United States Securities and Exchange Commission v. Wellness Matrix Group, Inc.

• Court: District Court, C.D. California
• Decided: August 10, 2023
• Docket: 8:21-cv-01031
• Status: Unknown

Opinion

8 UNITED STATES DISTRICT COURT

9 FOR THE CENTRAL DISTRICT OF CALIFORNIA

10 UNITED STATES SECURITIES Case No. 8:21-cv-01031-SSS-DFMx AND EXCHANGE COMMISSION, 11 ORDER GRANTING MOTION FOR 12 Plaintiff, DEFAULT JUDGMENT, [DKT. 59], AND GRANTING, IN PART, 13 v. MOTION FOR FINAL JUDGMENT, 14 [DKT. 62]

15 WELLNESS MATRIX GROUP, INC., et al. 16

17 Defendants.

18 19 Before the Court are two motions filed by Plaintiff United States 20 Securities and Exchange Commission (“SEC”). [Dkt. 59, 62]. The first is a 21 motion for entry of default judgment against Defendant Wellness Matrix Group, 22 Inc. (“Wellness Matrix”) for violating Section 10(b) of the Securities Exchange 23 Act and Rule 10b-5. [Dkt. 59]. Wellness Matrix has not appeared in this case; 24 thus, the motion is unopposed. The second is a motion final judgment against 25 Defendant George Todt (“Todt”). [Dkt. 62]. Todt does not oppose. 26 Having reviewed the SEC’s arguments, relevant legal authority, and 27 record in this case, the motion for default judgment against Wellness Matrix is 1 GRANTED, and the motion for final judgment against Todt is GRANTED, IN 2 PART. 3 I. MOTION FOR DEFAULT JUDGMENT AGAINST WELLNESS MATRIX 4 5 The Court first turns to the SEC’s motion for default judgment against 6 Wellness Matrix. 7 A. Background 8 1. Wellness Matrix’s fraudulent and deceptive representations 9 10 This case is about Wellness Matrix’s fraudulent and deceptive 11 representations about its purported COVID-19 home test kits and disinfectant in 12 connection with the sale of its stocks. Wellness Matrix is a company whose 13 purpose is “to develop and implement the most advanced technologies available 14 to provide advanced healthcare and to provide advanced systems and platforms 15 to allow customers to have access to the most secure data storage and records 16 security available.” [Dkt. 1, Compl. ¶ 13]. In 2018, Wellness Matrix’s CEO 17 agreed to sell the company to Todt. [Id. ¶ 20]. Wellness Matrix’s CEO allowed 18 Todt to run the day-to-day operations of the company. [Id. ¶¶ 19, 21]. 19 Beginning in February 2020, Todt began receiving information about 20 COVID-19-related products Wellness Matrix could market. [Id. ¶ 25]. One of 21 these products was a COVID-19 antiviral disinfectant distributed by 22 CoronaCide, LLC (“CoronaCide”), which claimed to effectively kill COVID-19 23 for 28 days. [See id. ¶¶ 25-26, 31]. Around this time, Todt and his ex-wife 24 registered three website domains: coronastop28.com, stopcorona28.com, and 25 virastop28.com. [Id. ¶ 27]. In mid-March 2020, Todt learned of a COVID-19 26 home test kit distributed by CoronaCide. [Id. ¶ 28]. CoronaCide’s test kits 27 warned that they were only for in vitro or emergency purposes. [Id.]. Soon after learning about the test kits, Wellness Matrix, at Todt’s direction, opened up 1 a payment processing account to receive payments from consumers for the test 2 kits and disinfectant. [Id. ¶ 29]. 3 On March 19, 2020, a CoronaCide associate sent Todt a letter from the 4 Federal Drug Administration (“FDA”). [Id. ¶ 30]. The FDA stated it received 5 the CoronaCide test kit submission and would notify CoronaCide once its 6 review was completed. [Id.]. The FDA did not indicate, however, that the 7 CoronaCide’s test kits were approved for any use. [Id.]. The next day, Todt 8 sent a Wellness Matrix purchase order to CoronaCide for about $10,000 of test 9 kits and disinfectant. [Id. ¶ 31]. A CoronaCide associate notified Todt the order 10 could not be fulfilled because the test kits could only to be sold to governments 11 in bulk at that time. [Id.]. This information was later confirmed in another 12 email to Todt. [Id.] 13 On Wellness Matrix’s behalf, Todt directed an associate of his to add 14 information about the test kits and disinfectant to two of Wellness Matrix’s 15 affiliated websites—namely, stopcorna28.com and virastop28.com. [Id. ¶ 32]. 