The opinion of the court was delivered by: Gerard E. Lynch, District Judge
This enforcement action arises from the alleged dissemination of false information to investors by Universal Express, Inc., its chief executive officer Richard A. Altomare, and its in-house counsel Chris G. Gunderson (collectively, "Organizational Defendants"), in an effort to facilitate the illegal unregistered distribution of 500 million shares of Universal Express stock to the public through re-sellers Mark S. Neuhaus, George J. Sandhu, Spiga Limited, and Tarun Mendiratta (collectively, "Re-Sellers"). Defendants Neuhaus and Sandhu entered into bifurcated settlement agreements on November 19 and November 25, 2007, respectively. Pursuant to those agreements, they consented to be held liable for disgorgement, prejudgment interest, and civil penalties, if appropriate. The SEC now moves for an order granting such relief. For the reasons discussed below, judgment will enter against Neuhaus in the amount of $14,221,508, which consists of $9,786,589 in disgorgement, $3,434,919 in prejudgment interest, and $1,000,000 in civil penalties, and against Sandhu in the amount of $6,036,117, which consists of $4,064,058 in disgorgement, $1,472,059 in prejudgment interest, and $500,000 in civil penalties.
The SEC commenced this enforcement action on March 24, 2004, alleging that defendants Universal Express, Inc., Richard Altomare, Chris Gunderson, Mark Neuhaus, George Sandhu, and Tarun Mendiratta violated various provisions of the federal securities laws. On August 17 and 18, 2006, the SEC sought summary judgment against all defendants on claims that they offered or sold unregistered securities in violation of Section 5 of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. § 77e, and against all defendants except Mendiratta on claims that they engaged in fraud relating to the purchase, offer, or sale of securities in violation of Section 17(a) of the Securities Act, id. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), id. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. Universal Express, Altomare, and Gunderson cross-moved for summary judgment as to Section 5 liability, while Neuhaus and Sandhu cross-moved for summary judgment on all claims.
In a February 21, 2007, Opinion and Order, this Court granted the SEC's motion for summary judgment against the Organizational Defendants on all claims. See SEC v. Universal Express, Inc., 475 F. Supp. 2d 412, 426-28 (S.D.N.Y. 2007), aff'd sub nom. SEC v. Altomare, 300 Fed. Appx. 70 (2d Cir. 2008). Finding that those defendants "violated [federal registration and anti-fraud securities] laws and, if not enjoined, likely would do so again," the Court also granted the SEC's request to permanently enjoin them from committing similar violations in the future.*fn1 Id. at 428. In addition, the Court granted the SEC's motion for summary judgment against Neuhaus as to Section 5 liability, but denied the motion in all other respects. Id. at 433-34. All other requests for summary judgment, including defendants' cross-motions, were denied. Id. at 434-40.
Although the Court denied the SEC's motion for summary judgment against Neuhaus as to the statutory fraud claims, and denied the SEC's motion for summary judgment against Sandhu in its entirety, instead of going to trial both Neuhaus and Sandhu entered into bifurcated consent agreements, the terms of which were materially identical. Among other terms, Neuhaus and Sandhu consented -- without admitting or denying the allegations set forth in the complaint -- to be permanently enjoined from committing future violations of the securities registration provisions of Section 5 of the Securities Act, the anti-fraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. (11/19/07 Consent Agreement ¶ 2(a); 11/25/07 Consent Agreement ¶ 2(a); see also 11/26/07 Order of Permanent Injunction and Other Relief Against Defendant George Sandhu at I-III; 12/4/07 Order of Permanent Injunction and Other Relief Against Defendant Mark Neuhaus at I-III.) They further consented to be barred from participating in the offering of penny stock. (11/19/07 Consent Agreement ¶ 2(b); 11/25/07 Consent Agreement ¶ 2(b); see also 11/26/07 Order of Permanent Injunction at IV; 12/4/07 Order of Permanent Injunction at IV.)
