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UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA ORLANDO DIVISION Docket No. 6:09-CV-1963-ORL-28GJK . . . . . . . . . . . . . . . U.S. SECURITIES AND : EXCHANGE COMMISSION : : Plaintiff : : v. : : BIG APPLE CONSULTING USA., : INC., ET AL. : : Defendants : . . . . . . . . . . . . . . .

Orlando, Florida February 28, 2013 9:04 a.m.

TRANSCRIPT OF EVIDENTIARY HEARING BEFORE THE HONORABLE JOHN ANTOON, II UNITED STATES DISTRICT JUDGE

For the Plaintiff:

Jeffery T. Infelise Duane K. Thompson Carl F. Schoeppl

For the Defendant:

Matthew Maguire Mark C. Kaley Keith Jablon Amie R. First, RPR, CRR 330-760-2452

Proceedings recorded by mechanical stenography. Transcript produced by Computer-Aided Transcription.

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P R O C E E D I N G S THE DEPUTY CLERK: This is the case of

U.S. Securities and Exchange Commission versus Big Apple Consulting USA, Inc.; MJMM Investments, LLC; Marc Jablon; Matthew Maguire; Mark Kaley; and Keith Jablon. 6:09-CV-1963. Will counsel please state their appearances for the record? MR. INFELISE: Good morning, Your Honor. Jeffery Case Number

Infelise for the Securities and Exchange Commission. MR. THOMPSON: Good morning, Your Honor. Also for

the Securities and Exchange Commission, Duane Thompson. MR. INFELISE: Carrenard. THE COURT: What's your last name? Carrenard? And with us, Your Honor, is Gerardy

MS. CARRENARD: THE COURT:

Are you an attorney then? I am not.

MS. CARRENARD: THE COURT: assistance?

You're giving them technical

Is that what you're doing? I will try.

MS. CARRENARD: THE COURT:

Lawyers need a lot of that. May it please the Court? My name is Carl Schoeppl. Your I'm here

MR. SCHOEPPL: Honor, good morning.

this morning on behalf of Big Apple Consulting USA, Inc.,

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MJMM Investments, LLC, and Marc Jablon. And Marc Jablon is seated here to my left. MR. KALEY: Mark Kaley appearing pro se. Keith Jablon appearing pro se.

MR. KEITH JABLON: MR. MAGUIRE: THE COURT:

Matthew Maguire appearing pro se. Okay. We're going to start with a

short opening statement, telling me what you want and why. And then we're going to move into the evidence. We're going to take a very short break this morning, but we're not going to go that long. to go to about 11:30. We're going And

We'll break for about an hour.

then we'll pick up and go until you're done. that will be before 5:00. Okay? You may proceed. Thank you.

I'm trusting

MR. INFELISE: MR. SCHOEPPL:

Your Honor, if I may, I would just If there are any

like to invoke the rule of sequestration.

witnesses that are not parties, I would like to ask that the Court invoke the rule. courtroom yet but -THE COURT: The rule of sequestration as it The Court grants I don't see anybody in the

applies to witnesses has been requested. the motion and invokes the rule.

Counsel understands the I don't

rule and will assist the Court in enforcing it.

see anybody in the room except the parties and counsel and

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staff of counsel. You may proceed, sir. MR. THOMPSON: Thank you, Judge Antoon. And I

will try to be brief, keeping my opening remarks to about 15 minutes. Especially since this is a bench hearing, I encourage the Court to go ahead and pose any questions that the Court may have along the way. I'd like to begin, Your Honor, with a brief reminder of the violations found in the liability phase of this case. That is, after all, the departure point for

today's consideration of remedies. On January 19, 2012, after a two-week trial, a jury found that all defendants had committed securities fraud in violation of Section 17(a) of the Securities Act. The jury also found that all defendants had aided and abetted James Plant in violating Section 10b of the Exchange Act. Judge, those findings were based on overwhelming evidence that the defendants played a critical role in the dissemination of a fictitious press release claiming that Cyberkey Corporation had a $25 million purchase order from the Department of Homeland Security. For example, the evidence showed that some defendants operated a call room to contact brokers. They

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also handled investor relations' calls for Cyberkey.

And

perhaps most critically, the defendants drafted the press releases in question, claiming the fictitious $25 million purchase order. And, Judge, at the same time defendants were engaged in these activities, they were aggressively selling Cyberkey stock and making money hand over fist in the process. So in addition to violating the antifraud provisions of securities laws, the sales of Cyberkey stock were themselves illegal. They were illegal because the

sales were neither registered with the Securities and Exchange Commission nor with any valid exception to registration. Therefore, on August 25 of 2010, the Court granted the Commission's motion for summary judgment on its claims against Big Apple, MJMM, Marc Jablon and Matthew Maguire under Section 5 of the Securities Act. The Court also ruled that Big Apple and MJMM had violated Section 15(a) of the Exchange Act by acting as dealers, unregistered dealers. And then Marc Jablon, Mark Kaley and Matthew Maguire had aided and abetted those violations by acting with at least severe recklessness. Through these blatant violations, Judge, Big Apple

