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Securities and Exchange Commission v. Vassallo

United States District Court, E.D. California

May 23, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
ANTHONY VASSALLO, KENNETH KENITZER, and EQUITY INVESTMENT MANAGEMENT AND TRAINING, INC., Defendants

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.

OPINION

LAWRENCE K. KARLTON, SENIOR UNITED STATES DISTRICT JUDGE.

Page 1064

ORDER

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.

I. BACKGROUND

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

Page 1065

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.).[1] 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.[2]

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

Page 1066

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.

III. STANDARDS

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).[3]

" [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).

IV. ANALYSIS

A. Civil Disgorgement.

The SEC asserts that there is no conflict between its requested $43 million civil disgorgement and the $43 criminal restitution already ordered in the criminal case. The plea agreement makes express reference to the civil case, and the fact that the receiver " has recovered some funds for investors." ECF NO. 155 at 3, ¶ II(B). Further, the plea agreement states that " [t]he parties agree that the total amount of [criminal] restitution shall be credited by the amounts disbursed by the receiver to the victims of this crime." Id. In light of this, there appears to be no encroachment on the criminal judgment, as that judgment specifically contemplates an overlapping civil disgorgement order, and the disbursement of disgorged funds to investors.

The SEC cites no Ninth Circuit cases addressing this issue, and the court's own research revealed none. However in SEC v. Palmisano, 135 F.3d 860 (2nd Cir.), cert. denied, 525 U.S. 1023, 119 S.Ct. 555, 142 L.Ed.2d 462 (1998), the Second Circuit reviewed a case that involved a similarly overlapping disgorgement order, after a criminal restitution order had already been entered. After determining that there was no Double Jeopardy issue, the court affirmed the disgorgement order. Palmisano, 135 F.3d at 867. However, it modified the disgorgement order:

to provide that to the extent that Palmisano makes payment of restitution as ordered in the judgment entered in the criminal case, those payments shall offset his disgorgement obligation in the present case.

Page 1067

Id., 135 F.3d at 866-67. This offset is already built in to the Vassallo criminal case.[4]

B. Pre-judgment Interest

The amount of disgorgement should include all gains flowing from the illegal activities. See SEC v. Lund, 570 F.Supp. 1397, 1404 (C.D. Cal. 1983). The ill-gotten gains include prejudgment interest to ensure that the wrongdoer does not profit from the illegal activity.

SEC v. Cross Financial Services, Inc., 908 F.Supp. 718, 734 (C.D. Cal. 1995) (emphasis added); SEC v. M & A West, Inc., 538 F.3d 1043, 1054 (9th Cir. 2008) (affirming district court judgment ordering disgorgement, with pre-judgment interest, " to ensure that [defendant] is not allowed to benefit from his unlawful conduct" ).[5]

Whether to order pre-judgment interest is within this court's discretion, which in turn, should be guided by " fundamental considerations of fairness." Osterneck v. Ernst & Whinney, 489 U.S. 169, 176, 109 S.Ct. 987, 103 L.Ed.2d 146 (1989). Vassallo asserts that ordering pre-judgment interest in this case would be unfair because (1) the order for restitution already issued in the criminal case, if satisfied, will make the defrauded investors whole, (2) Vassallo has already been punished enough, and (3) Vassallo does not have the money to pay. None of these assertions convinces the court that it should refrain from ordering prejudgment interest.

First, Vassallo offers no support for his bare assertion that the restitution order would make the defrauded investors whole, if he satisfied the order. Vassallo ignores the fact that the purpose of pre-judgment interest in a securities fraud case is to make the defrauded investors whole. " Prejudgment interest reflects the victim's loss due to his inability to use the money for a productive purpose, and is therefore necessary to make the victim whole." Gordon, 393 F.3d at 1059 (affirming grant of prejudgment interest on criminal restitution judgment for victims of securities fraud).[6]

Second, the amount of punishment Vassallo is subject to in the criminal case is not relevant to the question of prejudgment interest. The disgorgement itself is not punishment. Hateley v. SEC, 8 F.3d 653, 656 (9th Cir. 1993) (" the $55,000 disgorgement order is not, in fact, a fine levied against the petitioners as punishment for their conduct. Rather it is the means by which the petitioners are required to remedy the unjust enrichment" ). The prejudgment interest is levied solely against this disgorgement, and is necessary

Page 1068

only to make the defrauded investors whole.

Third, Vassallo, who is represented by counsel, offers no explanation of any kind for why his current inability to pay prejudgment interest would render a judgment for prejudgment interest unfair. The court will not make up an explanation for him, and additionally notes that Vassallo consented to a judgment that contemplated that the SEC would later seek prejudgment interest, in addition to disgorgement and penalties.