In addition to the foregoing,
[Neuhaus and Sandhu] agree[d] that the Court shall order disgorgement of ill-gotten gains and prejudgment interest thereon; that the amounts of disgorgement and civil penalty, if any, shall be determined by the Court upon motion of the Commission; and that prejudgment interest shall be calculated from February 1, 2004, based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621(a)(2). [They] further agree[d] that, upon motion of the Commission, the Court shall determine whether a civil penalty is appropriate pursuant to Section 20(d)(2)(C) of the Securities Act . . . and Section 21(d)(3)(B)(iii) of the Exchange Act . . . , and if so, the amount of the penalty. (11/19/07 Consent Agreement ¶ 5; 11/25/07 Consent Agreement ¶ 5.) For purposes of any such motion, Neuhaus and Sandhu acknowledged that they would be "precluded from arguing that [they] did not violate the federal securities laws as alleged in the [c]omplaint"; that they could not contest the validity of the Court's summary judgment Opinion, their Consents, or the Orders of Permanent Injunction; that the allegations of the complaint would be deemed true; and that the Court could "determine the issues raised in the motion on the basis of affidavits, declaration, excerpts of sworn depositions or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure." (11/19/07 Consent Agreement ¶ 5; 11/25/07 Consent Agreement ¶ 5.)
Finally, both Neuhaus and Sandhu explicitly affirmed that they "enter[ed] into th[e] Consent[s] voluntarily and . . . that no threats, offers, promises, or inducements of any kind ha[d] been made by the Commission or any member, officer, employee, agent, or representative of the Commission to induce [them] to enter into th[e] Consent[s]." (11/19/07 Consent Agreement ¶ 8; 11/25/07 Consent Agreement ¶ 8.)
II. Facts Relating to Neuhaus's and Sandhu's Liability
Because the parties' consent agreements require the Court to accept the allegations in the complaint as true, and because the agreements also prohibit Neuhaus and Sandhu from contesting the validity of the Court's February 2007 Opinion and Order, the facts relating to liability are essentially undisputed.*fn2
A. Overview of the Organizational Defendants and Re-Sellers
Universal Express is a publicly traded Nevada corporation purportedly involved in shipping and transportation. Universal Express, 475 F. Supp. 2d at 415-16. At times relevant to this action, it maintained its principal place of business in Florida and had an office in New York City. Id. at 416. From 1992 to August 31, 2007, when Universal Express was placed into a receivership, Richard Altomare served as the company's chief executive officer and director. Id.
Altomare was assisted by Chris Gunderson, a lawyer who served as Universal Express's in-house counsel. Id.
Mark Neuhaus trades securities. Id. He founded and managed the company Coldwater Capital, LLC ("Coldwater"). Id. He also formed and controlled Perfect Line Investments ("Perfect Line"), and helped form the partnership H&N LLC ("H&N"). Id. Both Perfect Line and H&N were involved in the sale of Universal Express shares. Id.
George Sandhu is an investment advisor who, at all times relevant to this dispute, advised a mutual fund called Target Growth Fund Ltd. ("Target"), id., and exercised trading authority over certain brokerage accounts belonging to Spiga, Ltd.*fn3 (Compl. ¶ 21.) Spiga, an investment company owned by Sandhu's brother-in-law, was involved in the sale of Universal Express shares. (Id.) It also received investment advice from Sandhu.*fn4 Universal Express, 475 F. Supp. 2d at 416.
Between April 2001 and January 2004, Universal Express issued more than 500 million shares of stock to Neuhaus, Sandhu, and Tarun Mendiratta, another Re-seller whose role and liability are not at issue here.*fn5 Id. These shares were issued pursuant to written agreements purporting to exchange stock for the Re-sellers' consulting services. Id. The agreements, which were drafted by Gunderson and signed by Altomare, represented that the exchanged shares were registered. Id. at 416-17. However, with the exception of two S-8 forms,*fn6 Universal Express filed no securities registration statements between January 1, 2001, and March 31, 2004. Id. at 416. The first S-8 form was filed on May 7, 2001, and covered 30 million shares. Id. The second was filed on January 22, 2002, and covered 20 million shares. Id. Accordingly, of the 500 million shares issued by Universal Express during this time period, only 50 million were covered by the S-8 forms.*fn7 Id.
Between April 2001 and March 2004, Neuhaus received 270,698,345 of the purported "S-8 shares," 235 million of which were deposited into brokerage accounts he opened in the names of Coldwater, H&N, and Perfect Line. Id. at 417. During the same time period, Neuhaus also received 26,233,248 restricted Universal Express shares, over 5.5 million of which he deposited into the Coldwater, H&N, and Perfect Line accounts. Id. Neuhaus subsequently sold 259,649,167 shares of Universal Express stock for proceeds of $9,786,589. Id. From April 2002 to November 2003, however, he transferred $5,861,488 from bank accounts controlled by him to Universal Express. Id.
During the course of Neuhaus's sale of Universal Express stock, a brokerage firm where Coldwater maintained accounts contacted him and inquired about the trading status of the stock. Id. at 417-18. Although that firm subsequently closed Coldwater's accounts, Neuhaus never took any steps to determine whether a ...