United States District Court, S.D. New York
OPINION AND ORDER ADOPTING REPORT AND RECOMMENDATION IN PART
RONNIE ABRAMS, District Judge.
The Securities and Exchange Commission ("SEC") commenced this action against Defendants GTF Enterprises ("GTF'), Gedrey Thompson, Dean Lewis, and Sezzie Goodluck for injunctive relief, disgorgement and civil penalties for violations of the Securities Act of 1933 (the "Securities Act"), the Securities Exchange Act of 1934 (the "Exchange Act"), the Investment Company Act of 1940 (the "Company Act"), and the Investment Advisers Act of 1940 (the "Advisers Act"). The action arises from a securities offering fraud and Ponzi scheme that targeted unsophisticated investors in Brooklyn, New York from 2004 to 2009.
Final judgments have been entered against all Defendants. Lewis and Goodluck settled with the SEC pursuant to consent judgments entered on May 23, 2011, and June 4, 2013, respectively. (Dkt. 30, 67.) On September 20, 2013, the Court entered a default judgment against the remaining Defendants, GTF and Thompson (together, "Defendants"). (Final Judgment by Default ("Default Judgment").) The Default Judgment (1) enjoined Defendants from violating the securities laws, (2) found them "liable jointly and severally for disgorgement of $584, 457, representing ill-gotten gains" from the conduct alleged, and prejudgment interest of $355, 988.56, and (3) found "that a civil penalty is appropriate." ( Id. ) Pursuant to 28 U.S.C. § 636(b)(1), the Court referred the matter to the Hon. Kevin Fox, United States Magistrate Judge, for an inquest on the appropriate amount of the civil penalty. (Dkt. 84.)
Before the Court is a Report and Recommendation ("Report") from Judge Fox, recommending that no civil penalty be awarded because, although he found that a third tier civil penalty was warranted, the appropriate amount of such penalty could not be ascertained. (Report at 11.) The SEC filed Objections to the Report on May 20, 2014, and revised Objections ("Obj.") on May 25, 2014, arguing that a civil penalty should be imposed. (Dkt. 85, 88.) To date, Defendants have not filed a motion to set aside or vacate the Default Judgment pursuant to Fed.R.Civ.P. 55(c) and 60(b), nor have they objected to the Report. For the reasons discussed below, the Report is adopted only in part.
A district court reviewing a magistrate judge's report and recommendation "may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge." 28 U.S.C. § 636(b)(1)(C). A court may accept portions of a report to which no objections are made as long as those portions are not "clearly erroneous." Greene v. WCI Holdings Corp., 956 F.Supp. 509, 513 (S.D.N.Y. 1997) (citing Fed.R.Civ.P. 72(b)). As to those portions to which specific objections are made, a court must undertake a de nova review. See 28 U.S.C. § 636(b)(1); Greene, 956 F.Supp. at 513 (citing United States v. Raddatz, 447 U.S. 667, 676 (1980)). When the party "makes only conclusory or general objections, or simply reiterates the original arguments, " however, "the Court will review the Report strictly for clear error." See, e.g., Alam v. HSBC Bank USA, N.A., No. 07 Civ. 3540 (LTS), 2009 WL 3096293, at *1 (S.D.N.Y. Sept. 28, 2009).
The Securities Act, the Exchange Act, and the Adviser's Act authorize three tiers of monetary penalties for statutory violations. See 15 U.S.C. §§ 77t(d), 78u(d)(3), 80b-9(e). Under each provision, a first tier penalty may be imposed for any violation of the underlying statute, a second tier penalty may be imposed if the violation "involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement, " and a third tier penalty may be imposed if the requirements for a second-tier penalty are met and "such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." Id .; see also SEC v. Razmilovic, 738 F.3d 14, 38 (2d. Cir. 2013). At all tiers, the penalty for each violation "shall not exceed the greater of (i) [a specified amount for each tier], or (ii) the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d), 78u(d)(3), 80b-9(e). The maximum statutory amounts for a natural person and for any other person, respectively, are: (1) $5, 000 and $50, 000 at the first tier, (2) $50, 000 and $250, 000 at the second tier, and (3) $100, 000 and $500, 000 at the third tier. Id . These amounts are adjusted for inflation. 17 C.F.R. Ch. II, Pt. 201, Subpt. E.
