U.S. Sec. & Exch. Comm'n v. Yossef Kahlon, TJ Mgmt. Grp., LLC
| Decision Date | 30 September 2016 |
| Docket Number | Case No. 4:12-CV-517 |
| Parties | UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. YOSSEF KAHLON, TJ MANAGEMENT GROUP, LLC, Defendants. |
| Court | U.S. District Court — Eastern District of Texas |
The following are pending before the court:
Having considered the Plaintiff's motion and the responsive briefing thereto, the court finds that the motion should be granted.
On September 30, 2015, the court issued its "Memorandum Opinion and Order Denying Cross Motions for Summary Judgment" (docket entry #59); SEC v. Kahlon, 141 F. Supp. 3d 675 (E.D. Tex. 2015). In its memorandum opinion and order, the court concluded that summary judgment should be granted in favor of the Securities and Exchange Commission (SEC) on liability because no genuine dispute as to any material fact existed regarding the SEC's entitlement to judgment as a matter of law on the following issues: (1) the Defendants' transactions violated the Securities Act of 1933; and (2) the Defendants' transactions were not exempt from registration under Rule 504 of Regulation D. Id. The court, however, reserved ruling on the SEC's request for remedies, finding that "there are genuine factual issues with regard to the factors the court must consider in assessing Plaintiff's requests for equitable and injunctive relief." Id. at 681. The court concluded that the "appropriateness of such remedies shall be determined after a trial or evidentiary hearing." Id.
Thereafter, on October 20, 2015, the court entered a scheduling order which governed the briefing schedule related to the SEC's claims for monetary and injunctive relief (docket entry #61). Additionally, the court scheduled this matter for a hearing on May 10, 2016 for "the Parties to present further argument and/or evidence as the court deems appropriate." Id.
On May 4, 2016, the court cancelled the May 10, 2016 hearing (docket entry #71). In its "Order Cancelling Hearing Scheduled for May 10, 2016," the court determined that after reviewing the parties' respective briefs regarding remedies as well as the evidence submitted, an evidentiary hearing was not necessary. The court further noted that on May 4, 2016, counsel for the Plaintiff, Mr. Jonathan Polish, and counsel for the Defendants, Mr. David Kornblau, left a voicemail with the court's judicial assistant. In the voicemail, counsel for the parties advised the court that they did not intend to present any witnesses or further evidence at the May 10, 2016 hearing. The parties stated that they only intended to present their arguments to the court at the May 10, 2016 hearing. In light of the parties' telephone message and because the written submissions from the parties containedtheir arguments, the court concluded that oral argument was not necessary.1
Having already determined the issue of liability as a matter of law, the court now turns to the issue of remedies. The SEC seeks the following remedies:
1. A permanent injunction against both Defendants;
2. Disgorgement, jointly and severally, in the amount of $7,758,178;
3. Prejudgment interest in the amount of $1,522,895;
4. A civil penalty against Defendant Kahlon in the amount of $200,000; and
5. A permanent penny stock bar against both Defendants.
The court will address each requested remedy in turn.
SEC v. Offill, No. 3:07-CV-1643-D, 2012 WL 1138622, at *4 (N.D. Tex. Apr. 5, 2012).
The SEC seeks a permanent injunction against the Defendants to ensure that the Defendants do not violate Section 5 of the Securities Act in the future. See Offill, supra. Since the court previously determined that the Defendants violated the securities laws, Kahlon, supra., "the court need only decide whether there is a reasonable likelihood of future violations." Offill, 2012 WL 1138622, at *4.
The SEC argues that the egregiousness of the Defendants' conduct, coupled with their scienter, compels the issuance of a permanent injunction. The SEC contends that the Defendants ignored the fact that their prior counsel was permanently barred from issuing opinion letters. The SEC further contends that the Defendants ignored the SEC's complaint pertaining to the illegal public distributions of My Vintage Baby stock. The SEC also argues that the Defendants were not truthful with their attorney, David Kahn, about (1) their intent to publicly distribute shares as soon possible, or (2) the suggestion that the Defendants' operations and investment decisions were based in Texas. Additionally, the SEC notes that the Defendants have failed to acknowledge their wrongdoings; rather, they have maintained that their offerings were permitted under Section 5. Although the SEC notes that the Defendants have ceased their penny stock offering operations, the SEC argues that a permanent injunction is necessary to ensure that the Defendants do not engage in lucrative, but illegal, penny stock offerings in the future.
In response, the Defendants urge the court not to issue a permanent injunction. Specifically, the Defendants argue that they did not act with the requisite scienter. The Defendants contend thatthe "violations found by the Court resulted from Mr. Kahlon's good-faith interpretation of ambiguous SEC regulatory pronouncements, the advice of numerous attorneys, and the apparent go-ahead he [Defendant Kahlon] received from numerous SEC enforcement attorneys who had closely scrutinized TJM's investment activities." DEFS. BRIEF IN OPP. TO PL. SEC'S MTN. FOR REMEDIES, pp. 32-33. The Defendants further argue that once Defendant Kahlon learned that a third group of SEC attorneys concluded that the Defendants' transactions were not exempt from the Securities Act registration requirements, the Defendants ceased trading - at a significant loss of approximately $2 million.
The court is not persuaded by the Defendants' arguments. The Defendants rely heavily on the notion that because the SEC's enforcement attorneys failed to advise the Defendants that their transactions were not exempt from the Securities Act registration requirements, the Defendants were permitted to engage in such activity. As such, the Defendants contend that they lacked the requisite scienter or knowledge of wrongdoing that is a factor to be considered by the court in determining whether to impose a permanent injunction. The court, however, previously rejected a similar argument urged by the Defendants in its prior decision concerning liability.
Defendant contends that the fact that the SEC had interviewed and requested documents from Kahlon in connection with two other investigations but did not bring this enforcement action until much later somehow means that the SEC "explicitly permit[ted]" his conduct. Defendant has put forth no evidence showing the SEC had previously interpreted the exemption on which he relies in a manner that is contrary to the interpretation which it asserts here. "As stated by one court, 'neither a good faith belief that the offers or sales in question were legal, nor reliance on the advice of counsel, provides a complete defense to a charge of violating Section 5 of the Securities Act.'"
Kahlon, 141 F. Supp. 3d at 681. Having reviewed the Defendants' arguments on the issue of remedies, the court is not inclined to alter its prior ruling. Therefore, in light of the fact that theDefendants sold unregistered securities, either intentionally or with reckless disregard for the registration requirements, at a volume that netted over $100,000 a month at their peak, the court finds that the Defendants should be permanently enjoined from violating Section 5 of the Securities Act. See Offill, 2012 WL 1138622, *5.
" " Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398, 413 (5th Cir. 2007) (quoting SEC v. Huffman, 996 F.2d 800, 802 (5th Cir. 1993)). "The district court has broad discretion in fashioning the equitable remedy of a disgorgement order." Huffman, 996 F.2d at 803. "Because disgorgement is meant to be remedial and not punitive, it is limited to property causally related to the wrongdoing at issue." Allstate Ins., 501 F.3d at...
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...scienter is just one factor to be considered in determining whether to impose aSection 17(a) injunction. See SEC v. Kahlon, 2016 WL 5661642 (E.D. Tex. Sept. 30, 2016) (citing SEC v. Calvo, 378 F.3d 1211, 1216 (11th Cir. 2004) (citations omitted) ("while scienter is an important factor in th......