The opinion of the court was delivered by: Judge John A. Nordberg
PLAINTIFF'S MOTION AND MEMORANDUM OF LAW TO SET DISGORGEMENT AND CIVIL PENALTY AMOUNTS AS TO DEFENDANTS PETER P. VEUGELER AND LAWRENCE H. HOOPER, JR.
Plaintiff Securities and Exchange Commission moves the Court for a final judgment against Defendant Peter P. Veugeler ordering him to pay: (1) disgorgement of $8,035,297; (2) prejudgment interest of $1,011,621; and (3) a civil penalty of $8,035,297, equivalent to his pecuniary gain. The Commission also moves the Court for a final judgment against Defendant Lawrence H. Hooper, Jr. ordering him to pay a civil penalty of $130,000. As detailed below, Veugeler, through his company Defendant Seven Palm Investments, LLC, orchestrated an elaborate pump-and-dump scheme involving two separate penny stocks. Veugeler was central to the scheme and committed a number of fraudulent acts, as well as engaging in manipulative trades, all resulting in his receipt of over $8 million in ill-gotten gains. Hooper, then the CEO of Defendant Cardiovascular Sciences, Inc., came to Veugeler looking for financing for his company, but ultimately worked with Veugeler to issue false and misleading press releases and other communications to investors regarding Cardiovascular. While Hooper did not receive any direct financial benefit, his acts ultimately assisted Veugeler with his schemes. As discussed below, the proposed relief is appropriate because of Veugeler and Hooper's respective involvement in the pump-and-dump scheme in this case, which involved the manipulation of two penny stocks, false and misleading press releases, and unregistered offerings.*fn1
I. FACTUAL AND PROCEDURAL HISTORY
A. The Procedural History of the Case
On May 4, 2010, the Commission filed its Complaint seeking, among other things, permanent injunctions to prohibit violations by the Defendants of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. §§ 77e(a), 77e(c), and 77q(a); and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. (Compl., D.E. # 1 at ¶ 6.) Additionally, the Complaint seeks disgorgement, prejudgment interest, and a civil penalty against Veugeler and a civil penalty against Hooper.
On January 9, 2012 and on March 9, 2011, the Court entered, by consent, Judgments of Permanent Injunction and Other Relief against Veugeler and Hooper respectively, which permanently enjoined them from violating Sections 5(a), 5(c), and 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the Exchange Act. (D.E. ## 33, 43.) The Judgments also imposed permanent penny stock bars against Veugeler and Hooper. (Id.) The Judgments provide in pertinent part for this motion:
IT IS FURTHER ORDERED AND ADJUDGED that (Veugeler/Hooper) shall pay disgorgement of ill-gotten gains, prejudgment interest thereon, and a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. The Court shall determine the amounts of the disgorgement and civil penalty upon motion of the Commission. Prejudgment interest shall be calculated from (September 28, 2009 for Veugeler / March 11, 2008 for Hooper) based on the rate of interest used by the Internal Revenue Service for the underpayment of federal income tax as set forth in 26 U.S.C. § 6621(a)(2). In connection with the Commission's motion for disgorgement and civil penalties, and at any hearing held on such a motion:
(a) (Veugeler/Hooper) will be precluded from arguing that he did not violate the federal securities laws as alleged in the Complaint; (b) (Veugeler/Hooper) may not challenge the validity of the Consent or this Judgment; (c) solely for the purposes of such motion, the allegations of the Complaint shall be accepted as and deemed true by the Court. (emphasis added) (D.E. # 33 at 4-5; # 43 at 4-5.) Accordingly, the Court should deem the allegations in the Complaint true for the purposes of this motion.
