Sustainable Power Corp (fka SSTP)

[kenmitz]

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF MISSISSIPPI
WESTERN DIVISION
SECURITIES AND EXCHANGE COMMISSION PLAINTIFF
VS. CIVIL ACTION NO. 5:08-cv-245(DCB)(JMR)
U.S. SUSTAINABLE ENERGY CORP.
AND JOHN H. RIVERA DEFENDANTS
ALICE M. PRICE RELIEF DEFENDANT
MEMORANDUM OPINION AND ORDER
This cause is before the Court on the plaintiff Securities and
Exchange Commission (“the Commission”)’s motion for summary
judgment (docket entry 61). Having carefully considered the motion
and the defendants’ response, the parties’ memoranda and the
applicable law, and being fully advised in the premises, the Court
finds as follows:
In this case, the Commission claims that defendant John H.
Rivera (“Rivera”) used false press releases and other false public
statements to “pump up” interest in U.S. Sustainable Energy Corp.
(“USSE”) stock in order to “dump” insider shares (that Rivera,
relief defendant Alice M. Price (“Price”) and others held) into a
public market fraudulently influenced by Rivera’s false statements.
The Complaint further alleges that after obtaining a corporate
shell with freely trading shares in October of 2006, Rivera,
through USSE, falsely claimed that USSE could employ “the Rivera
Process” to produce commercial products, revenue and value for the
Company. According to the Commission, these and other
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1 See Report of plaintiff’s expert, Dr. Thomas Adams, Item 21
attached to Statement of Undisputed Material Facts in Support of
Plaintiff’s Motion for Summary Judgment.
2
misstatements by Rivera created investor demand for USSE shares.
Rivera, Price and others purportedly sold millions of USSE shares
to thousands of investors lured by Rivera’s false claims about the
company.
The central fraud alleged involves claims by Rivera that USSE
could produce viable commercial biofuel and fertilizer products.
The Commission contends that false press releases dramatically
increased the price and volume of trading in USSE’s shares. The
“Rivera Process” is a type of pyrolysis, the thermochemical
decomposition of organic material at elevated temperatures in the
absence of oxygen. Experts agree that experiments with pyrolysis
hold promise of developing useful and cost effective technologies
to extract energy from abundant forms of organic waste like
woodchips, palm oil waste or other organic waste, regardless of
whether accomplished by the “Rivera Process” or otherwise.1 The
Commission asserts that its case is not about whether a pyrolytic
process like Rivera’s might someday be successful, but about
whether Rivera’s claims that USSE had perfected the “Rivera
Process” in any commercially meaningful way were false. The
Commission contends that there is no genuine issue of material fact
disputing the falsity of Rivera’s alleged misrepresentations.
Defendant USSE began as a Mississippi corporation formed by
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2Rivera was also the principal shareholder of SSTP. According
to the Commission, Rivera used SSTP for misconduct similar to that
alleged in this case.
3
Rivera in February 2006. Subsequently, it merged itself into a
Nevada corporation with freely trading public shares and changed
that corporation’s name to USSE in November 2006. USSE was
initially headquartered in Natchez, Mississippi, and later moved
its headquarters to Baytown, Texas. USSE’s stock was not
registered with the Commission. Rivera’s press releases and other
statements to investors, USSE’s website and postings on various
penny stock blogs were the only public information available about
the company.
Defendant Rivera is the founder of USSE. Rivera was the
principal shareholder of USSE and controlled its activities. He
also served as USSE’s chairman and CEO.
Relief Defendant Price resides with Rivera and is his
caregiver. Price sold more than 35 million combined shares of USSE
(15,837,740 shares) and Sustainable Power Corporation (“SSTP”)2
(19,669,000 shares) and allegedly used the more than $2 million
proceeds to fund her lifestyle with Rivera and the activities of
USSE. Rivera and Price were married in August of 2010.
The crux of the Commission’s case is set forth in its brief in
support of its motion for summary judgment (the bracketed
references are to the plaintiff’s Statement of Undisputed Material
Facts in Support of Plaintiff’s Motion for Summary Judgment):
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At the heart of this case is Rivera’s fraudulent claim
that USSE, using the Rivera Process [¶¶ 21-33], had a
fully operational plant that produced commercial biofuels
and fertilizer that could be sold to generate revenue for
the company. Rivera made false claims about various
aspects of the Rivera Process: (a) that USSE had a fully
operational plant; [¶¶ 44-46, 52-63] (b) that the process
could produce 5 gallons of biofuel from one bushel of
soybeans; [¶¶ 47-51 ] (c) that USSE could produce 6,000
gallons of fuel per day; [¶¶ 52-63, 103, 107] and (d)
that USSE could produce quality fuel for 50 cents per
gallon. [Facts, ¶¶’s 99-104]
Rivera also made misrepresentations about USSE on a
variety of other topics: (a) that USSE had engaged a
prominent investment banker when it had not; [¶¶ 64-67]
(b) that USSE had appointed a prominent industry figure
as a new director when the new director had not heard
about USSE until after the publication of the press
release [¶¶ 68-71], and had later appointed a new CEO who
lasted for two weeks because he had no authority; [¶¶ 73-
4] (c) that USSE had purchased property for its
manufacturing facility in Natchez, Mississippi when the
property was purchased by another entity; [¶¶ 75-77] (d)
that it made the first sale of its fertilizer although no
fertilizer was shipped for more than two years; [¶¶ 111-
115] and (e) that it had developed ASTM certified
biodiesel when in fact no USSE fuel was included in the
biodiesel Rivera touted in the July 17, 2007 press
release. [Facts, ¶¶’s 116-126]
Brief in Support of Motion for Summary Judgment, pp. 4-5.
On July 17, 2008, the Commission filed its Complaint alleging
that USSE and Rivera violated Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder. The Complaint seeks permanent injunctions
against future violations; disgorgement of ill-gotten gains plus
prejudgment interest; imposition of civil penalties against USSE
and Rivera; and penny stock and officer and director bars against
Rivera. The Commission’s Complaint also names Price as a relief
defendant, and seeks disgorgement of her ill-gotten gains plus
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prejudgment interest. The plaintiff states that it has provided
its entire investigative file to the defendants, and has updated
its production as it has received new materials. The plaintiff has
taken 10 depositions, and has timely produced its expert’s report.
Rivera and Price have conducted no discovery. USSE is
unrepresented and is alleged by the Commission to be out of
business.
The Commission seeks summary judgment on all of its claims.
Summary judgment is appropriate when the pleadings and record
evidence show that no genuine issue of material fact exists and
that the movant is entitled to judgment as a matter of law. Little
v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). The movant
bears the burden of proving that no genuine issue of material fact
exists. Latimer v. Smithkline & French Lab., 919 F.2d 301, 303 (5th
Cir. 1990). The Court should grant summary judgment if the moving
party establishes there is no genuine issue of material fact and
that it is entitled to judgment as a matter of law. Celotex Corp.
v. Catrett, 477 U.S. 317, 323 (1986); Carlin Commc’n, Inc. v. S.
