irrevocable海盗船内存官网

SECURITIESANDEXCHANGECOMMISSIONWashington,D.
C.
SECURITIESACTOF1933ReleaseNo.
10886/November9,2020SECURITIESEXCHANGEACTOF1934ReleaseNo.
90385/November9,2020INVESTMENTCOMPANYACTOF1940ReleaseNo.
34089/November9,2020Admin.
Proc.
FileNo.
3-16318IntheMatterofALEXANDRES.
CLUG,AURUMMINING,LLC,PANAMTERRA,INC.
,andTHECORSAIRGROUP,INC.
OPINIONOFTHECOMMISSIONCEASE-AND-DESISTPROCEEDINGBROKER-DEALERPROCEEDINGGroundsforRemedialActionAntifraudviolationsReportingviolationsRegistrationviolationsRespondentsviolatedantifraud,reporting,andregistrationprovisionsofthefederalsecuritieslaws.
Held,itisinthepublicinterestto:(i)imposebarsfromtheindustryandpennystockofferings;(ii)enteracease-and-desistorder;and(iii)orderpaymentofdisgorgementplusprejudgmentinterestandathird-tiercivilmoneypenalty.
APPEARANCES:DanielA.
BushellforAlexandreS.
Clug.
DavidStoeltingandIbrahimBahfortheDivisionofEnforcement.
2Appealfiled:March1,2016Lastbriefreceived:February14,2019Oralargument:September18,2019I.
IntroductionAlexandreS.
Clugappeals,andtheDivisionofEnforcementcross-appeals,anadministrativelawjudge'sinitialdecisionandsubsequentordersconcerningallegedviolationsoftheantifraud,reporting,andregistrationprovisionsofthefederalsecuritieslawsbyClug,MichaelW.
Crow,andthreecompaniesthattheyfoundedin2011andcontrolled—AurumMining,LLC("Aurum"),PanAmTerra,Inc.
("PanAm"),andTheCorsairGroup("Corsair").
1TheALJfoundthat:(i)Aurum,Clug,andCrowviolated,andClugandCrowaided,abetted,andcausedviolationsof,Section10(b)oftheSecuritiesExchangeActof1934andRule10b-5thereunder,andSection17(a)oftheSecuritiesActof1933,bymisrepresenting:Crow'sprofessionalbackground;thatAurumhadsatisfiedtheconditionsnecessaryforittoretaininvestorfundswhenithadnotandthatAurumhadsatisfiedtheconditionsnecessaryfornoteholderstoconvertintoshareswhenithadnot;andAurum'sgoldproductionestimatesforaminingexplorationproperty;(ii)PanAmviolatedSecuritiesActSection17(a)(2)bymisrepresentinginitsfilingsthestatusofaconvertiblenoteheldbyCrowandthatthecompanyhadsubmittedanapplicationtolistitsstockontheOTCBulletinBoard;(iii)Corsair,Clug,andCrowviolated,andClugandCrowaided,abetted,andcausedCorsair'sviolationof,ExchangeActSection15(a)(1)byactingasunregisteredbroker-dealers;and(iv)CrowviolatedExchangeActSection15(b)(6)(B)byassociatingwithabroker-dealer(Corsair)incontraventionofabarthatprohibitedhimfromdoingso,andClugaided,abetted,andcausedthatviolation.
TheALJorderedthatClugandCrowcease-and-desistfromfurtherviolationsoftherelevantstatutoryprovisions,paydisgorgementplusprejudgmentinterest,andbebarredfromthesecuritiesindustryandfromparticipatinginpennystockofferings.
Crowwasalsoorderedtopayacivilpenalty.
TheALJdidnotsanctionAurum,PanAm,orCorsair.
Aurum,PanAm,Corsair,andCrowdidnotappealorrespondtotheDivision'scross-appeal.
CrowsettledwiththeCommissionduringthependencyofthisappeal.
2Clugappealsthefindingsoffactandconclusionsoflawastohisviolationsandsanctions.
1MichaelW.
Crow,InitialDecisionReleaseNo.
953,2016WL489352(Feb.
8,2016);MichaelW.
Crow,Admin.
Proc.
RulingsReleaseNo.
3708(Mar.
15,2016)(OrderGrantingtheDivision'sMotiontoCorrectaManifestErrorofFact),availableathttps://www.
sec.
gov/alj/aljorders/2016/ap-3708.
pdf;MichaelW.
Crow,Admin.
Proc.
RulingsReleaseNo.
5691(Apr.
20,2018)(OrderRatifyinginPartandRevisinginPartPriorActions),availableathttps://www.
sec.
gov/alj/aljorders/2018/ap-5691.
pdf.
2MichaelW.
Crow,ExchangeActReleaseNo.
84914,2018WL6722724(Dec.
21,2018)(orderingthatCrowcease-and-desistfromviolationsofSecuritiesActSection17(a),ExchangeActSection10(b)andRule10b-5thereunder,andExchangeActSections15(a)(1)and15(b)(6)(B);paydisgorgementof$100,000plusprejudgmentinterest;andbebarredfromassociationwithamunicipalsecuritiesdealer,municipaladvisor,transferagent,nationally3TheDivisioncross-appealstheALJ'sconclusionthatitdidnotestablishthatCrowservedasadefactoexecutiveofficerofPanAm.
AccordingtotheDivision,weshouldfindthatCrowwasadefactoexecutiveofficerandthatthefollowingviolationsresultedfromPanAm'sfailuretodisclosurethatfactorinformationaboutCrow'sbackgroundinitsperiodicreports:(i)PanAmviolated,andClugaided,abetted,andcausedPanAm'sviolationsof,theantifraudprovisionsofExchangeActSection10(b)andRule10b-5andSecuritiesActSection17(a);(ii)PanAmviolated,andClugaided,abetted,andcausedPanAm'sviolationsof,thepubliccompanyreportingrequirementsofExchangeActSection13(a)andRules12b-20,13a-1,and13a-13thereunder;and(iii)ClugviolatedExchangeActRule13a-14(a)bycertifyingcertainofthosereportsasPanAm'sCEO.
TheDivisionfurthercross-appealstheALJ'sfindingthatPanAmviolatedSecuritiesActSection17(a)(2)bymisrepresentingthestatusofaconvertiblenoteheldbyCrow;itcontendsthatthroughthismisrepresentationPanAmalsoviolatedSecuritiesActSections17(a)(1)and(a)(3)andExchangeActSection10(b)andRule10b-5,andthatClugaided,abetted,andcausedthoseviolations.
Finally,theDivisionseekstheimpositionofcease-and-desistorders,disgorgementplusprejudgmentinterest,andcivilpenaltiesonClug,Aurum,PanAm,andCorsair;andindustry,pennystock,andofficer-and-directorbarsonClug.
Nopartyappealedthefindingsthat:(i)AurumviolatedSecuritiesActSection17(a)andExchangeActSection10(b)andRule10b-5bymakingthemisrepresentationsnotedabove;(ii)PanAmviolatedSecuritiesActSection17(a)(2)bymisrepresentingthatithadsubmittedanapplicationtolistitsstockontheOTCBulletinBoard;and(iii)CorsairviolatedExchangeActSection15(a)(1).
Buttheinitialdecision"cease[d]tohaveanyforceoreffect"whenwegrantedthepetitionsforreview.
3Asaresult,wediscussthesefindingsandtheissuesappealedbelow.
4II.
ProceduralHistoryOnNovember30,2017,afterClugandtheDivisionfiledtheirappeals,weratifiedtheappointmentsoftheCommission'sALJs,includingtheALJassignedtothiscase.
5Wealsoremandedthisproceeding(amongothers)inorderfortheALJtoconductadenovoreconsiderationandreexaminationoftherecordtodetermine"whethertoratifyorreviseinanyrespectallprioractionstakenby"theALJ.
6Aspartoftheremand,thepartieswereallowedtosubmitnewevidenceandbriefs.
7OnApril20,2018,baseduponthenewevidencesubmittedandreconsiderationoftherecord,theALJdeterminedtoratifyallprioractionshehadtaken,includingtheinitialdecision,exceptthatheincreasedthedisgorgementamountfrom$50,000torecognizedstatisticalratingorganization,orinvestmentcompany,andfromparticipatinginanypennystockoffering).
Becausehesettled,ourfindingshereindonotapplytoCrow.
3EricJ.
Brown,SecuritiesActReleaseNo.
9311,2012WL1143573,at*2(Apr.
5,2012).
4SeeLarryC.
Grossman,SecuritiesActReleaseNo.
10227,2016WL5571616,at*1(Sept.
30,2016).
5Order,ExchangeActReleaseNo.
82178,2017WL5969234,at*1-2(Nov.
30,2017).
6Id.
7MichaelW.
Crow,Admin.
Proc.
RulingReleaseNo.
5300(Dec.
6,2017),availableathttps://www.
sec.
gov/alj/aljorders/2017/ap-5300.
pdf.
4$67,000afterClugsubmittedanupdatedfinancialstatementreflectingthathewas"nowgainfullyemployed"andthat"heandhiswife'sjointnetassetsha[d]increased.
"8Thereafter,ClugandtheDivisionagainsoughtCommissionreview.
OnJune21,2018,theSupremeCourtissueditsdecisioninLuciav.
SEC.
9InLucia,theCourtheldthattheCommission'sALJswereappointedinamannerthatviolatedtheAppointmentsClauseofArticleIIoftheConstitution.
10TheCourtremandedfortheCommissiontoprovidetherespondentwithanewhearingbeforeahearingofficerwhowasproperlyappointedandhadnotparticipatedinthematterpreviously.
11Subsequently,weratifiedtheappointmentofourALJsandonceagainremandedthisproceeding(andothers)toprovidethepartieswitha"newhearingbeforeanALJwhodidnotpreviouslyparticipateinthematter.
"12Wespecifiedthat,inanysuchhearing,thenewlyassignedALJwould"exercisethefullpowersconferredbytheCommission'sRulesofPracticeandtheAdministrativeProcedureAct"andnot"giveweighttoorotherwisepresumethecorrectnessofanyprioropinions,orders,orrulingsissuedinthematter.
"13Wealsoprovidedthepartieswiththeoptionofsubmittingan"expressagreement.
.
.
regardingalternativeprocedures"totheChiefALJ.
14OnSeptember11,2018,ClugandtheDivisionjointlyrequestedthattheCommissiondecidetheirpetitionsandcross-petitionsforreviewontheexistingrecord.
TheirjointagreementstatedthatClugknowinglyandvoluntarily"waive[d]anyclaimorentitlementto.
.
.
anewhearingbeforeanotherALJortheCommission";"waive[d]anychallengetothisadministrativeproceeding,aswellastheCommission'sconsiderationofthePetitionsforReview,andanyandallorders.
.
.
issuedduringorattheconclusionoftheseproceedings.
.
.
baseduponanyallegedoractualdefectintheappointmentof[the]ALJ";and"elect[ed]tohavetheCommissiondecidetheissuesraisedinthe"already-filedpetitionsforreviewwithout"takingnewevidence.
"158MichaelW.
Crow,Admin.
Proc.
RulingReleaseNo.
5691(Apr.
20,2018),availableathttps://www.
sec.
gov/alj/aljorders/2018/ap-5691.
pdf.
9138S.
Ct.
2044(2018).
10Id.
11Id.
at2055.
12InrePendingAdmin.
Proceedings,ExchangeActReleaseNo.
83907,2018WL4003609,at*1-2(Aug.
22,2018).
13Id.
14Id.
15InClug'sbriefinsupportofhispetitionforreview,Clugstatedthathe"continue[s]toassert"and"incorporate[s].
.
.
byreference"the"constitutionalchallenges[he]raisedbeforetheALJ"topreservethemforanyappealoftheCommissionopinion,butthathedoes"notfocusonthoseargumentsin[hisbriefstotheCommission]because[he]recognize[s]thattheCommissiondisagreeswiththem.
"Asstatedabove,in2018,ClugexplicitlywaivedanychallengebasedupontheappointmentoftheALJ.
Inhispost-hearingbrief,ClughadraisedanAppointmentsClausechallengeandaddedthatinhisviewtheproceedingalso"violatesArticleIIoftheU.
S.
ConstitutionbaseduponFreeEnterprise[Fundv.
PCAOB]"and"violatesArt.
Idelegation5III.
TheAurumViolationsExchangeActSection10(b)andRule10b-5(b)thereunderprohibit,throughmeansofinterstatecommerceandinconnectionwiththepurchaseorsaleofsecurities,makinganuntruestatementofmaterialfactoromittingtostateamaterialfactnecessarytomakestatementsnotmisleading.
16Afactismaterialifthereisa"substantiallikelihoodthatthedisclosureoftheomittedfactwouldhavebeenviewedbythereasonableinvestorashavingsignificantlyalteredthe'totalmix'ofinformationmadeavailable.
"17Aviolationoftheseprovisionsrequiresscienter.
18Scienteristheintenttodeceive,manipulate,ordefraud.
19Itincludesrecklessness—highlyunreasonableconductthatrepresentsan"extremedeparturefromthestandardsofordinarycare,.
.
.
whichpresentsadangerofmisleadingbuyersorsellersthatiseitherknowntothe[respondent]orissoobviousthatthe[respondent]musthavebeenawareofit.
"20WefindthatClugviolatedExchangeActSection10(b)andRule10b-5(b)inthreerespects:(1)hemisrepresentedCrow'sprofessionalbackgroundinanAugust2011Aurumprivateplacementmemorandum("PPM")bynotdisclosingCrow'spriorviolationsofthesecuritieslaws;(2)hemisrepresentedinalettertoAurum'sinvestorsinJanuary2012thatAurumhadsatisfiedtheconditionsnecessaryforittoretaininvestorfundswhenithadnot,andinaseparateletterinJanuary2012thatAurumhadsatisfiedtheconditionsnecessaryfornoteholderstoconvertintoshareswhenithadnot;and(3)hemisrepresentedinnumerousPPMsandmarketingmaterialsthegoldestimatesforaminingexplorationpropertyinPeru.
21Adoctrineandarighttoajurytrial.
"Clugdidnotexpandonthesestatementsinhispost-hearingbriefletaloneinhisbriefingtotheCommission.
"[E]venproselitigantsmustbriefargumentsinordertopreservethem.
Merelylistingclaimswithnoanalysisisinadequatetopreservetheclaimonappeal.
"Mossv.
La.
Dep'tofCorr.
,671F.
App'x351,352(5thCir.
2016).
Accordingly,wefindthatClughasnotpreservedanyother"constitutionalchallenges.
"Inanycase,theCommissionrecentlyheldthat"FreeEnterpriseFunddoesnotcompeltheconclusionthatthestatutoryrestrictionsonremovalofALJsviolateseparation-of-powersprinciples"andthattheSeventhAmendmentrighttoajurytrialisnotapplicabletoadministrativeproceedings.
JohnThomasCap.
Mgmt.
Grp.
LLC,d/b/aPatriot28LLC;andGeorgeR.
Jarkesy,Jr.
,ExchangeActReleaseNo.
89775,2020WL5291417at*26-27(Sept.
4,2020).
1615U.
S.
C.
§78j(b);17C.
F.
R.
§240.
10b-5(b).
Clugdoesnotdisputethatheactedthroughinterstatecommerceorthathisactionswere"inconnectionwiththepurchaseorsale"ofsecurities.
17BasicInc.
v.
Levinson,485U.
S.
224,231-32(1988);seealsoTSCIndus.
,Inc.
v.
Northway,Inc.
,426U.
S.
438,445(1976)("Thequestionofmateriality.
.
.
isanobjectiveone,involvingthesignificanceofanomittedormisrepresentedfacttoareasonableinvestor.
").
18SeeErnst&Ernstv.
Hochfelder,425U.
S.
185,214(1976).
19See,e.
g.
,SECv.
Steadman,967F.
2d636,641-42(D.
C.
Cir.
1992).
20Id.
(quotingSundstrandCorp.
v.
SunChem.
Corp.
,553F.
2d1033,1045(7thCir.
1977));accordRockiesFund,Inc.
v.
SEC,428F.
3d1088,1093(D.
C.
Cir.
2005).
21Inlightofourfindings,weneednotdeterminewhetherClugorAurumalsoviolatedSecuritiesActSection17(a)asaresultofthesemisrepresentations.
6companyisliablefortheactionsofitsresponsibleofficers,anditsscienterisimputedfromthatoftheindividualscontrollingit.
22Asaresult,AurumisalsoliableforthesemisrepresentationsbecauseClugcontrolledAurumandthereforehisconductandscienterareimputedtoit.
A.
ClugmisrepresentedCrow'sprofessionalbackground.
1.
ClugmademateriallymisleadingomissionsaboutCrow'sbackgroundwithscienter.
ClugandCrow,whoweredescribedasAurum's"managers"initsofferingdocuments,exercisedcontrolofAurumthroughtheirownershipoftwotruststhateachheld50%ofAurum'sClassBmembershipunits—theonlyequityshareswithvotingrights.
Between2011and2014,ClugandCrowraisedalmost$4millionforAurumfrominvestorsthroughthesaleofconvertiblenotesandnonvotingClassAmembershipunits(the"ClassAShares").
Ofthatmoney,Aurumpaid$377,347toClug,$293,614toCrow,and$625,000in"retainerfees"toCorsair,anentityClugandCrowownedandcontrolled.
AurumpaidCorsairtheretainerfeespursuanttoan"advisoryagreement"makingCorsairAurum's"financialandmanagementconsultant.
"Aurumwentoutofbusinessin2014,resultinginatotallossofinvestorfunds.
AurumbegansellingtheClassASharesusingaPPMdatedAugust2011.
ClugandCrowdraftedthePPMandcausedAurumtodistributeittoinvestors.
ThePPMdescribedtheprofessionalbackgroundsofAurum'sthreemanagers—Clug,Crow,andCFOAngelLana.
23ForCrow,thePPMdescribedhiseducationaswellasCrow'spastbusinesssuccesses.
ButthePPMomittedanymentionofCrow'sdisciplinaryhistoryregardingviolationsofthesecuritieslaws.
In1998,inanactionbroughtbytheCommission,Crowconsentedtoajudgmentinfederaldistrictcourtbarringhimfromactingasanofficerordirectorofapublicreportingcompany.
24TheCommission'sactionwasbasedonallegations,whichCrowneitheradmittednordenied,thathecommittedsecuritiesfraudasthepresidentandchairmanofWilshireTechnologies,Inc.
In2008,afederaldistrictcourtfoundthatCrowaidedandabettedsecuritieslawviolationsbytwobroker-dealersthathecontrolled.
25ThecourtfoundthatCrowaidedandabettedDuncanCapitalGroupLLC'sviolationofExchangeActSection15(a)byactingasanunregisteredbroker;andthatheaidedandabettedDuncanCapitalLLC'sviolationsofExchangeActSection15(b)(1)and(7)andrulesthereunderby,amongotherthings,failingtodisclosethatCrowcontrolled,andwasadefactoofficeranddirectorof,thefirm.
CrowwasenjoinedfromfurtherviolationsofExchangeActSection15(a)and(b)andrulesthereunderand22A.
J.
White&Co.
v.
SEC,556F.
2d619,624(1stCir.
1977)(holdingthatafirm"canactonlythroughitsagents,andisaccountablefortheactionsofitsresponsibleofficers");WarwickCapitalMgmt.
,Inc.
,AdvisersActReleaseNo.
2694,2008WL149127,at*9n.
33(Jan.
16,2008)("Acompany'sscienterisimputedfromthatoftheindividualscontrollingit.
").
