Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_01-cv-03376/USCOURTS-cand-3_01-cv-03376-5/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:77 Securities Fraud

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United States District Court

For the Northern District of California

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United States District Court

For the Northern District of California

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SECURITIES & EXCHANGE COMMISSION,

Plaintiff,

v

M & A WEST, INC et al,

Defendants. /

No C-01-3376 VRW

ORDER

This court granted summary judgment for plaintiff

Securities & Exchange Commission (“SEC”) against defendant Stanley

Medley (“Medley”) on the SEC’s claim that Medley offered and sold

securities without filing a required registration statement,

violating sections 5(a) and (c) of the Securities Act of 1933 (the

“Securities Act”), 15 USC §§ 77e(a) and (c). SJ Ord (Doc #136). 

Medley procured these securities as payment for facilitating three

reverse merger transactions. Id at 6-9. The summary judgment

order discusses the main facts of this case so there is no need to

recite them here, though further relevant facts will be discussed

as needed below.

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The court reserved the matter of remedies for future

consideration and asked both parties to brief the issue. Id at

20:19-21:4. The SEC submitted a memorandum requesting three

separate remedies: disgorgement with interest, civil penalties and

a permanent injunction. SEC Br (Doc #141). Medley objected to all

of these remedies and moved to strike most of the supporting

exhibits that plaintiff had attached to its memorandum. Medley Br

(Doc #145-1). The court considers these issues in turn.

I

The SEC seeks to disgorge with interest the salary that

Medley received for the reverse merger transactions. SEC Br at 5-

7, 10-12. It also seeks with interest profits from the

unregistered sales of securities that Medley received in the

reverse mergers. Id. 

“The district court has broad equity powers to order the

disgorgement of ‘ill-gotten gains’ obtained through the violation

of securities laws.” SEC v First Pacific Bancorp, 142 F3d 1186,

1191 (9th Cir 1998). And whether to award prejudgment interest is

a question of fairness lying within the court’s sound discretion

and depending on the balancing of equities. Knapp v Ernst &

Whinney, 90 F3d 1431, 1441 (9th Cir 1996); SEC v Henke, 275 F Supp

2d 1075, 1082 (ND Cal 2003). The court should “consider a number

of factors, including whether prejudgment interest is necessary to

compensate the plaintiff fully for his injuries, the degree of

personal wrongdoing on the part of the defendant, the availability

of alternative investment opportunities to the plaintiff, whether

the plaintiff delayed in bringing or prosecuting the action, and

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other fundamental conditions of fairness.” Osterneck v Ernst &

Whinney, 489 US 169, 176 (1989).

In this case, summary judgment was granted against Medley

for selling unregistered stock, which he had received as payment

for facilitating three separate reverse mergers involving

VirtualLender.com, Inc (“Virtual Lender”), M&A West, Inc (“M&A

West”) and Digital Bridge, Inc (“Digital Bridge”). SJ Ord at 6-9. 

Medley pocketed approximately $1.8 million from his illegal stock

sales and he received a salary of $175,000 for facilitating the

three reverse mergers. SEC Br at 5-7.

Even though Medley may be honest in his claims that he

will not violate the securities laws in the future, such assurances

do not cure past misdeeds. Simply put, Medley should not be

allowed to benefit from his unlawful conduct, even if he acted in

good faith. And disgorging Medley’s profits might deter other

would-be violators from engaging in similar behavior. Hence,

disgorgement with interest is an appropriate remedy here.

Concerning the amount to disgorge, the SEC seeks to

recover the money received from the Virtual Lender, M&A West and

Digital Bridge mergers, as well as from a fourth reverse merger

involving Workfire.com (“Workfire”). SEC Br at 10-12. Summary

judgment was not granted against Medley for the Workfire merger

because Medley did not sell any stock that he received from the

transaction, though he did receive a salary of $75,000. SJ Ord at

17:19-22; SEC Br at 6:2-3. The SEC argues that the disgorgement

remedy should include Medley’s Workfire salary because he

facilitated the merger to help other co-defendants violate the

securities laws.

