Case 4:15-cv-00338-ALM Document 266 Filed 08/07/17 Page 1 of 18 PageID #: 4499
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`United States District Court
`EASTERN DISTRICT OF TEXAS
`SHERMAN DIVISION
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`SECURITIES AND EXCHANGE
`COMMISSION
`
`
`v.
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`SETHI PETROLEUM, LLC, SAMEER P.
`SETHI
`
`
`
`
`Civil Action No. 4:15-CV-00338
`Judge Mazzant
`
`§
`§
`§
`§
`§
`§
`§
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`
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`MEMORANDUM OPINION AND ORDER
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`Pending before the Court is the Security and Exchange Commission’s Motion to Enter
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`Judgment (Dkt. #252) and Sameer P. Sethi’s Motion to Amend Findings (Dkt. #258). After
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`reviewing the relevant pleadings and motions, the Court finds the motion for judgment should be
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`granted and the motion to amend findings should be denied.
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`BACKGROUND
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`As early as January 2014, Defendant Sameer Sethi (“Sameer”) and his company, Sethi
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`Petroleum, LLC (“Sethi Petroleum”), began offering to investors positions in the Sethi-North
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`Dakota Drilling Fund-LVII Joint Venture (“NDDF”). The offering proposed income from two
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`sources: oil-and-gas revenues, and tax benefits for oil-and-gas exploration and production
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`activities.
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`On May 14, 2015, the Securities and Exchange Commission (“SEC”) brought a civil
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`enforcement action under Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange
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`Act, and Rule 10b-5 promulgated thereunder. The SEC alleged that Defendants carried on a
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`fraudulent scheme and made materially false and misleading statements to potential investors to
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`offer and sell securities in the NDDF. On May 26, 2015, the Court entered the Agreed
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`Preliminary Injunction, Asset Freeze, and Other Relief (“Preliminary Injunction”) (Dkt. #23).
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`Shortly thereafter, Sameer began selling securities with a different company, Cambrian
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`Resources LLC (“Cambrian”). On August 1, 2016, the Court held a show cause hearing
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`regarding the alleged contempt by Sameer and others. On August 9, 2016, the Court entered an
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`order finding Sameer, his father Praveen Sethi (“Praveen”), and John Weber (“Weber”) in
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`contempt for violating the terms of the Preliminary Injunction by directly or indirectly engaging
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`in the offer, issuance, or sale of securities through Cambrian (Dkt. #169).
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`On September 14, 2016, the SEC moved for summary judgment, claiming that
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`Defendants made material misrepresentations about Defendants’ history and experience; false
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`claims of partnerships with major oil companies; false claims about NDDF’s interest in wells;
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`false and unfounded representations about NDDF returns; and Sameer’s personal instructions to
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`“boiler room” sales staff to mislead potential investors. Sameer argued that his statements were
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`not fraudulent because they were forward-looking and because not enough time had passed for
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`his plans to materialize. Sameer also argued that NDDF’s relationship with Slawson Exploration
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`Co. was a relationship with a major oil and gas company. The Court denied summary judgment
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`on four theories asserted by the SEC, but granted summary judgment based on Sameer’s
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`representations that Sethi Petroleum had partnerships with major oil companies (Dkt. #238
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`at p. 20).
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`On March 1, 2017, the SEC filed a motion for judgment (Dkt. #252). On March 23, 2017,
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`Sameer filed a response (Dkt. #256; Dkt. #257).1 On March 30, 2017, the SEC filed a reply
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`(Dkt. #259). On April 10, 2017, Sameer filed a surreply (Dkt. #262).
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`1 Sameer filed a Combined Motion to Amend Findings and Response to Plaintiff’s Motion to Enter Judgment
`(Dkt. #256), which was not designated as a pending motion due to the local rule prohibiting multiple motions in a
`single filing. E.D. Tex. Civ. R. CV-7(a). On March 27, 2017, Sameer filed a Motion to Amend Findings
`(Dkt. #258), which contained identical arguments to the first part of his previous filing and was designated as a
`pending motion.
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`2
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`On March 27, 2017, Sameer filed a Motion to Amend Findings (Dkt. #258). On April 10,
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`2017, the SEC filed a response (Dkt. #263). On April 21, 2017, Sameer filed a reply (Dkt. #264).
