DALE A. KIMBALL, District Judge.
This matter is before the court on the Securities and Exchange Commission's (the "Commission") Motion for Summary Judgment, Defendants Brian J. Smart and Smart Assets, LLC's Cross-Motion for Summary Judgment. A hearing on the motions was held on April 28, 2011. At the hearing, the Commission was represented by Brian T. Fitzsimons and Thomas M. Melton. Defendants were represented by Steven G. Loosle. Before the hearing, the court carefully considered the memoranda and other materials submitted by the parties. Since taking the motions under advisement, the court has further considered the law and facts relating to these motions, along with the proposed orders and proposed findings of fact and conclusions of law submitted by the parties. Now being fully advised, the court renders the following Findings of Fact and Conclusions of Law.
1. This Court has jurisdiction over this action pursuant to Sections 20(d)(1) and 22(a) of the Securities Act of 1933 (15 U.S.C. §§ 77t(d)(1) and 77v(a)) and Sections 21(d), 21(e), and 27 of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78u(d), 78u(e), and 78aa). Defendants, directly or indirectly, have made use of the means in instrumentalities of interstate commerce or of the mails in connection with the acts, transactions, practices and courses of business alleged in this Complaint.
2. Venue in this Court is proper pursuant to Section 22(a) of the Securities Act of 1933 (15 U.S.C. § 77v(a)) and Section 27 of the Exchange Act of 1934 (15 U.S.C. § 78aa), because certain of the conduct alleged in this Complaint took place within the District of Utah.
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5. In March 2001, Smart, acting as an insurance salesman for AIM Association, Inc. ("AIM") — an insurance brokerage located in California — sold an $100,000 annuity to Paul Brown and Katherine Brown.
6. In April 2003, Smart convinced the Browns to cancel their annuity at a loss by telling them that he would invest their money in investment products that would provide steady income for retirement. See Fitzsimons Decl. 1 ¶ 12.
7. The Browns invested an additional $80,000 with Smart based on his misrepresentations.
8. In 2005, Paul Brown died, and Smart convinced Katherine Brown ("Brown") to invest the death benefit from his insurance policy of over $145,000 with him by misrepresenting to Brown that the money would be invested in an "S & P" index mutual fund and other securities, and that he would invest the majority of the money in a safe investment.
9. Brown's money was not used as Smart represented.
10. Brown's money was pooled with the money of other investors, and the pooled funds were used for (1) Smart's personal expenses; (2) investment in real estate; (3) hard money loans; (4) investment in high risk companies; and (5) to pay other investors.
11. At deposition, when asked about whether he invested her money in a low risk mutual fund, used her money for his own personal expenses, used her money to invest in real estate, used her money to make hard money loans, and pooled her money with other investor money, Smart asserted his Fifth Amendment privilege.
12. In order to further his scheme and deception, Smart gave Brown fabricated account statements that misstated, among other things, the balance of her account and the interest rate earned on her account.
13. Brown made repeated requests for account information that Smart would not honor.
14. Smart did not keep adequate books and records, he commingled investor funds, and he recreated company records during discovery.
15. The false account statements gave the appearance that Brown's money was held in a separately managed account and invested in securities offering fixed rates of return.
16. Brown's money was not used as Smart represented and was not held in a separate account.
17. Smart repeatedly asserted the Fifth Amendment privilege at deposition when asked about whether the account statements were fabricated and whether he designed the statements to mislead investors.
18. Smart also furnished Brown with a fabricated product information sheet, describing the non-existent Smart Assets, LLC product "Safe Guard VI," which stated that "[c]lients can realize above average returns without risking loss of principal" and that it is "[d]esigned for clients primarily interested in a fixed rate strategy."
19. In 2004, Smart met with Lisa Maria Padilla ("Padilla") and her mother Virginia, and convinced them to invest the assets of the Padilla Family Trust — approximately $1.1 million dollars — in an annuity.
