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U.S. Securities and Exchange Commission v. Levine

November 24, 2009


The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge


The U.S. Securities & Exchange Commission (the "Commission" or "SEC"), brought this action on September 28, 1999, claiming that the defendants Gerald H. Levine and Marie A. Levine (together the "Levines" or "Defendants") violated several provisions of federal securities laws. The Commission sought injunctive relief, including disgorgement of illicit profits, prejudgment interest, and statutory penalties.

At the conclusion of a ten-day trial, a jury returned a verdict finding that the Levines had violated three laws: Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. § 78j(b)] and Rule 10b-5 under that law [17 C.F.R. § 240.10b-5], Sections 17(a)(1), (2) and (3) [15 U.S.C. § 77q(a)(1), (2) and (3)] of the Securities Act of 1933 ("Securities Act") and Section 13(b)(5) [15 U.S.C. § 78m(b)(5)] of the Exchange Act and Rule 13b-2-1 under that law [17 C.F.R. § 240.13b-2-1].

Thereafter, on December 4, 2006, the Court conducted a hearing to determine the remedies to which the Commission was entitled given the jury's verdicts. Eventually this Court entered an "Order of Judgment" that required the Levines to:

a. Pay disgorgement in the amount of $217,358.69 within thirty (30) days.

b. Pay prejudgment interest in the amount of $230,325.59 within thirty (30) days.

c. Pay a $200,000 civil penalty within thirty (30) days.

d. Refrain from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 promulgated thereunder [17 C.F.R. § 240.10b-5].

On December 20, 2007, the Commission filed an Ex Parte Motion For Emergency Relief And Application For An Order To Show Cause Why Defendants Should Not Be Held In Civil Contempt ("Ex Parte Motion"). In its motion, the Commission contended that the Levines were in contempt of Court for two main reasons:

a. The Levines had allegedly failed to pay any part of the $447,684.28 of disgorgement and prejudgment interest ordered in the June 6, 2007 Order of Judgment; and

b. The Levines had allegedly violated the Court's June 6, 2007 injunction against further violations of the antifraud provisions of the federal securities laws.

Pursuant to the Commission's Motion the Court conducted civil contempt proceedings on February 20, 2008, and March 11, 12 and 13, 2008, at the conclusion of which the Court found the Levines in contempt of Court for their failure to pay the judgment. The parties were required to submit proposed findings of fact and conclusions of law regarding the Levines' alleged violation of the June 6, 2007 injunction against further violations of the antifraud provisions of the federal securities laws.

Having considered the evidence presented at the hearing and the Parties Proposed Findings of Fact and Conclusions of Law, the court makes the following:



1. During the lengthy time this case has been pending, the Court has had the opportunity to assess the Levines' credibility and candor with the Court. Their credibility and candor were often lacking with respect to important matters.

2. For example, Mrs. Levine was impeached numerous times when she testified during the hearing. In one instance, Mrs. Levine claimed that she never signed for her daughter, MaryAnn Metz ("Metz"), on corporate checks. This testimony was directly contradicted by an affidavit Mrs. Levine attempted to admit into the proceeding which stated: "On occasion, I have signed MaryAnn Metz's name on documents and check drafts for the companies." (3/11/08 Tr. at 131). Mrs. Levine's explanation for this contradictory testimony was "I don't really think that clear in the afternoon." (3/12/08 Tr. at 38). This explanation is simply not credible.

3. Other parts of Mrs. Levine's testimony were similarly unbelievable. Mrs. Levine admitted that she lost over $209,000 gambling in Station Casinos properties in the year 2007. But Mrs. Levine claimed that she still thinks she won gambling money that year because she did better at video poker machines that are located in a grocery store she frequents. Mrs. Levine's testimony on this point is not believable.

4. Mrs. Levine's own interrogatory answers indicate that she did not have anywhere close to $200,000 in gambling winnings from grocery stores in 2007. (Pl. Ex. 117).*fn1 Any time individuals win more than $1,200 gambling, they are given a W-2G.

