Securities and Exchange Commission v. Alternative Green Technologies, Inc. et al
Filing
75
OPINION AND ORDER re: 62 MOTION for Judgment Ordering Disgorgement, Prejudgment Interest and Civil Penalties against Defendants Alternative Green Technologies, Inc. and Mitchell Segal and Ordering Disgorgement against Relief Defendants Sie rra Range Holdings, Inc., Senior filed by Securities and Exchange Commission. For the foregoing reasons herein, the SEC's motion for final judgment is GRANTED. All disgorgement, prejudgment interest, and civil penalties shall be paid as set forth herein, as well as in accordance with the Order of Final Judgment issued in conjunction with this Opinion. The Clerk of the Court is directed to close this motion [Dkt. No. 62]. (Signed by Judge Shira A. Scheindlin on 12/15/2014) (kgo)
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
OPINION AND ORDER
- against 11 Civ. 9056 (SAS)
ALTERNATIVE GREEN
TECHNOLOGIES, INC., MITCHELL
SEGAL, BELMONT PARTNERS, LLC,
JOSEPH MEUSE, HOWARD BORG,
DAVID RYAN, VIKRAM KHANNA, and
PANASCOPE CAPITAL INC.,
Defendants,
SIERRA RANGE HOLDINGS, INC.,
SENIOR CAPITAL SERVICES, INC.,
LAW OFFICES OF MITCHELL SEGAL,
P.C., and THOMAS RUSSO,
Relief Defendants.
x
SHIRA A. SCHEINDLIN, U.S.D.J.:
I.
INTRODUCTION
In December 2011, the Securities and Exchange Commission CSEC")
brought this civil enforcement action against, among others, Alternative Green
Technologies, Inc. ("AGTI") and Mitchell Segal (collectively, the "Named
Defendants”) alleging various securities violations arising from “a scheme by
[AGTI, Segal, and others] to issue and illegally sell purportedly unrestricted
securities of AGTI by defrauding a transfer agent.”1 On April 2, 2012, the Named
Defendants consented to the entry of partial judgment against them (the “Partial
Judgment”).2 The Partial Judgment orders the Named Defendants to “pay
disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty
pursuant to Section 20(d) of the Securities Act [of 1933] . . . and Section 21(d)(3)
of the [Securities] Exchange Act [of 1934].”3 The Partial Judgment further
provides that “[t]he Court shall determine the amounts of the disgorgement and
civil penalty upon motion of the [SEC].”4
1
Complaint (“Compl.”) ¶ 1. This Opinion and Order does not
implicate the other named defendants in this action. However, it does implicate
some of the relief defendants.
2
See generally Consent of Defendants Alternative Green Technologies,
Inc. and Mitchell Segal, Ex. C to Declaration of Megan R. Genet in Support of
Plaintiff Securities and Exchange Commission’s Motion for Final Judgment
Ordering Disgorgement, Prejudgment Interest and Civil Penalties Against
Defendants Alternative Green Technologies, Inc. and Mitchell
Segal and Ordering Disgorgement Against Relief Defendants Sierra Range
Holdings, Inc., Senior Capital Services, Inc. and Law Offices of Mitchell Segal,
P.C. (“Genet Decl.”).
3
Judgment as to Defendants Alternative Green Technologies, Inc. and
Mitchell Segal (“Partial Judgment”), Ex. D to Genet Decl., at 4.
4
Id. at 5.
The SEC now moves for the entry of final judgment.5 In so moving,
the SEC seeks disgorgement and prejudgment interest from the Named
Defendants. The SEC also seeks disgorgement and prejudgment interest from
relief defendants, Sierra Range Holdings, Inc. (“Sierra Range”), Senior Capital
Services, Inc. (“Senior Capital”), and Law Offices of Mitchell Segal (“Law
Offices”) (collectively, the “Relief Defendants”). Lastly, the SEC seeks maximum
civil penalties against the Named Defendants.
