Free Motion for Summary Judgment - District Court of Arizona - Arizona

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MOLLY M. WHITE, Cal. Bar No. 171448 E-mail: [email protected] Attorneys for Plaintiff Securities and Exchange Commission Rosalind R. Tyson, Acting Regional Director Michele Wein Layne, Associate Regional Director Andrew G. Petillon, Associate Regional Director 5670 Wilshire Boulevard, 11th Floor Los Angeles, California 90036 Telephone: (323) 965-3998 Facsimile: (323) 965-3908 UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. SECURITY TRUST COMPANY, N.A., et al., Defendants. Case No. CV-03-2323-PHX-JWS MEMORANDUM SUPPORTING COMMISSION'S MOTION FOR SUMMARY JUDGMENT AGAINST GRANT D. SEEGER

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TABLE OF CONTENTS Page I. STATEMENT OF FACTS ..............................................................................2 A. B. C. D. E. II. Security Trust Company ........................................................................2 The Market-Timing Scheme ..................................................................3 The Late-Trading Scheme .....................................................................5 STC's Compensation Arrangement with the Hedge Funds...................6 Seeger's Compensation..........................................................................6

ARGUMENT...................................................................................................7 A. B. The Standard for Summary Judgment ...................................................7 The Undisputed Facts Prove the Commission's Claims .......................8 1. Seeger Violated the Antifraud Provisions of the Securities Laws ............................................................................8 Seeger Violated Section 37 of the Investment Company Act .............................................................................11

2.

C.

The Commission is Entitled to the Remedies it Seeks ........................11 1. 2. 3. 4. Permanent Injunction.................................................................12 The Court Should Order Disgorgement.....................................13 Prejudgment Interest is Appropriate..........................................15 The Court Should Award $240,000 in Civil Penalties ..............16

III.

CONCLUSION..............................................................................................17

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TABLE OF AUTHORITIES Page CASES Aaron v. SEC 446 U.S. 680 (1980).........................................................................................9 Anderson v. Liberty Lobby, Inc. 477 U.S. 242 (1986).........................................................................................8 Basic, Inc. v. Levinson 485 U.S. 224 (1988)................................................................................ 10, 11 Celotex Corp. v. Catrett 477 U.S. 317 (1986).........................................................................................8 Falls Riverway Realty, Inc. v. Niagara Falls 745 F.2d 49 (2d Cir. 1985)...............................................................................8 First Lincoln Holdings, Inc. v. Equitable Life Assurance Soc. 164 F. Supp. 2d 383 (S.D.N.Y. 2001) .............................................................4 Gleb v. Royal Globe Ins. Co. 798 F.2d 38 (2d Cir. 1986)...............................................................................8 Herman & MacLean v. Huddleston 459 U.S. 375 (1983).........................................................................................9 Hollinger v. Titan Capital Corp. 914 F.2d 1564 (9th Cir. 1990) .........................................................................9 In re Mutual Funds Invest. Litig. 384 F. Supp. 2d 845 (D. Md. 2005).............................................................1, 4 SEC v. Benson 657 F. Supp. 1122 (S.D.N.Y. 1987) ..............................................................14 SEC v. Burns 816 F.2d 471 (9th Cir. 1987) ...........................................................................9
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SEC v. Coates 137 F. Supp. 2d 413 (S.D.N.Y. 2001) ...........................................................17 SEC v. Fehn 97 F.3d 1276 (9th Cir. 1996) .........................................................................12 SEC v. First Jersey Sec. Inc. 101 F.3d 1459 (2d Cir. 1996) ........................................................................14 SEC v. First Pac. Bancorp 142 F.3d 1186 (9th Cir. 1998) .......................................................... 13, 14, 15 SEC v. Hughes Capital Corp. 917 F. Supp. 1080 (D.N.J. 1996) ...................................................................14 SEC v. Kenton Capital, Ltd. 69 F. Supp. 2d 1 (D.D.C. 1998) .....................................................................17 SEC v. Koracorp Indus., Inc. 575 F.2d 692 (9th Cir. 1978) .........................................................................12 SEC v. Manor Nursing Centers 458 F.2d 1082 (2d Cir. 1972) ................................................................. 14, 15 SEC v. Murphy 626 F.2d 633 (9th Cir. 1980) .........................................................................12 SEC v. Patel 61 F.3d 137 (2d Cir. 1995).............................................................................14 SEC v. PIMCO Advisors Fund Mgmt., LLC 341 F. Supp. 2d 454 (S.D.N.Y. 2004) .........................................................1, 4 SEC v. Randolph 736 F.2d 525 (9th Cir. 1984) .........................................................................12 SEC v. Rind 991 F.2d 1486 (9th Cir. 1993) ................................................................ 13, 14 T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n 809 F.2d 626 (9th Cir. 1987) ...........................................................................8
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Thornhill Pub. Co., Inc. v. GTE Corp. 594 F.2d 730 (9th Cir. 1979) ...........................................................................8 TSC Indus., Inc. v. Northway, Inc. 426 U.S. 438 (1976)................................................................................ 10, 11 United States v. Podell 572 F.3d 31 (2d Cir. 1978)...............................................................................8 United States v. Scarlata 214 F.2d 807 (3d Cir. 1954)...........................................................................11 Walters v. United States 256 F.2d 840 (9th Cir. 1958) ...........................................................................9 Western Pac. Fisheries, Inc. v. S.S. President Grant 730 F.2d 1280 (9th Cir. 1984) .......................................................................16 FEDERAL STATUTES 28 U.S.C. § 1961............................................................................................... 15, 16 Securities Act of 1933 Section 17(a) [15 U.S.C. § 77q(a)]................................................................................ 1, 2, 9 Section 17(a)(1) [15 U.S.C. § 77q(a)(1)] ....................................................................................9 Section 20(b) [15 U.S.C. § 77t(b)] .......................................................................................12 Section 20(d) [15 U.S.C. § 77t(d)] .......................................................................................16 Section 20(d)(2)(C) [15 U.S.C. § 77t(d)(2)(C)] ...................................................................... 16, 17

