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Securities & Exchange Commission v. Milan Group, Inc.

United States District Court, District of Columbia

August 26, 2013

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
MILAN GROUP, INC., et al., Defendants

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[Copyrighted Material Omitted]

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[Copyrighted Material Omitted]

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For SECURITIES AND EXCHANGE COMMISSION, Plaintiff: James A. Kidney, SECURITIES & EXCHANGE COMMISSION, Washington, DC.

For BRYNEE K. BAYLOR, Defendant: Alan I. Baron, Rhett E. Petcher, LEAD ATTORNEYS, SEYFARTH SHAW, LLP, Washington, DC; Christopher F. Robertson, PRO HAC VICE, SEYFARTH SHAW LLP, Boston, MA.

BAYLOR & JACKSON, P.L.L.C., Defendant, Pro se.

For MIA C. BALDASSARI, Defendant: Christopher Allan Glaser, LEAD ATTORNEY, Jackson & Campbell, Washington, DC; Christopher B. Jones, PRO HAC VICE, LAW OFFICES OF CHRISTOPHER B. JONES, Scranton, PA.

BRETT COOPER, Defendant, Pro se, Philadelphia, PA.

For GLOBAL FUNDING SYSTEMS LLC, Defendant: Gerard J Martillotti, LEAD ATTORNEY, JERRY MARTILLOTTI & ASSOCIATES, Philadelphia, PA; John A. Zohlman, III, PRO HAC VICE, HAGNER & ZOHLMAN, LLC, Cherry Hill, NJ.

DAWN R. JACKSON, Defendant, Pro se.

PATRICK T. LEWIS, Defendant, Pro se, Richmond, UT.

For JULIAN ESTATE, ESTATE OF FRANK L. PAVLICO, III, Defendants: Dominic G. Vorv, LEAD ATTORNEY, THE VORV FIRM, PLLC, Washington, DC.

OPINION

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ROSEMARY M. COLLYER, United States District Judge.

The Securities and Exchange Commission sued The Milan Group, Inc., the law firm Baylor & Jackson, P.L.L.C., and certain individuals as " Principal Defendants" for conducting an alleged securities fraud from which victims suffered losses amounting to millions of dollars. SEC also named certain " Relief Defendants" --that is, persons who allegedly received money resulting from the fraudulent activities but who are not charged with personally engaging in the fraud. SEC seeks disgorgement from both sets of defendants for restitution to the victims. SEC moves for summary judgment. For the reasons stated below, SEC's motion will be granted in part and denied in part. Relief Defendant Mia Baldassari's cross-motion for summary judgment and for release of funds will be denied.

I. FACTS

A. Background

The Securities and Exchange Commission complains that the Principal Defendants--The Milan Group, Inc. a/k/a The Milan Trading Group, Inc. (Milan); Frank Pavlico III a/k/a Frank Lorenzo (Pavlico); Brynee K. Baylor; and through Ms. Baylor, her law firm Baylor & Jackson P.L.L.C.--made untrue statements of material fact or omitted to state material facts in connection with the sale of securities in violation of Section 17(a) of the Securities Act of 1933 (Securities Act), 48 Stat. 74,,,, codified at 15 U.S.C. § 77a et seq. ; Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), Pub. L. 73-291, 48 Stat. 881,,,, codified at 15 U.S.C. § 78a et seq. ; and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5. See Am. Compl. [Dkt. 53] ¶ ¶ 62-65 (Count I, Section 10(b) and Rule 10b-5), ¶ ¶ 68-70 (Count III, Section 17(a)). Alternatively, Mr. Pavlico, Ms. Baylor, and Baylor & Jackson are alleged to have aided and abetted Milan's violation of these statutes and the Rule. Am. Compl. ¶ ¶ 66-67 (Count II, aiding and abetting violations of Section 10(b) and Rule 10b-5), ¶ ¶ 71-72 (Count IV, aiding and abetting violation of Section 17(a)).

SEC also complains that all Principal Defendants offered and sold securities without a registration statement or exemption from registering in violation of Sections 5(a) and 5(c) of the Securities Act. Id. ¶ ¶ 73-76 (Count V, Sections 5(a) and 5(c)). Alternatively, Ms. Baylor and her law firm are alleged to have aided and abetted these violations. Id. ¶ ¶ 77-78 (Count VI, aiding and abetting violations of Sections 5(a) and 5(c)). Finally, SEC complains that Mr. Pavlico and Ms. Baylor induced, or attempted to induce, the purchase or sale of a security by an unregistered broker or dealer in violation of Section 15(a) of the Exchange Act. Id. ¶ ¶ 79-81 (Count VII, Section 15(a)).

