Sec. & Exch. Comm'n v. Chapman, Civil No. WDQ–03–1877.

• Decision Date: 29 November 2011
• Docket Number: Civil No. WDQ–03–1877.
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Nathan A. CHAPMAN, Jr., et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

826 F.Supp.2d 847

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Nathan A. CHAPMAN, Jr., et al., Defendants.

Civil No. WDQ–03–1877.

United States District Court, D. Maryland, Northern Division.

Nov. 29, 2011.

Catherine E. Pappas, David S. Horowitz, Denise D. Colliers, U.S. Securities and Exchange Commission, Philadelphia, PA, Tarra DeShields Minnis, Allen F. Loucks, Office of the United States Attorney, Baltimore, MD, Thomas M. DiBiagio, Beveridge and Diamond PC, Washington, DC, for Plaintiff.

Nathan A. Chapman, Jr., Morgantown, WV, pro se.

James Howard Fields, Nathaniel Edmond Jones, Jr., Jones and Associates PC, Baltimore, MD, for Defendants.

MEMORANDUM OPINION

WILLIAM D. QUARLES, JR., District Judge.

The Securities and Exchange Commission (“SEC”) sued Nathan Chapman, Chapman Capital Management (“CCM”),¹ and others for securities fraud and related claims. For the following reasons, the SEC's motion for partial summary judgment against Chapman will be granted. Its motion for partial summary judgment against CCM will be denied, but default judgment will be entered on all claims asserted against it.

I. Background ²

Before 1999, Chapman founded and was the chairman of the board, chief executive officer (“CEO”), and majority shareholder of several financial services companies, including The Chapman Company (“TCC”), a securities broker-dealer, and CCM, an investment advising and management firm. ECF No. 66 ¶ 19.

CCM was the investment manager for the DEM–MET Trust, a pooled trust designed for diversified investments using minority-owned sub-advisers. Id. ¶ 16. From January 1997 to August 2001, Alan Bond was a sub-adviser to the DEM–MET Trust through his investment company, Albriond Capital Management. Id. ¶ 17. ³ The trust had three clients in 2000: the Maryland State Retirement and Pension System, Bankers Trust Company Pension Plan, and Alliant Energy Corporation. Id. ¶ 16.

In 1998, Chapman took two companies public: Chapman Holdings, Inc. (“CHI”), ICC's parent company, and Chapman Capital Management Holdings, Inc. (“CCMH”), CCM's parent company. Id. ¶ 21. The Initial Public Offerings (“IPO”) were successful, netting over $12 million, and by November 1999, Chapman owned about 73 percent of CHI's and CCMH's outstanding shares. Id.

In November 1999, Chapman introduced eChapman, a new public company he planned to form by merging CHI and CCMH. TCC would be the lead, and largest, underwriter for eChapman's IPO. Id. ¶¶ 24–25, 27. At that time, eChapman filed an initial registration statement with the SEC for an IPO of 3,333,333 shares of its common stock, costing $14 to $16 per share. Id. ¶ 25. CHI and CCMH's shares would be converted into eChapman shares during the merger, and Chapman would own about 63 percent of the new company. Id. 126. Chapman solicited Bond to buy 200,000 of the IPO shares using DEM–MET funds at the $13 per share price, and other DEM–MET sub-advisers to buy 20,000 of the shares during the IPO. ECF No. 1 ¶ 47; ECF No. 66 ¶¶ 44, 47.

In early 2000, stock values of internet companies dropped sharply and interest in eChapman fell. By June 2000, the underwriters had commitments for slightly more than one-third of the shares to be offered in the IPO, and eChapman reduced the number and asking price of shares it would offer, and pushed back its offering date. ECF Nos. 1 ¶¶ 33–34; 66 ¶ 35.

On June 15, 2000, eChapman's IPO opened and the underwriters offered 1,260,000 shares at $13 per share. The IPO purchases were recorded with trade and process dates of June 15, 2000, and a settlement date of June 20—the first day of public trading. Id. ¶ 38. On June 20, 2011, eChapman, available for public trading, opened at $8 per share, hovered between $7 and $8 per share for two days, then slid until it fell below $1 per share, where it remained. ECF No. 66 ¶ 39.

Chapman told the sub-advisers' representatives that there would be no conflict of interest when they purchased the shares, but CCM, as the trust's investment adviser, was an “insider,” Chapman, who controlled CCM, was a majority owner of eChapman, and TCC, which Chapman also controlled, would broker the deal. ECF No. ¶ 149.

On June 26, 2000, Chapman convinced Bond to purchase more eChapman stock at $13 per share because an underwriter had dropped out of the IPO. Bond bought 175,000 more shares for $13 per share when the market price was $7 per share. The sale was backdated to June 20, 2000, as if it had been part of the IPO. Id. ¶ 50; United States v. Chapman, 209 Fed.Appx. 253, 260 (4th Cir.2006).

