Securities and Exchange Commission v. Vassallo et al, No. 2:2009cv00665 - Document 503 (E.D. Cal. 2014)
Court Description: ORDER signed by Judge Lawrence K. Karlton on 5/22/14 ORDERING that the SEC's 488 Motion is GRANTED, with the detailed judgment issuing this day in the accompanying Final Judgment Against Anthony Vassallo. (Kastilahn, A)
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Securities and Exchange Commission v. Vassallo et al Doc. 503 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA 10 11 SECURITIES AND EXCHANGE COMMISSION, No. CIV. S-09-0665 LKK/DAD 12 Plaintiff, 13 ORDER v. 14 15 16 ANTHONY VASSALLO, KENNETH KENITZER, and EQUITY INVESTMENT MANAGEMENT AND TRAINING, INC., 17 Defendants. 18 19 The U.S. Securities and Exchange Commission (“SEC”), in this 20 securities fraud enforcement action, moves for a final judgment 21 of disgorgement for $43 million against defendant Anthony 22 Vassallo, with pre-judgment interest, and civil penalties. 23 No. 488. 24 the motion. 25 ECF For the reasons set forth below, the court will grant I. BACKGROUND 26 According to the SEC’s complaint, ECF No. 1, from 27 approximately May 2004 through November 2008, defendant Vassallo 28 1 Dockets.Justia.com 1 (and Kenneth Kenitzer, who is not involved in this motion), 2 raised over $40 million from approximately 150 investors. 3 some point, if not from the very beginning, the investors’ funds 4 were lost to Vassallo’s “Ponzi” scheme, in which earlier 5 investors were paid “returns” from the investments of later 6 investors. 7 eventually came to light in 2008, when investors found that they 8 could not access their funds. 9 At Vassallo hid the fraud from his investors, but it II. PROCEDURAL HISTORY 10 A. 11 On March 11, 2009, the Securities and Exchange Commission The Civil Case. 12 (“SEC”) sued Anthony Vassallo (“Vassallo”) and Equity Investment 13 Management and Trading, Inc. (“EIMT”) for securities fraud. 14 No. 1. 15 Stephen E. Anderson to be the Receiver for EIMT, and empowered 16 him to “[t]ake all steps the receiver deems necessary to secure 17 and protect the assets and property of EIMT.” ECF On April 30, and July 31, 2009, the court appointed ECF No. 52. 18 On March 9, 2010, based upon a Consent and Stipulation 19 between the SEC and Vassallo (ECF No. 220), the court entered the 20 Judgment of Permanent and Other Relief Against Defendant Anthony 21 Vassallo. 22 by the Commission, the Court shall determine whether it is 23 appropriate to order disgorgement of ill-gotten gains and/or 24 civil penalties,” against Vassallo, and if so, the amounts. 25 at 4, ¶ V. 26 the SEC’s motion for disgorgement, interest and penalties, and 27 solely for the purposes of that motion, “the allegations of the 28 Complaint shall be accepted as and deemed true by the Court.” ECF No. 228. The Judgment provides that “upon motion Id., The judgment also provides that in connection with 2 1 Judgment at 4 ¶ V. 2 B. 3 On March 18, 2009, the United States filed a criminal 4 complaint against Vassallo, charging him with conspiracy, mail 5 fraud, wire fraud, money laundering, and securities fraud. 6 v. Vassallo, 2:9-cr-179 GEB (E.D. Cal.).1 7 Grand Jury returned an indictment against Vassallo, charging him 8 with mail fraud, wire fraud and money laundering. 9 Vassallo, id., ECF No. 19. The Criminal Case. U.S. On April 15, 2009, the U.S. v. On February 1, 2013, Vassallo agreed 10 to plead guilty to Count 2 of the indictment, wire fraud. 11 No. 115. On September 19, 2013, the district court entered an 12 Amended Judgment against Vassallo, convicting him of wire fraud, 13 based upon his guilty plea. 14 The remaining parts of the indictment were dismissed. 15 ECF U.S. v. Vassallo, id., ECF No. 150. Id. As part of his sentence, Vassallo was ordered to pay 16 restitution of $43 million to the defrauded investors. 17 ECF No. 150 at 5 (“The defendant must make restitution … to the 18 following payees in the amount listed below”). See id., 19 C. 20 On October 4, 2013, the Receiver filed a motion for a The Motion for Disgorgement. 21 judgment of disgorgement of $43 million against Vassallo. 22 ECF No. 479. 23 expressed concern, and later requested briefing, about whether 24 the requested judgment of disgorgement would conflict with the See At the hearing on the Receiver’s motion, the court 25 1 26 27 The civil case was assigned to the undersigned, and the criminal case was assigned to Hon. Garland E. Burrell. This court declined to “relate” the cases to the same judge. ECF No. 28. 