29 - Opp to Mont Mot

7/31/2019 29 - Opp to Mont Mot

1/27

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 07-cv-61693 (JAL)

________________________________________________

)

SECURITIES AND EXCHANGE COMMISSION, ))

Plaintiff, )

)

)

v. )

)

)

JOSEPH J. MONTEROSSO, and )

LUIS E. VARGAS, )

)

Defendants. )________________________________________________)

PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS

OPPOSITION TO DEFENDANT JOSEPH E. MONTEROSSOS

MOTION TO DISMISS

Of Counsel: Jeffery T. Infelise (DC 546998)

Cheryl J. Scarboro Special Florida Bar No. A5501154

[email protected]

Reid A. Muoio

Special Florida Bar No. A5501160

[email protected]

Brent Mitchell


[email protected]

100 F Street NE

Washington, D.C. 20549

(tel) (202) 551-4904 (Infelise)

(fax) (202) 772-9362 (Infelise)

January 28, 2008 Attorneys for Plaintiff,

Securities and Exchange Commission

Case 0:07-cv-61693-JAL Document 29 Entered on FLSD Docket 01/28/2008 Page 1 of 27


2/27

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES ........................................................................................................ ii

PROCEDURAL HISTORY ........................................................................................................... 1

ARGUMENT ................................................................................................................................ 3

I. Standards Of Review .................................................................................................. 3

II. The Complaint Is Plead With Adequate Particularity ................................................ 4

III. The Complaint Properly Alleges Claims Upon Which ReliefMay Be Granted ....................................................................................................... 7

A. The Complaint Properly Alleges Scienter Claims ........................................ 7

1. The Complaint Properly Alleges That Monterosso Is Liable

For Primary Fraud Violations ........................................................... 7

2. The Complaint Properly Pleads Scienter ........................................ 11

B. The Complaint Properly Alleges Aiding And Abetting Claims .................. 13

C. The Complaint Properly Pleads Violations of Exchange

Act Rules 13b2-1 and 13b2-2 ..................................................................... 17

1. Rule 13b2-1: Falsifying Books and Records ................................... 17

2. Rule 13b2-2: False Statements to Auditors ..................................... 18

CONCLUSION ........................................................................................................................... 19



3/27

ii

TABLE OF AUTHORITIES

CASES

Aaron v. S.E.C., 446 U.S. 680 (1980) .............................................................................. 8

Appalachian Enterprises, Inc. v. Epayment Solutions Ltd., No.

01-civ-11502, 2004 WL 2813121 (S.D.N.Y. Dec. 8, 2004) ....................................... 5

Bruhl v. Price Waterhousecoopers International, No. 03-23044-civ, 2004

WL 997362 (S.D. Fla. Mar. 27, 2007) ........................................................................ 5

Castro v. Sec. of Homeland Security, 472 F.3d 1334 (11th Cir. 2006) ............................. 3

Cippola v. County of Rensselaer, 129 F. Supp. 2d 436 (N.D.N.Y. 2001) ........................ 7

Conley v. Gibson, 355 U.S. 41 (1957) .............................................................................. 3

Cordova v. Lenman Brothers, Inc., F. Supp. 2d __, 2007, No. 05-21169, WL 4287729

(S.D. Fla. 2007) ........................................................................................................... 5

In re Eagle Building Technology, Inc. Sec. Litigation, 319 F. Supp. 2d 1318

(S.D. Fla. 2004) ......................................................................................................... 13

Friedlander v. Nims, 755 F.2d 810 (11th Cir. 1985) ........................................................ 4

Fujisawa Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720 (N.D. Ill. 1993) .................... 4

In re Global Crossing, Ltd. Sec. Litigation, 322 F. Supp. 2d 319 (S.D.N.Y.

2004) ......................................................................................................................... 11

Glover v. Liggett Group, Inc., 459 F.3d 1304 (11th Cir. 2006) ........................................ 3

Hishon v. King & Spalding, 467 U.S. 69 (1984) ........................................................ 3, 16

In re Microstrategy, Inc. Sec. Litigation, 115 F. Supp. 2d 620 (E.D. Va.

2000) ......................................................................................................................... 13

National Organization for Women, Inc. v. Scheidler, 510 U.S. 249 (1994) ..................... 3

In re Parmalat Sec. Litigation, 376 F. Supp. 2d 472 (S.D.N.Y. 2005) ............................ 11

Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015 (11th Cir. 2004) ............................... 12



4/27

iii

In re Royal Ahold N.V. Sec. & ERISA Litigation, 351 F. Supp. 2d 334 (D.Md. 2004) .................................................................................................................. 10

Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986) ............................ 14

S.E.C. v. Carriba Air Inc., 681 F.2d 1318 (11th Cir. 1982) ..................................... 11, 12

S.E.C. v. Cedric Kushner Promotions, Inc., 417 F. Supp. 2d 326 (S.D.N.Y.