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and MJMM cleared millions of dollars by selling millions of shares of unregistered stock of Cyberkey. That brings us to the subject of today's hearing remedies. The Commission will be asking the Court to

fashion four types of remedies. The first remedy that we seek is disgorgement of ill-gotten gains, plus prejudgment interest. For Big Apple and MJMM, the evidence at the liability phase of this case, we submit, established that those entities had cleared approximately $5.4 million by selling Cyberkey stock. Now, we expect the defendants to dispute that figure in all sorts of creative ways, but we also expect that none of those justifications will bear scrutiny. Likewise, it would be no defense for Big Apple and MJMM to argue in this proceeding that they can't satisfy such a disgorgement order. Your Honor, that's a collections issue. Whether

or not a defendant claims that it's in dire financial circumstances, that's simply not a defense due to a disgorgement order. But, Judge, at the same time, the Court should not blind itself to Marc Jablon's efforts to take money out of Big Apple and MJMM. The Commission will ask that the Court hold Marc

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Jablon jointly and severally liable for disgorging Big Apple and MJMM's ill-gotten gains. And the evidence

upon which that will be based, Your Honor, will show that Marc Jablon dominated those entities. And after the Commission filed this action in 2009, he proceeded to dissipate the corporation's assets, paying himself large dividends and salary, even as the corporate entities were reporting losses. The evidence will also show, Judge, that Mr. Jablon, Mr. Marc Jablon, cannot account, cannot credibly account for what happened to the millions of dollars that Big Apple and MJMM made selling Cyberkey stock. Now, as to the other individual defendants, Mark Kaley, Matthew Maguire and Keith Jablon, our position on disgorgement will be informed by the depositions that were taken in the remedies phase of this case, as well as whatever evidence they care to present at this hearing. we'll say more about that in our post-hearing submission, Judge. The next remedy that the Court should fashion is injunctive relief. And this applies to all defendants. We So

submit that injunctive relief is clearly warranted in view of the egregiousness of the violations, and the substantial danger of additional violations in the future.

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Now, I should note that that Commission will not be seeking generic obey-the-law injunctions but will instead be seeking specific conduct-based injunctions. An obey-the-law injunction, as I'm sure Your Honor knows, simply says that the defendant shall commit no further violations of the securities laws. But in the case of SEC against Goble, Eleventh Circuit questioned the enforceability of such injunctions under Rule 65. So in light of Goble, we will be asking the

Court to enter injunctions that are more specifically tailored to the type of conduct that defendants engaged and as to which violations were found. The third type of remedy that we'll be seeking is a penny stock bar. And this applies to defendants

Big Apple, MJMM, Marc Jablon and Matthew Maguire. Judge, penny stock bars will prevent these defendants from participating in any offering of penny stock in the future. And that would include a ban on

defendants acting as dealers or inducing a purchase or sale of a penny stock. I do emphasize that the Commission considers this relief critical. And if there's any doubt about that, I

submit that the evidence the Court will hear about Marc Jablon's continued involvement with penny stocks will erase that doubt.

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We will show, Your Honor, that Mr. Jablon is essentially continuing his business under the guise of another company and using the same business model that led to the violations already found. Finally, we come to the question of money penalties. The Commission will seek the maximum penalties So that would be a

allowed by the law for each violation.

third-tier penalty for each violation found. The Securities Act and the Exchange Act provide that third-tier penalties may be imposed when the violation involved fraud or deceit and resulted in substantial loss to others or created a significant risk of substantial loss to others. Now, third-tier penalty may not exceed the greater of $120,000 for each violation by a natural person and $600,000 for a corporation or the gross amount of defendants' pecuniary gain. The amount of penalty is within the sound discretion of the Court. various factors. I will note that some courts have considered defendant's financial circumstances. And in discovery of And the courts have considered

the remedies phase, Judge Antoon, all of the individual defendants, in particular Mr. Keith Jablon, Mr. Matthew Maguire and Mr. Mark Kaley, suggested that they have become

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impecunious. And as to those particular defendants, the Commission will defer taking a position on the appropriate money penalties, if any, until after all of the evidence is in. But I can say right now the Commission does intend to seek penalties as to Mr. Marc Jablon. Indeed, the

Commission intends to present evidence that Mr. Jablon is currently receiving substantial income from work for penny stock companies. Let me now provide a brief introduction to the Commission's planned evidentiary exposition here today. The focus of the Commission's case will be evidence showing that for the corporate defendants, and especially for Marc Jablon, the Cyberkey saga is not aberrational but instead reflects a mindset, a way of life, a business model, that they fully exploited and that Mr. Marc Jablon continues to exploit to this day. In essence, Your Honor, we intend to show that Mr. Jablon will not stop unless he is stopped. We will show that Mr. Marc Jablon's companies have received hundreds of millions of unregistered shares, not just in Cyberkey Corporation, but in a number of other penny stock companies as well. We will show that