20. At this time, Smart still worked as an insurance salesman with AIM. See Fitzsimons Decl. 1 ¶ 17.
21. Shortly thereafter, in or around September 2004, Smart left AIM. See Fitzsimons Decl. 1 ¶ 17.
22. In March 2005, Padilla was appointed sole trustee of the family trust. See Fitzsimons Decl. 1 ¶ 17.
23. Smart, still holding himself out as being affiliated with AIM, convinced Padilla to invest the trust assets with him based on myriad misrepresentations. See Fitzsimons Decl. 1 ¶ 17.
24. Smart memorialized the conversation in an email that he sent to Padilla, stating: (1) that her money would be invested "into Low [sic] risk or fixed funds offering Principal [sic] guaranteed protection with above average returns;" (2) that the fixed rate funds offer 5.5% returns; (3) that her remaining $425,000 would be invested with a "ROI (return on investment) company called Golden Key investments [sic]" offering "principle [sic] guaranteed product;" (4) that the investments were "very solid and safe;" and (5) that the investment could be "turned into a stretch IRA, passing the gains tax free to it's [sic] beneficiaries."
25. Padilla's money was not used as Smart represented and was not held in a separate account. See Fitzsimons Decl. 1 ¶ 18. Padilla's money was pooled with other investors' money and was used for highly speculative investments, Smart's personal expenses, and to pay other investors.
26. Padilla made repeated requests for account information that Smart would not honor.
27. At the deposition of Smart Assets, Smart admitted that approximately $870,000 of Padilla's money was used to make a failed "hard money" loan.
28. Smart met Dagmar Chaplin-Lee ("Lee") in early 2005, and by November of 2005, had convinced her to invest $200,000 with him by telling her that: (1) he would put the money in safe investments; (2) she would always have access to her money; (3) he was going to make Brown and Lee millionaires; and (4) he was still affiliated with AIM.
29. To make Lee "comfortable" with the investment, Defendants entered into a promissory note agreement with Lee and gave her a membership certificate purporting to give her 200,000 units of membership in Smart Assets.
30. As collateral for the note, Defendants offered a defaulted $870,000 promissory note.
31. In order to further his scheme and deception, Smart gave Lee fabricated account statements containing various misstatements.
32. The account statements gave the appearance that Lee's money was held in a separately managed account and invested in securities offering an annual interest rate of 20.65%.
33. Lee made repeated requests for account information that Smart would not honor.
34. In February 2006, based on Smart's prior misrepresentations, Lee invested another $50,000 with Smart through a promissory note offering an 18% annual rate.
35. Lee's money was pooled with other investors' money and used for highly speculative investments, Smart's personal expenses, and to pay other investors.
36. In February 2008, Smart admitted to Lee that her and Brown's assets were not placed in low risks funds or investments, but were instead invested in a Hawaiian real estate deal. One month later, Smart told Lee that they were also invested in a company called Pharma Meds.
37. The O'Briens held an annuity that they purchased through an agent at an insurance brokerage named Asset Protection and Insurance Services ("APIS").
38. When that agent left APIS, Smart was assigned to them as their representative.
39. Smart convinced the O'Briens to cancel their annuity and invest the money with him by telling them that such an investment would be just as safe.
40. Smart misled the O'Briens by representing that he was a financial advisor and by claiming that they would be investing in a reputable company named Smart Assets.
41. Smart failed to disclose to the O'Briens that Smart Assets was a company that was owned and controlled by Smart.
42. Pursuant to several promissory notes offering between 12% and 15% interest per year, the O'Briens invested with Smart over $126,000 based on his misstatement.
43. Smart gave the O'Briens fabricated account statements containing various misstatements.
44. The statements gave the appearance that the O'Briens's money was held in a separately managed account and invested in securities offering an annual fixed interest rate of 12%.
