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UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 07-cv-61693 (JAL)
________________________________________________
)
SECURITIES AND EXCHANGE COMMISSION, ))
Plaintiff, )
)
)
v. )
)
)
JOSEPH J. MONTEROSSO, and )
LUIS E. VARGAS, )
)
Defendants. )________________________________________________)
PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS
OPPOSITION TO DEFENDANT JOSEPH E. MONTEROSSOS
MOTION TO DISMISS
Of Counsel: Jeffery T. Infelise (DC 546998)
Cheryl J. Scarboro Special Florida Bar No. A5501154
infelisej@sec.gov
Reid A. Muoio
Special Florida Bar No. A5501160
muoior@sec.gov
Brent Mitchell
Special Florida Bar No. A5501159
mitchellb@sec.gov
100 F Street NE
Washington, D.C. 20549
(tel) (202) 551-4904 (Infelise)
(fax) (202) 772-9362 (Infelise)
January 28, 2008 Attorneys for Plaintiff,
Securities and Exchange Commission
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TABLE OF CONTENTS
TABLE OF AUTHORITIES ........................................................................................................ ii
PROCEDURAL HISTORY ........................................................................................................... 1
ARGUMENT ................................................................................................................................ 3
I. Standards Of Review .................................................................................................. 3
II. The Complaint Is Plead With Adequate Particularity ................................................ 4
III. The Complaint Properly Alleges Claims Upon Which ReliefMay Be Granted ....................................................................................................... 7
A. The Complaint Properly Alleges Scienter Claims ........................................ 7
1. The Complaint Properly Alleges That Monterosso Is Liable
For Primary Fraud Violations ........................................................... 7
2. The Complaint Properly Pleads Scienter ........................................ 11
B. The Complaint Properly Alleges Aiding And Abetting Claims .................. 13
C. The Complaint Properly Pleads Violations of Exchange
Act Rules 13b2-1 and 13b2-2 ..................................................................... 17
1. Rule 13b2-1: Falsifying Books and Records ................................... 17
2. Rule 13b2-2: False Statements to Auditors ..................................... 18
CONCLUSION ........................................................................................................................... 19
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TABLE OF AUTHORITIES
CASES
Aaron v. S.E.C., 446 U.S. 680 (1980) .............................................................................. 8
Appalachian Enterprises, Inc. v. Epayment Solutions Ltd., No.
01-civ-11502, 2004 WL 2813121 (S.D.N.Y. Dec. 8, 2004) ....................................... 5
Bruhl v. Price Waterhousecoopers International, No. 03-23044-civ, 2004
WL 997362 (S.D. Fla. Mar. 27, 2007) ........................................................................ 5
Castro v. Sec. of Homeland Security, 472 F.3d 1334 (11th Cir. 2006) ............................. 3
Cippola v. County of Rensselaer, 129 F. Supp. 2d 436 (N.D.N.Y. 2001) ........................ 7
Conley v. Gibson, 355 U.S. 41 (1957) .............................................................................. 3
Cordova v. Lenman Brothers, Inc., F. Supp. 2d __, 2007, No. 05-21169, WL 4287729
(S.D. Fla. 2007) ........................................................................................................... 5
In re Eagle Building Technology, Inc. Sec. Litigation, 319 F. Supp. 2d 1318
(S.D. Fla. 2004) ......................................................................................................... 13
Friedlander v. Nims, 755 F.2d 810 (11th Cir. 1985) ........................................................ 4
Fujisawa Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720 (N.D. Ill. 1993) .................... 4
In re Global Crossing, Ltd. Sec. Litigation, 322 F. Supp. 2d 319 (S.D.N.Y.
2004) ......................................................................................................................... 11
Glover v. Liggett Group, Inc., 459 F.3d 1304 (11th Cir. 2006) ........................................ 3
Hishon v. King & Spalding, 467 U.S. 69 (1984) ........................................................ 3, 16
In re Microstrategy, Inc. Sec. Litigation, 115 F. Supp. 2d 620 (E.D. Va.
2000) ......................................................................................................................... 13
National Organization for Women, Inc. v. Scheidler, 510 U.S. 249 (1994) ..................... 3
In re Parmalat Sec. Litigation, 376 F. Supp. 2d 472 (S.D.N.Y. 2005) ............................ 11
Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015 (11th Cir. 2004) ............................... 12
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In re Royal Ahold N.V. Sec. & ERISA Litigation, 351 F. Supp. 2d 334 (D.Md. 2004) .................................................................................................................. 10
Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986) ............................ 14
S.E.C. v. Carriba Air Inc., 681 F.2d 1318 (11th Cir. 1982) ..................................... 11, 12
S.E.C. v. Cedric Kushner Promotions, Inc., 417 F. Supp. 2d 326 (S.D.N.Y.