28 3 1 $43 million restitution order entered against Vassallo in the 2 criminal case. 3 See ECF No. 485.2 The SEC thereupon filed this motion, seeking the same 4 $43 million disgorgement relief previously sought by the 5 Receiver, but in addition, seeking prejudgment interest and civil 6 penalties. 7 Receiver withdrew his own motion. ECF No. 488. In light of the SEC’s motion, the ECF No. 489. 8 The SEC argues that (1) disgorgement will not conflict with 9 the criminal restitution because Vassallo will receive a set-off 10 2 11 12 13 14 The court also requested briefing on (1) whether a summary procedure was appropriate for the Receiver’s request, (2) whether there is evidence that the funds sought to be disgorged are assets of EIMT to which Vassallo has no legitimate claim (the standard for “relief” or “nominal” defendant disgorgement), and (3) whether collateral estoppel, based upon the criminal conviction for mail and wire fraud, and money laundering (not securities fraud), was appropriate in this case. 15 16 17 18 19 20 21 22 23 24 25 26 27 Now that the SEC is seeking the disgorgement relief, the first two of these issues no longer exist. The SEC’s motion seeks a restitution order outside of the summary procedures, and it is based upon Vassallo’s role as a securities law violator (not a relief or nominal defendant). As for the third issue (collateral estoppel), the SEC correctly points out that the basis for its assertion that Vassallo has violated the securities laws is this court’s judgment of permanent injunction against Vassallo. Under that order, when the SEC seeks disgorgement, interest and penalties, as it now does, “the allegations of the Complaint shall be accepted as and deemed true by the Court.” Judgment at 4 ¶ V. The Complaint sufficiently alleges that Vassallo defrauded investors of “more than $40 million” through various securities law violations. Complaint ¶¶ 1 & 13. Accordingly, to the degree the SEC seeks disgorgement of $40 million (rather than the requested $43 million), the third issue no longer exists, either. However, the court finds that the SEC’s collateral estoppel argument has demonstrated that Vassallo’s ill-gotten gains total $43 million. Accordingly, that will be the amount of disgorgement ordered. 28 4 1 in the restitution based upon any disgorgement he pays, (2) this 2 court is authorized by law to order disgorgement, pre-judgment 3 interest and civil penalties, and (3) the consent judgment 4 against Vassallo contemplates that the SEC will seek disgorgement 5 and penalties. 6 Vassallo opposes the motion on the grounds that since the 7 criminal case has already granted $43 million in restitution, 8 this court should exercise its discretion by not imposing any 9 more financial remedies. Specifically, Vassallo asserts that 10 (1) the criminal restitution order fully compensates his victims, 11 (2) he has already been sufficiently punished, and (3) the 12 judgment will go unpaid since Vassallo does not have sufficient 13 funds, thus preventing the judgment from serving its intended 14 purpose. 15 III. STANDARDS 16 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. 17 18 19 20 SEC v. First Pacific Bancorp, 142 F.3d 1186, 1191-92 (9th 21 Cir. 1998) (citations omitted), cert. denied, 525 U.S. 1121 22 (1999).3 23 “[T]he amount of disgorgement should include all gains flowing from the illegal activities.” Disgorgement need be “only a 24 25 26 27 3 “Further, where two or more individuals or entities collaborate or have a close relationship in engaging in the violations of the securities laws, they have been held jointly and severally liable for the disgorgement of illegally obtained proceeds.” Id. 28 5 1 reasonable approximation of profits causally connected to the violation.” 2 SEC v. Platforms Wireless Int’l Corp., 617 F.3d 1072, 1096 (9th 3 Cir. 2010). 4 IV. ANALYSIS 5 A. 6 The SEC asserts that there is no conflict between its Civil Disgorgement. 7 requested $43 million civil disgorgement and the $43 criminal 8 restitution already ordered in the criminal case. 9 agreement makes express reference to the civil case, and the fact The plea 10 that the receiver “has recovered some funds for investors.” 11 NO. 155 at 3, ¶ II(B). 12 “[t]he parties agree that the total amount of [criminal] 13 restitution shall be credited by the amounts disbursed by the 14 receiver to the victims of this crime.” 15 there appears to be no encroachment on the criminal judgment, as 16 that judgment specifically contemplates an overlapping civil 17 disgorgement order, and the disbursement of disgorged funds to 18 investors. 