56 - Order Denying Motions to Dismiss

7/31/2019 56 - Order Denying Motions to Dismiss

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UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 07-61693-CIV-LENARD/GARBER

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

vs.

JOSEPH J. MONTEROSSO, and

LUIS E. VARGAS,

Defendants.

________________________________/

OMNIBUS ORDER DENYING DEFENDANT JOSEPH J. MONTEROSSOS

MOTION TO DISMISS (D.E. 24); DENYING DEFENDANT LUIS E. VARGASS

MOTION TO DISMISS (D.E. 21); DENYING DEFENDANT LUIS E. VARGASS

MOTION FOR A MORE DEFINITE STATEMENT (D.E. 22); AND REQUIRING

DEFENDANTS TO FILE ANSWER TO COMPLAINT

THIS CAUSE is before the Court on the Motion to Dismiss filed by Defendant

Joseph J. Monterosso (Monterosso) on January 11, 2008 (Monterosso Motion, D.E.

24) and on the Motion to Dismiss and Motion for a More Definite Statement filed by

Defendant Luis E. Vargas (Vargas) on January 14, 2008 (Vargas Motions) (see D.E.

21 (Motion to Dismiss), D.E. 22 (Motion for More Definite Statement), D.E. 23

(Memorandum of Law in Support of Motion to Dismiss the Complaint or Alternatively

for a More Definite Statement), and D.E. 26 (duplicative Memorandum of Law in

Support of Motion to Dismiss the Complaint or Alternatively for a More Definite

Case 0:07-cv-61693-JAL Document 56 Entered on FLSD Docket 09/26/2008 Page 1 of 22


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Where appropriate, Monterosso and Vargas shall collectively be referred to as1

Defendants in this Order. Further, the Monterosso Motion and the Vargas Motions shall

collectively be referred to as Motions in this Order.

2

Statement)). On January 28, 2008, Plaintiff Securities and Exchange Commission (the1

SEC) filed its response to the Monterosso Motion (Response to Monterosso Motion,

D.E. 30) and to the Vargas Motions (Response to Vargas Motions, D.E. 29). On

February 7, 2008, Defendants each filed a reply (Vargas Reply, D.E. 35; Monterosso

Reply, D.E. 36). Having reviewed the Motions, the relevant pleadings, and the record,

the Court finds as follows:

I. Complaint

On November 21, 2007, the SEC commenced this action with the filing of the

Complaint. (See D.E. 1.) In sum, the SEC alleges therein that, from about July 2004

through September 2006, Defendants engaged in a fraudulent scheme to generate

fictitious revenue for GlobeTel Communications Corp. (GlobeTel) by creating false

invoices that reflected transactions that never occurred between various

telecommunication companies and three of GlobeTels wholly-owned subsidiaries. (Id.

1.) As a result of this alleged scheme, GlobeTel issued periodic reports, required

registration statements, and press releases that, according to the SEC, misled investors

because they materially overstated GlobeTels financial results for at least the period from

the third quarter of 2004 through the second quarter of 2006. (Id.) Based on these and

additional detailed allegations, the SEC alleges the following claims: 1) violations of



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Section 17(a) of the Securities Act (Section 17(a)), which prohibits fraud in the offer or

sale of securities; 2) Violations of Section 10(b) of the Securities Exchange Act (Section

10(b)) and Rule 10b-5, which prohibit fraudulent acts and material misstatements or

omissions in connection with the purchase or sale of any security; 3) Aiding or Abetting

Violations of Section 10(b) and Rule 10b-5; 4) Aiding or Abetting Violations of Section

13(a) of the Securities Exchange Act and Rules 12b-20, 13a-1, and 13a-13, which in part

prohibit filing reports with the SEC that contain false statements of material fact, and

failing to correct misleading or omitted information; 5) Aiding or Abetting Violations of

Section 13(b)(2)(A) of the Securities Exchange Act, which in part requires every issuer to

make and keep records which in reasonable detail accurately and fairly reflect the

transactions and dispositions of the assets of the issuer; and 6) Violation of Securities

Exchange Act Rule 13b2-1, which prohibits any person from falsifying or causing to be

falsified, any book, record or account subject to section 13(b)(2)(A) of the Securities

Exchange Act, and violation of Rule 13b2-2, which in part prohibits a director or officer

from making or causing to be made a materially false or misleading statement or omission

to an accountant in connection with documents or reports required to be filed with the

SEC. (See id. 97-125.)

