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From Securities Regulation Daily, December 11, 2013

Guilty plea leads to civil liability in scheme involving pre-IPO shares of Facebook, Groupon

By Rodney F. Tonkovic, J.D.

A district court has granted summary judgment in favor of the SEC in its action against John A. Mattera for his involvement in a fraudulent scheme. The SEC claimed that Mattera and the other defendants solicited more than $12.6 million in investments in special purpose vehicles that falsely claimed to hold shares in privately held companies that were expected to soon hold an initial public offering (IPO). The Commission also charged David Howard with assisting in the solicitation and sales (SEC v. Mattera, December 9, 2013, Castel, P.).

Background. In 2010, Mattera and an associate formed the Praetorian Fund and a number of affiliated LLCs purporting to be special-purpose vehicles holding shares in pre-IPO companies such as Facebook, Groupon, and Zynga. In reality, the LLCs held no shares and were not registered with the Commission. Mattera also represented that investor funds would be held in an escrow account, but once the money was transferred, Mattera removed the funds and distributed them to accounts under his control.

Howard was recruited to introduce the Praetorian funds to broker-dealers in the summer of 2011. At the time, Mattera told Howard that Praetorian was a fund holding shares in pre-IPO companies expected to go public in approximately two years. Howard's compensation was 10 percent of the sales, shared with the brokers; on average, Howard kept 2 percent of the commissions.

The Commission filed claims against Mattera for fraud under the Exchange Act and violations of the registration provisions of the Securities Act. The SEC charged Howard with the sale of unregistered securities in violation of Securities Act Sec. 5. Criminal charges were also filed against Mattera for the same conduct underlying this action, and he was sentenced to 11 years in prison, as reported in the June 14, 2013, Securities Regulation Daily Wrap Up.

Summary judgment. The Commission moved for summary judgment and other relief against Mattera and Howard. Mattera did not respond to the Commission's motion. Howard argued that his actions were "introductions" rather than "solicitations" that would expose him to liability under Sec. 5. The court granted the SEC's motion with respect to both defendants' liability.

Mattera. Regarding Mattera, the Commission argued that his guilty plea in his criminal action required a finding of liability in this action due to collateral estoppel. The court agreed, concluding that Mattera's conviction estopped him from relitigating the same facts as they pertained to the civil fraud claims. The court found that the civil complaint alleged violations of the Exchange Act fraud provisions arising out of the same transactions as the criminal indictment, so Mattera's conviction "necessarily decided that he was civilly liable" for making false statements about the Praetorian entities. The court also granted summary judgment on the Commission’s claims under Securities Act Sec. 17(a) for the same reasons.

Unlike the fraud claims, the Securities Act registration claims against Mattera were not part of the criminal prosecution. The court found that the Commission made a prima facie showing of Mattera's liability, and because he submitted no response, the court accordingly granted summary judgment. The court also permanently enjoined Mattera from future violations of the antifraud provisions of the Exchange Act and from violations of Securities Act Sec. 5 and 17(a). Additionally, he was permanently enjoined from participating in the issue, offer, or sale of any security, aside from buying or selling for his own account.

Howard. Next, the court found that the Commission made a prima facie showing of Howard's liability for violations of Sec. 5. Howard did not dispute that the offerings were unregistered or that he played a role in their sale and was compensated for his role. The court then concluded that no exemption was available for any of the sales Howard facilitated and that he was liable under Sec. 5.

Howard argued for the private placement exemption under Rule 506, stating that he only solicited investments, through broker-dealers, of accredited investors. The Commission asserted that defendant Joseph Almazon's general solicitation of Praetorian funds tainted the entire offering to the extent that no exemptions were available (background on Almazon's conduct may be found in the Securities Regulation Daily Wrap-Up for November 11, 2013). The court agreed, finding that all sales of the Praetorian funds were integrated. Accordingly, no exemption applied, and the SEC's motion for summary judgment on Howard's liability was granted.

The court then ordered Howard ordered to disgorge $34,000, plus prejudgment interest. The Commission sought disgorgement of $142,000 received by Howard in commissions, but the court deducted $107,000 that Howard paid to various broker-dealers. The court then declined to order payment of third-tier civil penalties, finding that the Commission failed to demonstrate that Howard acted recklessly. Because Howard was already subject to a permanent injunction against violations of Sec. 5 issued by another court, the court declined to issue an additional injunction.

The case is No. 11 Civ. 8323.

Attorneys: George S. Canellos for the SEC. John A. Mattera, pro se.

Companies: Praetorian Fund LLC

MainStory: TopStory FraudManipulation Enforcement NewYorkNews SecuritiesOfferings

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