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SEC v. Wheeler

United States District Court, W.D. New York

September 29, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
CHRISTOPHER WHEELER and OTCSTOCKEXCHANGE.COM, Defendants, And NORTH COAST ADVISORS, LLC, Relief Defendant

Decided September 27, 2014

For Plaintiff: Preethi Krishnamurthy, Esq., Christopher M. Castano, Esq., U.S. Securities & Exchange Commission, New York Regional Office, New York, NY.

For Defendants: Steven E. Cole, Esq., Paul L. Leclair, Esq., Leclair Korona Giordano Cole LLP, Rochester, NY.

Page 242

DECISION AND ORDER

CHARLES J. SIRAGUSA, United States District Judge.

INTRODUCTION

Pending before the Court is a motion for monetary relief against defendant Christopher Wheeler (" Wheeler" ) and a motion for default judgment as to North Coast Advisors, LLC (" North Coast" ) and OTCStockExchange.Com (the " Website" ). Pls.' Mot. Monetary Relief, Dec. 3, 2013, ECF No. 58 [hereinafter " Motion I" ]; Pls.' Mot. Default J., Dec. 3, 2013, ECF No. 61 [hereinafter " Motion II" ]. These motions were filed by the Securities and Exchange Commission (" SEC" ) pursuant to a judgment signed by this Court against Wheeler on April 17, 2012. J. as to Christopher Wheeler, Apr. 17, 2012, ECF No. 45 (hereinafter " Judgment I" ). Wheeler consented to entry of the judgment without admitting or denying the allegations of the Complaint[1] (except as to jurisdiction) and waived findings of fact and conclusions of law, as well as any right to appeal the judgment. Id. ¶ 1. In addition to permanent injunctions described in Parts I--IV of Judgment I,[2] Part V granted the Commission an opportunity to bring these motions for disgorgement and/or civil penalties related to the proceeds

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of Defendant's statutory violations. Id. at § § I--V. Plaintiff's applications are hereby granted in part.

BACKGROUND

The Court relies on the facts as they are stated in the complaint and affidavits. As indicated in the previous judgment for this case, " solely for the purposes of such motion [for disgorgement and/or civil penalties], the allegations of the Complaint shall be accepted as and deemed true by the Court." Id. at 4, § V.

The complaint alleges that during the " Relevant Period," at various times between 2007 and 2008, Wheeler orchestrated a fraudulent " pump and dump" scheme through the Website involving four thinly-traded penny stocks: Infinity Medical Group, Inc. (" Infinity" ), Solei Systems, Inc. (" Solei" ), Cannon Exploration Inc. (" Cannon" ), and China Jiangsu Golden Horse Steel Ball Inc. (" China Jiangsu" ) (collectively, the " Issuers" ). Am. Compl. ¶ ¶ 1-4, 8, Feb. 3, 2011, ECF No. 9. Utilizing the Website, of which he was the sole employee and operator, Wheeler recommended that investors purchase the Issuers' stocks by posting lofty price targets and failing to disclose that he had received millions of shares of those stocks while selling them for his personal benefit. Id. at ¶ ¶ 10, 16-23. For instance, Wheeler recommended one stock as a " buy" with a " long term price target" of $18.00 per share, a 1,500% increase over the stock's then-quoted price of approximately $1.20 per share. Id. at ¶ 31. Wheeler's promotion of the Issuers' stocks had the effects of temporarily raising their quoted prices, after which Wheeler sold the stocks at a substantial profit. Id. at ¶ ¶ 19-20.