45. In July 2006, Smart solicited Ryan and Joanna Smith (the "Smiths") to invest in "hard money" real estate lending.
46. In August 2006, Smart offered and sold a $100,000 promissory note to the Smiths, offering a 10% per month rate of return.
47. While Smart made some of the monthly payments on the note, the payments stopped in January 2008.
48. Eighteen months after their supposed real estate investment, Smart informed the Smiths that, rather than investing their money in real estate as he had promised, their money was invested in a company that manufactures "slurry ice."
49. In December 2005, Ida Wilson ("Wilson") invested $165,000 with Smart and Smart Assets on the assurance that the investment was "safe". Wilson has not received any of her money back.
50. Brown gave Smart $325,126 in total.
51. Lee gave Smart $251,039 in total.
52. Padilla gave Smart $1,372,798 in total.
53. The O'Briens gave Smart $126,764 in total.
54. Ida Wilson gave Smart $165,000 in total.
55. The Smiths gave Smart $100,000 in total.
56. Smart pooled investor money in the Smart Assets, LLC bank account at Wells Fargo.
57. In September 2008, Smart's counsel at the time sent Padilla a letter dated September 17, 2008 stating that her funds were pooled with the funds of other investors, and that there are "no `official' documents stating the location of [her] funds."
58. Both Padilla and Brown received "dividend" payments from Smart. The payments came from the Smart Assets bank account where the investor money was pooled.
59. Lee received payments from the Smart Assets bank account where the investor money was pooled.
60. Since 2007, Lee repeatedly requested that Smart provide account information on her investments and did not received any such information.
61. The Smiths received payments from the Smart Assets bank account where the investor money was pooled.
62. Padilla gave Smart $1,372,798 and received twenty-three "dividend" payments from the Smart Assets bank account totaling $78,970. Smart thus misappropriated $1,293,828 from Padilla.
63. Brown gave Smart $325,126 and received "dividend" payments from Smart totaling $88,180. Smart thus misappropriated $236,945 from Brown.
64. Lee gave Smart $251,039 and received nine "dividend" payments from the Smart Assets bank account totaling $52,500. Smart thus misappropriated $198,539 from Lee.
65. Ida Wilson gave Smart $165,000 and received no money back. Smart thus misappropriated $165,000 from Wilson.
66. The O'Briens gave Smart $126,764 and received no money back. Smart thus misappropriated $126,764 from the O'Briens.
67. The Smiths gave Smart $100,000 and received "dividend" payments from Smart totaling $62,000. Smart thus misappropriated $38,000 from the Smiths.
68. Smart did not track, record, or monitor the status of money he collected from his clients.
69. Investors made repeated requests for account information to Smart that he did not satisfy.
70. Smart gave Brown false account statements containing: (1) fabricated account balances; (2) fabricated interest earned amounts; (3) fabricated interest rate figures; and (4) fabricated account term figures. The account statements referenced "account activity" and "withdrawals, transfers and deposits" regarding Brown's "Non-Qualified" Smart Assets account and listed her account number as P1003049. This gave the impression that Brown had a separate account where her assets, account values, and account activity were tracked and recorded by Smart and where her assets were held in trust.
71. Smart gave Lee false account statements containing: (1) fabricated account balances; (2) fabricated interest earned amounts; and (3) fabricated interest rate figures. The account statements referenced "account activity" and "withdrawals, transfers and deposits" regarding Lee's "Non-Qualified" Smart Assets account and listed her account numbers as P1005187 and P1005196. This gave the impression that Lee had separate accounts where her assets, account values, and account activity were tracked and recorded by Smart and where her assets were held in trust.
72. Smart gave the O'Briens false account statements containing: (1) fabricated account balances; (2) fabricated interest earned amounts; (3) fabricated interest rate figures; and (4) fabricated account term figures. The account statements referenced "account activity" and "withdrawals, transfers and deposits" regarding the O'Briens's "Qualified" Smart Assets account and listed their account numbers as SA13789118 and SA13789119. This gave the impression that the O'Briens had a separate account, where their assets, account values, and account activity were tracked and recorded by Smart and where their assets were held in trust.