The SEC seeks various types of injunctive and equitable relief, as well as

disgorgement and civil monetary penalties. (See generally id.)



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II. Motions

A. Monterosso Motion

In his motion, Monterosso argues that the SEC has failed to plead with

particularity that Monterosso engaged in fraud in accordance with Federal Rule of Civil

Procedure 9(b) because the Complaint lump[s] Monterosso and Vargas together and

makes allegations about them as a unit. (See D.E. 24-2 at 1-9.) In addition,

Monterosso argues that the SEC has failed to allege that he made any misrepresentation

or omission, or that he possessed the requisite scienter. (Id. at 9-12.) Monterosso also

argues that the SEC failed to adequately plead the alleged aiding and abetting violations,

as well as Monterossos alleged violations of Rules 13b2-1 and 13b2-2 of the Exchange

Act. (Id. at 12-18.)

In its response, the SEC argues that the Complaint identifies each Defendant

separately, and describes the conduct in which each is alleged to have engaged. (See D.E.

29 at 10-12.) Next, the SEC argues that, unlike a private plaintiff, the SEC need not

allege or prove reliance, causation or damages violations of Section 10(b) or Section

17(a), and that the Complaint properly alleges that Monterosso is liable for primary fraud

violations. (Id. at 13-16.) The SEC also argues that the Complaint properly pleads

scienter (id. at 16-18); aiding and abetting claims (id. at 18-22); and violations of

Exchange Act Rules 13b2-1 and 13b2-2 (id. at 22-24).

In his reply, Monterosso argues that the SECs lumping of Defendants violates



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Rule 9(b). (See D.E. 36 at 1-3.) Monterosso then reiterates his arguments that the

Complaint fails to properly allege violations of the anti-fraud provisions or the Exchange

Act Rules 13b2-1 and 13b2-2, and fails to adequately plead aiding and abetting. (Id. at 3-

8.)

B. Vargas Motions

In his motions, Vargas argues that the SEC has not alleged sufficient facts to

support its claims that any representation or omission was material, that Vargas had

scienter as required under Sections 10(b) and 17(a)(1) and Rule 10b-5, that Vargas

violated Sections 17(a)(2) and (3), that Vargas engaged in aiding and abetting, or that

Vargas violated Rule 13b2-1 or 13b2-2. (D.E. 26 at 1-15.) In addition, he argues that the

Complaint improperly lumps Defendants together in violation of Rule 8(a), 9(b), and

improperly lumps claims together in violation of Rule 10(b) of the Federal Rules of Civil

Procedure. (Id. at 15-21.)

In its response, the SEC argues that the Complaint properly alleges scienter claims

against Vargas, and, more specifically, that the Complaint adequately alleges that Vargas

is liable for primary fraud violations, that Vargass fraud was material, and that Vargas

possessed the requisite scienter. (See D.E. 30 at 4-15.) Next, the SEC argues that the

Complaint adequately alleges non-scienter claims against Vargas, namely, that he violated

Section 17(a)(2)-(3), that he engaged in aiding and abetting, and that he violated Rule

13b2-1 and 13b2-2. (Id. at 15-19.) The SEC further contends that the Complaint pleads



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fraud with adequate particularity, and that it satisfies the Federal Rules of Civil

Procedure. (Id. at 19- 26.)

In his reply, Vargas in large part reiteratesthe arguments set forth in his motion.

(See D.E. 35.)

