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Securities and Exchange Commission v. Tecumseh Holdings Corp.

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK


January 18, 2011

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
TECUMSEH HOLDINGS CORP., TECUMSEH TRADEVEST LLC, S.B. CANTOR & CO., INC., JOHN L. MILLING, GERARD A. MCCALLION, ANTHONY M. PALOVCHIK, AND DALE CARONE, DEFENDANTS.

The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.:

OPINION AND ORDER

I. INTRODUCTION

In 2003, the Securities and Exchange Commission ("SEC") filed this suit alleging securities violations by Tecumseh Holding Corporation ("Tecumseh"), Tecumseh Tradevest LLC ("Tradevest"), S.B. Cantor & Company ("Cantor"), John L. Milling, Gerard A. McCallion, Anthony M. Palovchick and Dale Carone. In 2009, the SEC moved for partial summary judgment against Milling, who proceeds pro se, on its non-scienter claims. I granted the SEC's motion with respect to its claim that Milling violated Sections 5(a) and (c) of the Securities Act of 1933 ("Securities Act"), but denied the motion with respect to the SEC's claim that Milling aided and abetted a violation of Section 17(a) of the Securities Exchange Act of 1934 ("Exchange Act"). I also enjoined Milling from engaging in future violations of the securities laws, ordered that Milling disgorge $7,200,000 in ill-gotten gains plus pre-judgment interest, and imposed "first-tier" civil penalties of $6,500.*fn1

The SEC now moves for summary judgment against Milling on its First Claim for Relief (violations of Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act (the "Antifraud Provisions")) and its Fifth Claim for Relief (aiding and abetting violations of Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4) ("aiding and abetting claim").*fn2 The SEC also seeks an order enjoining Milling from future violations and imposing third-tier civil monetary penalties against him. For the reasons stated below, the SEC's motion is granted with respect to its claim under the Antifraud Provisions; summary judgment is granted in favor of Milling with respect to the SEC's aiding and abetting claim; and Milling is enjoined from future violations and ordered to pay third-tier civil penalties of $110,000.

II. BACKGROUND*fn3

A. The Fraudulent Offerings of Tecumseh Securities

Tecumseh's unregistered offerings consisted of Tecumseh Class A stock, Tecumseh Class C stock, and units of Tradevest (collectively, the "Tecumseh Securities").*fn4 Tecumseh and the Tecumseh Securities were described to prospective investors in eight offering memoranda dated June 20, 2000; December 1, 2000; February 25, 2001; September 1, 2001; September 25, 2001; March 5, 2002; November 1, 2002; and April 1, 2003.*fn5 Milling drafted or reviewed the offering memoranda used to sell the unregistered securities,*fn6 authorized the distribution of these memoranda to prospective investors,*fn7 and participated in discussions regarding "matters pertaining to the sale of Tecumseh securities" and "the compliance oversight of . . . sales personnel."*fn8

1. Profit Projections

The September 1, 2001 offering memorandum for Tecumseh Class A Common Stock (the "September 2001 Class A Offering Mem.") announced that Tecumseh had "acquired ownership of [Cantor]."*fn9 It contained the following three-year profit projections: net operating income (profits) of $8,296,350 in the first year, $12,470,200 in the second year, and $17,067,900 in the third year.*fn10

These projections were distributed to prospective investors from September 2001 through May or June 2003*fn11 and were incorporated by reference into the September 25, 2001, March 5, 2002, and November 1, 2002 offering memoranda, all of which pertained to offerings of Class C Common Stock.*fn12 Subscription agreements accompanying those memoranda required prospective investors to attest that they had "received and carefully reviewed" the September 2001 Class A Offering Mem.*fn13

At the time Tecumseh made these projections, both Tecumseh and Cantor were operating at a loss.*fn14 By 2003, neither Tecumseh nor Cantor, separately or together, had come close to meeting these projections.*fn15 Milling knew that Cantor recorded only net operating losses after its fiscal 2000 year*fn16 and that Tecumseh had recorded only net operating losses.*fn17 Those losses were never disclosed to investors, except to those who specifically inquired.*fn18 In 2003, after regulatory inquiries by the SEC and the NASD had begun, Tecumseh disclosed to prospective investors in a new Class C offering memorandum -- which no longer incorporated the projections contained in the September 2001 Class A Offering Mem. -- that the company "has had net losses since its inception."*fn19