19 ECF Further, the plea agreement states that Id. In light of this, The SEC cites no Ninth Circuit cases addressing this issue, 20 and the court’s own research revealed none. 21 Palmisano, 135 F.3d 860 (2nd Cir.), cert. denied, 525 U.S. 1023 22 (1998), the Second Circuit reviewed a case that involved a 23 similarly overlapping disgorgement order, after a criminal 24 restitution order had already been entered. 25 that there was no Double Jeopardy issue, the court affirmed the 26 disgorgement order. 27 modified the disgorgement order: 28 However in SEC v. After determining Palmisano, 135 F.3d at 867. However, it to provide that to the extent that Palmisano 6 1 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. 2 3 4 Id., 135 F.3d at 866-67. 5 Vassallo criminal case.4 6 B. 7 This offset is already built in to the 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. 8 9 10 11 SEC v. Cross Financial Services, Inc., 12 (C.D. Cal. 1995) (emphasis added); SEC v. M & A West, Inc., 538 13 F.3d 1043, 1054 (9th Cir. 2008) (affirming district court 14 judgment ordering disgorgement, with pre-judgment interest, “to 15 ensure that [defendant] is not allowed to benefit from his 16 unlawful conduct”).5 Whether to order pre-judgment interest is within this 17 18 908 F. Supp. 718, 734 4 20 Accord, SEC v. C.J.'s Fin., 2012 WL 3600239 at *9 (E.D. Mich.) (Whalen, M.J.), (approving disgorgement order, so long as defendant is given credit for amounts paid in criminal restitution), adopted 2012 WL 3597644 (E.D. Mich. 2012). 21 5 19 22 23 24 25 26 27 In the criminal case, the district court determined that Vassallo “does not have the ability to pay interest” on the restitution, and therefore waived it. U.S. v. Vassallo, 9-cr179, ECF No. 150 at 5. That waiver applied to the post-judgment interest on criminal restitution, authorized by 18 U.S.C. § 3612(f). Pre-judgment interest in certain criminal cases is also authorized by the Mandatory Victims Restitution Act of 1996, 18 U.S.C. §§ 3663A & 3664. See U.S. v. Gordon, 393 F.3d 1044, 1057-59 (9th Cir. 2005), cert. denied, 546 U.S. 957 (2005). Neither side has addressed whether pre-judgment interest was available in the criminal case, nor whether it might be relevant to the decision here, so this court does not address it. 28 7 1 court’s discretion, which in turn, should be guided by 2 “fundamental considerations of fairness.” 3 Whinney, 489 U.S. 169, 176 (1989). 4 ordering pre-judgment interest in this case would be unfair 5 because (1) the order for restitution already issued in the 6 criminal case, if satisfied, will make the defrauded investors 7 whole, (2) Vassallo has already been punished enough, and 8 (3) Vassallo does not have the money to pay. 9 assertions convinces the court that it should refrain from 10 Osterneck v. Ernst & Vassallo asserts that None of these ordering prejudgment interest. 11 First, Vassallo offers no support for his bare assertion 12 that the restitution order would make the defrauded investors 13 whole, if he satisfied the order. 14 the purpose of pre-judgment interest in a securities fraud case 15 is to make the defrauded investors whole. 16 reflects the victim's loss due to his inability to use the money 17 for a productive purpose, and is therefore necessary to make the 18 victim whole.” 19 prejudgment interest on criminal restitution judgment for victims 20 of securities fraud). 21 Vassallo ignores the fact that “Prejudgment interest Gordon, 393 F.3d at 1059 (affirming grant of 6 Second, the amount of punishment Vassallo is subject to in 22 the criminal case is not relevant to the question of prejudgment 23 interest. 24 SEC, 8 F.3d 653, 656 (9th Cir. 1993) (“the $55,000 disgorgement 25 order is not, in fact, a fine levied against the petitioners as 26 6 27 The disgorgement itself is not punishment. Hateley v. Cf., Burgess v. Premier Corp., 727 F.2d 826, 838 (9th Cir. 1984) (prejudgment interest was not necessary to make victims whole, where proper showing was made). 28 8 1 punishment for their conduct. Rather it is the means by which the 2 petitioners are required to remedy the unjust enrichment”). 3 prejudgment interest is levied solely against this disgorgement, 4 and is necessary only to make the defrauded investors whole. 5 The Third, Vassallo, who is represented by counsel, offers no 6 explanation of any kind for why his current inability to pay 7 prejudgment interest would render a judgment for prejudgment 8 interest unfair. 9 him, and additionally notes that Vassallo consented to a judgment The court will not make up an explanation for 10 that contemplated that the SEC would later seek prejudgment 11 interest, in addition to disgorgement and penalties. 12 C. 13 The SEC is authorized to seek, and this court is authorized Penalties. 