U.S. Securities and Exchange Commission v. Syndicated Food Service International, Inc. et al

Filing 275

ORDER ADOPTING 268 REPORT AND RECOMMENDATIONS in its entirety. Plaintiff's motion for final judgments accordingly is GRANTED in part and DENIED in part, and judgments shall beentered as follows: (1) for Defendant Richardson, judgment in the amount of $329,000, representing $274,000 in disgorgement and $55,000 in civil penalties; (2) for Defendant Klein, judgment in the amount of$157,000, representing $151,500 in disgorgement and $5, 500 in civil penalties; and (3) for Defendant Keeler, judgment in the amount of $220,000 in civil penalties. No Subject Defendant shall be assessed prejudgment interest. The Clerk of Court is respectfully directed to enter judgment and close the case. So Ordered by Judge Nicholas G. Garaufis on 3/26/2014. (c/m to pro se defendants William Keeler and Adam Klein, fwd'd for jgm) (Lee, Tiffeny)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

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U.S. SECURITIES AND E)(CHANGE
COMMISSION,
Plaintiff,
-against-

MEMORANDUM & ORDER
04-CV-1303 (NGG) (VLS)

SYNDICATED FOOD SERVICE
INTERNATIONAL, INC., et al.,
Defendants.

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NICHOLAS G. GARAUFIS, United States District Judge.
Before the court are prose Defendant Adam Klein's and prose Defendant William
Keeler's objections to Magistrate Judge Vera M. Scanlon's Report and Recommendation
("R&R"), dated February 14, 2014, which recommended granting Plaintiff's motion for final
judgments. (Dkt. 268.) Defendant Jeffrey Richardson did not object to the R&R. For the
reasons set forth below, the R&R is ADOPTED in full.
I.

BACKGROUND
On March 29, 2004, the Securities and Exchange Commission ("SEC") commenced this

action against Defendants William Keeler, Adam Klein, and Jeffrey Richardson (collectively, the
"Subject Defendants"), along with sixteen other named defendants, to remedy alleged violations
ofthe federal securities laws in connection with the alleged manipulation of the market for
securities issued by Syndicated Food Service International, Inc. ("Syndicated Food"). (Compl.
(Dkt. 1).) Each Subject Defendant consented to partial judgments against them as to liability,
which were entered by the court between March 2009 and October 2011. (J. as to Adam Klein,
Mar. 4, 2009 (Dkt. 95); J. as to William Keeler, Oct. 31, 2011 (Dkt. 207); J. as to Jeffrey
Richardson, Mar. 12, 2009 (Dkt. 101).) The consent agreements provided that the allegations

contained in the operative pleadings-the original Complaint for Mr. Klein (Dkt. 1), the
Amended Complaint for Mr. Richardson (Dkt. 86), and the Second Amended Complaint for Mr.
Keeler (Dkt. 135)-would be deemed true for the purposes of the instant motion. (R&R at 3.)
In short, the Subject Defendants were accused of participating in a massive broker bribery
scheme in which the stock of nine public companies, including Syndicated Food, ofwhich
Defendant Keeler was the CEO, was surreptitiously sold into the public market for personal gain
and for undisclosed kickbacks. (See id. at 4.) Defendants Klein and Richardson were both
active participants in this scheme. (Id. at 4-7.)
Unable to reach an agreement on the proper measures of disgorgement, civil penalties,
and prejudgment interest that should be paid by the Subject Defendants pursuant to their consent
agreements, the SEC filed a motion for final judgments against the Subject Defendants on April
23,2013. (Pl. Mot. for Final J. (Dkt. 245).) The SEC's motion seeks final judgments ordering
disgorgement, prejudgment interest, and civil penalties against Defendants Adam Klein and
Jeffrey Richardson, and a final judgment ordering civil penalties against Defendant William
Keeler. (ld.) The court referred this motion to Magistrate Judge Vera M. Scanlon for a report
and recommendation pursuant to 28 U.S.C. § 636(b)(1)(B) and Federal Rule of Civil Procedure
72(b)(1) to address the merits of Plaintiffs motion and the proper measure of damages. (See
Order, Apr. 25, 2013 (Dkt. 247).)
A telephonic inquest hearing was held before Judge Scanlon on January 30,2014.
Counsel for the SEC and Defendant Richardson appeared, and Defendants Keeler and Klein
participated pro se. In connection with that proceeding, the parties were invited to submit
additional documents to be considered by the court. (Scheduling Order, Jan. 21, 2014.) Only the

