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S.E.C. v. MONTLE

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.

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

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 ...


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