1997 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-9-1997

SEC v. Hughes Cap Corp

Precedential or Non-Precedential:

Docket

96-5401

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Recommended Citation

"SEC v. Hughes Cap Corp" (1997). 1997 Decisions. Paper 152.

http://digitalcommons.law.villanova.edu/thirdcircuit_1997/152
Filed July 9, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 96-5401

SECURITIES AND EXCHANGE COMMISSION

v.

HUGHES CAPITAL CORPORATION; F.D. ROBERTS

SECURITIES, INC.; HOWARD ACKERMAN; GILBERT

BEALL; DOMINICK FIORESE; FREDERICK GALIARDO;

SHELDON G. KANOFF; JOHN KNOBLAUCH; SUSAN

LACHANCE; ALAN LIEB; FREDERIC MASCOLO; JOHN

PERFETTI; LIONEL REIFLER; IRA VICTOR

 Lionel Reifler, Susan Lachance,

 and Howard Ackerman,

 Appellants

Appeal from the United States District Court

for the District of New Jersey

D.C. No. 88-cv-05238

Submitted Under Third Circuit LAR 34.1(a)

June 13, 1997

Before: MANSMANN, NYGAARD, and ROSENN,

Circuit Judges.

(Opinion filed July 9, 1997)

 Lucinda O. McConathy

 Allan A. Capute

 Jacob H. Stillman

 Securities & Exchange Commission

 450 Fifth St., N.W.

 Washington, D.C. 20549

 Counsel for Appellee

 Martin R. Raskin

 Raskin & Raskin

 2937 S.W. 27th Avenue

 Suite 206

 Miami, FL 33133

 Counsel for Appellants
OPINION OF THE COURT

ROSENN, Circuit Judge.

The three appellants in the present matter were

defendants in an action brought by the Securities and

Exchange Commission (SEC) in the United States District

Court for the District of New Jersey. The district court

granted summary judgment in favor of the SEC against all

the defendants on the issues of both liability and damages.1

Susan Lachance and Howard Ackerman, two of the

defendants, appeal from both the judgment of liability and

the disgorgement order; Lionel Reifler appeals only from the

order of disgorgement. Although the appellants raise a

number of issues, our principal concern is with their

challenge to the district court's order of disgorgement. We

affirm.

_________________________________________________________________

1. The district court had jurisdiction over this action pursuant to 28

U.S.C. S 1331 and 15 U.S.C. SS 77v and 78aa (granting federal district

courts exclusive jurisdiction over cases involving violations of the

Securities Act of 1933 and the Securities Exchange Act of 1934

respectively). We have appellate jurisdiction pursuant to 28 U.S.C.

S 1291.

 2

I.

Between 1968 and 1976, Lionel Reifler had six felony

convictions for crimes including securities fraud, tax

evasion, sale of unregistered securities and operation of an

unregistered brokerage firm. His wife, Susan Lachance, is

involved in a number of business ventures, independently

and with her husband. She is the sole owner and president

of Susan Lachance Industrial Design (SLID) and she is the

president of Flat Rock Developers, Inc. (Flat Rock), a

corporation formed by Lachance, Reifler, Gilbert Beall and

Frederic Mascolo. Howard Ackerman, a bookkeeper, has

been employed by Reifler since March, 1984; he shared a

suite of offices with Reifler and Lachance and served as the

bookkeeper for the Hughes Capital Corporation (Hughes)

from its inception.

In 1985, Reifler and two other defendants, Beall and

Mascolo, acquired Hughes, a Florida shell corporation, as a

vehicle for a public stock offering.2 John Knoblauch became

Hughes' "nominal owner and chairman of the board of

directors." Reifler and the others amended Hughes'

Registration Statement, changing the stock-to-warrant ratio
from 1:3 to 1:21. Hughes then announced a public offering

of the stock. The defendants, including Lachance and

Ackerman, purchased at least 88% of the stock sold in the

public offering.

In 1986, a public relations firm hired by the Reiflers

issued press releases announcing Hughes' plans to

purchase four other businesses; these press releases did

not mention that the acquisition candidates were all owned

and controlled by affiliates of Hughes. Among the

companies named as acquisition candidates were SLID and

Flat Rock. In one press release, Lachance represented, as

president of SLID, that SLID was in good financial shape (in

fact, it had only just emerged from bankruptcy) and was

being acquired by Hughes, which had sufficient capital to

purchase SLID and expand its business. In a press release

issued on behalf of Flat Rock, Lachance, using her married

name of "Susan Reifler," similarly represented that Flat

_________________________________________________________________

2. A more complete statement of the facts is available in Wiley v. Hughes

Capital Corp., 746 F. Supp. 1264 (D.N.J. 1990).

