Case 1:10-cv-02031-DLI-JMA Document 332 Filed 11/25/14 Page 1 of 12 PageID #: 9607

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
10-CV-2031 (DLI) (JMA)
v.
SPONGETECH DELIVERY SYSTEMS, INC.,
RM ENTERPRISES INTERNATIONAL, INC.,
STEVEN Y. MOSKOWITZ, MICHAEL E.
METTER, GEORGE SPERANZA, JOEL
PENSLEY, and JACK HALPERIN,

THE SECURITIES AND

EXCHANGE COMMISSIONS
REPLY BRIEF IN FURTHER
SUPPORT OF ITS MOTION FOR A
FINAL JUDGMENT
ESTABLISHING MONETARY
RELIEF AS TO DEFENDANT
METTER

Defendants,
and
BLUE STAR MEDIA GROUP, INC. and
BUSINESSTALKRADIO.NET
ACQUISITION CORP.,
Relief Defendants.

Dated: November 25, 2014

/s/ Paul W. Kisslinger

Paul W. Kisslinger (PK0764)
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-5977
(202) 551-4427
(202) 772-9292 (fax)
Counsel for Plaintiff

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TABLE OF CONTENTS
PAGE

PRELIMINARY STATEMENT .....................................................................................................1

ARGUMENT ...................................................................................................................................2
I.

Metters Plea Agreement In the Criminal Action Supports The Entry of Full
Disgorgement And Penalties In This Action, To Which Metter Consented........................2

II.

The SEC Is Seeking Disgorgement From Metter Based On His Own Misconduct, And
Has Not Relied On Bare Or Unspecified Allegations In the Complaint ......................3

III.

The Commission Established That Metter Is Jointly And Severally Liable

To Disgorge $52.4 Million In Illegal Proceeds Of The Spongetech Fraud .........................5

IV.

Alternatively, Metter Should Disgorge At Least $6.13 Million That Was Paid To Him,
For His Benefit, And From Which He Was Unjustly Enriched ..........................................7

V.

Metters Claimed Lack Of Ability To Pay Should Not Detract The Court From Issuing
Full Disgorgement And Civil Penalties ...............................................................................8

CONCLUSION ..............................................................................................................................10

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PRELIMINARY STATEMENT
Mr. Metters opposition brief [Docket Entry (Dkt.) 331-14] does not rebut the Security and
Exchange Commissions (Commission or SEC) opening brief [Dkt. 331-1] under the facts or law.
First, his opposition overlooks the fact that the Court already has entered a judgment requiring him to
pay disgorgement and civil penalties, and providing that when determining the proper monetary
award, the Court will accept as true all allegations in the Amended Complaint. Metters plea
agreement in the criminal action1 has no bearing on the terms of the consent judgment that Metter
voluntarily executed to settle the civil charges brought against him in this action. Further, Metters
plea agreement that did not include any forfeiture or restitution penalties was based, in part, on the
Courts anticipated award of monetary relief in this case. This fact underscores the appropriateness of
full civil monetary awards in this proceeding.
Second, Metter wrongly argues that the Commission is seeking to hold him liable for the
misconduct of others. The Commission demonstrated in its opening brief (Opening Br.) that Metter,
himself, was an active and willing participant in both the pumping and dumping phases of the
Spongetech fraudulent scheme, and it seeks to hold him accountable for his own misdeeds. Metters
not me defense just does not work here.
Third, the Commission has satisfied its burden for an award of joint and several liability, under
Second Circuit law. The Commission has shown that Metter controlled Defendants Spongetech
Delivery Systems, Inc. (Spongetech) and RM Enterprises International, Inc. (RM Enterprises), and
closely collaborated with Moskowitz and the other Defendants to carry out the fraudulent scheme.
Metter has not offered any specific evidence to rebut that showing, nor did he come forward with
specific evidence to limit or apportion his liability. In the same way, Metter did not rebut the
Commissions showing that he personally received and benefited from more than $6.13 million stolen

United States v. Michael Metter, No. 10-Cr-600 (DLI) (E.D.N.Y.).

