Securities and Exchange Commission v. Tavella et al
Filing
68
MEMORANDUM AND ORDER granting 45 Motion for Default Judgment. The Commission's motion for a default judgment (Doc. No. 45) is granted on the foregoing terms. However, we defer entering judgment to afford the Commission an opportunity to supplement its submission as to the amount of prejudgment interest that should be disgorged. Such supplemental submission shall be due on January 23, 2015. (Signed by Judge Naomi Reice Buchwald on 1/6/2015) (ajs)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
----------------------------------------X
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
MEMORANDUM AND ORDER
- against -
13 Civ. 4609 (NRB)
MAGDALENA TAVELLA, ANDRES HORACIO
FICICCHIA, GONZALO GARCIA BLAYA,
LUCIA MARIANA HERNANDO, CECILIA DE
LORENZO, ADRIANA ROSA BAGATTIN,
DANIELA PATRICIA GOLDMAN,
MARIANO PABLO FERRARI, MARIANO
GRACIARENA, and FERNANDO LOUREYRO,
Defendants.
----------------------------------------X
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE
Plaintiff Securities and Exchange Commission (the “SEC” or
the “Commission”) moves for entry of default judgment against
Magdalena
Tavella,
Andres
Horacio
Ficicchia,
Gonazalo
Garcia
Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa
Bagattin, Daniela Patricia Goldman, and Mariano Pablo Ferrari
(collectively “defendants”).1
Commission
has
established
While we are persuaded that the
its
entitlement
to
a
default
judgment, we disagree in part with the Commission’s proposed
remedies.
1
We write principally to explain this disagreement.
The complaint calls these eight parties the “Selling
Defendants.”
Compl. ¶ 1.
Two others, Mariana Graciarena and
Fernando Loureyro, have settled with the Commission. We ignore
Graciarena and Loureyo herein except to emphasize that this
opinion contains no findings or conclusions as to them.
I. BACKGROUND
A.
The Biozoom Scheme
The factual allegations of the complaint, which we describe
here insofar as they are relevant, revolve around a penny-stock
company called Biozoom, whose shares were traded on the Overthe-Counter Bulletin Board.
Compl. ¶¶ 1, 113.
Biozoom was incorporated in Nevada in 2007 as Entertainment
Arts, Inc. (“Entertainment Art”).
Id. ¶ 27.
Entertainment Art
originally represented that it was in the business of designing
and marketing leather bags.
Id.
Its stock was divided among
three corporate officers and thirty-four outside investors.
¶¶ 28-30.
Id.
In May 2009, Entertainment Art disclosed that the
three officers had sold their holdings to a Belize entity called
Medford
Financial
Ltd.
Id.
¶ 31.
Although
it
was
not
disclosed, Medford Financial actually purchased all of the stock
in
Entertainment
investors.
Art,
including
the
shares
held
by
outside
Id. ¶¶ 32-33.
In October 2012, Medford Financial announced that it had
sold 39,600,000 shares of Entertainment Art stock to Le Mond
Capital, a British Virgin Islands entity.
Id. ¶¶ 35-36.
fact, Le Mond Capital purchased all 59,730,000 shares.
¶ 37.
In
Id.
Le Mond Capital is owned by Sara Deutsch, who is not a
party to this action.
“Entertainment
Art’s
new
Id. ¶ 38.
President,
2
Deutsch was appointed as
Chief
Executive
Officer,
Principal Executive Officer, Treasurer, Chief Financial Officer,
Secretary, . . . and Director.”
co-owner,
with
defendant
Id.
Deutsch also is or was a
Tavella,
and
restaurant in Buenos Aires, Argentina.
the
manager
a
Id. ¶ 39.
Defendants are eight residents of Buenos Aires.
21.
of
Id. ¶¶ 14-
In January to May 2013, each defendant separately opened an
account at one of two United States broker-dealers, and they
deposited a combined total of 15,685,000 shares of Entertainment
Art stock in those accounts.
89, 95, 101.
Id. ¶¶ 46-47, 57, 64, 70, 77, 83,
Each defendant represented to the broker-dealers
that he or she had acquired the shares in November 2012 through
March 2013 in private transactions with individuals who either
were among the thirty-four original outside investors or had
purchased
false,
from
because
those
investors.
