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Securities and Exchange Commission v. Luna

United States District Court, D. Nevada

June 27, 2014

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
MARCUS A. LUNA; NATHAN MONTGOMERY; ADAM DASKIVICH; DAVID MURTHA; ST. PAUL VENTURE FUND, LLC; MINNESOTA VENTURE CAPITAL, INC.; REAL ESTATE OF MINNESOTA, INC.; and MATRIX VENTURE CAPITAL, INC., Defendants.

ORDER AND PERMANENT INJUNCTION

PHILIP M. PRO, District Judge.

Presently before the Court is the Opening Brief in Support of Plaintiff Securities and Exchange Commission's Request for Remedies (Doc. #109), filed on March 14, 2014. Defendants Nathan Montgomery and Minnesota Venture Capital, Inc. filed an Opposition Brief (Doc. #112) on April 17, 2014. Defendants Marcus Luna and St. Paul Venture Fund filed an Opposition Brief (Doc. #113) on April 17, 2014. Defendants Adam Daskivich; Real Estate of Minnesota, Inc.; David Murtha; and Matrix Venture Capital, Inc. filed an Opposition Brief (Doc. #114) on April 18, 2014. Plaintiff Securities and Exchange Commission filed a Reply Brief (Doc. #115) on May 2, 2014.

I. BACKGROUND

This is a civil enforcement action brought by the Securities and Exchange Commission ("SEC") against four individuals, Defendants Marcus Luna ("Luna"), Nathan Montgomery ("Montgomery"), Adam Daskivich ("Daskivich"), and David Murtha ("Murtha"), and their respective entities, Defendants St. Paul Venture Fund, LLC; Minnesota Venture Capital, Inc.; Real Estate Minnesota, Inc.; and Matrix Venture Capital, Inc. The Court set out the factual background of this case in a prior Order, and the Court will not repeat the facts here except where necessary. (Order (Doc. #108).) The Court previously granted the SEC's Motion for Summary Judgment, finding no genuine issues of material fact remained that Defendants each violated Section 5 of the Securities Act, and that Defendant Luna violated Sections 17(a)(1), (2), and (3) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. The Court then ordered the parties to further brief the issue of what remedies were appropriate given Defendants' violations. (Id.)

SEC now seeks as remedies a permanent injunction enjoining Defendants from violating the federal securities laws, disgorgement of Defendants' profits plus prejudgment interest, civil penalties, a bar on Defendants participating in an offering of penny stocks in the future, and a bar on Luna providing professional legal services in connection with an offer or sale of securities purportedly exempt from the registration requirements. Defendants oppose the requested remedies.

II. DISCUSSION

A. Permanent Injunction

SEC contends a permanent injunction enjoining Defendants from violating Sections 5(a) and (c) of the Securities Act, and enjoining Defendant Luna from violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 is appropriate. SEC asserts an injunction is appropriate because Defendants are likely to engage in future violations of the securities laws. SEC contends Defendants acted at least recklessly, their conduct was not isolated, Defendants have not recognized the wrongful nature of their conduct, Defendants' occupations suggest they will remain involved in the securities markets, and Defendants have not offered assurances they will not engage in future violations.

To obtain a permanent injunction, the SEC bears the burden of showing there is "a reasonable likelihood of future violations of the securities laws." S.E.C. v. M & A West, Inc. , 538 F.3d 1043, 1055 (9th Cir. 2008) (quoting S.E.C. v. Murphy , 626 F.2d 633, 655 (9th Cir. 1980)). The Court evaluates the likelihood of future violations based on (1) past violations, (2) the degree of scienter involved, (3) whether the present violation was isolated or recurrent, (4) whether the defendant recognizes the wrongful nature of his conduct, (5) "the likelihood, because of defendant's professional occupation, that future violations might occur, " and (6) "the sincerity of his assurances against future violations." Murphy , 626 F.2d at 655. The inquiry is based on "the totality of the circumstances surrounding the defendant and his violations." Id.

1. The Luna Defendants

Defendants Luna and St. Paul Venture Fund LLC (the "Luna Defendants") do not oppose a permanent injunction from future securities law violations. (Defendants' Marcus Luna & St. Paul Venture Fund Opp'n to Pl.'s Request for Remedies (Doc. #113) ["Luna Opp'n"] at 8.) The likelihood that Luna will commit future violations supports the imposition of a permanent injunction. Luna acted with a high degree of scienter, as set forth in the Court's prior Order (Doc. #108). Luna does not recognize the wrongful nature of his conduct, as demonstrated by his Opposition Brief which continues to assert that Luna properly opined on the nature of the transactions at issue in this case. (Luna Opp'n at 2-4.) Due to Luna's occupation as an attorney, and his argument that a legal services bar is inappropriate because it will negatively impact his ability to earn a livelihood, future violations are likely to occur. (Id. at 8-9.) Finally, Luna offers no assurances against future violations.