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Securities Exchange Act of 1934 Section 10(b) [15 U.S.C. § 78j(b)] ................................................................................ 1, 2, 9 Section 21(d)(1) [15 U.S.C. § 78u(d)(1)]..................................................................................12 Section 21(d)(3) [15 U.S.C. § 78u(d)(3)]..................................................................................16 Section 21(d)(3)(B)(iii) [15 U.S.C. § 78u(d)(3)(B)(iii)] ............................................................... 16, 17 Investment Company Act of 1940 Section 37 [15 U.S.C. § 80a-36] ................................................................................. 2, 11 FEDERAL REGULATIONS 17 C.F.R. § 201.1001 ........................................................................................ 16, 17 17 C.F.R. § 201.1002 ........................................................................................ 16, 17 Rule 10b-5 [17 C.F.R. § 240.10b-5] ...............................................................................2, 9 FEDERAL RULES OF CIVIL PROCEDURE Fed. R. Civ. P. 56 .......................................................................................................7 Fed. R. Civ. P. 56(c)...................................................................................................8 Fed. R. Civ. P. 56(e)...................................................................................................8 LOCAL RULES Rule 56.1(e)................................................................................................................2
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1

Grant D. Seeger violated the antifraud provisions of the securities laws by facilitating the late-trading1 and market-timing2 schemes of two hedge funds while he was CEO of Security Trust Company ("STC"). In the middle of 2000, two hedge funds3 contacted Seeger and requested STC's assistance in facilitating late trading and market timing in various mutual funds. Mutual funds actively discourage their participants from engaging in late-trading or market-timing. Seeger agreed to help the hedge funds conceal their late-trading and market-timing practices, and from about May of 2000 through September of 2003, STC used different methods (with varying degrees of success) to help the Hedge Funds conceal their market timing and late trading. In the fall of 2003, the New York Attorney General ("NYAG") filed criminal charges against Seeger, STC, and other STC employees. In that proceeding, Seeger entered a guilty plea and admitted his involvement in the market-timing scheme (though he did not admit his participation in the late trading). Seeger's guilty plea and conviction establish the elements necessary to prove he is liable for violating Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934

Late trading is the practice of placing orders to buy or sell mutual funds shares after 4:00 p.m. ET, but receiving a price based on the prior Net Asset Value ("NAV"), which is usually determined as of 4:00 p.m. that same day. Late trading enables the trader to profit from knowledge of market-moving events that occur after 4:00 p.m. and that are not reflected in that day's fund share price. In re Mutual Funds Invest. Litig., 384 F. Supp. 2d 845, 852 n.1 (D. Md. 2005). 2 "Mutual fund market timing is a form of arbitrage activity that takes advantage of small short-term fluctuations in mutual fund prices. In order for a market timing firm to achieve substantial gains using the strategy, it must be able to quickly cycle its investments into and out of the targeted funds, engaging in what are known in the industry as `round trips.'" SEC v. PIMCO Advisors Fund Mgmt., LLC, 341 F. Supp. 2d 454, 458 (S.D.N.Y. 2004). 3 The two hedge funds that approached Seeger were Hartz Trading ("Hartz") and Samaritan Asset Management ("Samaritan"). (Fact No. 24.) Hartz was the investment arm of the Stern family, which made its fortune through the Hartz Pet Food Company. Hartz named many of its affiliated companies after birds. (Fact No. 82.) The Hartz-related entities will be referred to as "Hartz" or "Canary." Hartz and Samaritan will be collectively referred to as "the Hedge Funds."
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("Exchange Act"), Rule 10b-5 of the Exchange Act, and Section 37 of the Investment Company Act of 1940. Based on the evidence and the arguments presented herein, the Court should, as a matter of law, find Seeger liable for violating the securities laws and grant a permanent injunction enjoining him from future violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Section 37 of the Investment Company Act. The Court should also order Seeger to disgorge $175,877 in ill-gotten gains, pay prejudgment interest, and pay a civil penalty of $240,000. I. STATEMENT OF FACTS A. Security Trust Company

STC, which was based in Phoenix, was an uninsured national banking association that provided trust and custody-related services to high net-worth individuals, private trusts and entities, and retirement plans and their third party administrators ("TPAs"). (Fact No. 4.4) STC did not hold deposits, was not a public company, and was not registered with the Securities and Exchange Commission ("Commission"). (Fact No. 5.) As of August 31, 2003, STC reported that it had $12.9 billion in assets under administration. (Fact No. 6.) From about 1998 to October 5, 2003, Grant Seeger was the CEO of STC. (Fact No. 7.) In 1991, Seeger formed STC's predecessor, Security Investment Management & Trust, to engage in securities sales to private custodial accounts. (Fact No. 10.) At least until STC was formed, Seeger held a Series 7 license, which allowed him to buy and sell securities. (Fact No. 8.) Seeger also held a state securities license at that time. (Fact No. 9.) William Kenyon was President and Secretary of STC from June of 1998 until November 1, 2003. (Fact No. 50.) Kenyon reported to Seeger the entire time that he worked at STC. (Fact No. 51.) Both Kenyon and Seeger were members of

