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Securities and Exchange Commission v. Milan Group, Inc.

United States District Court, D. Columbia.

August 27, 2015

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

          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

         ROSEMARY M. COLLYER, United States District Judge.

Page 22

          On August 26, 2013, this Court granted summary judgment to the Securities and Exchange Commission (SEC), in which the Court found Defendant Brynee K. Baylor liable for securities fraud under the Securities Act of 1933 (Securities Act), 48 Stat. 74,,,, codified at 15 U.S.C. § 77a et seq., and the Securities Exchange Act of 1934 (Exchange Act), Pub. L. 73-291, 48 Stat. 881,,,, codified at 15 U.S.C. § 78a et seq. The Court also held Ms. Baylor liable as a seller of unregistered securities, in violation of 15 U.S.C. § 77e(a), and as a seller of securities without being registered as a broker-dealer, in violation of 15 U.S.C. § 78 o (a). The Court ordered, inter alia, that Ms. Baylor and her law firm, Defendant Baylor & Jackson, P.L.L.C. (Baylor & Jackson) be held jointly and severally liable for a third-tier civil penalty of $746,266. Ms. Baylor appealed the Court's Final Judgment. The D.C. Circuit affirmed this Court's ruling in part and vacated and remanded the order for the civil penalty.

         On remand, SEC moves for third-tier civil monetary penalties solely against Ms.

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Baylor in the amount of $600,000 and the entry of an amended Final Judgment against Ms. Baylor and Baylor & Jackson. For the reasons below, the Court will grant SEC's motion.

         I. BACKGROUND

         A. SEC's Amended Complaint

         On February 27, 2012, the Commission filed an Amended Complaint against Defendants Frank L. Pavlico, Brynee K. Baylor, The Milan Group, Inc. (Milan) and through Ms. Baylor, her law firm Baylor & Jackson, P.L.L.C. (Baylor & Jackson), alleging that they defrauded investors in a " prime bank" scheme. See Am. Compl. [Dkt. 53].[1]

         The Amended Complaint alleged that Ms. Baylor and the other Defendants violated the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and, alternatively, alleged that Mr. Pavlico, Ms. Baylor, and Baylor & Jackson aided and abetted Milan's violation of these statutes and the Rule. See id. ¶ ¶ 62-65 (Count I, Section 10(b) and Rule 10b-5), ¶ ¶ 66-67 (Count II, aiding and abetting violations of Section 10(b) and Rule 10b-5), ¶ ¶ 68-70 (Count III, Section 17(a)), ¶ ¶ 71-72 (Count IV, aiding and abetting violation of Section 17(a)). The Amended Complaint also alleged that Ms. Baylor and the other 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, and, alternatively, alleged that Ms. Baylor and Baylor & Jackson aided and abetted these violations. See id. ¶ ¶ 73-76 (Count V, Sections 5(a) and 5(c)), ¶ ¶ 77-78 (Count VI, aiding and abetting violations of Sections 5(a) and 5(c)). Finally, the Amended Complaint alleged that Mr. Pavlico and Ms. Baylor induced or attempted to induce the purchase or sale of a security without being registered as a broker or dealer in violation of Section 15(a) of the Exchange Act. See id. ¶ ¶ 79-81 (Count VII, Section 15(a)).

         B. This Court's Summary Judgment Opinion and Order

         On August 26, 2013, this Court granted SEC's motion for summary judgment with respect to the Estate of Frank Pavlico,[2] Milan, Baylor & Jackson, and Ms. Baylor. See Op. [Dkt. 181] (SJ Opinion); Order [Dkt. 182].[3] The Court entered a Final Judgment ordering the remedies requested by SEC against these Defendants. See Final Judgment [Dkt. 183]. The Court held that Ms. Baylor was jointly and severally liable with Baylor & Jackson, Mr. Pavlico's estate, and Milan for disgorgement of $2,665,000, together with prejudgment interest for a total of $2,822.414.89. Id. at 8. The Court ordered Ms. Baylor to satisfy her obligation by paying a total of $2,752,758.64. Id. Because it determined that Defendants' violations " involved fraud and deceit which resulted in substantial losses to other persons," the Court held Ms. Baylor jointly and severally liable with Baylor & Jackson for third-tier civil penalties in the amount of $746,266. Id. at 10-11. This amount represented the total amount of money from the scheme that was received by and subsequently spent

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from Baylor & Jackson's accounts. See SJ Opinion [Dkt. 181] at 5.

         C. D.C. Circuit Ruling on Ms. Baylor's Appeal

         Ms. Baylor appealed the Court's Final Judgment to the D.C. Circuit. See Notice of Appeal [Dkt. 188]. The D.C. Circuit affirmed the Court's findings of liability and affirmed the disgorgement order, but vacated and remanded the civil penalty against Ms. Baylor and Baylor & Jackson. See Mandate [Dkt. 219] at 1-2.[4] Although it did not decide the question, the D.C. Circuit noted that " the text of the relevant statutory provisions suggests that civil penalties are not properly imposed on a joint-and-several basis." Id. at 2. In support, the D.C. Circuit cited SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d 279, 287-88 (2d. Cir. 2013), which held that civil penalties cannot be awarded jointly and severally.[5] The D.C. Circuit remanded for this Court " to reconsider whether the penalty should have been imposed on a joint-and-several basis." Id. at 2.

