U.S. S.E.C. v. Universal Exp., Inc.

• Decision Date: 21 February 2007
• Docket Number: No. 04 Civ. 2322 GEL.,04 Civ. 2322 GEL.
• Citation: 475 F.Supp.2d 412
• Parties: U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. UNIVERSAL EXPRESS, INC., Richard A. Altomare, Chris G. Gunderson, Mark S. Neuhaus, George J. Sandhu, Spiga, Ltd., and Tarun Mendiratta, Defendants.
• Court: U.S. District Court — Southern District of New York

475 F.Supp.2d 412

U.S. SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. UNIVERSAL EXPRESS, INC., Richard A. Altomare, Chris G. Gunderson, Mark S. Neuhaus, George J. Sandhu, Spiga, Ltd., and Tarun Mendiratta, Defendants.

No. 04 Civ. 2322 GEL.

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

February 21, 2007.

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Julie K. Lutz and Leslie J. Hughes, Securities and Exchange Commission Central Regional Office, Denver, Colorado, and Robert B. Blackburn, Securities and Exchange Commission Northeast Regional Office, New York, New York, for plaintiff.

Barry Schaevitz, Jacob Medinger & Finnegan, LLP, New York, New York, and Arthur W. Tifford, Tifford and Tifford, Miami, Florida, for defendants Universal Express, Inc., Richard A. Altomare, and Chris G. Gunderson.

John B. Harris and Lara Shalov Mehraban, Stillman, Friedman & Schectman, P.C., New York, New York, for defendant Mark S. Neuhaus.

Jason Pickholz, Marvin Pickholz, and Jeremy A. Shure, Akerman Senterfitt LLP, New York, New York, for defendant George S. Sandhu.

John A. Hutchings, Dill, Dill, Carr, Stonbraker & Hutchings, P.C., Denver, Colorado, and Harry H. Wise, New York, New York, for defendant Tarun Mendiratta.

OPINION AND ORDER

LYNCH, District Judge.

The Securities and Exchange Commission ("SEC") has accused Universal Express, Inc., Richard A. Altomare, and Chris G. Gunderson (collectively, "Organizational Defendants") and Mark S. Neuhaus, George J. Sandhu, and Tarun Mendiratta (collectively, "Consultant Defendants") of violating certain provisions of the federal securities laws. It now seeks summary judgment against all the defendants on claims that they offered or sold unregistered securities in violation of Section 5 of the Securities Act of 1933 and against all defendants except Mendiratta on claims that they engaged in fraud relating to the purchase, offer, or sale of securities in violation of Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The Organizational Defendants cross-move for summary judgment with respect to Section 5 liability, and Neuhaus and Sandhu cross-move for summary judgment as to all allegations. For the following reasons, the SEC's request for partial summary judgment against the Organizational Defendants is granted on all claims, and the Organizational Defendants' cross-motion is denied; its motion for summary against Neuhaus judgment is granted as to liability under Section 5 but denied in all other respects; and all the remaining requests for summary judgment are denied.

BACKGROUND

I. Defendants

Universal Express is a publicly traded Nevada corporation purportedly involved in shipping and transportation, and it maintains its principal place of business in Florida and an office in New York City.¹ Richard A. Altomare has been its chief executive officer and director since 1992, and he currently is the company's sole officer and director. Chris G. Gunderson is a lawyer and has worked for Universal Express as its in-house counsel since 1995.

Mark S. Neuhaus trades securities and apparently was once a professional race car driver. He formed and manages the company Coldwater Capital, LLC, and also helped form the partnership, H & N LLC, the brokerage accounts of which were involved in selling Universal Express shares. He also formed and controlled an entity called Perfect Line Investments, which also traded Universal Express shares.

George J. Sandhu is an investment advisor. During times relevant to this case, he held some degree of trading authority over certain brokerage accounts belonging to Spiga, Ltd., a company that sold Universal Express shares and to which Sandhu provided investment advice. Sandhu also advised a mutual fund called Target Growth Fund Ltd.

Tarun Mendiratta apparently is the nephew of two individuals, Sabita Dhingra and Veena Kaila. During relevant times he was authorized to buy and sell securities in brokerage accounts belonging to Dhingra and Kaila, which received and sold Universal Express shares. Mendiratta is also the president of Jensen Pacific, a Nevada corporation that received funds during this time from the accounts of Dhingra and Kaila.

II. Section 5 Claims

Between April 2001 and January 2004, Universal Express issued more than 500 million of its shares to Neuhaus, Spiga, Dhingra, and Kaila. The shares were issued pursuant to written agreements, drafted by Gunderson and signed by Altomare, exchanging stock purportedly for consulting services. (See P. Exs. 7a-d.) No securities-registration statement was filed by Universal Express between January 1, 2001, and March 31, 2004, except for two S-8 forms registering a total of 50 million shares — one on May 7, 2001, for 30 million shares, and another on January 22, 2002, for 20 million shares.² There is no evidence that any shares were issued under the S-8 forms.

