Sec. & Exch. Comm'n v. Mattera

• Decision Date: 06 December 2013
• Docket Number: 11 Civ. 8323 (PKC)
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOHN A. MATTERA, ET AL., Defendants.
• Court: U.S. District Court — Southern District of New York

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. JOHN A. MATTERA, ET AL., Defendants.

11 Civ. 8323 (PKC)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

FILED: December 9, 2013

Dated: December 6, 2013

MEMORANDUMAND ORDER

CASTEL, District Judge:

The Securities and Exchange Commission ("SEC") asserts that John Mattera, in violation of section 5 of the Securities Act of 1933 ("Securities Act"), section 17(a) of the Securities Act, section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rule 10b-5 thereunder, solicited investments in special purpose vehicles that falsely claimed to hold shares in pre-IPO companies and that David Howard, in violation of section 5 of the Securities Act, assisted in the solicitation and sales. (Docket #1.) The SEC now moves for summary judgment against Mattera and Howard, and other relief.

Mattera, who is pro se, has not submitted a response to the SEC's motion. In opposition, Howard, who is also pro se, characterizes his actions as "introductions," rather than "solicitations," and claims that, as such, they should not expose him to liability under section 5. In response to the SEC's well-supported summary judgment motions, Mattera and Howard have failed to come forward with evidence that, if believed, would permit a reasonable fact-finder to find in their favor on the issue of liability. Howard has, however, submitted enough evidence that would permit a reasonable fact-finder to find that he did not act with the requisite level of scienter to justify third-tier penalties. For the reasons discussed, the SEC's motions for summaryjudgment are granted with respect to Mattera and Howard's liability, but denied with respect to civil money penalties against Howard.

BACKGROUND

I. Procedural History

The SEC alleges that Mattera, Howard, and the other named defendants engaged in the fraudulent and sales of securities. (Compl. ¶ 1, Docket # 1.) Specifically, the Complaint alleges that the defendants solicited more than $12.6 million in investments in special purpose investment vehicles ("SPVs"). In these SPVs, the defendants purported to hold shares in certain privately-held companies expected to launch initial public offerings. (Id. ¶¶ 1-4.) The Complaint further alleges that the SPVs did not in fact hold such shares and Mattera simply transferred investor funds to accounts under his control. (Id. ¶ 5.)

Previously, the SEC applied to the Court for a Temporary Restraining Order, and Order Freezing Assets and Granting Other Relief ("TRO"). (Docket # 4.) The Court granted the SEC's application and set the matter for a preliminary injunction hearing. (Id.)

At the hearing, the SEC presented the Court with a Stipulation and Consent Order Imposing Preliminary Injunction and Other Relief Against Defendant John A. Mattera (the "Consent Order") signed by Mattera. (Docket # 25.) The Consent Order was entered as an Order of the Court and filed that same day and a similar order was entered against Howard. (Id.; Docket #23.)

The Consent Order ordered Mattera to hold and retain within his control, and otherwise prevent "any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment, or other disposal of any assets, funds, or other property," including money andpersonal property, whether held in Mattera's name or for his direct or indirect beneficial interest. (Id. at 6.)

On September 26, 2012, this Court found, by clear and convincing evidence, that Mattera violated the asset freeze by, inter alia, liquidating assets and transferring the proceeds to his mother, incurring debt in excess of that permitted by the Consent Order, and having his mother make unauthorized expenditures on his behalf. (Findings of Fact and Conclusions of Law on Civil Contempt ("Contempt Order") 7-14, Docket # 107.) Accordingly, the Court held him in contempt of court. (Id. at 21-22.) Mattera was ordered to pay $75,000 to the Court Registry and provide the SEC and the Court, by September 30, 2012, a verified accounting of his assets and related documents. (Id. at 23-24.) The Court warned that if he failed to comply with the terms of the order, his Answer would be stricken. (Id. at 24-25.) The Contempt Order, in relevant part, stated:

If John Mattera does not file such evidence establishing full compliance with Paragraphs 1, 2, and 3, his Answer in this action, filed on January 27, 2012 (Docket # 64), will be STRICKEN. The foregoing relief is appropriate because other sanctions are not likely to be efficacious, John Mattera's conduct has caused significant delay and prejudiced the SEC's ability to prove its case, and, further, John Mattera has made no significant effort to purge himself of contempt since the SEC's May 22, 2012 application.

(Id. at 24-25.)

As of July 30,2013, Mattera had failed to comply with the terms of the September 26, 2012, Contempt Order. (See Willenken Decl. ¶ 12.) There is no evidence that he has complied since then.

