Court: District Court, D. New Jersey; November 4, 2015; Federal District Court
The SEC has filed for summary judgment against Brett A. Cooper and default judgment against his associated businesses—Global Funding Systems LLC, Dream Holdings, LLC, RE OP Group Inc., Fortitude Investing, LLC, and Peninsula Waterfront Development, L.P.—collectively referred to as the "Cooper Companies." The SEC's Complaint alleges that Cooper and the Cooper Companies engaged in fraudulent schemes and made false statements in connection with securities transactions, violating several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. Specifically, the SEC claims that from November 2008 to April 2012, the Defendants defrauded at least 11 investors out of approximately $2.1 million through three schemes: fictitious “Prime Bank” instruments, trading programs with promised high returns, and a fraudulent “finder’s fee” scheme. Cooper is accused of operating without the necessary licenses or registrations and of having sole control over the Cooper Companies, which lacked formal corporate structure and operations. He misappropriated funds from these entities for personal expenses, including gambling and luxury items, while commingling their accounts with his personal finances.
Cooper, through the Cooper Companies, engaged in deceptive financial schemes from 2008 to 2011, as outlined by the SEC.
1. **Classic Prime Bank Transactions Scheme**: Cooper misled investors into fictitious "Prime Bank" or "High-Yield" investment contracts, falsely promising high returns with minimal risk. Investors were told their money would be used to purchase bank instruments, such as standby letters of credit (SBLCs) and bank guarantees, which were to be monetized for significant profits. However, no funds were invested in these instruments, and investors received no returns. During his deposition, Cooper invoked the Fifth Amendment when questioned about these schemes and did not respond to plaintiffs' requests for admissions.
2. **Fraudulent Escrow Account Information Scheme**: In February 2011, Cooper was approached by Jack Riley regarding a partnership with Alliance Building Systems for a "Swiss Cash Trade" program involving a fictitious bank guarantee from Leybourne Holdings Limited. Cooper falsely claimed to have a client with $5 million in an attorney's trust account and proposed that both he and Alliance contribute to a €3 million investment. He created a false escrow agreement with misleading wiring instructions that misrepresented the account ownership. Investors, unaware of the deception, wired $925,000 to Cooper's account, which he then used for personal expenses such as hotels and cars, rather than for the promised investment.
In April 2012, Cooper and REOP entered into a finder’s fee agreement for a purported Brazilian bond, agreeing to receive $50,000 for identifying a bank or brokerage to accept the bond for sale. Cooper approached Fred Schrodt at Penserra Securities LLC, but the bond was never accepted. During Penserra's review, a forged email and letter, falsely attributed to Schrodt, were sent to the seller's counsel, misleadingly indicating that Penserra had accepted the bond. Penserra confirmed these communications were not genuine. Cooper acknowledged his involvement in drafting the forgery and suggested he might own a Toshiba computer linked to the letter's metadata. Despite the forgery and the bond's non-acceptance, Cooper received the $50,000 fee without fulfilling the agreement's terms.
The SEC engaged Professor James E. Byrne as an expert witness, who characterized the transactions as resembling "Prime Bank" or "High Yield" investment schemes, which lack legitimacy. Byrne found that the investments associated with Cooper and REOP were essentially “Finder’s Fee” schemes based on worthless representations, lacking any real financial basis and resulting in the dissipation of principal funds. He outlined common characteristics of such schemes, including unrealistic returns, claims of safety, misleading financial instruments, and unnecessary secrecy.
Summary judgment may be granted if there are no genuine disputes over material facts, which could affect the lawsuit's outcome. A material fact is one that influences the case under applicable law, and a genuine dispute exists if a reasonable jury could favor the nonmoving party. Courts do not weigh evidence in this determination and must resolve all reasonable doubts and credibility issues against the moving party.
A mere "scintilla of evidence" is insufficient to create a genuine dispute for trial; courts are not obligated to accept the nonmoving party's version of facts if they are so discredited that no reasonable jury could believe them. Summary judgment is appropriate if the record does not support a rational trier of fact finding for the nonmoving party. The movant must initially inform the court of the basis for the motion and identify relevant evidence demonstrating the absence of a genuine issue of material fact. The nonmoving party must then provide specific facts showing a genuine issue for trial, supported by concrete evidence; mere allegations or speculation are inadequate.
Defendant Cooper is pro se, and the court will interpret his submissions liberally. For default judgment against the remaining defendants, REOP and the Cooper Companies, the court must verify service, a sufficient cause of action, and the propriety of default judgment based on potential plaintiff prejudice, the existence of a meritorious defense, and whether the delay was due to misconduct.
