S.E.C. v. Tecumseh Holdings, et al

Filing 136

MEMORANDUM OPINION AND ORDER re: 130 MOTION For an Order Determining Disgorement and Civil Monetary Penalties filed by Securities and Exchange Commission. For the foregoing reasons, I grant the SEC's motion for an order imposing on Palovchik and Carone (1) joint and several liability for (i) $7,200,000 in disgorgement and (ii) $3,466,346.48 in pre-judgment interest and (2) first-tier and third-tier civil penalties of $110,000 and $6,500, respectively. The Clerk of the Court is directed to close this motion [Docket No. 130]. (Signed by Judge Shira A. Scheindlin on 5/23/2011) (tro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
.--------------------------------------------------- J(

SECURITIES AND EXCHANGE
COMMISSION,
MEMORANDUM OPINION
AND ORDER

Plaintiff,

03 Civ. 5490 (SAS)

- againstTECUMSEH HOLDINGS CORP.,
TECUMSEH TRADEVEST LLC, S.B.
CANTOR & CO., INC., JOHN L.
MILLING, GERARD A. McCALLION,
ANTHONY M. PALOVCHIK, AND
DALE CARONE,
Defendants.

SHIRA A. SCHEINDLIN, U.S.D.J.:

I.

INTRODUCTION

In 2003, the Securities and Exchange Commission ("SEC") filed this
suit alleging securities violations by Tecumseh Holding Corporation
("Tecumseh"), Tecumseh Tradevest LLC, S.B. Cantor & Company ("Cantor"),
John L. Milling, Gerard A. McCallion, Anthony M. Palovchick, and Dale Carone.
The Court previously entered Partial Final Consent Judgments against Palovchik
and Carone, resolving, on each defendant's consent, all issues ofliability against
1

them and leaving to the Court's discretion the assessment of disgorgement and
civil penalties. Now before the Court is the motion of the SEC for an order
determining disgorgement and civil monetary penalties against those two
defendants. l

II.

BACKGROUND
The background of this case is laid out extensively in the Opinions

and Orders of this Court dated December 22,2009 2 and January 18,2011. 3 Suffice
it to say that Tecumseh engaged in a series of fraudulent, unregistered offerings of
Tecumseh and Tecumseh Tradevest LLC securities from June 2000 until April or
July 2003, raising at least ten million dollars from about five-hundred investors
nationwide through a cold-calling campaign run through a team of sales
representatives in Tecumseh's California office. The offering memoranda
describing Tecumseh and its securities contained false and misleading statements
concerning (1) Tecumseh's anticipated profits, (2) Tecumseh's dividends or

For the purposes of assessing the SEC's motion, and by the consent of
both Palovchik and Carone, the Court accepts as true all of the allegations in the
Complaint.
2

SEC v. Tecumseh Holdings Corp., No. 03 Civ. 5490,2009 WL

4975263, at * 1 (S.D.N.Y. Dec. 22, 2009) ("2009 Opinion").

See SEC v. Tecumseh Holdings Corp., --- F. Supp. 2d ----, No. 03 Civ.
5490,2011 WL 147725, at * 1-2 (S.D.N.Y. Jan. 18, 2011) ("2011 Opinion").
3

2

returns on investment, and (3) the National Association of Securities Dealers'
("NASD") approval of Tecumseh's acquisition of Cantor.

II.

DISCUSSION
A.

Palovchik and Carone Are Jointly and Severally Liable to
Disgorge Fraud Proceeds
The SEC argues that Palovchik and Carone should be ordered to

disgorge the proceeds of the fraud together with Milling and Tecumseh. 4 Courts
may impose joint and several liability where two or more defendants have
collaborated in the illegal conduct at issue. 5

1.

