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UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA CASE NO. 07-cv-61693 (JAL) ________________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) ) Plaintiff, ) ) ) v. ) ) ) JOSEPH J. MONTEROSSO, and ) LUIS E. VARGAS, ) ) Defendants. ) ________________________________________________)

PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS OPPOSITION TO DEFENDANT LUIS E. VARGAS MOTION TO DISMISS THE COMPLAINT OR, IN THE ALTERNATIVE, FOR A MORE DEFINITE STATEMENT

Of Counsel: Cheryl J. Scarboro

Jeffery T. Infelise (DC 546998) Special Florida Bar No. A5501154 infelisej@sec.gov Reid A. Muoio Special Florida Bar No. A5501160 muoior@sec.gov Brent Mitchell Special Florida Bar No. A5501159 mitchellb@sec.gov 100 F Street NE Washington, D.C. 20549 (tel) (202) 551-4904 (Infelise) (fax) (202) 772-9362 (Infelise) Attorneys for Plaintiff, Securities and Exchange Commission

January 28, 2008

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TABLE OF CONTENTS

TABLE OF AUTHORITIES ....................................................................................................... iii PROCEDURAL HISTORY ........................................................................................................... 1 ARGUMENT ................................................................................................................................. 3 I. II. Standards Of Review .................................................................................................. 3 The Complaint Properly Alleges Claims Upon Which Relief May Be Granted ........................................................................................................ 4 A. The Complaint Properly Alleges Scienter Claims ........................................ 4 1. The Complaint Properly Alleges That Vargas Is Liable For Primary Fraud Violations ............................................................ 4 The Complaint Properly Alleges That Vargas Fraud Was Material ..................................................................................... 6 The Complaint Properly Pleads Scienter ........................................... 8

2.

3. B.

The Complaint Properly Alleges Non-Scienter Claims .............................. 10 1. 2. Section 17(a)(2)-(3): Non-scienter Fraud ......................................... 10 Aiding and Abetting Claims ............................................................ 10

C. D. III.

Rule 13b2-1: Falsifying Books and Records ............................................... 11 Rule 13b2-2: False Statements To Auditors ............................................... 12

The Complaint Pleads Fraud With Adequate Particularity .................................... 13 A. The Complaint Adequately Informs Vargas Of The Nature Of His Participation In The Fraud ............................................................... 13 The Complaint Does Not Rely Upon Conclusory Allegations To Impute Conduct To Vargas .................................................................... 15

B.

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C.

The Use Of The Words False and Cause In The Complaint Does Not Violate Rule 9(b) ........................................................................ 17

IV.

The Complaint Satisfies the Requirements Of Rule 10(b) .................................... 18

V.

Vargas Motion for A More Definite Statement Should Be Denied ............................................................................................... 20

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

ii

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TABLE OF AUTHORITIES CASES Anderson v. District Board Of Trustees of Central Fla. Community College, 77 F.3d 364 (11th Cir. 1996) ................................................................ 19, 20 Appalachian Enterprise, Inc. v. Epayment Solutions Ltd., No. 01-cv-11502, 2004 WL 2813121 (S.D.N.Y. Dec. 8, 2004) ..................................................... 13, 14 Bell Atlantic Corp. v. Twombly, U.S. , 127 S. Ct. 1955 (2007) .............................. 7, 9 Bradbury v. S.E.C., -F.3d-, 2008 WL 108728 (D.C. Cir. Jan. 11, 2008) .......................... 7 Bruhl v. Price Waterhousecoopers International, No. 03-23044cv, 2007 WL 997362 (S.D. Fla. Mar. 27, 2007) ...................................................................... 13 Brunette v. Dresser Industrial, Inc., 849 F.2d 1277 (10th Cir. 1988) ............................. 14 Castro v. Sec. of Homeland Security, 472 F.3d 1334 (11th Cir. 2006) ............................ 3 Cippola v. County of Rensselaer, 129 F. Supp. 2d 436 (N.D.N.Y. 2001) ...................... 18 Conley v. Gibson, 355 U.S. 41 (1957) .............................................................................. 3 Cordova v. Lenman Brothers, Inc., __ F. Supp. 2d __, 2007 WL 4287729 (S.D. Fla. 2007) ................................................................................................... 13, 14 In re Eagle Building Technology, Inc. Sec. Litigation, 319 F. Supp. 2d 1318 (S.D. Fla. 2004) ........................................................................................................... 9 Ganino v. Citizens Utilities Co., 228 F.3d 154 (2d Cir. 2000) ......................................... 8 In re Global Crossing, Ltd. Sec. Litigation, 322 F. Supp. 2d 319 (S.D.N.Y. 2004) ........................................................................................................................... 6 Glover v. Liggett Group, Inc., 459 F.3d 1304 (11th Cir. 2006) ........................................ 3 Green v. C.B. Fleet Holding Co., No. 07-80589-civ, 2008 WL 113668 (S.D.Fla. Jan. 8, 2008) ........................................................................................ 19, 20 Hishon v. King & Spalding, 467 U.S. 69 (1984) .............................................................. 3