Bell Tel. Co., 802 F.2d 1352, 1356 (11th Cir. 1986). As recognized
in Celotex, the “summary judgment procedure is properly regarded
not as a disfavored procedural shortcut, but rather as an integral
part of the Federal Rules as a whole, which are designed ‘to secure
the just, speedy, and inexpensive determination of every action.’”
477 U.S. at 327.
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Rule 56(e) provides that the non-moving party “may not rest
upon the mere allegations or denials of the adverse party’s
pleading,” but instead must come forward with “specific facts
showing that there is a genuine issue for trial.” Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Indeed,
the Supreme Court directs that “the trial judge must [enter summary
judgment] if, under the governing law, there can be but one
reasonable conclusion.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 250 (1986); see also Matsushita, 475 U.S. at 587 (“Where the
record taken as a whole could not lead a rational trier of fact to
find for the non-moving party, there is ‘no genuine issue for
trial.’”) (citation omitted).
The Commission maintains that the undisputed evidence in this
case shows that Rivera intentionally defrauded investors by
claiming that USSE’s machine was fully operational and ready to
generate income for the company, when in fact the USSE equipment
using the “Rivera Process” was still under development and not
fully operational; and that Rivera’s continuing string of press
releases, many of which contained these and other
misrepresentations, were material in creating a market for USSE
shares into which Rivera, Price and others sold millions of shares.
Specifically, the Commission alleges that the defendants made the
following claims about the “Rivera Process” (the bracketed
references are to the plaintiff’s Statement of Undisputed Material
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Facts):
1. That USSE’s Equipment Was Fully Operational
There is no dispute that USSE, at best, had an
experimental reactor still in development that was not
ready for full scale production. [¶¶ 30, 45-6, 59, 60-3,
104, 107] The longest it ever ran continuously was four
or five days. [¶ 59] It did not produce any fuel that
could be sold and it never generated any revenue for
USSE. [¶ 54]
2. That USSE Could Make 5 Gallons of Fuel From One
Bushel of Soybeans
In press releases dated October 26, 2006 and January 17,
2007, Rivera falsely claimed that USSE’s reactor could
produce five gallons of quality fuel from one bushel of
soybeans. [¶¶ 42, 52] The five gallon per gallon
statement is indisputably inflated because in an hour the
machine produced barely five gallons of liquid which
contained significant amounts of water. [¶¶ 47-8] When
the water was distilled off of the raw output, as it had
to be to run anything, the remainder was materially less
than five gallons. [¶ 49 (“after the water was removed 3
gallons of fuel would remain”)] In some tests, the amount
of water was above 25%. [¶ 50]
3. That USSE Could Produce 6,000 Gallons of Fuel Per Day
In the January 17 [2007] press release, Rivera also
falsely claimed that USSE’s reactor could produce 6,000
gallons of biofuel daily. This statement was false. By
the most generous estimate, USSE’s machine could produce
only half of its promised production. [¶ 60, 103-8] In
actual test observations, it might produce 2,400 gallons
per day. [Id.] At least one observation showed that the
machine only generated 880 gallons in 24 hours. [¶ 54]
One reason that the reactor failed to meet this
production goal was that the reactor could process only
half or less of the amount of soybeans needed to generate
this production goal in one 24 hour period. [¶¶ 61-3,
103-5] The other reason, of course, was the fact that the
reactor only ran four or five days in continuous
operation on one occasion. [Facts, ¶ 59]
4. That USSE Could Produce Fuel for Fifty Cents Per
Gallon
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Rivera made the claim that the USSE reactor could produce
fuel for $.50 per gallon in the “About U.S. Sustainable
Energy Corp.” section which appeared near the bottom of
most USSE press releases. There is no genuine issue that
this claim was false. Rivera’s “back of the envelope”
calculations that resulted in the 50 cent per gallon
number ignored equipment and production costs, [¶¶ 99-
100], ignored the fact that the machine could at best
produce only half of its projected output, [¶¶ 59-63] and
depended on the illusory claim that the USSE fuel would
qualify for some ill-defined $1 per gallon credit. [¶¶
10,103] In fact, USSE never produced anything that
actually qualified for any credit. [¶ 127]
Brief in Support of Motion for Summary Judgment, pp. 7-8. In
addition, the Commission alleges that the defendants made
additional false claims about USSE’s business prospects that
fraudulently influenced investors to purchase its shares:
1. False Claim to Have Engaged Investment Bank
On November 16, 2006, soon after its shares began
trading, Rivera published a press release announcing that
it had engaged a prominent investment bank. [¶ 64] Rivera
based the press release on a draft contract he received
from the investment bank. [¶ 65] Five days later, Rivera
retracted the statement. The retraction admits that the
earlier press release was false. [¶ 66] At this early
stage of USSE’s public trading, the regular publication
of optimistic press releases likely outweighs the impact
of a retraction after the fact. Indeed, Rivera announced
that it was working with a different investment bank the
morning before the retraction was published. [¶ 67]
2. False Claims about Appointing New Board Member and
New CEO
Again, early in USSE’s public trading, Rivera published
a press release announcing that a prominent industry
figure had joined USSE’s board of directors. [¶ 68] There
is no doubt that the press release was false. The
industry figure had never heard of USSE until he learned
about the press release several days after it was
published and he never agreed to serve as a director of
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USSE. [¶¶ 69, 72] When he learned about the press
release, he sent Rivera a letter asking that the press
release be retracted, but it never was. [¶¶ 70-71]
USSE also published a press release in May 2007
announcing the appointment of an experienced scientist as
CEO of the company. [¶ 73] This press release was also
misleading. In fact, Rivera never relinquished any
control over the company to the “new” CEO and the “new”
CEO left after less than two weeks when he realized that
Rivera would not let him exercise any real control. [¶
74]
3. False Claim to Have Purchased Natchez Property
On December 12, 2006, Rivera wrote a USSE press release
that announced that USSE had purchased a 35-acre property
in Natchez as its new manufacturing facility through its
affiliated real estate holding company. [¶¶ 74, 77] In
fact, USSE did not own the real estate holding company
that bought the property and did not purchase the
property. [¶ 66]
4. False Disclosures to and about Diversified Ethanol
In December 2006, Taylor Moffitt and others from
Diversified Ethanol, Inc., a division of Originally New
York, Inc. (“ONYI”), a reporting company, visited USSE’s
plants in Port Gibson and Natchez. [¶ 78] Diversified
Ethanol owned an ethanol plant. [¶ 79b] During the visit,
Rivera made a variety of false claims to Moffitt: that
Rivera owned the land across the river from his plant in
Natchez and owned a pipeline that went across the river,
that USSE’s reactor was fully operational and that the
Air Force was taking all he had to sell, that the reactor
could produce 6,000 gallons of fuel per day and that he
had received two offers to buy his technology for nine
and twelve billion dollars. [¶¶ 79-81] A few days later,
Rivera and others visited Diversified Ethanol’s
facilities in Eagle Grove, Iowa. [¶ 82]
Rivera sought to merge USSE with ONYI and on December 22,
2006, he signed a Memorandum of Understanding with ONYI
to merge the two companies into ONYI with Rivera in
control of the resulting company. [¶¶ 83-85] The
Memorandum of Understanding Rivera signed with ONYI
falsely claimed that USSE had patented technology. [¶ 86]
USSE did not own patented technology but only licensed
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Rivera’s patent pending technology at Rivera’s will. [¶¶
22, 87] Rivera also caused Diversified Ethanol to issue
a January 4, 2007 press release that falsely claimed,
among other things, that the combined business were worth
9 to 12 billion dollars. [¶¶ 88, 91-95] This was false
since USSE had nothing to sell. [¶¶ 80, 92] On January 5,
2007, USSE published a similar press release that claimed
that the combined companies would save 30-35% on their
energy costs making their product the most cost-effective
ethanol anywhere. This statement was false because it
incorrectly assumed that the energy supplied by USSE
would be free. [¶ 98]
5. False Claim to Have Sold Fertilizer
On April 3, 2007, USSE announced that it had made its
initial sale of a ton of its fertilizer at 15 cents per
pound, purportedly generating the first revenue ($300)
for the company. [¶¶ 111-2] In fact, no fertilizer was
shipped or delivered to the “purchaser” until June 2009.
