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Securities and Exchange Commission v. Cope

United States District Court, S.D. New York

July 30, 2018

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
JASON COPE, IZAK ZIRK DE MAISON F/K/A IZAK ZIRK ENGELBRECHT, GREGORY GOLDSTEIN, STEPHEN WILSHINSKY, TALMAN HARRIS, WILLIAM SCHOLANDER, JACK TAGLIAFERRO, VICTOR ALFAYA, JUSTIN ESPOSITO, KONA JONES BARBERA, LOUIS MASTROMATTEO, ANGELIQUE DE MAISON, TRISH MALONE, KIERNAN T. KUHN, PETER VOUTSAS, RONALD LOSHIN, GEPCO, LTD., SUNATCO LTD., SUPRAFIN LTD., WORLDBRIDGE PARTNERS, TRAVERSE INTERNATIONAL, and SMALL CAP RESOURCE CORP., Defendants, And ANGELIQUE DE MAISON, Relief Defendant.

          For the Securities and Exchange Commission: Howard A. Fischer John O. Enright For Trish Malone: Trish Malone Pro Se

          For Angelique de Maison: Jeffrey B. Coopersmith Lauren Rainwater Davis Wright Tremaine LLP

          OPINION AND ORDER

          DENISE COTE, UNITED STATES DISTRICT JUDGE

         Pursuant to the judgments entered against them on consent, the Securities and Exchange Commission (“SEC”) seeks an assessment of civil penalties against three individuals --Angelique de Maison, Trish Malone, Louis Mastromatteo -- and one entity, Traverse International. For the reasons that follow, the four defendants are ordered to pay disgorgement, prejudgment interest, and civil penalties.

         BACKGROUND

         The above-captioned case, first brought by the SEC on September 18, 2014, arises out of a series of fraudulent schemes conducted by the defendants -- masterminded by defendant Izak Zirk de Maison F/K/A/ Izak Zirk Engelbrecht (“Engelbrecht”) --between 2008 and 2014.[1] In general, the SEC alleges that Englebrecht, with the aid of the co-defendants and others, would cause corporations (“Fraudulent Issuers”)[2] to issue tens of millions of shares of restricted stock to himself and his nominees, which he would then use for illegal distributions.

         On October 22, 2014, after a conference held with the SEC and counsel representing three defendants, [3] the Court entered a preliminary injunction order, enjoining the defendants from committing federal securities violations and freezing the assets of certain defendants and their spouses, including de Maison, Mastromatteo, and Traverse (the “Freeze Order”).[4] On June 15, 2015, after continuing its investigation into the alleged fraud, the SEC filed an Amended Complaint. The Amended Complaint expanded the scope of the conduct charged: defendants were added, the number of Fraudulent Issuers increased, the time period of the allegedly violative conduct widened, and the amount of relief sought increased. Mastromatteo and Traverse answered the Amended Complaint on September 18. On October 7, the SEC, in a status letter, informed the Court that it had reached settlements or was engaged in settlement discussions with multiple defendants, including de Maison.

         Judgment against Malone was entered October 8, 2015. Judgment was entered against de Maison on December 23, 2015. Judgment was entered against Mastromatteo and Traverse on January 4, 2016. Along with each respective judgment, the Court so ordered a Consent between the SEC and each settling defendant.

         Pursuant to the terms of their respective Judgment and Consent, Malone and de Maison agreed to eventually pay disgorgement of their ill-gotten gains, along with prejudgment interest, and a civil penalty. Mastrometteo and Traverse's Judgment noted the following:

The Court shall determine whether it is appropriate to order Defendants to pay disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. If it is determined that such disgorgement, prejudgment interest, and a civil penalty is warranted, the Court shall determine the amounts of the disgorgement and civil penalty upon motion of the Commission.

(Emphasis supplied.) In the Consent signed by Mastromatteo (in his individual capacity and in his representative capacity on behalf of Traverse), defendants “agree[d] that the Court shall order disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant” to the relevant statutes. (Emphasis supplied.) All defendants agreed that “for the purposes of a [an SEC motion for disgorgement and/or civil penalties], the allegations of the Complaint shall be accepted and deemed as true by the Court.” On January 26, 2018, the SEC moved for monetary relief against de Maison, Malone, Traverse, and Mastromatteo.[5]Specifically, the SEC requests disgorgement of ill-gotten gains in the amount of $4, 240, 049.30 from de Maison, $394, 741.24 from Malone, $58, 753 from Mastromatteo and Traverse, and that each defendant pay prejudgment interest on their respective disgorgement sums. The SEC has also asked that the Court impose civil money penalties. The SEC has not requested a specific sum for those civil penalties, but has suggested multiple methods of calculation. Malone and de Maison both oppose the imposition of disgorgement and civil penalties. Mastromatteo and Traverse have not opposed the SEC's motion. A summary of each of the defendant's underlying conduct relevant to the disgorgement and civil penalties the SEC seeks, taken from the Amended Complaint, follows.

         I. De Maison

         De Maison, Engelbrecht's wife, sought out investors to purchase unregistered securities in two of the Fraudulent Issuers, Kensington and Casablanca. She raised approximately $1 million for Kensington, and $3.5 million for Casablanca. De Maison did not transfer all proceeds from those investments to the companies as promised, but used some of the proceeds to pay her own personal expenses and diverted other proceeds to other entities associated with the scheme. De Maison advised investors on the merits of potential investments and the companies she was advertising. Investors lost their entire investments in Casablanca and Kensington. She also arranged for the execution of the governing agreements and the mailing of stock certificates to investors. The SEC identifies $748, 000 in ill-gotten gains from investments related to Kensington, and $3, 456, 049.30 from investments related to Casablanca, for a total of $4, 240, 049.30.

