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Securities and Exchange Commission v. Opulentica

March 22, 2007

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
OPULENTICA, LLC, ZARRAR SHEIKH, AND NASSER A. DAWOUD, DEFENDANTS, AND
SAIMA SHAHZADI, RELIEF DEFENDANT.



MEMORANDUM OPINION AND ORDER

The Securities and Exchange Commission ("SEC" or "Commission") brought this action charging Opulentica, LLC ("Opulentica"), Zarrar Sheikh, and Nasser A. Dawoud (collectively, "defendants") with engaging in a fraudulent scheme to offer unregistered securities, to divert the proceeds of the offering to the personal use of the defendants, and to make material false representations in the course of selling the securities, in violation of sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c), 77q(a), and section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. In addition, the SEC charged relief defendant Saima Shahzadi, Sheikh's wife, with receiving a portion of the ill-gotten gains. On January 12, 2004, the Court entered an order on consent of Opulentica, Sheikh, and Shahzadi, preliminarily enjoining them from future violations of the Securities Act or the Exchange Act, freezing their assets, and granting the SEC other interim equitable relief. On the same day, Dawoud consented to the entry of a Partial Final Consent Judgment ("Consent Judgment"), enjoining him from future violations of the securities laws. The Consent Judgment required Dawoud to "disgorge the full amount of his ill-gotten gains from the conduct alleged in the Complaint, plus prejudgment interest . . . in an amount to be determined by the parties or, failing that, by the Court" and to "pay a civil penalty . . . in an amount to be determined by the Court and upon application of the Commission."

The SEC now moves for summary judgment, pursuant to Federal Rule of Civil Procedure 56(a), and requests that the Court permanently enjoin Opulentica and Sheikh from future violations of the securities laws. The SEC also asks the Court to order Sheikh and Dawoud to pay disgorgement, prejudgment interest, and civil penalties. Dawoud does not object to the entry of summary judgment on the securities violations or to the propriety of disgorgement and a civil penalty, but he disputes the amounts proposed by the SEC. Sheikh, who is proceeding pro se, has not responded to the SEC's motion.*fn1 For the reasons set forth below, the SEC's motion [27] is granted.

BACKGROUND

The following facts are drawn from plaintiff's statement of material facts ("56.1 Statement") and defendant Dawoud's counterstatement ("Counterstatement"). Where disputed, the facts are construed in favor of the nonmoving parties. See Nationwide Life Ins. Co. v. Bankers Leasing Ass'n, Inc., 182 F.3d 157, 160 (2d Cir. 1999).

Opulentica is a New York limited liability company formed in May 2002. (56.1 Statement ¶ 1.) Opulentica represented itself as "a stock trading firm that deals with short term capital management" and solicited investors to open accounts with Opulentica for periods of three, six, nine, and twelve months. (Pl's Mot. for Summary Judgment ("Mot."), Hanson Decl., Ex. 4). Opulentica claimed that its founders were a "Michael Cohan" with "over 15 years . . . on Wall Street" and a "Jim Stopaznev," an experienced currency trader and financial analyst. (Id.) Its website, www.opulentica.com, listed thirteen other employees, including eleven licensed financial analysts and traders, a compliance officer, and a chief financial officer. (Id.) Defendant Sheikh's name was listed under "Media Relations" and "Traders/Analysts." (Id.) Opulentica also claimed to have offices located at 44 Wall Street, New York, New York. (56.1 Statement ¶ 1.)

Opulentica recruited investors through its website, regular advertisements in two Arabic-language newspapers marketed to the Pakistani-American community, and written offering materials. (Id. ¶ 9.) These materials promised investors risk-free monthly returns of six percent and risk-free annual returns of seventy-two percent (id. ¶¶ 6, 9--10), and stated that all investments were insured up to $10.5 million per account and $100 million in aggregate (id. ¶¶ 7, 15, 17). Opulentica's website also stated that investors would receive monthly interest checks. (Hanson Decl., Ex. 4).

Between May 2002 and December 2003, at least twenty individuals invested $534,043.60 with Opulentica (id. ¶ 20), although Opulentica itself claimed to have "$1.2 million in assets under management from diverse offerings" (id. ¶ 9). Opulentica tried to lull these investors into thinking that it was capable of producing the promised returns by returning $90,081.50 to investors over the course of the scheme. In actuality, however, Opulentica did not employ professional traders and analysts to manage investors' funds-of the fifteen employees listed on Opulentica's website, only Sheikh was a real person (id. ¶ 22)-and its purported offices at 44 Wall Street were nothing more than a mail drop and a telephone answering service (id. ¶ 1). Opulentica's securities were not registered, and Opulentica never filed a Form D with the SEC. (Id. ¶ 23.) Although Opulentica did in fact transfer some of the solicited funds into eight trading accounts at Ameritrade, E*TRADE Financial, and MB Trading, ultimately Opulentica incurred trading losses of $117,635.10 (id. ¶¶ 14--15). Further, Opulentica's investments were not insured as promised. (Id. ¶¶ 15--18.) As a result, investors did not receive the six-percent monthly returns promised by Opulentica. (Id. ¶ 14.) Instead, while Sheikh was in Pakistan seeking to expand Opulentica's business, at his request Dawoud initiated an international wire transfer of $40,000 from Opulentica's bank account on September 29, 2003, and then transferred $15,000 from the same bank account to an account in Lahore, Pakistan on October 27, 2003. (Id. ¶ 19; Counterstatement ¶ 3.) Sheikh and Dawoud also used investor funds for personal expenses, including food, rent, clothing, and gym membership. (Id. 7--8, 19.)

