Securities and Exchange Commission v. Muehler

          Present: The Honorable CHRISTINA A. SNYDER

          CIVIL MINUTES - GENERAL

         Proceedings: (IN CHAMBERS) - PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION AGAINST STEVEN J. MUEHLER, CLAUDIA MUEHLER, ALTAVISTA CAPITAL MARKETS, LLC, ALTAVISTA PRIVATE CLIENT, LLC, AND ALTAVISTA SECURITIES, LLC (Dkt. 4, filed February 28, 2018)

         I. INTRODUCTION

         On February 28, 2018, the Securities and Exchange Commission (“SEC”) filed a civil enforcement action against defendants Steven J. Muehler (“Muehler”), Claudia Muehler (“C. Muehler”), Koorosh “Danny” Rahimi (“Rahimi”), AltaVista Capital Markets, LLC, AltaVista Private Client, LLC, and AltaVista Securities, LLC (collectively, the “AltaVista Companies”). Dkt. 1 (“Compl.”). The SEC asserts claims against defendants for (1) violations of Section 5(c) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (the “Securities Act”), for (2) violations of Sections 10(b), 15(a), and 20(e) of the Exchange Act of 1934, 15 U.S.C. § 78j(b), 78o, 78t (the “Exchange Act”), and for (3) violations of Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.

         The gravamen of the SEC's complaint is that defendants have been operating an unregistered broker-dealer and securities fraud scheme in contravention of the securities laws and a prior cease-and-desist order issued by the SEC against Muehler for similar misconduct in 2016. Compl. Ex. B (“SEC Order”). The SEC requests the Court to issue a preliminary injunction enjoining defendants Muehler, C. Muehler, and the AltaVista Companies from committing further violations of federal securities laws and from violating the cease-and-desist requirements of the SEC Order.^[1] Dkts. 4-17 (“Motion”).

         On March 6, 2018, defendants were served summons, a copy of the complaint, and a copy of the motion for preliminary injunction. Dkts. 22-27. On March 19, 2018, the SEC filed a notice of non-opposition to its motion for preliminary injunction. Dkt. 28.

         On April 2, 2018, the Court held oral argument. Defendant appeared and did not provide any opposition in response to the tentative of the Court.

         Having carefully considered the SEC's arguments, the Court finds and concludes as follows.

         II. BACKGROUND

         The SEC alleges the following facts.

         A. The AltaVista Companies and the Current Scheme

          The SEC alleges that Muehler and his wife, C. Muehler, co-founded the AltaVista Companies in late 2015 and continue to operate these companies out of their condominium in Marina Del Rey, California. Compl. ¶¶ 12-17, 22-24, 36. Despite Muehler disclaiming his ownership and management roles in the AltaVista Companies, the SEC alleges that Muehler maintains control of the AltaVista Companies and their operations, often treating them “as interchangeable parts of a single enterprise under his control.” Id. ¶¶ 37-39.

         The SEC's primary allegation is that defendants have been engaging in the business of a broker-dealer through the instrumentalities of interstate commerce, offering unregistered securities on an unregistered “alternative trading system” (“ATS”)^[2] called the “Nanocap Market, ” and are committing these securities violations by making various false and misleading statements about the AltaVista Companies' experience, capabilities, and association with Muehler. Id. ¶¶ 4-8. Moreover, the SEC alleges that none of the defendants have ever registered with the SEC in any capacity.^[3] Id. ¶¶ 14, 17, 22-24, 84- 86. The SEC asserts that this “AltaVista scheme” is virtually indistinguishable from Muehler's previous scheme, the “Alternative Securities Market Group” (“ASMG”) scheme, which was the subject of the prior SEC Order. Compl. ¶ 25, 27-28.

         In particular, the SEC alleges that Muehler, with substantial assistance from his wife, C. Muehler, has been operating this unregistered broker-dealer scheme through the AltaVista Companies since November 2015, whereby the Companies solicit small business owners and potential investors. Id. ¶¶ 8, 25-26, 89, 91-94. Muehler allegedly induced customers into signing up for the AltaVista Companies' services by marketing the Companies as a combination of underwriting, broker-dealer, and ATS services that are well-established players in the securities industry and have connections to thousands of investors. Id. ¶¶ 43-44, 95. Since their inception, the AltaVista Companies have allegedly signed “Issuer Agreements” with more than 20 customers and have collected approximately $100, 000 in fees for their unlawful services. Id. ¶ 70.

