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Securities and Exchange Commission v. One Or More Unknown Traders In the Common Stock

March 28, 2012

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
ONE OR MORE UNKNOWN TRADERS IN THE COMMON STOCK OF CERTAIN ISSUERS ET AL. DEFENDANTS.



The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Re Document Nos.: 53, 59

MEMORANDUM OPINION

GRANTING IN PART AND DENYING IN PART THE PLAINTIFF'S MOTION FOR DISGORGEMENT; DENYING PAREX'S MOTION FOR SUMMARY JUDGMENT;GRANTING PAREX'S ALTERNATIVE REQUEST TO UNFREEZE $1,164,652.07

I. INTRODUCTION

This matter comes before the court on both the plaintiff's motion for disgorgement and the relief defendant*fn1 , JSC Parex Bank, Inc.'s ("Parex"), motion for summary judgment. The defendants are four individuals who reaped substantial profits by engaging in illegal trading on the U.S. stock market. They carried out this illegal activity using Parex's brokerage account and stored the ill-gotten money at Parex. The court previously ordered Parex to freeze the brokerage account, which held $3,000,000.00, because it appeared to house the defendants' illegally obtained funds. The court also entered default judgment against the defendants and ordered restitution in the amount of $1,835,347.93.

The plaintiff, the Securities and Exchange Commission ("SEC"), has filed a motion to disgorge the frozen funds. In response, Parex moves to unfreeze the frozen funds or, in the alternative, asks that the court unfreeze the amount in the brokerage account in excess of the $1,835,347.93 that was ordered in restitution. Because the plaintiff does not sufficiently establish that the brokerage account funds are causally related to the defendants' wrongdoing, the court denies in part the plaintiff's motion for disgorgement. Further, because a genuine dispute of material fact exists as to this issue, the court denies in part Parex's motion for summary judgment. Because, however, the plaintiff demonstrates that the funds in a particular defendant's "current" account were indeed causally related to the wrongdoing, the court grants in part the plaintiff's motion. Finally, because the court previously determined that only $1,835,347.93 was subject to restitution, the court grants Parex's alternative request to unfreeze the funds in the frozen brokerage account that exceed the restitution amount.

II. FACTUAL & PROCEDURAL BACKGROUND

In 2002, Parex, a bank located in Latvia, established a brokerage account in the United States to allow its customers to buy and sell shares of stock on the U.S. stock market. Rel. Def.'s Statement of Undisputed Material Facts in Supp. of Summ. J. ("Rel. Def.'s Statement") ¶ 14. Parex established this brokerage account by contracting with Penson Financial Services, Inc. ("Penson"), a private financial company. Id. Parex claims that the brokerage account included, inter alia, a communal "omnibus" account maintained for the benefit of all of its customers who traded in U.S. securities. Id. Pl.'s Statement of Genuine Issues of Fact in Opp'n to Summ. J. ("Pl.'s Statement") ¶ 5. In addition, Parex states, each of its investors had his or her own separate "current account" that was located in Latvia. Rel. Def.'s Statement ¶ 14.

Parex claims that an investor would use the brokerage account as a platform to make trades on the U.S. stock market. Id. at 15. Parex would deposit any resulting proceeds into the omnibus account within the brokerage account. Id. According to Parex, these funds would then be sent*fn2 to the investor's respective "current" account in Latvia. Id.

Between December 2005 and December 2006, the defendants used the brokerage account to purchase and sell shares of common stock on the U.S. stock market. Id. ¶¶ 2, 15, 18. Utilizing "a modern-day, technological version of the traditional 'pump-and-dump' market manipulation scheme," the defendants illegally inflated stock prices for their personal gain. Id. ¶ 3. To carry out this scheme, the defendants first purchased stocks in thinly traded*fn3 companies at very low prices. Id. The defendants then hacked into the accounts of third-party investors and bought shares in these thinly traded companies in order to increase the appearance of trading activity and thereby artificially inflate their stock prices. Id.Once the stock prices were significantly inflated, the defendants sold all of their personal shares in the companies for substantial monetary gains. Id.

According to Parex, the illegally obtained assets were "credited" to the defendants' respective "current" accounts in Latvia. Rel. Def.'s Mot., Ex. B, Mem. of P. & A. in Supp. of Opp'n to Pl.'s Mot. and Rel. Def.'s Cross-Mot. for Summ. J.*fn4 ("Rel. Def.'s Mem.") at 6. PareX claims that it closed those current accounts due to the defendants' suspicious activities well before the plaintiff filed this action. Id. at 7-8.

In March 2007, the plaintiff brought this suit against the defendants, alleging that their actions violated § 17(a) of the Securities Act, § 10(b) of the Exchange Act and SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5. See generally Compl. The plaintiff then filed a preliminary injunction to enjoin the illegal activity and Parex was named as a relief defendant because it allegedly held the ill-gotten funds.*fn5 See generally Pl's Mot. for Prelim. Inj. The court granted the injunction and entered a consent order for Parex to freeze $3,000,000.00 held in the omnibus account. Order (Mar. 6, 2007) at 3. The defendants did not respond to any of the allegations and neglected to engage in the proceedings. See generally Mem. Op. (Aug. 31, 2010). Eventually, the court entered default judgment against each of the defendants and ordered them to collectively pay $1,835,347.93 in restitution. Id.

Because the defendants have yet to pay any of the judgment ordered against them, the plaintiff has now filed a motion requesting that the relief defendant turn the frozen funds over to the SEC to satisfy the restitution order. See Pl.'s Mot. for Order Directing Rel. Def. JSC Parex Bank to Turnover Frozen Funds ("Pl.'s Mot."). In response, Parex has filed a motion for summary judgment, contending that the funds in the brokerage account are not subject to ...


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