RICHARD M. BERMAN, District Judge.
On March 10, 2010, the United States Securities and Exchange Commission ("SEC") filed a complaint ("Complaint") against Vincent L. Verdiramo, Esq., an attorney licensed to practice law in the State of New Jersey and a partner in Verdiramo & Verdiramo P.A.; Richard Verdiramo, former Chairman, Chief Executive Officer, President, and Chief Financial Officer of RECOV Energy Corporation ("RECOV"); Edward Meyer, Jr. ("Meyer"), Principal of Xcel Associates, a New Jersey corporation; and Victoria Chen ("Chen"), Principal of Greenwood Capital Holdings, Inc., a Nevada corporation (collectively, "Defendants"). (Compl., dated Mar. 9, 2011, ¶¶ 14-17.) The SEC alleges, among other things, that Defendants sold shares of RECOV "in unregistered, non-exempt transactions" in violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e(a) ("Securities Act"). The SEC further alleges that Defendants violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(b)(5) ("Exchange Act"), and Rules 10b-5 and 13b2-1 promulgated thereunder, 17 C.F.R. §§ 240.10b-5, 240.13b2-1; and that Richard Verdiramo violated Sections 13(a), 13(d), and 16(a) of the Exchange Act, 15 U.S.C. §§ 78m(a), 78m(d), 78p(a), and Rules 13a-1, 13a-13, 13d-1, 13d-2, and 16a-3 promulgated thereunder, 17 C.F.R. §§ 240.13a-1, 240.13a-13, 240.13d-1, 240.13d-2(a), 240.16a-3. (Compl. ¶¶ 1, 10.)
On December 23, 2010, the SEC moved for partial summary judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure ("Fed. R. Civ. P."), with respect to the Section 5, Section 13(d), and Section 16(a) claims.
On April 11, 2011, Vincent and Richard Verdiramo filed an opposition arguing, among other things, that (1) Vincent and Richard Verdiramo did not violate Section 5 because Vincent Verdiramo's sales of RECOV shares — in which the SEC alleges Richard Verdiramo was "indirectly" involved — fell within the "safe harbor" provisions of Rule 144(k), 17 C.F.R. § 230.144(k); and (2) Richard Verdiramo did not violate Sections 13(d) and 16(a) because his acquisition of 6.1 million RECOV shares did not change his beneficial ownership of RECOV but occurred "solely to [pass] control of RECOV [to Carbon Recovery Corp (`CRC')] if a merger [between RECOV and CRC] took place." (Mem. of Defs. Vincent Verdiramo and Richard Verdiramo in Opp'n to SEC Mot. for Partial Summ. J., dated Apr. 11, 2011 ("Defs. Mem."), at 15, 17-18.) Vincent and Richard Verdiramo also argue that there are no grounds for any equitable relief against them because, among other reasons, "partial summary judgment on the SEC's substantive claims is unwarranted." (Defs. Mem. at 18.) They include in their opposition the purported expert report of attorney Robert D. Axelrod, dated December 22, 2010 ("Axelrod Report").
Chen, who is proceeding pro se, has not submitted an opposition to the SEC's motion for partial summary judgment. Chen initially appeared in this matter through her counsel, Gregory Bartko ("Bartko"). (See Order for Admission Pro Hac Vice of Gregory Bartko, Esq., dated June 1, 2010[#16].) At a status conference on January 6, 2011, the Court was advised that Bartko had been suspended from the practice of law because he "had been convicted" of various crimes, including the unlawful sale of unregistered securities in violation of Section 5 of the Securities Act, in the United States District Court for the Eastern District of North Carolina. (See Tr. of Proceedings, dated Jan. 6, 2011, at 2:19-20; Tr. of Proceedings, dated Feb. 24, 2011); see also United States v. Bartko, No. 09 Crim. 321 (E.D.N.C.)
On May 9, 2011, the SEC filed a reply arguing, among other things, that Vincent Verdiramo's unregistered transactions did not qualify for safe harbor treatment under Rule 144(k) — which allows "a person who is not an affiliate of the issuer" to sell shares in unregistered transactions provided that the seller (together with any prior holder of shares with whom the seller can "tack" under Rule 144(d)(3)(ii)) has held those shares for "at least two years." (SEC Reply Mem. in Supp. of Mot. for Partial Summ. J., dated May 9, 2011 ("SEC Reply"), at 4-8); 17 C.F.R. § 230.144(d), (k). First, Vincent Verdiramo could not satisfy Rule 144(k)'s two-year holding requirement because he personally held the
The parties waived oral argument. (See Tr. of Proceedings, dated Nov. 15, 2010.)
The following facts are not in dispute:
(i) at all relevant times, RECOV (formerly Interactive Multimedia Network, Inc. ("IMNI")) was a "reporting company" under Section 12 of the Exchange Act, 15 U.S.C. § 78l.
