Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_08-cv-01464/USCOURTS-azd-2_08-cv-01464-1/pdf.json

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

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WO

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

Securities and Exchange Commission, 

Plaintiff, 

vs.

Alliance Transcription Services, Inc., et

al., 

Defendants. 

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No. CV 08-1464-PHX-NVW

ORDER

Before the Court is Plaintiff Securities and Exchange Commission’s

(“Commission”) Motion for Reconsideration Re Denial of Imposition of Penny Stock Bar

Against Raymond Dabney (doc. #93) and Defendant Richard Dabney’s Motion for

Reconsideration (doc. #97). The Court previously granted the Commission’s Motion for

Summary Judgment and asked the Commission to provide further briefing regarding the

amount of civil penalties that should be assessed against Richard Dabney, Raymond

Dabney, Charles Smith, and Phillip Young, and the justification for any amounts

proposed by the Commission. (Doc. #91.) The Court grants the Commission’s request

for civil penalties in all respects and denies both motions for reconsideration. 

I. Civil Penalties

Section 20(d)(2) of the Securities Act of 1933 (“Securities Act”) and section

21(d)(3) of the Securities Exchange Act of 1934 (“Exchange Act”) authorize a court to

impose civil penalties against a party for violating any provision of the statute or rules

enacted thereunder. 15 U.S.C. § 77t(d)(2); 15 U.S.C. § 78u(d)(3). Third tier penalties are

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The third tier penalty maximum was increased from $100,000 to $130,000 for

violations occurring after February 15, 2005. 17 C.F.R. § 201.1003. Richard Dabney’s

violations of section 10(b) and rule 10b-5 took place after February 15, 2005. 

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available where the securities law violation “involved fraud, deceit, manipulation or

deliberate or reckless disregard of a regulatory requirement [and] such violation directly

or indirectly resulted in substantial losses or created a significant risk of substantial loss to

other persons.” 15 U.S.C. § 77t(d)(2)(C). Second tier penalties are available where the

securities law violation “involved fraud, deceit, manipulation or deliberate or reckless

disregard of a regulatory requirement.” 15 U.S.C. § 77t(d)(2)(B). First tier penalties are

available for securities laws violations that did not involve fraud. See 15 U.S.C. §

77t(d)(1)-(2)(A). 

1. Richard Dabney 

The imposition of a third tier penalty against Richard Dabney is justified. The

Court previously found that Richard Dabney violated section 10(b) of the Exchange Act

and rule 10b-5 promulgated thereunder. Richard Dabney acted at a minimum with

reckless disregard of a regulatory requirement when he disseminated press releases

containing materially false information. The Commission submitted evidence that the

press releases either resulted in losses or created a substantial risk of loss to investors. 

For example, on April 26, 2005, the day Alliance announced that it had a $6 million

dollar contract with Radian, the trading volume of Alliance’s stock increased almost

tenfold and its stock price increased forty-seven percent. Investors who relied on false

press releases that stated that Alliance had contracts and sources of revenue that it did not

have risked substantial losses because those contracts and sources of revenue did not

exist. Richard Dabney has not taken responsibility for his wrongdoing nor has he given

the Court any other reason for not imposing civil penalties. Accordingly, the Court will

assess third tier civil penalties against Richard Dabney for his section 10(b) and rule 10b5 violations.1

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The evidence established that there were at least seven misleading press releases

issued in 2005 for which Dabney was responsible. If the maximum penalty per violation

were assessed, this would result in a $910,000 total penalty. This amount is excessive

because, not only does it greatly exceed the total amount Richard Dabney obtained from

Alliance (by nearly a multiple of three), but would penalize him equally for the publication

of all of the press releases, although the evidence suggests that he may have actually inserted

false information in some releases and simply approved the publication of others. 