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from Spongetech investors. Metters argument that others also benefitted from these illicit payments
does not lessen his own disgorgement liability. Finally, Metters unsupported claims of an inability to
pay, even if believed, do not justify anything less than a full disgorgement award, nor even begin to tip
the scales against the entry of a substantial civil penalty.
ARGUMENT
I.

Metters Plea Agreement In the Criminal Action Supports The Entry of Full
Disgorgement And Penalties In This Action, To Which Metter Consented
Metters starting point in his opposition brief (Metter Br.) is that the Court should not award

any disgorgement against him because the criminal authorities dismissed some charges against him in
the related criminal action. See Metter Br. at 1, 3-4, 10. This argument is a non-starter. Metter
ignores the language in the Metter Judgment [Dkt. 255], to which he consented, in which the Court
directed that Metter shall pay disgorgement, prejudgment interest, and a civil penalty Metter
negotiated and agreed to the terms of this settlement agreement separate and apart from his dealings
with the criminal authorities, knowing full well that the criminal action was proceeding on its own
track. The question in these proceedings is thus how much disgorgement should Metter be ordered to
pay, not whether the Court should order disgorgement at all.
The fact that Metter was able to negotiate a favorable plea agreement with the criminal
authorities in his criminal case, involving different allegations, a higher burden of proof, and unique
procedural circumstances,2 months after he consented to the entry of the Metter Judgment, should not
deter the Courts from awarding full disgorgement and civil penalties as to Metter in this civil action.
See SEC v. Contorinis, 743 F.3d 296, 306-07 (2d Cir. 2014) (finding that civil disgorgement is
separate and distinct from criminal forfeiture proceedings, and that both play important functions in
enforcing securities laws).

See January 8, 2013 sentencing letter from Assistant United States Attorney Patrick Sinclair to the Court [Criminal
Docket No. 284] (attached to Aug. 25, 2014 Koch Declaration as Exh. 1) at 1-2, describing unique circumstances giving rise
to Metter plea agreement.

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Indeed, Metters sentence in the criminal action, which ordered no criminal restitution or
forfeiture of assets,3 underscores the importance of the Court imposing significant monetary remedies
in these proceedings. The United States specifically referred to and relied on the Courts pending
award of monetary relief pursuant to the Metter Judgment when recommending the lenient sentence
that Metter received in that action. See Jan. 8, 2013 Sinclair Letter at 5 (Moreover, the defendant will
be financially punished. The agreement with the SEC permits the Courtto order disgorgement of
any and all ill-gotten gains, civil penalties and reimbursements). It is therefore warranted and
proper that Metter be directed to pay back all proceeds of the fraud that he, and those with whom he
collaborated, carried out, in addition to paying a maximum civil penalty equal to his pecuniary gain.4
II.

The SEC Is Seeking Disgorgement From Metter Based On His Own Misconduct,
And Has Not Relied On Bare Or Unspecified Allegations In the Complaint
Metters next point, scattered throughout his opposition, is a not me defense. He argues that

in moving for disgorgement, the SEC has somehow improperly relied on bare allegations or
unspecified allegations in the Amended Complaint to hold him responsible for the actions of other
people. Metter Br. at 1-3, 10, 13-14. These contentions not only are untrue, but once again they
ignore the language of the Metter Judgment, to which Metter consented, allowing the SEC to do
exactly what he complains about rely on the allegations in the Amended Complaint for purposes of
this remedies proceeding. The Metter Judgment states:
In connection with the Commissions motion for disgorgement, civil penalties,
and/or reimbursement, and at any hearing held on such a motion: (c) solely
for the purposes of such motion, the allegations of the Complaint shall be
accepted as and deemed true by the Court.
Metter Judgment [Dkt. 255] at Sec. XIII (emphasis added).

