U.S. Sec. & Exch. Comm'n v. Yossef Kahlon, TJ Mgmt. Grp., LLC, Case No. 4:12-CV-517

CourtUnited States District Courts. 5th Circuit. United States District Court of Eastern District Texas
PartiesUNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. YOSSEF KAHLON, TJ MANAGEMENT GROUP, LLC, Defendants.
Docket NumberCase No. 4:12-CV-517
Decision Date30 September 2016

UNITED STATES SECURITIES AND
EXCHANGE COMMISSION, Plaintiff,
v.
YOSSEF KAHLON, TJ MANAGEMENT GROUP, LLC, Defendants.

Case No. 4:12-CV-517

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF TEXAS SHERMAN DIVISION

September 30, 2016


MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFF SECURITIES AND EXCHANGE COMMISSION'S MOTION FOR REMEDIES

The following are pending before the court:

1. Plaintiff Securities and Exchange Commission's motion for remedies and supporting brief (docket entry #63);

2. Defendants' brief in opposition to Plaintiff SEC's motion for remedies (docket entry #68); and

3. Plaintiff Security and Exchange Commission's amended reply brief in support of its motion for remedies (docket entry #70).

Having considered the Plaintiff's motion and the responsive briefing thereto, the court finds that the motion should be granted.

BACKGROUND

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

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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 contained

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their arguments, the court concluded that oral argument was not necessary.1

DISCUSSION AND ANALYSIS

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.

A. Permanent Injunction

Section 20(b) of the Securities Act "authorize[s] the [SEC] to seek and direct[s] the courts to enter permanent restraining orders upon a 'proper showing' that the defendant 'is engaged or is about to engage' in violations of the securities laws." SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. Unit A July 1981). "The SEC is entitled to injunctive relief when it establishes (1) a prima facie case of previous violations of federal securities laws, and (2) a reasonable likelihood that the wrong will be repeated." SEC v. Calvo, 378 F.3d 1211, 1216 (11th Cir. 2004) (citations omitted). Courts analyze a number of factors to determine whether past violations of the securities laws constitutes a reasonable likelihood of future transgressions, such as the

egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of the conduct, and the likelihood that the defendant's occupation will present opportunities for future

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violations.

Id. "While scienter is an important factor in this analysis, it is not a prerequisite to injunctive relief." Id. (citations omitted).

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 that

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the "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....

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