2006) ................................................................................................................... 15, 16

S.E.C. v. Collins & Aikens Corp., F. Supp. 2d , 2007 WL 4480025(S.D.N.Y. Dec. 21, 2007) ................................................................................ 8, 10, 12

S.E.C. v. Converge Global, Inc., No. 04-80841cv, 2006 WL 907567 (S.D.Fla. March 10, 2006) ................................................................................................... 9

S.E.C. v. Dauplaise, No. 05-1391cv, 2006 WL 449175 (M.D. Fla. Feb. 22,2006) ....................................................................................................................... 8, 9

S.E.C. v. Digital Lightwave, 196 F.R.D. 698 (M.D. Fla. 2000) ..................................... 12

S.E.C. v. Dunlap, 2002 WL 1007626 (S.D. Fla. March 27, 2002) ................................... 8

S.E.C. v. Gane, 2005 WL 90154 (S.D.Fla .Jan. 4, 2005) ............................................... 13

S.E.C. v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004) ...................................................... 11

S.E.C .v. Holschuh, 694 F.2d 130 (7th Cir. 1982) .................................................... 10, 13

S.E.C. v. KPMG, 412 F. Supp. 2d 349 (S.D.N.Y. 2006) .................................................. 8

S.E.C. v. Lucent Technology, Inc., 363 F. Supp. 2d 708 (D.N.J. 2005) ..................... 9, 12

S.E.C. v. McNulty, 137 F.3d 732 (2nd Cir 1998) ........................................................... 17

S.E.C. v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007) .................................... 8

S.E.C. v. Nacchio, 438 F. Supp. 2d 1266 (D. Colo. 2006) ............................................. 10

S.E.C. v. Parnes, No. 1-civ-0763, 2001 WL 1658275 (S.D.N.Y. Dec. 26, 2001) ............ 5

S.E.C. v. Physicians Guardian Unit Investment Trust, 72 F. Supp. 2d

1342 (M.D. Fla. 1999) ............................................................................................ 3, 4



5/27

iv

S.E.C. v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y. 1997) ................................... 13, 17

S.E.C. v. Solow, No. 06-81041cv, 2007 WL 1970806 (S.D. Fla. May 10,

2007) ......................................................................................................................... 11

S.E.C. v. Treadway, 354 F. Supp. 2d 311 (S.D.N.Y. 2005) ............................................. 8

S.E.C. v. U.S. Environmental, Inc., 155 F.3d 107 (2d. Cir. 1998) ................................. 11

In re Suprema Specialities, Inc. Sec. Litigation, 438 F.3d 256 (3d Cir.

2006) ..................................................................................................................... 9, 12

Tellabs, Inc. v. Makor Issues and Rights, Ltd., U.S. , 127 S. Ct. 2499

(2007) ........................................................................................................................ 13

Wayne Investment, Inc. v. Gulf Oil Corp., 739 F.2d 11 (1st Cir. 1984) ........................... 4

Ziemba v. Cascade International, Inc., 256 F.3d 1194 (11th Cir. 2001) ....................... 4, 8

REGULATIONS

17 C.F.R. 240.13b2-2 ................................................................................................... 18

17 C.F.R. 240.3b .......................................................................................................... 18



6/27

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF FLORIDA

CASE NO. 07-cv-61693 (JAL)

________________________________________________

)

SECURITIES AND EXCHANGE COMMISSION, ))

Plaintiff, )

)

)

v. )

)

)

JOSEPH J. MONTEROSSO, and )

LUIS E. VARGAS, )

)

Defendants. )________________________________________________)

PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS

OPPOSITION TO DEFENDANT JOSEPH E. MONTEROSSOS

MOTION TO DISMISS

Pursuant to Rule 7 of the Federal Rules of Civil Procedure and Local Rule 7.1, plaintiff,

the Securities and Exchange Commission (the Commission), respectfully submits its

memorandum of law in support of its opposition to the defendant, Joseph E. Monterossos

(Monterosso) motion to dismiss the Commissions complaint. For the reasons set forth below,

the Court should deny both motions.

PROCEDURAL HISTORY

On November 21, 2007, the Commission filed a complaint against defendants

Monterosso and Vargas alleging that from about July 2004, through September 2006, they

engaged in a fraudulent scheme to generate fictitious revenue for GlobeTel Communications

Corp. (GlobeTel). Specifically, they created false invoices that appeared to record purchases

and sales by three of GlobeTels, wholly-owned subsidiaries that never occurred. The Complaint



7/27

2

further alleges that as a direct result of defendants fraudulent scheme, GlobeTel issued periodic

reports, registration statements and press releases that 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. Compl. 1.

The defendants fraudulent scheme involved the creation of false invoices by Monterosso

and Vargas that made it appear that GlobeTels three wholly-owned subsidiaries, Centerline

Communications, LLC (Centerline), Volta Communications, LLC (Volta), and Lonestar

Communications, LLC (Lonestar) engaged in the buying and selling of telecom minutes with

other wholesale telecom companies. In reality, there were no transactions under the so-called

off-net program. Two of GlobeTels subsidiaries Volta and Lonestar actually did no

business. The third subsidiary, Centerline, reported millions of dollars in business with

Monterossos and Vargas own private company, Carrier Services Inc. (CSI),that never

occurred. Compl. 3. In order to substantiate the fictitious revenue reported in the fake

invoices, the defendants obtained call detail records (CDRs) that purported to document the

calls that related to the invoices and submitted them to GlobeTel. All of CDRs obtained were

false in that the calls documented in the CDRs were not related in any way to any minutes

bought or sold by GlobeTels subsidiaries. Compl. 42, 43, 48, 49, 53, 54.