23LanaconsentedtosanctionsforviolatingSecuritiesActSection17(a)(2)and(3).
AngelE.
Lana,CPA,ExchangeActReleaseNo.
73852,2014WL7145627(Dec.
16,2014).
24SECv.
Crow,No.
96-1661S(S.
D.
Cal.
Apr.
16,1998).
25SECv.
Crow,No.
07-CV-3814(S.
D.
N.
Y.
Nov.
13,2008).
7orderedtopaydisgorgementandcivilpenalties.
26Basedonthecivilaction,theCommissionbarredCrowfromassociationwithanybroker,dealer,orinvestmentadviser.
27ThePPM'somissionswerematerialbecausetheyprovidedinvestorsamisleadingbasisforbelievingthatCrowcouldbetrustedtomanagethefundstheyinvestedinAurum.
ThedisclosuresinthePPMhighlightedCrow'sbusinesssuccesseswhileomittinganyreferencetohisdisciplinaryhistoryorthenamesofthecompaniesinvolved—WilshireTechnologies,DuncanCapitalGroupLLC,andDuncanCapitalLLC.
TwoAuruminvestors,HowardPaulHollanderandSimonStern,testifiedthattheprofessionalbackgroundsofAurum'smanagers,includingCrow,wereimportanttotheirinvestmentdecisions.
WeconcludethatareasonableinvestorwouldhavewantedtoknowaboutCrow'sdisciplinaryhistory.
28ClugactedwithscienterbecauseheadmittedlywasawareofCrow'shistorybeforetheylaunchedAurumin2011.
ClugtestifiedthathelearnedaboutCrow'sdisciplinaryhistorywhentheyworkedtogetherbetween2005and2008atDCAssociates,amerchantbankthatCrowfoundedandranasCEO,andthatClugworkedforasCFOandCOO.
ClugtestifiedthatCrowresignedasCEOin2008whenhewassanctionedforviolatingthesecuritieslaws.
292.
Clug'schallengestomaterialityandscienterareunpersuasive.
ClugchallengesmaterialityandscienterbyclaimingthatsubsequentPPMsincludedadverseinformationaboutCrow'spastafterClugbecame"consciousoftheomission"intheAugust2011PPM.
Hefurtherchallengesmaterialitybyclaimingthatnoinvestors"complained"and"manymadefurtherinvestments"afterCrow'sdisciplinaryhistorywas"communicatedtoinvestors.
"ButtherecorddoesnotshowthatAurumevermadeadequatedisclosuretoinvestors,insubsequentPPMsorotherwise,aboutCrow'sbackground.
SubsequentdisclosuresintheDecember2011,September2012,andJanuary2013PPMsdidnotcorrecttheearlieromissions.
30AllthreePPMscontainedalinktoanonline"dataroom,"26Thedistrictcourtstatedthat"[t]hereisnoassurancethatCrowcanbetrustedinthefuturetocomplywithsecuritieslaws"because,amongotherthings,he"perjuredhimself"incourtand"tookstepstocoverup"his"egregious"conductatDuncanCapitalLLC.
27MichaelW.
Crow,ExchangeActReleaseNo.
59982,2009WL2779121(May27,2009).
28SeeSECv.
MerchantCapital,LLC,483F.
3d747,770-71(11thCir.
2007)(findingitmateriallymisleadingtoomitfrommanager'sbusinessexperience"toutedin"offeringmaterialsthatmanagerhadapersonalbankruptcythatresultedfromthefailureofarelatedbusiness);SECv.
Weintraub,No.
11-21549-CIV,2011WL6935280,at*4-5(S.
D.
Fla.
Dec.
30,2011)(findingdefendant'stenderofferdocumentsmateriallymisleadingforomittinghiscriminalrecord,officeranddirectorbar,personalbankruptcy,andunpaidCommissionjudgment).
29SeeSECv.
PirateInv'rLLC,580F.
3d233,243(4thCir.
2009)(statingthat"thefactthatadefendantpublishesstatementswheninpossessionoffactssuggestingthatthestatementsarefalseis'classicevidenceofscienter'")(citationomitted).
30Cf.
N.
J.
CarpentersHealthFundv.
RoyalBankofScot.
Grp.
,PLC,709F.
3d109,127(2dCir.
2013)(recognizing"seriouslimitationsonacorporation'sabilitytochargeits8whichtheDecember2011PPMstatedincludeda"discussionofanypastlitigation"involvingAurum'smanagers,andwhichtheSeptember2012andJanuary2013PPMsstatedincluded"details"aboutCrow's"litigat[ion]withtheSEC"in2008.
ButtherecorddoesnotshowwhetherAurummadeafulldisclosureinthedataroom.
31AndthedisclosuresinthePPMswerevagueandincomplete.
Indeed,theDecember2011PPMprovidednoadditionalinformation,andtheSeptember2012andJanuary2013PPMsdidnotmentionCrow'sdisciplinaryhistoryfrom1998.
AsforCrow'sdisciplinaryhistoryfrom2008,theSeptember2012andJanuary2013PPMsstatedonlythatCrow"wasorderedtopayafineandrestitution"becauseofafindingthat"aninvestment,ownershipandrelationshipwithabrokerdealer.
.
.
requiredalicense.
"ThePPMsomittedthecease-and-desistorderandindustrybarimposedonCrowandthathecommittedmultipleviolationsofExchangeActSection15throughtwobroker-dealers.
NordowefindthatthesesubsequentincompletedisclosuresnegatescienterbecauseClugwasnot"consciousoftheomission"intheAugust2011PPM.
ClugandCrowdraftedthePPM,andClugknewCrow'sdisciplinaryhistoryatthetime.
Clug'somissionofCrow'sdisciplinaryhistoryfromtheAugust2011PPMwas,attheleast,suchanextremedeparturefromthestandardsofordinarycarethatClugmusthaveknownofthedangerofmisleadinginvestors.
32Clugclaimsfurtherthathedidnotactwithscienterbecausehe"consultedwithandreliedoncounselthroughouttheproductionofallthesedocuments.
"Anadvice-of-counseldefenserequiresthatClugprovehe"madecompletedisclosuretocounsel,soughtadviceastothelegalityofhisconduct,receivedadvicethathisconductwaslegal,andreliedonthatadviceingoodfaith.
"33TherecordcontainsnoevidencethatClug(oranyoneelseatAurum)soughtorreceivedlegaladviceregardingtheadequacyofthePPM'sdisclosuresorthatanylawyersconsultedwereevenawareofCrow'sdisciplinaryhistory.
B.
ClugmademisrepresentationsconcerningaprojectinBrazil.
1.
ClugrepresentedfalselythatAurumsatisfiedtheconditionsintheAugust2011PPMnecessaryforittoretaininvestorfundsandtheconditionsinconvertiblenotesnecessaryfornoteholderstoconvertintoshares.
InadditiontotheofferingofClassASharesthroughtheAugust2011PPM,Aurumraisedfundsbysellingconvertiblenotes(the"AurumNotes")throughatermsheetdatedMaystockholderswithknowledgeofinformationomittedfromadocumentsuchasa.
.
.
prospectusonthebasisthattheinformationispublicknowledgeandotherwiseavailabletothem'")(omissioninoriginal)(quotingKronfeldv.
TransWorldAirlines,Inc.
,832F.
2d726,736(2dCir.
1987)).
31TherecordincludesanemailfromClugtoCrowdatedSeptember14,2012,statingthatsomeonehaddownloadedfromthedataroomadocumententitled"PressReleaseSECPrevailsinTrialAgainstMichaelW.
CrowforUnlawfullyControllingRegisteredBroker-Dealer.
"32Seesupranote20andaccompanyingtext(describingthestandardforrecklessness).
33Markowskiv.
SEC,34F.
3d99,104-05(2dCir.
1994).
92011(the"AurumTermSheet").
BothofferingsincludedconditionsrelatedtoatractoflandinBrazil,knownastheBatalhaproperty,whichAurumpurportedlyplannedtodevelopasagoldmineinajointventurewithaBrazilianentity,ArthomParticipacoes,Ltda.
("Arthom").
TheAugust2011PPMstatedthatAurumwould"promptly"refundallmoneyraisedthroughtheofferingifitdidnot:(i)raise$1millionthroughtheoffering;(ii)receiveageologistreportattestingtothegoldcontentofBatalha;and(iii)receivealegalopinionstatingthatthejointventurehadirrevocablelandandminingrightstoBatalhaandallnecessarylicenses.
TheAurumNotesandAurumTermSheetstatedthatnoteholderswouldreceive"8%perannum"attheendofanine-monthtermbutcouldconverttheprincipalandinterestintoClassAShares(ata50%discounttotheshareprice)eitheratmaturityorearlieruponthejointventure's"acquisition[of].
.
.
land.
.
.
andminingrightsforthe[g]oldprojectknownasBatalha"—the"conversionevent.
"AurumdidnotsatisfyanyofthePPM'sthreeclosingconditionsdiscussedaboveortheconditionsfortheAurumNotes'conversionevent.
34Nonetheless,ClugandCrowclaimedfalselyinaJanuary2012lettertoinvestorswhoreceivedthePPMthatAurumhad"satisfiedtheconditionsofclosing.
"Theyrequestedthatinvestorssignthelettertoacknowledgethey"wish[ed]tocontinue"theirinvestmentsunderanewPPMdatedDecember2011and"receive[their]ClassA"Shares.
AllsuchinvestorsagreedtocontinuetheirinvestmentandreceiveClassAShares.
Aurum,inclearviolationoftheAugust2011PPM,retainedallofthe$115,000inproceedsthatinvestorshadconditionallycontributed.
ClugconcedesthatAurumhadnotsatisfiedtheconditionsofclosing.
35Nonetheless,hecontendsthatothercommunicationsAurummadecorrectedthestatementthatAurum"satisfiedthe[PPM's]conditionsofclosing.
"ButnocommunicationsintherecordcorrectedtheJanuary2012letter'sfalseclaimthattheclosingconditionshadbeenmet.
Similarly,ClugandCrowclaimedfalselyinasecondletterdatedJanuary2012—thisonetothenoteholders—thatAurumhad"[c]losedonacquiringthe50%interestinBatalha.
"Allninenoteholders,whohadinvestedatotalof$250,000,subsequentlyconvertedtoClassASharesratherthanreceivetheprincipalandinteresttowhichtheywereentitled.
Fivenoteholdersconvertedbeforetheirnotesmatured.
ClugarguesthatthestatementthatAurum"[c]losedonacquiringthe50%interestinBatalha"wastruebecauseAurumbecamea50%ownerofBatalhawhenitsignedajointventureagreementwithArthominDecember2011.
AlthoughAurumsometimesusedtheterm"Batalha"torefertothejointventure,thelettermakesclearthatinitsstatementaboutacquiring34ClugcontendsthattheALJerredinconcludingthatnoteholdersdidnothavetheoptiontoconvertpriortomaturitywithouttheconversioneventhappening.
ButtheAurumNotesstatedthattheywere"convertibleattheelectionofthe[h]olderattheearlieroftheCloseor"thematuritydate,and"[t]he'Close'isdefinedasthefinancingandclosingoftheacquisitiononthelandrightsandminingrightsforthe[g]oldprojectknownasBatalha.
"35Duringoralargument,Clugcontendedthattheonlyclosingconditionheconcedeswasnotsatisfiedwasraising$1millionthroughtheoffering.
Butatthehearing,ClugtestifiedthatAurumdidnotobtainthegeologistreportorthelegalopinionrequiredbytheAugust2011PPM.
10a50%interestAurumwasreferringtotheland.
TheletterstatedthatAurumcompletedsuccessfullyits"acqui[sitionof]aninterestinBatalha,a3,742hectarepropertyinnorthernBrazilwithourpartnersthere"—astatementClugknewwasuntrue.
ClugalsoassertsthattheAurumTermSheet"wasnotusedfor"sellingthenotesand,inanycase,statedthat"itwasonly'proposed,'"thatitwas"notanofferto[p]urchase[s]ecurities,"andthat"anysuchoffer[would]onlybemadebythesubscriptionagreementandassociatedmemorandum.
"ButLanatestifiedthathepresentedtheTermSheettoinvestors,andinanycasetherelevanceofClug'sargumentsisnotclear.
Clugdoesnot,andcouldnot,disputethatthemisrepresentationintheJanuary2012lettertonoteholdersregardingthecompletionoftheconversioneventwasinconnectionwiththepurchaseorsaleofsecurities.
362.
Clug'smisrepresentationsintheJanuary2012lettersthatAurumhadsatisfiedtheconditionsnecessaryforittoretaininvestorfundsandfornoteholderstoconverttoshareswerematerial.
Thesemisrepresentations,whichallowedAurumtoretainthefundsraisedthroughthePPMandtheAurumNotes,werematerial.
AreasonableinvestorwouldconsideritimportantthatAurumhadnotraisedthefundsnecessarytocompletetheofferingunderthePPM.
37Areasonableinvestorwouldalsoconsideritimportantthat,fortheonlypropertynamedintheofferings,Aurumhadnotobtainedageologistreportoralegalopinionstatingthatithadobtainedlandandminingrightsornecessarylicenses.
38ClugcontendsthatthestatementthatAurum"satisfiedtheconditionsofclosing"wasnotmaterialbecauseinvestors"understoodthattheirinvestmentwasveryrisky,"andnonefiledcomplaintsortestifiedthattheyreliedonthemisstatements"tomakeaninvestment.
"Althoughinvestorsmayhaveunderstoodthattheminingventurewasrisky,areasonableinvestorwouldhaveconsidereditimportantthatClugmisrepresentedtheextentofthoserisksbyclaimingfalselythattheclosingconditionshadbeenmetandtheconversioneventhadoccurred.
3936SECv.
Zandford,535U.
S.
813,819,825(2002)(holdingthatthe"inconnectionwith"requirementissatisfiedifthe"fraudulentscheme"andsecuritiestransactioncoincide).
37See,e.
g.
,Svalbergv.
SEC,876F.
2d181,183-84(D.
C.
Cir.
1989)(findingthatclosingofall-or-nothingstockofferingwithouthavingsoldtherequiredminimumstocktothepublicwasmaterialbecause"shareholdersclearlywouldconsiderit'important'thatprincipalswereactingontheirowntoclosewhatappearedtobeaweakunderwriting").
38See,e.
g.
,SECv.
ArcturusCorp.
,171F.
Supp.
3d512,536(N.
D.
Tex.
2016)(findingthatreasonableinvestors"wouldfinditimportantinmakingtheirinvestmentdecisiontolearnthatthe[defendants']workinginterestinthe.
.
.
wellwas,attheveryleast,'indispute',becausethiswouldcallintoquestionanyrighttoparticipateintestinganddrillingofthewell—theexactbusinesspurposeoftheirpotentialinvestment"),rev'donothergrounds,912F.
3d786(5thCir.
2019);SECv.
AssetMgmt.
Corp.
,No.
IP78-34-C,1979WL1275,at*3-6,14(S.
D.
Ind.
Dec.
10,1979)(findingthatmisrepresentationsthatnewcompanyofferingsecuritieshadcoalpropertyleasesandminingrightswerematerial),aff'd,694F.
2d130(7thCir.
1982).
39SeeRodneyv.
KPMGPeatMarwick,143F.
3d1140,1145(8thCir.
1998)("ReasonableinvestorsreadingtheFund'sprospectusesandKPMG'sreportswouldconcludethat,whatever11InvestorswouldhavewantedtoknowthatAurumhadnotmetthenecessaryconditions—ithadnotraised$1million,ithadnotreceivedageologistreportattestingtothegoldcontentofBatalha,andithadnotreceivedalegalopinionstatingthatthejointventurehadirrevocablelandandminingrightstoBatalhaandallnecessarylicenses.
Asforproofofreliance,thatisnotanelementofasecuritiesfraudactionbytheCommission.
403.
Clugmadethemisrepresentationsaboutthesecuritiesofferingswithscienter.
WefindfurtherthatClugmadethemisrepresentationswithscienter.
Heconcededbelowthatheknew,atthetimehemadethefalsestatementsinthetwoJanuary2012letters,thatAurumhadnotsatisfiedthePPM'sclosingconditions.
41Contemporaneousemailsestablishthatheknew,bythetimehesentthetwolettersinJanuary2012,thattheAurumNotes'conversioneventhadnotyetoccurredbecauseArthom'sCEOtoldClugandCrowinanemailonDecember14,2011thathehadnotyetobtainedthelandandminingrightsforBatalha.
ClugcontendsthatthestatementthatAurum"satisfiedtheconditionsofclosing"wasnegligentbutnotrecklessbecause,duetotheillnessanddeathofaclosefamilymember,he"didnotcatchthatapparentlyerroneousonelineinthatonedocument,whichwaspreparedwithcounselandallmanagers.
"Butupdatinginvestorsabouttheclosingconditionswastheprimarypurposeofthetwo-pageletter,whichClugandCrowdraftedandsigned.
Andbymisleadinginvestorsaboutthesatisfactionofthoseconditions,Aurumwasabletoretaininvestorfunds.
Asdiscussedabove,Clugknewthestatementabouttheclosingconditionswasfalsewhenhesenttheletterandmusthaveknownthatstatingtheclosingconditionshadbeensatisfiedwouldmisleadinvestors.
Asforrelianceoncounsel,ClugandCrowtestifiedthatanattorneynamedBobBrantldraftedthelineaboutAurumhavingsatisfiedtheclosingconditions.
ButClugandriskstheywereacceptingbyinvestinginamutualfundthattradedinderivativesandengagedinforwardcommitments,theywerenotencounteringtheenhancedriskscreatedbyviolationsoftheFund'sownbasicinvestmentpolicies.
");FundamentalPortfolioAdvisors,Inc.
,ExchangeActReleaseNo.
48177,2003WL21658248,at*12(July15,2003)(findingthatafund'sfailuretodisclosechangestoitsinvestmentstrategythatincreaseditsriskwasmaterial),petitiondenied,167F.
App'x836(2dCir.
2006).
40See,e.
g.
,SECv.
Teo,746F.
3d90,102(3dCir.
2014)(citingSECv.
MorganKeegan&Co.
,Inc.
,678F.
3d1233,1244(11thCir.
2012)(citingSECv.
Blavin,760F.
2d706,711(6thCir.
1985);SECv.
Wolfson,539F.
3d1249,1256(10thCir.
2008);seealsoS.
W.
Hatfield,CPA,ExchangeActReleaseNo.
73763,2014WL6850921,at*7(Dec.
5,2014)(rejectingargumentthatinvestortestimonywasnecessarytoestablishmaterialitybecause"thereactionofindividualinvestorsisnotdeterminativeofmateriality,sincethestandardisobjective,notsubjective").
41SeeSvalberg,876F2dat184(affirmingCommissionfindingthatrespondentsactedwithscienterbecause"theycertainlyknew.
.
.
thattheywereclosingthe.
.
.
offeringalthoughtherequiredminimumhadnotbeensoldtothepublic")(internalquotationomitted).
12CrowputonnoevidenceortestimonytosupporttheirassertionthatBrantlprovidedadviceconcerningtheletterorwasevenawareofwhethertheclosingconditionshadnotbeenmet.
42C.
ClugmisrepresentedthegeologicalresultsforaPeruvianproperty.
1.
ClugmisrepresentedthegoldestimatesattheMolleHuacansite.
In2012,AurumsecuredapermittomineatractoflandinPeruknownastheMolleHuacanproperty.
EliasGarate,anin-housegeologist,conductedtestsofMolleHuacan'sgoldpotentialbetweenMarch2012andFebruary2013andreportedhisfindingstoClugandCrow.
