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U.S. Securities and Exchange Commission


Litigation Rel. No. 17809 / October 28, 2002

Former Broker Dennis Herula Incarcerated for Contempt of
Court in SEC Fraud Action, and Judge Orders Attorney Mary
Lee Capalbo Arrested for Failure to Appear in Court

SEC v. Dennis Herula et al. (United States District Court for the District of Rhode Island, C.A. No. 02 154 ML, filed April 1, 2002)

The Commission announced that, at a hearing on October 24, 2002 concerning the Commission's motions for contempt, in United States District Court for the District of Rhode Island, Judge Mary M. Lisi found former broker Dennis Herula in contempt of court for failure to provide a detailed accounting pursuant to a preliminary injunction order entered by the court in May 2002. Judge Lisi ordered Herula incarcerated until such time that he complies with those provisions. At the conclusion of the hearing, officers of the court took Herula into custody. Judge Lisi also issued a bench warrant for the arrest of Herula's wife, Rhode Island attorney Mary Lee Capalbo, for failure to appear for the October 24 hearing, as previously ordered by the court. Herula and Capalbo are defendants in a civil fraud action filed by the Commission on April 1, 2002. The Commission's complaint alleged that they and others participated in a fraudulent offering scheme that raised at least $52 million from investors. According to the complaint, Herula and Capalbo played integral roles in the fraudulent scheme and misappropriated approximately $8 million in investor funds.

On May 8, 2002, the court issued a written order imposing preliminary injunctions and asset freezes against Herula, Capalbo, and certain other defendants. The order required them to submit a detailed accounting showing, among other things, all transfers or payments of funds to them from investors or clients, the precise disposition of all such transfers or payments, and the current location of all funds or assets derived from such transfers or payments. After Herula and Capalbo failed to submit the accounting, the Commission filed civil contempt charges against them on August 8, 2002. At a hearing on September 16, 2002, the court ordered Herula to provide the Commission with certain information required by the accounting by September 23, 2002. Herula provided the Commission with an accounting on September 23, 2002. At the October 24 hearing, Judge Lisi held that information Herula provided to the Commission did not satisfy the detailed accounting requirements of the preliminary injunction, and ordered him incarcerated until such time that he complies with the accounting requirements. The court had previously entered final judgment by default against Herula, permanently enjoining him from future violations of the antifraud provisions of the federal securities laws. The final judgment also ordered Herula to pay disgorgement, plus prejudgment interest, in the total amount of $18,941,665.63, and assessed him a $250,000 civil monetary penalty.

Capalbo failed to appear for hearings before the court on September 16 and October 10, 2002 concerning the Commission's contempt motion against her At the October 10 hearing, Judge Lisi ordered Capalbo to appear on October 24, 2002, and indicated her failure to appearwould result in the issuance of an arrest warrant. When Capalbo failed to appear for the October 24 hearing, Judge Lisi issued a bench warrant for her arrest. A contempt hearing, as well as a hearing concerning a motion for default judgment against Capalbo, will be held after she is taken into custody and transported to the federal court in Rhode Island.

For further information, please see Litigation Release Numbers 17800 (October 23, 2002) [final judgment by default against Herula]; 17793 (October 18, 2002) [preliminary injunction and asset freeze against Herula, Capalbo, and others in a separate action filed in federal district court in the Northern District of California alleging similar fraudulent scheme]; 17737 (September 19, 2002) [civil contempt hearing against Herula in Rhode Island action]; 17514 (May 13, 2002) [preliminary injunction and asset freeze against Herula and others in Rhode Island action]; 17461 (April 5, 2002) [temporary restraining order and asset freeze against Herula and others in Rhode Island action].



Modified: 10/29/2002