Securities and Exchange Commission v. Penn

Background

The Securities and Exchange Commission (SEC) had previously obtained summary judgment against Lawrence E. Penn, III, for violating Section 10(b) of the Securities Exchange Act, Rule 10b-5, and provisions of the Investment Advisers Act and its regulations. The Second Circuit summarily dismissed Penn’s appeal of that judgment.

The SEC then moved for summary judgment against CASO Management and Camelot Group International, LLC (CGI), collectively called the Camelot Entities. CASO Management was a registered investment adviser and investment manager for the Camelot Acquisitions Secondary Opportunities Fund. CGI functioned as an affiliate or parent organization of CASO Management. The opinion states that Penn founded, owned, and controlled both entities, owned at least 99% of each, and was responsible for all business decisions made by CASO Management.

The underlying scheme involved diverting more than $9 million from the Fund through false invoices and inaccurate books and records. The opinion states that CGI received $8,627,004 and CASO Management received $440,000 of the purported due-diligence payments. Penn had previously admitted transferring $9.3 million from the Fund to the two entities and had pleaded guilty in state court to first-degree grand larceny and falsifying business records.

The Camelot Entities did not file an opposition to the SEC’s motion. Penn attempted to file papers for them, but the court struck those papers because a non-lawyer may not represent another person or entity in federal court. The court nevertheless independently considered whether summary judgment was supported by the undisputed facts and applicable law.

Liability

Summary judgment is appropriate when there is no genuine dispute over a material fact and the moving party is entitled to judgment under the law. The court held that Penn’s conduct and securities-law violations could not be relitigated. It relied on the law-of-the-case doctrine, which generally prevents reconsideration of issues already decided, particularly after appellate review. The court also concluded that applying the doctrine to the Camelot Entities was fair because the entities had notice that the determination of Penn’s liability would control the claims against them and had not objected.

The court then addressed whether Penn’s conduct and knowledge should be attributed to the entities. It explained that an individual’s misconduct may be attributed to an entity when the individual completely dominates and controls it, leaving no meaningful independent existence for the transactions at issue. The court found no genuine dispute that Penn dominated the Camelot Entities, owned at least 99% of each, controlled CASO Management’s business decisions, and benefited from the scheme through the entities.

Because Penn’s conduct and knowledge were attributed to CASO Management, the court held CASO Management liable for directly violating Section 10(b) and Rule 10b-5, Sections 204, 206(1), and 206(2) of the Investment Advisers Act, and Rule 204-2. The court held CGI liable for aiding and abetting Penn’s and CASO Management’s violations. Aiding-and-abetting liability required a primary securities-law violation, knowledge of that violation, and substantial assistance. The court found those requirements satisfied because Penn’s violations had already been adjudicated, his knowledge was attributed to CGI, and CGI helped implement the fraud by allowing the use of its newsletters and emails to procure the payments.

Remedies

The court granted a permanent injunction because it found a reasonable likelihood of future violations. It relied on the scheme’s planning, coordination among multiple entities, repeated use of 32 false invoices to generate 80 improper transfers over three years, and the absence of accepted responsibility or assurances against future violations.

The court ordered disgorgement, which is a payment designed to remove the benefits obtained from illegal conduct. CGI must disgorge $8,627,004, and CASO Management must disgorge $440,000. To prevent duplicate recovery, each entity is jointly and severally liable with Penn for disgorgement up to that entity’s share of the ill-gotten gains. Prejudgment interest at the Internal Revenue Service underpayment rate was granted, but the SEC must submit a revised calculation. The calculation must account for any period in which frozen assets that will be used to satisfy the obligation were frozen and must be updated to the current date.

The court also imposed civil monetary penalties equal to each entity’s pecuniary gain. CGI must pay $8,627,004, and CASO Management must pay $440,000. The court cited the scheme’s egregiousness, high degree of knowledge of wrongdoing, repeated nature, losses exceeding $9 million, and the entities’ failure to provide a basis for reducing the penalties.

Disposition

Judge Valerie Caproni granted the SEC’s motion for summary judgment, permanent injunction, disgorgement, and civil penalties against CASO Management and CGI as described above. The SEC was ordered to submit a proposed final judgment and revised prejudgment-interest calculations by April 15, 2020. The existing asset-freeze order remained in effect pending a decision on the SEC’s anticipated request to turn over frozen assets.