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`ANALYSIS
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`I. Motion to Amend Findings (Dkt. #258)
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`Sameer urges the Court to amend its findings according to Federal Rule of Civil
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`Procedure 52. Rule 52 permits a court to amend, or make additional findings, upon a party’s
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`motion. Fed. R. Civ. P. 52(b). “The purpose of Rule 52 is to correct manifest errors of law or fact
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`or, in some limited situations, to present newly discovered evidence.” Fontenot v. Mesa
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`Petroleum Co., 791 F.2d 1207, 1219 (5th Cir. 1986) (citation omitted). However, a motion to
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`amend should not be employed to introduce evidence that was available at trial but was not
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`proffered, to relitigate old issues, to advance new theories, or to secure a rehearing on the merits.
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`Id. The court is only required to amend its findings of fact based on evidence contained in the
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`record. Id. To do otherwise would defeat the compelling interest in the finality of litigation. Id.
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`Sameer argues that the Court should amend its finding on Sameer’s misrepresentation
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`regarding partnerships with major operators. Sameer argues that the Court incorrectly
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`characterized the size of its well operators because the operators cited by the Court in its opinion
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`granting summary judgment are publicly traded or have market capitalization of more than
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`$7 billion. Because this was the only basis for which the Court granted summary judgment,
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`Sameer argues that summary judgment was improper.
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`
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`The SEC argues that Sameer waived this argument when his only response to summary
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`judgment was that statements about direct partnerships with major oil and gas operators were
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`future-looking statements.
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`The record before the Court at the summary judgment stage does not support amended
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`findings. Sameer’s response to summary judgment first claimed that his statements were not
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`false because they were future-looking statements (Dkt. #211 at p. 12). Sameer then argued that
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`Slawson Exploratino Co. “is a major oil and gas company that [sic] prominently in the area
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`where the wells were located” (Dkt. #211 at p. 13). Sameer’s only support was a URL leading to
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`a Forbes.com profile of the Slawson family. Sameer did not argue that any of the other operators
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`were major oil and gas companies. Sameer did not provide evidence of the size or influence of
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`the other operators, and he did not request the Court take judicial notice of the sizes of oil
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`companies.
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`This is the first time Sameer has attempted to provide support for the size of each
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`operator. The facts were available to Sameer when he responded to summary judgment; yet,
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`Sameer did not provide such support in either his response or surreply to summary judgment.
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`Therefore, Sameer may not now assert those facts to relitigate summary judgment. Sameer’s
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`motion is denied.
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`Further, Sameer’s representations led a reasonable investor who was not well-versed in
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`oil and gas to believe that Sethi Petroleum’s partnerships were with much larger companies.
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`Sethi Petroleum represented on its webpage that it had current relationships with Exxon and Hess
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`Corporation. The cold call script stated that Sethi Petroleum was “partnered directly with a
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`couple of HUGE, PUBLICLY trades companies like Conoco Phillips, Continental, GMXR just
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`to name a few. We are working DIRECTLY with these major companies.” Sethi Petroleum
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`implied that it had a current relationship with ConocoPhillips by using the phrase “just to name a
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`few” and the present tense verb “are.” Further, the next sentence confirms this implication by
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`claiming that Sethi Petroleum was working with “these” companies, not similar companies. For
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`all of these reasons, Sameer’s motion to reconsider is denied.
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`II. Motion for Judgment (Dkt. #252)
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`In his response to the Motion to Enter Judgment, Sameer argues reliance on counsel in
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`two regards. First, Sameer argues that the Court should amend its findings on intent necessary to
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`find securities fraud. Sameer argues that he made statements based on advice of counsel, and
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`therefore he lacked the intent to defraud investors. Sameer also argues his reliance on counsel in
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`the context of defeating a factor for permanent injunction. The SEC argues that Sameer waived
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`this argument by failing to bring it up until the surreply to the motion for summary judgment.
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`To the extent that Sameer asks the Court to amend its summary judgment findings as to
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`securities fraud, the Court agrees with the SEC. Courts do not consider issues raised for the first
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`time in a reply brief. Morin v. Moore, 309 F.3d 316, 328 (5th Cir. 2002) (citing Cavallini v. State
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`Farm Mut. Auto Ins. Co., 44 F.3d 256, 260 n.9 (5th Cir. 1995)). Therefore, Sameer waived his
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`argument regarding his underlying violation of the securities laws. A motion for judgment is not
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`the appropriate time to introduce evidence relating to liability.
