evidence produced in the light most favorable to the non-movant, there is
no genuine issue of material fact, then the entry of summary judgment is
appropriate. See Burrell, 894 F. Supp. at 758 (citing Binder v. Long
Island Lighting Co, 932 F.2d 187, 191 (2d Cir. 1991)).
Materiality is defined by the governing substantive law. "Only disputes
over facts that might affect the outcome of the suit under the governing
law will properly preclude the entry of summary judgment. Factual
disputes that are irrelevant or unnecessary will not be counted."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). "[T]he mere
existence of factual issues — where those issues are not material
to the claims before the court — will not suffice to defeat a
motion for summary judgment." Quarles v. General Actors Corp.,
758 F.2d 839, 840 (2d Cir. 1985).
For a dispute to be genuine, there must be more than metaphysical
doubt." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 47S U.S. 574,
586 (1986). "If the evidence is merely colorable, or is not significantly
probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50
Summary judgment is appropriate here because the facts material to the
resolution of this matter are not in dispute, and the SEC is entitled to
judgment as a matter of law. The facts material to the complaint against
Brandon pertain to misrepresentations he made to investors concerning
securities or other property invested, and the subsequent fate of those
securities due to Brandon's misrepresentations. It is undisputed that
Brandon promised to act as a trustee when managing investor custodial
accounts. He promised that the securities would be put in custodial
accounts, of which he would be the sole signatory, and the he would have
the power to return the securities to investors. Further, he pledged that
the securities would not be disposed of without the investors'
permission, and that he was representing the investors' best interests.
The undisputed facts reveal that he acted recklessly in the extreme after
a series of events should have shown him that these representations were
Brandon Violated the Antifraud Provisions of the Securities Laws
Section 17(a) of the Securities Act prohibits the making of any untrue
statement of material fact or failing to disclose the existence of a
material fact in connection with the offer or sale of a security.
15 U.S.C. § 77q(a)(1),(2),(3). Section 10(b) of the Exchange Act, and
Rule 10b-5, promulgated thereunder, prohibit similar conduct in
connection with the purchase or sale of a security. 15 U.S.C. § 78(b);
17 C.F.R. § 240.10b-5.
Brandon has violated these antifraud provisions of the federal
securities laws by making material misstatements, with the requisite
scienter, about Credit Bancorp's trust and credit facility agreement in
connection with the purchase or sale of securities.
In order to be liable for securities fraud, a defendant must nave made
a material misrepresentation or a material omission as to which he had a
duty to speak, or used a fraudulent device; with scienter; in connection
with the purchase or sale of a security. SEC v. Monarch Funding Corp.,
192 F.3d 295, 308 (2d Cir. 1999). The standard for violations of Section
17(a)(1) and Section 10(b) and Rule 10b-5 promulgated thereunder are
essentially the same.
The SEC does not need to prove investor reliance, loss causation, or
damages in an action under Section 10(b) of the Exchange Act, Rule
10b-5, or Section 17(a) of the Securities Act. E.g. SEC v. North Am.
Research & Dev. Corp., 424 F.2d 63, 84 (2d Cir. 1970) (reliance not an
element of a Rule 10-5 claim in the context of an SEC proceeding); Berko
v. SEC, 316 F.2d 137, 143 (2d Cir. 1963 (reliance, loss causation and
damages not relevant because "[t]he Commission's: duty is to enforce the
remedial and preventive terms of the statute in the public interest, and
not merely to police those whose plain violations have already caused
demonstrable loss or injury"); N. Sims Organ & Co. v. EEC, 293 F.2d 78,
80 n. 3 (2d Cir. 1961) (reliance is not an element of an SEC claim under
Section 10(b) of the Exchange Act or Section 17(a) of the Secirities
Act); SEC v. Todt, 2000 WL 223836, at 10 (S.D.N Y Feb 20, 2000) ("the SEC
need not prove actual reliance in an enforcement action"); aff'd, 2001 WL
345151 (2d Cir. Apr. 5, 2001); SEC v. Horton, 1997 WL 611556, at 3 n. 2
(S.D.N.Y. Oct. 3, 1997) (proof of justifiable reliance and damages are
not required in an SEC enforcement action).
