765 F.Supp.2d 340
S.D.N.Y.2011Background
- SEC filed suit in SDNY alleging Tecumseh entities and individuals violated federal securities laws; Milling proceeded pro se on partial summary judgment in 2009 and the court granted in part and denied in part Tecumseh I.
- Tecumseh offered unregistered securities (Tecumseh Class A, Class C, and Tradevest units) based on offering memoranda drafted or reviewed by Milling.
- Offering memoranda contained aggressive profit projections while Tecumseh and Cantor operated at a loss; these projections were not updated to reflect ongoing losses through 2002.
- Distributions labeled as dividends/ROIs were funded from investor capital rather than Cantor/Tecumseh profits, and Milling signed checks and communications reflecting those mischaracterizations.
- Milling knew of Cantor and Tecumseh losses, failed to disclose lack of profitability, and was responsible for NASD- Cantor acquisition-related filings not submitted until May 2003.
- The court previously found sufficient facts to rule Milling liable for antifraud provisions and enjoined him; the current motion addressed additional claims for fraud, aiding and abetting, and penalties.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was Milling liable under the antifraud provisions? | SEC contends Milling drafted/distributed memoranda with false projections and undisclosed losses. | Milling denied responsibility for compliance oversight and suggested disclaimers shield liability. | Yes; court granted summary judgment for SEC on antifraud claims. |
| Did Milling aid and abet a violation of Section 17(a)? | SEC argues Milling aided Cantor’s 17(a) violations through counsel and involvement. | Milling argued lack of substantial assistance; SEC contends evidence shows otherwise. | No; court granted summary judgment in Milling’s favor on aiding and abetting claim. |
| Should injunctive relief and third-tier penalties be imposed? | SEC seeks ongoing injunction and third-tier penalties for egregious and investor-harming fraud. | Milling contends no ongoing violations/lesser penalties warranted given circumstances. | Yes; court enjoined Milling from future violations and imposed a $110,000 third-tier penalty. |
Key Cases Cited
- SEC v. Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (scienter and negligence standards in fraud actions)
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality and duty to disclose in misrepresentation)
- TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (U.S. 1976) (materiality framework for securities fraud)
- Halperin v. eBanker USA.com, Inc., 295 F.3d 352 (2d Cir. 2002) (cautionary language and bespeaks caution doctrine limitations)
- First Am. Ctr. Sec. Litig. v. First Am. Ctr. Ltd. P'ship, 807 F. Supp. 326 (S.D.N.Y. 1992) (fraudulent projections and updating duty considerations)
- In re Time Warner Inc. Sec. Litig., 9 F.3d 259 (2d Cir. 1993) (forward-looking projections subject to securities laws)
- Sledge v. Kooi, 564 F.3d 105 (2d Cir. 2010) (standard for evaluating summary judgment in fraud cases)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (duty to update and materiality in disclosures)
- South Cherry St., LLC v. Hennessee Group LLC, 573 F.3d 98 (2d Cir. 2009) (reckless disregard as a basis for scienter)
- Monarch Funding Corp., 192 F.3d 295 (2d Cir. 1999) (scienter and negligence standards in fraud actions)