23 - Vargas Motion to Dismiss

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

Case No. 0:07-cv-61693-JAL

SECURITIES AND EXCHANGE ) COMMISSION, ) ) Plaintiff, ) ) vs. ) ) JOSEPH J. MONTEROSSO, and ) LUIS E. VARGAS, ) ) Defendants. ) )

DEFENDANT LUIS E. VARGAS’S MEMORANDUM OF LAW IN SUPPORT

OF HIS MOTION TO DISMISS THE COMPLAINT OR, ALTERNATIVELY, FOR A MORE DEFINITE STATEMENT

Walter J. Mathews & D. Patricia Wallace Fla. Bar Nos. 0174319 & 0185930 wjmathews or [email protected] Walter J. Mathews, P.A. Attorneys for Defendant Luis E. Vargas Courthouse Law Plaza 700 SE Third Avenue, Suite 300 Fort Lauderdale, Florida 33316 Tel: (954) 463-1929 Fax: -1920

Case 0:07-cv-61693-JAL Document 23 Entered on FLSD Docket 01/11/2008 Page 1 of 23


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TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................................ ii

MEMORANDUM OF LAW ...........................................................................................................1

INTRODUCTION ...........................................................................................................................1

INVESTIGATION AND COMPLAINT .........................................................................................2

The SEC’s Lengthy and Unfocused Investigation ...............................................................2

GlobeTel’s Scheme to Book Revenue .................................................................................4

ARGUMENT ..................................................................................................................................6

Standard for Motion to Dismiss .......................................................................................................6

I. The Complaint Fails to State a Claim Upon Which Relief Can Be Granted .................6

A. The SEC Has Not Alleged Sufficient Facts to Support a Claim that any Representation or Omission Was Material ......................................7

B. The SEC Has Not Alleged Sufficient Facts to Support its Claim that Vargas Had Scienter as Required Under §§ 10(b) & 17(a)(1) and Rule 10b-5 .........................................8

C. The SEC Has Not Alleged Facts Sufficient to Support its Claim that Vargas Violated §§ 17(a)(2) and (3) ....................................9

D. The SEC Has Not Alleged Sufficient Facts to Support Any of its Aiding and Abetting Claims Against Vargas........................................10

E. The SEC Has Not Alleged Facts Sufficient to Support its Claims that Vargas Violated Rule 13b2-1 or 13b2-2 ..........................11

II. The Complaint Improperly Lumps Defendants Together in Violation of Rules of Civil Procedure 8(a) and 9(b) ...............................13

III. The Complaint Improperly Lumps Claims Together in Violation of Rule of Civil Procedure 10(b) ..............................................18

IV. At the Very Least, the SEC Must File a More Definite Statement ..............................19

CONCLUSION ....................................................................................................................................20

CERTIFICATE OF SERVICE ............................................................................................................20


MEMORANDUM OF LAW

Defendant Luis E. Vargas states in support of his motion to dismiss the Complaint with

prejudice and his motion for a more definite statement:

INTRODUCTION

The SEC’s claims against Vargas present a test case to see how far down a corporate

ladder the SEC can reach to allege securities fraud. By the SEC’s own admissions, Vargas was

not an officer of GlobeTel Communications Corporation, the publicly traded company

investigated by the SEC, or even a member of its upper level management such that he was

involved in recording or reporting GlobeTel revenues. Vargas’s negligible role in GlobeTel’s

allegedly fraudulent reporting is reflected in the short shrift the SEC gives Vargas in the

Complaint. Of the 96 paragraphs of general allegations, only 14 focus on Vargas or Vargas

working under the supervision of or along with Monterosso. Forty-two paragraphs (D.E. 1, ¶¶

12-15, 34, 56-93)1 deal primarily with GlobeTel, 15 deal with Monterosso and GlobeTel (¶¶ 18-

23, 31, 33) or Monterosso (D.E. 1, ¶¶ 10, 25-30), 16 paragraphs allege conduct attributed to

“Monterosso or Vargas, at Monterosso’s direction” (D.E. 1, ¶¶ 36, 40-43, 46-49, 52-54), and the

first nine paragraphs are general allegations concerning venue and the nature of the action. This

leaves 14 paragraphs – out of 96 – that focus on either Vargas or Vargas and Monterosso.

This test case should not be allowed to proceed. First, the SEC has not alleged facts

sufficient to state a claim upon which relief could be granted. Instead, the SEC relies on

conclusory allegations that deceptively sweep together ambiguous factual allegations. Each

count does little more than simply restate the language of the statutes or rules. Second, the

Complaint improperly lumps together the defendants, making it impossible for Defendant Vargas

to determine the contours of the allegations against him to sufficiently prepare a response and a

defense. Third, the Complaint lumps together as many as six causes of action into one count by

joining three different types of violation by the conjunction “or” and attributing one or more of

those violations to both defendants. For these reasons, the Court should dismiss the Complaint

against Vargas. If it does not, it must, in accordance with Rule 12(e) and Eleventh Circuit case

law on that rule, instruct the SEC to file a more definite statement.

1 Paragraphs in the Complaint are cited as “(D.E. 1, ¶ ___).”



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THE INVESTIGATION AND COMPLAINT

After over a year’s investigation crossing two continents, the SEC was apparently unable

to elicit evidence sufficient to charge GlobeTel’s executives who devised an “off-net” revenue

program with any securities violations, undoubtedly because of these executives’ refusal to

cooperate with the SEC. By contrast, Luis Vargas, a low level employee with a bookkeeping

background, has borne the brunt of the SEC’s investigation and now faces allegations of

securities fraud among other violations of the federal securities laws. Such allegations against

Vargas are unwarranted, untrue, and as discussed below, must be dismissed.

The SEC’s Lengthy and Unfocused Investigation

The SEC has virtually unlimited resources to investigate potential violations of the

federal securities laws. See Section 20(a) of the Securities Act of 1933 (“Securities Act”), 15

U.S.C. §§ 77a et seq.; Section 21(a) of the Securities Exchange Act of 1934 (“Exchange Act”),

15 U.S.C. §§ 78a et seq. It chose to focus its regulatory sites on GlobeTel,2 its officers,

employees and countless others. During the spring of 2006, the SEC initiated an informal

inquiry into GlobeTel. Several months later, on September 21, 2006, the SEC obtained a formal

order of investigation. During the next 14 months, the SEC issued subpoenas for documents and

testimony from dozens of entities and individuals. See Section 19(c) of the Securities Act;3

Section 21(b) of the Exchange Act.4

From the beginning the SEC’s investigation was akin to a poorly planned fishing

expedition because it lacked focus and explored many different theories of potential wrongdoing.

