THOMAS F. HOGAN, District Judge.
Pending before the Court is plaintiff's motion for summary judgment against defendants Better Life Club of America, Inc., and Robert N. Taylor and against the relief defendants. After considering the numerous submissions of each party, the Court will grant summary judgment for plaintiff on all counts and will dismiss defendants' counterclaims with prejudice. The Court will also grant summary judgment for plaintiff on Count Four of the Second Amended Complaint, which asserts a claim against the relief defendants.
The defendants in this case are the Better Life Club of America ("BLC") and Robert N. Taylor, its president. The substance of the case is plaintiff's allegation that defendants ran a "Ponzi"
Defendants assert three counterclaims. These claims are for (1) tortious interference with contracts, (2) intentional infliction of emotional distress, and (3) willful invasion in violation of the Right to Financial Privacy Act of 1978. For these counterclaims defendants request $52 million in compensatory damages and $10 million in punitive damages.
Defendant Robert Taylor founded the Better Life Club of America in early 1993. The price of membership in the BLC was $39 per year, which entitled the member to a subscription to the "Better Life News," plus perks such as "free financial counseling," a one-third discount on seminars, guidebooks, and tapes, and the opportunity to participate in BLC "wealth building projects." The largest of these wealth-building projects was the "Advertising Pool." Investors in the Advertising Pool were promised that their investment would be "doubled" within 60 to 90 days.
At no time did defendants attempt to register these Advertising Pool "contracts" as securities under any federal or state laws. The Advertising Pool investment opportunity was promoted in a variety of publications, fliers, letters, and other media. Most of these promotions contained references to past performance and to the Club's optimism for the future, but each also stated, unequivocally and without reference to risk or uncertainty, that each investor would receive double his investment in either 60 or 90 days.
Between January 1, 1993 and August 31, 1995, the effective life of the operation, the BLC received over $45 million in funds invested through the Advertising Pool.
The BLC "profit-making" ventures never managed to turn a profit. Although the "Better Life News" may have made modest strides as a subscription paper, other ventures — including the vaunted "900 Number" services — were consistent financial losers. Even defendants admit to the Court that the "900-number" services failed to generate any income. Therefore, almost all funds that were coming into BLC accounts were made up of new investments, not of profits from Club activities.
Defendant Taylor received substantial sums of money from BLC accounts during his two and a half year reign at the helm of the Club. The Special Administrator estimates that defendant Taylor received in excess of $800,000 — perhaps as much as $1.2 million.
II. Summary Judgment
Summary judgment is appropriate only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56; Celotex Corp., v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In considering a motion for summary judgment, the "evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Plaintiff's Complaint contains three counts for relief: for the sale of unregistered securities, in violation of 15 U.S.C. § 77e (Count One); for securities fraud, in violation of 15 U.S.C. § 77q(a) (Count Two); and for securities fraud, in violation of 15 U.S.C. § 77j(b) and 17 C.F.R. 240.10b-5 (Count Three). Defendants assert three counterclaims, for tortious interference with contracts, for intentional infliction of emotional distress, and for willful invasion in violation of the Right to Financial Privacy Act of 1978.
Plaintiff moves for summary judgment on all three counts of the complaint. Plaintiff also moves for summary judgment on defendants' three counterclaims.
III. Sale of Unlicensed Securities
Count One of the Amended Complaint asserts that defendants violated § 5 of the Securities Acts. That statute makes it unlawful for anyone
15 U.S.C. § 77e(c). The statute also makes it illegal to actually sell such securities. 15 U.S.C. § 77e(a). Plaintiff asserts that defendants' marketing of the Advertising Pool investment violates this statute.
There are no material factual disputes underlying this count. It is undisputed that defendants offered the opportunity to invest in the Advertising Pool and that persons accepted that offer and conveyed funds to defendants for investment in the Pool. It is undisputed that the Advertising Pool transactions involved the mails and other instrumentalities of interstate commerce. It is further undisputed that defendants never filed any registration statements regarding the Advertising Pool.