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SEC filed additional exhibits. (See Letter, Jan. 27, 2014 (Dkt. 265); Letter, Jan. 30, 2014 (Dkt.
266).)
On February 14, 2014, Judge Scanlon issued an R&R recommending that the SEC's
motion be granted in part and denied in part. Specifically, the R&R recommends: (1)
disgorgements in the amount of$274,000 from Mr. Richardson and $151,500 from Mr. Klein;
(2) no prejudgment interest for any Subject Defendant; and (3) civil penalties in the amounts of
$55,000 against Mr. Richardson, $5,500 against Mr. Klein, and $220,000 against Mr. Keeler.
(R&R at 40.) The R&R was filed electronically and copies were mailed to prose Defendants
Keeler and Klein by the Clerk of the Court.
On February 28, 2014, within the fourteen-day window for parties to object to the R&R,
Defendant Klein filed a Motion for Sanctions pursuant to Federal Rule of Civil Procedure 3 7.
(Mot. for Sanctions & Recons. ("Klein Obj.") (Dkt. 269).)· Contending that the SEC had violated
its discovery obligations under Rule 26, Klein asks that the court preclude two documents from
being allowed into evidence to support the SEC's motion and that the court "[r]econsider the
recommendation" for disgorgement against him. (Klein Obj. at 3.) For the reasons set forth
below, and in recognition of Defendant Klein's pro se status, the court considers the purported
motion to be a timely filed objection to the R&R pursuant to 28 U.S.C. § 636 and Federal Rule
of Civil Procedure 72(b)(2). The SEC filed a response to Defendant Klein's motion on March
24,2014. (SEC's Memo. of Law in Opp'n to Klein Obj. ("Klein Resp.") (Dkt. 274).)
Also on February 28, 2014, Defendant Keeler attempted to send an email to Judge
Scanlon detailing his objections to the R&R. The email was never received, however, and
Defendant Keeler failed to comply with the court's March 6, 2014, Order directing him to
properly file his objections on the docket. (Mar. 6, 2014, Order.) The SEC, which received

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Keeler's email, responded to the objections by letter dated March 5, 2014. (Letter, Mar. 5, 2014
("Keeler Resp.") (Dkt. 270).) At the court's request, the SEC docketed Defendant Keeler's
February 28, 2014, email on March 18, 2014. (Dkt. 273 ("Keeler Obj. ").) Citing his current
health woes and financial hardship, as well as disputing his participation in the underlying fraud,
Keeler's email requests that the court consider dismissing the "charges" against him. (IQJ In
recognition of Defendant Keeler's prose status, the court considers the objections as timely filed.
II.

STANDARD OF REVIEW
When a magistrate judge issues an R&R and it has been served on the parties, the parties

have fourteen days in which to file an objection to the R&R. Fed. R. Civ. P. 72(b)(2). If the
district court receives timely objections to the R&R, the court makes "a de novo determination of
those portions of the report or specified proposed findings or recommendations to which
objection is made. [The district court] may accept, reject, or modify, in whole or in part, the
findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(l). However,
to obtain de novo review, an objecting party "must point out the specific portions of the report
and recommendation to which [he] object[s]." U.S. Flour Corp. v. Certified Bakery, Inc., No.
10-CV-2522 (JS), 2012 WL 728227, at *2 (E.D.N.Y. Mar. 6, 2012); see also Fed. R. Civ. P.
72(b)(2) ("[A] party may serve and file specific written objections to the [R&R].").
If a party "makes only conclusory or general objections, or simply reiterates his original
arguments, the Court reviews the Report and Recommendation only for clear error." Pall Corp.
v. Entergris, Inc., 249 F.R.D. 48, 51 (E.D.N.Y. 2008); see also Mario v. P&C Food Markets,
Inc., 313 F.3d 758, 766 (2d Cir. 2002) (holding that plaintiffs objection to an R&R was "not
specific enough" to "constitute an adequate objection under[] Fed. R. Civ. P. 72(b)"). Portions

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of the R&R to which a party makes no objection are also reviewed for clear error. U.S. Flour,
2012 WL 728227, at *2.
III.

