United States District Court, D. Colorado
ORDER GRANTING IN PART AND DENYING IN PART
PLAINTIFF'S REMEDIES MOTION
William J. Martinez, United States District Judge.
a securities fraud case that Plaintiff Securities and
Exchange Commission (“SEC”) brought against Taj
“Jerry” Mahabub (“Mahabub”) and the
company he founded, GenAudio, Inc. (“GenAudio”)
(together, “Defendants”). The SEC asserted
various theories of liability under the Securities Act of
1933 (“Securities Act”), 15 U.S.C. §§
77a et seq., and the Securities Exchange Act of 1934
(“Exchange Act”), 15 U.S.C. §§ 78a
et seq. The SEC moved for summary judgment on all
theories of liability, and the Court granted that motion in
part (“Summary Judgment Order”). See SEC v.
Mahabub, 343 F.Supp.3d 1022 (D. Colo. 2018) (ECF No.
95). The Court then ordered the SEC to state “whether
it wishes to go to trial to establish Defendants'
liability on claims for which the Court has not granted
summary judgment and/or on a broader base of facts than the
Court accepted when granting summary judgment, ” or, on
the other hand, “whether it is willing to proceed
directly to the remedies phase of this case (abandoning those
claims that would otherwise need to go to trial on
liability).” Id. at 1050. The SEC chose the
latter course. (See ECF No. 99.)
before the Court is the SEC's Motion for Final Judgment
Seeking Remedies Against Defendants Taj Jerry Mahabub and
GenAudio, Inc. and to Establish a Fair Fund. (ECF No. 110.)
Defendants, represented separately, each filed a response
(ECF Nos. 111, 112), and the SEC then filed separate replies
(ECF Nos. 113, 114). For the reasons explained below, the
Court grants the remedies the SEC requests except that the
Court will limit Mahabub's joint and several liability
with GenAudio to the amounts the SEC has shown to be
Mahabub's profits from GenAudio's stock sales. The
Court will also require the SEC to submit a new prejudgment
Court's findings of fact and conclusions of law in the
Summary Judgment Order are extensive and need not be repeated
here. The Court incorporates them by reference and offers the
following summary, for context.
developed and marketed “AstoundSound, ” a
software-based system for processing normal stereo audio to
make it sound three-dimensional (e.g., as if the
sound is coming from behind listener, from far away, etc.).
Summary Judgment Order, 343 F.Supp.3d at 1028.
Mahabub is GenAudio's founder and served as its CEO and
Chairman of the Board from 2009 to 2012. Id.
in July 2009 or thereabouts, and continuing for roughly the
next three years, Mahabub had various levels of discussions
with engineers at Apple, Inc., about integrating AstoundSound
into Apple's computers and portable devices. Id.
at 1029-37. No one higher than mid-level executives at Apple
ever became aware of these discussions. Id. at
1032-36. However, when communicating with GenAudio employees,
investors, and prospective investors, Mahabub routinely
exaggerated or fabricated details about Apple's interest.
See id. Mahabub claimed, for example, that
Apple's senior vice president of worldwide marketing,
Phil Schiller, was making specific plans to incorporate
AstoundSound into particular product rollouts, and that CEO
Steve Jobs had taken a personal interest in AstoundSound.
Id. at 1030-36. Ultimately, Apple and GenAudio never
reached any deal. Id. at 1037.
Summary Judgment Order, the Court found no genuine dispute
that Mahabub, acting on GenAudio's behalf, knowingly or
recklessly made six materially false or misleading statements
in connection with two offerings of GenAudio securities, in
violation of Exchange Act § 10(b) (15 U.S.C. §
78j(b)), and Rule 10b-5(b) (17 C.F.R. § 240.10b-5(b)).
Because this is an SEC enforcement action, the SEC did not
need to prove that anyone relied to his or her detriment on
those statements. See SEC v. Wolfson, 539 F.3d 1249,
1256 (10th Cir. 2008). However, the SEC nonetheless
demonstrated a lack of genuine dispute that one of those six
misrepresentations prompted a $15, 000 investment in
GenAudio. Summary Judgment Order, 343 F.Supp.3d at
1046. That representation was therefore also a violation of
Securities Act § 17(a)(2) (15 U.S.C. § 77q(a)(2)).
See id. at 1042-43 (holding that Securities Act
§ 17(a)(2) contains a causation requirement, even in an
SEC enforcement action). The SEC claimed that numerous other
statements made by Mahabub were likewise violations of the
Exchange Act or the Securities Act, or both, but the Court
found that all statements beyond the six just noted raised
genuine, material factual disputes. Id. at 1043-44
the Court held that GenAudio and Mahabub had both sold
unregistered GenAudio securities without qualifying for any
registration exemption. Id. at 1039-41. Accordingly,
they had violated Securities Act § 5(a) and (c) (15
U.S.C. §§ 77e(a) & 77e(c)). These unregistered
securities offerings were the same securities offerings that
the Court found to be infected by the misleading statements
for which Defendants were liable under Exchange Act §
10(b), Rule 10b-5(b), and Securities Act § 17(a)(2).
