Securities and Exchange Commission v. Cope et al
OPINION AND ORDER: For the above reasons, it is hereby ORDERED that de Maison shall disgorge her ill-gotten gains in the amount of $4,240,049.30, plus prejudgment interest. IT IS FURTHER ORDERED that the SEC shall recalculate the amount of prej udgment interest owed by de Maison in accordance with the instructions in this Opinion and file a letter with its calculations by July 30. Any response, limited to discussions of the calculations alone, is due August 3. IT IS FURTHER ORDERED that de Maison shall pay a civil penalty of $4,240,049.30. IT IS FURTHER ORDERED that Malone shall disgorge her ill-gotten gains in the amount of $394,741.24, plus prejudgment interest to be calculated at the IRS underpayment rate, running fro m the date of the last received payment from Wikifamilies, Lustros, and Gepco, through to the present. IT IS FURTHER ORDERED that Malone shall pay a civil penalty of $125,000. IT IS FURTHER ORDERED that Mastromatteo and Traverse shall disgorge their ill-gotten gains in the amount of $58,753, plus prejudgment interest to be calculated at the IRS underpayment rate, running from August 1, 2014 through to the present. Mastromatteo and Traverse are jointly and severally liable for the di sgorgement payment. IT IS FURTHER ORDERED that Mastromatteo and Traverse shall pay a civil penalty of $58,753. Mastromatteo and Traverse are jointly and severally liable for the civil money penalty. IT IS FURTHER ORDERED that by August 6, 2018, the SEC shall submit a proposed order implementing the Court's rulings as to all four defendants. (Signed by Judge Denise L. Cote on 7/30/2018) (rro)
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 1 of 28
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE COMMISSION,
JASON COPE, IZAK ZIRK DE MAISON (F/K/A):
IZAK ZIRK ENGELBRECHT), GREGORY
GOLDSTEIN, STEPHEN WILSHINSKY, TALMAN :
HARRIS, WILLIAM SCHOLANDER, JACK
TAGLIAFERRO, VICTOR ALFAYA, JUSTIN
ESPOSITO, KONA JONES BARBERA, LOUIS
MASTROMATTEO, ANGELIQUE DE MAISON,
TRISH MALONE, KIERNAN T. KUHN, PETER
VOUTSAS, RONALD LOSHIN, GEPCO, LTD.,
SUNATCO LTD., SUPRAFIN LTD.,
WORLDBRIDGE PARTNERS, TRAVERSE
INTERNATIONAL, and SMALL CAP RESOURCE :
ANGELIQUE DE MAISON,
For the Securities and Exchange Commission:
Howard A. Fischer
John O. Enright
Brookfield Place, 200 Vesey Street,
New York, New York, 10281
For Trish Malone:
For Angelique de Maison:
Jeffrey B. Coopersmith
OPINION AND ORDER
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 2 of 28
Davis Wright Tremaine LLP
1201 Third Avenue, Ste. 2200
Seattle, Washington 98101
DENISE COTE, District Judge:
Pursuant to the judgments entered against them on consent,
the Securities and Exchange Commission (“SEC”) seeks an
assessment of civil penalties against three individuals -Angelique de Maison, Trish Malone, Louis Mastromatteo -- and one
entity, Traverse International.
For the reasons that follow,
the four defendants are ordered to pay disgorgement, prejudgment
interest, and civil penalties.
The above-captioned case, first brought by the SEC on
September 18, 2014, arises out of a series of fraudulent schemes
conducted by the defendants -- masterminded by defendant Izak
Zirk de Maison F/K/A/ Izak Zirk Engelbrecht (“Engelbrecht”) -between 2008 and 2014.1
In general, the SEC alleges that
This case is related to prior securities fraud litigation
before this Court. See generally SEC v. Milan Capital Group,
Inc., 00cv108 (DLC), 2000 WL 1682761 (S.D.N.Y. Nov. 9, 2000).
That litigation largely centered around the fraudulent activity
of Jason Cope (“Cope”) and, later, the SEC’s difficulty in
recovering from Cope. Cope is a defendant in the instant
litigation and has pleaded guilty to related criminal conduct in
the Northern District of Ohio. Judgment in this civil action
was entered against Cope on December 17, 2015.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 3 of 28
Englebrecht, with the aid of the co-defendants and others, would
cause corporations (“Fraudulent Issuers”)2 to issue tens of
millions of shares of restricted stock to himself and his
nominees, which he would then use for illegal distributions.
