U.S SECURITIES AND EXCHANGE COMMISSION v. SECURE CAPITAL FUNDING CORPORATION et al

Filing 111

OPINION filed. Signed by Judge Anne E. Thompson on 3/10/2014. (mmh)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
U.S. Securities and Exchange Commission,
Civ. No. 11-916
Plaintiff,
OPINION
v.
Secure Capital Funding, et al.,
Defendants.
THOMPSON, U.S.D.J.
The matter before the Court concerns Plaintiff U.S. Securities and Exchange
Commission’s, (“Plaintiff’s”), First Amended Complaint, (Doc. No. 29), against Defendants
Secure Capital Funding Corporation, (“SCF”), ST Underwriters Corporation, (“STUC”), Alan
Smith, (“Smith”), and Kiavanni Pringle, (“Pringle”). A default judgment as to liability and
injunctive relief has previously been entered against these defendants, (collectively,
“Defendants”). (Doc. Nos. 94 and 95). 1 For the reasons set forth below, the Court supplements
its June 28, 2013 Order and Opinion, (Doc. Nos. 94 and 95). 2
BACKGROUND
Background for this matter, including the facts and law relating to the liability of SCF,
STUC, Smith and Pringle, is set forth in its entirety in this Court’s Opinion dated June 28, 2013
(Doc. 94).

1

Smith and Pringle failed to appear at the hearing or to have counsel enter an appearance on
their behalf.
2
The Court has based its rulings on the evidence adduced at the hearing conducted before the
Court on December 18, 2013, the evidentiary material submitted by Plaintiff, (Doc. No. 85), and
the entire record in the case.
1

DISCUSSION
The Court will address the following issues: (1) Smith’s obligation to disgorge ill-gotten
gains; (2) Smith’s obligation to pay prejudgment interest; (3) Smith’s obligation to pay a civil
penalty; and (4) Pringle’s obligation to pay a civil penalty.
1. Smith’s Obligation to Disgorge Ill-Gotten Gains
“Disgorgement is an equitable remedy designed to deprive a wrongdoer of his unjust
enrichment and to deter others from violating securities laws.” S.E.C. v. Hughes Capital Corp.,
124 F.3d 449, 455 (3d Cir. 1997). “Disgorgement of illegally derived funds is a remedy within
the equitable powers conferred on this Court [. . .].” S.E.C. v. Hughes Capital Corp., 917 F.
Supp. 1080, 1085 (D.N.J. 1996) aff'd, 124 F.3d 449 (3d Cir. 1997). “The district court has broad
discretion in fashioning the equitable remedy of a disgorgement order.” Id. (citations omitted).
The SEC has the initial burden of establishing that “its disgorgement figure reasonably
approximates the amount of unjust enrichment.” Id.; S.E.C. v. Lazare Indus., Inc., 294 F. App'x
711, 714 (3d Cir. 2008) (amount of disgorgement reviewed under “abuse of discretion”
standard); see SEC v. Graystone Nash, Inc., 820 F. Supp. 863, 875 (D.N.J. 1993). In meeting its
burden, the “plaintiff 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.” Hughes Capital Corp., 917 F. Supp. at 1085; see also SEC v. Huff, 2012 WL 10862, at
*1 (11th Cir. Jan. 3, 2012) (“The SEC’s burden for showing the amount of assets subject to
disgorgement [. . .] is light: a reasonable approximation of a defendant’s ill-gotten gains.”).
Once the plaintiff has established that the disgorgement figure is a reasonable approximation
of unlawful profits, the burden of proof shifts to the defendants, who must “demonstrate that the
disgorgement figure is not a reasonable approximation.” Hughes Capital Corp., 917 F. Supp. at

