that the odd minor foreign bank on occasion may have issued or considered issuing a PBI purchase order. In no way would it establish that any material number of leading banks issue PBIs or that there is an active market in them. Accordingly, the Court declines to hold a hearing.
Sanchez's Challenge to the Merits
Sanchez's first contention, that the Court lacks subject matter jurisdiction over the case, is easily dismissed. The SEC asserts, and Sanchez wisely does not dispute, that PBIs, if they existed, would be securities. (SEC Mem. 17-21; Sanchez Mem. 8-9) "The purpose of § 10(b) and Rule 10b-5 is to protect persons who are deceived in securities transactions." Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984). Making substantial misrepresentations as to the value of a worthless but technically extant security is a paradigmatic form of securities fraud. Extending the protection of the securities laws to the victims of schemes so fraudulent that the underlying paper does not exist logically follows, as fraudsters would have a perverse incentive to magnify their deceptive conduct. Other courts have reached the same conclusion. See Lauer, 52 F.3d at 77 ("It would be a considerable paradox if the worse the securities fraud, the less applicable the securities laws."); Mishkin v. Peat, Marwick, Mitchell & Co., 744 F. Supp. 531, 553 n.10 (S.D.N.Y. 1990) (fact that securities do not exist "does not remove [an] action from the operation of the federal securities laws.").
Sanchez contends that even if the securities laws reach fictitious securities, the Court lacks jurisdiction over the conduct at issue. Rule 10b-5 prohibits "any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security." It is the "in connection with" language upon which Sanchez focuses.
The Supreme Court stated in Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 30 L. Ed. 2d 128, 92 S. Ct. 165 (1971), that " § 10(b) and Rule 10b-5 prohibit all fraudulent schemes in connection with the purchase or sale of securities . . ." Id. at 10 n.7 (1971) (quoting A.T. Brod & Co. v. Perlow, 375 F.2d 393, 397 (2d Cir. 1967)); see Perez-Rubio v. Wyckoff, 718 F. Supp. 217, 236 (S.D.N.Y. 1989). The Court "construed the phrase 'in connection with' flexibly to include deceptive practices 'touching' the sale of securities, a relationship which has been described as 'very tenuous indeed.'" United States v. Newman, 664 F.2d 12, 18 (2d Cir. 1981) (citations omitted); see also Chemical Bank, 726 F.2d at 943 (expressing discomfort with breadth of Bankers Life standard). The SEC has demonstrated the likelihood that defendants took large fees, essentially brokerage commissions, for setting up deals for non-existent securities. Such behavior clearly satisfies Rule 10b-5's "in connection with" language.
Sanchez next argues that the SEC has failed to establish a likelihood that he acted with scienter.6 Even discounting Bremont's testimony against Sanchez due to Bremont's obvious incentive to exaggerate Sanchez's role, and recognizing that the SEC's evidence against Sanchez is far less copious than it is against Bremont, the SEC nonetheless has met its burden, which is modest given the limited nature of the relief it seeks.
Smith's testimony establishes that Sanchez, who describes himself as Bremont's lawyer (Sanchez Mem. 2), communicated with Smith, telling her that he was negotiating with several banks and would get a purchase order issued to close the UUPA transaction. (Troncoso Dec. Ex. 18 at 122-23, 414, 440) Such representations appear to have been false. Equally damning, in the Pegasus transaction Sanchez received $ 100,000 of the $ 150,000 that was fraudulently released from an escrow account after a purchase order from the non-existent First Federal was faxed to the escrow agent. (Troncoso Dec. Ex. 41)
When given the opportunity to refute this evidence, Sanchez invoked the Fifth Amendment, refused to testify before the SEC (Troncoso Dec. Ex. 17), and chose not to submit an affidavit to the Court. Generally speaking, "the Fifth Amendment does not forbid adverse inferences against parties to civil actions when they refuse to testify in response to probative evidence against them . . ." Baxter v. Palmigiano, 425 U.S. 308, 318, 47 L. Ed. 2d 810, 96 S. Ct. 1551 (1976); see United States v. One Parcel of Property Located at 15 Black Ledge Drive, 897 F.2d 97, 103 (2d Cir. 1990). The Court is entitled to and does draw an adverse inference from Sanchez's silence. Accordingly, the Court finds that the SEC has met its burden as to Sanchez.
Because the SEC has made the requisite showing as to both defendants, the Court will extend the asset freeze. However, the Commission is not entitled to freeze assets unrelated to its investigation. Accordingly, the SEC is ordered to file with the Court within 60 days an estimate of defendants' maximum liability, including all penalties and interest, whereupon the Court will entertain an application to modify the amount frozen.
Verified Accounting and Carve Out For Legal Fees
Defendants contest also both the need for and scope of the SEC's request for a verified accounting. Because defendants are in possession of over $ 2 million that, more than likely, they have attained improperly from investors, an accounting is appropriate. See SEC v. Manor Nursing Centers, 458 F.2d 1082, 1105 (2d Cir. 1972). Such relief is minimally intrusive.
Defendants request also that the Court allow them access to their frozen resources for the purpose of paying legal bills. "Just as a bank robber cannot use the loot to wage the best defense money can buy, so a swindler in securities markets cannot use the victims' assets to hire counsel who will help him retain the gleanings of crime." SEC v. Quinn, 997 F.2d 287, 289 (7th Cir. 1993) (citations omitted). Until such time as the Court can determine whether the frozen assets exceed the SEC's request for damages, defendants will not be permitted to use any of the frozen assets.
The SEC's request for an asset freeze is granted. Each defendant will provide the SEC with a verified accounting of his assets within 30 days. The SEC, within 60 days, will provide the Court with a statement setting forth the maximum sum it will request, including all penalties and interest, and, as soon as is practicable, an estimate of the total value of defendants' frozen assets.
Dated: February 18, 1997
Lewis A. Kaplan
United States District Judge