The opinion of the court was delivered by: Hon. Harold Baer, Jr., District Judge
The Securities and Exchange Commission (the "Commission" or "SEC") brought this action on August 27, 2006, charging Defendant Janette Diller Stone ("Diller Stone") and the other defendants with conducting a market manipulation scheme by which they purchased stock from WebSky, Inc. ("WebSky"), then disseminated false public information touting WebSky with the goal of dumping inflated WebSky stock on unsuspecting public investors, in violation of Sections 5(a), 5(c) and 17(a) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c) and 77q(a), Sections 10(b) and 15(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78o(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5.
Without admitting or denying the Commission's allegations, Diller Stone consented to the entry of an Order of Permanent Injunction and Other Relief ("Consent Judgment"), enjoining her from future violations of those statutes. The Consent Judgment requires Diller Stone to "pay disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]." Diller Stone also agreed that "[t]he Court shall determine the amounts of the disgorgement and civil penalty upon motion of the Commission or at trial."
The Consent Judgment precludes Diller Stone from "arguing that she did not violate the federal securities laws as alleged in the Complaint" and from challenging the validity of the Consent Judgment. The Consent Judgment provides that, for the purposes of the instant motion, "the allegations of the Complaint shall be accepted as and deemed true by the Court."
The Commission now moves for a determination of (1) disgorgement in the amount of $345,754.04; (2) prejudgment interest in the amounts of (a) $69,593.14, jointly and severally with Defendants Pedracar, Inc. ("Pedracar"), Crescent Fund, LLC ("Crescent Fund") and Jeffrey Steven Stone ("Stone"), and (b) $46,900.03, jointly and severally with Stone only; and (3) a civil penalty of $60,000.00. The Commission also moves to strike certain arguments and evidence by Diller Stone as inadmissible and beyond the scope of the Consent Judgment.
For the reasons set forth below, the Commission's motions are granted and, contemporaneously with this Opinion, the Court enters the attached Order Granting Plaintiff's Motion for Determination of Disgorgement, Prejudgment Interest and Penalty Amounts to be Paid by Defendant Janette Diller Stone and Final Judgment.
To the extent that the parties' agreement and the Consent Judgment require this Court to deem the factual allegations in the Complaint as true, "[t]he facts related to liability are essentially undisputed." See SEC v. Kane, No. 97 Civ. 2931, 2003 WL 1741293, at *1 (Apr. 1, 2003). On or about September 20, 2004, Pedracar, an entity controlled by Diller Stone, agreed to purchase 287,700,000 WebSky shares from WebSky for $719,250, or $0.0025 per share. Diller Stone, as the president of Pedracar, signed a subscription agreement for the purchase. (Compl. ¶ 16.) In the subscription agreement, Diller Stone falsely represented to WebSky that Pedracar was an "accredited investor" within the meaning of Rule 501 of Regulation D of the Securities Act and that Pedracar was acquiring the shares for its own account and not on behalf of any other or with any view to distributing them. Diller Stone repeatedly misled WebSky's president and CEO by telling him that Pedracar had no intention of selling the shares. (Id. ¶ 17.)
Diller Stone's statements were false. When Diller Stone signed the subscription agreement, she and Stone, who is now her husband, fully intended to distribute the WebSky shares, even though the federal securities laws barred them from doing so in the absence of a registered transaction or statutory exemption. (Id. ¶ 18.) Three days after she entered into the subscription agreement on behalf of Pedracar, Diller Stone, along with Stone, took steps to distribute the shares. For example, she authorized the transfer of 14.5 million WebSky shares from Pedracar's brokerage account to a third party investment manager who purchased them for $100,000. (Id. ¶ 19.) In December 2004, Crescent Fund, of which Diller Stone was president, entered into an agreement to assume certain of Pedracar's payment obligations to WebSky under the subscription agreement; in exchange, Pedracar transferred its WebSky shares to Crescent Fund. (Haffer Decl. ¶ 3, Ex. B.) By January 2005, Pedracar and Crescent Fund had sold more than 101 million WebSky shares for $365,000 in proceeds to third parties, making a profit of $110,855. (Compl. ¶ 20.) From late December 2004 through February 2005, Pedracar and Crescent Fund also began selling WebSky shares directly into the open market. (Id. ¶ 21.)
Diller Stone and Stone promoted WebSky's prospects to make their shares more valuable. For example, in late October 2004, Diller Stone undertook a fax campaign to distribute a copy of a recent WebSky press release concerning a Wi-Max project in Argentina, and by December 2004 she began sending emails to investment managers and others asking them to invest in WebSky. In December 2004, Crescent Fund entered into a consulting agreement with WebSky in which Crescent Fund would attempt to secure investments in WebSky in exchange for a ten percent "success fee." (Id. ¶ 22.)
Although Pedracar had received all 287 million shares from WebSky pursuant to the subscription agreement, by mid-January 2005 Diller Stone, Stone and Pedracar had failed to pay WebSky for most of the shares. In December 2004 and January 2005, Defendant Douglas Haffer ("Haffer"), the president and CEO of WebSky, told Diller Stone and Stone that their failure to pay was jeopardizing WebSky's business prospects, especially WebSky's joint venture to develop a Wi-Max system in Argentina. (Id. ¶ 24.) Nevertheless, Stone proceeded with a plan to have a third party stock promoter distribute a spam email that touted WebSky's business prospects, including that WebSky planned to build a Wi-Max system in Argentina for which it anticipated annualized net revenues in the third year of operations to exceed $40 million. (Id. ¶ 25.) Despite her knowledge of WebSky's financial problems and specific problems with the Argentina project, and despite an explicit instruction from Haffer not to disseminate the spam email, Diller Stone authorized the stock promoter to distribute it. (Id. ¶ 26.)
Based on Diller Stone's approval, the stock promoter distributed the spam email on January 26 and 27, 2005. The email falsely stated that WebSky had a joint venture agreement for development of a Wi-Max system in Argentina that would result in annual revenues of over $40 million in the third year of operations. (Id. ¶ 27.) As a result, by the end of the second trading day of the spam email campaign, the trading price of WebSky's stock increased more than 200%, from $0.0021 per share at closing on January 25, 2005, to $0.0069 at closing on January 27, 2005. (Id. ¶ 28.) From January 26, 2005, to the end of the following week, Diller Stone, Crescent Fund and Pedracar sold more than 98 million WebSky shares, which had been purchased through the subscription agreement, for proceeds of approximately $575,000. (Id. ¶ 29.) In all, the Stone-related entities obtained proceeds exceeding $1 million on the sale of WebSky securities. (Id. ¶ 30.)