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`A. Permanent Injunction
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`
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`Section 21(d) of the Exchange Act provides for injunctive relief when the evidence
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`establishes a “reasonable likelihood” that a Defendant will engage in future violations of the
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`securities laws. See 15 U.S.C. §§ 77t(b), 78u(d)(1); SEC v. Zale Corp., 650 F.2d 718, 720
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`(5th Cir. 1981); SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980); SEC v. Koracorp Indus.,
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`Inc., 575 F.2d 692 (9th Cir. 1978). “[T]he Commission is entitled to prevail when the inferences
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`flowing from the defendant’s prior illegal conduct, viewed in light of present circumstances,
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`betoken a ‘reasonable likelihood’ of future transgressions.” Zale Corp., 650 F.2d at 720; SEC v.
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`Blatt, 583 F.2d 1325 (5th Cir. 1973).
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`Courts consider a number of factors when imposing permanent injunctions, including:
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`(1) egregiousness of the defendant’s conduct; (2) isolated or recurrent nature of the violation;
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`(3) degree of scienter; (4) sincerity of the defendant’s recognition of his transgression; and
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`(5) likelihood of the defendant’s job providing opportunities for future violations. SEC v. Gann,
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`565 F.3d 932, 940 (5th Cir. 2009); Blatt, 583 F.2d at 1334–35.
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`The SEC argues that the Court should permanently enjoin Sameer because his violations
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`were multiple, continued, egregious, and undertaken with scienter (Dkt. #252 at p. 3). Sameer
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`argues that a permanent injunction is inappropriate because he has continuously engaged with
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`lawyers to abide by securities laws and because he has shown sincere efforts to profit from oil
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`and gas exploration (Dkt. #256 at p. 8).
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`1. Egregiousness of Conduct
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`Sameer’s conduct was egregious. The SEC alleged that Sameer violated the Preliminary
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`Injunction just days after the Court entered it. After holding a show cause hearing, the Court
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`found by clear and convincing evidence that Sameer continued to sell securities after the Court
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`entered the Preliminary Injunction. Sameer cites a statement from that hearing where the Court
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`stated: “the big question for the SEC is, is this a security” (Dkt. #217 at 373:7–8). Sameer
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`characterizes this statement to mean that the SEC had more to prove than he did and thus
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`Sameer’s actions were not egregious. Sameer argues that he did his best to walk the fine line
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`between a partnership and a security.
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`The SEC argues that Sameer’s violations were egregious because he deceived investors
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`with repeated lies in order to raise over $4 million, and Sameer disregarded the Court’s
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`preliminary injunction. The SEC further argues that Sameer immediately comingled investors’
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`funds, that he never consulted investors before suing for rescission of their only mineral asset,
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`and that he employed dozens of workers to spread his lies across the country. The Court finds
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`Sameer’s conduct was egregious because of his repeated lies and disregard of the Court’s order.
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`The Court declines to assume, without evidence, that Sameer committed egregious
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`violations because he employed dozens of people related to the oil and gas industry. The SEC
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`has not come forth with any evidence that Sameer employed landmen, geologists, or an IT
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`department with the intent to further his fraudulent scheme. Rather, the SEC has proved that
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`Sameer unreasonably relied on one person, Michael Davis (“Davis”), who claimed to be an
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`attorney and accountant, but was not.
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`Nevertheless, the Court finds Sameer’s acts in evading the Court’s order were egregious.
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`The SEC proved that the day after the Court entered the Preliminary Injunction, Sameer engaged
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`Weber for the explicit purpose of creating Cambrian to avoid the Court’s order. Sameer’s
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`argument that he created Cambrian in an effort to comply with securities laws is not convincing.
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`Multiple witnesses testified at the contempt hearing that they knew Sameer could not be
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`associated with Cambrian because of this lawsuit. If Sameer honestly believed that Cambrian
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`was not engaged in the sale of securities, then he would have no problem being a full participant.
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`However, Sameer demonstrated his knowledge of misconduct by concealing his actions with
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`papers that claimed Weber was in charge of Cambrian. Evidence showed that Weber was the
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`owner of Cambrian on paper, but that Sameer was truly in charge. The Court finds such side-
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`stepping actions to be egregious conduct.
