Securities and Exchange Commission v. Greene
910 F. Supp. 2d 83
D.D.C.2012Background
- SEC alleges Len Familant and Paul Greene ran a scheme with APC to conceal InPhonic’s deteriorating finances by issuing unearned credits backed by fake grounds and then repaying via inflated invoices and resold phones.
- Credit memos from APC (Greene’s company) totaled $9.99 million and were recorded as reductions to expenses, inflating InPhonic’s reported performance.
- The scheme operated from Oct 2005 through Feb 2007, with restatements in 2006 and 2007 revealing the fraud’s impact on net losses and EBITDA.
- Greene and Familant allegedly knew the arrangement was illegal, directing backdated memos and falsified invoices to conceal the scheme from InPhonic’s accountants.
- By November 2007 InPhonic ceased operations; APC did not fully recoup the credits.
- Greene moved to dismiss the Complaint (or for pre-discovery summary judgment); the court denied the motion and proceeded to consider counts on the merits.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the scheme to defraud falls within Rule 10b-5 liability | SEC argues scheme liability applies beyond misstatements/omissions. | Greene contends only misstatement-based liability (or none) survives under Janus. | Counts I–II survive; scheme liability viable under 10b-5. |
| Impact of Janus Capital on 10b-5(a)/(c) scheme liability | SEC contends Janus does not bar aid/abettor scheme liability. | Greene relies on Janus to limit liability to misstatements. | Janus does not foreclose scheme liability under 10b-5(a)/(c). |
| Materiality of the APC credit scheme for Counts I–II | SEC contends 11% restated losses were material; scheme affected investors. | Greene argues restated figures render scheme immaterial. | Materiality issue not resolved in Greene’s favor; summary judgment denied. |
| Sufficiency of substantial assistance and scienter for Counts III–IV (aiding/abetting) | Greene actively facilitated false books/records; scienter shown. | Greene disputes substantial assistance and scienter. | Counts III–IV survive; substantial assistance and scienter shown. |
| Direct violation of Rule 13b2-1 (Count V) and falsification of books/records | Greene caused falsification of InPhonic’s books/records through credit memos and invoices. | Greene asserts no direct participation in records; Rule 13b2-1 applies broadly to those who cause falsification. | Count V survives; indirect causation sufficient. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading plausibility standard for Rule 12(b)(6))
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (context for plausible claims in pleadings)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (U.S. 1994) (aider-and-abettor liability under §20(a) restricted)
- Stoneridge Investment Partners v. Scientific-Atlanta, Inc., 552 U.S. 148 (U.S. 2008) (limits of private 10b-5 liability; SEC reach considerations)
- Morrison v. Nat’l Austl. Bank Ltd., 130 S. Ct. 2869 (S. Ct. 2010) (statutory interpretation of 10b-5 scope; limits of liability)
- Janus Capital Group v. First Derivative Traders, 131 S. Ct. 2296 (S. Ct. 2011) (who 'mades' statements under Rule 10b-5(b))
- Basic Inc. v. Levinson, 485 U.S. 224 (U.S. 1988) (materiality standard for omissions/misstatements)
- SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012) (combined test for substantial assistance and scienter)
- Graham v. SEC, 222 F.3d 994 (D.C. Cir. 2000) (aiding-and-abetting liability framework)
- In re DVI, Inc. Sec. Litig., 639 F.3d 623 (3d Cir. 2011) (scheme liability concepts)