The opinion of the court was delivered by: Richard J. Holwell, District Judge:
MEMORANDUM OPINION AND ORDER
In this action, the Securities and Exchange Commission ("SEC") alleges that defendants Doyle Scott Elliott, Scott Elliott, Inc. ("SEI"), Michael J. Xirinachs, Emerald Asset Advisors LLC ("Emerald"), Robert L. Weidenbaum, and CLX & Associates Inc. ("CLX") (collectively, "Defendants") sold unregistered securities in violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e. The SEC has moved for summary judgment as to liability and several forms of relief: a permanent injunction against violating Section 5, disgorgement in an amount to include prejudgment interest, civil penalties, and a penny stock bar. For the reasons set forth below, the SEC's motion is GRANTED in part and DENIED in part.
The SEC alleges that Defendants sold unregistered securities of Universal Express, Inc. ("Universal Express"). Universal Express was a Nevada corporation with headquarters in Manhattan whose shares traded under the symbol USXP on the automated quotation system maintained by the National Quotation Bureau, Inc., also known as the "Bulletin Board." (Pl.'s Xirinachs 56.1 Stat. ¶¶ 17, 20; Pl.'s Elliott 56.1 Stat. ¶ 14; Pl.'s Weidenbaum 56.1 Stat. ¶¶ 65, 68.)*fn1 Richard Altomare served as President and CEO of the company and Chris Gunderson served as its general counsel. (Pl.'s Xirinachs 56.1 Stat. ¶¶ 18-19; Pl.'s Elliott 56.1 Stat. ¶¶ 15-16; Pl.'s Weidenbaum 56.1 Stat. ¶¶ 66-67.) The company's shares traded for less than a penny. (Pl.'s Xirinachs 56.1 Stat. ¶ 28; Pl.'s Elliott 56.1 Stat. ¶ 81; Pl.'s Elliott 56.1 Stat. ¶ 14; Pl.'s Weidenbaum 56.1 Stat. ¶ 69.)
Universal Express purported to be in the shipping business (see, e.g., Pl.'s Xirinachs 56.1 Stat. Ex. 100 at 48:10-19), but the SEC came to believe that the company was essentially a pump-and-dump scheme. On March 24, 2004, the SEC filed suit against Universal Express, Altomare, Gunderson, and others alleging that they made false statements about the company's business and sold millions of unregistered shares in violation of Section 5 of the Securities Act, see SEC v. Universal Express, Inc., 04 Civ. 2322 (GEL). (Pl.'s Xirinachs 56.1 Stat. ¶ 39; Pl.'s Elliott 56.1 Stat. ¶ 78; Pl.'s Elliott 56.1 Stat. ¶ 14; Pl.'s Weidenbaum 56.1 Stat. ¶ 81.) After temporarily restraining Universal Express, Altomare, and Gunderson from violating Section 5 (among other provisions of the securities laws), Judge Lynch entered summary judgment for the SEC on its claim that the three defendants had violated Section 5 and permanently enjoined them from violating that provision, see SEC v. Universal Express, Inc., 475 F. Supp. 2d 412 (S.D.N.Y. 2007). (Pl.'s Xirinachs 56.1 Stat. ¶ 39; Pl.'s Elliott 56.1 Stat. ¶ 79; Pl.'s Weidenbaum 56.1 Stat. ¶ 81.)
Judge Lynch later appointed a receiver for the company who reported that the company was earning no income other than from sales of its securities and had incurred liabilities substantially in excess of its assets. (Pl.'s Xirinachs 56.1 Stat. ¶ 40; Pl.'s Elliott 56.1 Stat. ¶¶ 79-80; Pl.'s Weidenbaum 56.1 Stat. ¶¶ 82-83.) Universal Express was ultimately liquidated and ceased operations. (Pl.'s Xirinachs 56.1 Stat. ¶ 40.5; Pl.'s Elliott 56.1 Stat. ¶ 80; Pl.'s Weidenbaum 56.1 Stat. ¶ 83.)
The SEC alleges that Xirinachs sold unregistered Universal Express shares in brokerage accounts owned by two investment firms: (a) defendant Emerald and (b) North Atlantic Resources Ltd. ("North Atlantic").