And the W-2Gs the Levines have from the grocery stores add up to well under $100,000. In addition, there can be no question that Mrs. Levine must have lost some amount of money gambling in grocery stores, and those losses would offset the winnings reflected in the proffered W-2G's. Furthermore, rather than claiming that she gambled more at the grocery stores, Mrs. Levine testified that her favorite place to gamble is Station Casinos. In sum, Mrs. Levine's testimony regarding her alleged gambling winnings in 2007 is in direct conflict with her interrogatory answers and the documentary evidence. Her testimony also defies common sense.

5. Mrs. Levine also contradicted herself when trying to explain how she used the checks made out to her, to her husband, or to cash from Delaware Escrow or Euro Escrow accounts. For example, she first stated that she would go to the bank and get money to assist the companies, and then, two sentences later, she stated that, because of her health problems, she could not "just pick up on a moment's notice and move or do anything." (3/11/08 Tr. at 34). And her explanation that her health problems prevented her from travel was contradicted by her later testimony concerning the trips she took in 2007. She testified that she went on a cruise to Mexico; she traveled to California more than once; she went to Texas; and she went to Florida. Thus, her testimony regarding her ability to travel was not credible.

6. Another example of Mrs. Levine's inconsistent testimony concerns the ownership of the 2006 Cadillac Escalade that she and her husband drive. Initially, when discussing who owns the car, Mrs. Levine described herself and her husband as the "title owners," while her mother was the "legal owner." (3/11/08 Tr. at 41). After further questioning from the Court, she changed her story, claiming that her mother's purchase of the car was "like a loan to us, the money was a loan to us because she kept the title, she was -- she was the lien holder on the title." (3/11/08 Tr. at 43). As for why the car ownership was set up as it was, Mrs. Levine claimed that the car was so titled "for insurance purposes." (3/11/08 Tr. at 42). Casting further doubt upon the insurance excuse was Mrs. Levine's acknowledgment that they do not allow Mrs. Levine's mother to drive the car.

7. Mr. Levine's testimony also repeatedly demonstrated that he was not credible. Mr. Levine admitted to being one of only two corporate officers for Public Highway. The other officer is his wife. Although he is a corporate officer of a company with no employees other than himself and his wife, Mr. Levine claimed to know almost nothing about what Public Highway did in 2007. The record clearly shows that Public Highway had no employees other than the Levines and kept all its corporate files in the Levines' home. In fact, Mr. Levine initially claimed not to even be sure of his own position at Public Highway. Mr. Levine also claimed to be ignorant regarding the reason a substantial amount of checks were written to himself and his wife from the account of Public Highway. Given that Mr. Levine was one of only two officers and directors of Public Highway, it is beyond belief that he would not know the reason his own company wrote thousands of dollars of checks to himself and his wife.

8. Mr. Levine's testimony regarding the business activities of Public Highway and Wire to Wire was also totally unbelievable. He stated that Public Highway was a consulting firm, and that he and his wife were the only consultants. But then, in response to a question as to whether Public Highway served as an escrow agent in 2007, he replied, "I can't answer you what it did because I wasn't involved in it." (2/20/08 Tr. at 81). Mr. Levine's stated knowledge of Wire to Wire was even less clear. When asked whether Wire to Wire, a company that he and his wife run exclusively, conducted any business in 2007, Mr. Levine testified, "I'm sure it did, but I can't answer you directly what it was." (2/20/08 Tr. at 81). It defies credulity that one of two officers and directors does not even know what business a company engages in.

9. Mr. Levine's testimony was similarly not believable when it came to explaining why Euro Escrow wrote him checks. Mr. Levine testified that, while he did not work for Euro Escrow, he "did do some errands for them," but he was not paid for this work. (2/20/08 Tr. at 71). Thus, he would have this Court believe that Euro Escrow's checks written to him were "to pay some expenses for Euro Escrow." Each of the five checks in question was for $2,000; Mr. Levine received $10,000 from Euro Escrow from February 26, 2007 to August 23, 2007, and yet his testimony is that he cannot recall what those payments were for, other than "to pay some expenses." This testimony is not believable.

