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Securities and Exchange Commission v. U.S. Funding Corp.

April 11, 2006


The opinion of the court was delivered by: William J. Martini, U.S.D.J.



Dear Counsel:

This matter comes before the Court on Plaintiff Securities and Exchange Commission's (the "SEC") motion for summary judgment against Defendant Angelica Gwinnett ("Gwinnett"). The SEC also moves to strike Gwinnett's affirmative defenses. There was no oral argument. Fed. R. Civ. P. 78. For the following reasons, the SEC's motion for summary judgment and motion to strike is GRANTED. Furthermore, the Court shall order various remedies as further explained below.


Gwinnett, a New Jersey resident, was the president, founder and sole owner of defendants U.S. Funding Company and U.S. Funding Corporation (collectively, "U.S. Funding"). (Plaintiff's Statement of Undisputed Material Facts at ¶ 1 [hereinafter "Pl.'s SMF"]). Gwinnett formed U.S. Funding Company in New Jersey in October 2001. (Id. at ¶ 3). She formed U.S. Funding Corporation, a New Jersey based corporation, in December 2001. (Id. at ¶ 4). Gwinnett's capital contribution of $39,526.00 constituted most of U.S. Funding's start-up capital. (Id. at ¶¶ 8-9; see also Affidavit of Louis H. Miron at ¶¶ 9-10 [hereinafter Miron Aff.]). Additional start-up capital for U.S. Funding came from investor contributions. (Pl.'s SMF at ¶ 10). U.S. Funding's business was factoring commercial accounts receivable.*fn1 (Id. at ¶ 11).

When Gwinnett started U.S. Funding, she had no prior experience in the factoring business other than performing bookkeeping for two companies that used factoring services and personally funding a one-time factoring transaction for a friend. (Id. at ¶ 12). Furthermore, she had no formal or informal business plan and did not prepare any profit/loss or other projections for U.S. Funding's operations during its first year. (Id. at ¶ 13). As president and sole owner of U.S. Funding, Gwinnett controlled the company's finances and was responsible for raising capital to fund U.S. Funding's business. (Id. at ¶¶ 16, 17-18). In addition, Gwinnett approved all terms of investor agreements used to raise money for U.S. Funding. (Id. at ¶¶ 20-21).

On October 11, 2001, Gwinnett caused U.S. Funding to enter into an agreement with a telemarketing company, Southeast Tracking Technologies, Inc. ("Southeast Tracking"), to assist in U.S. Funding's capitalization efforts. (Id. at 23). Gwinnett agreed that U.S. Funding would pay the telemarketing company a 40% commission on all funds it raised for U.S. Funding. (Id. at 25). On October 31, 2001, the telemarketer subcontracted with another telemarketer, Capital Concept Marketing, Inc. ("CCM") to assist in U.S. Funding's capitalization effort. (Id. at ¶ 26-27). Gwinnett agreed that U.S. Funding would pay CCM a 35% commission on all revenue raised for U.S. Funding. (Id. at ¶ 27-28).

Southeast Tracking and CCM sent packages of offering materials to potential investors (the "Investment Materials"). (See id. at ¶¶ 32-33, 36). The Investment Materials contained various documents, such as a cover letter describing U.S. Funding's business, "unaudited" financial statements stating that U.S. Funding had $2.2 million in assets, a list of thirteen "industries serviced," a letter from a satisfied U.S. Funding customer, wiring instructions for investors to wire funds to U.S. Funding's bank account in New Jersey, and a blank Accounts Receivable Purchase Agreement (the "Purchase Agreement") to be executed by the investor. (Id. at ¶ 34). To make an investment in U.S. Funding, investors transferred their accounts receivable to U.S. Funding by executing the Purchase Agreement (Id. at ¶ 37).

The Purchase Agreement promised investors a 20% or 25% return on their investment, depending on whether they entered into a one year or two year agreement with U.S. Funding. (Id. at ¶ 40). The investors received this return through four post-dated checks sent by U.S. Funding.*fn2 (See id. at ¶ 42). U.S. Funding agreed to return the entire investment principal at the end of the investment term, unless the investors gave notice that they would re-invest for another year. (Id. at ¶ 44). In return for this handsome profit, investors did nothing. (Id. at ¶ 57). All they had to do was transfer their accounts receivable to U.S. Funding and wait for their return.

Between October 2001 and April 30, 2002, U.S. Funding raised approximately $2,530,000.00 from 80 investors (the "Transaction"). (Id. at ¶ 29). U.S. Funding, though, did not register the Transaction with the SEC and no registration statement was filed or in effect as to the Transaction. (Id. at ¶ 31). All funds received from the investors were deposited into a single bank account and were used for various purposes. (Id. at ¶ 54). One such purpose was to purchase new accounts receivable. (Id. at ¶ 55). Other purposes, however, included paying Gwinnett's salary, satisfying her gambling debts, paying for her purchases at various department stores such as Saks Fifth Avenue and Victoria's Secret, and funding several related companies that Gwinnett's family and friends operated. (See id. at ¶¶ 49-52, 55). In addition, funds in the account were used to pay the telemarketers commissions.