2. Dividends and Returns on Investment

The September 2001 Class C Offering Mem. stated that investors would receive quarterly payments "derived from the amount of Cantor net trading profit."*fn20 The March 2002 Amended Class C Offering Mem. changed this provision to read that investors would receive quarterly "ROI" (return on investment) distributions derived from the general funds of Tecumseh (to the extent distributions were not made from Cantor profits).*fn21 It also explained that "the distributions to investors will not necessarily be indicative of trading profits of Cantor."*fn22 Tecumseh made quarterly payments to Class C shareholders that were identified on the checks by which they were issued as "Dividend Payout[s]."*fn23

Milling signed the checks on behalf of Tecumseh.*fn24 However, the source of Tecumseh's "dividends" was in fact investor capital or proceeds raised from more recent investors.*fn25

In the April 2003 Class C Offering Mem., Tecumseh disclosed to prospective investors that the company "has had net losses since its inception," reiterating that any quarterly "dividends" would not be "indicative of profits earned by the company."*fn26 However, in a subsequent correspondence with existing investors, Milling continued to characterize the payments to investors as "dividends."*fn27

3. The Cantor Acquisition

NASD approval of the Cantor acquisition was a condition of Tecumseh's ability to legally operate Cantor as a wholly-owned subsidiary, a fact contemplated by the August 2001 acquisition agreement*fn28 and known by Milling.*fn29 In offering memoranda and Tecumseh newsletters, Milling repeatedly represented to investors that NASD approval of the acquisition was "forthcoming."*fn30

However, Milling did not submit a formal application to the NASD on Cantor's behalf until May 9, 2003, almost two years after the 2001 acquisition agreement.*fn31

As Tecumseh's general counsel, Milling was responsible for submitting the application,*fn32 and expressly acknowledged in correspondence with the NASD in 2001 that an application under NASD Rule 1017 had not been submitted.*fn33 Milling failed to disclose to investors that there was no application filed or pending with the NASD.*fn34

III. APPLICABLE LAW

A. Legal Standard

Summary judgment is appropriate "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law."*fn35 "'An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. A fact is material if it might affect the outcome of the suit under the governing law.'"*fn36 "[T]he burden of demonstrating that no material fact exists lies with the moving party . . . ."*fn37 In determining whether a genuine issue of material fact exists, the court must "constru[e] the evidence in the light most favorable to the non-moving party and draw all reasonable inferences" in that party's favor.*fn38

B. The Antifraud Provisions

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraud in connection with the purchase or sale of any security.*fn39 To prove a violation of these provisions, the Commission must establish that Milling "'(1) made a material misrepresentation or a material omission as to which he had a duty to speak, or used a fraudulent device; (2) with scienter; (3) in connection with the purchase or sale of securities.'"*fn40 "Essentially the same elements are required under Section 17(a)(1)-(3) in connection with the offer or sale of a security, though no showing of scienter is required for the SEC to obtain an injunction under subsections (a)(2) or (a)(3)."*fn41

"A statement or omission is material if 'there is a substantial likelihood that a reasonable shareholder would consider it important' or, in other words, 'there [is] a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable shareholder as having significantly altered the 'total mix' of information available.'"*fn42 Materiality "depends on the significance the reasonable investor would place on the withheld or misrepresented information."*fn43 "The determination [of materiality] requires delicate assessments of the inferences a 'reasonable shareholder' would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact."*fn44 "Only if the established omissions are so obviously important to an investor, that reasonable minds cannot differ on the question of materiality is the ultimate issue of materiality appropriately resolved as a matter of law by summary judgment."*fn45

"The requisite state of mind in a section 10(b) and Rule 10b-5 action is an intent 'to deceive, manipulate, or defraud.'"*fn46 However, the Second Circuit "has also long held that the scienter element can be satisfied by a strong showing of reckless disregard for the truth."*fn47 Conduct is reckless if it "'represents an extreme departure from the standards of ordinary care to the extent that the danger was either known to the defendant or so obvious that the defendant must have been aware of it.'"*fn48 Similarly, "evidence that the 'defendants failed to review or check information that they had a duty to monitor, or ignored obvious signs of fraud,' and hence 'should have known that they were misrepresenting material facts'" constitutes a showing of recklessness.*fn49