2006) ................................................................................................................... 15, 16
S.E.C. v. Collins & Aikens Corp., F. Supp. 2d , 2007 WL 4480025(S.D.N.Y. Dec. 21, 2007) ................................................................................ 8, 10, 12
S.E.C. v. Converge Global, Inc., No. 04-80841cv, 2006 WL 907567 (S.D.Fla. March 10, 2006) ................................................................................................... 9
S.E.C. v. Dauplaise, No. 05-1391cv, 2006 WL 449175 (M.D. Fla. Feb. 22,2006) ....................................................................................................................... 8, 9
S.E.C. v. Digital Lightwave, 196 F.R.D. 698 (M.D. Fla. 2000) ..................................... 12
S.E.C. v. Dunlap, 2002 WL 1007626 (S.D. Fla. March 27, 2002) ................................... 8
S.E.C. v. Gane, 2005 WL 90154 (S.D.Fla .Jan. 4, 2005) ............................................... 13
S.E.C. v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004) ...................................................... 11
S.E.C .v. Holschuh, 694 F.2d 130 (7th Cir. 1982) .................................................... 10, 13
S.E.C. v. KPMG, 412 F. Supp. 2d 349 (S.D.N.Y. 2006) .................................................. 8
S.E.C. v. Lucent Technology, Inc., 363 F. Supp. 2d 708 (D.N.J. 2005) ..................... 9, 12
S.E.C. v. McNulty, 137 F.3d 732 (2nd Cir 1998) ........................................................... 17
S.E.C. v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007) .................................... 8
S.E.C. v. Nacchio, 438 F. Supp. 2d 1266 (D. Colo. 2006) ............................................. 10
S.E.C. v. Parnes, No. 1-civ-0763, 2001 WL 1658275 (S.D.N.Y. Dec. 26, 2001) ............ 5
S.E.C. v. Physicians Guardian Unit Investment Trust, 72 F. Supp. 2d
1342 (M.D. Fla. 1999) ............................................................................................ 3, 4
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S.E.C. v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y. 1997) ................................... 13, 17
S.E.C. v. Solow, No. 06-81041cv, 2007 WL 1970806 (S.D. Fla. May 10,
2007) ......................................................................................................................... 11
S.E.C. v. Treadway, 354 F. Supp. 2d 311 (S.D.N.Y. 2005) ............................................. 8
S.E.C. v. U.S. Environmental, Inc., 155 F.3d 107 (2d. Cir. 1998) ................................. 11
In re Suprema Specialities, Inc. Sec. Litigation, 438 F.3d 256 (3d Cir.
2006) ..................................................................................................................... 9, 12
Tellabs, Inc. v. Makor Issues and Rights, Ltd., U.S. , 127 S. Ct. 2499
(2007) ........................................................................................................................ 13
Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11 (1st Cir. 1984) ........................... 4
Ziemba v. Cascade International, Inc., 256 F.3d 1194 (11th Cir. 2001) ....................... 4, 8
REGULATIONS
17 C.F.R. 240.13b2-2 ................................................................................................... 18
17 C.F.R. 240.3b .......................................................................................................... 18
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UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF FLORIDA
CASE NO. 07-cv-61693 (JAL)
________________________________________________
)
SECURITIES AND EXCHANGE COMMISSION, ))
Plaintiff, )
)
)
v. )
)
)
JOSEPH J. MONTEROSSO, and )
LUIS E. VARGAS, )
)
Defendants. )________________________________________________)
PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS
OPPOSITION TO DEFENDANT JOSEPH E. MONTEROSSOS
MOTION TO DISMISS
Pursuant to Rule 7 of the Federal Rules of Civil Procedure and Local Rule 7.1, plaintiff,
the Securities and Exchange Commission (the Commission), respectfully submits its
memorandum of law in support of its opposition to the defendant, Joseph E. Monterossos
(Monterosso) motion to dismiss the Commissions complaint. For the reasons set forth below,
the Court should deny both motions.
PROCEDURAL HISTORY
On November 21, 2007, the Commission filed a complaint against defendants
Monterosso and Vargas alleging that from about July 2004, through September 2006, they
engaged in a fraudulent scheme to generate fictitious revenue for GlobeTel Communications
Corp. (GlobeTel). Specifically, they created false invoices that appeared to record purchases
and sales by three of GlobeTels, wholly-owned subsidiaries that never occurred. The Complaint
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further alleges that as a direct result of defendants fraudulent scheme, GlobeTel issued periodic
reports, registration statements and press releases that misled investors because they materially
overstated GlobeTels financial results for at least the period from the third quarter of 2004
through the second quarter of 2006. Compl. 1.
The defendants fraudulent scheme involved the creation of false invoices by Monterosso
and Vargas that made it appear that GlobeTels three wholly-owned subsidiaries, Centerline
Communications, LLC (Centerline), Volta Communications, LLC (Volta), and Lonestar
Communications, LLC (Lonestar) engaged in the buying and selling of telecom minutes with
other wholesale telecom companies. In reality, there were no transactions under the so-called
off-net program. Two of GlobeTels subsidiaries Volta and Lonestar actually did no
business. The third subsidiary, Centerline, reported millions of dollars in business with
Monterossos and Vargas own private company, Carrier Services Inc. (CSI),that never
occurred. Compl. 3. In order to substantiate the fictitious revenue reported in the fake
invoices, the defendants obtained call detail records (CDRs) that purported to document the
calls that related to the invoices and submitted them to GlobeTel. All of CDRs obtained were
false in that the calls documented in the CDRs were not related in any way to any minutes
bought or sold by GlobeTels subsidiaries. Compl. 42, 43, 48, 49, 53, 54.