For the reasons that follow, the SEC’s motion for final judgment is
GRANTED. The Named Defendants are jointly and severally liable for $195,944
(the “Total Amount”), which consists of $165,003 in disgorgement of ill-gotten
gains and $30,941 in prejudgment interest. The Total Amount shall be paid in the
following manner:
(1) The Named Defendants, along with Law Offices, are jointly
and severally liable for up to the Total Amount, which consists of
$165,003 in disgorgement of ill-gotten gains and $30,941 in
prejudgment interest;
(2) Sierra Range, along with the Named Defendants, is jointly and
severally liable for up to $15,990.74 of the Total Amount, which
consists of $13,500 in disgorgement of ill-gotten gains and
5
See generally Plaintiff Securities and Exchange Commission’s Motion
for Final Judgment Ordering Disgorgement, Prejudgment Interest and Civil
Penalties Against Defendants Alternative Green Technologies, Inc. and Mitchell
Segal and Ordering Disgorgement Against Relief Defendants Sierra Range
Holdings, Inc., Senior Capital Services, Inc. and Law Offices of Mitchell Segal,
P.C. (“SEC Mem.”).
3
$2,490.74 in prejudgment interest; and
(3) Senior Capital, along with the Named Defendants, is jointly
and severally liable for up to $23,867.67 of the Total Amount,
which consists of $20,150 in disgorgement of ill-gotten gains and
$3,717.67 in prejudgment interest.
Additionally, AGTI is liable for a civil penalty in the amount of $650,000, and
Segal is liable for a civil penalty in the amount of $130,000.
II.
BACKGROUND6
AGTI is a publicly traded company with its headquarters in New
York.7 Segal is the CEO and sole director of AGTI.8 Segal is also a licensed
attorney in New York.9 From September 2008 through September 2009, AGTI
and Segal “obtain[ed] and furnish[ed] false documents (including a sham
assignment of debt and a fabricated and backdated corporate resolution and
convertible note), to support a legal opinion letter that was provided to AGTI’s
6
For the purposes of addressing the SEC’s motion, and by consent of
the Named Defendants in the Partial Judgment, the Court accepts as true all of the
allegations in the Complaint. See Partial Judgment at 5.
7
See Compl. ¶ 8.
8
See id. ¶ 9.
9
See id. However, Segal, in his declaration in opposition to this
motion, states that “[i]n connection with my participation in the transactions that
are the subject of this lawsuit, I did not act in any capacity as a lawyer, I was not
actively practicing law at the time, and I did not hold myself out to be an attorney
in any respect.” See Declaration of Mitchell Segal (“Segal Decl.”) ¶ 3.
4
transfer agent so that the transfer agent would issue millions of shares of
purportedly unrestricted stock in an unregistered offering.” 10 Other defendants in
this action assisted AGTI and Segal in the execution of this scheme.11 The
activities of AGTI and Segal constituted violations of (1) sections 5(a) and 5(c) of
the Securities Act of 1933 (the “Securities Act”); and (2) section 10(b) of the
Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5(a) and (c)
thereunder.12
A.
Distribution of the Ill-Gotten Gains
The total proceeds from the sale to the public of the issued AGTI
shares was $317,256.77.13 Of this total, Law Offices collected $242,353, Sierra
Range collected $13,500, Senior Capital collected $20,150, and Segal, personally,
10
Compl. ¶ 2.
11
See id. (“Belmont and Meuse assisted AGTI and Segal in creating the
false, backdated, and fabricated documents and furnishing them to the attorney for
use in drafting the opinion letter.”) (emphasis added); id. ¶¶ 27-28 (“Segal insisted
that Belmont provide Segal with various documents . . . Segal made these requests
to create the basis for the issuance of purportedly unrestricted stock that could then
be sold into the public market.”) (emphasis added).
12
See id. ¶ 3.
13
See id. ¶ 58. In total, there were fifty-three separate sales of restricted
AGTI shares. See Charts Reflecting Gains from Janacor’s Illicit Sales of AGTI
Stock to Segal and Relief Defendants, Ex. E to Genet Decl., at 2-3.
5
collected $8,500.14 Thereafter, Segal, who is the president and sole shareholder of
both Sierra Range and Senior Capital,15 paid $119,500 to defendant Belmont
Partners, LLC (“Belmont”).16
B.
The Partial Judgment
Five months after the SEC instituted this action, the Named
Defendants consented to entry of the Partial Judgment. By consenting to the terms
of the Partial Judgment, the Named Defendants neither admitted nor denied the
allegations in the Complaint.17 However, in relation to the SEC’s present motion,
the Partial Judgment requires the Named Defendants to accept as true all of the
allegations in the Complaint, which thereby precludes the Named Defendants from
arguing that they did not violate the securities laws.18
C.
