Securities and Exchange Commission v. Ramirez
Filing
39
OPINION AND ORDER in support of rulings at Docket Nos. 37 and 38. See attached. Notice of compliance due by 5/25/2018. SEC may move for the additional remedies in case it is unable to reach and agreement by 6/15/2018. Signed by Judge Pedro A. Delgado-Hernandez on 4/30/2018.(LMR)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
CIVIL NO. 15-2365 (PAD)
v.
JOSE G. RAMÍREZ, JR.,
Defendants.
OPINION AND ORDER
Delgado-Hernández, District Judge.
The Securities and Exchange Commission (“SEC”) initiated this action against José G.
Ramírez, Jr., alleging that he violated Sections 17(a)(1)-(3) of the Securities Act of 1933 (the
“Securities Act”), 15 U.S.C. §§ 77q(a)(1)-(3), Section 10(b) of the Securities Exchange Act of
1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R.
§§ 240.10b-5(a)-(c), by way of a fraudulent scheme involving material omissions and
misrepresentations to customers in order to purchase and sell approximately $50 Million in closedend funds (Docket No. 1 at ¶¶ 1, 4). Before the court is SEC’s “Motion for Partial Summary
Judgment on the Issue of Liability and Accompanying Memorandum of Law” (Docket Nos. 21
and 22). Ramírez opposed and filed a “Motion to Strike” (Docket Nos. 29-31). The SEC replied
(Docket No. 34). Because there is ample evidence of Ramírez’s liability, the SEC’s motion is
GRANTED.
I.
BACKGROUND
Ramírez was a registered representative of UBS Financial Services Inc. of Puerto Rico
(“UBS-PR”)(Docket No. 1 at ¶ 7). The SEC claims that from approximately 2006 through
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
Opinion and Order
Page 2
approximately 2013, Ramírez made material omissions and misrepresentations to customers and
effected a fraudulent scheme that increased his compensation by soliciting customers to
improperly use proceeds from lines of credit offered by a UBS-PR affiliate in order to purchase
securities. Id. at ¶¶ 1, 3. This, despite the fact that he knew UBS-PR’s policy and the line of credit
agreements prohibited customers from using loan proceeds to purchase securities. Id. at ¶ 2.
II.
STANDARD OF REVIEW
Summary judgment is appropriate when “the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to judgment as a matter
of law.” Fed. R. Civ. P. 56(c). The purpose of summary judgment is to pierce the pleadings and
assess the proof in order to see whether there is need for trial. Mesnick v. General Elec. Co., 950
F.2d 816, 822 (1st Cir. 1991). The party moving for summary judgment bears the initial
responsibility of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v.
Catrett, 477 U.S. 317, 323 (1986).
A factual dispute is “genuine” if it could be resolved in favor of either party. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 249 (1986). It is “material” if it potentially affects the outcome
of the case in light of applicable law. Calero-Cerezo v. U.S. Dept. of Justice, 355 F.3d 6, 19 (1st
Cir. 2004). All reasonable factual inferences must be drawn in favor of the party against whom
summary judgment is sought. Shafmaster v. U.S., 707 F.3d. 130, 135 (1st Cir. 2013). Conclusory
allegations, empty rhetoric, unsupported speculation, or evidence which, in the aggregate, is less
than significantly probative will not suffice to ward off a properly supported summary judgment
motion. Nieves-Romero v. U.S., 715 F.3d 375, 378 (1st Cir. 2013)(citing Rogan v. City of Boston,
267 F.3d 24, 27 (1st Cir.2001))(internal quotation marks omitted).
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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III.
A.
FINDINGS OF FACTS1
Background
Ramírez was a registered representative of UBS-PR from approximately 1997 until 2014
(Docket No. 22-1, “Plaintiff’s Statement of Material Uncontested Facts in Support of Plaintiff’s
Partial Motion for Summary Judgment on the Issue of Liability” (“SUMF”) at ¶ 1). See also
Docket No. 30, defendant’s “Counterstatement of Material Facts” (“OSUMF” at ¶ 1).2 While at
UBS-PR, he was a proponent of UBS-PR’s closed-end funds (“CEFs”).3 He was the registered
representative of record for approximately 350 customer accounts, most if not all of which held
shares of CEFs. SUMF at ¶ 2.4 He favored CEFs because they offered an attractive yield,
advantageous reinvestment options, and tax advantages to customers. SUMF at ¶ 3.5 CEFs paid
1
As statements of fact, plaintiff submitted 37 numbered paragraphs. While Local Rule 56(b) requires a motion for summary
judgment to be supported by “separate, short, and concise statement of material facts,” L.Civ.R. 56(b)(emphasis added), some of
the SEC’s paragraphs were somewhat extensive and included more than one issue of fact. Even though the court reviewed every
statement submitted by the parties, it will only consider and include in this Opinion and Order those facts that are material for
purposes of summary judgment as mandated by Fed.R.Civ.P. 56.
Ramírez opposed summary judgment via a “Motion to Strike” (Docket No. 29) and an “Opposition to Motion for Partial Summary
Judgment” (Docket No. 31) with an accompanying “Counterstatement of Material Facts” (Docket No. 30). The “Motion to Strike”
states that most of the SEC’s exhibits are inadmissible, and as such the court should strike them from the record and deny the
motion for summary judgment. These arguments are analyzed and mostly rejected in Section IVB. The “Opposition to Motion for
Partial Summary Judgment” and “Counterstatement of Material Facts” reiterate the inadmissibility of the SEC’s documents,
arguing that the SEC’s SUMFs should be deemed denied, without more, because of Ramírez’s assertion of Fifth Amendment rights.
This argument is considered and rejected in Section IVA. Defendant did not attempt to controvert any of the SEC’s SUMFs by
presenting evidence.
2
3
Ramírez contends this statement is not properly supported. OSUMF at ¶ 2. Vanessa Ortiz testified that Ramírez focused on
promoting Puerto Rico CEFs “for everybody” and as one of the “two big areas for him” (Docket No. 22-5 at p. 40, lines 7-14).