On October 22, 2014, after a conference held with the SEC
and counsel representing three defendants,3 the Court entered a
preliminary injunction order, enjoining the defendants from
committing federal securities violations and freezing the assets
of certain defendants and their spouses, including de Maison,
Mastromatteo, and Traverse (the “Freeze Order”).4
On June 15,
2015, after continuing its investigation into the alleged fraud,
the SEC filed an Amended Complaint.
The Amended Complaint
expanded the scope of the conduct charged: defendants were
added, the number of Fraudulent Issuers increased, the time
period of the allegedly violative conduct widened, and the
The Fraudulent Issuers were: Lenco Mobile Inc. (“Lenco”),
Kensington Leasing Inc. (“Kensington”), Wikifamilies Inc.
(“Wikifamilies”), Casablanca Mining Ltd. (“Casablanca”), Lustros
Inc. (“Lustros”), and Gepco, Ltd. (“Gepco”).
Counsel for defendants Engelbrecht, Sunatco, and Suprafin
appeared. Sunatco and Suprafin were entities controlled by
Engelbrecht. Final judgment was entered against Engelbrecht,
Sunatco, and Suprafin on October 13, 2015.
Malone was not subject to the Freeze Order. On December 23,
2016 the Freeze Order was modified to allow de Maison to pay
$93,478.65 in attorneys’ fees to Davis Wright Tremain and for
the payment of $25,000 to de Maison as compensation for her
efforts in connection with the sale of real estate.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 4 of 28
amount of relief sought increased.
Mastromatteo and Traverse
answered the Amended Complaint on September 18.
On October 7,
the SEC, in a status letter, informed the Court that it had
reached settlements or was engaged in settlement discussions
with multiple defendants, including de Maison.
Judgment against Malone was entered October 8, 2015.
Judgment was entered against de Maison on December 23, 2015.
Judgment was entered against Mastromatteo and Traverse on
January 4, 2016.
Along with each respective judgment, the Court
so ordered a Consent between the SEC and each settling
Pursuant to the terms of their respective Judgment and
Consent, Malone and de Maison agreed to eventually pay
disgorgement of their ill-gotten gains, along with prejudgment
interest, and a civil penalty.
Mastrometteo and Traverse’s
Judgment noted the following:
The Court shall determine whether it is appropriate to
order Defendants to pay disgorgement of ill-gotten gains,
prejudgment interest thereon, and a civil penalty pursuant
to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]
and Section 21(d)(3) of the Exchange Act [15 U.S.C. §
78u(d)(3)]. If it is determined that such disgorgement,
prejudgment interest, and a civil penalty is warranted, the
Court shall determine the amounts of the disgorgement and
civil penalty upon motion of the Commission.
In the Consent signed by Mastromatteo (in
his individual capacity and in his representative capacity on
behalf of Traverse), defendants “agree[d] that the Court shall
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 5 of 28
order disgorgement of ill-gotten gains, prejudgment interest
thereon, and a civil penalty pursuant” to the relevant statutes.
All defendants agreed that “for the
purposes of a [an SEC motion for disgorgement and/or civil
penalties], the allegations of the Complaint shall be accepted
and deemed as true by the Court.”
On January 26, 2018, the SEC moved for monetary relief
against de Maison, Malone, Traverse, and Mastromatteo.5
Specifically, the SEC requests disgorgement of ill-gotten gains
in the amount of $4,240,049.30 from de Maison, $394,741.24 from
Malone, $58,753 from Mastromatteo and Traverse, and that each
defendant pay prejudgment interest on their respective
The SEC has also asked that the Court impose
civil money penalties.
The SEC has not requested a specific sum
for those civil penalties, but has suggested multiple methods of
The SEC has not moved for monetary relief against ten
defendants whose claims were settled. Those defendants have all
pleaded guilty to conduct relating to matters alleged in the
SEC’s Amended Complaint in a criminal case before the Northern
District of Ohio. The SEC does not seek relief against those
defendants in light of the orders of restitution and prison
sentences imposed against them. Two other defendants, whose
claims were also settled, have not yet been sentenced: Kona
Jones Barbera and Jason Cope. Barbera’s sentencing has been
rescheduled to August 2, 2018; Cope’s sentencing has recently
been rescheduled to August 10, 2018. The SEC expects that any
sentence imposed on Cope and Barbera will include restitution,
and thus has not asked for disgorgement or civil penalties to be
imposed. The SEC has reserved the right to move for such
penalties if the restitution orders are less than the
anticipated disgorgement amount.