As a result of defendants fraudulent scheme, GlobeTels books, records and accounts

falsely and inaccurately reflected the companys financial condition, Compl. 85, and caused

GlobeTel to falsely report to its investors and auditors that between September 2004 and June

2006, the company and its wholly-owned subsidiaries generated nonexistent revenue of $119

million that accounted for approximately 80 percent of the revenue GlobeTel reported during this



8/27

3

period. Compl. 2. In addition, the false invoices and false CDRs that Monterosso and Vargas

provided to GlobeTel as part of their fraudulent scheme resulted in material, false and misleading

statements to GlobeTels accountants and auditors. Compl. 87-90.

On December 7, 2007, and on December 13, 2007, Monterosso filed unopposed motions

to extend the time to respond to the Commissions Complaint, which were granted by the Court.

Dkt. Nos. 12, 13, 15, 17. On January 11, 2007, Monterosso filed a motion to dismiss the

Commissions complaint pursuant to Fed. R. Civ. P. (Rule) 12(b)(6), and 9(b). Dkt. No. 24.

ARGUMENT

I. Standards Of Review

In resolving a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the Court should

accept the factual allegations in the complaint as true and construe them in the light most

favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Castro v. Sec. of

Homeland Security, 472 F.3d 1334, 1336 (11 Cir. 2006), citing Hill v. White, 321 F.3d 1334th

(11 Cir. 2003). [A] complaint should not be dismissed for failure to state a claim unless itth

appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which

would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Glover v. Liggett

Group, Inc., 459 F.3d 1304, 1308 (11 Cir. 2006); Castro, 472 F.3d at 1336. The Commissionsth

complaint must be sustained if relief could be granted under any set of facts that could be

proved consistent with the allegations. National Org. for Women, Inc. v. Scheidler, 510 U.S.

249, 256 (1994).

The purpose of Fed. R. Civ. P. 9(b) is to provide the defendant with sufficient notice and

to enable him to prepare answers to allegations of fraud. S.E.C. v. Physicians Guardian Unit Inv.



9/27

4

Trust, 72 F. Supp. 2d 1342, 1352 (M.D. Fla. 1999); see Wayne Investment, Inc. v. Gulf Oil

Corp., 739 F.2d 11, 13 (1st Cir. 1984). As noted in Physicians Guardian, 72 F. Supp. 2d at 1352:

[W]hen considering the question of whether or not a pleading of fraud is alleged

with adequate particularity in a securities law context, this Court must not readRule 9(b) of the Federal Rules of Civil Procedure to abrogate the notice pleading

requirements of Rule [8] of the Federal Rules of Civil Procedure. Friedlander v.

Nims, 755 F.2d 810 (11 Cir. 1985). Therefore, the court, in considering ath

motion to dismiss for failure to plead fraud with particularity, must be careful to

harmonize the directives of Fed. R. Civ. P. Rule 9(b) with the broader policy of

notice pleading.

See also Ziemba v. Cascade Intl, Inc., 256 F.3d 1194, 1202 (11 Cir. 2001); accord, Fujisawath

Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720, 726 (N.D. Ill. 1993) (Rule 9(b) . . . must be

read in conjunction with Rule 8, which requires a short and concise pleading).

Rule 9(b) does not require nor make legitimate the pleading of detailed evidentiary

matter. Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979). Pleading additional

evidentiary details would contravene the standards of Rule 8 while serving neither purpose of

Rule 9(b) putting a defendant on notice and enabling him to prepare an answer.

II. The Complaint Is Plead With Adequate Particularity

Monterosso does not claim that the allegations in the Complaint lack specificity

concerning the nature of the conduct and misrepresentations that the Commission alleges

constitute the fraud in this case. Neither does he claim that the Complaint is ambiguous with

respect to when the conduct and misrepresentations occurred. Monterossos only claim is that

the Complaint does not satisfy the specificity requirements of Fed. R. Civ. P. 9(b) because it

lumped him together with Vargas when describing the conduct that is the basis for the claims



10/27

Mem. at ____, refers to the Memorandum of Law In Support of Defendant1

Joseph J. Monterossos Motion to Dismiss.

5

against them. Mem. at 8-9. Monterosso claims that this lumping hinders his ability to defend1

against the allegations. Mem. at 9. Monterossos argument is based upon a misstatement of the

nature of the allegations against him and Vargas.

First, contrary to Monterossos claim, the Complaint does not refer to Monterosso and

Vargas indiscriminately as a group. To the contrary, the Complaint identifies each defendant

separately and describes the conduct in which each is alleged to have engaged. Compl. 40-43,

46-49, 52-54. This stands in stark contrast to the cases in which it has been held that a

complaint fails to adequately distinguish between the conduct attributable to multiple plaintiffs.

See Cordova v. Lehman Bros., Inc., --F.Supp.2d --, 2007 WL 4287729, *6 (S.D. Fla. 2007)

(complaint repeatedly referred to six unrelated defendants collectively as Financial Institution

Defendants); Bruhl v. Price Waterhousecoopers Intl, No. 03-23044-civ, 2004 WL 997362, *3-

*4 (S.D. Fla. Mar. 27, 2007) (complaint referred to two separate corporate entities collectively as

Citco Defendants); Appalachian Enterprises, Inc. v. ePayment Solutions Ltd., slip op., No. 01-

civ-11502, 2004 WL 2813121 (S.D.N.Y. Dec. 8, 2004) (complaint did not differentiate between

acts taken by 17 different defendants, or how the defendants were interrelated); S.E.C. v. Parnes,

No. 1-civ-0763, 2001 WL 1658275, *4 (S.D.N.Y. Dec. 26, 2001) (complaint made

undifferentiated reference to four different defendants as ADAR defendants).

