Sec. & Exch. Comm'n v. Milan Grp., Inc.

• Decision Date: 26 August 2013
• Docket Number: Civil Action No. 11–2132 (RMC).
• Citation: 962 F.Supp.2d 182
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. MILAN GROUP, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

962 F.Supp.2d 182

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.MILAN GROUP, INC., et al., Defendants.

Civil Action No. 11–2132 (RMC).

United States District Court,

District of Columbia.

Aug. 26, 2013.

James A. Kidney, Securities & Exchange Commission, Washington, DC, for Plaintiff.

Alan I. Baron, Rhett E. Petcher, Seyfarth Shaw, LLP, Washington, DC, Christopher F. Robertson, Seyfarth Shaw LLP, Boston, MA, Christopher Allan Glaser, Jackson & Campbell, Dominic G. Vorv, The Vorv Firm, PLLC, Washington, DC, Christopher B. Jones, Law Offices of Christopher B. Jones, Scranton, PA, for Defendants.

Baylor & Jackson, P.L.L.C., pro se.

Brett Cooper, Philadelphia, PA, pro se.

Dawn R. Jackson, pro se.

Patrick T. Lewis, Richmond, UT, pro se.

OPINION

ROSEMARY M. COLLYER, District Judge.

The Securities and Exchange Commission sued The Milan Group, Inc., the law firm Baylor & Jackson, P.L.L.C., and certain individuals as “Principal Defendants” for conducting an alleged securities fraud from which victims suffered losses amounting to millions of dollars. SEC also named certain “Relief Defendants”—that is, persons who allegedly received money resulting from the fraudulent activities but who are not charged with personally engaging in the fraud. SEC seeks disgorgement from both sets of defendants for restitution to the victims. SEC moves for summary judgment. For the reasons stated below, SEC's motion will be granted in part and denied in part. Relief Defendant Mia Baldassari's cross-motion for summary judgment and for release of funds will be denied.

I. FACTS

A. Background

The Securities and Exchange Commission complains that the Principal Defendants—The Milan Group, Inc. a/k/a The Milan Trading Group, Inc. (Milan); Frank Pavlico III a/k/a Frank Lorenzo (Pavlico); Brynee K. Baylor; and through Ms. Baylor, her law firm Baylor & Jackson P.L.L.C.—made untrue statements of material fact or omitted to state material facts in connection with the sale of securities in violation of Section 17(a) of the Securities Act of 1933 (Securities Act), 48 Stat. 74, codified at15 U.S.C. § 77a et seq.; Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Pub. L. 73–291, 48 Stat. 881, codified at15 U.S.C. § 78a et seq.; and Rule 10b–5 thereunder, 17 C.F.R. § 240.10b–5. See Am. Compl. [Dkt. 53] ¶¶ 62–65 (Count I, Section 10(b) and Rule 10b–5), ¶¶ 68–70 (Count III, Section 17(a)). Alternatively, Mr. Pavlico, Ms. Baylor, and Baylor & Jackson are alleged to have aided and abetted Milan's violation of these statutes and the Rule. Am. Compl. ¶¶ 66–67 (Count II, aiding and abetting violations of Section 10(b) and Rule 10b–5), ¶¶ 71–72 (Count IV, aiding and abetting violation of Section 17(a)).

SEC also complains that all Principal Defendants offered and sold securities without a registration statement or exemption from registering in violation of Sections 5(a) and 5(c) of the Securities Act. Id. ¶¶ 73–76 (Count V, Sections 5(a) and 5(c)). Alternatively, Ms. Baylor and her law firm are alleged to have aided and abetted these violations. Id. ¶¶ 77–78 (Count VI, aiding and abetting violations of Sections 5(a) and 5(c)). Finally, SEC complains that Mr. Pavlico and Ms. Baylor induced, or attempted to induce, the purchase or sale of a security by an unregistered broker or dealer in violation of Section 15(a) of the Exchange Act. Id. ¶¶ 79–81 (Count VII, Section 15(a)).

Relief Defendants Mia Baldassari; Dawn Jackson; Brett Cooper and his former business, Global Funding Systems, Inc. (referred to in some materials as GFS); Patrick T. Lewis and his former business, GPH Holdings LLC (referred to in some materials as GPH); and The Julian Estate, Inc., a Pennsylvania company incorporated by Pavlico, are alleged to have received funds from defrauded investors through the Principal Defendants without providing any legitimate product or service. Id. ¶¶ 21, 82–83.

SEC asks the Court to enjoin the Principal Defendants from further violations; to order them to disgorge all proceeds from their fraud, with interest; to bar them from serving as officers or directors of any public company; and to order them to pay a large civil penalty. SEC asks the Court to exercise its equitable powers to order the Relief Defendants to disgorge the funds they received from the Principal Defendants, with interest.

B. The Alleged Prime Bank Scheme

SEC alleges that the Principal Defendants defrauded at least 13 investors out of $2.665 million in a “Prime Bank” scheme that operated from August 2010 through November 2011. Am. Compl. ¶¶ 22–29, SEC MSJ Mem. [Dkt. 109–2] at 3–7. Mr. Pavlico and Ms. Baylor (and, therefore, Milan and Baylor & Jackson) are alleged to have lured investors into the scheme by offering extraordinary returns ranging from 180% to 2400% per year at little to no risk. The purported investment involved the purchase or lease of bank instruments, including “standby letters of credit,” “bank guarantees,” or “medium term notes,” all of which were to be “leveraged” to increase their value and then “monetized” or “traded” to generate extraordinary returns. SEC MSJ Mem. at 3–4.

