UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Securities and Exchange Commission

v. Civil No. 14-cv-192-PB Opinion No.

Allen R. Smith

MEMORANDUM AND ORDER

The Securities and Exchange Commission (the “SEC”) claims

in this securities fraud action that Allen Smith participated in

an advance-fee investment fraud scheme in his capacity as an

attorney and fiduciary. The SEC now moves for summary judgment

and asks the court to impose injunctive relief, disgorgement,

and a monetary civil penalty against Smith. Most of the SEC’s

claims require proof of scienter, which ordinarily must be

resolved during a trial. Here, however, the SEC has produced

compelling evidence of Smith’s involvement in the fraud, and

Smith’s meager opposition to the SEC's motion neither identifies

a genuine dispute of material fact nor explains why the SEC’s

motion should be denied. Accordingly, I determine that the SEC

is entitled to summary judgment on both its substantive claims

and its requests for disgorgement and permanent injunctive

relief. But because the SEC’s claim for a monetary penalty

requires further factual and legal development, I deny the SEC’s request for a civil monetary penalty without prejudice to its

right to renew its request in a properly supported motion.

I. BACKGROUND

The SEC alleges that Smith participated in an investment

fraud scheme in his capacity as an attorney and fiduciary. I

first summarize the scheme itself and then describe Smith’s

involvement.

A. The Fraudulent Scheme

Between 2009 and 2011, Martin Schläpfer, James Warras, and

Hans-Jurg Lips (the “Principals”) conducted an advance-fee

investment scam that defrauded more than 30 investors out of

over $10.8 million. The Principals conducted their fraud

through a number of business entities, including:

• Malom Group AG (with “Malom” being an acronym for “make a lot of money”), a Swiss business organization run by Schläpfer and Lips.

• Northamerican Sureties (Europe) AG (“NAS Europe”), another Swiss business organization where both Schläpfer and Warras served as executives.

• Northamerican Sureties Ltd. (“NAS Ltd.”), a Utah organization that specialized in issuing surety bonds guaranteeing loan performance. Although Schläpfer was a board member of both NAS Europe and NAS Ltd., the two firms were separate entities.

• M.Y. Consultants, Inc., a Nevada firm with few, if any, regular employees that facilitated Malom’s transactions 2 with investors.

• Maxmore Corporation Ltd., a Hong Kong business organization of which both Schläpfer and Warras were principals.

The Principals devised two separate investment scams. The

first, which the SEC calls the “joint venture offering,” lasted

from August 2009 until August 2011. For an advance fee of

between $150,000 and $200,000, this scam invited investors to

enter into joint venture arrangements with several of the

business entities controlled by the Principals, most frequently

Maxmore. Those entities, the Principals claimed, would then use

their capital to purchase U.S. treasury securities at a

discount, resell them for a 100 percent profit, and repeat the

cycle, generating a significant yield on the investors’ original

contribution. In fact, the entire arrangement was fraudulent;

no such trades ever took place. The Principals raised $7.5

million through 25 such joint venture agreements, $7.3 million

of which was lost to the fraud’s victims.

The second scam, which the SEC calls the “structured note

offering,” lasted from February 2011 until the fall of 2011.

Unlike the joint venture offering, the Principals conducted the

structured note offering only through the Malom entity. Through

this scam, the Principals would invite investors to contribute

an “underwriting fee” that would allow the Principals to 3 securitize, register, and issue “structured notes” in various

and unspecified “Western European exchanges.” Once issued, the

Principals promised, these securities would generate significant

returns on the investors’ initial contributions. As with the

joint venture offering, the structured note offering was

fraudulent; no notes were ever created or traded. Six investors

were defrauded out of $3.35 million through the structured note

offering scam. One of these investors was USA Springs, Inc., a

New Hampshire firm that was undergoing bankruptcy proceedings in

this District when, seeking to raise new financing for its

restructuring plan, it agreed to participate in the offering.

Based on their alleged involvement in the scheme,

Schläpfer, Lips, Warras, and the Malom entity are all named as

defendants in an SEC civil enforcement action in the District of

Nevada.1 This action is stayed pending resolution of a separate

criminal action in that District against the same defendants,

which also arises from their involvement in the scheme.2

1 The civil action pending in the District of Nevada is SEC v. Malom Group AG, 2:13cv2280.

2 The criminal action pending in the District of Nevada is United States v. Brandel, 2:13cr489. 4 B. Smith’s Involvement

Smith, a licensed attorney, was admitted to the Florida bar

in 1974. Since then, he has practiced mostly criminal law,

although he has done some civil work as well. He has no

experience in international banking and finance, structured

notes, or bank instruments. In 2008, Smith began to accept work

as a “paymaster” for several clients engaged in various

financial investment transactions. As paymaster, Smith would

receive third-party investor funds into his attorney trust

account, which he would then disburse either to his clients or

to other third parties at his clients’ direction.

