U.S. Sec. & Exch. Comm'n v. Verdiramo

• Decision Date: 09 September 2011
• Docket Number: No. 10 Civ. 1888 (RMB).,10 Civ. 1888 (RMB).
• Citation: 890 F.Supp.2d 257
• Parties: UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff, v. Richard VERDIRAMO, Vincent L. Verdiramo, Esq., Edward Meyer, Jr., and Victoria Chen, Defendants.
• Court: U.S. District Court — Southern District of New York

890 F.Supp.2d 257

UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.Richard VERDIRAMO, Vincent L. Verdiramo, Esq., Edward Meyer, Jr., and Victoria Chen, Defendants.

No. 10 Civ. 1888 (RMB).

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

Sept. 9, 2011.

Beth Collier Groves, Dean Michael Conway, U.S. Securities and Exchange Commission, Washington, DC, for Plaintiff.

Victoria Chen, Vancouver, BC, pro se.

DECISION & ORDER

RICHARD M. BERMAN, District Judge.

I. Introduction

On March 10, 2010, the United States Securities and Exchange Commission (“SEC”) filed a complaint (“Complaint”) against Vincent L. Verdiramo, Esq., an attorney licensed to practice law in the State of New Jersey and a partner in Verdiramo & Verdiramo P.A.; Richard Verdiramo, former Chairman, Chief Executive Officer, President, and Chief Financial Officer of RECOV Energy Corporation (“RECOV”); Edward Meyer, Jr. (“Meyer”), Principal of Xcel Associates, a New Jersey corporation; and Victoria Chen (“Chen”), Principal of Greenwood Capital Holdings, Inc., a Nevada corporation (collectively, “Defendants”). (Compl., dated Mar. 9, 2011, ¶¶ 14–17.) The SEC alleges, among other things, that Defendants sold shares of RECOV “in unregistered, non-exempt transactions” in violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e(a) (“Securities Act”). The SEC further alleges that Defendants violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78m(b)(5) (“Exchange Act”), and Rules 10b–5 and 13b2–1 promulgated thereunder, 17 C.F.R. §§ 240.10b–5, 240.13b2–1; and that Richard Verdiramo violated Sections 13(a), 13(d), and 16(a) of the Exchange Act, 15 U.S.C. §§ 78m(a), 78m(d), 78p(a), and Rules 13a–1, 13a–13, 13d–1, 13d–2, and 16a–3 promulgated thereunder, 17 C.F.R. §§ 240.13a–1, 240.13a–13, 240.13d–1, 240.13d–2(a), 240.16a–3. (Compl. ¶¶ 1, 10.) ¹

On December 23, 2010, the SEC moved for partial summary judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure (“Fed. R. Civ. P.”), with respect to the Section 5, Section 13(d), and Section 16(a) claims.² The SEC argues, among other things, that (1) Vincent Verdiramo and Chen “directly,” and Richard Verdiramo “indirectly,” sold “hundreds of thousands” of RECOV shares in unlawful unregistered transactions, in violation of Section 5; and (2) Richard Verdiramo violatedSections 13(d) and 16(a) by failing to report to the SEC his acquisition of 6.1 million shares of RECOV stock and the change in his beneficial ownership of RECOV. (SEC Mem. at 6–9.) The SEC seeks permanently to enjoin Vincent Verdiramo, Richard Verdiramo, and Chen from future violations of Section 5 and permanently to enjoin Richard Verdiramo from future violations of Sections 13(d) and 16(a). It also seeks disgorgement of Vincent Verdiramo, Richard Verdiramo, and Chen's “ill-gotten gains.” (SEC's Mem. in Supp. of Mot. for Partial Summ. J., dated Dec. 23, 2010 (“SEC Mem.”), at 9; Compl. ¶ 9.)

On April 11, 2011, Vincent and Richard Verdiramo filed an opposition arguing, among other things, that (1) Vincent and Richard Verdiramo did not violate Section 5 because Vincent Verdiramo's sales of RECOV shares—in which the SEC alleges Richard Verdiramo was “indirectly” involved—fell within the “safe harbor” provisions of Rule 144(k), 17 C.F.R. § 230.144(k); and (2) Richard Verdiramo did not violate Sections 13(d) and 16(a) because his acquisition of 6.1 million RECOV shares did not change his beneficial ownership of RECOV but occurred “solely to [pass] control of RECOV [to Carbon Recovery Corp (‘CRC’) ] if a merger [between RECOV and CRC] took place.” (Mem. of Defs. Vincent Verdiramo and Richard Verdiramo in Opp'n to SEC Mot. for Partial Summ. J., dated Apr. 11, 2011 (“Defs. Mem.”), at 15, 17–18.) Vincent and Richard Verdiramo also argue that there are no grounds for any equitable relief against them because, among other reasons, “partial summary judgment on the SEC's substantive claims is unwarranted.” (Defs. Mem. at 18.) They include in their opposition the purported expert report of attorney Robert D. Axelrod, dated December 22, 2010 (“Axelrod Report”).³

Chen, who is proceeding pro se, has not submitted an opposition to the SEC's motion for partial summary judgment. Chen initially appeared in this matter through her counsel, Gregory Bartko (“Bartko”). ( See Order for Admission Pro Hac Vice of Gregory Bartko, Esq., dated June 1, 2010 [# 16].) At a status conference on January 6, 2011, the Court was advised that Bartko had been suspended from the practice of law because he “had been convicted” of various crimes, including the unlawful sale of unregistered securities in violation of Section 5 of the Securities Act, in the United States District Court for the Eastern District of North Carolina. ( See Tr. of Proceedings, dated Jan. 6, 2011, at 2:19–20; Tr. of Proceedings, dated Feb. 24, 2011); see also United States v. Bartko, No. 09 Crim. 321 (E.D.N.C.)

