212. The Individual Defendants have reached an agreement with Cayman National Bank to continue USPT’s business. (Tr. 262). Pursuant to that agreement, a company called
International Fiduciary Solutions (“IFS”) will replace USPT. (Tr. 259).
213. IFS operates the same type of business that USPT does, using similar marketing materials. (Tr. 263). IFS offers investment plans that include mutual funds, trusts, and insurance (Tr. 263-64).
214. IFSF is a joint venture created in 2008 between the Individual Defendants, on the one hand, and Cayman National Bank on the other, pending the resolution of the trial in this case. (Tr. 259). Until the resolution of this case, IFS is owned by Cayman National Bank (Tr. 268-69).
215. USPT has already provided IFS with USPT investor and agent lists and contact information, and brochures (Tr. 262-63). The Individual Defendants helped IFS make its marketing brochure. The IFS marketing brochure is circulating and there are currently sales efforts through IFS. IFS has also solicited USPT investors. (Tr. 267-68).
CONCLUSIONS OF LAW
1. Subject matter jurisdiction exists under the Securities Act and the Exchange Act even though most of the investors were non-U.S. residents. SEC v. Berger, 322 F.3d 187, 194 (2d Cir. 2003) (“Congress did not mean the United States to be used as a base for fraudulent securities schemes even when the victims are foreigners, at least in the context of suits by the SEC or by named foreign plaintiffs.”). Courts have traditionally applied two factors to determine if
jurisdiction applies to fraudulent foreign transactions: (1) whether the wrongful conduct occurred in the U.S., and (2) whether the wrongful conduct had a substantial effect in the U.S. or on United States citizens. Id. at 191; SEC v. Wolfson, 03-C914, 2003 WL 23356418 at *15 (D. Utah Dec. 10, 2003). Jurisdiction exists if only one factor is established. Berger, 322 F.3d at 195. Here, jurisdiction exists under the first factor, the “conduct test” because, among other factors, the Defendants operated out of Florida.
2. The SEC must prove the violations by a preponderance of the evidence. SEC v.
Ginsburg, 362 F.3d 1292, 1298 (11th Cir. 2004) (the “SEC must prove violations of § 10(b) and
§ 14(e), and their supplementary Rules, by a preponderance of the evidence, and may use direct or circumstantial evidence to do so”); Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n. 30 (1983) (10(b) suit proven by preponderance of the evidence); SEC v. CM Joiner Leasing
I. Count I
3. Count I charges all the Defendants with violating Section 17(a)(1) of the Securities Act. Section 17(a) of the Securities Act makes it unlawful “in the offer or sale of” securities, by jurisdictional means, to:
(1) employ any device, scheme or artifice to defraud;
(2) obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary to make the
statement made not misleading; or
(3) engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a).
4. “To show a violation of section 17(a)(1), the SEC must prove (1) material
misrepresentations or materially misleading omissions, (2) in the offer or sale of securities, (3) made with scienter.” SEC v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007) (citing
Aaron v. SEC, 446 U.S. 680, 695 (1980)).
5. Participating in a course of business that operates as a fraud on the buyers or sellers of stock can qualify as making a misrepresentation. SEC v. Zandford, 535 U.S. 813, 819-22 (2002);
Affiliated Ute Citizens v. United States, 406 U.S. 128, 152-53 (1972).
6. In order for a misrepresentation or omission to be material, the facts misrepresented or omitted must be “material in the sense that a reasonable investor might have considered them important in the making of this decision.” Affiliated Ute Citizens, 406 U.S. at 153-54. More specifically, “there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976).
7. “[I]f a company chooses to make a statement on a subject, having chosen to speak, the company is obligated to make a full and fair disclosure.” Harvey M. Jasper Retirement Trust v.
Ivax Corp., 920 F. Supp. 1260, 1267 (S.D. Fla. 1995) (citing Dominick v. Dixie Natl Life Ins. Co., 809 F. 2d 1559, 1571 (11th Cir. 1987) ([O]nce [defendant] undertook to speak, it was
required to make a full and fair disclosure.”)). Truthful statements can be misleading when someone omits to state a material fact without which the truthful statement, based on the
circumstances, becomes misleading. 17 C.F.R. § 240.10b-5 (in the context of Rule 10b-5); Ivax
Corp., 920 F. Supp. at 967. “The test for materiality of an omission is ‘whether a reasonable man
would attach importance to the fact omitted in determining a course of action.’ Merchant
Capital, 483 F.3d at 768 (quoting Kennedy v. Tallant, 710 F.2d 711, 719 (11th Cir. 1983)).
