Sec. & Exch. Comm'n v. Weed

• Citation: 315 F.Supp.3d 667
• Decision Date: 25 May 2018
• Docket Number: Civil Action No. 14–14099–NMG
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Richard WEED, Defendant.
• Court: U.S. District Court — District of Massachusetts

315 F.Supp.3d 667

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Richard WEED, Defendant.

Civil Action No. 14–14099–NMG

United States District Court, D. Massachusetts.

Signed May 25, 2018

Martin F. Healey, Securities and Exchange Commission, Boston, MA, for Plaintiff.

William H. Connolly, Law Offices of William H. Connolly, Boston, MA, Caroline K. Simons, Elizabeth G.H. Ranks, Gus P. Coldebella, Thomas C. Frongillo, Fish & Richardson, P.C., Boston, MA, J. W. Carney, Jr., J. W. Carney, Jr. & Associates, Boston, MA, for Defendant.

MEMORANDUM & ORDER

Nathaniel M. Gorton, United States District Judge

This case arises out of a government investigation of a pump-and-dump scheme ("the scheme") involving publicly-traded shares of CitySide Tickets, Inc. ("CitySide"). Plaintiff Securities and Exchange Commission ("the SEC" or "the Commission") contends that defendant Richard Weed ("Weed" or "defendant"), an attorney, together with two former stockbrokers, Coleman Flaherty ("Flaherty") and Thomas Brazil ("Brazil"), committed securities fraud in connection with the scheme.

Pending before the Court were (1) the SEC's motion for partial summary judgment on the SEC's first, second, fourth, fifth and sixth claims for relief (Docket No. 69) and (2) Weed's motion for partial summary judgment on the SEC's third claim for relief (Docket No. 73). By order of the Court (Docket No. 105) entered on May 10, 2018, the SECs motion was allowed and Weed's motion was denied, with the notation that an explanatory memorandum and order ("M & O") would follow. This is that M & O.

I. Background and Procedural History

A. Factual Background

Brazil and Flaherty are former stockbrokers who ran several iterations of the pump-and-dump scheme with the assistance of Weed. Flaherty controlled a public shell company, UpTurn. In 2009, the owner of CitySide, a sporting event ticket broker, proposed that Flaherty make an investment in CitySide. Flaherty counter-proposed a reverse merger as a result of which CitySide would become a publicly-traded company after a merger with the public shell company, UpTurn.

Brazil and Flaherty participated in the reverse merger deal and Weed performed the legal work necessary to complete the merger. As a result of the merger, Flaherty and Brazil held debt in CitySide, in the form of promissory notes, which could be converted into shares of CitySide stock. To facilitate the reverse merger, Weed completed legal work, including 1) a name change application with the Financial Industry Regulatory Authority ("FINRA"), 2) the paperwork for the reverse stock split, 3) the issuing of a controlling share block to CitySide's owner and 4) the conversion of the promissory notes into shares that were freely tradable ("unrestricted") securities.

After the merger, Flaherty and Brazil arranged for stock promoters to issue favorable press releases about CitySide in order to inflate the value of CitySide stock. Weed accomplished the conversion of the promissory notes held by Brazil and Flaherty into share certificates that were deposited into brokerage firms for trading and which allowed Flaherty and Brazil to execute sales of the certificates after the value of the stock was inflated. In a conversation that was recorded, Weed told Flaherty (who was cooperating with federal law enforcement agents at the time) "the deals are all vapor, and they cannot sustain themselves for six weeks".

In order to facilitate the conversion of the notes into freely tradable shares, Weed wrote legal opinion letters to transfer agents of CitySide who were responsible for issuing new securities and recording changes in ownership of securities. In those letters, Weed opined that the transfer agent could lawfully allow the issuance of unrestricted shares of stock under 17 C.F.R. § 230.144. He represented to the transfer agents that

[n]one of the persons who have elected to convert [their] notes into common stock are affiliates of the [i]ssuer and none of these persons have been affiliates during the preceding three months.

The recipients of the shares were, in fact, Flaherty or nominees of Flaherty and Brazil, all affiliates of the issuing company. Flaherty sold approximately $1.3 million of CitySide stock after his notes were converted.