Medford
shares years earlier.
Financial
These
had
representations
acquired
all
of
were
those
Id. ¶¶ 32, 54-56, 61-63, 67-69, 74-76,
80-82, 86-88, 92-94, 98-100.
Defendants also represented that
they had paid amounts ranging from $5,445 to $31,050 each, and
totaling $84,260, for these shares.
Id. ¶¶ 54, 56, 62, 68, 75,
81, 87, 93, 99.
In March and April 2013, Entertainment Art changed its name
to Biozoom and announced that, following a transaction involving
the acquisition of patents and other intellectual property, it
was now in the biomedical industry.
3
Id. ¶¶ 40-41, 45.
Sara
Deutsch remained a director, but not an officer, of Biozoom.
Id. ¶ 42.
On May 22, 2013, Biozoom and other entities began to
tout
Biozoom
that
handheld
measure
consumer
certain
had
“‘created
device’
to
the
world’s
instantly
biomarkers.”
Id.
first
and
¶ 106.
portable,
non-invasively
This
promotional
campaign caused a dramatic increase in Biozoom’s stock price,
which peaked at over $4 per share.
Id. ¶ 6.
Also beginning in May 2013, defendants began to sell their
shares in transactions that were neither registered with the SEC
nor exempt from the registration requirement of the Securities
Act of 1933 (the “1933 Act”).
Id. ¶¶ 107, 111.
Between May 16
and June 19, defendants used emails and instant messages to
instruct their U.S. broker-dealers to sell 14,078,406 shares for
a
total
of
defendants
foreign
Id.
$33,421,062.
sought
bank
to
wire
accounts,
¶¶ 107-108.2
some
or
successfully
approximately $15,990,000 abroad.
(“almost $17 million”).
all
of
In
June,
these
moving
a
seven
proceeds
to
total
of
Id. ¶ 109; but see id. ¶ 1
On June 25, the Commission issued an
2
Paragraph 107 of the complaint alleges that the total
proceeds were $33,997,152, but it is followed by a table
containing line items for each defendant’s “[p]roceeds” totaling
$33,421,062. This discrepancy corresponds to the two manners in
which the proceeds of four defendants can be calculated, as
described in Part II.C.2 below. As we explain there, the lower
calculation of these defendants’ proceeds is correct for present
purposes.
4
order suspending trading in Biozoom stock.
Id. ¶ 109; see SEC
Release No. 34-69841 (June 25, 2013).
B.
Procedural History
On July 3, 2013, the Commission commenced this action, and
we granted the Commission’s ex parte application for a temporary
restraining order that included a freeze of defendants’ Biozoom
shares and proceeds from the sales of Biozoom shares.
On July
16, defendants having retained McLaughlin & Stern, LLP, a New
York
law
firm,
the
parties
stipulated
to
the
entry
of
a
preliminary injunction including a revised version of the asset
freeze.
We so-ordered the preliminary injunction on July 17,
and we ordered defendants to answer or otherwise respond to the
complaint by August 26.
On September 11, 2013, McLaughlin & Stern moved to withdraw
as counsel for reasons described in an ex parte submission.
The
Court granted the motion, which the Commission did not oppose.
On December 17, 2013, we signed a scheduling order directing
defendants to answer or otherwise respond to the complaint by
February 3, 2014.
This order provided that “[f]ailure to answer
or otherwise respond to the complaint by that date may result in
entry
of
a
default
judgment
against
the
Defendants.”
On
February 3, 2014, Brafman & Associates, another New York law
firm, appeared on behalf of defendants and applied for a further
5
thirty-day extension, which we granted.
However, on March 14,
2014, Brafman & Associates applied to withdraw as counsel.
We
granted this application, which the Commission did not oppose.
On May 15, 2014, the Clerk of Court certified defendants’
default pursuant to Fed. R. Civ. P. 55(a), and on June 4, 2014,
the SEC filed the instant motion.
The Commission served the
motion papers on defendants in a manner consistent with the July
16, 2013 stipulation.
