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Securities and Exchange Commission v. Tropikgadget Fze

United States District Court, D. Massachusetts

February 23, 2017

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,
v.
TROPIKGADGET FZE, et al. Defendants.

          MEMORANDUM AND ORDER GRANTING SUMMARY JUDGMENT TO PLAINITFF FOR COUNTS AGAINST DEFENDANTS ANDREW ARRAMBIDE, UNINVEST FINANCIAL SERVICES CORPORATION, PARKWAY REAL ESTATE LLC, RST5 INVESTMENTS LLC, AND PAULO KOGA

          ALLISON D. BURROUGHS U.S. DISTRICT JUDGE

         In February 2015, Plaintiff Securities and Exchange Commission (the “SEC” or the “Commission”) filed this civil enforcement action against two companies, fifteen individual defendants, and several relief defendants. This case arises out of an alleged pyramid scheme operated by defendants Tropikgadget FZE and Tropikgadget Unipessoal LDA (collectively, “Tropikgadget”) and Tropikgadget's agents, including Andrew Arrambide (“Arrambide”). The relief defendants allegedly received wire transfers from Tropikgadget consisting of illicit proceeds and profits of the alleged pyramid scheme. Four of those relief defendants are Uninvest Financial Services Corporation (“Uninvest”), Parkway Real Estate LLC (“Parkway”), RST5 Investments LLC (“RST5”), and Paulo Koga (“Koga”) (for the purposes of this memorandum, collectively, “the relief defendants”). Now pending before this Court are the SEC's motions for summary judgment against Arrambide [ECF No. 245] and the aforementioned relief defendants [ECF No. 289]. The motions for summary judgment as well as related requests for disgorgement, fines, and injunctive relief, have not been opposed. [ECF Nos. 280, 295]. For the reasons discussed below, this Court GRANTS both motions for summary judgment and awards appropriate relief.

         I. LEGAL STANDARD

         “Summary judgment is appropriate when the record shows that ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'” Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782 (1st Cir. 2011) (quoting Fed.R.Civ.P. 56(a)). “A genuine issue is one that can ‘be resolved in favor of either party' and a material fact is one which ‘has the potential of affecting the outcome of the case.'” Gerald v. Univ. of P.R., 707 F.3d 7, 16 (1st Cir. 2013) (quoting Pérez-Cordero v. Wal-Mart P.R., Inc., 656 F.3d 19, 25 (1st Cir. 2011)); see also Walker v. President & Fellows of Harvard Coll., 840 F.3d 57, 61 (1st Cir. 2016). This analysis does not permit the judge “to weigh the evidence and determine the truth of the matter, ” but focuses solely on “whether there is a genuine issue for trial.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-50 (1986). The factual record on summary judgment may consist of “depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials.” Fed.R.Civ.P. 56(c)(1)(A). The Court can also consider all uncontested facts. Torres-Rosado v. Rotger-Sabat, 335 F.3d 1, 5 (1st Cir. 2003). When, as in this case, a motion for summary judgment is unopposed, a court cannot simply grant summary judgment to the moving party, see Cordero-Soto v. Island Fin., Inc., 418 F.3d 114, 118 (1st Cir. 2005), but rather “must inquire whether the moving party has met its burden to demonstrate undisputed facts entitling it to summary judgment as a matter of law.” Id. (quoting Lopez v. Corporación Azucarera de P.R., 938 F.2d 1510, 1516 (1st Cir. 1991).

         II. SUMMARY OF RELEVANT FACTS

         The salient portions of the Statements of Undisputed Material Facts submitted by the SEC accompanying its two motions, [ECF Nos. 248, 291], are summarized below. Tropikgadget FZE is a foreign corporation that holds the rights to the “Wings Network” marketing and brand services. [ECF No. 248-3 at 2, 29]. Tropikgadget promoted the Wings Network as a “multi-level marketing” company, [ECF No. 8 at ¶ 4], that offered “a global sales channel of Online and Mobile Marketing Solutions” [ECF No. 248-13 at 3]. Tropikgadget Unipessoal handled cash from investments in the Wings Network and also disbursed cash to investors in the Wings Network. [ECF No. 9 at ¶¶ 5, 11, 15]. Tropikgadget FZE and Tropikgadget Unipessoal, and in turn the Wings Network, were controlled by three men: Sergio Henrique Tanaka, Carlos Luis da Silveira Barbosa, and Claudio de Oliveira Pereira Campos. [ECF No. 179 at 5, 13]. Tropikgadget has never been registered with the SEC and it has never registered any offering of securities under the Securities Act of 1933 (the “Securities Act”) or any class of securities under the Exchange Act of 1935 (the “Exchange Act”). [ECF No. 10 at ¶ 5].

