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Securities and Exchange Commission v. Haligiannis

January 17, 2007



Plaintiff Securities and Exchange Commission ("SEC") moves for default judgment and for summary judgment in this securities fraud action against defendants Angelo Haligiannis, Sterling Watters Group LP ("Sterling Watters" or the "fund"), Sterling Watters Capital Advisors, LLC ("Sterling Advisors"), and Sterling Watters Capital Management, Inc ("Sterling Capital"). The SEC shows through undisputed evidence that defendants issued materially false statements concerning the performance and assets of Sterling Watters and defrauded clients in their role as investment advisors in violation of securities laws. Based on this undisputed evidence, the Court grants SEC's motion for summary judgment. Because the Court finds the SEC has met its burden under Rule 56 of the Federal Rules of Civil Procedures, and because the Court is granting remedies in excess of $30 million, the Court chooses in its discretion not to enter default judgment against the defendants. See Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 2685 (3d ed. 1998) (district court has discretion in deciding whether to grant default judgment, and may consider a number of factors including the amount of money potentially involved and whether plaintiff will be prejudiced by failure to enter default judgment).


1. Civil Proceeding

On August 11, 2004, the SEC brought this action against defendants, alleging violations of securities laws, including Section 17(a) of the Securities Act of 1933 ("Section 17(a)"), 15 U.S.C. § 77q(a) (2000), Section 10(b) of the Securities Exchange Act of 1934 ("Section 10(b)"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder ("Rule 10b-5"), 17 C.F.R. § 240.10b-5 (2005), and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940 ("Advisers Act"), 15 U.S.C. § 80b-6 (2000). Defendants failed to file an answer and the Clerk of the Court filed a Certificate of Default on May 3, 2006. (Smith Decl. Ex. B.) On August 25, 2004, the Court granted a preliminary injunction enjoining defendants from further securities violations, froze defendants' assets, and ordered a verified accounting of defendants' business.

On October 14, 2004, the Court issued an order holding Haligiannis in contempt after he repeatedly refused to prepare an accounting, and Haligiannis was consequently remanded to prison.*fn1 Haligiannis appeared before the Court again on November 5, 2004 and requested he be allowed to purge himself of contempt. During that hearing, Haligiannis made statements that the SEC relies upon in this motion. (Black Decl. Ex. I.) The Court discharged Haligiannis and he subsequently prepared an accounting as required by the terms of the August 25, 2004 order. On May 16, 2006, the SEC filed this motion for default judgment and summary judgment. Defendant filed no opposition papers.*fn2

2. Criminal Proceedings

Haligiannis was also indicted on criminal charges of securities fraud and investment adviser fraud in the Southern District of New York on September 27, 2004. See United States v. Haligiannis, 06 Crim. 161 (S.D.N.Y.). Specifically, the indictment charged one count of securities fraud in violation of 15 U.S.C. §§ 78j(b) & 78ff and 17 C.F.R. § 240.10b-5; and one count of investment adviser fraud in violation of 15 U.S.C. §§ 80b-6(1), 80b-6(2) & 80b-17. (Black Decl. Ex. D.) Haligiannis plead guilty to these charges. During allocution at the entry of his plea of guilty to securities fraud, Haligiannis made a number of statements that the SEC relies upon in this motion. (Black Decl. Ex. F.) The court set Haligiannis' sentencing for January 11, 2006. He failed to appear for his sentencing and was indicted for his failure to appear. (Black Decl. Ex. H.) Haligiannis' current whereabouts are unknown.

3. Defendants

Haligiannis was president and chief operation officer of Sterling Capital and Sterling Advisors from 1996 until August 2004 ("relevant period"). (Drenis Decl. Ex. B at 10.) In these capacities, Haligiannis had exclusive control over the management and operation of the Sterling Watters, including all investment decisions. (Id. at 17; Drennis Decl. Ex. C at 7--8.)

Sterling Watters was a Delaware limited partnership formed in 1995, with a place of business in New York City. (Drenis Decl. Ex. B at 1.) It operated as a hedge fund, with a stated goal "to seek an above average economic return" through "equity and equity-derived securities," and offered for sale limited partnership interests to investors. (Id.) Sterling Watters' certificate to operate under Delaware laws was cancelled by the Secretary of State of Delaware on June 1, 1998 for neglect, refusal, or failure to pay its annual taxes, and since then it has not officially been in existence. Drenis v. Haligiannis, 04 Civ. 9263 (RJH), 2006 WL 2720971, 2006 U.S. Dist. LEXIS 68488, at *9 (S.D.N.Y. Sept. 25, 2006). Notwithstanding, it continued to operate during the relevant period.

Sterling Advisors, a Delaware limited liability company, was responsible for management of the Sterling Watters securities portfolio during the relevant period. (Drenis Decl. Ex. B at 10.). Sterling Capital, a Delaware corporation, was responsible for the administration of Sterling Watters during the relevant period. (Id.) Sterling Capital is no longer in existence and is not in good standing under the laws of the State of Delaware as of March 1, 2003. Drenis, 2006 WL 2720971, at *8. Although there are four captioned defendants, the two companies and the fund were controlled for all relevant purposes by Haligiannis.

4. False Statements

a. Offering Materials

The following facts are drawn from evidence submitted by the SEC, including Haligiannis' statements made during his contempt hearings and his plea allocution, and from the SEC's Rule 56.1 Statement of Facts.*fn3 They are undisputed. In connection with the sale of Sterling Watters limited partnership interests, defendants distributed a private placement memorandum, a partnership agreement, and a subscription agreement (collectively, "offering materials"). (Drenis Decl. Exs. B, C, D.) The offering materials stated that investors could redeem partnership interests upon thirty days notice at the end of any calendar quarter, that investors would be provided with annual financial statements certified by independent accountants, and that Sterling Advisors and Sterling Capital would furnish unaudited financial statements for each of the first three quarters of each fiscal year to limited partners. (Drenis Decl. Ex. B at 3, 11.) These statements were false. Over the relevant period, defendants never provided fund investors with either annual audited financial statements or with unaudited financial statements for any quarterly period. (See ...

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