iii

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In re Microstrategy, Inc. Sec. Litigation, 115 F. Supp. 2d 620 (E.D. Va. 2000) ......................................................................................................................... 10 National Organization for Women, Inc. v. Scheidler, 510 U.S. 249 (1994) ..................... 3 In re Parmalat Sec. Litigation, 376 F. Supp. 2d 472 (S.D.N.Y. 2005) .............................. 6 Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015 (11th Cir. 2004) ................................. 8 Ross v. A.H. Robins Co., 607 F.2d 545 (2d Cir. 1979) .................................................... 4 In re Royal Ahold N.V. Sec. & ERISA Litigation, 351 F. Supp. 2d 334 (D. Md. 2004) ........................................................................................................................... 6 Rudolph v. Arthur Andersen & Co., 800 F.2d 1040 (11th Cir. 1986) ............................ 10 S.E.C. v. Carriba Air, Inc., 681 F.2d 1318 (11th Cir. 1982) ......................................... 8, 9 S.E.C. v. Cedric Kushner Promotions, Inc., 417 F. Supp. 2d 326 (S.D.N.Y. 2006) ......................................................................................................................... 11 S.E.C. v. Collins & Aikman Corp., --, F. Supp. 2d -- 2007 WL 4480025 (S.D.N.Y. Dec. 21, 2007) .................................................................................... 5, 7, 9 S.E.C. v. DiBella, 2005 WL 3215899 (D. Conn. Nov. 29, 2005) ................................... 11 S.E.C. v. Digital Lightwave, 196 F.R.D. 698 (M.D.Fla. 2000) .................................. 9, 20 S.E.C. v. Dunlap, No. 01-8437cv, 2002 WL 1007626 (S.D.Fla. Mar. 27, 2007) ......................................................................................................... 5, 11, 14, 19 S.E.C. v. Gad, No. 07-civ-8385, 2007 WL 4437230 (S.D.N.Y. Dec. 17, 2007) .......... 7, 8 S.E.C. v. Gane, 2005 WL 90154 (S.D. Fla. Jan. 4, 2005) ............................................ 7, 9 S.E.C. v. Ginsburg, 362 F.3d 1292 (11th Cir. 2004) ........................................................ 6 S.E.C. v. Holschuh, 694 F.2d 130 (7th Cir. 1982) ........................................................ 5, 9 S.E.C. v. Lucent Technology, Inc., 363 F. Supp. 2d 708 (D.N.J. 2005) ....................... 5, 9 S.E.C. v. McNulty, 137 F.3d 732 (2d Cir. 1998) ............................................................ 11 S.E.C. v. Nacchio, 438 F. Supp. 2d 1266 (D.Colo. 2006) ................................................ 5 iv

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S.E.C. v. Physicians Guardian Unit Investment Trust, 72 F. Supp. 2d 1342 (M.D. Fla. 1999) ......................................................................................................... 3 S.E.C. v. Softpoint, Inc., 958 F. Supp. 846 (S.D.N.Y.1997) .............................. 10, 11, 12 S.E.C. v. Solow, 2007 WL 1970806 (S.D. Fla. May 10, 2007) ........................................ 6 S.E.C. v. U.S. Environmental, Inc., 155 F.3d 107 (2d. Cir. 1998) ............................... 6, 7 In re Suprema Specialities, Inc. Sec. Litigation, 438 F.3d 256 (3d Cir. 2006) ....................................................................................................................... 4, 9 TSC Industrial, Inc. v. Northway, Inc., 426 U.S. 438 (1976) ........................................... 7 In re Twinlab Corp. Securities Litigation, 103 F. Supp. 2d 193 (E.D.N.Y. 2000) ........................................................................................................................... 7 Watts v. Florida International University, 495 F.3d 1289 (11th Cir. 2007) ..................... 7 Ziemba v. Cascade International, Inc., 256 F.3d 1194 (11th Cir. 2001) ....................... 4, 7 REGULATIONS 17 C.F.R. 240.13b2-2 ................................................................................................... 12 17 C.F.R. 240.3b .................................................................................................... 12, 13

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UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF FLORIDA CASE NO. 07-cv-61693 (JAL) ________________________________________________ ) SECURITIES AND EXCHANGE COMMISSION, ) ) Plaintiff, ) ) ) v. ) ) ) JOSEPH J. MONTEROSSO, and ) LUIS E. VARGAS, ) ) Defendants. ) ________________________________________________) PLAINTIFFS MEMORANDUM OF LAW IN SUPPORT OF ITS OPPOSITION TO DEFENDANT LUIS E. VARGAS MOTION TO DISMISS THE COMPLAINT OR, IN THE ALTERNATIVE, FOR A MORE DEFINITE STATEMENT Pursuant to Rule 7 of the Federal Rules of Civil Procedure and Local Rule 7.1, plaintiff, the Securities and Exchange Commission (the Commission), respectfully submits its memorandum of law in support of its opposition to the defendant, Luis E. Vargas (Vargas) motion to dismiss the Commissions complaint or, in the alternative, for a more definite statement. For the reasons set forth below, the Court should deny both motions. PROCEDURAL HISTORY On November 21, 2007, the Commission filed a complaint against defendants Monterosso and Vargas alleging that from about July 2004, through September 2006, they engaged in a fraudulent scheme to generate fictitious revenue for GlobeTel Communications Corp. (GlobeTel). Specifically, they created false invoices that appeared to record purchases and sales by three of GlobeTels, wholly-owned subsidiaries that never occurred. The Complaint further alleges that as a direct result of defendants fraudulent scheme, GlobeTel issued periodic

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reports, registration statements and press releases that misled investors because they materially overstated GlobeTels financial results for at least the period from the third quarter of 2004 through the second quarter of 2006. Compl. 1. The defendants fraudulent scheme involved the creation of false invoices by Monterosso and Vargas that made it appear that GlobeTels three wholly-owned subsidiaries, Centerline Communications, LLC (Centerline), Volta Communications, LLC (Volta), and Lonestar Communications, LLC (Lonestar) engaged in the buying and selling of telecom minutes with other telecom companies. In reality, there were no transactions under the so-called off-net program. Two of GlobeTels subsidiaries, Volta and Lonestar, did no business. The third subsidiary, Centerline, reported millions of dollars in business with Vargas private company, Carrier Services Inc. (CSI), that never occurred. Compl. 3. In order to substantiate the fictitious revenue reported in the fake invoices, the defendants obtained call detail records (CDRs) and submitted them to GlobeTel as documentation for the calls billed on the invoices. All the CDRs obtained were false in that the calls documented in the CDRs were not related in any way to minutes bought or sold by GlobeTels subsidiaries. Compl. 42, 43, 48, 49, 53, 54. As a result of defendants fraudulent scheme, GlobeTels books, records and accounts falsely and inaccurately reflected the companys financial condition, Compl. 85, and caused GlobeTel to falsely report to its investors and auditors $119 million in nonexistent revenue that accounted for approximately 80 percent of the revenue GlobeTel reported during this period. Compl. 2. In addition, the false invoices and false CDRs were material, false and misleading statements to GlobeTels accountants and auditors.1 Compl. 87-90.