Initially, the SEC staff focused on certain business relationships with GlobeTel’s subsidiaries,

2 Established in 2002, GlobeTel is a Delaware corporation which is currently headquartered in Fort Lauderdale, Florida. (D.E. 1, ¶ 12). At all relevant times it was a public company with several subsidiaries. According to its filings, GlobeTel was engaged in the business of providing domestic and international telecommunications services, primarily involving internet telephone service using voice over internet protocol technology and equipment, stored value services and wireless communications. As such, the company and its officers were very sophisticated in utilizing technology relating to communications and conducting business in this arena. 3 15 U.S.C. § 78s(c). 4 15 U.S.C. § 78u(b).



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Sanswire Networks, LLC and HotZone Wireless, LLC, which were unrelated to Vargas. Later,

the staffs’ investigation turned to explore potential violations of stock option backdating, false

press releases, and insider trading, which were also unrelated to Vargas. Finally, the SEC sought

to investigate Vargas. They looked into both his employment with a GlobeTel subsidiary,

Centerline Communications, LLC (“Centerline”), and his prior employment with a private

company, Carrier Services, Inc.

The SEC encountered substantial obstacles from GlobeTel regarding all aspects of its

investigation. Initially, GlobeTel failed to provide any meaningful response to the SEC’s

voluntary request for information. Likewise, in response to an SEC subpoena, GlobeTel initially

stated that it had very few, if any, documents related to the SEC’s investigation. Ultimately,

GlobeTel produced very few documents to the SEC and it failed to cooperate with the SEC’s

investigation. Moreover, it appears that there was a concerted effort to prevent the production of

relevant information. Upon information and belief, a GlobeTel officer intentionally interfered

with the SEC’s investigation by withholding (and perhaps destroying) relevant documents that

should have been produced to the SEC. One can only conclude that GlobeTel failed to cooperate

with the SEC’s investigation and withheld valuable evidence because its cooperation and

production of evidence would incriminate GlobeTel’s officers.

Contrary to the SEC’s experience with GlobeTel, Vargas fully cooperated with the SEC’s

investigation. In response to several subpoenas, Vargas produced over fifteen thousand (15,000)

pages of documents. The SEC advised that this was the single largest production of documents

from any entity or individual in the GlobeTel investigation. Most of the documents produced by

Vargas included email communications. Unfortunately, it was discovered only after the

production that the response was not complete because the reproduction of certain electronic

information was unintentionally omitted on the hard copy that was printed. The missing

information was the “cc” recipients of each email as well as any attachments to the emails. This

missing information was extremely important because it showed who was privy to pertinent

information. The SEC was immediately advised of this unintentional oversight yet it failed to

request or obtain a complete production from Vargas.

Upon information and belief, the SEC took testimony from all of GlobeTel’s former and

present officers, including Tim Huff (CEO/CTO), Lawrence Lynch (COO/CFO), Thomas



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Jimenez (CFO), Jonathan Leinwand (General Counsel), Jesus Quintero (comptroller), John

Coniglio (outside accountant), in addition to countless others. Many of these testimonies took

multiple days to complete. In fact, the SEC staff was so committed to ferreting out potential

wrongdoing that several members of the staff traveled to Australia to pursue the “investigation”.

At the end of its 14-month multi-pronged investigation, the SEC initiated the instant

action, an alleged revenue recognition fraud, against only two individuals. The SEC alleged that

Vargas was a willing participant in a multi-year $119 million dollar scheme to defraud the

investors of GlobeTel. (D.E. 1, ¶¶ 1 and 2). Nonsense. Vargas was a low level employee who

did not obtain a college degree and he certainly was not a CPA. He is a family man who served

as a sergeant in the Marine Corps and also served in the reserves (his son is also a Marine who

was wounded in Iraq). Vargas was not an officer at GlobeTel or its subsidiary, Centerline.

Additionally, he did not maintain the books and records of GlobeTel or its subsidiary Centerline.

Furthermore, Vargas had no actual, apparent or implied authority to formulate accounting

policies or recognize revenue at GlobeTel. To be sure, Vargas was at the absolute bottom of the

totem pole at Centerline. Vargas did not supervise any other employee.

What did Vargas do at Centerline? Simple, he took direction and followed instructions

from upper level management at GlobeTel (i.e., its officers). Vargas was not an employee in

GlobeTel’s accounting department and he was not invited to attend (nor did he attend) any

accounting meetings at GlobeTel. Vargas did not maintain the books and records of GlobeTel

(or its subsidiaries) and was not responsible for making any entries into its books and records.

He did not formulate or have any input into GlobeTel’s internal controls. Vargas did not report

to GlobeTel’s CFO. Moreover, Vargas did not draft or review any of GlobeTel’s financial

statements and SEC filings (e.g., including quarterly and annual filings as well as registration

statements). And, Vargas had very limited contact with GlobeTel’s auditors. Certainly, he never

discussed revenue recognition with GlobeTel’s auditors. Vargas merely followed orders.

GlobeTel’s Scheme to Book Revenue

According to the Complaint, “in about October 2004 [several months before Vargas

became an employee of GlobeTel, according to ¶ 11 of the Complaint], Monterosso, Vargas and

GlobeTel executives devised an ‘off-net’ revenue program.” (D.E. 1, ¶32). According to the

Complaint, this program allowed the generation of revenue “from telecom traffic that did not



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pass through the switch in Los Angeles that was owned by Monterosso and controlled by

Centerline.” (D.E. 1, ¶ 32). In other words, according to the SEC, GlobeTel executives,

allegedly along with Monterosso and Vargas, sought a way to “generate” revenue even though it

was not providing services through its switch. According to the Complaint, GlobeTel then

recorded and reported this revenue. (D.E. 1, ¶¶ 56-61). GlobeTel’s finance department,

according to the Complaint, “asked Monterosso and Vargas” for invoices to customers

(presumably those buying the use of someone else’s switch service) and call detail records

(commonly referred to in the telecom industry as “CDRs”) documenting each call made through

a switch other than the one owned by GlobeTel (incorrectly identified in the Complaint as owned

by Monterosso). (D.E. 1, ¶ 34). According to the Complaint, these “invoices – and the technical

data that Monterosso and Vargas provided to the company’s auditors – caused [sic] GlobeTel to

materially overstate its revenues for eight consecutive quarters and caused [sic] GlobeTel to fail

to keep accurate books, records and accounts.” (D.E. 1, ¶ 4).

