The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge*fn1
Tillie Ruth Wallie Steeples, a/k/a Tillie Ruth Walley, a/k/a Ruth Walley ("Steeples" or "Defendant"), proceeding pro se, moved to dismiss a SEC civil enforcement complaint that alleged various violations of the securities laws. Her motion was premised on the fact that her co-defendant David Rabi ("Rabi") reportedly made exculpatory statements to a prison chaplain after his conviction that established her innocence. She later added a claim of improper venue (stylized as a "Challenge of Jurisdiction" motion), pursuant to 28 U.S.C. § 1746. The SEC opposed Defendant's motion to dismiss, moved for summary judgment and requested that this Court grant the following relief: permanently enjoin Steeples against committing future violations of the securities laws, disgorge all her illegally obtained profits and order payment of prejudgment interest on the illegally gained funds, provide for entry of civil penalties, order a penny stock bar as well as an officer and director bar, and impose other appropriate civil penalties the Court deems just and appropriate. For the reasons set forth below, the Defendant's motion to dismiss is DENIED. The Government's motion for summary judgment is GRANTED.
On November 11, 2002, the U.S. Attorney's Office indicted Steeples and Rabi (collectively "Defendants") for conspiracy to commit securities fraud, to file false reports with the SEC, to falsify books and records, to make false statements to accountants, to falsely certify the accuracy of a filing with the SEC, to commit mail fraud, and fraud in connection with the purchase and sale of securities. The criminal case was assigned to Honorable Miriam Cedarbaum.
Shortly thereafter, on November 13, 2002, the Securities and Exchange Commission ("SEC") filed a civil enforcement action against the Defendants based on the same events. The case was originally assigned to Judge John S. Martin but following his resignation, re-assigned to me on July 23, 2003. The civil suit against Steeples alleges that she, alone and in concert with David Rabi, committed 1) securities fraud in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), Section 10(b) of the Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10-b-5, 2) registration violations of Section 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c), and 3) reporting violations of Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and Rule 13b2-1, 17 C.F.R. § 240.13b2-1. The SEC also charged Steeples with making materially false and misleading statements to 800America.com, Inc.'s ("800America.com," or "Company") accountant in violation of Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2. Last, the SEC alleges that Steeples is either liable as a control person or for aiding and abetting 800America.com to commit violations of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), Section 13(b)(2) of the Exchange Act, 15 U.S.C. §78m(b)(2), as well as Rules 12b-20 and 13a-1, 17 C.F.R. §§ 240.12b-20, 240.13a-1. In March 2003, Judge Martin stayed the civil action pending the outcome of the criminal case. The stay was lifted on Dec. 21, 2005.
Rabi, Steeples' co-defendant in the criminal action, was indicted in a two-count indictment and convicted after trial on both counts. United States v. Rabi and Steeples, 03 CR 082 (S.D.N.Y. Sept. 16, 2005). He passed away in prison.*fn2
Steeples pled guilty to both counts before Judge Cedarbaum on September 18, 2005. See Judgment in a Criminal Case ("Judgment"), Ex. 11 to Plaintiff's Motion for Summary Judgment ("Pl.'s Mot.") (Apr. 21, 2004). Steeples was sentenced to 70 months imprisonment and 2 years supervised release, and ordered to pay restitution in the amount of $9,147,617. Id.
The complaint alleges the following facts. In July 1999, World House Entertainment, a publicly registered shell company controlled by Rabi, Steeples or both, issued one million shares of restricted common stock in a reverse merger to acquire all of the issued and outstanding common stock of 800America, Inc. and renamed the corporation 800America.com, Inc. Complaint ("Compl.") at ¶¶ 15, 29, Ex. 2 to Pl's Mot. 800America.com held itself out as an Internet retailer that, inter alia, sold clothing and connected customers to other internet retailers. Id. at ¶ 16. 800America.com reported having ten subsidiaries: InShop.com, Internet Web Guide Magazine, Inc., Rothman Closeouts, Fileshooter.com, Inc., Ebiz4Biz.com, IRSpayment.com, cs-live, Igain, Inc., YouTopia.com, and One Two Click. Id. The common stock was registered with the SEC and traded on the over-the-counter ("OTC") Bulletin Board. Id. at ¶ 15.
For most of the period from July 1999 through January 2002, Rabi served as President, Chief Executive Officer, Chief Financial Officer, Director, and majority shareholder of 800America.com. Id. at ¶ 17. The SEC alleges that Steeples served as a Secretary or other undisclosed control person of 800America.com during this time period, although Steeples denies this. Id. at ¶ 18; See also Affidavit of Tillie Steeples ("Steeples Aff.") at ¶¶ 3, 11, 33, 37--38 (May 18, 2006).