(ii) RECOV was founded in March 1994 by Vincent Verdiramo, who served as its Chairman, Chief Executive Officer, and President until March 1, 2000. Since March 2000, Vincent Verdiramo has served "as counsel for RECOV on numerous matters" (SEC 56.1 ¶¶ 8, 9; Defs. 56.1 ¶¶ 8, 9);
(iii) in addition to his role as counsel, in December 2004 and January 2005, Vincent Verdiramo had "discussions" with Meyer which "result[ed]" in Meyer "agree[ing] to purchase control of [RECOV] for $825,000." As of March 31, 2005, Vincent Verdiramo also held $255,935 in RECOV debt, constituting 64% of RECOV's total outstanding notes and 42% of RECOV's outstanding liabilities. And, between 1999 and 2005, Vincent Verdiramo also repaid $140,000 of RECOV's corporate debt out of his own assets (Decl. of Vincent L. Verdiramo in Opp'n to Pl.'s Mot. for Partial Summ. J., dated Apr. 11, 2011 ("Vincent Verdiramo Decl."), ¶ 13-14; Richard Verdiramo Decl. ¶ 28; Ex. 21 R to Decl. of Dean M. Conway in Supp. of SEC's Mot. for Partial Summ. J., dated Dec. 23, 2010 ("Conway Decl."));
(iv) as of March 31, 2005, Vincent Verdiramo's wife, Marion Verdiramo, owned 3.4 million shares of RECOV common stock, making her the largest single holder of RECOV shares at the time (Richard Verdiramo Decl. ¶ 38);
(v) at all relevant times, RECOV "share[d office] space" with Vincent Verdiramo's law firm, Verdiramo & Verdiramo P.A., which had "agreed not to charge rent [to RECOV] and [wa]s not expecting payment
(vi) between 2000 and 2006, Richard Verdiramo, who is Vincent Verdiramo's son, served as the Chairman, Chief Executive Officer, President, and Chief Financial Officer of RECOV (see SEC 56.1 ¶ 1; Defs. 56.1 ¶ 1);
(vii) prior to April 7, 2005, Richard Verdiramo "owned, directly or indirectly, greater than five percent of outstanding RECOV common stock" (SEC 56.1 ¶ 26; Defs. 56.1 ¶ 26; Richard Verdiramo Decl. ¶ 38; Conway Decl. Ex. 21R);
(viii) on April 7, 2005, Richard Verdiramo, in his capacity as President, signed a resolution on behalf of the RECOV Board of Directors ("April 7, 2005 Resolution") authorizing RECOV's transfer agent, Jersey Transfer and Trust ("Transfer Agent"), to issue "2,032,290 ... free trading shares of [RECOV] [c]ommon [s]tock to [certain] individuals." The April 7, 2005 Resolution also authorized the Transfer Agent to issue "6,100,000 shares of restricted common stock [to Richard Verdiramo] for services rendered [as] its President" (SEC 56.1 ¶¶ 12-13; Defs. 56.1 ¶¶ 12-13);
(ix) Irving Rothstein, Esq., an attorney retained by RECOV to provide an opinion on the April 7, 2005 Resolution, wrote a letter to the Transfer Agent, dated April 7, 2005 ("Rothstein Opinion"), concluding that "[t]he proposed issuance [of certain RECOV shares in the April 7, 2005 Resolution]... appears to meet the requirements of Rule 144 for tacking" (Richard Verdiramo Decl. ¶ 43);
(x) by separate letter to the Transfer Agent, dated April 7, 2005, Vincent Verdiramo, also as "counsel to RECOV," opined that the April 7, 2005 Resolution's proposed issuance of 6.1 million shares to Richard Verdiramo was "allowable" under federal securities law (Conway Decl. Ex. 20R, at 1);
(xi) on April 8, 2005, pursuant to the April 7, 2005 Resolution, the Transfer Agent issued 1,756,000 free trading shares of RECOV common stock as follows: 333,334 shares to Edward Meyer; 150,000 shares to Marie Meyer, Edward Meyer's daughter; 183,333 shares to Ross Laterra, Edward Meyer's step-son; 333,333 shares to Greenwood Capital Holdings, Inc., a company controlled by Chen; 126,000 shares to Public Entity Acquisition Corp., a company controlled by Vincent and Richard Verdiramo; 300,000 shares to Illuminate International Corp., a company controlled by Vincent Verdiramo; and 330,000 shares to Worldwide Connect, LLC, a company controlled by individuals with whom Vincent and Richard Verdiramo had previously worked (see SEC 56.1 ¶ 15; Defs. 56.1 ¶ 15);
(xii) on April 8, 2005, the Transfer Agent "issued 6,100,000 shares of restricted common stock to [Richard Verdiramo]." This number of shares accounted for "more than 70% of [RECOV's] ... outstanding shares" at the time (SEC 56.1 ¶¶ 14, 27; Defs. 56.1 ¶¶ 14, 27);
(xiii) Richard Verdiramo did not report to the SEC his acquisition of the 6,100,000 shares of RECOV stock described in paragraph (xii) above, nor did he timely report to the SEC any change in his beneficial ownership of RECOV (SEC 56.1 ¶¶ 28, 30-31; Defs. 56.1 ¶¶ 28, 30-31);
(xiv) on May 26, July 18, and July 22, 2005, respectively, Richard Verdiramo signed three other RECOV Board of Directors
(xv) on May 26, July 19, and July 22, 2005, respectively, the Transfer Agent issued 1,491,495 free trading shares of RECOV common stock pursuant to the resolutions referred to in paragraph (xiv) above (SEC 56.1 ¶ 19, Defs. 56.1 ¶ 19; Conway Decl. Exs. 8R, 9R, 10R);
(xvi) at all relevant times, Richard Verdiramo sent the Transfer Agent written instructions "by facsimile" and the Transfer Agent "used the mails to distribute the share certificates to the intended recipients" (SEC 56.1 ¶¶ 20, 24; Defs. 56.1 ¶¶ 20, 24);
(xvii) between July 20 and September 13, 2005, Chen sold 158,333 RECOV shares (which she had received through the April 7, 2005 Resolution) "in [fifteen] unregistered transactions through her interstate brokerage account" (SEC 56.1 ¶ 32; Conway Decl. Ex. 19R; SEC Reply at 11, 12 n. 10);
(xviii) between July 15, 2005 and February 6, 2006, Vincent Verdiramo sold 109,000 RECOV shares (which he had received through the April 7, 2005 Resolution) "in [nineteen] unregistered transactions through his company Illuminate Corp. through his interstate brokerage account" (SEC 56.1 ¶ 36; Defs. 56.1 ¶ 36; Conway Decl. Ex. 14R; SEC Reply at 3 n. 3, 12 n. 10);
(xix) no registration statement was on file or in effect with the SEC for any of the transactions involving RECOV stock referred to in paragraphs (xvii) and (xviii) above (SEC 56.1 ¶ 21; Defs. 56.1 ¶ 21); and
(xx) Defendants did not file a notice of proposed sale, i.e., Form 144, for the period during which the sales of the securities referred to in paragraphs (xvii) and (xviii) above occurred, i.e., between January 1 and December 31, 2005 (SEC 56.1 ¶ 25; Defs. 56.1 ¶ 25).