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Malone and de Maison both oppose the imposition of
disgorgement and civil penalties.
Mastromatteo and Traverse
have not opposed the SEC’s motion.
A summary of each of the
defendant’s underlying conduct relevant to the disgorgement and
civil penalties the SEC seeks, taken from the Amended Complaint,
I. De Maison
De Maison, Engelbrecht’s wife, sought out investors to
purchase unregistered securities in two of the Fraudulent
Issuers, Kensington and Casablanca.
She raised approximately $1
million for Kensington, and $3.5 million for Casablanca.
Maison did not transfer all proceeds from those investments to
the companies as promised, but used some of the proceeds to pay
her own personal expenses and diverted other proceeds to other
entities associated with the scheme.
De Maison advised
investors on the merits of potential investments and the
companies she was advertising.
Investors lost their entire
investments in Casablanca and Kensington.
She also arranged for
the execution of the governing agreements and the mailing of
stock certificates to investors.
The SEC identifies $748,000 in
ill-gotten gains from investments related to Kensington, and
$3,456,049.30 from investments related to Casablanca, for a
total of $4,240,049.30.
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De Maison made materially misleading statements concerning
another company of which she was an officer, Gepco.
provided quotes concerning the sale and purchase of diamonds for
a Gepco press release.
De Maison omitted material facts,
including that she was personally involved with the relevant
purchases and sales.
The SEC does not, in the instant motion,
identify any ill-gotten gains from de Maison’s involvement with
On December 23, 2015, the Court entered a partial judgment
against de Maison, accompanied by her signed Consent.
Consent, she agreed to be enjoined from violating Sections 5,
17(a)(1), and 17(a)(3) of the Securities Act; and Sections
10(b), 15(a), and 16(a) of the Exchange Act, and Rule 10b-5
Malone served as the Chief Financial Officer (“CFO”) for
several of the Fraudulent Issuers -- Lustros, Kensington,
Wikifamiles, and Gepco -- and also held positions at a number of
the other companies alongside Engelbrecht.
In her role as CFO,
Malone engaged in multiple unregistered securities offerings.
The SEC seeks ill-gotten gains in the form of Malone’s salary
during the periods she served as an officer of the Fraudulent
Issuers during unregistered offerings.
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Malone was at the center of many of Engelbrecht’s schemes
and fraudulent transactions.
For example, Malone helped to
merge Wikifamilies, at the time a shell company, into new
company, rename it, and conduct a “reverse merger,” allowing the
shell company to issue over 30 million shares of common stock,
including to herself and other co-defendants.
served as president, CFO, and secretary of Gepco and facilitated
the issuance of shares to Jason Cope, a co-defendant in this
action, and other individuals to liquidate in the open market.
Neither Gepco nor Wikifamilies, at the time, had registered any
of their securities with the SEC and no exemption from the
standard registration requirements applied.
The SEC has calculated $394,741.24 in ill-gotten gains from
the salary payments Malone received for her service as CFO of
the various companies.
Specifically, the SEC requests
disgorgement of $4,615.39, Malone’s pay for a week in May 2011,
during which Wikifamilies issued 31.5 million shares of
unregistered securities; disgorgement of $309,783.85, the sum of
Malone’s pay between June 2012 and January 2014, during which
time she was involved in the offering of unregistered shares of
Lustros; and disgorgement of $80,342.00, Malone’s pay between
February and September 2014, during which time she participated
in the unregistered offerings of Gepco securities.
On October 8, 2015, the Court entered a partial judgment
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 9 of 28
against Malone, accompanied by her signed Consent.
Consent she agreed to be enjoined from violating Sections 5,
17(a)(1), and 17(a)(3) of the Securities Act; and Section 10(b)
of the Exchange Act, and Rule 10b-5 thereunder.
III. Mastromatteo and Traverse
Mastromatteo, individually and through his corporation
Traverse, participated in a fraudulent scheme to acquire and
sell more than 2.5 million shares of Gepco stock in an
unregistered offering, after which Mastromatteo funneled most of
the proceeds to Cope.
Cope used the proceeds to pay a judgment
to the SEC that had previously been entered against him by this
Court in the Milan litigation.
In return, Cope made payments
back to Mastromatteo through Traverse.