4

Pursuant to Local Rule 56.1(e), the Commission cites the specific paragraph in the Separate Statement of Facts that supports its factual assertions.
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STC's board of directors. (Fact No. 52.) In 1998, Seeger shifted STC's business to serving as a custodian for retirement plans and their TPAs. (Fact No. 11.) At that time, STC developed an electronic trading platform that allowed retirement plan participants to trade multiple mutual funds in a single day. (Fact No. 12.) STC's platform was designed primarily to process trades made by TPAs. (Fact No. 14.) The platform relied on STC's access to an interface sponsored by the National Securities Clearing Corporation ("NSCC") that enabled simultaneous trading in thousands of mutual funds through an NSCC subsidiary corporation known as Defined Contribution Clearance & Settlement ("DCC&S"). (Fact Nos. 13 & 17.) STC processed mutual fund trades,5 primarily for retirement funds. (Fact No. 15.) STC's trade processing for TPAs involved several steps. (Fact No. 18.) First, retirement plan sponsors collected orders for the purchase and sale of mutual fund shares from plan participants during the day and then shut off the participants' ability to enter trading orders at 4:00 p.m. ET, when the markets close. (Fact No. 19.) Next, by approximately 6:30 p.m. ET, STC provided its TPA clients with a file showing that day's NAV for all mutual funds that could be traded through its platform. (Fact No. 20.) TPAs then created a trade file listing the trades for all plan participants and delivered the files electronically to STC by approximately 9:00 p.m. ET. (Fact No. 21.) STC processed these files through internal, proprietary databases and sent them electronically to NSCC in a single, consolidated file. (Fact No. 22.) NSCC then executed and settled the trades with the various mutual funds, and provided confirmations that STC forwarded to the TPAs. (Fact No. 23.) B. The Market-Timing Scheme

In 2000, Seeger was contacted by two hedge funds that were engaged in market timing ­ Samaritan and Canary. (Fact No. 24.) The Hedge Funds wanted to use STC to process their trades to the mutual funds in an attempt to hide from
5

A mutual fund share is a type of security sold to the public. (Fact No. 16.)
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the mutual funds the fact that they were market timing. (Fact Nos. 27 & 28.) Mutual funds generally dislike and attempt to shut down market timing. While market timing can be a successful strategy for individual investors and is not itself illegal, it can also harm investors in a mutual fund that permits market timing by increasing trading and brokerage costs, as well as tax liabilities, incurred by a fund and spread across all fund investors. The quick pace of investments and redemptions associated with market timing may also hinder the ability of mutual fund managers to act in the best interests of fund investors who seek to maximize their long-term investment gains. It would make little sense for a fund manager to invest in assets with significant long-term potential but high short-term volatility if a market timer's redemptions could force the quick sale of fund assets. SEC v. PIMCO, 341 F. Supp. 2d at 458; see also In Re Mutual Funds Invest. Litig., 384 F. Supp. 2d at 852 n.1 (describing five ways that late trading and market timing adversely affect mutual funds); First Lincoln Holdings, Inc. v. Equitable Life Assurance Soc., 164 F. Supp. 2d 383, 390-94 (S.D.N.Y. 2001). The Hedge Funds opened several accounts at STC in May of 2000. (Fact No. 29.) From about May 2000 to September 2003, Seeger agreed that STC would process these trades on behalf of the Hedge Funds. (Fact No. 30.) Hartz signed an exclusivity agreement with STC, pursuant to which STC agreed that the Hedge Funds could participate in active market timing, but that no others could participate. (Fact No. 42.) Seeger asked Kenyon to oversee the development of software that would allow the creation of omnibus accounts, thereby allowing the Hedge Funds' trades to be hidden among the trades made by retirement and pension plans which were being processed by STC. (Fact No. 31.) Seeger and others at STC referred to this as "piggybacking." (Fact No. 31.) STC opened omnibus accounts for the Hedge Funds in 2000 and used STC's tax ID number for the omnibus accounts. (Fact Nos. 32 & 33.) Seeger knew that if mutual funds were aware that the money was from hedge funds and that the hedge funds were market timing, some mutual funds would have refused to allow these trades to occur. (Fact No. 35.) In fact, one STC
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employee told Seeger that he was concerned that some mutual funds might shut down STC's ability to make trades in DCC&S because of the market timing in those mutual funds. (Fact Nos. 80 & 81.) C. The Late-Trading Scheme

In early discussions with STC, the Hedge Funds learned they could submit trades through STC as late as 9:00 p.m. ET and still receive that day's NAV for the mutual funds traded because of STC's trade processing procedures for TPAs. (Fact No. 25.) Seeger specifically confirmed this to the Hedge Funds. (Fact No. 26.) After the Hedge Funds began trading through STC, they submitted the vast majority of their trades to STC after the market close at 4:00 p.m. ET. Indeed, Hartz submitted 99% of its trades to STC after 4:00 p.m. ET, and Samaritan submitted 80% of its trades after 4:00. (Fact Nos. 43 & 44.) Seeger knew ­ or was reckless in not knowing ­ that the Hedge Funds were submitting their trades after the close of the market. In October of 2000, Seeger received an email from an STC employee expressing her concern that STC was receiving trades from Hartz after the close of the market at 4:00 p.m. (Fact No. 45.) In fact, in her October 10, 2000 email to Seeger, the employee raised her concern that the Commission might have a problem with STC's trading practices. (Fact No. 46.) In response to another employee's suggestion that Hartz submit its trade files to STC before the market closed, Seeger said that STC did not necessarily need Hartz's trade files, but that STC needed a "hold harmless" from Hartz.6 (Fact No. 47.) Indeed, Seeger admitted that at the time, he did not