2

1085. “[A]ll doubts concerning the determination of disgorgements are to be resolved against
the defrauding party.” Id.; S.E.C. v. Calvo, 378 F.3d 1211, 1217 (11th Cir. 2004) (“Exactitude is
not a requirement; [s]o long as the measurement of disgorgement is reasonable, any risk of
uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.”).
[W]here a defendant’s record-keeping or lack thereof has so obscured
matters that calculating the exact amount of illicit gains cannot be
accomplished without incurring inordinate expense, it is well within
the district court’s discretion to rule that the amount of disgorgement
will be the more readily measurable proceeds received from the
unlawful transactions.
SEC v. Calvo, 378 F.3d at 1217-18.
Smith’s ill-gotten gains were at least $3.4 million. Smith received most of his ill-gotten
gains from investors who were directed to send money to a New Jersey bank account in SCF’s
name. Smith used SCF, and co-defendant Bertram A. Hill, in his fraudulent securities offerings.
A small portion of Smith’s ill-gotten gains came from investors who were told to send their
money to a bank account in California in the name of Secure Capital Corporation (“SCC”),
another company that Smith used to facilitate his fraudulent activities. In both cases, Smith’s
share of the fraud proceeds was wired from bank accounts in the U.S. to a bank account in the
Republic of Latvia. These facts are established by the testimony and documentary evidence
adduced at the December 18, 2013 hearing, including the testimony of Donna K. Norman
concerning Plaintiff’s investigation of the fraud; the testimony of Bertram A. Hill concerning the
division of fraud proceeds as between Smith and SCF; the Declaration of Benjamin Johnson, Jr.,
(Plaintiff’s Hearing Ex. 3), concerning the division of fraud proceeds between Smith and SCC;
banking records and other transaction records, (Plaintiff’s Hearing Ex. 1, 2, 4, 11-14); and
Smith’s email instructions to Hill to wire fraud proceeds, (Plaintiff’s Hearing Ex. 15).

3

Approximately $2.95 million of Smith’s total $3.4 million of ill-gotten gains was routed
through SCF’s bank accounts in New Jersey and then wired to the account in Latvia. A large
percentage of this money came from Smith’s 80% share of the $3.8 million that was routed
through SCF. Pursuant to instructions from Smith and/or Hill, investors sent their money to a
bank account in SCF’s name in New Jersey. Evidence shows that Hill was the sole signatory
authorized to make withdrawals from the bank account and the sole officer of SCF. The account
at issue is identified as Account No. xxxxx6052 at JP Morgan Chase. Smith and Hill had agreed
to split the proceeds, with 80% going to Smith and 20% going to SCF. Pursuant to that
agreement, and on Smith’s instructions, Hill wired $2.84 million of the $3.7 million from SCF’s
bank account in New Jersey to a bank account in the Republic of Latvia without investors’
knowledge or consent. The account is in the name of a Latvian corporation that purports to
invest in real estate, “LV71xxxxxx-xxx-xxxxx at Regionala Investiciju Banka, J. Alunana 2,
Riga, Latvia.” The Court finds that the $2.84 million that Hill wired to Latvia on Smith’s
instructions represents the proceeds of fraud perpetrated in substantial part in the United States.
Smith reaped additional ill-gotten gains of $450,000 as his share of monies that investors
were instructed to send to a bank account in California in SCC’s name. Smith’s $450,000 share
was part of a total of at least $500,000 that investors were told to send to SCC’s business
checking account in a Riverside, California branch of JP Morgan Chase. (Id.). SCC wired
$450,000 of the $500,000 total to the same account in Riga, Latvia to which SCF sent Smith’s
proceeds from the New Jersey-based fraud. When added to Smith’s approximately $2.95 million
share of fraud proceeds routed through SCF, Smith’s $450,000 share routed through SCC adds
up to ill-gotten gains of approximately $3.4 million.

