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Securities and Exchange Commission v. Moddha Interactive, Inc.

United States District Court, D. Hawaii

July 25, 2018





         This matter is before the Court upon the Ex Parte Application of Plaintiff Securities and Exchange Commission (“SEC”) for a Temporary Restraining Order, Order to Show Cause Why a Preliminary Injunction Should Not Be Granted, and Orders (1) Freezing Assets; (2) Repatriating Assets; (3) Requiring Accountings; (4) Prohibiting the Destruction of Documents; and (5) Granting Expedited Discovery (the “TRO Application”).

         The Court, having previously issued a Temporary Restraining Order and Orders (1) Freezing Assets; (2) Repatriating Assets; (3) Requiring Accountings; (4) Prohibiting the Destruction of Documents; and (5) Granting Expedited Discovery (“TRO”), and having considered the SEC's Complaint, the TRO Application, the supporting Memorandum of Points and Authorities, the supporting declarations and exhibits, Defendants' opposition to preliminary injunction, the SEC's reply in support of the entry of a preliminary injunction, and the testimony, evidence and argument presented to the Court at the July 23-25, 2018 hearing on the Order to Show Cause Why a Preliminary Injunction Should Not Be Granted, the Court finds that:

A. This Court has jurisdiction over the parties to, and the subject matter of, this action.
B. The SEC has made a sufficient and proper showing in support of the relief granted herein, as required by Section 20(b) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77t(b)] and Section 21(d) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78u(b)] by evidence establishing a prima facie case and reasonable likelihood that: (i) Defendants Moddha Interactive, Inc. (“Moddha”), Marianne Veronika Sandor (“Sandor”), and Edward Michael Porrazzo (“Porrazzo”) have engaged in, are engaging in, are about to engage in, and will continue to engage in, unless restrained, transactions, acts, practices and courses of business that constitute violations of Section 17(a) of the Securities Act, [5 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; and (ii) Defendant Spar Street (“Street”) engaged in, is engaging in, is about to engage in, and will continue to engage in, unless restrained, transactions, acts, practices and courses of business that constitute violations of Section 15(a)(1) of the Exchange Act [15 U.S.C. § 78o(a)(1)] (collectively, “Defendants”).
C. Good cause exists to believe that, unless preliminarily restrained and enjoined by order of this Court, Defendants will dissipate, conceal, or transfer assets which could be subject to an order directing disgorgement or the payment of civil money penalties in this action. It is appropriate for the Court to issue this Preliminary Injunction so that prompt service on appropriate financial institutions can be made, thus preventing the dissipation of assets.
D. Good cause exists to believe that the repatriation of assets held in foreign locations is necessary.
E. Good cause exists to believe that an accounting of assets is necessary.
F. Good cause exists to believe that, unless restrained and enjoined by order of this Court, Defendants may alter or destroy documents relevant to this action.
G. Good cause exists for the SEC to conduct expedited discovery.

         The Court makes the following findings in support of the entry of a preliminary injunction.

         Defendants offered and sold unregistered securities to investors, and misrepresented and failed to disclose material facts to those investors, including through the Moddha Private Placement Memorandum (“PPM).[1] SEC Ex. 6 (Moddha 2017 PPM); SEC Ex. 200 (11/11/14 Moddha Form D); SEC Ex. 201 (2/16/18 Moddha Form D). Moddha, Porrazzo, and Sandor engaged in a series of misrepresentations and omissions that should have been and were material to whether an investor chose to invest in Moddha and further engaged in a scheme to defraud. That fraudulent scheme included the following:

         First, Moddha misrepresented the value, extent and quality of its patent portfolio. See, e.g., SEC Ex. 6 (Moddha 2017 PPM) at 13 (“MODDHA owns its own exclusive proprietary portfolio of patents based on the Quantum Transducer ‘QT'”). The testimony revealed that Moddha's patents have largely expired, are purportedly owned by other entities in partnership, or are not related to the Quantum Transducer. Moddha omitted these material facts from its PPM. While the Court cannot conclude that expired patents are valueless, the Court can and does conclude that the expired condition of Moddha's patents should have been disclosed in Moddha's marketing materials, as that fact would have been material to any prospective investor.

         Second, Moddha misrepresented its business relationship with Verizon. Producing marketing materials emblazoned with the juxtaposed Verizon and Moddha trademarks on virtually every page, [2] expressly touting the multi-billion dollar value of the companies' joint relationship and distributing these materials to prospective investors, it was Moddha's clear intent to convey an established, existing and valuable relationship with one of the world's largest telecommunications companies. SEC Ex. 4 (Moddha Verizon PowerPoint). Moddha, however, has never received a single dollar in sales, licensing, or other revenue from Verizon, and the “Registered Supplier” relationship that it has repeatedly emphasized is, even if true, practically valueless. SEC Ex. 211 (7/3/18 Decl. of Jeffrey Schweitzer); SEC Ex. 210 (7/3/18 Decl. of Beth A. Sasfai); Defs.' Ex. E (“Clarification on your registration status: Verizon utilizes the supplier registration database to identify prospective suppliers. Being ‘registered' in vSource makes you a potential supplier that we may consider for sourcing events. The registration process does not guarantee Business[.]”).

