Securities and Exchange Commission v. Gibraltar Global Securities, Inc. et al

Filing 84

MEMORANDUM DECISION AND ORDER adopting 81 Report and Recommendation. Before this Court is Magistrate Judge Francis's October 16, 2015 Report and Recommendation ("Report," (ECF No. 81 )), recommending that Defendants be held jointly and severally liable for disgorgement in the amount of $14,449,176 and for prejudgment interest in the amount of $2,700,443. (Report at 2.) Magistrate Judge Francis also recommended that this Court enter a tier two civil penalty against each Defendant in the amount of $3,667,146. (See id.) This Court adopts all of the Report, save for the error in calculation of total prejudgment interest. Judgment therefore is entered against Defendants as follows: 1. Disgo rgement of $14,449,176, representing Defendants' illicit profits, joint and several; 2. Disgorgement of $2,700,483, representing prejudgment interest on Defendants' illicit profits, joint and several; and 3. A tier two civi l penalty against each Defendant in the amount of $3,667,146. This Order resolves the motion at ECF No. 68. The Clerk of the Court is directed to enter judgment accordingly and close this case. (As further set forth in this Memorandum Decision and Order.) (Signed by Judge George B. Daniels on 1/11/2016) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

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SECURITIES AND EXCHANGE COMMISSION, :
Plaintiff,
-againstGIBRALTAR GLOBAL SECURITIES, INC. and
WARREN A. DAVIS,
Defendants.

MEMORANDUM DECISION
AND ORDER
13 Civ. 2575 (GBD) (JCF)

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GEORGE B. DANIELS, United States District Judge:
The Securities and Exchange Commission ("the SEC") brought this action alleging
violations of the federal securities laws by Defendants, Gibraltar Global Securities, Inc.
("Gibraltar"), a Bahamian broker-dealer, and its president and sole shareholder, Warren A. Davis
("Davis"). (Compl., (ECF No. 1).)

According to the SEC, Gibraltar, under Davis's direction

operated as an offshore, unregistered broker-dealer in violation of Section 15(a)(l) of the
Exchange Act of 1934, 15 U.S.C. §§ 78o(a)(l), 78t(a).

(See id.,

iii! 30-32.) The SEC also

alleged that Gibraltar and Davis engaged in the sale of millions of shares of unregistered stock in
a company, Magnum d'Or, in violation of Sections 5(a) and (c) of the Securities Act of 1933, 15
U.S.C. § 77e(a), (c). (See id.,

iii! 33-35.)

On June 12, 2015, the SEC moved for the entry of a default judgment against Defendants,
representing that Defendants "repeatedly announced that they will no longer defend themselves."
(Mot. for Default J .. , (ECF No. 68); Mem. in Support of Mot. for Default J., (ECF No. 69), at 3;
see Aff. of Warren A. Davis, (ECF No. 63-1),

iii! 2, 5, 7.) On July 2, 2015, this Court entered

default judgment for the SEC against Defendants. (July 2, 2015 Order, (ECF No. 73).) This
Court referred the case to Magistrate Judge James C. Francis for an inquest on damages, (ECF

No. 71), which Magistrate Judge Francis held on September 18, 2015.

Defendants failed to

appear at the inquest hearing. (Inquest Hr'g Tr., (ECF No. 82), at 2:6-8.)
Before this Court is Magistrate Judge Francis's October 16, 2015 Report and
Recommendation ("Report," (ECF No. 81 )), recommending that Defendants be held jointly and
severally liable for disgorgement in the amount of $14,449, 176 and for prejudgment interest in
the amount of $2,700,443. (Report at 2.) Magistrate Judge Francis also recommended that this
Court enter a tier two civil penalty against each Defendant in the amount of $3,667,146. (See

id.) This Court adopts those recommendations IN PART, differing as to the proper calculation
of total prejudgment interest in the amount of $2,700,483.

I. LEGAL STANDARD
This Court may accept, reject, or modify, in whole or in part, the findings set forth in the
Report. 28 U.S.C. § 636(b)(l)(C). When no party files objections to a Report, the Court may
adopt the Report if "there is no clear error on the face of the record." Adee Motor Cars, LLC v.