Of the more than 500 million shares, 270,698,345 were issued to Neuhaus pursuant to letters, drafted by Gunderson and reviewed and signed by Altomare, informing the company's transfer agent that the shares were "to be free trading under an S-8 registration." (P. Exs.257a-ii.) Pursuant to similar letters containing the "S-8 registration" phrase, Universal Express issued 152,389,115 shares to Spiga, 40,954,000 to Kaila, and 37,903,000 to Dhingra. (See P. Exs. 260, 261, 290.) During this time, Universal Express also issued 26,233,248 restricted shares to Neuhaus and 6,310,625 to Spiga.³

On approximately April 12, 2004, several months after the last issuance based on a letter mentioning "S-8 registration," the SEC advised Universal Express's transfer agent that she might be charged with participating in the issuance of unregistered securities. The transfer agent informed Gunderson of the SEC's communication and asked him about the legality of the issuance of the shares. On April 23, 2004, Gunderson wrote to the transfer agent stating that "the shares in question were properly issued pursuant to and in compliance with the 1994 Stock Option Plan of Packaging Plus Services, Inc." (P.Ex. "Drayer Wells Letter.")

The 1994 Stock Option Plan ("Option Plan") had been attached to the bankruptcy reorganization plan, judicially approved in February 1994, of Universal Express's previous incarnation, Packaging Plus Services, Inc. The Option Plan authorized the company to issue shares upon the exercise of an option to purchase by "officers, directors, employees, consultants, franchisees and professional advisors of the Company." (P.Ex. 248.) The maximum number of shares to be issued under the Option Plan was 1,250,000 in total, although that limit could be changed "by reason of any recapitalization, stock split or stock dividend," at the discretion of the plan's administrators. (Id.) The number of authorized options was reduced to 104,167 after a reverse stock split in June 1997, and there is no indication of any other change of that number during the relevant time. Under the Option Plan, all options issued were to be evidenced by an option agreement and written notice by individuals intending to exercise an option stating, among other information, their investment intent; the record contains no such agreements or notices. The consulting agreements between Universal Express and Neuhaus, Spiga, Dhingra, and Kaila, do not mention the Option Plan or any possibility of exercising options. Universal Express stated in its annual reports to the SEC from 2001 through 2003, during the period of the subject transactions, that "[t]he [Option Plan] provides for the issuance of up to 104,167 shares of common stock ... No options have been granted under the plan as of [this date]." (P. Exs.240, 237, 180.)

Between April 2001 and March 2004, Universal Express issued 270,698,345 "S-8 registration" shares to Neuhaus, and he deposited nearly 235 million of them into brokerage accounts he opened in the names of Coldwater Capital, LLC, H & N LLC, and Perfect Line Investments. He also deposited over 5.5 million restricted shares into these accounts during the same period. In this time, Neuhaus sold 259,649,167 shares of Universal Express for proceeds of $9,786,589. From April 2002 to November 2003, $5,861,488 was transferred from bank accounts controlled by Neuhaus to Universal Express. At one point a brokerage firm where Coldwater Capital maintained accounts wrote Neuhaus to ask about the proper trading status of the Universal Express stock being sold; that firm subsequently closed the accounts. Neuhaus never checked with the SEC whether a registration statement had been filed as to the shares issued to him.

Spiga, the company associated with defendant Sandhu, sold 134,490,539 of the Universal Express shares transferred to it during this time for proceeds of $3,970,280. It transferred 9,644,333 of the shares it received to an account of Target Growth Fund, from which over 8 million of the shares were sold for $93,778. Sandhu advised Spiga about the amount, timing, and price of certain Universal Express stock sales. During the period covering these sales, Spiga made payments to Universal Express totaling $2,604,880.

All of the "S-8 registration" shares issued to Mendiratta's aunt Dhingra were deposited into accounts at brokerage firms including NevWest Securities Corporation. Between September 1, 2002, and September 30, 2003, these accounts sold 35,703,000 shares of Universal Express for proceeds of $1,230,234. The "S-8 registration" shares issued to Mendiratta's aunt Kaila were deposited in a NevWest brokerage account; they were sold for proceeds of $2,940,009. Dhingra's and Kaila's accounts also purchased shares of Universal Express-905,000 shares by Dhingra and 172,000 by Kaila.

Mendiratta was authorized to buy and sell securities in Dhingra and Kaila's brokerage accounts. The relevant representative of NevWest has testified that he received sales instructions for Dhingra's and...