United States Sec. v. Bravata

• Decision Date: 31 January 2011
• Docket Number: Case No. 09–12950.
• Parties: UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff,v.John J. BRAVATA, Richard J. Trabulsy, Antonio M. Bravata, BBC Equities, LLC, Bravata Financial Group, LLC, and Shari A. Bravata, Defendants.
• Court: U.S. District Court — Eastern District of Michigan

763 F.Supp.2d 891

UNITED STATES SECURITIES and EXCHANGE COMMISSION, Plaintiff,

v.John J. BRAVATA, Richard J. Trabulsy, Antonio M. Bravata, BBC Equities, LLC, Bravata Financial Group, LLC, and Shari A. Bravata, Defendants.

Case No. 09–12950.

United States District Court, E.D. Michigan, Southern Division.

Jan. 31, 2011.

Benjamin J. Hanauer, James G. Lundy, Jonathan S. Polish, U.S. Securities and Exchange Commission, Chicago, IL, Louis P. Gabel, Michael J. Riordan, U.S. Attorney's Office, Detroit, MI, for Plaintiff.Richard J. Trabulsy, Tampa, FL, pro se.

OPINION AND ORDER CONTINUING PRELIMINARY INJUNCTION, ASSET FREEZE ORDER, AND APPOINTMENT OF RECEIVER, AND GRANTING MISCELLANEOUS RELIEF

DAVID M. LAWSON, District Judge.

The Security and Exchange Commission commenced this action on July 26, 2009 alleging that the defendants had engaged in the unauthorized sale of securities, and that the securities it offered for sale were part of a fraudulent scheme in which earlier investors were paid “returns” from new investments remitted by subsequent investors. That type of investment structure is commonly known as a pyramid or Ponzi scheme. The complaint alleges that the defendants' actions violated several provision of the Securities Act of 1933, the Securities Exchange Act of 1934, and various regulations promulgated under that legislation. With the complaint, the plaintiff filed an emergency motion for a temporary restraining order, to freeze the defendants' assets, and for the appointment of a receiver.

The Court entered a temporary restraining order and continued the order as an order of preliminary injunction with the consent of the parties at a hearing on August 4, 2009. Following the August 4, 2009 hearing, the parties reached an agreement that a Receiver should be appointed to handle limited operational and business matters of the institutional defendants, subject to modification of the scope of the Receiver's duties and responsibilities following an evidentiary hearing.

The Court held an evidentiary hearing, taking testimony from ten witnesses on October 21, 22, and 30, 2009 and January 14, 2010. The parties were given time to file post hearing briefs and proposed findings of fact and conclusions of law. The focus of the hearing was whether the preliminary injunction and receivership should continue, and whether certain aspects of the preliminary orders—most notably, the asset freeze order—should be modified or dissolved. In addition to the merits of the plaintiff's contentions as described in the complaint, the defendants made specific objections to freezing certain assets that, they argue, were acquired by funds other than investments by the investors in BBC Equities, LLC and Bravata Financial Group, LLC. Those assets include the following: (1) non-party bank accounts consisting of (a) Comerica Bank Account No. XXXXXXXX684 held jointly by Richard Trabulsy and his grandmother Lily Trabulsy; and (b) Comerica Bank Account No. XXXXXX9556 held jointly in the name of Antonio Bravata and his grandmother, Dylite Adams; (2) certain frozen assets consisting of (a) all assets that were accumulated prior to the date that BBC Equities received and accepted its first subscription agreements for the sale of limited liability membership units (approximately October 2006, rather than May–June 2006 as alleged in the complaint); and (b) assets that were acquired during the time that BBC offered and sold limited liability membership units, but either have no net asset value, are the subject of monthly installment payments required to avoid forfeiture of those assets and, assets that could be unfrozen and used to enable the Bravata defendants to retain experienced securities counsel and present a defense to the charges raised in the SEC Complaint, which include (i) a 1995 Ferrari purchased by John J. Bravata in June 2006; (ii) three Additional Vehicles used and paid for by John Bravata: John J. Bravata's 2005 Cadillac STS, Richard Trabulsy's 2006 Chevrolet Corvette, and Lily Trabulsy's 2007 Cadillac Escalade; (iii) insurance policies on John J. Bravata's life; and (iv) the balance of the retainer John Bravata paid to his bankruptcy counsel.

The Court entered an order on August 21, 2009 denying the defendants' request to unfreeze those assets, subject to the outcome of the evidentiary hearing.

