Securities and Exchange Commission v. Vinay Kumar Nevatia
3:14-cv-05273
N.D. Cal.Oct 19, 2015Background
- Defendant Vinay Kumar (also known by several aliases) formed VRSBS Investment, LLC to pool funds from eight investors and himself to purchase 179,900 shares of CSS Corp. in 2008; Kumar was managing member and contributed $24,500; investors contributed $874,500.
- Kumar distributed physical stock certificates to each investor to reflect their pro rata interests and represented he would not commingle proceeds or sell without notice.
- Between November 2011 and May 2013 Kumar secretly resold 174,950 of VRSBS’s 179,900 shares to third parties, received $654,300 in proceeds, and diverted funds to accounts he controlled instead of distributing proceeds to the investors.
- Kumar concealed the sales by falsely telling purchasers and CSS’s transfer agent that he owned the shares, that original certificates were lost, and by creating false paperwork; he later stopped responding to investors and to the SEC and left the U.S. for the UAE.
- The SEC sued for violations of Section 10(b)/Rule 10b-5 and Section 17(a); Kumar did not appear, the Clerk entered default, and the SEC moved for default judgment seeking disgorgement, prejudgment interest, civil penalty, and injunctive relief.
- The magistrate judge recommended default judgment: disgorgement of $629,800 (profits net of Kumar’s $24,500 investment), prejudgment interest of $71,213.94 (total $701,013.94), a civil penalty equal to $629,800, and an injunction; recommended the report be served and judgment withheld 14 days to permit response.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Personal jurisdiction | Kumar resided and acted in California during the scheme, so court has jurisdiction | (No appearance; no contest) | Court has personal jurisdiction over Kumar under Ninth Circuit precedent |
| Adequacy of service abroad | Service at Dubai detention center through authorized receptionist complied with UAE law and Fed. R. Civ. P. 4(f)(2) | (No appearance; no contest) | Service was adequate under Rule 4(f)(2) and UAE procedural law |
| Liability under Section 10(b)/Rule 10b-5 | Kumar made material misrepresentations and omissions, conducted a fraudulent scheme with scienter in connection with securities transactions | (No appearance; no contest) | Complaint states a claim; default judgment appropriate on these claims |
| Liability under Section 17(a) | Kumar employed a scheme to defraud in offers/sales of securities and obtained investor funds; scienter shown for 17(a)(1) and liability for 17(a)(2)/(3) | (No appearance; no contest) | Complaint states claims under paragraphs (1)–(3) of Section 17(a); default judgment appropriate |
| Disgorgement amount | Seek disgorgement of illicit gain ($654,300 minus Kumar’s $24,500 = $629,800) | (No appearance; no contest) | Court recommends disgorgement of $629,800 (plus prejudgment interest) as a reasonable approximation |
| Prejudgment interest rate/calculation | Apply interest per 26 U.S.C. § 6621(a)(2) as adopted in SEC standards; calculated $71,213.94 | (No appearance; no contest) | Recommended prejudgment interest $71,213.94 (total disgorgement $701,013.94); any minor compounding discrepancy is de minimis |
| Civil penalty amount | Third-tier penalty appropriate given fraud, concealment, substantial loss and flight; seek penalty equal to pecuniary gain ($629,800) | (No appearance; no contest) | Recommended maximum penalty equal to pecuniary gain $629,800; factors support third-tier penalty |
| Injunctive relief | Reasonable likelihood of future violations given scienter, recurrent scheme, lack of remediation, history of soliciting investments | (No appearance; no contest) | Recommended permanent injunction against future securities law violations |
Key Cases Cited
- Steel v. United States, 813 F.2d 1545 (9th Cir.) (move of defendant does not defeat personal jurisdiction)
- TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915 (9th Cir. 1987) (allegations in complaint taken as true on default except as to damages)
- SEC v. Todd, 642 F.3d 1207 (9th Cir. 2011) (elements for Rule 10b-5 claim articulated)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (U.S. 1976) (scienter requirement for securities fraud)
- SEC v. First Pac. Bancorp, 142 F.3d 1186 (9th Cir.) (purpose and scope of disgorgement remedy)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir.) (civil penalties supported where defendant fled, refused to admit wrongdoing, and participated in pervasive fraud)
- SEC v. Fehn, 97 F.3d 1276 (9th Cir.) (factors for assessing likelihood of future securities-law violations for injunction)