The opinion of the court was delivered by: SOTOMAYOR
SONIA SOTOMAYOR, U.S.D.J.
Plaintiff, Securities & Exchange Commission ("SEC"), alleges, inter alia, that defendant Ronald G. Stoecklein ("Stoecklein") participated in the sale of unregistered common stock of Softpoint, Inc. ("Softpoint"), thereby violating the securities registration provisions of Sections 5(a) and (c) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a) and 77e(c). Plaintiff further claims that Stoecklein deceived public investors as to the true financial status of Softpoint in violation of the anti-fraud provisions of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. Plaintiff also maintains that Stoecklein falsified accounting records, thereby violating Rule 1362-1, 17 C.F.R. § 240.13b2-1.
Plaintiff now moves for an order precluding Stoecklein from introducing evidence, denials, and defenses that he previously withheld by invoking his Fifth Amendment privilege during deposition. Plaintiff further moves for summary judgment, pursuant to Fed. R. Civ. P. 56, and requests that the Court permanently enjoin Stoecklein from future violations of the securities laws, bar him from future service as a director or officer of a public company, and order him to pay disgorgement, prejudgment interest, and civil penalties.
For the reasons discussed below, both motions are granted.
Between 1992 and 1995, Stoecklein participated in a series of securities transactions and related activities to raise capital for Softpoint,
a publicly-held Nevada corporation that markets a computerized cash register with proprietary software. During the relevant period, Softpoint common stock was traded on the over-the-counter market and on the Boston Stock Exchange. (1993 Form 10-K at 8 (Zucker Aff. Supp. Summ. J. of 5/15/96 (hereinafter "Zucker Aff.") Ex. 14.)) Softpoint is required to file annual and quarterly reports with the SEC, pursuant 15 U.S.C. § 78m and the rules promulgated thereunder.
The stock transactions and related activities began unfolding in 1992, while Stoecklein was a consultant to Softpoint. They continued after he became the president, chief operating officer, and a director of Softpoint in March and April 1994. Stoecklein remained a director and officer of Softpoint until his forced resignation in June 1995.
Stoecklein was a seasoned businessman when he began working for Softpoint in 1991. He had served as an officer and director of several public corporations, securities firms, and an investment banking company, where he gained expertise in structuring and filing securities registration statements and other SEC reports. (1994 Form 10-K at 29-30 (Zucker Aff. Ex. 10); Softpoint Mgt. Profile (Zucker Aff. Ex. 12 at nos. 315-17.)) Stoecklein was also president of a company that he formed to analyze the finances of corporate clients and help them raise capital. (Id.) He continued to hold directorships in other public companies while working for Softpoint. (1994 Form 10-K at 29.) The SEC maintains, without denial by Stoecklein, that Stoecklein currently serves as an officer and director of C.E.C. Industries Corp., a public company that attempted to merge with Softpoint during the period covered by this litigation. (Statement of SEC counsel (Oral Ar. Tr. of 10/11/96 (hereinafter "Hr'g Tr.")); Pl. Summ. J. Mem. of 5/17/96 (hereinafter "Pl. 1st Sum. J. Mem.") at 23.)
As a consultant to Softpoint, Stoecklein held the title of Director of Administration. (Softpoint Mgt. Profile at no. 315.) He facilitated stock sales, prepared public filings and press releases, participated in business and marketing planning, and disseminated information to investors. (Stoecklein Inv. Interview Tr. of 5/12/94 (hereinafter "Inv. Tr.") at 27 (Zucker Aff. Ex. 3.))
Softpoint paid Stoecklein $ 71,100 in 1993 and $ 86,072 in 1994. (Forms 1099-Misc. (Vasilescu Aff. Supp. Summ. J. of 8/23/96 (hereinafter "Vasilescu 2d Aff.") Ex. 12.) Stoecklein also was compensated with 70,000 shares of Softpoint stock, which he sold for $ 282,416, through his company, co-defendant Remington Publications, Inc. ("Remington").
(Pl. Rule 3(g) Statement of Undisputed Facts (hereinafter "Pl. 3(g) Statement") PP 311-324.) In addition, Stoecklein and Remington received $ 192,000 from the sale of Softpoint common stock that had been issued to co-defendant John Lane ("Lane").
(Zucker Disgorgement & Penalties Decl. of 4/22/96 (hereinafter "Zucker Decl.") P 22.)