That Ramírez also “focused” on bonds does not make the fact that he was a proponent of CEFs any less true. Moreover, he testified
to that, when he stated that UBS closed-end funds were “a big product for me” (Docket No. 22-6 at p. 46, lines 18-22).
Ramírez argues that the last sentence of the SEC’s SUMF at ¶ 2 to the effect that all of his accounts held shares of closed-end
funds is exclusively supported by his assertion of the Fifth Amendment privilege, making it legally insufficient. OSUMF at ¶ 2.
The argument lacks merit. Although the SEC supported the statement with Ramírez’s testimony, it is testimony in connection with
which the privilege was not raised. Upon being asked how many clients he had in his books when he left UBS, Ramírez answered
“350, around 350 accounts” and after being asked how many of those clients had closed-end funds, Ramírez answered “around
350” (Docket No. 22-6, p. 47, lines 2-5).
4
As described in the Complaint, CEF’s are closed-end investment management companies incorporated under the laws of Puerto
Rico, available only to Puerto Rico residents (Docket No. 1 at ¶ 19). They are non-marginable; are not registered in the SEC; are
not traded on any exchange or quoted on any quotation service (id.); and are significantly leveraged, financing approximately 50%
of their total assets, thus bearing the concomitant risk level. Id. at ¶ 20. Nearly all of them invest in similar securities, with
investment portfolios generally concentrated in Puerto Rico municipal bonds, which produce tax-free interest income. Id. Dividend
5
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
Opinion and Order
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brokers a 3% commission at the initial offering. SUMF at ¶ 4.6 Even though investing in CEFs
had risks such as lack of liquidity and of off-island diversification, SUMF at ¶ 5,7 Ramírez did not
explain those risks to clients (id.),8 some of whom even believed, erroneously, that the CEFs were
bonds. SUMF at ¶ 6.
B. Lines of Credit
UBS-PR offered its customers non-purpose lines of credit (“LOCs”) from a Utah-based
affiliate, UBS Bank USA (“UBS-USA”), at no initial cost to the customer and a low interest rate.
SUMF at ¶ 7.9 Registered representatives received additional compensation based on the amount
drawn on customers’ LOCs. SUMF at ¶ 9.10 Nonetheless, UBS-USA’s loan agreements and UBSPR’s internal policy prohibited the use of LOC proceeds to purchase, carry, or trade in securities.
payments to residents of Puerto Rico are tax-exempt. Id. To be eligible for tax benefits, CEF’s portfolios must be comprised of at
least 67% in Puerto Rico issuers. Id. Although CEF’s have a high percentage of their portfolios in Puerto Rico bonds, they are not
fixed-income securities. Id. at ¶ 21. Payable dividends vary depending on a number of factors, including prevailing variable margin
loan rates payable by the particular CEF, interest rates, the market value of securities within the CEF’s and various fees and
expenses. Id. In response to this description, Ramírez invoked his constitutional right against self-incrimination. See, Docket No.
8 at ¶¶ 19, 20, 21.
As submitted by the SEC, this SUMF initially read: “CEFs paid brokers a 3% commission making them the highest paying
securities registered representatives could sell.” Upon defendant’s objection (OSUMF at ¶ 4) and the SEC’s response (Docket No.
5, p. 9), the court has modified it to reflect the referenced testimony more appropriately. Either way, as the SEC suggests, whether
the CEFs were the highest commission paying securities is not an issue of material fact. And the fact that Ramírez received
commissions, which is material, is established by the court’s modification.
6
Ramírez posits that the fact that CEFs “had risks, such as the lack of liquidity and lack off-island diversification” is exclusively
supported by his assertion of privilege during his deposition, but defendant did not claim the Fifth Amendment privilege in the
testimony that the SEC referenced in support of that item (Docket No. 22-6 at p. 50-51; Docket No. 34 at p. 10).
7
Ramírez maintains that this fact is not supported by Vanessa Ortiz’s testimony. Ortiz stated that Ramírez “didn’t talk a lot about
risks . . . And he would talk about fluctuations, normal fluctuations, but never using principal in large amounts or never the type of
risk assessments . . . He would talk about the good features of the bonds first and then of the funds later on. But never went into
risk disclosure of you might lose everything. Never heard that from him” (Docket No. 22-5 at p. 36, lines 3-15). The testimony
supports the fact to which it is linked.
8
9
Ramírez claims the fact that UBS-PR offered LOCs from UBS-USA and at a low interest is not supported by the referenced
documents (OSUMF at ¶ 7). Exhibit 9 is a Credit Line Account Application that bears the name UBS Bank USA on every page,
discusses interest terms, and states “All decisions made by bank regarding the credit line will be made in Utah (Docket No. 2210).” This is sufficient to establish that LOCs were provided from the Utah-based affiliate (Docket No. 34 at p. 10).
The court modified the SEC’s proposed SUMF, as it could not ascertain where the supporting documents established that the
registered representatives also received “credit for new assets when an LOC is opened.”
10
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
Opinion and Order
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SUMF at ¶ 7.11
See also SUMF at ¶ 11.
UBS-PR’s internal policy required registered
representatives to take reasonable steps to ensure customers understood the risks associated with
taking an LOC, SUMF at ¶ 8,12 which included making sure the customers understood the risks
they faced in the event their collateral became insufficient due to market declines. Id. In those
circumstances, the customer could be required to increase collateral, repay the borrowed funds,
and/or sell securities. Id.13
Each application for a LOC contained a “UBS Bank USA Know Your Customer:
Appropriateness and Client Verification” form. SUMF at ¶ 12. By singing the form, the registered
representative represented that he had explained to the customer that: (1) BUSA could demand
repayment of the loan at any time; and (2) if the value of the pledge collateral fell below BUSA’s
maintenance requirements, BUSA could require the customer to deposit additional collateral
and/or sell the pledged collateral to repay the loan. Id.14
11
The court notes that the SEC has not specified pages or paragraphs in some of the referenced documents. For example, in support
of the third sentence of SUMF at ¶ 7, the SEC included “Ex. 9, LOC Application…” yet did not point to a specific page or paragraph,
which forced the court to devote additional time and effort to find the information. See Docket No. 22-10 at p. 5, ¶ 7 and p. 7, ¶ 7;
Docket No. 22-15 at pp. 1, 5.