The Court "shall grant summary judgment 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(c); SEC v. Empire Dev. Grp., LLC, No. 07 Civ. 3896, 2008 WL 2276629, at *6 (S.D.N.Y. May 30, 2008). "[T]he SEC, as the moving party, bears the initial burden of showing `the absence of a genuine issue of material fact.'" SEC v. Softpoint, Inc., 958 F.Supp. 846, 859 (S.D.N.Y.1997) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). "Where a moving party meets that initial burden, the opposing party must come forward with specific evidence demonstrating the existence of a genuine dispute of material fact." Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)).
"The purpose of the [Section 5] registration requirement, and of the Securities Act as a whole, is to `protect investors by promoting full disclosure of information thought necessary to informed investment decisions.'" Id. (citing SEC v. Ralston Purina Co., 346 U.S. 119, 124,
"When a motion for summary judgment is unopposed, ... `the district court may not grant the motion without first examining the moving party's submission to determine if it has met its burden of demonstrating that no material issue of fact remains for trial.'" Empire, 2008 WL 2276629, at *7 (citing Vt. Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 244 (2d Cir.2004)).
Preliminarily, Vincent and Richard Verdiramo, on August 8, 2011, filed objections to an order issued July 26, 2011 by United States Magistrate Judge Andrew J. Peck, to whom the matter had been referred for general pretrial purposes. Judge Peck's July 26, 2011 order denied Vincent and Richard Verdiramo's motion, filed July 20, 2011 without a supporting memorandum of law, to "dismiss[] the complaint in this action," or, "in the alternative," to "preclud[e] [the SEC] from offering evidence that [D]efendants were not entitled to rely on the exemption available under ... Rule 144," as a sanction for the SEC's late production of documents in this action. (Not. of Mot., dated July 20, 2011, at 1.) Judge Peck concluded, among other things, that Vincent and Richard Verdiramo had "not demonstrated prejudice by the SEC's late production of the material," and presented "absolutely no detail as to the contents of the late-produced documents or how earlier production would have benefitted [them]." (Judge Peck's Order, dated July 26, 2011, at 1-2 (emphasis in original).)
Vincent and Richard Verdiramo argue that Judge Peck "embraced fully the SEC's self-serving justification that the 13,000 [late-produced] documents were irrelevant and that the non-disclosure entailed no prejudice to the Verdiramo[s]." (Objections, dated Aug. 8, 2011, at 1.) They do not argue, let alone establish, that the late disclosure of documents was prejudicial to them, see Monaghan v. SZS 33 Assocs., L.P., 148 F.R.D. 500, 508-09 (S.D.N.Y.1993), or that Judge Peck's "determination was `clearly erroneous or contrary to law,'" Dubin v. E.F. Hutton Grp., Inc., 125 F.R.D. 372, 373 (S.D.N.Y.1989); Flaherty v. Filardi, No. 03 Civ. 2167, 2009 WL 749570, at *19 (S.D.N.Y. Mar. 20, 2009) ("The clearly erroneous standard is highly deferential, and magistrate judges are afforded broad discretion in resolving non-dispositive disputes ...." (internal quotation marks and alterations omitted)); Weiss v. La Suisse, 161 F.Supp.2d 305, 321 (S.D.N.Y.2001); see Fed.R.Civ.P. 72(a); (SEC's Opp'n to Objections, dated Aug. 15, 2011, at 1 ("[Vincent and Richard Verdiramo] merely repeat [the] conclusory arguments of generalized harm, emphasize the number of documents at issue ... and seek sanctions that have no rational connection to the event in question.")) Judge Peck's conclusion that "case-ending sanctions" were not appropriate was reasonable and certainly well within his broad discretion. (Judge Peck's Order at 2); Dubin, 125 F.R.D. 372, at 373-74; see Bobal v. Rensselaer Polytechnic Inst., 916 F.2d 759, 764 (2d Cir.1990); Moss v. Enlarged City Sch. Dist. of the City of Amsterdam, 166 F.Supp.2d 668, 671 (N.D.N.Y. 2001) ("[The] Magistrate Judge['s] determination as to whether or not to impose discovery sanctions under these circumstances
The SEC contends that the Axelrod Report should be excluded for the following reasons: First, it contains "just the type of legal argument by an attorney not permitted in this Circuit as expert opinion." (SEC Expert Mem. at 3); see United States v. Bilzerian, 926 F.2d 1285, 1294 (2d Cir.1991) ("[T]estimony encompassing an ultimate legal conclusion based upon the facts of the case is not admissible."); Feinberg v. Katz, No. 01 Civ. 2739, 2007 WL 4562930, at *8 (S.D.N.Y. Dec. 21, 2007). Second, "[t]here is nothing reliable about Axelrod's methodology" because, although "[h]e states his opinion based upon [his] `knowledge and experience as an attorney,'" "[t]he issue of whether [D]efendants violated Section 5 of the Securities Act, or qualified for the Rule 144 safe harbor, is not a matter of `knowledge and experience'" but "is a matter of controlling case law." (SEC Expert Mem. at 3, 6 ("[Axelrod's] interpretation is nothing more than his own personal and subjective inferences, which is likewise improper for an expert.")); see Hygh v. Jacobs, 961 F.2d 359, 364 (2d Cir.1992). And third, "nowhere in [Axelrod's] `Curriculum Vitae' does it say that Axelrod has ever before been qualified by a Court or other tribunal as an expert." (SEC Expert Mem. at 5 ("Of all the securities experts in the New York area, the Verdiramos went to Houston, Texas to find Mr. Axelrod to give this `expert opinion.'").)