800America.com attracted investors by issuing artificially inflated financial statements about the company. Compl. at ¶ 2, Ex. 2 to Pl.'s Mot. Allegedly, its public filings were created from falsified bank statements, general ledgers and invoices. Id. Furthermore, 800America.com failed to disclose to the SEC and to investors that the majority of 800America.com's officers, directors, and employees had either left the company or were otherwise unavailable. The Company also did not disclose that Steeples' had a prior felony conviction and the Company published press releases that misrepresented Rabi's status as a convicted felon. Id. at ¶ 41 - 45.
800America.com filed an S-8 securities offering with the SEC pursuant to an employee benefit plan. Id. at ¶ 30. Rabi and Steeples, as alleged control persons, were restricted from reselling the shares. That fact notwithstanding, the complaint alleges that they sold these shares to the public through Internet brokerage accounts (the "nominee accounts"), under Steeples' name and the names of 13 other individuals who were unaware of the existence of these accounts. Id. at ¶ 29--31. At the time the complaint was filed, it was alleged that Rabi and Steeples had sold at least 1,188,150 shares of 800America.com stock to the public, either through shares issued through the S-8 offering or obtained through the reverse-merger with World House Entertainment. Id. Steeples disputes this and instead asserts that the shares she received were pursuant to 800America.com's employee benefit plan. Steeples Aff. at ¶¶ 3, 11, 33, 37--38 (May 18, 2006).
800America.com's activities ended when Judge Martin granted the SEC's temporary injunction against the Company on December 2, 2002.
Pursuant to Federal Rule of Civil Procedure 56, the movant on a motion for summary judgment, such as the SEC motion here, must establish that there is no genuine issue of material fact and the undisputed facts are sufficient to warrant judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322--23 (1986); Anderson v. Liberty Lobby Inc., 477 U.S. 242, 250 (1986). The party opposing summary judgment "may not rest upon the mere allegations or denials of the adverse party's pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." FED. R. CIV. P. 56(e).
A disputed issue of material fact alone is insufficient to deny a motion for summary judgment, the disputed issue must be "material to the outcome of the litigation," Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir. 1986), and must be backed by evidence that would allow "a rational trier of fact to find for the non-moving party." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In ruling on a summary judgment motion, the Court resolves all ambiguities and draws all inferences against the moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962) (per curiam); Donahue v. Windsor Locks Bd. of Fire Comm'rs, 834 F.2d 54, 57 (2d Cir. 1987). The Defendant is proceeding pro se; therefore, the pleadings must be construed more leniently than pleadings submitted by a practicing attorney. See, e.g., Graham v. Lewinski, 848 F.2d 342, 344 (2d Cir. 1988) (giving "special solicitude" to pro se litigants when served with summary judgment motions).
Turning first to Steeples' motion to dismiss, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, the movant must establish that the plaintiff failed to "state a claim upon which relief can be granted." FED. R. CIV. P. 12(b)(6). In ruling on a Rule 12(b)(6) motion, this Court must construe all factual allegations in the complaint in favor of the non-moving party. See Krimstock v. Kelly, 306 F.3d 40, 47--48 (2d Cir. 2002). A motion to dismiss, such as the Steeples motion here that asserts her innocence, may not be granted "unless it appears beyond doubt that the [movant] can prove no set of facts in support of his claim which would entitle him to relief." Shakur v. Selsky, 391 F.3d 106, 112 (2d Cir. 2004) (quoting Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).
The SEC claims that Steeples is collaterally estopped from asserting her innocence in this civil proceeding based on her previous guilty plea to one count of conspiracy and one count of securities fraud. A defendant may be estopped from denying his or her guilt in a civil suit if he or she has already been criminally convicted, either by a guilty plea or by a jury trial. United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978). To rely on this doctrine, the following four-part test must be satisfied: (1) the issues in both proceedings must be identical; (2) the issue in the prior proceeding must have been actually litigated and actually decided; (3) there must have been a full and fair opportunity for litigation in the prior proceeding; and (4) the previously litigated issue must have been necessary to support a valid and final judgment on the merits. SEC v. Monarch Funding Corp., 192 F.3d 295, 304 (1999). Where there is a plea allocution, as in this case, the court must examine the plea allocution to make this determination. SeeSEC v. McCaskey, No. 98 Civ. 6153, 2001 WL 1029053, at *3--4 (S.D.N.Y. Sept. 6, 2001).