Mr. Jablon's companies quickly sold those shares into the

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market without registration. We will show that Mr. Marc Jablon continues to be involved in public relations activities and investor relations activities for penny stock companies. And we will also show that Mr. Jablon essentially transferred his business and his business model to another company that he created. Marketing. The evidence will show that Boost Marketing essentially continued the business that Big Apple and its MSI, Management Solutions International, business had formerly conducted. The only difference is that Mr. Jablon is now calling himself a consultant to that business. Let me review the evidentiary sources and witness lineup that we intend to present this morning and this afternoon. Our first witness will be Mr. Stephen Glascoe. And he's offered as a summary witness pursuant to Rule 1006, Your Honor. Mr. Glascoe is a senior market surveillance specialist in the SEC's division of enforcement. And he And that company is called Boost

will summarize the trading activity in one of the brokerage accounts that Big Apple used to trade unregistered shares of various clients, not just Cyberkey, in the period

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June 2009 to July 2010. Those records show, Your Honor, that in just that one period and for just that one brokerage account, Big Apple Consulting sold over 500 million shares of unregistered penny stock and had over $2.3 million in revenue from those sales. Its affiliate, Big Apple Equities, in the same period sold over 1.2 billion shares of unregistered penny stock and received over $2.2 million in revenue on those sales. Now, Your Honor, we know from the liability phase that Big Apple and MJMM had many brokerage accounts. this is just one of them. And we submit that the trading activity in that one brokerage account lending to various stock companies in that one period shows the extent of defendants' -particularly the corporate defendants and Marc Jablon -activities and that this was, indeed, a business model for them. If I can digress from the witness lineup, Your Honor, in addition to live witnesses, the Commission does rely on deposition designations taken during the remedies phase of this case. We do not propose to put anybody in the witness box and read those into the record. Instead, we would ask And

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that Your Honor take those under submission. The one exception will be it may be necessary as a predicate for Mr. Glascoe's testimony, which will be presented by Mr. Infelise, to read some of the designations from Marc Jablon's testimony. And that's because there's a hearsay objection to the brokerage records that Mr. Glascoe will be summarizing. And unless an objection can be resolved, it may be necessary to present some deposition designations. And there's also a certification from the entity that produced the records that can be presented, Your Honor. But in addition to deposition designations, we also rely on testimony from the liability phase. In

particular, the Court may remember that the Commission presented Mr. Robert Lowry as both an expert and a summary witness and in our post-hearing submissions will be relying on Mr. Lowry's testimony which summarized the trading records that showed the amounts that Big Apple and MJMM cleared through their sales of Cyberkey stock. we believe that amount is $5.4 million. Our next witness, live witness, will be Mr. Marc Jablon himself. The focus of that examination And, again,

will be Mr. Jablon's continued involvement with penny stock companies and his income from such activities as well as

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his domination of both Big Apple and MJMM and what happened to all of the money that they took in. Now, parenthetically I note that the Commission and Mr. Schoeppl have agreed that in cross-examining Mr. Jablon, Mr. Schoeppl may go beyond the scope of the Commission's direct examination. result in time savings. The live examination of Mr. Jablon will endeavor not to repeat testimony gone into in the designations except to the extent necessary for impeachment, or as already mentioned, to establish foundation for Mr. Glascoe's testimony. Our next witness will be Mr. Michael Gibilisco. And this will be brief testimony. Mr. Gibilisco is the And hopefully that will

founder of the penny stock company named 3D Eye Solutions. And he will testify as to Mr. Marc Jablon's involvement with that company. Next in the lineup, Your Honor, is Miss Brenda Hamilton. Boca Raton. And the evidence will show that in 2010, Marc Jablon approached her to provide an opinion letter to OTC Markets on behalf of Big Apple's clients. OTC Markets runs a quotation platform for microcap and penny stock companies, and it has various levels of Now, Miss Hamilton is a securities lawyer in

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quotations.

It has Grey Market quotations which involve And

companies that don't provide any type of disclosures. then Pink Sheets is for companies that do provide some disclosures. Penny stock companies typically aren't SEC reporting, but OTC Markets or Pink Sheet companies does require that they provide certain disclosures that basically track what they would provide to the SEC. So the evidence will show that in May of 2010,

Marc Jablon approached Miss Hamilton after Pink Sheets had refused to take opinions regarding disclosures made by Big Apple's clients. They refused to take the opinions

from two other lawyers that Big Apple had referred to those clients. The evidence will show that those two attorneys were part of a string of attorneys that Big Apple had referred to its clients to provide these opinions so that the company stock could be quoted on Pink Sheets and that that string of attorneys is all under some type of cloud. They've all either been barred by Pink Sheets itself, banned from practicing before the SEC, or facing some type of bar disciplinary proceeding. But Brenda Hamilton was different. The evidence

will show that Miss Hamilton would not bless disclosures that Big Apple had prepared for its client, and the