C. Penalties.

The SEC is authorized to seek, and this court is authorized to impose - " upon a proper showing" - civil penalties for the securities law violations established in this case. See 15 U.S.C. § § 77t(d)(1) & 78u(d)(3)(A). The SEC requests the imposition of " third tier" penalties.

The court is authorized to impose " third tier" penalties if the defendant engaged in " fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement," and the violation " resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. § § 77t(d)(2)(C) & 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1003 & Table III (statutory amount of $100,000 maximum per violation, adjusted for inflation to $130,000 maximum per violation; or defendant's gross pecuniary gain).[7]

The penalty decision appears to be within this court's discretion. See SEC v. Pattison, 2011 WL 723600 at *5 (N.D. Cal. 2011) (" the discretion to determine the appropriate kind of penalty to impose lies with the district court" ), aff'd mem., 495 F.App'x 786 (9th Cir. 2012). The SEC argues for the largest possible penalty to reflect the seriousness of the case and the large losses to investors. Vassallo argues that there should be no penalty because a Magistrate Judge in a different case held that doing so would be " draconian in light of [defendant's] restitution penalty of $703,474.10, property forfeiture, money judgment of $1,190,470.10, and significant prison sentence." See C.J.'s Financial, 2012 WL 3600239 at *10.

The court has determined that a penalty is appropriate in this case. According to the allegations of the Complaint, which are presumed to be true for these purposes, Vassallo lied to his investors about what he would do with their money, covered up his trading losses by issuing false statements, misappropriated investor funds for his personal use, and ultimately caused his investors to lose substantial amounts in investments. This plainly qualifies Vassallo for the " tier three" penalty level. See, e.g., SEC v. CMKM Diamonds, Inc., 635 F.Supp.2d 1185, 1192 (D. Nev. 2009) (finding third tier penalties are warranted).

Determining the amount of the penalty is not as simple. It appears from the Complaint that Vassallo did initially engage in actual stock trading with investor funds. There is no allegation that the soliciting of funds and trading that Vassallo engaged in from 2004 to 2007 was fraudulent, or that the statements of return were fraudulent or incorrect. While Vassallo admits that he raised " over $40 million" from investors, it is not clear how much of that was raised illegally, or pursuant to the " Ponzi" scheme.[8] Accordingly,

Page 1069

the court does not know how many " violations" occurred, even though Vassallo admits that he raised " over $40 million" from 150 investors.

The court accordingly will impose the maximum penalty of (1) $130,000 for one violation of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), (2) $130,000 for one violation of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, (3) $130,000 for one violation of aiding and abetting Kenitzer's Exchange Act violations, (4) $130,000 for one violation of Sections 206(1) and (2) of the Investment Advisors Act, 15 U.S.C. § 80b-6(1) and (2), and (5) $130,000 for one violation of Section 206(4) of the Investment Advisors Act, 15 U.S.C. § 80b-6(4) and Rule 206(4)-8 thereunder, 17 C.F.R. § 275.206(4)-8. These penalties total $650,000.00.

IV. CONCLUSION

For the reasons set forth above, the SEC's motion is hereby GRANTED, with the detailed judgment issuing this day in the accompanying " Final Judgment Against Anthony Vassallo."

IT IS SO ORDERED.

FINAL JUDGMENT AGAINST ANTHONY VASSALLO

Plaintiff Securities and Exchange Commission (" Commission" ) has moved for issuance of a final judgment against defendant Anthony Vassallo. Having considered the papers submitted in support of and opposing the motion, the Commission's motion is hereby GRANTED, as follows:

I.

IT IS ORDERED THAT Vassallo and his agents, servants, employees, attorneys, and those persons in active concert or participation with any of them, who receive actual notice of this Judgment, by personal service or otherwise, and each of them, are permanently restrained and enjoined from, in the offer or sale of any securities, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly:

A. employing any device, scheme, or artifice to defraud; or
B. obtaining money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
C. engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser;

in violation of Section 17(a) of the Securities Act of 1933 (" Securities Act" ) [15 U.S.C. § 77q(a)].

II.

IT IS FURTHER ORDERED THAT Vassallo and his agents, servants, employees, attorneys, and those persons in active concert or participation with any of them, who receive actual notice of this Judgment, by personal service or otherwise, and each of them, are permanently restrained and enjoined from, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange:

A. employing any device, scheme, or artifice to defraud;
B. making any untrue statement of a material fact or omitting 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. engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person;

in connection with the purchase or sale of any security, in violation of Section 10(b) of the Securities Exchange Act of 1934 (" Exchange Act" ) [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].

III.