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`2. Isolated or Recurrent Nature of the Violation
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`Sameer’s actions were recurrent. Sameer instructed his salespeople each morning. At his
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`direction, Sameer’s callers contacted approximately 2,000 potential investors per day, eventually
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`capturing more than 90 investors from 28 different states. Then, Sameer created a new entity to
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`continue selling securities after Sethi Petroleum was enjoined. Quite simply, this was not a one-
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`time mistake by Sameer.
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`3. Degree of Scienter
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`Sameer argues that scienter is negated by his continued reliance on counsel. Sameer
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`argues that if his intent was to defraud investors, he would not have spent substantial sums of
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`money to retain counsel. Sameer cites the SEC’s calculation of Sethi Petroleum’s legal expenses
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`as evidence of this expense. Sameer also argues that he hired a Harvard law graduate to help
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`craft the NDDF offering documents. The SEC argues that it was Weber, not Sameer, who sought
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`legal advice, and that the advice sought was how to “avoid papering Cambrian like a security.”
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`Reliance on counsel is not a formal defense, but rather “[i]t is simply a means of
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`demonstrating good faith and represents possible evidence of an absence of any intent to
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`defraud.” SEC v. Snyder, 292 F. App’x 391, 406 (5th Cir. 2008) (quoting United States v.
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`Peterson, 101 F.3d 375, 381 (5th Cir. 1996)). In Peterson, the Fifth Circuit approved a jury
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`instruction that described the defense as follows:
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`To decide whether such reliance was in good faith, you may consider whether the
`Defendant sought the advice of a competent attorney concerning the material fact
`allegedly omitted or misrepresented, whether the Defendant gave his attorney all
`the relevant facts known to him at the time, whether the Defendant received an
`opinion from his attorney, whether the Defendant believed the opinion was given
`in good faith and whether the defendant reasonably followed the opinion.
`Peterson, 101 F.3d at 381 n.5. Under this analysis, a party may not avoid liability under the
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`securities laws by simply retaining outside counsel to prepare required documents. Nevertheless,
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`the Government constantly bears the burden to prove intent to deceive. Snyder, 292 F. App’x
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`at 406.
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`The SEC proved that Sameer acted with scienter. As stated by the Court in its
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`Memorandum Opinion and Order (Dkt. #238), Sameer engaged in a scheme intended to deceive
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`others and to induce their investment. Sameer trained his callers on how to obtain investors. This
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`began with a cold call to potential investors in which Sethi Petroleum represented that it is
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`“partnered directly with a couple of HUGE, PUBLICLY traded companies like Conoco Philips,
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`Continental, GMXR just to name a few.” If the investor expressed interest, the salesperson
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`qualified the investor as an “accredited investor.” The determination of an “accredited investor”
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`is unrelated to the investor’s experience in oil and gas. Rather, an “accredited investor” simply
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`had a certain amount of money. Once the investor expressed interest and was qualified as
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`“accredited,” the salesperson sent offering documents including the Private Placement
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`Memorandum and Executive Summary.
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`The Court does not find Sameer’s argument of reliance on counsel convincing. The
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`evidence dispels the only arguments Sameer makes regarding reliance on counsel in this case.
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`Contrary to Sameer’s contentions, he did not hire a Harvard law graduate. Rather, Weber hired a
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`Harvard law graduate to help him draft Cambrian’s offering documents. However, Sameer
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`ultimately controlled Weber. Weber said that he acted at the behest of Sameer’s lawyers. One of
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`Sameer’s lawyers was Davis. Davis represented that he was a licensed attorney and that he had a
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`Master’s of Business Administration degree from the University of Texas. Weber later became
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`General Counsel for Sethi Petroleum for less than a month. In this short time, Weber discovered
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`that Davis did not have any of the degrees that he represented he had. This shows that Sameer
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`did not reasonably rely on a competent attorney. The fact that Davis’s fraudulent representations
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`could easily be uncovered shows that Sameer was not diligent in determining Davis’s
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`credentials. Further, because Davis effectively controlled Weber, the hiring of a Harvard law
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`graduate is irrelevant because Weber and the Harvard law graduate acted at the behest of a fraud.
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`Further, Sameer’s evasive acts to skirt the Court’s Preliminary Injunction show that
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`Sameer was not given, or did not follow, any reasonable legal opinion. People inside the
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`Cambrian organization repeatedly said that Sameer could not participate because of the
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`Preliminary Injunction. Yet, Sameer and Weber constantly maintained that Cambrian was not
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`selling securities. These are inconsistent positions. Sameer’s role was so large that Cambrian
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`employees saw Weber as merely a placeholder to keep the illusion that Sameer was not involved.