73. Smart gave Brown a false and misleading product information sheet referencing a fabricated Smart Assets investment product called "Safe Guard VI." The sheet explained that "[c]lients can realize above average returns without risking loss of principal."
74. The product information sheet also listed Brown's account number as P10043039, which is different than the account number of P1003049 listed on the fabricated account statements.
75. Smart gave Lee a certificate for 200,000 units of membership in Smart Assets. She is not, and has never been, a member of Smart Assets.
76. Smart transferred $114,091 in investor money from his Smart Assets bank account to his personal checking account. Much of this money was used for personal and family expenses.
77. Smart used his Smart Assets bank account check card for: $40,183 in personal credit card payments; $16,728 in retail purchases; $17,757 in personal mortgage expenses; $2,762 for restaurants; $2,367 for gas; $2,109 for hotels; $1,606 for car rentals; $1,426 for phone bills; and $6,245 in other personal expenses.
78. Smart used investor money to pay for his wife's personal expenses. From the Smart Assets bank account, Smart wrote checks to Kelly Smart totaling $26,400 and made $3,012 in payments to her personal credit card.
79. Smart withdrew $1,193,921 from the Smart Assets bank account. This money was used for personal expenses, investment in real estate, to make "hard money" loans, and to invest in failed companies.
80. Smart wired $461,700 from his Smart Assets bank account for use in real estate investment and to make highly speculative investments in companies. The bulk of this money went to American Enterprise Investment Services, Inc., Fuerte Real Estate Investment Group, Golden Key Investments, Metro National Title Trust, Jake Consulting Int., and First Guarantee Capital.
81. Smart used investor money to invest in real estate in Coalville, Utah, and may have used investor money to invest in real estate in Draper, Utah, Park City, Utah, and Maui, Hawaii.
82. Smart used investor money to make highly speculative investments in companies including Pharma Meds, Inc., McFarland and Hullinger, Inc., and Vision Natural, Inc.
83. Smart sold promissory notes to investors.
84. Smart told investors that he was going to invest their money in securities, including mutual funds.
85. After repeated postponements granted by the Commission at the request of Smart and his lawyers, Smart was noticed for his deposition on June 3, 2009, pursuant to Rule 30 of the Federal Rules of Civil Procedure.
86. Specifically, Smart asserted the Fifth Amendment when questioned regarding:
87. Smart controlled all aspects of Smart Assets, LLC.
88. Smart intentionally misled investors regarding how he was going to invest their money.
89. Smart gave investors false account statements in order to mislead them.
90. Smart gave investors fabricated production information sheets in order to mislead them.
91. Smart gave Lee a membership certificate in Smart Assets to mislead her into investing money.
92. Smart held himself out to investors as a financial advisor in order to mislead them.
93. Smart told investors that their investments would be allocated to low risk funds with principal-guaranteed protection. However, Smart knew that the money was either being invested in (1) real estate; (2) high risk companies; or (3) hard money lending; or being used to (4) pay his own personal expenses.
94. Smart did not disclose to Lee that her promissory note was secured with an $870,000 promissory note that was already in default.
95. Smart paid investors with other investor money. Smart pooled investor money, and made "dividend" payments to some of the investors from the pooled funds.
Rule 56(c) of the Federal Rules of Civil Procedure provides that a party is entitled to summary judgment if the moving party demonstrates that "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). A genuine issue of material fact exists when, after viewing the record and making all reasonable inferences in a light most favorable to the non-moving party, a reasonable jury could return a verdict for the non-moving party.
Rule 56(e) further states that "[w]hen a motion for summary judgment is made and supported as provided in this rule . . . the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. P. 56(e). In other words, once the moving party has demonstrated that there are no issues of material fact in dispute, the burden shifts to the opposing party "to come forward with specific facts showing that there remains a genuine factual issue for trial."