The SEC's evidence shows no genuine issue of material fact regarding the defendants' violation of statutes by misappropriating investors' funds through material misrepresentations and omissions. Cooper invoked his Fifth Amendment privilege during deposition, allowing the court to draw an adverse inference against him. The court indicated that this invocation would not prevent adverse findings or summary judgment. Cooper did not file further opposition to the summary judgment motion beyond general denials and invocations of his privilege.
To establish violations of Section 10(b) and Rule 10b-5, the SEC must prove the defendants acted with intent to deceive or defraud, making material misrepresentations or omissions in connection with securities transactions. Liability under Section 17(a)(1) of the Securities Act follows a similar standard regarding intent.
To establish a corporation's liability for scienter, the mental state of its officers can be attributed to the corporation itself. The scienter requirement under Sections 10(b) and 17(a)(1) can be met by demonstrating recklessness, defined as a significant deviation from ordinary care that poses a clear risk of misleading investors. Sections 17(a)(2) and 17(a)(3) only require proof of negligence. Since "Prime Bank" instruments are non-existent, courts have determined that promoters of such schemes acted recklessly. Claims of high returns with no risk are inherently implausible and necessitate a rigorous investigation. Evidence shows that the Cooper Companies, led by Cooper, falsely represented investment opportunities in non-existent bank instruments, leading to total losses for nearly all investors as Cooper misappropriated their funds. The SEC’s expert report corroborates that the instruments and trading platforms offered were fictitious and align with recognized "Prime Bank" fraud characteristics. Defendants failed to provide any legitimate evidence for their investment claims. Although the offered "securities" were non-existent, their actions still meet the criteria for liability under Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. The investment scheme satisfies the Supreme Court’s definition of a security, as investors pooled their money expecting profits from the promoters' efforts. The argument that non-existent securities cannot connect with a sale has been consistently rejected by courts. The SEC's antifraud provisions apply even when the underlying security does not exist, protecting victims from such fraudulent schemes.
Finding that securities laws do not apply to extreme fraud would create a paradox, suggesting that the severity of fraud inversely correlates with legal applicability. Cooper, through the Cooper Companies, materially misrepresented the existence of financial instruments and the status of fictitious investments in bank guarantees and SBLCs to investors via various communication methods. Evidence from the SEC indicates that Cooper misled investors regarding the safety of their funds, using fake collateral and escrow agents, and falsely assured them that their money would be returned if investments failed.
Cooper also falsified his identity, posing as an escrow agent and a registered representative, and lied when confronted about previous frauds. Financial records reveal that $2.1 million from investors was diverted to accounts controlled by Cooper, with no intention to invest as promised. Material misrepresentations are significant if a reasonable investor would consider the information important in making investment decisions; here, the non-existence of the securities and the misappropriation of funds were clearly material omissions.
Additionally, Cooper engaged in fraudulent acts, including creating sham transactions and misappropriating investor assets, in violation of federal securities laws. Specific deceptive practices included using his account number in escrow agreements, establishing a fictitious escrow company with a fake website, providing misleading account statements, and forging correspondence from a brokerage firm.
Cooper meets the scienter requirements under Section 10(b) and 17(a)(1), as he knowingly induced victims to invest in non-existent schemes, fully aware that the funds were controlled by him and were misappropriated for personal use.
Cooper established a fictitious escrow company, complete with a website and phony attorneys, to deceive investors into transferring millions to his controlled bank accounts. Despite using nearly all the invested funds for personal expenses, he misled investors about potential returns by attributing transaction delays to the nonexistent escrow firm he created. Evidence shows Cooper acted with at least reckless disregard for the truth, as substantiated by Professor Byrne's expert report, which confirmed the fraudulent nature of the transactions. A court ruling indicated that the lack of evidence supporting the existence of any legitimate transaction demonstrated Cooper's scienter, which can also be attributed to the Cooper Companies.
The SEC's motion for summary judgment against Cooper was granted based on violations of the Securities Act and the Exchange Act regarding the Prime Bank Schemes. Additionally, Cooper and REOP engaged in a Finder’s Fee Scheme by fabricating a letter to claim a finder’s fee for services not rendered, violating Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act. They fraudulently claimed a $50,000 fee without any legitimate basis, as no brokerage or bank was ever involved. Evidence included impersonation of a Penserra broker and unauthorized use of their logo, with metadata linking the forged letter to a computer potentially owned by Cooper. The Court granted the SEC's motion for summary judgment against Cooper for this scheme as well, leading to a default judgment against the Cooper Companies and REOP.
