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

Filing 113

OPINION. Signed by Judge Anne E. Thompson on 4/29/2014. (gxh)

NOT FOR PUBLICATION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.
This matter comes before the Court on Plaintiff U.S. Securities and Exchange
Commission’s, (“Plaintiff’s”), application for assessment of monetary remedies against
Defendant Bertram A. Hill, (“Defendant”). The Court has decided the motion after considering
the parties’ written submissions and without oral argument pursuant to Federal Rule of Civil
Procedure 78(b). 1 For the reasons set forth below, the Court requires disgorgement and payment
of prejudgment interest and also assesses a civil penalty against Defendant.
BACKGROUND 2
On July 30, 2012, Defendant consented to a judgment against him as to liability and
injunctive relief. (Doc. No 64). The Court entered Judgment against Defendant pursuant to this
consent. (Doc. No. 66).

1

On October 3, 2013, the Court granted Plaintiff’s request to determine the question of monetary
remedies against Hill on the papers. (Doc. No. 104). Defendant’s brief objected to the
calculations concerning ill-gotten gains and the civil penalty. (Doc. No. 108).
2

Much of the background for this matter, including the facts and law relating to the liability of
the codefendants in this case, is set forth in its in this Court’s Opinion dated June 28, 2013.
(Doc. 94).
1

Defendant was involved in a large scale financial fraud scheme in which he induced
individuals to deposit money into a certain New Jersey bank account. (Doc. No. 66). Defendant
has a total of $758,000 in ill-gotten gains from this scheme. (Doc. No. 107 at 6). Defendant
directed investors to deposit a total of roughly $3.97 million into a JP Morgan Chase bank
account. (Doc. No. 85, Norman Declaration at ¶ 23). During the scheme, Defendant transferred
$173,000 out of this account to pay for various expenses and divided the remaining $3.8 million
with Alan Smith, a codefendant. (Id. at ¶ 27). Secure Capital Funding, a company partially
owned by Defendant, received 20% of the proceeds from these investors. (Doc. No. 29; Doc.
No. 66). Defendant was Secure Capital Funding’s only employee and was its only director
besides Smith. (Hill Deposition Transcript 45:8-16). Defendant was also the only person
authorized to make withdrawals from the account and transferred large amounts of money
directly out of this account into accounts solely controlled by him. (Id. at 27:6-28:15, 102:24103:4).
DISCUSSION
The Court will address the following issues: disgorgement, prejudgment interest, and
civil penalties.
1. Defendant’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).

2

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
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.
Here, the record makes clear that Defendant was entitled to 20% of the roughly $3.8
million in fraud proceeds. (Doc. No. 66; Doc. No. 107 at 9). Defendant also exercised
considerable control over the accounts in which the $3.8 million were deposited. (Hill
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Deposition Transcript 27:6-28:15, 102:24-103:4; Doc. No. 29; Doc. No. 66). Therefore,
Plaintiff is entitled to $758,000 in disgorgement from Defendant’s ill-gotten gains.
2. Defendant’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 1404726 at *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”).
Here, Defendant consented to pay prejudgment interest and also consented to accept as
true the allegations that he acted with scienter. (Doc. No. 66). Therefore, the Court now turns to
the amount 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.
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).

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Here, the Court adopts the underpayment rate used by the IRS. The record shows that the
amount due by the end of the briefing schedule based on this rate is $69,201.23. Therefore,
Defendant owes $69,201.23 in prejudgment interest.
3. Defendant’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.
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,
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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).
Here, the Court employs the proportional approach and assesses a civil penalty against
Defendant in the amount of $740,000, an amount slightly less than his ill-gotten gains.
Defendant was closely involved in the large-scale fraud, caused a significant amount of actual
loss, and acted with a high degree of scienter. (Doc. No. 29; Doc. No. 66).
CONCLUSION
For the reasons set forth above, the Court assesses a civil penalty against Defendant and
requires Defendant to pay a civil penalty, disgorge all ill-gotten gains, and pay prejudgment
interest.

Anne E. Thompson
ANNE E. THOMPSON, U.S.D.J.
Dated: April 29, 2014

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