Palovchik

This Court previously found that the appropriate disgorgement
amount is approximately $7,200,000 representing the total amount raised in the
offerings minus the amounts returned to investors, the assets marshaled by the
receiver and the amounts from prior settlements - and that Milling should be held
jointly and severally liable with Tecumseh for that amount. See 2009 Opinion,
2009 WL 4975263, at *6.
4

See SEC v. AbsoluteFuture.com, 393 F.3d 94, 97 (2d Cir. 2004).
Accord SEC v. Calvo, 378 F.3d 1211, 1215 (l1th Cir. 2004) ("It is a well settled
principle that joint and several liability is appropriate in securities laws cases where
two or more individuals or entities have close relationships in engaging in illegal
conduct.") (citations omitted); Hateley v. SEC, 8 F.3d 653,656 (9th Cir. 1993)
(affirming disgorgement order imposed jointly and severally against broker-dealer
securities firm, its president, and its executive vice-president for violations of
NASD rules where defendants "acted collectively in violating the association's
rules and because of the close relationship among the three of them"); SEC v.
Hughes Capital Corp., 917 F. Supp. 1080, 1088 (D.N.J. 1996) (finding joint and
several liability of corporation and individual defendants because all were
"knowing participants who acted closely and collectively").
5

3

Palovchik played an essential role in the Tecumseh offerings. At all
times relevant to the Complaint, Palovchik was Tecumseh's Vice President. 6 He
knowingly provided substantial assistance to Milling and Tecumseh in the fraud. 7
Palovchik was responsible for the day-to-day administrative oversight of all of
Tecumseh's business operations, including data, paperwork, and compliance
issues. s Among other things, he reported Tecumseh's daily trading profits and
losses to the California office, prepared Tecumseh's trading reports, and handled
matters pertaining to the registration of the California office with the NASD. 9
Self-described as Tecumseh's "point man" and "problem solver," Palovchik
worked exclusively for Milling. 10
During the ongoing securities offerings, Palovchik knew about the

See Complaint ("Comp!."), Ex. M to Declaration of Nancy A. Brown,
counsel for the SEC, in Support of Plaintiff's Motion for Partial Summary
Judgment ("Brown PSJ Decl.") [Docket No. 97], ~ 14.
6

7

See id.

~

52.

8

See id.

~

52(b).

See Memorandum titled "Employee Duties - December 2002," Ex. A
to Declaration of Linda L. Arnold, counsel for the SEC, in Support of Plaintiff's
Motion for Order Determining Disgorgement and Civil Monetary Penalties
("Arnold Decl."), at 1; Fax from Palovchik to Carone dated March 19, 2003, Ex. B
to Arnold Decl.
9

See Excerpts of the Declaration of Terrence P. Bohan ("Bohan
Decl."), Ex. C to Arnold Decl, ~ 12.
10

4

true financial condition of Tecumseh and Cantor. I J He also knew how Tecumseh
was describing the formula for calculating the "dividend" payments in the offering
materials, and he was aware that checks were being issued to investors with the
notation "dividend."12 He also understood that the payments were not really
dividends because he knew Tecumseh had no earnings, given his daily reporting of
Tecumseh's trading profits and day-to-day oversight of all of Tecumseh's business
operations. 13 Indeed, during the SEC's examination of Cantor in February of 2003,
Palovchik admitted to the SEC's staff that the real source of Tecumseh's
"dividends" was investors' capital contributions. 14 As a result of his knowing and
substantial assistance to Tecumseh and Milling in their violations of section 1O(b)
of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 1Ob- 5
thereunder, the SEC's Complaint asserted violations of section 20(e) of the
Exchange Act against him as an aider and abettor. 15

2.

Carone

Carone also played an essential role in the Tecumseh offerings.
II

12

See Compi.

~

52(b).

See id.

13

See id.

14

See Bohan Deci.

15

See Compi.

~~

~

47.

61-63 (Second Claim for Relief).

