United States District Court, E.D. California
Decided May 22, 2014
JINA L. CHOI (NY Bar No. 2699718), MICHAEL S. DICKE (Cal. Bar No. 158187), ROBERT L. MITCHELL (Cal. Bar No. 161354), MONIQUE C. WINKLER (Cal. Bar. No 213031), Attorneys for Plaintiff, SECURITIES AND EXCHANGE COMMISSION, San Francisco, California.
LAWRENCE K. KARLTON, SENIOR UNITED STATES DISTRICT JUDGE.
The U.S. Securities and Exchange Commission (" SEC" ), in this securities fraud enforcement action, moves for a final judgment of disgorgement for $43 million against defendant Anthony Vassallo, with pre-judgment interest, and civil penalties. ECF No. 488. For the reasons set forth below, the court will grant the motion.
According to the SEC's complaint, ECF No. 1, from approximately May 2004 through November 2008, defendant Vassallo (and Kenneth Kenitzer, who is not involved in this motion), raised over $40 million from approximately 150 investors. At some point, if not from the very beginning, the investors' funds were lost to Vassallo's " Ponzi" scheme, in which earlier investors were paid " returns" from the investments of later investors. Vassallo hid the fraud from his investors, but it eventually came to light in 2008, when investors found that they could not access their funds.
II. PROCEDURAL HISTORY
A. The Civil Case.
On March 11, 2009, the Securities and Exchange Commission (" SEC" ) sued Anthony Vassallo (" Vassallo" ) and Equity Investment Management and Trading, Inc. (" EIMT" ) for securities fraud. ECF No. 1. On April 30, and July 31, 2009, the court appointed Stephen E. Anderson to be the Receiver for EIMT, and empowered him to " [t]ake all steps the receiver deems necessary to secure and protect the assets and property of EIMT." ECF No. 52.
On March 9, 2010, based upon a Consent and Stipulation between the SEC and Vassallo (ECF No. 220), the court entered the Judgment of Permanent and Other Relief Against Defendant Anthony Vassallo. ECF No. 228. The Judgment provides that " upon motion by the Commission, the Court shall determine whether it is appropriate to order disgorgement of ill-gotten gains and/or civil penalties," against Vassallo, and if so, the amounts. Id., at 4, ¶ V. The judgment also provides that in connection with the SEC's motion for disgorgement, interest and penalties, and solely for the purposes of that motion, " the allegations
of the Complaint shall be accepted as and deemed true by the Court." Judgment at 4 ¶ V.
B. The Criminal Case.
On March 18, 2009, the United States filed a criminal complaint against Vassallo, charging him with conspiracy, mail fraud, wire fraud, money laundering, and securities fraud. U.S. v. Vassallo, 2:9-cr-179 GEB (E.D. Cal.). On April 15, 2009, the Grand Jury returned an indictment against Vassallo, charging him with mail fraud, wire fraud and money laundering. U.S. v. Vassallo, id., ECF No. 19. On February 1, 2013, Vassallo agreed to plead guilty to Count 2 of the indictment, wire fraud. ECF No. 115. On September 19, 2013, the district court entered an Amended Judgment against Vassallo, convicting him of wire fraud, based upon his guilty plea. U.S. v. Vassallo, id., ECF No. 150. The remaining parts of the indictment were dismissed. Id.
As part of his sentence, Vassallo was ordered to pay restitution of $43 million to the defrauded investors. See id., ECF No. 150 at 5 (" The defendant must make restitution ... to the following payees in the amount listed below" ).
C. The Motion for Disgorgement.
On October 4, 2013, the Receiver filed a motion for a judgment of disgorgement of $43 million against Vassallo. See ECF No. 479. At the hearing on the Receiver's motion, the court expressed concern, and later requested briefing, about whether the requested judgment of disgorgement would conflict with the $43 million restitution order entered against Vassallo in the criminal case. See ECF No. 485.
The SEC thereupon filed this motion, seeking the same $43 million disgorgement relief previously sought by the Receiver, but in addition, seeking prejudgment interest and civil penalties. ECF No. 488. In light of the SEC's motion, the Receiver withdrew his own motion. ECF No. 489.
The SEC argues that (1) disgorgement will not conflict with the criminal restitution because Vassallo will receive a set-off in the restitution based upon any disgorgement
he pays, (2) this court is authorized by law to order disgorgement, pre-judgment interest and civil penalties, and (3) the consent judgment against Vassallo contemplates that the SEC will seek disgorgement and penalties.
Vassallo opposes the motion on the grounds that since the criminal case has already granted $43 million in restitution, this court should exercise its discretion by not imposing any more financial remedies. Specifically, Vassallo asserts that (1) the criminal restitution order fully compensates his victims, (2) he has already been sufficiently punished, and (3) the judgment will go unpaid since Vassallo does not have sufficient funds, thus preventing the judgment from serving its intended purpose.
The district court has broad equity powers to order the disgorgement of " ill-gotten gains" obtained through the violation of the securities laws. Disgorgement is designed to deprive a wrongdoer of unjust enrichment, and to deter others from violating securities laws by making violations unprofitable.
SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191-92 (9th Cir. 1998) (citations omitted), cert. denied, 525 U.S. 1121, 119 S.Ct. 902, 142 L.Ed.2d 901 (1999).
" [T]he amount of disgorgement should include all gains flowing from the illegal activities." Disgorgement need be " only a reasonable approximation of profits causally connected to the violation."
SEC v. Platforms Wireless Int'l Corp., 617 F.3d 1072, 1096 (9th Cir. 2010).
A. Civil Disgorgement.