16 Todt specifically told the associate to include the FDA submission number for 17 the CoronaCide test kits and to indicate the products were Wellness Matrix’s. 18 [Id.]. Wellness Matrix included a banner on the front page of its main website 19 that directed viewers to “Visit CoronaStop28.com.” [Id. ¶ 34]. 20 Between March 19 and 31, 2020, Wellness Matrix advertised for sale 21 CoronaCide’s products as a “WMGR” product through its affiliated website 22 domains and through Todt’s personal social media accounts. [Id. ¶¶ 35-36, 23 41-42]. During this 12-day period, Wellness Matrix advertised the test kits as 24 FDA-approved for at least three days and advertised them as FDA-registered 25 and -authorized for two other days. [Id. ¶ 38]. Wellness Matrix advertised the 26 disinfectant was approved or registered by the Environmental Protection 27 Agency (“EPA”), citing a purported registration number. [Id. ¶ 40]. Wellness 1 Matrix and Todt knew the test kits and disinfectant were not government 2 approved, authorized, or registered. [Id. ¶¶ 45, 47-48]. 3 2. The investors 4 Shortly after learning about the disinfectant, Todt spoke to a 5 then-prospective investor in late February 2020. [Id. ¶ 49]. Todt told the 6 investor to purchase Wellness Matrix shares because it had an EPA-approved 7 disinfectant to stop the spread of COVID-19. [Id.]. Todt further told the 8 investor that the federal government and Amazon expressed interest in the 9 disinfectant. [Id. ¶ 50]. This product could increase Wellness Matrix’s stock 10 price, Todt continued, from $0.05 to $20 per share. [Id.]. Todt told the investor 11 he was an owner of Wellness Matrix and showed him coronastop28.com, which 12 he said was affiliated with Wellness Matrix. [Id. ¶ 51]. The next day, Todt told 13 the investor that Wellness Matrix had sold 10,000 units of the disinfectant to 14 Costco. [Id. ¶ 52]. The investor periodically reviewed coronastop28.com and 15 noticed that documentation was added to support Wellness Matrix purported test 16 kits and disinfectant. [Id. ¶ 53]. 17 Relying on the information he learned from Todt and from Wellness 18 Matrix’s own and its affiliated websites, the investor purchased over 23,000 19 shares of Wellness Matrix between March 6 and 24, 2020. [Id. ¶ 56]. The 20 investor convinced his sister to invest in Wellness Matrix, resulting in her 21 purchasing 5,000 shares of Wellness Matrix on March 26, 2020. [Id. ¶ 57]. 22 Things took a turn for the worse the following month. In April 2020, 23 National Public Radio investigated Wellness Matrix’s sales of the test kits and 24 reported that several customers who ordered test kits did not receive them, and 25 the FDA had not authorized any at-home COVID-19 test kit. [Id. ¶ 67]. Five 26 days later, the SEC suspended trading in Wellness Matrix’s securities because 27 of questions regarding the accuracy and adequacy of information in the 1 marketplace since March 19, 2020. [Id. ¶ 68]. The two investors eventually 2 sold their shares at a loss. [Id. ¶ 58]. 3 3. The fluctuation in Wellness Matrix’s share price 4 In the three months before Wellness Matrix began advertising the test kit 5 and disinfectant, the company’s share price fluctuated between $0.025 and 6 $0.053, with an average daily trading volume of 28,100 shares for the 7 three-month period. [Id. ¶ 59]. After Wellness Matrix began advertising the 8 products, Wellness Matrix’s share price increased. [See id. ¶¶ 61-62]. For 9 example, on February 25, 2020, Wellness Matrix’s share price increased and 10 fluctuated between $0.05 and $0.10 with an increased trading volume of 11 194,055 shares. [Id. ¶ 61]. And between February 25 through April 6, 2020, 12 Wellness Matrix’s share price fluctuated between $0.035 and $0.19, with an 13 average trading volume of about 85,000 shares. [Id. ¶ 62]. 14 B. Procedural History 15 On February 10, 2023, the SEC filed a Complaint against Wellness 16 Matrix, alleging it violated Section 10(b) of the Securities Exchange Act and 17 Rule 10b-5. [Dkt. 1]. The SEC served the summons and Complaint on 18 Wellness Matrix on June 23, 2021. [Dkt. 15]. After failing to appear in this 19 case, the Clerk entered default against Wellness Matrix on July 30, 2021. [Dkt. 20 20]. The SEC now moves for default judgment against Wellness Matrix. [Dkt. 21 59]. 