Segal’s Lack of Cooperation
Despite settling with the SEC and despite this being his first securities
14
See Compl. ¶ 58.
15
See id. ¶¶ 16-17.
16
See id. ¶ 58. Segal had purchased a controlling block of AGTI from
Belmont in 2008. See id. ¶ 26. This payment constituted money “owed [to]
Belmont for the purchase of AGTI.” Id. ¶ 58.
17
See Partial Judgment at 1.
18
See id. at 5.
6
violation,19 Segal remained uncooperative. Segal refused to be deposed and
asserted his Fifth Amendment rights in response to questioning. 20
D.
SEC Settlements with Other Defendants
Belmont agreed to pay $119,500 to the SEC — $110,500 in
disgorgement and $9,000 in prejudgment interest.21 Belmont also paid a civil
penalty of $55,500.22 Another defendant, Joseph Meuse, who is the founder,
president, and sole shareholder of Belmont, agreed to pay a civil penalty of
$50,000.
E.
Financial Condition of the Named Defendants and the Relief
Defendants
1.
Segal
19
See Response on Behalf of AGTI, Mitchell Segal, Sierra Range
Holdings, Senior Capital Services, and Law Offices to the SEC’s Motion for Final
Judgment (“AGTI Opp.”) at 8.
20
See Affidavit of Mitchell Segal (“Segal Aff.”), Ex. A to Plaintiff
Securities and Exchange Commission’s Reply Memorandum of Law in Further
Support of Its Motion for Final Judgment Against Defendants Alternative Green
Technologies, Inc. and Mitchell Segal and Relief Defendants Sierra Range
Holdings, Inc., Senior Capital Services, Inc. and Law Offices of Mitchell Segal,
P.C. (“SEC Reply”), ¶¶ 3-4.
21
See Final Judgment as to Belmont Partners, LLC and Joseph Meuse
(“Belmont/Meuse FJ”), Ex. C to Declaration of Eric M. Creizman, attorney for the
Named Defendants, at 4.
22
See id.; see also Compl. ¶ 11.
7
In opposition to this motion, Segal submitted a Statement of Financial
Condition, a form given to him by the SEC (the “SEC Form”).23 The SEC Form
lists Segal’s assets as $44,475, which includes a boat valued at $28,000. 24 The
SEC Form shows Segal’s liabilities as $419,030.75.25 These liabilities consist of
only two line items: (1) a tax liability of $374,030.75; and (2) a boat loan of
$45,000.26
However, portions of the SEC Form are incomplete. For example,
when asked to list all his bank accounts since September 2007, Segal only lists
Law Office’s bank account.27 Moreover, Segal does not respond to questions
asking for a complete list of disbursements of $1,000 or more made by him from
2007 to the present.28 Segal also fails to substantiate his tax liability.
2.
AGTI and the Relief Defendants
According to Segal, (1) AGTI is not operational and has no remaining
23
See generally United States Securities and Exchange Commission
Statement of Financial Condition (“SEC Form”), Ex. A to Segal Decl.
24
See id. at 1.
25
See id. at 2.
26
See id.
27
See id. at 4.
28
See id. at 7.
8
assets;29 (2) Sierra Range and Senior Capital are “no longer active, do not conduct
business operations, and have no assets[;]”30 and (3) “Law Offices is merely an
extension of Mitchell Segal, and has no assets . . . .”31
III.
APPLICABLE LAW
A.
Disgorgement
“The primary purpose of disgorgement as a remedy for violation of
the securities laws is to deprive violators of their ill-gotten gains, thereby
effectuating the deterrence objectives of those laws.”32 “[D]isgorgement forces a
defendant to account for all profits reaped through his securities law violations and
to transfer all such money to the court.”33 Because disgorgement is an equitable
remedy, “[t]he district court has broad discretion not only in determining whether
or not to order disgorgement but also in calculating the amount to be disgorged.”34
“In determining the amount of disgorgement to be ordered, a court must focus on
29
See Segal Decl. ¶ 4.
30
Id. ¶ 5.
31
AGTI Opp. at 2.
32
SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1474 (2d Cir. 1996).
33
SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006).
34
First Jersey, 101 F.3d at 1474-75.