On June 26, 2003, the SEC sued Chapman, CCM, TCC, eChapman, and several of Chapman's employees for violating § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) (“Securities Act”), § 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78j(b), SEC Rule 10b–5, § 206 of the Investment Advisers Act, 15 U.S.C. § 80b–6, and § 13(a) of the Exchange Act and SEC rules associated with that section. ECF No. 1 ¶¶ 95–108. In February 2009, the Court dismissed TCC and eChapman on the SEC's motion, and the SEC settled with two of the three employees.⁴ ECF Nos. 138, 142, 144.

In 2004, a jury convicted Chapman on 23 counts of Mail and Wire Fraud, in violation of 18 U.S.C. §§ 1341 and 1343, Investment Adviser Fraud, in violation of 15 U.S.C. § 80b–6, and other crimes, based on the eChapman IPO, including the backdated share sales.⁵ Chapman, 209 Fed.Appx. at 260–61. The jury found beyond a reasonable doubt that Chapman's criminal conduct cost the DEM–MET clients $5,000,856. United States v. Chapman, No. 03–0301, ECF No. 100 at 27 (Aug. 13, 2004) [hereinafter “Jury Verdict”]. On February 20, 2007, the Court sentenced Chapman to 63 months imprisonment and ordered that he make restitution of the full $5,000,856 of loss.⁶ ECF No. 149 Attach. 6 at 2, 4.

On June 3, 2010, the SEC moved for partial summary judgment in the civil case. ECF No. 149. On July 9, 2010, Chapman opposed the motion. ECF No. 159. On January 24, 2011, he filed a memorandum in support of his opposition. ⁷ ECF No. 162.

II. Analysis

A. Standard of Review

Under Rule 56(a), summary judgment “shall [be] grant[ed] ... if 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). In considering the motion, “the judge's function is not ... to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute about a material fact is genuine “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Id. at 248, 106 S.Ct. 2505.

The Court must “view the evidence in the light most favorable to ... the nonmovant, and draw all reasonable inferences in h[is] favor,” Dennis v. Columbia Colleton Med. Ctr., Inc., 290 F.3d 639, 645 (4th Cir.2002), but it also must abide by the “affirmative obligation of the trial judge to prevent factually unsupported claims and defenses from proceeding to trial,” Bouchat v. Balt. Ravens Football Club, Inc., 346 F.3d 514, 526 (4th Cir.2003) (citation and internal quotation marks omitted).

B. Collateral Estoppel as to Chapman

The SEC contends that it is entitled to summary judgment on the first and third claims of the complaint because Chapman's convictions, combined with party admissions and principals of agency law, establish all elements of securities and investment adviser fraud. ECF No. 149 Attach. 1 at 1. Thus, according to the SEC, Chapman is collaterally estopped from disputing the elements established in his criminal trial.

Collateral estoppel bars relitigation of an issue determined in an earlier proceeding when:

(1) the issue sought to be precluded is identical to one previously litigated; (2) the issue ... ha[s] been actually determined in the prior proceeding; (3) determination of the issue [was] a critical and necessary part of the decision in the prior proceeding; (4) the prior judgment [is] final and valid; and (5) the party against whom estoppel is asserted ... had a full and fair opportunity to litigate the issue in the previous forum.

Sedlack v. Braswell Svc's Group, Inc., 134 F.3d 219, 224 (4th Cir.1998).

1. Count One: Securities Fraud

Chapman argues that his conviction does not bar litigation of the allegations in count one because his conviction does not establish that he used the mails in furtherance of a scheme to defraud. ECF No. 164 at 2.

i. Identity of Issues

Count One alleges that Chapman violated § 17(a) of the Securities Act, ⁸ § 10(b) of the Exchange Act,⁹ and Rule 10b–5 under the Exchange Act.¹⁰ Compl. ¶ 97. The SEC can prove the allegations by establishing that Chapman, directly or indirectly, (1) used the mails or interstate commerce to employ, (2) knowingly or intentionally, a scheme to defraud in which Chapman made a materially false statement or omission, (3) in the offer or sale of securities. See 15 U.S.C. §§ 77q(a), 78j(b); 17 C.F.R. § 240.10b–5; Aaron v. SEC, 446 U.S. 680, 691, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980).¹¹

Chapman was convicted of Mail and Wire Fraud, in violation of 18 U.S.C. §§ 1341 and 1343. To find a violation of either type of fraud, a jury must find beyond a reasonable doubt that the defendant: (1) used the mails or interstate wire communications in furtherance of (2) a scheme to defraud for which the defendant acted intentionally, and (3) the scheme “involved a material misrepresentation or concealment of fact.” United States v. Harvey, 532 F.3d 326, 333 (4th Cir.2008) ( citing Neder v. United States, 527 U.S. 1, 25, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999)); United States v. Godwin, 272 F.3d 659, 666–67 (4th Cir.2001).

Although wire fraud is not identical to securities fraud ¹² and thus the claims are not identical, the SEC seeks to use the elements underlying the convictions to establish elements of its claim. The...