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S.E.C. v. MONTLE

United States District Court, Southern District of New York


March 3, 2003

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
PAUL J. MONTLE, LS CAPITAL CORPORATION, PAUL V. CULOTTA, CAROL C. MARTINO, CMA NOEL, LTD., MARIO J. IACOVIELLO, ILAN ARBEL, AND EUROPE AMERICAN CAPITAL CORPORATION, DEFENDANTS.

The opinion of the court was delivered by: Milton Pollack, Senior District Judge

ORDER ADJUDGING PAUL J. MONTLE IN CIVIL CONTEMPT

Plaintiff Securities and Exchange Commission (SEC or Commission) renews its motion to hold Defendant Paul J. Montle in civil contempt for violating this Court's July 12, 2001 Judgment Order, January 17, 2002 Document Production Order, and May 3, 2002 hearing Order. For the reasons set forth below, the Commission's motion is granted.

Background and Findings of Fact

Defendant's misdeeds, stretching back more than ten years in this case, involved three clusters of securities violations. The Commission's suit, filed May 14, 1998, alleged Defendant (1) knowingly disseminated false sales figures and other information regarding the HIV drug Fluorognost, in an effort to pump up the stock price of (and defraud investors in) Viral Testing Systems Corporation (VTS), which sold the drug; (2) knowingly made a series of false statements in various SEC filings of the Lone Star Casino Corporation, a wholly-owned subsidiary of VTS, in an effort to circumvent Colorado's gaming laws for the sake of an important investor; and (3) orchestrated a sophisticated stock manipulation scheme, in which shares of RMS Titanic, Inc. (a company owning a partnership that purportedly held rights to salvage artifacts from the sunken luxury ship Titanic) were alternately released into and withheld from the market, in an effort to bilk unsuspecting investors of thousands of dollars.

On July 12, 2001, after a three-day bench trial, this Court concluded that Defendant had violated, in connection with his various schemes, the following provisions: § 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a); §§ 10(b), 13(a), and 13(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b) & 78m(a) & (b); and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated under the Exchange Act, 17 C.F.R. § 240.10b-5, 240.13a-1, 240.13a-13, 240.12b-20, and 240.13b2-1. Defendant personally profitted from his knowing violations of these laws and rules. Moreover, this Court found that "all of the Defendant's testimony on issues that were disputed was without even the semblance of credibility."*fn1

In the Court's July 12, 2001 Judgment Order, Defendant was (1) permanently enjoined from violating the securities laws and rules mentioned above; (2) barred, for five years, from participating in the sale of securities under Regulations D and S of the Securities Act, and from serving as an officer or director of any company having a class of securities registered under § 12 of the Exchange Act; (3) ordered to pay, within 30 days of the Judgment, a $50,000 civil penalty pursuant to § 20(d) of the Securities Act; and (4) ordered to disgorge, within 30 days of the Judgment, the $187,459.25 that he obtained as a result of his Titanic manipulation scheme, plus $177,633 in prejudgment interest.*fn2 The monies due and payable to the SEC within 30 days of July 12, 2001 thus totalled $415,092.25 (collectively, the "Judgment").

By mid-August 2001, when the 30 days were expired, Defendant had paid none of the Judgment. (In fact, to this date he has paid none of it.) Meanwhile, the SEC, to its detriment, took no immediate action to enforce the Judgment when it became due. A month later, the September 11 terrorist attacks destroyed the New York offices of the Commission at 7 World Trade Center. Some of the documents that Defendant had produced earlier to the SEC were lost, and the case was delayed.

On November 21, 2001, in order to determine Defendant's ability to pay the Judgment, the SEC served him with a first set of post-judgment requests for production of documents relating to his assets. Making several spurious arguments, Defendant refused to produce these requested documents, which included all federal, state, and local income tax returns (dating from tax year 1993) that he signed on behalf of any entity. On January 17, 2002, the Commission filed a motion to compel production of the documents, and the Court issued an order compelling Defendant to produce them by January 24 (Document Production Order). By January 30, Defendant still had failed to produce the documents, and the Commission filed a motion to hold him in contempt for violating both the Judgment Order and the Document Production Order. In February, days before Defendant's opposition papers were due on the contempt motion, he filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court for the Southern District of Texas. That filing automatically stayed proceedings in this Court*fn3 until, on April 15, 2002, U.S. Bankruptcy Judge Karen Brown dismissed the petition as filed in bad faith (i.e. solely as a means to obtain an automatic stay on further proceedings in this Court). On April 19, this Court entered an Order resetting Defendant's response time on the pending contempt motion to April 26, and set a May 3 hearing date.