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The court disagrees with the SEC’s argument. In effect,

the SEC’s proposed remedy would relitigate the issue of Medley’s

liability for the Workfire merger, on which summary judgment was

not granted. If the SEC wants to disgorge the $75,000 that Medley

received for that transaction, then it must first obtain a judgment

against him on that matter. The SEC cannot piggyback liability for

the Workfire transaction on the other mergers.

Accordingly, Medley must disgorge with interest the

salary and profits from stock sales for the three reverse merger

transactions for which he was held liable. Because Medley never

objected to any aspect of the SEC’s disgorgement calculation other

than the inclusion of the Workfire merger, the court adopts the

SEC’s proposed annual compounding method, which is reasonable. 

Disgorgement plus pre-judgment interest (D) is calculated using the

formula: D = P(1 +r/m)^(t*m), where P = disgorgement principal

value, r = pre-judgment interest rate, m = number of times per year

interest is compounded and t = number of years. Cf Richard A

Brealey & Stewart C Myers, Principles of Corporate Finance 36-39

(McGraw-Hill, 1991). Under the annual compounding method adopted

by the SEC, m = 1, so the formula simplifies: D = P(1+r)^t.

The court accepts the SEC’s proposed values of P =

$1,990,750.44 and t = 4 5/6 years, which approximates the time

between Medley’s last unregistered sale on October 3, 2000, and the

hearing on August 11, 2005. SEC Rev Calc (Doc #153), Ex 27A. The

court also adopts the SEC’s proposed pre-judgment interest rate of

6.08%, which is r = .0608. Id. Even though 28 USC § 1961 on its

terms applies only to post-judgment interest, the Ninth Circuit has

suggested that courts should also use that provision to calculate

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pre-judgment interest rates unless there is substantial evidence

that the case’s equities require a different rate. Western Pacific

Fisheries, Inc v SS President Grant, 730 F2d 1280, 1289 (9th Cir

1984). Under 28 USC § 1961(a), the interest rate to apply is “the

weekly average 1-year constant maturity Treasury yield, as

published by the Board of Governors of the Federal Reserve System,

for the calendar week preceding * * * the date of the judgment.” 

Adapting this language to the pre-judgment context here, the court

agrees with the SEC that the relevant date is October 3, 2000, the

date of Medley’s last sale. SEC Rev Calc, Ex 27A. The court also

believes the SEC in its claim that the § 1961(a) rate on that date

was 6.08%, and hence, the court adopts r = .0608 for calculating

pre-judgment interest.

Plugging in these values into the annual compounding

formula, the court calculates that Medley owes $2,647,964.29 in

disgorgement plus interest.

II

The court next determines whether it can award civil

penalties and/or injunctive relief on summary judgment. Unlike at

the liability stage, in which scienter was irrelevant, scienter

matters when determining the amount and type of these remedies. 

And the issue of scienter is disputed between the parties here. 

SEC Br at 14:16-19, 17:13-14; Medley Br at 8:25-26, 12:25-26. 

Nonetheless, the court can set a civil penalty and injunction on

summary judgment because specifying these remedies does not

implicate the Seventh Amendment jury trial right. “[T]he right to

a jury trial does not attach to purely injunctive actions brought

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by the [Securities and Exchange] Commission.” SEC v Rind, 991 F2d

1486, 1493 (9th Cir 1993). Also, “a determination of a civil

penalty is not an essential function of a jury trial, and * * * the

Seventh Amendment does not require a jury trial for that purpose in

a civil action.” Tull v United States, 481 US 412, 427 (1987). 

Hence, the court can decide the scope of both of these remedies

based on the briefs and the oral hearing held on August 11, 2005.

