Securities and Exchange Commission v. Allen R. Smith

2015 DNH 189

• Court: District Court, D. New Hampshire
• Decided: October 1, 2015
• Docket: 14-CV-192-PB
• Status: Published

Opinion

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW HAMPSHIRE

Securities and Exchange Commission

v. Case No. 14-CV-192-PB Opinion No. 2015 DNH 189 Allen R. Smith

MEMORANDUM AND ORDER

The Securities and Exchange Commission (“SEC”) brought this

securities fraud action against Allen R. Smith for Smith’s role

in an advance-fee investment fraud scheme.1 On July 2, 2015, I

granted the SEC’s motion for summary judgment on all of its

substantive claims and its requests for disgorgement and

permanent injunctive relief. See Doc. No. 32. I denied without

prejudice, however, the SEC’s request for a civil monetary

penalty. Id. The SEC renewed its request for civil monetary

relief on July 30, 2015, asking for a $150,000 penalty. Doc.

No. 35. For the reasons set forth below, I now grant the SEC’s

motion and order Smith to pay $43,342.88.

1See document number 32 for a detailed factual background. I. LEGAL BACKGROUND

The Securities Act and the Exchange Act authorize district

courts to impose civil penalties against those who violate the

federal securities laws. See 15 U.S.C. §§ 77t(d)(1);

78u(d)(3)(A); SEC v. Boey, 2013 DNH 101, 4 (noting that civil

penalties may be imposed “in addition to disgorgement and

injunctive relief”) (citation and punctuation omitted). These

penalties are intended to “punish and deter securities law

violations.” Boey, 2013 DNH 101, 4 (citation and punctuation

omitted).

The Securities Act and the Exchange Act create three tiers

of civil penalties based on the severity of the defendant’s

misconduct. See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). First

tier penalties are available for all violations. Second tier

penalties are available only for “fraud, deceit, manipulation,

or deliberate or reckless disregard of a regulatory

requirement.” And third tier penalties are available for all

second tier violations that also “directly or indirectly

resulted in substantial losses or created a significant risk of

substantial loss to other persons.”

For each of these tiers, the maximum allowable penalty is

the greater of (1) a set dollar amount per violation or (2) the

2 defendant’s gross pecuniary gain from the violation.2 See 15

U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). For an individual defendant

whose violations occurred between March 2009 and March 2013 (the

relevant time period here), the maximum penalty per violation is

$7,500 for the first tier, $75,000 for the second tier, and

$150,000 for the third tier.3 So, for instance, the maximum

penalty for a single third tier violation that occurred in the

relevant time period is the greater of $150,000 or the

defendant’s gross pecuniary gain.

2 Although the Securities Act and the Exchange Act authorize courts to impose penalties “for each violation,” it does not define the term “violation.” See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B); In re Reserve Fund Sec. & Derivative Litig., 2013 WL 5432334, at *20 (S.D.N.Y. Sept. 30, 2013). Prior courts have, however, assessed penalties based on (1) the number of schemes in which the defendant was involved, (2) each violation of a statutory provision, or (3) the number of victims. See SEC v. Stanard, 2009 WL 196023, at *35 (S.D.N.Y. Jan. 27, 2009) (per scheme); SEC v. Coates, 137 F. Supp. 2d 413, 428-30 (S.D.N.Y. 2001) (per misrepresentation); SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 17 n.15 (D.D.C. 1998) (per defrauded investor); see also SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 288 n.7 (finding no error in district court “calculating the maximum penalty by counting each late trade as a separate violation”).

3 The Securities Act and Exchange Act sets the maximum penalties for a natural person at $5,000 for first tier, $5,000 for second tier, and $100,000 for third tier violations. See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B). These statutory maximums are adjusted for inflation on a periodic basis. See 28 U.S.C. § 2461 (note). In the 2009 adjustment, the maximum “per violation” penalties for natural persons for violations between March 2009 and March 2013, increased to $7,500, $75,000, and $150,000. See 17 C.F.R. § 201.1004 (Table IV); available at https://www.federalregister.gov/a/E9-4379. 3 Finally, within the statutory range, “the actual amount of

the penalty [is] left up to the discretion of the district

court,” based on the case’s particular facts. SEC v. Kern, 425

F.3d 143, 153 (2d Cir. 2005); see Boey, 2013 DNH 101, 4-5

(explaining that the statute “establishes a ceiling” but does

not “require that the full . . . allowable penalty be imposed”)

(citation and punctuation omitted). In exercising that

discretion, courts have considered factors including (1) the

egregiousness of the violation, (2) the defendant’s scienter,

(3) the repeated nature of the violation, (4) defendant’s

admission of wrongdoing and cooperation with authorities, and

(5) the defendant’s financial situation. See, e.g., SEC v.

Kapur, 2012 WL 5964389, at *7 (S.D.N.Y. Nov. 29, 2012); SEC v.

Locke Capital Mgmt., Inc., 794 F. Supp. 2d 355, 370 (D.R.I.

2011).

I. ANALYSIS

Imposing a civil monetary penalty thus follows a three-step

process: (1) set the appropriate tier based on the defendant’s

conduct, (2) determine the statutory maximum penalty from the

defendant’s gross pecuniary gain and number of “violations,” and

(3) exercise discretion to assess an appropriate penalty within

that statutory range. I follow that analysis here. 4 A. Tier

The SEC contends that a third-tier penalty is available

here. I agree. As described above, third-tier penalties are

permitted only for violations that involve (1) “fraud, deceit,

manipulation, or deliberate or reckless disregard of a

regulatory requirement,” and (2) “directly or indirectly

resulted in substantial losses or created a significant risk of

substantial losses to other persons.” See 15 U.S.C. §§

77t(d)(2); 78u(d)(3)(B).