DISCUSSION
A.

Klein Objection

Though filed in response to Judge Scanlon's R&R, Defendant Klein's objections to the
R&R are styled as a motion for sanctions against the SEC pursuant to Federal Rule of Civil
Procedure 37. (Klein Obj. at 1.) Klein's motion argues that two documents submitted by the
SEC should have been, or should be, precluded from being used as evidence when calculating
his disgorgement obligation. 1 (ld. at 2-3.) However, demonstrating the Defendant's intent to
object to the R&R, the motion concludes: "WHEREFORE, I respectfully request that the Court
grant this motion and Reconsider the recommendation for disgorgement." (ld. at 3.) The court
accordingly interprets Klein's motion as a timely-filed objection to the R&R; though, in
recognition of his pro se status, it will also address the merits of Klein's petition as if it were a
stand-alone discovery motion.
At issue in the Klein Objection are two exhibits filed by the SEC on January 27, 2014, in
anticipation of the January 30, 2014, inquest hearing before Judge Scanlon. (Letter, Jan. 27,
2014 (Dkt. 265), Exs. 2, 3.) The challenged documents are two sample account statements that
purport to show individual stock trades executed by Defendant Klein and Joseph Ferragamo, 2
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Defendant Klein does not appear to contest the R&R recommendation that he be required to pay $5,500 as a civil
penalty.

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Though originally named as a defendant in this suit, the SEC did not request that Mr. Ferragamo disgorge profits
or receive a civil penalty as part ofthis case. (See R&R at 6.) Rather, Mr. Ferragamo was the subject of a
criminal judgment in the District of New Jersey, which required him to pay over $4 million in restitution to his
victims. United States v. Ferragamo, No. 05-CV-29 (D.N.J. Apr. 18, 2006) (Dkt. 7). Ferragamo was also
sentenced to fifty-one months imprisonment and three years supervised release. (R&R at 7 n.3.) As discussed in
the R&R, the District of New Jersey's restitution order against Ferragamo indicates that the Syndicated Food
fraud was one of three separate frauds on which the $4 million restitution award was premised. However, after
reviewing the record in Ferragamo's criminal case, neither Judge Scanlon nor this court is able to determine what
portion ofthe total restitution award is attributable to the Syndicated Food fraud. (See R&R at 6-7.)

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another LH Ross Branch representative involved in the Syndicated Food fraud. (R&R at 16; Tr.
at 14:2-15:4l Among other things, the account statements illustrate that Messrs. Klein and
Ferragamo shared a "Rep Number," which both the SEC and Klein agree makes it effectively
impossible at this late stage to apportion the illicit kickbacks paid on trades associated with their
Rep Number between them. (See R&R at 6, 17-18; Tr. at 14:2-15:13.) Based on a spreadsheet
provided by the SEC, to which Defendant Klein did not object, Judge Scanlon determined that
the shared Rep Number was associated with trades involving 67,550 shares of Syndicated Food
stock, which resulted in the payment of$151,500 in illicit kickbacks. (R&R at 16-19.)
Defendant Klein's objection challenges Judge Scanlon's purported reliance on these two
documents in support of the R&R recommendation that he be ordered to disgorge the full
$151,500. (Klein Obj. at 2-3.) Arguing that the SEC's supplemental production on January 27
gave him "no additional time to prepare any further opposition responses" and that the account
statements should instead have been produced with the other documents provided by the SEC in
June 20 13-which he asserts the SEC "claim[ed] to be all the discovery gathered during the
investigation"-Klein contends that the SEC violated its discovery obligations and that the
account statements should be accordingly precluded from being used as evidence. (Id. at 2-3.)
In deciding whether to exercise its discretion to preclude evidence as a discovery
sanction, the Second Circuit directs courts to consider: "(I) the party's explanation for the failure
to comply with the discovery order; (2) the importance of the testimony of the precluded
[evidence]; (3) the prejudice suffered by the opposing party as a result of having to prepare to
meet the new testimony; and (4) the possibility of a continuance." Sofitel, Inc. v. Dragon Med.
& Sci. Commons, Inc., 118 F.3d 955, 961 (2d Cir. 1997). For the reasons detailed below,
3

Unless otherwise indicated, citations in the form "Tr._" refer to the Inquest Hearing Transcript, dated January
30,2014. (Dkt. 267.)