See United States v. Metter, 10-CR-600, Judgment in a Criminal Case [Criminal Docket No. 304] at 5 (ordering
$100 assessment but no fine or restitution).

As the Southern District court recognized when upholding the terms of a similar bifurcated judgment, [B]y entering
into the consent judgments, defendants concede as true, for purposes of this motion, the extensive allegations of fraud made
in the Complaint Considerations of fairness and equity weigh in favor of enforcing the parties consensually agreed-upon
judgment. SEC v. Kapur, No. 11 Civ. 8094 (PAE), 2012 WL 5964389, at *5-6 (S.D.N.Y. Nov. 29, 2012).

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That said, the Commission did not rely solely on allegations in the Amended Complaint. Nor is
the Commission simply charging Metter with guilt by association. As detailed below, the Commission
has submitted to the Court a great deal of specific, probative, and uncontradicted evidence that
demonstrates Metters active participation in the Spongetech fraud.5
III.

The Commission Established That Metter Is Jointly And Severally Liable

To Disgorge $52.4 Million In Illegal Proceeds Of The Spongetech Fraud
In the opening brief, the SEC outlined the basis for holding Metter jointly and severally liable

for $52.4 million in illegal proceeds generated from the illegal sale of artificially inflated Spongetech
shares. Opening Br. at 6-9, 17-19. The Commissions theory, well-supported by Second Circuit law,
is premised on Metters control of Spongetech and RM Enterprises, the close collaboration between
Metter and the other Defendants in carrying out the expansive pump and dump scheme, and Metters
own active, knowing, and willing participation in both the pumping and dumping phases of the
scheme. See Opening Br. at 4-9, 12-13, 18. See also, SEC v. Pentagon Capital Mgmt. PLC, 725 F.3d
279, 288 (2d Cir. 2013) (affirming joint and several disgorgement award against all defendants in
light of their collaboration).
In particular, the Commission has established that Metter, in collaboration with Moskowitz and
the other Defendants, and as an officer and director of Spongetech, issued false and misleading press
releases and public filings concerning Spongetechs financial condition, its customers, and its
outstanding share count, among other things.6 Opening Br. at 5-6. See also, the SECs May 14, 2010
memorandum in support of its motion for preliminary injunction [Dkt. 2-1] at 4-8 (SEC PI

In addition to the documents and declaration accompanying the Commissions Opening Brief, the Commission
previously submitted declarations, bank records, trading records, summary charts, and other documents to support its motion
for preliminary injunction [see Dkts. 2-7, 54, 62]. The Court reviewed and cited this evidence in its March 14, 2011
Opinion and Order [Dkt. 112] entering a preliminary injunction and asset freeze against Metter and the other Defendants.
6

See March 14, 2011 Opinion and Order [Dkt. 112] at 15 (The SEC has shown that Metter made materially false
or misleading statements in multiple press releases and SEC public filings to inflate the value of Spongetech shares. Metter
signed many of the allegedly fraudulent filings in his capacity of CEO, and also made statements that were directly quoted
within the filings).