Defendant Emerald, a Delaware limited liability company, is a hedge fund formed by defendant Xirinachs, its founder and sole member and an experienced investment advisor. (Pl.'s Xirinachs 56.1 Stat. ¶¶ 7-16.) On May 24, 2005, Xirinachs opened in the name of Emerald an account with the brokerage firm Basic Investors, Inc. ("Basic"). (Id. ¶ 41.) Xirinachs completed the required forms, listed himself as "account executive" and "registered representative" with exclusive trading authority over the account, and represented that he was the sole proprietor of Emerald. (Dec. of G. Purcell, Jan. 27, 2011 ("Purcell Dec.") ¶ 2; Pl.'s Xirinachs 56.1 Stat. ¶ 43.)
Gary Purcell served as the broker for the Emerald account with Basic. (Id. ¶ 45.) According to Purcell's sworn and undisputed testimony, either he or Basic broker Charles Barba spoke with Xirinachs almost every day regarding selling Universal Express shares. (Purcell Dec. ¶ 5.)
Xirinachs testified at his deposition that in 2006 Curt Kramer, a former colleague of Xirinachs's at another investment firm, told Xirinachs that Universal Express needed funding and that its stock was highly liquid. (Pl.'s Xirinachs 56.1 Stat. ¶ 48.) Kramer arranged for Altomare to call Xirinachs in February 2006. (Id. Ex. 100 at 47:7-11.) Altomare told Xirinachs that Universal Express needed funding to grow some of its divisions. (Id. Ex. 100 at 47:13-47:15, 48:10-22.) Xirinachs indicated that Emerald would invest $50,000 in Universal Express in exchange for the ability to purchase Universal Express shares at a discount. (Id. ¶ 49, Ex. 100 at 48:23-49:4.) In the ensuing weeks, Xirinachs confirmed these terms, Altomare sent Xirinachs wiring instructions, and Xirinachs wired $40,000 from an Emerald account to a Universal Express account. (Id. ¶¶ 50-51, 54-55.) Shortly thereafter, Emerald received 15 million shares of Universal Express stock from the company's transfer agent. (Id. ¶¶ 55, 58, 62.) One day later, Emerald sold these shares for a profit of $116,982.89. (Id. ¶ 64.)
Xirinachs does not dispute that he repeated this process again and again over the course of the next year. Specifically, the record shows that Xirinachs made 32 wire transfers for a total of $7,940,000 from the Emerald account to the Universal Express account; that Emerald received from the company's transfer agent certificates for a total of more than 6 billionshares of Universal Express stock; and that these shares were deposited in the Emerald brokerage account with Basic. (Id. ¶¶ 54, 56, 58-59.) Further, the record shows that Emerald sold these shares-generally within a month-for total profits of nearly $10 million. (Id. ¶¶ 64-85, 89.)
According to Purcell, Xirinachs placed the orders to sell the shares.(Purcell Dec. ¶ 4.) Prior to instructing Basic to make each sale of Universal Express shares, Xirinachs completed an IB Equity Authentication Form. (Pl.'s Xirinachs 56.1 Stat. ¶ 99.) That form indicated that "TO AVOID A SECTION 5 VIOLATION THE EQUITY MU[ST] BE EITHER: 1. Registered in an offering" or "2. Clearing under an exemption from registration." (Id. Ex. 13.) The form provided space to describe how and when the securities were registered and how the securities were exempt from registration. (Id.) Xirinachs did not complete this part of the form. (Id.)
Xirinachs does not dispute that no registration statement was, in fact, in effect for Universal Express shares and that neither he nor Emerald filed one for the shares Emerald sold. (Pl.'s Xirinachs 56.1 Stat. ¶¶ 91-93.) Xirinachs, however, contends that "the record is replete with actions taken by [him] and Emerald to confirm that the shares were registered or covered by an exemption to the registration requirement." (Xirinachs 56.1 Stat. ¶¶ 98-100.) These actions include obtaining corporate resolutions from Universal Express stating that "the shares are free trading and will not be retracted at a later date"; receiving certificates that contained no restricted legends; receiving letters from the transfer agent that Xirinachs read to mean that the shares were free for trading; and speaking with Altomare and Gunderson who assured him that the company could issue registered shares pursuant to a bankruptcy order. (See Dec. of D. Roque, Mar. 14, 2011 ("Roque Dec.") Exs. 3, 5, 7; Xirinachs 56.1 Stat. ¶¶ 98-99.)
