SEC v. Benson

• Decision Date: 08 April 1987
• Docket Number: No. 84 Civ. 2263 (PNL).,84 Civ. 2263 (PNL).
• Citation: 657 F. Supp. 1122
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Mason BENSON, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

657 F. Supp. 1122

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v.Mason BENSON, et al., Defendants.

No. 84 Civ. 2263 (PNL).

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

April 8, 1987.

COPYRIGHT MATERIAL OMITTED

Linda B. Bridgman, John Courtade, S.E.C., Washington, D.C. (Anne C. Flannery, S.E.C., New York City, of counsel), for plaintiff.

Hoffinger Friedland Dobrish Bernfeld & Hasen, New York City(Jack S. Hoffinger, David B. Bernfeld, Mark W. Geisler, of counsel), for defendantMason Benson.

OPINION AND ORDER

LEVAL, District Judge.

Plaintiff, the Securities and Exchange Commission("SEC") moves for summary judgment against defendantMason Benson, president and chief executive officer of Empire of Carolina, Inc.("Empire") on a showing that from 1977 to 1982he engaged in a fraudulent scheme to divert over $502,201.99 from Empire in violation of numerous provisions of the Federal securities laws.¹Plaintiff seeks disgorgement in the amount of $502,201.99, as well as a permanent injunction against further violations of the federal securities laws.On the motion for summary judgment, the SEC has fully proved its contentions.Summary judgment is therefore granted in favor of the plaintiff.Defendant is permanently enjoined from further violations of the Federal securities laws and is ordered to disgorge the diverted funds.

Background and Contentions

From September 1972 to September 1978 Benson had been executive vice-president of Carolina Enterprises, Inc.(Empire's predecessor and now wholly owned subsidiary), at which time he became president and chief operating officer.In December 1979, Empire purchased Carolina.Benson then became Empire's president and chief executive officer.He resigned in March 1982.(The two companies are collectively referred to as "Empire.")²

During the periods in question Empire was a public company which primarily manufactured and marketed children's toys.Its common stock was listed and traded on the American Stock Exchange.To market its toy line Empire employed numerous outside sales representatives as well as numerous in-house sales people.

The complaint alleges that from at least 1977 to 1982, Benson violated the Federal securities laws in connection with a four-part scheme to misappropriate corporate funds from Empire.The scheme involved (1) requiring Empire's outside sales representatives to pay back a portion of their commissions to Benson or his designee; (2) requiring certain salaried employees to submit expense claims for fictitious travel and entertainment expenses to Empire and to remit the proceeds to Benson or his designee; (3) misappropriating refunds on unused airlines tickets purchased by Empire's employees by causing Empire's travel agent to issue the refund checks to Benson's designee and (4) paying a sales representative fictitious unearned commissions for transmission to Benson.

The complaint alleges that in furtherance of this scheme, Benson made false and misleading statements and material omissions of fact to Empire's investors and auditors and to the SEC in violation of numerous provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.Some of the documents alleged to have been fraudulently prepared in violation of these laws include Empire's securities registration statement for its initial public offering of common stock in December 1979, its November 1981 registration statement for its public offering of convertible subordinated debentures, numerous quarterly 10-Q reports, annual 10-K reports, proxy solicitation materials and several management representation letters to Empire's auditor Main Hurdman.

The evidence the SEC has presented in support of its motion is substantial and persuasive.It includes the testimony from over a dozen witnesses with first-hand knowledge of the scheme, plus supporting documentation consisting of checks and records identified and explained by numerous sales representatives and employees who participated in the scheme.The evidence shows a four-part scheme, carried out as follows:

Part I — Paybacks From Outside Sales Representatives

The most lucrative part of the scheme for Benson involved kickbacks to Benson of over $404,215 out of the sales commissions paid by Empire.Extensive testimony and documentation shows that Benson directed many of Empire's outside sales representatives who were compensated on a commission basis to return part of their monthly gross commissions (generally 20-30%) to Benson or certain designated entities for his benefit.The evidence shows that Benson's designees (Spartan Consulting Services, Inc., N.J.C. Consultants, Polo Management, Mollen Sales Corp. and others) were used as conduits to help divert the funds.The testimony of the sales representatives shows that they would cash the checks payable to them and deliver kickback cash to Benson.It was their understanding that the paybacks were a condition of their continuing business with Empire.SeeR. Blanken testimony, Ex. 4, pp. 122-124, 126, 145-148;Witkin testimony, Ex. 14, pp. 46-51, 54-65, 71, 84;Horchler declaration, Ex. 8, ¶ 3;Eckstein testimony, Ex. 9, pp. 65, 67, 71, 81, 102.

