416 F.Supp.3d 306
S.D.N.Y.2019Background
- Joseph A. Fiore controlled Berkshire Capital and Eat at Joe’s (later SPYR), and maintained brokerage accounts in their names during April 2013–March 2014.
- Fiore and his entities acquired and controlled large blocks of penny stock of Plandai Biotechnology (PLPL) through debt conversions and purchases.
- Fiore financed a promotional campaign (over $2.1M paid to promoters and intermediaries) touting PLPL while selling nearly 11.96 million PLPL shares for roughly $11.5M; many sales occurred contemporaneously with paid promotions.
- The SEC alleges manipulative trading: matched/wash trades, marking the close, and painting the tape, plus false broker representations and failure to file Schedule 13D despite >5% beneficial ownership.
- SEC sued for violations including Section 17(a), Section 10(b)/Rule 10b-5, Sections 9(a)(1) & (2), Section 13(d), Section 7(a) of the Investment Company Act, Section 20(b), and sought disgorgement; the court denied the defendants’ Rule 12(b)(6) motion to dismiss.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scheme liability under §10(b)/Rule 10b-5(a),(c) and §17(a) for disseminating paid promotions while selling stock | Fiore orchestrated a deceptive scheme: paid/promoted PLPL, manipulated trading, and sold shares to profit (scalping) | Janus precludes primary liability because Fiore did not "make" the promotional statements | Lorenzo permits scheme liability for disseminators; SEC pleaded a deceptive scheme and claim survives dismissal |
| Misstatements/omissions and materiality | Failure to disclose Fiore’s beneficial ownership and intent to sell was material and accompanied by false broker representations | Market assumes promoters are paid; statements were accurate as a matter of law | Materiality and misstatement allegations are plausible; cannot dismiss at pleading stage |
| Scienter for fraud and manipulation claims | Fiore profited materially, engaged in deceptive trades contemporaneous with promotions, and used accounts he controlled | Alleged motive alone insufficient | Circumstantial facts (timing, profit, trading patterns) support a strong inference of scienter |
| Market manipulation under §§9(a)(1) & (2) (wash/matched trades, marking the close, painting the tape) | Alleged specific matched/wash trades, marking the close instances, and painting the tape intended to induce purchases | SEC failed to allege actual market impact | Intent to manipulate is actionable; alleged conduct adequately pleads manipulation |
| Investment Company Act §7(a) – whether Eat at Joe’s had to register | Eat at Joe’s held >40% investment securities and conducted securities trading as principal activity | 10-Ks show restaurant/operating business; thus exempt | Court declines to accept 10-Ks for their truth on motion to dismiss; factual dispute precludes dismissal |
| §13(d) Schedule 13D filing failure | Fiore acquired >5% and failed to file Schedule 13D | Fiore reasonably relied on Plandai’s public filings and thus lacked knowledge | Scienter is not required for §13(d); reasonable reliance is a factual defense not resolvable on 12(b)(6) |
| Statute of limitations (28 U.S.C. §2462) | Many alleged wrongful acts occurred within five years of suit and later proceeds fall within limitations | Claims based on conduct before June 18, 2013 are time-barred; continuing-violation doctrine inapplicable | Court finds timely allegations exist and defers statute-of-limitations resolution to later stages |
Key Cases Cited
- Janus Capital Grp. v. First Derivative Traders, 564 U.S. 135 (2011) (defines who “makes” a statement under Rule 10b-5(b))
- Lorenzo v. S.E.C., 139 S. Ct. 1094 (2019) (dissemination of false statements can support primary liability under Rule 10b-5(a) and (c))
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for evaluating reasonable inference of scienter)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility framework at motion to dismiss)
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality standard: ‘total mix’ of information)
- Aaron v. S.E.C., 446 U.S. 680 (1980) (scienter requirement under §17(a)(1) vs negligence for other subsections)
- S.E.C. v. McNulty, 137 F.3d 732 (2d Cir. 1998) (scienter not required for §13(d) civil claims)
- Kokesh v. S.E.C., 137 S. Ct. 1635 (2017) (disgorgement is a penalty subject to §2462 five-year limitations)