Smith’s involvement with the scheme’s Principals began in

late 2008, when Smith met Warras, who was then the executive

vice president of NAS Europe. Between 2008 and 2010, Smith’s

involvement with the Principals and their business entities was

minimal. In April 2010, however, Smith began to act as a

paymaster for NAS Europe, Malom, and some of the other business

entities used by the Principals. In this capacity, Smith

received and disbursed millions of dollars of funds received

from investors who had been deceived into participating in the

two fraudulent schemes.

5 Smith’s role in the scheme expanded in early 2011, when he

agreed to represent Malom as its attorney. In that role, Smith

made a number of material statements that proved to be false in

a series of communications to prospective investors whom the

Principals were trying to persuade to invest in their schemes.

These communications and misrepresentations include:

 An April 2011 certification letter to prospective investors. Although one of the Principals’ associates appears to have drafted the letter, Smith signed it and placed it on his attorney letterhead. Knowing that the Principals planned to show the letter to prospective investors, Smith made a number of material representations in the letter that appear to be false based on the summary judgment record. These include a claim that Smith had represented Malom in transactions “measured in the hundreds of millions of US dollars” and a certification that Malom had sufficient liquidity to honor refund requests from investors.3

 A series of letters and emails, which the SEC calls the “lulling communications,” that the Principals asked Smith to send to investors who had already invested in the scheme but had not yet received any refund or return on their investments. Smith did so shortly after he signed the April 2011 certification letter. In these communications, Smith assured the investors that the Principals were working on a “Senior Life Settlement” transaction that would yield investors their promised returns within one week. In fact, no “Senior Life Settlement” transaction ever existed. The SEC alleges that the Principals asked

3 Smith also wrote in the April 2011 letter that he “[knew] the principals of Malom Group AG to be of the highest moral and ethical character.” That assessment, of course, is at best dubious.

6 Smith to send these communications to the fraud’s victims to lull them into inaction.

 A series of communications to USA Springs, Inc., a New Hampshire firm undergoing bankruptcy proceedings in this District that needed to find a new source of financing to avoid liquidation. Beginning in early 2011, Malom’s Principals sought to raise $2.4 million from USA Springs, which they characterized as an “underwriting fee,” through their structured note offering fraud. As part of this effort, Smith sent USA Springs a number of emails containing misrepresentations similar to those he made in the April 2011 certification letter – for instance, that Malom had conducted transactions involving hundreds of millions of dollars and that Malom and its Principals had sufficient liquidity to honor refund requests. Smith repeated these misrepresentations during multiple telephone calls and personal meetings with both USA Springs officials and attorneys and the Creditors’ Committee for the USA Springs bankruptcy. USA Springs, convinced that Malom was legitimate and that Malom’s structured note offering was viable, finally agreed to invest with Malom. Malom allowed USA Springs to participate for a reduced “underwriting fee” of $1.2 million, which USA Springs raised from third-party investors.

 A “certification” regarding Malom that Malom was required to submit as part of its transaction with USA Springs. The certification, which Smith signed, contained a number of apparent misrepresentations, most notably Smith’s verification that USA Springs’ investment was secured by a freely assignable and negotiable “bank draft” issued by a certain Swiss bank. In fact, Malom held no assets at that bank at the time Smith made this statement. No such instrument ever existed, at least authentically.

Smith received $39,525 from Malom in compensation for his

paymaster work and legal representation, all of which originated

from investor funds. His participation in the fraud contributed

to the decisions of at least four investors to invest their

7 money in the scheme, causing them to lose over $2 million.

II. STANDARD OF REVIEW

Summary judgment is appropriate when the record reveals “no

genuine dispute as to any material fact and [that] the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P.

