In SEC v. Tavella, No. 13 Civ. 4609 (NRB), 2015 BL 1982 (S.D.N.Y. Jan. 06, 2015), the United States District Court for the Southern District of New York granted the motion by the Securities and Exchange Commission (SEC) for default judgment against eight Argentinians for failure to respond to an SEC action for numerous securities violations and granted the SEC the opportunity to supplement its remedial request for disgorgement of prejudgment interest.

According to the allegations in the complaint, the eight Argentinian defendants (“Defendants”) were involved in numerous violations of American securities law. The securities in question were distributed by Biozoom (formerly known as Entertainment Arts), a penny stock company traded on the OTCBB. Biozoom represented its stock was divided among 3 corporate officers and 34 outside investors. In May 2009, Medford Financial purchased all of the shares. Biozoom, however, disclosed only the corporate officers had sold and that outside investors maintained their investment in Biozoom. In October 2012, Medford Financial announced the sale of 39,600,000 to Le Mond Capital, but actually sold 59,730,000 shares. 

Between January and May 2013, according to the SEC, Defendants opened accounts at U.S. broker-dealers making combined deposits totaling 15,685,000 shares. Defendants represented that the shares were purchased from the original 34 outside investors or persons who had acquired shares from these investors when in fact those shares had been conveyed to Medford Financial years earlier. Eventually, “Biozoom and other entities began to tout that Biozoom had ‘created the world's first portable, handheld consumer device' to instantly and non-invasively measure certain biomarkers’” and as a result of the campaign, shares underwent a “dramatic increase” and eventually “peaked at over $4 per share.” 

In May 2013, Defendants allegedly began selling shares of Biozoom in the public market. In June 2013, a number of the Defendants sought to wire proceeds to foreign accounts. Shortly thereafter, the SEC issued an order to suspend trading of Biozoom securities.

On July 3, 2013, the SEC commenced this action, seeking a temporary restraining order and a freeze on Defendants’ Biozoom shares and sales proceeds. Defendants retained two separate American attorneys, both of whom withdrew before the filing of the motion for default judgment. Defendants failed to respond to the complaint despite multiple extensions. The clerk of the court then certified Defendants’ default under FRCP 55(a), citing prolonged inaction.   

The SEC submitted a request for four separate remedies: permanent injunction, disgorgement of illegal proceeds, civil penalties, and disgorgement of prejudgment interest. The court approved a permanent injunction finding Defendants possessed a “substantial likelihood of future violations of illegal securities conduct.” The court agreed Defendants’ misrepresentations demonstrated scienter and that their violations demonstrated systematic wrongdoing. The court also approved the request for disgorgement of illegal proceeds. The court did, however, amend the amounts to be disgorged for four of the eight defendants due to calculation errors.

Civil penalties were also awarded, but the court reduced the amounts sought by the SEC. The court noted that, without more information, the role of each Defendant in the Biozoom scheme was left unclear. The court reduced penalties to $160,000 per Defendant, citing inadequate evidence of culpability necessary to  warrant penalties as high as the requested $2 to $6.2 million per Defendant.

The last remedy sought was disgorgement of prejudgment interest. The court had the discretion to require disgorgement of prejudgment interest in order to deprive defendants of the benefit of holding their illicit gains over time. When utilizing this remedy, courts generally use the IRS underpayment rate to calculate the applicable interest rate.

Because the funds had been subject to a freeze order, Defendants were already denied access to those assets. The SEC did not assert facts indicating Defendants had violated the freeze order in a manner that provided improper access to the proceeds.  As a result, the court deferred any decision on the imposition of prejudgment interest until after the Agency had “an opportunity to establish the actual amount of the returns, if any, that have accumulated on the frozen assets" or to show the Defendants had violated the asset freeze.  

The primary materials for this case may be found on the DU Corporate Governance website.