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Memorandum), and accompanying May 13, 2010 Declaration of Christine Neal [Dkts. 5, 6]. The
SEC also has established that Metter played an active role, through his control of Spongetech and RM
Enterprises, and his collaboration with the other Defendants, in directing the sale of hundreds of
millions of shares of Spongetech stock in illegal unregistered transactions. Opening Br. at 8-9. See
also, SEC PI Memorandum [Dkt. 2-1] at 9-10, and accompanying May 13, 2010 Declaration of
Charles Davis [Dkt. 3]. The SEC also has demonstrated that Metter directed the transfer of millions of
dollars in tainted funds obtained from the illegal sale of Spongetech stock.7 See Opening Br. at 9-15.
Finally, the Commission demonstrated that a joint and several award is particularly appropriate
in this case, under well-established Second Circuit precedent, as the case involves a pervasive multilayered fraud in which Metter and the other Defendants constructed a web of complex transactions,
cash payments, nominees, and affiliates to conceal the transfer of illegal funds. See Opening Br. at 1719; Aug. 25, 2014 Koch Decl. [Dkt. 331-2] at 3-6. See also, March 14, 2011 Opinion and Order [Dkt.
112] at 16 (Not only did Metters conduct involve fraud, it involved a scheme to funnel and conceal
illegal proceeds through nominees and affiliates.).8
Having met the threshold requirements for a joint and several liability award, the burden then
passed to Metter to demonstrate that his liability should be apportioned to other scheme participants.
See Boock, 2012 WL 3133638, *3 citing SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir.
1997). See also, SEC v. China Energy Sav. Technology, Inc., No 06-cv-6402, 2008 WL 6572372,
*13-14 (E.D.N.Y. March 28, 2008) (citing cases) (The burden is on the tortfeasor to establish that
the liability is capable of apportionment Defendants have not refuted the SECs allegations as to

See March 14, 2011 Opinion and Order [Dkt. 112] at 15 (There is also evidence that Metter was a necessary
participant and substantial factor in the unregistered offerings.)
8

See SEC v. Boock, No. 09 Civ. 8261 (DLC), 2012 WL 3133638, at *3 (S.D.N.Y. Aug. 2, 2012) (joint and
several liability is particularly appropriate where apportionment of the disgorgement amount is difficult or even
practically impossible because the defendants have engaged in complex and heavily disguised transactions in an effort to
conceal their fraud.); Kapur, 2012 WL 5964389, at *2 (quoting SEC v. Razmilovic, 822 F. Supp. 2d 234, 253 (E.D.N.Y.
2011)) (Where, as here, a fraud is pervasive, it is appropriate to order the defendant to disgorge all ill-gotten gains
realized during the course of the fraud[ulent] scheme.)

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the relationship between them. Therefore, I am recommending to Judge Spatt that the Court impose
joint and several liability on Defendants.) It was incumbent on Metter to come forward with
specific evidence, not just broad statements and sweeping argument, to make this showing.
This, he failed to do. The only fact that Metter identified to sever his liability from the other
Defendants is that he allegedly resigned as president of RM Enterprises in September 2007. Metter
Br. at 5, 12. Even if this resignation actually occurred, Metter continued to be a director and
shareholder of RM Enterprises, continued to sign and certify SEC filings identifying himself as a
control person of RM Enterprises, continued to direct the illegal sale of Spongetech shares by RM
Enterprises, and continued to sign and certify Spongetechs SEC filings containing materially false
statements regarding the companys financial results, customers, and share count. See Opening Br. at
6-8; March 14, 2011 Opinion and Order [Dkt. 112] at 3-5, 14-15. And, of course, a scheme
participants formal resignation from a fraudulent enterprise does not, in itself, limit his liability,
particularly where he continues to play a key role in carrying out the scheme. See Boock, 2011 WL
3792819, *3 (Aug. 25, 2011) and 2012 WL 3133638, * 3 (August 2, 2012) (finding defendant Wong
jointly and severally liable for entire scope of microcap fraud scheme, even after he resigned from the
fraudulent transfer agency that directed the fraudulent activities: there is undisputed evidence that
Wong was involved in [transfer agency] operations, whether or not he retained a formal title, at least
through late 2005). As a result, Metter is liable for the proceeds generated from the fraud after his
purported resignation from RM Enterprises.
As Metter has not rebutted the Commissions showing that a joint and several award is
appropriate as to Metter for all proceeds of the Spongetech fraud, the Court should find him jointly
and severally liable to disgorge $52.4 million, as set forth in the Commissions opening brief.

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IV.

