Securities and Exchange Commission v. Braslau et al, No. 2:2014cv01290 - Document 39 (C.D. Cal. 2014)
Court Description: ORDER GRANTING PLAINTIFFS MOTION FOR DEFAULT JUDGMENT AGAINST DEFENDANT STUART E. RAWITT 36 by Judge Otis D. Wright, II: Rawitt be permanently enjoined from future violations of: (i) Section 17(a) of the Securities Act; (ii) Section 10(b) of the Ex change Act and Rule 10b-5; (iii) Section 15(a)(1) of the Securities Exchange Act; and (iv) Section 15(b)(6)(B)(i) of the Securities Exchange Act. The Court also ORDERS that Rawitt pay disgorgement, prejudgment interest and a civil penalty in amounts to be determined at a later date upon noticed motion. (lc).Modified on 11/18/2014 .(lc).
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Securities and Exchange Commission v. Braslau et al Doc. 39 O 1 2 3 4 5 6 7 8 United States District Court Central District of California 9 10 11 12 SECURITIES AND EXCHANGE 13 Case 2:14-cv-01290-ODW(AJWx) COMMISSION, Plaintiff, 14 15 ORDER GRANTING PLAINTIFF’S v. MOTION FOR DEFAULT 16 SAMUEL BRASLAU, RAND J. JUDGMENT AGAINST 17 CHORTKOFF, and STUART E. DEFENDANT STUART E. RAWITT 18 RAWITT, [36] Defendants. 19 I. 20 INTRODUCTION 21 Samuel Braslau, Rand J. Chortkoff, and Stuart E. Rawitt fraudulently offered 22 and sold securities to investors who were told their money would finance a multi- 23 million dollar movie starring A-list celebrities that was “sure” to generate significant 24 returns. 25 percentage of investor proceeds earmarked for purposes unrelated to making the 26 movie, likely never could have been made. 27 Commission (“SEC”) filed suit against Braslau, Chortkoff, and Rawitt for multiple 28 violations of the Securities Act and the Securities Exchange Act. (ECF No. 1.) When (Compl. ¶ 1.) The movie was never made and, considering the large (Id.) The Securities Exchange Dockets.Justia.com 1 Rawitt failed to respond to the Complaint, default was entered and the SEC moved for 2 entry of default judgment. (ECF No. 36.) For the reasons discussed below, the Court 3 GRANTS the SEC’s Motion.1 (Id.) II. 4 FACTUAL ALLEGATIONS 5 1. 6 In 2010, Braslau and Chortkoff discussed acquiring several million dollars 7 purportedly to finance the production of a movie. (Compl. ¶ 19.) In December 2010, 8 Braslau formed Mutual Entertainment, LLC—a company that offered and sold 9 securities in the form of “membership units” investors purchased ostensibly to finance 10 Formation of the Fraud the movie. (Id. ¶ 20.) 11 An unemployed actor was named the managing member of Mutual 12 Entertainment, but Braslau exercised de facto control over the company, its finances, 13 and operations. (Id. ¶ 21.) The actor-managing member and Braslau shared signature 14 authority over Mutual Entertainment’s bank accounts, but Braslau transacted all the 15 activity and did not share records of his transactions. (Id. ¶ 22.) 16 In January 2011, Mutual Entertainment contracted with a film director to 17 purchase the rights to an unpublished story titled Marcel, later retitled The Smuggler, 18 for “$25,000 or 1% of the final going in budget, whichever amount is greater.” (Id. 19 ¶ 23.) Film Shoot, LLC paid $25,000 to Jasmine Pictures pursuant to this agreement. 20 (Id.) An unemployed musician was named the managing member of Film Shoot, but 21 Braslau exercised de facto control over the company, its finances, and operations. (Id. 22 ¶ 42.) The musician-managing member and Braslau shared signature authority over 23 Film Shoot’s bank accounts, but Braslau transacted all the activity and did not share 24 records of his transactions. (Id.) 25 Mutual Entertainment contracted with the same director to direct the movie and 26 agreed to finance the estimated $3.5 million budget. (Id. ¶ 24.) The director was 27 28 1 After carefully considering the papers filed concerning the Motion, the Court deems the matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; L.R. 7-15. 2 1 never used or paid. (Id.) 2 In February 2011, Mutual Entertainment contracted with Film Vergnuegen, 3 Inc. to secure a producer. (Id. ¶ 25.) The producer was never used and was paid 4 $75,000. (Id.) 5 In March 2011, Mutual Entertainment began offering and selling up to $7.5 6 million of securities in the form of membership units at $1 per unit with a $25,000 7 required minimum. (Id. ¶ 27.) The company reserved, and exercised, the right to 8 accept investments less than $25,000. (Id.) 2. 