         On remand and following a status conference at which Ms. Baylor failed to appear, the Court ordered SEC to submit a motion and brief in support of its proposal as to how the Court should proceed. See Order [Dkt. 223]. SEC moves for civil monetary penalties against Ms. Baylor alone and for the entry of an amended Final Judgment against Ms. Baylor and Baylor & Jackson. See SEC Mot. [Dkt. 225]; Reply [Dkt. 227]. Ms. Baylor opposes the imposition of any penalty, but asks that she and Baylor & Jackson be held jointly and severally liable if the Court imposes civil penalties. See Opp'n [Dkt. 226]. In view of this request and SEC's contention that Baylor & Jackson no longer exists, the Court ordered Ms. Baylor to show cause in writing why the joint and several remedy she seeks would not be futile and to identify what assets Baylor & Jackson holds that are available to satisfy a judgment. See Order to Show Cause [Dkt. 228]. Ms. Baylor failed to respond.

         II. LEGAL STANDARD

         SEC asks the Court to impose third-tier civil penalties against Ms. Baylor. Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act set identical standards for assessing civil monetary penalties and establish three tiers of penalties. See 15 U.S.C. § 77t(d)(2); 15 U.S.C. § 78u(d)(3). Third-tier civil penalties may be imposed when the securities law violation " involved fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement [and] such violation directly or indirectly resulted in substantial losses or created a significant risk of substantial loss to other persons." 15 U.S.C. § 77t(d)(2)(C); 15 U.S.C. § 78u(d)(3)(B)(iii). At the time of Ms. Baylor's conduct, third-tier civil penalties were " the greater of" (1) $150,000[6] for each violation for a natural persons or (2) the " gross amount of pecuniary gain" to the defendant as a result of the securities law violation. Id.

         " The purpose of a civil penalty is to punish the individual violator and deter

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future violations." SEC v. One Or. More Unknown Traders in the Common Stock of Certain Issuers, 825 F.Supp.2d 26, 33 (D.D.C. 2010). Courts have discretion to determine the amount of a civil penalty " in light of the facts and circumstances" of the particular case. 15 U.S.C. § § 77t(d)(2)(A), § 78u(d)(3)(B)(i); SEC v. Daly, 572 F.Supp.2d 129, 134 (D.D.C. 2006). In determining the amount of the penalty, courts frequently consider such factors as: (1) the egregiousness of the defendant's conduct; (2) the degree of scienter; (3) whether the conduct created substantial losses or the risk of substantial losses to other persons; (4) whether the conduct was isolated or recurrent; and (5) whether the penalty should be reduced due to demonstrated current and future financial condition. See, e.g., SEC v. Shehyn, No. 04-2003, at *22 (S.D.N.Y. Aug. 6, 2010) (citation omitted); SEC. v. Allen, No. 11-882, 2012 WL 5986443, at *2 (N.D. Tex. Nov. 28, 2012) (citation omitted).

         III. ANALYSIS

         SEC requests that this Court impose third-tier civil penalties against Ms. Baylor in the amount of $150,000 for each primary violation she committed for a total penalty of $600,000.[7] SEC no longer seeks civil penalties against Baylor & Jackson because the firm is defunct and SEC has settled its claims against Dawn Jackson. See SEC Mot. at 2.[8] SEC argues that imposing third-tier civil penalties against Ms. Baylor is appropriate because: (1) Ms. Baylor's conduct was egregious, (2) she acted with a high degree of scienter, (3) her misconduct created substantial losses to others, and (4) her conduct was recurrent and lasted over a year. Ms. Baylor raises four arguments in opposition: (1) she is not a repeat violator and her conduct was isolated; (2) her conduct was not intentional; (3) she does not have the financial resources to pay a penalty; and (4) the substantial disgorgement order provides sufficient deterrence, making a penalty excessive and unnecessary. The Court finds that imposing third-tier civil penalties in the amount of $600,000 is appropriate.

         Ms. Baylor's violations satisfy the two statutory requirements for imposition of third-tier civil penalties. Her conduct involved fraud and deceit in violation of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. It also involved deliberate or reckless disregard of the securities and broker-dealer registration requirements of Sections 5(a) and 5(c) of the Securities Act and Section 15(a) of the Exchange Act. See SJ Opinion at 19-20, 27-28. In addition, her conduct caused substantial losses to other persons. See id. at 19-23.

         Several factors weigh heavily in favor of imposing a substantial third-tier civil penalty against Ms. Baylor. Ms. Baylor's conduct was egregious, as the Court fully recounts in its summary judgment Opinion. See SJ Opinion at 18-28. Notwithstanding Ms. Baylor's protest that her conduct was not intentional because she " had limited knowledge of the transaction and relied heavily on Pavlico's purported

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experience," Opp'n at 6, the Court previously determined that Ms. Baylor " acted with extreme recklessness concerning the fraudulent scheme." SJ Opinion at 19-20; 26-27. The D.C. Circuit agreed with this Court and concluded that the evidence of Ms. Baylor's recklessness was " overwhelming." Mandate at 2. Further, Ms. Baylor's conduct created substantial losses to numerous investors and created a significant risk of substantial losses to others. See SJ Opinion at 19-23. Although Ms. Baylor maintains that her conduct was " more isolated than recurrent," see Opp'n at 6, this characterization is without merit. The record demonstrates that Ms. Baylor made " many ...


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