Alternatively, Metter Should Disgorge At Least $6.13 Million That Was Paid To
Him, For His Benefit, And From Which He Was Unjustly Enriched
The Commission established in the Opening Brief that Metter directly received and benefitted

from $6.133 million in illegal proceeds of the Spongetech fraud. Opening Br. at 9-15. These funds
were used for various purposes: to make payments and undocumented loans to himself, his wife, to
entities Metter ran and controlled, and to pay off a debt owed by Metters company,
BusinessTalkRadio (BTR), for which he was personally liable. See summary table (id. at 15.)
Metter does not rebut the SECs calculations, nor deny that proceeds from the sale of Spongetech
shares were indeed distributed as the SEC sets forth. See Metter Br. at 6-7. Metter simply argues that
because he did not personally receive the majority of these funds (he admits that he and his wife
received approximately $600,000 (id. at 6)), or because those funds benefitted others in addition to
himself, that he should not have to disgorge these funds. The facts and law do not support his
argument.
In particular, Metters argument that he should not have to disgorge $5 million paid to BTRs
creditors because Metter did not personally receive the funds (Metter Br. at 2, 6, 13) fails for two
reasons. First, the fact that other people may have benefitted, along with Metter, from the $5 million
payment does not lessen Metters own disgorgement liability, because Metter personally guaranteed
the entire amount of the $5.5 million loan. See Personal Guaranty, attached to March 7, 2013 Koch
Declaration as Exh. H [Dkt. 265-3 at 158-159]. Just as BTRs creditors could have, and did, sue
Metter personally for the entire amount of the $5.5 million loan based on his personal guaranty, so too
was Metter unjustly enriched by the entire $5 million in tainted funds that he directed RM Enterprises
to pay to BTRs creditors to reduce his personal liability by the same amount.
Second, even if Metter did not personally receive or control one dime of the $5 million (or any
of the additional undocumented loans that Metter directed be made to BTR (see Metter Br. at 13)),
he still is liable for disgorging all of these funds. See March 14, 2011 Opinion and Order [Dkt. 112] at
7

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16-17 and n. 6 (To hold that a court may order defendant to disgorge only the actual assets unjustly
received would lead to absurd results.) (citation omitted). The Second Circuit recently confirmed
in Contorinis that a disgorgement award is rightly awarded against a wrongdoer for funds that he did
not personally receive or benefit from, but that were paid for the sole benefit of third parties:
[U]njust enrichment may also be prevented by requiring the violator to disgorge unjust
enrichment he has procured for the third party. As our case law indicated (and as our
opinion here confirms), when third parties have benefitted from illegal activity, it is possible
to seek disgorgement from the violator, even if that violator never controlled the funds. The
logic of this is that to fail to impose disgorgement on such violators would allow them to
unjustly enrich their affiliates.[it] serves disgorgements core remedial function of
preventing unjust enrichment.

Contorinis, 743 F.3d at 307.

Finally, Metters attempts to carve out $115,000 from the $6.13 million disgorgement amount
that was allegedly paid by some unidentified person to another unidentified person as part of some kind
of a stock buy-back program are also without merit. Metter Br. at 6, 13. Metter does not submit any
evidence to provide any detail, description, or documentary support of the alleged stock buy-back
i.e., who delivered and received the payments, for what purpose, how many shares were bought back,
at what price, what accounts were involved, who negotiated the transactions, etc. Metter also does not
explain why he should receive a credit for the alleged stock buy-back payments, nor does he make
clear why this amount should offset his disgorgement liability. Lacking any specific evidentiary
support for such a transaction, and any legal justification, the Court should not allow any off-set from
Metters disgorgement liability.
V.