As a result of defendants fraudulent scheme, GlobeTels books, records and accounts
falsely and inaccurately reflected the companys financial condition, Compl. 85, and caused
GlobeTel to falsely report to its investors and auditors that between September 2004 and June
2006, the company and its wholly-owned subsidiaries generated nonexistent revenue of $119
million that accounted for approximately 80 percent of the revenue GlobeTel reported during this
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period. Compl. 2. In addition, the false invoices and false CDRs that Monterosso and Vargas
provided to GlobeTel as part of their fraudulent scheme resulted in material, false and misleading
statements to GlobeTels accountants and auditors. Compl. 87-90.
On December 7, 2007, and on December 13, 2007, Monterosso filed unopposed motions
to extend the time to respond to the Commissions Complaint, which were granted by the Court.
Dkt. Nos. 12, 13, 15, 17. On January 11, 2007, Monterosso filed a motion to dismiss the
Commissions complaint pursuant to Fed. R. Civ. P. (Rule) 12(b)(6), and 9(b). Dkt. No. 24.
ARGUMENT
I. Standards Of Review
In resolving a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court should
accept the factual allegations in the complaint as true and construe them in the light most
favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Castro v. Sec. of
Homeland Security, 472 F.3d 1334, 1336 (11 Cir. 2006), citing Hill v. White, 321 F.3d 1334th
(11 Cir. 2003). [A] complaint should not be dismissed for failure to state a claim unless itth
appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which
would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Glover v. Liggett
Group, Inc., 459 F.3d 1304, 1308 (11 Cir. 2006); Castro, 472 F.3d at 1336. The Commissionsth
complaint must be sustained if relief could be granted under any set of facts that could be
proved consistent with the allegations. National Org. for Women, Inc. v. Scheidler, 510 U.S.
249, 256 (1994).
The purpose of Fed. R. Civ. P. 9(b) is to provide the defendant with sufficient notice and
to enable him to prepare answers to allegations of fraud. S.E.C. v. Physicians Guardian Unit Inv.
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Trust, 72 F. Supp. 2d 1342, 1352 (M.D. Fla. 1999); see Wayne Investment, Inc. v. Gulf Oil
Corp., 739 F.2d 11, 13 (1st Cir. 1984). As noted in Physicians Guardian, 72 F. Supp. 2d at 1352:
[W]hen considering the question of whether or not a pleading of fraud is alleged
with adequate particularity in a securities law context, this Court must not readRule 9(b) of the Federal Rules of Civil Procedure to abrogate the notice pleading
requirements of Rule [8] of the Federal Rules of Civil Procedure. Friedlander v.
Nims, 755 F.2d 810 (11 Cir. 1985). Therefore, the court, in considering ath
motion to dismiss for failure to plead fraud with particularity, must be careful to
harmonize the directives of Fed. R. Civ. P. Rule 9(b) with the broader policy of
notice pleading.
See also Ziemba v. Cascade Intl, Inc., 256 F.3d 1194, 1202 (11 Cir. 2001); accord, Fujisawath
Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720, 726 (N.D. Ill. 1993) (Rule 9(b) . . . must be
read in conjunction with Rule 8, which requires a short and concise pleading).
Rule 9(b) does not require nor make legitimate the pleading of detailed evidentiary
matter. Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979). Pleading additional
evidentiary details would contravene the standards of Rule 8 while serving neither purpose of
Rule 9(b) putting a defendant on notice and enabling him to prepare an answer.
II. The Complaint Is Plead With Adequate Particularity
Monterosso does not claim that the allegations in the Complaint lack specificity
concerning the nature of the conduct and misrepresentations that the Commission alleges
constitute the fraud in this case. Neither does he claim that the Complaint is ambiguous with
respect to when the conduct and misrepresentations occurred. Monterossos only claim is that
the Complaint does not satisfy the specificity requirements of Fed. R. Civ. P. 9(b) because it
lumped him together with Vargas when describing the conduct that is the basis for the claims
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Mem. at ____, refers to the Memorandum of Law In Support of Defendant1
Joseph J. Monterossos Motion to Dismiss.
5
against them. Mem. at 8-9. Monterosso claims that this lumping hinders his ability to defend1
against the allegations. Mem. at 9. Monterossos argument is based upon a misstatement of the
nature of the allegations against him and Vargas.
First, contrary to Monterossos claim, the Complaint does not refer to Monterosso and
Vargas indiscriminately as a group. To the contrary, the Complaint identifies each defendant
separately and describes the conduct in which each is alleged to have engaged. Compl. 40-43,
46-49, 52-54. This stands in stark contrast to the cases in which it has been held that a
complaint fails to adequately distinguish between the conduct attributable to multiple plaintiffs.
See Cordova v. Lehman Bros., Inc., --F.Supp.2d --, 2007 WL 4287729, *6 (S.D. Fla. 2007)
(complaint repeatedly referred to six unrelated defendants collectively as Financial Institution
Defendants); Bruhl v. Price Waterhousecoopers Intl, No. 03-23044-civ, 2004 WL 997362, *3-
*4 (S.D. Fla. Mar. 27, 2007) (complaint referred to two separate corporate entities collectively as
Citco Defendants); Appalachian Enterprises, Inc. v. ePayment Solutions Ltd., slip op., No. 01-
civ-11502, 2004 WL 2813121 (S.D.N.Y. Dec. 8, 2004) (complaint did not differentiate between
acts taken by 17 different defendants, or how the defendants were interrelated); S.E.C. v. Parnes,
No. 1-civ-0763, 2001 WL 1658275, *4 (S.D.N.Y. Dec. 26, 2001) (complaint made
undifferentiated reference to four different defendants as ADAR defendants).