The SEC alleges that from September 2004 until June 2006, GlobeTel and its subsidiaries

overinflated revenue by $119 million which was described as “off net” revenue. (D.E. 1, ¶ 2).

The “off net” revenue equated to approximately 80% of GlobeTel’s reported revenue during this

period of time – roughly four out of every five dollars. Id. It is inconceivable that such an

overstatement in revenue could occur without the knowledge, consent and approval of upper

management. During this period of time, GlobeTel had a finance/accounting department, which

included an internal accounting staff of four individuals (including a full-time CFO) and an

external accountant. It also had a CEO. Since it was a public company, its financials were

reported on a quarterly basis and reviewed by auditors. The financials were also audited once a

year. Its CEO and CFO also certified the accuracy of all of these quarterly and annual reports

pursuant to the Sarbanes-Oxley Act of 2002. Interestingly, the SEC has not included GlobeTel’s

CEO or CFO in this action relating to false financial statements, and no Sarbanes-Oxley signing

violations were alleged in the SEC’s complaint.

The SEC alleges that the primary motive for Vargas to engage in this alleged scheme to

defraud was financial compensation, but the SEC refused to provide the specific amount Vargas

allegedly kept, undoubtedly because any such amount was insignificant. (D.E. 1, ¶¶ 94-6). Even

if this were true (and it is not), then several other upper level managers were also complicit, yet



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such individuals have not been included in this action. GlobeTel’s officers and directors, not

Vargas, profited from any alleged scheme to fraud. Upon information and belief, GlobeTel’s

officers and directors sold large blocks of GlobeTel’s stock and received substantial

compensation from these transactions. The SEC failed to pursue this theory or include these

actors in this matter.

ARGUMENT

The Complaint should be dismissed because it fails to state a claim upon which relief can

be granted, and it fails to comply with the requirements of Federal Rules of Civil Procedure 8(a),

9(b), and 10(b).

Standard for Motion to Dismiss

A motion to dismiss should be granted when it is demonstrated “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). For the purpose of the motion to dismiss, the

complaint is construed in the light most favorable to the plaintiff, and all facts alleged by the

plaintiff are accepted as true. Hishon v. King & Spaulding, 467 U.S. 69, 73 (1984). Regardless

of the alleged facts, however, a court may dismiss a complaint on a dispositive issue of law.

Marshall County Bd. of Educ. v. Marshall County Gas Dist., 992 F.2d 1171, 1174 (11th Cir.

1993). “Conclusory allegations in the complaint need not be taken as true and the plaintiff must

allege sufficient facts to support his allegations.” Marine Coatings of Ala., Inc. v. United States,

792 F.2d 1565, 1568 (11th Cir. 1986); see also Aldana v. Del Monte Fresh Produce, Inc., 416

F.3d 1242, 1253 (11th Cir. 2005) (praising district court “for remembering that some minimal

pleading standard does still exist”). In ruling on a motion to dismiss, “conclusory allegations,

unwarranted factual deductions or legal conclusions masquerading as facts will not prevent

dismissal.” Davila v. Delta Air Lines, Inc., 326 F.3d 1183, 1185 (11th Cir. 2003).

I.

The Complaint Fails to State a Claim Upon Which Relief Can Be Granted

All claims against Vargas should be dismissed with prejudice because the SEC has failed

to allege facts sufficient to state a claim upon which relief could be granted.



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The SEC’s claims that Vargas violated Sections 17(a)(1)5 and 10(b)6 and Rule 10b-57

must be dismissed because the facts alleged do not show that Vargas operated with the mental

state that triggers these regulations. To state a claim for primary violation of Section 17(a)(1),

Section 10(b) and Rule 10b-5, the SEC must allege: “(1) a misrepresentation or omission, (2)

that was material, (3) which was made in the offer and sale of a security (Section 17(a)(1)) or in

connection with the purchase or sale of securities (Section 10(b) and Rule 10b-5), (4) scienter,

and (5) the involvement of interstate commerce, the mails, or a national securities exchange.”

SEC v. Gane, No. 03-61553-CIV-SEITZ, 2005 WL 90154, at *11 (S.D. Fla. Jan. 4, 2005).

A. The SEC Has Not Alleged Sufficient Facts to Support a Claim that any Representation or Omission Was Material

The SEC has not alleged facts sufficient to support a claim that any representation or

omission by Vargas was materially misleading. As stated by this Court in Gane, “[a]

misrepresentation or omission is material when there is a substantial likelihood that a reasonable

investor would consider the information important in making an investment decision.” 2005 WL

90154, at *12 (citing Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); SEC v. Carriba Air,

Inc., 681 F.2d 1318, 1323 (11th Cir. 1982)). Similarly, an omission is material if there is a

“‘substantial likelihood that the disclosure of the omitted fact would have been viewed by the

reasonable investor as having significantly altered the “total mix” of information made

available.’” SEC v. Ginsburg, 362 F.3d 1292, 1302 (11th Cir. 2004) (quoting Basic Inc. v.