The Axelrod Report does not help Vincent and Richard Verdiramo's cause because, as the Court concludes below, the transactions at issue were not exempt from Section 5 registration under Rule 144(k). The securities sold by Vincent Verdiramo in 2005 and early 2006 clearly were not held by him for the two years required under Rule 144(k). See supra ¶¶ xi, xviii; see infra pages 269-70; 17 C.F.R. § 230.144(k). And, it is indisputable that Vincent Verdiramo was an "affiliate" of RECOV at the time of his unregistered sales of RECOV stock. See supra ¶¶ ii-v, x; see infra pages 270-71; 17 C.F.R. § 230.144(k).
The SEC also moves to strike Vincent and Richard Verdiramo's declarations, dated April 15, 2011, because, among other reasons, the "declaration[s do not] state that the statements are `true and correct'" as required by 28 U.S.C. § 1746, and because they "contain information largely irrelevant to the issue of [their] liability under Section 5." (SEC Reply at 7 n. 7.) As discussed below, the SEC is entitled to judgment as a matter of law and "[t]he Court need not strike or otherwise disregard the declarations submitted by [Defendants]... to reach this conclusion. Consequently, Plaintiffs' motion to strike all or part of these declarations is moot." Fraser v. Fiduciary Trust Co. Int'l, No. 04 Civ. 6958, 2009 WL 2601389, at *1 n. 2 (S.D.N.Y. Aug. 25, 2009).
Section 5 provides that it is unlawful for any person to use the channels of interstate commerce to sell a security unless a registration statement is in effect as to such security. See SEC v. Cavanagh, 155 F.3d 129, 132-33 (2d Cir.1998) ("Cavanagh I"). "To establish a prima facie violation of Section 5, the SEC must prove three elements: (1) that no registration statement was in effect for the securities; (2) that the defendant directly or indirectly sold or offered to sell the securities; and (3) that interstate means were used in connection with the offer or sale." SEC v. Cavanagh, No. 98 Civ. 1818, 2004 WL 1594818, at *16 (S.D.N.Y. July 16, 2004) ("Cavanagh II") (citing Europe & Overseas Commodity Traders v. Banque Paribas London, 147 F.3d 118, 124 n. 4 (2d Cir.1998)). "Once the SEC has [established] a prima facie case, the burden shifts to the defendant to show that the securities were exempt from the registration requirement." Id.
The SEC clearly has established a prima facie violation of Section 5 by Vincent Verdiramo. See Softpoint, 958 F.Supp. at 861; see also SEC v. Tecumseh Holdings Corp., No. 03 Civ. 5490, 2009 WL 4975263, at *4 (S.D.N.Y. Dec. 22, 2009). No registration statement was filed or in effect in 2005 or early 2006 covering Vincent Verdiramo's sales of RECOV shares. See supra ¶ xix; (see SEC 56.1 ¶ 21; Defs. 56.1 ¶ 21.) Vincent Verdiramo sold 109,000 RECOV shares between July 15, 2005 and February 6, 2006. See supra ¶ xviii; (see SEC 56.1 ¶ 36; Defs. 56.1 ¶ 36.) And, such sales were conducted by interstate means through Vincent Verdiramo's brokerage account. See supra ¶ xviii; (see SEC 56.1 ¶¶ 21, 36; Defs. 56.1 ¶¶ 21, 36; Conway Decl. Ex. 11); SEC v. Lybrand, 200 F.Supp.2d 384, 392 (S.D.N.Y.2002) ("Lybrand II").
Vincent Verdiramo has not met his burden to show that these unregistered sales were exempt from registration. He contends unpersuasively that (a) his sales of RECOV shares were exempt from registration under the Rule 144(k) safe harbor because his shares were "derived from" a promissory note issued on April 1, 2000 by RECOV to Maureen Hogan ("Hogan") and that "the shares issued by [the Transfer Agent to Vincent Verdiramo in 2005] were deemed to have been issued when the [promissory] note was issued [to Hogan] in April 2000"; (b) he relied in good faith on the Rothstein Opinion, which states that "the proposed issuance by [RECOV] to [Vincent Verdiramo] ...