Additionally, the allegations in the Complaint clearly raise the inference that Monterosso
and Vargas acted in concert to perpetrate the fraud in this case. It alleges that prior to entering
any agreement with GlobeTel, Vargas worked as Monterossos bookkeeper. Compl. 17. It also
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alleges that after Vargas started his own telecom company, CSI, Monterosso handled all the
negotiations for the company. Compl. 18. Additionally, after CSI entered the agreement with
GlobeTel, Vargas reported to Monterosso throughout their work for GlobeTel. Compl. 24. The
Complaint also alleges that Vargas personally made a request for additional invoices from
another telecom company that Monterosso had previously contacted to obtain invoices. Compl.
27-28. Thus, the allegations in the Complaint assert that the actions of Monterosso and Vargas
were inextricably related and that they acted in concert to perpetrate the fraud in this case. Cf.
Appalachian Enterprises, 2004 WL 2813121 at *6. (complaint did not meet specificity
requirements of Rule 9(b) because it did not differentiate between which acts were taken by
which of the 17 defendants, or how the parties were interrelated).
The allegations in the Complaint that actions were taken by Monterosso or Vargas, at
Monterossos direction reflect the relationship between the two defendants established by the
other factual allegations and assert that Monterosso was responsible for all the fraudulent actions
taken either by him or by Vargas. These allegations clearly put Monterosso on notice that he
must defend against the Commissions assertion that between September 2004 and June 2006, he
created false invoices, obtained false CDRs and submitted false invoices or CDRs to GlobeTel or
that he directed Vargas to do so.
Monterosso suggests that the Complaint improperly lumps the defendants together
because it alleges that he and Vargas violated the Anti-Fraud provisions in the same manner.
Mem. At 8. However, when an allegation only applies to either Monterosso or to Vargas, the
allegation makes that fact clear. Compl. 19, 21, 23-30, 33, 37. In this case, a large number of
the allegations apply to both Monterosso and Vargas because they both engaged in the same
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fraudulent acts. The combination of the allegations that apply to both Vargas and Monterosso
does not create confusion and does not violate the specificity requirement of Rule 9(b). The
Commission is not required to plead separate claims for relief with respect to Vargas and
Monterosso when the conduct alleged to be the basis for the claim against both of them is
identical. See Cippola v. County of Rensselaer, 129 F.Supp.2d 436, 444-45 (N.D.N.Y. 2001)
(proper to combine allegations against multiple defendants where it is alleged that all defendants
engaged in the same conduct).
III. The Complaint Properly Alleges Claims Upon Which Relief May Be Granted
Monterossos various arguments concerning why the claims in the Commissions
complaint should be dismissed pursuant to Rule 12(b)(6) are without merit because they are
based upon a misreading of the allegations in the complaint and a misunderstanding of the law.
A. The Complaint Properly Alleges Scienter Claims
1. The Complaint Properly Alleges That Monterosso Is Liable For
Primary Fraud Violations
Monterosso claims that, with respect to the claim that he violated Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder, the Complaint fails to allege that he made a material
misstatement or omission. Mem. at 9. Monterossos argument is premised upon his assertion
that he cannot be held liable for GlobeTels misstatements because they were not publicly
attributed to him and, therefore, have failed to properly allege a material misstatement or
omission by him. Mem at 9-11. Monterossos argument is incorrect because it attempts to apply
a standard for pleading that does not apply to an action brought by the Commission to enforce the
securities laws.
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See also, e.g., S.E.C. v. Power, -- F. Supp.2d --, 2007 WL 4224368 *3-42
(S.D.N.Y. Nov. 29, 2007) (denying motion to dismiss where executive created sham transaction,
was involved in accounting, and the company recognized improper revenue); S.E.C. v. KPMG,
412 F. Supp.2d 349, 375 (S.D.N.Y. 2006) (denying motion for summary judgment by audit
partners who argued that primary violations should be dismissed under the Bright Line Rule
because audit opinions were issued under the name of KPMG, not individual partners); S.E.C. v.
Treadway, 354 F. Supp. 2d 311, 315 (S.D.N.Y. 2005) (denying motion to dismiss where
executive was in unique position to disclose a deal that he negotiated and was responsible for
drafting, producing, reviewing and/or disseminating a statement).
Even in the S.E.C. v. Dauplaise, No. 05-1391cv, 2006 WL 449175 (M.D. Fla. Feb. 22,
2006), cited by Monterosso, although the court claimed to apply the Bright Line Test against the
Commission, it refused to dismiss the primary violation claim against a CFO who was not
publicly linked to a false Form 8-K because the Commission pleaded that he had misled the
8
The Commission, unlike a private plaintiff, need not allege or prove reliance, causation or
damages violations of Section 10(b) or Section 17(a). See Aaron v. S.E.C., 446 U.S. 680, 695,
697, 702 (1980) (listing elements); S.E.C. v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th
Cir. 2007) (citing Aaron); S.E.C. v. KPMG, 412 F. Supp.2d 349, 375 (S.D.N.Y. 2006) (noting
SEC is not required to prove reliance, loss causation or damages). Monterosso is correct that the
Eleventh and Second Circuits have adopted a Bright Line Rule that requires private plaintiffs
to allege that a false statement was attributed to an individual defendant. See, e.g., Ziemba v.