14 to impose – “upon a proper showing” – civil penalties for the 15 securities law violations established in this case. 16 U.S.C. §§ 77t(d)(1) & 78u(d)(3)(A). 17 imposition of “third tier” penalties. 18 See 15 The SEC requests the The court is authorized to impose “third tier” penalties if 19 the defendant engaged in “fraud, deceit, manipulation, or 20 deliberate or reckless disregard of a regulatory requirement,” 21 and the violation “resulted in substantial losses or created a 22 significant risk of substantial losses to other persons.” 23 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii); 17 C.F.R. § 201.1003 24 & Table III (statutory amount of $100,000 maximum per violation, 25 adjusted for inflation to $130,000 maximum per violation; or 26 defendant’s gross pecuniary gain).7 15 27 7 28 First and second tier penalties are available when there were no significant losses to investors (second tier), or fraud was 9 1 The penalty decision appears to be within this court’s 2 discretion. 3 Cal. 2011) (“the discretion to determine the appropriate kind of 4 penalty to impose lies with the district court”), aff’d mem., 495 5 Fed. Appx. 786 (9th Cir. 2012). 6 possible penalty to reflect the seriousness of the case and the 7 large losses to investors. 8 no penalty because a Magistrate Judge in a different case held 9 that doing so would be “draconian in light of [defendant’s] See SEC v. Pattison, 2011 WL 723600 at *5 (N.D. The SEC argues for the largest Vassallo argues that there should be 10 restitution penalty of $703,474.10, property forfeiture, money 11 judgment of $1,190,470.10, and significant prison sentence.” 12 C.J.’s Financial, 2012 WL 3600239 at *10. 13 See The court has determined that a penalty is appropriate in 14 this case. 15 are presumed to be true for these purposes, Vassallo lied to his 16 investors about what he would do with their money, covered up his 17 trading losses by issuing false statements, misappropriated 18 investor funds for his personal use, and ultimately caused his 19 investors to lose substantial amounts in investments. 20 plainly qualifies Vassallo for the “tier three” penalty level. 21 See, e.g., SEC v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1885, 1192 22 (D. Nev. 2009) (finding third tier penalties are warranted). 23 Determining the amount of the penalty is not as simple. 24 appears from the Complaint that Vassallo did initially engage in 25 actual stock trading with investor funds. According to the allegations of the Complaint, which not involved (first tier). & 78u(d)(3)(B). 15 U.S.C. §§ 77t(d)(2) 28 10 It There is no allegation 26 27 This 1 that the soliciting of funds and trading that Vassallo engaged in 2 from 2004 to 2007 was fraudulent, or that the statements of 3 return were fraudulent or incorrect. 4 he raised “over $40 million” from investors, it is not clear how 5 much of that was raised illegally, or pursuant to the “Ponzi” 6 scheme.8 7 “violations” occurred, even though Vassallo admits that he raised 8 “over $40 million” from 150 investors. While Vassallo admits that Accordingly, the court does not know how many 9 The court accordingly will impose the maximum penalty of 10 (1) $130,000 for one violation of Section 17(a) of the Securities 11 Act, 15 U.S.C. § 77q(a), (2) $130,000 for one violation of 12 Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and 13 Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, (3) $130,000 for 14 one violation of aiding and abetting Kenitzer’s Exchange Act 15 violations, (4) $130,000 for one violation of Sections 206(1) and 16 (2) of the Investment Advisors Act, 15 U.S.C. § 80b-6(1) and (2), 17 and (5) $130,000 for one violation of Section 206(4) of the 18 Investment Advisors Act, 15 U.S.C. § 80b-6(4) and Rule 206(4)-8 19 thereunder, 17 C.F.R. § 275.206(4)-8. 20 $650,000.00. 21 IV. 22 These penalties total CONCLUSION For the reasons set forth above, the SEC’s motion is hereby 23 24 25 26 27 8 The Complaint alleges that Vassallo provided potential investors documents “purporting to show” that he had never suffered a loss and that he had a trading program returning 3.5% per month. Complaint ¶ 12. The Complaint does not allege that those claims were false or fraudulent from the very beginning. Thus, Vassallo may have believed his own publicity, rather than knowingly engaging in a Ponzi scheme, at least in the beginning. 28 11 1 GRANTED, with the detailed judgment issuing this day in the 2 accompanying “Final Judgment Against Anthony Vassallo.” 3 IT IS SO ORDERED. 4 DATED: May 22, 2014. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 12
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