Levinson, 485 U.S. 224, 231-32 (1988)). It is fundamental that a statement is not a

misrepresentation if the person being told the statement knows it to be false, and an omission of a

fact would not be material if the person to whom a duty of disclosure might arise already knows

that fact.8 In this case, GlobeTel executives, as the ones to whom Monterosso and Vargas

allegedly submitted invoices and CDRs, stepped into the shoes of investors for purposes of

5 15 U.S.C. § 77q(a)(1). 6 15 U.S.C. § 77j(b). 7 17 C.F.R. § 240.10b-5. 8 Cf. Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 473-74 (1977) (Rule 10b-5 extended to claims of corporate mismanagement “only if the conduct alleged can be fairly viewed as ‘manipulative or deceptive’”).


http://web2.westlaw.com/find/default.wl?tf=-1&rs=WLW7.11&referencepositiontype=S&serialnum=1977118756&fn=_top&sv=Split&tc=-1&findtype=Y&referenceposition=1302&db=708&vr=2.0&rp=%2ffind%2fdefault.wl&mt=Florida


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applying this material misrepresentation or omission rule. These executives, however, had

themselves allegedly participated in devising the “off-net” revenue program. (D.E. 1, ¶ 32).

Because of this awareness, a reasonable executive at GlobeTel could not have relied on the

invoices or CDRs allegedly supplied as part of the “off-net” revenue program. Not a single

investor relied on any information allegedly supplied by Vargas absent the translation of that

information by GlobeTel executives who were well aware of the nature of the “off-net” program.

Nothing that Vargas allegedly submitted to GlobeTel was misleading, and thus he cannot be

found liable for a primary violation of the securities laws and regulations.

For this reason, the Court should dismiss Counts I and II.

B. The SEC Has Not Alleged Sufficient Facts to Support its Claim that Vargas Had Scienter

as Required Under §§ 10(b) & 17(a)(1) and Rule 10b-5

The SEC has not alleged sufficient facts to support its claim that Vargas had scienter as

required under §§ 10(b) and 17(a)(1) and Rule 10b-5. The scienter element means that the

plaintiff must show an “intent to deceive, manipulate or defraud.” Ernst v. Hochfelder, 425 U.S.

185, 192 (1976). Although a showing of severe recklessness can satisfy the scienter

requirement, “‘[s]evere recklessness is limited to those highly unreasonable omissions or

misrepresentations that involve not merely simple or even inexcusable negligence, but an

extreme departure from the standards of ordinary care, and that present a danger of misleading

buyers or sellers which is either known to the defendant or is so obvious that the defendant must

have been aware of it.’” Cordova v. Lehman Bros., Inc., No. 05-21169-CIV-

MOORE/GARBER, 2007 WL 4287729, at *11 (S.D. Fla. Dec. 7, 2007) (quoting Ziemba v.

Cascade Int’l Inc., 256 F.3d 1194, 1202 (11th Cir. 2001)).

The SEC has alleged no facts from which it can be inferred that Vargas must have been

aware that his work for GlobeTel would create a “danger of misleading buyers or sellers.” As

the SEC acknowledges, Vargas’s background is in bookkeeping, somewhat ordinary work.

According to the SEC’s allegations, Vargas did not handle negotiations for CSI, he did not

negotiate the agreements between CSI and GlobeTel, and he did not try “to convince other

telecom companies to enter into “‘Partner Incentive and Financing Agreements’” with

Centerline. (D.E. 1, ¶ 24-31). Vargas never participated in or reviewed GlobeTel’s public

filings or press releases; there is no allegation that he had any role in GlobeTel’s decisions to



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record and publish the revenues as it did. The conduct alleged against Vargas does not rise

above the level of business management to achieve the level of awareness and culpability that

warrants application of the securities fraud statutes.

The SEC’s inability to allege that Vargas had any motivation to commit securities fraud

further supports the factual inference that Vargas lacked the requisite scienter to violate Sections

10(b) and 17(a)(1) and Rule 10b-5. Although motivation is not an element of securities fraud,

courts regularly consider it when determining whether to infer scienter. In Gane, this Court

included the defendant’s lack of motive to commit securities fraud as a basis for its conclusion

that the defendant had not violated Sections 17(a) and 10(b) and Rule 10b-5. 2005 WL 90154, at

*15 (citing Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1286-87 (11th Cir. 1999)); see also

Cutsforth v. Renschler, 235 F. Supp. 2d 1216, 1250 (M.D. Fla. 2002) (“If motive to commit

fraud can be a relevant circumstance supporting a claim for scienter, it would seem that an

inability to show motive can be a relevant circumstance indicating the lack of scienter”). As in

Gane, there is no allegation here that Vargas received bonuses or extra compensation. The

closest that the SEC comes to alleging that Vargas received any compensation from GlobeTel is

its allegation that Vargas withdrew an unknown amount of money from his own privately held

company’s account and kept it. (D.E. 1, ¶ 96). This is a far cry from the “many securities fraud

cases where senior executives of a public company engage in significant sales of their stock

and/or obtain significant compensation or bonuses tied to the performance of the company’s

stock price.” Gane, 2005 WL 90154, at *15.

Because of the SEC’s failure to allege facts from which the Court could infer scienter, the

claims against Vargas under Sections 17(a)(1) (if the SEC intends to apply Section 17(a)(1) to

Vargas)9 and 10(b) and Rule 10b-5 must be dismissed.

C. The SEC Has Not Alleged Facts Sufficient to Support its Claim that Vargas Violated §§ 17(a)(2) and (3)

The SEC has alleged no facts to support its suggestion that Vargas violated Section

17(a)(2)10 or 17(a)(3).11 Section 17(a)(2) requires allegations that the defendant “obtained

9 As discussed below, Count I ambiguously alleges claims against both Vargas and Monterosso and alleges that one or both violated Sections 17(a)(1), 17(a)(2), or 17(a)(3). 10 15 U.S.C. § 77q(a)(2).



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money or property by means of untrue statements of material fact or by omitting to state material

facts necessary in order to make the statements made, in the light of the circumstances under

which they were made, not misleading.” The strongest allegation that the SEC levels at Vargas

is that he “withdrew money from CSI’s account, which he kept.” (D.E. 1, ¶ 96). By contrast, the

SEC makes a point of alleging that Monterosso took $300,000 from the account and had his

personal credit cards and rent on a residence and a storage unit paid by CSI. (D.E. 1, ¶ 96).

Even after months of investigation, the SEC hedges on whether Vargas received anything

significant from GlobeTel. The SEC also acknowledges that CSI legitimately earned revenues

and that Vargas worked at CSI for almost three years. (D.E. 1, ¶¶ 11, 95). The reasonable

inference from these allegations – and, more tellingly, the SEC’s omissions – is that Vargas

accepted some remuneration for the services he provided CSI, not that Vargas obtained money or

property by making untrue statements of material fact or omitting a material fact necessary to

make statements not misleading. Even if Vargas had so obtained payments from GlobeTel – and

there is absolutely no allegation that GlobeTel ever directly paid Vargas – the transaction would

be an issue between Vargas and GlobeTel, not a securities issue.