FromMay2012toJuly2013,AurumtoutedMolleHuacan'sgoldpotentialasreflectedbyGarate'sfindingsincommunicationswithinvestors.
Specifically,AurumsentinvestorsafirstquarterupdateinMay2012thatClugandCrowdraftedandsignedestimatingthatMolleHuacanhad"atleast500,000ouncesofgoldthatcanbeminednearthesurface.
"Aurumdescribedthatgoldas"worth$42.
5million"and,iffullymined,worth"$800million.
"Aurumaddedthatitis"intheprocessofpreparingthesiteforproduction.
.
.
bythirdquarter2012,"andadvisedinvestorsthat"nowisthetime"to"increasetheirstake"inAurum.
InasecondquarterupdatesentinJuly2012thatClugandCrowdraftedandsigned,andPPMsissuedinSeptember2012andJanuary2013thatClugandCrowdrafted,Aurumclaimedthatits"seniorgeologist,EliasGarate,isbecomingincreasinglyconvincedthatMolleHuacanisamajorgoldconcessionandmayhavemorethan1millionouncesofgold.
"ThesecondquarterupdateandSeptember2012PPMreiteratedthatAurum's"goalistobeabletoinitiateminingoftheorefromMolleHuacanbytheendof"thethirdquarterof2012.
ButinOctober2012,StevenPark,anindependentgeologist,issuedareportthatconflictedwithGarate'sfindings.
ParkconcludedthatMolleHuacanwas"notreadyforproduction"consideringthe"lowaverage[gold]gradeandsmalltonnagepotential"fromsamples,andthatMolleHuacan"shouldbeconsideredasanexplorationtargetthatwillrequiresignificantexpenditureinfieldworkinordertodiscoverandlocatesufficientresourcestomovetotheproductionstage.
"ThereportestimatedthatMolleHuacanhadanaveragegradeof2.
97gramsofgoldpertonwithin75,600metrictonsofmineral.
Fromthisdata,AllanMoran,theDivision'sgeologyexpert,calculatedthatPark'sreportestimated7,219ouncesofgoldpotentialatMolleHuacan—substantiallylowerthantheestimated500,000ouncescontainedintheMay2012update.
AurumwithheldPark'sfindingsfrominvestorsbecause,asClugexplainedinanemailtoCrow,"anunsophisticatedviewer"mightviewthereport"asrathernegative.
"DespitePark'sassessment,AurumcontinuedtoincreaseitsgoldestimateandwithholdPark'sfindingsfrominvestors.
InNovember2012,AurumsentinvestorsathirdquarterupdatethatClugandCrowdraftedandsignedstatingthatitestimatedMolleHuacanhad1.
254millionouncesofgold.
Itprojectedthefirstdayofoperationalmining"tobeNovember25,[2012,]withprocessingandcashflowstartingbyJanuary2013,"and"2013netcashflow"ofmorethan$9million.
Aurumaddedthatitneeded"toraiseanadditional$500,000"to"putMolleHuacanintoproduction,"thatitwas"firstofferingthisto[its]existing[shareholders]"given"theexcellent42Seesupranote33andaccompanyingtext(discussingtheelementsofanadvice-of-counseldefense).
13upsideandvaluationnowper[ClassAShare],"andthatitwould"seekthefundsfromotherinvestors"ifshareholdersdidnot"increase[their]stake[s].
.
.
byNovember30,2012.
"AtleasttwoAurumshareholdersmadeadditionalinvestmentsasaresult.
OnNovember26,2012,MitchellMelnickemailedClugtoinvestanadditional$50,000"[i]nresponsetothe.
.
.
newoffering"mentionedintheletter.
MelnicktestifiedthathediscussedtheletterwithArthurWeinshank,hisbusinesspartner,whotheninvestedanadditional$25,000.
InFebruary2013,AurumsentinvestorsafourthquarterupdatethatClugandCrowdraftedandsignedthatagainincreasedMolleHuacan'sgoldestimate.
TheupdatestatedthatAurum'sprevious1.
254millionounceestimatewasnow"significantlyhigher,perhapsasmuchasdouble,"becauseof"excellent"testresultsandthatAurumhadhiredanindependentgeologistto"confirm[its]goldreserves.
"Claimingthatproductionattheminewassettobegin"nolaterthanMarch15,2013,"AurumencouragedinvestorstomakeadditionalinvestmentsbyFebruary28,2013.
AurummadesimilarclaimsinabusinessplanthatClugandCrowdraftedandthataccompaniedthefourthquarterupdate,whichestimatedthatMolleHuacanhad"goldmineralresourcesofaminimum2,842,000ounces.
"TheestimatesintheFebruary2013updateandbusinessplanwerebasedonaninternalreportGaratewroteinJanuary2013statingthatMolleHuacanhadgoldpotentialof2,842,000ounces.
ThebusinessplanreiteratedthatAurumhadhiredanindependentgeologist"toconfirm"thegoldestimate.
AurummisrepresentedthereportthatPeterDaubeny,theindependentgeologisthiredto"confirm"MolleHuacan'sestimatedgoldresources,wrote.
InMay2013,DaubenyestimatedthatMolleHuacanhad195,000ouncesofgoldpotentialbutdid"notcontainanyknow[n]mineralresourcesorreserves.
"Daubeny'sreportalsoobservedthatDaubeny'ssamplesreturnedlowergoldgradesthanthosethatAurum'spersonneltookatthesamelocations,andpositedthatAurum'ssamplesmayhavebeencollectedorhandledimproperly.
CrowacknowledgedatthehearingthatDaubeny'sreportmadeit"prettyclear"that"Garatewasnotusinggoodsamplingpractices.
"AswithPark'searlierreport,AurumwithheldDaubeny'sfindingsfrominvestors.
Instead,AurumassuredinvestorsinaJuly2013firstquarterupdatethatClugandCrowdraftedandsignedthatanindependentgeologisthad"confirm[ed][MolleHuacan]asaprojectofmerit.
"Thiswasmisleadingbecause,althoughDaubenyconsideredMolleHuacantohave"meritforfurtherexploration,"hehadnotconfirmedGarate'sestimates.
Theupdatenonethelessassuredinvestorsthat,afterthefirstyearofproduction,Aurum"expect[ed]tohavemoreresourcesandreservesestablished.
"TheJuly2013updatealsostatedthatAurum'sdataroomcontainedacopyofDaubeny'sreport,althoughtherecorddoesnotestablishwhetherthatwasthecase.
Inanyevent,theupdatewassupposedtoinforminvestorsratherthanmakethemsearchforthetruth.
43Totheextentthedataroomcontainedcurativedisclosures,wefindthatitwasnotconveyedtoinvestors"withadegreeofintensityandcredibilitysufficienttocounter-balanceeffectively"themisrepresentationsandomissionsintheupdate.
44Inanycase,barriers43SECv.
ChurchExtensionoftheChurchofGod,Inc.
,No.
1:02CV1118-DFH-VSS,2005WL3370568,at*8(S.
D.
Ind.
Dec.
12,2005)(statingthatofferingdocuments"weresupposed—wererequired—toinformnotebuyers,nottochallengetheircriticalwitsinahuntforcontradictions")(citingVa.
Bankshares,Inc.
v.
Sandberg,501U.
S.
1083(1991)).
44SECv.
Mudd,885F.
Supp.
2d654,667(S.
D.
N.
Y.
2012)(citationsomitted).
14existedtoenteringthedataroom.
Inanemailtoaninvestor'srepresentative,Clugstatedthatthelinkssometimesdid"notworkwellautomatically.
"Andpasswordsforthelinkschangedperiodically.
Threeinvestorstestifiedthattheydidnotrecallaccessingthedataroom,andaninvestor'srepresentativeaccesseditonlyafteremailingClugthatthelinkwas"broken.
"InDecember2013,mineralproductionbeganandendedatMolleHuacan.
Aurumproducedasinglebarthatitsoldfor$4,633.
Clugtestifiedthatthebarwas"probably80"or"90%copper"and"10%gold,"whichwasthe"reverse"ofwhatitshouldhavebeen.
InJanuary2014,CrowemailedaninvestorthatMolleHuacanwasa"[m]arginalmine"withgoldproduction"waybelowwhat[the]independentgeologistand[Aurum's]people"hadestimatedandthatAurum'snewplanwas"todomerchantbanking.
"Asdiscussedabove,Aurumceasedoperationsin2014andinvestorslosttheentiretyoftheirinvestments—atotalof$3,995,775.
2.
Themisrepresentationsaboutthegoldestimateswerematerial.
Aurum'sfailuretodisclosethattwoindependentgeologistsestimatedlessgoldpotentialthanitsin-housegeologist,whiletoutingitsin-housegeologist'sestimates,wasmaterial.
Areasonableinvestorwouldhaveconsideredtheindependentgeologists'reportsimportant.
45ClugcontendsthatPark'sreportwasnotmaterialbecauseAurum"didalotmoreinvestingandtestingon"MolleHuacaninthetimebetweenwhenParktook44samplesthereinApril2012andwhenheissuedhisreportinOctober2012,andbecausemostofPark'ssamples"containederrors.
"AccordingtoClug,Park'sreportwas"outdated"andasaresultmighthaveconfusedinvestorsby"convey[ing]amistakenstatusofthemine.
"ButClughasnotshownthattheapproximately150samplesthatGaratetookatMolleHuacan—presumablytheadditionaltestinghereferences—invalidatedPark's44samples.
AndCrowtestifiedthatitwasGaratewhoAurumknew"wasnotusinggoodsamplingpractices.
"AsforanyerrorsinPark'ssamples,Parkacknowledgedthatlocationdatafrommostofhissampleshadbeenlostbuthedeterminedthathewasstillabletouseotherdatafromhissamples(suchasgoldgrade)toreachtheconclusionsinhisreport.
Clugprovidesnoreasonwhythiswasimproper.
ClugalsocontendsthattheDivisiondidnotestablishmaterialitybecauseitdidnotaskthetestifyinginvestorswhetherPark'sreportwouldhavebeenimportanttothemandthatinvestorssuggestedtheopposite.
46ButnoinvestorstestifiedthatPark'sreportwasunimportant45SECv.
Blavin,557F.
Supp.
1304,1313(E.
D.
Mich.
1983)(findingthattherewas"nodoubtthat"misstatementsaboutanoilandgasexplorationcompany'sprospects,includingitsdrillingactivitiesandanticipatedproduction,werematerial),aff'd,760F.
2d706(6thCir.
1985);seealsoSECv.
Murphy,626F.
2d633,653(9thCir.
1980)("Surelythematerialityofinformationrelatingtofinancialcondition,solvencyandprofitabilityisnotsubjecttoseriouschallenge.
Aprospectivepurchaserofalimitedpartnershipinterestwouldhaveconsidereditquitesignificant.
.
.
thatthepromisedtaxsheltermightprovemoreillusorythanreal.
").
46ClugalsocontendsthattheDivisiondidnotestablishmaterialitybecauseit"didnotcallanexperttotestifyaboutwhethermentioningthe[Park]reportinthePPMwouldhavebeenimportanttoinvestors.
"Butmaterialityneednotbebasedonexperttestimony.
See,e.
g.
,SECv.
15totheirinvestmentdecisions.
Indeed,asdiscussedabove,oneinvestortestifiedthatheandhisbusinesspartnerincreasedtheirstakesinAurumduetotheNovember2012update—distributedamonthafterClugandCrowdecidednottodisclosetheParkreport—thatestimated1.
254millionouncesofgoldatMolleHuacanandofferednewsharesfirsttoexistingshareholders"[g]iventheexcellentupsideandvaluationnowper[ClassAShare].
"Inanyevent,theDivisionneednotestablishmaterialitythroughinvestortestimony.
47Normustitshow"thatdisclosureoftheomittedfactwouldhavecausedthereasonableinvestortochange"hisbehavior.
483.
Clugmadethemisrepresentationsaboutthegoldestimateswithscienter.
WefindthatClugactedwithscienterbecauseheknewormusthaveknownthatinvestorswouldbemisledbytoutingGarate'sestimateswhilefailingtodisclosePark'sandDaubeny'sreports.
Indeed,Clug'sownemailtoCrowadvisedwithholdingPark'sreportbecausehefearedinvestorsmightviewthereport"asrathernegative.
"Similarly,ClugmusthaveknownthatitwasmisleadingtodescribeDaubeny'sreportas"confirm[ing][MolleHuacan]asaprojectofmerit"withoutdisclosingthereport'soverallnegativeassessmentoftheproject.
49IV.
ThePanAmViolationsWefindthatClugandPanAmviolatedtheExchangeActbyfailingtodiscloseCrow'sroleatPanAmandarrangementswithPanAm.
Specifically,PanAmfailedtodiscloseinitsperiodicreportsthatCrowwasadefactoexecutiveofficerofPanAmandthathehadadisciplinaryhistoryandpendingbankruptcyproceeding.
Asaresult,PanAmviolatedExchangeActSection10(b)andRule10b-5(b)thereunderandExchangeActSection13(a)andRules12b-20,13a-1,and13a-13thereunder.
WefindthatClugaidedandabettedandcausedtheseviolationsandthatClugviolatedExchangeActRule13a-14(a)bycertifyingfilingsthatfailedtodiscloseCrow'sroleatPanAm.
WealsofindthatPanAmviolated,andClugaidedandabettedandcausedPanAm'sviolationsof,ExchangeActSection10(b)andRule10b-5(b)thereunderbystatinginPanAm'speriodicreportsthatPanAmandCrowhadagreedtoextendthepaymenttermofaconvertiblenoteissuedbyPanAmtoCrowbutomittingthematerialfactthatCrowhadalreadyconvertedthemajorityofthenoteintoPanAmshares.
A.
ClugandCrowformedPanAmasapubliccompanywithperiodicreportingobligations.
In2009,shortlyafterbeingsanctionedforaidingandabettingabroker-dealer'sfailuretodiscloseCrow'sstatusasadefactoofficeranddirectorofthefirm,Crow'smerchantbank,DCAssociates,collapsed.
Crow,whoafederaldistrictcourthadbarredfromservingasanofficerorJensen,No.
CV11-5316-R,2013WL12129377,at*4(C.
D.
Cal.
Mar.
13,2013)(findingexperttestimony"notrequiredtoshowthatthestockpricedrop[wa]sprobativeofmateriality").
47Hatfield,2014WL6850921,at*7.
48TSCIndus.
,Inc.
,426U.
S.
at449.
49Inlightofourfindings,weneednotdeterminewhetherClugalsodefraudedinvestorsbymakingoverlyoptimisticprojectionsaboutthepotentialreturnsontheirinvestments.
16directorofapubliccompany,soughttoreturntobusinessthroughanarrangementwithhisformerDCAssociatescolleagueClug.
Ina2010memorandum"propos[ing]togetusstartedagain,"Crowexplainedthat,inanewventure,Clugwouldserveinthepositionof"ManagingDirectorandPartner"with"aseatontheBoardofDirectors"andbethe"CEO.
.
.
intheshell(s).
"Despitethesetitles,Clugwould"[f]unction.
.
.
as[Crow's]righthandmaninmostmatterswithemphasisonmakingsuredealsaretrackingandbeingfulfilled.
"ThememorandumstatedthatCrowwould"concentratemoreonsalesanddeals.
"Aroundthistime,ClugandCrowformedPanAmbyrenamingashellcompanythattheycontrolledandfilingaForm10toregisteraclassofitscommonstockunderExchangeActSection12(g).
EmailsbetweenClugandCrowshowthattheysplitmosttasksforlaunchingPanAm,includingpreparingitsForm10,financialmodel,andbusinessplan—theacquisitionanddevelopmentoffarmlandinLatinAmerica.
Crowprovidedinitialfundingof$25,000toPanAminexchangeforaconvertiblenote,whichClugsignedonbehalfofthecompany.
1.
PanAm'speriodicreportingobligationsrequiredittodiscloseitsexecutiveofficers.
PanAmfileditsForm10onApril29,2011,whichbecameeffectivesixtydayslater,andremainedeffectiveuntilPanAmfiledaForm15onMay1,2013,terminatingitsregistrationofitsclassofcommonstockunderExchangeActSection12(g).
Duringthatperiod,PanAmhadreportingobligationsunderExchangeActSection13(a).
ExchangeActSection13(a)andRules13a-1and13a-13thereunderrequiredissuersofaclassofcommonstockregisteredwiththeCommissionunderExchangeActSection12tofilecompleteandaccurateannualandquarterlyreportsonForms10-Kand10-QwiththeCommission.
50Form10-Krequiredthatissuersidentifytheir"executiveofficers"anddescribetheirexecutiveofficers'businessexperienceandpriorlegalproceedingsinvolvingbankruptcyorsecuritieslawviolations.
51ExchangeActRule3b-7defines"executiveofficer"toincludearegistrant's"president,anyvicepresident.
.
.
inchargeofaprincipalbusinessunit,divisionorfunction(suchassales,administrationorfinance),anyotherofficerwhoperformsapolicymakingfunctionoranyotherpersonwhoperformssimilarpolicymakingfunctionsfortheregistrant.
"52Policymakingfunctions"includebusinessandlegaldecisions.
"535015U.
S.
C.
§78m(a)(requiringthatpubliccompanies"filewiththeCommission.
.
.
suchannualreports.
.
.
andsuchquarterlyreports.
.
.
astheCommissionmayprescribe");17C.
F.
R.
§240.
13a-1(requiringthatpubliccompanies"fileanannualreportontheappropriateformauthorizedorprescribedtherefor");17C.
F.
R.
§240.
13a-13(requiringthatpubliccompaniesthatfiletheirannualreportsonForm10-Kalsofilequarterlyreports"onForm10-Q").
5117C.
F.
R.
§§229.
10(a)(2),229.
401(b),(e),&(f);Form10-K,PartIII,Item10.
5217C.
F.
R.
§240.
3b-7.
53AdoptionofIntegratedDisclosureSys.
,SecuritiesActReleaseNo.
6383,1982WL90370,at*26&n.
68(Mar.
3,1982)(finalruleadoptingdefinitionof"executiveofficer").
17PanAmfiledanannualreportfor2011onForm10-KandfivequarterlyreportsonForm10-Q.
ExchangeActRule13a-14(a)requiredtheCEOsforissuerssuchasPanAmtocertifytheForms10-Kand10-Q.
54FortwooftheForms10-Q,ClugsignedExchangeActRule13a-14(a)certificationsstatingthat,"[b]asedon[his]knowledge,th[e]reportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesmade,notmisleading.
"TheForms10and10-KidentifiedPanAm'sexecutiveofficers—theCEOandCFO—anddescribedtheirprofessionalbackgrounds.
ClugwastheCEOuntil2012,atwhichtimehewasreplacedbyStevenRoss,whoservedonapart-timebasis.
TheCFOwasAngelLana(alsoAurum'sCFO).
TheForms10and10-KalsoidentifiedanddescribedtheprofessionalbackgroundofPanAm'sBoardofDirectors:Clug(whoservedasChairmanevenafterheresignedasCEO),Ross,HenryGewanter,andE.
ChadwickMooney.
TheForms10-QstatedthatPanAm'sCEOandCFOwerethecompany'sonlyemployees,andidentifiedthembyname.
FromJanuary2011toMarch2013,PanAmraised$400,000frominvestors.
Ofthatamount,$230,000wasraisedafterPanAm'sfirstperiodicfiling.
2.
CrowexercisedauthorityoverPanAm'sboard,management,andfinancing.
NoneofPanAm'speriodicreportsmentionedCrowdespitethefactthatheperformedpolicymakingfunctionsatPanAm.