In June and July 2014, we engaged in correspondence with
Juan
Ignacio
Prada,
represent defendants.3
an
Argentinian
lawyer
who
claimed
to
Prada requested leave for some defendants
to “respond Pro Seo [sic] to the Commission’s Complaint, via the
expertise of Mr. Juan Ignacio Prada, our Argentinian counsel
since [defendants] are unable to retain proper US counsel due to
lack of funds.”
We responded that “[t]here is no mechanism
available that would enable a party to be represented in a U.S.
action by foreign counsel while simultaneously appearing pro se.
Accordingly,
this
Court
cannot
grant
your
request.”
Prada
replied that “[n]otwithstanding there is no mechanism available
to be represented by a foreign counsel, the defendants would
like to bring before the court all the documents regarding the
commercial transactions.
3
The Court
correspondence.
copied
If this is available, please let us
the
Commission’s
6
counsel
on
this
know and the defendants will send them.”
We responded that
“there is no prohibition on individual defendants appearing pro
se -- i.e. representing themselves -- and, in that capacity,
making submissions to the Court.”
Subsequently, the Commission
served a copy of its motion papers on Prada.
We have not since heard from defendants or anyone on their
behalf.
II.
A.
DISCUSSION
Default Judgment
Rule 55 of the Federal Rules of Civil Procedure permits the
entry of a default judgment against a party who “has failed to
plead or otherwise defend.”
Fed. R. Civ. P. 55(a).
Here,
although two New York law firms appeared for defendants, both
firms were permitted to withdraw.
Defendants have failed to
answer or otherwise response to the complaint, even though the
deadline to answer, having been extended multiple times, lapsed
over
ten
months
ago.
Further,
we
warned
defendants
in
our
December 17, 2013 order that failure to defend “may result in
entry of a default judgment,” and in July 2014, we informed
defendants’
themselves.
Argentinian
lawyer
that
defendants
may
represent
Defendants’ prolonged inaction warrants imposition
of a default judgment.
7
By
their
default,
defendants
are
deemed
to
concede
the
complaint’s well-pleaded allegations of liability, but not of
the amount of damages.
Realty
Corp.,
“accept[]
as
973
true
Greyhound Exhibitgroup, Inc. v. E.L.U.L.
F.2d
155,
all
of
158
the
(2d
Cir.
factual
1992).
Thus,
allegations
of
complaint, except those relating to damages.”
we
the
Au Bon Pain Corp.
v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981).
However, we
must independently establish the damages and other relief to be
awarded on the basis of sufficient evidence.
Cement & Concrete
Workers Dist. Council Welfare Fund v. Metro Found. Contractors
Inc., 699 F.3d 230, 234 (2d Cir. 2012) (“Cement Workers”); SEC
v. Mgmt. Dynamics, Inc., 515 F.2d 801, 814 (2d Cir. 1975).
To make the necessary findings upon default, a court may
conduct
a
hearing
to,
inter
alia,
“conduct
an
accounting,”
“determine the amount of damages,” or “investigate any other
matter.”
Fed. R. Civ. P. 55(b)(2)(A), (B), (D).
However, it is
within a court’s discretion to “determine there is sufficient
evidence . . . based . . . upon a review of detailed affidavits
and documentary evidence.”
Cement Workers, 699 F.3d at 234.
Here, the SEC has submitted the detailed declaration of
Ricky
Sachar,
Declaration”),
Esq.,
including
dated
June
numerous
4,
exhibits
fully detail defendants’ trading activity.
2013
(the
that,
“Sachar
inter
alia,
As this submission
adequately supports the remedies we will impose, there is no
8
need for an evidentiary hearing.
However, as discussed in Part
II.C.3 below, we delay the entry of final judgment to permit the
Commission an opportunity to supplement its presentation as to
the subject of prejudgment interest.
B.
Liability
The facts established by defendants’ default support the
conclusion that defendants violated Section 5 of the 1933 Act.
Section 5 “requires that securities be registered with the SEC
before any person may sell or offer to sell such securities.”
SEC v. Cavanagh, 445 F.3d 105, 111 (2d Cir. 2006) (“Cavanagh
II”); see 15 U.S.C. § 77e.