III. Standard of Review

Pursuant to Federal Rule of Civil Procedure 12(b), a defendant may move for

dismissal of a claim based on one or more of seven specific defenses, including failure to

state a claim upon which relief can be granted. In reviewing a motion to dismiss, the

Court accepts the facts alleged in the complaint as true, and construes all reasonable

inferences therefrom in the light most favorable to the plaintiff. Bank v. Pitt, 928 F.2d

1108, 1109 (11th Cir. 1991). To survive an motion under Rule 12(b)(6), a claim need

not contain detailed factual allegations, but must provide sufficient grounds to show more

than a merely speculative entitlement to relief. Bell Atlantic Corp. v. Twombly, 127 S.Ct.

1955, 1964-65 (2007); Grossman v. Nationsbank, N.A., 225 F.3d 1228, 1231-32 (11th

Cir. 2000). Moreover, a plaintiffs obligation to provide the grounds for his or her

entitlement to relief requires more than labels and conclusions, and a formulaic

recitation of the elements of a cause of action will not do. Bell Atlantic Corp., 127 S Ct.

at 1964-65.

In addition, where a complaint alleges fraud, it must meet the heightened pleading

requirements of Federal Rule of Civil Procedure 9(b) (Rule 9(b)), which requires the



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circumstances constituting fraud or mistake to be stated with particularity.

IV. Analysis

A. Monterosso Motion

Monterosso first argues that the Complaint improperly lump[s] Monterosso and

Vargas together and makes allegations about them as a unit in violation of Rule 9(b).

Where multiple parties are charged with fraud, the complaint must distinguish among

defendants and specify their respective roles in the fraud, and must alert defendants to

the precise misconduct with which they are charged. Leisure Founders v. CUC Intl,

833 F. Supp. 1562, 1575-1576 (S.D. Fla. 1993). Here, the Court finds that the allegations

in the Complaint sufficiently distinguish between the only two Defendants in this case --

Monterosso and Vargas -- where appropriate, and articulate with sufficient particularity

the roles played by each in the alleged fraudulent conduct for purposes of Rule 9(b). It is

clear from the Complaint that Monterosso and Vargas are alleged to have both engaged in

some of the same fraudulent acts, and, given that the Complaint also separately identifies

each Defendant, describes each Defendants relationship to each other, identifies each

Defendants respective position at GlobeTel, and indicates that Vargas reported to

Monterosso throughout their work for GlobeTel (see, e.g. D.E. 1 10-11, 17-18, 24),

the Court does not find that the Complaint improperly lumps Monterosso and Vargas

together. Where appropriate, the Complaint separately attributes specific acts and/or

knowledge to either Monterosso or Vargas alone (see, e.g., id. 19, 21, 23-30, 33), or to



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Monterosso and Vargas together (see, e.g., id. 35, 37, 44). Although Monterosso also

asserts that it is improper under Rule 9(b) to allege that certain acts were taken by

Monterosso or Vargas, at Monterossos direction, in light of the fact that the Complaint

alleges that Monterosso was Vargass superior in that Vargas reported to Monterosso, the

Court does not find that such language amounts to improper lumping of Defendants

together in violation of Rule 9(b). See, e.g., First American Bank & Trust v. Frogel, 726

F. Supp. 1292, 1295-1296 (S.D. Fla. 1989) (where plaintiff alleged specific acts

attributable to the various defendants and alleged that defendants essentially acted as a

group to make false or misleading statements or omissions of material statements in, inter

alia, annual reports, Rule 9(b) was satisfied); cf. Cordova v. Lehman Bros., 526 F. Supp.

2d 1305, 1313 (S.D. Fla. 2007) (where complaint referred to eight defendants collectively

as Financial Institution Defendants or combined defendants with third entity when

alleging a fraud and failed to state how fraudulent actions were attributable to specific

individual defendants, Rule 9(b) was not satisfied). The allegations in the Complaint are

sufficient to alert each Defendant to the precise misconduct with which they are charged.

