US SEC v . Hor Chong (David) Boey 07-CV-039-SM 7/22/13 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

United States Securities and Exchange Commission, Plaintiff

v. Case N o . 07-cv-39-SM Opinion N o .

Hor Chong (David) Boey, and Jerry A . Shanahan, Defendants

O R D E R

The United States Securities and Exchange Commission (the

“SEC”) seeks a default judgment against Defendant Hor Chong

(David) Boey, and relief in the nature of a permanent injunction,

disgorgement, civil penalties and an officer and director bar.

Doc. n o . 361.

On October 1 5 , 2008, the SEC filed its amended complaint,

naming Boey and others as defendants. Doc. n o . 150. Because

Boey “failed to plead or otherwise defend,” on June 4 , 2013,

pursuant to Fed. R. Civ. P. 55(a) and Local Rule 55.1, the clerk

entered a default. A damages hearing was held on July 1 7 , 2013.

Although provided notice, neither Boey nor his counsel appeared. I. Liability

In its amended complaint, the SEC alleges that Boey, Vice

President of Finance for Enterasys Network Inc.’s Asia Pacific

region, (1) used a devise, scheme, or artifice to defraud

investors and engaged in a transaction, practice, or course of

business that operated as a fraud or deceit in connection with

the offer, sale, or purchase of securities of Enterasys, all in

violation of the anti-fraud provisions of Section 17(a) of the

Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-

5.; (2) violated Section 13(b)(5) of the Exchange Act and Rule

13b2-1 by falsifying Enterasys’ books and records; (3) violated

Rule 13b2-2 of the Exchange Act by providing false documents

during an audit; and (4) aided and abetted violations of Section

13(a) and 13(b)(2)(A) of the Exchange Act and the rules enacted

under these provision. Am. Compt., doc. n o . 1 5 0 , at 98-102. See

(a)(1)-(3); 15 U.S.C. § 78j(b); 15 U.S.C.

§§ 78m(a), 78(b)(2)(A); 15 U.S.C. § 78m(b)(5);

.10b-5, 240.12b-20, 240.13a-1, 240.13a-11 and 240.13a-13.

Having failed to answer or otherwise respond to the

allegations, Boey “is taken to have conceded the truth of the

factual allegations in the complaint as establishing the grounds

for liability.” Franco v . Selective Ins. Co.,

, 9 n.3

2 (1st Cir. 1999). The court finds that the conceded factual

allegations establish the violations alleged.1

II. Remedy

Disgorgement and Prejudgment Interest

The SEC seeks disgorgement of profits and prejudgment

interest. As an equitable remedy, disgorgement “does not serve

to punish or fine the wrongdoer, but simply serves to prevent

[his] unjust enrichment.” SEC v . Druffner,

(D. Mass. 2011) (quotation marks omitted). The court has

broad discretion to order disgorgement and prejudgment interest.

SEC v . Dibella,

, at *2-3 (D. Conn. March 1 3 ,

2008).

The SEC has established a disgorgement figure of $29,576.40,

representing Boey’s net profits from his exercise of 4000 options

on January 3 1 , 2002, after Enterasys had filed its 10Q for

Q2TY2001. Because this figure is “the amount by which [Boey] was

unjustly enriched,” disgorgement of that amount is fair and

equitable. SEC v . Blatt,

(5th Cir. 1978).

In addition, an award of prejudgment interest of $24,044.21 “is

necessary to prevent” Boey “from receiving the benefit of what

1 Prior to the filing of this civil suit, Boey was found guilty of criminal securities fraud related to the transaction with Ariel International Technology Co., Ltd.

3 would otherwise be an interest-free loan.” Druffner,

.

Civil Penalty

The SEC asks the court to impose on Boey a “third tier”

civil penalty of $120,000. See

(u)(d)(3)(B)(iii);

15 U.S.C. § 77t(d)(2)(C). In authorizing civil penalties,

Congress intended “to punish and deter securities law violations,

and such penalties may be imposed in addition to disgorgement and

injunctive relief.” SEC v . Tanner,

, at *2

(S.D.N.Y. July 3 , 2003).

