U.S. Sec. & Exch. Comm'n v. Benger
| Decision Date | 09 November 2015 |
| Docket Number | No. 09 C 676,09 C 676 |
| Parties | UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. STEFAN H. BENGER et al., Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
MEMORANDUM OPINION AND ORDER
This protracted litigation over the violation of the defendants' operation of a "boiler room" scheme is at last coming to a close. The SEC's cases against all of the defendants, except Stephan von Hase and CTA Worldwide Services, have been resolved, and there remains only the SEC's motion for default judgment against Mr. von Hase and CTA Worldwide, [Dkt. #451] - their motions to vacate the defaults against them having been denied. See United States Securities and Exchange Commission v. Benger, 2014 WL 2198325, 2 (N.D.Ill.2014) [Dkt. ##506, 507].
The SEC now seeks entry of default judgment against the Default Defendants and the following remedies under the federal securities laws:
(1) Disgorgement of the proceeds from the boiler-room scheme [Amended Complaint, Dkt. # 234-4] in the amount of $6,357,966.25, with prejudgment interest, calculated according to the underpayment rate used by the Internal Revenue Service (IRS), in the amount of $1,423,077.08, for a total disgorgement of $7,781,043.33.
Alternatively the SEC would be content with a disgorgement figure of $3,031,999.45, which represents monies paid the Default Defendants and von Hase's wife from December 5, 2007 through January 9, 2009. [Dkt. #538 at 7];1
(2) "substantial" civil penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act (15 U.S.C. §§ 77t(d) and 78u(d)(3));
(3) an order permanently barring the Default Defendants from participating in future penny stock offerings, pursuant to Section 20(g) of the Securities Act and Section 21(d)(6) of the Exchange Act (15 U.S.C. §§ 77t(g) and 78u(d)(6)); and
(4) an injunction permanently barring the Default Defendants from engaging in conduct that violates Section 17(a) of the Securities Act, (15 U.S.C. § 77q(a)), Section 10(b) (and the related Rule 10b-5) of the Exchange Act, (15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5), and Section 15(a) of the Exchange Act, (15 U.S.C. § 78o(a)), pursuant to Section 20(b) of the Securities Act and Section 21(d)(1) of the Exchange Act (15 U.S.C. §§ 77t(b), 78u(d)(1)).
[Dkt. ##451, 525, 538].
Default Defendants do not deny that they are jointly and severally liable for some amount of disgorgement, some amount of prejudgment interest and a civil penalty in some amount. They do, however, object to the imposition of "significant" civil penalties. [Dkt. #451 at 8-10]. Accordingly, the only aspect of the Commission's request for relief that Default Defendants take issue with is the amounts of the monetary remedies.
For the reasons discussed below, Plaintiff's Motion for Default Judgment Against Defendants Stephan Von Hase and CTA Worldwide Services, S.A., [Dkt. 451], as to all of the forms of relief sought, is granted, with the modifications and exceptions discussed below. Jurisdiction is retained to set the proper amount of a civil penalty, upon motion by the SEC requesting a specific penalty amount, made within 7 days from the issuance of this Opinion.
The facts of this case have been extensively discussed in previous opinions. See S.E.C. v. Benger, 64 F.Supp. 3d 1136 (N.D.Ill. 2014); S.E.C. v. Benger, 2013 WL 593952 (N.D.Ill.2013); S.E.C. v. Benger, 931 F.Supp.2d 908 (N.D.Ill.2013); S.E.C. v. Benger, 931 F.Supp.2d 904 (N.D.Ill.2013); S.E.C. v. Benger, 931 F.Supp.2d 901 (N.D.Ill.2013); S.E.C. v. Benger, 934 F.Supp.2d 1008 (N.D.Ill.2013); S.E.C. v. Benger, 2010 WL 724416 (N.D.Ill. 2010). Thus, only the pertinent facts will be recounted here.
The SEC filed suit in connection with an alleged "boiler room" scheme on February 3, 2009, initially naming the Default Defendants as relief defendants only. [Dkt. #1]. The SEC amended its Complaint several times, first converting the Default Defendants from relief defendants to full defendants with the Amended Complaint of April 1, 2010. [Dkt. # 238, 333]. The penny stock offerings at issue are those relating to China Voice Holding Corp. ("China Voice"), Biomoda, Inc. ("Biomoda"), Pharma Holdings Inc. ("Pharma Holdings"), World Energy Solutions, Inc. ("World Energy"), Revolutions Medical Corp. ("Revolutions"), Earthsearch Communications, Inc. ("Earthsearch"), and Essential Innovations Technology Corp. ("Essential Innovations"). [See Dkt. ##333, 451-1].
