Securities and Exchange Commission v. Johnson

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
SECURITIES & EXCHANGE :
COMMISSION, :
:
Plaintiff, :
:
v. : Civil Action No. 05-36 (GK)
:
CHARLES JOHNSON, JR., et al., :
:
Defendants. :
AMENDED MEMORANDUM OPINION
On January 16, 2009, Plaintiff Securities & Exchange Commission (“SEC”) filed a Motion
for Summary Judgment against Defendant Charles Johnson, Jr. (“Johnson”). Johnson had been
represented by Nicholas I. Porritt and others, of Wilson Sonsini Goodrich & Rosati, P.C. (“WSGR”).
On February 24, 2009, the Court granted WSGR’s unopposed Motion to Withdraw as Johnson’s
attorneys. No counsel ever entered an appearance thereafter on behalf of Johnson, and the Court has
proceeded on the assumption that he is acting pro se. The Court is well aware that Johnson was
convicted in a criminal trial and is now imprisoned serving his sentence on those charges.
On May 19, 2009, the Court issued an Order, pursuant to Fox v. Strickland, 837 F.2d 507(D.C. Cir. 1980), informing Johnson of the consequences of failing to respond to a dispositive
motion such as the pending Motion for Summary Judgment. In particular, the Court informed
Johnson that under Local Civil Rule 7(b), the Court may treat the Motion as conceded if the
opposing party does not respond to it within 11 days of the date of service. In the Order of May 19,
2009, the Court required Johnson to respond to Plaintiff’s Motion by July 15, 2009, and said
specifically that “[i]f Defendant does not respond by that date, the Court will treat the Motion as
conceded and, if the circumstances warrant, grant the relief sought.” Johnson has failed to file any
response to Plaintiff’s Motion for Summary Judgment.
Johnson’s first criminal trial began in October 2006. During that trial, Johnson tried,
unsuccessfully, to have his defense attorney use a false document that Johnson had manufactured.
The attorney, who was in no way responsible for the creation of that document, then withdrew and
Johnson was severed from the other three defendants in the trial.1 Johnson was then tried in a bench
trial before Judge Walter D. Kelley, Jr. in October 2007. Johnson was represented by counsel
throughout that trial, which lasted more than 10 days. He was found guilty of securities fraud,
conspiracy to commit securities fraud, witness tampering, and obstruction of justice. On November
14, 2008, Judge Kelley sentenced Johnson to 108 months in prison and ordered him to pay restitution
of $9.6 million.
This civil case was stayed as to Johnson because of the pending criminal proceeding in the
United States District Court for the Eastern District of Virginia. It was ultimately tried by this Court
against three Defendants in March 2008: Benyo, Wakeford, and Michael Kennedy. Those charges
involved the same basic nucleus of facts upon which this Motion for Summary Judgment depends.
Consequently, the Court is very familiar with the facts surrounding the transactions and conduct
upon which the SEC bases its claims of civil liability.
The jury in this case found Benyo liable on one count of aiding and abetting securities fraud,
and found Wakeford and Michael Kennedy not liable on any of the civil charges. The SEC later
agreed to dismiss the civil charges against Defendant Tuli.
1
The 2006 trial proceeded as to the other Defendants: Christopher Benyo, Kent
Wakeford, and John Tuli. All three were acquitted of all charges.
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The Court has considered the lengthy and detailed Motion for Summary Judgment filed by
the SEC, the comprehensive and detailed opinion by Judge Kelley establishing Johnson’s guilt for
all the criminal acts asserted against him, this Court’s own knowledge of the evidence presented in
the civil trial held in March 2008, and the applicable case law, and concludes that the Motion for
Summary Judgment should be granted for the following reasons.
1. Under LCvR 7(b), the Court has the authority to grant such dispositive motions when
no opposition has been filed. No opposition has been filed and there is no reason not to exercise
such authority in this case.
2. Given the fact that Johnson has been criminally convicted and sentenced on charges
which arise out of the transactions and conduct that support the SEC’s civil complaint in this case,
and which were credited by all fact finders in both the criminal and civil cases, Johnson is estopped
under the doctrine of collateral estoppel from denying the facts at issue that were litigated in the
criminal and civil cases. SEC v. Belzerian, 29 F.3d 689, 693 (D.C. Cir. 1994), citing Parkland
Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5 (1979); SEC v. Gruenberg, 989 F.2d 977, 978 (8th Cir.