B. Allegations of the Complaint Deemed True
From October 2007 through September 2009, Veugeler, through his company, Seven Palm, earned illicit profits of more than $8 million through the pump-and-dump of two penny stocks, Cardiovascular and Emergent Health Corp. ("Emergent") (Compl., at ¶ 2.) During the fraud, Veugeler managed all of Seven Palm's affairs. (Id. at ¶ 8.) Seven Palm obtained nearly all of Cardiovascular and Emergent's purportedly unrestricted shares by offering financing to the companies. (Id. at ¶ 3.) In order to generate trading volume and increase both companies' stock prices, Veugeler entered into manipulative trades allowing Seven Palm to sell its holdings in both stocks at artificially inflated prices. (Id. at ¶ 5.) As part of the fraud, Hooper, Cardiovascular's president and CEO, prepared false and misleading press releases as well as other letters to investors on behalf of the company. (Compl., at ¶ 4.) Veugeler reviewed and discussed a number of the false press releases Hooper prepared and directed him to work with a third-party stock promoter to issue the press releases. (Id. at ¶ 5.)
1. Cardiovascular Sciences, Inc.'s Fraudulent Offerings of Unregistered Shares
In 2007, Hooper solicited Veugeler to provide financing for Cardiovascular. (Compl., at ¶ 17.) Through Seven Palm, Veugeler agreed to provide $1 million in exchange for 5 million shares of Cardiovascular. (Id.) The shares were to be issued to Seven Palm in two 2.5 million share tranches for $500,000 each. (Id.) No registration statement has ever been filed or in effect with the Commission in connection with the securities offered by Cardiovascular to Seven Palm, nor is any registration exemption applicable to these shares. (Id. at ¶ 18.) The subscription agreement for the first 2.5 million share tranche, dated October 2, 2007, stated Cardiovascular was conducting its offering (to Seven Palm) in reliance on an exemption, pursuant to Rule 504 of Regulation D and the Texas Securities Act. (Id. at ¶ 19.) In particular, the subscription agreement claimed an exemption to the requirement that all publicly traded shares be registered with the Commission. (Id.) In order to allow Cardiovascular to claim this exemption and Seven Palm to receive the shares, Veugeler directed an attorney to issue an opinion letter to Hooper and Cardiovascular to instruct a transfer agent to issue the shares to Seven Palm. (Id. at ¶ 20.)
The First Unregistered Cardiovascular Offering
According to the attorney opinion letter, dated October 8, 2007, Cardiovascular purported to rely on the registration exemption set forth in Rule 504(b)(1)(iii) of Regulation D, which allows accredited investors to rely on a state law exemption. (Compl. at ¶ 21.) The letter also said Cardiovascular's offering to Seven Palm was relying on the Texas Securities Act. (Id.) The letter stated Seven Palm was "an entity residing and authorized to transact business within the state of Texas." (Id.) As Seven Palm's president, Veugeler knew this was false. (Id.) On the basis of this statement, the opinion letter claimed Cardiovascular could rely on Rule 109.4 of the Texas Administrative Code, an exemption for sales to certain institutional investors. (Id.) Cardiovascular's offering to Seven Palm, however, had no nexus to Texas. (Id. at ¶ 22.)
The opinion letter instructed Cardiovascular's transfer agent to issue unrestricted share certificates to Seven Palm, a Florida limited liability company doing business in Illinois. (Compl. at ¶ 22.) On October 8, 2007, Cardiovascular forwarded the attorney opinion letter to the transfer agent and instructed it to issue the first 2.5 million share tranche to Seven Palm. (Id. at ¶ 23.) Contrary to the express terms of the subscription agreement, Cardiovascular instructed the agent to issue the 2.5 million shares to Seven Palm even though Cardiovascular had not yet received "the total purchase price." (Id.) A draft Promissory Note dated October 9, 2007 gave Seven Palm 90 days, or until January 9, 2008, to make the $500,000 payment to Cardiovascular. (Id. at ¶ 24.) In reality, Veugeler and Seven Palm did not make any payments until February 22, 2008, when it transferred just $10,000 to Cardiovascular. (Id.) By March 14, 2008, Seven Palm had paid Cardiovascular only $95,000 for the shares. (Id.)