Monterosso next argues that the Complaint does not state a valid claim under

Section 10(b) of the Exchange Act and Rule 10b-5 thereunder because (1) it fails to allege

that the information provided by Monterosso (or Vargas, at Monterossos direction) to

GlobeTel in invoices and call detail records could reasonably be attributed to Monterosso

at the time the financial results, which were based upon the invoices and call detail



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Monterosso does not challenge this second element.2

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records, were publicly disseminated; and (2) its allegations regarding scienter are

conclusory. To establish a violation under Section 10(b), the SEC must show (1)

material misrepresentations or materially misleading omissions, (2) in connection with the

purchase or sale of securities, (3) made with scienter. SEC v. Merchant Capital, LLC,2

483 F.3d 747, 766 (11th Cir. 2007). The Complaint alleges, inter alia, that Monterosso

had prior experience in SEC filings and served as GlobeTels chief operating officer

(D.E. 1 10); that Monterosso helped devise an off-net revenue program to generate

revenue for G lobeTels subsidiaries (see, e.g., id. 32), and contains specific details

regarding the scheme (see, e.g., id. 24-38 ; that Monterosso knew that GlobeTel could

not record revenue generated by such off-net business without invoices and call detail

records to substantiate that the subsidiaries actually engaged in the transactions that were

the basis for the revenue reported (see, e.g., id. 35); that Monterosso either created, or

directed that Vargas create, fake invoices to submit to GlobeTel to substantiate the

subsidiaries business (see, e.g., id. 36); that, for example, Monterosso (or Vargas, at

Monterossos direction) changed the names of customers, dates, and amounts on invoices,

and created false invoices showing sales of minutes that did not actually occur (id.

41); that Monterosso (or Vargas, at Monterossos direction) also obtained false call detail

records to substantiate the invoices (id. 42); that Monterosso then submitted, or directed

that Vargas submit, the invoices and call detail records to GlobeTel despite knowing that



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the invoices and call detail records did not represent business that actually occurred (id.

43); that the false information provided by Monterosso (or Vargas, at Monterossos

direction) caused GlobeTels revenue to be grossly overstated in press releases and

reports (see, e.g., id. 56-83); and that Monterosso further knew or was reckless in not

knowing that such information would be incorporated into the revenue reported by

GlobeTel in its press releases and reports, and would result in material misstatements of

GlobeTels financial results in press releases and reports for approximately two years

(see, e.g. id. 84). The Court finds that these allegations, when viewed together with the

remaining allegations in the Complaint, sufficiently articulate material misrepresentations

and/or materially misleading omissions that can be attributed to Monterosso, and further,

sufficiently demonstrate that Monterosso acted with the requisite scienter for purposes of

defeating dismissal. See, e.g., S.E.C. v. Solow, Case No. 06-81041-CIV-

MIDDLEBROOKS, 2007 WL 1970806, at *1-2 (S.D. Fla. May 10, 2007) (denying

motion to dismiss claim under Section 10(b) where complaint alleged that the defendant

falsified trade tickets which caused company to submit inaccurate reports and caused

inaccurate capital computations).

Monterosso next argues that the Complaint fails to allege that Monterosso had any

involvement or responsibilities relating to GlobeTels books, records, or the maintenance

of its system of internal controls, and that it further fails to allege that Monterosso had the

ability to influence those who did control GlobeTels books, records, or the maintenance



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of its system of internal controls, requiring dismissal of the SECs aiding and abetting

claims. (See D.E. 24-2 at 12-26.) To establish an aiding and abetting claim, a complaint

must allege that (1) some other party has committed a securities law violation; (2) the

party accused of aiding and abetting has general awareness that his role was part of an

overall activity that is improper; and (3) the accused aider-abettor knowingly and

substantially assisted the violation. Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d

1004, 1009 (11th Cir. 1985). General awareness is generally inferred from surrounding

circumstances. Id. Knowledge may be shown by circumstantial evidence, or by

reckless conduct, but the proof must demonstrate actual awareness of the partys role

in the fraudulent scheme. Id. (citations omitted). Whether a defendant substantially

assisted the violation depends on the totality of the circumstances. Id. at 1010.

