In the Courts

In closing arguments, the SEC alleged that the defendants were motivated by greed for higher commissions from the sale that were a vital source of revenue for the brokerage. Allen and Wasserman had a duty to correct the audit misrepresentations but failed to do so — with the SEC noting that Allen himself held an ownership stake in American Growth and that Wasserman had served as the brokerage's Chief Compliance Officer in 2011 prior to his appointment as President. Portfolio denied liability on the basis that it was up to American Growth to audit itself, characterizing the audit representations in the offering documents as a harmless mistake that in any case did not cause the investors to lose any money. The jury deliberated for approximately six hours before finding the brokerage, Allen and Wasserman liable on all counts brought by the SEC.

Following the jury's verdict, Judge Wood ordered the defendants to pay a combined total of $1.58 million — including disgorgement and interest of over $1 million to be paid by Portfolio (relating to the amount earned in commissions on the sale) and imposing a $200,000 civil penalty on the brokerage. Allen was also found jointly and severally liable for Portfolio's disgorgement and pre-judgment interest as an owner of the brokerage who had sold the majority of the American Growth investments. The defendants had earlier disputed the disgorgement calculation, relying on a statement by Wasserman as to her review of Portfolio's books and records that was rejected by the Judge as containing "no citations or supporting documents to substantiate her fact-bare assertions." Allen was also required to pay around $400,000 in disgorgement and interest with a civil penalty of $120,000. Finally, Judge Wood ordered that Wasserman pay a $100,000 civil penalty.

While Judge Wood mostly granted the relief sought by the SEC (including permanent injunctions barring the defendants from committing future securities fraud), the amount in civil penalties was less than the maximum allowable penalties sought by the agency. The Judge found that applying the maximum penalties would be "unduly penalizing" given that the fraud had not resulted in "substantial losses" to investors.

According to the Judge: "The violations continued over a period of years, and were not simply an isolated occurrence of bad judgment," with the defendant's "continu[ing] to dispute their blame for the illegal conduct." Allen and Wasserman remained employed as registered broker-dealers at Portfolio at the date of the Judge's Order, with Counsel indicating that they intend to appeal the decision.

The case is SEC v. American Growth Funding et al., in the U.S. District Court for the Southern District of New York (No. 1:16-cv-00828).

— Juliet Gunev, Mayer Brown LLP