Cooper is deemed the alter ego of REOP and the Cooper Companies, as courts in the Third Circuit evaluate several factors when considering whether to pierce the corporate veil. These factors include failure to observe corporate formalities, unauthorized siphoning of funds, non-functioning officers and directors, lack of corporate records, and the potential for the corporation to be merely a facade for the stockholder's operations. Evidence presented indicates that REOP and the Cooper Companies did not maintain any formal corporate structure, failing to hold meetings or appoint any officers, directors, or employees apart from Cooper himself. The corporate addresses were personal or temporary, and no legitimate income was generated; instead, funds were derived from fraudulent schemes. Investor money was improperly transferred between accounts and used for Cooper's personal expenses, signifying that Cooper operated these entities as mere legal fictions.
Additionally, Cooper violated Section 15(a)(1) of the Exchange Act by failing to register as a broker-dealer while engaging in securities transactions and securing over $2.1 million from at least ten investors for fraudulent schemes without the necessary registration. Consequently, summary judgment against Cooper for this violation is justified.
The SEC seeks injunctive relief based on the likelihood of future violations, supported by the statutory provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, which allow for such relief when a defendant is currently or imminently engaging in unlawful conduct. Courts assess the totality of circumstances to determine this likelihood.
Defendant Cooper, along with the Cooper Companies and REOP, has engaged in multiple egregious violations of securities laws, demonstrating a high degree of scienter. Despite being implicated in fraudulent schemes that generated millions, Cooper has not taken responsibility for his actions. He continued to operate under a “Finder’s Fee” scheme while facing lawsuits for fraud and after becoming aware of an SEC investigation. At his deposition, Cooper invoked his Fifth Amendment privilege when questioned about his involvement in certain investment schemes. As a result, the court has ordered injunctive relief against him and the Cooper Companies, as well as REOP, following the entry of default judgment.
The SEC seeks disgorgement of $2,096,160 and prejudgment interest of $297,463 from Cooper and the Cooper Companies, totaling $2,393,623 related to the “Prime Bank” schemes. Additionally, the SEC requests disgorgement of $50,000 and prejudgment interest of $4,016 from Cooper and REOP for the Brazilian Bond scheme. The disgorgement figures are based on a forensic accounting review of the defendants’ records and are calculated using the underpayment rate for federal income tax. The court has confirmed these amounts and has ordered relief in accordance with the summary judgment granted. Joint and several liability applies due to the collaborative nature of the violations.
The SEC seeks third tier civil penalties against each Defendant due to violations involving fraud, deceit, manipulation, or reckless disregard for regulatory requirements, leading to substantial losses or significant risk thereof. Under Section 21(d)(3)(B) of the Exchange Act, penalties can be up to $150,000 per violation for individuals or $725,000 for entities, or equal to the gross pecuniary gain from the violation. Courts assess penalty amounts based on factors including the egregiousness of the conduct, the level of scienter, and the risk of losses created.
Defendant Cooper's actions were deemed egregious and recurrent, having misused investor funds for personal benefit over at least four years without legitimate income or business operations. Cooper did not acknowledge the wrongful nature of his conduct and continues to present himself as a successful businessman. Consequently, the Court orders a civil penalty of $2,447,639 against Cooper, reflecting the total defrauded amount plus interest.
Default judgments are also entered against REOP and the Cooper Companies, with penalties of $54,016 for REOP and specific amounts for each Cooper Company based on their gross pecuniary gains: $308,667 for Global Funding, $1,264,272 for Dream Holdings, $320,468 for Fortitude, and $500,216 for Peninsula. The Court does not grant summary judgment against defaulted parties but treats the SEC's motion regarding them as a request for default judgment. The SEC had previously instructed that failing to respond to requests would lead to admissions of the matters stated.
The Court's prior Order addressed the Defendant's misunderstanding regarding the necessity of admitting certain facts to establish a material issue in dispute. It emphasized that mere allegations or denials from the non-movant are insufficient to prevent summary judgment; concrete evidence must be presented. The Court confirmed that adequate proof of service had been established for REOP and the Cooper Companies and that the Complaint stated sufficient causes of action. In considering default judgment, the Court found that the SEC's extensive record of evidence against all Defendants warranted granting the SEC's request, as denying default judgment would unfairly prejudice the SEC. The Court noted that it is not obligated to construct a defense for the Defendant and found that Cooper's failure to ensure the Companies' appearance constituted culpable misconduct. Consequently, default judgment will be entered against REOP and the Cooper Companies. The Court also highlighted that the SEC's allegations under Section 17(a) were not contradicted by any expert testimony from the Defendants. Cooper's invocation of the Fifth Amendment regarding corporate matters further supported the SEC’s claims. The Court determined that Cooper acted as an alter ego for the Cooper Companies, negating the need to address whether he aided and abetted them.