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particular client we'll be focusing on is a company called Cloud Centric. But Miss Hamilton wouldn't bless disclosures that Big Apple had prepared. She also noted red flags. Those

red flags were the absence of any disclosure in the disclosures that Big Apple had prepared concerning Big Apple's receipt of so much Cyberkey stock and its sales of that stock into the market without registration pursuant to the same purported exemption that this Court in the liability phase found did not apply, did not justify Big Apple sales of unregistered Cyberkey stock. The evidence will also show that Big Apple and Marc Jablon first tried to silence Miss Hamilton and then tried to punish her after she wouldn't go along with the program. This evidence, we submit, will make crystal clear the need for strong injunctive relief and penny stock bars against Mr. Jablon and his companies. Our final witness, Your Honor, will be Mr. Jason Takacs. Mr. Takacs is a person who Marc Jablon installed

as a nominal owner and head of Boost Marketing. The evidence will show that Mr. Jablon is using Boost Marketing to continue the same business and the same business model he had with Big Apple. Indeed, Big Apple

simply assigned its consulting contracts to Boost

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Marketing. The evidence will show that Mr. Jablon is receiving approximately $300,000 a year in compensation as a purported consultant to Boost Marketing. And, tellingly,

the evidence will show that Mr. Jablon describes himself as the founder of Boost Marketing. All this evidence, Your Honor, we believe, is relevant to the need for injunctive relief. Penny stock

bars tend to show that Mr. Jablon has substantial income, even leaving aside the question of what happened to all of the money that Big Apple and MJMM made selling Cyberkey stock. Your Honor, we anticipate that the evidence should finish up by late afternoon, depending on the need to impeach witnesses and how much time gets spent arguing on objections. And we are assuming, given that there will be post-hearing submissions, that the Court does not want closing argument. THE COURT: standards. next month. be quickly. MR. THOMPSON: We understand, Your Honor. Well, I'm under the gun on time

I need to get this case concluded by the end of So whatever I ask you to do, if anything, will

Thank you, Your Honor.

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MR. SCHOEPPL:

Your Honor, may I approach? Your Honor, this is the

May it please the Court? remedies phase of the case.

And I just want to correct one

thing that was mentioned about the liability phase. There was a reference that my clients drafted the press releases. That's not accurate. There was a

stipulation entered between the parties that the press releases were based on content that was provided by Cyberkey and James Plant. That's part of the evidence, the trial record. that is not correct. THE COURT: My clients relied upon -Are those two things inconsistent? Absolutely, Your Honor. So

MR. SCHOEPPL:

There's a U.S. Supreme Court case that came out that we cited in our moving papers and the various Rule 50 motions and other motions that dealt with that issue. And basically that case stood for the proposition that if these parties were not the actual drafters of the information, they weren't holding themselves out as being the persons that were actually making the statements, they could not be liable under 10b. And in this case, that's a critical fact, because every one of the press releases that the SEC has alleged in the underlying liability phase of the case were actually published and printed by Cyberkey itself.

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And that's a critical fact.

And we think that

that's important because it does bear on the issues regarding the penalties, as an example, in the remedies phase of the case, which I'm actually going to talk about that first. The penalty phase of the case is one of the remedies the SEC is seeking. There are actually three

different tiers for civil money penalty under the Securities Act and also under the Exchange Act. Now, the SEC has indicated that it's going to seek the maximum third-tier penalty against my clients in this case. Now, in my view, I don't believe it is appropriate for them to do that for any of the violations, but particularly for the violations that do not involve fraud, deceit, or misrepresentations. In this case, the Court entered a summary judgment order regarding a Section 5 violation and a Section 15 violation. provisions. Those two violations are separate statutory The first is a registration provision of the

securities, and the other is a registration provision regarding a broker-dealer. Neither one of those provisions involved fraud, deceit, misrepresentations. And under the civil monetary

provisions, you need to have those -- that nexus in order

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to impose a third tier, or even a second tier, civil money penalty. So it's our position that the violations for Section 5 and for Section 15 cannot result in a third-tier or second-tier civil money penalty; that at best, it could result in a first-tier civil money penalty. So we believe that that's something that the Court is going to have to align when presented with the remedies papers after this hearing today. Furthermore, on that issue, with respect to the penalty, the ability to pay of a party is a consideration that the Court may take into consideration when assessing the amount of the penalty. And I agree with the plaintiff that for purposes of disgorgement, at this time, that's not an appropriate factor for the Court to consider in assessing the amount of disgorgement, but it is a factor that is appropriate for the Court to consider in assessing the penalty amount. So let me turn to the disgorgement issue. In this

case, Your Honor, the disgorgement issue is really one that the SEC has the burden to carry here. It has to prove that the reasonable approximation of the ill-gotten gain, the disgorgement, is based on a theory of unjust enrichment. And the SEC has to tether the

proof at the remedies phase to an actual violation in the

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underlying liability part of the case. It can't just get a blunderbuss: Here's a tax

return for $20 million, and they are liable to pay $20 million. They have to show a nexus between the

Cyberkey transactions, the violation, and then an ill-gotten gain that is derived from that violation. And it's our position -- until today in opening statement, we did not know what they were seeking in terms of the amount of disgorgement against Big Apple, MJMM, and Mr. Marc Jablon. $5.4 million. The evidence in this case, they are going to have to adduce it to demonstrate what the basis is for that particular number. Now, each of the parties in the case, the two entity defendants in the case, MJMM and Big Apple, do not stand in the same position as it relates to disgorgement. It's our position that MJMM was the contracting party directly with Cyberkey. They received the lion's Now, today, they are saying they want

share of the money directly from Cyberkey, and Big Apple did not. So we expect that the evidence is going to show that there's going to be a dichotomy between the approximation of disgorgement that is attributable to Big Apple and as it relates to MJMM.