22 C. Legal Standard 23 A court may enter default judgment against a defendant who has failed to 24 plead or otherwise defend against an action after the clerk enters default. Fed. 25 R. Civ. P. 55(b)(2). “The district court’s decision whether to enter default 26 judgment is a discretionary one.” Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th 27 Cir. 1980). Seven factors—colloquially known as the Eitel factors—guide this 1 merits of plaintiff's substantive claim, (3) the sufficiency of the complaint, (4) 2 the sum of money at stake in the action; (5) the possibility of a dispute 3 concerning material facts; (6) whether the default was due to excusable neglect, 4 and (7) the strong policy underlying the Federal Rules of Civil Procedure 5 favoring decisions on the merits.” Eitel v. McCool, 782 F.2d 1470, 1471-72 6 (9th Cir. 1986). The facts in the complaint are taken as true and deemed 7 admitted by virtue of the entry of default, except those regarding damages. See 8 Fed. R. Civ. P. 8(b)(6); TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 9 (9th Cir. 1987). 10 D. Discussion 11 1. Procedural compliance with Local Rule 55-1 12 As a threshold matter, the Court must determine whether the SEC has 13 complied with the procedural requirements of Local Rule 55-1, which 14 coextensively governs applications for default judgment made to the Court. 15 Under this rule, an applicant must submit a declaration attesting to the 16 following: (1) “[w]hen and against what party the default was entered”; (2) [t]he 17 identification of the pleading to which default was entered; (3) “[w]hether the 18 defaulting party is an infant or incompetent person”; (4) “[t]hat the 19 Servicemembers Civil Relief Act (50 U.S.C. App. § 521) does not apply”; and 20 (5) “[t]hat notice has been served on the defaulting party, if required by [Federal 21 Rule of Civil Procedure 55(b)(2)].” C.D. Cal. R. 55-1. 22 The SEC has satisfied these procedural requirements. In support of its 23 motion for default judgment, the SEC offers a declaration from Alyssa A. 24 Qualls, Senior Trial Counsel for the SEC. [Dkt. 61, Decl. of Alyssa A. Qualls 25 (“Qualls Decl.”)]. Qualls attests default was entered against Wellness Matrix on 26 July 30, 2021, after it failed to respond to the Complaint or otherwise appear in 27 this case. [Id. ¶¶ 3-5]. Quall further attests Wellness Matrix is not an infant or 1 Act does not apply. [Id. ¶ 7]. And Quall attests notice was given via email to 2 Wellness Matrix’s CEO about the SEC’s intent to move for default judgment 3 under Federal Rule of Civil Procedure 55(b)(2). [Id. ¶ 9]. 4 2. The Eitel Factors 5 Having satisfied Local Rule 55-1’s procedural requirements, the Court 6 must now decide whether entry of default judgment against Wellness Matrix is 7 appropriate by weighing the seven Eitel factors. 8 i. Prejudice to the SEC 9 The first Eitel factor considers the possibility the SEC will suffer 10 prejudice if default judgment is not entered. Eitel, 782 F.2d at 1471. Here, the 11 SEC will suffer prejudice because it has no other recourse for recovery if default 12 judgment is not entered. See also Sec. and Exch. Comm’n v. Harrison, No. 13 8:21-cv-01610-SPG-DFM, 2022 WL 17327325, at *4 (C.D. Cal. Oct. 4, 2022); 14 Sec. and Exch. Comm’n v. Baccam, No. ED CV 17-0172 SJO (SPx), 2017 WL 15 5952168, *4 (C.D. Cal. June 14, 2017). 16 Accordingly, this factor weighs in favor of entering default judgment. 17 ii. Merits of the SEC’s claim and sufficiency of the Complaint’s allegations 18 19 Often considered together, the second and third Eitel factors assess the 20 merits of the SEC’s claim by addressing whether it has adequately alleged facts 21 to state claim under Section 10(b) and Rule 10b-5 against Wellness Matrix. 