01/16/2009 383 REPLY to Response to Motion re: 355 MOTION Order for Disgorgement and Civil Penalties against Defendant Mark Neuhaus.. Document filed by U.S. Securities and Exchange Commission. (Attachments: # 1 Exhibit A: Neuhaus Investigative Testimony)(Lutz, Julie) (Entered: 01/16/2009)
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PLAINTIFF’S REPLY IN SUPPORT OF MOTION FOR DISGORGEMENT AND CIVIL PENALTIES AGAINST DEFENDANT MARK S. NEUHAUS
Pursuant to the Court’s February 2007 order granting partial summary judgment against defendant Mark S. Neuhaus (“Neuhaus”) and the terms of a bifurcated settlement reached in November 2007 on remaining issues of liability, both of which deferred issues of financial relief, Plaintiff Securities and Exchange Commission (“SEC”) filed a motion seeking disgorgement and penalties against Neuhaus (“Motion”). In his response, Neuhaus asks the Court to order some lesser amount of disgorgement and penalty against him than the amounts sought by the SEC, but he nowhere defines what that lesser amount should be. Neuhaus suggests that a reason for reducing financial relief against him is that that he has cooperated with the SEC throughout this litigation, and suggests that the SEC should be required to settle with him, presumably on terms of his choosing. Both arguments are baseless.
Neuhaus further argues that he cannot pay the amounts sought by the SEC, but makes no attempt as a threshold matter to demonstrate his asserted inability to pay. Even if proved, moreover, Neuhaus’ current financial situation would be irrelevant. The financial relief sought by the SEC is warranted by the scale of Neuhaus’ violative conduct in this case, is in accordance with legal precedent, and is necessary in the public interest as a matter of deterrence.
A. Neuhaus did not provide cooperation.
Neuhaus’ primary argument against the imposition of the disgorgement and penalties sought by the SEC is the assertion that he “tried to assist the SEC by cooperating fully,” both before and after the filing of this case (response, p. 1). That assertion is at best mystifying in light of the record of this case. For example, Neuhaus’ claim that he appeared voluntarily to give investigative testimony is false. Neuhaus appeared, and produced documents, only when issued a subpoena by the SEC requiring him to do so. [Ex. A]. It is also worth noting that Neuhaus’ three-year program of illegal stock sales came to an end only when the SEC filed this enforcement action against him in 2004, seeking emergency relief in the form of a temporary restraining order against Neuhaus and other named defendants.
Neuhaus thereafter proceeded to defend the discovery in the case, and to not only oppose the SEC’s motion for summary judgment but to cross file his own motion for summary judgment against the SEC. Following the Court’s adverse decision as to the SEC’s securities registration claim against him, Neuhaus settled the remaining fraud liability portions of the case only on the eve of trial, and even then only to avoid the imminent costs of trial, not to assist the SEC. These actions do not bespeak “cooperation” with the SEC on the part of Neuhaus, and his citation to the Seaboard Report (at ftnte. 2) is plainly inapt.
Further, even had Neuhaus provided some level of cooperation to the SEC, which he did not, it would not be dispositive of the issue of financial relief as to him. As the Commission noted in Seaboard:
First, the paramount issue in every enforcement judgment is, and must be, what best protects investors. There is no single, or constant, answer to that question. Self-policing, self- reporting, remediation and cooperation with law enforcement authorities, among other things, are unquestionably important in promoting investors' best interests. But, so too are vigorous enforcement and the imposition of appropriate sanctions where the law has been violated. Indeed, there may be circumstances where conduct is so egregious, and harm so great, that no amount of cooperation or other mitigating conduct can justify a decision not to bring any enforcement action at all. In the end, no set of criteria can, or should, be strictly applied in every situation to which they may be applicable…..
2001 SEC LEXIS 2210 (October 23, 2001) at *6-7.
B. Neuhaus’ conduct was of significant duration and harm to public investors.
Notably absent from the Neuhaus response is any acknowledgement of the scope of his illegal conduct or any articulation of how a reduction in the disgorgement and penalty sought by the SEC could or should be rationalized. As found by the Court on summary judgment and in various other opinions and orders in this case, Neuhaus was a primary co-conspirator with Universal Express, Inc. (“Universal Express”) and its former officers Richard Altomare and Chris Gunderson in funneling millions of shares of stock in an essentially worthless company into the public market. The Court’s summary judgment opinion finds that Neuhaus engaged in a three-year scheme, between April 2001 and January 2004, through which he sold nearly 260 million shares of Universal Express stock to unsuspecting investors in numerous unregistered transactions, and through which he reaped proceeds of $9,786,589. [Opinion, pp. 29-34]. Neuhaus also committed fraud violations. Although the Court denied summary judgment as to the fraud alleged against Neuhaus in the Complaint, the Court nevertheless noted that “a conclusion of participation in fraud could be sustained on the basis of the uncontested facts of Neuhaus’ conduct, given the repeated nature of this conduct and defendant’s undisputedly sizeable, nearly simultaneous sales of Universal Express stock.” Opinion, p.34-36.