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Courts calculate third tier penalties in two ways. The first is to impose a perviolation penalty by multiplying a defendant’s violations by a dollar amount. Sec. &

Exch. Comm’n v. CMKM Diamonds, Inc., 635 F. Supp. 2d 1185, 1192 (D. Nev. 2009). In

cases where the number of violations is difficult to discern or where assessing a perviolation penalty would be excessive, as is the case here,2

 courts have imposed a flat

penalty equal to the defendant’s gross pecuniary gain, which is generally the same as the

disgorgement amount imposed for the violations. Id. at 1193. 

The Commission has asked for a one-time third tier penalty in the amount of

$130,000, which is lower than both the maximum penalty per violation that could be

assessed ($910,000) and the disgorgement amount ($315,940.74), and is reasonable under

the circumstances. The Court will therefore assess a one-time third tier penalty in the

amount of $130,000. 

2. Raymond Dabney, Charles Smith, and Phillip Young

The Court previously found that defendants Raymond Dabney, Charles Smith, and

Phillip Young violated section 5 of the Securities Act, and the Court will assess first tier

civil penalties against each. The Commission submitted evidence that these defendants

were directly involved in the sale of unregistered securities at least fifteen times. The first

tier penalty is $6,500.00 per each violation occurring after February 14, 2005. 17 C.F.R.

§ 201.1003. Therefore, a penalty of up to $97,500 ($6,500 * 15) would be appropriate as

to each defendant. The Commission has only requested a $50,000 penalty per defendant

in light of the amounts it obtained through settlement with other defendants in this action

and in light of other settled cases that are comparable. The Court will therefore grant the

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The Commission contends in a footnote that because the 15 U.S.C. § 78u(d)(6)

penny stock bar at issue here does not contain the “public interest” language contained in the

15 U.S.C. § 78o(b)(6) penny stock bar that the court interpreted in Steadman,

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Commission’s request for a $50,000 penalty against Raymond Dabney, Charles Smith,

and Phillip Young. 

II. Motions for Reconsideration

A. Standard 

“The Court will ordinarily deny a motion for reconsideration of an Order absent a

showing of manifest error or a showing of new facts or legal authority that could not have

been brought to its attention earlier with reasonable diligence.” LRCiv 7.2(g)(1).

B. Reconsideration of Denial of Penny Stock Bar as to Defendant

Raymond Dabney

A court may enter an order prohibiting a party from participating in a penny stock

offering against “any person participating in, or, at the time of the alleged misconduct

who was participating in, an offering of penny stock.” 15 U.S.C. § 78u(d)(6)(A). When

deciding to impose such a bar, the court looks at essentially the same factors that govern

the imposition of an officer or director bar. Steadman v. Sec. & Exch. Comm’n, 603 F.2d

1126, 1140 (5th Cir. 1979). The factors are: (1) the egregiousness of the underlying

securities violation; (2) the defendant’s “repeat offender” status; (3) the defendant’s role

or provision when he engaged in the fraud; (4) the defendant’s degree of scienter; (5) the

defendant’s economic stake in the violation; and (6) the likelihood that misconduct will 

recur.3

 First Pac. Bancorp, 142 F.3d 1186, 1193 (9th Cir. 2003) (citing Sec. & Exch.

Comm’n v. Patel, 61 F.3d 137, 141 (2d Cir. 1995)).

The Court previously found that a penny stock bar against Raymond Dabney was

not warranted. The first, third, and fifth First Pacific Bancorp factors weighed in favor of

a bar because Raymond Dabney’s section 5 violations were serious, taking place over a

period of two years; he personally benefitted from the violations; and he was a direct

participant in the offending transactions. However, the second, fourth, and sixth factors

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 (continued) at least one court has ordered a penny stock bar based solely on wrongful

conduct associated with a penny stock offering and the likelihood of future violations. See

Sec. & Exch. Comm’n v. Converge Global, Inc., No. 04-80841-CIVMIDDLEBROOKS/JOHNSON, 2006 WL 907567, at *4-5, 2006 U.S. Dist. LEXIS 17581,

at *11-15 (S.D. Fla. Mar. 10, 2006). However, Converge Global makes no mention of the

differences between the two provisions cited by the Commission. See id. In addition, in

Converge Global, the court enjoined the defendant from violating section 10(B) and rule

10b-5 based upon the defendant’s “history of infractions,” the degree of scienter involved,

the egregiousness of his conduct, his failure to recognize the wrongful nature of his conduct,

and his questionable assurances against future violations. Id. The court then also issued a

penny stock bar based upon the defendant’s “misconduct in this case,” his long career and

experience in the financial services industry, and the likelihood of future violations. Id.