IV. DISCUSSION

A. The Antifraud Provisions

The SEC argues that Milling made misrepresentations in, and omitted material facts from, offering materials and other communications with investors concerning (1) Tecumseh's anticipated profits, (2) Tecumseh's dividends or returns on investment, and (3) the NASD's approval of Tecumseh's acquisition of Cantor. The only argument Milling articulates in opposition is that he was not responsible for compliance and oversight of Tecumseh sales personnel.*fn50 Leaving aside for the moment that Milling's assertion is in direct contradiction to a response he previously supplied to an SEC interrogatory,*fn51 it is also irrelevant to the SEC's claim under the Antifraud Provisions. Moreover, in the course of making this argument, Milling admits that "[t]here were a number of instances in which our compliance rules were violated, some of which were in the extreme," and that "[s]everal entailed oral and written statements which were preposterous" -- "[m]ost, but by no means all, were not transmitted to prospective investors."*fn52 The remainder of his submission consists of statements extracted from various offering memoranda. For the reasons stated below, the SEC's motion is granted.

1. Material Misrepresentations and Omissions

a. Profit Projections*fn53

The SEC argues that the "baseless [profit] projections in Tecumseh's offering memoranda are actionable under the antifraud provisions," citing In re Time Warner Inc. Securities Litigation for the proposition that projections are "'not beyond the reach of the securities laws.'"*fn54 Specifically, in the September 2001 Class A Offering Mem., Tecumseh projected profits of almost $8.3 million for the fiscal year ending August 31, 2002 -- at a time when Tecumseh was operating at a loss and on the heels of Cantor's incurring pre-tax losses of $945,754 in the fiscal year that had just ended. Neither the September 1, 2001, September 25, 2001, March 5, 2002, nor November 1, 2002 offering memoranda disclosed these losses to investors. Nor at any time throughout the 2002 fiscal year did Tecumseh seek to amend its profit projections for that fiscal year (or for any other fiscal year) -- despite the fact that (1) Cantor was on track to incur pre-tax losses of $852,657, (2) the September 2001 Class A Offering Mem. was incorporated by reference into all of the 2002 offering memoranda and distributed to investors, and (3) subscription agreements accompanying those memoranda required prospective investors to attest that they had "received and carefully reviewed" the September 2001 Class A Offering Mem. The most disclosure Tecumseh ever provided with respect to the actual (and extreme) disconnect between its expected profits and its actual losses did not occur until April 1, 2003, when Tecumseh disclosed for the first time that it "has had net losses since its inception."*fn55

Milling does not directly address the SEC's argument that the profit projections were false, instead suggesting that a series of disclaimers contained in the offering memoranda sufficiently qualified the profit projections.*fn56 "Such disclaimers, however, do not necessarily shield a defendant from liability . . . if plaintiffs [prove] facts demonstrating the defendant knew that such statements were false at the time they were made."*fn57 And here, the SEC argues that Milling -- who undisputedly drafted all of the offering memoranda -- knew that Cantor recorded only net operating losses after its 2000 fiscal year, knew that Tecumseh had recorded only net operating losses, and "failed to disclose, although he knew it and had a duty to disclose, that neither Cantor nor Tecumseh were profitable, and both had incurred continuing and mounting losses."*fn58

With respect to the March 2002 Amended Class C Offering Mem., and certainly the November 2002 Class C Offering Mem., I find the profit projections were materially false. This is because, halfway into fiscal year 2002, when Tecumseh was on track to record a net loss of $852,657, it was still circulating a profit projection of almost $8.3 million. At that point, "[c]autionary words about future risk [could not] insulate from liability the failure to disclose that the risk [had] transpired."*fn59 Moreover, there is no question that a reasonable shareholder would have considered it important, when determining whether to invest in the Class C offering in 2002, that Tecumseh was on track to record a net loss for the 2002 fiscal year. By November 1, 2002, when that near-million dollar loss had fully materialized, Milling still failed to disclose it to investors -- while continuing to incorporate by reference the 2001 profit projections into its offering memoranda*fn60 and requiring subscribing investors to represent, warrant, and agree that they had "received and carefully reviewed the [September 2001 Class A Offering Mem.]."*fn61 At that point, the profit projections were undeniably false.*fn62

Therefore, the SEC has proven the first element of its Section 10(b) and 17(a) claim with respect to the March 2002 and November 2002 offering memoranda.