22 Eitel, 782 F.2d at 1471; U.S. Sec. and Exch. Comm’n v. C3 Int’l, Inc., No. 23 8:21-CV-01586-CAS (PDx), 2022 WL 16814859, at *4 (C.D. Cal. Nov. 7, 24 2022). The facts in the Complaint are taken as true and deemed admitted, 25 except those regarding damages. Televideo, 826 F.2d at 917-18. 26 Section 10(b) together with Rule 10b-5 makes it unlawful for a person to 27 engage in fraudulent or deceptive conduct in connection with the purchase or 1 claim under Section 10(b) and Rule 10b-5, the SEC must show (1) Wellness 2 Matrix made a material misrepresentation or omission (2) in connection with the 3 purchase or sale of a security (3) with scienter (4) by means of interstate 4 commerce. Sec. and Exch. Comm’n v. Todd, 642 F.3d 1207, 1215 (9th Cir. 5 2011). 6 The SEC adequately states a claim for a violation of Section 10(b) and 7 Rule 10b-5 against Wellness Matrix. The COVID-19 pandemic was a period 8 filled with uncertainty and consternation. Exploiting this situation, Wellness 9 Matrix advertised for sale its purported COVID-19 test kits and disinfectant and 10 advertised these products were registered, authorized, or approved by the federal 11 government. Wellness Matrix acted with a high degree of scienter, knowing 12 these representations were false. On behalf of Wellness Matrix, Todt repeated 13 these representations, along with others, to a then-prospective investor, 14 convincing him these two products could increase the company’s share price. 15 Relying on Wellness Matrix’s fraudulent and deceptive representations, two 16 investors were induced to purchase Wellness Matrix shares. The SEC thus 17 adequately alleges facts to state a claim for a violation of Section 10(b) and Rule 18 10b-5. 19 Accordingly, these two factors weigh in favor of entering default 20 judgment. 21 iii. Sum of money at stake 22 The fourth Eitel factor balances the amount of money at stake relative to 23 the seriousness of Wellness Matrix’s conduct. Eitel, 782 F.2d at 1471; C3 Int’l, 24 2022 WL 16814859, at *6. If the money at stake is proportional to Wellness 25 Matrix’s fraudulent and deceptive conduct, this factor will weigh in favor of 26 entering default judgment. Baccam, 2017 WL 5952168, at *7. 27 Here, the SEC seeks a third-tier civil penalty of $100,000 from Wellness 1 third tier provides for a maximum penalty of $1,116,140 for each violation of 2 Section 10(b) and Rule 10b-5 if the underlying conduct involved “fraud, deceit, 3 manipulation, or deliberate or reckless disregard of a regulatory requirement” 4 and “such violation directly or indirectly resulted in substantial losses or created 5 a significant risk of substantial losses to other persons.” 15 U.S.C. 6 § 78u(d)(3)(B)(iii)(aa)-(bb); 17 C.F.R. § 201.1001(b).1 There is no doubt 7 Wellness Matrix engaged in fraudulent and deceptive advertising of its 8 purported COVID-19 products to induce investors to purchase Wellness 9 Matrix’s shares, which at the least, created a significant risk of substantial loss 10 to investors. A $100,000 civil penalty—a mere fraction of the maximum 11 penalty allowed—is proportional to Wellness Matrix’s fraudulent and deceptive 12 conduct. 13 Accordingly, this factor weighs in favor of entering default judgment. 14 iv. Possibility of a dispute about the material facts 15 The fifth Eitel factor considers the possibility of a dispute about Wellness 16 Matrix’s fraudulent and deceptive conduct. Eitel, 782 F.2d at 1471-72. Again, 17 the facts in the Complaint are taken as true and deemed admitted, except those 18 regarding damages. Fed. R. Civ. P. 8(b)(6); Televideo, 826 F.2d at 917-18. 19 Here, because Wellness Matrix failed to file an answer, the Court deems 20 admitted and true the SEC’s allegations that Wellness Matrix engaged in 21 fraudulent and deceptive conduct in violation of Section 10(b) and Rule 10b-5. 22 There remains no possibility of a dispute about these material facts. 23 Accordingly, this factor weighs in favor of entering default judgment. 