         De Maison made materially misleading statements concerning another company of which she was an officer, Gepco. De Maison provided quotes concerning the sale and purchase of diamonds for a Gepco press release. De Maison omitted material facts, including that she was personally involved with the relevant purchases and sales. The SEC does not, in the instant motion, identify any ill-gotten gains from de Maison's involvement with Gepco.

         On December 23, 2015, the Court entered a partial judgment against de Maison, accompanied by her signed Consent. In that Consent, she agreed to be enjoined from violating Sections 5, 17(a)(1), and 17(a)(3) of the Securities Act; and Sections 10(b), 15(a), and 16(a) of the Exchange Act, and Rule 10b-5 thereunder.

         II. Malone

         Malone served as the Chief Financial Officer (“CFO”) for several of the Fraudulent Issuers -- Lustros, Kensington, Wikifamiles, and Gepco -- and also held positions at a number of the other companies alongside Engelbrecht. In her role as CFO, Malone engaged in multiple unregistered securities offerings. The SEC seeks ill-gotten gains in the form of Malone's salary during the periods she served as an officer of the Fraudulent Issuers during unregistered offerings.

         Malone was at the center of many of Engelbrecht's schemes and fraudulent transactions. For example, Malone helped to merge Wikifamilies, at the time a shell company, into new company, rename it, and conduct a “reverse merger, ” allowing the shell company to issue over 30 million shares of common stock, including to herself and other co-defendants. Malone also served as president, CFO, and secretary of Gepco and facilitated the issuance of shares to Jason Cope, a co-defendant in this action, and other individuals to liquidate in the open market. Neither Gepco nor Wikifamilies, at the time, had registered any of their securities with the SEC and no exemption from the standard registration requirements applied.

         The SEC has calculated $394, 741.24 in ill-gotten gains from the salary payments Malone received for her service as CFO of the various companies. Specifically, the SEC requests disgorgement of $4, 615.39, Malone's pay for a week in May 2011, during which Wikifamilies issued 31.5 million shares of unregistered securities; disgorgement of $309, 783.85, the sum of Malone's pay between June 2012 and January 2014, during which time she was involved in the offering of unregistered shares of Lustros; and disgorgement of $80, 342.00, Malone's pay between February and September 2014, during which time she participated in the unregistered offerings of Gepco securities.

         On October 8, 2015, the Court entered a partial judgment against Malone, accompanied by her signed Consent. In that Consent she agreed to be enjoined from violating Sections 5, 17(a)(1), and 17(a)(3) of the Securities Act; and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.

         III. Mastromatteo and Traverse

         Mastromatteo, individually and through his corporation Traverse, participated in a fraudulent scheme to acquire and sell more than 2.5 million shares of Gepco stock in an unregistered offering, after which Mastromatteo funneled most of the proceeds to Cope. Cope used the proceeds to pay a judgment to the SEC that had previously been entered against him by this Court in the Milan litigation. In return, Cope made payments back to Mastromatteo through Traverse. The SEC seeks $58, 753 in ill-gotten gains, the amount Mastromatteo allegedly received in payments from Cope.

         On January 5, 2016, the Court entered a partial judgment against Mastromatteo and Traverse, accompanied by a signed Consent. In the Consent, they agreed to be enjoined from violating Sections 5(a), 5(c), and 17(a) of the Securities Act; and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder.

         PROCEDURAL HISTORY

         The instant motion was filed on January 26, 2018. Malone, who is appearing pro se, submitted a response dated March 26.[6]De Maison filed a response on March 30. Mastromatteo and Traverse have not filed any response. The SEC filed its reply on April 27. Malone submitted an unsolicited sur-reply dated July 10.[7]

         DISCUSSION

         I. Disgorgement

         “Once the district court has found federal securities law violations, it has broad equitable power to fashion appropriate remedies, including ordering that culpable defendants disgorge their profits.” SEC v. Razmilovic, 738 F.3d 14, 31 (2d Cir. 2013) (citation omitted). Disgorgement is used “to prevent wrongdoers from unjustly enriching themselves through violations, which has the effect of deterring subsequent fraud.” SEC v. Cavanagh, 445 F.3d 105, 117 (2d Cir. 2006). See also SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997). “[T]he size of a disgorgement order need not be tied to the losses suffered by defrauded investors.” Official Committee of Unsecured Creditors of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir. 2006) (citation omitted). Courts may even require disgorgement “regardless of whether the disgorged funds will be paid to . . . investors as restitution.” Kokesh v. SEC, 137 S.Ct. 1635, 1644 (2017) (citation omitted).

         “The district court has broad discretion not only in determining whether or not to order disgorgement but also in calculating the amount to be disgorged.” SEC v. Contorinis,743 F.3d 296, 301 (2d Cir. 2014) (citation omitted). To calculate disgorgement, the district court engages in “factfinding . . . to determine the amount of money acquired through wrongdoing, ” and then issues “an order compelling the wrongdoer to pay that amount plus interest.” Cavanagh, 445 F.3d at 116. The Supreme Court has recently noted that, at least for statute of limitations purposes, “SEC disgorgement is imposed for punitive purposes.” Kokesh, 137 S.Ct. ...


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