9 Execution of the Fraud Mutual Entertainment obtained investors through Mutual Entertainment 10 11 Ventures, Inc. (“MEV”) and Chortkoff. (Id. ¶ 28.) MEV and Chortkoff hired 12 “fronters” to cold call potential investors from lead lists that MEV and Chortkoff 13 purchased. (Id.) Braslau and Chortkoff created a script that fronters used to solicit 14 potential investors. (Id. ¶ 29.) Per the script, fronters asked whether the person was a 15 qualified investor and, if so, whether the person wanted to opt in and hear more about 16 an “opportunity to get in with a production company seeking qualified investors.” 17 (Id.) 18 Once the self-accredited potential investor opted in, fronters explained that 19 Mutual Entertainment was looking for people to invest in “the kind of project that 20 only comes around once in a great while.” (Id. ¶ 31.) Fronters said the movie would 21 be directed and produced by professionals with previous commercial success. (Id.) 22 Fronters provided a website with the movie’s “proposed” A-list cast and asked 23 whether the person was interested in hearing more about the investment opportunity 24 from a “Production Executive.” (Id.) 25 Once the self-accredited potential investor expressed continued interest, the 26 fronter provided the person’s information to Chortkoff, and Chortkoff provided the 27 information to a “closer.” (Id. ¶ 32.) 28 /// 3 1 Chortkoff oversaw the mailing of written offering materials to potential 2 investors. (Id. ¶ 34.) Among other materials, he supplied a glossy brochure that 3 included biographical sketches of the director and producer, a “proposed” A-list cast, 4 and budget and revenue figures for “comparable” movies. (Id.) The named director 5 and producer never provided any services. (Id. ¶¶ 24–25.) The proposed A-list cast 6 members were never contacted about appearing in the movie. (Id. ¶ 36.) And the 7 movies advertised as comparable were actually filmed and released. (Id. ¶ 35.) 8 From April 2011 through August 2013, Braslau, Chortkoff, and salespeople 9 raised over $1.8 million from at least 60 investors nationwide. (Id. ¶ 5.) Braslau 10 drafted and Chortkoff distributed memoranda to investors that affirmatively 11 misrepresented or failed to disclose material facts, including the rates of commissions 12 paid to salespeople. 13 Defendants and their associates, often as sales commissions or consulting fees, or to 14 facilitate the offering. (Id. ¶ 7.) (Id. ¶ 44.) Almost all investor money was diverted to the 15 3. Rawitt’s Role 16 Chortkoff hired Rawitt as a “closer.” (Id. ¶ 57.) Rawitt received a commission 17 of 27% of the amount invested by any person that Rawitt closed by himself and 10 to 18 15% of the amount invested by any person that Rawitt closed with the assistance of 19 others. (Id.) Through his involvement, Rawitt acted as a broker and dealer; however, 20 he was not registered with the SEC. (Id. ¶ 10.) 21 On July 15, 2010, Rawitt entered into a consent judgment permanently barring 22 him from violating Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of 23 the Securities Exchange Act. See SEC v. Rockwell Energy of Texas, LLC, et al., 4:09- 24 cv-4080 (S.D. Texas). 25 Chortkoff, Rawitt was subject to the SEC Order. (Id. ¶ 11.) (Id. ¶ 15.) During his involvement with Braslau and 26 4. 27 On February 20, 2014 the SEC filed this action against Defendants for multiple 28 The Civil Action violations of the Securities Act and the Securities Exchange Act. 4 (ECF No. 1) 1 Discovery was stayed pending completion of a parallel criminal case against 2 Defendants. (ECF No. 14.) On August 27, 2014, the SEC’s process server personally 3 served Rawitt with the Summons and Complaint. (ECF No. 22.) When Rawitt failed 4 to answer or otherwise respond, the Clerk of Court entered default. (Id.) On October 5 9, 2014, the SEC moved for default judgment. Because Rawitt has not appeared or 6 retained counsel in this action, the SEC served the instant Motion on Rawitt’s criminal 7 defense attorney by U.S. mail and email. (Greco Decl. ¶ 9.) Rawitt has not filed an 8 opposition. 9 5. The Criminal Action and Rawitt’s Guilty Plea 10 On October 24, 2014, Rawitt entered a plea agreement with the United States 11 Attorney’s Office in United States v. Samuel Braslau, et al., 2:14-cr-44-RGK (C.D. 12 Cal.). (Greco Decl. ¶ 3, Ex. 1.) He pleaded guilty to mail fraud in violation of 18 13 U.S.C. § 1341. (Id.) In the civil action, the SEC alleges that Rawitt made numerous 14 false and misleading statements to potential investors. (Compl. ¶¶ 85–95.) In the 15 criminal action, he said, “[a]lthough I do not recall each and every statement, I do 16 admit making many, if not most, of them to prospective investors.” (Rawitt Decl. 17 ¶ 13.) In the civil action, the SEC alleges that Rawitt “knew or was reckless in not 18 knowing” that his representations were false. (Compl. ¶ 98.) In the criminal action, 19 he said that he did not know his statements were false but admitted that he “chose not 20 to know and did not question [co-defendants Braslau and Chortkoff] as to the basis for 21 any such statement” and agreed that “at the very minimum [his] lack of knowledge, 22 therefore, was ‘reckless.’” (Rawitt Decl. ¶ 16.) 