The Second Unregistered Cardiovascular Offering
Despite having received only $95,000 of the initial $500,000 owed under the share purchase agreement, Cardiovascular issued Seven Palm's second 2.5 million-share tranche on March 18, 2008. (Compl. at ¶ 25.) Again, Seven Palm failed to pay for the shares upon their issuance. (Id.) On March 26, 2008, after having sold Cardiovascular's shares into the market, Seven Palm made one additional payment to Cardiovascular of $100,000. (Id.) Seven Palm never paid the remainder of the $1 million it had agreed to pay Cardiovascular. (Id.)
2. Fraudulent Misrepresentations and Omissions Related to Cardiovascular's Offerings
In connection with Cardiovascular's unregistered offerings, Veugeler and Hooper made numerous material misrepresentations and omissions regarding Seven Palm's funding of the company and Cardiovascular's operations. Many of their public misrepresentations and omissions concerned Seven Palm providing funding to Cardiovascular. (Compl., at ¶ 27.) Veugeler devised a Cardiovascular promotional campaign to facilitate Seven Palm's liquidation of its Cardiovascular shares. (Id.) Veugeler, through Seven Palm, provided investor relations services to Cardiovascular, which included launching Cardiovascular's website and instructing Hooper to work with stock promoters. (Id.) Seven Palm paid for various Cardiovascular promotional activities, and even transferred shares to one promoter to hype the company. (Id.) Hooper's Involvement With Cardiovascular's Promotional Activities
From October 2007 through February 2008, Cardiovascular issued a shareholder letter and press releases, and provided content for a newspaper article, falsely touting that Seven Palm had funded the company. (Compl. at ¶ 28.) Many of these communications discussed how Cardiovascular planned to use the money to fund its research and development, which the company touted as active and ongoing. (Id.) Hooper prepared and sent the shareholder letter, approved all releases, and was quoted in the newspaper article. (Id. at ¶ 29.) These materials included statements that were false and misleading at the time he made them. (Id.) Hooper also worked with Veugeler in creating and contributing to these materials. He e-mailed Veugeler draft copies of shareholder letters and various releases, and Veugeler provided links to Cardiovascular news on at least one penny stock promotion website. (Id. at ¶ 30.) Hooper spoke with Veugeler to discuss the content of Cardiovascular's draft press releases. (Id.)
In particular, certain Cardiovascular shareholder letters contained misrepresentations and omissions. In an October 18, 2007 letter to shareholders, Hooper claimed Cardiovascular was moving forward with a 504 Regulation D offering that would allow it to raise up to $1 million. (Compl. at ¶ 31.) The letter went on to state "by the time you receive this letter, we expect to be receiving funds from this offering." (Id.) Hooper knew this statement was false because the draft promissory note provided that Seven Palm did not have to pay Cardiovascular until January. (Id. at ¶ 32.) On December 6, 2007, even though it had yet to receive any funding, Cardiovascular announced in a shareholder letter, drafted by Hooper, it was "just wrapping up" the Rule 504 Regulation D offering. (Id. at ¶ 33.) On December 12, 2007, still not having received a penny in funding, the company announced the funding event in a press release and a newspaper article titled "Cardiovascular Sciences get $1M capital investment." (Id. at ¶ 34.) In the article, Hooper provided the following quote: "The investment will allow the company to develop its products more rapidly and enter the marketplace within the next two years." (Id.)
The statements in the shareholder letter, the press release and the newspaper article were baseless and misleading because at the time Hooper made them, Seven Palm had not provided any funding to Cardiovascular. (Compl. at ¶ 35.) Seven Palm did not provide any funding to the company until it made a de minimis payment on February 22, 2008, and the next payment was not until March 11, 2008. (Id.) Veugeler knew about these late payments as well as Seven Palm's failure to make full payment to the company. (Id.) In total, Cardiovascular netted only $140,000 of the $1 million funding it had publicly touted. (Id.)
Hooper also made public statements falsely asserting Seven Palm's funding to Cardiovascular allowed the company to further its research and development. For example, in a February 5, 2008 press ...