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`Even assuming that Sameer reasonably believed the person giving the advice was a competent
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`attorney, the Court finds that a person could not reasonably follow such advice. Therefore,
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`Sameer’s arguments for reliance on counsel support, rather than negate, scienter.
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`4. Sincerity of Defendant’s Recognition of his Transgression
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`Sameer has not been sincere in recognizing his transgression. The Court does not find
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`Sameer’s willingness to contest the SEC’s accusations as a lack of remorse. However, Sameer’s
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`willingness to violate Court orders resulting from the NDDF venture is telling. SEC v. Koenig,
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`469 F.2d 198, 202 (2d Cir. 1972). The day after the Court entered the Preliminary Injunction,
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`Sameer began his scheme to violate the Court’s order by creating Cambrian. While Sameer now
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`claims that he worked hard to keep Cambrian out of the securities realm, he had the foresight at
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`the time to distance himself from Cambrian. Sameer placed Weber as the owner of Cambrian,
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`while Sameer performed its essential functions and even managed Weber. Further, it was well-
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`known that Sameer could not be on Cambrian papers because of the Preliminary Injunction.
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`These acts show that Sameer did not recognize his transgressions with NDDF and had a
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`disregard for the consequences of his actions.
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`5. Likelihood of Defendant’s Job Providing Opportunities for Future Violations
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`Finally, Defendant’s job provides numerous opportunities for future violations. The SEC
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`argues that Sameer has shown a repeated disregard for securities laws and authority of the Court.
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`Sameer argues that if he is allowed to continue in the oil and gas industry, he will continue to
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`abide by securities laws. In another portion of Sameer’s response, he argues that this litigation
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`has caused major damage to his reputation and therefore investors or partners will not be likely
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`to do business with Sameer.
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`Sameer’s arguments are unavailing. First, as the Court has noted in this opinion and its
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`opinion following the contempt hearing, Sameer’s engagement with lawyers has been for
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`nefarious purposes to skirt the Court’s orders. It is more likely that if Sameer continues to engage
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`attorneys, he will continue to search for ways around the Court’s order at the expense of innocent
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`investors. Further, the SEC is not seeking to enjoin Sameer’s involvement in the oil and gas
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`industry, but rather to enjoin Sameer from soliciting investors to purchase or sell securities.
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`Finally, the fact that Sameer has already been ostracized is no argument that he should not be
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`enjoined. The question is whether Sameer’s job provides opportunities, not whether those
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`opportunities are guaranteed. Gann, 565 F.3d at 940. Even though Sameer’s opportunities may
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`be much fewer because of the public nature of this lawsuit, he nevertheless has opportunities.
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`Therefore, this factor also weighs toward an injunction.
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`Based on the foregoing analysis, the Court finds that Sameer should be permanently
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`enjoined from directly or indirectly soliciting investors to purchase or sell securities, provided
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`that such injunction does not prevent Sameer from purchasing securities listed on a national
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`securities exchange for his own personal accounts.
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`B. Disgorgement
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`“The district court has broad discretion not only in determining whether to order
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`disgorgement but also in calculating the amount to be disgorged.” SEC v. Huffman, 996 F.2d
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`800, 802 (5th Cir. 1993). The party seeking disgorgement must distinguish between what has
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`been legally and illegally obtained. Allstate Ins. Co. v. Receivable Fin. Co., 501 F.3d 398, 413
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`(5th Cir. 2007). In actions brought by the SEC involving a securities violation, “disgorgement
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`need only be a reasonable approximation of profits causally connected to the violation.” Allstate
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`Ins. Co., 501 F.3d at 413 (quoting SEC v. First City Fin. Corp., 890 F.3d 1215, 1231 (D.C. Cir.
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`1989)). In the securities context, the proper starting point for disgorgement is the total proceeds
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`received from the sale of the securities. SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104
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`(2d Cir. 1972). The SEC bears the initial burden of showing that its requested disgorgement
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`amount reasonably approximates the amount of profits connected to the violation. First City Fin.
