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Securities and Exchange Commission v. Pittsford Capital Income Partners

May 20, 2010


The opinion of the court was delivered by: Michael A. Telesca United States District Judge



The Securities and Exchange Commission ("SEC") filed an application for an Order to Show Cause why defendants Edward Tackaberry ("Tackaberry") and Mark Palazzo ("Palazzo")*fn1 should not be held in contempt for failing to disgorge and pay prejudgment interest on ill-gotten gains from violating federal securities laws, as mandated almost three years ago by order of this Court. Further, the SEC contends that Tackaberry's contemp warrants an order from the Court requiring Tackaberry to deposit payments in the Registry of the Court. Failing such a deposit within a reasonable time, incarceration is the next step until he attempts to comply with the Court's order. For the following reasons, the SEC's motion to hold Tackaberry in contempt is granted and in light of such contempt findings, Tackaberry must make payments to the Court's registry within thirty (30) days.*fn2


The SEC previously filed a motion for summary judgment, which the Court granted. In granting the motion, the Court found that Tackaberry and Palazzo "acted with a high degree of scienter; they were trained securities professionals who repeatedly made false and misleading statements and omissions to the investors....They knew what they were doing and they did it with fraudulent intent." See SEC v. Pittsford Capital Income Partners, L.L.C. et al., 2007 WL 2455124 at *17 (W.D.N.Y. August 23, 2007), aff'd, 2008 WL 5435580 (2d Cir. Dec. 31, 2008). The procedural and factual background of this case is set forth in that Decision and Order dated August 23, 2007 ("August 23 Decision"). Accordingly, familiarity with that decision is assumed. Thus, the Court will not repeat all the facts of the prior proceeding and will only address the most pertinent information as it relates to this motion for contempt. For purposes of the instant motion it is sufficient to note the following facts.

The SEC commenced this action against Tackaberry and Palazzo on July 14, 2006, alleging violations of various provisions of federal securities law arising out of the alleged use of investor funds for improper purposes by making secret loans, commingling investor funds without disclosure and other material misrepresentations and omissions. On the same day the complaint was filed, this Court granted the SEC's application for a temporary restraining order freezing the assets at issue pending a determination of its application for a preliminary injunction. In addition, the Court appointed a Receiver. As stated above, the Court granted summary judgment in favor of the SEC on August 23, 2007. The Final Judgment as to Tackaberry and Palazzo, entered on August 30, 2007, ordered that both defendants are jointly and severally liable for disgorgement of $11,725,294.92, plus prejudgment interest of $14,028,728.07 for a total of $25,754,022.90. In addition, the Final Judgment authorizes the SEC to enforce the payment obligation "by moving for civil contempt and/or through other collection procedures authorized by law[.]" See Dkt. # 112. After three years of diligent effort on the part of the Receiver in liquidating available assets, he submitted a proposed plan to the Court for distributing these assets to the victims of the fraud.

On November 16, 2009, the Court approved the plan, which will return only 7.86% of the amount owed to each investor. See Dkt. # 138. The SEC claims that the funds being distributed by the Receiver do not include even one penny from Tackaberry. Despite repeated demands and an ability to make at least partial payments, Tackaberry has refused to make even a token payment in the almost three years since the entry of the Final Judgment. The SEC contends that this conduct demonstrates a failure to recognize the consequences of his actions, a disregard for his former clients whose money he stole*fn3 and a blatant contempt for the Final Judgment entered by this Court. In addition, the SEC claims that Tackaberry is involved in a new promissory note scheme similar to the Pittsford Capital fraud wherein he has been raising money for several start-up companies with no operating history and offering promissory notes with an 8% return.


