IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF TEXAS

DALLAS DIVISION

SECURITIES and EXCHANGE §

COMMISSION, §

§

Plaintiff, §

§

v. § Civil Action No. 3:04-CV-1320-K

§

CONRAD P. SEGHERS, §

§

Defendant. §

MEMORANDUM OPINION AND ORDER

The Court enters this Memorandum Opinion and Order in conjunction with the

Final Judgment signed this same day. The case was submitted to the jury on March 1,

2006, after closing arguments. The jury returned a verdict for the Defendant on the

Plaintiff’s claim that the Defendant violated Section 5 of the Securities Act. The jury

returned a verdict for the Plaintiff on the Plaintiff’s claims that the Defendant

committed securities fraud in violation of Section 17(a) of the Securities Act; Section

10(b) of the Securities Exchange Act and Rule 10b-5; and Section 206 of the Investment

Advisers Act. After the jury returned its verdict, Defendant filed a Motion for Judgment

as a Matter of Law. Plaintiff also filed a motion for relief against Defendant based on

the jury’s verdict. Because the record at trial contains sufficient evidence to support the

jury verdict, Defendant’s Motion for Judgment as a Matter of Law is DENIED, and the

Court GRANTS the Plaintiff appropriate relief based on the jury verdict. See Rouillier

v. Illinois Cent. Gulf R.R., 886 F.2d 105, 108 n.2 (5th Cir. 1989) (stating that a court

must uphold a jury’s factual findings unless the facts and inferences are so strongly in

 

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favor of one party that the court believes reasonable men could not come to a contrary

verdict). 

I. Securities Fraud

The Government’s claims for securities fraud arises out of Seghers’ participation

and involvement with three hedge funds: Integral Hedging, L.P., Integral Arbitrage, L.P.;

and Integral Equity, L.P. (collectively the “Funds”). The Funds’ assets were invested at

Morgan Stanley Dean Witter (“Morgan Stanley”) in an account (the “Galileo Fund”)

that was opened by Samer M. El Bizri (“Bizri”) in June 1999. Olympia Capital

Associates, L.P. (“Olympia”) acted as administrator of the Funds and sent monthly and

quarterly statements to the Funds’ investors. 

The Government’s securities fraud claims are based on the theory that Seghers

fraudulently caused the Funds to overstate the value of the investments to the investors.

The Government alleged that Seghers did this by overstating the value of the funds to

Olympia, who in turn sent monthly and quarterly statements to investors based on

Segher’s fraudulent overstatements. 

The parties stipulate that Seghers participated in the offer and sale of limited

partnership interests in the Funds and that those limited partnership interests were

securities. At trial, the parties also stipulated on the record that Seghers was acting as

an investment adviser. In order to prove its claim for securities fraud, the Government

had to prove that Seghers acted fraudulently in connection with his offer or sale of

securities. The Government also had to prove that Seghers acted with the requisite

degree of mental culpability. Because the Government presented sufficient proof at trial

 

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to support the jury’s finding that Seghers knowingly or recklessly defrauded investors,

the Court DENIES Seghers’ Motion for Judgment as a Matter of Law. The

Government’s proof, however, only supports the jury’s finding that Seghers committed

securities from June 6, 2001 through September 30, 2001.

A. Seghers’ Fraudulent Conduct Under Sections 17(a)(1); 206(1);

17(a)(2); 17(a)(3); and Rule 10b-5

To support a finding of fraudulent conduct under Section 17(a)(1) of the

Securities Act or Section 206(1) of the Investment Advisers Act, the Government was

required to prove that Seghers directly or indirectly employed a device, scheme, or

artifice to defraud. 

To support a finding of fraudulent conduct under Section 17(a)(2) or Section

17(a)(3) of the Securities Act, the Government was required to prove that Seghers (1)

obtained 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 under which they were made, not misleading, or (2) engaged

in any transaction, practice or course of business which operated or would operate as a

fraud or deceit upon the purchaser.