Metters Claimed Lack Of Ability To Pay Should Not Detract The

Court From Issuing Full Disgorgement And Civil Penalties
Metter claims an inability to pay. See Metter Br. at 2, 14-15, and November 4, 2014 Metter

Declaration. He has not, however, supported his claims of lack of resources with any recent bank or
brokerage statements, pay stubs, tax returns, healthcare bills, foreclosure notices, adverse judgments
or liens, workers compensation applications, bankruptcy filings, or any recent accounting setting
forth his current assets and liabilities. As such, he has not presented the Court with sufficient
8

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evidence upon which to adjudge his demonstrated current and future financial condition. Metter Br.
at 13 (citation omitted).
Given Metters many material misrepresentations concerning Spongetechs operations and
revenue (Opening Br. at 5-7; March 14, 2011 Opinion and Order [Dkt. 112] at 15), his criminal plea
of lying about income received from DL Investments (Opening Br. at 4-5), his false statements in his
sworn accounting about the amount and basis for the payments that DL Investments received from
RM Enterprises (Opening Br. at 12, n. 3), his false investigative testimony that he did not control DL
Investments (Opening Br. at 12, n. 3), the many unknown cash payments drawn from RM
Enterprise accounts (Aug. 25, 2014 Koch Decl. at 14), and the Courts prior finding that Metters
conduct involved a scheme to funnel and conceal illegal proceeds through nominees and affiliates
(March 14, 2011 Opinion and Order at 16), his unsupported claims of lack of resources in these
proceedings are far from trustworthy.
Even if this Court was inclined to accept Metters claims, it should not allow Metter to escape
liability for disgorgement and penalties on these grounds. Inability to pay is not a factor that should be
considered when determining disgorgement liability. See SEC v. Robinson, No. 00-Civ-7452, 2002 WL
1552049, *8 (S.D.N.Y. July 16, 2002) (citing cases) (Financial hardship is not grounds for denying
disgorgement.) The Robinson court explained, The Court may order disgorgement in the amount of
the wrongdoers total gross profits, without giving consideration to whether or not the defendant may
have squandered and/or hidden the ill-gotten profits Entry of a disgorgement judgment is appropriate
despite a defendants inability to pay, given that the defendant may subsequently acquire the means to
satisfy the judgment. Id (citations omitted).
As for civil penalties, a defendants demonstrated lack of ability to pay is but one factor to
consider in determining civil penalties. See Kapur, 2012 WL 5964389, at * 7. As outlined in the
Commissions opening brief at 20-23, even if the Court was to find that Metter made a credible and
9

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sufficient showing as to this element, the balance of all of the other factors for the imposition of civil
penalties, including the expansive nature of the fraud, the enormous harm to investors, and Metters
pivotal role in the scheme, supports the imposition of a substantial civil penalty. The Court thus
should enter a maximum civil penalty to fully penalize Metters past illegal conduct, and to deter
future violations of the securities laws, by Metter and others. See SEC v. Inorganic Recycling Corp.,
No. 99 Civ. 10159 (GEL), 2002 WL 1968341, *4 (S.D.N.Y. Aug. 23, 2002) (Caridis claims of
poverty cannot defeat the imposition of a disgorgement order or civil penalty. Perhaps, if Caridi is
indeed impecunious, the SEC will eventually prove unable to collect on any judgment. But to
withhold the remedy of disgorgement or penalty simply because a swindler claims that she has
already spent all the loot and cannot pay would not serve the purposes of the securities laws. An
order of disgorgement and civil penalty are both proper remedies in this case; the future will tell
whether the SEC can find assets to levy upon.) Metter was not penalized in the criminal action, and
it is just and fair that he receive a substantial civil penalty in this action.
CONCLUSION
For the foregoing reasons, and as set forth in the opening brief, the Securities and Exchange
Commission respectfully requests that the Court enter a Final Judgment against Metter ordering
disgorgement, prejudgment interest, and a maximum, Third Tier civil penalty, as provided herein.

November 25, 2014

Respectfully submitted,

/s/ Paul W. Kisslinger

Paul W. Kisslinger
U.S. Securities and Exchange Commission
100 F. Street, NE,
Washington, DC. 20549-5977
Phone: (202) 551-4427
Fax: (202) 772-9292
Counsel for Plaintiff
10