Sec. & Exch. Comm'n v. Penn

• Decision Date: 21 December 2016
• Docket Number: 14–CV–0581 (VEC)
• Citation: 225 F.Supp.3d 225
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Lawrence E. PENN, III, et al., Defendants, and A Big House Film and Photography Studio, LLC, Relief Defendant.
• Court: U.S. District Court — Southern District of New York

225 F.Supp.3d 225

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v. Lawrence E. PENN, III, et al., Defendants,andA Big House Film and Photography Studio, LLC, Relief Defendant.

14–CV–0581 (VEC)

United States District Court, S.D. New York.

Signed December 21, 2016

Amelia Anne Cottrell, Andrew Matthew Calamari, Howard A. Fischer, Karen Elizabeth Willenken, Katherine Starr Bromberg, Michael Joseph Osnato, Jr., U.S. Securities and Exchange Commission, New York, NY, for Plaintiff.

Edward Rodriguez, Law Office of Edward Rodriguez, PLLC, New York, NY, Ian Douglas Orr, Law Offices of Ian Douglas Orr, P.C., White Plains, NY, for Defendants.

Lawrence E. Penn, pro se.

MEMORANDUM OPINION & ORDER

VALERIE CAPRONI, United States District Judge:

The Securities and Exchange Commission ("SEC") filed this action against Defendant Lawrence E. Penn, III ("Penn") alleging that Penn misappropriated approximately $9 million from a hedge fund he managed. The SEC alleges violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b–5(a) and (c) thereunder, 17 C.F.R. § 240.10b–5 ; and Sections 204, 206(1), 206(2), and 207 of the Investment Advisers Act of 1940 (the "40 Act"), 15 U.S.C. §§ 80b–4, 80b–6(1), 80b–6(2), and 80b–7, and Rule 204–2 thereunder, 17 C.F.R. §§ 275.204–2. Penn pled guilty in New York state court to one count of grand larceny and one count of falsifying business records after being charged criminally in connection with the same scheme as underlies the SEC's complaint. Penn has asserted various common law torts and a violation of 42 U.S.C. § 1983 as counterclaims against the SEC.

Before the Court is the SEC's motion for judgment on the pleadings with respect to its claims under Section 10(b), Rule 10b–5 of the Exchange Act and Sections 204, 206(1), 206(2) and Rule 204–2 of the 40 Act. In the alternative, the SEC moves for partial summary judgment on each of these claims except those under Section 204 and Rule 204–2 of the 40 Act. The SEC also moves to dismiss Penn's counterclaims.

For the reasons set forth below, the Court converts the SEC's motion for judgment on the pleadings to a motion for summary judgment and GRANTS that motion in its entirety. The Court further DISMISSES Penn's counterclaims without prejudice. The SEC's remaining claim under Section 207 of the 40 Act is unresolved by this Opinion.

BACKGROUND¹

1. The SEC Complaint and Related State Criminal Proceedings

From its inception in 2007 to approximately February 2014, Penn managed a private equity fund called Camelot Acquisitions Secondary Opportunities LP (the "Fund"). Willenken Dec. Ex. E at 1. According to the SEC's Complaint, Penn misappropriated over $9 million from the Fund through a series of purported "due diligence" payments to an entity called Ssecurion LLC ("Ssecurion") that was controlled by Penn's co-conspirator. Compl. (Dkt. 151–1) at ¶ 2. Monies paid to Ssecurion were transferred to Penn and used for his personal and business expenses. Compl. ¶¶ 2, 4. Based on the same facts as underlie the SEC's Complaint, Penn was indicted in state court for grand larceny, money laundering, and falsifying business records. Pl. 56.1 Stmt. ¶ 3. Given the substantial overlap between the legal and factual issues in the SEC's civil case and the state criminal case, on June 11, 2014, the Court granted the SEC's motion to stay all discovery pending the outcome of Penn's criminal case. Dkt. 51. On March 16, 2015, Penn pled guilty to one count of grand larceny in the first degree and one count of falsifying business records in the first degree.² Pl. 56.1 Stmt. ¶ 6.

2. The Amended Answer and Allocution

As a part of his guilty plea allocution, Penn admitted that he made a false entry in a schedule of invoices in the Fund's business records "with the intent to defraud, including an intent to commit another crime[.]" Pl. 56.1 Stmt. ¶ 9; Willenken Dec. Ex. G (plea allocution) at 7:2–12. Penn also admitted that he stole in excess of $1 million from the Fund. Pl. 56.1 Stmt. ¶ 8.c; Willenken Dec. Ex. G at 6:18–7:1.

