S.E.C. v. Abellan

• Decision Date: 07 December 2009
• Docket Number: Case No. C08-5502BHS.
• Citation: 674 F.Supp.2d 1213
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Framcosco ABELLAN, et al, Defendants.
• Court: U.S. District Court — Western District of Washington

674 F.Supp.2d 1213

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Framcosco ABELLAN, et al, Defendants.

Case No. C08-5502BHS.

United States District Court, W.D. Washington, at Tacoma.

December 7, 2009.

COPYRIGHT MATERIAL OMITTED

Lloyd A. Farnham, Marc J. Fagel, Robert L. Tashjian, U.S. Securities and Exchange Commission, San Francisco, CA, for Plaintiff.

O. Robert Meredith, Salt Lake City, UT, Roger Fidler, Midland Park, NJ, Robert E. Kovacevich, Spokane, WA, for Defendants.

ORDER GRANTING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

BENJAMIN H. SETTLE, District Judge.

This matter comes before the Court on Plaintiff's unopposed motion for summary judgment (Dkt. 94). The Court has considered the pleadings filed in support of the motion and the remainder of the file, and Defendants not having filed opposition to the motion, hereby grants Plaintiff's motion for the reasons stated herein.

I. PROCEDURAL HISTORY

On August 13, 2008, Plaintiff filed a complaint against Defendants. Dkt. 1. On August 14, 2008, Plaintiff filed an application for temporary restraining order ("TRO"). Dkt. 17. On August 14, 2008, this case was reassigned to the undersigned. Dkt. 22. On the same day, the undersigned granted the TRO. Dkt. 29. On September 11, 2008, the Court converted the TRO into a preliminary injunction. Dkt. 64. On October 14, 2009, Plaintiff filed a motion for summary judgment against Defendants. Dkt. 94. This motion is unopposed.

II. FACTUAL BACKGROUND

The following is a synopsis of the uncontroverted facts, as provided by Plaintiff:

[B]eginning in late 2005 defendants illegally sold millions of shares of Bremerton-based defendant GHL Technologies Inc. ("GHLT") to the public without any disclosure of the company's financial statements or details of its business operations. The scheme was orchestrated by defendant Francisco Abellan, a Spanish stock promoter, using foreign companies that he owns and controls, defendants EU Equity Holdings Inc. ("EU"), KLO Financial Services Inc. ("KLO"), and Vega Star Capital, SL ("Vega Star"). Abellan began the scheme by helping to reorganize GHLT and obtaining a public listing for its stock. At about the same time, GHLT's Chief Executive Officer, defendant Gene Hew-Len, caused the company to issue nearly seven million shares to Abellan's companies EU and KLO, which paid $500,000 in exchange for the shares. Defendants did not register the transaction by filing a "registration statement" with the Commission. Had defendants registered the transaction, GHLT would have been required to provide important and detailed public disclosures about the company's business and finances. Defendants evaded public disclosure by falsely claiming that the transaction was a private sale for longterm "investment purposes," supposedly exempt from registration. In fact, Abellan entered the transaction with a view to selling the shares quickly to an unsuspecting market.

In the spring of 2006, Abellan engaged in a fraudulent promotional campaign to tout GHLT stock to potential investors. Abellan, through his company Vega Star, paid for a promotional mailer to be sent to more than two million addresses in the United States within a three-day period in May 2006. In the mailer, Abellan touted GHLT stock as a "strong buy" but did not disclose that he actually owned shares of the stock or that he intended to sell his shares into the demand he created by the mailer. At the same time, Abellan helped devise a public relations plan for GHLT in which GHLT issued press releases containing claims about the company's contracts with major customers.

The share price and trading volume of GHLT stock rose dramatically upon release of Abellan's misleading mailer and GHLT's press release campaign. Shortly thereafter, Abellan (through EU, KLO and Vega Star) sold GHLT shares to the public for more than $13.5 million. Abellan wired all of the funds out of the United States to bank accounts in Andorra in late May 2006.

In late July 2008, Andorran authorities for the first time confirmed that GHLT stock sale proceeds had been wired to bank accounts in Andorra opened in the names of EU, KLO, and Vega Star. See Declaration of Tonia J. Tornatore ("Tornatore Decl.") (Docket No. 37) ¶¶ 3, 4. The Andorran authorities' information directly contradicted Abellan's sworn declaration that he submitted in support of his proposed pre-litigation settlement with the Commission. See Scafe Decl. ¶¶ 53-54 & Exs. 43, 44, 45. According to Andorran authorities, Abellan personally controlled the disposition of their GHLT proceeds: He transferred the proceeds out of the EU and KLO accounts into nine other accounts for which he has power of attorney, including an account held in the name of Vega Star. Tornatore Decl. ¶¶ 4-6. The entities whose names appear on the Andorran accounts—named in this action as Relief Defendants—are based in Central America and the Caribbean. See Tornatore Decl. ¶¶ 5-7.