Forexample,inOctober2010,CrowrecruitedandselectedMooneyforPanAm'sBoardofDirectors.
Contemporaneousemailsshowthat,whenCrowinformedClugthatMooneyhad"agreedtojointheBoard,"ClughadnotmetorspokenwithMooney.
TheseemailsalsoshowthatMooneyunderstoodhewas"inbusinesswith[Crow].
"CrowalsoplayedaleadingroleinhiringClugandthenRossasCEO.
WhenClugandCrowlaunchedPanAm,CrowprovidedcommentsforClug'semploymentagreementasCEO.
CrowrecruitedRoss,alongtimebusinessassociate,anddraftedRoss'semploymentagreement.
Duringthehiringprocess,RossemailedCrowaskingifhewas"stillplanningongetting[him]started[asCEO]thisweek"RosslookedtoCrowforguidanceafterhebecameCEO,notinginanemailshortlyaftertakingthepositionthathe"stillneed[ed]supportfrom"CrowandClug.
Crow'srelationshipwithLana,PanAm'sCFO,furtherevincedhisleadingroleatPanAm.
FromMay2012toAugust2012,CrowandClugrepeatedlydemandedthatLanaupdatethemonthestatusoftheForms10-Kand10-Q,andrepeatedlythreatenedtofirehim.
Forexample,onJune6,2012,CrowemailedLana(copyingClug)tocomplainthatLanawasnottakingCrow'scalls,whichCrowdescribedas"justnotacceptable.
"CrowwarnedLanathat"[i]fyoucan[']tgettheworkfinished.
.
.
itisreallybestifwemovetheworkandlimitthe5417C.
F.
R.
§240.
13a-14(a);seealso15U.
S.
C.
§7241(a)(2)(requiringtheRule13a-14(a)certificationtostatethat,"basedontheofficer'sknowledge,thereportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessaryinordertomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleading").
18damage,"andthat,"iftheworkisn[']tdonebeforeMonday[June11,2012,]weareoutoftimeandpatience.
"LanarespondedbyassuringCrowthathewould"definitelyfinish.
.
.
today.
"CrowalsomadesubstantialeffortstosecurefinancingforPanAm.
PanAmneededfundingbecause,asstatedinitsForm10-K,thecompanycouldnot"commence[itsfarmland]acquisitionprogram"withoutfinancing"ofatleast$3million.
"AndPanAmhadraisedonly$345,000atthetimeitfileditsForm10-K.
Toobtainadditionalfinancing,Crownegotiatedanagreementforamanagementservicesfirm,MickelsonCapitalConsulting,Inc.
,toassistPanAminobtaininga"workingcapitalinvestment"ofatleast$2millionand"investmentcapitalfromanofferingstructuredby"Mickelsonofatleast$50million.
Inreturn,PanAmagreedtoprovideMickelsona$6,000"monthlyretainer,"a$25,000"start-upcashfee,"andwarrants,plusdeferredcashandstocktobepaiduponPanAmobtainingtheminimumworkingandinvestmentcapital.
CrowandRoss(afterbecomingCEO)negotiatedtheagreementthroughout2011and2012.
OneemailfromMickelson'sCOOtoRossstatedthattheCOO"spokewith[Crow]andweareprettyclosetoagreement.
"Inanotheremail,RossaskedCrowifheshould"pushback"onthedeferredcashandstockterms,towhichCrowresponded:"Thinkyouneedtomakethedeal.
Onlywaytomoveforward.
"Rossthensignedtheagreementwiththosetermsunaltered.
ThisfinancingagreementwastheonlyagreementofitskindthatPanAmeverreached.
CrowalsoworkedonobtainingbusinesspartnersforPanAminLatinAmerica.
Forexample,heassistedCluginnegotiatinganagreementthatPanAmexecutedwithArielInvestmentManagement,anassetmanagementservicescompanyinUruguay.
ArielagreedtoassistPanAminacquiring,managing,andultimatelydisposingoffarmlandinvestments.
CrowalsoattemptedtosetupmeetingsinLatinAmericawithotherlocalcompanies.
InemailstotheCEOofonesuchcompanyconcerningsuchameeting,CrowreferredtoClug(copiedontheemails)ashis"businesspartner"andPanAmas"[o]urfarmlandinvestmentcompany.
"3.
CrowalsoexercisedhispoweroverPanAmbycausingittoallowhimtoconvertaconvertiblenoteintomorethan5%ofitsoutstandingshares.
InadditiontoexercisingauthorityoverPanAm'sboard,management,andfinancing,Croworchestratedascheme,whichClug,Ross,andLanaassisted,todefraudPanAmanditsinvestorssothathecouldraisemoneytopayoffhispersonaldebts.
OnAugust27,2012,CrowemailedClugthathelearnedhis"passportrenewal.
.
.
isbeingheldpendingold2008arrearsin[personalfinancialobligations]"andthathewas"stuckintheUSAuntil[he]get[s]thisresolved.
"Crowstatedthathe"need[ed]somemoneyfast,"thatoneoptionwouldbetosellaconvertiblenotePanAmhadissuedhimin2011,andthathewould"keepworkingonotherideas.
"Theconvertiblenote,whichPanAmhadissuedtoCrowinexchangefora$25,000loan,wasduetomatureinSeptember2012butcouldbeconvertedintosharesatanytime—inanamountuptobutnotinexcessof4.
99%ofPanAm'soutstandingcommonshares.
Clugtestifiedthatthepurposeofthe4.
99%capwastoensurethatCrowwouldnotviolatehisofficer-and-directorbarbyobtaining"enoughsharestoforceanythingthrough.
"OnAugust29,2012,CrowemailedClugandLanaa"structure"to"get[his]arrearshandled":Crowwouldconvertthenote"inpartintocommonsharesandselltheminadirectprivatedealtoaccreditedinvestor[s]"ata"priceof25cents.
"Clugwouldgive$.
05toLanafor"helpingwiththetrade"sothatCrowwould"net20cents.
"Crowacknowledgedthatthe19transactionwouldcompetedirectlywithPanAm—heemailedClugandLana:"IknowPanAmwantstoraisemoneytoobutatahigherprice.
"OnSeptember14,2012,CrowemailedLanaa"letterforinvestorstosign"inwhichtheinvestorswouldacknowledgebuyingPanAmshares"at25centspershare.
"Thatsameday,LanasentthelettertoMitchellMelnick(aclientofLana'ssoloCPApractice),whosignedandreturnedittoLanaforthepurchaseof100,000shares.
SimonSternandElisaRamirez,twootherLanaclients,alsopurchased100,000shareseach.
OnSeptember18,2012,ClugemailedCrowthatLanahadreceivedwiretransfersfromtheinvestorstotaling$75,000.
LanadidnottelltheinvestorsthatCrowwastheselleroftheshares,thattheirmoneywasgoingtoCrow,orthatheneededittopayarrears.
MelnickandSterntestifiedthattheythoughtthemoneywasgoingtofundPanAm'sbusinessoperations.
Stern,whohadalreadyinvested$110,000inPanAm,addedthathebelievedPanAm"wouldneedmoneytoget[off]theground.
"Instead,the$75,000waspaidtoCrow(makingCrowtheonlyPanAminvestortoprofitfromthesaleofitssecurities).
InexecutingCrow'sscheme,PanAmwaivedaclauseintheconvertiblenotethatprohibitedCrowfromconvertingthenoteintomorethan4.
99%oftheoutstandingcommonsharesofPanAm—alimitof438,035shares.
Crowneededonly300,000sharesforthethreeinvestorsdiscussedabove.
YetCrowinstructedRosstoconvertthemajorityofthenote($17,859of$25,000)into1,382,500shares.
ThisgaveCrow16%ofPanAm'sstock(beforehistransferstothethreepurchasersandotherthirdparties).
55AlthoughRosstestifiedthatheknewabouttheownershipcapatthetime,PanAmconvertedthemajorityofthenoteinexcessoftheownershipcapandreceivednothinginreturnforwaivingthecap.
PanAmalsomisrepresentedthestatusoftheconvertiblenotetoitsauditorandinvestors.
TheconvertiblenotehadbeendueandpayableonSeptember10,2012,ifnotconvertedbeforethatdate.
OnSeptember20,2012—twodaysafterLanareceivedwiretransfersfrominvestorsforCrow'sshares—LanaemailedClug(copyingCrowandRoss)thatPanAm'sauditor"wouldliketoseesomethinginwritingpriortoissuanceofthefinancialstatementsthatanextension[ofthenote]hasbeenagreedto,otherwise[PanAm]wouldbeindefaultanddisclosurethereofwouldberequired.
"Clugrespondedthattheparties"hadagreedtoa3yearextension.
"Afewdayslater,CrowemailedLanaandtheauditorasignedformstatingthesame.
OnOctober18,2012,theauditoremailedClugandRossrequesting"executedcopiesoftheextension[].
"Becausenosuchdocumentexisted,ClugbackdatedanagreementtoSeptember10,2012,thatextendedthenotetoSeptember10,2015.
ClugsignedtheagreementasCEOofPanAmeventhoughRosshadbeentheCEOsinceJuly.
Crowalsosignedtheagreement.
ThebackdatedagreementwasreflectedinPanAm'sForm10-Kforyear-end2011andthreeForms10-Qforthefirstthreequartersof2012.
Thosereportsstatedthatthe"notewasmodifiedtoextendthematurityandnoteconversiondeadlinedatestoSeptember10,2015,"andthatthenotecouldbeconvertedinto1,935,284sharesunlessthatamountexceeded4.
99%ofPanAm'soutstandingshares.
ThereportsdidnotdisclosethatCrowhadalreadyconvertedmostofthenoteinto1,382,500sharesorthatPanAmhadwaivedtheownershipcaptoallowhimtodoso.
RossandLanasignedtheForms10-Kand10-QonbehalfofPanAmandsignedand55Crowtransferred300,000sharestothethreeinvestorsLanafound,transferred682,500sharestofamilymembersandpeopleheowedmoney,andretained400,000shares.
20certifiedtheForms10-Kand10-QasPanAm'sCEOandCFO.
ClugsignedtheForm10-Kasadirector.
PanAm'sauditortestifiedthathewasunawareofthenoteconversion,considereditmaterial,andwouldhavewithdrawnasauditorhadheknownaboutit.
BySeptember2012,PanAmhadraisedonly$345,000,ofwhichithadspentallbut$119,349.
InitsForm10-K,PanAm'sindependentauditordeterminedthatPanAm'sfinancialcondition"raise[d]substantialdoubtasto[its]abilitytocontinueasagoingconcern.
"Clug,Ross,andLanatestifiedthatPanAmcouldhaveusedthe$75,000raisedforCrow.
BytheendofJanuary2013,PanAmhadonly$22,405leftandwasstrugglingtopayitsbills.
OnJanuary31,2013andFebruary11,2013,RossemailedLanaforupdatesonwhetherPanAmreceiveda"critical"$25,000check.
InthelatteremailRossstatedthathehad"heldoffMickelsonaslongas[hecould]withoutdamagingtherelationship,andreallyneed[ed]togetthemthe$6[,]000forJanuary'sretainerrightaway.
"MickelsonneverraisedanymoneyforPanAm.
Lanaraisedanadditional$80,000forPanAmfromindividualinvestors.
PanAmreceivedthelastinfluxofthiscashinMarch2013,butitspentthemoneyshortlyafterreceivingit.
PanAmceasedoperationsandderegistereditscommonstockinMay2013.
B.
PanAmandClugviolatedthesecuritieslawsbyfailingtodisclosethatCrowwasadefactoexecutiveofficerofPanAmwithadisciplinaryhistoryandpendingbankruptcy.
1.
Crowwasadefactoexecutiveofficer.
WefindthatCrowwasadefactoexecutiveofficerofPanAm.
UnderExchangeActRule3b-7,apersonwhoperformsapolicymakingfunctionforaregistrantisadefactoexecutiveofficer.
56"Courtsregularlyrelyonth[is]definition[]todeterminewhetheranindividualactedasadefactoofficerofacompany.
"57Inotherwords,thebroaddefinitionof"executiveofficer"isnotlimitedtothose"formallydesignatedassuch,butalsoanypersonwhoperformsasimilarroleforthecompany"orcanbedeemed"asignificantfigureinthemanagementofthecompany.
"58Here,CrowactedasadefactoexecutiveofficerofPanAmbecausehesetpolicyforPanAminawaythatamereinvestororconsultantcouldnot.
Specifically,CrowexercisedauthorityovertheselectionofmembersofPanAm'sboardand56See17C.
F.
R.
§240.
3b-7.
57SECv.
Brown,740F.
Supp.
2d148,161(D.
D.
C.
2010)(citationsomitted).
58SECv.
Enters.
Sols.
,Inc.
,142F.
Supp.
2d561,574(S.
D.
N.
Y.
2001).
NoproofofscienterisnecessarytoestablishviolationsofExchangeActSection13anditsrules.
SECv.
McNulty,137F.
3d732,740-41(2dCir.
1998);seealsoSECv.
SavoyIndus.
,Inc.
,587F.
2d1149,1167(D.
C.
Cir.
1978)(holdingthattheCommission"neednotprovescientertoestablishaviolation"ofExchangeActSection13(d)(1)becauseitisa"reporting,andnotanantifraud,provision,"which"place[s]asimpleandaffirmativedutyofreportingoncertainpersons").
21management,ledPanAm'snegotiationstoobtainfinancing,andmadethedecisiontosellPanAmstocktoraisemoneyforhispersonaluseratherthanforPanAm'sbusiness.
59ClugconcedesthatCrow"offeredrecommendationsandinput"toPanAmbutarguesthathedidnotmeetthedefinitionofadefactoexecutiveofficer"becausehedidnothavedecision-makingauthorityorcontroloverPanAm.
"AccordingtoClug,CrowdidnotexercisetherequisiteauthoritybecauseseveralwitnessestestifiedthatCrowwasnotadefactoofficerofthecompanyandtheALJfound"thisuniformtestimony"tobecredibleandbecausePanAm'smanagementrejectedCrow'srecommendationsinsomecases.
TheevidenceClugcitesdoesnotestablishthatCrowdidnotperformpolicymakingfunctionsforPanAm.
Substantialevidence,includingthatCrowexercisedauthorityoverPanAm'spersonnel,negotiations,andstocksales,establishesthatCrowperformedpolicymakingfunctionsforPanAmandoutweighsthetestimonyofwitnesseswhodeniedthatCrowwasadefactoofficerofPanAm.
60Inanycase,documentaryevidencecontradictssomeofthetestimonyonwhichClugrelies.
Forexample,RosstestifiedthatCrowdidnotparticipateinmeetingswithMickelsonfollowinganinitialintroduction.
ButdocumentsintherecordshowthatCrowbothparticipatedinmeetingswithMickelsonaswellashandledsomeofthefinalnegotiationshimself.
WedonotdisputeClug'sclaimthat"outsidepersons"mayberetainedtonegotiateonacompany'sbehalfandthatsuchactionmaynotitselfcreateofficerstatus.
ButCrow'sprincipalroleinthesenegotiationsisafactorweighinginfavorofourfindingthathewasanexecutiveofficer.
61HenryGewanter,oneofPanAm'sdirectorswhodisputedCrow'sauthority,alsowasunawareofthefullextentofCrow'sroleatthecompany.
GewanterbelievederroneouslythatCrowwasmerelyprovidingadviceonpossiblelandacquisitions,andadmittedlywasunawarethatCrowhadbeeninvolvedinRoss'shiringandtheMickelsonnegotiations.
NordidGewanterknowthatCrowownedtheconvertiblenoteandhadsoldPanAmsharesafterconvertingit.
TheinstancesClugcitesofPanAmrejectingCrow'srecommendationsalsodonotshowthathedidnotperformpolicymakingfunctions.
Forexample,ClugcontendsthatherejectedCrow'srecommendationthatDanielNajorbecomeadirector.
Buttherecorddoesnotsupportthiscontention.
CrowemailedNajortoaskifhe"reallywant[ed]tobeinvolvedwith[P]anAm,"andnotedthatClug"nevergot[Najor's]bioandquestionnaire.
"TherecorddoesnotshowwhathappenedwithrespecttoNajorafterthisemailexchange.
Clugsimilarlycontendsthat,despiteCrow'surging,"PanAmdidnotgiveacompanycreditcardtoMooney.
"But59See,e.
g.
,Enters.
Sols.
,Inc.
,142F.
Supp.
2dat570(findingthat"theCommissionpresentedsubstantialevidencethat[thedefendant]controlledthecompany"byhiringtheCEOandputtinghisdaughterontheBoardofDirectors,payingthecompany'sexpensesonthreeoccasions,providingcommentsforthecompany'sregistrationstatement,andnegotiatingloansforthecompanyandaproposedacquisitionofanothercompany).
60SeeExchangeActRule3b-7,17C.
F.
R.
§240.
3b-7(defininganexecutiveofficernotasapersonwhoexercisedcontrolbutasapersonwhoperformspolicymakingfunctionsfortheregistrant);seealsogenerally,e.
g.
,Hylandv.
HomeServicesofAm.
,Inc.
,771F.
3d310,322(6thCir.
2014)(statingthat"awitnessmaynottestifytoalegalconclusion").
61Seesupranote59.
22MooneyemailedClugthat"[Crow]saidhewouldgive[Mooney]acreditcardtouseforair,carrental,etc.
"Clugdidnotoverrulethisdecision;rather,ClugsuggestedthatMooney(whohadarecentpersonalbankruptcy)"mayhavetouseadebitcardwithlimitsascreditcardsneedtobepersonallyguaranteedbutthatshouldhelpwith[Mooney's]capitalraisingrelatedefforts.
"WerecognizethattheALJfoundthatCrowwasnotadefactoexecutiveofficer,butwerespectfullydisagree.
TherecordcontradictstheALJ'sconclusionthatCrow'srolewas"asaconsultantandinvestor.
"Crowhelpedformthecompany,selectedmembersofitsboardandmanagement(andthreatenedtofireitsCFO),andnegotiateditsonlysignificantfinancingagreement.
Mooney,aPanAmdirector,understoodthathewas"inbusinesswith[Crow].
"CrowalsodescribedPanAmas"our[hisandClug's]farmlandinvestmentcompany.
"CrowevenarrangedforPanAmstocktobesoldsothattheproceedscouldbeusedtopayoffhispersonaldebtsratherthanforPanAm'sbusiness.
TheonlycasethattheALJcitedtosupporthisconclusion,SECv.
Prince,involvedanemployeewho"didnothavetheauthoritytomakeorimplementanypolicydecisions.
"62Asdiscussedabove,thatisnotthecasehere.
Accordingly,wefindthatCrowwasadefactoexecutiveofficerofPanAm.
632.
PanAmviolated,andClugaidedandabettedandcausedPanAm'sviolationsof,ExchangeActSection10(b)andRule10b-5(b)thereunderandExchangeActSection13(a)andRules12b-20,13a-1,and13a-13thereunderbyfailingtodisclosethatCrowwasadefactoexecutiveofficerofPanAm.
PanAmviolatedExchangeActSection10(b)andRule10b-5(b)thereunderbyfailingtodisclosethatCrowwasanexecutiveofficerwithadisciplinaryhistoryandpendingbankruptcy.
64Form10-Krequiredthedisclosureofthecompany'sexecutiveofficers,theirdisciplinary62942F.
Supp.
2d108,136(D.
D.
C.
2013).
63SeeSECv.
SolucorpIndus.
Ltd.
,274F.
Supp.
2d379,383-86,420(S.
D.
N.
Y.