“To state a cause of action under
Section 5, one must show (1) lack of a registration statement as
to
the
subject
securities;
and
securities;
(3)
the
use
(2)
of
the
offer
interstate
or
sale
of
transportation
the
or
communication and the mails in connection with the offer or
sale.”
Cavanagh II, 445 F.3d at 111 n.13 (internal quotation
marks omitted).
Although some securities sales are exempt from
the Section 5 registration requirement, “[o]nce a prima facie
case has been made, the defendant bears the burden of proving
the applicability of an exemption.”
Id. (citing SEC v. Ralston
Purina Co., 346 U.S. 119, 126 (1953)).
Furthermore, “Section 5
imposes strict liability on offerors and sellers of unregistered
securities regardless of any degree of fault, negligence, or
9
intent on the seller’s part.”
SEC v. Bronson, 14 F. Supp. 3d
402, 408 (S.D.N.Y. 2014) (internal quotation marks omitted).
In May and June 2013, defendants used international emails
and
instant
messages
to
unregistered transactions.
sell
their
Biozoom
shares
in
Thus, the SEC has made out a prima
facie case that defendants violated Section 5.
Defendants have
not made any effort to show the applicability of an exemption
from the registration requirement, and we are not aware of any
applicable exemption.
C.
Thus, defendants violated Section 5.
Remedies
The
Commission
disgorgement
of
seeks
the
(1)
a
proceeds
permanent
of
the
injunction;
illegal
sales;
(2)
(3)
disgorgement of prejudgment interest on those proceeds; and (4)
civil
penalties
disgorged.
1.
in
the
same
amount
as
the
proceeds
to
be
We address each remedy in turn.
Permanent Injunction
Section 20(b) of the 1933 Act expressly authorizes the SEC
to seek an order enjoining “acts or practices which constitute
or will constitute a violation of the provisions of this [Act].”
15 U.S.C. § 77t(b).
must
be
“a
The basis for ordering such an injunction
substantial
likelihood
illegal securities conduct.”
of
future
violations
of
SEC v. Cavanagh, 155 F.3d 129, 135
10
(2d Cir. 1998) (“Cavanagh I”).
To determine whether the SEC has
established this substantial likelihood, a court is to consider
the following factors:
the fact that the defendant has been found liable for
illegal conduct; the degree of scienter involved;
whether the infraction is an “isolated occurrence;”
whether defendant continues to maintain that his past
conduct was blameless; and whether, because of his
professional occupation, the defendant might be in a
position where future violations could be anticipated.
Id. (quoting SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90,
100 (2d Cir. 1978)).
A permanent injunction is “particularly
within the court’s discretion where a violation was founded on
systematic wrongdoing, rather than an isolated occurrence.”
SEC
v. First Jersey Secs., Inc., 101 F.3d 1450, 1477 (2d Cir. 1996)
(“First Jersey”) (internal quotation marks omitted).
The relevant factors amply support a permanent injunction.
Defendants displayed scienter by falsely representing to their
American
broker-dealers
that
they
had
acquired
Entertainment Art stock from individual investors.
their
That they
engaged in parallel conduct strongly supports the inference that
they were engaged in coordinated wrongdoing.
Unwary investors
are all too vulnerable to market manipulation of the type that
11
evidently took place here.
Thus, we will not hesitate to grant
the injunction proposed by the Commission.4
2.
Disgorgement of Illegal Proceeds
The
equitable
remedy
of
disgorgement,
which
“serves
to
remedy securities law violations by depriving violators of the
fruits of their illegal conduct,” SEC v. Contorinis, 743 F.3d
296,
301
(2d
Cir.
2014)
(“Contorinis”),
is
“well-established
. . . in securities enforcement actions,” Cavanagh II, 445 F.3d
at 116.
Indeed, “[t]he deterrent effect of an SEC enforcement
action would be greatly undermined if securities law violators
were not required to disgorge illicit profits.”