Rather than raise factual defenses, defendants argue that their Advertising Pool activities were not subject to regulation under the Securities Acts, and therefore that they do not create liability under § 77e. Defendants first argue that the notes given in exchange for the Advertising Pool investment funds were not securities. They then argue that, even if the Advertising Pool notes were securities, they were exempted from the registration requirements, because they had a maturity of less than nine months.
Defendants first argue that the BLC did not sell sold securities, but merely executed promissory notes in exchange for loan agreements. Such loan agreements are not literally covered by the Securities Act; however, in keeping with the flexible, remedial nature of securities laws, courts distinguish between traditional, commercial promissory notes, which are outside the Securities Acts, and "investment contracts," which are subject to regulation. See SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), rehearing denied, 329 U.S. 819, 67 S.Ct. 27, 91 L.Ed. 697; Baurer v. Planning Group, Inc., 669 F.2d 770 (D.C.Cir. 1981); Securities and Exchange Commission v. International Loan Network, Inc., 770 F.Supp. 678, 688-92 (D.D.C.1991), aff'd, 968 F.2d 1304 (D.C.Cir.1992). Under a test developed by the Supreme Court, a transaction is an "investment contract" if persons invest or loan money to a common enterprise with a promise or expectation of profits to come solely from the efforts of others (generally the promoter or a third party). Howey, 328 U.S. at 299. Courts have applied this definition to many situations, including pyramid schemes. See International Loan, 770 F.Supp. at 692.
Even the language of BLC's own promotional literature demonstrates that these "loans" were investment contracts under Howey. The transactions involved several individual investors who contributed substantial funds to a common enterprise (the Ad
Defendants next argue that, even if these promissory notes were securities, they were exempted from registration requirements by Section 3(a)(3) of the 1933 Act. That section exempts from coverage certain commercial paper that has a maturity of less than nine months. 15 U.S.C. § 78c(a)(10). Defendants argue that since the Ad Pool notes had a maturity of 60 to 90 days, they are within this "commercial paper exemption." Therefore, defendants contend, they could not sell unregistered securities in violation of 15 U.S.C. § 77e, because the notes were exempted from registration requirements.
Defendants are correct that § 78c contains a commercial paper exemption; however, courts have interpreted this provision very loosely, and have held that a short maturity period does not automatically exempt a security from the registration requirement. In re NBW Commercial Paper, 813 F.Supp. 7 (D.D.C.1992). See also Holloway v. Peat, Marwick, & Mitchell, 900 F.2d 1485 (10th Cir.1990), cert. denied, 498 U.S. 958, 111 S.Ct. 386, 112 L.Ed.2d 396; SEC v. American Board of Trade, 751 F.2d 529 (2d Cir.1984). In fact, the commercial paper exemption is available only for true commercial paper — short-term, high quality instruments issued to fund operations, and sold only to sophisticated investors. NBW, 813 F.Supp. at 18. Therefore, while the statute creates a presumption that commercial paper is exempted, this presumption can be rebutted by evidence that sales are made available to the general, unsophisticated public, or that the investments are of less than prime quality. Id.
The Advertising Pool notes are clearly not commercial paper that is exempted from the registration requirement. These notes were offered to small-scale investors in the general public, not to typical, sophisticated, experienced purchasers of commercial paper.
Finally, defendants argue that the provisions of 15 U.S.C. § 77(d) exempt the Advertising Pool notes from the regulations of § 77e, because the notes were not offered to the public and because they were offered only to accredited investors.
It is equally absurd to suggest that the bulk of the Advertising Pool investors were in any way "accredited" under the meaning of 15 U.S.C. § 77(d)(6). Defendants sought to tap the savings and income of middle and
The Advertising Pool notes offered by defendants were securities and were not exempt from regulation under 15 U.S.C. § 77e. Because defendants offered and sold these securities, and because these securities were not registered, defendants were in clear violation of the statute.