 3

Rock was an active concern (in fact, it was dormant and

had no revenue at the time of the press release) and that

Hughes had sufficient capital to acquire the business and

to expand its real estate holdings. In neither press release

did Lachance reveal her marital connection to Reifler or her

status as a principal shareholder in Hughes.

Ackerman, as the bookkeeper, admits that he executed

most of the transactions necessary to perpetuate the

fraudulent scheme. He transferred money among the

various bank accounts held by Reifler, Lachance and the

other participants in the Hughes stock sale, although he

acknowledged that many of these transactions had no

legitimate business purpose. He obtained cashier's checks

with money from some of these accounts to purchase stock

and warrants for nominee accounts in the names of various

Reifler associates, including himself, Reifler, Lachance,

Lachance's minor daughter, and Reifler's housekeeper.

After the price of the stock rose, warrants were sold from

the accounts controlled by Reifler and his cohorts into the

public market. Ackerman deposited most of the proceeds of

these sales, approximately $1.15 million, into various

accounts held by himself, Reifler, Lachance and others. The

money was then transferred from account to account and

withdrawn in small amounts by Ackerman and the other

participants in the stock fraud scheme. Eventually, the
scheme was uncovered. A number of the participants,

including Reifler, were criminally prosecuted; all of the

participants were sued civilly, both by the SEC in the

present action and in a class action suit brought by the

defrauded purchasers of Hughes stock.

II.

We exercise plenary review over a district court's order

granting summary judgment. Bieregu v. Reno, 59 F.3d

1445, 1449 (3d Cir. 1995); United States v. Koreh, 59 F.3d

431, 438 (3d Cir. 1995). "On review the appellate court is

required to apply the same test the district court should

have utilized initially." Goodman v. Mead Johnson & Co.,

534 F.2d 566, 573 (3d Cir. 1976).

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The standard for summary judgment is well-established:

Summary judgment may be granted only "if the pleadings,

depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is

no genuine issue as to any material fact and that the

moving party is entitled to judgment as a matter of law."

Fed. R. Civ. P. 56(c). When considering a motion for

summary judgment, the court must view all evidence in

favor of the non-moving party. Bixler v. Central Pa.

Teamsters Health & Welfare Fund, 12 F.3d 1292, 1297 (3d

Cir. 1993). Additionally, all doubts must be resolved in

favor of the non-moving party. Meyer v. Riegel Prods. Corp.,

720 F.2d 303, 307 (3d Cir. 1983). The party challenging the

motion for summary judgment must be able to produce

evidence that, "when considered in light of that party's

burden of proof at trial, could be the basis for a jury finding

in that party's favor." Kline v. First W. Gov't Sec., 24 F.3d

480, 485 (3d Cir. 1994).

A.

In the present matter, the district court granted the

SEC's motion for summary judgment on the charge that

Lachance violated 15 U.S.C. S 77q(a)(2). This section, also

known as Section 17(a)(2) of the Securities Act of 1933,

provides in pertinent part:

 (a) It shall be unlawful for any person in the offer or

 sale of any securities by the use of any means or

 instruments of transportation or communication in

 interstate commerce or by the use of the mails, directly

 or indirectly

 * * *
 (2) to obtain money or property by means of any

 untrue statement of a material fact or any omission to

 state a material fact necessary in order to make the

 statements made, in the light of the circumstances in

 which they were made, not misleading.

Thus, this section bars the use of untrue statements or the

omission of material statements of fact which are

misleading. As the district court properly stated, omissions

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and misstatements are material if there is a substantial

likelihood that the omitted or misstated facts would have

been "viewed by the reasonable investor as having

significantly altered the `total mix' of information available."

Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting

TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976)).

A violation of S 77q(a)(2) can be established by a showing

of negligence. Aaron v. SEC, 446 U.S. 680, 701-02 (1980);

Finkel v. Stratton Corp., 962 F.2d 169, 175 (2d Cir. 1992).

Lachance concedes that she made false statements in the

two press releases issued in relation to Hughes' purported

acquisition of SLID and Flat Rock. Such information

concerning Hughes' ability and intention to acquire two

purportedly financially healthy corporations made Hughes'

stock appear more attractive to prospective purchasers. She

argues, however, that she believed these statements were

true at the time she made them and that she did not act

negligently in making them because she relied on the

assertions of her husband and of other representatives of

Hughes Capital. Thus, she argues that a genuine issue of

material fact remains as to whether she was negligent in

relying on information provided to her by her husband and

others and this issue of material fact precludes summary

judgment on the question of liability under S 77q(a)(2).