The SEC charged that the defendants operated a boiler room scheme whereby they engaged foreign sales agents using high-pressure sales tactics and misrepresentations to prey on unsophisticated investors, including the elderly. The high-pressure tactics employed included "falsely representing that the price of the stock being offered was about to rise sharply, urging potential investors to liquidate savings and other investments, purporting to offer discounted pricing, and, on at least one occasion,threatening to sue investors if they did not purchase the full amount of shares initially agreed upon." [Dkt. ##144, 263].
The Default Defendants further misrepresented the division of funds received from investors. In some instances, boiler room agents misrepresented the fact that over 60% of the funds received from investors were not going to the issuing company, by falsely stating that "only nominal transaction fees would be charged," and that the boiler room operatives would receive a commission only if the investor sold their shares for a profit. [Dkt. ##144, 333]. In reality, the majority of the funds collected from the victims was to be paid to the Default Defendants pursuant to the Escrow & Settlement and Distribution Agreements that the Default Defendants had with each stock issuer and the escrow agents - 71% in most cases. [Dkt. # 538-1, 538-2]. These agreements, and the commissions they contemplated, were never disclosed to, and in some instances were actively concealed from, the investor-victims. [Dkt. #333, ¶¶ 2-4, 23, 35-50]. A number of the Default Defendants' boiler room agents, some of whom were barred from conducting business in the United Kingdom, also misrepresented themselves as employed or otherwise associated with reputable financial services firms operating in the United Kingdom. [Dkt. # 333, ¶ 25].
The scheme was wildly successful, raising upwards of $44 million from more than 1,400 investors. [Dkt. # 333].
The Default Defendants answered the Complaint more than a month after the extended deadline granted by the court, [Dkt. # 159, 180], and more than three months after the original July 14, 2009 deadline to answer had expired.
The SEC filed its first Amended Complaint on April 1, 2010, [Dkt. #238], and, though the deadline to respond was May 6, 2010, [Dkt. #239], the Default Defendants did not do so. [See Dkt. #253]. The SEC moved for default judgment, [Dkt. #253], and the court granted the motion on June 22, 2010. [Dkt. #261]. However, the Default Defendants received leave to file an answer to the Amended Complaint instanter on November 18, 2010, gaining a brief respite from default. [Dkt. ##282-284, 314].
This belated submission essentially marked the conclusion of the Default Defendants' meaningful and responsible participation in the case. The court granted the SEC's motion to compel the Default Defendants to answer the Second Amended Complaint. [Dkt. #442]. When the Default Defendants failed to respond, the SEC again moved again for entry of default. [Dkt. ##447, 451]. And a second time, the SEC's motion was granted, [Dkt. #447], not to be vacated again.
Three months passed before the Default Defendants filed a motion to vacate the default, claiming that a sudden thirteen-day hospitalization for alcoholism prevented Mr. von Hase from even "communicating" with counsel for several months. [Dkt. ##457, 507]. This motion, coincidentally, came only a few days after the SEC filed its motion for the entry of final default judgment. [Dkt. #451]. The motion to vacate was denied. [Dkt. #507]. See United States Securities and Exchange Commission v. Benger, 2014 WL 2198325 (N.D.Ill. 2014).
As a result of the defaults entered against the Default Defendants on October 13, 2013, the factual allegations in the SEC's Second Amended Complaint [Dkt. # 442] are deemed admitted and not open to challenge. See Thomson v. Wooster, 114 U.S. 104,110-11 (1885); Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994); Dundee Cement Co. v. Howard Pipe & Concrete Products, Inc., 722 F.2d 1319, 1323 (7th Cir. 1983).
Though the facts are admitted, a question still exists as to the remedies sought by the SEC. See Thomson, 114 U.S. at 111. Thus, while default judgment precludes challenge as to the well-pleaded factual allegations in the plaintiff's complaint, the amount of any monetary relief not identified as liquidated or otherwise calculable from the record must be proved-up separately; conclusions of law contained in the complaint are not admitted. See Pope v. United States, 323 U.S. 1, 12 (1944); e360 Insight v. The Spamhaus Project, 500 F.3d 594, 602 (7th Cir. 2007); Marshall v. Baggett, 616 F.3d 849, 852 (8th Cir. 2010). A separate evidentiary inquiry to ascertain the proper amount of a monetary judgment is not necessary where, as here, the amounts are "capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits." e360 Insight, 500 F.3d at 602; S.E.C. v. Michel, 521 F. Supp. 2d 795, 830-31 (N.D.Ill. 2007).
As to the injunctive relief sought by the SEC, "judgment is immediately given . . . where the thing demanded is certain." Thomson, 114 U.S. at 111. See also S.E.C. v. Management Dynamics, Inc., 515 F.2d 801, 813-814 (2nd Cir. 1975); Ramm Industries Co. v. Chapman Performance Products, Inc., 1978 WL 21741, *4-5 (N.D.Ill. 1978). The civil penalties sought by the SEC involve an exercise of the court's...
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