Vargas statement of Procedural History includes numerous allegations of fact that are not included in the Complaint and supported only by the ipse dixit of counsels argument. Many of these allegations are false, but the Commission does not respond to them because they are not part of the Complaint and irrelevant to the resolution of the motions before the Court. 2

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On December 5, 2007, and again on December 17, 2007, Vargas filed unopposed motions to extend the time to respond to the Commissions Complaint, which were granted by the Court. Dkt. Nos. 8, 10, 18, 19. On January 11, 2007, Vargas filed a motion to dismiss the Commissions complaint pursuant to Fed. R. Civ. P. (Rule) 12(b)(6), 8(a), 9(b) and 10(b) and what is styled as a motion for a more definite statement pursuant to Rule 12(e), although the relief requested in the motion is dismissal of the Commissions complaint. Dkt. Nos. 21 & 22. ARGUMENT I. Standards Of Review In resolving a motion to dismiss pursuant to Rule 12(b)(6), the Court should accept the factual allegations in the complaint as true and construe them in the light most favorable to the plaintiff. Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Castro v. Sec. of Homeland Security, 472 F.3d 1334, 1336 (11th Cir. 2006). [A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Castro, 472 F.3d at 1336; Glover v. Liggett Group, Inc., 459 F.3d 1304, 1308 (11th Cir. 2006). The Commissions complaint must be sustained if relief could be granted under any set of facts that could be proved consistent with the allegations. National Org. for Women, Inc. v. Scheidler, 510 U.S. 249, 256 (1994). The purpose of Rule 9(b) is to provide the defendant with sufficient notice and enable him to prepare answers to allegations of fraud. S.E.C. v. Physicians Guardian Unit Inv. Trust, 72 F. Supp. 2d 1342, 1352 (M.D. Fla. 1999). As noted in Physicians Guardian, 72 F. Supp. 2d at 1352: [W]hen considering the question of whether or not a pleading of fraud is alleged with adequate particularity in a securities law context, this Court must not read Rule 9(b) of the Federal Rules of Civil Procedure to abrogate the notice pleading requirements of Rule [8] of the

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Federal Rules of Civil Procedure. See also Ziemba v. Cascade Intl, Inc., 256 F.3d 1194, 1202 (11th Cir. 2001). Rule 9(b) does not require nor make legitimate the pleading of detailed evidentiary matter. Ross v. A.H. Robins Co., 607 F.2d 545, 557 (2d Cir. 1979). Pleading additional evidentiary details would contravene the standards of Rule 8 while serving neither purpose of Rule 9(b) putting a defendant on notice and enabling him to prepare an answer. II. The Complaint Properly Alleges Claims Upon Which Relief May Be Granted Vargas various arguments concerning why the claims in the Commissions complaint should be dismissed pursuant to Rule 12(b)(6) are without merit because they are based upon a misreading of the allegations in the complaint and a misunderstanding of the law. A. The Complaint Properly Alleges Scienter Claims 1. The Complaint Properly Alleges That Vargas Is Liable For Primary Fraud Violations

In his motion, Vargas incorrectly suggests that the Complaint does not allege violations of Sections 17(a), 10(b) and Rule 10b-5 because there is no allegation that he had any role in GlobeTels decision to record or publish its revenue statements, Mem. at 8-9, 10, 16.2 The allegations state a claim for primary fraud violations by Vargas because they allege he used deceptive devices and his own false statements to cause GlobeTel to make false statements to investors. In the words of Section 10(b), Vargas directly or indirectly . . . employ[ed a] manipulative or deceptive device or contrivance. When a defendant creates false documents, knowing they will be used to prepare a companys financial reports, he may be held liable for violation Section 10(b). See, e.g., In re Suprema Specialities, Inc. Sec. Litig., 438 F.3d 256 (3d Cir. 2006) (reversing dismissal where corporate executives had created false invoices);

Mem. at ___, refers to Defendant Luis E. Vargass Memorandum of Law in Support of his Motion to Dismiss the Complaint or, Alternatively, for a More Definite Statement. 4

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S.E.C. v. Lucent Tech., Inc., 363 F. Supp.2d 708, 711-12 (D.N.J. 2005) (denying motion to dismiss by defendant who negotiated with customer, then created false paperwork that caused Lucent to overstate revenue); S.E.C. v. Collins & Aikman Corp., F. Supp.2d , 2007 WL 4480025 *9-12 (S.D.N.Y. Dec. 21, 2007) (denying motion to dismiss against defendants who created false documents that caused company to inaccurately record income). Vargas cannot avoid liability for his role in the fraudulent scheme merely because he did not personally prepare GlobeTels false statements that mislead investors, because he acted with scienter to cause those misrepresentations. See S.E.C. v. Holschuh, 694 F.2d 130, 134-35 (7th Cir. 1982) (affirming judgment against defendant who made false statement to individual who drafted circulars sent to investors); S.E.C. v. Nacchio, 438 F.Supp.2d 1266, 1281-82 (D.Colo. 2006). Although he has not directly raised this argument, Vargas implies that the Complaint does not properly plead materiality because it does not allege that the misrepresentations to investors were not attributable to him. This argument fails because, unlike a private plaintiff, the Commission need not allege that a false statement was attributed to an individual defendant. As discussed more fully in the Commissions opposition to Monterossos motion to dismiss, courts have declined to apply this Bright Line Rule to actions brought by the Commission because it is not required to allege or prove reliance, which is the basis of the rule in private plaintiff cases. See, e.g., S.E.C. v. Collins & Aikens Corp., F. Supp.2d , 2007 WL 4480025 (S.D.N.Y. Dec. 21, 2007) (declining to apply bright line test against the SEC); S.E.C. v. Power, -- F. Supp.2d -, 2007 WL 4224368, *3-4 (S.D.N.Y. Nov. 29, 2007) (denying dismissal where executive created sham transaction, was involved in accounting, and the company recognized improper revenue); S.E.C. v. Dunlap, No. 01-8437cv., 2002 WL 1007626, *5 n.7 (S.D. Fla. March 27, 2002) (Ziemba has only tangential value to a case brought by the Commission). 5