In support of SUMF at ¶ 8, the SEC references “Ex. 14 Credit Line Compliance Policy” but points to no particular page or section
of that document. Upon review, the court located the cited material at p. 3, ¶ 2 of Exhibit 14 (Docket No. 22-15).
12
In opposition of SUMF at ¶ 8, Ramírez merely states “[d]enied for the same reasons as the preceding paragraph.” The previous
paragraph was denied for various reasons and in different contexts, so the court is unclear as to what Ramírez is referring to. Hence,
the denial is deemed waived. See, U.S. v. Zannino, 895 F.2d 1, 17 (1st Cir. 1990)(“It is not enough merely to mention a possible
argument in the most skeletal way, leaving the court to do counsel’s work, create the ossature for the argument, and put flesh on
its bones”).
13
14
In support of SUMF at ¶ 12, the SEC references Exhibit 19. However, it points to no particular page or section of that document.
Upon review, the court found the materials referenced at p. 15 at ¶ 2 of Exhibit 19 (Docket No. 22-20).
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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C. Ramírez’s Scheme
Ramírez was aware that UBS-PR policy did not allow customers to use LOC proceeds to
purchase securities, and that UBS-USA’s LOC loan agreement prohibited it. SUMF at ¶ 10.15
Despite those prohibitions, he presented customers a way to make additional money by using
LOCs to increase their CEF holdings, recommending the strategy of using proceeds from LOCs to
purchase CEFs since at least 2006. SUMF at ¶15. Customers could borrow money through the
LOC at rates as low as 1.5 percent, with the CEFs generating returns of greater than 6 percent.
SUMF at ¶ 16. So in some instances, Ramírez would call customers over the telephone to request
that they sign the LOC documentation. SUMF at ¶ 14.
In order to circumvent UBS-PR’s policy against using LOCs to purchase securities,
Ramírez directed his customers to request wire transfers or write checks from their LOCs to the
customers’ personal bank accounts in other banks. SUMF at ¶ 17. Afterwards, customers were
instructed, to deposit the funds recently deposited in their outside bank accounts, into their UPSPR brokerage accounts, to allow Ramírez to execute trades for additional CEF shares. SUMF at
¶¶ 17 and 22. The scheme avoided detection because UBS-PR did not have a procedure designed
to catch transfers from LOCs to outside banks and from outside banks back to UBS-PR. SUMF
at ¶ 18.
D. Ramírez’s Material Representations and Omissions
Ramírez misrepresented to customers that there was no violation of UBS-PR policy as long
as the proceeds were first transferred to an outside bank account. Id. In several meetings with
customers, he would take a dollar bill out of his wallet and say “if I give you this dollar and you
Exhibit 18 submitted by the SEC in support of SUMF at ¶ 10 includes a “Know Your Customer Form,” signed by Ramírez at p.
13, stating that a non-purpose loan “may not be used (directly or indirectly) to purchase or carry securities.”
15
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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bring [another dollar] back next month, it’s not the same dollar.” SUMF at ¶¶ 20, 25. He told some
customers “Plaza las Americas will go broke before something happens [to your money],” SUMF
at ¶ 25;16 stated that there was little or no risk in using proceeds from their LOCs to reinvest in
additional shares of the CEFs; and falsely claimed that investments in the CEFs were guaranteed
by the Constitution of Puerto Rico, SUMF ¶ 24.
Additionally, Ramírez did not explain to his customers that if the value of the collateral
decreased below a certain level, the customer could receive a maintenance call, and the firm could
liquidate the customer’s investments in order to satisfy the outstanding maintenance call. SUMF
at ¶ 13.17 Had the customers known the risks involved in this scheme, and that doing so was
against UBS-PR policy and a violation of the LOC loan agreement, they would have not invested
in CEFs using LOC proceeds. SUMF ¶ 25. He misrepresented to UBS-PR on the “Know Your
Customer” form that he had disclosed material information concerning risks to the customers.
SUMF ¶ 25.18
E. Ramírez’s Reward
Ramírez was a top performing registered representative at UBS-PR with regard to LOC
business production. SUMF at ¶ 27. He received recognition as a “Banking Champion.” Id. His
16
Plaza Las Américas is a well-known shopping center located in the City of San Juan, Puerto Rico, open to the public since 1968.
See, http://www.plazalasamericas.com/center-info/about-us/
UBS-PR and BUSA operated a “haircut engine,” which considered the value of the collateral and the outstanding balance of the
LOC account. SUMF at ¶ 8. If the value fell below a certain threshold determined by the engine, the customers received a
maintenance call requiring them to increase the collateral, pay down the loan by a certain amount, or risk UBS’ liquidating
collateral. Id. Since the CEFs were not marginable, customers could not use them to obtain margin loans. SUMF at ¶ 15.
17
18
In support of this particular fact, the SEC references Exhibit 18 yet points to no particular page or section in the document for
support. Upon review, the court finds the relevant materials at pp. 11-13 of Exhibit 18 (Docket No. 22-19). That document, which
Ramírez signed, states that the following had been explained to the clients: “the proceeds of the Loan may not be used (directly or
indirectly) to purchase or carry securities…” and that if “the value of the pledged collateral falls below the Bank’s maintenance
requirements, the Bank may require the client to deposit additional collateral and/or sell the pledged collateral to repay the Loan”
(Docket No. 22-19 at p. 1, ¶ 1).
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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compensation was based, in part, on his LOC production and the amount of funds his customers
withdrew upon their LOCs. SUMF at ¶ 28. He earned commissions on the CEFs his customers
purchased, id., and from 2011-2013, he received over $12.9 Million in total compensation, over
$5.5 Million of which was attributable to customer LOCs. Id.