The striking of a defendant's pleading is a drastic measure and runs counter to the strong policy in favor of giving every party his day in court. Throughout this litigation,Mattera's conduct has caused delay. In the Contempt Order, Mattera was given clear notice that his failure to comply with its terms would result in the striking of his Answer. Because he has failed to comply with the monetary sanctions of the Contempt Order, a sanction less than the striking of his pleading would not likely be efficacious. Despite notice and warning from the Court, he has, for ten months, failed to comply with the Contempt Order. Consequently, the Court hereby strikes Mattera's Answer in this action.

II. Factual History

The following facts are either undisputed or described in the light most favorable to defendants as the non-movants. See, e.g., Costello v. City of Burlington, 632 F.3d 41, 45 (2d Cir. 2011). Because Mattera's Answer has been stricken, the allegations against him in the Complaint are accepted and deemed as true by the Court, but only insofar as consideration of the motion directed towards him. See Rule 8(b)(6), Fed. R. Civ. P. Additional facts are derived from the parties' submissions of evidence in connection with the motions and their respective Rule 56.1 statements, but only to the extent not disputed by Howard.

Though Howard has not submitted a sworn statement in opposition to the SEC's motion, the Court will consider the assertions in his Rule 56.1 statement and opposition brief to the extent that they are otherwise admissible. See Geldzahler v. N.Y. Med. Coll., 746 F. Supp. 2d 618, 620 n.l (S.D.N.Y. 2010) ("[D]espite [plaintiff] having received the 56.2 Notice, we take into account his status as a pro se litigant and will consider the unsworn statements in his 56.1 Response on the assumption that he would have testified to these statements in his Declaration."). To the extent that Howard's earlier sworn testimony conflicts with his later unsworn statements in opposition to the motion, the earlier testimony is accepted as true. Hayes v. New York City Dep't of Cons., 84 F.3d 614, 619 (2d Cir. 1996) ("[A] party may not create anissue of fact by submitting an affidavit in opposition to a summary judgment motion that, by omission or addition, contradicts the affiant's previous deposition testimony.")

In 2010, Mattera, together with his associate Bradford Van Siclen, formed an entity known as the Praetorian Fund and a number of affiliated LLCs. (Compl. ¶ 27-28.)¹ Each LLC purported to be an SPV that held (or would soon hold) shares in a single pre-IPO company, such as Facebook, Groupon, or Zynga. (Id.) In reality, the LLCs held no shares at all. (Id. ¶ 33.) None of the funds were registered with the SEC. (Willenken Decl. Ex. G ¶ 15.)

Beginning in approximately August, 2010, Mattera and Van Siclen solicited investments in the Praetorian entities through a number of broker-dealers. (Compl. ¶¶ 29-30.) In order to facilitate sales, Mattera and Van Siclen provided subscription agreements representing that the Fund held shares of pre-IPO companies and that investor funds would be held in an escrow account until a later triggering event. (Id. ¶ 32-33.) Once investors transferred money into the purported escrow accounts, Mattera had the funds removed and distributed amongst his associates. (See id. ¶¶ 85-87.)

Howard's affiliation with Praetorian began in July or August, 2011, when he, together with representatives of Eastern Institutional Funding ("EIF"), met with Van Siclen at a bar in Manhattan to speak about business opportunities with the Praetorian Fund. (Jacobson Decl. Ex. E, at 11-13.) Van Siclen described Praetorian to Howard as a fund which held shares of pre-IPO companies which were expected to go public within the next eighteen to twenty-four months. (Id. at 15-16.) At the meeting, Van Siclen recruited Howard to introduce Praetorian funds to broker-dealers in the New York area. (Id. at 16.) The dealers would then, in turn, sell the product to their clients. (Id.) Howard's compensation would be 10% of sales, shared withthe brokers, based on the volume of sales the brokers made. (See id. at 18-19, 30-31.) Once Howard began working with broker-dealers, Praetorian sent compensation to Howard directly. (Id. at 133.) Howard then passed a portion of the compensation to the broker-dealers as their commission. (Id.) On average, Howard kept 2% of the commission. (Id. at 133-34.)

While affiliated with Praetorian, Howard acted as a liaison between brokers and Van Siclen. (See id. at 36-40.) When brokers had questions, they would ask Howard, who would forward the questions to Van Siclen. (See id.) In addition to answering questions, Howard pointed brokers to Praetorian's website for more information. (Id. at 78-80.) In order to obtain information about the funds, users were required to register with the website as accredited investors. (Id. at 78-79.) Only after the registration process was complete did users gain access to fund information. (Id. at 82.)...