Even then, only 1,700 pounds of fertilizer was delivered
and the purchaser never paid for it. [¶¶ 113-5]
6. False Claim to Have Produced Certified Biofuel
On July 17, 2007, USSE announced that it had developed a
revolutionary new biodiesel that was certified for
commercial use and would begin shipment in 72 hours. [¶
116] The claim was false. Rivera knew that the
revolutionary biofuel had been created in gallon buckets
and contained none of USSE’s purported fuels. [¶¶ 118-22]
Plainly, the fuel could not begin shipment in 72 hours.
[¶¶ 118, 122]
Brief in Support of Motion for Summary Judgment, pp. 8-11.
To prove violations of Section 10(b) of the Exchange Act and
Rule 10b-5, the Commission must establish that the defendants acted
with scienter. Aaron v. S.E.C., 446 U.S. 680 (1980). Scienter is
the “mental state embracing intent to deceive, manipulate or
defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
Scienter may be established by showing intentional or severely
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3 Bracketed references are to the plaintiff’s Statement of
Undisputed Material Facts.
11
reckless conduct. Broad v. Rockwell Int’l Corp., 642 F.2d 929,
961-62 (5th Cir. 1981); S.E.C. v. Kornman, 391 F.Supp.2d 477, 493
(N.D. Tex. 2005). Severe recklessness is (1) an extreme departure
from the standards of ordinary care, and (2) a present danger of
misleading buyers or sellers of securities that is either known to
the defendant or is so obvious that the defendant must have been
aware of it. Shushany v. Allwaste, Inc., 992 F.2d 517, 521 (5th
Cir. 1993).
In support of its motion for summary judgment on the issue of
scienter, the Commission asserts that Rivera knew that USSE’s
reactor was not ready for commercial operation. Gerald F. Brent
(“Brent”) worked for Rivera from at least 2001 and served as
general manager of the mechanics and laborers involved in
constructing, operating and maintaining the equipment used to carry
out the “Rivera Process” from its early development in Port Gibson,
Mississippi, through June of 2009. Brent testified that the
longest the machine had run continuously was for a period of four
or five days. [¶ 59].3 Rivera admitted that they only had storage
capacity of “between 4 and 6,000 gallons,” not enough capacity to
store Rivera’s claimed commercial production of 6,000 gallons per
day. [¶ 108]. Rivera also knew that his fuels had not complied
with any ASTM standard and, without doing so, could not be sold
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commercially. [¶¶ 43, 124, 127]. Rivera also knew that fuels from
the “Rivera Process” had to be distilled before being used but
nonetheless told Moffitt that the fuel was only filtered before it
was used in lawn mowers and other equipment in demonstrations. [¶¶
79, 106 (raw fuel must be distilled), 130 (Rivera agreed that raw
fuel would not run a diesel engine)]. Rivera also signed a
memorandum of understanding with ONYI that falsely claimed USSE had
patented technology. [¶¶ 86-87].
The plaintiff also shows that Rivera acted with scienter in
making other misrepresentations. There is no dispute that Rivera
knew the November 16 press release announcing the purported
engagement of a prominent investment bank was false. He retracted
it five days later. [¶¶ 64-66]. The announcement that Dr. David
Crow had been appointed to USSE’s board was simply made up. Crow
knew nothing about USSE until after the press release was
published. When he was told about the press release, he sent a
letter demanding a retraction. [¶¶ 68-72]. Rivera knew that USSE
did not sell fertilizer in April of 2007. No shipment was made to
the purported purchaser until June of 2009, and USSE did not have
fertilizer to ship in April 2007. [¶¶ 111-115]. In addition,
Rivera’s scienter is imputed to USSE because Rivera controlled the
company. See S.E.C. v. Manor Nursing Ctrs., Inc., 458 F.2d 1082,
1097 n.18 (2nd Cir. 1972).
Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and
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Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, prohibit fraudulent
conduct in connection with the purchase and sale of securities. To
prove violations based on misrepresentations or omissions, the
Commission must show that the misrepresentations or omissions were
material. S.E.C. v. Texas Gulf Sulphur Co., 401 F.2d 833 (2nd Cir.
1968). A misrepresentation or omission is material if there is a
substantial likelihood that under all circumstances it would have
assumed actual significance in the deliberations of a reasonable
investor. Basic, Inc. v. Levinson, 485 U.S. 224 (1988); TSC
Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976).
The plaintiff shows that the misrepresentations Rivera made
through USSE were material. False statements from senior
management impugn the integrity of management and are material. In
re Monster Worldwide, Inc. Securities Litigation, 251 F.R.D. 132,
138 (S.D. N.Y. 2008); Novak v. Kasaks, 216 F.3d 300, 312 (2nd Cir.
2000); S.E.C. v. v. Joseph Schlitz Brewing Co., 452 F.Supp. 824,
830 (E.D. Wisc. 1978). The misrepresentation that USSE had
developed a fully operational machine ready for commercial
production to produce revenue goes to the fundamental value of USSE
shares and was significant to a reasonable investor trying to
decide whether to invest in the company. Information concerning a
company’s financial condition is generally considered material.