It is doubtful that Lachance makes this argument

seriously. She stated in her deposition that she was

involved in formulating the two press releases and that she

edited them. She, as president of SLID and Flat Rock, knew

she was misrepresenting the financial status of each of

these companies. She also knew that she was using two

different names in the press releases, lending an

impression that the companies were utterly separate

concerns. Clearly, she knew that she was married to one of

the principal forces behind Hughes, and she should have

known that this relationship would be of interest to the

stock-buying public. Presumably, she knew about her
husband's criminal past, and certainly a cautious woman

with that knowledge would question her husband's

assertion that his current business venture was not

fraudulent. Thus, she was at least negligent in failing to

 6

mention her marriage to one of the principal backers of

Hughes, her own personal stake in Hughes, and the

financial status of SLID and Flat Rock, material omissions

which invoke liability under S 77q(a)(2).

Lachance further asserts that she did not make the

statements regarding Hughes' financial strength negligently,

because both Reifler and Knoblauch assured her that

Hughes had sufficient capital to acquire the two companies.

Lachance asserts that her reliance creates a genuine issue

of material fact that should be tried before a jury. However,

the facts here are not in dispute (she does not assert that

she studied Hughes' books or checked the financial

statements) and her reliance on the alleged assertions, if

made, would not be deemed reasonable in the context of

making financial statements so obviously intended to

influence potential investors. "One who . . . supplies false

information for the guidance of others in their business

transactions, is subject to liability for pecuniary loss

caused to them by their justifiable reliance upon the

information, if he fails to exercise reasonable care or

competence in obtaining or communicating the

information." Restatement (Second) of Torts S 552 (1977). A

number of states have adopted this Restatement Rule as

the standard for determining liability for a negligent

misrepresenatation.3

A reasonable businesswoman selling her company would

certainly not rely only on the assertions of the purchaser

that he had sufficient capital to complete the acquisition;

rather, a reasonable businesswoman would undertake

some investigation of the financial status of the entity with

which she was negotiating. Here, Lachance admits that she

_________________________________________________________________

3. Some of the states are noted in the following cases: Pulte Home Corp.

v. Osmose Wood Preserving, Inc., 60 F.3d 734, 740, n. 16 (11th Cir.

1995) (Florida); Petrillo v. Bachenberg, 655 A.2d 1354, 1360 (1995) (New

Jersey); Rocky Mountain Helicopters v. Bell Helicopter, 24 F.3d 125, 130

(10th Cir. 1994) (Texas); Arthur Children's Trust v. Keim, 994 F.2d 1390,

1400 (9th Cir. 1993) (Arizona); Jordan-Milton Machinery v. F/V Teresa

Marie, II, 978 F.2d 32, 36 (1st Cir. 1992) (Maine); J.E. Mamiyee Sons, 

Inc.

v. Fidelity Bank, 813 F.2d 610, 615 (3d Cir. 1987) (Pennsylvania); Abell

v. Potomac Ins. Co., 858 F.2d 1104, 1131 (5th Cir. 1988) (Louisiana),
vacated on other grounds, 492 U.S. 914 (1989).

 7

did not undertake any investigation of Hughes' financial

condition, but rather simply trusted the assertions of her

convicted-felon husband and his business partner in a

sham corporation. There are no disputed facts which could

alter this conclusion. Therefore, we perceive no error in the

district court's grant of summary judgment on this count.

B.

The district court also granted the SEC's motion for

summary judgment on the charge that Ackerman violated

15 U.S.C. S 77q(a)(3). This section, also known as Section

17(a)(3) of the Securities Act of 1933, provides in pertinent

part:

 (a) It shall be unlawful for any person in the offer or

 sale of any securities by the use of any means or

 instruments of transportation or communication in

 interstate commerce or by the use of the mails, directly

 or indirectly.

 * * *

 (3) to engage in any transaction, practice, or course of

 business which operates or would operate as a fraud or

 deceit upon the purchaser.