2003)(findingthatapurported"consultant"wasactuallyadefactoofficerofthecompanybecausevirtuallynoactioncouldbetakenwithouttheconsultant'sapproval,employeesviewedthecompanyastheconsultant's"baby;"theconsultant"wastheonlyguybringingmoneyin;"theconsultantleveragedthatroletoextractbenefitsfromthecompany,andbusinessandmergerpartnersdealtexclusivelywiththeconsultantintheirnegotiationswiththecompany);Enters.
Sols.
,Inc.
,142F.
Supp.
2dat574(findingthatwhereputativeconsultantprovidedmanagementleadershipforthecompany,negotiatedacquisitionbythecompany,andhiredtheCEOandnegotiatedcompensation,theevidencesupportedtheconclusionthathisactivitiesonbehalfofthecompanywere"sufficientlysimilartothedutiesofanofficerordirectorofthecompanythathisinvolvement.
.
.
oughttohavebeendisclosed");RobertG.
Weeks,ExchangeActReleaseNo.
48684,2004WL828,at*9(Oct.
23,2003)(rejectingargumentthatpetitioner"wasmerelya'consultant'whoseroleneednotbedisclosed"becausepetitionerselectedthecompany'sofficersanddirectorswhoactedathisdirectionandunderstoodtheywereactinginhisplace).
64Inlightofourfindings,weneednotdeterminewhetherPanAmalsoviolatedSecuritiesActSection17(a)asaresultofthisomission.
TheALJalsofoundthatPanAmviolatedSecuritiesActSection17(a)(2)bymisrepresentingthatithadsubmittedanapplicationtolistitsstockontheOTCBulletinBoard.
BecausewefindthatPanAmviolatedtheantifraudprovisionsoftheExchangeActinotherrespects,weneednotaddressthisbasisforliabilityeither.
23histories,andanypendingbankruptcies,65andExchangeActRule12b-20requiredissuerstoincludeany"materialinformation.
.
.
asmaybenecessarytomaketherequiredstatements,inthelightofthecircumstancesunderwhichtheyaremadenotmisleading.
"66PanAm'somissionwasmaterialbecauseinvestorswouldhaveconsidereditimportantthatanindividualwithCrow'sbackgroundhadasignificantroleinthecompany.
67PanAmactedwithscienterbecauseClug'sandCrow'sknowledgeisimputedtoit.
68ClugandCrowknewthatCrowwasbarredfromservingasanofficerordirectorofapubliccompany,thatafterCrowleftDCAssociatesheplannedanewventureinwhichClugwouldserveashis"righthandman,"andthatCrowplayedasignificantpolicymakingroleatPanAm.
Asaresult,theymusthaveknownoftheriskthatinvestorswouldbemisledbythefailuretodisclosethatCrowwasanexecutiveofficer.
69PanAm'sfailuretodiscloseCrow'sroleasanexecutiveofficerinitsForms10-QalsoviolatedExchangeActSection10(b)andRule10b-5(b).
AlthoughForm10-Qdoesnotrequireacompanytodiscloseitsexecutiveofficers,PanAmstatedexplicitlyinitsForms10-QthatitsCEOandCFO,whomitnamed,"aretheCompany'sonlyemployees.
"ThisstatementmisledinvestorsastoCrow'ssignificantroleinpolicymakingfunctionsatthecompany.
70BecausewefindPanAm'sfailuretodisclosethatCrowwasadefactoexecutiveofficerviolatedExchangeActSection10(b)andRule10b-5,wealsofinditfiledmisleadingperiodicreportsinviolationofExchangeActSection13(a)andRules12b-20,13a-1,and13a-13.
7165Seesupranote51andaccompanyingtext.
6617C.
F.
R.
§240.
12b-20.
67SeeEnters.
Sols.
,Inc.
,142F.
Supp.
2dat573("GivenCannon'sextensivehistoryofcriminalandregulatoryviolations,disclosureofhissignificantparticipationinthecompanywouldcertainlyhavealteredthe'totalmix'ofinformationavailabletoareasonableshareholder.
");seealsoSECv.
Kimmes,799F.
Supp.
852,856(N.
D.
Ill.
1992)(findingtheidentifyofapubliccompany'sofficersanddirectorstobematerialinformation),aff'dsubnom.
SECv.
Quinn,997F.
2d287(7thCir.
1993);Weeks,2004WL828,at*9(findingpetitioner's"undisclosed,surreptitiouscontrolof[thecompany],andthefactthatthepurportedofficersanddirectorsweremerefigureheadswouldhavebeenmaterialtothereasonableinvestor").
68Seesupranote22(discussingimputingscientertoacompany).
69PanAmsatisfiestheotherelementsforantifraudliability.
Itactedthroughmeansofinterstatecommerceand"inconnectionwiththepurchaseorsale"ofsecuritiesbecauseitsmaterialomissionscoincidedwithitssaleofsecurities.
SeeZandford,535U.
S.
at819,825.
70See,e.
g.
,SEC.
v.
Curshen,372F.
App'x872,880(10thCir.
2010)(findingliabilityunderSection10(b)andRule10b-5because"whereapartywithoutaduty[tospeak]electstodisclosematerialfacts,hemustspeakfullyandtruthfully,andprovidecompleteandnon-misleadinginformationwithrespecttothesubjectsonwhichheundertakestospeak").
71TheRockiesFund,Inc.
,ExchangeActReleaseNo.
48590,2003WL22273596,at*15(Oct.
2,2003)("BasedonourfindingsabovethattheFund'sForm10-KandForm10-QfilingscontainedmateriallyfalseandmisleadinginformationaboutitsPremierholdings.
.
.
wefindthat24WealsofindthatClugaidedandabettedandcausedPanAm'sviolations.
Toestablishaidingandabettingliability,wemustfind:(i)aprimaryviolationofthesecuritieslaws;(ii)substantialassistanceintheprimaryviolation;and(iii)scienter.
72Scientermeansthepersonknewoforrecklesslydisregardedthe"wrongdoingandhis.
.
.
roleinfurtheringit.
"73Onewhoaidsandabetsaprimaryviolationisalsoacauseofthatviolation.
74Here,ClugsubstantiallyassistedPanAm'sprimaryviolations.
ClugoversawPanAm'speriodicfilingsthatomittedCrow'sroleandbackgroundbyprovidinginstructionstoLanaconcerningthetimingandcontentofthefilings,signedtheForm10-Kasadirector,andsignedandcertifiedtwoForms10-QastheCEO.
75Forthereasonsdiscussedabove,Clugactedwithscienter.
BecausewefindthatClugaidedandabettedPanAm'sprimaryviolations,hecausedthemaswell.
76ClugcontendsthatPanAmdidnotwaivetheownershipcapbecause,asidefrom400,000sharesthatCrowkeptforhimself,Crowdidnotreceiveorcontrolthesharesfromtheconversion;rather,thetransferagentdistributedthesharestoothersinaccordancewithRoss'sinstructions.
ButRossfollowedCrow'sinstructionsfordistributingtheshares,whichweredistributedtoCrow'sfamilyandpeopleheowedmoney.
Clugcontendsfurtherthatevenifthenoteconversion"wouldhavemadeitaviolationtofailtodiscloseCrowasadefactoofficer,thatdisclosureviolationwouldnotbeattributableto"Clugbecausehe"wasnolongerCEOorresponsibleforPanAm'sfilingsatthetime.
"ButClugremainedPanAm'schairmanafterRossbecameCEO.
And,atthetimeofthenoteconversion,ClugrepresentedthathewastheCEObyexecutingthebackdatedagreementtoextendthenoteinthatcapacityonbehalfofthecompany.
Inanycase,ClugisheldsecondarilyandnotprimarilyliableforthefailuretodiscloseCrow'sstatusasadefactoexecutiveofficer.
Asdiscussedabove,ClugsubstantiallyassistedPanAm'sprimaryviolationanddidsowithscienter.
ClugalsocontendsthatBrantl,PanAm'scounsel,approvedthenoteconversionbecauseLanatestifiedthatBrantltoldhimitwaslegalforCrowtomakea"privatesale.
.
.
ofsharesthat[Crow]wouldbeconverting.
"AlthoughtheALJfoundthatthe"requirementsforanadviceofcounseldefenseweresatisfied"becauseBrantladvisedLana"thatCrow'snoteconversationandsaleofPanAmshareswasalegalprivatetransaction,"ourfindingisnotthatCrow'snoteconversionandsubsequentstocksaleswereillegal.
Rather,ourfindingisthatthecircumstancestheFundwillfullyviolatedExchangeActSection13(a)andRules12b-20,13a-1and13a-13.
"),aff'dinrelevantpartandvacatedinpartonothergrounds,428F.
3d1088(D.
C.
Cir.
2005).
72EricJ.
Brown,ExchangeActReleaseNo.
66469,2012WL625874,at*11(Feb.
27,2012),petitiondeniedsubnom.
Collinsv.
SEC,736F.
3d521(D.
C.
Cir.
2013).
73Id.
74Id.
;seealsoExchangeActSection21C(a),15U.
S.
C.
§78u-3(a)(authorizingsanctionsonanypersonwhowasa"cause"ofaviolationoftheExchangeActorrulesthereunder).
75SeeSECv.
Glob.
ExpressCapitalRealEstateInv.
Fund,I,LLC,289F.
App'x183,199(9thCir.
2008)(findingthatdefendant"substantiallyassistedGlobalSecurities'violationsbyreviewing,approving,andcertifyingtheGlobalSecurities'misleadingpublicfilings").
76Seesupranote74andaccompanyingtext.
25surroundingthenoteconversionandsubsequentsalessupporttheconclusionthatCrowwasadefactoexecutiveofficerofPanAm.
Clugdoesnotcontend,nordoestherecordshow,thatBrantlprovidedadviceregardingCrow'sstatusasadefactoofficerordisclosuresrelatingthereto.
3.
ClugviolatedExchangeActRule13a-14bycertifyingtheaccuracyofForms10-QthatfailedtodisclosethatClugwasadefactoexecutiveofficer.
ClugalsoviolatedExchangeActRule13a-14(a)'srequirementthathecertifyPanAm'sForm10-Qs.
"Rule13a-14,likeotherrulespromulgatedunderSection13oftheExchangeAct,includesanimplicittruthfulnessrequirement.
"77Clug,asPanAm'sCEO,signedcertificationsfortwoForms10-QthatPanAmfiledstatingthattheformsdid"notcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesmade,notmisleading.
"YetClugmusthaveknownitwasmisleadingtostatethattheCEOandCFOwerePanAm'sonlyemployeesgivenCrow'sroleatPanAm;indeed,ClugknewthatafterCrowleftDCAssociatesitwashisintenttoformanewventurewhereClugwouldfunctionastheCEOwhileoperatingasCrow's"righthandman.
"Accordingly,becauseitis"notenoughforCEOsandCFOstosigntheirnamestoadocumentcertifyingthatSECfilingsincludenomaterialmisstatementsoromissionswithoutasufficientbasistobelievethatthecertificationisaccurate,"78wefindthatClugviolatedRule13a-14.
C.
PanAmviolated,andClugaidedandabettedandcausedPanAm'sviolationsof,ExchangeActSection10(b)andRule10b-5(b)thereunderbymisrepresentingthatCrowcouldconvertanoteintoshareswhenhehadalreadydoneso.
PanAmviolatedExchangeActSection10(b)andRule10b-5(b)bymisrepresentingthestatusofCrow'sconvertiblenote.
79Asdiscussedabove,PanAm'sForm10-KandthreeofitsForms10-QstatedthatCrow'sconvertiblenote"wasmodifiedtoextendthematurityandnoteconversiondeadlinedatestoSeptember10,2015,"andthatpriortothisdatethenoteholdercouldconvertallorpartofthenoteintoupto1,935,284shares.
ThiswasmisleadingbecausePanAmomittedthatCrowhadalreadypartiallyconvertedthenoteinto1,382,500shares.
PanAm'sfailuretodiscloseCrow'spartialconversionofthenoteintoover1millionshareswasmaterialbecauseCrow'ssharesrepresentedmorethan16%ofPanAm'soutstandingshares—anownershipstakewellinexcessoftheownershipcap.
Areasonableinvestorwouldconsideritimportantthatanoteholderacquiredsomanysharesbecausetheconversiondilutedtheownershiprightsoftheothershareholders.
80ThetestimonyofPanAm'sauditorthattheconversionwasmaterialandshouldhavebeendisclosedfurthersupportsourfinding.
77SECv.
Jensen,835F.
3d1100,1113(9thCir.
2016).
78Id.
79Inlightofourfindings,weneednotdeterminewhetherPanAmalsoviolatedSecuritiesActSection17(a)asaresultofthismisrepresentation.
80SeeGruberv.
Gilbertson,No.
16cv9727,2018WL1418188,at*9(S.
D.
N.
Y.
Mar.
20,2018)(findingthatamisrepresentationthat"noperson[was]abeneficialownerofmorethan5%of[the]commonstock"wasmaterial);cf.
15U.
S.
C.
§§78m(d)&78m(g)(requiringthat26PanAmactedwithscienterbecauseRoss,itsCEOatthetime,signedtheForm10-KandForms10-QeventhoughheknewCrowhadalreadypartiallyconvertedthenoteinto1,382,500shares.
81Asdiscussedabove,CrowhaddirectedRosstoconvertthenoteintoshares.
82RossmusthaveknownoftheriskthatinvestorswouldbemisledbyastatementthatCrowhadtherighttoconvertwhenthenotehadbeenconvertedintoover1millionsharesalready.
83WefindthatClugaidedandabettedandcausedPanAm'sviolation.
ClugsubstantiallyassistedtheviolationswithscienterbycreatingandsigningbackdateddocumentstoconcealtheconversionfromPanAm'sauditoraftertheauditorquestionedthestatusofthenote.
BecausewefindthatClugaidedandabettedPanAm'sprimaryviolations,hecausedthemaswell.
84Clugoffersmyriadargumentsagainstliabilityfortheseviolations.
First,ClugdeniesresponsibilityforPanAm'sdisclosuresintheperiodicreports.
Asdiscussedabove,weholdClugsecondarilyandnotprimarilyliablefortheseviolations.
Clugcannotescapeliabilityforcreating,executing,andtransmittingthebackdatednoteextensionagreement.
ThisagreementfacilitatedPanAm'smateriallymisleadingdisclosures.
AndClugmusthaveknownhewasfacilitatingmisleadingdisclosuresbecauseheemailedLanatoensurethatthebackdatedagreement"hasbeenreflectedinthe10K.
"85Second,Clugarguesthattheconversionwas"positiveinmanyways"forPanAmsuchas"reduc[ing]thedebtonthebalancesheetandincreas[ing]theequity"andpotentiallyincreasing"liquidityofthecompany'sshares.
"ButClugignorestheevidencethatPanAmneededmorefundsandthetestimonythatPanAmcouldhaveusedthe$75,000raisedforCrow.
Inanycase,investorswereentitledtoknowabouttheconversionanddecideitsramificationsforthemselves.
Third,Clugassertsthat"therewasnobenefitinhidingtheconversion"becausetheForm10-Kdisclosed"thetotalnumberofshares[Crowwouldreceive]onafullyconvertedbasis.
"reportbefiledwiththeSECwhenapersonacquiresbeneficialownershipofmorethan5%ofaclassofacompany'sshares);17C.
F.
R.
§240.
13d-1(same);FilingandDisclosureRequirementsRelatingtoBeneficialOwnership,ExchangeActReleaseNo.
15348,1978WL171074,at*2(Nov.
22,1978)(statingthatthelegislativehistoryforExchangeActSection13(d),15U.
S.
C.
§78m(d),"revealsthatitwasintendedtoprovideinformationtothepublicandtheaffectedissueraboutrapidaccumulationsofitsequitysecuritiesinthehandsofpersonswhowouldthenhavethepotentialtochangeorinfluencecontroloftheissuer").
81Seesupranote22(discussingimputingscientertoacompany).
82TheALJfoundthatLana,whoalsosignedtheforms,didnotactwithscienter.
ButtheALJdidnotdiscussRoss'sscienterorthefactthatCrowdirectedRosstoconvertthenote.
83PanAmsatisfiestheotherelementsforantifraudliability.
Itactedthroughmeansofinterstatecommerceand"inconnectionwiththepurchaseorsale"ofsecuritiesbecauseitsmisrepresentationscoincidedwithitssaleofsecurities.
SeeZandford,535U.
S.
at819,825.
84Seesupranote74andaccompanyingtext.
85Inthesameemail,ClugalsoaskedLanaifhewas"abletodothenotesforthe10Qs.
"27Butareasonableinvestorwouldwanttoknowthatthispossibilityhadalreadyoccurred.
86Fourth,Clugcontendsthatthebackdatedextensionagreementwas"neverfiledorusedwiththeauditors.
"Buttheauditortestifiedthathisfirm"receivedth[e]extensionfrom[PanAm].
"Finally,Clugcannotrelyontheadviceofcounsel.
Lanatestifiedthathe"neverhadadiscussionwith.
.
.
Brantlabout[PanAm]failingtodisclosetheconversion"inperiodicfilings.
V.
TheCorsairViolationsA.
Corsairsolicitedinvestorstopurchasesecuritiesandreceivedcompensationasaresult.
ClugandCrowfoundedCorsairin2011.
Theyowneditinequalsharesandstipulatedthattheycontrolledit.
ClugandCrowdidnotregisterCorsairwiththeCommissionasabroker.
OnJanuary1,2012,CorsairenteredintoareferralagreementwithABSManager,LLC,aninvestmentadviserthatmanagedthreeinvestmentfunds.
Undertheagreement,Corsairwould"introducepotentialinvestors"toABSand,"ifaninvestment[wa]smadein"anABSfund,ABSwouldpayCorsaira"feeequalto3%"oftheinvestment.
Aroundthistime,ABSalsoagreedtoaninvestmentstructurewherebyitwouldsecurealineofcreditfromwhichinvestorscouldborrowupto70%againstthevalueoftheirABSaccountstoinvestinAurum.
InanemailtoABS'sprincipalonJanuary17,2012(andforwardedtoClugthefollowingday),Crowstatedthat"webelievewecanintroduceforyou"investmentsof$10millioninthefirstthreequartersof2012,whichis"whatweneedtoexecuteourplanonwhatthesepeoplemightchoosetoreinvestfromtheirline.
"Crowalsostatedthat"[we]believewecandoalotmore.
.
.
andmightbeabletogetasmuchas$25milliontoyouthisyear.
"Clug,Crow,andLanaorganizedameetingforpotentialinvestorsinFebruary2012,atwhichClugpitchedAurumandABS'sprincipalpitchedABS.
LanaalsoadvisedhisclientstoinvestwithABSandusethelineofcredittoinvestinAurum.
LanausedaCorsairemailaddresswithasignaturelinethatidentifiedhimasCorsair'sCFO.
LanainducednineinvestorstoinvestinanABSfund,andClugpersonallysolicitedtwoinvestorswhoinvestedinanABSfund.
FromJanuarytoJune2012,Corsairinducedatleast11investorstoinvestatotalof$1.
7millioninanABSfund.
CorsairsentinvoicestoABS,whichClugpreparedinatleastoneinstance,identifyinginvestorsthatCorsairreferredandcalculateditsfeebasedonthe3%formulainthereferralagreement.
SeveraloftheinvestorsthatCorsairinducedtoinvestinanABSfundborrowedfromABS'slineofcredittoinvestinAurum.
OnJune1,2012,ABSandCorsairenteredintoanewagreementunderwhichABSwouldpayCorsair$5,000permonthto"actas[a]financialandmanagementconsultant.