S.E.C. v. Murphy, 626 F.2d 633, 653 (9th Cir. 1980). Similarly,
Rivera’s representations about the capability of the USSE machine
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employing the “Rivera Process” to produce 6,000 gallons of fuel per
day, to convert one bushel of soybeans into five gallons of fuel,
and to produce for 50 cents per gallon, all support the core
misrepresentation that USSE was ready for commercial production.
The knowledge that USSE had nothing to sell and no prospect of
immediate revenue was withheld from investors and was also
material. See S.E.C. v. Platforms Wireless Intern. Corp., 617 F.3d
1072, 1092 (9th Cir. 2010)(“An omitted fact is material ‘if there
is a substantial likelihood that disclosure of the omitted fact
would have been viewed by a reasonable investor as having
significantly altered the total mix of information available.’”)
(quoting S.E.C. v. Phan, 500 F.3d 895, 907-08 (9th Cir. 2007)).
The Commission also shows that other misrepresentations by
Rivera materially altered the mix of information available to
investors. False press releases announcing the engagement of a
prominent investment banker (November 16, 2006) [¶¶ 64-66], the
appointment of a prominent industry figure to USSE’s board
(November 15, 2006) [¶¶ 64-72], the purchase of a manufacturing
property (December 12, 2006) [¶¶ 75-77], the merger with
Diversified Ethanol (January 4 & 5, 2007) [¶¶ 78-110], the
announcements of the first official reactor (January 17, 2007) [¶¶
52-63] and the first sale of fertilizer (April 3, 2007) [¶¶ 111-
115], all continued to keep investors interested in purchasing USSE
shares. The continuing stream of USSE press releases that Rivera
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produced from October of 2006 through at least July of 2007, many
of which were false, influenced the trading in USSE shares. The
USSE price/volume chart from Bloomberg for the period from October
2006 through July 2008, attached as Item 3 to the plaintiff’s
Statement of Undisputed Material Facts, shows that although USSE’s
stock price steadily declined, millions of shares were traded by
thousands of investors sufficiently interested in USSE to keep
buying its shares.
In their response to the plaintiff’s motion for summary
judgment, defendant Rivera and relief defendant Price fail to
contradict the Commission’s evidence of the core misrepresentations
that misled investors.
Federal Rule of Civil Procedure 56(e) requires that affidavits
and oppositions to a summary judgment motion must be based upon
admissible evidence (Fed.R.Civ.P. 56(e)(1)), and on supporting
facts (not mere allegations) showing a genuine issue for trial.
Fed.R.Civ.P. 56(e)(2). Defendant Rivera has failed to offer
admissible evidence creating a genuine issue of material fact.
Most of the materials filed with the response are unauthenticated.
Fed.R.Evi. 901(a) provides that “[t]he requirement of
authentication or identification as a condition precedent to
admissibility is satisfied by evidence sufficient to support a
finding that the matter in question is what its proponent claims.”
Most of the materials filed with the response fail to meet this
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basic test. The response provides no affidavits, testimony or
other materials to establish that the documents filed with the
response are what they purport to be. As a consequence, they are
inadmissible and cannot create a genuine issue of material fact.
In addition, most if not all of the filings fail to meet the
requirement of relevancy set forth in Fed.R.Evi. 401: “‘Relevant
evidence’ means evidence having any tendency to make the existence
of any fact that is of consequence to the determination of the
action more probable or less probable than it would be without the
evidence.’”
The bulk of the filings accompanying the defendants’ response
bear on the likelihood that the “Rivera Process” has potential for
producing useful products, instead of the central misrepresentation
alleged in this case, which is that USSE had a “fully operational
plant in production” as Rivera claimed in press releases beginning
as early as October 26, 2006. The plaintiff’s expert and others
agree that a pyrolytic process like Rivera’s might someday be
successful in extracting energy effectively from various forms of
organic waste. However, the focus of the Commission’s case is the
misrepresentation that USSE had developed its process to the point
of full production. Many of the documents filed with Rivera’s
Response, notwithstanding their lack of authentication, merely
suggest that there may be promise to the “Rivera Process.” These
documents are irrelevant to the question of whether the USSE
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equipment actually worked as Rivera claimed.
The defendants’ response makes three general arguments: (1)
the “Rivera Process” is valuable; (2) Rivera did not author the
false press releases; and (3) Rivera and Price did not profit from
their sales of USSE and SSTP shares.
Rivera’s argument that USSE had a commercial process is based
upon the testimony of Brent, his longtime plant manager, the
affidavit of Neil Boone, a purported contract with the Town of
Vidalia, Louisiana, a Strategic Alliance Agreement between SSTP and
L. Sole S.A., a Spanish company, a summary of USSE stock owned by
Alice Price, an article on “Biochar Systems,” and various other
documents. None of the defendants’ submissions contradict the
undisputed fact that USSE never had a fully operational plant.
None of the defendants’ arguments in their response address the
misrepresentations that the USSE equipment could produce 6,000
gallons of fuel per day, that it could produce fuel for $0.50 per
gallon, that USSE had engaged a prominent investment banker, that
a prominent industry figure had joined USSE’s board, that USSE had
purchased its facility in Natchez, that it sold fertilizer in April
of 2007, or that USSE product would begin shipping within 72 hours
as of July 17, 2007.
Rivera’s chief argument from Brent’s testimony is that since
USSE had storage capacity for 4 to 6,000 gallons of output, the
plant was fully operational. However, USSE could not have a “fully
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4 Boone is employed by AMSPEC Services, LLC, a company that
inspects and tests petroleum and chemicals. Boone Aff., ¶ 4.
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operational plant in production” on October 26, 2006 (or be “Ready
for Green Fuel Production” on January 17, 2007) if it could not
store more than one day’s purported output. Brent also testified
that the plant had only operated once for as long as four or five
days continuously, and that they repeatedly modified the equipment
and tested it for some shorter period of time. Brent Deposition,
pp. 24-27. This testimony does not contradict the evidence that
USSE never had a “fully operational plant in production.”
Moreover, the portions of Brent’s deposition filed in support of
the defendants’ response establish that USSE’s plant could not
produce 6,000 gallons of fuel per day. Brent Depo., pp. 24-25.
Brent’s testimony also admits that the output of the USSE equipment
contained water and that they had to use a “whiskey still” to
remove the water in order to produce USSE’s so-called fuel. Brent
Depo., pp. 31, 33-35. Despite the defendants’ argument, Brent’s
testimony actually supports several of the plaintiff’s critical
misrepresentation claims.