Under Rule 144(k), "if a person is not now and has not been an affiliate of the issuer within the last three months, and at least two years have elapsed since the securities to be sold were last acquired from an issuer or affiliate of the issuer, then that person need not comply with the other Rule 144 requirements." Kern II, 425 F.3d at 148 (citing 17 C.F.R.
Vincent Verdiramo did not satisfy Rule 144(k)'s two-year holding requirement because he acquired 109,000 RECOV shares in April 2005 and sold them between July 15, 2005 and February 6, 2006. See supra ¶¶ xi, xviii; (see SEC 56.1 ¶¶ 15, 36; Defs. 56.1 ¶¶ 15, 36); Kern II, 425 F.3d at 148-49 ("[Rule 144(k)] mandates ... a two-year holding period between the time the securities were acquired from the issuer or an affiliate of the issuer and the time they are resold."). And, Vincent Verdiramo was not able to "tack" onto Hogan's prior holding period pursuant to Rule 144(k) because the shares Vincent Verdiramo sold in 2005 were obtained from RECOV, not from Hogan. See supra ¶¶ viii, xi; (see SEC 56.1 ¶¶ 12-13, 15; Defs. 56.1 ¶¶ 12-13, 15); Kern II, 425 F.3d at 151; Phlo Corp. v. Stevens, 62 Fed.Appx. 377, 382-83 (2d Cir.2003); see also Lybrand II, 200 F.Supp.2d at 396; M & A West, Inc., 538 F.3d at 1049.
There is no basis — in law or common sense — for concluding that the 109,000 shares may "be deemed" to have been issued to Hogan at the time the promissory note was issued to her in April 2000, pursuant to Rule 144(d)(3)(ii). These shares were never issued to Hogan, who returned the promissory note to RECOV in 2005. (SEC Reply at 5.) RECOV's issuance of shares to Vincent Verdiramo on April 8, 2005 occurred pursuant to the April 7, 2005 Resolution. See supra ¶¶ viii, xi, xviii. Vincent Verdiramo's sales of those shares between July 15, 2005 and February 6, 2006, were transactions separate and apart from Hogan's receipt and later return of her promissory note to RECOV earlier in 2005.
Assuming, arguendo, that Vincent Verdiramo could somehow satisfy Rule 144(k)'s holding period (which he clearly cannot do), nowhere in his submissions does Vincent Verdiramo contend that he was not an affiliate of RECOV at the time of his unregistered sales in 2005. As the SEC persuasively contends, Vincent Verdiramo was clearly an affiliate of RECOV at the time of his sales of RECOV shares and he cannot rely on the Rule 144(k) safe harbor. (See SEC Reply at 4-8; Vincent Verdiramo Decl. ¶¶ 12-14, 18; Richard Verdiramo Decl. ¶¶ 27-28, 38; Conway Decl. Ex. 21R); see also 17 C.F.R. § 230.144(k) (only a seller "who is not an affiliate of the issuer at the time of his sale and has not been an affiliate during the preceding three months" is exempt from Section 5 registration). Vincent Verdiramo was "a person that directly, or indirectly through one or more intermediaries, control[led] ... [an] issuer," 17 C.F.R. § 230.144(a)(1), by virtue of his active participation in and influence over the management and policies of RECOV at the time of (and during the three months preceding) his unregistered sales, as evidenced by: (i) Vincent Verdiramo's "central role in the plans to effect a [sale]" of a controlling interest in RECOV to Meyer on February 8, 2005; (ii) Vincent Verdiramo's holding, as of March 31, 2005, of $255,953 of RECOV's debt, which constituted 64% of RECOV's total outstanding notes and 42% of its total outstanding liabilities; (iii) RECOV and Verdiramo & Verdiramo P.A.'s "share[d] [use of] office space," and Verdiramo & Verdiramo PC's "agree[ment] not to charge [RECOV] rent... for [such] ... use"; (iv) Vincent Verdiramo's repayment, between 1999 and 2005, of $140,000 of RECOV's corporate debt out of his own assets; (v) the letter, dated April 7, 2005, written by Vincent Verdiramo, "as counsel to RECOV," to the Transfer Agent, opining that "[t]he [6.1 million] shares issued to Richard Verdiramo" "are allowable"; (vi) the attorney-client relationship between Vincent Verdiramo and his son Richard Verdiramo, who was Chairman, CEO, President, and CFO of RECOV, and who, as of March 31, 2005, owned 1 million shares, or 7.48%, of RECOV common stock; and (vii) Vincent Verdiramo's wife's ownership of approximately 3.4 million shares of RECOV stock as of March 31, 2005, which made her the largest single holder of RECOV shares, see supra ¶¶ ii-vii, x; (see SEC 56.1 ¶¶ 8, 12-13; Defs. 56.1 ¶¶ 8, 12-13; Defs. Mem. at 10; Richard Verdiramo Decl. ¶¶ 27-28, 38-39; Vincent Verdiramo Decl. ¶¶ 12-14, 18; Conway Decl. Exs. 20R, 21R); United States v. Corr, 543 F.2d 1042, 1050 (2d Cir.1976) (whether someone is an affiliate "depends upon the totality of the circumstances including an appraisal of the influence upon management and policies of [the company] by the person involved").