I. Applicable Standards on a Motion for Civil Contempt

It is a firmly established principal that federal courts possess the inherent power to punish for contempt. See D'Orange v. Feely, 959 F.Supp. 631, 634-35, 637 (S.D.N.Y.1997); see also Chambers v. NASCO, Inc., 501 U.S. 32, 43 (1991) ("Courts of justice are universally acknowledged to be vested, by their very creation, with power to impose silence, respect, and decorum, in their presence, and submission to their lawful mandates"); Young v. United States ex rel. Vuitton et Fils, S.A., 481 U.S. 787, 795 (1987); Abrams v. Terry, 45 F.3d 17 (2d Cir.1995). The standards applicable to a motion for civil contempt are well settled and require only brief review. As the Court of Appeals for the Second Circuit explained in EEOC v. Local 638, a party may be held in contempt for failure to comply with a court order if the moving party shows by clear and convincing evidence that "the order being enforced is clear and unambiguous, the proof of noncompliance is clear and convincing, and the defendant [] ha[s] not been reasonably diligent and energetic in attempting to accomplish what was ordered." 753 F.2d 1172, 1178 (2d Cir. 1985); see also Paramedics Electromedicina Comercial, Ltda. v. GE Med. Sys. Info. Tech., Inc., 369 F.3d 645, 655 (2d Cir.2004); King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir.1995).

To meet this initial burden, the plaintiff, SEC need only present a prima facie case (see United States v. Rylander, 460 U.S. 752, 755 (1983)) and it need not be established that the violation was willful. See Donovan v. Sovereign Sec. Ltd., 726 F.2d 55, 59 (2d Cir.1984); see also SEC v. Universal Express, Inc., 546 F.Supp.2d 132, 134 (S.D.N.Y.2008); Perez v. Danbury Hosp., 347 F.3d 419, 423-24 (2d Cir.2003); Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d Cir.1995); New York State Nat'l Org. for Women v. Terry, 886 F.2d 1339, 1351 (2d Cir.1989). Once the initial burden is met by the SEC, the burden shifts to the defendant to come forward with evidence showing "categorically and in detail" the reasons he is unable to comply with the court's order. See Rylander, 460 U.S. at 755. Here, defendant Tackaberry who claims that he is unable to pay the judgment, "bears the burden of producing evidence of his inability to comply" with the disgorgement order. See Huber, 51 F.3d at 10, citing Rylander, 460 U.S. at 757. Tackaberry's "burden is to establish his inability clearly, plainly, and unmistakably." Id. In other words, Tackaberry must clearly establish "that compliance is impossible." Rylander, 460 U.S. at 757.

If Tackaberry "offers no evidence as to his inability to comply...or stands mute," he fails to meet that burden. Huber, 51 F.3d at 10 (quotations omitted). As a result, Tackaberry must demonstrate his inability to comply "categorically and in detail." See Rylander, 460 U.S. at 755. Further, proof that Tackaberry cannot pay the entire amount would not absolve him from paying as much as is possible to pay under the circumstances: "When an order requires a party to pay a sum certain, a mere showing that the party was unable to pay the entire amount by the date specified is insufficient to avoid a finding of contempt. When a party is absolutely unable to comply due to poverty or insolvency, inability to comply is a complete defense. [Citation omitted.] Otherwise, the party must pay what he or she can." SEC v. Musella, 818 F.Supp. 600, 602 (S.D.N.Y.1993) (citations omitted). The court will presume a present ability to comply with an order where at some point in the past a defendant could have complied with that order. See SEC v. Princeton Econ. Int'l Ltd., 152 F.Supp.2d. 456, 459 (S.D.N.Y.2001).

Once contempt has been established, a district court has "broad discretion to fashion an appropriate coercive remedy based on the nature of the harm and the probable effect of alternative sanctions[.]" EEOC v. Local 28 of Sheet Metal Workers Int'l Ass'n, 247 F.3d 333, 336 (2d Cir.2001) (citations omitted). In determining an appropriate sanction for civil contempt, a court must consider: "(1) the character and magnitude of the harm threatened by the continued contumacy; (2) the probable effectiveness of any suggested sanction in bringing about compliance; and (3) the contemnor's financial resources and the consequent seriousness of the burden of the sanction." Dole Fresh Fruit Co. v. United Banana Co., 821 F.2d 106, 110 (2d Cir.1987); see also SEC v. ...

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