The defendants also argue that the affidavit of Neil Boone4
somehow creates a genuine issue of fact regarding the commercial
viability of the “Rivera Process.” However, Boone’s affidavit does
not address whether USSE’s large-scale reactor was ready for
commercial production, whether it could produce 6,000 gallons per
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19
day of fuel, whether it could produce fuel for $0.50 per gallon, or
whether any possible output from the “Rivera Process” would be
economically viable to produce. Boone’s affidavit speaks only to
the “test reactor at the Natchez, Mississippi plant.” Boone Aff.,
¶¶ 5-8. However, the uncontradicted testimony of Kelmer Smith,
Jr., and Keith Mazer establishes that the output of the so-called
mini-reactor was different from the so-called continuous operation
reactor that was required for commercial production. Smith Depo.,
pp. 98-100, 103, 105, 135; Mazer Depo., pp. 42-43, 75-76.
The balance of Boone’s affidavit is inadmissible and fails to
address any issue relevant to this case. Boone’s personal belief
that USSE’s liquid oil could be refined, stored and handled like a
crude oil, and that the gaseous output may be used as a boiler fuel
are unsupported by any facts and are, at best, the personal opinion
of Boone, who is not offered as an expert and who does not support
his conclusions with any facts. Boone’s opinions fail under
Fed.R.Evi. 701 as the opinion testimony of a lay witness because
his personal beliefs are not rationally based on actual
observations and, at best, can only be based upon scientific and
economic conclusions from data Boone never claims to have observed.
There is nothing in Boone’s affidavit to establish that he is
qualified to render an expert opinion. Nor does he disclose the
basis for his personal conclusions or demonstrate that his opinions
are the product of reliable scientific principles and methods as
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20
required by Fed.R.Evi. 702 and 703.
At best, Boone’s declaration can be read to challenge the fact
that the “Rivera Process” could not produce five gallons of fuel
from a bushel of soybeans. That challenge, however, fails.
Another document filed with the response, although unauthenticated,
claims that one bushel of soybeans produces 35 pounds of biocrude
and 21 pounds of activated biochar. Defendants’ Exhibit 76-9, p.
2. Applying Boone’s calculation, one bushel of beans would only
generate 4.7 gallons of fuel without accounting for its water
content. But it is undisputed that the biocrude generated by
either the mini-reactor or the larger machine contains some amount
of water that must be distilled to produce any useful product.
Smith Depo., pp. 26-29, 65-67, 98-100, 103, 105, 135; Mazer Depo.,
pp. 31-33, 44-46, 75-76. Boone’s affidavit fails to address the
undisputed fact that there is water content in the Rivera biocrude,
and fails to challenge the Commission’s assertion that the claim
that the “Rivera Process” could produce five gallons of fuel from
one bushel of soybeans was false.
The defendants also argue that two purported contracts filed
with their response demonstrate that USSE (or, later, SSTP) was
commercially viable. Wholesale Power Contract between USSE and
Town of Vidalia, Louisiana; Strategic Alliance Agreement between
SSTP and L. Sole, S.A. The purported “Wholesale Power Contract,”
dated November 14, 2006, is unauthenticated and irrelevant and,
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21
hence, is inadmissible to create any genuine issue of material
fact. Moreover, on September 17, 2007, Rivera testified concerning
the circumstances surrounding the contract:
Page 193
15 MR. LOUGH: Because I -- I don't -- I don't quite
16 understand that. You have another statement in -- in here --
17 in the press release it says, "USSEC announces it is in
18 receipt of multiple take or pay contracts to be disclosed
19 soon." Was that an accurate statement when made?
20 THE WITNESS: Which document are you referring to?
21 MR. LOUGH: I'm sorry, Exhibit Number 12, or is
22 this 14?
23 MR. WESTRICK: Twelve.
24 MR. LOUGH: Twelve, okay.
25 MR. WATSON: Twelve.
Page 194
1 THE WITNESS: Do I have a copy of that. Is this
2 12?
3 MR. WESTRICK: Yes, sir, it is.
4 MR. LOUGH: It is about the middle bullet point
5 without counting up and down.
6 THE WITNESS: Okay.
7 MR. LOUGH: "Announces it's in receipt of multiple
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22
8 take or pay contracts to be disclosed soon"?
9 THE WITNESS: That's correct.
10 MR. LOUGH: That was accurate when made?
11 THE WITNESS: Accurate when made, City of Vidalia.
12 MR. LOUGH: Okay, well, that's one.
13 THE WITNESS: LEPA.
14 MR. LOUGH: Excuse me?
15 THE WITNESS: LEPA.
16 MR. LOUGH: How do you spell that?
17 THE WITNESS: Well, it's L-E-P-A.
18 MR. LOUGH: Okay. And you had those contracts in
19 hand at that time?
20 THE WITNESS: Those contracts were negotiated
21 between the City of Vidalia and LEPA, Kelmer Smith was doing
22 all the heat balance and the negotiations with them. They
23 started off wanting five megawatts and then they went to 50
24 megawatts, went from, I want to say eight, nine cents, I
25 don't remember exactly and it came all the way down to 4.3
page 195
1 cents. And then we discovered that they weren't -- they
2 weren't going to be using the capacity, they had maybe three
3 megawatts worth of capacity and they were selling the rest of
4 it to LEPA at twice, three times of what we were selling it
5 to them for.
6 MR. LOUGH: At the time that this press release
7 was issued in Exhibit Number 12 on October 26, 2006, did you
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23
8 have executed contracts?
9 THE WITNESS: We didn't -- I did not sign them
10 under the per kilowatt charge that they were -- that was.
11 presented to me.
12 MR. LOUGH: You -- you named two entities with
13 whom, I guess, USSE had been in negotiations.
14 THE WITNESS: The City of Vidalia Power Authority
15 and LEPA, which is, I'm going to take a real good stab at it,
16 Louisiana Electric Power Authority Co-op.
17 MR. LOUGH: Okay. And -- but those were in
18 negotiations?
19 THE WITNESS: Those -- we had a -- we had a deal
20 already signed with the mayor and director of the Vidalia
21 Power Authority and in the contract it says that United had
22 to get LEPA's authority for power transmission and what that
23 ended up meaning that LEPA had to buy the excess power from
24 them. So we did have a contract signed with the City of
25 Vidalia that had a proviso in it that turned out to me more
Page 196
1 than just a boilerplate.
2 MR. LOUGH: Which meant that it wasn't of any
3 value?
4 THE WITNESS: It meant that -- yeah, they're in
5 agreement, they're going to buy, but we've got to get LEPA's
6 permission to put in the other 45 megawatts and transmit them
7 on their lines.
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 23 of 38
24
. . .
Page 199
15 MR. LOUGH: Okay. Did you -- did the company
16 derive any revenue from these take or pay contracts?
