The opinion of the court was delivered by: HARRIS
Before the Court are plaintiff's motion for partial summary judgment, defendants Bonvicino's and PX Marketing's opposition thereto, and plaintiff's reply.
The evidence submitted by the SEC undisputedly establishes that defendants engaged in the selling of unregistered securities, in violation of Sections 5(a) and 5(c) of the Securities Act of 1933, 15 U.S.C. §§ 77e(a) and 77e(c), and that the corporate defendants engaged in broker-dealer activities without being registered as broker-dealers with the SEC, in violation of Section 15(a) of the Securities and Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78o(a). Accordingly, the Court grants plaintiff's motion for partial summary judgment.
First, it is clear that the interests sold in Parkersburg Wireless, LLC ("PWLLC") are securities. Defendants, through high-pressure telephone tactics and mail solicitations, sold "memberships" in PWLLC to over 700 individuals in 43 states, requiring each member to purchase at least two "units" at $ 5,000 per unit, for a total minimum contribution of $ 10,000. The "members" of PWLLC ostensibly were screened for net worth, but an incomplete survey of the membership of PWLLC shows that many of the investors in the company were unemployed or retired, and many were over 60 years old. (The PWLLC marketers apparently targeted prospective investors who had Individual Retirement Accounts ("IRAs"), and encouraged them to divert funds from their IRAs to buy units of the company.) Defendant Michelle Gerstner exercised near-total control over the management of PWLLC, diverting business to companies she owned (such as UniMic and ServPro), filing and settling lawsuits (such as those against and brought by Parkersburg in Colorado), and soliciting capital contributions over and above the amount allowed in PWLLC's then-current Operating Agreement. Gerstner submitted one issue to the "members" of PWLLC: the purchase of a wireless cable operation in Salinas, California.
Section 2(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, 15 U.S.C. §§ 77b(1) and 78c(a)(10), define a security to include "investment contracts." An investment contract is: (1) an investment of money, (2) in a common enterprise, (3) with profits to be derived from the entrepreneurial or managerial efforts of others. SEC v. J. Howey & Co., 328 U.S. 293, 301, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946); see also SEC v. International Loan Network, Inc., 297 U.S. App. D.C. 22, 968 F.2d 1304, 1308 (D.C. Cir. 1992).
The Parkersburg Wireless units easily satisfy this definition. Members of the LLC were required to invest at least $ 10,000 in the enterprise, which fulfills the requirement that the "investment contract" involve an investment of money. They were told that they would receive a pro rata share of the revenues generated from the wireless cable operation. This establishes that the members of the LLC shared "horizontal commonality," meaning that the fates of all investors in PWLLC were bound together with the profit or the loss of the entire group. See Salcer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 682 F.2d 459, 460 (3rd Cir. 1982); SEC v. Int'l Loan Network, Inc., 770 F. Supp. 678, 689-90 (D.D.C. 1991), aff'd, 297 U.S. App. D.C. 22, 968 F.2d 1304 (D.C. Cir. 1992).
Members of the LLC also had "vertical commonality" with the fate of the corporation itself, meaning that the investors' success or failure was linked inextricably to the success or failure of the corporation. See Long v. Shultz Cattle Co., Inc., 881 F.2d 129, 140 (5th Cir. 1989); Int'l Loan Network, 770 F. Supp. at 690. Although at least one judge in this district has held that either horizontal or vertical commonality will suffice to establish the second element of an "investment contract," Int'l Loan Network, 770 F. Supp. at 690, the Court finds that both horizontal and vertical commonality exist here. See Life Partners, 898 F. Supp. 14 at 21 (noting the existence of "horizontal commonality," "broad vertical commonality," and "strict vertical commonality" in that case, and declining to decide which of the three measures is sufficient under Howey). The interests in PWLLC, therefore, assuredly were "securities."
Finally, PWLLC investors' hoped-for profits clearly were to be derived from the efforts of individuals other than the investors themselves; the investors had little, if any, true input into the company. See Int'l Loan Network, 968 F.2d at 1308; Siebel v. Scott, 725 F.2d 995, 999 (5th Cir. 1984) (holding that limited partnership interests in a cable television system were securities, because the limited partners relied so heavily on the managerial efforts of one defendant for their profit); Williamson v. Tucker, 645 F.2d 404, 418 (5th Cir. 1981) (endorsing the Ninth Circuit's view that the "efforts" requirement was satisfied if "the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise") (quoting SEC v. Glenn Turner Enters., 474 F.2d 476, 482 (9th Cir. 1973)).
Bonvicino contends that he was not a "necessary participant" or a "substantial factor" in the sale of PWLLC units. This argument is spurious: Bonvicino owned and controlled a company that sold units to PWLLC investors, and therefore was necessarily and directly involved in the sale of unregistered securities. Bonvicino argues that he was unwittingly used by other individuals to cover their unlawful scheme, and that, although he purchased PX Marketing, he did not truly own the company and did not participate in the marketing of PWLLC units. But during the period of time Bonvicino owned PX Marketing, the company paid commissions to salespeople, rent for office space, large phone bills (resulting, assumedly, from telephone sales calls made to prospective investors), and other expenses incidental to the marketing operation. The Court agrees with plaintiff that "it is difficult to imagine what more Bonvicino could have done to demonstrate that he was a necessary participant and a substantial factor" in selling PWLLC units to investors. Pl.'s Reply at 6.
Bonvicino argues as well that, since he had no idea that the units he was selling were securities, he should not be held accountable to the SEC. There is, however, no scienter requirement under Section 5, and whether Bonvicino was an unwitting participant in this complex scheme would be of no moment. See SEC v. Thomas D. Kienlen Corp., 755 F. Supp. 936, 939 (D. Or. 1991).
Bonvicino contends that there is no need for the Court to enter injunctive relief against him, since according to Bonvicino, he "does not intend to engage in any further sale of unregistered securities." Bonvicino Opp. at 12. Permanent injunctive relief is appropriate if a reasonable likelihood exists that a defendant will violate the securities laws in the future. SEC v. Bilzerian, 308 U.S. App. D.C. 43, 29 F.3d 689, 695 (D.C. Cir. 1994). Bonvicino is a repeat player in this sort of scheme -- in fact, he is currently a defendant in another wireless cable case in this court. The fact that Bonvicino assures the Court that he does not intend to violate the law in the future does not suffice to establish that injunctive relief is inappropriate:
If a defendant could survive summary judgment by simply submitting a self-serving statement about his desire to conform to the law in the future, it "would establish . . . a ritualistic dodge around a permanent injunction on a motion for summary judgment."
Bilzerian, 29 F.3d at 695 (quoting SEC v. Murphy, 626 F.2d 633, 656 (9th Cir. 1980)). The Court finds that permanent injunctive relief against defendants is appropriate and does order it.
Finally, Bonvicino argues that the amount received by him and his company, and therefore the amount the SEC requests that he be ordered to disgorge, are grossly overstated. Bonvicino submitted an affidavit describing the steps he took to re-route some of the earnings of PX Marketing, thereby increasing the amount the SEC attributes to PX Marketing and to Bonvicino for disgorgement purposes. See Bonvicino Opp., Ex. 1 (Aff. of Rodney Bonvicino), at 5-6; Pl.'s Reply at 6 n. 2. The Court finds no merit to defendant's contention and credits the representations of the SEC that the amount owed by Bonvicino and PX Marketing is $ 1,075,892.10, jointly and severally.