Section 17(a)(3) requires a showing that of “(1) material misrepresentations or materially

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

Merchant Capital, LLC, 483 F.3d 747, 766 (11th Cir. 2007). For the reasons discussed above in

section I.A, the SEC has not alleged facts sufficient to show that Vargas made any material

misrepresentations or materially misleading omissions.

For these reasons, the claims against Vargas for violation of Sections 17(a)(2) and (3) (if

the SEC intends to apply Sections 17(a)(2) and (3) to Vargas)12 must be dismissed.

D. The SEC Has Not Alleged Sufficient Facts to Support Any of its Aiding and Abetting Claims Against Vargas

To state a claim for aiding or abetting a primary malefactor’s securities violations, the

SEC must allege that (1) another party violated the securities laws; (2) the accused is generally 11 15 U.S.C. § 77q(a)(3). 12 As discussed below, Count I ambiguously alleges claims against both Vargas and Monterosso and alleges that one or both violated Sections 17(a)(1), 17(a)(2), or 17(a)(3).



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aware of his role in the improper activity; and (3) the accused aider and abettor knowingly

rendered substantial assistance. 15 U.S.C. § 78t(e); see also Rudolph v. Arthur Andersen & Co.,

800 F.2d 1040, 1045 (11th Cir. 1985). The statute requires that the SEC ultimately demonstrate

“actual awareness of the party’s role in the fraudulent scheme.” Woods v. Barnett Bank, 765

F.2d 1004, 1009 (11th Cir. 1985) (quoting Woodward v. Metro Bank of Dallas, 522 F.2d 84, 96

(5th Cir. 1975)); see also Schneberger v. Wheeler, 859 F.2d 1477 (11th Cir. 1988); Smith v. First

Union Nat’l Bank, No. 00-4485-CIV, 2002 WL 31056104 at *2 (S.D. Fla. Aug. 23, 2002).

Although conviction under the aiding and abetting statute does not require that the alleged

violator directly communicated misrepresentations to the purchaser, the SEC must show that the

defendant “knew or should have known that his representation would be communicated to

investors.” Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1226 (10th Cir. 1996).

As discussed above, the SEC failed to allege facts from which the Court may infer

scienter. For this reason, Counts III, IV, and V, all of which attempt to allege that Vargas

committed secondary violations of securities regulations, should be dismissed.

The aiding and abetting claims also should be dismissed because the SEC has failed to

allege facts that would support the Commission’s conclusory assertion that Vargas provided

substantial assistance. The substantial assistance element requires the SEC to allege facts

showing that the defendant’s conduct was a “substantial causal factor in the perpetration” of the

primary wrongdoer’s fraud. SEC v. DiBella, No. 304CV1342EBB, 2005 WL 3215899 at *10

(D. Conn. Nov. 29, 2005). The SEC must allege that the acts of the secondary defendant

“proximately caused the harm on which the primary liability is predicated.” SEC v. Cedric

Kushner Promotions, Inc., 417 F. Supp. 2d 326, 335 (S.D.N.Y. 2006) (citing Bloor v. Carro, 754

F.2d 57, 62-63 (2d Cir. 1985)). Here, the relationship between Vargas’s alleged conduct and

GlobeTel’s publication of its revenues and projections is too tenuous to create securities fraud

liability on the basis of Vargas’s conduct.

For these reasons, the Court should dismiss Counts III, IV, and V of the Complaint.

E. The SEC Has Not Alleged Facts Sufficient to Support its Claims that Vargas Violated Rule 13b2-1 or 13b2-2

The Sixth Count alleges that both defendants violated Rules 13b2-1 and 13b2-2. There is

no factual allegation in the Complaint that supports these claims. Rule 13b2-1 provides that



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

account subject to section 13(b)(2)(A).” 17 C.F.R. § 240.13b2-1. As the Complaint implicitly

recognizes, Vargas was a low-level employee who did not maintain or control GlobeTel’s books,

records or accounts. The Complaint says that GlobeTel executives, allegedly along with

Monterosso and Vargas, devised a scheme that would allow GlobeTel to book more revenue and

that GlobeTel requested invoices and CDRs as part of that plan. (D.E. 1, ¶ 32). If, as the

Complaint alleges, Vargas prepared invoices as part of this scheme, these invoices could in no

way have deceived the GlobeTel executives who devised the alleged scheme. If the GlobeTel

executives knew about the alleged scheme and the allegedly false invoices, none of Vargas’s

actions caused GlobeTel to falsify its books. Rather, GlobeTel executives, knowing full well the

nature of the alleged invoices, chose to use those invoices to beef up the revenues that GlobeTel

executives – not Vargas – recorded and reported.

Rule 13b2-2 generally forbids officers and directors of issuing companies from making

material misstatements or omissions in communications with accountants in connection with

audits or reviews of the issuer's 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 the issuer's financial statements. See 17 C.F.R. § 240.13b2-2; see also SEC. v.

Dauplaise, No. 6:05CV1391 ORL 31KRS, 2006 WL 449175, at *5-6 (M.D. Fla. Feb. 22, 2006);

SEC v. Autocorp Equities, Inc., 292 F. Supp. 2d 1310, 1332 (D. Utah 2003) (“Rule 13b-2 makes

it illegal for an officer to mislead auditors and accountants”) (emphasis added); SEC v. Autocorp

Equities, Inc., No. 04-2315 (WHW) 2004 WL 1771608, at *6 (D. Utah Aug. 4, 2004) (“Rule

13b2-2 . . . imposes a duty on corporate officers to clarify previous statements that are

misleading in the absence of some material fact”) (emphasis added).