17 THE WITNESS: We are in a position to sell every
18 green certificate for every kilowatt of electricity that we
19 can produce, both in the United States and aboard.
20 MR. LOUGH: Okay. But did the company derive any
21 income from any take or pay contracts?
22 THE WITNESS: No, sir.
23 MR. LOUGH: Okay.
24 THE WITNESS: We haven't derived any income from
25 anything
Investigative Testimony of John H. Rivera, September 17, 2007, pp.
193-196, 199.
Regardless of the actual language of the purported contract
with the Town of Vidalia, Rivera testified in September of 2007
that the contracts were never completed because the pricing terms
were unfavorable to USSE, and USSE never derived any revenue from
this or any other contract. Further, the basic terms of the
contract demonstrate that it could only be commercially viable if
USSE’s equipment became fully operational:
“DELIVERY TERM” means the period commencing the day after
final acceptance testing and completion of SELLER’S
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 24 of 38
25
RESOURCE rendering RESOURCE available for commercial
POWER generation.”
Wholesale Power Contract between USSE and Town of Vidalia,
Louisiana, p. 15.
By its basic terms, the purported contract is irrelevant to
the issue of whether USSE had a fully operational plant. Rivera
knew the contract had no real value because the contract, when it
was entered (through the present), was impossible for USSE to
perform. On March 8, 2007, Rivera testified that USSE had not
generated any revenue. Investigative Testimony of John H. Rivera,
March 8, 2007, pp. 70, 76, 97. A contract that was not completed
and could not be performed does not make USSE a commercially viable
company.
Rivera also argues that various unsubstantiated,
unauthenticated claims about the value of USSE’s biochar
demonstrate that the USSE process was commercially viable. See,
e.g., defendants’ exhibits 75-1, 75-9, 75-11, 76-8, 76-9. However,
the unauthenticated and factually unsupported claims of Michael
Garjian, President of Vee-Go Energy, fail to demonstrate the
relationship between USSE’s biochar and Garjian’s claims of
atmospheric remediation. There are no references to any test
results demonstrating that the biochar had been tested in
greenhouses or trials in any scientific way, and no documentation
that the cost of producing carbon by using the “Rivera Process” to
produce biochar is economically viable. Garjian’s deposition does
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 25 of 38
5 There was no independent lab confirmation. See Smith Depo.,
pp. 44-45.
26
establish, however, that USSE’s April 3, 2007, press release that
it had made its first sale of fertilizer was false because nothing
was shipped to Garjian until more than two years after the press
release. Garjian Depo., pp. 11-13, 29. According to Garjian, he
received approximately 1700 pounds of fertilizer in June of 2009,
but did not receive a bill and did not pay for the fertilizer. Id.
Rivera also submits a purported patent application and related
correspondence to attempt to show USSE’s commercial value. It is
undisputed that Rivera filed patent applications which were never
completed, and which lacked sufficient details to allow the patent
applications to be evaluated. Rivera Depo. of August 30, 2010, pp.
160-162, 169-172; Patent Application of April 27, 2006. However,
in a January 17, 2007, press release and many others (cited in
footnote 15 of plaintiff’s reply brief), USSE made repeated
representations that it owned patent pending technology for
creating biofuels and fertilizer. For example, on October 12,
2006, USSE issued a press release containing a section titled,
“About U.S. Sustainable Energy Corp.” which stated:
USSE holds patent pending technology for a new
breakthrough biofuel and carbon based fertilizer. USSE
has successfully demonstrated the most cost effective
method of producing biofuel estimated at $.50/gallon
according to exhaustive studies and independent lab
confirmation.5 The company has developed the process,
units, and catalyst that will transform agricultural
biomass into biofuel and fertilizer.
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 26 of 38
27
USSE Press Release, Oct. 12, 2006. Many of USSE’s press releases
emphasized the importance of its patent-pending technology; but, in
fact, USSE’s “patent pending” claims were false. USSE never owned
any patent pending technology. Rivera, not USSE, filed and owned
the provisional patents USSE claimed to hold. Rivera Depo. of
August 30, 2010, p. 161; Patent Applications of April 5, 2006.
In addition to their response, Rivera and Price have filed a
List of Genuine Issues of Material Fact that argues, among other
things, that Rivera never authored any press releases, that
attorneys and others edited and approved the press releases, and
that in any event the press releases were somehow protected because
they contained boilerplate concerning “forward-looking” statements
that brought them within the safe harbor provisions of Section
21(E) of the Securities Exchange Act of 1934 (“Exchange Act”).
The Commission maintains that these arguments do not create
any genuine issue of fact that is relevant to this case. First, as
the plaintiff repeatedly emphasizes, the purported exhibits on
which the defendants rely are not authenticated by anyone. For
example, defendants’ exhibit 76-3, which purports to be the USSE
policy for publishing press releases, is unauthenticated and there
is no basis to believe that it was ever put into place. The same
is true for various unauthenticated email strings (exhibits 75-8
and 76-4) which purport to show that persons other than Rivera were
involved in the editing of various press releases. Moreover,
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 27 of 38
28
Rivera has admitted that he was responsible for USSE’s press
releases. Rivera Depo. of March 8, 2007, pp. 52-62 (Rivera had the
final word on press releases and all changes went through him), pp.
191-192 (“when I put a press release out or I’m involved in a press
release, I want to make sure that every word, every comma, every
symbol is correct”); Mazer Depo., p. 89 (Mazer transmitted the
press releases to the wire service after he received the approved
press release from Rivera).
The defendants also suggest, without documentation, that
Rivera is not liable for his false press releases because they
might have been approved by attorneys. A good faith reliance on an
attorney or an accountant’s advice is not a defense to securities
fraud. It simply represents possible evidence of an absence of any
fraudulent intent. United States v. Peterson, 101 F.3d 375, 381
(5th Cir. 1996); In re Zonagen, Inc. Securities Litigation, 322
F.Supp.2d 764, 775 (S.D. Tex. 2003). However, no good faith
defense can be established unless the defendants show by a
preponderance of the evidence: (1) that Rivera informed the
lawyers of all relevant facts; (2) that he did not misrepresent any
relevant facts to the lawyers; (3) that he asked the lawyers for a
specific opinion about the particular point that on which he claims
to rely; and (4) that he actually received the specific opinion he
requested from the lawyers on which he claims to rely. United
States v. Duncan, 850 F.2d 1104, 1116 (6th Cir. 1988). Rivera has
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 28 of 38
6 The “bespeaks caution” doctrine, similar to the PSLRA safe
harbor provision, survived enactment of the PSLRA and protects
optimistic projections accompanied by cautionary language. In re
Securities Litigation BMC Software, Inc., 183 F.Supp.2d 860 (S.D.
Tex. 2001).