SEC v. Manor
Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972).
amount
of
disgorgement
ordered
‘need
only
be
a
“The
reasonable
approximation of profits causally connected to the violation’;
‘any risk of uncertainty [in calculating disgorgement] should
fall
on
the
uncertainty.’”
wrongdoer
whose
illegal
conduct
created
that
First Jersey, 101 F.3d at 1475 (quoting SEC v.
Patel, 61 F.3d 137, 139-40 (2d Cir. 1995)).
However, because
the disgorgement “remedy is remedial rather than punitive, the
court may not order disgorgement above” “the amount of money
4
The same reasons justify the proposed order permanently
barring defendants from participating in an offering of penny
stock. See 15 U.S.C. § 77t(g).
12
acquired through wrongdoing . . . plus interest.”
Cavanagh II,
445 F.3d at 116 & n.25.
Here,
defendants’
the
Commission
illegal
seeks
sales.
to
disgorge
Disgorgement
the
is
proceeds
of
appropriate
to
prevent defendants from profiting from their violations of the
securities laws.
disgorged
is
A reasonable approximation of the amount to be
the
difference
between
the
amounts
that
each
defendant obtained for his or her shares and the amount that
that defendant stated that he or she paid for them.
The Commission has provided ample evidence of defendants’
proceeds.
its
We have carefully reviewed the Sachar Declaration and
supporting
exhibits,
which
enumerate
each
of
defendants’
Biozoom sales.
We concur in the Commission’s calculation of the
amounts
disgorged
to
be
by
Goldman,
Baggatin,
Ferrari,
Tavella, which correspond to the complaint’s allegations.
and
See
Sachar Decl. ¶¶ 27, 29, 30, 32, 33, 35, 36, 38 & Exs. 12-19;
Compl. ¶¶ 81, 87, 93, 99, 107.
In contrast, the disgorgement amounts that the Commission
proposes for the other defendants exceed those defendants’ true
net proceeds as reflected in the Commission’s exhibits.
First,
we note a $15 error in the Commission’s transcription of the
amount Blaya reported paying for his shares.
13
Compare Sachar
Decl. ¶ 18, with id. Ex. 6, at 1.5
More significantly, as to
Ficicchia,
Hernando,
appears
number
to
of
Blaya,
have
shares
De
Lorenzo,
calculated
sold
by
and
the
the
proceeds
selling
the
by
SEC
staff
multiplying
the
However,
the
price.
exhibits demonstrate that their actual proceeds were lower due
to commissions and fees paid on the trades.
Compare Sachar
Decl. ¶¶ 17, 20, 23, 26, with id. Exs. 5, 7, 9, 11.
The lower
figures, which we have recalculated on the basis of the actual
amounts deposited in those four defendants’ brokerage accounts,
as
shown
in
the
exhibits,
match
the
complaint’s
allegations as to those defendants’ “[p]roceeds.”
This
provides
an
independent
basis
for
line-item
Compl. ¶ 107.
adopting
the
lower
calculation, since “[a] default judgment must not . . . exceed
in amount[] what is demanded in the pleadings.”
Fed. R. Civ. P.
54(c).6
Accordingly,
we
will
order
following amounts of principal:
that
defendants
disgorge
the
Tavella, $3,107,819; Ficicchia,
$1,948,339; Blaya, $3,008,200; Hernando, $5,042,771; De Lorenzo,
$4,801,536;
Baggatin,
$6,216,380;
Goldman,
$3,764,306;
and
Ferrari, $5,447,450.
5
The complaint alleges the proper purchase price, which is
$6,765. Compl. ¶ 62.
6 Our method for recalculating the proceeds of Ficicchia,
Blaya, De Lorenzo, and Hernando is also consistent with the
method by which the SEC staff appears to have calculated the
proceeds of Goldman, Baggatin, Ferrari, and Tavella, as
reflected in both the complaint and the Sachar Declaration.
14
3.