IV. Securities Fraud
Counts Two and Three of the Amended Complaint allege that defendants engaged in securities fraud in violation of § 17(a) of the Securities Act of 1933 and § 10(b) and Rule 10b-5 of the Securities Act of 1934. Section 17(a)(2) makes it unlawful for any person engaged in the offer or sale of securities through interstate commerce
15 U.S.C. § 77q(a). Section 10(b) makes it unlawful to "use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules or regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to the rulemaking power delegated by this section, the Commission promulgated Rule 10b-5, which makes it unlawful for any person
17 CFR § 240.10b-5(b) (1979).
Sections 17(a) and 10(b) (through Rule 10b-5) set forth very similar requirements for proof of securities fraud. In order to show securities fraud under these sections, the Commission must show that defendants were engaged in the sale or offer of securities through the instrumentalities of interstate commerce and that defendants made material misrepresentations or omitted material facts necessary to clarify misleading statements. 15 U.S.C. §§ 77q(a), 78j(b); 17 CFR § 240.10b-5(b) (1979); Basic, Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); International Loan Network, 770 F.Supp. at 694.
Despite the similarities on the other elements of fraud, however, the statutes have been interpreted differently as to the requirement of scienter. The Supreme Court has clearly stated that proof of scienter is required for the Commission to show a violation of § 10(b) or Rule 10b-5. Aaron, v. SEC, 446 U.S. 680, 691, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980). A specific showing of scienter is not necessary to establish a violation of § 17(a)(2), although the degree of scienter may be considered by the Court in deciding whether to grant injunctive relief. Id. at 701.
Therefore, plaintiff must establish scienter, at least to prevail on its claim under § 10(b). However, it is clear that plaintiff may prove scienter by showing recklessness, as well as by showing knowledge. International Loan Network, 770 F.Supp. at 694. See also SEC v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir.1982); Coleco Industries, Inc. v. Berman, 567 F.2d 569 (3d Cir.1977), cert. denied, 439 U.S. 830, 99 S.Ct. 106, 58 L.Ed.2d 124 (1978), rehearing denied, 439 U.S. 998, 99 S.Ct. 601, 58 L.Ed.2d 671;
There is no dispute that defendants engaged in the offer and sale of securities or that they did so through the use of interstate commerce. As the Court has discussed above, the Advertising Pool notes were securities, and are covered by the Securities Acts. Furthermore, defendants distributed materials relating to the offer and sale of these notes through the interstate mails and also marketed BLC membership and these securities through the "Better Life News," which by defendants' own admission is a nationally-distributed newspaper. Therefore, it is clear that defendants' actions fall within the scope of the Securities Acts' regulation.
Defendants violated §§ 17(a) and 10(b) only if they made misrepresentations (or omissions that permitted a misconception to go uncorrected) that were material. 15 U.S.C. §§ 77q(a), 78j(b); 17 CFR § 240.10b-5(b) (1979); International Loan Network, 770 F.Supp. at 694. The evidence clearly established that the Advertising Pool was not a legitimate investment venture, but was instead a pyramid scheme, destined to collapse and to leave investors stranded, with millions of dollars in losses. Despite this inevitable crash, defendants continued to recruit and to entice investors with unequivocal, impossible promises of doubled money in 60 or 90 days. Defendants never revealed to potential investors that the Advertising Pool was nothing more than a pyramid scheme; thus, the entire solicitation process was itself a broad misrepresentation on the grandest scale.
At the time that plaintiff filed this action and obtained an order freezing defendants' assets, the BLC accounts contained only $2.7 million. At that same time, defendants had committed to pay over $51 million to investors who had already contributed funds to the Advertising Pool. Clearly, defendants would have been unable to pay most of these investors, and would have been unable to pay out on the new investments that defendant Taylor was recruiting up until the day of the temporary restraining order. Therefore, defendants' promise of doubled money was a misrepresentation.
In addition, defendants represented that the Advertising Pool funds would be invested into the "900" number services and in "other profit-making business activities." The Advertising Pool solicitations and investment contracts implied that investors would be paid their return out of profits from these activities. In reality, none of these activities ever turned any profit.
Furthermore, defendants misrepresented the destination of investor funds. Defendant Taylor withdrew at least $544,000 — and perhaps as much as $1.2 million — as "compensation" for his personal use. As the Court has already described above, defendant Taylor's contention that these funds came exclusively from membership dues is clearly incorrect. Instead, the bulk of these monies must have come from the Advertising Pool contributions. At no time did defendants inform prospective investors that substantial sums of the Advertising Pool funds would not be invested in "profit-making business activities," but would instead be diverted to defendant Taylor's personal use.
