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Securities and Exchange Commission v. Smith

United States District Court, D. New Hampshire

October 1, 2015

Securities and Exchange Commission
v.
Allen R. Smith Opinion No. 2015 DNH 189

MEMORANDUM AND ORDER

Paul Barbadoro United States District Judge

The Securities and Exchange Commission (“SEC”) brought this securities fraud action against Allen R. Smith for Smith’s role in an advance-fee investment fraud scheme.[1] On July 2, 2015, I granted the SEC’s motion for summary judgment on all of its substantive claims and its requests for disgorgement and permanent injunctive relief. See Doc. No. 32. I denied without prejudice, however, the SEC’s request for a civil monetary penalty. Id. The SEC renewed its request for civil monetary relief on July 30, 2015, asking for a $150, 000 penalty. Doc. No. 35. For the reasons set forth below, I now grant the SEC’s motion and order Smith to pay $43, 342.88.

I. LEGAL BACKGROUND

The Securities Act and the Exchange Act authorize district courts to impose civil penalties against those who violate the federal securities laws. See 15 U.S.C. §§ 77t(d)(1); 78u(d)(3)(A); SEC v. Boey, 2013 DNH 101, 4 (noting that civil penalties may be imposed “in addition to disgorgement and injunctive relief”) (citation and punctuation omitted). These penalties are intended to “punish and deter securities law violations.” Boey, 2013 DNH 101, 4 (citation and punctuation omitted).

The Securities Act and the Exchange Act create three tiers of civil penalties based on the severity of the defendant’s misconduct. See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). First tier penalties are available for all violations. Second tier penalties are available only for “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.” And third tier penalties are available for all second tier violations that also “directly or indirectly resulted in substantial losses or created a significant risk of substantial loss to other persons.”

For each of these tiers, the maximum allowable penalty is the greater of (1) a set dollar amount per violation or (2) the defendant’s gross pecuniary gain from the violation.[2] See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). For an individual defendant whose violations occurred between March 2009 and March 2013 (the relevant time period here), the maximum penalty per violation is $7, 500 for the first tier, $75, 000 for the second tier, and $150, 000 for the third tier.[3] So, for instance, the maximum penalty for a single third tier violation that occurred in the relevant time period is the greater of $150, 000 or the defendant’s gross pecuniary gain.

Finally, within the statutory range, “the actual amount of the penalty [is] left up to the discretion of the district court, ” based on the case’s particular facts. SEC v. Kern, 425 F.3d 143, 153 (2d Cir. 2005); see Boey, 2013 DNH 101, 4-5 (explaining that the statute “establishes a ceiling” but does not “require that the full . . . allowable penalty be imposed”) (citation and punctuation omitted). In exercising that discretion, courts have considered factors including (1) the egregiousness of the violation, (2) the defendant’s scienter, (3) the repeated nature of the violation, (4) defendant’s admission of wrongdoing and cooperation with authorities, and (5) the defendant’s financial situation. See, e.g., SEC v. Kapur, 2012 WL 5964389, at *7 (S.D.N.Y. Nov. 29, 2012); SEC v. Locke Capital Mgmt., Inc., 794 F.Supp.2d 355, 370 (D.R.I. 2011).

I. ANALYSIS

Imposing a civil monetary penalty thus follows a three-step process: (1) set the appropriate tier based on the defendant’s conduct, (2) determine the statutory maximum penalty from the defendant’s gross pecuniary gain and number of “violations, ” and (3) exercise discretion to assess an appropriate penalty within that statutory range. I follow that analysis here.

A. Tier

The SEC contends that a third-tier penalty is available here. I agree. As described above, third-tier penalties are permitted only for violations that involve (1) “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.” See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B).

Smith’s conduct here satisfies both statutory requirements. In granting the SEC’s motion for summary judgment, I concluded that Smith violated five securities law provisions. See Doc. No. 32. In so concluding, I focused primarily on Smith’s April 2011 certification letter to prospective investors. Id. at 13-14. That letter contained several fraudulent misrepresentations and “persuade[d] at least four investors to contribute, and lose, over $2 million.” Id. at 13-14, 18, 25. Smith’s conduct, and that letter in particular, thus “involved fraud” and resulted in “substantial losses, ” and so meets both requirements for a third-tier penalty.[4] See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). I therefore agree that a third-tier penalty is available in this case.

B. Statutory Maximum Penalty

The statutory maximum penalty for a third-tier violation (during the relevant period) is, again, the greater of the defendant’s gross pecuniary gain from the violation or $150, 000 per violation. Here, Smith’s gross pecuniary gain was $43, 342.88. Doc. No. 32 at 26-27 ($39, 525 in compensation from the scheme’s principals, plus $3, 817.88 in prejudgment interest). With respect to the “per violation” provision, the SEC asserts that “[a]lthough Smith violated multiple provisions of the securities laws, violated several provisions multiple times, and did so in ...


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