By memo endorsement on the transcript of the May 3 hearing (hearing Order), the Court, in a spirit of clemency, held the contempt motion in abeyance and ordered Defendant to submit to an immediate deposition and discovery proceeding at the offices of the SEC. The deposition was for the purpose of determining with specificity what assets he had that were lawfully available to be turned over forthwith to the Commission or a court-appointed receiver. At the close of the hearing the Court explicitly warned Defendant on the record that:

Any resistance or obfuscation to that deposition and discovery and disclosures required thereunder will be grounds for an immediate application to this Court on one day's notice to consider and decide so much of the contempt motion as being laid aside at this time for the requisite discovery, disclosure and transfer to the SEC or otherwise of assets appropriately obtainable in satisfaction of its judgments. . . . You have heard the Court's indication and the degree of future tolerance.*fn4

The SEC took the deposition one week later, on May 10, 2002.

The Commission, apparently concluding — in the Court's view, erroneously — that Defendant was unable to satisfy any portion of the Judgment, and that he had satisfactorily produced the relevant information and documents, took no further action against him until January 8, 2003.*fn5 On January 8, it renewed the contempt motion, citing newly discovered information that Defendant had concealed at the May 10 deposition a Canadian securities account that he controlled. In its motion papers, the Commission submitted documentation from the Canadian firm showing that at the time of the deposition, Defendant controlled some $115,000 in stock assets in the account. Meanwhile, in the eight months after the deposition, the account — on which Defendant was listed as the sole beneficiary — had been depleted to $45,000. An employee of the Canadian firm stated to a representative of the Commission in January that Defendant had recently been calling his office "two to three times a day" demanding that monies from the account be released to him, including more than $40,000 that Defendant alleged was misappropriated from the account by an employee of the firm. These facts, taken together, cast a deep and dark shadow of doubt on the veracity of Defendant's claims at the May 10 deposition with respect to his foreign accounts.*fn6

On January 23, 2003, the Court held a hearing on the renewed contempt motion. In opposition papers and orally at the hearing, Defendant's attorney made various implausible efforts to explain away the obfuscations in the sworn deposition testimony. He also informed the Court that Defendant had communicated to the SEC a settlement offer of $125,000, to be paid with borrowed funds, in full satisfaction of the Judgment. He renewed the settlement offer on behalf of Defendant, who did not attend the hearing.

In light of these facts, the relevant caselaw, and especially the Court's explicit warning to Defendant to avoid "resistance or obfuscation" with respect to disclosing all of his assets at the May 10 deposition, it was well within the Court's discretion to hold Defendant in civil contempt on January 23 and order him, as the Commission requested, imprisoned and fined up to $10,000 per day until he complied with the Court's previous Orders. He had failed to pay a penny of the Judgment, he had failed to produce documents in response to the Document Production Order, and he had concealed assets at the deposition in violation of the hearing Order. Electing once again to give an otherwise difficult Defendant every benefit of the fast-shrinking doubt, however, the Court instead ordered him, by memo endorsed transcript, to turn over within one week (by January 30) the $45,000 identified by the SEC in the Canadian securities account, as well as certain other shares that were possibly held in an account at Tucker Anthony Sutro Capital Markets (or proceeds from the sale of such shares if they had already been sold). At the same time, the SEC's attorney was ordered to submit Defendant's settlement proposal — the offer to pay $125,000 above and beyond the Canadian monies and the Tucker Anthony shares — to appropriate Commission authorities for acceptance or rejection.

When no report from the Commission or Defendant's counsel had been received by February 6 — two weeks later — the Court made inquiry and learned that the SEC had been unable to obtain any of the Canadian monies because a third party had laid a competing claim to a portion of the funds.*fn7 The SEC also said that the supposed $45,000 in the account was apparently in Canadian dollars, which translated to roughly 28,000 U.S. dollars. Moreover, contrary to the Commission's expectation, no shares were found at Tucker Anthony, nor were any proceeds turned over from the sale of any such shares.

