Sec. & Exch. Comm'n v. Monterosso

• Citation: 756 F.3d 1326
• Decision Date: 30 June 2014
• Docket Number: 13–10342,Nos. 13–10341,13–10464.,s. 13–10341
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)
• Parties: SECURITIES and EXCHANGE COMMISSION, Plaintiff–Appellee, v. Joseph J. MONTEROSSO, Luis Vargas, Lawrence E. Lynch, Defendants–Appellants, Globetel Communications Corp., et al., Consolidated Defendants.

756 F.3d 1326

SECURITIES and EXCHANGE COMMISSION, Plaintiff–Appellee,

v.Joseph J. MONTEROSSO, Luis Vargas, Lawrence E. Lynch, Defendants–Appellants,Globetel Communications Corp., et al., Consolidated Defendants.

Nos. 13–10341, 13–10342, 13–10464.

United States Court of Appeals,Eleventh Circuit.

June 30, 2014.

William Kenneth Shirey, Lisa Kinney Helvin, Jeffery T. Infelise, Brent Mitchell, Reid A. Muoio, Cheryl J. Scarboro, Benjamin L. Schiffrin, U.S. Securities & Exchange Commission, Office of the General Counsel, Washington, DC, for Plaintiff–Appellee.

D. Patricia Wallace, Walter John Matthews, Mathews Wallace, LLP, Ft. Lauderdale, FL, Mark David Hunter, Tiffany Jeanette Brown, Hunter Taubman Weiss, LLP, Coral Gables, FL, Marc Alan Rowin, Lynch Rowin, LLP, New York, NY, for Defendants–Appellants.

Appeal from the United States District Court for the Southern District of Florida. D.C. Docket No. 0:07–cv–61693–JAL.

Before PRYOR, JORDAN, and FAY, Circuit Judges.

PER CURIAM:

This court issued an unpublished opinion in this case on March 3, 2014. Appellee, the Securities and Exchange Commission, subsequently moved to publish the opinion. Appellee's motion is GRANTED. We vacate our prior, unpublished opinion and substitute the following opinion for publication.

Joseph J. Monterosso, Luis Vargas, and Lawrence E. Lynch appeal summary judgment for the Securities and Exchange Commission (“SEC”) and the remedies and penalties imposed for their participation in a fraudulent revenue scheme. We affirm.

I. BACKGROUND

A. Formation and Operation of GlobeTel Communications Corp.

This case involves the SEC's investigation into a fraudulent scheme to generate fictitious revenue for a Florida-based, publicly traded, telecommunications (“telecom”) company formerly known as GlobeTel Communications Corp. (“GlobeTel”). Timothy Huff was GlobeTel's chief executive officer (“CEO”), Thomas Jimenez served as GlobeTel's chief financial officer (“CFO”) until March 2006, and Lynch was GlobeTel's chief operating officer (“COO”) from August 2004 until March 2006 and CFO from March to October 2006. Monterosso managed GlobeTel's wholesale telecom business from June 2004 to September 2006, served as president until July 2006 for one of GlobeTel's subsidiaries, Centerline Communications (“Centerline”), and served as GlobeTel's COO from July 2006 to May 2007. Monterosso directly reported to GlobeTel's CEO.

Vargas was the vice president of Centerline and the owner of another telecom company, Carrier Services, Inc. (“CSI”). Vargas assisted Monterosso in running GlobeTel's wholesale telecom business; he was also responsible for CSI's accounting and for preparing and forwarding CSI's and Centerline's sales documentation to GlobeTel.

In June 2004, Huff and Monterosso negotiated a joint venture agreement between GlobeTel and CSI, in which CSI would generate $25 million in revenue for Centerline in exchange for 5 million shares of GlobeTel stock. Pursuant to the agreement, neither CSI nor Monterosso would receive payment unless Centerline generated $25 million in revenue. Monterosso thereafter ran GlobeTel's wholesale telecom business and negotiated agreements on behalf of GlobeTel and its subsidiaries, Centerline, Volta Communications (“Volta”), and Lonestar Communications (“Lonestar”).

B. The Fictitious “Off–Net” Revenue Scheme1. Origin and Operation

Between 2004 and 2006, GlobeTel filed periodic reports describing its wholesale telecom business as buying and selling “large blocks of calling minutes with particular origination and termination points.” R5–475 at 3. ¹ As a wholesale telecom company, GlobeTel would generate revenue by connecting individual callers with the locations they wished to call, and the calls were routed through GlobeTel's “switch.” ² R3–313 at 3. Telecom companies pay by the minute for the right to route calls through the switches to other companies' networks. The switches then create call detail records (“CDRs”) that register information regarding the traffic routed through them. GlobeTel's revenue depended upon the call traffic routed through the switch, as measured by the CDRs.