9
the extent to which a defendant has profited from his [violation].”35
“Because of the difficulty of determining with certainty the extent to
which a defendant’s gains resulted from his frauds . . . the court need not determine
the amount of such gains with exactitude.”36 Under Second Circuit law, “‘[t]he
amount of disgorgement ordered need only be a reasonable approximation of
profits causally connected to the violation.’”37
“Once the SEC has met the burden of establishing a reasonable
approximation of the profits causally related to the fraud, the burden shifts to the
defendant to show that his gains ‘were unaffected by his offenses.’” 38 Defendants
are “entitled to prove that the [] measure is inaccurate,”39 but the “‘risk of
uncertainty in calculating disgorgement should fall upon the wrongdoer whose
35
SEC v. Universal Exp., Inc., 646 F. Supp. 2d 552, 563 (S.D.N.Y.
2009).
36
SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013).
37
SEC v. Contorinis, 743 F.3d 296, 305 (2d Cir. 2014) (quoting First
Jersey, 101 F.3d at 1474-75) (emphasis added).
38
Razmilovic, 738 F.3d at 31 (quoting SEC v. Lorin, 76 F.3d 458, 462
(2d Cir. 1996)).
39
SEC v. Warde, 151 F.3d 42, 50 (2d Cir. 1998) (citing SEC v.
Bilzerian, 29 F.3d 689, 697 (D.C. Cir. 1994) (“Bilzerian, however, bears the
burden of establishing that the price increases that occurred during his ownership
of the stocks were attributable to market forces rather than to his violations.”)).
10
illegal conduct created that uncertainty.’”40 Ultimately, however, the final decision
as to the amount of disgorgement rests with the district court.41
“For purposes of calculating disgorgement, financial hardship does
not preclude the imposition of an order of disgorgement.”42 “[W]hether or not the
defendant may have squandered and/or hidden ill-gotten profits should not
determine the amount disgorged; similarly, the likelihood that the SEC will in fact
be repaid is unrelated to the amount by which a wrongdoer was improperly
enriched.”43
“Where an individual or entity has collaborated or worked closely
with another individual or entity to violate the securities laws, those individuals
and/or entities may be held jointly and severally liable for any disgorgement. . . . In
such situations, the joint tortfeasors bear the burden of demonstrating that their
liability can be reasonably apportioned.”44
B.
Prejudgment Interest
40
Contorinis, 743 F.3d at 305 (quoting First Jersey, 101 F.3d at 1475).
41
See First Jersey, 101 F.3d at 1474-75.
42
SEC v. Taber, No. 13 Misc. 282, 2013 WL 6334375, at *2 (S.D.N.Y.
Dec. 4, 2013) (quotations omitted).
43
Id. (quotations omitted).
44
Universal Exp., 646 F. Supp. 2d at 563 (citing First Jersey, 101 F.3d
at 1475; SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997)).
11
The court also has discretion to order payment of prejudgment interest
on any disgorged gains. Requiring the payment of interest prevents a defendant
from obtaining the benefit of “‘what amounts to an interest free loan procured as a
result of illegal activity.’”45 “In deciding whether an award of prejudgment interest
is warranted, a court should [take into account] . . . considerations of fairness and
the relative equities of the award, [] the remedial purpose of the statute involved,
and/or [] such other general principles as are deemed relevant by the court.”46
C.
Civil Penalty
The Securities Act and the Exchange Act authorize three tiers of civil
penalties.47 Third-tier penalties are appropriate when two conditions are met: (1)
“the [securities] violation . . . involved fraud, deceit, manipulation, or deliberate or
reckless disregard of a regulatory requirement; [and (2)] such violation directly or
indirectly resulted in substantial losses or created a significant risk of substantial
losses to other persons.”48 “[T]he amount of penalty for each such violation shall
not exceed the greater of (I) [$130,000] for a natural person or [$650,000] for any
45
SEC v. Credit Bancorp, Ltd., No. 99 Civ. 11395, 2011 WL 666158, at
*3 (S.D.N.Y. Feb. 14, 2011).
46
First Jersey, 101 F.3d at 1476 (quotations omitted).
47
See 15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d)(3).
48
15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d)(3).