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Rule 10b-5(a) and (c) are broad and encompass much more than illegal trading activity: they encompass the use of any device, scheme or artifice, or any act, practice, or course of business used to perpetuate a fraud on investors. In re Royal Ahold N.V. Sec. & ERISA Litig., 351 F. Supp. 2d 334, 372 (D. Md. 2004). See also In re Parmalat Sec. Litig., 376 F. Supp. 2d 472, 501-02 (S.D.N.Y. 2005); In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 33637 (S.D.N.Y. 2004). Courts have recognized that the Commission has broader authority to enforce securities laws than a private party, and may bring claims based upon fraudulent devices and schemes, as well as false statements. See S.E.C. v. Ginsburg, 362 F.3d 1292, 1298-1301 (11th Cir. 2004) (defendant liable for insider trading notwithstanding he made no material misrepresentations to investors); S.E.C. v. Solow, No. 06-81041cv, 2007 WL 1970806 (S.D. Fla. May 10, 2007) (denying motion to dismiss although defendants misrepresentations were made to his broker-dear, not to investors); S.E.C. v. U.S. Environmental Inc., 155 F.3d 107, 110-11 (2d. Cir. 1998) (broker primarily liable when he participated in the fraudulent scheme or other activity proscribed by the securities laws). The allegations in the Complaint properly plead that Vargas engaged in a fraudulent scheme, or practice or course of business that directly caused material misrepresentations to be made in conjunction with the offer, purchase or sale of GlobeTel securities. Therefore, it sufficiently pleads a violations of Sections 17(a), 10(b) and Rule 10b-5 thereunder. 2. The Complaint Properly Alleges That Vargas Fraud Was Material

Vargas first claims that the Complaint fails to allege specific facts that any representation or omission by Vargas was material. Mem. at 7-8. He argues that the facts alleged could not mislead GlobeTel executives who Vargas claims stepped into the shoes of investors for purposes of applying the material misrepresentation or omission rule, and therefore could not be

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considered material. Id. Vargas argument misconstrues the requirements of the law and ignores the allegations in the complaint. To establish a violation of Section 17(a)(1) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, the Commission must show (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. S.E.C. v. Gane, No. 03-61553cv, 2005 WL 90154, at *11 (S.D. Fla. Jan. 4, 2005); see also Ziemba, 256 F. 3d at 1202. The test for materiality is not whether the executives at GlobeTel believed the representations concerning the amount of revenue being generated by Centerline. Rather, the issue is whether there is a substantial likelihood that a reasonable investor would have believed GlobeTels reporting of approximately $119 million in nonexistent revenue as a result of Vargas and Monterossos fraudulent scheme was important. See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); S.E.C. v. Kirkland, 521F.Supp.2d 1281, *21 (M.D.Fla. 2007) ( Material information is defined as information that is substantially likely to be important to a reasonable investor in deciding whether to purchase, sell, or hold securities.); see Bradbury v. S.E.C., F.3d, 2008 WL 108728, *6 (D.C. Cir. Jan. 11, 2008) (investors must have the opportunity to assess the total mix of information). Moreover, [b]ecause materiality is generally a question of fact, it is unlikely that a cause of action turning on materiality would be dismissed as a matter of law. In re Twinlab Corp. Secs. Litig., 103 F.Supp.2d 193, 201 (E.D.N.Y. 2000); S.E.C. v. Gad, No. 07-civ-8385, 2007 WL 4437230 (S.D.N.Y. Dec. 17, 2007). Therefore, the Complaint need only allege facts concerning the materiality of Vargas fraudulent scheme that are at least plausible. Watts v. Florida Intl Univ., 495 F.3d 1289, 1295-96 (11th Cir. 2007) (citing Bell Atlantic Corp. v. Twombly, U.S. , 7

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127 S. Ct. 1955, 1965 (2007)); see Gad, 2007 WL 4437230 at *2 (applying plausible on its face standard to materiality). The Complaint alleges that Vargas fraudulent scheme caused GlobeTel to report approximately $119 million in revenue that did not exist in its eight periodic filings, three registration statements, and nine press releases. Compl. 56-84. It is, at the very least, plausible that a reasonable investor would have considered important the fact that 80 percent of the revenue GlobeTel reported during this period was fictitious. See, Ganino v. Citizens Utilities Co., 228 F.3d 154, 164-66 (2d Cir. 2000) (overstatement of less than two percent was material). 3. The Complaint Properly Pleads Scienter

Vargas argument that the Complaint fails to plead sufficient facts to establish he acted with scienter, Mem. at 8, fails when the allegations in the complaint are examined in light of existing precedent. The Complaint alleges facts that demonstrate Vargas scienter under either test enunciated by the Eleventh Circuit: a defendants acts of knowing misconduct or a defendants acts that demonstrate recklessness. See S.E.C. v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. 1982). In weighing scienter, courts look to an aggregate of all allegations, not merely single allegations. Phillips v. Scientific-Atlanta, Inc., 374 F.3d 1015, 1016-17 (11th Cir. 2004). Specifically, the Complaint alleges that: (1) Vargas created hundreds of false invoices and CDRs, Compl. 36; (2) the invoices were false because Centerline, Volta and Lonestar had not bought or sold anything and the CDRs were false because they did not record transmissions that had any connection to the three subsidiaries, Compl. 36, 39-55; (3) some of the invoices appeared to be sent by two companies owned by other individuals, Compl. 40-41, 46; and (4) copies of invoices purporting to be to or from Ron Hays companies, were not sent to Hay. Compl. 43. Thus, the Complaint contains numerous allegations that Vargas engaged in knowing 8