29
not even attempted to establish such a defense, nor has he
submitted any evidence in support of such.
Section 21(E) of the Exchange Act (15 U.S.C. §78u-5) provides
a safe harbor for forward-looking statements, but is not available
to USSE in this case. Section 21(E)(b)(C) excludes penny stock
companies from any such safe harbor. Moreover, Section 21(E)’s
safe harbor provision and the “bespeaks caution” doctrine6 apply to
forward-looking statements only, and not to material omissions or
misstatements of historical fact. In re Constellation Energy
Group, Inc. Securities Litigation, 738 F.Supp.2d 614, 625 (D. Md.
2010). Here, any application of the safe harbor rule is
ineffective both because USSE has always been a penny stock (see
Plaintiff’s Statement of Undisputed Facts, ¶ 1) and, more
critically, because misrepresentations such as that USSE has a
“fully operational plant in production” materially misstate
historical facts and are not forward-looking in any regard.
The undisputed evidence in this case establishes the core
misrepresentations that USSE had a “fully operational plant in
production” and was “ready for Green Fuel production.” The
undisputed evidence also proves other repeated misrepresentations:
that USSE had engaged a prominent investment banker; that a
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30
prominent industry figure had joined its board; that USSE had
purchased its production facility in Natchez; that USSE had
patented technology; that USSE owned patent pending technology;
that USSE sold fertilizer in April 2007 and was a revenue producing
company; and that USSE had developed an OD-66 certified product
that it would begin shipping in 72 hours. The core
misrepresentations are supported by undisputed collateral facts
that USSE could not produce 6,000 gallons of fuel per day as Rivera
repeatedly claimed; that USSE’s equipment had never been
continuously operated for more than four or five days; and that
USSE had no reasonable basis to claim that it could produce fuel
for $0.50 per gallon. Rivera’s attempt to create an issue of fact
as to whether USSE could produce five gallons of fuel from each
bushel of soybeans fails because Boone’s affidavit fails to address
the undisputed fact that the biocrude from the Rivera Process, even
in the mini-reactor, contains some percentage of water, which might
be higher than 25%. The Response offers no evidence to contradict
the testimony of Brent (Rivera’s trusted plant manager), Smith (the
chemical engineer), and Mazer (Rivera’s almost constant companion
for a year) that the USSE equipment never produced as much as half
of 6,000 gallons per day, that the USSE biocrude output contained
significant amounts of water that had to be removed to produce any
fuel, that USSE never had a product to sell and that the USSE
equipment was experimental and never operated continuously for
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 30 of 38
31
longer that four or five days.
Each of these material misrepresented facts establishes a
violation of Section 10(b) of the Exchange Act and Rule 10b-5
thereunder, as alleged in the complaint. Together, they establish
repeated material misrepresentations to USSE investors that allowed
enough USSE shares to be sold for Rivera to continue falsely
promoting the company.
The plaintiff has demonstrated that it is entitled to summary
judgment on the issue of liability. The Court turns now to the
issue of remedies. “A district court in an SEC enforcement action
has the authority, through its equitable jurisdiction, to fashion
an appropriate remedy on a proper showing of a securities
violation.” SEC v. Current Financial Services, Inc., 783 F.Supp.
1441, 1443 (D. D.C. 1992), citing SEC v. Manor Nursing Centers,
Inc., 458 F.2d 1082, 1103 (2nd Cir. 1973). In its motion, the
plaintiff seeks the following relief:
1. Injunctions against USSE and Rivera against future
violations of Section 10(b) of the Securities Exchange Act of 1934
(“Exchange Act”)(15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. §
240.10b-5) promulgated thereunder;
2. A bar against Rivera from acting as a director or officer
of any issuer having a class of securities registered with the
Commission pursuant to Section 12 of the Exchange Act (15 U.S.C. §
78l) or required to file reports pursuant to Section 15(d) of the
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 31 of 38
32
Exchange Act (15 U.S.C. § 78o(d));
3. A Penny Stock bar against Rivera pursuant to Section 21(d)
of the Exchange Act (15 U.S.C. § 78u(d));
4. Disgorgement and prejudgment interest against USSE, Rivera
and Price; and
5. Civil penalties pursuant to Section 21(d)(3) of the
Exchange Act (15 U.S.C. §§ 78u) against USSE and Rivera.
Plaintiff’s Motion for Summary Judgment, p. 2.
First, the Commission seeks a permanent injunction prohibiting
USSE and Rivera from violating Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission. Such relief is authorized by statute, which provides:
Whenever it shall appear to the Commission that any
person is engaged or about to engage in any acts or
practices constituting a violation of any provision of
this chapter, [and/or] the rules or regulations
thereunder, ... it may in its discretion bring an action
in the proper district court of the United States ... to
enjoin such acts or practices, and upon a proper showing
a permanent or temporary injunction or restraining order
shall be granted without bond. ...
15 U.S.C. § 78u(d)(1).
“The courts have an obligation, once a violation has been
established, to protect the public from a continuation of the
harmful and unlawful activities.” United States v. Parke, Davis &
Co., 362 U.S. 29, 48 (1960). “A District Judge is vested with a
wide discretion when an injunction is sought to prevent future
violations of the securities laws ... and ‘cessation of illegal
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 32 of 38
33
activity does not ipso facto justify the denial of an injunction.’”
Commission v. Universal Major Industries Corp., 546 F.2d 1044, 1048
(2nd Cir. 1976). An injunction from further violations of the
federal securities laws is proper if “the inferences flowing from
defendant’s prior illegal conduct, viewed in light of present
circumstances, betoken a ‘reasonable likelihood’ of future
transgressions.” SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir.
1981). The Fifth Circuit has suggested several non-exclusive
factors which a district court may consider: “(1) the egregiousness
of the defendant’s actions, (2) the isolated or recurrent nature of
the infraction, (3) the degree of scienter involved, (4) the
sincerity of the defendant’s assurances against future violations,
(5) the defendant’s recognition of the wrongful nature of his
conduct, and (6) the likelihood that the defendant’s occupation
will present opportunities for future violations.” SEC v. Blatt,
583 F.2d 1325, 1334 n.29 (5th Cir. 1978), citing Universal Major
Indus., 546 F.2d at 1048; Manor Nursing, 458 F.2d at 1100.
Second, the plaintiff requests the Court to enter an Order
permanently prohibiting Rivera from acting as a director or officer
of any issuer having a class of securities registered with the
Commission pursuant to Section 12 of the Exchange Act (15 U.S.C. §
78l) or required to file reports pursuant to Section 15(d) of the
Exchange Act (15 U.S.C. § 78o(d)).