In an overabundance of fairness to Defendant, the Court decided to put pressure on the Commission. By letter, the Court again requested that the Commission's attorney submit the Defendant's once-and-for-all settlement offer to the full Commission for acceptance or rejection, which had not yet been done. The Court also ordered the Commission to submit a complete copy of the transcript of Defendant's May 10 deposition, which it had never previously done.*fn8

On February 13, 2003, in response to the Court's letter, the Commission's attorney reported that he had presented Defendant's settlement offer to the full Commission. The Commission rejected the offer. The Commission's attorney also brought to the Court's attention the fact that Defendant's attorney, in papers filed in opposition to the renewed contempt motion, had misquoted — in the Commission's view, deliberately — Defendant's May 10 deposition testimony. The misquoted text had been used to support an overall representation to the Court that Defendant had not really attempted, after all, to conceal the funds in the Canadian account.*fn9

Meanwhile, the Court by this time had had its first opportunity to digest the entire transcript of the May 10 deposition. The transcript gave a much fuller picture of Defendant's income, assets, expenses, obligations, and frankly, obstructionism, than the Commission had ever before brought to the Court's attention. Each of these areas is briefly treated below.

On the one hand, Defendant painted a portrait of himself as a man with virtually no income or assets. He stated that he had no current employment*fn10 and no income in recent months other than from the liquidation of securities that he owned.*fn11 He said that even this liquidation income — which, the Court notes, amounted to a whopping $20,000 per month — was, unfortunately, running out very fast. The stock was almost all gone. The $15,000 and 50,000 shares of stock that he had earned doing consulting work in the previous year were gone. He admitted earning millions of dollars in the 1980s and 90s, but said that all of that money was gone too, spent mostly on the lavish lifestyle of his former wife, whom he had divorced five years before. All of the partnerships in which he had held an ownership interest were broke. His bank accounts, IRA accounts, and securities accounts were all bled dry. The horses that he had purchased for horse shows had all been sold, or were very old.*fn12

At the same time, Defendant was painting another very interesting portrait of himself as a man with staggering expenses and financial obligations. In the deposition, Defendant stated that he had the following monthly expenses: $10,000 in legal fees; $4555 in alimony payments (an obligation that would continue through March 2007, he said); $4000 for rent of his main residence in Brookline, Massachusetts*fn13; $550 for the lease payment on his 2001 Saab automobile; $300 for gasoline and repair expenses on the Saab; $300 in telephone bills; $300 in life insurance premiums; $200 for cable television and internet service; $200 for charitable contributions to a struggling church; $125 for dry cleaning*fn14; and assorted medical and dental expenses for himself and his daughter. The total was over $20,000 per month. In addition, Defendant admitted that he financed, within roughly one year prior to the deposition, a trip to Ireland, a ski trip to Colorado, an investment trip to California, a trip to Florida to visit with a former co-defendant, and a gift of "a couple of thousand dollars" to his girlfriend so that she could pay the rent on their Houston town house.

A final theme, Defendant's obstructionism, emerged from the transcript. To take one example, he had failed to produce key records, most notably all of his tax returns from 1997 forward. When first asked about these returns at the deposition, Defendant claimed that his personal copies of the documents had been lost during a move from Houston to Brookline. He said that he could produce his accountant's copies of the documents within two weeks perhaps — if he could manage to scrape together the funds necessary for paying the accountant an outstanding bill.*fn15 When asked about the returns later in the deposition, however, Defendant stated that he had not filed any returns for 1998, 1999, 2000, and 2001 (he said that he had filed in 1997). He said that he would face no penalty for not filing in these years because, he believed, the Internal Revenue Service owed him between $25,000 and $50,000. Nonetheless, he said, he had sent his accountant within the past month all of the documents necessary to prepare the returns, and once the returns were prepared he would forward them to the Commission. When asked, he could not explain why he had not already sent the Commission copies of the documents that now had been sent to his accountant for use in preparing the returns.

The implications of all of these facts are clear. First, it is highly implausible that this Defendant has virtually no assets or income and at the same time can afford such enormous expenses. He is either hiding assets or grossly exaggerating expenses, or both, in an attempt to delay or avoid paying the Judgment. Second, Defendant's high monthly expenses, and the sizeable income (derived from whatever source) necessary to defray them, presumably continued unabated in the nine months between the Judgment due date and the date of Defendant's deposition — not to mention during the additional nine months between the deposition and now. The Commission could have seized upon these facts when they ultimately emerged and effectuated a garnishment on Defendant's income or fashioned some other proposed remedy. Ironically, Defendant's attorney himself boldly raised the garnishment question in more than one of his submissions to the Court and opposing counsel.*fn16 Third, the obstructionism and deception apparent in the May 10 deposition might have provoked a swifter reaction from the Commission.

