282 F. Supp. 3d 499
N.D.N.Y.2017Background
- From 2010–2014 Charles Riel, sole member/operator of REinvest LLC, marketed "150% Return" high-yield investments via two websites and solicited investors by email/phone. REinvest had no employees and minimal bank balances.
- Five investors invested $285,000 in exchange for promissory notes or "performance agreements." Riel deposited funds into REinvest accounts, used large amounts for personal withdrawals/checks, transferred portions into a futures trading account, and lost nearly all trading funds.
- Riel provided fabricated account statements and testimonials, solicited repeat investments, and asked investors to sign “clarification”/non‑disclosure documents during an SEC investigation; he also instructed an investor to delete prior documents.
- The SEC served subpoenas in 2014; Riel and REinvest failed timely to comply. Riel later invoked the Fifth Amendment at deposition and in other proceedings.
- SEC sued (2015) asserting primary fraud under Securities Act §17(a) and Exchange Act §10(b)/Rule 10b‑5, aiding/abetting and control‑person claims; SEC moved for summary judgment against Riel and default judgment against REinvest. The court granted summary judgment largely for the SEC, entered default judgment against REinvest, and ordered disgorgement, prejudgment interest, permanent injunctions, and a civil penalty against Riel.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Were the REinvest promissory notes securities? | Notes were investment vehicles marketed for profit; Reves factors support classification as securities. | Riel contended notes were private loans; labeled "lender" on documents; not securities. | Notes were securities under the Reves family‑resemblance test; all four Reves factors favored securities. |
| Did Riel make material misrepresentations in connection with the sale of securities? | Websites, emails, oral statements and fake account statements misled investors about returns, investment vehicle, and use of funds. | Riel denied misuse, claimed funds paid legitimate business expenses; disputed some factual assertions. | Court found undisputed misrepresentations and omissions material; summary judgment for SEC on primary violations. |
| Was there scienter (intent or recklessness)? | Riel benefitted personally, misappropriated funds, issued fabricated statements, and sought to conceal records — showing intent/recklessness. | Riel proffered denials but invoked Fifth Amendment; asserted lack of knowledge. | Court held circumstantial evidence and conduct established scienter; adverse consequences of invoking Fifth Amendment noted; summary judgment granted. |
| Liability beyond primary fraud: aiding/abetting and control person claims | SEC sought aiding/abetting and §20(a) control person liability against Riel and REinvest. | Riel argued alternative characterizations; disputed some facts. | Court granted aiding/abetting liability (Riel both Reinvest and actor). Control person claim not resolved in SEC's favor at summary judgment stage because it overlaps with primary liability (denied insofar as seeking summary judgment on §20(a)). |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (1986) (summary judgment standards and non‑respondent cannot rely on pleadings)
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (assessing genuine issues of material fact on summary judgment)
- Reves v. Ernst & Young, 494 U.S. 56 (1990) (family‑resemblance test for whether a note is a security)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard for misstatements/omissions)
- Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000) (personal benefit to defendant supports scienter inference)
- S.E.C. v. Pentagon Capital Mgmt. PLC, 725 F.3d 279 (2d Cir. 2013) (statutory interpretation limiting joint and several civil penalties)
- S.E.C. v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (disgorgement principles and equitable remedies)