Sec. & Exch. Comm'n v. Nevatia
| Decision Date | 19 October 2015 |
| Docket Number | Case No. 14-cv-05273-JCS |
| Court | U.S. District Court — Northern District of California |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. VINAY KUMAR NEVATIA, Defendant. |
This is a civil enforcement action by the Securities and Exchange Commission (the "SEC") against Defendant Vinay Kumar Nevatia ("Kumar").1 Kumar has not answered the SEC's Complaint otherwise appeared in this action, and the SEC moves for default judgment. According to the SEC's uncontested allegations and evidence, Kumar fraudulently sold approximately $650,000 worth of stock that he did not own, went to great lengths to conceal his misconduct, and left the country rather than cooperate with the SEC's administrative investigation. For the reasons stated below, the undersigned recommends that the SEC's Motion be GRANTED, and that the Court order disgorgement, a civil penalty, and injunctive relief. Although the SEC has consented to the jurisdiction of the undersigned magistrate judge, Kumar has not. Accordingly, this case will be reassigned to a United States district judge for all further proceedings, including action on the recommendations of this Report.
Kumar lived in Palo Alto, California "at least from 2004 through 2013," during which time he solicited investments in real estate and securities. Compl. (dkt. 1) ¶ 8.2 He "is not individually registered with the [SEC] and has never been licensed to trade securities." Id.
From approximately May through August of 2008, Kumar convinced eight investors (the "Investors") to purchase shares of CSS Corp. Technologies (Mauritius) Limited ("CSS"), a privately held technology company. Id. ¶¶ 10-11. Kumar "told the investors that CSS shares were only available to persons, like himself, with personal connections to the company," and that "it was necessary for the shares to be purchased through a single entity to simplify the transaction for the seller." Id. ¶¶ 11-12. He formed a Delaware limited liability company, VRSBS Investment, LLC ("VRSBS"), for the purpose of purchasing the shares. Id. ¶¶ 9, 12. Kumar contributed $24,500 to VRSBS, the Investors contributed $874,500, and "Kumar used all of the funds for the purchase of [179,900] CSS shares on behalf of the VRSBS members"—i.e., himself and the eight Investors. Id.; Lee Supp'l Decl. (dkt. 35) ¶¶ 3-6 & Ex. A. Kumar was the managing member of VRSBS. Compl. ¶ 14.
The CSS shares were held by VRSBS, but Kumar and the Investors agreed that rights to the shares would be directly proportional to each member's contribution. Id. ¶ 13. The "Operating Agreement of VRSBS Investment, LLC," adopted August 8, 2008, provided that VRSBS's "'sole purpose' was to buy and hold CSS shares 'for the benefit of [the VRSBS members],'" that Kumar would notify the investors of the material terms any sale of shares, and that Kumar "was prohibited from commingling the proceeds [of any sale] with his personal accounts." Id. ¶ 14 (). At the Investors' request, Kumar procured separate stock certificates from CSS, each representing the number of shares corresponding to an individual Investor's ownership interest. Id. ¶ 15. Kumar distributed the physical certificates to each Investor from August 2008 through December 2008, "to ensure that each individual investor would have control over the future sale of his or her shares." Id.
About three years later, in November of 2011, Kumar nevertheless reached an agreement to sell 89,950 CSS shares—constituting half of the VRSBS holdings—to three directors of a San Mateo, California venture capital firm. Id. ¶ 16. "In negotiating this sale, Kumar concealed the ownership interests of the original investors and falsely told the directors that the shares were 'his shares.'" Id. He also signed a stock purchase agreement falsely representing that the shares were not subject to any encumbrance or restriction, and that he was not a party to any agreement granting any other person rights to the shares. Id. ¶ 17. At Kumar's instruction, the directors transferred their $359,800 payment for the stock to "a personal trust bank account held in Kumar's name, rather than to the VRSBS bank account." Id. ¶ 18. Kumar never transferred those funds to VRSBS or informed the Investors of the sale. Id.
When the directors requested stock certificates for the shares they had purchased, Kumar "falsely claimed that new certificates needed to be issued because all his CSS shares were held on a single certificate, which covered a greater number of shares than the directors had purchased." Id. ¶ 19. In February of 2012, two of the directors bought an additional 25,000 CSS shares from Kumar for $100,000 under similar circumstances, again transferring funds to "a bank account under Kumar's sole control," and Kumar again failed to notify the VRSBS Investors of the sale. Id. ¶¶ 20-21.