The scheme varied slightly for various sales representatives.The principals of three of the sales representative firms, Mollen Sales Corporation, Miller-Sperber Inc., and Harvey Prince Associates, testified that they were directed by Benson to give their monthly paybacks (payable to Benson or his designee) directly to Benson, either by cash or check.SeeZaretsky dep. (principal of Mollen Sales Corp.) Ex. 2, pp. 14-15, 18-19, 25, 67-72, 74, 79, 134, 139;Ex. 3, pp. 15-16, 19-21, 25-26;Miller (principal of Miller-Sperber Inc.), Ex. 6, pp. 52-56, 71;Prince declaration (principal of Harvey Prince Associates), Ex. 7, ¶¶ 3-5.

Three other sales representatives, Blanken Sales Company, Inc., L.S.H. Sales, and Landsman & Eckstein made their paybacks to Benson or his designee through Empire's vice-president for sales Robert Witkin.R. Blanken testimony, Ex. 4, pp. 11-13, 117-124;Witkin testimony, Ex. 14, pp. 46-51, 58-64;Horchler declaration, Ex. 8, ¶ 3;Eckstein testimony, Ex. 9, ¶¶ 65-68.

Witkin and numerous participating sales representatives testified that Benson told them that Witkin collected the checks for him and that Benson decided the amount of the checks and to whom they were payable.SeeBlanken testimony, ex. 4, pp. 122-124, 126, 145-148;Witkin ex. 14, pp. 46-51, 54-65, 71, 84;Horchler declaration, ex. 8, ¶ 3;Eckstein testimony, ex. 9, pp. 65, 67, 71, 81, 102.

The supporting evidence of Benson's use of conduits to collect these paybacks is detailed and extensive.A few examples follow.

One of the designees to whom Benson frequently directed the sales representatives to make their payback checks payable, was Spartan Consulting Services, Inc.The SEC's evidence shows that Benson controlled Spartan and endorsed checks made payable to it.See e.g.Miller testimony, Ex. 6, pp. 44-46;Witkin testimony, Ex. 14, pp. 77-78;Ex. 14A.Numerous sales representatives testified that in directing them to make payback checks to Spartan, Benson represented that he controlled and had organized Spartan.See, e.g.,Miller testimony, Ex. 6, pp. 44-46;Prince declaration, Ex. 7, ¶ 3.Moreover, Witkin not only testified that Benson had told him that he had founded Spartan, but that for almost two years part of his salary from Empire consisted of monthly checks from Spartan.Witkin testimony, Ex. 14B, pp. 38-45.When asked during a deposition if he had any knowledge about Spartan, Benson refused to answer and asserted his Fifth Amendment privilege.Benson dep., Ex. 21, pp. 7-8.

Several sales representatives testified that Benson personally directed them to make these paybacks to Spartan and advised them that the money was for Spartan's "consulting services."These sales representatives stated, however, that they had never had contact with Spartan nor received services from it.See, e.g.,Miller testimony, Ex. 6, pp. 44-56(Miller testified that from 1977 to 1981 Benson personally directed him to make monthly checks to Spartan for alleged consulting services.He stated that in all those years he had no contact with Spartan nor received any services from Spartan except for a few insubstantial business opportunities that Benson claimed were from Spartan).The evidence shows that these paybacks by the outside sales representatives to Spartan totalled approximately $98,157.See, e.g.,Exhibits1(C)-(G);Miller testimony, Ex. 6, pp. 44-56;Witkin testimony, Ex. 14, pp. 77-78;Ex. 14A.

Another designee to whom payback checks were frequently made payable was N.J.C. Consultants, whose principal, Neil Cohen, was a personal friend and neighbor of Robert Witkin.Witkin and Cohen testified that at Benson's direction, Witkin convinced Cohen to cash checks from various sales representatives made out to N.J.C. Consultants and deliver the proceeds to Witkin who then delivered the cash to Benson.Cohen's declaration states:

In or about the summer of 1980, Robert Witkin asked me to cash some checks to be drafted to NJC from various sales representatives of Empire.Witkin stated that he was under pressure from Benson to cash such checks from Benson.Following my agreement to this arrangement, Witkin delivered 8 checks....I deposited all such checks in the account of NJC ... I then withdrew and delivered to Witkin cash in the same amount as the checks.Neither I nor NJC kept any of the monies received by NJC by these transactions ... all monies were remitted to Witkin.Further, neither I nor NJC provided any services in connection with these transactions....

Cohen declaration, Ex. 17.

Witkin testified that he delivered all cash proceeds from the checks to Benson.Witkin testimony, Ex. 14, pp. 72-74, 97.See alsoWitkin testimony, Ex. 14, pp. 58, 90, 96-97.Plaintiff demonstrates through testimony and documentation that total payments to NJC,...