Here, the SEC has alleged facts sufficient to establish an aiding and abetting claim

against Monterosso. The Complaint properly alleges primary violations of securities laws

by GlobeTel. (See, e.g., D.E. 1 57-60, 63-83, 85-86, 109-111.) Moreover, the

Complaint clearly and specifically alleges in detail that Monterosso, who had prior

experience with SEC filings and was GlobeTels chief operating officer (see id. 10),

caused GlobeTel to make material statements in violation of securities laws; that

Monterosso knew how GlobeTel would use, and that GlobeTel would rely upon, the false

invoices and call detail records he allegedly created; and that GlobeTel would incorporate

the information into press releases and other reports of revenue. (See, e.g., id. 35, 38,



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41-44, 84, 88, 90, 92-93.) These allegations suffice to defeat dismissal at this stage, as

they create, at the very least, an inference that Monterosso had a general awareness that

his role was part of an overall activity that is improper, and further, that he knowingly and

substantially assisted GlobeTels violations of securities laws by creating false invoices

and call detail records upon which he knew GlobeTel would rely.

Finally, Monterosso argues that the Complaint fails to adequately plead his

violations of Exchange Act Rules 13b2-1 and 13b2-2. To plead a claim for violation of

Rule 13b2-1, the SEC must demonstrate that Monterosso directly or indirectly,

falsif[ied] or cause[d] to be falsified, any book, record, or account that GlobeTel was

required to maintain under the Securities Exchange Act. See 17 C.F.R. 240.13b2-1.

The SEC has specifically articulated how Monterossos actions affected and caused to be

falsified GlobeTels books and records by alleging, inter alia, that Monterosso created, or

caused to be created, false invoices and obtained false call detail records that became part

of GlobeTels books and records; that Monterosso knew the false documents he submitted

to GlobeTel would be relied upon by GlobeTel for accounting purposes; and that

GlobeTel relied upon the false information provided by Monterosso in its press releases,

accounting records, and reports. (See, e.g., D.E. 1 34-38, 57-93.) As such, the SEC

has sufficiently pleaded a claim that Monterosso has violated Rule 13b2-1. Cf. SEC v.

Dauplaise, 2006 U.S. Dist. LEXIS 9589, at *29-30 (M.D. Fla. Feb. 22, 2006) (where SEC

failed to allege how defendants actions affected any of companys books, records or



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accounts, and made no reference to companys books, records, or accounts except for one

conclusory allegation, SEC failed to allege claim under Rule 13b2-1). Similarly, the SEC

has sufficiently pleaded a claim that Monterosso has violated Rule 13b2-2. Rule 13b2-2

prohibits officers and directors from making material misstatements or omissions in

communications with accountants in connection with audits or reviews of financial

records, or with the preparation or filing of documents required to be filed with the SEC,

and also prevents officers and directors from manipulating, misleading or fraudulently

inducing any independent accountant who is performing an audit or review of financial

statements. See 17 C.F.R. 240.13b2-2. The SEC has specifically alleged that

Monterosso was an officer of GlobeTel (see D.E. 1 10); that, knowing revenue from

off-net business could not be recorded without supporting documentation (see id. 35),

he created, or caused to be created, false invoices and obtained false call detail records

that were submitted to GlobeTel (see, e.g., id. 36-38, 41-43, 47-48, 53-54); that

Monterosso knew the invoices and call detail records were false and that the information

contained therein would be used by GlobeTel in recording the companys books and

records and would be used by GlobeTels accountants and auditors in connection with

audits and reviews of financial statements (see, e.g., id. 38-40, 43-46, 49-52; 54-59;

61; 85-93); and that, as such, Monterosso indirectly or directly took action to manipulate

or fraudulently influence independent public or certified public accountants engaged in

the performance of an audit or review of the financial statements of GlobeTel in violation



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of Section 240.13b2-2 (see id. 124-25). In light of these allegations, the SEC has

sufficiently stated a claim against Monterosso for violating Rule 13b2-2. See, e.g.,

Dauplaise, 2006 U.S. Dist. LEXIS 9589, at *31-32 (rejecting dismissal of the SECs

claim against defendant for violating Rule 13b2-2).

Based on the above, Monterossos Motion is denied in its entirety.