12
other person, or (II) the gross amount of pecuniary gain to such defendant as a
result of the violation[.]”49
Factors that courts consider in determining whether to impose civil
penalties include:
(1) the egregiousness of the violations at issue, (2) defendants’
scienter, (3) the repeated nature of the violations, (4) defendants’
failure to admit to their wrongdoing; (5) whether defendants’
conduct created substantial losses or the risk of substantial losses
to other persons; (6) defendants’ lack of cooperation and honesty
with authorities, if any; and (7) whether the penalty that would
otherwise be appropriate should be reduced due to defendants’
demonstrated current and future financial condition. 50
“While [] factors [like these] are helpful in characterizing a particular defendant’s
actions, the civil penalty framework is of a ‘discretionary nature’ and each case
‘has its own particular facts and circumstances which determine the appropriate
49
Id.; see also 17 C.F.R. § 201.1004.
50
SEC v. Lybrand, 281 F. Supp. 2d 726, 730 (S.D.N.Y. 2003) (citing
SEC v. Kane, No. 97 Civ. 2931, 2003 WL 1731293, at *4 (S.D.N.Y. Apr. 1, 2003);
SEC v. Inorganic Recycling Corp., No. 99 Civ. 10159, 2002 WL 1968341, at *5
(S.D.N.Y. Aug. 23, 2002); SEC v. Robinson, No. 00 Civ. 7452, 2002 WL 1552049,
at *10 (S.D.N.Y. July 16, 2002); SEC v. McCaskey, No. 98 Civ. 6153, 2002 WL
850001, at *14 (S.D.N.Y. Mar. 26, 2002); SEC v. Coates, 137 F. Supp. 2d 413,
428-29 (S.D.N.Y. 2001); SEC v. Todt, No. 98 Civ. 3980, 2000 WL 223836, at *13
(S.D.N.Y. Feb. 25, 2000)). Accord SEC v. Wyly, No. 10 Civ. 5760, 2014 WL
4792229, at *4 (S.D.N.Y. Sept. 25, 2014) (quoting SEC v. Opulentica, LLC, 479 F.
Supp. 2d 319, 331 (S.D.N.Y. 2007)).
13
penalty to be imposed.’”51
IV.
DISCUSSION
A.
Joint and Several Liability
The Named Defendants are jointly and severally liable for the amount
of disgorgement and prejudgment interest. The Named Defendants collaborated to
violate the securities laws.52 Moreover, the actions of AGTI and Segal (the
president and CEO of AGTI) are indistinguishable. The Named Defendants even
admit that “multiple actors, including Segal, collaborated together in a joint
effort.”53 Thus, the Named Defendants may be held jointly and severally liable.
The Relief Defendants are also each jointly and severally liable with
the Named Defendants (but not with one another) for their respective amounts of
disgorgement and prejudgment interest. Each Relief Defendant received a portion
of the ill-gotten gains and may therefore be held jointly and severally liable, along
with the Named Defendants, for that portion.
51
Opulentica, 479 F. Supp. 2d at 331 (quoting SEC v. Moran, 944 F.
Supp. 286, 296-97 (S.D.N.Y. 1996)).
52
See Compl. ¶ 2 (“AGTI and Segal obtain[ed] and furnish[ed] false
documents (including a sham assignment of debt and a fabricated and backdated
corporate resolution and convertible note), to support a legal opinion letter that was
provided to AGTI’s transfer agent so that the transfer agent would issue millions of
shares of purportedly unrestricted stock in an unregistered offering.”).
53
AGTI Opp. at 7.
14
B.
Disgorgement
1.
Named Defendants
The SEC seeks disgorgement from the Named Defendants, jointly and
severally, in the amount of $165,003.54 The Named Defendants argue that such
disgorgement should be waived entirely, or, in the alternative, should be in the
amount of $154,742.84.55
The Named Defendants contend that their poor financial condition
allows the Court to order disgorgement, “but then waive such disgorgement based
on the [Named Defendants’] demonstrated inability to pay.”56 The Named
Defendants point to Segal’s negative net worth as evidence of his inability to pay
disgorgement, regardless of the amount.57 Moreover, the Named Defendants state
that AGTI is non-operational and has no assets.58
However, “[t]he fact that swindlers have run through the proceeds of
the fraud and are now insolvent should not prevent the imposition of a remedy,
54
See SEC Mem. at 20.
55
See AGTI Opp. at 1.
56
Id. at 4 (citing SEC v. Schiffer, No. 97 Civ. 853, 2001 WL 504860, at
*4 (S.D.N.Y. May 11, 2001)) (emphasis added).
57
See id.
58
See id.
15
since defendants may subsequently acquire the means to satisfy the judgment.”59
Thus, the Named Defendants’ claimed inability to pay is irrelevant, and I decline to
waive disgorgement.