         Through the Issuer Agreements, defendants allegedly purport to offer several services such as examining customers' financial statements and business plans, preparing securities offerings, identifying and screening potential investors, and marketing securities to investors. Id. ¶ 57. Defendants also assist customers in obtaining qualification from the SEC under Regulation A of the Securities Act, and allegedly offer to underwrite customers' offerings of Customer Preferred Stock. Id. ¶¶ 58, 61. Qualified customers' securities are then listed on the Nanocap Market that was created, developed, and operated by Muehler. Id. ¶¶ 45, 59. The Issuer Agreements also allegedly include a Minimum Investment Commitment guarantee that falsely promises that defendants can raise minimum levels of capitalization from investors, or, in the alternative, an AltaVista Investment Fund will purchase enough Customer Preferred Stock to meet the Minimum Investment Commitment. Id. ¶ 62-64. The SEC alleges that defendants falsely claim to have millions of dollars on hand in the “AltaVista Investment Funds;” however, the AltaVista Investment Funds allegedly have minimal assets and no investors. Id. ¶¶ 44, 63-64, 94. The SEC further alleges that as compensation for these purported services, defendants have received upfront fees ranging from $10, 000 to $20, 000; monthly fees ranging from $400 to $1, 500 per month; “Broker-Dealer Fees” equal to a certain percentage of the funds raised from investors; and, an equity interest in each issuer customer upon the occurrence of certain milestones in the process of successful capitalization. Id. ¶¶ 67, 69.

         The SEC asserts that Muehler has been personally involved with providing services to customers by structuring proposed offerings of customers' securities, drafting and submitting Regulation A offering statements to the SEC, preparing Nanocap Market “listing pages, ” soliciting investors by purchasing leads on the Internet, and screening each investor that expresses interest. Id. ¶¶ 71-77. The SEC claims that C. Muehler has substantially assisted Muehler in the scheme and in violating the terms of the SEC Order by helping Muehler formally organize the AltaVista Companies, funding the companies' expenses, identifying potential customers, collecting and depositing customer fees, and allowing Muehler to sign agreements using her name. Id. ¶ 263. Moreover, C. Muehler has actively participated in convincing customers to sign up for services and facilitating agreements. Id. ¶¶ 263-67.

         In its motion and a supporting declaration by counsel, the SEC asserts that the AltaVista scheme is ongoing, and that defendants have defrauded a married couple, referred to as Mr. and Mrs. A, as recently as February 2018, by advertising a fraudulent fixed income bond offering on the Internet. Motion at 11; Jasper Decl. ¶¶ 99-100. The SEC has also attached 95 exhibits in support of its motion, including sworn investigative testimony, e-mails strings, Issuer Agreements, and press releases.

         B. The SEC Order and Muehler's Past Schemes

         The SEC alleges that defendants' current scheme is a reincarnation of the prior ASMG scheme. Compl. ¶ 5, 27. The ASMG scheme took place between August 2013 and September 2015. Id. ¶ 27. In this scheme, Muehler and entities under his control made false and misleading statements to induce small business owners to sign up for broker-dealer services. Id. ¶ 28. Muehler also attempted to sell securities on behalf of his customers, but was unable to consummate any transactions before the SEC instituted enforcement proceedings against him. Id.

         Muehler reached a settlement with the SEC, whereby he consented to the entry of the SEC Order. Id. ¶ 29. Under the terms of the settlement, Muehler admitted that he and his companies held themselves out as broker-dealers, offered to effect securities transactions for customers pursuant to Regulation A, and made false and misleading statements to persuade customers to sign up for his services. Id. ¶¶ 29-31. Muehler acknowledged that this conduct violated the federal securities laws. Id. ¶ 32. The SEC now asserts that Muehler has also been the subject of cease-and-desist orders from Minnesota and California for similar conduct, which were issued prior to the SEC's proceedings and which he concealed from prospective customers. Id. ¶ 34.

         In addition to ordering Muehler to cease-and-desist from future violation of sections 10(b) and 15(a) of the Exchange Act and Rule 10b-5, the SEC Order barred Muehler from associating with a broker or dealer, participating in penny stock or ATS offerings, or acting as an officer or director of a public company. Id. ¶ 33. Muehler was also ordered to pay over $410, 000 in disgorgement and civil penalties. Id. The SEC alleges that Muehler is currently violating the SEC Order, and has provided customers with false explanations of the order. Id. ¶¶ 4, 88, 98. The SEC alleges that contrary to Muehler's ...