4

Smith’s disgorgement obligation will be partially satisfied by applying available funds
from SCF’s bank account at JP Morgan Chase in New Jersey. Fraud proceeds in the total
amount of $130,700 were deposited into the JP Morgan Chase account after this Court issued a
Temporary Restraining Order on February 18, 2012, freezing withdrawals from the account.
Smith’s 80% share of the $130,700 amounts to $104,500. The freeze prevented Hill from wiring
Smith’s 80% share to the bank account in Latvia as he had done with Smith’s share of fraud
proceeds deposited into the JP Morgan Chase account prior to the freeze order. JP Morgan
Chase is ordered to pay that money to a bank account to be established by the Distribution Agent
appointed by the Court to return fraud proceeds to investors pursuant to the Plan of Distribution,
(Doc. 90). After the $104,560 offset for funds that will be seized from the JP Morgan Chase
account, Smith’s remaining disgorgement obligation will be $3,295,440.
2. Smith’s Obligation to Pay Prejudgment Interest
“Prejudgment interest on damages awarded pursuant to a violation of the federal securities
laws is a matter of judicial discretion. In exercising its discretionary powers, a court must
consider both compensation and fairness.” S.E.C. v. Hughes Capital Corp., 917 F. Supp. at
1089-90; S.E.C. Comm'n v. Hasho, 784 F. Supp. 1059, 1112 (S.D.N.Y. 1992); see S.E.C. v. First
Jersey Securities, Inc., 101 F.3d 1450, 1476 (2d Cir. 1996) (decision to award prejudgment
interest, like the decision to grant disgorgement, is left to the district court’s “broad discretion”).
Proof of a defendant’s scienter justifies the award of prejudgment interest. S.E.C. v. Utsick, 2009
WL 1404726at *15 (S.D. Fla. May 19, 2009) (“in the context of Section 10(b) and Rule 10b-5
actions, a defendant’s scienter is sufficient to justify an award of prejudgment interest”).
As for the amount of the prejudgment interest, most “courts have adopted the [IRS]
underpayment rate without controversy.” S.E.C. v. Yun, 148 F. Supp. 2d 1287, 1292 (M.D. Fla.

5

2001); see S.E.C. v. Hughes Capital Corp., 917 F. Supp. at 1090 (adopting the underpayment
rate method). “That rate reflects what it would have cost to borrow the money from the
government and therefore reasonably approximates one of the benefits the defendant derived
from [his] fraud.” S.E.C. v. Aleksey, 2007 WL 1789113, at *2 (M.D. Fla. June 19, 2007)
(quoting SEC v. First Jersey Securities, Inc., 101 F.3d at 1476).
Here, the Court finds that Smith must pay $319,481.76 in prejudgment interest. This
prejudgment interest figure is calculated by applying the rate of interest used by the Internal
Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621
(a)(2) to Smith’s ill-gotten gains of approximately $3.4 million. The starting date for the
calculation is February 28, 2011, the date on which the last monies were received into the JP
Morgan Chase account from investors. The ending date for the calculation is January 14, 2014.
Smith is not entitled to deduct from the calculation of prejudgment interest the $104,560 that has
been frozen in the JP Morgan Chase account because that is not an interest-bearing account, and
thus, no interest is available to partially offset Smith’s obligation to pay prejudgment interest.
3. Smith’s Obligation to Pay a Civil Penalty
Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act set forth three
tiers of civil money penalties. 15 U.S.C. §§ 77t(d), 78u(d)(3). A third tier penalty is appropriate
when a defendant’s violation involved fraud or deceit and resulted in substantial loss to others or
created a significant risk of substantial loss to others. 15 U.S.C. §§ 77t(d)(2), 78u(d)(3)(B).
For violations occurring after March 3, 2009, a third tier penalty imposed upon an individual
may not exceed the greater of the following: (1) $150,000 for each violation by a natural person
and $725,000 for each violation by any other person; or (2) the gross amount of the defendant’s
pecuniary gain. 17 C.F.R. § 201.1002, Table IV to Subpart E.

