917 F. Supp. at 1089-90. When
the defendants collaborated to violate securities laws, as is
the case here, joint and several liability is appropriate. See
Hughes Capital, 124 F.3d at 455.
Here, the SEC seeks disgorgement of $2,096,160 and
prejudgment interest of $297,463, jointly and severally, from
Cooper and the Cooper Companies for a total of $2,393,623 in
32
connection with the “Prime Bank” schemes. SOF ¶¶ 120-125.
Separately, the SEC seeks disgorgement of $50,000 and
prejudgment interest of $4,016, jointly and severally, from
Cooper and REOP in connection with the Brazilian Bond scheme.
Id. The disgorgement calculation is based on a forensic
accounting review of Defendants’ account records showing the
total amount of investor funds Defendants fraudulently obtained.
SOF ¶¶ 120-123. The Commission then applied the rate for the
underpayment of federal income tax to arrive at a prejudgment
interest amount. SOF ¶¶ 124-1259; see 26 U.S.C. § 6621(a)(2);
Hughes Capital, 917 F. Supp. at 1089-90.
The Court agrees with
these uncontested amounts.
Accordingly, the Court, pursuant to its grant of summary
judgment, orders relief in the form of disgorgement in the
amounts discussed above against Defendant Cooper.
With regard
to REOP and the Cooper Companies, the Court, given its entry of
default judgment, orders relief in the form disgorgement in the
amounts described above.
iii. Civil Penalties as to Defendants
Finally, The SEC requests “third tier” civil penalties
against each of the Defendants. Third tier penalties set the
ceiling for penalty amounts and are available when the
securities law violation “involved fraud, deceit, manipulation,
or deliberate or reckless disregard of a regulatory requirement
33
[and] such violation directly or indirectly resulted in
substantial losses or created a significant risk of substantial
loss to other persons.” Section 21(d)(3)(B) of the Exchange Act,
15 U.S.C. § 78u(d)(3)(B); see also Graulich, 2013 WL 3146862, at
*7. The maximum third tier penalty is the greater of (1)
$150,000 per violation for a natural person or $725,000 per
violation for any other person (e.g., corporate entity) or (2)
the “gross amount of pecuniary gain” to the defendant as a
result of the securities law violation. Exchange Act §
21(d)(3)(B), 15 U.S.C. § 78u(d)(3)(B); see Graulich, 2013 WL
3146862, at *7 (“With regard to gross pecuniary gain, many
courts have imposed a single penalty equal to the amount of
disgorgement.”).
In determining the amount of penalty, courts frequently
consider such factors as: (1) the egregiousness of the conduct;
(2) the degree of scienter; (3) whether the conduct created
substantial losses or the risk of substantial losses to other
persons; (4) whether the conduct was recurrent; and (5) whether
the penalty should be reduced due to demonstrated current and
future financial condition. See e.g., SEC v. Secure Capital
Funding, No. 11–916, 2014 WL 936722, at *4-5 (D.N.J Mar. 10,
2014).
Defendants’ securities violations were egregious, repeated,
and carried a high degree of scienter. Cooper violated the law
34
repeatedly over a period of at least four years, using investor
funds for his personal use. He had no gainful employment during
this period and there is no evidence that the other Defendants
had any business operations or earned any legitimate income.
Cooper does not admit the wrongful nature of his conduct. He
gives no assurance against future violations and, in fact,
continues to hold himself out as a successful businessman.
Accordingly, the Court orders that summary judgment shall
be entered against Defendant Cooper and relief shall be required
in the form of a civil penalty of $2,447,639, equal to the total
amount by which he defrauded investors including prejudgment
interest. Second, default judgment shall be entered against REOP
and relief shall be granted in the form of a civil penalty of
$54,016, an amount equal to the “fee” investors paid for the
purported acceptance of the Brazilian sovereign bond plus
prejudgment interest. Finally, default judgment shall be entered
against each of the Cooper Companies and they shall be required
to pay a civil penalty equal to their “gross amount of pecuniary
gain” (i.e., disgorgement and prejudgment interest): $308,667
for Global Funding, $1,264,272 for Dream Holdings, $320,468 for
Fortitude, and $500,216 for Peninsula. SOF ¶¶ 124-125.
An appropriate Order follows.
35
DATED: November 5, 2015
s/Renée Marie Bumb
RENÉE MARIE BUMB
UNITED STATES DISTRICT JUDGE
36
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