Enforcement of Exchange Act Rule 13b2-2 is appropriate when an officer or director of a

public company signs a false management representation letter to their auditor. SEC v. Todd,

No. 03CV2230BEN(WMC), 2006 WL 1564892, at *10 (S.D. Cal. May 30, 2006) (finding that

officer who signed a management representation letter was not liable for a violation of Rule

13b2-2 because there was no evidence that the officer knew of was reckless in not knowing that

the statements in the management representation letter were false); McConville v. SEC, 465 F.3d



13

780, 789 (7th Cir. 2006) (CFO’s evidence of signature on management representation letter

supported the Commission’s conclusion that officer lied to auditors).

For these reasons, the Court should dismiss Count VI of the Complaint.

II.

The Complaint Improperly Lumps Defendants Together in Violation of Rules of Civil Procedure 8(a) and 9(b)

The Complaint should be dismissed for failure to comply with the pleading requirements

of Rules 8(a), 9(b), and 10(b). The Complaint fails to apprise either defendant of the specific

allegations against him and, if allowed to go forward, risks depriving both of their due process

rights. Whether by design or carelessness, the Complaint conflates the alleged conduct of the

defendants, thus making it impossible for Vargas to determine precisely what allegations he

faces. The SEC uses three basic means to effect this confusion: (1) referring to the defendants 16

times as “Monterosso or Vargas, at Monterosso’s direction;” (2) making conclusory allegations

in each Count that impute conduct of one defendant to both; and (3) defining and using critical

terms “false” and “cause” outside of those words’ ordinary meaning.

The SEC’s conflation of defendants’ conduct and its contortion of the critical terms

“false” and “cause” requires that the Complaint be dismissed for failure to comply with the

pleading requirements of Rule 9(b). Allegations of securities fraud must satisfy Federal Rule of

Civil Procedure 9(b), which requires pleading with particularity. See Ziemba v. Cascade Int’l

Inc., 256 F.3d 1194, 1202 (11th Cir. 2001). In Ziemba, the Eleventh Circuit explained how the

particularity requirement is vital to protecting defendants’ due process rights: “The particularity

rule serves an important purpose in fraud actions by alerting defendants to the ‘precise

misconduct with which they are charged’ and protecting defendants ‘against spurious charges of

immoral and fraudulent behavior.’” Id. at 1202 (quoting Durham v. Bus. Mgmt. Assocs., 847

F.2d 1505, 1511 (11th Cir. 1988)). The Eleventh Circuit has held that Rule 9(b) requires that the

complaint set forth “‘(1) precisely what statements were made in what documents or oral

representations or what omissions were made, and (2) the time and place of each such statement

and the person responsible for making (or, in the case of omissions, not making) same, and (3)

the content of such statements and the manner in which they misled the plaintiff, and (4) what

the defendants obtained as a consequence of the fraud.’” Id. (quoting Brooks v. Blue Cross &


http://web2.westlaw.com/find/default.wl?tf=-1&rs=WLW7.11&fn=_top&sv=Split&tc=-1&findtype=L&docname=USFRCPR9&db=1004365&vr=2.0&rp=%2ffind%2fdefault.wl&mt=Florida




14

Blue Shield of Fla., Inc., 116 F.3d 1364, 1371 (11th Cir. 1997)); see also SEC v. Dunlap, No. 01-

8437-CIV, 2002 WL 1007626 (S.D. Fla. Mar. 27, 2002). Further, aiding and abetting claims

under Sections 10(b), 13(a), 13(b)(2)(B) and Rules 10b-5, 13a-1, 13a-13, and 12b-20 must be

pled with particularity because the entire complaint sounded in fraud even those claims did not

require showing of scienter. See SEC v. Lucent Tech. Inc., 363 F. Supp. 2d 708 (D.N.J. 2005).

Where, as here, a complaint is made against more than one defendant, “Courts are

especially vigilant in applying Rule 9(b).” T.H.C., Inc. v Fortune Petrol Corp., No. 96 CIV .A.

2690, 1999 WL 182593, at *3 (S.D.N.Y. Mar. 31, 1999). Rule 9(b)’s specificity requirement

prohibits plaintiffs from “lumping” multiple defendants together, instead “requir[ing] plaintiffs

to differentiate their allegations when suing more than one defendant . . . and inform[ing] each

defendant separately of the allegations surrounding his alleged participation in the fraud.”

Cordova v. Lehman Bros., Inc., No. 05-21169-CIV-MOORE/GARBER, 2007 WL 4287729, at

*6 (S.D. Fla. Dec. 7, 2007) (quoting Bruhl v. Price Waterhouse Coopers Int’l, No. 03-23044-

CIV, 2007 WL 997362, at *3 (S.D. Fla. Mar. 27, 2007)). This Court has also recognized that “a

plaintiff’s use of the passive voice in alleging a fraud can impermissibly obscure allegations such

that the allegations fail to satisfy the particularity requirements of Rule 9(b).” Cordova, at *6

(citations omitted).

Courts also have applied Federal Rule of Civil Procedure 8(a) to prohibit this lumping

together of defendants. Rule 8 requires that a pleading setting forth a claim for relief to contain

“a short and plain statement of the claim showing that the pleader is entitled to relief.” Under

this rule and requirements of due process, the complaint must give the defendant fair notice of

what a plaintiff’s claim is and the grounds upon which it rests. A complaint fails to satisfy Rule

8(a) where the complaint “lump[s] all the defendants together and fail[s] to distinguish their

conduct because such allegations fail to give adequate notice to the defendants as to what they

did wrong.”13

13 Appalachian Enters., Inc. v. ePayment Solutions, Ltd., No. 01 CV 11502(GBD), 2004 WL 2813121, at *7 (S.D.N.Y. Dec. 8, 2004); Classen Immunotherapies, Inc. v. Biogen IDEC, 381 F. Supp. 2d 452 (D. Md. 2005); see also Burnette v. Dresser Indus., Inc., 849 F.2d 1277, 1283 (10th Cir. 1988) (negligence complaint lumping claims against defendants did not adequately allege claims against particular defendant); Medina v. Bauer, No. 02 Civ. 8837(DC), 2004 WL 136636, at *6 (S.D.N.Y. Jan. 27, 2004) (complaint lumping together conduct of



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The Complaint against Monterosso and Vargas utterly fails the particularity requirements

of Rule 9(b) and due process. As discussed above, to allege violations of § 17(a)(1) and §10(b)

and Rule 10b-5, the SEC must allege facts that will show that Vargas acted with scienter.

