WILLIAM D. QUARLES, JR., District Judge.
The Securities and Exchange Commission ("SEC") sued Nathan Chapman, Chapman Capital Management ("CCM"),
Before 1999, Chapman founded and was the chairman of the board, chief executive
CCM was the investment manager for the DEM-MET Trust, a pooled trust designed for diversified investments using minority-owned sub-advisers. Id. ¶ 16. From January 1997 to August 2001, Alan Bond was a sub-adviser to the DEM-MET Trust through his investment company, Albriond Capital Management. Id. ¶ 17.
In 1998, Chapman took two companies public: Chapman Holdings, Inc. ("CHI"), ICC's parent company, and Chapman Capital Management Holdings, Inc. ("CCMH"), CCM's parent company. Id. ¶ 21. The Initial Public Offerings ("IPO") were successful, netting over $12 million, and by November 1999, Chapman owned about 73 percent of CHI's and CCMH's outstanding shares. Id.
In November 1999, Chapman introduced eChapman, a new public company he planned to form by merging CHI and CCMH. TCC would be the lead, and largest, underwriter for eChapman's IPO. Id. ¶¶ 24-25, 27. At that time, eChapman filed an initial registration statement with the SEC for an IPO of 3,333,333 shares of its common stock, costing $14 to $16 per share. Id. ¶ 25. CHI and CCMH's shares would be converted into eChapman shares during the merger, and Chapman would own about 63 percent of the new company. Id. 126. Chapman solicited Bond to buy 200,000 of the IPO shares using DEM-MET funds at the $13 per share price, and other DEM-MET sub-advisers to buy 20,000 of the shares during the IPO. ECF No. 1 ¶ 47; ECF No. 66 ¶¶ 44, 47.
In early 2000, stock values of internet companies dropped sharply and interest in eChapman fell. By June 2000, the underwriters had commitments for slightly more than one-third of the shares to be offered in the IPO, and eChapman reduced the number and asking price of shares it would offer, and pushed back its offering date. ECF Nos. 1 ¶¶ 33-34; 66 ¶ 35.
On June 15, 2000, eChapman's IPO opened and the underwriters offered 1,260,000 shares at $13 per share. The IPO purchases were recorded with trade and process dates of June 15, 2000, and a settlement date of June 20—the first day of public trading. Id. ¶ 38. On June 20, 2011, eChapman, available for public trading, opened at $8 per share, hovered between $7 and $8 per share for two days, then slid until it fell below $1 per share, where it remained. ECF No. 66 ¶ 39.
Chapman told the sub-advisers' representatives that there would be no conflict of interest when they purchased the
On June 26, 2000, Chapman convinced Bond to purchase more eChapman stock at $13 per share because an underwriter had dropped out of the IPO. Bond bought 175,000 more shares for $13 per share when the market price was $7 per share. The sale was backdated to June 20, 2000, as if it had been part of the IPO. Id. ¶ 50; United States v. Chapman, 209 Fed.Appx. 253, 260 (4th Cir.2006).
On June 26, 2003, the SEC sued Chapman, CCM, TCC, eChapman, and several of Chapman's employees for violating § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) ("Securities Act"), § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), SEC Rule 10b-5, § 206 of the Investment Advisers Act, 15 U.S.C. § 80b-6, and § 13(a) of the Exchange Act and SEC rules associated with that section. ECF No. 1 ¶¶ 95-108. In February 2009, the Court dismissed TCC and eChapman on the SEC's motion, and the SEC settled with two of the three employees.
In 2004, a jury convicted Chapman on 23 counts of Mail and Wire Fraud, in violation of 18 U.S.C. §§ 1341 and 1343, Investment Adviser Fraud, in violation of 15 U.S.C. § 80b-6, and other crimes, based on the eChapman IPO, including the backdated share sales.
On June 3, 2010, the SEC moved for partial summary judgment in the civil case. ECF No. 149. On July 9, 2010, Chapman opposed the motion. ECF No. 159. On January 24, 2011, he filed a memorandum in support of his opposition.
Under Rule 56(a), summary judgment "shall [be] grant[ed] ... if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). In considering the motion, "the judge's function is not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute about a material fact is genuine "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248, 106 S.Ct. 2505.
The Court must "view the evidence in the light most favorable to ... the nonmovant, and draw all reasonable inferences in h[is] favor," Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 645 (4th Cir.2002), but it also must abide by the "affirmative obligation of the trial judge to prevent factually unsupported claims and defenses from proceeding to trial," Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 526 (4th Cir.2003) (citation and internal quotation marks omitted).