Thus, although Steadman was not specifically mentioned, the court’s ruling is consistent with

the application of the Steadman factors. Moreover, a number of district courts within the

Ninth Circuit have applied the Steadman factors in considering whether to issue a penny

stock bar under 15 U.S.C. § 78u(d)(6). See, e.g., Sec. & Exch. Comm’n v. Aqua Vie

Beverage Corp., 2008 WL 1914723, at *2, 2008 U.S. Dist. LEXIS 35595, at *4 (D. Idaho

Apr. 29, 2008); Sec. & Exch. Comm’n v. Abellan, _ F. Supp. 2d _, 2009 WL 4730796, at *9,

2009 U.S. Dist. LEXIS 113450, at *24 (W.D. Wash. Dec. 7, 2009). See also Sec. & Exch.

Comm’n v. Universal Express, Inc., 475 F. Supp. 2d 412, 429 (S.D.N.Y. 2007) (applying

Steadman to determine whether a penny stock bar should issue under 15 U.S.C. § 77t(g),

which contains essentially the same language as 15 U.S.C. § 78u(d)(6)).

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weighed3

 against imposing an injunction. The Commission did not show that Raymond

Dabney was a repeat offender; it only noted that he had been previously disciplined by

the British Columbia Securities Commission. The Commission did not charge Raymond

Dabney with a securities violation that required scienter. And, the Commission did not

show that there was a likelihood that misconduct would recur. The Commission now asks

the Court to reconsider its finding that the second, fourth, and sixth factors weighed

against imposing an injunction. 

1. Repeat Offender Status

The Court previously decided not to consider the prior disciplinary action taken by

the British Columbia Securities Commission against Raymond Dabney in deciding

whether he was a “repeat offender” for purposes of the second First Pacific Bancorp

factor. On November 15, 2005, Raymond Dabney entered into a settlement agreement

with the British Columbia Securities Commission that prohibited him from engaging in

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investor relations activities for five years because he issued false press releases in

connection with his company, XRAYMEDIA, Inc. Under Grunenthal GmbH v. Hotz,

712 F.2d 421, 424-26 (9th Cir. 1983), for a court to exercise jurisdiction under the federal

securities laws, the court must find that the defendant’s conduct in the United States was

significant with respect to the alleged violation. With no authority directly on point, and

in light of the Commission’s failure to show that the conduct had any connection to the

United States, the Court likewise declined to consider Raymond Dabney’s conduct in

British Columbia for purposes of deciding whether an injunction should issue. 

The Commission argues that federal securities laws have recognized that conduct

abroad may be used to bar individuals from certain roles in U.S. securities markets

because that conduct makes them unfit to fulfill those roles. The Commission cites 15

U.S.C. § 78o(b)(6)(A)(ii), which gives the Commission authority to bar a person from

associating with a broker dealer if he has been convicted of a securities related crime by a

“foreign court of competent jurisdiction” in support of this proposition. The Commission,

however, does not cite to any statutory provision that purports to give courts such

authority. Moreover, the statutory provision cited by the Commission suggests that the

threshold for grounding disciplinary action in the United States on violations of foreign

securities laws is high. The Commission has authority to bar a person who has been

convicted of a crime by a foreign court of competent jurisdiction. Here, in contrast,

Raymond Dabney entered into a settlement agreement with respect to a civil offense with

the British Columbia Securities Commission. 

