14 F. Supp. 3d 402
S.D.N.Y.2014Background
- SEC filed a complaint against Edward Bronson, E-Lionheart Associates, LLC, and relief defendant Fairhills Capital, Inc. for alleged violations of the Securities Act registration provisions and unjust enrichment.
- Defendants allegedly operated a penny stock scheme: purchasing discounted shares from issuers and rapidly reselling them to the public through Rule 504(b)(1)(iii) exemptions and Delaware exemptions, enabling profits over $10 million since 2009.
- The scheme allegedly involved cold calling issuers, offering deeply discounted purchases, drafting subscription agreements, and obtaining opinions from an attorney to remove restrictive legends on certificates.
- Transactions were largely centered in New York (White Plains address) with alleged Delaware law exemptions invoked via subscription agreements, though many issuers had no Delaware nexus.
- Bronson allegedly used FCI to hold assets derived from the scheme, transferring funds to FCI and transferring vehicle titles to FCI as purportedly ill-gotten assets.
- SEC seeks disgorgement via unjust enrichment against FCI, arguing FCI holds ill-gotten funds with no legitimate claim to them.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Bronson and E-Lionheart were accredited investors throughout the scheme | SEC contends they could be accredited investors under net worth/income definitions. | Defendants argue they were accredited investors across all transactions via Rule 501(a)508/8, and that early transactions satisfy status. | Denied; insufficient pled facts to establish ongoing accredited-investor status for all transactions. |
| Whether the Delaware exemption in § 73-207(b)(8) applies to the transactions | SEC argues no sufficient nexus to Delaware to invoke the Delaware exemption. | Defendants contend Delaware exemption applies and allows Rule 504(b)(1)(iii) treatment. | Denied; no sufficient Delaware nexus to justify exemption. |
| Whether Rule 504(b)(1)(iii) requires exclusive compliance with state exemptions and how it applies here | SEC interprets Rule 504(b)(1)(iii) to require compliance with applicable state exemptions where offered/sold. | Defendants contend the rule allows exemptions based on any one state's exemption and permits general solicitation/advertising. | Rejected; rule requires exclusive compliance with the state exemptions where offered or sold, and not satisfied here. |
| Whether Delaware law could be invoked to support Rule 504(b)(1)(iii) in the absence of a Delaware nexus | SEC argues no Delaware nexus; Delaware act cannot apply extraterritorially to authorize exemption. | Defendants argue Delaware Act could govern because subscription agreements designate Delaware law. | Denied; Delaware nexus is insufficient to apply § 73-207(b)(8). |
| Whether the unjust-enrichment claim against FCI is viable | SEC alleges FCI received ill-gotten proceeds and holds assets traceable to the scheme. | Defendants challenge linkage of funds; argue no rightful claim to funds or assets by FCI. | Granted; unjust-enrichment claim against FCI survives the motion to dismiss. |
Key Cases Cited
- SEC v. Cavanagh, 445 F.3d 105 (2d Cir. 2006) (Section 5 elements and strict liability; burden on exemption)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility standard for pleading)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (-context-specific plausibility standard)
- In re Top Tankers, Inc. Sec. Litig., 528 F. Supp. 2d 408 (S.D.N.Y. 2007) (affirmative defenses and pleading burden against motion to dismiss)
- Mabry v. Neighborhood Defender Serv., 769 F. Supp. 2d 381 (S.D.N.Y. 2011) (affirmative defenses must be supported by facial allegations)
- Edgar v. MITE Corp., 457 U.S. 624 (U.S. 1982) (blue sky laws and state regulation scope)
- Singer v. Magnavox Co., 380 A.2d 969 (Del. 1977) (Delaware Securities Act nexus considerations)
- Dofflemyer v. W.F. Hall Printing Co., 558 F. Supp. 372 (D. Del. 1983) (territorial nexus and Delaware Blue Sky applicability)