10. Mr. Levine's testimony regarding the source of the funds he used to gamble was also not credible. He acknowledged that he gambled with money obtained from several sources: his social security income, advances from credit cards, money borrowed from MaryAnn Metz or her husband, or free play offered by the casino. But when asked who paid off the credit cards, Mr. Levine stated "I can't answer how they were paid because they could have been paid by some gaming winnings. I don't know, that's not what I do, so I can't answer that question." (2/20/08 Tr. at 88-89). Given that Mrs. Levine's testimony acknowledged that she lost over $200,000 in 2007 at Station Casino, and given the evidence the Levines themselves offered that their winnings at other gambling establishments did not make up for the Station Casino losses, it is utterly unbelievable that Mr. Levine's credit cards were paid off using winnings from gambling.

11. Mr. Levine's testimony regarding his mortgage payments was also unbelievable. He acknowledged that Countrywide held the mortgage in his home. He admitted that he does not pay that mortgage, but then claimed to be ignorant of who does pay for the house in which he and his wife live.

12. Mr. and Mrs. Levine contradicted each other when they testified about a $17,000 ring that they purchased in January 2007 while on a cruise in Mexico, using money from a Euro Escrow account, and sold shortly thereafter. Mr. Levine testified that he told his friend about the ring. Initially, Mr. Levine claimed that he didn't know how the ring was sold. Upon further questioning, he admitted that he told his friend about the ring, but he could not recall whether his friend came and talked to him, or to Mrs. Levine, or to Metz when he purchased the ring. Mrs. Levine, on the other hand, answered very clearly that her husband sold the ring. What makes the conflicting testimony so unbelievable is that the ring cost more than the Levines claimed was their entire taxable income for 2006. The idea that they could be unclear about such a significant purchase only one year after making it is patently absurd.

13. Mr. and Mrs. Levine also contradicted each other regarding whether Delaware Escrow has an office in the Levines' own home. Mr. Levine testified that Delaware Escrow only stored documents at the Levine home, but that its office was on South 10th Street. Mrs. Levine, however, testified that, in fact, Delaware Escrow did maintain an office in the Levine home, and only used the South 10th Street office as a mail drop. Metz confirmed Mrs. Levine's testimony that Delaware Escrow maintained an office at the Levine home. Given that the Receiver testified that he found Delaware Escrow documents in the Levine home, the Court finds Mr. Levine's testimony that it did not maintain an office there to be unbelievable.

14. The Levines also called their daughter, Metz,*fn2 to testify. Metz intervened in this case. (DE 241). Metz is the trustee of The 1975 Trust which is ostensibly the owner of two entities involved in the contempt proceeding -- Delaware Escrow and Euro Escrow. Metz's testimony on many points was not credible.

15. Metz was impeached numerous times and she gave testimony that was internally inconsistent. At one point, she explained that she gave her parents funds because "My mom can't work." (3/12/08 Tr. at 142). She gave this answer in spite of the fact that, in response to the previous question, she stated that she used Delaware Escrow funds to pay her parents' expenses when her mother requested, partly because, "She was also doing work for Delaware Escrow." (3/13/08 Tr. at 141-142).

16. Metz tried to persuade this Court that she could not remember who acted as the salesperson when Euro Escrow sold shares it allegedly owned in a company called Immune-Tree International to investors in Europe. On her first day of testimony, she claimed it was a person known as Cobi. The next day, when she resumed her testimony, she corrected herself, stating that the person who acted as the salesperson for Euro Escrow's Immune-Tree shares was Craig Cumming. She gave no reason other than to imply that because their names were similar, she kept "getting them mixed up." (3/13/08 Tr. at 6). Such an explanation is not credible.

17. Finally, Metz stated that the escrow agreements that Delaware Escrow had were with Cobi. But she would have the Court accept that she does not even know Cobi's last name. It is simply not believable that a person supposedly running a very small business would have not one, but many, contracts with an individual, and would send that individual hundreds of thousands of dollars pursuant to those contracts, and yet would not know that individual's last name.


