Court: Court of Appeals for the Eleventh Circuit; July 27, 2004; Federal Appellate Court
An enforcement action initiated by the Securities and Exchange Commission (SEC) targets William A. Calvo III, Diversified Corporate Consulting Group, Jerome E. Rosen, and Joseph D. Radcliffe for violations of the Federal Securities Act of 1933 and the Federal Securities Exchange Act of 1934. This specific Order addresses Calvo's appeal; Rosen and Radcliffe did not appeal, while Diversified's appeal is discussed in a separate opinion.
The SEC's January 30, 2001, Complaint in the Southern District of Florida alleged that Calvo and others engaged in a 'pump and dump' scheme involving Software of Excellence, Inc., artificially inflating stock prices before selling to unsuspecting investors for illicit profits. The district court found Calvo and Diversified liable for selling unregistered securities under Sections 5(a) and (c) of the Securities Act. A jury trial determined liability for material misrepresentations in securities sales against Diversified and Rosen.
Subsequently, on March 19, 2002, the court ordered Calvo and Diversified to jointly pay $2,511,145.60 in disgorgement and imposed civil penalties, permanently restraining Calvo from violating the Securities Act. Calvo’s appeal challenges the district court’s summary judgment on the SEC’s claims under Sections 5(a) and (c), arguing he did not participate in the sale of SOE securities. The standard for summary judgment requires no genuine issue of material fact, with evidence viewed favorably towards the non-moving party.
To establish a prima facie case for a violation of Section 5 of the Securities Act, the SEC must prove three elements: (1) the defendant sold or offered to sell securities; (2) this occurred via interstate transportation, communication, or mail; and (3) no registration statement was effective at the time. Calvo contests only the first element, arguing that the mere sale of unregistered stock by Diversified does not alone warrant summary judgment against him. To show that a defendant sold securities, the SEC must establish that the defendant was a "necessary participant" or "substantial factor" in the sale, with no requirement for proving scienter or intent. The Securities Act imposes strict liability on sellers of unregistered securities, meaning negligence or intent are not factors in this case.
The court found sufficient undisputed facts indicating that Calvo illegally sold unregistered securities. His involvement included negotiating and signing contracts for Diversified's receipt of unregistered shares, opening a brokerage account, authorizing stock transfers, and receiving proceeds from sales, confirming his role as a necessary participant in the illegal sale.
Calvo also argued against being jointly and severally liable for disgorgement damages alongside Diversified, as his liability was based on strict liability while Diversified's was based on fraud. However, the court upheld that joint and several liability is appropriate in securities cases involving closely related parties, even if one is more culpable. Given Calvo's founding role and ongoing ownership in Diversified, along with both parties' involvement in unlawful conduct, the court found no error in holding them jointly and severally liable.
Calvo contests the district court's decision to issue a permanent injunction prohibiting him from violating certain provisions of the Securities Act. The SEC can secure injunctive relief by demonstrating past violations and a likelihood of future misconduct. Factors indicating potential repetition of wrongful acts include the severity of the defendant's actions, history of violations, level of intent, credibility of assurances against future violations, acknowledgment of wrongful conduct, and the potential for future infractions given the defendant's occupation. In Calvo's case, the court found substantial evidence of recidivism and a lack of recognition of his wrongful actions, especially given his current investment-related role, which increases the risk of future violations. Calvo's employment of Lenny Tucker, a felon with a history of securities law breaches, further supports the likelihood of future misconduct.
Additionally, Calvo challenges the court's order for him to pay over $2.5 million in disgorgement, asserting that he only profited approximately $337,000 from Diversified. However, the SEC is entitled to disgorgement based on a reasonable estimate of ill-gotten gains, and the burden lies with Calvo to prove that the SEC's approximation is unreasonable. Absolute precision in calculating disgorgement is not necessary; any uncertainty should be borne by the wrongdoer due to their illegal actions.
The SEC demonstrated that Diversified’s illegal sale of unregistered SOE securities generated proceeds of $2,438,643, with Calvo and Diversified receiving $1,636,556.51. The court deemed further apportionment impractical due to insufficient documentation and the complexity of the transactions involved. Calvo’s reliance on testimony from Vanessa Lindsey, his office administrator, to argue for apportionment was found unpersuasive. Lindsey admitted her lack of accounting expertise and did not employ a recognized accounting method, indicating her conclusions were based on personal interpretation rather than established practices. The district court highlighted the difficulties in tracking illicit gains due to Calvo’s poor record-keeping, justifying its discretion to rely on more easily measurable proceeds from the unlawful transactions for disgorgement. Additionally, Calvo's challenge to the statute of limitations was rejected. In cases brought by the United States in its sovereign capacity, statutes of limitations generally do not apply unless specified by Congress. Here, the SEC was acting to enforce securities laws, serving public interests, thus supporting the court's ruling despite the nature of the requested relief as disgorgement.
The Commission is authorized to use disgorged proceeds for compensating victims without undermining the public nature of its enforcement actions, which are intended to serve public policies and interests. There is no statute of limitations applicable to the Commission's enforcement actions, as established by the Ninth Circuit, which indicates that Congress intentionally did not impose a time limit on such actions while outlining specific limitations for private claims within the same legislative framework. Consequently, the district court correctly dismissed Calvo's statute of limitations defense.
Calvo also argued that he should be granted summary judgment based on being an innocent purchaser of unregistered securities. This defense relied on a non-binding interpretation from the SEC regarding the treatment of inadvertently issued securities. However, the court found that this interpretation did not apply due to a lack of factual context in the record and emphasized that the Securities Act imposes strict liability on sellers of unregistered securities, negating any fault-based defenses. The district court’s summary judgment in favor of the SEC was upheld, confirming its discretion in determining the remedy. Section 5(a) of the Securities Act prohibits the sale or delivery of unregistered securities unless a registration statement is effective.
Section 5(c) of the Securities Act, 15 U.S.C. § 77e(c), prohibits any person from utilizing any means of interstate commerce or mail to offer or buy securities unless a registration statement has been filed. This prohibition remains in effect if the registration statement is subject to a refusal order, stop order, or is under public examination before its effective date. In Bonner v. City of Prichard, the court recognized the binding nature of Fifth Circuit decisions made before October 1, 1981. In the case of Electronics Warehouse, Calvo was found liable for violating multiple provisions of the Securities Act and the Exchange Act, including aiding and abetting under Section 15(c) of the Exchange Act. Additionally, the document references SEC staff statements, clarifying that while they provide guidance on federal securities law, such interpretations are not legally binding. Informal telephone responses from the Division of Corporation Finance are also highlighted as non-binding, intended for general guidance, and subject to change without notice.