F. Collapse of the CEF Market
In 2013, the Puerto Rico bond market collapsed when, among other things, major credit
ratings agencies began a series of downgrades of Puerto Rico’s credit rating. SUMF at ¶ 29. The
erosion in the Puerto Rico bond prices hit CEF investors particularly hard because the CEFs
employed leverage of up to 50 percent of the total CEF assets, losing 20-30% of market
capitalization. SUMF at ¶ 30. And so, customers with LOCs collateralized by brokerage accounts
holding CEFs began receiving maintenance calls. SUMF at ¶ 32.
In August 2013, Ramírez went out on disability leave, becoming unreachable to his team
and customers. Id. While he was on leave, his customers met with UBS-PR representatives to
discuss outstanding maintenance calls (SUMF at ¶ 33), informing UBS-PR representatives that
Ramírez had solicited them to use LOC proceeds to reinvest in additional CEF shares without
informing them of the risks associated with doing so. Id. By the end of September 2013, 37 of
Ramírez’s customers whose loans were recycled, had maintenance calls of over $37 Million.
SUMF at ¶ 34.
Subsequently, UBS-PR reviewed Ramírez’s clients’ accounts (SUMF at ¶ 35), finding,
within hours, six of the accounts with potential loan recycling. Id. As part of its internal
investigation, UBS-PR engaged National Economic Research Associates, Inc. (“NERA”) to assist
in identifying the breadths of the potential misuse of the LOCs (SUMF at ¶ 36). NERA’s review
identified 414 instances where it appeared that CEFs were purchased with proceeds of LOCs
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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during the period of January 1, 2011-September 13, 2013. Id. Of those 414 instances, 230
occurred across 29 unique marketing households in accounts of Ramírez’s customers, for a total
of $49,506,225.00. Id. UBS-PR terminated Ramírez for his use of LOCs to purchase CEFs on
behalf of clients in violation of UBS-PR’s policy and BUSA’s LOC agreement. SUMF at ¶ 37.
IV.
DISCUSSION
A. Ramírez’s Invocation of the Fifth Amendment
Ramírez disputes 35 out of 37 of the SEC’s statements of fact on Fifth Amendment grounds
(Docket Nos. 30-31), essentially arguing that: (1) he invoked the Fifth Amendment; (2) no adverse
inference may be derived from his invocation of the Fifth Amendment at the summary judgment
stage; and (3) the SEC has not produced independent admissible evidence of wrongdoing (Docket
No. 31 at ¶ 3.11). The Fifth Amendment privilege against compelled self-incrimination applies in
civil and criminal proceedings. See, Lefkowitz v. Cunningham, 431 U.S. 801, 804-805 (1977)(so
recognizing); McCarthy v. Arndstein, 266 U.S. 34, 40 (1924)(same). Its invocation should not be
penalized. Id.
The privilege operates differently in criminal and civil contexts. See, Coquina Investments
v. TD Bank, N.A., 760 F.3d 1300, 1310 (11th Cir. 2014)(noting difference). In criminal cases, no
negative inference from the accused’s silence may be made. Id. But in civil cases adverse
inferences are permitted against parties, when they refuse to testify in response to probative
evidence offered against them. Id. (quoting Baxter v. Palmigiano, 425 U.S. 308, 318 (1976)).
Invocation of the Fifth Amendment is not a substitute for relevant evidence in a civil case excusing
a litigant claiming the privilege, from adducing proof in support of a burden which would
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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otherwise have been his in the litigation. See, U.S. v. Certain Real Property and Premises known
as 4003-4005 5th Ave., Brooklyn, N.Y., 55 F.3d 78, 83 (2d Cir. 1995)(examining concept).19
With this backdrop, Ramírez’s invocation of the Fifth Amendment is insufficient under
Fed. R. Civ. P. 56. He failed to present any evidence to controvert any of the SEC’s SUMFs, and
albeit argued that in the main, those SUMF’s are not supported with admissible, corroborating
evidence, as discussed throughout this Opinion, that is not the case.20 As the First Circuit stated
in In re Marrama, 445 F.3d 518, (1st Cir. 2006), “[w]e draw no inference form Marrama’s silence
but still see no issue of material fact that precludes summary judgment.” Id. at 523. Thus, by
solely relying on the Fifth Amendment, Ramírez failed to create a genuine issue of material fact.
See, S.E.C. v. Ficken, 546 F.3d 45, 52-54 (1st Cir. 2008)(entry of summary judgment in part
because defendant, who had invoked the Fifth Amendment, did not raise a genuine issue of
material fact in opposing summary judgment); U.S. Commodity Futures Trading Com’n v. Driver,
877 F.Supp.2d 968, 977 (C.D. Cal. 2012)(granting summary judgment against defendant with
respect to every question to which he asserted privilege against self-incrimination because plaintiff
offered ample evidence to support its claims); S.E.C. v. Benson, 657 F.Supp. 1122, 1129 (S.D.
N.Y. 1987)(summary judgment against silent party).
19
When a party in a civil case is confronted with the invocation of the privilege by the opposing side, contrary to the government
in a criminal case that party has no capacity to avoid it by, say, offering immunity from prosecution. See, Mitchell v. U.S., 526
U.S. 314, 328 (1999)(recognizing problem). Allowing invocation of the privilege though at the risk of suffering an adverse
inference -or even a default- for failure to rebut evidence, accommodates the right not to be a witness against oneself while still
permitting civil litigation to proceed. Id. Consequently, the rule does not render assertion of the privilege against self-incrimination
unconstitutionally costly. See, S.E.C. v. Thomas, 116 F.R.D. 230, 234 (D. Utah 1987)(so concluding). A sanction of precluding
a party from introducing evidence for a legitimate assertion of privilege, however, would be too severe and may well “render
assertion of the privilege ‘costly’.” Id. at 234 & n.6 (citing 8 Wright & Miller, Federal Practice and Procedure § 2018 at 148-150
(1970)).