24 25 26 27 1 See also Inflation Adjustments to the Civil Monetary Penalties Administered by the Securities and Exchange Commission (as of January 15, 2023), available 1 v. Possibility default was due to excusable neglect 2 The sixth Eitel factor considers the possibility that the entry of default 3 was due to Wellness Matrix’s excusable neglect. Eitel, 782 F.2d at 1472. This 4 possibility is doubtful here. Wellness Matrix was served with the summons and 5 Complaint on June 23, 2021. After failing to respond to the Complaint, the SEC 6 served Wellness Matrix with its application for entry of default on July 29, 7 2021, and default was entered the next day. Five hundred eighty-four days 8 elapsed without any response or filings from Wellness Matrix. On March 6, 9 2023, Qualls emailed Wellness Matrix’s CEO expressing the SEC’s intent to 10 apply for default judgment. [Qualls Decl. Ex. 1]. Unsurprisingly, Wellness 11 Matrix did not respond to the email. [Id. ¶ 10]. Despite having been served 12 with a copy of this motion for default judgment, Wellness Matrix did not file a 13 response. Based on Wellness Matrix’s history of inaction in this case, it is 14 doubtful that entry of default was due to its excusable neglect. 15 Accordingly, this factor weighs in favor of entering default judgment. 16 vi. Strong policy favoring a decision on the merits 17 The seventh Eitel factor requires this Court to account for the strong 18 policy favoring that this case be resolved on the merits. Eitel, 782 F.2d at 1472. 19 However, the very existence of Federal Rule of Civil Procedure 55(b) suggests 20 this policy alone is not dispositive. C3 Int’l, 2022 WL 16814859, at *7. 21 Here, a decision on the merits is impractical, if not impossible, because 22 Wellness Matrix has failed to response to the allegations in the Complaint. 23 Baccam, 2017 WL 5952168, at *8. Accordingly, this factor does not weigh in 24 favor or against entering default judgment. 25 vii. Balancing the Eitel factors 26 Having considered and balanced the seven Eitel factors, the Court finds 27 six of the seven factors weigh in favor of entering default judgment against 1 Wellness Matrix. The SEC’s application for entry of default judgment is 2 GRANTED. 3 3. Terms of the Judgment 4 The Court must now decide the terms of the judgment against Wellness 5 Matrix. The SEC requests that the Court (1) permanently enjoin Wellness 6 Matrix from violating Section 10(b) and Rule 10b-5 in the future, and (2) 7 impose a $100,000 civil penalty. The Court addresses each term below. 8 i. Permanent injunction 9 The Court has the authority to permanently enjoin Wellness Matrix from 10 engaging in future conduct that would violate Section 10(b) and Rule 10b-5. 15 11 U.S.C. § 78u(d)(1). To obtain a permanent injunction, the SEC must show there 12 is a reasonable likelihood that Wellness Matrix will violate Section 10(b) and 13 Rule 10b-5 in the future. Sec. and Exch. Comm’n v. Murphy, 626 F.2d 633, 655 14 (9th Cir. 1980). In assessing the likelihood of future violations, the Court must 15 look at the totality of the circumstances surrounding Wellness Matrix and its 16 violations. Id. Past securities violations may give rise to an inference there will 17 be future violations. Id. Additional relevant considerations—otherwise known 18 as the Murphy factors—include “the degree of scienter involved; the isolated or 19 recurrent nature of the infraction; the defendant's recognition of the wrongful 20 nature of his conduct; the likelihood, because of defendant's professional 21 occupation, that future violations might occur; and the sincerity of his 22 assurances against future violations.” Id. 23 There is a reasonable likelihood Wellness Matrix will violate Section 24 10(b) and Rule 10b-5 in the future. Wellness Matrix advertised CoranaCide’s 25 test kits and disinfectant as its own and represented them as government 26 approved. It knew, however, that it did not actually own the product, that it 27 could not fulfill any purchase orders, and that the products were not approved 1 wrongfulness of its conduct and fails to provide any assurance it will not violate 2 Section 10(b) and Rule 10b-5 in the future. Based on these circumstances, the 3 Court finds it appropriate to permanently enjoin Wellness Matrix from engaging 4 in conduct that would violate Section 10(b) and Rule 10b-5. 