With respect to the September 2001 offering memoranda, even if the projections were not "false" at that time, they were materially misleading. Under the so-called "bespeaks caution" doctrine,*fn63 "[c]ertain alleged misrepresentations in a stock offering are immaterial as a matter of law [if] it cannot be said that any reasonable investor could consider them important in light of adequate cautionary language set out in the same offering."*fn64 "[W]hen cautionary language is present, [courts] analyze the allegedly fraudulent materials in their entirety to determine whether a reasonable investor would have been misled."*fn65

There is no question here that adequate cautionary language would have disclosed that -- in September 2001, when the multi-million dollar profit projections were made -- Tecumseh and Cantor were both operating at a loss. Yet the disclosed "risk factors" Milling extracts from the September 2001 Class A Offering Mem. -- relating to "additional financing,"*fn66 "dependence on management,"*fn67 "management experience limitations,"*fn68 "revenue and income overrides to management,"*fn69 and "no assurance of dividends"*fn70 -- make no such disclosure. Even the statement "[t]he Company . . . has not yet generated any operating profit" fails to adequately caution how unrealistic Tecumseh's profit projections were because (1) it fails to disclose that the Company was currently losing money and (2) it suggests the only reason the Company has "not yet generated any operating profit" is because Tecumseh had not "formally commenced its new operations."*fn71 But those new operations -- presumably, Cantor's broker-dealer operations -- were, at the time Tecumseh made this "risk disclosure," already losing money.

Nor do Tecumseh's generic warnings -- that the investment "involves a high degree of risk" and is "highly speculative," and that only investors who "can afford a total loss of their investment" should consider subscribing -- adequately caution that Tecumseh's profit projections were entirely divorced from reality or reasonable expectations for future earnings.*fn72 Perhaps most importantly, the disclaimer preceding Tecumseh's actual "Projected Statements of Income" -- labeled "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" -- does not alert investors to any such incongruence.*fn73 That "safe harbor statement" "discloses" that [a]lthough the company believes that the expectations reflected in such forward looking statements are reasonable, actual results are subject to risks and uncertainties which could cause such actual results to differ materially from those set forth or implied herein, as a result of numerous factors including without limitation sales levels, competition trends, securities market conditions, and other factors . . . . The data further assumes the commencement of full scale and not partial business activity after procurement of capital by the Company in the approximate amount of $3,000,000, the preponderance of which has not, as of the date hereof, been obtained by the Company. The assumptions upon which the following projections are based are extensive and are not included herewith in their entirety but, with any other pertinent information, are available to any recipient of this memorandum upon request to the Company.*fn74

These general caveats fail to reveal the material fact that Tecumseh and Cantor were actually operating at a loss at the time Tecumseh was projecting first-year profits of over $8 million, second-year profits of over $12 million, and third-year profits of over $17 million -- information that "would have been viewed by the reasonable shareholder as having significantly altered the 'total mix' of available information."*fn75 Milling's "established omissions" in the September 2001 Class A Offering Mem. would have been "so obviously important to an investor, that reasonable minds cannot differ on the question of materiality."*fn76 And because the profit projections were both attached to and incorporated by reference in the September 2001 Class C Offering Mem. -- from which Milling extracts "cautionary language" just as inadequate as the cautionary language discussed above -- the SEC has satisfied the first element of its Section 10(b) and 17(a) claim with respect to the September 2001 offering memoranda as well.

b. Dividends and Returns on Investment

The SEC also alleges that the Class C offering documents (dated September 25, 2001, March 5, 2002, and November 1, 2002), as well as a letter from Milling to Class C shareholders on July 11, 2003, were false and misleading in their description of the Class C quarterly distributions as "ROIs" or "dividends," because they failed to disclose to investors that Cantor and Tecumseh had actually been losing money and that any profit-derived dividends were highly unlikely.*fn77

Characterizing the quarterly distributions in this way "implied that Tecumseh, along with Cantor, was a profitable enterprise with earnings to distribute to investors when in fact both Tecumseh and Cantor had incurred substantial losses."*fn78

To counter these accusations, Milling again points to statements extracted from various offering memoranda for the Class C shares. For example, the 2001 Class C Offering Mem. stated that "[w]ith respect to the amount of Cantor's net trading profits, if any, from which these ROI's are intended to be derived, and the effect of these amounts, if any, on the amounts distributed to Investors, no guarantees or assurances of any kind can be made."*fn79 However, "simply stating that there is no assurance Tecumseh will pay dividends is insufficient to advise investors of the risk that Tecumseh's so called 'dividend' payments were not truly dividends but instead returns of investor capital."*fn80 Thus, Milling's failure to disclose the source of the distribution made for the last calendar quarter of 2001 -- which the March 2002 Amended Class C Offering Mem. confirms was made*fn81 -- constituted an actionable omission.