Additionally, the allegations in the Complaint clearly raise the inference that Monterosso

and Vargas acted in concert to perpetrate the fraud in this case. It alleges that prior to entering

any agreement with GlobeTel, Vargas worked as Monterossos bookkeeper. Compl. 17. It also



11/27

6

alleges that after Vargas started his own telecom company, CSI, Monterosso handled all the

negotiations for the company. Compl. 18. Additionally, after CSI entered the agreement with

GlobeTel, Vargas reported to Monterosso throughout their work for GlobeTel. Compl. 24. The

Complaint also alleges that Vargas personally made a request for additional invoices from

another telecom company that Monterosso had previously contacted to obtain invoices. Compl.

27-28. Thus, the allegations in the Complaint assert that the actions of Monterosso and Vargas

were inextricably related and that they acted in concert to perpetrate the fraud in this case. Cf.

Appalachian Enterprises, 2004 WL 2813121 at *6. (complaint did not meet specificity

requirements of Rule 9(b) because it did not differentiate between which acts were taken by

which of the 17 defendants, or how the parties were interrelated).

The allegations in the Complaint that actions were taken by Monterosso or Vargas, at

Monterossos direction reflect the relationship between the two defendants established by the

other factual allegations and assert that Monterosso was responsible for all the fraudulent actions

taken either by him or by Vargas. These allegations clearly put Monterosso on notice that he

must defend against the Commissions assertion that between September 2004 and June 2006, he

created false invoices, obtained false CDRs and submitted false invoices or CDRs to GlobeTel or

that he directed Vargas to do so.

Monterosso suggests that the Complaint improperly lumps the defendants together

because it alleges that he and Vargas violated the Anti-Fraud provisions in the same manner.

Mem. At 8. However, when an allegation only applies to either Monterosso or to Vargas, the

allegation makes that fact clear. Compl. 19, 21, 23-30, 33, 37. In this case, a large number of

the allegations apply to both Monterosso and Vargas because they both engaged in the same



12/27

7

fraudulent acts. The combination of the allegations that apply to both Vargas and Monterosso

does not create confusion and does not violate the specificity requirement of Rule 9(b). The

Commission is not required to plead separate claims for relief with respect to Vargas and

Monterosso when the conduct alleged to be the basis for the claim against both of them is

identical. See Cippola v. County of Rensselaer, 129 F.Supp.2d 436, 444-45 (N.D.N.Y. 2001)

(proper to combine allegations against multiple defendants where it is alleged that all defendants

engaged in the same conduct).

III. The Complaint Properly Alleges Claims Upon Which Relief May Be Granted

Monterossos various arguments concerning why the claims in the Commissions

complaint should be dismissed pursuant to Rule 12(b)(6) are without merit because they are

based upon a misreading of the allegations in the complaint and a misunderstanding of the law.

A. The Complaint Properly Alleges Scienter Claims

1. The Complaint Properly Alleges That Monterosso Is Liable For

Primary Fraud Violations

Monterosso claims that, with respect to the claim that he violated Section 10(b) of the

Exchange Act and Rule 10b-5 thereunder, the Complaint fails to allege that he made a material

misstatement or omission. Mem. at 9. Monterossos argument is premised upon his assertion

that he cannot be held liable for GlobeTels misstatements because they were not publicly

attributed to him and, therefore, have failed to properly allege a material misstatement or

omission by him. Mem at 9-11. Monterossos argument is incorrect because it attempts to apply

a standard for pleading that does not apply to an action brought by the Commission to enforce the

securities laws.



13/27

See also, e.g., S.E.C. v. Power, -- F. Supp.2d --, 2007 WL 4224368 *3-42

(S.D.N.Y. Nov. 29, 2007) (denying motion to dismiss where executive created sham transaction,

was involved in accounting, and the company recognized improper revenue); S.E.C. v. KPMG,

412 F. Supp.2d 349, 375 (S.D.N.Y. 2006) (denying motion for summary judgment by audit

partners who argued that primary violations should be dismissed under the Bright Line Rule

because audit opinions were issued under the name of KPMG, not individual partners); S.E.C. v.

Treadway, 354 F. Supp. 2d 311, 315 (S.D.N.Y. 2005) (denying motion to dismiss where

executive was in unique position to disclose a deal that he negotiated and was responsible for

drafting, producing, reviewing and/or disseminating a statement).

Even in the S.E.C. v. Dauplaise, No. 05-1391cv, 2006 WL 449175 (M.D. Fla. Feb. 22,

2006), cited by Monterosso, although the court claimed to apply the Bright Line Test against the

Commission, it refused to dismiss the primary violation claim against a CFO who was not

publicly linked to a false Form 8-K because the Commission pleaded that he had misled the

8

The Commission, unlike a private plaintiff, need not allege or prove reliance, causation or

damages violations of Section 10(b) or Section 17(a). See Aaron v. S.E.C., 446 U.S. 680, 695,

697, 702 (1980) (listing elements); S.E.C. v. Merchant Capital, LLC, 483 F.3d 747, 766 (11th

Cir. 2007) (citing Aaron); S.E.C. v. KPMG, 412 F. Supp.2d 349, 375 (S.D.N.Y. 2006) (noting

SEC is not required to prove reliance, loss causation or damages). Monterosso is correct that the

Eleventh and Second Circuits have adopted a Bright Line Rule that requires private plaintiffs

to allege that a false statement was attributed to an individual defendant. See, e.g., Ziemba v.