The SEC contends that it is entitled to summary judgment on the first and third claims of the complaint because Chapman's convictions, combined with party admissions and principals of agency law, establish all elements of securities and investment adviser fraud. ECF No. 149 Attach. 1 at 1. Thus, according to the SEC, Chapman is collaterally estopped from disputing the elements established in his criminal trial.
Collateral estoppel bars relitigation of an issue determined in an earlier proceeding when:
Sedlack v. Braswell Svc's Group, Inc., 134 F.3d 219, 224 (4th Cir.1998).
Chapman argues that his conviction does not bar litigation of the allegations in count one because his conviction does not establish that he used the mails in furtherance of a scheme to defraud. ECF No. 164 at 2.
Count One alleges that Chapman violated § 17(a) of the Securities Act,
Chapman was convicted of Mail and Wire Fraud, in violation of 18 U.S.C. §§ 1341 and 1343. To find a violation of either type of fraud, a jury must find beyond a reasonable doubt that the defendant: (1) used the mails or interstate wire communications in furtherance of (2) a scheme to defraud for which the defendant acted intentionally, and (3) the scheme "involved a material misrepresentation or
Although wire fraud is not identical to securities fraud
"In the case of a criminal conviction based on a jury verdict of guilty, issues which were essential to the verdict must be regarded as having been determined by the judgment." Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 569, 71 S.Ct. 408, 95 L.Ed. 534 (1951).
Here, the jury actually and necessarily determined that Chapman (1) used the mails and interstate wire communications in furtherance of (2) a scheme to defraud for which he had the specific intent to defraud, and (3) he made material misrepresentations or omissions. See Harvey, 532 F.3d at 333.
A criminal conviction is a final judgment on the merits. See Smith v. SEC, 129 F.3d 356, 362 (6th Cir.1997). Chapman's conviction is final.
A party has had a full and fair opportunity to litigate an issue only if he was a party to the prior suit, or is within certain limited circumstances. See Taylor v. Sturgell, 553 U.S. 880, 892-96, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008).
Chapman had the opportunity and incentive to litigate in the initial, criminal proceeding because he was the defendant in that proceeding. Accordingly, Chapman is collaterally estopped from denying
Chapman argues that his conviction under the Investment Adviser's Act was too vague to determine what issues were necessarily decided, and there is a continuing "dispute as to whether CCM and [Chapman] were acting as investment advisers or as investment adviser consultants" during the course of the crime. ECF No. 164 at 3. Chapman also contends that the jury did not necessarily find that he "acted as a principal for [his] own account or acted as a broker as proscribed by" § 206(2) and (3). Id. (internal quotation marks omitted).
The civil and criminal charges alleged violations of the same section of the Investment Adviser's Act, and are thus identical. Compare ECF No. 1 ¶¶ 106-07 with ECF No. 149 Attach. 5 at 32-33.
If the prior judgment is a jury verdict and the jury "could reasonably have grounded its verdict on an issue other than the one in question," the ground has not necessarily been decided and lacks preclusive effect. United States v. Fiel, 35 F.3d 997, 1006 (4th Cir.1994); see also United States v. Ruhbayan, 325 F.3d 197, 203 (4th Cir.2003). There is no ambiguity here.
The jury convicted Chapman of violating 15 U.S.C. § 80b-6, § 206 of the Investment Advisers Act.
Accordingly, the jury necessarily decided that CCM was an investment adviser and Chapman, CCM's employee, "engaged in transactions, practices, and courses of business which operated as a fraud and deceit upon" the DEM-MET trust clients, and:
Id.
For the reasons discussed above, Chapman's conviction is final and valid, and he had a full and fair opportunity to litigate the charges during the criminal trial. Accordingly, Chapman is collaterally estopped from denying liability on count three of the complaint.
To obtain summary judgment on the securities fraud claim, the SEC must prove that Chapman's fraud was in connection with the sale of securities. See SEC v. Zandford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002). Fraud is "in connection with" the sale of a security when the sale is "made to further [the] fraudulent scheme." Id. at 820, 122 S.Ct. 1899 (analyzing Exchange Act § 10(b) and SEC rule 10b-5). If the sale of securities is "properly viewed as a `course of business' that operated as a fraud or deceit on a stockbroker's customer," the requisite nexus is present.
The SEC seeks: (1) a permanent injunction barring Chapman from further violations, (2) an officer/director bar against Chapman, (3) disgorgement of Chapman's salary and bonuses, plus pre-judgment interest, and (4) civil penalties.