North Atlantic is an investment company incorporated under the laws of St. Vincent and the Grenadines. (Pl.'s Xirinachs 56.1 Stat. ¶ 101.) The company's principal is Thomas G. Phillips. (Id.) On September 26, 2006, Phillips opened in North Atlantic's name a brokerage account with Basic. (Id. ¶ 102.) Purcell also served as the broker for the North Atlantic account. (Id. ¶ 106.) On the account forms, Phillips listed Xirinachs as an investment advisor for North Atlantic with authority to direct Basic to make trades in the brokerage account. (Id. ¶¶ 103-104.) Xirinachs, however, testified that, vis-a-vis North Atlantic, he did not have the authority without consulting with Phillips to direct Basic to make trades in North Atlantic's account. (Xirinachs 56.1 Stat. ¶¶ 103-104.)
Xirinachs testified that he recommended Universal Express to North Atlantic. (Pl.'s Xirinachs 56.1 Stat. Ex. 100, 70:16-20.) He further testified that, as with Emerald, he arranged for North Atlantic to purchase Universal Express shares at a discount. (Id. ¶ 109.) Between September 2006 and June 2007, North Atlantic wired $3 million from its account to a Universal Express account. (Id. ¶ 130.) At Altomare's direction, Universal Express issued and its transfer agent delivered 9.5 billion shares to North Atlantic. (Id. ¶¶ 110-129, 131.) North Atlantic deposited the shares into its brokerage account at Basic (id. ¶ 132) and North Atlantic sold the shares-usually within a month-for profits of over $3.4 million (id. ¶¶ 133-144, 148-49, 158).
Purcell avers that Xirinachs, his "main contact," instructed Basic to make these sales. (Purcell Dec. ¶ 7.) Purcell acknowledges that Phillips was listed as a contact on the account but only recalls speaking with him on one occasion. (Id.) Purcell did not aver that any other Basic broker serviced the North Atlantic account.
Xirinachs does not dispute that no registration statement was in effect for Universal Express shares and that neither he nor North Atlantic filed one for the shares North Atlantic sold. (Pl.'s Xirinachs 56.1 Stat. ¶¶ 152-54.) Emerald is not alleged to have been liable for these trades.
Defendant CLX is a Florida corporation owned by defendant Weidenbaum, its President, sole officer, and sole proprietor and an experienced securities broker. (Pl.'s Weidenbaum 56.1 Stat. ¶¶ 14-15, 17.)
On September 21, 2004, CLX, by Weidenbaum, entered into an agreement with Universal Express whereby CLX would provide consulting services to Universal Express in exchange for 1 million shares per month. (Id. Ex. 207.) The agreement did not require CLX to pay anything for the shares and did not require Universal Express to file a registration statement before issuing the shares to CLX.
Pursuant to the agreement, between September 2004 and June 2007, Universal Express directed its transfer agents to issue to CLX 35 certificates for a total of 932 million shares. (Id. ¶¶ 24, 29.) These shares were deposited in brokerage accounts in the name of CLX which, according to the documentary record, Weidenbaum opened and with respect to which he had trading authority. (Id. ¶¶ 26, 32, 33, 35, 37, 39.) CLX sold these shares for net profits of $2,411,397.40. (Id. ¶¶ 34, 36, 38, 40-42, 44.) CLX generally sold the shares within weeks after they were issued. (Id. ¶ 43.)
Weidenbaum asserted his Fifth Amendment privilege in response to questions regarding whether he controlled CLX's brokerage accounts and whether he directed the deposits into and sales out of CLX's brokerage accounts. (Id. ¶¶ 52-56.)
Weidenbaum also purchased over 3.3 million shares for his own account for $170,000. (Id. ¶¶ 46-48.) Universal Express issued these shares on January 25, 2005. (Id. ¶ 47.) In March 2006, Weidenbaum sent documents to a brokerage firm proposing to sell these shares pursuant to Securities and Exchange Commission Rule 144, 17 C.F.R. § 230.144, which in some circumstances provides a so-called "safe harbor" for unregistered securities that have been held for more than one year. (Id. Ex. 212.) The SEC does not allege that Weidenbaum violated Section 5 with respect to these shares.