Moreover, even if an inability to pay can excuse the payment of
disgorgement, the Named Defendants have not demonstrated their inability to pay
— now or in the future. Segal relies on the SEC Form to demonstrate his current
inability to pay.60 However, the SEC Form lacks critical information that casts
doubt on the accuracy of the form as a whole. For example, Segal asserts that he
has had only one bank account — Law Offices’ bank account — since September
2007.61 It seems improbable that Segal would not have had and does not currently
have a personal bank account. Furthermore, Segal does not list any transfers of
money or property of $1,000 or more since September 2007.62 This failure to
report leads to the plausible conclusion that Segal may have transferred his assets
elsewhere and now wants to hide that fact from the SEC. Moreover, Segal
provides no explanation of his tax liability — other than to state it exists. Finally,
59
Inorganic Recycling Corp., 2002 WL 1968341, at *2.
60
See AGTI Opp. at 4.
61
See SEC Form at 4.
62
See id. at 7.
16
Segal is a licensed attorney. He can likely earn a living practicing law or, at a
minimum, find employment in some capacity. Segal has therefore failed to
demonstrate his current and future inability to pay.
As to AGTI’s inability to pay, the only support for AGTI’s financial
condition is a single statement in Segal’s declaration filed in opposition to the
SEC’s motion: “AGTI is non-operational and does not have any assets.” 63 The
SEC Form appended to Segal’s declaration makes no mention of AGTI’s financial
condition. Therefore, even if an inability to pay can authorize the waiver of
disgorgement, the Named Defendants have not sufficiently demonstrated their
present and future inability to pay.
In the alternative, the Named Defendants argue that the amount of
disgorgement should be $154,742.84, not $165,003. 64 As an initial matter, I find
that $165,003 is a reasonable approximation of disgorgement given that the SEC
derived this amount directly from the payments received by the Named
Defendants.65 Nevertheless, the Named Defendants argue that the SEC’s
calculations are inaccurate because Segal actually paid Belmont $129,760.15 of the
63
Segal Decl. ¶ 4.
64
See AGTI Opp. at 1.
65
See SEC Mem. at 16-17. After paying Belmont, Segal had $165,003
remaining in proceeds from the sale of AGTI stock.
17
ill-gotten gains, not $119,500.66 However, the Named Defendants have not
adequately substantiated this claim. In his declaration, Segal only lists the date and
amount of each payment he made to Belmont, along with corresponding check
numbers.67 But Segal has not submitted copies of these checks to support these
contentions. Therefore, the “‘risk of uncertainty in calculating disgorgement
should fall upon the [Named Defendants] whose illegal conduct created that
uncertainty.’”68
Moreover, if the Named Defendants are not required to pay $165,003
in disgorgement, the SEC would not collect the entirety of the ill-gotten gains. In
settling with the SEC, Belmont agreed to disgorge $119,500, not $129,760.15. 69
Thus, if the Named Defendants only disgorge $154,742.84, the SEC will not
collect the remaining $10,260.16. Furthermore, it is ultimately irrelevant how
much Segal paid to Belmont given that “payment[s] to co-conspirators are not
deductible from the gross profits subject to disgorgement.”70 Thus, I find that the
66
See AGTI Opp. at 3.
67
See Segal Decl. ¶ 6.
68
Contorinis, 743 F.3d at 305 (quoting First Jersey, 101 F.3d at 1475).
69
See Belmont/Meuse FJ at 4.
70
SEC v. Rosenfeld, No. 97 Civ. 1467, 2001 WL 118612, at *2
(S.D.N.Y. Jan. 9, 2001) (citing SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y.
1987)).
18
Named Defendants must disgorge $165,003 in ill-gotten gains.
2.
Relief Defendants
Like the Named Defendants, the Relief Defendants seek a waiver of
their disgorgement due to inability to pay.71 However, as discussed above, that
“swindlers have run through the proceeds of the fraud and are now insolvent
should not prevent the imposition of a remedy[.]”72 Moreover, Relief Defendants
have not submitted any evidence demonstrating their inability to pay. The only
evidence of their inability to pay stems from statements made by Segal in his
declaration.73 Those statements are conclusory and do not rely on any
corroborative documents. Therefore, the Relief Defendants are not entitled to a
waiver of their disgorgement and must pay disgorgement proportionate to the
fraction they received of the ill-gotten gains.