Also in February of 2012, Kumar sold 60,000 CSS shares to a private equity fund for $195,000. Id. ¶ 20. The private equity fund transferred the $195,000 to the VRSBS bank account, but Kumar depleted all but $500 of that through nine separate transfers to an account under his own control, culminating on March 1, 2012. Id. ¶ 21; Lee Decl. (dkt. 27) ¶ 2 & Ex. 1. Again, Kumar never distributed these funds to the VRSBS Investors or notified them of the sale. Compl. ¶¶ 20-21.
When Kumar sought to finalize the resales by procuring new stock certificates, CSS's transfer agent informed him that he would need to return the original certificates for cancellation. Kumar "falsely told the transfer agent during a phone conversation that all of the original stock certificates issued to VRSBS had been lost," when in fact he had distributed them to the Investors as assurance that the stock would not be sold without their consent. Id. ¶ 22. Kumar signed an "Indemnity for Lost Share Certificates" repeating that assertion, and the transfer agent issued new stock certificates to the purchasers in September of 2012 and, "[a]fter an administrative delay," May of 2013. Id. All told, Kumar resold 174,950 of VRSBS's 179,900 CSS shares—more than 97% of its holdings. Id. ¶¶ 16, 20.
From around March of 2012 through July of 2013, Kumar took a number of steps to conceal the resales from the Investors. Id. ¶ 23. While "he was in the final stages of the fraudulent resale of the shares," he told the original Investors that he would obtain new stock certificates in the Investors' own names (as opposed to in the name of VRSBS). Id. He also told an Investor that CSS was performing well and planning for "a potentially lucrative public offering," and told two Investors that he would try to find buyers for their shares, despite having already sold the stock. Id. When CSS announced a dividend, Kumar asked the Investors to provide wire transfer information, even though he had already sold at least some of the stock. Id. When certain Investors confronted Kumar in August of 2013 with evidence they had obtained from CSS regarding the fraudulent sales, "Kumar tried to keep his scheme going by falsely claiming that he had not actually sold the shares, but only temporarily 'transferred' them to safeguard them from Kumar's creditors." Id. ¶ 24. He also "pretended to restore an original investor's shares through a purported stock transfer from two fictitious shareholders," by sending the Investor "bogus forms purporting to record the transfer of 100,000 shares" from individuals who did not actually own any CSS stock. Id. Kumar then "stopped responding to all attempts by the VRSBS members to contact him." Id.
During the SEC's investigation of the conduct at issue in this case, SEC attorney William Salzmann spoke to Kumar by telephone, and Kumar informed Salzmann "that e-mail was the best way to send documents to him." Salzmann Decl. (dkt. 26) ¶¶ 1-2. In early October, 2013, Salzmann sent Kumar an administrative subpoena to appear for testimony on October 21, 2013, and Salzmann and other SEC staff members later spoke to Kumar by telephone regarding the schedule for his testimony. Id. ¶ 4. "Mr. Kumar stopped responding to the [SEC]'s calls, e-mails, and other written correspondence on or about October 25, 2013 [and] never appeared for testimony." Id.
The SEC filed its Complaint in this action on December 2, 2014. See generally Compl. Two days later, the SEC "sent courtesy copies of the complaint, summons and other documents via e-mail" to Kumar. Salzmann Decl. ¶ 5. The SEC later learned that Kumar was in custody at the Dubai Customs Holding Center in the United Arab Emirates ("UAE") on unrelated charges, and on February 9, 2015, served process on a receptionist authorized to accept service at the Dubai Customs Holding Center. See generally Certificate of Service (dkt. 16); Singh Decl. (dkt. 34).
Kumar has not responded to the Complaint or otherwise appeared in this action. At a case management conference on June 19, 2015, the SEC stated its intent to seek default judgment. Civil Minute Order (dkt. 23). On June 22, 2015, the SEC sent Kumar, via email, a courtesy copy of the Minute Order reflecting that intent. Salzmann Decl. ¶ 6. The SEC moved for default judgment on July 17, 2015, see Mot. (dkt. 25), and filed a separate Request for Entry of Default (dkt. 30) on July 20, 2015. The Clerk entered default as to Kumar on July 21, 2015. Dkt. 31.
The Complaint includes three claims, all based on substantially the same conduct: the first for violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; the second for violation of paragraph (a)(1) of Section 17 of the Securities Act; and the third for violation of paragraphs (a)(2) and (a)(3) of Section 17 of the Securities Act. The SEC's Motion is supported by: (1) a declaration by William Salzmann describing the...
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