Sec. & Exch. Comm'n v. RMR Asset Mgmt. Co.

• Decision Date: 03 February 2021
• Docket Number: Case No.: 18-cv-1895-AJB-LL
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiffs, v. RMR ASSET MANAGEMENT COMPANY, et al., Defendants.
• Court: U.S. District Court — Southern District of California

553 F.Supp.3d 820

SECURITIES AND EXCHANGE COMMISSION, Plaintiffs,

v.RMR ASSET MANAGEMENT COMPANY, et al., Defendants.

Case No.: 18-cv-1895-AJB-LL

United States District Court, S.D. California.

Signed February 3, 2021

Christian Schultz, Cori Michelle Shepherd, James E. Smith, Kevin Nick Guerrero, Michael Roessner, Warren Edward Greth, Jr., U.S. Securities and Exchange Commission, Washington, DC, for Plaintiffs.

Robert Norman Knuts, Pro Hac Vice, Sher Tremonte LLP, New York, NY, Thomas D. Mauriello, Mauriello Law Firm APC, San Clemente, CA, for Defendants Jocelyn M. Murphy, Michael S. Murphy.

Richard C. Gounaud, Chester, NJ, Pro Se.

ORDER GRANTING IN PART AND DENYING IN PART THE SEC'S MOTION FOR REMEDIES

Anthony J. Battaglia, United States District Judge

Before the Court is a motion for remedies filed by the Security Exchange Commission ("SEC"). (Doc. No. 138.) In its motion, the SEC requests remedies in the form of civil penalties and an injunction against Sean Murphy ("Mr. Murphy"), Jocelyn Murphy ("Ms. Murphy") (collectively, "the Murphys"), and Richard Gounaud ("Mr. Gounaud") (collectively, "Defendants").

For the reasons set forth, the Court GRANTS IN PART AND DENIES IN PART the SEC's motion for remedies.

I. BACKGROUND

The SEC commenced this action, alleging that for several years, Defendants violated Section 15(a)(1) of the Securities Exchange Act of 1934 ("Exchange Act") by acting as unregistered brokers when they bought and sold securities transactions, including new-issue municipal bonds, on behalf of RMR Asset Management Company ("RMR"). The SEC also alleged that Ms. Murphy violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder when she provided false information regarding her residence, while seeking to purchase new-issue municipal bonds, in order to obtain the highest priority for her orders.

On August 14, 2020, the Court granted the SEC's motion for summary judgment. (Doc. No. 137.) Specifically, the Court held that upon consideration of the relevant factors, Defendants were brokers as defined by Section 3(a)(4)(A) of the Exchange Act, and that there is no dispute that they did not register as brokers as required by Section 15(a) of the same. (Id. at 7.) The Court also held that there is no genuine issue of material fact that Ms. Murphy fraudulently obtained new issue bonds in violation of Section 10(b) and Rule 10b-5 by knowingly providing false zip codes to brokers to secure priority in obtaining bonds. (Id. at 8–10.) The Court thereafter directed the SEC to file a motion regarding the remedies sought in this matter. The instant motion followed.

II. LEGAL STANDARD

The Exchange Act authorizes the SEC to seek penalties and injunctive relief for violations of the Act. 15 U.S.C. § 78u(d). Civil penalties are "determined by the court in light of the facts and circumstances." Id. § 78u(d)(3) (B). The purposes of civil penalties are to punish the violator and deter future violations of the securities laws. SEC v. Indigenous Global Development Corp. , 2008 WL 8853722, at *17 (N.D. Cal. June 30, 2008) ; SEC v. CMKM Diamonds, Inc. , 635 F. Supp. 2d 1185, 1192 (D. Nev. 2009). These, in turn, "further the goals of ‘encouraging investor confidence, increasing the efficiency of financial markets, and promoting the stability of the securities industry.’ " SEC v. Spyglass Equity Sys. , Inc., 2012 WL 13008422, at *3 (C.D. Cal. Apr. 5, 2012) (quoting SEC v. Palmisano , 135 F.3d 860, 866 (2d Cir. 1998) ). Injunctions are appropriate where the SEC has shown a "reasonable likelihood of future violations of the securities laws." SEC v. Fehn , 97 F.3d 1276, 1295 (9th Cir. 1996). "The granting or denying of injunctive relief rests within the sound discretion of the trial court." Id. at 1295.

To determine whether to impose civil penalties or an injunction, courts evaluate the totality of the circumstances surrounding the defendant and his or her violations and consider several factors. See SEC v. Loomis , 17 F. Supp. 3d 1026, 1029–30 (E.D. Cal. 2014) (citing SEC v. Fehn , 97 F.3d 1276, 1295–96 (9th Cir. 1996) and SEC v. Murphy , 626 F.2d 633, 655 (9th Cir. 1980) ). Factors to consider are: "(1) the degree of scienter involved; (2) the isolated or recurrent nature of the infraction; (3) the defendant's recognition of the wrongful nature of his conduct; (4) the likelihood, because of defendant's professional occupation, that future violations might occur; (5) and the sincerity of his assurances against future violations." Fehn , 97 F.3d at 1295–96 (quoting Murphy , 626 F.2d at 655 ).