8. The misrepresentations and omissions made by the Corporate Defendants, pursuant to a course of business which the Individual Defendants participated in, are material
misrepresentations or omissions connected to the offer or sale of securities. Specifically, Defendants’ failure to disclose the total amounts taken from contributions, including
commissions of 70% or more, fees, and profits, particularly when they sometimes misleadingly disclosed much lower costs, constituted a material misrepresentation or omission. See SEC v.
Levine, 671 F. Supp. 2d 14, 30 (D.D.C. 2009) (“there should be no doubt that the [Defendants’]
failure to disclose the agents’ commissions of over 75% was also a material misrepresentation.”). Their 2001 and 2002 graphs were wholly inadequate to disclose total plan costs. When a May 2006 illustration did disclose the amount taken from contributions, its graphs nonetheless misleadingly depicted that contributors would begin making profits immediately (by showing accumulated money as being higher than contributed money), rather than taking five years to
break even. (Ex. 16). The failure to disclose the financial relationship between the Companies and Fidelity and the statement that the Companies products were regulated by the United States were also, under the facts of this case, misleading.
9. These misrepresentations and omissions were made in connection with the offer or sale of securities.
10. The Supreme Court has defined scienter in this context as “a mental state embracing intent to deceive, manipulate, or defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976). In the Eleventh Circuit, scienter may be established by a showing of knowing
misconduct or severe recklessness. SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982). “Severe recklessness is limited to those highly unreasonable omissions or
misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.” McDonald v. Alan Bush Brokerage Co., 863 F.2d 809, 814 (11th Cir. 1989) (citation omitted); see also SEC v. Southwest Coal and Energy Co., 624 F.2d 1312 (5th Cir. 1980). Mere negligence, however inexcusable, does not serve as scienter. Id. at 815.
11. The Plaintiff in this case has shown by a preponderance of the evidence that the Defendants in this case had scienter regarding the omissions and misrepresentations at issue. Accordingly, the Defendants are guilty of Count I.
II. Count II
12. Count II charges all Defendants with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act.
13. “[T]o show that the defendants violated section 17(a)(2) or 17(a)(3), the SEC need only show (1) material misrepresentations or materially misleading omissions, (2) in the offer or sale of securities, (3) made with negligence.” Merchant Capital, LLC, 483 F.3d at 766. Indeed, the elements of Sections 17(a)(2) and (3) of the Securities Act are the same as for Section 17(a)(1), except the SEC does not have to prove scienter, only negligence. SEC v. Dain
Rauscher, Inc., 254 F.3d 852, 856 (9th Cir. 2001). The analysis and the result regarding material
misrepresentations or omissions connected to the offer or sale of securities are accordingly the same for Count II as they were for Count I.
14. The Court finds by a preponderance of the evidence that these misrepresentations and omissions were made with negligence, at the least. Accordingly, the Defendants are guilty of Count II.
III. Count III
15. Count III charges all Defendants with violating Section 10(b) and Rule 10b-5 of the Securities Exchange Act (“Exchange Act”). “The scope of liability under Section 10(b) and Rule 10b-5 is the same.” Merchant Capital, 483 F.3d at 766 n. 17.
16. Section 10(b) of the Exchange Act provides in pertinent part that “it shall be
unlawful for any person, directly or indirectly, to use or employ, in connection with the purchase or sale of any security, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe as necessary or appropriate in the public interest or for the protection of investors.” 15 U.S.C. § 78j(b).
17. Rule 10b-5, promulgated under the Exchange Act, provides in pertinent part: It shall be unlawful for any person, directly or indirectly,
(a) To employ any device, scheme, or artifice to defraud;
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
18. Along with section 17(a), Section 10(b) and Rule 10b-5 "both prohibit essentially the same type of practices." SEC v. Lauer, No. 03-80612-CIV, 2008 WL 4372896, at *16 (S.D.Fla. 2008) (citing United States v. Naftalin, 441 U.S. 768, 773 n. 4 (1979)). “To prove a 10(b) violation, the SEC must show (1) material misrepresentations or materially misleading omissions, (2) in connection with the purchase or sale of securities, (3) made with scienter.”
