The opinion of the court was delivered by: James Robertson United States District Judge
In this action, the Securities and Exchange Commission alleges that, by failing to disclose his unlawful diversion of funds from a subsidiary of a publicly-held corporation of which he was chief executive officer, Donald Haywood Pace violated the anti-fraud provisions of the Securities Act of 1933, 15 U.S.C. § 77q(a), and of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78n(a) and Rules 10B-5 and 14A-9, 17 C.F.R. § 240.10B-5, 240.14A-9, and the "books and records" provisions of the Exchange Act, 15 U.S.C. § 78m(b)(5) and Rule 13B2-1. Now that Pace has been convicted of wire fraud and tax fraud in connection with the same diversion of funds, the SEC moves for summary judgment on the strength of Pace's conviction.
Pace opposes the SEC's motion and cross-moves for summary judgment. He advances four arguments: (i) that the amount of money he was found to have unlawfully diverted was not material; (ii) that the SEC has not shown that any investor lost money because of his non-disclosure of the diversion of funds; (iii) that he did not know of the diversion "during the time that disclosure would have taken place" (Pace Mem., p. 2); and (iv) that the SEC's claims are precluded by a ruling, in his favor, in a Tax Court proceeding.
The following facts are undisputed.
1. Pace was chief executive officer and a director of Pace American Group, Inc. and a vice-president and director of American Bonding Company, a subsidiary of Pace American Group.
2. On July 26, 2001, in the United States District Court for the District of Arizona, a judgment of conviction was entered against Pace on two counts of wire fraud, 18 U.S.C. § 1343, and one count of tax fraud, 26 U.S.C. § 7206(1), in connection with two transfers of funds from American Bonding Company to his personal bank account totaling $36,659.28 (SEC Statement of Material Facts, ¶¶ 3, 4, 7).
3. The transfers of funds to Pace's personal bank account were not reflected in the books and records of Pace American Group. (Id., ¶¶ 8, 9, 11).
4. The transfers of funds to Pace's personal bank account were not disclosed in the registration statement for Pace American Group's initial public offering filed on September 22, 1992, or in the Form 10-K annual report for Pace American Group filed on March 31, 1993, or in the proxy statement for a Pace American Group meeting of shareholders filed July 15, 1993. (Id., ¶¶ 12, 13, 14
5. Pace signed the registration statement and the Form 10-K and was one of the persons soliciting votes from shareholders through the proxy statement. (Id., ¶¶ 12, 13, 14 Pace's Defenses Pace's four defenses are discussed below. None of them has merit.
Pace argues that the $36,659.28 of American Bonding Company's premium income that was transferred to his personal account was a tiny fraction of Pace American's total premium income of $62 million and considerably less than the $60,000 threshold for materiality established by SEC Guidelines, Regulation S-K, Item 404. (Pace Decl. ¶¶ 40-41, Mem. p. 10). Although at one point the SEC appears to argue that the dollar amount of the "transactions" in this case was greater than $60,000, its better argument (and the prevailing one) is that the illegal transfer of $36,659.28 was material -- and had to be disclosed -- even if Item 404 did not require it. See Maldanado v. Flynn, 597 F.2d 789, 796 (2d Cir. 1979). False statements or omissions are material if a reasonable investor would consider them important, see Basic, Inc. v. Levinson, 485 U.S. 225 (1988).
Investors have a right to know -- and would reasonably consider it important -- when the head of a publicly-owned company is stealing any quantity of money from their company, see United States v. Fields, 592 F.2d 638, 650 (2d Cir. 1978), cert. denied 442 U.S. 917 (1979).
Plaintiff's loss causation argument (Mem. pp. 2-10) depends on two district court decisions that are completely inapposite. Lucia v. Prospect High Street Income Portfolio, Inc., 769 F. Supp. 410 (D. Mass. 1991), and In Re Washington Public Power Supply Sys. SEC. Litig., 650 F. Supp. 1346 (W.D. Wash. 1986), were private actions for damages. There is no "loss causation" requirement in public enforcement actions. See Graham v. ...