(Id. at ¶¶ 49, 55)

The Investment Materials misrepresented and ommitted many key facts about U.S. Funding. For instance, the Investment Materials misrepresented: (1) that as of September 30, 2001, U.S. Funding had over $2.2 million in assets; (2) that U.S. Funding serviced thirteen industries, such as "food," "telemarketing," and "transportation," even though it had not engaged in any such businesses prior to this date; (3) that U.S. Funding was a "privately-funded" business that had operated since 1998; (4) that U.S. Funding owned a substantial portfolio of accounts receivable; (5) that investments in U.S. Funding would be used solely to acquire new accounts receivable; and (6) that U.S. Funding would secure UCC-1 filings to protect the interests of investors. (See id. at ¶¶ 45-52). Furthermore, the Investment Materials omitted many important facts. For example, the Investment Materials did not disclose that investors' funds would be used to pay the telemarketers' commissions along with Gwinnett's personal expenses. (Id. at ¶¶ 49-50).

On December 11, 2001, the Pennsylvania Securities Commission sent Gwinnett and U.S. Funding a cease and desist order. (See Declaration of Robert F. Durham at Ex. 7 [hereinafter Durham Decl.]). The order explained that the Purchase Agreements constituted securities and, therefore, must be registered. (See id.) Because the Purchase Agreements were not registered, the Pennsylvania Securities Commission ordered Gwinnett to cease and desist from selling the Purchase Agreements in Pennsylvania. (See id.).

On May 2, 2002, the SEC filed a complaint against Gwinnett for violating various federal securities laws. The SEC now moves for summary judgment against Gwinnett, arguing that she violated Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a) ("Section 17(a)"), Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) ("Section 10(b)"), Rule 10b-5, 17 C.F.R. § 240.10b-5, and Sections 5(a) and 5(c) of the Securities Act, 15 U.S.C. §§ 77e(a), (c) ("Section 5(a)" and "Section 5(c)"). The SEC also moves to strike the affirmative defenses contained in Gwinnett's answer to the SEC's complaint. Furthermore, the SEC requests that the Court order disgorgement of Gwinnett's ill-gotten gains plus payment of pre-judgement interest. The SEC further requests that the Court impose civil penalties and order Gwinnett to comply with previous orders of this Court regarding the payment of contempt fines and attorneys' fees. Gwinnett does not oppose the SEC's motions.


I. Standard of Review

Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. See Fed. R. Civ. P. 56. Rule 56(e) requires that when a motion for summary judgment is made, the nonmoving party must set forth specific facts showing that there is a genuine issue for trial. See id.; see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). The mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment. Only disputes over facts that might affect the outcome of the lawsuit under governing law will preclude the entry of summary judgment. See Anderson, 477 U.S. at 247-48. If the evidence is such that a reasonable fact-finder could find in favor of the nonmoving party, summary judgment should not be granted. See id.; see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

Fed. R. Civ. P. 56(e) provides that "if the adverse party does not ... respond, summary judgment, if appropriate, shall be entered against the adverse party." It is well settled "that this does not mean that a moving party is automatically entitled to summary judgment if the opposing party does not respond." Anchorage Assoc. v. Virgin Islands Bd. of Tax Review, 922 F.2d 168, 175 (3d Cir. 1990). The Court must first determine whether summary judgment is appropriate -- that is, whether the moving party has shown itself to be entitled to judgment as a matter of law."

Id. Furthermore, when considering an unopposed motion for summary judgment, "it is entirely appropriate for this court to treat all facts properly supported by the movant to be uncontroverted." Allebach v. Sherrer, Civ. No. 04-287, 2005 U.S. Dist. LEXIS 15626, at *5 (D.N.J. July 27, 2005)(citing Anchorage Assoc., 922 F.2d at176).

II. The U.S. Funding Investments Constitute Securities Under 15 U.S.C. § 77b(a)(1) and § 78c(a)(1)

The initial question the Court must address is whether the investments in question constitute a security. The SEC contends that the Purchase Agreements are a type of security known as "investment contracts." See 15 U.S.C. ยงยง 77b(a)(1) and 78c(a)(1) (defining the term "security" as including investment contracts). The Supreme Court, in SEC v. W.J. Howery & Co., 328 U.S. 295, 301 (1946), provided the test for determining whether an instrument constitutes an investment contract. Under the Howery Test, an instrument is an investment contract if it involves: "(1) 'an investment of money,' (2) 'in a common enterprise,' (3) ...

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