S.E.C. v. Chester Holdings, Ltd., CIV. A. 97-1654 (MTB).
| Decision Date | 19 February 1999 |
| Docket Number | No. CIV. A. 97-1654 (MTB).,CIV. A. 97-1654 (MTB). |
| Citation | 41 F.Supp.2d 505 |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CHESTER HOLDINGS, LTD., et al., Defendants. |
| Court | New Jersey Supreme Court |
Joseph Pignatiello, Coral Springs, FL, pro se.
Constance Pignatiello, Coral Springs, FL, pro se.
Christopher Werner, Newport, RI, pro se.
The Securities and Exchange Commission ("SEC" or "plaintiff") has brought this civil enforcement action against Chester Holdings, Ltd., formerly known as Aqua Buoy Corporation ("Aqua Buoy"); Joseph Pignatiello; Constance Pignatiello; and Christopher Werner ("Werner"). On August 20, 1997, a final order of permanent injunction was entered by consent against Chester Holdings. In addition, on October 8, 1998, a final order of permanent injunction was entered by consent against Christopher Werner. The only defendants who remain in this case are, therefore, Joseph and Constance Pignatiello (collectively as "defendants") and the SEC now moves for summary judgment against each of them. For the following reasons, this court will grant the SEC's motion.
Aqua Buoy was formed in December 1988 and, on June 19, 1989, merged with Seek Ventures, Inc., a company then registered with the SEC. Exh. 131 at 12. From 1989 to 1994, Aqua Buoy's securities were registered with the SEC pursuant to Section 12(g) of the Securities Exchange Act of 1934 and its common stock was traded over the counter on NASDAQ. Exh. 53 at 14-15.2
Joseph Pignatiello founded Aqua Buoy and was its first CEO, President and Chairman of the Board of Directors. Exh. 1 ¶ 6, Exh. 2 ¶ 6. He resigned as President in July 1990 and as CEO and Chairman in May 1991 but continued on as Director of International Marketing. Id.; Exh. 10 at 3; Exh. 6 at 82-83. Constance Pignatiello, Joseph's wife, was Aqua Buoy's Secretary and Treasurer from June 1989 to July 1990, President from July 1990 to February 1992, and a director from June 1989 to February 1992. Exh. 1 ¶ 7; Exh. 3 ¶ 7. Her parents were also directors of Aqua Buoy. Exh. 17 at 28. Werner was Aqua Buoy's Controller from January 1989 to April 1991, Exhs. 1, 2, 3 ¶ 8, its Secretary-Treasurer from July 1990 to February 1993, and its Chief Financial Officer and a director from April 1991 to February 1993. Exh. 17 at 28; Exh. 46 at 31.
This action revolves around the following five acquisitions by Aqua Buoy in 1991:(1) manufacturing equipment acquired from Aqua Buoy International, Inc. ("ABI"); (2) Leven Oaks, a hotel and restaurant retirement facility in California; (3) a commercial building in Michigan acquired from H & R Corporation ("H & R"); (4) certain assets of Lord Jeff Knitting Company, Ltd. ("Lord Jeff"), a bankrupt sweater manufacturer; and (5) equipment, trademarks and trade names acquired from Pearson Yachts Corporation ("Pearson"), a bankrupt boat manufacturer.
On March 15, 1991, Aqua Buoy acquired from ABI the manufacturing equipment, along with the necessary trademarks and patents, to produce the Aqua Buoy Flotation Aid ("ABI acquisition"). Exh. 17 at 7.
Mitchell, Londer & Company ("Mitchell Londer") was Aqua Buoy's independent auditor and supplied an Independent Auditor's Report dated July 19, 1990 to accompany Aqua Buoy's 1990 10-K statement for the fiscal year ending June 30, 1990 ("1990 10-K"). Exh. 13 at F-1, F-2. Monty Lamirato ("Lamirato"), an accountant at Mitchell Londer, was the audit manager for Aqua Buoy. Exh. 21 at 10. On February 28, 1991, Joseph Pignatiello wrote to Londer, described the upcoming ABI acquisition, and stated, inter alia, that:
1. We are purchasing the manufacturing facility for $1,353,000 which is $153,000 in cash and 300,000 shares of restricted 144 stock at $4.00 per share.
Exh. 23 at 1. Lamirato testified that he informed Joseph Pignatiello that Aqua Buoy's $4.00 per share valuation of the 300,000 shares of unregistered common stock issued in connection with the ABI acquisition, did not comply with Generally Accepted Accounting Principles ("GAAP"). Exh. 21 at 49-51. Lamirato explained to Joseph Pignatiello that because the shares of Aqua Buoy's common stock were publicly trading at between $1.00 and $1.50 per share at the time of the ABI acquisition,3 and because Rule 144 stock is restricted stock that cannot be immediately sold, the 300,000 shares should be valued at approximately 25-50% less than $1.00-$1.50 per share. Exh. 21 at 46-51, 56-58. Lamirato also explained that Mitchell Londer "would not certify and opine upon the value that [Aqua Buoy] was placing on the transaction." Exh. 21 at 47. On April 15, 1991, Aqua Buoy terminated Mitchell Londer as its independent auditor. Exh. 21 at 51; Exh. 22 at 2.