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We don't know what it is yet until we see their proof that they put in. But that's something that I want

to alert the Court to, that they have to tie it to each one of the defendants. And in the case of Mr. Marc Jablon, we don't believe it is necessary for the Court to hear evidence regarding what the SEC is claiming, domination and control. We've never disputed the fact that Mr. Marc Jablon, you know, was a shareholder, an officer, of the two corporate entities that are defendants in this case. So we

really don't think that's an issue that really warrants dispute on our end. And we understand principles of joint and several liability with that as well for Mr. Marc Jablon. So I don't think that's something that we really want to waste the Court's time on. So I want to alert that

that's not something that we're contending is an issue. But on the disgorgement issue, one of the things that we are unaware of until we see the evidence, we could have evidence of potential setoffs in the case. There's certain expenses that legal precedent in the Eleventh Circuit and other districts within the Eleventh Circuit have recognized for proper setoffs against the amount of disgorgement that the SEC is seeking; that they are not entitled to a gross number.

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There has to be some proof that the SEC puts on that shows that this is the actual amount of the gain that was received. Because the idea of disgorgement is to

deprive the alleged violator of whatever the unjust enrichment was. And we believe that there are some setoffs that should be applied. There are exhibits that their own

expert has prepared, which I believe almost all of them have already been stipulated as to their admission regarding that. And I haven't looked at the numbers to compare them with what those numbers are to see -- the SEC may already be conceding that. And if they are, we're not

going to have a lot to deal with on the setoff issue other than the fact that I'm alerting the Court that that's a factor. Now, along with that issue on disgorgement, the SEC seems to be mixing apples and oranges regarding what it needs to prove in the remedies phase versus what it has to prove in the collection phase. It is our position that evidence regarding the ability to pay disgorgement is only relevant to the Court at the time of collection. remedies phase. THE COURT: I think that's what Mr. Thompson said. It's not relevant today at the

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MR. SCHOEPPL:

Yeah.

And so we believe that, you

know, evidence regarding income that Mr. Jablon is earning today, that's really not appropriate for the Court's consideration on disgorgement. And in any event, what we intend to do on behalf of Mr. Jablon, there's a federal wage garnishment exception for income. The federal statute provides that only

25 percent of after-tax income can be subject to a court order. And what we intend to do is enter an income deduction order for 25 percent of his after-tax income that would be applied to whatever judgment the Court ultimately enters in this case. At this time, the parties, my clients, do intend to file a notice of appeal, but we expect there will be a judgment. ability. We believe that evidence regarding dissipation or alleged transfers of assets to reduce the assets of Big Apple and MJMM during the time period between 2009 and, I believe, 2012, I don't think it's relevant for the Court for today. That's a collection issue. He intends to fully comply to the extent of his

And if the SEC is going to take the position that there's been a dissipation of assets or a diminution of the ability to pay, that's something that the Court doesn't

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need to consider today. And we believe that that should not be permitted, that type of testimony or evidence today. That should

happen after, in the collection phase of the case. Now, another area that has caused us some concern regarding the remedies phase is that the SEC appears to seek to offer evidence regarding Cloud Centric and other securities, other than Cyberkey. Cyberkey, as the Court will remember, was only a client during the time period between 2005 and 2007 for Big Apple and MJMM. It's over five years ago.

And what the SEC is seeking to do is basically try another case today to establish alleged violations that my clients haven't even been charged with. We think it's a

denial of procedural due process for them to do that. They haven't provided us with a charging instrument charging my clients with any alleged violations regarding Cloud Centric, Artfest, or any of the other securities that they attempted to elicit testimony and documentary evidence during the remedies phase. And we think it's improper for them to adduce evidence today before this Court on that issue. THE COURT: How would that work, though, if just,

for example, there is conduct that would be uncharged, untried, but may be relevant with regard to injunctive

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relief? MR. SCHOEPPL: Well, on the injunctive relief

issue, Your Honor, I think the SEC versus Goble case is the leading case out of the Eleventh Circuit that came out in 2012. There's six factors that the Court has to consider.