Calling himself Frank Lorenzo,¹ Mr. Pavlico initiated this scheme in 2010. He created Milan and recruited Ms. Baylor as his lawyer, who then allegedly used her position as an attorney to give an aura of legitimacy to the “investments.” Among other things, Ms. Baylor is alleged to have told investors that she had known Mr. Pavlico for years, that Mr. Pavlico and Milan had previously completed numerous successful bank instrument transactions at great investor profit for years, that investors' funds would remain in escrow in her law firm's IOLTA account,² that Milan and Mr. Pavlico offered a great investment opportunity that she had validated, and that she and Mr. Pavlico were working in the best interests of the investors. See SEC MSJ Mem. at 3–7. For example, SEC cites a September 15, 2011, telephone call between Mr. Pavlico and agents of the Federal Bureau of Investigation acting as investors, in which Mr. Pavlico assured the FBI: “And you can speak to our attorneys,too, and they'll let you know of the credibility of who we are.... They were just involved in the 15 million.... They actually speak to the bankers. They actually—they know everybody. They know everything. We don't do anything without them.” SEC MSJ, Decl. Christopher McLean (McLean Decl.) [Dkt. 109–4], Exs. 1–68 [Dkts. 109–5 to –17] (SEC Exs.), SEC Ex. 35, Dep. of Frank Pavlico, at 98–99.

SEC contends that the bank instruments were fictitious; that no victim's money was ever invested anywhere; that almost all of the money went immediately to the pockets of the Principal Investors or, to a lesser extent, to the Relief Defendants; that investors were lulled for more than a year into believing that successful bank transactions were underway; and that Ms. Baylor became the chief contact assuring suspicious investors of hard work on their behalf after time passed with no return. By December 1, 2011, when the scheme was terminated by this Court's temporary restraining order, see Dkt. 4, and preliminary injunction, see Dkt. 22, the Principal Defendants and Relief Defendants had allegedly received and spent the following amounts:

Baylor and Jackson (Baylor)

$ 746,266

Milan (Pavlico)

$1,318,734

GFS (Cooper)

$ 225,000

GPH (Lewis)

$ 375,000

TOTAL:

$2,665,000

SEC MSJ Mem. at 7.

After the case was filed, SEC dismissed the case against three other Relief Defendants, Susan C. Kevra–Shiner, the Law Office of Susan Kevra, and Elmo Baldassari, upon satisfaction that they no longer held any improperly gained benefits of the fraud. See SEC Partial Mot. Dismiss [Dkt. 52]; Minute Order dated Feb. 27, 2012 (granting SEC motion to dismiss). SEC then filed a Motion for Summary Judgment or Default Judgment on November 15, 2012. See SEC MSJ [Dkt. 109]. Some of the remaining Principal and Relief Defendants are no longer contesting SEC's allegations. A default judgment was entered against Relief Defendant GPH Holdings, LLC, on November 14, 2012. See [Dkt. 110]. Default judgment was also entered against Relief Defendant Global Funding Systems, Inc. See [Dkt. 137]. SEC and Relief Defendant Dawn Jackson, Ms. Baylor's former law partner, settled all disputes between them with an agreement that Ms. Jackson is liable for $153,000 of disgorgement and $9,410 in prejudgment interest, to be repaid only upon sale of certain property Ms. Jackson owns in the Bahamas. See Redacted Jackson Final J. [Dkt. 164].

SEC filed a Notice of Defendant Death on December 12, 2012, notifying the Court and all parties of the death of Principal Defendant Frank Pavlico. ³See [Dkt. 117]. Mr. Pavlico's estate was substituted as a party, see Minute Order dated Jan. 18, 2013, and the executrix of Mr. Pavlico's estate has filed a response to SEC's motion stating, in part:

As prior to his death Frank L. Pavlico a/k/a Frank Lorenzo asserted his Fifth Amendment right against self incrimination, the Estate of Frank L. Pavlico, III has no objection to Plaintiff's Motion for Summary Judgment.⁴

[Dkt. 131]. Judgment will be entered against Mr. Pavlico's estate.

Judgment will also be entered against the three entities that filed answers in the case but have ceased defending: Principal Defendants Milan and Baylor & Jackson and Relief Defendant The Julian Estate. See Joint Answer to Amended Complaint by Milan and Julian Estate [Dkt. 60], Answer to Amended Complaint by Baylor & Jackson, P.L.L.C. [Dkt. 65]. Milan and Baylor & Jackson have collapsed. Mr. Pavlico formed The Julian Estate to purchase a house using funds obtained from the Prime Bank fraud, see SEC MSJ Mem. at 2 n. 1; that entity has also not defended this case since entering its answer. Because Milan, Baylor & Jackson, and The Julian Estate have not responded to SEC's motion for summary judgment, the motion is deemed conceded as to those defendants.⁵See LCvR 7(b).

Thus, presently remaining for adjudication are the arguments of the...