Wheeler's sales of the Issuers' stocks produced profits totaling $3,012,747.56. Baier Decl. ¶ ¶ 3-11, Exs. 1A, 1B, 2-4, Dec. 3, 2013, ECF No. 60; Castano Decl. Exs. 7-9, Dec. 3, 2013, ECF No. 64. More specifically, Wheeler sold Infinity shares from July 11 to December 17, 2007, for a total of $1,093,002.05, and from May 27 to September 29, 2008 for a total of $203,568.15, collectively totaling $1,296,570.20. Baier Decl. 5-8, Exs. 1A and 1B; Castano Decl. Exs. 7-9. He sold Solei shares from June 2 to July 10, 2008 for a total of $307,609.96. Baier Decl. ¶ 9, Ex. 2; Castano Decl. Exs. 7-8. He sold Cannon shares from May 7 to September 29, 2008 for a total of $1,356,134.46. Baier Decl. 10 and Ex. 3; Castano Decl. Exs. 7-8. Finally, Wheeler sold China Jiangsu shares on June 12 and 13, 2008, for a total of $52,432.94. Baier Decl. 11 and Ex.4; Castano Decl. Exs. 7-8. Additionally, $390,000 in proceeds from the fraudulent scheme were transferred to North Coast, an incorporated entity wholly-owned by Wheeler and otherwise unrelated to the fraudulent activities. Am. Compl. ¶ 3; Pls.' Mem. Mot. Default J. 17, ECF No. 62 [hereinafter " Memo II," to coincide with Motion II].

The SEC filed its Amended Complaint against the defendants on February 4, 2011 in the United States District Court for the Southern District of New York. On March 18, 2011, the Honorable George B. Daniels entered an Order transferring the case to this district. Order Den. Mot. Dismiss, Mar. 18, 2011, ECF No. 19.

On April 1, 2011, Wheeler moved to stay the case pending the conclusion of a criminal investigation by the United States Attorney's Office for the Western District of New York. Def.'s Mot. Stay, Apr. 1, 2011, ECF No. 22. On October 7, 2011, the Court denied that motion. Order Den. Mot. Stay, Oct. 7, 2011, ECF No. 35. On October 28, 2011, Wheeler filed his Answer, asserting his Fifth Amendment privilege against self-incrimination in response to each substantive allegation.

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Answer, Oct. 28, 2011, ECF No. 37. Wheeler continued to assert his Fifth Amendment privilege throughout the course of this case. Meanwhile, the Website and North Coast failed to respond to the allegations stated in the Amended Complaint.

On April 19, 2012, the Court entered a Judgment regarding Wheeler reflecting the parties' partial settlement on injunctive relief and a penny stock bar, but not regarding monetary relief. Judgment 1, § § I--V. In that Judgment, this Court stated:

In connection with the Commission's motion for disgorgement and/or civil penalties . . . (a) Defendant [Wheeler] will be precluded from arguing that he 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 of the Complaint shall be accepted as and deemed true by the Court; and (d) the Court may determine the issues raised in the motion on the basis of affidavits, declarations, excerpts of sworn deposition or investigative testimony, and documentary evidence, without regard to the standards for summary judgment contained in Rule 56(c) of the Federal Rules of Civil Procedure.

Id. at § V.

On November 20, 2013, the Clerk entered a default against Website and North Coast[3] for failure to appear or otherwise defend the allegations in the Amended Complaint. Entry of Default, Nov. 20, 2013, ECF No. 57.

On December 3, 2013, the SEC filed a " Motion for Monetary Relief Against Defendant Christopher Wheeler" and a " Motion for Default Judgment as to North Coast Advisors, LLC and OTCStockExchange.com," along with accompanying memoranda in support. Motion I, ECF No. 58; Motion II, ECF No. 61; Pls.' Mem. Mot. Monetary Relief, ECF No. 59 (hereinafter " Memo I" ); Memo II, ECF No. 62. Those motions sought joint and several liability for Wheeler and Website regarding disgorgement totaling $3,012,747.56 and prejudgment interest totaling $681,808.51, as well as maximum civil penalties for each; injunctive relief against the Website; and disgorgement with pre-judgment interest against North Coast totaling $468,830.18. See id. In seeking monetary relief, the Commission relied on the declarations of ...


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