The opinion of the court was delivered by: Gerard E. Lynch, District Judge
In light of the alleged failure of defendants Universal Express Inc., Richard A. Altomare, and Chris G. Gunderson ("defendants")*fn1 to comply with the orders of this Court, the Securities and Exchange Commission ("SEC") has moved for an order finding these defendants in civil contempt. For the following reasons, this Court finds that the SEC has met their burden, and orders these defendants to appear on October 12, 2007, at 2:30 p.m., either to demonstrate exactly how they have complied with the orders of this Court, or to show cause why they should not be held in contempt, and, in the case of Altomare and Gunderson, incarcerated to compel compliance. The SEC also moves for the appointment of a receiver, and in light of the inability of Universal Express, Altomare, or Gunderson to find qualified individuals to serve as officers of Universal Express, this Court will appoint a receiver to provide the company with needed stewardship, help the company satisfy the judgments against it, and determine how the company should proceed in light of those judgments.
The Court's opinion today also disposes of all arguments made by Defendants in their pleadings seeking a stay of enforcement of the judgment against them pending their appeals. The repeated actions of defendants demonstrate not only defendants' clear lack of respect for the orders of this Court and federal securities laws, but also the necessity of this Court's judgments remaining in full force pending appeal.
I. Parties and Procedural History
Universal Express is a publicly-traded Nevada corporation purportedly involved in shipping and transportation, and it maintains its prinicipal place of business in Florida and an office in New York City. SEC v. Universal Express, 475 F. Supp. 2d 412, 415-16 (S.D.N.Y. 2007). Richard A. Altomare has been its chief executive officer and director since 1992, and is currently the company's sole officer and director. Id. at 16. Chris G. Gunderson is a lawyer who has served as in-house counsel for Universal Express since 1995. Id.
In this action, the SEC charged defendants (and several others) with violating various provisions of the federal securities laws. On February 21, 2007, this Court granted summary judgment in favor of the SEC, holding that the defendants violated Section 5 of the Securities Act by issuing unregistered shares absent any applicable exception, Universal Express, 475 F. Supp. 2d at 424-26, and by violating the antifraud provisions of the federal securities laws, id. at 426-28. Since March 24, 2004, by order of this Court, the defendants have been enjoined from violating, inter alia, sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77e(a), e(c), and 77q(a)], 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]. (Order of March 24, 2004, at 3.) The defendants were also enjoined from violating various related provisions. (Id.)
The February 21 order granted the SEC's request both for summary judgment, and for a permanent injunction against the defendants, finding it clear that "these defendants violated [federal registration and anti-fraud securities] laws, and if not enjoined, likely would do so again." Universal Express, 475 F. Supp. 2d at 428. The Court noted that the defendants "not only deny culpability but do so with incredible and contorted arguments." Id. The Court outlined the sanctions to be imposed against the various defendants, and directed the SEC to submit an updated, proposed order of final judgment and permanent injunction. Id. at 428-30.
On March 8, 2007, the Court entered judgment against defendants on the SEC's claims that defendants violated Sections 5(a), 5(c), and 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Exchange Act Rule 10b-5. (Judgment of March 8, 2007, at 1.) The permanent injunction prohibits (i) violations of Section 5 of the Securities Act, including the "direct or indirect" sale, via interstate commerce, of "any [unregistered] security" in the absence of any applicable exemption*fn2 (id. at 2); (ii) violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, or Rule 10b-5 [17 C.F.R. § 240.10b-5], including the offer or sale of any security via interstate commerce by use of any means "to obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading" (id. at 2-3); (iii) Altomare or Gunderson's participation in an offering of penny stock (id. at 9); and (iv) Altomare's acting as an officer or director of any company, including Universal Express, that issue certain types of securities (id. at 10).
In addition, all three defendants were ordered to pay certain sums to the Clerk of the Southern District of New York by April 16, 2007: Universal Express was ordered to pay $21,906,483, consisting of $9,959,828 in disgorgement, $1,986,827 in prejudgment interest, and $9,959,828 in civil penalties (Judgment of March 8, 2007, at 4); Altomare was ordered to pay a total of $3,121,123, consisting of $1,419,025 in disgorgement of ill-gotten gains, $283,073 in prejudgment interest, and $1,419,025 in civil penalties (id. at 6.); Gunderson was ordered to pay $794,711, consisting of $361,317 in disgorgement, $72,077 in prejudgment interest, and $361,317 in civil penalties (id. at 8).
After judgment was entered, Defendants appealed and moved this Court to stay any proceedings to enforce the judgment entered against them pending appeal. (D. Mot. to Stay.) That motion was denied, SEC v. Universal Express, Inc., No. 04 Civ. 2322, 2007 WL 2245509, *3 (S.D.N.Y. August 3, 2007), though the Court noted that certain arguments raised in that motion would be dealt with in discussing the merits of the instant SEC motions for the enforcement of the judgment. Id. at *2.
In one such SEC motion for enforcement, the SEC seeks an entry of civil contempt against these defendants, for the following alleged violations of this Court's orders:
(a) Universal Express, with the participation of Altomare and Gunderson, has issued over 5.4 billion shares of Universal Express stock during the first three months of 2007 and issued an additional 15.5 billion shares since April 2, 2007;
(b) Altomare and Gunderson have continued to participate in the offering of penny stock;
(c) Universal Express and Altomare have continued to make materially false and misleading statements in reports filed with the Securities and Exchange Commission;
(d) Universal Express, Altomare, and Gunderson have failed to pay disgorgement and prejudgment interest by April 16, 2007;
(e) Altomare has remained as an officer of Universal Express.
In a separate motion, the SEC also moves the Court to appoint a receiver to take control of the assets and operations of Universal Express, arguing that appointing a receiver is also necessary to enforce the Court's judgment.
In the Second Circuit, to support a finding of contempt, "a movant must establish that (1) the order the contemnor failed to comply with is clear and unambiguous, (2) the proof of noncompliance is clear and convincing, and (3) the contemnor has not diligently attempted to comply in a reasonable manner." Perez v. Danbury Hosp., 347 F.3d 419, 423-424 (2d Cir. 2003), quoting King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995); EEOC v. Local 638, 753 F.2d 1172, 1171 (2d Cir. 1985) (internal quotation marks omitted). Though the violation need not be willful, the movant seeking the contempt order must demonstrate that "the contemnor was not reasonably diligent in attempting to comply." City of New York v. Local 28, Sheet Metal Workers' Intern. Ass'n, 170 F.3d ...