5

Milling has admitted that he shared control of Tecumseh with Carone and
Souran. 16 As Tecumseh's Vice Chairman, Carone was responsible for setting up
and managing Tecumseh's sales operation in its California office. 17 Working
closely with Milling, Carone managed a sales force of as many as thirty-three sales
representatives who solicited investors to purchase Tecumseh's securities. 18 The
California sales force sold Tecumseh's securities through a nationwide cold-calling
campaign, and Milling and Carone oversaw their activities. 19 Milling has admitted
that, among other things, he and Carone discussed matters pertaining to the sale of
Tecumseh's securities. 20 Milling also admitted that he and Tecumseh "relied on
Dale Carone to oversee, manage and enforce compliance by all company personnel
with the requirements for the lawful and proper sale of Tecumseh shares."21
Carone also participated in the illegal offerings by directly selling

See Milling's Amended Responses to the SEC's Requests for
Admission dated May 22, 2009 ("Amended Admissions"), Ex. A to Brown PSJ
Decl., ~ 3.
16

17

See CompI.

18

See id.

~

~

14.

23.

19

See 2009 Opinion, 2009 WL 4975263, at *3; Amended Admissions ~

20

See id.

3.

21
Excerpts of Milling's Submission in Opposition to SEC's Motion for
Summary Judgment dated November 1,2010, Ex. D to Arnold Decl., at 1.
6

Tecumseh securities to investors at a time when Carone was not a registered
representative associated with a registered broker dealer.22 The SEC's Complaint
alleges that Carone violated sections 5(a) and 5(c) of the Securities Act of 1933
("Securities Act,,)23 and section 15 of the Exchange Act. 24
Based on the foregoing, I hold that both Palovchik and Carone were
"knowing participants who acted closely and collectively,,25 such that they should
be held jointly and severally responsible with Milling and Tecumseh for
disgorgement of $7,200,000.

B.

Palovchik and Carone Are Jointly and Severally Liable to Pay
Pre-judgment Interest
The SEC argues that the Court should require Palovchik and Carone

to pay pre-judgment interest on the full amount of disgorgement on a joint and
several basis with Milling. 26 An award of pre-judgment interest is a proper

22
23

See CompI.

~

75.

See id.

~~

64-66 (Third Claim for Relief).

24

See id.

~~

74-76 (Sixth Claim for Relief).

25

Hughes Capital Corp., 917 F. Supp. at 1088.

26
Pursuant to the SEC's joint settlement with defendants Tecumseh,
Tecumseh Tradevest LLC, and Cantor, Tecumseh was ordered to disgorge
$7,271,134 in ill-gotten gains and Cantor was held jointly and severally liable with
Tecumseh for $850,000 of that amount. In that settlement, the Consent Judgment
did not order pre-judgment interest from Tecumseh or Cantor.
7

exercise ofjudicial discretion, and courts typically impose pre-judgment interest in
SEC enforcement actions. 27 In determining pre-judgment interest, it is appropriate
to use the IRS underpayment rate,28 and the interest should be compounded
quarterly29 and calculated "for the entire period from the time of defendants'
unlawful gains to the entry ofjudgment.,,30 Accordingly, Palovchik and Carone are
ordered to pay pre-judgment interest on $7,200,000, on a joint and several basis
with Milling, from May 4, 2003, to the last date Tecumseh received offering
proceeds, through December 22, 2009, in the amount of $3,466,346.48. 31

C.

Civil Penalties Are Appropriate 32

See, e.g., SECv. Warde, 151 F.3d 42,50 (2d Cir. 1998); SECv. First
Jersey Sec., Inc., 101 F.3d 1450,1476 (2d Cir. 1996).
27

28

See 26 U.S.C. § 6621(a)(2).

29

See 17 C.F .R. § 201. 600(b).

30

First Jersey Sees., 101 F.3d at 1476-77.