20
Ramírez basically opted to bypass Local Rule 56(c), which requires a party opposing a motion for summary judgment to submit
with its opposition a separate, short, and concise statement of material facts admitting, denying or qualifying the facts supporting
the motion for summary judgment, substantiating each denial or qualification by a record citation. For the most part, he only argued
that the SEC had not produced independently admissible evidence of wrongdoing in support of its SUMFs at ¶¶ 2 and 5 (Docket
No. 31 at p. 7).
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B. Ramírez’s Motion to Strike
First, Ramírez argues that SEC Exhibits 9-11, 14, 16, 18, 19-20, 24, 26, 28-29, 32, 34, and
35 were not attached to an affidavit of the person through whom they could be admitted into
evidence, and thus, should be stricken from the record for lack of proper authentication (Docket
No. 29 at p. 4). The SEC counters that: (1) the 2010 amendments to the Federal Rules of Civil
Procedure do not require a party requesting or opposing summary judgment to authenticate
documents, but only to, in case of an objection, demonstrate that they would be presentable in an
admissible form at trial (Docket No. 34 at pp. 4-5); and (2) the documents in question are UBS
Business Records that: (i) could be presented in an admissible form at trial; (ii) were recorded
during the relevant time periods; and (iii) were kept in the course of regularly conducted activity
in accordance with regular practice. Id. Furthermore, it points out that a custodian would be able
to testify as to these conditions, and there is no indication of a lack of trustworthiness that would
justify excluding them at summary judgment. Id. The exhibits will not be excluded.
Rule 56(c)(2) of the Federal Rules of Civil Procedure provides that a “party may object
that the material cited to support or dispute a fact cannot be presented in a form that would be
admissible in evidence.” Fed. R. Civ. P. 56(c)(2) (emphasis added). The objection the Rule
contemplates is “not that the material ‘has not’ been submitted in admissible form, but that it
‘cannot’ be.” Intern. Shipping Agency, Inc. v. Union de Trabajadores de Muelles Loc. 1740, 2015
WL 5022794, *2 (D.P.R. Aug. 21, 2015)(quoting Foreword Magazine, Inc. v. OverDrive, Inc.,
2011 WL 5169384, *2 (W.D. Mich. Oct. 31, 2011); Santos v. Nogueras, 2012 WL 2871108, *4
(D.P.R. July 11, 2012)(that plaintiff could properly authenticate exhibits at trial sufficient to defeat
a Rule 56(c)(2) objection). And Ramírez has not explained why the documents would not be
admissible at trial. See Intern. Shipping Agency, Inc. 2015 WL 5022794, at *3 (“Because
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Civil No. 15-2365 (PAD)
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[plaintiff] makes no argument that the defendants’ evidence could not be authenticated, its
objection should be denied”); González-Bermúdez v. Abbott Laboratories PR Inc., 214 F.Supp.3d
130, 137 (D.P.R. 2016) (denying general objection to unauthenticated exhibits given that “[a] plain
objection simply stating that the exhibit proffered has not been properly authenticated will not
suffice”).
Second, Ramírez raises a general objection that Exhibits 4, 6, 7, 12-13, 17, 21, 22-23, 25
and 31 contain inadmissible prior testimony because they were rendered in other proceedings and
he was unable to cross-examine the witnesses (Docket No. 29 at pp. 5-7).21 The SEC responds
that: (1) considering the amendment to Rule 56, the prior sworn testimony is appropriate because
the witnesses could testify at trial, consistently with their prior testimony; and (2) Ramírez had the
opportunity to depose the witnesses during the discovery period, but chose not to (Docket No. 34
at p. 8). As support, it cites Boston Athletic Ass’n v. Sullivan, 867 F.2d 22, 24 (1st Cir 1989), for
the proposition that “[r]eference to prior trial testimony…is proper in summary judgment cases.”
Id. Because, in the final analysis, Ramírez could not say that prior sworn testimony rendered in
other proceedings is unreliable, the court will not exclude it. See, U.S. v. O’Connell, 890 F.2d
563, 567 (1st Cir. 1989)(concluding that district court properly considered prior criminal trial
testimony excerpts in determining there were no genuine issues of material fact, noting that “there
is no sensible rationale which would preclude reliance on sworn testimony faithfully recorded
during the conduct of a judicially-supervised adversarial proceeding…”); Dickinson v. UMass
Memorial Medical Group, 2011 WL 1155497, at *8 (D. Mass. Mar. 24, 2011)(“Sworn deposition
21
He did not distinguish amongst the types of proceedings wherein the testimony was taken or the type of testimony (deposition,
trial, etc.).
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testimony may be used to support or oppose a motion for summary judgment regardless of whether
the testimony was taken in a prior proceeding”).
Third, Ramírez states that the newspaper articles filed as Exhibits 30 and 33 should be
stricken for lack of proper authentication and as inadmissible hearsay; and the “economic
consulting report” submitted as Exhibit 36 should be stricken due to lack of proper authentication
and as an unsworn expert report (Docket No. 29 at pp. 4-5). The SEC explains that Exhibits 30
and 33 are press articles that: (1) are self-authenticating pursuant to Fed. R. Evid. 902(6); (2) would
not be used for the truth of the matter asserted, but to demonstrate that articles were published
regarding the matters about which witnesses testified; and (3) in any case, would qualify as an
exception to hearsay because they have guarantees of trustworthiness and discussed highly
publicized events regarding easily verifiable facts (Docket No. 34 at pp. 6-7).
The articles are properly authenticated but do not qualify as an exception to the hearsay
exclusion rule, as they do not seem to be “more probative on the point for which [they are] offered
than any other evidence…[the SEC] can obtain through reasonable efforts” as required by Fed. R.
Evid. 807.
Nevertheless, a district court may consider hearsay evidence submitted in an
inadmissible form at the summary judgment stage where the content of the evidence proffered
could later be provided in an admissible form at trial. See, Securities and Exchange Commission
v. Strategic Global Investments, Inc., 262 F.Supp.3d 1007, 1019 (S.D. Cal. 2017)(so noting)(citing
in part, JL Beverage Company, LLC v. Jim Beam Brands Co., 828 F.3d 1098, 1110 (9th Cir. 2016)
and Fed. R. Civ. P. 56(c)(2) committee’s note to 2010 amendments). Such is the case here.
