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WASHINGTON � In an unusual decision, a federal judge in Connecticut recently dismissed a $9 million enforcement action brought by the U.S. Securities and Exchange Commission in connection with a scheme to “pump and dump” stock because lengthy litigation delays by the federal agency amounted, he said, to a failure to prosecute. “The Supreme Court in a case right after World War II said the power to investigate is the power to destroy,” said Frank C. Razzano, partner at Washington’s Dickstein Shapiro and counsel to the defendants in the case. “This seven-year ordeal has had a profound impact on my client and his family quite frankly, and obviously on his company as well,” Razzano said. The Securities and Exchange Commission (SEC) filed an enforcement action in November 2005, charging six individuals and four companies with securities fraud and other violations in connection with a scheme to pump up the value and then sell off � or dump � the stock of PacketPort.com, a company based in Norwalk, Conn., and obtaining more than $9 million in illicit proceeds. SEC v. PacketPort.Com Inc., No. 3:05CV1747. The SEC actually started its investigation in December 1999, two days after the alleged scheme began, according to court documents. However, the agency did not seek an injunction or file an administrative proceeding to stop the alleged illegal activity. One of the defendants did appear voluntarily for a deposition in October 2000. About 18 months later, in April 2002, the SEC, through a so-called Wells Notice, informed the defendants that it was recommending a civil proceeding be filed against them. Also in 2002, the agency referred the matter to the U.S. attorney’s office in Connecticut to investigate whether criminal charges were warranted. In November 2004, the U.S. attorney referred the matter back to the SEC after declining to prosecute the case. “Despite the five-year statute of limitations for an action for civil penalties running in February 2005, the SEC did nothing until Nov. 15, 2005, when it filed this lawsuit � almost six years after the allegedly illegal acts began, three-and-one-half years after the ‘Wells Notice,’ about three years after the matter was referred to the U.S. Attorney’s Office in Connecticut, one year after the U.S. Attorney’s Office declined to prosecute, and nine months after the statute of limitations ran for civil penalties,” wrote Senior Judge Peter C. Dorsey of New Haven, Conn. “Even after this lawsuit was filed, the SEC hardly hastened its pace,” he added, noting particularly that since April 2006, the agency has not taken a single deposition and that it failed to submit its damages analysis by Sept. 1, 2006. But the SEC, which did not respond to a request for comment, argued that the parties had attended mandatory settlement conferences in April and May 2006, and that the agency had responded to myriad motions by the defendants from mid-January to late March 2006. Dorsey analyzed the dismissal motions under a 2d U.S. Circuit Court of Appeals precedent that set out five factors to consider: (1) the plaintiff’s failure to prosecute caused a significant delay; (2) plaintiff was given notice that further delay would result in dismissal; (3) defendant was likely to be prejudiced by further delay; (4) the need to alleviate court calendar congestion was carefully balanced against the plaintiff’s right to an opportunity for a day in court; and (5) the trial court adequately assessed the efficacy of lesser sanctions. The judge found that only two factors � 2 and 4 � weighed against dismissal. Securities scholar Barbara Black of the University of Cincinnati College of Law said that it was a “stretch” that any of the factors favored dismissal, but she added, “The judge seems intent on sending a message to the SEC � when persons’ careers are at stake, you must move expeditiously. Given that the SEC had missed the statute of limitations for civil penalties and that equitable relief is solely within the discretion of the court, it might not be a bad result.”

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