The opinion of the court was delivered by: William M. Skretny Chief Judge United States District Court
Presently before this Court is the Securities and Exchange Commission's ("the Commission") Motion for Summary Judgment and for Determination of Civil Penalties and Disgorgement. (Docket No. 110.) For the following reasons, the Commission's motion is granted in part and denied in part.
Guy W. Gane, Jr. ("Gane") was the president and principal of the Watermark Defendants*fn1 . (Plaintiff's Statement of Undisputed Material Facts ("Plaintiff's Statement"), Docket No. 123, ¶ 1.*fn2 ) Gane held Series 7 and 24 securities licenses and operated a broker-dealer office from July 2007 through 2008, at the M-One Financial Services, Inc. ("M-One") offices in Amherst, N.Y., but was not a registered representative at that broker-dealer. (Id.) Previously, Gane was a registered representative associated with a series of registered-broker dealers and operated branch offices of those dealers in the M-One offices from October 2002 to April 2007. (Id.) Since April 2007, Gane has not been a registered representative associated with any broker-dealer. (Id.)
Defendant Lorenzo Altadonna worked for Gane at the M-One offices. He held Series 6 and 63 securities licenses. (Plaintiff's Statement, ¶ 2.) The Commission's case against Altadonna has concluded. Altadonna has consented to a judgment permanently enjoining him from violating the securities laws specified therein and requiring him to pay disgorgement of $1,866,867.90 and prejudgment interest of $205,486.37. (Docket Nos. 185, 196.)
Thomas Brick and Deborah Galas worked for Gane at the M-One offices. They have both consented to judgments permanently enjoining them from violating the securities laws specified therein and have agreed that the allegations against them contained in the amended complaint may be deemed true for purposes of this motion. (Plaintiff's Statement, ¶¶ 3, 4; Docket Nos. 96, 97.) Their liability has therefore been established and all that remains is to determine the amount of disgorgement and what, if any, civil penalties they must pay. (Docket Nos. 96, 97.)
The relief defendants are Denkon, Inc., a Florida corporation owned by Konstantinos Samouilidis; Guy W. Gane, III, who is Gane's son; and Jenna Gane, who is Gane's daughter.*fn3 (Plaintiff's Statement, ¶¶ 9-11, 15.) They are each alleged to have received money derived from the scheme detailed below.
In January 2006, Gane met with Altadonna, Brick, and Galas in the M-One offices and advised them of his plan to purchase and develop waterfront property by selling debentures and promissory notes that would pay a 10% sales commission and would earn investors a 10% return. (Plaintiff's Statement, ¶¶ 16, 19, 21, 22, 28.) Gane signed the debentures and notes and set the 10% interest rate. (Plaintiff's Statement, ¶¶ 17, 18, 24.) The debentures were not registered with the Commission. (Plaintiff's Statement, ¶ 56.)
Gane, Altadonna, Brick, and Galas induced investors to purchase debentures by guaranteeing them that they would earn 10% interest per year. (Plaintiff's Statement, ¶¶ 20, 21, 28; Affidavit of Deborah Galas ("Galas Aff."), Docket No. 200, ¶¶ 13-15, 17.) Altadonna sold more than $1 million in debentures or promissory notes from 2007 to May 2008 and personally guaranteed the investments to his clients, telling them that it was impossible for them to lose money and by promising them a one-week time-share in the real estate project that the debentures were supposed to fund. (Plaintiff's Statement, ¶¶ 23, 28, 34.) Galas sold $1.3 million dollars in debentures. (Galas Aff., ¶ 21.)
In addition, Altadonna made exaggerated claims in written communications to his debenture and promissory note clients, such as "[t]he words risk and loss are not in my vocabulary" and "you have done an 11% return in 8 months guaranteed through my company." (Plaintiff's Statement, ¶ 35 (emphasis in original exhibit).) And both Altadonna and Gane told investors that their money was in Greece, that lawyers were converting the Euros into dollars, that their money had been deposited in a Florida bank, and that the money was being held up by U.S. Customs. (Plaintiff's Statement, ¶ 54.)
Gane and Altadonna targeted long-time clients, friends, neighbors, and family members. (Plaintiff's Statement, ¶ 25.) They also urged investors to transfer their investments from secure IRA accounts and certificates of deposit into debentures, without disclosing the risks of doing so. (Plaintiff's Statement, ¶ 26.)
Despite the promises and guarantees, no investor funds were ever used to purchase waterfront property, and Gane and Altadonna knew that no such purchases were being made. (Plaintiff's Statement, ¶¶ 32, 33.) Instead, Gane used investor funds for personal and general operating expenses, including paying commissions to Altadonna, Brick, and Galas. (Plaintiff's Statement, ¶¶ 33, 52.) Gane, Altadonna, Brick, and Galas knew or should have known that the investment return on the debentures was not guaranteed, because proceeds from the sales of the debentures and promissory notes were the only source of funds, and the obligations to investors were significantly larger than the available funds. (Plaintiff's Statement, ¶ 29.)
