Court Opinion

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Opinions of the United
1997 Decisions                                                                                                             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Precedential or Non-Precedential: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

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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).

                                4

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

                                5

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

                                13