Nevertheless, the Court concludes the more targeted injunctions discussed below barring the Luna Defendants from participating in future penny-stock offerings and barring Luna from certain legal work are more appropriate than the general injunction against any Section 5, Section 17, Section 10, or Rule 10b-5 violation that the SEC requests. To the extent Luna violates these provisions unrelated to the penny-stock and legal services bars, he may face prosecution or enforcement actions for any future violations regardless of whether the Court imposes a permanent injunction barring him from further securities law violations. The Court therefore will decline to impose a permanent injunction from future Section 5, Section 17, Section 10, or Rule 10b-5 violations as to the Luna Defendants.

2. The Montgomery Defendants[1]

Defendants Montgomery and Minnesota Venture Capital, Inc. (the "Montgomery Defendants") respond that a permanent injunction is inappropriate as to them because there was no finding at summary judgment that Montgomery acted with scienter, and he did not act with scienter because he relied on Luna's advice. The Montgomery Defendants further argue the violation was isolated because there is no evidence Montgomery previously acted as a statutory underwriter in a public offering, and there is no basis to conclude he will do so in the future. The Montgomery Defendants assert Montgomery no longer works in the securities field, has no desire to again risk criminal and civil proceedings, and Montgomery has provided a certification attesting that he will not violate the securities laws again.

The violation at issue in this case is not isolated as to Montgomery. He has been convicted of one count of conspiracy to commit securities fraud and wire fraud in a separate criminal proceeding. (Defs. Nathan Montgomery & Minnesota Venture Capital, Inc.'s Br. in Opp'n (Doc. #112) ["Montgomery Opp'n"], Certification of Nathan Montgomery ("Montgomery Certification") at 3); see also United States v. Curshen, No. 1:11-CR-20131-RWG, S.D. Fla., Jury Verdict (Doc. #262). This factor weighs in favor of granting a permanent injunction.

As to the degree of scienter, a Section 5 violation does not require any scienter. S.E.C. v. CMKM Diamonds, Inc. , 729 F.3d 1248, 1256 (9th Cir. 2013). Because the SEC brought only a Section 5 claim against the Montgomery Defendants, the SEC did not request, and the Court did not rule as a matter of law at summary judgment, that the Montgomery Defendants acted with scienter. The evidence presented at the summary judgment stage would support a finding that Montgomery acted at least recklessly. As detailed in the Court's prior Order, the Montgomery Defendants engaged in lockstep coordinated activity in multiple steps within a short time frame with the other Defendants to distribute their unregistered Axis Technologies Group, Inc. stock to the uninformed public. (Order (Doc. #108) at 2-9, 18-22.) Additionally, the Court concluded the SEC was entitled to an adverse inference against the Montgomery Defendants regarding whether they acquired the Axis Technologies Group, Inc. shares with a view to distribute those shares. (Id. at 18-20.)

Montgomery states in his Certification that he did not understand he was acting as a statutory underwriter in relation to the Axis Technologies Group, Inc. stock, that he trusted Luna's opinion on the matter, and that he "did not intend to violate the law." (Montgomery Certification at 2.) Montgomery's Certification comes after Montgomery declined on Fifth Amendment grounds to answer questions at his deposition regarding whether he relied on Luna's advice. (See, e.g., Pl.'s Mot. Summ. J., Ex. 9 at 162.) Nevertheless, the SEC did not seek summary judgment on the issue of scienter as to these Defendants, and these Defendants now have presented contrary evidence under oath on the issue. The Court therefore will deem this factor as neutral or weighing slightly against a permanent injunction.

Whether the Montgomery Defendants recognize the wrongful nature of their conduct is ambiguous. Although Montgomery states in his Certification that he understands the Court's finding that he violated the law, he does not accept responsibility for his participation, instead blaming Luna. (Id.) Elsewhere in their Opposition Brief, the Montgomery Defendants suggest they caused no harm to the investing public. (Montgomery Opp'n at 10.) This factor is neutral or weighs slightly in favor of granting a permanent injunction.

Montgomery no longer works in the securities field, and now works for an architectural and interior design company. (Montgomery Certification at 2-3.) Montgomery also assures the Court he has matured and learned from his past mistakes. (Id.) Montgomery expresses a desire to not be involved in the securities arena in the future, and assures the Court that he does not want to risk his future with his wife. (Id. at 3-4.) These factors weigh against imposing a permanent injunction.

Viewing the totality of the circumstances, the Court concludes the likelihood of future violations, while not unsubstantial, is not sufficient to support the broad permanent injunction that the SEC seeks against any future violations of Section 5 of the Securities Act. Montgomery has suffered considerable ramifications, both civilly and criminally, for his prior securities-related activities. Montgomery no longer will be working in the securities arena, and assures the Court he has learned his lesson from the mistakes he made as a young man. To the extent Montgomery's assurances are insincere, he may face prosecution or enforcement actions for any future violations regardless of whether the Court imposes a permanent injunction barring him from further securities law violations under Section 5. As discussed below, the Court concludes a more targeted injunction barring the Montgomery Defendants from future penny-stock offerings is more appropriate than the general injunction against any Section 5 violation that the SEC requests. The Court therefore will decline to impose a permanent injunction from future Section 5 violations as to the Montgomery Defendants.

