Securities & Exchange Commission v. Ficeto
839 F. Supp. 2d 1101
C.D. Cal.2011Background
- SEC filed securities action on February 24, 2011 asserting a fraudulent scheme manipulating thinly traded U.S. microcap stocks in OTC markets and inflating offshore hedge fund values.
- Defendants include Hunter World Markets, Inc. (HWM), Hunter Advisors, LLC (Hunter Advisors), Todd Ficeto, Florian Homm, and Colin Heatherington, with HWM alleged to execute trades and report them to FINRA.
- Alleged market manipulation techniques include matched orders, wash trades, and ‘marking the close’ to inflate issuer stock prices on OTCBB and Pink Sheets.
- Plaintiff asserts claims under the Securities Act §17(a), Exchange Act §10(b)/Rule 10b-5, §15(c)(1) for broker-dealer, §17a for broker-dealer records, and §206(l)-(2) of the Investment Advisers Act.
- The court addresses Rule 12(b)(6) standard, Rule 9(b) pleading requirements, and the viability of the Investment Advisers Act and §10(b) claims after Morrison.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Rule 9(b) sufficiency of fraud allegations | FAC provides who/what/when/where/how for each act. | FAC lacks Defendant-specific, transaction-level granularity. | FAC satisfies Rule 9(b) with sufficient specificity. |
| Investment Advisers Act claim viability | Ficeto and Hunter Advisors defrauded Hunter Fund’s clients; Homm’s control does not bar liability. | Claims fail because Hunter Fund’s clients and Homm’s alleged self‑fraud prevent liability. | Investment Advisers Act claim against Ficeto and Hunter Advisors survives. |
| Section 10(b) extraterritorial reach post-Morrison | Morrison does not bar applying §10(b) to domestic OTC market manipulation. | Morrison forecloses extraterritorial application, limiting §10(b) to domestic exchanges. | Morrison does not bar §10(b) claims; §10(b) applies to domestic OTC market manipulation. |
| Scope of Morrison and OTC market application | OTCBB/Pink Sheets trades are domestic; §10(b) applies to these transactions. | Only domestic transactions on exchanges are within §10(b)’s reach post-Morrison. | Court rejects narrow reading; §10(b) extends to domestic OTC market manipulation. |
| Remaining §17(a)/§15(c)(1)/§206(l)-(2) claims after §10(b) | If §10(b) applies, other related claims should proceed as well. | Those claims should be dismissed on the same grounds as §10(b). | DENY as to all related claims; all claims survive at this stage. |
Key Cases Cited
- Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010) (limits extraterritorial reach of §10(b))
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading must show plausible claim, not mere notions)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plaintiff must plead non-conclusory facts supporting claims)
- W. Mining Council v. Watt, 643 F.2d 618 (9th Cir. 1981) (standard for pleading in complex litigation)
- Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097 (9th Cir. 2003) (Rule 9(b) requires particularity in fraud claims)
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) (intent and manipulation standards under §10(b))
- Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977) (misleading market activity under securities laws)
- Homm v. Absolute Activist Value Master Fund Ltd., 2010 WL 5415885 (S.D.N.Y. 2010) (post-Morrison treatment of private placements not reaching market)
- Sierra Brokerage Servs., Inc., 608 F. Supp. 2d 923 (S.D. Ohio 2009) (OTC market manipulations under §10(b))