Sec. & Exch. Comm'n v. Bennett
| Decision Date | 28 January 2022 |
| Docket Number | Civil Action 8:17-cv-2453-PX |
| Parties | SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. DAWN BENNETT, BRADLEY MASCHO, and DJB HOLDINGS, LLC, Defendants. |
| Court | U.S. District Court — District of Maryland |
Pending before the Court is the motion for summary judgment in this civil enforcement action filed by Plaintiff United States Securities and Exchange Commission (“The SEC”) and against Defendants Dawn J. Bennett and DJB Holdings, LLC ECF No. 38. The time for responding to the motion has passed and no hearing is required. See D. Md. Loc. R 105.6. For the following reasons, the motion is GRANTED.
In this matter, the SEC alleges that Bennett and DJB Holdings violated §§ 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), 77e(c); § 17(a) of the Securities Act, 15 U.S.C. § 77q(a); and § 10(b) of the Exchange Act of 1934 and Rule 10b-5 thereunder, 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. The Court stayed the civil action pending the outcome of a companion criminal case in which Bennett was tried and convicted of securities fraud and conspiracy to commit securities fraud arising from the same alleged misconduct. ECF Nos. 14, 20, 29; see United States v. Dawn J. Bennett, No. PX-17-0472 (D. Md.) (“Criminal Action”), ECF Nos. 386, 491, 493. In the Criminal Action, the Court sentenced Bennett to twenty years' imprisonment, followed by five years of supervised release and $14, 504, 290.00 in restitution to the victim-investors. Criminal Action, ECF No. 493. The United States Court of Appeals for the Fourth Circuit has since affirmed Bennett's conviction and sentence, and Bennett's petition for writ of certiorari to the United States Supreme Court has been denied. See id., ECF No. 554; Dawn J. Bennett v. United States, cert. denied, No. 21-5092 (Dec. 6, 2021). On February 4, 2021, this Court lifted the stay in this case, and the SEC moved for summary judgment based on the evidence adduced at Bennett's criminal trial. ECF No. 32, 38. The Court briefly summarizes the trial record in the light most favorable to Bennett as the nonmoving party.
For many years, Bennett enjoyed a successful career as a financial advisor in the Washington, D.C. area. Through her firm, Bennett Group Financial Services (“BGFS”), Bennett built a loyal and lucrative client base. Bennett's clients trusted her, and many considered her a friend. ECF No. 38-3 ¶ 1, 3.
In 2010, Bennett launched a separate startup, DJB Holdings, LLC (“DJB Holdings”), an online business selling luxury sportswear. Id. ¶ 4. Co-defendant Bradley Mascho (“Mascho”), also a financial advisor, worked alongside Bennett at BGFS and DJB Holdings. Id. ¶¶ 4-5. In late 2014, BGFS hit on hard financial times, prompting Bennett to train her sights on finding investors for DJB Holdings. Bennett specifically targeted her longstanding clients at BGFS to invest in DJB Holdings. Id. ¶¶ 6-11. To start, Bennett created false promotional materials and financial reports that inflated DJB Holdings revenues, grossly minimized its liabilities, and hid from investors the true risk profile of the company. Id. ¶¶ 50-51.
Under the guise of raising revenues for DJB holdings, Bennett initially offered her clients the option to purchase a three-year convertible note (“Convertible Notes”) with guaranteed earnings of 15% on investments secured with purported inventory and Bennett's personal assets and options to purchase shares of DJB Holdings common stock. Id. ¶¶ 8-16, 31. Later, Bennett offered clients nine-month promissory notes (“Promissory Notes”) with similarly favorable investment terms. Id. ¶¶ 25-27. Bennett also assured all potential investors that the Convertible and Promissory Notes were stable, fully liquid, and guaranteed to turn a handsome profit. Id. ¶¶ 8-16, 56-62. Neither the Convertible Notes nor the Promissory Notes were registered with the SEC as required. Id. ¶¶ 17, 33.
All told, Bennett convinced 47 investors to invest over twenty million dollars in DJB Holdings. ECF No. 38-3 ¶ 49. Indeed, many turned over to Bennett their entire life savings, relying on her promises of healthy returns. Id. ¶ 48. But Bennett demonstrated little appetite for using the funds legitimately. Instead, she sunk millions into her own personal passions-ritual blessing ceremonies in India, astrological gemstones, cosmetic surgery, pricey anti-aging treatment, and a private box-suite at the Dallas Cowboy's Stadium. She also used roughly $2.5 million to pay personal credit card debt. ECF No. 38-3 ¶¶ 71-75. To be sure, Bennett did plow about $6 million into paying sham dividends or returning investments funds on demand for certain investors, but the remaining $14 million was spent on debts largely unrelated to DJB Holdings. Id. ¶¶ 76-78. In the end, Bennett could not fulfill the Convertible or Promissory Note terms for the lion's share of her investors.