56(a). Where, as here, the moving party bears the burden of

proof, summary judgment may not issue “unless the evidence that

[the moving party] provides . . . is conclusive.” Torres Vargas

v. Santiago Cummings,

(1st Cir. 1998). In other

words, if “the moving party will bear the burden of persuasion

at trial, that party must support its motion with credible

evidence – using any of the materials specified in Rule 56(c) –

that would entitle it to a directed verdict if not controverted

at trial.” Winnacunnet Coop. Sch. Dist. v. Nat’l Union Fire

Ins. Co. of Pittsburgh,

(1st Cir. 1996) (quoting

Celotex Corp. v. Catrett,

(1986) (Brennan,

J., dissenting on other grounds)).

To meet this rigorous standard, the moving party must first

offer properly pleaded facts of evidentiary quality sufficient

to show the absence of any genuine dispute of material fact

related to its claims. In re Varrasso,

(1st

8 Cir. 1994). A fact is material if it “might affect the outcome

of the suit under the governing law.” Anderson v. Liberty

Lobby, Inc.,

(1986). I must then consider the

proffered evidence in the light most favorable to the nonmoving

party, drawing all reasonable inferences in the nonmoving

party’s favor. Navarro v. Pfizer Corp.,

(1st

Cir. 2001). I may grant summary judgment only if no reasonable

finder of fact could find for the nonmoving party after

evaluating the moving party’s proffer in this light. EEOC v.

Unión Independiente de la Autoridad de Acueductos y

Alcantarillados,

(citing Calderone v. United

States,

(6th Cir. 1986)).

If the moving party meets this initial burden, the

nonmoving party must then demonstrate, “through submissions of

an evidentiary quality, that a trialworthy issue persists.”

Rockwood v. SKF USA Inc.,

(1st Cir. 2012). To

meet this burden, the nonmoving party may either produce its own

submissions of evidentiary quality that evince a genuine dispute

of material fact or explain why the moving party’s proffer does

not demonstrate the absence of such a dispute. Fed. R. Civ. P.

56(c)(1); Vineberg v. Bissonnette,

(1st Cir.

2008). The nonmoving party may not, however, “rest[] merely

9 upon conclusory allegations, improbable inferences, and

unsupported speculation.” Medina-Munoz v. R.J. Reynolds Tobacco

Co.,

(1st Cir. 1990); see also Griggs-Ryan v.

Smith,

(1st Cir. 1990) (“A genuine issue of

material fact does not spring into being simply because a

litigant claims that one exists.”). If the nonmoving party

fails to meet its burden in this way, a court may deem the

moving party’s proffer admitted and undisputed for purposes of

summary judgment. Fed. R. Civ. P. 56(e)(2); LR 56.1(b); Stonkus

v. City of Brockton Sch. Dept.,

(1st Cir.

2003).

III. ANALYSIS

The SEC raises five claims for relief. Count One alleges

that Smith violated Section 10(b) of the Securities Exchange Act

of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and SEC Rule

10b-5 thereunder,

.10b-5. Count Three raises the

closely related claim that Smith violated Section 17(a) of the

Securities Act of 1933 (the “Securities Act”), 15 U.S.C. §

77q(a). Counts Two and Four invoke 15 U.S.C. §§ 77o(b) and

78t(e) to allege that Smith aided and abetted primary violations

of both provisions committed by the fraud’s Principals and the

10 business organizations that they controlled. Finally, Count

Five alleges that Smith violated Section 5 of the Securities

Act, 15 U.S.C. § 77e.

The SEC supports its summary judgment motion with a

detailed statement of uncontested material facts citing

extensive evidence demonstrating Smith’s involvement in the

Principals’ security fraud scheme. See Doc. No. 25; LR 56.1(a).

Smith has responded with a two-and-a-half page memorandum that

offers only general and conclusory denials of the SEC’s claims

and contains no statement of material facts as required by Local

Rule 56.1(b). See LR 56.1(b); Griggs-Ryan v. Smith,

(1st Cir. 1990) (“A genuine dispute of material fact

does not spring into being simply because a litigant claims that

one exists.”). Accordingly, I accept as true each of the SEC’s

properly supported factual averments in evaluating the

evidentiary sufficiency of its claims for relief. See Fed. R.

Civ. P. 56(e)(2); LR 56.1(b); Stonkus v. City of Brockton Sch.

Dept.,

(1st Cir. 2003).