Defendants guaranteed a 100% return on contributions to the Advertising Pool when they were clearly unable to pay back the contributions themselves, much less pay any return. Defendants misled investors as to the source of returns that were paid, and as to the use of contributions to the Advertising
There is no reasonable dispute as to these facts. Plaintiff has produced substantial evidence, in the form of affidavits, bank records, and other financial statements, that the Advertising Pool's obligations far outstripped its available funds. Plaintiff has also shown that the BLC "business ventures" never resulted in profits and that they were incapable of generating sufficient profit to keep the scheme afloat. Furthermore, plaintiff has shown that defendant Taylor's "compensation" must have come primarily out of Advertising Pool investments.
Finally, it is obvious that these misrepresentations were material. The test of materiality is whether a reasonable investor would consider the representations important. Basic v. Levinson, 485 U.S. at 231-32; International Loan Network, 770 F.Supp. at 694. Defendants' fabulous promises were substantial inducements to investment in the Advertising Pool, and it is more than reasonable to assume that prospective investors would have shied away had they known that the Advertising Pool was a pyramid scheme. Furthermore, no rational investor would knowingly invest in a project which never funded profitable ventures and which diverted substantial funds to the personal use of its promoters. Therefore, there is no question that defendants' frequent misrepresentations and misleading omissions were material.
Plaintiff has shown that, as sole director, defendant Taylor was responsible for every aspect of the Better Life Club and its ventures.
Therefore, while a showing of scienter is not even required for one of plaintiff's counts of securities fraud, it is clear that plaintiff has shown sufficient scienter to support judgment in its favor. Plaintiff has shown that defendant Taylor knew — or at least was dangerously reckless if he did not take measures to know — the complete state of affairs of the BLC and its Advertising Pool scheme. Despite all this knowledge, defendant Taylor continued to offer the Advertising Pool securities and he continued to sell them by offering the same illusory promises, bolstered by the same straw stories of profitability and financial stability.
In order to show securities fraud, plaintiff must show that defendants were engaged in the sale or offer of securities through the instrumentalities of interstate commerce and that defendants made material misrepresentations or omitted material facts necessary to clarify misleading statements. 15 U.S.C. §§ 77q(a), 78j(b); 17 CFR § 240.10b-5(b) (1979); Basic, Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988); International Loan Network, 770 F.Supp. at 694. Plaintiff has demonstrated that defendants were engaged in the offer and sale of securities and that defendants used the instrumentalities of interstate commerce in such sales. Plaintiff has submitted sufficient evidence to prove that defendants engaged in substantial misrepresentations and omission, that those misrepresentations were material, and that defendants had the necessary scienter for a violation of the Securities Acts. Defendants do not rebut plaintiff's evidence or otherwise raise any material factual areas of dispute, and plaintiff is entitled to judgment as a matter of law. Therefore, plaintiff has proven its claims of securities fraud, and summary judgment is appropriate on Counts Two and Three of the Complaint.
Plaintiff has requested that the Court permanently enjoin defendants and their subsidiaries and agents from violating 15 U.S.C. § 77e, 77q(a), 78j(b). Plaintiff has also requested that the Court order restitution and disgorgement in the amount of $25,805,577, plus pre-judgment interest.
Permanent injunctive relief is appropriate where a securities violation is ongoing or there is a reasonable likelihood of further violations in the future. SEC v. First City Financial Corp., 890 F.2d 1215, 1228 (D.C.Cir.1989); SEC v. Savoy Industries, 587 F.2d 1149, 1168 (D.C.Cir.1978), cert. denied, 440 U.S. 913, 99 S.Ct. 1227, 59 L.Ed.2d 462 (1979). The Court should consider the danger of future violations based on the totality of circumstances, including whether the violation was isolated or part of a pattern, whether the violation was flagrant or deliberate, and whether defendants' business will present opportunities for future violations. Savoy Indus., 587 F.2d at 1168.