Amato, 388 F. Supp. 2d 250, 253 (S.D.N.Y. 2005) (quoting Nelson v. Smith, 618 F. Supp. 1186,
1189 (S.D.N.Y. 1985)); Wilds v. United Parcel Service, Inc., 262 F. Supp. 2d 163, 169 (S.D.N.Y.
2003) ("To accept the report and recommendation of a magistrate, to which no timely objection
has been made, a district court need only satisfy itself that there is no clear error on the face of
the record" (internal citations and quotation marks omitted).).
Magistrate Judge Francis advised the parties that failure to file timely objections to the
Report would constitute a waiver of those objections on appeal. (Report at 23); see also 28
U.S.C. § 636(b)(l)(C); Fed. R. Civ. P. 72(b). As of the date of this Order, no objection to the
Report has been filed. This Court is satisfied that the Report contains no clear error of law and
adopts the Report, differing only as to the proper calculation of total prejudgment interest.

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II. DEFENDANTS' LIABILITY
Where, as here, a defendant has defaulted, all of the facts alleged in the complaint, except
those relating to the amount of damages, must be accepted as true. See Greyhound Exhibitgroup,

Inc. v. EL.UL. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992). Magistrate Judge Francis
properly found the facts alleged in the Complaint established a "sound legal basis upon which
liability may be imposed." (See Report, at 4-5 (citingJemine v. Dennis, 901 F. Supp. 2d 365,
373 (E.D.N.Y. 2012)).)

A. SECTION 15
Under Section 15 of the Exchange Act of 1934, it is unlawful for an unregistered broker
or dealer to make use of the mails or any means or instrumentality of interstate commerce to
effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security.

See 15 U.S.C § 78o(a)(l). A showing of scienter is not required to establish a Section 15(a)(l)
violation. See S.E.C. v. Aronson, No. 11 Civ. 7033, 2013 WL 4082900, at *7 (S.D.N.Y. Aug. 6,
2013).
The Report correctly held that the SEC sufficiently alleged that Gibraltar "effected
transactions in, or induced the purchase and sale of securities." (Report at 8; Compl., iii! 16-23.)
Gibraltar "received from its customers 'shares oflow-priced, thinly-traded stock,"' retitled those
shares in its name, and deposited them in its own U.S.-based brokerage accounts. (Report at 2-3
(citing Com pl.,

iii! 21-22).)

Accordingly, Gibraltar's customers then conveyed sell orders to

Defendants using Gibraltar's website, e-mail, or telephone, for Defendant's U.S. brokers 1 to sell

A "broker is any person engaged in the business of effecting transactions in securities for the account of
other." (See Report, at 8 (quoting 15 U.S.C. § 78c (a)(4)(A)) (internal quotation marks omitted)).)
Gibraltar was clearly a broker under Section l S(a) because evidence of brokerage activity may include
"receiving transaction-based compensation ... and possessing client funds and securities." (See id.
1

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the customers' stock under Gibraltar's name on the open market. (See Compl., ~ 22.) Gibraltar
instructed the U.S. brokers to wire the sale proceeds to a Royal Bank of Canada account
Gibraltar maintained in the Bahamas. (See id.,~ 23; 15 U.S.C § 780 (a)(l); S.E.C. v. Cavanagh,
445 F.3d 105, 108-110 (2d Cir. 2006); S.E.C. v. Spinosa, 31 F. Supp. 3d 1371, 1376 (S.D. Fla
2014) (holding that the use of telephone and internet is sufficient to satisfy interstate commerce
requirement of Section l 5(a)).) After deducting its commission of 2-3% of the proceeds,
Gibraltar wired the remaining money back to its U.S.-based customers, thereby employing
instrumentalities of interstate commerce to effect transactions in any security. (See Report, at 8
(citing

Comp!.~~

21-23).)

Magistrate Judge Francis also found that the Complaint established Defendant Davis'
"control person" liability under Section 15, as well as Gibraltar's liability as a "controlled
person" for the time period of March 2008 until August 2012. (See id, at 2, 5-6;

Comp.,~

9.)

See also 15 U.S.C. § 78t. During this time, Defendant Davis was the "founder, president, and
sole owner" of Gibraltar, and the Complaint indicates that Davis had more than "the potential
power to influence and direct the activities of the wrongdoer," Gibraltar. See Dietrich v. Bauer,
126 F. Supp. 2d 759, 765 (S.D.N.Y. 2001). (See Comp., ,-i 9.) Davis "was responsible for
authorizing Gibraltar employees to place trades in the U.S," thereby fulfilling Section 15's
"culpable participation" requirement for establishing liability. (See Report, at 6-7 (citing
Comp!., ,-i 9; Special Situations Fund Ill QP, L.P. v. Deloitte Touche Tohmatsu CPA, Ltd., 33 F.
Supp. 3d 401, 438 (S.D.N.Y. 2014) (collecting cases)).)
Throughout this time period, neither Defendant complied with Section 15(a)(l )'s
requirement to register as broker-dealers with the SEC with regard to Magnum stock, or any
(citing S.E.C. v. Margolin, No. 92 Civ. 6307, 1992 WL 278735, at *5 (S.D.N.Y. Sept. 30, 1992) (internal
quotation marks omitted)).)