23 6. Judgment Sought 24 The SEC alleges four claims against Rawitt: (i) fraud in the offer or sale of 25 securities, in violation of Section 17(a) of the Securities Act; (ii) fraud in connection 26 with the purchase or sale of securities, in violation of Section 10(b) of the Exchange 27 Act and Rule 10b-5; (iii) acting as an unregistered broker or dealer, in violation of 28 Section 15(a)(1) of the Securities Exchange Act; and (iv) associating with a broker or 5 1 dealer in contravention of a prior SEC bar order, in violation of Section 15(b)(6)(B)(i) 2 of the Securities Exchange Act. (Id. ¶¶ 104 –115.) 3 The SEC seeks a permanent injunction barring Rawitt from future violations of 4 the Securities Act and the Securities Exchange Act. (Mot. 2.) The SEC also seeks an 5 order that Rawitt is subject to disgorgement of all ill-gotten gains, prejudgment 6 interest and the imposition of a civil penalty, but will later seek a final judgment 7 setting forth specific monetary relief. (Id.) III. 8 LEGAL STANDARD 9 Federal Rule of Civil Procedure 55(b) authorizes a district court to grant default 10 judgment after the Clerk enters default under Rule 55(a). Local Rule 55-1 requires 11 that the movant submit a declaration establishing (1) when and against which party 12 default was entered; (2) identification of the pleading to which default was entered; 13 (3) whether the defaulting party is a minor, incompetent person, or active service 14 member; and (4) that the defaulting party was properly served with notice. 15 A district court has discretion whether to enter default judgment. Aldabe v. 16 Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). Upon default, the defendant’s liability 17 generally is conclusively established, and the well-pleaded factual allegations in the 18 complaint are accepted as true. Televideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917– 19 19 (9th Cir. 1987) (per curiam) (citing Geddes v. United Fin. Grp., 559 F.2d 557, 560 20 (9th Cir. 1977)). In exercising its discretion, a court must consider several factors, including 21 22 (1) the possibility of prejudice to plaintiff; (2) the merits of plaintiff’s substantive 23 claim; (3) the sufficiency of the complaint; (4) the sum of money at stake; (5) the 24 possibility of a dispute concerning material facts; (6) whether the defendant’s default 25 was due to excusable neglect; and (7) the strong policy underlying the Federal Rules 26 of Civil Procedure favoring decisions on the merits. Eitel v. McCool, 782 F.2d 1470, 27 1471-72 (9th Cir. 1986). 28 /// 6 1 Upon proper showing, a permanent injunction shall be granted in enforcement 2 actions brought by the SEC pursuant to Section 20(b) of the Securities Act and 3 Section 21(d) of the Securities Exchange Act. See 15 U.S.C. § 77t(b); 15 U.S.C. 4 § 78u(d)(1). That burden is met when the evidence establishes a reasonable likelihood 5 of a future violation of the securities laws. SEC v. Koracorp Indus., Inc., 575 F.2d 6 692 (9th Cir. 1978). The factors to be considered include the degree of scienter 7 involved; the isolated or recurrent nature of the infractions; the defendant’s 8 recognition of the wrongful nature of his conduct; the likelihood that, based on the 9 defendant’s occupation, future violations might occur; and the sincerity of the 10 defendant’s assurances against future violations. See id. IV. 11 12 A. DISCUSSION Notice 13 On August 27, 2014, the SEC’s process server personally served Rawitt with 14 the Summons and Complaint. (ECF No. 22.) Therefore, the Court finds that the SEC 15 properly served Rawitt in compliance with Federal Rule of Civil Procedure 16 4(e)(2)(A). 17 B. Eitel Factors 18 The Court finds that the Eitel factors weigh in favor of default judgment. 19 1. 20 If the Court does not grant default judgment, the case will be at a standstill. 21 Rawitt has had ample opportunity to participate in the adjudicatory process and help 22 the Court resolve this matter. The SEC Would Suffer Prejudice 23 2. The SEC Has Brought Meritorious Claims 24 The SEC’s allegations establish that Rawitt violated Section 17(a) of the 25 Securities Act and Section 10(b) of the Securities Exchange Act. Section 17(a) 26 prohibits fraud in the offer and sale of securities. Similarly, Section 10(b) and Rule 27 10b-5 prohibit fraud in connection with the purchase or sale of any security. A party 28 violates these anti-fraud provisions by making false or misleading representations that 7 1 concern material facts. See Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC 2 Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). 