The Court finds that defendant poses a great danger to the public. Defendants' violations of the securities laws were neither isolated nor merely technical; instead they were persistent, premeditated, and particularly brazen. Defendant Taylor hatched and implemented a pyramid scheme designed to ensnare hundreds of investors. Through his own efforts and those of his Better Life Club, Taylor offered fantastic promises that clearly were not true, which he knew to be false, and he helped himself to the Better Life Club coffers, which were stocked with the life savings of hundreds of investors. Defendant and his cronies continued to recruit new investors to the Advertising Pool up until the entry of the temporary restraining order, even though it was clear that the BLC could
It is likely that defendants would attempt further violations in the future. Defendant Taylor has proven himself inclined to violate this Court's orders in the past, so there is no reason to expect him to change his ways in the future. For example, the Assistant United States Attorney has presented significant evidence that defendant Taylor consistently and continuously violated the Court's asset freeze order by withdrawing funds from BLC accounts.
Plaintiff also asks the Court to order defendants to pay restitution and to disgorge their profits. The Court may order disgorgement "to deprive the wrongdoer of his unjust enrichment and to deter others from violating the securities laws." First City, 890 F.2d at 1230. However, because disgorgement is so specifically aimed at illgotten profits, it is only to be exercised over property "causally related to the wrongdoing." Id. Restitution, on the other hand, is appropriate to compensate the victims of defendants' wrongful acts. See SEC v. Huffman, 996 F.2d 800, 802 (5th Cir.1993), rehearing denied, 4 F.3d 992.
The Court has broad discretion in fashioning the equitable remedies of disgorgement and restitution. See Huffman, 996 F.2d at 803; First City, 890 F.2d at 1228-31. In the present case, defendants helped themselves to a substantial sum of the investors' money, much of which may likely never be recovered. At the same time, because investors' funds were paid out to keep the pyramid scheme afloat, the funds remaining in BLC accounts are insufficient to even pay back initial investments, much less to pay returns on those investments; therefore, a loss of almost $25 million is likely to be shared by hundreds of small-scale investors. For this reason, it is clear that both restitution and disgorgement are appropriate.
The reports of the Special Administrator establish that $25,805,577 of investor principals remained unreturned at the time of the temporary restraining order. This is the amount that the victims of the fraud — the investors themselves — stand to lose because of defendants' fraudulent, collapsing scheme. Therefore, this is the proper amount for an award of restitution.
Defendants are also in possession of the undeserved profits from their illegal scheme. The Court will require defendants' to disgorge these profits.
VI. Defendants' Counterclaims
In their Answer to plaintiff's Second Amended Complaint, defendants assert three counterclaims and request $52 million in compensatory and $10 million in punitive
Defendants' counterclaims must be dismissed under Section 21(g) of the Securities Acts. That section provides that
15 U.S.C. § 78u(g). This statute bars, among other things, a defendant's counterclaims. See SEC v. Lorin, No. 90 Civ. 7461, 1991 WL 155767 at *1 (S.D.N.Y. Aug.7, 1991). The Commission has not consented to defendants' assertion of claims in this action; therefore, defendants' counterclaims are barred from consolidation with this action and must be dismissed. Id.; See also SEC v. Electronics Warehouse, Inc., 689 F.Supp. 53, 72 (D.Conn.1988), aff'd, SEC v. Calvo, 891 F.2d 457 (2d Cir.1989), cert. denied, 496 U.S. 942, 110 S.Ct. 3228, 110 L.Ed.2d 674.
Defendants' claims also must be dismissed on their merits. The first two counterclaims assert causes of action that are covered by the Federal Tort Claims Act (FTCA). See, e.g., Lorin, 1991 WL at *1-2; Art Metal-U.S.A., Inc. v. United States, 753 F.2d 1151, 1153 (D.C.Cir.1985) (Interference with contracts is tort claim under FTCA). Under the FTCA, the United States retains sovereign immunity except where specifically waived. The statute waives immunity in many cases, but it reserves immunity for claims based on discretionary regulatory functions, "whether or not the discretion involved be abused." 28 U.S.C. § 2680(a). Investigation and prosecution under § 21 of the Securities Acts is discretionary; therefore the United States is immune to these claims.
