Plaintiff Securities and Exchange Commission ("SEC" or "Commission") brought this action against Defendants alleging violations of the securities laws through the operation of a Ponzi scheme. Dkt. No. 1 ("Complaint") ¶ 6. After the extended failure of any Defendant to appear in this action or to respond to the allegations in the Complaint, on September 14, 2011, the Court granted the SEC's Motion for default judgment (Dkt. No. 10) as to liability and injunctive relief. Dkt. No. 12 ("September Order") at 4-8. The Court also granted the SEC leave to seek disgorgement, prejudgment interest, and civil penalties after the criminal case then pending against Defendant Christopher W. Bass ("Defendant Bass") before the Court was resolved. Id. at 8. On December 12, 2011, the Court entered judgment against Defendant Bass in United States v. Bass, 10-CR-166, Dkt. No. 42, Judgment (N.D.N.Y. filed Dec. 12, 2010) (Kahn, J.). The SEC subsequently filed this Motion seeking an entry of final judgment against Defendants incorporating the injunctive relief previously granted by the Court, granting the monetary relief of disgorgement and prejudgment interest, and deeming such monetary relief satisfied by the criminal restitution order entered against Defendant Bass in his parallel criminal case. Dkt. No. 14 ("Motion") at 1-2.*fn1
For the reasons set forth below, the SEC's Motion is granted in full.
The Court renews its previous Order permanently enjoining Defendants
from violating §§ 5 and 17(a) of the Securities Act of 1933, § 10(b)
of the Securities Exchange Act of 1934, and Rule 10b-5.*fn2
In addition, the Court orders Defendants, who the Court finds
are jointly and severally liable, to disgorge the $4,557,632 they
received from their scheme, as well as pay $645,422 in prejudgment
interest on this sum. Finally, as requested by the SEC, this total sum
of $5,203,054 is deemed satisfied by the criminal restitution order
entered against Defendant Bass in his parallel criminal case.
The Court assumes the parties' familiarity with the factual and procedural background recounted in its prior ruling on this case. This ruling, therefore, sets forth only those facts deemed necessary to an understanding of the issues raised in, and the decision rendered on, the SEC's Motion for final judgment. Because an entry of default has been made in this case, the Court deems true the relevant and well-pleaded factual allegations in the SEC's Complaint. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 108 (2d Cir. 1997) (recognizing that the factual allegations in the complaint, except those relating to damages, are deemed true after default).
From January 2007 to June 2009, Defendants operated a Ponzi scheme through which they defrauded over 400 investors of approximately $5.9 million. Compl. ¶ 1. Between January and December 2007, Defendant Bass solicited investments in Revisco Finanz AG ("Revisco"), a Swiss company, by misrepresenting both the rate of return on investments in that company and how Defendant Bass would use investor funds. Id. at ¶¶ 15-18. At least 70 investors gave Defendant Bass funds to invest in Revisco. Id. ¶ 19. Only a small portion of those funds were actually invested, however, with much of the remaining investor principal improperly used to pay Defendant Bass's personal expenses. Id. When Revisco was later declared bankrupt and ordered dissolved and liquidated by the Swiss Federal Banking Commission, Defendant Bass assured investors that their investments were secure and being transferred to Defendant Swiss Capital Harbor-USA, LLC ("SCH"), of which Defendant Bass was the sole shareholder, president, and chief executive officer. Id. ¶¶ 1, 20. In fact, investor funds actually invested by Defendant Bass in Revisco were frozen by Swiss authorities and therefore incapable of being transferred. Id. ¶ 21.
In December 2007, Defendant SCH formed Defendants Swiss Capital Harbor Fund A Partners, L.P., Swiss Capital Harbor Fund B Partners, L.P., and Swiss Capital Harbor Fund C Partners, L.P. (collectively "the SCH-LPs"). Id. ¶ 23. Defendant SCH was installed as the general partner of all three SCH-LPs. See id. ¶ 31. Defendants Bass and SCH used the SCH-LPs to solicit investments. Id. Investors were told by Defendants Bass and SCH that these investments would be made through a European trust and would earn a rate of return ranging from 2% to 5%. Id. ¶¶ 24, 28-29. Defendants never filed a registration statement with the SEC for these securities. Id. ¶ 33.
The offering memoranda for all three SCH-LPs stated that SCH could only use monthly investment returns on the funds invested by the SCH-LPs to pay SCH's operating expenses. Id. ¶ 31. Of the funds collected by Defendants Bass and SCH for investment in the SCH-LPs, only a small portion of them were actually invested through the European trust. Id. ¶ 32. The remaining amount of investor principal was improperly used to pay Defendant Bass's personal expenses, to pay Defendants SCH's and the SCH-LPs' operating costs, and to satisfy investor's redemption requests. Id. In July 2009, when Defendants could no longer pay redemption requests, their Ponzi scheme collapsed. Id. ¶ 37.
On August 19, 2010, Defendant Bass pleaded guilty to parallel criminal charges arising out of this conduct. Bass, No. 10-CR-166, Dkt. No. 15, Plea Agreement. Judgment was entered against him on December 2, 2011. Bass, 10-CR-166, Dkt. No. 42, Judgment. The judgment provided that he serve 151 months incarceration and three years supervised release, as well as pay $5,308,340.02 in restitution to the scheme's victims. Id.
Under the leave granted by the Court in its prior ruling in this case, on March 19, 2012, the SEC filed this Motion for final judgment. To date, none of the Defendants have responded to the Motion, and it has been several years since any Defendant has appeared in this action.
A district court has broad discretion to order disgorgement of profits obtained through violation of federal securities laws and, if ordered, in calculating the disgorgement amount. SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1474-75 (2d Cir. 1996); see also SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972). "[T]he primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains." SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997); First Jersey, 101 F.3d at 1474. The disgorgement amount need only be a "reasonable approximation of profits causally connected to the violation," and "'any risk of uncertainty [in calculating disgorgement] should fall on the wrongdoer whose conduct created that uncertainty.'" SEC v. Patel, 61 F.3d 137, 139-40 (2d Cir. 1995) (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1231-32 (D.C. Cir. 1989)). Because disgorgement is remedial and not punitive, "the court's power to order disgorgement extends only to the amount with interest by which the defendant profited from his wrongdoing." SEC v. MacDonald, 699 F.2d 47, 54 (1st Cir. 1983).
The SEC seeks an award of $4,557,632 in disgorgement from Defendants. Mot. at 1; Plaintiff's Memorandum of law in support of final judgment (Dkt. No. 14-1) ("Pl.'s Mem.") at 2. In its September Order, the Court informed the SEC that it would be required to show a basis for any monetary relief it sought through either an evidentiary hearing or production of detailed documentary evidence. Sept. Order at 8 (citing Ace Shipping Corp., 109 F.3d at 111). Here, although no evidentiary hearing was held, the SEC submitted exhibits containing a comprehensive listing of Defendants' bank account activity involving investor funds and the Declaration of Liora Sukhatme, an SEC attorney, in which she explains the origin of this information and how the Commission used it to calculate the disgorgement amount. See generally Dkt. Nos. 12-2 ("Sukhatme Declaration"), 12-3 ("Exhibits A-D"). According to Sukhatme, the award amount was derived by subtracting the $1,397,515 Defendants paid back to investors as redemptions from the total ...