Section 21(d)(2) of the Exchange Act authorizes courts in SEC
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34
civil actions to issue an order prohibiting any person who violated
Section 10(b) of the Exchange Act from acting as an officer or
director of any company that has a class of securities registered
with the SEC pursuant to Section 12 of the Exchange Act, or that is
required to file reports with the SEC pursuant to Section 15(d) of
the Exchange Act, if that person’s conduct demonstrates his
unfitness to serve as an officer or director of such an issuer.
See 15 U.S.C. § 78u(d)(2).
Courts generally consider six factors when making an
“unfitness” determination: “(1) the ‘egregiousness’ of the
underlying securities law violation; (2) the defendant’s ‘repeat
offender’ status; (3) the defendant’s ‘role’ or position when he
engaged in the fraud; (4) the defendant’s degree of scienter; (5)
the defendant’s economic stake in the violation; and (6) the
likelihood that misconduct will recur.” See SEC v. Patel, 61 F.3d
137, 141 (2nd Cir. 1995); SEC v. First Pacific Bancorp, 142 F.3d
1186, 1193 (9th Cir. 1998); SEC v. Quinlan, 373 Fed.Appx. 581, 586
(6th Cir. 2010). Courts may consider some of the factors, all of
them, or additional factors. Patel, 61 F.3d at 141.
Third, the Commission seeks an Order barring Rivera from
participating in any offerings of penny stock. Section 603 of the
Sarbanes-Oxley Act amended Section 21(d) of the Exchange Act, 15
U.S.C. § 78u(d), to provide federal courts with statutory authority
to bar an individual from participating in an offering of penny
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35
stock. A person participating in an offering of penny stock
includes one who engages “in activities with a[n] ... issuer for
purposes of the issuing, trading, or inducing or attempting to
induce the purchase or sale of, any penny stock.” Section
21(d)(6)(B) of the Exchange Act (15 U.S.C. § 78u(d)(6)(B)). A
penny stock must, inter alia, have tangible net assets of less than
$2,000,000, have a value less than $5 per share, and not be a
national market stock with a market value of listed securities
greater than $50 million for 90 consecutive days. 17 C.F.R. §
240.3a51-1. See SEC v. McNamee, 481 F.3d 451, 456 (7th Cir. 2007)
(“[a] penny stock is any equity security that has a price of less
than five dollars, except as provided in Rule 3a51-1 under the
Exchange Act (17 C.F.R. 240.3a51-1)).”). This request reflects the
degree to which the SEC considers Rivera to be a hazard to the
public investing community.
Fourth, the plaintiff requests the Court to order USSE, Rivera
and Price to disgorge the ill-gotten gains they received.
Disgorgement is designed both to deprive a wrongdoer of his unjust
enrichment and to deter others from violating the securities laws.
SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978); SEC v. First City
Fin. Corp., 890 F.2d 1215 (D.C. Cir. 1989); Manor Nursing, 458 F.2d
at 1104 (“The effective enforcement of the federal securities laws
requires that the SEC be able to make violations unprofitable.”).
The Commission urges that, in light of the “pervasive” fraud
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36
committed by the defendants, the Court should order all profits
stemming from the scheme to be disgorged. See CFTC v. British Am.
Commodity Options Corp., 788 F.2d 92, 93-94 (2nd Cir. 1986).
The law does not require precision in determining the proper
amount of disgorgement. “The District Court has broad discretion
not only in determining whether or not to order disgorgement but
also in calculating the amount to be disgorged.” SEC v. First
Jersey Sec., Inc., 101 F.3d 1450, 1475 (2nd Cir. 1996). The
Commission “is entitled to disgorgement upon producing a reasonable
approximation of a defendant’s ill-gotten gains.” Calvo, 378 F.3d
at 1217. In determining the appropriate disgorgement amount, all
doubts “are to be resolved against the defrauding party.” SEC v.
First City Fin. Corp., 688 F. Supp. 705, 727 (D. D.C. 1988)
(quoting SEC v. McDonald, 699 F2d 47, 55 (1st Cir. 1983)). “Once
the [Commission] has established that the disgorgement figure is a
reasonable approximation of unlawful profits, the burden of proof
shifts to the defendants, who must ‘demonstrate that the
disgorgement figure is not a reasonable approximation.’” SEC v.
Hughes Capital Corp., 917 F. Supp. 1080, 1085 (D. N.J. 1996)
(quoting First City, 890 F.2d at 1232).
The Commission also seeks prejudgment interest on the amount
of disgorgement ordered. Where a securities law violator has
enjoyed access to funds over a period of time as a result of his
wrongdoing, requiring the violator to pay prejudgment interest is
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37
consistent with the equitable purpose of disgorgement. Id. at
1090.
Fifth, The Commission seeks civil money penalties against
Rivera and USSE pursuant to Section 21(d)(3) of the Exchange Act
(15 U.S.C. § 78u(d)(3)). A civil penalty is determined “in light
of the facts and circumstances” of a particular case. 15 U.S.C. §
78u(d)(3)(B)(i). “First tier” penalties for violations occurring
after February 14, 2005, but on or before March 3, 2009, may be
imposed up to the greater of $6,500 or the amount of ill-gotten
gain to the defendant as a result of the violation. See 17 C.F.R.
§ 201.1003. When the violation involves fraud, “second tier
penalties” may be imposed up to the greater of $65,000 or the
amount of ill-gotten gain to the defendant as a result of the
violation. A “third tier” civil penalty of up to the larger of
$130,000 or the amount of pecuniary gain to the defendant as a
result of the violation may be imposed if the violation involved
fraud or deceit and the violation resulted in substantial losses or
created a significant risk of substantial losses to other persons.
Id. The decision to impose a penalty, and the amount of any such
penalty, is a matter within the discretion of the Court. In
determining whether to award civil penalties, courts consider
numerous factors, including the egregiousness of the violation, the
isolated or repeated nature of the violations, the degree of
scienter involved, whether the defendant concealed his trading, and
Case 5:08-cv-00245-DCB-JMR Document 88 Filed 07/21/11 Page 37 of 38
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the deterrent effect given the defendant’s financial worth. SEC v.
Sargent, 329 F.3d 34, 42 (1st Cir. 2003).
In light of the numerous findings that must be made by the
Court in fashioning appropriate remedies, the Court shall conduct
a hearing on remedies, to be held August 8, 2011. The parties may
present any additional written arguments in advance of the hearing,
should they desire to do so, on or before August 1, 2011.
Accordingly,
IT IS HEREBY ORDERED that the plaintiff Securities and
Exchange Commission’s motion for summary judgment (docket entry 61)
is GRANTED as to liability;
FURTHER ORDERED that a hearing on remedies shall be held
August 8, 2011. Any additional written arguments shall be filed on
or before August 1, 2011.
SO ORDERED, this the 21st day of July, 2011.
/s/ David Bramlette
UNITED STATES DISTRICT JUDGE