Securities and Exchange Commission v. Mendia-Alcaraz

Background

The SEC brought this civil securities-enforcement action against Bernardo Mendia-Alcaraz and Toltec Capital LLC, and against Edith F. Ramirez Cano and Fondo Toltec S de RL de CV as relief defendants. The complaint alleged that, between December 2019 and September 2023, Mendia-Alcaraz and Toltec Capital raised approximately $3.3 million from 41 investors through pooled investment vehicles, promissory notes, and joint venture agreements. The SEC alleged that these securities were offered and sold without registration and that defendants promised investors repayment of their capital and, in many cases, dividends ranging from 21% to 36.88%.

The SEC further alleged that investor funds were used for personal expenses and Ponzi-like payments to other investors rather than for the represented investment purposes. It alleged that 33 investors never received their investment principal, resulting in approximately $2.2 million in principal losses, excluding interest and dividends. The complaint also alleged that defendants made materially false or misleading statements about repayment, use of funds, Mendia-Alcaraz’s qualifications, his criminal history, and his bankruptcy filings.

The defendants and relief defendants were served but did not timely respond. After receiving a 14-day extension, they still did not answer. The Clerk entered default, and although Mendia-Alcaraz told the SEC’s lawyer that he would seek relief from default, no defendant or relief defendant ever did so.

Jurisdiction and Default-Judgment Standard

The court confirmed that it had subject-matter jurisdiction under 28 U.S.C. § 1331 because the action involved federal securities laws. It also found service adequate and concluded that it had general personal jurisdiction over Mendia-Alcaraz, Ramirez Cano, and Toltec Capital based on the allegations concerning their California residences or principal place of business.

The court also found specific personal jurisdiction over Fondo Toltec, a Mexican limited liability company based in Mexico City. The promissory notes with California investors stated that Toltec Capital and Fondo Toltec jointly and severally guaranteed the investment capital, that California law governed, and that obligations were performable in San Francisco. The court concluded that these contractual relationships showed purposeful contact with the United States and California and that the SEC’s claims arose directly from Fondo Toltec’s role in the investment scheme.

Under Federal Rule of Civil Procedure 55, a court may grant default judgment in its discretion. The court considered the factors commonly used for that decision, including prejudice to the plaintiff, the strength of the claims, the sufficiency of the complaint, the amount of money at stake, the likelihood of factual disputes, whether the default resulted from excusable neglect, and the preference for decisions on the merits. The court treated the complaint’s factual allegations as true, except allegations concerning damages.

Securities-Law Claims

The court found that the SEC adequately stated violations of the registration provisions in Sections 5(a) and 5(c) of the Securities Act. The SEC alleged that defendants offered and sold promissory notes and joint venture agreements without an effective registration statement and used the internet to solicit investors through interstate commerce. Because defendants did not respond, they did not establish that an exemption from registration applied.

The court also found adequately stated fraud claims under Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. The alleged misrepresentations included guarantees that investors would receive their capital, statements that investor funds would be used only for investments, false representations about Mendia-Alcaraz’s credentials, and failures to disclose his bankruptcy filings and criminal history. The court concluded that these facts supported material misrepresentations and a high degree of intent or recklessness, known as scienter. It also concluded that internet solicitations established the required interstate-commerce connection.

The court found that defendants adequately qualified as investment advisers under Section 206 of the Advisers Act because they managed investor funds for compensation. It also found that the relevant funds were pooled investment vehicles because they pooled money from multiple investors for investment strategies. Based on the alleged false statements and misuse of investor money, the court found adequately stated violations of Section 206(4) and Rule 206(4)-8, as well as Sections 206(1) and 206(2), which prohibit investment advisers from defrauding clients and require them to deal with clients in good faith and disclose material facts.

Remedies

The court found that permanent injunctions were warranted because the alleged violations were recurrent, involved a high degree of scienter, and indicated a likelihood of future violations. The approved relief included an injunction against future securities-law violations, a prohibition on Mendia-Alcaraz serving as an officer or director of a company with securities registered with the SEC, and a conduct-based injunction barring him from participating directly or indirectly in issuing, purchasing, offering, or selling securities, except for transactions in his own personal accounts.

The court found that the SEC’s requested disgorgement from Mendia-Alcaraz and Toltec Capital, jointly and severally, was supported by the evidence. It approved disgorgement of $2,207,524 and prejudgment interest of $150,866. The court also approved disgorgement and prejudgment interest from the relief defendants: Ramirez Cano was held jointly and severally liable for $3,654 plus $249 in prejudgment interest, and Fondo Toltec was held jointly and severally liable for $554,563 plus $37,899 in prejudgment interest.

The court also approved a civil monetary penalty against Mendia-Alcaraz of $2,207,524. It found that the alleged conduct was egregious, continued for several years, caused substantial investor losses, involved numerous false and misleading statements and misappropriation of funds, and warranted a third-tier penalty.

Disposition

Judge Seeborg granted the SEC’s motion for entry of default judgment. The court stated that the SEC’s proposed form of judgment would be entered separately.