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other stock. See 15 U.S.C. § 78o(a)(l); (Report, at 3-4, 8 (citing Compl., ~~ 8-9, 24, 28)).

Nor

had Defendants registered as a broker-dealer at the time the SEC filed the Complaint. (Report, at
8 (citing Compl., ~~ 8-9, 28).) Defendants' conduct thereby violated Section 15(a) of the
Exchange Act of 1934.

B. SECTION 5
A defendant violates Section 5 of the Securities Act of 1933 if (1) he directly or indirectly
sold or offered to sell securities, (2) no registration statement was in effect for the subject
securities, and (3) interstate means were used in connection with the offer or sale. See S. E. C. v.
Universal Exp., Inc., 475 F. Supp. 2d 412, 422 (S.D.N.Y. 2007); 15 U.S.C. § 77e. Section 5

liability does not require scienter, and the defendant bears the burden of proving whether any
registration exemption is applicable. See S.E.C. v. Czarnik, No. 10 Civ 745, 2010 WL 4860678,
at* 11 (S.D.N.Y. Nov. 29, 2010).
Accordingly, Magistrate Judge Francis properly found that the facts established that
Defendants violated Section 5. (See Report, at 10-11.) Specifically, from November 2008 until
about September 2009, Dwight Flatt, David Della Sciucca, and Shannon Allen (together, "the
Flatt nominees") deposited with Gibraltar over 11 million shares of stock in a company called
Magnum d'Or that the nominees received from the issuer. (See Report, at 3 (citing Compl.

~~

10-14, 25 ). ) Fallowing the general scheme described above, Defendants sold over 10 million of
those Magnum shares through their U.S. brokers to generate $11,384,589 in proceeds, in
violation of Section 5. (See id. at 3 (citing Compl.

~~

10-14, 25, 27)). Gibraltar eventually wired

about $7.175 million directly back to Magnum. (See id. at 4 (citing Compl.

ii 29).)

During this

time, the Magnum securities were unregistered and transferred from the Bahamas to Defendant's
U.S. brokers via mail. (See id. at 11.) The facts as alleged in the Complaint therefore

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established Defendants' liability for violating Section 5 of the 1933 Securities Act. See
Universal Exp., Inc., 475 F. Supp. at 422.

III. DISGORGEMENT OF ILL-GOTTEN GAINS
Magistrate Judge Francis recommended that the SEC be awarded $3,486,867 in
disgorgement from Defendants' illicit profits in violation of Section 15(a)(l) as requested by the
SEC. (See Report, at 14; Pl.'s Revised Proposed Findings of Fact and Conclusions of Law, (ECF
No. 78), iJ 18.) This amount was calculated as follows:
Proceeds wire-transferred to U.S.-based customers
Defendants' commission rate
Section 15 Disgorgement

$116,228,909 .52
x 0.03
$3,486,867

This Court finds that recommendation reasonable because although any uncertainty in
calculating the defendants' illicit gains "should be resolved in favor of the plaintiff," the amount
of disgorgement requested for Defendants' Section 15 violations, in fact, underestimates
Defendants' total ill-gotten gains. See S.E.C. v. Patel, 61F.3d137, 140 (2d Cir. 1995) (agreeing
"with the District of Columbia Circuit that any 'risk of uncertainty [in calculating disgorgement]
should fall on the wrongdoer whose illegal conduct created that uncertainty" (alteration in
original) (internal quotation marks omitted).). First, the proceeds amount disregards more than
$46 million worth of wire transfers to Gibraltar customers with unknown residency. (See Report,
at 13 (citing Peters June 11, 2015 Deel., iii! 15-17, (ECF No. 70)).)
Additionally, the SEC's requested amount clearly underestimates Defendants' ill-gotten
Section 15 gains, which were calculated with the assumption that by the time Defendants wired
the proceeds back to their customers, Defendants would have already deducted their commission
(e.g. post-commission). (See id. at 13-14, n.4.) Had the SEC based its Section 15 disgorgement