A. Counts One and Three: Violation of Exchange Act Section 10(b), SEC Rule 10b-5, and Securities Act 17(a)

Rule 10b-5 implements the statutory prohibitions of Section

10(b). Aaron v. SEC,

(1980). To prevail

on its Rule 10b-5 claim, the SEC must prove the following 11 elements: (1) that Smith made a material misrepresentation or

omission, or otherwise committed a manipulative or deceptive act

as part of a scheme to defraud; (2) in connection with the

purchase or sale of securities; (3) through the means or

instruments of transportation or communication in interstate

commerce or the mails; (4) with the requisite scienter. See 15

U.S.C. § 78j(b);

.10b-5; SEC v. Tambone,

(D. Mass. 2006). In the context of this case,

a claim under Section 17(a) entails the same four elements as a

Rule 10b-5 claim; therefore, I address the SEC’s Rule 10b-5

claim in Count One and its Section 17(a) claim in Count Three

jointly.4 See 15 U.S.C. § 77q(a); Tambone,

.

Of these four elements, Smith contests only the SEC’s

allegation that he acted with the requisite scienter. The First

Circuit has explained that scienter, as an element of a Rule

10b-5 claim, is

4 More specifically, like Rule 10b-5, the scienter element of Section 17(a)(1) requires either direct knowledge or extreme recklessness. SEC v. Ficken,

(1st Cir. 2008). By contrast, claims under Sections 17(a)(2) and 17(a)(3) contain the same elements as Rule 10b-5 but require only negligence, not the extreme recklessness or direct knowledge that Section 17(a)(1) and Rule 10b-5 demand.

Because I conclude that Smith acted with extreme recklessness, this distinction is of no consequence here.

12 an intention to deceive, manipulate, or defraud. In this circuit, proving scienter requires a showing of either conscious intent to defraud or a high degree of recklessness. Recklessness is a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.

SEC v. Ficken,

(1st Cir. 2008) (internal

quotation, omission, and citation omitted).

The SEC identifies myriad instances of alleged material

misrepresentations that it claims Smith made with at least

extreme recklessness, but for purposes of this motion, it is

enough to take one such misrepresentation as an example.5 In his

5 Although I can decide this motion by following this approach, the SEC would have been better served to organize and analyze its case violation by violation, and element by element for each violation. Instead, in both its complaint and its motion for summary judgment, the SEC describes Smith’s particular misrepresentations – the actual instances of securities law violations – within a larger narrative of Smith’s involvement in the scheme. It then offers legal arguments without specifically applying them to these alleged misrepresentations, particularly in its discussion about scienter. The five counts in its complaint identify the securities law provisions that the SEC claims Smith violated, but the complaint does not attribute particular instances of unlawful conduct to each of these provisions. This structure makes it difficult to determine which of the SEC’s legal arguments attaches to each misrepresentation, and it makes it impossible to determine exactly how many securities violations the SEC alleges that Smith committed. One of my colleagues on this Court has cautioned the SEC about such “shotgun pleading” and “puzzle pleading” in the past. SEC v. Patel,

. 13 April 2011 certification letter to prospective investors, Smith

wrote: “Moreover, from my personal knowledge, I hereby affirm

that, should a demand be made for the refund of any monies,

Malom Group AG and its principals have more than sufficient

liquidity to immediately tender payment.” Doc. No. 17-4 at 2.

In fact – and as Smith does not dispute, at least not

sufficiently for purposes of summary judgment – Malom remained

insolvent for the duration of this period, and there is no

indication that any of Malom’s Principals had nearly sufficient

liquidity to honor refund requests. Smith’s statement,

therefore, was false. Nor does Smith dispute either that his

misrepresentation was material or that he made it both in the

channels of interstate commerce and in connection with the sale

of securities. Accordingly, the summary judgment record

demonstrates that Smith’s statement in the April 2011 letter

clearly satisfies each of the first three elements of the SEC’s

Rule 10b-5 and Section 17(a) claims.6 The only question that

(McAuliffe, J.).

6 There is no question that Smith’s misrepresentation was material, since Smith’s certification of Malom’s liquidity was substantially likely to incline a reasonable investor to participate in the fraudulent scheme. See Ficken,

(“A misrepresentation is material if there is a substantial likelihood that the misrepresentation would affect the behavior of a reasonable investor.”) Moreover, there is no question that 14 remains, therefore, is whether Smith made his statement with the

requisite level of scienter.