On December 19, 2003, the United States Attorney for the Southern District of New York ("U.S. Attorney") filed a complaint in the criminal case, United States v. Zarrar Sheikh and Nassar A. Dawoud, 04 Cr. 58 (BSJ), and, four days later, federal law enforcement agents arrested Sheikh and Dawoud. (Id. ¶ 4.) The criminal case charged Sheikh and Dawoud with one count of conspiracy to commit mail fraud, in violation of 18 U.S.C. § 1341, and securities fraud, in connection with the purchase and sale of securities in violation of section 10(b) of the Exchange Act and Rule 10b-5, and three counts of mail fraud. (Hanson Decl., Ex. 13.) The SEC filed the instant civil case against defendants on December 23, 2003. Following the entry on consent of a preliminary injunction against Opulentica, Sheikh, and Shahzadi, and the Consent Judgment against Dawoud, the Court granted defendants' request that the civil action be stayed pending the resolution of the parallel criminal proceeding.

Dawoud quickly pleaded guilty to all four counts in the criminal indictment, after which he provided the government with substantial assistance in the criminal case against Sheikh. (United States v. Sheikh, No. 04 Cr. 58 (BSJ), Dawoud Sentencing Tr. 26--27, Sept. 22, 2005.) Sheikh pleaded guilty on August 6, 2004, a mere four days before trial.

(56.1 Statement ¶ 5; United States v. Sheikh, No. 04 Cr. 58 (BSJ), Sheikh Plea Tr. 16, Aug. 6, 2004.) At his plea allocution, Sheikh admitted that he "put false statements on the Internet and in the newspapers and several other[] documents that misrepresent the actual nature of the company that [he] had built," and that his purpose was to encourage people to invest in Opulentica. (56.1 Statement ¶ 7). He also admitted that he lied to investors in stating that their funds with Opulentica were insured. (Id.) Additionally, Sheikh admitted he told investors that their money would be invested in the stock market, but that he actually used the money for his own personal benefit. (Id.) It is undisputed that Sheikh was the primary beneficiary of the fraudulent scheme. Sheikh, rather than Dawoud, communicated with investors and controlled the funds in the bank accounts and trading accounts. (Id. ¶ 3; Counterstatement ¶ 8--10.) Sheikh was identified as the administrative contact for Opulentica's website, as the contact person in Opulentica's newspaper advertisements, and as the media relations contact in offering materials mailed to at least one investor. (Id. ¶ 2). Judge Barbara S. Jones, who presided over Sheikh's criminal case, stated at his sentencing that Sheikh diverted over $185,000 of investors' money for his own personal use, including $55,000 for the purchase of real estate in Pakistan. (United States v. Sheikh, No. 04 Cr. 58 (BSJ), Sheikh Sentencing Tr. 5, 16--17, March 22, 2005.) In addition, Sheikh filed the company's Articles of Organization (Hanson Decl., Ex. 1) and set up the mail drop and answering service at 44 Wall Street (56.1 Statement ¶ 2). Consequently, Judge Jones sentenced Sheikh to forty-six months in prison and ordered Sheikh to pay restitution of $443,962.10, the full amount netted in the fraudulent scheme. (Id. ¶ 5). The Second Circuit has affirmed this sentence. (United States v. Sheikh, No. 05-1747-cr, Summary Order (2d Cir. Jan. 5, 2006).)

Dawoud, in contrast, was a much smaller beneficiary of the fraudulent scheme with a correspondingly smaller role.*fn2 Dawoud picked up the mail at 44 Wall Street, permitted Sheikh to use his name and personal information to open bank accounts and one online trading account, and withdrew funds from Opulentica's bank accounts to pay for the newspaper advertisements and to pay for the mail drop and answering service. He also made small withdrawals from Opulentica's bank accounts for his personal use. (Counterstatement ¶ 3.) In an account opening statement filed with Citibank, N.A., Dawoud held himself out to be the president of Opulentica. (56.1 Statement ¶ 3; Counterstatement ¶ 3.) Dawoud also admits to having filed fraudulent debit statements with the bank and a police report regarding those debits at Sheik's direction. (Counterstatement¶ 3.) However, it is undisputed that Dawoud had no contact with investors, did not prepare any of the offering materials or website content, and made only one deposit of investor funds into an Opulentica account, while Sheikh was in Pakistan. (Id. ¶ 8.) Roberto Finzi, counsel for the government in the criminal case, made the following statement to the Judge Jones, which the SEC does not dispute:

MR. FINZI: Usually when I come to these proceedings I want to be careful to not try to sugar coat a defendant's or cooperator's conduct too much. There is a tendency in this job to try to take their side too much and try to paint a picture of a cooperator who is better than -or better than perhaps he is.

In this case I was concerned about the opposite. What I wrote in the letter about his conduct really being a small fraction of what his co-defendant's was really is true. And we approach these cases very skeptically. When someone comes in and tells me, Over the course of 18 months I only made $10,000 off of this and I never talked to an investor and I never reviewed the literature, your initial reaction is skeptical. But we went ahead and investigated that. I have spoken to almost all of the investors in this case. None of them have ever said that they spoke with anyone other than Mr. Sheikh. Likewise we reviewed bank records fairly extensively, and I have absolutely no reason to believe that Mr. Dawoud made any more money than he did.

THE COURT: That's rather important to me. Is the full extent here the $10,000 that I have read about ...


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