77 F. Supp. 3d 353
S.D.N.Y.2015Background
- Biozoom (formerly Entertainment Arts) was a penny-stock company; ownership transfers to offshore entities were undisclosed, and Biozoom later promoted biomedical technology, sharply raising its stock price.
- Eight Argentinian defendants opened U.S. brokerage accounts (Jan–May 2013), deposited large blocks of Biozoom shares they falsely claimed to have recently purchased from individual investors, and sold 14,078,406 shares in unregistered transactions for roughly $33.4 million.
- The SEC froze defendants’ assets and brought suit for violations of Section 5 of the Securities Act; defendants defaulted after successive U.S. counsel withdrew and did not appear or respond.
- The Court accepted well-pleaded allegations as true for liability, reviewed SEC evidentiary submissions (Sachar Decl. and exhibits) for remedies, and withheld an evidentiary hearing as unnecessary on damages.
- The Court found Section 5 violations, ordered permanent injunctions and disgorgement, adjusted disgorgement calculations to account for commissions/actual deposits, deferred judgment on prejudgment interest because funds were frozen, and imposed civil penalties of $160,000 per defendant (third-tier but not the maximum requested).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Entry of default judgment | SEC: Defendants failed to defend despite extensions; default appropriate | Defendants: no response; sought foreign counsel representation (argued inability to retain US counsel) | Default judgment appropriate; defendants deemed to concede well-pleaded allegations of liability |
| Liability under §5 (unregistered sales) | SEC: Sales were unregistered, used interstate communications; no exemption applies | Defendants: no responsive submissions or exemptions shown | Court found prima facie §5 violations; defendants bore burden to show exemption and did not do so |
| Disgorgement amount | SEC: disgorge gross sale proceeds; used trade records | Defendants: no opposition; exhibits show commissions and lower net proceeds for some defendants | Court adopted disgorgement principal amounts based on actual amounts deposited (adjusted for commissions/errors) and limited awards to amounts pleaded |
| Prejudgment interest and asset freeze | SEC: seeks prejudgment interest (from July 1, 2013) at IRS underpayment rate | Defendants: funds frozen; would be deprived if interest assessed twice | Court deferred awarding prejudgment interest due to Razmilovic; allowed SEC to supplement evidence of actual returns or freeze breaches before finalizing interest award |
| Civil penalties magnitude | SEC: seeks penalties equal to defendants’ gross pecuniary gain (maximum tiers) | Defendants: no submission to contest amount or facts | Court found third-tier penalties justified but refused maximum; imposed $160,000 per defendant given lack of record on individual roles and proportionality |
Key Cases Cited
- Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155 (2d Cir. 1992) (default admits well-pleaded factual allegations but not damages)
- Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61 (2d Cir. 1981) (accept complaint allegations as true on default except damages)
- Cement & Concrete Workers Dist. Council Welfare Fund v. Metro Found. Contractors Inc., 699 F.3d 230 (2d Cir. 2012) (court may rely on affidavits and documentary evidence instead of hearing to establish damages)
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (elements of a §5 claim and burden to prove exemption)
- SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (disgorgement remedial purpose and calculation principles)
- SEC v. First Jersey Secs., Inc., 101 F.3d 1450 (2d Cir. 1996) (disgorgement standard and injunctive relief for systematic wrongdoing)
- SEC v. Patel, 61 F.3d 137 (2d Cir. 1995) (disgorgement reasonable approximation standard)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (limits prejudgment interest when defendant’s assets were frozen by the government)
- Manor Nursing Ctrs., Inc. v. SEC, 458 F.2d 1082 (2d Cir. 1972) (disgorgement necessary to preserve deterrent effect of SEC enforcement)