3 In his criminal guilty plea, Rawitt substantiated the SEC’s civil allegations by 4 admitting that he recklessly made false and material misrepresentations to potential 5 investors. (Rawitt Decl. ¶¶ 13, 16.) Therefore, he violated Section 17(a) of the 6 Securities Act and Section 10(b) and Rule 10b-5 of the Securities Exchange Act. 7 The SEC’s allegations establish that Rawitt violated Section 15(a)(1) of the 8 Securities Exchange Act, which requires that anyone who effects a transaction to 9 induce the purchase or sale of any security be registered with the SEC. 10 Rawitt acted as a broker in connection with co-Defendants’ securities offerings. 11 He directly solicited potential investors and raised substantial amounts of money. He 12 received transaction-based compensation, earning 27% of the amount invested by any 13 person he closed by himself and 10 to 15% of the amount invested by any person he 14 closed with the assistance of others. Rawitt was not registered as a broker or dealer 15 when he sold securities. Therefore, he violated Section 15(a)(1) of the Securities 16 Exchange Act. 17 The SEC’s allegations establish that Rawitt violated Section 15(b)(6)(B)(i) of 18 the Securities Exchange Act, which prohibits any person from associating with a 19 broker or dealer in contravention of a prior SEC bar order. Through his involvement 20 with Braslau and Chortkoff, Rawitt violated the October 27, 2010 Order instituted by 21 the SEC. Therefore, he violated Section 15(b)(6)(B)(i). 22 23 The SEC has pleaded actionable Securities Act and Securities Exchange Act claims against Rawitt. 24 3. The Amount at Stake Weighs in Favor of Default Judgment 25 The SEC seeks a Court order that Rawitt be subject to disgorgement, 26 prejudgment interest and the imposition of a civil penalty, but does not currently seek 27 any specific amount for monetary relief. Therefore, there is no amount at stake in this 28 Motion and this factor does not apply. 8 1 4. There is Little Possibility of Dispute as to Material Facts 2 The statements that Rawitt made in his criminal guilty plea substantiate the 3 SEC’s civil allegations and therefore leave little possibility of a dispute as to material 4 facts. 5 5. 6 The SEC’s process server personally served Rawitt with the Summons and 7 Complaint and Rawitt did not answer or otherwise respond. The SEC then filed the 8 instant Motion and served Rawitt’s criminal defense attorney by U.S. mail and email. 9 Rawitt has not filed an opposition. This leaves little possibility that default was due to 10 There is Little Possibility Default was Due to Excusable Neglect excusable neglect. 6. 11 Policy for Deciding on the Merits Weighs in Favor of Granting Default Judgment 12 13 Although Rawitt did not respond to the Complaint, his admissions in his guilty 14 plea in the criminal case substantiate the SEC’s civil allegations. The Court finds that 15 this factor does not preclude entry of default judgment. 16 C. Permanent Injunction 17 The factors established for imposing injunctive relief weigh heavily in favor of 18 granting a permanent injunction. Rawitt’s violations were continued and egregious. 19 Repeatedly, Rawitt made false and misleading representations to potential investors 20 that were designed to convince them to invest so that he could earn substantial and 21 undisclosed sales commissions drawn from their investment. He did so with full 22 knowledge that no movie had been made or likely could ever be made. 23 V. CONCLUSION 24 The Court ORDERS that Rawitt be permanently enjoined from future 25 violations of: (i) Section 17(a) of the Securities Act; (ii) Section 10(b) of the 26 Exchange Act and Rule 10b-5; (iii) Section 15(a)(1) of the Securities Exchange Act; 27 and (iv) Section 15(b)(6)(B)(i) of the Securities Exchange Act. 28 ORDERS that Rawitt pay disgorgement, prejudgment interest and a civil penalty 9 The Court also 1 in amounts to be determined at a later date upon noticed motion. For the reasons 2 discussed above, the Court GRANTS the SEC’s Motion for Default Judgment. (ECF 3 No. 36.) 4 IT IS SO ORDERED. 5 6 November 17, 2014 7 8 9 ____________________________________ OTIS D. WRIGHT, II UNITED STATES DISTRICT JUDGE 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10
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