Finally, Vincent Verdiramo's sales of RECOV shares could not have been exempt from registration under Section 4(1) of the Securities Act because his affiliate status, see supra pages 270-71, "precludes any eligibility for th[at] exemption," Platforms Wireless, 617 F.3d at 1090 (citation omitted); see also Cavanagh III, 445 F.3d at 111 n. 12, (Defs. Mem. at 14.)
Richard Verdiramo argues that the SEC has not shown a prima facie violation of Section 5 because he "never sold a single share of RECOV or IMNI during the period relevant to this action." (Richard Verdiramo Decl. ¶ 49.) The SEC replies persuasively that Richard Verdiramo "is liable not because he himself sold [any shares], but because he was a necessary and substantial participant in the unregistered sales of shares by Chen, Edward Meyer, and V[incent] Verdiramo." (SEC Reply at 9); see supra ¶¶ viii, xi, xvii-xix.
Richard Verdiramo violated Section 5 because he was a necessary and substantial participant in the unregistered sales of RECOV shares by Chen, Meyer, and his father, Vincent Verdiramo. See supra ¶¶ viii, xi, xvii-xix; (see SEC 56.1 ¶¶ 12-13, 18-19, 32-33, 36; Defs. 56.1 ¶¶ 12-13, 18-19, 36); see SEC v. Czarnik, No. 10 Civ. 745, 2010 WL 4860678, at *11 (S.D.N.Y. Nov. 29, 2010) ("Liability for violations of Section 5 ... can extend ... to all necessary participants in the sale of unregistered stock."); see also SEC v. Chinese Consol. Benev. Ass'n, Inc., 120 F.2d 738, 741 (2d Cir.1941). The evidence presented, including the April 7, 2005 Resolution signed by Richard Verdiramo, see supra ¶ viii, demonstrates that Richard Verdiramo personally authorized and directed the issuance of the RECOV shares to Vincent Verdiramo, Meyer, and Chen that were later sold in unregistered transactions, see supra ¶¶ viii, xi, xvii-xix;
The SEC clearly has established a prima facie violation of Section 5 by Chen. See Empire, 2008 WL 2276629, at *7. No registration statement was filed or on file in 2005 for Chen's sales of RECOV stock. See supra ¶ xix; (see SEC 56.1 ¶ 21.) Chen sold 158,333 RECOV shares between July 20, 2005 and September 13, 2005. See supra ¶ xvii; (see SEC 56.1 ¶ 32.) And such sales were conducted by interstate means through Chen's brokerage account. See supra ¶ xvii; (see SEC 56.1 ¶ 32); see also Cavanagh II, 2004 WL 1594818, at *16.
Because Chen has not asserted, much less presented evidence, that any registration exception applied to her unregistered sale of shares, the SEC's request for summary judgment as to Chen is granted.
The SEC argues, among other things, that Richard Verdiramo violated Section 13(d) of the Exchange Act because he failed timely to file a Schedule 13D amendment when he acquired 6.1 million shares of RECOV; and that he violated Section 16(a) of the Exchange Act by "failing to timely file a Form 4 [and Form 5] reporting [t]his change in beneficial ownership of RECOV shares." See supra ¶ xiii; (SEC Mem. at 8-9.) Richard Verdiramo contends that "the 6.1 million shares were [only] issued [to him] pending the consummation of [a] proposed merger" between RECOV and CRC and, as a result, "there were no changes in [his] beneficial ownership of RECOV." (Defs. Mem. at 17-18.)
"Section 13(d)(1) and Rule 13 d-1(a) require a stock purchaser acquiring beneficial ownership of 5% or more of a company's securities to disclose his ownership to the SEC by filing a Schedule 13D...." SEC v. Wyly, 788 F.Supp.2d 92, 97-98 (S.D.N.Y.2011) (citing 15 U.S.C. § 78m(d)(1)(D), 17 C.F.R. § 240.13d-1(a)); Rorer Grp. Inc. v. Oppenheimer & Co., Inc., No 82 Civ. 7906, 1983 WL 1330 (S.D.N.Y. June 27, 1983); U.S. v. Bilzerian, 926 F.2d 1285, 1298 (2d Cir.1991); SEC v. Sierra Brokerage Servs., Inc., 608 F.Supp.2d 923, 954 (S.D.Ohio 2009).
Section 16(a) and Rule 16a-3 require every person "who is a director or an officer of the issuer of securit[ies]" to file a Form 4 with the SEC reporting any "changes in beneficial ownership," see Sierra, 608 F.Supp.2d at 954 (citing 15 U.S.C. § 78p(a); 17 C.F.R. § 240.16a-3), and also to "file an annual statement [reporting such changes] on [a] Form 5," SEC v. Shattuck Denn Mining Corp., 297 F.Supp. 470, 471 (S.D.N.Y. 1968) (citing 17 C.F.R. § 240.16a-3); SEC v. Teo, No. 04 Civ. 1815, 2010 WL 3184349, at *9 (D.N.J. Aug. 10, 2010).