The March 2002 Class C Offering Mem., however, cautioned that [w]hile a significant gauge of the amounts of distributions to Investors by Tradevest is intended to be the amount of the trading profits of Cantor, this amount will not govern the amounts of such distributions, particularly in light of the circumstance that the expanded Cantor trading departing is et [sic] in its formative stages. Accordingly, the distributions to Investors will not necessarily be indicative of trading profits of Cantor.*fn82

The memorandum further explained that "[t]o the extent that distributions are not made out of Cantor trading profits, Tecumseh will pay over to Tradevest, from its general funds, the amount of such distribution for the account of Tradevest."*fn83 It also repeated the cautionary language contained in the September 2001 Class C Offering Mem., namely that to the extent the ROIs would "eventually" be derived from Cantor's net trading profits, "no guarantees or assurances of any kind can be made."*fn84 The November 2002 Class C Offering Mem. contained largely identical warnings, with additional caveats that "[t]here can be no assurance that the Company will continue to pay dividends at [the rate it had been paying them]."*fn85

Although I find the cautionary language in the March 2002 and November 2002 offering memoranda to bespeak somewhat more caution than that contained in the September 2001 memorandum, Tecumseh's continual use of the word "dividend" and "return on investment" or "ROI" to describe its quarterly distributions -- not to mention its description of such distributions as "dividend payouts" on the very checks on which they were issued -- was unquestionably misleading. Black's Law Dictionary defines a "dividend" as "[a] portion of a company's earnings or profits distributed pro rata to its shareholders, usu[ally] in the form of cash or additional shares."*fn86 It defines a "fair return on investment" as "[t]he usual or reasonable profit in a business . . . ."*fn87 Although Milling occasionally used the word "distribution" in lieu of "dividend" in the offering memoranda, he never completely eliminated use of the word "dividend."*fn88

More importantly, even the cautionary language strongly suggests that at least part of the "distributions" were and would be profit-derived -- i.e., "a significant gauge of the amounts of distributions . . . is intended to be the amount of trading profits of Cantor" and "the distributions . . . will not necessarily be indicative of trading profits of Cantor." Buried in a paragraph on "Payment of the Investors' Return on Investment" in the March 2002 memorandum is a statement that "[t]he ROI on all investments . . . with respect to the period subsequent to October 1, 2001, is intended to be derived from the general funds of Tecumseh."*fn89

However, the sentence immediately following describes how distributions are to be made "[t]o the extent [they] are not made out of Cantor trading profits."*fn90

Informing investors that their quarterly "distributions" -- intermittently referred to as "dividends" or "ROIs" -- might be paid out of a "general fund" falls far short of disclosing a piece of information that would be "obviously important"*fn91 to investors: "that the distributions could not have been paid from earnings (which were non-existent)."*fn92 Milling omitted such disclosures from these memoranda, from his July 2003 letter to investors, and from the checks he signed to investors making such quarterly distributions. "Anayz[ing] the [memoranda] in their entirety" -- especially taking into account the misleading profit projections incorporated by reference into each of them -- I conclude as a matter of law that "a reasonable investor would have been misled"*fn93 by these documents' description of the Class C quarterly distributions.

c. The Cantor Acquisition

Finally, Tecumseh's offering memoranda and other communications with investors repeatedly stated that NASD approval of Tecumseh's acquisition of Cantor was "forthcoming," failing to disclose that no such application for approval had been submitted to or was pending before the NASD before May 2003. Milling offers no "commentary" or "extracts" (or evidence) in response to the SEC's argument that such omissions were materially misleading. It is undisputed that Milling knew there was no NASD application on file -- an application he was responsible for submitting as counsel for Cantor. And there is no question that "NASD approval was a condition of Tecumseh's ability to legally operate Cantor as a wholly-owned subsidiary, and Tecumseh's future was promoted as dependent on a combination with Cantor."*fn94 Therefore, I conclude that "'disclosure of the [fact that NASD approval of Tecumseh's acquisition with Cantor was not "forthcoming"] would have been viewed by the reasonable shareholder as having significantly altered the 'total mix' of information available.'"*fn95 Accordingly, I find Milling's failure to disclose this fact a material omission.

