limited to corporate officers or employees. Promotion of Reliability of Financial Information, Exchange Act Release No. 34,15570, 1979 WL 17892 (SEC), at *10 (Feb. 15, 1979) (Pl. Post-Arg. Mem. App. A.) There is no scienter requirement; liability is predicated on "standards of reasonableness." Id.
As president of Softpoint, Stoecklein was responsible for the accuracy of Softpoint's books and records. By deciding to retain fictitious entries and payments in Softpoint's accounts receivable ledger, he acted neither reasonably nor in conformity with Generally Accepted Accounting Principles. Stoecklein also approved and signed the 1994 annual disclosure that misrepresented Softpoint's sales and collections. Moreover, Stoecklein admitted that, as a consultant, he participated in the preparation of numerous annual and quarterly reports containing the fictitious entries and payments. None of those activities met the standards of reasonableness required by Rule 13b2-1.
In sum, the government has more than met its burden for summary judgment pursuant to Fed. R. Civ. P. 56. Although Stoecklein is precluded from introducing evidence that he withheld from discovery, he is not barred from coming forward with arguments or witnesses to rebut the government's claims. This he has failed to do. Stoecklein has not fulfilled his Rule 3(g) obligation to submit a statement identifying any triable issues of fact. Moreover, the affidavits of his supporting witnesses consist of immaterial statements and unsupported opinions and conclusions that are insufficient to raise a genuine issue to be tried.
Stoecklein has submitted statements from five supporting witnesses. Affiant David Cosby ("D. Cosby"), a former Softpoint officer and director, and the son of co-defendant Robert Cosby, speculates that Stoecklein lacked knowledge of Softpoint's foreign business dealings, but D. Cosby offers no relevant testimony about Stoecklein's participation in Softpoint's various securities transactions and related activities. (D. Cosby Aff. of 8/6/96 (appended to Stoecklein 1st Aff.)) Affiant D. Stoecklein, the defendant's brother, opines about Stoecklein's culpability, based on hearsay evidence obtained from attendance at depositions, a review of deposition transcripts, and discussions with Softpoint officers. (D. Stoecklein Aff.) Affiant Terry Maxwell, a former Softpoint consultant, theorizes that Stoecklein would have tried to rectify any wrongdoing had he been aware of misconduct in Softpoint's overseas business dealings. (Maxwell Aff. of 8/7/96 (appended to Stoecklein 1st Aff.)) Affiant Loretta Adams, Stoecklein's former secretary at Softpoint, offers non-material statements that Stoecklein did not travel overseas, and she opines that Stoecklein lacked authority to sign Softpoint checks. (Adams Aff. of 8/7/96 (appended to Stoecklein 1st Aff.)) Co-defendant Cosby postulates that Stoecklein could not have reasonably concluded that Softpoint had engaged in any wrongdoing. (Cosby Decl. of 3/14/95 PP 10-11 (appended to Stoecklein 1st Aff.)) Although Cosby, claims responsibility for retaining fictitious software sales on Softpoint's books in 1993, his statement is not relevant to Stoecklein's decision to write down the fictitious receivables as bad debt in 1994. (Contrast Id. P 9 with Midgley Dep. at 95-97.)
Stoecklein's own proffered testimony would be similarly insufficient, if not precluded, because it too consists of unsubstantiated allegations and conclusory denials. See Matsushita Elec. Indus. Co., 475 U.S. at 586 (requiring the opponent of summary judgment to do more that raise "some metaphysical doubt as to the material facts"). Accordingly, I grant the government's motion for summary judgement as to Stoecklein's violations of Sections 5 and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and SEC Rules 10b-5 and 13b2-1.
1. Permanent Injunction
The Securities Act and the Exchange Act both provide for injunctive relief when any of their provisions have been violated. See 15 U.S.C. §§ 77t(b), 78u(d). A defendant may be permanently enjoined from further violations of either act. Id. The Exchange Act also gives authority to permanently enjoin future service as an officer or director of a public company. See 15 U.S.C. § 78u(d)(2). Injunctive relief is appropriate when there is a "realistic likelihood of recurrence" of the violations. SEC v. Commonwealth Chem. Secs., Inc., 574 F.2d 90, 99-100 (2d Cir. 1978). Injunctive relief is permissible following summary judgment. Research Automation Corp., 585 F.2d at 33. First offenders are not immune from injunctive relief. SEC v. Shapiro, 494 F.2d 1301, 1308 (2d Cir. 1974).
The Second Circuit has articulated several factors to be considered in assessing the probability of future infractions: (1) the degree of scienter involved, (2) the isolated or recurring nature of the fraudulent activity, (3) the defendant's appreciation of his wrongdoing, and (4) the defendant's opportunities to commit future violations. Commonwealth Chem. Secs., Inc., 574 F.2d at 100. Examination of these factors shows that, without restraint, there is a realistic likelihood that Stoecklein's infractions would recur.
The record shows a high degree of culpability. Stoecklein participated in the fraudulent schemes despite his awareness of Softpoint's deceptive public disclosures. He helped prepare false reports, registrations, and press releases; signed and filed false reports with the SEC; engaged in insider trading; and participated in falsifying corporate financial records. Stoecklein's fraudulent behavior was not limited to a single, isolated incident. He engaged in a three-year course of conduct, entailing repeated and diverse violations of the securities laws; yet he shows no appreciation of his misconduct. Stoecklein adamantly maintains that his involvement in Softpoint's financial manipulations was entirely legitimate or unknowing. He depicts himself as an unwitting participant in schemes concocted by Cosby and other Softpoint officers.