Notwithstanding Lamirato's comments, Aqua Buoy issued a press release on March 3, 1991 ("March 3, 1991 Press Release"), prepared by Joseph Pignatiello and signed by Constance Pignatiello, Exh. 6 at 129, which stated that the ABI assets were acquired for $1,353,000 in cash and equity. Exh. 15. As was more specifically delineated in Aqua Buoy's 10-Q statement for the quarter ending March 31, 1991 filed with the SEC on April 29, 1991 ("March 1991 10-Q"), the $1,353,000 was in the form of a promissory note for $153,000 and 300,000 shares of Aqua Buoy unregistered stock valued at $4.00 a share. Exh. 19 at 10. Aqua Buoy also represented the value of the ABI acquisition as $1,353,000 in its 10-K statement for the fiscal year ending June 30, 1991 ("1991 10-K"). Exh. 17 at 7-8. Finally, the SEC asserts, and defendants do not deny, that the 1991 Annual Report to Shareholders ("1991 Annual Report") and a press release dated July 27, 1991 announcing the 1991 10-K ("July 27, 1991 Press Release") listed Aqua Buoy's total assets as $7,538,609 which included the valuation of the ABI acquisition at $1,353,000. Exh. 41; Exh. 40.
On May 8, 1991, Aqua Buoy purchased Leven Oaks, a retirement facility in California ("Leven Oaks acquisition"). Exh. 17 at 8. Aqua Buoy issued a press release on May 13, 1991 ("May 13, 1991 Press Release"), prepared by Joseph Pignatiello and reviewed by Constance Pignatiello, Exh. 11 at 19-20, which stated that Leven Oaks was purchased for $1,940,000. Exh. 26. As was specified in Aqua Buoy's 1991 10-K, the $1,940,000 represented $1.2 million and 146,000 shares of unregistered common stock valued at $5.00 per share. Exh. 17 at 8. The quoted market price of Aqua Buoy common stock on May 8, 1991 was $1.50 per share. Exh. 27. The SEC asserts, and defendants do not deny, that the 1991 Annual Report and the July 27, 1991 Press Release announcing the 1991 10-K listed Aqua Buoy's total assets as $7,538,609 which included the valuation of the Leven Oaks acquisition at $1,940,000. Exh. 41; Exh. 40.
Next, on June 10, 1991, Aqua Buoy acquired 100% of the shares of H & R whose sole asset was a commercial building located in Michigan ("H & R acquisition"). Exh. 17 at 9. Aqua Buoy issued a press release on July 21, 1991 ("July 12, 1991 Press Release"), prepared by Joseph Pignatiello and reviewed by Constance Pignatiello, Exh. 6 at 178, which stated that it had acquired the H & R building which had an "M.A.I. appraised value of $2.75 million, in exchange for shares of [Aqua Buoy's] unregistered shares of stock [and Aqua Buoy] will assume approximately $590,000 in debt as part of the agreement." Exh. 33. Aqua Buoy's 1991 10-K reported that the $2.75 million represented Aqua Buoy's assumption of $490,000 in a first mortgage plus the issuance of 433,000 shares of Aqua Buoy unregistered common stock valued at $5.00 a share. Exh. 17 at 8.
In July 1991, before Aqua Buoy filed its 1991 10-K statement, Lamirato reviewed a draft of the 10-K for the purpose of Mitchell Londer reissuing its opinion concerning Aqua Buoy's financial statements for the year ending June 30, 1990. Exh. 24, Exh. 21 at 83-87. On July 25, 1991, Lamirato sent a letter to Werner regarding Aqua Buoy's proposed 1991 10-K statement ("July 25, 1991 Letter"). Exh. 24. In that letter, Lamirato stated:
8. We assume you will be able to support a common stock value of $4-5 per share used in acquiring various businesses when the free trading price of the Company's common stock never exceeded $2.88.
Exh. 24 at 2, ¶ 8.4 Neither Joseph nor Constance Pignatiello contest Werner's assertion that they saw the letter. Exh. 11 at 68.
Werner then faxed a letter to Lamirato which responded to Lamirato's concerns and stated with respect to paragraph eight:
8. According to counsel, the price for which we traded shares of stock is to our advantage and the price is substantiated by the acceptance of the buyer to trade his equity at that level. Each owner has signed a subscription agreement drawn up by counsel which states all of the risk factors and that each owner is aware that he could lose his entire investment.
Exh. 42 at 1, ¶ 8. Joseph Pignatiello drafted this paragraph of the letter. Exh. 11 at 75.
In response, Lamirato sent another letter to Werner on July 26, 1991 which further commented on paragraph eight by stating:
Comment # 8: We assume you and your current accountants have reviewed the SEC guidelines for valuing stock.
Exh. 43 at 1. Werner distributed the letter to both Joseph and Constance Pignatiello. Exh. 11 at 80.
Notwithstanding the above correspondence, Aqua Buoy's 1991 10-K reported the H & R acquisition at $2,750,000 which included, in part, 433,000 shares of Aqua Buoy unregistered common stock valued at $5.00 a share. Exh. 17 at 8. In addition, the SEC asserts, and defendants do not deny, that the 1991 Annual Report and the July 27, 1991 Press Release announcing the 1991 10-K listed Aqua Buoy's total assets as $7,538,609 which included the valuation of the H & R acquisition at $2,750,000. Exh. 41; Exh. 40.
On September 27, 1991, Aqua Buoy acquired...
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