18. The Levines have chosen to live their lives through corporate entities that they have created. They do not personally receive investor funds or send out shares; they do so through corporations. As is discussed fully below, the Levines, via their corporate entities, complete the sale of shares in small companies. The Court heard evidence about the Levines' assisting in the completion of sales in shares of seven corporations in 2007: Avitech LifeSciences, Inc.; Biomaxx Systems, Inc.; Evolution Global Capital Partners, Inc.; Green Machine Development Corp.; Xiiva Holdings, Inc.; Savior Energy Corp.; and Magellan Energy, Ltd. In general, Mrs. Levine is told by agents for the seller of the shares ("Seller's Agents") that individuals have agreed to purchase shares in one of the corporations.*fn3 Mrs. Levine then sends out a form, called a "Securities Purchase Application," that is completed by the individual investor. After the investor completes the Securities Purchase Application, and wires funds to one of the Levines' corporations to purchase shares, Mrs. Levine then sends the investors their share certificates. The Securities Purchase Application fails to disclose a number of critical facts, including: (1) the fact that the Levines have been found liable for securities fraud; (2) the amount of commissions to be paid to the sales agent; (3) the fact that the funds the investors send in will be commingled with general operating funds, and, in some cases, may be withdrawn by Mrs. Levine at a casino; and (4) the fact that the corporations acting as escrow agents for the securities purchases are not licensed to perform escrow work. The Levines apparently believed that by handling all their business through their corporations, they could shield themselves from any responsibility for their actions. They are wrong.


19. This Court has already found that the Levines used Wire to Wire as their alter ego. (DE 221 at ¶¶ 33-34). After the Court made that finding, the Levines continued to use Wire to Wire as their personal piggy bank, wholly ignoring corporate formalities. According to the Levines' own accounting, Wire to Wire wrote Marie Levine checks totaling $66,000 in 2007. That same accounting shows Wire to Wire paying for many of the Levines' personal expenses, including medical expenses (Desert Radiologists and Medicare), credit cards (Direct Merchants Bank and Capital One), the power bill for their house, and the mortgage for their house. Furthermore, the Court heard testimony of other payments from Wire to Wire. There were $24,000 in checks made out to cash (Pl. Ex. 88) and $7,000 in checks made out to Gerald Levine (Pl. Ex. 89). 20. Wire to Wire's sole officers and directors are the Levines. Wire to Wire also maintained its only offices in the Levines' house. Until the receivership was imposed in early 2008, Wire to Wire's paper records were stored at the Levine house. And Wire to Wire's electronic records were maintained on a computer in the Levines' bedroom, a computer that also contained the records of the other corporate entities at issue in this matter.


21. Public Highway is the Levines' alter ego. Gerald and Marie Levine are the only officers and directors of Public Highway. Public Highway's only offices are at the Levine house. Until the receivership, Public Highway's paper records were stored at the Levine house. And Public Highway's electronic records were maintained on a computer that was also used to maintain the records of the other corporate entities at issue in this case.

22. The Levines also made liberal use of Public Highway's funds. The Levines acknowledged receiving money from Public Highway, although they failed to calculate the exact amount. In 2007, Public Highway wrote six checks to Marie Levine totaling $14,000. Mrs. Levine also signed 14 Public Highway checks made out to "Cash" for a total of $32,000. These checks were endorsed by Mrs. Levine. The Levines also used Public Highway funds to pay for their personal expenses. For example, Public Highway paid for Mr. Levine's health insurance at AARP. Public Highway also paid for purchases Mrs. Levine made on ShopNBC. And Public Highway paid for purchases put on Mr. Levine's Sears card.

23. The Levines also transferred large amounts of Public Highway funds to other entities. On June 26, 2007, twenty days after this Court entered its Final Judgment in this matter, they sent $50,000 to Delaware Escrow. And between April 28 and July 13, 2007, Mrs. Levine wrote five checks from Public Highway's account to Euro Escrow for a total of $290,000. Public Highway also transferred over $60,000 to a company called Aura Trading in Cyprus on June 5, 2007. Aura Trading was involved in the sale of securities to investors in Europe.

24. The Levines used Public Highway as an unlicensed escrow company. Mrs. Levine testified that Public Highway served as an escrow agent in 2007. It was not licensed to do so. In fact, Public Highway was not licensed to do any business whatsoever in 2007. And the lack of an escrow license was not the only corporate deficiency -- ...

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