Disgorgement of Prejudgment Interest
It
is
also
within
a
court’s
discretion
to
order
disgorgement of prejudgment interest on the principal amount to
be disgorged, so as to “to deprive the wrongdoer of the benefit
of
holding
the
approximating
government.”
illicit
the
cost
gains
of
over
borrowing
time
by
such
Contorinis, 743 F.3d at 308.
gain
reasonably
from
the
As a general matter,
the Second Circuit has approved the calculation of prejudgment
interest at the IRS underpayment rate, which “reflects what it
would have cost to borrow the money from the government and
therefore
reasonably
approximates
one
of
the
defendant derived from its [illegal conduct].”
benefits
the
First Jersey,
101 F.3d at 1476.
Last year, in an opinion not cited in the Commission’s
brief,
the
Second
Circuit
limited
the
availability
of
disgorgement of prejudgment interest as to funds frozen at the
government’s behest.
SEC v. Razmilovic, 738 F.3d 14, 36-38 (2d
Cir. 2013) (“Razmilovic”), cert. denied, 134 S. Ct. 1564 (2014).
In
Razmilovic,
the
defendant
challenged
the
district
court’s
award of prejudgment interest at the IRS underpayment rate, see
SEC v. Razmilovic, 822 F. Supp. 2d 234, 279 (E.D.N.Y. 2011), on
the ground that the government had caused some of his funds in a
foreign account to be frozen in anticipation of forfeiture in a
15
pending
criminal
case.
The
Circuit
found
merit
in
the
defendant’s argument, explaining as follows:
[I]t is within the discretion of a court to award
prejudgment interest on the disgorgement amount for
the period during which a defendant had the use of his
illegal profits, see, e.g., First Jersey, 101 F.3d at
1474-77.
However, where, as here, the defendant has
had some or all of his assets frozen at the behest of
the government in connection with the enforcement
action, an award of prejudgment interest relating to
those funds would be inappropriate with respect to the
period covered by the freeze order, for the defendant
has already, for that period, been denied the use of
those assets. In such a case, after a final order of
disgorgement,
the
funds
previously
frozen
would
presumably be turned over to the government in
complete or partial satisfaction of the disgorgement
order, along with any interest that has accrued on
them during the freeze period. In that circumstance,
the remedial purpose of prejudgment interest would
already have been served with respect to the period of
the
freeze;
to
require
the
defendant
to
pay
prejudgment interest on the entire disgorgement amount
including the earlier frozen amount would, for the
freeze period, deprive him twice of interest on the
portion of the disgorgement award that is satisfied by
the frozen assets.
738 F.3d at 36-37 (emphases added).7
We interpret Razmilovic to mean that when a defendant’s
funds have been frozen in connection with an enforcement action,
the
defendant
may
not
be
ordered
7
to
disgorge
prejudgment
The Razmilovic court remanded to permit the government to
clarify whether the frozen funds would be applied to the
disgorgement order, in which case prejudgment interest would not
be allowed, or would remain frozen in connection with the
criminal charges pending against the defendant, in which case
prejudgment interest on non-frozen funds would be allowed. 738
F.3d at 37-38. But here, there is no question that the frozen
funds are those subject to disgorgement.
16
interest at the IRS underpayment rate.
rate
is
intended
benefit[]
the
to
“reasonably
defendant
derived
As noted earlier, that
approximate[]
from”
the
. . .
time
value
the
of
possession of the defendant’s ill-gotten gains, First Jersey,
101 F.3d at 1476; but where a defendant’s funds are frozen, if
the
freeze
is
possessory
not
benefit
violated,
for
the
the
defendant
duration
of
derives
the
no
freeze.
such
Yet
Razmilovic also recognizes that frozen funds “turned over to the
government
in
disgorgement
complete
order”
should
or
partial
be
turned
satisfaction
over
“along
of
the
with
any
interest that has accrued on them during the freeze period.”
738 F.3d at 36.
Otherwise, a defendant might perversely benefit
from the asset freeze by pocketing accumulated returns on the
frozen principal.8
Here,
the
Commission
from July 1, 2013.
seeks
prejudgment
interest
running
See Sachar Decl. ¶¶ 39-46 & Exs. 20-27.
However, we ordered a worldwide freeze on defendants’ relevant
8
Similarly, in the Rules of Practice applicable to its own
proceedings, the SEC recognizes that the IRS underpayment rate
may be inappropriate for funds secured in anticipation of
disgorgement.