The SEC may seek a permanent injunction "[w]henever it shall appear to the [SEC] that any person is engaged or about to engage in any acts or practices which constitute a violation of" the Securities or Exchange Acts. 15 U.S.C. §§ 77t(b), 78u(d)(1), § 80b-9(d). "[U]pon a proper showing a permanent ... injunction ... shall be granted." Id. The SEC need not prove irreparable injury or inadequacy of other remedies. SEC v. Marker, 427 F.Supp.2d 583, 590 (M.D.N.C.2006) (citing SEC v. Mgmt. Dynamics, Inc., 515 F.2d 801, 808 (2d Cir.1975)). Instead, the Court must issue an injunction if the SEC "`demonstrates a reasonable and substantial likelihood that the defendant, if not enjoined, will violate securities laws in the future.'" Id. (quoting SEC v. Pros Int'l, Inc., 994 F.2d 767, 769 (10th Cir.1993)).
The Court considers five factors in deciding whether to enjoin a defendant from violating securities laws:
Lawbaugh, 359 F.Supp.2d at 424-25.
Here, Chapman had the specific intent to defraud when he committed securities fraud. See part II.B.1.ii, supra. He has not recognized the wrongful nature of his acts nor promised he would not commit
Under the Exchange Act, the Court may prohibit a defendant "from acting as an officer or director of [a public company] if the person's conduct demonstrates unfitness to serve as an officer or director of any such issuer." 15 U.S.C. § 78u(d)(2). The court considers:
Lawbaugh, 359 F.Supp.2d at 426 (internal quotation marks and citations omitted).
Chapman played a central role in the fraud by orchestrating the purchasing scheme, and he had the specific intent to commit fraud. As eChapman's majority shareholder, he had a large economic stake in the value of its stock. As noted above, Chapman will likely have future opportunities to repeat his offenses. See part II. E.2, supra. Although this is Chapman's first offense, his abuse of his clients' trust and use of his investment management company to promote eChapman's well-being over that of his clients renders the offense egregious enough to merit imposing a permanent officer and director bar. See Lawbaugh, 359 F.Supp.2d at 426 (The court imposed a permanent bar when defendant caused bank where he worked to make payments to "companies he secretly controlled," altered documents to hide the fraud, and lied to investors about how he would invest their funds.).
The Court may order disgorgement, an equitable remedy, after finding a violation of securities laws. Lawbaugh, 359 F.Supp.2d at 425 (citing SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 95-96 (2d Cir.1978)). Disgorgement forces the defendant to give up "unjust enrichment he received as a result of his illegal activities." Id. The SEC must show that the money to be disgorged was "causally related to [the] securities violations.'"
The SEC seeks disgorgement of Chapman's salary and bonuses from June through December, 2000, because "[h]is actions ultimately and directly resulted in the failure of ... TCC and CCM." ECF No. 149 Attach. 1 at 37. The SEC does not contend that Chapman would not have received his salary or bonuses for those months if the eChapman IPO failed. Compare ECF No. 149 Attach. 1 at 37 with Resnick, 604 F.Supp.2d at 783 (The defendant's "bonuses were tied to [the victim] meeting its earnings targets, and [the defendant] was convicted of manipulating [the victim's] earnings figures so that it would meet those targets."). The SEC has not shown a causal relationship between Chapman's salary and bonuses and the fraud. Disgorgement will not be ordered.
The SEC seeks imposition of a civil penalty against Chapman for his fraud. The Securities, Exchange, and Investment Advisers Acts authorize civil monetary penalties to redress violations of those Acts. 15 U.S.C. §§ 77t(d), 78u(d)(3), 80b-9(e). The SEC seeks third-tier—maximum—penalties because of the deliberate nature of and substantial loss caused by Chapman's scheme. ECF No. 149 Attach. 1 at 37-38.
The Court must determine the amount of the penalty "in light of the facts and circumstances." 15 U.S.C. §§ 77t(d)(2)(A), 78u(d)(3)(B)(i), 80b-9(e)(2)(A). The Court may impose a penalty of the greater of: (1) $110,000 for a natural person or $550,000 for a company for each violation or (2) the gross amount of pecuniary gain to the defendant as a result of the violation, if the violation "involved fraud, deceit, [or] manipulation" and "directly or indirectly 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), 80b-9(e)(2)(C).
Chapman's violations involved fraud—he was convicted of multiple counts of mail and wire fraud and investment adviser fraud that form the basis of the civil suit— and they resulted in over $5 million in losses to the DEM-MET trust clients. Jury Verdict at 1-13, 16-19, 27. Considering the large losses and Chapman's intentional, central role in the violation, a thirdtier penalty is appropriate.
