DENVER (Legal Newsline) - The U.S. Court of Appeals for the Tenth Circuit has affirmed a Utah federal court that entered a judgment against a company for a Ponzi scheme.
The action was brought against the company by the Securities and Exchange Commission. The Tenth Circuit issued its ruling on Friday.
The SEC began investigating Brian J. Smart, owner of Smart Assets, a California corporation, in 2009 for securities fraud. Smart asserted his Fifth Amendment right against self-incrimination when appearing before the SEC in 2009 for a deposition.
The SEC then sued him, alleging he defrauded multiple investors because he had represented that investors' money would be placed in low-risk financial instruments, but he then used their money to cover his and his wife's personal expenses, pay prior investors, and engage in high-risk ventures, like hard-money lending.
According to the complaint he also, "commingled investor funds, fabricated account statements, refused investors' inquiries about their money, misled investors about his affiliation with a financial-planning firm, gave promissory notes as collateral for investment funds, and gave investors bogus financial product-information sheets."
The SEC also asked the court to draw an adverse inference against Smart because he invoked the Fifth Amendment. They requested summary judgment.
The district court conducted a hearing and granted the SEC's motions. The court cited Smart's "failure to raise a genuine issue of fact, and it inferred from his Fifth Amendment invocation that "he knowingly and purposely defrauded investors."'
The court found Smart liable for disgorgement of $2,059,077 in investor funds, a civil penalty in that same amount, and $597,426 in prejudgment interest, for a total judgment of $4,715,580.
Smart appealed the case to the Tenth Circuit, trying to withdraw his Fifth Amendment pleas. The Appeals Court denied this and affirmed the district court judgment.
Judge Michael Murphy of the Tenth Circuit wrote in his opinion, "The circumstances of Smart's invocation of the Fifth Amendment reveal that he was using the privilege to manipulate the litigation process. When Smart invoked the Fifth Amendment during discovery, he had failed to attend his own deposition the prior day, and he offered no satisfactory explanation for the failure."
The judge also noted Smart took the Fifth after conferring with counsel.
"Even if we assume that Smart was unaware of the potential consequences for invoking the Fifth Amendment at that time, Smart had taken the Fifth on the advice of his own counsel three months earlier, during the SEC's investigatory process," the judge said.