Cascade Intl, 256 F.3d 1194, 1205 (11th Cir. 2001; Wright v. Ernst & Young LLP, 152 F.3d

169, 175 (2d. Cir 1998). However, Monterosso fails to explain that district courts in both circuits

have declined to apply the Bright Line Rule against the Commission because it not need allege or

prove reliance, which is the basis for application of the Bright Line Rule. See, e.g., S.E.C. v.

Collins & Aikens Corp., -- F. Supp.2d --, 2007 WL 4480025 (S.D.N.Y. Dec. 21, 2007) (declining

to apply bright line test against the SEC); S.E.C. v. Dunlap, 2002 WL 1007626 *5 n.7 (S.D.

Fla. March 27, 2002) (Ziemba has only tangential value to a case brought by the

Commission). In S.E.C. v. Converge Global, Inc., No. 04-80841cv, 2006 WL 907567 (S.D. Fla.2



14/27

accountants and lawyer who drafted the document. Id. At *6.

9

March 10, 2006), this court entered judgment after a jury trial against a consultant who had

drafted and disseminated a false press release without discussing whether the false statement was

attributed to the consultant.

The Complaint states a claim for primary fraud violations by Monterosso because it

alleges that he or Vargas, at Monterossos direction, used deceptive devices and their own false

statements in order to cause GlobeTel to make false statements to investors. Specifically, they

negotiated a deal to get paid for creating revenue for GlobeTel, then created false invoices and

false CDRs which they provided to GlobeTels finance department knowing that the company

would record revenue based upon the false documents. Compl. 25; 36-39, 43-44, 49-50, 54-56,

84, 87-93.

Courts have routinely denied motions to dismiss when defendants caused misstatements

in a companys financial reports by creating false documents that the defendant knew would be

used to change the companys financial reports. See, e.g., In re Suprema Specialities, Inc. Sec.

Litig., 438 F.3d 256 (3d Cir. 2006) (reversing dismissal where corporate executives had, inter

alia, allegedly created fictitious transactions with cheese suppliers, including false invoices, and

prevented the accountants from having any contact with the suppliers); S.E.C. v. Lucent Tech.,

Inc., 363 F. Supp.2d 708, 711-12 (D.N.J. 2005) (denying motion to dismiss by vice president

who negotiated deal with customer, then created paperwork that misrepresented the terms, and

resulted in Lucent overstating revenue).

Recently, a district court refused to dismiss claims of direct liability against three

defendants because the individuals negotiated deals knowing that the company would record the



15/27

10

money as income, then created false documents about the deals or provided them to the

companys accountants and audit committee. See SEC v. Collins & Aikman Corp.., F. Supp.2d

, 2007 WL 4480025, *9-12 (S.D.N.Y. Dec. 21, 2007). In that case, one defendant argued that

he was merely the counter-party in one of the transactions and had not known how the company

would account for the false transactions, but the court refused to dismiss because the

Commission had alleged that the defendant knew the company would book the transactions as

income. Id. at *9-10. Another defendant allegedly created false side letters and directed other

employees to obtain false documents from a supplier that he knew would be used to misrepresent

the companys income, which the court held were deceptive devices that constituted a direct

violation of Section 10(b) of the Exchange Act. The court refused to dismiss the complaint

against this defendant because the SEC has alleged with particularity that [the defendant]

intended to falsify C&As financial statements Id. at *11-12.

Monterosso cannot avoid liability for his role in the fraudulent scheme merely because he

did not personally prepare GlobeTels false statements that mislead investors, if he acted with

scienter to cause those misrepresentations. See S.E.C .v. Holschuh, 694 F.2d 130, 134-35 (7th

Cir. 1982) (affirming judgment against defendant who made false statement to individual who

drafted circulars sent to investors); Power, F. Supp.2d , 2007 WL at *3-4 (denying motion to

dismiss because the Commission alleged defendant in effect caused the statement to be made

and knew or had reason to know that the statement would be disseminated to investors); S.E.C.

v. Nacchio, 438 F. Supp.2d 1266, 1281-82 (D. Colo. 2006).

Rule 10b-5(a) and (c) are broad and encompass much more than illegal trading activity:

they encompass the use of any device, scheme or artifice, or any act, practice, or course of



16/27

11

business used to perpetuate a fraud on investors. In re Royal Ahold N.V. Sec. & ERISA Litig.,

351 F. Supp. 2d 334, 372 (D. Md. 2004). See also In re Parmalat Sec. Litig., 376 F. Supp. 2d

472, 501-02 (S.D.N.Y. 2005); In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 336-

37 (S.D.N.Y. 2004). Courts have recognized that the Commission has broader authority to

enforce securities laws than a private party and may bring claims based upon fraudulent devices

and schemes, as well as false statements. See S.E.C. v. Ginsburg, 362 F.3d 1292, 1298-1301

(11 Cir. 2004) (defendant liable for insider trading notwithstanding he made no materialth

misrepresentations to investors); S.E.C. v. Solow, No. 06-81041cv, 2007 WL 1970806 (S.D. Fla.