A defendant's disgorgement amount is a "helpful starting point" for calculating that defendant's gross pecuniary gain, but several adjustments must be made. SEC. v. Cole, 12 Civ. 8167 (RJS), 2014 WL 4723306, at *6 (S.D.N.Y. Sept. 22, 2014); see also SEC v. Amerindo Inc. Advisors, Inc., No. 05 Civ. 5231 (RJS), 2014 WL 2112032, at* 11 (S.D.N.Y. May 6, 2014). First, unlike disgorgement, gross pecuniary gain may only include gains from frauds occurring within the five-year statute of limitations for civil penalties. Id. at *5 (citing Gabelli v. SEC, 133 S.Ct. 1216, 1220-21 (2013)). Second, the civil penalty statutes require that such awards be based on the pecuniary gam of each defendant and do not allow the penalties to be imposed jointly and severally. SEC v. Pentagon Capital Mgmt., PLC, 725 F.3d 279, 288 (2d Cir. 2013)
"Beyond setting maximum penalties, the statutes leave the actual amount of the penalty... up to the discretion of the district court.'" Razmilovic, 738 F.3d at 38 (quoting SEC v. Kern, 425 F.3d 143, 153 (2d. Cir. 2005). To inform that discretion, courts in this district weigh the following so-called Haligiannis factors: "(l) the egregiousness of the defendant's conduct; (2) the degree of the defendant's scienter; (3) whether the defendant's conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the defendant's conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to the defendant's demonstrated current and future financial condition." SEC v. Rajaratnam, 822 F.Supp.2d 432, 433 (S.D.N.Y. 2011) (quoting SEC v. Haligiannis, 470 F.Supp.2d 373, 386 (S.D.N.Y. 2007)); see also SEC v. Gupta, 569 F.Appx. 45, 48 (2d Cir. 2014) (citing Haligiannis).
Judge Fox concluded in the Report that a third tier civil penalty against GTF and Thompson was merited, but recommended awarding no penalty because the number of violations committed by Defendants had not been ascertained. (Report at 9, 14.) The SEC objects to the Report's finding that no penalty be awarded, arguing that the Court may determine the number of violations using the evidence in the record, and offering several methods for doing so: (1) finding a separate violation for each of the ten investors who invested within the five year statute of limitations, (2) finding a violation for each statutory claim charged against Defendants, or (3) finding one violation per defendant for the entire scheme. (Obj. at 1-2.) These proposed methods were introduced for the first time in the Objections, and thus would generally not be considered by the Court. Tavares v. City of New York, 08 Civ. 3782 (PAE), 2011 WL5877548, at *2 (S.D.N.Y. Nov. 23, 2011). In light of the SEC's specific Objections, however, the Court's review is de novo as to the portion of the Report declining to calculate a penalty. 28 U.S.C. § 636(b)(1).
In the first instance, the Court agrees with Judge Fox's finding that a third tier civil penalty against GTF and Thompson is warranted. (Report at 9.) Thompson, through GTF, deliberately orchestrated an investment scheme that defrauded unsophisticated investors of hundreds of thousands of dollars over a five year period. (Report at 8.) After duping those investors about his qualifications and employment history, Thompson misappropriated the vast majority of their investments. (Id.) Thompson invested only $100, 000 of the more than $800, 000 entrusted to him, and even that amount was put into a risky options trading strategy that ultimately lost all of the invested funds. (Compl. ¶¶ 25-26.) In addition, Thompson took at least $465, 000 in cash from the GTF fund for himself and diverted $52, 000 into his personal accounts. (Id. ¶ 27.) By the scheme's end, at least seventeen investors lost over $600, 000. (Matthews Declaration in Support of Motion for Default Judgment ("Matthews Deel.") ¶ 17.) This conduct clearly "involved fraud, deceit, manipulation, or reckless disregard of a regulatory requirement, " and "directly or indirectly resulted in substantial losses to other persons" to merit a third tier penalty. See Razmilovic, 738 F.3d at 38-39.
The Court disagrees, however, with Judge Fox's recommendation that, despite the appropriateness of a third tier penalty, no penalty be imposed against Defendants. Although the Court did not make any explicit findings in the Default Judgment as to the number of violations committed by Defendants, the Court may determine a suitable penalty based on the information provided to the Court by the SEC in support of its motion for default judgment and in its civil penalty submissions. (Dkt. 70, 88.) In calculating such penalty, the Court deviates from the SEC's ...