         Third, Moddha misrepresented its share dividend buyback program. While publicly and repeatedly claiming that foundational investors could achieve a virtually immediate 100% return on their investment through a buyback program that was without precedent in the history of corporate America, Moddha privately knew that the company has never been in a financial position to execute the program and would never be able to do so unless one of several “white whales” fulfilled his supposed pledge for as much as $10 billion in seed money. SEC Ex. 17 (11/3/17 Moddha Shareholder Update) (“To our knowledge and by our research, MODDHA is the only Private Company in history, who will have ever provided a 100% return on investment to our capital stock shareholders who believe in us and invested with us, to take us to the amazing place we are today.”); SEC Ex. 59 (4/23/18 Sandor Shareholder Update) (“We have prepared an Offer to Re-Purchase Moddha Common Shares for any, and all, shares you are currently holding. The offer is only awaiting final approval from securities counsel in order for it to go out for distribution to you, from Transfer Online. . . . We have been advised to expect that within a week you will receive the documents with all instructions, and the form to participate, or withdraw.”).

         That Moddha ever truly believed that such an investor, including Oscar Peters and Keith Garner, was just on the horizon is nothing short of ludicrous. Peters, whom Moddha claims promised $150 million in investment money, proved elusive. According to Defendants, Peters turned them away on the tarmac because of supposed immigration problems, declined a meeting in Dubai after Defendants travelled there from Hawaii, and could not transmit the promised funds because he was “ill” (and years later, presumably remains so), because of upheaval in the Canadian skies and because of violence at a Turkish Embassy. It appears that it never occurred to Defendants that Peters, whom they never met, was not real. Nor could Defendants so much as identify the name of the private “Middle Eastern Investment Fund” that Peters purported to manage, which was prepared to invest up to $2 billion dollars in Moddha.

         Garner of Atlanta made Peters look like a pauper. Garner promised $10 billion to Moddha, according to Defendants. And despite allegedly performing what they characterized as comprehensive due diligence on the financial wherewithal of Garner (and Peters), the only evidence that Defendants offered to prove Garner's reality was a one-page document ominously marked Exhibit X. Even if considered, Exhibit X presents Defendants with more problems than it purports to resolve.[3] Exhibit X is the first page report of a supposed Fidelity brokerage account owned by Garner, reflecting an account balance of more than $17 billion. The single page contains numerous facial irregularities, including missing values and corresponding values that do not correspond. The single page also includes a United States District Court criminal case number. That federal court case No. tracks to United States v. Keith Garner, 1:06-cr-00472-01-RWS-GGB, which in turn, evidences Garner's status as a convicted felon, sentenced by a United States District Judge to 120 months' imprisonment for fraud.[4] Why Defendants' comprehensive due diligence did not disclose that fact is not clear. To make it even worse, as if that were possible, the evidence shows that Defendants paid more than $30, 000 to Garner to cover his alleged investment transfer fees while receiving not a single penny from the supposed investor in return. On these facts, just whom was investing in whom is far from clear. What is clear is that Garner's status as a whale was no more real, and perhaps even less so, than Peters', yet Moddha continued touting its buyback program that was reliant on both.

         Fourth, Sandor and Porrazzo utilized investor funds for personal expenses unrelated to Moddha's business. Such personal expenses included a $15, 884.01 food and hotel bill at the Casa Del Mar in Los Angeles-including a $2, 400 room rate, per night-financed directly from a $500, 000 investment by the Weisels in October and November 2017. SEC Ex. 236 (Moddha Bof A 286 Statement, 11/1/17-11/30/17); SEC Ex. 209 (hotel invoices). Sandor and Porrazzo attribute legitimacy to these expenses, explaining that they conducted at least five separate business meetings during the course of their late-November 2017 stay at the hotel, and that those meetings were so productive that they resulted in the execution of term sheets and “contracted business valued in excess of tens of millions of dollars” for their burgeoning company. Opp'n to Prelim. Inj. at 26, Dkt. No. 22. Defendants, however, have not offered a single such contract into evidence, nor have they offered the testimony, affidavit or even unsigned statement from any of the individuals with whom they allegedly met. Moreover, the only “term sheet” they provided as evidence of the business purpose underlying their hotel stay was dated November 7, 2017-nearly two weeks before their stay at the Casa Del Mar began. See Defs.' Ex. J. (11/7/17 Term Sheet). Sandor and Porrazzo also claim entitlement to executive compensation under the terms of employment agreements with Moddha and contend that thousands of dollars of corporate withdrawals for that purpose should not be questioned. The terms of the very agreements on which Defendants rely, however, indicate that compensation may not be paid to either one until Moddha raises at least $5 million in capital, a milestone that Defendants admit has not been reached, even today. See Defs.' Ex. N (Moddha Corporate Records Book, Employee Contracts).[5]

         Fifth, Street served as an unregistered securities broker who facilitated investor sales on behalf of Moddha and without Moddha disclosing his commission participation to those investors. Absent such disclosure, those investors were not aware that a material portion of their investments would not be deployed as working capital for Moddha's business.[6] Defendants do not deny that multiple payments have been made to Street over a period of at least four years out of corporate funds. They claim, however, that such payments were made for Street's contributions to interactive art projects consistent with a 2011 joint venture agreement (SEC Ex. 50) between Street and Moddha. Such assertions bear little resemblance to reality. The evidence shows that from 2014 through 2017, Moddha made seven payments to Street totaling more than $200, 000. Each payment came immediately on the heels of Moddha's receipt of investment funds, and each payment consistently represented 15% of the amount of investment funds received. SEC Ex. 261 (Summary Chart Re: Street Commissions); see also SEC Exs. 228- 242 (Moddha Bank Statements). By contrast, there is no evidence of any art project having been performed or completed in temporal association with any of ...

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