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`Corp., 890 F.2d at 1232; SEC v. Rockwall Energy of Tex., LLC, No. H-09-4080, 2012 WL
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`360191, at *3 (S.D. Tex. Feb. 1, 2012). Once the SEC meets its burden, the burden shifts to the
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`defendant to “demonstrate that the disgorgement figure was not a reasonable approximation.”
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`First City, 890 F.2d at 1232.
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`In attempting to mitigate liability, “securities law violators may not offset their liability
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`with business expenses of running the very business that they created to defraud investors.” SEC
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`v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1114 (9th Cir. 2006). However, in a partially
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`legitimate company, business expenses that do not further a fraudulent scheme can reduce
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`disgorgement awards. Id. at 1114–15.
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`The SEC argues for a disgorgement amount of $4,028,264.81 because Sameer’s
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`misrepresentations enabled him to raise $4,028,264.81 via the NDDF venture. The SEC does not
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`provide additional evidence of the alleged ill-gotten gains. Rather, it relies on the Court’s
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`previous order granting summary judgment and the fact that Sameer has not met his burden to
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`refute the SEC’s calculation.
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`Sameer argues that the NDDF spent $3.4 million on legitimate business expenses,
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`including oil and gas lease projects, marketing, and other human capital. While he acknowledges
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`that this was over budget for NDDF’s projected expenditures, Sameer argues that it was not
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`unreasonably so. To support his arguments, Sameer provided excerpts of the SEC’s summary of
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`Sethi Petroleum’s Bank of America accounts and a table comparing NDDF expected
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`expenditures to Sethi Petroleum’s actual expenditures (Dkt. #257 at pp. 6–8).
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`The essence of the NDDF was to encourage investors to invest under false pretenses that
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`Sethi Petroleum had partnerships with major oil operators. By misleading investors, Defendants
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`were able to raise much more money than they would have raised had they told the truth. While
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`Sameer may now argue that he used some of the raised money for legitimate ends, this argument
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`is inapposite. The standard for disgorgement does not look to how the defendant spent the
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`money, but rather how it was gained. The Fifth Circuit has recognized that the overwhelming
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`weight of authority does not allow securities laws violators to offset their liability with business
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`expenses. SEC v. United Energy Partners, Inc., 88 F. App’x 744, 746 (5th Cir. 2004) (citing
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`cases); see also SEC v. Brown, 658 F.3d 858, 861 (3d Cir. 2011); SEC v. Kahlon, No. 4:12-cv-
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`517, 2016 WL 5661642, at *4 (E.D. Tex. Sept. 30, 2016). Courts have required tippers in insider
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`trading cases to disgorge profits gained by individuals who received and traded on that
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`information, even though the tipper never received any profits. SEC v. Warde, 151 F.3d 42, 49
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`Case 4:15-cv-00338-ALM Document 266 Filed 08/07/17 Page 14 of 18 PageID #: 4512
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`(2d Cir. 1998); SEC v. Clarke, 915 F.2d 439, 454 (9th Cir. 1990). For these reasons, the Supreme
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`Court recently held that disgorgement is actually a penalty. Kokesh v. SEC, 137 S. Ct. 1535,
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`1644 (2017).
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`The Court previously found that the investors targeted by Defendants did not have
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`knowledge of the oil and gas industry. Based on this, the Court found that Defendants’
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`representations regarding partnerships with major oil and gas companies amounted to fraudulent
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`statements. Notwithstanding Sameer’s present argument that Sethi Petroleum did have
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`partnerships with major companies that were simply not household names, the Court has found
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`that the total mix of information constitutes fraud. Sameer has not offered any explanation about
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`how NDDF investors would have invested had they not received representations about major
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`partnerships with companies like ConocoPhillips. Because these representations were material to
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`investors and because there is no proffered demarcation between the amount that would have
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`been invested without these representations, the Court finds that the total amount raised is a
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`reasonable approximation of illegal profits connected to the violation.
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`While the Court does not accept Sameer’s argument for an offset based on business
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`expenses, the Court does agree that Sameer’s liability should be offset for any amount repaid to
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`investors. The Receiver has not yet completed his distribution to investors. Until the Receiver
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`does so, the Court cannot calculate a final disgorgement figure. The Receiver is therefore ordered
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`to include in his final report for the receivership estate an amount distributed to investors. At that
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`time, Sameer’s obligation to pay $4,028,264.81, less any amounts returned to investors, will
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`accrue.