6 Hartz signed an addendum agreement with STC, pursuant to which Hartz agreed that all instructions delivered to STC on any business day "shall have been received by [Hartz] from the Client-shareholder by the close of trading (currently 4:00 pm EST) on the New York Stock Exchange." (Fact No. 48.) The language in the addendum makes no sense because Hartz was not a third-party administrator with "client-shareholders." Hartz was a hedge fund that was investing "family money" with STC. (Fact No. 78.) The existence of this agreement shows that STC knew the late trading was occurring and that STC chose not to ask Hartz to submit its trade files before the close of the market.

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consciously consider whether the Securities Exchange Commission, or other entities that regulate the stock market, might have a problem with entities making trade decisions after the market closed. (Fact No. 49.) D. STC's Compensation Arrangement with the Hedge Funds

STC had a compensation arrangement with the Hedge Funds that included a custodial fee and a profit sharing agreement. (Fact No. 39.) Pursuant to the profitsharing arrangement, Hartz paid STC a 4% profit sharing fee. (Fact No. 84.) The fees that the Hedge Funds paid STC were a significant revenue stream for STC. (Fact No. 85.) Indeed, from July of 2000 through June 30, 2003, STC received compensation from Hartz alone, totaling approximately $5.8 million. (Fact No. 74.) STC's gross revenue for the entire company was just $25,509,542 for the years 2000 through 2002.7 (See Fact Nos. 75-77.) Thus, the fees that Hartz alone paid STC accounted for about 20% of STC's gross revenue in those years. E. Seeger's Compensation

Seeger profited from the Hedge Funds' relationship with STC because the amount of stock dividends that STC's parent company paid Seeger was based on the revenue that STC generated. On November 10, 1999, Convergent Capital Management ("CCM") purchased all the shares of STC. (Fact No. 43.) Before CCM purchased all of STC's shares, Seeger and a business partner each owned 50% of STC. (Fact No. 54.) In connection with CCM's acquisition of STC in late 1999, Seeger and Kenyon received Class C shares of stock in CCM. (Fact No. 55.) CCM paid dividends on the Class C shares of its stock. (Fact No. 56.) The dividends were calculated pursuant to a formula that was driven entirely by STC's revenue. (Fact Nos. 57 & 58.) When CCM acquired STC, CCM agreed to provide STC with $1 million in

7

The Commission calculated the $25,509,542 figure by totaling STC's gross revenue (less fees for advisory services, which STC backed out of its financial statements) for the years 2000, 2001, and 2002. (See Fact Nos. 75-77.)
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working capital. (Fact No. 59.) If STC generated enough revenue so that its working capital exceeded $1 million, STC made distributions of the additional money to CCM, which then paid dividends to Seeger and Kenyon. (See Fact No. 60.) From the time that CCM acquired STC, Kenyon calculated the formula to determine the amount of money that STC was to distribute to CCM. (Fact No. 61.) Kenyon prepared a spreadsheet reflecting the actual results of STC's operations as they pertained to the formula for distributable revenues. (Fact Nos. 63-65.) On this spreadsheet, Kenyon tracked the actual dollars that were being moved from STC to CCM, as well as the dividends that CCM paid Seeger and Kenyon in connection with their ownership of the Class C shares. (Fact Nos. 66 & 68.) Kenyon knows that his spreadsheet was accurate because he shared the information on the spreadsheet with CCM. (Fact Nos. 62 & 67.) If there were discrepancies between Kenyon's calculations and CCM's calculations, they determined what the difference was, and Kenyon corrected his spreadsheet. (Fact No. 67.) From the time that CCM acquired STC in November of 1999 until the end of 2003, CCM paid Seeger and Kenyon a total of $1,099,233.51 in dividends on the Class C shares. (Fact No. 69.) CCM actually distributed $1,099,233.51 in Class C dividends to Seeger and Kenyon, even though CCM should have paid Seeger and Kenyon a total of about $2.3 million in dividends. (Fact No. 70.) Moreover, CCM did not pay Seeger and Kenyon all of the $1,099,233.51 in dividends in cash; some of the disbursements were non-cash disbursements. (Fact No. 73.) Kenyon received 20% of the dividends on the Class C shares because he owned 20% of the Class C shares. (Fact No. 71.) Seeger received about 80% of the dividends ­ or $879,386 ­ because he held 79.9% of the Class C stock. (Fact No. 72.) II. ARGUMENT A. The Standard for Summary Judgment

