146 F. Supp. 3d 270
D. Mass.2015Background
- SEC sued Tropikgadget FZE and Tropikgadget Unipessoal LDA ("Tropikgadget") and related individuals for operating a Wings Network pyramid scheme that sold "membership packs" promising guaranteed returns tied to recruitment rather than real product sales.
- Tropikgadget entities are foreign corporations based in Portugal; service by publication was authorized after failed direct attempts; none of the Portuguese defendants answered and clerk entered defaults.
- Wings Network charged membership fees and sold packs ($299–$1,499) that conferred ‘‘points’’ redeemable for monetary returns based on recruitment; little to no genuine product revenue was ever generated.
- Between Nov. 2013 and Apr. 2014 Tropikgadget raised at least $23.5 million from U.S. investors; after regulatory scrutiny Tropikgadget suspended U.S. operations in May 2014.
- Relief defendants Compasswinner and Happy received large wire transfers from Tropikgadget (~€7,000,000 and €950,000 respectively) that the SEC alleges are proceeds of the scheme.
- SEC moved for default judgment; court reviewed well-pleaded allegations and SEC accountant’s disgorgement calculations and granted default judgment and requested relief.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tropikgadget sold unregistered securities | Sale of "membership packs" were investment contracts under Howey and thus securities offered without registration | (No appearance; defaulted) | Court: membership packs are investment contracts; Section 5 violations established |
| Whether Tropikgadget committed fraud in connection with securities | Made material misstatements/omissions (DSA affiliation, guarantees, refund promises) and ran a pyramid scheme | (Default) | Court: allegations support §10(b)/Rule 10b‑5 and §17(a) claims; scienter adequately pleaded |
| Whether relief defendants unjustly received and must disgorge proceeds | Compasswinner and Happy received large wire transfers of illicit proceeds and have no legitimate claim | (Default) | Court: equitable relief available; relief defendants liable for disgorgement amounts received |
| Appropriate remedies (disgorgement, interest, penalties, injunction) | Disgorgement approximated by SEC forensic accounting; prejudgment interest; third‑tier civil penalties; permanent injunction warranted | (Default) | Court: ordered joint and several disgorgement totaling $26,175,732 (with portions joint and several with Compasswinner and Happy), prejudgment interest, $725,000 penalties each for Tropikgadget entities, and permanent injunction |
Key Cases Cited
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946) (Howey test for investment contracts)
- S.E.C. v. SG Ltd., 265 F.3d 42 (1st Cir. 2001) (application of Howey to MLM/ponzi‑type schemes)
- In re The Home Restaurants, Inc., 285 F.3d 111 (1st Cir. 2002) (default admits well‑pleaded facts for liability)
- Ramos‑Falcon v. Autoridad de Energia Electrica, 301 F.3d 1 (1st Cir. 2002) (court must independently examine complaint on default to ensure a cause of action)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (materiality standard for misstatements/omissions)
- S.E.C. v. Druffner, 802 F.Supp.2d 293 (D. Mass. 2011) (disgorgement calculation and district court discretion)