See Summary Judgment Order, 343 F.Supp.3d at
Injunction Against Further Violations
first asks the Court to enjoin Defendants from further
violations of federal securities laws. (ECF No. 110 at
Act 20(b) states that, “upon a proper showing, a
permanent or temporary injunction or restraining order shall
be granted without bond” against a person whom the SEC
proves to have “engaged . . . in any acts or practices
which constitute or will constitute a violation of the
provisions of [the Securities Act].” 15 U.S.C. §
77t(b). Using materially identical language, Exchange Act
§ 21(d)(1) similarly authorizes an injunction against
violations of the Exchange Act and its implementing
regulations. See 15 U.S.C. § 77u(d)(1).
“proper showing” required by these statutes
places the burden on the SEC to demonstrate
a reasonable and substantial likelihood that the defendant,
if not enjoined, will violate securities laws in the future.
Determination of the likelihood of future violations requires
analysis of several factors, such as the seriousness of the
violation, the degree of scienter, whether defendant's
occupation will present opportunities for future violations
and whether defendant has recognized his wrongful conduct and
gives sincere assurances against future violations. Although
no single factor is determinative, [the Tenth Circuit has]
previously held that the degree of scienter bears heavily on
the decision. A knowing violation of [Exchange Act §]
10(b) or [Securities Act §] 17(a)(1) will justify an
injunction more readily than a negligent violation of
[Securities Act] § 17(a)(2) or (3). However, if there is
a sufficient showing that the violation is likely to recur,
an injunction may be justified even for a negligent violation
of § 17(a)(2) or (3).
SEC v. Pros Int'l, Inc., 994 F.2d 767, 769 (10th
Cir. 1993) (citations and internal quotation marks omitted).
Application to Mahabub
• Mahabub's violations were “serious and
repeated, ” given the multiplicity of false statements
and the length of time over which he made them;
• the sale of unregistered securities was also serious
given that it had been ongoing for many years;
• Mahabub's misrepresentations were
• Mahabub continues to serve as GenAudio's CEO, and
he is now also the CEO of a new company for which he has
solicited investment; and
• Mahabub has never acknowledged his wrongful conduct or
given assurances against future violations.
(ECF No. 110 at 10-11.)
never directly responds to any of these accusations. The only
portion of his response brief that comes close is an argument
related to the penalties the SEC seeks (addressed in Part
II.C.2, below), where admission of wrongdoing is also a
factor. (See ECF No. 112 at 4.) In that context, he
notes that he “does not oppose” the
director-officer bar (another remedy the SEC seeks, addressed
in Part II.D, below). (Id.) This non-opposition, he
says, shows that “he understands and accepts that [the
director-officer bar] appropriately follows the Court's
order on the SEC's summary [judgment] motion.”
extent this was also meant to address (indirectly) the
request for an injunction, it is decidedly not an
acknowledgment of wrongful conduct. It is, rather, a
carefully worded attempt to sound contrite without admitting
anything other than uncontroversial proposition that a
director-officer bar is often an appropriate remedy against
those who violate securities laws.
Mahabub's failure to address the factors relevant to an
injunction, or to contest the SEC's argument in this
regard, the Court finds that Mahabub has conceded that the
SEC has made a proper showing for an injunction against him.
The Court will therefore award the requested injunction
Application to GenAudio
argues that its showing as to Mahabub applies equally to
GenAudio because Mahabub acted on GenAudio's behalf and
can continue to do so, as its CEO. (ECF No. 110 at 10-11.)
GenAudio responds that there can be no reasonable likelihood
of a future violation because “GenAudio is a defunct
corporation that has ceased operations and is no longer
engaged in the sale of securities.” (ECF No. 111 at
10.) GenAudio supports this assertion with a declaration from
Mahabub explaining that he is the only remaining GenAudio
employee, that GenAudio does not have any open bank accounts,
and that GenAudio is no longer operating or engaging in the
sale of securities. (ECF No. 111-1.) The SEC replies with a
declaration from GenAudio shareholder Dell Skluzak that no
one from GenAudio has ever notified him that “the
company is defunct and no longer has any ongoing
operations.” (ECF No. 113-1 ¶ 7.) Moreover,
Skluzak says that GenAudio still has assets (at least three
recently-issued patents) and that a third-party valuation
report from 2010 values a non-exclusive AstoundSound
licensing regime at slightly more than $1 billion.
(Id. ¶¶ 3-5.)
the 2010 valuation report is of questionable value today, the
Court is persuaded that there remains at least a reasonable
probability that GenAudio will operate again and will sell
securities. Accordingly, the Court will issue the requested
injunction against GenAudio.
Disgorgement & Prejudgment Interest
next seeks disgorgement and prejudgment interest on the
disgorged amounts. (ECF No. 110 at 11-14.)