The SEC argues that the summary judgment record compels the

conclusion that Smith acted with extreme recklessness, and

therefore with scienter, when he misrepresented Malom’s

liquidity in the April 2011 certification letter. That is so,

the SEC contends, because although Smith knew that prospective

investors would rely on his statement, he lacked any legitimate

basis for making it. To support this assertion, the SEC

explains that Smith was asked during discovery to identify the

bases for his statement regarding Malom’s liquidity. In

response, Smith pointed to the following two sets of materials:

 A 2007 unaudited financial statement regarding Northamerican Sureties. This statement, however, was already four years old when Smith signed the April 2011 certification letter. Moreover, the statement addresses the financial condition of Northamerican Sureties, a separate entity from Malom. The 2007 statement, in short, says nothing about Malom’s financial condition in April

Smith’s misrepresentation was made in connection with the purchase or sale of securities. Both the joint venture offering and structured note offering “[sought] the use of the money of others on the promise of profits.” SEC v. W.J. Howey Co.,

(1946). And finally, there is no question that Smith made his misrepresentation through the facilities of interstate commerce. The scheme, including Smith’s involvement, involved the use of email, telephone calls, the mail, and interstate travel (for instance, to New Hampshire to recruit USA Springs as an investor). See SEC v. Softpoint, Inc.,

(S.D.N.Y. 1997). 15 2011 and provided Smith with no legitimate basis to make any representation about Malom’s liquidity at that time.

 A group of documents – apparently Malom’s own marketing materials – that Smith received from Warras on April 19, 2011, which discussed new financial products that Malom planned to sell in Europe. But Warras did not give Smith these materials until after Smith had already executed the April 2011 certification letter, and so they could not logically have provided Smith with any basis to make any representation about Malom’s liquidity at the time he made his statement. Moreover, the documents speak only about future instruments that Malom was planning to offer, not Malom’s present liquidity.

Other than these materials – none of which support any

representation about Malom’s liquidity in April 2011 –

Smith relied only on what Warras, Schläpfer, and Lips told

him about Malom’s financial condition when he signed the

April 2011 certification letter. He neither asked for nor

received any genuine financial documents such as financial

statements, tax records, or bank statements. Thus, the

undisputed facts in the summary judgment record show that

Smith simply parroted what the Principals in the fraud told

him to say without taking any meaningful steps to verify

their claims. The record, in short, reasonably supports no

other factual conclusion but that Smith’s misrepresentation

about Malom’s liquidity was wholly baseless.

16 The baselessness of Smith’s misrepresentation, the SEC

argues, constitutes at least extreme recklessness, and therefore

scienter, as a matter of law. I agree. “‘[R]epresentations and

opinions . . . given without basis and in reckless disregard of

their truth or falsity’ establish scienter under Rule 10b-5.”

SEC v. Bremont,

(S.D.N.Y. 1997) (quoting

Rolf v. Blyth, Eastman Dillon & Co.,

(2d Cir.

1978); see also Eisenberg v. Gagnon,

(3d Cir.

1985) (“[A]n opinion that has been issued without a genuine

belief or reasonable basis is an ‘untrue’ statement which, if

made knowingly or recklessly, is culpable conduct actionable

under § 10(b) and Rule 10b-5.”; SEC v. Kenton Capital, Ltd.,

(D.D.C. 1998); SEC v. Deyon,

(D. Me. 1997) (defendant who “relied exclusively on

[principals’] representations” in making material

misrepresentation acted with scienter); cf. Glassman v.

Computervision Corp.,

(1st Cir. 1996) (in

context of financial forecasts, inaccurate predictions “may be

actionable to the extent they are not reasonably based on, or

are inconsistent with, the facts at the time the forecast is

made.”). If the summary judgment record suggested that Smith

had taken any meaningful step to independently evaluate Malom’s

17 liquidity, I would probably be unable to grant summary judgment,

since a reasonable finder of fact could infer from such a step

that Smith had some legitimate basis, however tenuous, for his

statement. As I have explained, however, this record permits

only the conclusion that Smith’s misrepresentation of Malom’s

liquidity lacked any legitimate basis at all. Because this

factual conclusion is not in genuine dispute, it necessarily

follows that Smith made his statement with extreme recklessness,

and therefore with scienter. See Bremont,

.