The SEC seeks $58,753 in
ill-gotten gains, the amount Mastromatteo allegedly received in
payments from Cope.
On January 5, 2016, the Court entered a partial judgment
against Mastromatteo and Traverse, accompanied by a signed
In the Consent, they agreed to be enjoined from
violating Sections 5(a), 5(c), and 17(a) of the Securities Act;
and Section 10(b) of the Exchange Act, and Rule 10b-5
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 10 of 28
The instant motion was filed on January 26, 2018.
who is appearing pro se, submitted a response dated March 26.6
De Maison filed a response on March 30.
Traverse have not filed any response.
on April 27.
The SEC filed its reply
Malone submitted an unsolicited sur-reply dated
“Once the district court has found federal securities law
violations, it has broad equitable power to fashion appropriate
remedies, including ordering that culpable defendants disgorge
SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir.
2013) (citation omitted).
Disgorgement is used “to prevent
wrongdoers from unjustly enriching themselves through
violations, which has the effect of deterring subsequent fraud.”
SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006).
See also SEC
v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997).
The opposition was received and entered on the docket on March
Malone’s letter was received and entered on the docket on July
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 11 of 28
size of a disgorgement order need not be tied to the losses
suffered by defrauded investors.”
Official Committee of
Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81
(2d Cir. 2006) (citation omitted).
Courts may even require
disgorgement “regardless of whether the disgorged funds will be
paid to . . . investors as restitution.”
Kokesh v. SEC, 137 S.
Ct. 1635, 1644 (2017) (citation omitted).
“The district court has broad discretion not only in
determining whether or not to order disgorgement but also in
calculating the amount to be disgorged.”
SEC v. Contorinis, 743
F.3d 296, 301 (2d Cir. 2014) (citation omitted).
disgorgement, the district court engages in “factfinding . . .
to determine the amount of money acquired through wrongdoing,”
and then issues “an order compelling the wrongdoer to pay that
amount plus interest.”
Cavanagh, 445 F.3d at 116.
Court has recently noted that, at least for statute of
limitations purposes, “SEC disgorgement is imposed for punitive
Kokesh, 137 S. Ct. at 1643.
Kokesh, however, did
not disrupt settled precedent that courts “possess authority to
order disgorgement in SEC enforcement proceedings.”
Id. at 1542
The Second Circuit has noted that Kokesh “held that
disgorgement ordered as a consequence of a violation of
securities laws was a ‘penalty’ for purposes of 28 U.S.C. §
2462, which imposes a five-year statute of limitation . . . .”
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“[B]ecause 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
Razmilovic, 738 F.3d at 31.
disgorgement amount “need only be a reasonable approximation of
profits causally connected to the violation; any risk of
uncertainty in calculating disgorgement should fall on the
wrongdoer whose illegal conduct created that uncertainty.”
v. First Jersey Securities, Inc., 101 F.3d 1450, 1475 (2d Cir.
1996) (citation omitted).
The SEC bears the burden “of establishing a reasonable
approximation of the profits causally related to the fraud,” but
once it has met this burden, “the burden shifts to the defendant
to show that his gains were unaffected by his offenses.”
Razmilovic, 738 F.3d at 31 (citation omitted).
A defendant may
not avoid disgorgement by arguing that he had limited or no
control over the ill-gotten gains, or that the gains did not
“personally accrue” to him.
Contorinis, 743 F.3d at 306.
Additionally, an order which only accounts for the profits
retained by the wrongdoer is an inadequate measure of
See id. at 305-06 (“[T]he proposition,
unsupported in our case law, that the wrongdoer need disgorge
United States v. Brooks, 872 F.3d 78, 91 (2d Cir. 2017)
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 13 of 28
only the financial benefit that accrues to him personally . . .
is without foundation.”).
Indeed, to limit disgorgement to the
direct pecuniary benefit of the wrongdoer “would run contrary to
the equitable principle that the wrongdoer should bear the risk
of any uncertainty affecting the amount of the remedy” and
“permit evasion of [the prohibited conduct] by allowing the
direction of benefits to acquaintances.”
Id. at 306.
II. Prejudgment Interest
As with disgorgement, an award of prejudgment interest lies
within the discretion of the court.
See First Jersey, 101 F.3d
Generally, “an award of prejudgment interest may be
needed in order to ensure that the defendant not enjoy a
windfall as a result of its wrongdoing.”