.
.
andtoproviderecommendations.
"ButtherecorddoesnotshowthatCorsairprovidedsuchservices86SeeHuddlestonv.
Herman&MacLean,640F.
2d534,544(5thCir.
1981)(statingthatto"warnthattheuntowardmayoccurwhentheeventiscontingentisprudent;tocautionthatitisonlypossiblefortheunfavorableeventstohappenwhentheyhavealreadyoccurredisdeceit"),rev'donothergrounds,459U.
S.
375(1983).
28toABS.
Rather,itshowsthattheonlyserviceCorsairprovidedwastoreferinvestorstoABS.
87SevenoftheinvestorsthatCorsairreferredinvestedbeforethenewagreementwassigned,andfourotherinvestorsinvestedbyJuly14,2012.
ABSpaidCorsairatotalof$39,563.
TwoinvestorstestifiedthatABSstoppedpayingmonthlyreturnsontheirinvestmentsbyFebruary2013,whentheCommissionfiledasuitagainstABSforallegedantifraudviolations.
OnJuly30,2015,ABSanditsprincipalconsentedtofinaljudgmentsenjoiningthemfromantifraudviolationsandorderingthemtopaydisgorgementandcivilpenalties.
Inafollow-onproceeding,ABS'sprincipalwasbarredfromthesecuritiesindustry.
88B.
Corsairviolated,andClugwasacauseofCorsair'sviolationof,ExchangeActSection15(a)(1)byactingasanunregisteredbroker.
WefindthatCorsairviolated,andthatClugwasacauseofitsviolationof,ExchangeActSection15(a)(1).
ExchangeActSection15(a)(1)prohibits,throughmeansofinterstatecommerce,anybroker"toeffectanytransactionsin,ortoinduceorattempttoinducethepurchaseorsaleof,anysecurity.
.
.
unlesssuchbroker.
.
.
isregistered"withtheCommissionorisanaturalpersonassociatedwitharegisteredbroker.
89Aviolationofthisprovisiondoesnotrequirescienter.
90Arespondentisa"cause"ofanother'sviolationiftherespondent"kneworshouldhaveknown"thattherespondent'sactwouldcontributetotheviolation.
"91ExchangeActSection3(a)(4)definesabrokeras"anypersonengagedinthebusinessofeffectingtransactionsinsecuritiesfortheaccountofothers.
"92Indeterminingwhetherapersonfallswithinthisdefinition,courtshaveconsideredwhetherthepersonsolicitedpotentialinvestors,advisedastothemeritsofinvestments,receivedtransaction-basedcompensation,andparticipatedinthenegotiationorstructuringofsecuritiestransactions.
9387CrowtestifiedthatCorsairperformedservicesforABSsuchas"tighten[ing]uptheirprocessintermsofvaluationofassets,monthlyreporting,[and]gettingitonline.
"Noevidencesupportshistestimony.
ClugandCrowalsotestifiedthattheswitchtoaflatfeeinthenewagreementresultedfromareviewbycounsel,butClugandCrowdidnotnamethecounsel,andCrowcouldnotrecallifthecounselworkedforABSorCorsair.
88GeorgeCharlesCodyPrice,AdvisersActReleaseNo.
4631,2017WL405511(Jan.
30,2017).
8915U.
S.
C.
§78o(a)(1).
90E.
g.
,SECv.
Martino,255F.
Supp.
2d268,283-85(S.
D.
N.
Y.
2003),remandedonothergrounds,94F.
App'x871(2dCir.
2004).
91Feeley&WillcoxAssetMgmt.
Corp.
,AdvisersActReleaseNo.
2143,2003WL22680907,at*13n.
52(July10,2003).
9215U.
S.
C.
§78c(a)(4)(A).
93Martino,255F.
Supp.
2dat283;seealsoSECv.
Helms,No.
A-13-CV-01036ML,2015WL6438872,at*3(W.
D.
Tex.
Oct.
20,2015)("Transaction-basedcompensation,orcommissionsareoneofthehallmarksofbeingabroker-dealer.
")(cleanedup).
29CorsairactedasabrokerfromJanuarytoNovember2012bysoliciting,advising,andinducinginvestorstoinvestinanABSfundandreceivingtransaction-basedcompensationasaresult.
94BecauseCorsairwasnotregisteredasabrokerwhenitsolicitedandinducedtheABSinvestments,itviolatedExchangeActSection15(a)(1).
95ClughelpedstructurethetransactionthatallowedinvestorstoborrowagainsttheirABSaccountstoinvestinAurum,participatedinameetingwithinvestorswherehepitchedAurumandABS'sprincipalpitchedABS,andpersonallysolicitedtwoinvestorstoinvestinanABSfund.
ClugshouldhaveknownthattheseactswouldcontributetoCorsair'sviolationofExchangeActSection15(a)(1)becauseheknewCorsairreceivedtransaction-basedcompensationfrominvestmentsinABS.
96Accordingly,ClugwasacauseofCorsair'sviolationofExchangeActSection15(a)(1).
97ClugcontendsthatCorsair"lackedtheregularityofparticipation"insecuritiestransactionsnecessarytobeabrokerbecause(i)"LanawasnotanemployeeofCorsair,sohisactionscannotbeattributedtoCorsair"(emphasisinoriginal);(ii)ClugandCrowdidnot"refer[]evenoneperson"toABS"otherthan[Clug's]father";and(iii)"withinthreemonthsofreceivingthefirstcommission,Corsairnullifiedtheagreementthatcalledforittoreceivetransaction-basedcommissions.
"Thesecontentionslackmerit.
Lana'sactionsareimputedtoCorsairbecausehewasitsagent.
98Indeed,therecordshowsthatCorsairrecruitedLanatoactonitsbehalftosolicitinvestorsforABS;thatCorsairdirectedLana'swork;thatLanausedaCorsairemailaddressforcommunicatingwithinvestorsandABS;thatClugtoldLanatousethatemailaddress;thatLanarepresentedinanemailtoABS(copiedtoClugandCrow)thathewas94SeeSECv.
KentonCapital,Ltd.
,69F.
Supp.
2d1,13(D.
D.
C.
1998)(findingthatcompanyactedasabrokerwhenthepresidentandpeopleaffiliatedwiththecompanysolicitedinvestorsandinducedtwelveinvestorstoinvestabout$1.
7million);SECv.
Nat'lExec.
Planners,Ltd.
,503F.
Supp.
1066,1073(M.
D.
N.
C.
1980)(findingthatdefendantwasabrokerbecause"[i]tsolicitedclientsactively,and$4,300,000.
00worthof[securities]weresoldbyit").
95Corsairactedbymeansofinterstatecommerce,andanABSfundinvestmentwasasecurity.
96Clugcontendsthatthereferral"agreementwasenteredintobyCrowwithout[Clug's]knowledge.
"Therecorddoesnotsupportthiscontention.
Inanycase,therecordshowsthatClugknewaboutthereferralagreementafterCorsairenteredintoitbecausehepreparedatleastoneinvoicethatcalculatedCorsair'sfeebasedonthe3%formulainthereferralagreement.
97Inlightofourfindings,weneednotreachtheDivision'sclaimthatClughimselfviolatedExchangeActSection15(a)(1).
TheDivisionalsoallegesthatCrowviolatedExchangeActSection15(b)(6)(B)byassociatingwithCorsairdespitebeingbarredfromassociatingwithabroker,andthatClugaidedandabettedandcausedthatviolation.
BecauseCrowhasnowsettledwiththeCommission,andwefindthatClugcausedCorsair'sviolationofExchangeActSection15(a)(1),weneednotreachthisalternativepotentialbasisforClug'sliability.
98Seesuprafootnote22;seealsoRestatement(Third)ofAgency§1.
01(2006)("Agency.
.
.
ariseswhenoneperson(a'principal')manifestsassenttoanotherperson(an'agent')thattheagentshallactontheprincipal'sbehalfandsubjecttotheprincipal'scontrol,andtheagentmanifestsassentorotherwiseconsentssotoact.
").
30Corsair'sCFO;andthatCorsairreceivedfeesbasedonLana'sreferralstoABS.
99TherecordalsoshowsthatCluginducedatleasttwoinvestors(hisfatherandanotherperson)toinvestatotalof$400,000withABS.
Lana'sreferralsaside,thesesolicitationsthemselvessupportfindingthatCorsairwasabroker.
100Asforthelengthofthereferralagreement,itlastedatleastfivemonthsandthereisnoevidenceCorsairprovidedABSservicesotherthanreferringinvestorsevenafterthatfive-monthperiod;inanycase,thethree-monthperiodClugciteswasenoughforCorsairtobeconsideredabroker.
101ClugalsocontendsthatCorsairfallsundera"finder'sexception"tothedefinitionofbroker(i.
e.
,formerely"bringingtogetherthepartiestotransactions").
102TheCommissionhasneverrecognizeda"findersexception"tothedefinitionofabroker.
103Regardless,Corsair'sactivitieswentbeyondbringingpartiestogethergivenitsparticipationinadvisinginvestors,structuringtransactionswithABS,andreceivingtransaction-basedcompensation.
Clugcontendsfurtherthat"[a]talltimeswehadanattorneyreviewingourcontractstomakesurethatwewerenotpartofanythingillegalorimproper,"which"iswhywhentheattorneytoldusthatitwouldbebettertonotreceiveacommissionforreferrals,westoppedthatarrangement.
"NoevidenceshowsthatunderthenewagreementCorsairreceivedcompensationforanythingotherthanreferrals.
Inanycase,thereisalsonoevidencethatcounselreviewedthereferralagreement,providedanyadviceconcerningCorsair'sbrokeractivitiespriortothenewagreement,ortoldCorsairthatitwouldbebetterifitdidnotreceivecommissionsforreferrals.
99Duringoralargument,ClugcontendedthatheallowedLanatouseaCorsairemailaddress"temporarily"becauseLanawashaving"aproblemwithhisownemailaddress,"andthatClugneverexpectedLanatousetheCorsairemailaddresstoconductbusinessforCorsair.
ButtherecordshowsthatfromJanuary2012throughatleastMarch2012,LanaregularlyusedtheCorsairemailaddresstoreferinvestorstoABSandcopiedClugonthoseemails.
LanaalsoidentifiedhimselfinoneofthoseemailsasCorsair'sCFO.
100SeeHelms,2015WL6438872,at*2(rejectingargumentthatdefendantwasnot"anunregisteredbrokerbecausehewasonlyinvolvedinonetransaction"andfindingthatdefendantwasabrokerbecausehereceivedacommissionforsolicitingonecompanytoinvest$3,050,000intoaPonzischemeandactedasalinkbetweenagentsforthecompanyandthePonzischeme).
101SeeKentonCapital,Ltd.
,69F.
Supp.
2dat5-7,13(findingthatdefendantsactedasbrokersoverathree-monthperiod).
102Helms,2015WL6438872,at*3(internalquotationsandcitationomitted).
103SeealsoSECv.
Collyard,861F.
3d760,767-68(8thCir.
2017)(rejectingargumentthat"thereisa'finderexception'or'finderdefense'tounregistered-brokerliability").
ClugcitesSECv.
Kramer,778F.
Supp.
2d1320(M.
D.
Fla.
2011),asholdingthatthereisafinder'sexception,butastheEighthCircuitstatedinCollyard,the"so-called'finder'sexception'"referredtoinKramer"justmeansthatindividualscanengagein'anarrowscopeofactivitieswithouttriggeringthebroker/dealerregistrationrequirements'—notthatthereisa'finderdefense'availabletothosewhoareotherwise'brokers.
'"Collyard,861F.
3dat768.
31VI.
SanctionsA.
WebarClugfromassociatinginvariouscapacitiesinthesecuritiesindustry.
ExchangeActSection15(b)(6)authorizestheCommissiontobarapersonwhowillfullyviolatedthefederalsecuritieslawsfromassociationwithaninvestmentadviser,broker,dealer,municipalsecuritiesdealer,municipaladvisor,transferagent,ornationallyrecognizedstatisticalratingorganization,andfromparticipatingintheofferingofpennystock,ifwefindthatatthetimeofthemisconductthepersonwasassociatedwithabrokerandthatsuchbarsareinthepublicinterest.
104WefindthatClug'sassociationwithCorsairestablishesthathewasassociatedwithabrokeratthetimehedefraudedinvestorsinAurum.
105OurfindingthatClugactedwithscienterissufficienttoestablishthatheactedwillfully.
106Weconsider,indeterminingwhatreliefisappropriateinthepublicinterest,theegregiousnessoftherespondent'sactions,theisolatedorrecurrentnatureoftheinfraction,thedegreeofscienterinvolved,thesincerityoftherespondent'sassurancesagainstfutureviolations,therespondent'srecognitionofthewrongfulnatureofhisconduct,andthelikelihoodthattherespondent'soccupationwillpresentopportunitiesforfutureviolations.
1071.
Therelevantfactorsestablishthatabarisnecessarytoprotectinvestors.
Clug'smisconductwasegregious,recurrent,andatleastreckless.
TheAurumantifraudviolationsalonewereegregiousanddemonstratethatbarringClugisnecessarytoprotectthepublic.
108Formorethantwoyears,Clugmisledinvestorsregardingthecompany'smanagement,theconditionsofitssecuritiesofferings,anditsminingdevelopmentprospects.
By10415U.
S.
C.
§78o(b)(6).
Clugcontendsthatwemayimposepennystockbarsonlyonpersonsparticipatinginpennystockofferings,buthemisreadsExchangeActSection15(b)(6).
105See15U.
S.
C.
§78c(a)(18)(defining"personassociatedwithabroker"toinclude"anypersondirectlyorindirectlycontrolling,controlledby,orundercommoncontrolwith"abroker).
106See,e.
g.
,BennettGrp.
Fin.
Servs.
,LLC,ExchangeActReleaseNo.
80347,2017WL1176053,at*4n.
30(Mar.
302017)("Ourfindingofscienter.
.
.
demonstratesthatBennett'sviolationswerewillful.
");seealsoRobarev.
SEC,922F.
3d468,479-80(D.
C.
Cir.
2019)(holdingthatafindingofrecklessnessissufficienttoproveaviolationofSection207oftheInvestmentAdvisersActof1940,whichprohibitswillfullyomittingtostateinaninvestmentadviserregistrationapplicationamaterialfactthatisrequiredtobestatedtherein).
107GaryM.
Kornman,ExchangeActReleaseNo.
59403,2009WL367635,at*6(Feb.
13,2009)(citingSteadmanv.
SEC,603F.
2d1126,1140(5thCir.
1979)),petitiondenied,592F.
3d173(D.
C.
Cir.
2010).
108See,e.
g.
,DavidHenryDisraeli,AdvisersActReleaseNo.
2686,2007WL4481515,at*15-16(Dec.
21,2007)(barringinvestmentadviserformisrepresentinghowofferingproceedswouldbeused),petitiondenied,334F.
App'x334(D.
C.
Cir.
2009).
32theendofthefraud,investorshadlost$4million,andClugreceivednetprofitsof$286,810.
01.
109Clugcitescertaincircumstancesthatheclaimsaremitigating.
Hecontendsthat"alloftheinvestorswereaccreditedinvestors,whoknewtheinvestmentswereveryhighrisk,andthattherewasaseriouspossibilitythattheprojectwouldfail.
"But"accreditedinvestors.
.
.
arealsovulnerabletofraud,"110andareas"entitledtotheprotectionoftheantifraudprovisionsofthesecuritieslaws"asotherinvestors.
111ClugalsocontendsthattheshortdurationoftheCorsairviolationmitigatesthatmisconduct.
ButwefindthattheAurumantifraudviolationsalone,whichClugcommittedwhileassociatedwithCorsair,establishthatthebarsarenecessarytoprotectthepublic.
Clugcontendsfurtherthatthefactthatheconsultedwithcounselmitigateshismisconduct.
Asdiscussedabove,Clugdidnotshowthathemadeafulldisclosuretocounsel,receivedadvicethathisconductwaslegal,orreliedonanysuchadviceingoodfaith.
112Withrespecttotheremainingfactors,Clug'sassurancesagainstfutureviolationsandrecognitionofthewrongfulnatureofhismisconductdonotoutweightheongoingriskthatheposestothepublic.
Clugstatesthathe"mademistakes";thathehas"sleeplessnightsdistraughtaboutthelossesto.
.
.
investors";andthatheshould"havebeenmoreconservativeinmakinganystatementstoinvestorsandwoulddosoifgiventheopportunityinthefuture.
"ButClugdidnotmerelymakeoverlyoptimisticstatementstoinvestorsthatcouldbetemperedinthefuture;heliedtothemandintentionallymisrepresentedcrucialinformation.
ClugalsoshiftsblametoCrowforhisownmisconduct,statingthathis"biggestmistake"andthe"primaryreason"heis"involvedinthiscase"isthathe"associated.
.
.
withandtrustedCrow,"who"hadexperienceinthesecuritiesindustryandshouldhaveknownbetter.
"YetClugknewCrow'shistorybeforeassociatingwithCrowandhimselfmadematerialmisstatementstoinvestorswithscienter.
Astothelikelihoodthathisoccupationwillpresentopportunitiesforfutureviolations,Clugcontendsthathehas"neverbeenamemberofthesecuritiesindustry"or"engagedina109SeeJamesS.
Tagliaferri,ExchangeActReleaseNo.
80047,2017WL632134,at*6(Feb.
15,2017)("Wealsoconsiderthedegreeofharmtoinvestorsandthemarketplaceresultingfromtheviolation.
");AllenM.
Perres,ExchangeActReleaseNo.
79858,2017WL280080,at*4(Jan.
23,2017)(findingthatrespondent'smisconductwasegregious"[i]nlightofthenatureofhisviolations,theirduration,andhisunjustenrichment"),petitiondenied,695F.
App'x980(7thCir.
2017).
Clugcontendsthatnoinvestorscomplainedthat"theyweremisledorhurtby[his]actions.
"TherecordcontainsverylimitedevidenceregardingtheaffectedinvestorsortheparticularcircumstancessurroundingtheirinvestmentswithClug,butitestablishesthatheactedegregiouslyandcausedharmregardlessofwhetherornottheycomplained.
110ShreyansDesai,ExchangeActReleaseNo.
80129,2017WL782152,at*6(Mar.
1,2017)(quotingIraWilliamScott,AdvisersActReleaseNo.
1752,1998WL611726,at*4(Sept.
15,1998)).
111AnthonyFields,CPA,ExchangeActReleaseNo.
74344,2015WL728005,at*13(Feb.
20,2015)(internalquotationsandcitationomitted).
112Seesupranote33andaccompanyingtext(discussingpredicatesforadvice-of-counseldefense).
33pennystockoffering";thathehasnocontinuedinvolvementwithCroworanyofthebusinessventures;andthathe"do[es]notintendtofindemploymenthavinganythingtodowiththevariousissuesinthiscase.
"Clug'semploymenthistorydidnotpreventhimfromcommittingtheviolationshereorassociatingwithanunregisteredbroker,andabsentabarClugcouldreenterthesecuritiesindustryatanytime.
113Accordingly,weconcludethatbarsarenecessarytoremedythecontinuingthreatthatClugposestoinvestors.
1142.
TheadditionalconsiderationsClugcitesdonotobviatetheneedforabar.
ClugcontendsthattheALJ'sassessmentofhischaracterisincompatiblewiththeneedtobarhim.
TheALJstated:"TherewasnoevidencethatCluglivedlavishlyorspentmoneyrecklessly.
Heappearedtobe.
.
.
asincereindividualwhomaderegrettabledecisions,inlargepartbecauseheattemptedtoundertakeendeavorsthathewasill-equippedfor.