By way of example, a local church invested $200,000 in debentures that matured in December 2007. (Plaintiff's Statement, ¶ 36.) With interest, Gane owed the church $220,000. (Plaintiff's Statement, ¶ 37.) Knowing that they could not pay the church, Gane and Brick met with church officials to persuade them to roll over the debentures so that no payment would be required. (Plaintiff's Statement, ¶ 38.) When the officials insisted on cashing out, Gane convinced them to remain invested by promising them a monthly interest payment and assuring them that they could liquidate their investment at any time. (Plaintiff's Statement, ¶ 39.) Later, in January 2008, when the church sought to liquidate its investment, Altadonna sold a $200,000 debenture to a different investor, the proceeds from which were used to pay the church. (Plaintiff's Statement, ¶¶ 40-43.)
M-One never had sufficient cash available to pay the amounts due under the debentures. (Plaintiff's Statement, ¶ 30.) The gap between the cash on hand to pay the debenture obligations and the obligations themselves grew exponentially from the time the first debenture was sold. (Id.) By August 2006, the gap was more than $1 million, and it grew to more than $6 million by April 2008. (Id.) The only way to raise money to pay the existing debenture obligations was to sell more debentures, which is what Gane and Altadonna did. (Plaintiff's Statement, ¶¶ 31, 45. 52.) The total amount raised and deposited from the sale of debentures was $5,378,399.99. (Plaintiff's Statement, ¶ 66.) The total amount raised from the sale of promissory notes was $1,254,937. (Plaintiff's Statement, ¶ 66.)
Some of the money raised by the sale of the promissory notes and debentures went to the Relief Defendants - Denkon, Inc., Guy W. Gane, III, and Jenna Gane.
In 2007, Gane and Altadonna met with Samouilidis, the owner of Denkon, Inc., to discuss Samouilidis investing in M-One. (Plaintiff's Statement, ¶ 69.) Samouilidis was reportedly expecting to receive $5 million from Greece that he wanted to invest in the United States. (Plaintiff's Statement, ¶ 68.) Gane and Altadonna wanted the Samouilidis investment to repay the debenture and noteholders, although they did not tell Samouilidis that. (Plaintiff's Statement, ¶ 70, 71.) Samouilidis, in turn, told Gane and Altadonna that he needed financial assistance from them until he received the $5 million from Greece. (Plaintiff's Statement, ¶¶ 72, 74.) Gane and Altadonna thereafter transferred $200,000 to Samouilidis, which Altadonna secured by convincing his father to invest $200,000, and promising him that it would pay 10% interest guaranteed by M-One and Gane. (Plaintiff's Statement, ¶¶ 73, 75.) Gane and Altadonna subsequently transferred an additional $155,000 to Denkon. (Plaintiff's Statement, ¶ 81; Maya Decl., Docket No. 166-2, ¶ 4.)
Guy W. Gane, III, received $18,720.60 from Watermark entities, which he maintains he earned as an employee. (Plaintiff's Statement, ¶¶ 83, 86; Affidavit of Guy W. Gane, III, Docket No. 163-2, ¶¶ 4-6, 8.) Jenna Gane received $15,711.78 from Watermark entities, which she also maintains she earned as an employee. (Plaintiff's Statement, ¶¶ 84, 86; Affidavit of Jenna Gane, Docket No. 164, ¶¶ 3-7, 9.)
B. The Criminal Proceedings
On March 25, 2010, a federal grand jury indicted Gane and two other corporate officers (Ian Gent and James Lagona*fn4 ) for the conduct discussed above. (See United States v. Guy W. Gane, Jr., et al., 10-CR-90S.) After initial discovery and pretrial motions, Gane pled guilty on December 9, 2010, to one count of mail fraud and one count of money laundering. On September 14, 2011, this Court sentenced Gane to 13 years of incarceration and to pay $6,394,359.37 in restitution jointly and severally with Altadonna and any others convicted in this scheme.
On April 16, 2010, Altadonna appeared before this Court, waived indictment, and pled guilty to a one count felony information charging him with violating securities laws and regulations contained in 15 U.S.C. §§ 78j(b) and 78ff, 17 C.F.R. § 240.10b-5, and 18 U.S.C. § 2. (See United States v. Lorenzo Altadonna, 10-CR-75S.)This Court sentenced Altadonna on August 5, 2010, to time served due to Altadonna's documented, life-threatening medical condition - a malignant brain tumor - and to pay $1,866,867.90 in restitution jointly and severally with any individuals convicted in the scheme.
III. DISCUSSION AND ANALYSIS
The Commission seeks summary judgment on each of the five causes of action in its amended complaint. (Docket No. 98.) In its first and second causes of action, the Commission alleges that Defendants violated the antifraud provisions of Section 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77q(a), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. In its third cause of action, the Commission alleges that Defendants violated the registration requirements of Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a) and 77e(c). In its fourth cause of action, the Commission alleges that Gane and Altadonna violated Section 15(a) of the Exchange Act, 15 U.S.C. § 78o(a), by selling ...