The opinion of the court was delivered by: William M. Skretny United States District Judge
Presently before this Court is Plaintiff Securities and Exchange Commission's (the "Commission") Motion for an Ex Parte Order to Show Cause and Temporary Restraining Order against Defendants and the Relief Defendants, filed on May 15, 2008.
In connection with this motion, this Court has considered the following submissions filed by the Commission: (1) the Complaint; (2) the Notice of Motion; (3) the Declaration of Israel Maya, and the 23 exhibits thereto; (4) the Memorandum of Law in Support; and (5) the Declaration of Linda Arnold.
Ordinarily, a party seeking injunctive relief must demonstrate "(1) irreparable harm should the injunction not be granted, and (2) either (a) a likelihood of success on the merits, or (b) sufficiently serious questions going to the merits and a balance of hardships tipping decidedly toward the party seeking injunctive relief." N.A.A.C.P., Inc. v. Town of East Haven, 70 F.3d 219, 223 (2d Cir. 1995) (quoting Resolution Trust Corp. v. Elman, 949 F.2d 624, 626 (2d Cir. 1991)); see also SmithKline Beecham Consumer Healthcare, L.P. v. Watson Pharm., Inc., 211 F.3d 21, 24 (2d Cir. 2000).
But the Commission, because it is charged with safeguarding the public interest through enforcement of the securities laws, is not required to meet this standard. See SEC v. Cavanagh, 155 F.3d 129, (2d Cir. 1998); SEC v. Dorozhko, 07 Civ. 9606, 2008 WL 126612, at *5 (S.D.N.Y. Jan. 8, 2008) (quoting SEC v. Management Dynamics, Inc., 515 F.2d 801, 808 (2d Cir. 1975)). Rather, the SEC is entitled to temporary or preliminary injunctive relief upon "a substantial showing of likelihood of success as to both a current violation and the risk of repetition." Cavanagh, 155 F.3d at 132 (citing SEC v. Unifund SAL, 910 F.2d 1028, 1039-40 (2d Cir. 1990).
Based on this Court's review of the submissions, it finds that the Commission has met its burden of establishing the likelihood of both current and future violations of the securities laws. From May 2005 to January 2008, Defendants and others raised approximately $5,100,000 from approximately 90 unsophisticated investors, many of whom were senior citizens or individuals close to retirement. (Maya Decl., ¶¶ 21, 35, 37.) Defendants convinced these investors to purchase convertible debentures issued by Defendant Watermark Financial Services Group, Inc. ("Watermark Financial") and Watermark M-One Holdings, Inc. ("Watermark Holdings") (collectively "Watermark"), or by Defendant M-One Financial Services, LLC ("M-One") for the benefit of Watermark. (Maya Decl., ¶ 21.) Investors were promised a fixed 10% or higher annual return on their principal, with the debentures having one- or two-year maturity dates. (Maya Decl., ¶ 22.) Investors also had the option of converting all or part of the face value of the debentures and accrued interest into shares of Watermark common stock at the investors' discretion on or before the debentures' maturity dates. (Maya Decl., ¶ 22.)
The debentures were not registered with the Commission, nor did Defendants provide investors with any offering materials other than the debenture contracts. (Maya Decl., ¶ 37.) To induce investors, Defendants falsely told them that Watermark would use the proceeds to purchase or develop real estate. (Maya Decl., ¶¶ 24, 27.) Instead, the money raised was diverted to five companies in Buffalo, New York; to Defendant Gane himself and to his family members; to Defendants' employees and consultants; to pay investors; and to Denkon, Inc., a company controlled by Defendant Gane. (Maya Decl., ¶¶ 28, 29, 30, 31.)
Defendants raised an additional $580,000 between December 2007 and January 2008 by selling short-term promissory notes issued by Watermark to at least four investors. (Maya Decl., ¶ 32.) In at least one instance, funds raised through this offering were used to repay a previous investor, a local church. (Maya Decl., ¶ 33.)
In sum, the evidence demonstrates a strong likelihood that Defendants have run and are running a Ponzi scheme. Based on information gathered from investors whose debentures have recently matured, Defendants Gane and Altadonna have falsely represented that their funds were located in Greece and that a bank strike there was making their funds inaccessible. (Maya Decl., ¶ 38.) Analysis of subpoenaed records, however, reveals no evidence that any funds were sent to Greece. (Maya Decl., ¶ 38.)
Furthermore, based on a review of the debentures, it appears that many of them will mature this year, entitling investors to their principal and interest. (Maya Decl., ¶ 40.) More than $3,300,000 million will come due in May and June 2008 alone. (Maya Decl., ¶ 41.) But according to records obtained by Investigator Maya, as of February 2008, only $98,000 of the approximately $5,700,000 raised through this scheme remained in bank accounts controlled by Defendants. (Maya Decl., ¶ 39.) And of the $98,000, $55,000 was in Defendant Gane's personal bank account. (Maya Decl., ¶ 39.) Because of the amount of money coming due, and the corresponding lack of available funds, this Court finds that the Commission has established a high probability that Defendants will issue more debentures or promissory notes to new investors to pay the maturing debentures. (Maya Decl., ¶ 40.) Thus, the securities laws will continue to be violated.
In this Court's view, the Commission has made a proper showing, as required by Section 20(b) of the Securities Act and Section 21(d) of the Exchange Act for the relief granted herein, and this Court finds as follows:
1. It appears from the evidence presented that Defendants Watermark Financial, Watermark Holdings, Watermark Capital, M-One, Gane, and Altadonna have violated, and, unless temporarily restrained, will continue to violate, Sections 5(a) and 5(c) of the Securities Act, as charged in the Complaint; Defendants Watermark Financial, Watermark Holdings, M-One, Watermark Capital, Gane, and Altadonna have violated, and, unless temporarily restrained, will continue to violate, Section 17(a) of the Securities Act, and Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, as charged in the Complaint; and Defendant Gane has violated, and, unless temporarily restrained, will continue to violate, Section 15(a) of the Exchange Act, as charged in the Complaint.
2. It appears that an order freezing the Defendants' and Relief Defendants' assets, as specified herein, is necessary to preserve the status quo, and to protect this Court's ability to award equitable relief in the form of disgorgement of illegal profits from fraud and civil penalties, and to preserve the Court's ability to approve a fair distribution for victims of the fraud.
3. It appears that the Defendants and Relief Defendants may attempt to dissipate or transfer from the jurisdiction of this Court, funds, property and other assets that could be subject to an order ...