Summary judgment is granted in favor of the SEC on its Sections 13(d) and 16(a) claims against Richard Verdiramo, who owned more than 5% of RECOV stock, see supra ¶ vii, and was Chairman, CEO, President, and CFO of RECOV, see supra ¶ vi, failed to file a Schedule 13D amendment reporting his acquisition of over 70% of outstanding RECOV shares, and failed also to file Forms 4 and 5 reporting such change in beneficial ownership, see supra ¶¶ xii, xiii; see SEC v. Solucorp Indus., Ltd., 274 F.Supp.2d 379, 420 (S.D.N.Y.2003); SEC v. Sands, 902 F.Supp. 1149, 1164-65 (C.D.Cal.1995); SEC v. Olins, No. C-07-6423, 2010 WL 900518, at *1-2 (N.D.Cal. Mar. 12, 2010). Prior to April 7, 2005, Richard Verdiramo owned 1 million shares in RECOV, which exceeded 5% of outstanding RECOV common
Richard Verdiramo's assertion that he was not required to report his acquisition of the 6.1 million RECOV shares because "[t]hose shares were issued solely to enable control of RECOV to pass if [a] merger took place" (Defs. Mem. at 18) is unpersuasive because, among other reasons, he provides no evidence in support, see Cavanagh II, 2004 WL 1594818, at *12 ("[C]onclusory statements are insufficient to defeat a motion for summary judgment." (citing Opals on Ice Lingerie v. Bodylines, 320 F.3d 362, 370 n. 3 (2d Cir. 2003))).
The SEC argues that an injunction against all Defendants is warranted because their "conduct was not isolated," they "have provided no assurances against future violations," and they "have [not] acknowledged their wrongful conduct." (SEC Mem. at 10.) The SEC states that Vincent Verdiramo should be permanently enjoined from future violations of Section 5 because he "sold 109,000 [RECOV] shares in ... illegal transactions," his "conduct was repeated and went [on] over a long time," "[his] conduct was knowing, or at least reckless, since [he] is a lawyer who deals in securities matters," and he is "in [a] professional position[ ] to repeat the
Vincent and Richard Verdiramo unpersuasively counter that there are no grounds for an injunction because the SEC cannot establish "a single violation," Vincent and Richard Verdiramo "ha[ve] never previously [or subsequently] been sued by the SEC," and "the events at issue took place years ago." (Defs. Opp'n at 19.)
"Injunctive relief is expressly authorized by Congress to proscribe future violations of federal securities laws." Cavanagh I, 155 F.3d at 135; see also 15 U.S.C. § 78u(d). "In order to obtain a permanent injunction, the SEC must show that there is a `substantial likelihood of future violations of illegal securities conduct.'" Cavanagh II, 2004 WL 1594818, at *28 (citing Cavanagh I, 155 F.3d at 135). In making this determination, a court should look to
Id. (citation omitted); see also SEC v. McNulty, 137 F.3d 732, 741 (2d Cir.1998); SEC v. Mgmt. Dynamics Inc., 515 F.2d 801, 807 (2d Cir.1975).
The SEC is entitled to injunctive relief against Vincent Verdiramo preventing him from committing future violations of Sections 5. See SEC v. Platinum Inv. Corp., No. 02 Civ. 6093, 2006 WL 2707319, at *4 (S.D.N.Y. Sept. 20, 2006). Vincent Verdiramo has been found above to have violated Section 5 of the Securities Act by selling 109,000 RECOV shares in nineteen unregistered transactions between July 15, 2005 and February 6, 2006. See supra ¶ xviii, pages 14-20. As an attorney dealing in securities matters, and as the former Chairman, Chief Executive Officer, and President of RECOV, Vincent Verdiramo's unregistered sales of RECOV shares in violation of Section 5 was, at the very least, reckless. See supra ¶¶ ii, x; (See SEC 56.1 ¶ 8; Defs. 56.1 ¶ 8; Defs. Mem. at 6); see also Cavanagh II, 2004 WL 1594818, at *29 ("[Defendants] knew or should have known that a registration statement was required for the sale of stock.... [D]efendants were sophisticated businessmen with extensive securities industry experience."); SEC v. Cooper, 402 F.Supp. 516, 525 (S.D.N.Y.1975). Vincent Verdiramo's multiple sales over a seven-month period were not isolated and "indicate a likelihood of future violations." See supra ¶ xviii; (see SEC 56.1 ¶ 36; Defs. 56.1 ¶ 36); SEC v. Shapiro, 494 F.2d 1301, 1308 (2d Cir.1974) ("First offenders are not immune from injunctive relief," particularly where such offender "made not one but seven [unlawful transactions which
The SEC is entitled to injunctive relief against Richard Verdiramo preventing him from committing future violations of Sections 5, 13(d), and 16(a). See SEC v. Tecumseh Holdings Corp., No. 03 Civ. 5490, 2009 WL 4975263, at *5-6 (S.D.N.Y. Dec. 22, 2009). Richard Verdiramo has been found above to have violated Section 5 of the Securities Act and Sections 13(d) and 16(a) of the Exchange Act. See supra pages 271-72. As the Chairman, CEO, President, and CFO of RECOV from 2000 to 2006, see supra ¶ vi, Richard Verdiramo's authorization of the issuance of shares to individuals, including his father, who soon thereafter sold such shares in unregistered transactions was, at the very least, reckless, see supra ¶¶ viii, xi, xvii; see Cavanagh II, 2004 WL 1594818, at *29; SEC v. Aqua-Sonic Prod. Corp., 524 F.Supp. 866, 879 (S.D.N.Y.1981) (citing Oleck v. Fischer, 623 F.2d 791, 794 (2d Cir.1980)). Also, reckless was Richard Verdiramo's failure to report to the SEC his own personally authorized