Absent restraint, Stoecklein's profession would give him numerous opportunities to commit future violations. He holds himself out as an expert on corporate capitalization and appears to be a current officer and director of a public corporation. Moreover, Stoecklein already has demonstrated that he is capable of engaging in future unlawful acts. He flouted the law by continuing his misconduct throughout the SEC's investigation of Softpoint. Moreover, by ordering fictitious receivables retained on Softpoint's books, he spurned an opportunity to rectify past infractions. Accordingly, I find that Stoecklein's long and continuing pattern of misconduct demonstrates a reasonable likelihood of recurrent violations, and I grant the SEC's request to permanently enjoin him from future violations of the securities laws and permanently bar him from serving as an officer or director of a public company.
Disgorgement of illicit profits is a proper equitable remedy for securities fraud. SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995) (citing Manor Nursing Ctrs., Inc., 458 F.2d at 1104). Disgorgement is not punitive; it is designed to deprive wrongdoers of the profits of their wrongdoing. SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987), cert. denied, 486 U.S. 1014, 108 S. Ct. 1751, 100 L. Ed. 2d 213, 486 U.S. 1015 (1988). Thus, the proper measure of disgorgement is the amount of the wrongdoer's unjust enrichment. Commonwealth Chem. Secs., Inc., 574 F.2d at 102. In cases of insider trading, the disgorgement normally consists of the full profit derived from the tainted securities transactions. SEC v. First Jersey Financial Corp., 281 U.S. App. D.C. 410, 890 F.2d 1215, 1231 (D.C. Cir. 1989). Where an exact computation is not possible, the wrongdoer bears any risk of uncertainty. SEC v. Lorin, 76 F.3d 458, 462 (2d Cir. 1996).
Stoecklein's illicit profits consist of $ 192,000 received from co-defendant Lane and $ 282,416 derived from the sale of 70,000 shares of Softpoint stock in October and November 1993. Stoecklein traded the stock jointly with his company, co-defendant Remington, which was ordered to disgorge the $ 282,416 and pay prejudgment interest of $ 61,155, pursuant to a final default judgment entered on June 11, 1996. Accordingly, Stoecklein must disgorge a total of $ 474,416, of which he is jointly and severally liable with Remington for the sum of $ 282,416. Stoecklein also is assessed prejudgment interest of $ 61,155, for which is jointly and severally liable with Remington. Stoecklein will be individually liable for prejudgment interest to be computed on his illicit profit of $ 192,000, received from co-defendant Lane.
3. Civil Penalties
The Securities Act and the Exchange Act both provide for civil penalties when any of their provisions have been violated. See 15 U.S.C. §§ 77t(d), 78u(d)(3). The penalties are established in three tiers, imposing escalating levies commensurate with the severity of the offenses. The third tier, for the most egregious violations, provides a civil penalty of $ 100,000 for individuals. The Exchange Act also allows imposition of an additional civil penalty in the amount of three times the profits derived from insider trading. 15 U.S.C. § 78u-1.
Because Stoecklein's conduct involved fraud, deceit, manipulation, and deliberate disregard of regulatory requirements, and because his conduct created a significant risk of substantial losses to others, Stoecklein's violations warrant imposition of the most severe civil penalty. See 15 U.S.C. §§ 78t(d)(2)(C), 78u(d)(3)(B)(iii); see also 15 U.S.C. § 78u-1(a)(2). Accordingly, Stoecklein is assessed a civil penalty of $ 100,000.
The Court is deeply troubled by the manner in which penalties have been sought by the SEC in this case. Co-defendant Cosby, whose conduct was equal to or more egregious than Stoecklein's, was assessed a civil penalty of $ 100,000 pursuant to a Default Order submitted by the SEC. (Cosby Default J. signed 8/23/96.) Similarly, co-defendant Lane, whose conduct was equal to or only slightly less egregious than Stoecklein's, also was assessed a civil penalty of $ 100,000 pursuant to a Default Order submitted by the SEC. (Lane Default J. filed 6/11/96.) The SEC, however, sought and obtained an order from this Court assessing against co-defendant Remington a civil penalty of $ 847,248, which is triple the amount that it profited, with Stoecklein, from insider trading. (Remington Default J. filed 6/11/96.) The Court believes this represents a fundamental inconsistency. Accordingly, the civil penalty assessed against Remington is reduced to $ 100,000.
For the reasons set forth above, the SEC's motion for an order of preclusion is granted. The SEC's motion for summary judgment also is granted as to Stoecklein's violations of Section 5 and Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 and Rule 13b2-1 thereunder. Stoecklein is permanently enjoined from violating Section 5 and Section 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 and Rule 13b2-1 thereunder. Stoecklein is permanently barred from service as an officer or director of a public company. Stoecklein is ordered to disgorge $ 474,424, of which he is jointly and severally liable with co-defendant Remington for $ 282,416. Stoecklein is ordered to pay a civil penalty in the amount of $ 100,000. Stoecklein is assessed prejudgment interest of $ 61,155, for which he is jointly and severally liable with co-defendant Remington. Stoecklein will be individually liable for prejudgment interest to be computed on the sum of $ 192,000. The civil penalty assessed against co-defendant Remington is reduced to $ 100,000.
Within five business days of this order, plaintiff is directed to submit a proposed judgment order (1) barring Stoecklein from serving as an officer or director of a public company, (2) specifying, with the particularity required by law, the conduct from which Stoecklein will be permanently enjoined, (3) enumerating the amounts to be disgorged by Stoecklein and the prejudgment interest to be assessed, including a computation of prejudgment interest on $ 192,000 of the disgorgement, and (4) specifying the amounts for which Stoecklein is individually liable and those for which he is jointly and severally liable with Remington.
Within five business days of this order, plaintiff is further directed to submit a proposed order modifying the Remington Default Judgment of June 11, 1996, by reducing the civil penalty assessed against Remington to $ 100,000.
Dated: New York, New York
March 19, 1997