B. Vargas Motions

In his Motions, Vargas first argues that the SECs claims that he violated Section

17(a) and 10(b) and Rule 10b-5 must be dismissed because the Complaint fails to allege

sufficient facts to support a claim that any representation or omission was materially

misleading. (See D.E. 26 at 7-8.) In the context of claims brought under Section 17(a)

and 10(b), materiality is defined as information that is substantially likely to be

important to a reasonable investor in deciding whether to purchase, sell, or hold

securities. SEC v. Kirkland, 521 F. Supp. 2d 1281, 1303 (M.D. Fla. 2007). Here, the

Complaint alleges in detail that Vargas participated in a scheme which caused GlobeTel

to inaccurately report and overstate its revenue by approximately $119 million over a

substantial period of time. (See D.E. 1 56-86.) It cannot be legitimately disputed that

such an overstatement of revenue, if true, is materially misleading to investors. In any

event, as Plaintiff correctly notes, materiality is a question of fact that typically is not

resolved at this stage of a securities action. See Holmes v. Baker, 166 F. Supp. 2d 1362,

1372 (S.D. Fla. 2001).



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Next, Vargas argues that the Complaint fails to allege sufficient facts to indicate

that Vargas possessed the requisite scienter to support the SECs claims under Section

10(b), 17(a), and Rule 10b-5. Scienter, which is a necessary element of a violation of

Sections 10(b) and 17(a), may be established by a showing of knowing misconduct or

severe recklessness. SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982).

Here, the Complaint alleges, inter alia, that Vargas began working for GlobeTel through

CSI, a company of which he was the sole shareholder; that, prior to operating CSI, he

worked as a bookkeeper for Monterosso; and that in or about April 2005, he began to

oversee the finances of GlobeTels subsidiary, Centerline. (D.E. 1 11.) The Complaint

further alleges, for example, that Vargas, along with Monterosso and GlobeTel

executives, devised an off-net revenue program to generate revenue for Centerline (id.

32); that Vargas knew that GlobeTel could not record revenue generated by such off-

net business without invoices and call detail records to substantiate that Centerline

actually engaged in the transactions that were the basis for the revenue reported (see, e.g.,

id. 35); that Vargas created and generated false invoices and call detail records to

support the fictitious revenue; and that Vargas knew, or was reckless in not knowing that

the non-existent revenue would be recorded by GlobeTel in its books and records (see,

e.g. id. 36-38; see also id. 55). In addition, as the SEC argues, the Complaint

establishes that Vargas may have had a strong pecuniary motive to create fictitious

revenue for GlobeTel, given that he was the sole shareholder of CSI, which received



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payment from GlobeTel only if CSI generated revenue for GlobeTel. (See id. 11, 21-

22.) Viewing all of these allegations together with those remaining in the Complaint as

true, the SEC has sufficiently alleged that Vargas possessed the requisite scienter for

purposes of defeating dismissal of the SECs claims against Vargas under Section 10(b),

17(a), and Rule 10b-5. See, e.g., Kirkland, 521 F. Supp. 2d at 1303-1304 (where

defendant, inter alia, manufactured evidence of success of businesses by drafting fake

leases, scienter element was established); SEC v. Digital Lightwave, 196 F.R.D. 698, 701

(M.D. Fla. 2000) (finding that the SEC sufficiently pleaded scienter inasmuch as the SEC

alleged that defendant acted with actual knowledge that he was fraudulently recording

revenue).

Vargas next argues that the Complaint fails to state a claim under Section 17(a)(2)

and (3). Section 17(a)(2) prohibits any person in the offer or sale of any securities from

obtaining money or property by means of any untrue statement of a material fact or any

omission to state a material fact necessary in order to make the statements made, in light

of the circumstances under which they were made, not misleading. Section 17(a)(3), in

turn, prohibits any person in the offer or sale of any securities from engaging in any

transaction, practice, or course of business which operates or would operate as a fraud or

deceit upon the purchaser. To establish a claim for a violation of either Section 17(a)(2)

or 17(a)(3), the SEC need only show (1) material misrepresentations or materially

misleading omissions, (2) in the offer or sale of securities, (3) made with negligence.