It is undisputed that there was no registration statement in effect for the Universal Express shares that CLX sold. (Id. ¶ 45.) However, Weidenbaum also asserted his Fifth Amendment privilege regarding his knowledge of the registration requirements, including the operation of Rule 104, and of the SEC's proceedings against Universal Express, Altomare, and Gunderson. (Id. ¶¶ 58-59, 61, 63-64.)
Defendant SEI is a Florida corporation owned by defendant Elliott, its President and an experienced securities broker. (Pl.'s Elliott 56.1 Stat. ¶¶ 6-7, 11-12.) Elliott testified that he was introduced to Altomare during a visit to Boca Raton, Florida in late 2003. (Id. Ex. 12, 27:17-25.) Elliott met with Altomare at Altomare's office where the two men discussed Universal Express. (Id. Ex. 12 at 28:19-23.) Shortly thereafter, Universal Express hired Elliott as a consultant. (Id. at 28:24-26.)
In early 2004, the parties committed this arrangement to writing. A draft consulting agreement provided that Elliott would be compensated in the form of options to purchase shares that "will be prior to delivery . . . registered pursuant to valid and effective registration statements." (Id. Ex. 19 at 2). However, on January 29, 2004, Elliott signed a version of the agreement that provided that he would be compensated in the form of 200,000 Universal Express shares per month but did not provide that the shares would be properly registered. (Id. Ex. 20 at 2.) On February 4, 2004, Elliott executed an amendment to the consulting agreement providing that he could accept options to purchase 10 million shares per month at a discount in lieu of receiving 200,000 shares per month. (Id. Ex. 21 at 2.)
The next month, the SEC filed its action against Universal Express, Altomare, and Gunderson. On March 25, Elliott faxed Gunderson a letter indicating that he intended to return two stock certificates and stating that "given the magnitude of the allegations USXP faces, we at Elliott & Associates, respectfully and regrettably wish to suspend our consulting contract with USXP for an indefinite period of time." (Id. ¶ 26; Ex. 22.) However, Elliott testified that he did not know what he was referring to in the letter (id. Ex. 20 at 44:12-24) and he does not appear to have followed through on his declaration.
Not only did Elliott sign two more amendments to the consulting agreement increasing the number of shares he would receive each month from 200,000 to 1.5 million. (Id. ¶¶ 27-28.) Between February 2004 and August 2007, Elliott wired more than $8 million from his account to a Universal Express account in what Elliott testified was an exercise of his option to purchase shares at a discount. (Id. ¶¶ 57-59.) Between February 2004 and March 2007, Universal Express issued to Elliott, SEI, or clearing firms for brokerage firms where Elliott or SEI had accounts some 207 certificates for a total of over 5 billion shares. (Id.¶ 42). (Elliott exercised exclusive control over his and SEI's brokerage accounts. (See id. ¶ 41.)) The process worked as follows: Elliott would inform Altomare that he intended to purchase shares at a discount, would wire funds to Universal Express, and would receive share certificates from Gunderson. (Id. ¶ 43; Ex. 12, 36:16-37:19.) Elliott and SEI later sold over 4 billion of those shares for proceeds of over $14.3 million and profits of over $6.2 million. (Id. ¶ 61.) On average, Elliott and SEI sold the shares less than two weeks after they were issued. (Id. ¶¶ 64-65.)
It is undisputed that no registration statement was filed for the shares that Elliott and SEI sold and that neither Elliott nor SEI filed any such statement. (Id. ¶¶ 72-74.)
The SEC filed its complaint in this action on September 1, 2009. Xirinachs and Emerald answered the complaint on September 24, 2009. After a series of extensions, Weidenbaum and CLX answered the complaint on January 6, 2010. Elliott and SEI have not yet answered the complaint and are not represented by counsel. Following a post-discovery telephone conference on December 16, 2010, the Court directed Elliott and SEI to answer or otherwise respond to the ...