Cascade Intl, 256 F.3d 1194, 1205 (11th Cir. 2001; Wright v. Ernst & Young LLP, 152 F.3d
169, 175 (2d. Cir 1998). However, Monterosso fails to explain that district courts in both circuits
have declined to apply the Bright Line Rule against the Commission because it not need allege or
prove reliance, which is the basis for application of the Bright Line Rule. See, e.g., S.E.C. v.
Collins & Aikens Corp., -- F. Supp.2d --, 2007 WL 4480025 (S.D.N.Y. Dec. 21, 2007) (declining
to apply bright line test against the SEC); S.E.C. v. Dunlap, 2002 WL 1007626 *5 n.7 (S.D.
Fla. March 27, 2002) (Ziemba has only tangential value to a case brought by the
Commission). In S.E.C. v. Converge Global, Inc., No. 04-80841cv, 2006 WL 907567 (S.D. Fla.2
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accountants and lawyer who drafted the document. Id. At *6.
9
March 10, 2006), this court entered judgment after a jury trial against a consultant who had
drafted and disseminated a false press release without discussing whether the false statement was
attributed to the consultant.
The Complaint states a claim for primary fraud violations by Monterosso because it
alleges that he or Vargas, at Monterossos direction, used deceptive devices and their own false
statements in order to cause GlobeTel to make false statements to investors. Specifically, they
negotiated a deal to get paid for creating revenue for GlobeTel, then created false invoices and
false CDRs which they provided to GlobeTels finance department knowing that the company
would record revenue based upon the false documents. Compl. 25; 36-39, 43-44, 49-50, 54-56,
84, 87-93.
Courts have routinely denied motions to dismiss when defendants caused misstatements
in a companys financial reports by creating false documents that the defendant knew would be
used to change the companys financial reports. See, e.g., In re Suprema Specialities, Inc. Sec.
Litig., 438 F.3d 256 (3d Cir. 2006) (reversing dismissal where corporate executives had, inter
alia, allegedly created fictitious transactions with cheese suppliers, including false invoices, and
prevented the accountants from having any contact with the suppliers); S.E.C. v. Lucent Tech.,
Inc., 363 F. Supp.2d 708, 711-12 (D.N.J. 2005) (denying motion to dismiss by vice president
who negotiated deal with customer, then created paperwork that misrepresented the terms, and
resulted in Lucent overstating revenue).
Recently, a district court refused to dismiss claims of direct liability against three
defendants because the individuals negotiated deals knowing that the company would record the
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money as income, then created false documents about the deals or provided them to the
companys accountants and audit committee. See SEC v. Collins & Aikman Corp.., F. Supp.2d
, 2007 WL 4480025, *9-12 (S.D.N.Y. Dec. 21, 2007). In that case, one defendant argued that
he was merely the counter-party in one of the transactions and had not known how the company
would account for the false transactions, but the court refused to dismiss because the
Commission had alleged that the defendant knew the company would book the transactions as
income. Id. at *9-10. Another defendant allegedly created false side letters and directed other
employees to obtain false documents from a supplier that he knew would be used to misrepresent
the companys income, which the court held were deceptive devices that constituted a direct
violation of Section 10(b) of the Exchange Act. The court refused to dismiss the complaint
against this defendant because the SEC has alleged with particularity that [the defendant]
intended to falsify C&As financial statements Id. at *11-12.
Monterosso cannot avoid liability for his role in the fraudulent scheme merely because he
did not personally prepare GlobeTels false statements that mislead investors, if he acted with
scienter to cause those misrepresentations. See S.E.C .v. Holschuh, 694 F.2d 130, 134-35 (7th
Cir. 1982) (affirming judgment against defendant who made false statement to individual who
drafted circulars sent to investors); Power, F. Supp.2d , 2007 WL at *3-4 (denying motion to
dismiss because the Commission alleged defendant in effect caused the statement to be made
and knew or had reason to know that the statement would be disseminated to investors); S.E.C.
v. Nacchio, 438 F. Supp.2d 1266, 1281-82 (D. Colo. 2006).
Rule 10b-5(a) and (c) are broad and encompass much more than illegal trading activity:
they encompass the use of any device, scheme or artifice, or any act, practice, or course of
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business used to perpetuate a fraud on investors. In re Royal Ahold N.V. Sec. & ERISA Litig.,
351 F. Supp. 2d 334, 372 (D. Md. 2004). See also In re Parmalat Sec. Litig., 376 F. Supp. 2d
472, 501-02 (S.D.N.Y. 2005); In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 336-
37 (S.D.N.Y. 2004). Courts have recognized that the Commission has broader authority to
enforce securities laws than a private party and may bring claims based upon fraudulent devices
and schemes, as well as false statements. See S.E.C. v. Ginsburg, 362 F.3d 1292, 1298-1301
(11 Cir. 2004) (defendant liable for insider trading notwithstanding he made no materialth
misrepresentations to investors); S.E.C. v. Solow, No. 06-81041cv, 2007 WL 1970806 (S.D. Fla.