Summary judgment is an appropriate device in actions brought by the Commission alleging securities fraud.
The foregoing findings of fact underline that the Commission has presented undisputed evidence that Smart violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C § 78j(b) ("Exchange Act"), and Rule 10b-5 thereunder.
In proving that Smart violated Sections 17(a) of the Securities Act and 10(b) of the Exchange Act, the Commission established that (1) in connection with the offer or sale of securities; (2) Smart engaged in a scheme to defraud when he made untrue statements, omitted material facts, and engaged in transactions, practices or courses of business that operated as a fraud or deceit upon the investor; that (3) Smart's misrepresentations or omissions were material, such that a reasonable investor would consider the misrepresented or omitted facts to be important in making an investment decision,
The Commission has presented undisputed evidence that Smart sold promissory notes to investors, and that he told investors that he was going to invest their money in securities, including mutual funds.
The promissory notes that Defendants offered and sold are securities as either notes or investment contracts. In assessing whether an investment is a security, the United States Supreme Court has noted that the fundamental purpose of the Securities Acts is "to eliminate serious abuses in a largely unregulated securities market."
Investment contracts are securities within the scope of the Securities Acts. An investment contract is a security if it involves (1) investment of money; (2) in a common enterprise; (3) with profits derived from others' efforts.
Here, the note-holders invested money with the Defendants. The funds were pooled in a common enterprise. Indeed, Smart's attorney sent a letter on behalf of Smart to one of his investors assuring her that her "funds are placed along with others, in a pool for investments." And Lee was issued "membership certificates" for 200,000 units of Smart Assets in return for her investment in the Defendants' notes.
The Defendants' promissory notes are not merely loan agreements. These notes were "not loans for commercial purposes, but were investment payouts disguised beneath the façade of promissory notes. These notes are akin to a
According to the United States Supreme Court, notes are presumed to be securities unless the notes fall into certain judicially created categories that are plainly not securities or the notes bear a family resemblance to the notes in those categories.
The first factor under
The first factor puts the promissory notes comfortably in the category of a security. Here, the investors were not provided any information regarding any assets that purportedly backed up the promissory notes — other than the fact that some investors were told the money would be used for "real estate."
The second factor requires the examination of the plan of distribution of a note "to determine whether it is an instrument in which there is `common trading for speculation or investment.'"
Under the third
The final factor for the Court to assess is whether there are adequate risk-reducing factors such as an alternative regulatory scheme that would "significantly reduce[ ] the risk of the instrument" to the lender, "thereby rendering application of the Securities Acts unnecessary."
Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] prohibits persons, in the offer or sale of a security, from employing any device, scheme or artifice to defraud; obtaining money or property through materially false or misleading statements or omitting to state material facts; or engaging in any transaction, practice, or course of business which operates as a fraud or deceit.
As underlined in the above findings of fact, the Commission has shown through undisputed evidence that Defendants made numerous misrepresentations and omissions to investors. Among other things, Defendants omitted material facts by failing to inform investors that their money would be used for (1) Smart's personal expenses; (2) investment in high risk real estate ventures; (3) hard money loans; and (4) to pay other investors. Defendants omitted material facts by failing to inform investors that their money would be pooled together in one account.
Defendants misrepresented material facts when Smart told investors that their money would be invested in safe, principal-guaranteed investments including S & P index mutual funds. Defendants misrepresented material facts when Smart furnished investors with account statements that misstated the balance of their account and the interest rate earned on their account. Defendants misrepresented material facts when Smart furnished investors with product information sheets that misstated how their money was invested.
Information is material if a substantial likelihood exists that the facts would have assumed actual significance in the investment deliberations of a reasonable investor.