In addition to those admissions, Penn filed an amended answer to the SEC's Complaint. Dkt. 129. In his amended answer, Penn admitted that he "sent" $9.3 million from the Fund to two Penn-controlled entities, Camelot Acquisitions Secondary Opportunities Management LLC ("CASO Management") and Camelot Group International LLC ("CGI"), and that he did so through Ssecurion. Pl. 56.1 Stmt. ¶ 18 (citing Am. Answer ¶ 3, 3d Aff. Def.). According to Penn, CGI used the money to pay overhead expenses including rent and salary. Id. ¶ 19 (citing Am. Answer ¶¶ 3–4). Penn also admits mischaracterizing the use of Fund money, id. ¶ 20 (citing Am. Answer ¶ 2), and he forthrightly admits liability for violations of Section 204 of the 40 Act and Rule 204–2 thereunder, id. ¶ 22 (citing Am. Answer ¶ 6).

But Penn has responded imprecisely and ambiguously to other facts regarding the details of the scheme alleged in the Complaint, particularly allegations related to the connection between Penn's scheme and the misstatements in the Fund's records. For example, Penn denies knowledge or information sufficient to form a belief as to the truth of "some of the allegations in Paragraph 29 of the Complaint." Am. Answer ¶ 29. It is in that paragraph that the SEC alleges that the transfers to Ssecurion were characterized as "due diligence" payments and that the purported due diligence payments from 2010 through October 2013 total almost $9.3 million—the same amount Penn admits he "diverted." Compare Comp. ¶ 29, and Am. Answer ¶ 3, 3d Aff. Def. Penn also denied knowledge adequate to form a belief as to some, but not all, of the SEC's allegations that the Ssecurion invoices for "due diligence" expenses were included in the Fund's records—the same records Penn admits were inaccurate in some unspecified way—and that he created purported work product to correspond to those invoices in response to an investigation by the Fund's auditors.³ Compare Compl. ¶¶ 5, 30, 37 and Am. Answer ¶¶ 5, 30, 37. These ambiguous denials do not comply with the minimum requirements under Rule 8, even accounting for Penn's pro se status, because Penn denied knowledge adequate to form a belief only as to some of the SEC's allegations. ⁴

By failing to specify what portions of the SEC's allegations were beyond his knowledge and by failing to specifically deny the allegations that were within his knowledge, Penn has left the Court guessing. Given the inappropriate and ambiguous nature of these responses, the Court deems the SEC's allegations in paragraphs 5, 29, 30, and 37 of the Complaint to have been admitted. See Fed. R. Civ. P. 8(b) ; Dawkins v. Williams , 511 F.Supp.2d 248, 270–71 (N.D.N.Y. 2007) (deeming admitted allegations which defendant improperly denied in his answer).

3. The Instant Motion

The SEC's motion is based on Penn's admissions in his guilty plea allocution and in his amended answer. Because many of Penn's responses do not comply with the basic requirements of Rule 8(b), the SEC contends that the Complaint is essentially uncontroverted with respect to its Exchange Act and 40 Act claims, with the exception of its claim pursuant to Section 207 of the 40 Act. Pl.'s Mem. (Dkt. 150) at 2. Alternatively, the SEC argues that it is entitled to summary judgment on its fraud claims under the Exchange Act and Section 206 of the 40 Act because Penn is collaterally estopped from relitigating the facts of the scheme to which he pled guilty in state court. Id. at 26–28. Finally, the SEC seeks dismissal of Penn's counterclaims as improperly consolidated with its enforcement action. Id. at 28–29.

In connection with its motion, the SEC served on Penn a Notice to Pro Se Litigant in the form provided by Local Rule 12.1. Dkts. 153, 154. The SEC's notice alerted Penn to the possibility that the Court would treat the SEC's motion as a motion for summary judgment and that he was required by Rule 56(e) to provide admissible evidence to counter the SEC's submissions. See Dkt. 154 at ¶¶ 2–3. This constituted sufficient notice that the SEC's motion for judgment on the pleadings might be converted to a motion for summary judgment.⁵ See Loccenitt v. City of New York , No. 10–CV–8319 (JPO), 2012 WL 5278553, at *3 (S.D.N.Y. Oct. 22, 2012) (holding that a Local Rule 12.1 Notice to Pro Se Litigant provides adequate notice of potential conversion to a motion for summary judgment).

DISCUSSION

1. Summary Judgment Conversion and Standard

Because the SEC has presented matters outside the pleadings and properly noticed Penn, the Court converts its motion for judgment on the pleadings to one for summary judgment. See Hernandez v. Coffey , 582 F.3d 303, 307 (2d Cir. 2009) ("If, on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56.") (quoting Fed. R. Civ. P. 12(d) ). Summary judgment is appropriate when "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; see also Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). "Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Scott v. Harris , 550 U.S. 372, 380, 127 S.Ct. 1769, 167 L.Ed.2d 686 (2007) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ). "The Court must ‘construe the facts in the light most favorable to the non-moving party and must resolve all ambiguities and draw all reasonable inferences against the movant.’ " Pandora Media, Inc. v. Am. Soc'y of Composers, Authors and Publishers , 785 F.3d 73, 77 (2d Cir. 2015) (per curiam ) (quoting Beyer v. Cnty. of Nassau , 524 F.3d 160, 163 (2d Cir. 2008) ). Nevertheless, "to defeat...