Exhibit 30 was submitted to support the SEC’s SUMF at ¶ 29, which states that in 2013,
the Puerto Rico bond market collapsed when the major credit rating agencies began a series of
downgrades resulting in Puerto Rico’s credit rating being lowered to just above “junk” status, a
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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statement supported by additional material in the record. See, Exhibits 3, 12, 17, and 25. Exhibit
33 was used in connection with the statement at SUMF at ¶ 30, to the effect that from “January
through September 2013, the CEFs lost over $1.6 billion in market value.” Other exhibits refer to
the collapse of the market and resulting losses, which totaled 20-30% of market capitalization.
See, Exhibit 3 (Docket No. 22-4 at pp. 99-106).
Fourth, Ramírez claims Exhibit 36 should be stricken as an “unsworn expert witness
report” (Docket No. 29 at p. 5). The SEC maintains that: (1) Exhibit 36 it is not an “expert witness
report” but a “summary statistical report”; (2) the methodologies used to arrive at the statistical
conclusions could be testified at trial; and (3) according to Fed. R. Evid. 1006, it is permissible to
use a summary or calculation to prove the content of voluminous materials as long as the originals
or duplicates are available for examination by the other party (Docket No. 34 at pp. 6-7).22 The
court agrees with the SEC that the conditions for admissibility under Rule 1006 have been satisfied.
Therefore, the exhibit will not be stricken.
C. SEC’s claims
The SEC contends that Ramírez engaged in a fraudulent scheme: (i) making material
omissions and misrepresentations; (ii) in the offer or sale of securities (in the context of the
Securities Act) and in the purchase or sale of securities (in the context of the Exchange Act); (iii)
acting with scienter; (iv) in interstate commerce (Docket No. 21). Ramírez responds that there is
no basis for the SEC’s claim because it relies on factual assertions for which there is no record
support inasmuch as: (1) he invoked the Fifth Amendment; and (2) the documents that the SEC
submitted to back up the claim must be stricken (Docket No. 31 at pp. 1, 3).
22
Further, the SEC asserts that the underlying supporting evidence of the report was all produced as part of discovery. Id. at p. 7.
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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Ramírez’s arguments were discussed and rejected above. As for the merits, Section 17(a)
makes it unlawful to engage in certain conduct “directly or indirectly” in “the offer or sale of
securities.” 17 U.S.C. § 77q(a). Section 17(a)(1) bars “employ[ing] any device, scheme, or artifice
to defraud.” Id. Section 17(a)(2), forbids “obtain[ing] money or property by means of any untrue
statement of a material fact or any omission to state a material fact.” Id. Section 17(a)(3)
proscribes “engag[ing] in any transaction, practice, or course of business which operates or would
operate as a fraud or deceit upon the purchaser.” Id. Section 10(b) of the Exchange Act makes it
unlawful to, in connection with the purchase or sale of securities, “use or employ any manipulative
or deceptive device or contrivance in contravention of such rules and regulations as the SEC may
prescribe as necessary or appropriate in the public interest for the protection of investors.” 15
U.S.C. § 78j(b).
Pursuant to this rulemaking power, the SEC promulgated Rule 10(b)-5, which renders it
illegal to “employ any device, scheme or artifice to defraud; (b) make any untrue statement or
omission of material fact or to omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not misleading;
or (c) engage in any act, practice or course of business which operates or would operate as a fraud
or deceit on any person, in connection with the purchase or sale of any security.” 17 C.F.R.
§ 240.10b-5. The scope of Rule 10(b)-5 is coextensive with the coverage of Section 10(b). See,
SEC v. Zandford, 535 U.S. 813, 816 & n.1 (2002)(so recognizing).
The Securities Act and the Exchange Act were enacted to set the economy on the road to
recovery after the 1929 stock market crash and reports of widespread abuses in the securities
industry. See, Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78 (2006)
(describing historical background of Securities Act and Exchange Act); Central Bank of Denver,
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 170-171 (1994)(same). They seek to
promote this goal by prohibiting fraud through an extensive scheme of civil and criminal liability,
substituting a philosophy of full disclosure for the philosophy of caveat emptor, thus setting a high
standard of business ethics in every facet of that industry. See, U.S. v. Naftalin, 441 U.S. 768, 775
(1979)(noting statutory objectives); Securities and Exchange Commission v. Capital Gains
Research Bureau, Inc., 375 U.S. 180, 186 (1963) (same). Since their enactment, they “have
anchored federal regulation of vital elements of our economy.” Dabit, 547 U.S. at 78.
Consistently with their objective, the statutes contain catch-all language designed to
prevent fraudulent practices, including not just garden type varieties of fraud, but also unique
forms of deception involving novel or atypical methods. See, VanCook v. S.E.C., 653 F.3d 130,
138 (2nd Cir. 2011)(so observing)(quoting Superintendent of Ins. of State of N.Y. v. Bankers Life
& Cas. Co., 404 U.S. 6, 11 & n.7 (1971). In their operation, their elements coincide. To that
extent, the elements of a Section 17(a) claim are virtually identical to those of a Section 10(b) and
Rule 10(b)-5 claim, except that scienter is not necessary to show a violation of Sections 17(a)(2)
and 17 (a)(3). See, S.E.C. v. Druffner, 517 F.Supp.2d 502, 508 (D.Mass. 2007), aff’d S.E.C. v.