May 10, 2007) (denying motion to dismiss although defendants misrepresentations were made
to his broker-dear, not to investors). See also S.E.C. v. U.S. Environmental, Inc., 155 F.3d 107,
110-11 (2d. Cir. 1998) (broker primarily liable when he participated in the fraudulent scheme or
other activity proscribed by the securities laws).
The allegations in the Complaint properly plead that Monterosso engaged in a fraudulent
scheme or practice or course of business that directly caused material misrepresentations to be
made in conjunction with the offer, purchase or sale of GlobeTel securities and, therefore,
sufficiently pleads a violation of Section 10(b) and Rule 10b-5 thereunder.
2. The Complaint Properly Pleads Scienter
Monterossos argument that the Complaint fails to plead sufficient facts to establish he
acted with scienter, Mem. at 11-12, fails when the allegations in the complaint are examined in
light of existing precedent.
The Complaint alleges facts that demonstrate Monterossoss scienter under either test
enunciated by the Eleventh Circuit: a defendants acts of knowing misconduct or a defendants
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acts that demonstrate recklessness. See S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th
Cir. 1982). In determining scienter, courts look to an aggregate of all allegations, not merely
single allegations. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016-17 (11th Cir. 2004).
Specifically, the Complaint alleges that: (1) Monterosso created hundreds of false invoices and
CDRs, Compl. 36; (2) the invoices were false because Centerline, Volta and Lonestar had not
bought or sold anything and the CDRs were false because they did not record transmissions that
had any connection to the three subsidiaries, Compl. 36, 39-55; (3) some of the invoices
appeared to be sent by two companies owned by other individuals, Compl. 40-41, 46; and (4)
copies of invoices purporting to be to or from Ron Hays companies, were not sent to Hay.
Compl. 43.
Thus, the Complaint contains numerous allegations that Vargas engaged in knowing
misconduct when he created false invoices and false CDRs for transactions he knew never
occurred and for companies where he did not work, and submitted them to GlobeTel. The
creation of documents that are known to be false is evidence of scienter. See, e.g., Carriba, 681
F.2d at 1324 (scienter shown where defendant failed to correct glaring omissions in prospectus
he reviewed); See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); S.E.C. v.
Kirkland, 521F.Supp.2d 1281, *21-*22 (M.D.Fla. 2007) (creating fake leases to create
impression of business success is evidence of scienter); In re Suprema, 438 F.3d at 278-79
(creating false invoices is evidence of scienter); see also SEC v. Digital Lightwave, Inc., 196
F.R.D. 698, 701 (M.D. Fla. 2000) (scienter plead when SEC alleged that defendant knew he was
recording revenue fraudulently). The Complaint also alleges that Monterosso tried to conceal his
fraud by not forwarding to Hay copies of the invoices that appeared to come from or be sent to
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his company. See, Lucent Tech., Inc., 363 F. Supp.2d at 717-18 (scienter sufficiently pleaded by
alleging defendant tried to hide agreements from his companys chief accountant); see also,
Holschuh, 694 F.2d at 143-44.
Additionally, the allegations establish that Monterosso had a strong pecuniary motive to
create fictitious revenue for GlobeTel; an allegation that is relevant to recklessness. Tellabs, Inc.
v. Makor Issues and Rights, Ltd., U.S. , 127 S.Ct. 2499, 2503 (2007); S.E.C. v. Gane, No. 03-
61553cv, 2005 WL 90154, at *15 (S.D. Fla. Jan. 4, 2005). The Complaint alleges that: CSI
would received payment from GlobeTel only if CSI generated revenue for GlobeTel, Compl.
21-23; CSI was unable to generate the revenue required by the agreement with GlobeTel, Compl.
24-32; as a result of meeting the revenue goals in the agreements with GlobeTel, CSI received
at least $180,000 from GlobeTel and total payments of $1 million, Compl. 95; and Monterosso
received approximately $300,000 from CSIs account. Compl. 96.
n inference of recklessness is further supported by the allegations that Monterosso created
hundreds of false invoices over a period of two years and that these invoices accounted for
approximately 80 percent of GlobeTels revenue during that period because the length and
magnitude of the fraud are indicia of recklessness. See In re Eagle Building Tech., Inc. Sec.
Litig., 319 F. Supp.2d 1318, 1326 (S.D. Fla. 2004) (magnitude of fraud is relevant to establish
scienter); In re Microstrategy, Inc. Sec. Litig., 115 F. Supp.2d 620, 639 (E.D. Va. 2000); see also
S.E.C. v. Softpoint, Inc., 958 F. Supp. 846, 865 (S.D.N.Y. 1997).