May 10, 2007) (denying motion to dismiss although defendants misrepresentations were made

to his broker-dear, not to investors). See also S.E.C. v. U.S. Environmental, Inc., 155 F.3d 107,

110-11 (2d. Cir. 1998) (broker primarily liable when he participated in the fraudulent scheme or

other activity proscribed by the securities laws).

The allegations in the Complaint properly plead that Monterosso engaged in a fraudulent

scheme or practice or course of business that directly caused material misrepresentations to be

made in conjunction with the offer, purchase or sale of GlobeTel securities and, therefore,

sufficiently pleads a violation of Section 10(b) and Rule 10b-5 thereunder.

2. The Complaint Properly Pleads Scienter

Monterossos argument that the Complaint fails to plead sufficient facts to establish he

acted with scienter, Mem. at 11-12, fails when the allegations in the complaint are examined in

light of existing precedent.

The Complaint alleges facts that demonstrate Monterossoss scienter under either test

enunciated by the Eleventh Circuit: a defendants acts of knowing misconduct or a defendants



17/27

12

acts that demonstrate recklessness. See S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th

Cir. 1982). In determining scienter, courts look to an aggregate of all allegations, not merely

single allegations. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016-17 (11th Cir. 2004).

Specifically, the Complaint alleges that: (1) Monterosso created hundreds of false invoices and

CDRs, Compl. 36; (2) the invoices were false because Centerline, Volta and Lonestar had not

bought or sold anything and the CDRs were false because they did not record transmissions that

had any connection to the three subsidiaries, Compl. 36, 39-55; (3) some of the invoices

appeared to be sent by two companies owned by other individuals, Compl. 40-41, 46; and (4)

copies of invoices purporting to be to or from Ron Hays companies, were not sent to Hay.

Compl. 43.

Thus, the Complaint contains numerous allegations that Vargas engaged in knowing

misconduct when he created false invoices and false CDRs for transactions he knew never

occurred and for companies where he did not work, and submitted them to GlobeTel. The

creation of documents that are known to be false is evidence of scienter. See, e.g., Carriba, 681

F.2d at 1324 (scienter shown where defendant failed to correct glaring omissions in prospectus

he reviewed); See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); S.E.C. v.

Kirkland, 521F.Supp.2d 1281, *21-*22 (M.D.Fla. 2007) (creating fake leases to create

impression of business success is evidence of scienter); In re Suprema, 438 F.3d at 278-79

(creating false invoices is evidence of scienter); see also SEC v. Digital Lightwave, Inc., 196

F.R.D. 698, 701 (M.D. Fla. 2000) (scienter plead when SEC alleged that defendant knew he was

recording revenue fraudulently). The Complaint also alleges that Monterosso tried to conceal his

fraud by not forwarding to Hay copies of the invoices that appeared to come from or be sent to



18/27

13

his company. See, Lucent Tech., Inc., 363 F. Supp.2d at 717-18 (scienter sufficiently pleaded by

alleging defendant tried to hide agreements from his companys chief accountant); see also,

Holschuh, 694 F.2d at 143-44.

Additionally, the allegations establish that Monterosso had a strong pecuniary motive to

create fictitious revenue for GlobeTel; an allegation that is relevant to recklessness. Tellabs, Inc.

v. Makor Issues and Rights, Ltd., U.S. , 127 S.Ct. 2499, 2503 (2007); S.E.C. v. Gane, No. 03-

61553cv, 2005 WL 90154, at *15 (S.D. Fla. Jan. 4, 2005). The Complaint alleges that: CSI

would received payment from GlobeTel only if CSI generated revenue for GlobeTel, Compl.

21-23; CSI was unable to generate the revenue required by the agreement with GlobeTel, Compl.

24-32; as a result of meeting the revenue goals in the agreements with GlobeTel, CSI received

at least $180,000 from GlobeTel and total payments of $1 million, Compl. 95; and Monterosso

received approximately $300,000 from CSIs account. Compl. 96.

n inference of recklessness is further supported by the allegations that Monterosso created

hundreds of false invoices over a period of two years and that these invoices accounted for

approximately 80 percent of GlobeTels revenue during that period because the length and

magnitude of the fraud are indicia of recklessness. See In re Eagle Building Tech., Inc. Sec.

Litig., 319 F. Supp.2d 1318, 1326 (S.D. Fla. 2004) (magnitude of fraud is relevant to establish

scienter); In re Microstrategy, Inc. Sec. Litig., 115 F. Supp.2d 620, 639 (E.D. Va. 2000); see also

S.E.C. v. Softpoint, Inc., 958 F. Supp. 846, 865 (S.D.N.Y. 1997).