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misconduct when he created false invoices and false CDRs for transactions he knew never occurred and for companies where he did not work, and submitted them to GlobeTel. The creation of documents that are known to be false is evidence of scienter. See, e.g., Carriba, 681 F.2d at 1324 (scienter shown where defendant failed to correct glaring omissions false statements in prospectus he reviewed); Kirkland, 521 F. Supp.2d at *21-*22 (creating fake leases to create impression of business success is evidence of scienter); In re Suprema Specialities, 438 F.3d at 278-79 (creating false invoices is evidence of scienter); see also S.E.C. v. Digital Lightwave, Inc., 196 F.R.D. 698, 701 (M.D.Fla. 2000) (scienter plead when SEC alleged that defendant knew that he was recording revenue fraudulently). The Complaint also alleges that Vargas tried to conceal his fraud by not forwarding to Hay copies of the invoices that appeared to come from or be sent to his company. See, Lucent, 363 F. Supp.2d at 717-18 (scienter sufficiently pleaded by alleging defendant tried to hide agreements from his companys chief accountant); see also, Holschuh, 694 F.2d at 143-44. Additionally, the allegations establish that Vargas had a strong pecuniary motive to create fictitious revenue for GlobeTel; an allegation that is relevant to recklessness. Tellabs, Inc. v. Makor Issues and Rights, Ltd., U.S. , 127 S.Ct. 2499, 2503 (2007); Gane, 2005 WL 90154 at *15. The Complaint alleges that: CSI would received payment from GlobeTel only if CSI generated revenue for GlobeTel, Compl. 21-23; CSI was unable to generate the revenue required by the agreement with GlobeTel, Compl. 24-32; Vargas was the sole shareholder of CSI, Compl. 1; and, as a result of meeting the revenue goals in the agreements with GlobeTel, CSI received at least $180,000 from GlobeTel and total payments of $1 million. Compl. 95. An inference of recklessness is further supported by the allegations that Vargas created hundreds of false invoices over a period of two years and that these invoices accounted for approximately 80 percent of GlobeTels revenue during that period because the length and 9

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magnitude of the fraud are indicia of the recklessness. See In re Eagle Building Tech., Inc. Sec. Litig., 319 F. Supp.2d 1318, 1326 (S.D. Fla. 2004) (magnitude of fraud is relevant to establish scienter); In re Microstrategy, Inc. Sec. Litig., 115 F. Supp.2d 620, 639 (E.D. Va. 2000); see also S.E.C. v. Softpoint, Inc., 958 F. Supp. 846, 865 (S.D.N.Y. 1997). B. The Complaint Properly Alleges Non-Scienter Claims 1. Section 17(a)(2)-(3): Non-scienter Fraud

Vargas argument that the First Claim for Relief does not properly allege a violation of Section 17(a)(2) and (3) because it does not specify how much money he received, Mem. at 10, is specious. As explained above in Section II.A.3., the Complaint alleges clearly that Vargas obtained money as a result of the fraudulent scheme. Compl. 95-96. The law does not require the Complaint to allege a sum certain, as evident from Vargas failure to cite a single precedent to support his argument. Vargas argument that the First Claim is deficient because it fails to allege any material misrepresentation by him is again based upon his confusion of the requirements of a suit brought by a private party with one brought by the Commission. As we explain above in Section II.A.2., the Complaint properly pleads Vargas involvement in a fraudulent scheme that directly caused a material misrepresentation, so he may be liable for a primary violation of the securities laws. 2. Aiding and Abetting Claims

In order to state aiding and abetting claims, like those in the Third, Fourth and Fifth Claims for Relief, the Commission must allege facts showing that (I) there was a primary violation of the securities laws, (ii) the defendant had general awareness that his role was part of an overall activity that is improper, and (iii) that the defendant knowingly and substantially assisted the violation. Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1045 (11th Cir. 1986). Vargas argues that the Complaint has not properly plead aiding and abetting because it 10

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fails to allege scienter. Mem. at 11. Vargas motion makes only a cursory argument about these claims and does not distinguish between them.3 However, as a matter of law, Vargas argument fails with respect to the Fourth and Fifth Claims because scienter is not an element of any claims under Section 13 of the Exchange Act. See S.E.C. v. McNulty, 137 F.3d 732, 741 (2d Cir. 1998). With respect to the Third Claim, that involves a claim of fraud, the Commission identified in Section II.A.3. above, the allegations that support the claim that Vargas acted with scienter. Those same allegations support the claim that Vargas acted with scienter when he aided and abetted GlobeTels violation of Section 10(b) and Rule 10b-5. Finally, the allegations identified in Section II.A.1. above support the claim that Vargas committed a primary violation of Section 10(b) and Rule 105-b when he caused GlobeTel to make material misstatements. Therefore, they also support a claim that he provided substantial assistance to GlobeTels violation of the same provisions. Those detailed allegations distinguish the Complaint from the cases cited by Vargas. See SEC v. Cedric Kushner Promotions, Inc., 417 F. Supp.2d 326, 335-36 (S.D.N.Y. 2006) (granting motion for summary judgment because facts did not support the aiding and abetting allegation); SEC v. DiBella, No. 04-cv-1342, 2005 WL 3215899 *10 (D. Conn. Nov. 29, 2005) (denying motion to dismiss). C. Rule 13b2-1: Falsifying Books and Records The Sixth Claim alleges that Vargas violated Rule 13b2-1, which provides that "[n]o person shall, directly or indirectly, falsify or cause to be falsified, any book, record, or account" maintained pursuant to Section 13(b)(2)(A). Scienter is not an element of a Rule 13b2-1

Vargas failure to differentiate between the three counts is grounds to deny his motion with respect to these claims for relief. See S.E.C. v. Dunlap, 2002 WL 1007626, *7 (S.D. Fla. 2002) (defendant bears the burden of proving that no claim has been stated). 11