Pursuant to Rule 56 of the Federal Rules of Civil Procedure, the Court should grant this Motion. Summary judgment is appropriate if the pleadings,
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affidavits, and other supporting papers show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). At the summary judgment stage, the Court does not make credibility determinations or weigh conflicting evidence. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n., 809 F.2d 626, 630 (9th Cir. 1987). Rather, it draws all inferences in the light most favorable to the nonmoving party. Id. at 630-31. Once the Commission shows there is no genuine issue of material fact, the burden shifts to defendant to dispute that showing with specific evidentiary facts. Fed. R. Civ. P. 56(e); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50 (1986). Conclusory, speculative testimony in affidavits and other papers in insufficient to raise issues of fact and defeat summary judgment. Falls Riverway Realty, Inc. v. Niagara Falls, 745 F.2d 49, 56 (2d Cir. 1985); Thornhill Pub. Co., Inc. v. GTE Corp., 594 F.2d 730, 738 (9th Cir. 1979). All facts material to and underlying Seeger's criminal conviction bind him in this subsequent civil action. Gleb v. Royal Globe Ins. Co., 798 F.2d 38, 42-44 (2d Cir. 1986) (criminal defendant is barred from re-litigating in civil action any issue determined adversely to him in criminal proceeding if he had a full and fair opportunity to litigate in criminal proceeding); United States v. Podell, 572 F.3d 31, 35 (2d Cir. 1978) (criminal conviction by trial or guilty plea constitutes estoppel in subsequent civil proceeding on matters determined by the criminal judgment). Collateral estoppel prevents Seeger from disputing the facts to which he allocuted and which underlie his criminal conviction for securities fraud. Moreover, during his deposition in this matter, Seeger again admitted that the facts in his plea agreement are true. (Fact No. 83.) B. The Undisputed Facts Prove the Commission's Claims 1. Seeger Violated the Antifraud Provisions of the Securities Laws

By facilitating and participating in the Hedge Fund's late-trading and
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market-timing schemes, Seeger violated the antifraud provisions of the federal securities laws. Section 17(a) of the Securities Act prohibits fraudulent conduct in the offer or sale of securities. Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 prohibit fraud in connection with the purchase or sale of any security. Violations of Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 701-02 (1980). Scienter may be established by a showing of recklessness. Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990) (en banc). Proof of recklessness may be inferred from circumstantial evidence. Herman & MacLean v. Huddleston, 459 U.S. 375, 390-91 n.30 (1983); SEC v. Burns, 816 F.2d 471, 474 (9th Cir. 1987). Seeger violated these antifraud provisions in at least three ways. A finding of liability for participating in any one of these three schemes will support the relief the Commission seeks. First, by helping to conceal the Hedge Funds' market timing and late trading, Seeger helped misrepresent to numerous mutual funds that the Hedge Funds were retirement accounts. See Walters v. United States, 256 F.2d 840, 843 (9th Cir. 1958) ("Avoidance of detection and prevention . . . may be a material part of an illegal scheme.") Seeger asked Kenyon to oversee the development of software that would allow the creation of omnibus accounts, thereby allowing the Hedge Funds' trades to be hidden among the trades made by retirement and pension plans which were being processed by STC. (Fact No. 31.) These misrepresentations were material to the mutual funds because the mutual funds' perception that the Hedge Funds were retirement accounts helped the Hedge Funds conceal their late trading and market timing.8 See Basic, Inc. v. Levinson, 485 U.S.
8

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STC's trading platform was designed to process trades by retirement account participants and TPAs. (Fact No. 14.) Because retirement accounts and TPAs had procedural mechanisms that prevented late trading, the mutual funds were not concerned when they received trades by retirement accounts and TPAs after the markets closed. (See Fact Nos. 18-23.)
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224, 231-32 (1988) (fact is material if there is substantial likelihood a reasonable investor would consider it significant in making an investment decision); see also TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Seeger acted with scienter. He knew the Hedge Funds were not retirement accounts or TPAs, that the Hedge Funds were market timing, and that the mutual funds would not have permitted the Hedge Funds' trading if the mutual funds knew the trades were from hedge funds instead of retirement accounts. (See Fact Nos. 31, 35, 40-42, 78 & 8082.) Seeger also knew, or should have known, that the Hedge Funds were late trading. (Fact Nos. 46-48.) One of STC's employees specifically complained to Seeger about misrepresenting the Hedge Fund trades as retirement accounts and expressed his concern that deceiving the funds could hurt STC's relationship with the mutual funds. (Fact Nos. 80 & 81.) Despite this, Seeger did not disclose the Hedge Funds' trading to the mutual funds. Seeger also violated the securities laws by facilitating a late-trading scheme. STC allowed the Hedge Funds to submit hundreds of trades to mutual funds as late as 9:00 p.m. ET over a three-year period. To make detection more difficult, STC hid the Hedge Funds' trades among the trades made by retirement and pension plans that were being processed by STC. (See Fact No. 31.) Seeger acted with scienter. He knew that the Hedge Funds were not retirement accounts or TPAs. (Fact No. 78 & 82.) He also knew or should have known that the late trading was taking place because at least one STC employee expressed concern that the late trading would be a problem for regulators. (See Fact Nos. 46 & 47.) Despite being apprised of the late trading, Seeger did not consciously think about whether the Commission, or other entities that regulate the stock market, might have a problem with the Hedge Funds late trading. (Fact No. 49.) STC continued to facilitate the late trading. Finally, Seeger violated the antifraud provisions of the securities laws by participating in the market-timing scheme. In an attempt conceal the scheme from the mutual funds, STC employed several devices to deceive the mutual funds,
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including the piggybacking scheme. (See Fact Nos. 25, 28, 31-33 & 42.) The market-timing schemes were material to the mutual funds, as evidenced by the complaints that STC employees received from mutual funds that discovered the timing schemes. (Fact Nos. 40, 41, 80 & 81.) See Basic, 485 U.S. at 231-32; TSC Indus., 426 U.S. at 449. Seeger acted with scienter because he was aware of the market timing. (Fact Nos. 30-33.) 2. Seeger Violated Section 37 of the Investment Company Act