Hestrovecommittedlytoensurethebusinessessucceeded,inordertoreturnmoneytoinvestors,butwasunabletodoso.
Heappearstobeahard-working,generallygoodperson.
"115ButtheALJbarredClugdespitethesecomments,statingthathehad"considerableconcernfor[Clug's]futureactions"becauseherepeatedlycommitted"egregious"fraudwith"anextremelyrecklessdisregardtotheinterestsofinvestors.
"WesharetheALJ'sconcernsaboutClug'sfutureactionsandagreewithhisconclusionthatasaresultClugmustbebarredtoprotectthepublic.
Clugcontendsweshouldconsiderthatheservedinthemilitary"withhonor,"thathehasnopriordisciplinaryhistory,thatheandhisfamily"havesufferedgreatly"asaresultofthisproceeding,andthatthestigmafromimposingbarswouldlikelypreventhimfrom"obtainingpositionsinunrelatedfields.
"WefindthattheneedtoprotectinvestorsfromCluggreatlyoutweighsthemitigatingimpactofthesefactors.
116Accordingly,basedonourapplicationoftherelevantfactorsandalloftheconsiderationsdiscussedabove,wefindthatitisthepublicinteresttobarClugunderExchangeActSection113See,e.
g.
,RockiesFund,Inc.
,2006WL3542989,at*4("AlthoughRespondentsassertthatthey'voluntarilyexitedthelineofbusinessthatinvolvedtheviolationsatissuehere,'thereisnothingtoprecludetheirenteringthesecuritiesindustryagainatsomefuturepoint.
").
114SeeFields,2015WL728005,at*22(imposingabarfromassociationinallofthecapacitiescoveredbyExchangeActSection15(b)(6)becausepermittingFields"toremaininthesecuritiesindustryinanyofthecapacitiescoveredbyExchangeActSection15(b)(6)"would"presentanunacceptablyhighriskoffutureviolations").
115ClugcontendsthatletterssupportinghimweresenttotheALJ'soffice.
Butnosuchletterswereofferedorreceivedintoevidenceatthehearing,orareapartoftherecord.
116See,e.
g.
,Fields,2015WL728005,at*22(findingthatthehardshiptoFieldsfromabar"isoutweighedbythenecessityofensuringthatpublicinvestorsareprotectedfromhim");TobyG.
Scammell,AdvisersActReleaseNo.
3961,2014WL5493265,at*8(Oct.
29,2014)(findingthatanymitigationfromrespondent'slackofdisciplinaryhistoryandtheeffectoftheproceedingonhiscareerwere"outweighedby.
.
.
theegregiousnessof[his]conduct,hishighdegreeofscienter,andhisfailuretorecognizetheseriousnessofhisviolations"),vacatedinpartonothergrounds,AdvisersActReleaseNo.
5272,2019WL2775920(July2,2019).
3415(b)(6)fromassociationwithabroker,dealer,investmentadviser,municipalsecuritiesdealer,municipaladvisor,transferagent,ornationallyrecognizedstatisticalratingorganization,andfromparticipatingintheofferingofapennystock.
Section9(b)oftheInvestmentCompanyActof1940authorizesustoprohibitapersonfromservingoractingasanemployee,officer,director,memberofanadvisoryboard,investmentadviserordepositorof,orprincipalunderwriterfor,aregisteredinvestmentcompanyoraffiliate,ifwefindthatthepersonwillfullyviolatedthefederalsecuritieslawsandsuchprohibitionisinthepublicinterest.
117WebarCluginthesecapacitiesforthesamereasonsweimposebarsunderExchangeActSection15(b)(6).
ExchangeActSection15(b)(6)(C)providesthatabarfrom"participatinginanofferingofpennystock"includes"actingasanypromoter,finder,consultant,agent,orotherpersonwhoengagesinactivitieswithabroker,dealer,orissuerforpurposesoftheissuanceortradinginanypennystock,orinducingorattemptingtoinducethepurchaseorsaleofanypennystock.
"118Asaresult,suchabarprecludesthebarredindividualfromtradingpennystocksintheirpersonalcapacitiesfortheirownaccount.
Section15(b)(6)(C)providesfurtherthatwemaybyorderexemptanypersonfromanypartofthedefinitionofabarfromparticipatingintheofferingofpennystock.
119WeexemptClugfromthepennystockbartotheextentitprohibitshimfromsellingthesharesofthepennystockthatheownscurrently.
120Clugmaydosowithoutseekingrelieffromthepennystockbarthatweimposetoday.
However,asdiscussedbelow,inconnectionwithhisargumentthathelackstheabilitytopaymonetarysanctions,Clugtwicefailedtodiscloseinformationregardinghisownershipofthepennystockthathecurrentlyowns.
121Thisfactinformsourdeterminationthat,atthistime,Clugshouldnotbewhollyexemptedfromanyoftherestrictionsofapennystockbar.
ItisnotinthepublicinteresttowhollyexemptClugfromthepartofthepennystockbarthatprecludestradingpennystocksinhisownaccountgivenhisconcealmentofhisownershipofapennystockinsuchanaccount.
12211715U.
S.
C.
§80a-9(b).
11815U.
S.
C.
78o(b)(6)(C).
119Id.
120Asdiscussedbelow,ClugownssharesofAVRAMedicalRobotics,Inc.
,apennystock.
Seeinfranotes153-155andaccompanyingtext.
121Seeinfranotes153-155andaccompanyingtext.
122WewouldconsiderarequestforexemptiverelieftotheextentClugwishestotradepennystocksthathedoesnotcurrentlyowninhispersonalcapacityinthefuture.
SeegenerallyChristopherDay,ExchangeActReleaseNo.
86818,2019WL4073781(Aug.
29,2019)(orderingbriefingonDay'srequestthatabarorderbemodifiedduetohis"fearofviolatingthepennystockbarifhesellsapennystockthatheownsandthathasappreciatedinvalue");ChristopherDay,ExchangeActReleaseNo.
87770,2019WL6875397(Dec.
17,2019)(amendingbarordertoremovethebarfromparticipatingintheofferingofapennystock).
35B.
Weimposecease-and-desistordersonallrespondents.
ExchangeActSection21C(a)authorizesustoissueacease-and-desistorderwithrespecttoanypersonwhohasviolatedtheExchangeAct.
123Indeterminingwhethertoissuesuchanorder,welooktowhetherthereissomeriskoffutureviolation.
124Therisk"neednotbeverygreat"andisordinarilyestablishedbyasinglepastviolationabsentevidencetothecontrary.
125Wealsoconsiderwhetherotherfactorsdemonstrateariskoffutureviolations,includingthefactorsdiscussedaboveandwhethertheviolationisrecent,thedegreeofharmtoinvestorsorthemarketplaceresultingfromtheviolation,andtheremedialfunctiontobeservedbythecease-and-desistorderinthecontextofanyothersanctionsbeingsought.
126Here,wefindthatAurum,PanAm,Corsair,andClugallcommittedmisconductthatestablishesariskoffutureviolations.
Asdiscussedabove,theantifraudviolationsthatAurumandClugcommittedwereegregious,recurrent,andatleastreckless.
Theharmthatinvestorssufferedfurtherestablishesariskoffutureviolations.
ThesameistruewithrespecttoPanAm'sviolations.
PanAmmisledinvestorsaboutbothCrow'sroleatthecompanyandthestatusoftheconvertiblenoteitissuedCrow.
Itactedatleastrecklessly.
Andinvestorslostover$200,000.
AstoCorsair,theregistrationprovisionthatitviolated"isoftheutmostimportanceineffectingthepurposesofthe[Exchange]ActbecauseitenablestheSECtoexercisedisciplineoverthosewhomayengageinthesecuritiesbusinessanditestablishesnecessarystandardswithrespecttotraining,experience,andrecords.
"127Corsair'sarrangementwithABSalsofacilitatedinvestmentswithAurum.
Corsairdoesnotarguethatthereisnoriskoffutureviolations.
Accordingly,wefinditinthepublicinteresttoorderthatallrespondentsceaseanddesistfromcommittingorcausingviolationsoftheprovisionsoftheExchangeActthattheyviolated.
C.
Wedeclinetoimposeanofficer-and-directorbaronClug.
ExchangeActSection21C(f)authorizesustobarapersonfromactingasanofficerordirectorofanyissuerthathasaclassofsecuritiesregisteredunderExchangeActSection12,orthatisrequiredtofilereportsunderExchangeActSection15(d),ifwefindthat(i)thepersonviolatedExchangeActSection10(b)ortherulesthereunder;and(ii)"theconductofthatpersondemonstratesunfitnesstoserveasanofficerordirectorofanysuchissuer.
"128TheALJdeclinedtoimposeanofficer-and-directorbaronClugbecausehefoundthatClugwasdeniedadequatenoticeandanopportunitytodefendthisissue.
TheOIPdidnotincludeanofficer-and-director12315U.
S.
C.
§78u-3(a).
124RobertL.
Burns,AdvisersActReleaseNo.
3260,2011WL3407859,at*8n.
34(Aug.
5,2011).
125KPMGPeatMarwickLLP,ExchangeActReleaseNo.
43862,2001WL47245,at*24(Jan.
19,2001),petitiondenied,289F.
3d109(D.
C.
Cir.
2002).
126Id.
at*26.
127SECv.
Benger,697F.
Supp.
2d932,944(N.
D.
Ill.
2010)(internalquotationsandcitationomitted).
12815U.
S.
C.
§78u-3(f).
36baramongthesanctionsitstatedwereatissueorindicatethatothersanctionsmightbeatissue;andtheDivisiondidnotrequestanofficer-and-directorbaruntilitspost-hearingbrief.
129Underthesecircumstances,wealsodeclinetoimposeanofficer-and-directorbaronClug.
AstheALJstated,bynotrequestingthebaruntilafterthecloseofevidence,Clugwasdeprivedtheopportunityofpresenting"additionalandperhapsevenmitigatingevidence,suchasdevelopingarecordabouthispotentialpriorpubliccompanyrolesbeforetheconductatissueandcallingfavorablewitnessesfromthosecompaniestotestifyinhisdefense.
"130TheDivisionacknowledgesthatomittingtherequestforanofficer-and-directorbarfromitspre-hearingbriefwasan"unintentionaloversight,"butcontendsthatourrulesdonotprovidethatreliefiswaivedifnotdisclosedinapre-hearingbrief.
Buttheissuehereisnoticeandnotwaiver.
Underthecircumstances,Clugwouldbedeniedfairnoticewerewetoimposeabarnow.
Wethereforedeclinetoimposeanofficer-and-directorbaronClug.
D.
Weorderthatrespondentsdisgorgetheirill-gottengains.
ExchangeActSections21B(e)and21C(e)andInvestmentCompanyActSection9(e)authorizeustoorderdisgorgementinthisproceeding.
131Disgorgementdepriveswrongdoersofthenetprofitsobtainedfromtheirviolations.
132Calculatingdisgorgementrequiresonlyareasonableapproximationofnetprofitscausallyconnectedtotheviolation.
133OncetheDivisionshowsthatitsdisgorgementfigureisareasonableapproximationoftheamountofthenetprofits,theburdenshiftstotherespondenttodemonstratethattheDivision'sestimateisnotareasonable129SeeJaffee&Co.
v.
SEC,446F.
2d387,392-94(2dCir1971)(findingthatrespondentwasdeniedadequatenoticethatitwouldbedisciplinedderivativelyunderExchangeActSection15(b)becausetheOIPfocusedondirectbutnotderivativeliability,andbecausetheDivisionofEnforcement"apparentlyneversuggestedthattheCommissionactuallyrelyon[Section]15(b)(5)forthatpurposeuntilitmadethesuggestioninabrieffiledwiththeexamineraftertheconclusionofthehearing");seealsoAlohaAirlines,Inc.
v.
CAB,598F.
2d250,262(D.
C.
Cir.
1979)(holdingthat,inadministrativeproceedings,thestandardfordeterminingwhethernoticeisadequateiswhether"therespondentunderstoodtheissueandwasaffordedfullopportunitytojustify[his]conductduringthecourseofthelitigation";"[t]hus,thequestiononreviewisnottheadequacyofthe[OIP]butisthefairnessofthewholeprocedure")(internalquotationsomitted).
130SeealsoJaffee&Co.
,446F.
2dat394(statingthathadrespondentbeenaffordedadequatenotice"itwouldhavehadanopportunity,bothtotakeactiontolessentheattractivenessofinvokingderivativesanctionsandtointroduceevidencebeforethehearingexaminertendingtoshowthattheuseofsuchsanctionswouldnothavebeeninthepublicinterest").
13115U.
S.
C.
§§78u-2(e),78u-3(e),80a-9(e).
132MontfordandCo.
,Inc.
v.
SEC,793F.
3d76,83(D.
C.
Cir.
2015);seealsoLiuv.
SEC,140S.
Ct.
1936,1940,1946(2020)(holdingthatdisgorgementofnetprofitsmayqualifyasequitablereliefforpurposesofExchangeActSection21(d)(5)).
133SECv.
FirstCityFin.
Corp.
,Ltd.
,890F.
2d1215,1231(D.
C.
Cir.
1989).
37approximation.
134Wheredisgorgementcannotbeexact,theburdenofuncertaintyincalculatingnetprofitsfalls"onthewrongdoerwhoseillegalconductcreatedthatuncertainty.
"135Inhispost-hearingbrief,Clugacknowledgesthat,if"itisdeterminedthatdisgorgementisappropriate,"then"theappropriateamountwouldequateto$286,810.
01"thathereceivedfromAurumthroughCorsair.
Thisamount,asClugclarifiedinhisproposedfindingsoffact,excludes(i.
e.
,alreadyincorporatesadeductionfor)"documentedreimbursements[hereceived]forpre-paidexpenses.
"Thus,weorderthatClugdisgorge$286,810.
01.
ThisisareasonableapproximationofClug'snetprofitscasuallyconnectedtohisviolations.
136WealsoorderthatAurum,PanAm,andCorsairpaydisgorgement.
AurumandPanAmmustdisgorgetheproceedstheyreceivedaftermakingthemisstatementsandomissionsthatviolatedtheantifraudprovisionsofthesecuritieslaws—$3,995,775and$230,000,respectively—andCorsairmustdisgorgethe$39,563infeesitreceivedfromABS.
Weprovidenooffsetforexpensesbecausetheentitiesdidnotestablishthatanyoffsetsforexpenseswereappropriatetoreducethedisgorgementamount.
Infact,becausetheentitiesdidnotseekoffsetsormakeassertionsconcerningtheirexpensesbelow,andbecausetheydidnotrespondtotheDivision'scross-appeal,theyhavenotcarriedtheirburdentoshowwhat,ifany,expenseswerelegitimateandthereforeproperlysubjecttodeductionfromthedisgorgementamount.
137Norcanwediscernfromourreviewoftherecordwhat,ifany,expensesshouldbeconsideredlegitimate.
However,weoffsetAurum'sdisgorgementbytheamountweareorderingClugtodisgorge.
Wefurtheroffsetthe$100,000thatCrowagreedtopayindisgorgementinsettlingthisproceedingfromtheindividualdisgorgementamountsforallthreeentities,whichwe134Id.
at1232.
135Id.
;seealsoSECv.
Razmilovic,738F.
3d14,31(2dCir.
2013)("[B]ecauseofthedifficultyofdeterminingwithcertaintytheextenttowhichadefendant'sgainsresultedfromhisfrauds.
.
.
thecourtneednotdeterminetheamountofsuchgainswithexactitude.
");Restatement(Third)ofRestitution§51(5)(c)-(d)&cmt.
I(2011)(statingthat"theclaimanthastheburdenofprovingrevenuesandthedefendanthastheburdenofprovingdeductions,"thatiftheclaimantsubmitsareasonableapproximationofthegainthe"defendantisthenfree.
.
.
.
tointroduceevidencetendingtoshowthatthetrueextentofunjustenrichmentissomethingless,"andthatany"uncertaintyincalculatingnetprofitisassignedtothedefendant"since"theuncertaintyarisesfromthedefendant'swrong")(emphasisadded).
136SeeRestatement(Third)ofRestitution§51(4)(statingthatdisgorgementisaremedythatseeksto"eliminateprofitfromwrongdoing"andthatthe"unjustenrichmentofaconsciouswrongdoer.
.
.
isthenetprofitattributabletotheunderlyingwrong").
137Seesupranotes134-135andaccompanyingtext(concerningburdenshifting);optionsXpress,Inc.
,ExchangeActReleaseNo.
78621,2016WL4413227,at*36&nn.
131-32(Aug.
18,2016)(recognizingthatevenwhenarespondentmaybe"'entitledtoadeductionforallmarginalcostsincurredinproducingtherevenuesthataresubjecttodisgorgement,'"therespondenthastheburdentoestablishsuchanoffset,sincethe"riskofuncertainty"properlyfallsonthewrongdoer)(quotingRestatement(Third)ofRestitution§51cmt.
H).
38apportionproportionally$93,000forAurum(93%),$6,000forPanAm(6%),and$1,000forCorsair(1%).
138Thus,weorderthat(i)Aurumdisgorge$3,615,964.
99plusprejudgmentinterest;(ii)PanAmdisgorge$224,000plusprejudgmentinterest;and(iii)Corsairdisgorge$38,563plusprejudgmentinterest.
E.
WeorderthatClugpayonethird-tiercivilmoneypenalty.
ExchangeActSection21B(a)(2)andInvestmentCompanyActSection9(d)authorizeustoimposecivilmoneypenaltiesforwillfulviolationsofthesecuritieslawswhensuchpenaltiesareinthepublicinterest.
139Indeterminingthepublicinterest,weconsider:(1)whethertheactoromissioninvolvedfraud;(2)whethertheactoromissionresultedinharmtoothers;(3)theextenttowhichanypersonwasunjustlyenriched;(4)whethertheindividualhascommittedpreviousviolations;(5)theneedtodetersuchpersonandothersfromcommittingviolations;and(6)suchothermattersasjusticemayrequire.
140Athree-tiersystemestablishesthemaximumpenaltywemayimposeonanindividual:(1)afirst-tierpenaltyupto$7,500foreachactoromission;(2)asecond-tierpenaltyupto$75,000foreachactoromissioninvolvingfraudorrecklessdisregardofaregulatoryrequirement;and(3)athird-tierpenaltyupto$150,000foreachactoromissioninvolvingfraudorrecklessdisregardofaregulatoryrequirementthat,directlyorindirectly,resultedin(orcreatedasignificantriskof)substantiallossestootherpersonsorresultedinsubstantialgaintothewrongdoer.
141Wefinditinthepublicinteresttoimposeathird-tierpenaltyof$150,000onClugfortheAurumviolations.
142Clugdefraudedinvestors,causedsubstantiallosses,andreceivedsubstantialgains.
Theimpositionofacivilpenalty"isnecessaryforthedeterrenceofsecurities138Webasethesepercentagesonthepercentageofthetotaldisgorgementamounttobepaidbyallthreeentitiesattributabletoeachindividualentity.
13915U.
S.
C.
§§78u-2(a)(1)&(2),80a-9(d)(1).
14015U.
S.
C.
§80a-9(d)(c).
14115U.
S.
C.
§78u-2(b),80a-9(d)(2);17C.
F.
R.
§201.
1001.
ThesearethemaximumsformisconductbetweenMarch4,2009andMarch5,2013.
17C.
F.
R.
§201.
1001,TableI.
142Cf.
TimothyS.
Dembski,ExchangeActReleaseNo.