The Commission nevertheless argues that at least one court considered violations

of the securities laws of another country to determine whether a defendant was a “repeat

offender” for purposes of deciding whether an injunction should issue. In SEC v. Save

the World Air, Inc., No. 01 Civ. 11586 (GBD)(FM), 2005 WL 3077514, at *16, 2005

U.S. Dist. LEXIS 28313, at *50 (S.D.N.Y. Nov. 15, 2005), the court imposed an officer

and director bar because the Commission submitted “overwhelming evidence” that the

defendant’s transgressions could not be dismissed as an isolated event. The court noted

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that the defendant had previously been cited in Australia for selling unregistered

securities, and then went on to describe multiple instances of serious violations of U.S.

securities laws involving fraud. Id. at *16-17, 2005 U.S. Dist. LEXIS 28313, at *49-51. 

The court explained, that before imposing a permanent bar, it was required to consider

whether a bar limited in time might be sufficient, “especially where there [was] no prior

history of unfitness.” Id. The court specifically refused to impose a permanent officer

and director bar, imposing instead a twenty-year bar, because “[the defendant’s] base of

operations [was] in another country, and this case mark[ed] the first time he ha[d] been

accused of wrongdoing in the United States.” Id. It is therefore unclear whether the court

placed much, if any, weight on the defendant’s foreign law violations in deciding whether

to grant an injunction. 

The Commission contends that even if it must demonstrate conduct and effect in

the United States it can do so because Raymond Dabney’s prior company,

XRAYMEDIA, Inc., was incorporated in the United States and listed as a bulletin board

stock, and Raymond Dabney used a U.S. attorney to review false press releases prior to

their issuance–suggesting that he was concerned that his company comply with U.S.

securities laws because U.S. citizens might read the press releases and invest. However,

the Commission has not attempted to show that any of the false press releases issued by

XRAYMEDIA, Inc., were disseminated in the United States or that U.S. investors were

affected in any way. 

Finally, the Commission argues that Raymond Dabney is a repeat offender

because, although the Commission did not charge him with fraudulent conduct, he

nevertheless reviewed all of the false press releases issued by Alliance and provided

advice to Richard Dabney. The Commission, however, only charged Raymond Dabney

with section 5 violations for selling unregistered securities and not with a violation

premised upon his alleged involvement in a scheme to issue false press releases. In fact,

there is not a single allegation in the Commission’s Memorandum in Support of

Plaintiff’s Motion for Summary Judgment (doc. #67) charging Raymond Dabney with

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Courts consider the same factors when deciding whether to impose officer and

director bars and whether to impose a penny stock bar. See Steadman, 603 F.2d at 1140. 

As explained above, even a limited officer and director bars requires some degree of scienter.

It follows that scienter is also required in order to impose a penny stock bar.

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participating in such a scheme. The Commission’s Local Rule 56.1 Statement (doc. #68)

does state that Raymond Dabney reviewed false press releases issued by Alliance. 

However, because he was not charged with violations premised upon the review of those

releases, Raymond Dabney may not have had the motivation to respond to those

allegations. 

In light of the foregoing, the Court did not commit “manifest error” in finding that

the second First Pacific Bancorp factor weighed against imposing a penny stock bar. 

2. Degree of Scienter Involved

As with officer and director bars, courts generally place great weight upon whether

the defendant acted with scienter in deciding whether a penny stock bar is appropriate.4

 

The Commission contends that there is strong evidence of scienter because Raymond

Dabney orchestrated the offering of unregistered securities and reviewed misleading

Alliance press releases before they were released. The reality is, however, that the

Commission did not charge Raymond Dabney with an offense that requires scienter. 