Here, the Commission has offered undisputed evidence that Defendants made misrepresentations regarding the use of the investors' funds and failed to disclose that their funds were being misappropriated and used for purposes other than those stated when their investments were solicited. There is a substantial likelihood that such information would have assumed actual significance in the investment deliberations of the Defendants' investors. Therefore, the Defendants' misrepresentations and omissions are material.
Scienter is an element of violations of Section 17(a)(1) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, but is not a required element of a violation of Sections 17(a)(2) or 17(a)(3) of the Securities Act.
Here, the Commission has offered undisputed evidence that Defendants acted with the requisite scienter. Smart told investors that their investments would be allocated to low risk funds with principal-guaranteed protection. However, Smart knew that the money was either being invested in (1) real estate; (2) high risk companies; (3) hard money lending; or being used to (4) pay his own personal expenses. Smart knew that he gave investors false account statements and misleading product information sheets. Moreover, Smart repeatedly asserted his Fifth Amendment privilege when asked whether he intentionally misled investors in using these various artifices of fraud.
As the Supreme Court recently reaffirmed, the "in connection with" requirement is to be construed broadly and flexibly to effectuate its remedial purposes.
The Commission has presented undisputed evidence that Defendants' conduct in this case coincided with the sale of securities. Defendants sold promissory notes, mutual funds and other securities. Smart's misrepresentations regarding the use of funds occurred in the course of selling the securities to investors. Indeed, the investors would likely not have invested in Smart or Smart Assets without Smart's misrepresentations regarding the use and nature of their investments. It does not matter that Defendants never invested the investor's money in mutual funds despite his statements that he would do so.
The Commission has shown undisputed evidence that Defendants used the requisite jurisdictional means to affect the fraud. In
After repeated postponements granted at the request of Smart and his lawyers, Smart was noticed for his Rule 30 deposition on June 3, 2009. Smart failed to appear. On the following day, Smart attended the Rule 30(b)(6) deposition of Smart Assets as the company's sole controlling member. At the deposition, Smart asserted his Fifth Amendment privilege against self incrimination with regard to the majority of questions concerning the Commission's material allegations.
This Court draws an adverse inference against Smart based on his refusal to answer many substantive questions during his deposition and his assertion of the Fifth Amendment privilege. The Supreme Court has held that, "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence offered against them."
In
By asserting his privilege, Smart refused to answer questions regarding (1) the Smart account statements given to investors; (2) the product information sheet given to Brown; (3) the promissory notes that he sold to investors; (4) the membership certificate that he issued to Lee; (5) what he told investors when soliciting their investments; (6) how he invested investor money; (7) how he otherwise used investor money; (8) whether he told investors he was going to invest their money in safe, principal-guaranteed investments; (9) whether he used investor money for his own personal use; (10) whether he used investor money to invest in real estate; (11) whether he used investor money to invest in hard lending; (12) whether he misled investors regarding how he was going to use their money; (13) whether he commingled investor money in a single account; (14) whether he gave investors false and misleading account statements; (15) whether he gave investors false and misleading product information sheets; (16) whether he paid investors with other investor money; (17) whether he misled investors to think that he was affiliated with AIM after he left AIM; (18) whether he routinely misled investors regarding the status of their investments; (19) whether he transferred investor money into his personal checking account; (20) whether he used investor money to pay his mortgage; (21) whether he used investor money to pay his personal credit cards; (22) whether he used investor money to pay his wife's personal credit cards; (23) whether he used investor money to issue a $23,000 check to his wife; and (24) whether he orchestrated a scheme to defraud investors.
Smart's silence and failure to contest these assertions is evidence of his acquiescence to the fact that he knowingly and purposely defrauded investors. As such, this Court draws an adverse inference against Smart in this case.
"Once a violation of the federal securities laws has been found, a district court `has broad equitable power to fashion appropriate remedies.'"