See 17 C.F.R. § 201.600(b) (Although “[i]nterest
on the sum to be disgorged shall be computed at the [IRS]
underpayment rate of interest,” “[t]he Commission or the hearing
officer may, by order, specify a lower rate of prejudgment
interest as to any funds which the respondent has placed in an
escrow . . . .”).
17
assets in our orders of July 3 and 17, 2013.9
While it is
possible that our freeze orders have been violated, the SEC does
not provide any evidence of such violation.
Nor does the SEC
offer any information as to the actual returns, if any, that
have accumulated on the frozen assets.
On the current record,
in light of Razmilovic, we could merely order disgorgement of
any actual returns on the frozen assets, without specifying the
amount of such returns.
However,
we
will
defer
entering
judgment
to
afford
the
Commission an opportunity to establish the actual amount of the
returns, if any, that have accumulated on the frozen assets.
If
the Commission does so, we will be inclined to incorporate those
amounts in our final judgment.
Alternatively, if the Commission
can show that defendants have violated the asset freeze as to
any of the funds subject to that freeze, the Commission may
renew its request for disgorgement of prejudgment interest as to
those funds at the IRS underpayment rate.
4.
Civil Penalties
Section 20(d) of the Securities Act provides that, in an
enforcement action brought by the Commission, “the court shall
9
After filing the instant motion, the Commission informed
us by letter that authorities in Belize and Cyprus have also
ordered defendants’ assets within those countries to be frozen.
Doc. No. 52, at 2.
18
have jurisdiction to impose, upon a proper showing, a civil
penalty to be paid by the person who committed such violation.”
15 U.S.C. § 77t(d)(1).
Section 20(d) “authorizes three tiers of
monetary penalties for statutory violations.”
F.3d at 38.
Razmilovic, 738
Each of the three tiers “provides that, for each
violation, the amount of penalty ‘shall not exceed the greater
of’ a specified monetary amount or the defendant’s ‘gross amount
of
pecuniary
gain’;
the
amounts
specified
for
an
individual
defendant for the first, second, and third tiers, respectively,
are $[7,500], $[80,000], and $[160,000],” id. (quoting 15 U.S.C.
§ 77t(d)
(emphasis
(adjusting
in
statutory
Razmilovic));
maximum
see
penalties
17
for
C.F.R.
§ 201.1005
inflation).
The
third, most serious tier, requires a showing that “the violation
. . .
involved
reckless
fraud,
disregard
of
deceit,
a
manipulation,
regulatory
or
deliberate
requirement”
and
or
“such
violation directly or indirectly resulted in substantial losses
or created a significant risk of substantial losses to other
persons.”
15 U.S.C. § 77t(d)(2)(C)(I)-(II).
Subject only to the applicable maximum, “[t]he amount of
the penalty shall be determined by the court in light of the
facts and circumstances.”
15 U.S.C. § 77t(d)(2)(A).
Thus,
“[b]eyond setting maximum penalties, the statute[] leave[s] ‘the
actual amount of the penalty . . . up to the discretion of the
19
district court.”
Razmilovic, 738 F.3d at 38 (quoting SEC v.
Kern, 425 F.3d 143, 153 (2d Cir. 2005)).
“In determining whether civil penalties should be imposed,
and the[ir] amount,” SEC v. Wyly, --- F. Supp. 3d. ---, ---,
2014 WL 4792229, at *4 (S.D.N.Y. 2014) (internal quotation marks
omitted), courts in this District have
look[ed] to a number of factors, including (1) the
egregiousness of the defendant’s conduct; (2) the
degree of the defendant’s scienter; (3) whether the
defendant’s conduct created substantial losses or the
risk of substantial losses to other persons; (4)
whether the defendant’s conduct was isolated or
recurrent; and (5) whether the penalty should be
reduced due to the defendant’s demonstrated current
and future financial conduction.
Id. (quoting SEC v. Opulentica, LLC, 479 F. Supp. 2d 319, 331
(S.D.N.Y. 2007) (“Opulentica”)).
But although “these factors
are helpful in characterizing a particular defendant’s actions,
. . . each case ‘has its own particular facts and circumstances
which
determine
the
appropriate
penalty
to
be
imposed.’”