Section 37 of the Investment Company Act provides: Whoever steals, unlawfully abstracts, unlawfully and willfully converts to his own use or to the use of another, or embezzles any of the moneys, funds, securities, credits, property, or assets of any registered investment company shall be deemed guilty of a crime, and upon conviction thereof shall be subject to the penalties provided in section 49. A judgment of conviction or acquittal on the merits under the laws of any State shall be a bar to any prosecution under this section for the same act or acts. 15 U.S.C. § 80a-36. Seeger violated Section 37. By facilitating the Hedge Funds' ability to conduct late trading, Seeger helped them garner substantial profits at the expense of other mutual fund shareholders. In this way, Seeger converted the money both for the Hedge Funds' use (in the form of trading gains) and for his own use (in the form of STC's 4% profit-sharing fee on Hartz's gains and Seeger's receipt of dividends on his Class C shares of CCM). (See Fact Nos. 39 & 84.) Because Seeger pleaded guilty in the criminal action brought by the New York Attorney General, the Court may find that Seeger is barred from prosecution under Section 37. To make this finding, the Court must conclude that Seeger's plea and sentence constituted a "judgment of conviction." See United States v. Scarlata, 214 F.2d 807 (3d Cir. 1954). C. The Commission is Entitled to the Remedies it Seeks

The Commission seeks 1) a permanent injunction; 2) disgorgement of all illgotten gains, 3) prejudgment interest; and 4) civil penalties. If the Court finds liability on any one of the three theories of liability, the Court should grant all the
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relief the Commission seeks. 1. Permanent Injunction

The Court should enter a permanent injunction against Seeger. Section 20(b) of the Securities Act and Section 21(d)(1) of the Exchange Act provide that in Commission actions, upon a proper showing, a permanent injunction shall be granted. 15 U.S.C. §§ 77t(b) & 78u(d)(1). Injunctions are the primary civil remedy available to the Commission for violations of the securities laws. See SEC v. Randolph, 736 F.2d 525, 529 (9th Cir. 1984). To obtain a permanent injunction, the Commission has the "burden of showing there [is] a reasonable likelihood of future violations of the securities laws." SEC v. Murphy, 626 F.2d 633, 655 (9th Cir. 1980). "In predicting the likelihood of future violations, a court must assess the totality of the circumstances surrounding the defendant and his violations." Id. (the "existence of past violations may give rise to an inference that there will be future violations"); see also SEC v. Koracorp Indus., Inc., 575 F.2d 692, 699 (9th Cir. 1978). The factors that courts consider include "the degree of scienter involved; the isolated or recurrent nature of the infraction; the defendant's recognition of the wrongful nature of his conduct; the likelihood, because of defendant's professional occupation, that future violations might occur; and the sincerity of his assurances against future violations." Murphy, 626 F.2d at 655; accord SEC v. Fehn, 97 F.3d 1276, 1295 (9th Cir. 1996). Here, the totality of the circumstances weighs in favor of granting a permanent injunction. Seeger knowingly helped the Hedge Funds conceal their market-timing activity from the mutual funds. Seeger knew the Hedge Funds were not retirement plans or TPAs and that they were engaging in market timing, and he agreed to help conceal the activity from the mutual Funds. (Fact Nos. 30-33, 42 & 78.) Seeger also knew, or should have known, that the Hedge Funds were late trading, because at least one of his employees raised the issue with him. (Fact Nos. 45-47.) The fact that Seeger acted with a high degree of scienter weighs heavily in favor of
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entering a permanent injunction. The recurrent nature of the conduct also weighs in favor of entering a permanent injunction. The late-trading and market-timing schemes continued for several years. The Hedge Funds opened accounts at STC in May of 2000, and they continued to trade and conceal their market-timing activity until September of 2003. (Fact No. 30.) At no time did Seeger try to put a halt to the late trading or market timing. Instead, he collected the large dividends that CCM paid him. (See Fact Nos. 69-72.) Another factor weighing in favor of summary judgment is Seeger's failure to recognize the wrongful nature of his conduct. Despite the admissions that he made in connection with his guilty plea, Seeger still claims he did nothing wrong. In fact, during his deposition, Seeger indicated that he regretted entering the guilty plea in NYAG's action because he did not feel he did anything criminal or illegal. (Fact No. 86.) Finally, Seeger has made no assurances that he will keep out of the securities or banking businesses. 2. The Court Should Order Disgorgement