Almost every one of those factors relate to the underlying violations. For example, the first factor is the egregiousness of the defendants' actions. That's the actions in the

underlying liability phase of the case, the Cyberkey transactions. The second issue, which is the issue that, I think, the plaintiff is training on, is the isolated or recurrent nature of the infraction. I think that's the -- what they are trying to tether the ball to today, with that. that's appropriate. And this is why. But we don't think

Big Apple, MJMM, and Mr. Marc Jablon have never been found to have violated the federal securities laws before or after this case. And if the SEC is going to try

to adduce evidence of an actual violation, they need to charge them, if that's really what they want to do, in my view; and that's not what they've done. And what they are trying to do, they are trying to get an adjudication today based on facts that we don't have

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charges; we don't have an opportunity to take discovery on; and we think it's a denial of due process. think it's appropriate. On the injunction phase, the issue really -- and, by the way, I mean, for purposes of the evidence with respect to this point, obviously we intend to appeal the underlying liability determination. But if it helps deal with this, we have no problem stipulating to the entry of an injunction, Your Honor, and the penny stock bar as to my clients without prejudice to our right to appeal the underlying liability determination. Because we don't believe any of that stuff is relevant to it. We don't want to waste the Court's time in Because this will create We believe it is not We just don't

going through this evidence.

another appellate issue for us.

appropriate for the SEC to basically sandbag us. THE COURT: in here? MR. SCHOEPPL: Yes. We've talked about giving us Have you guys talked before you came

notice and why they're doing this. THE COURT: No, about the stipulating. If you're

stipulating to the penny stock bar, then that would remove an issue from -MR. SCHOEPPL: Yeah. As far as we're concerned,

as it relates to Marc Jablon, Big Apple Consulting, and

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MJMM, we're prepared to do that.

And I think that really Obviously there are

narrows the issues down for the Court.

other parties in the case besides my clients. But until I heard their opening statement, I really didn't know what they intended to do with this evidence. It was just a hodgepodge of stuff. I was Now I see

speculating as to what they might do with it. what they are trying to do. THE COURT:

Mr. Maguire, would you be willing to

enter into such a stipulation as well? MR. MAGUIRE: THE COURT: Penny stock bar, yes. Mr. Jablon? Mr. Kaley. No. Mr. Kaley is over Back row.

MR. INFELISE: THE COURT: here.

I'm sorry.

MR. KEITH JABLON: there's a penny stock -MR. THOMPSON:

Your Honor, I don't think

Your Honor, if I may, the

Commission did not seek a penny stock bar for Mr. Keith Jablon. THE COURT: MR. KALEY: Okay. Mr. Kaley?

I don't believe there was a penny

stock bar sought against me either. MR. THOMPSON: THE COURT: That's correct, Your Honor.

Well, that makes the day a little

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easier, I think. MR. SCHOEPPL: Yes.

And, Your Honor, I think that that will then -all of the objections that I made to the exhibits and to the testimony of certain of the witnesses, including Miss Hamilton, would be now obviously ripe and appropriate. And we think then the only issue that really should be offered today would be disgorgement, prejudgment interest, and civil penalties. I think those are the only

things that would be appropriate for the Court to consider. The issue with respect to the penalty is directly related to the disgorgement number. The way that the tiers

work under the three tiers, it has the greater of a certain dollar amount or the gross pecuniary amount of the gain that the defendant entered into. If, for example, the number is $5.4 million, I anticipate that the SEC is going to seek the $5.4 million for the penalty. Is that a fair deducement, or you don't know? MR. THOMPSON: The penalty would be based on the

language of the Securities Act and the Securities Exchange Act, Your Honor, which, as I indicated, sets forth, I believe, on a per-violation basis, $120,000 for an individual and up to $600,000 for the corporate entity. So that would be the basis of the Commission

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seeking penalties.

So for the number of violations found,

for example, we would multiply that by the statutory amounts. THE COURT: Mr. Thompson, you accept the

stipulation with regard to the penny stock bar, right? MR. THOMPSON: We would need to know, Your Honor Because we do believe

-- we are seeking a permanent bar.

conduct was egregious, and there's a danger of further conduct in the future. So if they are stipulating to the

permanent stock bar, penny stock bar, we certainly accept that. THE COURT: Is that included in your stipulation? Yes. And as to the injunction,

MR. SCHOEPPL: MR. THOMPSON:

Your Honor, if I may, as I indicated, we're not just seeking a generic obey-the-law injunction, but we're seeking a specific conduct-based injunction. So the language of that would need to be worked out. But in concept, we'd certainly welcome a stipulation

to injunctive relief. THE COURT: I understood the offer to stipulate to

be that the defendants against whom the bar was being sought would not engage in that trade, right? MR. SCHOEPPL: Yeah.

Your Honor, if I can help, the penny stock bar

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language, I think that's not subject to the SEC versus Goble case. MR. THOMPSON: MR. SCHOEPPL: That's correct. The language, as I understand it,

there's standard language that's used in a penny stock bar. I'm familiar with that language, and I know that my client is familiar with that language as well. That language is not part of the Rule 65 issue. don't think there's going to be an issue with that. I

That's

standard boilerplate language that the SEC requires in every penny stock bar. The issue is not the same with the injunction, but I can speak to that separately. MR. THOMPSON: I don't know that I would call it

boilerplate language, Your Honor, but there is standard language. I'm sure Mr. Schoeppl is familiar with it. I

can pull it up, and we can look at it and maybe agree to it during a recess. But I think the larger issue is the language of the injunction. And we would need to tailor that language

to the violations found in order to prevent future violations. But, again, in concept, we certainly welcome such a stipulation. MR. SCHOEPPL: And, Your Honor, if I can just