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violation. McNulty, 137 F.3d at 741; Softpoint, 958 F. Supp. At 865-66. Any unreasonable conduct directly or indirectly resulting in falsification of corporate records is within the scope of Rule 13b2-1. Id. at 866. The Complaint meets this standard by alleging that Vargas created false invoices and CDRs and submitted them to GlobeTel, knowing they would be relied upon by GlobeTels accountants to make entries in GlobeTels general ledger and other documents. Compl. 85-90, 121-22. Thus, the Complaint properly alleges that Vargas both directly (the invoices) and indirectly falsified or caused to be falsified GlobeTels books and records. D. Rule 13b2-2: False Statements To Auditors

The Sixth Claim also alleges violations of Rule 13b2-2, which prohibits officers, directors or any other person acting under the direction thereof from misleading an accountant engaged in the audit or review of the financial statements of that issuer where the people know or should have known that the action would render the financial statements materially misleading. 17 C.F.R. 240.13b2-2. For purposes of the Exchange Act, the term officer is defined to include a vice president . . . and any person routinely performing corresponding functions. 17 CFR 240.3b. The Complaint properly alleges that Vargas violated Rule 13b2-2(b) when he created and submitted invoices and CDRs at Monterossos direction. Compl. 124-25. Vargas misled auditors throughout this period by providing false invoices and false CDRs, knowing the auditors had requested them to confirm the off-net transactions. Compl. 91-93. Vargas became a person acting under the direction of an officer at least by May 2005 when Monterosso was hired by GlobeTel as Centerlines president. Compl. 10.4 In his motion, Vargas misreads Rule

Monterosso qualified as an officer as early as 2004 when he took over GlobeTels entire Centerline subsidiary, reported to GlobeTels CEO, supervised its employees, negotiated contracts and ran the entire wholesale telecommunications business. Compl. 10. This conduct qualifies as routinely performing the functions of a vice president. 12

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13b2-2 and argues that it only applies to officers and directors. As discussed above, Rule 13b22(b) applies to people, such as Vargas, acting under the direction of an officer. III. The Complaint Pleads Fraud With Adequate Particularity Vargas asserts that the Complaint must be dismissed because it fails to satisfy the specificity requirements of Rule 9(b). Mem. at 13. It appears that Vargas claim is based upon three arguments: (1) the Complaint improperly alleges actions taken by Monterosso or Vargas, at Monterossos direction; (2) the Complaint contains conclusory allegations that impute conduct of one defendant to both; and (3) the Complaint uses the terms false and cause outside the words ordinary meaning. Id. None of Vargas arguments have merit. A. The Complaint Adequately Informs Vargas Of The Nature Of His Participation In The Fraud

Vargas does not claim that the Complaint lacks specificity concerning the conduct and misrepresentations that constitute the fraud. Neither does he claim that the Complaint is ambiguous with respect to when the conduct occurred. Vargas only argument is that the Complaint lacks specificity because it improperly lumps Monterosso and Vargas together, when it refers to conduct by Monterosso or Vargas, at Monterossos direction. Mem. at 13. Unlike the cases upon which Vargas relies to support his argument, the Complaint does not refer to Monterosso and Vargas collectively as a group. See Cordova v. Lehman Bros., Inc., F.Supp.2d , 2007 WL 4287729, *6 (S.D. Fla. 2007) (complaint repeatedly referred to six unrelated defendants collectively as Financial Institution Defendants); Bruhl v. Price Waterhousecoopers Intl, No. 03-23044cv, 2007 WL 997362, *3-*4 (S.D. Fla. Mar. 27, 2007) (complaint referred to two separate corporate entities collectively as Citco Defendants); Appalachian Enter., Inc. v. ePayment Solutions Ltd., No. 01-cv-11502, 2004 WL 2813121, *6-*7

See 17 C.F.R. 240.3b. 13

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(S.D.N.Y. Dec. 8, 2004) (complaint did not differentiate between acts taken by 17 different defendants, or explain how the defendants were interrelated).5 Also, unlike the cases upon which Vargas relies, the Complaint does not contain general allegations of fraud in the passive voice without attributing the actions to any particular defendant. See Cordova , 2007 WL 4287729 at *6 (use of the passive voice to allege fraud obscured exactly who made the statements or committed the fraudulent acts). The Complaint alleges the fraudulent acts in the active voice. Compl. 32, 36, 37, 99. Although Vargas cites Cordova, Mem. at 14, he does not cite one instance where the Complaint employs the passive voice to describe his conduct. The Complaint clearly raises the inference that Monterosso and Vargas acted in concert to perpetrate their fraud. It alleges that, prior to dealing with GlobeTel, Vargas worked as Monterossos bookkeeper. Compl. 17. It also alleges that after Vargas started his own telecom company, Monterosso handled all the negotiations for the company. Compl. 18. Additionally, after CSI entered the agreement with GlobeTel, Vargas reported to Monterosso throughout their work for GlobeTel. Compl. 24. The Complaint also alleges that Vargas personally requested additional invoices from a telecom company that Monterosso had previously contacted to obtain invoices. Compl. 27-28. Thus, the allegations in the Complaint assert that Monterosso and Vargas were inextricably related and that they acted in concert to perpetrate the fraud in this case. Cf. Appalachian Enter., 2004 WL 2813121 at *6.