Defendants' remaining counterclaim is based on alleged violations of the Right to Financial Privacy Act of 1978 (RFPA), 12 U.S.C. § 3405. Plaintiff asserts that this should be dismissed under Rule 12(b)(6) for failure to state a claim. Defendants provide no details in support of their allegations, nor do they even identify the alleged improprieties on which this claim is based. Therefore, the Court finds that defendants have not stated a claim for a violation of the RFPA, and the Court will dismiss this final counterclaim.
VII. Relief Defendants
Count Four of the Amended Complaint seeks disgorgement of certain funds and assets transferred by defendant Taylor and now held by the relief defendants, Elizabeth Lawson and Wilkins McNair, Jr. Plaintiff's argument is that the relief defendants hold these assets in a constructive trust for the defrauded Advertising Pool investors.
It is clear that a gratuitous donee of fraudulently-obtained funds is not a bona fide purchaser and may be subject to a constructive trust. See, e.g., Garner v. First Nat'l City Bank, 465 F.Supp. 372, 385 (S.D.N.Y. 1979). Neither relief defendant disputes this point. However, the relief defendants argue that the Court lacks subject matter jurisdiction over them, and that they were paid out of the membership fees, which were not the spoils of fraud.
The argument that the funds granted to the relief defendants were paid out of legitimate membership fees lacks merit. First, the gross membership fees amassed by the BLC do not exceed $200,000, which does not cover the amounts transferred by Taylor from BLC accounts to the relief defendants. Furthermore, BLC co-mingled membership fees with other revenues, including the extensive Advertising Pool investments, and it is impossible to separate out the membership proceeds from the other BLC funds. Therefore, it is ridiculous to suggest that the relief defendants were paid solely from funds that represented a mere fraction of a percent of
Finally, when legitimate assets are co-mingled with illegitimate ones such that the assets cannot be separated out, a constructive trust may extend over the entire asset pool. See, e.g., In Re Gotham Provision Co., 669 F.2d 1000, 1011 (5th Cir.1982) (cattle acquired in one manner and mingled with cattle acquired in another cannot be separated out, so entire herd is subject to trust), cert. denied, 459 U.S. 858, 103 S.Ct. 129, 74 L.Ed.2d 111 (1982); Austin Scott & William F. Fratcher, The Law of Trusts § 519.1 (4th ed.1989). Therefore, because the membership fees were freely co-mingled with the fraudulently-obtained Advertising Pool investments, and because defendant Taylor helped himself and his cronies to the co-mingled funds in the BLC accounts, even allegedly legitimate profits have become tainted. For this reason, the investors have an equitable interest in all BLC funds, whatever the original source of those.
The relief defendants' other argument is equally devoid of merit, because this Court has proper subject matter jurisdiction. Indeed, the Court can exercise jurisdiction over plaintiff's disgorgement claims under two theories. First, under the Judicial Improvement Act of 1990, the Court has supplemental jurisdiction over claims against third parties "that are so related to claims in the action within original jurisdiction that they form part of the same case and controversy under Article III." 28 U.S.C. § 1367(a). Since the claims for disgorgement against the relief defendants arise from the same scheme of securities fraud, they unquestionably meet this standard for supplemental jurisdiction. In addition, the securities statutes themselves confer jurisdiction over the relief defendants. Federal courts are empowered to exercise jurisdiction over securities claims against non-violators when necessary to ensure a complete remedy. See Deckert v. Independence Shares, Corp., 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189 (1940); International Controls Corp. v. Vesco, 490 F.2d 1334, 1338 (2d Cir.1974), cert. denied, 417 U.S. 932, 94 S.Ct. 2644, 41 L.Ed.2d 236 (1974); SEC v. Antar, 831 F.Supp. 380, 398-99 (D.N.J.1993). This includes the exercise of jurisdiction over claims against non-violators when those claims seek disgorgement of wealth which has been unjustly transferred by a violator. Antar, 831 F.Supp. at 398-403. This exercise of jurisdiction is particularly appropriate where, as here, the relief defendants are gratuitous transferees who hold funds in constructive trust for defrauded investors.