Slupinski v. First
Unum Life Ins. Co., 554 F.3d 38, 54 (2d Cir. 2009).
In deciding whether an award of prejudgment interest is
warranted, a court should consider (i) the need to fully
compensate the wronged party for actual damages suffered,
(ii) considerations of fairness and the relative equities
of the award, (iii) the remedial purpose of the statute
involved, and/or (iv) such other general principles as are
deemed relevant by the court.
First Jersey, 101 F.3d at 1476 (citation omitted).
It is within the “discretion of a court to award
prejudgment interest on the disgorgement amount for the period
during which a defendant had use of [its] illegal profits.”
Razmilovic, 738 F.3d at 36.
“In an enforcement action brought
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 14 of 28
by a regulatory agency, the remedial purpose of the statute
takes on special importance.”
First Jersey, 101 F.3d at 1476.
The Second Circuit has approved the use of the “IRS underpayment
rate” to calculate prejudgment interest because that rate
“reflects what it would have cost to borrow the money from the
government and therefore reasonably approximates one of the
benefits the defendants received from its fraud.”
defendant has had some or all of her assets frozen “at the
behest of the government in connection with [an SEC civil]
enforcement action, an award of prejudgment interest relating to
those funds would be inappropriate” with respect to the period
covered by the freeze order, because the defendant has already,
for that period, “been denied the use of those assets.”
Razmilovic, 738 F.3d at 36.
III. Civil Money Penalty
The Securities Act and the Exchange Act authorize three
tiers of civil penalties.
See 15 U.S.C. § 77t(d); 15 U.S.C. §
Under each statute, a first-tier penalty may be imposed for
any violation; a second-tier penalty may be imposed if the
violation involved fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory
requirement; a third-tier penalty may be imposed when, in
addition to meeting the requirements of the second tier,
the violation directly or indirectly resulted in
substantial losses or created a significant risk of
substantial losses to other persons.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 15 of 28
Razmilovic, 738 F.3d at 38 (citation omitted).
At each tier,
“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 $5,000, $50,000, and $100,000.”
Beyond these restrictions, the amount of the penalty is
within “the discretion of the district court.”
The amount of the penalty should be determined “in
light of the facts and circumstances” surrounding the
15 U.S.C. § 78u(d)(3).
Courts in this district
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
SEC v. Tavella, 77 F. Supp. 3d 353, 362-63 (S.D.N.Y. 2015)
While the SEC requests the imposition of a civil money
penalty for each defendant, it does not request a specific
penalty amount for any defendant.
Instead, the SEC proposes
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 16 of 28
alternative methods of calculating a penalty: a penalty based on
a defendant’s pecuniary gain, a penalty assessed weighing the
defendant’s role in an illegal scheme, or a penalty based on the
number of statutory or regularity violations the defendant has
a. De Maison
The SEC seeks $4,240,049.30 in disgorgement, with
prejudgment interest in the amount of $938,201.13, and the
imposition of a money penalty.9
$4,240,049.30 in disgorgement is
a reasonable approximation of the extent to which de Maison
profited from violations of the federal securities laws to which
she has admitted.
In light of the allegations in the Amended
Complaint, which are deemed true for the purposes of this
motion, the SEC has demonstrated that between July 2010 and
October 2011 de Maisons’s illegal conduct generated proceeds of
De Maison argues that a disgorgement order is
She argues that Engelbrecht, her husband at the
time of the fraudulent scheme, had complete control over her
The SEC clarified in its reply memorandum that it inadvertently
included an investment of $200,000 in its original request for
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 17 of 28
She claims she did not understand that she
was part of a fraud and that she simply carried out instructions
given to her by Engelbrecht.
November 5, 2015.
De Maison signed her Consent on
That document states “[d]efendant agrees that
the Court shall order the payment of sums by which she has been
unjustly enriched, disgorgement ill-gotten gains, prejudgment
interest thereon and a civil penalty.”
That Consent further
states, the “defendant will be precluded from arguing that she
did not violate the federal securities laws as alleged in the
complaint” and that for the purposes of the remedies motion that
“the complaint shall be accepted as and deemed true by the
She is precluded from contesting her liability here.
With respect to the amount of disgorgement sought, de
Maison does not dispute that she raised that amount of money in
She argues instead that she did not
receive $4.2 million in ill-gotten gains for her personal
Further, she argues that the investment money was
immediately diverted into other accounts over which she had no
These arguments are unavailing.
