The opinion of the court was delivered by: Gladys Kessler United States District Judge
Plaintiff Securities and Exchange Commission ("SEC") filed this action against four individual Defendants (John Tuli, Kent Wakeford, Christopher Benyo, and Michael Kennedy, collectively "Defendants") on January 10, 2005, alleging a fraudulent scheme to materially and improperly inflate the announced and reported revenues of PurchasePro.com, Inc. ("PurchasePro"). On April 24, 2008, an eleven-member jury found Defendant Christopher Benyo ("Benyo") liable on Count Three of this Complaint, for aiding and abetting PurchasePro's violations of Exchange Act Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5. Benyo was found not liable on the remaining three of the four claims against him.
The SEC has now filed a request for the entry of three remedial orders against Benyo. Specifically, the SEC seeks a permanent injunction against any future violations by Benyo of the applicable securities laws which were violated in this case, imposition of a permanent bar against Benyo serving as an officer or director of a publicly held company, and imposition of a civil monetary penalty of $120,000. Having considered the SEC's Memorandum in Support of Remedies, the Defendant's Opposition, the Reply, and the extensive record in this case, including the trial testimony and exhibits, the Court grants the SEC's request in part and denies it in part for the following reasons.
I.*fn1 Benyo was PurchasePro's Senior Vice President for Marketing and Network Development during the relevant time period, namely, March and April of 2001. The SEC presented substantial evidence at trial in support of its allegations that Benyo helped orchestrate creation of a fraudulent Statement of Work ("SOW") that was drafted and executed after the close of PurchasePro's First Quarter of business, ending March 31, 2001, but was back-dated to February 5, 2001, before the close of the First Quarter, in an effort to lead auditors and investors into believing that the revenue described in that SOW was recognized in the First Quarter.*fn2 The SEC presented evidence at trial that PurchasePro did not complete the project documented in the Statement of Work before the close of the First Quarter, and that Benyo was involved in concealing that fact. Among other evidence presented, Matthew Sorensen, a PurchasePro employee, testified that Benyo proposed the creation of an Internet hyperlink designed to generate the false appearance to PurchasePro's auditors and investors that the services described in the Statement of Work had actually been performed before March 31, 2001.
Prior to PurchasePro's announcement of its First Quarter earnings in an April 26, 2001 analyst call, Purchase Pro executives held a number of meetings to discuss exactly what amount of revenue could be recognized in the First Quarter. According to Dale Boeth, PurchasePro's Senior Vice President for Strategic Development, when the revenue associated with AuctioNet and the SOW were discussed, Benyo voiced no opposition to including it in PurchasePro's quarterly earning announcement. Benyo was an active participant on the April 26, 2001 analyst conference call, and made a number of references to the revenue related to PurchasePro's relationship with AOL. The SEC also presented evidence at trial that Benyo failed to disclose any facts relating to the fraudulent nature of the SOW during that call.
II. Section 21(d)(1) of the Exchange Act, 15 U.S.C. § 78u(d)(1), authorizes the Court "to enjoin" any "acts or practices constituting a violation of any provision of this title [or] the rules or regulations thereunder." Such injunctive relief may be provided by making a "proper showing." Id. Injunctions are appropriate remedies with regard to those who directly violate the securities laws and those who aid and abet violations. See SEC v. Fehn, 97 F.3d 1276, 1296 (9th Cir. 1996).
In SEC v. Savoy Industries, 587 F.2d 1149, 1168 (D.C. Cir. 1978), our Court of Appeals stated that, where the SEC seeks an injunction regarding future conduct (rather than to halt an ongoing violation), "the ultimate test is whether the defendant's past conduct indicates . . . there is a reasonable likelihood of further violation(s) in the future." The Court of Appeals has applied the following factors in assessing whether an injunction is warranted: (1) whether the violation was "an isolated incident"; (2) whether the defendant has "demonstrated that he understands his conduct to have been wrongful"; (3) whether he gives "sufficient assurances against future violations"; and (4) whether his "business activities may present him with further temptations to violate the law." Id.; SEC v. Huttoe, Civil Action No. 96-2543 (GK), 1998 WL 34078092, at *12 (Sept. 14, 1998).
A. As to the first factor, it is true that Benyo committed a number of separate actions to achieve his desired result of misleading the auditors and the public about the amount of revenue to be recognized in the First Quarter of 2001. In that sense, his violation of the Exchange Act included a number of discrete individual acts, all designed to mislead the public, and were not "isolated incidents."
For example, it was Benyo who knew that the AuctioNet integration project could not possibly be finished by March 31, 2001, the end of the First Quarter, and who offered the suggestion that PurchasePro establish a hyperlink to the AuctioNet site in order to create the appearance that full integration had been accomplished. Benyo's proposal was one important component of the overall plan to mislead investors about the status of PurchasePro's revenues for the First Quarter of 2001. It was on April 2, 2001, after the close of the First Quarter, that Benyo proposed his plan to create the hyperlink to the Auctionet site and then "circle back" to the actual work before the auditors arrived to perform their full inspection of the business.
In addition, Benyo participated in at least one meeting of high-level PurchasePro employees which occurred shortly before PurchasePro's announcement on April 26, 2001 of its First Quarter 2001 revenues. At that meeting, Benyo did not raise any objections to the announcement nor did he inform those present of the facts about creation of the deceptive hyperlink. When PurchasePro officers held the public conference call on April 26, 2001 with stock analysts and others, Benyo spoke and referred to revenue that PurchasePro had received due to its relationships with AOL, knowing that that reference included the AuctioNet revenue which had not in fact been received.
Thus, it is true that Benyo's wrongful actions in this case did include, as the SEC argues, a series of misrepresentation and omissions of material facts.
However, for purposes of considering whether these actions were "isolated incidents" under Savoy Industries, it is clear that they were all one ongoing "incident" relating to the inclusion of one item of revenue, albeit the "incident" was composed of several different actions all designed to achieve the same goal. Moreover, it is significant that Benyo had never previously committed such fraudulent conduct or violation of the Exchange Act. He had been a high level manager in this area of the business world for a number of years prior to 2001, and there is nothing in the record to suggest that he had ever committed illegal acts or misled the public. Therefore, viewed in context, his hyperlink scheme, with the attendant actions he took to accomplish it, did constitute "an isolated incident," as described in Savoy.
B. It must not be forgotten that the issuance of a permanent injunction against future securities violations is a "drastic remedy and not a mild prophylactic." SEC v. Yun, 148 F. Supp.2d 1287, 1293 (M.D. Fla. 2001), vacated on other grounds, 327 F.3d 1263 (11th Cir. 2003). In determining the appropriateness of imposing such a drastic remedy, which would undoubtedly have a far reaching impact upon Benyo's future livelihood and success in the commercial world, the courts have focused on whether there is a reasonable likelihood that, "unless enjoined, the violations will continue." SEC v. First Jersey Securities, 1010 F.3d 1450, 1477 (2d Cir. 1996).
The SEC has not carried its burden of proof on this issue. As noted, Benyo is a "first offender" and this episode was an isolated one in a career that spanned more than ten years. The SEC cannot rely only upon "the mere facts of past violations." SEC v. Levine, 517 F. Supp.2d 121, 147 (D.D. C. 2007). In short, it "has not demonstrated that the defendant engaged in the type of repeated and persistent misconduct which usually justifies ...