In 2004, in an effort to enhance GlobeTel's reported revenue, the “off-net” program was implemented. The term “off-net” referred to telecom traffic run on a switch neither owned nor operated by GlobeTel, Volta, Lonestar, or Centerline. R5–475 at 5. In essence, the “off-net” program was a scheme that involved creating false invoices to reflect alleged transactions between GlobeTel's subsidiaries and other companies. Each quarter, a GlobeTel executive would tell Monterosso an amount of revenue needed for that quarter. To meet the requested revenue, Monterosso and Vargas would receive invoices and CDRs from other companies and would change the name to reflect sales to and from GlobeTel's subsidiaries. Starting in 2004, Ronald Hay, the owner of Mercury Telecom (“Mercury”) and World Communications Carrier Services (“WCCS”), began providing Monterosso and Vargas with WCCS invoices and CDRs. These WCCS invoices and CDRs were provided to Monterosso as part of a legitimate business arrangement Hay had with Monterosso. Upon receipt of the invoices, Vargas would change the names on the invoices to show sales from Volta to Mercury and purchases from WCCS to Volta. Despite what the invoices showed, Volta never sold anything to, or bought anything from, WCCS or Mercury.³

On December 27, 2004, Monterosso sent an email to John Petuoglu, one of Hay's employees, requesting “additional revenue” before the end of the year. In this email, Monterosso listed the December invoices he already had received and requested a specific amount be added to each one. After this request, Hay did not provide Monterosso and Vargas with any additional invoices. Monterosso and Vargas subsequently submitted the WCCS–to–Volta and the Volta–to–Mercury invoices to GlobeTel's accounting department. The invoices matched the real invoices but the customer name had been changed to Volta, and the amounts had been increased.

After Hay stopped providing invoices, Monterosso and Vargas started receiving CDRs from Chuck Leblo, and would use the data from these CDRs to create invoices on WCCS letterhead. Leblo had no connection to Hay's companies, and there was no authorization from Mercury or WCCS to create these invoices. Vargas used Leblo's CDRs to create invoices showing sales of minutes from WCCS to Volta and sales of minutes by Volta to Mercury. Vargas would then submit the invoices and CDRs to GlobeTel.

Leblo's CDRs and invoices also were used to manufacture revenue for Lonestar. In 2004 and early 2005, Monterosso and Vargas obtained CDRs and invoices purporting to show Lonestar had purchased minutes from Leblo's company XSTEL and had sold minutes to Leblo's company Telmetriks. Even after Leblo stopped providing invoices in 2005 and sent only CDRs, Vargas prepared XSTEL–to–Lonestar and Lonestar–to–Telmetriks invoices using Leblo's CDRs. Lonestar actually never transacted with XSTEL or Telmetriks.

GlobeTel also reported “off-net” revenue for Centerline from Vargas's company, CSI. Centerline, however, never bought from nor sold anything to CSI as part of the “off-net” program. From September 2004 to March 2006, Monterosso and Vargas created and submitted invoices showing Centerline and CSI were purchasing minutes from, and selling minutes to, each other.⁴

2. Continuation of the Scheme and GlobeTel's Knowledge

At Monterosso's direction, Vargas submitted the phony manufactured invoices reflecting the “off-net” business of Volta, Lonestar, and Centerline, to GlobeTel's accounting department. GlobeTel recorded revenue, costs of goods, and expenses from Centerline and its subsidiaries by making entries in its general ledger. Lynch, as GlobeTel's COO from August 2004 to March 2006 and CFO from March 2006 to October 2006, and Jimenez, as GlobeTel's CFO until March 2006, were responsible for recording the “off-net” revenue. Lynch told Jimenez he always had believed the “off-net” revenue was “fake.” R5–475 at 13. Additionally, on January 12, 2005, Vargas accidentally sent Lynch an invoice from WCCS to another unrelated telecom company, and the following day, Lynch requested a “new one.” R5–475 at 12.

In April 2005, Lynch asked Monterosso to provide an extra $1.6 million in revenue for the first quarter of the year. Monterosso then contacted Leblo to ask whether he had “any additional revenue ... that GlobeTel could utilize.” R5–475 at 12. Vargas also emailed Leblo the precise amount of revenue needed for each GlobeTel subsidiary over particular time periods within the quarter. After sending the email requesting the particular amount, on May 2, 2005, Vargas sent Leblo another email stating the additional $1.6 million was “need [ed] ... within the next couple of days.” R–314–28 at 79 (Ex. 161). That same day, GlobeTel recorded the approximate $1.6 million in revenue in its general ledger.

In 2004 and 2005, the fraudulent “off-net” revenue accounted for approximately 58% and 87.4% of GlobeTel's revenue, respectively; and for the first quarter of 2006, it accounted for approximately 92%. Because of the fictitious “off-net” revenue, from October 2004 through June 2006, GlobeTel's financial statements misstated the company's revenue by more than $100 million. These misstatements were consequently made a part of GlobeTel's periodic reports, securities registration statements, and press releases.

C. SEC Investigations and Proceedings Below

In November 2007, the SEC filed a complaint against Monterosso and Vargas and alleged multiple violations of the Securities Act of 1933 (“Securities Act”) ⁵ and the Securities Exchange Act of 1934 (“Exchange Act”).⁶ In a separate action, in May 2008, the SEC filed a complaint against GlobeTel, Lynch, Huff, and Jimenez. Lynch settled with the SEC on liability, but the civil penalties determination was left for a later date. Huff consented to judgment on both liability...