C.
Prejudgment Interest
While the Court has broad discretion to determine whether to award
prejudgment interest, here I conclude that both the Named Defendants and the
Relief Defendants are required to pay prejudgment interest on their disgorgement.
71
See AGTI Opp. at 1-2.
72
Inorganic Recycling Corp., 2002 WL 1968341, at *2.
73
See Segal Decl. ¶ 5.
19
All defendants have had free use of the ill-gotten gains before and during the
pendency of this litigation. Furthermore, there is no evidence of any delay by the
SEC that warrants a downward adjustment of prejudgment interest. If anything,
any delay is more likely attributable to Segal’s refusal to cooperate. Imposing
prejudgment interest here “ensures that [all] ‘defendant[s] do[] not profit’ from
[their] ill-gotten gains, including the time value of money.”74
Nevertheless, all defendants argue that prejudgment interest is
“unnecessary in this case.”75 They contend that ordering prejudgment interest
would be a “futile act” given the inability of all defendants to pay.76 However,
“[d]isgorgement, which includes the award of prejudgment interest, would have no
deterrent value if defendants could avoid it by spending their unlawful gains before
the government discovers the fraud.”77 Moreover, as previously stated, none of the
defendants have demonstrated an inability to pay. Therefore, prejudgment interest
is appropriate here in the amount of $30,941.78
74
SEC v. Tourre, 4 F. Supp. 3d 579, 591 (S.D.N.Y. 2014) (quoting SEC
v. World Info. Tech., Inc., 590 F. Supp. 2d 574, 578 (S.D.N.Y. 2008)).
75
AGTI Opp. at 5.
76
Id.
77
Wyly, 2014 WL 4792229, at *23.
78
All parties agreed that prejudgment interest would be calculated from
June 18, 2009 based on the interest rate used by the IRS for the underpayment of
20
D.
AGTI and Segal Are Each Liable for Civil Penalties
1.
Third-Tier Penalties Are Appropriate
The Named Defendants’ conduct satisfies both prerequisites for the
imposition of third-tier penalties. First, the Named Defendants’ securities
violations involved deceit and manipulation. Given the explicit terms of the Partial
Judgment, the Named Defendants cannot argue that they did not violate the
securities laws as alleged in the Complaint.79 Consequently, because the
Complaint alleged deceit- and manipulation-based violations,80 the Named
Defendants’ conduct necessarily involved deceit and manipulation. Second, the
Named Defendants’ securities violations “directly or indirectly resulted in
substantial losses or created a significant risk of substantial losses to other
persons.”81 Here, the scheme at issue resulted in the loss of over $300,000 to
investors.82
2.
Factors Favoring the Imposition of Civil Penalties
federal income tax as set forth in 26 U.S.C. § 6621(a)(2). See Partial Judgment at
5.
79
See id.
80
Namely, section 10(b) of the Securities Act, which governs the use of
“manipulative and deceptive devices.”
81
15 U.S.C. § 77t(d); 15 U.S.C. § 78u(d)(3).
82
See Compl. ¶ 58. The risk of substantial loss was likely greater.
21
Many factors weigh in favor of imposing civil penalties. First, AGTI
and Segal played central roles in the scheme that resulted in over $300,000 of illgotten gains.83 Second, AGTI and Segal acted with scienter in violating the
securities laws.84 Third, Segal deliberately and repeatedly acted in contravention
of the securities laws in order to bring the fraudulent scheme to fruition.85 Fourth,
Segal has failed to admit any wrongdoing — he invoked his Fifth Amendment
rights, and consented to the entry of partial judgment against him on a “neither
admit nor deny” basis.86 Fifth, the conduct of AGTI and Segal created substantial
83
See, e.g., Compl. ¶ 2 (“Belmont and Meuse assisted AGTI and Segal
in creating the false, backdated, and fabricated documents and furnishing them to
the attorney for use in drafting the opinion letter.”) (emphasis added); Compl. ¶¶
27-28 (“Segal insisted that Belmont provide Segal with various documents . . .
Segal made these requests to create the basis for the issuance of purportedly
unrestricted stock that could then be sold into the public market.”) (emphasis
added). Also, Segal is president and CEO of AGTI, the company whose shares
were sold in violation of the securities laws.
84
In order to violate Rule 10b-5, scienter is required. See Dalberth v.