1993); SEC v. Freeman, 290 F. Supp.2d 401, 405 (S.D.N.Y. 2003). Consequently, the Court
concludes that there is no genuine issue of material fact and that the SEC is entitled to summary
judgment as a matter of law pursuant to Fed. R. Civ. P. 56.
3. The SEC has requested a number of different remedies which should be granted in
order to protect the public from further violation of the applicable securities laws.
a. Based on the conduct of which Johnson has been convicted, the SEC’s request
to permanently enjoin him from committing future violations of the applicable securities laws is
more than justified. Under SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1168 (D.C. Cir. 1978), the
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SEC has met the ultimate test of whether the Defendant’s past conduct indicates that there is a
reasonable likelihood of further violations in the future.
In the present case, the illegal conduct stopped only because PurchasePro and the auditors
at Arthur Andersen eventually discovered that revenues were being improperly claimed from certain
transactions, such as the one with AuctioNet. That violation of the securities laws was by no means
an isolated incident. Johnson committed numerous violations over many months in the first half of
2001. He has never demonstrated any recognition of the wrongfulness of his conduct, and in fact
has obstructed justice by manufacturing documents in his first criminal trial and leading his
employees to destroy documents and lie to investigators. Finally, Johnson may well have
opportunities to violate the law after his release from prison. He will be approximately 55-56 years
old when he is released, an age at which it is certainly possible for him to be involved in other
business ventures.
b. The SEC also requests that the Court enjoin Johnson from serving as an
officer or director of a publicly-held company. Again, the facts established in this case demonstrate
the appropriateness of this remedy. Johnson’s actions involved repeated efforts to deceive investors
in PurchasePro and the investing public at large. These actions, including directions to subordinates
to forge signatures and falsify documents, are flagrant and serious. Johnson, as the highest executive
at PurchasePro, developed the fraudulent schemes and then directed his subordinates to carry them
out. He had a large financial stake in this fraud, given that he had pledged his own PurchasePro
stock in order to obtain a $100 million line of credit; his fraudulent activities were designed, in part,
to avoid having that line of credit terminated or restricted. All of these factors support imposition
of a life-time bar on serving as an officer or director of publicly-held companies.
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c Civil monetary penalties are authorized for violations of the Securities
Exchange Act of 1934 under § 21(d)(3)(A). Section 20(d) of the Securities Act of 1933, 15 U.S.C.
§ 77t(d), contains analogous provisions for violations of that statute. Johnson’s fraudulent activities
and obstruction of justice were so flagrant and so serious that measures to achieve maximum
deterrence are appropriate.
Section 21(d)(3)(B) of the Exchange Act contains a three-tier range of penalty amounts that
may be imposed and provides that the penalty cannot exceed the greater of “the gross amount of [the
Defendant’s] pecuniary gain” that resulted from the statutory violation. While the statute also allows
imposition of amounts listed for each of the specific tiers, one appropriate method of determining
the amount of the penalty is to set the Defendant’s pecuniary gain as the outside limit. Here Johnson
obtained a pecuniary gain of at least $3 million as a result of his illegal activities.2 Therefore, it is
perfectly appropriate to impose a civil penalty of $3 million.
For all these reasons, it is hereby
ORDERED, that Plaintiff’s Motion for Summary Judgment should be granted. An order
will accompany this Memorandum Opinion.
September 11, 2009 /s/
Gladys Kessler
United States District Judge
Copies via ECF to all counsel of record
2
In April 2001, PurchasePro’s directors decided to pay Johnson a bonus of $2 million
and to reimburse him for $1 million in expenses. Judge Kelley specifically found that “[t]he Board
would not have authorized the $3 million payment to [Johnson] but for management’s assurances
that PurchasePro had met its Q1 Earnings guidance.” Thus, it is clear that it was Johnson’s
fraudulent efforts to artificially inflate PurchasePro’s earnings that enabled him to seek and obtain
the $3 million from the Board.
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