B. The Complaint Properly Alleges Aiding And Abetting Claims

In order to state aiding and abetting claims, like those in the Third, Fourth and Fifth

Claims for Relief, the Commission must allege facts showing that (I) there was a primary



19/27

14

violation of the securities laws, (ii) the defendant had general awareness that his role was part of

an overall activity that is improper, and (iii) that the defendant knowingly and substantially

assisted the violation. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11 Cir. 1986).th

Monterosso argues that the Third Claim for Relief, which alleges that he aided and

abetted GlobeTels violation of Section 10(b) and Rule 10b-5 fails to allege that Monterosso

knew how the fraudulent invoices and CDRs would be used in order to establish that he

knowingly and substantially assisted GlobeTels violations. Mem. at 13. Section III.A.1. above

supports the claim that Monterosso committed a primary violation of Section 10(b) and

Rule 10b-5 when he caused GlobeTel to make material misstatements. Therefore, these same

allegations support a claim that he provided knowingly substantial assistance to GlobeTels

violation of the same provisions. Moreover, the Complaint also includes allegations establishing

the basis for alleging Monterosso had knowledge of GlobeTels use of the false invoices and

CDRs:

(1) the purpose of the agreement between GlobeTel and Vargas company,

CSI, was to build telecommunications revenue . . . Compl. 19;

(2) Monterosso knew GlobeTel could not record revenue generated by

Centerlines off-net telecom business without invoices and CDRs,

Compl. 35;

(3) GlobeTels finance department requested CDRs from Monterosso to prove

that Volta, Lonestar and Centerline had actually engaged in the telecom

transactions for which invoices had been submitted, Compl. 88;

(4) Monterosso knew GlobeTels auditors had specifically requested CDRs in

order to compare them to the invoices and confirm that the telecom

minutes had actually been bought and sold, Compl. 92; and



20/27

15

(5) Monterosso knew the fake invoices and CDRs relating to off-net

revenue would be presented to GlobeTels independent auditors. Compl.

93.

These allegations create a plausible inference that Monterosso knew that GlobeTel would use the

fraudulent invoices and CDRs to record revenue that would be incorporated into GlobeTels

filings and other reports of revenue.

Monterosso argues that the Fourth Claim for Relief alleging that he aided and abetted

GlobeTels violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-3

should be dismissed because there is no allegation that he had any involvement in, or

responsibility for, filing of GlobeTels annual and quarterly reports. Mem. at 15. At the risk of

repetition, a claim of aiding and abetting requires allegations that a defendant knowingly and

substantially assisted a violation of the securities laws. As alleged in the Complaint, Monterosso

created and submitted false invoices and false CDRs to GlobeTel knowing they would be relied

upon by to record revenue in GlobeTels quarterly and annual reports. Compl. 43-44, 47-50,

53-55. The Complaint also alleges that as a direct result of Monterossos fraudulent scheme,

GlobeTel overstated its revenue in its quarterly and annual reports during fiscal years 2004

through 2006 by a total of approximately $119 million. Compl. 57-61. These allegations

establish that, at the very least, Monterosso knowingly provided substantial assistance to

GlobeTels violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-3

thereunder.

Finally, for all the reasons explained above, Monterossos claim that the Fifth Claim for

Relief alleging that he aided and abetted GlobeTels violation of Section 13(b)(2)(A) fails.

Monterosso asserts that the Fifth Claim fails because there is no allegation that he had the ability



21/27

16

to influence the individuals who controlled and maintained GlobeTels books. Mem. at 16.

However, this argument attempts to superimpose upon an aiding and abetting allegation a

requirement that does not exist.

As explained above, an allegation of aiding and abetting need only allege that Monterosso

knowing provided substantial assistance to GlobeTels violation of Section 13(b)(2)(A) by

maintaining false and misleading books and records. To satisfy this requirement, the allegation

need not assert that Monterosso had any control over the individuals who actually made entries in

GlobeTels books and records. It is enough that Monterosso provided the fodder for the entries

that were made in GlobeTels books and records, knowing the information he provided was false,

and that it would be used by GlobeTel to record millions of dollars in off-net revenue in the

companys books and records. Compl. 117-19.

Monterossos reliance upon SEC v. Cedric Kushner Promotions, Inc., 417 F. Supp.2d 326

(S.D.N.Y. 2006) to support his argument is misplaced. Kushner involved a motion for summary

judgment that was granted because the facts did not support the aiding and abetting allegation.

Id. at 335-36. Whether the facts will support an allegation is irrelevant to a motion to dismiss

pursuant to Rule 12(b)(6), which is only concerned with whether, assuming the facts to be true,

the complaint states a cause of action. See Hishon, 467 U.S. at 73. In any case, the court in

Kushner granted summary judgment on the aiding and abetting claim because it found that the

defendant played a very background role in preparation of the companys reports and had no

part in creating the fraudulent financial statements that were incorporated into the companys

annual report. Kushner, 417 F.Supp.2d at 329. Consequently, the court concluded there was no

evidence that the defendants conduct proximately caused the underlying fraud. Id. at 335. In



22/27

17

contrast to the defendant in Kushner, the Complaint alleges that Monterosso was the architect of

the fraudulent scheme that directly resulted in GlobeTel recording and reporting revenue that did

not exist. In other words, but for Monterossos conduct, none of the violations of the Securities

Act or Exchange Act alleged would have occurred.

C. The Complaint Properly Pleads Violations of Exchange Act Rules 13b2-1 and

13b2-2

Monterossos argument that the Complaint fails to adequately plead violations of

Exchange Act Rules 13b2-1 and 13b2-2, Mem. at 17-19, is based upon a misunderstanding of the

requirements of those rules.

1. Rule 13b2-1: Falsifying Books and Records

Monterosso argues that the allegation in the Sixth Claim for Relief that he violated Rule

13b2-1 is deficient because there are no allegations that he either had the ability to directly falsify

GlobeTels books and records or the ability to influence any person who actually prepared

GlobeTels books and records. Mem. at 17. This argument misapplies the requirements of the

Rule to the allegations of the Complaint.