See Calculation of Pre-judgment Interest on Milling's Disgorgement
Amounts from March 4,2003 through December 22,2009, Ex. B to the
Declaration of Dee-Ann DiSalvo in Support of Plaintiff's Motion for Partial
Summary Judgment Against Milling [Docket No. 106].
31

32

The standard for assessing civil penalties in SEC enforcement actions
is laid out in the 2009 and 2011 Opinions. See 2009 Opinion, 2009 WL 4975263,
at *6-7; 2011 Opinion, 2011 WL 147725, at *10.
8

A "third-tier" civil penalti 3 of $110,000 34 is appropriate as against
Palovchik because his violations involved fraud and resulted in, or created a
significant risk of, substantial losses to other persons. 35 As noted above, Palovchik
aided and abetted Tecumseh's and Milling's violations of the antifraud provisions.
Palovchik, a Tecumseh Vice President, helped Milling manage all aspects of
Tecumseh. His role in the enterprise constituted substantial assistance, and it was
coupled with a high degree of scienter: He knew about Tecumseh's offerings, was
aware that Tecumseh's only revenues came from new investors, was familiar with
the dire financial condition of Tecumseh, knew that Tecumseh's so-called
"dividend" payments were improper, and knew that Tecumseh had not informed
investors about the source of these payments.
As to Carone, who has not been charged with fraud, a "first-tier" civil

33

See 15 U.S.C. § 78u( d)(3)(B)(iii).

34

See 17 C.F .R. §§ 201.1001 and 201.1002.

I impose the statutorily-prescribed penalty on as opposed to the
gross amount of pecuniary gain to - each defendant because the SEC has not
provided any evidence of the total amount of pecuniary gain Palovchik or Carone
personally received from the sale of unregistered securities. In any event, because
they have already been held jointly and severally liable for the entire amount of
Tecumseh's ill-gotten gains, the maximum statutory fine against each of them is
adequate to punish them and deter future violations.
35

9

penalti 6 of $6,S0037 is more appropriate. In addition to the facts recited above,
Carone is a recidivist. In early 2003, the SEC sued Carone in the Central District
of California for engaging in the fraudulent and unregistered offering of securities
in LinkNet, Inc. and LinkNet de America Latina (collectively "LinkNet,,)38 and
was awarded a default judgment. 39 According to the Complaint, Carone sold
LinkNet securities during its unregistered offering from August 1999 to October
2000 and engaged in "cold-calling tactics" and supervised a "boiler room
operation" set up to market the securities. 40 Subsequently, the SEC barred Carone
from association with any broker or dealer pursuant to section IS(b)( 6) of the
Exchange Act as a result of his conduct in connection with the LinkNet offering. 41
Carone was also the subject of a 2001 cease and desist order by the Ohio Division

36

See IS U.S.C. § 77t( d)(2)(A).

37

See 17 C.P.R. §§ 201.1001 and 201.1002.

38

See Docket from SEC v. Dale Carone, et al., No. 03 Civ. 374 (C.D.
CaL), Ex. D to Brown PSJ Decl.
39

See Order entered March 10, 2004, Granting Plaintiff s Motion for
Default Judgment, Ex. E to Brown PSJ Decl.
40

Id.

See In the Matter ofDale Carone, Exchange Act ReI. No. 50236
(Aug. 24, 2004).
41

10

of Securities for state registration and securities fraud violations. 42
For all of these reasons, the imposition of civil penalties is
appropriate.

III.

CONCLUSION
For the foregoing reasons, I grant the SEC's motion for an order

imposing on Palovchik and Carone (1) joint and several liability for (i) $7,200,000
in disgorgement and (ii) $3,466,346.48 in pre-judgment interest and (2) first-tier
and third-tier civil penalties of $110,000 and $6,500, respectively. The Clerk of
the Court is directed to close this motion [Docket No. 130].

SO ORDERED:

New York, New York
May 23,2011

Dated:

42

See Bohan Decl.

~

13.
11

- Appearances ­

For the SEC:
Nancy A Brown, Esq.
Linda Lai-king Arnold, Esq.
Securities & Exchange Commission
3 World Financial Center, Room 4300
New York, New York 10281
[phone]

Defendant Anthony Palovchik:
12188 NW 47th Manor
Coral Springs, Florida 33076

Copy to:
John L. Milling, Esq.
Milling Law Offices
115 River Road
Building 12, Suite 1205
Edgewater, New Jersey 07020
[phone]

12