5 ii. Civil penalty 6 The SEC seeks a third-tier penalty for $100,000 against Wellness Matrix. 7 Civil penalties are designed to deter wrongdoers from engaging in similar 8 violations in the future. C3 Int’l, 2022 WL 16814859, at *9. The Securities 9 Exchange Act provides three escalating tiers of penalties for a violation of 10 Section 10(B) and Rule 10b-5. 15 U.S.C. § 78u(d)(3)(B)(i)-(iii). As noted 11 above, the third-tier provides for a maximum penalty of $1,116, 140 against 12 Wellness Matrix for each of violation of Section 10(b) and Rule 10b-5. 15 13 U.S.C. § 78u(d)(3)(B)(iii)(aa); 17 C.F.R. § 201.1001(b). Such a penalty is 14 appropriate where the violation involved “fraud, deceit, manipulation, or 15 deliberate or reckless disregard of a regulatory requirement” and “such violation 16 directly or indirectly resulted in substantial losses or created a significant risk of 17 substantial losses to other persons.” 15 U.S.C. § 78u(d)(3)(B)(iii)(aa)-(bb). The 18 Murphy factors that guide the consideration of whether to enter a permanent 19 injunction apply equally to the Court’s decision to impose civil penalties. C3 20 Int’l, 2022 WL 16814859, at *9; see also Murphy, 626 F.2d at 655. 21 For the same reasons justifying entering a permanent injunction, see 22 discussion supra Section I.D.3.i, a $100,000 civil penalty against Wellness 23 Matrix is appropriate here. 24 /// 25 /// 26 /// 27 /// 1 E. Conclusion 2 For the above reasons, the SEC’s motion for default judgment is 3 GRANTED. The Court will issue a separate judgment. 4 II. MOTION FOR FINAL JUDGMENT AGAINST TODT 5 On October 21, 2022, the Court granted the SEC’s motion for summary 6 judgment against Todt, concluding he engaged fraudulent and deceptive conduct 7 that violated Section 10(b) and Rule 10b-5. [Dkt. 54]. The SEC now moves for 8 final judgment against Todt. [Dkt. 62]. The SEC specifically requests that the 9 Court (1) enter a new permanent injunction; (2) enter a conduct-based 10 injunction; (3) bar Todt from being able to serve as an officer or director; (4) bar 11 Todt from engaging in any conduct involving a penny stock; and (5) impose a 12 civil penalty. 13 Because the SEC is familiar with the facts, which have been extensively 14 detailed in the Court’s order granting the motion for summary judgment, the 15 Court will not recite them here. The Court will provide only those facts 16 necessary to the analysis below. 17 A. New Permanent Injunction 18 The SEC moves the Court to enter a new permanent injunction that would 19 prohibit Todt from violating Section 10(b) and Rule 10b-5. As noted above, the 20 Court can permanently enjoin Todt from engaging in future conduct that would 21 violate Section 10(b) and Rule10b-5. 15 U.S.C. § 78u(d)(1). To obtain a 22 permanent injunction, the SEC must show there is a reasonable likelihood that 23 Todt will violate Section 10(b) and Rule 10b-5 in the future. Murphy, 626 F.2d 24 at 655. The Court considers the totality of the circumstances with guidance 25 from the Murphy factors. Id. 26 There is a reasonable likelihood Todt will violate Section 10(b) and Rule 27 10b-5 in the future. To begin, this is not the first time Todt has committed a 1 Anderson permanently enjoined Todt from engaging in conduct that would 2 violate Section 10(b) and Rule 10b-5 for orchestrating two fraudulent schemes 3 involving the sale and distribution of stocks. See Secs. and Exch. Comm’n v. 4 Todt, No. 2:05-cv-03697-PA-PJW (C.D. Cal. Oct. 3, 2005) (Dkt. 80). 5 Notwithstanding that permanent injunction, Todt engaged in another fraudulent 6 and deceptive scheme, advertising the test kits and disinfectant as Wellness 7 Matrix products and having government approval, authorization, or registration. 8 [See Dkt. 54 at 7]. Todt used these misrepresentations to induce at least two 9 investors to purchase Wellness Matrix shares. [Id. at 2]. Todt fails to 10 acknowledge the wrongfulness of his conduct and fails to provide any 11 assurances he will not violate Section 10(b) and Rule 10b-5 in the future. These 12 circumstances justify permanently enjoining Todt from engaging in conduct that 13 would violate Section 10(b) and Rule 10b-5. 