Disgorgement need not
be tied to the direct benefit of the defendant, nor does the SEC
need to demonstrate that the defendant exercised full control
over the ill-gotten gains.
Finally, de Maison argues she returned over $1 million to
the investors, so ill-gotten gains have been repaid.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 18 of 28
is significantly less than the amount of disgorgement the SEC
In any event, de Maison has not carried her burden to
demonstrate that any of the ill-gotten gains were repaid to the
De Maison submitted many pages reflecting financial
transactions which do not demonstrate what she argues they do.
The SEC has examined those documents and has discovered no
evidence of a repayment for the investments at issue here.
fact, de Maison’s largest claimed “return” to an investor of
$300,000 is actually a promissory note for that amount, which
she defaulted on.
Even when the documents de Maison submitted in opposition
to the SEC’s motion reflect payment by de Maison to an investor,
there is no evidence of linkage to Kensington or Casablanca.
For example, de Maison offers a September 20, 2013 transfer for
$10,000 to investor Frank Mastronuzzi.
The memorandum line on
the transfer, however, reads “Refund final pmt of purchase of
“LSTS” is the ticker symbol for another Fraudulent
The disgorgement the SEC seeks from de Maison
is not related to investments in Lustros.
The same is true for other documents de Maison submitted.
For example, the instructions for a March 11, 2013 wire transfer
to Todd Williamson read “For The Blue Painting.”
documents simply include information that transfers were made,
but include nothing to suggest that the transfers were made as
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 19 of 28
reimbursement for the investments at issue here.
De Maison never actually argues that the payments reflected
in these documents were related to the transactions for which
the SEC seeks disgorgement.
Instead, she broadly argues that
the investors were “repaid” and therefore her disgorgement
amount should be reduced.
The documents she includes for that
proposition do not support an inference that she “repaid” or
refunded investors, let alone for the fraudulent investments at
issue in the SEC’s motion.
In addition to disgorgement, de Maison should pay
prejudgment interest to prevent her from obtaining a benefit of
what amounts to an interest free loan procured as a result of
The SEC seeks prejudgment interest running
from Malone’s last-received payment from each issuer –Kensington and Casablanca -- from which she received improper
payments to the present day.10
This request amounts to
Prejudgment interest will not be collected, however, on any
assets that were frozen from the date those assets were frozen.
When a defendant’s funds have been frozen in connection with an
enforcement action, and are now available to satisfy the
disgorgement order, the defendant should not be ordered to pay
For Kensington, May 1, 2011; for Casablanca, November 1, 2011.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 20 of 28
prejudgment interest on those funds.
See Razmilovic, 738 F.3d
When a defendant's funds are so frozen, if the
freeze is not violated, the defendant derives no benefit from
the ill-gotten gains.
$612,551.64 of de Maison’s assets were
frozen the date the Freeze Order went into effect, October 22,
Those funds were put into a trust account controlled by
de Maison’s counsel, Davis Wright Tremaine.
As of December 23,
2016, the date the Freeze Order was modified, $494,072.99
remained in that trust account.
The SEC does not argue that de
Maison violated the Freeze Order.
The frozen assets will
presumably be turned over to the SEC in partial satisfaction of
the disgorgement order.
The SEC may not collect prejudgment
interest on the frozen amount.
Given that frozen assets,
however, do not completely satisfy the disgorgement order,12 the
SEC may collect prejudgment interest on any outstanding amount
running through to the present day.
Some courts in this District have cabined Razmilovic’s holding
to the proposition that a defendant whose assets have been
frozen may not be ordered to pay prejudgment interest at the IRS
rate. See SEC v. Tavella, 77 F. Supp. 3d 353, 360-361 (S.D.N.Y.
Jan 6, 2015). Determining the scope of Razmilovic is
unnecessary here as the SEC has asked for an application of the
IRS underpayment rate, not a different rate and, as such, even
at its most narrow, Razmilovic is on point. In any event, the
issue of whether to impose prejudgment interest is soundly
within the discretion of the district court.
De Maison has not argued or made any showing that any assets
other than the funds in trust account were frozen.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 21 of 28
Finally, De Maison’s violations of the securities laws
support the imposition of a third-tier civil penalty.
had a principal role in a fraudulent scheme that deprived
investors of over $4 million.