I. Sale of Unregistered Stock And Fictitious Software Sales
In fiscal years 1992 and 1993,
Stoecklein participated in a series of transactions and related activities to sell unregistered Softpoint common stock in the United States and disguise the proceeds as earnings from the sale of Softpoint products. First, Softpoint invented fictitious sales of $ 4.41 million worth of software to six foreign distributors: Aston Pacific, Ltd. ("Aston Pacific") in Hong Kong, United Excel, Ltd. ("United Excel") in England, Europoint International ("Europoint") in Switzerland, Brantford (Jersey), Ltd. ("Brantford") in China, Canadyne Software Services ("Canadyne") in Canada, and Grupo E.A. ("Grupo") in Mexico. (Pl. 3(g) Statement PP 23, 48.) Softpoint recorded the artificial sales as accounts receivable.
(1993, 1992 Forms 10-K (Zucker Aff. Exs. 21, 14); Pl. 3(g) Statement PP 266-67, 278-79.) Those fictitious receivables accounted for 78 percent of Softpoint's reported total sales of $ 5.61 million in fiscal years 1992 and 1993. (Pl. 3(g) Statement PP 49-52.)
Stoecklein helped register the sales in Softpoint's quarterly and annual reports, filed with the SEC on Forms 10-Q and 10-K, and in a Form S-4 registration statement (collectively the "public filings") filed pursuant to a proposed merger with C.E.C. Industries Corp. (Inv. Tr. at 34-40, 184-85.) Stoecklein also publicized the sales in press releases. (Inv. Tr. at 27-29.) By portraying the fictitious sales as bona fide credit transactions, Softpoint's public filings and press releases misrepresented the nature of Softpoint's dealings with the foreign distributors and overstated Softpoint's 1992 and 1993 sales revenues by a total of 368 percent. (Tax Acc'ts Dep. at 110, 113-19, 122-23, 166, 171-72 (Zucker Aff. Ex. 6.); 1992 Form 10-K at 11 (Zucker Aff. Ex. 21); 1993 Form 10-K at 11 (Zucker Aff. Ex. 14.))
During the same period, Softpoint issued 460,000 shares
of unregistered common stock to four of the foreign distributors -- Aston Pacific, United Excel, Europoint, and Brantford -- as consideration for undefined services pursuant to marketing agreements. (Stock Certificates (Zucker Aff. Exs. 19, 23, 29, 31, 33); Marketing Agreements (Zucker Aff. Exs. 27, 35-37.)) Stoecklein helped Softpoint's then president Robert Cosby ("Cosby")
prepare the marketing agreements and was familiar with their terms. (Inv. Tr. at 48-54, 58-60, 71, 87, 97-98, 101-02.) Stoecklein claimed, however, that his knowledge of the contractual arrangements was limited to the information that Cosby gave him to "input" into the marketing agreements. (Inv. Tr. at 48-54, 58-60, 71, 87; Stoecklein Aff. of 8/7/96 (hereinafter "Stoecklein 1st Aff.") P 8.) Stoecklein asserted that Cosby was the only Softpoint official who dealt with foreign distributors. (Stoecklein 1st Aff. at P 8.)
In the third group of transactions and related activities, 344,700 shares of the unregistered common stock issued to the foreign distributors were sold to public investors in the United States for more than $ 1.7 million. (Pl. 3(g) Statement PP 153, 157, 167, 172, 178.) The bulk of the proceeds, $ 1.34 million, was remitted to Softpoint and recorded as payments against the fictitious accounts receivable. (Acc'ts Receivable Ledger (Zucker Aff. Ex. 22); Pl. 3(g) Statement PP 154, 158, 168, 175, 181.) During his pre-litigation examination, Stoecklein revealed that Softpoint's plan to liquidate the stock in the United States predated the distribution of the shares to three of the foreign distributors: United Excel, Europoint, and Brantford. (Inv. Tr. at 40-42, 45, 67-69, 91; Pl. 3(g) Statement PP 27, 33, 39, 44.)
Stoecklein admitted that he "helped to liquidate those blocks of stock" in the United States. (Inv. Tr. at 54-55.) He admitted that he contacted a number of large brokerage firms and arranged their compensation and the terms of the stock sales. (Inv. Tr. at 42-43, 67, 76-77, 91-92.) The firms included Lam Wagner, Inc., L.P. Charles & Goings, Inc., New World Securities, Inc., and Strategic Resource Management, Inc. (Id.) Stoecklein monitored the stock sales and the distribution of the proceeds. (Inv. Tr at 77-79; faxes to Stoecklein (Zucker Aff. Exs. 63, 64, 87, 90, 91, 95.)) He also arranged to have his brother, Donald Stoecklein ("D. Stoecklein"), open brokerage accounts and sell more than half of the unregistered shares liquidated in the United States.