The other cases cited by Vargas either are inapposite or do not support his argument. See Brunette v. Dresser Indus., Inc., 849 F.2d 1277, (10th Cir. 1988) (whether the complaint was sufficient to put defendants on notice of the unplead cause of action); S.E.C. v. Dunlap, No. 01-8437-civ, 2002 WL 1007626, *3 (S.D. Fla. Mar. 27, 2007) (pleading sufficient even though the complaint referred to individual defendants and corporation collectively). 14

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The allegations that actions were taken by Monterosso or Vargas, at Monterossos direction reflect the relationship between the two defendants and assert that Monterosso was responsible for all the actions taken either by him or by Vargas. The allegations describing the extent of Monterossos involvement does not create ambiguity concerning Vargas role. The complaint alleges that all of the invoices and all of the CDRs submitted to GlobeTel that purported to represent off-net telecom business were fraudulent. Compl. 40-55. These allegations clearly put Vargas on notice that he must defend against the assertion that he created false invoices, obtained false CDRs and submitted false invoices and CDRs to GlobeTel. Vargas argument that the Complaint impermissibly lumps the defendants together hinges on the use of or when the factual allegations refer to actions by Monterosso or Vargas. As explained above, the use of or does not impermissibly lump the defendants together in a manner that courts have found to violate Rule 9(b).6 Rather, the factual allegations specifically identify both defendants by name and allege that both defendants committed the acts alleged while recognizing the relationship between them. Any ambiguity about Vargas role created by use of the term or is eliminated in each of the claims for relief that allege Monterosso and Vargas committed the fraudulent acts alleged.7 Compl. 99, 100, 104, 109, 114, 118, 121, 125. B. The Complaint Does Not Rely Upon Conclusory Allegations To Impute Conduct To Vargas

Vargass claim that the Complaint only includes conclusory allegations concerning his conduct and attempts to impute Monterossos conduct to Vargas is incorrect. Mem. at 15.

The Complaint does not violate Rule 8(a) for all the same reasons it does not violate Rule 9(b). Vargas concedes that the claims of relief allege that both he and Monterosso committed the fraudulent acts alleged. Mem. at 15. 15
7

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Vargas first argues that the Complaint attempts to impute the experience of Monterosso to Vargas to show that he acted with scienter.8 Mem. at 15. However, the Complaint unambiguously sets forth the factual basis for the Commissions assertion that Vargas had extensive experience in the wholesale telecom business, including his work as Monterossos bookkeeper while Monterosso operated a wholesale telecom switch, Compl. 17, and the fact that, in 2003, Vargas began operating his own telecom business utilizing Monterossos switch. Compl. 18. Vargas argument goes to the sufficiency of the evidence to prove the extent of Vargas experience, not the sufficiency of the pleading. Vargas also argues that the Complaint contains only conclusory allegations concerning his knowledge of what GlobeTel would do with the off-net invoices and CDRs. Mem. at 17. This argument is patently incorrect. Rule 9(b) expressly provides that malice, intent, knowledge, and other condition of mind of a person may be averred generally. The Complaint complies with this standard by alleging Vargas knew how the false invoices and CDRs would be used by GlobeTel. However, the Complaint also includes allegations establishing the basis for alleging Vargas had knowledge of GlobeTels use of the false invoices and CDRs: (1) the purpose of the agreement between GlobeTel and Vargas company, CSI, was to build telecommunications revenue . . . Compl. 19; Vargas knew GlobeTel could not record revenue generated by Centerlines off-net telecom business without invoices and CDRs, Compl. 35; GlobeTels finance department requested CDRs from Vargas to prove that Volta, Lonestar and Centerline had actually engaged in the telecom transactions for which invoices had been submitted, Compl. 88; Vargas knew GlobeTels auditors had specifically requested CDRs in order to compare them to the invoices and confirm that the telecom

(2)

(3)

(4)

As explained in Section II.A.3., above, the Complaint adequately pleads scienter on the part of Vargas. 16

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minutes had actually been bought and sold, Compl. 92; and (5) Vargas knew the fake invoices and CDRs relating to off-net revenue would be presented to GlobeTels independent auditors. Compl. 93.

These allegations create a plausible inference that Vargas knew that GlobeTel would use the fraudulent invoices and CDRs to record revenue that would be incorporated into GlobeTels filings and other reports of revenue. C. The Use Of The Words False and Cause In The Complaint Does Not Violate Rule 9(b)

Vargas argument that the Complaints use of the words false and cause violates the specificity requirements of Rule 9(b) lacks any factual or legal basis. With respect to the use of the word false, Vargas concedes, Mem. at 16, that the Complaint explains specifically why the CDRs are alleged to be falsethey were not related in any way to the telecom minutes bought or sold by GlobeTels subsidiaries. Compl. 42, 48, 53. The CDRs may document some calls that were made somewhere, but they were false to the extent they were presented as documenting the calls for which Vargas submitted invoices to GlobeTel. Vargas cannot claim to be confused by the Complaint when his argument demonstrates he understands the allegations against which he must defend. Vargas argument is actually that the facts alleged are insufficient to prove that the CDRs were false; a factual dispute that is not relevant to resolution of his motion to dismiss pursuant to Rule 9(b). Vargas argues the Complaint improperly uses the word caused to describe how the fake invoices had an effect upon GlobeTels financial statements and thus, had a connection with the offering, sale or purchase of GlobeTel securities. Vargas argument again assumes the Commission must establish that the misrepresentations must be directly attributed to him. See Mem. at 16 (The SEC has not and cannot allege that Monterosso or Vargas prepared GlobeTels books, records and accounts.) However, as we demonstrated in Section II.A. above, this 17

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requirement does not apply to the Commission which has broader authority to bring suit to enforce the securities laws. See Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., U.S., slip op. at 10 (Jan. 15, 2008) (It is true that if business operations are used, as alleged here, to affect securities markets, the SEC enforcement power may reach the culpable actors.). The Commissions claims against Vargas are not based upon misrepresentations that he personally made to potential investors. Rather, the Complaint alleges that Vargas gave false document to GlobeTel knowing its accountants would rely upon them to report revenue in GlobeTels books, records, filings and press releases. There is no ambiguity in the Complaint and, therefore, no Rule 9(b) violation. IV. The Complaint Satisfies the Requirements Of Rule 10(b) Vargas argues that the Complaint also fails to satisfy the requirements of Rule 10(b) for two reasons: (1) it lumps Vargas and Monterosso together in each count; and (2) it lumps together causes of action. Mem. at 18-19. Both arguments fail. As explained in Sec. III.A. above, each of the claims for relief allege Monterosso and Vargas, committed the fraudulent acts alleged. This does not constitute an impermissible lumping together of the defendants. Rather, each count alleges that both Vargas and Monterosso violated the securities laws and alleges that they both engaged in the conduct. Apparently, Vargas argument is that the Commission must plead separate claims for relief against Vargas and Monterosso even when identical conduct is alleged against both of them. This standard for pleading is not required by Rule 10(b). See Cippola v. County of Rensselaer, 129 F.Supp.2d 436, 444-45 (N.D.N.Y. 2001) (proper to combine allegations against multiple defendants where it is alleged that all defendants engaged in the same conduct). Although Vargas argues all the claims for relief are flawed because they impermissibly lump together causes of action, he only explains his assertion with respect to the First Claim 18