Smith does not address, much less dispute, the SEC’s legal

contention that a wholly baseless misrepresentation evinces

extreme recklessness, and therefore scienter, under Rule 10b-5

and Section 17(a). Instead, and construing Smith’s submission

as generously as possible, I can discern only two legal

arguments that Smith offers in opposition to summary judgment,

neither of which is persuasive. First, he simply argues that

“disputed facts relating to whether [his] alleged reckless

conduct in his representation of his client that supposedly

aided or abetted that client in its engagement of fraudulent

schemes involving conduct that is regulated by the [SEC] should

be decided by the trier of facts.” Doc. No. 27 at 1-2. To the

extent I can understand this sentence at all (and to the extent

18 it does not simply beg the question), I take it to argue that

whether a defendant acted with extreme recklessness is a

question that must be decided at trial. But there is no

unwavering rule that requires a trial when a scienter is an

element of the claim under review. To the contrary, “[a]lthough

it is unusual to grant summary judgment on scienter, summary

judgment on this issue is sometimes appropriate.” Ficken,

. “Even in cases where elusive concepts such as

motive or intent are at issue, summary judgment may be

appropriate if the nonmoving party rests,” as Smith has, “merely

upon conclusory allegations, improbable inferences, and

unsupported speculation.” Medina-Munoz v. R.J. Reynolds Tobacco

Co.,

(1st Cir. 1990). Given the strength of the

SEC’s proffered evidence of scienter and the inadequacy of

Smith’s opposition to summary judgment, this is such a case.

See SEC v. Chester Holdings, Ltd.,

(D.N.J. 1999) (awarding SEC summary judgment on Rule 10b-5 and

Section 17(a) claims where no reasonable jury could avoid

finding of scienter).

Second, Smith relies on multiple conclusory and unspecific

denials of direct knowledge about the fraud. For reasons

already given, however, those denials do not serve to rebut the

19 SEC’s summary judgment proffer or raise any genuine dispute of

material fact. Moreover, because extreme recklessness, a lesser

mental state than direct knowledge, also satisfies the scienter

element under Rule 10b-5 and Section 17(a)(1), merely denying

direct knowledge of the fraud is legally insufficient to contest

scienter here. See Ficken,

. If the scienter

element required a showing of direct knowledge, and if Smith

could point to a denial of direct knowledge that he made during

discovery under penalty of perjury, I would likely be unable to

grant summary judgment for the SEC. See Velazquez-Garcia v.

Horizon Lines of Puerto Rico, Inc.,

(1st Cir.

2007) (“[I]t is for the jury, not the judge, to determine . . .

credibility.”). Because extreme recklessness also satisfies the

scienter element, however, Smith’s conclusory denials of direct

knowledge do not legally preclude summary judgment.

Thus, I conclude that no genuine dispute of material fact

exists regarding whether Smith acted with at least extreme

recklessness, and therefore with scienter, when he made his

April 2011 misrepresentation regarding Malom’s liquidity.

Because that misrepresentation also easily satisfies the other

elements of Rule 10b-5 and Section 17(a), I grant the SEC’s

motion for summary judgment on Counts One and Three.

20 B. Counts Two and Four: Aiding and Abetting Malom’s Violations of Section 10(b) and Rule 10b-5

In Counts Two and Four, the SEC alleges that Smith aided

and abetted Malom’s own violations of Rule 10b-5 and Section

17(a). To prevail on a claim of aiding and abetting a violation

of either provision, the SEC must prove: (1) that Malom itself

committed a primary violation of the relevant provision; (2)

that Smith either knew about or was reckless toward the primary

violation; and (3) that Smith provided substantial assistance to

Malom in committing the primary violation.7 See 15 U.S.C. §§

77o(b), 78t(e); SEC v. Coven,

(2d Cir.

1978); SEC v. Power,

(S.D.N.Y. 2007).

Beyond constituting an independent primary violation of

Rule 10b-5 and Section 17(a), Smith’s April 2011

misrepresentation of Malom’s liquidity also meets each of the

elements for aiding and abetting Malom’s own violations of those

provisions. First, both Malom and its Principals committed a

primary violation of Rule 10b-5 and Section 17(a) by entering

into a “funding commitment” with USA Springs in June 2011. See

Doc. No. 16-6. In that agreement, Malom promised to underwrite

7 The 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act conclusively established that recklessness satisfies the scienter element of an aiding and abetting claim. SEC v. Big Apple Consulting USA, Inc.,

(11th Cir. 2015). 21 and market structured notes that would help USA Springs meet its

acute need for financing. See id. at 2. Because the Principals

had no intention of underwriting any such notes, it is beyond

dispute that Malom’s statements in the funding commitment were

knowingly false. Second, for reasons already explained, Smith

acted with extreme recklessness by signing the April 2011

certification letter. And third, there is no question that

Smith, by signing this certification letter, provided

substantial assistance to Malom in defrauding USA Springs. The

Principals told Smith that they planned to show the letter to

prospective investors, and Smith endorsed the letter with that

understanding. The Principals then showed the letter to USA

Springs, which relied in part on Smith’s certification when it

agreed to invest money with Malom. These undisputed facts show

that Smith provided substantial assistance to Malom by

associating himself with and participating in the Principals’

effort to attract new investors and seeking to make that effort

succeed. See SEC v. Apuzzo,

(2d Cir. 2012).