In determining the civil penalty amount, the court must

consider the facts and circumstances of the case. 15 USC §

77t(d)(2)(A). The SEC alleges that Medley committed three “secondtier” Securities Act violations that should be punished at $55,000

each, summing to $165,000. SEC Br at 14:14-15; 15 USC §

77t(d)(2)(B); 17 CFR § 201.1001 & tbl 1. A second-tier penalty is

an intermediate level sanction that can be imposed only if the

violation “involved fraud, deceit, manipulation, or deliberate or

reckless disregard of a regulatory requirement.” 15 USC §

77t(d)(2)(B). The SEC asserts that Medley deliberately or

recklessly failed to register his sales of stock that he received

for facilitating the three reverse merger transactions on which

summary judgment was granted. SEC Br at 13-14.

In rebuttal, Medley only argues that he did not knowingly

violate the registration provisions. He asserts that at most, he

should receive a “first-tier” penalty, which permits fines of

$5,500 per violation, even if committed in good faith. Medley Br

at 12:16-26; 15 USC § 77t(d)(2)(A); 17 CFR § 201.1001 & tbl 1.

The court agrees with the SEC that Medley deserves

second-tier penalties. The SEC asserts that Medley deliberately

tried to hide his involvement in the illegal securities

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transactions by using another individual, Robert Bryan, as a

nominee for Medley’s shares, and then transferring the shares into

two companies that Medley controlled, Fordee Management Company

(“Fordee Management”) and Byzantine Investments, Inc (“Byzantine”). 

SEC Br at 7-9. Medley contends that this arrangement was for

estate planning — he claims that Bryan is a friend who is a

godfather of Medley’s children and was to be the trustee of Fordee

Management if Medley died. Ro Decl (Doc #110), Ex 2 at 24:21-25:1. 

Medley also claims he can show his good faith through attorney

opinion letters apparently approving his stock sales. Medley Br at

6:6-12.

Medley’s arguments fail to persuade. Medley has not

shown how involving these companies or Bryan in the reverse mergers

furthered his estate planning. In fact, Medley’s deposition

testimony suggests otherwise. Medley admitted that he deposited

his merger consulting fees with these companies in a “fairly

arbitrary” fashion, which suggests that he did not have a carefully

thought-out estate planning scheme. Ro Decl, Ex 1 at 37:16-38:3. 

When asked why Bryan was named a party to a merger, Medley

answered:

You know, I don’t know. It was sort of like — we had

never done a transaction with these people before. And

it was just sort of a way of protecting our transfers by

including his name in the document. It was a way of him

having noncircumvention agreements. It was a way of not

potentially screwing us and excluding us from the

transaction. And that was the only reason it was put in. 

No one objected to it, and left it in, so it protected

our interest.

Id, Ex 2 at 188:12-20. This response, which makes little sense,

differs from Medley’s purported estate planning rationale. And

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Medley’s claim that Bryan is a friend with important

responsibilities over Medley’s children is dubious considering that

Medley admitted he had not visited Bryan in years and did not know

where Bryan lived. Id, Ex 1 at 33:12-19; id, Ex 2 at 25-27. 

Although Medley claimed that “Robert [Bryan] works for me, and I

asked [Bryan] to find some people that had shells,” he never could

explain why Bryan was Medley’s nominee in the mergers. Id, Ex 2 at

45:8-17.

Medley’s alleged reliance on attorney opinion letters

does not help him either. Medley has provided three opinion

letters apparently approving stock sales stemming from the

Workfire, Black Stallion and M&A West reverse mergers. Medley SJ

Decl (Doc #121), Ex 1. Medley did not sell shares that he received

from the Workfire transaction, so the opinion letter for that

transaction is irrelevant. SJ Ord at 12:11-17.