The Sixth Claim for Relief alleges that Monterosso violated Rule 13b2-1, which provides

that [n]o person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or

account maintained pursuant to Section 13(b)(2)(A). Scienter is not an element of a Rule 13b2-

1 violation. See McNulty, 137 F.3d at741; Softpoint, 958 F. Supp. At 865-66. Any unreasonable

conduct directly or indirectly resulting in falsification of corporate records is within the scope of

Rule 13b2-1. Id. at 866.



23/27

18

The Complaint meets this standard by alleging that Monterosso created false invoices and

false CDRs that were part of GlobeTels books and records. Compl. 86. In addition, the

Complaint alleges Monterosso knew the false documents he submitted to GlobeTel would be

relied upon by GlobeTels accountants to make entries in GlobeTels general ledger and other

documents, Compl. 85-90, 121-22, because GlobeTels accountants requested the invoices to

and from Centerlines customers to substantiate the off-net revenue. Compl. 34-35.

Thus, the Complaint alleges that Monterosso violated Rule 13b2-1 by directly falsifying

invoices that became part of GlobeTels books and records. It also alleges he indirectly falsified

or caused to be falsified GlobeTels books and records because the false invoices submitted were

the basis for the off-net revenue GlobeTel recorded in the general ledger and other books and

records.

2. Rule 13b2-2: False Statements To Auditors

The Sixth Claim for Relief also alleges violations of Rule 13b2-2, which prohibits

officers, directors or any other person acting under the direction thereof from misleading an

accountant engaged in the audit or review of the financial statements of that issuer where the

people know or should have known that the action would render the financial statements

materially misleading. 17 C.F.R. 240.13b2-2. For purposes of the Exchange Act, the term

officer is defined to include a vice president . . . and any person routinely performing

corresponding functions. 17 C.F.R. 240.3b.

Monterosso argues that the Sixth Claim does not properly allege a violation of



24/27

Monterosso qualified as an officer as early as 2004 when he took over3

GlobeTels entire Centerline subsidiary, supervised its employees, negotiated contracts and ran

the entire wholesale telecommunications business. Compl. 10. This conduct qualifies as

routinely performing the functions of a vice president. See 17 C.F.R. 240.3b.

19

Rule 13b2-2 because the Complaint does not allege Monterosso made any effort to mislead any

independent public or certified public accountant. Mem. At 18. Monterossos argument is

patently incorrect.

The Complaint alleges that between at least May 2005 and September 2006, Monterosso

was an officer of GlobeTel, Compl. 10, and violated Rule 13b2-2 when he created and3

submitted invoices and CDRs to GlobeTel. Compl. 124-25. The Complaint also alleges that

Monterosso knew that GlobeTels auditors had specifically requested CDRs so the auditors could

compare them to the invoices and confirm that Volta, Lonestar and Centerline actually bought

and sold the telecom minutes claimed, Compl. 92, and Monterosso knew that the fake

invoices and CDRs relating to Centerlines off-net revenue he submitted would be presented to

GlobeTels independent auditors. Compl. 93. Finally, the Complaint alleges that Monterosso

misled auditors throughout this period by providing false invoices and false CDRs, knowing they

would be used by GlobeTels auditors in connection with an audit. Compl. 125. Taken

together, these allegations properly plead a violation of Rule 13b2-2.

CONCLUSION

For the reasons set forth above, the Court should deny Monterossos motion to dismiss in

its entirety.



25/27

January 28, 2008 Respectfully submitted,

s/Jeffery T. Infelise

Of Counsel: Jeffery T. Infelise (DC 546998)

Cheryl J. Scarboro Special Florida Bar No. [email protected]

Reid A. Muoio


[email protected]

Brent Mitchell


[email protected]

100 F Street NE

Washington, D.C. 20549

(tel) (202) 551-4904 (Infelise)

(fax) (202) 772-9362 (Infelise)

Attorneys for Plaintiff,

Securities and Exchange Commission



26/27

CERTIFICATE OF SERVICE

I hereby certify that on January 28, 2007, I electronically filed the foregoing Plaintiffs

Memorandum of Law in Support of its Opposition to Defendant Joseph J. Monterossos Motion

to Dismiss with the Clerk of the court using CM/ECF. I also certify that the foregoing document

is being served this day on all counsel of record or pro se parties identified on the attachedService List in the manner specified, either via transmission of Notices of electronic filing

generated by CM/ECF or in some other authorized manner for those counsel or parties who are

not authorized to receive electronically Notices of Electronic filing.

s/Jeffery T. Infelise

Jeffery T. Infelise



27/27

SERVICE LIST

Walter J. Mathews, Esq. Mark David Hunter, Esq.

D. Patricia Wallace, Esq. [email protected]

wjmathews and [email protected] Leser Hunter Taubman & Taubman, PLLCWalter J. Mathews, P.A. 407 Lincoln Rd., Suite 500

Courthouse Law Plaza Miami beach, FL 33139

700 S.E. Third Avenue, Suite 300 Tel. 305-604-5547

Fort Lauderdale, FL 33316 Fax. 305-604-5548

Tel. 954-463-1929 Attorney for Defendant

Fax. 954-463-1920 [Joseph J. Monterosso]

Attorney for Defendant [electronic]

[Luis E. Vargas]

[electronic]


Documents

29 - Opp to Mont Mot