14 B. Conduct-Based Injunction 15 The SEC also moves the Court to permanently enjoin Todt from directly 16 or indirectly participating in the issuance, purchase, offer, or sale of any 17 security. According to the SEC, this conduct-based injunction will “not prevent 18 Todt from purchasing or selling securities listed on a national securities 19 exchange for his own personal account.” [Dkt. 63 at 5]. 20 The Court has broad discretion to fashion “any equitable relief that may 21 be appropriate or necessary for the benefit of investors,” including a 22 conduct-based injunction. 15 U.S.C. § 78u(d)(5); Sec. and Exch. Comm’n v. 23 Moleski, No. 2:21-cv-01065-SVW-E, 2021 WL 6752254, at *5 (C.D. Cal. Oct. 24 21, 2021). As is true with any injunction, the SEC must show there is a 25 reasonable likelihood that Todt will engage in the conduct the injunction seeks 26 to prohibit. Murphy, 626 F.2d at 655. 27 1 For the exact same reasons discussed above in Section II.A, an injunction 2 that prohibits Todt from directly or indirectly participating in the issuance, 3 purchase, offer, or sale of any security is appropriate here. 4 C. Officer and Director Bar 5 The SEC moves the Court to bar Todt from serving as an officer and 6 director for a public company. The lack of qualifying language in the SEC’s 7 motion suggests it asks that this bar be permanent and unconditional. 8 The Court may prohibit any person from serving as an officer or director 9 of a public company if that person’s misconduct demonstrated unfitness to serve 10 as an officer or director. 15 U.S.C. § 78u(d)(2). The Court may consider the 11 following factors to determine whether to impose an officer and director bar: (1) 12 the egregiousness of Todt’s securities law violation; (2) whether Todt is a repeat 13 offender; (3) Todt’s role or position when he engaged in the fraud; (4) the 14 degree of scienter; (5) Todt’s economic stake; and (6) the likelihood Todt will 15 engage in future misconduct. Sec. and Exch. Comm’n v. First Pac. Bancorp, 16 142 F.3d 1186, 1193 (9th Cir. 1998). A court should also consider “whether a 17 conditional bar (e.g., a bar limited to a particular industry) and/or a bar limited 18 in time (e.g., a bar of five years)” would be sufficient to prevent future securities 19 law violations. Sec. and Exch. Comm’n v. Patel, 61 F.3d 137, 142 (2d Cir. 20 1995); see also 15 U.S.C. § 78u(d)(2). 21 An officer or director bar is appropriate here. Todt engaged in egregious 22 conduct, exploiting the uncertain nature of COVID-19 by marketing products 23 that were unavailable and were not approved by the government, all to induce 24 investors to purchase Wellness Matrix shares. Although Todt did not 25 technically serve as an officer or director, he was a controlling shareholder of 26 Wellness Matrix and effectively served as a quasi-officer or quasi-director 27 because he was authorized to run the company’s day-to-day operations. Given 1 is a significant likelihood he will violate securities laws in the future. A 2 permanent, unconditional officer and director bar against Todt is appropriate 3 here. 4 D. Penny Stock Bar 5 The SEC also moves the Court to bar Todt from participating in offering 6 penny stocks in the future. Again, the lack of qualifying language in the SEC’s 7 motion suggests it asks that this bar be permanent and unconditional. 8 A penny stock is any equity security other than certain statutorily 9 identified securities. 15 U.S.C. § 78c; 17 C.F.R. § 240.3a51-1. The Court may 10 prohibit Todt from participating in an offering of penny stock if he engaged in 11 such conduct at the time of the alleged violation. Id. § 78u(d)(6)(A). These 12 bars may be conditional or unconditional and may be permanent or for a limited 13 period. Id. The Court considers the same factors that help determine whether to 14 impose an officer and director bar when deciding whether to impose a penny 15 stock bar. Sec. and Exch. Comm’n v. Premier Holding Corp., No. SACV 16 18-00813-CJC(KESx), 2020 WL 8099514, at *10 (C.D. Cal. Nov. 30, 2020). 