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address the injunction issue now, in terms of the fashioning of the actual language in the injunction order is not something -- I don't believe it would have been done today. I think the evidence today would have been to put on a basis to impose injunctive relief, I believe, is what the purpose of today's hearing would be. But the Goble case did address certain language that would be found like in a Section 5 violation or a 15 violation, I believe, in the Goble case. It found that the language under the securities, under the registration provisions, was clear to prohibit the type of conduct so that a defendant would know how to comply with that to avoid a contempt. The issue is on the fraud part and how to draft that language. I think that would have to be tailored to

the specific conduct in the underlying case regarding Cyberkey. And the SEC staff would have to submit a proposed injunction order to me, and we would look at that. And

obviously we would endeavor to deal with that in good faith and address it. That's not something that would happen today, but we certainly would do that, Your Honor, in this case. THE COURT: When would that happen?

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MR. SCHOEPPL:

As soon as the SEC wants to provide We

it to me, we can turn that around quickly, Your Honor. know the Court wants to dispose of this case. to do that as soon as possible. MR. THOMPSON:

We're happy

Your Honor, first of all, I believe

it is the Goble case, not Global. MR. SCHOEPPL: former client. Goble, G-O-B-L-E. He used to be my

I know who he is. Mr. Schoeppl is correct. We have

MR. THOMPSON:

not had specific language here to present at the hearing today. Perhaps during a break -- the Court has indicated We may

that we're going to need to take a break at 11:30. be able to have some discussion then and maybe work something out. THE COURT: Okay.

MR. SCHOEPPL:

And then, if I can turn to the

issue of the penalty, because I believe that the penalty, if I heard Mr. Thompson correctly, he was talking about the per violation assessments that are in the statute. Well, the per violation, I don't know how they -they haven't offered evidence as to how many different violations they claim existed. quantifying that. But under the third tier, it is $100,000 for a natural person or $500,000 for any other person; but it's I don't know how they are

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the greater of those amounts against the gross amount of the pecuniary gain as a result of the violation. can't get more than that number. quantification of that. But I think that for purposes of the hearing today, my understanding of a remedies hearing on the penalties phase is for the Court to determine the propriety of entering a penalty assessment, that that's the purpose of it. Now, as a matter of law, I believe that if there are findings of fact in the underlying case on liability that triggers a fraud or deliberate disregard or reckless disregard of a regulatory requirement, that's going to trigger the application of either a second- or third-tier penalty. The amount of that penalty is obviously based on the number of violations or the gross amount of the pecuniary gain. I believe that that can all be argued on the papers. I don't know what it is yet. As to what it is, I So they

And I haven't seen a

think that the moment that there is a violation, that this triggers the application of a potential penalty under the penalty provisions of the statute. So I don't believe additional evidence is needed to determine that issue, that whether a penalty is

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appropriate or not. I think the issue for the Court is, when it looks at Section 5 and 15 violations, I don't believe the secondand third-tier penalties are appropriate. first tier is appropriate for that. question, not a factual question. And then I believe whether the second-tier or third-tier penalty, the biggest difference between those, Your Honor, is under the second tier, it has to involve fraud, deceit, manipulation, et cetera. Under a third, it has to involve fraud, deceit, manipulation; and then it has to then -- it has to then result in substantial losses or create a significant risk of substantial losses to other persons. And that, again, is the underlying violation. It's not what happens after the 2007. And so I think that's something that -- you know, I haven't seen the SEC's position on it. We didn't know I think only a

That's a legal

they were seeking a third-tier civil penalty on everything until today in their opening statement. But I believe that that's something that can be briefed before the Court. I don't believe any new evidence

needs to be presented to the Court today on that issue. I think that you have to use the underlying liability, what happened with those violations, whether

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those violations exposed persons to substantial risk of loss or losses. I think that's what it comes down to.

So I don't believe any evidence on the penalty issue is appropriate today. And that's another reason why

I've objected to many of the witnesses that the SEC has attempted to call and many of the exhibits that they have put on their exhibit list for today. So that's that issue. THE COURT: issues ahead of time. some time. I'm going to save myself some time right now, at least with regard to the injunctive questions. You're Well, I wish I would have had these I could have probably saved you all

going to have the conference now to see if you can give me a stipulation so we can get -- if possible, I can get that off the table. And we'll proceed from there. MR. SCHOEPPL: Thank you. Yes, sir.

How much time would you like us to What

do -- check back with you in an hour, a half an hour? would you like us to do? THE COURT: 15 minutes. MR. SCHOEPPL: you. Fifteen minutes. Got it. I would like you to do it in about

Thank

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MR. THOMPSON:

Your Honor, if I may very briefly,

Mr. Infelise informed me that I did misspeak during the opening statement. I believe I indicated that Miss Hamilton was proposed to testify concerning Big Apple's dealings with Cyberkey. And if I said that, I meant Cloud Centric. THE COURT: Okay. Your Honor, one thing. Based on

MR. INFELISE:

the stipulations which Mr. Schoeppl has offered, I think that we probably are in a position where we can streamline our case substantially. THE COURT: Okay. That's great.