B. Procedural History

The SEC filed the civil complaint in this action on November 6, 2014 against Weed, Flaherty and Brazil alleging six violations of the securities laws. The following month, a grand jury returned an indictment charging Weed with criminal violations of Section 10(b), 15 U.S.C. §§ 78j(b) & 78ff, and Rule 10b–5, 17 C.F.R. § 240.10b–5 as well as conspiracy, 18 U.S.C. § 371, and wire fraud, 18 U.S.C. § 1343. In July, 2015, this Court allowed a motion to stay the proceedings in this civil action during the pendency of the parallel criminal proceedings against Weed in Criminal Action No. 14–10348–DPW.

On May 16, 2016, after ten days of trial, a jury convicted Weed on all nine counts of the indictment and he was subsequently sentenced to a term of 48 months imprisonment. That conviction was affirmed in October, 2017 by the First Circuit Court of Appeals ("the First Circuit") and Weed's petition for a writ of certiorari was denied by the United States Supreme Court in May, 2018. This Court had previously entered a consent judgment as to Brazil and Flaherty in October, 2016.

The SEC and Weed filed motions for partial summary judgment in March, 2018. Those motions are the subject of this memorandum.

II. Motions for Partial Summary Judgment

A. Legal Standard

The role of summary judgment is "to pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial." Mesnick v. Gen. Elec. Co., 950 F.2d 816, 822 (1st Cir. 1991). The burden is on the moving party to show, through the pleadings, discovery and affidavits, "that there is 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). A fact is material if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact exists where the evidence with respect to the material fact in dispute "is such that a reasonable jury could return a verdict for the nonmoving party." Id.

If the moving party has satisfied its burden, the burden shifts to the non-moving party to set forth specific facts showing that there is a genuine, triable issue. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The Court must view the entire record in the light most favorable to the non-moving party and indulge all reasonable inferences in that party's favor. O'Connor v. Steeves, 994 F.2d 905, 907 (1st Cir. 1993). Summary judgment is appropriate if, after viewing the record in the non-moving party's favor, the Court determines that no genuine issue of material fact exists and that the moving party is entitled to judgment as a matter of law.

B. Application

1. SEC's Motion for Partial Summary Judgment

The SEC contends that Weed is collaterally estopped from disputing the facts that form the basis of his criminal conviction. The Commission asserts that the factual underpinnings of those convictions are sufficient to establish the necessary elements of violations of the securities laws alleged in this civil action.

Weed responds that collateral estoppel is inapplicable here because he did not have a full and fair opportunity to defend himself in the criminal proceeding. He claims that the government failed to produce exculpatory evidence for his trial counsel, rendering his conviction constitutionally infirm. Further, Weed contends that the factual issues that formed the basis of the criminal conviction are not identical to the SEC's claims in this civil action. Finally, he suggests that, with respect the sixth claim, collateral estoppel cannot apply because the factual allegations supporting that claim were not essential to the judgment in the criminal case.

Collateral estoppel bars the re-litigation of any factual or legal issue that was actually decided in previous litigation on a different cause of action involving a party to the first case. Keystone Shipping Co. v. New England Power Co., 109 F.3d 46, 51 (1st Cir. 1997). A party seeking to invoke collateral estoppel must establish that

(1) the issue sought to be precluded in the later action is the same as that involved in the earlier action; (2) the issue was actually litigated; (3) the issue was determined by a valid and binding final judgment; and (4) the determination of the issue was essential to the judgment.

Ramallo Bros. Printing, Inc. v. El Dia, Inc., 490 F.3d 86, 90 (1st Cir. 2007). Courts routinely hold that a defendant convicted in a criminal proceeding is collaterally estopped from re-litigating the operative facts in a subsequent civil proceeding. See, e.g., United States v. Podell, 572 F.2d 31, 35 (2d Cir. 1978) ("It is well-settled that a criminal conviction, whether by a jury verdict or guilty plea, constitutes estoppel in favor of the United States in a subsequent civil proceeding as to those matters determined by judgment in the criminal case.").

a. Full and fair litigation of criminal proceeding

As a preliminary matter, Weed's contention that he did not have a "full and fair" opportunity to litigate the issues in his criminal proceeding is unconvincing. He suggests that the government in the criminal proceeding failed to produce certain exculpatory evidence, rendering the trial unfair and he has filed post-trial motions advancing that argument in the criminal proceeding. He maintains that, at the very least, the Court should refrain from applying collateral estoppel until the judicial officer presiding over the criminal proceeding has adjudicated Weed's motion to compel production of the alleged exculpatory evidence.

Since the date of the filing of Weed's memoranda in opposition to the...