Ficken, 546 F.3d 45 (1st Cir. 2008)(noting similarity); S.E.C. v. Wolfson, 539 F.3d 1249, 1256
(10th Cir. 2008)(observing that Section 17(a) requires substantially similar proof as Section 10(b)
and Rule 10(b)-5).23
23
The SEC grouped its discussion of the Securities Act and the Exchange Act, instead of addressing the elements for each claim
separately or attempting to be more precise in its discussion of the specific elements for each cause of action. The SEC’s approach
did not result in any argumentative deficiency, as courts have regularly considered the same misconduct as violative of Section
17(a), Section 10(b) and Rule 10(b-5. See, S.E.C. v. Rocklage, 470 F.3d 1, 14 & n.1 (1st Cir. 2006)(all parties agreed that analysis
under Section 17(a) is identical to analysis under Section 10(b) and Rule 10(b)-5); U.S.S.E.C. v. Power, 525 F.Supp.2d 415, 419423 (S.D. N.Y. 2007)(common factual allegations underlying infringement of 0the three provisions).
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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(1) Fraudulent Scheme/Course of Conduct
Scheme liability “arises where the defendant employs a deceptive device for the purpose
of defrauding investors.” See, Securities and Exchange Commission v. Esposito, 2017 WL
388800, at *6 (D. Mass. Jan. 27, 2017)((citing S.E.C. v. Durgarian, 477 F.Supp.2d 342, 351-352
(D. Mass. 2007), aff’d, S.E.C. v. Papa, 555 F.3d 31 (1st Cir. 2009)). Ramírez employed a
fraudulent scheme to have customers invest in CEFs with money drawn from their LOCs,
concealing that the practice was in contravention of UBS-PR policy and prohibited by the LOC
agreements. Docket No. 21, pp. 14-15; SUMFs at ¶¶ 10, 15, 16, 19. He directed his customers to
request wire transfers or write checks from their LOCs to the customers’ personal bank accounts
at other banks, SUMFs at ¶¶ 17, 22, and afterwards, to deposit the funds recently deposited into
their outside bank, into their UBS-PR brokerage accounts so that Ramírez could execute trades for
additional CEF shares (id.), while Ramírez attempted to shroud his strategy in legitimacy saying
“if I give you this dollar and you bring [another dollar] back next month, it’s not the same dollar,”
thus implying that the strategy was not a violation of the LOC agreement or of UBS-PR policy.
SUMFs at ¶¶ 20, 25.
(a) Material omissions and misrepresentations
While recommending that strategy to clients, Ramírez omitted explaining that if the value
of the collateral decreased below a certain level, the customer could receive a maintenance call,
and the firm could liquidate the customer’s investments in order to satisfy the outstanding
maintenance call. SUMF at ¶ 13. The “it’s not the same dollar” line falls under the same category,
for it implied that the strategy did not violate the LOC agreement and UBS-PR policy, SUMFs at
¶¶ 20, 25. So too, informing customers that there was little or no risk in using proceeds from their
LOCs to reinvest in additional CEF shares because the CEFs “were guaranteed by the Constitution
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Civil No. 15-2365 (PAD)
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of Puerto Rico” and “Plaza las Americas will go broke before something happens [to your
money].” SUMFs at ¶¶ 24 and 25. Thus, even though investing in CEFs had risks, such as the
lack of liquidity, Ramírez did not explain those risks (SUMFs at ¶ 5), to the point where, some
clients even believed that the CEFs were bonds. SUMF at ¶ 6.
The misrepresentations and omissions were material. A “misrepresentation is material if
there is a substantial likelihood that the misrepresentation would affect the behavior of a reasonable
investor.” Ficken, 546 F.3d at 47 (so recognizing); S.E.C. v. Fife, 311 F.3d 1, 10 (1st Cir.
2002)(“misrepresentations and omissions were material because a reasonable investor would want
to know the risks involved”). Such was the case here, as investors would have wanted to know
the risks involved in the recommended strategy, including the risk of loss of principal, and the risk
of maintenance calls in the event the value of LOC collateral decreased (Docket No. 21 at p. 14).
Even more, investors would have been interested in knowing that Ramírez’s recommendations
were in direct contravention of UBS-PR policy and of the LOC agreements. And along the same
line, those disclosures would have significantly altered the “total mix” of information made
available to them. See, Basic Inc. v. Levinson, 485 U.S. 224, 231-232 (1988) (quoting TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (“to fulfill the materiality requirement
‘there must be a substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the “total mix” of information
made available’”).24 No reasonable minds could differ on the question of materiality. See, TCS
24
The SEC submitted testimony of two investors who would not have invested in CEFs using LOC proceeds had they known the
risks involved in Ramírez’s strategy. SUMF at ¶ 25.
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Civil No. 15-2365 (PAD)
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Indus. v. Northway, Inc., 426 U.S. 438, 450 (1976)(applying formulation in summary judgment
context)
(b) In the Offer or Sale of Securities (for purposes of the Securities Act); In
connection with the purchase or sale of securities (for purposes of the
Exchange Act)
For purposes of the Securities Act, the material omissions and misrepresentations must
have been “in the offer or sale of any securities,” whereas for purposes of the Exchange Act, they
must have been “in connection with the purchase or sale of any securities.” 15 U.S.C. § 77q; 17
C.F.R. § 240.10b-5. The Supreme Court has directed lower courts to interpret those requirements
broadly and flexibly rather than technically or restrictively. See, Naftalin, 441 U.S. at 773 (so
holding under Securities Act); S.E.C. v. Zandford, 535 U.S. 813, 819 (2002)(same as to Exchange
Act and Rule 10(b)-5). It has used Section 17(a)’s phrase “in” interchangeably with Section
10(b)’s “in connection with,” Naftalin, 441 U.S. at 773 & n.4 (so stating), further noting that the
statutory terms are expansive enough to “encompass the entire selling process, including the
seller/agent transaction.”
Id. at 773. To this end, the terms cover Ramírez’s scheme and
misrepresentations, directed, as they were, to investors in order to encourage them to purchase
additional CEF shares with LOC proceeds (Docket No. 21 at p. 16; SUMF at ¶¶ 15, 17, and 22).
See Calderon Serra v. Banco Santander Puerto Rico, 747 F.3d 1, 6 (1st Cir. 2014)(holding that
allegations of fraudulently misrepresenting or failing to disclose Regulation U margin lending
restrictions as part of a scheme to induce customers to purchase more securities was “in connection
with the purchase or sale” of a security under Rule 10b-5); Wolfson, 539 F.3d at 1262-1263
(material misstatement or omission present “in the offer or sale” of securities and “in connection
with the purchase or sale” of a security).