The undisputed facts, therefore, compel the conclusion that

Smith aided and abetted the Principals’ primary violations of

Rule 10b-5 and Section 17(a) by endorsing the April 2011 letter,

including its misrepresentation of Malom’s liquidity.

22 Accordingly, I grant summary judgment on Counts Two and Four.

C. Count Five: Violation of Securities Act Section 5

Section 5 of the Securities Act prohibits both the sale and

the offer of sale of securities in interstate commerce that have

not been registered with the SEC and are not otherwise exempt

from registration. 15 U.S.C. § 77e(a). To prevail on its

Section 5 claim against Smith, the SEC must prove the following

three elements: (1) that no registration statement was in effect

for the securities at issue here; (2) that Smith either sold or

offered to sell those securities or was a necessary participant

in the sale or offer to sell; and (3) that the sale or offer of

sale of those securities was made using interstate

transportation, communication, or the mails. See SEC v.

Cavanagh,

(S.D.N.Y. 1998). Section

5 imposes no scienter requirement.

.

No genuine dispute of material fact exists here that

pertains to any of the elements of the SEC’s Section 5 claim.

It is undisputed that Malom and its Principals never registered

the fictional “instruments” underlying the joint venture and

structured note offering schemes. Furthermore, it is undisputed

that Smith signed the certification regarding Malom to

facilitate the USA Springs transaction. Without that

23 certification, USA Springs never would have agreed to invest in

the structured note offering. Smith, therefore, was a necessary

participant in Malom’s offer to sell an unregistered security.

See

.8 Finally, there is no question that both Malom

and Smith promoted the joint venture and structured note

offerings through multiple channels of interstate commerce. The

SEC, therefore, has demonstrated both that no genuine dispute of

fact exists pertaining to any element of its Section 5 claim and

that it is entitled to judgment as a matter of law on that

claim. Thus, I grant the SEC’s motion for summary judgment on

Count Five.

D. Penalties

The SEC asks for three types of relief against Smith: a

permanent injunction, disgorgement, and civil penalties. I

address each in turn.

1. Permanent Injunction

A permanent injunction is appropriate where a defendant has

violated the securities laws and the SEC demonstrates a

reasonable likelihood that the defendant will do so again in the

future. SEC v. Haligiannis,

(S.D.N.Y.

8 I have already explained why the instruments underlying the scheme qualify as securities as a matter of law. See supra note 6. 24 2007) (citing SEC v. Commonwealth Chem. Sec., Inc.,

(2d Cir. 1978)). “The federal courts are vested with wide

discretion when an injunction is sought to prevent future

violations of the statutory securities laws.” SEC v. John Adams

Tr. Corp.,

(D. Mass. 1988). Factors that

a court may consider in determining whether a defendant is

reasonably likely to commit future violations of the securities

laws include the egregiousness of the violation, the degree of

scienter, the isolated or repeated nature of the violations, and

the sincerity of the defendant’s assurances against future

violations. Haligiannis,

.

The SEC seeks a permanent injunction against Smith that

enjoins him both from committing further violations of the

securities laws and from participating in the offer or sale of

any security in the future, including as a paymaster. See Doc.

No. 19. The SEC’s proposed injunction is warranted. The

undisputed evidence establishes that Smith contributed to the

scheme with extreme recklessness as both an attorney and a

paymaster. Smith’s participation in the scheme extended over

multiple years and helped to persuade at least four investors to

contribute, and lose, over $2 million to the fraud. Smith has

offered no assurance that he will not commit further violations

25 of the securities laws; to the contrary, he has expressed his

intention to continue seeking work as a paymaster in the future.

These facts all show a reasonable, if not strong, likelihood

that Smith will continue to violate the securities laws. See

Haligiannis,

. Furthermore, in his

opposition to summary judgment, Smith does not address the SEC’s

requested injunctive relief or otherwise explain why such relief

should not issue. Based on these considerations, I grant the

SEC’s proposed injunctive relief as an appropriate remedy to

prevent Smith from committing further violations of the

securities laws.