It is well settled that the Commission may seek, and courts may order, disgorgement of ill-gotten gains. See SEC v. First Pac. Bancorp, 142 F.3d 1186, 1191 (9th Cir. 1998); SEC v. Rind, 991 F.2d 1486, 1490 (9th Cir. 1993). Thus, once a Court has found liability, courts have "broad equity powers to order the disgorgement of `ill-gotten gains' obtained through the violation of the securities laws." SEC v. First Pac. Bancorp, 142 F.3d at 1191. Indeed, the Ninth Circuit has recognized that Disgorgement plays a central role in the enforcement of the securities laws. "The effective enforcement of the federal securities laws requires that the [Commission] be able to make violations unprofitable. The deterrent effect of [a Commission] enforcement action would be greatly undermined if securities law violators were not required to disgorge illicit profits. . . . By deterring violations of the securities laws, disgorgement actions further the Commission's public policy mission of protecting investors and safeguarding the integrity of the markets.
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SEC v. Rind, 991 F.2d at 1491-92 (internal citations omitted); see also SEC v. First Pac. Bancorp, 142 F.3d at 1191; SEC v. Manor Nursing Centers, 458 F.2d 1082, 1104 (2d Cir. 1972) ("The effective enforcement of the federal securities laws requires that the SEC be able to make violations unprofitable.") Courts do not require an exact calculation of disgorgement. The Commission need only show "`a reasonable approximation of profits causally connected to the violation.'" SEC v. First Pac. Bancorp, 142 F.3d at 1192 n.6 (quoting SEC v. First Jersey Sec. Inc., 101 F.3d 1459, 1474 (2d Cir. 1996)). Once the Commission has established that the disgorgement figure reasonably approximates the unlawful proceeds, the burden of proof shifts to the defendant who must demonstrate that the disgorgement figure is not a reasonable approximation. SEC v. Hughes Capital Corp., 917 F. Supp. 1080, 1085 (D.N.J. 1996); SEC v. Benson, 657 F. Supp. 1122, 1133 (S.D.N.Y. 1987). Any uncertainty in the calculation of disgorgement "should fall on the wrongdoer whose illegal conduct created that uncertainty." SEC v. Patel, 61 F.3d 137, 141 (2d Cir. 1995) (internal citations omitted); see also SEC v. Hughes Capital, 124 F.3d at 455 ("'the risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty'"). The amount of disgorgement usually includes all gains flowing from a defendant's illegal activity. Seeger personally profited from his facilitation of the Hedge Funds' market-timing and late-trading schemes. CCM paid Seeger dividends on his shares of Class C stock. (Fact No. 56.) The amount of those dividends was driven completely by the amount of revenue that STC generated. (Fact Nos. 57 & 58.) Seeger received a total of $879,386 in dividends from February 2001 through the end of 2002. (Fact Nos. 69 & 72.). The fees that the Hedge Funds paid were a significant revenue stream for STC. Hartz alone paid STC more than $5.8 million in fees from July of 2000 through June 30, 2003. (Fact No. 74.) The fees that Hartz paid STC accounted for

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roughly 20% of STC's gross revenue for the years 2000 through 2002.9 But for STC's ability and willingness to help the Hedge Funds conceal their market-timing and late-trading activities, the Hedge Funds would not have paid STC these fees and STC would not have generated the amount of revenue that it did. If STC had not generated the amount of revenue that it did, then Seeger would not have received $879,386 in dividends. The Commission seeks to disgorge only 20% of the dividends that Seeger received, which amounts to $175,877. Although there is evidence to suggest that it may be appropriate to disgorge the full $879,386 in dividends,10 the Commission only seeks to disgorge about 20% of those dividends, which is proportionate to the 20% of STC's gross revenues that Hartz's fee generated. 3. Prejudgment Interest is Appropriate

Disgorgement normally includes prejudgment interest to ensure that the wrongdoer does not profit from the illegal activity. See SEC v. Manor Nursing, 458 F.2d at 1105; SEC v. Cross Fin. Servs., Inc., 908 F. Supp. 718, 734 (C.D. Cal. 1995). In the Ninth Circuit, the post-judgment interest rate mandated by 28 U.S.C. § 1961 is the appropriate rate at which to calculate pre-judgment interest unless the trial judge finds, on substantial evidence, that the equities of a particular case

The exact percentage is 22.7%. The Commission acknowledges that there is a discrepancy between the time during which Hartz paid fees to STC (mid-2000 through mid-2003) and the gross revenue figures (2000 through 2002). If the Commission were to include STC's gross revenue for 2003 in its calculation, then the percentage might be lower. In an effort to be fair, the Commission has dropped the percentage by a few points (from 22.7% to 20%) and it has not included Samaritan's fees (which totaled more than $1 million) in its calculation. While the Commission's calculation may not be exact, the Commission believes that it is a "reasonable approximation." See SEC v. First Pac. Bancorp, 142 F.3d at 1192 n.6. 10 During her deposition, Nicole (McDermott) Geremina, who was the STC employee who ran the retirement business, testified that the fees the Hedge Funds paid STC were the largest revenue stream at STC. (Fact No. 87.) It was her belief, based on her analysis of the business she was running, that STC's "ability to make money was predicated upon the revenue streams that [STC was] getting through [the Hedge Funds]." (Fact No. 88.) If STC's ability to make money were predicated on the fees it received from the Hedge Funds, then it is unlikely CCM would have paid Seeger any dividends without the Hedge Funds' fees.
9

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require a different rate. See Western Pac. Fisheries, Inc. v. S.S. President Grant, 730 F.2d 1280, 1289 (9th Cir. 1984). Thus, the Court should assess prejudgment interest, as calculated pursuant to 28 U.S.C. § 1961, on Seeger's ill-gotten gains. 4. The Court Should Award $240,000 in Civil Penalties

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) provide that the Commission may seek monetary civil penalties for violations of the Securities Act and the Exchange Act. The Commission seeks the imposition of a third-tier civil penalty.
11