Neuhaus nowhere addresses this egregious misconduct, which under any reading of the relevant case law warrants the financial sanctions sought by the SEC. Instead, Neuhaus complains that he spent “many hours” assembling documents concerning his ostensible current financial condition and submitting them to the SEC. Despite these efforts, Neuhaus cannot bootstrap his desire to reach a settlement with the SEC for a lesser amount of financial relief into some obligation on the part of the SEC to do so. Given the scope of Neuhaus’ misconduct, the SEC is entitled to seek sanctions which are in its view commensurate with the harm caused by Neuhaus to the investing public and necessary as a matter of deterrence.
C. The disgorgement sought by the SEC is in accord with existing case law.
How Neuhaus chose to spend his illicit trading proceeds is irrelevant, and does not, as Neuhaus argues, transform a disgorgement order into a penalty. SEC v. Dimensional Entertainment Corp., 493 F. Supp. 1270, 1283 (S.D.N.Y. 1980) (defendant's "`expenses in carrying out his scheme and in defending himself are hardly appropriate or legitimate deductions from the amount he received for his own benefit'"); see also cases cited in Plaintiff’s Motion at p. 11. Neither does it provide a rationale for Neuhaus to shift part of his disgorgement liability solely onto Universal Express, simply because he chose to send part of his ill-gotten gains to the company in order to perpetuate the illegal scheme. Neuhaus was primarily responsible for the sales of Universal Express stock which generated the illegal proceeds, and holding him jointly and several liable for the total is appropriate even if he ultimately retained some lesser portion of the proceeds. SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1476 (2d Cir. N.Y. 1996).
D. Neuhaus has made no showing of inability to pay.
Neuhaus asks the Court to consider “his financial condition” (Response, p. 3), but makes no attempt to demonstrate what that financial condition might be. Instead, having reaped stock sales proceeds of nearly $10 million in transactions ending as recently as 2004, Neuhaus cavalierly asks the Court to accept his unsupported claim that he “has no money” to pay any amount of disgorgement or penalty. Even were the Court inclined to accept this facile assertion, though, it would be irrelevant. As noted in Plaintiff’s motion, financial hardship is not grounds for denying disgorgement. The Court may order disgorgement “without giving consideration to whether or not the defendant may have squandered and/or hidden the ill-gotten profits.” SEC v. McCaskey, 2002 WL 8500001 (S.D.N.Y. March 26, 2002) at * 5; accord, e.g., CFTC v. Avco Financial Corp., 97 Civ. 3119, 1998 WL 524901 at *1 (S.D.N.Y. Aug. 21, 1998) (“ declin[ing] to take into consideration Defendant's ... claim of an inability to pay” disgorgement under Commodities Exchange Act), aff'd in part & rev'd in part on other grounds sub nom. CFTC v. Vartuli, 228 F.3d 94 (2d Cir.2000); SEC v. Grossman, 87 Civ. 1031, 1997 WL 231167 at *10 (S.D.N.Y. May 6, 1997) (Kram, D.J.) (“there is no legal support for [defendant's] assertion that his financial hardship precludes the imposition of an order of disgorgement” ), aff'd in part, vacated in part on other grounds sub nom. SEC v. Hirshberg, No. 97-6171, 97-6259, 173 F.3d 846 (table), 1999 WL 163992 (2d Cir. Mar.18, 1999); SEC v. Thomas James Assoc., Inc., 738 F. Supp. 88, 95 (W.D.N.Y.1990) (“ Nor may a securities law violator avoid or diminish his responsibility to return his illgotten gains by establishing that he is no longer in possession of such funds due to subsequent, unsuccessful investments or other forms of discretionary spending.”)
E. Third tier penalties are necessary to deter Neuhaus and other violators
Neuhaus also fails to address the need for penalties to deter other would-be violators. “By enacting the Remedies Act, Congress sought to achieve the dual goals of punishment of the individual violator and deterrence of future violations.” SEC v. Moran, 944 F. Supp. 286, 296 (S.D.N.Y. 1996); SEC v. Coates, 137 F. Supp. 413, 428 (S.D.N.Y. 2001); SEC v. Downe, 969 F. Supp. 149, 158 (S.D.N.Y. 1997); SEC v. Palmisano, 135 F. 3d 860, 866 (2d. Cir. 1998). As set forth in the Motion at pp. 14-19, Neuhaus’ conduct reflects at a minimum his continuous reckless disregard for securities regulatory requirements, and resultant significant harm to investors. Absolving Neuhaus of the requirement to pay financial relief based upon his significant misconduct would defeat this objective.
F. Conclusion
For the reasons stated above, Plaintiff requests that the Court enter an order: (1)requiring Neuhaus to pay disgorgement of $9,786,589; (2) requiring Neuhaus to pay prejudgment interest of $3,434,919; and (3) requiring Neuhaus to pay third tier penalties in the amount of his pecuniary gain.
DATED: January 16, 2009
Respectfully submitted:
s/ Julie K. Lutz
Julie K. Lutz
Leslie J. Hughes
Attorneys for Plaintiff
U.S. Securities and Exchange Commission |