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SEC v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007). Here, the SEC

alleges that GlobeTel paid approximately one million dollars to CSI a company of

which Vargas was the sole shareholder (see, e.g., D.E. 1 11) -- as a result of the false

revenue generated by the alleged scheme in which Vargas participated, and that Vargas

withdrew money from CSIs account, which he kept. (Id. 95-96). In light of these and

additional, detailed allegations in the Complaint regarding Vargass involvement in the

alleged off-net revenue scheme, including, inter alia, his role in the practice of

falsifying and submitting invoices and call detail records as described above and causing

GlobeTel to grossly overstate its revenue in press releases and reports, the Court finds

that the Complaint adequately alleges a claim under Section 17(a)(2) and 17(a)(3).

Vargas next argues that the Court should dismiss the SECs aiding and abetting

claims against him because, according to Vargas, the relationship between his conduct

and GlobeTels publication of its revenues and projections is too tenuous to create

securities fraud liability on the basis of Vargas conduct and, more specifically, the

Complaint fails to satisfy the scienter and substantial assistance elements of aiding

and abetting securities violation. The Court easily rejects these arguments and finds that

the Complaint adequately alleges that Vargas had a general awareness that his role was

part of an overall activity that is improper and that he substantially assisted the alleged

securities violation in this case, in light of the Courts discussion and conclusions above

regarding Vargass scienter in the scheme that forms the basis for the charged securities



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violations, as well the allegations in the Complaint that detail Vargas role in causing

GlobeTel to make material misstatements in press releases and reports, as also described

above. See Woods, 765 F.2d at 1009-1010.

Vargas next argues that the Complaint fails to adequately plead his violations of

Exchange Act Rules 13b2-1 and 13b2-2 because he was not in a position to cause

GlobeTel or its officers to do anything. Again, to plead a claim for violation of Rule

13b2-1, all that the SEC must demonstrate is that Vargas directly or indirectly, falsif[ied]

or cause[d] to be falsified, any book, record, or account that GlobeTel was required to

maintain under the Securities Exchange Act. See 17 C.F.R. 240.13b2-1. Here, as

discussed above, the Complaint specifically alleges how Vargass actions caused

GlobeTels books and records to be falsified by alleging, inter alia, that Vargas created

false invoices and submitted to GlobeTel false call detail records that became part of

GlobeTels books and records, and it further alleges that Vargas knew the false

documents he submitted to GlobeTel would be relied upon by GlobeTel for accounting

purposes. (See, e.g., D.E. 1 32, 38, 55.) As such, the SEC has sufficiently pleaded a

claim that Vargas has violated Rule 13b2-1. Similarly, the SEC has sufficiently pleaded a

claim that Vargas has violated Rule 13b2-2, which states, in relevant part, that:

No officer or director of an issuer, or any other person acting under

the direction thereof, shall directly or indirectly take any action to

coerce, manipulate, mislead, or fraudulently influence any

independent public or certified public accountant engaged in the

performance of an audit or review of the financial statements of that

issuer that are required to be filed with the Commission pursuant to



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this subpart or otherwise if that person knew or should have known

that such action, if successful, could result in rendering the issuers

financial statements materially misleading.

17 C.F.R. 240.13b2-2. The SEC has specifically alleged throughout the Complaint that

Vargas acted under the direction of Monterosso, who was an officer of GlobeTel (see,

e.g., D.E. 1 10, 36); that Vargas knew that GlobeTel could not record revenue

generated by the off-net business without supporting documentation (id. 35); that he

created, or caused to be created, false invoices and obtained false call detail records that

were submitted to GlobeTel (see, e.g., id. 36-38, 41-43, 47-48, 53-54); that Vargas

knew the invoices and call detail records were false and that the information contained

therein would be used by GlobeTel in recording the companys books and records and

used by GlobeTels accountants and auditors in connection with audits and reviews of

financial statements (see, e.g., id. 38-40, 43-46, 49-52; 54-59; 61; 85-93); and that, as

such, Vargas, indirectly or directly took action to manipulate or fraudulently influence

independent public or certified public accountants engaged in the performance of an audit

or review of the financial statements of GlobeTel in violation of Section 240.13b2-2 (see

id. 124-25). Accepting these allegations as true, at the very least, Vargas can be said to

have indirectly manipulated, mislead, and/or fraudulently influenced independent public

or certified public accountants engaged in the audit or review of GlobeTels financial

statements while knowing that the actions he took could result in rendering GlobeTels

financial statements materially misleading. Thus, the SEC has sufficiently stated a claim