Both relief defendants also argue that they gave value for the assets they received, and therefore that these assets are not subject to disgorgement. For the most part these arguments are also meritless; however, the Court will examine the issue on an asset-by-asset basis.
A. Relief Defendant McNair
Plaintiff seeks disgorgement of $120,000 from relief defendant McNair. McNair received this money from defendant Taylor as part of a trust he was setting up for Taylor's sons. Essentially, McNair accepted the money as payment for some of his stock in the Baltimore Mortgage Corporation, a company that he founded and owned. The stock then went into the corpus of the new trust. Plaintiff contends that this transaction was essentially a gratuitous gift from Taylor to McNair, and that the money is subject to disgorgement.
There is no dispute that defendant Taylor took this $120,000 from accounts fed by BLC investor money. Therefore, if relief defendant McNair is indeed a gratuitous transferee,
Clearly, this transaction involving the "sale" of Baltimore Mortgage was little more than a sham. Relief defendant McNair's unsupported assertions are insufficient to overcome the weight of the evidence and create a question of fact on that issue. Defendant Taylor, and the investors who hold an interest in constructive trust on his assets, received no value for the $120,000 of BLC money that he gave to McNair. The stocks defendant Taylor "bought" were at best worth 1/6 of that amount, and in all likelihood were worthless. Therefore, relief defendant McNair is hardly a bona fide purchaser for value. Even if he did not know the true source of defendant Taylor's funds, McNair is a gratuitous transferee because he received a substantial amount of money without transferring any value in return. For this reason, McNair holds this $120,000 in constructive trust for its true owners — the investors of the Advertising Pool — and disgorgement is proper.
B. Relief Defendant Lawson
Plaintiff seeks disgorgement of several assets held by relief defendant Lawson. Specifically, plaintiff seeks disgorgement of Lawson's interest in a $7500 cashier's check, a $273,000 residence that she owns jointly with defendant Taylor, a 1992 Jaguar, $8,000 in consulting fees paid to Ruby Communications — relief defendant Lawson's business — and a $50,000 loan from defendant Taylor to Ruby Communications. It is undisputed that each of these assets was transferred by defendant Taylor to relief defendant Lawson, or to her business. It is equally undisputed that defendant Taylor made these transfers from accounts fed by his acquisitions of BLC investor funds. Relief defendant Lawson, however, contends that she is entitled to keep at least some of these assets because she gave value for them.
1. Cashier's Check
Defendant Taylor gave Lawson a cashier's check for $7500 in March 1995. Lawson contends that this check was repayment for money she had given to defendant Taylor over the preceding fifteen months. However, she has no documentation
Even if the Court were willing to believe relief defendant Lawson's self-serving assertions,
Relief defendant Lawson is listed as joint owner with defendant Taylor of a home in suburban Maryland. Lawson contends
Relief defendant Lawson's assertion that she assisted in the initial payment on the house does not appear credible. She alleges that she contributed $12,500 to the payment, but she offers no documentation to support that assertion. Furthermore, on the very same day that he purchased a certified check in the amount of $110,999.75, defendant Taylor withdrew $111,200.00 from his Nations-bank account (which was filled with funds taken from BLC accounts). Defendant Taylor then used this certified check to make the initial payment on the house. This evidence shows that Taylor made the initial payment entirely with funds drawn from his own account; relief defendant Lawson has submitted no evidence at all to question that conclusion. Therefore, there is no material question of fact as to the source of this initial payment.
Relief defendant Lawson has supplied five or six copies of checks that may document her payments towards the mortgage on the house. Although plaintiff asserts that she made these payments with funds given to her by defendant Taylor, from BLC accounts, plaintiff has not substantiated that claim. If Lawson indeed made these payments with her own savings, she may be entitled to withhold these amounts from disgorgement. However, it is clear that relief defendant Lawson has not been making all the mortgage payments; plaintiff has provided evidence of several payments made by defendant Taylor from his own accounts, which were filled with tainted BLC money.