In short, it seems that frank disclosures from Defendant might have enabled collection of the entire $415,092.25 in Judgment monies that came due on August 12, 2001. Even if the Commission might have obtained only a portion of the Judgment, at least Defendant would not have been left free to bleed his ill-gotten gains away on ski trips, expensive automobiles, visits to Ireland and Florida, and three residences.

Nevertheless, the disruption of 9/11 on the Commission's attention to this case, no matter how fortuitous to Defendant, in no way relieved him of his legal obligation to pay the entire Judgment by August 12, 2001,*fn17 nor did it authorize him to play a shell game with his assets. His continuing refusal to pay a penny of the Judgment, at the same time that he maintained an admittedly extravagant lifestyle and hid assets, strikes this Court as contumacious conduct.

Legal Standard for Civil Contempt

Under the law of this Circuit, a district court must make findings relating to three issues before holding a party in civil contempt:

[I]n order to hold the alleged contemnor in contempt, the court need only (1) have entered a clear and unambiguous order, (2) find it established by clear and convincing evidence that the order was not complied with, and (3) find that the alleged contemnor has not clearly established his inability to comply with the terms of the order. The court's findings of fact are not to be disturbed unless they are clearly erroneous. . . . Its decision to impose sanctions in light of properly found facts may not be overturned except for abuse of discretion.*fn18

Further, the law states that the "alleged contemnor bears the burden of producing evidence of his inability to comply."*fn19 Thus, with regard to orders requiring monetary payment, for the district court "there is no requirement that the ability to pay be clearly established; what is required is that the inability to pay be clearly established by the alleged contemnor."*fn20

Application

As outlined in the Findings of Fact above, the three orders at issue here were clear and unambiguous. First, under the terms of the July 12, 2001 Judgment Order, Defendant was to pay a total of $415,092.25 to the Commission by August 12, 2001. Second, under the terms of the January 17, 2002 Document Production Order, he was to produce all documents within his custody or control that were responsive to the Commission's first set of post-judgment requests for production of documents. Third, under the terms of the May 3, 2002 hearing Order, he was to avoid any "resistance or obfuscation" to the disclosures requested by the Commission at his May 10, 2002 deposition.

As further outlined in the Findings of Fact above, the Court finds, by clear and convincing evidence, that Defendant has violated the three orders at issue. First, he admits that he has not paid a penny of the $415,092.25 Judgment — while admitting, at the same time, that he has maintained a lavish lifestyle since the time that the Judgment became due and payable. Second, he has failed to produce all of the documents required under the Commission's first set of post-judgment requests for the production of documents.*fn21 Third, he has failed to avoid "any resistance or obfuscation" to the disclosures required at the May 10, 2002 deposition.*fn22

Finally, this Court finds, for all of the reasons outlined in the Findings of Fact above, that Defendant has failed to establish his inability to comply with the three orders. He has not shown that he cannot pay the Judgment; on the contrary, he has shown that he almost certainly can.*fn23 He has not adequately shown that he cannot produce the documents required by the Document Production Order. He has not shown that he was unable to avoid obfuscation regarding the assets in the Yorkton Securities account.

Conclusion

The Commission has asked this Court to impose sanctions of $10,000 per day upon Defendant until he complies with the Court's previous Orders, and if he fails to comply within ten days, to incarcerate him. The Commission has also requested that Defendant be ordered to turn over certain assets and valuables identified at the May 10 deposition and subsequently.

Nevertheless, this Court will give this Defendant one last opportunity to obey its previous Orders. Defendant shall (1) pay $10,000 per month to the SEC,*fn24 (2) fully comply with the Court's January 17, 2002 Document Production Order, and (3) turn over to the Commission certain assets and receivables, to the extent that they are now (or in the future become) in his custody, control or possession, identified in the Commission's Supplemental Memorandum of Law in Support of Its Renewed Motion for Civil Contempt and elsewhere.*fn25

Defendant has been found in contempt. If he disobeys this Order in any respect, or defaults ten days from the date hereof in any respect of the foregoing, the Commission may move this Court, by order to show cause returnable in five days, for an order of commitment.

So ordered.


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