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Securities and Exchange Commission v. Tecumseh Holdings Corp.

January 18, 2011


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



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.


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 ...

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