2. "In the Offer and Sale" and "in Connection with the Purchase and Sale" of Securities

The materially false and misleading misrepresentations and omissions concerning the profit projections, Tecumseh's dividends, and the NASD's approval of the acquisition of Cantor were all made "in" and "in connection with" the offer, purchase, or sale of securities because they were all included in the offering memoranda (drafted by Milling) for the Tecumseh securities, which were distributed to investors in order to persuade them to purchase the securities of Tecumseh.

3. Scienter

The SEC argues that Milling knowingly or recklessly made the false and misleading statements described above, or knowingly or recklessly omitted to state material facts pertaining thereto. To the extent Milling's submission in opposition can be considered a "good faith defense," it fails. Milling was a senior officer at Tecumseh.*fn96 He wrote the offering documents and authorized their distribution to investors to solicit interest in the private placements.*fn97 Milling admits that he knew that Tecumseh recorded only operating losses*fn98 and that Cantor recorded only operating losses after its fiscal year 2000.*fn99 He was responsible for submitting an application for approval of the Cantor acquisition to the NASD.*fn100 This undisputed evidence therefore proves that Milling knew or was reckless in not knowing that the Tecumseh income projections given to investors were baseless; that neither Cantor nor Tecumseh had any earnings, and both recorded only net operating losses; that Class C investors were being paid quarterly distributions from investor capital, not earnings; and that no NASD application for approval of the Cantor acquisition was pending with the NASD before May 2003. As the principal officer of Tecumseh orchestrating the sale of its securities, Milling either knew or was reckless in not knowing that the information provided to investors was materially false and misleading. Therefore, the SEC is entitled to summary judgment on its claim that Milling violated the Antifraud Provisions of the federal securities laws.

B. Aiding and Abetting Claim

In Tecumseh I, I found the evidence before the Court "insufficient to establish that Milling substantially aided Cantor's alleged violation of Section 17(a)," and directed the SEC to "inform the Court if it has any additional evidence to submit that would create a genuine issue of material fact as to whether Milling aided and abetted a violation of Section 17(a)."*fn101 I denied summary judgment to the SEC and indicated my intention to grant summary judgment in favor of Milling if the SEC was "unable to produce any such evidence."*fn102 Because the SEC has produced no new evidence in support of its renewed motion for summary judgment on this claim,*fn103 I grant summary judgment on this claim in favor of Milling.

C. Damages

1. Injunctive Relief

The SEC asks that I enjoin Milling from engaging in future violations of the securities laws.*fn104 For the same reasons I granted that request in Tecumseh I,*fn105 and because the degree of scienter involved in Milling's violation of the Antifraud Provisions of the federal securities laws is significant,*fn106 I grant it once again.

2. Civil Penalties

The SEC also requests that I impose "third-tier" civil penalties.*fn107

Third-tier penalties may be imposed to punish a violation involving "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement" if the violation "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons."*fn108 Such penalties cannot exceed the greater of $110,000 per violation for a natural person*fn109 or "the gross amount of pecuniary gain to such defendant as a result of the violation."*fn110

Weighing the same factors I considered when determining whether to impose first-tier civil penalties in Tecumseh I*fn111 -- the same factors a court weighs when determining whether to award injunctive relief*fn112 -- I conclude that the imposition of a civil penalty is appropriate in this case: Milling has now been found in violation of the federal securities laws' Antifraud Provisions, violations that were "particularly egregious because, having been a securities lawyer for more than 40 years, he gained the trust of investors and then abused that trust by repeatedly making materially false and misleading statements and omissions to them."*fn113

Moreover, investors suffered substantial losses through the fraudulent offerings -- more than ten million dollars. However, because the SEC has not provided any evidence of the total amount of pecuniary gain Milling personally received from the sale of unregistered securities; because Milling has already been held jointly and severally liable for the entire amount of Tecumseh's ill-gotten gains; and because of his advanced age and deteriorating health, I find a civil fine of $110,000 adequate to punish Milling and deter future violations.

IV. CONCLUSION

For the aforementioned reasons, the SEC's motion for summary judgment is granted with respect to its claim that Milling violated Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act, and Milling is enjoined from future violations and ordered to pay third-tier civil penalties of $110,000. Summary judgment is granted in favor of Milling with respect to the SEC's claim that he violated Section 17(a) of the Exchange Act and Rules 17a-3 and 17a-4. The Clerk of Court is directed to close this motion (Docket


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