         Although the Wings Network purported to use a multi-level distribution network to sell marketing products and services, it generated little to no revenue from the sale of those products or services. Instead, to the extent that it and its members obtained revenue, that revenue was derived from the recruitment of new members. [ECF No. 248-15 at 1]. Rather than actually selling product, the Wings Network focused on simply recruiting more investors. [ECF No. 8 at ¶¶ 5-6].

         The Wings Network established a network of lead promoters from amongst its initial members, and then grew rapidly by recruiting new members using traditional face-to-face sales and social media. [ECF Nos. 248-6 at 11; 10 at ¶¶ 6-7]. The Wings Network promised returns to investors that were based solely on amounts invested and additional members recruited, which incentivized current members to recruit additional members, rather than to sell product. [ECF Nos. 248-18]. Members of the Wings Network were paid according to a system of “points, ” based on (1) the number of additional members the member recruited; (2) the number of additional members recruited by those members that the member recruited; (3) the number of total membership products sold throughout the Wings Network; and (4) the price level of the membership packs purchased. [ECF Nos. 248-14; 248-18].

         Promoters like Arrambide encouraged people to purchase memberships in Wings Network as investments. [ECF No. 248-10 at 27:14-28:5]. The Wings Network charged a $49 membership fee to its members. [ECF No. 248-14 at 11]. The company's promotional materials represented that paying this membership fee qualified the member to receive a “sales bonus” equal to 25% of future Wings Network total sales. [ECF 248-18 at 3]. The initial $49 fee, however, did not entitle the member to participate in the Wings Network compensation plan. [ECF No. 248-14 at 11-12]. Rather, to participate in the compensation plan, the member had to invest in one of three “membership packs, ” ranging in price from $299 to $1, 499. Id. at 12. Each pack came with an increasing number of “points, ” that could purportedly be exchanged for compensation, as well as a number of tools that the member could use for further promotion of the Wings Network, such as “landing pages, ” “banners, ” Facebook ads, and cloud storage. Id.

         Arrambide, who lives in Utah, became involved with the Wings Network as a promoter in December 2013. [ECF No. 248-10 at 5:10-15, 15:6-20]. He acted as an independent distributor for the Wings Network, and received a commission for each person that he recruited to join the network. Id. at 21:22-22:3, 22:24-23:3. He achieved the “Director” rank within the Wings Network, meaning that he generated at least $6 million in investments, which, in his case, came from approximately 50 to 60 investors and for which he personally received over $100, 000. Id. at 32:20-25, 33:1-5, 34:11-35:14, 36:10-37:5; [ECF No. 248-5 at 9]. Arrambide appeared in videos promoting the Wings Network, participated in monthly online conferences for the network, promoted it on Facebook and his personal website, traveled from Utah to Boston to promote the network, and spoke at a “Wings Network Mega Business Event” in Boston. [ECF Nos. 248-10 at 40:8-22, 41:25-42:8, 43:5-17; 248-6 at 11; 248-11 at 2].[1] Arrambide never sold any actual product. [ECF No. 248-10 at 26:7-27:13].

         The relief defendants handled cash associated with the Wings Network. Uninvest is a Florida corporation, created to act as an intermediary by receiving deposits from people affiliated with the Wings Network scheme. [ECF Nos. 291-2 at ¶ 7; 67 at ¶ 29]. Koga is the president and a director of Uninvest. [ECF Nos. 291-2 at ¶ 2; 67 at ¶ 29]. Parkway is a Florida corporation, managed by Uninvest. [ECF No. 67 at ¶ 32]. RST5 is a Delaware corporation, also managed by Uninvest. Id. at ¶ 33. According to SEC calculations, Uninvest received net deposits and credits associated with the Wings Network amounting to $8, 917, 594. [ECF No. 291-1 at ¶ 7]. Uninvest then made the following transfers of money from its accounts: $1, 935, 716 to RST5, $290, 700 to Parkway, and $537, 411 to Koga. Id. at ¶ 9. The SEC maintains that each of those transfers unjustly enriched the receiving defendant. Id. at ¶ 11. Adding prejudgment interest, the SEC calculates that each of the relief defendants was unjustly enriched in the following amounts: $2, 018, 765 for RST5, $312, 185 for Parkway, and $528, 344 for Koga. Id. at ¶ 12. Subtracting the disbursements to RST5, Parkway, and Koga from the total Wings Network deposits to Uninvest, the SEC calculates that Uninvest received $4, 469, 033 in unjust enrichment from its involvement with the Wings Network, id. at ¶ 10, and that, with interest, the total comes to $4, 815, 892. Id. at ¶ 12.

         III. DISCUSSION

         a. Liability of Arrambide

          i. Violation of ...


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