For the reasons outlined below, the Court concludes that the plaintiff has demonstrated a likelihood of success on the merits of their claims; other pertinent factors favor the continuation of the preliminary injunction; the disputed assets likely were acquired from investor funds accumulated since the inception on May 1, 2006 of what came to be known as BBC Equities, LLC; the asset freeze order should continue in force; and the receivership should continue with the Receiver's duties remaining as described in the original order. The following constitutes the Court's findings of fact under Federal Rule of Civil Procedure 52(a)(2), followed by its application of the governing law.

I. Summary of Testimony at Evidentiary Hearing

The plaintiff contends that BBC Equities was formed on May 1, 2006 and began receiving funds from putative investors on May 22, 2006. Bravata Financial Group was formed in January 2003. The plaintiff also contends that between May 22, 2006 and June 30, 2009, the defendants received $55.2 million from approximately 440 investors. The plaintiff maintains that at the end of 2008, BBC Equities had a negative net worth, with reported assets of $146,493,312 and liabilities of $158,005,354. By the end of June 2009, BBC Equities had available cash of $131,316.

The defendants argue that no investment in BBC Equities occurred until October 2006; they complied with regulations governing the offering of investment opportunities to “qualified investors”; although the company was on tenuous financial footings in the late spring of 2009, it had reached a settlement with the Michigan Office of Financial and Insurance Regulation concerning a cease and desist order that agency had issued in March 2009; and the company was on the brink of securing substantial funding that would have allowed it to fund rescission agreements with many of its investors.

The following is a summary of the testimony of the witnesses presented by the parties at the evidentiary hearing.

Luz Aguilar

Luz Aguilar testified that she is the senior staff accountant at the Chicago office of the SEC who had the primary involvement with the examination of the defendants' books and records. After describing her qualifications, job responsibilities, and involvement in the case, she testified that BBC Equities is an “entity ... created to offer shares in investment in real estate,” and Bravata Financial Group was “an entity that was used to market and sell the BBC Equities shares” as well as “insurance products.” Evid. Hr'g Tr., Vol. II, Oct. 22, 2009 [dkt. # 136], at 158. John Bravata and Richard Trabulsy were co-founders of these entities; John Bravata was their chairman and Richard Trabulsy was their vice-chairman. Both Bravata and Trabulsy had signatory authority over two corporate defendants' accounts.

In the course of her work on the matter, Aguilar analyzed about 70 accounts, focusing on accounts for the two corporate defendants and bank records of the individual defendants. She put all of the transactions into an Excel spread sheet and sorted the transactions into different categories. The documents covered a period from May 2006 to sometime in April 2009, with some documents ranging into June 2009 or even later. Aguilar did not find evidence of any certificates of deposits held by BBC Equities or Bravata Financial Group other than the $300,000 and $113,000 CDs mentioned in the Receiver's October 19, 2009 report.

Next, Aguilar authenticated SEC Exhibit 14, entitled Summary of Investor Funds, which she compiled based on various company records. She confirmed that during the time period between May 22, 2006 and June 30, 2009, BBC Equities raised approximately $55 million from investors and paid around $12.5 million back to investors, some in the form of cash interest payments and others as withdrawals of their principal investments. Through her, the government introduced the list of approximately 440 BBC Equities investors as SEC Exhibit 15. Exhibit 15 referenced individuals who invested in BBC Equities prior to April 30, 2009, but Aguilar said her review of bank records disclosed other investors who invested in BBC Equities after that date.

Aguilar testified that before June 2008, BBC Equities' securities were sold by BBC Equities's employees. But beginning June 2008, all the sales were done by Bravata Financial Group's employees. Prior to June 2008, BBC Equities paid its salespersons approximately $2.1 million for selling BBC Equities's securities. SEC Exhibit 17, entitled BBC Equities, LLC, Comerica Bank No. 1851841765, Sources and Uses Statement, listed approximately $7.6 million for Bravata Financial Group as “the monies that went from BBC Equities' account to Bravata Financial Group's account ... [p]resumably to reimburse Bravata Financial Group for expenses incurred in the selling of BBC Equities' shares.” Id. at 174. Aguilar authenticated SEC Exhibit 19, which showed that in 2006, 2007, and 2008, Bravata Financial Group earned $356,958, $143,052, and $214,593 in insurance sales, respectively; Exhibit 20, which summarized transactions in Bravata Financial Group's bank account; and Exhibit 21, entitled Summary of Funds to Defendants and Relief Defendants, May 1, 2006 through June 30, 2009. She explained that the line item on Exhibit 21 identified as BBC Management, Inc. represented BBC Management, Inc.'s payment of payroll for the BBC Equities' employees beginning in August 2007.

Aguilar prepared SEC Exhibit 22 entitled Detail of Transactions for John and Shari Bravata, which summarized the transactions in John and Shari Bravata's bank...