Relief Defendants Mia Baldassari; Dawn Jackson; Brett Cooper and his former business, Global Funding Systems, Inc. (referred to in some materials as GFS); Patrick T. Lewis and his former business, GPH Holdings LLC (referred to

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in some materials as GPH); and The Julian Estate, Inc., a Pennsylvania company incorporated by Pavlico, are alleged to have received funds from defrauded investors through the Principal Defendants without providing any legitimate product or service. Id. ¶ ¶ 21, 82-83.

SEC asks the Court to enjoin the Principal Defendants from further violations; to order them to disgorge all proceeds from their fraud, with interest; to bar them from serving as officers or directors of any public company; and to order them to pay a large civil penalty. SEC asks the Court to exercise its equitable powers to order the Relief Defendants to disgorge the funds they received from the Principal Defendants, with interest.

B. The Alleged Prime Bank Scheme

SEC alleges that the Principal Defendants defrauded at least 13 investors out of $2.665 million in a " Prime Bank" scheme that operated from August 2010 through November 2011. Am. Compl. ¶ ¶ 22-29, SEC MSJ Mem. [Dkt. 109-2] at 3-7. Mr. Pavlico and Ms. Baylor (and, therefore, Milan and Baylor & Jackson) are alleged to have lured investors into the scheme by offering extraordinary returns ranging from 180% to 2400% per year at little to no risk. The purported investment involved the purchase or lease of bank instruments, including " standby letters of credit," " bank guarantees," or " medium term notes," all of which were to be " leveraged" to increase their value and then " monetized" or " traded" to generate extraordinary returns. SEC MSJ Mem. at 3-4.

Calling himself Frank Lorenzo, [1] Mr. Pavlico initiated this scheme in 2010. He created Milan and recruited Ms. Baylor as his lawyer, who then allegedly used her position as an attorney to give an aura of legitimacy to the " investments." Among other things, Ms. Baylor is alleged to have told investors that she had known Mr. Pavlico for years, that Mr. Pavlico and Milan had previously completed numerous successful bank instrument transactions at great investor profit for years, that investors' funds would remain in escrow in her law firm's IOLTA account, [2] that Milan and Mr. Pavlico offered a great investment opportunity that she had validated, and that she and Mr. Pavlico were working in the best interests of the investors. See SEC MSJ Mem. at 3-7. For example, SEC cites a September 15, 2011, telephone call between Mr. Pavlico and agents of the Federal Bureau of Investigation acting as investors, in which Mr. Pavlico assured the FBI: " And you can speak to our attorneys,

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too, and they'll let you know of the credibility of who we are. . . . They were just involved in the 15 million. . . . They actually speak to the bankers. They actually--they know everybody. They know everything. We don't do anything without them." SEC MSJ, Decl. Christopher McLean (McLean Decl.) [Dkt. 109-4], Exs. 1-68 [Dkts. 109-5 to -17] (SEC Exs.), SEC Ex. 35, Dep. of Frank Pavlico, at 98-99.

SEC contends that the bank instruments were fictitious; that no victim's money was ever invested anywhere; that almost all of the money went immediately to the pockets of the Principal Investors or, to a lesser extent, to the Relief Defendants; that investors were lulled for more than a year into believing that successful bank transactions were underway; and that Ms. Baylor became the chief contact assuring suspicious investors of hard work on their behalf after time passed with no return. By December 1, 2011, when the scheme was terminated by this Court's temporary restraining order, see Dkt. 4, and preliminary injunction, see Dkt. 22, the Principal Defendants and Relief Defendants had allegedly received and spent the following amounts:

Baylor and Jackson (Baylor)

$ 746,266

Milan (Pavlico)

$ 1,318,734

GFS (Cooper)

$ 225,000

GPH (Lewis)

$ 375,000

TOTAL:

$ 2,665,000

SEC MSJ Mem. at 7.

After the case was filed, SEC dismissed the case against three other Relief Defendants, Susan C. Kevra-Shiner, the Law Office of Susan Kevra, and Elmo Baldassari, upon satisfaction that they no longer held any improperly gained benefits of the fraud. See SEC Partial Mot. Dismiss [Dkt. 52]; Minute Order dated Feb. 27, 2012 (granting SEC motion to dismiss). SEC then filed a Motion for Summary Judgment or Default Judgment on November 15, 2012. See SEC MSJ [Dkt. 109]. Some of the remaining Principal and Relief Defendants are no longer contesting SEC's allegations. A default judgment was entered against Relief Defendant GPH Holdings, LLC, on November 14, 2012. See [Dkt. 110]. Default judgment was also entered against Relief Defendant Global Funding Systems, Inc. See [Dkt. 137]. SEC and Relief Defendant Dawn Jackson, Ms. Baylor's former law partner, settled all disputes between them with an agreement that Ms. Jackson is liable for $153,000 of disgorgement and $9,410 in prejudgment interest, to be repaid only upon sale of certain property Ms. Jackson owns in the Bahamas. See Redacted Jackson Final J. [Dkt. 164].

