TheCorporateCounsel.net

While we’re on the topic of potential consequences for violating Section 16 of the Exchange Act, did you ever wonder what would happen if somebody tried to dodge paying over short swing profits under Section 16(b)? Would you believe handcuffs?  Here’s something Alan Dye recently posted on his Section16.net blog:

This is my fifth blog about Avalon Holdings v. Gentile, a long-running and bitterly fought action filed by David Lopez and Miriam Tauber against a Bahamian broker-dealer (MintBroker) and its sole owner (Guy Gentile, a resident of Puerto Rico) based on their high-frequency trading in the securities of two microcap companies, Avalon Holdings and New Concept Energy. Earlier this year, the district judge found the defendant’s liable to each company for short-swing profits of $6 million plus pre-judgment interest, currently amounting to a total of $16 million. In my blog about that decision, I noted that “recovering the amount of the judgment may not be easy, given that the Bahamian Securities Commission has forced MintBroker into liquidation proceedings.”

That prediction is proving to be true. The plaintiffs subpoenaed the defendants to produce records and provide testimony regarding their assets, but the defendants didn’t respond and didn’t show up for a hearing on the motion. The defendants’ counsel appeared, though, and told the judge that he hadn’t heard from Gentile since May and had no information regarding how to effect service on Gentile. After post-hearing attempts to serve Gentile did not elicit a response, the plaintiffs renewed their motion to compel and also submitted an application for a bench warrant for Gentile’s civil arrest for contempt of court.

Last week the judge granted the motion, in language that makes startlingly clear the consequences of failing to comply with a court’s order. The judge directed the U.S Marshals Service to effect service on Gentile in any U.S. district in which he may be found, and ordered that:

– the U.S. Marshall “will be permitted to use the minimum degree of non-deadly force necessary to arrest and detain Gentile and bring him before this Court, and will be permitted to enter any premises of Gentile’s if he is reasonably believed to be inside and if requested access to such premises is withheld” and

– “Gentile shall be incarcerated until he responds to Avalon’s post-judgment subpoenas or until further Order of this Court.”

Gentile may decide it’s not worth stepping foot in the U.S. ever again, but there is a big fee at stake for Lopez and Tauber, so I suspect collection efforts will continue.

– John Jenkins