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request on the pre-commission amount, that different amount would have been $3,594,708.54,
calculated as follows:
Proceeds wire-transferred to U.S.-based customers
Accounting for 3% already taken
Total pre-commission proceeds
Defendants' commission rate
Pre-commission ill-gotten gains

$116,228,909.52
--'- 0.97
$119,823,618.06
x 0.03
$3,594,708.54

Because disgorgement "'need only be a reasonable approximation of profits causally
connected to the violation,"' this Court accepts the Report's recommendation as reasonable.
Patel, 61 F.3d at 139 (quoting S.E.C. v. First City Financial Corp., 890 F.2d 1215, 1231 (D.C.
Cir. 1989)).
Magistrate Judge Francis also recommended that the SEC be awarded $10,962,309 in
Section 5 disgorgement, to be paid jointly and severally by Defendants. This amount was
calculated as follows:
Pre-commission ill-gotten Magnum proceeds
Defendants' estimated commission from Section 15 (at 3%)2
Adjusted pre-commission Magnum proceeds
Disgorgement payment from Flatt Nominee Allen3
Section 5 Disgorgement

$11,384,589
$341,538
$11,043,051
$80,742
$10,962,309

Magistrate Judge Francis properly noted that the SEC's submissions make clear that
Defendants' conveyed the majority of the $11,384,589 revenue generated by the sale of Magnum
stock back to Magnum d'Or in the amount of $7,175,757, presumably reducing Defendants'
profits. (See Report at 14, 16; Peters June 11, 2015 Deel.,

iJ 23, (ECF No. 70).) However, the

The SEC subtracted the Defendants' 3% commission rate from the initial Magnum proceeds to avoid
"any potential double counting." (See Report, at 14 n.5 (citing Peters June 11, 2015 Deel.,~ 25).)
2

3

The SEC learned that one of the Flatt Nominees, Shannon Allen, had already paid disgorgement as of
September 9, 2015 and adjusted their calculations accordingly. (See Report, at 14 n.5 (citing Peters Sept.
9, 2015 Deel., (ECF No. 79), ~~ 1-3); Pl.'s Revised Proposed Findings of Fact and Conclusions of Law,~
25.)

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SEC did not subtract the approximately $7 million sent back to Magnum in its calculation of the
Magnum proceeds.

(See Peters June 11, 2015 Deel.,

~

23.)

Because district courts have

discretion to award disgorgement beyond a defendant's personal pecuniary gain, and because
Defendants played an "indispensable role" in selling the unregistered Magnum stock and also
refused to participate in discovery, Magistrate Judge Francis properly recommended that it is
appropriate and within the District Court's discretion to hold Defendants jointly and severally
liable for the total proceeds in the amount of $10,962,309. See SE. C. v. Contorinis, 743 F.3d
296, 306 (2d Cir. 2014), petition for cert. filed, No. 14-471 (U.S. Oct. 23, 2014); S.E.C. v.
Tourre, 4 F. Supp. 3d 579, 590 (S.D.N.Y. 2014) ("The Second Circuit has upheld the

disgorgement of all profits received, even though a portion of those profits were later transferred
to another party .... "); (Report, at 16-17).
IV. PREJUDGMENT INTEREST ON ILL-GOTTEN GAINS

The Report recommends that the Defendants be held jointly and severally liable for
$2,700,443 in prejudgment interest on their ill-gotten gains. (See Report, at 18.) Awards of
prejudgment interest and disgorgement ensure that defendants do not profit from their ill-gotten
gains, including the time value of money. See SEC v. World Info. Tech., Inc., 590 F. Supp. 2d
574, 578 (S.D.N.Y. 2008).
Magistrate Judge Francis properly weighed
the need to fully compensate the wronged party for actual damages suffered[,] . . .
considerations of fairness and the relative equities of the award[,] . . . the remedial
purpose of the statute involved[,] ... and other such factors as are deemed relevant by the
court.
Id. (quoting SEC v. First Jersey, Secs., Inc., 101 F.3d 1450, 1476 (2d Cir. 1996)) (internal

quotation marks omitted)).