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Defendant Klein's objection that the sample account statements should have been, or should be,
precluded fails on several grounds, even if considered as an independent motion for sanctions.
As a threshold matter, there is no evidence of any wrongdoing by the SEC. Defendant
Klein's consent agreement-in which he agreed that the court "shall order disgorgement of illgotten gains"-expressly provided that the parties may take discovery in connection with the
SEC's motion for final judgments. (Mot. to Approve Consent J. of Adam Klein, Feb. 27, 2009
(Dkt. 88) at 2-3.) However, that discovery was limited to those documents or types of
documents specifically identified and requested by the Subject Defendants as bearing upon the
SEC's penalties calculations. (Status Conf. Tr., May 17, 2013 (Dkt. 272) at 23:2-24:7, 25:2126:6.) There is no indication that Defendant Klein ever requested production of his customers'
account statements or similar documents. (See, e.g., Tr. at 22:2-22; see also Klein Resp. 3-5
(describing May 17, 2013, status conference at which parties discussed how discovery would
proceed).) Indeed, during a telephonic status conference on June 10, 2013, counsel for the SEC
stated that it had provided all discovery requested by Mr. Klein; namely, transcripts of testifying
witnesses and a spreadsheet showing all transactions the SEC intended to use in establishing its
disgorgement figure. (Status Conf. Tr., June 10,2013 (Dkt. 270) at 2:24-3:14, 5; see also id. at
12:2-4, 12:25-13:15 (when prompted by the court, Defendant Klein did not request any
additional discovery); Klein Resp. at 5-8.) Nor does the SEC's June 4, 2013, production email
"claim[] to be all of the discovery gathered during the investigation," as Klein suggests. (Klein
Obj. at 2; see also id. at 6 (attaching a copy ofthe SEC's June 4, 2013, email producing
documents "[i]n response to [Klein's] request for documents.").) In addition, Defendant Klein
does not point to any order of the court that would have otherwise obligated the SEC to disclose

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the account statements or that formally closed discovery in this matter. 4 Quite to the contrary, in
her January 21, 2014, Scheduling Order, Judge Scanlon directed the parties to produce any
additional documents they intended to rely on at the inquest hearing that had not already been
disclosed to the other parties during discovery. (Scheduling Order, Jan. 21, 2014; R&R at 10;
see also Klein Resp. 8.) As such, Klein's objection does not establish the existence of a
discovery violation on which the court might premise a preclusion sanction.
Even if the court were to find wrongdoing by the SEC, which it does not, Klein cannot
prove either that the evidence was particularly critical to the R&R disgorgement
recommendation or that he was prejudiced by its admission. First, the account statements at
issue were used by the SEC for the limited purpose of showing that Messrs. Klein and
Ferragamo shared a "Rep Number" and that as a result it would be difficult, if not impossible, to
apportion their ill-gotten gains beween them based on which individual executed a particular
trade. (See R&R at 6, 17-18; Tr. at 14:2-15:13; Klein Resp. 8-9 (describing purpose for
producing account statements).) But Klein admitted that this was the case at the inquest hearing
(id. at 15:8-13 (stating "[u]nfortunately I don't have any way to determine that")), and the shared
Rep Number additionally appears on the spreadsheet provided to Defendant Klein by the SEC, to
which he does not object (Klein Obj. 2-3; Letter, Jan. 27, 2014, Ex. 1.) The court accordingly
finds that the account statements were not necessary to Judge Scanlon's decision to hold

