The opinion of the court was delivered by: Sidney Stein, District Judge
After extended proceedings as well as a bench trial on certain damage issues, the sole remaining issue in this litigation is whether to impose civil monetary penalties pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, 15 U.S.C. § 78u(d), on three individuals who actively participated in a fraudulent scheme to manipulate stock. For the reasons set forth in this Opinion, monetary penalties are being imposed.
The Securities and Exchange Commission ("SEC") brought this action seeking entry of monetary and injunctive relief against the defendants due to their scheme to defraud investors. The complaint alleged that defendant Peter C. Lybrand, aided and abetted by defendants Richard S. Kern, Donald R. Kern and Charles Wilkins, defrauded innocent investors by engaging in matched trades of shares of shell corporations without adequate public disclosure in order to create the appearance of substantial legitimate trading, which inflated the market price of the [ Page 2]
shares and ultimately improperly enriched defendants. The corporations that were used to implement the scheme were also named as defendants. In addition, two trusts that the Kerns established to benefit their children received a portion of the illegal proceeds and were named as "relief defendants."
The SEC complaint charged (I) Lybrand with fraudulent and deceitful market manipulation in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C § 78j(b), SEC Rule 10b-5 promulgated thereunder, 17 C.RR. § 240.10b-5, and Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (the "Securities Act"); (2) Wilkins and the Kerns with aiding and abetting Lybrand's violations of Section 10(b) and Rule 10b-5 through their participation in matched trades of the shell corporations' shares in the first days of trading; (3) Lybrand, Wilkins and the Kerns with illegally selling restricted securities without filing the registration statements required by Sections 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and 77e(c); and (4) relief defendants with receiving a portion of the illegal trading proceeds. Prior to the completion of discovery, the SEC sought a preliminary injunction freezing the assets of the Kerns and Wilkins, ordering an accounting from them and the trusts, and prohibiting the alteration or destruction of documents. In an Opinion dated July 6, 2000, this Court determined that the SEC had established that it was likely to succeed at trial in demonstrating that Wilkins and the Kerns had violated securities laws and granted the SEC's motion. See SEC v. Lvbrand No. 00 Civ. 1387.2000 WL 913894 (S.D.N.Y. July 6, 2000). The details of the scheme are set forth in that opinion and in SEC v. Lvbrand 200 F. Supp.2d 384, 387-91 (S.D.N.Y. 2002), and will not be repeated here. [ Page 3]
Lybrand, who was at that time being prosecuted on criminal charges, defaulted in this civil action, as did several of the corporate defendants that were under his control. A final judgment of default was subsequently entered against the defaulting defendants, enjoining them from violating the securities law and directing disgorgement of $3,757,127.66 and prejudgment interest of $722,936.16, and directed Lybrand to pay a civil monetary penalty of $1,000,000 pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. See Final Judgment of Default, dated March 28, 2002. The remaining defendants — Richard Kern, Donald Kern, Charles Wilkins, EFI Corporation, Barclay Bankcard, Inc., Canyon Vista Corp. and Salteaux, Ltd. — then moved for summary judgment in their favor and the SEC moved as well for summary judgment against the relief defendants on the grounds that they had received ill-gotten gains and against the remaining non-defaulting defendants pursuant to Sections 5(a) and (c) of the Securities Act, This Court denied defendants' motion and granted the SEC's motion. See Lvbrand, 200 F. Supp.2d at 389.
Subsequent to that determination, the Kerns and Wilkins entered into "Consents and Undertakings" in which they agreed, without admitting or denying the SEC's allegations, to be enjoined from violating Section 10(b) and Rule 10b-5 thereafter.
On August 6, 2002, Donald Kern filed for bankruptcy pursuant to Chapter 7 of the U.S. Bankruptcy Code. (Def. Ex. HH).*fn1 In connection with a creditor meeting in the bankruptcy proceeding, Donald Kern testified that, as of two years earlier- i.e., approximately July 2000 -he did not own any private stocks, nor was he a partner in any partnerships, joint ventures or [ Page 4]
related businesses. When questioned as to why the July 2000 accounting — which had been sworn to by Richard, not Donald — revealed private stock assets by Donald of $200,000 and joint venture assets of $385,000, Donald testified that although he knew of the July 2000 accounting, he had never seen a physical copy of it until two weeks prior to the creditor meeting in 2002 and that he did not know why his brother had sworn to Donald's ownership of the assets in July 2000. (Pl. Ex. 25 at 12 — 22).
In separate accountings submitted to the SEC in September 2002, Charles Wilkins confirmed that he had preserved his frozen assets except for $75,000 in "private stock" that had declined in value to $0, (Def. Ex. JJ), and Richard Kern revised the value of his assets from $2,798,000 in July 2000 to $923,500. Richard explained that (I) "[s]tock positions have been reduced or by market and business conditions or expenses" and (2) the "declining market and business conditions" and disclosure of this pending securities case reduced the value of his ventures. (Def. Ex. GG). As trustee for the relief defendant trusts, Richard also attested to the devaluation of the trusts from $995,000 to between $150,000 and $300,000, allegedly due to market losses, "legal and accounting expenses," and "business ventures and expenses, etc." (Id,).
On October 11, 2002, a bench trial was held to determine the issues of disgorgement, prejudgment interest and civil penalties. During that trial, the parties stipulated to judgment against the remaining defendants for disgorgement in the amount of $5,972,525 and prejudgment interest in the amount of $1,792,648, calculated by agreement at the rate employed by the Internal Revenue Service for tax underpayments, see 26 U.S.C. § 6621(a)(2). All defendants except the relief defendants also stipulated to the issuance of injunctions against future violations of Section 5 of the Securities Act. [ Page 5]
As a result of those agreements, the sole remaining issue for this Court to determine is whether to impose civil monetary penalties pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,15 U.S.C § 78u(d) (the Remedies Act") District courts have discretion in determining the appropriate amount of any penalty. See SEC v. Kane, 97 Civ. 2931, 2003 WL 1741293, *2 (S.D.N.Y. April 1, 2003); SEC v. Robinson, 00 Civ. 7452, 2002 WL 1552049, *10 (S.D.N.Y, July 16, 2002); 15 U.S.C. § 77t(d)(2) ('The amount of the penalty shall be determined by the court in light of the facts and circumstances."). A monetary penalty is designed to serve as a deterrent against securities law violations. See SEC v. Palmisano. 135 F.3d 860, 866 (2d. Cir. 1998); SEC v. Tanner, 02 Civ. 306, 2003 WL 21523978, *2 (S.D.N.Y. July 3, 2003); SEC v. Moran. 944 F. Supp. 286, 296 (S.D.N.Y. 1996), As set forth in H.R. Report No. 616 — the Report of the Committee on Energy and Commerce of the U.S. House of Representatives on the Remedy Act,
[T]he money penalties proposed in this legislation
are needed to provide financial disincentives to
securities law violations other than insider
trading. . . . Disgorgement merely requires the
return of wrongfully obtained profits; it does
not result in any actual economic penalty or act
as a financial disincentive to engage in
securities fraud. A violator who avoids detection
is able to keep the profits resulting from
Currently, even a violator who is caught is
required merely to give back his gains with
interest, leaving him no worse off financially than
if he had not violated the law. The Committee
therefore concluded that authority to seek or
impose substantial money penalties, in addition to
the disgorgement of profits, is necessary for the
deterrence of securities law violations that
otherwise may provide great financial returns to