To support a finding of fraudulent conduct under Section 10(b) of the Securities

and Exchange Act and Rule 10b-5, the Government was required to prove that Seghers

(1) employed a device, scheme, or artifice to defraud; or (2) made an untrue statement

of a material fact, or omitted to state a material fact necessary in order to make the

 

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statements made, in the light of the circumstances under which they were made, not

misleading; or (3) engaged in an act, practice or course of business which operated as a

fraud or deceit upon any person.

Finally, to support a finding of fraudulent conduct under Section 206(2) of the

Investment Advisers Act, the Government was required to prove that Seghers directly

or indirectly engaged in any transaction, practice, or course of business which operated

as a fraud or deceit upon any client or prospective client. 

At trial, the Government offered sufficient proof to support the jury’s finding that

Seghers defrauded investors under each of the securities laws listed above from June 6,

2001 through September 30, 2001. The fraudulent conduct alleged in the

Government’s First Amended Complaint and the Joint Pretrial Conference Order is that

“Seghers fraudulently caused the Funds to overstate to investors the value of their

investments in the Funds by anywhere from 13% to 77% per month.” The Government

supported these allegations at trial with (1) summary charts prepared by Nina

Yamamoto, (2) the testimony of the receiver, Daniel Jackson, and (3) a letter that

Seghers sent to investors on July 13, 2001 which misstated the performance of the

Funds. 

1. Nina Yamamoto’s Testimony

The Government supported its allegations of fraud with summary charts prepared

by Nina Yamamoto, which were submitted into evidence as Government’s Exhibit 225,

 

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and were based upon the documents submitted into evidence as Government’s Exhibit

235. The summary charts reflect overstatements that Olympia made to investors from

June 30 through November 30, 2000, and from March 31 through September 30, 2001.

Laurence Platoni testified that Olympia relied on the overstatements provided by

Seghers in order to value the Funds’ assets, prior to sending the statements to investors.

This supports the Government’s allegation that Seghers caused the Funds’ to overstate

the value of the investments. As explained in Section I. B. of this Order, however, the

Government only produced sufficient evidence to establish Seghers’ mental culpability

beginning on June 6, 2001. Seghers can, therefore, only be liable for overstatements

made to investors after June 6, 2001. The summary chart, reproduced below, shows the

overstatements made to investors after June 6, 2001.

Statement Date Funds’ Asset

Value Reported

by Olympia to

Investors

Funds’Asset

Value

Calculated

Using Reports

By Brokers And

Banks

Difference Percent

6/30/01 $70,886,740.54 $41,303,631.85 $29,583,108.69 72%

7/31/01 $72,523,134.47 $49,401,727.37 $23,121,407.10 47%

8/31/01 $60,659,263.15 $34,305,736.31 $26,353,526.84 77%

9/30/01 $73,852,329.40 $46,792,879.72 $27,059,449.68 58%

This evidence, summarized in the Government’s chart, supports the jury’s finding

that Seghers employed a scheme, or practice of business, to defraud investors by causing

 

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Olympia to overstate the Funds’ value between June 6, 2001 and September 30, 2001,

in violation of Section 17(a) of the Securities Act, Section 10(b) of the Securities and

Exchange Act and Rule 10b-5, and Section 206(1) and (2) of the Investment Advisers

Act. 

Seghers also submitted evidence at trial showing that Morgan Stanley’s monthly

statement information, which was the basis of the calculations in the column labeled

“Funds’ Asset Value Calculated Using Reports By Brokers And Banks” in the

Government’s summary charts, was erroneous by $10 - 35 million. The Court, however,

does not find Seghers’ evidence to be so overwhelming that the jury verdict should be

set aside. See Rouillier v. Illinois Cent. Gulf R.R., 886 F.2d 105, 108 n.2 (5th Cir. 1989)

(stating that a court must uphold a jury’s factual findings unless the facts and inferences

are so strongly in favor of one party that the court believes reasonable men could not

come to a contrary verdict). 