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for Relief, which alleges a violation of Section 17(a) of the Securities Act.9 Mem. at 18-19. Rule 10(b) provides, in pertinent part: Each claim founded upon a separate transaction or occurrence . . . shall be stated in a separate count or defense whenever a separation facilitates the clear presentation of the matters set forth. (Emphasis added). In addition, Rule (8)(e)(2) provides, in pertinent part: A party may set forth two or more statements of a claim or defense alternately or hypothetically, either in one count or in separate counts or defenses. (Emphasis added). Together, the two rules require separate counts when claims arise out of different transactions or occurrences. This is consistent with the precedent in this circuit. See Anderson v. Dist. Bd. Of Trustees of Central Fla. Cmty. Coll., 77 F.3d 364, 366-67 (11th Cir. 1996); Green v. C.B. Fleet Holding Co., No. 07-80589cv, 2008 WL 113668, *2 (S.D. Fla. Jan. 8, 2008). In this case, all the claims for relief arise from the same off-net program and, therefore, the Federal Rules of Civil Procedure expressly authorize combining different claims. However, none of the counts contain more than one claim. Each counts seeks relief based upon specific sections of the Securities Act or the Exchange Act or the rules thereunder. Each claim for relief sets forth its elements, Compl. 98, 103, 108, 113, 117, 121-24, and each count identifies the allegations that support the claim. Compl. 99-100, 104-05, 109-10, 114, 118, 121-25. These claims are not the type of shotgun pleadings condemned in Anderson, that makes it virtually impossible to know which allegations of fact are intended to support which claim(s) for relief. 77 F.3d at 366. Vargas single argument concerning Rule 10(b) is that the First Claim does not specify which subpart of Section 17(a) of the Securities Act he violated. Mem. at 18-19. Vargas cites no authority for his proposition that different subsections of Section 17(a) must be alleged in

Vargas failure to provide any argument concerning the other claims for relief foreclose his motion to dismiss with respect to those claim. Dunlap, 2002 WL 1007626, at *7. 19

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different counts, because there is none. The First Claim alleges that Vargas violated all three subsections of Section 17(a). It includes the text of all three subsections and identifies the factual allegations that support the claim. This form of alternative pleading is expressly recognized as a proper way to state a claim: When two or more statements are made in the alternative and one of them if made independently would be sufficient, the pleading is not made insufficient by the insufficiency of one or more of the alternative statements. Rule 8(e)(2). The First Claim for Relief, like all the other claims for relief, comply with the requirements of Rule 10(b). IV. Vargas Motion For A More Definite Statement Should Be Denied Rule 12(e) provides that a more definite statement of a pleading is required when it is so vague or ambiguous that the party cannot reasonably prepare a response. The standard for granting a motion to dismiss is unintelligibility, not lack of detail. Digital Lightwave, 196 F.R.D. at 700. For all the reasons explained above, Vargas motion for a more definite statement should be denied, because the Complaint presents clear and precise claims for relief. Anderson, 77 F.3d at 366. However, if the court were to conclude that any portion of the Complaint is ambiguous or vague, the correct remedy is not dismissal, but amendment of the Complaint to remove any ambiguity. Anderson, 77 F.3d at 366; Green, 2008 WL 113668 at *2 (Even in far more egregious shotgun pleadings, the remedy is not dismissal.). CONCLUSION For the reasons set forth above, the Court should deny Vargas motion to dismiss and his motion for a definite statement in their entirety.

20

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January 28, 2008

Respectfully submitted, s/Jeffery T. Infelise Jeffery T. Infelise (DC 546998) Special Florida Bar No. A5501154 infelisej@sec.gov Reid A. Muoio Special Florida Bar No. A5501160 muoior@sec.gov Brent Mitchell Special Florida Bar No. A5501159 mitchellb@sec.gov 100 F Street NE Washington, D.C. 20549 (tel) (202) 551-4904 (Infelise) (fax) (202) 772-9362 (Infelise) Attorneys for Plaintiff, Securities and Exchange Commission

Of Counsel: Cheryl J. Scarboro

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CERTIFICATE OF SERVICE I hereby certify that on January 28, 2007, I electronically filed the foregoing Plaintiffs Memorandum of Law in Support of its Opposition to Defendant Luis E. Vargas Motion to Dismiss the Complaint, or in the Alternative, for a More Definite Statement with the Clerk of the court using CM/ECF. I also certify that the foregoing document is being served this day on all counsel of record or pro se parties identified on the 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/Jeffery T. Infelise Jeffery T. Infelise

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SERVICE LIST

Walter J. Mathews, Esq. D. Patricia Wallace, Esq. wjmathews and pwllace@wjmlawfirm.com Walter J. Mathews, P.A. Courthouse Law Plaza 700 S.E. Third Avenue, Suite 300 Fort Lauderdale, FL 33316 Tel. 954-463-1929 Fax. 954-463-1920 Attorney for Defendant [Luis E. Vargas] [electronic]

Mark David Hunter, Esq. mdhunter@lhttlaw.com Leser Hunter Taubman & Taubman, PLLC 407 Lincoln Rd., Suite 500 Miami beach, FL 33139 Tel. 305-604-5547 Fax. 305-604-5548 Attorney for Defendant [Joseph J. Monterosso] [electronic]