United States District Court, S.D. New York
THOMAS P. GRIESA, District Judge.
Plaintiff Securities and Exchange Commission brings this civil-enforcement action against defendants Juno Mother Earth Asset Management, LLC ("Juno"), Eugenio Verzili, and Arturo Allan Rodriguez Lopez. The Commission charges defendants with fraudulently misappropriating approximately $1.8 million from a hedge fund that they controlled. In this motion for monetary relief, the Commission requests that defendants (1) disgorge the $1.8 million they misappropriated, (2) pay prejudgment interest on that sum, and (3) pay the highest available civil penalty.
The court grants the Commission's request.
Details of Complaint
Juno was a Delaware limited liability company that was registered as an investment adviser with the Commission. Juno managed the investments of three hedge funds, only one of which - the Juno Mother Earth Resources Fund, Ltd. - is relevant to this case. In 2006, Juno offered investors the opportunity to purchase shares in the Fund, and by 2007, Juno had raised approximately $16 million for the Fund.
Verzili served as Juno's Chief Executive Officer and Rodriguez served as Juno's Chief Investment Officer. Each owned at least a 25% partnership interest in Juno and controlled its day-to-day operations.
In 2007 and 2008, through a series of 41 separate transactions, Verzili and Rodriguez directed Juno to withdraw about $1.8 million from Fund accounts for their and Juno's benefit. Verzili and Rodriguez used the misappropriated funds, among other things, to pay for their apartment, personal travel, meals, entertainment, and purchases from department stores.
Verzili and Rodriguez misappropriated the $1.8 million through two fraudulent schemes. First, in 2007 and 2008, Verzili and Rodriguez misappropriated about $642, 000 by making withdrawals from the Fund that they fraudulently characterized as payments for Fund expenses. In fact, defendants used the funds to pay Juno's business expenses and their own personal expenses. Defendants have not reimbursed the Fund for any of the misappropriated $642, 000.
Second, defendants transferred an additional $1.17 million from the Fund to Juno's bank account. Defendants concealed these transfers from the Fund's independent directors by creating the appearance that the transfers were legitimate Fund investments. On nine separate occasions between January 9 and July 4, 2008, Verzili and Rodriguez transferred a total of $1.17 million from the Fund's accounts to Juno's bank account in exchange for promissory notes issued to the Fund by Juno. However, the promissory notes were not investments for the benefit of the Fund but, instead, were created solely as a cover for defendants to obtain cash to pay Juno's operating expenses and to keep Juno from going out of business. In essence, the Commission alleges that defendants used the promissory notes as vehicles for withdrawing cash from the Fund for their own benefit. Defendants have not repaid any of the $1.17 million.
The Commission brought this action on March 15, 2011, charging defendants with violating the following antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act, 15 U.S.C. §§ 77q(a), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), Sections 203A, 206(1), 206(2), 206(4), and 207 of the Investment Adviser Act, 15 U.S.C. §§ 80b-3A, 80b-6(1-4), and 80b-7; Rule 10b-5 promulgated thereunder, 17.C.F.R § 240.10b-5, and Rules 206(4)-2 and 20(4)-8 promulgated thereunder 17 C.F.R. §§ 275.206(4)-2 and 275.206(4)-8.
In July and August of 2012, this court issued consent judgments against defendants. The consent judgments enjoin defendants from violating the anti-fraud provisions of the federal securities laws. The consent judgments also provide that upon motion of the Commission, the court will determine whether to require defendants to disgorge funds, impose prejudgment interest on the amount to be disgorged, and impose a civil penalty against defendants. Moreover, the consent judgment explains that in connection with the Commission's motion for monetary relief, each defendant will be limited by the following conditions:
(a) Defendant will be precluded from arguing that it did not violate the federal securities laws as alleged in the complaint; (b) defendant may not challenge the validity of the consent or this judgment; (c) solely for the purposes of such motion, the allegations ...