Ex-SEC Atty Asks 2nd Circ. To Nix $2M Ponzi Scheme Penalty
by Carmen Germaine
A former U.S. Securities and Exchange Commission attorney has urged the Second Circuit to toss a $2 million judgment entered against him in an SEC suit alleging he helped a paving stone company run a Ponzi scheme, saying the penalty should have waited until his criminal trial.
Fredric Aaron, a Nassau County lawyer and onetime SEC counsel, filed a brief Tuesday urging the Second Circuit to vacate U.S. District Judge Jed Rakoff’s September decision ordering him to pay more than $2 million in disgorgement and penalties over his role in what the SEC and U.S. authorities said was a Ponzi scheme that allegedly scammed investors out of $26 million.
Aaron said Judge Rakoff’s order contradicted his 2013 settlement with the SEC, which said that the monetary judgment against him wouldn’t be calculated until a month after his criminal trial ended. His trial is currently set to begin in October.
“While the parties’ agreement (and the district court’s consent thereto) … may have become a source of irritation to the district court, there was no legal basis for upsetting the agreement of the parties on this issue,” the brief said.
The SEC and U.S. prosecutors each brought cases against Aaron and PermaPave Industries executives Eric Aronson and Vincent Buonauro in October 2011. According to the government, PermaPave and various affiliates raised more than $26 million from more than 140 investors between 2006 and 2010 by falsely claiming that there was huge demand for its product, a porous paving stone, and used funds to make payments to earlier investors as well as to pay personal expenses.
Aaron, who worked in the SEC’s New York office between 1991 and 1992, according to the website for his solo practice, reached a settlement with the SEC in December 2013. He consented to five-year bars on practicing before the SEC, participating in penny stock offerings and acting as an officer or director, and both parties stipulated that monetary penalties wouldn’t be decided until after his criminal trial, according to the brief.
But Judge Rakoff said in February 2015 that he would order briefing on the penalties even if Aaron’s trial hadn’t started, according to the brief, and entered judgment for the SEC in an Aug. 24 decision finding that PermaPave was “nothing more than a vehicle for fraud.”
The judge took aim at Aaron for allegedly using his status as a lawyer and former SEC counsel to reassure investors that their money was safe, saying, “Most disturbing to the court is Aaron’s blatant abuse of his position and knowledge as a lawyer.”
Under a September final judgment, Judge Rakoff ordered Aaron to pay $1.8 million in disgorgement and interest and a $250,000 penalty; Aronson to pay $18.2 million in disgorgement and interest and a $1.4 million civil penalty; and Buonauro to pay $12.6 million in disgorgement and interest and a $10,000 penalty.
In his brief with the Second Circuit, Aaron argued that Judge Rakoff erred by ordering the penalties before the criminal case concluded, saying neither he nor the SEC had sought a ruling on monetary penalties and that the judge impermissibly altered the settlement and the judgment entering the agreement.
He also argued that he was unable to fully defend himself in briefs on the monetary penalty while the criminal case was ongoing because he couldn’t offer facts or information pertaining to the case without being a witness against himself.
Even if Judge Rakoff was able to impose the penalty, Aaron said, the disgorgement amount was too high. He argued he shouldn’t be required to disgorge all of the $282,580 in legal fees he collected from PermaPave because the fees were for legitimate legal services, and said disgorgement of $212,500 in profits from a temporary increase in stock value was unwarranted because he didn’t actually sell the stock or realize the profits.
Aaron also objected to Judge Rakoff’s decision to hold him jointly liable for just over $1 million that was transferred out of PermaPave in cash, saying there was no evidence he received any of the cash and only Aronson had control of the accounts, and argued that the $250,000 penalty was unnecessary.
The SEC declined to comment. A representative for Aaron did not immediately respond Thursday to a request for comment.
Aaron is represented by Andrew M. St. Laurent of Harris St. Laurent & Chaudhry LLP.
The SEC is represented by Paul Gerard Alvarez.
The case is U.S. Securities and Exchange Commission v. Aronson et al., case number 15-3446, in the U.S. Court of Appeals for the Second Circuit.
The lower court case is U.S. Securities and Exchange Commission v. Aronson et al., case number 11-cv-07033, in the U.S. District Court for the Southern District of New York.
–Additional reporting by Max Stendahl. Editing by Kelly Duncan.