Also, Medley cannot rely on the attorney opinion letter

approving the stock sales relating to the Black Stallion

transaction because the attorney, Thomas H Cadden (“Cadden”),

assumed incorrect facts. Cadden’s opinion letter on February 4,

2000, approves the reissuance of stock that shareholders — which

included Robert Bryan and Fordee Management — received in the Black

Stallion reverse merger. Medley SJ Decl, Ex 1 at 3-4. But

Cadden’s opinion is based on an explicit assumption that “the

shareholders * * * had no prior relationship with the Company by

share ownership or otherwise.” Id at 2. This assumption was

incorrect because both Bryan and Fordee Management had significant

prior relationships with the company — both parties received their

shares through the merger, and Fordee Management was controlled by

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Medley, who facilitated the merger. SJ Ord at 8-9. Medley claims

he informed Cadden about his relationship with Bryan and Fordee

Management, but he does not provide any evidence to support this

naked assertion. Medley Decl (Doc #146) at ¶ 7. “To qualify for

an advice of counsel [jury] instruction, the defendant must show

that there was full disclosure to his attorney of all material

facts, and that he relied in good faith on the specific course of

conduct recommended by the attorney.” United States v

Ibarra-Alcarez, 830 F2d 968, 973 (9th Cir 1987). Hence, the Cadden

attorney opinion letter does not shield Medley from civil

penalties.

Moreover, Medley cannot rely on the opinion letter

approving the stock sales for the M&A West transaction because the

opinion is tainted by a conflict of interest. Gary S Joiner

(“Joiner”) is the attorney who provided a May 13, 1999, opinion

letter indicating that Fordee Management, a purchasing shareholder,

could reissue its shares without restriction. Medley SJ Decl, Ex 1

at 7-9. The opinion letter also indicates that Joiner is the

leading selling shareholder in the transaction. Id at 7. Joiner’s

large stake in the transaction may have created an incentive for

him to find the stock sales to be legal when in fact they were not. 

Hence, Joiner may have been tainted in his ability to provide an

objective opinion letter. Because this conflict of interest was

apparent on the very face of the opinion letter, Medley cannot

claim that he relied in good faith on the letter in selling the

unregistered stock.

The only reasonable explanation why Medley used Bryan and

the shell companies was to shield Medley’s involvement in the

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illegal securities transactions. Although Bryan was a nominee for

the three reverse mergers, the shares were ultimately transferred

to Fordee Management and Byzantine — entities that Medley

controlled. SJ Ord at 6-9. Medley then illegally sold this stock

for nearly $2 million. Bryan, however, received only “a small

amount of money” and was “not really getting commission” for his

involvement in the scheme. Ro Decl, Ex 2 at 158:2-14. This

arrangement suggests that Bryan was involved in the transaction

only in name to shield Medley, who was the true beneficiary.

Moreover, the court believes that second-tier civil

penalties are necessary here to deter future fraudulent conduct. 

Even if Medley’s business does not focus primarily on reverse

mergers, as he claims, a civil penalty will make Medley think twice

before pursuing any questionable business practice. And even if

Medley is honest when he claims that he will obey the law in the

future, civil penalties can still deter others from similarly

breaking the law.

Finally, the court notes that the SEC has shown restraint

in the penalty it seeks. Under 15 USC § 77t(d)(2), the SEC may

impose a civil penalty up to the amount disgorged, even for a

first-tier violation. This penalty would have been about $2

million, which would far exceed the $165,000 requested by the SEC. 

Alternatively, the SEC could have treated each of Medley’s hundreds

of illegal stock sales as a separate offense. La Marca Decl (Doc

#142), Exs 28-30. Even if punished as a first-tier offense at

$5,500 per violation, the total penalty would far exceed the amount

the SEC has requested. Moreover, in determining the penalty

amount, the SEC was conscious to avoid exceeding the $550,000 of

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penalties imposed on co-defendant Frank Thomas Eck, III, who

engaged in much more egregious conduct including filing false

reports with the SEC, making false representations to auditors and

defrauding investors. Eck SJ Ord (Doc #102-1) at 2:20-28, 4:6-7. 

Given these considerations, the court agrees with the SEC that a

total civil penalty of $165,000 is appropriate, based on three

second-tier civil penalties of $55,000 each.