On August 13, 2008, based on the evidence submitted by the Commission, the Court entered a Temporary Restraining Order. See Docket No. 29. Abellan and Vega Star waived service of the summons and complaint and filed answers. See Docket Nos. 45-46 (waivers), 74-75 (answers). The Court converted the Temporary Restraining Order into a Preliminary Injunction, which was entered on September 11, 2008. See Docket No. 64. Among other things, the Preliminary Injunction froze Abellan's assets in the United States and required him and the companies he controls to repatriate investor funds that he transferred overseas. See Prelim. Inj. §§ XI, XIII, XIV.

Abellan, EU, KLO, and Vega Star refused to comply with the Court's Order to repatriate investor funds. Declaration of Robert L. Tashjian (filed concurrently) ¶ 1. In October and December 2008, the Commission served requests for production of documents on Abellan and Vega Star. Id. ¶¶ 2-3. Both failed to respond. Id. Abellan, furthermore, failed to appear at his deposition noticed for March 20, 2009. Id. ¶ 4. As a result of defendants' refusal to comply with their discovery obligations, the Commission was unable to develop further facts showing Abellan's ownership and control over EU, KLO, Vega Star, and the Relief Defendants.

Upon the Commission's application, the Court signed a letter rogatory requesting that the Andorran judicial authorities require Abellan's banks to produce documents to the Commission relating to Abellan and his companies' accounts. See Letter Rogatory (Docket No. 26). The Commission retained counsel in Andorra to submit the Court's letter rogatory to the Andorran magistrate presiding over an investigation into Abellan's alleged money laundering activities in Andorra. Tashjian Decl. ¶ 5. Following lengthy consideration, the Andorran magistrate declined to order the banks to produce documents to the Commission. Id. & Exs. A, B (attaching Sept. 28, 2009, order and English translation).

Dkt. 94 at 1-11 (synopsis based on excerpts from brief).

III. DISCUSSION

A. Summary Judgment Standard

Summary judgment is proper only if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law. Fed. R.Civ.P. 56(c). The moving party is entitled to judgment as a matter of law when the nonmoving party fails to make a sufficient showing on an essential element of a claim in the case on which the nonmoving party has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). There is no genuine issue of fact for trial where the record, taken as a whole, could not lead a rational trier of fact to find for the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (nonmoving party must present specific, significant probative evidence, not simply "some metaphysical doubt"). See also Fed.R.Civ.P. 56(e). Conversely, a genuine dispute over a material fact exists if there is sufficient evidence supporting the claimed factual dispute, requiring a judge or jury to resolve the differing versions of the truth. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 253, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.1987).

The determination of the existence of a material fact is often a close question. The Court must consider the substantive evidentiary burden that the nonmoving party must meet at trial—e.g., a preponderance of the evidence in most civil cases. Anderson, 477 U.S. at 254, 106 S.Ct. 2505; T.W. Elec. Serv., Inc., 809 F.2d at 630. The Court must resolve any factual issues of controversy in favor of the nonmoving party only when the facts specifically attested by that party contradict facts specifically attested by the moving party.

However, when a party does not oppose a motion for summary judgment Local Rule 7(b)(2) is instructive. This rule provides: "If a party fails to file papers in opposition to a motion, such failure may be considered by the court as an admission that the motion has merit." Local Rule 7(b)(2). Here, Defendant has not opposed Plaintiff's motion for summary judgment (Dkt.94). The Court finds it appropriate to apply Local Rule 7(b)(2) in this matter, which implies Plaintiff's motion is meritorious.

B. Plaintiff's Summary Judgment Motion

1. Allegations

a. Violation of the Securities Act

Plaintiff argues that Defendants violated Sections 5(a) and 5(c) of the Securities Act. Dkt. 94 at 20. To establish a prima facie violation of Section 5, the SEC must establish that (1) no registration statement covering the securities in question was in effect; (2) the securities were sold; and (3) the sale was carried out by the use of interstate communication or transportation and the mails. SEC v. Continental Tobacco Co. of S.C., 463 F.2d 137, 155-56 (5th Cir.1972). Once those...