Securities and Exchange Commission v. Calabrigo

Background

The SEC sued Domenic Calabrigo, Curtis Lehner, Hasan Sario, and Courtney Vasseur, alleging that they participated in a pump-and-dump scheme involving at least nine microcap issuers. According to the complaint, the defendants obtained controlling interests in securities, held shares through nominee entities and offshore brokerage accounts, promoted the stocks to create investor interest, manipulated trading activity to create an appearance of market activity, and then sold shares for millions of dollars. The SEC alleged that the defendants collectively netted $39.6 million and that activity involving Sario netted $31.8 million.

The court had previously issued a temporary restraining order that froze defendants’ assets up to specified amounts, required repatriation of overseas funds and assets, required accountings, and prohibited destruction of relevant documents. The other defendants had either consented to similar preliminary relief or had not opposed it. This opinion addressed the SEC’s request for preliminary relief against Sario.

Evidence and Legal Standards

The SEC relied primarily on a declaration by Trevor T. Donelan, an SEC enforcement accountant, and attached records. The SEC argued that Sario was associated with the Lion State Account, a Singapore bank account held in the name of Lion Sate Capital Pte. Ltd. The declaration stated that money connected to alleged stock manipulation flowed through that account and was used for stock promotions and trading. It also referred to an interview with “Associate C,” who reportedly described a person using the nickname “H” and made statements the SEC considered consistent with Sario’s involvement.

For an asset freeze, the court explained, the SEC had to show either a likelihood of success on the merits or a basis to infer that Sario had violated federal securities laws. The court could consider hearsay at the preliminary-injunction stage, but it had to assess the evidence’s reliability and weight. An asset freeze is a temporary measure intended to preserve money that could satisfy a later judgment. An accounting may be ordered to determine the amount and location of alleged unlawful profits, and a document-preservation requirement is generally minimally intrusive.

Court’s Analysis

The court held that the evidence was insufficient even to support an asset freeze against Sario. Donelan did not explain what it meant for Sario to be “associated” with the Lion State Account—such as whether Sario controlled it, could direct its activity, benefited from it, or had some other connection. Donelan also did not identify the witness who supplied information about the account, explain what that witness knew, or provide enough information for the court to assess the witness’s reliability.

The court found similar problems with the information attributed to Associate C. The declaration did not explain who Associate C was, how Associate C knew the reported information, whether the information was based on firsthand knowledge, or why the account should be considered credible. Other references to witness interviews were likewise conclusory. The court recognized that the SEC could have legitimate reasons to protect confidential sources, particularly while a parallel criminal case was pending, but concluded that the SEC had not supplied enough information to support the requested relief.

The court acknowledged that it could draw an adverse inference from Sario’s invocation of the Fifth Amendment privilege. It held, however, that such an inference could not serve as a penalty or substitute for relevant evidence. Because the SEC’s other evidence was not sufficiently specific or reliable, Sario’s invocation of the privilege did not support an asset freeze.

Disposition

The court ruled that the SEC was not entitled to a preliminary injunction against Sario on the record presented. The objection to the accounting requirement was moot because Sario had invoked his Fifth Amendment privilege concerning the accounting. Sario did not argue that the document-destruction restraint was improper, so that restraint remained in place. The temporary restraining order was extended until the decision took effect and expired on July 13, 2022, at 5:00 p.m. Eastern time.