Similar to S 77q(a)(2), scienter is not required for a violation

of this section; negligence is sufficient to establish a

violation of S 77q(a)(3). Aaron, 446 U.S. at 701-02; Finkel,

962 F.2d at 175.

Ackerman argues that he did not act negligently when he

assisted Reifler and the others to purchase almost the

entire IPO while keeping quiet their own involvement in

Hughes and then assisted them in reselling the stocks to

the general public and redistributing the profits. He

obtained cashier's checks with which to purchase the IPO

but directed that his name not appear on these cashier's

checks as the purchaser; rather, the cashier's checks bore

the names of the nominee account holders. He transferred

the proceeds of the sale among the various accounts held

by those involved in the Hughes scheme, even though he

concedes that these transactions had no apparent business

purpose. Yet, Ackerman has employed a Nuremberg defense

 8
by arguing that he simply did what he was told and was

not in a position to question the orders given to him by his

employer, Reifler. He further argues that he has no

background or knowledge in securities and thus did not

find any of the transactions suspicious.

Regardless of Ackerman's purported lack of knowledge or

his assertion that he was just being a good soldier and

following orders, the undisputed facts establish that the

transactions were so clearly suspicious that Ackerman was

negligent in continuing to complete the transactions that

helped further the fraud. Among the indicia of fraud that

Ackerman should have picked up on: (1) use of the aliases

by various parties (including Reifler's purchase of stock as

"Lionel Lachance"); (2) stock purchases by unlikely parties

(such as Reifler's minor daughter, Reifler's housekeeper,

and a number of corporations Ackerman knew lacked

operating capital); (3) the lack of business purpose to a

number of the transactions made; and (4) the need to hide

himself as purchaser of the cashier's checks with which the

IPO purchase was completed. There are no disputed facts

that would establish that Ackerman did not act negligently

in ignoring all these clear indicators of questionable

behavior. Therefore, the district court did not err in

granting summary judgment on this count against

Ackerman.

III.

The district court held that Lachance would be jointly

and severally liable for the disgorgement of the

approximately $1.4 million in illegal profits traceable to the

securities fraud. Lachance argues that the evidence failed

to establish that she received anything more than $85,000

in fraud proceeds and that it is unfair to order her to be

jointly and severally liable for any amount above that

figure. Lachance argues that this result is particularly

unfair in light of the finding that she acted only negligently,

and not with scienter, regarding the fraud. A district court's

order of disgorgement is reviewed for abuse of discretion.

CFTC v. American Metals Exchange Corp., 991 F.2d 71, 76

(3d Cir. 1993). Our review of the granting of summary

judgment is plenary. Id.

 9

"Disgorgement is an equitable remedy designed to deprive

a wrongdoer of his unjust enrichment and to deter others

from violating securities laws." SEC v. First City Fin. Corp.,

890 F.2d 1215, 1230 (D.C. Cir. 1989). When apportioning
liability among multiple tortfeasors, it is appropriate to hold

all tortfeasors jointly and severally liable for the full amount

of the damage unless the liability is reasonably

apportioned. "Where joint tortfeasors cause a single and

indivisible harm for which there is no reasonable basis for

division according to the contribution of each, each

tortfeasor is subject to liability for the entire harm." United

States v. Alcan Aluminum Corp., 964 F.2d 252, 268-69 (3d

Cir. 1992).

Courts have held that joint-and-several liability is

appropriate in securities cases when two or more

individuals or entities collaborate or have close

relationships in engaging in the illegal conduct. See First

Jersey Securities, 101 F.3d at 1475; Hateley v. SEC, 8 F.3d

653, 656 (9th Cir. 1993). In the instant case, the

defendants all collaborated in a single scheme to defraud

Hughes' investors through the bogus initial public offering

and the subsequent sale of warrants. They enjoyed a"close

relationship" with each other through their connection to

Hughes, the other corporations used in the scheme, and

the nominee accounts used to perpetuate the scheme.

The burden is on the tortfeasor to establish that the

liability is capable of apportionment, Alcan, 964 F.2d at

269, and the district court has broad discretion in

subjecting the offending parties on a joint-and-several basis

to the disgorgement order. S.E.C. v. First Jersey Securities,

Inc., 101 F.3d 1450, 1475 (2d Cir. 1996), petition for cert.

filed, 65 U.S.L.W. 3799 (U.S. May 23, 1997) (No. 96-1862).

Imposing the burden upon the defendant of proving the

propriety of the apportionment of the disgorgement amount

in securities cases is appropriate and reasonable. Although

in some cases, a court may be able easily to identify the

recipient of ill-gotten profits and apportionment is practical,

that is not usually the case. Generally, apportionment is

difficult or even practically impossible because defendants

have engaged in complex and heavily disguised

transactions. See CFTC v. American Bd., 803 F.2d 1242,

 10

1252 (2d Cir. 1986). Very often defendants move funds

through various accounts to avoid detection, use several

nominees to hold securities or improperly deprived profits,

or intentionally fail to keep accurate records and refuse to

cooperate with investigators in identifying the illegal profits.