2. Daniel Jackson’s Testimony

The Government further supported its allegations of fraud through the testimony

of Daniel Jackson (“Jackson”). Mr. Jackson testified at trial that “there were millions of

dollars difference between the reported value to the investors and the ultimate – the true

value, or the value put on the Morgan Stanley statement, during that period of time.”

Mr Jackson further testified that the maximum difference between the mark-to-market

value and the value reported to investors from January 2001 to July 15, 2001 was about

 

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$23-$24 million. Because the Government has produced sufficient evidence to establish

Seghers’ mental culpability beginning on June 6, 2001, Mr. Jackson’s testimony supports

the jury’s finding that Seghers employed a scheme, or practice of business, to defraud

investors by causing Olympia to overstate the Funds’ value between June 6, 2001 and

July 15, 2001, in violation of Section 17(a) of the Securities Act, Section 10(b) of the

Securities and Exchange Act and Rule 10b-5, and Section 206(1) and (2) of the

Investment Advisers Act.

3. Letters from Seghers to Investors

The Government also supported its allegations of fraud with a letter Seghers sent

to investors on July 13, 2001, reporting “positive developments” and stating

that,“amidst the volatility in the markets we have continued to post respectable returns.”

The letter was submitted into evidence as Government’s Exhibit 222. This evidence

supports the jury’s finding that Seghers made an untrue statement of a material fact, or

omitted to state a material fact necessary in order to make the statements true, in the

light of the circumstances under which they were made, in violation of Section 17(a)(2)

and Section 17(a)(3) of the Securities Act, and Section 10(b) of the Securities and

Exchange Act and Rule 10b-5.

 

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B. Evidence of Seghers’ Mental Culpability as of June 6, 2001

To support a finding of fraudulent conduct under Section 17(a)(1) of the

Securities Act, Section 10(b) of the Securities and Exchange Act and Rule 10b-5, or

Section 206(1) of the Investment Advisers Act, the Government was required to prove

that Seghers acted knowingly or with severe recklessness.

To support a finding of fraudulent conduct under Section 17(a)(2) or Section

17(a)(3) of the Securities Act, or Section 206(2) of the Investment Advisers Act, the

Government was required to prove that Seghers acted at least negligently. 

1. Matharu Letter dated June 6, 2001

The Court finds that the Government presented sufficient evidence to support the

jury’s finding that Seghers acted knowingly or with severe recklessness when he

overstated the value of the Funds, beginning June 6, 2001. The Government presented

evidence that Seghers knew on June 6, 2001, that the statement values for the Integral

Equity Galileo Fund had been incorrect since February 2001. Seghers testified at trial

that he asked Sonny Matharu, the Morgan Stanley broker, to “document the fact that

Morgan Stanley agreed that the statements had been wrong....” In response, Sonny

Matharu sent Seghers a letter on June 6, 2001, which stated that the statement values

for the Funds “have been incorrect since February 2001...Including most recently the

statements for May 31, 2001. They have not accurately reflected the actual value of the

accounts during any of these periods.” Seghers testified at trial that he “had known that

 

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the [Morgan Stanley] statements were incorrect.” 

2. Email from Seghers to Morgan Stanley

Seghers also testified that his “concerns started to grow almost exponentially

beginning approximately the 10th through the 12th of June, 2001.” Seghers also sent

an email to Morgan Stanley on June 15, 2001, stating in part that, “every day” there

were new errors. Seghers requested of Morgan Stanley, “please help get this fixed,

together with our web pages that are incorrect so frequently that they can never be

trusted.” Seghers further stated that “Morgan Stanley’s continued inaccuracies with

respect to our account positions and incorrect order fills continue to materially damage

our funds and the respective investors,” and that Morgan Stanley accounts are

“continually full of multi-million dollar errors.” Finally, Seghers told his own attorney

on August 1, 2001, that the Funds were “in the toilet.” This evidence establishes that

Seghers acted knowingly or recklessly with respect to the fact that he was causing the

Funds to overstate the value of the Funds’ assets beginning June 6, 2001. 