IT IS FURTHER ORDERED THAT Vassallo and his agents, servants, employees, attorneys, and those persons in active concert or participation with any of them, who receive actual notice of this Judgment, by personal service or otherwise, and each of them, are permanently restrained and enjoined from, directly or indirectly, by use of any means or instrumentality of interstate commerce:

A. employing any device, scheme, or artifice to defraud any client or prospective client; or
B. engaging in any act, practice or course of business which operates or would operate as a fraud or deceit upon any client or prospective client;

while engaged in the business of advising others for compensation as to the advisability of investing in, purchasing, or selling securities, in violation of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 (" Advisers Act" ) [15 U.S.C. § § 80b-6(1) and 80b-6(2)].

IV.

IT IS FURTHER ORDERED THAT Vassallo and his agents, servants, employees, attorneys, and those persons in active concert or participation with any of them, who receive actual notice of this Judgment, by personal service or otherwise, and each of them, are permanently restrained and enjoined from, directly or indirectly, by use of any means or instrumentality of interstate commerce, engaging in any act, practice, or course of business which is fraudulent, deceptive or manipulative, while acting as an investment adviser to any pooled investment vehicle, in violation of Section 206(4) of the Advisers Act [15 U.S.C. § 80b-6(4)] and Advisers Act Rule 206(4)-8 [17 C.F.R. § 275.206(4)-8].

V.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Vassallo shall pay disgorgement of his ill-gotten gains in the amount of $43,288,725.08 plus prejudgment interest of $874,048.92, for a total of $44,162,774.00. Defendant shall satisfy this obligation by paying $44,162,774.00 to the Securities and Exchange Commission within 14 days after entry of this Final Judgment.

Defendant may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request. Payment may also be made directly from a bank account via Pay.gov through the SEC website at http://www.sec.gov/about/offices/ofm.htm. Defendant may also pay by certified check, bank cashier's check, or United States postal money order payable to the Securities and Exchange Commission, which shall be delivered or mailed to

Enterprise Services Center
Accounts Receivable Branch
6500 South MacArthur Boulevard
Oklahoma City, OK 73169

and shall be accompanied by a letter identifying the case title, civil action number, and name of this Court; Anthony Vassallo as a defendant in this action; and specifying that payment is made pursuant to this Final Judgment.

Defendant shall simultaneously transmit photocopies of evidence of payment and case identifying information to the Commission's counsel in this action. By making this payment, Defendant relinquishes all legal and equitable right, title, and interest in such funds and no part of the funds shall be returned to Defendant.

The Commission shall hold the funds (collectively, the " Fund" ) and may propose a plan to distribute the Fund subject to the Court's approval. The Court shall retain jurisdiction over the administration of any distribution of the Fund. If the Commission staff determines that the Fund will not be distributed, the Commission shall send the funds paid pursuant to this Final Judgment to the United States Treasury.

The Commission may enforce the Court's judgment for disgorgement and prejudgment interest by moving for civil contempt (and/or through other collection procedures authorized by law) at any time after 14 days following entry of this Final Judgment. Defendant shall pay post judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961.

Defendant is also subject to a restitution order of $43,288,725.08 in a separate criminal proceeding, U.S. v. Vassallo, 2:09-cr-00179-GEB (E.D. Cal.). All payments the Defendant makes pursuant to that restitution order will be credited against his disgorgement obligation under this Final Judgment.

VI.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant shall pay a civil penalty in the amount of $650,000 to the Securities and Exchange Commission pursuant to 15 U.S.C. § 77t(d)(2) (Securities Act); 15 U.S.C. § 78u(d) (Exchange Act); and 15 U.S.C. § 80b-9(e) (Advisers Act). Defendant shall make this payment within 14 days after entry of this Final Judgment.

Defendant may transmit payment electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions upon request. Payment may also be made directly from a bank account via Pay.gov through the SEC website at http://www.sec.gov/about/offices/ofm.htm. Defendant may also pay by certified check, bank cashier's check, or United States postal money order payable to the Securities and Exchange Commission, which shall be delivered or mailed to

Enterprise Services Center
Accounts Receivable Branch
6500 South MacArthur Boulevar
Oklahoma City, OK 73169

and shall be accompanied by a letter identifying the case title, civil action number, and name of this Court; Anthony Vassallo as a defendant in this action; and specifying that payment is made pursuant to this Final Judgment.

Defendant shall simultaneously transmit photocopies of evidence of payment and case identifying information to the Commission's counsel in this action. By making this payment, Defendant relinquishes all legal and equitable right, title, and interest in such funds and no part of the funds shall be returned to Defendant. The Commission shall send the funds paid pursuant to this Final Judgment to the United States Treasury. Defendant shall pay post-judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961.

VII.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that the Consent of Defendant Anthony Vassallo to Judgment of Permanent Injunction and Other Relief (Docket No. 220) is incorporated herein with the same force and effect as if fully set forth herein, and that Defendant shall comply with all of the undertakings and agreements set forth therein.

VIII.

IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Final Judgment.

IX.

There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.


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