This alone warrants imposition of
a third-tier penalty under the relevant statutes, satisfying the
requirement that the violations involved fraud and resulted in
In de Maison’s case, considering the
seriousness of the fraud, the significant role she played, and
considering the personal benefits that she received from the
violations of the securities laws, the maximum fine -- an amount
equal to the disgorgement sum of $4,240,049.30 -- is
De Maison urges the Court not to impose a civil penalty or,
if a penalty is imposed, it should be “minimal.”
that she has cooperated with the SEC and Department of Justice
throughout the SEC’s enforcement action.
that she is destitute.
She also reiterates
While consideration of a defendant’s
financial consideration is a factor to be considered in
assessing a civil penalty, it is but one of many a court
considers when exercising its discretion.
was egregious and recurrent.
De Maison’s conduct
It resulted in substantial losses
The seriousness of her wrongdoing justifies a
serious punitive response.
A civil penalty equal to the
disgorgement sum is appropriate.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 22 of 28
The SEC seeks $394,741.24 in disgorgement of the documented
wages and payments Malone received for her services to
Engelbrecht and the Fraudulent Issuers, prejudgment interest of
$55,539.30, and a civil penalty.
$394,741.24 is a reasonable
approximation of the extent to which Malone profited from
violations of the federal securities laws to which she has
admitted for purposes of this motion.
The SEC’s disgorgement
request is reasonable.
Like de Maison, Malone may not contest her liability here.
A Section 5 claim is a strict liability claim; any argument that
Malone did not intend to help carry out fraudulent transactions
is not germane.
See SEC v. Cavanagh, 98cv1818 (DLC), 2004 WL
1594814, at *19 (S.D.N.Y. July 16, 2004) (“[Defendant] contends
that the disgorgement remedy is limited to securities violations
involving fraudulent intent.
Using their powers of equity,
courts can and have granted disgorgement against defendants
found liable under strict liability statutes such as Section
5.”), aff’d, SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006).
de Maison, Malone signed a Consent in which she “agree[d] that
the Court shall order disgorgement of ill-gotten gains,
prejudgment interest thereon, and a civil penalty.”
consented that she would be “precluded from arguing that she did
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 23 of 28
not violate the federal securities laws as alleged in the
Malone resists disgorgement with several arguments.
Malone argues that she signed the Consent because the SEC
represented that she would not have to pay a penalty.13
not a credible argument; the text of the Consent she signed
explicitly and unambiguously denotes that disgorgement and a
civil penalty will be imposed.
Malone next argues that the money the SEC seeks does not
constitute ill-gotten gains because it reflects a salary she
earned for her legitimate work for the Fraudulent Issuers.
alleges that she had no knowledge of the scheme perpetrated by
her co-defendants and was simply and dutifully carrying out
As a threshold matter, Malone is precluded from
contesting her liability given the Consent she signed.
the allegations in the Amended Complaint, taken as true for the
purposes of this motion, belie Malone’s protestations.
in her capacity as an officer of Kensington, Wikifamilies, and
Gepco, helped further illegal activities, including unregistered
securities offerings and a reverse merger of a public shell
Malone finally contends that the amount sought by the SEC
Malone reiterates this, and other arguments made in her
opposition to the motion, in a letter received on July 13, 2018.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 24 of 28
is financially crippling.
First, the SEC seeks no disgorgement
beyond documented payments Malone received.
Second, courts in
this District have generally agreed that financial hardship does
not preclude the imposition of an order of disgorgement.
e.g., SEC v. Wyly, 56 F. Supp. 3d 394, 406 (S.D.N.Y. 2014); SEC
v. Taber, 13mc282 (KBF), 2013 WL 6334375, at *2 (S.D.N.Y. Dec.
4, 2013) (collecting cases).
The imposition of prejudgment interest on Malone is
The SEC seeks prejudgment interest of $55,429.30,
running from Malone’s last-received salary payment in connection
with work performed for each Fraudulent Issuer -- Wikifamilies,
Lustros, and Gepco.14
Malone contests the imposition of
disgorgement in its entirety, but makes no separate argument
with respect to prejudgment interest or a specific amount of
Finally, Malone’s violations of the securities laws support
the imposition of a second-tier civil money penalty.
unlawful actions involved fraud, deceit, manipulation, or
deliberate or reckless disregard of the securities laws and
Malone should be subject to a severe penalty, but
not the maximum one.
She is ordered to pay $25,000 per
For Wikifamilies, June 1, 2011; for Lustros, February 1, 2014;
for Gepco, October 1, 2014.