2. Disgorgement

Where a defendant is liable for securities fraud, “it is

simple equity that a wrongdoer should disgorge his fraudulent

enrichment.” Janigan v. Taylor,

(1st Cir.

1965). In awarding disgorgement, a district court may exercise

its “broad discretion” and order the defendant to pay

prejudgment interest in addition to the principal amount that

the defendant earned from the fraud. SEC v. Sargent,

(1st Cir. 2003). The undisputed evidence here shows that

Smith received $39,525 from the fraud, which the SEC has

computed to yield an additional $3,817.88 in prejudgment

26 interest. Smith does not contest these figures, and he does not

specifically object to the assessment of prejudgment interest.

Furthermore, I find that an award of prejudgment interest in

addition to disgorgement of the principal amount derived from

the fraud “is necessary to prevent” Smith “from receiving the

benefit of what would otherwise be an interest-free loan.” SEC

v. Boey,

(quoting SEC v. Druffner,

(D. Mass. 2011)). Therefore, I grant the

SEC’s request and order Smith to disgorge $43,342.88, an amount

that includes both his principal earnings from the fraud and

prejudgment interest.

3. Civil Penalty

In addition to disgorgement and injunctive relief, Sections

21(d) of the Exchange Act, 15 U.S.C. § 78u(d), and 20(d) of the

Securities Act, 15 U.S.C. § 77t(d), both provide for the

imposition of civil monetary penalties against defendants found

liable for securities fraud. See 15 U.S.C. §§ 77t(d)(1),

78u(d)(3)(A); Haligiannis,

. These

statutes provide two methods for determining the amount of civil

penalties to be imposed. Under the first method, which the SEC

asks me to apply, the court selects a dollar amount from among

three “tiers” of egregiousness prescribed by the statutes and

27 then multiplies that amount by the total number of the

defendant’s violations. See 15 U.S.C. §§ 77t(d)(1),

78u(d)(3)(A). Under the second method, the court simply

assesses the defendant’s “gross pecuniary gain.” See 15 U.S.C.

§§ 77t(d)(1), 78u(d)(3)(A).

The SEC requests a maximum third-tier civil penalty against

Smith under the first method. Its briefing supporting this

request, however, is inadequate. Although the SEC identifies a

specific amount to be multiplied by the number of Smith’s

securities law violations – perhaps unsurprisingly, the maximum

amount that the SEC claims is allowed for a third-tier violation

– it does not specify in any of its pleadings just how many

violations Smith committed, making it impossible to compute a

specific total penalty amount under the first method.9 I decline

to make this determination myself in the absence of any guidance

9 Although the SEC represents that the maximum amount allowed by the statutes per violation for individual defendants is $150,000, it appears that the statutory maximum is actually $100,000. See 15 U.S.C. §§ 77t(d)(2)(C) (for third-tier violation, “the amount of penalty . . . shall not exceed . . . $100,000 for a natural person); 78u(d)(3)(B)(iii) (for third- tier violation, “the amount of penalty . . . shall not exceed . . . $100,000 for a natural person.”). If the SEC derives its $150,000 figure from a different source of authority, it does not cite it in its brief. When it renews its motion for summary judgment on the civil penalty question, the SEC should identify the authority that allows for a $150,000 penalty per violation.

28 at all from the SEC. Thus, I deny the SEC’s request for a

monetary civil penalty without prejudice. If the SEC intends to

pursue its request for a civil penalty in light of this

Memorandum and Order, it should file a new motion for summary

judgment on the civil penalty issue. In its renewed motion, the

SEC should both identify each alleged violation on which it

bases its claim for a civil penalty under the first method and

specify the evidence supporting each violation.10

IV. CONCLUSION

For the reasons set forth in this Memorandum and Order, I

grant the SEC’s motion for summary judgment (Doc. No. 15) to the

extent that it seeks a permanent injunction. Additionally, I

order Smith to pay disgorgement in the amount of $43,342.88. I

deny without prejudice the SEC’s motion for summary judgment on

its request for a civil penalty. Within fourteen days, the SEC

shall either renew its motion for summary judgment on this issue

as directed in this Memorandum and Order or ask the Court for

10I reiterate that the SEC would have been well served to structure its complaint and summary judgment motion in this way from the beginning. See supra note 5. Alternatively, the SEC remains free to request a civil penalty under the second method, or to no longer seek a civil penalty at all.

29 the entry of judgment.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge July 2, 2015

cc: Stephen W. Simpson, Esq. Allen R. Smith, Esq.

30