On May 9, 2011, the SEC filed a reply arguing, among other things, that Vincent Verdiramo's unregistered transactions did not qualify for safe harbor treatment under Rule 144(k)—which allows “a person who is not an affiliate of the issuer” to sell shares in unregistered transactions provided that the seller (together with any prior holder of shares with whom the seller can “tack” under Rule 144(d)(3)(ii)) has held those shares for “at least two years.” (SEC Reply Mem. in Supp. of Mot. for Partial Summ. J., dated May 9, 2011 (“SEC Reply”), at 4–8); 17 C.F.R. § 230.144(d), (k). First, Vincent Verdiramo could not satisfy Rule 144(k)'s two-year holding requirement because he personally held the shares for less than one year, and because the person whose holding period Vincent Verdiramo sought to “tack” onto “never sold or gave her shares to V[incent] Verdiramo,” thereby “end[ing] any ‘tacking’ claim.” (SEC Reply at 4–8.) Second, Vincent Verdiramo was an affiliate of RECOV at the time he engaged in the unregistered sales of RECOV shares, and “an affiliate cannot ... cannot rely on Rule 144(k).” (SEC Reply at 8.) The SEC also argues that the Axelrod Report “should ... be excluded or disregarded as impermissible expert opinion on the law.” (SEC Reply at 6; see also SEC's Mem. of Law in Supp. of Mot. in Limine to Exclude Axelrod Report, dated May 9, 2011 (“SEC Expert Mem.”), at 1 (“The Axelrod Report is the quintessential legal argument by an attorney in the guise of ‘expert’ opinion,” and “fails other tests of reliability and relevance under the Federal Rules of Evidence.”).)

The parties waived oral argument. ( See Tr. of Proceedings, dated Nov. 15, 2010.)

For the reasons set forth below, the SEC's motion for partial summary judgment is granted.

II. Background

The following facts are not in dispute:

(i) at all relevant times, RECOV (formerly Interactive Multimedia Network, Inc. (“IMNI”)) was a “reporting company” under Section 12 of the Exchange Act, 15 U.S.C. § 78 l.⁴ As a reporting company, RECOV was required to file with the SEC reports disclosing the “acquisition or disposition of shares equal to or greater than one percent of ... total outstanding stock” and “changes in [the beneficial] ownership” of the company (SEC Statement of Material Facts, dated Dec. 23, 2010 (“SEC 56.1”), ¶ 29; SEC Mem. at 8–9; Counter–Statement Pursuant to Local Civil R. 56.1 of Defs. in Opp'n to SEC Mot. for Partial Summ. J., dated Apr. 11, 2011 (“Defs. 56.1”) ¶ 29);

(ii) RECOV was founded in March 1994 by Vincent Verdiramo, who served as its Chairman, Chief Executive Officer, and President until March 1, 2000. Since March 2000, Vincent Verdiramo has served “as counsel for RECOV on numerous matters” (SEC 56.1 ¶¶ 8, 9; Defs. 56.1 ¶¶ 8, 9);

(iii) in addition to his role as counsel, in December 2004 and January 2005, Vincent Verdiramo had “discussions” with Meyer which “result[ed]” in Meyer “agree[ing] to purchase control of [RECOV] for $825,000.” As of March 31, 2005, Vincent Verdiramo also held $255,935 in RECOV debt, constituting 64% of RECOV's total outstanding notes and 42% of RECOV's outstanding liabilities. And, between 1999 and 2005, Vincent Verdiramo also repaid $140,000 of RECOV's corporate debt out of his own assets (Decl. of Vincent L. Verdiramo in Opp'n to Pl.'s Mot. for Partial Summ. J., dated Apr. 11, 2011 (“Vincent Verdiramo Decl.”), ¶ 13–14; Richard Verdiramo Decl. ¶ 28; Ex. 21 R to Decl. of Dean M. Conway in Supp. of SEC's Mot. for Partial Summ. J., dated Dec. 23, 2010 (“Conway Decl.”));

(iv) as of March 31, 2005, Vincent Verdiramo's wife, Marion Verdiramo, owned 3.4 million shares of RECOV common stock, making her the largest single holder of RECOV shares at the time (Richard Verdiramo Decl. ¶ 38);

(v) at all relevant times, RECOV “share[d office] space” with Vincent Verdiramo's law firm, Verdiramo & Verdiramo P.A., which had “agreed not to charge rent [to RECOV] and [wa]s not expecting paymentfrom [RECOV] for the office use” (Conway Decl. Ex. 21R, at 5);

(vi) between 2000 and 2006, Richard Verdiramo, who is Vincent Verdiramo's son, served as the Chairman, Chief Executive Officer, President, and Chief Financial Officer of RECOV ( see SEC 56.1 ¶ 1; Defs. 56.1 ¶ 1);

(vii) prior to April 7, 2005, Richard Verdiramo “owned, directly or indirectly, greater than five percent of outstanding RECOV common stock” (SEC 56.1 ¶ 26; Defs. 56.1 ¶ 26; Richard Verdiramo Decl. ¶ 38; Conway Decl. Ex. 21R);

(viii) on April 7, 2005, Richard Verdiramo, in his capacity as President, signed a resolution on behalf of the RECOV Board of Directors (“April 7, 2005 Resolution”) authorizing RECOV's transfer agent, Jersey Transfer and Trust (“Transfer Agent”), to issue “2,032,290 ... free trading shares of [RECOV] [c]ommon [s]tock to [certain] individuals.” The April 7, 2005 Resolution also authorized the Transfer Agent to issue “6,100,000 shares of restricted common stock [to Richard Verdiramo] for services rendered [as] its President” (SEC 56.1 ¶¶ 12–13; Defs....