Sec. & Exch. Comm'n v. Carrillo Huettel LLP

SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. CARRILLO HUETTEL LLP, LUIS J. CARRILLO, WADE D. HUETTEL,GIBRALTAR GLOBAL SECURITIES, WARREN DAVIS, JOHN B. KIRK,BENJAMIN T. KIRK, DYLAN L. BOYLE,JAMES K. HINTON JR., LUNIEL DE BEER,JOEL P. FRANKLIN, PACIFIC BLUE ENERGY CORPORATION,and TRADESHOW MARKETING COMPANY LTD., Defendants.

13 Civ. 1735 (GBD) (JCF)

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

January 17, 2017

REPORT AND RECOMMENDATION

TO THE HONORABLE GEORGE B. DANIELS, U.S.D.J.:

In this enforcement action alleging violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. §§ 77e(a) & (c), 77q(a), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, the Securities and Exchange Commission (the "SEC") seeks a default judgment pursuant to Rule 55(b)(2) of the Federal Rules of Civil Procedure against six defendants: Carrillo Huettel LLP ("Carrillo Huettel"), Luis J. Carillo, Wade D. Huettel, Gibraltar Global Securities ("Gibraltar"), Warren Davis, and Luniel de Beer (collectively, the "Defaulting Defendants").¹ Only Mr. Carrilloand Mr. Huettel oppose the motion. I recommend granting the motion in part.

Background

The Amended Complaint alleges that various defendants made false or misleading representations and illegally distributed shares in connection with two scams of the type popularly known by the phrase "pump and dump."² (Amended Complaint, ¶ 1). According to the SEC, the fraudulent schemes centered on the publicly-traded stock of two companies: Tradeshow, an entity established to sell merchandise at trade shows and shopping malls (Amended Complaint, ¶ 31), and Pacific Blue, an enterprise re-purposed as a purported alternative energy company (Amended Complaint, ¶ 77).

Tradeshow was largely controlled by John B. Kirk through the complicity of the nominal CEO and President, Mr. de Beer. (AmendedComplaint, ¶¶ 32-34; Declaration of Todd Brody dated Aug. 11, 2016 ("Brody Decl."), ¶¶ 55, 60). By mid-2009 -- through gifts of shares from John Kirk's father, Bruce Kirk, a non-party who had founded the company -- John Kirk, his brother Benjamin T. Kirk, and Dylan L. Boyle beneficially owned over 40% of the outstanding stock of Tradeshow through various nominee entities. (Amended Complaint, ¶¶ 37-38; Brody Decl., ¶¶ 56, 61). The Kirks, Mr. Boyle, and James K. Hinton, Jr., a stock promoter, initiated and controlled two "boiler room" operations,³ known as Skymark Media Group ("Skymark") and Emerging Stock Report ("ESR"), to "tout[] their purported 'independent' research coverage" misleadingly "predicting dramatic increases in [Tradeshow's] stock price." (Amended Complaint, ¶¶ 47-50, 55-57; Brody Decl., ¶¶ 49, 56-57). The communications Skymark and ESR had with potential buyers did not disclose that the Kirks and Mr. Boyle held millions of shares in Tradeshow and were selling those shares as their price (incrementally) rose. (Amended Complaint, ¶¶ 58-62). When an article appeared in an on-line trade publication highlighting connections among the Kirks, Tradeshow, Skymark, and Carrillo Huettel (a law firm controlled by Mr. Carillo and Mr. Huettel that represented Tradeshow and Skymark (Amended Complaint, ¶¶ 15-17)), various defendants, including Skymark, Tradeshow, and Mr. de Beer, made misleading statements intending to cover up those connections. (Amended Complaint, ¶¶ 69-75; BrodyDecl., ¶ 59). In addition, Tradeshow and Mr. de Beer made false and misleading statements in Tradeshow's annual reports, quarterly reports, and press releases in order to conceal Tradeshow's ownership, control, use of stock promoters, and payment of kickbacks. (Amended Complaint, ¶¶ 42-46; Brody Decl., ¶¶ 62-64, 88-92). Mr. de Beer also made false statements in Tradeshow's corporate resolutions regarding the trading status of the shares, which should have been restricted. (Amended Complaint, ¶¶ 127-130, 140; Brody Decl., ¶¶ 91-92). Gibraltar, a Bahamian broker-dealer at which Benjamin Kirk, Mr. Boyle, Mr. Hinton, and Mr. Carrillo maintained accounts, and which was represented by Mr. Carrillo (Amended Complaint, ¶¶ 18, 113), similarly provided misleading representations -- signed by its president, Mr. Davis -- regarding the ownership and trading status of Tradeshow shares in order to facilitate (illegal) distribution of the securities (Amended Complaint, ¶¶ 114-124, 144-146; Brody Decl., ¶¶ 65-70).