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`Case 4:15-cv-00338-ALM Document 266 Filed 08/07/17 Page 15 of 18 PageID #: 4513
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`C. Prejudgment Interest
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`The SEC also argues for prejudgment interest on Sameer’s disgorgement. Besides
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`arguing that disgorgement is premature, Sameer does not make any argument regarding
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`prejudgment interest.
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`A court may award prejudgment interest in order to prevent a defendant from profiting
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`from his securities violations by what amounts to an interest free loan procured by illegal
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`activity. SEC v. Gunn, No. 3:08-cv-1013-G, 2010 WL 3359465, at *2 (N.D. Tex. Aug. 25, 2010)
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`(citing SEC v. Sargent, 329 F.3d 34, 40–41 (1st Cir. 2003)). A court may order disgorgement of
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`all ill-gotten gain, plus any interest the defendant profited from his wrongdoing. Blatt, 583 F.2d
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`at 1335.
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`The SEC requests prejudgment interest beginning March 9, 2015, the date Sameer raised
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`his final investment with NDDF. The SEC provided a table of its interest calculation in which it
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`used the full Internal Revenue Service (“IRS”) tax underpayment rate, compounded quarterly
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`(Dkt. #252, Exhibit A). The IRS underpayment rate “reflects what it would have cost to borrow
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`the money from the government and therefore reasonably approximates one of the benefits the
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`defendant derived from its fraud. Accordingly, courts have approved the use of the IRS
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`underpayment rate in connection with disgorgement.” SEC v. First Jersey Secs., Inc., 101 F.3d
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`1450, 1476 (2d Cir. 1996). The SEC’s calculation is reasonable. SEC v. Platforms Wireless Int’l
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`Corp., 617 F.3d 1072, 1099–1100 (9th Cir. 2010) (holding that court was within its discretion to
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`award prejudgment interest from the date securities were sold).
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`Further, the SEC’s basis of $4,028,264.81 is reasonable. The fact that the Receiver may
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`return some (or even most) of the illegally obtained funds does not alter the fact that the entire
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`amount was at Sameer’s disposal before the SEC filed this motion. See SEC v. AmeriFirst
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`Case 4:15-cv-00338-ALM Document 266 Filed 08/07/17 Page 16 of 18 PageID #: 4514
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`Funding, Inc., No. 3:07-CV-1188-D, 2008 WL 1959843, at *5 (N.D. Tex. May 5, 2008).
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`Similarly, delays of litigation do not mitigate Sameer’s liability for prejudgment interest. First
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`Jersey Secs., 101 F.3d at 1477. Sameer is liable to pay prejudgment interest on the entire amount
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`of his ill-gotten gains for the entire period from the time of his unlawful gains until the entry of
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`judgment in this case. SEC v. Razmilovic, 822 F. Supp. 2d 234, 278 (E.D.N.Y. 2011).
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`D. Civil Penalty
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`Civil penalties are designed to punish the individual violator and to deter future violations
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`of the securities laws. SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 17 (D.D.C. 1998). While
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`the statutory tier determines the range of maximum penalties for each violation, the amount
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`imposed is left to the Court’s discretion. SEC v. Kern, 425 F.3d 143, 153 (2d Cir. 2005).
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`In determining the appropriate amount for civil penalties, courts consider:
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`(1) the egregiousness of the defendant’s conduct; (2) the degree of the defendant’s
`scienter; (3) whether the defendant’s conduct created substantial losses or the risk
`of substantial losses to other persons; (4) whether the defendant’s conduct was
`isolated or recurrent; and (5) whether the penalty should be reduced due to the
`defendant’s demonstrated current and future financial condition.
`SEC v. Capital Sols. Monthly Income Fund, LP, 28 F. Supp. 3d 887, 901 (D. Minn. 2014).
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`The SEC argues that the foregoing analysis has shown that all but the final factor weigh
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`heavily in favor of a substantial civil penalty. The SEC also argues that Sameer’s financial
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`condition is not a basis to forego or reduce civil penalties, especially based on his co-dependence
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`with his father. The SEC then calculated the range of penalties for each tier, based on a scheme
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`of five violations, one for each statement cited by the Court in its order on summary judgment.
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`Sameer argues that civil penalties are not appropriate based on his arguments regarding
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`egregiousness, truthfulness of the statements, and reliance on counsel. Sam