17 The Court cannot glean from the SEC’s briefing that a penny stock bar is 18 appropriate here. The SEC contends “all of the fraudulent conduct in this case 19 involved a penny stock” and thus satisfies the statutory definition of what is 20 considered a penny stock. [Dkt. 63 at 7]. The SEC’s assertions, however, are 21 conclusory and unsupported with any evidence. Without such evidence, the 22 Court cannot conclude that Wellness Matrix’s securities qualify as penny stock. 23 Consequently, the Court cannot conclude Todt participated in an offering of 24 penny stock during the relevant time period. At this time, the Court declines to 25 impose a penny stock bar on Todt. 26 E. Civil Penalty 27 The SEC seeks a third-tier penalty of $446,458 against Todt. The SEC 1 $223,229 for two separate violations. The first is when Todt fraudulently 2 marketed the disinfectant, and the second is when he marketed the home test 3 kits. 4 As noted above, the Securities Exchange Act provides three escalating 5 tiers of penalties for a violation of Section 10(b) and Rule 10b-5. 15 U.S.C. 6 § 78u(d)(3)(B)(i)-(iii). After accounting for inflation, the third tier provides a 7 maximum penalty of $223,229 for each securities violation committed by Todt. 8 15 U.S.C. § 78u(d)(3)(B)(iii)(aa); 17 C.F.R. § 201.1001(b).2 Such a penalty is 9 appropriate for each separate violation of Section 10b and Rule 10b-5 that 10 involved “fraud, deceit, manipulation, or deliberate or reckless disregard of a 11 regulatory requirement” and “such violation directly or indirectly resulted in 12 substantial losses or created a significant risk of substantial losses to other 13 persons.” 15 U.S.C. § 78u(d)(3)(B)(iii)(aa)-(bb). While the Securities 14 Exchange Act does not define “violation,” the Court has broad discretion to 15 determine what constitutes a “violation.” U.S. Sec. & Exch. Comm’n v. Murphy, 16 50 F.4th 832, 848 (9th Cir. 2022). The same considerations that help assess 17 whether a permanent injunction is appropriate apply equally for assessing the 18 appropriateness of civil penalties. C3 Int’l, 2022 WL 16814859, at 10. 19 The maximum civil penalty of $446,458 against Todt is appropriate here. 20 Exploiting the uncertainty surrounding COVID-19, Todt promoted 21 CoronaCide’s home test kits and disinfectant as Wellness Matrix products. 22 Most concerning, Todt promoted that these products were government 23 approved. Todt acted with a high degree of scienter, knowing he would be 24 unable to satisfy any purchase orders and that the products were not government 25 26 27 2 See also Inflation Adjustments to the Civil Monetary Penalties Administered by the Securities and Exchange Commission (as of January 15, 2023), available 1 | approved. Todt misrepresented these facts across Wellness Matrix’s own and || its affiliated websites. Acting on Wellness Matrix’s behalf, Todt repeated these 3 | misrepresentations, along with others, to induce investors to purchase Wellness 4] Matrix shares. During this time, Wellness Matrix’s share price rose. But once 5 || the truth was revealed, Wellness Matrix’s share price plummeted and created 6 || significant risk of substantial loss to investors. Throughout the litigation, Todt 7 || has not accepted the wrongful nature of his conduct and has failed to provide 8 || any assurances that he would not commit any future securities violations. The 9 || circumstances of this fraudulent scheme coupled with the fact that Todt is a 10 || repeat offender of securities laws leads to a strong inference that he will commit 11 || future securities violations. 12 Accordingly, a penalty of $446,458 against Todt is appropriate to deter 13 | him from engaging in similar misconduct in the future. 14 F. Conclusion 15 For the above reasons, the SEC’s motion for final judgment against Todt || is GRANTED, IN PART. The Court will issue a separate judgment. 17 IT IS SO ORDERED. 18 19 20 || Dated: August 10, 2023 21 Cinited State oDRetret D udge 22 23 24 25 26 27 28