Hence, "the risk of uncertainty should fall on the wrongdoer

whose illegal conduct created that uncertainty." First City

Financial Corp., 890 F.2d at 1232.

In the present matter, Lachance has failed to carry her
burden of establishing that the liability can be apportioned.

The only documentary evidence that Lachance has offered

to establish the apportionment of liability -- the

photocopies of the admittedly altered check stubs and the

summary of those photocopies -- was properly ruled

inadmissible by the district court, as discussed in the next

section. The only other evidence offered by Lachance is her

own testimony that she did not receive that much money

from the scheme. Not only can Lachance not support her

testimony with specific facts or documentary evidence, her

testimony is contradicted by strong evidence showing she

received substantially more than $85,000.

The division of liability is an intensely factual

determination, and summary judgment can be granted only

when it is clear that no genuine issue of material fact

regarding the apportionment of liability remains. As noted

above, the burden is on the party challenging disgorgement

-- in this case, Lachance -- to establish the manner in

which liability should properly have been apportioned.

Lachance's mere assertions that she did not receive the

benefit of this money, in light of substantial evidence to the

contrary (her acknowledgment that Reifler paid all

household expenses, their lavish lifestyle, and expensive

automobiles) does not create a triable issue of fact. In this

matter, the amount of illegal proceeds is not in dispute.

Rather, the only issue presented is whether Lachance

should be subject to joint and several liability for the entire

amount. When there is no documentary evidence to

contradict the clear evidence that Lachance benefited

substantially from this scheme and where Lachance has

failed to set forth "specific facts showing there is a genuine

issue for trial," the district court did not err in granting

 11

summary judgment holding Lachance joint and severally

liable for the disgorgement of the illegal proceeds of the

securities fraud.

IV.

The district court refused to admit the proffered evidence

that the defendants assert would establish the distribution

of the proceeds from the securities fraud. Our review of a

district court's ruling on an evidentiary matter is subject to

the abuse of discretion standard.

The defendants assert that the court erred in refusing to

admit photocopies of check stubs, arguing that these were

admissible pursuant to Federal Rules of Evidence 803(6),

the business records exception. They further assert that
photocopies of these check stubs are admissible pursuant

to Rule 1003, which admits duplicates "to the same extent

as an original unless (1) a genuine question is raised as to

the authenticity of the original or (2) in the circumstances

it would be unfair to admit the duplicate in lieu of the

original."

Ackerman admits that the check stubs were "altered"

before photocopying. Defendants assert that Ackerman's

notations were a matter of reconciling the accounts, and

the alterations did not affect the accuracy of the payee or

amount of the checks themselves. However, there is

nothing to support this assertion, and Ackerman himself

testified that he cannot remember what information on the

stubs was changed prior to photocopying. The defendants

further assert that the canceled checks themselves will bear

out the accuracy of these stubs; the canceled checks,

however, could not be located in response to requests for

them in discovery and thus the defendants cannot rely on

missing evidence to support the authenticity of photocopies

of admittedly altered check stubs. Given this scenario, it

would be impossible to say that the district court abused

its discretion in concluding that the photocopies of the

check stubs indicated "a lack of trustworthiness" and thus

were not admissible under Rule 803(6).

Accordingly, it was not an abuse of discretion for the

district court to further refuse to admit the summary

 12

exhibit that the defendants sought to admit pursuant to

Rule 1006, which was based primarily on the altered check

stubs. The summary was based on information which the

court deemed inadmissible for lack of trustworthiness, a

ruling which was not an abuse of discretion. Therefore, the

district court did not abuse its discretion by refusing to

admit a summary based on inadmissible evidence.

Consequently, neither of the district court's challenged

evidentiary issues were an abuse of discretion.

V.

Accordingly, for the reasons set forth above, we see no

error in the district court's grants of summary judgment in

favor of the Securities and Exchange Commission.

Moreover, the district court did not err in holding Lachance

jointly and severally liable for the disgorgement of the illegal

proceeds of the securities fraud and in its evidentiary

rulings. The judgment of the district court will be affirmed.

The memorandum opinion of this court filed July 9, 1997

will be vacated and this will be the opinion of the court.
Costs will be taxed against the appellants.

A True Copy:

Teste:

 Clerk of the United States Court of Appeals

 for the Third Circuit

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