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SECURITIES & EXCHANGE COM. v. AMERICAN BD. OF TRADE

July 26, 1990

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
THE AMERICAN BOARD OF TRADE, INC., ARTHUR N. ECONOMOU, PHYLLIS H. ECONOMOU AND THE AMERICAN BOARD OF TRADE SERVICE CORP., DEFENDANTS.



The opinion of the court was delivered by: Kram, District Judge.

MEMORANDUM OPINION AND ORDER

This case now comes before the Court on plaintiff Securities and Exchange Commission's ("SEC" or "Commission") motion for partial summary judgment pursuant to Fed.R.Civ.P. 56 as to alleged violations of sections 5(a) and 5(c) of the Securities Act of 1933 ("the Registration Provisions"), 15 U.S.C. § 77e(a) and 77e(c) by the individual defendants, Arthur N. Economou and Phyllis H. Economou ("A. Economou," "P. Economou," collectively, "the Economous"), proceeding pro Se, and for voluntary dismissal with prejudice of its other claims against all defendants pursuant to Fed.R.Civ.P. 41(a)(2). The Court is not considering any motions with respect to the alleged violations of the Registration Provisions by the corporate defendants. The SEC seeks a permanent injunction against further violation of the Registration Provisions by the Economous, pursuant to section 20(b) of the Securities Act of 1933 ("the 1933 Act"), 15 U.S.C. § 77t(b).

BACKGROUND

This opinion follows numerous other opinions in this case, by both this Court and the Second Circuit, familiarity with which is assumed. The relevant facts of this case, recounted on many prior occasions, will be only briefly reviewed here. Because the SEC has requested summary judgment only with respect to its claim that the individual defendants violated the Registration Provisions by their role in ABT's sale of the commercial paper, the Court will briefly recapitulate only those facts surrounding ABT's sale of the notes.*fn1

This case arose from the sale to investors of interests in Treasury Bills and of commercial paper by defendant American Board of Trade, Inc. ("ABT"). ABT's commercial paper program involved the sale of notes at a discount to investors, with maturities of three or six months, in small denominations. In an opinion affirmed by the Second Circuit, this Court found that ABT's commercial paper was a security within the meaning of the 1933 Act. S.E.C. v. American Board of Trade, Inc., 598 F. Supp. 335, 340 (S.D.N.Y.), aff'd, 751 F.2d 529, 539-40 (2d Cir. 1984). On July 25, 1985, the Court issued an injunction prohibiting ABT and American Board of Trade Service Corp. ("Service") from selling its commercial paper in violation of the registration provisions of the 1933 Act. At the same time that injunction was granted, the Court granted a stay pending registration of the ABT commercial paper in accordance with the 1933 Act. Securities and Exchange Commission v. American Board of Trade, [1985-86 Transfer Binder] Fed. Sec.L.Rep. (CCH) ¶ 92,224 (S.D.N.Y. July 26, 1985) (1985 WL 2165). ABT, however, refused to make available the certified financial statements required for the registration process. Thus, this Court lifted the stay on the previously-issued injunction, and further enjoined defendants from redeeming maturing commercial paper. The Court's second injunction became effective on July 18, 1986 after affirmance by the Second Circuit. Securities and Exchange Commission v. American Board of Trade, 798 F.2d 45, 47 (2d Cir. 1986). A Special Master was appointed to provide an accounting of ABT's finances and to supervise the winding down of the commercial paper program.

Shortly after the injunction against sale and redemption of ABT commercial paper issued, the Court ordered a freeze on the assets of ABT's commercial paper program to guard against further depletion of the program's assets. The Court also ordered appointment of an interim receiver for all of the ABT entities. In the course of its September 2, 1986 Order, the Court noted Economou's repeated violations of orders and injunctions. After the injunction against sale and redemption of ABT commercial paper became effective, A. Economou caused ABT to redeem commercial paper held by over 100 investors. S.E.C. v. American Board of Trade, Inc., 645 F. Supp. 1047, 1052 (S.D.N.Y. 1986). Further, without the required approval of the Special Master, ABT used its funds to send a bulletin to its commercial paper holders.*fn2 The Court found that there were willful and knowing violations. In addition, the Economous disclosed to the Special Master that they had "borrowed" in excess of $500,000 from ABT to pay their taxes and that those "loans" had never been repaid. Finally, there were $5 million in unexplained ABT disbursements after June 1, 1986, and there was evidence that funds from ABT's commercial paper program were being used to meet the operational expenses of other ABT entities, in particular Arthur N. Economou & Co., Inc. Therefore, for the protection of the assets of the commercial paper program, the Court expanded its original freeze order to include all ABT entities*fn3 and appointed an interim receiver.

A. Economou was subsequently found guilty of two counts of criminal contempt. In addition, he was found liable for civil contempt and ordered to pay restitution of $175,000 to ABT from personal funds. The Second Circuit affirmed these findings against Economou.

The report of the Special Master, dated November 5, 1986 revealed that ABT's liquid assets were short of its liabilities by $55,312,445. Recognizing that ABT's chances of recovery from its gross insolvency were dim, the Court ordered the appointment of a receiver and liquidation of the ABT Entities. A. Economou has paid ABT only $35,000 of the $175,000 restitution and has paid none of the acknowledged $500,000 debt to ABT. The Economous continue to assert claims against ABT assets.*fn4

DISCUSSION

Summary Judgment

Summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R. Civ.P. 56(c). In testing whether the movant has met this burden, the Court must resolve all ambiguities against the movant. Lopez v. S.B. Thomas, Inc., 831 F.2d 1184, 1187 (2d Cir. 1987) (citing United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962)).

The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. Adickes v. S.H. Kress and Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970). The movant may discharge this burden by demonstrating to the Court that there is an absence of evidence to support the nonmoving party's case on which that party would have the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).*fn5 The non-moving party then has the burden of coming forward with "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). The non-movant must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). Speculation, conclusory allegations and mere denials are not enough to raise genuine issues of fact. To avoid summary judgment, enough evidence must favor the non-moving party's case such that a jury could return a verdict in its favor. See Anderson v. Liberty Lobby, 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986) (interpreting the "genuineness" requirement).

In this claim for permanent injunction, summary judgment will be appropriate if there is no genuine issue of material fact as to the existence of a prior violation of the securities laws, and as to the "reasonable likelihood" that the violation will be repeated. Securities and Exchange Commission v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1100 (2d Cir. 1972) (citing SEC v. Culpepper, 270 F.2d 241, 249 (2d Cir. 1959); and United States v. W.T. Grant Co., 345 U.S. 629, 633, 73 S.Ct. 894, 897, 97 L.Ed. 1303 (1953)). Trial courts have broad discretion in granting injunctive relief pursuant to the provisions of the 1933 Act. Manor Nursing Centers, supra, 458 F.2d at 1100.

There can be no genuine dispute that the Economous violated the Registration Provisions. Both this Court and the Second Circuit have found that the commercial paper issued by ABT are securities within the meaning of the 1933 Act, and must therefore be registered with the Securities and Exchange Commission pursuant to the Registration Provisions. S.E.C. v. American Board of Trade, Inc., 593 F. Supp. 335, 340 (S.D.N.Y.), aff'd, 751 F.2d 529, 539-40 (2d Cir. 1984). There is no question that the ABT commercial paper was never actually registered. As "controlling persons" of ABT, the individual defendants are responsible under section 15 of the 1933 Act (15 U.S.C. ยง 77o) for violations of the Registration ...


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