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, filed on January 8, 2009.
In connection with this motion, this Court has considered the following documents filed by the Commission: (1) the Complaint, dated January 7, 2009; (2) the Declaration of Kurt Hammer, executed on January 6, 2009, and the exhibits thereto; (3) the Declaration of Charles O. LeRoux, executed on January 7, 2009, and the exhibits thereto; and (4) Plaintiff's Memorandum of Law in Support of Its Motion for an Ex Parte Temporary Restraining Order, Preliminary Injunction, Asset Freeze and Other Relief, dated January 7, 2009.
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. According to the Commission's allegations and evidence collected thus far, Defendants appear to be defrauding investors through a Ponzi scheme.
Defendant Piccoli is the President of Defendant Gen-See Capital, a New York corporation. (Hammer Decl., ¶¶ 4, 5.) Gen-See and Piccoli are not registered with the Commission in any capacity, and neither Gen-See nor Piccoli have ever registered any class of securities or offerings or sales of securities with the Commission. (LeRoux Decl., ¶¶ 15, 16.)
Investigation by Postal Inspector Kurt Hammer has revealed evidence that Piccoli advertises his investment services through publications directed to members of the Catholic church and to senior citizens. (Hammer Decl., ¶¶ 6, 10, 13, 16, 28, 29.) Hammer, posing as an individual interested in investment options for his 87-year-old mother, spoke to Piccoli and learned that (1) Piccoli professed to be in the "discount residential mortgage business" for thirty-three years and to have "never lost a dime for a client," (2) Piccoli purportedly invests in "seasoned mortgages," which Piccoli described as "mortgages 5 and 6% and [ ] 7 8 9 years left on [them]," (3) Piccoli promises 7.1% to 8.3% annual returns "guaranteed for the entire term of your certificate" with no fees or commissions, and (4) that Piccoli targets priests, senior citizens, and members of the Catholic religion throughout the country. (Hammer Decl., ¶¶ 6--20.)
Piccoli provided Hammer with various documents, including a sample certificate investors receive from Gen-See, a list of references, documents describing two investment options, a new account application, and a solicitation letter. (Hammer Decl., Exhibit D.) Piccoli explained to Hammer that his investment strategy is to purchase safe "discount residential mortgages" that have less than 10 years of repayment left. (Hammer Decl., ¶ 26.) Piccoli represented that this strategy is unaffected by economic downturns because "we own the mortgages." (Hammer Decl., ¶ 27.)
Further investigation by the Commission, however, reveals no evidence that either Piccoli or Gen-See have purchased or acquired residential mortgages. (LeRoux Decl., ¶ 12.) Three corporate bank accounts holding approximately $4.1 million appear to hold investor funds. According to Charles O. LeRoux, a staff accountant with the Commission, analysis of these accounts held by Gen-See and controlled by Piccoli reveals only deposits from investors and payments to investors. (LeRoux Decl., ¶ 7.) There is allegedly no activity consistent with Piccoli's claim to be purchasing residential mortgages with investors' funds as promised. For example, there is no evidence of (1) payments to banks or other parties to purchase mortgages; (2) payments to lawyers, accountants or other professionals; or (3) payment to companies for due diligence work or post-acquisition servicing of the mortgages. (LeRoux Decl., ¶ 12.) Moreover, there is no public information demonstrating that Gen-See or Piccoli have acquired residential mortgages. (LeRoux Decl., ¶¶ 13, 14.)
This evidence demonstrates a strong likelihood that Defendants have run and are running a Ponzi scheme. It appears that Defendants are falsely representing to investors that they are purchasing residential mortgages as safe investments unaffected by the economy. Analysis of Defendants' bank accounts and public records reveals that no such mortgages have been purchased. Rather, the evidence thus far reveals that new investor funds are deposited into the corporate bank accounts and used to pay returns to older investors. This activity is ongoing, and 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 Gen-See and Richard S. Piccoli 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; and Defendants Gen-See and Richard S. Piccoli 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.
2. It appears that an order freezing the 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 ...