MR. INFELISE:

So I would ask for an additional

15 minutes so we can reorganize and see what we have to put on. THE COURT: You guys are experts in this field,

and you know much more about the intricacies of it probably than the rest of us in the room do. appellate issues better probably. It may be -- and I'm speaking -- I'm not assuming this to be true, but to the extent that Mr. Schoeppl made a -- the major issue in our pretrial proceedings, the question that he asked for rehearing on in summary judgment, that's the big -- that's his big issue. a question of law. And it's a good question. And it's And you understand the

It is.

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And if all we're doing here or if substantially all we're doing here is setting that up, then maybe there's room for appeal. Maybe there's room for you all to resolve And

some of these issues even beyond the injunction. that's great if you can do it.

I've recognized that as being the defendants' position and understood all along that that's going to be something that the Eleventh Circuit is going to have to rule on. So maybe that's the -- if you look at it from that perspective, maybe there's more you can agree to. MR. SCHOEPPL: I appreciate that, Your Honor. Thank you.

We'll certainly endeavor to do that. (Recess at 9:54 a.m.) THE COURT:

Blessed are the stipulators. Your Honor, we've reached a

MR. SCHOEPPL:

stipulation on all matters to dispense with the necessity of the hearing today. Would you like me to read the stipulation, or would you like to do it? MR. INFELISE: Why don't I go through it?

My understanding -- Mr. Schoeppl will correct me if I'm wrong -- is with respect to the defendants, Marc Jablon, Big Apple Consulting, and MJMM, the parties have stipulated that there will be a permanent penny stock bar.

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There will be a permanent injunction in language.

We have

a draft that we intend to finalize that the defendants have looked at and agreed to. There will be $5.4 million in disgorgement. And

prejudgment interest will be jointly and severally liable against Mr. Jablon, Big Apple Consulting, and MJMM. And

then a penalty, the amount to be determined after briefing by the parties. With respect to the defendants Mark Kaley and Keith Jablon, they've stipulated to a permanent injunction and a penalty in an amount to be determined by the Court after briefing. With respect to the defendant Matt Maguire, a permanent penny stock bar, a permanent injunction, and a penalty, again, to be determined by the Court after briefing. So with that, Your Honor, the SEC has no need to put any evidence on today. MR. SCHOEPPL: And the only thing I would add just

for the record is that our stipulation is being entered into without waiving our right to appeal the underlying merits of the case. THE COURT: Right. That's understood. And you

represent corporate entities. MR. SCHOEPPL: The two entities and Mr. Jablon,

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that is correct. THE COURT: Marc Jablon? Yes.

MR. SCHOEPPL: THE COURT: stipulation as well?

Mr. Keith Jablon, is that your

MR. KEITH JABLON: THE COURT: stipulation? MR. MAGUIRE: THE COURT: stipulation? MR. KALEY: THE COURT: Yes. Okay.

Yes, Your Honor.

And, Mr. Maguire, is that your

Yes, Your Honor. And, Mr. Kaley, is that your

That's my stipulation. And we're clear that there will

be no evidentiary hearing required to dispose of the other issues; is that correct? MR. SCHOEPPL: MR. INFELISE: THE COURT: Yes, Your Honor. Yes. What I would like you to do is

Okay.

to reduce your stipulation to writing and have it signed by all parties. Well, I don't think that's necessary. has agreed on the record. But what I want you to do is submit your papers sooner rather than later. Maybe you can use part of I don't know. Everybody

today's to put them together.

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But I would like those in ten days.

I know that's

a lot to ask, but I'm under the gun on this as far as my time standards. And to the extent you're relying on the record created in the liability phase -- do you all have a copy of that record? MR. SCHOEPPL: THE COURT: relying on. MR. INFELISE: So I understand, then, sir, you Yes.

I want page citations that you're

want our submissions not later than March 11? THE COURT: Right. And then for us, we don't know what

MR. SCHOEPPL:

the submissions are going to be from them on that part. How much time would the Court want for us? do it in five days. THE COURT: Five days will be fine. Yes. Thank you. We can probably

MR. SCHOEPPL: THE COURT: to get it done. MR. KALEY: a copy of the record? THE COURT: through -MR. SCHOEPPL:

And that will give me only a few days

Excuse me.

But what if we don't have

Well, you can try to get access to it

I can try to help them out with

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that. THE COURT: MR. KALEY: THE COURT: Do that. I can't give it to you.

I understand. Yeah. That applies to everybody. If

you all want to submit a brief on it, you may as well. Okay. today? MR. SCHOEPPL: Honor, it does. MR. INFELISE: MR. SCHOEPPL: THE COURT: Yes, Your Honor. Thank you, Your Honor. Have a good day. On behalf of my clients, Your Does that take care of the business for

Thank you very much. Thank you. Thank you.

MR. SCHOEPPL: MR. INFELISE:

(Proceedings adjourned at 11:04 a.m.)

C E R T I F I C A T E

I certify that the foregoing is a correct transcript from the record of proceedings in the above-entitled matter.

s\Amie R. First, RPR, CRR