Magistrate Judge Francis derived the total amount of the

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prejudgment interest4 from the SEC's separate calculations of $614,995 m interest for
Defendants' Section 15 violations and $2,085,488 for the Section 5 violations. (See Report, at
18 (citing Peters Sept. 9, 2015

Deel.,~

3; Tr. at 5:9-6:17).) Magistrate Judge Francis properly

found that the SEC' s separate calculations for Section 15 and Section 5 prejudgment interest
accurately reflect the value of the "interest free loan" Defendants received as a result of their
violations. (See id. (citing S.E.C. v. Moran, 944 F. Supp. 286, 295) (S.D.N.Y. 1996).)
This Court accepts Magistrate Judge Francis' recommendation that Defendants be held
jointly and severally liable for prejudgment interest calculated as the sum of the prejudgment
interest amounts for the Section 15 and Section 5 violations. See SE. C. v. Tourre, 4 F. Supp. 3d
579, 591 (S.D.N.Y. 2014) ("Whether to grant prejudgment interest, and the rate of any such
interest, is left to the broad discretion of this Court."); see also 15 U.S.C. § 77t(d)(2) ("The
amount of the penalty shall be determined by the court in light of the facts and circumstances.").
However, upon this Court's review of the calculations done by the S.E.C., the total prejudgment
interest is not $2,700,443, but $2,700,483. 5
V. CIVIL MONETARY PENAL TIES

The Report further recommends that each Defendant pay a second-tier civil monetary
penalty of $3,667,146. (See Report, at 22.) When determining the egregiousness of Defendants'
conduct, Magistrate Judge Francis properly considered 1) that Defendants engaged in repeated

4

The SEC used the IRS underpayment rate as the prejudgment interest rate, which "reflects what it would
have cost to borrow money from the government and therefore reasonably approximates one of the
benefits the defendant derived" from his illegal conduct. (See Report, at 18 (citing First Jersey Secs., 101
F.3d at 1476); 26 U.S.C. § 662l(a)(2).) See also S.E.C. v. World Info. Tech., Inc., 590 F. Supp. 2d 574,
578 (S.D.N.Y. 2008) (also using the IRS underpayment rate provided at 26 U.S.C. § 662l(a)(2)).
This total was calculated as follows: Section 15 prejudgment interest of $614,995 plus the Section 5
prejudgment interest of $2,085,488 for a total of $2,700,483 using the numbers supplied by the SEC.
(See Peters Sept. 9, 2015 Deel., ii 5.)

5

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Section 15 violations while encouragmg and aiding customers in avoiding taxes; 2) that
Defendant Davis indisputably conveyed his intention to cease cooperating in this litigation; and,
3) that Defendants knowingly committed Section 5 violations. (See Report, at 20-21.) See also
S.E.C. v. Lybrand, 281 F. Supp. 2d 726, 730 (S.D.N.Y. 2003) ajj'd sub nom. S.E.C. v. Kern, 425

F.3d 143 (2d Cir. 2005).

Accordingly, Magistrate Judge Francis calculated the tier two civil

penalties as follows:

Commissions derived from Section 15 violations within
5-year Statute of Limitations
Adjusted total proceeds generated by Section 5 violations
Proceeds Defendants wired back to Magnum
Total Tier Two Penalty
Divided Equally Between Defendants
Tier Two Penalty per Defendant

$3,448,998

+ $11,043,051
$14,492,049
- $7,157,757
$7,334,292
2
$3,667,146

Magistrate Judge Francis properly reasoned that this substantial amount "maintains a
relationship between the penalty and Defendants' ill-gotten gains." (See Report, at 22 (citing
SEC v. One Wall St., Inc., No. 06 CV 4217, 2008 WL 5082294, at *9 (E.D.N.Y. Nov. 26, 2008)

(citing cases in this District that support the proposition that penalties should bear some
relationship to the amount of ill-gotten gains)).) This Court therefore adopts the Report's tier
two civil penalty recommendation of $3,667,146 for each Defendant.

VI. CONCLUSION
This Court adopts all of the Report, save for the error in calculation of total prejudgment
interest. Judgment therefore is entered against Defendants as follows:

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1. Disgorgement of $14,449, 176, 6 representing Defendants' illicit profits, joint and
several;
2. Disgorgement of $2,700,483, 7 representing prejudgment interest on Defendants'
illicit profits, joint and several; and
3. A tier two civil penalty against each Defendant in the amount of $3,667,146.
This Order resolves the motion at ECF No. 68. The Clerk of the Court is directed to enter
judgment accordingly and close this case.

Dated: New York, New York
January 11, 2016
SO ORDERED.
)

('- LU iiJ

~--~~~~~~~~~

The total amount of$14,529,918 was derived from the sum of Defendants' Section 15 ill-gotten gains of
$3,486,867 and the Section 5 ill-gotten gains of $10,962,309.

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7

See n.5 supra.

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