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 25 of 28
violation, totaling $125,000.15
c. Mastromatteo and Traverse
The SEC seeks $58,753 in disgorgement from Mastromatteo and
Traverse (together, “Mastromatteo”), $7,461.69 in prejudgment
interest, and a civil penalty.
Disgorgement is appropriate
here, and the SEC’s request is a reasonable approximation of the
extent to which Mastromatteo profited from violations of the
federal securities laws to which he has admitted for purposes of
$58,753 in disgorgement is a reasonable approximation of
Mastromatteo’s ill-gotten gains.
This amount is documented in
bank deposits to accounts in Mastromatteo’s own name and in the
name of Traverse, an entity he controlled.
The payments were
made by Cope directly or were proceeds of the sales of Gepco
Mastromatteo has not opposed the SEC’s motion.
not attempted to show that the payments were unaffected by his
Mastromatteo and Traverse are jointly and severally
liable for the civil money penalty.
See First Jersey, 101 F.3d
at 1475-76 (affirming district court’s order of joint and
several disgorgement against First Jersey and its sole owner,
The Amended Complaint alleged that Malone violated Sections 5,
17(a)(1), and 17(a)(3) of the Securities Act; Section 10(b) of
the Exchange Act, and Rule 10b-5 thereunder, totaling five
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 26 of 28
noting that “[n]o more than the total amount of First Jersey's
unlawful profits, plus interest on those amounts, is to be
The SEC seeks $7,461.69 in prejudgment interest, calculated
at the IRS underpayment rate from August 1, 2014, immediately
following the last month Mastromatteo and Traverse received
illegal payments from Cope, through to the present.
imposition of prejudgment interest on Mastromatteo and Traverse
While prejudgment interest should not be
collected on any assets that were frozen, no party has made a
showing that any of Mastromatteo or Traverse’s assets were
actually frozen pursuant to the Freeze Order.
Traverse failed to respond to the SEC’s instant motion.
such, the SEC may collect prejudgment interest from August 1,
Finally, the imposition of a second-tier civil money
penalty is appropriate.
Mastromatteo, individually and through
Traverse, knowingly and deliberately disregarded the securities
laws and regulations by acquiring millions of shares of Gepco
stock in an unregistered offering, and then channeling the
proceeds to Cope.
Mastromatteo benefitted directly from this
scheme through kick-backs from Cope.
Mastromatteo is fully
culpable for his violations, from which he profited.
relatively small amount of pecuniary gains, a penalty equal to
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 27 of 28
that amount, $58,753, is appropriate, which is well within the
statutory range given the number of violations.
and Traverse are jointly and severally liable for the civil
For the above reasons, it is hereby
ORDERED that de Maison shall disgorge her ill-gotten gains
in the amount of $4,240,049.30, plus prejudgment interest.
IT IS FURTHER ORDERED that the SEC shall recalculate the
amount of prejudgment interest owed by de Maison in accordance
with the instructions in this Opinion and file a letter with its
calculations by July 30.
Any response, limited to discussions
of the calculations alone, is due August 3.
IT IS FURTHER ORDERED that de Maison shall pay a civil
penalty of $4,240,049.30.
IT IS FURTHER ORDERED that Malone shall disgorge her illgotten gains in the amount of $394,741.24, plus prejudgment
interest to be calculated at the IRS underpayment rate, running
from the date of the last received payment from Wikifamilies,
Lustros, and Gepco, through to the present.
IT IS FURTHER ORDERED that Malone shall pay a civil penalty
IT IS FURTHER ORDERED that Mastromatteo and Traverse shall
Case 1:14-cv-07575-DLC-RWL Document 335 Filed 07/30/18 Page 28 of 28
disgorge their ill-gotten gains in the amount of $58,753, plus
prejudgment interest to be calculated at the IRS underpayment
rate, running from August 1, 2014 through to the present.
Mastromatteo and Traverse are jointly and severally liable for
the disgorgement payment.
IT IS FURTHER ORDERED that Mastromatteo and Traverse shall
pay a civil penalty of $58,753.
Mastromatteo and Traverse are
jointly and severally liable for the civil money penalty.
IT IS FURTHER ORDERED that by August 6, 2018, the SEC shall
submit a proposed order implementing the Court’s rulings as to
all four defendants.
New York, New York
July 30, 2018
United States District Judge
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