acquisition of over 70% of RECOV's outstanding shares in April 2005. See supra ¶¶ xii, xiii. These failures to comply with federal securities law were not isolated events. See supra ¶¶ viii, xi, xiv-xv; see Shapiro, 494 F.2d at 1308. With respect to his Section 5 violations, Richard Verdiramo personally signed, over the course of four months, four separate Board resolutions authorizing the issuance of shares to various individuals, including Vincent Verdiramo, Richard Verdiramo, Chen, and Meyer. See supra ¶¶ viii, xi, xiv-xv; (see SEC 56.1 ¶¶ 12-13, 16-18; Defs. 56.1 ¶¶ 12-13, 16-18); Shapiro, 494 F.2d at 1308. Richard Verdiramo continues to maintain that his conduct was legal and has provided no assurances against future violations. (See Defs. Mem. at 1, 14-18); see also Cavanagh II, 2004 WL 1594818, at *29; Platinum, 2006 WL 2707319, at *4. And, Richard Verdiramo, who is now CEO and President of Public Entity Acquisition Corporation, a New Jersey corporation, "is responsible for and certifies ... company filings" (SEC Reply at 11), and clearly engaged in an occupation which presents future opportunities for violations of the securities laws. See supra ¶ vi; (see SEC 56.1 ¶ 1; Defs. 56.1 ¶ 1); see also Cavanagh
The SEC is also entitled to injunctive relief against Chen preventing her from committing future violations of Section 5. See SEC v. World Info. Tech., Inc., 590 F.Supp.2d 574, 577 (S.D.N.Y.2008). Chen violated Section 5 of the Securities Act when she sold her RECOV shares in unregistered transactions on fifteen separate occasions between July 20, 2005 and September 13, 2005. See supra page 272, ¶¶ xvii; (see SEC 56.1 ¶ 32); Shapiro, 494 F.2d at 1308; Softpoint, 958 F.Supp. at 866. Chen failed to appear for her deposition in this matter and/or to file an opposition to the SEC's motion for partial summary judgment. She has also failed to acknowledge her wrongdoing and/or to provide assurances against further violations. See SEC v. Pierre, No. 02 Civ. 253, 2003 WL 21488014, at *5 (S.D.N.Y. June 27, 2003); SEC v. China Energy Sav. Tech., Inc., No. 06 Civ. 6402, 2008 WL 6572372, at *8 (E.D.N.Y. Mar. 28, 2008); see also SEC v. One or More Unknown Traders in Common Stock of Certain Issuers, No. 08 Civ. 1402, 2009 WL 3233110, at *5 (E.D.N.Y. Oct. 2, 2009). As Principal of Greenwood Capital, Inc., Chen is in a position to commit future violations of the securities laws. (See SEC 56.1 ¶ 11); China Energy, 2008 WL 6572372, at *8; Pierre, 2003 WL 21488014, at *5.
The SEC argues that Defendants' "illgotten gains" from "the[ir] sales of unregistered securities ... should be disgorged." (SEC Mem. at 11.) Vincent and Richard Verdiramo counter that there are "no grounds for disgorgement" because neither of them "has ever previously been sued by the SEC," "the events at issue took place years ago," and "[i]n all the years since the events at issue, the SEC has never pursued any other claim of violation regarding the Verdiramo[s'] business activities." (Defs. Opp'n at 19.)
"As an exercise of its equity powers, a court may order defendants to disgorge their earnings from violations of the securities law." SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir.1997). "The primary purpose of disgorgement as a remedy for violation of the securities law is to deprive violators of their ill-gotten gains, thereby effectuating the deterrence objectives of those laws." SEC v. Credit Bancorp, Ltd., No. 99 Civ. 11395, 2011 WL 666158, at *1 (S.D.N.Y. Feb. 14, 2011) (citing SEC v. Wang, 944 F.2d 80, 85 (2d Cir.1991)). "[D]isgorgement need only be a reasonable approximation of profits causally connected to the violation." SEC v. Warde, 151 F.3d 42, 50 (2d Cir.1998). "When disgorgement is ordered in an SEC-initiated proceeding, the IRS underpayment rate is appropriate." Cavanagh II, 2004 WL 1594818, at *29.
Vincent Verdiramo, Chen, and Richard Verdiramo are obligated to disgorge profits from the unregistered sale of shares (described above) because the "deterrent effect of an SEC enforcement would be greatly undermined if securities law violators were not required to disgorge illicit profits." SEC v. Svoboda, 409 F.Supp.2d 331, 344 (S.D.N.Y.2006) (quoting SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1474 (2d Cir.1996)); see SEC v. AbsoluteFuture.com, 393 F.3d 94, 97 (2d Cir. 2004); SEC v. Calvo, 378 F.3d 1211, 1215 (11th Cir.2004); Tecumseh Holdings, 2009 WL 4975263, at *6.
For the reasons stated herein, the SEC's motion for partial summary judgment [#45] is granted. This matter is referred to United States Magistrate Judge Andrew J. Peck for further proceedings as to the amounts to e disgorged.
The parties shall appear before the Court for a status/pretrial conference on Thursday, September 15, 2011 at 9:30 a.m. in Courtroom 21B of the United States Courthouse, 500 Pearl Street, New York, New York.
Were the Court to credit Hogan's (unsworn, untimely, and farfetched) claim, such evidence would only help to (further) establish Vincent Verdiramo's influence over the management and policies of RECOV, and thus his status as a RECOV "affiliate," which would independently preclude him from safe harbor protection under Rule 144(k). See infra pages 270-71; see Kern II, 425 F.3d at 150; M & A West, Inc., 538 F.3d at 1051; 17 C.F.R. § 230.144(k).