B. The Complaint Properly Alleges Aiding And Abetting Claims
In order to state aiding and abetting claims, like those in the Third, Fourth and Fifth
Claims for Relief, the Commission must allege facts showing that (I) there was a primary
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violation of the securities laws, (ii) the defendant had general awareness that his role was part of
an overall activity that is improper, and (iii) that the defendant knowingly and substantially
assisted the violation. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11 Cir. 1986).th
Monterosso argues that the Third Claim for Relief, which alleges that he aided and
abetted GlobeTels violation of Section 10(b) and Rule 10b-5 fails to allege that Monterosso
knew how the fraudulent invoices and CDRs would be used in order to establish that he
knowingly and substantially assisted GlobeTels violations. Mem. at 13. Section III.A.1. above
supports the claim that Monterosso committed a primary violation of Section 10(b) and
Rule 10b-5 when he caused GlobeTel to make material misstatements. Therefore, these same
allegations support a claim that he provided knowingly substantial assistance to GlobeTels
violation of the same provisions. Moreover, the Complaint also includes allegations establishing
the basis for alleging Monterosso had knowledge of GlobeTels use of the false invoices and
CDRs:
(1) the purpose of the agreement between GlobeTel and Vargas company,
CSI, was to build telecommunications revenue . . . Compl. 19;
(2) Monterosso knew GlobeTel could not record revenue generated by
Centerlines off-net telecom business without invoices and CDRs,
Compl. 35;
(3) GlobeTels finance department requested CDRs from Monterosso to prove
that Volta, Lonestar and Centerline had actually engaged in the telecom
transactions for which invoices had been submitted, Compl. 88;
(4) Monterosso knew GlobeTels auditors had specifically requested CDRs in
order to compare them to the invoices and confirm that the telecom
minutes had actually been bought and sold, Compl. 92; and
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(5) Monterosso knew the fake invoices and CDRs relating to off-net
revenue would be presented to GlobeTels independent auditors. Compl.
93.
These allegations create a plausible inference that Monterosso knew that GlobeTel would use the
fraudulent invoices and CDRs to record revenue that would be incorporated into GlobeTels
filings and other reports of revenue.
Monterosso argues that the Fourth Claim for Relief alleging that he aided and abetted
GlobeTels violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-3
should be dismissed because there is no allegation that he had any involvement in, or
responsibility for, filing of GlobeTels annual and quarterly reports. Mem. at 15. At the risk of
repetition, a claim of aiding and abetting requires allegations that a defendant knowingly and
substantially assisted a violation of the securities laws. As alleged in the Complaint, Monterosso
created and submitted false invoices and false CDRs to GlobeTel knowing they would be relied
upon by to record revenue in GlobeTels quarterly and annual reports. Compl. 43-44, 47-50,
53-55. The Complaint also alleges that as a direct result of Monterossos fraudulent scheme,
GlobeTel overstated its revenue in its quarterly and annual reports during fiscal years 2004
through 2006 by a total of approximately $119 million. Compl. 57-61. These allegations
establish that, at the very least, Monterosso knowingly provided substantial assistance to
GlobeTels violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-3
thereunder.
Finally, for all the reasons explained above, Monterossos claim that the Fifth Claim for
Relief alleging that he aided and abetted GlobeTels violation of Section 13(b)(2)(A) fails.
Monterosso asserts that the Fifth Claim fails because there is no allegation that he had the ability
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to influence the individuals who controlled and maintained GlobeTels books. Mem. at 16.
However, this argument attempts to superimpose upon an aiding and abetting allegation a
requirement that does not exist.
As explained above, an allegation of aiding and abetting need only allege that Monterosso
knowing provided substantial assistance to GlobeTels violation of Section 13(b)(2)(A) by
maintaining false and misleading books and records. To satisfy this requirement, the allegation
need not assert that Monterosso had any control over the individuals who actually made entries in
GlobeTels books and records. It is enough that Monterosso provided the fodder for the entries
that were made in GlobeTels books and records, knowing the information he provided was false,
and that it would be used by GlobeTel to record millions of dollars in off-net revenue in the
companys books and records. Compl. 117-19.
Monterossos reliance upon SEC v. Cedric Kushner Promotions, Inc., 417 F. Supp.2d 326
(S.D.N.Y. 2006) to support his argument is misplaced. Kushner involved a motion for summary
judgment that was granted because the facts did not support the aiding and abetting allegation.
Id. at 335-36. Whether the facts will support an allegation is irrelevant to a motion to dismiss
pursuant to Rule 12(b)(6), which is only concerned with whether, assuming the facts to be true,
the complaint states a cause of action. See Hishon, 467 U.S. at 73. In any case, the court in
Kushner granted summary judgment on the aiding and abetting claim because it found that the
defendant played a very background role in preparation of the companys reports and had no
part in creating the fraudulent financial statements that were incorporated into the companys
annual report. Kushner, 417 F.Supp.2d at 329. Consequently, the court concluded there was no
evidence that the defendants conduct proximately caused the underlying fraud. Id. at 335. In
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contrast to the defendant in Kushner, the Complaint alleges that Monterosso was the architect of
the fraudulent scheme that directly resulted in GlobeTel recording and reporting revenue that did
not exist. In other words, but for Monterossos conduct, none of the violations of the Securities
Act or Exchange Act alleged would have occurred.
C. The Complaint Properly Pleads Violations of Exchange Act Rules 13b2-1 and
13b2-2
Monterossos argument that the Complaint fails to adequately plead violations of
Exchange Act Rules 13b2-1 and 13b2-2, Mem. at 17-19, is based upon a misunderstanding of the
requirements of those rules.
1. Rule 13b2-1: Falsifying Books and Records
Monterosso argues that the allegation in the Sixth Claim for Relief that he violated Rule
13b2-1 is deficient because there are no allegations that he either had the ability to directly falsify
GlobeTels books and records or the ability to influence any person who actually prepared
GlobeTels books and records. Mem. at 17. This argument misapplies the requirements of the
Rule to the allegations of the Complaint.