3. The Daskivich and Murtha Defendants

Defendants Daskivich; Real Estate of Minnesota, Inc.; Murtha; and Matrix Venture Capital (the "Daskivich and Murtha Defendants") respond that a permanent injunction is inappropriate as to them because they did not act with scienter, rather they relied on Luna's advice. The Daskivich and Murtha Defendants further argue there is no evidence of past violations as to them, and there is no basis to conclude these Defendants would be statutory underwriters in the future. The Daskivich and Murtha Defendants also argue the likelihood of future violations is low because Daskivich no longer works in the securities field, and both Defendants have submitted certifications to the Court assuring they will not violate the securities laws in the future.

The SEC has not presented admissible evidence establishing the Daskivich and Murtha Defendants engaged in a separate violation beyond the one alleged in this case, the SEC has presented evidence the Daskivich and Murtha Defendants have associated with other individuals who have engaged in separate penny-stock schemes, including Montgomery who was convicted for participating in a pump and dump scheme with these same individuals. See S.E.C. v. Curshen , 888 F.Supp.2d 1299, 1301-08 (S.D. Fla. 2012); see also United States v. Curshen, No. 1:11-CR-20131-RWG, S.D. Fla., Plea Agreement for Robert Weidenbaum (Doc. #184), Plea Agreement for Ryan Reynolds (Doc. #219), Plea Agreement for Timothy Barham (Doc. #220), Factual Proffer (Doc. #222), Factual Proffer (Doc. #223). When asked about their association with these individuals, Defendants Daskivich and Murtha invoked their Fifth Amendment rights. (Pl.'s Mot. Summ. J., Ex. 6 at 71-72, 76-77; Ex. 10 at 58-59.) While not conclusive evidence of a prior violation, Defendants' association with others engaged in penny-stock pump and dump schemes weighs in favor of imposing a permanent injunction.

For the same reasons as discussed above with respect to the Montgomery Defendants, the question of the degree of scienter is neutral or weighs slightly against granting a permanent injunction. The evidence at summary judgment could support a finding of recklessness. However, Murtha and Daskivich state in their Certifications that they did not understand they were acting as statutory underwriters in relation to the Axis Technologies Group, Inc. stock, and that they trusted Luna's opinion on the matter. (Defs. Adam Daskivich, Real Estate Minnesota, Inc., David Murtha & Matrix Venture Capital, Inc.'s Opp'n to Pl.'s Request for Remedies (Doc. #114) ["Daskivich & Murtha Opp'n"], Certification of David Murtha ("Murtha Certification") at 2, Certification of Adam Daskivich ("Daskivich Certification") at 2.) Defendants declined to answer questions on these topics at their depositions, invoking their Fifth Amendment rights. (See, e.g., Pl.'s Mot. Summ. J., Exs. 6, 10.) Nevertheless, the SEC did not seek summary judgment on the issue of scienter as to these Defendants, and these Defendants now have presented contrary evidence under oath on the issue. The Court therefore will deem this factor as neutral or weighing slightly against a permanent injunction.

Whether the Daskivich and Murtha Defendants recognize the wrongful nature of their conduct is ambiguous. Although these Defendants state in their Certifications that they understand the Court found they violated the law, they do not accept responsibility for their participation, instead blaming Luna. (Murtha Decl. at 2, Daskivich Decl. at 2.) Elsewhere in their Opposition Brief, the Daskivich and Murtha Defendants suggest they caused no harm to the investing public. (Daskivich & Murtha Opp'n at 5.) This factor is neutral or weighs slightly in favor of granting a permanent injunction.

Daskivich no longer works in the securities field, and now works in a custom tailoring business making men's clothing. (Daskivich Certification at 2.) Daskivich also assures the Court he has matured and is interested in pursuing his career outside the securities markets. (Id.) Daskivich states he will not engage in any future questionable or illegal conduct in relation to the securities markets. (Id. at 2-3.)

Murtha, on the other hand, does not attest that he has a career separate from the securities arena. However, he asserts he has matured, and he assures the Court he will not engage in any questionable or illegal conduct. (Murtha Certification at 2.) These factors weigh against granting a permanent injunction.

Viewing the totality of the circumstances, the Court concludes the likelihood of future violations, though not unsubstantial, is not sufficient to support the broad permanent injunction that the SEC seeks against any future violations of Section 5 of the Securities Act. Daskivich no longer will be working in the securities arena, and Daskivich and Murtha assure the Court they have learned from the mistakes they made as young men. As with Montgomery, to the extent these assurances are insincere, they may face prosecution or enforcement actions for any future violations regardless of whether the Court imposes a permanent injunction barring them from further securities law violations under Section 5. As discussed below, the Court concludes a more targeted injunction barring the Daskivich and Murtha Defendants from future penny-stock offerings is more appropriate ...


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