Third-tier

penalties apply to violations of the Securities Act and Exchange Act which: (a) involved "fraud, deceit, manipulation, or reckless disregard for a regulatory requirement"; and (b) which "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." 15 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii). Here, a third-tier penalty is appropriate because Seeger's violations of the securities laws involved "fraud, deceit, [and] manipulation" and because Seeger's conduct created a significant risk that investors in the mutual funds in which the Hedge Funds traded would suffer substantial losses. Once the Court has determined the propriety of awarding a civil penalty, it must determine the appropriate amount. For each fraud violation, the maximum third-tier penalty is the greater of (1) $120,000 for a natural person or $600,000 for

The Securities Act and the Exchange Act provide three tiers of penalty amounts that correspond to specified degrees of culpability. See 15 U.S.C. §§ 77t(d) & 78u(d)(3). The amount of a first-tier penalty "shall be determined by the court in light of the facts and circumstances." For each violation, the maximum first-tier penalty is the greater of (1) $6,500 for a natural person or $60,000 for any other person, or (2) "the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii), 17 C.F.R. §§ 201.1001 & 201.1002 (2006). Second-tier penalties apply to violations of the Securities Act and Exchange Act which "involved fraud, deceit, manipulation or deliberate or reckless disregard of a regulatory requirement." 15 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii). For each violation, the maximum second-tier penalty is the greater of (1) $60,000 for a natural person or $300,000 for any other person, or (2) "the gross amount of pecuniary gain to such defendant as a result of the violation." 15 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii); 17 C.F.R. §§ 201.1001 & 201.1002 (2006).
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any other person, or (2) the "gross amount of pecuniary gain" to the defendant as a result of the violation. 15 U.S.C. §§ 77t(d)(2)(C) & 78u(d)(3)(B)(iii); 17 C.F.R. §§ 201.1001 & 201.1002 (2006). Thus, the Court may impose a penalty for each of Seeger's violations of the Securities Act or the Exchange Act. The penalty amount may be determined by assessing a penalty for each of the misrepresentations made. SEC v. Coates, 137 F. Supp. 2d 413, 428-30 (S.D.N.Y. 2001). Here, Seeger participated in three different fraudulent schemes over the course of several years, so the Court could impose a penalty for each of the schemes. Alternatively, the penalty amount can be determined by assessing a penalty for each investor ­ or mutual fund ­ defrauded. See SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 17 n.15 (D.D.C. 1998) ($1.2 million penalty, or one $100,000 penalty assessed for each of 12 investors that defendant defrauded). If this measure were used, Seeger's penalty would be in the millions of dollars (397 x $120,000), because the Hedge Funds traded in 397 different mutual funds. The Commission, however, only seeks $240,000, which is double the maximum third-tier penalty, in order to reflect the recurrent nature of Seeger's misconduct. III. CONCLUSION For the foregoing reasons, the Court should grant the Commission's Motion for Summary Judgment and order all the relief requested.

DATED: July 26, 2007

/s/ Molly M. White MOLLY M. WHITE Attorney for Plaintiff Securities and Exchange Commission

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Case 2:03-cv-02323-JWS

PROOF OF SERVICE I am over the age of 18 years and not a party to this action. My business address is: [X] U.S. SECURITIES AND EXCHANGE COMMISSION, 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California 90036.

Telephone: (323) 965-3998 Fax: (323) 965-3908 On July 26, 2007, I caused to be served the document entitled MEMORANDUM SUPPORTING COMMISSION'S MOTION FOR SUMMARY JUDGMENT AGAINST GRANT D. SEEGER upon the parties to this action addressed as stated on the attached service list: [X] OFFICE MAIL: By placing in sealed envelope(s), which I placed for collection and mailing today following ordinary business practices. I am readily familiar with this agency's practice for collection and processing of correspondence for mailing; such correspondence would be deposited with the U.S. Postal Service on the same day in the ordinary course of business. [ ] PERSONAL DEPOSIT IN MAIL: By placing in sealed envelope(s), which I personally deposited with the U.S. Postal Service. Each such envelope was deposited with the U.S. Postal Service at Los Angeles, California, with first class postage thereon fully prepaid. EXPRESS U.S. MAIL: Each such envelope was deposited in a facility regularly maintained at the U.S. Postal Service for receipt of Express Mail at Los Angeles, California, with Express Mail postage paid.

[ ]

[ ] [ ]

PERSONAL SERVICE: I caused to be personally delivered each such envelope by hand to the office of the addressee. FEDERAL EXPRESS: By placing in sealed envelope(s) designated by Federal Express with delivery fees paid or provided for, which I deposited in a facility regularly maintained by Federal Express or delivered to a Federal Express courier, at Los Angeles, California. ELECTRONIC MAIL: By transmitting the document by electronic mail to the electronic mail address as stated on the attached service list. FAX (BY AGREEMENT ONLY): By transmitting the document by facsimile transmission. The transmission was reported as complete and without error. (Federal) I declare that I am employed in the office of a member of the bar of this Court, at whose direction the service was made. I declare under penalty of perjury that the foregoing is true and correct. /s/ Molly M. White MOLLY M. WHITE

[ ] [ ]

[X]

Date: July 26, 2007

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SEC v. Security Trust Company, et al. United States District Court - District of Arizona Case No. CV 03-2323 PHX JWS (LA-2781) SERVICE LIST Jess A. Lorona, Esq. Dodge Anderson Mableson Steiner Jones & Horowitz, Ltd. 3003 N. Central Avenue, Suite 1800 Phoenix, AZ 85012-2909 Email: [email protected] Attorney for Defendant Grant D. Seeger

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