Opulentica, 479 F. Supp. 2d at 331 (quoting SEC v. Moran, 944 F.
Supp. 286, 297 (S.D.N.Y. 1996)).
Here, “the Commission seeks to impose a penalty against
each of the [defendants] equal to his or her gross pecuniary
gain from the sale of Biozoom shares, i.e., the disgorgement
amount for each [defendant].”
Br. at 14.
In other words, the
Commission seeks civil penalties in the maximum amounts allowed
by statute, which range from approximately $2.0 million to $6.2
20
million per defendant.
specific
argument
The Commission’s brief makes no case-
whatsoever
these proposed penalties.
in
support
of
the
magnitude
of
Instead, the Commission states only
that “[c]ourts have routinely imposed civil penalties equal to
the gross amount of a defendant’s pecuniary gain,” Br. at 14,10
and that “[a] penalty is appropriate given the massive selling
of shares in an unregistered distribution of securities -- an
unregistered
distribution
of
which
purchasers
and
sellers
of
[Biozoom] stock were unaware when they made their investment
decisions,” Br. at 14-15.
Such cursory presentation is scarcely
adequate for a law enforcement agency seeking to invoke the
Court’s
discretion
to
impose
multiple
multi-million-dollar
fines.
A
civil
penalty
is
defendants’ illegal conduct.
plainly
appropriate
to
punish
Yet the Commission’s submission
leaves us with many unanswered questions.
Beyond the bare facts
pertaining to defendants’ deposits and sales of Biozoom stock,
practically the only thing we know about defendants is their
occupations,
which
shed
little
10
light
on
the
circumstances.11
Perhaps tellingly, this statement is supported only by
out-of-circuit decisions, whose persuasive value is undermined
by the lack of any attempt to demonstrate their factual
similarity to this case.
11 In opening their brokerage accounts, defendants reported
the following professions:
Ficicchia, “Self-employed music
producer”; Blaya, “Music producer-stock investments”; Hernando,
“Marketing
Manager”;
De
Lorenzo,
“Self-employed
marketing
21
Most importantly, we do not know what defendants’ role in the
Biozoom scheme was.
Did defendants orchestrate that scheme, or
was Sara Deutsch or some other master pulling their strings?
Did defendants personally participate in the campaign to promote
Biozoom to unwary investors?
mere pawns?
Were defendants the profiteers or
Answers to these questions would have illuminated
this otherwise obscure portrait.
A
third-tier
penalty
is
justified
because,
as
already
discussed, defendants’ illegal conduct was undertaken with some
degree
of
scienter,
and
because
we
infer
substantial collective losses to investors.
that
it
caused
The amount of money
acquired through the Biozoom scheme further justifies a penalty
in an amount that Congress and the Commission, in the exercise
of its rulemaking authority, have deemed weighty.
And we will
not reward defendants for their decision to default and thus to
deprive the Commission of an opportunity to take discovery into
their roles in the scheme.
However, we decline to assess the
maximum penalties, on top of disgorgement, in the absence of a
basis
to
conclude
that
defendants’ culpability.
such
penalties
are
proportionate
to
Accordingly, we award civil penalties
in the amount of $160,000 against each defendant.
specialist”;
Tavella,
“Attorney
practicing
administrative,
political, intellectual property, and patent law”; Bagattin,
“Retired Teacher”; Ferrari, “Sales and Marketing”; Goldman,
“Delicatessen owner.” Compl. ¶ 48. As noted above, Tavella is
also part owner, with Sara Deutsch, of a restaurant. Id. ¶ 39.
22
CONCLUSION
The
45)
is
entering
Commission's
granted
on
judgment
supplement
its
to
motion
the
for
a
foregoing
afford
submission
the
as
terms.
Commission
to
interest that should be disgorged.
default
the
judgment
(Doc.
However,
we
an
amount
No.
defer
opportunity
of
to
prejudgment
Such supplemental submission
shall be due on January 23, 2015.
Dated:
New York, New York
January 6, 2015
~/) / ---~·
-~·~u~
NAOMI REICE BUCHWALD
§
UNITED STATES DISTRICT JUDGE
23
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