Stoecklein subsequently attempted to recant his admission that he initiated contact with any brokerage firms, but he affirmed that he dealt with the broker-dealers to sell the stock. (Stoecklein 1st Aff. P 19.)
During the stock liquidation, Softpoint remitted $ 196,000 to the brokerage firms without disclosing the payments to the SEC or to the public. (Pl. 3(g) Statement PP 260, 263, 280, 285, 291.) The SEC labeled the payments as "kickbacks" and alleged that they were directed by Stoecklein. (Pl. 1st. Sum. J. Mem. at 10; Pl. 3(g) Statement PP 263, 269, 271-72.) Stoecklein knew about the payments and admitted handling communications regarding the funds, but he professed a lack of authority to make the disbursements. (Inv. Tr. at 77-81; Pl. 3(g) Statement PP 254-255, 257, 262-291; Stoecklein 1st Aff. PP 32-33.)
Although Stoecklein was aware that proceeds from the stock sales were remitted to Softpoint and used to pay down the accounts receivable, he nonetheless helped portray the stock proceeds as legitimate income in Softpoint's public filings and press releases. (Stoecklein Inv. Tr. at 54-55, 75-76, 86; Press Rels. (Zucker Aff. Ex. 34 at nos. 10026, 10042, 10047.)) Stoecklein subsequently tried to recant his admission that he knew that Softpoint recorded the stock proceeds as payments to accounts receivable. (Stoecklein 1st Aff. P 20, 21, 23, 25.)
After Stoecklein became president of Softpoint in 1994, he retained the remainder of the fictitious receivables on Softpoint's books as doubtful accounts, thereby perpetuating the fiction that the software sales had been bona fide and that future collection was possible. (Pl. 3(g) Statement PP 242, 244.) Nevertheless, Softpoint did not report the fictitious software sales in its federal tax returns for fiscal 1992, 1993, and 1994, all of which were prepared and filed in 1994 and 1995, while Stoecklein was president of Softpoint. (Pl. 3(g) Statement PP 215-223; 1992-94 Tax Returns (Zucker Aff. Exs. 77, 78, 81.) Stoecklein participated in discussions with Softpoint's auditor Duane Midgley ("Midgley") about the preparation of the 1992 federal tax return, and both the 1992 and 1993 returns were sent to Stoecklein before they were filed with the Internal Revenue Service. (Midgley Dep. at 44-49, 77 (Zucker Aff. Ex. 7.)) Softpoint's 1992 and 1993 federal tax returns were inconsistent with the Form 10-Q and Form 10-K statements that Stoecklein had previously helped prepare and file with the SEC, listing the fictitious software sales as legitimate income. (1992, 1993 Tax Returns (Zucker Aff. Exs. 77, 78); 1992, 1993 Forms 10-K (Zucker Aff. Exs. 21, 14.)) Softpoint also included the fictitious accounts receivable in its 1994 Form 10-K statement, and Stoecklein signed both that 10-K statement and the 1994 federal tax return knowing that they were at variance. (1994 Form 10-K (Zucker Aff. Ex. 10); 1994 Tax Return (Zucker Aff. Ex. 81.)).
II. Stock Payments For Fictitious Consulting Fees
In late 1993, Stoecklein participated in additional transactions and related activities to raise capital for Softpoint through the sale of common stock disguised as compensation for consulting services. Softpoint issued 577,000 shares of common stock to co-defendant Lane through his public relations firm, Newhouse & Associates, Inc. ("Newhouse"). (Pl. 3(g) Statement P 292.) Softpoint filed two Form S-8 registration statements with the SEC, listing 550,000 shares of that stock as compensation for bona fide services not connected with activities to raise capital. (Pl. 3(g) Statement PP 297-298.) Nonetheless, when the stock was subsequently sold through Newhouse's brokerage account, 45% of the proceeds were funneled back to Softpoint and to Stoecklein. Out of the $ 1.83 million generated by the stock sale, $ 400,000 was remitted directly to Softpoint; another $ 226,050 was used to pay advertising and other promotional expenses for Softpoint; and $ 192,000 was paid to Stoecklein through his company, Remington. (Pl. 3(g) Statement PP 301-304.)
Stoecklein negotiated the stock arrangement with Lane. (Inv. Tr. at 121-22). Stoecklein also helped prepare the Form S-8 registration statements that falsely listed the stock as compensation for services by Lane's company, Newhouse. (Inv. Tr. at 121-22.)