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Although the First Claim for Relief does not make specific reference to how Vargas3

obtained money or property in violation of Section 17(a)(2), the Complaint itself contains

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against Vargas for violating Rule 13b2-2. See, e.g., Dauplaise, 2006 U.S. Dist. LEXIS

9589, at *31-32 (rejecting dismissal of the SECs claim against defendant for violating

Rule 13b2-2).

Vargas, like Monterosso, also argues that the Complaint improperly lumps

Defendants together. For the same reasons the Court has rejected Monterossos

argument, as discussed above, the Court rejects Vargass argument in this regard as well.

Vargas additionally asserts that the Complaint improperly lumps the SECs Section 17(a)

claims together in its First Claim for Relief, in violation of Federal Rule of Civil

Procedure 10(b). Nonetheless, as the SEC argues, there is no requirement that the

Complaint segregate claims under Section 17(a)(1), (2), and (3), especially where, as

here, the Complaint clearly separates and articulates each of the three subsections and

presents them as alternatives (see D.E. 1 98) in the First Claim for Relief, and the

Complaint itself contains detailed allegations in support of each of the three provisions

under Section 17(a), as already described above, and does so in numbered paragraphs,

each of which are limited as far as practicable to a single set of circumstances. See Fed.

R. Civ. P. 10(b). Moreover, each of the three alternative claims presented under Section

17(a) are founded on the same set of circumstances -- namely -- the actions taken by

Vargas, as detailed throughout the Complaint and as specifically referred to in the First

Claim for Relief. As such, the Court declines to rule that the Complaint fails to comply3



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specific allegations, as already described by the Court herein, that GlobeTel paid CSI

approximately one million dollars as a result of the false revenue generated by Defendants

alleged scheme involving, inter alia, false invoices and false call detail records, and that Vargas,

who was the sole shareholder of CSI, obtained and kept money from CSIs account. (See e.g.,

D.E. 1 11, 95-96.) These allegations, when taken together with the remaining allegations in

the Complaint, are more than adequate to inform Vargas of the basis of the SECs claim that he

violated Section 17(a)(2).

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with the pleading requirements set forth in Federal Rule of Civil Procedure 10(b).

For all of these reasons, Vargass motion to dismiss is denied in its entirety.

Moreover, for reasons also stated herein, the Court does not find that the Complaint is so

vague or ambiguous that Vargas cannot reasonably required to frame a responsive

pleading. Accordingly, it is:

ORDERED AND ADJUDGED that:

1. The Motion to Dismiss filed by Defendant Joseph J. Monterosso on January

11, 2008 (D.E. 24) is DENIED.

2. The Motion to Dismiss the Complaint filed by Defendant Luis E. Vargas on

January 11, 2008 (D.E. 21) is DENIED.

3. The Motion for a More Definite Statement filed by Defendant Luis E.

Vargas on January 11, 2008 (D.E. 22) is DENIED.

4. The Motion for Protective Order Staying Discovery Pending Resolution of

Motions to Dismiss and the accompanying Motion for Hearing on Motion

for Protective Order Staying Discovery Pending Resolution of Motions to

Dismiss, filed by Defendants on September 3, 2008 (D.E. 54), is DENIED.



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5. Defendant Joseph J. Monterosso and Defendant Luis E. Vargas shall file an

Answer to the Complaint within ten (10) days of the date of this Order.

DONE AND ORDERED in Chambers at Miami, Florida, this 26th day of

September, 2008.

__________________________________

JOAN A. LENARD

UNITED STATES DISTRICT JUDGE


56 - Order Denying Motions to Dismiss

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