In order to impose a third tier penalty, the court must find

that Boey’s violation(s) (1) “involved fraud, deceit,

manipulation or deliberate or reckless disregard of a regulatory

requirement,” and (2) “directly or indirectly resulted in

substantial losses or created a significant risk of substantial

losses to other persons.” 15 U.S.C. §§ 78u(d)(3)(B)(iii). Under

the statute and SEC rules, a third tier penalty for conduct

occurring between February 2 , 2001, and February 1 4 , 2005, “shall

not exceed the greater of” $120,000 “for a natural person, . . .

or . . . the gross amount of pecuniary gain to such a defendant

as a result of the violation.” 15 U.S.C. § 78u(d)(3)(B)(iii);

and 201.1003. Notably, “the statute does

4 not require that the full . . . allowable penalty be imposed, but

establishes a ceiling for the amount of the penalty.” SEC v .

Renaissance Capital Mgmt., Inc.,

, at *6

(E.D.N.Y. Aug. 2 5 , 2003).

Under the facts of this case, a third tier penalty is

appropriate. Boey’s conduct involved fraud and deceit.

Moreover, Boey’s direct violations and his aiding and abetting of

Enterasys’ overall fraud “indirectly resulted in substantial

losses,” or a “significant risk” of such losses, to the investing

public. 15 U.S.C. § 78u(d)(3)(B)(iii). See SEC v . Zwik,

, at *2 (S.D.N.Y. March 1 6 , 2007) (imposing third tier

penalty on aider and abetter).

Although the statute authorizes a penalty of up to $120,000

for each violation, a more modest penalty — $10,000 — is

warranted under the circumstances of this case. Those

circumstances include the relatively small dollar amount of

Boey’s personal ill-gotten gains, and his secondary role in

Enterasys’ overall fraudulent conduct. See Renaissance Capital,

, at *6 (imposing third tier penalties of

$30,000, $20,000, and $5,000 against co-defendants, based on the

fact that they raised, respectively, 1 4 % , 1 0 % , and 2% of the

total amount fraudulently raised from investors). Moreover,

5 because there is no imminent need for further deterrence, the

penalty is punitive only.

Officer and Director Bar

The SEC requests that the court permanently bar Boey from

serving as an officer or director of a public company. A court

may impose an officer and director bar “if the person's conduct

demonstrates substantial unfitness to serve as an officer or

director.” 15 U.S.C. § 78u(d)(2). The bar may be conditional or

unconditional, and permanent or for a period of time. Id. In

determining a defendant’s fitness, a court may consider “(1) the

‘egregiousness' of the underlying securities law violation; (2)

the defendant's ‘repeat offender’ status; (3) the defendant's

‘role’ or position when he engaged in the fraud; (4) the

defendant's degree of scienter; (5) the defendant's economic

stake in the violation; and (6) the likelihood that misconduct

will recur.” SEC v . Patel,

3 7 , 141 (2d Cir. 1995)

(quotation marks omitted).

A lifetime bar — as the SEC seeks here — is an extraordinary

remedy, usually reserved for those defendants who engaged in

prior securities violations, and under circumstances suggesting

the likelihood of future violations. DiBella,

,

at *10-11 (citing SEC v . Drexel Burnham Lambert, Inc.,

6 Supp. 587 (S.D.N.Y. 1993), aff’d SEC v . Posner,

(2d

Cir. 1994) (affirming lifetime bar against recidivist

defendants)). Boey has no history of prior violations. In

addition, although he acted with a high level of scienter, the

SEC has not shown that there is any plausible risk that he will

commit future violations. As the SEC acknowledges, Boey has

already been “deported and . . . sanctioned by the SEC, which

suspended him from practicing before it.” P l . Br., doc. n o . 361-

1 , at 2 3 . And, over a decade has passed with no further

misconduct on Boey’s part. Under these circumstances, a lifetime

bar is unnecessary. Instead, a five-year bar adequately reflects

the circumstances, which include Boey’s role in Enterasys’

widespread fraud, his modest economic stake in the violation, his

first-time offender status, and the small risk of recidivism.