III

The SEC also requests a permanent injunction against

defendant’s future violations of sections 5(a) and 5(c) of the

Securities Act. SEC Br at 16-20. Although a request to enjoin

someone from breaking a law seems odd, the SEC provides two reasons

for seeking this injunction. First, the SEC claims the injunction

will send a continuing message to Medley that his future conduct

must be lawful. By hanging the sword of injunctive relief over

Medley’s head, the argument goes, he is more likely to obey the

law. Second, the SEC claims the injunction has certain practical

benefits. The SEC asserts that, for example, if Medley ever works

as an officer for a public company, he would have to disclose the

injunction against him. Hence, the injunction not only serves as a

scarlet letter, but it also warns others about Medley’s unlawful

past. The court notes that a “scarlet letter” punishment has been

upheld in another, albeit rather different, context. See United

States v Gementera, 379 F3d 596 (9th Cir 2004). Furthermore, of

course, a violation of the injunction may be punished civilly with

its less stringent burden of proof.

//

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The SEC must show that an injunction is appropriate

because there is a reasonable likelihood that Medley will violate

these laws in the future. SEC v Fehn, 97 F 3d 1276, 1295 (9th Cir

1996). The court should consider the totality of the

circumstances, including five factors: “(1) the degree of scienter

involved; (2) the isolated or recurrent nature of the infraction;

(3) the defendant's recognition of the wrongful nature of his

conduct; (4) the likelihood, because of defendant's professional

occupation, that future violations might occur; (5) and the

sincerity of his assurances against future violations.” Id at

1295-96.

The first factor strongly favors the SEC, because the

court has already determined that scienter was present by awarding

second-tier civil penalties against Medley. The second factor also

favors the agency — although there are only three reverse merger

transactions at issue, Medley repeatedly violated the law by

selling the unregistered securities hundreds of times. La Marca

Decl, Exs 28-30.

With respect to the third and fifth factor, Medley seems

to recognize the wrongful nature of his conduct, and he asserts

that his previous actions were unintentional and that he will act

lawfully in the future. Medley Br at 9:11-18, 10:5-8. 

Accordingly, these factors appear to weigh in Medley’s favor.

The parties disagree over the fourth factor, which

relates to the scope of Medley’s professional occupation. The SEC

contends that Medley is likely to repeat these offenses because he

deliberately and evasively violated the law in the past, and

because he still advises persons in offering securities to the

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public. SEC Br at 9:3-10:6, 16:21-17:12. Medley counters that

reverse merger transactions are only a small part of his business. 

Medley Decl at ¶¶ 8-9.

The court believes that this factor favors the SEC. 

Although Medley may not focus on reverse mergers, he does not

dispute that these transactions form a part of his business. And

by facilitating the reverse mergers in this case, Medley netted

about $2 million — hardly an insignificant sum. Hence, it is very

likely that Medley’s professional occupation would encourage future

violations.

Taken together, these factors support granting an

injunction. But because two of the factors weigh in Medley’s

favor, an injunction of indefinite length is too stringent. “The

district court has broad powers and wide discretion to frame the

scope of appropriate equitable relief.” SEC v United Financial

Group, Inc, 474 F2d 354, 358-59 (9th Cir 1973). Accordingly, the

court grants a five-year injunction effective today against

Medley’s future violations of sections 5(a) and 5(c) of the

Securities Act. The court believes the five-year duration prevents

Medley from violating the law in the future while not subjecting

him to the perpetual threat of an injunction.

IV

Medley objected to exhibits 32-40 that the SEC attached

to its remedies memorandum. Medley Br at 3:6-4:20. Medley moved

to strike exhibits 32-37 on the grounds that they had not been

properly authenticated, and exhibits 38-40 on the grounds that they

are inadmissible hearsay. Id. Because the court does not rely on

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any of these exhibits in this decision, Medley’s objections are

moot.

V

In sum, the court holds that Medley owes $2,647,964.29 in

disgorgement and $165,000 in civil penalties. Moreover, the court

grants a five-year injunction effective today against Medley’s

future violations of sections 5(a) and 5(c) of the Securities Act.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge

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