The SEC has not identified Chapman's gross pecuniary gain from the fraud. See Part II.E.3, supra. Accordingly, the Court will impose a civil monetary penalty of $110,000 against Chapman.
Chapman contends that he is "being punished because [he] would not agree to sign a settlement agreement" with the SEC. ECF No. 162 at 8. The SEC is authorized to seek the relief it requests. See 15 U.S.C. §§ 77t(b), (d), (e), 78u(d)(1)-(3), 80b-9(d)-(e). The argument lacks merit.
For the reasons stated above, the SEC's motion for partial summary judgment will be granted.
For the reasons discussed in the accompanying Memorandum Opinion, it is, this 29th November, 2011, ORDERED that:
1. The plaintiff's motion for partial summary judgment, (ECF No. 149), BE, and HEREBY IS, GRANTED in part and DENIED in part:
2. Judgment BE, and HEREBY IS, ENTERED in favor of the plaintiff against Chapman on the first and third claims as follows:
3. Default judgment BE, and HEREBY IS, ENTERED against CCM as follows:
4. The SEC is directed to submit a status report (including the status of claims against Earl Bravo) by December 16, 2011; and
5. The Clerk of the Court shall send copies of this Memorandum Opinion and Order to the defendants and counsel for the plaintiff.
The Court will not order summary judgment against CCM as CCM was not represented when the motion was briefed. However, CCM has not obtained new counsel since August, 2005. Accordingly, pursuant to Local Rule 101(2)(b), default judgment will be entered against CCM on all claims.
Counts 19-21 charged Chapman with violating his fiduciary duty, as an investment adviser, to: (1) act in good faith and in the best interests of his clients, (2) make full and fair disclosure of all material facts bearing on the investment advisory relationship between CCM and its clients, (3) use reasonable care to avoid misleading his clients, and (4) refrain from self-dealing; by knowingly and willfully, directly and indirectly, (a) employing devices, schemes, and artifices to defraud three of his DEM-MET investment advisory clients, (b) engaging in transactions, practices, and courses of business which operated as a fraud and deceit upon the clients, and (c) caused CCM to act as a principal for its own account and knowingly purchasing and selling securities for a client without disclosing to the client and obtaining consent, in writing, before completing the transaction, the capacity in which he was acting, all in violation of 15 U.S.C. § 80b-6. Id. at 31-32. But see United States v. Chapman, No. 03-0301, ECF No. 100 at 16-19 (Aug. 13, 2004) (finding Chapman guilty under the SEC's (b) and (c) theories above, but finding that Chapman caused TCC, not CCM, to act as a principal for its own account) [hereinafter "Jury Verdict"].
Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a).
Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b).
Rule 10b-5, 17 C.F.R. § 240.10b-5.
15 U.S.C. § 80b-6.
15 U.S.C. § 80b-6(4). Thus, like § 10(b) of the Exchange Act, subsection (4) defers to SEC rules to define violations. See, e.g., SEC v. C.R. Richmond & Co., 565 F.2d 1101, 1105 (9th Cir.1977) (finding a violation of § 206(4) through a violation of SEC Rule 206(4)-1, 17 C.F.R. § 275.206(4)-1). Chapman's criminal violation did not involve those administrative rules. See Indictment, ECF No. 149, Attach. 6 at 32-33.
Accordingly, the jury could not have convicted Chapman under subsection (4) of the Advisers Act; it necessarily determined that Chapman violated at least one of the first three subsections.
ECF No. 149, Attach. 6 at 32-33 (emphasis added). The jury instructions state that the jury had to find (1) that CCM was an investment adviser, (2) that Chapman, "acting on behalf of [CCM], employed a device, scheme, or artifice to defraud . . . the client," (3) that Chapman "devised or participated ... knowingly and willfully, and with the intent to defraud," and (4) he employed the device, scheme, or artifice by use of the mails or interstate commerce. Court's Jury Instructions. The Court may consider the jury instructions to determine what the jury necessarily decided. See, e.g., United States v. Beaty, 245 F.3d 617, 625 (6th Cir.2001) (relying on the fact that in the previous trial "the judge specifically instructed the jury to find Beaty not guilty if he established" an entrapment defense to determine that the jury's determination that he was not entrapped was necessary and essential to a guilty verdict).
The SEC did not request a sum certain against CCM in the complaint. Accordingly, the Court will not enter civil penalties against CCM without a hearing or other proceeding that preserves CCM's right to a jury trial. Fed.R.Civ.P. 55(b)(2).