The Sixth Claim for Relief alleges that Monterosso violated Rule 13b2-1, which provides
that [n]o person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or
account maintained pursuant to Section 13(b)(2)(A). Scienter is not an element of a Rule 13b2-
1 violation. See McNulty, 137 F.3d at741; Softpoint, 958 F. Supp. At 865-66. Any unreasonable
conduct directly or indirectly resulting in falsification of corporate records is within the scope of
Rule 13b2-1. Id. at 866.
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The Complaint meets this standard by alleging that Monterosso created false invoices and
false CDRs that were part of GlobeTels books and records. Compl. 86. In addition, the
Complaint alleges Monterosso knew the false documents he submitted to GlobeTel would be
relied upon by GlobeTels accountants to make entries in GlobeTels general ledger and other
documents, Compl. 85-90, 121-22, because GlobeTels accountants requested the invoices to
and from Centerlines customers to substantiate the off-net revenue. Compl. 34-35.
Thus, the Complaint alleges that Monterosso violated Rule 13b2-1 by directly falsifying
invoices that became part of GlobeTels books and records. It also alleges he indirectly falsified
or caused to be falsified GlobeTels books and records because the false invoices submitted were
the basis for the off-net revenue GlobeTel recorded in the general ledger and other books and
records.
2. Rule 13b2-2: False Statements To Auditors
The Sixth Claim for Relief also alleges violations of Rule 13b2-2, which prohibits
officers, directors or any other person acting under the direction thereof from misleading an
accountant engaged in the audit or review of the financial statements of that issuer where the
people know or should have known that the action would render the financial statements
materially misleading. 17 C.F.R. 240.13b2-2. For purposes of the Exchange Act, the term
officer is defined to include a vice president . . . and any person routinely performing
corresponding functions. 17 C.F.R. 240.3b.
Monterosso argues that the Sixth Claim does not properly allege a violation of
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Monterosso qualified as an officer as early as 2004 when he took over3
GlobeTels entire Centerline subsidiary, supervised its employees, negotiated contracts and ran
the entire wholesale telecommunications business. Compl. 10. This conduct qualifies as
routinely performing the functions of a vice president. See 17 C.F.R. 240.3b.
19
Rule 13b2-2 because the Complaint does not allege Monterosso made any effort to mislead any
independent public or certified public accountant. Mem. At 18. Monterossos argument is
patently incorrect.
The Complaint alleges that between at least May 2005 and September 2006, Monterosso
was an officer of GlobeTel, Compl. 10, and violated Rule 13b2-2 when he created and3
submitted invoices and CDRs to GlobeTel. Compl. 124-25. The Complaint also alleges that
Monterosso knew that GlobeTels auditors had specifically requested CDRs so the auditors could
compare them to the invoices and confirm that Volta, Lonestar and Centerline actually bought
and sold the telecom minutes claimed, Compl. 92, and Monterosso knew that the fake
invoices and CDRs relating to Centerlines off-net revenue he submitted would be presented to
GlobeTels independent auditors. Compl. 93. Finally, the Complaint alleges that Monterosso
misled auditors throughout this period by providing false invoices and false CDRs, knowing they
would be used by GlobeTels auditors in connection with an audit. Compl. 125. Taken
together, these allegations properly plead a violation of Rule 13b2-2.
CONCLUSION
For the reasons set forth above, the Court should deny Monterossos motion to dismiss in
its entirety.
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January 28, 2008 Respectfully submitted,
s/Jeffery T. Infelise
Of Counsel: Jeffery T. Infelise (DC 546998)
Cheryl J. Scarboro Special Florida Bar No. A5501154infelisej@sec.gov
Reid A. Muoio
Special Florida Bar No. A5501160
muoior@sec.gov
Brent Mitchell
Special Florida Bar No. A5501159
mitchellb@sec.gov
100 F Street NE
Washington, D.C. 20549
(tel) (202) 551-4904 (Infelise)
(fax) (202) 772-9362 (Infelise)
Attorneys for Plaintiff,
Securities and Exchange Commission
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CERTIFICATE OF SERVICE
I hereby certify that on January 28, 2007, I electronically filed the foregoing Plaintiffs
Memorandum of Law in Support of its Opposition to Defendant Joseph J. Monterossos Motion
to Dismiss with the Clerk of the court using CM/ECF. I also certify that the foregoing document
is being served this day on all counsel of record or pro se parties identified on the attachedService List in the manner specified, either via transmission of Notices of electronic filing
generated by CM/ECF or in some other authorized manner for those counsel or parties who are
not authorized to receive electronically Notices of Electronic filing.
s/Jeffery T. Infelise
Jeffery T. Infelise
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SERVICE LIST
Walter J. Mathews, Esq. Mark David Hunter, Esq.
D. Patricia Wallace, Esq. mdhunter@lhttlaw.com
wjmathews and pwllace@wjmlawfirm.com Leser Hunter Taubman & Taubman, PLLCWalter J. Mathews, P.A. 407 Lincoln Rd., Suite 500
Courthouse Law Plaza Miami beach, FL 33139
700 S.E. Third Avenue, Suite 300 Tel. 305-604-5547
Fort Lauderdale, FL 33316 Fax. 305-604-5548
Tel. 954-463-1929 Attorney for Defendant
Fax. 954-463-1920 [Joseph J. Monterosso]
Attorney for Defendant [electronic]
[Luis E. Vargas]
[electronic]
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