III. DISCUSSION

In its motion, the SEC requests civil penalties and injunctions against Defendants for their respective violations of the Exchange Act. (Doc. No. 138-1.) The Court discusses the appropriateness of the remedies sought against each defendant in turn.

A. Mr. Gounaud's and Mr. Murphy's Section 15(a) Violations

i. Civil Penalties

The Exchange Act authorizes the Court to impose a monetary penalty against Defendants based upon either (i) specific statutory amounts multiplied by the number of violations committed, or (ii) the gross amount of his or her pecuniary gain. See 15 U.S.C. §§ 77t(d)(2), 78u(d)(3). In this case, the SEC seeks Tier 1 penalties against Mr. Gounaud and Mr. Murphy. The statute provides for Tier 1 penalties in an amount that "shall not exceed the greater of" $7,500 per violation (or $9,639 for acts occurring after November 2, 2015) or the gross amount of pecuniary gain to a defendant as a result of the violation. 15 U.S.C. § 78u(d)(3)(b)(i) ; 17 C.F.R. § 201.1001 ; 17 C.F.R. § 201.1001, Tbl. I.¹ Of these two statutory alternatives, the SEC requests penalties of $7,500 for each month during which Mr. Gounaud and Mr. Murphy violated Section 15(a).

Because Mr. Gounaud engaged in securities transactions as an unregistered broker from August 14, 2013 to May 4, 2017, a period of forty-six months, the SEC seeks $385,641 in civil penalties against Mr. Gounaud. And because Mr. Murphy engaged in securities transactions as an unregistered broker from November 28, 2011 to March 10, 2017, a period of sixty-five months, the SEC seeks $523,863 against Mr. Murphy. Contesting the appropriateness of the SEC's request, Defendants argue that the penalty amounts are unjust and inequitable when compared to their gross pecuniary gain and the sanctions imposed on other defendants in this action, and violative of the Excessive Fines Clause of the Eight Amendment to the U.S. Constitution. The Court disagrees.

First, there is no requirement that the Court consider the amount of penalties requested against the defendant's gross pecuniary gain. See SEC v. Brookstreet Sec. Corp. , 664 F. App'x 654, 656 n.2 (9th Cir. 2016) ("Nothing in the Act requires courts to impose penalties based on a wrongdoer's illicit gain or ability to pay."). The statute itself authorizes the Court to impose either a fixed dollar amount for each violation or the gross amount pecuniary gain. See 15 U.S.C. §§ 77t(d)(2), 78u(d)(3). As the SEC seeks civil penalties based on the fixed statutory amounts, the Court does not find it necessary to have, or consider evidence of, gross pecuniary gain.² See, e.g., SEC v. Wu , 2017 WL 11518453, at *4 (N.D. Cal. Sept. 20, 2017) ("Because the SEC seeks only the fixed amount in this case, no evidence of [the defendant's] pecuniary gain is required.").

Second, the SEC seeks the same type of sanctions for Mr. Gounaud and Mr. Murphy, similarly situated defendants whom the Court has found to have violated Section 15(a). The Court is not persuaded that Mr. Gounaud's and Mr. Murphy's civil penalties should be measured against those of the other defendants in this action because those defendants entered into a pre-litigation settlement with the SEC, and thus, are not comparable to Mr. Gounaud and Mr. Murphy. Here, the requested penalties result from a judgment on the merits of the case. In contrast, the settling defendants consented to a final judgment without any finding of liability, and their penalties resulted from a bargained-for exchange. See also Brookstreet Sec. Corp. , 664 Fed. App'x at 656 n.2 ("[W]e eschew evaluating penalties in light of awards against other defendants because doing so inappropriately pushes the decision toward a mathematical bright-line.") (citation omitted). The Court further notes that although Defendants are entitled to litigate their case, they did so by presenting arguments without credible evidentiary support. (See, e.g. , Doc. No. 137 at 5 ("Defendants also argue that they were in a "partnership" with Riccardi. [ ] However, Defendants provide no evidence of this other than self-serving declarations.").) As such, the Court does not find that the settling defendants' civil penalty amounts are an appropriate benchmark for ascertaining the penalties appropriate here.

Third, the Court declines to find that the SEC's requested penalties violate the Excessive Fines Clause of the Eight Amendment. Other than conclusory asserting that the requested penalties are grossly disproportional to their violations, Defendants offered no explanation to support their position. (Doc. No. 160 at 24.)³ As stated in the Court's summary judgment order, Mr. Gounaud and Mr. Murphy engaged in unregistered broker activity for nearly four and six years, respectively. (Doc. No. 137 at 2.) The SEC explains that instead of counting each unlawful transaction that Mr. Gounaud and Mr. Murphy engaged in during those years, it proposes a "per month" calculation. Had the SEC elected a "per violation" calculation, Mr. Gounaud and Mr. Murphy would have been subjected to millions of dollars in penalties as a result of their partaking in thousands of unlawful trades on behalf of RMR. See, e.g., SEC v. Pattison , 2011 WL 723600, at *5 (N.D. Cal. Feb. 23, 2011) ("The Court may assess a penalty for each distinct violation[.]"); SEC v. AmeriFirst Funding, Inc. , 2008 WL 1959843, at *9 (N.D. Tex. May 5, 2008) ("[T]he court concludes that it should...