The Commission has presented undisputed evidence that there is a substantial likelihood that Smart will continue to violate the federal securities laws if not enjoined. His conduct meets the statutory requirement of "proper showing" to establish the likelihood that he will violate securities laws in the future, thus demonstrating the need for a permanent injunction. The Court may grant permanent injunctions against future violations of the securities laws on a motion for summary judgment.
In remedial actions such as this case, the Commission appears "not as an ordinary litigant, but as a statutory guardian charged with safeguarding the public interest in enforcing the securities laws."
When determining the likelihood of future violations, the courts should evaluate the totality of the circumstances.
The egregious, systematic and widespread nature of Smart's conduct clearly demonstrates the need for a permanent injunction to deter future violations of the federal securities laws. Smart's actions were not a single incident or one-time occurrence, but rather a systematic program of deception and fraud perpetrated over several years. Smart is young, and left unrestrained, will have ample time and opportunity to devise another securities scheme. His victims do not have such luxury of time and opportunity, and may never financially recover.
The long term and ever-changing nature of Smart's deception demonstrates that Smart is likely to invent new fraudulent schemes to defraud. Consequently, given Smart's conduct, the high degree of scienter he demonstrated, the likelihood that Smart could again engage in violations of the securities laws, and that lack of remorse that he has demonstrated, this Court shall permanently enjoin Smart from violating Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.
It is well settled that the Commission may seek and the courts may order disgorgement of ill-gotten gains in Commission-instigated injunctive actions.
Moreover, the amount of disgorgement should not include any offset for the operating expenses of Smart Assets.
The Commission is entitled to full disgorgement and prejudgment interest in order to deter Smart — and other potential violators — from future violations of the securities laws and make his victims whole to the fullest extent practicable. The Commission presented undisputed evidence that Smart misappropriated $2,059,077 from investors. Thus, the Commission is entitled to an order of disgorgement in the amount of $2,059,077 plus prejudgment interest of $597,426 for a total of $2,656,503.
Pursuant to Section 20(d)(2) of the Securities Act and Section 21(d)(3) of the Exchange Act, the Commission may seek civil penalties for violations of the federal securities laws. 15 U.S.C. § 77t(d)(2); 15 U.S.C. § 78u(d)(3). Like a permanent injunction, civil penalties are imposed to deter the wrongdoer from similar misconduct in the future. Accordingly, the factors considered to determine the likelihood of future violations for the purposes of a permanent injunction are also useful in assessing civil penalties.
A third-tier penalty is appropriate where the violations (1) involve "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement", and (2) "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).
Furthermore, in determining whether to assess civil penalties, a court may consider evidence of a defendant's overall conduct, including conduct that is not directly related to the violations at issue. For example, in
The undisputed facts show that Smart repeatedly induced investors to participate in his systematic program of deception and fraud. Although he knew investor money was being misappropriated and used contrary to the representations made to clients, Smart continued to solicit investors and take their money. Smart's high level of scienter is further evidenced by the fact that he targeted elderly investors in need of safe, highly liquid investments for retirement. Smart would misrepresent to prospective investors regarding how he was going to invest their money. After the money was handed over to Smart, he would use it for a myriad of personal expenses and would squander the money on fruitless, high risk investments. Also, Smart provided clients with fabricated accounts statements and product information sheets, which wholly misrepresented how the money was being used.
Smart has shown no recognition of his wrongdoing and has not provided any assurances that he will not defraud investors again. As such, this Court shall grant the Commission's request for civil penalties as well as a permanent injunction and disgorgement. Smart shall pay the maximum third tier penalty which provides for a penalty in the amount of $2,059,077, or $100,000 per violation by Smart and $500,000 per violation by Smart Assets, LLC, or such other amount as the Commission may submit by further motion.
Based on the forgoing, and for the reasons set forth in the Commission's memoranda, there is no genuine issue of material fact separating the parties in this action. The record contains undisputed evidence that Smart violated Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. The Court will enter separate Orders regarding these two motions.