There is a question of fact as to the extent of these mortgage payments by relief defendant Lawson. However, even by her own evidence, Lawson had not made more than five payments, which total less than $10,000 on a house valued at over $273,000. Thus, she has hardly contributed a substantial portion of the financing, and the Court must consider that her joint ownership is primarily a gift from defendant Taylor, who provided the bulk of the payments. As a gratuitous grantee, relief defendant Lawson is therefore subject to disgorgement of her interest in the house, with a credit to be applied for any payments she may have made with her own funds. The Court will consider the extent of this credit in a separate order, after further briefing and a hearing, if necessary.
On August 9, 1995, defendant Taylor purchased a used 1992 Jaguar XJ6, which he gave to relief defendant Lawson. Defendant Taylor paid for the car with a cashier's check in the amount of $24,063. The check was purchased from an account filled by BLC funds. To the extent that the Jaguar was a gift from defendant Taylor, it is subject to disgorgement, even though it is titled solely in relief defendant Lawson's name.
Relief defendant Lawson contends that she contributed towards the purchase of this car. She asserts that she traded in her previous automobile for $6000 and that she contributed $4500 in cash. The bill of sale does reflect a $6000 trade-in allowance, and Lawson has supplied a check for $525 made out to the seller.
4. Consulting Fees and Loan to Ruby Communications
Very soon after learning that he was under investigation by plaintiff, defendant Taylor paid $8000 in consulting fees to relief defendant Lawson and made several payments which supposedly were part of a $50,000 loan to Ruby Communications, which is Lawson's business. Plaintiff asserts that these payments were also gifts because the consulting fees were never earned and the loan was a sham transaction.
Relief defendant Lawson apparently does not dispute that the $8000 fee was unearned, because she never raises the issue in her responsive pleadings. Plaintiff presents evidence that the transfer was made immediately after defendant Taylor learned of the SEC investigation and that relief defendant Lawson did not provide services to earn this payment. Since Lawson does not dispute this evidence, there is no material issue of fact that the $8000 transfer was a gift from defendant Taylor. As such, it its subject to disgorgement.
Relief defendant Lawson does argue that the $50,000 loan was legitimate, and that the money can be collected only under the terms of the loan. However, plaintiff presents significant evidence that the transfer of funds from Taylor to Lawson was not a legitimate loan. First, it was made as a series of payments, not as a lump sum transfer. Second, while the loan was ostensibly made to Ruby Communications, not to relief defendant Lawson personally, Lawson used the funds for personal and household expenses — including landscaping, home furnishings, and assorted cash withdrawals. Finally, relief defendant Lawson has apparently defaulted on her obligations to pay back this loan, further raising the spectre of a sham and perhaps accelerating the payment of the entire debt principal.
Plaintiff has provided sufficient evidence to show that the $50,000 transfer was not a legitimate loan but a gratuitous gift. Relief defendant Lawson has provided no evidence beyond her own bald assertions to the contrary.
The assets held by relief defendants McNair and Lawson are subject to disgorgement. Relief defendant McNair must disgorge the $120,000 profit which he took on the "sale" of the Baltimore Mortgage Corporation stock. Relief defendant Lawson must disgorge $7500 to cover the cashier's check, $8000 to cover the unearned consulting fees, and $50,000 to cover the "loan" to Ruby Communications. Furthermore, she must disgorge her interest in the residence, with a credit for the mortgage payments that she made from her own savings, and she must disgorge either the 1992 Jaguar or its cash value, with a credit for her trade-in and for any payments she made from her own savings.
Defendant Taylor, through defendant Better Life Club of America, carried out an elaborate pyramid scheme, marketing and selling worthless Advertising Pool securities through a network of fraud and deceit, brazenly playing on the trust of the club members and investors. Defendants Taylor and the Better Life Club pursued the scheme by making representations that they knew were untrue and by promising fabulous returns that they never intended to deliver. Over the course of their two and a half year fraud, defendants amassed over $45 million in small-scale "investments," from which defendant Taylor siphoned at least $800,000 for his personal use, and from which Taylor transferred over $200,000 to his cronies. Had plaintiff not stepped in to end this scheme, there is no doubt that defendant Taylor would have continued to line his own pockets, fiddling away funds while the Advertising Pool's financial situation burned.