6

Courts consider the following factors in determining the amount of penalty to impose:
(1) the egregiousness of the violations at issue, (2) defendant’s
scienter, (3) the repeated nature of the violations, (4) defendant’s
failure to admit to their wrongdoing, (5) whether defendant’s conduct
created substantial losses or the risk of substantial losses to other
persons, (6) defendant’s lack of cooperation and honesty with
authorities, if any, and (7) whether the penalty that would otherwise
be appropriate should be reduced due to defendant’s demonstrated
current and future financial condition.
S.E.C. v. Bear Stearns, 626 F. Supp. 2d 402, 407 (S.D.N.Y. 2009). A defendant’s ability to pay
is “at most” one factor the Court should consider when imposing a penalty; securities laws do not
prohibit the imposition of a penalty in excess of a violator’s ability to pay. S.E.C. v. Warren, 534
F.3d 1368, 1370 (11th Cir. 2008).
Courts have applied “two general methods for assessing civil penalties in securities cases,
a ‘per violation’ approach and a ‘proportional approach.’” S.E.C. v. Koenig, 532 F.Supp.2d 987,
995 (N.D. Ill. 2007). Courts applying a “per violation” approach have imposed a penalty for
each of the false filings made by a violator, see S.E.C. v. Huff, 758 F. Supp. 2d 1288, 1366 (S.D.
Fla. 2010); SEC v. Coates, 137 F. Supp. 2d 413, 430 (S.D.N.Y. 2001), or for each of the
securities laws violated by the defendant, see S.E.C. v. Henke, 275 F. Supp. 2d 1075, 1086 (N.D.
Cal. 2003).
After considering the factors identified in Bear Stearns and the fact that a “per violation”
approach would not result in a sanction sufficient to serve the interests of punishment or
deterrence, the Court finds that the proportional approach and a civil penalty of $3.4 million is
appropriate with respect to Smith. Bear Stearns, 626 F. Supp. 2d at 407. Smith masterminded a
significant fraud with a high degree of scienter, causing substantial loss to investors. Moreover,
Smith has neither acknowledged his wrongdoing nor cooperated with Plaintiff or the Court.

7

4. Pringle’s Obligation to Pay a Civil Penalty
Pringle is assessed a single third tier penalty of $150,000 under the “per violation” approach.
Pringle did not personally realize profits through his participation in the scheme; however, he did
act with a high degree of scienter and caused a substantial loss to the four investors he brought to
Smith. Pringle identified and induced at least four investors to send a total of $400,000 to SCC
or SCF. See 2nd Supp. Norman Decl., ¶ 17; 4th Supp. Norman Decl., ¶ 16and Ex. 1 [Pringle
Deposition], 81:11-83:14. This money would be leveraged for $35 million worth of credits in
Swiss accounts and used to purchase securities. See 4th Supp. Norman Decl., ¶ 16 and Ex. 1
[Pringle Deposition], 77:9-20; 99:5. Pringle falsely told his customers that each customer was
purchasing access to “non-depleting” accounts that offered “100 to one” leverage with no risk of
loss. See 4th Supp. Norman Decl., ¶ 16 and Ex. 1 (Pringle Deposition), 87:12-89:23.
Based on Pringle’s actions, one investor from Nevada wired $50,000 to SCC’s bank account
in California as payment for purported “Swiss debentures” of Secure Trust. See Supp. Norman
Decl., ¶¶ 11-16; 4th Supp. Norman Decl., ¶ 16 and Ex. 1 (Pringle Deposition)], 157:23-163:24;
181:20-182:18. Pringle told this investor that the $50,000 payment bought him access to a $5
million line of credit as to which PP&M Trade Star Partners (a trade name that Pringle used)
would bear any risk and pay all fees. Id. Pringle also induced this investor to execute a power of
attorney that gave Pringle sole authority over the purported Swiss account. Id. However, the
investor never had access to his money or received any account statements after complying with
Pringle’s instructions. Pringle induced this investor, along with others, to send payments that
were ultimately funneled to Smith even though Pringle had never met Smith in person and had
no justifiable reason to believe that Smith’s companies or the securities or the “100 to one”

8

leveraged lines of credit they were offering ever existed. See 4th Supp. Norman Decl., ¶ 16 and
Ex. 1 [Pringle Deposition], 39:25-45:24; 101:13-21.
Pringle has shown disregard for the judicial process and admitted to committing
additional acts of securities fraud even after being preliminarily enjoined in this case. See
Plaintiff’s Hearing Ex. 5, 6 and 7.
CONCLUSION
For the reasons set forth above, the Court supplements its June 28, 2013 Order, (Doc. No.
95). An appropriate order follows.

/s/ Anne E. Thompson
ANNE E. THOMPSON, U.S.D.J.
Date: 3/10/14

9