Pacific Blue was born, under a different name, as a travel service company. (Amended Complaint, ¶ 76; Brody Decl., ¶ 47). In September 2009, the Kirks and Mr. Carillo purchased all outstanding shares of that company, renamed it, re-purposed it as an alternative energy company, and then installed Mr. de Beer as Chairman and Mr. Franklin as President, CEO, and Director. (Amended Complaint, ¶¶ 77-79; Brody Decl., ¶ 47). Although over 90% of the purchase price came from John Kirk, Mr. Carrillo and Mr. Huettel "arranged for Pacific Blue's outstanding shares to be distributed in blocks of 4.9% to John Kirk, [Mr. Carrillo's father]Dr. Luis Carillo,⁴ and to various foreign nominee entities controlled by the Kirks and [Mr.] Boyle."⁵ (Amended Complaint, ¶¶ 79-82; Brody Decl., ¶¶ 47-48). Mr. Carrillo and Mr. Huettel drafted sham stock purchase agreements in order to conceal the fact that the Kirks, Mr. Boyle, Dr. Carrillo, and Mr. de Beer controlled "at least 85% of the company's outstanding shares" through offshore nominee entities controlled by the Kirks, as well as to conceal the existence of privately negotiated transactions in which John Kirk sold over 1 million shares of Pacific Blue, netting proceeds of over $210,000. (Amended Complaint, ¶¶ 82-86; Brody Decl., ¶¶ 48-49). The Kirks, through the cooperation of Mr. Franklin and Mr. de Beer, also directed the release of misleading statements in Pacific Blue's annual reports, quarterly reports, and press releases as to the company's ownership, internal controls, stock promotion, and payment of kickbacks. (Amended Complaint, ¶¶ 91-96; Brody Decl., ¶¶ 50-52, 93). Mr. Carrillo and Mr. Huettel "drafted and actively facilitated" these false statements by, for example, commenting on false representations in quarterly reports and directing Mr. Franklin to sign misleading documents on which Pacific Blue's auditors would rely. (Amended Complaint, ¶¶ 97-101). Mr. Carrillo and Mr. Huettel also provided false and misleading opinion lettersto brokers "to facilitate the deposit and sale of the Kirks' and [Mr.] Boyle's Pacific Blue shares." (Amended Complaint, ¶¶ 133-138; Brody Decl., ¶¶ 79-84). ESR and Skymark misleadingly promoted the company in a manner similar to that used to promote Tradeshow, and Gibraltar similarly participated in illegal distribution of Pacific Blue shares (Amended Complaint, ¶¶ 102-107, 121-125; Brody Decl., ¶¶ 94-96). Indeed, the Amended Complaint alleges that all of the defendants participated in the illegal distribution of Pacific Blue shares. (Amended Complaint, ¶¶ 147-160).

Each of the individual Defaulting Defendants (that is, each defaulting defendant other than Carrillo Huettel and Gibraltar) has asserted that he will no longer defend against the Amended Complaint in this action. (Letter of William B. Fleming dated Nov. 24, 2015 (Mr. Huettel); Letter of Luniel de Beer dated Oct. 9, 2015 (Luniel de Beer); Letter of Thomas J. Curran dated Sept. 2, 2015 (Mr. Carrillo); Letter of Nicholas M. de Feis dated May 13, 2015 (Mr. Davis); Affidavit of Warren A. Davis dated April 23, 2015, attached as Exh. to Letter of Philip C. Patterson dated April 24, 2015, ¶ 5). Mr. Davis has also violated a court order to produce discovery, and Mr. Davis, Mr. Carrillo, and Mr. Huettel have each violated one or more court orders to testify through deposition. SEC v. Carrillo Huettel LLP, No. 13 Civ. 1735, 2015 WL 1610282, at *6 (S.D.N.Y. April 8, 2015) (requiring Mr. Carrillo and Mr. Huettel to testify regarding certain communications, but not setting date or location for testimony); SEC v. Gibraltar Global Securities, Inc., No. 13 Civ. 2575, 2015 WL 1514746, at *6 (S.D.N.Y. April 1,2015) (requiring Mr. Davis to produce documents); (Memorandum Endorsement dated April 8, 2015 (requiring Mr. Carrillo to appear for deposition in New York); Memorandum Endorsement dated April 1, 2015 ("April 1 Order") (requiring Mr. Davis to appear for deposition in New York); Brody Decl., ¶¶ 9-13, 16-18, 30-33).⁶ Gibraltar and Carrillo Huettel are no longer represented by counsel (Order dated July 2, 2015 (Gibraltar); Order dated Oct. 23, 2014 (Carrillo Huettel); Brody Decl., ¶¶ 22-23, 42-43) and, as each is a business entity rather than a natural person, neither may appear in this action pro se. See, e.g., Eagle Associates v. Bank of Montreal, 926 F.2d 1305, 1309-10 (2d Cir. 1991); RGI Brands LLC v. Cognac Brisset-Aurige, S.A.R.L., No. 12 Civ. 1369, 2013 WL 1668206, at *4-5 (S.D.N.Y. April 18, 2013), report and recommendation adopted, 2013 WL 4505255 (S.D.N.Y. Aug. 23, 2013).

Discussion

A. Legal Standards

The decision whether to grant a motion for a default judgment "is within the sound discretion of the district court." SEC v. Coronati, No. 16 Civ. 2022, 2016 WL 6462240, at *2 (E.D.N.Y. Oct. 14, 2016) (quoting United States Fidelity and Guaranty Co. v.Petroleo Brasiliero S.A., 220 F.R.D. 404, 406 (S.D.N.Y. 2004)). In making that determination, the court treats all factual allegations of the complaint (other than those pertaining to damages) as true and "then [] analyze[s] those facts for their sufficiency to state a claim." Id. (quoting Brown v. Gabbidon, No. 06 Civ. 8148, 2007 WL 1423788, at *2 (S.D.N.Y. May 14, 2007)); see also Heneghan v. Thibeault, No 15 Civ. 9651, 2016 WL 4411424, at *2 (S.D.N.Y. Aug. 19, 2016). Therefore, although only Mr. Carrillo and Mr. Huettel have opposed the SEC's motion, I must still evaluate whether the plaintiff has stated a claim against each of the...