Securities and Exchange Commission v. Rinfret

Background

The Securities and Exchange Commission (SEC) brought this civil-enforcement action against Paul A. Rinfret and Plandome Partners LLC. The SEC alleged that, from 2013 through 2018, Rinfret solicited nearly $20 million from at least five investors by selling interests in Plandome LP. According to the complaint, he falsely claimed that the fund had a successful trading history, had generated returns as high as 362%, had never lost money in a month since 2012, and managed approximately $25 million in assets. The SEC also alleged that Rinfret fabricated account statements, bank records, and offering documents, and falsely represented that an audit firm had been retained.

The SEC alleged that Rinfret did not use most of the money for the promised trading. Instead, he used investor funds for personal expenses, luxury goods, payments to family members and related companies, and payments to earlier investors. The complaint further alleged that the trading that did occur was unsuccessful. In a related criminal case, Rinfret pleaded guilty to one count of securities fraud and one count of wire fraud. The opinion states that Judge Gregory H. Woods sentenced him to 63 months in prison and ordered him to forfeit approximately $20 million.

Plandome was also named as a relief defendant, but the SEC later voluntarily dismissed its claims against that entity with prejudice because it was defunct and held no meaningful assets. The remaining defendants, Rinfret and Plandome LLC, were served but never appeared. The Clerk entered defaults, and the SEC moved for default judgment.

Default judgment and liability

Federal Rule of Civil Procedure 55 uses two steps for a defendant who fails to defend: entry of default and entry of default judgment. A default establishes that the defendant has admitted the well-pleaded factual allegations related to liability, but it does not automatically establish the legal conclusions or the amount of damages. The court must still determine whether the allegations establish liability as a matter of law, and damages must be supported with sufficient evidence.

The court concluded that the SEC’s allegations established violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. The alleged misrepresentations about Plandome’s performance, trading strategy, assets under management, and monthly losses were material because a reasonable investor would consider them important. The court also found that the allegations showed Rinfret acted knowingly and that the conduct occurred in connection with the offer and sale of securities. Because Rinfret controlled Plandome LLC, the court imputed his state of mind to the company.

The court therefore concluded that default judgment was warranted against both defendants on the SEC’s claims.

Relief

The court granted the SEC’s request for a permanent injunction barring Rinfret and Plandome LLC from future violations of Section 17(a), Section 10(b), and Rule 10b-5. It found that the alleged conduct was egregious, continued for years, involved deliberate deception, and created a reasonable likelihood of future violations, particularly because the defendants had not appeared or represented that they would not repeat the conduct.

The court also concluded that the SEC was entitled to disgorgement, which requires a defendant to give up gains obtained through unlawful conduct. Based on an SEC accountant’s review of financial records, the court found a reasonable approximation of $8,463,171.08 in benefits or transfers received by Rinfret, his family members, and affiliated entities. The court ordered Rinfret to pay that amount. It also awarded $143,051.57 in prejudgment interest against Rinfret.

The court imposed third-tier civil penalties because the alleged violations involved fraud, significant losses or risks of losses to investors, and repeated conduct. It imposed a single maximum statutory penalty for the overall scheme: $160,000 against Rinfret and $775,000 against Plandome LLC.

Status of judgment

Although the court concluded that default judgment and the specified relief were warranted, it did not enter judgment at that time. The SEC had explained that the disgorgement could overlap with restitution or forfeiture from Rinfret’s criminal case. The court ordered the SEC to submit supplemental briefing within two weeks after the criminal proceedings were completed, explaining how any criminal forfeiture or restitution should affect the final relief, and to submit updated proposed judgments. The court also directed the SEC to serve the opinion on the defendants and file proof of service.