SEC v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007) (citing Aaron v. SEC, 446
U.S. 680, 695 (1980)).
19. The Court makes the same findings in connection to Count III that it did with respect to Count I. Accordingly, the Court finds the Defendants guilty of Count III.
IV. Count IV
20. Count IV charges the Corporate Defendants as primary violators of Section 15(a)(1) of the Exchange Act. In its entirety, Section 15(a)(1) provides:
It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or
instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this
section.
21. Under Section 15(a)(1) of the Exchange Act, a broker or dealer must register with the SEC before it can use the mails or any instrumentality of interstate commerce to effect any transaction in the purchase or sale of a security. 15 U.S.C. § 78o.
22. Section 3(a)(4)(A) of the Exchange Act defines “broker” as a person “engaged in the business of effectuating transactions in securities for the account of others.” 15 U.S.C. §
78c(a)(4).
23. "In determining whether a person has acted as a broker, several factors are
considered. These factors include whether the person: 1) actively solicited investors; 2) advised investors as to the merits of an investment; 3) acted with a 'certain regularity of participation in securities transactions'; and 4) received commissions or transaction-based remuneration." SEC v.
Corporate Relations Group, Inc., No. 99-CV-1222, 2003 WL 25570113, at *17 (M.D. Fla. 2003)
(citing In re Kemprowski & the Cambridge Consulting Co., Exchange Act Release No. 34-35058, 1994 WL 684628, at *2 (Dec. 8, 1994)). Courts have also considered whether the alleged broker 5) is an employee of the issuer; 6) is selling, or previously sold, the securities of other issuers; 7) is involved in negotiations between the issuer and the investor; 8) analyzes the financial needs of an issue; 9) recommends or designs financing methods; 10) discusses the details of securities transactions; and 11) makes investment recommendations. SEC v. Corporate
Relations Group, Inc., No. 99-CV-1222, 2003 WL 25570113, at *17 (M.D. Fla. 2003); Salamon v. Teleplus Enterprises, Inc., No. 05-2058, 2008 WL 2277094, at *8 (D.N.J. 2008); See also S.E.C. v. Bravata, No. 09-12950, 2009 WL 2245649 (E.D. Mich. 2009).
being brokers, because they actively solicited investors, advised them on the merits of
investments, regularly participated in securities transactions, received commissions, and sold securities from several different issuers. Based on the Court’s factual findings and a weighing of the factors, the Court concludes that the Corporate Defendants are brokers.
25. Mutual fund shares, such as those at issue in this case, are securities. See Tcherepnin
v. Knight, 389 U.S. 332, 343 (1967) (“we have little doubt that such [mutual fund] shares are
securities within the meaning of the Securities Exchange Act.”).
26. As discussed in the factual findings, the Corporate Defendants made use of the mails and other instrumentalities of interstate commerce in order to effect transactions in or to induce the purchase or sale of securities.
27. It is undisputed that the Corporate Defendants have never registered as brokers, or in any capacity, with the SEC. Accordingly, the Court finds that the Corporate Defendants are guilty of Count IV.
V. Count V
28. Count V charges the Individual Defendants with aiding and abetting violations of Section 15(a)(1) of the Exchange Act.
29. "For aiding and abetting liability under the federal securities laws, three elements must be established: (1) a primary or independent securities law violation committed by another party; (2) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; also conceptualized as scienter in aiding and abetting antifraud violations; and (3) that the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation.” Woods v. Barnett Bank, 765 F.2d 1004, 1009 (11th Cir.
1985); SEC v. K.W. Brown and Co., 555 F.Supp.2d 1275, 1306 (S.D. Fla. 2007). The primary securities law violation at issue was established in Count IV.
30. The knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1306-07 (S.D. Fla. 2007). As discussed in the Court’s findings of fact, all the Individual Defendants were active participants, acting as corporate officers and directors and even translating marketing materials. The Court finds that this shows an awareness or
knowledge by the Individual Defendants that their role was part of an overall activity that was improper. It also shows the third factor, that the Individual Defendants knowingly and
substantially assisted the conduct that constituted the violation, namely the Corporate Defendants acting as unregistered broker-dealers. Accordingly, the Court finds the Individual Defendants guilty of Count V.
VI. Relief