SEC filed a Notice of Defendant Death on December 12, 2012, notifying the Court and all parties of the death of Principal Defendant Frank Pavlico. [3] See [Dkt. 117].

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Mr. Pavlico's estate was substituted as a party, see Minute Order dated Jan. 18, 2013, and the executrix of Mr. Pavlico's estate has filed a response to SEC's motion stating, in part:

As prior to his death Frank L. Pavlico a/k/a Frank Lorenzo asserted his Fifth Amendment right against self incrimination, the Estate of Frank L. Pavlico, III has no objection to Plaintiff's Motion for Summary Judgment. [4]

[Dkt. 131]. Judgment will be entered against Mr. Pavlico's estate.

Judgment will also be entered against the three entities that filed answers in the case but have ceased defending: Principal Defendants Milan and Baylor & Jackson and Relief Defendant The Julian Estate. See Joint Answer to Amended Complaint by Milan and Julian Estate [Dkt. 60], Answer to Amended Complaint by Baylor & Jackson, P.L.L.C. [Dkt. 65]. Milan and Baylor & Jackson have collapsed. Mr. Pavlico formed The Julian Estate to purchase a house using funds obtained from the Prime Bank fraud, see SEC MSJ Mem. at 2 n.1; that entity has also not defended this case since entering its answer. Because Milan, Baylor & Jackson, and The Julian Estate have not responded to SEC's motion for summary judgment, the motion is deemed conceded as to those defendants. [5] See LCvR 7(b).

Thus, presently remaining for adjudication are the arguments of the remaining persons who oppose SEC: Principal Defendant Brynee Baylor and Relief Defendants Mia Baldassari, Patrick Lewis, and Brett Cooper.

II. LEGAL STANDARDS

A. Summary Judgment

Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment shall be granted " if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Moreover, summary judgment is properly granted against a party who " after adequate time for discovery and upon motion . . . fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

In ruling on a motion for summary judgment, the court must draw all justifiable inferences in the nonmoving party's favor and accept the nonmoving party's evidence as true. Anderson, 477 U.S. at 255. A nonmoving party, however, must establish more than " the mere existence of a scintilla of evidence" in support of its position. Id. at 252.

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In addition, the nonmoving party may not rely solely on allegations or conclusory statements. Greene v. Dalton, 164 F.3d 671, 675, 334 U.S. App. D.C. 92 (D.C. Cir. 1999). Rather, the nonmoving party must present specific facts that would enable a reasonable jury to find in its favor. Id. at 675. If the evidence " is merely colorable, or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (citations omitted).

B. Counts I through IV--Principal Defendants--Securities Act Section 17(a), Exchange Act Section 10(b), and Rule 10b-5

1. Primary Violation

Together, Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 proscribe fraud touching on the purchase or sale of a security in the United States. See SEC v. Falstaff Brewing Corp., 629 F.2d 62, 75-76, 203 U.S. App. D.C. 28 (D.C. Cir. 1980). Under Section 2(1) of the Securities Act, 15 U.S.C. § 78b(1), and Section 3(a)(10) of the Exchange Act, 15 U.S.C. § 78c(a)(10), " security" includes " investment contracts," which the Supreme Court has defined as (1) an investment of money, (2) in a common enterprise, (3) with profits to be derived from the entrepreneurial or managerial efforts of others. SEC v. W. J. Howey & Co., 328 U.S. 293, 301, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946); see also SEC v. Int'l Loan Network, Inc., 968 F.2d 1304, 1308, 297 U.S. App. D.C. 22 (D.C. Cir. 1992).

As interpreted by the courts, these antifraud provisions promote the informational integrity of securities transactions. Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), provides:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), provides:

It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement . . . by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly[:] (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.

Rule 10b-5, 17 C.F.R. § 240.10b-5, states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) [t]o employ any device, scheme, or artifice to defraud,
(b) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the

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circumstances under which they were made, not misleading, or
(c) [t]o engage in any act, practice, or course of business which operates or would operate as a fraud ...

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