As a preliminary matter, Steeples disputes the voluntary nature of her plea allocution. Defendant's Memorandum in Support of Motion to Dismiss ("Def.'s Mem.") at 1--2 (Mar. 20, 2006). Although defendants may challenge the voluntariness of their guilty plea via, inter alia, a habeas petition, see, e.g., Vasquez v. Filion, 210 F.Supp.2d 1994 (E.D.N.Y. 2002), or a motion to vacate the sentence, see, e.g., Hernandez v. U.S., 839 F.Supp. 140 (E.D.N.Y. 1993), Steeples is not permitted to do so here. In fact, at her plea allocution, Steeples stated that she understood the consequences of a guilty plea and was ready to voluntarily plead guilty to the crimes she was charged with.
The Court: Ms. Steeples, after our discussion, after our extended discussion, I am satisfied that you understand the consequence of entering a plea of guilty.
The Defendant: Yes, ma'am.
The Court: And that you are entering this plea of your own free will because you are, in fact, guilty of the crimes with which you are charged. So I am going to ask you with respect to indictment 02 Crim 082, how do you plead with respect to Count One?
The Court: And how do you plead to Count Two?
Ex. 9 to Hanson Decl. at 46:7-19.*fn3 Thus, Steeples' motion to dismiss will not be granted on this basis.
1. Rabi's Conversation with the Prison Chaplain
Steeples asserts that Rabi made a dying declaration to a prison chaplain that absolved her of all responsibility for the events that led to her indictment. As a result, these statements should be admissible to support her innocence in this civil proceeding. Def.'s Mem. at 1--2; see Affidavit of Reverend Winston Cato, Pastor of the Shekinah Outreach Ministry, Inc. ("Cato Aff."), Ex. A to Def.'s Mem.
Rule 804(b)(2) exempts a declarant's statements from the hearsay rule when the declarant believes that he or she faces imminent death, and the statement concerns the circumstances or cause of his or her death. FED. R. EVID. 804(b)(2). Rabi is an unavailable witness because he died in prison. FED. R. EVID. 804(a)(4). However, Rabi neither stated that he believed that his death was imminent, nor that he believed that Steeples' actions were the direct or indirect cause of his death, thus this exception does not apply. See Cato Aff., Ex. A to Def.'s Mem.
Nor would Rabi's statements be admitted under Rule 804(b)(3). Hearsay statements are admissible under Rule 804(b)(3) when the statement would subject a declarant to civil or criminal liability, or would so threaten a person's financial or property interests. Under those circumstances, the statement is deemed reliable. See FED. R. EVID. 804(b)(3). However, when the hearsay statement is made by a co-conspirator, the statement is not admissible without corroborating evidence to confirm the reliability of the statement. United States v. Marquez, 462 F.2d 893, 895 (2d Cir. 1972) (finding that statements made merely to exculpate one's friends does not meet the inherent reliability test required for the Rule 804(b)(3) hearsay exception). Steeples has submitted no evidence to corroborate Rabi's exculpatory statements. Thus, Steeples cannot rely on this exception to the hearsay rule to establish her innocence.
Steeples also contends that the Southern District of New York ("SDNY") is not the proper venue to try this civil action because the allegations against her arose solely out of her activity in Tennessee. For the reasons set forth below, I disagree and find that venue is properly laid in the SDNY.
Under the Securities Act of 1933 and the Securities Exchange Act of 1934, securities law claims are exclusively controlled by the special venue provisions of 15 U.S.C. § 77v(a) and 15 U.S.C. § 78aa, respectively. S.S.T. Global Technology v. Chapman, 270 F.Supp.2d 444, 452 (S.D.N.Y. 2003). Under the special venue provisions of those Acts, a claim may be brought by the SEC either "(1) in the district wherein any act or transaction constituting the violation occurred or (2) in the district wherein the defendant is found or is an inhabitant or transacts business." 15 U.S.C. § 78aa; see also 15 U.S.C. § 77v(a) (stating same standard). Given the nature of securities fraud actions, it is well-established that the special venue provisions should be liberally construed. See e.g. First Federal Sav. & Loan Ass'n of Pittsburgh v. Oppenheim, Appel, Dixon & Co., 634 F.Supp. 1341, 1350 (S.D.N.Y. 1986); Steinberg & Lyman v. Takacs, 690 F.Supp. 263, 267 (S.D.N.Y. 1988) (internal quotation and citation omitted) (stating that "any non-trivial act in the forum district which helps to accomplish a securities law violation is sufficient to establish venue.").
The SEC, among other things, alleges that Rabi and Steeples conspired to commit securities fraud. In cases that allege a common scheme to commit violations of federal securities law, any act or transaction within a district by a participant in furtherance of the scheme establishes venue as to any ...