The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court
Order Setting Hearing on Securities and Exchange Commission's Motion for Civil Contempt Sanctions with Regard to Failure to Pay Monetary Damages and Costs; Bifurcating Additional Matters for aka Purposes of Referring for Criminal Contempt Proceedings
The Securities and Exchange Commission ("SEC") has filed a motion for an order to show cause why Defendant Alfred Louis Vassallo, Jr. ("Bobby Vassallo" or "Vassallo") should not be held in civil contempt for his violation of the Court's August 23, 2005 Permanent Injunction [Doc. No. 801]. As explained below, the Court finds the SEC has shown by clear and convincing evidence that Vassallo violated the Permanent Injunction by failing to pay disgorgement, civil penalties, and the Receiver's costs. The Court will hold a further civil contempt hearing on this issue. However, the Court bifurcates from this civil contempt proceeding the SEC's allegation that Vassallo has violated the Permanent Injunction by engaging in conduct prohibited by the federal securities laws. The Court will separately issue a notice and order referring those claims to the United States Attorney for the Southern District of California for prosecution under 18 U.S.C. § 401 and Fed. R. Crim. P. 42.
On January 27, 2004, the SEC filed a complaint against Defendants Presto Telecommunications, Inc. ("Presto") and Vassallo alleging violations of federal securities laws. [Doc. No. 1.] On the date the complaint was filed, the Court issued a temporary restraining order freezing the assets of Presto and Vassallo and appointing a temporary receiver. [Doc. No. 10.] On March 2, 2004, the Court granted a preliminary injunction against Vassallo and Presto. [Doc. No. 52.] The Court ordered the assets of Presto and Vassallo remain frozen and appointed Thomas Lennon as permanent receiver of Presto.
On May 25, 2005, the Court summarily adjudicated the SEC's claims that Presto and Vassallo violated federal securities laws. [Doc. No. 752.] On August 15, 2005, the Court summarily adjudicated the amount of disgorgement damages and civil penalties against Vassallo. [Doc. No. 796.] On August 23, 2005 the Court entered a Permanent Injunction requiring Vassallo to disgorge to the Receiver, within 30 days after entry of the final judgment, $1,263,658.79, plus prejudgment interest of $23,638.97. The Court further ordered Vassallo to pay a civil penalty in the amount of $120,000, such payment to be made to the Receiver within 10 days after entry of the final judgment. Finally, the Court ordered Vassallo to pay the Receiver's costs, in the amount of $601,784.77, within 30 days of the entry of final judgment. [Doc. No. 801.] Notwithstanding the Court's order, Vassallo has failed to pay any of the amounts set forth in the final judgment for disgorgement, prejudgment interest, civil penalty, or costs. [Declaration of David Brown ("Brown Decl."), Doc. No. 955, ¶ 40.]
In addition, the August 23, 2005 order enjoined Vassallo from engaging in conduct which violates the federal securities laws. [Doc. No. 801.] In particular, the Court enjoined Vassallo from (1) offering for sale unregistered securities in violation of Section 5 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77e, (2) engaging in fraud or misrepresentations in violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and (3) engaging in fraud or misrepresentations in violation of 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. Notwithstanding the Permanent Injunction, the SEC has presented evidence in its motion demonstrating Vassallo has (1) offered and sold unregistered securities, (2) misrepresented his ownership and control of companies for which he is soliciting investor funds, as well as the potential for investor profits and how investor funds will be used, (3) and misappropriated investor funds.
On September 21, 2010, the SEC filed a motion asking the Court to issue an order to show cause why Vassallo should not be held in civil contempt for violating the August 23, 2005 Permanent Injunction. The Court issued the order to show cause on September 24, 2010, setting a hearing for October 7, 2010. Vassallo appeared for the October 7, 2010 hearing and invoked his Fifth Amendment right to remain silent in lieu of responding to the SEC's allegations. At that time the Court ordered Vassallo to surrender his passport. The Court continued the hearing to Monday, October 25, 2010 to permit Vasallo time to obtain an attorney and file a written response. However, on October 19, 2010, Vassallo requested a continuance of the hearing to obtain counsel. To ensure Vassallo is afforded due process in these contempt proceedings, on October 20, 2010, the Court appointed Attorney John Lemon to represent Vassallo.
The Court went forward with the hearing on October 25, 2010, at which time Vassallo and his attorney appeared.
A district court has the inherent authority to enforce its orders through civil contempt. Shillitani v. United States, 384 U.S. 364, 370 (1966).
The standard for finding a party in civil contempt is well settled: The moving party has the burden of showing by clear and convincing evidence that the contemnors violated a specific and definite order of the court. The burden then shifts to the contemnors to demonstrate why they were unable to comply.
FTC v. Affordable Media LLC, 179 F.3d 1228, 1239 (9th Cir. 1999) (quoting Stone v. City and County of San Francisco, 968 F.2d 850, 856 n. 9 (9th Cir.1992)). "A party's actions 'need not be willful' and there is no good faith exception to the requirement of obedience to a court order." Go-Video, Inc. v. Motion Picture Ass'n of America, 10 F.3d 693, 695 (9th Cir. 1993) (quoting In re Crystal Palace Gambling Hall, Inc., 817 F.2d 1361, 1365 (9th Cir.1987)). A party may not, however, be held in civil contempt if he "has taken 'all reasonable steps' to comply with the court order." General Signal Corp. v. Donallco, Inc., 787 F.2d 1376, 1379 (9th Cir. 1986).
Here, the Court's final judgment and Permanent Injunction dated August 23, 2005, is specific and definite with regard to Vassallo's obligation to pay monetary penalties to the Receiver. It unambiguously directs Vassallo to pay disgorgement, civil penalties, and the Receiver's costs, within a specified time period. The SEC has presented a declaration stating Vassallo has not paid any of the amounts required by the Permanent Injunction. Therefore, the Court finds by clear and convincing evidence that Vassallo has violated the August 23, 2005 Permanent Injunction insofar as it required him to pay disgorgement, civil penalties, and the Receiver's costs. The burden now shifts to Vassallo to demonstrate why he is unable to comply with the order, and the Court may hold Vassallo in civil contempt if he fails to satisfy that burden.
The Permanent Injunction is also specific and definite with regard to Vassallo's duty to avoid conduct which violates federal securities laws. It unambiguously enjoins Vassallo from selling or offering for sale unregistered securities, and from making fraudulent and misleading statements with regard to the offer and sale of securities. [ Doc. 801, ¶¶ II - IV.] The SEC has presented clear and convincing evidence, in the form of declarations and deposition testimony from the defrauded investors, demonstrating that Vassallo has violated the permanent injunction by (1) offering for sale and selling unregistered securities [Declaration of Mark Pease ("Pease Decl."), ¶ 4, 5, 6, 9, 10, 12, 13, 15, Exh. 1, p. 5; Declaration of Lowell Fitzgerald ("Fitzgerald Decl."), ¶ 5, 9, 13; Declaration of Austin Moore ("Moore Decl."), ¶¶ 4-7, 10 ; Declaration of Oscar Garza ("Garza Decl."), ¶ 4, 5, 7], (2) misrepresenting his ownership and control of companies for which he is soliciting investor funds, as well as the potential for investor profits and how investor funds will be used [Fitzgerald Decl., ¶¶ 7, 8, 10, 17, and 19; Moore ...