Apparently lacking these facts, the SEC attempts to blur the identities of the defendants, thus

imputing the conduct and experience of each to the other. For example, the SEC alleges that

both “Monterosso and Vargas had extensive experience in the wholesale telecom business,” but

then describes Vargas’s “extensive” experience as his having served as a bookkeeper for

Monterosso. (D.E. 1, ¶ 17). Vargas’s only other additional experience in the telecom business

was his operation of CSI. But, as the SEC points out, “Monterosso handled all negotiations for

CSI, often held himself out as the head of the company, and received hundreds of thousands of

dollars from CSI.” (D.E. 1, ¶ 18). The SEC’s allegations suggest that Monterosso, not Vargas,

negotiated all agreements between CSI and GlobeTel (D.E. 1, ¶¶ 18-23), and that Monterosso

tried “to convince other telecom companies to enter into ‘Partner Incentive and Financing

Agreements’” with Centerline. (D.E. 1, ¶ 24-31).

This blurring of Monterosso and Vargas is most egregious when the SEC elides their

identities in trying to set forth the elements of each claim. In the segregated “Counts,” the SEC,

abandons its vague and ambiguous attribution of conduct to “Monterosso or Vargas, at

Monterosso’s direction.” Instead, in the Counts, the SEC identifies the defendants as

“Monterosso and Vargas” and combines broad conclusory statements and cross-reference to

prior paragraphs to give the impression that both defendants, not just one or the other, engaged in

all the conduct alleged in prior paragraphs. For example, in support of each count against

Vargas, the SEC makes the conclusory allegations that “Monterosso and Vargas engaged in

fraudulent acts by creating or obtaining fake invoices and CDRs.” (D.E. 1, ¶¶ 99.a, 104.a14,

109.a, 114.a, 118.a, and 121.a). In support of these conclusory allegations, the SEC cites

paragraphs 36, 37, 41, 42, 47, 48, and 53, none of which, with the exception of paragraph 37

defendants failed to satisfy requirements of Rule 8(a) and notice); Lippe v. Bairnco Corp., 225 B.R. 846, 860 (Bankr. S.D.N.Y. 1998) (plaintiffs cannot simply lump together defendants and allege that the purported acts of each can be imputed to every other defendant). 14 In this paragraph, the SEC has omitted any actor, but, based on the repetition of this clause in each count, the SEC meant to have inserted “Monterosso and Vargas.”



16

discussed below, alleges that both Monterosso and Vargas engaged in the conduct at issue.

Paragraph 37 is a fiction unto itself because it depends on the SEC’s pinched definition of

“false.” Paragraph 37 alleges that “Monterosso and Vargas also generated false CDRs to support

the fictitious $119 million in ‘off-net’ revenue contained in the false invoices,” an allegation that

is both untrue and contradicted by the SEC’s other allegations. (D.E. 1, ¶ 37). As the SEC

explains several paragraphs later, it is not using the term “false” in its common sense of “not

genuine, intentionally untrue, not true,” (as set forth in Merriam-Webster’s online dictionary

(http://www.m-w.com/dictionary/false)). Rather, the SEC explains that “All of [sic] 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 Volta . . . Lonestar . . . [or] Centerline.” (D.E. 1, ¶¶ 42, 48, 53).

CDRs, as the SEC states, “are technical documents that record information, such as the date,

length, origin and destination for each telephone call.” (D.E. 1, ¶ 34). The CDR “documents all

the telephone calls that are placed through a ‘switch.’” (D.E. 1, ¶ 34). Because CDRs are

technical documents that automatically document every call through a switch, there is no way

that anyone, including Vargas, could “generat[e]” a CDR as the SEC alleges. (D.E. 1, ¶ 37).

Also, the SEC’s definition of “false” and its allegations that the CDRs at issue were “obtained”

belies its allegation that Vargas “generated false CDRs.”

The SEC’s linguistic shenanigans extend into the very heart of the allegations against

Monterosso and Vargas: whether their conduct had a connection with the offering, sale, or

purchase of securities. Lacking facts that would support this allegation against Vargas, the SEC

distorts the ordinary meaning of the word “caused,” and uses verbs that convey conduct without

identifying the person who is engaging in that conduct. For example, Paragraph 85 alleges:

“Monterosso’s and Vargas’ fraudulent scheme directly caused GlobeTel’s books, records and

accounts to falsely and inaccurately reflect the company’s financial condition.” First, nothing in

the factual allegations supports the SEC’s conclusory allegation that this alleged scheme

belonged to Vargas. Further, this allegation reflects a breakdown in logic and parsing the

sentence shows the weakness of the SEC’s case. The SEC has not and cannot allege that

Monterosso or Vargas prepared GlobeTel’s books, records and accounts. To avoid this chain of

causation problem, the SEC simply identifies the “scheme” as the cause of the inaccuracies in

GlobeTel’s books; without a human agent somehow “GlobeTel’s books and records overstated



17

the company’s revenue.” The alleged scheme may have provided fodder for GlobeTel’s

financial department, but a scheme cannot “cause” the financial department at GlobeTel to report

its finances inaccurately. This distinction is not mere hair-splitting because the SEC is

attempting to elide the conduct of Monterosso and Vargas with that of GlobeTel officers, thus

making it impossible to discern what the SEC is alleging against these defendants.

The SEC engages in the same kind of fudging when it alleges in support of each claim

that Monterosso and Vargas “knew that the invoices and CDRs would be used by GlobeTel to

record in the company’s books and records that Centerline, Volta and Lonestar generated

millions of dollars in ‘off-net’ revenue and, consequently, would be incorporated into GlobeTel’s

reports of revenue generated by the company and its wholly owned subsidiaries.” (D.E. 1, ¶¶

99.b, 104.b, 114.b, 118.b, and 121.b; see also ¶¶ 38, 44, 50, 55). The SEC has alleged no facts

that support its allegation that Vargas had actual knowledge of what GlobeTel would do with the

information it had requested. The SEC has not alleged and cannot allege that either Monterosso

or Vargas directed or controlled what GlobeTel reported to the SEC or published through press

releases, nor can the SEC allege that either was involved in GlobeTel’s financial reporting.

