United States District Court, S.D. New York
For Securities and Exchange Commission, Plaintiff: Patrick Maxwell Bryan, LEAD ATTORNEY, Richard Edward Simpson, Securities and Exchange Commission (DC), Washington, DC; David J. Gottesman, U.S. Securities and Exchange Commission (DC), Washington, DC.
For Magdalena Tavella, Defendant: Alexander Benjamin Spiro, Manhattan District Attorney's Office, New York, NY.
MEMORANDUM AND ORDER
NAOMI REICE BUCHWALD, UNITED STATES DISTRICT JUDGE.
Plaintiff Securities and Exchange Commission (the " SEC" or the " Commission" ) moves for entry of default judgment against Magdalena Tavella, Andres Horacio Ficicchia, Gonazalo Garcia Blaya, Lucia Mariana Hernando, Cecilia De Lorenzo, Adriana Rosa Bagattin, Daniela Patricia Goldman, and Mariano Pablo Ferrari (collectively " defendants" ). While we are persuaded that the Commission has established its entitlement to a default judgment, we disagree in part with the Commission's proposed remedies. We write principally to explain this disagreement.
A. The Biozoom Scheme
The factual allegations of the complaint, which we describe here insofar as they are relevant, revolve around a penny-stock company called Biozoom, whose shares were traded on the Over-the-Counter Bulletin Board. Compl. ¶ ¶ 1, 113.
Biozoom was incorporated in Nevada in 2007 as Entertainment Arts, Inc. (" Entertainment Art" ). Id. ¶ 27. Entertainment Art originally represented that it was in the business of designing and marketing leather bags. Id. Its stock was divided among three corporate officers and thirty-four outside investors. Id. ¶ ¶ 28-30. In May 2009, Entertainment Art disclosed that the three officers had sold their holdings to a Belize entity called Medford Financial Ltd. Id. ¶ 31. Although it was not disclosed, Medford Financial actually purchased all of the stock in Entertainment
Art, including the shares held by outside investors. Id. ¶ ¶ 32-33.
In October 2012, Medford Financial announced that it had sold 39,600,000 shares of Entertainment Art stock to Le Mond Capital, a British Virgin Islands entity. Id. ¶ ¶ 35-36. In fact, Le Mond Capital purchased all 59,730,000 shares. Id. ¶ 37. Le Mond Capital is owned by Sara Deutsch, who is not a party to this action. Id. ¶ 38. Deutsch was appointed as " Entertainment Art's new President, Chief Executive Officer, Principal Executive Officer, Treasurer, Chief Financial Officer, Secretary, . . . and Director." Id. Deutsch also is or was a co-owner, with defendant Tavella, and the manager of a restaurant in Buenos Aires, Argentina. Id. ¶ 39.
Defendants are eight residents of Buenos Aires. Id. ¶ ¶ 14-21. In January to May 2013, each defendant separately opened an account at one of two United States broker-dealers, and they deposited a combined total of 15,685,000 shares of Entertainment Art stock in those accounts. Id. ¶ ¶ 46-47, 57, 64, 70, 77, 83, 89, 95, 101. Each defendant represented to the broker-dealers that he or she had acquired the shares in November 2012 through March 2013 in private transactions with individuals who either were among the thirty-four original outside investors or had purchased from those investors. These representations were false, because Medford Financial had acquired all of those shares years earlier. Id. ¶ ¶ 32, 54-56, 61-63, 67-69, 74-76, 80-82, 86-88, 92-94, 98-100. Defendants also represented that they had paid amounts ranging from $5,445 to $31,050 each, and totaling $84,260, for these shares. Id. ¶ ¶ 54, 56, 62, 68, 75, 81, 87, 93, 99.
In March and April 2013, Entertainment Art changed its name to Biozoom and announced that, following a transaction involving the acquisition of patents and other intellectual property, it was now in the biomedical industry. Id. ¶ ¶ 40-41, 45. Sara Deutsch remained a director, but not an officer, of Biozoom. Id. ¶ 42. On May 22, 2013, Biozoom and other entities began to tout that Biozoom had " 'created the world's first portable, handheld consumer device' to instantly and non-invasively measure certain biomarkers." Id. ¶ 106. This promotional campaign caused a dramatic increase in Biozoom's stock price, which peaked at over $4 per share. Id. ¶ 6.
Also beginning in May 2013, defendants began to sell their shares in transactions that were neither registered with the SEC nor exempt from the registration requirement of the Securities Act of 1933 (the " 1933 Act" ). Id. ¶ ¶ 107, 111. Between May 16 and June 19, defendants used emails and instant messages to instruct their U.S. broker-dealers to sell 14,078,406 shares for a total of $33,421,062. Id. ¶ ¶ 107-108. In June, seven defendants sought to wire some or all of these proceeds to foreign bank accounts, successfully moving a total of approximately $15,990,000 abroad. Id. ¶ 109; but see id. ¶ 1 (" almost $17 million" ). On June 25, the Commission issued an order suspending trading in Biozoom stock. Id. ¶ 109; see SEC Release No. 34-69841 (June 25, 2013).
B. Procedural History
On July 3, 2013, the Commission commenced this action, and we granted the Commission's ex parte application for a temporary restraining order that included a freeze of defendants' Biozoom shares and proceeds from the sales of Biozoom shares. On July 16, defendants having retained McLaughlin & Stern, LLP, a New York law firm, the parties stipulated to the entry of a preliminary injunction including a revised version of the asset freeze. We so-ordered the preliminary injunction on July 17, and we ordered defendants to answer or otherwise respond to the complaint by August 26.
On September 11, 2013, McLaughlin & Stern moved to withdraw as counsel for reasons described in an ex parte submission. The Court granted the motion, which the Commission did not oppose. On December 17, 2013, we signed a scheduling order directing defendants to answer or otherwise respond to the complaint by February 3, 2014. This order provided that " [f]ailure to answer or otherwise respond to the complaint by that date may result in entry of a default judgment against the Defendants." On February 3, 2014, Brafman & Associates, another New York law firm, appeared on behalf of defendants and applied for a further thirty-day extension, which we granted. However, on March 14, 2014, Brafman & Associates applied to withdraw as counsel. We granted this application, which the Commission did not oppose.
On May 15, 2014, the Clerk of Court certified defendants' default pursuant to Fed.R.Civ.P. 55(a), and on June 4, 2014, the SEC filed the instant motion. The Commission served the motion papers on defendants in ...