80306,2017WL1103685,at*16(Mar.
24,2017)(imposing"onemaximum$150,000third-tiercivilpenaltyfortheoralmisrepresentationsandonemaximum$150,000third-tierpenaltyforthewrittenmisrepresentation"),petitiondenied,726F.
App'x841(2dCir.
2018).
Althoughtherelevantsecuritieslaws"specifythatpenaltiescanbeimposed'foreachactoromission'inviolationofthefederalsecuritieslaws,"whichmeansthat"ahigherpenaltycouldbecalculatedonthebasisofseveraldiscreteviolations,"weexerciseourdiscretiontoimposeasinglepenaltyforthemisconductClugengagedinatAurum.
Seeid.
(notingthatthepenaltiesimposed"arelessthanweareauthorizedtoimpose:amaximumthird-tierpenaltyof$150,000foreachfraudulentmisrepresentationthatDembskimade");seealsoDennisJ.
Malouf,ExchangeActReleaseNo.
78429,2016WL4035575,at*27-28(July27,2016)(imposingasinglepenaltyforthetotalityofthemisconduct),aff'd,933F.
3d1248(10thCir.
2019);cf.
GuyP.
Riordan,ExchangeActReleaseNo.
61153,2009WL4731397,at*21-22(Dec.
11,2009)(imposingapenaltyforeachviolativetransaction),petitiondenied,627F.
3d1230(D.
C.
Cir.
2010).
39lawviolations"becauseotherwiseClugwouldbe"requiredmerelytogivebackhisgainswithinterest,leavinghimnoworseofffinanciallythanifhehadnotviolatedthelaw.
"143Clugcontendsthat,insettlingwithCrow,theCommission"reduce[d]Crow'sfinancialpenaltybyalmost90%,fromthe$900,000.
00orderedbyALJPatilto$100,000.
"TotheextentClugisarguingthatitisunfairtoimposeahigherpenaltyonhimthanweimposedonCrow,wehavelongheldthattheremediesimposedinsettledactionsareinappropriatecomparisonsbecausepragmaticconsiderationsjustifyacceptinglesserremediesinasettlement.
144Indeed,wehaveheldthat"respondentswhooffertosettlemayproperlyreceivelessersanctionsthantheyotherwisemighthavereceived"andthatasaresultitisnotunfairifalitigatedproceedingresultsingreatersanctionsonarespondentwhoislessculpablethanonthesettlingco-respondent.
145WealsonotethatCrowandClugarenotsimilarlysituated.
OnlyClugappealedtheinitialdecision.
Asdiscussedabove,bothCrowandClugweregiventheopportunityforanewhearingbeforeanALJthathadnotparticipatedinthematterpreviouslyaftertheSupremeCourtissueditsdecisioninLuciav.
SEC.
146CrowwaivedhisrighttoanewhearingandinsteadsettledwiththeCommission.
147Asaresult,theCommissiondidnothavetoholdanewhearingwithrespecttoarespondentwhohadnotappealedtheinitialdecision,andCrowwasorderedtopaytotalmonetarysanctionsof$100,000ratherthanthemonetarysanctionsorderedintheinitialdecision.
ClugalsowaivedhisrighttoanewhearingbutaskedthattheCommission"decidetheissuesraisedin"thepetitionforreviewoftheinitialdecisionthathehadfiledwithout"takingnewevidence.
"WithrespecttoClug,theinitialdecisionhadimposedtotalmonetarysanctionsof$50,000.
Underallofthesecircumstances,wedonotbelieveitisappropriatetocomparethesanctionsimposedonCrowinhissettlementandthesanctionsimposedonCluginthisdecision.
TotheextentClugisarguingthatheisbeingpenalizedbecausehechosetoappealtheALJ'sinitialdecisionratherthansettletheproceeding,thefactsofthiscasedonotsupportthatconclusion.
AlthoughwerecognizethatweareimposinggreatermonetarysanctionsonClug143SECv.
Coates,137F.
Supp.
2d413,429(S.
D.
N.
Y.
2001)(citationomitted).
144See,e.
g.
,MichaelC.
Pattison,CPA,ExchangeActReleaseNo.
67900,2012WL4320146,at*11-12(Sept.
20,2012)(recognizingthatsanctionsinlitigatedcasescannotbecomparedtosanctionsinsettledcasesbecausesettlementsavoid"time-and-manpowerconsumingadversaryproceedings"andthusmayresultinlessersanctions);AnthonyA.
Adonnino,ExchangeActReleaseNo.
48618,2003WL22321935,at*9(Oct.
9,2003)(same),aff'd,111F.
App'x46(2dCir.
2004).
Clugrepeatsmanyofthesamepublicinterestargumentswithrespecttocivilpenaltiesashedidwithrespecttothebars.
Wefindthatacivilpenaltyiswarrantednotwithstandingtheseconsiderationsforthesamereasonsthatwefoundthebarswarrantednotwithstandingtheseconsiderations.
145LeslieA.
Arouh,ExchangeActReleaseNo.
50889,2004WL2964652,at*11(Dec.
20,2004)(rejectingargumentthatitwasunfairtoimposeabar,cease-and-desistorder,andthird-tiercivilmoneypenaltyonrespondentwheresettlingco-respondentwhorespondentclaimedwas"moreculpable"wassanctionedonlywithacease-anddesistorder).
146Seesupranote12andaccompanyingtext.
147SeeCrow,2018WL6722724.
40thandidtheinitialdecision,itisnotbecauseClugfiledapetitionforreview,butratherbecausetherecord,includingtheALJ'sfindings,supportssuchsanctions.
Intheinitialdecision,theALJstatedthathewouldhaveimposeddisgorgementof$386,810.
01onClugbutthathewoulddiscounttheamountto$50,000basedonClug'sshowingofaninabilitytopay.
148TheALJalsocitedClug'sinabilitytopayindecliningtoimposeacivilmoneypenalty.
Asdiscussedbelow,however,therecordindicatesthatClughasanabilitytopayandthathedidnotfullydisclosehisassetswhenthecasewaspendingbeforetheALJ.
Nonetheless,weimposedisgorgementonClugintheamountof$286,810.
01,ratherthanthe$386,810.
01thatthelawjudgesaidhewouldhaveimposedbutforaninabilitytopay.
Astothecivilmoneypenalty,weimposeitnotbecauseClugappealedtheinitialdecisionbutbecausethefactorsdiscussedaboveindicatethatacivilmoneypenaltyisinthepublicinterestandtherecordnowbeforetheCommissionrevealsthathehastheabilitytopay.
F.
WefindthatClughasnotestablishedaninabilitytopaythemonetarysanctions.
WerejectClug'sassertedinabilitytopaydisgorgementorcivilpenalties.
149"Theburdenofprovingfinancialinabilitytopay.
.
.
fallsupontherespondent.
"150Here,Clughasrepeatedlyfailedtodisclosesignificantfinancialinformationrelevanttosuchadefense.
151InAugust2015,Clugfiledafinancialdisclosurestatementtodemonstratehisinabilitytopay.
AlthoughRuleofPractice630(b)requiredthathekeephisstatementcurrent,152Clugdidnotdisclosethathepurchasedahomeinanall-cashtransactioninDecember2015usingmoneyloanedfromafamilymembereitherbeforetheALJissuedtheinitialdecisionin2016orwhenClugsubsequentlyfiledhispetitionforreviewandsupportingbriefs.
TheDivisiondiscoveredthepurchaseanddiscloseditonJanuary8,2018.
148Asdiscussedabove,onremandtheALJlaterincreasedClug'sdisgorgementto$67,000.
149TheALJdidnotimposemonetarypenaltiesonAurum,PanAm,orCorsairbecausehefoundthat"eachoftheentitiesiswithoutmoney(accordingtotheDivision'sownsummaryanalysis).
"Forthisreason,wealsodeclinetoimposecivilpenaltiesonthoseentities.
Butevenwhenarespondent"demonstratesaninabilitytopay,wehavediscretionnottowaive.
.
.
disgorgement.
.
.
particularlywhenthemisconductissufficientlyegregious.
"GregoryO.
Trautman,SecuritiesActReleaseNo.
9088A,2009WL6761741,at*24(Dec.
15,2009).
Asdiscussedabove,Aurum'sandPanAm'santifraudviolationswereegregious,andCorsair'sarrangementwithABSfacilitatedinvestmentswithAurum.
WefindcivilpenaltiesonAurum,PanAm,andCorsairtobeinappropriateinlightoftheirfinancialcircumstances,butthemisconductatissueleadsustoconcludethatawaiverofdisgorgementisnotappropriate.
150TerryT.
Steen,ExchangeActReleaseNo.
40055,1998WL278994,at*6(June2,1998).
151BecauseitappearsthattheALJdidnothavealltheinformationrelevanttoClug'sassertedinabilitytopay,wedonotplacesignificantweightonhisfindingthatClugdemonstratedaninabilitytopaysufficienttoimposelessermonetarysanctionsthandowe.
15217C.
F.
R.
§201.
630(b).
41OnJanuary31,2018,Clugfiledanupdatedfinancialdisclosurestatement.
AlthoughClugdisclosedthathehadobtainedemploymentin2016atAVRAMedicalRobotics,Inc.
,heomittedthathewasthebeneficialownerofmorethan1millionAVRAshares.
153WhentheDivisiondiscoveredthisinformation,ClugdidnotdenyitandrespondedonlythatAVRA"hasnotradingsymbolandisthusnotlistedonanyexchange.
"InJanuary2019,ClugdisclosedinasupplementalbriefthathehadresignedasAVRA'sVicePresidentofGlobalBusinessDevelopmentinJuly2018.
Clugdidnotdisclosethat(i)someoftheAVRAshareshadbeentransferredtohiswife,154andthat(ii)AVRAwasthentradingontheover-the-countermarket(atapriceofabout$3pershareinJanuary2019,themonthofClug'sfiling).
155Thus,ClugrepeatedlyfailedtodisclosethatheandhiswifewerethebeneficialownersofAVRAsharesthatappeartohavebeenworthmorethan$3millioninJanuary2019.
Accordingly,wefindthatClughasnotestablishedaninabilitytopaybecause(i)hisrepeatedfailurestodisclosesignificantfinancialinformationmakehisclaimnotcredible;156and(ii)theevidencesuggeststhathisnetworthisinexcessofthemonetarysanctionsweimpose.
157Inanycase,wewouldimposethemonetarysanctionsevenifClugestablishedaninabilitytopay.
Inabilitytopayisonlyonefactorthatinformsourdeterminationandisnotdispositive.
158Wehavediscretionnottowaivemonetarysanctions"particularlywhenthemisconductissufficientlyegregious.
"159Asdiscussedabove,Clug'smisrepresentations153AVRA'sFormS-1/AfiledonJuly13,2017,statedthatClugowned150,000sharesand300,000stockoptionsandhadvotinganddispositivecontrolof1,000,000sharesheldbyTheMustangTrustofwhichhewasthetrustee.
WetakeofficialnoticeofthisEDGARfilingpursuanttoRuleofPractice323,17C.
F.
R.
§201.
323(permittingtheCommissiontotakeofficialnoticeof"anymatterinthepublicofficialrecordsoftheCommission").
154AnamendmenttoAVRA'sFormS-1A,filedonDecember7,2018,statedthatClugowned300,000stockoptionsandhiswifeowned150,000sharesandhadvotinganddispositivecontrolof890,000sharesheldbyTheMustangTrustofwhichshewasthetrustee.
155WetakeofficialnoticeofAVRA'ssharepricehistoryathttps://www.
nasdaq.
com/symbol/avmr/historical.
SeeRichardA.
Holman,ExchangeActReleaseNo.
6931,1962WL69563(Nov.
6,1962)(takingofficialnoticeofOTCstockpricequotations).
156SeeWilliamJ.
Murphy,ExchangeActReleaseNo.
69923,2013WL3327752,at*26(July2,2013)(findingthatrespondent'sfinancialsubmissioninsupportofinability-to-paydefensewas"unreliable"becauseofits"gaps,inconsistencies,andseeminginaccuracies"),petitiondenied,751F.
3d472(7thCir.
2014).
157SeeBurns,2011WL3407859,at*12(findingthatrespondentdidnotdemonstrateinabilitytopaymonetarysanctionsof$249,000becausehispurportednetworthof$277,000was"sufficienttopay"thesanctions);Lehman,2006WL3054584,at*9(findingthatrespondentdidnotdemonstrateaninabilitytopaya$55,000penaltybecausethe"recordevidencesuggeststhathisnetworthiswellinexcessofthatamount").
158Trautman,2009WL6761741,at*24.
159Lehman,2006WL3054584,at*4.
42regardingAurumyieldedsignificantpecuniarygainsforhimselfwhilecausingsignificantharmtoinvestors.
Inthesecircumstances,allowingClugtoretaintheamountbywhichhewasunjustlyenrichedorpayonlythatamountandnotapenaltywouldnotbeinthepublicinterest.
G.
FairFundBasedonthefactsofthiscase,wefindthatitisappropriatetoorderthatthedisgorgement,prejudgmentinterest,andcivilpenaltybeusedtocreateaFairFundforthebenefitofinvestorsharmedbyRespondents'violations.
160Anappropriateorderwillissue.
161BytheCommission(ChairmanCLAYTONandCommissionersPEIRCE,ROISMAN,LEE,andCRENSHAW).
VanessaA.
CountrymanSecretary16017C.
F.
R.
§201.
1100.
Aurumhadabout35investorsandPanAmhadabout15investors.
TheDivisionhasnotexpressedaviewonwhethertocreateaFairFundhere,butthestatutoryandregulatoryschemeveststheCommissionwiththediscretionaryauthoritytocreateonein"anyadministrativeproceedinginwhichafinalorderisenteredagainstarespondentrequiringdisgorgementandpaymentofacivilmoneypenalty.
"AdoptionofAmendmentstotheRulesofPractice,ExchangeActReleaseNo.
49412,2004WL503739,at*5(March12,2004);seealso15U.
S.
C.
§7246(a)(providingforcreationofFairFund"atthedirection"oftheCommission);OfficialComm.
ofUnsecuredCreditorsofWorldCom,Inc.
v.
SEC,467F.
3d73,82-85(2dCir.
2006)(recognizingCommission'sdiscretionregardingcreationandtermsofaFairFund).
161Wehaveconsideredalloftheparties'contentions.
Wehaverejectedorsustainedthemtotheextentthattheyareinconsistentorinaccordwiththeviewsexpressedinthisopinion.
RuleofPractice451(d)permitsamemberoftheCommissionwhowasnotpresentatoralargumenttoparticipateinthedecisionofthatproceedingifthatmemberhasreviewedthetranscriptofthatargumentpriortosuchparticipation.
Here,therequiredreviewhasbeenmade.
UNITEDSTATESOFAMERICAbeforetheSECURITIESANDEXCHANGECOMMISSIONSECURITIESACTOF1933ReleaseNo.
10886/November9,2020SECURITIESEXCHANGEACTOF1934ReleaseNo.
90385/November9,2020INVESTMENTCOMPANYACTOF1940ReleaseNo.
34089/November9,2020Admin.
Proc.
FileNo.
3-16318IntheMatterofALEXANDRES.
CLUG,AURUMMINING,LLC,PANAMTERRA,INC.
,andTHECORSAIRGROUP,INC.
ORDERIMPOSINGREMEDIALSANCTIONSOnthebasisoftheCommission'sopinionissuedthisday,itisORDEREDthatAlexandreS.
ClugceaseanddesistfromcommittingorcausinganyviolationsorfutureviolationsofSection10(b)oftheSecuritiesExchangeActof1934andRule10b-5(b)thereunder;ExchangeActSection13(a)andRules12b-20,13a-1,13a-13,and13a-14(a)thereunder;andExchangeActSection15(a)(1);anditisfurtherORDEREDthatAurumMining,LLCceaseanddesistfromcommittingorcausinganyviolationsorfutureviolationsofExchangeActSection10(b)andRule10b-5(b)thereunder;thatPanAmTerra,Inc.
ceaseanddesistfromcommittingorcausinganyviolationsorfutureviolationsofExchangeActSections10(b)and13(a)andRules10b-5(b),12b-20,13a-1,and13a-13thereunder;andthatTheCorsairGroup,Inc.
ceaseanddesistfromcommittingorcausinganyviolationsorfutureviolationsofExchangeActSection15(a)(1);anditisfurtherORDEREDthatAlexandreS.
Clugisbarredfromassociatingwithanybroker,dealer,investmentadviser,municipalsecuritiesdealer,municipaladvisor,transferagent,ornationallyrecognizedstatisticalratingorganization;barredfromactingasapromoter,finder,consultant,oragent,orotherwiseengaginginactivitieswithabroker,dealer,orissuerforpurposesoftheissuanceortradinginanypennystock,orinducingorattemptingtoinducethepurchaseorsaleofanypennystock,withtheexceptiondiscussedintheaboveopinion;andprohibitedpermanentlyfromservingoractingasanemployee,officer,director,memberofanadvisory2board,investmentadviserordepositorof,orprincipalunderwriterfor,aregisteredinvestmentcompanyoraffiliatedpersonofsuchinvestmentadviser,depositor,orprincipalunderwriter;anditisfurtherORDEREDthatAlexandreS.
Clugdisgorge$286,810.
01,plusprejudgmentinterestof$90,221.
23,suchprejudgmentinterestcalculatedbeginningfromDecember1,2013,withsuchinterestcontinuingtoaccrueonfundsoweduntiltheyarepaid,inaccordancewithRuleofPractice600,17C.
F.
R.
§201.
600;anditisfurtherORDEREDthatAurumMining,LLCdisgorge$3,615,964.
99,plusprejudgmentinterestof$1,137,466.
41,suchprejudgmentinterestcalculatedbeginningfromDecember1,2013,withsuchinterestcontinuingtoaccrueonfundsoweduntiltheyarepaid,inaccordancewithRuleofPractice600,17C.
F.
R.
§201.
600;thatPanAmTerra,Inc.
disgorge$224,000,plusprejudgmentinterestof$76,432.
05,suchprejudgmentinterestcalculatedbeginningfromApril1,2013,withsuchinterestcontinuingtoaccrueonfundsoweduntiltheyarepaid,inaccordancewithRuleofPractice600,17C.
F.
R.
§201.
600;andthatTheCorsairGroup,Inc.
disgorge$38,563,plusprejudgmentinterestof$12,130.
69,suchprejudgmentinterestcalculatedbeginningfromDecember1,2013,withsuchinterestcontinuingtoaccrueonfundsoweduntiltheyarepaid,inaccordancewithRuleofPractice600,17C.
F.
R.
§201.
600;anditisfurtherORDEREDthatAlexandreS.
Clugpayacivilmoneypenaltyof$150,000.
ORDEREDthatthedisgorgement,prejudgmentinterest,andcivilmoneypenaltyamountsbeusedtocreateaFairFundforthebenefitofinvestorsharmedbyRespondents'violationspursuanttoRulesofPractice1100-1106.
Paymentofcivilmoneypenaltiesanddisgorgementplusprejudgmentinterestshallbe(i)madebyUnitedStatespostalmoneyorder,certifiedcheck,bankcashier'scheck,orbankmoneyorder;(ii)madepayabletotheSecuritiesandExchangeCommission;(iii)mailedtoEnterprisesServicesCenter,AccountsReceivableBranch,HQBldg.
,Room181,6500SouthMacArthurBlvd.
,OklahomaCity,OK73169;and(iv)submittedundercoverletterthatidentifiestherespondentandthefilenumberofthisproceeding.
BytheCommission.
VanessaA.
CountrymanSecretary