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Securities and Exchange Commission v. Whittemore

July 27, 2010


The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge


On February 12, 2009, this Court entered Judgment against Defendant Peter S. Cahill, and on February 17, 2010, this Court entered a similar Judgment against Defendants David E. Whittemore and Whittemore Management, Inc. ("WMI"). See J. Against Cahill [Dkt. # 73]; J. Against Whittemore Defs. [Dkt. # 89]. In the underlying Consents of each Defendant, and without admitting or denying the allegations of the Complaint, the Defendants agreed to entry of the Judgments which restrain them from violating Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the relevant rule thereunder, and also agreed to a court order of "disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty . . . ." See Cahill's Consent [Dkt. # 72] ¶ 3; Whittemore Defs.' Consent [Dkt. # 74] ¶ 3. The parties have been arguing ever since about the values to apply to each of these remedies.

The Court previously granted the SEC's request for prejudgment interest against Defendants. See Mem. Op. [Dkt. # 90]; Am. Order [Dkt. # 93]. Defendants seek reconsideration of the prejudgment interest calculation and the SEC opposes.*fn1 As explained below, the motions to reconsider will be denied, but the Amended Order [Dkt. # 93] granting judgment will be corrected to reflect the proper disgorgement amounts and the proper prejudgment interest calculation.


The Complaint alleges a scheme, commonly referred to as a "pump and dump," to defraud the public through the nationwide broadcasting of fraudulent voicemail messages touting the stocks of small, thinly-traded companies. Compl. ¶ 1. Such messages are intended to deceive recipients by making them believe that the caller had dialed their number by mistake and that they were the unintended recipient of a hot stock tip meant for a friend of the caller; the calls are intended to "pump" or inflate the trading volume and share prices of the touted company. Id. The parties engaging in the fraud and their associates can then "dump" the stock, i.e. sell it, at the inflated price and thereby profit from the scheme.

In July 2004, Mr. Cahill hired WMI and its sole employee, Mr. Whittemore, to place hundreds of thousands of calls nationwide in order to leave prerecorded messages. Id. ¶ 11. The Whittemore Defendants are in the business of using auto-dialing computers to broadcast prerecorded messages via telephone. Id. ¶ 6. Mr. Cahill hired the Whittemore Defendants to broadcast voicemail messages promoting the stock of Triton American Energy Corporation ("TRAE"), an oil and natural gas exploration and production company. Id. ¶¶ 9 & 11. TRAE's common stock is quoted in the Pink Sheets, a price quotation system primarily used for trading the securities of small corporations that do not meet the minimum listing requirements of a national securities exchange. Id.

Mr. Cahill engaged the Whittemore Defendants after TRAE's president, Louis Guidry, hired Mr. Cahill to raise capital for TRAE. See SEC Supp. Mem. [Dkt. # 82], Ex. A ("Guidry Tr.") at 23-24.*fn2 Mr. Cahill received 1.2 million shares of TRAE stock as his fee. Guidry Tr. at 22. Mr. Cahill, in turn, paid the Whittemore Defendants 594,000 shares of TRAE stock for their auto-dialing services. The Whittemore Defendants later returned the TRAE shares to Mr. Cahill, and Mr. Cahill paid them $142,000 in lieu of the stock. Compl. ¶ 11.

On or about August 17, 18, 19, 31 and September 14, 2004, and other dates unknown, WMI broadcast a series of false and misleading messages touting TRAE, each of which was substantially similar:

Hey David, it's Kathy. Listen, honey, Jim wanted me to give you a call. I just put him on a plane and he didn't have time to call you himself, uh, but he wanted you to know . . . remember those guys that do those stock promos? They're getting ready to start another one this week. Uhm, they just did, uh, shoot. Hang on there a minute, let me look here and see. Okay, the first one was CNDD, the other one was PWRM, and he said that the next one you can get in on was TRAE. Let me look here, uhm, yeah, TRAE. It's an oil company. And, anyway, he said he thought that it's gonna be their best stock promotion this year. It's at 75 right now and I think it's going to go up to like five or six bucks, or something like that. He said you needed to get in in the morning before the price starts going up 'cause you definitely want in on this one. Give him a call later tonight, sweetheart, and, um, I think that's it. I'll talk to you soon. Bye.

Id. ¶ 12.

As the Complaint says bluntly, "The messages had their intended effect, increasing the trading volume and share price of TRAE stock." Id. ¶ 13. The share price of TRAE stock increased from $.32 per share on August 6, 2004 to a high of $.97 per share on August 19, 2004.*fn3

Id. The trading volume during this period increased from 10,000 shares to 756,000 shares, an increase in market capitalization of around $12 million. Id.

Defendants profited from the TRAE "pump and dump" scheme. Between August 18 and September 28, 2004, Mr. Cahill sold 1,060,200 TRAE shares, generating proceeds in the amount of $738,473. See SEC's Mot., Ex. B ("Lowry Decl.") ¶ 13.*fn4 Mr. Cahill then wired $549,300 of the $738,473 amount to an Interest Only Lawyers Trust Account ("IOLTA account") in the name of WMI at Godwin Gruber LLP.*fn5 The deposit into the WMI IOLTA account was made on the authority of Phillip W. Offill, a former partner in the Godwin Gruber firm and counsel to the Whittemore Defendants.*fn6 Id. ¶¶ 14 & 16.

In September and October of 2004, an entity called BBX Support, Inc. ("BBX") also made deposits into the WMI IOLTA account - deposits totaling $147,500. Id. ΒΆ 17. Also, Richard Markle, Mr. Cahill's attorney, wired $78,500 into a NAFCO account maintained by Mr. Whittemore's wife, ...

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