4

To the extent that Defendant Klein premises his request for preclusion on the SEC's initial disclosure obligation
under Federal Rule of Civil Procedure 26(a), that too is without merit. The partial judgment entered against
Defendant Klein makes clear that the Defendant would be entitled to limited discovery only "in connection with
the Commission's motion for disgorgement and/or civil penalties." (J. as to Defendant Adam Klein, Mar. 4, 2009
(Dkt. 95) at 4.) As the transcripts ofthe May 17,2013, and June 10,2013, status conferences before Judge
Scanlon make clear, Klein was afforded a full and fair opportunity to seek discovery from the SEC, but did not
request production of any customer records. While the court is sensitive to Defendant's pro se status, it is
unwilling to impose the harsh sanction of preclusion on these facts.

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Defendant Klein severally but not jointly liable for disgorging the full $151,500 figure.

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(R&R

at 19-24.) Second, and perhaps more importantly, Mr. Klein expressly disclaimed any prejudice
caused by the delayed production of these documents on the record. When asked by Judge
Scanlon whether he felt that he'd had an adequate opportunity to review the Government's
submission, including the additional exhibits, he responded "[y ]es." (Tr. at 10:1-10-13, 11 :9-10,
11 :25-12:2.)
In sum, because Klein fails to establish any misconduct on the part of the SEC or that the
SEC's provision of the two sample account statements prejudiced him, the court rejects his
request for preclusion under Rule 37, regardless of whether it is viewed as an objection or as an
independent motion.

B.

Keeler Objection

By his February 28, 2014, emai1 to Judge Scanlon, Defendant Keeler appears to challenge
the R&R's recommendation that he be required to pay a civil penalty of $220,000, requesting
instead that the court "consider dismissing the[] charges against [him]." (Keeler Obj.) But
Keeler's correspondence does not indicate with any degree of specificity the portion of the R&R
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The court notes that the R&R equitably reduced the civil penalties owed by Defendant Klein from the $220,000
requested by the SEC to $5,500 in recognition of his less prominent role in the Syndicated Food fraud, his age and
family financial pressures at the time, and his current and future financial situation. In the court's view, the
equitable relief afforded by the R&R appropriately balances, in practical effect if not by design, the severity of
Defendant's disgorgement liability. As capably explained in Judge Scanlon's R&R, the $151,500 in illicit profits
attributable to the shared "Rep Number" represents the only "reasonable approximation of the profits causally
connected to the violation" that is possible on these facts. S.E.C. v. First Jersey Sec., Inc., 101 F.3d 1450, 1475
(2d Cir. 1996) (internal quotation marks and citation omitted). (See also R&R at 16-18, 20.) The burden of
proving how much of those profits were attributable to his co-conspirator was rightly placed on Defendant Klein,
see First Jersey Sec., 101 F.3d at 1475, which he was unable to do (R&R at 21-22.) The uncertainty that prevents
the court from more accurately estimating Defendant Klein's portion of the joint profits is entirely of his own
making. Nor does the court believe it would be appropriate to offset Ferragamo's criminal restitution payments
against Defendant Klein's disgorgement penalty. See S.E.C. v. Credit Bancoro. Ltd., No. 99-CV-11395 (RWS),
2011 WL 666158, at *1-3 (S.D.N.Y. Feb. 14, 2011) ("The distinction between disgorgement and criminal
restitution is that, unlike restitution, 'the primary purpose of disgorgement to [the SEC] is not to compensate
investors,' but rather to force 'a defendant to give up the amount by which he was unjustly enriched."' (citations
omitted)), affd sub nom. S.E.C. v. Blech, 501 F. App'x 74 (2d Cir. 2012). Having no means by which to
determine what portion ofFerragamo's criminal restitution obligation is tied to his participation in the Syndicated
Food fraud, any offset would be entirely speculative.