III. Unauthorized Issuance Of Preferred Stock
Stoecklein also participated in transactions and related activities to raise money for Softpoint by issuing preferred stock, even though such stock was not authorized by Softpoint's articles of incorporation. In fiscal 1994, Softpoint issued 125,000 shares of preferred stock to purchase prepaid media credits valued at $ 1.25 million. (1994 10-K at 13, 21-23 nn.5 & 7.) As president of Softpoint, Stoecklein signed the 1994 10-K statement representing that Softpoint's articles of incorporation had been amended in August 1993 to authorize preferred stock. (1994 Form 10-K at 23.) That representation was false. (Softpoint Art. Incorp. (Zucker Aff. Ex. 111.)) Stoecklein subsequently denied culpability for the misrepresentation, professing unfamiliarity with Softpoint's corporate charter. (Stoecklein 1st Aff. P 38.)
The SEC began investigating Softpoint's activities in 1993. SEC attorneys questioned Stoecklein on May 12, 1994. During that examination, Stoecklein was represented by his brother D. Stoecklein, an attorney.
The SEC commenced this action on March 27, 1995. Pursuant to the Court's scheduling order of September 8, 1995, the SEC sent Stoecklein a notice of deposition, dated January 17, 1996, requiring him to appear for questioning on February 9, 1996, in Reno, Nevada, near his home. Prior to deposition, Stoecklein consulted with his counsel regarding assertion of the Fifth Amendment privilege. (Stoecklein 1st Aff. P 4.) By letter dated February 1, 1996, defense counsel informed the SEC that Stoecklein could not afford to bring a lawyer to his deposition; however, the letter did not include any mention that Stoecklein would invoke the Fifth Amendment at the deposition. (Letter from Def. Att'y to SEC of 2/1/96 (Vasilescu 2d Aff. Ex. 2.)) Defense counsel contends that he informed the SEC before the deposition that Stoecklein planned to invoke the Fifth Amendment solely because his attorney would be absent. (Hr'g Tr. at 6-7.) Counsel for the SEC, however, disputes the assertion that defense counsel gave advance notice of the true reason for Stoecklein's assertion of privilege. (Id.)
During his deposition on February 8-9, 1996, Stoecklein invoked his Fifth Amendment privilege in response to virtually all questions. At the next case management conference, on March 22, 1996, the SEC advised Stoecklein's lawyer that it planned to move for a preclusion order and summary judgment, based, in part, on Stoecklein's assertion of the Fifth Amendment privilege. By letter of April 18, 1996, the SEC warned Stoecklein's counsel that it was preparing motion papers for preclusion and summary judgment. (Letter from SEC to Def. Att'y of 4/18/96 (Vasilescu Aff. Supp. Summ. J. of 5/17/96 (hereinafter "Vasilescu 1st Aff.") Ex. 3.)) At the same time, however, the SEC expressed its willingness to halt work on the motions if Stoecklein would waive his Fifth Amendment privilege and sit for deposition. (Id.) On April 26, 1996, Stoecklein's counsel responded to the SEC that Stoecklein would not waive his privilege, but would, instead, "take his chances" with a motion for summary judgment. (Letter from SEC to Def. Att'y of 4/27/96 (Vasilescu 1st Aff. Ex. 4.)) The SEC filed its motions for preclusion and summary judgment on May 17, 1996.
By affidavit dated August 7, 1996, Stoecklein informed the Court for the first time that he had invoked the Fifth Amendment at deposition because he could not afford to fly his lawyer to Reno to attend the deposition. (Stoecklein 1st Aff. P 4.) Stoecklein asserted that he would sit for deposition if he could afford to have his attorney present, but he did not specify the exact circumstances under which he would be willing to submit to examination. (Id.) Moreover, during oral argument, defense counsel was unable to tell the Court under what specific conditions Stoecklein would submit to deposition. (Hr'g Tr. at 4-5.)
Recognizing that assertion of the Fifth Amendment privilege is an effective way to obstruct discovery, the Second Circuit has instructed district courts to "pay particular attention to how and when the privilege was originally invoked" before allowing a defendant to withdraw his claim of privilege. United States v. Certain Real Property and Premises Known As: 4003-4005 5th Ave., Brooklyn, N.Y., 55 F.3d 78, 84 (2d Cir. 1995). Courts must be especially alert to the danger that litigants might invoke the privilege primarily to manipulate discovery or gain an unfair strategic advantage. Id. Courts may, in appropriate cases, bar ...