Nor has the SEC alleged facts from which it could be inferred that Vargas was reckless in

not knowing that “‘off-net’ revenue would be recorded by GlobeTel in its books and records and

included in the revenue GlobeTel reported in its public findings and in its press releases” (D.E.

1, ¶ 38), or that or that he was “reckless in not knowing that the fake . . . invoices and

corresponding CDRs they submitted to GlobeTel, would be used by GlobeTel to record in the

company’s books and records . . . and, consequently, would be incorporated into GlobeTel’s

reports of revenue generated by the company and its wholly owned subsidiaries.” (D.E. 1, ¶¶ 44,

50, 55). By the SEC’s own allegations, the closest that Vargas came to involvement with the

financial hierarchy of GlobeTel was his “oversee[ing] the finances of GlobeTel’s subsidiary,

Centerline” under the supervision of the company president, who negotiated all the company’s

contracts. (D.E. 1, ¶¶ 10-11). Vargas was a bookkeeper and had never been an officer of any

publicly traded company. Any information he provided was for GlobeTel’s accounting

professionals, including its CFO, to scrutinize and properly report. According to the SEC, the

“off-net” revenue program ended in June 2006. (D.E. ¶¶ 37, 52). GlobeTel, however, used the

“off-net” revenue in its press releases as late as September, 2006. (D.E. ¶¶ 62, 83). From these



18

allegations, the logical conclusion is that GlobeTel and not Vargas intended to mislead the

public.

For these reasons, the Complaint should be dismissed. Alternatively, as discussed below,

the Court should require the SEC to provide a more definite statement.

III.

The Complaint Improperly Lumps Claims Together in Violation of Rule of Civil Procedure 10(b)

The Complaint does not comply with Rule 10(b)’s mandate to state in a separate count

“[e]ach claim founded upon a separate transaction or occurrence . . . whenever a separation

facilitates the clear presentation of the matters set forth.” As this Court stated, a “proper

complaint will ‘present each claim for relief in a separate count, as required by Rule 10(b), and

with such clarity and precision that the defendant will be able to discern what the plaintiff is

claiming.’” Harris v. Radioshack Corp., No. 01-5093-LENARD, 01-5093-CIV SIMONTON,

2002 WL 1907569, at *2 (S.D. Fla. May 23, 2002) (quoting Anderson v. Dist. Bd. of Trustees of

Cent. Fla. Comty. Coll., 77 F.3d 364, 366-67 (11th Cir. 1996); Cesnick v. Edgewood Bapt.

Church, 88 F.3d 902, 905-07 (11th Cir. 1996)). Rule 10(b), in conjunction with Rule 8(a)’s

requirement that the plaintiff set forth “a short plain statement of the claim showing the pleader

is entitled to relief,” “require the pleader to present his claims discretely and succinctly, so that

his adversary can discern what he is claiming and frame a responsive pleading, the court can

determine which facts support which claims and whether the plaintiff has stated any claims upon

which relief can be granted, and, at trial, the court can determine that evidence which is relevant

and that which is not.” Fikes v. City of Daphne, 79 F.3d 1079, 1082 (11th Cir. 1996) (citations

omitted). This is not merely an issue of form; failure to comply with Rule 10(b)’s requirements

“raises due process concerns.” Barkley v. Davis, No. 07-61252-CIV, 2007 WL 4557156, at *2

(S.D. Fla. Dec. 21, 2007) (dismissing count with instruction “to separate out the different claims

into separate counts per offense and per Defendant”).

All the counts in the SEC’s Complaint violate Rule 10(b) because they lump together

both defendants as discussed above, and they lump together causes of action. For example, the

first count alleges violations of Section 17(a) of the Securities Act, but it does not identify which

particular division of that section were violated or by whom. As discussed above, violation of



19

Section 17(a)(1) requires a showing of scienter whereas Sections 17(a)(2) and (3) do not. What

sections, if any, does the SEC allege that Vargas violated? Does each count’s collapsing the

“Monterosso or Vargas, at Monterosso’s direction” of the factual allegations into “Monterosso

and Vargas” mean that the SEC intends to allege these claims against Vargas? If so, on the basis

of what facts? The facts where the SEC says that either “Monterosso or Vargas, at Monterosso’s

direction” acted? If so, how is Vargas supposed to defend against such allegations when he

cannot identify what unlawful conduct the SEC attributes to him?

The same vagueness and ambiguity plagues the other counts, all of which lump together

Monterosso and Vargas.

For these reasons, the Complaint should be dismissed. Alternatively, as discussed below,

the Court should require the SEC to provide a more definite statement.

IV.

At the Very Least, the SEC Must File a More Definite Statement

Alternatively, as Judge Tjoflat points out in Fikes, the Court may order plaintiff to file a

more definite statement in accordance with Federal Rule of Civil Procedure 12(e). 79 F.3d at

1082. Such instruction is necessary where “a complaint ‘is so vague or ambiguous that a

[defendant] cannot reasonably be required to frame a responsive pleading.’” Id. (quoting Rule

12(e)). For the reasons discussed above, the Complaint is so ambiguous that Vargas cannot

reasonably be required to frame a responsive pleading.



20

CONCLUSION

For these reasons, the Complaint should be dismissed with prejudice. Alternatively, the

Court should require the SEC to provide a more definite statement.

Respectfully submitted,

Walter J. Mathews & D. Patricia Wallace Fla. Bar Nos. 0174319 & 0185930 wjmathews or [email protected] Walter J. Mathews, P.A. Attorneys for Defendant Luis E. Vargas Courthouse Law Plaza 700 SE Third Avenue, Suite 300 Fort Lauderdale, Florida 33316 Tel: (954) 463-1929 Fax: -1920

By: s/ Walter J. Mathews

Walter J. Mathews

CERTIFICATE OF SERVICE

I certify that that on January 11, 2008, I electronically filed the foregoing document 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 on the attached Service 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/ Walter J. Mathews

Walter J. Mathews



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SERVICE LIST

Brent Mitchell (CM/ECF)

Cheryl J. Scarboro (e-mail at [email protected])

Jeffery T. Ingelise (CM/ECF)

Reid A. Muoio (e-mail at [email protected])

Mark Hunter (CM/ECF)


mailto:[email protected]

Documents

23 - Vargas Motion to Dismiss