II. Injunctive Relief, Civil Penalties, and Disgorgement

Although the liability issues in this case were tried to a jury, the Court decides the

appropriate relief. See Tull v. United States, 481 U.S. 412, 425 (1987); SEC v. Rind, 991

F.2d 1486, 1493 (9th Cir. 1993) (stating that there is no right to a jury trial where only

injunctive relief and disgorgement are sought). 

 

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A. Permanent Injunction Against Seghers

In conjunction with this Memorandum Opinion and Order, the Court enters a

Final Judgment of Permanent Injunction against Seghers, permanently enjoining him

from committing securities fraud. A district Court shall upon proper showing grant a

permanent injunction against any person who is engaged or is about to engage in any

acts or practices that violate federal securities laws. See SEC v. Mize, 615 F.2d 1046,

1051 (5th Cir. 1980). The critical question is whether the defendant’s past violations

indicate a reasonable likelihood of further violations in the future. See SEC v. Blatt, 583

F.2d 1325, 1334 (5th Cir. 1978). Among the factors to be considered are the

egregiousness of the defendant’s conduct; the isolated or recurrent nature of the

infraction; the degree of scienter involved; the defendant’s recognition of the wrongful

nature of his conduct; and the likelihood, because of the defendant’s profession

occupation, that future violations might occur. See id. n.29. In this case, a jury found

Seghers liable for knowingly or recklessly committing securities fraud. Seghers testified

at trial that, since obtaining his Ph.D. in microbiology, he has exclusively devoted

himself to investing, largely on behalf of others. Seghers continues to maintain that he

committed no securities fraud. Because of the jury finding, the Court finds there is a

reasonable likelihood that Seghers will violate the securities laws in the future. The

Court, therefore, permanently ENJOINS Seghers from violating Section 17(a) of the

Securities Act; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5;

 

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and Section 206 of the Investment Advisers Act.

B. Civil Penalties

The Court GRANTS the Government’s motion to impose a civil penalty on

Seghers in the amount of $50,000. Civil penalties are meant to punish the individual

wrongdoer as well as deter him and others from future securities law violations. See SEC

v. Kenton Capital, 69 F. Supp. 2d 1, 17 (D.D.C . 1998). As the record indicates, the

Government settled its investigation into this matter with Bizri, Seghers’ former partner

and business associate, for $50,000. The Court imposes the same penalty upon Seghers,

and therefore, ORDERS that Seghers is liable for a Civil Penalty of $50,000. 

C. Disgorgement

The Government seeks disgorgement of Seghers ill-gotten gains, obtained as a

result of committing securities fraud. The Court has broad discretion to determine

whether or not to order disgorgement. See SEC v. First Jersey Secs., Inc. 101 F.3d 1450,

1474-75 (2nd Cir. 1996). The primary purpose of disgorgement is to deprive securities

law violators, like Seghers, of their ill-gotten gains. Id. at 1474. Because Seghers lost

over $900,000 of his own money with the investors, he was not unjustly enriched by any

ill-gotten gains. The Court finds that the Permanent Injunction will sufficiently deter

Seghers from committing further securities fraud, and the imposition of a Civil Penalty

will sufficiently punish him for the securities violations proved at trial. The Court,

therefore, DENIES the Government’s motion to order disgorgement. 

 

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III. Conclusion

Because the record at trial contains sufficient evidence to support the jury verdict,

Defendant’s Motion for Judgment as a Matter of Law is DENIED. The Court finds

there is a reasonable likelihood that Seghers will violate the securities laws in the future;

therefore, the Court permanently ENJOINS Seghers from violating Section 17(a) of the

Securities Act; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5;

and Section 206 of the Investment Advisers Act. The Court ORDERS that Seghers to

pay a civil penalty of $50,000. Since Seghers lost over $900,000 of his own money, no

disgorgement is ordered. 

SO ORDERED.

Signed September 14 , 2006.

th

______________________________________

ED KINKEADE

UNITED STATES DISTRICT JUDGE

 

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