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to which it objects. See Pall Corp. v. Entegris, Inc., 249 F.R.D. 48, 51 (E.D.N. Y. 2008). Even
though he did not oppose the SEC's motion for final judgments, Keeler now requests that the
"charges" against him be dismissed because (1) he was "never a part of the insider trading
scheme" and his signature was applied to relevant filings without his permission and (2) he
suffers from poor health and lacks the ability to pay the recommended penalties. (Keeler Obj.)
These generalized objections are insufficient to trigger de novo review, and also are insufficient
to overcome the R&R's carefully reasoned recommendation under a clear error review. 6
Defendant Keeler's argument that he did not participate in the fraud is improper. The
court's October 18, 2011, judgment against Keeler-which was entered pursuant to his signed
consent agreement with the SEC-provides that:
In .connection with the Commission's motion for disgorgement
and/or civil penalties, and at any hearing held on such a motion: (a)
Defendant will be precluded from arguing that he did not violate
the federal securities laws as alleged in the Complaint; (b)
Defendant may not challenge the validity of the Consent or this
Judgment; [and] (c) solely for the purposes of such motion, the
allegations of the Complaint shall be accepted as and deemed true
by the Court ....
(J. as to De f. William Keeler, Oct. 18, 2011 (Dkt. 207) at 4; see also id. at 7-8 (consent
agreement providing that "Defendant agrees that the Court shall order ... a civil penalty" subject
to the same limitations).) Accordingly, to the extent that the Keeler's objection contests the
operative pleading's factual allegations concerning his participation in the Syndicated Food
fraud, it violates the clear terms of this court's prior judgment and is therefore improper. (See
Keeler Resp. at 2.)

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Defendant Keeler's objection also details certain communications made by counsel for the SEC to him in
connection with his decision to sign the consent agreement. (Keeler Resp.) These discussions occurred in the
context of settlement, and will not be considered by the court both as a matter of evidentiary practice and in light
of the express terms of the court's judgment against Mr. Keeler.

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The objection's unsubstantiated reference to Defendant Keeler's poor health and financial
condition, while unfortunate, also is insufficient to further reduce the R&R's recommendation of
civil penalties. As a preliminary matter, the court notes Keeler did not object to the instant
motion or otherwise bring these purported mitigating factors to Judge Scanlon's attention, as
would have been proper. See U.S. Flour, 2012 WL 728227, at *2 ("[E]ven in a de novo review
of a party's specific objections, the court ordinarily will not consider 'arguments, case law and/or
evidentiary material which could have been but [were] not, presented to the magistrate judge in
the first instance."' (citation omitted)). Nor does he argue that the court should equitably reduce
the R&R's recommended civil penalties in light of these facts; rather, he argues for the wholesale
dismissal of the SEC's "charges." For the reasons just discussed, this request is rejected. In his
role as CEO of Syndicated Food during the relevant period, Keeler committed-both through
direct participation and as a control person-"willful and serious violations" of the securities
laws that caused "substantial harm to [the] victims" ofthe Syndicated Food fraud. (R&R at 39;
see also Compl. (Dkt. 1) ~~ 109-16 (describing Keeler's involvement).) Moreover, the R&R
does account for the fact that Keeler did not obtain any profits from his actions, reducing the
civil penalty sought by the SEC from $330,000 to $220,000. (R&R at 38-40.) The court sees no
cause for a further reduction in the R&R's recommendation on civil penalties, much less the
desired "dismissal" of all claims against Defendant Keeler. Finding no cause to modify the R&R
under either a clear error or de novo standard, the objection accordingly is overruled.
IV.

CONCLUSION
For the reasons set forth above and finding no clear error, see Porter v. Potter, 219 F.

App'x 112 (2d Cir. 2007), the court ADOPTS the R&R in its entirety. Plaintiffs motion for
final judgments accordingly is GRANTED in part and DENIED in part, and judgments shall be

II

entered as follows: (1) for Defendant Richardson, judgment in the amount of$329,000,
representing $274,000 in disgorgement and $55,000 in civil penalties; (2) for Defendant Klein,
judgment in the amount of$157,000, representing $151,500 in disgorgement and $5,500 in civil
penalties; and (3) for Defendant Keeler, judgment in the amount of $220,000 in civil penalties.
No Subject Defendant shall be assessed prejudgment interest.
The Clerk of Court is respectfully directed to enter judgment and close the case.
SO ORDERED.

s/Nicholas G. Garaufis
Dated: Brooklyn, New York
March~, 2014

ICHOLAS G. GARAUFI
nited States District Judge

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