Securities and Exchange Commission v. Jose G. Ramírez, Jr.
Civil No. 15-2365 (PAD)
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(c) Scienter
As explained above, violations of Section 17(a)(1), Section 10(b) and Rule 10b-5 require
proof of scienter.25 Negligence, however, is sufficient to establish liability under Sections 17(a)(2)
and 17(a)(3). See, Ficker, 546 F.3d at 47 (so noting). Scienter consists of a mental state embracing
intent to deceive, manipulate, or defraud. Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185,
194 & n.12 (1976)). It calls for a showing of either conscious intent to defraud or a high degree
of recklessness (id.), and may be demonstrated by indirect evidence. See, In re Cabletron Systems,
Inc., 311 F.3d at 38 (discussing issue); Druffner, 517 F.Supp.2d at 509 (same).
Recklessness refers to a highly unreasonable omission, involving not merely simple or even
inexcusable negligence, but an extreme departure from the standard of ordinary care, and which
presents a danger of misleading buyers or sellers that is either known to the defendant or is so
obvious the actor must have been aware of it. See, Ficken, 546 F.3d at 47-48 (so noting)(quoting
S.E.C. v. Fife, 311 F.3d at 9-10) (internal quotations omitted). While it is unusual to grant
summary judgment on scienter, it is appropriate where the movant has presented evidence
sufficient to establish the elements of the action and the nonmoving party fails to submit
sufficiently probative evidence or to controvert the record, resting “upon conclusory allegations,
improbable inferences, and unsupported speculation.” Id. at 51 (quoting Medina-Muñoz v. R.J.
Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
First, Ramírez knew that UBS-PR’s policies and the LOC agreements prohibited the
practice of transacting CEF’s with LOC proceeds (SUMF at ¶ 10), but put in place a scheme to
25
See also, Aaron v. Securities and Exchange Commission, 446 U.S. 680, 691, 695-697, 701-702 (1980)(analyzing scienter
requirement under Sections 17(a)(1), 17(a)(2), 17(a)(3) and 10(b), and Rule 10(b)-5).
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Civil No. 15-2365 (PAD)
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avoid detection, persuading customers to request wire transfers or write checks from their LOC’s
to the customers’ personal bank accounts at other banks (SUMFs at ¶¶ 17, 22), and to deposit the
funds into their UBS-PR brokerage accounts so Ramírez could execute trades for CEF shares. Id.
He encouraged customers using the “it’s not the same dollar” line, implying that his recommended
strategy was not a violation of the LOC agreement or UBS-PR policy. SUMFs at ¶¶ 20, 25. As
an experienced registered representative, however, he either knew or was reckless in not knowing,
that his recommendations about the safety of the CEFs and his proposed strategy were misleading.
Second, Ramírez was at least reckless in: (1) failing to explain to customers that if the value
of their collateral decreased below a certain level, they could receive a maintenance call and lose
their investments in a firm-initiated liquidation procedure (SUMF at ¶ 13); (2) telling customers
that there was little or no risk in using proceeds from their LOCs to reinvest in additional CEF
shares because the CEFs “were guaranteed by the Constitution of Puerto Rico” and “Plaza las
Americas will go broke before something happens [to your money],” (SUMFs at ¶¶ 24 and 25);
and (3) failing to explain other general risks about investing in CEFs, such as the lack of liquidity,
to the point that, as noted above, some clients believed that CEFs were bonds (SUMFs at ¶¶ 5 and
6).
Third, topping it all, Ramírez earned commissions on the CEFs that his customers
purchased (SUMF at ¶ 28), a fact demonstrative of a financial motive to incur in material omissions
and misrepresentations. See, Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 325
(2007) (personal financial gain may weigh heavily in favor of inferring scienter).26 He acted with
Relying on United States v. Zanghi, 189 F.3d 71, 83 (1st Cir. 1999), the SEC suggests that Ramírez’s disability leave of absence
shows a guilty conscience (Docket No. 21 at p. 12). Zanghi supports this proposition “so long as there is an adequate factual
predicate for the inference that the defendant's movement was indicative of a guilty conscience.” As of today, the record does not
contain a sufficient, additionally independent “factual predicate” to support the SEC’s contention that Ramírez went on leave due
to a guilty conscience instead of some other reason.
26
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Civil No. 15-2365 (PAD)
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the requisite scienter. See, Ficken, 546 F.3d at 51 (no genuine dispute regarding scienter); S.E.C.
v. Smith, 2015 WL 4067095, at *7 (D.N.H. July 2, 2015)(summary judgment for SEC).
(d) Interstate Commerce
Finally, Ramírez communicated with possible customers/investors by telephone, among
other methods, to carry out the scheme (SUMF at ¶ 14), confirming use of interstate commerce.
(Docket No. 21 at p. 15-16).
V.
CONCLUSION
The SEC has established all the necessary elements to show that Ramírez violated Section
17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. In view
of the foregoing, “Plaintiff’s Motion for Partial Summary Judgment on the Issue of Liability and
Accompanying Memorandum of Law” (Docket No. 21) is GRANTED. Ramírez’s “Motion to
Strike” (Docket No. 29) is DENIED.
At footnote 1 of its motion, the SEC points out that if the motion is granted, it will attempt
to resolve with Ramírez “the remaining issues as to the relief it seeks, namely injunctive relief,
disgorgement plus prejudgment interest, and civil penalty,” and in the event it is unable to do so,
it will file the appropriate motion in court (Docket No. 21 at n.1). To that end, it requests 90 days
to move for the additional remedies in case it is unable to reach an agreement. It may so move by
June 15, 2018. On May 25, 2018, the parties shall file a follow up joint informative motion on the
status of the case.
SO ORDERED.
In San Juan, Puerto Rico, this 30th day of April, 2018.
s/Pedro A. Delgado-Hernández
PEDRO A. DELGADO-HERNÁNDEZ
United States District Judge
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