Smith’s conduct here satisfies both statutory requirements.

In granting the SEC’s motion for summary judgment, I concluded

that Smith violated five securities law provisions. See Doc.

No. 32. In so concluding, I focused primarily on Smith’s April

2011 certification letter to prospective investors. Id. at 13-

14. That letter contained several fraudulent misrepresentations

and “persuade[d] at least four investors to contribute, and

lose, over $2 million.” Id. at 13-14, 18, 25. Smith’s conduct,

and that letter in particular, thus “involved fraud” and

resulted in “substantial losses,” and so meets both requirements

for a third-tier penalty.4 See 15 U.S.C. §§ 77t(d)(2);

4 I focused on the April 2011 letter, in large part, because the SEC’s complaint and motions made it “impossible to determine exactly how many securities violations the SEC alleges that 5 78u(d)(3)(B). I therefore agree that a third-tier penalty is

available in this case.

B. Statutory Maximum Penalty

The statutory maximum penalty for a third-tier violation

(during the relevant period) is, again, the greater of the

defendant’s gross pecuniary gain from the violation or $150,000

per violation. Here, Smith’s gross pecuniary gain was

$43,342.88. Doc. No. 32 at 26-27 ($39,525 in compensation from

the scheme’s principals, plus $3,817.88 in prejudgment

interest). With respect to the “per violation” provision, the

SEC asserts that “[a]lthough Smith violated multiple provisions

of the securities laws, violated several provisions multiple

times, and did so in connection with at least four investors,

these violations occurred in the same scheme,” and I should

therefore find only a single violation. Doc. No. 35 at 4.

Because I agree that Smith committed at least one

violation, I need not endorse the SEC’s approach, or determine

how many “violations” Smith actually committed.5 Instead, for

Smith committed.” Doc. No. 32 at 13 n.5. I follow that same approach here.

5 The SEC argues that “[e]ach of [Smith’s] misrepresentations, to each investor, could be penalized as discrete violations of several of the securities laws.” Doc. No. 35 at 8. Because the SEC asks the court to find only one violation (and because Smith 6 the reasons provided below, I conclude that a penalty below the

statutory maximum is appropriate in this case.

C. Penalty Imposed

The SEC asks the court to impose a $150,000 penalty for

Smith’s “overall participation” in the scheme. Doc. No. 35 at

5. The SEC contends that this penalty – the highest permitted

for a single “per violation” penalty – is warranted based on

“the egregiousness of [Smith’s] violations,” his scienter,

repeated violations, failure to admit wrongdoing, and other

factors. Id. at 6-8. I disagree for several reasons.

First, Smith played a secondary role in the overall fraud.

See Boey, 2013 DNH 101, 5. Undoubtedly, Smith participated in

the scam for several years, and helped to persuade investors to

contribute, and lose, more than $2 million. Doc. No. 32 at 25.

He was not, however, principally responsible for planning or

executing the fraud. See id. at 2. He instead acted largely as

the principals’ paymaster and legal counsel, and was paid

accordingly - for his role in a $10.8 million scheme, Smith

received only $39,525 in payment. Id. at 2, 7. That limited

role, and Smith’s relatively small financial gain, warrants a

lower penalty. See Boey, 2013 DNH 101, 5.

does not challenge this calculation), I need not assess whether the SEC’s argument is correct as a matter of law. 7 Further, despite the SEC’s assertion that “Smith’s scienter

was high,” Doc. No. 35 at 6, I concluded in the July 2, 2015

order only that Smith acted “with at least extreme

recklessness.” Doc. No. 32 at 20. That finding was sufficient

to establish scienter, and to grant the SEC’s motion for summary

judgment. Id. I did not find, however, that Smith acted

knowingly. That too warrants a smaller fine.

Finally, I note that I previously granted the SEC’s request

for permanent injunctive relief. See id. at 29. That

injunction should prevent Smith from “committing further

violations of the securities laws and from participating in the

offer or sale of any security in the future.” Id. at 25.

Imposing the maximum civil penalty is therefore unnecessary to

deter Smith from committing future securities laws violations.

See Boey, 2013 DNH 101, 5-6.

Based on the above factors, and in light of the court’s

considerable discretion in this area, I conclude that a penalty

equal to Smith’s gross pecuniary gain from the scheme is proper

here. See 15 U.S.C. §§ 77t(d)(2); 78u(d)(3)(B); SEC v. Yuen,

272 Fed. Appx. 615, 618 (9th Cir. 2008) (noting that a district

court is “well within its discretion in setting the civil

penalty equal to the disgorgement amount”). A $43,342.88

penalty, equal to the disgorgement amount, reflects Smith’s 8 culpability in this scam, and serves the purposes of these

penalties – to punish and deter securities law violations. See

Boey, 2013 DNH 101, 4.

II. CONCLUSION

For the reasons set forth in this Memorandum and Order, I

grant the SEC’s motion for civil penalties (doc. no. 35), and

order Smith to pay $43,342.88.

SO ORDERED.

/s/Paul Barbadoro Paul Barbadoro United States District Judge

October 1, 2015

cc: Stephen W. Simpson, Esq. Allen Ross Smith, pro se