Xerox Corp., 766 F.3d 172, 183 (2d Cir. 2014) (citing Dura Pharms., Inc. v.
Broudo, 544 U.S. 336, 341, 342 (2005)).
85
See, e.g., Compl. ¶ 2 (“AGTI and Segal obtain[ed] and furnish[ed]
false documents (including a sham assignment of debt and a fabricated and
backdated corporate resolution and convertible note), to support a legal opinion
letter that was provided to AGTI’s transfer agent so that the transfer agent would
issue millions of shares of purportedly unrestricted stock in an unregistered
offering.”).
86
See Segal Aff. ¶¶ 3-4; Partial Judgment at 1.
22
losses to others — over $300,000.87 Sixth, Segal refused to be deposed and made
no effort to cooperate with the SEC.88
In opposition, the Named Defendants again argue that their poor
financial condition should preclude the imposition of civil penalties.89 This
argument remains unavailing for the reasons previously stated.
3.
Amount of Civil Penalties
The maximum third-tier penalties under the statute are $650,000 and
$130,000 for AGTI and Segal, respectively.90 The SEC argues that the Court is
authorized to impose the maximum third-tier penalty twice (based on the number
of statutory violations)91 or fifty-six times (based on the number of separate acts
87
See Compl. ¶ 58.
88
See Segal Aff. ¶¶ 3-4.
89
See AGTI Opp. at 8-9.
90
See 17 C.F.R. § 201.1004.
91
See SEC Mem. at 19. For authority, the SEC cites SEC v. Murray,
No. 05 Civ. 4643, 2013 WL 839840, at *5 (E.D.N.Y. Mar. 6, 2013) (citing SEC v.
Ehrenkrantz King Nussbaum, Inc., No. 05 Civ. 4643, 2012 WL 893917, at *5
(E.D.N.Y. Feb. 14, 2013)). Murray offers one solution to the question of how
many multiples of the civil penalty may be imposed in a given case. The
ambiguity arises from the phrase “each such violation” in the civil penalty statute.
The SEC notes that the Named Defendants violated (1) sections 5(a) and 5(c) of
the Securities Act; and (2) section 10(b) of the Exchange Act, and Rule 10b-5(a)
and (c) thereunder. See Compl. ¶ 3.
23
that violated the securities laws).92 By this arithmetic, the SEC contends that the
Court may impose penalties up to $36,400,000 against AGTI and up to $7,280,000
against Segal. Although the authority supporting the SEC’s calculations authorizes
the Court to impose these amounts, I find it appropriate to only impose one
maximum civil penalty each against AGTI and Segal. Because this is Segal’s first
violation of the securities laws,93 and as AGTI’s conduct in this case is merely an
extension of Segal’s own conduct, I find that imposing only one maximum civil
penalty will serve as a sufficient deterrent, both specifically and generally, to future
securities violations. Thus, Segal is liable for a civil penalty in the amount of
$130,000, and AGTI is liable for a civil penalty in the amount of $650,000.
V.
CONCLUSION
For the foregoing reasons, the SEC’s motion for final judgment is
GRANTED. All disgorgement, prejudgment interest, and civil penalties shall be
paid as set forth herein, as well as in accordance with the Order of Final Judgment
issued in conjunction with this Opinion. The Clerk of the Court is directed to close
92
The SEC cites two cases in support: (1) SEC v. Pentagon Capital
Mgmt. PLC, 725 F.3d 279, 288 n.7 (2d Cir. 2013); and (2) SEC v. Elliot, No. 09
Civ. 7594, 2012 WL 2161647, at *11 (S.D.N.Y. Jun. 12, 2012). The SEC counts
each of the fifty-three trades as a separate act, in addition to (1) the sham
assignment of debt; (2) the convertible note; and (3) the notice of conversion. See
SEC Mem. at 19.
93
See AGTI Opp. at 8.
24
this motion [Dkt. No. 62].
Dated:
New York, New York
December 15, 2014
25
- Appearances For the SEC:
Megan R. Genet, Esq.
Todd D. Brody, Esq.
U.S. Securities and Exchange Commission
200 Vesey Street, Suite 400
New York, New York 10281
(212) 336-0080
For AGTI, Segal, Sierra Range, Senior Capital, and Law Offices:
Eric M. Creizman, Esq.
Creizman PLLC
565 Fifth Avenue, 7th Floor
New York City, New York 10017
(212) 972-0200
26
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