3:22-cv-01914
S.D. Cal.Apr 11, 2023Background
- The SEC filed an amended complaint alleging a pump-and-dump scheme involving UPPR and related defendants; Dudley (owner of Venado Media) was hired to run a promotional campaign.
- Dudley’s firm distributed about five research reports via labels (TheOTCReporter.com, DiscoveryStocks.com) between Jan–Jun 2019; the reports stated compensation came from Venado Media but allegedly were paid for by UPPR and Reagh.
- SEC alleges Dudley reviewed/approved the reports, knew or was reckless about Reagh’s beneficial ownership and intent to sell, and failed to disclose the true source of payment.
- Claims against Dudley: violations of Exchange Act §10(b) and Rule 10b-5 (including scheme liability under 10b-5(a)/(c)) and Securities Act §17(b).
- Dudley moved to dismiss for failure to state a claim; the court denied the motion and ordered Dudley to answer within 30 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Duty to disclose / misstatement vs omission | Dudley made affirmative, materially misleading statements by saying Venado paid the reports when UPPR/Reagh did | The SEC alleges omissions (source and Reagh ownership), so Dudley owed no duty to disclose | Court: Allegations describe affirmative misrepresentations; no separate duty-to-disclose pleading required |
| Materiality of source-of-payment | Source of payment by the promoted issuer is material to a reasonable investor | Source is immaterial; only that the content was effectively “bought and paid for” matters | Court: Plausibly material; fact-specific and for the trier of fact, so survives dismissal |
| "In connection with" requirement | Dissemination of public research reports that investors rely on satisfies the nexus to securities transactions | The statements had no bearing on stock value and were not reasonably calculated to influence investors | Court: Allegations that reports were publicly disseminated and optimistic about UPPR satisfy the ‘‘in connection with’’ requirement |
| Scienter | Dudley reviewed/approved reports and knew or was reckless about payment source and Reagh’s ownership/intent to sell | No specific contemporaneous facts showing Dudley’s knowledge or recklessness | Court: SEC’s pleading standard allows general allegations of scienter; facts alleged suffice under Rule 9(b) |
| Scheme liability (10b‑5(a),(c)) | Dissemination of misleading statements as part of promotional campaign supports scheme liability | Rule 10b‑5(a)/(c) requires extra allegations beyond 10b‑5(b) misstatements | Court: Lorenzo forecloses narrow reading; overlap allowed and alleged dissemination with intent to defraud suffices |
| Securities Act §17(b) | Section 17(b) requires disclosure of receipt and source when paid by issuer/underwriter/dealer; misidentifying Venado as payer violates the statute | Disclosure that Dudley was a paid promoter and amount sufficed; §17(b) doesn’t require naming the source | Court: Plain language and legislative purpose require disclosure of source when payment is from issuer; SEC sufficiently pleaded a §17(b) violation |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility pleading standard under Rule 8)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must be plausible, not merely speculative)
- Platforms Wireless Intern. Corp., 617 F.3d 1072 (9th Cir.) (elements of a §10(b)/Rule 10b‑5 claim)
- Prodanova v. H.C. Wainwright & Co., LLC, 993 F.3d 1097 (9th Cir.) (Rule 9(b) applies to §10(b)/Rule 10b‑5 claims)
- TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976) (objective standard for materiality)
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (disclosure required to make statements non‑misleading)
- Rana Research, Inc., 8 F.3d 1358 (9th Cir.) (broad construction of "in connection with")
- Lorenzo v. Securities & Exchange Comm'n, 139 S. Ct. 1094 (2019) (dissemination of false/misleading statements can ground liability under Rules 10b‑5(a) and (c))
- In re GlenFed, Inc. Sec. Litig., 42 F.3d 1541 (9th Cir.) (lenient scienter pleading standard applies to SEC actions)
- U.S. v. Amick, 439 F.2d 351 (7th Cir.) (discusses promoter disclosure and the problem of ‘‘bought and paid for’’ promotional literature)