Consequently, the Commission did not attempt to show that Raymond Dabney acted with

scienter. In fact, in its Reply Brief in Support of Summary Judgment Against Richard

Dabney and Raymond Dabney (doc. #78), the Commission stated that the only defense

that Raymond Dabney raised was that his lawyer gave him advice as to how to structure

the sale of the unregistered securities. The Commission then went on to say that even

assuming, arguendo, that Raymond Dabney’s lawyer did provide such legal advice, such

advice was irrelevant for liability pursuant to section 5 because the Commission need not

demonstrate scienter for liability to attach. (Doc. #78.) Having explicitly refused to

provide evidence of scienter, the Commission cannot now ask the Court to find that

Raymond Dabney acted with scienter for purposes of deciding whether an injunction

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should issue. The Court therefore did not commit “manifest error” in finding that the

fourth First Pacific Bancorp factor weighed against a penny stock bar. 

3. Likelihood that Misconduct will Recur

Finally, the Commission argues that it is likely that misconduct will recur. Prior

misconduct is the best indicator of future misconduct. See Patel, 61 F.3d at 141.

However, as explained, the Commission’s evidence of prior misconduct is shaky. On the

other hand, misconduct is more likely to occur if the defendant has not accepted

responsibility for the conduct at issue, and Raymond Dabney has not accepted

responsibility for his acts. See id. This factor therefore does not weigh in favor of either

the Commission or Raymond Dabney. 

The Commission has not shown that the Court committed “manifest error” in

finding that the second, fourth, and sixth First Pacific Bancorp factors weighed against

imposing a penny stock bar, nor that there are new facts or legal authority in support of

the Commission’s claims that could not have been brought to the Court’s attention with

reasonable diligence. See LRCiv 7.2(g)(1). Therefore, the Court will deny the

Commission’s request to reconsider its denial of a penny stock bar against Raymond

Dabney. 

C. Reconsideration of Monetary Penalties, Penny Stock, and Officer and

Director Bar as to Defendant Richard Dabney 

Richard Dabney also moves the Court to reconsider, essentially, its entire order

granting summary judgment for the Commission. LRCiv 7.2(g)(1) requires the party

filing a motion for reconsideration to “point out with specificity the matters that the

movant believes were overlooked or misapprehended by the Court, any new matters being

brought to the Court’s attention for the first time and the reasons they were not presented

earlier, and any specific modifications being sought in the Court’s order.” 

1. False Press Releases

Richard Dabney continues to assert that he is not responsible for the misleading

press releases issued by Alliance. However, Richard Dabney simply repeats what he said

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in his initial Opposition to Motion for Summary Judgment (doc. #76). No new facts or

legal authority are cited. Although Richard Dabney argues that the Commission

misrepresented facts to the Court, Richard Dabney did not controvert the Commission’s

initial Statement of Facts in Support of Plaintiff’s Motion for Summary Judgment as

required by LRCiv 56.1(b). The Commission’s facts were therefore deemed admitted. 

Richard Dabney had an opportunity to rebut the Commission’s facts in his Opposition

and did not do so. He cannot now attempt to raise a genuine issue of material fact. 

2. Computation of Disgorgement Amounts

Richard Dabney also contends that the Commission miscalculated the amounts it

sought to disgorge from him and that the Court erred in ordering those amounts to be

disgorged. Richard Dabney asserts that the moneys that were transferred from Alliance to

his personal accounts were used to pay Alliance employees and not to line his pockets. 

However, Richard Dabney only makes bald assertions–he does not point to any evidence

in the record or otherwise that supports his allegations. Moreover, he does not explain

why he did not challenge the Commission’s calculations in his Opposition to Motion for

Summary Judgment. 

Richard Dabney has not shown that the Court committed “manifest error” nor that

there are new facts or legal authority in support of his claims that could not have been

brought to the Court’s attention with reasonable diligence as required by LRCiv

7.2(g)(1). Therefore, the Court will deny his Motion for Reconsideration. 

IT IS THEREFORE ORDERED that the Commission’s Motion for

Reconsideration (doc. #93) is denied. 

IT IS FURTHER ORDERED that Defendant Richard Dabney’s Motion for

Reconsideration (doc. #97) is denied. The Clerk shall terminate this action. 

DATED this 8th day of February, 2010.

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