The SEC now moves for summary judgment on all counts of the Amended Complaint, arguing that the criminal securities fraud convictions preclude Bennett from re-litigating identical civil claims. ECF No. 38-2 at 11. For the reasons discussed below, the Court agrees, and the motion must be granted.
Summary judgment is appropriate when the Court, construing all evidence and drawing all reasonable inferences most favorably to the non-moving party, finds no genuine dispute exists as to any material fact, thereby entitling the movant to judgment as a matter of law. Fed.R.Civ.P. 56(a); see In re Family Dollar FLSA Litig., 637 F.3d 508, 512 (4th Cir. 2011). Genuine disputes of material fact are not created “through mere speculation or the building of one inference upon another.” Othentec Ltd. v. Phelan, 526 F.3d 135, 140 (4th Cir. 2008) (quoting Beale v. Hardy, 769 F.2d 213, 214 (4th Cir. 1985)). Nor can an absent party gain advantage by failing to participate in the litigation, for even an unopposed motion requires that the Court independently determine whether “the moving party is entitled to summary judgment as a matter of law.” Robinson v. Wix Filtration Corp. LLC, 599 F.3d 403, 409 n.8 (4th Cir. 2010) (quoting Custer v. Pan Am. Life Ins. Co., 12 F.3d 410, 416 (4th Cir. 1993)) (emphasis omitted). Where the evidence viewed most favorably to the non-movant leaves no doubt as to the result, then summary judgment is proper. See Custer, 12 F.3d at 416.
The SEC urges the Court to grant summary judgment on all claims because Bennett's criminal convictions preclude re-litigation on the merits. ECF No. 38-2 at 13. “It is well established that a prior criminal conviction may work an estoppel in favor of the Government in a subsequent civil proceeding.” Emich Motors Corp. v. Gen. Motors Corp., 340 U.S. 558, 568 (1951). “Applying collateral estoppel ‘forecloses the relitigation of issues of fact or law that are identical to issues which have been actually determined and necessarily decided in prior litigation in which the party against whom collateral estoppel is asserted had a full and fair opportunity to litigate.'” In re Microsoft Corp. Antitrust Litig., 355 F.3d 322, 326 (4th Cir. 2004) (quoting Sedlack v. Braswell Servs. Grp., Inc., 134 F.3d 219, 224 (4th Cir. 1998)) (internal brackets omitted). For the doctrine of collateral estoppel to apply, the moving party must demonstrate:
(1) the issue or fact is identical to the one previously litigated; (2) the issue or fact was actually resolved in the prior proceeding; (3) the issue or fact was critical and necessary to the judgment in the prior proceeding; (4) the judgment in the prior proceeding is final and valid; and (5) the party to be foreclosed by the prior resolution of the issue or fact had a full and fair opportunity to litigate the issue or fact in the prior proceeding.
In re Microsoft Corp., 355 F.3d at 326; see also E. Assoc. Coal Co. v. Dir., Off. of Worker's Comp. Programs, 578 Fed.Appx. 165, 173 (4th Cir. 2014) (per curiam); Polk v. Montgomery Cnty., 782 F.2d 1196, 1201 (4th Cir. 1986).
With this standard in mind, the Court turns to the civil claims.
The Amended Complaint alleges two counts of securities fraud in violation of § 10(b) of the Exchange Act, Rule 10b-5 under the Exchange Act, and § 17(a) of the Securities Act. ECF No. 38-2 at 13; ECF No. 38-23 ¶¶ 107-114. For practical purposes, each requires the SEC to demonstrate that Bennett (1) made a false statement or omission; (2) of material fact; (3) with knowledge; and (4) in connection with the purchase or sale of securities. SEC v. Pirate Investor LLC, 580 F.3d 233, 239 (4th Cir. 2009) (quoting McConville v. SEC, 465 F.3d 780, 786 (7th Cir. 2006)); see 15 U.S.C. §§ 78j(b), 77q(a); 17 C.F.R. § 240.10b-5. “Section 17(a)(1) bars essentially the same behavior as Section 10(b), but in relation to the offer to sell securities, as well as to the sale of securities.” SEC v. North Star Finance, LLC, No. GJH-15-1339, 2019 WL 3860321, at *5 (D. Md. Aug. 15, 2019) (citing SEC v. SBM Inv. Certificates, Inc., No. DKC 2006-0866, 2007 WL 609888, at *11 (D. Md. Feb. 23, 2007)); see also Aaron v. SEC, 446 U.S. 680, 697 (1980).
As to the four criminal counts of securities fraud for which Bennett had been convicted, the jury necessarily found each element had been met with proof beyond a reasonable doubt. The criminal offense elements are the same as the civil claims. Compare 15 U.S.C. §§ 77q(a) and 15 U.S.C. § 78j(b) and 17 C.F.R § 240.10b-5 with ECF No. 38-10 (jury instructions); see SEC v. Chapman, 826 F.Supp.2d 847, 857 (D. Md. 2011) (...
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