Additionally, the evidentiary standard applicable in a civil
enforcement action is a preponderance of the evidence. Steadman v. SEC,
450 U.S. 91, 95, 101 S.Ct. 999, 1004, 67 L.Ed.2d 69 (1981); SEC v.
Moran, 922 F. Supp. 867, 888 (S.D.N.Y. 1996). "The majority of lower
courts which have addressed this issue have determined that in civil
enforcement actions the proper standard of proof is preponderance of the
evidence." Id. For example, while the SEC must demonstrate that Brandon
knew, should have known, or was reckless in not knowing, that he was
committing fraud, the burden of proving scienter also remains a
preponderance of the evidence. Additionally, an action based upon
circumstantial evidence is not any less sufficient than one based on
direct evidence, Michalic v. Cleveland Tankers, Inc., 364 U.S. 325, 330,
81 S.Ct. 6, 11, 5 L.Ed.2d 20, (1960), and does not necessitate a higher
standard of proof, SEC v. Moran, 922 F. Supp. 867, 888 (S.D.N.Y. 1996).
The Misrepresentations Were In Connection With the Purchase or Sale
Liability will only exist where misrepresentations are made Ic.
connection with the purchase or sale of securities. Brandon has advanced
the narrow position that actionable claims only lie if a
misrepresentation or omission relates to the actual security itself.
Brandon claims that since he did not make any false claims about customer
securities, he is therefore absolved from liability under the federal
antifraud statutes. The courts have rejected this argument.
In Rubin v. United States, 449 U.S. 424, 101 S.Ct. 698, 66 L.Ed.2d 633
(1981), the Supreme Court recognized that "obtaining a loan secured by a
pledge of shares unmistakably involves a `disposition of [an] interest in
a security, for value.'" 449 U.S. at 429. The Court continued,
"[t]reating pledges as included among `offers' and `sales' comports with
the purpose of the [Securities] Act and, specifically, with that of
§ 17(a). We frequently have observed that these provisions were
enacted to protect against fraud and promote the free flow of information
in the dissemination of securities." 449 U.S. at 431.
The "in connection with" factor has been broadly construed. SEC v.
Hasho, 784 F. Supp. 1059, 1106 (S.D.N.Y. 1992), citing Superintendent of
Insurance v. Banker's Life and Casualty Co., 404 U.S. 6, 12, 92 S.Ct.
165, 169, 30 L.Ed. 128 (1971). "Any statement that is reasonably
calculated to influence the average investor satisfies the "in connection
with' requirement of Rule 10b-5." Hasho, 784 F. Supp. at 1106, citing SEC
v. Texas Gulf Sulphur Co., 401 F.2d 833, 861-62 (2d Cir. 1968), cert.
denied, 394 U.S. 975, 89 S.Ct. 1454, 22 L.Ed. 756 (1969); accord SEC v.
Savoy Indus., Inc., 587 F.2d 1149, 1171 (D.C. Cir. 1971), cert. denied,
440 U.S. 913, 99 S.Ct. 1227, 59 L.Ed.2d 462 (1979). Brandon's statements
regarding the custody of investor funds and securities were calculated to
influence investors and cause them to place their securities in the hands
of Credit Bancorp.
Brandon claims that the fraudulent activities occurred in a separate
transaction — the sale or margin of the pledged securities
— from the actual pledge itself. This parsing of the transaction
fails since it does not take into account that Brandon himself promised
investors that their securities would be held in segregated accounts
under his control, a representation he knew or should hive known to be
false based on the facts found above. In fact, rather than safeguarding
investor securities as he bad promised to do, he allowed the securities
to be margined or sold by Blech. Brandon's false promise to investors,
made with scienter, cannot be separated from the subsequent pledge or
sale or other liquidation of investors assets placed under the control of
Credit Bancorp. The uncontested facts prove that the assets were not held
in custodial accounts and investor securities were sold or margined.
Brandon can cite to no authority limiting the application of the
antifraud provisions only to the value of the underlying securities
Brandon's Misrepresentations Were Material