See SEC v . Chester Holdings, Ltd.,

(D.N.J. 1999) (ordering five-year officer and director bar in

light of defendant’s role in the fraud and her first-time

offender status).

Permanent Injunction

The Commissioner seeks an order permanently enjoining Boey

from engaging in violations of the securities laws. The court is

“vested with wide discretion when an injunction is sought to

prevent future violations of the statutory securities laws.” SEC

7 v . John Adams Trust Corp.,

(D. Mass. 1988).

Because a permanent injunction is a severe remedy, the SEC

carries a heavy burden to justify its imposition:

“A permanent injunction is a drastic remedy and should not be granted lightly, especially when the conduct has ceased.” SEC v . Steadman,

(D.C. Cir. 1992) . . . “There must be ‘some cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive.’” Although “fraudulent past conduct gives rise to an inference of a reasonable expectation of continued violations,” SEC v . Opulentica, LLC, 479 F. Supp. 2d at 329, . . . the SEC must “go beyond the mere facts of past violations and demonstrate a realistic likelihood of recurrence.” SEC v . Commonwealth Chem Sec., Inc.,

0 , 99-100 (2d Cir. 1978).

Dibella,

, at *12 (some citations omitted).

As noted, the SEC here has not shown any realistic

likelihood that Boey will commit similar violations in the

future. Twelve years have passed since Boey’s fraudulent

conduct, and the SEC does not argue that he has engaged in any

additional illegal conduct. And although Boey has not defended

himself in this civil enforcement action, his inaction does not

constitute a protestation of innocence indicating a lack of

remorse. Moreover, to the extent there is any lingering danger

of recidivism, the disgorgement, five-year officer and director

bar, and civil penalty will serve as adequate deterrents. For

these reasons, a permanent injunction is not warranted. See id.

at *13 (ordering disgorgement and civil penalties, but denying

8 SEC’s request for a permanent injunction); SEC v . Jones,

7 4 , 384-85 (S.D.N.Y. 2007) (denying SEC’s request for a

permanent injunction); SEC v . Ingoldsby,

at *2

(D. Mass. May 1 5 , 1990) (same).

Conclusion

The SEC’s motion for default judgment, doc. n o . 3 6 1 , is

granted in part. Boey shall pay $29,576.40 as disgorgement,

$24,044.21 in prejudgment interest, and a civil penalty of

$10,000.00, for a total of $63,620.61. Boey is hereby enjoined

from serving as an officer or director of a public company for

five years. The Clerk shall enter judgment in accordance with

this order.

SO ORDERED.

__________ c " Stefeven J./McAuliffe fnited States District Judge

July 2 2 , 2013

cc: Peter D. Anderson, Esq. John R. Baraniak, Jr., Esq. Conrad W . P. Cascadden, Esq. William Cintolo, Esq. Philip G. Cormier, Esq. Victor W . Dahar, Esq. Maria R. Durant, Esq. Nancy J. Gegenheimer, Esq. Andrew Good, Esq. Steven M . Gordon, Esq. Miranda Hooker, Esq.

9 Leslie J. Hughes, Esq. Lucy J. Karl, Esq. William H . Kettlewell, Esq. John C . Kissinger, Esq. Diana K. Lloyd, Esq. James Lux, Esq. Jeffrey S . Lyons, Esq. Richard J. McCarthy, Esq. Peter B . Moores, Esq. Ann Pauly, Esq. Michelle R. Peirce, Esq. James W . Prendergast, Esq. Michael D. Ramsdell, Esq. Jeffrey B . Rudman, Esq. James A . Scoggins, I I , Esq. Jonathan A . Shapiro, Esq. Kevin E . Sharkey, Esq. Bruce A . Singal, Esq. Elizabeth H . Skey, Esq. Peter A . Spaeth, Esq.

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